Ally Financial Inc. (ALLY) Earnings

Management highlights

### Overall Strategic and Financial Performance - Q2 2026 adjusted EPS of $1.21 increased 22% year-over-year, core ROTC rose to 11.8%, and adjusted net revenue of $2.3 billion grew 10% year-over-year driven by asset growth and margin expansion. - Net interest margin (NIM) improved 11 basis points sequentially to 3.63%, supported by lower deposit costs. - CET1 capital ratio increased 20 basis points year-over-year to 10.1%, providing greater capital flexibility; over $300 million has been returned to shareholders via share repurchases since the December authorization. - Adjusted tangible book value per share reached $42, up 13% year-over-year, paired with a stable quarterly dividend of $0.30 per share. ### Brand and Cultural Strength - The "Life Today" marketing campaign has delivered strong improvements in brand health, awareness, and customer engagement, with industry-leading customer retention. - Employee engagement scores rank in the top decile of U.S. companies for the seventh consecutive year, with particularly strong improvement in alignment with company strategy; management views engaged employees as a core competitive advantage. ### Capital and Balance Sheet Management - Completed a fifth credit risk transfer transaction, generating approximately 20 basis points of additional CET1 capital, demonstrating ongoing market demand for Ally's retail auto assets. - Issued $1 billion of 7.1% coupon preferred stock to redeem the higher-cost Series B preferred stock, resulting in a $350 million reduction in outstanding preferred stock and improved long-term capital economics; a one-time $15 million early redemption charge was excluded from adjusted results. - Executed $148 million in share repurchases during the quarter, bringing year-to-date repurchases to nearly $300 million. ### Asset Quality Trends - Consolidated net charge-offs were 111 basis points, flat year-over-year and down 10 basis points quarter-over-quarter; the improvement included a P&L benefit from the resolution of a legacy non-accrual corporate finance loan originated in 2015, where built reserves exceeded realized losses. - 30+ day all-in delinquencies fell 8 basis points year-over-year to 4.8%, though the pace of year-over-year improvement has moderated as expected; overall portfolio credit quality remains solid, with delinquency rates, used vehicle values, and flow-to-loss rates remaining active watch items amid ongoing macro uncertainty. - Consolidated reserve coverage ratio was 2.49%, down quarter-over-quarter due to the corporate finance reserve release; retail auto reserve coverage held steady at 3.75%, balancing solid current performance against broader macro uncertainty.

Guidance

- Average earning assets growth guidance was revised upward to 3-5% for 2026, from the prior 2-4% range, reflecting stronger-than-expected retail auto originations and continued momentum in corporate finance. - Consolidated net charge-off guidance was narrowed to 1.2-1.3% for 2026, from the prior 1.2-1.4% range, reflecting better-than-expected credit performance through the first half of the year. Retail auto net charge-off guidance is held steady at 1.8-2%, with management viewing the midpoint as the appropriate base case. - Full-year 2026 NIM guidance is maintained at 3.6-3.7%, with the potential to exit the year above the high end of the range. Management reaffirmed the long-term target of a sustainable upper 3% NIM over time, despite recent shifts in short-term interest rate expectations. - S-tier origination mix is expected to decline modestly from the 47% level in Q2 2026 and settle in the low-to-mid 40% range over time, which will support originated yields in the absence of benchmark rate changes. - Retail auto origination year-over-year growth rates are expected to moderate in the second half of 2026 following the strong double-digit growth in the first half. - Management expects to continue delivering positive operating leverage, with revenue growth outpacing expense growth, supported by the company's focused strategy on core competitive businesses.

Segment performance

1. Dealer Financial Services (Auto Finance): Auto loan originations reached $13.3 billion, up 21% year-over-year, supported by record application volume of 4.6 million (up 17% year-over-year). Pre-tax income was $410 million, lower year-over-year due to CECL reserve builds from strong asset growth. Retail origination yield hit 9.1%, with 47% of originations in the lower-risk S-tier segment. Retail auto and corporate finance assets grew 8% year-over-year to nearly $8 billion. Retail auto net charge-offs improved 18 basis points year-over-year to 157 basis points, marking the sixth consecutive quarter of year-over-year improvement. 2. Insurance: Written premiums totaled $382 million, up 9% year-over-year. Core pre-tax income was $24 million, an increase of $26 million year-over-year. It contributes capital-efficient, diversified revenue and contributes to the full-suite dealer value proposition. 3. Corporate Finance: Delivered record pre-tax income and a 32% return on equity. The portfolio ended the quarter at $13.7 billion, up 25% year-over-year. Non-accrual loans are at historic lows, demonstrating strong credit discipline. 4. Digital Bank: Retail deposit balances ended the quarter at $144 billion, representing 87% of total company funding. The bank serves 3.6 million customers, up 7% year-over-year, marking the 69th consecutive quarter of customer growth. Nearly 70% of new accounts come from millennials and younger consumers. Cost of funds decreased 12 basis points quarter-over-quarter driven by disciplined deposit pricing actions.

Risks & headwinds

- Ongoing cumulative inflationary pressures and a dynamic evolving macroeconomic backdrop create uncertainty around consumer credit performance, with higher energy costs pressuring consumer affordability. - Delinquency rates remain elevated even as net charge-off rates have improved, and continued high energy and vehicle costs could pressure consumer ability to make loan payments over time. - Used vehicle values, which have supported lower loss rates in the first half of 2026, could deteriorate, leading to higher-than-expected net charge-offs. - Finalization of new U.S. bank capital rules (RSA) creates uncertainty around required capital levels, though management currently projects CET1 will remain above the 9% internal target even after full implementation. - Interest rate volatility and potential unexpected rate hikes can create short-term fluctuations in net interest margin, even as the long-term expansion trajectory remains intact. - Corporate finance has inherent lumpiness in credit losses, even with strong underwriting and reserve discipline, that can lead to quarterly volatility in reserve levels and earnings.

Analyst Q&A

• Q: Retail auto net charge-offs came in better than expected with accelerating year-over-year declines, but delinquencies have leveled out. With the Q2 spike in S-tier origination mix, how does this align with your 1.8-2% 2026 net charge-off guidance and long-term 1.6-1.8% target loss rate?

  A: Management notes that credit performance in the first half of 2026 has been stronger than expected, supported by record low flow-to-loss rates and resilient used vehicle prices, so the 1.8-2% full-year guidance is maintained with the midpoint as the base case. The elevated 47% S-tier mix in Q2 is driven by normal seasonality and the company's measured credit posture amid high macro uncertainty, and is not a structural shift — management expects the mix to return to the low-to-mid 40s range over time. Consumers are triaging payments amid higher costs, but the strong labor market is supporting performance, and single-quarter mix shifts should not be overinterpreted, as quarter-to-quarter volatility is normal. Long-term, management still expects to reach the 1.6-1.8% loss rate over time, but does not expect to hit this target in the next two quarters, as the quarterly NCO reflects multiple vintages at different stages of loss development.

• Q: You noted auto origination growth will moderate in the second half of 2026 — what is driving this expectation, and how will moderating growth impact CECL reserve builds going forward?

  A: The strong growth in origination volume so far this year is driven by successful dealer incentives to increase application volume, which has expanded the top of the funnel and allowed the company to select accretive, risk-adjusted originations — this strategy still has runway, so growth will remain strong but year-over-year comparisons will moderate after the double-digit growth achieved this year. Current reserve coverage of 3.75% for retail auto appropriately balances the solid current credit performance and ongoing macro uncertainty. Management does not plan earnings around future reserve releases, but slower growth will naturally lead to a slower pace of CECL reserve builds than the elevated level seen in Q2 2026 from faster-than-expected asset growth.

• Q: With the legacy 2015 healthcare corporate finance loan resolved, is the current 1.19% reserve coverage a normalized level, are there other similar legacy non-performing loans outstanding, and how does reserve coverage differ between private credit and the rest of the portfolio?

  A: The resolved healthcare loan was originated in 2015 in a vertical the company no longer participates in, and it has been on non-accrual status since 2018 — there are no other similar large legacy troubled loans in the current corporate finance portfolio. The reduction in the overall reserve ratio reflects the release of specific reserves tied to this loan, and quarterly volatility in the aggregate reserve level should be expected due to the lumpiness of large credit resolutions in corporate finance. Non-accrual loans are currently at historic lows, the private credit portfolio performs strongly, and the overall credit-first culture of the business has driven conservative reserving and successful work-outs of troubled credits; the resolution of this loan, where reserves exceeded realized losses, demonstrates this conservative approach.

• Q: With stronger-than-expected revenue growth, how should we model full-year expense growth, and what is the outlook for operating leverage going forward?

  A: Q2 2026 delivered strong positive operating leverage, with revenue up 10% year-over-year and expenses up only 5%, in line with management's expectations. The expectation of ~3% second-half expense growth is appropriate, and management will continue to target revenue growth outpacing expense growth to sustain positive operating leverage. This dynamic is a core benefit of the company's focused strategy, which prioritizes growth in core businesses where Ally has established competitive advantages and scale, creating natural operating leverage as volume grows.