Ally Financial Inc. — Q3 2023 Form 10-Q
Business context and period. Ally is a digital bank and provider of automotive finance and insurance, with mortgage, consumer lending, credit-card, and corporate-finance businesses. This unaudited report covers the quarter and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods unless noted.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total net revenue | $1.968 billion | $2.016 billion | $6.147 billion | $6.227 billion |
| Net financing revenue and other interest income | $1.533 billion | $1.719 billion | $4.708 billion | $5.176 billion |
| Provision for credit losses | $508 million | $438 million | $1.381 billion | $909 million |
| Income before tax | $228 million | $417 million | $1.019 billion | $1.897 billion |
| Net income from continuing operations | $296 million | $300 million | $945 million | $1.437 billion |
| Diluted EPS from continuing operations | $0.88 | $0.88 | $2.83 | $4.18 |
| Net interest margin | 3.24% | 3.81% | 3.37% | 3.92% |
| Operating cash flow | — | — | $4.680 billion | $5.074 billion |
Net revenue declined 2% in the quarter and 1% year to date; pretax income fell 45% and 46%, respectively. Higher asset yields and financing revenue were outweighed by substantially higher funding costs, credit provisions, and operating expenses. Q3 net income was supported by a $68 million income-tax benefit, including a nonrecurring $94 million net tax benefit, primarily from releasing a valuation allowance on foreign tax credit carryforwards.
At September 30, 2023, total assets were $195.7 billion and total equity was $12.8 billion. Finance receivables and loans, net, were $136.4 billion, after a $3.8 billion loan-loss allowance. Deposits were $152.8 billion; short-term borrowings were $2.4 billion and long-term debt was $20.1 billion. The common dividend was $0.30 per share for the quarter.
Material changes and business performance
- Funding costs and margin: Total interest expense rose to $1.85 billion in Q3 from $804 million, as higher rates increased deposit and debt costs. Interest-bearing deposit cost was 4.04% versus 1.58% a year earlier. Ally describes its balance sheet as structurally liability-sensitive over time, despite expected near-term benefit if rates rise more than the forward curve implies.
- Credit: Nine-month net charge-offs on consumer loans were $1.207 billion, versus $507 million. Consumer automotive net charge-offs were $1.021 billion, versus $438 million; the automotive quarterly net charge-off ratio rose to 1.8% from 1.1%. Management cited inflation-related delinquency deterioration, but said the rate of increase in automotive delinquencies had slowed. The total allowance was 2.7% of finance receivables, unchanged from year-end 2022.
- Automotive finance: Nine-month consumer automotive originations fell to $30.4 billion from $37.1 billion. Ally attributed the decline to pricing and curtailment actions intended to optimize risk appetite and returns. Automotive pretax income fell 27% to $1.32 billion year to date.
- Insurance: Premiums and service revenue earned increased 10% year to date to $936 million, but insurance losses rose to $329 million from $217 million. The combined ratio was 104.3% in Q3 and 107.0% year to date, compared with 98.7% and 100.3%. Higher weather losses, dealer inventory and insured values, and GAP loss frequency and severity contributed.
- Other segments: Corporate Finance pretax income increased 6% year to date to $228 million, while Mortgage Finance pretax income rose to $68 million from $36 million as expenses declined. Corporate and Other reported a $681 million year-to-date pretax loss, mainly reflecting higher interest costs.
- Accumulated investment losses: Available-for-sale securities had $6.471 billion of gross unrealized losses at September 30; accumulated other comprehensive loss was $4.765 billion. Ally reported no expected credit losses on these securities and said it did not intend, and did not expect to be required, to sell them before recovery of amortized cost.
Liquidity, capital, outlook, and risks
- Reported available liquidity was $64.1 billion, including $8.0 billion of liquid cash and equivalents, $11.0 billion of unused FHLB capacity, $19.6 billion of unencumbered highly liquid securities, and $25.6 billion of FRB Discount Window capacity. Discount Window capacity is contingent funding, not cash on hand; Ally reported no Discount Window or Bank Term Funding Program borrowings through September 30.
- Ally reported that more than 92% of Ally Bank deposits were FDIC-insured. Uninsured deposits were $11.4 billion, excluding affiliate and intercompany deposits. Retail deposits were $140.1 billion; customers shifted balances from liquid accounts into CDs during the period.
- Ally’s regulatory capital ratios were 9.31% CET1, 10.71% Tier 1, 12.49% total capital, and 8.60% Tier 1 leverage. Ally Bank met the well-capitalized thresholds under the prompt corrective action framework. The stress capital buffer was 2.5%.
- Management provided no specific earnings or financial guidance in the supplied filing text. It cited persistent inflation and elevated macroeconomic risks, and described pricing, underwriting, and origination curtailments as actions to manage returns and risk.
- Proposed banking rules could materially affect capital and funding requirements. Ally expects the proposed long-term-debt requirement in particular to have a significant effect; it also anticipates that recognizing accumulated other comprehensive income and loss in regulatory capital could require gradual capital increases. Timing and final rule terms remain uncertain.
- Other risks include interest-rate and deposit repricing sensitivity, consumer credit deterioration, auto residual values, insurance weather losses, commercial credit exposures, regulatory changes, and legal contingencies. Ally said current legal matters are not likely to be material to consolidated financial condition after existing accruals, but one or more could materially affect a particular period’s results or cash flows. It reported no material changes to the risk factors in its 2022 Form 10-K.
Important facts for investors to verify
- Whether funding costs and deposit mix stabilize enough to support net interest margin and earnings.
- Whether consumer auto, card, and personal-lending delinquencies and charge-offs continue to rise, and whether allowance coverage remains adequate.
- Whether insurance pricing and loss trends bring the combined ratio below 100%.
- How much of reported liquidity is readily available across legal entities, and the potential cost or constraints of contingent funding sources.
- The eventual scope and implementation of proposed capital, long-term-debt, liquidity, and resolution-planning rules.
- The recurring earnings effect apart from the Q3 tax benefit and volatile investment gains or losses.