Ally Financial Inc. quarterly report, Q2 FY2013

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Ally Financial Inc. — Q2 2013 Form 10-Q

Business context and period. Unaudited results for the three and six months ended June 30, 2013, compared with the same 2012 periods. Ally is an automotive-focused financial services and direct-banking company. It was exiting several noncore businesses, including mortgage activities and international automotive finance; discontinued operations materially affect reported net income.

Financial performance and position

  • Q2 revenue and earnings: Total net revenue was $1.03 billion, down 12% year over year. Net financing revenue rose 37% to $628 million, but other revenue fell 44% to $402 million. Continuing-operations net income was $100 million versus $183 million; consolidated net loss was $927 million versus $898 million, including a $1.027 billion loss from discontinued operations.
  • First half: Total net revenue was $2.056 billion, down 3%. Continuing-operations net income was $160 million versus $185 million. Net income was $166 million compared with a $588 million net loss in 2012, reflecting discontinued-operations results of $6 million versus a $773 million loss.
  • Profitability measures: Q2 net interest spread increased to 1.51% from 1.18%; net yield on interest-earning assets rose to 1.85% from 1.38%. Core pretax income, a non-GAAP measure, was $201 million for Q2 versus $263 million and $195 million for the first half versus $374 million. Q2 efficiency ratio improved to 77.77% from 82.92%.
  • Credit and expenses: Loan-loss provision was $89 million in Q2 versus $33 million, and $220 million for the first half versus $131 million. Management attributed the increase mainly to broader auto underwriting and portfolio growth. Noninterest expense fell 18% in Q2 to $801 million, partly because prior-year representation-and-warranty expense did not recur at the same level. Consumer auto net charge-offs rose to $80 million for Q2 from $70 million.
  • Insurance: Q2 pretax income increased to $45 million from $20 million, helped by realized investment gains. The combined ratio worsened to 112.9% from 109.0%; ratios above 100% indicate underwriting losses. Weather-related losses, including spring hailstorms, weighed on results.
  • Cash flow: For the first half, operating cash flow was $3.4 billion versus $4.9 billion; investing activities provided $5.7 billion versus using $6.1 billion; financing activities used $10.8 billion versus providing $4.3 billion. Cash and cash equivalents ended June at $7.8 billion, compared with $7.5 billion at year-end. Divestiture proceeds and debt repayments were significant drivers.
  • Balance sheet and funding: Total assets were $150.6 billion, down from $182.3 billion at December 31, 2012, substantially reflecting businesses classified as held for sale or disposed. Deposits were $50.1 billion versus $47.9 billion; long-term debt was $64.5 billion versus $74.6 billion; total equity was $19.2 billion versus $19.9 billion. Ally reported $23.0 billion of available parent liquidity and $10.3 billion at Ally Bank; these measures include restrictions and intercompany funding arrangements.
  • Capital: At June 30, Ally reported Tier 1 risk-based capital of 15.45%, total risk-based capital of 16.48%, and Tier 1 leverage of 13.16%. Ally Bank’s leverage ratio was 15.93%, above its 15% requirement under the capital and liquidity maintenance agreement.

Material changes and management commentary

  • Automotive Finance benefited from growth in consumer loans and leases and lower funding costs, while higher lease depreciation and credit provisions pressured quarterly pretax income. Auto loan growth included expanded nonprime and used-vehicle lending.
  • Mortgage operations contracted sharply: the company sold its agency mortgage servicing rights, exited correspondent lending, stopped new jumbo mortgage production, and wound down other mortgage activities. Mortgage production fell to $688 million in Q2 from $5.9 billion a year earlier.
  • Ally completed sales of its Canadian automotive finance operations, European and most Latin American automotive finance operations, and certain insurance businesses. Remaining Brazil operations and a China joint venture were expected to be sold in 2013 or possibly 2014.
  • Management described the U.S. economy and auto sales as improving, but remained cautious about government spending cuts, weak manufacturing, and slow economic growth. The filing provides no specific consolidated earnings guidance.

Significant matters, risks, and contingencies

  • ResCap bankruptcy settlement: The bankruptcy court approved a Plan Support Agreement in June. Ally agreed to contribute $1.95 billion plus up to $150 million of insurance recoveries, with the latter amount guaranteed by Ally, in exchange for broad releases. The $1.95 billion was accrued at June 30, along with the $150 million. The plan had not yet become effective; milestones, court approvals, and other conditions remained, and the filing warned that failure could leave Ally exposed to substantial claims. Certain FHFA and FDIC securities claims were excluded from the proposed releases.
  • Capital plan: The Federal Reserve objected to Ally’s 2013 capital plan on quantitative and qualitative grounds. Ally was considering alternatives, including a possible common-stock issuance, but had made no decision. The Fed continued to approve specified preferred-stock and debt payments.
  • Legal and regulatory exposure: Ally disclosed mortgage-related litigation and investigations, including SEC and Department of Justice information requests and a CFPB investigation into retail financing practices. The company also noted possible liability under mortgage settlement and consent-order obligations if the ResCap plan did not become effective. The mortgage representation-and-warranty reserve was $25 million at June 30; ultimate claims could differ from estimates.
  • Other risks: Key exposures include auto credit performance and lease residual values, liquidity and market funding access, interest and foreign-exchange rates, regulatory capital requirements, and competitive pressure. Chrysler’s financing agreement expired in April 2013, and Ally’s GM exclusivity agreement was due to expire in December 2013.
  • Subsequent events: In July, Ally issued $1.4 billion of senior guaranteed notes. The board also declared $201 million of preferred-stock dividends payable in August.

Important facts for investors to verify

  • Whether the ResCap plan became effective, whether Ally funded the agreed contribution, and the scope and status of any claims not released.
  • How much of reported earnings and cash flow came from discontinued operations, divestitures, investment gains, and other nonrecurring items; reconcile non-GAAP core pretax income to GAAP results.
  • Whether the rising auto-loss provision and charge-offs reflect the expanded underwriting mix, and how delinquencies, nonperforming loans, and allowance coverage develop.
  • Whether Ally maintains parent and bank liquidity, meets regulatory capital requirements and resolves the Federal Reserve’s capital-plan objection without an equity issuance.
  • The realized proceeds, remaining liabilities, and timing of pending business sales, and the impact of losing Chrysler and GM preferred-provider benefits.