Ally Financial Inc. quarterly report, Q1 FY2019

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Ally Financial Inc. — Q1 2019 Form 10-Q

Business context and period. Ally is a digital financial-services company focused on automotive finance and insurance, with banking, mortgage, corporate finance and investment services. This unaudited report covers the three months ended March 31, 2019; comparisons are with Q1 2018 unless noted.

Key financial results

  • Revenue and earnings: Total net revenue rose 14% to $1.598 billion. Net income from continuing operations increased 49% to $375 million; diluted EPS was $0.92, versus $0.57. Net income was $374 million, including a $1 million discontinued-operations loss.
  • Net interest and margins: Net financing revenue and other interest income increased 8% to $1.132 billion. Net interest spread was 2.46%, down from 2.48%; net yield on interest-earning assets was 2.67%, up from 2.64%. Interest expense rose 33% to $1.055 billion, reflecting higher rates and funding needs.
  • Credit costs and expenses: Provision for loan losses increased to $282 million from $261 million. Noninterest expense rose to $830 million from $814 million. Pretax continuing income was $486 million, up from $328 million; income tax expense was $111 million, versus $76 million.
  • Cash flow: Operating activities provided $1.081 billion, compared with $1.097 billion. Investing activities used $2.041 billion, versus $4.402 billion; financing activities provided $237 million, versus $2.976 billion. Cash, cash equivalents and restricted cash ended the quarter at $4.904 billion, down $722 million from year-end.
  • Balance sheet and funding: At March 31, total assets were $180.117 billion and equity was $13.699 billion. Deposits were $113.299 billion, up $7.121 billion from December 31; short-term borrowings were $6.115 billion and long-term debt was $41.490 billion. Total liabilities were $166.418 billion.
  • Liquidity and capital: Available liquidity was $25.647 billion, including $20.347 billion of unencumbered highly liquid securities and $1.834 billion of unused committed facilities. Ally’s CET1 ratio was 9.33%, total capital ratio 12.54%, and Tier 1 leverage ratio 9.02%; Ally and Ally Bank were reported well-capitalized.
  • Credit performance: Consumer net charge-offs were $232 million, down from $259 million; the annualized consumer net charge-off ratio was 1.1%, versus 1.3%. Total allowance for loan losses was $1.288 billion, or 1.0% of gross loans. Nonperforming loans were $987 million at quarter-end.

Material changes and management commentary

  • Results benefited from higher yields and growth in earning assets, as well as $108 million of net investment gains versus a $12 million loss in Q1 2018. The 2019 investment gain included $70 million of unrealized equity-security gains; this market-driven item materially contributed to the year-over-year earnings improvement.
  • Insurance pretax income rose to $145 million from $27 million, principally reflecting investment gains and lower weather-related losses. The combined ratio improved to 85.7% from 88.8%.
  • Automotive Finance pretax income increased to $329 million from $268 million. Consumer loan growth and higher yields contributed; consumer automotive originations were $9.151 billion, down from $9.464 billion, as higher Growth-channel volume partly offset lower GM and Chrysler channel originations.
  • Corporate Finance pretax income fell to $13 million from $29 million. The provision increase was primarily tied to two loan exposures; management said the broader portfolio continued to perform within expectations.
  • Management described consumer credit performance as strong, citing low unemployment and disciplined underwriting, but expected modest downward pressure on used-vehicle values during 2019. Off-lease vehicle terminations fell 42% year over year, largely due to runoff of the legacy GM lease portfolio.
  • Ally announced a digital mortgage partnership with Better.com in April 2019, with a planned nine-state pilot in summer 2019 and nationwide availability expected by year-end. The board also authorized up to $1.25 billion in share repurchases from Q3 2019 through Q2 2020, subject to regulatory and other conditions.

Outlook, risks and unusual items

  • The filing provides no formal numerical earnings or revenue guidance. Management expects future off-lease termination volume to be more consistent with Q1 2019 trends and anticipates modest downward pressure on used-vehicle values in 2019.
  • Ally plans to adopt CECL on January 1, 2020 and expects a material increase in credit-loss allowances, primarily from consumer automotive loans, with a negative retained-earnings adjustment. The amount will depend on portfolio composition and economic conditions at adoption.
  • Interest-rate sensitivity is mixed: management reported a more liability-sensitive position under instantaneous upward-rate scenarios. The filing estimates the next-12-month pretax net financing revenue impact at +100 basis points as negative $23 million instantaneously and positive $3 million gradually; at +200 basis points, negative $99 million instantaneously and positive $20 million gradually.
  • Other risks include credit deterioration, used-vehicle and housing values, funding costs and market access, regulatory and capital requirements, LIBOR transition, and operational, technology and cybersecurity risks. Legal outcomes are described as unpredictable; management did not believe currently threatened or pending matters were likely to be material to consolidated financial condition after existing accruals, while noting a matter could affect results or cash flows in a period.
  • Accounting changes included adoption of lease guidance, which added approximately $161 million of right-of-use assets and $190 million of lease liabilities at adoption, and callable-debt premium amortization guidance, which reduced opening retained earnings by $10 million net of tax.

Important facts for investors to verify

  • How much of earnings growth persists excluding unrealized equity gains and other market-sensitive items.
  • Whether deposit growth and pricing can offset rising deposit costs and other funding expenses, and how net interest margins evolve.
  • Trends in consumer auto delinquencies, charge-offs, reserve coverage and nonprime exposure, as well as the two Corporate Finance exposures that drove higher reserves.
  • The eventual CECL allowance increase and its effects on retained earnings, regulatory capital and distributions.
  • Used-vehicle resale values, lease residual risk and the remaining runoff of the legacy GM lease portfolio.
  • Execution and regulatory conditions for the announced repurchase plan, dividend payments and Better.com mortgage partnership.