DBRS Confirms Issuer and LT Debt Rating of Ally Financial Inc. at BB, Trend Revised to Positive

DBRS, Inc. (DBRS) has today confirmed the ratings of Ally Financial Inc. (Ally or the Company), including its Issuer and Long-Term debt rating of BB. Concurrently, DBRS has revised the trend on the long-term debt ratings to Positive from Stable. Lastly, the Short-Term Instrument ratings of Ally were confirmed at R-4 with a Stable trend. Today’s rating action follows a detailed review of the Company’s operating result, financial fundamentals, and future prospects.

The confirmation reflects Ally’s leading automotive finance franchise, which is complemented and supported by the growing direct bank franchise. The Company’s sound underwriting and servicing capabilities across multiple products and solid balance sheet further support the ratings. Ratings also consider the challenge of sustaining growth in earning assets in a competitive market while maintaining credit discipline.

In revising the trend to Positive from Stable, DBRS recognizes the strengthening capital base of the Company, including a significant reduction in the U.S. Treasury (UST) ownership. The Positive trend also considers DBRS’s view that the progress Ally has made towards improving earnings are beginning to be become evident in the financial performance of the Company and should continue over the near to medium-term. If these improving trends continue while Ally maintains sound credit performance, the ratings could be upgraded. Conversely, the trend could revert to Stable if earnings deteriorate evidencing weakening in the franchise, credit losses exceed expectations, or should potential returns of capital be viewed as aggressive.

Ally’s position as the leading provider of U.S. automotive retail and dealer financing and top-tier direct banking franchise are key factors in the rating. While the automotive captives and banks have always provided for a competitive marketplace, DBRS sees Ally’s unique business model as having competitive advantages that provide Ally with a defendable franchise. Ally offers a complete suite of products and services that most banking peers cannot match, which are designed to improve a dealership’s operations and profitability, providing Ally with deep customer relationships. DBRS also sees Ally’s leading direct bank franchise as providing the Company a competitive advantage over its automotive captive peers. Ally Bank (the Bank) provides Ally with access to stable, lower cost deposit funding, an advantage DBRS expects will become more evident in a rising rate environment. Importantly, while Ally’s penetration of both GM and Chrysler sales has declined over the last 18 months, DBRS notes that Ally has increased its origination volumes in leasing, used vehicle finance and diversified new financing (non-GM and Chrysler sales) demonstrating the strength of the franchise and providing better diversification of revenue and credit.

Over the last several years, DBRS has considered the true earnings power of the automotive franchise as masked by the efforts and related costs to reshape the franchise. However, with most of these actions complete the earnings generation ability of the core franchise is becoming evident. Indeed, since mid-2013 Ally has redeemed nearly $10.0 billion of legacy, high-cost debt resulting in the Company’s net interest margin improving 59 basis points to 2.63%. Ally’s efforts to reduce controllable expenses is also benefiting earnings, with the Company removing $110 million of expenses during 1H14 compared to a year ago. Nevertheless, DBRS sees more work as necessary to restore earnings to a level commensurate with the strength of the franchise. Over the medium-term DBRS expects that additional progress will be made towards improving margins and reducing controllable expenses resulting in further strengthening in the Company’s operating results.

Credit performance continues to be sound, benefiting from the Company’s strong servicing capabilities, as well as the benign economic environment and still healthy market for used vehicles. Non-performing assets totaled $612 million, or 0.61% of consumer and commercial loans at June 30, 2014, a 16% reduction from year-end 2013. U.S. retail auto loan net charge-offs and delinquencies remain at low levels with both charge-offs and delinquencies reflecting seasonality in 2Q14, as well as the more balanced origination mix since 2012. However, DBRS expects and has tolerance for normalization in asset quality as the Company’s origination mix normalizes across the credit spectrum and used vehicle values moderate from historically strong levels.

Ally continues to maintain a solid balance sheet supported by ample liquidity, a more diversified funding base and sound capital levels. Liquidity continues to be well-managed with a required time to funding of more than 24 months. Meanwhile, Ally’s growing retail deposit base continues to become a more prominent funding component comprising 43% of total funding at June 30, 2014, compared to 23% at year-end 2009. With a Tier 1 common equity ratio of 9.4% at June 30, 2014, Ally’s capital remains sound and well-above regulatory requirements. Pro-forma to the closing of the sale of the China JV, Ally estimates its Tier 1 common equity ratio to be 9.9%.

Concurrent with the rating action on Ally, DBRS today confirmed the Guaranteed Euro Notes rating of GMAC International Finance B.V. at BB and revised the trend to Positive from Stable, reflecting the guarantee from Ally.

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

The principal applicable methodology is the Rating Finance Companies Operating in the United States (May 2008). Other applicable methodologies include the Global Methodology for Rating Banks and Banking Organisations (June 2014), Rating Auto Finance Companies Operating in the United States (May 2008), Non-Captive Automotive Finance Companies (April 2006), DBRS Criteria: Guarantees and Other Forms of Explicit Support (July 2013) and DBRS Criteria – Support Assessment for Banks and Banking Organisations (January 2014). These can be found at http://www.dbrs.com/about/methodologies

The primary 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
Rating Committee Chair: 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.