Ally Says It Is Better Able to Withstand a Downturn Than Before

   By Andrew R. Johnson 
 

Ally Financial Inc., the auto lender that is majority owned by the U.S. government, predicts it could survive a severe economic downturn with enough capital to meet regulatory requirements.

The Detroit-based company said Tuesday that its Tier 1 common ratio--a key measure of capital strength--would fall to a minimum of 6% during a hypothetical nine-quarter period of rising unemployment, falling home prices and stock-market turmoil.

Regulators require a minimum Tier 1 common ratio of 5%.

Ally had previously forecast a minimum ratio of 5.7% in March.

The company released the estimate per a requirement of the Dodd-Frank Act, which called on large banks to conduct for the first time this year mid-year stress tests to gauge their ability to weather another economic crisis.

Ally was one of two banks that had their capital-allocation plans rejected by the Federal Reserve in March under a separate series of stress tests called the Comprehensive Capital Analysis and Review, or CCAR.

While similar to the Dodd-Frank tests, the results of the CCAR exams are closely watched by investors because they determine whether banks will get the Fed's blessing to move forward with share repurchases and dividend payments.

Ally, which is 74% owned by the U.S. government, is looking to buy back $5.9 billion of preferred shares that the Treasury Department owns in the company as part of the agency's bailout of the bank during the financial crisis.

The Fed in March objected to Ally's capital plan under the CCAR exam, estimating the bank's Tier 1 common ratio would fall to 1.52% in a severe downturn.

Ally criticized the Fed's results at the time, arguing that the regulator failed to take into account other capital it has at its disposal.

Chief Executive Officer Michael Carpenter said last month that Ally was preparing to submit a revised capital plan to the Fed as it is required to do. Ally planned to seek permission to purchase the $5.9 billion of shares held by Treasury, Mr. Carpenter said.

In conjunction with that plan, Ally is also raising about $1 billion by selling common stock to about 12 investors in a bid to boost its capital levels.

The company, formerly known as GMAC and once the in-house financing arm of General Motors Co. (GM), has taken other steps to raise capital and cut expenses to get on more stable footing.

Its subprime mortgage subsidiary, Residential Capital, filed for Chapter 11 bankruptcy in May 2012, a move intended to sever Ally from costly litigation over soured mortgage securities that had weighed on the company. The U.S. Bankruptcy Court in June approved a $2.1 billion settlement Ally reached with ResCap and the subsidiary's creditors that largely shields Ally from such litigation.

Ally has also sold billions of dollars of assets, including international auto-lending and insurance operations as well as the servicing rights to mortgage loans.

The company said Tuesday it estimates loan losses over a hypothetical nine-quarter period would total $2.3 billion, the same as what it estimated in March.

It would suffer a $3.8 billion pre-tax loss during the period when excluding discontinued operations. It previously predicted a $4.7 billion pre-tax loss.

Write to Andrew R. Johnson at [e-mail]

Subscribe to WSJ: http://online.wsj.com?mod=djnwires