Q3 2020 Ally Financial Inc Earnings Call
All participants are in listen only mode. After the speakers presentation. There will be a question and answer session lots of question Gordon Special need to press Star one on your telephone as a reminder, today's call is being recorded.
Require any further assistance. Please press star RBC or else I would now like to respond as crops are dangerous for Investor Relations you may begin sir.
Thank you Kevin we appreciate everyone joining us to review ally Financial's third quarter 2020 results.
Morning, we have our CEO, Jeff Brown, and our CFO, Jennifer clear on the call three results and take questions.
For beginning I'll note that the presentation, we'll reference throughout the call can be found on the ally Investor Relations website.
On slide two you'll find the forward looking statements and risk Falcon factor language that will govern todays call.
On slide three we've included several GAAP or non-GAAP metrics, which we refer to as core measures pertaining to allied operating performance and capital results.
Metrics are supplemental to and not a substitute for GAAP measures definitions and reconciliations can be found in the appendix with that I will turn the call over to JP.
Thank you Daniel Good morning, everyone and thank you for joining us to review our results.
Slide number four includes highlights from the third quarter demonstrating performance across all of our lines of business.
I'll begin with a broader perspective on these results, which serve as further validation around our ability to continuously deliver.
Our steady execution over the past several years positioned us for success in a variety of operating environments.
We're guided by a consistent set of strategic priorities and a customer centric philosophy.
Always do it right.
Our results show this focus is resonating, particularly during challenging environments as we're operating in today.
The simple, but effective approach echoes throughout the culture at ally and shows up in the innovative engaging and leading actions we've taken on behalf of our customers and is further evidenced within our community efforts, where we've committed time and increased resources to effect positive and last.
Sting change.
Turning to the quarter adjusted EPS was one dollar and 25 cents and poor ROTC was 15.2%.
These record setting levels, reflecting revenue expansion from embedded balance sheet, Tailwinds and diversified income sources combined with credit outperformance or both.
Our balance sheet strength is apparent across capital liquidity and reserves where levels remain near the highest in allies history.
In auto we decision 3.2 million applications generating 9.8 billion, a consumer originations our highest quarterly volume in five years.
We continue to leverage our broad market reach interacting with over 90% of franchise dealers in the U.S.
Auto market trends remain encouraging.
Industry, New vehicle sales close the gap to prior year levels throughout the quarter in fact, the rebound in sales over the past five months took five years to achieve following the past financial crisis.
Used vehicle sales have demonstrated particularly strong performance outpacing prior year levels every month since may.
As a result overall dealer profitability rebounded to the highest levels and several years during the quarter more than offsetting a difficult Q2.
Allied new origination yields of 6.95% represented another quarter, a disciplined underwriting and combined with net charge offs of 64 basis points drove expanded risk adjusted returns.
This was the lowest third quarter loss level for ally since 2013, when our portfolio consisted mainly of new subvented loans.
Generally speaking the U.S. consumer entered 2020 on solid footing and has demonstrated a higher degree of resiliency, despite significant and ongoing challenges aided by meaningful and necessary fiscal stimulus.
While recent trends suggest a broader recovery is underway in various pockets of the economy. We're mindful of the currently expired stimulus benefits and the ongoing uncertainty around the outlook of the Covance.
Unemployment levels remain above pre pandemic levels labor participation has declined in recent layoff announcements have picked up across harder hit travel and entertainment industries. The.
The growing desperate impact being felt across educational income and racial backgrounds is troubling and speaks to a more fundamental issue, we're facing as a society reinforcing for us the corporate citizenship commitments we've made.
Against this backdrop, we're remaining focused and balanced.
We're proud to continue serving our customers, including actions, we've taken to keep them in their cars and homes artifice.
Our deferral program serves as a real time example of this were higher than industry take rates were driven by the early easy and largely digital approach, we provided our customers in a time of uncertainty.
The on strong performance, we've heard from many who described how the program provided them with a crucial opportunity to devote focus and attention to unexpected life events. They faced as a result of Kevin again this is doing that right.
And while many questioned the level of actions. We took earlier this year Jan will show you. The standout performance of the deferral population in just a few minutes.
Within insurance written premiums of $333 million increased meaningfully quarter over quarter, despite persistently low dealer inventories, while retail underwriting stabilize throughout the quarter invest.
Investment income remained robust highlighting our ability to generate diversified income.
Turning to our consumer and commercial banking products momentum continued to build during the quarter.
Total deposits increased 13% year over year, including a record third quarter, driving 17.1 billion of retail growth in 2020.
Our retail deposit customer base of $2.2 million expanded for the 14th consecutive quarter.
Two thirds of account openings continue to be sourced from younger generations in the vast majority of inflows still come from us to ask is made from traditional banks plus practically no outflows to neovacs.
Ally home ally invest in our lending continue to make considerable progress towards our long term objectives.
We generated the highest origination levels since launching our mortgage offering with improving loan profitability.
Our partnership with better Dot Com is another example of providing our customers with elegant simple and largely digital experiences.
Reference accounts that invest grew 16% year over year al.
Ally lending generated $167 million of volume and entered the retail point of sale segment through two key partnerships.
Our capabilities on health care home improvement in retail position us well in the rapidly growing payment ecosystem.
Corporate finance held for investment balances ended at 5.9 billion.
17% increase year over year, while credit performance remains stable.
Turning to slide number five weve included a snapshot of our competitive advantages, which will position us to generate sustainable expansion for years to come.
Our established auto and insurance businesses are foundational to our ongoing success and results representing market, leading businesses with prudent products services and scale.
We've grown our dealer base for 10 years, expanding our reach through both established and emerging players are used.
Our use of technology and digital tools within auto has dramatically expanded this year we modern.
We modernized our entire servicing platform are increasing the use of data analytics throughout the underwriting process have completely rebuilt the technology stack on smart auction, our online digital ox on site and have rolled out digital self service tools, and portals, which again simplified and streamlined.
Deferral experience for our customers. So while this is a mature business, we continue to make it stronger.
Ally Bank was an early Disrupter and we've continued to leverage the momentum behind our digitally focused products in a customer centric manner.
[noise] differentiated through frictionless experiences built through a data driven approach and innovative Tac.
Our scalable platform is established but nimble our customer base has grown rapidly remains loyal to allied and our active users within our ecosystem, we're offering a broad array of products through our award winning platforms and service levels.
Combined with an amazing culture and continue to edge on finding ways to disrupt our industries. These attributes represent a sustainable and attractive path forward.
Let's turn to slide number six delicate customer trends.
Over the years, we feel that a variety of questions regarding the feasibility and long term prospects of the direct banking model and our ability to diversify our auto platform.
Data and metrics shown over the past 10 years provide a clear indication of the outcomes we generated at ally.
At ally Bank, our conviction in a direct bank strategy has never wavered. It has been reinforced by accelerating consumer preferences for digital products and excellent customer service.
Foundational elements of our platform.
Customer trends in the upper left have grown at a 19% CAGR since 2010.
We're seeing steady progress in deepening relationships and in Threeq you at just over 7% of our 2.2 million depositors for customers, who also use a home or invest product.
And on the bottom our growth and dealers over the past 10 years has led to a 13% CAGR in application volume, giving us market visibility and enhancing our ability to remy to meet our return objectives.
Moving forward, we remain focused on being able to continue offering are eight and a half million customers with the innovative financial products and service levels, they've shown an increasing appetite for.
On slide number seven S. In the upper left demonstrates the near term result of our long term planning and execution. It seem that carries across revenue growth of 4% year over year shown in the upper right and deposit expansion in the bottom left tangible book value in the bottom right through the quarter.
Ever quarter to $34.56 and adjusting for day, one seasonal impacts were well above $37 per share reinforcing the intrinsic value of our company we're in.
We're remaining thoughtful and our execution our actions continue to be guided by our values culture and long term strategic objectives with that Gen. Its all yours to review the detailed results. Thank you JB and good morning, everyone. Let's jump in first on some of our key operating metrics I'll begin on slide eight.
With a review of monthly trends in our auto segment consumer application and origination momentum continued this quarter, reflecting our adaptable business model dealer resilience and stronger than anticipated consumer demand.
The recovery in sales from the trough in April has been driven by a combination of three factors, including a shift toward personnel vehicle ownership.
Same thing mass transit and ride sharing where usage has declined 50% to 70% from pre covered levels.
The utility provided by owning a car, including the added flexibility and control in an uncertain commodity environment and then.
And then increased consumer propensity to purchase a car as spending on entertainment and travel has been reduced.
At these sudden and meaningful consumer shifts have unfolded weve remained focused and dependable partner for our dealers.
We're actively expanding our market reach evidenced by the increased loan purchase program, we announced with Carvana last month, and the dynamic and evolving support for emerging and more traditional dealer.
We continue to be mindful of the credit environment and have managed an effective and dynamic underwriting approach.
In the bottom left used car gain per vehicle averaged over $2400 the highest level in seven years, leading to the highest quarterly gains in five years.
We now expect full year 2020 used car values rise by more than 5% year over year, benefiting Eni and net charge off.
Moving into 2021, we expect to used vehicle values to decline modestly steady demand and low new vehicle inventories will continue to be a tailwind longer term.
Commercial balances shown in the bottom right grew in August and September following the trough in July.
Oh OEM production levels have largely normalize we expect balances to slowly rebuild through the latter part of next year.
Let's turn to slide nine to review consumer product trends.
Momentum and progress among our digitally based consumer offerings continued in Q3.
Retail deposit balances and customer growth reached their highest third quarter level for ally.
Balances expanded despite record tax outflows as payment deadlines were delayed into Q3 and our.
And our customer base expanded every month this quarter, reflecting the appeal of our award winning offerings.
Direct to consumer mortgage originations reached 1.3 billion in the quarter.
Elevated trading activity continued adding best customer assets ending the quarter at 11.1 billion.
Growth in both channels continues to be sourced from existing customers with 64% of new brokerage accounts account openings and 54% of mortgage originations coming from existing ally customers.
These metrics reflect our large organic growth opportunity as customers continue to seek ways to expand their ally relationship.
Slide 10 includes a snapshot of key balance sheet metrics, we've taken deliberate actions over the past several years to strengthen our balance sheet, allowing us to focus on executing for our customers in this challenging environment.
Let's keep liquidity levels remain strong and our evolving funding profile continues to provide opportunities to lower our cost of funds and patiently deploy liquidity.
Capital levels remain well above regulatory minimums and reserve levels to ensure we're prepared for a variety of potential credit outcomes.
While many unknowns remain around the full extent and ongoing impacts related to co bed, we have confidence in the strength of our balance sheet and our proven ability to navigate.
Let's move to slide 11 to review detailed financial results for the quarter net.
Net financing revenue, excluding I'd of 1.209 billion grew 146 million linked quarter and $14 million year over year.
This represents our highest quarterly result, and one.
And more importantly, with names on trajectory of Eni and NIM expansion powered by the combination of stable, earning asset yields from retail lot of yield expansion lease gain and a well positioned investment security portfolio.
Decline in cost of funds as we continue optimizing the deposit portfolio and reducing higher cost funding and steady loan growth.
These dynamics uniquely position us to overcome headwinds associated with lower rates elevated prepayments and negative carry from excess liquidity.
Other revenue of $471 million reflected strong realized investment gains and robust mortgage fee income within this line item is a charge related to the early pay down of certain FHLB debt and action that reduces excess liquidity and accelerates NIM as we replaced 2.8%.
Debt with low cost deposit.
Entering 2020 other revenue was projected to generate approximately 400 million per quarter, reflecting growth growing insurance mortgage and smart option result.
We've generated meaningfully higher income this year from strong investment activity reinforcing our ability to generate diversified revenue.
Provision expense of 147 million with materially lower linked quarter and year over year, driven by improved frequency and severity across consumer portfolios and stable strong commercial performance.
Non interest expense declined seasonally 80 million quarter over quarter and increased 67 nine year over year, driven by recurring themes, including revenue related business expenses and volume driven cost of our growing customer base investments in technology related items and higher insurance expenses, where we experienced a mortgage.
Good Q3 weather season.
We are continuously working to identify and would you spend across non essential areas. While also investing in our businesses to fuel revenue and customer growth.
Key metrics at the bottom reflect the solid performance generated across our company during the quarter.
Okay.
Slide 12 includes balance sheet and NIM result.
Net interest margin, excluding IP of 2.67% expanded quarter over quarter, reflecting embedded dynamics I just reviewed where are we.
Our retail auto portfolio expansion strong lease gains in deposit cost improvement drove margin expansion, despite NIM pressure from premium amortization and excess liquidity.
Average, earning assets expanded quarter over quarter to 180.1 billion driven by consumer audio in cash offsetting the impact of lower commercial balances and elevated mortgage prepayment activity.
Retail auto portfolio yield, excluding hedge impacts expanded 60 basis points quarter over quarter, and 17 basis points year over year.
Average commercial auto balances declined 4.8 billion quarter over quarter, though expansion occurred in August and September.
Cost of funds improved 31 basis points, the fifth consecutive quarter over quarter decline a trend we expect to continue over the next several quarters.
These fundamental drivers will propel ongoing NIM expansion paving a path to 3% as we move through 2021.
Detailed deposit trends are on slide 13, total deposits grew to 134.9 billion as retail balances expanded to 120.8 billion compared to 101.3 billion a year ago.
From a retention measured as those to maintain an account with us over time remains strong at 96%.
Demonstrating consistent loyalty and engagement.
On the bottom right. We ended the quarter with over 2.29 customers growing at the highest level breast third quarter ever.
In the bottom left retail portfolio rates declined 38 basis points linked quarter, and 88 basis points year over year, reflecting disciplined pricing actions and a shift to liquid products and expect to trend in a flat rate environment.
Let's turn to capital on Slide 14, Q Threec T. One of 10.4% reflected ongoing earnings growth and the continued pause in our share repurchase program last.
Last week, we announced the Q4 common dividend of 19 cents per share payable on November 13th.
We are well underway with RC CCAR 2020, Resubmission and are on track to submit our revised capital plan in early November four.
For participating banks, there remains much to be determined by the federal reserve regarding specific outcomes of this process, but we remain confident in the positioning of our balance sheet, our robust capital and our proven approach to risk management.
Capital actions over the past five years shown on the bottom reiterate our disciplined approach to deploying capital shares outstanding have declined 23% as we repurchased at attractive levels relative to our growing tangible book value.
Well, we increased the dividend on five separate occasions.
These actions occurred as we grew risk weighted assets optimized our leading businesses and expanded product offering.
We look forward to returning to a normalized environment when we can resume dynamic capital deployment.
Turning to slide 15 credit performance remains strong and better than anticipated.
Reflecting a combination of broad based consumer commercial resilient and our expertise and dedicated approach within service and collections, including efforts to increase engagements are easy to use digital tools for our customers.
The consolidated net charge off rate of 41 basis points declined 17 basis points quarter over quarter, and 42 basis points year over year.
In the upper right net charge offs of 122 million declined 145 million year over year, driven by retail auto and corporate finance.
In the bottom left retail auto net charge offs of 64 basis points improved quarter over quarter, a departure from the typical seasonal trend of rising ends yes.
Second half of each year and represents less than half the prior level of 1.38%.
Delinquency trends remain solid I, suppose 30, and 60 plus results ended meaningfully below prior year levels.
We remain encouraged by the performance across our portfolio, including deferred and non deferred population.
Let's turn to slide 16, given credit results year to date, we're lowering our retail auto and COO outlook for full year 20 to less than 1.2% and.
And if trends continue to outperform we could be closer to 1%.
Our consolidated reserved ended the quarter at 3.4 billion as coverage of 2.87 per cent move slightly higher quarter over quarter.
Retail auto reserves and coverage levels remain stable overall.
These levels reflect our balanced approach and contemplate rising NCR is driven by elevated levels of unemployment and ongoing uncertainty related to coal bed and the economy.
Our current baseline forecast assumes unemployment remains elevated ending 2021 around 7%.
Consistent with prior quarters, we do not include any stimulus related benefits in our reserve modeling.
We continue to expect retail auto losses to peak as we move through 2021, and we believe our current reserve level is sufficient to absorb this expected increase.
Absent significant further deterioration due to the economic outlook, we would not expect any additional build.
Moving to slide 17, I'll briefly touch on the auto deferral program as of quarter end, 99% of covert deferrals have expired, 96% of participants have had two or more payments due and 89% remained current or paid in full.
Later stage performance migration has remained favorable to our expectations and is reflected in our Q3 credit metrics.
In addition to strong consumer trends, we diligently preparing for each stage of the deferral program launching new digital tools that drove higher engagement and payment rates among participants.
We are pleased with the program on many fronts, most notably the support provided to our borrowers reflective of our customer first values.
On slide 18, I'll highlight a few additional metrics in the auto segment.
Net financing revenue expanded quarter over quarter and year over year, reflecting growth in the retail margin and strong lease gains that more than offset over 10 billion in lower earning assets driven by inventory levels.
Noninterest expense grew reflecting the added resources and capabilities deployed within our service and customer care centers.
And as you can see on the bottom right portfolio yields continued to migrate higher loss content remains strong.
Overall execution within auto reflects the resilience of the auto asset class as well as our unique ability to adapt and continue to meet the needs of our dealers and customers.
Detailed origination and asset trends on slide 19 Q3.
Q3 auto originations of 9.8 billion expanded quarter over quarter and year over year, while average FICO and nonprime levels remained stable.
U.S volume represented 55% of originations or 5.4 billion, our highest quarterly used volume, reflecting our ability to respond to market and consumer demand in real time.
In the bottom left ending consumer assets expanded again in Q3, ending at 82.9 billion driven by retail and lease balance growth.
On the bottom right average commercial assets declined so ending balances expanded.
Insurance results are on slide 20.
Core pre tax income of 65 million increased 26 million linked quarter and was essentially flat year over year written.
Written premiums of 333 million grew 66 million quarter over quarter, reflecting a rebound in retail life and I activity more than offsetting lower dealer inventory levels.
Trend steadily improved throughout the quarter, and we expect stabilizing to improving performance as dealer inventory build.
Turning to slide 21, corporate finance pre tax income of 60 million or 28 million quarter over quarter and $16 million year over year, reflecting steady credit performance and asset growth.
Unfunded commitments of 3.8 billion reflect our disciplined but opportunistic approach to growth.
Well utilization remains lower given the environment, our ability to lend and generate growth comes in minute challenging backdrop.
Portfolio metrics reflect our prudent approach to risk management, 47% of balances our asset base, 65% of the portfolio has contractual LIBOR floors, while criticized and non accrual loans continued to perform well in the current economic backdrop.
On slide 22 mortgage pre tax income of $26 million expanded versus prior quarter and prior year and strong gain on sale activity more than offset elevated prepayment related impacts.
Direct to consumer originations were solid as mortgage as low mortgage rates generated strong refinance activity, which was 63% of our volume in the quarter.
I'll close by reiterating how proud I am of our ally teammates who remain the driving force behind our accelerating operating and financial results as demonstrated in our consistent book value growth and expanding return profile, we remain focused on doing it right for our customers communities and Sharon.
Older and with that I'll turn it back to JB.
Thank you Jan I'll wrap up with a few comments on slide number 23 like Jan I want to thank all of our associates for their tremendous efforts. They continue to give day in and day out now I've witnessed firsthand how many of them are juggling, a variety of personal and family obligations, while working from home, but have taken on.
Each challenge with a devotion and commitment to do it right.
The significant pressure since strain brought on by Kevin and the difficult social issues, let have unfolded had presented challenges beyond anything I've witnessed in my career, but what I've seen in the actions in response by our people serves as a bright spot and a tremendous source of pride for me in leading this great company.
For our customers, we will continue to work relentlessly to preserve and grow the trust and loyalty you have in us as your financial partner No matter. What lies ahead, it's who we are and within our communities. We've stepped up our actions in recent months to effect positive change in several ways.
Most publicly with the launch of the Allied Foundation, a channel that will allow us to quickly and efficiently support the many causes an efforts being carried out by worthy individuals and organizations today.
Whatever uncertainty and challenge.
Lies ahead of us I'm confident in our team's ability to continue successfully navigating on behalf of our customers, which enhances long term value for our shareholders.
With that Daniel back to you and it's time for a few an axiom. Thanks, Jami so as we head into Q and I'll remind participants to limit themselves to one question and one follow up operator, you can now queue up the Qs.
Ladies and gentlemen, if you have a question or a comment at this time. Please press. The Star then one key on your Touchtone telephone. If your question has been answered you were seeing with yourself from the queue. Please press the balance sheet. Our first question comes from Ryan Nash with Goldman Sachs.
Hey, good morning, Jay and good morning, Jay.
Morning, Ryan.
So maybe I'll start Jan you saw a nice bounce back on the margin this quarter to one cues level.
Now you're talking about a path to 3% can you maybe just talk about some of the drivers to the path I know you referenced some of them in the prepared remarks, what's embedded in them as well as timing and then also you know if we feel liquidity come down as dealers pick up you know it seems like to me to these tailwinds could actually see us go above 3% so.
I was curious if you could just give us some color on the numbers as well as the moving pieces on the path to 3%.
Yeah sure Ryan I appreciate the question so.
So a couple of things this quarter, we saw our NIM expand about 25 basis points.
And as I had message to a couple of weeks back that was exactly what we were expecting as we move forward from here, we would expect the NIM to continue to expand likely not quite at that level each quarter, but we do see a really nice path.
In Q4 and into 2021 in terms of expanding up to that 3% Mark now in terms of some of the drivers let let me hit a few highlights Phil on the asset side as you can see we've continued to see our retail auto portfolio yield migrate up and that's as a result of kind of nine tree.
Linked quarters of of new origination yields coming on the books at that.
10%, we we're almost at 7% this quarter I said, we'll continue to see that nice increase in retail auto originations, which should offset some declines because of rates in other areas in pre payment and so that should stabilize our overall, earning asset yield.
Now to your point, there could be some opportunity for that asset yields even expand you know as commercial balances come back and cash is redeployed into commercial balances and we continue to grow corporate finance so at a minimum it will be stable.
And then on the liability side.
You know cost of funds.
Funds came down over 30 basis points Rick.
And you expect to continue to see cost of funds come down.
With a rate of about 60 basis points and then you've got Cds.
Her 2% repricing down below 1%, which creates a justice nice tailwind and then last but not least we continue to look for a liability management opportunities to further take down cost of funds and you felt we early retired from FHLB debt, So ive tierpoint nice path.
Forward I think strong dynamics on both sides of the balance sheet and I'd say, you know what a minimum will be migrating towards that 3% kind of as we enter 2021.
Got it and if I could do a follow up I'll stick with Daniel Scott Instead of just one follow up.
You know JB you, obviously have a huge windfall of revenue right now given all these tailwinds agenda, just reference on the margin.
Can you maybe just talk about just the magnitude of positive operating leverage you're targeting and then what adjusted efficiency ratio and potentially what return do you think is doable in this kind of environment and I'll just tag onto that just given the fact the stock continues to trade below tangible book value you, maybe just talk about your willingness to get much.
More aggressive on returning capital in the coming quarters before the valuation potentially content you know expands in a meaningful way. Thanks.
You got it right and then obviously, we're happy to follow up with you offline on any of these Gen Baby, maybe you want to start on kind of operating leverage targets things like that and then maybe I'll take that the capital one because obviously that's a complicated question in light of the.
The fed C car 2.0, and the environment, but that maybe John you can take the first part yeah sure Ah yes. So on operating leverage I just described the path on the NIM, which ties in to our path on net interest income and we're anticipating continued revenue growth from net interest income on on other.
Revenue, we've seen some outsized opportunity to take market related gains over the last couple of quarters, we'd expect that to normalize a bit down to kind of that 425 level, but overall because of the strength in Eni and continued strong performance in other revenue, we would expect growth there which to your point.
Ryan is going to drive positive operating leverage, especially if you kind of adjust for some of these outsized gains that we're seeing and all other revenue line item from a return perspective, you know it's still early as we think about 2021, but we are expecting to get back to kind of pre covitz return levels.
Kind of over the next kind of 12 to 18 months, assuming that our path on the macros continues to be a.
Accurate and if anything 2020 has taught us things can move pretty quickly, but based on what we're seeing right now we should be able to return to pre service levels.
Here in short order and then just on capital return I know JB I want to jump in on this but it priorities remain the same continue to invest in customer related gross I think the fact that we see a strong earnings path ahead allows us to continue to do that and then it'll be up to the full.
Said and kind of see card auto to see where we are we have the ability to to start repurchasing shares again, but JV I'm sure you want to jump in on that as well yeah I mean.
Start with really pleased with the results and police right with your recognition of the increasing pace and kind of inherent strength, that's starting to show through the income statement. So I'm very focus there and I think with that provides us a lot of opportunities. It's Jan referenced in her prepared remarks, you have this concept of a centralism.
That's something that we're very focused on inside of ally. So really what is it simply the disciplined pursuit of less so I think what we're being very focused on is driving as many efficiencies as possible utilizing technology kinda up and throughout the entire corporation and then using some of those savings to continue reinvesting.
In in technology, and digital tools, and really making us even stronger for the long run on on capital overall again I do think.
You know that's the theme that we talk about at ally and you're certainly here and it being echoed procurement house just the amount of uncertainty that exists I think we've been extraordinarily pleased with the state of the consumer right now.
The consumer is performing incredibly well and obviously that showing up in our results and so we think theres plenty of numerical reasons to support pretty aggressive it's pretty dynamic capital returns in the immediate future, but you know you got still ongoing uncertainty with Kobe you don't understand.
The full implications if we have a change in the political landscape and so all these are dynamics, we're facing but I think.
We're just focused on keeping our heads down executing seeing strong revenue growth really come through the entire company and that affords us a lot opportunities and hopefully a lot opportunities for our shareholders as well.
I appreciate all the color and nice quarter.
Thanks, Ron I appreciate you.
Our next question comes from Suntrust.
W.
Thank you JV you talked about a very strong rebound in originations and the relatively quicker rebound relative to the previous cycle I guess, if you if we peel back the onion, a little bit on the trends how much of this is sustainable can some of this be a pull forward of demand and when we think about.
Where it's coming from is it share gains as well.
Yeah I I.
Sorry. Thanks.
I do think it is fairly sustainable now obviously 9.8 billion. It's a it's a pretty robust quarter and I think as we pointed out is the highest level that we've seen in five years.
But.
But I think there's still opportunities to see levels.
Remain here or within this relative range I think as Jan pointed out you are starting to see a fairly meaningful shift in the decline in public transportation I don't think Thats necessarily short list you know maybe it's.
An alteration in the environment for the next couple of years, but obviously that affords us a lot of opportunity and I think you know when I go out and talk to dealers and certainly engage with our auto team I think you know our expansion into these alternative channels. You know the Carvana is of the world The drive times and and.
Echo parks and other players like that coupled with the 19000 franchise dealers that were touching it yeah.
Yeah, it's pretty powerful and our ability to sustain.
Sustain strong originations and I think the other important point.
As you know we have been extraordinarily price discipline damning as gen points out.
Our 695, well rounded out called seven I mean this is you know we've been very focused on booking high quality, earning asset yields. If we gave up a touch of price we could expand that a box and go well north of 10 billion a quarter in originations. We've just chosen to be very price disciplined very price.
Yes, not chase the.
Not chase the Super Prime.
Product because you just don't generate all the attractive returns for us that we want to chase. So for US we feel really good about our position we feel really good about where we are playing in the credit environment and we think there's there's more room to run there.
Okay.
Thank you and my follow up is on credit quality, coupled with sort of returns Jan you mentioned that if the trends continue you could be a 1% for fourth quarter into the year I guess, if we if we married that maybe what are the swing factors there how comfortable do you feel about credit I see that.
Referral trends look really favorable but then if you couple that with the NIM discussion before as we look into 2021, I mean shouldn't the returns actually be higher than what you were expecting going forward because I don't know that weve seen 3% nims in the past.
Yeah I appreciate the question Sanjay and I think a lot comes back around credit and the ultimate path around delinquencies and he has and I think what we're observing and the entire industry is observing at large is it's just a disconnect between the macroeconomic factors and delinquency trends and so.
Yeah, well were incredibly pleased with the performance year to date and in Q4 is shaping up to be strong. We also want to be mindful of the environment that we're in.
And you know and what the ultimate path does look like how the path of coal bed and the economy shapes up and so you know I think at this point, we're just being really cautious around that no. Yeah, I would like to reiterate as well that well, we could see it kind of 1% or less than one.
2% for full year two.
2020, we do have a retail auto reserve that four times so.
So just from an income statement perspective, we should have taken the pain and we did that in the in the first quarter. So we did it early we did at large and and we're going to just continue to be mindful of the environment, but absolutely of performance continues like this and delinquency rates continue to trail kind of 30 plus down Oh.
100 basis points, then bad credit loss could get pushed out kind of mid 2021 or beyond.
And that obviously would impact on returns, but I you know I think as I described I'm just a couple of minutes ago I think the fundamental drivers of our returns are very solid from NIM perspective, and I growth continuing to see other revenue continued to be strong maybe not quite at the.
These levels, but strong and to your point, we do see a really attractive path on expanding returns, which which we've been talking about for sometime now subject.
All right well. Thank you guys. Good luck. Thank you.
Thank you thanks Hunter.
Our next question comes from Rub welfare Autonomous research.
Yeah.
Hi, good morning, guys Flushing.
Machine.
Hi, just a question on your on your partner relationships here, you know I noticed there and you highlighted that you upped your commitments to groom and Carvana.
How have those opportunities evolve as we've kind of gone through 2020 and gotten into this new paradigm and what effect do those changes and we should have on your partnership strategy more broadly.
Yeah, Rob I appreciate the question I mean, I would say our partnerships with some of the newer entrants are very similar to what we have more broadly across auto and supporting all of our dealers, which we want to be there for them in all environments and we want to be opportunistic I think like a has been.
A big win for US here in 2020 is just the growth in some of these new dealers and we've been able to grow with our partners grows a week, we had kind of record levels of inflows and you think retail auto flows this quarter from those new partnership. So you know we're going to continue to support all of our.
Dealers our strategy is centered around increasing application reach you can see that in.
Some of the customer metrics shared applications continue to grow at a 13% CAGR.
And.
We feel good about our positioning in across the board and our dealers and you know and the other thing I'd say and maybe talk a lot about this is just the modernization of auto continues to see consumer shift to more digital purchasing behaviors and because we have the partnerships that you just mentioned we're able to shift.
With changing dynamics across all consumer preferences as well.
Got it got and then just a quick one on capital and capital return you know the 10.
The 10.4% see T. One right now that's obviously, a little lower Ics with the seasonal adjustment.
Do you do you have one eye on that fully phased in Cecil capital level, when you're thinking about capital return or is it too early to be thinking about that yet.
I know, we're at we're always thinking about Pat.
We think about that all day, but I think you know that the headlines around capital one we feel great about the position where these are the highest capital levels. We've had in history, where some kind of $3.3 billion.
Above our implied the easy one requirement from the FCB and you couple that with the rest of the balance sheet with a $3.4 billion reserve and we feel like we are in a really strong position across the balance sheet.
And then as we as we as we move forward and as we were just talking about we see a strong path on earnings growth and so the question now is you know where to redeploy.
Where to redeploy the growing capital from earnings and you know we don't you know.
You know we don't you know follow kind of the same path that we've been talking about customer growth is number one we'd expect RW way to pick up as commercial balances pick up that's probably the most obvious driver of <unk> of <unk> capital deployment, we continue to see growth across every one of our businesses whether that our allies lens.
King business corporate finance DTC mortgage.
Tumor auto is as well as the commercial side and so that would be kind of have to and then you know I think JV summarized it really well, we we would like to move into a more normalized I situation when it comes to repurchases.
Especially with where our stock is trading relative to very strong book value growth.
Got it. Thank you. Thank you.
Our next question comes from Betsy Graseck would mortgage family.
Hi, Good morning, JB good morning, John.
I'd say more investing.
So in listening to your prepared remarks, I feel like I'm in a parallel universe in the land of Plenti.
It's a it's really exciting.
Hey, you have done a strong supporter for awhile, we notice that we appreciate it we're just executing the mission.
[laughter] make you look right [laughter], well I appreciate that to especially on a Friday [laughter].
So you know my my question here is one that I know I'm going to get from investors you know.
You know, which is around the sustainability and I think John It earlier in your prepared remarks, you highlighted how you know you do anticipate.
To see some steady demand going.
Going into 2021, I'm wondering if you could give us some color some comments that can support that just to give people. Some understanding of why you think some of these tailwinds are going to continue for at least several more.
Several more quarters here.
Yeah sure and we appreciate the question and anticipated it which is why we added page five to our earnings materials today.
Which is just about the positioning of our businesses and if you start first on the auto side auto continues to be a really strong performing asset class throughout 2020 units, it's where we play in kind of the prime segment, but it's really across the board and Super Prime as well and you're just seeing strength across the board.
And then when you look at where we said in the industry with our scale with the breadth of products that we offer with the partnerships. We just touched on a we feel really well positioned to continue to see that outflow grow we've closed the gap on a year over year basis, we had record used application flow.
And so just the positioning of our model, where we can take advantage of your need pockets within a growing and strong asset class a we absolutely see sustainability there and you know for full year 2020, we are likely to be pretty pretty darn close to where we were last year from origination perspective, and pretty close to that 7% yield.
Old, which remains at kind of record levels to the underlying benchmark. So great flows a great sustain pricing.
Within auto and and again, we don't see any sign of that thing just yet.
Oh and aren't anticipating that stopping and then on the consumer side, you just think about the shift.
In banking around Digitization, and we're already there we're kind of a 100% digital you see the flows that we have this strong retention on the deposit side and we've done that with record declines in pricing. So we feel really well positioned.
And meet the needs of our consumers and deposits and then you know continuing the theme of Digitization <unk>, that's where you see alpinvest and all toward DTC mortgage products picking up and they're able to kind of draft off of the strong performance that we've had on the deposit side. So feel really really good about all of our.
Businesses in this environment and and we added that a customer slide as well because not only.
Not only are we positioning ourselves well from a product perspective, but we're seeing that customer growth that we can continue to harvest over time.
Okay that is showing up in the scale that we are seeing in our new businesses.
Got it yeah, no. That's helpful. So more legs to the stool and penetrating client base successfully.
So I get the thanks for the color on one other question on the capital return for you in GB is around the FCB. So the question I got from somebody the other day was does the S. C. B change how flexible and nimble you can be is there a change in the you know.
Hi back capability that the FCB gives you.
Yeah. So I mean, let me first start with the FCB that the rate and then just that the guidance that we've received around me on me around yes, I see be so first of all it implies kind of a required T. T. One of 8% we already manage the company at 9%. So there's really no change there in terms of.
How we think about overall capital levels and then a at least how they originally position the FCB it should actually give us more flexibility.
As long as we're managing capital.
Climate above that 8%, we should we should be able to to really dynamic more done and dynamically deploy our capital as we move through the quarter. So if anything Betsy it should be a net positive.
Just in terms of timing and magnitude of capital deployment, but as JB I think highlighted very well, there's still a lot of questions around how you ever be we'll respond to see card auto and and we think we're well prepared for that but we're mindful that there's still some uncertainty there got it.
Got it.
Thanks, so much I appreciate it thanks have a good weekend.
Have a good weekend [laughter] you too.
Our next question comes from Moshe Orenbuch with credit Suisse.
Great. Thanks, most of my questions have been asked and answered, but I think the I mean to me. The most the most interesting part of the quarter has been.
What you would expect had predicted.
For Q2, it's when PPNR improvement has certainly happened and I think.
You alluded to the ability to kind of continue to optimize your right hand side of your balance sheet and maybe if you could spend just a minute or two.
A minute or two on how much room, you think there is both in terms of deposits, replacing other liabilities as your balance sheet kind of normalizes in size and also you know kind of deposit pricing I think you lagged a little bit your peers at the beginning of this you know this downward trend and we're starting to catch up now so maybe if you could just talk about.
That a little bit yeah.
Yeah, and and I appreciate that Moshe and we're optimizing both sides of the balance sheet I think steady, earning asset yields are a really important but but I'm not on the on the liability side, you're absolutely right. We have a wide variety of opportunities to continue to optimize and you know the most obvious and powerful one is.
The deposit we take I would say we dropped it I'd say right 50 basis points this quarter down to 60 basis points and and that was kind of in record time. If you look at the great financial crisis. It took some 35 36 months to get to that point and the industry kind of came down and in a car.
Full of money, so just a very accelerated decline in and say rates and and so you'll see that roll forward from partial year to four year as we head into 2021, and then you also see Cds Cds repricing down. So it is a will reprice from over 2% down to.
Less than 1% so that creates a nice tailwind for us and that as we've continued to see flows we can start or can continue to reprice to replace some of the broker deposits with retail deposits and if you look kind of a year ago a broker.
Broker deposits were about 15% of our deposits back that's down to 10%. So we'll continue to watch that.
Slow.
And then on in terms of the other liabilities unsecured we had about 2.2 billion unsecured roll off in 2020 is what we'll keep kind of the volume and the same but the rate will be better so we'll be bringing down cost of unsecured.
I guess, a little bit less of an impact in 2021, but we'll have a nice roll forward. There and then in terms of other liabilities you saw exactly ER I pointed out the FHLB early retirement, we're going to continue to look for.
Out ways to take down.
To take down some of this more expensive debt because of this really strong tailwind we have from both the deposit flows and pricing and then last but not least said it just gives us such a strategic advantage because while we have this cash we can use that excess cash or replace higher cost liabilities and were not forced to kind of invest into.
You know, putting duration and our security portfolio less than 1%. So we feel just really great about dynamics on both sides of the balance sheet and the ability to continue to optimize liabilities take down that's funny funding cost for several quarters to come.
Great. Thanks, and I, certainly didn't mean to minimize the impact of pricing.
Pricing on the asset side, but I do.
I wanted to ask was.
About you mentioned kind of in passing that you're expecting plus 5% used car values. This year and I think that kind of had been you know minus three.
Minus 3% to 5% in the past and could you just a little bit about how that might have impact going into 2020, one given where used car values I mean, which are probably.
In <unk>.
Actual terms you know, 15% they may not sustain that but they are up substantially higher than that.
Yeah, and if maybe I'm just ghilas factors kind of late 19 and heading into 20, if you look at off lease.
Why we were hitting a peak here in 2020 says it simply because of supply side dynamics we.
We were expecting to see a kind of a 3% to 5% decline in overall used vehicle values. This year now.
2020 has really shaken everything up kind of across the industry. We saw precipitous drop in the second quarter as as auction lanes kind of dried up but.
But as the auto asset class has continued to remain strong consumer demand for vehicles Covidien related has continued to to accelerate and new vehicle inventories are at you know kind of nine years lows down 27% year over year, we're just seeing demand for used spike up.
Kind of it to unprecedented levels were in the mid teens here in Q3, and that's expected no should that continue into Q4 and be strong quite frankly in the first half of 2021 now at some point, we do expect this to normalize a bad and so while we're expecting overall 2020 used vehicle pricing to come about up about 5%.
And we do think it it'll normalize down a couple of percentage points heading into 2021 with strength in the first half and some pressures in the last half, but I will say bigger picture that off lease inventory does start to come down heading into 2022, so there could be some sustained tailwinds.
Kind of over the next 12 to 18 months simply because that.
And yeah, I imagine, they're $2400 in a kind of gain per vehicle and that's predominantly in the S.T.V. and truck category, which continues to be in high demand across our consumers. Some of the other categories, the small cars and and a smaller vehicles don't have.
It means that we've seen in our book.
Thanks, very much yeah.
Yes, Thank you Moshe.
Our next question comes from Bill Carcache with Wolfe Research.
Thanks, Good morning, GP engine it.
I know and Martin.
So we clearly see the benefit in your numbers as you guys have leaned into use than more of your business has remix there how high would you be comfortable letting that used versus new mix is there any reason not to let it get to I.
And then could you also maybe give some color on the relative difference in profitability of of new versus used just at a high level.
Yes, sure I said Bell <unk>, we don't have any cap on unused I mean used has really strong risk adjusted returns, we're very comfortable managing the credit risk we know how to price. It we have no cap. There. So we'll just continue to be opportunistic across new and used and what the numbers.
Layout a in terms.
In terms of profitability and you know I think I've shared in the past that the pricing on our used vehicle tends to be kind of 100 hundred 50 basis points higher than in new vehicle and the and the delta on credit risk tends to be just 2030 basis points or so so you can kind of do the math around that but we.
Oh, absolutely get paid kind of three four times.
The increase in credit risk in the yield that we see on the used car front end and this environment with used vehicle values continuing to outperform on that return on I guess a bit higher.
Got it very helpful. Thank you and as a follow up if I may can you go a little bit deeper into your outlook for dealer floorplan lending any constraints on the production side there.
They are still and when a little bit more and perhaps when balanced growth could start to resume there.
Yeah, I mean, the only items are back into kind of full full speed ahead production I think they're about a 100% manufacturing.
Levels and if they were pre cove it I think.
Like driving a slower build in terms of inventory is it just the very strong pent up and very strong demand again going back to auto continues to be an asset class winner in this in this environment. So as quick as they are manufacturing. The cars. There are kind of getting sold off a lot. So you know what we've seen it's kind of a trough here in July.
Right and then we picked up about a billion dollars.
In August and September are continuing to see it slowly come back, but that but we wouldn't expect to be back to pre coded levels and our floorplan book until late 2021.
Understood. Thank you for taking my questions right now. Thank you everyone for joining us. This morning, and if you have any further questions feel free to reach out to Investor relations, but that concludes today's call operator, taking them.
Ladies and gentlemen. This concludes today's presentation you may now disconnect and have a wonderful day.