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’. At the same time, DBRS Morningstar confirmed the ratings of its banking subsidiary, Ally Bank (the Bank). The trend on all ratings is Stable. The Intrinsic Assessment (IA) for the Bank is BBB (high), while its Support Assessment is SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA.
KEY RATING CONSIDERATIONS
Ally’s ratings and Stable trend consider the Company’s leading auto financing and digital banking franchises, supplemented by more moderately sized insurance and consumer businesses, as well as a growing middle market lending business. Ally holds significant operating scale and sources its auto finance and insurance customers through a large and growing network of active dealers located across the country. Earnings generation capacity is solid benefiting from disciplined growth in earning assets, net interest margin (NIM) management and deposit growth. However, we expect that net income growth will be pressured in 2023 due to tempered earning asset growth as consumer loan portfolio run-off may outpace new originations given expectations for still below pre-pandemic auto sales and the potential impact on demand from a slowing economy. We view the Company’s asset performance as sound while credit metrics normalized in 2022 from unsustainably strong levels. The ratings also consider the Company’s good balance sheet fundamentals, including solid core deposit funding, good liquidity, and sound capital levels. The Company’s Stable trend reflects our view that Ally’s credit fundamentals will remain within our expectations, despite the slowing economy and the possibility of a mild recession in 2023.
A sustained improvement in earnings performance along with further 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 reflect Ally’s leading position in the auto financing and digital banking sectors along with its substantial institutional and industry knowledge built up over 104 years of operations. Positively, the Company has been highly successful in building up its used vehicle financing capabilities, which has enhanced customer diversity and widened its origination funnel. In 2022, used vehicle originations comprised 64.9% of total originations, up from 59.8% in 2021.
Despite its business concentration in auto finance and digital banking, the Company maintains, a moderately sized, but strategic insurance business, that provides its auto finance customers with complementary insurance products and strengthens its relationships with auto dealers. Ally also has more modestly sized but evolving consumer lending businesses which deepen its relationships with its deposit customers resulting in improving customer engagement and loyalty. These businesses include Ally Home, Ally Invest, Ally Credit Card (formerly Fair Square Financial), and Ally Lending. 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 ratings consider Ally’s solid earnings generation capacity that has benefited from disciplined growth in earning assets, expanding NIM, and good asset performance. The Company’s NIM which has tracked upward on an annual basis, came under some pressure in 2H22 given the rapid rise in rates and Ally’s balance sheet dynamics. Meanwhile, despite ongoing production issues at the manufacturers and vehicle affordability issues, origination levels were resilient in 2022, reflective of a growing used vehicle component.
The Company's net income totaled $1.7 billion in 2022, down from $3.1 billion in 2021, primarily reflecting an outsized increase in provisions for loan loss reserves and the prior year’s reserve releases, as well as lower other revenue, and higher non-interest expense. Higher provision expense reflects the normalization of the Company’s credit position and reserve build to support loan growth and a possible mild recession in 2023. Lower other revenue, in part, reflected the decrease in the fair value of the Insurance segment’s equity securities portfolio. Meanwhile, higher non-interest expense largely reflected continued investments within the Company’s growing businesses, brand, and technology. Reflective of its solid receivables and deposit growth, Ally generates good levels of spread income. Indeed, its net financing revenue in 2022 increased 11.1% year-on-year (YoY), driven by a 11.0% increase in net finance receivables and loans, and a widening NIM, up 31 basis points (bps) to 3.85% in 2022. Going forward, we expect some pressure on the Company’s spread income, given the rapid rise in rates and the Company’s liability sensitive balance sheet. Indeed, in 4Q22, Ally’s NIM contracted by 15 bps YoY to 3.65%. Finally, we view Ally's income before provisions and taxes (IBPT) as continuing to provide sound loss absorption capacity. Indeed, the Company’s provisions for loan loss reserves represented a sound 37.4% of IBPT in 2022, as compared to 33.6% in pre-pandemic 2019.
Risk Profile Combined Building Block (BB) Assessment: Good / Moderate
Ally maintains a sound risk profile underpinned by its strong underwriting and servicing platform. In 2022, asset performance and credit metrics normalized from unsustainably strong levels that were reflective of federal stimulus that flowed into the economy and deferrals provided to borrowers to offset the impact of the pandemic. In 2022, net charge-offs (NCOs), on a consolidated basis, totaled a moderate 0.74%, up from a very low 0.23% in 2021. Meanwhile, retail auto NCOs totaled 0.97% up from 0.31% in 2021. More recently, retail auto NCOs (annualized) totaled 1.66% in 4Q22, up from 0.48% from the same quarter in the prior year. With the expectation of a mild recession and a further 13% decline in used vehicle values in 2023, the Company is anticipating retail auto NCOs to increase to 2.2% in 4Q23 and total 1.7% for full-year 2023.
Ally’s risk profile has also benefited from the lower exposure to residual value risk due to the smaller retail lease portfolio. At December 31, 2022, retail leases, net of depreciation totaled $10.4 billion, 4% lower year-on-year. We consider Ally’s residual value risk to be well-managed and benefiting from the declining but still high used vehicle values, which continue to drive sound vehicle disposition gains upon lease expiration. Although the Company's Corporate Finance business performed soundly in 2022, we view the portfolio to be somewhat risky, given that the lending is to middle market companies, which we see as innately riskier than lending to large corporations.
Funding and Liquidity Combined Building Block (BB) Assessment: Good
Ally maintains a sound funding profile, with 88% of funding comprised of deposits. The Company’s deposits totaled $152.3 billion at December 31, 2022, up from $141.6 billion at December 31, 2021, and consisted predominantly of savings, money market and checking accounts, and to a lesser extent retail CDs, and brokered deposits. Ally maintains its modestly sized brokered deposit base mostly for diversification purposes, which we view as sensible management of the deposit base. Meanwhile, Ally's liquidity is good and well-managed. At December 31, 2022, the Company's liquidity totaled $27.3 billion, comprised of $22.2 billion of highly liquid unencumbered securities and $5.1 billion of cash and cash equivalents.
Capitalization Combined Building Block (BB) Assessment: Good / Moderate
Capitalization is adequate with Ally’s solid earnings generation capacity and sound risk position. The Company’s CET1 ratio totaled 9.3% at December 31, 2022, down from 10.3% at December 31, 2021, reflecting higher risk-weighted assets.
Further details on the Scorecard Indicators and Building Block Assessments can be found at https://www.dbrsmorningstar.com/research/410117
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/ Social/ Governance factors that had a significant or relevant effect on the credit analysis.
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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings. (May 17, 2022)
All figures are in U.S. dollars unless otherwise noted.
The principal methodology is the Global Methodology for Rating Banks and Banking Organisations: https://www.dbrsmorningstar.com/research/398692/global-methodology-for-rating-banks-and-banking-organisations (June 23, 2022). In addition DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings: https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings. (May 17, 2022) in its consideration of ESG factors.
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.
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.
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