Big Changes at Ally Bank

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Updated on Monday, March 23, 2015

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This article was last updated March 23, 2015. Some of the terms and conditions may have changed or are no longer available. For the most accurate and up to date information please consult the terms and conditions found on the bank’s website.

Big management changes at Ally Bank continue, with Barbara Yastine, CEO of the Retail Bank, resigning. Yastine left Ally only a few months after the appointment of Jeff Brown as Chief Executive of the Group. The former CEO, Michael Carpenter, left the firm in February and had long ties with Yastine, dating back to their days at Citigroup. When Ally went public in March 2014, it opened at $27.91. It has not been a smooth ride for shareholders, and the stock closed at $21.03 on Friday, down 25% since the IPO. In its first tumultuous year as a public company, Ally has lost its exclusive leasing contract with General Motors, its CEO and now the head of its Retail Bank.

Ally has demonstrated strong profitability, generating $1.2 billion of profit in 2014 and a Return on Equity of 7.9%. The business had managed to drive down funding costs via a hugely successful online bank, which was led by Yastine. In addition, Ally had worked through the credit losses of the inherited General Motors portfolio and was heading towards double-digit returns. The big question on shareholder and customer minds: where will Ally go next?

The Opposite of The Big Banks

Its name said it all: Ally Bank wanted to be very different from traditional banks. Ally was born during the financial crisis, when General Motors was rescued and the financing business (GMAC) was separated from the auto business. The Treasury invested billions in GMAC, and had majority ownership. In 2010, the business was renamed Ally. The mission of the business reflected the mood at the time: no one trusted banks, particularly auto lending businesses targeting subprime auto financing.

What made Ally unique was that it didn’t just brand itself allies of the consumer, it actually meant it. Its savings accounts had market leading interest rates, paying close to 1%. Not only were the rates high, but there were no minimum deposits, no minimum balances, no fees and an incredibly easy account opening process. In checking accounts, Ally differentiated itself even further. Ally introduced a truly free checking account, with no monthly fee and no sneaky minimum balance or direct deposit requirements. It changed the game with its approach to ATM fees. Ally offers unlimited reimbursement of other bank ATM fees. And it really staked its claim on overdraft fees. If you link your savings account, Ally Bank will transfer funds between the savings and checking account for free, compared to the standard $10 charge levied by traditional banks. And, rather than $35 per incident, up to $140 day of NSF (non-sufficient funds) and overdraft fees, Ally capped its fees to $9 per day. Ally didn’t decide to be marginally better than the rest of the industry. Instead, it completely rewrote the rulebook.

Its checking account received an A+ Transparency Score from MagnifyMoney. An honor only two banks in the country received.

You can almost imagine a team of former bankers (which they were) making a list of the worst sins and fees, and then reversing them. Ally was refreshing, and refreshingly profitable.

To fund the generous consumer accounts, Ally did not build a branch network. It built a truly digital bank, without the overhead of its competitors. And, more importantly, it viewed its deposit accounts as enablers of its lending business, rather than as a profit-center. If you read Ally’s investor presentation, you will the bank described as a “deposit franchise.” The key metric is the cost of deposits, rather than the fee income earned from those accounts. By managing the business in this way, Ally was able to focus on deposit growth and customer satisfaction, rather than extracting an extra nickel from its depositors.

But Ally also had history on its side. The deposit franchise was a cheaper way to fund subprime auto loans than the debt market. So, the faster the deposit franchise grew, the lower the overall group funding costs. This would give positive year-over-year earnings momentum.

Ally has now reached an inflection point. Future asset growth is in question, after the loss of General Motors. With an increasingly competitive online deposit market, Ally risks becoming a victim of its own success, and online deposits may start to look comparatively more expensive.

Back To The Future?

The new CEO spent his formative years at Bank of America. The question, for shareholders and customers, is whether or not he will continue living up to the Ally brand. Ally could use its brand and low-cost funding to transform other parts of the banking sector. Credit cards, personal loans and student loan refinancing are just three asset classes that could welcome Ally’s touch.

However, a quicker and easier way to increase revenue would be to increase the fees on its existing account holders. Ally could also lower the interest rate on savings accounts, as Capital One did to ING customers after the acquisition.

At MagnifyMoney, we are big fans of the Ally retail bank built by Barbara Yastine. We hope that Ally’s next step is to revolutionize other asset classes and product types, rather than reverting to type and increasing fees and reducing rates. Only time will tell.

 

 

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