DBRS: Ally’s Strong 1Q14 Results Reflect NIM Expansion on Lower Funding Costs; Earning Asset Growth

Summary:
• Ally reported strong QoQ growth in underlying pre-tax income, primarily driven by lower funding costs supporting NIM expansion and solid growth in earning assets in an intensely competitive marketplace.
• Good progress was made towards operating efficiency targets with adjusted non-interest expenses 8% lower QoQ.
• 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) strong 1Q14 results as evidencing good progress by the Company in executing on its strategic plans to drive improvement in profitability through lower funding costs and improved operating efficiency, while diversifying originations. From DBRS’s perspective, the strength of Ally’ dealer-centric franchise and focus on diversifying its origination mix were on display in the quarter with origination volumes climbing 12% quarter-on-quarter (QoQ) to $9.2 billion, driven by growth in used and leasing volumes. Importantly, the Company continues to broaden its dealer channel with 19% of originations sourced through non-GM or Chrysler dealers.

For the quarter, Ally’s DBRS-calculated underlying pre-tax income (which excludes original issue discount (OID), repositioning items, and the CFPB settlement recorded in 4Q13) totaled $335 million, a 35% improvement from 4Q13. Net financing revenue (excluding OID), improved 3% QoQ to $865 million as margins improved while average earning assets were stable. Asset yields improved over the prior quarter as strong used vehicle values supported higher lease remarketing gains. Meanwhile, funding costs declined 15 bps QoQ to 2.06%. The reduction in the cost of funds demonstrates the benefits of Ally’s calling $9.7 billion of legacy high cost debt since the beginning of 2013 and continuing growth of the low cost retail deposit base. As a result, Ally’s net interest margin (NIM) improved 14 bps QoQ to 2.53%.

Adjusted non-interest expense was 8% lower QoQ at $710 million (excluding repositioning items and the CFPB settlement in 4Q13), reflecting management actions to streamline the expense base to be better aligned with its operating footprint post the sale of the international operations and exit from all mortgage activities. Demonstrating good cost control, controllable expenses declined QoQ with each expense line lower QoQ, with the exception of a seasonal increase in compensation and benefits.

Ally’s balance sheet strength remains solid supported by a growing deposit base and solid capital levels. At March 31, 2014, retail deposits were $45.2 billion, up 5% QoQ, and constitute 35% of total funding. Regarding capital, Ally’s estimated fully phased-in Basel III Tier 1 Common Equity ratio was a sound 9.3% at quarter-end. On March 26th, the Federal Reserve Board announced that it had no objection to the Company’s 2014 Capital Plan, under which Ally maintained a 6.3% Tier 1 Common ratio in the Fed’s severely adverse scenario. Importantly, in April 2014 Ally completed its initial public offering, resulting in the U.S. Treasury’s ownership stake in Ally declining to 17% from 37%.

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

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