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Rise in auto finance revenues drove Ally Financial Inc.’s (ALLY - Snapshot Report) second-quarter 2014 adjusted earnings of 42 cents per share. The figure outpaced the Zacks Consensus Estimate of 32 cents and improved from a loss of 13 cents in the year-ago quarter.

Better-than-expected results were attributable to a rise in the top line, a fall in provision for loan losses and lower controllable expenses, partially offset by a rise in other non-interest expenses. Further, improvement in asset quality and growth in loan and deposit balances acted as tailwinds, while capital ratios declined.

Ally Financial reported a net income of $323 million or 54 cents per share compared with a loss of $927 million or $2.73 per share in the prior-year quarter.

Performance in Detail

Total net revenue (excluding original issue discount) came in at $1.28 billion, up 17.7% from the prior-year quarter. The rise was primarily driven by 32.4% growth in net financing revenues.

Controllable expenses declined 12.3% year over year to $455 million. The decrease was largely due to initiatives undertaken to streamline the business. However, other non-interest expenses rose 29.8% from the year-ago quarter to $366 million.

Total finance receivables and loans climbed 4.0% year over year to $99.6 billion as of Jun 30, 2014. Further, total deposits were $56.1 billion, up 11.9% from the prior-year quarter.

Ally Financial’s credit quality showed a marked improvement in the quarter. Provision for loan losses declined 29.2% year over year to $63 million. Non-performing loans were $611 million as of Jun 30, 2014, down 39.4% from the prior year quarter level.

Ally Financial’s capital ratios deteriorated. As of Jun 30, 2014, total capital ratio came in at 13.2%, down from 16.5% as of Jun 30, 2013. Also, Tier I capital ratio was 12.3%, down from 15.4% at the prior-year quarter end.

Our Viewpoint

The company undertook several strategic initiatives to return additional capital to the U.S. tax payers and lower the U.S. Treasury's common equity stake. In January, the Treasury completed the private placement of $3 billion worth of the company’s common shares. Further, in April, Ally Financial closed the initial public offering of $2.4 billion.

Hence, in aggregate, Ally Financial returned $17.7 billion to the tax payers, reflecting a profit of $500 million. Notably, the Treasury still holds 17% stake in the company.

We believe that with the economy turning around and a rise in disposable income and consumer spending, Ally Financial’s financials will benefit from the further rise in auto finance. Further, the company’s efforts to contain expenses will aid bottom-line growth. However, the Treasury stake and rise in provision for loan losses remain primary near-term concerns.

Currently, Ally Financial carries a Zacks Rank #3 (Hold).

Performance of Other Banks

Lower credit cost and growth in fee income drove Capital One Financial Corp's (COF - Analyst Report) second-quarter earnings of $2.04 per share, which surpassed the Zacks Consensus Estimate by 14%.

SLM Corporation (SLM - Analyst Report) or Sallie Mae delivered a positive earnings surprise in its standalone financials for second-quarter 2014. Core earnings of 10 cents per share outpaced the Zacks Consensus Estimate by a penny. However, results compared unfavorably with 17 cents earned in the year-ago quarter.

Lower provisions and prudent expense-management drove Westamerica Bancorp.’s (WABC - Analyst Report) second-quarter earnings of 58 cents per share. The figure was in line with the Zacks Consensus Estimate, but lower than 64 cents earned in the year-ago quarter.

 

(We are reissuing this article to correct a mistake in our earnings article issued on Jul 29. The original article should no longer be relied upon. Also, Ally Bank should read as Ally Financial in our earnings preview article issued on July 28.)

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