OREANDA-NEWS. Fitch Ratings has affirmed Ally Financial's (Ally) long-term Issuer Default Rating (IDR) at 'BB+' and short-term IDR at 'B'. The Rating Outlook is Stable. A full list of ratings is detailed at the end of this release.

KEY RATING DRIVERS

IDRs, VRs, AND SENIOR DEBT
The rating affirmations reflect Ally's strong franchise, leading market position in the U.S. auto finance industry, high credit quality assets, diverse funding base, ample liquidity, adequate risk-adjusted capitalization and seasoned management team.

Rating constraints include Ally's concentrated and cyclical business model, higher reliance on wholesale funding sources relative to peers, potential increased price sensitivity of internet deposits, uneven financial performance relative to peers and credit performance uncertainty surrounding recent vintages that were originated outside of Ally's previous relationships with GM and Chrysler.

The Stable Rating Outlook reflects Fitch's view that while a number of Ally's credit attributes are on an improving trend, the company faces counterbalancing challenges in the near term, including navigating an increasingly competitive underwriting environment which is expected to lead to asset quality and residual value reversion.

The expected introduction of capital returns to shareholders, product expansion into mortgage and credit card lending, albeit on a low risk basis, and the presence of an activist investor are not explicit rating constraints, but are other notable considerations in Fitch's analysis.

Profitability has continued to improve, albeit off of a modest base, supported by solid loan growth, expanding margins due to liability management efforts and expense rationalization, partially offset by reserve building. Adjusted net income increased to $1.3 billion in 2015, up from $1.15 billion in the prior year period. Although core return on average assets (ROA) was essentially flat with the prior year at 0.8% in 2015, core return on average tangible common equity (ROTCE) increased to 9.4% in 2015, up from 7.9% in 2014.

Fitch expects 2016 financial performance to be supported by moderate loan growth, a further reduction in Ally's funding costs as more loans are funded through the bank, and continued operating expense rationalization. These positive contributors to earnings will be partially offset by higher loss provisions as a result of industry credit normalization and the mix shift within Ally's portfolio. In 2016, Ally expects to grow adjusted EPS by at least 15% over 2015, sustain a core ROTCE 10%+ and maintain a mid-40% efficiency ratio.

Although consumer auto originations in 2015 were essentially flat with the previous year at $41 billion, Ally's origination mix also shifted meaningfully, following General Motors Company (GM) electing to offer subvention loan and lease programs to dealers exclusively through General Motors Financial Company, Inc. Roughly 32% of Ally's 2014 originations consisted of GM subvented business. While Ally was successful in being able to replace this volume through other channels, given the dramatic shift in Ally's loan origination mix over a relatively short period of time, the underlying credit performance of the more recent vintages will be an important driver of Ally's ratings.

Credit performance continues to gradually normalize. Ally's retail auto net charge-offs increased to 96bps in 2015, up 9bps from the year-ago period, but remained well below historical levels. Ally's retail auto 30+ day delinquencies increased to 2.91% of total loans, up 18bps from year-ago period. Reserve coverage remained strong at 1.4x total nonperforming assets and 1.3x net charge-offs at Dec. 31, 2015. Fitch expects credit performance will continue to normalize, driven by a portfolio mix shift which includes a higher proportion of nonprime loans and used car financing, loan seasoning, and a moderation in used car prices supporting recovery values.

In addition to internet-based deposits, Ally utilizes a diverse mix of other sources across various debt markets including unsecured debt, securitizations and bank loans. Fitch views this strategy positively as it reduces concentration risk and provides more funding flexibility in the event that wholesale funding sources (securitization and public debt markets) dry up or become cost prohibitive, or if the online deposit platform experiences material outflows in a rising interest rate environment.

At Dec. 31, 2015, deposits represented 47% of Ally's total funding with secured debt accounting for 36% and unsecured accounting for 17% of total funding. Short-term wholesale funding, including $3.4 billion of unsecured demand notes, represented only 2.5% of Ally's total funding at Dec. 31, 2015. Fitch views Ally's increased use of retail deposit funding positively given the lower cost and greater resiliency relative to wholesale funding during periods of market stress.

Ally maintains adequate liquidity with $15 billion of total consolidated liquidity at year-end 2015. This compared to unsecured debt maturities of $1.9 billion during 2016. At the parent company, Ally had $6.3 billion of total liquidity including $300 million of committed unused capacity on its credit lines as of the same date.

Fitch views unused credit line capacity as an additional liquidity source, but potentially less reliable than cash or high-quality liquid assets, given that it generally requires eligible assets to collateralize incremental funding. Fitch believes the value of eligible assets could be reduced during a period of market stress, thereby affecting the company's liquidity position. That said, Ally's loan portfolio is mostly unencumbered reflecting the company's high mix of deposit and unsecured funding.

Ally remains well capitalized, as reflected by Basel III Transitional Tier I capital and Tier I common ratios of 11.1% and 9.2%, respectively, as of Dec. 31, 2015. The company estimates that the fully phased-in Basel III Tier I common ratio was 8.7% at Dec. 31, 2015. Fitch views the company's capital position as adequate given the risk profile of its balance sheet.

On March 11, 2015, Ally received a non-objection on its capital plan from the Federal Reserve. This resulted in Ally redeeming all ($2.6 billion) of its Series G preferred securities in 2015, and repurchasing $325 million of the $1 billion Series A preferred securities outstanding at the beginning of 2015. In addition, Fitch expects Ally to seek to redeem the remaining Series A preferred securities over the course of 2016. Further, Fitch expects Ally to seek to include distributions to common shareholders in the form of share repurchases and dividends as part of its 2016 CCAR submission. Ally has indicated that it anticipates an earnings payout ratio of roughly 75%, which, when coupled with the expected redemption of remaining preferred securities, will slow the growth of Ally's regulatory capital ratios.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

Ally's subordinated debt rating is rated one notch below Ally's VR of 'bb+' in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profile. The subordinated note rating includes one notch for loss severity given the subordination of these securities in the capital structure, and zero notches for non-performance given contractual limitations on interest payment deferrals and no mandatory trigger events which could adversely impact performance.

The rating assigned to the trust preferred securities, series 2 issued out of GMAC Capital Trust I is 'b+', three notches below Ally's VR of 'bb+'. The rating reflects the subordination of the securities and Ally's option to defer coupon payments, and is in accordance with Fitch's assessment of each instrument's respective non-performance and relative loss severity risk profile.

Ally's perpetual preferred securities, series A rating are rated 'b', four notches below Ally's VR of 'bb+' and one notch below the trust preferred securities as the series A securities are junior in Ally's capital structure. The securities are non-cumulative, are nonredeemable prior to May 15, 2016, and pay a fixed rate of 8.5% per annum. Beginning on May 15, 2016, dividends will accrue at a LIBOR-based floating rate.

SUPPORT RATING AND SUPPORT RATING FLOOR

Ally has a Support Rating of '5' and Support Rating Floor of 'NF'. In Fitch's view, Ally is not systemically important, and therefore the probability of sovereign support is unlikely. Ally's IDRs and VRs do not incorporate any support.

RATING SENSITIVITIES
VR, IDRs, AND SENIOR DEBT
Positive ratings momentum could potentially be driven by credit performance on newer loan vintages that is consistent with Ally's historical experience, measured growth in the increasingly competitive lending environment, further improvements in profitability and operating fundamentals, and further diversification of its funding mix toward more stable retail deposits while operating with strong capital levels at both the parent and Ally Bank.

Ally's ability to retain online deposit customers in a cost-effective manner in a rising rate environment will also be a key consideration in evaluating the strength of its funding profile relative to traditional bank models.

A material decline in profitability and/or asset quality, reduced capital and liquidity levels, an inability to access the capital markets for funding on reasonable terms, and non-compliance with potential new and more onerous regulations are among the drivers that could generate negative rating momentum.

In particular, Fitch remains focused on the credit performance of Ally's consumer auto portfolio mix as it continues to shift towards other origination channels (e.g. used vehicles, nonprime originations, new dealer relationships) and away from GM lease subvention during a period when the competitive environment has intensified. Although Ally's exposure to residual value risk should decline further with the decline in subvented lease volume, to the extent that the higher risk profile of Ally's auto loan portfolio outpaces the reduction in residual value risk, Ally's ratings or Outlook could be pressured.

Similarly, Ally's rollout of new product initiatives, while viewed as a having the potential to provide revenue diversification longer-term, also creates other risks including execution risks, increased reliance on third-party execution and reputational risk that could result in ratings and Outlook pressure.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES

The subordinated debt ratings are directly linked to Ally's VR and would move in tandem with any changes in the VR.
The preferred stock ratings are directly linked to Ally's VR and would move in tandem with any changes in Ally's credit profile.

SUPPORT RATING AND SUPPORT RATING FLOOR

Since Ally's Support and Support Rating Floors are '5' and 'NF', respectively, there is limited likelihood that these ratings will change over the foreseeable future.

Fitch has affirmed the following ratings:

Ally Financial Inc.
--Long-term IDR at 'BB+';
--Senior unsecured debt at 'BB+';
--Viability rating at 'bb+';
--Subordinated debt at 'BB';
--Perpetual preferred securities, series A at 'B';
--Short-term IDR at 'B';
--Short-term debt at 'B';
--Support rating at '5';
--Support Floor at 'NF'.

GMAC Capital Trust I
--Trust preferred securities, series 2 at 'B+'.

GMAC International Finance B.V.
--Long-term IDR at 'BB+';
--Short-term IDR at 'B';
--Short-term debt at 'B';

The Rating Outlook is Stable.