Ally Financial Q4 Earnings Beat Reinforces Recovery But Fails to Mitigate Core Auto Credit Risks

What happened

Ally Financial reported Q4 2025 earnings of $1.09 per share, beating the Zacks Consensus Estimate of $1.01 and showing a significant year-over-year increase from $0.78 per share. This continues the earnings inflection trend highlighted in the DeepValue report, where Q2-Q3 2025 improvements were driven by auto originations and deposit repricing. However, the report cautions that retail auto net charge-offs, a critical swing factor, remain elevated with guidance at 2.0-2.25% and risks of exceeding 2.5% in a downturn. Moreover, net interest margin sustainability around 3.45-3.50% depends on disciplined deposit pricing, which could be pressured in a falling-rate environment. While the beat supports the positive market narrative, it does not address the fundamental auto credit and margin vulnerabilities that underpin the 'POTENTIAL SELL' rating.

Implication

The Q4 earnings beat reinforces Ally's recovery narrative, potentially driving near-term stock appreciation as sentiment improves. However, the DeepValue report indicates the stock is already pricing in a successful turnaround at 0.96x P/B and 23x trailing EPS, limiting upside. Key risks include retail auto net charge-offs rising above 2.5%, which could erode earnings and capital, and net interest margin falling below 3.3%, signaling a lost funding advantage. The $2 billion buyback program, while positive, must be executed without compromising the CET1 ratio, currently at 10.1%, to avoid regulatory issues. Therefore, investors should await clearer evidence of sustained credit improvement and margin stability, ideally at a lower entry price near $40, before reconsidering the sell stance.

Thesis delta

The earnings beat does not materially shift the investment thesis from the DeepValue report's 'POTENTIAL SELL' rating. While it confirms ongoing earnings recovery, the beat is within expected trends and does not address the asymmetric downside risks from auto credit and net interest margin pressures. A sustained improvement in retail auto net charge-offs and net interest margin guidance would be necessary to reconsider the rating.