DBRS Comments on Ally Financial’s 1Q11 Results; Unaffected at BB (low), Trend Positive

DBRS Inc. (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 1Q11 results. The trend on the long-term rating is Positive, while the trend on the short-term rating is Stable.

Ally’s results demonstrate the Company’s solid revenue generation ability, the strength of the core franchise, and the progress achieved in converting to a more market-focused model. For the quarter, Ally reported net income of $146 million, the fifth consecutive quarter of profitability. On an underlying basis, core pre-tax income, as defined as income from continuing operations before taxes and original issue discount (OID) was a solid $428 million. Total net revenues were $1.9 billion driven by strong auto loan originations and stable margins. Net interest margin was 2.2% in 1Q11, reflecting the repositioned balance sheet towards less risky, lower yielding assets.

U.S. retail auto originations grew 25% on a linked quarter basis and 93% year-on-year to $11.6 billion. The noteworthy increase in origination volumes reflects incentives offered by various auto manufacturers (OEMs) and Ally’s progress in diversifying the customer base. Indeed, used vehicle originations increased 77% compared to the prior quarter to $2.3 billion, while non GM/Chrysler originations, although small on a dollar basis at $500 million, a 68% increase from 4Q10. Despite the uplift from year-end incentive programs offered by the OEMs, the Company continues to successfully shift from subvented to standard business. During the quarter only 20% of retail originations were driven by subvented loan programs compared to 32% in 1Q10 and 82% in 2006. DBRS sees the strong origination volumes as illustrating the substantial strength of Ally’s core Auto Finance franchise, which is a key factor underpinning the rating. Moreover, DBRS views the overall strong loan origination volumes as evidencing the Company’s solid competitive position and the ability of the Company to leverage its strong relationship with auto dealers.

Within the $106.5 billion loan book, the positive trajectory in credit performance continued in the quarter. Non-performing loans declined 17.5% on a linked quarter basis to $1.2 billion. Moreover, net charge-offs declined 21.2% to $189 million resulting in a net-charge-off rate of a very low 0.7%. Nevertheless, provision for loan losses increased 59% compared to 4Q10 to $113 million reflecting the growth in new auto loan origination. Losses on the retail book continue to improve, with loss frequency declining and severity improving, as the market for used vehicles remains healthy. Further, the positive trajectory in delinquencies indicates credit trends will likely remain healthy for the near term.

The Company continues to strengthen the funding and liquidity profile. Net deposits grew by $1.6 billion, or 4.4% in the quarter to $40.7 billion, evidencing strong CD retention rates at 86%. Ally enjoys good access to the capital markets completing $7.2 billion of funding during 1Q11. Importantly, the Company renewed more than $16.0 billion of existing funding facilities, including refinancing two auto credit facilities totaling $15.0 billion. With $22 billion of available corporate liquidity, Ally has essentially pre-funded the Company’s unsecured debt maturities coming due through 2012.

Capital remains solid. Risk-weighted assets increased slightly to $173.2 billion due to the balance sheet growth attributed to the high auto loan volumes. At March 31, 2011, the Company’s Tier 1 common ratio was 8.4% and Tier 1 Capital stood at 14.7%. Regarding forthcoming regulatory requirements under Basel III, the Company estimates that the pro-forma Tier 1 Common ratio at March 31, 2011, would be 10.8% on a fully converted basis. DBRS notes that during the quarter Ally filed for a potential initial public offering (IPO). DBRS would view an IPO positively as it would demonstrate access to private capital and reduce U.S. government ownership thereby improving operational flexibility.

The Positive trend reflects DBRS’s view that continuation of the positive momentum, transforming the franchise, strengthening the balance sheet, and advancing the track record of solid earnings could lead to upward rating pressure. Moreover, although the quality of the capital stack has improved, DBRS would view positively further reduction in high cost capital.

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

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

The sources of information used for this rating include the issuer. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Steve Picarillo
Approver: Alan G. Reid
Initial Rating Date: 16 May 2001
Most Recent Rating Update: 4 February 2011