Ally Financial IPO: Cost Of Funds Decrease As Govt Repayments Up


Ally Financial Inc. is set to become a public company next week. The U.S. Treasury Department and the auto lender plan to price the shares on April 9 and start trading on April 10. The stock will be listed on the New York Stock Exchange under the ticker symbol “ALLY.” In the planned offering, the U.S. Treasury plans to sell 95 million shares of the company at the announced range of $25-$28. The U.S. government can raise up to $2.66 billion in the offering.

Ally Financial IPO to bring down government’s stake to 17%

BTIG analyst Mark Palmer said in a research note from April 2nd, 2014 that investors should participate in the offering through the upper end of the announced range. He said the company’s strategic plan to increase its return on tangible common equity (ROTCE) from 3% in 2013 to double digits is well within the management’s ability to executive. Ally Financial plans to achieve it by reducing its operating costs, improving its cost of funding through liability management, and capitalizing on enhanced regulatory flexibility.

Ally Financial Inc.’s IPO will bring down the U.S. government’s stake in the company. It was previously the lending unit of General Motors Company (NYSE:GM), and was called GMAC at the time. The company was on the verge of collapse in 2008, when the U.S. Department of Treasury infused $17.2 billion into GMAC through its Troubled Asset Relief Program (TARP).

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The Treasury Department owned a 70% stake in the company after the bailout. The sale at the IPO will reduce the government’s stake from 37% to 17%. It was named Ally Financial in 2010. The government’s decision to start exiting its remaining stake underlines Ally Financial’s success in resolving various legal issues, and offloading non-core businesses such as mortgage and international units. Mark Palmer says the company’s transformation from a multinational, multi-business line company to a focused, domestic auto lender has given it plenty of opportunities to reduce non-interest expenses.

Ally Financial well-positioned to benefit from rising interest rates

Repayment of government debt will pave the way for increased deposit funding and expanded origination of loans from Ally Bank. That should reduce funding costs. Ally Financial lowered its funding costs from 3.1% in 2011 to 2.5% in 2013 through redemption of high-cost callable debt and deposit growth. The repayment of government loans will help it drive funding costs even lower.

Ally Financial Inc. has about $10.5 billion in non-callable unsecured loans with an average coupon of 6%. These debts will mature in 2014 and 2015. The auto lender plans to refinance this debt with lower-cost unsecured loans and new deposits. The company management estimates that the improvement in funding costs, increased deposit funding, and expanded origination of loans should help Ally Financial improve its core ROTCE by 225 to 325 basis points by 2015.

Ally Financial’s balance sheet has mostly low-cost assets. BTIG says the duration of those assets is usually less than three years. As a result, the company is well-positioned to benefit from rising interest rates. The research firm says Ally Financial represents lucrative value at the high end of the announced range of $25-$28.

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