Ally Financial Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Unaudited results; amounts in U.S. dollars unless noted. Ally is a digital financial services company, with major businesses in automotive finance and insurance, alongside mortgage and corporate finance, deposits, and online brokerage.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Total net revenue | $1.403 billion | $1.375 billion; up 2% |
| Net financing revenue | $1.049 billion | $979 million; up 7% |
| Provision for loan losses | $261 million | $271 million |
| Noninterest expense | $814 million | $778 million |
| Income before tax from continuing operations | $328 million | $326 million |
| Net income from continuing operations | $252 million | $213 million |
| Net income | $250 million | $214 million |
| Diluted EPS | $0.57 | $0.46 |
| Net interest spread / yield on interest-earning assets | 2.48% / 2.64% | 2.47% / 2.60% |
| Operating cash flow | $1.097 billion | $1.175 billion |
Comprehensive loss was $78 million, reflecting $328 million of other comprehensive loss, principally unrealized losses on investment securities. Cash and cash equivalents were $3.721 billion at quarter-end; cash, cash equivalents, and restricted cash totaled $4.938 billion for cash-flow reporting purposes.
At March 31, 2018, total assets were $170.021 billion, finance receivables and loans net were $124.049 billion, and the allowance for loan losses was $1.278 billion. Deposits totaled $97.446 billion; short-term borrowings were $9.564 billion and long-term debt was $45.076 billion. Total equity was $13.082 billion. Available liquidity was $17.706 billion, including $2.970 billion of unused committed facilities. Ally reported a 9.26% Common Equity Tier 1 ratio and said Ally and Ally Bank were well-capitalized.
Material changes and management commentary
- Higher lending revenue, larger investment-security balances, a lower loan-loss provision, and lower insurance losses supported earnings. The lower federal corporate tax rate also reduced tax expense to $76 million from $113 million.
- Funding costs rose: interest expense increased 16% to $794 million, with higher market rates and deposit growth cited as drivers. Deposits increased $4.2 billion from year-end 2017.
- Operating lease revenue continued to decline as the legacy GM lease portfolio ran off. Management expected that portfolio to be substantially wound down by Q2 2018. Net operating lease revenue was $109 million, down 29% year over year.
- Automotive Finance pretax income fell to $268 million from $288 million, as improved consumer and commercial financing revenue and credit performance were more than offset by lease runoff, higher funding costs, and no repeat of prior-year loan-sale gains.
- Insurance pretax income declined to $27 million from $40 million, including $35 million of unrealized equity-security losses. Its combined ratio improved to 88.8% from 98.1%, with lower weather losses and reinsurance contributing.
- Mortgage Finance pretax income was $8 million versus $9 million; mortgage assets grew, including $1.3 billion of third-party loan purchases during the quarter. Corporate Finance pretax income increased to $29 million from $25 million. Corporate and Other narrowed its pretax loss to $4 million from $36 million.
- Net cash used in investing activities was $4.402 billion, largely reflecting loan and investment purchases and lower proceeds from lease-asset disposals. Financing activities provided $2.976 billion, including $4.173 billion of net deposit inflows and $894 million net issuance of long-term debt.
Outlook, risks, and unusual items
- Management described U.S. economic and labor-market conditions as supportive, while noting moderated new-vehicle sales and expecting modest downward pressure on used-vehicle values through 2018.
- Ally said available liquidity would cover planned originations and financial obligations for more than 36 months under a long-term capital-markets stress scenario with no unsecured-debt or term-securitization issuance. This is a company estimate, not a guarantee.
- Interest-rate sensitivity analysis showed forecast net financing revenue over the next 12 months below its baseline by $51 million under an instantaneous +100-basis-point shock and $124 million under +200 basis points; results depend on modeling assumptions, including deposit repricing.
- Ally planned to adopt the expected-credit-loss standard (ASU 2016-13) on January 1, 2020, and expected a significant increase in credit-loss reserves and a negative retained-earnings adjustment. Management was still evaluating the impact.
- New revenue-recognition rules adopted January 1, 2018 reduced opening retained earnings by approximately $126 million after tax. The reported Q1 adoption effect on net income was a $2 million reduction. Other new accounting rules changed equity-security fair-value movements to flow through earnings; Q1 included $40 million of unrealized losses.
- Ally repurchased $185 million of common stock in Q1. The board declared a $0.13-per-share dividend on April 10, payable May 15, 2018. Future distributions remained subject to board decisions and Federal Reserve capital-plan review; the 2018 plan response was expected by June 30.
- Pending securities class actions allege misstatements related to Ally’s 2014 IPO. Ally also disclosed information requests or investigations concerning subprime auto finance from the SEC, U.S. Department of Justice, and New York Department of Financial Services. The filing said it could not estimate reasonably possible losses for the described legal matters.
- Other disclosed risks include auto-loan credit performance, used-vehicle residual values, interest-rate and funding-market changes, regulatory capital requirements, cybersecurity and operational disruptions, and legal or regulatory developments.
Investor verification priorities
- Review auto-loan delinquencies, charge-offs, nonperforming loans, criticized commercial exposures, and reserve adequacy; nonperforming loans rose to $863 million from $792 million at year-end.
- Assess deposit pricing and funding costs against asset yields, and confirm available liquidity, collateral constraints, and committed-facility availability.
- Track used-vehicle values, lease returns, remarketing gains, and the completion and earnings impact of the legacy GM lease runoff.
- Separate recurring earnings from equity-security fair-value movements, tax effects, prior-year loan-sale gains, and accounting-adoption impacts.
- Monitor regulatory approval for capital distributions, capital ratios, the expected CECL transition impact, and developments in the pending legal and regulatory matters.