DBRS: Ally’s 4Q13 Solid Underlying Results Reflect NIM Improvement and Earning Asset Expansion

Summary:
• Ally’s net financing revenue, excluding OID, grew 5% QoQ supported by expanding NIM and growth in earning assets in a highly competitive environment
• Non-interest expenses slightly higher QoQ, however, non-interest expenses reduced YoY reflecting cost control initiatives
• DBRS rates Ally Financial Inc. Issuer and Senior Debt at BB with a Stable trend.

DBRS, Inc. (DBRS) considers Ally Financial Inc.’s (Ally or the Company) 4Q13 underlying results as solid. For the quarter, Ally’s DBRS-calculated underlying pre-tax income, which excludes original issue discount (OID), repositioning items, a previously announced $98 million one-time charge related to the Consumer Financial Protection Bureau and Department of Justice settlement, and other items, totaled $248 million, a 5% improvement quarter-on-quarter (QoQ). Importantly, 4Q13 was the seventh consecutive quarter of solid underlying pre-tax income generation from continuing operations. Consistent earnings generation expansion along with continued sound balance sheet management and execution on opportunities to further strengthen its leading auto finance and direct banking franchises could result in positive ratings movement.

Demonstrating the benefits of the Company’s focus on lowering funding costs and the strength of the Company’s dealer-focused auto lending franchise, net financing revenues, excluding OID, were 5% higher QoQ at $841 million. Positively, net interest margin (NIM) improved 5 basis points (bps) QoQ and 48 bps YoY to 2.39%. While asset yields were lower reflecting an increase in lower yielding commercial loan balances, this was more than offset by the improvement in the Company’s cost of funds. Continued growth in the deposit base along with Company’s proactive calling of $8.1 billion of high cost debt in 2013 were the primary drivers of the 17 bps QoQ and 50 bps YoY cost of funds reduction. Despite a highly competitive marketplace, earning assets grew 8% during 2013 to $107.9 billion, supported by good growth in leasing and used vehicle loans, partially offset by the expected reduction in subvented originations.

Non-interest expenses were slightly higher on a sequential basis to $766 million, reflecting seasonally higher marketing expense and an increase in repossession costs. Nevertheless, demonstrating early success in streamlining the cost structure, non-interest expenses were 14% lower YoY. Importantly for the ratings, DBRS expects Ally in 2014 to continue to focus on realigning its cost base to be more in line with its refocused operating footprint, while continuing to invest in its core auto lending and direct banking franchises.

Liquidity and capital remain sound. As of December 31, 2013, Ally continues to maintain a time to required funding of more than 24 months and DBRS notes that Ally Bank had a significant level of total available liquidity of $5.9 billion. Ally’s Tier 1 common ratio improved 90 basis points (bps) in the quarter to 8.8% driven by the $1.3 billion common equity raise and the sale of the Brazilian operation. DBRS notes that Ally is well-positioned for Basel III with the Company expecting the impact on a fully phased-in basis to be a reduction of 20-40 bps.

DBRS rates Ally’s Issuer and Long-Term Debt at BB with a Stable trend.

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

The principal applicable methodology is Rating Finance Companies Operating in the United States. All DBRS methodologies and criteria can be found on 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: 16 May 2001
Most Recent Rating Update: 3 July 2013

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