Good day and thank you for standing by. Welcome to the Ally Fourth Quarter and Full Year 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advise that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to your speaker today, Daniel Eller, Head of Investor Relations. Please go ahead.

Thank you, Jiji. And welcome, everyone, to Ally Financial’s fourth quarter and full year 2021 earnings call. This morning, we have our CEO, Jeff Brown; and our CFO, Jen LaClair to review Ally’s results before taking questions. I will note that the presentation we will reference on today’s call can be found on the Investor Relations section of our website, ally.com. Forward-looking statements and risk factor language governing today’s call can be found on slide two, and GAAP and non-GAAP or core measures pertaining to our operating performance and capital results are on slide three and four. These metrics are supplemental to and not a substitute for U.S. GAAP measures. Definitions and reconciliations can be found in the appendix. With that, I will hand the call over to JB.

Thank you, Daniel. Good morning, everyone. And thank you for joining our call today to review fourth quarter and full year 2021 results. I will begin on slide number five. Ally generated outstanding results in 2021. I’m incredibly proud of the efforts and dedication of our more than 10,000 teammates who delivered yet another year of innovation and focused execution. Over the past few years, we’ve experienced a profound shift in consumer demand and expectations for seamless digital first banking products in response to COVID-related challenges and advancements in technology. Ally has leveraged these broad-based secular trends to strengthen our position as a disruptive growth company guided by a winning formula to do it right for our customers, employees and communities. Full year adjusted EPS of $8.61, core ROTC of 24.3% and revenues of $8.4 billion represented record setting results and evidence of the leading auto, insurance and digital bank platforms we built. Momentum generated across our businesses positions us well to continue unlocking franchise value in the years ahead. Our recent acquisition of Fair Square, the latest digital first capability we’ve added to our product suite will further enhance our trajectory. We close the transaction in December, ahead of schedule and are well underway with the integration. Looking at auto results, our dealer networks expanded for the 12th straight year in 2021, generating $46.3 billion of originations, our highest level since the early 2000 source from a record 13 million decision applications. This was our fourth consecutive year of origination yields above 7%, demonstrating our strong competitive position, disciplined underwriting, and leading dealer and customer service capabilities. Credit losses remained benign, with 31 basis points of full year retail auto net charge-offs. Our leadership position within the auto ecosystem is clear across these metrics, affirming the strength of our…

Thank you, JB, and good morning, everyone. I’d like to start by expressing my gratitude for our dedicated Ally workforce, who powered our growing momentum over the past several years and drove exceptional results in 2021. Before diving into the fourth quarter details, I will review Ally’s multiyear strategic and financial transformation, including the drivers behind our steady execution and strong performance. Beginning on slide eight, we’ve included a view of our comprehensive and expanded products read, reflecting the many capabilities we’ve added since 2014. We provide a broad range of integrated and sophisticated offerings built for and around our consumer and commercial clients. Turning to slide nine, we’re constantly evolving and adapting our capabilities innovating through tech and data driven approaches. With each new product launch, redesign or enhancement, we apply our deeply rooted expertise in disruptive DNA to create unique, safe and innovative solutions for a broad range of financing and banking needs. Our customer-centric approach focused on delivering compelling value, fills growth, creates opportunities for relationship deepening and diversifies Ally’s balance sheet and earning. Ally’s compelling growth trajectory and the customer oriented awards we’ve amassed over the years serve as a testament to the effectiveness of our approach. Turning to slide 10, customers using an Ally product now stands at 10.5 million across our platforms expanding 52% since 2014. Ally Bank customers have more than quadrupled over this timeframe, as we’ve evolved our capabilities and successfully expanded multi-product relationships shown on the bottom left. In auto, we’ve added nearly 5,500 dealers as part of our multiyear effort to broaden the funnel and increase dealer engagement. This strategy has culminated in a 40% plus increase in application volume, driving strong originations and risk adjusted return. Robust product expansion and customer growth have translated to improved balance sheet and…

Thank you so much. And I will close with just a few comments on slide number 28. Our purpose and cause will remain centered our customers, employees and communities. We build a profitable, compelling growth company by meeting customer needs through differentiated products and services. Ally has pivoted to an exciting era of growth. The dedication of our 10,000 plus Ally teammates, fuels my confidence in the ability we have to drive an even brighter future. And with that, Daniel, back to you and head into Q&A.

Thanks, JB. So as we head into Q&A, I will ask participants to limit yourself to one question and one follow up. Operator, you can go ahead and tee up the first question.

[Operator Instructions] Our first question comes from the line of Ryan Nash from Goldman Sachs. Your line is now open.

Hey. Good morning, JB. Good morning, Jen.

Hi, Ryan.

Hi, Ryan.

So, JB, you outlined in the slides 16% to 18% plus returns in 2022 and the medium-term, I think, Jen said, two years to three years and beyond, and I wanted to maybe focus on the plus. So can you maybe just talk about, some of the assumptions that are underlying, maybe give us a little bit more color? And maybe what are some of the sources of upside that we could see over the next one year to two years that are not baked into the 16% to 18%?

Sure. Jen, you want to take it or, I mean, a few I will start with Ryan, and then, Jen, can go through the details. Obviously, I mean, you would look at our levels of reserves, relative to the levels of loss expectations and I think our guidance on credit, I think, you see, we’ve taken a very pragmatic and gradual normalization to credit, but that would be certainly a big one. And then, obviously, used car prices, I think, Jen, has guided, we see them within our financial plan is moderating. But I think if you look at current trends, you look at the environment, I mean, used car prices are still really strong. And as Jen pointed out, we are seeing some very modest uptick in inventory levels. But our outlook, I think, this year is a really robust used car market. So, I mean, those are a couple. Jen’s obviously got all the details behind it, but we feel really good about the outlook.

Yeah. JB, I think, you nailed it. The only thing I would add is just around gains and in our insurance portfolio, we’ve been able to optimize our equity market activity and drive outside gains and so that potentially Ryan could be another area of upside. But I think you’re asking the right question. I think there’s an asymmetric bias here towards the outperforming the 16% to 18% plus and it’s past events here as reserves, these used vehicle pricing that JB hit on, plus our ability to generate gains.

Got it. And Jen, if I could just dig into the expectations for the upper threes net interest margin, can you maybe just flesh out some of the assumptions that are underlying this in terms of, your assumptions on rates, your ability to drive price in the loan book? And I guess, more importantly, what are the expectations over that timeframe for deposit betas, just given you guys have obviously done a great job building the liquidity on the balance sheet and I’m wondering, can we end up seeing you exceed prior cycles, just given all the work that you guys have done on the deposit side? Thanks.

Yeah. Sure. And I will start first on the yields and then go to liabilities. But on asset yields, 90% plus of our retail auto portfolio was originated at 7% plus yields. And so we are expecting, Ryan, to continued to see retail auto yields continue to migrate up towards that 7% plus. And then if rates continue to increase as we’re expecting, that could potentially go even higher. We also have floating rate assets as we’re growing floor plan. JB mentioned, we’re starting to see some increases in floor plan. Those are floating rate assets. They would migrate higher as rates increase. We’ve increased our asset sensitivity just through pay-fixed hedging activity kind of maxed out our hedging, which will also give us some tailwind. So, net-net, when we wrap this all up, plus Fair Square, Ally Lending, we see a really robust trajectory ahead on asset yields, in particular, if we see rising rates. And then on the liability side, both mix and deposits will help us. We have a much healthier liability stack having run-off, expensive high cost unsecured debt, our deposit levels are 89% of funding, and then, when you look at the value we’re providing to our customers based on products, our digital platforms and the fact that we’re core funded now, we do think, Ryan, to your questions, specifically around deposit pricing, that overall rate paid will be lower in this next rising rate cycle. So, you wrap it all up in the first couple of pages, the transformation we’ve led, the product capability expansion and the asset side, the transformation of our funding profile, it positions us so well to hit that upper 3% NIM, irrespective of the rate environment and to your question, gives us opportunity to outperform as well.

Thanks for taking my questions.

Yeah.

Thanks, Ryan.

Thanks, Ryan.

Thank you. Our next question comes from the line of Bill Carcache from Wolfe Research. Your line is now open.

Thank you. Good morning, JB and Jen.

Hi. Good morning, Bill.

Hi, Bill.

Can you discuss the trajectory that you’re expecting for NIM, particularly in light of changes in fed funds and all the moving parts? The guidance on the slide is super helpful, but maybe just a little bit of color and directionally should we be expecting 2023 NIM to be normalizing higher, lower versus 2022?

Yeah. Sure. And I am going to jump in here. And we’ve been guiding towards NIM expansion now for years. So if you take a step back, this has been a guide irrespective of the rate trajectory and it’s all the things I just described, Ryan, around the transformation of our asset side of balance sheet, as well as our liability stack. And so, Bill, we are expecting NIM to expand irrespective of rates. That said, in a raising -- rising rate environment, we do think that there’s an accelerated opportunity to expand earning asset yields. Just walk through some of the drivers there around floating rate assets, growing floor plan at the right time, adding short duration assets sensitive assets, like, Ally Lending and Fair Square, that will all give us growing momentum in a rising rate environment to continue to see earning asset yield expansion. And then on the liability side, the healthier staff we have, lots of that that we’re so well positioned from customer brand, engagement, digital capabilities, we do think that we will be able to hold funding costs much better in this rate environment or rising rate environments than the last one. And so that will fuel that trajectory into 2022 and allow us to sustain it into 2023 and beyond. So that’s some of the dynamics there, Bill, and hopefully that helps to answer your question.

Yeah.

This is not…

Yeah.

… a rate driven NIM expansion. This is all about structural improvements and transformation.

Got it. That’s helpful. And then, separately as a follow up, can you speak to the trajectory of the reserve rate and how you’re thinking about growth in that dynamics as you grow the card business, the fact that you’re starting off the year above your day one level should help dampen those headwinds? And then sort of tacking on to that, as the card business grows, given sort of that’s a higher loss content business or should there be some expectation that at some point you would raise your capital -- your target capital expectations, if you could just touch on that? Thank you.

Yeah. Sure. And on the overall reserve, it’s largely driven by retail autos. Let me start there and I will go to some of the smaller portfolios. But retail auto right now is at 3.54%. Day one was at 3.34%. So we’re running 20 basis points ahead of day one. And I think that, to JB’s point and his prepared remarks really helps us to manage through any kind of economic cycle that we could see ahead. But if you look at the path of normalization our past history, we would expect over time as NCOs normalized that, that rate would come down from the 3.54% somewhere closer to that 3.34%. So I think if anything, Bill, that gives us some tailwind heading into 2022 and 2023. And then on some of the newer products that, we will have higher coverage levels, I think, we’re very well reserve there. Fair Square, we just put on it a 12% coverage ratio. Ally Lending is close to that. So I think we’re just in a really good spot there. Not going to drive upside, but we will be growing that and the mix may change a slightly higher consolidated level. But if you wrap it all up with retail auto being as big as it is, with as high our reserve coverage level from a consolidated perspective that should come down over time. And then on our capitol target, look, we feel that we are very well positioned. We are adding some new portfolios with Fair Square and Ally Lending, but they are about $2 billion today and we will grow to $2 billion to $4 billion from here, but it’s not a big enough percent of our portfolio to really revisit the 9% target. And then also keep in mind, we’re holding 9% against a floor plan balance that is relatively risk free. So we feel really good Bill about our 9% CET1 target.

That’s very helpful. Thank you for taking my questions.

Thank you, of course.

Thank you. Our next question comes from the line of Betsy Graseck from Morgan Stanley. Your line is now open.

Hi. Good morning.

Hey. Good morning, Betsy.

Hi, Betsy.

A couple of questions here, first, as we’re thinking about the Fair Square integration getting behind you, can you give us a sense as to the timing and the size that you’re going to be thinking about in terms of expanding that portfolio and what the levers are to affecting that?

Yeah. Sure. So we are at about $950 billion in balances today and we see a past medium-term to $2 billion to $3 billion, Betsy, and I think, if anything, they’ve shown an ability to really accelerate those customer growth and balance sheet growth, both are up over 60% year-over-year and the balances are running 25% ahead of just the projections that we shared with you in October. So they’re seeing a really robust growth trajectory. We’re right now seeing kind of a past to $2 billion to $3 billion, but we will continue to monitor and take it from there.

And that’s obviously -- sorry, go ahead.

Yeah. I mean, it’s just very compelling customer segment and product focus that is allowing them to continue to grow. And I just find out that they grew during one of the toughest credit card markets in history as we navigated COVID.

So that piece of the portfolio expanding clearly net positive to NIM. Floor plan is a little bit of a lower NIM contributor and I know in the past, you’ve talked about funding that via securities to help keep the NIM moving higher. How much room is there in that piece of security shift in floor plan? I’m asking a question from the context of your guide for upper 3% NIM. What keeps you from seeing that guide move into low 4%s, as these piece parts are coming through here?

Yeah. Sure. And Betsy, we obviously have upside from floor plan and it’s on a couple of different dimensions. One is the supporting readout. But so as short-term rates increase that will naturally migrate the yield up. And second, to your point on funding, we’re reallocating cash into floor plan. So that gives us another tailwind from a mix perspective. And as I mentioned earlier, in response to Ryan’s question, there’s a lot of opportunity for earning asset yield to continue to migrate higher, plus the fact that we think we’re very well positioned to manage liability costs down. So there is an opportunity to go to that 4% plus. It’s just we tried to provide balanced guidance as we look forward, but certainly there’s upside opportunity there.

And then separately on the outlook here for used car values, which does feed into a couple of parts of the income statement. How should we think about, what you’ve got here the modeling 15% plus declined by year end 2023, like? Is that -- how did you come -- how did you get to that assessment in the guide? And what kind of pace are you thinking about that coming through the model?

Yeah. Sure. And let me hit on model and then reality.

Yeah.

We’ve modeled a straight line reduction from 2021 to 2023, down 15% to 20%. I think if we look at pace of used vehicle values, that continues to increase, and so the reality is, there’s probably upside to that. But again, we’re trying to give you kind of a run rate view of returns. And we will be opportunistic around upside if we were certainly in 2021 here, but the model just assumed kind of straight line reduction there. And then, another factor I’d call your attention to, because there’s so much focus on used vehicle values. As we exited 2021, the lessee buyout and the dealer buyout was increasing to 60%, 70%, 80% and so that’s muted our ability to harvest gains. It lowers the year-over-year comp as we head into 2022. So just keep that in mind. It’s not quite as big of fallout as I think some folks are modeling at this point in time. And then the last thing I’d say on used vehicle values is, we do have natural hedges, just as we had a hedge with floor plan coming down, used vehicle values going up and impacting lease yields positively. We have the hedge on the reverse, right? So as lease yields come down, we will see floor plan growing and you get all the great dynamics around putting cash to work, floating rate asset increasing. So just keep that in mind that there’s positive hedges as used vehicle values come down just like there was as they went up.

Got it. Thanks, Jen. Thanks, JB.

Yeah. Thank you, Becky.

Thanks, Betsy.

Thank you. Our next question comes from the line of Moshe Orenbuch from CS. Your line is now open.

Hey. Thanks. Thanks very much. And you’ve had -- you alluded to this in the opening comments, but you’ve got a better loan growth than you’ve had in a while both you’ve got reasonable growth in retail auto and then kind of grows across the portfolios. Can you talk about how that is likely to trend over the next year or two and then I’ve got a follow up? Thanks.

Yeah. Sure, Moshe. And I mentioned assets getting to $200 billion and -- in our medium-term and that’s driven by all the portfolios, you just mentioned, I mean, retail auto, we were originating at mid-$30 billion, we had $46.3 billion this year, we’re guiding towards low $40 billion. And so as we continue to see opportunities to originate at a higher level that will obviously take our retail portfolio higher. Also seeing strong growth in lease as well, floor plans, obviously, come back. We saw kind of trough in September and steady growth from there, and I think it will be a little choppy from here on out, we will see, but definitely opportunities in floor plan to come back. And then the unsecured capabilities that we’ve recently added with Ally Lending, with Fair Square, each of those portfolios could get to $2 billion to $3 billion over time. And then last but not least, we’ve seen really nice opportunities to originate in mortgage, we put forward kind of our $10 billion target into this year and we will see how that plays out. But we really like our capabilities and we’ve expanded into new markets with mortgage systems and growth opportunities there. And floor plan continues to be a steady driver. We always talked about, I’m sorry, corporate finance always tends to be a steady driver, we’ve talked about $8 billion to $10 billion in that portfolio. We already hit $8 billion, I think, well on our way to $10 billion, as you look at the total opportunity in that segment. And then we will put cash to work and securities as well. So really across the Board, Moshe, we see really nice tailwinds and opportunities to grow, in addition to the NIM expansion that we’ve been talking about this morning.

Great. Right. And your medium-term kind of forecast talks about PPNR expansion on an annual basis. One of the concerns that investors have had about financials after the reports in the big banks has been expense growth. Can you kind of talk about your plans, because obviously, PPNR expansion means that your revenues got to grow faster than expenses, but just talk about the plans for generating operating efficiencies and how you think about that, particularly in light of the context, the remarks, JB, that you made about, minimum wage, phasing that in and kind of how that will integrate into your plan over the next couple of years?

Yeah. Sure. And Moshe, just as a reminder, we don’t manage kind of single line items point in time, we’ve been managing the company to drive accretive returns and we’ve been investing in growth. And what I shared with you in the first couple pages around continuing to invest in capabilities, grow customers, grow our balance sheet, grow returns, that is the focus of ours, just in general. And we’ve been investing as a growth company. We’ve seen kind of mid single-digit expense growth over the last couple years. We would expect to continue to see that. But as we’ve demonstrated in the past, we’re focused on positive operating leverage, PPNR expansion, robust return trajectory and you should expect more of that to come from a PPNR, as well as operating leverage perspective. Now, I will note that with Fair Square coming in -- into 2022, we will have one month of expenses rolling forward to 12 months. There’s some nuances there. We do see positive operating leverage as we get into 2023. But definitely just some technical impacts this year from Fair Square. But you wrap it all up, a lot of focus on expenses, but for us, it’s really around growing our businesses and growing revenue. We saw revenue up 25% this year. We have a very robust trajectory as we head into 2023 -- 2022 and 2023 and we will keep investing, but we’re -- leverage is front and center all the time.

Okay. Thanks so much.

Yeah. Thank you, Moshe.

Thank you. Our next question comes from the line of Sanjay Sakhrani from KBW. Your line is now.

Thanks. Good morning. I guess I got a question on the retail auto yield. I mean, that’s -- I guess your expectations are that continues to remain strong. I’m just curious, I know a lot of it’s been driven by mix inside of retail auto. But as we think about just maybe competitive forces coming back into play, how much of a factor do you think it plays into that yield going forward over the next couple of years?

Yeah, Sanjay, yeah, it’s fourth year putting strong origination flows on the books that 7% plus yields and we’re guiding towards similar performance as we head into 2022. And it’s simply a result of the growth in dealers, growth in dealer engagement, where we think we still have significant opportunity for expansion. It’s the continued investment in our capabilities, including our SmartAuction platform, insurance. And so we don’t see any signs that that will slow down as we head into 2022 and beyond. And while competition is always intense, we aren’t seeing that interrupt our flows are -- impact our performance whatsoever as we head into 2022 and beyond.

And Sanjay, just -- obviously, remind our number one lender in the prime space, one of the largest used lenders. And to get that type of performance, you need to have significant scale, which is something we bring. And so, I think, we’re large, we’re fast, the dealers like us. We’ve automated a lot of our risk-based decisions, so we respond very quickly. So, yes, we recognize, there are players come and go, but I think the one thing what dealers appreciate about Ally is our stability and that’s part of the -- have been one of the big drivers why we continue to see a big uptick in origination flows and what, Jen, just guided even into the low $40 billions is pretty strong loan growth year-on-year.

No. Absolutely. You guys have executed really well. I guess, maybe another question on competition and follows along some of the questions that Moshe was asking in terms of expenses. In the -- on the consumer lending side that that targeted growth that you expect for Fair Square, I mean, like, is that just more direct marketing, and therefore, there shouldn’t be a significant ramp up in marketing spend, because we’ve heard the big banks, as well as some of the card issuers talk about ramping up expenses to get new accounts. I’m just curious sort of how you expect to go-to-market there and do you expect some pressure on expenses as you build that business out? And how does it factor into the growth that you’re expecting?

Yeah. And I think, Fair Square is a bit unique. It’s similar to what JB just mentioned on auto. It’s kind of a unique product for a unique market. They’re originating in that time space, which is not nearly as competed as the super prime space and so the direct marketing that they’ve been doing has been highly effective as reflected in the 60% plus increase in customer accounts, as well as the growth in the balance sheet. And all of the expenses attached to that are in the really robust guidance I’ve provided, which is kind of immediately accretive from our ROTC perspective, it will be accretive from an EPS perspective by year end this year and it will drive operating leverage as we head into 2023. So you can see that our investments are paying off from a growth and profitability perspective. And I think if anything, we can turbo charge that growth by bringing them in inside the four walls of Ally and leveraging our existing customer base, Sanjay, which is not going to require significant additions to our marketing spend.

And how much of that is factor, like, is this cross-sell a big part of the growth expectation or is that just benefit?

Yeah.

Benefit?

None of that, Sanjay, is built into any of the numbers that we share. That will be all upside. And again, it will be driven by synergies across our platform much more so than increase in marketing.

Okay.

Sanjay, I mean, I would point out, though, what sometimes cross-sell gets knocked and the question of, can you really do it? I think, I mean, if you look at our growth and multi-product relationships, it shows we are actually one of the banks that’s executing in that regard. And so while we don’t necessarily have it embedded in the guidance, I think, that’s a clear focus point for us. So how do we use the cross-sell of a massive customer base? I mean, if you think of kind of another 9.5 million customers ex credit card, is even bigger than that existed Ally. That is an opportunity that we will go after.

Great. Thank you.

Thank you, Sanjay.

Our next question comes from the line of Arren Cyganovich from Citi. Your line is now open.

Thanks. Maybe not to stay on card for too much, but the -- it is kind of an exciting new area for you. But what’s the strategy for 2022, are you going to rebrand to Ally? Are you going to go up market a little bit or are you just going to kind of let them operate under that Fair Square brand for the near-term?

Yeah. And -- thank you. And we agree it’s an exciting opportunity. And the short answer here is, we’re going to let them continue to execute the way they’ve been executing over the last five years. It’s been a tremendous product, growth story for them and we don’t want to interrupt the execution on that front. In parallel, we are looking to rebrand their cards. We will do so by year end. And we do think that there’s product expansion opportunities as we just talked about over time, but that’s going to be something we grow into as we think about the broader Ally customer ecosystem. And then last but not least, just a huge shout out to that team. It’s just been a tremendous experience bringing them on Board. They know what they’re doing. They’ve got decades of experience in card and we couldn’t be more excited about the team products, the opportunity ahead in the card space.

Great. And then, just lastly, the -- there’s been, excuse me, a little bit of concern about credit in the personal installment loan space with a lot of new entrants into the market. What are you seeing within Ally Lending on the credit side?

Yeah. I mean, I would point to our performance, which has been robust. I think it’s a large. It’s a rapidly growing market. So there’s no surprise that there’s new entrants in that space. But we feel really well positioned, especially in the verticals where we’re focused home improvement, healthcare are dominant areas for us. We’ve continued to be able to grow merchants in that spaces, as well as originations and balances. So, we’re not surprised that there’s some new entrants, but we feel really good about our products and our performance. And just as a reminder, we’re not kind of BNPL, the paying for product, that’s getting a lot of scrutiny across the industry, just in terms of consumer-oriented practices. This is a traditional installment product. We go through traditional credit underwriting. We have robust credit risk management around this product. So feel great about the opportunity ahead.

Okay. Thanks. Thanks, Jen, and to all the participants. That concludes today’s calls. We’re at the top of the hour here. Operator, you may now take us through the disconnect process.

This concludes today’s conference. Thank you for participating. You may now disconnect.