This bank trades around book value. What it must achieve to be truly cheap
Earnings per share rose 22% year over year, net revenue rose 10%, and the volume of newly originated loans rose 21%. Yet analysts expected more. Behind that discrepancy lies an accounting rule. The bank lent roughly a billion dollars more than it had planned, and for each new loan it must immediately set aside a reserve for expected losses over the loan's entire life. Interest from those loans will flow in over the coming years, but the cost was booked right away. The additional reserve shaved eight cents off earnings per share, just enough to leave the result four cents below consensus.
Key points
The miss had a favorable cause. Adjusted earnings of $1.21 came in below the consensus of $1.23 to $1.25, but the deviation was significantly driven by an additional CECL reserve on loans originated above the company's own plan. New auto loan volume reached $13.3 billion from a record 4.6 million applications, with underwriting criteria unchanged according to management.
Berkshire trimmed for the first time in three years, but the least of the three. It holds roughly 27 million shares, or just under nine percent of the company, after selling about seven percent of its position. In the same quarter it slashed Capital One by 58% and continued its eighth consecutive sell-down at Bank of America. The sale took place from April through June, before the July results were released.
The entire thesis hinges on net interest margin. It rose to 3.63% from three independent sources: deposit repricing, the roll-off of expensive certificates of deposit, and the replacement of low-yielding mortgages with auto loans. The company's own projection assumes two Fed rate hikes, which would delay margin expansion by a few quarters.
Valuation near book value is not a discount. Ally trades at 0.95 times expected book value versus 1.10 for Capital One and 1.49 for Synchrony, but it earns 11.8% on tangible capital versus 25.2% for Synchrony. The discount will disappear only when the return moves toward the stated low fifteen percent.
The improvement in credit losses is partly one-time. Charge-offs fell to 1.57% and improved for the sixth consecutive quarter, but they benefit from the run-off of the weak 2022 vintage and the outperformance of the 2024 vintage, which management does not promise for future vintages. Delinquency remains at 4.80% and is improving more slowly than before.
The company operates the largest purely digital bank in the United States. It has no branches, serves 3.6 million deposit customers, and their deposits cover 87% of the entire balance sheet funding. But it earns most of its profit on the other side of the balance sheet. It is among the largest American lenders for used and new cars, sells insurance through car dealerships, and lends to mid-sized companies and private equity funds.
Berkshire Hathaway a few days ago showed how it handled banks in its portfolio in the second quarter. It slashed Capital One by 58 percent and continued its eighth straight quarter of sell-downs at Bank of America. This bank lost only seven percent and, alone among the trio, kept more than ninety percent of its original position at Berkshire.
The quarter when record loan volume hit profit
We are talking about Ally Financial $ALLY , a bank based in Detroit that until 2010 operated under the name GMAC as the lending arm of General Motors. From that era it retained its most valuable asset: established relationships with thousands of authorized car dealers across the United States. And also its biggest challenge: concentration in a single type of lending.
Second quarter 2026 results were released in July. Adjusted earnings per share reached $1.21, while the analyst consensus ranged from $1.23 to $1.25 depending on the source. GAAP earnings were $1.18 per share, and net income to common shareholders, after deducting preferred dividends, reached $367 million versus $324 million in the same quarter last year. Total net revenue of $2.29 billion slightly beat estimates, and pre-tax income of $537 million was up 23% year over year.