Ally Financial Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Ally is a digital financial-services company with automotive finance and insurance as core businesses, alongside consumer banking, mortgage, corporate finance, brokerage, and point-of-sale lending.
Financial results and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total net revenue | $1.684 billion | $1.601 billion | $4.705 billion | $4.751 billion |
| Net income | $476 million | $381 million | $398 million | $1.337 billion |
| Diluted EPS | $1.26 | $0.97 | $1.06 | $3.35 |
| Provision for credit losses | $147 million | $263 million | $1.337 billion | $722 million |
| Net financing revenue and other interest income | $1.200 billion | $1.188 billion | $3.400 billion | $3.477 billion |
| Net yield on interest-earning assets | 2.65% | 2.70% | 2.57% | 2.68% |
Q3 revenue rose 5% and net income rose 25% year over year, helped by lower credit-loss provision, higher other revenue, and slightly higher net financing revenue. For the first nine months, revenue was nearly flat, while net income fell 70%, primarily reflecting pandemic-related credit reserves and higher expenses; the 2019 comparison also benefited from an approximately $200 million tax valuation-allowance release.
Balance sheet at September 30, 2020: Assets were $185.3 billion, versus $180.6 billion at year-end 2019. Net finance receivables and loans were $114.6 billion, down from $127.0 billion; the allowance for loan losses was $3.379 billion, compared with $1.263 billion at year-end. Deposits increased to $134.9 billion from $120.8 billion. Short-term borrowings were $3.0 billion and long-term debt was $25.7 billion, down from $5.5 billion and $34.0 billion, respectively. Equity was $14.1 billion, versus $14.4 billion.
Cash flow and liquidity: For the nine months, operating activities provided $2.6 billion, investing activities provided $11.0 billion, and financing activities provided $2.6 billion; cash and restricted cash ended at $20.6 billion, compared with $4.4 billion at the beginning of the year. Reported available liquidity was $43.7 billion, up from $29.9 billion at December 31, 2019. Deposits supplied 82% of on-balance-sheet funding, compared with 75% at year-end.
Capital and distributions: Ally’s Common Equity Tier 1 ratio was 10.36% and Ally Bank’s was 13.63%; both were reported as well-capitalized. Ally’s stress capital buffer requirement of 3.5% took effect October 1, 2020. The common dividend was $0.19 per share for Q3, and the Board declared another $0.19 dividend in October. Share repurchases were suspended, subject to Federal Reserve restrictions.
Material changes and notable items
- Ally adopted CECL on January 1, 2020. Adoption increased the allowance by approximately $1.3 billion and reduced opening retained earnings by approximately $1.0 billion after tax. The company elected to defer and phase in the regulatory-capital impact beginning in 2022.
- Nine-month provision for credit losses increased to $1.337 billion from $722 million, reflecting pandemic-related expected-loss reserves. Q3 provision declined year over year to $147 million, aided by lower consumer automotive net charge-offs and an improved macroeconomic forecast.
- Q3 net charge-offs on consumer automotive loans were $117 million, versus $253 million a year earlier. At September 30, consumer nonperforming loans were $1.343 billion, or 1.5% of consumer loans, compared with $821 million, or 0.9%, at year-end 2019.
- Ally recognized a $50 million goodwill impairment at Ally Invest in Q2, citing reduced expected growth and delayed revenue. It recorded a $48 million loss in Q3 after prepaying $2.5 billion of FHLB advances.
- Automotive finance originations were $9.8 billion in Q3, versus $9.3 billion a year earlier, but were down for the nine-month period. Commercial automotive balances were substantially lower than at year-end amid reduced vehicle production and dealer inventories.
Outlook, commentary, and risks
Management reported improving activity in Q3, including recovery in automotive applications, originations, dealer inventories, and used-vehicle values, but said the sustainability of the recovery and the pandemic’s ultimate effects remained uncertain. No specific earnings or financial forecast is provided in the supplied filing text.
Management identified COVID-19 resurgence, unemployment, the end or nonrenewal of fiscal support, and further economic disruption as risks to borrowers, credit performance, funding markets, and operating results. Other risks include automotive production and used-vehicle values, interest-rate and market volatility, deposit competition, regulatory capital requirements, LIBOR transition, and operational or cybersecurity disruption. Management noted that strong used-vehicle prices supported lease remarketing gains; Q3 average gain was $2,437 per terminated vehicle, versus $944 a year earlier.
Federal Reserve restrictions limited common-stock repurchases and constrained dividend increases through Q4 2020. Ally submitted an updated capital plan on November 2, 2020; the filing says the resubmission could affect its stress capital buffer requirement. A certified class action concerning vehicle-repossession notices could result in significant damages if awarded, but Ally said a reasonably possible loss estimate could not be made. Management did not believe the ultimate outcomes of pending matters were likely to be material to consolidated financial condition, while noting an individual matter could materially affect a reporting period’s results or cash flows.
Investor verification priorities
- Assess the adequacy and sensitivity of the $3.379 billion CECL allowance to unemployment, economic forecasts, and loan-deferral performance.
- Verify subsequent delinquency, charge-off, and repayment trends among borrowers who exited pandemic relief programs; reported delinquency was frozen during deferrals.
- Review the durability of automotive origination recovery, dealer floorplan balances, used-vehicle prices, and lease residual values.
- Reconcile the large increase in cash and available liquidity with funding needs, debt maturities, and the decline in loan balances.
- Monitor Federal Reserve capital-plan and distribution restrictions, including the updated stress capital buffer and dividend capacity.
- Track the vehicle-notice class action and other contingencies; the filing provides no quantified loss range for the identified lawsuit.