Ally Financial Inc (ALLY) 2008 Q3 法說會逐字稿

Good day, ladies and gentlemen. And welcome to the Third Quarter 2008 GMAC LLC Earnings Conference Call. My name is Stacy, and I will be your conference moderator for today. At this time, all participants are in a listen-only mode.

(Operator Instructions)

As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Ms. Susan Shank, Director of Investor Relations. Please proceed.

Thank you very much. Good morning, everybody. And thanks for joining us as we review GMAC and ResCap's third quarter 2008 results.

Before we get started, I do want to mention that the format for today's call is going to be a little bit different than our previous quarterly conference calls. You'll here in our discussion today we're working on a number of important transformative initiatives. Since we don't yet know that these initiatives will succeed, we're limiting what we can say about our outlook and about these efforts. As a result, we will not hold a Q&A session at the end of the call as we normally do.

We understand the value of Q&A. We hope that we'll be able to resume the Q&A portion of our call in future calls. However, until these particular issues are resolved, we're just very limited and don't think that it's a good thing to do right now. Thank you for your understanding about this change. And let's move onto the presentation.

In page two of the slide deck, we have a legend regarding forward-looking statements and risk factors that I would direct your attention to. This language will govern the entire conference call. At the end of the deck, we've provided some supplemental charts that help us comply with the SEC's Regulation G. They reconcile managerial data with GMAC and ResCap GAAP figures.

Now I'd like to turn the call over to Robert Hull, our Chief Financial Officer, to review our third quarter results. Rob?

Thanks, Susan. Good morning. Thanks for joining us. And thanks also with your patience with a different format for this quarter's call. We scheduled this call to discuss our Q3 2008 performance. And we will. Right out of the gate, though, I want to recognize an important fact. Despite all the chaos in the marketplace, GMAC's value turns on its ability to support its customers, all of them, dealers, car buyers, and GM, as we have for the last 90 years. We know how important our customers are to our success. And we're trying to fairly balance the needs of each of our customers while coping with limited market funding.

Despite the challenges, we originated $13.3 billion of auto loans and leases to consumers during the quarter and have $42 billion of loans outstanding to auto dealers on September 30th. We've been forced to make painful choices about curtailing leases and restricting certain retail lending while we look for new sources of capital. We see our mission at GMAC as the finest and largest auto lender in North America. And we intended for these cuts to be temporary. We thank our customers, the dealers, the retail borrowers, the lessees, and General Motors for understanding the difficult time we're in.

So back to the third quarter, it's no surprise that with all the turmoil in the capital markets, consumer credit weakness, home price deterioration, and tough conditions in the auto industry, GMAC booked a consolidated loss for the quarter of $2.5 billion. As you may know, we've taken several key steps to our goal of transforming GMAC into a deposit-funded lender and scale servicer with GMAC Bank at the core.

Some elements of this self-help strategy include -- we have an agreement to sell GMAC reinsurance. We have an agreement to sell GMAC home services, our real estate services operation. We're focused on de-levering our balance sheet and building liquidity. We've applied for a bank holding company charter in the United States. And finally, we may launch a private bond exchange transaction in the future. We believe a successful transaction would improve our capital position.

One other thing I'd reference here, there have been a lot of rumors in the market about a possible transaction with another auto finance company. I'm sure you'd all like to understand what such a transaction would mean for GMAC, as would we. At this point, however, any discussion of such a transaction is speculative. And I don't think it's appropriate to comment on at this time.

Okay. Let's move from strategies to results, going to slide four of the deck. Let's review some of the key drivers of the quarter. Both global auto finance and ResCap generated significant losses. ResCap lost $1.9 billion, driven by weakened credit performance, negative foreign currency impacts, restructuring charges, and lower production levels.

Insurance earned $97 million for the quarter. Global auto lost $294 million for the quarter due to falling used car prices, weaker credit performance, and mark-to-market related losses. In addition, we had a loss of $414 million in other, stemming largely from inter-company funding and investment activity.

At the bottom of the page, you'll see that GMAC ended the quarter with consolidated cash of $13.5 billion, down roughly $800 million from the end of the second quarter. ResCap had $6.9 billion of that amount. The ResCap number includes GMAC Bank cash of $4.9 billion.

Moving onto slide five, slide five provides net income by segment as well as some of the notable items that drove the quarter. The items in the second table and the rest of the presentation are pretax unless otherwise noted.

There was only a modest amount of goodwill impairment in the third quarter compared to a large impairment at ResCap a year ago. Due to the weakness in the credit markets, we recognized a $223 million valuation charge on auto held-for-sale loans and retained interest from securitizations.

Weaker used vehicle prices are behind the next two lines on the table. We've impaired our Canadian truck leases by $93 million. We've also increased our credit loss provision on our retail balloon loans due to higher severity.

On the ResCap side, we recognize valuation adjustments on ResCap's investment securities at a more modest level than a year ago due to the smaller size of our book today and the fact that we've marked these assets down in prior quarters.

We've also increased our credit provision at ResCap, but again at a lower level than a year ago. What you're seeing there is a higher coverage ratio than last year, but on a smaller book. In addition, ResCap had a $380 million hit from foreign exchange volatility. And the final item on the table is from our other segment, where we realized $137 million of losses on investment securities. We'll talk more about that later on.

Now let's take a deeper look at our auto finance operation starting on slide six. The first graph on the slide shows Global Auto's net income for the last eight quarters. Q3 2008 resulted in a loss of $294 million. Lower used car prices were the largest single source of the loss. We increased our retail reserves by $112 million from the second quarter primarily due to our residual exposure on retail balloon contracts, as mentioned. And we also impaired trucks in our Canadian lease portfolio by $93 million pre-tax, again as we also mentioned.

We recognized $223 million of LOCOM and mark-to-market reductions on our held-for-sale loans and securitization [resids]. Additional factors include increased provision for commercial credit losses, impairments of certain Canadian investments and higher operating expenses.

Moving to the right, you can see that auto originations have slowed in the third quarter. New vehicle financing originations for the third quarter amounted to $11.3 billion of retail lending and lease contracts due to tighter underwriting standards and lower industry sales. Note that this is an annual run rate of roughly $45 billion, which compares to roughly $60 billion a year ago.

With regard to GM penetration, GMAC's retail penetration in the United States for new vehicles was 19% in September and 14% in October. Used vehicle origination for the quarter were lower than in the second quarter as economic weakness crimped used car sales.

Going forward, we expect originations to remain below the levels we've seen in the last few years. The lower level of originations will stem from the reductions we've implemented in leasing programs in North America, significantly tighter consumer underwriting standards in the US, and our exit from retail lending in seven European countries, plus Australia and New Zealand.

The graph in the lower left section of the slide highlights the stability of our servicing portfolio, which came in at $115 billion, just slightly lower than recent levels.

The last graph on this page illustrates the trends and remarketing proceeds from US retail lease terminations. These results tend to track used vehicle prices, which were lower than Q2 levels. As an aside, I said earlier that we're taking additional reserves on our retail balloon contract this quarter. But if you look at the remarketing trends, the drop wasn't very severe in the third quarter.

The additional reserves are due not just to the change in used vehicle prices, but also to how those prices interact with our various GM support agreements. At a certain level, we exhaust the GM support and carry 100% exposure. And that's what we're seeing now with these contracts.

I also want to point out that lease values in Canada were quite a bit weaker than they were in the US. The Canadian truck segment in particular was especially hard hit. And we impaired some of our Canadian truck leases this period, as I mentioned.

So on slide seven, you'll find the income statement for auto finance. Net financing revenue or margin was down year over year through the Canadian lease impairment and higher depreciation rates, both driven by lower used car prices.

At the start of a lease contract, we separate appreciation rates based on expectations of the sales proceeds at termination. We adjust appreciation rights over the life of the contract if our actual results differ from our expectation. And that's what we've been seeing lately.

The gain on sale line varies with market conditions and how much securitization we can execute in a quarter. We did fewer deals in Q3 this year than we did a year ago.

Credit trends were a drag on auto's results as we increased our allowance coverage ratio for both consumer and commercial loans. First, let's talk about the consumer book. While loss severity has continued to increase in North America, the rate of change is slowing just a bit. Likewise, in our international portfolio, there as a slight deterioration in retail credit performance. At the end of Q3, our consumer coverage ratio was 4.37% for our North American business and 1.6% for international business.

The commercial portfolio has shown weakness as well. In North America, we've increased our credit allowance on the commercial book to reflect this weakness. Our commercial reserves now stand at $96 million compared to $44 million in the second quarter and $37 million a year ago. Our international portfolio has seen a slight deterioration in commercial credit. And we increased our allowance in some emerging markets, primarily Russia. In all, the revised reserve levels resulted in $437 million of credit provision in Q3 '08.

Moving to the non-interest expense line, the main drivers were vehicle remarketing expenses and disposal fees.

As I mentioned earlier, loss severity has continued to increase, driving our losses higher, as you can see on slide eight. Globally, our annualized credit losses rose to 1.55% in the quarter, the highest level we've seen over the last two years. Our average gross severity in our North American service book is about $11,700 per unit.

For our international portfolio, losses were up in Asia and Latin America. An accounting policy change in Asia accelerated writeoffs of past-due accounts. In Latin America, losses were higher in Brazil, Colombia, and Mexico, due to weaker economic conditions in those countries.

As a result, our consumer loan loss reserves in global auto finance now stand at $1.4 billion, a coverage ratio at 3.24%, which we believe is appropriate for the current environment.

Moving ahead to slide nine, third quarter delinquencies are up compared to Q2 levels. This reflects both the seasonal trends in our book and weakening economic conditions. We believe our intensified collection efforts and tightened underwriting have kept this figure from moving even higher. We're monitoring severity levels. But we believe we've taken appropriate actions to ride out the current trends.

Okay. So let's turn to GMAC insurance on slide ten. Net income for the third quarter of $97 million reflects unfavorable investment results and slightly lower premium levels. Core earnings, shown to the right, strips out the one-time items and gives you a better idea of the operating performance of this unit. Remember the core earnings excludes capital gains and losses and is the industry-preferred measure of year-over-year performance.

Q3 core earnings results reflect normal seasonal weather losses and favorable reserve changes. While Hurricane Ike had an impact throughout our US insurance business, the losses were less than our storm losses a year ago.

The improved combined ratio of 90.9% reflects the reserve changes and lower losses. On the premiums written graph, results are down just slightly compared to year-ago and second quarter levels. The US personal lines market remains extremely difficult. And volume is down. But this was partially offset by increased sales of extended service contracts due to GM promotion plus strong results in our UK and Mexican operations.

On slide 11, we lay out a condensed income statement for insurance, giving you additional detail about the business. Premiums have fallen slightly, reflecting lower premiums written in prior quarters. Investment income was negative due to realized losses driven by the extreme market volatility we experienced in the third quarter.

During the quarter, we reduced our exposure to certain industry groups in the investment portfolio for insurance, which contributed to total realized losses of nearly $90 million. This included $26 million of impairments from Lehman Brothers securities we held. In all, the insurance operation continues to be a solid performer for GMAC.

And that brings us to ResCap on slide 12. We continue to execute on our strategies to reduce the balance sheet here and lower operating expense. However, market conditions have overwhelmed these efforts somewhat.

By the end of the third quarter, we've reduced ResCap's balance sheet to $67 billion, including components of the auto bank, roughly 50% off its peak at the end of 2006 and down $6 billion since the end of the second quarter. However, tight credit and depressed market conditions are slowing our ability to shed distressed assets. Depressed home prices and weak consumer credit continue to drive increased loss frequency and severity. This has rippled through the HFI book in the form of increased allowance for credit losses, higher loan repurchase reserves and additional real estate asset impairments.

In addition, market conditions have made it difficult for ResCap to maintain capital and liquidity. As a result, ResCap has become dependent on GMAC for support. Our Q3 results included restructuring costs, lower valuations on mortgage servicing rights, and negative results from foreign currency changes.

The graphs on slide 13 show this. The upper left hand corner shows ResCap's third quarter loss of $1.9 billion. The graph just the right illustrates what I was saying earlier about the reduction in ResCap's balance sheet, which has dropped 42% in a year's time.

In the bottom left corner, you can see that the primary servicing portfolio is down a bit at $426 billion. Q3 continues the downward trend originations due to domestic market conditions, tightening of credit standards, and elimination of all international production, except for Canadian-insured loans.

Now let's go into more detail, turning to ResCap's income statement on slide 14. Net financing revenue showed a loss of $62 million reflecting lower originations and asset levels and a higher level of non-performing assets. Servicing fees of $369 million reflect the sale of certain servicing assets in 2007. Servicing asset valuations net of a hedge were $261 million negative due to higher cost to serve.

While the gain loss on sale line was negative again this quarter, it was an improvement compared to year-ago levels when we recognized significant write downs as you may recall. With a continuing mortgage market disruption, we reduced the size of our book. And we marked down the less liquid portfolios in previous quarters.

The other income line was better than year-ago levels for a similar reason. Last year, we took negative valuation adjustments on our trading securities due to illiquidity and rising credit assumptions.

The provision for credit losses remains high at ResCap. We increased the allowance for loan-loss coverage ratio for the HFI and lending receivable books as a result of falling home prices and increased severity. These trends are especially evident in the US, the UK, Spain, and Germany.

Our consolidated coverage ratio was 4.8% without FAS159 assets and 4.5% including them. Non-interest expense is up despite our reduced cost structure. This was due to negative foreign exchange results, higher loan repurchase reserves, and $73 million of restructuring charges in the quarter. Also, Q3 2007 included a $455 million charge for goodwill impairment.

Next, let's run through some credit metrics for ResCap, turning to slide 15. Nonaccural loans as a percentage of HFI loans increased to 15%, once again excluding FAS 159 loans, due to weak consumer credit and falling home prices. And you can see that. Net charge-offs as a percentage of HFI loans increased to 0.71%. Nonaccrual loans as a percentage of lending receivables increased to 21.8%. And net charge-offs decreased to [0.14%] (corrected by company after the call).

Slide 16 provides an overview of nonprime risk in the book. You can see that we continue to bring that risk down but at a lower pace now that we've eliminated the bulk of the exposure. This trend should continue for some time.

Credit exposure to nonprime is minimal in the servicing book. The decline in nonprime exposure in the warehouse lending and HFI books is due largely to runoff. We no longer originate nonprime assets in either space. And we'll work off a book at a time. We've also stopped originating nonprime loans in the held-for-sale book. We expect the remaining nonprime to be amortized down or be sold.

On slide 17, we lay out ResCap's cash and equity positions. ResCap ended the quarter with total equity of $2.3 billion. During the quarter, GMAC contributed ResCap bonds with a face value of $93 million and a market value of just over $50 million. In addition, GMAC forgave $100 million of other debt. This equity increase was more than offset by losses in the quarter on that equity base.

ResCap had consolidated tangible net worth of $350 million at the end of the quarter in excess of its minimum requirement of $250 million. This calculation excludes the equity in GMAC bank, as you may know.

ResCap was above its cash covenants at quarter end. The consolidated ResCap cash balance of $6.9 billion was up modestly from the prior quarter and up significantly from year-end levels, primarily due to GMAC Bank, which built up cash of $4.9 billion to fund future originations and maintain safe capital levels.

The execution of strategic initiatives is reducing the balance sheet and lowering operating costs. However, credit-related costs and lower production continue to negatively impact ResCap results.

We still have a number of asset sales and business wind-downs to complete. We're looking for other opportunities to reduce risk and leverage. We remain focused on the liquidity picture and will only originate loans if there's a distribution channel available for those loans, as we've said in prior periods.

Normally, we don't spend much time talking about GMAC's other segment since it's traditionally not a big driver of our results. But in the third quarter, other posted a loss of $414 million. So I'm going to spend just a few moments outlining [that].

As you may remember, the other segment includes our corporate unit, our GMAC commercial finance unit, and investment in our formal commercial mortgage sub. Nearly all the loss in the other segment in the third quarter comes from our corporate unit, however. The corporate unit includes the results of inter-company lending and eliminations from consolidations. The inter-company lending and investing activities generated a negative $169 million of net revenue. This figure includes $137 million of realized losses, primarily on Lehman securities.

Remember, we also had $26 million of Lehman securities in our insurance book as well. In addition, corporate noninterest expense has increased as we continue to build out our control infrastructure.

The last business operation we want to cover is GMAC Bank on slide 18. Now that our ownership of the bank has been confirmed, we're focusing our efforts on growing the bank, of course, within FDIC guidelines. We ended the quarter with $32.9 billion of assets in the bank. Of that, roughly $8.5 billion was auto assets. And the rest were mortgage assets.

During Q3, we increased our marketing at GMAC Bank. Those efforts have already driven an increase in retail deposits that's material. As you know, there's an agreement with the FDIC that outlines certain ratios we maintain as a condition of owning GMAC Bank. At the end of the third quarter, we met all the required ratios, except the equity-to-assets test at the GMAC LLC top-of-the-house level. The actual figure at the end of Q3 was 4.38% compared to the 5% target set by the FDIC. We're in discussions with the FDIC regarding our proposed actions and timetables to get back into compliance with this requirement.

With that, we'll move to the GMAC consolidated level. On slide 19, we walk the cash balance from Q2 levels to the end of Q3. GMAC ended the quarter with $13.5 billion on a consolidated basis, down to about $800 million from the end of the second quarter. Significant debt maturities within the auto segment, which you can see in the chart offset by reduced originations drove most of this change.

Keep in mind that of the $6.6 billion cash outside ResCap and outside the bank, a subset of that sits in foreign subs and in our insurance company and is therefore not easily accessible to our treasury teams. In contrast, ResCap cash increased during the quarter due to increases at GMAC bank as low originations and operating costs more than offset the loss of certain funding.

GMAC Bank's cash increased by more than $1 billion during the quarter. As I mentioned earlier, we increased deposits to fund future originations.

Maintaining these cash balances has become a significant challenge, given the volatility in the capital markets over the last few months. We don't believe that this will get any easier until the markets begin to stabilize. GMAC has benefited during this credit crunch from a high level of secured committed funding. Nonetheless, the current environment has made it extremely challenging for us to find new funding, such as in the ABS markets.

To provide more transparency on our funding picture, slide 20 provides a breakout of our short-term and long-term debt on the balance sheet. We protected liquidity through a series of self-help initiatives, as I mentioned, including reductions in retail auto loans and leases in the US and Canada as well as commercial and consumer lending cutbacks in other selected countries.

Reducing originations is not something we want to do. But we felt it was important in this environment to make absolutely sure that our originations are in line with our available committed funding.

At the same time, our funding levels have come down as a result of the frozen credit markets. Our short-term debt is under pressure, especially unsecured borrowing, such as commercial paper, demand notes, and short-tenor bank loans. This is a direct result of increased risk aversion in all parts of the credit market, banks, institutional, and retail.

The changes in our long-term debt are less dramatic. But this table shows that we are not replacing long-term debt as quickly as it rolls off. This is due both to our strategy of de-levering the balance sheet, but also to the volatility of the capital markets, as you might suspect.

Slide 21 gives you more detail on the trends in our committed bank facilities. We've laid it out a bit differently from what you've seen previously in our 10-Qs and elsewhere by breaking out the whole-loan forward flow agreements separately in a memo item at the bottom.

Overall, we've seen the capacity in our committed bank facilities decline modestly, while the amount outstanding is nearly flat. We've increased our use of the $11.4 billion secured revolver line we've put in place this past June. We'd have preferred to continue to use the public and private ABS markets to generate this funding. But those markets are effectively closed, as I mentioned.

In fact, we've also seen activity in the asset-backed CP market fall sharply over the past several months. As a result, our NCAT asset-backed CP conduit applied to participate in the Federal Reserve's CP purchase program. NCAT was approved. And we've executed over $5 billion in trades under the facility over the last two weeks.

One last note before we move on -- GMAC met all the covenants in its lending agreements at quarter end.

At the end of last quarter, I mentioned that 2008 was shaping up to be one of the most challenging years we've seen. In fact, this is the most difficult environment we've ever faced. We've addressed these challenges with a self-help plan. To date, we've undertaken restructuring to ResCap and our North American auto operation. Earlier this year, we completed a massive refinancing of our bank commitments and ResCap bonds.

We've secured ownership of GMAC Bank for another 10 years. We've shed non-core operations, such as GMAC Home Services and GMAC Reinsurance. And we have reluctantly reduced originations and increased pricing on all of our automotive lending products.

As you know, the US government has launched a number of programs intended to stabilize the credit markets. And GMAC is attempting to access these tools. I mentioned earlier that our NCAT facility is now participating in the Federal Reserve's CP purchase program.

GMAC is evaluating other programs, such as discount window access, which incidentally we already have to a limited extent in our ILC, TARP funds, and other funding under the FDIC's liquidity guarantee program.

Finally, as I mentioned, GMAC has applied for a bank holding company charter. We believe that as a bank holding company, GMAC would have a greater chance of participating in the various government liquidity programs. However a bank charger would bring us an increased level of regulation and would require significant changes to GMAC's corporate structure and product array.

While we believe that a bank holding company with a deposit funding structure is a great solution to becoming a successful lender and servicer, there is absolutely no guarantee that our application will be successful or when we might get a decision on our application. So accordingly, we've built our business plan around the self-help strategies I've mentioned frequently here today.

A bank charter or participation in any of the government programs is an upside to these plans. But regardless of the outcome of our application, we'll continue our efforts to protect liquidity at almost any cost, even if it means further reducing our lending originations.

GMAC's focus on the short-term tactics needed to survive this environment is critical. But we also remain committed to the strategies we've laid out in prior quarters to shift GMAC away from our captive roots toward independent, deposit-funded auto-centric lender and servicer. Longer term, we believe these strategies will serve as the groundwork for a stronger GMAC as well as long-term support for our dealers, consumers, and General Motors. Thank you very much.

Thank you, Rob. This concludes our call. We did want to thank you for your continued support of GMAC and ResCap and your patience with the change in format. And we will be providing a similar update in future quarters. Thank you very much, Stacy.

Thank you for your participation in today's conference. This does conclude your presentation. You may now disconnect. And have a great day.