Is Ally Bank Safe?

Our overall analysis finds that Ally Bank is a safe bank. While it might not be a top-tier institution, we feel that it is a reasonably-operated bank with sufficient safety for depositors.  We conducted the analysis using detailed factors that typical Wall Street based financial analysts would look at. If you’re interested in learning more, then please keep on reading further.

Ally Bank is an online-only bank that has been around since 2009 and is part of Ally Financial, Inc., a company with a history dating back to the 1920s. But how safe is Ally Bank? Can you trust them with your money? Here are some factors to consider.

Who Regulates Ally Financial?

Ally Financial is regulated by US Federal Reserve Board and the Consumer Finance Protection Bureau. As Ally Financial stock also trades in the public market, it is also regulated by the Securities and Exchange Commission and the Federal Deposit Insurance Corporation.

FDIC Insurance

One of the most important aspects of banking safety is whether your deposits are insured by the Federal Deposit Insurance Corporation (FDIC). The FDIC is an independent agency of the U.S. government that protects up to $250,000 per depositor, per insured bank, for each account ownership category in case of a bank failure.

Ally Bank is an FDIC member (FDIC certificate #57803), which means that your checking, savings, money market, CD, and IRA accounts are covered by this insurance. According to a recent comment by management, 90% of Ally’s depositors are covered by FDIC insurance, which bodes well for the stability and security of the deposit base.

You can use the FDIC’s online tool to verify Ally Bank’s status and calculate your coverage.

Financial Metrics & Stability

It’s extremely important to consider how financially stable Ally Bank is. While FDIC insurance can protect you from losing your money if a bank fails, it’s still preferable to avoid such a situation in the first place. And if your cash balance exceeds the FDIC limit, then it’s very important that you pay attention to this analysis.

Analysts working on Wall Street look at many different factors when evaluating the stability of a bank. Based on my experience of analyzing stocks, companies, and banks in my career, I have compiled a list of the most important metrics and provided a brief summary of the ones I think are relevant and what they mean for you. The goal here isn’t to inundate you with data and technical terms, so I’ve kept the discussion at a relatively high level.

Balance Sheet

The balance sheet of any business indicates its financial health and the same goes for a bank too. The banking industry and analysts use specific terms and ratios to assess the health of the bank. We’ve discussed these below, so let’s dive in.

Capital Ratios & Leverage

One way to assess a bank’s financial health is to look at its capital ratio, which measures how much equity it has relative to its assets. A higher capital ratio means a bank has more cushion to absorb losses and withstand economic shocks. The bank’s capital consists of money invested by shareholders, bond holders, and prior earnings that were retained within the bank (instead of being dividended out).

As of the year-end of 2022, Ally’s CET1 ratio was 9.30%, which is higher than the 7% Federal Reserve imposed minimum requirement on Ally. Tier 1 ratio was 10.70% and total capital ratio was 12.2%. All these figures have dropped from the same time in 2021, which indicates a slightly worsening position for the bank.

Loan Portfolio

We’re getting a bit in to the weeds here, but it’s worth having a quick look at a bank’s loan portfolio to gauge how stable a bank will be in a bad economic scenario. When a bank lends money, it wants to ensure that it can get all of it back along with the interest. Therefore, banks that have a risky loan portfolio may be at greater risk of stress in a recession.

Ally’s total loan portfolio was $136.4 billion as of the end of 2022, of which $107 billion is in consumer auto loans and a further $29B in commercial loans. Real estate loans comprise a small $25.1 billion of the total. This loan portfolio is a bit risky as it is mostly exposed to car loans which can be problematic in a bad economic situation. Cars also don’t hold their value too well over time and especially so in a downturn.

Ally’s non-performing assets are 0.76% of total assets, which is slightly on the higher side, but not surprising given its loan portfolio. Ally’s loan book is 92% of its deposits, which indicates that most of its deposits are lent out. This figure is reasonable.

Deposits & Other Funding Sources

Just like with the loans, deposits are important because they provide funding to the bank to carry out its operations. Ally has $152 billion in deposits, of which $41 billion are from time deposits. The rest is in relatively shorter-term interest-bearing deposits. From a stability perspective, banks tend to prefer having the locked-in time deposits as this capital cannot be withdrawn easily by depositors. The negative aspect of course is that banks have to pay a higher interest rate on these.

Ally has a further $17.9 billion in borrowings from other sources, like debt or wholesale funding.

Overall, it looks like Ally has a good funding profile. Of course no bank is immune to a bank run, but I do not see anything Ally-specific here as a cause for concern.

Assets

The bank also has a further $29.5 billion in securities which marked as available-for-sale. While having a big investment book of stable securities is generally a good thing, having an excessively large AFS portfolio in a rising interest rate environment can be a source of stress. Ally has recorded $4 billion in mark-to-market losses in 2022 as this portfolio of securities loss their value. This is slightly concerning, but I do not expect to see any SVB-like repeat situation here.

Income Statement

The income statement of a business gives us insight in to how a business earns and spends its money. Most importantly, it also shows how profitable the organization is. Let’s look at what’s most important for a bank.

Net Interest Income & Net Interest Margins

A bank takes money from the depositors and lends it out to borrowers. It pays interest to the depositor and charges interest to the borrower. The difference between those two is what is called net interest income. Ally earned net interest income of $6.1 billion and its net interest margin was 3.8%.  These figures are reasonable.

Non-Interest Income

This is typically fee income that is generated from the other services that a bank provides – like investment management, wealth advisory, or other fees like transfer fees, and ATM charges. Larger banks may have a capital markets division that can be quite profitable as well. A good balance between income from lending and income from other sources shows if a bank is well diversified in its revenue sources.

Ally reported $1.7 billion in non-interest income which is quite healthy. This component is 22% of net revenue, which is decent for a bank of this size.

Return on Equity

The ROE is a way of measuring the rate of return for equity investors. Within reason, a higher ROE indicates a better business. Ally Bank’s return on equity (ROE) was 13.57% in the last fiscal year, which is higher than its 5-year average of 12%, and demonstrates strong performance. It indicates that the bank can stand a reasonable decline in its income without going into stress.

External Ratings

While I like to do my own analysis of banks, it’s important to cross check with agencies that publicize their ratings. The major external ratings agencies have Ally’s bonds rated at the bottom-tier of investment grade with a stable outlook. An investment grade rating means that the bond rating agencies feel that Ally can honor its debt without any issues.

Before You Go…

Please do let us know in the comments whether you found this article useful or not. If there’s something we missed or anything that needs to change, please do let us know. Your feedback and constructive comments help us make this content more valuable for everyone. Thanks!

FAQs