The end of the Troubled Asset Relief Program is at hand. Ally Financial will be exiting the federal government’s TARP over the next week or two after the U.S. Treasury finalizes the sale of its remaining 54.9 million Ally shares. In their December 18th Equity Research Report, Mark Palmer and Giuliano Bolgna of BTIG Research argue that the exit from TARP will be a key catalyst in propelling Buy-rated closer to their price target of $31.

Improved ROTCE for Ally Financial

The BTIG report notes that operations have already been improving at Ally Financial, with Ally’s core return on tangible common equity (ROTCE) moving up substantially over the last year or so (from 3% in 2013 to 9.1% in 3Q 2014). Palmer and Bologna also point out that most of the improvement derives from reductions in expenses. The firm’s efficiency ratio decreased to 49% in 3Q 2014 from a sky-high 73% in 4Q 2013.

The analysts argue that the only way the company was going to be able to meet its stated goal of 10-11% ROTCE by the end of 2015 was to get out from under the TARP restrictions. That would give them “the flexibility to increase deposit funding from Ally Bank and originate more loans and leases from the bank, reducing its funding costs.

Ally Financial

Market behind the curve on Ally

Palmer and Bolgna highlight that exiting TARP is critical for Ally as it enables the firm to take actions to reduce its funding costs and become more competitive with its peers. The BTIG analysts also argue that the current price of $22.75 a share indicates the market has not recognized the importance of getting out from under the TARP restrictions in improving the profitability of Ally’s operations. Moreover, the firm’s already improving ROTCE is likely to receive a boost over the next couple of quarters, which should now translate directly to an increase in the share price as is typical for other firms in the sector.