DBRS Comments on Ally Financial’s 2Q12 Results, Unaffected at BB (low), UR - Developing

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 2Q12 results. The ratings remain Under Review – Developing where they were placed on May 15, 2012.

From DBRS’s perspective, Ally’s underlying results illustrate the solid revenue generation ability and significant strength of the core auto finance franchise, and the strengthening funding and liquidity profile. As expected, however, the bankruptcy filing of Residential Capital, LLC (ResCap), which occurred on May 14, 2012, negatively impacted 2Q12 results. For the quarter, Ally reported a net loss of $898 million largely driven by a $1.2 billion charge related to the bankruptcy filing of ResCap. The Under Review Developing reflects the ResCap bankruptcy filing and DBRS’s view that while there are medium-to longer-term positives for Ally to this action from ResCap, DBRS is nonetheless concerned that indirect and direct costs may exceed Ally’s estimates. Moreover, DBRS notes that the bankruptcy plan may be altered or delayed in the bankruptcy process. Importantly, DBRS notes that Ally’s quarterly results indicate that costs to Ally of ResCap’s bankruptcy to-date remain within its initial estimates. DBRS expects to conclude its review at the end of the bankruptcy process.

Excluding the ResCap-related charge and ResCap’s pre-tax loss for the partial quarter up to the filing, Ally generated core pre-tax income of $533 million, a 48% improvement on a linked quarter basis. Results were driven by growth in the core auto services business and the U.S. direct banking unit as well as favorable credit performance. The North American Automotive Finance segment reported pre-tax income of $631 million up from $442 million in 1Q12 primarily due to higher net financing revenue on earning asset growth and lower provision for credit losses on positive credit trends. Evidencing the impact of the shift in funding towards a more bank funded model, funding costs declined 40 bps during the quarter benefiting margin expansion. To this end, net interest margin was 2.2% in 2Q12, a 20 bps improvement from 1Q12.

In 2Q12, Ally’s North American Auto Finance segment reported its second highest quarter of U.S. originations since 2007 at $10.5 billion. The increase in origination volumes reflects the progress Ally has achieved in diversifying its origination mix with diversified new dealers, used and lease origination volumes accounting for 49% of originations compared to 28% in 3Q10. Moreover, evidencing the success of Ally’s shift to a dealer-centric business model from a captive model, only 18% of GM originations are subvented loans compared to 80% five years ago. DBRS sees the healthy origination volumes as illustrating the substantial strength of Ally’s core Auto Finance franchise. Moreover, DBRS views the overall solid loan origination volumes as evidencing the Company’s strong competitive position and the ability of the Company to leverage its strong relationship with auto dealers despite consumer sentiment remaining below pre-recession levels.

For the quarter, the Mortgage Operations segment reported pre-tax income from continuing operations of $110 million, up from $55 million in 1Q12. Mortgage Operations include the Company’s legacy and originations servicing segments, but exclude ResCap. The improved results were primarily driven by higher gain on sales and continued HARP refinancing activities. DBRS notes that post-ResCap deconsolidation, total mortgage assets account for less than 10% of Ally’s total assets.

Ally’s credit metrics continue to reflect positive trends. Within the $119.9 billion loan book, net charge-offs (NCOs) declined 18% QoQ to $88 million resulting in a NCO rate of a very low 0.29%. DBRS notes that losses on the retail book continue to improve, with loss frequency declining and severity improving, as the market for used vehicles remains healthy. Delinquencies in the global auto book were up 19 bps from the prior quarter at 1.23%, reflecting seasonal trends as delinquencies remained near cyclical lows and 25 bps lower than a year ago. The strong credit performance precipitated the provision for loan losses to decline substantially QoQ to $29 million from $140 million in 1Q12. Importantly, the decrease in provision expense was achieved despite the solid growth in new auto loan originations as Ally books a provision on day one of a new auto loan origination. DBRS sees the reserve coverage as solid at 143.4% of nonperforming loans.

Ally continues to diversify its funding sources and maintain strong liquidity levels. At quarter-end the Company’s time to required funding was sound at over two years. DBRS notes that the Company has $7.4 billion of TLGP maturing in 2H12 and the Company’s debt maturity schedule becomes more balanced subsequent to those maturities. Deposits continue to grow as the Company advances on becoming more deposit-funded. Net deposits grew by 2% QoQ, or $800 million to $48.0 billion. Importantly, CD retention rates remain strong at 90% and the average number of deposit accounts per customer at 1.95 demonstrates the strength of franchise. Ally completed nearly $10.0 billion of new secured and unsecured funding during the quarter, illustrating the Company’s broad access to capital markets.

Capital remains solid despite the impact from the ResCap actions. At June 30, 2012, the Company’s Tier 1 Capital ratio stood at 13.7%, essentially unchanged from 1Q12. Risk-weighted assets declined due to the ResCap deconsolidation partially offset by asset growth in the core auto business. At June 30, 2012, risk-weighted assets totaled $147.9 billion compared to $158.5 billion at the end of March 2012.

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

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on the DBRS website under Methodologies.

The sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

Lead Analyst: David Laterza
Approver: Roger Lister
Initial Rating Date: May 16, 2001
Most Recent Rating Update: May 15, 2012

For additional information on this rating, please refer to the linking document under Related Research.