Ally Financial Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. Ally is a digital financial services company focused on automotive finance and insurance, with online banking, mortgage, corporate finance, brokerage and wealth-management businesses. This summary emphasizes annual results; quarterly data are also reported.
Financial performance and position
| Metric | 2017 | 2016 |
|---|---|---|
| Total net revenue | $5.765 billion | $5.437 billion |
| Net financing revenue and other interest income | $4.221 billion | $3.907 billion |
| Income from continuing operations before tax | $1.507 billion | $1.581 billion |
| Net income from continuing operations | $926 million | $1.111 billion |
| Net income, including discontinued operations | $929 million | $1.067 billion |
| Basic / diluted EPS from continuing operations | $2.04 / $2.03 | $2.25 / $2.24 |
| Net interest spread / net yield on interest-earning assets | 2.58% / 2.71% | 2.49% / 2.63% |
| Provision for loan losses | $1.148 billion | $917 million |
| Operating cash flow | $4.079 billion | $4.567 billion |
| Assets / deposits at year-end | $167.1 billion / $93.3 billion | $163.7 billion / $79.0 billion |
| Total equity at year-end | $13.5 billion | $13.3 billion |
- Net cash used in investing activities was $8.727 billion; net cash provided by financing activities was $2.033 billion. Cash, cash equivalents and restricted cash declined $2.612 billion to $5.269 billion.
- Available liquidity was $18.126 billion, including $10.559 billion of unencumbered highly liquid securities, $3.757 billion of liquid cash and equivalents, and $3.810 billion of unused committed facilities. The modified liquidity coverage ratio exceeded 100%.
- Year-end debt was approximately $56.8 billion in principal, including $36.9 billion secured debt; this principal measure differs from balance-sheet debt amounts. Long-term debt on the balance sheet was $44.226 billion and short-term borrowings were $11.413 billion.
- Transitional Common Equity Tier 1, Tier 1 and total capital ratios were 9.53%, 11.25% and 12.94%; Ally Bank was well capitalized. Return on average assets was 0.57%, versus 0.68% in 2016.
- Insurance’s combined ratio improved to 96.8% from 98.7%; below 100% indicates underwriting profitability under the company’s definition.
Changes versus 2016
- Revenue increased 6%, but pretax income fell 5% and continuing-operations net income fell 17%. Higher net financing revenue, loan-sale gains and insurance revenue were outweighed by greater credit provisions, expenses and tax costs.
- Provision for loan losses rose 25% to $1.148 billion. Net charge-offs increased to $1.010 billion from $801 million; the total net charge-off ratio rose to 0.8% from 0.7%. Consumer automotive net charge-offs rose to $986 million from $795 million, and the ratio increased to 1.5% from 1.2%.
- Interest expense rose 9% to $2.857 billion, reflecting higher funding levels and market rates, while deposits grew $14.2 billion. Deposits increased to 63% of liability-based funding from 54%.
- Operating-lease assets fell to $8.7 billion from $11.5 billion as the legacy GM lease portfolio ran off. Lease remarketing gains declined to $124 million from $213 million.
- Automotive Finance pretax income fell to $1.220 billion from $1.380 billion. Corporate Finance pretax income rose to $114 million from $71 million; Mortgage Finance pretax income fell to $20 million from $34 million; Insurance pretax income increased to $168 million from $157 million.
Outlook, management commentary and risks
- Management expects the legacy GM lease portfolio to be substantially wound down by the second quarter of 2018 and expects downward pressure on used-vehicle values to continue through 2018. No quantified company-wide earnings or revenue guidance is provided in the filing.
- Management cited broader credit-spectrum auto originations, portfolio growth and the 2017 hurricanes as key drivers of higher provisions. Ally retained a $45 million hurricane-related reserve at year-end and expected related losses during 2018; $53 million had been added to the allowance during 2017.
- The Tax Act produced $119 million of 2017 tax expense, principally from a higher valuation allowance on foreign tax-credit carryforwards. Management expects the lower federal corporate tax rate to provide a significant ongoing benefit, without quantifying it.
- Ally Bank’s regulatory commitments, including a former 15% minimum Tier 1 leverage commitment, were lifted in August 2017. The bank paid $2.9 billion to the parent in the third quarter and another $400 million in the fourth quarter, supporting lower-cost funding and liability reduction.
- Capital distributions remain subject to Board decisions and Federal Reserve review. The 2017 capital plan received a non-objection; the Board declared a $0.13-per-share quarterly dividend in January 2018, up from $0.12.
- Key exposures include consumer auto credit performance and used-car values; GM/Chrysler concentration; deposit competition and brokered funding; interest-rate sensitivity; debt refinancing and credit ratings; regulatory requirements; cyber, technology and third-party risks; and legal contingencies. The filing says it cannot estimate reasonably possible losses for the described securities litigation matters.
- Ally disclosed three consolidated securities class actions alleging IPO-related misstatements concerning subprime auto lending; they were consolidated for discovery, and litigation was stayed in November 2017. The company also reported SEC, DOJ and New York regulatory information requests concerning subprime auto finance and securitization. Ally said it intended to defend the lawsuits.
- CECL, effective for Ally on January 1, 2020, is expected to materially increase credit-loss allowances and reduce opening equity; the amount is not clearly quantified. The filing also reports expected opening retained-earnings reductions of approximately $126 million for the 2018 revenue-standard adoption and $20 million for adoption of the financial-instruments standard.
Most important facts for investors to verify
- Whether auto delinquencies, charge-offs and allowance levels remain consistent with the risk-adjusted returns management targets, particularly as newer vintages season.
- Whether used-vehicle prices, lease residuals and runoff of the legacy GM lease portfolio develop as management expects.
- Whether deposit growth and funding-cost trends offset rising rates, debt maturities and reliance on secured or brokered funding.
- Whether capital, liquidity and Federal Reserve approvals support planned dividends, repurchases and Ally Bank growth.
- Developments and potential financial exposure from the securities litigation, subprime-auto inquiries, hurricanes and upcoming accounting-standard changes.