DBRS: Ally’s 4Q Core Results Lower on Lease Normalization and Seasonality

Summary:
• For 4Q14, Ally reported underlying pre-tax income (excluding original issue discount (OID) and repositioning items) of $396 million, 15% lower than the prior quarter.
• Core results were impacted by normalization in the lease portfolio and seasonally higher provisioning expense.
• DBRS rates Ally Financial Inc. Issuer and Senior Debt at BB with a Positive trend.

DBRS, Inc. (DBRS) considers Ally Financial Inc.’s (Ally or the Company) 4Q14 results as solid despite the impact of normalizing lease yields and seasonality. Moderating used vehicle values from historically high levels resulted in lower lease remarketing gains that drove net finance revenue (excluding OID) lower QoQ to $835 million. Reduced net leasing revenue and relatively stable funding costs resulted in net interest margin (NIM) (excluding OID) contracting 30 basis points (bps) to 2.35%. DBRS expects NIM to expand in 2015 supported by further reductions in funding costs as Ally has $4.9 billion of legacy high-cost debt maturing. Further, DBRS expects NIM will benefit from the continuing shift in portfolio mix both by product and credit profile, which combined with stabilizing lease yields, should result in higher asset yields.

In the seasonally weaker fourth quarter, origination volumes were lower quarter-on-quarter (QoQ), however, volumes were 10% higher year-on-year (YoY). Ally achieved this growth while continuing to broaden the mix of volume. As a result, the share of volume from non-GM/Chrysler dealers continues to expand. In a competitive and evolving marketplace, DBRS sees this performance as demonstrating the strength of Ally’s dealer-centric auto finance franchise and the benefits of its deep and wide ranging product set.

Consistent with the seasonal pattern observed in past years, asset quality metrics were higher quarter-on-quarter in 4Q14. U.S. retail auto net charge-offs were 17 bps higher sequentially at 1.10% while delinquencies were 45 bps higher at 2.73%. While these metrics were higher YoY reflecting continuing normalization of Ally’s portfolio mix, DBRS notes that on a historical basis, credit performance remains sound. Nevertheless, the increase in charge-offs and delinquencies as well as growth in the portfolio resulted in seasonally higher provisioning expense. For 4Q14, provisions for loan losses totaled $155 million, up from $102 million in 3Q14.

Ally’s balance sheet strength remains solid, underpinned by its strong direct bank franchise and solid capital levels. Retail deposits grew 3% in the quarter to $48.0 billion. Importantly to the rating, the quality of the deposit base continues to strengthen with 50% of retail deposits comprised of savings products. At December 31, 2014, Ally’s estimated fully-phased in Basel III Common Equity Tier 1 ratio was 9.7%.

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.