Fitch Affirms Ally Financial's IDR at 'BB '; Outlook Stable
Ally's rating review was conducted as part of Fitch's periodic peer review of U.S. consumer finance companies. For a summary of the outcomes and drivers of this peer review please see the release entitled 'Fitch Affirms Five U.S. Consumer Finance Companies Following Peer Review' dated April 8, 2015.
KEY RATING DRIVERS - IDRs, Senior Unsecured Debt, Short-term Debt, Subordinated Debt, Preferred Shares, Support Rating, Support Rating Floor and Viability Rating
The rating affirmations and Stable Outlook reflect Ally's strong franchise, leading market position in the U.S. auto finance industry, high credit quality assets, diverse funding base, ample liquidity, adequate risk-adjusted capitalization and seasoned management team.
Rating constraints include Ally's concentrated and cyclical business model, reliance on wholesale funding sources, potential increased price sensitivity of internet deposits, lackluster financial performance relative to peers and stated targets, execution risk associated with growing non-GM/Chrysler originations and expanding into new products, and continued elevated regulatory, legislative and litigation risk.
Profitability has continued to improve, albeit off of a modest base, supported by strong growth in auto originations, expanding margins due to liability management efforts and expense rationalization. Net income increased to \$1.15 billion in 2014, up from \$361 million in the prior year period. Return on average assets (ROA) increased to 0.8% in 2014, up 60 basis points (bps) from the year-ago period. Core return on average tangible common equity (ROTCE) increased to 7.9% in 2014, up from 3.1% in 2013.
Fitch expects operating performance to continue to improve in 2015, supported in part by economic growth, further improvement in the U.S. labor market, stable albeit normalizing credit performance and incremental margin expansion. Furthermore, Fitch expects Ally's management team to remain focused on expense rationalization and liability management to enhance operating efficiency and financial returns. Ally expects to generate a core ROTCE between 9% and 11% in 2015, in line with the company's long-term financial target of earning a double-digit core ROTCE.
Consumer auto originations remain strong, reflecting in part Ally's expanded presence in the used vehicle and nonprime auto finance market. Non-GM/Chrysler auto originations increased to \$8.3 billion in 2014, up 45% from the prior year period. Used vehicle originations increased to \$11.7 billion in 2014, up 18% from the prior year period. Over the near term, Fitch expects growth in these channels to be at least partly offset by declining subvented volume from General Motors Company (GM, rated 'BB+', Positive Outlook) and Fiat Chrysler Automobiles N.V. (Chrysler, rated 'BB-', Stable Outlook).
Ally recently disclosed that in Jan 2015, GM informed its dealers that it would provide lease subvention programs for Buick, GMC, and Cadillac products exclusively through its wholly-owned subsidiary, General Motors Financial Company, Inc. (GMF, 'BB+', Positive Outlook). In February 2015, GM informed Ally that it would also provide lease subvention programs for Chevrolet exclusively through GMF. Ally's total originations during 2014 of \$41 billion included \$9.3 billion of GM lease originations and \$4 billion of GM subvented loan originations. Buick, GMC, Cadillac, and Chevrolet leases combined accounted for roughly 23% of Ally's total originations during 2014.
Despite the loss of GM subvented lease volume, Ally is still targeting origination volume in the high \$30 billion range in 2015. Fitch believes the target is potentially achievable given Ally's market position and the growing U.S. auto finance market, but reaching it will pose challenges and may lead to growth in potentially higher risk areas in an effort to meet shareholder expectations.
Credit performance continues to gradually normalize. Fitch estimates that retail auto net charge-offs increased to 89bps in 2014, up 16bps from the year-ago period, but remained well below historical levels. Retail auto 30+ day delinquencies increased to 2.73% of total loans, up 38bps from year-ago period. Reserve coverage remained strong at 177% of total nonperforming assets and 1.4x net charge-offs at Dec. 31, 2014. 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.
In addition to internet-based deposits, Ally utilizes a diverse mix of other sources 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.
At Dec. 31, 2014, Fitch estimates deposits represented 44% of Ally's total funding with secured debt accounting for 36% and unsecured accounting for 20% of total funding. Short-term wholesale funding, including \$3.3 billion of unsecured demand notes, represented only 5% of Ally's total funding at Dec. 31, 2014.
Ally maintains adequate liquidity with \$16.6 billion of total consolidated liquidity at year-end 2014. This compares to unsecured debt maturities of \$4.9 billion over the next 12 months. At the parent company, Ally had \$8.8 billion of total liquidity including \$3.4 billion of committed unused capacity on its credit lines as of the same date. 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 affecting the company's liquidity position.
That said, Ally's loan portfolio is mostly unencumbered reflecting the company's high mix of deposit and unsecured funding. Additionally, on March 10, 2015, Ally announced that it had upsized, renewed, and extended its credit facilities at both the parent company and Ally Bank. Combined these facilities provide \$12.5 billion in total funding with \$8 billion available to the parent company and \$4.5 billion available to Ally Bank. Both facilities are secured and mature in March 2017. Furthermore, Ally expects to be compliant with the modified liquidity coverage ratio (LCR) requirement beginning Jan. 1, 2016, subject to the transition period.
Ally remains well capitalized, as reflected by Basel I Tier I capital and Tier I common ratios of 12.5% and 9.6%, respectively, as of Dec. 31, 2014. The company estimates that the fully phased-in Basel III Tier I common ratio was 9.7% at Dec. 31, 2014. Fitch views the company's capital position as adequate given the risk profile of its balance sheet.
On March 11, 2015, Ally announced that is received a non-objection on its capital plan from the Federal Reserve. Ally's capital plan includes the redemption of \$1.3 billion of its preferred securities, series G outstanding in April 2015, among other actions. Ally provided a redemption notice for these securities with a redemption date of April 10, 2015. In connection with the transaction, Ally expects to incur a \$1.2 billion charge to common capital in the second quarter of 2015. Pro forma for this transaction, Fitch estimates Ally's Tier I common ratio was 8.7% at Dec. 31, 2014.
The Support Ratings (SRs) of '5' reflect Fitch's view that external support cannot be relied upon. The Support Rating Floors (SRFs) of 'No Floor' reflect Fitch's view that there is no reasonable assumption that sovereign support will be forthcoming to Ally.
Ally's perpetual preferred securities, series A rating is four notches below the Ally's VR of 'bb+' in accordance with Fitch's assessment of each instruments respective non-performance and relative loss severity risk profile. The securities are non-cumulative, are nonredeemable prior to May 15, 2016, and pay a fixed rate of 8.5% per annum. Beginning on May 15, 2016, dividends will accrue at a LIBOR-based floating rate.
The rating assigned to the trust preferred securities, series 2 issued out of GMAC Capital Trust I is one notch higher than the perpetual preferred securities, series A reflecting the subordination of the series A securities, as they rank junior to the trust preferred securities.
RATING SENSITIVITIES - IDRs, Senior Unsecured Debt, Short-term Debt, Subordinated Debt, Preferred Shares, Support Rating, Support Rating Floor and VR
Positive ratings momentum could potentially be driven by further improvements in profitability and operating fundamentals, successful execution against strategic plans including growth in non-GM/Chrysler channels and new products, measured growth in the currently competitive lending environment without material deterioration in asset quality, and additional actions to further enhance funding and liquidity sources while maintaining strong capital levels at both the parent and Ally Bank. In particular, 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 non-compliance with potential new and more onerous rules and regulations are among the drivers that could generate negative rating momentum.
In particular, Fitch remains focused on Ally's aspirations for 2015 portfolio originations in the high \$30 billion range, while moving the portfolio mix more towards other origination channels (e.g. used vehicles, nonprime originations) and away from GM lease subvention in the face of what is an increasingly competitive environment. To the extent that the risk profile of Ally's portfolio outpaces reduced residual value risk (via GM lease subvention declines), Ally's ratings or Outlook could be pressured.
Fitch has affirmed the following ratings:
Ally Financial Inc.
--Long-term IDR at 'BB+';
--Senior unsecured debt at 'BB+';
--Viability rating at 'bb+';
--Perpetual preferred securities, series A at 'B';
--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';
--Senior unsecured debt at 'BB+'.
The Rating Outlook is Stable.
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