NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded Ally Financial Inc.'s (Ally) long-term Issuer Default Rating (IDR) and senior unsecured debt rating to 'BB' from
'BB-'. The Rating Outlook is Stable. A detailed list of rating actions follows at the end of this press release.
KEY RATING DRIVERS
The upgrade of Ally's ratings follows the approval of Residential Capital LLC's (ResCap's) bankruptcy plan by the Bankruptcy Court releasing Ally from all ResCap related claims, which combined with the recent mortgage settlements with the FHFA and the FDIC, essentially removes any mortgage-related contingent liability to Ally. The upgrade also reflects recent strategic actions taken by the company to strengthen its credit profile, including the issuance of $1.3 billion of common equity to third-party investors and the repurchase of $5.9 billion in preferred shares held by the U.S. Treasury (UST), which improves the quality of Ally's capital base, demonstrates increased investor confidence, and potentially paves the way for the UST to exit its remaining stake in Ally.
Ally's ratings also reflect its leading online direct banking platform, which has enabled the company to lower its overall cost of funds and more effectively compete in the market. Ally's deposit growth continued its strong momentum in 2013, with total deposits increasing to $51.5 billion in 3Q'13, up 16% year-over-year. Importantly, the growth was driven by a 30% increase in retail deposits, which Fitch views as being generally more stable than brokered deposits. Deposits accounted for 44% of Ally's total funding in 3Q'13, up from 37% in 2012 and 31% in 2011. Fitch views Ally's deposit platform as well positioned to withstand a rate increase given its focus on low balance, retail time deposits, while not currently offering above market interest rates. Fitch would expect Ally to incur incremental deposit funding costs in a rising rate environment in order to grow, or at least maintain, deposit levels.
Despite its strengthened financial profile, Ally faces a number of challenges. The company's earnings and profitability remain lackluster and below peers. Management has identified various actions including replacing high cost legacy debt with lower cost deposit funding and reducing non-interest expenses, which should improve profitability over time.
The sale of the international auto operations has reduced Ally's earnings and risk diversity, making the company more concentrated in a highly competitive U.S. auto lending market. The loss of exclusive subvention agreements with Chrysler and General Motors (pending Dec. 31, 2013) and the growth in their respective captive finance companies threatens Ally's competitive position, as Ally still derives a substantial amount of retail and commercial lending business from the dealers of these two OEMs. Fitch recognizes, however, that despite increased competition and reduced subvention volume, Ally has continued to profitably grow and diversify its lending portfolio due to its dealer-centric platform and offerings, which include a suite of lending products, floorplan insurance, and auction-related services offering it a unique competitive advantage. Ally will need to demonstrate the ability to maintain its market share and originations over time once the subvention agreements are terminated.
With its exit from the mortgage business, Ally's overall asset performance is becoming more influenced by its higher quality auto loan and lease portfolio. Consistent with the auto lending industry, Ally has experienced favorable credit performance in its auto lending portfolio over the past few years primarily from tightening of credit underwriting standards and higher used car prices. However, asset quality has started to normalize. The net loss rate on the U.S. retail auto portfolio, which comprises a majority portion of the consolidated portfolio, increased to 0.82% in 3Q'13, from 0.49% in 3Q'12 and 0.57% in 2Q'13. 30-day delinquencies increased to 2.10% in 3Q'13, from 1.42% in 3Q'12, and 1.78% in 2Q'13. Fitch believes credit normalization reflects in part a continued mix shift as higher quality subvented loans are replaced with a more balanced mix of loans combined with a moderation in used car values and a continued gradual loosening in underwriting standards.
Fitch notes that these ratios are in line with management's expectations and compare favorably to pre-crisis levels. Also, the company has prudently added to its reserve for loan losses, with reserve coverage increasing to 1.26% in 3Q'13, from 1.17% in 3Q'12. Overall, Fitch expects Ally's asset performance to moderately weaken in 2014, driven by amortization of tightly underwritten loans from the 2009/2010 vintage, shift in asset mix to more used, non-prime and leasing, and normalization in used car values. Fitch expects the company to prudently add to its loan loss reserves with the change in asset mix.
At the end of 3Q'13, Ally had $6.9 billion of cash and highly liquid securities at the parent company, and an additional $9.5 billion in cash and highly liquid securities at Ally Bank. Absolute liquidity at the parent level is expected to decline in 4Q'13 as a result of the preferred share buyback from the UST ($5.9 billion) and the planned buyback of high cost legacy debt. However, Fitch notes that the use of liquidity has gradually declined as more business is shifted to Ally Bank and funded with deposits, and the unsecured debt maturity schedule at the parent has been normalized. Upcoming unsecured debt maturities measured $5.6 billion in 2014 and $5.1 billion in 2015, which are materially lower compared to prior maturities of $10.7 billion, $9.3 billion, and $11.6 billion in 2010, 2011, and 2012, respectively. Ally continues to maintain a minimum of 24 months liquidity coverage of outstanding unsecured debt maturities, which Fitch views positively.
Capital ratios have improved year-over-year despite absorbing sizeable ResCap, FHFA and FDIC settlement charges, primarily due to the gain on sale realized from the sale of international auto operations and core earnings from the auto lending segment. Ally's Basel 1 Tier 1 common ratio increased to 7.9% in 3Q'13, from 7.0% in 4Q'12. Pro forma for the sale of $1.3 billion in common equity in 4Q'13 and the sale of its remaining international operations (Brazil and China), Ally expects its Basel 1 Tier 1 common ratio to increase to 9.5%, which is relatively strong compared to the credit quality of Ally's core portfolio of auto loans and leases, which have a five-year historical loss rate of 1.5%.
RATING DRIVERS AND SENSITIVITIES
The UST's majority ownership of Ally constrains further positive rating momentum in Fitch's opinion, given the uncertainty this introduces regarding Ally's longer-term strategic direction and the potential for equity-friendly actions to be taken if an IPO or sale is not achieved in the near-term.
Positive rating momentum could be driven by a favorable resolution of the UST's remaining stake in Ally, combined with continued operating performance improvement, prudent loan growth portfolio in the face of increased competition, and sound asset quality, funding diversity, and capital and liquidity levels at both the parent company and operating company levels.
Conversely, Fitch could consider a negative action if earnings or credit quality were to materially weaken because of an adverse change in the asset mix or underwriting standards, liquidity levels materially decline relative to unsecured debt maturities, funding access is disrupted either through material deposit outflows or inability to access the capital markets for a prolonged period, or if external market factors limit the UST's ability to exit its investment or lead it to seek additional asset sales at Ally.
Fitch has taken the following rating actions:
Ally Financial Inc.
--Long-term IDR upgraded to 'BB' from 'BB-';
--Senior unsecured debt upgraded to 'BB' from 'BB-';
--Viability rating upgraded to 'bb' from 'bb-';
--Perpetual preferred securities, series A upgraded to 'B-' from 'CCC';
--Short-term IDR affirmed at 'B'
--Short-term debt affirmed at 'B';
--Support rating affirmed at '5';
--Support Floor affirmed at 'NF',
GMAC Capital Trust I
--Trust preferred securities, series 2 upgraded to 'B' from
The Rating Outlook for all ratings is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria'
--'Rating FI Subsidiaries and Holding Companies'
--'Finance and Leasing Companies Criteria'