Ally Financial Inc. quarterly report, Q2 FY2020

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Ally Financial Inc. — Q2 2020 Form 10-Q

Business context and period. Ally is a digital financial-services company centered on automotive finance and insurance, with online banking, mortgage, corporate finance, brokerage, and consumer point-of-sale lending businesses. This unaudited report covers the quarter and six months ended June 30, 2020; comparisons are with the corresponding 2019 periods unless stated otherwise. The filing describes substantial effects from the COVID-19 pandemic and related economic disruption.

Key financial results and position

  • Q2 revenue and earnings: Total net revenue was $1.609 billion, up 4%; net income was $241 million versus $582 million, and diluted EPS was $0.64 versus $1.46. Pretax income fell to $337 million from $494 million.
  • First-half results: Total net revenue was $3.021 billion, down 4%. Ally recorded a $78 million net loss, or diluted loss per share of $0.21, compared with net income of $956 million and diluted EPS of $2.37 in H1 2019.
  • Interest income and margins: Q2 net financing revenue and other interest income was $1.054 billion, down 9%; H1 was $2.200 billion, down 4%. Net yield on interest-earning assets was 2.40% in Q2 versus 2.66%, and 2.53% for H1 versus 2.66%. Lower benchmark rates, less commercial floorplan lending, and mortgage prepayments weighed on income; lower funding costs partly offset the pressure.
  • Credit costs: Provision for credit losses was $287 million in Q2 and $1.190 billion in H1, versus $177 million and $459 million. The June 30 allowance was $3.354 billion, or 2.8% of finance receivables and loans. Consumer automotive nonperforming loans rose to $1.250 billion from $762 million at year-end 2019; reported consumer nonperforming loans were 1.5% of outstanding consumer loans versus 0.9% at year-end.
  • Cash flow: For H1, operating activities provided $1.162 billion, investing activities provided $11.305 billion, and financing activities provided $3.120 billion. Cash and restricted cash ended at $19.964 billion, up from $4.380 billion at year-end 2019. The large investing inflow primarily reflected the change in originations and repayments of held-for-investment loans; it should not be read as operating earnings.
  • Balance sheet and funding: Assets were $184.061 billion, deposits $131.036 billion, short-term borrowings $3.689 billion, long-term debt $29.176 billion, and equity $13.826 billion. Deposits were 80% of on-balance-sheet funding, up from 75% at year-end. Total available liquidity was $43.522 billion, including $18.567 billion of liquid cash and equivalents and $23.405 billion of unencumbered U.S. federal and agency securities.
  • Capital: Ally’s June 30 CET1 ratio was 10.09%, total capital ratio 13.79%, and Tier 1 leverage ratio 8.93%; Ally Bank’s CET1 ratio was 13.21%. Both were reported as well-capitalized and compliant with applicable requirements. A preliminary 3.5% stress capital buffer for Ally was scheduled to take effect October 1, subject to potential revision.

Material changes versus the prior comparable period

  • COVID-19-related expected losses drove much higher credit provisioning and the first-half net loss. Ally adopted CECL on January 1, 2020; adoption increased the allowance by about $1.3 billion pretax and reduced opening retained earnings by about $1.0 billion after tax. Prior-period figures were not restated.
  • Consumer automotive originations fell amid dealership restrictions and production shutdowns: total consumer automotive financing originations were $7.190 billion in Q2 versus $9.743 billion. Average wholesale floorplan receivables fell to $20.215 billion from $29.031 billion a year earlier. Management reported a recovery in consumer originations during Q2, including June volume above the prior year, but said sustainability was uncertain.
  • Insurance results benefited in Q2 from investment-market recovery: other gain on investments was $188 million versus $39 million. For H1, that gain was $109 million versus $147 million. Q2 Insurance pretax income was $128 million, while its combined ratio worsened to 120.9% from 114.4%; H1 pretax income fell to $23 million from $145 million.
  • Automotive lease remarketing shifted from gains to losses: Q2 average loss was $421 per vehicle versus a $776 gain. Ally cited weaker used-vehicle prices earlier in the quarter, followed by improvement later in Q2.
  • Ally recorded a $50 million goodwill impairment at Ally Invest, citing developments affecting expected growth and revenue timing. Ally also terminated its proposed CardWorks acquisition by mutual agreement, with no termination or breakup fee.

Outlook, management commentary, risks, and unusual items

  • Management said it could not yet determine the pandemic’s ultimate effects and was not confident that Q2 improvements would persist, particularly amid renewed COVID-19 cases. It warned of possible higher credit losses and reserves, weaker demand, funding-market volatility, and impacts on capital, liquidity, and ratings. The filing provides no specific earnings or revenue guidance.
  • COVID-19 customer relief included automotive loan and lease deferrals of up to 120 days; about 840,000 automotive loan customers, or 21% of that customer base, remained enrolled at June 30. Dealer assistance had been requested by about 73% of eligible dealers. These programs may support customers but can affect revenue and complicate interpretation of delinquency trends: enrolled borrowers’ delinquency status was generally frozen during deferral.
  • Ally cited a changing economic forecast, including unemployment peaking near 14% and declining to about 9% by year-end 2020, before reverting toward a historical mean. These are model assumptions, not company guidance. The filing cautions that future credit-loss estimates are materially uncertain.
  • Ally suspended its stock-repurchase program; it did not plan a new program or repurchases other than compensation-related shares for the remainder of 2020. Federal Reserve restrictions for Q3 2020 also barred most repurchases and limited dividend increases. The Board declared a $0.19-per-share quarterly dividend payable August 14, 2020, subject to applicable restrictions.
  • Other items to monitor include a certified nationwide and Missouri class action involving vehicle repossession notices, for which plaintiffs sought potentially significant damages; Ally said it would defend the claims and could not estimate reasonably possible losses. Management stated that current legal matters were not expected to be material to consolidated financial condition after existing accruals, but could affect a particular period’s results or cash flows.

Important facts for investors to verify

  1. Whether automotive and commercial borrower performance worsened after deferral programs expired, and whether reserve levels adequately reflect updated economic conditions.
  2. How CECL-driven provisions, charge-offs, nonperforming loans, and TDR balances evolve; distinguish CECL adoption effects from subsequent credit deterioration.
  3. Whether used-vehicle prices and lease remarketing results recover, and how residual values affect future depreciation expense.
  4. Whether deposit growth and the reported $43.5 billion of available liquidity remain durable, considering funding maturities, collateral restrictions, and any renewed market disruption.
  5. Whether regulatory stress-capital requirements or dividend and repurchase restrictions change, and the effect on capital distributions.
  6. The outcome and potential financial exposure of the repossession-notice class action; the filing does not provide a clear estimate of reasonably possible losses.