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

Hello, everyone. We'll start the next fireside chat session with Ally Financial, Russ Hutchinson, the relatively new CFO, but I feel like you're the face of the franchise.

Russ, let's just start here at a very high level. You've been in the chair for about 8 months now. Just talk about some of your biggest priorities that you have for 2024 and beyond.

Yes. Thanks, Jon. Thanks for having me here. Thanks, everyone, for giving us your attention for 30 minutes. I'm fully immersed in Ally's Do It Right culture at this point. It feels like I've been at Ally forever. As many of you know, I spent a long time covering the company. I've known the management team for a number of years. And so it really does feel like I've been part of the Ally story for a long time. And I'd say, look, we continue to focus on our culture. We're focused on our employees, our customers, our communities. As many of you know, we've been focused on execution. That means our customers across our dealer franchise and our deposit franchise. It means managing our risks across credit and interest rates and it means managing our resources. And when I kind of tick through each of those things, the strength of our dealer franchise and our deposit franchises really gives us a lot of confidence around the NIM expansion that we've been talking about the last few quarters. When we think about managing our risk, that's obviously something that we focus very closely on, and we manage it across both how we think about credit risk as well as interest rate. We look at the risks across all the different portfolios that we have. When we think about our resources, we think about both expenses and capital. We took some actions late last year in terms of expenses, and we're seeing the benefits of that now. And similarly, in terms of capital, we've taken real actions in terms of just how we think about capital and how we allocate capital across our businesses. I'd say at this point, we continue to focus on allocating capital towards our highest-return businesses and highest return on a risk-adjusted basis. So I'd say that in a summary, those are kind of how I think about the priorities -- my priorities and also Ally's priorities over the foreseeable future.

Okay. Great. I do have a number of prepared questions. But as always, in these sessions, if you do have questions, put your hand up and ask them. So CEO search, you showed up in the chair, JB announced he was moving on. Doug is in the spot now. Can you give us a quick update in terms of how that search is progressing?

Yes. So look, I'm not directly involved in the search. I'd say our Board is very focused on it. Search is ongoing. I'd say I'm pleased. Our Board is very focused on finding the right person for the job and kind of the right person for the job is someone with the skill set, the capabilities and the experience to continue to move us forward as a company. It's a digital-first bank, and I think they're also focused on getting someone who's the right culture. We -- I referenced the Do It Right culture. That culture runs deep at Ally, and I think it's really important to us to find someone who is not just going to carry the franchises forward, but also carry the culture forward. I think that the Board has taken a lot of confidence, having Doug in place and having this leadership team in place. We're not stopping or pausing. We're going to continue to move the franchise forward. We're going to continue to advance the culture and give the Board as much time as they need to find the right person.

Okay. Great. You talked about the balance sheet in your earlier comments and it's one of the key topics here. You recently sold Ally Lending. You've done some other optimization or you've talked about it at least. Can you expand on this and give us some color in terms of how you see the balance sheet trending from here?

Yes, it's a timely question. The Ally Lending sale closed on Friday, so on March 1. And so with that, we deconsolidated over $2 billion of assets. 280 of our associates started the week working for Ally and ended the week working for Synchrony. And so when you think about our balance sheet post the sale of Ally Lending, it's relatively flat over the next couple of years. And underneath that, there's a lot of things moving around. And I'd say moving around for the positive in terms of improving the overall profitability of the company. I'd say, on the auto side, we'll continue to see some modest growth, both across the commercial side in terms of floor plan and inventory levels normalizing as well as continued increasing in the size of the retail loan book. On the other side of that, we'll continue to see our mortgage portfolio, our both loans and securities, continue to run off. We'll see some growth in our corporate loan book and corporate finance. In credit card, obviously, we're being very cautious there just given some of the challenges in the industry on credit, but you'll see some minimal growth certainly over the course of this year and some very moderate growth over the course of the next couple of years in that portfolio as well. All of that is basically a mix migration towards our higher-yielding, higher-returning assets and away from some of the lower-yielding stuff and so all good things from a balance sheet perspective.

Okay. Good. It's a good segue into auto. You had a good year in '23, $40 billion in originations, 10.7% yields. Surprising to many investors. Just a really good year. Talk a little bit about competition in the auto space today, how you're differentiating yourself and what lies ahead.

Yeah, maybe I'll start with the differentiation point. When we think about auto, our message is pretty simple. We want to help our dealers sell as many cars as possible. And so what really differentiates us is we ask our dealers to send us all their apps. We want to see as much application volume as possible. And we're coming off a year where we saw record application volume and even early this year -- early in the year this year, we continue to see record application volume. I think part of the strength of our auto franchise is just the tremendous scale that we have and the depth of the relationships with dealers. I mean, we're there to help make their businesses better and we can support them across a broad range of credits. We support them through lending to them directly as dealers to support their inventories. We provide insurance on their floor plan, and we provide insurance products through their F&I offices. We also support them with our SmartAuction. And so our relationships in the industry and with our dealers is just -- it's particularly deep. And I think that gives us a real advantage that helps us drive that application volume. And I think we sit here at a time now where the competitive environment is favorable to us. A number of our competitors have either pulled back or exited entirely. It's no secret what's going on. They're facing a lot of the same pressures that we're facing. A lot of folks are on RWA diets. And in that environment, they really have to focus on the businesses that are -- and the franchises that are absolutely most important to them and so do we. And so you saw us make moves on our Ally Lending business. For us, auto is the core. It is an incredibly important franchise for us, and so that's where we're directing our capital. But we're benefiting from an environment where others are pulling capital away from auto and I think that dynamic is going to persist. A number of our competitors have taken the hard step of exiting the sector entirely. And as you know, that's -- it's hard to come back. And with regulatory headwinds that are going to continue with the impact of CECL, I think it just becomes even harder for folks to think about reentering or kind of rebuilding their franchise after pulling back hard. We've taken this opportunity to deepen our relationships with dealers to really deepen the moat that exists around our franchise. And so I'd say, overall, I think we feel pretty good about the competitive environment. And I think we feel really great about our ability to really leverage our relationships.

Okay. Just following up on that, the pricing environment. I mean, a strong year. You had over 11% origination yields in the fourth quarter. What kind of expectations do you have for that going forward? And what kind of leverage do you think you have?

Yes. Look, I think the steady march up in our portfolio yield -- and we've shown this in previous quarters where we show our portfolio yield kind of sitting in the fourth quarter about 9% marching up. Because as you said, as we originate loans at higher yields and last year, we averaged 10.7% over the year, in fourth quarter, we were actually at 10.8% for the fourth quarter. As we continue to book new loans at those yields much higher than our portfolio yield, there's just a natural march up in terms of our portfolio yield. And we'd shown an illustration before where we show that march approaching 10% over the medium term. That's still very much -- still very much intact. And so we feel pretty good about the pricing dynamic. We feel even better given how we've actually moved up credit at the same time. And so if you look at the distribution across our various credit tiers, we're booking over 40% of our loans in what we call our S tier, which is our top credit tier. That would historically be more like 30%. And so we've simultaneously basically increased pricing at the same time that we've moved up credit. And I think that just puts us in a great position going forward. To the extent that as benchmark yields came down, we continued to see stabilization in the credit environment, it gives us flexibility to protect our yields by moving within that credit spectrum. We're in no rush to do that. And where we sit today, we don't see any reason why we need to. But it's a lever that we've got to help us support these yields for the foreseeable future. So we feel pretty good about the pricing environment that we live in right now on the auto side.

Okay. Good. Other side of that on deposit pricing. You've talked about starting to reprice downward. I think you've said you've done it -- at least publicly, you've done it twice. Any update on deposit trends to start the year? And what are you thinking on the pricing strategy from here?

Yes, we are delighted by where our deposit franchise is. We've continued to see strong growth in balances so far this year. Last year, even with all the turmoil in the industry, we grew balances. We had a record year in terms of customer growth. And so we feel like we've got a lot of great momentum on our deposit business. Where we sit today, we're really happy with it, particularly given if you look at our balance sheet and our funding stack is 88% deposits. As I said, our balance sheet is pretty much flat over the next couple of years. And so we sit in this interesting spot where the strength of our deposit franchise has really put us in a position where we can focus more on optimization versus chasing balances. And of course, we have to do that in a way that's true to our value proposition to our customers. But as you pointed out, we have taken some actions. We've run multiple rounds of reductions in pricing on our CD products. You take, for example, our 12-month CD. We've taken it down a total of 75 basis points so far this year in terms of pricing. On Friday, we made our first move on liquids. We took 5 basis points off of our MMA rates. And so where we sit today, I think we're in a great position where we can really focus on optimizing our deposit portfolio versus chasing deposits.

Okay. You mentioned 88% of your funding is from deposits. Is that optimal for you and how do you think about optimizing it longer term?

Yes. Look, it feels pretty good. That being said, we've kept our foot in the door across a variety of funding sources because we think that's prudent and the responsible thing to do. You've seen us tap the ABS markets. You've seen us tap the unsecured markets. We hit FHLB. We hit brokered CDs opportunistically as we think about short-term cash. And so we keep a diverse array of funding sources but obviously, having a stable deposit base, 92% FDIC insured as the anchor of our liability structure puts us in a position where I think we feel really great about that.

My favorite topic, the margin. You have some tailwinds in the margin. You talked a little bit, maybe about the path to 4%. What does it take to get there, the time line? And is that sustainable, do you think over time?

Yes. We -- 4% is sustainable. We expect to get there in 2025. And I would say, as we think about our NIM with respect to rates, we'll get to the guidance a little bit later, We still expect to exit the year at 3.4% to 3.5%. We still expect to be at 3.25% to 3.30% for the year. And I would say that the 2024 trajectory really doesn't depend on what the Fed does. Obviously, we hope the Fed cuts, that will certainly be a positive in terms of accelerating our path to 4% during the course of 2025. But we've taken a lot of the rate risk from a NIM perspective off the table for 2024. When you think about our NIM overall, it's -- that NIM trajectory is choppy, right? And you see some of that this quarter when we spoke to folks after earnings in January, we talked about some of the factors that impact Q1 NIM, right? So the sale of Lending took some NIM off the table. When you kind of go through the list of things, the kind of that last OSA increase that we did in December, obviously took some -- the CD rollover, took some NIM off the table. And so when we talked to The Street in January, we talked about NIM being down for the quarter and obviously it is. The good news is that all of those factors, yes, those are things that impact us in the first quarter, but they're not persistent headwinds on the business. What is persistent, though, is what we're seeing on the auto side in terms of that rollover of the auto portfolio as we continue to originate in the high 10s on a yield basis. That part is persistent, and that continues. And that's what really gives us comfort in that NIM trajectory over the rest of the year and over the course of 2025. But obviously, it's choppy. It's not going to be a straight line. And we obviously will try to give people as much transparency as we can as we go through that.

Yes. It's hard to stop it, with both going the right direction.

Absolutely.

Yes. Okay. On the other revenue line, you've talked about up 5% to 10% for the year. What's driving that expansion? Anything to call out there?

Yes. Look, I think we continue to see really great opportunities in the auto side of our business, particularly Insurance. Last year, we did $1.3 billion of premiums in the Insurance business. We continue to see a great runway in that business, both on the P&C side in terms of ensuring dealer floor plan as well as on the F&I side. Of our 22,000 dealers, about 10 -- only about 10% use our insurance products. So just a tremendous amount of runway in terms of the ability to grow. We put new leadership into that business a little while ago, and we've really emphasized the coordination between our auto coverage team and our insurance coverage teams to really use the strength of the auto franchise to drive growth on the insurance side of the house. And look, we saw that over the course of last year. We expect that to continue. We've got some other good guys in-house as far as a noninterest revenue go. The SmartAuction, that continues to grow. I mean that SmartAuction volume is up 60% since 2019, and it continues to go, including through our white label products. And then we've got servicing streams that are growing as well. So fourth quarter, we deconsolidated some assets through the ABS markets, about $1.7 billion of retail auto loans. We keep a servicing stream on that going forward. And so that's helpful in terms of noninterest revenue. We also get noninterest revenue through the loans that run through our pass-through programs. And so we're building up some additional forms of noninterest revenue as we go. So I think we feel pretty good about the 5% to 10%.

Okay. Good. You have to give me a little bit to get this question out. I want to make sure I get the cadence right. But on credit, you're talking about retail auto losses ticking up slightly versus '23, but staying below 2%. You gave us some of the vintage detail. So '23 is performing better than '22. And then you've talked about the first half of '24 being a little bit higher, but then leveling off, potentially starting to come down. Is that the right guide? And how should we think about that second half losses are going to be leveling out.

That sounds right as I kind of parse through it, and I know we'll get to the quarterly guide a little bit later. But I'd say, look, we're still confident. So our expectation is losses tick up from 2023. So 2024, we expect losses to tick up from 2023. But we're confident we'll hold below 2%. And I'd say, as I kind of parse through the dynamics there, we've talked about our second half 2022 vintages before. Those vintages are showing elevated loss content. Great thing about the auto asset is it's relatively short, you can adjust on the fly, but you also get information real time. So about 6 months after origination, we really kind of start to see how a book is developing, and then our books hit peak losses 12 to 18 months in. So when you think about that second half 2022 vintage, it's really kind of going through its peak loss periods in the first half of this year. And so we're seeing some of that in terms of elevated first half '24 NCO rates. But as we get into the back half of '24, we'll really start to see kind of more of the loss content driven by the 2023 vintages. We provided some additional color when we reported fourth quarter just showing how that -- those 2023 vintages were diverging in terms of NCO rate and delinquency away from the 2022's showing favorability and that's continued. And so that favorability, reflecting all of the curtailment that we put in place over the course of 2023, is really what gives us confidence in terms of how we think about the back half of 2024. And so kind of where we sit today, I'd say, overall, our outlook on losses is still same place it was a month ago. It's higher, up based on those second half '22 vintages. But again, based on the kind of, as we roll into kind of more of the loss content driven by the 2023 vintages, we expect to contain and hold under 2% for the year. I'd say used car prices are also a factor that is impactful to us in terms of where we see NCO rates. When we reported the quarter, we talked about used car prices being soft back in January. I'd say that softness has persisted. And used car prices we've seen over the course of the last year have been choppy. They were choppy going through the strike experience we saw over the course of last year with both positive favorability at times and then obviously, ending the year with some negative development and softness. Again, that softness has persisted, but it doesn't change our medium-term view of used car prices. And that medium-term view is really informed by the -- just the supply/demand dynamic that we see going forward. A lot of that driven by what we're seeing in terms of new car pricing but also just what we saw in terms of new car deliveries over the past few years and how that feeds the used supply going forward. And so while we expect used car prices are going to be choppy, and we'll have periods of favorability and we'll have periods of softness, our general expectation is unchanged. We expect them to kind of settle out 20% above pre-pandemic levels. So for us, that means on an Ally used vehicle index basis around 120.

Okay. Good. Sticking on credit, you provided some insights on card and Corporate Finance. Any updates there? Any changes you're thinking there?

Yes, I'll start with Corporate Finance. That business is very much on track with expectations and it's set up for another strong 2024. And as you know, that portfolio is at historic lows in terms of criticized assets and nonperforming loans. So it's in great shape. There's not a lot of CRE in there. It's less than 1% of the portfolio and it's all health care-related stuff. There's no office CRE in there. So we feel great about that portfolio. On the credit card side, just switching over, obviously, challenges in the industry with credit on the credit card space. I'd say those challenges are exaggerated for our book. We entered relatively recently through an acquisition. And so our credit card book really looks almost like entirely a front book. It doesn't have the benefit of some of the back book of the seasoned vintages, which tend to provide some stability in credit as we go through periods like this. And we're also near prime focused. And so I think we're -- our book is overall kind of more impacted by the industry. We talked about -- I think when we did the quarter, we talked about losses increasing through the first half of the year. We still expect losses this quarter around 13%, and we expect losses to peak in the second quarter. We do expect favorability in the second half of 2024. And a lot of that is based on what we're currently seeing in terms of delinquencies. We've seen some stabilization and then some improvement over the course of February. And our expectation is we'll continue to see improvement. It's largely seasonal. We typically see improvement through the course of March and April. And so we expect that seasonality to hold. And kind of based on what we've seen, plus that seasonality, it gives us some confidence in losses peaking out in the first half of the year.

Okay. Perfect. I want to touch on capital and guidance as well before we end here. But you generated some capital from the sale of Ally Lending. You deconsolidated some retail loans. Is 9% still the right target? And how are you thinking about managing capital going forward?

Yes. No, it's a great point. I'm glad you went back to the sale of Ally Lending. So closed on Friday, generated 15 basis points of CET1. We have the CECL phase-in, which will offset that. And we also had the portfolio sale, which provided some benefit that we saw on our -- in the fourth quarter. We continue to be incredibly disciplined around capital in terms of how we deploy it towards the best possible returns. Look, then on the 9%, I think the 9% is still the appropriate target level for us from a management perspective, just given the risk that's on our books. It still puts us 200 basis points in excess of our SCB minimum of 7%. I would say, though, with new capital regulations coming, we're obviously in a position where we are building capital in advance of that. I'd also say the inclusion of AOCI in particular introduces another form of volatility to capital. And so where you've seen us target 9% but actually hold a buffer to that, call it, 9.2%, 9.3% in general, I think the expectation is as AOCI becomes a more real part of the capital picture, that we'd probably look to increase the size of the buffer. I don't think we've settled on a specific level yet, but I think that's kind of a safe assumption is to see that buffer increase, but the 9% target generally hold. And look, at Ally, share repurchases have always been part of our discussion. They're on pause while we build capital ahead of the new regulations, but they're still a part of the consideration. And obviously, we recognize the importance of capital return to our shareholders and being good stewards of capital. And so that's always going to be part of the conversation for us, albeit on pause as we build capital ahead of these new regulations that are coming in.

Okay. Good. [ Ross Wood ].

Can you give us an update on your LTD need? Then when you think about the rising growth of unsecured issuance, how are you thinking about narrowing the gap versus some of your traditional peers of the captive finance? There just is such a wide gap on where you fund versus others. How are you looking to address that?

Yes. Look, on the LTD question, look, I think it's still early days in terms of what that regulation is going to look like. It is obviously impactful to us as it's currently drafted with the requirement at both the holdco and at the IDI level. I'd say we have some flexibility in terms of how we manage assets between those levels. That's certainly something to think about if the regulators do stick to this dual IDI holdco requirement. And obviously, depending on whether they hold at 6% of RWA or they look for a different level, it's probably too early to quantify the magnitude at this point. But obviously, it's something we're thinking about. It's something that would be impactful to our business. I'd say, as you think about our NIM trajectory, it doesn't change our outlook in terms of the sustainability of a 4% NIM in the medium term. Depending on implementation time line, et cetera, it obviously could impact us, but it doesn't stop us from getting to the 4%.

Let's wrap up. We might steal an extra minute of your time here. But I'll put the guidance up really quick. We covered most of the inputs, and this is the guidance slide you filed this morning. Talk about some of the moving pieces here, how the 1Q input factored into your full year outlook and anything that you want to flag.

Yes. Maybe I'll just hit a few points quickly just given the timing. And I'd say I think the headline is accurate. No update to full year guidance. As I kind of tick through some of the first Q impacts, net interest margin, 3.10% to 3.15%. We told everyone back in January we expected NIM to be down in the first quarter just given some of the factors that I raised earlier, things like the sale of Lending, some of those more recent changes to OSA, the CD rollover, a lot of those factors. Again, they're factors that impact us in the quarter, but they're not permanent or persistent headwinds. I'd say in addition, lease termination volumes were lower than we expected so far in the quarter. That could reverse itself in coming months. And so that may turn out to be a good guy later on. But that's certainly something that impacts the guidance we provide now at 3.10% to 3.15%. The good news, again, is all these factors are things that impact us in the quarter, but they're not persistent, and so it really doesn't change our view on the full year 2024 and so you can see that is very much unchanged. On the noninterest expense line, again, unchanged from where we were before. We still see controllable expenses down more than 1%. Total expenses, yes, I think we show kind of up 2% year-over-year. As we think about -- sorry, on the quarter. As we think about that, one thing to keep in mind is the sale of Ally Lending closed on Friday. And so we actually carried the expenses, the 280 people, through 2 out of the 3 months. And so that's just something to think about as you're adjusting your models. Obviously, as we go through the years, we have the full benefit for the year of the expense actions we took late last year. And then obviously, the Ally Lending expenses roll off starting, effectively, this past Monday. And so we have that benefit through the year. I'd say on the total expenses versus controllable, we carve out the FDIC and insurance expenses. Yes, I'd just say on the insurance side, those expenses are generally a good guy. But the way that business is run, we effectively have offsetting revenues to offset both the sales expenses as well as the loss expenses. And so to the extent that we're able to grow that business more quickly, we could see more expenses. Again, it's a good guy and so we like separating that out from our controllables. NCOs, we spent some time talking about. We're at 2.2% to 2.3% for the quarter. Again, no change to the outlook for full year 2024. Up, but we still think, again, confident that we'll be below the 2% mark. And consolidated NCOs unchanged, 1.4% to 1.5% for the full year; 1.5% to 1.6% for the quarter. And I think that just about covers it. And I know we're out of time.

Very comprehensive. But we appreciate it, Russ. Thanks for the time. Thanks to the team for preparing this. I appreciate it.

Great. Thanks, everyone.