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 full list of ratings is detailed at the end of this release.
KEY RATING DRIVERS
The rating upgrades reflect increased clarity around Ally's ownership structure given Ally's recent announcement that it has launched an initial public offering those shares of its common stock held by the U.S. Treasury (the Treasury). The upgrades also incorporate Ally's improved performance under the Federal Reserve's most recent DFAST stress test as compared to last year.
The Stable Outlook reflects Fitch's view that while Ally has addressed a number of structural and organizational challenges facing the company over the last several years, it still remains exposed to potential challenges in its operating environment. For example, addressing the ResCap litigation and the U.S. government's large ownership position while meaningfully increasing the amount of deposit funding are all key milestones that have supported upward rating momentum, but normalizing asset quality performance, below-average profitability, and deposit sensitivity in a rising rate environment all limit the likelihood of additional upward rating momentum over the Outlook horizon.
Profitability has gradually improved over the last several years, supported by strong loan and lease originations and expanding margins. However, results remain lackluster and below industry peers. Fitch expects operating performance to continue to improve in 2014, supported in part by economic growth, further improvement in the U.S. labor market, stable credit performance and incremental margin expansion. Furthermore, Fitch expects Ally's management team to remain focused on reducing non-interest expenses as the company rationalizes its cost structure to reflect its new strategic focus as a domestic auto lender, after the sale of its international auto lending operations to General Motors Financial Company in 2013.
Retail auto net charge-offs increased to 80 basis points (bps) in 2013, up 4bps year over year, but remained well below historical levels. Fitch expects credit performance will continue to normalize, driven primarily by a portfolio mix shift and loan seasoning although the credit environment is expected to remain fairly benign over the near term.
Ally's deposit platform, Ally Bank, is a key strategic asset which has enabled the company to lower its cost of funds and more effectively compete in the market. That said, Fitch expects Ally to continue to utilize a diverse mix of funding sources while maintaining its investor relationships across various debt markets (e.g. unsecured debt markets, securitizations, bank loans). Fitch views this strategy positively as it reduces concentration risk and provides more funding flexibility in the event that wholesale funding sources (securitization and public debt markets) dry up or become cost prohibitive, or if the online deposit platform experiences material outflows in a rising interest rate environment.
Ally maintains adequate liquidity with $19.2 billion of total consolidated liquidity at year-end 2013. This compares to unsecured debt maturities of $10.7 billion over the next two years. At the parent company, Ally had $13.3 billion of total liquidity including $6.5 billion of committed unused capacity on its credit lines, which compares to estimated unsecured debt maturities of $10.1 billion over the next two years. Fitch views unused credit line capacity as potentially less reliable than cash or high-quality liquid assets, given that it generally requires eligible assets to collateralize incremental funding. Fitch believes the amount of eligible assets could be reduced during a period of market stress, thereby impacting the company's liquidity position.
Fitch believes Ally's current liquidity position is adequate and, when combined with future asset paydowns, provides sufficient sources to fund new loan originations and meet its debt obligations at least through 2015. That said, Fitch would view an improvement in core holding company liquidity (cash and high-quality liquid assets) relative to holding company debt positively.
Ally remains well capitalized, as reflected by Basel I Tier I capital and Tier I common ratios of 11.8% and 8.8%, respectively, as of Dec. 31, 2013. The company estimates that the impact of enhanced Basel III capital requirements on its Tier 1 common ratio would be between 20bps and 40bps. Fitch views the company's capital position as adequate given the risk profile of its balance sheet.
RATING SENSITIVITIES
Fitch's Stable Outlook reflects the view that positive rating momentum is limited over the next 12-24 months. Longer term, however, positive ratings momentum could potentially be driven by further improvements in profitability and operating fundamentals, measured growth in the currently competitive lending environment and additional actions to further enhance funding and liquidity sources while maintaining strong capital levels at both the parent and operating company levels. In particular, the durability of the internet-based deposit platform in a rising rate environment will be a key determinant in evaluating the strength of Ally's funding profile.
A material decline in profitability or asset quality, reduced capital and liquidity levels, an inability to access the capital markets for funding on reasonable terms, and potential new and more onerous rules and regulations are among the drivers that could generate negative rating momentum.
The rating actions are as follows:
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 'B-';
--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 'B'.
The Rating Outlook is Stable.
Additional information is available on www.fitchratings.com
Applicable Criteria and Related Research:
Global Financial Institutions Rating Criteria (January 2014)
Finance and Leasing Companies Criteria (December 2012)
U.S. Bank HoldCos & OpCos: Evolving Risk Profiles (March 2014)
FinCo Deposit Sensitivity to Rising Rates (January 2014)
Nonbank Financial Institution Interest Rate Sensitivity (January 2014)
3Q13 U.S. Bank Capital Ratios (December 2013)
2014 Outlook: U.S. Finance and Leasing Companies (November 2013)
Fitch Fundamentals Index - U.S. (October 2013)
U.S. Auto Asset Quality Review: 2Q13 (August 2013)
Applicable Criteria and Related Research:
U.S. Auto Asset Quality Review: 2Q13
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715698
Fitch Fundamentals Index - U.S.; Index Trend Analysis 3Q13
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=718948
2014 Outlook: U.S. Finance and Leasing Companies (Strong Fundamentals, But Sector Headwinds Persist)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722839
3Q13 U.S. Bank Capital Ratios
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726621
Nonbank Financial Institution Interest Rate Sensitivity
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723766
FinCo Deposit Sensitivity to Rising Rates
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726196
U.S. Bank HoldCos & OpCos: Evolving Risk Profiles
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=742096
Finance and Leasing Companies Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696720
Global Financial Institutions Rating Criteria
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=825791
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