Ally Financial Inc. (ALLY) Earnings Call Transcript & Summary

All right. Thank you, everyone, for joining. My name is Rob Wildhack. I cover the auto lenders and trust banks here at Autonomous. With me from Ally right now is Doug Timmerman, who runs the auto business there. Doug was recently named the Auto Finance Executive of the Year by Auto Finance magazine. So congratulations, Doug.

I appreciate that. Thank you.

Thank you for joining us.

You bet. Absolutely. Good to be with you guys today.

Yes, to start at the top. Ally has been very successful growing and optimizing the auto business. From a high level, tell us about that evolution and where you're excited going forward.

Yes. I think for us, it really starts with the fact that we're very dealer-centric in our approach, so that means focusing on the wants and needs of our dealer body. And I think that keeps us very much focused on what's happening in the marketplace, on dealer showroom floors. So kind of an example of that is you're thinking about the trend relative to the used vehicle marketplace and the fact that dealers are focusing more on used vehicle retail sales. Obviously, the margins on the new side for our dealers have been compressed. So they've been looking at how do you adjust for that? How do you figure out how to optimize their business? So they've been focusing more on the used side of the business. And then of course, there's also been this trend from a consumer perspective, the fact that the price of a new vehicle is much higher than the price of a used vehicle. That gap has been increasing. So consumers are thinking more about buying a used vehicle than they have in the past. And of course, there's a large supply of off-lease vehicles that are coming into the marketplace, so a lot of selection, 1- and 2-, 3 year-olds. Quality of used vehicles at an all-time high. And then also if you look at features and benefits of used vehicles today, they have a lot of the same technology as a new car. So a case in point of kind of the marketplace moving a little bit more to the used. We've been following that trend by staying focused relative to what our dealer customers are focusing on. And then if you go back in time, obviously, we were captive and today we're independent. And I think that's been kind of a function of taking our game to the balance of the marketplace, which, obviously, the balance of the marketplace has been very accepting and wanting to do business with us and partnering with us. And then most recently, I'll say during my tenure, the last couple of years, we've really focused on how do we optimize the business, how do we take optimization to an all-new level. So yes, as I kind of think about that and the team thinks about that, I really feel that there's a lot of opportunity for us to focus on kind of the core business, our strengths, our competencies and the blocking and tackling associated with the business. And so that's really been our focus. And in that regard, it's how do we better use technology and data and analytics to make even better decisions on the front end relative to consumer underwriting to refine our strategies on the back end. One of the things we've been focusing on is increasing our auto decisioning, not changing when we say yes or no but automating those decisions. And for perspective, just a data point, if you look at our auto approvals today, we're up 75% from where we were in the first quarter of 2018. And why that's important is the faster you can say yes in the car business, you're more apt to capture that business. And that ties into kind of a tactical focus point that we've had and that is to increase our application flow. And so if you look in 2019, our application flow was up 9% year-over-year. So what that means is the combination of that increase in application flow and the increase in the capture rates associated with auto decisioning more of the applications allows us to, one, hold a little bit more rate relative to competition but also concentrate our mix and our volume to the segments that have the very best risk-adjusted return. So kind of some examples and kind of different time lines as to how we've optimized the business. We've made -- we're making a big investment in our SmartAuction business, which is a business that we're really excited about. And so not just changing the dealer experience, improving the dealer experience and functionality, but also building out the technology in a way that we can offer it to large fleet accounts on kind of a private label basis and allows us to compete for, quite frankly, a segment of the business, a big segment of the business that we haven't effectively been able to compete for before. We think we've got a big announcement in that regard here pretty soon relative to large fleet account partnership. So a lot of exciting things going on for sure, yes.

Absolutely, and a lot of things we can dig into. But maybe just to stay with the high-level industry view and competition, auto has been a very good product for the lenders lately. A large competitor is coming back on. So what are you guys seeing out there competitively, both in the new and used channels?

Yes. I think it's probably actually been a little bit, I would say, more consistent maybe than what's -- maybe you're reading about and what you hear. Obviously, there's ebbs and flows, daily, weekly, quarterly, yearly. There's been some players that have kind of come back into the marketplace. And a lot of that has been on the top end of the credit spectrum, where it is very price competitive. We like to be in the belly of the curve where, again, we think the best risk-adjusted returns are. But I think it's been -- quite frankly, it's been pretty similar to what we've seen over the last few years. But it's -- obviously, it's a fragmented marketplace. There's a lot of players in there. For us, obviously, we had a great 2019. We look back in time, 2019 might have been our best year ever. But the exciting thing for us is we think we can take optimization of the business to an all-new level, off to a really good start as it relates to 2020. So origination flow right in line with our expectations. Yields continue to be really good. We're -- we'll be north of 7% for the quarter. So again, back to finding that balance between origination flow and risk-adjusted returns. We feel really good about the start. So...

Yes, but I want to unpack your point on yields a little bit more, too. You touched on application flow. Do you think application flow is the primary contributor and driver of your success with the originated yields? Or is there more to it than that?

Yes. It's really the combination of the increase in outflow and then also the increase in the capture rates associated with that auto decisioning. So again, not changing when we say yes and no, just automate when we know we want to say yes and no and that capture rate. So in other words, we're going to get more of that volume by saying yes faster. So if you think about how it flows, how the process flows through a dealership, you got a consumer that's going through the process, a lender that gets back sooner and offers a rate that's acceptable to the dealer and the consumer. And maybe there's only 1 or 2 players that get back really quickly. Those are the rates that are going to stick. If you're an hour late, the customer's already done. So that's that capture rate, that increase in the capture rate has really helped us to control more of the flow. So the pie is getting bigger. We got more coming through the pipe, and we're capturing a greater percentage of it. And again, what that allows us to do is to kind of concentrate our mix to the best risk-adjusted return and also hold a little bit more rate relative to competition.

Yes. And a talking point for the company has been adding to the dealer count and widening the funnel. How much room is there to continue to add new dealers to the Ally platform?

Yes. So you're never at full employment because there's always ebbs and flows relative to buy, sells. But I'd say, generally speaking, we're probably -- if you look at franchise dealers, we're pretty close to doing business with most everyone that we want to do business with. But there's changes in ownership and then that shifts. So I think we've done a good job there. And now there's opportunity for additional throughput relative to that application flow despite the fact that obviously we've increased a lot last year and off to a good start again this year. The independent space is evolving a little bit. When we think about independent dealers, we think about dealers that are franchise-like. So I think a case in point there is you might be familiar with Sonic and their EchoPark initiative. So they've got 9, what I'll call, large used car superstores that are having tremendous success in the marketplace. They're selling, on average, 500 million used vehicles a month. And so that's one of our partner relationships that we're one of the primary lenders. But that's an independent store but it's very much franchise-like. And you're seeing more and more of that evolution happening. Of course, those are perfect opportunities for us. So...

Got it. Now you've talked in the past about the relationship aspect of your business. And so can you share with us your thoughts there and how you're coaching and directing the sales force to balance maintaining relationships, increasing penetrations and adding new dealers?

Yes. So it's definitely a relationship business where we're a 100-year-old company. I've been along the ride for 1/3 of that, which look in the mirror about that and think about that a little bit, right? So -- and when I look in the mirror, I can see that, I guess. So relationships definitely matter. I've had a chance. I've come up through the business. I've done every job in the business. So that's very helpful. I know how everything works very well. But also, I've moved 12 times along my career. So I worked in virtually every market. And of course, you build relationships over time. Myself, my team, we have relationships that are multi-decades and go over multi-generations as well. And the dealers want to do business on a relationship business. That's kind of how it works. And so interesting enough, I was spending the time with one of our new sales reps, who worked for one of our competitors, I won't say who. But the difference with us, I think, and this is what I get -- try to get our people to really focus on is because of the breadth of the product that we have and because of our position in the marketplace, we have a little bit different position with the dealer principal. So there's certain products like your wholesale floor planning, your loans, your insurance business. Those are decisions that are going to be made by the dealer principal, the owner of the business. And so her comments to me is, "I'm the same person I was before. But now I have the Ally badge, and now all of a sudden, I have access to the dealer owner and principal." And that's -- again, it's because of who we are. It's because of our scale. It's because of our breadth of product. It's because how we go to market. One of the things that we're very good at is cross-selling across our products within automotive. And that's because we have a full breadth of product of anything a dealer would want, whether it's finance product or an insurance product. We also do training and consulting across all those products and services. And then we have a rewards program that rewards the owner relative to the more business he does and the more business he does across the various products. So if you think about all those connect points, you're connecting with the owner, and of course, that brings the relationship together. We're not just out there chasing contracts. We're very much a partner with the dealer. And we handle virtually all the needs that he has. And of course, what makes us different than, say, a captive is the fact that we've got an appetite across all franchises. And today, most dealers have multiple franchise. So that's a one-stop shop versus a captive, though. I just play for one of those dealerships. So...

Yes. And one thing that we've heard when it comes to dealer relationships is the importance of the floor plan business. That's an area where you have a significant presence and have grown nicely. So talk about the importance there, the importance of that business as it relates to your relationship with dealers.

Yes. It ties back to those same points. So again, a dealer owner is going to make the decision as to where they do their floor plan business. What's very important to a dealer, younger dealers learned this from their fathers or their mothers, that it's very important to have a lender that is going to be there consistent in good times and tough times. And of course, that's what we've proven. We're very good at managing the rest. We're very good at consulting with dealers as times get more difficult. So dealers that understand that, we're high on the list relative to they're choosing us for the floor plan. And again, we have an appetite across all franchises. Back to the point of our rewards program is it ties very closely to our floor plan business. So a dealer that does their floor plan business with us will earn additional rewards the more business they do across our products and services. So if they do more retail business, they're rewarded by more awards. So that ties together. And then also as we sit across from the dealer and we kind of think about partnership relative to our floor plan business is we're not looking to do business just for your floor plan or just for your real estate, working capital loans, acquisition lines of credit. We really want a partnership, a dealer that's interested in doing business across our product lines. So if I was sitting across from the dealer and he says, "You know what? I've got -- we've got my retail source. I've got my lease source. I've got my insurance source. I really just want to talk to you about real estate loans, acquisition loans or a floor plan," that's probably just not a fit for us. We want someone that's kind of all in. That's how we approach it. That's how we're best for them. And that's what ties it all together. So it resonates very well for our dealers as well as you can imagine. So...

Yes. You touched on the -- your increased presence in the used market. And used demand is something that we've been seeing industry-wide. Is that -- is the outlook for that to continue? And then how do you feel you're positioned...

Yes. So our perspective for 2020, we see new vehicle retail sales coming down a little bit. We see used vehicle retail sales to be consistent 2020 to 2019. I would say probably half of the market has a mindset similar to ours. The other half thinks that used vehicle retail sales might tick up a little bit and maybe offset the decline on the new vehicle side of the business. So if that were to happen, that's a little plus up from what we have built into our forecast. But I think that the used segment, it continues to be strong for all those same reasons, right? The dealer sees better margins. The consumer recognizes different price points, that gap again. Again, there's a lot of supply coming into the marketplace. That will continue again into 2021. And so I think there's going to be a continued kind of slow change to maybe a little bit more used business for those reasons. When I'm sitting with dealers and talking about, "What are you trying to solve?" oftentimes, dealers are telling me still is, "I still need more used inventory. I still have opportunity to get better on the used side." And so back to my first point is we're very dealer-centric, where we're very much focused on, "Okay. So how do we help solve for that?" And we've got a lot of different ways to do it. Obviously, on the retail side, we purchase a lot of their business through indirect lending. SmartAuction business is a great source for dealers relative to used product. And again -- so we kind of tie into both the supply side and the demand side of their needs. So...

Absolutely. Maybe shifting gears to credit. Can you talk about what you're seeing with respect to credit trends overall?

Yes. So I would say relative to the quality of the business, very consistent. I mean that's our goal, to stay very consistent as well. Risk appetite, very consistent with what it's been and that's how we see it as we go forward. Obviously, last year was a great year. So if you look at our net charge-offs, we came at 1.29%, so that was better than what we had expected, right? We priced the net charge-off rate at 1.4% to 1.6%, and we've been outperforming in that regard. I think some of that outperformance is what I talked about before. I think we've gotten better, the decision-making on the front end. I think we've also gotten better as it relates to the strategies on the back end of the business. But it's also in an environment of a very healthy consumer, very healthy economy. So that's obviously adding to the performance. As we think about 2020, I think that we'll be kind of on the low end of that guidance, the 1.4% to 1.6%. You asked as to why does it go up, well, we do think these vehicle valuations will come down in 2020, not demand-driven but supply-driven. And so it's built into our forecast. We've got a 6% decline on used vehicle valuations for 2020, 5% in 2021. We saw the softening in the fourth quarter of last year. So far, January and February have held up pretty consistent to last year. So we'll see where that goes. Obviously, if used vehicle prices hold up, that's certainly some tailwind for us. For every percentage point change in used vehicle prices, it's about $25 million on an annual basis to our lease book and about $10 million or $15 million to our retail book of business. But again, I think there's going to be some supply-driven pressure on used vehicle valuations. So...

Right. And just on that outlook, if I look at the 2 widely tracked publicly available indices, it's fairly rare for used car prices to be down 5% or 6% for a sustained period.

Right. Yes.

So is it just the supply dynamic that's embedded in there? Is there something that you're seeing in the metrics that you track and in your auction lanes?

Yes, definitely supply-driven, again, back to those dealer discussions. There's still an appetite for more of the right product. So yes, I think it's a supply-driven phenomenon. So yes.

Got it. On the recovery side, that's an area where you've been performing well. What are the drivers there? And are there any areas where you think you can improve or invest? Or any areas you'd like to do a little bit more?

Yes. So what we have -- we have had some good success in doing better on the recovery side of the equation. 2 years ago, we essentially kind of relooked at all the agencies that we use for collections. And we narrowed that down significantly from the number that we were using before, kind of challenging the group that gets selected to outperform, and we've seen that happen. Back to my point relative to collection strategies, one of the things that we've done is also kind of delay it as to when we issue the debt balance after it's been sold to legal. So giving our team a little bit more time to collect and outside agencies more time to collect those balances. Similar strategy that we've had kind of on a general collection effort is we've pushed out -- kind of test and learn along the way as to moving out the issuance relative to repossessions. And what we found is giving our collectors a little bit more time to collect, we benefited from that and also giving time for customers to be able to self-help has helped as well. And of course, with a strong economic backdrop, obviously, that ties in. So we're continually testing and fine-tuning those strategies to find some opportunities. But that's the primary success story around the recoveries aspect. So...

And what are you seeing more broadly with respect to consumer health?

Very, very -- almost surprising, right? So yes, obviously, healthy and confident. If we go back to our application volume on this last Saturday, so think about what was happening last week and think about what we were all thinking about last Saturday, right? So we've had a pretty consistent record application growth in last Saturday. We had really strong application flow. I think we got a little bit more than our fair share. But the industry close to February was really strong. And that's despite everything around coronavirus, everything around the stock market. I think it surprised us. I mean it surprised a lot of the dealers that this is yes, the consumer confidence despite all that we're hearing and thinking about, right? So I think that says a lot, doesn't it? Yes.

Yes. Now going back to the new and used dynamic, intertwined in there is the attractiveness of a lease option. You typically get a new car at a lower monthly payment. Talk about the leasing business, strategic priorities there and what kind of lease demand you're seeing these days.

So we're -- we play, I'll say, kind of an opportunistic role on the lease business. OEMs obviously incentivize our captives to do the majority of the lease business. So if you look at our heritage, what -- we've done a lot of lease business in the past. I think one of the things that we're better than anyone is predicting depreciation curves and residual values. And so kind of leveraging that expertise to look for opportunities in the market relative to make some models that aren't incentivized by the OEM. And so as we kind of scan through the market, we look to where we think we can get the right customer price point, and of course, the right price point at a very good return. So we've got about between -- it runs between $8 billion and $9 billion on our balance sheet relatively as booked. I think that's going to probably be pretty consistent as we go forward. It's obviously down significantly from where it was before, and that's not necessarily a bad thing. But we like, I think, our position today. And I think our opportunities are going to probably be pretty consistent as we go forward as well. But try to find those spots where we can fit into the right customer payment, and of course, fit in that right customer payment at good returns. So...

Yes, absolutely.

A common theme. Everything -- we're trying to balance our flow with the returns and a lean towards the return. So...

Switching to the expense and spending side, where are your priorities there for this year?

Yes. So we're spending on projects that we see good returns. And again, it's mostly around the blocking and tackling associated with the business and where we see that we can optimize the business. Given our scale, obviously, we've got the ability to invest in a lot of different things. Sometimes, I think people think that creativity and innovation, investment in technology ties to new products and new businesses and new verticals and new ideas. And we want that -- the energy to be towards blocking and tackling associated with the business. But...

Got it. And I'll take the typical expense question and invert it a little bit. Where are you most eager to do more? If you had $10 million or $20 million extra to invest, where would you emphasize it?

Yes. I think we're actually pretty well covered. But I'll tell you an area that we're really excited about. And again, this is back to blocking and tackling, but it ties back to our collection business. So if you look at us, you look at our competitors, we still are very much telephone-oriented relative to our collection activity. So I'd say the opportunity for us to really fine-tune mediums around texting, to touching base with the customers, to getting more effective and more efficient relative to use of text to connect with collection customers and to get better performance from that is an opportunity. It's something we are investing in, it's not something that we're not. But I think we're going to find over time that, that's going to really help the performance of the portfolio. So...

Right. And most of your business is in the indirect channel. But direct-to-consumer, particularly digital direct-to-consumer, is one that's increasingly interesting. Talk about your efforts there and how you can be successful in the direct channel.

Yes. So a little bit different perspective in that regard. So if you look at direct-to-consumer lending -- actually, dealers are controlling more of the financing today than they did last year, 2 years ago and 5 years ago. So despite some of the stuff that you hear, dealers are actually controlling more of the financing that they did in the past. And I think another kind of thing that you heard a lot about is peer-to-peer vehicle sells, one consumer selling to another consumer a used vehicle, and there was companies out there that were helping to facilitate that. If you look at that segment of the business, it's actually declining as well. Dealers are actually controlling more used vehicle retail sales than they did in the past. So I think case in point of a couple of trends that you heard a lot about, and I think it ties back to my previous point, is part of what makes us successful is being really tuned into the dealers' wants and needs but also what's really happening in the marketplace. So it gets us focused on truly what's happening. And then of course, by doing so, you're going to be more effective in making it happen on our side. So...

Yes. And maybe a third channel in there would be a partnership channel. So you have a partnership with Carvana.

That's right.

Talk a little bit about that, how that reaches the customer base and other ideas there, things you can do in that respect.

Yes. We feel really good about our partner relationships. And obviously, Carvana is one of them. We have strong relationships with all the large publics and large privates and obviously 18,000 dealers, right? So -- but our approach to -- in kind of thinking about partnerships, and this is something that's evolved over time, is the fact because of who we are, we don't have to partner too early. We can kind of wait until the path becomes more clear. And so as I challenge the team is -- it's when we think about partnership, let's really focus on the biggest and the best in the marketplace. And we attract the biggest and best and it fits very well. And obviously, Carvana is an example of that. I mentioned Sonic and what they're doing relative to the EchoPark strategy they have. It's another case in point. The Hendrick relationship is one that fits very well in a lot of cases. AutoNation is one. Vroom is kind of an up-and-coming digital dealer in the marketplace that we're a primary lender in. But if you look at kind of our lineup of partners, we're very proud of the fact that we partner with the biggest, best in the industry. And we're continually monitoring as to what's happening in the marketplace. And as we see, as things evolve, to partner with those that are evolving. And again, those are the biggest -- those that are the biggest and the best. So...

Definitely. There are a couple of mics around the room. If anyone in the audience has an auto-related question, feel free to...

I wonder -- you mentioned you've been doing this for 33 years. The -- one of the challenges is if we have a recession -- hopefully, we won't. The last one was just so unusual. It's almost like banks were putting out press releases, bragging about how quickly they were getting out of indirect auto lending. If you think to your experience just in normal recessions, '01 or '91, '92, what does it typically look like? What do you kind of see on yields and competition? Where do you see the first cracks on credit? Or where are the early warning signs? And maybe on the used cars, I totally agree that the supply stuff usually doesn't push it down very much. But what do you watch for, for maybe a demand crack and those first signs that something more meaningful could be at risk with used car values?

Right. Yes. So a lot of questions there. I'll try to...

Just the recession playbook.

Yes. I think we've got a great benefit in the fact that we've been through so many cycles. Myself, I've been through many cycles. My leadership team has been through many -- so many cycles. But really, where we see it first gets to be our interactions with the dealers, right? We also see it with our interactions with the customers from our collections teams. The conversations are different. And so if you're sitting across from a dealer and he is checking on a business, he checks on how many did he sell today. That's a normal routine that he's in, no matter where he's at, if he's on vacation mode. So he is very much tuned into how many sold today and what the forward traffic is. So we're getting real-time feedback as to what's happening in those dealer showrooms. And on top of that, we're getting the color of why is that, what's happening and coming through. So one, you get the kind of the subjective perspective of what's happened. Obviously, because of broadened footprint relative to the floor plan business, we're also seeing release patterns. So we're seeing his sales rates along the way. So before anything is reported even on a monthly basis, of course, a lot of OEMs just report on a quarterly basis, we're seeing that on real time. And then if you look at recessions, the average is, call it, 8 months, right? So I think one of the things that as we're thinking through is an opportunity maybe to be even a little bit more opportunistic as you go through a recession. We got to kind of figure out, it's always about a balance. But we're usually very consistent with our dealers and the floor plans and the floor plan business during the recessions, and that's, quite frankly, why dealers do business with us. And so consequently, that's why they're comfortable in doing business with us as well. But I think you get the perspective relative to the conversations. You get the perspective relative to the flow of the business. You know kind of how the business flows through the more difficult times. And I think for us, as we think about the consumer side of the businesses, maybe there's opportunity to be a little bit more opportunistic as we think about recessions as we go forward. But...

Question?

Coming off of Rob's question, just as -- kind of similar. How do you envision different scenarios? How are you kind of preparing? How do you plan to support clients if we have the worst outcome?

Yes. So again, it starts with our commercial business, right? And so as you think about the trends that are happening within their business and you see soft spots in their business, we're very active relative to, "Okay. So this is what we see that's happening in your business. It's what we're seeing in the marketplace." What are their plans to address those issues as they get through those difficult times? And so we're also -- because we get a lot of reps, we're also very tuned into the best practices of how other dealers have kind of worked themselves through those scenarios. And so we can also take a consultative approach as to, "Okay. Have you thought about this? How are you thinking about this?" and give them perspective on things that can help them as they work through those challenges. But if you look at our commercial book of business, I mean on average, you're talking about net charge-off rates of 4 or 5 basis points. I mean it's -- we like all of our asset classes, the retail asset class and the commercial asset class. That commercial asset class performs extremely well in both good times and difficult times. And that's -- part of that is because if the dealer comes upon on difficult times, there's another dealer that is willing to buy that dealership, and there's blue sky associated with it. It helps the lenders transition out of a difficult situation.

So we read a lot about the ratio of consumer on loans are being longer, right? Duration has been extended. The consumers are going over existing car loans into new ones. What's your perspective on that?

Duration actually is pretty consistent. Yes, call it, 2.5 years' duration. So trade cycles have been pretty consistent for a while, yes. And if you look at loan to values going in, also been very consistent particularly relative to our business, yes.

It isn't something that the consumer now takes out, they call them 7 years instead of 4?

We haven't seen that trend change dramatically in our business. I mean we do some 84-month financing, where we align those terms to the very best credits in the marketplace, yes. But our duration has been very consistent. Our advances have been very consistent as well. So...

Any questions?

Capitalizing on the downturn suggests that you're seeing many of your competitors, that they're sort of putting pedal to the metal late in the cycle and they will not have the ability to capitalize during a downturn. Is that correct? Or...

No. I would characterize it as -- floor plan business is an example. So there's a lot of banks, as an example, who get into the floor plan business. And things get to be difficult and then they'll get out. So they'll exit the space. And so that gives you an opportunity to kind of take advantage of that, when they get out and we're consistent and we like the swap or the risk of return to stay consistent through the cycle. And of course, again, back to the fact that your net charge-off rate is very low gives you a spot. So yes, there's definitely fair-weather fans in the auto space. And I guess what I tried to explain is the fact that we're very consistent through the difficult times where, because we understand it, we're confident. If you're not -- if you don't understand it, then obviously it's more difficult to work through. But we see fair-weather fans and market downturns. And I think the opportunity for us to take advantage of that is something that's an opportunity for us, so yes.

So you said you're very good at depreciation tables and forecasting. I mean we're in the midst of a change from internal combustion engines to electrification, right? It's -- we don't know how fast that will evolve. It's not as strong in the U.S. So how do you take that into account, those that may have huge impact on the residual value?

Yes. So obviously, there's not a lot of data in that respect at this point in time. Anytime that you have a gray area, you're going to make sure that you got more than enough cushion to cover the various scenarios, and you're going to price accordingly. So always make sure that you got enough coverage to cover the numbers on the different scenarios in that respect, and then if you price again for the returns. So we're in a very fortunate position, the fact that we're not out there chasing market share, volumes. We're really focused on the balance of the flow and the risk-adjusted returns. And if you can't hold more than enough cushion, more than enough return for the associated risk of uncertainty around the residual value, we'll play in a different space.

Maybe going back to the 7% yield comment. In a scenario like this where rates spike down and assuming the bank side of Ally will price deposits accordingly, how does that interplay with the yields you're able to get? I mean would you then pass that on to the consumer? Would you keep yields where they are and get a little bit more margin? Is it just subject to competition? And if so, how would you expect competition reacting? I guess ultimately, what I'm getting at is, is this rate spike down actually good for your margin? Or is it kind of a net neutral?

Yes. So one of the things that's very unique about Ally is the fact, as we look forward, we would see continuing expansion of our net interest margin. And one of the things that we've proven very successfully is around our betas, right? So if you look in a rising interest rate environment, higher betas on auto space. You look at a declining interest rate environment, lower betas and then the reverse on the deposit side. So that's kind of a perfect scenario, right? And I think that ties very well to your question. So lower rates, low betas, and we've proven that in different cycles. I'm confident that we can continue that as we go forward. And again, how does that happen? It's because you have this additional application flow coming through and the better capture rates. The combination of those things allow us, one, to hold a little bit more, right, to the market and allows us to concentrate more of our volume into the better risk-adjusted return segments.

Maybe I'll just jump back. You talked about the SmartAuction platform a little bit. And maybe for people who aren't as familiar with the product, describe what it is and how it fits with your goals strategically.

Sure, yes. So it's one of the largest online auctions. It's tremendous benefit for us for selling our repossessions and our off-lease vehicles. But we also provide that same benefit to our dealer customers. So they can sell inventory that they're -- before rather than sending it to a physical auction. They can also buy vehicles on SmartAuction. So they'll buy our repossessions and our off-lease vehicles. And so one of the things that we watch very closely is the type of pricing that we get, all-in pricing relative to selling vehicles at -- on SmartAuction repossessions and off-lease vehicles versus the physical auction. And we consistently get better net pricing on SmartAuction than we do through the physical auctions. And so there's a couple of reasons why. So if you're selling on an online auction, obviously, you don't have to transport those vehicles to a physical auction. So that's a pretty significant savings. And then one of the other things that we've had throughout our history is because we're representing a particular vehicle as to being -- as represented, and if it's not as represented, we'll take that back. There's higher demand for our vehicles. So that also helps relative to the pricing. The punchline is it's one of the largest online auctions in the marketplace. It's very good for us disposing of our off-lease and retail business. And it's a great added benefit to the dealers that do business with us to both sell their inventory on there and also buy vehicles on there. And of course, you got a lot of big players, all the large publics, the Carvanas, the CarMaxes, a lot of partner relationships that are very active in there. And then, again, we're making a big investment in SmartAuction because our optimism in the future, and that has to do -- the investment has not just a dealer experience but also to chase that large fleet account activity. I'm excited about, hopefully, an announcement here in the next 3 or 4 months. So...

That's great. About a minute left here. Any other questions from the audience?

As you've sped up the approval process, do you have any concerns around the quality of underwriting?

No. So essentially, what we're doing is automating when we know we would say yes and when we would say no. No change, and no change in the underwriting. No, no. We -- since we auto-approve now about 60% of our approvals, about 64% or 65% of our rejects. And again, what -- we're coming off a great year, and we think that we have an opportunity to getting it better, but we think that there's still another step forward relative to automating more of those, yes.

All right. I think we'll wrap it there. Thank you, Doug.

Okay. All right. Well, thanks for having me. Appreciate it. Thank you.

And just for everybody, Charlene Chu from Autonomous is up next. So stick around because she's our Hong Kong analyst, who will have some insight on the coronavirus and trends in China. Thanks.

She's coming from D.C.

Coming from the D.C. Coming from the D.C. So nothing to worry about there.