Ally: Strong 3Q Auto Performance Not Enough to Reverse Mortgage Struggles
NEW YORK — Ally Financial's strengthening third-quarter auto originations weren't enough to overcome softening within the company's mortgage division, resulting in a net loss.
Ally said earlier this week that it sustained a third-quarter net loss of $210 million, compared to net income of $113 million in the prior quarter and net income of $269 million for the third quarter of last year.
Officials determined their core pre-tax income — which reflects income from continuing operations before taxes and original issue discount (OID) amortization expense primarily from bond exchanges — totaled $102 million in the third quarter, compared to $466 million in the prior quarter and $635 million in the comparable prior-year period.
The company indicated the third-quarter income decline was largely driven by a $471 million pre-tax loss related to the negative impact of the mortgage servicing rights (MSR) valuation, net of hedge, resulting from a decline in interest rates and market volatility.
Excluding the impact of the MSR valuation, net of hedge, Ally noted core pre-tax income was $573 million during the quarter.
Additionally, Ally had lower lease gains as lease termination levels declined in line with the company's expectations.
In order to proactively address the changes in the mortgage industry as a whole, the company plans to take immediate action to reduce its focus on the correspondent mortgage channel.
Ally intends to maintain correspondent relationships with its key customers and continue to participate in the consumer and broker lending channels, which are higher margin businesses. The correspondent channel represents approximately 84 percent of the company's mortgage originations year-to-date.
As a result, Ally expects its exposure to MSR asset volatility to decrease over time, and the company should be better positioned to comply with Basel III requirements.
"Ally's leading global auto finance and Ally Bank franchises performed well in the third quarter with strong growth and solid profitability," stated Ally chief executive officer Michael Carpenter.
"Unfortunately, this was offset by the valuation of the MSR asset during a period of extraordinary market turmoil," Carpenter continued.
"The combination of MSR volatility in the quarter reduced margins due to regulatory costs and the impending impact of Basel III has caused us to begin significantly scaling back originations in the mortgage correspondent segment," he went on to say.
"As the mortgage industry changes, the model for mortgage businesses will also change, and we believe a fee-based structure would enable less risk and a greater ability to serve customers," Carpenter added.
Auto Originations and Penetration
Turning to Ally's automotive side, the company reported its total consumer financing originations from continuing operations during the third quarter totaled $13.7 billion, compared to $11.4 billion in the prior-year period.
Ally said third-quarter consumer auto originations were comprised of $9.5 billion of new-retail originations, $2.5 billion of used originations and $1.8 billion of new leases. During the third quarter of last year, consumer auto originations included $9.0 billion of new originations, $1.3 billion of used originations and $1.1 billion of new leases.
Executives pointed out growth in consumer financing originations was driven by strong growth in used and leasing volume in the U.S., which grew 94 percent and 74 percent, respectively, compared to the corresponding period last year.
Additionally, the company noted it continues to generate strong new volume from a diversified mix of manufacturers with diversified retail originations increasing 101 percent in the U.S., compared to the third quarter of last year.
Ally revealed North American consumer financing originations in the third quarter were $11.1 billion, which included $10.0 billion in the U.S. In the third quarter of last year, consumer financing originations in North America were $9.4 billion, which included approximately $8.3 billion in the U.S.
The company mentioned third-quarter international consumer originations from continuing operations, which include a non-consolidated joint venture in China, were $2.6 billion, compared to $2.0 billion in the year-ago quarter. Ally said originations were up in all five of the company's key markets overseas.
Ally calculated that its average U.S. wholesale penetration for General Motors dealer stock was 75 percent in the third quarter, compared to 79 percent in the prior quarter and 83 percent in the third quarter of last year. U.S. consumer penetration for GM was 32 percent during the third quarter, compared to 36 percent in the prior quarter and 34 percent in the third quarter of 2010.
Ally also tabulated that its average U.S. wholesale penetration for Chrysler dealer stock was 66 percent in the third quarter, compared to 68 percent in the second quarter of 2011 and 71 percent in the corresponding period last year. Ally's U.S. consumer penetration for Chrysler during the third quarter was 35 percent, compared to 30 percent in the prior quarter and 49 percent in the third quarter a year ago.
Update on Global Automotive Services
Executives reiterated their Global Automotive Services is comprised of Ally's auto-centric businesses: North American Automotive Finance and International Automotive Finance and Insurance.
Global Automotive Services reported third quarter pre-tax income from continuing operations of $747 million, compared to $739 million in the comparable prior-year period.
North American Automotive Finance, which includes results for the U.S. and Canada, generated pre-tax income from continuing operations of $551 million in the third quarter, which was flat compared to the corresponding prior-year time frame.
The company explained results in the quarter were driven by higher retail earning asset levels and lower loan loss provisions as the overall credit quality of the portfolio has improved. This gain was offset by a decline in lease revenue compared to the comparable prior-year period.
International Automotive Finance posted pre-tax income from continuing operations of $82 million in the third quarter, compared to $74 million in the same period last year.
Executives pointed out results improved primarily due to lower operating expenses driven by lower legal and tax costs, the wind-down of operations in certain countries and a continued focus on cost reduction.
Additionally, they said last year's third quarter benefited from favorable mark-to-market adjustments on derivatives. The company's international auto finance footprint currently consists of 15 countries, including the company's five core international markets: Germany, U.K., Brazil, Mexico and its joint venture in China.
Insurance, which focuses on dealer-centric products such as extended service contracts and dealer inventory insurance, made pre-tax income from continuing operations of $114 million in the third quarter, which was flat compared to the third quarter of last year.
In this division, officials said results were driven by improved underwriting income, as non-weather related losses and operating expenses were lower than the comparable prior year period. They added this improvement was offset by lower income due to the sale of the company's International Insurance Services (IIS), which was completed in the fourth quarter of last year, as well as lower investment gains.
Liquidity and Capital Status
As an entire company, Ally indicated its consolidated cash and cash equivalents were $16.4 billion as of Sept. 30, compared to $14.9 billion on June 30. Officials broke down this total to include the consolidated cash and cash equivalents balance of $623 million at Residential Capital (ResCap), $4.5 billion at Ally Bank and $1.2 billion at the insurance businesses.
"The growth in cash and cash equivalents was primarily the result of the sale of investment securities during the third quarter," official explained.
Ally determined its total equity at Sept. 30 was $19.7 billion, compared to $20.4 billion at the prior quarter's end.
"The decrease in total equity was due to dividend payments on preferred stock, a decline in other comprehensive income and the net loss reported during the quarter," officials acknowledged.
The company's preliminary third quarter Tier 1 capital ratio was 14.3 percent, compared to 14.6 percent in the prior quarter. Ally said the decline is primarily due to the quarterly net loss and a decline in other comprehensive income, slightly offset by lower risk-weighted assets.
Ally continued to utilize a diversified funding strategy across markets and asset classes as it completed new funding transactions totaling $12.4 billion during the third quarter. This plan included $5.4 billion raised in the U.S. public and private securitization markets, as well as the establishment of $5.5 billion of new revolving bank credit capacity globally.
3Q Deposit Totals
Ally highlighted that it continued to grow deposits during the quarter through its subsidiaries, Ally Bank and ResMor Trust.
Total deposits increased in the third quarter to $44.3 billion from $42.3 billion as of June 30.
Retail deposits at Ally Bank were $26.3 billion on Sept. 30, compared to $24.6 billion at the end of the prior quarter. Retail deposits comprised approximately 82 percent of the quarterly increase in total deposits.
Brokered deposits at Ally Bank totaled approximately $9.9 billion at quarter end, which is unchanged from June 30.
Executives mentioned deposit growth during the quarter was primarily driven by growth in CD balances, which was supported by strong CD balance retention rates of 91 percent.
Ally Bank Performance
For purposes of quarterly financial reporting, executives explained Ally Bank's operating results are included within North American Automotive Finance, Mortgage Operations and Corporate and Other, based on its underlying business activities.
As a result during the third quarter, Ally Bank reported pre-tax income from continuing operations of $375 million, compared to $255 million in the corresponding prior-year period.
Officials emphasized performance in the quarter was driven by continued strong auto originations.
Total assets at Ally Bank were $79.4 billion on Sept. 30, compared to $77.4 billion on June 30.
"The growth in assets was mostly due to strong retail and lease originations, along with increases in mortgage held-for-sale and warehouse lending," officials concluded.