Ally Financial Inc. quarterly report, Q3 FY2019

Ally Financial Inc. — Q3 2019 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2019. Ally is a digital financial-services company focused on automotive finance and insurance, with banking, mortgage, brokerage, and corporate finance businesses. Figures are unaudited; dollar amounts below are in U.S. dollars.

Financial performance and condition

Metric	Q3 2019	Comparable period
Total net revenue	$1.601 billion	$1.505 billion in Q3 2018
Net financing revenue and other interest income	$1.188 billion	$1.107 billion in Q3 2018
Provision for loan losses	$263 million	$233 million in Q3 2018
Pre-tax continuing-operations income	$500 million	$465 million in Q3 2018
Net income	$381 million; diluted EPS $0.97	$374 million; diluted EPS $0.88 in Q3 2018

• For the first nine months, net revenue was $4.751 billion versus $4.366 billion, and net income was $1.337 billion versus $973 million. Diluted EPS was $3.35 versus $2.25.
• Q3 net interest spread was 2.48% versus 2.49%; net yield on interest-earning assets was 2.70% versus 2.67%. Nine-month net interest spread was 2.45% versus 2.50%, and net yield was 2.68% versus 2.67%.
• At September 30, total assets were $181.5 billion, finance receivables and loans net were $127.3 billion, and equity was $14.45 billion. Deposits were $119.2 billion, up from $106.2 billion at year-end 2018; short-term borrowings were $5.3 billion and long-term debt $35.7 billion, down from $10.0 billion and $44.2 billion, respectively.
• For the nine months, operating cash flow was $3.133 billion, investing cash flow was negative $3.148 billion, and financing cash flow was negative $1.242 billion. Cash and restricted cash ended at $4.371 billion, compared with $4.707 billion a year earlier.
• Available liquidity was $28.6 billion, versus $19.0 billion at year-end 2018. Average modified liquidity coverage ratio was 124%, above the 100% regulatory minimum. Ally’s CET1 ratio was 9.56%; Ally Bank’s was 12.40%.

Material changes and drivers

• Q3 net income rose modestly as higher net financing revenue and asset growth more than offset higher credit provisions and operating costs. Interest expense rose 13% year over year, reflecting higher rates, deposit growth, and funding needs.
• Nine-month earnings benefited substantially from a second-quarter release of valuation allowance on foreign tax credit carryforwards. The resulting $140 million nine-month tax expense was unusually low relative to pre-tax income; management said the release reflected expected securitization capacity, investor demand, and timing of credit expirations.
• Automotive Finance pre-tax income rose 12% in Q3 and 18% for the nine months. Consumer automotive loan yields improved and balances grew; the segment’s loan-loss provision also increased.
• Insurance pre-tax income was $201 million for the nine months, versus $93 million, helped by investment gains and premium growth. Its combined ratio improved to 87.5% for Q3 and 95.6% for the nine months.
• Corporate Finance nine-month pre-tax income declined to $103 million from $123 million, including higher provisions associated with two specific loan exposures. Corporate and Other losses widened, principally as deposit funding costs increased.
• Deposits grew by $13.1 billion during the first nine months, while debt funding declined. The company repurchased $740 million of common stock and declared $0.51 per share in dividends during the period.

Outlook, risks, and notable items

• No formal earnings or revenue guidance is provided in the supplied filing text. Management described the U.S. economy as continuing to expand modestly, reported unemployment of 3.5% at September 30, and expected modest downward pressure on used-vehicle values for the remainder of 2019.
• Ally expected CECL adoption on January 1, 2020. Preliminary assessment indicated the allowance for loan losses on finance receivables and loans could increase by 105%–115%, driven primarily by consumer auto loans and lifetime-loss measurement. Management cautioned that the final impact depends on portfolio composition, credit quality, economic forecasts, models, and other assumptions; CECL could increase future provision volatility.
• Interest-rate sensitivity analysis estimated that, versus its baseline forecast, next-12-month net financing revenue would decrease by $90 million if rates remained unchanged. Scenario results varied by rate shock and were sensitive to deposit repricing and other assumptions.
• Key risks include consumer and commercial credit deterioration, used-car and housing values, interest rates and deposit costs, funding and liquidity access, LIBOR transition, competition, cybersecurity and system implementation, regulatory change, and legal matters. Management said current legal and other contingencies were not likely to be material to consolidated financial condition after accruals, but individual matters could affect results or cash flows materially in a period.
• After quarter-end, Ally completed its approximately $190 million acquisition of Health Credit Services on October 1. Ally Invest announced commission-free trading effective October 9; management was evaluating the effect on projected revenue and earnings and the $193 million Ally Invest goodwill balance. The board declared a $0.17-per-share dividend payable November 15.
• Regulatory changes designate Ally as a Category IV firm effective December 31, 2019, with tailored supervisory and liquidity requirements. The company reported that disclosure controls were effective and that there were no material changes to internal control over financial reporting during the quarter.

Important facts for investors to verify

• Whether consumer auto credit losses and provisions continue to rise as the portfolio grows and seasons; Q3 consumer auto net charge-offs were $253 million versus $233 million a year earlier.
• The final CECL transition impact and how it affects allowance levels, capital, and future provision volatility.
• Whether deposit growth continues to offset higher funding costs and the reduction in market-based debt funding.
• Used-vehicle residual values, lease remarketing gains, and the expected lease termination volume; these affect depreciation and lease economics.
• The sustainability of earnings excluding the foreign-tax-credit valuation allowance release and investment-market gains.
• The effects of commission-free trading on Ally Invest revenue and goodwill, and the integration and performance of the Health Credit Services acquisition.
• Capacity to maintain capital distributions under regulatory review and evolving capital, liquidity, and CECL requirements.