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

Good morning, everyone, and thanks for joining us today. My name is Rob Wildhack, and I'll be leading our discussion here. I'm delighted that we have Diane Morais from Ally joining us. Di has been with Ally since 2008 and is the President of Ally Bank, overseeing deposits, Ally Invest, Ally Home, Ally Lending and the Corporate Finance division. [Operator Instructions]

With that, we can jump right in and get started. Di, it's really great to have you with us. As one of the first all-digital direct bank models 10 years ago, can you talk about how the strategy has evolved and where Ally Bank is headed from here?

Absolutely. And thank you. Good morning, everyone. It's great to be with you. So our strategy, as you've just said, has been really grounded in digital first since inception, and that has never wavered. We have systematically continued to grow our company, really grounded on this principle of do it right, do it right for our customers, digital- first. And I'd say that formula has worked. You've seen our results. We've had just year after year, quarter after quarter of consecutive growth and continue to expand the company. And so I always say we feel very fortunate that our digital-first model is absolutely where consumers are and are continuing to migrate. And we just don't have any of that whatever -- I like to say, just the noise in the system of needing to deal with multiple channels. We are digital, all in, all day.

Got it. And you also have a significant focus and emphasis on culture at Ally with the tagline, Do It Right, that we see a lot. Talk through the significance of that at Ally and how it plays into your overall execution and strategy.

Thank you for that question. And I would say the culture is one of our top priorities, if not the top priority. It guides everything we do. And I tell you, as we've navigated challenges in our businesses, certainly over the last 1.5 years, navigating COVID and being able to really meet on that culture to guide our decision-making, and we are an extremely customer-focused, customer-obsessed company. So there's always this conversation in the room of, is this doing it right for our customers? And if the answer is no, then we have a lot of easy decisions to make. It has really become the rallying cry for all 10,000 associates at Ally and that sort of harmonization of customers, communities, our employees and our stakeholders, the Do It Right philosophy guides everything and all of the actions that we take in every decision we make.

Yes. And what kinds of things are you doing to further develop the Ally brand here and make sure that culture continues to resonate?

Yes. I mean it is -- with the brand, again, if you go back and just think about 10 years ago, no one knew who Ally was. And we're so proud of the fact that we've grown our brand, but more importantly, what the brand resonates and how it resonates with consumers and quite frankly, in the marketplace. It is modern, transparent, fair. So I'll give you an example. Over the last couple of months, we took a pretty bold step as a company and said, "Coming out of COVID, we learned a lot in terms of things we did to help our customers." So one of those areas was fees. And Ally was the first bank to fully eliminate overdraft fees back in June of this year. That has been a huge boost to the brand and our customers and people who don't even bank with Ally continue to really share with us how much they appreciate the decisions we make, how we run the company and that we take these decisions to put the customer first very seriously.

Yes. It's a good segue into my next question. Nearly every bank, whether it's traditional or Fintech, have amped their focus on digital. Many of the larger banks have a bigger tech and marketing budget. Some of the neobanks aren't as focused on profitability. So how does Ally navigate that environment and still stand out?

Yes, in a couple of ways. And it is the question that we get a lot. And I'd say, again, it comes back to the ethos of the company. And founding -- when we founded Ally, we said the world doesn't need another bank; it just needs a better bank. And what we have continued to do, again, leaning into digital, leaning into innovation, and we always look at what are the additional products, services, tools we can put in customers' hands to make their lives better. And so what I would say, we like to think that we sit in this sweet spot. We're not the same as the traditional big brick-and-mortar banks who, to your point, have much bigger budgets and wallets. But on the same token, we're an established -- a very well-established bank that is in that sweet spot between neobanks and the traditional banks. And I think Ally really stands out in that regard. We offer a full suite of products and services, again, many of the neo banks are more limited in their offering. I say, I remain healthily paranoid of everyone. We study everyone. But what we come back to is what has gotten us here, how do we continue to innovate, put the customer first and really make sure that we are taking friction out of the process, and that formula continues to resonate with consumers.

Yes. And your deposit offering has really defined the product and your differentiation over the past several years. What do you see as the drivers behind the success that you've had?

Yes, a number of factors. And I'd like to say, we talk about our deposit business really as the gateway to the rest of the products and services that Ally has to offer, but that's where we started. As you know, we started with a very simple value proposition in the bank space. And there were a couple of formulas that we had, again, that have continued to drive that quarter-over-quarter year-over-year growth. We're now at $132 billion in deposits, 10-plus years. That -- I love that stat. We've grown from virtually 0 customers to over 2.5 million and growing. And I think it comes back to we have compelling rates. We're not the top rate payer, but we are consistently competitive. We put a lot of energy into how we serve our customers. And whether that's digitally through a very seamless mobile interface, whether that's if you need to call, we make that a delightful experience. And again, really adding value. We launched something about 1.5 years ago that we call smart savings tools. And there are simple ways to help people take make better financial decisions. If you are needing to save for some things, set up buckets, name those buckets. When you do that, you have an emotional connection to "I'm saving for adopting a baby or a new house or my kids education. And that connection there, people really have found that to be an incredible tool. And then another tool, surprise savings. We look at your transaction account, whether it's an Ally account or an external account, and if there is an amount that we have determined that's safe to save, we automatically sweep that into your savings account. And what we're hearing from customers, we've had over 1 million people sign up for these tools, and they're just really helpful. So again, to your point, how do we continue to stand out? It's starting with the customer, innovating, looking for problems to solve or jobs that we can help them with. And that again continues to resonate. So ,little flavor...

That's great. What about the customer base? What's the typical customer base or a typical customer like? Anything particularly notable or attractive about that demographic?

Yes, a number of things. I'd say there is no one profile. We really appeal to a very broad audience. And whether that's boomers, Gen Xers, we have been over-indexing in the new customers that we've brought on over the last couple of years, intentionally over-indexing in the millennial segment. But what we find is these are customers who appreciate the digital-only model. They see the value in the Ally products and services. There's a high degree of loyalty and a high propensity to want to buy and use other products and services. So, I know we'll talk about some of the additional things that we've added to the Ally suite of offerings. But over 60% to 70% of customers adopting either our Ally Invest or Ally Home, our mortgage offering, are coming out of that deposit base. And again, it's grounded in they appreciate the value, the service and doing business with a company that makes it easy.

Yes. But let's stick with deposits. What are your priorities and your expectations around growth and pricing as we move forward into maybe a more -- or a higher interest rate environment?

Right. A couple of things I'd say. So we are at an all-time low, as we know, in a really protracted low rate environment. And we, as a company, I'm very proud of this statistic. We have now attained our desired deposit funding ratio. So we're now over 90% deposit funded. Again, if you think back even 5 years ago and certainly 10 years ago, that was 0. And so that has been a huge unleashing value for Ally as a company. And so what we're really looking at now is, to your point, how do we continue to use the deposit offering as the gateway to attracting new customers, that are going to have propensity and interest in deepening the relationships with some of the other products and services to increase value more broadly. As we look into the next couple of years and what are the projected increases in rates, we've done a lot to have pricing power. And certainly, we saw that even with the last rate cycle, Ally going through managing rates in a pretty competitive environment got through the last rising rate cycle with just a 50% Beta. So we will continue to monitor all those factors, we certainly want to be true to the brand promise of being competitive, but we will exercise that power because we now have, obviously, a lot more flexibility and tools given where we are as a company.

And having hit that target funding mix probably helps you on the deposit beta side, so maybe growing or changing the mix is not as much of a priority this time around.

That's exactly right. Exactly right. .

Great. I want to dive into each of your consumer product offerings. But before we do that, maybe we'll start with your view of the product suite, the consumer product suite. You've launched 3 products in the last 4 years, positioned to add an additional 1 with Fair Square. The question here is do you have another product that you'd like to add? Is there anything that you think the suite is missing?

I will say the Fair Square acquisition that we announced about 1.5 weeks ago really rounds out our piece of tapestry, as I've said. The products that we have in our consumer bank really cover the full gamut of what we are wanting to offer. And we've seen great success as we've tucked in and added some of these additional products over the last couple of years, and I know we'll go deeper. So Ally, again, we are always looking at what our customers -- are they asking for anything, can we offer additional product or service in accordance with our risk appetite and will it generate a meaningful return for our shareholders? We feel great about where we are right now. The Fair square acquisition, it's been no secret that Ally had great interest in adding a card product to our family. And we're very pleased. We think it's a great team that will be joining us more anxious to get that deal closed and really move through the integration and complete the puzzle.

Yes. Well, let's dig in on some specific products now. Your mortgage offering, Ally Home, has grown from essentially nothing in 2016 to $10 billion in originations this year. What's behind that success? And what are the challenges and opportunities that could come from a transition to a more purchase-focused environment?

Right. We are pleased as I think this group knows. We entered into a partnership with Better.com a couple of years ago, a digital end-to-end provider. And we have seen just a great amount of positive feedback from the customers that we have been able to shepherd through that process. It is a very seamless, easy way, a modern way to get a mortgage, whether it's a refinance or a purchase. We've obviously been helped over the last 1.5 years with lower rates and obviously, refi, but we are well positioned to capitalize on purchase as well. And so again, as we think about how we continue to serve our customers. And again, the majority of -- not the lion's share, but as I said, between 60% and 70% of our customers, banking customers are using Ally Home, and we are continuing to expand that. We know we're facing a rising rate environment. So that will put a little pressure. But again, we just think about where some of the broad trends and consumers, many of them, again, out there trying to get their first home upscale for their new babies and a yard for their dogs, and there's a lot of -- just there's a lot of activity in the market still. So we feel really well positioned. And again, as a large provider with a very large balance sheet, we've got a lot of flexibility. So we've been very happy with what we've been able to do, and I think there's a lot of growth potential in that business still.

Yes, definitely, definitely. I'm going to go to a question from the audience. Just a quick reminder for our participants here. [Operator Instructions] But we do have one that's related to mortgage. So how do you make sure you're retaining the client relationship with your mortgage borrowers given how competitive mortgage is?

Right. So a couple of things. We originate both held for sale and held for investment loans. And Ally has a large balance sheet, so we do retain a number of those loans on the Ally balance sheet and have them serviced through our partner. And so that clearly is a very seamless process, and we've got a branded servicing experience. With our held for sale conforming mortgages, that's a little bit trickier because we do sell those into the GSEs. But again, the majority of these customers already have a relationship with Ally, and we manage that communication pretty carefully. So again, we see mortgage as a critical tool. It's a very important and emotional purchase, and Ally has been able to really deliver something. I mean we have we have very high Net Promoter Scores. And again, I think that just speaks to, we've taken with our partnership with Better, we've taken a lot of friction and pain out of that process.

That's great. Let's turn to the brokerage offering, Ally Invest. This is an area where the competitive landscape has shifted pretty dramatically over the last few years. Now we've got $0 trading, a lot of consolidation and some really skilled players. What does Ally what do you find attractive about this business? And what are your plans for Ally Invest moving forward?

Yes, it's a great question, and it really has been fascinating to see so many, I want to call them fairly seismic shifts in this industry over the last couple of years. I would tell you a couple of things. One, right now, we have almost half of our Ally Invest customers. have multi relationships with Ally. Again, to that point, we see a great synergy between banking and investing, and really that continuum of customers may be starting out. They're saving and then they realize, "Okay, I have enough saved. I'm really ready to maybe try on my own or use one of our automated robo advisory offerings really to just start on that path of investing and really rounding out that journey." And we see, again, a great amount of synergistic opportunities between the banking and the investing space. So one of the things that we're excited about that we've talked about is how do we continue to fill out the offering today where largely do-it-myself in the self-directed side, do it for me. We have a variety of automated robo advisory products. And we're also going to be launching a human advice component, a wealth management offering early next year. Again, and that's -- we -- again, as we do with everything, how do we deliver something in an Ally way that is unique and puts the customer first. So we'll talk more about that as we bring that to market. But again, we are not trying to compete on every feature. We're not in the uber active trading game. We've seen our customer base migrate over the last couple of years. There -- and we've all seen it, right? There's been a tremendous amount of activity in the markets over the last couple of years based on the health of the market. Obviously, with many people working from home during the pandemic, we saw a big uptick starting to normalize, but we love the business. And again, we see that as a really synergistic add to what we already have.

That's great. And then on a newer offering for Ally, really as of late 2019 is the point-of-sale business, Ally Lending. So a similar question to the last 2, but can you talk about your entry into this space, why you wanted to be here and what your goals are over the next several years?

Absolutely. We are very pleased with the business. And as you just said, we've literally just celebrated our second year and 1 month. And that business had been founded really to serve this sort of medical vertical. So think audiology, dental, sort of elective health care. And probably a year ago, right in the middle of COVID, we launched our home improvement vertical, and that has been hugely beneficial and successful. So we've weathered -- there was some worry going into COVID of how will medical fare, and what we've seen is great resilience across our businesses. And we're really seeing tremendous growth continuing to come out of all corners of that business. So we love the returns. It's a high-return business. It is a B2B2C. So you go to your audiology provider or getting braces for your kid and we can finance that right there or as many of us experienced, my air conditioner blew up and a guy came in my kitchen, I was able to finance that. So it's, again, a great business. We are well positioned. I think having that as part of a bank and part of Ally suite of products and services, has been very additive. It started with a desire to be in the unsecured credit space. And so that was an opportunistic acquisition that we are very pleased about. And obviously, now with the announcement of Fair Square, we're just continuing that unsecured growth but more in the direct-to-consumer model, and both are great businesses.

Certainly. And the -- from our perspective, the point-of-sale business is one that's really popular with our clients and investors currently. Whether it's buy now, pay later, point-of-sale or home improvement, they're all very competitive, and you've actually seen some of your more traditional bank peers make a couple of big moves into the home improvement space. So how does Ally intend to differentiate itself here?

So in a couple of ways. Certainly, in the relationships with our providers, we've got great teams and our business, we make decisions how to do it right for the provider, how to do it right for the customer. So it is more than just, okay, can we provide the best rate or there's a whole lot that goes into how do we help that provider serve more of their customers. And again, I just bring it back to -- it starts with the ethos of our company. And we have some amazing partners and provider clients, and they appreciate that Ally is constantly thinking about how we can help them do more business, how they can help more people get the products and services that they need. So when you start with that other things flow, right? And so that's the primary way. And I think we will continue to innovate. We will continue to look for how to take friction out of the process again and make that a really seamless transparent process for the providers and ultimately, the people who are needing the service and the loans.

Ties back to the -- your culture sort of touch on business lines there. Yes.

Absolutely.

Let's turn to Fair Square. What attracted you to that deal? And why do you think it's such a good fit for Ally?

Yes, a couple of things. I would say we have been anxiously looking to add this product for a number of years. And when we met the Fair Square team, I would say we were incredibly impressed with what they've built, the seasoning and the knowledge base and sort of a modern digital-first approach to credit card. And as you probably -- if you listen to our earnings and heard our CFO, Jenn LaClair, talk about, we also love the fact that they're almost through the J curve. And so I think that we have a tremendous opportunity ahead of us on that business as -- and to Rob Habgood and the team there at Fair Square, they've built an incredible business, and we think bringing that into the Ally family just brings even more potential for growth and acceleration. So we're very pleased. We think it's a great team. It's a great business model. We like where they play. And again, we love the asset class.

Right. And can you just remind us of the typical customer base at Fair Square?

Yes, sort of a little lower, not full prime but not deep sub-prime, and right in that, we say less served sector and again, where there's not as much activity that really gave the team the ability to be surgical and competitive. And so we'll continue to look at do we broaden that suite across the spectrum over time. Our immediate priority is closing the deal, integrating into Ally, and that just brings a great amount of possibilities and innovation that we're anxious to get to.

Absolutely. One more on Fair Square here from the audience. What are your expectations for growth with Fair Square? And what's the ability to cross-sell this into other Ally products or existing Ally borrowers? I mean I'll just throw one little bit on there. So what are like the key variables that you think will determine the degree of success with the Fair Square's growth and with cross-sell there?

Yes, a couple of things. I mean, I think we are very optimistic. They've had a really nice growth trajectory over the last couple of years, and we expect that to continue, absent any other cross-sell or deepening out of the Ally customer base. The core business is really strong, and there's a lot of momentum. And so we absolutely expect that to continue. As it relates to cross-sell, we've got 9 million customers at Ally across the businesses I run and across our auto and insurance business. So we know there is a very ripe customer base that will be eligible and want that additional product from Ally. So again, we're early days, as you know, 10 days post announcement, but we feel extremely optimistic that there's a tremendous amount of synergies around tapping into that customer base, but really riding along on what they've already been doing, which has been very impressive.

Yes. Yes. Absolutely. Okay. Let's go to the corporate finance business where you have -- it's a decent-sized corporate lending portfolio. How have you been able to grow here? And what are you seeing in terms of credit within this book?

Yes. This team is just a phenomenal seasoned team of very experienced corporate lenders. They're great. And we're really -- and I was talking to the leader of that business, Bill Hall, a couple of days ago, and we just reflect back how much that business has been able to grow really, being part of Ally Bank and again, tapping into that more attractive funding cost. So the team has continued to be very opportunistic around how to expand in some verticals. We have a heavy sponsor business. We stood up a vertical probably 1.5 years ago, maybe it's all blurry now. In lender finance, that's been very successful for us. We do a lot of asset-based lending. And this team, again, they've been together 20-plus years. So there's just a tremendous reputation in the marketplace for we're fast, we're creative. We solve problems, and people want to work with us. And so we've got very deep established relationships with a number of sponsors. And those teams come to us, they know that the Ally CF team is going to really be creative in terms of how to do the deals. And take calculated risks but make sure that we're getting the right return. And that is -- Bill always says, "Every dollar we lend, it's like our money, and we're going to paid back every last nickel." So how do we feel about credit? I mean, I'd say, on any given day, there are things on our watch list, but this team is really, in terms of, if something goes a little sideways at a restructure, how to continue to look at driving those deals that may look a little troubled depending on what the core reason is really good at workout. So we always say it's lumpy in this business. It's -- you just -- you don't -- it's harder to predict, but we play across a variety of sectors and verticals and this business has just continued to really be a huge driver of growth and profitability for Ally. So...

Okay. Got it. And any noticeable change in the credit performance there as we sort of exited the pandemic and started to reopen?

It's all the stuff we talked -- so no, not yet is the short story. As I said, there are probably certain deals that we're watching more closely just based on some of these macro factors: chip shortage, supply chain, things that are impacting and certainly, what is the labor market and how does that impact some of these businesses. But for now, we're seeing things really knock on wood. We don't like to say that loud. So let's not jinx it, Rob, okay? But the business is performing, and we've got the best in the business if things start to turn a little bit.

Yes. Makes sense. Makes sense. I want to go back to, I think you mentioned it earlier, the statistic where 9% of depositors have another product with Ally. That's up from essentially nothing a few years ago, right? What are you expecting this to grow to? And sort of what are the priorities and the milestones to achieve that?

Right. So a couple of things. It used to be 0 because we had very few things to sell then, right? So as we've continued to fill out our suite of offerings with Ally Invest, Ally Home, obviously now Fair Square. I'm going to figure out what the name will be. That's really part of the magic. And the more that we can put in front of customers, we are not a product pushing organization, and so that is not how we roll. It is much more about we have ways to help people realize what we offer. We may have triggers and things we see if somebody may be searching for a mortgage or they may be looking to whatever. We look for those cues and use that in our marketing, but I think the point to your question is it's our strategy, right? We are not -- and I think that is where I come back to what is one of the things that really makes us different. We are not a series of vertically oriented silos. We are an ecosystem that, again, J.B, our CEO, coined this term when he took over, One Ally. So we think One Ally and how do we stitch things together in a way that makes sense from a consumer perspective and not really that horizontal view is first priority. And then we look within the vertical. So it's a mindset and it's how my team operates. And again, one may say this may not be the best thing for this particular business, but it's better for Ally overall. So that's what we do. So I don't have a metric of like we're trying to get to X. We're trying to continue to go up and to the right. And what we know is the more customers that we serve well and smartly introduce them to the other products and services and serve them well, that's the recipe for success that has continued to grow that multi-relationship percent. I expect it to continue to grow even in an elevated manner once we really start tapping in with our card offering. And again, that's the exciting part of continuing to see puzzle get filled out and really the value of these multi-relationship customers, their retention, their engagement with us is significant.

Got it. And I promise I won't ask you about any trends in the auto business, but the cross-sell strategy, that does apply to your auto borrowers too, right? Is there any difference in how you can cross-sell to auto borrowers versus Ally Bank customers?

There's not a massive difference in how. I'd say the one thing that we know, and it's just a fact, is that their Ally Auto customers come primarily through a dealer relationship. And so it's a more indirect acquisition of a customer, but they know that they're dealing with Ally. And again, we've got a mobile app for them to pay. And there are many ways we talk to our auto customers to continue to build value there. So again, it's just what's the right time and way to introduce and cultivate those relationships. But we're constantly testing and finding things that work and when things don't work, we go back to the drawing board. But we know there's an appetite, and we've seen great success even on tapping into the Ally Auto book for some of the other products like Ally Home.

Yes. Makes sense. Makes sense. You go to an audience question on the consumer more broadly. Would love to get your thoughts on whether or not you think consumer actions today, high savings rate, paying down debt obligations, do you think those are permanent consumer actions and changes in behavior? Or do you think that they're more transitory?

No. It's such a great question, and this is where the infamous crystal ball comes into play. I think people, consumers learned a lot going through COVID. I think there are some things that will stay. I do believe as economies reopen and we, God willing, get back to whatever the new normal is, I think we'll see spending rates go up a bit. But I do think there is -- I think there will continue to be money in savings and in the markets because consumers they -- that fear of the unknown, I think really fits with people. But we'll see. And again, we've got a lot of ways to monitor the health of the consumer. Consumer balance sheets are very healthy right now. We've all seen that in our credit performance, not just in auto but across our other asset classes as well. And I think it will play out a bit over the next 12, 24 months.

Yes. Yes. I have one more audience question here. What are your biggest investment priorities for your business over the next year or 2?

Yes, we're in the thick of that, and it's exciting. It's an exciting time to be at Ally because we are in a growth mindset. And how can we -- given the strength of the company and the momentum that we have, where do we lean in further? So I think you'll see us, again, continuing to invest in growing our newer businesses and whether that's again building out additional tools for Ally Invest, Ally Home, expanding the products that we offer there. Obviously, I think there's going to be a great excitement post integration with Fair Square and how else do we want to invest there. But we're continuing to invest in the digital experience and technology really across our entire company. And that, we literally just finished our reviews with our CEO last week, and we feel fortunate. We've got some capital to deploy. We are smart about how we deploy it. We don't chase every single thing. We stay grounded on our strategies, and that's how we guide our investment decisions.

That's great. And tie that to one more high-level, broader strategic question. But what do you think is the most important for you to get right at Ally Bank, especially in the digital experiences that you're offering customers?

Yes. So the most important thing to get right is to care for our customers. It starts and ends with that, and so then that takes you to how do you do that. And again, everybody wants a seamless mobile at my phone is -- I can't touch it, Daniel won't let me. But having a great mobile app and making the app the destination, so that you've got to get that right. And again, we see this as consumers, right? I refuse to even engage with brands that have very clunky, painful digital experiences and God forbid, if I need to talk to somebody, and I can't even figure out where the phone number is. People aren't going to do business with brands and companies like that. So I think we start with what do our customers need, how do we and what we offer as Ally Bank, how can we beat our ally, how can we make their lives better. And if that is as simple as being really easy to do business with, helping their money work harder, giving them options on saving more, investing smartly, being able to refinance their home and obviously be in better financial footing, that's a lot of how we think.

Yes. Yes, that makes sense. And with the different products and the growth that you guys have, a very exciting time. I don't see any more audience questions and we've certainly covered a lot. So I think we can end a couple of minutes early. But thank you to our audience for joining. And Di, of course, thank you for joining us today for what I thought was a really, really great discussion on a lot of different businesses that are important for Ally. So thank you, everyone, and enjoy the rest of the conference, and we hope to see you soon.

Thanks, Rob. Appreciate it. Bye-bye.