Ally Financial Earnings Upside Potential Shrinks Amid Higher Interest Rates, Morgan Stanley Says in Downgrade

01:16 PM EDT, 10/12/2026 (MT Newswires) -- Ally Financial's (ALLY) earnings are likely to see less upside than previously projected amid higher interest rates and a "less favorable" credit environment, Morgan Stanley said in a note e-mailed Monday. The auto lending-focused digital financial services company's key earnings drivers -- namely net interest margin, or NIM, and auto credit -- may not see much improvement for now, thus limiting growth in both its return on tangible common equity, or ROTCE, and earnings per share, the investment firm said in the note to clients. While Ally's NIM is projected to improve beyond the third quarter, Morgan Stanley said its 2027 and 2028 estimates of 3.70% and 3.74%, respectively, are now below consensus, as the firm assumes two more Federal Reserve interest rate increases following last month's 25-basis-point hike. "We now forecast less earnings upside amid higher interest rates and a less favorable credit backdrop," Morgan Stanley wrote. "We are not calling for a material contraction in NIM or deterioration in auto credit; however, these two key earnings drivers are unlikely to improve much from here, keeping a lid on ROTCE and EPS growth for the time being." Morgan Stanley said it does not expect Ally to achieve a mid-teens ROTCE through 2028 and sees "a less compelling risk/reward" for the company's shares from here. The firm downgraded its rating on the Ally stock to equal-weight from overweight, and lowered its price target to $43 from $55. The shares were up 0.6% in Monday afternoon trade, but have lost about 17% in value so far this year. Last month, the Fed's Summary of Economic Projections signaled the potential for another rate hike later this year as policymakers seek to tame inflation. Morgan Stanley is no longer projecting an improvement in Ally's net charge-off rate next year, according to the note. Auto credit delinquencies were nearly flat year over year in the last quarter and are likely to flatten out further particularly as loans given out recently have "underperformed" those loans given out in 2024, the firm wrote. "The 2024 vintage will only become a smaller piece of the pie, which should keep delinquencies from improving from here," Morgan Stanley said. Used car prices are now flattening out after rising in recent years and serving as a tailwind to auto loan recoveries, according to the note. The projected flattening out "should result in less of a benefit to auto loan recovery rates going forward," Morgan Stanley said. "Prices could actually decline if rates jump even higher, the macro deteriorates even further, and/or gas prices move even higher, sapping demand for vehicles." Ally and fellow financial services companies Capital One Financial (COF) and Synchrony Financial (SYF) are scheduled to release their respective third-quarter results Oct. 20. Price: 37.86, Change: +0.26, Percent Change: +0.70