Ally Financial Inc. quarterly report, Q2 FY2017

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Business context and reporting period

Ally Financial Inc. is a digital financial services company whose principal businesses include automotive finance and insurance, mortgage finance, corporate lending, online banking, and digital brokerage. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods unless stated otherwise. Financial amounts are in millions of dollars except per-share data and ratios.

Financial performance and condition

  • Second-quarter results: Net revenue was $1,455, up 7%; net income from continuing operations was $254, down 29%; and diluted EPS was $0.55, versus $0.70. Pretax continuing income was $376, down 9%.
  • First-half results: Net revenue was $2,830, up 5%; continuing net income was $467, down 23%; and diluted EPS was $1.01, versus $1.18. Pretax continuing income was $702, down 13%.
  • Revenue and margins: Second-quarter net financing revenue was $1,067, up 8%, while total interest expense increased 8% to $700. Net interest margin was 2.76%, versus 2.68%, and net interest spread was 2.63%, versus 2.56%. For the first half, net financing revenue was $2,046, up 6%, and net interest margin was 2.68%, versus 2.64%.
  • Credit costs: Loan-loss provision rose 56% to $269 in Q2 and 38% to $540 in the first half. First-half net charge-offs increased to $452 from $331; the consumer automotive net charge-off ratio was 1.4%, versus 1.0%. The allowance for loan losses was $1,225, or 1.0% of loans, at June 30.
  • Expenses and other income: Q2 noninterest expense rose 5% to $810; first-half expense rose 7% to $1,588. Q2 gain on mortgage and automotive loans was $36, including a $33 gain from selling previously written-down Chapter 13 auto loans. Lower used-vehicle remarketing gains reduced lease revenue.
  • Cash flow: For the first half, operating cash flow was $2,070, investing cash outflow was $3,316, and financing cash outflow was $313. Cash and cash equivalents fell by $1,557 to $4,377.
  • Balance sheet and funding: Total assets were $164,345 at June 30, versus $163,728 at year-end 2016. Deposits increased to $86,183 from $79,022; short-term borrowings were $10,712 and long-term debt was $49,145, down from $12,673 and $54,128, respectively. Equity was $13,473.
  • Capital and liquidity: Ally Financial’s CET1 ratio was 9.47%, total risk-based capital ratio 12.83%, and Tier 1 leverage ratio 9.51%; Ally Bank’s CET1 ratio was 17.89% and Tier 1 leverage ratio 15.31%. Available liquidity was $20,969, including $2,545 of unused committed facilities whose availability depends on eligible collateral. Management said liquidity would cover planned originations and obligations for more than 36 months under a long-term capital-markets stress scenario, assuming no unsecured debt issuance or term securitizations.

Material changes versus prior comparable periods

  • Higher loan balances and yields supported financing revenue, but credit provisions rose with consumer auto portfolio growth, seasoning, and a deliberate shift toward a broader risk mix. Management also cited deterioration in lower credit tiers.
  • Operating lease assets fell to $9,717 from $11,470 at year-end 2016, reflecting runoff of the GM lease portfolio. Q2 net operating lease revenue fell 37%; average gain per terminated vehicle was $453, compared with $1,126, amid declining used-car values.
  • Deposit funding grew, while short-term borrowings and long-term debt declined from year-end levels. Interest costs nevertheless increased year over year, reflecting deposit growth and higher rates on secured funding.
  • Automotive Finance pretax income fell 19% in Q2 to $347. Corporate Finance pretax income increased to $35 from $14, while Insurance reported a $21 pretax loss versus a $18 loss.

Outlook, commentary, risks, and unusual items

  • No formal earnings or revenue guidance is provided in the supplied filing text. Management expected used-vehicle values to continue declining in the near term and noted a shift in future lease returns toward trucks and SUVs.
  • Interest-rate sensitivity was liability-sensitive in rising-rate shock scenarios under management’s deposit repricing assumptions. An instantaneous +100-basis-point shock was estimated to reduce next-12-month pretax net financing revenue by $69; a +200-basis-point shock by $277. Results depend materially on deposit beta assumptions and other modeling inputs.
  • A nonrecurring $175 tax benefit in Q2 2016, from release of a prior-year federal tax reserve, made the 2017 year-over-year tax comparison less favorable. Q2 2017 income tax expense was $122, versus $56 in Q2 2016.
  • The Federal Reserve did not object to the 2017 capital plan. Authorized actions included raising the quarterly dividend from $0.08 to $0.12 per share and a share-repurchase authorization of up to $760 through Q2 2018, subject to regulatory and board requirements. The board declared the $0.12 dividend on July 18, 2017.
  • Risks include consumer auto credit performance, used-car residual values, interest-rate and funding costs, deposit repricing, capital-market access, regulation, and legal matters. Securities class actions allege IPO disclosure failures; the company also reported SEC, DOJ, and New York regulatory inquiries concerning subprime auto finance and securitization. The CFPB/DOJ indirect auto finance consent orders terminated July 27, 2017; Ally reported about $240 in cumulative related judgments, fines, and customer payments since 2013.
  • Management stated it could not estimate reasonably possible losses beyond established reserves for the identified material legal matters. The filing identifies CECL adoption planned for January 1, 2020, as likely to materially increase credit-loss allowances and reduce retained earnings.

Important facts for investors to verify

  1. Whether consumer auto charge-offs and provision growth stabilize as newer, broader-risk loan vintages season, and whether allowance levels remain adequate.
  2. How further declines in used-vehicle prices affect lease residuals, remarketing gains, and auto credit recoveries.
  3. Whether deposit growth and repricing assumptions support funding costs and reported interest-rate sensitivity; confirm the collateral conditions behind unused committed liquidity.
  4. Whether authorized dividends and buybacks proceed as planned, subject to regulatory review, capital levels, and board approval.
  5. Developments and potential financial exposure from securities litigation and regulatory matters, and the eventual impact of CECL implementation.