Ally Financial (NYSE:ALLY) is seeing tremendous growth in its digital banking business, even as the company's auto lending business, its primary income driver, continues to score double-digit growth. Ally's second-quarter 2019 results, issued on July 18, impressed investors and catalyzed a 5.6% pop in the company's stock in the trading session following the release: Shares have now ascended 47% year to date. Note that all comparative numbers in the discussion that follows are presented against those of the prior-year quarter.
Ally Financial: The raw numbers
|Metric||Q2 2019||Q2 2018||Change|
|Revenue||$1.55 billion||$1.46 billion||6.1%|
|Net income||$582 million||$349 million||66.7%|
|Diluted earnings per share||$1.46||$0.81||80.2%|
What happened at Ally Financial this quarter?
- The company achieved auto originations of $9.7 billion, which were sourced from a record 3.3 million loan applications. Ally's estimated retail auto originated yield of 7.5% improved by 56 basis points, while its retail auto net charge-off rate declined by 9 basis points, to 0.95%. The automotive finance segment's operating income jumped 20% to $459 million.
- The insurance segment recorded a breakeven quarter (zero operating income) against $11 million in operating income in the prior-year quarter. Management attributed the decline in income to weather-related losses that offset higher earned premiums.
- Corporate finance operating income declined by $12 million to $46 million as a higher provision for loan losses, lower "other" revenue, and higher non-interest expense combined to offset higher net financing revenue.
- Mortgage finance income of $14 million was flat against the prior-year quarter.
- Ally Bank added 100,000 customers during the quarter to bring its total customer base to 1.87 million. The company has expanded the digital bank's customer base by 23% since the end of the second quarter of 2018.
- Retail deposits grew by $3.2 billion -- Ally Bank's highest ever second-quarter deposit growth tally. Total deposits have advanced by $17.6 billion since the end of the second quarter of 2018 to $116.3 billion, with nearly all of this growth fueled by customer deposits. Deposits fund 72% of Ally's auto, mortgage, and commercial loan portfolios, with the balance supplied by a mix of unsecured and secured debt.
- Net interest margin of 2.66% was virtually flat against both the prior sequential quarter and prior-year quarter.
- The company purchased $229 million worth of its own shares during the quarter, bringing its year-to-date repurchase total to $440 million.
What management had to say
In the organization's earnings conference call, CEO Jeff Brown discussed Ally's market dominance in the auto loan arena, and in particular, its competitive advantage of wide penetration among the nation's auto dealers:
We grew our dealer relationships this quarter to over 18,000 dealers, the 21st consecutive quarter where we've expanded our reach, with benefits extending well beyond volume generation. This affirms our position as the leading auto and insurance partner for dealers in the U.S., enhancing our opportunity to drive greater penetration across our full suite of products and services while also providing us with key data and insights in real time across the consumer lending space.
Brown also touched on Ally's swiftly expanding bank customer deposit base (which is allowing it to fund new auto loans at a lower cost versus unsecured debt) while pinpointing an avenue for future expansion:
A majority of [new customer deposit] inflows continue to be sourced from traditional banks, highlighting the ongoing trend among consumers who are seeking increased value and convenience from their bank. These are the cornerstones of our nationwide, always on, digital bank, evidenced by Ally being named the best online bank for the third consecutive year by Kiplinger's earlier this month. The direct deposit market represents around 10% of total retail deposits in the U.S. today and has grown by an average 15% per year since 2008. This represents a significant ongoing opportunity, something Ally is well positioned for as the largest online-only bank.
During the earnings call, CFO Jenn LaClair confirmed that Ally Financial is on track to meet various full-year 2019 guidance benchmarks shared with investors in January of this year. These include year-over-year revenue growth of 4%-6%, earnings per share (EPS) expansion of at least 18%, and a core return on tangible common equity ratio of at least 13%. At the midpoint of the year, all three goals appear well within reach.