Q3 2024 Summary
Updated Jan 7, 2025, 8:01 PM UTC- Ally Financial is confident in achieving mid-teens return on capital over time, based on three key factors: normalization of credit losses, expansion of net interest margin (NIM) to around 4%, and disciplined management of expenses and capital. CEO Michael Rhodes affirms that there is a clear path to reach these targets.
- Underwriting changes made in 2023 are showing positive results, with the 2023 loan vintages outperforming the 2022 vintages in terms of credit performance. Early data indicates that the 2024 vintages are outperforming 2023, supporting expectations for improved credit and lower losses over time.
- The company expects net interest margin (NIM) to expand to 4% in the medium term, driven by factors such as portfolio rollover into higher-yielding assets, asset mix shift towards retail auto and corporate finance loans, and favorable deposit pricing approaching a 70% beta in a lower rate environment. Despite near-term pressures, management reiterates that fundamentally nothing has changed in their medium-term outlook.
- Capital headwinds expected due to upcoming accounting changes and regulatory requirements, including the final phase-in of CECL accounting and potential changes in accounting for EV lease tax credits, each potentially reducing CET1 capital ratio by approximately 20 basis points.
- Uncertainty in achieving long-term financial targets, with the CEO acknowledging that prior expectations might have been optimistic and being less prescriptive about the timing of achieving mid-teens return on capital due to uncertainties in credit normalization and interest rate movements.
- Increasing competitive pressures as competitors reenter the market, which may impact Ally's originated yields and risk-adjusted returns, particularly in prime and super prime segments.
-
Credit Losses Outlook
Q: How will retail auto credit losses trend, and when will they normalize?
A: Management expects retail auto credit losses to normalize over time but acknowledges that the timing is uncertain due to elevated delinquencies and macroeconomic volatility. They have revised the full-year loss rate guidance to 2.25% to 2.30% due to seasonality and impacts from recent storms. The 2023 vintages are showing better performance than 2022, and early indications for 2024 are even better, reflecting underwriting curtailments. However, elevated loss content in the 2022 vintage and sensitivity to the macro environment may prolong the road to normalization. -
Net Interest Margin (NIM) Outlook
Q: When will NIM inflect, and what is the outlook for reaching 4%?
A: Management reaffirms their medium-term goal of achieving a 4% NIM, driven by factors like asset mix shifts and deposit pricing strategies. Near-term pressures from lower rates and competition may delay inflection, depending on factors like the pace of rate cuts and deposit betas. While avoiding quarterly guidance, they remain confident in reaching the 4% NIM over time. -
Confidence in Long-Term Targets
Q: Are long-term targets, like mid-teens return on capital, still achievable?
A: Management believes that mid-teens return on capital is attainable, contingent upon three factors: credit normalization, NIM expansion to around 4%, and effective expense and capital management. They acknowledge challenges but see a clear path to achieving these goals, emphasizing confidence in their underwriting and asset strategies. -
Capital Levels and Basel III Impact
Q: What is the target for CET1 capital ratio amid upcoming headwinds?
A: The CET1 ratio stands at 9.8%, but management anticipates headwinds of approximately 20 basis points from CECL phase-in and potential accounting changes related to EV lease tax credits. They are preparing for Basel III's inclusion of AOCI in CET1 and feel confident in managing capital organically to meet future requirements. -
EV Lease Accounting Changes
Q: How will accounting changes for EV leases impact NIM and earnings?
A: Management is considering switching from the "flow-through" to the "deferral" accounting method for EV lease tax credits. This change would shift income recognition from the tax line to the NIM line, potentially adding about 6 basis points to NIM in Q3. While this affects the presentation, it doesn't materially change overall earnings or their confidence in achieving the 4% NIM target. -
Competitive Environment
Q: How does increased competition affect originated yields and returns?
A: While some competitors are re-entering the market, particularly in prime segments, management believes they'll maintain strong relationships with dealers due to their consistency through cycles. Although originated yields may come down as rates decrease, they are confident in the risk-adjusted margins and the quality of the business being booked. -
Dealer Relationships and Curtailments
Q: Will underwriting curtailments affect dealer relationships and volumes?
A: Management asserts that dealer relationships remain strong, facilitated by their consistent presence in the market and broad range of services. The impact of curtailments is modest from the dealer's perspective due to high application volumes, allowing selective underwriting without significantly affecting dealer partnerships or loan volumes. -
Early-Stage Delinquencies
Q: What are the trends in early-stage delinquencies?
A: Early-stage delinquencies have remained reasonably stable through September and early October, providing some confidence in future credit performance. Management continues to monitor these trends closely as part of their overall credit outlook.