Ally Financial Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2016. Amounts are in U.S. dollars; financial amounts are in millions unless stated otherwise. Ally is a bank holding company and digital financial services provider, with automotive finance, insurance, mortgage finance, corporate finance, and online banking businesses.
Financial performance and condition
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total net revenue | $1,384 | $1,302 | $4,069 | $3,522 |
| Net financing revenue | $996 | $970 | $2,931 | $2,736 |
| Provision for loan losses | $258 | $211 | $650 | $467 |
| Income from continuing operations | $261 | $273 | $865 | $621 |
| Net income, including discontinued operations | $209 | $268 | $819 | $1,026 |
| Net interest spread | 2.58% | 2.54% | 2.54% | 2.42% |
| Net yield on interest-earning assets | 2.69% | 2.64% | 2.66% | 2.54% |
- Q3 basic EPS was $0.54 from continuing operations and $0.43 in total, compared with $0.49 and $0.48, respectively, in 2015. Nine-month basic EPS was $1.73 from continuing operations and $1.63 in total; 2015 was a continuing-operations loss of $1.52 per share and total loss of $0.68 per share.
- At September 30, total assets were $157.4 billion, finance receivables and loans net were $113.8 billion, and operating lease assets net were $12.7 billion. Equity was $13.6 billion.
- Deposits were $75.7 billion, short-term borrowings $6.4 billion, and long-term debt $56.8 billion. Deposits increased $9.3 billion and long-term debt declined $9.4 billion from December 31, 2015.
- Cash and cash equivalents were $4.3 billion, down from $6.4 billion at year-end 2015. Available liquidity was reported at $10.4 billion for Ally Bank and $6.7 billion for the parent company. Management estimated this liquidity could fund planned originations and obligations for approximately 36 months under a long-term capital-markets stress scenario, assuming no unsecured debt issuance or term securitizations.
- For the first nine months, operating cash flow was $3.6 billion, investing cash outflow $2.8 billion, and financing cash outflow $2.9 billion.
- Ally Financial’s regulatory capital ratios were 9.53% Common Equity Tier 1, 11.13% Tier 1, 12.80% total capital, and 9.73% Tier 1 leverage. Ally Bank’s Tier 1 leverage ratio was 15.45%; the bank had committed to maintain at least 15%. Both were reported well-capitalized and compliant with applicable requirements.
Material changes versus comparable periods
- Q3 revenue rose 6%, but continuing-operations net income fell 4% as higher loan-loss provision and noninterest costs more than offset increased net financing revenue and investment gains. For nine months, continuing-operations income rose 39%, while total net income fell because 2015 included a roughly $400 million after-tax gain from the sale of a China automotive-finance joint venture.
- Loan-loss provision increased 22% in Q3 and 39% for nine months. Management attributed the increase mainly to higher automotive net charge-offs and reserve needs as the portfolio mix shifted toward higher-return lending, plus growth in commercial automotive lending. Nine-month 2015 provision also benefited from commercial reserve releases that did not recur.
- Net charge-offs were $213 million in Q3 and $544 million for nine months, versus $161 million and $411 million, respectively, in 2015. The allowance for loan losses was $1.134 billion, versus $1.054 billion at year-end 2015. Nonperforming loans were $753 million, up from $680 million at year-end.
- Operating-lease revenue and net lease revenue declined as the GM lease portfolio ran off and remarketing gains per vehicle fell. Q3 average gain per terminated vehicle was $767, compared with $1,611 a year earlier; management said the trend was expected to continue in the near term.
- Consumer automotive originations were $8.4 billion in Q3, down from $10.1 billion. Management cited lower GM-channel volume and a deliberate focus on risk-adjusted returns rather than volume. Deposit growth supported funding, while higher deposit balances and LIBOR rates increased interest expense.
- Insurance’s nine-month pretax income declined to $88 million from $133 million, and its combined ratio increased to 103.2% from 95.3%, primarily due to severe hailstorm losses. Q3 pretax income improved to $56 million from $40 million, helped by investment gains and lower non-weather-related claims.
Outlook, commentary, risks, and unusual items
- No consolidated earnings or revenue guidance is stated in the provided filing text. Management described plans to introduce a direct-to-consumer mortgage product through a strategic partnership in Q4 2016 and continued investment in digital automotive finance. TradeKing, acquired June 1 for $298 million, expands Ally into online brokerage and wealth management; integration costs contributed to higher expenses.
- The Federal Reserve did not object to Ally’s 2016 capital plan, which included a proposed quarterly common dividend of $0.08 per share and authority to repurchase up to $700 million of common stock through Q2 2017. Ally repurchased $159 million of shares in Q3. A further $0.08-per-share dividend was declared October 18, payable November 15, 2016.
- Ally recorded a $52 million reserve in discontinued operations in Q3 related to potential claims under the Department of Justice’s investigations of legacy mortgage matters; the company said settlement discussions were advanced. The filing does not provide a reasonably estimable range of possible losses in excess of reserves for the described legal matters.
- Ally expected to expense a further $10 million to $15 million in Q4 for remaining customer remediation under the 2013 CFPB/DOJ indirect-auto-finance consent orders, which were scheduled to terminate in 2017.
- A purported securities class action was filed in Michigan in October 2016 concerning alleged IPO disclosure omissions, including subprime auto delinquencies and underwriting. Ally said it intended to defend the action. SEC, DOJ, and New York regulators also had information requests or investigations concerning subprime automotive finance and securitization activities.
- Principal risks include consumer and commercial credit deterioration, used-vehicle prices and lease residual values, interest-rate and deposit repricing uncertainty, funding-market access, regulatory capital and liquidity requirements, legal proceedings, and execution of dealer and manufacturer relationships. Ally noted that the Federal Reserve’s 15% minimum Tier 1 leverage commitment for Ally Bank could constrain bank balance-sheet growth and affect parent liquidity.
- For the next twelve months, the company’s forward-curve sensitivity analysis showed pretax net financing revenue decreases of $65 million under an instantaneous 100-basis-point rate decline and increases of $17 million under an instantaneous 100-basis-point rise. Results depend on assumptions, particularly deposit repricing behavior.
Most important facts for investors to verify
- Whether rising automotive charge-offs and reserve requirements persist, and how portfolio mix, loan terms, and used-car prices affect credit losses.
- Whether lower lease remarketing gains and GM lease runoff continue to weigh on net financing revenue and residual-value risk.
- How deposit growth, funding costs, debt maturities, and the 15% Ally Bank leverage commitment affect liquidity, capital deployment, and growth capacity.
- The outcome and potential financial exposure from the DOJ legacy mortgage discussions, automotive regulatory investigations, securities litigation, and remaining consent-order remediation.
- Whether insurance underwriting results recover after weather-related losses and the combined ratio above 100% for the nine-month period.
- TradeKing integration costs and the contribution of the acquisition and new digital initiatives to earnings; the filing does not provide a clear quantified earnings target for these efforts.