DBRS: Ally’s Strong Growth in non-GM Channels and Improving NIM Drive Higher Underlying Results

Summary:
• Ally reported underlying pre-tax income (excluding original issue discount (OID) and repositioning items) of $435 million, a modest improvement on a linked quarter basis (excluding the net gain on the TDR mortgage portfolio sale realized in 1Q15).
• During the quarter, Ally received regulatory approval to originate loans with lower credit scores in Ally Bank (the Bank), a positive for future earnings generation.
• DBRS rates Ally Financial Inc. Issuer and Senior Debt at BB (high) with a Positive trend.

DBRS, Inc. (DBRS) considers Ally Financial Inc.’s (Ally or the Company) 2Q15 results as sound; benefiting from strong U.S. auto sales, improving consumer confidence and the Company’s investments in expanding its presence in non-GM related origination channels. Indeed, non-GM/ non-Chrysler (Growth Channel) dealer origination volumes were 26% higher sequentially at $3.5 billion. Demonstrating the strength of the Ally franchise, the Company originated $10.8 billion of retail auto loans and leases, a 10% improvement over the prior quarter, in the first full quarter without the GM leasing business. Importantly, for the first time in the Company’s history, GM-related originations were less than half of Ally’s total new originations. DBRS sees improving the penetration rate within the Growth channel as a key opportunity and important to Ally’s future growth, as well as its ratings.

Ally’s underlying earnings continue to benefit from growth in earnings assets, actions taken to reduce funding costs as well as management’s focus on removing controllable costs. Over the last nine months, Ally has reduced legacy high cost debt by $7.2 billion through maturities and debt repurchases. Combined with deposit growth, the Company’s funding costs improved in 2Q15 by 8 basis points (bps) from the prior quarter and 32 bps from the year ago quarter. Lower funding costs and a modest uptick in asset yields driven by a shift in origination mix supported an 11 bps expansion in net interest margin (NIM) from the prior quarter to 2.58%. Other revenue was lower QoQ, as the prior quarter benefited from the portfolio sale of TDR mortgages. Ally sees the current level of other revenue as more in line with expectations going forward.

Ally continues to focus on its initiative to lower controllable expenses, while remaining focused on investing in the franchise. Controllable expenses were 4% lower sequentially at $448 million resulting in an adjusted efficiency ratio of 46%, which is near the top-end of the Company’s target adjusted efficiency of mid-40% range.

Importantly, during the quarter, Ally received regulatory approval to originate loans with FICOs of 620-to-660 in Ally Bank. The origination of these loans will allow the Company to leverage the Banks’s low cost deposit base, which DBRS sees as a competitive advantage compared to Ally’s captive and non-bank auto lending peers. As of June 30, 2015, approximately 68% of Ally’s assets were held at the Bank, and the Company forecasts that the approval will allow that to grow to 75% over the medium-term. DBRS sees the ability of Ally to broaden its originations at the Bank as an important step to fully leverage the funding advantages afforded by the Bank, and should eventually result in a stronger earnings profile for Ally, which would be a positive for the ratings.

DBRS rates Ally’s Issuer and Long-Term Debt at BB (high) with a Positive trend.

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