ALLY - Ally Financial

[simplefocus]

ALLY just lost gm business.  Does it impact your outlook of ALLY? 

 

https://news.yahoo.com/losing-gm-business-ally-looks-other-automakers-grow-205002805--sector.html

[muscleman]

ALLY just lost gm business.  Does it impact your outlook of ALLY? 

 

https://news.yahoo.com/losing-gm-business-ally-looks-other-automakers-grow-205002805--sector.html

 

This definitely sucks.

http://google.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=10273333-1183-628339&type=sect&TabIndex=2&companyid=12134&ppu=%252fdefault.aspx%253fsym%253dALLY

Just look at page 79 and let me know what you think. This is about 20% of their business.

 

I am still holding on to it though. My primary thesis is that if they refinance all their high yield debt, they should make 15% ROE, which should be about $3.9 per share.

[bobozou]

I'm out - i think longterm, the debt-refinance story is still valid, but those subsidized GM leases make up a substantial portion of current originations... I'm concerned about the hit to earnings, and it'll take too long for the refinance thesis to make up for it

 

glta

[muscleman]

I'm out - i think longterm, the debt-refinance story is still valid, but those subsidized GM leases make up a substantial portion of current originations... I'm concerned about the hit to earnings, and it'll take too long for the refinance thesis to make up for it

 

glta

 

What's the percentage of hit to earnings do you expect?

Losing the GM lease business may not be as bad as you thought. They can use the money to retire high yield debt instead of originating GM leases. What's the earning impact on retiring the high yield debt vs originating GM leases?

How long do you think the long term means when you say "too long"? Do they have covenants that prohibit them from retiring the high yield bond?

[bobozou]

What's the percentage of hit to earnings do you expect?

 

The immediate (next couple quarters) impact will be small.  But if they don't replace that profit, then it'll hit them pretty hard in 1-2 years.

 

As for magnitude, it's hard to say, because lease interest appears to be earned overtime.  However, GM makes up the bulk of their leases (Chrysler small minority).  I just assume the following: 1) all lease revenues disappear, 2) the profit is unreplaced, and 3) no SG&A/interest decreases.  If you apply those (admittedly conservative) assumptions, then quite a bit of net revenue and operating income would get wiped out.  This is probably a worst case scenario, but it was rather scary.

 

Plus, I'm not sure I can get comfortable that the remaining GM business (non-lease) is going to stay with Ally either.  The downside just got a lot more 'real' for me.

 

As I think about 'who can they sign up', I couldn't see them just going out to sign up a massive deal that added a ton of volume (the new dealers all have their own captives).

 

I also don't like the way it was (not really) communicated to investors.  (TBF, maybe I wasn't listening hard enough)

 

 

Losing the GM lease business may not be as bad as you thought. They can use the money to retire high yield debt instead of originating GM leases. What's the earning impact on retiring the high yield debt vs originating GM leases?

How long do you think the long term means when you say "too long"? Do they have covenants that prohibit them from retiring the high yield bond?

 

That's fair.  If they refinanced the debt immediately, then that'd be a positive.  And there's nothing, legally, to stop them from doing that (that I know of).  I just don't feel comfortable assuming that it's going to happen that quickly.  I was (conservatively) projecting them to phase it out in proportion to the growth of the deposit base (5 years or so).

 

But, the downside of earnings hit is now a reality, while the upside of debt refinancing is still just a hope.  I would feel much better about the ALLY thesis if the opposite was true.

[muscleman]

http://www.prnewswire.com/news-releases/ally-financial-announces-cash-tender-offers-300033608.html

 

It sounds like ALLY does not have the calllable provisions on these bonds, so they have to pay a hefty premium to tender these bonds?  >:(

[LowIQinvestor]

FYI: Ally passes Stress Test

 

Ally Financial Receives Non-Objection to CCAR Capital Plan

https://media.ally.com/2015-03-11-Ally-Financial-Receives-Non-Objection-to-CCAR-Capital-Plan

 

""These actions are key steps to enable Ally to further advance its plans to normalize its capital structure and reduce its funding costs in the future, which will have a meaningful result on overall performance," said Ally Chief Executive Officer Jeffrey J. Brown.  "With respect to our operations, we have a strong capital and liquidity profile to support our broad customer base, including our continued momentum in expanding our auto finance growth channel."

 

 

[muscleman]

http://google.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=10589268-1167-264657&type=sect&TabIndex=2&companyid=12134&ppu=%252fdefault.aspx%253fsym%253dALLY

 

Why would Ally offer the senior notes at 98.138 % of face value? Does this give the impression of getting a low interest rate?

I know accounting wise, they have to amortize the cost of this discount so it won't boost earnings, unless they do a one time "charge off" of this amortization cost.

[muscleman]

Q1 out:

http://google.brand.edgar-online.com/displayfilinginfo.aspx?FilingID=10649030-5836-33786&type=sect&TabIndex=2&companyid=12134&ppu=%252fdefault.aspx%253fsym%253dALLY

 

Some notes:

1. Deposit growth 16% YoY. That is great. Pure onlink bank model continues to work.

2. "new and used originations from Growth dealers grew 54 percent compared to the prior year period.". However, what's the definition of GROWTH DEALERS? Has the company modified this definition? We probably have to wait until 10-Q comes out.

3. "Also contributing to total results was a previously disclosed after-tax gain of approximately $400 million in discontinued operations from the completed sale of the Chinese joint venture in January". Does anyone know anything about this? Who is the buyer? Does the buyer and Ally still have future business relationships? If that's true, that might cloud the current one time gain number.

4. "Auto Finance reported pre-tax income of $331 million for the first quarter of 2015, compared to $339 million in the corresponding prior year period. Results for the quarter were primarily driven by slightly lower net financing revenue due to expected lower net lease revenue, primarily as a result of lower lease gains, as well as continued competition in the marketplace. This was largely offset by improved provision expense, resulting from continued favorable loss performance and associated reserve releases." So this quarter's EPS growth is boosted by reserve releases? Are they growing the loan book and shrinking the reserve at the same time? Note the current allowance for loan losses is down from 977 to 933 while total loan book is down from 99,948 to 99,857, so the percentage of loan loss coverage is dropping. This might be ok as ALLL as % of NPLs is dropping.

 

Overall, I am happy with the results, but I still would like to deep dive into the above issues since this is my 2nd largest holding.

[LowIQinvestor]

Anyone have notes from this presentation?:

 

"Lion Point’s Cederholm Sees Ally Shares Rising as Much as 60%"

http://www.bloomberg.com/news/articles/2015-05-04/lion-point-s-cederholm-sees-ally-shares-rising-as-much-as-60-?cmpid=yhoo

[muscleman]

Anyone have notes from this presentation?:

 

"Lion Point’s Cederholm Sees Ally Shares Rising as Much as 60%"

http://www.bloomberg.com/news/articles/2015-05-04/lion-point-s-cederholm-sees-ally-shares-rising-as-much-as-60-?cmpid=yhoo

 

No I haven't. Back in 2000 or the late 90s Buffet told GEICO employees that whoever wins the internet wins the future. I invested in ALLY with the same belief for banks.

 

[LowIQinvestor]

I imagine other banks would be salivating over ALLY's continued deposit growth:

 

Exceeded $50 billion of retail deposits, with balances up 12% YoY

– Added over 45,000 deposit customers in 1Q

– Retail deposit growth of $2.7 billion QoQ

 

 

[LowIQinvestor]

Goldman Sachs analyst Eric Beardsley and team call Ally Financial (ALLY), the former financing arm of General Motors (GM), “among the most attractive value investments in financials.” They explain why:

 

We upgrade ALLY to Buy from Neutral with a 12-month price target of $27 (up from $24.50), implying 18% upside potential. The stock is among the most attractive value investments in financials, in our view, trading at only 0.93x YE15E adjusted TBV, despite ROTCE likely reaching 9-10% by 2016E as its balance sheet restructuring is realized. We also believe ALLY’s primary overhang – the loss of General Motors business – has been overly discounted and could be neutral to EPS (vs. our prior estimate of a $0.20-$0.30 headwind), as better-than-expected loan originations, asset yields and credit trends have given us incremental confidence in the earnings trajectory moving forward.

[Spekulatius]

This is one of my larger positions, but the stock has been a dog. The financial results were pretty much as expected and I think they will overcome the loss of thee GM business.

They have made decent progress restructuring the balance sheet and paying down high cost debt as it mature, but what I overlooked is that they have really long dated Trups (Maturing in 2040) and referred stock (paying 7% and 8% current and attached to Libor) that they have to pay substantial premium to face value to get ready of them, which hits the book value. So management , while boasting he almost $30 tangible book value, has recently started to publish and adjusted book value (accounting for he liability from the Trups and referred, which is way lower and hers around $23/share, not so much about the prevailing price/share.

 

The bull case is that this is a fast growing and low cost online bank, but on the asset side, I am not too excited about owning a car lender. In any case, the story takes much longer than I thought to play out. Second opinions welcome.

[LowIQinvestor]

Maybe someone (another bank) comes in and forces a separation of the online bank and the auto lender. I think ALLY is better in a larger banks hands...

 

The timing is ripe now they they received approval to redeem the preferred shares.

 

http://blogs.barrons.com/stockstowatchtoday/2015/11/12/ally-financial-here-come-the-capital-returns/

[LowIQinvestor]

ALLY @ $20

vs

Adjusted Book Value = $24.30 (up from $22.20 YOY)

 

Annual retail deposit growth of 15 percent to $53.5 billion, expanded customer base 16 percent year-over-year and surpassed 1 million customers"

 

Any thoughts on what an asset-light bank (online only) with $64B in retail deposits would fetch in a sale to a larger bank?

 

Glad ALLY can now repurchase shares.

[muscleman]

ALLY @ $20

vs

Adjusted Book Value = $24.30 (up from $22.20 YOY)

 

Annual retail deposit growth of 15 percent to $53.5 billion, expanded customer base 16 percent year-over-year and surpassed 1 million customers"

 

Any thoughts on what an asset-light bank (online only) with $64B in retail deposits would fetch in a sale to a larger bank?

 

Glad ALLY can now repurchase shares.

 

Seems like you and me are the only ALLY investors.  :)

[Spekulatius]

ALLY @ $20

vs

Adjusted Book Value = $24.30 (up from $22.20 YOY)

 

Annual retail deposit growth of 15 percent to $53.5 billion, expanded customer base 16 percent year-over-year and surpassed 1 million customers"

 

Any thoughts on what an asset-light bank (online only) with $64B in retail deposits would fetch in a sale to a larger bank?

 

Glad ALLY can now repurchase shares.

 

The book value was ~$28 last year before they started to come up with the adjusted book value, (which accounts for the debt and preferred trading above par, as I understand it). I don't like how they started to change their reporting metrics without much of an explanation why. They calculate their ROE based on adjusted book (which makes the ROE appear higher) and I think that is one of he performance metrics that management measures itself.

 

I like direct bank model, on the asset collecting side, but I don't like the car lending on their asset side. Car lending is a crummy business with credit unions falling over themselves to offer 5year car loans for 2.5% or less. Going subprime will only work until the economy hits a pothole.

 

FWIW, this is one of my larger positions; despite the concerns, I think the risk reward is quite good.

[LowIQinvestor]

ALLY @ $20

vs

Adjusted Book Value = $24.30 (up from $22.20 YOY)

 

Annual retail deposit growth of 15 percent to $53.5 billion, expanded customer base 16 percent year-over-year and surpassed 1 million customers"

 

Any thoughts on what an asset-light bank (online only) with $64B in retail deposits would fetch in a sale to a larger bank?

 

Glad ALLY can now repurchase shares.

 

The book value was ~$28 last year before they started to come up with the adjusted book value, (which accounts for the debt and preferred trading above par, as I understand it). I don't like how they started to change their reporting metrics without much of an explanation why. They calculate their ROE based on adjusted book (which makes the ROE appear higher) and I think that is one of he performance metrics that management measures itself.

 

I like direct bank model, on the asset collecting side, but I don't like the car lending on their asset side. Car lending is a crummy business with credit unions falling over themselves to offer 5year car loans for 2.5% or less. Going subprime will only work until the economy hits a pothole.

 

FWIW, this is one of my larger positions; despite the concerns, I think the risk reward is quite good.

 

I agree with much of what you said. Wish there was some way to separate the two businesses. I think investors would be more excited to just own the growing online retail bank...especially given the potential for rates rising soon.

 

Cerberus Capital Management owns 8% and I'm thinking they are growing impatient--- will push for value creation at Ally.

 

[muscleman]

Does anyone know how to do due diligence on ALLY's 3rd party dealer growth channels? I am surprised that this sector grow so quickly to replace the lost GM lease business. I wonder if they used lower loan initiation standard to achieve this.  ::)

[fareastwarriors]

What do you guys think of the preferreds? I used to hold the A and B's until they significantly over $25.

[fareastwarriors]

https://media.ally.com/2016-04-05-Ally-Financial-Announces-Acquisition-of-TradeKing-Group

 

Looks like ally is trying to become a broader diversified financial services company

[HJ]

Doesn't look like the market cared much for it.  TD Ameritrade - 700 billion client assets, 16 billion market cap.  Charles Schwab - $2.5 trillion client assets, 36 billion market cap.  By their disclosure, TradeKing - $4.5 billion client assets, including $1.1 billion in cash, $275MM acquisition?

 

I guess I can understand where this is coming from.  These deposits have very low beta.  Still, questionable to pay up to the extent that they did.  $275MM doesn't really change the thesis on the stock in the grand scheme of things, but I hope whoever pushed for this deal is put on short leash.

[muscleman]

Doesn't look like the market cared much for it.  TD Ameritrade - 700 billion client assets, 16 billion market cap.  Charles Schwab - $2.5 trillion client assets, 36 billion market cap.  By their disclosure, TradeKing - $4.5 billion client assets, including $1.1 billion in cash, $275MM acquisition?

 

I guess I can understand where this is coming from.  These deposits have very low beta.  Still, questionable to pay up to the extent that they did.  $275MM doesn't really change the thesis on the stock in the grand scheme of things, but I hope whoever pushed for this deal is put on short leash.

 

I am surprised this is happening. ALLY already has a few activist funds on the board. I doubt about ALLY's CEO's capital allocation skills.

[chesko182]

Hey guys,

 

Love this name, one of my top holdings. Not only is it "benefiting" from the cheap valuations of all financials but I think this one is posed to growth for the long run given their ability to grow their deposit base at double digits and they've had a great response from millennial given their "online bank" branding. Their main competitive advantage in my opinion for now is their ability to pay a high interest rate on their deposit base by passing on the savings from not having branches to customers, their also aiming to achieve a mid-40% efficiency ratio which would be spectacular for the industry. I think ROE should keep growing and stabilize at around 12%+ and they've done a great job of not only cleaning up the balance sheet (e.g. paying down high cost legacy preferreds), but completely reinventing the brand.

 

As of the TradeKing acquisition, I wouldn't be to worried about the price, as long as their able to move some of their existing customers into the platform (which may prove difficult but I imagine they've looked into this), I'd love to look a bit more into their cross-selling strategy because if executed effectively, this could be booming for longer term earnings growth (i.e. customers with auto loans opening deposit accounts, or deposit account holders opening a brokerage accounts etc.) They've also started offering mortgage products as well as a branded credit card, it seems their on track to become a universal bank.

 

Finally, not only is the valuation insanely cheap ~8x forward PE ratio and TBV per share of 0.7, but management has acknowledged specifically the discount there is in their share price and thus decided to allocate most of their capital returns to buybacks which should prove very accretive to shareholders who standby, I think they're buying back ~10% of market cap which is a very significant figure.

 

I'm a long term shareholder here.