DBRS Confirms Ally Financial Inc.’s Issuer and Long-Term Debt Rating at BBB (low), Trend Stable

DBRS, Inc. (DBRS) has today confirmed the ratings of Ally Financial, Inc. (Ally or the Company), including the Company’s Issuer and Long-Term Debt rating of BBB (low). The trend on all ratings is Stable. The Intrinsic Assessment (IA) for the Company is BBB (low), and its Support Assessment is SA3.

The rating confirmation reflects Ally’s solid franchise, underpinned by its top-tier position in the U.S. auto finance market and its strengthening and growing direct banking franchise which continues to reflect strong deposit growth. The ratings are also supported by the Company’s solid core earnings generation with sufficient capacity to absorb additional unanticipated losses, its acceptable risk profile, which reflects the Company’s measured shift in the credit mix, and its sound capital position. The ratings also consider the Company’s declining, yet still relatively high reliance on wholesale funding sources, as well as the cyclical U.S. auto market.

The Stable trend reflects DBRS’s expectations that Ally’s 2017 operating performance will remain sound despite increasing headwinds, including normalizing credit costs particularly within the below-prime space, higher interest rates, and declining used vehicle values.

The Company’s franchise reflects a long history of financing dealers and consumer automobile purchases. Ally maintains considerable scale, industry expertise and a broad auto finance product offering, which provides resiliency to its operations. Ally’s growing direct bank, Ally Bank (the Bank), provides a solid underpinning for the Company’s funding and a competitive advantage over many auto finance companies. Importantly, the Company continues to further diversify its consumer product offerings to strengthen its customer relationships and grow its customer base. DBRS sees the potential long-term benefits of these initiatives including revenue diversification and improved deposit retention. DBRS also recognizes the Company’s low risk approach with new product roll-outs. Nonetheless, it is DBRS’s view that there are execution risks involved with the strategy.

As with many auto finance companies, Ally’s earnings generation remains pressured by mounting headwinds, including the normalizing credit cycle and lower used vehicle values. Moreover, although the Company is less dependent on new U.S. auto sales, plateauing U.S. light vehicle sales still are a moderate headwind. In addition, Ally’s lease portfolio continues to contract, impacted by General Motors’ shifting subvented leases to its own captive auto finance company. While this contraction results is lower lease related revenue, the reduction in lease exposure at a time of declining used vehicle values is a positive for the Company’s credit profile. Despite these headwinds, Ally’s asset and deposit growth, and well-managed cost base continue to support the Company’s core earnings generation.

For 2016, the Company’s pre-tax income from continuing operations increased 13.5% year-over-year (YoY) to $1.6 billion, reflecting a $352 million decline in debt extinguishment charges, as well as improved net financing revenues. Auto originations totaled $36 billion, down 12% YoY, as the Company continued to prioritize risk-adjusted returns over volume. Provisions for loan losses increased $210 million to $917 million, in part reflecting the Company’s focus on a wider credit spectrum, as well as growth in the retail auto portfolio. Ally’s net interest margin widened 6 basis points (bps) YoY to 2.63%, contributing to the growth seen in net financing revenues. Meanwhile, expenses were well managed, as the Company’s core efficiency ratio of 45.4% (Company calculated) was relatively stable with the prior year. Finally, 2016 pre-provision earnings generation was more than sufficient to absorb the higher provision expense.

For 1Q17, Ally reported pre-tax income from continuing operations of $326 million, down 18% from 1Q16 due to higher levels of expenses and provisions for loan loss reserves. Higher expenses primarily reflected an increase in weather related losses in the Company’s insurance business, and additional costs associated with new product initiatives.

While modestly increasing the Company’s overall credit risk profile, DBRSs views Ally’s transition to a wider credit risk spectrum for its auto loan originations as well controlled. To date, the Company’s current focus within the non-prime space has mostly been in the upper-tier of non-prime borrowers. As expected, asset quality metrics continue to normalize, with U.S. retail auto net charge-offs (NCOs) at 1.54% for 1Q17, as compared to 1.08% for 1Q16. On a consolidated basis, Ally’s NCOs were 0.86% for 1Q17, as compared to 0.64% for 1Q16.

Other balance sheet fundamentals remain sound, including an improving funding profile driven by a growing deposit base, solid liquidity and sound regulatory capital. At March 31, 2017, deposits totaled $84.5 billion and represented 57% of total liabilities, up from $70.3 billion, or 49% of total liabilities, at March 31, 2016. Meanwhile, available liquidity remains solid at $17.9 billion, which more than adequately covers maturing long term debt over the next few years. Finally, at March 31, 2017, Ally’s Basel III fully phased-in common equity Tier 1 ratio was 9.3%, up from 9.2% at March 31, 2016.

RATING DRIVERS
Upward rating movement is not expected over the medium term. Nonetheless, sustained earnings growth while making further progress in growing the deposit funding base, along with positive traction in new growth initiatives, while not materially altering the risk profile of the balance sheet would be viewed favorably. Meanwhile, downward pressure on ratings could occur if Ally’s earnings generation were to weaken, signaling a deterioration in the strength of the franchise, or if credit quality experienced sustained deterioration.

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

The applicable methodologies are Global Methodology for Rating Finance Companies (October 2016), Global Methodology for Rating Banks and Banking Organisations (July 2016), DBRS Criteria – Support Assessments for Banks and Banking Organisations (March 2017), and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (February 2017), which can be found on our website under 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: Mark Nolan, Vice President – Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director – Global FIG
Initial Rating Date: 16 May 2001
Last Rating Date: 2 May 2016

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities