Ally Financial Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Financial statements are unaudited. Ally is a digital financial-services company focused on automotive finance and insurance, online banking, mortgage finance, corporate lending, and brokerage.
Financial performance and position
| Metric | Q2 2019 | Prior comparable period |
|---|---|---|
| Total net revenue | $1.552 billion | $1.458 billion; up 6% |
| Net financing revenue | $1.157 billion | $1.094 billion; up 6% |
| Provision for loan losses | $177 million | $158 million |
| Noninterest expense | $881 million | $839 million |
| Income before tax | $494 million | $461 million |
| Net income | $582 million | $349 million |
| Diluted EPS | $1.46 | $0.81 |
- For the first half, net revenue was $3.150 billion versus $2.861 billion; net income was $956 million versus $599 million. Operating cash flow was $1.844 billion, compared with $2.009 billion.
- Q2 net interest spread was 2.43%, down from 2.53%; net yield on interest-earning assets was 2.66%, versus 2.68%. Return on average assets was 1.29% and return on average equity 16.92%, compared with 0.82% and 10.71%, respectively.
- At June 30, total assets were $180.4 billion; net finance receivables and loans were $127.9 billion; deposits were $116.3 billion; short- and long-term debt totaled about $44.0 billion; and equity was $14.3 billion. Deposits grew from $106.2 billion at year-end 2018, while debt declined from $54.2 billion.
- Available liquidity was $26.3 billion, and the average modified Liquidity Coverage Ratio was 125%, above the 100% regulatory minimum. Ally’s Common Equity Tier 1 ratio was 9.52%; Ally Bank’s was 12.54%.
- The allowance for loan losses was $1.282 billion. First-half net charge-offs were $419 million versus $439 million in 2018; nonperforming loans were $903 million, down from $1.092 billion at year-end 2018.
Material changes and drivers
- Higher consumer and commercial lending yields and growth in earning assets supported revenue. Deposit and other funding costs rose: Q2 interest expense increased to $1.095 billion from $873 million, reflecting higher rates, deposit growth, and funding needs.
- Q2 net income included a tax benefit of $90 million, primarily from an approximately $200 million release of a valuation allowance on foreign tax credit carryforwards. This one-time tax item materially affected the comparison; it was tied to expected securitization capacity and market demand.
- First-half other investment gains rose to $147 million from $15 million, including $75 million of unrealized equity gains. Higher provision expense and operating costs partly offset stronger revenue.
- Insurance results were pressured by weather-related losses: the Q2 combined ratio was 114.4%, compared with 111.2%; the first-half ratio was 100.0%, versus 99.6%.
- Automotive Finance pretax income rose 20% in Q2 to $459 million. Corporate Finance pretax income declined to $46 million from $58 million, with higher credit provisions among the drivers. Corporate and Other reported a $25 million pretax loss versus a $4 million loss.
Outlook, risks, and unusual items
- The filing provides no specific consolidated earnings guidance. Management expected modest downward pressure on used-vehicle values during 2019 and said future lease termination volumes should be more consistent with first-half 2019 trends.
- Management expected adoption of the CECL credit-loss standard on January 1, 2020 to materially increase the allowance for credit losses, primarily for consumer automotive loans, with a negative opening retained-earnings adjustment. The amount would depend on portfolio composition and economic forecasts at adoption.
- Key exposures include consumer and commercial credit performance, used-car prices and lease residual values, interest-rate sensitivity, deposit pricing and funding access, regulatory capital and liquidity requirements, and the LIBOR transition. Ally noted cybersecurity and technology risks, including implementation of a replacement consumer auto loan and lease platform expected within 12 months.
- Interest-rate sensitivity analysis estimated that, relative to its baseline forecast, next-12-month net financing revenue would fall $60 million if rates were unchanged; instantaneous +100 and +200 basis-point shocks were estimated to reduce it by $28 million and $11 million, respectively. These are model-based estimates, not guidance.
- Legal matters are inherently uncertain. Ally did not believe their ultimate outcomes were likely to materially affect consolidated financial condition after accruals, but noted they could materially affect results or cash flows in a particular period.
- After quarter-end, the board declared a $0.17-per-share dividend and Ally agreed to acquire Health Credit Services for approximately $190 million, with closing expected in Q4 2019 subject to conditions. A $1.25 billion repurchase authorization was set for Q3 2019 through Q2 2020; distributions remain subject to regulatory and other conditions.
Important facts for investors to verify
- How much of the earnings increase is sustainable absent the approximately $200 million tax valuation-allowance release and investment gains?
- Whether higher deposit costs and other funding expense continue to pressure spread and net financing revenue.
- Trends in auto delinquencies, charge-offs, allowance adequacy, and the two Corporate Finance exposures that increased first-half provisions.
- Actual used-vehicle resale values, lease residual performance, and weather-related insurance claims and combined ratios.
- The eventual CECL day-one allowance and retained-earnings impact, and any related regulatory-capital effects.
- Execution and cost of the Health Credit Services acquisition and new servicing platform, and the regulatory capacity to sustain planned dividends and repurchases.