Ally Financial Inc. annual report, FY2020

Ally Financial Inc. — 2020 Form 10-K

Reporting period: Fiscal year ended December 31, 2020; comparisons are primarily with 2019. Ally is a digital financial-services company centered on automotive finance and insurance, with direct banking, mortgage, corporate finance, brokerage and point-of-sale lending businesses. It reported $182.2 billion in assets.

Financial performance and position

Metric	2020	2019
Total net revenue	$6.686 billion	$6.394 billion
Net financing revenue and other interest income	$4.703 billion	$4.633 billion
Provision for credit losses	$1.439 billion	$998 million
Noninterest expense	$3.833 billion	$3.429 billion
Income before tax	$1.414 billion	$1.967 billion
Net income	$1.085 billion	$1.715 billion
Diluted EPS	$2.88	$4.34
Net yield on interest-earning assets	2.65%	2.67%
Net interest spread	2.49%	2.45%

Cash flow: Operating cash flow was $3.7 billion, versus $4.1 billion in 2019. Investing activities provided $8.4 billion, versus $3.8 billion used in 2019; financing activities provided $25 million, versus $1.5 billion used in 2019. Cash and cash equivalents were $15.6 billion at year-end, up from $3.6 billion.
Liquidity and funding: Available liquidity was $40.3 billion, including $24.8 billion of unencumbered government and agency securities, $14.9 billion of liquid cash and equivalents, and $560 million of unused committed facilities. Deposits reached $137.0 billion, up $16.3 billion; retail deposits rose 20% to $124.4 billion.
Debt: Long-term debt was $22.0 billion and short-term borrowings were $2.1 billion at year-end. The filing separately cites approximately $25.1 billion of indebtedness at principal amount; reported balances and principal amounts differ. Secured and unsecured debt maturities, along with $41.8 billion of certificates of deposit maturing in 2021, make refinancing and deposit retention relevant liquidity considerations.
Capital: Ally’s Common Equity Tier 1 ratio was 10.64%, up from 9.54%; Ally Bank’s was 13.38%. Both were reported well-capitalized and compliant with applicable capital requirements. The regulatory capital impact of CECL was deferred; the deferred CET1 impact was $1.2 billion at year-end.
Credit: The allowance for loan losses was $3.283 billion, or 2.8% of finance receivables, versus $1.263 billion, or 1.0%, in 2019. The comparison is affected by CECL adoption. Nonperforming finance receivables and loans increased to $1.522 billion from $1.036 billion. Net charge-offs declined to $764 million from $976 million.
Other margin measure: Insurance’s combined ratio rose to 98.0% from 92.2%; below 100% indicates underwriting profitability under the company’s definition.

Material changes versus 2019

Net income fell 37%, despite 5% revenue growth. Higher credit-loss provisioning, operating expenses and lower financing revenue before interest expense more than offset lower funding costs and higher other revenue.
Credit-loss provision increased $441 million, primarily reflecting COVID-19-related macroeconomic deterioration and higher specific Corporate Finance reserves. Provision was $903 million in Q1, then declined to $287 million, $147 million and $102 million in Q2–Q4 as the outlook improved and reserves were released in the second half.
CECL adoption on January 1, 2020, increased the allowance by approximately $1.3 billion before tax and reduced opening retained earnings by approximately $1.0 billion after tax.
Automotive Finance pretax income declined to $1.285 billion from $1.618 billion. Consumer automotive originations fell to $35.1 billion from $36.3 billion; lower dealer inventory reduced average wholesale floorplan balances. Used-vehicle financing increased as a share of originations.
Deposit growth shifted funding mix toward deposits: deposits represented 85% of on-balance-sheet funding, versus 75%. Long-term debt fell to $22.0 billion from $34.0 billion.
Ally repaid $4.3 billion of FHLB advances early, recognizing a $99 million loss. It also recorded a $50 million goodwill impairment at Ally Invest.

Outlook, commentary, risks and unusual items

Management reported recovering automotive applications and originations after the second-quarter downturn and strong consumer payment performance through year-end. It cautioned that the durability of the recovery and the effects of the pandemic, unemployment, fiscal support and vaccines remained uncertain; no specific full-year earnings guidance is provided in the supplied filing text.
Ally expected favorable vehicle remarketing trends to continue in the near term and adjusted depreciation to recognize lower lifetime depreciation on vehicles scheduled to terminate through December 31, 2021. Used-vehicle values, lease residuals and future credit losses remain sensitive to economic conditions and vehicle supply and demand.
The pandemic relief programs included payment deferrals; 30.9% of the serviced consumer automotive portfolio had received an extension or rewrite by year-end, versus 10.6% a year earlier. Most customers had exited COVID-related deferrals by year-end. Performance after deferral, further stimulus and borrower finances remain key uncertainties.
In December 2020, Ally reached a binding memorandum of understanding to settle a certified class action concerning repossession notices. The proposed terms include an $87.5 million cash payment and waiver of $700 million in charged-off deficiency balances. The cash amount was accrued in 2020; court approval and other settlement conditions remained outstanding. Separate purported securities class actions were filed in February 2021 and are being contested.
The Federal Reserve restricted capital distributions during 2020 and limited first-quarter 2021 dividends and repurchases. Ally’s board authorized a repurchase program of up to $1.6 billion for 2021, subject to regulatory and other restrictions; the stress capital buffer could be recalculated.
Other material risks include concentration in automotive lending and GM/Chrysler relationships, used-vehicle residual values, economic and credit deterioration, deposit competition, funding maturities, interest-rate and LIBOR transition risks, cybersecurity and third-party service disruption, regulation, and legal contingencies.
The audited financial statements received an unqualified opinion, and management and the auditor reported effective internal control over financial reporting as of December 31, 2020.

Important facts for investors to verify

How the CECL allowance, deferral-related modifications and elevated nonperforming balances develop as temporary relief and stimulus fade.
The composition and persistence of deposit growth, including brokered deposits, certificate maturities and the cost of retaining retail deposits.
Actual 2021 capital distributions after Federal Reserve limits and any change to Ally’s stress capital buffer.
The final approval and full economic cost of the proposed $87.5 million class-action settlement, including the deficiency-balance waiver, and the status of subsequent litigation.
Whether used-vehicle prices and lease remarketing gains normalize, and the resulting impact on credit losses, residual values and depreciation expense.
Unsecured and secured debt maturities, demand-note redemption, and available funding capacity under stressed market conditions.