DBRS, Inc. (DBRS Morningstar) has placed the ratings of Ally Financial Inc. (Ally or the Company) and its primary banking subsidiary, Ally Bank, including the Company’s Long-Term Issuer Rating of BBB (low) Under Review with Positive Implications.
KEY RATINGS CONSIDERATIONS
The Under Review with Positive Implications considers Ally’s resilient and improving credit fundamentals which are similar to those entities in the next rating category. Despite the difficult operating environment, Ally’s performance through the Coronavirus Disease (COVID-19) pandemic has been better than anticipated, including resilient earnings generation and strong credit performance. The review will focus on whether the Company can sustain its improving credit fundamentals. DBRS Morningstar expects to conclude the review within 90 days.
Continuing solid credit fundamentals, including resilient earnings generation without a material increase in the Company’s risk profile, would lead to an upgrade in the ratings. If credit fundamentals were to moderately deteriorate but remain manageable, Ally’s ratings would likely be confirmed at their current rating level. A substantial sustained decline in Ally’s core profitability metrics or significant erosion in its credit profile, would result in a ratings downgrade.
Franchise Combined Building Block (BB) Assessment: Good / Moderate
The Company has significant scale of operations, with a top-tier auto finance business that includes a deeply entrenched dealership network totaling 20,353 dealers, as well as its broadening menu of products and services. With an operating history of over 100 years in the auto industry, Ally maintains considerable institutional and industry knowledge, which has assisted the Company’s seasoned management team in successfully navigating Ally through the ongoing but moderating coronavirus pandemic.
Over the past several years, Ally has taken steps to diversify, as well as greatly improve its funding profile. Within its primary business, auto lending, Ally was once strictly an originator of new vehicle loans. Now it originates a better mix of used and new vehicle loans. Through its four moderately sized non-auto related businesses, the Company has expanded its product offerings. These businesses include Ally Invest, its digital brokerage and wealth management platform, Ally Home, which provides residential mortgage products for home purchases and refinancing, Ally Lending, which provides fixed rate installment loan products through a fully digital application process with a focus on point-of-sale lending, and the Company's Corporate finance business, which provides asset based and cash flow financing. Of note, in November 2021, the Company entered into a definitive agreement to acquire Fair Square Financial, a modestly sized credit card company focused on consumers with an average FICO score of 660 that will further diversify its product/service offerings.
Earnings Combined Building Block (BB) Assessment: Good / Moderate
Despite the difficult operating environment, earnings for the most part have been resilient, in part reflecting positively on the Company’s continuing diversification of its product offerings and customer base, including its focus on growing its used vehicle loan portfolio and sourcing more of its loans through growth channels. Indeed, increasing levels of used vehicle originations have countered the impact of constrained new vehicle originations resulting from OEM production constraints due to supply chain disruptions, which have also resulted in lower levels of commercial auto loan originations. Reflective of the Company’s strong auto finance business, consumer auto originations increased to $12.3 billion in 3Q21, up from $9.8 billion in 3Q20, including a record high $7.8 billion of used retail volume representing 64% of total originations. Importantly, this progress in earnings resiliency has occurred with no material alteration in the Company’s risk profile. We note that through the pandemic, the Company reported only one quarterly loss in 1Q20, primarily due to the implementation of CECL and higher provisioning due to coronavirus concerns.
Risk Profile Combined Building Block (BB) Assessment: Good / Moderate
Importantly, credit performance through the pandemic has been much better than expected, reflecting the success of the Company’s deferral program, its strong underwriting and servicing platform, the robust used vehicle markets, as well as the impact of government stimulus programs. The Company maintains a sound risk profile underpinned by strong underwriting and servicing capabilities, and a predominately prime lending portfolio. Ally’s exposure to nonprime lending (Company defined: FICO <620) has been consistent, ranging from 9% - 11% of consumer auto loan originations. Positively, Ally is not active in deep subprime lending, which is a far riskier customer base. Finally, residual value risk in the retail lease portfolio continues to be well managed, and has been mitigated by the strong used vehicle market, which has led to materially higher vehicle disposition gains upon lease expiration.
Funding and Liquidity Combined Building Block (BB) Assessment: Good
Funding is increasingly deposit focused, providing Ally the opportunity to run-off higher cost debt. Overall, deposits represented 90% of the Company’s funding at September 30, 2021, up from 85% at December 31, 2020, and significantly up from 50% at December 31, 2015. The balance of Ally's funding consists of secured financing and senior unsecured debt.
Capitalisation Combined Building Block (BB) Assessment: Good / Moderate
With its resilient earnings generation capacity and sound risk position, Ally's capital profile is acceptable, including a CET1 ratio of 11.2% as of September 30, 2021, a 60 basis points improvement from 10.6% at December 30, 2020. That said, we anticipate that Ally's CET1 ratio will migrate towards the Company’s internal target level.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/388650.
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.
All figures are in U.S. dollars unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations (July 19, 2021) https://www.dbrsmorningstar.com/research/381742/global-methodology-for-rating-banks.
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.
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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