Q4 2022 Ally Financial Inc Earnings Call
Okay.
Good day and thank you for standing by welcome to the fourth quarter Ally Financial Inc. Earnings Conference call. At this time all participants are in order should only mode after that.
The speaker's presentation, there will be a question and answer session to ask a question during that.
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Here the message I've I've seen your hand is rates. Please be advised that today's conference is being recorded I would now like to hand, the conference over to Mr. Shan Li head of Investor Relations. Please go ahead.
Thank you Carmen good morning, and welcome to ally Financial's fourth quarter and full year 2022 earnings call.
This morning, our CEO , Jeff Brown, and our interim CFO , Brad Brown will review, our <unk> results before taking questions.
The presentation, we'll reference can be found on the Investor Relations section of our website Allied 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 on slides three and four.
As a reminder, non-GAAP or core metrics are supplemental to and not a substitute for U S. GAAP measures.
Definitions and reconciliations can be found in the appendix and with that I'll turn the call over to J D.
Thank you Sean Good morning, we appreciate you joining us to review, our fourth quarter and full year results I'll start on page number five.
Full year adjusted EPS of $6 six.
Core our TCE of 25%.
Revenues of $8 7 billion reflected another year of solid financial results.
Our TCE was approximately 16% excluding the impact of OCI.
We completed $1 7 billion of share repurchases over the course of the year and this week our board approved a first quarter 2023 common dividend of <unk> 30 per share.
We built businesses that are nimble and able to pivot against the fluid backdrop, we maintain healthy levels of capital reserves and liquidity, which position us well for this dynamic environment.
Within auto finance consumer originations of 46 billion or so.
<unk> from $12 5 million applications across more than 23000 dealer relationships.
The average originated yield of 824 basis points expanded a 114 basis points on a full year basis.
In total we put nearly 400 basis points of price into the market largely in line with changes in the fed funds rate.
Industry vehicle sales remain below pre pandemic levels, but our ability to generate strong originations.
Most of the benefits of our scale.
Of application for awhile.
Net charge offs in retail auto or 97 basis points for the year and the fourth quarter net charge offs increased to 166 basis points as we saw accelerated normalization within the quarter.
Brad will cover losses in more detail as well as our current thinking for this year.
Within insurance written premiums again exceeded 1 billion driven by strong relationships with 4600 dealers.
Our insurance team remains focused on leveraging synergies with the auto finance sales team and we remain optimistic about the organic growth opportunities for this business going forward.
Turning to ally Bank.
Retail deposit balances increased $3 billion year over year, ending at nearly 138 million.
Okay.
We generated $7 billion in retail deposit growth in the second half of the year, while maintaining a very balanced approach to pricing.
We continue to see strong momentum in retail deposit customer growth and ended the year with $2 7 million customers up 8% year over year.
We've seen increased consumer engagement and adoption trends across other ally bank product offerings.
Ally home originations of $3 3 billion were down year over year, reflecting broader mortgage market conditions.
Equity market trends resulted in a decline in ally invest assets.
Active accounts increased to 518000.
Ally lending generated origination volume of $2 1 billion as we added merchant relationships across home improvement and health care verticals.
Our credit card reached one 6 billion of loan balances for more than 1 million active card holders.
The car team also reached a key milestone in the fourth quarter as we rolled out a lineup of ally branded credit cards.
I am proud of what we've accomplished on the integration over the past 12 months and excited about the continued opportunities which lie ahead.
Corporate finance continues to generate steady loan growth, but the held for investment portfolio, reaching 10 billion with growth coming primarily from asset based lending.
Turning to slide number six our long term strategic priorities remain unchanged, even as we navigate this dynamic environment.
Our teammates are well prepared to handle near term challenges, while remaining focused on driving long term value.
Our culture is the driving force behind everything we do as a company and I'll share more on that on the next page.
Since the launch of ally Bank, we've challenged ourselves to provide differentiated and friction less products in the market.
Consumer preferences have evolved over the past decade, and we've always strive to deliver leading digital experiences, allowing us to be an ally for our customers.
Our dominant positions in audio and deposits continue to fuel consolidated earnings today, and we see growth opportunities across the company, which will drive continued asset and revenue diversification as we further scale our newer businesses.
Central to all our lending products is a disciplined approach to credit risk and we view ability to underwrite and manage risk as our most critical core competency.
And lastly, disciplined capital deployment is a foundational aspect of our strategy to deliver strong returns and add value for all stakeholders.
Turning to slide number seven the building caring and nurturing of our culture is what has given me the greatest joy and leading our company over the past eight years and it remains a huge priority for me our culture is not about the CES culture.
As a culture that harnesses the true power of over 11500 teammates and empowers everyone to make a difference.
We believe our strong culture is essential to delivering for our customers communities and stakeholders and that all starts with taking care of our employees.
We've consistently prioritize investment in our people and culture and our actions in 2020 to reflect back commitment.
In the past 12 months, we've increased our minimum wage by 15% to $23 an hour, which makes a meaningful difference for thousands of our teammates.
We recently announced another year of our own brand program, which provides every employee 100 shares of ally stocks and empowers them to act as owners of the company.
We've expanded mental health benefits for employees and their families. This year and expanded upon our benefits for new parents.
The investments that we've made and our deliberate focus on culture as a resulted in a highly engaged workforce.
The top 10% of companies when it comes to employee engagement and well above industry averages. Our employee resource groups are eog's were launched five years ago, as we expanded our D. Eni initiatives and I'm proud to say over 50% of our workforce volunteers and is active in it.
<unk> one EOG.
Creating an engaged workforce that embraces our do it right approach improves every aspect of our business as we serve our growing customer base now 11 million strong.
Retention levels at ally bank remain industry, leading along with compelling customer satisfaction rates.
We've consistently rallied around initiatives that help us better our customers and drive industry change.
And our teammates continue to invest in the communities, we live and work in.
We work hard to nurture this culture across the enterprise and I am confident it will be a differentiator for ally now more than ever.
Let's turn to slide number eight.
Before diving into the fourth quarter details I'd like to holiday allies, multiyear strategic and financial transformation, which demonstrate the steady execution and strong performance over a longer lens than a quarter or two.
And nearly 10 years as a publicly traded company we've consistently work to remain a disruptor and execute against our long term priorities, which has resulted in sustained improvements in operational and financial results.
Within auto and insurance, we've transitioned from a captive auto finance company to a market, leading diversified lender with dealer relationships of 23000, increasing roughly 50% while application flow of nearly $13 million is up almost 40%.
Ally Bank remains the largest all digital bank in the U S. While the direct banking industry was largely unproven when we launched ally bank, our steady growth to $138 billion of retail deposits and 4 million customers make it clear our model and our brand resonates with consumers.
Our balance sheet has evolved through optimization within auto finance, along with expansion into other consumer lending verticals.
Overall, earning assets are up $44 billion since our IPO, which includes $28 billion of non auto loan growth.
This growth is generated $3 7 billion in revenue expansion.
This evolution has created a structurally more profitable company NIM of 388% is up 134 basis points from where we were in 2014 and is driven by optimization on both sides of the balance sheet.
Throughout this transformation, we've remained disciplined on capital allocation and ensuring we are adequately reserved.
Shares outstanding have declined 38% booked.
Book value, excluding the temporary headwind from OCI has effectively doubled and we maintain a $3 7 billion dollar loan loss reserve.
These metrics reflect years of consistent execution and give me confidence in our ability to deliver in the years ahead.
Slide number nine reflects our focus on growing and engaged customer base. We now serve 11 million customers across our businesses, which represents a 58% increase since 2014.
Ally bank customers have more than quadrupled over this timeframe as we've evolved expanded and enhanced our digital capabilities are.
Our consumer lending products are resonating and customers want to deepen their relationship with ally evidenced by the significant growth in multi product customers shown at the bottom of the page.
Across auto and insurance, we've added 500000 customers as we've leveraged our strength and scale in the market as the leading independent full spectrum lender.
This product expansion and customer growth translated into improved balance sheet composition and expanded earnings which I'll cover over the next few pages.
Turning to slide number 10 since 2014, we've significantly transformed our balance sheet as we optimize auto and expanded additional consumer offerings loans and leases have increased 31 billion or 26% since 2014 through disciplined expansion across all.
Our lending products.
Auto assets have been relatively stable as growth in higher yielding retail assets has been offset by the decline in floor plan balances.
While not reflected in the charts. The return profile of the auto finance business has dramatically improved as we strategically shifted into the intersection of prime and used.
Ally Bank consumer and commercial products have grown six asks since 2014 and now make up 33 billion of balances.
And it's important to keep in mind that while we've recently added point of sale lending and credit card capabilities, our balance sheet remains 95% secured.
On slide number 11, you can see we've driven substantially higher net interest margin given the optimization across both sides of our balance sheet.
NIM increased 134 basis points from 2014, given expanded earning asset yields and an improved liability construct.
The optimization within auto has increase yields while expanded consumer lending offerings have provided incremental tailwind.
Our liability stack shifts equally meaningful progress in 2014, we were only 41% deposit funded relative to 88% today.
Market based funding has declined by more than $50 billion. The transformation of our funding profile is driven cost of funds down nearly 30 basis points. Despite average fed funds being 160 basis points higher.
While we face near term pressure on margin given our liability sensitive position. This optimization on both sides of the balance sheet positions us with a much improved NIM. Despite the rapid rise in interest rates, Brad will share more on margin dynamics later.
Turning to slide number 12 total revenue of $8 7 billion represents a 74% increase since 2014.
Net financing revenue of $6 $9 billion is nearly doubled through balance sheet transformation and the strategic positioning of the auto finance business. Other revenue has also expanded as we ground fee generating businesses like insurance and smart auction.
Investment gains will fluctuate with market conditions, but we see a path to a $2 billion plus annual other revenue stream.
The bottom of the page highlights the significant progress across our ally bank businesses.
Revenue in 2022 of $1 2 billion has increased more than $1 billion since our IPO and is up 75% in just the last few years.
Moving to slide number 13, we show the consistent credit performance of our largely secured balance sheet and significant reserve coverage relative to losses.
On a consolidated basis net charge offs of 74 basis points compared to our coverage rate of 272%.
Within retail auto net charge offs of 97 basis points reflect normalization off historical lows.
The retail auto reserve of three 6% remained elevated versus seasonal day one we.
We feel comfortable our reserves position us well for a variety of environments as we've consistently taken a conservative approach in our reserve methodology.
Slide number 14, as additional perspective on absolute levels of our reserves in excess capital.
The $3 7 billion dollar allowance on our balance sheet is roughly $1 1 billion higher than seasonal day, one and positions us well to absorb expected lifetime losses based on the current economic outlook and our capital position creates significant buffer against unexpected losses and volatility.
While we have largely normalized excess capital relative to our internal targets. We continue to maintain three 6 billion of CET, one above our regulatory minimum under the SCB framework.
The ultimate path of the economy over the near term remains fluid, but we feel very good about the reserve and capital position of the company.
Moving to slide number 15, we highlighted our steady growth and book value per share at year end book value per share excluding the impact of OCI was $44 up 92%. Since 2014, we understand the magnitude of interest rate movements has heightened the focus on OCI and the mark on our six.
<unk> book, but we feel the 44 dollar figure is a better representation of the true intrinsic value of our company.
The existing Mark will fully amortize back to par over time and declines in rates like we saw in the fourth quarter will accelerate book value generation.
The bottom of the page shows the progress we've made in buying back shares at levels below the intrinsic value of the company since the inception of our repurchase program in 2016 shares outstanding are down 38%, creating significant value for long term holders, we recognize theres a lot of focus on our earnings.
Trajectory over the next few quarters, but it's important to consider the <unk> that have been created by a fundamental transformation over the past several years and with that I'll turn it over to Brad to cover our detailed financial results. Thank you Jamie Good morning, everyone I'll begin on slide 16.
Net financing revenue, excluding OID of $1 7 billion was up slightly year over year, driven by continued strength in origination volumes and auto pricing higher funding costs given the rapid increase in short term rates, partially offset through our hedging position and growth in unsecured consumer products.
Adjusted other revenue of $478 million reflect the continued momentum across our insurance smart auction and consumer banking businesses.
Elevated investment gains in 2021 drove the year over year decline.
Revision expense at $490 million reflected the continued normalization of credit and modest reserve build to support loan growth and to reflect the evolving macro environment.
Noninterest expense of $1 2 billion reflects investments in our growing businesses and in technology.
As we mentioned during our last call. The fourth quarter included a 57 million charge consisting of the final impact of the termination of our legacy pension plan.
<unk> also reflect a tax impact related to the termination, which drove $60 million of tax expense and increased the tax rate in the quarter by approximately 14 percentage points.
GAAP and adjusted EPS for the quarter were 83 cents and $1 eight respectively.
Moving to slide 17, net interest margin, excluding OID at three 6% to 8% decreased 14 basis points of year over year, and 15 basis points quarter over quarter.
The impact of rapid increases in short term rates and the repricing dynamics of our balance sheet creates some near term margin pressure.
Still see NIM tromping around three 5%, which I'll cover in more detail shortly and remain confident in our ability to return to a 4% margin over time.
Fourth quarter NIM benefited from continued increases in retail auto originated yields declining retail auto prepayment activity and growth within our commercial and unsecured consumer lending segments.
Total loans and leases are up nearly $16 billion versus prior year, while declines in cash and securities resulted in total earning asset growth of roughly $9 billion.
Earning asset yield of six 4% grew 65 basis points quarter over quarter, and 149 basis points year over year over year, reflecting a continuation of trends we've highlighted previously.
Including strong originated yields within retail auto growth in higher yielding assets.
And more than 40 billion of floating rate exposure across the loan and hedging portfolio.
Retail auto portfolio yield expanded 33 basis points from the prior quarter due to continued increases in originated yields and a decline in prepayment which have been pressuring yield since mid 2021.
Including the impact of hedges yields reached 798% up 69 basis points quarter over quarter, and we expect yields to migrate towards 9% throughout 2023.
Similar to the prior quarter commercial portfolio yields expanded as theyre floating nature benefits from higher rates.
Turning to liabilities cost of funds increased 84 basis points quarter over quarter, and 170 basis points year over year.
The increase in deposit costs was in line with what we shared last quarter and reflect higher benchmark rates and a competitive direct bank market for deposits.
Slide 18 provides incremental detail on our outlook for margin.
We continue to expect near term compression and NIM to trough around 350 basis points, assuming the forward curve and the fed funds peak of 5%.
And retail auto we added 395 basis points of price into the market in 2022 and are currently originating loans in that 10% range.
On the deposit side, our OSA pricing has moved up 280 basis points as of year end.
The prices in retail auto were 115 basis points in excess of what we pass through on OSA.
Despite that pricing momentum the timing dynamics. We've highlighted previously will remain a margin headwind until we get through the fed tightening cycle.
Similar to last quarter, the bottom of the page highlights the two largest driver of our NIM trajectory.
Retail originated yields were $9 five 7% and given the portfolio yield is still more than 150 basis points lower than originated yields we see meaningful portfolio expansion ahead.
By the fourth quarter of 2023, we expect portfolio yield will increase to roughly 9% without assuming any incremental pricing actions on new retail auto originations.
The bottom right shows the evolution of retail deposit pricing at year end, our OSA was priced at 330 basis points, while average retail deposit costs in the quarter were just over 240 basis points.
Deposit pricing has remained dynamic and competitive and incremental betas were a little higher in the fourth quarter.
And while we're not providing a specific outlook for OSA pricing, we continue to see a three 5% NIM trough in a scenario where liquid deposits go to 375 basis points.
Clearly there is a range of possible outcomes, but we feel very good about our overall NIM trajectory.
Turning to slide 19, our CET one ratio remained at nine 3% as earnings supported 2 billion in <unk> growth in.
In 2022, we executed $1 7 billion of share repurchases as we continued to normalize excess capital.
Additionally, we announced a dividend of <unk> 30 per share for the first quarter.
We remain disciplined in our capital allocation and currently maintain $3 6 billion of CET, one in excess of our <unk> requirements.
That priority for me focused on maintaining prudent capital levels amid continued uncertainty while investing in our businesses and supporting our customers.
Let's turn to slide 20 to review asset quality trends.
Consolidated net charge offs of 116 basis points reflected the combination of normalization and seasonality.
Comparisons to the prior year and pre pandemic periods are influenced by the addition of unsecured lending, which added 11 basis points.
I'll provide more color on retail auto credit shortly but trends remain generally in line with our expectations. We are closely monitoring performance trends across the portfolio to inform tactical actions and risk tolerance as we continue to manage through credit normalization.
In the bottom right 30 day delinquencies increased due to typical seasonality and have normalized back to 2019 levels.
60 day delinquencies are elevated versus 2019, given strategic shift and collection practices practices, while we continue to see favorable political loss rates.
We expect continued increases in delinquencies and are closely monitoring consumer health and the impact of persistent inflation on spending and savings trends.
The investments, we've made but in servicing and collections over the past few years will enhance our ability to communicate with and support our customers.
Slide 21 shows that consolidated coverage increased one basis point to 272%, primarily reflecting growth in our retail auto and unsecured lending portfolios.
Total reserve increased to $3 7 billion or $1 1 billion higher than C. For day, one levels as we accounted for modest loan growth and the current macro economic outlook, which has been unemployment rates approaching 5% by year end.
Retail auto coverage at three 6% increased four basis points quarter over quarter and is 26 basis points higher than C for day one.
Total retail auto reserves at 3 billion are up roughly $600 million or 25% versus seasonal day one.
Slide 22 provides a detailed view of originations dating back to 2016 bucket into bucket it into our proprietary credit tiers.
As a full spectrum lender with critical scale, we are able to <unk> the big focus on market segments, where we see the most value while supporting our dealer customers.
Since 2016 originations from our top two tiers have remained consistent in that 75% range, while we slightly decreased our exposure to lower credit tiers.
Our approach to risk based pricing is evident on the right side of the page in total we added 395 basis points of price in 2022, which was intentionally added across the credit spectrum.
Unlike some other lenders, we werent able to add as much price into higher FICO segments, but we aggressively added price to higher risk trusses to buffer returned from losses that may exceed underwritten expectations.
The bottom of the page highlights a few of our originated staff showing our strategic shift towards used which is largely driven yield expansion. Despite stable credit origination trends over the past seven years.
On slide 23, we show our forecast for used vehicle values, which has remained largely consistent for the past 12 months.
In 2022, we saw a 19% decline from peak values, most of which was realized during the second half of the year.
We are projecting a further decline of 13% from current levels, which would result in a 30% total decline from <unk> 21 to the end of 2023.
<unk> with previous guidance.
There are certainly other views on used values out there most of which are projecting smaller declines in 2023, while we do see the possibility for a smaller decline in 2023 based on the supply.
Manned dynamics at play we continue to maintain a conservative stance.
Turning to slide 24, we have added some details on what we're seeing within the retail auto portfolio regarding vintage performance we.
We have continued to see strong performance from vintages originated through mid 2021.
These loans have now passed their peak loss period, and we expect lifetime losses to be favorable to price expectations.
We are seeing elevated delinquency and loss trends and the vintages originated from late 2021 through mid 2022, consistent with what others have observed in the industry.
These vintages currently account for about 38% of the portfolio and are just entering peak losses.
Although we expect that cohort to amortize to about 24% of the book by the end of this year, we do expect elevated losses in those vintages to impact our full year 2023 net charge off rate.
As we've discussed previously we have been taking underwriting and pricing actions to reduce to reduce the risk content of new originations.
By the end of this year. These latest originations who account for the majority of the portfolio and loss content heading into 2024.
Slide 25 provides an update on our retail auto net charge offs expectations.
Our 2023 net charge off outlook assumes a mild recession in 2023, along with a 13% further decline in used values just discussed.
Loss performance in December was consistent with what we expect on a normalized basis and we assume full normalization of the portfolio in first quarter of 2023.
Take losses on the late 2021 in early 2022 ventures, vintages, and increasing unemployment drive elevated losses late in the year and our full year 2023, net charge off rate of around one 7%.
The bottom of this slide provides a perspective on how we currently expect losses to materialize throughout 2023.
We've also included historical references which have shown similar seasonality.
Overall expected losses are up approximately 30 basis points from those periods and are slightly elevated relative to what we'd expect for the normalized risk profile of our originations.
We expect 2023 to continue to be a very dynamic environment and we will continue to be transparent about what we're seeing and our current expectations for the year.
On slide 26, we've laid out various actions we've taken throughout 2022 to mitigate risk on new originations and how we are prepared to manage credit through the cycle by focusing on what we can control.
Front end actions, including modifying decision strategy implementing pricing increments and curtailing the risk help to ensure we're originating loans at adequate risk adjusted returns.
Maintaining appropriate staffing levels through the cycle and investing in digital capabilities proactively positions us to handle normalized credit conditions.
Moving now to ally Bank on Slide 27 retail deposits of 138 billion increased $3 8 billion quarter over quarter, reflecting continued growth and solid inflows from traditional banks.
Total deposit balances $152 billion increased 6 billion quarter over quarter, driven by incremental growth from broker deposits.
Given the continued momentum across the deposit deposit franchise, we're currently 88% deposit funded.
We delivered our strongest quarter of customer growth.
The second quarter of 2020, adding 85000, new customers in the fourth quarter, our 55th consecutive quarter of growth.
Since we founded ally bank balance growth and retention have been foundational aspects of our retail deposit strategy. We continue to lead the industry with a 96% customer retention rate.
Customer acquisition, especially within the younger generations is noteworthy the customer demographics in the bottom right highlight the long term opportunity we have to deepen our relationships by being part of our customers' financial journey from the other stages.
Turning to slide 28, we continue to drive scale and diversification across our digital bank platform.
<unk> continued to serve as the primary gateway to other banking products, which enhanced brand loyalty drive engagement and deepen customer relationships.
The strength of our brand allows us to build on current momentum across our Newark consumer lending products ally invest continues to increase depth and strength of customer relationships at ally bank. The percentage of new accounts opened by existing customers remained above 70%.
Card balances of $1 6 billion are derived from 1 million active customers, reflecting our strategy of low and grow credit lines.
Ally lending balances of 2 billion highlight the momentum across health care and home improvement verticals.
And we continue to see balanced opportunity for accretive accretive growth in these portfolios as they currently comprise less than 5% of our earning assets.
Let's turn to slide 29 to review auto segment highlights pre.
Pre tax income of $437 million was a result of continuing actions pricing actions as well as balanced growth within the retail and commercial auto offset by higher provision.
The increase in provision expense versus the prior year reflect historically loss performance in 2021.
As mentioned previously we put nearly 400 basis points of price into the market in 2022 and are continuing to see solid flows with originated yields above 10%.
This drove further expansion of the portfolio yield and we expect this to continue over the medium term given the strength and scale of our franchise.
The bottom right shows lease portfolio trends. Despite the decline in used values gain per unit was up quarter over quarter, given the decline in BC and dealer buyouts.
Turning to slide 30, we continue to realize the benefits of our leading agile platform underpinned by high Tech and high touch model.
Consistent application flow shown in the top left enables us to be selective in what we approve and ultimately originate.
Applications and approvals have been relatively stable over the past couple of years, but we did target has ticked down and approval rate as we proactively manage risk through detailed micro segment analysis.
In the upper right and in consumer assets of $94 billion are up 6% on a year over year basis.
Commercial balances ended at $18 8 billion as new vehicle supply remains pressured but has shown some signs of normalization.
Turning to origination trends on the bottom half of the page consumer auto volume of $9 2 billion demonstrates our ability to add price in the market and maintain solid origination volume.
This culminated in full year originations of 46 billion.
We remain nimble and are not tied to any target, but we would expect to generate originations in the low $40 billion range in 2023.
Lastly used accounted for 60% of originations in the quarter, while non prime declines at 7% of volume given ongoing risk management and seasonal trends.
Turning to insurance result on slide 31 core pretax income of $52 million decreased year over year from the lower from the impact of lower investment gains given the market backdrop.
Total written premiums of $285 million increase year over year, but still reflects headwinds from lower units out and inventory levels across the industry.
Last quarter, we shared some context and how our proactive approach and dealer relationships were able to limit losses related to hurricane even year.
We continue to see favorable results and expect minimal loss content as shown in the bottom left chart.
Going forward, we remain focused on leveraging our significant dealer network and host holistic offerings to drive further integration of insurance across auto finance.
Turning to corporate finance on slide 32 core income of $67 million reflect a disciplined growth in the portfolio and stable credit trends.
Net financing revenue was driven by higher asset balances as well as higher benchmarks as the entire portfolio is floating rate.
The loan portfolio is diversified across industries with asset based loans, comprising 55% of the portfolio and a first lien position and virtually 100% of exposures.
Our $10 1 billion <unk> portfolio is up 31% year over year, reflecting our expertise and disciplined growth within a highly competitive market.
Mortgage details are on slide 33 mortgage generated pretax income of $19 million and $170 million of DTC originations, reflecting tighter margins on conforming production and effectively zero demand for refinancing activity.
Mortgage is an important product for our customers who value a modern and seamless digital platform. We're focused on a great experience for our customers, but refrained from any specific volume targets.
Before closing I'll share a few thoughts on the outlook for 2023.
On Slide 34, we show key drivers of expected 2023 expense growth, while headline expenses are projected to grow roughly 6%. It's important to look a little closer at the details roughly half of the year over year growth is comprised of non discretionary items, including an industry wide increase in FTE.
Fees and insurance expenses, primarily commissions, which have a direct offset in revenue and weather losses.
Growth also includes increased costs to ensure we're able to provide leading service to our customers support continued credit normalization and manage loss exposure.
The remaining increases in expenses consist of variable cost directly tied to revenue growth like servicing and acquisition cost in auto and card and long term investments across the enterprise like cyber.
So what you traditionally think of as discretionary expenses are driving approximately 1% to 2% of expense growth in 2023, we acknowledged the revenue headwinds present this year and remain very focused on efficient expense deployment.
Slide 35 contains our financial outlook as we see it today clearly the dynamic environment makes it harder than ever to provide granular guidance, but we remain committed to transparency.
Based on what we know today, we see adjusted EPS of approximately $4 2023. The main drivers of which include NIM of three 5%, which we've covered previously other revenue expanding to roughly $500 million per quarter modest, earning asset growth mid single digit expense growth REIT.
While auto net charge offs of one six to one 8% and consolidated net charge offs of one two to one 4%.
And finally, a tax rate in the 21% to 22% range slightly favorable versus our historic average given ongoing tax planning strategies.
We've also provided our thoughts on earnings trajectory beyond 2023, we expect earnings expansion over the next several years as NIM moves past, the trough and migrate toward 4% base.
Based on what we know today, we can see a path to that $6 as early as 2024, but obviously several variables will ultimately dictate the pace of EPS expansion.
We continue to view mid teens as the return profile of the company based on all the structural enhancements we've made over the past several years.
We have now it's 2023 will be a very dynamic year, given macroeconomic headwinds and volatility, but we're confident in our ability to continue to execute and drive long term profitability.
And with that I'll turn it back to J B.
Thank you Brad.
Thought I'd close by highlighting.
Several of my near term priorities.
First and foremost as credit risk as I've said before.
Our ability to underwrite and manage credit risk is our core competency I'm confident the investments we continue to make in risk management.
<unk> us well to navigate this fluid environment.
The bar on cyber security risk management continues to move higher and we're committed to protecting our customers from external threats.
Thankful for the talent of our CIO and CSO and the broad cyber teams that exist at ally.
Taking care of our people and maintaining a purpose driven culture is even more important during periods of heightened uncertainty.
Our continued emphasis on essential as them will drive operating efficiencies over time.
While we are focused on tactically navigating this dynamic environment in the near term, we're committed to continuing to execute on our long term priorities.
And finally, we must live our name and being ally now more than ever.
Going to support our dealer corporate finance and consumer bank customers staying true to our name and promise has driven our unique growth and retention of customers.
I remain incredibly proud to lead our company and over time I'm confident these priorities will serve us well and deliver value for all stakeholders I know the deck today was longer than normal, but we thought it was important to really give that longer term view and focus on the trends that we've executed on since we.
Public and also hit the things that are top of mind for all of you and top of mind for investors things like credit and margins. So we tried to evolve the deck. This time, we know we added several pages, but we thought that transparency was very important and with that Sean back to you and we can head into Q&A. Thank you Jamie as we head in.
The Q&A, we do ask that participants limit yourself to one question and one follow up Carmen. Please begin the Q&A.
Thank you MSR reminder, too.
Have a question in the queue simply press Star one one on your telephone one moment for our first question.
From the line of Moshe Orenbuch with credit Suisse. Please go ahead.
Great. Thanks for that for that extra disclosure.
Could you just drill in a little bit on that.
Uh huh.
Minute loss outlook and how we should think about it can you talk a little bit of that.
The impact of frequency versus severity.
The period that you saw from the middle of that.
'twenty one to 'twenty two those originations what are you seeing thats driving that higher loss.
How does that inform us as to the past.
'twenty three 'twenty four for the overall loss rate.
Hey, good morning, Moshe it's Brad.
Let's start on that one and JV can certainly add in.
As you mentioned, we did highlight that.
Kind of late 2021 early 2022 vintage.
From a frequency perspective, we did see that kind of normalization pace accelerates in the fourth quarter.
A couple of variables that are important one as customers really get to that stage earlier in the cycles alone that is typically a higher balance at charge off with certainly impactful.
And then as well as noted we did see some acceleration and used car values.
The late part of the year, which were also impactful as we think.
Certainly into 2023 here.
As I mentioned that vintage was about almost 40% of the book at the end of the year as that continues to normalize and we will work that through the system here in 2023.
And I think that that will as we mentioned be impactful to the one 7% rate that we that we highlighted as well, but kind of the same time, we've taken as noted significant actions tactically around risk management and trimming some of the risks that we see particularly around micro segmentation, which will also which has really reduced.
Our loss expectations.
On that.
No more.
Recent book and then couple that with the really strong outperforming back book really kind of gives us comfort there.
Terms of that range and then ultimately the macro environment is certainly impactful as mentioned this does assume.
We are assuming a mild recession in 2023, that's really led by.
Contraction in GDP for the first couple of quarters, and then ultimately unemployment getting near 5% by the end of 2023.
Great. Thanks.
The margin outlook is roughly consistent with where you had been although rates have moved up a little bit more what's what is countered that has it been the yields on auto I mean I think the.
Your performance this quarter was a little better than we had been expecting can you talk a little bit about what drove.
Whats your.
How we should think about.
What's what's happened on the yield side I guess.
Yes sure.
I go back to all the enhancements that JV highlighted at the beginning structurally that is continuing to be a significant part of the expansion just generally from an overall company and balance sheet perspective, I would see I would say that retail portfolio yields continue continues to expand I think that.
Those levels I think have been a little bit underestimated.
As well and I think again, putting on good solid business at 10% yields high nines.
During the fourth quarter was also impactful and then you think about things like the.
The hedges that we have which really do provide a nice bridge for us.
As you think about the.
The increase in fed funds in the fourth quarter of 125 basis points was dramatic so that did reprice. The OSA portfolios. We also highlighted.
The hedges really do kind of help us bridge to <unk>.
<unk> through really most of 2023 to kind of give time for the retail auto portfolio really overwhelm the increase in liability costs.
Yes, not only things Moshe I, maybe would add just a couple of things.
Really slide 30.
Spend a ton of time drilling into the what we did in the quarter, but youll see.
Auto originations, we pared back fairly considerably in the fourth quarter from where we had been running and I would say that was probably driven twofold one.
Being ever more deliberate on credit management, and as Brad talked about turn on some of those micro segments and things like that but you also saw a decent pop in what we're doing in the new space and part of this we just think it's a function that I talked about it in one of the industry conferences and in December as you get to kind of a 10% type of yields.
On new consumer originations ahead, a bit of a saturation point with consumers. So.
Part of that all of those factors sort of drove into kind of lower volumes and maybe a little less risk appetite in the fourth quarter as well.
Thank you one moment for our next question comes from Ryan Nash with Goldman Sachs. Please proceed.
Yes.
Hey, good morning, guys and thanks for all the additional disclosure.
Most of this question you outline what you expect to drive credit losses in the near term.
Maybe just expand upon what's included in the allowance from a macro perspective, I know you said, 5% unemployment by the end of the year.
Just how are you thinking about future reserve builds here given the fact that you are expecting a modest recession in the near term. Thanks.
Hey, good morning, Ryan sure. So I guess I'd start by saying, we did mentioned the macroeconomic.
Certainly has evolved since third quarter right and we pointed that out and you did as well GDP contraction as well as higher unemployment by the end of the year approaching 5%.
I'll start with by saying, we and JV pointed this out right.
Sure.
Really generally conservative in our overall reserving methodology that includes the assumption that we make in our seasonal framework as well when you think about our 12 month, so affordable and then the 24 months.
Version as well and the look back there, which includes the great recession, so kind of get into that kind of reversion to mean, a six 3% and unemployment.
So when we kind of think about three 6% coverage versus that range of one six to one eight and my kind of simple broad math. When you think about even the high end of that range. If you allocate that annualized number over our weighted average life of order, which is 22 months or so you will see.
You bet.
Really well covered even at the higher end of that of that range.
Got it thanks for the color and then Jamie maybe a question for you on capital. So the slides note that you don't expect to repurchase any shares here.
And given slower than last year's balance sheet growth I think it's pretty clear you're going to build capital. This year. So maybe if you could just talk about given the uncertainty in the environment, where you'd like to run capital ratios that and then maybe what would it take for you to turn repurchases.
For the company back on Thanks, Yes sure.
Sure Ryan so.
We alluded to where we're close to sort of run in at our internal target, which is 9% ish.
And so we've been aggressive buyers of the shares.
Out ourselves paying a reasonable dividend today I think just in light of what flu.
Fluid environment dynamic environment challenging whatever you want to call it.
We think the prudent thing right now is not to plan for incremental buybacks, but to the extent we get clarity.
<unk>.
Whatever we head into and it becomes a mild recession and we start generating incremental capital I think we'd look to restart the buyback program at some point in the future and so that was using that word currently was very much by design I mean, I think what we see today the prudent things did not plan for it but.
Look we I think we've shown we are aggressive buyers of our shares when we feel they are undervalued and we certainly would say that today and so to the extent, we get more and more and better clarity.
It would not be unreasonable to assume we began again.
Thank you one moment for our next question. Please.
And he comes from the line of Bill contest with Wolfe Research. Please proceed.
Thanks. Good morning, your presentation materials go a long way towards addressing some of the major debates on your stocks. So let me add my thanks I wanted to.
Follow up on your credit comments based on what you see today would you expect Ncos to peak in 2023 year could we see.
Peak Ncos going on until 2024, and when should we expect the reserve rate to start to drift floor in relation to those peak losses.
Yes, Hey, good morning, Bill sure. So I think the side that we added that shows.
Sort of that expected trajectory in 2023 is a great reference point and Youll see kind of at most the biggest delta in sort of our normalized view versus 2023 expectations really is in the fourth quarter.
So that's where the.
The unemployment rate as I said is peaking of cresting.
As well as.
They're working through.
Some of the other dynamics, we mentioned in terms of just.
When you think about the content of new originations as well the vintage.
The dynamic that I mentioned, which is really working through.
That.
Late 'twenty one early 2022.
Cohort, where we expect that to be down to less than a quarter of the book by the fourth quarter.
So I think that that.
Also kind of continuing what we've guided to previously around our declining used vehicle values.
Kind of get us to that high point of.
Of the <unk> 2023 now if things worsen or have things changed from here I mean variables as I mentioned are moving quickly.
Quickly and certainly hard to predict but we would see that there could be some of that elevation going into 2024, but really feel like given all of those dynamics that that should be around photography.
Got it and then separately.
Separately I did wanted to also ask if you could give some color on the decision to provide concrete expense guidance and speak to concerns that 2024 is a long way away and you may be limiting your flexibility why not go with more of an efficiency ratio that gives you the ability to potentially manage expenses for the revenue environment.
Any kind of color on the thought process that you all went through there.
Yes.
Bill.
What I would say is look across the enterprise.
Brace this essential ism mindset, which is disciplined pursuit of less.
There is a number of the items that are sort of non controllable what I think Brad pointed out FDIC fees being a big driver.
Insurance line item creates a decent sized pop in your headline expense number but as Brad mentioned in his prepared remarks, that's the direct offset.
And revenues there and so then you get into kind of the.
Controllable space, you've got a number of 1% to 2%, which we think in light of the environment is pretty reasonable as I talk to other Ceos in financial services, I think everyone's kind of grappling with higher people costs in human capital cost and so we're trying to manage through that.
What I would say is as an enterprise and the end of the summer last year, we more or less hit the pause on hiring you've seen other financials do that as well I would say there are some special exceptions to that.
New talent entry level talent you want to.
To build a pipeline and allow those people to come into the company that doesn't end up being a big driver of expenses, but we've added to the head count there and then with respect to the technology space and cyber space things like that we think these are areas like you have to constantly invest in and we think it's kind of interesting what's going.
On in the World of technology more layoff announcements throughout this week more this morning, and that May provide us an opportunity to bring in incremental talent. So all these things kind of balance out the way we are thinking through I mean, we recognize revenues as Brad talked about are going to be pressured in the near term.
I think our focus is trying to create that right balance for the long run.
And I think what we've done in hiring has been very responsible and very disciplined in what I think are long term holders would expect us to be doing but I mean I'd start with there is a big a central is.
Push.
To drive efficiencies wherever we can.
Thank you one moment for our last question comes from the line of Betsy <unk> with.
Morgan Stanley . Please proceed.
Uh huh.
Hi, good morning.
Good morning.
Two questions. One just wanted to dig in a little bit on the guide for how Youre thinking about the OSA rate in the NIM and all that.
I know that you indicated there.
Several different scenarios in a range of potential outcomes.
Can you help us understand how you're thinking about working through this scenario, where perhaps OSA rate becomes a little more competitive than what youre baking in to the baseline that you've got here.
Yes, that's the all star, perhaps feel free to divest so.
What I would say certainly the direct bank market has been high.
Hyper competitive as of late.
I think theres, a bigger thirst for deposits. So we take the point I think where we're priced at right now at three three on OSA.
Is in line with what I would say, our other kind of top name direct banks and big banks and so we're kind of right in line with the pack there are certain names that are priced higher.
And then us and we're not seeing big outflows and so all of this ends up being kind of a balancing act on the competitive environment and the rate environment I think the guide that Brad tried to point out is I mean.
I think most of the universe is starting to think.
The feds getting closer to being done maybe there's another 50 basis points to go and obviously, we're at $3 three today, Brad showing you a scenario, where youre going up 45 basis points against may be.
<unk>.
A 50 basis point move so it's kind of like a 90% beta that that feels pretty darn aggressive to me. So it is about <unk>. That's why we tried to add the transparency about what you're assuming on the fed funds rates, everyone can kind of do their own math that they think it would go higher but the nice thing I'd say, we're talking to our deposit leader.
<unk>.
<unk> and our bank liter Diane Morais. They would tell you things have kind of felt a little bit more stable here in the past.
Three four weeks. So we think there's more to go but I don't think it's.
Another kind of 100 basis points from here.
Okay got it and then.
<unk> same kind of theme how should we think about the impact on loss rates if used car prices fall more sharply than what you have baked in.
Yes, I mean.
Obviously.
They can go up to some degree.
But I think there are a couple of dynamics at play first if you look at other industry experts.
And big names that are out there, they're more modest than the declines with a projected I think we've been pretty consistent saying.
End of 'twenty, one to the end of 'twenty three would be this 30% ish type decline, we saw a little more than that last year, but as Brad showing you <unk> got probably 13 basis points of the decline embedded here I think that the.
The other factor that's out there is there were about $11 million less cars produced.
Over the past sort of three years and so we think that provides some structural support we always try to take a more conservative view, but I mean, the way I would think about the range of risk is maybe it's another 5% decline in used car prices and that would represent kind of a couple of base.
This points of incremental NCO, so it's fairly well in there.
Yes could it be worse, but we think thats, probably a little bit unlikely from here.
Okay, great. Thanks, so much for the time appreciate it if you got it Betsy Thank you great.
Great. Thank you everyone. That's all the time, we have for today. If you do have additional questions as always please feel free to reach out to Investor relations. Thank you for joining US. This morning that concludes today's call.
And thank you ladies and gentlemen, this concludes today's conference and thank you for your participation and you may now disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial one one.
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The conference.
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