DBRS Morningstar Confirms Ally Financial Inc. at BBB (low); LTR Trend Negative; STR Trend Stable

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 the Long-Term ratings to Negative from Positive and the trend for the Short-Term ratings to Stable from Positive. Ally’s Intrinsic Assessment (IA) is BBB and its Support Assessment is SA3. The Company’s Long-Term Issuer Rating is positioned one notch below the IA.

KEY RATINGS CONSIDERATIONS
The change in trends considers the abrupt and severe economic downturn related to the Coronavirus Disease (COVID-19) and the expectation that this will adversely impact Ally’s financial performance. Specifically, we anticipate material profitability pressures due to the dramatic decline in auto loan originations and deterioration in the Company’s credit quality, including higher but manageable levels of delinquencies and charge-offs. That said, we expect the government’s significant monetary and fiscal support, as well as Ally’s deferral programs to limit the impact of these headwinds in the near-term. Nonetheless, should the market disruptions be prolonged, and the economic recovery take longer, ratings would likely be further pressured.

The confirmation considers the Company’s solid auto financing franchise and sound earnings generation capacity, which has improved over recent years. Ratings are also supported by Ally’s sound balance sheet fundamentals, including conservative risk management, solid liquidity and funding profiles, and acceptable capital position. Ratings also consider Ally’s below bank peer profitability and capitalization and less diversified franchise as compared to other U.S. banks, which makes it more susceptible to market disruptions.

RATING DRIVERS
Although an upgrade is not likely at this time, if Ally’s earnings and asset performance were to remain acceptable through the downturn, the long-term ratings trends could change back to a Stable. Conversely, if the challenging operating environment created by the coronavirus pandemic becomes more protracted than expected, leading to materially weaker credit fundamentals, and/or a sustained material reduction in earnings generation, ratings would be downgraded.

RATING RATIONALE
Countering the coronavirus headwinds, Ally maintains solid credit fundamentals, including a deeply rooted auto finance franchise, which is run by a conservative management team with deep industry knowledge. The franchise offers a broad menu of products and services to both retail and commercial customers, including financing new and used vehicles, as well as floorplan financing through its more than 18,300 dealership relationships. Although auto finance concentrated, DBRS Morningstar sees Ally as better positioned than other auto finance focused financial institutions given its scale, diversity of origination channels, as well as the Company being brand agnostic when financing automobiles. Ally continues to seek to diversify its franchise through acquisitions, including the recent announcement of its intent to acquire CardWorks, Inc, a privately held credit card company, with $4.7 billion in total assets supported by $2.9 billion of deposits. The acquisition is anticipated to close in 3Q20, subject to closing conditions.

DBRS Morningstar expects that the coronavirus headwinds will challenge Ally’s earnings generation in 2020. Specifically, lower origination volumes will impact revenue generation while provisioning expense is anticipated to be meaningfully higher driven by historically high unemployment associated with this downturn and declines in used vehicle values which will impact loss severity. Most recently, Ally reported a loss of $319 million in 1Q20, due to CECL related provisions for loan losses and fair value write downs on equity investments in the Insurance business. Ally’s ability to navigate the current environment by absorbing credit costs through earnings while showing sequential improvement in earnings in the second half of 2020 will be key to the ratings returning to a Stable trend.

Credit risk remains well managed, anchored by sophisticated underwriting that prevents the layering of risk, sound servicing capabilities, and a predominately prime lending portfolio. Ally’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. With jobless claims and unemployment rapidly increasing due to the shutting down of the U.S economy in response to the pandemic, Ally announced a deferral program to assist customers experiencing hardship, of which approximately 25% of Ally’s existing customers have already accepted some form of forbearance. While we view this program as prudent and likely to lead to lower overall losses through the downturn, we still expect losses for 2020 to be higher than 2019. In 1Q20, Ally reported manageable retail auto net charge-offs (NCOs) of 1.4% of average outstanding receivables and loans and guided towards a full year retail auto NCO rate range of 1.8%-2.1%. Residual value risk remains well managed, benefitting from a moderately sized lease book, which totaled $9.1 billion or 67% of equity at end of 1Q20, down from 86% in 2016.

Ally’s balance sheet remains sound and should benefit the Company in navigating the current challenging environment. Funding is diverse, anchored by a sizeable deposit base that constitutes 75% of Ally’s total funding. Liquidity is solid with Ally having more than $30 billion in available liquidity at March 31, 2020, and minimal debt maturities over the next 12 months. Meanwhile, capital remains acceptable. At 1Q20, Ally’s common equity tier 1 capital ratio was 9.3%, down from 9.5% at YE19, reflecting the meaningful reserve build that resulted in the net loss for the quarter. Positively, with origination volumes expected to remain pressured over the medium term, Ally will build capital as the existing portfolio amortizes.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

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 11, 2019): https://www.dbrsmorningstar.com/research/346375/global-methodology-for-rating-banks-and-banking-organisations.

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 had 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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