Ally Financial Mulls Divesting Credit Card Business, Shares Rise 1.8%

Ally Financial ALLY is considering selling its credit card business. This was reported by Bloomberg, citing persons familiar with the matter.

ALLY shares rose and closed Friday’s trading session up 1.8%.

Bloomberg noted that Ally Financial is working with a financial advisor to find buyers for the business. As of Sept. 30, 2024, the company had $2.13 billion in average credit card loans, with 1.25 million active cardholders.

Ally Financial has a long history with the credit card business. Before 2019, the company partnered with The Toronto-Dominion Bank TD to offer the Ally CashBack credit card. However, in June 2019, the company stopped onboarding new customers to pare losses in its underperforming card portfolio. Effective 2020, TD changed these cards to the TD Bank Cash Credit Card.

In February 2020, ALLY announced a deal to buy subprime credit card lender Cardholder Management Services, Inc. (CardWorks). However, the coronavirus pandemic upended the company’s plan. Both companies agreed to mutually terminate the $2.65 billion deal “after carefully considering the meaningful impacts of COVID-19 on global markets and the economy” in June 2020.

In December 2021, Ally Financial acquired Fair Square Financial, a digital-first credit card company, for $750 million. At that time, Fair Square had roughly 693,000 cardholders and $816 million in loan balances.

Now, almost three years after this buyout, Ally Financial, facing stiff competition from the larger card provider Capital One COF, is mulling a retreat from the business. COF’s deal to acquire Discover Financial will make later bigger.

Ally Financial, the country’s leading auto lender, is trying to focus on its core business, which includes auto finance and digital banking. In sync with this, it sold its point-of-sale financing business, Ally Lending (which included $2.2 billion of loan receivables as of Dec. 31, 2023) in March 2024. This transaction was part of the company’s broader initiative to invest resources in growing scale businesses and strengthen relationships with dealer customers and consumers. 

ALLY has been undertaking steps to bolster profitability amid a challenging operating backdrop. Last year, the company trimmed its headcount, leading to $80 million of annualized expense savings.

Its strategy to diversify into other businesses is supporting top-line growth. Ally Financial has expanded into the mortgage, wealth management and online brokerage businesses. In 2023, the company launched Ally.ai, a proprietary, cloud-based artificial intelligence (AI) platform that allows it to integrate any AI capability into business operations at an enterprise scale.

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ALLY is facing asset quality and higher interest rate-related concerns. On its third-quarter 2024 conference call, the company noted that the current “dynamic operating environment” including high interest rates, volatility and “cumulative inflationary pressure” has strained its consumers. This has, thus, resulted in “more volatility in our near-term outlook, particularly on credit costs and margin.” 

Along with the third-quarter results, the company announced changes to its asset quality and net interest margin (NIM) targets for this year. Ally Financial expects loan losses to increase in 2024. Retail auto NCO rates are projected to be between 2.25% and 2.30% this year, up from the prior target of 2.1%. Further, consolidated NCOs are likely to be in the 1.50-1.55% range, up from the earlier guidance of 1.45-1.5%.

Likewise, given the near-term headwinds, it lowered the NIM target for 2024. ALLY now projects NIM to be almost 3.20% (assuming 50 basis point rate cuts in the fourth quarter and slower deposit betas), down from earlier guidance of approximately 3.30%. In 2023, NIM was 3.32%.

With more interest rate cuts expected this year and in 2025, the company is well-poised to benefit from it over the medium term, driven by the liability-sensitive nature of its balance sheet and the rise in consumer loan demand. Management expects NIM to hit 4% over the medium term.

Further, if Ally Financial moves ahead with the divestiture of its credit card business, it is likely to witness a further improvement in NIM over time. As credit cards have floating rate interest, the lower rates might hurt the company’s NIM. Hence, by divesting the business, the company’s NIM will get some support.

Over the past three months, shares of ALLY have lost 11.7% against the industry’s rally of 22.5%. The bearish investor sentiments stem from concerns related to asset quality and NIM.

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At present, Ally Financial carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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