Ally Financial Inc. — 2018 Form 10-K Summary
Business context and reporting period. This annual filing covers the fiscal year ended December 31, 2018; “2018 Q4” is the requested period, but most financial results below are full-year figures. Ally is a digital financial-services company centered on automotive finance and insurance, with online banking, mortgage finance, corporate finance, and brokerage businesses. Assets were $178.9 billion at year-end.
Key financial results
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total net revenue | $5.804 billion | $5.765 billion |
| Net financing revenue and other interest income | $4.390 billion | $4.221 billion |
| Provision for loan losses | $918 million | $1.148 billion |
| Noninterest expense | $3.264 billion | $3.110 billion |
| Income from continuing operations | $1.263 billion | $926 million |
| Diluted EPS from continuing operations | $2.95 | $2.03 |
| Net cash from operating activities | $4.150 billion | $4.079 billion |
| Net cash used in investing activities | $14.509 billion | $8.727 billion |
| Net cash from financing activities | $10.721 billion | $2.033 billion |
- Profitability and margins: Net income from continuing operations rose 36%. Return on average assets was 0.74% (0.57% in 2017) and return on average equity was 9.65% (6.89%). Net yield on interest-earning assets was 2.65%, down from 2.71%; net interest spread was 2.47%, down from 2.58%.
- Fourth quarter: Net income was $290 million versus $181 million in Q4 2017; continuing-operations net income was $289 million versus $179 million. Total net revenue was $1.438 billion versus $1.473 billion, and pretax continuing income was $368 million versus $410 million.
- Credit: Net charge-offs were $945 million, down from $1.010 billion; consumer charge-offs were $937 million. The allowance for loan losses was $1.242 billion, or 1.0% of loans. Commercial nonperforming loans rose to $349 million from $72 million, including a large dealer-group default and weaker Corporate Finance exposures.
- Funding and liquidity: Deposits reached $106.2 billion, up $12.9 billion; retail deposits were $89.1 billion. Deposits were 66% of on-balance-sheet funding. Total available liquidity was $19.0 billion, and the modified liquidity coverage ratio exceeded 100%.
- Debt and capital: Long-term debt was $44.2 billion; short-term borrowings were $10.0 billion. Total debt in the funding table was $54.1 billion. Ally’s Common Equity Tier 1, Tier 1, and total capital ratios were 9.14%, 10.80%, and 12.31%, respectively; Ally Bank was reported well capitalized.
Material changes versus 2017
- Higher consumer and commercial lending revenue and lower loan-loss provision supported earnings growth; lower taxes also helped. Interest expense increased 27% to $3.637 billion as market rates and deposit balances rose.
- Consumer automotive credit performance improved, with net charge-offs declining and recoveries benefiting from stronger used-vehicle values. Nonprime loans fell to 11.7% of consumer auto loans from 12.9%, while used-vehicle loans increased to 51.5% from 46.8%.
- Automotive Finance pretax income rose 12% to $1.368 billion. Insurance pretax income fell to $80 million from $168 million, primarily reflecting unrealized equity-security losses. Mortgage Finance and Corporate Finance pretax income increased to $45 million and $144 million, respectively.
- Operating-lease assets declined to $8.4 billion. The legacy GM lease portfolio was substantially wound down by June 2018, reducing lease revenue and termination volumes.
- Year-end shares outstanding fell to 404.9 million from 437.1 million. Ally repurchased $939 million of common stock in 2018 and declared $0.56 per share in dividends. The board subsequently raised the quarterly dividend to $0.17 per share, payable in February 2019.
Outlook, risks, and unusual items
- Outlook: The filing does not provide a numerical earnings or revenue forecast. Management expected modest downward pressure on used-vehicle values during 2019 and planned continued deposit growth, portfolio diversification, digital investment, and disciplined risk management.
- Material risks: Credit performance is sensitive to economic conditions, unemployment, and used-vehicle and housing prices. Other significant exposures include higher funding costs and interest-rate changes; reliance on deposits, securitizations, and capital markets; GM/Chrysler and dealer concentration; competitive pressure; cyber, technology, and third-party service-provider risks; and extensive regulatory oversight.
- Accounting and unusual items: A new accounting standard required equity-security fair-value changes to flow through earnings; Ally recorded $121 million of unrealized equity losses in 2018. The 2017 comparison included $119 million of tax expense from tax reform. Adoption of the new revenue standard reduced opening retained earnings by $126 million and reduced 2018 net income by $10 million. CECL, scheduled for 2020, was expected to materially increase the allowance and negatively affect equity at adoption.
- Regulatory developments: The Federal Reserve did not object to Ally’s 2018 capital plan. In early 2019, it announced Ally would not be required to participate in the 2019 CCAR or stress-test cycle; capital distributions remained subject to regulatory review and board approval.
- Legal matters: A securities class-action matter alleging misstatements around Ally’s 2014 IPO was dismissed in January 2019; the order was not appealed and the case closed. The filing says it could not estimate reasonably possible losses for its other material legal matters.
Important facts for investors to verify
- Whether improving auto credit performance persists as the portfolio grows and shifts toward used vehicles, and how to interpret the increase in commercial nonperforming loans.
- Whether deposit growth and pricing can offset rising deposit and other funding costs, while Ally manages debt maturities and brokered-deposit reliance.
- Used-vehicle resale values, lease residual assumptions, and the impact of the continued run-off of the legacy lease portfolio.
- The expected scale and regulatory-capital effect of CECL adoption in 2020.
- Capital and liquidity headroom, and the regulatory and board conditions attached to future dividends and share repurchases.
- The filing reports unqualified audit opinions and effective internal control over financial reporting as of December 31, 2018.