Ally Bank 2014 Annual Report Download - page 27

Table of Contents
Ally Financial Inc. • Form 10-K
15
We are exposed to consumer credit risk, which could adversely affect our profitability and financial condition.
We are subject to credit risk resulting from defaults in payment or performance by customers for our contracts and loans, as well as
contracts and loans that are securitized and in which we retain a residual interest. Furthermore, a weak economic environment and high
unemployment rates could exert pressure on our consumer automotive finance customers resulting in higher delinquencies, repossessions, and
losses. There can be no assurances that our monitoring of our credit risk as it affects the value of these assets and our efforts to mitigate credit
risk through our risk-based pricing, appropriate underwriting policies, and loss-mitigation strategies are, or will be, sufficient to prevent a
further adverse effect on our profitability and financial condition. We have continued to provide nonprime automotive financing. We define
nonprime consumer automotive loans primarily as those loans with a FICO score (or an equivalent score) at origination of less than 620. In
addition, we have increased our used vehicle financing. Customers that finance used vehicles tend to have lower FICO scores as compared to
new vehicle customers, and defaults resulting from vehicle breakdowns are more likely to occur with used vehicles as compared to new
vehicles that are financed. At December 31, 2014, the carrying value of our Automotive Finance operations nonprime consumer automotive
loans before allowance for loan losses was $6.7 billion, or approximately 11.9% of our total consumer automotive loans. Of these loans, $118
million were considered nonperforming as they had been placed on nonaccrual status in accordance with internal loan policies. Refer to the
Nonaccrual Loans section of Note 1 to the Consolidated Financial Statements for additional information. If we continue to grow our nonprime
automotive financing loans over time, our credit risk may increase. As part of the underwriting process, we rely heavily upon information
supplied by third parties. If any of this information is intentionally or negligently misrepresented and the misrepresentation is not detected
before completing the transaction, the credit risk associated with the transaction may be increased.
General business and economic conditions may significantly and adversely affect our revenues, profitability, and financial condition.
Our business and earnings are sensitive to general business and economic conditions in the United States. A downturn in economic
conditions resulting in increased short- and long-term interest rates, inflation, fluctuations in the debt capital markets, unemployment rates,
housing prices, consumer and commercial bankruptcy filings, or a decline in the strength of national and local economies and other factors
that negatively affect household incomes could decrease demand for our financing products and increase financing delinquency and losses on
our customer and dealer financing operations. Further, a significant and sustained increase in fuel prices could lead to diminished new and
used vehicle purchases and negatively affect our automotive finance business. Finally, concerns about the pace of economic growth in the
U.S. and elsewhere and uncertainty regarding U.S. fiscal and monetary policies and the federal deficit, have resulted in significant volatility in
the financial markets, and could impact our ability to obtain, and the pricing with respect to, funding that is collateralized by affected
instruments and obtained through the secured and unsecured markets. As these conditions persist, our business, results of operation, and
financial position could be materially adversely affected.
If the rate of inflation were to increase, or if the debt capital markets or the economy of the United States were to weaken, or if home
prices or new and used vehicle purchases experience declines, we could be significantly and adversely affected, and it could become more
expensive for us to conduct our business. For example, business and economic conditions that negatively affect household incomes, housing
prices, and consumer behavior related to our businesses could decrease (1) the demand for our new and used vehicle financing and (2) the
value of the collateral underlying our portfolio of held-for-investment assets and new and used vehicle loans and retained interests that
continue to be held by us, thus further increasing the number of consumers who become delinquent or default on their loans. In addition, the
rate of delinquencies, foreclosures, and losses on our loans could be higher during more severe economic slowdowns.
Any sustained period of increased delinquencies, foreclosures, or losses could further harm our ability to sell our new and used vehicle
loans, the prices we receive for our new and used vehicle loans, or the value of our portfolio of mortgage and new and used vehicle loans
held-for-investment or retained interests from our securitizations, which could harm our revenues, profitability, and financial condition.
Continued adverse business and economic conditions could affect demand for new and used vehicles, housing, the cost of construction, and
other related factors that could harm the revenues and profitability of our business.
Acts or threats of terrorism and political or military actions taken by the United States or other governments could adversely affect
general economic or industry conditions.
Geopolitical conditions may affect our earnings. Acts or threats of terrorism and political or military actions taken by the United States or
other governments in response to terrorism, or similar activity, could adversely affect general economic or industry conditions.
Our borrowing costs and access to the unsecured debt capital markets depend significantly on our credit ratings.
The cost and availability of unsecured financing are materially affected by our short- and long-term credit ratings. Each of Standard &
Poor’s Rating Services; Moody’s Investors Service, Inc.; Fitch, Inc.; and Dominion Bond Rating Service rates our debt. Our current ratings as
assigned by each of the respective rating agencies are below investment grade, which negatively impacts our access to liquidity and increases
our borrowing costs in the unsecured market. Ratings reflect the rating agencies’ opinions of our financial strength, operating performance,
strategic position, and ability to meet our obligations. Future downgrades of our credit ratings would increase borrowing costs and further
constrain our access to the unsecured debt markets and, as a result, would negatively affect our business. In addition, downgrades of our credit
ratings could increase the possibility of additional terms and conditions being added to any new or replacement financing arrangements as
well as impact elements of certain existing secured borrowing arrangements.
Agency ratings are not a recommendation to buy, sell, or hold any security and may be revised or withdrawn at any time by the issuing
organization. Each agency’s rating should be evaluated independently of any other agency’s rating.