Ally Financial's (ALLY) Stock Down Despite Q1 Earnings Beat

Ally Financial Inc.’s (NYSE:ALLY) first-quarter 2018 adjusted earnings of 68 cents per share surpassed the Zacks Consensus Estimate of 66 cents. Also, the bottom line compared favorably with the prior-year quarter’s figure of 48 cents.

Results benefited from an increase in total net revenues and lower provisions. Also, improvement in loans and deposit balances was a positive factor. However, higher expenses witnessed during the reported quarter hurt results to some extent. Moreover, capital ratios decreased on a year-over-year basis in the quarter. Probably due to these negative factors, shares of the company declined nearly 2.7%, following the earnings release.

After taking into consideration non-recurring items, net income available to common shareholders (GAAP basis) for the reported quarter was $250 million or 57 cents per share, increasing from $214 million or 46 cents registered in the prior-year quarter.

Revenues Improve, Expenses Rise

Total net revenues for the quarter increased nearly 2% year over year to $1.40 billion, owing to rise in net financing revenues. However, the figure lagged the Zacks Consensus Estimate of $1.45 billion.

Total non-interest expenses increased 4.6% year over year to $814 million. The rise was due to an increase in compensation and benefits expenses along with other operating expenses.

Credit Quality: Mixed Bag

Non-performing loans of $863 million at the end of the reported quarter were up 8.1% year over year. However, provision for loan losses decreased 3.7% year over year to $261 million.

Strong Balance Sheet, Capital Ratios Decline

Total finance receivables and loans amounted to $124.05 billion as of Mar 31, 2018, compared with $121.62 billion as of Dec 31, 2017. Deposits totaled $97.45 billion, increasing from $93.26 billion as of Dec 31, 2017.

As of Mar 31, 2018, total capital ratio was 12.5%, decreasing from 12.7% registered in the prior-year quarter. Similarly, Tier I capital ratio was 11.0%, down from 11.1% as of Mar 31, 2017.

Share Repurchases

During the reported quarter, the company repurchased shares worth $185 million.

Our Take

Ally Financial’s initiatives toward diversifying revenue base are likely to support profitability in the quarters ahead. Also, its steady capital deployment plan reflects a strong balance sheet position. However, persistently increasing expenses are expected to hurt bottom-line growth to some extent. Moreover, the company's use of high debt levels might hamper its flexibility and restrict it from procuring additional finance for working capital and other purposes.

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

Performance of Other Finance Companies

Among others, Capital One Financial Corporation’s (NYSE:COF) first-quarter 2018 adjusted earnings of $2.65 per share surpassed the Zacks Consensus Estimate of $2.34. Results benefited from rise in revenues and easing margin pressure. While majority of the credit quality metrics worsened during the quarter under review, a decline in provision for credit losses was a positive. Yet, an increase in expenses was the undermining factor.

Sallie Mae (NASDAQ:SLM) delivered a positive earnings surprise of 12.5% in first-quarter 2018. The company reported core earnings of 27 cents per share, surpassing the Zacks Consensus Estimate of 24 cents. Earnings growth was supported by an increase in net interest income and non-interest income. However, elevated expenses and poor credit quality remained headwinds.

Navient Corporation’s (NASDAQ:NAVI) first-quarter 2018 adjusted core earnings per share of 40 cents missed the Zacks Consensus Estimate by a penny. Results reflected lower revenues, aided by a decrease in net interest income and non-interest income. Moreover, expenses escalated. However, lower provisions were a tailwind.

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