DBRS: Ally’s 3Q Results within Expectations; Trajectory in Fundamentals Supportive of Positive Trend

Summary:
• Ally reported underlying pre-tax income (excluding original issue discount (OID) and repositioning items) of $431 million, slightly lower (1%) on a linked quarter basis.
• Net interest margin (NIM) expansion and strong loan origination volumes offset lower lease revenue and higher provision expense.
• DBRS rates Ally Financial Inc. Issuer and Senior Debt at BB (high) with a Positive trend.

While slightly lower on a linked quarter basis, DBRS, Inc. (DBRS) considers Ally Financial Inc.’s (Ally or the Company) underlying 3Q15 results, and the favorable trends in its business fundamentals, as within DBRS’s expectations, and supportive of the Positive trend on the ratings. Higher origination volumes in the Growth and Chrysler channels, revenue growth supported by NIM expansion, and improving operating efficiency were all key contributors to the quarter’s results.

Origination volumes were 6% lower year-on-year (YoY) at $11.1 billion reflecting strong GM sales incentives in the year ago quarter. Importantly, Ally reported strong growth in non-GM/ non-Chrysler (Growth Channel) dealer origination volumes, which were 46% higher YoY at $3.5 billion. Further, Chrysler new standard retail lending volumes were 38% higher YoY, demonstrating the strength of the Ally brand and its value proposition to dealers. Also, during the quarter Ally completed the previously announced purchase of Mitsubishi Motors Credit of America’s loan and lease portfolio, which totaled $607 million. DBRS sees continuing expansion of volumes in the Growth Channel through expanding the dealer base and strengthening the penetration rate as a key opportunity and important to Ally’s future growth, as well as its ratings.

Ally’s underlying results benefited from a 6% quarter-on-quarter (QoQ) increase in net financing revenue to $981 million (excluding OID), supported by earning asset growth and an improving NIM. Deposit growth, as well as the reduction in high cost legacy debt, drove cost of funds lower QoQ. As a result, NIM improved 9 basis points (bps) from the prior quarter to 2.67%. Meanwhile, other revenue, excluding a loss on debt extinguishment realized in 2Q15, was lower QoQ largely reflecting lower securities gains from the Insurance segment investment portfolio. Importantly for the ratings, DBRS-calculated pre-provision income (IBPT) continues to be more than sufficient to absorb the higher provision expense associated with shift in the origination mix to loans from leases.

Non-interest expenses were 7% lower linked quarter largely reflecting seasonally lower weather-related losses in the insurance operations. Controllable expenses were flat QoQ at $449 million, despite growth in origination volumes demonstrating good cost discipline. As a result, the Company’s adjusted efficiency ratio of 44%, is within the Company’s target adjusted efficiency of the mid-40% range.

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.