Q3 2021 Ally Financial Inc Earnings Call
Ladies and gentlemen, thank you for standing by and walk to the ally financial Q3 'twenty 'twenty.
One earnings conference call at this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time, if anyone should require operator sits during the program. Please press star Zero I would now like to turn the call over to your host Daniel Eller head of Investor Relations you may begin.
Thank you and welcome everyone to ally.
<unk> Financial's third quarter 2021 earnings call.
This morning, our CEO, Jeff Brown, and our CFO Jenn Leclair will review allies results before taking questions.
I'll note that the presentation, we'll reference on today's call can be found on the Investor Relations section of our website ally Dot com.
Forward looking statements.
<unk> and risk factor language governing today's call can be found on slide two while GAAP and non-GAAP or core measures pertaining to our operating performance and capital results are on slide three.
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 turn the.
Call over to Jamie Thank.
Thank you Daniel Good morning, everyone. We appreciate you joining our call today.
We posted another strong quarter of results as all of our businesses continued to be well positioned.
Benefit from a strong and healthy consumer macro environment.
Momentum across our leading.
It says reflects disciplined execution underpinned by our do it right culture.
We're excited to announce the acquisition of Fair square financial a digital first credit card provider, which further enhances our suite of consumer products.
This is a company we have been following for quite some.
Leading them and we're pleased to bring this important product set and great leadership team and to the ally family.
On slide number four we continue driving long term value for all of our stakeholders as was evident in several purpose driven actions taken during the quarter.
Tom on the customer front the cities for financial empowerment on certified our bank on National account status and recognition of our customer first approach, citing our industry, leading action to eliminate overdraft fees.
We also rolled out a refi now.
<unk> product expanding access to underserved populations looking to obtain a mortgage.
For our ally teammates, we increased our minimum wage 18% to $20 per hour and announced all employees will be eligible to receive ally stock.
<unk> third annual <unk> Grant program promoting an environment of shared success and an ownership mentality across the company.
This is an important program to me and aligns every teammate and advancing our mission.
Additionally earlier this year.
Through our named a top 50 place to work by diversity, Inc. Recognizing the inclusive environment, we've nurtured over many years.
Among community efforts, we held our annual mobile center, making student led competition featuring representation from 10 HBC use.
Rene awarded several scholarships and internship offers to the inspiring group of young men and women who participated.
The pride I have in our accomplishments is exceeded only and the confidence I have in our ability to continue driving long term value for all.
All of our stakeholders moving forward.
Let's turn to slide number five where I'll touch on third quarter highlights.
Adjusted EPS of $2 16.
Core Aro TCE of 24, 2% and revenues of $2 1 billion represented.
And our record setting third quarter levels powered by diversifying revenues and solid credit trends.
The credit backdrop remains strong by nearly all measures and the fundamental drivers of allies performance reflect well positioned and dominant auto insurance in ally.
Good platforms.
Our agile customer centric businesses provide us the ability to capture market opportunities in real time evident in our results across the past several years and in our long term outlook.
Within auto consumer originations of $12.
I think <unk> billion and $3 3 million decision applications represented our highest third quarter in 15 years at a really impressive seven 1% yield.
The strength and adaptability of ally platform is clearly seen in our industry leading.
Comprehensive product offerings, and 12 consecutive years of expanding dealers.
Our capabilities and scale distribution enhance our ability to deliver is the broader auto ecosystem shifts and evolves in the near and long term.
Credit.
Three <unk> remains solid with 27 basis points of retail Ncos are lowest third quarter on record, we remain well reserved for the eventual and gradual normalization of losses.
We've maintained a disciplined approach to underwriting and collections increasing.
Credit for use of advanced data enhanced technology, and innovative self service tools for dealers and customers.
But the true strength of our auto finance business comes back to seasoned ally teammates that foster great relationships with our dealer partners and a shared sense.
Are you arrive and winning together.
Overall consumers remain well positioned financially with healthy balance sheets excess savings and strong wage and job prospects. These dynamics helped mitigate the wind down of assistance programs and ongoing inflationary.
Of Retrans.
Impacts of semiconductor shortages, and resulting OEM production constraints resulted in new record lows for industry inventories.
Given consumer demand remains robust, we expect floorplan levels will remain low through the latter.
Later part of next year, which provides ongoing structural support for used vehicle demand and values.
Within our insurance business written premiums of $295 million reflected lower industry sales in floor plan levels. However, ally insurance customers are now.
<unk>, the 3 million Mark.
The $6 $4 billion investment portfolio within our insurance business generated solid revenues and hurricane Ida claims or minimal.
Turning to ally bank growth and expansion trends continued reinforcing.
The scalable nimble nature of our platform.
Retail deposit customers grew for the fifth consecutive quarter and balances expanded to 132 billion representing year to date growth of $7 2 billion.
We continue to deepen.
<unk> customer relationships through our differentiated platform that combines leading award winning digital capabilities with deeply integrated stable and secure bank platforms.
Ally home originations of $3 6 billion nearly tripled compared to the prior year.
Period.
Ally invest customer assets ended the quarter at $16 3 billion, a 42% increase year over year driven by the combined result of market activity and self directed and managed account growth, which surpassed half a million dollars.
Year peer ally lending generated $362 million in originations more than double the prior year level with growth sourced from the healthcare and home improvement verticals as we build out the retail channel.
Corporate finance posted another solid quarter with <unk> balances growing.
$6 6 billion in total balance sheet exposure exceeding 11 billion for the first time.
Performance across each of our businesses reinforces our ability to deliver as we increasingly meet the needs of our engaged customer base.
Turning to.
Growing <unk> performance remains solid across each of the measures shown on the page.
In the upper right PNR surpassed 1 billion again this quarter and annual expansion in the years ahead will be generated by leveraging the strength of our balance sheet and growth opportunities across all of our businesses.
On the bottom right of the page tangible book value per share reached an all time high of $39 72.
Since becoming a publicly traded company seven years ago, we demonstrated a clear ability to build intrinsic and financial value.
Specifically we've expanded.
Slide in revenues over 60% grown earning assets over 20% increase book value over 80% and delivered a transformed return profile moving from low single digits to mid teens RTC.
Turning to slide number.
<unk>, our acquisition of fair square enhances our ability to continue delivering solid results and expanding our reach to even more customers.
Adding a credit card capability has been an important objective for us and today, we're announcing the opportunity to address this key product gap.
This transaction fully aligns with our long term priorities centered around a relentless customer focus solid risk adjusted returns and long term value enhancement.
The mortgage investing in point of sale capabilities. We've added since 2016 are differentiated.
<unk> through digitally compelling experiences positioning us to grow within large and attractive addressable markets.
Adding credit card capabilities, we're introducing yet another opportunity to expand our presence in consumer wallets and drive enhanced returns.
Through <unk>.
Claimed familiarity with their team and our diligence efforts, we are confident in the strong employee culture and values deep management execution and risk management capabilities unique product and positioning in an underserved market and digitally base tech forward capabilities that.
<unk> accretive growth.
Launched in 2016. This management team has several decades of collective experience and credit card marketing underwriting and risk management.
The team has successfully executed a strategy to deliver customer centric.
Differentiated products to an underserved market segment via nimble modern platforms.
While the credit card industry has experienced the pause in growth over the past two years fir squares, all our branded offerings have expanded due to steady customer acquisition and underserved market.
But our dry welcome the fair square team to the ally family and I am excited for what we will do together in the months and years ahead and with that I'll pass it to Jen to walk through a few other details on the transaction and our overall third quarter results.
Thank you JB and good morning, everyone. Thank you.
You just heard we are excited to announce the acquisition of ferrous square given the natural state with ally and our strategy. This transaction enhances our runway for ongoing momentum as the leading and largest digital bank in the U S.
On slide eight we've provided highlights of their platform and operating approach.
Sure square builds around the customer familiar concept at ally focusing on digital product engagement and delivery and generating satisfaction scores consistently above 90% and NPS in the mid fifties.
The highly rated products are differentiated through straightforward offering.
Offerings seamless platforms, and our brand promise of no surprise beat.
The brand and value proposition resonate with consumers and present, a compelling opportunity across a large underserved market.
100% of applications are completed digitally and 90% of.
Fair square customers engage digitally each month.
A snapshot of end market offerings can be found in the appendix demonstrating the team's efficient launch of several products over the past four years.
Sophisticated proprietary risk management and marketing strategies are powered by integrated technology.
<unk> data and analytics deeply rooted in the management team's extensive experience.
Growth trends shown in the bottom left have been robust accounting balanced CAGR of 66, and 74% since 2017 highlight the success of customer acquisition and loan growth trends outpaced.
Pacing elevated industry payment rates and lower consumer spend.
These trends position fair square to accelerate growth and profitability as they rapidly exit the J curve.
The early scalable nature of this platform and aligned approach are complementary to our existing ally bank consumer teams.
And the DNA of our company.
Standalone after tax ROA of 5% incorporates mid teens risk adjusted margins defined as total revenues less credit cost an estimated seasonal impacts representing attractive economics.
Once closed we expect the transaction.
Accretive to earnings by late 2022, and two full year 2023, while adding 100 to 150 basis points to our returns as we organically grow the portfolio.
In addition to the accelerated growth opportunity as a cross ally, we will realize deposit funding synergies.
And to be replacing wholesale funding, we're adding a highly aligned customer centric growth engine that means all of our capital allocation criteria.
Including delivering customer value through differentiated products and services and accretive and aligned risk return profiles and the ability to enhance long term value for.
She is by all of our stakeholders.
Let's turn to slide nine to review our strong third quarter results, we generated core pre tax earnings of $1 billion for the third consecutive quarter net financing revenue, excluding OID of $1 6 billion reached the highest level on record for.
For the second consecutive quarter growing 33% year over year.
Our NII and NIM expansion trajectory continues to be powered by stable, earning asset yields reflecting accretive retail auto trends and elevated used car values.
Further enhanced by optimized funding costs as the benefits of.
For all deposit growth permanently reduce our dependence on higher cost alternatives.
Our balance sheet uniquely positions us to overcome the headwinds of a flat rate curve.
Adjusted other revenue was $507 million, reflecting another solid quarter of investment gains and diversified.
Revenues from smart auction ally home invest and insurance.
As indicated last quarter.
We repositioned $52 million of OID expense associated with the retirement of our trust preferred securities.
Provision expense of $76 million increase seasonally.
Remaining well below normalized levels as overall credit performance remains exceptionally strong.
Noninterest expense of just over $1 billion reflected our continued focus on essential ism across the enterprise as well as investments in business growth and new capabilities.
GAAP and adjusted EPS for the.
Quarter were $1 89, and $2 16, respectively.
As previously indicated we've embedded normalized trends in our outlook for used car values and credit trends in 2022, and 2023, and we continue to highlight the permanent structural improvements across our balance sheet and leading.
<unk> growing businesses.
Moving to slide 10, net interest margin, excluding OID of 368% expanded 11 basis points quarter over quarter, and 101 basis points or 38% year over year.
Earning asset yield of 468%.
Remained stable quarter over quarter, and average, earning assets of $172 5 billion reflected ongoing retail auto expansion growing lease balances and yields aided by elevated used car values increased ally lending and ally home balances and the ongoing redeployment.
With liquidity.
These dynamics offset headwinds from prepayment activity above target liquidity levels and reduced floorplan balances stemming from robust consumer demand and persistent supply constraints.
2021 remains on track to.
Our fourth full year of retail auto origination yields at or above 7%, while we expect used car values to rise by over 30% year over year.
Yeah.
Turning to liabilities cost of funds improved 12 basis points, the ninth consecutive linked quarter decline.
We remain confident in our ability to grow net financing revenue and sustain net interest margins well above 3% in both higher and lower rate environments, given balance sheet strength and positioning.
Disciplined asset growth over the past several years reflects our focus on differentiated products and services.
<unk> for our dealers customers and clients, which we expect to continue across all our businesses over the next several years.
Stable sticky deposits at ally Bank now represent 90% of overall funding more than double the 2014 level.
We remain.
Well positioned for a variety of rate environments, and expect improved price elasticity as a result of the industry, leading loyalty we've built over the past decade, and growing engagement generated through our suite of digitally based financial products.
Turning to slide 11 CET one.
Of 11, 2% remained nearly 220 basis points above our internal target equivalent to $3 1 billion of excess capital.
We are on track to execute our full $2 billion buyback program in 2021, and recently announced the Q4.
Mainland of 25 per share.
Capital deployment actions over the past several years demonstrate our disciplined dynamic approach and consistent priorities shares outstanding have declined 28% since we initially initiated buybacks in 2016 and we've increased.
<unk> our dividend on six occasions over this same timeframe.
During the quarter Moodys upgraded ally, bringing us to investment grade at each of the major rating agencies. Another testament to the fortitude and strength of our company.
Upon closing the Farragut square.
<unk> acquisition will utilize around 50 to 55 basis points around one quarter of our excess capital.
On slide 12 asset quality remained very strong consumer and commercial portfolios continued to exhibit historically strong performance.
<unk> net charge offs of 19.
At this point, we're less than half the prior year and less than 25% of 2019 levels.
Retail auto performance reflected solid payment trends and improved loss given default rates.
We expect full year 2021 retail Ncos in the 30 to 40 basis.
At this point range well below the one four to one 6% range, we underwrite to and reserve against.
As we've noted on several occasions, our financial outlook contemplates a steady migration back to normalized levels by 2023. So this could be extended given the continued.
The strength of the consumer.
In the bottom right early and late stage delinquency trends moved seasonally higher but remain solid overall and encouraging leading indicator heading into year end in 2022.
On slide 13 consolidated coverage.
<unk> of $2 seven 5% reflected growth among retail auto point of sale and mortgage portfolios.
Retail auto coverage of 362% moved lower by eight basis points quarter over quarter as trends generally improved across consumer health and macroeconomic measures.
We continue to actively.
<unk> monitor a broad range of variables that may impact credit performance and remain confident our reserves are well positioned for a variety of economic environments, including downside scenarios.
On slide 14 total deposits ended at 139 billion.
Reflecting Q3 retail growth of $2 4 billion as customers consistently keep their money and grow their balances with us.
We added 54000 customers with over 70% from younger generations, who demonstrate a higher propensity and desire to engage digitally.
Customer retention remained industry, leading at 96% and balance retention trends not shown here remains stable to growing within each annual vintage.
Underlying growth in our multi product relationships continued in the quarter offset by a practice of removing accounts with limited.
Limited or no activity over a six month timeframe, which we believe is a more accurate portrayal of engaged active customers.
This impacted our reported multi relationship metric, but excluding this adjustment we observed net growth for the 18th consecutive quarter, which we expect to continue moving.
Moving forward.
Turning to slide 15, we grew customers and balances across all our digital bank platforms, we've acquired customers at a 19% CAGR over the past decade, cultivating loyalty and satisfaction and expanded relationships through a convenient.
Straightforward offerings.
Ally invest and ally home continued to derive significant accounts and volume activity from existing depositors, while the steady expansion of ally lending point of sale offering remains a bright spot for growth in a rapidly expanding market.
Our formula for success.
<unk> positions us well as we had credit card in the months ahead.
Okay.
Moving to slide 16 auto segment pre tax income of $825 million reflected the strong platform. We've built over many years and was driven by net financing revenue growth from ongoing optimization in the consumer portfolio.
Folio and strong used values.
Expansion of smart option and clear path and solid credit performance.
Retail portfolio trends shown in the bottom right highlight the continued strength and risk adjusted margin trends driven by solid origination yields an NCO performance.
Turning to slide 17, we constantly adapt to dealer and customer needs evidenced in our multiyear growth of dealer relationships and our ability to source and originate loans in a competitive environment.
In the upper left we surpassed 20000 dealers, who purchased one or more of our.
Our auto products across consumer and commercial lending smart auction and commercial services lending an important differentiator for ally as we deepen relationships.
In the upper right and in consumer assets expanded to $88 7 billion, driven by retail and lease portfolio growth.
Average.
Commercial balances ended at $13 9 billion as industry inventories that he knew multi decade, low driven by strong consumer demand and supply chain constraints.
We continue to see broad based health among dealers evidenced in strong profitability due in part to lower inventory.
Sorry carry costs and strong demand and pricing for available supply.
Auto originations of $12 3 billion represented our highest third quarter since 2006, while we've maintained a consistent underwriting approach.
Turning to insurance.
On slide 18.
<unk> core pre tax income of $89 million increased quarter over quarter and year over year in the bottom left the $6 4 billion investment portfolio continued providing diversified revenues that enhanced segment and consolidated returns.
Total written premiums.
Of $295 million reflected prevailing low floor plan levels and corresponding decrease unit volumes.
We remain focused on leveraging our large dealer network for future growth through our holistic offerings.
We actively assess pricing across our products staying mindful of inflationary impacts.
<unk> on vehicle repair and maintenance costs.
Turning to slide 19, corporate finance core income of $60 million, reflecting asset growth strong syndication on investment income and solid credit trends.
<unk> balances ended at $6 6 billion the highest levels.
He is on record and unfunded commitments of $4 6 billion position us for ongoing revenue and loan growth.
Portfolio credit performance remained strong and inline with expectations, allowing us to reduce coverage by 12 basis points.
Mortgage.
Details are on slide 20, pre tax income of $6 million reflects direct to consumer volume growth and asset expansion, partly offset by a shift from hff's to HSI normalizing gain on sale margins and persistently elevated prepayment trends.
Ally home direct to consumer originations of $3 six.
Again affirmed our expectation to surpass $10 billion and volume. This year ahead of schedule as our compelling digitally based experience continues to resonate.
On Slide 21, we've included our financial outlook again this quarter.
R O T C for 2000.
Bill one excluding reserve releases will exceed 20%, reflecting strong P. P in our trends and solid credit performance.
We've also layered in the return expansion, we expect to generate in 2022 and 2023 associated with the acquisition of Fair square as I noted earlier.
'twenty, we've captured upside opportunities in a uniquely strong environment, we're operating in this year <unk>.
Importantly, our enhanced and sustained return profile in the mid teens provides a clearer view of our broader objectives and significant progress.
These results will be fueled by revenue driven.
We and our expansion reflected in the mid to upper 3% NIM outlook and diversified other revenue generated among our established and brought in consumer offerings.
As a reminder, we assume modest investment gain activity, but we'll remain opportunistic in the years ahead.
Keep your outlook incorporates balanced competitive and operating environment assumptions, including normalized trends across used car prices credit and deposit pricing.
We're confident in our ability to continue driving near and long term benefits for all of our stakeholders and with that I'll turn it back to JB.
Thank.
I'll close with a few comments on slide number 22.
Our results remained strong.
Our purpose and cause resolute.
The outlook for continued success remains clear and achievable, we built a compelling growth company upon the foundations disciplined.
Execution, and clear prioritization of meeting customer needs through differentiated products and services.
With a new exciting chapter of growth now in front of US we will continue to execute with a focus on the same values and priorities.
<unk> is well over <unk>.
Thank you Josh.
And with that Daniel back to you I mean, we can head into Q&A. Thanks, Jamie So as we head into the Q&A I'll ask participants to limit yourself to one question and one follow up operator, I'll turn it over to you to begin the Q&A.
Our first question comes from Bill Clark Archie with Wolfe Research.
Thanks, Good morning, I appreciate you, taking my questions J D and John.
I wanted to turn to.
Good morning, I wanted to follow up on your comments.
All the detail you provided on the first square deal, that's certainly smaller and more digital in nature.
Then.
The prior deal that you guys had announced does this.
This provides you with enough of a platform to organically build build out the credit card business or should we just think of it as a sort of a starting point that you'd look to add through <unk> through other inorganic opportunities over time.
And in terms of outlook.
100, 125 basis points.
Seems it seems like.
Certainly quite impressive, but given that the card businesses.
Such a high ROE business it would seem like there could be if it continues to grow there could be some longer term potential for for greater accretion to the extent that you guys continue to grow that business, but love to hear your thoughts around that.
Yeah sure good morning, Bill I'll jump in and Jamie may want to add but so first on your question around the platform. So.
<unk> square is through the J curve and they've established for meaningful product and you can see how successful they've been with those products.
60, plus.
Is sent account active account growth and over 70% loan growth and so bringing them into the ally ecosystem really just gives them more fuel to scale, what they've already built and we have very high confidence that they continue to grow at these levels and.
Also note that we have not included synergies across kind of the whole broader nine plus million dollar customers that we have within the four walls of ally here. So.
So the short answer to your question is yes, they're platform is absolutely poised for growth and you can see that in their historic results and we're expecting to see continue.
First is growth out in the future and then relative to the accretion. Yeah. This is the kind of business that takes them a painful growth math just with Cecil.
So we could certainly increase and accelerate the accretion on both EPS as well as our O TCE in the near term, but the.
Continue to feel quite frankly, it would be longer term accretion over time, so we want to give them access to liquidity and capital to grow as quickly as they can.
We're very confident in the 100 150.
Basis points of our O E R. A T Z in the next couple of years.
But that also takes into.
Trade relation the growth math on seesaw, which we can toggle up and down but we really just want that want to focus on the long term here.
And Jamie I don't know if you want to add in anything so I think jenn I think you framed it perfectly.
The other thing I'd, just say, obviously really no surprise.
The card has been an area.
Consider interest for us and so we examined a lot thought about a lot. But this is also a really really good.
Management team. These are card experts grew up in card.
Wanted to do something out on their own but theres a lot of really strong foundations in industry.
Area of our Ts what sits within the leadership team and so I think all sides are really excited about what this can mean going forward, but as John said, well. We're pleased really about the state of the business today, but I think we see much broader opportunities to scale this business up going forward.
That makes a lot of sense and it's very helpful.
If I could follow up separately with another different question on funding and understanding that you.
You want to continue to offer a healthy premium on deposits relative to the more traditional banks.
How significant does that premium need to be is there still some room for your cost of interest bearing deposits to continue to migrate lower from here and then.
By extension I know, you said jenn mid to upper 3% NIM, but is it fair to say that there is a bias towards the upper end of that range.
If you could give some thoughts around that thank you.
Yeah sure. So on the funding side failure, absolutely right. There's a long runway to continue to bring down the overall overall.
Overall cost of funds for ally below 1% and I talked about the nine consecutive quarters that we've had of lower funding costs and that will continue as we head into 2022 and as you're pointing out really fueled that NIM expansion.
And a lot of that is related to Cds repricing that the.
The industry in the sector is largely in our Florida OSA had about 50 basis points, but we still have Cds rolling down and then outside of deposits, we still have opportunities to rationalize mix and costs.
So youll see a long runway there.
Yeah, and then just in terms of the overall NIM.
Yeah. There is an upside case, there and so we've been guiding towards kind of three to.
3.5% to 4% and I think with the acquisition of ferrous square it gives us some additional NIM tailwind here. So I think there absolutely could be an upward bias to the high 3% as we head into 'twenty two and beyond.
That's really helpful. Thank you for taking my questions.
Thank you Bill Thanks Bill.
Our next question comes from Sanjay Saar Kearney with K B W.
Hey, guys.
My first question just following up on fair and square I was wondering if you could just talk about how you expect to focus that business sort of the.
And market today are in that FICO band range that you guys mentioned on the slide but do you envision to go more up market.
John you talked about cross selling it potentially to your customers and would that bring down the ROA of the business. Maybe you could just talk about that and maybe also.
Tie that into some of your other consumer.
Finance lending.
Initiatives. Thanks.
Sure.
Yes. So thanks for the question Sanjay So first on the target market, they've largely been focused on a middle class customers. So think about a customer without a $70000 income.
And that 660 FICO average level.
And what they have seen there is a largely underserved market and that's why they've been able to grow so aggressively through difficult current environment and so our priority number one is to allow them to keep their focus on.
On that segment and on the unique opportunities they have to grow.
And then above and beyond that we do think that they have full spectrum underwriting capabilities with their digital platforms. Their data driven capabilities. We do believe that they have the capabilities to go more broad base.
And full spectrum.
As I mentioned, we haven't modeled that into two the impacts that we provided this morning, but that would be upside opportunity and then just as you think about that 5% ROA.
Yeah, we we've contemplated some some gross scenarios there.
If.
If we did go up market there could be a little bit more pressure on that are away, but overall it should be very accretive to ally.
Think about where we're running today and and as we think about that cross sell it it certainly in the bank but.
Opportunities within the auto segment as well, so we're really thinking about bringing there.
This product on into the broader ally ecosystem and not only do we think that there's cross sell of card, but as we generate more card grows there is opportunity to cross sell some of our other products into the into the card business. So a lot of opportunities here I think we've been pretty modest in the projections we provided.
And we're really excited.
Okay, and then just to follow up turning to the auto business.
Maybe you could just talk about how 2022 might be setting up from an origination standpoint, obviously the line too.
Might be establishing its own captive so you've got some more competition.
There, maybe just broadly speak on the set up and you have the supply chain issues.
Don't know if anything's changed in your outlook, but if you could provide some guidance that would be great.
Yeah, sure and Sanjay I think we highlighted in our prepared remarks, how strong auto continues continues to perform with them.
Hi.
Highest application flow, we've seen in 15 years highest origination flow for third quarter, continuing to see really strong pricing with yields at 710 and full year at 7%. So you can see just in our performance that the market is continuing to perform and our position in the market is.
Performing as we look into 2022, and we'll provide a lot more details as we get into January but we're still expecting to see really robust application flow and robust originations likely in that 40 billion, maybe not quite to 45, so there could be some modest reductions but overall.
<unk> continues to perform exceptionally well.
We don't see any signs of that stopping based on market trends, but also our position in the market continues to strengthen with our 12 consecutive year of growing dealers as well as continued increase in that outflow.
So we're feeling really good about that.
So David the only thing I would add obviously still lantus sort of doing what they did I don't think that realistically presents any.
Change for us anytime soon.
Long term.
There'll be implications, perhaps but obviously.
ARPA.
Offices on taking care of the dealers, we have incredibly strong dealer relationships.
I see why the rationale of why they did what they did but I don't think it really changes anything for them.
What we're thinking about in terms of originations or relationships for anytime soon.
Thank you.
Yeah.
You got it thank you Jay.
Our next question comes from Rob World Heck with Autonomous research.
Good morning, everyone, one more on <unk>.
5% run rate ROE as you highlighted in the slides does that take into account the cost of funds benefit from being part of the alloy and what kind of credit environment.
Because there isn't that number.
Yeah. Good morning, Rob It does take into consideration a lower cost of funds as we bring fair square into ally. So there are some synergies there.
We overall think that 5% is is a is a very reasonable number just as we grow them.
Considering the portfolio and again it doesn't include a lot of synergies that we see from a growth and a revenue perspective.
Yeah.
Okay and should we just consider like a normalized credit environment as the underlying assumptions that yeah.
Yeah on that on the credit environment they.
As we have been outperforming I think similar to other players in the industry, we would expect that to normalize kind of into a 6% to 8% range.
Range over time, and we do include all of the T cell mass in the guide that we've provided the transaction highlights here, but we would expect that to normalize Rob.
From where they are today is simply with the outperformance.
Got it and then on the floor plan business was was the decline this quarter in line with your expectations and when you say lower through the later part of 2022 is that a meaningful decline from here or do you think we're geared at all.
Yeah, I mean, Rob every time, we think we've kind of plateaued, we decline a bit more so we're now a floor plans under $8 billion, that's down about 50% on a year over year basis, and that's due to all of the supply chain constraints and the complexities around chips, but it's also reflective of a very strong consumer.
So demand is also driving the inventory levels lower.
I will say.
I think late 'twenty two early 'twenty three is when we would expect that to normalize and I think some of that chip dynamics can be sorted out I think the big question is how strong demand will be as we continue.
<unk> into 'twenty, two and 'twenty three and just to reiterate we have not built any of kind of the natural hedges upside that we have in used vehicle values and LGD and our credit as you look at that guide so to the extent that floor plan stays lower consumer stays stronger.
If anything Rob there's there's.
Consumer side to the guide that we've provided in 'twenty, two and 'twenty three.
And Rob maybe the only just touch to add I mean, what we're hearing from a lot of the dealers right now certainly a lot of the big names. They are pre sold four to five months out on new cars coming in and so to Jim's.
That's just going to keep this continued pressure on inventories grow in anytime soon.
That's very helpful. Thank you.
Thank you Ram.
Our next question comes from Betsy <unk> with Morgan Stanley.
Hi, good morning.
Good morning Duffy.
Points.
Really interesting acquisition wanted to just dig into the excess capital point you were making so the acquisition is taking up about I think you mentioned a quarter of your excess capital. So as we have to think about.
How do you think about the rest.
Is this hey, we're going to hold onto it because we're gonna grow this card portfolio at a rapid.
Decent clip so we want to hold some of that or you know you're generating a lot of excess capital every quarter. So do we take the raft and buy it back.
Or is it.
You know held for some of this continuation of the retail auto loan growth just want to understand how youre thinking about that at this stage.
Yeah, that's it and you're right, it's about 25% of our excess capital and I think the short answer is it's all of the above we're going to continue to organically grow the balance.
And and that's really across every single one of our portfolios, it's reaching a lot of it leaves us to the Floorplan question that will come back over time, we're going to grow.
Our ally lending business will grow fair square in our credit card business and so it's really all of the above it's first and foremost continuing to.
She'd customers and grow our balance sheet.
And then you've seen that we've distributed significant amounts of capital through buybacks and the dividend and we'll continue to look to to distribute capital in that regard as well. It's it's really a full portfolio of opportunities that we have ahead of us and we're not in a.
A survey, we still have a great Aro TCE guide without rushing to deploy that capital.
But really no change to how we're thinking about our overall priorities on capital allocation.
Yeah, I guess the reason I asked the question is.
Theres been some thought that you would use the capital strategically.
Hurry, we you know in this manner and now that you have the card acquisition.
When it closes done and dusted you know do you do you hold the excess capital or do you get to that optimized capital.
Level of our capital ratio that you've got a target I ask because your.
We're generating a lot of excess capital every quarter and really I forgot. One question is can you fund your your growth with.
You know your earnings or do you want to lean into growth more aggressively buy it by holding that excess capital to fund. It I guess, that's what that's really the question.
Yeah, Yeah, I mean, it's it's Greg.
Great question, and we're working through that as we go through our strategic plan right now and you're right. It is 25% of the access is actually three months of earnings that we're deploying through this acquisition and so theres still a lot of dry powder here.
We're pushing every one of our businesses to think about growth.
In a different way to think about unconstrained growth.
Think about how we can be more creative and innovative in the marketplace and it's not only growing our balance sheet at looking at technology investments and marketing investments and just to your point Betsey really taking a look at where the opportunities are and smartly deploying that capital. So we increase growth and returns.
Great question.
We will work through this capital I mean, this is 25% of our access and as we grow.
Through the next few years, we will work through it it's just going to take a bit of time.
If I could just get one more in on mortgage I know you have a better dot com relationship wondering.
If you could speak to how you think that's going to <unk>.
The impact of U as we migrate from refi heavy to more purchase skewed mortgage environment.
Yeah.
Relationship is going very well and you saw that we had our highest origination.
Nation flow this quarter and in the history of our mortgage business.
And we're really finding that that digital platform and the strong customer value and NPS scores are resonating across a wide variety of consumers in terms of the shift.
From refi to purchase.
<unk>.
That presents opportunities for us.
We have a very agile platform and I think if anything what you see as more of a shift to HSI, just with higher ticket purchases and seeing a strong consumer, especially at the high end and more of a shift to <unk> is what we're seeing right now but.
But we really think that we're well positioned.
As we head into a a purchase market simply because of the strong value proposition that we provide.
Got it thank you.
Thanks Betsy.
Our next question comes from Rick Shane with JP Morgan.
Okay.
Thanks, guys for taking my questions. This morning, I'd like to talk a little bit about the competitive environment on the origination side historically.
Historically when our sales.
Sales are soft we see the captives come in and basically subsidized financing.
Im curious if youre seeing any effort.
Captives right now to basically capture premium as a way to enhance their economics.
In an environment, where supply and demand of new cars is so out of whack and then also to follow up on that are you seeing any entrants from sort of the private equity world given.
By the.
Really compelling economics and auto finance at the moment.
Yeah, I'll start and Jamie may want to jump in here, but just on your question on cap is a wreck, we're actually seeing incentives come down because car demand is so high that they haven't needed to needed to provide any subsidies.
To Jamie's point, the backlog and people are purchasing cars out kind of six to 12 months from now so they haven't needed to provide those incentives are those rebates to really create that demand because demand is so strong.
So the short answer to your question is no we're not.
Not seeing that.
Just in terms of the overall environment, including private equity, we haven't seen any major shifts there and I think that's because we play predominantly in that Prime segment and J B made the comment last quarter that it's kind of boring and our segment. It is kind of boring I mean, we were the number one lender in prime we have.
It is very high as strategic moat around our business because you need very sufficient.
Sophisticated underwriting and servicing capabilities, it's hard to enter its kind of outside of the risk profile of more of the regional bank model.
So we just continue to see very strong application flow and ability.
A originate in that space and it hasnt been disruptive from.
Yeah movement around captives or private equity and last but not least we're really seeing dealers.
Thrive in this end market and the percent profitable dealers is kind of 95 plus.
And so not only are we seeing strength in ally, but all of the the 20 plus thousand relationships that we have with the dealers are also very strong.
Hey, Joe if I can reframe that question slightly so.
Totally understand that incentives are way way down I'm just curious when.
<unk> look, particularly our franchise dealers when dealers look at their economics, and they can make money selling cars. They can make money financing cars.
I'm just curious if they are.
Steering more towards captive finance is way to actually pick up some of the economic.
When do you mix that they just can't capture full recapture on the retail pricing at this point.
Yeah no.
And in fact, it's hard to do that right now simply because there's not a lot of new vehicles. Most captive financing is around new vehicles. If you look at just even the percent used to that we've generated its the highest level in history from.
Economic per cent perspective, and so as dealers are leaning more into us, it's actually become harder for them to generate income from captive financing.
Which is largely again around the new vehicle.
Yes that totally makes sense. Thank you so much thank.
Thank you rod lift for.
For next.
A dollar and it comes from Moshe Orenbuch Credit Suisse.
Okay.
Okay.
If you are out there.
Yeah.
Operator, let's move to the next in the queue.
Our next question.
Next question question comes from Kevin Barker with Piper Sandler.
Good morning. Thank you. Thanks for taking my questions I just wanted to follow up again on fair Square I mean, you mentioned, a 5% run rate ROE which implies.
It seems maybe $35 million to $40 million earnings and then you outline also it's accretive to return on equity.
In 2022, 2023 of 100 to 125 basis points, which would imply well over $100 million in earnings.
Could you reconcile how you would get to that.
The run rate earnings today versus.
The guidance for over 100 basis points of ROE expansion.
And maybe 2023.
Yeah. Thanks, Kevin for the question, yes, so on the R. A T C that the deal is actually immediately accretive simply because we're putting 25% of our excess capital to work. So there is a denominator effect there on the Aro TCE. So think about day, one we're accretive as you look.
E P S. It takes.
Just a little bit longer and we'll start to see EPS accretion and kind of the back half of 2022 and then no.
As we as we indicated for full year 'twenty 'twenty three but that's essentially the different it is the denominator effect on the CET one.
Okay.
And then.
When you think about the potential earn back from this acquisition, what's your estimate of the earn back on tangible book value given the earnings outlook that you see today.
Yeah, and so that's kind of comes back to the seasonal math question. So the earned that can be very quickly quicker if we weren't.
Werent growing us, but based on our.
Focus on growth, Kevin I'll, probably take about five years.
Two to achieve the book value earn back and again, that's simply because we upfront a lot of seasonal costs or is it regarding the card portfolio, but.
We really think that we acquired a growth company at kind of a value.
You earn back period.
Even within the 5%.
Now.
I would assume that you thought.
I would assume that the.
The earn back you would theoretically have on a build out versus a purchase.
With a lot longer is that the.
The assessment that you made that you would rather purchase the capabilities and.
Utilize the management team that's in place rather than build out.
Central card product is that right.
Yeah, absolutely, we really think we got the best of everything here, Kevin because we were buying a company.
And that's largely through the J curve.
It makes sense for them to choose to be part of the bank as they think about scaling leveraging funding.
Funding synergies leveraging our brand our 9 million customer ecosystem. It makes perfect sense for them to kind of come with inside four walls of the bank makes perfect sense.
Because the painful part of the J curve is over and so we can acquire a growth company without having a PE multiple.
Huge multiples of book and we can still accrete.
EPS in short order. So it so like I said I I really feel like we bought a growth company with a more mature company.
We're all kind of earn back period and again. This is three months of earnings and about a quarter of our excess capital. So we feel great about the investment that we've made and you've kind of heard some of the earlier questions around well.
What else are you going to do what are the other opportunities to grow and we feel like this was a great step two.
Kind of a growth and our earnings.
TCE trajectory Kevin.
Okay. Thank you Jonathan.
Thank you.
Our next question comes from Jonathan <unk> with Evercore ISI.
Good morning.
Good morning.
It seems like you're a little more color on your 2000.
Advanced aren't too although expectations I heard you in terms of the production.
Expectation that you mentioned that Sanjay.
How would you how would.
Do you think that would interpret into auto loan Outstandings as you look at 2022, and then separately around.
Your auto prices assumption.
Twitter to retail auto yield curious, how you're thinking about that as you look at 2022.
Yeah, and you know theres strong originations translates into strong balance sheet growth and so it's just as you're seeing retail auto outstandings grow we would expect that into 'twenty two and beyond.
John and and the same on lease rate, we're seeing really strong originations in the lease space that we would expect both our loan and lease retail auto portfolio is to grow.
It really robust yields I mean, this will be our fourth year in a row at 7% yields we're not seeing a lot of pressure on pricing right. Now so we're not going to give a specific.
If a guy just yet, but I'd say the trends are really positive around continued.
Origination strong origination flows standing balanced growth at robust pricing.
And then.
On the commercial side, that's where there's a bit more of a question Mark in terms of when the when does.
Truly turn.
Jamie you had mentioned late 'twenty two into 'twenty three I think the the positive. There is we have all these natural hedges from an income statement perspective, so it's a net positive either way for us.
But feeling really good about the outstanding growth to your question as well as a robust yields going forward.
And by the way in our guide for 'twenty, two and 'twenty. Three we've we are modeling much more normalized expectations versus what I'm sharing right now so if anything there's a bit of an upside there.
Got it okay. Thanks, and then as you look at the non auto businesses ultimately when we do see that.
The order picture begin to moderate.
How would you characterize your where you think the best growth prospects exist right now within Allied to help offset the abatement that you could see on the top line is auto begins to normalize further out.
Thank you.
It's actually explain the fair square acquisition right, there, but I mean, we see a really robust growth opportunities across every single one of our portfolios and you know you see mortgage really picking up that refinance but also purchase and we will see that mix shift, but we will see strong balance sheet and gain on sale margin opportunities.
In mortgage.
Definitely the unsecured space is one that we're seeing robust growth, we had our highest originations in ally lending this quarter seem really strong opportunities in retail as we scale that further scale, our home improvement vertical and health care and ally lending Fair square.
It obviously offers us robust growth opportunities. In addition to ally lending and in corporate finance continues to be a steady steady growers. This whole notion of diversification is what we've been focused on.
We're really pleased this year to see every one of our business is scaling up ahead.
Spectation.
And a really bright future ahead, not only for our existing businesses, but fair squares as we bring them on as well.
Alright. Thank you sure. Thank you John do you everyone that brings us to the end of the time today. We appreciate everyone joining and would remind folks to reach out to investor relations with additional follow ups that you may have.
But Kevin I'll hand, it back to you to close the call.
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.
Thank you.
Thank you.
Okay.