Ally Financial Inc. — Q1 2020 Form 10-Q
Business context and reporting period
Ally is a digital financial-services company with major automotive finance and insurance businesses, an online bank, mortgage and corporate lending, brokerage, and point-of-sale lending operations. This unaudited filing covers the three months ended March 31, 2020, and compares results with Q1 2019. The period includes the initial U.S. economic effects of COVID-19.
Financial results and position
| Metric | Q1 2020 | Q1 2019 or comparison |
|---|---|---|
| Total net revenue | $1.412 billion | $1.598 billion; down 12% |
| Net financing revenue | $1.146 billion | $1.132 billion |
| Provision for credit losses | $903 million | $282 million |
| Noninterest expense | $920 million | $830 million |
| Income before tax | Loss of $411 million | Income of $486 million |
| Net income | Loss of $319 million; diluted EPS $(0.85) | Income of $374 million; diluted EPS $0.92 |
| Net interest spread / net yield on interest-earning assets | 2.45% / 2.66% | 2.46% / 2.67% |
| Operating cash flow | $814 million | $1.081 billion |
| Cash and cash equivalents at quarter-end | $6.161 billion | $3.555 billion at Dec. 31, 2019 |
| Total assets / total equity | $182.527 billion / $13.519 billion | $180.644 billion / $14.416 billion at Dec. 31, 2019 |
| Deposits / short-term borrowings / long-term debt | $122.324 billion / $9.493 billion / $31.066 billion | $120.752 billion / $5.531 billion / $34.027 billion at Dec. 31, 2019 |
| Available liquidity | $30.080 billion | $29.899 billion at Dec. 31, 2019 |
At March 31, Ally’s Common Equity Tier 1, total capital, and Tier 1 leverage ratios were 9.27%, 12.76%, and 8.92%, respectively; Ally Bank’s corresponding ratios were 12.00%, 13.25%, and 9.87%. Both were reported as well-capitalized. The company declared $0.19 per common share for Q1 and reported a $0.19 dividend declared in April, payable May 15.
Material changes versus the prior comparable period
- The $319 million net loss followed $374 million of net income in Q1 2019. The main drivers were a sharp rise in credit-loss provision and investment losses, alongside lower total net revenue.
- Ally recorded $602 million of additional provision associated with the COVID-19 macroeconomic outlook. The total allowance for loan losses reached $3.245 billion, versus $1.263 billion at year-end 2019; the increase also reflects CECL adoption.
- Other investment results shifted to a $79 million net loss from a $108 million gain. The 2020 amount included $185 million of unrealized equity-security losses, compared with $70 million of unrealized gains in Q1 2019.
- Net financing revenue rose modestly: lower interest expense and higher consumer automotive revenue largely offset lower commercial revenue and lower yields on some earning assets.
- Deposits grew $1.572 billion from year-end, while long-term debt declined $2.961 billion. Short-term borrowings increased $3.962 billion.
- Q1 2020 net charge-offs were $266 million, compared with $237 million in Q1 2019. Consumer nonperforming loans increased to $1.140 billion from $821 million at year-end; commercial nonperforming loans rose to $256 million from $215 million.
Outlook, management commentary, risks and unusual items
- Management said the duration and severity of the pandemic and its effects could not be reliably predicted. It gave no clear quantified earnings guidance in the supplied filing text.
- Consumer automotive loan applications fell about 50% in the second half of March, with the decline continuing into April. Dealer closures and reduced vehicle sales, auction activity, and used-vehicle values could affect originations, credit performance, and lease residuals.
- As of March 31, about 716,000 consumer auto customers (18%) had enrolled in payment deferrals; about 33,000 lease customers (10%) had enrolled in lease-payment deferrals. About 72% of eligible dealers had requested at least one form of assistance. These programs support customers but may reduce near-term revenue and do not eliminate credit risk.
- Ally adopted CECL on January 1, 2020. The change reduced opening retained earnings by about $1.0 billion after tax and increased the allowance by about $1.3 billion pretax, primarily for consumer automotive loans. Ally elected a regulatory-capital transition that defers the estimated CECL impact through 2021, followed by phased recognition.
- Ally suspended its stock-repurchase program for the remainder of Q1 and Q2 2020. It reported $30.080 billion of available liquidity and said it continued to access routine short-term funding, while longer-term market funding costs had increased. In April it issued $750 million of 5.80% senior notes due 2025.
- Ally had agreed to acquire CardWorks, subject to regulatory approval and other conditions, with closing expected in Q3 2020. Subsequent to quarter-end, Ally estimated a possible $30–$60 million Q2 goodwill impairment at Ally Invest, based on developments affecting projected revenue and earnings.
- Risks include further pandemic-related credit losses, deposit and market-funding pressures, lower used-vehicle values, possible securitization triggers, interest-rate and equity-market volatility, and uncertainty in capital distributions. Ally disclosed a certified class action concerning vehicle repossession notices; it intends to defend the claim. Management said it could not estimate reasonably possible losses for the matter.
Important facts for investors to verify
- How subsequent unemployment, economic forecasts, payment deferrals, and portfolio performance affect credit provisions, delinquencies, and net charge-offs.
- Whether Ally’s $3.245 billion allowance remains adequate under changing conditions and the effect of CECL on reported earnings and regulatory capital as transition relief phases out.
- Trends in auto originations, dealer health, used-vehicle prices, lease returns, auction activity, and remarketing proceeds.
- Deposit retention and funding costs, available liquidity, debt maturities, and any changes to access or pricing in secured and unsecured markets.
- Whether the CardWorks transaction closes on expected terms and the final amount and timing of any Ally Invest goodwill impairment.
- Capital ratios, regulatory requirements, and the timing or amount of future dividends and share repurchases; repurchases were suspended for Q2.
- Developments in the vehicle-notice class action and any material changes in legal contingencies.