ALLY FINANCIAL INC.
At the same time, Morningstar DBRS confirmed the credit ratings of Ally's banking subsidiary,
KEY CREDIT RATING CONSIDERATIONS
The Company's credit ratings reflect its top-tier auto financing and digital banking franchises, its moderately sized insurance and consumer businesses, and growing middle market lending business. Ally's franchise has significant scale, including a 22,000 active auto dealer network located across the country. Earnings remain resilient but were down in 2023 year-on-year (YoY) reflecting lower net financing revenue, normalizing credit costs, as well as several one-time items, including a
The Stable trend reflects our view that the Company's credit fundamentals will remain within our expectations notwithstanding an operating environment punctuated by higher interest rates for longer and normalizing credit costs.
CREDIT RATING DRIVERS
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 credit ratings. Conversely, an outsized increase in credit losses, or an increase in risk appetite would result in a downgrade of the credit ratings. Additionally, a sustained deterioration in profitability metrics, or a material contraction in capital metrics would also result in a credit ratings downgrade.
CREDIT RATING RATIONALE
Franchise Combined
Ally maintains top-tier positions in auto financing and digital banking. The Company sources its applications through a large national dealer network. Ally's more moderately sized, but strategic insurance business, offers its auto finance customers complementary insurance products. The Company maintains modestly sized but evolving consumer lending businesses including
Earnings Combined
Ally's earnings generation has been pressured due to the higher interest rate environment, which given the Company's liability sensitive balance sheet, has led to net interest margin (NIM) compression. Indeed, the Company's NIM was 3.32% in 2023, a 53 basis point narrowing year-on-year (YoY). As a result, net financing revenue was lower despite average earning assets increasing YoY primarily driven by higher levels of retail auto and dealer floorplan loans, spurred by solid pent-up consumer demand and higher inventory levels at the dealers. Meanwhile, noninterest expense was elevated in 2023, reflecting the aforementioned one-time charges as well as an increase in insurance losses due to the inflationary impact on parts as well as an increase in weather related charges and loss adjustment expenses. Lastly, credit costs were materially up from the prior year, driven by normalizing credit performance. Overall, Ally reported net income of
Risk Profile Combined
The Company maintains a sound risk profile as Ally's credit metrics continue to normalize from the unsustainable low levels observed post pandemic. However, recent performance has been impacted by deterioration in its 2H22 retail auto origination vintage and Ally anticipates prime loss development from this vintage in 1H24. Positively, underwriting changes made over time as well as the recent significant levels of super-prime originations should benefit future credit performance. Overall, Ally anticipates its 2024 retail auto loss rate to be modestly higher than the 1.77% reflected in 2023. In 4Q23, retail auto NCOs totaled 2.21% and 1.77% for full-year 2023 (0.97% in 2022). Retail auto losses were at the low end of the Company's guidance. On a consolidated basis, net charge-offs (NCOs) were a manageable 1.77% in 4Q23 and in-line with the Company's guidance, while NCOs for full-year 2023 totaled 1.36%, as compared to 0.74% in 2022. Reserve levels remain acceptable with coverage totaling 2.57% of loans and leases, on a consolidated basis, slightly down from 2.72% for
Funding and Liquidity Combined
Ally's funding profile is dominated by deposits which totaled
Capitalization Combined
Capitalization is acceptable, given Ally's sound risk profile and resilient earnings. Ally's CET1 ratio totaled 9.4% at
Further details on the Scorecard Indicators and
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030/morningstar-dbrs-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings. (
Notes:
All figures are in
The principal methodology is the Global Methodology for Rating Banks and Banking Organizations: https://dbrs.morningstar.com/research/415978/global-methodology-for-rating-banks-and-banking-organisations (
The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.
The primary sources of information used for this credit rating include Morningstar, Inc. and company documents, Morningstar DBRS considers the information available to it for the purposes of providing this credit rating was of satisfactory quality.
The credit rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the credit rating process for this credit rating action.
Morningstar DBRS did have access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.
This is a solicited credit rating.
The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are under regular surveillance.
For more information on this credit or on this industry, visit dbrs.morningstar.com.
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