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

So good morning, everyone, and thanks for joining us. I'm Moshe Orenbuch, the specialty finance analyst here at Crédit Suisse. And we're very happy to have the management of Ally Financial with us this morning, Jenn LaClair, the CFO. Jenn has been with us before and has been with the company since late 2017, having spent a decade at PNC, prior to that in a number of financial roles and a consultant before that. The format today is going to be fireside chat, so we're going to go straight into questions. So Jenn, welcome.

I want to start with kind of a broader question on how Ally's navigated COVID and the current environment. Give us perspective on Ally's positioning priority strategy and how you've responded to those changes in the environment?

Sure. Thank you, Moshe, and good morning, everyone. It's my pleasure to be here and have an opportunity to share Ally's story and how we're getting out of the gate here in '21. And then just on COVID, I hope everybody is staying safe and healthy and getting vaccinated. But in terms of our priorities, there's really 3 areas that we continue to keep focus. One is our culture; second, business momentum; and third, making sure we continue to deliver compelling financial trajectory. And then maybe I'll make a few comments on each of those. On our culture, I think it's never been stronger in the history of the company, and you saw that demonstrated throughout 2020. We had some of the most flexible and generous forbearance programs across all of our asset classes, some of the highest take rates. And quite frankly, we've been rewarded across our customer base with their loyalty, with outstanding payment trends, and we don't see any of that stopping here through 2021. We've always at the company had a focus on taking care of those who take care of your customers. And so through the pandemic, our employees have been paramount to our priorities, and we've done everything we can, Moshe, to really keep our employees in their jobs, to support them with their physical health as well as their financial health, rolling out enhanced benefits, and we also have a new own it program, which we launched a year ago and have continued this year, where we've made every one of our employees, a shareholder. And then lastly, just sticking in the values bucket for a minute. On our communities, always been a focus here at Ally. I think it's not new but took on maybe some new meaning in 2020, and we've looked for ways to continue to accelerate our diversity and inclusion efforts as well as we found a unique opportunity to establish and fund the first ever Ally Foundation. So that -- we're really proud of that as well. And then on our businesses, and I know we're going to spend a lot of time this morning talking across each of those, it's just unbelievable momentum across our auto asset class, across all of our consumer businesses. And if you think about where we are today, we're not only working from home, we're banking from home and Ally really stands to continue to benefit from that rapid transformation in consumer behavior. And then last but not least, on the financial trajectory, I think we're really proud of where we've come. And pre-IPO, we've quadrupled our return profile through 2019. We're going to talk this morning about our very clear, compelling and sustained trajectory to mid-teens ROTCE, all while growing book value over 30% over the last 5 years. And so as I take a step back and think about it kind of as you pointed out, 3 years in the seat here, just unbelievably proud of what we've accomplished over our culture, business, financial momentum and, Moshe, no sign of any of that slowing down as we head here into 2021.

Great. So let's start with the auto business. So within the auto business, the trends have been stronger than many have anticipated, myself included. Can you talk about both from the sector and from Ally from -- on a specific basis what you've seen? And give us some perspective on what your priorities are as we go into '21 and '22?

Yes, sure. And maybe I'll start first on Ally and then a bit on the sector. But you're absolutely right. We have been winning in a winning sector. And if you look at the Ally model, it is unique in the industry. We've committed to this asset class over decades. We've been in the business for 100 years. We have deep-rooted, loyal relationships with our dealers and they appreciate that. I mean look at what we rolled out -- some of the most comprehensive forbearance programs, the PPP program we rolled out last year, and we continue to build on that loyalty. In fact, we have the highest count of dealers today in the history of the company and are also approaching just about the highest dealer outflow here in the first quarter as well. So we're getting rewarded with that loyalty. Second, we have a very flexible platform. We've continued to grow kind of what we call our growth channel. And that's because we can originate against all nameplates, new, used, more digital dealers as well as traditional dealers. And we have a unique product set with our insurance business as well as our SmartAuction platform. So kind of wrapping that all up, we feel really good about our ability to compete successfully within auto. And then as you look across the sector, Moshe, I'd just remind everybody, auto was performing exceptionally well before COVID. It has performed exceptionally well through time. And COVID, if anything, continued to underscore the importance of personal vehicle ownership. There's a lot of trends around that. If you think about rideshare as well as public transportation utilization, they've both come down about 50% to 70%. And that has kind of fueled even stronger demand for personal vehicle ownership. And then on the supply side, a lot of dynamics there, but what we're seeing is continued strong demand. Supply has been somewhat constrained because of plant shutdowns kind of mid-2020. Today, we have a chip shortage. And so the supply constraints have led to margin expansion as well as high pricing on the used vehicle side. So all net-net, those are all kind of positive trends for us here at Ally. And I think as you point out, the sector is doing well. So we are seeing competition heat up, but mostly kind of at the [ 2 ] ends of the spectrum, in the super prime and in the subprime space a bit. And where we've always played in that prime kind of 620 to 720 FICO band, we still see ample opportunity to continue to originate at strong pricing and risk-adjusted returns.

So drilling down on that a little bit. You've kind of said you expect mid-$30 billion of origination for 2021, pricing trending towards the 6.5% level, and then a low single-digit decline in used car values. Any -- can you kind of update us on what you're seeing now that we're roughly 2 months into the year relative to the outlook?

Yes, sure. And you said 2 months, and that's exactly right. So we're still early in the year. But what we're seeing through the first quarter has been exceptionally strong. We are anticipating origination flow will be up on a year-over-year basis. Pricing has held in really well. New retail auto originations are coming in above 7% yet again. And then used vehicle values, we were expecting to be up kind of first half and moderating a bit in the back half. I think it's likely that they will remain elevated for some time. And as you know, that helps not only for pricing on origination flow, it helps with residual value gains as vehicles come off-lease, and it also benefits us as we think about the loss given default in our provision for credit losses. So I'd say, Moshe, it's still early in the year, as you pointed out, kind of 2 months in, but across the board, really encouraging trends year-to-date.

That's great to hear. So moving on to other segments. The insurance segment was -- did very well in 2020. Can you tell us how that -- how that might look in 2021? And maybe a little bit about why this is important to Ally?

Yes. Sure. Our insurance business, in my view, is a bit of a hidden gem at Ally. It tends to be overlooked because it's not a business that is pervasive across financial services. But if you take a step back and you think about it, it's a $1 billion top line business. In a bad year, we deliver a 20% return on tangible common equity. And when I say a bad year, that's a bad weather year. Depending on the weather, returns can run far above 30% return on tangible common equity. This is not a balance sheet business. So it's not credit risk kind of impacted, and it also doesn't consume a lot of balance sheet and isn't interest rate dependent. And so we see a lot of value as it runs through other revenue. It has countercyclic benefits. As we saw in 2020, we have a $6 billion managed portfolio. And as equity market volatility tends to ramp up as it did in 2020, and quite frankly, here in '21, we have opportunities to monetize our portfolio through realized gains. So it's a great business for us. It's also incredibly important to our consumers as you think about safeguarding their investments and protecting them in the F&I space. And then last but not least, it's an important part of the dealer ecosystem. If you look at the margins from a car transaction, a new car or used car transaction, roughly 1/3 of the profitability, Moshe, comes from the insurance segment. So it's good for us, it's good for the consumer, and it's really strong for the dealer as well. And then the last thing I'd say about insurance is not only does it have an attractive return profile, attractive competitive advantage for us, but we also see growth opportunities. And in fact, pre-COVID, the business grew every year over the last 5 years, and we see additional growth opportunities in '21 and beyond.

Right. Certainly, it sounds that way, given what you said about having the highest dealer count that you've had, it seems like that should be a product with a tailwind to its growth rate.

Absolutely.

So moving -- yes. Moving on to the bank. So this is -- you cited the insurance as kind of an -- like something that investors don't think about. But you've got a bank with $135 billion of deposits. That's kind of a holy grail in online banking. And you're hitting your targeted funding levels from deposits. So it's always been -- the management has been focused on growing that number to get to that 85% funding level. Now that you've achieved it, and you do have some growth in that on the left-hand side of the balance sheet, but it's not a double-digit growth rate. So how do you think about the growth strategy in deposits and the pricing strategy as we move forward?

Yes, sure. And Moshe, I like your term the holy grail because we absolutely agree with that. And the strength that we are seeing, quite frankly, in our revenue and our PPNR, in our return trajectory, has a lot to do with the liabilities by the balance sheet, which has been an area of focus for over a decade now. And so the benefits that we're seeing both from a funding and a strategic perspective are not kind of a blip on the radar screen. We have been at this for a long time, and we're really starting to see the value of that franchise monetize. So let me maybe make a couple of comments on the funding strategy and then on the customer strategy. On funding, so you're absolutely right. We had 85% deposit funding. That's up from 65% just a couple of years ago. So you think about just that incredible transformation and we think that there's additional room to go there. And we'll have our demand note program roll down in March. We had some early terms on the FHLB debt, which will also continue to roll down over the next kind of 12 to 18 months. And other higher cost debt that we -- that can roll down and advantageously be replaced with deposit funding. So we still like that transformation from a mix perspective and still see NIM benefits from that. And then on the customer side, we really viewed the deposit business as kind of the gateway or the cornerstone strategy for growing our other consumer segments. And here, year-to-date in 2021, we've actually hit the highest number of customers with multiple products in the history of the company. And that's largely due to the fact that this platform is incredibly valuable, not only to us but to our customers. In fact, we hit our -- we will hit this quarter our 42nd consecutive quarter of customer growth in our deposit platform. So really pleased with that. And then I know NIM is a big focus across the industry. And if you think about that customer growth, we'll continue to have that continue throughout 2021, but we'll also have strong flows. And the flows this year-to-date are above that of prior year. And we're doing all of this as we've taken rate paid down over 100 basis points in our deposit portfolio. And obviously, more room to go as we continue to replace CDs at lower cost as they're running off. So feel really great, not only about that funding strategy but also, Moshe, about the continued evolution of our customer strategy, which benefits the entire bank.

Got you. Sounds good. So kind of continuing around the businesses, the corporate finance business, a $6 billion portfolio, it's grown upper teens over the last few years. How is that performing? And what should we expect from that going forward?

Yes. Our corporate finance business is one that we've been in for the last 20 years. It's had really strong through the cycle performance for 2 decades now. And 2020 was no exception as we navigated COVID. In fact, the business hit the highest originations it has had in its 20-year history. We feel really confident in the team. They have very deep vertical expertise, knowledge of our clients, and we definitely see that business continuing to grow and can hit kind of, Moshe, in that $8 billion to $9 billion range over time. As you look at the credit performance, obviously, something very top of mind in this environment, we did establish a robust reserve in 2020. As we've come through 2020 and into 2021, however, all of kind of the vital signs continue to be healthy, whether you look at criticized assets, nonaccrual assets and even NCOs, they've kind of -- the actuals have kind of trended in line with historic averages. So we're well reserved. And so far, business is looking good, and the credit is performing kind of in line with expectations.

Got you. So you alluded to the net interest margin performance and expectations, but let's talk about that a little bit. You've had a couple of quarters of NIM improvement. Your outlook says that, that's going to continue in 2021 and into 2022. Talk a little bit more in detail about the underlying drivers? And given the fact that we're now seeing a little bit of a steepening in the curve, we did -- I wouldn't say we studied your 10-K yet, but we did look through it and the 10-K points out that you're in a better position for rising rates than you were a year ago. And it's a positive, a slightly larger positive than it would have been in 2019. So talk a little bit about the NIM drivers and the potential in a rising rate -- steepening curve, rising rate environment?

Sure. And NIM expansion is kind of the cornerstone of our financial trajectory right now. And so I think it's a really important area for us to focus. And it's really reflective, Moshe, of the strong businesses we have on both sides of the balance sheet. And so on the liability side, what we just talked about, that continued optimization around deposits, the strong value that we are creating for our customers, has allowed us to continue to grow flows while take down the cost of funds over 100 basis points. And so we'll have an OSA portfolio, the roll forward of coming down to 50 basis points. That will continue into 2021. As I mentioned, CDs will continue to reprice about 150 basis points lower as we head through 2021. And then we have the continued mix dynamics, which are also contributing to NIM as we roll off higher cost debt. On the asset side, similar story. I mean because we are leaders in auto, because we have that high outflow, we are positioned to be very choosy about what we put on the balance sheet, and that has sustained pricing at that 7% level in the retail auto origination space. And so we'll slowly see the migration up in the book as the front book, back book dynamics continue to evolve throughout 2021. And then as we add on higher yield assets in Ally Lending and grow that portfolio. And to your good point, with the steepening in the yield curve, we should be able to put cash balances to work again, not only on the liability side, but on the asset side, as rates increase, we can deploy more of that cash into our investment securities portfolio. So net-net, really strong trajectory. Much of the NIM story that we'll have in '21 and beyond, quite frankly, has been the culmination of kind of 10 years of work in terms of building our leading businesses. And a lot of that, quite frankly, is already -- it's already done. It's baked into our trajectory, and we have high confidence in delivering that NIM performance over the next 12 to 18, 24 months.

I mean for what it's worth, I think investors do understand the liability side. I think we're -- they've had -- and you and I have talked about this a number of times, where they've -- they've had a tougher time kind of accepting is the ability to actually be discriminating on the asset side. And I think to the extent that you've done this now, I don't know exactly how many quarters in a row, whether it's 6 or 8. But it's certainly been, over the last couple of years that it's been -- you've been able to demonstrate that. And I think as that continues, part of your guidance, I think that's really going to help investors kind of appreciate the ability to generate that net interest margin.

Yes. Absolutely.