Ally Financial Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; unaudited. Ally is a digital financial-services company with automotive finance and insurance, a direct bank, mortgage and corporate finance, personal lending, credit card, and brokerage businesses.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total net revenue | $2.076 billion | $2.085 billion | $4.211 billion | $4.022 billion |
| Net financing revenue and other interest income | $1.764 billion | $1.547 billion | $3.457 billion | $2.919 billion |
| Provision for credit losses | $304 million | $(32) million | $471 million | $(45) million |
| Pre-tax continuing income | $634 million | $1.042 billion | $1.480 billion | $2.049 billion |
| Net income | $482 million | $899 million | $1.137 billion | $1.695 billion |
| Diluted EPS | $1.40 | $2.41 | $3.27 | $4.52 |
| Net yield on interest-earning assets | 4.04% | 3.55% | 3.98% | 3.36% |
Q2 net income fell 46%; first-half net income fell 33%. Higher loan and investment interest revenue and lower interest expense supported net financing revenue, but these gains were outweighed by higher credit-loss provision, investment losses, lease depreciation, and expenses. Q2 return on average assets was 1.06% (1.99% prior year); return on average equity was 13.36% (21.88%).
Balance sheet, liquidity, and capital
- At June 30, total assets were $185.7 billion, total liabilities $171.7 billion, and equity $14.0 billion, compared with $182.1 billion, $165.1 billion, and $17.1 billion at year-end 2021. Equity was pressured by a $2.851 billion six-month after-tax other comprehensive loss, principally unrealized losses on available-for-sale securities as interest rates rose.
- Net finance receivables and loans were $125.0 billion after a $3.450 billion allowance; the allowance was 2.7% of finance receivables. Net operating lease assets were $10.5 billion.
- Deposits were $140.4 billion, down from $141.6 billion at year-end. Short-term borrowings were $7.8 billion (none at year-end); long-term debt was $17.0 billion. Total funding sources were $165.2 billion, including $24.8 billion of debt.
- Available liquidity was $28.3 billion: $24.6 billion of unencumbered highly liquid securities and $3.7 billion of liquid cash and equivalents, down from $31.2 billion at year-end.
- Ally Financial CET1, Tier 1, and total capital ratios were 9.62%, 11.11%, and 12.75%, respectively, versus 10.34%, 11.89%, and 13.47% at year-end. Ally Bank was reported well-capitalized. Ally’s preliminary stress capital buffer of 2.5% was scheduled to take effect October 1, 2022, subject to regulatory requirements.
- Six-month operating cash flow was $3.5 billion, investing cash flow $(9.4) billion, and financing cash flow $5.1 billion. Cash and restricted cash ended the period at $4.8 billion.
Material changes and business trends
- Automotive Finance pre-tax income declined 35% in Q2 to $600 million. Higher consumer loan revenue was offset by higher credit provision, costs, and lower gains on off-lease vehicles. Used-vehicle lending contributed to portfolio growth; industry vehicle supply constraints weighed on dealer floorplan balances.
- Insurance reported a Q2 pre-tax loss of $122 million versus $87 million income. Its combined ratio rose to 106.0% from 96.7%, reflecting investment mark-to-market losses, weather-related claims, lower dealer inventory exposure, and higher expenses.
- Corporate and Other recorded Q2 pre-tax income of $90 million versus a $57 million loss, benefiting from Ally Credit Card revenue and lower funding costs. Ally acquired the digital-first card business in December 2021.
- Consumer credit performance normalized from pandemic-era lows. Q2 consumer net charge-offs were $128 million, compared with a $2 million recovery a year earlier. Total nonperforming consumer loans were $1.16 billion, or 1.1% of consumer balances; commercial nonperforming loans were $219 million, or 0.9% of commercial balances.
- Common shares repurchased totaled $1.184 billion in the first half. Common dividends declared were $0.60 per share for the first half; the board declared a further $0.30 quarterly dividend on July 14, 2022.
Outlook, risks, and unusual items
- The filing provides no consolidated earnings guidance. Management stated it expected consumer automotive loan yields to continue rising with market rates and expected dealer inventory constraints to limit wholesale finance growth through 2022. It anticipated the shift toward dealer and lessee off-lease buyouts to continue near term, potentially limiting remarketing proceeds, while used-vehicle values were expected to remain elevated amid supply constraints.
- Management’s 12-month net financing revenue sensitivity analysis showed a $751 million increase versus baseline if rates remained unchanged, reflecting expected federal funds rate increases. Under modeled instantaneous +200-basis-point and +100-basis-point shocks, the respective impacts were $(162) million and $(79) million; gradual shocks produced increases of $43 million and $26 million. These are model sensitivities, not guidance.
- Credit risks include further normalization in auto losses, economic contraction, inflation, unemployment and supply-chain uncertainty. Other material exposures include operating-lease residual values, interest-rate and securities valuation changes, deposit and wholesale funding access, and commercial borrower credit quality.
- Available-for-sale securities had $3.783 billion of gross unrealized losses at June 30. Management said it did not intend, and did not expect to be required, to sell the securities before recovery; it recorded no expected credit-loss allowance on them.
- The filing describes legal proceedings and other contingencies as inherently uncertain. Management did not believe their ultimate outcomes were likely to be material to consolidated financial condition after accruals, but one or more matters could materially affect results or cash flows in a particular period. No material changes to the prior annual report’s risk factors were reported.
- Disclosure controls and procedures were assessed as effective; no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Whether rising net interest revenue can offset higher credit losses, funding costs, and operating expenses.
- Trends in auto delinquencies, charge-offs, allowance adequacy, and consumer credit-card and personal-loan performance.
- Automotive lease residual assumptions, off-lease disposition mix, and realized remarketing gains.
- Available liquidity, deposit trends, secured borrowing dependence, and capital ratios relative to regulatory distribution constraints.
- How securities valuation losses and the BMC investment’s merger and valuation risks develop.
- Whether dividends and share repurchases proceed as planned, given regulatory review, capital needs, and market conditions.