Ally Financial Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Amounts are in U.S. dollars; financial statements are unaudited. Ally is a diversified digital financial services company, with major businesses in automotive finance, insurance, mortgage finance, corporate lending, and online banking.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total net revenue | $1.458B | $1.455B | $2.861B | $2.830B |
| Net financing revenue | $1.094B | $1.067B | $2.143B | $2.046B |
| Provision for loan losses | $158M | $269M | $419M | $540M |
| Pre-tax continuing income | $461M | $376M | $789M | $702M |
| Net income from continuing operations | $348M | $254M | $600M | $467M |
| Net income | $349M | $252M | $599M | $466M |
| Diluted EPS | $0.81 | $0.55 | $1.37 | $1.01 |
- Margins: Q2 net interest spread was 2.53%, down from 2.63%; net yield on interest-earning assets was 2.68%, down from 2.76%. For the first half, the figures were 2.50% versus 2.55% and 2.66% versus 2.68%, respectively.
- Balance sheet at June 30: Assets were $171.3B, up from $167.1B at year-end 2017. Net finance receivables and loans were $124.3B; operating leases were $8.6B; cash and cash equivalents were $3.9B. Equity was $13.1B, down from $13.5B.
- Funding and debt: Deposits were $98.7B, up $5.5B from year-end. Short-term borrowings were $7.1B, down from $11.4B; long-term debt was $47.3B, up from $44.2B. Deposits represented 64% of reported on-balance-sheet funding.
- Cash flow, first half: Operating activities provided $2.0B; investing activities used $6.1B; financing activities provided $3.8B. Cash, cash equivalents, and restricted cash totaled $4.9B at period-end.
- Liquidity and capital: Available liquidity was $19.7B. Ally reported a 9.37% Common Equity Tier 1 ratio, 12.66% total capital ratio, and 9.21% Tier 1 leverage ratio; Ally and Ally Bank were reported as well-capitalized.
Changes versus comparable periods
- Q2 net income rose 38% year over year, while total net revenue was essentially flat. First-half net income increased 29% and revenue increased about 1%.
- Lower loan-loss provision—primarily from favorable consumer auto credit performance—supported earnings. Net charge-offs were $180M in Q2 versus $199M a year earlier; the reported total loan allowance was $1.257B at June 30.
- Financing revenue benefited from higher loan balances, asset yields, and investment income. These gains were partly offset by higher funding costs: total interest expense rose 25% in Q2 and 21% in the first half.
- Other revenue declined 6% in Q2 and 8% in the first half, including materially lower gains on mortgage and automotive loan sales. Automotive lease revenue continued to fall as the legacy GM lease portfolio ran off.
- Noninterest expense increased 4% in Q2 and in the first half. The filing cites business-growth and technology investments, a first-quarter tax-reform-related employee bonus, and Q2 employee separation expenses.
- Consumer loans grew, driven by automotive Growth-channel lending and mortgage purchases; commercial loans declined from year-end, mainly due to lower dealer floorplan balances. Commercial nonperforming loans increased to $198M from $72M at year-end.
Outlook, commentary, risks, and unusual items
- Management did not provide a specific earnings or revenue forecast in the supplied filing text. It expected used-vehicle values to remain under modest downward pressure through 2018 and lease termination volume to be more consistent with first-half 2018 trends.
- Management said available liquidity would support planned originations and obligations for more than 36 months under a long-term capital-markets stress scenario, assuming no unsecured debt or term securitization issuance. The Modified Liquidity Coverage Ratio exceeded 100%.
- The Federal Reserve gave a non-objection to Ally’s 2018 capital plan. The board authorized up to $1.0B of share repurchases from Q3 2018 through Q2 2019 and declared a subsequent quarterly dividend of $0.15 per share, payable August 15, 2018. Future distributions remain subject to regulatory review and capital conditions.
- Ally adopted new revenue-recognition guidance in 2018, reducing opening retained earnings by approximately $126M; the adoption reduced reported Q2 revenue by $9M and net income by $4M. It also adopted financial-instrument guidance that moves equity-security fair-value changes into earnings, adding potential earnings volatility.
- Ally plans to adopt the expected-credit-loss standard on January 1, 2020, and expects it to significantly increase credit-loss allowances and reduce retained earnings; the ultimate effect depends on portfolio mix and economic conditions. The filing says the effect on regulatory capital remains uncertain.
- Market-rate increases, deposit repricing, consumer and commercial credit quality, used-car values, insurance weather losses, cybersecurity and operational risks, and regulatory change are material exposures. Rate sensitivity estimates indicated lower next-12-month net financing revenue versus baseline in the disclosed rate-shock scenarios.
- Ally disclosed securities litigation alleging omissions concerning subprime auto lending in its 2014 IPO, as well as ongoing SEC, Department of Justice, and state regulator information requests concerning subprime auto finance and securitizations. It said it could not estimate reasonably possible losses for the described legal matters. No material change to the 2017 Form 10-K risk factors was reported.
Important facts for investors to verify
- Whether improved auto credit performance and lower provisions persist as the consumer portfolio grows; review delinquency, charge-off, and allowance trends.
- How higher deposit costs and market rates affect funding expense, net interest spread, and reported rate sensitivity.
- Whether mortgage and corporate lending growth maintains underwriting quality, particularly given the increase in commercial nonperforming loans and criticized exposures.
- How lease runoff, used-vehicle prices, and remarketing gains affect lease income and residual risk.
- The eventual allowance, retained-earnings, and regulatory-capital impact of the 2020 expected-credit-loss standard.
- Developments in the disclosed securities litigation and regulatory inquiries, for which the filing provides no clear estimate of potential loss.
- Execution of the authorized buybacks and dividend increase, and whether regulatory and capital conditions permit the planned distributions.