DBRS: Ally’s 2Q14 Earnings Higher on Strong Originations and Improving Margins

Summary:
• Ally reported strong QoQ growth in underlying pre-tax income, primarily driven by NIM expansion, a slight increase in automotive earning assets in a highly competitive marketplace and strong credit performance.
• Origination volumes were the second highest in Company history with good growth across all channels
• 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) 2Q14 results as demonstrating the strength of the Company’s dealer-centric franchise in a highly competitive marketplace. For the quarter, Ally originated $10.9 billion of retail auto loans and leases, up 18% quarter-on-quarter (QoQ) and outpacing its peers. Importantly, origination volumes grew across all channels, including the highest used vehicle originations in Company history. Non-GM and non-Chrysler originations were up 48% year-on-year (YoY), accounting for 20% of total consumer originations. DBRS views this as demonstrating the Company’s success in broadening its dealer channel and focus on diversifying its origination mix.

For 2Q14, Ally reported underlying pre-tax income (excluding original issue discount (OID) and repositioning items) of $417 million, up 23% from the prior quarter. Good expansion in net financing revenue, sound credit performance and the continuing management focus on operating costs were the primary drivers of the improved results. Net financing revenue, excluding OID, increased QoQ to $912 million, reflecting a slight increase in automotive earning assets as well as expanding net interest margin (NIM). Excluding OID, NIM improved 10 basis points from the prior quarter to 2.63%. Lower funding costs reflecting continuing growth in lower cost retail deposits and the redemption of $10 billion in legacy high-cost debt benefited margins. Meanwhile, the strong used vehicle market supported lease remarketing gains resulting in an improving asset yield. However, going forward, Ally expects some moderation in used vehicle values, which would translate into lower asset yields and, subsequently, potentially lower NIM.

Credit performance remains strong supported by lower loss severities due to favorable used vehicle values and investments made by Ally in its servicing operations. Net charge-offs were lower QoQ while delinquencies increased QoQ reflecting normal seasonal patterns. As a result, the provision for loan losses was 54% lower QoQ at $63 million.

Excluding repositioning items, adjusted non-interest expense was 13% higher QoQ at $805 million. Driving the sequential increase was severe hail storms in the Midwest during the quarter that resulted in weather-related losses in the Insurance segment which far exceeded those incurred over prior second quarters. Positively, compensation and benefits expense was 15% lower on reduced corporate headcount, reflecting management’s continued focus on streamlining the cost base as well as a revaluation of the Company’s equity compensation. As a result, the Company’s adjusted efficiency ratio was 49% in 2Q14 compared to 55% in 1Q14.

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.