DBRS Comments on Ally Financial’s 3Q13 Results, Senior Unchanged at BB, Trend Stable

DBRS, Inc. (DBRS) has today commented on the 3Q13 financial results of Ally Financial Inc. (Ally or the Company). DBRS rates Ally’s Issuer and Long-Term Debt at BB. The trend on all ratings is Stable. For the quarter, Ally reported net income of $91 million compared to a net loss of $927 million in the prior quarter and net income of $384 million a year ago. Excluding repositioning items related to the exit from all legacy mortgage operations as well as OID expense, Ally generated core pre-tax income of $271 million compared to $211 million in the sequential quarter and $380 million a year ago.

Ally’s performance continues to demonstrate the strength of its leading U.S. auto finance franchise with origination volumes totaling $9.6 billion, largely unchanged from a year ago. The context of the Company’s performance is in an intensely competitive marketplace with U.S. consumer confidence softening modestly in the quarter. Importantly, Ally continues to execute on its dealer-centric strategy evidenced by more than 60% of 3Q13 originations from new diversified, used and lease channels. Indeed, double-digit growth in each of these channels more than offset the loss of the Chrysler subvented business. As a result, U.S. auto earning assets were 8% higher YoY at $102.2 billion. Further illustrating progress in its strategy of deepening its relationships with dealers, Ally’s wholesale insurance penetration improved modestly to 82% of U.S. dealers with Ally floorplan financing.

On an operating basis, the Company’s results benefited from solid performance in the Auto Finance and Insurance segments supported by improving margins, strong credit metrics and higher written premiums. The Auto Finance segment reported pre-tax income from continuing operations of $339 million, 11% lower QoQ but stable YoY. The sequential quarter decline was primarily related to higher provisioning expense driven by seasonality and shift in portfolio mix. Importantly, net financing revenue totaled $801 million, 16% higher QoQ and 46% higher YoY reflecting the growth in earning assets and margin expansion. Net interest margin improved 30 bps QoQ and 74 bps YoY to 2.34% demonstrating the positive contribution from the growth in deposits as well as actions taken by Ally to address high cost debt in the capital structure. To this end, the Company called $5.8 billion of high coupon debt in 3Q13 and recently called or gave notice to call an additional $1.7 billion of debt since quarter-end. DBRS notes that a priority of Ally going forward will be to further reduce the presence of legacy high cost debt in its capital structure, which should support further improvement in margin and earnings.

The Insurance segment reported pre-tax income of $83 million, up from $45 million in 2Q13 reflecting lower weather-related losses due to seasonality and reinsurance coverage partially offset by lower realized gains resulting in reduced investment income. Positively, the Dealer Products and Services business, (which provides dealer-centric products such as extended service contracts and floor plan insurance), wrote $267 million of premiums in 3Q13 modestly lower QoQ and stable YoY due to seasonally lower dealer inventory and higher reinsurance usage.

Ally’s balance sheet strength remains sound, anchored by Ally’s leading direct banking franchise. Deposits totaled $51.4 billion at September 30, 2013, up 4% from the prior quarter and accounting for more than 40% of total funding. Liquidity was solid with the Company’s time to required funding at over two years. Capital ratios were stable but higher YoY reflecting the sale of the international operations. At September 30, 2013, the Company’s Basel I Tier 1 Capital ratio was 15.4%, a 180 bps improvement from a year ago.

During the quarter, Ally made further progress towards the completion of its strategic transformation. To this end, Ally completed the sale of its Brazilian operations resulting in Ally having received approximately 90% of total proceeds expected from the sale of non-U.S. businesses. The final sale of the JV in China to GM Financial remains in process. Further, Ally has addressed most of its legacy mortgage issues. While the ResCap bankruptcy process continues to move towards completion, Ally reached a settlement with the FHFA and FDIC in October that dismisses all pending litigation and related claims. As a result, Ally took a $170 million pre-tax charge to discontinued operations. These actions are designed to simplify and streamline Ally’s business, which DBRS views favorably, as it allows management to focus on growing its leading dealer focused U.S. auto finance business and direct bank franchise.

Finally, the $1.0 billion private placement of common stock with private investors and agreement for the repurchase of the U.S. Treasury’s Mandatorily Convertible Preferred (MCP) securities announced in August remains in process, subject to certain conditions. DBRS views the transactions positively as they will remove the high-cost MCPs supporting earnings while improving the overall quality of capital as the MCPs do not count as regulatory Tier 1 common capital.

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

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]