Q4 2024 Ally Financial Inc Earnings Call
Good day and thank you for standing by. Welcome to the fourth quarter 2024 Ally Financial Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session.
To ask a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised.
To withdraw your question, please press star 1 1 again.
Please be advised that today's conference is being recorded.
I would now like to hand the conference over to your speaker today, Sean Leary, head of investor relations. Please go ahead.
Sean Leary: Thank you, Daniel. Good morning and welcome to Ally Financial's fourth quarter and full year 2024 earnings call. This morning, our CEO, Michael Rhodes, and our CFO, Russ Hutchinson, will review Ally's results before taking questions.
The presentation we'll reference can be found on the investor relations section of our website, ally.com.
Sean Leary: Forward-looking statements and risk factor language governing today's call are on slide 2. GAAP and non-GAAP measures pertaining to our operating performance and capital results are on slides 3 and 4. As a reminder non-GAAP or core metrics are supplemental to and not a substitute for U.S. GAAP measures.
Sean Leary: Please note that the company made a change in our accounting methodology for electric vehicle tax credits as previewed in recent quarters.
Sean Leary: Figures for 2023 and 2024 are presented under the new Deferral Method of Accounting.
Sean Leary: For certain metrics, we've shown results under both deferral and the prior flow-through methodology.
Definitions and Reconciliations can be found in the appendix.
And with that, I'll turn the call over to Michael.
Michael Rhodes: Thank you, Sean. Good morning, everyone, and thank you for joining the call.
Speaker Change: Before we begin, I want to take a moment to acknowledge the devastating wildfires in Los Angeles as our thoughts are with those facing such a tremendous loss.
Speaker Change: Now, while it's challenging to shift gears from such a heavy topic, let's move forward with our results, starting on page 5.
Speaker Change: In 2024, Ally delivered adjusted EPS of $2.35, core pre-tax income of $1 billion, and revenues of $8.2 billion.
Speaker Change: We are pleased with the momentum across the businesses entering 2025.
Speaker Change: After a year in which our financial results were pressured from a combination of volatile interest rates,
and a consumer burdened by the cumulative effects of inflation.
Speaker Change: Fourth quarter results were in line with or favorable to the updated guidance we provided in October.
Speaker Change: The team's collective efforts enable us to reinforce our market-leading positions.
and strengthen our foundation for the years ahead.
Speaker Change: As I reflect on my first eight months as CEO, I'm filled with a profound sense of gratitude and optimism.
Speaker Change: I remain particularly encouraged by the strength of our core franchises.
Speaker Change: We're poised to deliver growth and shareholder value through consistent execution in dealer financial services, corporate finance, and deposits.
Speaker Change: The strength and durability of our competitive advantage of those businesses are enhanced by our brand and culture.
The Ally brand has a powerful connection with consumers.
anchored in a history of always doing the right thing.
Thank you.
Speaker Change: For the third year in a row, we were recognized by Fast Company as a brand that matters.
Speaker Change: We're the only financial services brand to achieve this consecutive distinction.
Speaker Change: proving again that we have one most relevant and differentiated brands in banking.
Speaker Change: When I started as CEO, one of my first priorities was to keep our people-first culture.
Speaker Change: and Do It Right approach at the heart of everything we do.
Speaker Change: I believe it's one of the many things that truly sets Ally apart.
Speaker Change: In 2024 re-ranked in the top 10% of companies for employee engagement.
for the fifth consecutive year.
Seven points higher than the Financial Services Benchmark.
Speaker Change: When employees are all in, our culture thrives and our customers benefit.
Speaker Change: Our commitment extends beyond customers and into the communities where we live and work.
Speaker Change: In 2024, we continue to drive economic mobility through financial education, affordable housing, and workforce preparedness.
Our Community Reinvestment Act has earned three consecutive outstanding ratings.
a designation achieved by fewer than 15% of banks.
Speaker Change: Going forward, we'll continue to lead into our do-it-right approach, investing in our employee and customer experience.
Speaker Change: As many of you may have heard me say before, I spent the first few months in my role listening and learning.
Speaker Change: I developed a greater appreciation for Ally's legacy during these months.
Speaker Change: And as we prepare to launch the next chapter of this company's evolution.
Speaker Change: I believe we are best positioned to deliver compelling returns and grow shareholder value to the power of focus in our core franchises.
Speaker Change: Continuing to win in dealer financial services, corporate finance, and deposits will be our focus going forward.
More on this in a moment.
Let's turn to page 6 to talk about the quarter.
Speaker Change: Since becoming CEO, I've been evaluating all aspects of our business to identify opportunities to be even better.
Speaker Change: Building an ally, solid foundation, and position the company for long-term success is my top priority.
Speaker Change: To that end, we have taken a number of snippet steps this quarter.
Speaker Change: Now I recognize there are lots of moving pieces. However, these actions simplify and streamline the company.
prioritize our resources towards our core franchises.
and improve financial returns and transparency.
Speaker Change: This morning, we announced that we reached an agreement to sell our credit card business.
Speaker Change: As I've said before, CARD is a great business and we have a great team.
Speaker Change: However, I believe our path to deliver mid-teens returns is through the power of focus.
Speaker Change: Similarly, we are ceasing new mortgage loan originations on January 31st.
and expect remaining balances to run off over time.
The mortgage portfolio today yields just over 3%.
Speaker Change: As it runs off, we are positioned to invest in higher-yielding asset classes, driving NIM expansion.
Speaker Change: Beyond these actions, we've taken steps to manage controllable expenses in 2025.
Speaker Change: During the quarter, we announced a workforce reduction, which resulted in recognition of a $22 million restructuring charge.
all is not something we take lightly.
drive positive operating leverage.
and align the cost structure with our new streamlined footprint.
Speaker Change: We see tremendous opportunity in the businesses where we have demonstrated competitive advantage, attractive returns,
and the scale necessary to succeed.
Speaker Change: Shifting gears a bit, we had a few reporting related updates worth mentioning.
Sean Leary: As Sean mentioned earlier, we have changed the deferral method of accounting for EV lease tax credits.
Sean Leary: This change was made retroactively and reduced retained earnings by approximately $300 million.
and CET1 by 20 basis points.
Sean Leary: Importantly, the impact of capital is net neutral in the medium term as the day one impact is earned back over the next few years to net interest income.
Sean Leary: In alignment with a more simplified ally, we've also made updates to the corporate expense allocations and reporting segments.
These changes are intended to provide greater transparency to investors.
consistency in various allocations
Sean Leary: and align with how we manage and evaluate dealer financial services, corporate finance and deposits.
Russ will cover these changes in more detail shortly.
Let's turn to page 7 to discuss our market-leading franchises.
Sean Leary: Within auto finance, consumer originations of $39 billion were sourced from a record 14.6 million applications.
Again, showcasing the strength of our mutually beneficial dealer relationships.
and the scale of our franchise.
Sean Leary: Origination yields of 10.4% were driven by strong application flow that allows dynamic and selective underwriting.
Sean Leary: 44% of our originations were made up the highest credit quality tier.
positioning us for strong risk-adjusted returns in the years ahead.
Sean Leary: We remain committed to the success of our more than 20,000 dealers.
Sean Leary: And I'm encouraged by the trends we're seeing in application flow to further strengthen and grow our position as the leading bank auto finance lender in the country.
Sean Leary: Insurance written premiums of 1.5 billion dollars were the highest since our IPO as we benefited from new relationships, growth in inventory exposure, and synergies with our auto finance team.
Sean Leary: Corporate finance delivered record pre-tax income of more than 400 million dollars.
and an ROE of 37% with zero net charge-offs.
demonstrating the quality of our loan book.
Sean Leary: This was a uniquely strong year in the corporate finance business.
Sean Leary: Well, we expect some normalization of credit in the near term.
Sean Leary: I'm quite confident the team will continue to deliver accretive returns while prudently managing risk.
Our deposits franchise had another fantastic year.
Sean Leary: We've continued to invest to deliver best-in-class digital features and products.
growing the customer value proposition beyond rate.
Sean Leary: And we added more than 230,000 new customers and now serve 3.3 million depositors with $143 billion in balances.
Deposit balances were up $1 billion year-over-year.
very consistent with our outlook in January.
Sean Leary: and well aligned with what's needed to support the asset side of our balance sheet.
Sean Leary: Customer satisfaction of 90% and retention above 95% continue to lead the industry.
In 2024, we grew Engage Savers.
Sean Leary: Savings customers that leverage multiple core products and features by nearly 15%.
Sean Leary: Since 2019, we've increased engaged savers from 300,000 to 1.3 million.
Engage Savers now represent nearly 40% of customer base.
and are generally less rate sensitive than our other depositors.
Sean Leary: Our culture of customer obsession has strengthened our deposit franchise, enabled profitable growth in auto, insurance, and the corporate finance business.
Sean Leary: We are pivoting to a more focused approach that allocates capital to our core businesses where we have competitive advantage, it prioritizes efficiency and expense discipline, and prudently manages risk.
Sean Leary: I am confident this should translate to mid-teams ROTC over time.
And with that, I'll turn it over to Russ.
Russ Hutchinson: Thank you, Michael. Good morning, everyone. I'll begin on slide A. Before I get into the results, I'll expand on changes we've made to expense allocations and reporting segments.
Michael Rhodes: As Michael mentioned, these changes are intended to align to how we manage and evaluate our businesses.
Michael Rhodes: Our dealer financial services and corporate finance results now reflect 100% of our centralized functional costs.
Michael Rhodes: The business lines will no longer be allocated operating costs associated with the deposits platform.
Michael Rhodes: This better aligns with our approach to funds transfer pricing, which is primarily market-based, and match funds' assets at origination.
Michael Rhodes: and Mortgage Finance results for the Outstanding Portfolio are now reflected in Corporate and Other.
Michael Rhodes: Also, as discussed last quarter, our net interest income and income tax expense now reflect the deferral method of accounting for EV lease tax credits.
Now let's review results.
Michael Rhodes: In the fourth quarter, net financing revenue excluding OID of $1.5 billion was in line with the prior year and prior quarter. We benefited from continued expansion in retail auto yields, excluding the impact of hedges, and we benefited from the impact of lower deposit pricing.
Michael Rhodes: partially offset by lower yield on floating rate exposures quarter over quarter reflecting the decrease in short-term benchmark rates.
Michael Rhodes: Adjusted other revenue of $564 million was up 13% year-over-year, reflecting broad-based momentum.
Michael Rhodes: Full-year adjusted other revenue is up 14%, higher than the 5-10% expectation set forth at the beginning of the year.
Michael Rhodes: Other revenue streams, including insurance, smart auction, and consumer auto pass-through programs, continue to be a tailwind to fee revenue heading into 2025.
Michael Rhodes: Provision expense of $557 million was down year-over-year driven by a few factors. One, zero net charge activity in our commercial portfolios.
Michael Rhodes: 2. Lower consolidated net charge-offs following the sale of our point-of-sale lending business early in the year. 3. A modest quarter-over-quarter decline in retail auto coverage rate following an increase in the prior quarter.
Michael Rhodes: We will discuss retail auto net charge-offs in more detail later.
Michael Rhodes: Non-interest expense of $1.4 billion includes two one-time items, a partial write-down of goodwill related to the pending sale of the credit card business of $118 million, and a $22 million restructuring charge associated with the reduction in force.
Michael Rhodes: The headcount actions position us for $60 million in annualized savings next year.
Michael Rhodes: One-time expense items totaling $140 million, or $0.37 of EPS, have been excluded from core pre-tax results. This is consistent with our treatment of similar items in the past.
Michael Rhodes: Adjusted non-interest expense was up less than 2% year-over-year, primarily driven by growth in insurance and FDIC fees. And controllable expenses were down more than 1%, demonstrating commitment to cost discipline that will continue going forward.
Michael Rhodes: Our effective tax rate for the full year was 20%, reflecting the deferral method of accounting for EV tax lease credits.
Michael Rhodes: Our 0% tax rate within the quarter included impacts from prior state and international return as well as standard year-end true ups.
Michael Rhodes: GAAP and adjusted EPS for the quarter were $0.26 and $0.78 respectively.
Michael Rhodes: Moving to slide 9, net interest margin excluding OID of 3.33% increased one basis point from the prior quarter resulting in full year NIM of 3.3%.
Michael Rhodes: Expansion in retail auto yields, excluding the impact of hedges, and decreasing deposit costs will partially offset by contractual repricing of floating rate exposures and lower lease gains. Cost of funds decreased 17 basis points quarter over quarter, driven by a 22 basis point decrease in deposit costs.
Michael Rhodes: Deposit pricing has been in line with expectations during the quarter and we continue to expect a cumulative deposit beta of around 70% over time.
Michael Rhodes: We have good momentum on both sides of the Ally balance sheet.
from the Multi-Year Transformation of Both Our Assets and Liabilities.
Michael Rhodes: We continue to run off mortgage and securities balances with yields of approximately three percent Replacing them with retail auto and corporate finance loans both currently yielding over nine percent
Michael Rhodes: On the other side of the balance sheet, deposits as a percentage of funding have increased to 90% from 70% in 2019, and the spread between cost of funds and fed funds has improved significantly.
Michael Rhodes: As we've successfully reached core funded status and enhanced the value proposition, we've been able to price our deposits favorably relative to our major competitors.
Michael Rhodes: Due to the improvement in spreads for both assets and liabilities, we're well positioned for margin expansion and sustainably higher NIM over the medium term.
Michael Rhodes: As Michael mentioned earlier, we have reached an agreement to sell our credit card business.
given the 20% plus yield on that book.
Michael Rhodes: A sale of the business impacts our medium-term outlook for margin.
Michael Rhodes: However, the benefits from lower credit costs and operating expenses provide a substantial offset to lower margins.
Michael Rhodes: Taken together, an exit from the card business does not have a material impact on core pre-tax income. There are many moving pieces that will impact our path to normalized margin, most notably changes in interest rates and market pricing for deposits, but we remain confident in the trajectory.
Michael Rhodes: According to page 10, CET1 of 9.8% represents over $4 billion of excess capital above our SCB minimum. The sale of Ally Credit Card is expected to add 40 basis points of CET1 at closing and $1 of adjusted tangible book value per share.
Michael Rhodes: We intend to redeploy that capital into a combination of growth in our core franchises, potential restructuring of the securities portfolio, and eventually share repurchases. As we mentioned earlier, we booked a $118 million goodwill impairment in 4Q related to the card business.
Michael Rhodes: We expect to book approximately $10 million to $20 million of additional one-time transaction-related expenses as we progress towards closing.
Michael Rhodes: Within the quarter, there were a couple of material moving pieces impacting capital.
Michael Rhodes: We issued our second credit-linked note generating 16 basis points of CET1 at the time of sale.
Michael Rhodes: Demand was robust, leading to solid execution and demonstrating market appetite for the loans that were originating.
Michael Rhodes: and Adoption of the Deferral Method of Accounting for EV Leases, Temporarily Reduced CET1 by 20 Basis Points.
Michael Rhodes: Looking ahead, we'll continue to remain opportunistic with respect to growing capital and thoughtful about how we deploy excess capital over time.
Michael Rhodes: In the first quarter of 2025, we expect an approximately 20 basis point impact to CEP-1 from the final phase-in of CECL.
Michael Rhodes: We recently announced our quarterly dividend of $0.30 for the first quarter of 2025, which remains consistent with the prior quarter.
Michael Rhodes: Including the impacts of AOCI, adjusted tangible book value per share is $47, up more than two times from 2014. We remain focused on tangible book value per share growth in the years ahead and driving shareholder value through disciplined capital deployment.
Let's turn to slide 11 to review asset quality trends.
Michael Rhodes: The consolidated net charge-off rate of 159 basis points was up 9 basis points quarter-over-quarter.
Michael Rhodes: We continue to see solid credit performance in our commercial portfolios in the fourth quarter, resulting in zero net charge-offs in 2024. The year-over-year net charge-off comparison includes $36 million of Ally Lending activity in 4Q2023.
Michael Rhodes: Full year of consolidated NCOs finished within our range of 1.4 to 1.5 percent provided a year ago, driven by better than expected performance in our commercial portfolios.
Michael Rhodes: As we continue to be further removed from the unprecedented effects of the pandemic, including historically high inflation, we're seeing improving trends in consumer performance.
Michael Rhodes: Retail auto net charge-offs of 234 basis points were up 10 basis points quarter-over-quarter. Typically we would expect approximately 35 basis points of quarter-over-quarter increase tied to seasonality.
Michael Rhodes: We also had a strong fourth quarter for recovery, given the strength in used vehicle values relative to our expectations.
Michael Rhodes: In the fourth quarter, we outperformed typical seasonality as procurement action, auction price stability, and easing inflation pressure increasingly benefited portfolio results.
Michael Rhodes: In terms of trends, we saw throughout the quarter, we saw stabilization of trends early in the quarter, and we ended with a strong finish in December.
Michael Rhodes: We closed the year with historically low global loss rates and with a stable used vehicle value backdrop that led to results better than expectations heading into December . Credit performance throughout 2024 was shopping.
Michael Rhodes: We certainly expect to benefit from portfolio turnover in 2025, but we acknowledge the macro environment remains uncertain.
Michael Rhodes: In the bottom right, 30-plus day accruing delinquencies increased 15 basis points quarter over quarter and were down 3 basis points year over year. Late-stage delinquencies remain a key watch item.
Michael Rhodes: Given the increase in non-accrual loans we've been discussing throughout the year, we've enhanced our disclosure this quarter. We continue to show delinquency for the accruing only population, but have added the corresponding 30-day DQ metric for the total portfolio, which includes both accruing and non-accruing loans.
Michael Rhodes: We believe both are helpful to investors, and the total portfolio view aligns with how we manage the business from an operational and loss mitigation perspective.
Michael Rhodes: On slide 12, let's discuss the retail auto vintage credit trends. Actual and expected portfolio mix, as well as loss contribution by vintage, are shown on the top half of the page.
Michael Rhodes: As we've discussed previously, the 2022 vintage is producing elevated losses relative to expectations at the time of origination across the consumer finance space.
Michael Rhodes: Allies 2022 Vintage comprised roughly 40% of portfolio losses in 2024 as the Vintage worked through peak loss seasonings.
Michael Rhodes: As the portfolio continues to turn over, the 22 vintage will amortize down. That vintage is expected to comprise 10% of our retail auto portfolio by year-end 2025, compared to 20% at year-end 2024.
Vintage delinquency trends are on the bottom left.
Michael Rhodes: Our 2023 Vintage continues to outperform 2022 after equivalent months on book. We remain encouraged by the early trends in the 2024 Vintage, which is outperforming the 2023 Vintage after 12 months on book.
Michael Rhodes: The table on the bottom right highlights improvement in credit profile, which has resulted from the curtailment actions we've taken. We expect these curtailment actions to mitigate losses in future periods and drive strong risk-adjusted returns.
Michael Rhodes: Credit trends have improved recently and give us confidence in our path to normalized net charge-offs below 2%.
Michael Rhodes: We continue to carry an elevated population of late-stage delinquent accounts, which makes it difficult to provide precise timing and point estimates, but we remain confident that our curtailment actions and a constructive macro position us for lower losses over time.
Michael Rhodes: Moving to slide 13. Consolidated coverage increased four basis points and retail auto coverage decreased two basis points.
Michael Rhodes: The increase in consolidated coverage rates were largely driven by lower balances in commercial auto and corporate finance. The decrease in the retail auto coverage rate was driven by a partial release of the hurricane reserve recorded in the prior quarter.
Moving to slide 14 to review auto segment highlights.
Michael Rhodes: On the bottom left, we highlighted the trajectory of retail auto portfolio yields. Excluding the impact from hedges, yields are up 10 basis points quarter-over-quarter and 66 basis points year-over-year.
Michael Rhodes: Fourth quarter originated yield of 9.6% was down quarter over quarter, driven by a decrease in benchmark rates and an increase in S-tier originations from 43% to 49%.
Michael Rhodes: While the fourth quarter usually drives an uptick in credit quality, our capture rates in SuperPrime were above our expectations for much of the quarter.
Michael Rhodes: We're pleased with the return profile of what we originated, but have taken action on the pricing side that will result in lower S-tier in the first quarter. We've already seen the impact of this, with our originations mixed, exiting the year closer to what we originated for most of 2024.
Michael Rhodes: And as we've mentioned before, we expect to gradually unwind curtailment action over time to a more normalized mix.
Michael Rhodes: The unwind of curtailment actions will partially offset benchmark rate-driven price decreases over the long term.
Michael Rhodes: The timing of curtailment unwind remains fluid and will be informed by front book portfolio performance, which has begun to show signs of improvement.
Michael Rhodes: Lease trends are in the bottom right. Gains of $3 million in the fourth quarter reflect lower lease termination volume quarter over quarter and softer lease gains per vehicle driven by vehicle termination mix.
Michael Rhodes: We expect lease gains to remain low in the first quarter and increase modestly in the spring and summer due to typical seasonality, as well as vehicle termination.
Turning to insurance in slide 15.
Michael Rhodes: Corporate tax income was up 25 million dollars year-over-year driven by higher earned premiums.
Michael Rhodes: Total written premiums of $390 million reflect the continued momentum of business trends in PNC and F&I products. Growth in PNC written premiums of $40 million year-over-year are supported by new OEM relationships and recovering inventory levels.
Michael Rhodes: Insurance losses of $116 million, up $23 million year-over-year, are in line with expectations and are more than offset by higher revenues.
Michael Rhodes: Insurance was a key driver of our fee revenue expansion in 2024 and we remain encouraged by the opportunity to grow this business over time by leveraging synergies with our auto finance business.
Michael Rhodes: Corporate finance results are on slide 16. Core pre-tax income of $120 million demonstrated another strong quarter for corporate finance.
Michael Rhodes: While not shown on the page, corporate finance surpassed $400 million of earnings in 2024, a record in the 25-year history of the business.
Michael Rhodes: End-of-period HFI loans of $9.6 billion are well diversified in virtually all first liens, and we remain well positioned from a credit standpoint.
Michael Rhodes: On the bottom of the page, we highlight the accretive return profile of the corporate finance business.
Michael Rhodes: 2024 performance was in part due to exceptionally strong credit performance resulting in zero net charge-offs for the year. We expect NCO performance to normalize and are confident the business will continue to drive solid returns.
Corporate finance remains an attractive business for prudent growth.
Michael Rhodes: I'll provide an update on our 2025 outlook on slide 17. We've shown 2025, assuming credit card operations for a full year, largely for comparability purposes with 2024.
Michael Rhodes: We expect the sale of the card business to close in the second quarter and are providing a 2025 pro forma that assumes a sale on April 1st.
Michael Rhodes: We expect 2025 NIM of approximately 3.4 to 3.5 percent. Given the 20 percent yield on credit card receivables, the sale of Ally Credit Card has impacted our near-term NIM outlook by approximately 15 basis points.
Michael Rhodes: That would be approximately 20 basis points on an annualized basis.
Michael Rhodes: Importantly, the impact of NIM is offset by lower credit costs and expenses, and our medium-term outlook for mid-teens' ROTCE remains unchanged.
Michael Rhodes: The range for NIM reflects the uncertain path of interest rates and deposit competition.
Michael Rhodes: Margin should be flat, plus or minus, in the first quarter as we recognize the full quarter impact of 4Q rate cuts on floating rate exposures.
Michael Rhodes: We expect to position ourselves competitively during the first quarter to capture incremental money in motion as deposit availability generally increases due to tax refunds, year-end payouts, and changes in consumer behavior.
Michael Rhodes: Importantly, we see margin exiting 2025 higher than the full-year guide given our starting point and a stable 1Q margin.
Michael Rhodes: We expect continued momentum in insurance, smart auction, and auto pass-through programs to increase other revenues.
Michael Rhodes: However, other revenue is expected to be flat year over year as we will see lower fee revenue from the credit card business following its sale.
Michael Rhodes: In terms of credit, we see retail auto net charge-offs of 2 to 2.25%.
Michael Rhodes: We are exiting the year under favorable conditions, which led to our performance on both frequency and severity.
Michael Rhodes: On the frequency side, while we enter the fourth quarter with elevated levels of delinquency, the collections enhancements implemented within our servicing organization are working. These loss mitigation strategies are keeping people in their vehicles, and we exited the year with historically low flow-to-loss rates.
Additionally, our newer vintages are performing better than assumed.
Michael Rhodes: With respect to severity, used vehicle prices were approximately 4% better than what we assumed in our October update.
Michael Rhodes: Turning to expectations for 2025, our range reflects that we are still operating through an uncertain macroeconomic environment, and that we continue to carry elevated levels of late-stage delinquency.
Michael Rhodes: It also takes into consideration the vintage dynamics, which are an important catalyst that gives us confidence that we are structurally headed to losses normalizing lower.
Michael Rhodes: The midpoint of the range seems a slight increase in flow-to-loss rates coming off historic lows in the fourth quarter. If macroeconomic conditions deteriorate, we could see delinquencies increase, flow-to-loss rates worsen, or used vehicle values soften beyond our current expectations.
Michael Rhodes: Any degradation in conditions, or if our servicing strategies become less effective, our losses could migrate higher than the midpoint.
Michael Rhodes: Conversely, we see a path to lower than midpoint, assuming delinquency stabilized, 4Q flow-to-loss rates hold or improve further, or used vehicle values continue to outperform expectations.
Michael Rhodes: In closing on retail auto credit, it's important to note that monthly and quarterly variations will continue, so we remain highly confident in what we see as a trend normalizing lower.
Transitioning to Consolidated NCOs
Michael Rhodes: Despite the pressure we saw in retail auto last year, our consolidated loss rate of 1.48% in 2024 was in line with the original guidance we provided last January.
Michael Rhodes: as we saw uniquely strong performance across the entire commercial loan portfolio. While we feel great about the state of those portfolios, our full-year guidance does assume a return to more normalized losses.
Michael Rhodes: We see expense growth flattened in 2025, including the impact of exiting the credit card business.
Michael Rhodes: Increases in areas directly contributing to revenue generation and managing losses are offset by expense savings from the sale of the credit card business and headcount actions that we mentioned earlier.
Michael Rhodes: As you all know, the first quarter always has seasonal compensation items, so we expect link order expenses to be up 6-7%, which would put them in line with prior year.
Michael Rhodes: Our outlook for revenue expansion and tightly managed expenses positions us for positive operating level in 2025 and over the medium term.
Michael Rhodes: Earning assets are expected to be flat on average year over year. Importantly, the favorable asset mix shift underpinning relatively flat earning assets will be a tailwind to margin in 2025 and the medium term.
Michael Rhodes: Given the accounting change to deferral method, we're estimating a normalized tax rate of 22 to 23 percent.
Michael Rhodes: I've mentioned a few things related to first quarter, including relatively stable NIM.
Michael Rhodes: Seasonal compensation items, and of course, two fewer days in the quarter.
Michael Rhodes: We feel good about our earnings trajectory heading into 2026. Before I turn it over to Michael, I want to reiterate my confidence in our mid-teens ROE outlook. Our path to mid-teens returns is predicated on three primary drivers that remain unchanged.
Michael Rhodes: First, margin expansion. As we've covered, we're well positioned in various interest rate scenarios driven by underlying business trends in auto, corporate finance, and deposits.
Michael Rhodes: Second, normalization of retail auto NCOs to below 2%, which implies a consolidated net loss rate of approximately 1.3%, which is about 15 basis points lower than it would be with CARD.
Michael Rhodes: The trends we saw in the fourth quarter, driven by our actions to curtail risk, further increases my confidence in losses improving over time.
Michael Rhodes: Finally, our commitment to disciplined resource allocation in terms of expenses and capital, which is firm.
Speaker Change: The exact timing of when we achieve our return targets will be driven by a number of factors. However, we remain confident in our ability to execute against our plan and drive long-term shareholder value. And with that, I'll turn it back to Michael.
Michael Rhodes: Well, thank you, Russ. Before we wrap up, I believe it's important to highlight the progress we've made as a publicly traded company.
Michael Rhodes: Last month, we celebrated the 10-year anniversary of our IPO at the New York Stock Exchange.
Our team had the pleasure of ringing the opening bell.
Michael Rhodes: It gave me the opportunity to reflect on our legacy and how far we've come as an organization.
Michael Rhodes: Our Do It Right culture spans all layers of the organization and serves as the foundation of our success.
We've built a valuable nationally recognized brand.
centered on being a relentless ally for our customers.
Michael Rhodes: and over the years we've transformed both sides of the balance sheet to make us a structurally more profitable company.
Michael Rhodes: Since we launched Allied Bank 15 years ago, we've grown to be the largest all- digital U.S. direct bank, serving more than 3 million customers and over $140 billion of retail deposits.
Michael Rhodes: We are at the forefront of the shift in consumer preferences towards the digital banking.
Michael Rhodes: and we firmly establish a reputation as a leading innovative digital bank that offers compelling rates, best-in-class digital experiences.
and Exceptional Service.
Michael Rhodes: The dealer financial services business has transformed from a captive auto finance company to a leading full-service independent auto lender.
Michael Rhodes: offering a wide range of products and services to more than 20,000 dealers.
We've established ourselves as a full-spectrum franchise.
Michael Rhodes: with superior scale, technology, and deeply entrenched relationships with dealers across nearly all OEMs.
Michael Rhodes: while continuing to partner with those who are driving the evolution of the auto industry.
Michael Rhodes: Corporate finance has a 25-year proven track record as navigated multiple business and credit cycles.
Michael Rhodes: As we look ahead, I remain incredibly excited about the future of Ally.
Michael Rhodes: We are pursuing a more focused approach in our core businesses.
where we have demonstrated competitive advantages.
Dealer Financial Services, Corporate Finance, and Deposits.
Michael Rhodes: We are pivoting to increase focus on a few core businesses that have durable and diversified revenue streams, attractive returns, and relevant scale.
Michael Rhodes: Dealer financial services, insurance, smart auction, and our consumer auto pass-through programs have been increasing fee revenue, which now exceeds $2 billion per year, up more than 50% since 2014.
Michael Rhodes: Corporate finance has helped for investment portfolio has grown to ten billion dollars from roughly five billion dollars in 2019.
Michael Rhodes: and align our resources to the opportunities that drive the most value for our stakeholders.
as we launch the next chapter of Ally's Evolution.
Michael Rhodes: We will ensure our culture remains aligned with a relentless focus on customers, communities, employees, and shareholders.
Michael Rhodes: We will strive to be one most relevant and creatively disruptive brands in banking.
Michael Rhodes: We will invest in technology that powers dealer and customer-centric products and services.
Michael Rhodes: And most importantly, we expect this focus will improve financial results to deliver compelling returns.
Michael Rhodes: And with that, I'll turn it over to Sean for Q&A. Thank you, Michael. As we head into Q&A, we do ask that participants limit yourself to one question and one follow-up. Daniel, please begin the Q&A.
Speaker Change: As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced.
To withdraw your question, please press star 1 1 again
Please stand by while we compile the Q&A roster.
Speaker Change: and our first question comes from Ryan Nash with Goldman Sachs. Your line is open. Hey, good morning everyone.
Speaker Change: Good morning, Ryan. So, Russ, maybe to start on credit, you highlighted the better-than-expected performance in the fourth quarter due to a handful of items like recoveries.
Speaker Change: When I look at the slides, you know, slide 12, you show the problem vintages are becoming smaller, the new ones are outperforming, you've continued to move up in S tier. So I guess, you know, my question is, you know, given the guide of two to two and a quarter, just how do you see, and I know you give a lot of color when you were going through them, but how do you see losses progressing? And could we actually exit the year at a level that is below that 2% seasonally adjusted loss rate?
Speaker Change: Thanks Ryan for the question. I appreciate that and as you know, as you've seen, our outlook on credit has been choppy throughout the year.
Speaker Change: You know, and I'd say your observations on fourth quarter are mostly correct. We saw...
favorable flow-to-loss trends. We saw favorability and severity.
Speaker Change: And as you pointed out, we started the quarter with elevated levels of delinquency as we've been running at elevated levels of delinquency throughout 2024.
Speaker Change: Yeah, when you kind of look at the seasonality, you're right, we saw improvement in what we would call the seasonally adjusted annualized loss rate in the quarter. I still characterize it as north of 2%.
Speaker Change: It's probably not quite as good as you implied, but certainly favorable to what we were seeing in the third quarter, where we had highlighted NCOs that were running 10 basis points above our expectations and delinquencies that were running 20 basis points above our expectations.
based on seasonality and portfolio turnover.
Speaker Change: As I look forward, we've given the range of 2 to 2.25% on NCOs.
Speaker Change: You know, and I'd say, you know, as I think about that range, you know, it's important to think about the context in terms of the elevated levels of delinquencies that we've been seeing, as well as that favorability we saw in flow to loss in the quarter and on severity. And I'd say towards the midpoint of the range.
We've assumed that there's some reversion on flow-to-loss rates.
Speaker Change: Obviously, we have good visibility into where we're starting the year in terms of delinquencies, but we've assumed some reversion, so some unfavorability in flow-to-loss rates. And we've assumed kind of more or less stable used car values supporting us on the severity side.
revert
Speaker Change: you know, for example, in the context of a macro that weakens or to the extent that our our collection.
Speaker Change: become our collections methods become less effective or in an environment where used car prices deteriorate you know you could see either of those things kind of pushing us towards the high end you know on the other hand if we continue to see flow to loss rates like we saw in December
Speaker Change: or potentially even they continue their current path of improvement and used car prices remain constructive in the context of a favorable macro, that could drive us towards the low end of the range that we've provided.
Speaker Change: Got it. And then maybe as my as my follow-up a two-part question
Speaker Change: Post the sale of the card business, I think you highlighted 40 basis points of capital, and even with CECL Day 1, it should put you above 10%. And I know in your remarks, Russ, you talked about a handful of potential uses, growth, and then you talked about potential securities restructuring. So my first question, can you maybe just give more color in terms of like what the size and parameters of a restructuring could be? And then post the sale of the card, Russ,
Speaker Change: You know, you talked about being positioned for a sustainably higher NIM. Do you still believe Ally is a 4% NIM company and, you know, what are the drivers to getting there and if not, what do you think the more normal NIM of the company is? Thank you.
Speaker Change: Given that uncertainty and given the volatility that the inclusion of AOCI would introduce to our CET1 levels, we've said that, you know, where we've typically run at a 20 to 30 basis point buffer to that management target of 9%, we think that buffer needs to be fatter.
Speaker Change: And so, you know, just to give you a little bit of context and just in terms of kind of how we're currently thinking about capital, you know, certainly the card sale is going to increase our flexibility around capital. And so, as we think about that increased flexibility, you know, our number one priority is investing in our core businesses. And, you know, as we've noted throughout the year, you know, we're being really thoughtful and really disciplined around how we deploy capital to get to risk-adjusted returns.
Now, you know, aside from investing in the core businesses.
Speaker Change: We've talked about the possibility of some restructuring on the securities portfolio and eventually capital return through share repurchases, as you know, Ally historically.
Speaker Change: has used share repurchases as a way of returning capital and we look forward to getting back to that.
Speaker Change: And I'd say again, the capital flexibility that we've been building over the course of the last year, obviously from the card sale, from the lending sale, from the CRT transactions that we've been executing over the course of the year, all those things point to greater capital flexibility.
Speaker Change: And look, as we evaluate the alternatives, we'll be very much focused on shareholder value and on what's going to drive us in terms of risk-adjusted return, whether that is.
Speaker Change: whether that is investing in the core business and looking at the risk-adjusted return we can get there.
Speaker Change: or it's looking at restructuring of the securities portfolio and looking at the NIM pick up and ultimately the payback that we can get from that activity. But you can expect a continuation of the capital discipline that we've been talking about all year long.
Speaker Change: On your 4% NIM, I guess, your follow-up to your follow-up question,
You know what, look, I would say, look...
Speaker Change: The work we're highly confident in our trajectory and nothing's changed in terms of dynamics on our balance sheet and in our businesses that point to NIM increasing over time
Speaker Change: All that being said, as you pointed out, the sale of the card business will take about 15 basis points off of NIM this year, 20 basis points on an annualized basis.
Speaker Change: But it's important to note that, you know, with that, you know, we're all, you know, with that, you know, we're also, we're also shedding expenses.
Speaker Change: You know, and then our credit costs also come down. And so the net impact of credit card is a push from an earnings perspective.
Speaker Change: And so when you think about that, we talked about that 4% NIM, 2% loss rate on retail auto, continued discipline around expenses and capital.
Speaker Change: Yeah, in order to support a mid-teens ROTCE, I would say the 4% NIM is no longer required to support that mid-teens ROTCE. It's, you know, it's somewhere in the high threes, and so we're no longer banking on getting to that 4% NIM.
Speaker Change: All that being said, I wouldn't take 4% NIM off the page. It's certainly, you know, as you kind of think about the dynamics on our balance sheet, even without CART, it's certainly something that we could deliver, but we're not banking on it at this point. I think, you know, something in the high threes, again, with retail auto coming to 2% or lower on NCOs, and continued discipline around capital and expenses.
Speaker Change: We think those things are adequate to support our mid-teens ROTC aspirations going forward.
I'm at a follow-up, so thank you, Russ.
Thank you. Bye.
Speaker Change: Thank you. Our next question comes from Sanjay Sakrani with KBW. Your line is open.
Sanjay Sakrani: Thank you. Good morning. I heard, Russ, you talked about some of the movements and the originated yield this quarter and expecting to reprice higher. I'm just curious, how much of this is just sort of the selection of consumers you're getting versus competition? I know, like, Capital One is coming back into the market. Some other banks have talked about it. Maybe you just talk about the competitive dynamics.
Sanjay Sakrani: Yeah, sure. Yeah, there was about a 90 basis point drop in originated yield going from 3Q to 4Q. And I'd say, you know, a chunk of that was benchmark rates. And then a big chunk of that was actually mix.
So you saw our S-tier go from 43% to 49%.
It's typical in the fourth quarter that we pick up.
Sanjay Sakrani: More of the more of the S tier. It's just a seasonal trend that we see each year but obviously we picked up a lot more than we anticipated and and you know
Sanjay Sakrani: I would characterize that as we just got more volume that we closed in that S-tier than we anticipated. We mentioned earlier that we've made changes around our pricing late in the quarter, and so we think we've got that managed, and we expect our mix to return to more like what we saw over the full year of 2024.
But that was, you know, that mix.
Sanjay Sakrani: impact was certainly a factor. But importantly, if you look at how we price across the tiers, so comparing pricing on a more of a like-for-like basis, I'd say we're pretty pleased with our asset betas over the course of the quarter. And in fact, they're probably running favorable, quite frankly, to our original expectations.
Sanjay Sakrani: and you're not my anything yeah sorry Michael sorry sorry Sanjay I was just going to offer
Speaker Change: You know, it was an interesting dynamic between the third and the fourth quarters. Because in the third quarter...
Speaker Change: You know, we actually saw that our origination volume probably was a little softer than we would have expected. In the fourth quarter, we actually did quite well.
Speaker Change: I'd actually say that we were pretty consistent in terms of our market approach during those two quarters, and the market just, you know, I think rewarded us nicely in the fourth quarter. One other dynamic that you have to kind of think about is the most recent data on new car sales has been pretty strong, and see if that dynamic worked in our favor as well.
Got it.
Speaker Change: And then just a follow-up question to the previous line of questioning, in terms of all these different moves that you made, I know, Russ, you kind of reiterated the mid-teens ROTC target, but as far as like timing,
Speaker Change: Does that change anything? Because, like, you know, obviously some of these NIM, the NIM impacts from the EV credits are immediate, and they come back over time. I'm just curious, as we think about timing of achieving them, does that push it out in any way? Thanks.
Speaker Change: No, nothing's changed from our perspective on timing. I think, you know, with a lot of these moves, we have increased confidence and, you know,
Speaker Change: We certainly see the benefits of focus in terms of our ability to drive to the outcomes that we desire in terms of credit, in terms of expense levels, in terms of how we think about capital. So all of those things are positive. I'd say it doesn't change our view on timing. All that being said, we haven't given the street any precise timing. A lot of things outside of our control, including what happens with rates going forward, what
Speaker Change: That could affect the timing positively or negatively. The destination for us is clear in terms of where we're going and all the changes that we've done I think gives us better ability to manage different changes in the macro and ultimately give you hopefully more confidence in our ability to get to that mid-teens ROTC target in the medium term. But again, we haven't given a specific timing on that.
Thank you.
Speaker Change: Thank you. Our next question comes from Robert Walpat with Autonomous Research. Your line is open.
Speaker Change: Morning guys. I wanted to unpack some of your comments around unwinding curtailment actions. All SQL, I mean how much of a benefit do you think that is to the originated yield? And then what's the primary driver behind that decision? You know, given some of the volatility around credit in the past, it sounds like you're still being reasonably conservative with respect to the macro going forward too. I wonder why not keep the pedal down on the S tier volume. Thanks.
Speaker Change: Great, thanks Robert. Great question, and maybe just as we think about curtailment and also drawing back to Sanjay's question around originated yield, it is our expectation that as we see the impact of benchmark rates,
Speaker Change: The unwind curtailment will be an offset to that, and so as we think about originated yield on the forward, we're confident we can keep originating at yields that are in the high nines, touching 10%. That's certainly our expectations for the near term.
Speaker Change: As we think about curtailment and the timing of that, as you can imagine,
Speaker Change: Our process around credit is not a kind of one and done process. It is something that we're looking at continuously. And so, you know, we're constantly looking at our book.
Speaker Change: and evaluating credit performance relative to our expectations. And we do that at a pretty granular level.
Speaker Change: curtailment isn't something that I think you're you know we're going to kind of point to a specific point in time it it's going to come as you know as we continue to see important improved performance in our front books
Speaker Change: And it's going to be, it's not going to come in kind of one flash, it's going to come in stages.
Speaker Change: as we make tweaks to our underwriting at the micro-segment level. You'll see it as you see the distribution of S-tier versus other tiers change over time, but I just wanna point out it's not a one-and-done process in terms of how we look at credit.
Speaker Change: continuous and it's a you know a constant constant tweaking of our approach to underwriting.
Speaker Change: to our approach just around how we process applications, whether we auto approve or revert to manual underwriting. There are a lot of factors that kind of go into that. But again, you'll see that over time as you see that S-tier mix normalize from current levels.
Speaker Change: Okay thanks and then we know that the EV lease accounting change benefits the NIM. I was wondering if there is any way you could give some more context to that? You know could you comment on what the 2025 NIM guide would have been had you not made the accounting change?
Yeah, you know, it's...
Speaker Change: And that's been, you know, a significant driver of the amount of volume that we've done over the course of the year. And, you know, I would say, you know, I think that the benefit of
Speaker Change: Douglas Goldstein, CFP®, is the director of Profile Investment Services and the host of the Goldstein on Gelt radio show.
Speaker Change: which is, that is to say, to make us indifferent between an EV lease versus an internal combustion engine lease.
Speaker Change: in terms of the economics and how it presents on our balance sheet. And so it's hard to answer that question because it's not, you know, it's not how we look at the business. The way we look at the business is more consistent with this deferral method of accounting.
and more consistent with kind of the expression of it.
Speaker Change: You know, quite frankly, from your perspective, it shouldn't matter. Those are just timing differences.
Speaker Change: And I think investors should appreciate the transparency and the clarity that the deferral method provides versus some of that lumpiness that we saw with the flow-through method. Understanding our true economics when these mixed impacts can overwhelm our EPS on the tax line.
Speaker Change: I just don't think that was really kind of helping much of anyone.
Yep. Okay. Appreciate the color there. Thank you.
Speaker Change: Thank you. Our next question comes from Moshe Orenbuch with TD Cowan. Your line is open.
Moshe Orenbuch: Great, thanks. I wanted to dig in a little bit on some of the mitigation actions that you were talking about, Russ. Could you just give us a little more detail as to what you did that kind of allowed for those low flow-through rates in the quarter and what that might mean as you go forward? Do those borrowers have a period of time where they've got to perform? How should we think about that? Thank you.
Speaker Change: It's a great question, Moshe. Thanks for the question. We've been working on our loss mitigation strategies all year, and I think I can break it up into roughly three buckets.
Speaker Change: Number one would be repossession timing You know, we've been you know, we've been running a lot of analytics around when and you know our timing of repossession You know based on credit tier based on you know, based based on four characteristics based on a number of factors And for the most part we've been you know moving back
Speaker Change: The timing of repossession and we've been finding that you know giving the given the collectors that extra time To work with a borrower tends to lead to better outcomes. We can keep people in their cars longer We can collect more and we're we're getting to you know, we're getting to better outcomes
Speaker Change: The second is around our communication strategies, where we've been doing a lot of work around how and when we reach out to our borrowers who are delinquent. Probably the biggest change is just more use of, you know, however
Speaker Change: Whatever resonates with them in terms of the medium of communication, whether it's a text message, an email, or a phone call.
Speaker Change: And so, you know, we found we're just getting better at contacting and reaching them.
Speaker Change: And then third is modifications and extensions. You know, increasing the availability and removing some of the friction around those.
Now our extension and modification rates haven't changed
2024 versus 2023.
Speaker Change: but we've just gotten better at kind of how we use those and how we target those.
Speaker Change: It's important to note that we're obviously carefully looking at rates of recidivism and stick rates on the population of loans that have been extended or modified. We continue to be impressed by the borrower behavior, and based on what we're seeing, we don't think we're kicking the can down the road. We think we're getting better outcomes.
Speaker Change: in terms of helping our borrowers, keeping them in their cars, and also improving the effectiveness of our collections.
Got it. Thanks. Very helpful. As a follow-up...
Speaker Change: You know, you talked about capital allocation towards growth in the business.
Speaker Change: The, you know, the guidance that you gave for 2025 includes kind of flat earning assets. Talk a little bit about your thoughts about number one, like what is the, you know, what is the NIM impact in 25 of the MIX upgrade? And secondly, like, when would you be more comfortable allowing earning assets to grow within that capital plan?
Speaker Change: Yeah, you know, behind the flat earning assets, there are a couple moving pieces, you know, as we've talked about before, you know, we continue to see runoff of the lower yielding mortgage loan and mortgage securities portfolios.
Speaker Change: And so what we're effectively doing is, you know, we're running off those assets at the same time that we're growing our retail auto loans and our corporate finance loans.
Speaker Change: You know, and you can see also there's, you know, we're exercising a lot of discipline around our commercial auto portfolio as well.
And so, you know, behind the flat earning assets...
Speaker Change: there's a mixed shift that reflects kind of how we focus the business from here. And then obviously the sale of card and lending, both of those things also have an impact on earning assets. And so there's a lot going on behind that, but you can be assured that we're very much focused on growing in the places that are most accretive to returns. And that's in the retail auto lending.
Speaker Change: Corporate finance, and I'd also point out in the insurance business, you know, it doesn't impact earning assets necessarily But it's an important area where we're growing the business. It's less capital intensive and it's and it's additive to to our returns over time
Thank you.
Speaker Change: Thank you. And our final question comes from Mark DeVries with Deutsche Bank. Your line is open.
Thank you.
Mark Devries: Yeah, thank you. Russ, I was hoping you could provide some of the same context around the NIM guidance in terms of what gets you to the high and low end of the range that you provided around the charge-off guidance.
Yeah, thanks, Mark.
Mark Devries: You know, look, I'd say for the NIM guide, you know, obviously the the path of rates You know is is impactful in terms of in terms of our overall expectations around them as well as the competitive environment for our deposits business and you know We've talked a lot about beta and it's certainly our
Mark Devries: As we think about the rate environment, our range anticipates a range of different rate trajectories from a case where rates are flat.
Mark Devries: relative to where they are today and stay for a prolonged period of time at today's levels.
Mark Devries: We look at the forward curve and market expectations around where rates go from here. We also look at cases where rates come down faster than the market currently anticipates. I'd say our range kind of covers that range of scenarios.
Mark Devries: But I say we look at all those things and we also consider the timing of kind of when these rates come and how those could affect us through the year, both in terms of that beta evolution, as well as those near-term impacts that we've talked about in prior quarters.
and Robert KB1.
Mark Devries: One last thing I just might add, recognizing this is our last question, is
Mark Devries: recognize that we gave you a lot of information and a lot of moving pieces within the quarter.
Mark Devries: If you kind of step back from a lot of the great detailed questions and just kind of think about where we are, you know, I'd leave it at the thought that we should be encouraged by our momentum. And the momentum is occurring, it's on the expense line, it's on the credits line, and certainly on the margin line.
Mark Devries: When it comes to capital, I think you've seen we've been pretty disciplined and prudent with respect to how we're creating capital. Expect that our use of the capital will respect that same approach.
Mark Devries: And then we have this notion that we've introduced this quarter, which you're going to hear more about from us around the power of focus.
Mark Devries: And we think that when we focus our energies and efforts around the places where we have some demonstrated advantage, attract returns, and the necessary scale, you'd expect to see some good things from us going forward.
Speaker Change: Thank you, Michael. Okay, great. I'm sure a little past the hour here, so that's all the time that we have for today. If anyone has any additional questions, as always, feel free to reach out to Investor Relations. Thank you for joining us this morning. That concludes today's call.
This concludes today's conference call.
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