Q2 2021 Ally Financial Inc Earnings Call
Good day and thank you for standing by welcome to the ally financial second quarter 2020 earnings Conference call.
This channel participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star 1 on your telephone. Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero I would now like to hand the conference.
Or would your speaker today, Daniel Eller head of Investor Relations. Please go ahead.
Thank you operator, we appreciate everyone joining us to review ally financial second quarter, 2020, 'twenty 'twenty 'twenty 1 results.
This morning, we have our CEO, Jeff Brown, and our CFO. Jim look later on the call to review results and to take questions.
Before beginning I'll note. The presentation, we'll reference on today's call can be found on the ally Investor Relations website.
Forward looking statements and risk factor language governing today's calls on slide 2 and on slide 3 we've included several GAAP and non-GAAP for core measures pertaining to ally the operating performance and capital results.
These metrics are supplemental to and not a substitute for U S. GAAP measures definitions and reconciliations can be found in the appendix.
With that I'll hand, the call over to J P.
Daniel Good morning, we appreciate everyone joining us on the call today.
Performance this quarter was exceptionally strong and our results underscore the power of our vibrant and growing businesses.
The rapidly changing operating environment over the past 18 months or so we've executed against our strategic goals.
<unk>, our market, leading capabilities and driving momentum across all areas of the company.
Do it right serves as our mantra and provides great clarity to our actions inside and outside the walls of alloy.
<unk> proud of how our ally teammates uphold our values and meaningful ways every day.
Since ally Bank launched 12 years ago, you've seen us constantly challenge the status quo through innovative seamless and differentiated consumer bank products services and experiences.
In June we were the first major banks to announced the elimination of overdraft fees for all customers.
While eliminating our revenue stream was viewed by many as unprecedented and by some as controversial. This was a logical step for us and continuing to redefine traditional bank norms and advancing our mission to create a better and more equitable banking relationship for everyone.
The success of our all digital banking platform is reflected in the accelerating growth across several measures, including sustained rapid expansion of engage customers.
Industry, leading retention of balances and account holders and steady growth over the past 5 years, among customers, who use multiple ally bank products.
Our model will continue to evolve to meet the increasing demand among consumers for frictionless and simplified experiences enhancing our ability to further unlock additional franchise value in the years ahead.
For our ally teammates, we remain relentlessly focused on fostering and engage equitable and inclusive culture, while prioritizing their wellbeing.
We're encouraged by the reduction in Covid cases, and growth are vaccinated populations across the nation, but obviously mindful of variance like delta, but are still presenting risks.
At ally, we recently announced our intention to begin welcoming our workforce back to the office after labor day, but pilot programs already underway today show that teammates, we're ready and excited to get back together.
Our teammates across the company have gone to considerable links to balance the complexities involved in this environment demonstrating a do it right approach and their thoughtful planning.
Incredibly proud again of how we are balanced doing right for our teammates and doing rate for our company.
On top of the great financial and operational results. This morning, I am pleased to announce a $15 million contribution to the ally charitable foundation, a significant financial commitment toward driving lasting and positive change.
Our foundation was active in the quarter partnering with habitat for humanity of Charlotte to launch 1 of the largest affordable housing efforts to date addressing a critical shortage in housing within historically black neighborhoods.
We also increased our partnership with the University growth fund as they expanded in Atlanta.
These efforts help college students from under represented groups gain real world investment experience, including in areas like private equity.
We're thrilled to support these and many other organizations and the important work that day due to advanced social and educational causes.
The measure will progress we've made for our customers employees and communities is another source of pride for me and I am confident in the significant role. These efforts played in building a stronger company.
Let's turn to slide number 5 where I'll touch on a few highlights from <unk>.
Second quarter, adjusted EPS of $2.33.
Core <unk> of 26, 7% and revenues of $2.1 billion. Each represented record setting levels for ally driven by organic revenue expansion and strong credit trends.
While a favorable backdrop across consumer and auto markets accentuated financial results during the quarter. It is important to recognize the underlying drivers of ally broader performance.
First as you've heard from us on several occasions results of this magnitude reflects years of disciplined execution and our adaptability and creativity has enhanced our ability to capitalize on market opportunities in real time.
Second and critically important is that meaningful expansion opportunities remain ahead for ally as we continue to grow our company and unlock incremental value with an auto insurance and ally bank.
These dynamics serve as the cornerstones of our long term operational and financial expansion, which we steadily delivered against over the past several years.
Jen will provide more detail that we expect full year 2021 performance to exceed normalized returns, while our long term outlook for sustainable our OTC profile in the solid mid teens represents our strongest level as a publicly traded company.
Performance will be driven by ongoing core earnings expansion fueled by robust dealer engagement and deepen customer relationships across our digital bank offerings.
Our continued progress allowed us to announce a 25% expansion to our share buyback program and increase our dividend for the sixth time in as many years.
Disciplined capital management in accordance with the SCB regulatory framework as a continuous part of our focus.
Turning to our business performance within auto consumer originations of 12.9 billion represented our highest level in 15 years and a solid 7.5% yield.
We focused on being the preeminent dealer partner evidenced in a record $3.5 million applications. We decision this quarter and with a pathway for further expansion as we deepen relationships across our 19700 dealers.
For the first time in our history credit for the quarter was a net recovery, reflecting the resilience of the auto asset class, including strong consumer demand.
Broad strength and health among consumers, including the benefits of meaningful fiscal and monetary actions.
And our focus and modernized approach to underwriting and collections.
Credit trends remain encouraging reducing the likelihood of a protracted elevated losses is a gradual migration back to more normalized levels becomes more likely over the next 12 to 18 months.
Importantly, we used this time to further enhance our ability to reach our auto customers through expanded digital channels, coupled with enhanced analytics within our servicing teams.
We constantly monitor broader market indicators of consumer health, including wage and price inflation employment conditions and productivity measures. While there are several cross current today I remain other view of consumers are well positioned with healthy balance sheets, increasing their willingness.
S and ability to borrow and pay.
Auto sector competition remains intense but balanced overall as vehicle sales were robust, particularly for non fleet retail sales.
Strong demand continued to outpace OEM production pushing industry inventories to multi decade lows, which in turn is providing structural support for used values.
We expect floorplan balances to remain low and used values elevated for some time before beginning to steadily migrate towards more normalized levels.
Based on what we see today and in conversations we have with the dealer community. This will take us into next year.
Within insurance written premiums for 301 million reflected our highest second quarter of consumer volume driven by increased market share and strong vehicle sales.
Investment portfolio performance remains solid while weather claims were the lowest <unk> in over a decade.
Turning to ally bank organic and accelerating growth trends continued retail deposit customers ended at nearly $2.4 million.
Expanding 12% year over year, and representing our 49th consecutive quarter of growth.
Retail balances grew to 129 billion, even as seasonally higher customer tax payments increased about 70% year over year.
Our consumer product adoption trends remained exceptional ally home originations of $2.2 billion increased more than 80% compared to the prior year period.
Ally invest self directed customer assets grew to $15.6 billion, a 62% year over year increase while accounts expanded 11%.
And ally lending volume of $299 million increased nearly fourfold year over year, as we expanded merchant relationships and volume across health care home improvement and retail verticals.
Corporate finance posted another steady and solid quarter with combined held for investment and unfunded commitments exceeding $10 billion for the third consecutive quarter, including $6.2 billion of <unk> balances performance.
Performance across all of our businesses reinforces our broad customer reach years of disciplined execution.
<unk> ability of our businesses and ability to meet our financial and operational goals.
On slide number 6 our ongoing financial trajectory is evident across each of these key metrics with trends, having accelerate accelerated following widespread impacts experienced at the onset of the pandemic.
In the upper rate, we've included PNR, which we know many of you look to as a measure of core earnings power and is a key metric used by the fed during CCAR exercises we.
We surpassed $1 billion this quarter and expect to generate annual growth in the years ahead, though this may not always occur in a perfectly linear manner from quarter to quarter.
On the bottom rate of the page tangible book value per share reached an all time high of $38.83.
Reiterating the growth and intrinsic value of our company is our return profile is sustainably improved.
As you've heard for me in the past values culture, and disciplined execution remains central to our operating mindset and we're excited to build upon our momentum in the years ahead as we continue to drive an improved earnings and return profile.
With that Jen I'll hand, it to you to review the detailed financial results.
Thank you JB and good morning, everyone.
<unk> of our financial performance again this quarter reflects our disciplined operating approach and the continued execution of our long term strategic priorities.
Before I review the details I'd like to thank our ally teammates for their ongoing commitment, which underpins our strong performance and accelerating trajectory.
Deeply integrated audio and digital banking experiences for dealers and consumers enhancing ally franchise value and affording us the opportunity to protect and improve our market share grow our loan portfolio and diversify income sources and generate solid mid teens return profile.
For the years ahead.
We're well aware of the debate on whether prevailing market trends represent peak performance for company and while we acknowledge used car value and credit trends will migrate towards normalized levels over time.
Continue to focus on expanding our industry leading businesses day.
Delivering a sustainable core earnings trajectory that is structurally higher and pre pandemic levels and prudent management of capital and liquidity.
On slide 7 net financing revenue, excluding OID of 156 billion reached the highest level on record for ally growing 13% linked quarter and 46% year over year.
Performance was fueled by ongoing strength in auto pricing in origination volume elevated used car value optimization, among funding sources and benefits from redeployment of excess liquidity.
Adjusted other revenue of $588 million reflected another solid quarter of investment gains and continued growth among our smart option mortgage invest an insurance operation.
We repositioned $70 million of OID expense associated with the retirement of $2.4 billion Trust preferred Securities Inc.
Q3, we expect to reposition around $50 million aligned with the July closing of the second redemption.
We opportunistically replaced its floating rate instrument with 5 and 7 year fixed rate perpetual preferred securities, which improves the quality of our tier 1 capital and positions us favorably in rising rate environment.
Negative provision expense this quarter reflects the benefits of robust consumer dynamics that led to a net recovery in retail auto.
Non interest expense, including 90 included $90 million of significant items detailed below related to the contribution to the ally Foundation and modifications to our retirement eligibility benefits.
We remain focused on essentially them and generating positive operating leverage even while we continue to make prudent investments in innovation to enhance dealer and customer experiences technology security and brand.
Core pre tax earnings exceeded 1 billion for the second consecutive quarter, driving GAAP and adjusted EPS of $2.41, and $2.33, respectively.
Within GAAP tax expense, we recognized the discrete tax items that lowered our quarterly tax rate.
Moving to slide 8 net interest margin, excluding OID of 357% expanded 39 basis points quarter over quarter, and 115 basis points year over year, reflecting significant and sustained improvement.
Earning asset yield of $4.6 9% grew 25 basis points quarter over quarter, while average, earning assets of nearly 175 billion, reflecting steady retail auto expansion for us through strong originations at accretive pricing levels.
Growth in lease balances and yields.
By elevated used car values.
Ongoing redeployment of excess liquidity and higher ally lending balances at attractive yields.
These dynamics, largely offset prepayment activity and mortgage and lower floorplan balances stemming from robust consumer demand and continued supply chain constraints.
We expect full year retail auto origination yields in the 7% range.
And now expect used car values to rise in the mid to upper 20% range year over year is the mid 30% rise during the first half of 2021 and outlook contemplates 1 normalized pricing and that's substantial rise in car value that began in the latter part of last year.
Impacts from elevated used car values have been partly offset by higher liquidity levels and premium amortization trends, we expect to normalize over time.
Turning to liabilities cost of funds improved 15 basis points, the eighth consecutive quarter over quarter decline.
As you've heard from us before our interest rate risk position is relatively neutral and we remain confident in our ability to thrive in both higher and lower rate environments, given our balance sheet positioning.
While we continue to prefer a steeper curve, we are not overly dependent on rates to drive margin improvement.
Allies liability transformation asset growth and pricing tailwind on both sides of the balance sheet will drive ongoing NIM and NII expansion.
Our margin performance has been meaningfully enhance through years of transformation and organic growth.
Since 2014 consumer auto assets have grown 10 billion as we partner with more dealers decision more application and developed deep expertise to drive improved risk adjusted return.
Corporate finance ally lending and mortgage assets, including ally home have expanded by over $11 billion doubling the 2014 ending levels as we diversify our growing ally bank customers and clients we have.
Transformed our liabilities back reducing reliance on high cost, 100% beta wholesale funding as we unveil stable sticky deposits.
We are now 89% deposits funded double the 2014 level and we've retired 24 billion of unsecured over this timeframe at a weighted average coupons in excess of 5%.
These structural improvements position, our balance sheet breakfast stable, 3%, plus NIM moving forward versus low to mid 2% levels in years past.
Turning to slide 9.
<unk> increased to 11, 3% in Q2, representing $3.2 billion of excess capital above our 9% internal target.
Last week, we increased our Q3 dividend to <unk> 25 per share and expanded our 2021 buyback program by $400 million.
Reflective of valleys strong capital levels earnings profile and outlook.
On the bottom of the slide outstanding shares have declined 25% since the inception of the buyback program and we repurchased $719 million during the first half of this year.
Our approach to capital deployment remains centered around prioritizing opportunities for long term value enhancement.
On slide 10 asset quality reflected historically strong performance across our consumer and commercial portfolios.
Consolidated net charge offs were negative 2 basis points, the lowest level in our 102 year history.
Retail auto portfolio performance reflected solid consumer payment trends and improved loss given default rate.
In the bottom right early and late stage delinquencies ended meaningfully below prior year levels.
Our encouraging trends supporting our expectation for losses to migrate toward a normalized 1 for at a 1.6% NCO level over the medium term, which is contemplated in our reserve and pricing approaches and included in our return projections.
On slide 11 consolidated coverage was stable at 279% as retail auto and ally lending balances grew and floorplan, which carry significantly lower coverage decline.
Retail auto coverage of 3.7% declined by 10 basis points from favorable consumer behavior and improved macroeconomic indicators.
Our forecast assumes gradually improving unemployment ending the year between 4 and 5%.
Signs of economic improvement continued to emerge evidenced in rising confidence level widespread employment opportunities and ongoing gains in productivity and manufacturing.
We continually monitor wage and price inflation trends and assess.
Consumer debt dynamics in real time, but remain confident our reserves are well positioned for a variety of economic environments, including downside scenarios.
On slide 12 total deposits grew to 139 billion.
Retail balances expanded by nearly $900 million quarter over quarter, even as seasonal tax outflows were significantly higher than previous years, and we continue to lower brokered deposits.
Underlying retail trends remained robust, including inflows from both new and existing customers.
We added another 60000 customers during the quarter with nearly 70% representing digitally savvy younger generation early in their financial journey.
Looking deeper into portfolio dynamics every annual vintage since 2009 has grown or remained stable a testament to our brand value and the stability of balances across rate cycles and rapidly evolving competition.
Customer loyalty and engagement are reflected and industry, leading retention of 96% and multi relationship expansion for the 17th consecutive quarter ending at 9%.
Turning to slide 13 is the largest all digital bank in the U S. Ally Bank is uniquely positioned to benefit from ongoing consumer shift to all things digital.
This is evident in our robust customer growth expanding at a 19% CAGR since 2010.
Deposit service the gateway to our rapidly expanding bank, which continues to drive loyalty and deepened customer relationships through ally save invest PE and mortgage lending capabilities.
A significant portion of ally invest account openings and ally home direct to consumer volume continues to be sourced from existing depositors accelerating organic growth and diversification in the years ahead.
Let's turn to slide 14 to review auto segment highlights pre tax income of $917 million was driven by net financing revenue growth from ongoing optimization in the consumer portfolio and strong used values.
Expansion of smart option and clear path activities and solid credit performance.
Retail portfolio trend shown in the bottom right highlight our strong risk adjusted margin trends fueled by solid origination yields and credit performance.
Turning to slide 15, our leading agile platform is built to meet dealer and customer needs in a comprehensive and innovative manner.
Reflected in our performance and multiyear growth of dealer relationships.
Okay continues to migrate towards deepening these relationships driving strong application trends, which we expect to approach $13 million this year.
In the upper rate ending consumer assets expanded to $86.5 billion, both retail and lease growth demonstrates the resilience of the auto asset class in a challenged loan growth environment as we expanded volume and units.
Average commercial balances ended at $16.3 billion as industry inventories reached a 36 year low.
The Floorplan contraction has been driven by strong consumer demand and supply chain dynamics that have improved dealer profitability by lowering inventory carry costs and enhancing used vehicle values.
Turning to origination trends on the bottom half of the page auto volume of $12.9 billion represented our highest quarterly level since 2006.
We've continued to provide broad access to credit for consumer utilizing our full spectrum underwriting capabilities, while maintaining consistent FICO and non prime trend.
Turning to insurance results on slide 16 core pre tax income of $67 million increase year over year from underwriting income growth and notably lower weather losses.
Our investment activity decline quarter over quarter realized gains still ranked as a top 10 quarter over the past decade.
In the bottom left the investment balances grew to $6.4 billion, providing a diversified stable revenue stream and enhance returns.
Total written premiums of $301 million reflect consumer F&I strength, where we generated $274 million in volume leading to our highest number of total consumer policies.
P&C volume reflected lower industry inventories, though newly on boarded dealers and rate changes mitigated the overall decline.
Turning to slide 17 core income of $96 million was the highest quarterly result on record for corporate finance, reflecting stable net financing revenue.
<unk> other revenue from investment gains syndication income and growth and unused commitment fees and favorable credit trends, which allowed us to modestly reduce coverage.
The loan portfolio remains high quality comprised of 52% asset based lending up from 25% in 2014.
Our $6.2 billion <unk> portfolio and for 3 billion unfunded commitments.
Position us for ongoing revenue expansion.
Client utilization levels remain low and competition is fierce we remain confident in the outlook for growth.
Mortgage details are on slide 18, the breakeven income reflects a shift from HFF for HSI originations and impacts from elevated prepayment activity over the past several quarters.
La home DTC originations of $2.2 billion represented our highest quarterly level since launching in 2016 customer.
Customer engagement remains strong with nearly 40% of our origination sourced from existing depositors.
Further underscoring the significance of the of our growing multi product relationship.
The $10 billion in annual DTC volume over the next couple of years remains within reach even as the broader market is expected to decline as we build scale for existing and new customers.
On slide 19, we refresh the financial outlook given our strong results. We now expect our O T C E and the 20% range for this year, excluding the impact of reserve release activity.
Performance will be fueled by 20% plus year over year total revenue growth and operating leverage gains in the mid teens range.
The chart also demonstrates the significant long term momentum we've generated across the company evidenced in the sustainable 15% plus return profile.
Ongoing results will be fueled by revenue driven P PNR expansion.
I will reflect loan growth and net interest margin in the mid to upper 3% range.
Steadily expanding other revenues will reflect organic growth from our established and brought in consumer offering.
And as a reminder, we assume modest investment gain activity, but we'll remain opportunistic in the years ahead.
Our outlook and that balanced competitive and operating environment assumptions, including normalized trends across used car prices credit activity and deposit market growth.
We are confident in the value we're generating across our business is driving near and long term benefits for all our stakeholders and with that I'll turn it back to JB. Thank you Jen I'll close with a few comments on slide number 20.
First I remain deeply grateful and proud to lead our company. Our results. This quarter are really impressive, but our broader purpose and cost to serve our teammates our customers our communities and our stockholders is what defines for long term success, but still remains ahead for ally, we build a structurally enhanced.
Fundamentally stronger company.
For a strategic execution across our business lines and balance sheet optimization. This positions us for long term outlook is brighter now than at any other point in our company's history.
We will continue to execute with a focus on the same values and priorities that have served us well.
And the Future's bright for all things ally, so Daniel with that turn it back to you and we can head into Q&A alright. Thanks, JV. So as we head into the Q&A session I All day.
Remind participants to please limit yourself to 1 question and 1 follow up operator, you may now to you for Q&A session.
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So you please limit yourself to 1 question and 1 follow up question. Please standby, while we compile the Q&A roster.
Our first question comes from the line of Ryan Nash from Goldman Sachs. Your line is now open.
Hey, good morning, guys good morning.
So Jamie Jim maybe talk about how you can manage through.
The normalization of used car prices.
Underwriting and maybe just talk about what assumptions are baked into your intermediate term net interest margin guidance and so I can maybe you can just talk about what youre seeing in smart smart auction in terms of lease gains are you starting to see any signs of normalization and what are your expectations as you look out over the next.
6 to 18 months.
Sure Good morning, Ryan.
Just a couple of comments on where we are with used car prices, we can get into some other dynamics on smart option, but you know clearly first half of this year used vehicle pricing is up kind of over 30% in second quarter up over 40%.
We are expecting Ryan for used car pricing to start to normalize in the back half of this year.
The question is around the pacing of that.
We do think we've kind of past the peak and we would migrate down to more normalized levels at a minimum by 2023 and that's what is embedded in our kind of medium term guidance around 22.23 for.
15, plus percent Roe TCE.
I think a lot of dynamics, there and we hit on these and in the prepared remarks, but we're continuing to see incredibly strong for person demand for personal vehicle ownership.
We actually think some of that could be pushed out simply because of the availability of new and used vehicles.
Coupled with on the supply side, we think the chip shortage is going to continue to pressure inventory levels and so while we're expecting the normalization I think the big question, Brian is quite frankly, when will that happen.
I think you know what we tend to be pretty conservative in how we've modeled this and.
And we are expecting it to come down at least in our modeled numbers through 'twenty, 2 and 'twenty 3.
On your question on underwriting look we never change underwriting for pockets of.
Abnormal activity and so we have embedded a normalized used vehicle pricing.
And LGD and off lease as well.
Your writing for both lease and lending.
So we feel really good about our pricing approach obviously our reserves include.
Much more normalized levels and then on smart option.
Yeah, you know not as not quite as many cars as we would have liked we are seeing kind of dealer buyouts increase simply because of the demand for inventory on lots and their appetite to sell sell metals. So we're not seeing quite the activity wed like to on smart auction.
But the gains are coming in just huge as you saw in Q in Q2, and then will be modest in terms of assumptions they round out.
Got it and maybe if I can ask 1 follow up I mean, the business is obviously generating outstanding returns right now you're talking about 20% plus this year you're benefiting from.
Elevated used car prices J P. Can you maybe just talk about.
Prioritization in terms of how you think about accelerating investments and some of the new businesses that can drive revenue growth versus potentially accelerating capital repatriation, you've obviously increased the dividend by a decent chunk and youre going to be buying back $2 billion of stock versus over the next year, but I'm. Just curious how you think about that relative tradeoff up accelerating.
Some investments given the outsized profits versus continuing to return a lot of capital to shareholders. Thanks, Yeah. That's a great great question, Brian and I guess, it's a blend of both for US right now so as you pointed out.
We were really happy to be.
And be able to announce higher capital returns for the dividend and buybacks and.
Even having said that we're still running elevated levels of capital I think the 11.3 CET 1 is still 230 basis points higher.
That's a real amount of dollars than our internal target that we want to run so going into this year's planning process Jan and I are really working with our business leaders on trying to think through what we're calling kind of unconstrained growth. So what are the higher growth scenarios that we could deploy to drive better organic.
The levels both in terms of balance sheet Tan and revenue opportunities I think we continue to be very tactical and what we're doing on the technology side. The digital side. The cyber investment side. Those are some of the near term investments lead Gen and I have green lighted to accelerate and then also the same thing on the brand side well you know the ally Bank brand and the ally.
Grant overall continues to resonate extremely well I think relative to some of our competitors. We are under spent there we are under invested there and we think theres broader opportunities in promoting the brand doing more in digital acceleration with the brand we have a great chief marketing officer, and Andrea at Brammer and she's got some world class teammates that are trying to really push.
For what we do on the digital analytics side. There. So we're super excited and I think it is going to be a fun 1 year I think the board is on board with us and kind of pushing the company forward. So we're proud of the foundation that's been established but I think now it's really about pushing for even higher levels than we've achieved to date, so hopefully that.
Right Yeah, that's great. Thanks for all the color.
Thank you Ryan.
Thank you. Our next question comes from the line of Sanjay Suck Rodney from <unk>. Your line is now open.
Thanks, Good morning, and good quarter things are really solid.
Just a quick question on the originations, obviously very strong quarter of originations could you just speak to how you see that unfolding for the remainder of the year.
Yes, sure good morning, Sanjay and thank you for the question. So our originations approached 13 billion this quarter and it sets us up really nicely for full year originations were expecting strong flow through Q3, and Q4 and likely will exceed $40 billion.
You know, we always talk about our strategy is not to chase volume, but we'll be opportunistic when we see it and we are certainly seeing it this year.
Evidenced in and kind of the strongest originations we have seen in 15 years, and we continue to see opportunities to hit that kind of 7% retail auto origination yield in 2021 as well so think about kind of Sanjay a number in the 40 to 45 billion and then we will continue to see how things unfold into 'twenty 2.
23, again, no volume target, but with the rapidly expanding distribution you know JV you mentioned, it's our 29th quarter consecutively of growing dealers and then you know the team is all over relationship deepening right now so we hit record application flow, we're not seeing any sign of that.
Stopping based on the operating environment, but more specifically just our strategic positioning across our dealer base and our product set right now.
Great and then I guess, a follow up question too.
To Ryan's question on capital I guess, when we think about.
The excess capital some of it could be used towards M&A are there any opportunities out there that youre seeing is there a pipeline of things youre contemplating.
Sanjay I would say.
We always try to stay opportunistic.
Open I think.
The position we find ourselves in today, though is we've got dominant franchises in auto in the bank and we're seeing all of these new businesses really start to grow and scale on top of what auto continues to do so we're in this fortunate position, where we don't feel force.
To do anything and I think that's probably different than some of our banking competitors.
And so we will always stay open.
The ally lending business is obviously, new we're impressed with leadership there the way they've integrated into ally and the scalability of that business, but.
And that's an entree into this universe of.
Secured consumer lending I think theres still a broader question is there something bigger or should we accelerate what we're doing there do we have a broader opportunity, but we're just we find ourselves in a really great position today as a business is a business model. That's been validated so we're not in a rush for rates to do anything.
Okay.
Thanks.
Thanks, Tom debt.
Thank you. Our next question comes from the line of Bill Karachi for Wolfe Research. Your line is now open.
Thank you. Good morning can you give a bit more color on your discussions with your day.
<unk> is around for planned levels and the possibility that you'll be able to run with less inventory and also if you could remind us what kind of impact smaller dealer floorplan balances will have an ally is profitability.
Yes, sure. Good morning, Bill, maybe I'll start with the dealer Floorplan impacts and we can circle back to the dealer question, but on floor plan I mean, obviously, that's impacting our balance sheet.
Continued to see loans in the commercial space dip down and we think we've hit the trough here in the second quarter, we could kind of bounce around these levels for another couple of months, but we do expect kind of back half of this year to see commercial start to grow again and normalized kind of through 'twenty..2 'twenty 3 it is going to.
Take some time, no doubt, especially with cash.
Continued strong consumer demand and then supply chain shortages, just from chips as well as other constraints, so expecting to see that turnaround a bit towards the back half of this year, but it's going to be a flow kind of a steady recovery.
What's great for ally is that we have natural hedges and with the the lighter floor plan Youre seeing you used vehicle values continue to climb we had kind of a 40 plus percent in the second quarter, we're expecting 25% to 30% increase in used vehicle values, that's obviously showing up.
In our lease yield.
Through slower depreciation as well as lease gains.
And it's also showing up in our loss given default from a loss perspective were in a net recovery position this quarter as you've seen so the natural hedges offset the balance sheet.
Creases that we've seen on the Floorplan side and net net set us up.
To generate really robust returns and earnings and it's quite frankly, it's the same for our dealers, they're seeing margin expansion, we're hitting kind of record numbers of dealers that are profitable right now.
Due to due to some of these dynamics on the inventory side lower carry cause high vehicle values.
In terms of kind of their views on where we are I think the sentiment in J D can add on but the sentiment is this is going to take some time and I think because dealer profitability is so high there's no rush to kind of.
To increase inventory increase carry costs I think there's been some smart learnings that have come out of this and you know it always makes sense to build for demand as opposed to build supply and hope for the demand comes in sales.
Hopeful that the Oems as well as the dealers will continue to take some of these lessons learned into into future future operational practices, but JV anything you'd add.
Thank you.
Covered it incredibly well for them.
Thank you.
As a follow up I wanted to ask about branding.
Guys have had tremendous success with the build out of the deposit franchise, but is there an active focus on doing more to continue to develop the ally brand.
Inside the organization with the goal of ultimately being seen as more than.
Beyond beyond the provider of our balance sheet.
Yeah, Bill do you have a direct line to Andrea Brown.
Yeah, I mean in fact, we're as J P mentioned, we are in active dialog right now we're launching our strategic planning process.
We're in active dialogue around how we can continue to be thoughtful.
I share the the ally story with our customers, we have a terrific products that across both sides of the balance sheet, adding to our wealth management capabilities.
So we think there is just terrific opportunity ahead to accelerate the growth of our new businesses and to continue to dominate across auto and and deposits. So absolutely and I can kind of hear Andrea hearing from a couple of doors down around this now of course, we want to do it smartly and we want to make sure.
Or that's how we position the brand effectively just being mindful of generating positive operating leverage but with that said we would agree.
Just to add.
A little bit there too.
Sure.
Today, we've got ballpark round numbers 9 million customers I think for June anything for us.
As they're active they're engage we're growing the multi product nature of the customer base as well so.
It's all about what we're really trying to optimize if we wanted a higher headline customer number we could target for that but I think what's been very important and what's been guiding us is.
Get a customer in the door grow around them.
Help them see the holistic nature of the brand I mean, we're very proud.
Using a subset of the customer base $2.4 million at the bank I mean to see a 96% retention rate on their customer for our customer base says something about our brand and the quality of our service but.
As Jim pointed out Andrea.
As always looking to grow and optimize our new.
Advertisements promote kind of the holistic nature of ally so you'll see more from US obviously, we continue to grow our sports marketing footprint and what we've done on the champions tour with women's soccer with MLS come in and then obviously, a really dominant position in NASCAR today.
We think sports the sports marketing approach also drives pretty incredible brand value there as well.
That's super helpful. Thank you for taking my questions you got it. Thank you.
Okay.
Thank you. Our next question comes from the line of John Hecht from Jefferies. Your line is now open.
Morning, guys. Thanks for taking my questions and congratulations on a solid quarter.
The most of my questions were around residual value and you guys have addressed those.
So I guess.
1 thing is.
I think back in 2016 to 17, you kind of gave us an indication of.
I think it was like a 5% year over year decline in residual values or used car pricing to kind of give us just a sense of where your head's at.
So you are resetting your depreciation curve and so forth.
Do you have anything that's that straightforward for us thinking about 'twenty, 2 and where you might be kind of pinpointing expected residual value declines.
Yeah.
John.
So let me start with this year. So we are expecting this year to land kind of up 25 to high 20% range. The first half of this year is up 35 per cent or so above 30 per cent and so we are expecting the back half to start to normalize.
And without getting too specific around kind of 'twenty, 2 and 'twenty 3 numbers, which have lots of work through it and to have a clear view.
But by 'twenty 3 what we've modeled in our our guide is that we do get back to kind of a much more normalized lease yields that we always talked about kind of for 5% to 5% pre games and then add another percent or so.
For games and so we do expect to get back to that much more normalized yield by 2023 now, but as I mentioned there is definitely a bull case out there just as we look at continued demand for vehicles as well as the supply shortages, but we we don't model in any.
Kind of extraordinary results into the guide we have much more normalized.
Our projections.
Okay. That's super helpful. I appreciate that Jim and then GB.
Thinking about you guys had a lot of applications in thinking about your conversion rate and maybe just sort of commentary on what you see going on in terms of underwriting quality across the industry.
<unk>, maybe coming back into the Fray and how you guys respond from a competitive perspective.
Yeah. So I mean, it's been overall pretty balanced competition.
Market as we've seen for quite some time has been in test I think as we've probably talked about for a year or so there's been rumors of <unk>.
Players coming back in but it really hasnt disruptive flow or competition or things that we see are certainly any of the pricing dynamics I mean, if you look at some of our pages in the deck.
Some of the supplemental financial information that we Havent really changed anything in underwriting standards, we've kind of been running the same type of FICO trend same type of focus on our assets tiers of our business because we're generating really really solid returns there I mean, when you think about.
We're now at probably 12 quarters or so of running the 7% plus yield per.
Practically zero rate environment, with very low or benign credit costs. I mean this is this is pretty chunky.
We probably would've expected a little bit more competition that we're seeing but frankly.
We've made it really easy to work with the dealers the dealers know what our buybacks as they know we're not inconsistent in that.
And so part of just having established relationships with 19700 dealers just leads to really attractive originations overall and really attractive yields wherever book and so I, just say I don't mean to sound boring. It is just.
It's always a competitive market, but there haven't been really any big shifts in that universe in which we play them.
I appreciate that thanks, guys you got it thank you.
Thank you. Our next question comes from the line of Betsy <unk> from Morgan Stanley. Your line is now open.
Hi, good morning.
Good morning Betsy.
Hi.
I just had a couple of questions I wanted to ask about the capacity of the current balance sheet to add more loans I know you've been growing loans at a nice steady clip you've got a lot of capital generation, but I'm just wondering from a liquidity perspective do you feel like you are optimized for that or is there room to kind of burn down some of that liquidity.
Incremental lending.
Yeah, Hey, Betsy so on your first question you know resounding, yes, and really across all of our lending categories that you have.
<unk> seen us grow consumer retail auto.
Kind of sequentially for the last several quarters and you see the robust outflow origination flow and we're absolutely focused on continuing to grow our retail auto lending.
Lease as well continues to be a strong point and we don't see any sign of that stopping ally lending is really just getting started so.
So you saw we almost hit 300 million in originations were well on our way to get to a couple of billion in that business and in short order.
Hit our highest level of originations in our direct to consumer mortgage portfolio. So we're well on our way.
$8 billion or so in originations this year climb up to 10 billion from here on out.
Corporate finance continues to be steady.
Steady growth engine, we'd expect that to get to about $8 billion. So I mean across the board, we see opportunities to grow every 1 of our loan portfolios and that's part of the NII guidance NIM expansion, but it's the wholesale growth in the balance sheet and growth across all of our businesses and then on liquidity.
Yeah. The short answer there is yes, as well there's still room to optimize we are sitting with excess cash that we plan to burn through.
3 the growth of our loan portfolios, but also through liability management you you've seen us continue to be proactive at 89% deposits funded but we think that can go higher than where naturally running down our brokered deposits as well as F. H L. P M and some unsecured and secured debt so.
Just.
Continuing to take take down that cash over time, which will help with that NIM trajectory as well.
Okay.
So Daniel clarifying the ally lending is $2 billion annual [laughter], so sorry about that.
Annual 2 billion not quarterly.
Okay, and the outlook that you were giving their debt.
The time frame around those kind of odd.
Opportunities that you're citing is that a next 12 month kind of outlook or is that something longer than that yeah. It. It's over time I mean, we are expect I didn't hit on commercial Floorplan I hit on that earlier in the call, but that that's the big question Mark for Us in terms of how quickly that.
I'll kind of start to grow from here, but my my comments are really over kind of the next 18 to 24 months Betsy.
Okay, Great alright, Thank you very much thank you Betsy.
Thank you. Our next question comes from the line of Moshe Orenbuch from Credit Suisse. Your line is now open.
Great. Thanks.
Looking at the Big increase in originations. The biggest is is what you call the growth channel, which went from 50% to 53, so it kind of.
Accounted for.
Well over $2 billion of growth year over year can you talk about what's driving that is it the partnerships that you've got with some of the newer type players or any other kind of insights that you could give us there.
Yeah, Hey, Moshe, it's really all of the above its definitely growing.
Partnerships, we have and we've talked at length about Carvana that continues to be a very robust relationship, but there's many others in that category as well as just.
Focusing on diversified more traditional dealers.
That have added to that Brown channel as well that's been a deliberate strategy that we've had to diversify access to applications and diversify our customer base and we just continue to see really strong success across all types of dealerships.
Great Thanks and.
I am struck gen by a comment that you made earlier in your prepared remarks about kind.
Taking steps I think.
Given the strong earnings now and obviously some of these things will will moderate and as you pointed out about the dealer floor plan some of them will get better as you go forward.
Could you talk a little bit more.
You've talked about higher levels of cash.
Capital return, but.
Can you talk about other steps to optimize.
Whether it's balance sheet structure or other pieces of.
The P&L or other other types of kind of economies of scale that you could that we could see generating better.
Sustained returns overtime.
Yeah sure I mean, I talked a lot about the optimization that we just delivered and we're not done with that right. So.
The conversation, we just had on retail auto we're going to continue to diversify our customer base continue to increase access to applications and drive strong originations and risk adjusted returns and so out of the retail auto story.
It is to be continued and we see a lot more opportunity there.
In other than the traditional alone at least category, but also in insurance smart auction.
Our direct lending platform Cleo Laine clear path for a lot of opportunities to continue to optimize risk adjusted returns within kind of the for Walter of auto and insurance and then outside of that we talk a lot about liability optimization. That's been just a terrific growth that we've had in deposit.
Net customers.
Built loyalty with them strong retention and we've been able to take down the cost of funds 8 consecutive quarters and we've got you know at least that to come in terms of continuing to take down deposit costs. We have some kind of $20 billion in Cds that are rolling off this year at over 150 day.
At this point and much of that is rolling into a 50 basis point OSA product. So a lot of room, just kind of within the 4 walls of deposits to continue to optimize and then there's a mix component here as well.
As we continue to increase the percent of our liabilities coming from deposits so lot there.
Still to come and you know in.
Many of our newer businesses, we're just starting to accelerate up the J curve, we're seeing accretive.
Accretive returns in mortgage we're getting there quickly and ally lending invest is going to take some time, but we like the synergies across kind of the savings and invest platforms, though.
Really just getting started in terms of the optimization of our newer businesses and.
Then.
Moshe last but not least on capital deployment I think what's great. As you can see just a robust trajectory. We have ahead from organic growth and so we don't need to be in a hurry to deploy that capital. We can be patient we have a great earnings forecast will.
We will be opportunistic on M&A and then under the SCB framework, we can continue to look for ways to.
To optimize our of our capital and our capital deployment.
And with share buybacks, we had a big increase.
Based on where I believe our stock price is going because we have an incredibly strong returns from those buybacks and so we'll continue to look for.
Additional ways to deliver value through a buyback program. So hopefully that gives you some color but in many ways Moshe we are just getting started.
With that with optimization efforts, obviously, a lot completed but a lot more to come.
Great. Thank you and I'll remind folks if you have additional questions feel free to reach out to our Investor relations. Thank you for joining US. This morning that concludes today's call.
This.
Today's conference call. Thank you for participating you may now disconnect.
Yes.
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