Aug 2 – Standard & Poor’s Ratings Services today said its ratings on Ally
Financial Inc. (Ally, formerly GMAC; B+/Positive/C) are not affected by the
consolidated company’s second-quarter (ended June 30) results, which were
consistent with our expectations. The company’s reported net loss of $898
million, compared to net income of $113 million in second-quarter 2011, included
the effect of charges of $1.2 billion associated with the bankruptcy filing of
Ally’s subsidiary Residential Capital, LLC (ResCap) in May 2012. In connection
with the bankruptcy filing, ResCap is now deconsolidated from Ally’s financial
statements.
Ally’s core pretax income (as defined by Ally, and excluding items related to
ResCap) was $533 million, compared to $576 million in second-quarter 2011.
Ally’s core North American automotive finance business unit made a strong, in
our view, $631 million contribution to the current quarter’s pretax income, up
$72 million (13%) from the unit’s performance year-on-year. On a sequential
quarter basis, the unit’s contribution increased by $189 million or 43%. Other
factors contributing to the year-on-year change in pretax income included
lower overall revenue (in part attributable to certain elevated gains achieved
in second-quarter 2011), offsetting current-quarter improvements in loan loss
provisions and expenses.
In our view, the performance of Ally’s core business was solid, with U.S.
consumer originations up by $1 billion to $10.5 billion. Second-quarter
originations reflected a modest incremental gain in diversity, with
originations other than GM or Chrysler standard and subvented financings up by
about 15%, increasing from 48% to just over 50% of U.S. consumer originations.
The company also achieved some growth in GM and Chrysler originations, despite
year-on-year declines in Ally’s GM and Chrysler penetration. Ally has also
recorded ongoing asset quality improvements from the last year, with net
charge-offs decreasing to 0.29% from 0.45% of ending loan balance, entailing a
30% absolute reduction in net charge-offs, against a loan balance up 10%
year-on-year.
Ally successfully accessed diverse funding sources in the second quarter,
securing $10 billion in new financing, with ample liquidity to support
repayment of temporary liquidity guarantee program maturities in the second
half of 2012. Ally’s funding profile also benefited from continuing growth in
retail deposits at Ally Bank, with retail deposit balance up 13% in the past
year to $48 billion, and with the number of retail accounts up 27% in the same
period. Improved funding cost contributed to Ally’s net interest margin, which
at 2.2% has strengthened over the past two quarters, although it remains below
its level at second-quarter 2011 (2.5%).
There appears to be ongoing progress toward the ultimate resolution of the
ResCap bankruptcy process. The bankruptcy court has appointed an independent
examiner to look at arrangements between Ally and ResCap before and after the
bankruptcy filing. A key issue for Ally, in our view, is whether the ResCap
bankruptcy process results in a release for Ally relating to legal claims
related to ResCap mortgage securitization transactions sold in the 2004 to
2008 period. Future changes to the ratings will depend on the outcome of the
ResCap bankruptcy process, along with Ally’s activities relating to the sale
of its international business units, the potential repayment of capital
contributed by the U.S. Treasury, and the capitalization and position of its
core U.S. automotive financing business upon completion of the current
transitional period.
