Q1 2022 Ally Financial Inc Earnings Call
Good day, ladies and gentlemen, thank you for standing by and welcome to the ally financial first quarter 2022 earnings conference call.
At this time, all participants on 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. The Star then the one key on you touched on the telephone please be advised that today's conference is being recorded.
Operating system at any time. Please press Star then zero I would now like to turn the conference I'll, let you speak to host today, Mr. Shan Li head of Investor Relations. Please go ahead.
Thank you Olivia.
Good morning, and welcome to ally Financial's first quarter 2022 earnings call.
This morning, our CEO , Jeff Brown, and our CFO , John Leclair will review allies results before taking questions.
The presentation, we'll reference on today's call can be found on the Investor Relations section of our website at <unk> Dot com.
Forward looking statements and risk factor language governing today's call are on slide two.
GAAP and non-GAAP measures pertaining to our operating performance and capital results are on slide three.
As a reminder, non-GAAP or core metrics are supplemental to and not as substitutes for U S. GAAP measures definitions and reconciliations can be found in the appendix and with that I'll turn the call over to Judy.
Thank you, Sean and welcome to your first earnings call.
Your expanded role as the head of Investor Relations I've worked directly with Sean for over 13 years at ally and he will be a terrific liaison with the analysts and Investor community, It's great asset for our company and welcome to the Ralph Sean.
We do appreciate everyone. Joining us this morning to review our first quarter results I'm going to begin on slide number four.
Performance this quarter remained very strong and our results underscore the scale and durability of our growing businesses.
We've been operating in a rapidly evolving environment for several years now and the start to 2022 certainly continues that trend.
In addition to lingering pandemic uncertainties geopolitical unrest and more pronounced signs of inflation are being met with rising interest rates and the expected normalization of the federal reserve balance sheet.
Before getting into our results I also want to acknowledge and express our deep empathy for those impacted by the war in Ukraine. The stories and images are tragic and our thoughts are with all of those suffering through this terrible humanitarian crisis, we're certainly hopeful for a rapid resolution.
But recognize the ramifications could be long lasting.
This operating environment has driven market volatility that will continue in the near term. However, I remain confident and allies outlook, given the strength of our businesses and consistent focus on disciplined long term execution.
The U S consumer remains healthy with historically low debt servicing levels significantly elevated household savings and a tight labor market, what's coming with strong wage growth.
These trends are driving increased consumer spending reflected in robust originations pricing and loan growth across ally.
Our industry, leading auto and insurance businesses have deep mutually beneficial relationships with their dealer customers and have proven ability to drive growth and significant value through multiple economic cycles.
Across ally Bank, we continue to see solid customer momentum and engagement.
The integration of Fair square now ally credit card, our newest bank capability remains on schedule and the business delivered a great first quarter.
We remain confident in the differentiated value proposition provided by all of our digital consumer banking businesses and expect meaningful accretive growth over the next several years.
Ally success has always been defined by a relentless customer focus and the strength of our culture.
Our deliberate actions for all stakeholders remain rooted in our do it right philosophy.
In January we announced our new covered draft capability, which provides ally checking account customers protection against accidental overdrafts at no cost.
This follows our announcement fully eliminate overdraft fees in 2021, the first in the industry and a testament to our commitment to delivering a customer centric banking experience.
It has been great to see other banks follow as well.
In February we hosted our second annual supplier diversity and sustainability symposium created to build and expand relationships with minority owned businesses and we're well underway with the celebration of financial literacy month in April a key part of our continuous efforts to <unk>.
Port economic mobility across our communities.
I'm proud of our nearly 11000 ally teammates for their execution and living our values and meaningful ways every day.
Let's turn to slide five where I'll touch on a few highlights from <unk>.
First quarter adjusted EPS of $2 <unk>.
Core <unk> of 23, 6% and our revenues of $2 2 billion reflected continued momentum and a great start to the year across our diversified platforms. The.
The backdrop across consumer and auto markets remained strong during the quarter and we are well positioned to sustain robust operating and financial results this year and beyond.
This positioning reflects years of disciplined execution of building adaptable platforms that will allow us to grow and capitalize on market opportunities.
Wide variety of operating environments.
More specifically, we remain confident in our long term outlook for sustainable Aro TCE profile of 16% to 18% plus with the potential for outperformance in 2022 as the environment normalizes.
Our earnings trajectory has positioned us to execute a $2 billion buyback program for the second consecutive year and yesterday, we announced our second quarter dividend of <unk> 30 per share up nearly 60% from a year ago.
Our nimble customer centric businesses provide us the ability to capitalize on emerging trends evident on our results across the past several years and in our sustainable outlook.
Within auto consumer originations of 11 6 billion represented our highest first quarter in 11 years sourced from $3 2 million decision applications with originated yields once again exceeding 7%.
Despite low levels of inventory and new unit sales consumer originations were up 14% year over year, demonstrating the agility and scale of our auto business, allowing us to consistently generate volume at attractive risk adjusted returns.
Credit normalization through the first quarter has been in line with expectations and retail Ncos at 58 basis points remained well below pre pandemic levels.
We continue monitoring broader market indicators of consumer health, including wage and price inflation employment conditions and overall payment trends.
While the current inflationary environment, we'll add some pressure to households, consumers are generally well positioned with healthy balance sheets.
And as you've heard from US before we made significant investments in our ability to engage our auto customers through expanded digital channels, coupled with enhanced analytics within our servicing teams.
From an industry production perspective, we're still seeing low levels of inventory driven by persistent supply chain challenges and strong consumer demand.
These dynamics continue to result in lower Floorplan balances and structural support for used originations and values.
We saw modest normalization in the first quarter, but expect floorplan balances to remain low for quite some time.
Within insurance written premiums of $265 million reflected lower overall inventory levels investment portfolio performance remains strong while weather claims benefited from lower exposure.
Turning to ally bank organic and accelerating growth trends continued.
Retail deposit customers now exceed $2 5 million, expanding 8% year over year, and representing our 52nd consecutive quarter of growth.
Retail balances grew to 136 billion and account for nearly 90% of our funding profile.
Our consumer engagement and product adoption trends remained robust.
Ally home originated $1 7 billion in the quarter, despite the headwind from higher mortgage rates and slowing refinance volume.
Ally invest customer assets grew to $16 8 billion, a 10% year over year increase while accounts expanded 7% and ally lending volume of $442 million more than doubled year over year, as we expanded merchant relationships and volume in the healthcare and.
Home improvement verticals.
Ally credit card surpassed 1 billion in loan balances in the quarter and now has over 800000 active cardholders up 73% from prior year I was in Wilmington about a week ago with our new teammates and we celebrated 1 million account openings nice milestones for this.
Business.
Corporate finance posted another steady and solid quarter with the held for investment portfolio exceeding $8 million and credit performance remains very strong.
Performance across our businesses reinforces our broad customer reach adaptable platforms years of disciplined execution and ability to meet our financial and operational goals I remain incredibly proud of all of our teammates and highly confident in their ability to continue to exit.
In a rapidly changing environment and with that Jen over to you.
Thank you Jamie and good morning, everyone I'll begin on slide six the strength of our financial performance again this quarter reflects our disciplined operating approach and the continued execution against our long term strategic priorities.
Despite ongoing shifts in the broader market the strength of airlines auto and digital bank platform is reflected in our ability to protect and improve our market share grow and diversify our income sources and generate a solid sustainable return.
Our comprehensive product offering now serve more than 10.5 million customers with a clear path to ongoing expansion.
On slide seven we've provided a few metrics we are watching closely relative to consumer health with over $10 5 million total customers, including over two and a half million depositary and over 1 million monthly consumer loan applications, we have unique data and insight into our ongoing.
Consumer trends and performance.
The average savings account balance at ally has increased 20% to 30%, including a 23% increase and a lower balance accounts.
And while inflation in particular gas prices impact spending levels and real wage growth our retail auto portfolio is virtually no exposure to consumers most sensitive to higher gas prices.
We've also included a delinquency snapshot across our loan portfolio.
Increases after 2021 loans remain gradual and overall levels remain well below 2019.
While key consumer health indicators reflect a strong starting point, we expect normalization in the months ahead, and we will leverage our proprietary data to inform prudent underwriting and servicing strategies.
Let's turn to slide eight where we have included a snapshot of key measures demonstrating the strength of our balance sheet, our funding capital and liquidity remain robust and above pre pandemic levels are stable cost efficient deposit portfolio has increased to 88% of total fun.
<unk> up from 64% in Q1, 2018 positioning us well in this rising rate cycle.
Wholesale funding balances have materially declined we maintain access to multiple efficient funding alternatives and improved execution levels. As we've earned an investment grade rating in recent years.
Allowance for loan losses of $2, six 3% or $3 3 billion represent for two and a half times, our reserve level in 2018, and approximately $700 million higher than our seasonal day one requirement.
Our CET one level remains elevated at 10%, which resulted in approximately $1 5 billion of excess capital relative to our internal operating targets and nearly 3 billion above our <unk> requirement positioning us well to support accretive customer growth and capital.
Return.
Detailed results for the quarter are on slide nine net financing revenue, excluding OID of $1 7 billion grew roughly 23% year over year.
This represents the seventh consecutive quarter of expanding net financing revenue.
Performance in the quarter was driven by strength in auto pricing and origination volume growth and accretive consumer products, including our credit card and point of sale offerings.
Normalization of excess liquidity and proactive hedging activity, partially mitigating impacts from short term rate increases.
Adjusted other revenue of $508 million, reflecting strong investment gains and diversified revenues from smart auction insurance and our consumer businesses.
While our financial outlook assumes mid $400 million per quarter, we remain opportunistic capturing upside from favorable market condition.
Provision expense of $167 million reflects robust origination activity and the anticipated gradual normalization of credit performance, although trends remain favorable as we will cover in a few moments.
Noninterest expense of $1 1 billion includes seasonal compensation items. The first full quarter of credit card operations and investments in business growth brand and technology.
We expect the year over year expense increase to moderate over the remainder of 2022 and the quarter was impacted by certain nonrecurring items.
Excluding the acquisition of Fair square, we expect full year operating expense growth consistent with prior years.
As a reminder, fare square is projected to be EPS accretive by the end of 2022 and to drive positive operating leverage in 2023.
GAAP and adjusted EPS for the quarter were $1, 86, and $2 and <unk> respectively.
Okay.
Moving to slide 10, net interest margin, excluding OID of 395% expanded 13 basis points quarter over quarter, and 77 basis points year over year, reflecting significant and sustained improvement.
Overall margin expansion reflects the structurally enhance balance sheet, we have built over several years.
Earning asset yield of 486% grew 11 basis points quarter over quarter, and 42 basis points year over year, reflecting the same NII drivers I just mentioned.
Due to strong auto demand, we continue to see elevated prepayment activity in retail auto driving a linked quarter decline in the portfolio yield.
The originated yields exceeded 7% again this quarter and we still expect the portfolio to move closer to originated yield over time, especially as prepayment activity normalizes with used car pricing.
While prepayment activity presents a headwind to retail portfolio yields we have natural offsets as higher vehicle values benefit lease residuals and loss severity.
Looking forward, we expect earning asset yield expansion driven by the strength of our market position disciplined pricing, especially as rates increase in organic growth across our newer consumer portfolio.
Turning to liabilities cost of funds declined four basis points, the 11th consecutive quarter over quarter decline and 39 basis points year over year, reflecting the multiyear transformation of our funding profile.
The differentiated value proposition of ally bank is evident in the growth of our deposit portfolio and the stickiness of our customer base over a wide variety of interest rate and operating environment.
And while we constantly evaluate competitive dynamics, we expect overall deposit rate paid relative to fed funds will be favorable to the prior tightening cycle.
The growth and strength of our businesses on both sides of the balance sheet will support our strong net interest margin and net interest income expansion from here.
Turning to slide 11, our CET, one ratio declined modestly to 10% as strong earnings supported robust loan growth and nearly $600 million in share repurchases.
Yesterday, we announced a dividend of <unk> 30 per share and we remain on track to execute our $2 billion buyback program reflected of Alice strong capital levels and earnings trajectory.
We recently submitted our 2022 CCAR results, which we believe confirm the strength of our capital position in a severe stress and support our 9% CET one internal target.
On the bottom of the slide shares outstanding have declined 13% since we resumed share repurchases in 2021 and 32% since the inception of our buyback program in 2016.
Capital deployment priorities remain centered around investing in the growth of our businesses delivering innovative and differentiated products and driving long term shareholder value.
On slide 12, and asset quality remained strong.
<unk> reflect the gradual and expected normalization across our consumer portfolios and continuation of historically low losses in our commercial portfolios.
<unk> net charge offs of 43 basis points moved up by two basis points year over year.
Retail auto portfolio performance reflected solid consumer payment trends and favorable loss given default rates supported by strong vehicle collateral values.
In the bottom right delinquencies have increased as expected, which will drive higher net charge off activity over time.
We continue to expect gradual normalization to one four to one 6% NCO level in the medium term with the expectation of 1% or less in 2022.
On slide 13, consolidated coverage declined four basis points to 263%.
Retail auto coverage of 349% declined five basis points, but remains 15 basis points higher than seasonal day one levels.
Our baseline forecast assumes gradually improving unemployment ending the year at approximately three 5% before reverting to a historical mean of six 5% under a seesaw methodology.
As part of our reserve bank process, we consider a range of potential scenarios, including recession, stagflation and protracted geopolitical conflicts.
As discussed we evaluate consumer health real time, including rapidly rising inflationary impacts and real wage growth.
We remain confident our reserves are appropriate for a variety of economic environments, including potential but unexpected downside scenarios.
On slide 14 total deposits remained at 142 billion as retail balanced growth offset the roll down of brokered deposits.
Retail balances increased $1 3 billion quarter over quarter, even as seasonal tax payment activity was elevated in March.
Our portfolio includes significant balances from affluent depositors generally more susceptible to tax liability outflows.
Due to the financial strength of our customers, we would expect tax payment outflows to be elevated in Q2 temporarily pressuring deposit growth.
We added another 42000 customers, our 15th consecutive quarter of customer growth exceeding $2 5 million overall, our customer loyalty and engagement are reflected in industry, leading and consistent retention of 96% and <unk>.
I'll tie relationship expansion for the 17th consecutive quarter ending at 9%.
On Slide 15, we have included a chart that shows the stable nature of our growing deposit portfolio.
Since the launch of ally Bank in 2009 every single annual vintage of deposit customers has grown their balances overtime, reflecting more than 13 years of continuous growth.
Over this time, we've made substantial investments in the ally brand and product capabilities.
The powerful combination of industry, leading customer service, expanding digital products and tools and competitive rates differentiates us from our competition.
And gives us confidence in our ability to remain disciplined as we navigate a rising interest rate environment.
Turning to slide 16, we continue to drive scale and diversification across all our digital bank platforms.
<unk> serve as a gateway to our other banking products, including ally lending card invest and mortgage which enhanced brand loyalty drive engagement and deepen customer relationships.
Significant portion of ally invest account openings and ally home direct to consumer volume is sourced from existing depositors low.
<unk> acquisition costs, and accelerating organic growth and balance sheet diversification.
We also see a clear path for expansion among our newer point of sale lending and credit card products. Our focus on delivering digital first integrated capabilities supports our outlook for growth and accretive returns in the years ahead.
Let's turn to slide 17 to review auto segment highlights.
Pre tax income of $725 million was driven by expanded net financing revenue source from strong originations and solid credit performance.
Starting at the bottom left the originated yield again exceeded 7%, which we expect for the fifth consecutive year in 2022.
Tumor demand for auto remains robust, reflecting the high utility of the auto asset class and driving strong used vehicle values.
With low inventory and robust used car pricing consumers are accelerating trade ins, resulting in elevated prepayment expense impacting the portfolio yield by approximately 30 basis points.
As inventory grows over time, we expect this activity to normalize driving yields above 7% before any benefit from rate increases.
On the bottom right. We've included lease gain trends lease gains were robust in the quarter driven by used vehicle dynamics, but as we've discussed for some time the upside remains muted as approximately 85% of the units terminated were purchased by lessees and dealers.
This is another trend that will gradually normalize as inventory levels increased and used values decline, we expect fewer less and dealer buyout, which should be another positive for allied over the medium term.
So while strong used car values have been a benefit to results to date, there's a natural hedge to normalization, including higher retail auto yields favorable off lease vehicle dynamics and increased floorplan balances.
Turning to slide 18, our leading agile platform is built to adapt to dealer and customer needs in a comprehensive and innovative manner.
<unk> in our performance and our multiyear growth of our dealers.
Our focus continues to migrate towards deepening these relationships driving strong application trends, which we expect to exceed 13 million again this year.
In the upper right and in consumer assets expanded to $90 billion up 7% on a year over year basis.
We expect to see a robust market that is supportive of our outlook for 40 to 45 billion of consumer originations in 2022.
Commercial balances ended at $17 3 billion, reflecting a gradual and modest normalization of inventories.
Turning to origination trends on the bottom half of the page auto volume of $11 6 billion up 14% from prior year represents our highest first quarter in over a decade.
We provide a broad access to credit for consumers utilizing our full spectrum underwriting capabilities, while maintaining consistent FICO and non prime trends.
Turning to insurance results on slide 19 core pre tax income of $74 million decrease year over year, driven by the impact of lower industry sales dealer inventories and record investment gains in the prior year period.
Robust investment income of 64 million reflected our ability to drive gains opportunistically in volatile markets.
On a year over year basis underwriting income declined 18 million as favorable loss performance was offset by lower P&C premium.
Total written premiums of $265 million reflect reflected lower unit sales and inventory levels across the industry.
Within ally, we see significant opportunity to improve dealer penetration and grow that's highly accretive business and we are excited to have Daniel eller, a former investor relations executive in his new role leading this business.
Turning to corporate finance on slide 20 core income of $68 million reflected expanding net financing revenue driven by disciplined growth in the portfolio.
Other revenue from investment gains syndication income and growth and unused commitment fees and stable credit trends.
The loan portfolio remains diversified across industries, and it's floating rate, which positions us well for expected rate increases.
The quality of our portfolio is evident in our consistent credit performance and asset based loans comprising 54% of the portfolio.
Our $8 billion H F. I balance is up 28% year over year, reflecting our strong expertise and disciplined growth within a highly competitive market.
Mortgage details are on slide 21 mortgage generated pretax income of $11 million, reflecting tighter margins on conforming production and reduced demand for refinancing activity.
Ally home DTC originations of $1 7 billion was relatively flat on a year over year basis, but down linked quarter given the contraction in the overall mortgage market.
Mortgage remains a critical product for our customers who value a modernized and seamless digital platform. We added four new states to our platform. This quarter now active in 46 plus D C.
We are prioritizing a strong experience for our bank customers and enhanced risk adjusted returns, which may lead to changing origination levels in any given quarter or year.
On Slide 22, we've again included our financial outlook, considering the rapidly evolving operating environment. Since we provided guidance in January we've seen accelerating geopolitical conflict increased inflationary pressure any significant move in rates as the market expectation.
Fed funds has increased over 100 basis points since our January update a key watch item as we manage pricing on both sides of the balance sheet.
Despite that volatility, we're confident and alloys ability to generate a 16% to 18% plus return over the medium term with the expectation 2022 will be at the high end of that range.
Performance will be fueled by strong revenue growth annual P P and our expansion and normalizing used vehicle value and credit performance.
Our outlook embed balanced competitive and operating environment assumption, specifically in auto and deposit.
The earnings and return profile of the company has structurally improved and we remain focused on driving near and long term benefits for all of our stakeholders and with that I'll turn it back to J D.
Thank you Jen I'll close with a few comments on slide number 23.
First I remain deeply grateful and proud to lead our company. Our results. This quarter are impressive our broader objective to serve our teammates our customers our communities and our stockholders is what defines our company's long term success.
We built a structurally enhanced more profitable company.
Strategic execution across our business lines.
Balance sheet optimization over many years and differentiated products for our customers all of which positions us for a very strong long term outlook.
We will continue to execute with a focus on the same values and priorities would have served us well over several years and with that Jen Sean back to you. When we go into Q&A. Thank you Jamie as we head into Q&A, we do ask that participants limit yourself to one question.
And one follow up Livia please begin the Q&A.
Ladies and gentlemen.
I would like to ask a question at this time you will need to press. The Star then the one key on your Touchtone telephone. Please standby, while we compile the Q&A roster.
And our first question coming from the line of Bill <unk> from Wolfe Research. Your line is open.
Thank you good morning, J P and John Hey, good.
Good morning, Beth Good morning, Don Hi.
Hi, I wanted to dig into the impact of used car prices a bit more in your outlook.
<unk> said that Youre, assuming 15%, 20% decrease between 'twenty, one and the end of 2023, but that's an average correct and just to clarify where do you expect used car prices to be at the end of 'twenty three relative to 2019 levels.
Yeah sure. Thank.
You build a very important question as we've seen very elevated used car prices even coming into 2022. The guide that we've provided is a minus 10% to 15% on average for 2023. If you think about the point to point decline from first.
<unk> 2022 to fourth quarter of 'twenty, three is obviously significantly larger than that so.
Keep that in mind I, it's sequential and it's and it's a steep drop off now I do think the dynamics around used car pricing is really important as you look at the total earning asset yield and an income statement for ally and you know as we went to see used car pricing come down we would.
Back to see tailwind in our retail loan portfolio yield as I mentioned.
Elevated prepayment activity has created about a 30 basis point drag on our retail auto portfolio yields even within the lease business as we'd expect used vehicle values to come down LVL and D. B O shouldn't normalize and that should give us access to more games, just even within lease and then last but not.
We are expecting.
Inventory to come up as used vehicle values come down and that should create more growth any floating rate asset as we head into a rising rate environment. So a lot of just natural hedges around used vehicle values and I think ally really wins either way, it's used vehicle values remain robust.
We'll see elevated contract values strong originations strong lease yields lower LGD, if it moderates down youre going to see a lot of tailwind.
In our commercial floor plan as well as retail auto yields and I think from a credit perspective, we've been pricing appropriately for LGD, we have reserved qualitatively and quantitatively to cover and it's certainly included in our one four to one 6% guide as well so hopefully that gives you some color billets.
Really important to look at this holistically across alloy.
Understood maybe just following up on that.
So is it reasonable to conclude based on everything that as you as you explained it John that one four to one 6% NCO rate in your outlook for 'twenty three to 'twenty four.
Hum.
It is.
It reflects and all the other moving parts associated with used vehicle prices. If they were to decline to 2019 levels that you have confidence that.
The outlook that you've laid out contemplates.
The ability of.
The numbers that you've laid out if if used vehicle prices were to normalize back to 2019 levels.
Yeah, I mean in the guide just to be really clear, we have that 10% to 15% average annual decrease and that would flow through all of our yields as well as into our our.
Assumptions around N C O's and yeah, just keep in mind. We also have qualitative factors and we've been very mindful of the uncertainty in the operating environment. The elevated contract values that we're originating against and like I said, we're pricing sufficiently for that and are guiding toward towards it and that NCO.
Guide as well as establishing qualitative and quantitative reserves around that but I think we're very well covered in the guide.
It's just that there's a I think the lack of confidence that the improvement that <unk> seen in its earnings growth in our OTC post COVID-19 as sustainable.
You've laid out clearly that there are structural reasons for the improvement, but I think that just helps get at the sustainability question. Even if if you did have sharper normalization in used car prices.
For taking my questions.
Thank you Bill and I think that's a really important point and also you know as Jbl's always tells US there is a bull case around used vehicle pricing. If you think about inventory levels and continued supply chain constraints.
Thank the guide that we've provided is pretty conservative relative to what were actually experiencing across our dealers today.
To that point, even though we talk to some of our big dealers I mean there.
Yeah. They continue to be another quarter and then they are pretty sold.
456 months out of everything they have coming in on production. So it's a pretty fascinating dynamics that we're seeing right now.
But great questions Bill obviously, you are seeing us.
Land.
Staying ability story here, we feel really confident with.
We got a great outlook in really strong position for the future.
Yes.
Yeah.
And our next question coming from the line of Ryan Nash with Goldman Sachs. Your line is open.
Hey, good morning, J B and good morning, Jim.
Good morning, Ryan.
So maybe just to start on the net interest margin. So Jim you reiterated an upper threes NIM, which also factoring in the additional 100 basis points of rate hikes.
Maybe just unpack for US what's included in there in terms of the asset repricing and more importantly deposit betas and then second can you maybe just talk about how you expect betas to progress over let's say the first 100 to 150 basis points relative to the second $1 50, and how how are you expecting the pricing strategy to different what gives you the car.
So that's gonna be favorable relative to last time, when I have a follow up.
Yeah sure. So let me start first Ryan on the asset yield and I just hit on some of the dynamics there, but you know starting with retail loans, we're at <unk>.
And to see a robust originations will have our fifth year of putting new originations on the books at over 7% and as we would expect used vehicle values to come down we'd expect a really nice tailwind.
On lower prepayments in our retail loan portfolio and then even in lease.
Inventory returns, we should see growth there and just that it's important that we have this natural hedge with used vehicle values coming down LVL and DBA dynamics should shift with that and and help to neutralize some of the the decrease from lower vehicle values.
And then of course, we would see inventory levels coming up I mentioned floor plan, 100% floating rate as rates come up we'll be growing that portfolio at the right time.
We also have a mix better mix dynamic as we've run off excess cash we're also growing.
Our unsecured products, so think about ally lending and ally card at very healthy yield. So all in Brian We would expect our earning asset yield to continue to expand.
Well into the five percents, and that's with a rising rate environment, but even absent that with the favorable mix that will happen.
And you know noteworthy is.
And we talk about this a lot the originated yield on retail auto relative to the portfolio.
Just even through April year to date, we've been able to put pricing in the market. In fact, we've added about 40 basis points of price so far and that's as you know way out ahead of fed funds increases.
So feel really good about the earning asset yield expansion and the growth attached to that as well and then on the liability side look we are in such a different place today than we were in the past, especially in 2018 and the last rising rate cycles, do you think about where almost 90% core funded.
Investment grade, we have access to alternative funding sources.
And quite frankly, we've continued to invest in a very competitive value proposition around digital tools brand.
The multi product relationships that we've been building that consistent retention that we've driven and so.
We feel great from a consumer value perspective, as well as from an allied balance sheet perspective that we'll be able to hold.
Hold rates at a lower level relative to fed funds and that's next rising rate cycle now I mean, I know Ryan we've gone back and forth a lot on data map and as you know we're starting at a significantly lower pricing position. This time around and so veda could could you know we've run scenarios, where beta could potentially be a little higher but I think let them.
Horton is even when we run those scenarios, where we're still.
Seeing a path to that upper 3% NIM, that's supporting our 16% to 18% plus R. O T. SEC guide so hopefully that gives you a bit of color.
Yeah, No no that's helpful and maybe if I can ask a follow up a two part question. So JP. When we met in December you were you talked about the franchise being able to generate six to $7 a share of earnings, but obviously the world has changed a bit in the past few months, but I was wondering if you could talk about how you expect earnings to progress as the French.
As the cycle progresses do you still feel comfortable you know outside of a recession can we see those type of earnings and what are the drivers and then second Gen. You mentioned on the call that earning to structurally improve then and when I talk to investors you know they'd be struggling to understand what took us from kind of 12 to 12 and a half pre pandemic to 16 to 18.
Post pandemic.
Just talk about you know.
What are the main drivers that should make profitability structurally higher and why do you think they are sustainable.
Do you want me.
Ryan I think you're on question four or five but that's all right do.
Do you want to start to see I think.
We are very much connected and the key drivers as we continue to reiterate is just talk.
In retail lending, we have changed our focus from sub vented Super Prime paper to prime you've seen our market position and the continued performance we've had in retail auto and that just generates a higher higher earnings trajectory as well as a higher return on tangible common equity to suggest that.
Mix shift inside the four walls of of auto has been very powerful.
And then I mean look we've added a lot of new product capabilities, which are accelerating we shared the numbers around ally lending as well as ally card, obviously ally cards of 5%.
ROA product driving very significant and accretive returns ally lending as well and so the growth of our newer products is really helping to propel our earnings trajectory and the guide towards the 16 to 18 plus percent return on tangible common equity and then.
We can't underestimate the power of our liability stack and you've been out there, saying you know ally has transformed the liabilities back more so than any other.
Bank out there and and we agree with that and that is a big part of our structural.
Improvement in our profitability and Hey, if you want to point investors to our track record look at our 2021 return on tangible common equity had 24%. We just printed 20 over 23% I could see Ryan this year getting to 20% plus or minus and then we have a.
Very healthy Guy to 16 to 18 plus percent. So we've got a great track record I think we have a very reasonable set of assumptions going into the future and you know.
16, 18% plus return is very healthy because of all of those dynamics.
Thanks, Dan and no no follow ups.
Oh, hi, Thanks, Ryan I appreciate you're getting.
Thanks, guys.
I just told you we're not coming off of that but what I told you what I told you in December so.
Yeah all good thank.
Thank you Rod.
Right.
And our next question coming from the line of Sunshine Sciclone with <unk>. Your line is open.
Thanks, Good morning.
Obviously, you guys alluded to the fact that people are getting jittery about consumer credit and I. Appreciate the color you provided on slide seven on how it's affecting your portfolio, but I'm curious, how it's affecting your underwriting and the decisions that you're making going forward do you guys envision that impact any of your loan growth expectations, especially on the unsecured.
Sure Todd.
Yeah, good morning Sanjay.
So the way that our underwriting strategy has positioned us is really to look through the cycle and so we're not making big shifts based on macroeconomic forecast that that we know will not be perfectly correct or even remotely correct in some circumstances. So our position on underwriting has always been to.
Look three of returns through the cycle, we've largely done that and in retail auto I will say, we make some tweaks around the edges. We are seeing elevated contract values and so we're mindful of potential LGD impact down the road and so we've put additional pricing in.
To cover off on L. G. D. We've also been mindful of that as we've established quantitative and qualitative reserves around the portfolio.
So we do make tweaks around the edges.
That we are incredibly well positioned and as we think about both the pricing and the reserving that we have.
And then on the.
On the unsecured side very similar approach that we're taking in.
I shared a slide in the presentation just around the data that we're looking at and that that will help us to make tweaks as well again, its not going to be a wholesale change in our underwriting, but we will be mindful of that and making tweaks and and and then underwriting is important but servicing as well and as we see any kind of detour.
Ration or we see delinquencies pick up in pockets over time, we'll be able to be incredibly proactive from a servicing perspective as well.
Yeah I I just noted in response to Ryan's question that we've been mindful of this environment and we've been taking pricing up in retail auto by way of example, we've increased pricing a couple of times and it's about 40 basis points just year to date through April here.
Okay, Great and just a follow up on.
Some color on the reserve expectations I know, John you sort of went through.
Some of the comparisons relative to sequel day one.
Just on the qualitative side, we compare today versus people day one.
What's the difference in the qualitative assumptions given.
How the market or the investment community and sort of position in the macros considering deterioration from here. Thanks.
Yeah sure I mean look as we.
Came through the pandemic, we had qualitative reserves around COVID-19 and as we've headed into 2022, we've again considered qualitative factors, especially relative to inflation recession probability and in particular in retail auto have established.
Some qualitative reserve factors there.
So overall from a quantitative and qualitative perspective I you know retail auto was up some 15 basis points from day, one sees though so we think we're in a really good position there.
And then as I've continued to note, we essentially have a recession built in to our assumptions on our reserves. If you think about after year three unemployment rate hit six 5%. So for all those reasons, Sanjay and I think what you're pointing to.
We have a really robust reserve and really strong balance sheet as we enter.
And as we enter 2022 and continue to navigate an unbelievable amount of uncertainty.
Yeah.
Okay.
Okay.
Thank you Sanjay.
Okay.
And our next question coming from the line up that secret sauce with Morgan Stanley . Your line is open.
Hey, Good morning, this is Jeff adelson on for Betsy.
Hi, Jeff Good morning Ana.
Good morning, Jamie.
It seems like you're perhaps suggesting some some NIM upside from here just given all the benefits you talked about coming through today on the earning asset side over time as as used car prices normalize and I know, we're already sitting here today at a $3, 995% NIM and you're sticking to the upper 3% guide.
Just want to understand how you're thinking about the probability of going higher from here or how much conservatism is embedded in the guide.
And then on the slide you you did mention you're monitoring the shape of the yield curve can you just remind us what you're embedding in your expectations right now in the yield curve and maybe how much of an impact in version has for your and improve us.
Yeah, and let me let me just start with the assumption around the yield curve. So if it were now expecting fed funds for us to hit about two 5% at year end and then migrating up to about 3% early 2023.
And against that.
We are expecting kind of through time to continue to hit that upper 3% NIM I will say it could bounce around a little bit from quarter to quarter. As we continue to have low deposit pricing and asset yield expansion kind of early 2022, but then as deposit pricing picks up in some of the later quarters you could have NIM.
Mt around quite frankly over the next kind of six eight quarters, but I think what's important is is that we still see a clear path to that sustainable higher NIM simply because of the structural improvements we have on both sides of the balance sheet.
So hopefully that helps in terms of just the NIM from a.
From an inversion perspective.
That's something we're watching very carefully and where we're not putting a lot of duration on the books right now where we've been mindful of kind of adding to our securities portfolio as I talked about in mortgage we're being really selective about what we put into H F. I just to make sure that we do manage duration and potentially ahead of an inversion.
And yeah.
Other watch item and I mentioned this in my prepared remarks is is simply making sure we're disciplined and diligent around deposit pricing.
Got it that's helpful and just as a quick follow up I'm not sure. If I missed this already but just just wanted to understand in the back of the slide deck why the interest sensitivity profile seem to have been more impacted than the 100 basis.
Scenario for the instantaneous rate scenario.
Yeah, well I mean, you have to look at the underlying assumptions as we move from fourth quarter 'twenty, one to first quarter 'twenty to keep in mind. Our forward assumption also increased 100 basis points. So this is a 100 basis points on a 300 basis point assumption and so you're talking about a very very steep shock.
Relative to even where we were in the fourth quarter of 'twenty. One now as I've talked about in the past we have hedging activity that helps to mitigate part of that.
Very steep ramp up in interest rates, but essentially it's just that the pull forward of a 100 basis points on fed fund forwards.
Thanks, guys.
Thank you.
No.
Yes.
And our next question coming from the line of Moshe Orenbuch with Credit Suisse. Your line is open.
Great. Thanks, I think the wanted to talk a little bit about the origination level.
The yield and the pricing comments that you made I guess.
No pretty remarkable just given that some of the large banks reported is not.
Nearly as robust and.
You know like what do you see as driving that specifically as it is at a competitive advantage versus some of the competitors that are wholesale funded like can you talk a little bit about what is giving you that as with some of the partnerships you just talk about that.
And how it relates to both the volume and pricing.
Yeah sure sure Moshe and I think it relates to just our overall strategy in auto which is just focused on the prime segment I think you know.
Prime has been impacted simply because of vehicle availability right, where we're underwriting in prime and in particular at the intersection of used and Prime Theres still a terrific amount of transaction volume and some of that's driving churn in the portfolio.
But there is a terrific amount of demand still in the system, that's driving transactions and driving originations for us I mean, it's we take kind of a step back.
We think theres. Some four 5 million customers that are on the sideline right now just because they cannot find a vehicle to purchase and so not only are we expecting this very strong origination.
Volume to continue this year, we'd expected in the future and so there could be some mix shift for more new as it becomes available for system, they used and the new.
But it it's related to our segment is related to our scale our relationships were at well over 21000 continues to grow we're driving half flow through those dealer relationships and so Moshe it's really all of the above its the very important segment, where in prime and used and it's obviously the capabilities.
That we're bringing to that segment that is continuing to fuel just very accretive.
Originations for years.
Got it thanks, and maybe just kind of a follow up on one of Brian's questions you talked about the <unk>.
Natural hedges in terms of the earnings outlook and things that could that could help.
To help mitigate whatever you know whether it's the normalization of used car values are rising rates are there.
Active steps that you're taking that you would add to that like things that youre doing kind of a you mentioned, obviously pricing, but are there other things that occur.
Company is doing to kind of position for the rest of 'twenty two or 'twenty three.
Yeah, I mean look we are we're not complacent on anything I mean, we're very focused on continuing to serve all of our customers.
Starting first with the dealers, making sure we're there.
To support our.
Originations.
We've continued to expand not only our traditional dealers, but our newer dealers Carvana Echo Park, a number of our of the newer entrants and you know where we're not getting complacent at all.
<unk> to drive that engagement and that application flow.
We're also mindful of of dynamics around consumer health and said, where we're monitoring that very closely I included that extra slide. This morning to give you a sense for how closely were monitoring the data to inform as you pointed out Moshe pricing, but also servicing strategies I mean, we are expecting delinquency.
To continue to normalized charge offs to continue to normalize and we've continued to invest heavily in human capital technology and digital capabilities and the serving servicing side of the house as well.
And then I you know I think your point on hedges is really important.
I pointed out earlier.
Well, there's a lot of headlines around used vehicle pricing coming down.
Continuing to see offsets to that whether it's the L. D O D B O dynamics, whether that increase in inventory.
That we'll see in the Floorplan book or even continued origination unit opportunities that we would expect it to grow from here if used vehicle values come down. So again, Russia is continuing to do a lot of what we've been doing in the past, but just monitoring the consumer health and making sure that in consideration and in originations as well.
As underwriting strategy.
Great. Thank you Jamie I don't know if you want to add.
Sure.
Yeah.
Thank you Moshe.
Yeah.
And our next question coming from the line of Rob will happen I don't know Animas research. Your line is open.
Yeah.
Good morning, Jamie Good morning, Jen just wanted to ask on expenses quickly.
On expenses, you said that this year was going to be consistent with.
Past years in terms of expense growth, if we dig into that at all do declare square and more credit card or ally lending business change the expense profile such that there are some puts and takes within the business lines are.
Yeah, and Rob just to clarify I mentioned ally stand alone expense trajectory for full year will be similar to what you've seen in the past.
So that excludes credit card.
Yeah, and the ally stand alone expenses, you expect a lot of the same themes that you've you've heard me talk about in the past. So we're scaling our businesses, there's variable cost attached to that continuing to invest in technology and marketing brand to fuel that growth cyber security as well.
And then you know credit card I think we've been very clear on our performance expectation.
O T C accretive day, one EPS accretive by year end 2022, and operating leverage accretive by 2023, and you know as J D hit on and I hit on my prepared remarks, we are well underway.
To hit that guide and in those robust performance expectations from ally card and then just you know I think it is important to take the big picture in mind, we do not manage expenses point in time line item by line item, we are investing overtime for positive operating leverage and accretive returns and certainly we've.
Delivering that we had a mid teens plus positive operating leverage in 2020 . One we would expect to see operating leverage in PPR expansion over time, but we're not managing line item by line item quarter by quarter, Rob just to clarify.
Yeah.
Got it thanks, and then just on the deposit side looking at the rate tables. There. You know you guys are still at 50 basis points a lot of.
Your peers haven't moved either.
Why do you think that's the case why do you think those haven't repriced yet.
Yeah look I mean, there's still a lot of liquidity in the system today and.
You know I think it's going to take some time for loan growth to catch up to access.
Liquidity available on bank balance sheets, I think that's number one I think if you look at the 50 basis points relative to the average across the industry, it's still competitive.
And last but not least I think I'm just mindful of the continued capabilities that align has invested in are you in terms of digital brand customer service. We do think we offer a value above and beyond just rate but.
But I think it's going to take some time, Rob quite frankly to see pricing come through we have seen CD prices.
Elevate a bit across the industry you would expect that early in a rising rate cycle is.
The industry is trying to lock in lower cost funding, but not a lot of not a lot of growth in those in those products just yet.
Yeah.
Thanks, Rob that's very helpful. Thank you.
Rob So we're a little past the hour I think that's all the time, we have for today. If you have any additional questions. Please feel free to reach out to Investor relations. Thank you for joining US. This morning that concludes today's call.
Yeah.
Ladies and gentlemen that does conclude our conference for today. Thank you for your participation you may now disconnect.
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