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

All right. Good morning, everyone. Thanks for joining. My name is Rob Wildhack. I cover consumer finance here at Autonomous, and we are very excited to have Michael Rhodes with us today. Michael is the CEO of Ally and he's been in that seat for a little more than a year now. Just a quick note for the audience. We're still using Pigeonhole for the Q&A. You can submit your questions there. They will make their way up to me on this iPad and I will get them to Michael.

And now we can jump right in. Michael, let's start at the high level. You've been CEO for about 12 months. Give us some insight into your first year on the job. And what do you want investors to focus on or take away as it relates to the Ally story?

Great. Well, Rob, thanks. It's great to be here and thanks for hosting this. So it has been about a year. I started in, I guess, late April of last year so I celebrated my 1-year anniversary pretty recently. And if I think about the takeaways, I think keep it really simple, just really three things to think about. One is we have some terrific franchises. When I talk of the franchises, I talk about the businesses, but even beyond that, I think about the brand the organization has, which is quite differentiated, the culture that we have, the technology that we bring to bear. And so when I talk about the franchise, the combination of the businesses and then the capabilities that enable that. And I'm really encouraged, actually more energized at year-end by what I see than even by the day I started. Second thing to take away is we've taken very meaningful steps to both streamline the organization and focus in areas where we have a competitive advantage. And I think we're really beginning to see the fruits of that. They're going to play out now and then hopefully in the near future. The third takeaway I'd offer is that as a business, we are not yet reaching our full potential. I think when you look at our returns today, we're not living up to the potential of what this franchise can do, but we're on the right track. And so I have a lot of conviction that we're on the right track to make things happen. And so if you sum that all up, today, you think about Ally, look, we're just a leaner, more focused, more purpose-built organization. We're on the track. Returns are what they are, but we have a path to see it even better.

Right. And you mentioned focus and a common refrain from Ally recently has been the power of focus. What prompted a shift to be more focused? And then how does that set Ally up for this year and beyond? I know some of the aspects there are obvious, but for some of the people who maybe aren't as close to the details in the room, what's Ally doing differently today than in the past?

Great question. And you've done your work, the power of focus is something that we speak a lot about. You read the transcripts and we talk about that a lot. And maybe just some history-telling here first to be probably helpful is Ally, we're a 100-year-old organization. We've been public as a bank for 10 years. The roots, the bones of the organization are very much around auto finance, both commercial and retail auto finance. But as a public traded bank, we obviously are taking deposits, doing other things to diversify the business. And we're diversifying the business in many ways, some of them included getting into some new business lines, credit card, personal lending, mortgage and all good businesses. But when we talk about the power of focus and what Ally brings to the table, we've really, last year, engaged early in the job, you do a couple of things you want to roll. You think about the talent, you think about the organization, the structure, you think about strategy as well. And so early in the job looking at strategy, we said, look, we're going to actually make a pivot. And the pivot is going to be to focus on areas where we have demonstrated strength and like a real reason to win. And those areas were Dealer Financial Services. They're also in our Corporate Finance business and our banking business, our deposits business. And maybe if I can just kind of unpeel that a bit, when I think about focus and the reasons to win, if you look at Dealer Financial Services, what's our reason to win? We're the largest bank originator of auto loans in the country. We're the best of what we do as a bank originator. We're also there to serve our customers in very, us call it diversified ways. We provide insurance product, commercial lending. We have fee-based products including a SmartAuction product, which is like a virtual auction for used cars and even some kind of pass-through programs for risk that we don't want to take. So we're actually showing up for our dealers in a relationship-based way, in a very big way. We've become very relevant for them. And so I call that real differentiation or a reason to win. In our Corporate Finance business, this is a business that we've been doing for 25 years. Through the cycle, we've demonstrated very strong returns. We have a team with a lot of experience. Literally, the senior team has hundreds of years of experience. It's a business that's been growing. And so that's something we feel very, very good about. And then our deposit business, our deposit business is really quite remarkable. We've taken this from -- we've been a bank for not that long. We're now the largest digital-only bank in the country, $140 billion of deposits. And that business has done just really, really fabulously. And so when we talk about the power of focus, we're talking about really doubling down on the things where we have differentiated and very specific reasons to win. And so that was one of the big pivots for -- that we made last year. And everyone inside the organization hears about it and it's a real rallying cry, and there's real pride in that rallying cry because the businesses we are in and the businesses where we are investing are places where we have a real reason to win.

Let's zoom in on that pivot a little bit more because you did -- you mentioned acquisitions in personal lending and credit cards. And with all the emphasis on returns, those businesses, especially credit card, as you probably know better than anybody here, it can be a very high return business. So why the shift away there?

Yes. So like credit card, like I love the credit card business and credit cards are high-return businesses. And to be fair, when I talk about the businesses that we either sold or stopped originating, personal lending before I arrived with the divestiture there, credit cards and mortgages, like these are good businesses. And the question really is about trade-offs and where are you going to make your trade-off decisions. And so for us, the trade-off decisions are really going to be investing in things that are either core or have adjacency to the core. And when I talk of adjacency to the core, that's part of what creates an edge or sort of the reason that we will win. And again, you kind of step back and I think about diversification. Look, we're still diversifying our business but the way we're doing it is evolving. And again, we're evolving in a way that we're going to invest in places that are adjacent. And let me just bring that to life for just a moment if we can. If I think about our businesses and kind of what we've been able to do over the years, let's take 2019 versus today, so pre COVID versus today. If you look at our fee-based businesses, our fee-based businesses come from our Corporate Finance business and they come from our Dealer Financial Services. Our fee-based income has gone from $1.6 billion to $2 billion over that period of time, which is about a 5% CAGR. So our recent trajectory has been double digits. And we're actually seeing an acceleration of the fee-based businesses, and again, things that are adjacent to the core, which is where we're doing well. You take our Corporate Finance business, this business, the assets have grown at a 10%-plus kind of CAGR over the past 5 years. The income has grown 20%-plus. And so we've actually seen very strong returns there and we like what we're getting in there. In our retail bank, if I take our depository business, in our depository business, we've grown from under 2 million customers to over 3 million customers in 5 years, 1.3 million customer increase. And during that period of time, again, we've seen that our pricing capabilities and our ability to have engaged customers has actually increased. And you look at the synergies, if you will, between the deposit business and what we do in the Dealer Financial Services side and actually the spread between what we earn on a new auto loan and we're paying in terms of deposits, that spread has increased by about 100 points over the past 5 years. And so again, you're just kind of seeing the power of these things kind of working well together. And look, we have a small invest business. Our investment business, again, plays off with adjacency for what we're doing on the depository side. So everything kind of plays together well. And it's not that our businesses weren't good businesses. It's just we see a better use for our capital and better returns by investing in the things that we think we do very, very well.

Sure. Okay, let's touch on the topic du jour quickly. Tariffs policy, they're obviously changing very quickly. But acknowledging that, how are you thinking about tariffs today, the risks they present, especially given the outsized impact on the auto industry? And if tariffs do become a more permanent fixture, what's the potential longer-term impact for Ally?

Yes. So tariffs, it's interesting, and clearly, it seems like every day, there's a new development on tariffs. And so when I think about tariffs, first of all, I'd say this is very dynamic. And so it's hard to kind of draw a line in the sand because things are moving around. And there are like deals being cut and negotiations and court cases and all those other type of stuff, so like it's actually quite dynamic. When I think about tariffs, I do have to break up -- that's a long-term question. It's also a short-term question. And as the story unfolds, I think those stories could end up maybe diverging or they may end up aligning but it is dynamic. But in the near term, we actually see some potential favorability in the near term. And the favorability comes from potentially used car prices go up. That's good for collections activities, recoveries. It's good for when cars come, vehicles come at the end of lease and what are -- with the values come there. And so near term, there could be some favorability. Over the long term, it is really tough to figure out. This could go a lot of different ways. The underpinning economic rationale of bringing manufacturing onshore and to bolster the economy, that would be good but there's also a bear case that goes with that. I don't claim to have a crystal ball that's any better than anyone else's. And so it's kind of difficult to project exactly where it's going to go long term. But I will say if you kind of step back and look at an organization, we are in a structurally sounder position than we have been in years, and so for our ability to do well in all sorts of environments has improved significantly. And it's improved significantly for like a number of reasons. If you look at the steps we took last year to improve our business and influence the diversification, look, we sold our credit card business. Our credit card business, it's a high-returning business. It's also a volatile business when it comes to losses, particularly where we were playing. We were in the near prime segment. The near prime segment is going to have a lot more choppiness with respect to loss content than other places in the marketplace. So selling that kind of derisks our balance sheet from a credit risk perspective. We took some of the proceeds of that and not all of the proceeds but some proceeds and did a securities restructuring. By doing a securities restructuring, we actually have a better income stream on an ongoing basis. We've also reduced interest rate risk at the same time. And we've undertaken some credit risk transfer activities, and in doing that, we've actually augmented the capital base. And so I look at our balance sheet today and the environment we're going into, less sensitive to interest rates, less sensitive to credit risk, stronger capital position and the flows of our business that we're getting in, I feel very, very good about. And so look, this tariff environment is going to throw all sorts of things at us. And I'm not trying to say like it's not going to impact us one way or the other because that would be a bit naive. I think we are very well positioned to handle whatever is going to come at us.

Okay. And then sticking with the nearest term, how about the consumer? What are you seeing with respect to consumer behavior today and financial health? Any emerging trends, good or bad, pressure points that you're noticing?

Yes. Consumers are an unusual one for us because like we have a couple of sets of data that we look at. One is external. And so we see the consumer sentiment surveys and everyone reads those. And there's clearly angst in the consumer when I see these surveys. If I look at our own activities within our own book, look, as a focused business, we have a view on customers in certain ways. One way is new vehicle purchases. New vehicle purchases are very strong right now. That's likely a pull ahead. There's some pull ahead in there. It's hard to quantify exactly how much. When I see that, that's strong. When I look at our payment activity and particularly our payments for delinquent customers, I'm actually encouraged by what we see. And so again, if I kind of decouple from my read externally and just kind of look at our paying behavior, you see some encouraging things. So how can both these things be true is the question. And you have to kind of decouple and, again, kind of unfold the activity within our own delinquent payments, which is we made meaningful changes to how we underwrite our loans. We've taken meaningful changes and improvements to how we service our loans, i.e., collections, both the data and the modeling that we use and the digital tools that we use. And so far, our book right now, kind of disaggregating those 2 is actually a little tricky because what we're seeing actually feels pretty good, but I also recognize that the world out there is potentially changing. And so you're going to hear from us a combination of feeling good about the business and caution at the same time. And that's how I think about the consumer health.

Okay. And then the team has been vocal about reaching that mid-teens returns target. Clearly a major priority for the company over the medium term. What needs to occur for that to happen? And then how do the combinations of the core businesses where you're really emphasizing and highlighting today, auto, finance, insurance, corporate finance, how did they come together to produce and maintain those returns?

Yes, a great question. And so if anyone's listened to our earnings calls, we talk about this a fair amount. And so we are committed to hitting a mid-teens return. We're being less prescriptive as to when because there are some macro factors that come into play in the various line items. But for this to happen, 3 things need to be true. First of all, we need to have our net interest margin improve and somewhere in the high 3s is what we talk about. Second is on the credit side, we've had very, very low credit losses in the commercial businesses. But on the retail side, we're looking for retail auto to be below 2%. And the third item is we very much look at managing to have discipline with both our capital and our expenses. And so keep expense growth low, be very smart about how we're using capital. So between NIM, credit loss and particularly retail auto and expense discipline, that kind of gets you there. Now maybe if I just kind of unfolded a bit more because you asked specifically what the business is, there's stock and flow in our business. And so we spend a lot of time thinking about the new business that we're underwriting and what does that look like. And if I look at our new business and particularly around, if you take our auto franchise and our Corporate Finance businesses, which is kind of where the growth in assets is happening as opposed to some other places where there's more stability, the business coming in the door there has kind of roughly, call it, a 400-ish basis point spread from benchmarks. And our deposit funding is basically about a 50-point spread on the other direction from benchmarks. So between the two, you've got about a 450-point spread. So take that spread and then you actually go and put an efficiency ratio that reflects some discipline against it. And then if you go put a loss number, that reflects our kind of commercial experience on a historic basis and auto is below 2%. The business we're originating today gets to a mid-teens. And look, we have a bit of a -- we're dealing with some legacy investments that are made in mortgages and securities. And of course, my phone is ringing, which is -- it's always the trick with the Apple watches. But if you take away some of those decisions that were made a while ago and for the reasons that at the time made sense, but we're dealing with some negative P&L implications. But as time goes by, they unwind and better business winds on. It's the on-off dynamic, the quality of the book and the business that we're generating, it gets you there.

Okay. Now if you're successful or when you're successful in reaching that milestone, it would probably suggest that Ally's shares today are somewhat mispriced. I mean, what do you think the market is missing here?

So it's a fair question. Look, I appreciate that Ally is still a bit of a show-me story. Again, when you look at the business that we're generating, like this is an attractive return business. When you look at us overall, you don't see those because, again, we're dealing with some legacy issues that we're working our way through. So it's a bit of a show-me story. That being the case, I go back to the narrative of the things that we have done. We are structurally in a different place today than we were a few years ago. We've got a more focused business model, more efficient business model. We're playing -- we're competing in places where we know we can generate attractive returns. And so like we're structurally different place. And we've got a lot of conviction we're going to get there. Like there are all sorts of things in the macro that could take us one way direction or the other, but the direction of travel is clear. And look, it's up for us as a management team to deliver the numbers that give the confidence that we're going to get there, and we're committed to do that.

Okay. Let's dig into some of those key ingredients. The first one is the NIM. You've talked about optimizing the balance sheet, and earning assets are expected to be relatively flat for the time being. So first, what's driving yield expansion moving forward? How sustainable is that? And then when do you think earning assets might be able to grow again?

Yes. So on the -- look, when I think about NIM, first of all, our NIM story, the good thing about our NIM story is there is momentum on both sides of the balance sheet. Since you asked about assets, let's talk about assets. There's also benefits on the liability side. So on the asset side, it's really a mix story. And the mix story, there are a few components to that. First of all, as I mentioned before, look, we have a number of both long-dated mortgages and securities that are earning something like around the 3% range. But as those kind of wind off and we actually replace them with new business, we're an 8% to 10% type yield on the new business that we're generating. That on-off dynamic, it is a pull up in yield unambiguously on the asset side. And then if you can double-click just on the auto business and you look at our auto business, our new originations versus our portfolio yield, the auto has -- the benefit is a relatively short duration asset. And so you're actually seeing a pull up in terms of the portfolio yield on our auto business overall. And so the asset side, it's really a mix story. But clearly, today, we're talking about a flattish balance sheet. Over time, this will be growing. And again, as we grow, you're going to see again the benefits of the higher margin business and the higher yielding business, which is, again, we think, pull yield up.

Okay. And then on the deposit side, that's a platform that's really matured into a strategic differentiator for Ally. I mean, what does that franchise allow you to do today that the company couldn't do, say, 5, 10 years ago? And then what's next for the deposit franchise?

I would say, this deposit franchise, and this is something I inherited and I got to give credit to the team before me that has built this. This is a wonderful, wonderful franchise. This is a tremendous strategic differentiator. We've built the largest digital-only deposit franchise in the country. We're fund -- 90% of our assets, of our loans today through deposit funding was 50% 10 years ago. We're 92% FDIC insured. A lot of folks talk about the risks of a bank. We have credit risk and capital risk. Liquidity risk is actually a big risk. Being 92% FDIC insured, that is a great place to be. And again, hats off to the team that has actually created what we've done here. I'm just -- it's just really amazing. And in terms of the differentiators that we have, and I'll get to your margin question in a second, the differentiators, look, we have attractive rates. We have a brand that matters and very, very few banks of our size of a brand that actually translates on a national basis. We have a strong culture inside the organization. That culture manifests itself, I think, every day in how we show up for our customers and how we show up for each other. And we have great technology capabilities, digital data and the things that we bring to bear as a digital-only bank. And so what's been built is really remarkable, and I'm just so pleased to be part of this, so proud of the team of what we've created. On the margin side, the other thing is like as a -- with our FDIC insured deposit base, it's relatively short in terms of duration. You've heard us say we expect a roughly 70% beta through the cycle. We're about 60%, I think, give or take, so far. And so we expect rates to be going down on an ongoing basis. And with rates going down, we'll extract the beta, like there's some timing impacts that come into play. But again, the direction of travel is on this is better NIM for both the liability side and how we're funding the business and the asset side. That's what gives us confidence. I may even double-click on that even a bit more, which is if you look at the quarter coming up, second quarter -- on the first quarter call, we projected this so I'm saying something you may have already heard, but we sold the credit card business. The credit card business is adding about 20 points of NIM to our business. We expect to fully cover that in the second quarter through the power we're seeing on both the asset and the liability side of the balance sheet. And so again, the direction of travel, I think, here is very clear.

So that leaves the NIM about flat sequentially even with the headwind from the credit card business?

Yes.

Okay. And then if I could ask one more on the NIM. Any update or comment that you want to give on the timing of that high 3s, maybe even 4% NIM target? What does the trajectory maybe look like for the rest of the year to beyond the second quarter?

Yes. Again, with NIM, the direction of travel is clear. There's definitely a pull up here. We expect to see NIM expansion this year. And even in the quarter, look, we're going to come to 20 basis points, and I'm hoping we even see maybe a little bit better than that. but the direction of travel is clear. Timing is difficult because what happens is if the Fed moves 25 points, 50 points, they stay flat, their near-term impacts, which aren't the same as the medium-term impacts. And so it's hard for us to be precise in the timing, but recognizing the betas normalized the way they do on the liability side of the balance sheet, the direction of travel is in the right direction. Very difficult to be precise with timing, but again, I'd say the direction of travel is clear.

Okay. Let's dig into auto finance. The competitive landscape there seems to be shifting again. People had exited the business in '22, and now it does seem that at least some are reentering. What are you seeing competitively? And then what does Ally do in response to that? And how do you continue to differentiate when competition is flowing in?

So with competition auto, the auto business, I may leave you three thoughts. One, it's really good to be in a place where you're a through-the-cycle provider for the auto dealers. And we're a through-the-cycle provider. We've been there through thick and thin, and there's real value that comes with that, and I'll give you some more color on that in a moment. Second, there is more competition today but I would describe the competition on the periphery. In the periphery, I mean like the super, super prime and the subprime, and keep in mind that the auto market is a big market. We retain $40 billion a year. We're 5% of the volume of, give or take, in any given year. And so there's a lot going on outside of us. Our wheelhouse is the intersection of prime and used, and we're seeing less competition there more than what I call the periphery. The third point, which maybe the most important point is, we really like the returns we're seeing in the business today. And so yes, there's more competition, but you look at the power of our franchise, where the competition is happening and our returns. So first of all, the power of the franchise. As you can imagine, you're in a job. I've spent a lot of time with our dealers. And in my career, I've been in banking for 30 years, and I've done an awful lot of what I call B2B2C businesses, business to business to credit. I was in the credit card business for a long time and that's fundamentally a B2B2C business. And our business is a B2B2C business for auto, like our customer is the dealer. And yes, we have end retail customers but we get them through a relationship with a dealer. It really matters showing up and being there through a dealer through thick and thin, through good times and bad. And they reward us with that and they reward us by being able to look at a lot of their business. And so just last year, as an example, we looked at $400 billion worth of volume to book $40 billion. And so we get an awful lot of bites to the apple and we're in a privileged position we can do that. But why are we in a privileged position? This is a relationship-based business. And we have very strong deep standing relationships that span not just years, in some cases, generations, and that those become very, very powerful. And we're there, the dealers, with a more complete set of solutions. Yes, we're reasonably full spectrum and we don't -- maybe some of the subprime credits, we have third-party solutions that help us provide a full spectrum of solutions. We're providing commercial financing needs, whether it be floor planning, real estate planning for a physical facility, even acquisition financing. We've insurance product that we do. And we have advantages in insurance that we basically have a built-in distribution advantage on insurance. Yes, we have the underwriting costs, everyone does. But our distribution model is better because we're already there at the dealers. And then we have all these other fee-based products that we're able to sell, including our SmartAuction product, which the dealer community just loves, even the rental car community now is buying into that. And so coming with a complete set of solutions means we get a preferential bite of the apple. And you can't turn that on and off. And a lot of folks in this business will turn it on and off. You can't turn what we do on and off, and that's power. The second thing about the competition kind of where we're playing, again, when we play the intersection used in prime, A, it's an attractive market; and, B, the thing about that market also, it requires a certain degree of scale, capabilities, data expertise and history. And you can't just carve that up out of nothing as you have to have been there. And third is with returns, look, we like the margin of the business that we're generating. And also, look, particularly in recent vintages, the last 4 to 6 quarters where the vintages that we've seen, our price loss expectations, we're actually seeing behavior better than price loss expectation. And so we actually like the business. And so I appreciate there's more competition here, but I feel good about the business we're originating.

And then on the credit side within retail auto, the first quarter showed some certainly improving trends. Net charge-offs were down year-over-year. I mean, can you speak to dynamics underpinning that performance? And then given the strength, should we be thinking about any revisions to the loss outlook?

Yes, okay. I was waiting for that question.

I have to ask. It's my job.

Yes, I know. So anyway, if you think about losses, I mentioned earlier, I'm encouraged by some of the behavior that we're seeing in terms of our credit book. And I think that's playing out well. But two things can be true, and the two things are, one, I'm encouraged by the behavior. The second, I'm still cautious about the macro environment, like I don't have a great crystal ball in terms of where things are going. I'd also offer and you've heard us say this before, our delinquencies are elevated from where they were may have been historically so probably a little more sensitive to the macro. And so yes, I feel good about the trends that we're seeing. And as I said, like the most recent vintages, like our '24 vintages are performing better than '23. Our '24 vintage is performing better than we thought '24 was going to perform. And so we're doing better on our own expectations. And so there's some goodness there, but I'm still -- I'm balancing the goodness with caution. And so what that means is I'm not going to make any announcements today. What I will say is, look, we're going to have a couple more data points we report in July. And as we have more information, we'll talk then.

Okay. Have you adjusted underwriting at all in light of tariffs or broader macro sentiment affordability concerns?

Look, we're always adjusting underwriting to be fair, and we've used the data to try to influence where we want to take more, where we want to take less. In terms of tariffs, I will say this is that with tariffs, we don't view this like a COVID-like event. COVID was a real, real massive disruption. And we think tariffs are a less of a magnitude of an impact of us. That being the case, we're being thoughtful about this. As I think about the environment now, we're making tweaks around the edges. We're evolving our criteria. I will say, particularly with our most recent vintages, our performance has been better than we would have thought. And so we kind of think there's room. And so we think we're more or less on the right track right now, and so no big sweeping changes.

Yes. And then as I think about some of those most recent vintages, a larger percentage of those have been upmarket in your S-tier, a lot more than historical run rate. I mean, how should we think about the origination mix going forward? And what would you want to see or need to see before remixing? And then just lastly, is that decision when it -- if it comes to remix back to the historical average, is that going to be more of a proactive thing or a reactive thing?

So when it comes to the remixing of the business and our S-tier, which is our highest level tier, it's been north of 40% for a while. And I'll say this is like we're going to be very deliberate in terms of our kind of curtailment activities or how we kind of remix the portfolio on an ongoing basis. And again, you probably sensed from me two tones. One is I feel good about the business. The second is just a level of caution given the environment. And so we're going to be cautious and deliberate in terms of how we kind of remix that business. Like we feel no pressure to move kind of faster than we might otherwise do. And so we're going to read the data. We're going to be thoughtful about the macro environment. And then we'll edge into it as it makes sense.

Okay. Let's jump over to Corporate Finance because that's been a consistent business for Ally and one that you're highlighting more and more. What do you consider the company's competitive advantages there? And then where do you see potential new growth opportunities in that segment?

That's great. Great question. So our Corporate Finance business, maybe some context, first of all. If you look at our balance sheet, our lending balance sheet, hold securities out. But our lending balance sheet, about 25% of our loans are loans to businesses. Those loans to business, 1/3 of that. So our total loans to business is, call it, $32 billion. 1/3 of that is Corporate Finance. So what's the other 2/3? The other 2/3 is what we do in the dealer ecosystem where again, I talked about our auto business where the dealer is our customer. And that's the floor plan loans, that's our real estate loans, their physical facility. We also do acquisition financing for dealers in select situations. So that's 2/3 of our business. 1/3 is corporate finance. So when I think about our Corporate Finance business, many of the things that we do in Corporate Finance, our approach to the business, there are actually similarities in terms of how we address the dealer community and that this is a relationship-based business. We are not out chasing deals and trying to get everything done we possibly can. We have long-standing relationships with a number of financial sponsors and investors where they're looking for debt in one way or the other. Some of these relationships go back 20-plus years. Our team has 25 years' experience -- sorry, our business has 25 years experience. Our team has hundreds of years of experience in terms of the senior team. And they anchor things on a relationship, prudent underwriting, and the prudent underwriting is making sure that the business makes sense, the cash flows work out, plus you structure the deal. If you think about what we're doing and sort of source of competitive advantage, like your fundamental question, is this a good business or not? And we agent virtually everything that's on our balance sheet. We underwrite it. We actually syndicate a fair amount as well. And so there is a market for the stuff that we're doing. It's actually a very frothy and good market. And so we have seen market tests almost every time we originate a loan that give confidence that we're actually doing something really good here. So we feel good about this business. The growth of this business is going to come from two places. One is with these long-standing relationships and just getting more and more on those long-standing relationships. And second is, look, we are looking at kind of new verticals in places where we can bring capital with experienced teams. And we're very deliberate and thoughtful about when and how we do that. We've recently done something in the energy vertical. But look, we're going to be very deliberate, very thoughtful. We are a relationship-based credit for shop, and that's not going to change. And we think what we do, we do very well. And again, if I look through the cycle and look at the last 25 years since we've been a public company, the data is available, this business has performed extraordinarily well. And competitive advantage, it comes to your relationship-based approach, it comes to your team, your underwriting discipline, and we think we do really well on those.

Okay. And you touched on fee income a little earlier. That's been growing at a nice pace recently and certainly less sensitive to interest rates, credit risk, all those things. Fees grew 12% in '24 and I think the guide is only for flat this year. So what's the right longer-term growth trajectory for that decline?

Yes. So fee income is important to us, obviously, not capital intensive. We do like fees. And so this year, the guide was flat. If you look at the first quarter, it was 10% on a year-over-year basis. So I talked about double digit. By giving the card business. The card business is a fee-based business, and so we basically then overcome the card business, and that's a good story. In fact, if you think about the card business, so we're going to overcome the fee income. I mentioned earlier that we're going to overcome the NIM loss. And so the revenue, we've actually kind of making up on one way or the other, and we're getting rid of the credit losses and the cost. And so that's a good thing if you can do that. And so we expect to see continued growth in the fee incomes and in the fee businesses. That's a place that we're focusing on. I'm not going to kind of give you a long-term projection now. But overcoming the loss of the card business and the 10% print in the first quarter kind of gives you an idea of kind of how we think about this business.

Sure, sure. Okay. And then let's hit on capital. You've made several moves recently. I mean, how should we think about the capital management playbook right now? And specifically, what would you need to see to be comfortable restarting the share repurchase?

No, great question. Look, in terms of capital, again, there's some common themes I'll talk about here. I'm actually encouraged by our ability to generate organic capital that's in excess of dividends and in excess of risk-weighted asset growth. And so that feels like an opportunity for share repurchases. Again, probably two reasons for caution here. The first reason, again, the macro, which way things are going, and again, my crystal ball is no better than anyone else's. The second, which is a very real one is kind of what called the regulatory uncertainty. Look, there were some guidelines that were proposed a year or so ago, probably more than a year ago about what capital should look like for category 4 banks such as ourselves. Clearly, a new administration and probably a different regulatory approach could be coming. But I've got no visibility into what that's going to be. I don't think really anyone does. And so we're working on the assumption that the proposed rules are going to be the rules we do live with, including the elimination of the AOCI opt-out. And so you've got this regulatory uncertainty, macro uncertainty, a couple of that with, I'm offering some encouragement of our ability to generate capital organically. It kind of puts us in a -- we're still in kind of wait mode. I would tell you this, though, share repurchases are part of our playbook. No ambiguity about that. We look at the potential of this business to generate returns. We see share repurchases as being an important part of that. We're just not ready to call it quite yet.

Yes, okay. And then you mentioned some credit risk transfers that you guys have been using recently. This also ties to an audience question as well. Do you see more of those ahead? And how do they stack up against the other capital levers that are at your disposal?

We really like those transactions, just wanted to say that. So you should expect to see more of them these are really nice transactions. They don't really have a meaningful impact to our NIM and hitting our high 3s NIM target but they do add capital. And it actually helps get our kind of capital weights, if you will, particularly for some of the more prime business, to where on balance sheet, taking account the credit risk transfer, it kind of looks like the economic risk because the regulatory risk sometimes will be higher. So we really like these transactions. I anticipate us to do more of them. Timing and quantum to be determined on market factors and things like that. But it's a sense of enthusiasm for us, for this transaction.

Yes, absolutely. Okay. And then one more on capital, acknowledging that the regulatory environment is still unclear. But if we could normalize for that, how should we think about -- and how do you think about the CET1 target, which had been 9%, give or take? Is that still the right place to run?

Yes, I think 9%, give or take, and probably to be fair. 9% plus some type of operational buffer. And again, the operational buffer is hardly prescriptive on that because a little of it depends upon where AOCI ends up. AOCI ends up adding a lot of capital volatility. And so to the extent we have to deal with that, you might have a higher buffer than you might otherwise have. But think 9%-plus something.

Okay, fair enough. On expenses, you've made solid progress on the expense front. I mean, is there still more room to squeeze out efficiency? And then it's the age-old question for a CEO, but how do you balance sort of the operational efficiency with the necessary investment for growth?

No, we've been very -- a great question. We've been very disciplined on expenses. We've had 6 quarters in a row of flat or declining controllable expenses. And again, I've only been in the job for 4 quarters. So this was -- the team before me was working on a lot of this and we've kind of continued that. And so expect to see continued discipline, I would say, on expenses, and I'll get to your question about the trade-offs. And I'd say expect continued discipline. Even though we project to have nice revenue growth on a go-forward basis, expect discipline on expense growth. So that should translate to nice operating margins on a go-forward basis. And so I will say that. In terms of the investments, look, I'd say we've managed to both reduce our expenses and invest in things that we need to, and that continues to be the focus. And things we need to, it's around technology, it's around cyber. It's around marketing and branding. Some of you may have seen we just signed the WNBA, and we're really excited that plays totally into how -- who our customer segment is. It also plays into what we're doing in women's sports generally. We're just getting a ton of great goodwill from that. And so we're making the investments we need, but being in my role is like it's always about trade-offs. Like when are you going to stop doing or do something else? And so just as we think about our businesses and our business mix, it's about trade-offs. Our expense is about trade-offs. So expect us to continue to show some discipline about maybe stopping doing some things and doing more of something else. And the general notion is the stuff that's adding less value, we do less of, and the things that are adding more value, we'll do more of. And if we keep on doing that on a regular basis, you're going to get better returns on the business.

Yes, okay. We do have some time for a couple of audience questions. This one, you've exited card and mortgage, which most would agree was the right move for the business. From a longer-term perspective, are there any markets where Ally might want to make an entrance?

Yes, it's a great question. We talk about the power of focus. Just even before this meeting, we were -- the team and I, we were chatting about things. Folks are always coming with great ideas of things we can be doing. Like I would tell you that for the next -- for the near term, take the next few years, we think there's such tremendous opportunity in what we're doing today. We're not really trying to widen the aperture. We're really playing this power of focus and doing the things that we're doing very, very well. And we actually see meaningful upside by doing that. I mean, if I look at our auto business, like we're 5% of the origination volume. That's a big marketplace and I think we're the best at what we do. And so it feels like there's upside. The dealer community in general, if there are other adjacencies to dealer community, that could be interesting. But I'll use the word adjacencies. Adjacencies are really important here. In our Corporate Finance business, look, leverage the business we've been doing. And look, there are other verticals to get into that makes sense where we feel that we have something to bring. We'll look at that. And then our consumer bank, clearly, the banking activities that we're doing, kind of one place. I haven't spent a lot of time talking about, and we're still kind of in the norming, storming and forming type stage is really our invest capabilities. We do think there's a real adjacency between what we're doing on the invest side and in our consumer bank. And actually, we see a very attractive overlap in customers that have a depository relationship that open up an investor relationship. We're seeing real stickiness in that relationship when those two things happen. But in terms of doing -- going in, we're not going to do home equity loans or other types of things that we haven't been doing in the past. We're not focused on that at all right now.

Okay. And then one more. Can you talk about the competitive environment as it relates to competition from captives? You've had Stellantis Bank spin up. GM Financial, I think, renewed their application for an IOC. How could that impact Ally?

Yes. No, look, I'd say the captives are there and captives are there for a number of reasons, and one of which is look, they really like to move new inventory. When I talk about what we do, we say we compete at the intersection of prime and used. 60% of our volumes are used. And so we feel really good about where we're competing and don't see captive really getting into our space as much as they might have historically, I mean, something they have made historically, similar to how it's been historically. And so that's kind of how I think about captives. And also look, to be fair, like we're there providing a pretty robust set of solutions in a way that captives are probably not going to do the same thing.

Okay. Well, I'll leave it with one more question to close us out. I mean, this is a generalist conference, more generalist audience. So what are the two things or three things that you would want the investment community here to take away from the Ally story?

Great. So the three things, I'll probably start the three things to take away sort of, in a similar way, I started the whole conversation overall. First of all, look, we've taken meaningful steps to streamline this business and to focus on areas of competitive advantage, and competitive advantages are core and things that are adjacent to the core and where we have like edge or an advantage. So number one is just to streamline of the business and the focus. Number two is we've taken, again, meaningful steps to strengthen and improve the balance sheet. And when I think of the balance sheet, it's both our sensitivity to rates, our sensitivity to credit risk, the amount of capital that we have. We're just in a stronger position on our balance sheet, which is a great place to be as a bank. The third thing I'd take away from this is, again, we're showing a lot of discipline on expenses and capital and seen that historically, expect that to continue. And when you sum it all up, this translates -- this is a business that has the potential to generate better returns than we're generating today. And so we think there is a compelling return future in front of us. And so we feel very, very good about that. And also to be fair, this business -- returns are very important. As shareholders, you care about that. But at the same time, like we've got a mandate. We're trying to provide an outstanding customer experience and we're as committed doing that as ever. And also a great place for our colleagues to work and we're very proud of the culture of the organization. I mean, Fortune Magazine always has us as one of the best places to work. We attract great talent that people try to build their careers there. And so that stuff is going to be as important as it's ever been, plus we're going to generate attractive returns. If I were to boil it down to like just one simple theme, so you're in the job and everyone keeps on asking you, the one question people have to ask new chief executives, what do you want your legacy to be? I probably got this question 100 times. What's your legacy? And so first of all, I take this question, I pivot it. I say it's not my legacy. This is our legacy. This is something we're doing collectively. I'm just one guy. I'm just -- I have the good fortune to be in my role but this is a team effort. So we're doing this collectively. Second, if you think about our legacy, there's one word that we're using and it's extraordinary. We're looking to build something extraordinary. We are not like other banks. We are not trying to catch up or follow anyone. We are differentiated, and we celebrate that differentiation. And we think that's going to create something extraordinary. Like you've heard from me this combination of, hopefully, passion and excitement for where we're going and caution. And I can't control the macro environment. So all sorts of things can happen. But I feel good about this business, and I think we really will create something extraordinary here.

I think that's a perfect place to leave it.

Good.

Thank you very much. This has been great.

Thank you.