D. E. Shaw initiates a new position in Ally Financial

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D. E. Shaw overview

D. E. Shaw added new positions in Navient Corp (NAVI), Applied Materials (AMAT), and Ally Financial (ALLY). It upped its position in Apple (AAPL) and Time Warner Cable (TWC).

D. E. Shaw initiated a new position in Ally Financial that accounts for 0.13% of the company’s U.S. long portfolio. Third Point Partners also owns a stake in Ally Financial.

 

Treasury to decrease more of its investment

Ally Financial is an automotive financial services company with ~95 years of experience. Ally provides a variety of financial products and services to automotive dealers and their customers. Ally was founded in 1919. Previously, it was General Motors’ (GM) finance arm and was called GMAC.

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The U.S. Treasury bailed out the lender for $17.2 billion under the Troubled Asset Relief Program (or TARP) during the financial crisis in 2008. The Treasury sold 95 million shares in Ally’s $2.38 billion initial public offering (or IPO) in April. The Treasury currently holds 75,065,340 shares, or ~16% of Ally’s common stock.

The Treasury recently announced that it would continue to decrease its investment in Ally by selling additional shares.

A release said taxpayers have now recovered ~$17.8 billion on the Ally investment. This is roughly $650 million more than the original $17.2 billion investment.

In its IPO filing, Ally said that it’s undergone a strategic transformation from a captive finance subsidiary into a focused category leader in U.S. automotive finance. It’s streamlined its operations, de-risked its balance sheet, and enhanced its focus on increased risk-adjusted returns.

As part of that strategy, Ally has divested its international businesses. It also exited the mortgage origination and servicing business substantially. Ally’s mortgage subsidiary, Residential Capital (or ResCap), filed for bankruptcy in May 2012. Its liquidation plan was approved in December of last year.

Ally’s core operations are dealer financial services

Ally’s primary operations are conducted within dealer financial services. It consists of automotive finance operations and insurance operations. The operations offer a wide range of financial services and products to retail automotive consumers and automotive dealerships.

The automotive finance services include providing retail-installment sales financing, loans, and leases. It finances dealer floor plans and offers term loans and other lines of credit to dealers. Ally also has fleet financing and vehicle remarketing services.

The insurance operations offer consumer finance protection and insurance products sold primarily through the automotive dealer channel. It also offers commercial insurance products that are sold to dealers.

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Ally served the financial needs of ~16,000 dealers in the U.S. and approximately four million retail customers as of December 31, 2013. Ally has a long-standing relationship with General Motors. It also has relationships with other original equipment manufacturers (or OEMs), including Chrysler Group LLC.

Ally Bank

Ally Financial also owns Ally Bank. Ally Bank offers a full spectrum of innovative savings, checking, and other deposit products. It provides Ally with stable and diversified funding. Its direct bank business model caters to the expanding population of technologically comfortable consumers who are adopting digital technologies to meet their banking preferences.

Ally Bank had ~784,000 customers and over 1.5 million accounts on December 31, 2013. It had $52.9 billion in deposits, including $43.2 billion in retail deposits, at the end of last year.

Second quarter results driven by auto finance franchise

Ally’s second quarter of 2014 (or 2Q14) results beat estimates. Adjusted earnings per diluted common share for 2Q14 were $0.42, compared to $0.34 for the previous quarter and a loss of $0.13 for the same period last year.

Ally’s adjusted net financing revenue was up 32%. It said results for the quarter were primarily driven by strong performance from the auto finance franchise.

Higher lease asset balances primarily drove the increase in operating lease revenue for the automotive finance operations. The higher lease asset balance was a result of strong origination volume and increases in lease remarketing gains.

Strong used vehicle prices and increased termination volume drove the remarketing gains. Consumer financing originations increased to $10.9 billion—up 11% year-over-year (or YoY). This was the second highest quarterly originations total in Ally’s history.

The retail deposits for Ally Bank grew to $45.9 billion—up $6.1 billion, or 15% YoY. The release said that unprecedented weather-related losses in the insurance business impacted the results. The non-recurrence of a $1.6 billion one-time charge taken in 2Q13 impacted the YoY comparison. The charge was related to the comprehensive settlement agreement in the ResCap Chapter 11 bankruptcy case.

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