Executive Summary / Key Takeaways

• Ally Financial is strategically pivoting to a more focused business model, divesting non-core assets like its credit card business and ceasing mortgage originations to concentrate on its market-leading Dealer Financial Services (Auto Finance and Insurance), Digital Bank (Deposits), and Corporate Finance segments.
• Despite a GAAP net loss in Q1 2025 driven by strategic balance sheet repositioning losses and divestiture impacts, underlying operational trends show momentum, particularly in retail auto yield expansion and deposit cost reduction, supporting future Net Interest Margin (NIM) growth.
• Credit quality trends, while still navigating elevated delinquencies from prior vintages, are showing signs of moderation in newer originations and flow-to-loss rates, supported by refined underwriting and collections strategies, pointing towards eventual normalization of losses below 2% in retail auto.
• The company is actively managing capital through organic generation, strategic asset sales, and tools like Credit Risk Transfers, aiming to build buffer in anticipation of potential regulatory changes while positioning for future deployment into core growth and shareholder returns.
• Management maintains confidence in achieving a mid-teens Return on Tangible Common Equity (ROTCE) over the medium term, driven by NIM expansion into the upper threes, retail auto loss normalization, and disciplined expense and capital management, despite acknowledging potential near-term volatility influenced by macroeconomic factors and competitive dynamics.

The Evolution of an Ally: From Captive Lender to Digital Powerhouse

Ally Financial's journey is one of strategic evolution, transforming from a captive automotive finance company established in 1919 into a diversified financial services firm with a leading digital bank and a robust dealer-centric ecosystem. This history provides the bedrock for its current strategy, emphasizing deep relationships and specialized expertise. Over the past 15 years, the launch and growth of Ally Bank into the nation's largest all-digital direct bank has fundamentally reshaped the company, establishing a powerful consumer brand and a stable, low-cost funding source. Becoming publicly traded approximately a decade ago marked a shift towards broader market focus and diversification beyond its initial OEM ties.

In recent years, Ally has sharpened this focus, undertaking deliberate actions to streamline its operations and concentrate resources on core strengths. The sale of its point-of-sale lending business in March 2024 and the recent divestiture of the credit card business, which closed on April 1, 2025, are prime examples of this strategic simplification. Furthermore, the decision to cease new consumer mortgage originations in Q2 2025 signals an exit from a lower-yielding asset class, freeing up capital and management attention for higher-returning opportunities. This strategic pivot is designed to enhance efficiency, reduce complexity, and align the company's structure with its most competitive and profitable segments.

Within the competitive landscape, Ally operates alongside major banks like JPMorgan Chase (JPM), Bank of America (BAC), and Wells Fargo (WFC), as well as specialized players like Capital One (COF) in auto finance and agile fintechs like SoFi (SOFI) in digital lending. Ally differentiates itself through its deep, long-standing relationships with over 21,000 active dealers, offering a comprehensive suite of auto finance and insurance products that goes beyond simple lending. Its all-digital bank model provides a distinct advantage in efficiency and customer experience compared to traditional branch-based competitors. While larger banks benefit from scale and diversification, and fintechs may offer speed in specific niches, Ally's strength lies in its integrated dealer ecosystem and its established, trusted digital consumer brand, which boasts high customer satisfaction and retention rates, often leading industry averages.

A key differentiator for Ally is its foundational investment in technology and data analytics. The company's all-digital bank platform is a core technological asset, enabling a frictionless customer experience and contributing to lower operating costs per transaction compared to traditional banking models. In its auto finance operations, sophisticated data analytics and proprietary risk models underpin underwriting and collections processes. These technological capabilities allow for dynamic and selective underwriting, enabling Ally to optimize risk-adjusted returns on originations and refine credit buybacks based on granular performance data. Ongoing investments in modernizing its technology platform, including the core operating system for auto finance, and enhancing data and analytics capabilities are strategic priorities aimed at improving operational effectiveness, enhancing the customer and dealer experience, and supporting risk management. While specific quantitative metrics on the performance advantage of these technologies over competitors are not always publicly detailed, management commentary highlights their role in enabling efficiency, speed in decisioning, and the ability to manage credit risk effectively across the portfolio. The strategic intent behind R&D and technology investment is to maintain a competitive edge in digital delivery and data-driven decision-making, crucial for navigating evolving market dynamics like vehicle electrification and changing consumer preferences.

Financial Performance and Operational Momentum

Ally's financial performance in the most recent quarter (Q1 2025) reflects the impact of strategic actions alongside underlying business trends. The reported GAAP net loss from continuing operations of $225 million, compared to income of $143 million in Q1 2024, was significantly influenced by a $499 million other loss on investments, net, primarily stemming from a strategic repositioning of available-for-sale securities. This action, while impacting near-term earnings, was intended to reduce interest rate risk and improve future net interest income. Higher noninterest expense, driven by a $305 million goodwill impairment related to the credit card business transfer to held-for-sale and increased weather-related insurance losses, also contributed to the loss.

However, underlying operational performance showed areas of strength. Net financing revenue and other interest income increased by $10 million year-over-year, benefiting from lower total interest expense as the cost of deposits declined due to lower benchmark rates. This offset pressure from lower commercial automotive financing revenue and higher net depreciation on operating lease assets. Insurance premiums and service revenue earned grew to $364 million, up from $345 million in Q1 2924, primarily due to expansion in the vehicle inventory insurance program. Other income, net of losses, saw a $47 million increase, boosted by favorable equity-method investment performance.

Segment-wise, Automotive Finance reported income before tax of $375 million in Q1 2025, down from $480 million in Q1 2024, primarily due to higher interest expense and increased net depreciation on operating lease assets, partially offset by lower provision for credit losses. Consumer automotive loan financing revenue increased $70 million, driven by higher portfolio yields from newer, higher-yielding originations replacing maturing lower-yielding assets. Commercial loan financing revenue decreased $70 million, impacted by lower benchmark rates on variable-rate loans and reduced wholesale floorplan balances in certain channels.

Insurance operations reported a significant drop in income before tax to $2 million in Q1 2025 from $70 million in Q1 2024, mainly due to a substantial increase in insurance losses and loss adjustment expenses ($161 million vs $112 million), particularly from severe weather events ($58 million in Q1 2025 vs $17 million in Q1 2024), which resulted in a combined ratio of 106.5%. Despite this, written premiums grew 9% year-over-year to $385 million, reflecting strong momentum in the business.

Corporate Finance continued its steady performance, reporting income before tax of $76 million in Q1 2025, compared to $100 million in Q1 2024. The decrease was driven by lower net financing revenue and a higher provision for credit losses ($14 million vs $1 million), reflecting portfolio growth and increased specific reserves. Assets in this segment grew to $11 billion at March 31, 2025, up from $10.4 billion at December 31, 2024, with the portfolio remaining highly diversified and primarily first-lien.

The Digital Bank demonstrated continued strength in funding. Total deposits were $151.4 billion at March 31, 2025, relatively stable compared to $151.6 billion at December 31, 2024. Retail deposits increased by $2.6 billion in Q1 2025 to $146.1 billion, while brokered deposits decreased. The shift from CDs to liquid savings continued as higher-yielding CDs matured. Ally Bank added approximately 58,000 retail deposit customers, reaching 3.33 million, underscoring the strength of its brand and value proposition. The cost of funds declined 20 basis points quarter-over-quarter, benefiting from deposit repricing actions and CD maturities.

Asset Quality and Risk Management

Credit risk remains a key focus area, particularly within the consumer automotive portfolio. While elevated delinquency levels from prior vintages persist, management highlights encouraging trends in newer originations and flow-to-loss rates. Retail auto net charge-offs in Q1 2025 were $445 million, contributing to a consumer NCO rate of 2.1% (down from 2.3% in Q1 2024). Consolidated net charge-offs were $507 million, down from $539 million. Management attributes the improvement in consumer auto NCOs to pricing and underwriting strategies implemented in recent periods and stability in used vehicle prices.

Delinquencies in consumer automotive loans 30+ days past due decreased by $577 million in Q1 2025, showing a decline in trends driven primarily by seasonality. Management notes consistently strong trends in flow-to-loss rates, partly due to enhancements in collection strategies and loan modification programs designed to keep customers in their vehicles and improve collection effectiveness. Vintage analysis indicates that newer vintages (2023, 2024) are outperforming the 2022 vintage at equivalent months on book, which is expected to drive losses lower over time as the portfolio turns over.

The allowance for loan losses decreased by $316 million to $3.4 billion at March 31, 2025, representing 2.5% of total finance receivables (down from 2.7% at Dec 31, 2024). This decrease was primarily driven by a provision benefit from the transfer of the credit card portfolio to held-for-sale, partially offset by a higher allowance for the consumer automotive portfolio due to elevated delinquency and macroeconomic uncertainty, and increased specific reserves in the commercial portfolio.

Market risk, particularly interest rate risk and operating lease residual risk, is actively managed. The balance sheet is structurally liability sensitive over the medium term, positioning Ally favorably in a falling rate environment. Interest rate risk is mitigated through hedging activities. Operating lease residual risk, the exposure to declines in used vehicle values, is partially mitigated by OEM residual value guarantees on a portion of the portfolio ($2.3 billion at March 31, 2025). However, remarketing performance can be volatile, as seen in Q1 2025 with an average loss per vehicle of $863, compared to a gain of $1,431 in Q1 2024, impacted by lower auction prices for specific models.

Regulatory risks, including the potential impacts of proposed Basel III rules on capital requirements (especially AOCI inclusion) and proposed rules on long-term debt requirements for large banks, are significant watch items that could influence capital management strategies and financial flexibility.

Outlook and Path to Mid-Teens Returns

Management's outlook is centered on achieving a mid-teens Return on Tangible Common Equity (ROTCE) over the medium term, driven by three primary factors: Net Interest Margin expansion, normalization of retail auto losses, and disciplined expense and capital management.

For 2025, Ally's full-year outlook remains unchanged, reflecting confidence in the underlying business momentum despite near-term volatility. Management expects NIM to be approximately 3.4% to 3.5%. While the sale of the credit card business impacts NIM by an estimated 20 basis points on an annualized run rate, this is expected to be offset by lower credit costs and operating expenses, resulting in a neutral impact on core pretax income. NIM is expected to exit 2025 higher than the full-year guide, supported by retail auto yield expansion, the asset mix shift towards higher-yielding assets, and continued deposit repricing. Management is confident in achieving a cumulative deposit beta of around 70% over time, which will be a significant tailwind to funding costs.

Retail auto net charge-offs are projected to be between 2% and 2.25% for 2025. This range reflects the ongoing uncertainty in the macroeconomic environment and the elevated levels of late-stage delinquency, while also incorporating the expected benefits from portfolio turnover and the improved performance of newer vintages. Management believes the trend is normalizing lower, targeting below 2% over time, which translates to a consolidated loss rate of approximately 1.3%.

Expense growth is expected to be flat in 2025, including the impact of the credit card divestiture. This reflects a continued focus on cost discipline, with savings from strategic actions and workforce reductions offsetting investments in revenue-generating areas and loss management. Average earning assets are expected to be flat year-over-year in 2025, with a favorable mix shift towards higher-yielding assets.

Capital management remains a priority, with the goal of organically building capital and maintaining a strong buffer. The credit card sale is expected to add 40 basis points to CET1. Management intends to redeploy this capital into core business growth, potential securities portfolio restructuring, and eventually share repurchases, balancing investment for growth with returning capital to shareholders.

Conclusion

Ally Financial is navigating a dynamic environment by focusing on its core strengths in Dealer Financial Services, Digital Banking, and Corporate Finance. While recent financial results reflect strategic actions and external pressures, the underlying operational performance, particularly in deposit gathering and auto finance origination quality, supports a positive trajectory. The strategic divestitures and balance sheet optimization efforts are positioning the company for improved efficiency and higher returns.

The investment thesis hinges on Ally's ability to execute on its plan to expand Net Interest Margin through favorable asset repricing and deposit cost reduction, coupled with the normalization of retail auto credit losses driven by improved vintage performance and effective risk management. Despite acknowledged near-term volatility and macroeconomic uncertainties, management's guidance and medium-term targets indicate a clear path towards achieving mid-teens ROTCE. The company's differentiated digital platform, deep dealer relationships, and customer-centric brand provide a competitive foundation. Investors should monitor the pace of NIM expansion, the trajectory of credit losses, and the impact of regulatory developments on capital, as these will be critical indicators of Ally's progress towards its financial goals.