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

DBRS, Inc. (DBRS) confirmed the ratings of Ally Financial, Inc. (Ally or the Company), including the Company’s Long-Term Senior Debt of BBB (low), Subordinated Debt of BB (high), Short-Term Instruments of R-3 and Support Assessment of SA3. At the same time, DBRS assigned to Ally a Long-Term Issuer Rating of BBB (low) and a Short-Term Issuer Rating of R-3. The trend on all ratings is Stable.

KEY RATING CONSIDERATIONS
The Company’s ratings consider Ally’s strong operating franchise, including its top-tier position in the U.S. auto finance space along with its leading direct banking franchise. The ratings also consider Ally’s sound risk profile, which continues to reflect a measured shift to a wider credit spectrum, and its solid core earnings generation capacity that is underpinned by a risk-based pricing strategy and growing lower cost deposit base. Finally, Ally’s capital position remains acceptable, especially given its sound risk profile and solid earnings generation.

The Stable trend reflects DBRS’s expectations that Ally’s near-term credit fundamentals will remain solid, notwithstanding several headwinds, including the higher interest rate environment, the maturing credit cycle and decreasing used vehicle values.

RATING DRIVERS
Sustained earnings growth, driven by continuing improvement in the Company’s funding profile, including a higher proportion of deposit funding, could have positive rating implications. Meanwhile, a weakening of the Company’s franchise, due to outsized growth in its corporate finance business, or a significant widening of the auto finance business’s credit risk spectrum, could have negative rating implications. Additionally, a material deterioration in the Company’s credit quality or residual value risk, could have negative rating implications.

RATING RATIONALE
Ally has a long history of providing financial services to consumers and dealers for the purchase of vehicles. Its strong franchise is underpinned by its top-tier position within the automobile financing space, reflecting robust scale, strong industry expertise and a broad menu of auto finance products and services. The Company’s franchise is also underpinned by its leading direct bank, Ally Bank, which provides a substantial component of lower cost deposits to its funding profile, which is a competitive advantage in the auto finance space. Positively, the Company’s recently introduced products should benefit deposit retention.

Despite several challenges, including the rising interest rate environment, the maturing credit cycle and the contracting GM lease portfolio, Ally’s earnings generation capacity remains solid, providing a healthy cushion for absorbing unexpected charges and higher credit costs. DBRS notes that, while the contraction in the GM lease portfolio has resulted in lower lease related revenue, it also reduces residual value risk in a period of declining used vehicle values, which DBRS views as a positive for the Company’s risk profile. Underpinning its good earnings power are Ally’s solid level of loan originations, its continuing strategy of risk-based pricing, its well-managed expense base, and its growing component of lower cost deposit funding.

Ally’s risk profile remains sound, despite the Company’s measured transition to a wider credit risk spectrum for its auto loan originations. Importantly, most of Ally’s focus within the non-prime space has been in the upper-tier of non-prime borrowers. Specifically, Company-wide net charge-offs (NCOs) for 1Q18, represented a manageable 0.84% of total receivables, down slightly from 0.86% for 1Q17. Meanwhile, retail auto loan NCOs contracted to 1.47%, from 1.54% a year ago, and were in-line with the Company’s 2018 expectations of between 1.4% and 1.6%. Finally, non-performing loans remain manageable at 0.69% of total loans at the end of 1Q18.

Ally’s funding profile reflects a growing component of lower cost deposits, which benefits earnings. At March 31, 2018 deposits totaled $97.4 billion, or 62% of total liabilities, up from $79 billion, or 52% at YE16. Meanwhile, available liquidity remains sound at $17.7 billion, which more than adequately covers long-term debt maturities for 2018. Finally, the Company’s capital positon remains acceptable, reflecting a Basel III fully phased-in common equity Tier 1 ratio of 9.2%.

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

The applicable methodologies are the Global Methodology for Rating Finance Companies (November 2017) and the Global Methodology for Rating Banks and Banking Organisations (May 2017).

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, Head of NA FIG – Global FIG
Initial Rating Date: 16 May 2001
Last Rating Date: 3 May 2017

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.

For more information on this credit or on this industry, visit www.dbrs.com.