Morningstar DBRS Confirms Ally Financial Inc.'s Long-Term Issuer Rating at BBB; Stable Trend

DBRS, Inc. (Morningstar DBRS) confirmed the credit ratings of Ally Financial Inc. (Ally or the Company), including the Company's Long-Term Issuer Rating of 'BBB'. At the same time, Morningstar DBRS confirmed the credit ratings of Ally's banking subsidiary, Ally Bank (the Bank). The trend on all ratings is Stable. The Intrinsic Assessment (IA) for the Bank is BBB (high), 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 CREDIT RATING CONSIDERATIONS
Ally's credit ratings reflect its top-tier auto financing and digital retail banking franchises, along with its more moderately sized insurance and middle market lending businesses. With $39.0 billion of retail auto originations, Ally's auto financing business has significant scale, underpinned by its relationships with more than 22,000 active dealers located across the country and more than 100-year operating history. Reflective to its recent senior management transition including a new chief executive officer (CEO), the Company is pursuing a more focused approach to its core businesses and is in the process of divesting of moderately sized non-core businesses that lack the appropriate scale necessary to attain attractive returns. Specifically, actions include the March 2024 sale of the Ally Lending business, its recently announced agreement to sell its moderately-sized credit card business, along with the cessation of residential mortgage originations. Additionally, Ally announced a recent workforce reduction to improve its operating efficiencies.

Earnings generation is resilient, despite 2024 earnings being lower year-on-year (YoY), reflecting higher funding costs and normalizing credit expense. Ally's risk profile is sound, benefiting from the Company's primarily prime loan portfolio, disciplined underwriting and strong servicing capabilities. This sound risk management was evident in 2023 when the Company took certain curtailment actions in its originations in response to weaker than expected performance in its 2022 origination vintage. As a result of these actions, Ally's credit performance is benefiting from the stronger performance of its more recent retail auto loan vintages. Lastly, the Company's deposit franchise is solid, and its capital position is acceptable and improved.

The Stable trend reflects our view that Ally's credit fundamentals will remain sound and within our expectations notwithstanding an operating environment punctuated by an elevated interest rate environment and normalizing credit costs. Although not in our baseline scenario, downside risks include the potential for tariffs and trade disputes to lead to slower economic growth that results in a weakening labor market and higher inflation resulting in weaker than expected credit performance and pressure earnings.

The Bank's Intrinsic Assessment of BBB (high) has been assigned at the midpoint of the Intrinsic Assessment Range, as Morningstar DBRS views Ally's credit fundamentals and performance as commensurate with those of similarly rated peers.

CREDIT RATING DRIVERS
A sustained improvement in earnings performance commensurate with bank peers in the next rating category while maintaining a comparable risk profile, would result in an upgrade of the credit ratings. Conversely, an outsized increase in credit losses, or an increase in risk appetite would result in a downgrade of the credit ratings. Additionally, a sustained significant deterioration in profitability metrics, or a material contraction in capital metrics would result in a credit ratings downgrade.

CREDIT RATING RATIONALE
Franchise Combined Building Block (BB) Assessment: Good/Moderate
Ally maintains leading market positions in auto financing and digital banking. The Company sources its auto loan and lease applications through a large active national dealer network. Ally has a moderately sized, but strategic insurance business, that provides its auto finance customers complementary insurance products, including guaranteed asset protection (GAP) insurance and service and maintenance contracts. The franchise reflects a moderately sized corporate finance business, which provides first lien capital for sponsored middle-market companies. Ally also holds a modestly sized but evolving wealth management platform (Ally Invest) which we see as providing the Company the ability to enhance its relationships with its deposit customers, strengthening customer loyalty. Lastly, we note that Michael Rhodes took over as the Company's CEO in April 2024, replacing interim CEO, Douglas Timmerman. Mr. Rhodes previously served as the CEO and president of Discover Financial Services and president of Discover Bank, as well as a member of the board of directors of Discover Financial Services and Discover Bank.

Earnings Combined Building Block (BB) Assessment: Good/Moderate
Earnings are resilient, reflecting no annual losses since 2011. In 2024, the Company reported $558 million in total earnings attributable to shareholders, down from $847 million in 2023, driven by lower net financing revenues due to compressed net interest margin (NIM) and lower average earning assets as well as higher provisions for loan loss reserves. Ally's NIM compressed by 6 basis points YoY to 3.27% reflecting its liability sensitive balance sheet, pressured by the higher for longer interest rate environment, along with a moderate 1.5% decline in average earning assets. We expect Ally will make progress in expanding NIM in 2025 despite some drag from selling its credit card franchise, as the Company recycles capital from the run-off of its lower yielding mortgage and securities portfolios into higher yielding auto loans and corporate finance loans. Overall, the Company's ROAA was a modest 0.3% in 2024, slightly down from 0.4% in 2023. Lastly, the Company's provisions for loan loss reserves represented a high but acceptable 72.0% of income before provisions and taxes, up from 65.0% in 2023.

Risk Profile Combined Building Block (BB) Assessment: Moderate
Ally's risk profile is sound. Retail auto net charge-offs (NCOs) totaled a manageable 2.34% (annualized) in Q4 2024, modestly up from 2.21% in Q4 2023. On a consolidated basis, NCOs totaled 1.59% in Q4 2024 down from 1.77% in Q4 2023. The Company is anticipating full-year 2025 consolidated NCOs to range between 1.45% and 1.60%, and retail auto NCOs to range from 2.00% to 2.25%. On a pro-forma basis, which reflects reclassification of the credit card assets to held for sale, the Company anticipates consolidated NCOs of between 1.35% to 1.50%. Ally's allowance for loan losses is acceptable with coverage totaling 2.73% of loans and leases on a consolidated basis, moderately up from 2.57% for December 31, 2023. Lastly, residual value risk remains manageable, benefiting from the Company's moderately sized retail lease portfolio. Going forward, Ally's residual value risk should continue to benefit from firming used vehicle values, which continue to produce vehicle disposition gains upon lease expiration.

Funding and Liquidity Combined Building Block (BB) Assessment: Good
Ally's assets are overwhelmingly deposit funded. Deposits totaled $151.6 billion and represented 89.0% of total funding at December 31, 2024, and were comprised of savings, money market, and checking accounts, and to a lesser extent retail CDs, along with a very modest level of brokered deposits. Overall, 92% of the Company's deposits are FDIC-insured (December 31, 2024). Liquidity is soundly managed, totaling $68.5 billion, including $38.9 billion of unused borrowing capacity at the Federal Home Loan Banks (FHLB) and Federal Reserve Bank Discount Window, as well as $29.5 billion of highly liquid unencumbered securities, liquid cash and cash equivalents at December 31, 2024.

Capitalization Combined Building Block (BB) Assessment: Good/Moderate
With its resilient earnings generation and sound risk profile, Ally's capitalization is acceptable. At December 31, 2024, Ally's CET1 ratio totaled 9.8%, up 40 bps YoY, and above management's long-term target of 9.0%. The sale of Ally Lending (March 1, 2024) added 15 bps to the CET1 ratio. Additionally, the recent issuance of $440 million of credit linked notes underpinned by $4.0 billion of prime retail auto loans; benefited CET1 by 16 bps at closing. Partially offsetting, the adoption of the deferral method of accounting for EV lease tax credits, drove a negative 20 bps impact as of October 1, 2024. In Q1 2025, Ally anticipates the final phase-in of CECL will lower CET1 by 19 bps. Lastly, the upcoming sale of Ally Credit Card (expected close in Q2 2025) is expected to benefit CET1 by 40 bps.

Further details on the Scorecard Indicators and Building Block Assessments can be found at https://dbrs.morningstar.com/research/447784.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS   
 
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
 
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781.

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

The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (June 04, 2024) https://dbrs.morningstar.com/research/433881. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

The primary sources of information used for these credit ratings include Morningstar Inc. and Company documents. Morningstar DBRS considers the information available to it for the purposes of providing these credit ratings was of satisfactory quality.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS's trends and credit ratings are under regular surveillance.

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

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