Ally Financial Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; unaudited. Ally is a digital financial-services company with automotive finance and insurance, mortgage, corporate finance, banking, brokerage, and point-of-sale lending businesses. Dollar amounts are in U.S. dollars.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Total net revenue | $1.937 billion | $1.412 billion |
| Net financing revenue and other interest income | $1.372 billion | $1.146 billion |
| Provision for credit losses | Benefit of $13 million | Expense of $903 million |
| Noninterest expense | $943 million | $920 million |
| Income before tax | $1.007 billion | Loss of $411 million |
| Net income (diluted EPS) | $796 million ($2.11) | Loss of $319 million ($(0.85)) |
| Net cash from operating activities | $1.170 billion | $814 million |
- Net interest spread was 3.02%, versus 2.45%; net yield on interest-earning assets was 3.16%, versus 2.66%. Return on average assets was 1.78% and return on average equity was 21.39%; both were negative in Q1 2020.
- Interest expense fell to $557 million from $957 million, reflecting lower rates and a shift toward lower-cost deposit funding. Total other revenue rose to $565 million from $266 million, including $123 million of investment gains versus a $79 million loss a year earlier.
- The $916 million year-over-year reduction in credit-loss provision was a major driver of the earnings improvement. Management cited a recovering economic outlook, lower reserve needs, and strong consumer auto credit performance. The quarter’s provision benefit should not be treated as recurring operating income.
Balance sheet, liquidity, and capital
- At March 31, total assets were $181.9 billion, deposits $139.6 billion, long-term debt $20.5 billion, and equity $14.6 billion. Deposits rose $2.5 billion from year-end; long-term debt declined $1.5 billion. Short-term borrowings were zero after Ally ended its demand-notes program and repaid the outstanding balance.
- Cash and cash equivalents were $15.8 billion. Reported available liquidity was $43.6 billion, including $28.0 billion of unencumbered U.S. government and agency securities, $15.2 billion of liquid cash and equivalents, and $350 million of eligible unused committed facilities.
- Ally’s Common Equity Tier 1, Tier 1, total capital, and Tier 1 leverage ratios were 11.06%, 12.82%, 14.58%, and 9.78%, respectively. Ally Bank was reported well capitalized. Regulatory capital ratios include a $1.2 billion deferred CECL impact, with phase-in scheduled to begin in 2022.
- Net cash from investing activities was $452 million, compared with $325 million used in Q1 2020; net cash used in financing was $1.167 billion, compared with $2.201 billion provided. Ally repurchased $219 million of common stock and declared a $0.19-per-share dividend.
Material changes and business trends
- Automotive Finance income before tax was $803 million, compared with a $173 million loss. Consumer auto originations increased to $10.2 billion from $9.1 billion. Average wholesale floorplan balances fell to $15.6 billion from $25.1 billion, as strong vehicle sales and constrained production reduced dealer inventories.
- Insurance income before tax was $141 million, compared with a $105 million loss, substantially reflecting improved investment results. Its combined ratio improved to 89.5% from 91.6%. Management warned that lower dealer inventories could reduce property-and-casualty written premiums in 2021.
- Mortgage Finance income before tax rose to $23 million from $12 million. Mortgage loan prepayments reduced financing revenue, while mortgage loan sale gains increased to $36 million from $9 million.
- Corporate Finance income before tax was $53 million, compared with a $68 million loss, mainly due to lower credit-loss provision and improved investment income.
- Consumer net charge-offs declined to $104 million from $264 million; consumer nonperforming loans were 1.5% of the portfolio. The allowance for loan losses was $3.2 billion, or 2.8% of finance receivables, at quarter-end. Management noted that pandemic support and economic conditions helped credit performance, but charge-offs could rise as effects of the pandemic continue.
Outlook, risks, and unusual items
- The filing provides no specific earnings or revenue guidance. Management expected strong vehicle remarketing trends to continue in the near term and reduced depreciation rates for vehicles scheduled to terminate through June 30, 2022. It also cited semiconductor shortages and production constraints as headwinds to dealer inventories and commercial floorplan balances.
- Off-lease vehicle sales generated $64 million in remarketing gains, versus $2 million a year earlier; average gain per terminated vehicle was $2,114 versus $121. These gains materially supported lease results and depend on used-vehicle market conditions.
- Ally’s sensitivity analysis estimated that, relative to its baseline, net financing revenue over the next 12 months would decrease by $34 million if rates remained unchanged. A 200-basis-point instantaneous increase implied a $41 million decrease; a 25-basis-point decrease implied a $96 million decrease. These are modeled estimates, not guidance.
- The Federal Reserve’s restrictions on capital distributions continued through June 30, 2021, subject to its discretion. Ally had authorization to repurchase up to $1.6 billion of common stock in 2021, subject to regulatory and other conditions.
- A class-action settlement concerning repossession notices was preliminarily approved in March 2021. It provides for an $87.5 million cash payment and waiver of $700 million of charged-off deficiency balances, subject to final court approval and other conditions; Ally had accrued $87.5 million in 2020. Separately, Ally disclosed multiple short-squeeze-related purported class actions and said it intended to defend them.
- After quarter-end, Ally issued $1.35 billion of Series B preferred stock and announced its intent to redeem $1.4 billion of Series 2 trust preferred securities. The Board also declared a $0.19 common dividend payable in May 2021.
Important facts for investors to verify
- How much of reported earnings is sustainable after separating credit-reserve releases, investment gains, and unusually strong vehicle remarketing gains.
- Whether vehicle supply constraints, used-car values, and lease residual assumptions change, and how those changes affect floorplan revenue and lease depreciation.
- Credit performance and reserve adequacy as pandemic-related assistance and stimulus effects evolve, including consumer auto TDRs and commercial criticized exposures.
- Final court approval and ultimate cost of the repossession-notice settlement, and developments in the short-squeeze litigation.
- Regulatory approval or restrictions affecting dividends and buybacks, and the completion, terms, and capital effects of the planned trust preferred redemption.