Q4 2021 Ally Financial Inc Earnings Call
Good day, and thank you for standing by welcome to the ally fourth quarter and full year 2021 earnings conference call. At this time all 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 one.
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 over to your speaker today, Daniel Eller head of Investor Relations. Please go ahead.
Thank you Gigi and welcome everyone to ally Financial's fourth quarter and full year 2021 earnings call.
This morning, we have our CEO , Jeff Brown, and our CFO , Jim Mccaughan here to review allies results before taking questions.
I will note 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 and risk factor language governing today's call can be found on slide two and GAAP and non-GAAP or core measures pertaining to our operating performance and capital results on slides three and four.
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 Jamie Thank.
Thank you Daniel Good morning, everyone and thank you for joining our call today to review fourth quarter and full year 2021 results I'll begin on slide number five.
Allied generated outstanding results in 2021.
Incredibly proud of the efforts and dedication.
Of our more than 10000 teammates who delivered yet another year of innovation and focused execution.
Over the past two years, we've experienced a profound shift in consumer demand and expectations for seamless digital first banking products in response to COVID-19 related challenges and advancements in technology.
Ally is leverage these broad based secular trends to strengthen our position as a disruptive growth company guided by our winning formula to do it right for our customers employees and communities.
Full year adjusted EPS of $8 61.
Core Aro TCE of 24, 3% and revenues of $8 4 billion.
<unk> represented record setting results and evidence of the leading auto insurance and digital bank platform, we built.
Momentum generated across our businesses positions us well to continue unlocking franchise value in the years ahead.
Our recent acquisition of Fair square the latest digital first capability, we've added to our product suite will further enhance our trajectory.
We closed the transaction in December ahead of schedule and are well underway with the integration.
Looking at auto results, our dealer networks expanded for the 12th straight year in 2021, generating $46 3 billion of originations our highest level since the early 2000.
Source from a record $13 million decision applications.
This was our fourth consecutive year of origination yields above 7%.
Demonstrating our strong competitive position.
Disciplined underwriting and leading dealer and customer service capabilities.
Credit losses remain benign with 31 basis points of full year retail auto net charge offs.
Our leadership position within the auto ecosystem is clear across these metrics affirming the strength of our team and the success of our multi pronged strategy to broaden the dealer network and generate solid volumes and accretive risk adjusted returns.
The strength and agility of our business model and a wide variety of operating environments is evident in our performance over the past two years as we've successfully responded to strong consumer demand high used vehicle values and reduced inventories.
We've earned our market leading position by driving customer value over the long term and we remain focused on achieving continued success as we navigate change in the years ahead.
Across our consumer and commercial portfolios credit remains very strong supported by robust job prospects ongoing wage expansion and the strongest customer balance sheets observed in decades, all of which help mitigate inflationary dynamics.
While the pace of credit normalization remains up for debate, we've taken a balanced approach in our reserve process under review that normalization will occur gradually over the next two years.
We proactively enhance the use of advanced data automation and digital tools, increasing customer engagement.
And strengthening our ability to mitigate losses.
Between 40% and 70% of our auto customer interactions occurred digitally each month, increasing speed and effectiveness, while creating a strong customer experience.
Within insurance, our compelling value proposition for dealers and consumers is evident and written premium volume of $1 2 billion for 2021, as we expanded dealers and customers.
Our investment portfolio grew to $6 5 billion, the highest level since becoming a publicly traded company reflecting years of steady written policy growth.
Turning to ally bank growth accelerated again this year aligned with the increasing momentum toward a digital first world.
As the leading all digital and customer centric bank, we've established a scalable platform differentiated by the personalized seamless modern banking products, we are delivering.
We generated our 13th consecutive year of customer and balanced growth as our customer base expanded 10%, while total deposits grew to 89% of funding.
Within our digital first consumer offerings ally home originations of $10 4 billion or more than double the prior year level.
Ally invest customer assets exceeded 17 billion is self directed and Robo accounts grew to 506000.
Ally lending volume of $1 2 billion more than doubled and was powered by a 37% increase in merchant relationships across our healthcare and home improvement verticals.
Fair square balances closed the year at $953 million, an increase of 25% since announcing the acquisition in October and 66% year over year, reflecting.
<unk> strong customer acquisition consumer spending trends and the scalability of the payer square approach.
And within corporate finance AFI balances of $7 8 billion grew nearly 30% year over year through a combination of increased new loans and normalizing drawdown activity among our clients.
Our CF portfolio, including unfunded commitments now stands at $12 7 billion, which highlights the success we've had in growing this business.
As a result of our strong financial position, we were pleased to recently announce a $2 billion buyback authorization program for full year, 2022, and a 20% dividend increase to <unk> 30 per share.
As we turn to slide number six I will reiterate the view I've shared on many occasions regarding the link between values and results.
I am confident our record setting performance and ongoing momentum are directly tied to the clear focus and prioritization of our customers employees and communities.
Maintaining an authentic and inclusive culture has been a top priority for me during my tenure as CEO .
Ally took several actions over the past year aligned with our do it right approach.
For our customers, we've actively enhanced products interfaces and service capabilities utilizing advanced tech and data innovations, which Jen will provide more detail on.
We took the key step of adding the credit card product to our suite of digital first offerings and we're proud to lead the industry and eliminating overdraft fees, leading to bank on National account certification from the cities for financial Empowerment Fund.
For our ally teammates, we increased allies minimum wage to $20 per hour, while we announced the third annual grant of company stock to all employees.
And expanded health and family benefit programs, we were honored to be named among the best places to work at Forbes Diversity, Inc. And numerous other publications and received another perfect corporate a quality score from the human rights campaign.
Over 40% of our workforce voluntarily participates in one of our employee resource groups, a key element of how we're driving a stronger sense of belonging and engagement across our teams.
Our deliberate actions to treat people as people and create an inclusive workplace have the added benefit of acting as a powerful retention tool.
Within our communities, we marked our 10th year of the employee led giving back campaign donating 24000 hours of time to worthy causes.
Posted our third annual <unk> mobiles in the making student competition and partnership with several HBC use and marked the first full year for the Allied charitable foundation actions donating 15 million of combined employee and company contributions to community social.
And educational causes.
On the ESG front, we announced ally achieve carbon neutrality and officially established and environmental sustainability office.
Taken in isolation any one of these actions would represent a significant milestone, but when taken together. These actions provide clear evidence of what can be achieved when purpose creativity and dedication come together under a shared vision.
Moving to slide number seven I wanted to spend a few moments summarizing the strategic evolution, we've delivered before handing it over to Jan to walk through the details.
Over the years, we built resilient platforms through constant expansion and evolution of our customer centric offerings.
We challenge ourselves each day to look around corners, and embrace disruptive forces on behalf of our clients and customers to proactively manage risks and deliver financial solutions that anticipate their needs and a seamless differentiated manner.
While performance was exceptional in 2021 the opportunities we built for growth in 2022 and beyond are what I'm, most excited about including continued momentum across our leading customer centric businesses.
Delivering diversified and durable earnings and disciplined capital management.
These priorities have positioned us to deliver long term growth and sustained higher returns.
And our track record of delivering or exceeding the financial guidance, we've provided over the past several years.
We continue to focus on deepening customer relationships through digital capabilities that combined leading award winning products with integrated stable and secure bank platforms.
We've got a really powerful model and considerable financial strengths. The future is bright and you can be assured we will keep delivering with that I'll turn the call over to <unk> to provide perspectives on our progress and review our detailed financial results.
Thank you JB and good morning, everyone I'd like to start by expressing my gratitude dedicated Ali workforce.
Howard our growing momentum over the past several years and drove exceptional results in 2021.
Before diving into the fourth quarter detail ill review, Alex multiyear strategic and financial transformation, including the drivers behind our steady execution and strong performance.
Beginning on slide eight we've included a view of our comprehensive expanded product suite, reflecting the many capabilities we've added since 2014.
We provide a broad range of integrated and sophisticated offering.
And around our consumer and commercial client.
Turning to slide nine we're constantly evolving and adapting our capabilities innovating through tech and data driven approach it.
With each new product launch redesign or enhancement, we apply our deeply rooted expertise and disruptive DNA to create unique.
And innovative solutions for a broad range of financing and banking needs.
Our customer centric approach focused on delivering compelling value.
Growth creates opportunities for our relationship deepening and Diversifies, our balance sheet and earning Alan.
Alex compelling growth trajectory and our customer oriented awards, we've amassed over the years.
Over the years serve as a testament to the effectiveness of our approach.
Turning to slide 10 customers using an alloy product now stand at $10 5 million across our platforms spanning 52% since 2014 ally bank customers have more than quadrupled over this timeframe as we've evolved our capabilities and successfully.
Standard multi product relationship shown on the bottom left.
In auto we have added nearly 5500 dealers as part of our multiyear effort to broaden the funnel and increase dealer engagement.
Strategy is culminated in a 40 plus percent increase in application volume driving strong originations and risk adjusted return.
Robust product expansion and customer growth have translated to improved balance sheet and earnings covered over the next few pages.
Turning to slide 11, our balance sheet transformation reflects two key dynamics.
First the diversification of our asset base, which has grown by $31 million or 20% since 2014.
This timeframe, we've generally generated $23 billion right five fold increase in ally bank consumer and commercial product balances.
$13 billion of consumer auto balances, helping to mitigate the pandemic driven floorplan decline and nearly $14 billion in accretive capital efficient investment security.
The second driver of our optimization can be found within net interest margin shown on the bottom of the page, we're disciplined asset pricing deposit growth and active liability management have increased asset yields and improved funding costs.
Auto pricing has remained above 7% for four consecutive years, while floating rate commercial and unsecured products are positioned for further growth and accretion as rates rise.
On the funding side, we've more than doubled stable sticky deposits since 2014, while retiring $24 billion of legacy unsecured debt with a weighted average coupon of over 5%.
These actions drove structurally lower funding costs throughout the prevailing low rate environment.
Hence our ability to control liability costs.
In the years ahead, we expect our balance sheet to drive an upper 3% margin as asset steadily migrate towards 200 billion.
Structural enhancements across both sides of our balance sheet.
<unk> performance over the past two years and position us well for a variety of rate and economic environment moving forward.
Turning to slide 12 allies core <unk> has more than doubled since 2014 generating nearly $4 3 billion in 2021, our highest level.
Our outlook for annual P. PNR expansion will be revenue driven as we continue to prudently invest in customer capabilities technology talent and brand.
In the bottom left total revenues of $8 4 billion represented record setting net financing revenue and other revenue, reflecting diversified sources of income and our ability to capture tailwind in real time.
In the bottom right allies, adjusted efficiency ratio, which as a reminder, excludes insurance reached the lowest level since becoming a publicly traded company as we remain diligent and investment and expense management.
Moving to slide 13, our disciplined and rigorous risk management approach, that's driven consistently strong credit outcomes.
<unk> net charge offs have remained below 1%, while retail auto losses have outperformed our one four to one 6% guidance in six of the seven paths here.
These trends reflect the high quality high utility of our loan and lease products consistent disciplined underwriting capabilities modernize collection and servicing practices and more recently talent associated with stimulus and historically strong collateral values.
As Jamie mentioned earlier, we expect credit to steadily normalized through 2023, which our reserve levels accommodate.
Risk management is a key pillar within our strategic plan as we apply deep experience extensive data and sophisticated approaches in our assessment pricing and servicing across our balance sheet.
Turning to slide 14, our diligent focus on accretive capital deployment is reflected in our expanding returns and over 70% increase in tangible book value per share our capital strategy.
Strategy remains focused on long term value creation evident in our robust growth trajectory, both organic and inorganic as we've executed opportunistic tuck in acquisitions to augment capabilities.
This disciplined approach has resulted in $16 billion of RW and expansion, even while we've returned $6 5 billion in excess capital to shareholders through buybacks and dividends.
CET, one levels remain well above our internal and regulatory targets.
Estimate to our approach and the strength of our position moving forward.
Now, let's turn to slide 15 to review detailed results for the quarter.
Net financing revenue, excluding OID of 166 billion grew 27% year over year, representing our highest quarterly results adjust.
Adjusted other revenue of $533 million reflected solid investment gains and growing momentum across our diversified product offering.
Provision expense of $210 million included the day, one reserve build of $97 million associated with closing fares square and the seasonal rise in Ncos, even as loss frequency and severity trends demonstrate continued strength.
Noninterest expense of $1 1 billion was driven by actions highlighted over the past, including variable cost across our businesses from customer and revenue growth investments in our brand security and tech capabilities and purposeful investment in our workforce and benefits, allowing us.
To drive employee engagement and the top 10% of all companies.
Critical advantage for us as we navigate competitive labor market.
GAAP and adjusted EPS for the quarter.
We're $1 79, and $2 <unk>, respectively. Both of which include <unk> <unk> related to a state specific tax items and one month of their square results.
Moving to slide 16, net interest margin, excluding OID was 382% 90 basis points higher than prior year, and our sixth consecutive quarter of expansion.
Earning asset yield of 475% grew quarter over quarter, as we redeployed lowering cash into higher yielding loans and investment securities.
Average, earning assets grew to $172 9 billion ending balances increased by over $6 billion, representing our strongest linked quarter growth in over five years with all loan balances increasing.
Turning to liabilities cost of funds improved eight basis points, the 10th consecutive linked quarter decline.
Ally continues to remain well positioned for a variety of rate environments as we've cultivated strong customer loyalty and engagement through our expanded suite of digitally based products.
We strengthened pricing and data on both sides of the balance sheet and tactically utilize hedging strategies to bolster our overall asset sensitivity and NIM position.
Turning to slide 17, CET, one of 10, 3%.
<unk> risk weighted asset growth, including $3 5 billion of Floorplan balances balance increases and the impact of closing fair square, which taken together represented 75 basis points of capital consumption.
Despite these impacts CET one remains one 9 billion above our internal target, we recently announced our second consecutive $2 billion buyback authorization and a 20% increase in our common dividend to <unk> 30 per share.
Since the inception of our capital program in 2016, we've reduced shares outstanding by 30%, while increasing our dividend seven times.
The quality of our capital position has improved as we've leveraged our investment grade rating and proactive liability management to bolster liquidity funding and our financial profile.
On slide 18 asset quality remained strong throughout Q4 as consumer and commercial losses remained historically low.
In the upper left consolidated net charge offs of 35 basis points, where nearly half of prior year and 60% below 2019.
Retail auto trends shown on the bottom reflected solid customer payment trends and improved loss given default rates supported by strong collateral values.
Early and late stage delinquency trends, reflecting seasonal activity remaining well below prior year and 2019 levels, an encouraging signal heading into 2022.
On slide 19 consolidated coverage of $2 six 7% reflected growth across our retail auto point of sale and mortgage portfolios plus. The addition of reserves for fair square.
Retail auto coverage of 354% with lower quarter over quarter by eight basis points as trends continued to improve across consumer health and macroeconomic measures.
Blue chip forecast indicate unemployment levels will remain at approximately 4% as a reminder, under our CFO reserve approach. We incorporate this outlook for full employment into our 12 month reasonable and supportable period before migrating to the historic mean of six five.
5% by month 36.
This methodology reflects the prudent approach, we've adopted under CSO to manage uncertainty minimize volatility and maximize transparency.
Turning to slide 20 retail deposits ended at $134 7 billion Q.
Q4 increased $3 1 billion, representing our sixth straight year of growth at or above $10 billion.
New and existing customers continue to drive our performance, reflecting our compelling products and their desire to keep their money and grow their balances with us.
We generated our 50 <unk> consecutive quarter of customer growth, adding 226000 in 2021, while retention remains industry, leading at 96% as we launched our largest brand campaign to date during Q4.
On the bottom right customer demographics show the compelling opportunity, we have to deepen relationships as nearly 70% of new customers are from younger generation early in their financial journey and with a high propensity for digital engagement.
Turning to slide 21.
Expanded product suite positions us for ongoing growth.
We've generated six years of multi product relationship deepening that continues to accelerate across all product we have.
Leveraged our large and growing depositors to build scale within each of these offerings.
And we've seen a steady increase in growth from customers, who are new to ally altogether.
These trends reinforce the momentum of our brand and the relevance and quality of our diversified digital platforms.
Moving to slide 22 auto segment pre tax income of $839 million with Westar adaptable, leading business model revenue growth reflects the multiyear optimization of consumer and commercial lending strategies. In addition to tailwind from strong credit and elevated.
Used car values.
We included retail portfolio trends in the bottom left where origination yields remained above 7% again in 2021, which we expect to continue as we generate over $40 billion of volume annually moving forward.
On the bottom right lease activity reflects the impact of record used car values and elevated lessee and dealer buyout activity, which tempered realized gains in 2021.
Within our financial outlook, we assume steady normalization of these trend providing us yet another opportunity to demonstrate our ability to effectively navigate changes within the auto ecosystem.
Within our financial outlook for revenues and credit we have embedded an assumption for used values to decline by 15% to 20% cumulatively by the end of 2023, even as recent trends indicate ongoing resilience.
Execution within auto reflects our diversified full spectrum capabilities expanded market reach experienced underwriting and increased use of technology.
Turning to slide 23.
Chile adaptable platform enables us to source strong volume across a variety of environments.
In the upper left we generated $46 billion of origination volume in 2021 source from our network of over 21000 dealers.
And in consumer assets expanded to 89 billion shown in the upper right, reflecting retail and lease portfolio growth, while ending commercial balances grew for the first time in five quarters ending at $16 billion.
This was driven by a 15% rebound in industry inventories are modest but positive trend occurring ahead of our expectation for growth later this year.
Q4 auto originations of $10 9 billion represented our highest fourth quarter since 2004, while we've maintained a disciplined underwriting approach.
Turning to our insurance segment on slide 24 core pre tax income of $67 million reflected investment gain activity modestly below prior quarter results, but well above historic levels.
In the bottom left the $6 5 billion investment portfolio continues to add revenue generating capabilities enhancing segment and consolidated return.
Total written premiums of $268 million resulted in $1 2 billion of full year written premium our fourth consecutive year above $1 billion.
Overall, we are pleased with the resilient counter cyclic value of our insurance business and remain focused on more fully leveraging our large dealer network for future growth.
Moving to slide 25, corporate finance core income of $75 million reflected revenue growth from meaningful year over year asset growth strong investment and syndication income and solid credit trends.
<unk> balances ended at seven 8 billion the highest level on record for ally, while unfunded commitments of $4 9 billion position us for ongoing expansion.
Our portfolio is comprised of high quality diversified loans build through steady deliberate execution across our experienced team.
We remain confident in the continued discipline growth of this business moving forward.
Mortgage details are on slide 26, where pretax income remained relatively stable during the quarter as asset growth helped to mitigate normalizing gain on sale margins and persistently elevated prepayment trends.
Ally home originated $2 9 billion in direct to consumer volume in Q4 exceeding $10 billion for our full year 2021, well ahead of schedule.
<unk> steadily grown our national reach over the past two years, we've improved our opportunity to generate strong volume as we prioritize attractive return.
I'll wrap up on slide 27, with our financial outlook, we've consistently demonstrated earnings expansion and improved returns through several years of execution.
Our clear vision priorities and strategy have positioned allied to continue generating meaningful and sustained value in the years ahead.
We expect our OTC E of 16% to 18% plus over the medium term.
Find as the next two to three years and beyond as we further leverage our leading businesses and high quality balance sheet to drive financial performance.
Notably, while our return targets do not depend on uniquely strong macroeconomic trends or pockets of transitory dynamics.
We'll remain opportunistic capturing upside beyond these ranges.
Results will be fueled by revenue driven P. PNR expansion derived from an upper 3% NIM profile and diversified revenue generation, among our established and brought into consumer offerings.
We've included several of the key variables and assumptions embedded within our forecast, including benchmark interest rates credit expectations and used value used vehicle value trends.
Based on our balanced approach, we've taken in our outlook and the strong momentum across all our businesses I am confident in our ability to consistently generate profitable growth enhance book value and sustained returns and with that I'll turn it back to JB. Thank you so much Jim.
I'll close with just a few comments on slide number 28, our purpose and cause will remain centered on our customers employees and communities. We built a profitable compelling growth company by meeting customer needs through differentiated products and services.
<unk> has pivoted to an exciting era of growth.
The dedication of our 10000, plus ally teammates fuels my confidence and the ability we have to drive an even brighter future.
And with that Daniel back to you and head into Q&A. Thanks, Jamie So as we head into Q&A I'll ask participants to limit yourself to one question and one follow up operator, you can go ahead and tee up the first question.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press. The pound. Our first question comes from the line of Ryan Nash from Goldman Sachs.
Your line is now open hey.
Good morning, Jay Good morning, Tim.
Hi, Brian .
So.
J B you outlined in the slides 16 to 18 plus percent returns in 2022 in the medium term I think Jan said two to three years and beyond and I wanted to maybe focus on the plus so can you maybe just talk about some of the assumptions that are underlying maybe give us a little bit more color and maybe.
What are some of the sources of upside that we could see over the next one to two years that are not baked into the 16% to 18.
Sure Jamie.
John do you want to take it or I mean.
I'll start with Ryan and then Jim can go through the details obviously.
If you look at our levels of reserves relative to the levels of loss expectations and I think our guidance on credit I think you see we've taken.
A very pragmatic gradual normalization of credit, but that would be certainly a big one.
And then obviously used car prices I think Jen as guided we see them within our financial plan is moderating, but I think if you look at current trends you look at the environment. I mean used car prices are still really strong and as John pointed out we are seeing some very modest uptick in inventory levels.
Our outlook I think this year as well.
A really robust used car market. So I mean, those are a couple of Jones, obviously got all the details behind it but we feel really good about the outlook.
Yeah, Jamie I think you know that the only thing I would add is just around gains and in our insurance portfolio, we've been able to optimize.
Our equity market activity and drive outsized gains and so that potentially Ryan could be another area of upside, but I think youre asking the right question I think there is an asymmetric.
Bias here towards the outperforming the 16 to 18 plus percent in its path of NCS reserves, if used vehicle pricing that J D hit on plus our ability to generate gains.
Got it and then if I could just dig into the expectations for the upper Three's net interest margin can you maybe just flesh out some of the assumptions that are underlying this in terms of your assumptions on rates your ability to drive price and the loan book and I guess more importantly, what are the expectations over that time for.
For for a deposit beta has just given you guys have obviously done a great job building the liquidity on the balance sheet and I'm wondering can we end up seeing you exceed prior cycles, just given all the work that you guys have done on the deposit side. Thanks.
Sure and I'll start first on the yields and then go to liabilities, but on asset yields.
90, plus percent of our retail auto portfolio was originated at seven plus percent yields and so we are.
Expecting Ryan just continue to see retail auto yields continue to migrate up towards that seven plus percent and then if rates continue to increase as were expecting that could potentially go even higher.
We also have floating rate assets as we're growing Floorplan JV mentioned, we're starting to see some increases in floor plan those are floating rate assets, they would migrate higher as rates increase.
We've increased our asset sensitivity through pay fixed hedging activity kind of maxed out our hedging.
Which will also give us some tailwind so net net when we wrap this all up plus their square ally lending, we see a really robust trajectory ahead on asset yields in particular, if we see rising rates and then on the liability side.
Both mix and deposits will help us.
We have a much healthier liability stack, having runoff expensive high cost unsecured debt.
Our deposit levels are 89% of funding and then when you look at the value, we're providing to our customers based on products our digital platform.
And the fact that we are a core funded now we do think Ryan to your question specifically around deposit pricing overall.
Rates paid will be lower than this next rising rate cycle. So you wrap it all up in the first couple of pages of transformation. We've led the product capability expansion in the asset side, the transformation of our funding profile and positions us so well to hit that upper 3% NIM.
Respective of.
The rate environment and to your question gives us opportunity to outperform as well.
Thanks for taking my questions.
Okay.
Thank you. Our next question comes from the line with Bill Karachi.
Research Your line is now open.
Thank you good morning JB.
Bill.
Can you discuss the trajectory that you're expecting for NIM, particularly in light of changes in fed funds and all the moving parts.
Turn to slide is super helpful, but maybe just a little bit of color on Directionally should we be expecting 2023, NIM to be normalizing higher or lower versus 2002.
Yes, sure and Anvil jump in here and we've been guiding towards NIM expansion now for years. So if you take a step back.
This has been a guide irrespective of the rate trajectory and its all the things I just described Orion around the transformation of our asset side of balance sheet as well as our liability stack and so so bill we are expecting NIM to expand irrespective of rates.
<unk> said in a raising rising rate environment. We do think that there is an accelerated opportunity to expand earning asset yields just walk through some of the drivers there around floating rate assets.
Growing floor plan at the right time, adding short duration asset sensitive assets like ally lending and fair square that will all give us growing momentum in a rising rate environment to continue to see earning asset yield expansion and then on the liability side the healthier.
Stack, we have plus the fact that we're still well positioned from customer brand engagement digital capabilities. We do think that we'll be able to hold funding costs.
Much better in this rate environment or a rising rate environment, then the last one.
And so that will fuel that trajectory into 'twenty, two and allow us to sustain it.
Into 'twenty three and beyond.
So that's some of the dynamics there bill and hopefully that helps to answer your question yet.
This is not a rate driven NIM expansion. This is all about structural improvements in transformation.
Got it that's helpful and then separately as a follow up can you speak to the trajectory of the reserve rate and how youre thinking about growth math dynamics as you grow the card business. The fact that you are starting off the year above your day, one level should should help dampen those headwinds and then.
Sort of tagging onto that.
As the business grows given sort of that's a higher loss content business.
Should there be some expectation that at some point you would raise your capital.
Target capital expectations.
You can just touch on that thank you.
Yes, sure and overall.
It's largely driven by retail auto so let me start there and I'll go to some of the smaller portfolios, but retail auto right. Now is that $3 54 day. One was at $3 34. So we're running at 20 basis points ahead of day, one and I think that to Jbs point in his prepared remarks really helps us.
To manage through any kind of economic cycle that we could see ahead, but if you look at the path of normalization of our past history. We would expect over time as Ncos normalize that that rate would come down from the $3 54 somewhere closer to that 334. So I think if anything bill that gives us some.
Tailwind heading into 'twenty, two and 'twenty three and then on some.
Some of the newer products that will have higher coverage levels I think were very well reserved there fair square, we just put on at a 12% coverage ratio ally lending as close to that so I think we're just in a really good spot there.
Not going to drive upside, but we'll be growing that in the mix may change a slightly higher consolidated.
Level, but if you wrap it all up with retail auto being as big as it is with as high a reserve coverage level.
From a consolidated perspective that should that should come down over time, and then on our capital target look we feel that we are very well positioned.
We are adding some new portfolios with fair square in ally lending, but theyre about.
About $2 billion today and will grow to two to four from here, but it's not a big enough percentage of our portfolio to really revisit the 9% target and then also keep in mind, we're holding 9% against the floor plan balances that is relatively risk free. So we feel really good bill about a 9% CET one target.
Yeah.
That's very helpful. Thank you for taking my questions. Thank you of course.
Thank you. Our next question comes from the line of Greg.
Morgan Stanley Your line is now open.
Hi, good morning.
Hey, good morning, guys.
Couple of questions here first as we're thinking about the fair square.
Integration getting behind you.
Can you give us a sense as to the.
The timing and the size that you are going to be thinking about in terms of expanding that portfolio and what the levers are to affecting that.
Yes sure.
We were at about 950 and balances today and.
We see a path medium term to two to 3 billion Betsy and I think if anything they've shown an ability to really accelerate both customer growth and balance sheet growth. Both are up over 60% year over year end and the balances are running 25% ahead of just the projections that we shared with you in October .
They are seeing a really robust growth trajectory.
Right now, it's being kind of our path to $2 billion to $3 billion, but we will continue to monitor and take it from there.
And I know, it's obviously a.
Sorry go ahead.
Yeah, I mean, it's just very compelling customer segment and product.
Our focus that is allowing them to continue to grow and I would just point out that they grew during one of the toughest credit card markets.
In history as we navigated COVID-19 .
So.
That piece of the portfolio expanding clearly net positive to NIM.
Floor plan.
It was a little bit of a lower NIM.
NIM contributor and I know in the past you've talked about funding that via securities to help keep the NIM moving higher.
How much room is there in that piece of security shift in floor plan and I'm asking the question from the context of your guide for upper three NIM.
What keeps you from.
Seeing that guide move into low fours.
As these piece parts are coming through here.
Yeah sure.
And Betsy.
<unk>.
Obviously have upside from floor plan and it's on a couple of different dimensions. One is it's a floating rate asset so as.
Short term rates increase that will naturally migrate to yield up and second to your point on funding.
We're reallocating cash into floor plan so.
That gives us another tailwind from a mix perspective.
And as I mentioned earlier in response to Ryan's question Theres, a lot of opportunity for earning asset yield to continue to migrate higher plus the fact that we think we're very well positioned.
To manage our liability costs down. So there is an opportunity to go to that four plus percent. It's just we tried to provide balanced guidance.
As we look forward, but certainly there is upside opportunity there.
And then separately on the outlook here for used car values, which does feed into a couple of parts of the income statement how.
How should we think about what you've got here the modeling, 15% plus decline by year end 'twenty three.
Is that how did you how did you get to that assessment.
And the guide and what kind of pace are you are you thinking about that coming through the model.
Yeah sure let me hit on model and then reality.
We've modeled a straight line reduction from 'twenty, one to 'twenty, three down 15% to 20%.
I think if we look at pace of used vehicle values are continuously increase.
And so the reality is there's probably upside to that but again, we're trying to give you kind of a run rate view of returns and we will be opportunistic around upside as we were certainly in 'twenty. One here, but the model just assumes kind of straight line reduction there.
And then you know.
Another factor I would call your attention to because there is so much focus on used vehicle values as we exited 2021, the lessee buyout and the dealer buyouts was increasing to 60 70, 80% and so that's muted our ability to harvest gains and it lowers the year over year comp as we.
Heading into 2022, so just just keep that in mind.
It's not quite as big a fallout of that as I think some folks are modeling at this point in time and then the last thing I'd say on used vehicle values as we do have natural hedges just as we had a hedge with floor plan coming down used vehicle values going up and impacting lease yields positively we have the hedge on the reverse right Suez.
Lease yields come down, we'll see floor plan growing and you get all the great dynamics around putting cash to work floating rate asset increasing so just keep that in mind that there's there's positive hedges as used vehicle values come down just like there was they went up.
Got it thanks, Jim Thanks Julien.
Thanks Betsy.
Thank you. Our next question comes from the line of Moshe a orenbuch from UBS. Your line is now open.
Great. Thanks, Thanks very much.
Okay.
Yeah.
Added to this.
Opening comments, but you've got.
Better.
But you've had in a while.
Hi, you've got reasonable growth.
Retail auto and telecom.
Across the portfolio.
Could you talk about how that is likely to trend over the next year or two.
Got a follow up thanks.
Yeah, sure Moshe and I mentioned assets getting to 200 billion.
And our medium term and that's driven by all the portfolio as you just mentioned I mean retail order we were originating at mid $30 billion. We had $46 3 billion. This year, we're guiding towards low $40 billion.
And so as we continue to have the opportunity to originate at a higher level that will obviously take.
Our retail portfolio higher also seeing strong growth in lease as well.
Our plans obviously come back we saw kind of trough in September and steady growth from there and I think it'll be a little choppy from here on out, we'll see but definitely opportunities in floor plan to come back.
And then the unsecured capabilities that we've recently added with ally lending.
With fair square each of those portfolios could get to $2 billion to $3 billion over time, and then last but not least we've seen really nice opportunities to originate and mortgage we pulled forward kind of our $10 billion target into this year and we'll see how that plays out, but we really like our capabilities and we've expanded into new markets.
With mortgage system and growth opportunities there.
Floor plan continues to be a steady driver.
We always talked about I'm, sorry, corporate finance always tends to be a steady driver we've talked about getting to $10 billion in that portfolio. We already hit eight I think well on our way to $10 billion as you look at.
The total opportunity in that in that segment, and then well put.
Cash to work in securities as well, so really across the board shall.
So we see really nice tailwind in opportunities to grow in addition to the NIM expansion that we've been talking about this morning.
Right and.
Your your medium term kind of forecast talks about PPE and our expansion on an annual basis. One of the concerns that investors have had about financials. After the reports of the big banks has been expense growth.
Could you kind of talk about your plans, which obviously PPE and our expansion needs of your revenue is going to go faster with expenses just talked about the plans for generating operating efficiencies and how you think about that particularly in light of the context.
JV that you made about minimum wage phase of that and kind of how that will.
Any greater two plants.
Just a couple of years.
Yeah sure Moshe just as a reminder, we don't manage kind of single line items point in time, we've been managing the company to drive accretive returns and we've been investing in growth.
What I shared with you in the first couple of pages around continuing to invest in capabilities grow customers grow our balance sheet grow returns that is the focus of us.
Just in general.
And we've been investing as a growth company, we've seen kind of mid single digit expense growth.
Over the last couple of years, we'd expect to continue to see that.
But as we've demonstrated in the past we're focused on positive operating leverage PNR expansion.
Robust return trajectory.
You should expect more of that to come.
From the from <unk> as well as well as operating leverage perspective, no I will note that with fair square.
Coming in into 2022 will have one month of expenses rolling forward to 12 months. So there's some nuances there we do see positive operating leverage as we get into 2023.
But definitely just some technical impacts this year from from Fair square, but you wrap it all up a lot of focus on expenses, but for us it's really around growing our businesses and growing revenue. We saw revenue up 25%. This year, we have a very robust trajectory as we head into 'twenty.
Three.
22, and 'twenty three.
We will keep investing but leverages is front and center all the time.
Thanks, so much.
Thank you Moshe.
Thank you. Our next question comes from the line of Sanjay <unk> from <unk>. Your line is now open.
Thanks, Good morning.
I guess I got a question on the retail auto yields.
I guess your expectations are that continues to remain strong I'm just curious I know a lot of it's been driven by mix inside of retail auto, but as we think about.
Just maybe competitive forces coming back into play.
How much of a factor do you think it plays into that yield going forward over the next couple of years.
Yes Sanjay.
Yes, its fourth year of putting strong origination flows on the books at seven plus percent yields and we're guiding towards similar.
Performance as we head into 2022, and it's simply a result of the growth in dealers growth in dealer engagement, where we think we still have is thinking this significant opportunity for expansion. It's the continued investment in our capabilities, including our smart auction platform insurance.
And so we don't see any signs that that will slow down as we head into 'twenty, two and beyond and welcomes competition is always intense.
We arent seeing that interrupt our flows are.
Impact our performance whatsoever, as we head into 'twenty, two and beyond.
And Sanjay just.
Obviously, a reminder, number one lender.
Lender in the prime space, one of the largest shoes lenders and to get that type.
Performance you need to have significant scale, which is something we bring in so.
I think we're large or fast the dealers like us.
<unk> made it a lot of our risk based decisions. So we respond very quickly so yes.
Yes, we recognize their players come and go but I think the one thing with dealers appreciate about allies are stability and that's part of the one of the big drivers why we continue to see a big uptick in origination flows and Y Gen just guided even.
Into the low $40 billion is pretty strong loan growth year on year.
Absolutely you guys have executed really well I guess.
Maybe another question on competition.
<unk> alone some of the questions that Moshe was asking in terms of.
Expenses in the on the consumer lending side.
That that targeted growth that you expect for fair square I mean like is that just more direct marketing and therefore, there shouldnt be.
A significant ramp up in marketing spend because we've heard the big banks as well as some of the card issuers talked about ramping up expenses.
To get new accounts I'm, just curious sort of how you expect to go to market there and do you expect some pressure on expenses as you build that business out and how does it factor into the growth that you're expecting.
Yeah, and I think fair square is a bit unique and similar to what Jamie just mentioned on auto.
And have a unique product for a unique market, they're originating in that prime space, which is not nearly as computed as the super Prime space and.
And so the direct marketing that they've been doing has been highly effective.
Reflected in the 60 plus percent increase in customer accounts as well as the growth in the balance sheet.
And all of the expenses attached to that are in the really robust guidance I provided which is kind of immediately accretive from a <unk> perspective, it'll be accretive from an EPS perspective by year end this year and it will drive operating leverage as we head into 2023. So you can see that our investments are paying off.
From a growth and a profitability perspective and.
I think if anything we can turbocharge that growth by bringing them in inside the four walls of ally in and leveraging our existing customer base foundry, which is not going to require significant additions to our marketing spend.
And then how much of that is factor like is the cross sell a big part of the growth expectation or is that just benefit.
None of that Sanjay is built into any of the numbers that we shared that will be all upside and again it will be driven by synergies across our platform much more so than increase in marketing spend.
Sanjay.
I would point out that what sometimes cross sell gets no.
Not a question of can you really do it I think if you look at our growth in multi product relationships.
It shows we are actually one of the banks, that's executing in that regard and so while we don't necessarily have it embedded in the guidance. So I think thats a clearer focus point for us So how do we use the.
The cross sell of a massive customer base I mean, if you think of kind of another $9 5 million customers ex credit card, it's even bigger than that exists at alloy that is an opportunity.
We will go after.
Great. Thank you. Thank you Sanjay.
Our next question comes from the line of Erin <unk> from Citi. Your line is now open.
Thanks, maybe not to stay.
Stay on card for too much.
It is kind of an index.
An exciting new area for you, but what's what's.
What's the strategy for 'twenty, two or are you going to rebrand.
Are you going to go.
Up market, a little bit or are you just going to kind of let them operate under that fair square.
And for the near term.
Yeah. Thank you and we agree it's an exciting opportunity.
The short answer here is we.
We're going to let them continue to execute the way they have been executing over the last five years, it's been a tremendous product.
Growth story for them and we don't want to interrupt.
The execution on that front in parallel.
We are looking to rebrand their cards, we will do so by year end.
And we do think that there's product expansion opportunities as we just as we just talked about over time, but that's going to be something we grow into as we think about it.
We think about the broader ally customer ecosystem, and then last but not least just a huge shout out to that team has just been a tremendous experience.
Experience, bringing them onboard they know what they're doing they've got decades of experience in card and we couldnt be more excited about the team.
The opportunity ahead of us in the card space.
Great and then just lastly, but theres been excuse me a little bit of concern about credit and the personal installment loan space with a lot of new entrants.
Into the market.
What are you seeing within ally lending on the credit side.
Yeah, I mean, I would point to our performance, which has been robust I think it's a large it's a rapidly growing market. So there's no surprise that there's new entrants in that space, but we feel really well positioned especially in the verticals, where we're focused home improvement.
Health care, our dominant areas for us.
Continue to be able to grow merchants enough spaces as well as originations and balances. So we're not surprised that there are some new entrants, but we feel really good about our products and our performance and just as a reminder, we're not kind of the NPL the paying for product that's getting a lot of scrutiny across the industry.
Just in terms of consumer oriented practices. This is a traditional installment product we go through.
Traditional credit underwriting we have robust credit risk management around this product so feel great about the opportunity ahead.
Great. Thanks, Thanks, Jenn and to all the participants that concludes today's calls were at <unk>.
The top of the hour here operator, you may now take us through the disconnect process.
This concludes today's conference. Thank you for participating you may now disconnect.
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