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

Continuing running along, very pleased to have Ally Financial with us next. [Operator Instructions] With us representing Ally up next, very pleased to have Jenn LaClair, Chief Financial Officer of Ally Financial. Jenn, good morning.

Good morning, Jason. Thank you so much for having me. It's a pleasure to connect with you virtually and share an update on Ally.

No, I appreciate that. Maybe as we put up some slides that you guys closed this morning with some new guidance, which we can get to in a second, can you provide maybe some perspective, as in Ally's strategic objectives to kind of kick it off?

Okay. Sure. And good morning, everyone. Just a quick reminder, we do have a presentation that's available for all of you on our Investor Relations website at ally.com. And just do want to remind everybody that on Slide 2, we have our forward-looking statements and risk factors, and the content of today's call will be governed by this language. So Jason, back to your question, appreciate that. Just in terms of our strategic priorities, you can see here where we've been focused. No change as we've come through 2020, we are still focused very much on executing our long-term priorities, which I'd characterize kind of in 3 buckets. One is continuing to optimize our more mature businesses. So our leading auto franchise, our large and growing direct deposit business. And then second, continuing to scale up some of our newer businesses. We've been focused on diversification across our bank products. You can see a number of areas that we've expanded our capabilities, and we're seeing just terrific momentum across all of our newer businesses here in 2020. And then last but not least, from a financial perspective. We're continuing to focus on growing book value, which we'll do here in Q3 and for full year of 2020, and resuming a path to expanded return on tangible common equity. We had a great path getting us kind of through 2019, took a step back as we built reserves in the first half of this year. But post-COVID, and as we emerge from the crisis, we absolutely see a clear line of sight into expanding return profile for our company. I will say, COVID has introduced a very unique operating environment, and we've been really fortunate here at Ally to be able to rely on our strong values. And in fact, you can read our values that are just above me. There's -- it's no coincidence here that we have our values front and center in everything we do here at Ally. And you saw that just in March as COVID kind of really started to accelerate, we were one of the first companies to come out with very comprehensive forbearance programs. In fact, a retail auto forbearance program had one of the highest take rates, 30% take rate, multiples of what you saw across the rest of the industry. And that was really around our value on supporting the customers, really building that loyalty and doing everything we could to make sure our customers successfully navigated the stress of COVID. And I'm really pleased to say that we're seeing that loyalty show up in payments. I know, we're going to spend some more time on that this morning, and that's top of mind for everybody, but we're also seeing it in other areas. We just had a study conducted that showed -- suggested that our retail auto forbearance customers are 30% more likely to purchase a product from Ally coming out of their experience with us through COVID. And second, we have continued to focus on supporting our employees that is an absolute value of ours, and it's -- there's a very simple philosophy there around take care of those that take care of your customers. And you saw us very quickly, decisively to move to work-from-home. We were 99% work-from-home in a few weeks' time. We've expanded health care benefits for our employees, and also provided some special compensation programs to augment cash flow for our employees as well. And then focus on the community. So it's really taken a new level of importance for us this year. It's nothing new to Ally. We've always demonstrated our commitment to our communities. But certainly, as we've seen racial injustice really start to come to life this year, we've continued to find unique opportunities to support our communities. And you're going to see more and more in that regard coming out from Ally. From a performance perspective, I think bottom line here, Jason, we are incredibly pleased with the performance across every one of our operating units. And while we have strength coming into COVID, COVID has very much served to validate and answer the questions around the viability of the Ally model, whether that's performance in our Auto segment, whether that's the viability of digital deposits, our ability to expand new products, and we'll get to some of the specific operating results, but we have record level of performance this year. And we're really pleased to see that and have the opportunity to demonstrate just the strength of our business model and our performance through COVID in this very challenging environment. And then last but not least, I mean, we all recognize we are operating in a period of volatility. And so what's been incredibly important to myself and all of Ally's just strengthening our balance sheet, what you'll see is some of the highest capital levels we've had in the history of the bank, liquidity levels off the chart, and we acted very quickly in the first quarter to establish robust reserves, augmented those reserves a bit in the second quarter. So first half, feel great about our setup from a reserve perspective relative to what we're seeing in actual. Now we'll be mindful of the stress to come, but we feel incredibly well-positioned from a balance sheet management perspective at this time.

That was a really good overview.

One of the things that you mentioned that come out was at 30% kind of take-up rate on deferral programs. Maybe just give us an update of what you're seeing there now that I think one of those -- majority of those participants have likely rolled off?

Yes, sure. And I know this is front and center for everybody, all of our analysts and our investors, and happy to provide an update. I'll start on the consumer side and then go to commercial. But in our retail auto consumer forbearance program, I mentioned 30% take rate of 1.3 million customers that entered the program. And just as a reminder, the population that entered this program was a healthy one, but it was high FICO scores. Most -- the vast majority of these customers had never deferred, never been delinquent. So we had good credit coming in, and I'd say we have pretty exceptional credit coming out of the program. You can see here on the bottom of our slide that 96% of our customers have rolled out of the program as of August. In September, we'll head pretty close to 100%, hit about 99%. And at this point, 86% of our customers are current, meaning they either paid-in-full or they're less than 30 days past due. So just a terrific result, just by point of comparison, historically, Jason, we typically saw about a 70% paid-in-full or current level from our past deferral program. So we're materially outperforming what we've historically seen in our forbearance populations. So if you take that performance, you add it to the performance of our nondeferral population, which is also performing well, we're seeing in August our delinquency trends coming down fairly materially on a year-over-year basis. So our 30-plus delinquency, and you can see all of these numbers in the upper left, be down over 100 basis points, about 110 basis points, 60 plus, down 15 basis points which positions us for the third quarter to have NCOs coming down on a year-over-year basis. So as we've absorbed the Forbearance program, we're looking at current metrics. We are adjusting our guidance for 2020. We were originally guiding towards retail auto NCOs at 1.8% to 2.1% this year. Jason, we're adjusting that down to plus or minus 1.3%. And every single month, we continue to see better credit quality coming out of the deferral program. So if anything, we could even be down year-over-year '19 to '20 in terms of our retail auto NCO performance. So really great performance. I do want to just remind everyone, this is obviously a point in time. We do have a bit of a disconnect right now with what we've seen from the macros. So we'll be mindful of that, and these accounts need to season over time. But definitely, just really, really pleased with the performance. And I think if anything, this program has built loyalty. It's built that connection to our company and our brand. It's allowed our customers to outperform, and quite frankly, it's allowing us to outperform at this point as well. I think it really underscores the fact that many of our customers went into this program as a bit of an insurance policy as we entered the stress of the COVID pandemic.

I guess, Jenn, so I guess, significant outperformance in terms of net charge-offs in the near-term relative to your expectations. I guess, to what extent do you think stimulus kind of played a role in that? And now that some of those stimulus programs are winning and may not be re-upped, how do you think that kind of plays through? And just maybe, what do you think we could expect over the next 6 to 12 months for retail auto losses? And when do you think they'd peak?

Yes. Sure. I mean, short answer to that question, absolutely. I mean, stimulus has been providing tailwinds to the consumer, providing additional liquidity. I'd say, spend levels have come down. I think, we're seeing that in our deposit levels as well as across the entire industry. And then forbearance has also helped as well. And all of those things have contributed to the outperformance this year. We are, right now, and I think this is not unique to Ally, but we're seeing this disconnect between deterioration in the macroeconomic factors, where we had unemployment hit kind of low to mid-teens in the second quarter, it's come down to 8.4%. But obviously, we are operating at unemployment levels that are above our expectations above business as usual. And we would expect, to your question that, that stress will materialize in our retail NCOs. It's not going to be in 2020. It's likely going to pick up in 2021. We have -- certainly, as I mentioned at the outset, we've reserved for that. We have a retail auto NCO -- sorry, retail auto reserve rate of 4.09%. So we're well reserved for that. And I'd also like to remind everybody, we didn't include any stimulus or unemployment or forbearance benefits in that reserve. We also have a fairly conservative reversion to mean macroeconomic factors in the way in which we model CECL, which gives us some protection from a reserve perspective as well. So, I mean, bottom line to sum it up, 2020 outperformance, likely to see some ramp-up in 2021, but we feel very well reserved for that in the approach we've taken to date through CECL and through the second quarter.

I guess, on that, we have a timely question from the audience. But given the outperformance in residual pricing and the roll-off of the deferral programs, could you characterize ultimate losses as being lower or just pushed-off?

Sorry. Is this question -- I didn't know if this was an ARS question.

No. No. No. I'm sorry, Jenn. That was an e-mail question.

I'm sorry. It was because of -- happy to take that. Yes, I mean, look, we have built a reserve based on historic correlations. We would expect that over time, NCO rates will correlate to the macros. And as we've seen unemployment tick up in the second quarter, we would see -- we would expect to see some NCO acceleration in 2021 just based on the macros. I mean, I think a lot of uncertainty around the exact timing of that. But if we look at historic performance to macros, we would expect some acceleration there over time.

Got it. And maybe -- I guess, you talked about the big -- or you obviously had a big allowance built in the first half of the year. Charge-offs are lower-than-expected near-term. Are we kind of done with that allowance build? Do you get to actual release allowances? How should we think about that?

Yes. I mean, I think it's safe to say based on point in time performance that we've built an appropriate and a robust allowance. Now we still have to go through all of our modeling and run through our process here in the third quarter. It's really hard to guide exactly where the numbers are going to land. It's a very robust process, as you know. But at this point in time, Jason, I'd say, look, I think we're appropriately reserved for what we're seeing today. We have great point in time performance. Macros have actually improved modestly from what we modeled in the second quarter when we established our reserves. So we think we're in a good, good position, but more to come as we go through the modeling process in Q3 here.

That's fair. Maybe talk more broadly about what you're seeing for auto volumes. And just maybe how pricing is holding up versus that 7% new origination yield you talked about recently.

Yes. Auto has really been a bright spot for us. And you think about all the questions that have announced around the auto asset class. And I'll just [ dial ] everyone back to the great financial crisis. Auto was very high on the payment waterfall, #1 or #2. Coming into 2020, demand for auto remains high. And I'd say, if anything, COVID has even accelerated the importance of the auto to the consumer. You think about ride-shares down over 50% here in 2020. Public transportation is seeing some of the lowest utilization rates in the past 2 decades. And so you think about the relevance of auto to the consumer, and it's really at an all-time high. So that shows up in a number of areas. It shows up to your question on originations. It's going to show up in used vehicle values, and it's going to show up in payment trends for us. But to your specific question, we are continuing to find robust opportunities to originate at very robust yields. And in the third quarter here, we'll have about $9 billion in retail auto originations at a 7% yield. So you think about just this spread to the benchmark is at a pretty much all-time high for us. And that's really reflective of our diversified capabilities in this space. We can originate every nameplate, full credit spectrum. We're seeing outsized opportunities with traditional dealers like Hendrick, some of the newer entrants into the market, Carvana, Vroom, EchoPark, just really seeing a lot of opportunities to generate robust flows at really incredible pricing relative to benchmark. And our third quarter is not slowing down. We're seeing strong flows in September. We'd expect full year to be kind of low to mid-$30 billion range, with their yield kind of near 7%. Keep in mind, there is some seasonality there. We'd expect pricing to come down just a tad in the fourth quarter, we tend to see higher mix of newer vehicles in Q4. But for the full year, we are positioned to have kind of $30 billion, $35 billion in originations and at that 7% yield. And just as a reminder, this is our tenth consecutive quarter of generating retail auto originations at 7%. And our book in the second quarter was at 6.77%. So we have just this really nice tailwind coming out from a net interest income perspective as well as opportunity to continue to expand NIM as we go into Q3, back half of 2020 and especially into 2021. I do want to underscore that we're not seeing any change to our risk profile. We're not putting higher pricing on the books because we've adjusted FICO bands. In fact, as we came through the first half of this year, we really saw the higher FICO bound clipped due to high incentives from many of the captives. And then as part of our risk management, we clip the lower FICO end. So we're really seeing this opportunity in the value of the curve. Think about that FICO from 620 to 720. And just -- again, it's reflective of the relevance of this asset class, with strong coming into 2020, COVID has further strengthened auto as an asset class. We don't see any signs of that changing. And our model with the diversification that we have and the product suite has allowed us to continue to win in a pretty volatile economic environment.