Ally Financial Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Business Trends: Encouraged by underlying trends in core businesses; auto continues to win business with compelling risk-adjusted margins, insurance growth creates strong fee revenue, bank deposits contribute more margin, and corporate finance on pace for highest annual earnings.
• Margin Expansion: Expect NIM expansion to 4% medium-term, driven by liability-sensitive balance sheet, deposit portfolio repricing, and asset mix shift. Near-term margin may be choppy due to competitive dynamics and deposits.
• Credit Management: Took curtailment and pricing actions to reduce risk content of originations; vintage credit trends show 2023 vintage outperforming 2022, with early signs of 2024 vintage being encouraging.
• Expense and Capital Discipline: Focused on controlling expenses, with controllable expenses expected to be down year-over-year; CET1 was 9.8% quarter-over-quarter, with excess capital above SCB minimum, but facing headwinds from CECL and potential EV lease accounting change.

Segment Performance

• Auto: Pre-tax income was $175 million, down from prior year due to higher funding costs and provision expense. Originated $9.4 billion of consumer volume with an auto origination yield of 10.5%, consistent with prior quarter. Insurance written premiums were $384 million, a quarterly record since IPO.
• Ally Bank: Retail deposits totaled $141 billion, 92% FDIC insured, serving 3.3 million customers. Retail deposits declined $600 million quarter-over-quarter, but deposit customer growth remained strong with 57,000 new accounts.
• Corporate Finance: Core pre-tax income was $94 million, with end-of-period HFI loans of $10.3 billion, up $600 million quarter-over-quarter. The portfolio remained well-diversified and credit-wise positioned.
• Credit Card: Losses declined from prior quarter, with an attractive cardholder base and double-digit risk-adjusted margin.
• Insurance: Core pre-tax income was up $15 million year-over-year, with written premiums of $384 million (quarterly record) and P&C written premiums of $115 million (record). Hurricane Helene's losses were partially covered by reinsurance.
• Mortgage: Recorded pre-tax income of $27 million and $256 million of DTC originations, with held for investment assets continuing to decrease.

Guidance

• NIM: Updated full-year 2024 NIM outlook to approximately 3.2%, assuming another 50 basis point decrease in Fed funds by year-end and slow-starting deposit betas.
• Adjusted Other Revenue: Expected to grow 12% year-over-year, consistent with July update.
• Retail Auto NCOs: Guided 2.25% to 2.3% for the year, resulting in total consolidated loss rate of 1.5% to 1.55%.
• Expenses: Controllable expenses expected to be down within 1% year-over-year, total expenses up less than 2%.
• Tax Rate: Adjusted full-year guide to negative 25% to 30% based on EV lease momentum and earnings outlook.

Risks

• Macroeconomic Volatility: Dynamic operating environment with volatility in interest rates and strained consumers due to inflationary pressures, contributing to volatility in near-term outlook for credit costs and margins.
• Credit Cost Volatility: Elevated credit costs in a challenging macro environment, with uncertainty around the timing of credit performance normalization.
• EV Lease Accounting Change: Potential change in accounting treatment for EV leases could temporarily reduce CET1 by ~20 basis points.
• CET1 Headwinds: Impact from final phase of CECL (19 basis points) and potential EV lease accounting change (20 basis points) on CET1.

Question and Answer

Q: Ryan Nash from Goldman Sachs asked about credit loss trends and NIM inflection.

A: Russ Hutchinson responded that while there's near-term pressure, medium-term outlook for 4% NIM remains, driven by portfolio rollover, deposit pricing, and asset mix; timing of inflection uncertain due to rate outlook volatility.

Q: John Pancari from Evercore ISI inquired about retail auto charge-off guidance and capital targets.

A: Russ Hutchinson said retail auto charge-off guidance revised to 2.25%-2.30%, with confidence in medium-term loss reduction; CET1 has headwinds from CECL and potential EV lease accounting change, but 9.8% CET1 provides flexibility.

Q: Sanjay Sakhrani from KBW asked about vintage performance and capital targets.

A: Russ Hutchinson noted vintage trends show improvement but timing uncertain; CET1 headwinds discussed, with focus on Basel III compliance.

Q: Mark DeVries from Deutsche Bank asked about EV lease accounting impact on NIM and originated yield.

A: Russ Hutchinson explained EV lease accounting change would add 6 basis points to NIM, and originated yield expected to decline in Q4 due to rate environment but curtailments support accretive origination.

Q: Robert Wildhack from Autonomous Research asked about curtailment impact on dealer relationships and competitive intensity.

A: Russ Hutchinson and Michael Rhodes stated curtailments have modest dealer impact, with strong dealer relationships; competitive intensity seen in prime segments, but risk-adjusted margin remains strong.

Q: Jeff Adelson from Morgan Stanley asked about credit performance post-update and EV lease accounting.

A: Russ Hutchinson said credit performance has stabilized, with ongoing discussions on EV lease accounting treatment to present financials accurately.