DBRS Morningstar Confirms Ally at BBB (low), Trend on LT Rtgs Now Stable; Assigns Rtgs to Ally Bank

DBRS, Inc. (DBRS Morningstar) 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. Additionally, DBRS Morningstar revised the trend for Ally’s Long-Term ratings to Stable from Negative. The trend for the Company’s Short-Term ratings remains Stable. At the same time, DBRS Morningstar assigned ratings to the Company’s bank subsidiary, Ally Bank (the Bank), including a Long-Term Issuer Rating of BBB. The trend for Ally Bank’s ratings is Stable. The Intrinsic Assessment (IA) for the Bank is BBB while its Support Assessment is SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA.

KEY RATING CONSIDERATIONS
The ratings confirmation and revision of the ratings trend to Stable reflect Ally’s sound operating performance despite the challenges presented by the Coronavirus Disease (COVID-19) pandemic. Indeed, despite high levels of unemployment and an abrupt slowdown in the U.S. economy, the Company’s earnings generation capacity remained solid, driven by good retail auto loan originations, a stable net interest margin (NIM), and higher gains on sales of off-lease vehicles. Meanwhile, Ally’s credit quality metrics improved year-on-year (YoY), including lower than anticipated net charge-offs (NCOs), reflecting positively on the Company’s conservative culture, strong servicing, successful deferral program, government related stimulus programs, and a robust rebound in used vehicle values.

Ratings also reflect the Company’s solid balance sheet fundamentals, including its sound risk profile, solid funding and liquidity positions, and adequate capital profile. Finally, ratings also consider the Company’s less diversified franchise as compared to other U.S. banks, which makes it more sensitive to business cycles and market disturbances.

The Stable trend reflects our view that Ally’s credit fundamentals will continue to be sound, despite moderating yet still challenging headwinds associated with the coronavirus disease. In our analysis we utilized the macroeconomic scenarios discussed within the DBRS Morningstar commentary Global Macroeconomic Scenarios: January 2021 Update, with the moderate scenario as our anchor.

RATING DRIVERS
Improved earnings generation, while maintaining sound balance sheet fundamentals, could result in positive ratings pressure. Conversely, if the Company’s credit fundamentals were to materially weaken, including a sustained reduction in earnings generation capacity, or a steep deterioration in credit quality, ratings would be negatively pressured.

RATING RATIONALE
Ally’s ratings are anchored by the Company’s deeply entrenched and market leading auto financing business, underpinned by a seasoned management team with broad industry knowledge. We see Ally’s strong auto lending franchise combined with its leading digital bank franchise as important pillars to the Company’s sound performance through the pandemic. Ally provides a wide offering of products and services to both retail and commercial auto customers. Ally sources its retail and commercial auto loan applications through 18,700 dealer relationships, as well as alternative sources including Carvana, and DriveTime. Further, Ally’s insurance segment is an important complementary component to the auto lending business and deepens relationships with the auto dealers.

Over the last several years, Ally has introduced additional businesses that provide products to its digital bank customers and that support and deepen those relationships. As of year-end 2020, 8% of Ally’s retail bank customers utilize other Ally products including a mortgage or Ally Invest account. While still modest in size relative to Ally’s auto franchise, we see further development of Ally Home and Ally Invest as important to the diversification of the business over the longer-term.

Despite the coronavirus related headwinds, we view the Company’s financial performance in 2020 as solid, and supportive of the ratings. Earnings were 37% lower YoY to $1.1 billion in 2020, driven by a significant reserve build due to coronavirus concerns, as well as due to the implementation of CECL. Nevertheless, the Company’s annual net revenues continued to trend positively, increasing 4.6% YoY to $6.7 billion. Improved net revenues were underpinned by a stable NIM, and higher gains on sales of off-lease vehicles. The Company’s stable NIM of 2.65% in 2020, reflected Ally’s risk-based pricing strategy, and large and growing deposit base. Meanwhile, despite significant coronavirus related pressures, originations remained solid in 2020, down only 3.3%, reflecting strong demand for both new and used vehicles, in part spurred by heightened consumer inclination towards private vehicle transportation versus mass-transit, reflecting concerns regarding the transmission of the coronavirus. Meanwhile, Ally’s non-interest expenses increased 11.8% to $3.8 billion YoY, reflecting the Company’s sustained focus on investing in its technology platform and newer businesses.

Despite the backdrop of high unemployment and the swift contraction in the economy, Ally’s asset performance was sound, supported by the Company’s robust servicing capabilities, deferral programs implemented at the onset of the pandemic and the benefits of government stimulus programs. Specifically, the Company’s consolidated NCOs totaled a very manageable 0.63% in 2020, and were down from 0.76% in 2019. Within Ally’s retail auto loan portfolio, NCOs totaled a moderate 0.96% of average outstanding receivables and loans in 2020, down from 1.29% in 2019.

The Company maintains a moderately sized corporate finance portfolio, which we consider to be innately riskier, as the loans are to middle market companies rather than to large corporates. Positively, the portfolio’s asset based lending is done on a first lien senior secured basis, while its cash flow loans are generally secured by a blanked lien. Moreover, Ally only lends to companies in industries in which it has expertise. Although, the exposures are secured and within Ally's seasoned management teams' expertise, it is our view that the Company’s risk profile could possibly weaken if the portfolio were to grow rapidly and represent a much larger component of the Company's overall loan portfolio. This book of business' exposures with position hold levels from $25 million to $100 million are much larger than the more granular individual exposures associated with the retail auto financing portfolio. As such, losses within the portfolio, during adverse conditions could have an outsized impact on the Company's bottom line. Nonetheless, portfolio credit quality remains sound, with criticized and non-accrual loans below historic averages. Importantly, exposures within the portfolio are diversified across many industries, including financial services, health services, auto & transportation, manufacturing equipment, and chemicals & metals.

Overall, we view Ally’s reserve coverage as sound and providing good loss absorption capacity for an expected rise in credit losses as 2021 progresses. At year-end 2020, loan loss reserves totaled $3.3 billion, or 2.78% of total loans and leases, notably higher than the 1.0% at December 31, 2019, and 2.03% at January 1, 2020, the first day of CECL. Finally, Ally’s residual value risk on off- lease vehicles remains manageable, benefiting from the strong rebound in used vehicle values.

Other balance sheet fundamentals remain sound including a diverse funding profile, underpinned by a large and growing deposit base that represents 85% of the Company’s total funding. Additionally, Ally’s liquidity position remains solid, totaling $40.3 billion at December 31, 2020, consisting of $24.8 billion of highly liquid securities, $14.9 billion of liquid cash and cash equivalents, and $0.6 billion of current committed unused capacity. Finally, the Company’s capital profile remains acceptable, including a common equity tier 1 capital ratio of 10.6%, as of December 31, 2020, improved from 9.5% at December 30, 2019, reflecting solid earnings generation and a decline in risk-weighted assets driven by lower commercial floorplan balances. Of note, Ally's Board of Directors recently approved the resumption of stock buybacks, establishing a buyback program for up to $1.6 billion shares in 2021.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

The Grid Summary Grades for Ally are as follows: Franchise Strength – Good; Earnings Power – Good/Moderate; Risk Profile – Good/Moderate; Funding & Liquidity – Good: Capitalisation - Moderate.

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

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 8, 2020): https://www.dbrsmorningstar.com/research/362170/global-methodology-for-rating-banks-and-banking-organisations. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021): https://www.dbrsmorningstar.com/research/373262/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The primary sources of information used for this rating include Company Documents and S&P Global Market Intelligence. DBRS Morningstar 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 Morningstar did have access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

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

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