Ally Financial's Margin Is About to Get a Tailwind as High-Cost Deposits Roll Off. Is the Digital Bank a Buy?

Investors looking for a cheap stock with significant upside potential may want to consider Ally Financial (NYSE: ALLY). Ally is one of just a few dozen stocks in the Berkshire Hathaway portfolio, added several years ago by former CEO Warren Buffett. That says a lot right there.

Ally is also one of the first fully online banks, with its origins as General Motors' auto financing arm. While it is a full-service online bank, it is one of the largest auto loan lenders, and that segment of its business is the largest.

The stock has sputtered this year -- it's down 2.7% year to date and up about 9% over the past year. But it has a solid track record, averaging about 10.7% returns over the past 10 years.

But there are some strong reasons why Ally stock should be headed higher over the next year or so.

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Ally is seeing solid margin improvement

Ally launched its "Focused. Forward" strategic plan in 2025, and the results of this effort to reduce complexity, refocus on core strengths, and enhance expense and capital discipline have started to pay off.

In the first quarter, Ally increased net financing revenue by 8% to $1.6 bilion and lowered noninterest expenses by 24%. That resulted in net income of $291 million, or $0.93 per share, up from a net loss of $253 million in Q1 of 2025.

Further, its net interest margin (NIM) rose 17 basis points year over year to 3.5%. And management expects that to widen over the rest of the fiscal year. In its first-quarter guidance, Ally targeted a NIM of 3.6% to 3.7%, which would mark significant year-over-year growth from Q1.

This is due to several factors, including expense reduction and anticipated revenue gains. Ally had a record 4.4 million auto loan applications in Q1 and was selective, with originations of $11.5 billion, up 13% year over year. This resulted in improved credit quality, as net charge-off rates dropped year over year in Q1, and management expects them to move lower at the midpoint in 2026.

Is Ally a buy?

An underlying tailwind for Ally has been a boost in the average loan yield to 9.27%, up from 9.11% in the same quarter a year ago. Auto loan originations generated a robust 9.6% yield.

Looking forward, Ally should benefit from $18 billion in CDs maturing in 2026, management said on the Q1 earnings call. Those CDs carry a weighted average yield of close to 4%. So with deposit rates lower, Ally should be able to replace those higher-yield CDs with new, lower-rate funding.

In addition to this momentum, Ally stock is currently dirt cheap, trading at just 11 times earnings and 8 times forward earnings. That clearly makes it a good buy right now.

Ally is an advertising partner of Motley Fool Money. Dave Kovaleski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway. The Motley Fool recommends General Motors. The Motley Fool has a disclosure policy.