NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed Ally Financial's (Ally) Long-Term Issuer Default Rating (IDR) at 'BB+', Viability Rating (VR) and 'bb+' and Short-Term IDR at 'B'. The Rating Outlook is Stable. A full list of ratings follows at the end of this release.
Today's rating actions have been taken as part of Fitch's periodic peer review of U.S. consumer lending-focused internet banks, which comprises four publicly rated firms.
KEY RATING DRIVERS
IDRs, VRs, AND SENIOR DEBT
The rating affirmations reflect Ally's established franchise and leading market position in the U.S. auto finance industry, predominantly high credit quality assets, diverse funding base, ample liquidity, adequate risk-adjusted capitalization and seasoned management team.
Primary rating constraints include weaker financial performance relative to more highly rated bank peers and credit performance uncertainty surrounding recent vintages that were originated outside of Ally's previous relationships with General Motors (GM) and Chrysler. Recent originations also reflect Ally's mix shift towards a higher proportion of non-prime loans and used car financing set against the backdrop of a more competitive underwriting environment. Additional rating constraints include Ally's concentrated and cyclical business model, higher reliance on wholesale funding sources relative to bank peers, and potential interest rate sensitivity of internet-sourced deposits.
The Stable Rating Outlook reflects Fitch's view that while a number of Ally's credit attributes are on an improving trend, the company faces counterbalancing headwinds in the near term, including navigating an increasingly competitive underwriting environment which is expected to lead to asset quality and residual value reversion. The recent introduction of capital returns to shareholders and product expansion into credit card and mortgage (expected launch in 4Q16) lending, albeit on a low risk basis, are not explicit rating constraints, but are other notable considerations in Fitch's analysis.
Profitability has continued to improve over the past couple of years supported by stable loan volumes, expanding margins due to sales of loans with lower risk adjusted margins, funding mix shifts and expense rationalization, partially offset by reserve building. Core net income increased to $516 million in the first half of 2016 (1H16), up from $485 million in the prior year period. Core return on average assets (ROA) nearly doubled from the prior year to 0.92% in 1H16, and core return on average tangible common equity (ROTCE) increased to 9.75% in 2015, up from 8.66% in 2014.
Fitch expects Ally's financial performance over the next 12 months to be supported by moderate loan growth, a further reduction in Ally's funding costs as more loans are funded through the bank, and continued operating expense rationalization. These positive contributors to earnings will be partially offset by higher loss provisions as a result of industry credit normalization and the mix shift within Ally's portfolio. Nonetheless, based on its first half performance Ally appears to be tracking below its financial targets for 2016, which included growing adjusted EPS by at least 15% over 2015 and producing core ROTCE of 10%+; however, its mid-40% efficiency ratio appears to be on target.
Consumer auto originations in 1H16 of $18.4 billion declined roughly 11% from the same period a year ago, driven primarily by declines in subvented lease and loan volume from GM, following GM electing last year to offer subvention loan and lease programs to dealers exclusively through General Motors Financial Company, Inc. While Ally has been successful in replacing this volume through other channels, given the dramatic shift in Ally's loan origination mix over a relatively short period of time, the underlying credit performance of the more recent vintages will be an important driver of Ally's ratings.
Credit performance continues to gradually normalize, although remains well below long-term historical averages. Ally's retail auto net charge-offs increased to 94bps in 2Q16, up 29bps from the year-ago period in part driven by the sale of super-prime loans, but remained below historical levels. Ally's retail auto 30+ day delinquencies increased to 2.60% of total loans, up 31bps from year-ago period. Reserve coverage remained strong at 1.4% of consumer auto loans and 1.5x net charge-offs at June 30, 2016. Fitch expects credit performance will continue to normalize, driven by a portfolio mix shift, loan seasoning, and a moderation in used car prices supporting recovery values.
In addition to internet-based deposits, Ally utilizes a diverse mix of other sources across various debt markets including unsecured debt, securitizations and bank loans. Fitch views this strategy positively as it reduces funding concentration risk and provides more 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.
At June 30, 2016, deposits represented 52% of Ally's total funding with secured debt accounting for 30% and unsecured debt accounting for 18% of total funding. Short-term wholesale funding, including $3.6 billion of unsecured demand notes, represented only 2.5% of Ally's total funding at June 30, 2016. Fitch views Ally's increased use of retail deposit funding positively given the lower cost and greater resiliency relative to wholesale funding during periods of market stress.
Ally maintains adequate liquidity with $17.6 billion of total consolidated liquidity at the end of the second quarter. This compared to unsecured debt maturities of $1.4 billion for the remainder of 2016 and $4.4 billion in 2017. At the parent company, Ally had $6.8 billion of total liquidity including $1.1 billion of committed unused capacity on its credit lines as of the same date.
Fitch views unused credit line capacity as an additional liquidity source, but potentially less reliable than cash or high-quality liquid assets, given that it generally requires eligible assets to collateralize incremental funding. Fitch believes the value of eligible assets could be reduced during a period of market stress, thereby affecting the company's liquidity position. However, Ally's loan portfolio is mostly unencumbered reflecting the company's high mix of deposit and unsecured funding.
Ally remains well capitalized, as reflected by Basel III Transitional Tier I capital and Tier I common ratios of 11.2% and 9.6%, respectively, as of June 30, 2016. The company estimates that the fully phased-in Basel III Tier I common ratio was 9.3% at June 30, 2016. Fitch views the company's capital position as adequate given the risk profile of its balance sheet.
On June 29, 2016, Ally received a non-objection on its capital plan from the Federal Reserve (Fed) as part of the Comprehensive Capital Analysis and Review (CCAR) process. This resulted in Ally initiating a quarterly cash dividend of $0.08 per share to common shareholders and authorizing a share repurchase program of up to $700 million of common stock over the four quarters ended June 30, 2017. Although this level of shareholder payout relative to net income is consistent with other large banks, Fitch expects this will slow the growth of Ally's regulatory capital ratios.
Ally's sensitivity to rising interest rates is relatively modest compared to the peer group and traditional banks. At June 30, 2016, assuming an immediate 100 bps increase in interest rates, Ally estimates that net interest income over the following 12-month period would decrease by approximately $18 million, or less than 1% of Ally's 2015 net finance revenue. In its analysis, the company assumes that 75% of any interest rate increase by the Fed would be passed onto depositors. However, the interest rate sensitivity of the online deposit channel remains untested during periods of steadily rising interest rates.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
Ally's subordinated debt rating is rated one notch below Ally's VR of 'bb+' in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profile. The subordinated note rating includes one notch for loss severity given the subordination of these securities in the capital structure, and zero notches for non-performance given contractual limitations on interest payment deferrals and no mandatory trigger events which could adversely impact performance.
The rating assigned to the trust preferred securities, series 2 issued out of GMAC Capital Trust I is 'b+', three notches below Ally's VR of 'bb+'. The rating reflects the subordination of the securities and Ally's option to defer coupon payments, and is in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profile.
SUPPORT RATING AND SUPPORT RATING FLOOR
Ally has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, Ally is not systemically important, and therefore the probability of sovereign support is unlikely. Ally's IDRs and VRs do not incorporate any support.
RATING SENSITIVITIES
VR, IDRs, AND SENIOR DEBT
Positive ratings momentum could potentially be driven by credit performance on newer loan vintages, particularly the 2015 vintage, that is consistent with Ally's historical experience, measured growth in the increasingly competitive auto lending environment, further improvements in profitability and operating fundamentals, and further diversification of its funding mix toward more stable retail deposits while operating with strong capital levels at both the parent and Ally Bank.
Ally's ability to retain online deposit customers in a cost-effective manner in a rising rate environment will also be a key consideration in evaluating the strength of its funding profile relative to traditional bank models.
A material decline in profitability and/or asset quality, reduced capital and liquidity levels, an inability to access the capital markets for funding on reasonable terms, and non-compliance with potential new and more onerous regulations are among the drivers that could generate negative rating momentum.
In particular, Fitch remains focused on the credit performance of Ally's consumer auto portfolio mix as it continues to shift towards other origination channels (e.g. used vehicles, nonprime originations, new dealer relationships) and away from GM lease subvention during a period when the competitive environment has intensified. Although Ally's exposure to residual value risk should decline further with the decline in subvented lease volume, to the extent that the higher risk profile of Ally's auto loan portfolio outpaces the reduction in residual value risk, Ally's ratings or Outlook could be pressured.
Similarly, Ally's rollout of new product initiatives, while viewed as a having the potential to provide revenue diversification longer-term, also creates other risks including execution risks, increased reliance on third-party execution and reputational risk that could result in ratings and Outlook pressure.
SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
The subordinated debt ratings are directly linked to Ally's VR and would move in tandem with any changes in the VR.
The preferred stock ratings are directly linked to Ally's VR and would move in tandem with any changes in Ally's credit profile.
SUPPORT RATING AND SUPPORT RATING FLOOR
Since Ally's Support and Support Rating Floors are '5' and 'NF', respectively, there is limited likelihood that these ratings will change over the foreseeable future.
Fitch has affirmed the following ratings:
Ally Financial Inc.
--Long-Term IDR at 'BB+';
--Senior unsecured debt at 'BB+';
--Viability Rating at 'bb+';
--Subordinated debt at 'BB';
--Short-Term IDR at 'B';
--Short-term debt at 'B';
--Support Rating at '5';
--Support Floor at 'NF'.
GMAC Capital Trust I
--Trust preferred securities, series 2 at 'B+'.
GMAC International Finance B.V.
--Long-Term IDR at 'BB+';
--Short-Term IDR at 'B';
--Short-term debt at 'B';
The Rating Outlook is Stable.
Additional information is available on www.fitchratings.com.
Applicable Criteria
Global Bank Rating Criteria (pub. 15 Jul 2016)
https://www.fitchratings.com/site/re/884135
Global Non-Bank Financial Institutions Rating Criteria (pub. 15 Jul 2016)
https://www.fitchratings.com/site/re/884128
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https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012310
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