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Ally Financial Inc
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Good day, ladies and gentlemen, and welcome to the Second Quarter 2019 Ally Financial Earnings Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator instructions] As a reminder, this conference is being recorded.
I would now like to introduce your host for today’s conference Daniel Eller, Lead of Investor Relations. You may begin.
Thank you, operator. We appreciate everyone joining us to review Ally Financial's second quarter 2019 results. This morning we have our CEO, Jeff Brown; and our CFO, Jenn LaClair on the call to review our operating and financial results. We have time set aside after the prepared remarks for Q&A. You can find the presentation we'll reference during the call on the Investor Relations section of our website, ally.com. I’ll direct your attention to Slide 2 of the presentation where we have our forward-looking statements and risk factors.
The contents of our call will be governed by this language. On Slide 3, we've included some of our 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 results. Please keep in mind these are supplemental to and not a substitute for U.S. GAAP measures. Supplemental slides at the end include full definitions and reconciliations.
Now with that I will turn the call over to our CEO, Jeff Brown.
Thank you, Daniel. Good morning everyone and thank you for joining our call. Let's turn to Slide #4 and cover highlights from the quarter. We had another record setting quarter across many metrics. Our performance reflects the consistent execution of the strategic path we've been on for several years. All of our businesses shine this quarter demonstrating impressive momentum and financial performance.
Adjusted EPS of $0.97 increased 17% year-over-year representing our highest results since becoming a public company. Core ROTCE of 12.4% remained on a solid trajectory. Revenues of $1.56 billion grew 6% year-over-year and our risk profile remains strong. Underpinning our performance is a relentless focus on the 7 million plus customers and clients we are fortunate to serve. We originated $9.7 billion of auto loans and leases in the quarter and decisioned a record 3.3 million applications demonstrating the broad access we have through our extensive dealer network.
We grew our dealer relationships this quarter to over 18,000 dealers, the 21st consecutive quarter where we've expanded our reach with benefits extending well beyond volume generation. This affirms our position as the leading auto and insurance partner for dealers in the U.S. enhancing our opportunity to derive greater penetration across our full suite of products and services while also providing us with key data and insights in real-time across the consumer lending space.
Risk adjusted margins increased during the quarter as new origination yields of 7.6% expanded 56 basis points year-over-year resulting in another quarter of increasing portfolio yields and declining loss rates. New volume pricing remains strong even as benchmarks declined. Competitive behaviors across the space remained rationale. Banks tightened auto lending standards for the 11th time in the past 12 quarters as consumer demand remained relatively steady. This reinforces our view of a balanced backdrop in the auto lending space.
Our credit trends remain solid as retail auto net charge offs of 95 basis points declined 9 basis points compared to the prior year, highlighting the strength of our underwriting and credit risk management. We continue to see a strong backdrop for the U.S. consumer, including healthy employment levels, increasing wages and manageable debt service levels.
Turning to deposits, we ended the quarter with over $116 billion in balances, an 18% increase in our deposit portfolio year-over-year. We experienced our strongest second quarter ever in retail deposits at Ally Bank where balances grew $3.2 billion. We're often asked what is the primary driver of success at Ally Bank. Our answer has remained the same since we launched 10 years ago, a relentless customer focus anchored by industry leading service levels, differentiated product offerings, a world-class digital and mobile experience and consistently competitive rates.
Deposit customers of 1.9 million grew by 100,000 quarter-over-quarter, a 23% increase year-over-year, or 350,000 new customers. A majority of inflows continue to be sourced from traditional banks highlighting the ongoing trend among consumers who are seeking increased value and convenience from their bank. These are the cornerstones of our nationwide, always on, digital bank, evidenced by Ally being named the best online bank for the third consecutive year by Kiplinger's earlier this month.
The direct deposit market represents around 10% of total retail deposits in the U.S. today and has grown by an average 15% per year since 2008. This represents a significant ongoing opportunity something Ally is well positioned for as the largest online-only bank. From a deposit pricing perspective, we've been purposeful across our history to offer great rates that aligned with our customer value proposition. During the second quarter, we led the market taking pricing actions across several products, including a late June reduction to our liquid savings rate, which was largely in response to underlying benchmark activity. Following these actions, we've continued to see solid account openings and ongoing balance growth.
Turning to our other businesses, corporate finance posted a solid quarter expanding held for investment assets by 15% year-over-year. Ally invest accounts grew to 336,000 during the second quarter representing $7.1 billion of customer assets and trading accounts. And Ally Home direct-to-consumer originations of $600 million were the strongest levels since our 2016 entry into this space. We began the pilot with Better.com in July and are on schedule to expand the offering by year end.
This morning, we are pleased to announce the acquisition of Health Credit Services, a point-of-sale payment provider. This digitally based frictionless payment capability will enhance our product offerings at Ally Bank. With this acquisition, we are leveraging the growing desire of consumers to use alternative payment sources in a seamless manner. We expect the deal to close later this year. Remaining thoughtful and adaptable in the evolution of our offerings is a key strategic priority in taking Ally Bank to the next level and enhances our ability to serve the loyal savvy Ally customers.
Turning to capital management, we wrapped up $1 billion in share buy backs on June 30th. In total, we repurchased over 100 million shares since initiating the program in mid-2016. The $1.25 billion program we announced last quarter began in July. We continued to buy back shares at attractive levels even as the GAAP to book value has narrowed.
Let's turn to Slide #5 to review our key metrics for the quarter. All of these trends reinforce the meaningful and ongoing progress we've delivered over the past several years with each metric at the highest level for us as a public company in Q2. In the upper left, adjusted EPS of $0.97 per share increased from $0.83 a year ago. Adjusted total net revenue of $1.56 billion grew to $86 million year-over-year deposits on the bottom left expanded beyond $116 billion, an 18% increase compared to Q2 2018. And on the bottom right, tangible book value increased to $33.56 per share up from just over $28 per share last year as we remain diligent in building long-term shareholder value. Our dominant market leading auto and bank business lines and growing adjacent product offerings positions us to continue executing both financially and operationally moving forward.
With that I’ll turn it to Jenn to take you through the detailed financial results.
Thank you, JB, and good morning everyone. Overall, Ally has continued to execute driving strong operating and financial performance for the quarter. I'll start reviewing the detailed results beginning on Slide 6. Net financing revenue, excluding OID, of $1.164 billion increased $25 million linked quarter and $49 million year-over-year. The NII expansion was driven by balance sheet growth, particularly in capital efficient assets, auto optimization where portfolio yields continue to rise as new origination pricing remained above 7.5% and the ongoing liability restack where deposits are replacing high cost debt and funding asset growth.
These factors affirm our expectation that net interest income will continue to grow in the second half of the year. Adjusted other revenue of $393 million was down $4 million quarter-over-quarter and up $37 million year-over-year, reflecting solid investment gains and revenue growth from insurance. Provision expense of $177 million declined $105 million quarter-over-quarter, reflecting normal seasonal trends and increased $19 million year-over-year, mainly driven by higher asset levels.
Within our auto portfolio, year-over-year net charge-off rates declined for the sixth consecutive quarter, demonstrating our disciplined approach to underwriting and collections and reflecting a healthy consumer and macroeconomic backdrop.
Non-interest expense increased by $51 million linked quarter and $42 million compared to the prior year. Increases to the prior quarter reflect seasonally higher weather losses. On a year-over-year basis, weather losses increased by $18 million as losses in 2018 were relatively moderate.
Normalizing for weather, we drove positive operating leverage as revenue grew 6%, outpacing 3% expense growth. Higher costs were driven in part by volume and revenue-based activities, directly linked to the record operating results we delivered again in Q2. We remain focused on realizing near-term efficiency gains we’re making disciplined long-term investments, including expanded consumer offerings in growth products and enhancements to digital, tech and brand capabilities. Going forward, you should expect continued prudent investment spend throughout 2019 and improved operating leverage over time.
Turning to some of our key metrics, GAAP and adjusted EPS were $1.46 and $0.97 per share, respectively. We normalize results for a tax-related event, where we released approximately $200 million of valuation allowance associated with foreign credit set to expire in the coming years. This is accretive to capital levels and tangible book value.
Core ROTCE was 12.4% and our adjusted efficiency ratio was 46.1%, improving 160 basis points year-over-year. The reported tax rate of negative 18.2% includes the VA release impact. Our normalized tax rate of 22.5% is slightly below our 23% to 24% expected annual run rate.
Moving to Slide 7, we'll cover balance sheet and net interest margin. 2019 has been marked by a persistent trend of declining benchmark rate, a flattening to inverted yield curve and shifting views on the Fed funds path. Our results have been and will continue to be largely insulated from these dynamics due to our neutral rate positioning. We remain balanced and disciplined around interest rate risk, something we'll continue to prioritize as we assess repricing dynamics across both sides of our balance sheet.
Average earning assets grew 7% year-over-year to nearly $175 billion, primarily in capital efficient assets. Auto related balances expanded by approximately $1 billion year-over-year and now represent 66% versus 70% of total earning assets compared to a year ago as we continue to diversify our asset composition.
On the funding side, year-over-year average deposit growth of $16.9 billion financed earning asset growth of $11.2 billion, a roll down of $3 billion in unsecured and $3.9 billion in secured funding. These dynamics have yield top line growth over the past five years, keeping us on pace to achieve $5 billion of annual net financing revenue over time.
Net interest margin, excluding OID of 2.67% remained relatively stable, declining 2 basis points quarter-over-quarter, driven by ongoing diversification and elevated premium amortization in our mortgage and investment security portfolios as benchmarks declined and prepayments increased.
The retail auto portfolio yield of 6.58% moved higher by 11 basis points quarter-over-quarter and 50 basis points year-over-year. The underlying two- and three-year benchmark rates have declined 80 to 90 basis points, while our new volume pricing has remained consistent in the mid-7% range throughout the first half of 2019, reflecting the continued strength of our market position.
Monitor rate trends and competitive dynamics that see a clear path for the retail portfolio yield to continue to migrating toward new origination yields over time. The lease portfolio yield of 5.94% reflects higher gains linked quarter and year-over-year. These prices performed well during the second quarter, rebounding from a slight decline in Q1 and are flat, year-to-date.
Our 2019 outlook continues to incorporate a 3% to 5% decline as elevated off-lease supplies continue to increase and used vehicle sales typically moderate in the second half of the year. The commercial auto portfolio yield declined 5 basis points linked quarter and increased 55 basis points year-over-year in line with one-month LIBOR.
Turning to funding, deposits increased to 72% of overall funding, while unsecured balances declined to 8%. Through the end of the year, another $3 billion of high cost debt is scheduled to mature with an average coupon of 5.8%. We accessed the wholesale funding markets during the quarter with a $750 million deal, our first unsecured issuance in over three years, with strong investor participation, our tightest spread on a five-year issuance and execution inside investment grade levels. Moving forward, we expect to utilize unsecured markets for diversification and parent company liquidity, but overall unsecured balances will continue declining.
On Slide 8, we'll look closer at some of our key deposit details. In the upper right, total deposits ended above $116 billion, reflecting $3.2 billion of retail growth, our strongest second quarter ever, while customer retention levels remained at 96%. During the second quarter last year, retail balances were essentially flat as we experienced elevated tax payment and alternative market-based investment outflows from our mass affluent, high net worth customers.
While average per customer and tax outflows were 5% to 10% higher year-over-year, net growth was driven by robust inflows from new and existing customers. This momentum is keeping us well on pace to achieve our 75% to 80% deposit funding objective.
In the bottom left, retail deposit rates increased 8 basis points linked quarter, driven by time deposit repricing, resulting in a cumulative portfolio beta of 48% since the beginning of the tightening cycle. As J.B. mentioned, we led the market in reducing offered rates on many of our products in Q2. And while we believe further opportunity exists as the Fed begin to ease, we will remain thoughtful on pricing actions.
Looking back over the Fed tightening cycle, our cumulative percentage growth has significantly outpaced direct and traditional banks while our beta has remained within our expectations. We added another 100,000 deposit customers, approaching 1.9 million total customers during Q2. Year-to-date, we've added 220,000 customers, essentially equal to full year 2018 growth in half the time. Our loyal and growing customer base at Ally remains strategically important to our future as we expand our adjacent product offerings.
Capital details are on Slide 9. CET1 of 9.5% increase linked quarter and year-over-year, reflecting earnings growth and the valuation allowance release I discussed earlier. We repurchased 7.8 million shares in the second quarter and we have reduced shares outstanding by nearly 19% since we began the buyback program three years ago.
Earlier this month, we began repurchasing shares under our board-approved buyback program of up to $1.25 billion. And as it pertains to CECL, we expect to disclose projections later this year, given the opportunity to phase in capital impacts, we remain well positioned to incorporate the impact into our ongoing capital management processes.
Let's turn to Slide 10 to review asset quality details. Consolidated net charge-offs were 56 basis points this quarter, declining 1 basis point year-over-year as we remain focused on disciplined risk management. We have seen strong performance across our portfolios, particularly in retail auto. In the top right, consolidated provision expense was $177 million, up $19 million compared to the prior year, driven by higher auto loan balances.
Retail auto net charge-offs in the bottom right were solid at 95 basis points for the quarter, down 9 basis points year-over-year, the sixth consecutive quarter of year-over-year decline. In the bottom right, 30-plus and 60-plus delinquencies increased year-over-year by 12 and 7 basis points, respectively.
As we previously discussed, we expect year-over-year delinquencies to move higher throughout 2019, reflecting the increased mix and seasoning of our used portfolio. These trends also reflect actions implemented in our servicing and collection efforts, resulting in slightly higher delinquencies but improved flow to loss results, reflected in the lower net charge-off rate.
We continue to expect annual retail net charge-offs to remain on the low-end of our 1.4% to 1.6% full year outlook. Our balance sheet is well positioned, comprised primarily of fully secured assets that have demonstrated high priority in the payment waterfall over many cycles.
On Slide 11, auto finance pretax income of $459 million increased $130 million versus prior quarter and $77 million versus prior year. The ongoing optimization of our auto franchises is evident across our operating and financial results. Net financing revenue grew year-over-year, driven by retail auto asset growth and higher yielding originated volumes replacing lower yielding amortizing vintages. We continue to grow our dealer base and increased dealer engagement across our comprehensive suite of financing and insurance offerings.
We have relationships with over 90% of franchise dealers in the U.S. who continue to retain and grow their businesses with us. We decisioned a record 3.3 million applications in Q2, bringing the year-to-date total to just under 6.5 million, a 9% year-over-year increase. The broad reach we have with dealers and increased application flow drives our ability to generate volume, maintain disciplined underwriting and grow strong risk adjusted margins.
In the bottom right, estimated retail new origination yields increased 56 basis points year-over-year and our retail portfolio yield increased by 50 basis points, while our retail auto net charge-offs declined 9 basis points.
Turning to Slide 12, we booked $9.7 billion of loan and lease volume in Q2, an increase of nearly $600 million linked quarter and $165 million versus the prior year. Growth Channel originations of 50% during the quarter represent an all-time high and a meaningful milestone, considering 85% of our origination were sourced from two channels just five years ago.
Used originations were 54% of volume, while non-prime originations remained stable at 12%. These metrics provide a clear indication of the success we’ve had evolving our business model despite a competitive and dynamic market environment. In the bottom left, consumer assets grew $2 billion year-over-year to $81.2 billion, primarily from retail auto balances as lease balances remained relatively flat. Average commercial balances in the bottom right declined quarter-over-quarter and year-over-year to $34.8 billion due to normalizing dealer inventories.
On Slide 13, Insurance reported a core pretax loss of $4 million reflecting seasonally elevated weather losses. Included in the results this quarter were impacts related to elevated tornado activity, including the largest tornado event in our history. Our teammates worked diligently to assist impacted dealers and customers across the Midwest during this active weather season.
Overall, weather results were in line with expectations but elevated compared to 2018 when losses were below historic norms. Earned revenues increased $22 million year-over-year, reflecting increased written premiums over the past several quarters. Written premiums of $314 million were $36 million higher year-over-year, driven by growth across our products, including vehicle service contracts and dealer inventory offerings. We continue to see solid, new business activity due to our ongoing efforts to improve returns, grow dealers and increase dealer penetration.
Slide 14 has our Corporate Finance segment result. Core pretax income of $48 million increased $39 million linked quarter and declined $10 million year-over-year. Compared to the prior year, HFI assets grew 15%, primarily through the contributions from new verticals over the past two years, leading to higher net financing revenues. NII growth was partly offset by elevated syndication fees in the prior year period that did not repeat.
Overall portfolio performance remained strong and in line with our expectations. We have increased our focus on collateral-based lending, which represented around half of our new originations in Q2. We expect the year-over-year portfolio growth rate to remain in the mid to high teens throughout the remainder of 2019 as we navigate competitive dynamics and continue to focus on disciplined risk management in the space.
On Slide 15, mortgage pretax income of $14 million this quarter was relatively flat versus prior quarter and prior year’s period. We originated approximately $600 million of direct-to-consumer loans, the highest level since launching Ally Home, and over half of our DTC customers come from existing depositors. We’re confident in our ability to continue sourcing a steady flow of mortgage volume from the existing customer base in addition to offering a compelling product to the broader marketplace.
Our partnership with Better is progressing well. We launched a pilot in Texas earlier this month and expect to have broader rollout by the end of the year. This digital frictionless model will drive a 40%-plus reduction to our existing cost per loan, with longer-term improvements driving us towards best-in-class performance.
As I hand it back to J.B., I’ll close by saying we remain focused on delivering for our customers and building long-term value for our shareholders. Our momentum this quarter and through the first half of 2019 keeps us well on track to achieve our full year outlook, which we provided earlier this year.
Our consistent execution over the past several years results from our strong customer value, our leading market position, disciplined risk management and our focus on driving sustainable long-term value for our shareholders, which we’ve delivered again this quarter through our operating metrics, earnings, results – return profile and adjusted tangible book value per share of $33.56, up 20% year-over-year.
And with that, I’ll hand it back to J.B.
Thank you, Jenn. Hard to add much commentary to Jenn’s close there. Very strong, very proud and appreciative of the results that the team delivered this quarter. But I would say Slide number 16 reiterates our priorities for 2019, where each of the key themes is consistent with what we’ve previously discussed. Our comprehensive, adaptive and digitally focused consumer and commercial offerings and our market-leading dominant franchises position us well for the long-term.
Across our 8,500 Ally associates, we continue to focus on leveraging expertise, being mindful of our history as we build a stronger company for the future. Central to our culture is our mantra to Do It Right, which applies to every interaction with our customers, within the communities we serve and on behalf of our shareholders. I’m proud of the progress we’ve realized and of applying this principle to everything we do and I’m encouraged around the prospects we have moving forward from here.
And with that, Daniel, back to you and time for Q&A.
Yes. Thanks, J.B. So as we head into Q&A, we would ask participants to limit yourself to one question and one additional follow-up. Operator, if you will begin the Q&A session.
[Operator Instructions] And our first question is from Moshe Orenbuch from Credit Suisse. Your line is now open.
Great, thanks. Jenn, I appreciate the commentary on origination yields and the competitive environment. I’m just wondering, I mean, obviously, you had very strong originations this quarter. So could you kind of maybe flesh that out a little bit? And maybe talk a little bit about how that – you think that could develop into the third quarter in terms of the level of originations and the ability to get – to maintain your yield in the face of the current environment?
Yes. Sure. Good morning, Moshe. Thank you for the question. Yes. I mean throughout the first half of 2019, we’ve had consistent origination flow at over 7.5% yield, and that’s in the context of a very volatile rate environment. In fact, our underlying benchmark rates have come down 80 to 90 basis points. So we’re really pleased with the continued strength of our market position. We’re number one in retail lending. We’re continuing to find a lot of opportunities to originate strong flows at the right pricing.
In particular, in the used segment, you look at – from a consumer perspective, the price of a new vehicle versus the price of a used vehicle has kind of the largest gap it’s had in over a decade. So we continue to see strong consumer demand for used, continues to be very profitable for our dealers and it’s profitable for us as well. So we aren’t seeing any of that slow down for us. Even out of the gate here in Q3, as we’ve come through July, continuing to see really strong originations at good yields and returns.
Now keep in mind, as we go through the back half of 2019, we do have some seasonality. First and second quarter tend to be our heavy used seasons. And then Q3, and especially into Q4, we tend to have more of a new vehicle season. So we would expect yields for full year to be in that 7% to 7.5% range. And certainly, like I said, we’re really pleased with the dynamics so far this year. Now keep in mind that should migrate our overall portfolio yield up. 2017, we were at 5.80%. 2018, we’re at 6.40% in terms of our retail portfolio yield. We’re at 6.58% now and we will see the continue to climb up towards that 7% over time.
So hopefully, that gives you a bit of color. I think we’re continuing to see very good progress here and, on the asset side, should continue to see yield expansion.
Great, thanks.
Thank you.
And maybe J.B., you mentioned the payments acquisition. Could you kind of flesh that out a little bit and tell us what – how you envision the bank offering kind of developing over the next couple of years and what other things you might be thinking in that respect?
Yes. So, thanks for the question. I think we look at this as acquiring an important capability to have let them fit well within Ally. I think obviously the existing business has been largely focused in the healthcare sector and I think as we think about applicability, it's broader than just that, when we think of our other lines of businesses and other areas, but clearly consumers today are looking for alternative payment forms. We've been interested in the unsecured space and this was an ability to acquire a really nice platform at a relatively inexpensive price and we'll seek to grow it from there. It doesn't come with any balance sheet. Think about this is really a capability acquisition and we look forward to scaling it up from here.
Okay. Thank you.
Thanks.
Thank you. Our next question is from Arren Cyganovich from Citi. Your line is now open.
Thanks. Yes. I was just wondering if you could talk about the – on slide 21, you have your rate shock and ramp. It's still showing somewhat assets sensitive which is a little bit surprising. Do you see any potential for benefit as the deposits coming down and maybe just talk about what's included in those shock tables?
Yes, sure. As we've been discussing for some time now, we are relatively neutral from an interest rate risk position. I mean you'll see in that table some slight asset sensitivity and keep in mind we already have four cuts built into that forward. So it's pretty aggressive forecast there, but overall we are managing the balance sheet to be relatively neutral to interest rate risk. You see that in terms of when we cut our plan a year ago, we were expecting two hikes, now we've got three, maybe even four eases in our forecast. And in spite of that our NIM has remained relatively stable and we're still expecting strong NII growth throughout the back half of this year.
Now specifically on deposits, certainly we've led the market in terms of pre-pricing deposits down ahead of any fed action, should we see Fed rate cuts in July or beyond, we would expect to have an opportunity to continue to rationalize pricing. Now it's not just an automatic reduction. We do take in mind our appetite – keep in mind our appetite for deposits as well as the competitive landscape, but we feel like we are very well positioned to continue to optimize deposit pricing going forward.
Thanks. And just as a follow up, I was looking at I guess its slide eight, the retail deposit customer growth. It really seems like it's kind of expanded pretty rapidly over the past few quarters. Is there anything you're doing differently there? Anything kind of new marketing strategy or what's driving that kind of increase that you've had over the past few quarters?
Yes. And I would say no large pivot strategically. I think part of our success –main reason for our success is the consistency that we've had in the space in terms of offering value to our customers over the last decade. We do see over historic data that one yield get above 2%, you typically wake customers up to the value, and in this year as we've been above 2%, industry growth rate has increased about 1% or so, we've seen some elevated growth from an account perspective.
And we're always investing in technology and brand and I think you will see improvements in both of those this year as well as continuously. So it's never one thing. We think we're well positioned from a price perspective relative to kind of the $4 trillion or $5 trillion getting paid less than 50 basis points, but also continuing that investment in industry leading technology and brand.
Great. Thank you.
Thank you, Arren.
Thank you. Our next question is from Bill Carcache from Nomura. Your line is now open.
Thank you. Good morning. Jenn, can you give some additional color around how high user originations can grow as a percentage of the total and then perhaps how much of the pricing tailwind is coming from the growing mix shift towards the more profitable used business.
Yes, sure. Good Morning Bill and thank you for the question. It's a good one in terms of that percent used. We never went out with a target in terms of what next we are driving towards and you dial back a couple years ago, we were maybe a 30% used, today we're 50% to 55% used, I think what's so unique about our model is that we can adapt to changes in the industry dynamics. And as I mentioned just a minute ago, used is a really strong market, right now it's two and a half times the size of new. We have strong demand there from a customer perspective, strong dealer demand and so to the extent there's opportunity there and we can originate solid flows at the right risk adjusted deals, we'll continue to grow in that space, but we don't have any particular target around that.
Yes, relative to yield expansion, we've priced in kind of 100% of the underlying benchmark rate increases at this time. And we've continued to maintain that even in spite of rates coming down. And I'd say that's largely just reflective of our strong market position, I wouldn't say that's largely because of used, although the mix shift towards used is certainly helping vast majority of our yield expansion, just because the entire business is working well and we've been able to garner the right pricing across new, used and all the different nameplates that we originate against.
Got it. Thanks Jenn, that's helpful. And separately, I have one for JB. We've been engaging with investors in some healthy bull-bear debate discussions on Ally this quarter. And I was hoping you could comment on what we're hearing from both sides. In one camp there – the bulls side argue that you guys are growing tangible book value at an impressive roughly 10% pace and your tangible book value per share is growing even faster than that, in part because you trade below tangible book and your buybacks are accretive. And then in the other camp, the bears are arguing that you guys generate the lowest ROTCEs amongst financials, you're not able to cover your cost of capital and that you shouldn't be a standalone company, but belong inside of bank with a better funding profile that would augment your returns, could you speak to those points?
Yes, I mean, I think the bear case is pretty extreme in our minds. I mean, when I look across what we're delivering today and new assets that are coming on balance sheet, we are more than exceeding our cost of capital. I mean, this has been largely a restructuring story for the past several years where we've kept our heads down and working extremely hard to improve financial performance, knock-off some of the old legacy regulatory issues that kind of hindered performance. And now you're starting to see the benefits of the past couple of years. We haven't had those constraints on us, so do I see this institution belonging in side of somebody else, absolutely not.
I think we've got one of the strongest brands in business today. I'd say that even extends beyond banking. We planted a very strong flag and being a leader in the world of digital banking and utilizing a great brand, great technologies to grow customers, grow deposit flows and I think that positions us exceptionally strong.
I think Jenn obviously covered a number of the points around, when we look at where new assets are coming on, there's an embedded tailwind, I mean, I think look, relative to new assets that are coming on today versus portfolio yield, it's a 100 basis points difference and three times that's going to migrate up. So while you're sitting here listening to bank after bank, talk about contraction in asset yields, talk about substantial contraction in NIM, you're not seeing it in Ally. You're seeing that’s actually flat with an outlook of seeing that increase.
So I think the Bear case is way overdone, I think we’ve built a phenomenal institution here. We continue to be very thoughtful in the way we deploy capital. We are very prudent anytime we get asked the question about do you guys think towards M&A in the future, it starts with a focus on first and foremost anything we have to do has to be right and compelling for our customer. And number two, we have to believe that it can deliver long-term, appropriate return for our shareholders. And so for us that's the focus today.
I think on the bull case, I'm all about it. I mean, Jenn closed her comments with that stat on 20% increase in tangible book value per share relative to a year ago. We had been very disciplined in guarding our shareholder's capital and that will be the philosophy going forward. So we're all bulled-up, we feel great about the direction of the company. We feel great about customer growth. And we feel really content about the way this place can generate a sustained return through time. So for us as a management team, I think it’s put on the gas and keep growing in a very thoughtful and prudent manner.
That's super helpful JB, thank you for taking my questions.
You got it. Thank you.
Thank you. Our next question's from Betsy Graseck from Morgan Stanley. Your line is now open.
Betsy, we can't hear you. Are you on mute?
Pardon me Betsy. Your line is open. Pardon me, Betsy, please check your mute button.
Let's move to the next queue. We'll get Betsy back in there.
Thank you. Our next question is from Kevin Baker from Piper Jaffray. Your line is now open.
Good morning.
Good morning, Kevin.
Good morning. So I just wanted to follow up on the Health Credit Solutions acquisition. Could you help us understand the, what you're thinking on the capabilities of this platform and how you see it developing, whether it's products and whether you look at it as originated sell model or originated put on balance sheet and just how you're thinking about that acquisition going forward?
Sure, Kevin, and thank you for the question. I mean from a capability perspective, this is a point-of-sale lending capability. We see very high utility value for our customers as they are looking for efficient financing for purchases. And it's one of the highest-growth consumer asset classes across the industry right now. It’s growing at 18% to 20-plus-percent. And so we see this as offering a really great value proposition to end consumers. For us it gets us a new asset class. We intend to originate and invest and hold these on our balance sheet. And this is accretive to ROA, accretive to our ROE. Typically, very high FICO customer in like 725 over 700 range, and it’s also short duration. So we see this as just, not only a terrific capability for our customers, but also an opportunity for us to grow our balance sheet in an ROE accretive manner.
Okay. Can you size up the potential revenue opportunity or EBITDA or even maybe just like loan balances, you expect to be generated off of this platform maybe in the next year or in the next five years and how you're thinking about it? I'm just trying to understand, this versus the auto business and how it fits in overall from a risk adjusted perspective?
Yes, Kevin, I appreciate the question. I mean we are very early, we haven't even closed the transaction yet and as JB mentioned we're going to be very thoughtful in terms of getting the operating platform right, making sure we deploy capital and we can get accretive ROA and ROE. And so at this point I'd say ROE ranges in the 20 plus percent, relative to where we are today. It's accretive, I think more to come in terms of this specific financial forecast for you, just as we – as soon as we close and have more details in terms of the ramp up, but appreciate the question.
Okay, thank you.
Thank you, Kevin.
Thank you, Kevin.
Thank you. Our next question is from Eric Wasserstrom from UBS. Your line is now open.
Thanks very much and good morning.
Good morning, Eric.
Good morning, Eric.
Maybe just to follow-up on Bill’s question for a moment, I think the performance over the past several quarters has really done a lot to undermine the bare argument. So I imagine that, that argument is going to morph today into a – into a discussion about peak earnings and peak earnings and peak profitability, with the view being credit obviously continues to improve. Yields also continue to improve. You're pretty efficient on capital. You're generating very strong operating leverage. And therefore, this is as good as it gets. So how would you respond to that particular view, which I imagine will probably be the emerging discussion after this print?
Yes, and Eric we appreciate the bullish summary that you just provided, but a couple of things that I point out. I mean, you talked about assets, but asset yield expansion even in spite of rates is going to continue over the next two years as we migrate our auto portfolio yield up over 7% to new origination yields. And so we've got this natural tailwind in terms of yield expansion.
On the deposit side, we've got a large liquid OSA book and as we see some potential eases on the horizon, we should eventually be able to reprice down the liability side of the balance sheet as well. And that's not even considering the kind of 3 billion-plus we have in unsecured that’s rolling down. So the way that we see pricing on the asset and the liability side, we think positions us very well over the next two-plus years here.
Now, and then just from a strategic position, we are a digital bank and we think that positions us extremely well for growth across all of our businesses. If you think about trends across customers, how they purchase financial products, how they interact with their banks, we are unencumbered by complicated and expensive infrastructure brick and mortar and kind of the social issues attached to migrating towards the digital platforms.
So we feel like we're in a great place, not only from a financial perspective but also a strategic perspective being predominantly digital. And as we continued to be able to grow out capital-light businesses, we've invested in Ally Invest, which is ROE accretive, we're seeing great momentum there. We've got on the auto side a SmartAuction platform that's fee-generating, and we have some growth opportunities there as well. And then continuing to build out capabilities like HCS that are ultimately accretive to ROA and ROE. So we feel really, really good about our positioning on all fronts.
Great, thanks Jenn. And if I can just have one follow-up. The next phase of your capital return plan will obviously include the transition to the CECL accounting standard. So should we think about this upcoming pace of capital return as effectively a sustainable one? Or is this really one that takes some of these recent benefits, particularly around the margin expansion? And – but that the future may look somewhat different than this?
Yes. It's a question we get frequently. I mean the way that we're looking at CECL is it will have a material impact and we'll be coming out with more details around the range of impacts shortly. But if you think about the capital implications, we can phase it in, in over three years, which is essentially kind of a 25% over a four-year phase-in. And due to the phase- in, we think we'll be able to absorb that kind of in our normal capital allocation, capital management processes. We're not expecting any major – any strategic changes to how we're thinking about capital deployment at this time. We think it's absorbable.
Okay, thanks very much.
Thank you, appreciate the question.
Thank you. Our next question's from Betsy Graseck from Morgan Stanley. Your line is now open.
Hi, can you hear me?
We got you this time.
Yes. Sounds good.
Okay, thanks. Second time is a charm. All right. So a couple questions here. One on the loan growth generated really nice loan growth this quarter. Wanted to understand if that pace is something that you think you can continue to fund. And do you think it would come from kind of pulling down on the securities portfolio? It seemed more of a mix shift back into auto. Or is – are you suggesting that perhaps the target capital ratio has room to come down a little bit?
Yes. I mean, first, in terms of loan growth, Betsy, I appreciate the question. I mean we're always going to be opportunistic in how we deploy capital across our balance sheet. And I've mentioned a couple of times this morning; we are seeing good origination flows and yields and returns on the auto side. And so to the extent that'll continue, we'll be growing in retail auto. Continuing to grow in mortgage as we talked about great progress there and Corporate Finance continues kind of steady as we go at that 15%, 20% growth rate.
So no changes there, I mean I think with respect to securities, it'll depend a bit on the rate curve, both the level and the shape of the yield curve. And right now, we're seeing opportunities to grow at accretive yields. But should that change, we'll be opportunistic and kind of slow down and reallocate to the loan side. Over time, we do want to kind of close the gap on our securities portfolio. We think we're a bit underinvested there and we'll look to migrate kind of percent of our portfolio from 17% to 20%, but we're not in any rush to do that.
Like I said, we'll be opportunistic. And then on our 9% target around CET1, there hasn't been any major changes to our strategic positioning. We're not seeing any reason why we should change that 9%. I will caveat that around a lot of potential changes on the horizon from a regulatory perspective, we've got the SCB, enhanced prudential standards. We should see some final rules coming out in the near future. And should that change our positioning, vis-a-vis that 9%, that's a question that's outstanding. But as we sit here today, we are really comfortable with that 9% CET1 target.
Got it. All right. So if the tailoring rule goes through as currently proposed, does that impact how you think about capital?
No, I mean, ultimately, it's a question up to our Board of Directors. The SCB does suggest that we build our capital target from the bottom up that we don't have to hold quite as much, in particular in a stress around that nine – eight, nine quarters of our capital actions. And so that could suggest that we have a lower starting point as we're establishing our target and goal framework. But ultimately, it's a question up to our Board and it will be taken in the context of our strategic priorities and our risk profile going forward.
Okay. And then when we think about credit, credit obviously doing extremely well, not only on the recoveries that you're getting but also on delinquencies, and I guess a two-part question. One is what do you think is going on with the consumer that the roll rates are so low and the delinquencies are staying down where they are?
And then the second question is how do you think about the outlook for net charge-offs for the full-year feels like? The 1.4% to 1.6% range is extraordinarily conservative?
Yes. So first, on the consumer, we are still seeing really healthy consumer in the data, and that's – when you look at consumer demand for autos, it's come down a bit in terms of new vehicle sales, but used continues to be really robust and you see that reflected in the used vehicle prices that we've seen throughout Q2 here.
So on the demand side continues to be positive, showing up in our flows, showing up in our yields and we're seeing a really healthy consumer on that front. From a credit perspective, the flow to loss has a lot to do with the mix shift toward used where we tend to see higher frequency but lower severity, and so a bit of that is unrelated to kind of consumer health, it's more of a mixed impact. In related to that, we've talked for some time now just around some of our collection strategies that have pushed out repo timing and have ballooned delinquencies a bit, but we don’t see that flow to loss. And we would expect that to continue as I mentioned in my prepared remarks.
On net charge offs, certainly, really pleased with first quarter and second quarter results as we look to the back half of the year and we've got this 3% to 5% decline in terms of used vehicle prices and that could materialize, I mean, if you just look at off lease supply of vehicles, it will be at the highest point it's been in the history of the data. And so we could see a supply side pressure on used vehicle prices which could take up our net charge offs in the back half of the year, and that's what's embedded in our forecast today.
And keep in mind, used vehicle prices can change pretty rapidly. You take first quarter, the government shutdown, we saw almost an immediate reduction in terms of used vehicle prices, it’s come back quickly, but used vehicle pricing can change fairly quickly. And the supply and demand dynamics around off lease vehicles would suggest that we would have some pressure in the back half of this year.
Okay, thanks. Appreciate the color on this while you’re still conservative.
Thank you, Betsy. Absolutely.
Thank you. Our next question is from Ryan Nash from Goldman Sachs. Your line is now open.
Hey, good morning guys.
Hey, Ryan.
Hi, Ryan,
Maybe just a follow-up on one of Betsy's questions regarding credit. So you've had this target out there for 1.4% to 1.6% charge offs came in below with last year. It seems like you have the potential to come below it this year. I guess as you look out over a 18 to 24 month period, what will we need to see happen in the economy for you to get either into that range or even potentially towards the high end of that range? Because it seems like credit is – continues to drift away from its – I'd be curious on your views on that.
Yes. I mean the 1.4% to 1.6% range is out there because that's what we originate to. If you look at, then we've got this metric called a nailer, we are right now originating within that range. And so we would expect over time for that range to materialize in our financials. Now there's a lot of impact around the health of the consumer, currently it looks really great, but we're at a 15 year low in terms of unemployment. And a lot of questions around wage growth, it still looks pretty solid, but on an inflation adjusted, maybe not as great as you would expect.
So, I mean, there could be some pressures in terms of the health of the consumer. I'd say that's number one. Number two; we've implemented a lot of strategies to kind of curb that flow to loss, we’ll continue to do that. But the pace of those strategic deployments could flow a bit now that we've implemented many of those. And then I think the big question is really around used vehicle pricing and kind of addressed that already with Betsy’s question, but that could shift on us and we are expecting that 3% to 5% decline, we've been expecting that for some time and it hasn't quite materialized yet. But I think that's a reality we need to be aware of.
Got it. And then if I could ask some…
Thanks, Ryan.
Got it. If I could ask some – as my follow-up question on repricing dynamics. So you mentioned that pricing on the retail auto yield side is holding in well at around 760, despite the benchmark interest rates have gone down a lot. When asset yields rose over time, we saw the benchmarks movement and the repricing happened on a lag. I guess can you talk about how you are thinking about that on the way down?
And then as part of that question, you've already been proactive in terms of lowering deposit pricing yet you've continued to have really good growth. How do you think about the relative trade-off between continuing to grow deposits at a really robust pace and rationalizing price paid given that you guys are a market leader in the space? Thanks.
Yes. Sure. And you kind of described it correctly, Ryan. We did reprice on a lag. And what we're seeing on the downs here is that it's also on a lag. I think we've been really pleased in terms of our ability to maintain pricing. And you really have to look back to historic data because while prices are high relative to where they've been a couple years ago, relative to historic yields on autos, we're still at a fairly low point. And so consumers are able to absorb the yields that we're continuing to put in the market. It hasn't curbed demand at all.
So from a consumer perspective, we're not seeing a whole lot of pressure on yields. I think the question, and we're monitoring it incredibly closely, is what else happens in terms of the underlying benchmark rates as well as what happens with our competitive positioning. We continue to feel bullish there, in particular playing in the used space, which is 2.5 times the new space. There – it tends to be much larger, it’s growing faster and it’s much more fragmented. So we're feeling good about it. But to your point, we are mindful of where benchmarks are going as well as where the competitive landscape is going.
On the deposit side, we're fairly rapidly approaching our target funding rate of 75% to 80%. We're today at 72%. A year ago, we were at 64%. And so the flows have been incredibly strong. We're – our third record quarter consecutively. And so we'll be mindful of our appetite for deposits. We'll be mindful of continuing to provide value to our customers. That's incredibly important to us, but we do think we’re very well positioned to be able to continue to optimize deposit costs, in particular, if there's some eases down the road.
Got it. Thanks for taking my questions.
Thank you. Appreciate it.
Thank you. Our next question is from Kevin St. Pierre from KSP Research. Your line is now open.
Good morning, thanks for taking my question. J.B., you mentioned the other banks and how when we look at results that are going on and we just see widespread net interest margin pressure, and then you think about what their commentary has been around if the forward curve plays out and incremental margin pressure. And now as we look at the quarter you just posted, you had the lowest increase quarter-to-quarter in deposit costs in about six or seven quarters.
And your asset yields, your origination yields holding up and portfolio yield migrating towards the origination yield. Can we make the case that if we do – if the forward curve does play out, that while other banks continue to see accelerating margin pressure, your margin will trend up?
Yes. I’ll give you the simple response, Kevin, and then Jenn can elaborate. But I think we would both say yes due to some of those embedded tailwinds. I mean, again, where we're originating today on the auto side relative to where the portfolio yield is and the natural migration that's going to occur there is going to lead to continued expansion on the asset side.
Now obviously, there's certain nuances that we face around our mortgage business and accelerated premium amortization through that refinancing activity, but the lion share of our asset base still is in the form of auto and still has these natural tailwinds. So I think Jenn and I both think about it very much that you can see continued expansion. And Jenn, maybe you'd talk about the deposit and liability side.
Yes. I mean, Kevin, it's the right question to be asking. And we're one of the few banks linked quarter that saw asset yields up. But as we think about our interest rate positioning, we aim to be fairly neutral, especially in the near-term here and so we'll continue to grow as our balance sheet grows. Underneath that, and I think what your question is really getting at, is on the asset side, we've got embedded tailwinds.
And on the liability side, we've got embedded tailwinds as we see the Fed coming down. And so over time, certainly, yield curve-dependent. But over time, based on the pricing dynamics on both sides of the balance sheet, you could see expansion. Keep in mind, we are still looking to diversify our asset mix. And so as we – as J.B. mentioned, as we continue to grow mortgage and continue to grow securities, that will have some pressure on NIM, but we'll be accretive to ROE and continue to grow our net interest income.
Great, thanks. Maybe as a follow-up to that, as we think about perhaps diversifying into some higher-yielding categories, maybe talk about your initial success with the credit card partnership and uptick on that product and maybe long-term plans for potentially bringing those loans on balance sheet.
Yes. So Kevin, I guess the unsecured space holistically continues to be of interest for us. So obviously, you see part of that as a step-in and what we're doing with HCS today. I guess the other thing we didn't talk about as a core is our partnership with TD on the credit card side has ended. That agreement wrapped up and really did not – ultimately, did not end up achieving the objectives we had or probably objectives that TD had given their credit risk appetite.
Obviously, it was their credit rates underwriting, their credit decisioning. So the total portfolio size, I think, was under $100 million that was accumulated. So it's not a massive customer impact for us, but we basically wound down that relationship.
Having said that, I still think unsecured is the core consumer product. You see what we're doing with HCS as a step into that space where we – as Jenn covered, where we would actually balance sheet that product as well. And so we continue to look for avenues. And obviously, if the stock continues to perform, you can have a little bit more opportunistic view on growth.
And we haven't maybe been afforded that over the history. But given the performance we've seen, we'll keep those two objectives, which Jenn and I talked about, was anything we do, is it right for the customer; and number two, can it deliver an appropriate long-term return for our shareholders.
Thanks very much.
You got it, Kevin.
Thank you. At this time, I’m showing no further questions. I would like to turn the call back over to Daniel Eller for closing remarks.
Great. Thank you. And again, appreciate everyone joining us this morning. I would remind participants, if you have additional questions, feel free to reach out to Investor Relations. Thanks, and have a great morning.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.