Ally Financial Inc. — Q1 2016 Form 10-Q
Business context and period. Unaudited results for the three months ended March 31, 2016, compared with Q1 2015; balance-sheet comparisons are generally with December 31, 2015. Ally is a financial holding company with automotive finance, insurance, mortgage finance, and corporate finance businesses, and a direct-banking subsidiary. Amounts are in U.S. dollars.
Key financial results
| Metric | Q1 2016 | Q1 2015 / prior date |
|---|---|---|
| Total net revenue | $1.327 billion | $1.093 billion |
| Net financing revenue | $951 million | $850 million |
| Continuing-operations pretax income | $397 million | $282 million |
| Continuing-operations net income | $247 million; $0.48 per diluted share | $179 million; $0.23 per diluted share |
| Net income, including discontinued operations | $250 million; $0.49 per diluted share | $576 million; $1.06 per diluted share |
| Provision for loan losses | $220 million | $116 million |
| Net charge-offs | $179 million; 0.6% of average loans | $150 million; 0.6% |
| Net interest spread / yield on interest-earning assets | 2.49% / 2.59% | 2.31% / 2.44% |
| Return on average assets / equity | 0.64% / 7.38% | 1.55% / 14.88% |
| Operating cash flow | $1.188 billion | $247 million |
| Investing / financing cash flow | $651 million / $(3.220) billion | $805 million / $1.009 billion |
Revenue and continuing-operations earnings rose year over year. The prior-year comparison is significantly affected by a $397 million after-tax gain from discontinued operations, principally the sale of Ally’s China automotive-finance joint-venture interest. Q1 2015 also included a $198 million debt-extinguishment loss, versus $4 million in Q1 2016; therefore, reported total net income is not directly comparable as an indicator of ongoing performance.
Higher net financing revenue and lower lease-asset depreciation supported earnings. These benefits were partly offset by higher loan-loss provisions and insurance losses. Interest expense was $648 million versus $612 million; noninterest expense was $710 million versus $695 million. The filing attributes the $104 million increase in provision largely to consumer auto portfolio growth, a broader credit mix, and prior-year commercial reserve releases that did not recur.
Balance sheet, funding, and capital
- At March 31, total assets were $156.5 billion, total equity $13.8 billion, and finance receivables and loans, net, $109.8 billion. Total assets were $158.6 billion and equity $13.4 billion at December 31, 2015.
- Cash and cash equivalents were $5.0 billion, down from $6.4 billion at year-end. Deposits increased to $70.3 billion from $66.5 billion; short-term borrowings fell to $5.4 billion from $8.1 billion; long-term debt fell to $62.0 billion from $66.2 billion.
- Q1 cash flows included $3.8 billion of deposit growth, $8.5 billion of long-term debt repayments and $4.2 billion of issuance. Cash declined by $1.4 billion during the quarter.
- Available liquidity was reported at $9.9 billion for Ally Bank and $5.7 billion for the parent company. Management estimated this could fund planned originations and obligations for approximately 36 months under a long-term capital-markets stress scenario, assuming no unsecured debt issuance or term securitizations. The estimated Modified Liquidity Coverage Ratio exceeded 100%.
- Ally Financial’s Basel III CET1, Tier 1, and total capital ratios were 9.47%, 11.57%, and 13.00%, respectively, at March 31. Ally Bank’s CET1 ratio was 17.61%; its Tier 1 leverage ratio was 15.25%, against a stated commitment to maintain at least 15%. Both were reported well-capitalized and compliant with applicable requirements.
Material changes and operating trends
- Automotive Finance pretax income increased to $337 million from $306 million, with stronger consumer loan revenue and portfolio yields; higher credit-loss provisions partly offset the improvement. Consumer originations were $9.0 billion versus $9.8 billion, including lower GM subvented and lease volumes and higher Growth and Chrysler channel volumes. Loans of 76 months or more rose to 13% of retail originations from 6%.
- Insurance pretax income decreased to $50 million from $78 million. Severe early spring hailstorms increased losses; the combined ratio rose to 94.0% from 85.9%. Investment income also declined.
- Mortgage Finance pretax income was $2 million versus $1 million. Ally purchased $1.4 billion of third-party-originated mortgage loans during the quarter; mortgage finance assets grew to $7.5 billion from $3.9 billion at March 31, 2015.
- Corporate Finance pretax income declined to $11 million from $17 million, despite portfolio growth, reflecting lower recoveries, higher reserves and expenses. Corporate Finance was presented as a separate reportable segment in 2016, with 2015 amounts recast.
- Operating lease assets fell to $15.0 billion from $16.3 billion at year-end. Lease revenue declined, while the number of returned vehicles increased and average remarketing gain per vehicle fell to $700 from $1,067.
Outlook, risks, contingencies, and unusual items
- No consolidated earnings guidance was provided. Management expected continued third-party mortgage-loan purchases to support asset-liability management and diversification, and planned limited direct mortgage originations in late 2016. It expected lease termination volumes to rise during 2016 and average remarketing gains to remain under pressure near term.
- Management described the U.S. economy and labor market as continuing to expand, but cited caution about weak global growth and possible higher interest rates. It identified credit performance, used-vehicle and housing values, funding-market access, deposit repricing, dealer and manufacturer relationships, regulation, and credit ratings among material risks.
- Rate sensitivity was liability-sensitive under management’s primary assumptions: relative to the forward-curve baseline, a +100-basis-point instantaneous shock was estimated to reduce next-12-month pretax net financing revenue by $29 million; a +200-basis-point shock by $151 million. Results depend on assumptions, particularly retail-deposit repricing.
- Ally disclosed ongoing DOJ and SEC inquiries involving legacy mortgage-related matters and DOJ/SEC inquiries into subprime auto finance and securitization. CFPB and DOJ consent orders concerning alleged disparate impact in auto finance require compliance measures and potential payments if remediation targets are not met. Management said current legal matters were not expected to have a material adverse effect overall, while noting an unfavorable resolution could be material in a particular period.
- After quarter-end, Ally announced a proposed $275 million acquisition of TradeKing, expected to close in Q2 or Q3 2016 subject to approvals and other conditions. Ally also planned to redeem the remaining Series A preferred stock for approximately $697 million on May 16, 2016, and said it would indefinitely defer redemption of $500 million of trust preferred securities in support of the acquisition. The Federal Reserve’s response to Ally’s 2016 capital plan, which included proposed common dividends and share repurchases, was pending.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing reported no material change to the risk factors in Ally’s 2015 Form 10-K.
Important facts for investors to verify
- How consumer auto credit performance, provisions, delinquencies and charge-offs develop as the portfolio grows and originations include more extended-term loans.
- Whether used-vehicle residual values and lease remarketing gains remain consistent with assumptions, given higher lease returns and lower per-vehicle gains.
- Whether deposit growth, funding costs, liquidity buffers and debt maturities support the stated liquidity position under stress.
- The outcome and potential financial impact of the DOJ and SEC investigations, and compliance with the auto-finance consent orders.
- Completion, financing and regulatory approval of the TradeKing acquisition; the preferred-stock redemption; and Federal Reserve action on the capital plan.
- The sensitivity of earnings to interest rates and deposit repricing, and the effect of changes in credit, insurance claims and investment income.