Ally Financial Inc. quarterly report, Q2 FY2023

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Ally Financial Inc. — Q2 2023 Form 10-Q

Reporting period: Three and six months ended June 30, 2023. Ally is a digital bank and consumer and commercial finance company, with major automotive finance and insurance businesses. Figures are unaudited; amounts are U.S. dollars.

Financial performance and position

  • Q2 revenue and earnings: Total net revenue was $2.079 billion, essentially flat year over year. Net income was $329 million, down 32% from $482 million; diluted EPS was $0.99 versus $1.40. Pretax income fell 36% to $403 million.
  • First half: Net revenue was $4.179 billion, down 1%; net income was $648 million, down 43% from $1.137 billion. Diluted EPS was $1.95 versus $3.27.
  • Net interest performance: Q2 net financing revenue and other interest income declined 11% to $1.573 billion despite a 41% rise in financing revenue, as interest expense increased to $1.681 billion from $467 million. Net interest margin was 3.38%, down from 4.04%. First-half margin was 3.45%, versus 3.98%.
  • Credit costs: Q2 provision for credit losses was $427 million versus $304 million; first-half provision was $873 million versus $471 million. First-half consumer net charge-offs were $748 million, compared with $262 million a year earlier. The allowance for loan losses was $3.781 billion, or 2.7% of finance receivables and loans.
  • Expenses and insurance: Q2 noninterest expense increased 10% to $1.249 billion. Insurance losses and loss-adjustment expenses rose to $134 million from $89 million; the insurance combined ratio was 114.6% (above 100% indicates underwriting losses under Ally’s definition).
  • Balance sheet at June 30: Total assets were $197.2 billion; finance receivables and loans, net, were $134.7 billion. Deposits totaled $154.3 billion, short-term borrowings $2.2 billion, and long-term debt $20.1 billion. Total equity was $13.5 billion.
  • Cash flow, first half: Operating activities provided $3.0 billion, investing activities used $2.5 billion, and financing activities provided $3.9 billion. Cash and cash equivalents were $10.0 billion at quarter-end, excluding restricted cash.
  • Capital and liquidity: Ally’s CET1 ratio was 9.29%, total capital ratio 12.50%, and Tier 1 leverage ratio 8.59%. Available liquidity was $42.5 billion, including $9.5 billion of liquid cash and equivalents, $20.7 billion of unencumbered highly liquid securities, and $12.3 billion of unused FHLB borrowing capacity.

Material changes versus comparable periods

  • Higher asset yields and loan balances lifted financing revenue, but increased deposit and other funding costs more than offset that benefit. Ally attributed the cost increase primarily to higher benchmark interest rates.
  • Credit provisions and charge-offs increased substantially, especially in consumer automotive, personal lending, and credit card. Management said automotive delinquencies had risen amid inflation and weaker macroeconomic conditions, but the rate of increase slowed during the first half.
  • Automotive originations declined: consumer automotive financing originations were $10.35 billion in Q2, down from $13.25 billion. Ally cited pricing and underwriting actions intended to optimize risk appetite and returns.
  • Other investment gains improved markedly: Q2 included $26 million of gains, versus $124 million of losses a year earlier, mainly reflecting equity-security valuation movements. These gains are market-sensitive and contributed to the comparison.
  • Available-for-sale securities had a fair value of $28.7 billion against $33.8 billion amortized cost at June 30. Ally reported no expected credit losses and no intent or expected requirement to sell loss-position securities before recovery.

Outlook, commentary, and risks

  • The filing provides no specific earnings or revenue guidance. Ally’s allowance forecasts incorporated mild recessionary conditions in 2023, including negative GDP growth in the third and fourth quarters and unemployment rising to approximately 4.6% in early 2024.
  • Interest-rate sensitivity analysis estimated that an immediate 100-basis-point rise would increase pretax net financing revenue by $121 million over the following 12 months, while a 100-basis-point decline would reduce it by $117 million. Ally cautioned that higher-rate shocks could become adverse over time as cash balances normalize and pay-fixed swaps mature.
  • Ally said deposits were primarily granular retail accounts; more than 92% of Ally Bank deposits were FDIC-insured at quarter-end. Deposit outflows following bank failures were more than offset by inflows, and available liquidity exceeded uninsured deposits by $31.2 billion. Ally had not borrowed under the Federal Reserve’s Bank Term Funding Program through June 30.
  • A proposed U.S. Basel III endgame rule could increase capital requirements and change treatment of accumulated other comprehensive income. Ally was still assessing the impact; regulators estimated a 6% increase in risk-weighted assets and binding CET1 requirements for Category IV firms, but Ally’s actual impact could differ. Further capital, liquidity, and stress-testing requirements may also be proposed.
  • Key risks include worsening consumer credit, funding costs and deposit competition, used-vehicle residual values, weather-related insurance losses, market-sensitive investment results, regulatory changes, and legal or operational contingencies. Management did not believe pending legal matters were likely to be material to consolidated financial condition, while noting period-specific earnings or cash-flow effects could be material.
  • The Board had not authorized a 2023 common-stock repurchase program. A quarterly dividend of $0.30 per share was declared in July 2023, payable August 15, subject to applicable conditions.

Most important facts for investors to verify

  • Whether credit losses, delinquencies, and allowance coverage continue to rise or stabilize, particularly in automotive, personal lending, and credit card.
  • Whether asset yields and deposit pricing can improve net interest margin as funding costs and the rate environment change.
  • The durability of reported earnings given equity-security gains, off-lease vehicle remarketing gains, and higher weather-related insurance losses.
  • Deposit mix, uninsured balances, liquidity availability, and the effects of any new regulatory capital or liquidity rules.
  • Automotive origination volumes, underwriting standards, and used-vehicle residual values, including concentration in Stellantis-related operating leases.