Ally's Margin Widens as Auto Mix Shifts Toward Safer, Lower-Yield Loans
Net interest margin excluding core OID expanded 11 basis points to 3.63% in the second quarter as Ally Financial (ALLY) leaned harder into higher-credit-tier auto originations even as retail deposits shrank $2.6 billion.
Ally Financial (ALLY), the Detroit-based auto lender and digital bank, posted an acceleration in net interest margin that had stalled a quarter earlier. NIM excluding core OID rose 11 bps quarter-over-quarter and 18 bps year-over-year to 3.63% in the second quarter, a sharp pickup from the first quarter's tepid 1-bp QoQ gain to 3.52%. Net financing revenue climbed to $1.68 billion, up $95 million QoQ and 11% YoY, as retail and commercial auto assets grew.
The margin expansion came alongside a deliberate shift in loan quality. Consumer auto originations hit a record $13.3 billion in the second quarter on 4.6 million applications, up from $11.5 billion and 4.4 million applications in the first quarter. But the estimated retail auto originated yield fell to 9.09% from 9.60% in the first quarter and 9.74% for full-year 2023, as the share of originations in Ally's highest credit-quality tier rose to 47% from 41% a quarter earlier. Bank management is trading yield for credit quality, a trade that is already showing up in charge-offs: retail auto net charge-offs fell to 157 bps, down from 197 bps in each of the prior two quarters.
That credit improvement did not fully flow through to provision expense. Provision for credit losses rose to $430 million, up $46 million YoY, as CECL reserve build tied to the larger loan book offset the underlying charge-off improvement; the Auto Finance segment alone booked a $55 million YoY provision increase to $442 million. The segment's pre-tax income fell $62 million YoY to $410 million as higher provision and noninterest expense outpaced revenue growth, a divergence from the 23% YoY gain in consolidated pre-tax income, which was carried by Corporate Finance, Insurance and a narrower loss at Corporate & Other, down to -$48 million from -$160 million a year earlier.
Deposits told a different story than the loan book. Retail deposits fell to $143.6 billion, down $2.6 billion QoQ, reversing the $1.7 billion of growth booked in the fourth quarter. The average retail deposit yield fell 15 bps QoQ and 46 bps YoY to 3.12%, evidence that funding costs are easing as the Fed's rate cuts work through Ally's deposit book — a tailwind that helped offset the balance decline.
Capital ratios held steady even as Ally reshuffled its preferred stock stack. CET1 stood at 10.1%, flat QoQ and up roughly 20 bps YoY, while risk-weighted assets grew $1.6 billion to $156.8 billion. Buybacks totaled $148 million, in line with the first quarter's $147 million and drawing on the $2 billion open-ended repurchase authorization disclosed in the fourth quarter. Ally issued $1.0 billion of 7.1% fixed-rate reset perpetual preferred stock to fund the redemption of $1.35 billion of Series B preferred, a swap that added a $0.05 per share EPS drag this quarter that was absent in the first quarter.
Fee-generating segments outside the core auto lending business provided the offsetting lift. Corporate Finance ROE climbed to 32% from 26% in the first quarter, with pre-tax income up 27% YoY to $122 million, helped by a $10 million reserve release tied to the sale of a legacy healthcare exposure. Insurance pre-tax income nearly doubled QoQ to $53 million from $28 million, up $25 million YoY, as written premiums rose 9% YoY to $382 million, extending the momentum from a record $1.5 billion in full-year 2023 written premiums.
Expenses crept higher as the balance sheet grew. Noninterest expense rose to $1.319 billion, up $84 million QoQ and 5% YoY, with $36 million of the Auto Finance segment's increase tied to higher servicing costs on the larger loan book.
Core ROTCE, the profitability measure management leans on most, rose to 11.8% from 11.1% in the first quarter, resuming an upward trend after a quarter that had matched the fourth quarter's 11.1% flat reading. With deposit costs falling, credit quality improving even as the reserve build continues, and fee segments picking up slack from a softer Auto Finance print, Ally's path to further margin expansion now hinges on whether deposit balances stabilize as funding costs keep coming down.