Ally Financial Inc. — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2015; comparative results are for the three and nine months ended September 30, 2014 unless stated otherwise. Financial statements are unaudited. Ally is a diversified financial services company focused primarily on automotive dealers and retail customers, with Automotive Finance, Insurance, Mortgage, and Corporate and Other operations.
Financial performance and condition
Three months: Total net revenue was $1.302 billion, up 3%. Net financing revenue increased 9% to $970 million, while other revenue declined 11% to $332 million. Continuing-operations pretax income was $417 million, compared with $420 million; continuing net income was $273 million versus $293 million. Consolidated net income was $268 million versus $423 million, reflecting discontinued operations’ $5 million loss compared with $130 million income in 2014. Diluted EPS was $0.47.
Nine months: Total net revenue was $3.522 billion, down 3%; net financing revenue rose 6% to $2.736 billion, while other revenue fell 26% to $786 million. Continuing pretax income declined 9% to $962 million and continuing net income declined 20% to $621 million. Net income was $1.026 billion versus $973 million, including $405 million of discontinued-operations income in 2015 versus $199 million in 2014. Common shareholders’ net loss was $330 million, or diluted EPS of negative $0.68, principally reflecting $1.193 billion of deemed preferred dividends associated with preferred-stock redemptions and repurchases.
- Margins and funding costs: Third-quarter net interest spread was 2.55%, up from 2.38%; nine-month spread was 2.43%, up from 2.34%. Net yield on interest-earning assets was 2.64% for the quarter and 2.54% year to date, compared with 2.52% and 2.47%. Interest expense declined 10% for the quarter and 14% year to date, helped by deposit growth, repayment of higher-cost debt, and lower original-issue-discount amortization.
- Credit: Provision for loan losses increased to $211 million for the quarter from $102 million and to $467 million year to date from $302 million. Management attributed the increase mainly to consumer auto and mortgage portfolio growth and a shift toward auto loans versus leases. Nine-month net charge-offs were $411 million versus $367 million; the total annualized net charge-off ratio was 0.5% versus 0.5%. Consumer auto’s nine-month ratio rose to 0.9% from 0.8%. Nonperforming loans were $637 million, down from $653 million at year-end 2014.
- Balance sheet and leverage: Total assets were $156.1 billion, up from $151.8 billion at December 31, 2014. Finance receivables and loans, net, were $107.0 billion, up from $99.0 billion; operating lease assets were $17.3 billion, down from $19.5 billion. Deposits rose to $64.0 billion from $58.2 billion. Long-term debt was $67.5 billion versus $66.6 billion; short-term borrowings were $5.4 billion versus $7.1 billion. Total equity was $14.6 billion versus $15.4 billion.
- Cash flow and liquidity: Nine-month operating cash flow was $4.0 billion versus $2.5 billion; investing cash outflow was $7.0 billion versus $5 million provided; financing cash flow was $2.7 billion provided versus $2.3 billion used. Cash and cash equivalents were $5.2 billion, down from $5.6 billion at year-end. Available liquidity was $5.6 billion at the parent and $9.2 billion at Ally Bank. Ally reported Basel III CET1, Tier 1, and total capital ratios of 10.05%, 12.02%, and 12.95%, respectively; Ally Bank’s Tier 1 leverage ratio was 15.35% and met its 15% maintenance requirement.
Material changes and management commentary
- Automotive Finance pretax income fell 16% for the quarter and 11% year to date. Higher consumer financing revenue and lower funding costs were offset by higher credit provisions and lower lease revenue. GM’s decision to direct its lease and subvented financing programs exclusively through GM Financial sharply reduced Ally’s GM lease originations; growth in Chrysler and non-GM/Chrysler channels partly offset this.
- Consumer auto originations were $11.1 billion in the quarter, down from $11.8 billion; nonprime originations were 13.5% of quarterly volume versus 8.6%. Management said portfolio credit performance remained in line with expectations, while noting growth, underwriting mix, and account seasoning as drivers of higher losses.
- Insurance pretax income was $40 million for the quarter and $133 million year to date. The combined ratio improved to 87.7% for the quarter and 95.3% year to date, from 98.4% and 106.0%, principally due to lower weather-related and vehicle-service-contract losses. Investment income was lower, including an $11 million impairment on certain equity securities in the quarter.
- Mortgage pretax income was $7 million for the quarter and $84 million year to date. Results included gains from sales of troubled-debt-restructured mortgage loans; year-to-date bulk purchases of high-quality jumbo mortgages totaled $3.6 billion. Management expected bulk purchases to continue in support of asset-liability management and diversification.
- Ally recorded $354 million of nine-month debt-extinguishment losses, primarily from first-half tender offers that repurchased $1.8 billion of high-coupon debt. Management said it expects to continue accessing unsecured debt markets and reducing high-cost debt opportunistically.
Outlook, risks, and unusual items
The filing provides no specific earnings or revenue guidance. Management noted continued U.S. economic expansion and strong auto sales, but remained cautious about weak global growth and potentially higher interest rates. Its interest-rate sensitivity analysis showed a liability-sensitive position under its principal assumptions; estimated 12-month pretax net financing revenue changes ranged from negative $180 million under an instantaneous 200-basis-point increase to negative $40 million under a 100-basis-point decrease. Results depend materially on deposit repricing assumptions.
Significant risks include auto-loan credit performance and nonprime exposure, vehicle lease residual values and used-car prices, dependence on dealer and manufacturer relationships (particularly GM and Chrysler), funding-market access and liquidity, interest-rate and deposit behavior, regulatory requirements, and litigation or investigations. The DOJ and SEC have ongoing mortgage-related inquiries, including matters concerning former Residential Capital mortgage-backed securities; DOJ statutes of limitations for potential False Claims Act claims were extended to the end of January 2016. The SEC, DOJ, and New York DFS also requested information concerning subprime auto finance and securitization. Ally stated these matters could result in material adverse consequences, although management did not expect current legal matters to have a material adverse effect overall based on information then available.
Unusual items materially affected period comparisons: the China finance joint-venture sale generated an approximately $400 million after-tax gain, reported in discontinued operations; debt tender offers generated $354 million of nine-month extinguishment losses; and preferred-stock transactions generated $1.193 billion of deemed dividends for EPS purposes. The board declared preferred dividends after quarter-end, payable November 16, 2015.
Most important facts for investors to verify
- Whether auto-loan loss provisions, charge-offs, and nonprime mix continue rising as the portfolio grows and seasons.
- How much future earnings depend on lease returns, remarketing gains, vehicle residual values, and GM’s financing-channel changes.
- Whether deposit growth and funding-cost reductions persist, and whether available liquidity and committed facilities remain accessible with eligible collateral.
- The recurring earnings profile excluding the China sale gain, debt-tender losses, and preferred-stock deemed dividends.
- Developments, potential exposure, and any settlement or reserve implications from the DOJ, SEC, and New York DFS investigations and CFPB consent orders.
- Capital distributions and further preferred redemptions remain subject to regulatory conditions and approval; confirm subsequent capital actions and capital ratios.