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Ally Financial Inc
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Good day, ladies and gentlemen, and welcome to the Ally Financial Third Quarter 2018 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 follow at that time. As a reminder, today's conference is being recorded.
I'd now like to introduce your host for today's conference Mr. Daniel Eller, Executive Director of Investor Relations. Sir, please go ahead.
Thank you, Liz. And thank you, everyone, for joining us this morning as we review Ally Financial's third quarter 2018 results. You can find the presentation we'll reference during the call on the Investor Relations 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 contents of our 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. They are supplemental to and not a substitute for U.S. GAAP measures. Please refer to the supplemental slides at the end for full definitions and reconciliations.
This morning, our CEO, Jeff Brown, and our CFO, Jenn 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.
Thank you, Daniel. Good morning, everyone, and thank you for joining our call. Let's start by reviewing highlights for the third quarter on slide number 4. Results were strong this quarter and again, many of our operating metrics reached the best levels we've seen as a publicly traded company.
Adjusted EPS of $0.91 was up 41% year-over-year. Core return on tangible common equity was 13.7%, an increase of 340 basis points on a year-over-year basis. Total net revenue surpassed $1.5 billion, also a new high for us. The ongoing improvement in earnings and EPS results were driven by strong top line revenues, continued earning asset growth, sustained credit performance, and ongoing capital management.
Within our Auto Finance segment, we originated $8.1 billion of loans and leases in line with the prior year level while expanding risk adjusted margins. We put meaningful price increases into the market again this quarter while maintaining a consistent credit mix. This trend illustrates our competitive advantage and strong market leadership position in the industry.
New origination yields on retail loans were up over 130 basis points year-over-year. As we've discussed in the past, the consumer auto book turns every two to two and a half years on average providing a solid path for our future earnings profile. Jenn will provide additional detail on this dynamic in a few moments.
Credit trends remain on solid footing with retail auto net charge offs coming in at 132 basis points, a decline of 13 basis points compared to the prior year level, while retail auto portfolio yields expanded 38 basis points. Our credit performance is driven by a few familiar themes, including our consistent approach to underwriting, enhancements in our collection strategy, and the strong macroeconomic and consumer backdrop.
On the auto optimization front, our teams continue to press forward in broadening our reach in the marketplace. Several years ago, we deliberately positioned our Auto Finance business to be ready to address the changing needs and preferences of our customers and dealers. Our results have consistently reinforced the effectiveness and sustainability of this approach.
We continue to originate in the mid $30-billion range and have steadily grown dealer relationships every quarter over the past five years. For some added context, around 60% of our growth channel dealers send us under five contracts each month. Taken by itself, this stat may seem a bit nuance, but for us, it outlines the success we've had in maintaining volume, while highlighting the opportunity we have to continue deepening dealer relationships by leveraging our product capabilities, service levels and market position.
Our teams have demonstrated ongoing success in our auto business as we've grown and diversified the dealer base, including partnering with emerging market players, enhance dealer relationships and product penetration, produce solid origination volume, and driven improve risk adjusted returns.
Moving to deposits, we ended the quarter with over $101 billion in total deposits, including $2.9 billion in retail balance growth, which was one of our best third quarters ever. This represents an increase of $11.3 billion in total deposit growth year-over-year or 12%. Exceeding the $100-billion threshold is an important milestone for us. Since 2008, we have grown our retail deposits by 10x to $85 billion, and obviously delivering that growth with zero branches.
On the customer front, we added another 57,000 deposit customers, our strongest third quarter ever, and a continuation of the growth we've experienced every quarter since we launched Ally Bank. We're pleased to be awarded Best Online Bank by MONEY magazine in October, affirmation of our strong value proposition.
In looking at our adjacent product offerings, we're seeing deeper penetration across Ally Invest, Ally Home and Ally Card. Customer growth has been consistent in these products and we're now seeing an acceleration in the number of multi-product customers. In fact, this metric has grown every month since 2016. While there's still work to be done, I'm encouraged by the progress our teams continue to make and the opportunity for even deeper penetration.
You've heard me emphasize this point in the past, but it's worth reiterating. We've been thoughtful in our digital product expansion efforts with the concise objective being to meet the needs of our customers in a simple, straightforward manner.
Before I hand it over to Jenn, I'd like to go over a few key metrics we monitor on slide number 5. Across each of these metrics, you can see the progress we've achieved with record highs across the four quadrants. As noted earlier, adjusted EPS was $0.91 this quarter. Jenn will walk through an updated view of 2018 in a moment, but the underlying drivers of our performance are attributable to consistent execution within our business lines and capital management actions combined with a favorable economic backdrop.
Looking in the upper right in our total revenue trends, you can see what I mentioned earlier in that total net revenue surpassed $1.5 billion in the third quarter, fueled by expanding net financing revenue. Deposits in the bottom left show the 12% year-over-year increase and the strong retail performance trends. Tangible book value on the bottom right increased again this quarter on a linked and sequential basis, including the OCI impacts related to rising rates.
Across each of these metrics, I'm confident in our ability to execute on our strategic and financial path. Our progress is evident in our results, and as always, we're focused on continuing to serve our customers and drive improved shareholder returns.
With that, I'll turn it over to Jenn to walk through more details on the quarter.
Thank you, JB. Let's turn to slide 6 where we'll review detailed line items for the quarter. Net financing revenue excluding OID was $1.129 billion in the quarter, up $14 million linked-quarter and up $30 million year-over-year. The increase versus the prior year was driven by earning asset growth and meaningful expansion of retail and commercial auto yields, which more than offset the increased cost of funds related to deposits.
NII has grown every quarter this year, and we are confident about our ability to achieve an annual run rate of $5 billion. Adjusted other revenue of $392 million increased $36 million linked-quarter and $11 million versus the prior year. Q3 included a $16-million gain related to auto loan sale activity. And as a reminder, in Q2, this line item included the seasonal expense associated with our reinsurance policy.
Provision expense of $233 million was up $75 million quarter-over-quarter, reflecting seasonal net charge-off activity, but down $81 million versus the prior year. Year-over-year trends were driven by our consistent underwriting and collection approaches, the favorable consumer and macroeconomic backdrop, and hurricane reserve activity. We'll take a closer look at our detailed credit metrics in a moment.
Noninterest expense was $32 million lower compared to prior quarter. Expense growth versus the prior year was due to three primary factors we've previously discussed, including the continued investment in our core businesses, including digital and technology capabilities; the build out of our adjacent product offerings, where we are focused on driving scale over the medium-term; and a moderate increase in insurance loss expenses, including modest impact from Hurricane Florence. Compared to the prior quarter, expenses were down due to weather losses that are typically highest during Q2 each year and certain one-time items that did not repeat.
Our tax rate was 19.6% this quarter, benefiting slightly from a state law change. Quarterly taxes can bounce around a bit, the result here puts us in line with or slightly favorable to our expected run rate of 23% to 24% on a full year basis.
And then, turning to some of our key metrics: GAAP and adjusted EPS of $0.88 and $0.91 per share, respectively; core ROTCE of 13.7%; and, adjusted efficiency ratio of 46%.
Let's turn to slide 7 where, based on our solid third quarter and year-to-date performance, we're updating our outlook for full year 2018. We are pleased with the underlying strength of our core business operations, which helped to propel outperformance this year. We now expect both EPS and ROTCE to exceed the ranges we've provided earlier this year, with adjusted EPS reaching 35% to 40% and core ROTCE of 12% plus.
We're also updating our provision and net charge-off ranges, which are driven by consistent underwriting of originations over the past two years, the ongoing improvement in our flow to loss trends related to our collection capabilities, a favorable macroeconomic backdrop that is driving solid consumer trends and stronger used vehicle values, and hurricane reserve activity. With one quarter to go this year, these ranges reflect our solid performance year-to-date and a balanced view of our fourth quarter operating environment, including the seasonal nature of credit.
Moving to slide 8, I'll turn back to more details on the quarter. Net financing revenue expanded and earning assets grew on a linked and year-over-year basis while NIM remained relatively stable at 2.72%, in line with our expectations. These results reflect the dynamics we've discussed around our plan to achieve $5 billion of net financing revenue, which will be fueled by the ongoing replacement of higher cost debt with deposits, optimization within our auto book which drives higher portfolio yields, and deployment of capital into high ROE asset classes that carry a marginally lower asset yield.
As I discussed in detail last quarter, we regularly monitor the repricing trends on both sides of the balance sheet. On the asset side, overall yields rose 11 basis points linked quarter while balances increased. Retail auto portfolio yield moved up 12 basis points quarter-over-quarter, driven by strong pricing on new volumes combined with the rapid portfolio turnover that I'll cover more on in a moment. Commercial auto yields increased 20 basis points quarter-over-quarter and are up 74 basis points year-over-year as benchmarks continue to move higher.
Looking at the lease portfolio, yields increased to 5.56%. Used car values remained strong during the period and, while performance was strongest for sedans compared to trucks and SUVs, overall trends were favorable. We continue to price for values to decline over time largely due to increasing off-lease vehicle supplies. Keep in mind, year-over-year, we've expanded earning asset yields and grown net financing revenue even as higher yielding lease balances came down 7% and lease revenues declined $41 million.
Moving to the liability side, overall balances were relatively flat quarter-over-quarter as deposits replace maturing, high-cost, unsecured debt. Since Q4 of 2017, $3.8 billion of unsecured has matured with a weighted average coupon of 4.3%, and we have another $5 billion rolling off through the end of 2020, representing a tailwind to offset deposit beta. Importantly, deposits now comprise 65% of our funding base, up 4 percentage points versus a year ago.
Let's turn to slide 9 to review deposit details. We exceeded $100 billion in total deposits this quarter, ending the period at $101.4 billion, driven by retail deposit growth of $2.9 billion. Customer retention rates of 96% in Q3 further demonstrate the high brand loyalty of our customers.
In the bottom left, you can see that retail deposit rates increased 20 basis points this quarter. This resulted in a cumulative portfolio beta of 32% versus the beginning of the tightening cycle, in line with our medium-term expectations relative to fed funds. Keep in mind, it's important to look at deposit beta relative to asset beta in the overall context of the balance sheet. Deposits are a core part of our funding optimization and serve as a customer acquisition engine for adjacent products.
In the bottom right, we added 57,000 new Ally customers this quarter, our strongest third quarter ever and one of the highest quarterly growth levels over the past five years. Notably, 58% of our new customers came from the millennial population, an important customer segment for future growth and our product expansion efforts. We are continuing to see strong momentum in Q4. In October, we launched our most recent marketing campaign emphasizing the idea that better is out there. Following the launch, we experienced several consecutive days of record account openings.
On slide 10, we've included a chart that we've shown from time to time, demonstrating our stable deposit vintage performance. Our customers stay with us and grow their balances over time with great consistency. Q3 retail deposit growth marks the 35th consecutive quarter where we've posted double-digit percentage growth on a year-over-year basis, another indicator of our success and the momentum in this space.
Capital details are on slide 11. CET1 of 9.4% has remained stable over the past year as we've continued to generate capital organically through earnings and reductions in a disallowed DTA. On the bottom chart, you can see we've been aggressive and disciplined in repurchasing shares with outstanding shares now down almost 14% since the inception of the program.
Asset quality details are on slide 12. Consolidated charge offs were 75 basis points this quarter, down from 85 basis points last year, reflecting the strong credit performance we've seen across our portfolios, particularly in auto. In the top right, consolidated provision expense was $233 million, down from $314 million in the prior year. Compared to the prior quarter, we maintained a consistent retail auto coverage ratio of 1.49% reflecting stable credit vintages that comprise the majority of our balances today.
In the bottom left, you can see charge off performance in the retail auto portfolio has remained solid. Net charge offs of 132 basis points declined 13 basis points from the prior year continuing the trend we've seen throughout 2018 of declining loss rates year-over-year.
In the bottom right, 60-plus and 30-plus delinquencies were stable year-over-year. Hurricane activity impacted the 30-plus delinquency trend, which on a normalized basis was up 7 basis points year-over-year. Taken with the 60-plus performance, this reinforces the improved flow to loss trend we've seen in our book as we have originated incrementally more used volume. The portfolio is performing well and we'll continue to monitor industry and consumer trends.
On slide 13, Auto Finance reported pre-tax income of $383 million, up $1 million versus prior quarter and $83 million versus prior year, driven by retail net financing revenue growth and lower provision expense which more than offset these revenue declines.
The linked quarter pre-tax income trend was driven by higher seasonal net charge-off activity, largely offset by higher net financing revenue and gains related to loan sales. In the bottom right, you can see the continued progress we've made since the IPO in steadily growing our dealer base and increasing application flows. The growth demonstrates the opportunity we have to showcase our full spectrum, full product suite lending capabilities to our dealers. Application flows continue to increase with roughly 100,000 more applications being decision in Q3 compared to the prior year.
On slide 14, you can see we booked $8.1 billion of loan and lease volume while increasing risk adjusted returns. Our diversification efforts continue to deliver results with our growth channel accounting for 47% of our originated volume. In the upper right, huge volumes ticked up to 53% of consumer originations this quarter, along with our consistent mix of new and lease volume.
Consumer assets expanded $2.6 billion year-over-year to $78.6 billion, which you can see in the bottom left. And looking at commercial assets, average balances moved down slightly quarter-over-quarter and year-over-year as inventory levels are down, which we view as a net positive for the industry.
Turning to slide 15, we've included additional color around some key aspects of our retail auto portfolio. Estimated retail auto origination yields in the top left shows the success we've had at increasing price on new originations, up over 130 basis points year-over-year to 7.53% leading to a portfolio yield of 6.2% this quarter. While on a slight lag, we have now exceeded underlying benchmark increases, which have risen up by roughly 125 basis points on a match duration basis.
In the upper right, the credit profile of our originated volume has remained solid and consistent over the past couple of years with FICOs running in the 690 range even as used volumes have increased. Non-prime has been running in the low double digit, and while not shown here, subprime of below 540 FICO is only around 1% of our portfolio.
In the bottom left, you can see how rapid the retail portfolio turns over with estimated retail auto origination yields expected to be around 7% on a full year basis in 2018. Looking back at the beginning of the tightening cycle on the bottom right, you can see that our retail portfolio is up 94 basis points and commercial auto is up 162 basis points while deposit pricing has only increased 69 basis points, strong trends that helped fuel our net financing revenue expansion over the medium term.
Let's turn to Insurance segment results on slide 16. We generated core pre-tax income of $48 million this quarter, an increase of $45 million linked quarter, and a decline of $21 million from the prior year. The year-over-year variance was driven by marginally higher losses and lower investment income. Written premiums of $323 million during the third quarter were up $51 million versus the prior year, our highest quarterly volume over the past five years.
Driving this activity was a combination of strong vehicle service contracts and increased rates on dealer inventory products. On the VSC front, we have increased non-GM business 50% year-over-year, now representing 32% of our written premiums.
Turning to slide 17, the Corporate Finance segment performed very well again this quarter, generating $36 million of core pre-tax income. Results were $14 million higher than the prior period, driven by asset growth and continued fee generation. Compared to Q2, core income declined by $21 million largely due to non-recurring items, including prepayment fee income and recoveries on previously charged-off accounts.
HFI asset levels grew nearly $200 million during the quarter. Competition remains intense but we have been consistent in balancing volume, credit and risk adjusted returns. This asset class is a compelling space for us, we like the return profile and believe the growth opportunity we've talked about in the past remains achievable.
Looking at Mortgage Finance on slide 18, pre-tax income of $8 million this quarter was down $6 million linked quarter and up $6 million from the prior year. Net financing revenue was flat compared to Q2 and increased year-over-year as we grew assets. Year-over-year, the increase in assets drove higher noninterest expense in addition to costs associated with the build-out of our direct to consumer offering, Ally Home. We surpassed $500 million of originated volume year-to-date in the Ally Home product. And looking forward, we remain on track to drive $3 billion of volume over time, provided appropriate risk-adjusted returns.
Summing it all up, this was another solid quarter for us and I'm proud of how we executed. We are building upon the momentum in our business lines and our results demonstrate our ability to consistently deliver. We will continue to execute for our customers as we progress down the strategic and financial path we've established.
And with that, I'll hand it back to JB.
Great. Thanks, Jenn. I'll wrap up on slide number 19 with a quick revisit of our strategic priorities. Our communities, customers and associates remain at the center of our do it right mentality at Ally. I'm encouraged in how this approach has become embedded in our culture. This has been a leading driver of our execution.
Our strategic efforts are in full swing and results in the Auto Finance and Insurance affirm this sentiment when looking at profit trends, dealer growth and originated volume. We've not waivered on prioritizing our customers and optimizing risk adjusted returns, and we will continue to do so as we move forward.
Our deposit and customer trends remain robust, a testament to the quality and service level of our leading digital bank and unique brand we created nearly a decade ago. We are realizing the benefits of our position and recognize the tremendous opportunity before us to leverage secular trends in the space. I want to thank my teammates for great results again this quarter and ask every one of them to continue to do it right for our customers, communities and shareholders.
With that, Daniel, back to you for Q&A.
Thanks, JB. As we head into Q&A, we ask the participants to limit yourself to one question and one follow-up. Operator, please queue the first question.
Our first question comes from the line of Sanjay Sakhrani with KBW. Your line is now open.
Thanks. Good morning and good quarter. Question on the origination slowdown. Can you just talk about what particularly drove that slowdown? It seems a little bit like GM's relevance of that mix is slowing. Could you just talk about that trend?
Good morning, Sanjay, and thank you for the question. I'll kick this off and JB may want to jump in here. I don't know if I would characterize it as a slowdown. I think we've been pretty vocal in terms of hitting a $35-billion origination number this quarter end – or sorry, for full year. And certainly the $8.1 billion in our year-to-date performance positions us very well to hit that number.
If we take a step back and just look at our auto strategy, the focus here is really around optimizing our risk adjusted returns and we certainly see and you saw in the yield expansion we've had, as well as the consistent credit performance that we've had that we're well on our way to continuing to optimize in this space. Coupled with the fact that we continue to grow dealers. We've grown every single quarter over the last five years, continue to see increases in the application flows and the origination flows coming from those dealers.
So, I think we feel really good about our market positioning. We feel good about the volume of flows we're seeing, as well as what we're putting on the books. But JB, you maybe want to jump in here and add some additional color?
Yes. Sanjay, I mean thanks for the comments on the quarter. We obviously feel the same. So I appreciate your recognition of that. Yeah. I think you just point out the $8.1 billion we did is consistent with third quarter last year. And as Jenn gave in her prepared remarks, we are seeing inventory levels down, which is kind of a normal cycle in third quarter as manufacturers are getting ready for model year changes and things like that.
And while you may challenge us and say, yeah, but you're doing so much more in used today. Why would that be impacted, but still new car and people coming into dealerships to look at new cars that ultimately get turned to used. It's just less flow into the dealerships while people are waiting for the new model. So, we look at the $8.1 billion as right on target with our expectations for the quarter.
Okay. Great. And my follow-up question is on the risk adjusted yields or returns you're getting. I mean, those seem to be improving quite nicely. Could you talk about what's driving that, specifically, and how you expect it to sort of trend going forward?
Yeah, sure. As we look at retail originations, Sanjay, what we've been able to do in this space is just continue to add price in the market, and that's a reflection of our market positioning both with new and used. And essentially, what we've done on a slight lag is pass through underlying benchmark increases into the market, and we've caught up a bit over 100% of those, coupled with the fact that our mix shift has moved from new to used, and that adds a little bit more price in the market as well.
As we look forward, we'll continue to optimize around that yield and, certainly, as benchmark rates continue to move up, we would continue to put that price in the market. And that's on the retail side. Obviously, on the commercial side, we're kind of 99% plus variable rate there. So, the rates just naturally flow through.
Okay. Thank you.
Thanks, Sanjay.
Thank you.
Our next question comes from Don Fandetti with Wells Fargo. Your line is now open.
Jeff, so if you look across consumer finance, credit has been just coming in better than expected. That seems to be the case here at Ally. But a lot of investors sort of view it as transitory. I was wondering if you could talk about the sustainability of that. And I assume into 2019, you feel pretty good about your charge-off rate, although your delinquencies did tick up a bit. And just to kind of wrap it up, if you could talk about your outlook on used car pricing and if it continues to hold up pretty well.
Yeah. Sure. Good morning, Don. Yeah. I mean, on credit, so certainly some industry trends that are applicable here to Ally, I mean, tax reform, the underlying macroeconomic environment with kind of record low unemployment rates. Certainly, that has been a benefit to Ally through this year and has impacted used car price, and I'll come back to that in just a minute.
But coupled with that, Ally has some specific benefits on the credit line item, one being that we've really moved through those riskier 2015, 2016 vintages and have been very deliberate about putting consistent credit risk and credit consumer profile on our books. And so, you see that benefit rolling through in 2018 as well.
And we've also taken some efforts here to really upgrade our collections capabilities. We think we're best-in-class on that front. But as we've moved through the last couple of years, we've seen opportunities to continue to improve our strategies there. So, I'd say it's a combination of both a great environment, as well as our specific Ally strategies to improve credit and our risk-adjusted returns.
On used pricing, we have been expecting used vehicle prices to deteriorate in the range of 2% to 5%. We've been pricing that into our residual values in the lease portfolio. Certainly, this year, there's been outperformance there, which has benefited the credit line item.
If you do look at supply and demand dynamics in the used space, though, there's a lot of vehicles coming off-lease. And we do expect over time to decline in the range of 2% to 5% on average as we look out into 2019 and beyond. But, overall, we continue to have a positive outlook on the consumer. We feel great about our ability to originate within our credit box and to continue to put price in the market.
Thanks.
Our next question comes from Eric Wasserstrom with UBS. Your line is now open.
Thanks very much. Jenn, just to follow-up on the NIM discussion for a moment, having heard everything you've said about the duration of the asset classes and where the incremental loans are coming on and all of that, still when I look at your slide on the components of interest income and interest expense, your funding costs increased sequentially and year-over-year at a faster rate than your yields expanded.
And so, I guess my question is, how do we think about that trend over the next, let's say, six quarters? Is there a period of time in which you think it reverses or is this just going to be an issue of trying to keep on top of and pass through the increasing cost of funds?
Yeah. So, a lot in that; let me just address it one at a time. So, on NIM, I think we've been pretty vocal that we would expect that to be fairly stable moving forward. And certainly, you see that on a linked quarter basis. On a year-over-year basis, we do tick down and we've talked a lot about the lease normalization and we're through that. So, we would expect here on out to be relatively stable.
What is driving that? So, a couple of things. One is our strategy is really around continuing to grow net interest income coupled with EPS expansion and ROE expansion. And so, in that framework, we're looking to put earning assets on the books, such as expanding our securities portfolio that may have a marginally lower yield, but is accretive both from an NII as well as from an ROE perspective. And we're looking to kind of close the gap with our peer group in the securities portfolio.
We're growing out mortgage, which we like the ROE on. Again, it has, relative to our book, a moderately lower yield. So, that is also compressing NIM a bit as well. And so, part of what we see in NIM is just part of our – part and parcel of our strategy to grow NII to the $5 billion as well as to expand our ROE.
In terms of the asset and liability beta question, we certainly at some point see the asset beta moving more quickly than the deposit beta, but that's just going to take some time and it's a reflection of the underlying benchmarks. I think we've been pretty vocal on our deposit beta moving in that 30% to 50% range against the fed funds sort of kind of 2%, 2.5%. We're well in line with that and it'll depend on the shape of the yield curve how quickly we get to that asset beta moving faster than the deposit beta.
And just one follow-up on commercial auto, if I may. You highlighted the strength in the yields there, but it looks like your volumes are down about $2.5 billion year-over-year. So, how do we interpret that, because it seems like you might in fact be perhaps pricing yourself out of that market a bit?
Yeah. And JB made this comment and I did as well in my prepared remarks, but we are seeing inventory levels come down in particular in GM, and we think that's a net positive for the industry just from a supply and demand perspective. It does take our floor plan down a tad bit as you're pointing out. But we're not seeing any changes in terms of pricing ourselves out of that market whatsoever, it's more just the inventory dynamics.
Okay. Thanks very much.
Thank you.
Our next question comes from Moshe Orenbuch with Credit Suisse. Your line is now open.
Great. Maybe following-up on the margin question, you pointed out 132 basis points increase in the originated yield in over the course of the year. But by the same token, 105 basis points of that has come in the last two quarters. And I guess since you originate maybe I don't know a little – in the neighborhood of a tenth of your portfolio each quarter, I mean, it does – it is going to take a little bit of time for that to roll in. But – I mean, could you talk a little bit about where that originated yield is coming in for Q4? And how do we – I mean, it seems like you should be – this should be coming in at an accelerated pace as we go into 2019.
Yeah. Good morning, Moshe. Yes. There is some seasonality in terms of new and used mix which impacts that originated yield. So, as we move into Q4, which is really more of a new vehicle market, we're still seeing really strong yields but we would expect our full-year yields to be around 7%.
And you're absolutely right, as we go forward, and we included some of the dynamics in the presentation, but as our portfolio continues to mature in those older, lower-yielding vintages roll off, we'll see these much-higher yield vintages roll back on, which is just a nice and natural embedded tailwind. But you're exactly right, it's going to take two years or so for us to catch up to that 7% yield.
And the nice thing about it is it's just a natural tailwind in the book now that we have the higher-yielding originations coming on and the lower-yielding originations falling off. And it's a pretty rapid repricing asset class if you think about we repriced 40% of it a year. And if you take a look at our entire balance sheet, we have about 50%, 60% of our earning assets that repriced this year due to commercial and corporate finance and some of the activities that we've had around hedging.
Got it. Thanks so much.
Thank you, Moshe.
Our next question comes from Betsy Graseck with Morgan Stanley. Your line is now open.
Hi. Good morning.
Hi, Betsy.
Good morning. Hi, Betsy.
Hey. A couple of questions on the deposit side. I think you mentioned during prepared remarks that the last week or so you had record openings. Could you give us a sense of the year-on-your deposit growth and how it's tracking to date just so we get a sense as to how successful that campaign has been?
Yeah. Sure. I'll jump in here, Betsy. I mean, the campaign we just launched we've been incredibly pleased with the results. In fact, we've hit daily account opening records multiple consecutive days in a row. So, we've been just extremely pleased out of the gates there. And keep in mind, that's on the heels of Q3 where we had record account opening as well. And some of the statistics I shared, the 35th consecutive quarter of double-digit year-over-year deposit growth, it obviously feels really good to be on the heels of that and continue to have this record-level account growth.
From a balance perspective, we're right in line with where we expected to be this year. We're continuing to see kind of robust flows out of the gate here in October. Still some time left to go rounding out the full year, but we are certainly very pleased with the balance sheet growth that we've seen relative to our beta and relative to our marketing activities.
Okay. And then just to follow-up on that is, obviously, rates are rising the deposit betas are moving up a little bit. But your deposit retention rate, as you highlighted on slide 9, very high and stable. So, I'm wondering, do you think that that will translate to, over time, better debt ratings or better liquidity coverage ratios that then you can use to optimize the balance sheet more? Just wondering how long that tail is to see those kind of benefits.
Absolutely. And thank you for that question. And we agree with your sentiment there. And S&P actually just upgraded us to positive outlook. So, we're looking to continue to make progress with our agencies and get to investment grade. And then, in addition to that, I think we've proven we can continue to grow balances at reasonable beta levels.
And that allows us to continue to optimize the liability side of the balance sheet. I mentioned the $5 billion in high cost unsecured debt we have rolling down through 2020, and we've got more to come beyond that. So, we'll continue to just look for ways to be smart in terms of growing that deposit balance sheet and optimizing our cost of funds. Absolutely.
Betsy...
In your...
I'll say it, I just – I mean, I think the agencies have been way too slow to reflect the progress we've made. And, I mean, it's hard to argue on the stability of the book. I mean, obviously, we're very pleased with the 96% retention and rate plays a role in that, technology plays a role on that service, brand, et cetera.
But we really believe we've established ourselves as a primary savings bank. The quality of the deposit book is really unmatched. I mean, I'd be hard pressed to find another financial putting up 96% retention rates of their customers over a very long horizon. So, all these things through time we hope will yield deposit of benefits and really recognition that the model we put in place is the one that's here to stay.
And again that other stat that Jenn pointed out in her prepared remarks, 58% of the customers coming in the door this quarter are millennials. So, it's a really powerful trend and powerful for the long-term outlook of the company.
Cool. All right. Thank you.
Our next question comes from Kevin Barker with Piper Jaffray. Your line is now open.
Good morning. You've laid out some longer term scenarios where you're trying to grow earnings and grow the return on tangible equity. But as you consider your return on assets compared to the peers, it's still well below. Do you have a target or looking to set a target for return on assets over time, maybe by lowering the efficiency ratio to take into account the relatively high cost of funds compared to the peers?
Yeah. It's Jenn. Good morning, Kevin. We don't have a specific target around ROA, although I'd say that's a natural outcome of the guidance that we've put out there where we are looking to continue to grow our ROE. And we have put some guidance out there relative to our efficiency ratio as well coming down to kind of low 40% level. So, naturally, we would see ROA expand as we execute on our medium financial trajectory.
And that's through a number of different levers. I mean, we are looking to continue to invest in our new products. We've got Ally Invest, which is just a terrific growth engine for us. And back to the comments that JB just made, the deposit platform is really creating a nice way to leverage our deposit base into these new products. And just this year, we see a 20% increase year-over-year on the account opening.
And so, as we get some of these new adjacent products in full swing and we'll see the revenues start to accelerate there, that's a revenue category that doesn't track any capital or doesn't have any assets attached to it, we would naturally see ROA expand over time.
Okay. And then given the net charge-off rates are coming in below your guidance, going in the early 2019 you got it to lower used car prices or that's your expectation, would you expect the charge-off rate to revert back to your original guidance for 1.4% to 1.6%?
Yeah. We aren't moving off kind of the 1.4% to 1.6% as a longer term horizon. We'll be below that this year in part due to used vehicle prices coming in better than we expected. But really, it's about the risk profile we put out there and the consistency in the originations that we see. And over time, we'd expect to be back into kind of that 1.4% to 1.6% range.
And used vehicle prices, I'll just reiterate. Certainly, that hits on the credit line item. It hits on our lease residuals. But our residuals have come down significantly on a year-over-year basis. They're roughly half the impact, as we think about deltas and used vehicle prices, that they were even last year. So we've brought down that sensitivity to used vehicle prices to some extent.
Okay. Thank you for taking my question.
Thank you.
Thanks, Kevin.
Our next question comes from Arren Cyganovich with Citi. Your line is now open.
Thanks. I've been impressed by the ability to pass through the increases in yield and I'm surprised that the competitive intensity has an increase. And maybe you could just talk a little bit about how you've been able to do that and whether or not the competitive intensity is lessened at all or if you're seeing any changes on that front. Thanks.
Yeah. Good morning, Arren. Thank you for the question. It's, I think, a direct reflection of our market positioning. And January of 2019, we're going to hit 100 years in this business, and over time we've built very deep dealer relationships.
In addition to that, we play across the entire spectrum. And so, you tend to see some really tough competition in that super prime space where you've got a lot of large banks leaning in and credit unions. And certainly, I'd say that competition has intensified in that space. But that's only one part of our business. We really land across the entire kind of belly of the curve. And so where we play, which is across all different areas with a very robust spectrum of products and services, we're still seeing opportunity.
And we've talked a lot about used over the last couple of quarters. And if you look at Q3, Q3 had one of the lowest new vehicle rates we've seen in the last couple of years, but it had one of the highest used vehicle sales. And so, when you play in a lot of different places, you can find pockets of opportunity and, certainly, that's been the case for us throughout this year.
Thank you. And then, maybe just if you have any update on CECL, where you are in that process and if there's been any movement in Washington to help mitigate that.
Yeah. Sure. On CECL, the focus has really been around operationalizing the different changes that we're going to make. So, we've got our modeling teams working hard to get ready for that. We do plan to be running in parallel in 2019. I think we've made a lot of progress against that and, net-net, we'll be very well-prepared for the changes if they come.
That being said, there are certainly a lot of questions around what will happen from a capital standpoint. And the way we view this, quite frankly, is we're not putting any additional risk on our portfolio. We don't think that we should have to carry extra capital related to an accounting change. And so, we've been very vocal in D.C. around the impact to Ally, and JB has been in D.C. just even these past couple of weeks and as part of a FAC (49:36) group that has been in dialogue with regulators and legislators on the topic.
And recently, there's been a lot of attention around counter-cyclicality and how this positions Ally and, quite frankly, the entire industry if we were to go into a downturn. So, more to come on that. I think, again, we'll be very well-prepared and we'll continue to be very vocal on this front with our regulators and legislators.
Thank you.
Thank you.
Our next question comes from Rick Shane with JPMorgan. Your line is now open.
Good morning, guys. Thanks for taking my question. When we look at the dynamics of higher rates and where we are in the cycle, there is some pressure on demand for new cars. I'm curious if you are seeing – and again, with manufacturers it's no secret, they like selling cars and one of the tools they use to do that is providing more aggressive financing. What's the competitive landscape look like from the manufacturers and the captive auto finance companies at this point?
Yeah. I'll start it and JB may want to jump in on this front. But the fact that we've been able to lean in on used has, to some degree, shield us from OEM behaviors. And our expertise in that space coupled with the fact that consumers are leaning into used this year, I think, disproportionate to what we've seen in the past, has positioned us really, really well in this space.
And so, we've been somewhat immune to OEM behavior and just continuing our strategy, which has been to focus on the dealers, focus on adding value to them, and being ready for really production across any type of vehicle nameplate, new, used, really full spectrum in this space.
And obviously, Rick, I mean, (51:34) for them gets pretty expensive as rates get higher. So, we just – as Jenn said, we remain focused on serving our dealers, serving their needs, a lot of that's been more and back to the relationship component. That's part of the ability for us to capture 50% of the origination volume in the used space. So, that's the strategy.
But look, if OEMs want to partner, that's absolutely things that we look at from time to time because I do think with our cost of capital at a bank, it is definitely a competitive advantage relative to some of the costs that they're going to be facing now. So, I think we're well positioned here and, provided we can get the right risk adjusted returns, we'll look at anything.
Great. And that actually – Jenn, your response leads exactly to where I was interested in going. As you look at that mix in terms of used, it's obviously come up substantially on a year-over-year basis. How high could that go in an environment where the OEMs are more aggressive?
Yeah. Look, we don't have any targets around this. I mean, our strategy is to be opportunistic. We see areas across the market where this makes a lot of sense for us and, certainly, we make very good money on used and we'll continue to look for opportunities there.
As we look through kind of our medium horizon, we'd expect to continue to grow that modestly. It does kind of fluctuate from quarter-to-quarter just based on seasonality between new and used. But, over time, we'd say we'd remain kind of in that 50% to 55%. But again, our strategy is to optimize and to continue to look at pockets where we get the right risk adjusted returns.
Terrific, guys. Thank you very much.
Thank you.
Our next question comes from Chris Donat with Sandler O'Neill. Your line is now open.
Hi. Thanks for taking my question. Just to follow-up on Rick's, as we look at the – on page 10 of your supplement and the penetration rates for GM and Chrysler, and they've been declining over the course of the year, is that partly a function of – well, I'm trying to understand the dynamics. I'm guessing part of it's the shift toward used and away from new. But also, there's that – your typical seasonality that the fourth quarter's better for new? Just trying to make sure I'm understanding what's going on in the penetration rates.
Yeah. And so, I mean – and we've talked a lot about our diversification strategy across originations, and we've really been focused on that growth channel. So, as we continue to build out the growth channel, we'll continue to see GM and Chrysler as a percent of our originations to come down. And that's been a deliberate part of our strategy. And you take the lease portfolio, by a way of example, and we've run off 50-plus percent of originations and lease from the GM book. And in spite of that, we've been able to grow net interest income every single quarter through that transition.
And so that's really been our strategy, is to continue to diversify the sources of our originations. And we shared some really nice metrics around dealer growth, the increase in applications flows that we have that's up kind of in rough numbers, 50% since 2016, and so that's really where we're focused and those metrics around penetration are all reflection of that.
Got it. And then as my follow-up, Jenn, just wanted to ask on the tax rate. I think the range is still the same as it is in your outlook for full year 2018. But should we assume it's a little bit lower now given what – you had the state tax benefit in the third quarter, so when we think about the full year tax rate is going to be still in the range toward the lower end, is that fair?
Yeah. Chris, I think that's spot on. I mean, we jumped down to 19.6%. You'll always see kind of some lumpiness in the tax rate from quarter-to-quarter. But for full year, we're trending kind of in that same range probably on the favorable to slightly better than that range for our full year.
Got it. Thanks very much.
Thank you, Chris.
Thanks, Chris.
And that's all the time we have for question-and-answer session today. I'd like to turn the call back to Daniel Eller for closing remarks.
Thank you. I'll just remind participants, if you have any additional follow-ups, feel free to reach out to Investor Relations. Thank you very much for joining us this morning.
Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone, have a great day.