Sale of Ally Financial Is Unrealistic, Chief Executive Says

The main topic during Ally Financial's earnings call Tuesday was not the company's solid fourth-quarter financial performance. Instead, Chief Executive Jeffrey Brown focused on responding to the concerns of shareholders who are frustrated with Ally's sagging stock price.

Brown's remarks were his first public comments since a shareholder revolt spilled into public view in early January. He suggested that the investors' criticism has sparked a greater emphasis inside the company on returning capital to shareholders. But he also sought to tamp down expectations that Ally might sell itself, an idea that the firm's board has been asked to explore.

"I hope it goes without saying that I'm obviously disappointed by the performance of the stock," Brown said near the start of the conference call, adding that he does not believe the market's judgment reflects the company's results or the strength of its businesses. "We continue to do things every day from an operational and financial perspective that will create shareholder value over time."

Shares in Ally have fallen by 33% since the Detroit company's initial public offering in April 2014. Ally's stock was trading Tuesday at just 56% of the company's book value.

The auto lender, which was bailed out by the U.S. government in 2008 and 2009, finds itself stuck between the edicts of regulators and the demands of shareholders who are focused on the near term.

Ally needs the approval of the Federal Reserve Board for a capital-return program, an item that is high on the list of the unhappy shareholders' demands.

It promised to provide more details about its strategy for capital distribution at its inaugural Investor Day on Feb. 11.

Meanwhile, Lion Point Capital, a hedge fund that owns less than 1% of Ally's common stock, has asked the company to create a strategic alternatives committee, a move that would signal Ally wants to sell itself.

Brown said Tuesday that a sale of Ally, which has $156 billion in assets, is unrealistic at the moment. "I mean, you'd have to go back pre-crisis before you could see any type of deal that approached anywhere near our size," he said.

"I don't want to imply that a sale in total is not possible. But my phone is open every single day, and it's not ringing," he said. "Could it be considered at some point in the future? Absolutely."

Brown also dismissed the idea that Ally could be split into parts and sold on a piecemeal basis. He noted that several years ago, the firm's auto-lending business was largely separate from Ally Bank but said that is no longer the case.

"Today the company is much more integrated and combined," Brown said.

On the issue of returning more capital to shareholders, Brown sounded a somewhat more conciliatory note. Ally hopes to initiate a dividend and share repurchase program in 2016.

"Going forward, we will have a deliberate focus on prudent capital deployment and prioritizing profitability and shareholder value over growth," Brown said.

But again Brown emphasized the regulatory constraints that Ally faces as it seeks to balance the pursuit of loan growth with returning capital to shareholders.

"The regulators don't particularly want to see you stop originating, to generate excess capital," Brown said.

"We're not set in our ways," he added. "We seek to have open dialogue with all of our shareholders. But obviously we have an appreciation of the environment we're in, the regulatory environment we're in."

Shares in Ally were up more than 1% in late-afternoon trading on Tuesday, which was better than the broader U.S. stock market.

Christopher Donat, an analyst at Sandler O'Neill, said that Ally's executives sounded open to exploring various options that might help assuage impatient shareholders.

"It seems like management's focus has shifted more to capital return than balance sheet growth over the past few months," he said.

For the fourth quarter of last year, Ally posted net income of $263 million, versus $177 million in the fourth quarter of 2014.

The firm's net interest margin was 2.68%, up from 2.35% during the fourth quarter of 2014, as growth in deposits allowed the company to reduce its dependence on higher-cost sources of funding.
Brown also sought to soothe concerns about Ally's ability to weather a downturn in new car sales, which some observers are anticipating.

He noted that 40% of the company's business involves used cars, and argued that the company can continue to perform well even if sales of new cars fall by 2 million to 3 million a year.

"Whether it's in new car, whether it's in used car, there's great opportunities for us," Brown said.