DBRS Comments on Ally Financial’s 3Q10 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 and Long-Term Debt rating of BB (low), are unaffected by the Company’s announcement of 3Q10 results. The trend on all ratings is Stable.

Ally’s 3Q10 results evidence continuing solid momentum across the franchise. For the quarter, Ally reported net income of $269 million, a 52% decline from the prior quarter. However, the decline was largely attributable to non-core items. For the quarter, core pre-tax income, as defined as income from continuing operations before taxes and original issue discount (OID) was $636 million, 10% lower on a linked-quarter basis. Performance benefited from rather resilient net revenue generation, improving credit performance, lower non-interest expense and strong consumer origination volumes. However, net interest income decreased slightly owed to the migration towards higher-quality, lower yielding automotive finance assets. Indeed, net interest margin declined 30 basis points quarter-on-quarter to 2.5%. During the quarter, Ally increased its reserve for mortgage repurchases which resulted in a $344 million pre-tax expense.

For the third consecutive quarter, all business segments reported profits. Global Automotive generated core pre-tax income of $756 million, driven by solid results in both the North American and International Operations. In the North American Operations, pre-tax income fell slightly to $568 million largely attributed to the repositioning of the balance sheet. U.S. origination volumes increased 48.2% year-on-year to $8.3 billion, on good penetration of both GM and Chrysler retail sales. The Company continues to shift from subvented to standard business. While only 36% of retail originations are being driven by manufacturer incentive programs, retail sales penetration remained stable at 34.2% for GM and 49.4% for Chrysler, evidencing the Company’s solid competitive position and its ability to leverage its strong relationships with auto dealers.

The Mortgage Operations segment reported pre-tax income from continuing operations of $154 million, its third consecutive quarterly profit. Results were negatively impacted by the aforementioned repurchase reserve charge. This resulted in a $275 million build in reserves. At September 30, 2010, this reserve totaled $1.1 billion. Revenue increased for the quarter driven by solid servicing income remains and gains on sale of core originations. Benefiting from strong refinancing activity, new loan volumes increased 52% on a linked-quarter basis to $20.5 billion.

Credit trends continue to evidence that the peak of the current cycle has passed. Non-performing loans have declined by 73% from a year ago to $1.6 billion. This improvement reflects the actions taken to reduce the risk of the mortgage operations. Moreover, the Company recorded lower loan loss provision charges, which at $9 million compared favorably to $220 million in the prior quarter. Provision expense benefited from the continued run-off of legacy higher-risk assets, the sale of the resort finance portfolio and improved credit trends in the auto finance loan book. Within the global retail auto portfolio, delinquencies fell close to historical levels, declining to 2.26%.

The Company continues to make progress in diversifying its funding profile and improving liquidity. Net deposits grew by $2.6 billion, or 7.6%, quarter-on-quarter to $36.9 billion, on strong CD retention rates of 88%. As such, retail deposits account for 29% of total funding. Ally continues to demonstrate consistent access to the capital markets, generating $30.5 billion of funding year-to-date. Capital remains sound with Tier 1 capital ratio increasing to 15.4%, owed to the positive earnings, while risk-weighted assets increased slightly due to the strong new origination volumes partially offset by the sale of the European mortgage 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.