Ally Financial Inc
NYSE:ALLY
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Ally Financial Inc
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Good day, ladies and gentlemen, and welcome to the Second Quarter 2018 Ally Financial, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct the question-and-answer session and instructions will be given at that time. As a reminder, this conference is being recorded.
I would now like to introduce Executive Director of Investor Relations, Mr. Daniel Eller. Please go ahead, sir.
Thank you, Andrew, and thank you, everyone, for joining us this morning as we review Ally Financial's second quarter 2018 results. You can find the presentation we'll reference during the call on the Investor Relation section of our website, ally.com.
I'd like to direct your attention to the second slide of today's presentation, regarding forward-looking statements and risk factors. The content of today's call will be governed by this language.
On slide 3 of the presentation, we've included some of our key GAAP and non-GAAP or core measures. These and other core measures are used by management and we believe they are useful to investors in assessing the company's operating performance and capital measures. But they are supplemental to and not a substitute for U.S. GAAP measures. Please refer to the supplemental slide at the end for full definitions and reconciliations.
This morning, our CEO, Jeff Brown and our CFO, Jen LaClair will cover the financial results. We have time set aside after the prepared remarks for Q&A.
With that, I'll turn the call over to Jeff Brown.
Great. Thanks, Daniel. Good morning, everyone. We appreciate your joining our call. Highlights that I will cover start on slide number 4. We delivered high-quality results this quarter. We continue to execute on our strategic and operational plans, take care of our customers and remain on track to deliver solid financial results.
Adjusted earnings per share of $0.83 is up 43% year-over-year. Core return on tangible common equity was 12.8%. Those results are the highest since we've been publicly traded. Earnings improvement and EPS growth were driven by a combination of higher net financing revenue, strong credit performance, lower weather losses, and reduced share count. Additionally, earning assets grew 5% year-over-year, primarily in non-auto asset classes.
On the operations side, the auto finance business executed well. Auto originations of $9.6 billion were up 11% year-over-year. We delivered strong volume simultaneous with meaningful increases in price. Newly originated yields on average exceeded 7%, which will be a tailwind for asset yields as the portfolio continues to churn.
Credit trends improved on a year-over-year basis with our retail auto net charge-offs at 104 basis points, our lowest level in two years. Like the trend we saw in the first quarter, the portfolio yield was up year-over-year, while our loss rate was down. We do see a stronger consumer within our credit trends, fueled by strong employment conditions, higher take home pay, and wage inflation beginning to accelerate.
Our channel diversification efforts continued to drive healthy application volume. Growth channel volume was 45% during the quarter, a record for us, while used originations slightly increased to 51% of our total volume. Our number of growth channel dealers expanded this quarter as we onboarding nearly 200 new dealers across a variety of nameplates.
A few additional thoughts on used originations. We've taken a measured approach in increasing our volume in this space over the past few years. The industry average FICO on used loans is around 650. Our average FICO on used loans that we're booking is 680, 30 points higher. And further, our average FICOs on new loans that we are booking is about 700. So, we're originating both new and used within a fairly tight risk brand. Furthermore, used originations are generally booked at higher yields, have more predictable loss performance behaviors, and it's a much larger market.
Turning to our retail deposit business and customer growth, we had another strong quarter adding 41,000 new customers, eclipsing the 1.5 million retail deposit customer mark. Total deposits grew $1.3 billion in the second quarter while retail deposits were relatively flat. Jen will take you through the details in a few moments, but we saw retail flows impacted by the seasonal nature of consumer tax payments this quarter in addition to migration into investment products.
Deposits are obviously an important part of our funding optimization story, but we have a broader philosophy around how we view the deposit franchise. Deposits represent an important gateway product to the full suite of bank offerings we've built over the past couple of years. With Ally Invest, Ally Home and Ally Card now in place, we're well positioned for deeper product penetration.
The influx of millennials into our deposit products serves as an attractive future growth opportunity, as generational wealth transfer occurs and as their credit needs further develop. And finally, deposit growth allows us to more efficiently fund our asset base, which is an important part of our financial path in the future.
Looking towards capital management, our successful CCAR results demonstrate our commitment to efficiently deploy shareholder capital. We receive non-objection to our 2018 CCAR submission, allowing us to return 32% more capital through share repurchases.
We also increased the dividend 15% beginning in the third quarter, now paying almost two times where the dividend started post IPO, and I'd expect continued growth subject to board approval. Overall, I'm pleased with our results this quarter and feel we are well-positioned as we enter the second half of 2018.
With that, let's look at some of the key metrics on slide number 5. The trends on these charts reinforce the meaningful and consistent progress we've made over the past several years in improving our financial position. These metrics highlight year-over-year progress, which we expect to continue over the medium-term. As we highlighted earlier, adjusted EPS was $0.83 per share. The result this quarter keeps us on the upper end of the 20% to 30% EPS growth path that we've discussed.
On the revenue side, we saw net interest income grow quarter-over-quarter to the highest level we've had as a public company. Deposits in the bottom left demonstrate the strong path that we've been on over the past several years, with balances up 15% year-over-year, even considering the flat retail balances quarter-over-quarter. Tangible book value on the bottom right was up quarter-on-quarter and year-over-year. Across each of these metrics, I'm pleased with how we have delivered throughout the first half of 2018.
And with that, I'll turn it over to Jen to walk through more details on the quarter.
Thanks, JB. Slide 6 includes the review of the detailed line item trends. Net financing revenue excluding OID of $1.115 billion was up $31 million year-over-year and up $46 million linked-quarter. The growth was driven by higher asset balances and continued expansion of retail and commercial auto yields, which more than offset a decline in leased yields and an increase in cost of funds. We expect growth in NII throughout the remainder of 2018 as we increase assets and optimize our funding mix.
Adjusted other revenue $356 million was down $32 million year-over-year and $38 million linked-quarter. You can expect this line item to move around from period to period, but we still expect to be relatively flat on a full year basis. The year-over-year variance reflects a gain in a prior year related to an auto loan sale.
Looking at the quarter-over-quarter variance, the decline is primarily driven by lower investment gains and the seasonal costs associated with our reinsurance agreement that reduces volatility associated with weather losses. Provision expense of $158 million in the second quarter was down year-over-year and linked quarter. Several factors drove the decrease, including favorable auto portfolio mix coupled with a strong macroeconomic backdrop, hurricane-related reserve releases, and a large recovery in our corporate finance business. I'll provide some more details about credit and provision in a moment.
We are pleased with the overall performance in our book and remain cautiously optimistic around the outlook for the consumer. Non-interest expense moved higher year-over-year and linked-quarter. The trends in this line item are primarily due to the growth of our core businesses as well as the buildout of our product diversification initiative.
Also included here are some restructuring charges that we took during the quarter related to employee actions. As you would expect, increases versus the prior quarter reflect the impact of weather losses that are elevated during this period each year but are favorable year-over-year.
Moving to some of our key metrics on the bottom of the page, we reported GAAP EPS of $0.81 and adjusted EPS of $0.83. Core ROTCE was 12.8% this quarter, up from 9.6% last year. The adjusted efficiency ratio declined to 47.7% this quarter.
Our medium-term and 2018 financial path remained fully intact. This quarter we delivered the highest earnings per share and highest return on equity since going public, while growing assets and expanding net interest income.
Turning to slide 7, I'll review the key drivers of net financing revenue, NIM and balance sheet items for the quarter. Let me start with a couple of general comments on how we view NIM. We continually assess re-pricing and beta dynamics across the entire balance sheet.
On the assets side, our retail and commercial auto yields moved up substantially during the period demonstrating our ability to increase yields, book solid volumes while maintaining a stable risk profile. Keep in mind that over 10% of our retail auto portfolio reprices each quarter with approximately 99% of our floorplan book linked to floating rate indices.
On the liability side, we understand the focus and the importance of deposit betas, but we look holistically at the value of deposits. The multiyear migration of our funding base into deposits has resulted in less reliance on wholesale funding sources, including the continued reduction of high cost unsecured debt.
Turning back to the results in the quarter, asset yields were up 19 basis points, while cost of funds increased 14 basis points. This resulted in NIM expansion excluding OID of 5 basis points. Looking closer at retail auto, the portfolio yield expanded 18 basis points this quarter to 6.08%.
This was driven by a combination of higher yields on new originations and the favorable impact of the hedges we put in place earlier this year reducing our exposure to increases in short-term rates. Commercial auto yields expanded 83 basis points year-over-year on roughly $35 billion of assets.
Looking at lease, yields were in line with our expectations to be relatively flat. And as we've talked about on prior calls, the reduced termination volume results in lower gains but also lower residual risk. I would also note that the run-off of our legacy GM lease portfolio is essentially complete at this point. And GM now represents less than 2% of the overall lease book. And we expect to see the portfolio stabilize and grow modestly from here. We have deployed capital out of lease into other attractive return opportunities on our balance sheet, including the retail category within the auto segment.
On the liability side, deposit rates moved up this quarter with the trend remaining in line with our expectations on medium-term cumulative deposit betas relative to fed funds. Betas are on the rise industry-wide and we are mindful of competitive behaviors. We remain on our path to achieve $5 billion of net financing revenue in the medium term, a key driver of our earnings growth path.
Let's turn to slide 8 to review some more detail on deposit trends. Our total deposit balances grew by $1.3 billion this quarter, while retail balances were relatively flat. Retail balances were impacted by two main drivers during the period.
First, the expected seasonal aspect of consumer tax payments that occur during the second quarter of each year. This year, we saw an increase in tax payments of over 40% compared to last year. And second, outflows to brokerages as consumers shifted funds into alternative market-based investment products. Taken together, these factors resulted in approximately $1 billion in net ACH outflows during the period which largely offset the inflows.
This should not be surprising considering we have a large population of mass affluent, high net worth customer balances. This population is more susceptible to higher tax liability and have been active in this rising rate cycle deploying their funds into an array of investment products.
Year-over-year, total deposit balances have increased $12.6 billion and are expected to surpass $100 billion in the second half of 2018. We've included the customer retention rate in the upper right demonstrating the consistent high brand loyalty we experience, ending the quarter at 96%.
In the bottom left graphic, you can see that retail deposit rates increased 13 basis points this quarter. Pricing actions during the quarter resulted in a cumulative portfolio beta of 25% since the beginning of the tightening cycle, which again remained in line with our expectations. We expect the second half of the year to be competitive. We will remain disciplined in our approach to balance growth and pricing decisions. Customer growth was strong again this quarter as we added 41,000 new Ally customers in deposit products, pushing us over the $1.5 million mark for the first time.
Capital details are on slide 9. We received non-objection on our 2018 CCAR submission, allowing us to increase both our dividend and share buyback program. In total, we expect to distribute over $1.2 billion to common shareholders over the next year, which is around 11% of our client market capital. Since the inception of our share buyback program in mid-2016, we have deployed $1.46 billion of capital in share repurchases and a weighted average price of $22.46, a meaningful discount to book value and reducing share count by 12% as of the second quarter of 2018.
Asset quality details are on slide 10. Consolidated charge-offs of 57 basis points this quarter was down from 66 basis points last year. This reflects the low point for retail auto NCOs in the year, in addition to overall strong credit performance. In the top right, consolidated provision expense was $158 million down from $269 million in the prior year period. And as I mentioned earlier, provision was impacted by several drivers, including a favorable portfolio mix as we continue to roll down the 2015 and 2016 vintages, which we added reserves for in the second quarter of last year.
Lower reserves related to a stronger macroeconomic environment and the consistent performance of auto originations we've been putting on the books over the past two years. We released approximately $10 million of the 2017 hurricane reserve again this quarter and expect to work through the remaining $10 million during the second half of this year. Additionally, the recovery in the corporate finance business contributed to the provision decline year-over-year.
In the bottom left, you can see the solid credit performance within our retail auto portfolio, as net charge-offs came in 104 basis points compared to 120 basis points in the prior year period. It's important to note that trends in auto losses are a reflection of the consistent credit mix we've been originating coupled with a strong consumer and macroeconomic backdrop. Overall, performance is aligned with the 1.4% to 1.6% full year net loss rate we've discussed on the total portfolio. And based on what we're seeing, we expect to perform at the low-end of this range.
Looking at delinquencies in the bottom right, this quarter, we've included the 60-plus in addition to the 30-plus trends as this provides a closer view of our flow to loss performance. Year-over-year, 60-plus delinquencies increased 2 basis points, while 30-plus increased 7 basis points. These trends reflect the dynamics of our new and used portfolio mix, as well as collection strategies we've executed. And lastly, looking at linked quarters, the pace of delinquency increases has declined in 2018 compared to 2017 for both 30-plus and 60-plus population.
On slide 11, auto finance reported pre-tax income of $382 million, an increase versus prior year and prior quarter. Year-over-year pre-tax income was up driven by retail net financing revenue growth and lower provision which offset lease portfolio normalization and gains some this tail activity that did not repeat. Linked quarter, pre-tax income increased due to lower provision and higher net financing revenues as we continue to optimize our balance sheet mix.
We've added details on the bottom left showing strong dealer account and application flows. While these metrics in isolation do not directly correlate to higher originations, they illustrate our ability to diversify across the auto marketplace. Additionally, we continue to align ourselves with emerging players in the marketplace providing a pathway to incremental growth opportunities and positioning us for the continued evolution in this space.
Let's turn to slide 12 to review origination and balance sheet numbers for auto. In the top left, originations were $9.6 billion, up 11% compared to the prior year. We are sourcing a diversified mix of originations with growth channel driving 45% of volume.
We're a full spectrum and full product suite lender as demonstrated by our origination mix in the upper right. Our used volumes ticked up to 51% this quarter, second quarter being a typically larger market for used originations given tax rebates. And as you can see here, non-prime originations have run consistent at 11% of our retail volume over the past two quarters, down slightly from prior year levels.
Consumer assets grew to $79.2 billion in the period, given the strong consumer originations this quarter. On the commercial side, balances were down from the elevated levels we saw last year and pretty flat for the third consecutive quarter.
Moving to insurance on slide 13, overall, another steady quarter here with core pre-tax income up $24 million year-over-year, driven by strong earned premiums and lower weather losses. Written premiums moved higher by $58 million year-over-year. The increase in written premiums is driven by strong vehicle service contract volumes and higher rates on the dealer floorplan inventory coverage.
On slide 14, the corporate finance business continues to perform well with core pre-tax income of $58 million, up $23 million year-over-year and $24 million linked-quarter. Net financing revenue increased from the prior year from strong loan growth and some accelerated deferred fee income from paydowns. Auto revenue was up year-over-year as the business continues to grow syndication income.
And within provision, we recognized the recovery in the period, driving the linked-quarter and year-over-year favorability. Asset levels were stable this quarter as we were measured in our approach to growth in a heightened competitive environment. Year-over-year, held-for-investment loan balances were up $600 million or 18% and were relatively flat quarter-over-quarter. The asset diversification return profile and growth trajectory provided by this business continue to present a compelling storyline for us.
Turning to mortgage finance on slide 15, net financing revenue was up both year-over-year and linked-quarter, driven by higher asset levels as we continue to execute bulk purchases. Non-interest expense was up year-over-year, as assets in this segment grew and we continue to build out our direct-to-consumer offering, Ally Home.
Before turning it over to JB, I'd close by reiterating, that it was a solid second quarter and a strong first half of 2018 for us. We remain well-positioned to be able to build upon this momentum and to deliver on our financial outlook.
And with that I'll hand it back JB.
Thanks, Jen. On slide number 16, I want to quickly highlight the progress and investments we continue to make on the digital front. Our brand was built around a simple straightforward experience with the customer at the center. We've continued to update the look and feel across our digital footprint, including our homepage and our mobile interfaces, as well as integration with Alexa.
We brought in top talent from a wide range of industries and are focused on improving our go-to market timelines and customer satisfaction scores, by utilizing innovative design techniques and more advanced data analytics. The customer-centric and direct-only model keeps us in a well-established position, even as other players come into the space. We believe the customer focus, including in the experience and design is a key reason why retention has been so high and our growth rates have typically exceeded the market.
We're proud to be recognized for our efforts here, including most recently by Kiplinger's. And finally, it has been extremely satisfying for me to meet with our development teams and gain a hands-on perspective of the enhancements that have already been launched and those that are in the pipeline. We've migrated our cultural approach as well, with workspace being devoted to agile deployments and create-a-prototype labs, which drives much faster deployment of technology and customer experience improvements.
Turning to slide number 17 to wrap-up, I will do a quick recap of the priorities we laid out for 2018. Our culture remains a top focus area for me. We maintain the Do It Right mentality in everything we do for our customers, communities, associates, and shareholders. As part of that, we're focused on appropriately managing risk across the organization day in and day out.
On the operations front, our customers are at the center of everything we do. We've seen continued growth in our base and solid retention. The auto finance and insurance businesses continue to provide strong risk adjustment returns. We're staying disciplined on credit and feel positive about the results we've seen.
The deposit products serve as the gateway to the suite of bank products we offer, growing the customer base by 194,000 year-over-year serves as proof that our strategy and product offerings are effective. Looking at our product expansion efforts, we continue to build scale in wealth management, credit card, and mortgage. Our corporate finance business is also continuing to expand, while remaining disciplined in the space.
Each of these initiatives reflects our commitment to the customer and aligns with our strategy to deliver compelling and diversified consumer and commercial product suite. As trends in digital banking continue to evolve, we are well-positioned to utilize our existing platform and strong brand recognition along our growth path. And lastly, efficiently deploying shareholder capital to drive better returns remains a guiding principle.
Taken in total, these items are what will drive our ability to continue building on the progress we've achieved today. While the competitive environment in each of our operating areas continues to evolve, nothing deters us from executing day in and day out. We're pleased with the performance of our business this quarter and are encouraged about the growth path and ability to drive long-term value for our shareholders.
I want to thank my teammates for a great first half of 2018 and I am confident we will continue to execute on our growth path into the future. With that, let's head into Q&A, Daniel.
Sure. Thanks, JB. We would ask as we enter into the Q&A session that participants limit yourself to one question and one follow-up. Andrew, if you could please begin the Q&A session.
Certainly. And our first question comes from the line of Moshe Orenbuch with Credit Suisse. Your line is now open.
Thanks. Obviously, there is the ongoing to pay about your deposit price and deposit betas and you talked a lot about the cumulative effect thus far and some of the optimization on the rest of the balance sheet. But maybe if you kind of think about this over the course of the next perhaps two years as you get closer to your target level of deposit funding, maybe could you kind of refresh what that target level is and perhaps whether there could be any change or optimization within the deposit pricing when you get to that point.
Good morning, Moshe, and thanks for the question. Just to reiterate the importance of deposits in our medium term, we continue to see not only an opportunity to continue to bring customers into the bank which has a strategic benefit for us, especially as we continue to expand our product suite into Ally Invest and Ally Home.
So, the focus on deposits is really a long-term strategy for us. As you mention, in the medium term, we have a really great story from a liability restacking perspective. I know I've shared in the past with the $9 billion in expensive unsecured debt rolling down from Q4 of 2015 out into 2020 and that will generate a tailwind of $0.40 to $0.50 in EPS.
So, as we think about the medium term, certainly, very strong focus and appetite for deposit growth from a strategic perspective as well as from a finance perspective. And as we get beyond that point, I mean, right now, we're running about 64% of our liabilities, our deposits – in the medium term, we get up to 75%, and I would envision we would continue to focus on deposits continuing from a strategic perspective.
I will say coming into the second quarter here, deposits were a little lighter than we were expecting. We still think there's a tremendous opportunity with $3.5 trillion to $4 trillion in deposits across the industry getting paid under 25 basis points. We still think there is a huge opportunity for us to continue to grow in 2018 in our medium-term and beyond on deposits.
Okay. And just maybe I guess switching gears a little, the volume growth was really quite strong. And you've kind of alluded to some of these emerging kind of players. And maybe if you could kind of flesh out some of what it was, where the market share is coming from, and perhaps how some of those emerging players could contribute to volume over the intermediate term.
Yeah. Sure. I mean, our strategy is to really be diversified. So, we're looking for opportunities in new. Used, obviously, has been a very large source of growth for us. And the entire dealer network, we're up roughly 4% in terms of our growth dealers. And so, it's really diversifying across all of the traditional new and used channels and staying focused on the dealers.
In addition to that, I'm sure you are aware, we've talked about Carvana and DriveTime. We continue to see strength in flows from them and we'll continue to look for opportunities in areas which are new to the industry. And as we look at the growth channel specifically, where we've hit a record high this quarter, we're originating with a very wide range of nameplates, Ford, Hyundai, Toyota. And we feel very good about that channel for growth as we move forward in the medium term.
Thank you. And our next question comes from the line of Betsy Graseck with Morgan Stanley. Your line is now open.
Hi. Good morning.
Good morning, Betsy. How are you?
Good. Hey, obviously, fantastic quarter in credit. I wonder if you could drill down a little bit on that NCO rate that was so low this quarter. How much of that was from gross charge-offs? How much of that was from maybe recoveries are higher this quarter? A little bit of color there would be great.
Yeah. Sure. And thank you for the nice congratulations there. Net charge-offs, I mean, we're very pleased with the performance and we're seeing a lot of recoveries. Recoveries have ticked up for the first half of this year. In addition, we are seeing just a stemming from flow to worse (34:11) and flow to loss and as we look at our delinquencies. So, it's really a combination of seeing lower gross charge-offs as well as an increase in recoveries as we've come into the first half of 2018.
And as I mentioned, the drivers are a combination of strong macroeconomic backdrop, the consumer is healthy combined with the fact that we continue to originate an extremely consistent mix of credit over the last two years. And so all those combined have really helped to stem both the gross charge-offs and the net charge-offs.
Okay. And then my follow-up is just around to what degree used car prices are impacting that or your outlook for what auto prices are likely to do. And then secondly, on top of that, what the guidance range is. I mean, I know you're 1.40% to 1.60% NCO for the full year, but I think you're way at the bottom of that range, maybe a little below year-to-date. So does it make sense to keep that range where it is at 1.40% to 1.60% for the full year?
Yeah. And certainly, used car prices have helped to stem some of the losses from an LGD perspective and from a severity perspective and you see that as a benefit in the first half year. Just to comment, overall for used car prices, we are expecting to be down about 4% to 5% on a period-to-period basis and on an average basis down about 1% to 2%. And as we've been discussing for some time now, that's really with fleet as well as vehicles coming off lease, we think there's going to be an increase in supply. So the nice tailwinds we have in the first half of the year, we're not expecting to repeat here into the second half of the year.
We've been guiding towards the 1.4% to 1.6% for a long time now. I think we're pleased to see that we're coming in at the lower end of the range and that's where we're estimating we'll be at this point for full year. We guided provision in total to be down about 0% to 10% and we're not moving off that guidance right now. I mean, I think we'd be on the favorable end of that quite frankly. But there's still a lot in motion as we go into the second half of the year. It's when we get the bulk of our provision expense. Certainly, we feel we're at a trough in terms of credit quality and we're right where we want to be just from an overall credit perspective. So, I think we'll be at the favorable end of our range. But we're not moving off that right now.
Okay. Super. Thanks for the color.
Thank you, Betsy.
Thank you. And our next question comes from the line of Arren Cyganovich with Citi. Your line is now open.
Thanks. I was wondering if you could just talk a little bit more on the retail deposits being flat quarter-over-quarter. I know you said it was kind of due to seasonality, but when we look at the prior second quarters, you actually had growth. It also felt like maybe pricing was a little bit contained for you on your retail product this quarter relative to competitors, just weighing those options, please.
Yeah. Sure. Thanks, Arren. Yeah. As we look at deposits coming into the second quarter here, it was a little softer than what we were expecting, to be frank. I think the dynamics around tax reform impacted our customer base disproportionately to what you may have seen in some of the other regional banks. I mean, we tend to skew heavily mass affluent, heavily affluent segments. And they were hit harder with the tax reforms. So, that was one key driver that we saw.
Second, we do see our customer base has a lot of options in terms of where they put their dollars. And we did see some outflows to brokerage this quarter that were higher than – a bit higher than our expectations. That being said, we're very focused on managing beta and balances. And our strategy has been to be in range with the other direct banks. We've lagged a bit.
We're taking that into consideration and I've mentioned several times, we're very focused on continuing to grow balances. And we think there's a huge opportunity there. And just as we're coming into July, we already see a really nice pick-up in deposits ahead of our expectations.
Great. Thanks. And then talking about the mix of originations, the higher amount of used that's been growing, is that really a target that you have? I think you've talked about it in the past, of the – you have a little bit less residual risk, better for recoveries, et cetera. Where do you think that mix would go to over time?
Yeah. So, we don't have any specific targets on originations to be very clear. We are focused on driving returns, getting ROE, getting our risk adjusted spreads in a good place. We've got scale in this business, so we can be very selective about where we play in the market. As we look across all of our different origination channels, used is a very attractive channel for us. JB mentioned some of the metrics around FICO, but if you look at the delta in spreads to the delta in losses, we have used and new, it tends to be 4x. So we've got stronger ROA, stronger ROE in the used segment. So, as we continue to find opportunities to expand our returns in that segment, we will continue to originate there. But in total, we don't have any particular target in terms of originations.
Thank you. And our next question comes from the line of Rick Shane with JPMorgan. Your line is now open.
Thanks, guys, for taking my questions. Look, the last 24 hours has been really interesting in terms of the dichotomy that we're seeing between the strength for the auto finance companies, particularly in terms of credit and some of the challenges they see in the manufacturers. I am curious given the heightened level of profitability in auto finance if you're seeing the manufacturers become more aggressive with their captive financed businesses to sort of recap or sort of use those excess economics to drive volumes.
Rick, thanks. It's JB. Good morning. To-date, really, haven't seen it. Obviously, I think as we pointed out in the earnings deck that Jen covered, I mean, GM, which is probably the more aggressive of partners that we have that utilizes their captive is down to kind of the lowest level we've ever seen. But I think as you see in the chart, that's been a pretty gradual decline there. But not really seeing anything at this point unusual. Certainly, we're mindful of all the things you're talking about as well as potential for tariffs and what other dynamics could come across from that. But today, we really haven't seen anything.
Yeah. It's interesting. We're certainly kind of wrestle with tariffs and difference how that might impact new versus used and whether this is a domestic or an international sort of slowdown as well. There seem to be a lot of moving parts.
Yeah. We would agree completely. And I mean, part of the reason I think we feel also comfortable just about used being at 51%, which again then a pretty gradual and steady increase to get to that level is I do think, if you start to see tariffs actually imposed, it could bode very well for the used car business and used car prices. And we're obviously not embedding that into any of guidance or forward-looking outlook. But there's a lot of open questions at this point in time.
Got it. That's both of my questions. Thank you, guys.
Thank you.
Thank you. And our next question comes from the line of Ryan Nash with Goldman Sachs. Your line is now open.
Hey. Good morning, guys.
Good morning, Ryan.
Good morning.
Just a big picture question. So, while you're reiterating the guidance of credit on the low-end of 1.40% and provisions to be down likely on the low-end of 0% to 10%, assuming you can hit the high-end of the 30% EPS growth this year, the comps obviously become much tougher into 2019. So, nothing numerically specifically, but can you just talk about what are the key drivers for you to continuing to deliver on that 18% medium-term EPS growth that you talked about, specifically focusing on 2019?
Yeah. Sure. Let me just jump-in on that. So, our drivers are really around continuing to grow net interest income and the focus there is around really capital efficient, asset growth. And you've seen over this past year, we've been growing the securities balances, the mortgage balances and continuing to grow auto where we've got great risk adjusted returns. And so, we'll continue to grow our balance sheet on the asset side, continue to put price in the market and at the same time, continuing to grow deposits and take advantage of the liability restacking opportunity we have.
So, growth in NII is going to be a key component there. We've invested in some new businesses and we're starting to see momentum there as we look at Ally Invest, continuing to feel that fee income growth as well as Ally Home picking up and just continuing to grow those new businesses that we've been investing in. And I'd say those are the big drivers there.
And as you look at it, you really have to look at both sides of the balance sheet. Certainly, we saw yields coming up on the auto side linked-quarter 18 basis points. We'll continue to be putting price into the market as we continue to put new originations on the bulk here.
Just by way of example, our retail auto book was that of 5.80% portfolio yield last year, we're now putting on new originations at over 7%. And so, we'll continue to put pricing into the market on the auto side. So, we've got a number of dynamics there, assets, liabilities, and then continuing to grow that fee income.
Got it. And then just as a quick follow-up, can you just maybe just talk about what are your expectations for deposit betas for the rest of the year? And I think you said that there was a restructuring charge this quarter. How much was it and what type of savings do you think that will result in over time? Thanks.
Yeah. Sure. I mean, on the beta side, I mean, we don't really put out a target on a quarterly basis. What we're doing is balancing the growth on the balance side with the beta and, certainly, that's built into the 3% to 6% net interest income guidance that we've provided. And longer term, we've put out a number of $5 billion on net interest income and so that beta increase is all built into that. And I just want to reiterate on the asset side, we also have a beta and continuing to manage the asset and the deposit beta is going to be a key part of getting that $5 billion number.
On the restructuring charge, it was roughly $13 million dollars in the quarter. I think that was in the auto segment. I think we are public with some of the changes there. And we don't comment on kind of restructuring impact over time. It's essentially a $13 million charge this quarter.
Thanks for taking my question.
Thanks. Thank you.
Thank you. Our next question comes from a lot of the line of Chris Donat with Sandler O'Neill. Your line is now open.
Thanks and thanks for taking my question. I wanted to ask related to your deposit trends because you have Ally Invest and you've seen some outflows through ACH to other brokers, I'm just wondering what your philosophy is of using Ally Invest to try to capture some of that flow into brokerage products or other alternatives to savings accounts. It seems like you got a pretty good vehicle there. Just wondering how you can maximize it or is there a risk of cannibalizing yourself on pricing if you were to do that?
Yeah. Chris, it's JB. Great question, and I think it's obviously one we're asking inside the house as well. And I think you're exactly right. I think long term, retaining those flows is a big focus for us. I think Ally Invest is still, while we've had the business for about two years now, I think it's finally, and I'm talking within the past three, four months, been integrated from a technology perspective and even making things seamless to move money from your deposit account into your invest account. So it's just probably taking a little bit longer to get the business fully integrated and now we just got to be more aggressive in how we're targeting those customers and even when we see outflows, how do we get the dollars back and be more targeted.
But I think long term, you're exactly right. I mean, that is the focus how we retain those balances and whether it's in the deposit side of the house or the invest side of the house, we want to keep folks as customers. But I mean, that was sort of, I would say, relative to the total outflows, what Jen discussed around a billion dollars or so tax was the lion's share of the outflow. But we did see to $200 million, $300 million going to Vanguards of the world and migrate into ETFs.
Okay. And then sort of similar on the deposits side, just wonder if you can give us an update on where you stand with your checking product and having seen a bunch of competitors on the regional banks I talked, by taking their platforms nationally, it seems like checking is one important component of that, brand feels like another one. It seems like you have a decent head start on some of the regional banks that are trying to go national, that you guys have been national for a decade now. Anyway, just your thoughts on checking and brand.
Yeah. So, first off, I'll take brand. We agree with you and I talk all the time about brand being one of our big strategic weapons that we have just because we do have an extremely well respected consumer brand. Consumers buy into the value proposition and the focus. We actually are bringing on three new marketing agencies, that's been in the public as well. So we're excited to see some of our new efforts and their new efforts really gear up in the back of half of this year. So I think brand, you're completely right.
And then, with respect of the overall universe, I'd just say we kind of stepped back a little in the second quarter and said we weren't going to play the high rate game. And if we wanted more balances, we could have got them with confidence by ratcheting up rates. But right now, you see somewhat of an irrational competitive market by some of the direct bank players.
I think a couple of big names that have not prioritized deposits over the past year or so reprioritized over the past six months and they delivered some decent share. Then obviously to your point, there's a number of regionals looking to go national, even have some of the big cities launching digital brands as well. So, it's going to be an active and a competitive environment and we're just trying to balance all the right factors.
But I think for us, when we acquire customers and when we acquire deposits, we want to get them in the right format. We don't want to chase hot money. And so, we were a little bit more disciplined on that front in the second quarter than maybe some of the rest of the competitive universe. So, we'll have to balance that going forward because obviously deposits are a big part of the story in the roll down.
And then finally, with respect to checking, we've had a checking product in place for the past several years. It's not a product we aggressively promote and advertise. We've tried to target more the purposeful saver universe and I think, as Jen pointed out, the affluent and mass affluent, they represent about 85% of our deposit balances.
And so they've already got largely established checking relationships elsewhere. We haven't found the need to go after that or really chase that and we target them for more where they want to park their money to save for the long run. So, it's a product we have out there and I think we've had a number of internal discussions or debates whether we should ramp it up but with checking comes an awful lot of OpEx that you got to balance as well. So, it's just not been on the top of the priority list for us.
Thank you. And our next question...
Got it.
Our next question comes from the line of Kevin Barker with Piper Jaffray. Your line is now open.
Good morning. If you're...
Good morning.
Good morning, Kevin.
Good morning. Hey. It appears you have a pretty dour outlook for used car pricing and recovery values into the back half of this year. Given the trends that we've seen in the first half this year, do you feel like there's a chance that we could be a little bit more resilient in the back of the year and your net charge-off guidance for the low end of 1.4% may actually prove to be conservative?
Yeah. Let me just jump in here. I mean, on the used car pricing, this has been our guidance for a long time now. And it's just a matter of the supply and demand economics with leased vehicles terminating and even some fleet vehicles increasing the supply side. In terms of our forecast, I mean, we're very well-covered from a residual perspective. And as we've brought down our leasing portfolio, we've brought down our exposure to used vehicles by 50%. And so, it's not a huge driver of our economics as we look in the back half of the year. And certainly, on the provision side, I think we're well-covered in terms of changes in the used vehicle prices. And roughly 1% change in used vehicle prices is $10 million to $15 million in provision.
In terms of the outlook, I think we are optimistic in terms of our provision in the back half. I mean, I think we're just cautious here. We do feel like net charge-offs are the lowest rate they've been in two years. And I think with a consistent credit mix that we've been putting on, we tend to think we're in the trough in terms of our charge-off rate and we think we're getting paid well where we are. We're very happy with the yield relative to the charge-off rate, and so staying consistent is something that we're focused on.
And if you look at the first half of the year, some of that tailwind is a matter of last year when we had the larger 2015 and 2016 vintages seasoning, we had to build up some provision coverage there, which we don't have to do this year and that's been a onetime benefit in the first half this year that we wouldn't expect to repeat in the second half of the year. So I think we are positive in terms of the outlook. It's just how much more can we take down our provision and our coverage rate going forward based on the consistency of the originations we've been putting on the books.
Okay. And then given the origination outlook and your outlook for taking a little bit of market share across a broad group of OEMs, is there any potential where you could let some of that market share grow if there is increased competition, specifically around Chrysler and the creation of their potential captive?
So just trying to understand the question, is there an opportunity to take share on the used side or just overall?
Is there an opportunity – would you consider letting market share go in some sectors or even letting the auto book shrink if competition re-intensifies specifically around Chrysler?
Yeah. I mean, as we look holistically at the market and I think I mentioned this, we're really not targeting any specific origination number. We're focused primarily on risk-adjusted spreads, building our relationships with the dealer network across the entire country, continuing to provide top-of-the-industry product across the network and continuing to originate risk-adjusted spreads that fit into our return profile.
So, we're not, again, targeting any market share number. As we've seen competitors come in and out, we've been able to maneuver around that I think very successfully. We've got a resilient business model and some of these relationships with dealers go back decades. And I think we've been rewarded for the consistency of our focus on the space over time. And again, our model has been very resilient.
And I'd just say, to be blunt, where Jen opened up, look, if we can't deploy shareholder capital on a prudent and effective manner and generate an appropriate risk-adjusted returns, absolutely, we would let the balance sheet come down.
Thank you very much.
Thank you. And our next question comes from the line of John Hecht with Jefferies. Your line is now open.
Thank you, guys. Good morning. Most of my questions have been asked and answered. I guess one question I had is you talked about originations and good penetration in many channels and pricing patterns. I wonder, can you give us an update on anything you're seeing in terms of changes on the loan to value and the term of the loans at this point?
Yeah. I'll jump in here on this. Loan to value as we've looked over the trailing eight quarters is almost spot-on consistent every single quarter. And that's really reflective of the strategy that we've had to be consistent in the flows that we're bringing on the balance sheet.
In terms of term, we did go out a while ago with an 84-month product. It's primarily super prime. We've seen very minimal losses attached to that. But you do see term extending over the last couple of years maybe a month or two, a couple of months. But it's been very consistent otherwise in terms of all of our credit metrics.
Okay and then...
And I just want to reiterate just on the provision side, hitting that favorable end of our guidance is certainly going to be a big part of hitting our 20% to 30% EPS growth this year which we're right in line for.
Okay. Thank you for those details. And then the second question is if you take kind of the mix of hedging strategies, the improving yields on the loan portfolio, deposit betas, and your ability to roll off some of the higher cost unsecured debt, I think you guys mentioned you expect dollar net interest income to be up over the course of the year. But what should we think about the kind of quarter-to-quarter trends in net interest margin on a percentage basis over the next couple of quarters?
Yeah, and I mentioned our focus is on net interest income growth and continuing to grow ROE relative to net interest income. So it's really on the return from our asset growth that we're focused on. Now, NIM is something we watch obviously. We did have some pressure on NIM coming into this year related to leasing. That has largely stemmed and so we see consistent NIM from a leasing perspective. And then we'll continue to put in price in the market on the asset side and manage the beta on the liability side, and we're expecting NIM to be relatively stable from here on out, but really growing that net interest income and that ROE as we as we look into our medium term.
Thank you. And our next question comes from the line of Jack Micenko with SIG. Your line is now open.
Good morning, guys. This is John (59:15) from Jack's team.
Hi, John. (59:17)
Hi. Just a question on deposits so deposits. So, deposit growth was solid this quarter but in terms of retail deposit customer growth for the first half of 2018, it was slightly below last year's. You mentioned there $3.5 trillion to $4 trillion of deposits paid under 25 bps. But going forward with deposit beta trending higher, should we think about deposit growth trend kind of similar to what we've seen in the past or can we expect some acceleration going forward?
Yeah. I mean, deposit growth, if you look year-over-year we're still 15% on the retail side, ticking above that. And we're continuing to stay focused on deposits. I think you'll see similar trends into 2018 as you've seen historically from a balanced perspective and certainly from a customer perspective as well. And we've been industry-leading so far. I think we'd expect to continue to be as we go into 2018 and beyond. And again, we have this unique opportunity that other competitors don't have in terms of rolling down that unsecured debt. So, our appetite for deposits will continue to be really strong even relative to the competition.
Got it. And looking at the efficiency ratio and expenses, it's down in the quarter but up year-over-year and we've seen a slight upper trend for the past few quarters. How should we think about expense and efficiency ratio trend going into the second half? Thanks.
Yeah. On expenses, I mean, we've guided to 68% and we'll be within that guidance as we go through the year. And the expense growth is really related to the diversification efforts, really growing our new businesses and new product offerings, Ally Invest and Ally Home. And then continuing to invest in technology and JB shared some of the digital enhancements that we had no shortage of appetite around digital enhancements for a digital bank. So, we'll continue to invest in technology.
Now, as we go through our medium term, we've put out there a low 40% efficiency ratio and we'd expect to get there over our medium term and that's going to come from some of these new businesses really expanding in terms of revenue growth from a year-over-year perspective. So, we're still trending towards that 40%, low 40% efficiency ratio over time.
Thank you. And our next question comes from the line of Geoffrey Elliott with Autonomous Research. Your line is now open.
Oh, hello. Thank you for taking the question. I guess one piece on the deposit side that it seemed to grow quite a bit faster this quarter was the brokered and offered (01:02:03). Can you talk a bit about brokered deposits? How they kind of fit into the strategy, the tradeoff between growing brokered and growing retail?
Yes. Sure. Good morning, Geoffrey. Yeah. Brokered deposits have been roughly 15% of our liabilities. And we expect to manage roughly in that range. We're not looking to grow brokered deposits in any significant way over our medium term. We're really focused on the retail deposits and bringing in customers strategically as well as bringing in the retail deposits.
And just to clarify a couple of points there, Jen, you said 15% of liabilities, I think we mean 15% of the deposits.
Deposits. Yeah.
Of the deposits.
Yeah. Yes. Thank you, JB.
From a dollar perspective, I mean, I would think our outlooks are generally pretty flattish there for brokered usage. So, I wouldn't expect a lot of growth going forward.
Thanks. And then on the retail deposit side, I guess we've spent a lot of time on rate and betas and interest expense. But what about the marketing spend component? Is that competition that's been increasing? Is that having an impact on what you're spending on the marketing side now there are more competitors out there?
Yeah. I think we've been pretty consistent with our marketing spend, trying to be thoughtful about where we play in the space and we've been managing it, I think, very tightly and conscientiously over time and will continue to revisit the tradeoffs between marketing and deposit beta. But I think we feel pretty good about where we are.
Thank you.
Thank you.
Ladies and gentlemen, that is all the time we have today. Thank you for participating in today's conference. And this does conclude the program. You may all disconnect. Everyone, have a wonderful day.