Q4 2019 Earnings Call
To ask a question during the session you want me to press Star one on your telephone. Please be advised that today's conference is being recorded if you acquire any further assistance. Please press star zero I would now like to hand, the conference over to your speaker today, Daniel Heyler head of Investor Relations. Thank you. Please go ahead Sir.
Thank you operator, we appreciate everyone joining us to review ally Financial's fourth quarter and full year 2019 results. This morning.
Do you find the presentation will reference throughout the call on the Investor Relations section of our website and Allied dotcom.
I'll direct your attention to slide two of the presentation, where we have our forward looking statements and risk factors.
Contents of today's calls will be governed by this language.
On slide three and four we've included some of our GAAP and non gap or core measures.
These and other core measures are used by management and we believed are useful to investors and assessing the company operating performance and capital results.
Please keep in mind these are supplemental to not a substitute for getting U.S. GAAP measures.
Supplemental slides at the end include full definitions and reconciliations.
This morning, we have our CEO , Jeff Brown, and our CFO , Jim look where on the call to review our results and take your questions. Following the prepared remarks.
Yeah, I'll turn the call over the JV.
Thank you Daniel Good morning, everyone and thank you for joining our call I want to start by saying how proud I am of our results this year.
2019, reinforce the strength and adaptability of our businesses.
That's powered by thousands of Allied teenage you drove operating and financial performance to new levels and increased value for our shareholders.
This marks the fifth consecutive year since becoming publicly traded that we're able to say we've achieved the highest results or returns across several of our financial and operating metrics.
The consistent ability to drive improvement and deliver on our goals is centered around all what blacklist customer focus.
Looking closer at some of our highlights for the year adjusted EPS was $3.72 for 2019, a 12% increase year over year.
Core ROTC up 12% remain solid and within our expected range, even when considering the impact of lower rates on LCR.
Total revenues exceeded 6.3 billion, a 5% increase versus the prior year.
All of our businesses contributed to these solid results.
And auto and strong customer engagement across a broad product offerings led to improved risk adjusted returns.
We originated 36.3 billion of loans and leases a 900 million dollar increase year over year.
We increased volumes despite slowing new vehicle industry sales. This was fueled by a record 12 point sixmillion decision applications, reflecting our extensive coverage across the market.
Retail auto yields expanded 46 basis points on our 72 billion dollar portfolio driven by originated yield improvement.
Full year originated yields exceeded 7.4%, while net charge offs of 1.29% declined four basis points reinforcing our consistent approach to underwriting and ability to drive strong risk adjusted returns.
Our dealer base has expanded for 23 straight quarters, resulting in relationships with over 90% of U.S. franchise dealers.
Moving forward, our focus is to continue and strengthening and deepening relationships with our dealer partners.
Our insurance division continued to enhance our dealer value proposition evidenced by the 1.3 billion in written premiums, we generated and 2019, a 12% increase year over year, and the highest volume and over a decade.
Turning to our deposit and consumer bank product offerings, we saw sustained progress throughout the year.
Deposit balances ended at 120.8 billion for the year driven by retail deposit growth of 14.6 billion. This represented 16% year over year growth nearly three times the industry growth rate.
We added another 322000 deposit customers ending at 1.97 million overall, a 20% increase versus 2018 in the highest annual growth in the company's history.
Importantly, underlying trends continue with millennials, representing nearly 60% of new customers and the majority of incoming balances came to ally from traditional banks.
Our industry, leading retention reflects the combination of our award winning digital experience best in class customer service and consistently competitive race.
Our deposit portfolio is now within the range of our core funding financial objective, representing an important milestone for us.
This should not imply we take our foot off the gas with respect to deposit inflows deposits our central core funding customers are terrific asset that we want to grow we simply say this as a testament to how far we've come and scaling our deposit book.
Ally home DTC originations of 2.7 billion during the year represented an increase the forex year over year.
The focus of our team and the growing partnership with better dotcom drove our ability to deliver a meaningfully differentiated all digital experience for our customers and positions us well as we head into 2020.
Ally and that self directed accounts grew 15% year over year.
Obviously, there have been a lot of changes in the market and players in this space over the past year, we're focused on adapting to these conditions and industry changes.
We closed on the health credit services acquisition during the quarter in a rebranding this offering as ally lending.
We acquired a portfolio of around 200 million and generated 67 million in new volume.
We're encouraged by the early results and see strong potential in our ability to generate high quality growth, an incremental profits across our established and expanding consumer offerings.
Turning to corporate finance held for investment loans of 5.7 billion grew 23% year over year.
Asset expansion. This quarter was the result of execution by experienced teams, including those related to new verticals launched in 2019.
Our approach to credit and underwriting remain disciplined and consistent throughout the year.
Keep in mind, the strong track record of this portfolio over the past 10 years, averaging around 15 basis points and losses.
On capital management, we distributed 1.3 billion to shareholders through repurchases and dividends and 11% increase year over year, our all in yield exceeded 11%, placing ally among the highest see car participating bags.
And we just announced another uptick in the common dividend to begin in February .
And during the quarter S&P upgraded Allieds investment grade the second major rating agency to do so in 2019.
Electing the overall strength and position of our company. This was an exceptional year for ally.
Let's turn to slide number six.
We're pleased to close after year by meeting or exceeding every metric we provided in our 2019 outlook in January of last year.
We accomplish this against the backdrop of heightened interest rate volatility that weighed on the banking sector.
John will provide you with our summary, 2020 outlook in a few moments, but in short financial progress will accelerate in 2020, which reflects the embedded tailwinds letter you need to ally in a continuation of strong operating trends across our businesses.
Let's move to slide number seven to review our key metrics in the upper left adjusted EPS was 95 cents per share in the fourth quarter and increase compared to the prior year period.
Adjusted total net revenue remained above 1.6 billion again this quarter.
And the bottom left deposits grew to 120.8 billion.
Tangible book value on the bottom right increased to $35.06 per share a 17% increase year over year.
Across these metrics you can see the ongoing trends have improved results in the intrinsic value, but we continue to build and with that I'll hand, it to Jan to take you through the detailed financials. Thank you GB and good morning, everyone. In 2019, we delivered another year of sustained financial pressure.
Grass through operating discipline and consistent execution against our objective.
On slide eight 2019, adjusted EPS of $3 in 72 cents, that's more than doubled since 2014, representing a 17% CAGR over this timeframe.
Full year core ROTC of 12% increased 53% or 415 basis points over the past five years.
Excluding the impact from lower rates on as the RBC was modestly favorable to 2018, our ongoing financial progress as resulted from momentum across all of our businesses.
Disciplined capital deployment and a healthy macroeconomic backdrop.
And your trends are on slide nine.
We exceeded 6.3 billion in 2019 revenue an increase of 1.35 billion or a 27% increase since 2014.
Over this timeframe, we've averaged 5% annual revenue growth through three fundamental drivers.
First momentum across every business within auto insurance, Weve diversified and deepened our dealer relationships, increasing application flow and improving risk adjusted returns.
In mortgage we established a growing pipeline of direct to consumer originations are as strong partnership with better dotcom and incorporates enhance we've continued to grow prudently by hiring experienced teams in new verticals.
Second transformation of our funding profile since 2014 deposits have more than doubled to 120.8 billion.
And now represent 75% of funding 30 percentage point increase.
Well unsecured debt with an average coupon of 6% has declined by over 12 billion.
And third dynamic and effective interest rate risk management, we've managed repricing dynamics across our balance sheet, resulting in predictable and stable net interest margin and net financing revenue growth every year.
Path from Ron reinforces our ability to execute and solidifies our expectation to drive accelerated 2020 revenue and net interest margin expansion a key differentiator for ally.
Moving to slide 10, let's look at earning asset trends.
We ended 2019 with 172.7 billion in earning assets representing growth of 29.5 billion since 2014.
Risk weighted assets have grown 14.4 billion demonstrating capital efficient expansion.
We expect continued growth across our business line, while investment security growth will be more tempered as weve neared our objective.
Since 2014 retail auto lending has expanded by 14 billion more than offsetting lease balance declines of 11 billion and a reduction of 675 million and leaves net revenue.
Our full spectrum lending capability combined with a broader reach across the market without ties to one manufacturer prototype has led to increased outflow consistently strong volumes and attractive risk adjusted returns.
Let's turn to slide 11, adjusted efficiency ratio for full year 2019 was 47.4% and operating expenses were just over 3.4 billion.
Insurance related expenses shown in the top portion of the chart grew 6% year over year, reflecting elevated weather impacts in 2019 relative to historically low losses in 2018 and variable Commission based expense supporting ongoing written premium and revenue growth.
All other expenses of 2.4 billion grew 4.6% year over year, reflecting a slow pace relative to last years level.
These trends are consistent with objectives, we've provided centered around our core business growth and disciplined investments in technology and brand.
Revenue growth will outpace expense growth again in 2020, driving further improvement to our adjusted efficiency ratio.
Let's turn to slide 12 to go through our detailed results.
Net financing revenue excluding no idea for the fourth quarter of 1.164 billion declined on a linked quarter basis in line with our expectations as we discussed on the call last quarter.
The decline was driven by several components, we anticipated, including lower lease gains, reflecting seasonality and lower per unit gains on trucks and as you. These lower commercial balances, reflecting a four year low in industry inventory levels and including impacts from the strike and the effect of lower benchmark rates.
Resulted in increased premium amortization and impact in certain products with contractual resets.
Despite these impacts. This result was our third highest quarterly Eni results over the past five years.
And more importantly, we are reiterating our expectation for 2020 that net financing revenue will exceed 5 billion. One net interest margin will expand by double digits.
Revenue growth will be driven by many of the same drivers you've heard from us before including the embedded benefits of rising retail auto portfolio yields and are improving funding profile.
Adjusted other revenue of 458 million increased 34 million quarter over quarter, and 65 million euros year over year, driven by strong investment gain and growth in earned premiums within our insurance segment.
We expect an ongoing quarterly trend for this line item in the 400 to 425 million range.
Provision expense of 276 million increased $13 million quarter over quarter in 10 million year over year.
Variance to the prior quarter reflected seasonally higher end Ceos.
Credit performance was strong throughout 2019 and origination profiles remain consistent across credit attributes, we assess including LTV Psycho term de <unk> and T.
Noninterest expense increased 42 million quarter over quarter, and 76 million compared to the prior year, driven primarily by volume based activity, where full year auto applications increased 9% year over year deposit accounts expanded 24% and written premium volume increased.
12%.
And ongoing investment in technology and brand.
Well I ranks among the top five fastest growing bank brands in the U.S., while our awareness scores are at the highest levels on record.
Also reflected in expenses in the quarter, where HTS written related impacts.
Moving to quarterly key metrics at the bottom GAAP and adjusted EPS were 99, 95 cents per share core RTC of 11.2%.
Adjusted efficiency ratio was 49.4% and our effective tax rate was 21.7%.
Our normalized full year tax rate of 22.8% adjusts for the Q2 valuation allowance release.
Lightly favorable to our full year expected range of 23% to 24%.
Let's move to slide 13, net interest margin, excluding no idea of 2.66% declined six basis points quarter over quarter, driven primarily by lower lease gains.
Full year NIM of to 68 with two basis points below prior year and inline with our outlook to remain relatively stable despite significant rate volatility.
We continue to be relatively neutral to rate and feel confident about the strong interest rate risk profile of our balance sheet.
While we continue to per a steeper curve, we are not overly dependent on rates to improve our margin.
Overall asset yields decreased on a linked quarter on prior year basis, driven by seasonally lower lease gains and declining benchmarks impacting commercial auto mortgage and investment security portfolio yields.
These impacts were partly offset by the continued expansion of retail auto yields.
Weve shown the retail auto portfolio yield excluding the hedge a tool we use in our overall management of interest rate risk as the hedge impact was somewhat elevated linked quarter. Importantly, we continue to expect the portfolio to migrate closer to new volume yields as we've generated seven consecutive quarters of new.
Retail origination yield above 7%.
Lease portfolio yield was 5.19% for the quarter.
Full year used car values declined approximately 1% year over year outperforming our expectation and declined over 3% in Q4.
We continue to embed a 5% to 6% used car values decline in our financial projections for 2020, reflecting supply dynamics.
For planned balances declined quarter over quarter and year over year, reflecting the reduced inventory levels I mentioned earlier.
Turning to funding trends remained favorable with cost of funds declining 11 basis points quarter over quarter, as Nick and pricing trends continue to improve across our products.
Retail deposits grew 2.4 billion during the period and we remain steadfast in our drive to increase value for our customers love being disciplined in our pricing approach.
Year over year unsecured balances declined another 2.5 billion.
On slide 14 will cover some deposit highlights in the upper right total deposits ended at 120.8 billion driven by retail growth, our fortyth consecutive quarter, where we generated double digit percentage growth in our portfolio on a year over year basis.
We achieved record deposit and customer growth this year, even as we reduce rates and competition increased including higher price alternative offerings from established and emerging players.
Customer retention levels remained at an industry leading 96%.
Our customers continue to demonstrate strong loyalty to ally.
Reflecting our overall value proposition and the long term stability of the platform.
In the bottom left retail deposit rates declined 12 basis points linked quarter, reflecting pricing actions over the past several months as our mix remained consistent.
And as JV mentioned, we reached our objective to be 75% funded with deposit.
This is a significant achievement and provides us with increased flexibility around our growth needs and pricing strategy.
We will continue to balance margin opportunities with a relentless focus on delivering strong value for our customers.
We were recently recognized at the best online Bank by money magazine for the seven to time.
Maintaining our customers trust and loyalty will remain at the center of our strategy.
On the bottom right. We added 322000, new deposit customers during the year, a continuation of the record setting trend we've seen over the past couple of years.
Existing customers drove 35% of growth or 5.1 billion in 2019, the highest level, we've observed demonstrating the overall strength of the consumer and the desire of our customers to grow their relationships with us.
Let's move to capital on Slide 15.
The T one of 9.5% with staples linked quarter and year over year, reflecting earnings growth and are focused approach in managing risk weighted assets.
We continued repurchasing shares during the quarter since mid 2016, we produce shares outstanding by 22.6% and we've returned over 3.8 billion to shareholders through repurchases and dividends.
Our approach to capital management remains unchanged as we proactively assess growth opportunities, we continue to prioritize delivering unique customer value and maximizing long term shareholder return.
On Slide 16, we've included a page on diesel perspective.
We expect to report a day, one reserve increase of 106% or 1.3 billion at the low end of our expected range of 105% to 115%.
This represents an estimated 81 impact of 17 to 19 basis points.
Given the expected increasing complexity and volatility associated with the so we're providing you with an early look at our disclosures.
Beginning with our Q1 filing we plan to attribute allowance impact from NCL activity in the portfolio.
Changes in growth or portfolio size, and all other drivers, including portfolio mix and macroeconomic variable changes.
Our approach includes a one year reasonable unsupportable forecast followed by a 24 month linear reversion to the mean.
Variables, we use including unemployment are based on historical data beginning from the great recession in January of 2008 through the current period.
Our intention is to be balanced and transparent in our approach and as we learn more this year, we will continue to augment and refine our disclosures.
Even as the transition to lifetime loss reserving represents a significant increase or existing allowance and a new normal for reporting we continue to reiterate the underlying risk profile of our balance sheet and lifetime loan profitability does not change.
Let's turn to slide 17 to review asset quality detailed consolidated net charge offs were 91 basis points this quarter, increasing six basis points year over year in the top right consolidated provision expense was 276 million an increase of 10 million compared to the prior year due to higher.
Asset balances and modestly higher auto and yes.
In the bottom left the retail net charge off rate increased one basis point year over year to 1.49%, reflecting consistent origination trends strong used vehicle values and continued consumer strength.
In Q1, we expect around five basis points in higher retail auto and she is due to a system conversion that I'll discuss momentarily the provision will not be impacted.
30, plus and 60 plus delinquencies in the bottom right increased year over year by fixed and five basis points, respectively, reflecting the increased mix of use and seasoning of our portfolio and servicing approaches that have consistently resulted in improved flow to loss trends.
Activity in trends in credit performance remain fully aligned with our expectations.
On Slide 18 auto finance pretax income of 401 million declined 28 million linked quarter and increased 66 million compared to prior year net financing revenue growth was driven by retail auto asset growth and increasing portfolio yields.
We decision nearly 2.9 million apps.
7% year over year increase in our strongest fourth quarter ever.
Moving forward, we will continue to focus on generating strong risk adjusted returns through application volume growth and increased dealer penetration.
As I mentioned, a moment ago, we deployed a new core consumer servicing and accounting platform in January we converted 4.6 million customer contract the largest system conversion in our company's history.
It's modern platform, it's highly adaptable and scalable and fully integrates with our customer facing an internal platform.
We have been planning for their transition for awhile and the successful rollout positions us well for the future.
In the bottom right you can see the progress we've made over the past several years expanding retail auto portfolio yields, which will continue as the portfolio migrates closer to new origination yields.
The losses have continued to stabilize or improve.
Benchmark declines persisted through 2019, along with a heightened level of competition in auto but through our expansive dealer network, we generated strong risk adjusted return and volume within our mid 30 billion stated objective.
Turning to slide 19, we originated 8.1 billion of consumer loans and leases in the quarter.
In U.S volume accounted for 44% and 49% of originations three percentage points lower than prior year period, as we saw strong increases in lease.
From an underwriting perspective, our average FICO of 691, and Nonprime volume up 12% Mcwhorter remain consistent.
In the bottom left consumer assets grew year over year to 81.1 billion at least balances move slightly higher and retail loans grew by 1.7 billion.
And on the bottom right average commercial balances of 31.9 billion declined year over year and quarter over quarter as dealer inventories reflected industry and strike related impacts.
On slide 20.
Insurance reported core pre tax income of 86 million in the quarter, an increase of 20 million linked quarter and 7 million versus prior year.
Or in revenue increased 16 million year over year, reflecting strong written premium trends over the past several quarters.
Written premiums of 335 million in the period represented the highest Q4 since becoming a publicly traded company driven by increased volume and rate across our product offerings.
Slide 21 has our corporate finance segment results.
Core pre tax income of 50 million was up 4 million linked quarter, and 25 million year over year, ending HM <unk> asset levels grew 700 million during the quarter, while year over year assets increased by over 1 billion with 90% of the growth in asset based products.
Got it performance remained strong and inline with our expectations.
Very pleased with the highly diversified nature of this portfolio in the accretive returns to generate.
On slide 22 mortgage pretax income of 2 million was down versus prior quarter in prior year period, reflecting the impact of premium amortization as rates declined and prepayment activity increased.
And impacts from a prior quarter loan sale of 300 million that generated gains that did not repeat.
We originated over 1 billion of direct to consumer loan the first quarter to exceed this level and the fifth consecutive quarter of increased origination volume.
56% of originations were sourced from existing ally customers, well, 84% of originated volume, which generated through our partnership with better dotcom.
We remain very pleased with the all digital platform and streamline customer experience provided through this partnership evidence through our strong customer NPS reduced cycle time and improving cost per loan.
Let me wrap up on slide 23, with our full year 2020 expectations.
We expect to build upon our momentum in 2020, driving increased EPS expansion and solid return on equity result, keep in mind. This reflects a stable reserve under Cecil.
Expansion in Es, and ROTC will be driven by topline revenue growth of 6% to 9% fueled by ongoing execution across our business lines and driving positive operating leverage.
We remain focused on disciplined expense management and improved efficiency ratio demonstrated by our expectation to lower this metric by 50 to 150 basis points in 2020.
Looking at retail auto net charge off we expect to be on the low end of our stated 1.4% to 1.6% Anzio range driven by our consistent underwriting trends and a healthy consumer backdrop.
In closing, we had a strong year with growth in pretax pre provision income, while we generated operating leverage gain.
It's led to achieving our 2019 full year financial objective and positions us for accelerated improvement in 2020, and with that I'll turn it back to JB.
Thanks Jen.
On slide 24, I'll spend a few minutes reviewing our strategic priorities for 2020.
In 2020 will build upon the operating and financial momentum we've established.
Our dominant auto and direct deposit franchises that have tremendous scale are well positioned to produce stable and improved results.
This reflects our multiyear efforts to position these businesses for long term strength and ongoing growth.
We see opportunities to expand the way, we serve our growing customer base that ally.
We've made important investments and our capabilities over the past few years through enhancements to our existing products and the additions of new offerings.
It's clear to us as we look at consumer trends, but there isn't a rapid and growing desire for convenience financial products with excellent service levels key characteristics of every allied product offering.
The significant improvements we've driven over the past five years provides a strong foundation for our company.
We talked certainly assess opportunities to deliver for our customers and drive value for shareholders allocating investment resources through a consistent incentive parameters, including differentiated customer value.
Accretive financial return profile and alignment with our overall strategy to maximize long term value through disciplined capital deployment.
It's through this line that we've assessed expansion into ally home Alpinvest and most recently ally Levy and.
And it's with the same logic agenda and I discussed all the time that will guide us into the future.
Finally allies culture remains critical to our success and I'm, particularly proud of what I see every day in the way our associates operator.
We've created a place where people enjoy working and I'm proud to say they are employed at allied.
We have altered our benefits and philosophies to make our employee value proposition even stronger.
We've created one of the most passionate and inclusive environments for all of our teammates.
This leads to lower turnover deeper pride in energy well above industry average engagement scores and ultimately a better company for all.
And that's what you can see from our results are 8700 teammates remained focus on continuous advancement and improvement delivering for our customers and our shareholders. It's because of this what I'm confident in our ability to continue delivering in 2020 and beyond.
Thank you and Dan if we can now head end QNX sure operator, please see up that unit.
As a reminder to ask a question you'll need to press star one on your telephone to withdraw your question press the pound key please standby well we've compiled the queuing they roster.
And our first question is from Ryan Nash from Goldman Sachs. Your line is now open.
Hi, good morning, JV good morning.
Good morning, and.
Thanks for all the color on.
The auto business I wanted to start with the competitive environment. So you've been able to expand auto yields almost 50 basis points throughout the year given the shift towards views and the continued optimization in the portfolio. However, we've not heard others talking about competition, increasing particularly in parts of the market, where you play. So just wanted to get a sense for what you're thinking.
Competitively and what you think this means for origination yields going forward.
Sure sure. Thanks for the question Ryan So I mean, obviously, we've stayed in tune in the past couple days with other key competitors in the space kind of and their commentary what I'd say is a we're not really feeling it yet.
It's still a particularly in the bank stays a pretty rational environment. Now. So you know, we're confident and continuing to lift the origination trends at similar levels, you've seen from us over the past couple of years, obviously, we've been pretty consistent and doing nine billionish a quarter and I think in terms of pricing power.
We still feel really good about where things stand obviously for us what may be makes us a little more unique is just the scale we have within auto the deeper relationships. We have and then obviously the outreach for US I mean, we're seeing a lot more application flow. This year and this just gives us confidence in our ability to aid book.
Originations and be booking that add to very attractive levels. So for us not really feeling it yet, but obviously mindful, let it's a dynamic environment out there.
Got it and then maybe a follow up on credit thanks for.
The color on fee.
Packed will largely be driven by growth you just talked about origination. So how should we think about earning asset growth and then second given your credit outlook of the low end of the targeted range. What are you assuming in terms of used car prices going forward. Thanks.
Sure Ryan just on your first question on earning asset growth like you know as we go into 2020, we see opportunities to grow across all of our portfolios I will continue to find opportunities in retail auto and.
Two JB his comments, where we're not seeing any slowdown there we outperformed our mid $30 billion origination target and pricing continues to be robots that will be growing and retail auto and opportunistic in that portfolio corporate finance grew over 23% over a billion dollars. This year, we'll continue to find out parts.
You know news in that portfolio and then you know some of our newer products you see DTC mortgage ramping up really nicely. This year, we're pretty close to that $3 billion target. We set will continue to look for opportunities in mortgage and then HTS is just getting off the ground.
But good good trends there so far so yeah I would think about 2020 growth along the same lines as 2019 gross.
Yeah, we will be slowing down investments securities a bit we kind of hit our funding or our target portfolio mix target for earnings for security, So that'll flow down a bed.
But the loan categories will grow in line with 2019.
And then onto credit I know, we've been guiding towards a lower used car prices for sometime now 3% to 5% on a full year basis, we did outperform that fourth quarter. We did see some softening at showed up in Eni and in our or our NIM.
And we're projecting that to go down about 5% to 6% next year and that's really what drives up our NCL rate to the low end about 1.4% to 1.6% range.
Got it thanks for all the color.
Absolutely.
Thanks Ryan.
Thank you. Our next question from Mushy RM book from Credit Suisse. Your line is now open.
Great Thanks and.
Very impressive kind of grew from the deposit front, particularly given the moves you've made on pricing just curious if you could kind of talk a little bit about your views as to how that kind of goes.
Into this year in next to do you see that just the online space just continuing to take share I mean, how.
How will you be able to continue to do that.
Sure Matt Moshe I appreciate the nice comments and we agree and we're very pleased with the performance of our deposit business and we we don't see any signs of that slowing down in fact, you know you you see the record volume and the record customer growth and that in spite of the increased competition as well as taking rates down.
I'm kind of peak as they rate of 220 down to 160, and so we'll continue to optimize really across our customer strategy. That's a very important.
Part of our continued.
Expansion into new products, we want to continue to grow our customers will be mindful of the value, we're providing but we're also going to be focused on margin and say I mentioned the decrease we've had that will roll forward into 2020 and create that nice double digit NIM expansion I talked about and then on Cds Cds right now.
At about 250, there'll be rolling off around 180.
So we'll see some nice margin lift on the CD front as well, but I'd say overall no change to our strategy. We continue to find opportunities to grow both deposits in customers and it's a great place to be to have the margin expansion come with that.
Got it could you talk a little bit about the kind of evolution of ally lending and in terms of you had spent a lot of money. During Q4, you had mentioned as part of that.
Process, just kind of getting them up and running but how does that.
How does that kind of get to a more.
I guess normal.
Efficiency and maybe what that means for the prospect of.
Incremental acquisitions as you go forward.
Yeah, sure and I'm not sure I would say a lot of money.
Yes. It is a very very small amount in terms of the expense increase yes, just as a reminder, we really like this business. The market is about 130 billion, it's growing at almost 20% and the variable risk adjusted margin is kind of them that 910% range.
Right away in the 3% to 4% range and ROTC above 20% to fill Moshe our focus is really around ramping up gross in the portfolio, making sure we get the right.
Marginal return profile and overtime, we're very confident that we'll see the total financial profile accelerate into 2020 and 2021.
Thanks Rich.
Thank you Moshe.
Thank you know our next question is from Betsy Graseck from Morgan Stanley . Your line is now open.
Hi, good morning.
Hi, Betsy.
I just wanted to chicken a little bit on the expense side you indicated earlier the new your systems conversion occurred in January and when I look at the outlook for you know operating leverage this coming year in your guidance, obviously better than what you've been generating over the past roshe solid, but you've got an acceleration ramping there. So I just wanted to.
I understand.
It was how much of that is coming from the systems conversion.
Benefit that you should be getting this year and then if you could speak to other levers that are driving that outlook. Thanks.
Yeah sure and that's the I think you captured it nicely I mean, we are focused on positive operating leverage that is what we delivered here in 2019 out is again, our focus in 2020 and you see that in our efficiency ratio guidance coming down 50 to 150 basis points, yeah in terms of the overall.
All expense story for Q4 really for full year 2019 and into 2020. It's all the same themes that we've been talking about its variable cost attached and growing our businesses Q4, we had an outsize impact from insurance because we've hit record highs in terms of written premiums and earned premiums and so.
We see variable cost attached to our insurance business. We also have grown as you've seen.
Our application flow in the auto side up 9% year over year deposit accounts up 24%. So we'll continue to see that variable cost increase in line with revenue.
And then we continue to invest in brand and technology the system conversion.
That's been largely capitalized so that will roll forward into 2020, but keep in mind, that's embedded in the guidance that we're giving around positive operating leverage.
And then you know last but not leaves a modest investments in new products and Hds, obviously hit this quarter, but so I'd say pretty modest in terms of that new product impact.
Okay. So their systems conversion really isn't.
An outlier in terms of its impact on me 2020 efficiency outlook.
Well I mean, it's embedded in our guidance there it was a pretty material.
Investment that we May do you think about we've completely upgraded our whole servicing platform in the auto business, which was over four and a half million accounts.
By the way huge shout out to the team who accomplish that I mean, we had almost no friction terms of the conversion and customer feedback spend really strong today. So we kind of hit that big miles down the expenses will roll forward in depreciation kind of over the next couple of years, but it's embedded in the guidance we prefer.
And for 2020, Yeah. That's that's a it's been a effort lets them literally a underway for about five years inside the company and as Jim pointed out we just successfully rolled it out after the turn of year, but amazing effort, particularly given how minimal customer disruption was experienced over got a three to four days when you're convert.
Yeah over for a half million accounts that was quite impressive but from a financial perspective, it's already been partially embedded and we'll have a little bit more to come.
Okay. Thank you.
Thank you.
Thank you. Our next question from Sanjay Sakhrani from KBW. Your line is now open.
Thanks, and good results I guess, maybe we could tease out little bit sort of what the HCS acquisition means to 2020 and maybe over the near term.
Just talk about sort of how we expect it does factor into growth.
Sure and good morning, Sanjay to it on H.C.S., we had modest impact here in Q4 next year, it's really going to depend on the growth opportunities that we've seen we brought over about a 200 million dollar portfolio had some you know modest cost there and some modest provision you know we originated.
About $70 million in a new originations this quarter and we want to ramp that up as quickly as possible, but the total impact for 2020.
Number one it will be pretty immaterial and number two it will depend in large part around the opportunities that we see where new in this space and so we're going to be thoughtful about how we pay said.
And the growth that we are confident and we've been imbedded into our 2020 outlook.
We also you know that business is largely focused on health care Oh, We're also looking for opportunities and other verticals on the improvement in particular in auto where we've got a very extensive dealer network and we see some good synergies there.
And when when you say home improvement you mean like personal lending with home improvement or something.
Yeah point of sale lending with home improvement consumer investment.
Okay, and you guys would grow that organically or through acquisition.
Oh, we have the platform. So the acquisition that we closed on in October is largely a purchase of a platform. So that would be inorganic expansion of that platform into new verticals.
Okay got it and one final follow up question on used car prices and remarketing gains threat dropped pretty significantly in the fourth quarter is there anything to read into that <unk> and sort of how we should expect it to progress over the course of this year.
Yeah, Sanjay we were expecting that and we've been expecting lower used vehicle values for sometime in Q4, specifically, we saw trucks and that's you'd be values declining as a bit and that's just the phenomenon we've been talking about around the supply side dynamics, where we hit a peak here in 2019.
I mean, the P. continues in 2020, and then it does start to subside actually in 2021, but we should see some near term pressure, which is why we've continued to guide down and kind of 5% to 6% used vehicle prices in 2020, but to I've not had not a big surprise and it was in our forecast.
Okay, great. Thank you.
Thank you.
Thank you our next questions from Eric Wasserstrom from U.P.S. Your line is now fan.
Thanks, very much John I wanted to just circle back on to a couple of issues related to a net interest margin.
The.
Is the I was backing into a to the marginal origination yield on a on auto from the bottom of slide 18 in the fourth quarter I'm.
Getting a number of around 7.1% is that ballpark correct.
The origination yielding in Q4, it that's that's pretty close it was above 7%.
Full year 740, boring and in Q4 keys and I'll give some seasonality so it came down a bit.
Okay. So it has so in terms of the double digit NIM expansion guidance what.
How should we frame out what what yield that that implies.
Yeah, sure and keep in mind, a double digit NIM expansion is really reflective of a lot of drivers. The auto origination yield is a part of that so we'll expect our current portfolio, which is all year about 660.
In origination yields to migrate up towards that over 7% origination yield that we've been putting on the books for the last seven consecutive quarters, and then 2020, we expect new origination yields to remain above 7%. So there's just there's natural tailwind in terms of the repricing up you saw this year, we ought to 37.
Basis point increase in new origination yields a which translated into a 46 basis point increase in the portfolio. Those trends will continue into 2020. So that's kind of drive are number one driver number two is you know what I talked about a little bit earlier around our deposit portfolio as weve reprice down like they.
That rolls forward into 2020, and then with the CD deposit repricing that creates a tailwind as well.
And then Oh, there's other dynamics, we've got over $2 billion, an unsecured rolling down it over a 6.5% coupon instead, we've got some nice liability management tailwinds there as well so all of that will contribute to that double digit margin expansion next year.
And just on that that last point and this is my last question I'll get off but.
The the unsecured.
Back at the envelope I always calculating about two basis points of of NIM benefit from a from the shift.
You know from the repayment of the high cost debt does that again as a ballpark correct.
Yeah, Eric I'd I don't have the exact number right in front of me, but I think it's a bit higher than that.
Yeah.
And it depends a little bit on the timing we've got one we got almost $1 billion coming off in the first quarter. It you know over 70%, 70% coupon. So the timing of it matters as well and we can follow up with the exact math, but I think to breed two basis points seems a little bit low.
Got it okay. Thanks very much thank you Eric.
Thank you. Our next question comes from the line of ROV Wild half from Autonomous Research. Your line is now open.
Good morning, guys, you've talked a lot about the dealer count obviously, something that's grown nicely in the past few years can you give us some context around the growth in performance is coming from the expansion of the dealer count versus the success, you're having on a per dealer basis, and then what you think the growth levers and opportunities are from here. Thanks.
Yeah, Hi, Rob Yeah, I would say the growth that we're seeing an application volume, it's really a coming from both the dealer count and deeper penetration into those dealers I will say, yeah with the number of consecutive quarters, we have growth and and dealer count and the fact that we have relationships with 90 per.
Our sense of dealers that the go forward priority will be around apps per dealer you know about 70 plus percent of our dealers give us less than five apps per month, and we see tremendous opportunity in increasing house and quality of the dealer relationships. So that's really going to be the focus going forward content.
Viewing to bring in more apps more looks and then increased the quality of what we originate and continue to expand the risk adjusted returns, but it does shift a bit from count to quality.
[noise], maybe the only maybe the only other point there as you asked about performance I'd say, it's been very consistent with.
We haven't seen the new dealers had been on boarded maybe to pass 18 months or so really perform any differently from a credit perspective on accounts. So it's been very consistent with the rest of the book.
That's great. Thank you guys.
Thank you nice Rob.
Thank you. Our next question comes from the line of Kevin Barker from Piper Sander. Your line is now often.
Thank you.
Of course to your comments on C. So what's your thought were very helpful. I'll could you provide some quantification around the but the incremental impact to your provision expense and 2020.
Given what you've laid out there I understand you're gonna keep reserves salon stable, but just overall the impact on provision expense.
Yeah sure. It's it so Kevin I think you're getting on some of the dates you impact so as we've.
Put our guidance out there we've been mindful of where we're growing the portfolio and we are seeing growth across you know every single one of our our businesses, but we've embedded in there those increases in reserves. So auto retail auto will be growing modestly we are now rizzi preserving over 3% versus the 1.5% we're reserving before.
And that's all embedded in the guidance that we gave you.
But if it's a fairly modest impact as we head into 2020 now we have to keep in mind. That's what we know there are factors here that will have to continue to work through as were new to cease Olin and that's around just the macroeconomic variable changes if we see growth opportunities in the portfolio, we want to continue.
New to originate at strong risk adjusted returns in outlets seasonal hold us back. So there are some unknown there.
And then the last thing I'd say about seasonal is with the way in which we know we've approached a reversion to the need we have included the great recession and so we've got the I'm kind of an embedded kind of headwind just from the the macro economic assumptions that we've made that already embedded in there and that should reduce some of them the volatility as we go forward just.
From a macro perspective.
So would you say wouldn't really be fair to say that you're taking a more conservative view on the economic outlook and assuming somewhat of a slowdown versus what you know wide industry standards in order to just remain conservative around the provision.
Yeah, I mean, what I would say as we've just been very balanced and how we've looked at just the longer term trend in the portfolio and and that the assumptions that we've made are all embedded in the day one.
Okay, and then would this.
Definitely should see so that have an impact on how you think about certain asset classes that are currently on your balance sheet that may be lower yielding.
But may be.
Tougher the hold and postseason environment.
Yeah, I mean were always trying to optimize yield and risk adjusted returns, but that's not related at all is though.
Yeah, we as I mentioned in my prepared remarks, I mean, nothing is changes and changes in terms of the long term profitability of our various portfolios and we want to continue to focus on what's important to us which is driving value for our customers and long term shareholder value as well.
Thanks for taking my course.
Absolutely. Thank you.
Thank you. Our next question comes from the line of Rick Shane from JP Morgan. Your line is now open.
Hey, guys. Thanks for taking my question.
Look.
A lot of time thinking about asset.
Mismatches I'd like to think about this in a slightly different way, which is sort of compare your asset gathering franchise with your deposit gathering franchise.
It strikes me one is a traditional business.
I mean, the pejorative way.
The other is very cutting edge in unit.
You cited.
The words you've received.
Curious when you look at those customer bases.
What differences you see.
Particularly from a demographic perspective.
Well that will evolve over time, we see convergence.
Yeah. Rick appreciate the question then yeah I think we are innovative across all of our businesses I wouldn't say jumped on the deposit side and in auto you can see a lot of the partnerships that we've created with some of the new entrants.
Has positioned us very well for the modernization of auto and and we will continue to lead in that space and then you know I look at what we're offering through better Dot com is they absolute top notch digital fully digital end to end customer experience. It has some of the highest NPS scores across the industry.
I'd say, we're absolutely leading and cutting edge in terms of the product that we have out there and I'd say the same thing with what we just acquired the new platform with each the us.
Now a ally lending yeah, we are leaders in that space as well and and we'll continue to grow in lean in there. So yes, our our goal is to be innovative across all products not just on the liability side, but also on the outside side.
You know JB I don't know if you want to add anything in there but.
We don't see this big difference across the too and I just I mean, you did ask about customer profile and.
Our deposit base tends to be more of a mass affluent customer from a from a balance perspective, but we're growing millennials at a very rapid pace from an account number a point of view and we do see overlap certainly overlap in terms of.
The the allied lending customers, we're bringing in better I better dot com and mortgage I mentioned, the 56% of the new new originations are coming from the <unk> existing deposit business. So we certainly see a lot of overlap across all of our businesses on the on the asset and liability side and even.
With that.
Got it no and look I appreciate that you need to be innovative across all of your business.
Products.
I really.
I'd like to answer to the second part of the question in terms of that customer profile I'm curious when you look at it have you had more success selling loans to depository customers or deposits to borrowing customers.
It it's the former and it's it's mining our deposit business for a new asset opportunities and.
Mortgage is a great example of that and then you know not just outside of Monday, but in the invest space over a third of our new and best customers come from the deposit platform and as we continue to add new product into investment advisory capabilities, we see that very tight connection only continuing to grow.
Yes.
Thank you guys for your time.
Thank you that's correct.
Thank you. Our next question strong John Hecht from Jefferies. Your line is now fan.
Thank you guys very much most of my questions have been asked and answered on.
First one is out of curiosity Gen. Gen. It seems like you suggested that the day to impact was modest I'm wondering are you able to share with US you know is it.
Our adjusted EPS.
In 2020, the guidance would it had been a higher.
For the accrual method or would it had been generally the same range.
I it would've been higher and that and not just because we have to reserve at a higher rate and we had onto incurred number one and then you know because we do have to Prefund gay one impact in 2021, just capital levels will be a little bit elevated, especially in the back half of this year.
Okay. Thanks, very much and then second as you talk about strong growth in applications that the originations were generally flat.
Is that indication it being more selective in terms of what you're pulling through the photo orders or any other commentary around that.
Yeah, I mean, John aren't our strategy over the past several years has really been around quality driving risk adjusted returns and yeah, we do that by increasing application flow. Some more looks you got the hired a bar you can front in terms of what you book on your balance sheet and you know tying that to the competitive question.
We continue to increase our region haven't seen any sign of that slowing down and that the the more applications we bring in.
The more selective we can be around what we book in and we don't see any signs of that slowing down here in the first quarter or expecting that to slow down here in 2020.
And John I'd, just say that that ties into the initial question, we got from Ryan Nash as well about giving us confidence around pricing power as well that's all integrated together.
Perfect. Thanks, very much guys.
Thank you.
Thank you that's all the time, we have now for questions.
Okay. Operator, thank you that concludes today's call feel free to reach out to Investor relations for any follow ups.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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