DBRS, Inc. (DBRS Morningstar) upgraded the ratings of Ally Financial Inc. (Ally or the Company), including the Company’s Long-Term Issuer Rating to ‘BBB’ from BBB (low). At the same time, DBRS Morningstar upgraded the ratings of its banking subsidiary, Ally Bank (the Bank) to BBB (high) from BBB. The trend on all ratings is Stable. The Intrinsic Assessment (IA) for the Bank was raised to BBB (high), while its Support Assessment remains SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA. The rating actions remove the ratings from Under Review with Positive Implications, where they were placed on November 23, 2021.
KEY RATING CONSIDERATIONS
The ratings action reflects the broadening and deepening of the Company’s franchise and the strong deposit base developed over the last several years. Importantly for the ratings, these strategic actions have led to a strengthening of the Company’s earnings generation capacity while maintaining Ally’s sound risk profile. The rating action also considers that these strategic actions should benefit Ally as the U.S. economy enters a rising rate cycle and a normalizing credit environment as government stimulus and other support programs put in place during the pandemic are withdrawn.
The Stable trend reflects our view that U.S. economic growth will slow in 2022 but that still strong labor market and solid household balance sheets are supportive of healthy U.S. auto sales as well as sound consumer credit performance, generally. The Stable trend also considers our expectations that Ally’s asset quality metrics will weaken from their current unsustainably low levels consistent with the overall industry, but we anticipate any weakening in credit performance will be gradual and within the Company’s normalized levels.
A sustained improvement in earnings performance along with a material enhancement in revenue diversification while maintaining a comparable risk profile, would result in an upgrade of the ratings. Conversely, an outsized increase in credit losses, or an increase in risk appetite would result in a downgrade of the ratings. Additionally, a sustained deterioration in profitability metrics would result in a ratings downgrade.
Franchise Combined Building Block (BB) Assessment: Good / Moderate
The ratings consider the Company’s leading auto financing and digital banking businesses, complemented by its newer albeit more moderately sized consumer businesses. Ally maintains a significant scale of operations with a customer base totaling 10.5 million. The Company sources its auto finance and insurance customers through a large and growing network of 20,000 dealers located across the country. With over 100 years of operations, Ally holds considerable institutional and industry knowledge that has allowed it to develop deep relationships with dealers and navigate cycles within the U.S. auto industry.
Over the past few years, the Company has successfully broadened its franchise through modestly sized acquisitions of consumer focused businesses to deepen the relationships with its deposit customers resulting in improving customer engagement and loyalty. These businesses include Ally Home, Ally Invest, Fair Square Financial (FSF), and Ally Lending. Meanwhile, Ally’s market leading auto lending business has evolved and reflects a better balance between used and new vehicles financings. Specifically, in 2021, used vehicle originations represented 59.8% of total originations, up from 55.0% in 2020, and up from 28.5% in 2014. Although more moderately sized when compared to its auto financing business, Ally’s insurance business, provides complementary insurance products to its auto finance customers. Finally, the Company maintains a growing Corporate finance business, which offers first lien, asset based lending and cash flow financing to sponsored-backed U.S middle market companies.
Earnings Combined Building Block (BB) Assessment: Good
The rating actions reflect the Company’s sound and improving earnings capacity. In 2021, Ally’s net income totaled $3.1 billion, up from $1.1 billion in 2020, driven by an 83.2% decline in loan loss provisions along with a 31.1% increase in net financing revenues. Higher net financing revenues were driven by the benefits of consistent retail auto loan originations with good asset yields, as well as net interest margin (NIM) expansion. Reflective of the structural change in Ally’s funding profile to a more deposit focus, the Company’s NIM widened by 89 bps YoY to 3.54% in 2021, driven by a 78 bps decline in average funding yield along with a 15 bps increase in the average earning asset yield. The higher earning asset yield was driven by Ally’s risk-based pricing approach which has resulted in four years of retail auto originations with yields above 7.0%. While Ally has focused on diversifying its franchise, we note that the Company has maintained a focus on cost management. Indeed, Ally’s adjusted operating efficiency ratio was down slightly at 43.7% in 2021 from 45.0% in 2015. Going forward, we expect Ally to continue to generate consistent pre-provision net revenues supported by the expanding NIM as well as growing earning assets while providing solid absorption capacity for the expected rise in credit losses as asset quality gradually returns to more normalized levels.
Risk Profile Combined Building Block (BB) Assessment: Good / Moderate
The Company’s asset quality metrics have been strong and better than anticipated during the pandemic. We see this performance as validation of Ally’s deferral program introduced at the onset of the pandemic as well as its disciplined underwriting and strong servicing capabilities. Credit performance also has benefited over the last two years from improved consumer balance sheets and the strong used vehicle markets. In 2021, the Company’s net charge-offs (NCOs) totaled a very low 0.23% on a consolidated basis. Meanwhile, retail auto NCOs totaled just 0.31%, which was well below the Company’s guidance of 1.4% to 1.6% in a normal credit environment. However, we do not anticipate Ally maintaining asset quality metrics at these low levels.
Ally’s risk profile has also benefited from the lower exposure to residual value risk from the smaller retail lease portfolio. Indeed, at December 31, 2021, retail leases, net of depreciation totaled $10.9 billion, or 6.0% of total assets compared to $16.3 billion, or 10.3% of total assets at December 31, 2015. We consider Ally’s residual value risk as continuing to be well managed, and benefiting from the strong used vehicle values, which continue to drive higher vehicle disposition gains upon lease expiration.
Funding and Liquidity Combined Building Block (BB) Assessment: Good
Over the last six years, Ally has made meaningful progress in evolving its funding profile to one that is anchored by deposits. Deposits represented 89.3% of Ally’s funding, at December 31, 2021, up from 85.0% at December 31, 2020, and materially higher than the 57.2%, at December 31, 2015. Over the past several years, the growing core deposit base has afforded the Company the opportunity to manage down higher cost secured and unsecured debt, which is supportive of earnings. Indeed, the Company’s cost of funds have improved to 1.19% at year-end 2021 compared to 1.81% at year-end 2015. Importantly, Ally has exhibited strong deposit retention rates and balance growth which should benefit the Company in the anticipated rising rate environment.
Capitalisation Combined Building Block (BB) Assessment: Good / Moderate
Capitalization is acceptable, given the Company’s solid earnings generation and sound risk position. Ally's CET1 ratio was 10.3% at December 31, 2021, down from 11.2%, as of September 30, 2021, reflecting higher risk-weighted assets, as well as the closing of its acquisition of FSF. Going forward, we anticipate that Ally's CET1 ratio will migrate towards the Company’s target level of approximately 9.0%.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/392646
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 Organizations (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)
The primary sources of information used for this rating include Morningstar Inc. and Company Documents. 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.
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