Ally Financial Inc. — Q3 2022 Form 10-Q
Business context and reporting period. Unaudited results cover the quarter and nine months ended September 30, 2022, compared with the same 2021 periods. Ally is a digital financial-services company whose businesses include automotive finance and insurance, direct banking, mortgage and personal lending, credit cards, corporate finance, and brokerage services.
Financial performance and position
- Q3 revenue and earnings: Total net revenue was $2.016 billion, up 2% year over year. Net income from continuing operations was $300 million, down 58%; diluted EPS was $0.88, versus $1.89. Pretax income was $417 million, down 54%.
- Nine-month results: Total net revenue was $6.227 billion, up 4%; net income from continuing operations was $1.437 billion, down 40%; diluted EPS was $4.18, versus $6.41.
- Net interest performance: Net financing revenue and other interest income rose 8% in Q3 to $1.719 billion and 15% for nine months to $5.176 billion. Net interest margin was 3.81% in Q3 versus 3.66% a year earlier, and 3.92% for nine months versus 3.46%.
- Credit costs and expenses: Provision for credit losses was $438 million in Q3 versus $76 million, and $909 million for nine months versus $31 million. Noninterest expense increased 16% in Q3 to $1.161 billion and 13% for nine months to $3.421 billion.
- Cash flow: For the first nine months, operating activities provided $5.074 billion, investing activities used $13.908 billion, and financing activities provided $8.895 billion. Cash and cash equivalents were $5.004 billion at quarter-end; cash plus restricted cash was $5.722 billion.
- Balance sheet and funding: Total assets were $188.640 billion and equity was $12.434 billion at September 30. Deposits totaled $145.751 billion; short-term borrowings were $7.200 billion and long-term debt $16.628 billion. Available liquidity was $27.304 billion, down from $31.193 billion at December 31, 2021.
- Capital: Ally’s CET1, Tier 1, total capital, and Tier 1 leverage ratios were 9.30%, 10.77%, 12.39%, and 8.78%, respectively. Ally Bank was reported well capitalized under the prompt corrective action framework.
- Other indicators: Q3 return on average assets was 0.64% versus 1.58%; return on average equity was 8.36% versus 16.00%. The Insurance combined ratio was 98.7% in Q3 and 100.3% for nine months, compared with 96.4% and 94.2%.
Material changes versus the prior comparable period
- Higher interest income and loan growth supported revenue, but rising deposit and other funding costs, increased credit losses, and higher operating expenses weighed on earnings.
- Consumer automotive net charge-offs were $217 million in Q3 versus $51 million; total consumer net charge-offs were $245 million versus $54 million. Management attributed the increase largely to credit normalization after unusually low pandemic-era losses. The allowance for loan losses was $3.611 billion, up from $3.267 billion at year-end 2021.
- Investment results weakened: Q3 other loss on investments was $54 million versus a $24 million gain, and the nine-month loss was $173 million versus a $212 million gain. Ally recorded a $136 million impairment on its investment in BMC Holdco during Q3.
- Available-for-sale securities had $4.2 billion of net unrealized losses recorded in other comprehensive income for the first nine months, primarily reflecting higher interest rates. Accumulated other comprehensive loss reached $4.340 billion, contributing to the decline in reported equity.
- Automotive finance pretax income fell 41% in Q3 to $488 million, primarily due to higher credit provisions and lower net operating-lease revenue. Net remarketing gains were $39 million versus $86 million.
- Ally repurchased $1.6 billion of common stock during the first nine months. Common dividends declared were $0.30 per share in Q3, compared with $0.25 a year earlier.
Outlook, commentary, risks, and unusual items
- No consolidated earnings or revenue guidance is provided in the supplied filing text. Management said it intended to minimize common-stock repurchases in Q4 2022 amid the macroeconomic environment.
- Management cited credit normalization, inflation, supply-chain and manufacturing constraints, and economic uncertainty as relevant to credit performance and portfolio risk. Its allowance forecast assumed unemployment rising to about 4% in Q3 2023 and GDP growth decelerating through Q1 2023, before reverting toward historical averages.
- Ally expected constrained dealer inventory to limit commercial wholesale finance receivable growth through 2022 and into 2023. Management also said the shift toward dealer and lessee buyouts of off-lease vehicles was expected to continue near term and could limit remarketing proceeds.
- Interest-rate sensitivity analysis showed a projected $690 million increase in net financing revenue over the next 12 months if rates remained unchanged, relative to the baseline forecast. A parallel instantaneous increase of 200 basis points was estimated to reduce that forecast by $208 million; results depend on assumptions, including deposit repricing.
- Available-for-sale securities had significant unrealized losses, but management said it did not intend to sell the securities and did not expect to be required to sell them before recovery of amortized cost. It recorded no expected credit-loss allowance on those securities.
- Subsequent event: Ally settled the remainder of its defined-benefit pension plan on October 12, 2022, by purchasing a $103 million annuity. The settlement resulted in a $99 million loss, including $50 million of compensation expense and $49 million of income tax expense. The Board also declared a $0.30-per-share dividend payable November 15, 2022.
- Ally reported that pending or threatened legal matters were not expected to be material to consolidated financial condition after existing accruals, while noting that one or more matters could materially affect results or cash flows in a particular period. It reported no material changes to the risk factors in its 2021 Form 10-K.
Important facts for investors to verify
- Whether credit normalization continues, particularly in consumer automotive and newer personal-loan and credit-card portfolios, and how charge-offs and the allowance evolve.
- Whether deposit costs, wholesale funding needs, and available liquidity change as interest rates and funding markets evolve.
- The extent to which securities losses remain unrealized, and the effects of further rate changes on capital, equity, and earnings.
- Automotive lease residual values, remarketing gains, and vehicle disposition mix, given their impact on lease profitability.
- Progress and valuation outcomes for BMC Holdco, including the merger timetable and any further effects on Ally’s investment.
- Capital ratios, regulatory distribution limits, and the execution of management’s stated plan to minimize Q4 2022 repurchases.