S&P Lowers Outlook on Ally Financial (ALLY) to Stable; Ratings Affirmed
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S&P Global Ratings said it revised its outlook on Ally Financial Inc. (NYSE: ALLY) to stable from positive and affirmed the 'BB+' long-term issuer credit rating. We also affirmed our 'BB+' senior debt, 'BB-' subordinated debt, 'B' trust preferred stock, and 'B' short-term issuer credit ratings.
"The revised outlook reflects weakening credit conditions in the vehicle finance industry, in our view, which represents the majority of Ally's business," said S&P Global Ratings credit analyst Matthew Carroll. We believe collateral performance in the U.S. prime and subprime auto loan sectors has deteriorated from a year ago. Among the U.S. auto loan asset-backed securities (ABS) transactions S&P Global Ratings rates, the prime net loss rate in August 2016 of 0.68% was the highest level since January 2011, compared to 0.50% in August 2015, and we have observed more pronounced deterioration in subprime net loss rates. At the same time, we believe competitive dynamics have led to longer loan terms and higher loan-to-value ratios across the industry. These factors widen the gap between the loan outstanding amount and the vehicle value, thereby increasing loss severities. Also, softening used vehicle prices in the used car market have affected recoveries, in our view, and this is expected to continue in the coming months.
The rating affirmation reflects our view that--while industry credit conditions have weakened--Ally has maintained consistent risk-adjusted asset performance while diversifying its automotive finance origination channels. Ally is a full spectrum lender, and while near-prime exposure is significant, the company has lower subprime exposure than many nonbank vehicle finance companies. Since the expiration of agreements with GM and Chrysler in 2014 and 2013, respectively, that provided for certain exclusivity privileges related to subvention programs that they offered, Ally has maintained strong consumer origination volumes with non-GM/Chrysler originations accounting for 37% of originations in the first half of 2016, compared to 20% throughout 2014.
The stable outlook reflects our expectations that over the next 12 months Ally will maintain a stable market position in consumer automobile and dealer floorplan finance, a slight weakening in credit performance in line with the industry with consumer automobile finance net-charge-offs trending toward 1.20% of average receivables, and strong capital adequacy with a RAC ratio of 10.5%-11.0%.
Although an upgrade is not likely in the next 12 months, we could raise the ratings if the company can further demonstrate a track record of solid credit quality even as it continues to shift the mix of its consumer originations--particularly toward near-prime loans. We will measure its credit quality in part by net charge-offs, which we do not expect to rise meaningfully higher than about 1.2% of consumer automobile average receivables. We would also look favorably on a material reduction in the company's currently elevated double leverage and an increase of liquidity at its holding company level. Ally has used double leverage to support the robust capital levels at its subsidiary bank that regulators have required. It also currently has a level of liquid assets relative to debt service obligations at its holding company level that is below peers. Unless remediated to some degree, those factors could be impediments to a higher rating.
We could lower the ratings in the next 12 months if capital adequacy unexpectedly weakens with a RAC ratio that we expect to drop below 10.0% and remain there, whether due to capital management actions, growth in risk-weighted assets that outpaces organic capital generation, rising credit losses, or other factors. We could also lower the rating if the company's credit losses rose at a faster pace than the industry, perhaps significantly higher than 1.2% of average consumer automobile average receivables.
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