Business context and reporting period
Ally Financial Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2023. Ally is a digital bank and financial-services company with major automotive finance and insurance businesses, alongside mortgage, corporate finance, lending, credit-card, and brokerage operations. Comparisons below are with the three months ended March 31, 2022, unless otherwise noted.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 / prior period |
|---|---|---|
| Total net revenue | $2.10 billion | $2.14 billion |
| Net financing revenue and other interest income | $1.60 billion | $1.69 billion |
| Provision for credit losses | $446 million | $167 million |
| Income before tax | $388 million | $846 million |
| Net income | $319 million | $655 million |
| Diluted EPS | $0.96 | $1.86 |
| Net interest margin | 3.51% | 3.93% |
| Return on average assets / equity | 0.67% / 9.60% | 1.46% / 16.44% |
| Operating cash flow | $1.43 billion | $1.64 billion |
Revenue rose with higher loan yields and balances, but was more than offset by sharply higher deposit and other funding costs. Credit-loss provision and noninterest expense also increased. Other investment gains were $74 million, including $64 million of unrealized equity-security gains.
At March 31, 2023, total assets were $196.2 billion, finance receivables and loans net of allowance were $132.6 billion, and deposits were $154.0 billion. Cash and cash equivalents were $9.8 billion. Short-term borrowings were $1.5 billion and long-term debt was $20.5 billion. Total equity was $13.4 billion. Available liquidity was $42.9 billion, including $21.5 billion of unencumbered highly liquid securities, $9.3 billion of liquid cash and equivalents, and $12.2 billion of unused FHLB capacity.
Regulatory capital ratios at Ally Financial were 9.23% CET1, 10.66% Tier 1, 12.46% total capital, and 8.54% Tier 1 leverage. Ally Bank met the capital thresholds to be considered well capitalized under the prompt corrective action framework. The common dividend declared was $0.30 per share; the Board had not authorized a 2023 share-repurchase program.
Material changes versus the prior comparable period
- Net income fell 51% and diluted EPS declined from $1.86 to $0.96. Net interest margin compressed by 42 basis points as interest expense rose to $1.46 billion from $401 million, mainly reflecting higher rates and deposit funding costs.
- Provision for credit losses increased to $446 million from $167 million. Consumer net charge-offs were $409 million versus $134 million; automotive net charge-offs were $351 million versus $113 million. The allowance for loan losses was $3.75 billion, or 2.8% of finance receivables and loans, at quarter-end.
- Automotive Finance pretax income declined to $442 million from $725 million, primarily due to funding costs and credit losses. Insurance pretax income increased to $92 million from $13 million, aided by investment gains; its combined ratio worsened to 102.0% from 96.5%. Corporate and Other moved to a $239 million pretax loss from $33 million of income, reflecting higher interest expense and equity-method investment losses.
- Available-for-sale securities had $3.8 billion of cumulative net unrealized losses at March 31. Ally reported no expected credit losses on these securities and said it did not intend, nor believe it was more likely than not required, to sell them before recovery of amortized cost.
Outlook, management commentary, risks, and unusual items
The filing provides no formal earnings or revenue guidance. For its credit-loss estimates, Ally incorporated expectations of mild recessionary conditions in 2023, including negative GDP growth through the second quarter of 2023 and unemployment rising to approximately 4.5% in early 2024. These are allowance-model assumptions, not earnings guidance.
- Management cited elevated macroeconomic uncertainty, inflation, possible recession, higher interest rates, and potential deterioration in borrowers’ ability to pay. Auto lending and unsecured consumer portfolios warrant attention: nonprime consumer auto loans were about 10.5% of the portfolio, and nonprime share of new consumer auto originations rose to 10% from 8%.
- After the failures of SVB and Signature, Ally reported brief two-way deposit flows, with uninsured deposit outflows more than offset by inflows. More than 90% of Ally Bank deposits were FDIC-insured at quarter-end; uninsured deposits totaled $12.1 billion. Ally said it had not borrowed from the BTFP and estimated approximately $23.1 billion of available BTFP capacity.
- Potential changes to Federal Reserve rules for Category IV firms could bring stricter capital, liquidity, and stress-testing standards. Ally noted that the impact and timing were uncertain. Its 2023 capital plan was submitted to the FRB on April 5, 2023; capital distributions remain subject to regulatory review and Board approval.
- Interest-rate sensitivity analysis estimated that, under a stable-rate scenario, pretax net financing revenue over the next 12 months would be $134 million below the baseline forecast. Rate-shock estimates depend on assumptions, including deposit repricing.
- Ally reduced its committed consumer-loan purchase facility with Carvana from a maximum of $5.0 billion to $4.0 billion. Carvana’s wholesale floorplan balance outstanding was $494 million at March 31; Ally said its first-lien collateral position would be maintained if Carvana completed its proposed debt exchange.
- Automotive lease residual values remain a risk: Ally held $10.2 billion of operating lease assets, with expected lease residual value at scheduled termination of $8.2 billion. Lease terminations were lower year over year, though average remarketing gain per vehicle increased to $1,932 from $1,640.
- Ally said pending legal matters and other contingencies were not likely to be material to consolidated financial condition after existing accruals, but one or more could materially affect results or cash flows in a particular period. It reported no material changes to the risk factors in its 2022 Form 10-K.
Most important facts for investors to verify
- Whether consumer auto and other consumer credit deterioration continues, and how charge-offs, delinquencies, and allowance coverage develop.
- Whether deposit growth and pricing can limit funding-cost pressure and sustain net interest margin; also monitor uninsured deposit flows and available liquidity.
- How the unrealized securities losses, potential regulatory changes, and capital requirements affect liquidity, capital distributions, and funding costs.
- Whether Carvana exposures, auto lease residual performance, and insurance claims experience remain within management’s expectations.
- How much of future earnings depends on volatile investment gains, and whether underlying operating results improve without those gains.