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Ally expects up to 115% increase in Day 1 reserves following CECL implementation

Ally Financial Inc. expects its Day 1 reserves to increase 105% to 115% following implementation of new accounting standards.

The current expected credit loss model, also known as CECL, introduces a new accounting method for recording projected loan losses by requiring companies to reserve against them at origination instead of the current standard that requires companies to record provisions for loan losses only when a loss becomes likely. It goes into effect for larger companies on Jan. 1, 2020.

"Following CECL implementation, we expect increased volatility in go-forward earnings, as we move to life of loan reserving and have potential fluctuations in macroeconomic assumptions," CFO Jennifer LaClair said on a call to discuss third-quarter earnings.

Volatility will in part depend on the growth in each loan portfolio because of the "outsized increase" in reserves with the move to a life of loan loss model, the executive said. The increased volatility will also depend on the bank's mix of assets, the risk profile within those asset classes and the macroeconomic forecast, she added.

Ally Bank posted total deposits of $119.2 billion at the end of the third quarter, a $17.9 billion increase from the prior-year period.

LaClair noted that Ally's underlying risk profile has not changed. The bank plans to absorb that initial impact through balance sheet management, and LaClair said it will "continue to prioritize strategic capital deployment," such as investment and accretive growth opportunities, share buybacks and dividends. In April, Ally's board authorized the repurchase of up to $1.25 billion of the bank's common stock.

When asked for details on the impact to earnings per share, LaClair said Ally will provide more guidance as the company finalizes its 2020 plan.