Warren Buffett’s Berkshire Hathaway (NYSE: BRK-B) is flush with cash, including $189 billion on its balance sheet, an all-time high. Perhaps Buffett might want to consider increasing his allocation to one banking stock that has approximately 12% upside potential in 2024 – Ally Financial (NYSE: ALLY). 

As an innovator in the digital banking space, Ally, an all-direct digital bank, is one way to gain exposure to both technology and finance. With 3 million-plus customers, Ally Bank has struck a chord with depositors and borrowers for its digital approach involving online, mobile, text and telephone servicing. Ally is among the fintech platforms to spearhead the elimination of fees for activities like overdrafts. 

Buffett is inclined to invest in companies with business models he understands, which explains his focus on financial and insurance stocks. At 29 million shares, Berkshire Hathaway holds a 9.50% stake in ALLY stock, representing 0.30% of its portfolio. Buffett’s bet on Ally Financial is likely to pay off for his company this year, thanks largely to the digital bank’s growth strategy that’s resonating with consumers.

Not only is dividend-paying Ally in Buffett’s portfolio, but it’s also a favorite stock on Wall Street. Analysts have attached a high price target of $46, which based on the current share price represents upside potential of over 12% this year. ALLY stock is up 14% year-to-date, but there’s reason to believe there’s more runway for gains.

Banking Breadth  

In the most recent quarter, Ally’s deposits ballooned by $2.9 billion, owing to the addition of over 100,000 new customers. Ally hasn’t been immune to consumer weakness on the credit card front, resulting in heightened near-term delinquencies. Nevertheless, the bank is confident about the long-term performance of this segment.   

Ally, which just celebrated one decade as a publicly traded company, has diversified loan exposure that extends to autos. This model should help to offset weaknesses in any one given area, like credit cards.

In its last quarter, Ally Financial divested $1.1 billion of loans on its balance sheet from last year whose yields were below average, buoying earnings by $15 million and helping Ally to stay nimble in the uncertain market environment. 

More than one-third (40%) of Ally’s auto loan originations involve high-quality borrowers, a trend that spills over to all of its consumer loan originations and is on the rise. Ally stands to benefit from a recent Fed decision to reportedly allow the bank alongside Truist Financial (NYSE: TFC) to use financial instruments known as credit-linked notes to lower capital requirements for auto loans. 

In the current tight monetary policy economy, Ally is facing a higher cost of capital but believes the worst is behind. The digital bank is also not dependent on potential interest rate cuts to achieve its target net interest margin of 4% by year-end 2025, fueled largely by strong loan origination yields in its auto segment. 

Strong Conviction 

Ally Financial has an annual dividend yield of 3% attached, a distribution that comes on top of any increase in its value. The stock has been on the rise since reporting its Q1 results and trading volume has been increasing, a sign of strong conviction. If Wall Street analysts are right, any uncertainty around interest rates notwithstanding, Ally is one Buffett stock that has another 12% upside potential this year. 

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