Ally Financial Inc. — Q3 2017 Form 10-Q
Business context and reporting period. Ally is a digital financial services company and bank holding company, with automotive finance and insurance as its core businesses, alongside mortgage finance, middle-market corporate lending, deposits, and online brokerage. This unaudited filing covers the three and nine months ended September 30, 2017; comparisons are with the corresponding 2016 periods unless noted. Financial amounts are in millions of dollars unless stated otherwise.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total net revenue | $1,462 | $1,384 | $4,292 | $4,069 |
| Net financing revenue | $1,081 | $996 | $3,127 | $2,931 |
| Provision for loan losses | $314 | $258 | $854 | $650 |
| Income from continuing operations | $280 | $261 | $747 | $865 |
| Net income | $282 | $209 | $748 | $819 |
| Diluted EPS, continuing operations | $0.62 | $0.54 | $1.63 | $1.72 |
| Net interest spread | 2.59% | 2.57% | 2.57% | 2.54% |
| Net yield on interest-earning assets | 2.74% | 2.69% | 2.70% | 2.66% |
- Cash flow: For the first nine months, operating activities provided $3.373 billion, investing activities used $3.669 billion, and financing activities used $1.217 billion. Cash and cash equivalents were $4.424 billion at September 30, down $1.510 billion from year-end 2016.
- Balance sheet and funding: Total assets were $164.013 billion; finance receivables and loans, net, were $117.585 billion; deposits were $90.116 billion; short-term borrowings were $10.175 billion; long-term debt was $45.122 billion; and equity was $13.573 billion. Deposits funded 62% of reported on-balance-sheet funding, up from 54% at December 31, 2016.
- Liquidity and capital: Available liquidity was $21.822 billion, including $12.434 billion in unencumbered U.S. government and agency securities, $4.243 billion in liquid cash and equivalents, and $5.145 billion of unused committed facilities. Ally reported that liquidity would cover planned originations and financial obligations for more than 36 months under a long-term capital-markets stress, assuming no unsecured debt issuance or term securitizations. Ally’s Common Equity Tier 1 ratio was 9.72%; Ally Bank’s was 15.39%. Both were reported well-capitalized.
- Credit: The allowance for loan losses was $1.286 billion, or 1.1% of loans. Nine-month net charge-offs were $705 million, versus $544 million; the total net charge-off ratio was 0.8%, versus 0.6%. Nonperforming loans were $807 million, compared with $819 million at year-end 2016. Consumer automotive loans were $67.1 billion; nonprime loans were 13.3% of that portfolio.
Material changes versus the prior comparable periods
- Q3 net income rose to $282 million from $209 million, while nine-month net income fell to $748 million from $819 million. Q3 continuing-operations income improved, but nine-month continuing-operations income declined to $747 million from $865 million.
- Revenue grew 6% in Q3 and 5% year to date. Higher loan yields and balances, investment income, and automotive loan-sale gains supported results. Total interest expense rose 12% in Q3 and 8% year to date, as deposit growth and higher market rates increased funding costs.
- Loan-loss provision increased 22% in Q3 and 31% year to date. Management attributed the increase principally to consumer automotive credit performance, portfolio mix and growth, and $53 million of estimated hurricane-related provision expense.
- Automotive operating-lease revenue continued to decline as the GM lease portfolio ran off. Net operating-lease revenue was $162 million in Q3 and $483 million year to date, down 33% and 37%, respectively. The net operating lease asset balance fell to $8.931 billion from $11.470 billion at year-end 2016.
- The nine-month comparison also reflects a $175 million tax benefit in Q2 2016 from release of a prior-year federal tax reserve; lower investment gains in 2017; and continued investment in consumer and commercial products. Commercial Finance and Mortgage Finance revenue grew, while Automotive Finance pretax income declined 14% year to date.
Outlook, management commentary, and risks
- Business and credit outlook: Management described a strategy of originating across a broader credit spectrum to pursue risk-adjusted returns. It noted deterioration in lower-tier consumer automotive performance, expects downward pressure on used-vehicle values to continue through 2017, and said recent loan vintages have higher average buy rates and expected losses than older vintages.
- Hurricanes: Ally identified more than half a million automotive borrowers in potentially affected areas, temporarily paused certain collections and repossessions, and offered payment extensions generally of 30 to 90 days. Hurricane impacts increased estimated provision by $53 million; the timing and ultimate credit effects remained uncertain.
- Lease and insurance risks: Lower used-car values and lease termination volumes affected remarketing results. Insurance underwriting results benefited from an April 2017 reinsurance agreement that ceded certain weather-related losses and premiums; the combined ratio was 86.0% in Q3 versus 92.5%, but 101.5% year to date versus 103.2%.
- Funding and rates: Ally cited deposit retention and growth as important to its funding strategy. It remained moderately liability-sensitive in upward rate shocks under its baseline deposit-repricing assumptions. In October 2017, it reduced the capacity of its largest private committed facility by $1.5 billion to $8.0 billion; its maturity was March 2018. Unused facility availability depends on eligible collateral.
- Capital returns: The Federal Reserve did not object to Ally’s 2017 capital plan. The plan authorized up to $760 million of common-stock repurchases from Q3 2017 through Q2 2018 and raised the quarterly dividend to $0.12 per share. The Board declared another $0.12 dividend on October 10, payable November 15, 2017. Future distributions remain subject to regulatory review and Board approval.
- Legal and regulatory matters: Three consolidated securities class actions allege misstatements and omissions connected with Ally’s 2014 IPO, including disclosures about subprime auto lending. Ally also reported ongoing information requests or investigations involving the SEC, Department of Justice, and New York Department of Financial Services concerning subprime auto finance and securitizations. The filing states that reasonably possible losses could not be estimated for the material matters discussed.
- Other items: No formal earnings guidance is provided in the supplied filing text. Management identified expected adoption of the current expected credit loss standard in 2020 and said it would likely materially increase credit-loss allowances and reduce retained earnings; the impact was still being assessed.
Most important facts for investors to verify
- Whether consumer automotive delinquencies, charge-offs, and lower-tier vintage performance continue to worsen, and whether the allowance adequately reflects those trends and hurricane-related payment extensions.
- Whether used-vehicle values and lease termination economics weaken further, and how the GM lease runoff affects earnings and residual exposure.
- Deposit growth, deposit pricing, and the refinancing or replacement of the large committed facility maturing in March 2018, including the effect of its October capacity reduction.
- The progression and potential financial consequences of the IPO securities litigation and government inquiries; the filing provides no estimable range for material legal losses.
- Whether regulatory capital, liquidity, and earnings support planned repurchases and dividends, and whether future regulatory approvals or stress-test results constrain distributions.