DBRS: Ally’s 3Q14 Core Earnings Expand on Strong Origination Volume and Strengthening Margins

Summary:
• For 3Q14, Ally reported underlying pre-tax income (excluding original issue discount (OID) and repositioning items) of $467 million, up 12% from the prior quarter.
• Solid expansion in net financing revenue, despite lower lease remarketing gains and the continuing management focus on operating costs, were the primary drivers of the improved results.
• DBRS rates Ally Financial Inc. Issuer and Senior Debt at BB with a Positive trend.

From DBRS, Inc.’s (DBRS) perspective, Ally Financial Inc.’s (Ally or the Company) strong 3Q14 results demonstrate the continuing success of the Company in broadening its dealer channel base and diversifying its origination mix. Moreover, DBRS sees the strong origination volumes and mix of originations as demonstrating the strength of Ally’s dealer-centric auto finance franchise and supportive of the current rating and Positive trend.

For the quarter, Ally originated $11.8 billion of retail auto loans and leases, up 8% quarter-on-quarter (QoQ). Total new vehicle originations grew nearly 22%, once again outpacing growth the U.S. auto market. Higher non-GM and non-Chrysler originations as well as a notable increase in GM subvented volumes supported the expansion in new originations. DBRS notes that the expansion in GM-related subvented volume does not reflect a shift in Ally’s strategy regarding incentivized business but was driven by a strong GM incentive and marketing program, and the Company’s deep relationships with GM dealers that allowed Ally to capture a large share of the program volume. Used vehicle originations totaled $3.2 billion, the highest level in Company history, demonstrating the Company’s success in growing sales volume in this highly fragmented market.

Net financing revenue (excluding OID), increased 3% QoQ to $936 million. Finance revenues benefited from expanding net interest margin (NIM), which more than compensated for a slight decline in automotive earning assets due to seasonality in the dealer floorplan portfolio. NIM (excluding OID), improved modestly from the prior quarter to 2.65%. Importantly, this improvement was achieved despite an 18 basis point (bps) reduction in earning asset yield as normalizing used vehicle values resulted in lower lease remarketing gains.

Growth in retail deposits as well as management’s focus on addressing legacy high-cost debt in the capital structure continues to benefit results. During the quarter, the Company’s funding costs were 21 bps lower QoQ. DBRS notes that subsequent to quarter-end Ally completed a $750 million liability management exercise and that over the next six months an additional $4.6 billion of legacy high-cost debt will mature. As a result, DBRS expects further improvement in the cost of funds, which should help Ally to defend its NIM as lease yields moderate further in 2015.

Ally continues to make progress on improving its operating efficiency. For 3Q14, adjusted non-interest expense, excluding repositioning items was 8% lower QoQ at $742 million. Lower weather-related losses in the Insurance segment, reflecting normal seasonality and abnormally severe weather in 2Q14 were the primary drivers of the sequential decrease. This was partially offset by higher compensation and benefit expense as the result of the equity compensation revaluation in 2Q14. DBRS notes that the Company’s adjusted efficiency ratio was stable QoQ at 49%, yet remains above the Company’s medium-term target of mid -40% range.

DBRS rates Ally’s Issuer and Long-Term Debt at BB with a Positive trend.

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