Don’t miss out on news you won’t find anywhere else — get The Memo US and The Memo Europe in your inbox every two weeks

Ally Financial is forging ahead with its plans for credit risk transfer (CRT) even in the face of regulatory uncertainty. The bank has already done three deals referencing auto loans to take advantage of the growing market, while being mindful of the short duration of the transactions.

“We see it as a very useful tool in our box and just helpful to managing the balance sheet and optimizing our overall return profile,” said Russell Hutchinson, chief financial officer at Ally, at Barclays’ Global Financial Services Conference on 9 September.

Ally had been working on bolstering its capital position when Basel Endgame seemed imminent. At the time, it looked like accumulated other comprehensive income (AOCI) would count toward capital, which would impact the lender’s capital position negatively.

Regulators in the US are now reworking their Basel III proposals but Ally is not letting that get in the way of its preparations.

“Until we get told otherwise, we’ve been managing assuming that AOCI will eventually feed into capital and affect us negatively,” said Hutchinson. “We’ve been in capital-build mode as a result of that.”

One step in that direction has been the issuance of CRTs. Ally issued its first credit-linked note referencing fixed-rate auto installment contracts in June 2024, covering $330m of a $3bn portfolio, after receiving direct approval for this structure from the Federal Reserve. The bank went on to issue a roughly $440m CLN referencing a $4bn, October 2024, and a $550m CLN referencing a $5bn auto pool in August of this year.

“They’re highly capital efficient,” said Hutchinson of the CRT transactions.

The effective cost of capital is a useful metric for the viability of the trades. “When you look at the capital benefit from reducing the risk weights as a result of having that insurance in place, the effective cost of capital is very low, much lower than our overall cost of capital,” he said.

“We see it as a very efficient way of managing the balance sheet and supporting our capital levels and positioning us ultimately to continue to support our dealers and to speak for a large portion of originations in the market.”

Treadmill

The capital benefit is tied to the reference assets, auto loans, which are relatively short in duration. The recent Ally transactions have referenced seasoned collateral, further shortening the remaining life of the assets.

“It’s already aged out about six months on average,” said Hutchinson. “When you look at the remaining duration, it’s probably sub two years.”

As a result, the capital benefit from these CRTs runs off relatively quickly, but this can be beneficial in an uncertain regulatory environment.

At the Barclays conference, Hutchinson referred to the "optionality" that Ally had developed by putting the CRTs in place.

On the flip side, the quick run-off of the portfolios means that Ally would have to continue to carry out CRTs on a fairly regular basis to maintain the capital relief benefits over time. Hutchinson said Ally was cautious about relying heavily on the CRT market in this way.

“It’s important to us that we’re able to continue to originate and continue to support our dealers,” he said. “We’re careful about not putting ourselves on a treadmill at a speed that we can’t keep up with. That is, we’re mindful of the fact that RWA comes back.”

“We’ve been disciplined, we’ve been opportunistic, and we’ve been thoughtful about the volume and the timing of when we issue CRTs, not to put ourselves in a position where we’re dependent on what is ultimately a capital markets transaction.”

Ally has done $12bn of CRTs so far, with about $9.5bn on its books outstanding, Hutchinson said.

While Ally has a history of issuing cash auto ABS through its auto receivables trust program going back to 2009, recent approval from the Fed has opened up the possibility to free up capital while keeping the assets on balance sheet.

An SRT can be structured as a credit-linked note (CLN) issued either directly by the bank or indirectly through a special purpose vehicle. In either case, the investor pays for the CLN in cash in exchange for regular coupon payments and a lump sum at the end of the transaction representing the principal minus any losses incurred in the protected tranche.

SRT in the form of directly issued CLNs is limited in the US to an aggregate outstanding reference portfolio principal amount of the lower of 100% of the bank’s total capital or $20bn, per the Fed.

Truist debut

Ally is not the only regional bank that has been issuing auto CRTs in CLN format.

Last week, Truist Bank priced its first such transaction, a $582.5m CLN referencing a portfolio of prime auto loans.

Pioneer auto CRT issuer Huntington has also been busy this year, issuing a $414.75m CLN in March and a $414.8m CLN in August, its third and fourth such transactions, respectively.