![]() The bank also has very little cash compared to its assets, creating some potential liquidity risk in the event of a market shock. Further, its common-equity-to-asset ratio is only 6.3% and is the lowest it has ever been. ![]() I believe Ally's business model greatly exacerbates its asymmetric risk.Īlly Financial's CET1 ratio is 9.6%, which is lower than that of all of the largest banks in the U.S. Due to high leverage, bank stocks often face highly asymmetric risk exposure, where losses are minimal until catastrophic. Ally trades at a low valuation of 14% below its book value and a "P/E" of 4.7X, but I believe this is due to its high chance of failure. Ally Financial's Balance Sheet DynamiteĪ stock's valuation is only low if its business risk is not. Given the boom in the auto market is finally slowing, I believe Ally Financial's bankruptcy risk is likely to grow significantly over the coming months, making ALLY a probable "value trap" today. Banking losses are often low until they surge in an economic slowdown, causing risk-exposed banks to lose capital quickly. As is almost always the case with banking, leveraging risk can be a great cash-flow-raising strategy for years. In my view, Ally's high margins are not due to any genius on behalf of the company, but by taking on highly excessive risk exposure to boost yields. In perspective, Wells Fargo's ( WFC ) net interest margin is closer to 2.4%, with an ROTCE of 8.6%. These assets have much higher average yields of 6-7%, allowing Ally to operate at a very high ROTCE of 23.2% with a 4% net interest margin. Roughly $107B, or ~60% of the company's assets, are in auto loans and leases (primarily loans). The stock has lost over a third of its value over the past year due to its relatively high leverage and high exposure to U.S. On the surface, ALLY may seem cheap, given its extremely low forward "P/E" ratio of 4.7X. However, some banks, such as Ally Financial ( NYSE: ALLY ), may have stretched their balance sheets too far, creating excess exposure to high-risk economic segments. Basel accords, many banks have greater capitalization today than they had before 2008. Even more, the inverted yield curve signals growing economic turbulence that could cause bank asset losses to increase. ![]() Banks often find their net interest margins squeezed when long-term borrowing rates are well-below short-term bank financing costs. Colin Anderson Productions pty ltd/DigitalVision via Getty Imagesīanks stocks have had a challenging year in 2022 as the yield curve has become extremely inverted. ![]()
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