DBRS Comments on Ally Financial’s 2Q10 Results, Unaffected at BB (low), Trend Stable

DBRS has today commented that the ratings of Ally Financial Inc. (Ally or the Company) and certain related subsidiaries, including its Issuer & Long-Term Debt rating of BB (low), are unaffected by the Company’s announcement of 2Q10 results. The trend on all ratings is Stable.

Ally’s 2Q10 results evidence solid momentum across the franchise with all four segments profitable for the second consecutive quarter. For the quarter, Ally reported net income of $565 million, compared to $162 million in the prior quarter, and a loss of $3.9 billion a year ago. In DBRS’s view, the continued progress in restoring underlying earnings power illustrates that the risk reduction measures taken by management in 2009 are positively impacting Company performance.

For the quarter, core pre-tax income, as defined as income from continuing operations before taxes and original issue discount (OID), increased to $738 million compared to a sizeable loss of $1.3 billion a year ago. Performance has benefited from higher net revenue, improving credit performance and lower non-interest expense. While DBRS views the quarter’s earnings as very respectable, the results have also benefited from certain potentially non-reoccurring items such as gains on sale of auto loans under forward flow agreements, lease portfolio remarketing gains, legacy mortgage loan sale gains and gains from the insurance investment portfolio. As such, DBRS sees potential moderation in earnings, yet the Company is still expected to benefit from improving credit trends, lower funding costs owed to the growing share of funding from retail deposits and increasing auto origination volumes.

Global Automotive reported pre-tax income of $843 million driven by good results from North American Operations and improving performance in the International Operations. North American Operations generated pre-tax income of $630 million, further evidencing the ongoing strong recovery in Ally’s core auto lending operation. The solid quarterly results were driven by strong origination volume, up 33% to $8.0 billion, on improving penetration of both GM and Chrysler retail sales, and favorable remarketing gains due to the robust used vehicle market. Despite only 41.7% of retail originations being driven by manufacturer incentive programs, retail sales penetration improved to 34.4% at GM and 52.5% at Chrysler, evidencing the Company’s solid competitive position and its ability to leverage its strong relationships with auto dealers.

Pre-tax income in the International Automotive operations, more than doubled quarter-on-quarter due to lower provisioning expense and lower non-interest expense due to the effects of foreign exchange movements. Ally continues to streamline the International Operations focusing on five strategic markets. The Company experienced strong year-on-year origination growth in the key Brazil and China markets of 95% and 83%, respectively.

With pre-tax income from continuing operations of $230 million Ally’s Mortgage Operations reported its second consecutive quarterly profit. Results were supported by a 61% increase in net servicing revenue and a $134 million gains on sale from originations due to favorable margins. Importantly, for the second consecutive quarter, the Company’s Residential Capital, LLC (ResCap) unit required no additional capital support. DBRS sees the segment’s ongoing solid results as further validation of the actions taken to markedly reduce the risk of the legacy mortgage portfolios and advance ResCap towards self-sustainability, thereby limiting the potential capital drag on Ally.

Credit metrics remained constant in 2Q10, evidencing the more stable economic conditions, increased quality of more recent vintages and improving collection efforts. Losses on the global retail auto portfolio, on a managed basis, declined substantially to 1.05% from 2.04% in the prior quarter. The robust used-vehicle market, lower frequency of loss, good recoveries post-loss and improved quality of newer originations led to the improvement in charge-offs. Delinquencies increased slightly to 2.93% from 2.87% in the prior quarter, owed primarily to elevated delinquencies in the run-off sub-prime Nuvell portfolio due to a change in non-accrual policy. Excluding the Nuvell portfolio, delinquencies decreased marginally to 2.16% from 2.22% in the prior quarter.

Liquidity and funding continue to improve and diversify. Net deposits grew by $2.3 billion or 7.2%, to $34.3 billion, on strong CD retention rates of 82%, up from 69% in the prior quarter. Ally demonstrated good access to the capital markets generating $25 billion of funding year to date. Capital remains sound with Tier 1 capital ratio increasing to 15.3%, owed to the positive earnings and further reduction in risk weighted-assets.

Note:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating Auto Finance Companies Operating in the United States, which can be found on our website under methodologies.

This is a Corporate (Financial Institutions) rating.