Moody's Raises Outlook on Ally Financial (ALLY) to Positive

Moody's Investors Service affirmed the Ba3 corporate family and B1 senior unsecured ratings of Ally Financial (NYSE: ALLY) and revised the outlook for the ratings to positive from stable.

RATINGS RATIONALE

Moody's affirmed Ally's ratings and revised its rating outlook to positive based on the company's progress toward sustained improvements in profitability and repayment of government assistance received during the financial crisis.

Ally's operating performance is improving, driven by lower borrowing and operating costs. Ally's liability management actions and continued transition to deposit funding have lowered the firm's cost of funds and strengthened its net interest margin, which measured 2.53% for the first quarter of 2014, up from 2.07% one year earlier. Moody's expects that Ally's margins will continue to benefit from repayment of higher-cost indebtedness and growth in deposits, though competitive pressure on assets yields represents a headwind. The company's efforts to streamline its business resulted in a $70 million year-over-year reduction in controllable expenses in the first quarter, leading to an adjusted efficiency ratio of 55%, down from 64% for 2013. Ally is working to achieve additional efficiency gains that Moody's expects will result in a further improvement to the company's operating performance.

Ally has made significant progress repaying government support. In January, the U.S. Treasury privately placed $3 billion of Ally common stock and in April, Ally completed a $2.6 billion IPO on the NYSE. To date, the U.S. government has received $17.8 billion on its $17.2 billion extension of aid to Ally during the financial crisis. The U.S. Treasury's equity stake in Ally was reduced to 16% after the transactions. The share sales and IPO expanded and diversified Ally's investor base which, in Moody's view, contributes to improved access to capital, governance and transparency. Moody's expects that Ally will maintain good capital discipline as it pursues strategies to provide higher returns to shareholders.

Ally's ratings and outlook are supported by its position as a leading provider of U.S. dealer and retail auto finance, its effective liquidity management and adequate capitalization. A credit concern is strong competition that could potentially weaken Ally's franchise positioning and underwriting discipline. Bank and captive finance competitors have already eroded Ally's penetration of GM and Chrysler dealer financing and its financing share of GM and Chrysler retail auto sales. Ally has diversified its originations to include more leasing and used car lending, and it has modestly expanded lower credit-tier originations, helping to both drive volumes and preserve average asset yields. However, Moody's expects that these shifts in origination mix will lead to higher credit losses over time.

Ally's rating could be upgraded if the company sustainably strengthens profitability (toward a 1% return on assets) while demonstrating disciplined underwriting and maintaining strong franchise positioning, and maintains adequate liquidity and capital levels (at least 9% tangible common equity/tangible managed assets).

Ratings could be downgraded if Ally reports a material deterioration in asset quality performance and profitability, or a materially weakened capital or liquidity profile.

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