Ally Financial (ALLY) sees less earnings upside amid higher interest rates and a less favorable credit backdrop, with net interest margin expansion and improvement in auto credit unlikely to be significant from here, Morgan Stanley said in a Monday note.

Deposit costs have fallen meaningfully over the past few years, while the repricing tailwind from new auto originations has narrowed substantially, according to the note.

The brokerage said its model now embeds two additional rate hikes beyond the September rate move, driving deposit costs up about 40 basis points by Q4 2027 and curbing net interest margin expansion in 2027 and 2028.

Morgan Stanley said it is no longer forecasting improvement in Ally Financial's net charge-off, or NCO, rate in 2027, another reason for its forward earnings estimates to decline. Additionally, used car prices are flattening, which should result in less of a benefit to auto loan recovery rates going forward, the note added.

The investment firm said the combination of higher funding costs and a less favorable credit outlook would limit the path to a mid-teens return on tangible common equity, which it does not expect Ally to achieve through 2028.

Morgan Stanley downgraded Ally Financial to equalweight from overweight and adjusted its price target to $43 from $55.

Price: 37.58, Change: -0.01, Percent Change: -0.03