DBRS, Inc. (DBRS Morningstar) commented that the ratings of Ally Financial Inc. (Ally or the Company) are unaffected by the Company's recent announcement of its intent to acquire CardWorks, Inc. (CardWorks), a privately held credit card company for the purchase price of $2.65 billion (51% cash, 49% stock).
The Board of Directors of both Ally and CardWorks have approved the transaction, which is expected to close in 3Q20, subject to customary regulatory approvals and closing conditions. Ally's Long-Term Issuer Rating and Long-Term Senior Debt ratings are BBB (low) with a Positive trend.
On February 18, 2020, Ally announced that it had reached an agreement to acquire Woodbury, New York-based CardWorks, a top 20 national credit card issuer that focuses on the non-prime customer credit space. Established in 1987, CardWorks issues its credit cards through Merrick Bank, a wholly-owned subsidiary, which will merge into Ally Bank. Additionally, CardWorks is a top 15 merchant acquirer in the United States, and maintains a very modest indirect recreational and marine consumer finance products business (15% of 2019 CardWorks' assets). At year-end 2019, CardWorks, had $4.7 billion in total assets supported by $2.9 billion of deposits.
DBRS Morningstar sees no impact to the ratings of Ally, as the transaction is modest in size and is expected to continue Ally's positive momentum over the medium-term. As of December 31, 2019, CardWorks' total assets reflected approximately just 2.6% of Ally's total assets. Positively, we see the acquisition as augmenting and further diversifying the Company's revenues, while broadening its menu of consumer product offerings, which should provide opportunities to deepen Ally's relationships with its deposit customer base. On a pro forma basis (as of 2019), Ally's total revenues would increase 17%, while core pretax income would increase by 18%. With the addition of CardWorks, Ally anticipates its profitability metrics to strengthen, including a 10 basis point increase in core ROA and a 100 to 150 basis points increase in core ROTCE in 2021 and 2022. As part of the transaction, Ally also anticipates $50 million in expense synergies, which DBRS Morningstar views as manageable. Moreover, we view the acquisition as potentially offering future revenue synergies, as well as enhancing deposit customer retention. The acquisition will also add significantly to Ally's customer base with the number of customers increasing by 33%, to over 11 million.
In our view, Ally's credit risk profile is only moderately impacted by the addition of a business that is primarily focused on non-prime consumers. However, CardWorks' well-established underwriting and servicing capabilities in this product are expected to continue as part of Ally. Indicative of the impact on asset quality, the Company anticipates that full year 2020 net charge-offs would increase from the low-to-mid 0.8%, to a range of 0.9% to 1.0%. The increase reflects the addition of CardWorks' somewhat riskier customer base, which has an average FICO score of 630, as compared to the average of 690 in Ally's retail auto business, as well as the traditional higher loss severities on credit card receivables, which do not benefit from a recovery on collateral such as an auto loan.
The Company expects balance sheet fundamentals to be modestly impacted by the acquisition. Ally expects its capital position to remain relatively stable, even when taking into consideration the acquisition and the Company's intention to execute up to $1.0 billion of its previously announced $1.25 billion share repurchase program. DBRS Morningstar notes that Ally anticipates maintaining a 9.0% common equity tier 1 capital ratio.
As with any acquisition, execution risks are present in this transaction. However, we view these risks as manageable given Ally's conservative management team, which has grown the Company post-Great Recession in a deliberate manner. Further, Don Berman, the Founder and CEO of CardWorks will join Ally's executive management team and the Company's Board of Directors, further mitigating potential risks in the integration of CardWorks into the Ally business. Nevertheless, DBRS Morningstar notes that any material miss-steps or losses generated from the integration of CardWorks would be viewed negatively for the ratings.
Notes:
All figures are in U.S. dollars unless otherwise noted.
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ALLY FINANCIAL INC. 
