DBRS Confirms Ally Financial Inc. at BBB (low); Trend Revised to Positive from Stable

DBRS, Inc. (DBRS) confirmed the ratings of Ally Financial Inc. (Ally or the Company), including the Company’s Long-Term Issuer Rating of BBB (low), and Short-Term Issuer Rating of R-3. The trend on all ratings has been revised to Positive from Stable. Additionally, DBRS confirmed the Company’s Support Assessment of SA3.

KEY RATINGS CONSIDERATIONS
The confirmation and Positive trend consider Ally’s improving earnings generation ability and strong auto lending and on-line deposit franchises. The ratings also consider the strengthening funding profile that has become more deposit oriented. Importantly, this progress in earnings and funding has been achieved with no material alteration in the Company’s risk profile. The rating actions also consider an eventual shift in the current credit cycle and associated normalization of credit quality.

RATING DRIVERS
Sustained solid earnings generation without a material increase in the Company’s risk profile, while maintaining sound balance sheet fundamentals would likely result in a ratings upgrade. Conversely, a material decline in core profitability metrics or significant erosion in credit quality, could result in a return to Stable trend.

RATING RATIONALE
Ally’s ratings reflect its leading auto finance franchise, underpinned by the depth and significant scale of operations built over more than 100-years of operating in the industry. Further, the Company’s broad menu of products and services support the deep relationships the Company maintains with more than 18,000 dealers across the U.S. Importantly for the rating and the Positive trend, DBRS sees Ally’s franchise as better positioned to withstand the expectations that U.S. new vehicle sales will likely slow from their recent strong levels. Compared to the 2008/2009 recession, Ally has repositioned the auto finance franchise to be materially less dependent on new vehicle sales from a single manufacturer through expansion of originations sourced through growth channels, including the financing of used vehicles.

DBRS views the Company’s large and growing deposit franchise as a competitive advantage over other auto finance companies that are more reliant on more costly wholesale funding. With $113 billion in deposits, Ally Bank is the leading on-line deposit bank and has consistently been rated the top online bank by several leading publications. While DBRS has considered on-line deposits as less-sticky than traditional branch-based deposits, the rating and trend consider the sound customer retention and relatively low deposit beta demonstrated by Ally through the recent rate increases by the U.S. Federal Reserve. Over the last several years, Ally has introduced additional banking products and services including wealth management, credit cards and mortgages to strengthen and deepen customer relationships. DBRS considers further development and growth in these products as key to maintaining high retention rates. Additionally, DBRS views maintaining credit discipline as an important driver of the rating over the longer-term.

Despite the impact of losing its role as a provider of General Motors Company’s subvented loans and leases, Ally’s origination levels remain solid, and continue to drive higher levels of receivables and revenue growth. Importantly, credit costs remain low and the Company’s growing deposit base affords Ally the opportunity to run-off higher cost wholesale funding, benefiting funding costs. Moreover, Ally’s income before provisions and taxes continues to provide good loss absorption capacity.

The Company’s earnings generation has improved over the last few years including higher levels of net financing revenues and adjusted income before provisions and taxes. The Company’s recent earning results were improved, including net income of $374 million in 1Q19, up 50% from $250 million in 1Q18, driven by a $110 million swing in fair value of equity securities, as well as an $83 million increase in net financing revenue. Meanwhile, 2018 earnings totaled $1.3 billion, up 36% from the prior year, reflecting lower provisions for loan losses, higher net financing income and other interest income, and lower taxes, partially offset by $121 million of unrealized losses on equity securities.

Ally’s improved earnings generation has been achieved without a material alteration of its risk profile or appetite. The Company’s exposure to nonprime lending (Company defined: FICO <620) has remained consistent since 2016 in the range of 10% - 14% of consumer auto loan originations. DBRS notes that the Company is not active in deep subprime lending. Also, benefiting the sound risk profile is the Company’s reduced residual risk exposure. The Company’s lease book has declined to $8 billion, or 61% of total equity at March 31, 2019, from $11 billion, or 86% of total equity in 2016.

Credit costs are manageable, reflecting Ally’s conservatively run origination and servicing platform along with still healthy U.S. consumers and dealers. Ally’s consumer automotive portfolio’s annualized net charge-offs (NCOs) represented 1.3% of average outstanding receivables and loans in 1Q19, consistent with full year 2018 and remaining at the low end of the Company’s expectations. Meanwhile, overall NCOs, which includes Ally’s strongly performing commercial automotive loan portfolio, and its somewhat riskier corporate loan book that remains a segment of focus for DBRS, remained sound at 0.7% in 1Q19, slightly improved from 0.8% for full year 2018.

Ally’s funding profile is diverse and improved. The Company continues to grow its deposit base, allowing Ally the opportunity to run-off higher cost debt. At March 31, 2019, deposits represented 70% of total funding, much improved from 54% at December 31, 2016. Importantly, especially for an online bank, deposit retention remains solid at 96%. Besides deposits, assets are also funded by securitizations, repos, FHLB advances, and unsecured debt. Providing financial flexibility, the Company also maintains a sizable level of on balance sheet liquidity. Meanwhile, capital remains acceptable, especially given the Company’s sound risk profile and good earnings generation capacity. Although the implementation of CECL will pressure Ally’s capital position, the impact will be dampened by the three year transition period for regulatory capital purposes. That said, the Company expects to maintain its common equity tier 1 capital ratio at approximately 9%. At the end of 1Q19, Ally’s fully phased-in Basel III Tier 1 common equity ratio was 9.3%.

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

The applicable methodology is Global Methodology for Rating Banks and Banking Organisations (July 2018), 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.

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

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

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