Ally Financial Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019; quarterly figures below compare fourth-quarter 2019 with fourth-quarter 2018 where noted. Ally is a digital financial-services company focused primarily on automotive finance, with insurance, online banking, mortgage, corporate finance, brokerage and personal-lending businesses. It reported $180.6 billion in assets.
Key financial results
- Revenue: Total net revenue was $6.394 billion, up 10% from $5.804 billion. Net financing revenue and other interest income was $4.633 billion, up 6%; other revenue rose 25% to $1.761 billion.
- Profit: Income from continuing operations was $1.721 billion, up 36%; net income was $1.715 billion versus $1.263 billion. Diluted EPS was $4.34 versus $2.95. Fourth-quarter net income was $378 million versus $290 million a year earlier; diluted EPS was $0.99 versus $0.70.
- Margins and returns: Net yield on interest-earning assets was 2.67% versus 2.65%; net interest spread was 2.45% versus 2.47%. Return on average assets was 0.95% versus 0.74%, and return on average equity was 12.26% versus 9.65%.
- Credit costs: Provision for loan losses rose 9% to $998 million. Net charge-offs were $976 million versus $945 million; total allowance for loan losses was $1.263 billion at year-end. Nonperforming loans were $1.036 billion, down from $1.092 billion.
- Cash flow: Operating cash flow was $4.050 billion, investing cash outflow was $3.769 billion, and financing cash outflow was $1.530 billion. Cash and restricted cash ended the year at $4.380 billion.
- Funding, debt and liquidity: Deposits grew $14.6 billion to $120.8 billion and represented 75% of on-balance-sheet funding. Total debt was $39.6 billion, including $25.8 billion secured debt. Available liquidity was $29.9 billion, up from $19.0 billion. Total equity was $14.4 billion.
- Capital: Ally’s Common Equity Tier 1 ratio was 9.54%, Tier 1 ratio 11.22%, and total capital ratio 12.76%; Ally and Ally Bank were reported in compliance with regulatory capital requirements.
Material changes versus 2018
- Revenue and continuing-operations income increased, supported by asset growth and higher yields, while funding costs also rose: interest expense increased 17% to $4.243 billion.
- Other investment gains were $243 million versus a $50 million loss in 2018, including a shift to $92 million of unrealized equity-security gains from $121 million of unrealized losses. The Insurance segment’s pretax income increased to $315 million from $80 million; its combined ratio improved to 92.2% from 92.6%.
- Retail deposits grew 16% to $103.7 billion. The company continued reducing market-based funding; long-term debt declined to $34.0 billion from $44.2 billion.
- Consumer automotive loans grew, with used-vehicle originations increasing. Nonprime automotive loans were 11.6% of the portfolio, roughly stable year over year; used-vehicle loans rose to 54.9% of consumer automotive loans from 51.5%.
- Ally acquired Health Credit Services for $177 million in October 2019 and renamed the business Ally Lending. It also began offering commission-free brokerage trading in October.
Outlook, commentary and risks
- Management reported a modestly expanding U.S. economy and strong labor market in 2019, but expected modest downward pressure on used-vehicle values during 2020. The filing does not provide clear quantified earnings guidance.
- CECL took effect January 1, 2020. Ally estimated a roughly $1.3 billion pretax increase in its loan-loss allowance and a $1.0 billion after-tax reduction to opening retained earnings; it estimated a 17–19 basis-point reduction in CET1 in the first quarter of 2020, with regulatory-capital transition relief.
- In October 2019, new prudential rules designated Ally a Category IV firm, moving supervisory stress testing to a two-year cycle and reducing the frequency of liquidity stress tests, while retaining an annual capital plan and liquidity-buffer requirements.
- Key risks include automotive credit losses, lower used-car prices and lease residual values, competition and dealer relationship changes, concentration in GM and Chrysler business, deposit pricing and funding access, interest rates, LIBOR transition, cybersecurity and operational disruption, regulation, and legal contingencies. A certified class action concerning vehicle-repossession notices remains pending; the filing says a potential loss range cannot be estimated.
- Capital returns included $1.039 billion of common-stock repurchases and $0.68 per share in dividends declared during 2019. A $1.25 billion repurchase authorization ran through the second quarter of 2020; in January 2020, the Board declared a quarterly dividend of $0.19 per share.
- After year-end, Ally agreed to acquire CardWorks for approximately $2.65 billion in cash and stock, subject to regulatory approval and other conditions, with closing expected in the third quarter of 2020. The agreement includes a stock-price-related “fill or kill” provision.
Most important facts for investors to verify
- How CECL’s actual day-one allowance, retained-earnings impact and regulatory-capital effects compare with management’s estimates.
- Whether automotive delinquencies, charge-offs and used-vehicle values remain consistent with management’s expectations, including the impact of the early-2020 servicing-platform conversion.
- Whether deposit growth can continue at acceptable funding costs and how upcoming 2020 debt and certificate-of-deposit maturities are refinanced.
- How much of 2019 earnings growth reflects recurring operating performance versus investment-market gains and the approximately $200 million foreign-tax-credit valuation-allowance release.
- CardWorks transaction timing, final consideration and integration risks, and developments in the pending repossession-notice class action.