Ally joins ranks of banks moving to curb interest rate risk

Ally Financial is signaling it’s not finished playing offense on its capital strategy. The bank’s latest move — a multibillion-dollar balance sheet restructuring — uses some of the flexibility it’s built up recently to ease pressure on long-underwater bonds, but will come at a one-time, $250 million loss to its first-quarter results.

The Detroit-based digital lender sold a $2.5 billion piece of its investment portfolio, at a cost of about $2.8 billion, according to a public filing. It’s part of an ongoing effort by the company to boost capital flexibility and strengthen its balance sheet and operations.

Ally’s latest play — it plans to use the proceeds from the investment portfolio sale to buy “shorter duration highly liquid securities at current market rates” — will “modestly” boost net interest income and net interest margin going forward, per the public document, released Tuesday afternoon. The company’s Common Equity Tier 1 capital ratio will take about a 12 basis-point hit.

Ally is joining a robust roster of banks, including KeyCorp, PNC Financial Services Group, Synovus Financial and a slew of community banks, that are taking one-time losses to get a better grip on unrealized losses.

Ally Chief Financial Officer Russ Hutchinson said Wednesday at an industry conference that the $192 billion-asset company prioritized the securities restructuring, not only because of its benefit to profitability, but also to help manage interest rate risk.

Interest rates started inching down in the fall — albeit at a slower pace than many banks expected — but companies are still grappling with now-underwater bond portfolios from the effects of the rapid rise of rates in 2022 and 2023. 

“The way we think about it is probably a little bit different from other people,” Hutchinson said. “As we look at securities repositioning for this trade, and potentially any future trade, we look at it thinking about dual benefits as opposed to looking at it necessarily and just strictly [a net interest income] payback-type mechanism.”

The bank’s stock was up about 1% Wednesday, trading at $35.22 per share. 

Ally’s balance sheet restructuring wasn’t a surprise. Hutchinson said in January that the bank would consider repositioning its investment portfolio as part of recent efforts to deploy capital efficiently, though the company’s top priority was investing in Ally’s core businesses — such as its bread-and-butter auto lending services.

Hutchinson added Wednesday that Ally’s capital strategy is largely unchanged, even as the threat of regulatory proposals that had been agitating major banks in recent years seems to have waned. Ally has deliberately built a larger capital cushion to manage through both any shifts in the rules and the volatility of unrealized losses, he said. The company ended 2024 with a CET1 ratio of 9.8%

The bank recently agreed to sell its relatively short-lived credit card business in a deal slated to close this year. The transaction should add 40 basis points to its CET1 ratio and $1 of adjusted tangible book value per share, Hutchinson said on Ally’s fourth-quarter earnings call.

Hutchinson at the time floated the possibility of a securities portfolio remix, adding that eventually, the bank could also use capital for share repurchases.

The bank has also been padding its capital through credit risk transfers — transactions that involve external investors taking on the brunt of the risk in loans, freeing up banks to hold less capital against some of their loans. In the fourth quarter, Ally issued its second such transaction. The deals, which function like insurance policies, give banks some wiggle room to use some excess capital or make more loans.

The card business sale, the credit risk transfers and Ally’s exit from some other verticals, such as its point-of-sale lending business, give the bank options for how it could use extra capital, Hutchinson said in January.

“As we evaluate the alternatives, we’ll be very much focused on shareholder value and on what’s going to drive us in terms of risk-adjusted return,” he said. “But you can expect a continuation of the capital discipline that we’ve been talking about all year long.”