Shifting Gears: Behind Ally Bank's Move into Wealth Management

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For months now, Ally Financial has made no secret of the fact that it wants to diversify its sources of revenue by offering a wider array of products and services. At its inaugural investor day in February, Chief Executive Jeffrey Brown said that the $157 billion-asset Ally would begin offering credit cards and mortgages later this year and was exploring opportunities in wealth management and retail brokerage.

On Tuesday, Detroit-based Ally made good on its promise to branch out by announcing plans to acquire TradeKing Group, an online brokerage and wealth management firm, for about $275 million.

Ally officials said that the deal would provide the bank with a meaningful new source of fee income and allow it offer wealth-building products and services to its roughly 1.1 million depositors. It would also gain more than $1 billion in TradeKing client deposits that Ally could use to help fund loan growth as it looks to expand beyond automobile lending and into mortgage and credit card lending.

How well the deal is received by investors, though, remains to be seen. Ally has been under pressure in recent months to boost profits and improve its stock price, which has declined by about 25% since it went public in mid-2014. Some disgruntled investors have even recommended that Ally form a committee to consider all of its strategic alternatives, including a possible sale.

Ally's share price fell nearly 4% after the deal was announced Tuesday. Its shares were up slightly at midday Wednesday.

In an interview, Diane Morais, the president and chief executive of Ally Bank (Brown is CEO of the holding company), said the bank has been studying the wealth management space for the past six or seven months. Many of Ally's depositors "are affluent customers who have their savings with Ally, but they also have other financial needs," Morais said. "We saw a great opportunity with TradeKing."

TradeKing, based in Fort Lauderdale, Fla., has two businesses in which Ally is especially interested. One is its online brokerage business, which serves clients who enjoy picking their own stocks. The other is a digital wealth management platform — or "robo-adviser" — that allows users to provide information about their investment goals and horizon and have a portfolio constructed for them.

"The beauty of the digital wealth management platform is that it can be offered at a very low cost," said Michael Baresich, Ally Financial's chief information officer. He said that many people want to invest but are unable to meet the high minimums required by traditional wealth management firms. The minimum investment for a fully managed portfolio with TradeKing is as low as $500, though Ally reserves the right to change that number, Baresich said.

TradeKing has $4.5 billion in client assets, which includes $1.1 billion of cash and cash investments. In a research note, Sandler O'Neill & Partners' Christopher Donat said that Ally could use this client cash "as a low-cost funding source for loans."

The TradeKing acquisition was announced just weeks after Ally reached a truce with Lion Point Capital, an activist hedge fund that had asked Ally's board to explore strategic alternatives. Lion Point dropped that demand after Ally agreed to consult with the hedge fund on the appointment of an independent director to Ally's board.

John Hecht, an analyst at Jefferies, said that some shareholders would like to see Ally boost its share price by using its capital to repurchase stock. Nonetheless, he said, it's important for Ally to find new sources of revenue, especially given the anticipated slowdown in auto finance.

"There's no slam dunk here," Hecht said, "but it's reasonable to think that they can convert some of their customers" into brokerage or wealth management clients. "And you probably don't need to convert a very high percentage to make it financially worthwhile."

Ally, for its part, said that the deal would not affect its plan to pursue common stock dividends and a common stock repurchase program as part of its 2016 capital plan. That plan has yet to be approved by regulators.

Ally said it expects the transaction costs to have a negative marginal impact on its 2016 and 2017 results, with the deal becoming accretive in 2018.

"While we would have preferred to see expected accretion in 2016 or 2017, we think the incremental reduction of dependence on deposits justifies the deal," Sandler O'Neill said in its note.

Ally said the $275 million purchase price is subject to certain adjustments. The price is equal to about 3% of its market capitalization, according to Sandler O'Neill.

"Ally is generating about $250 million in net income per quarter, so we're taking a quarter's worth of net income to meaningfully change our franchise," Morais said.

Kevin Wack contributed to this story.

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