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

Okay. Thank you again for joining us here today on our third session this morning, and special thank you to Diane Morais. Thank you very much for being with us.

Thank you.

Diane is President of Consumer and Commercial Banking at Ally. And we really appreciate your time with us this morning.

No, it's great to be here.

So Diane, I wanted to kick off with a strategy question. When Ally Bank was launched in 2009, it was one of the first all-digital direct models. And since that time, multiple other competitors have joined into the fray. Wanted to understand changes in your strategy that you are employing to continue to win, especially with the Gen Z and the millennial customer.

Yes. There's a lot in there, but thank you for hosting us. We're thrilled to be here in person. I'd say, again, Ally launched back in '09 with this fundamental principle that the world didn't need another bank. It needed a better bank. And we leaned into the digital-only strategy. And that has paid off, obviously. But this culture of doing it right for our and our customer has been very central to our strategy. So over the years, we have continued to broaden the products and services and the capabilities we offer and have broadened our acquisition targets, if you will, so that we now serve -- our new customer vintages are over 70% millennial, and we continue to see that younger customer really embrace the digital-only model. So for us, we see competitors come and go. We watch everyone. We learn, and we're very curious about what we think is working in the market. But for Ally, staying true to that customer obsession and figuring out other ways to bring value to help consumers with their financial lives has been a winning formula for us.

And is there anything in particular that you're doing, leveraging what's going on in the fintech space, in the neobank space, to stay cutting edge?

So we absolutely think that Ally sits in this very unique spot between traditional banks and fintechs and neobanks. What we have been really proud of is that the level of customer loyalty and very high levels of customer engagement that we've been able to observe over the last decade plus. We study everyone. As I say, we remain healthily paranoid of every competitor, big and small, old and new. And I think when we look at that sweet spot, we have very broad products and services for our customers. Contrasting that, many of the fintechs are kind of more single-use case, looking to broaden. And our digital footprint has allowed us to invest all of our technology dollars in continuing to further our mobile experiences and really taking friction out. So I think we look at who's winning, who's maybe not winning as much. But we really like our position in the market. We have the trust of our consumers. And I was reading a study, having a meeting a couple of weeks ago, there's some really interesting observations comparing traditional banks, direct banks, neobanks or fintechs on the concepts of trust, easy-to-do business with, and if you have a problem, how easy is it to resolve? And quite frankly, we score really well. The direct banks score really well in all of those features. And so I would just say we will continue to watch what's happening around us, but again, being very maniacally focused on great digital, frictionless experiences and value for consumers.

Okay. And that's really what you're doing to drive the customer engagements. Anything in particular with some recent tech or digital initiatives that you want to highlight?

Absolutely. About 2 years ago, we launched a set of what we call smart savings tools, really grounded coming out of consumer research. We call it human-centered design, where consumers were struggling with where am I with my money, doing all this mental math of how to organize, how to save more. And these tools, what we're seeing, it's things like buckets, being able to name what you're saving for and have an emotional connection to it. And by the way, that's given us great data insight in terms of how to proactively market to our customers. If they tell us they're saving for a home or they're saving for a vacation, we can use that in a really personalized one-on-one kind of way. But what we've observed is that over 30% of our customers are engaging with the tools, so buckets 1 and then another thing we call boosters, which essentially looks at your transaction account, and if you have what we call a safe-to-save amount, it'll sweep it into your savings account. What we're seeing in terms of behavior, 2x higher likely to have another Ally product with us, 2x better retention rates. They save -- their balances go up at a higher level than those who are not engaging with the tools. So that has been a great set of learning and set of capabilities that have been broadly adopted. And then we're just really continuing to lean into that and build out even more capabilities.

Okay. Turning to culture. Maybe you could speak a little bit about the Do It Right culture. I think Ally is well known for that. But give us a sense as to how you're leveraging that to deliver for customers and investors.

Thank you for that question. We spend a lot of time at Ally caring for the culture that we have very carefully cultivated over the years. And if our CEO, J.B., Jeff Brown, were here, we often talk about when you get the culture right, everything else flows from that, doing it right for your customers, doing it right for your people, doing it right for the communities, and obviously, our stakeholders and shareholders. So we have 10,000-plus Ally associates across the country. And everyone -- I think what we love about the culture is the 3 words of Do It Right resonate so simply. And everyone gets what that is. So it's not some superfluous set of words on a mission statement. It's our purpose. And Do It Right has many, many forms. But we are so grounded in doing it right with the customer at the center, it's how we built the entire company, that people gravitate to -- we've been an employer of choice. There's this war for talent we all are fighting, and we've continued to see both in our -- highly sought-after tech jobs and other areas of our company. People want to -- they want to work for a place where they understand the value and feel proud about what we do. I would just say, last year, it's almost a little more than a year ago, Ally was the first bank to completely eliminate overdraft fees. And not only did that resonate with our customers, it resonated with people who weren't even customers of Ally yet. But it was another massive pride point for our people is they saw how we navigated through COVID and the things we did for our associates and what we did for customers to give them relief when no one knew how things were going to play out. And that step last year of really being the first bank to eliminate overdraft was an easy decision for us. We had never built our bank on charging a lot of these types of fees. So for us, the trade-off was a very strong one, but it really has been so powerful for our employees. And it's another reason that we continue to be an employer of choice.

Great. Thanks for that. When the culture message is simple and resonates, it's easier to manage your forces, right?

It is. Absolutely.

So turning to just the health of the customer, the consumer health. First, could we just spend a little bit of time on understanding what you're seeing across your 2.5 million deposit customers? Where are they spending? How are they saving? Clearly, with inflation as high as it is, there's a big investor question on understanding what's going on.

So we have many, many behavioral data points on our customers. I'd say right now, we see the consumer still in a healthy state. The deposit customer base, 2.5 million of them, and their rate split across all the demographic groups. Balances are -- have increased pretty materially throughout the pandemic, a lot of that in part due to the stimulus, obviously. Over the last month or so, we've seen some of the cohorts come down a small percentage but still much higher average balances than they had kind of leading into the pandemic. So that gives us gives us, obviously, one big sign of consumer health. From a card perspective, both debit and credit, we are seeing transaction volumes continue to remain sort of in typical norms. Transaction pricing is going up, and I think that is -- I mean I was reading a stat yesterday about fuel. Fuel obviously is a huge transaction category. And what we're seeing is consumers are using or buying gas more frequently, which I think what that means is it's $5 a gallon. People may not fill their tank up in one fell swoop. So we're watching all of that and having that insight into how consumers are behaving. The other thing that's interesting is those savings tools that I mentioned when consumers are setting up their buckets. What we've seen recently is the #1 named bucket is now people saving for rent. And that -- those are changing a little bit over time. So I think it does speak to consumers are obviously hearing and seeing what's happening out there. So far, we see strength. And I think the question of how we all navigate this will be interesting as things continue to play out.

Has that bucket for rent been there since the get-go of these?

It has. It's just moved up. Last year -- probably last year at this time, travel continues to be a bucket even into COVID and people not going anywhere. Really, you could just see that was continuing to be popular. Weddings. Rent has always been in the top categories, but it just most recently moved up. And again, rents are elevating.

Right. How are you managing expenses when we're in this high inflation environment? Is there anything that you can do either with the tech or with your staffing to provide flex?

So we're pretty maniacally focused on how we spend the company's capital. And I'd say we are continuing to invest in some key areas, cyber, technology. And the beauty, if you will, is that our other expense categories, we are a digital-only institution, so we are one variable, and we've done a lot to automate how certain processes work. So again, I call it moving the dials based on what's going on around us. This time last year, we were moving in even heavier and saying, how do we continue to build capability for the future? We're still investing. And that's, again, one of the things that I think I love about working at Ally is we have a long focus. We're playing for the long game. And so we know there are certain things that just must continue to stay cutting edge to your question from the beginning, or you lose a competitive advantage. So we're mindful of that.

Just flipping to deposits. This is probably the biggest single question on Ally that we've been getting over the past several weeks. And it has to do with we've got a rising rate environment, and I think in the past, Ally has had a cumulative deposit beta over a cycle of 50%. Is that right?

Yes.

Okay. So now your core funded 90% with deposits. And you've got an OSA rate that troughed at 50 basis points, and it was, I think, 100 last cycle. So how should we think about Ally's deposit beta this cycle, especially as we move beyond 100 basis points this week from the Fed?

Yes. I would say I'm shocked to get that question. Just kidding. I'd say a few things. So deposits continues to be an area of strength for Ally, again, $130-plus billion. We've had an interesting quarter. But as we navigate rates, and I'll come back to that interesting quarter comment, we are constantly balancing the promise to the customer. We have never been the top rate payer, but we strive to be consistently competitive. And again, as a digital-only bank without the expense of branches, that's part of our value proposition. I mean we have many things we watch. But as we navigate -- again, I always say deposit beta is a long game, depending on the curve and from the start of the evolving rate cycle to the end. And Ally's position always has been to lag and be lower throughout, and we did that the last rising rate cycle. In any given move you might say, what's your beta today? But it really has to, again, be carefully navigated based on the world around us. I think, again, this cycle starting at a much lower point, to your point, that, say, projected to end much higher than the last rising rate cycle, it will be different. And we obviously -- I use the phrase back at the ranch, we're balancing the [ models ] on the plate. We're absolutely looking to care for the customers, but we're incredibly mindful of not leading the market up, of making sure that we are retaining and keeping the trust of the consumers that have been with us through time. And so again, that will be the navigation that, quite frankly, it's going to be fun to navigate.

Okay. So I do have to drill down on this answer a little bit. Because if I look at what your rate transmission has been already, you went from 50 basis points to 90 on OSA, right?

In a couple of steps, yes.

Right. And the Fed has gone up 75 so -- at least so far as of today. So it looks like that's around a 50%, 53% to be exact, deposit beta. So you're sitting with a deposit beta now that's your cycle average last cycle. Are you signaling in your answer that, okay, it's going to slow down from here or -- maybe not slow down, but like stay the same for the rest of the rate hikes? Or do we have a period of acceleration, which then fades at some point?

So what I would tell you is we're playing chess, and we're not constantly moving in lockstep with each Fed hike. We've seen interesting behavior around us. Some have moved in advance of certain hikes. We'd really like to find a position where we can stay. And obviously, we will continue to migrate up. I can't tell you exactly what that will look like, Betsy. I think we're navigating a number of factors. And again, I think we feel with all of the data that we have, the understanding of our customer base, again, over 13-plus years, we have the benefit of deep analysis and segmentation to understand how customers are performing. But clearly, none of us really know exactly how this next set of hikes, when it will happen and when we'll be through it. But I think Ally is incredibly well positioned to weather it. So I can't tell you, sitting here today, exactly what each move will look like for Ally, but we believe, again, that point, lagging and lower, is generally the philosophy.

And yes, you are not the high, right? The high in the OSA is somewhere around 110, last time I looked. So you're well below that. Okay. The other question on deposit betas is how does that end up translating into the NIM guide? I know the NIM guide is upper 3s. But did that incorporate a view of the deposit betas that you're experiencing now?

It absolutely has. We have a very robust ALCO process, Asset-Liability Committee. And so the good part of Ally, we have these 2 very dominant franchises. Our auto franchise has been around 100 some years, and deposits, 13 years. And what my teammate who runs auto is seeing is as rates are going up, they're actually putting some presence in the market probably a little bit faster than they anticipated, and that's holding well. And so we feel like we're moving very much in sync. And our guidance, we still feel, is appropriate.

Okay. Let's turn to deposit growth. You posted an impressive deposit balance growth throughout your history, 13 years. Could you just give us a sense as to how you're thinking about deposit growth as we move in -- through 2Q? What's happened? Because I think Jenn mentioned during the 1Q earnings that deposit growth could be pressured in 2Q. So could you frame up what you've seen Q-to-date and expectations for the full year?

Yes. Thanks for that. This is my interesting quarter comment. We have seen the second quarter be a little choppy with tax outflows. So we will have a negative quarter in 2Q, probably in the range of $5 billion down. And that is largely -- 90% of that outflow is based on tax outflows. And everybody I know has seen the statistics, but we're seeing 3x higher payments for consumers who pay. Tax payments have been up materially. Lots of reasons for that, capital gains and the like. And so from our perspective, we've seen that normalize. Second quarter is always an interesting quarter between April tax payments and then those consumers who pay quarterly. They pay in June, so a bit of a double whammy. But we've gotten that past us, if you will. And as you referenced earlier, the fact that we are 90% deposit funded gives us that flexibility, if you will. So we'll still be a net deposit growth story for the year, maybe a little bit lower than we initially anticipated, but that's how we had planned the year. We really -- we had access to all sorts of sources of liquidity, many options for Ally. And again, we think the strength of both of these franchises is working in concert. We feel good about it.

So that $5 billion decline in deposits is an end of period? Or is that an average?

That'll be an end of period as of our best estimate, but we still have 3 weeks to go in the quarter.

Right. Right. Okay. Any other updates for 2Q '22?

In deposits or in general?

In general.

I mean there's a lot to talk about. There's a lot to talk about. How many more minutes do we have?

We have 14.

I think in general, we feel good about how the business is performing.

Okay. So maybe we can flip to customer growth. And along with deposit balances, you've delivered consistent customer growth. I think you have now more than 10.5 million customers across the organization.

Correct.

All right. And currently, about 9% of deposit customers have multiple relationships with Ally. Could you give us a sense as to how you see that trending over time? And what are you doing to accelerate adoption of other products?

Right. We are incredibly excited about progress that we've made. And again, going back, Ally was a 2-product shop for many years, auto and deposits. And we've been able to obviously augment that with home loans, our point-of-sale lending, and most recently, our credit card acquisition that we closed at the end of the year. So that 9% is primarily -- I didn't say Ally Invest. I should have. But the 9%, we see a lot of strong crossover between deposit and investing. About 70% of our Invest customers have an existing deposit relationship, and there's a lot of synergy between people savings and then moving into the market. That's been a great source. And home, obviously, Ally Mortgage has been -- this has been a tough backdrop with obviously the uptick in rates and the decline in refinance volume, but we still see 35-ish percent of consumers having a new home loan come out of deposit book. So we like what trends we have in place. We've seen some successes recently, even tapping into the auto market, which again is a little harder because those customers are sourced in an indirect manner through the dealer. We're very excited about the onslaught of our credit card company, and right now -- we'll talk about it if we have time. We're still integrating, the artist formerly known as Fair Square, now Ally Credit Card, that integration, we're about at the 6-month mark. We'll be converting that portfolio, and at the same time, we are building the new value proposition for existing Ally customers, and that'll come sometime next year.

How is that integration going?

It's going great. We are incredibly excited about the business. We love the return profiles, the risk/reward profiles of the business. The management team is incredibly talented. And so there's years and years of really strong card experience in that group, and they have seamlessly tucked into Ally. So it's going really well. We are continuing to see great growth in the business. We recently had a couple of milestones crossed over, and we've exceeded this now. $1 billion in outstandings, our millionth card customer. And we see, again, great growth prospects coming out of credit card. So coming back to your how is that 9% going to continue to grow? When we really meaningfully start cross marketing into the Ally customer base, which we're not doing yet as we're not fully under the Ally brand, we know that, that's going to just continue. That 9% is going to continue to go up.

So a question on that. Fair Square came with its own customers. Will they be rebranded to Ally?

Yes.

Okay. And then when should we expect the product that's targeted towards your existing customer base?

Yes. Sometime mid next year. Right now, we are working through a lot of the operational transition, if you will. We'll be beginning to market new customers, kind of in the existing buy box towards the end of the year under the Ally brand. We will be converting the full formerly -- the brand they marketed under what's called Ollo. That portfolio will be converted, probably early 2Q next year. And around the same time, we'll have the new value prop for existing Ally customers. So a lot going on, but it's going incredibly well.

One of the other areas that you've been leaning into is in point-of-sale. And I think last -- well, in late 2019, you acquired Health Credit Services, right? And that was focused primarily on health care and home improvement verticals. Is that right?

It was initially only focused on health care, and then we augmented with home improvement probably a year after the transaction.

So give us a sense as to what's going on with that business and where growth could go from here as well as understanding are there more verticals to participate in?

We really like this business, again, very strong margin, risk-adjusted margin and great growth prospects. And so again, this -- the 2 primary verticals, [ electable ], I can never say that word, electable health care assisting cosmetic, audiology, dental. There's a whole host of service providers that are working with Ally on the medical health care side. Home improvement has been a huge growth engine for us. We love it. And the dynamics between these 2 verticals -- the health care loans are like smaller ticket sizes and a little bit shorter in tenure. And then home improvement, if you're putting windows on your house or putting in new HVAC, higher ticket price and a little more length in the duration of the loans. We really still see a great amount of growth opportunities in both of those, so that's really where we're focusing for now. We've done some piloting in auto servicing and some testing in retail, but we're not really leaning in that. We're kind of coming back to our core and really just trying to extrapolate and maximize the opportunities we see right in front of us.

And the other loan category that you have responsibility for is on the mortgage side. Could you just give us a sense as to what's going on there? You mentioned earlier it's a little bit choppy.

Yes. It's just -- I mean it's a cyclical business. It's rate-driven. We all know that. We've had great successes last year. We originated over $10 billion in home loans. That'll be down this year, not surprisingly, just based on how the market is moving and the lack of -- more people doing refinancing. People are still doing it, but at a lower rate. And so we'll still grow. We're seeing very strong customer response going through our digital best-in-class process and very strong NPS scores coming out of that. So again, we flex with the market based on -- we're not going to reach for growth. We're going to originate smartly based on the demand that comes our way and make sure that we're continuing to put on our balance sheet, or if it's a held-for-sale loan, strong profitable loans that meet our criteria. So we like it, but we're in one of those down markets right now, and it'll come back. That's the nature of the beast.

And is there any interest in offering home equity loans or home equity line of credit?

Not right now. We look at it periodically. And I think as you would expect, we're constantly evaluating what are we offering not only in Ally Home, but across all of the businesses. And do we think it's within the risk appetite? Is there a unique way in for Ally? Again, we often call it the Ally twist. We want to have some kind of advantage. So we wouldn't say never, but that's not on our near-term priority list right now.

Okay. I just wanted to see if there's any questions in the room before we finish up my question list. Okay. All right. Some of the other areas you're responsible for is on the Invest product, Ally Invest. So could you give us a sense of how you see that business evolving? What your strategic objectives are? And how this market environment is impacting you?

Yes. So as I mentioned earlier, Ally Invest sits right alongside Ally deposits. And that natural flow from a consumer journey of let me start saving now, let me get into the market, we see a great amount of crossover, as I said, between the deposit customer base and the investment customer base. We recently launched a hybrid advisory service. And that is early days, but we think that was a place that we are intentionally going a little bit lower in terms of the minimum amount of assets that you need to get access to a dedicated adviser. Typically, many firms are a minimum of $250,000 or greater. So we're starting at $100,000 using a really different approach called behavioral finance, and we have about 10 advisers now. So again, this is about 5 or 6 weeks in market. It's going well, early days. But what we're finding is that the approach of really getting to the money story, they call it. Tell me about your background, how do you think about money and investing. And our advisers are able to really craft an appropriate plan. And I think having this service now is going to be very timely just with what's going on in the world around us. There are some people -- again, Ally Invest had self-directed brokerage, so do-it-myself. I want to trade or invest and buy individual ETFs or stock symbols. We also have a robo advisory. So that's more automated. But this piece in the middle of I want to talk to someone and I might need some help and advice, is meeting a need that many people have told us they have. And so again, early days, but we really think, again, the addition of this new capability is yet another way that Ally is going to be cementing customers, giving them more reasons to come to Ally, stay with Ally and really have their whole financial picture in one place.

Okay. And you're able to deliver that service profitably. Okay. Because it's automated or...

It's a very digitally-heavy experience with a dedicated -- so there are humans. There are some humans, but it's not outsized.

Got it. You also run a Corporate Finance line of business as well. Can you tell us about that and what you're expecting there in terms of growth and commitments and outstandings?

Yes. So that business, I always say I have a bowl of citrus fruits in all of the consumer businesses and an apple. But we love that business. There's a very seasoned team, 20-plus-year veterans. And what I would say, it's sponsor finance, it's restructuring. We have continued to really see nice growth with some new verticals. To your question about Ally Lending, our most recent vertical is lender finance, and that's been a very strong growth engine. That business, as you all probably know, is very competitive. But we, again, have great, seasoned pros who are very well thought of in the industry. And we've got great sponsor relationships. And so we like the prospects. We've grown that business very materially over the last couple of years. We're still seeing strength on -- strength in origination and commitment volume, strength in the fee income. And credit, again, knock on something, it's always lumpier in that business. But again, we have an exceptionally talented workout group. And so nothing to note on the credit side. We watch it carefully, but there's a lot of great momentum in that business. And we think the prospects continue to be really strong as a growth engine for Ally.

Okay. So credit, so far, so good.

Yes.

All right. And then just wrapping up, some of the biggest lessons that you've learned over the years, overseeing the digital evolution of Ally Consumer and Commercial Banking. What's on your watch list for the next 1 to 2 years? What are you most excited about?

So I remain excited about the prospects of our company continuing to grow and really do meaningful things in the lives of the consumers that we serve. I think the biggest lesson learned, if there's just one, I'd say stay true to your purpose. And our purpose at Ally is of being -- doing it right for customers has fueled so much of what we do. And it's easy to get distracted by that. And we often say the customer's in the room with us. And so that rallying of 10,000 people thinking about is this a good thing for customers every day, makes a huge difference because everyone is rallying in the same direction. So I think it's going to be an interesting couple of years to see how things evolve, how technology evolves and how we continue to grow. But we're excited about it.

Right. Diane, thanks so much for joining us this morning.

Thanks, Betsy. Thank you, everybody.