On Wednesday, Ally Financial (ALLY 0.56%) presented to shareholders another quarter characterized by robust loan originations and a swiftly rising deposit base. The financial services and banking concern also implemented changes in its brokerage subsidiary that fell in line with competitors who recently slashed brokerage commissions drastically. As we walk through third-quarter 2019 highlights below, note that all comparative numbers are presented against those of the prior-year quarter.
Ally Financial: A bird's-eye view of the results
|Metric||Q3 2019||Q3 2018||Change|
|Revenue||$1.60 billion||$1.51 billion||6%|
|Net income||$381 million||$374 million||1.9%|
|Diluted earnings per share||$0.97||$0.88||10.2%|
Key details from Ally's report
- Automotive finance income rose 12% to $429 million. Improved financing revenue was partially offset by a $30 million increase in the business' provision for loan losses, which management attributed to a larger auto asset base and higher auto retail charge-offs.
- Ally originated $9.3 billion in auto loans from a third-quarter record of 3.2 million loan applications, an increase of 14% over applications in the prior-year period. Ally's retail auto yield of 6.66% represented an improvement of 46 basis points against Q3 2018. Net charge-offs rose by just 6 basis points to 1.38%.
- Insurance income rose $1 million to $56 million.
- Greater financing revenue and a lower loss provision pushed corporate finance income higher by 22%, to $44 million.
- Mortgage finance income improved by $3 million to $11 million as other revenue absorbed a $5 million decrease in net financing revenue.
- Ally Bank's retail deposits grew by $2.7 billion over the last sequential quarter and expanded by 19.7% against the end of the third quarter of 2018.
- Net interest margin (NIM) of 2.70% crept slightly past the comparable period's NIM of 2.67%.
- Ally Invest, the company's brokerage arm, increased its account base by 21% year over year to end the quarter at 346,000 accounts. Conforming to a sudden industry wave of reduced commissions initiated by brokerage giant Schwab, Ally Invest dropped its stock commissions to zero this quarter. In addition, Ally Invest launched a zero-fee managed portfolio as well as 500 commission-free ETFs late in the quarter.
- The organization repurchased $300 million in its stock during the quarter. It has now executed $740 million in share repurchases through the first nine months of the year.
Management's comments on retail banking
During Ally's earnings conference call, CEO Jeff Brown discussed one of the company's greatest strategic strengths -- its rapid retail banking deposit growth. Brown observed that in the first three quarters of the year, Ally has already exceeded the growth in customers and balances achieved during the entirety of 2018. He also noted that Ally's average annual retail deposit growth rate of 19% over the last decade is 7.5 times the industry's retail deposit growth rate. Finally, Brown touched on both the composition of current depositors and the profile of customers opening new accounts:
Two-thirds of our customer balances are from mass affluent, high-net-worth individuals, while 60% of account openings are from the millennial cohort, establishing a banking relationship with us at an early stage in their financial journey. This presents us with the opportunity to continue deepening the relationship over time. The increasing desire for convenient, seamless products and exceptional customer service go hand in hand with the core tenets of our philosophy. We're applying the same framework to the broadening array of consumer products we offer and look to offer in the future.
Looking ahead to year's end
Ally appears likely to obtain at least two out of three of its financial benchmark goals in 2019. The company should be able to meet both a 4%-6% year-over-year revenue growth rate and an earnings-per-share expansion target of at least 18%.
However, the organization may fall short of notching a minimum 13% return on tangible common equity (ROTCE). Through the first three quarters of the year, Ally has averaged a ROTCE of 11.9%, hitting 12.4% and 12.3% in the second and third quarters of 2019, respectively. The company is likely to land between 12% and 13% for the year -- a mark that will fall below management's goal but represent an attractive return on equity nonetheless.