Q3 2024 Summary
Published Feb 18, 2025, 5:24 PM UTC- Anticipated Margin Expansion to 4%: Despite near-term pressures, Ally Financial expects net interest margin (NIM) to expand to 4% over the medium term, driven by factors such as the rollover of the portfolio, continued expansion in portfolio yield, and favorable deposit pricing dynamics. This outlook remains unchanged, indicating confidence in achieving improved profitability.
- Improved Credit Performance in Recent Vintages: The 2023 and 2024 loan vintages are outperforming the 2022 vintage, reflecting the positive impact of underwriting changes made over time. Early-stage delinquencies have been reasonably stable, and the company is confident that these trends will lead to a reduction in net charge-offs over the medium term.
- Commitment to Mid-Teens Return on Capital: Ally Financial's CEO, Michael Rhodes, reaffirmed the company's goal of achieving a mid-teens return on capital over time. This target is based on three factors: expected normalization of credit losses, expansion of margins to around 4%, and disciplined management of expenses and capital. The leadership expresses confidence in this path, emphasizing ongoing efforts in credit management and cost control.
- Elevated delinquencies are persisting, and management acknowledges uncertainty in the timing of credit loss normalization, indicating a longer road to achieve normalized net charge-off levels.
- Net interest margin expansion may be delayed due to near-term pressures from rate movements and deposit competition, with management refraining from providing specific timing for improvement, highlighting uncertainty in achieving margin targets.
- Capital levels may face headwinds from upcoming accounting changes, including the final phase-in of CECL and potential changes in accounting treatment for EV lease tax credits, which could negatively impact the CET1 ratio.
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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.