Ally Financial Inc
NYSE:ALLY
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Ally Financial Inc
Earnings Call Analysis
Q4-2023 Analysis
Ally Financial Inc
Over the past 9 years, the company has made considerable strides, nearly doubling revenue from insurance, corporate finance, and credit card businesses, feeding the optimism for further expansion. Despite a challenging rise in short-term rates, net interest margin (NIM) has improved by 80 basis points since 2014, largely due to a disciplined growth strategy and a profitable shift in the asset mix towards higher-yielding loans such as corporate finance and credit cards.
The company boasts a core funding profile with deposits making up 88% of its funding stack and exhibits strong liquidity, a testament to its consumer bank's resilience against a tough market backdrop in 2023. Their liquidity position stands at a comfortable $63.5 billion, considerably exceeding uninsured deposit balances, showcasing a conservative and robust profile.
The sale of Ally Lending is strategically aimed at prioritizing higher returning businesses, expected to enhance the CET1 ratio and tangible book value. Additional measures include the securitization sale of $1.7 billion in retail auto loans, curtailment in auto and card originations to mitigate underperforming segments, and a reduction in the cost base expected to yield an $80 million benefit in 2024.
The company’s financial results reflect a blend of challenges and achievements. Higher funding costs tempered net financing revenue, while adjusted revenue rose, thanks to diversified products and solid investment gains. The quarter saw earnings per share of $0.16 GAAP and $0.45 adjusted, with a net interest margin of 3.2%, a minor 6 basis points decrease from the previous quarter. Net charge-offs in retail auto were at the lower end of guidance, indicating solid credit performance.
Looking forward, the company anticipates stable asset levels with a favorable shift towards higher-yielding assets, expecting NIM to expand and reach an estimated full-year average just under 3.3% in 2024. The outlined path includes navigating through potential interest rate changes without relying on Fed cuts, suggesting resilience in their strategy for margin expansion.
Ally Credit Card presents a promising return profile and alignment with the company's balance sheet strategy. It caters to the near-prime segment, intertwined with existing auto and insurance customer bases. The insurance business benefited from a record-high premium earned since the IPO, underscoring potent growth opportunities ahead. On credit management, loan losses have increased but are expected to peak in mid-2024, with actions underway to reduce exposure by over $500 million.
The corporate finance portfolio shows strength, evidenced by low levels of nonaccrual loans and high reserves. The company remains confident heading into 2024 despite broader economic concerns and has taken steps to mitigate risk in its health care cash flow subsegment, resulting in a cautiously optimistic outlook for the corporate finance division. Coupling these portfolio strategies with broader operational maneuvers, the outlook for 2024 includes a possible NIM expansion to 4%, with growth in revenues expected to reach 5% to 10%, driven by insurance and auto services.
The company maintains a vigilant approach towards credit performance, continually assessing its vintages and adjusting servicing strategies to optimize outcomes. Despite an increase in losses for the 2022 book, largely attributed to inflationary pressure, signs of improvement have been noted in the 2023 vintages. The meticulous focus on credit quality suggests that these strategies are likely to pay off, fostering confidence in the company's ability to manage its credit portfolio and potentially improve loss frequency moving forward.
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Good day, and thank you for standing by. Welcome to Ally's Financial Fourth Quarter and Full Year 2023 Earnings Call. [Operator Instructions]. Be advised that today's conference is being recorded. I would now like to turn the call over to Sean Leary, Head of Investor Relations. Please go ahead.
Thank you, Carmen. Good morning, and welcome to Ally Financial's Fourth Quarter and Full Year 2023 Earnings Call. This morning, our CEO, Jeff Brown; and our CFO, Russ Hutchinson, will review Ally's results before taking questions. Interim CEO, Doug Timmerman, has also joined today's call. The presentation will reference can be found on the Investor Relations section of our website, ally.com.
Forward-looking statements and risk factor language governing today's call are on Slide 2. GAAP and non-GAAP measures pertaining to our operating performance and capital results are on Slides 3 and 4. As a reminder, non-GAAP or core metrics are supplemental to and not a substitute for U.S. GAAP measures. Definitions and reconciliations can be found in the appendix. And with that, I'll turn the call over to J.B.
Thank you, Sean. Good morning, everyone. Before we get into the results, I want to introduce and welcome Doug Timmerman, who will take over as Interim CEO on February 1. Doug has spent more than 30 years in our auto finance and insurance businesses and is incredibly well positioned to lead Ally. His experience in the industry is unrivaled. He's well respected across all areas of the company, and he has the full support and confidence of our Board, our leadership team, our employee base and also our auto finance customer base. We're very fortunate to have a great leader in Doug and a deep bench across the company to ensure a seamless transition now and when we name our permanent CEO. Doug, congratulations and maybe you'd like to share a couple of comments. .
Thank you, J.B. It's a pleasure to be here this morning. I'm really excited for the opportunity to lead Ally and encouraged by the momentum we have across the business. I'm more optimistic than ever about the outlook for the company based on the strength of the auto and bank franchises. And I've got a tremendous amount of confidence our team will continue to execute and support our customers during this transition. Back to you, J.B.
Thank you, Doug. Okay, let's get rolling on Page #5. I made this point many times over the past 9 years, but the culture we have developed at Ally is among my proudest achievements as CEO. To be clear, though, it's not my culture or the CEO's culture, it's a culture that is empowered and nurtured by every 1 of our 11,000-plus teammates. I firmly believe a strong culture is essential to delivering for our customers, communities and shareholders and it all starts with our employees.
To my teammates for the past 15 years, thank you for your hard work and dedication. Your commitment is the driving force behind our success. I'm grateful for your leadership, integrity and consistent execution against our long-term strategic objectives.
The real benefit of an engaged workforce that embraces our lead core values is the customer obsession it creates. We've consistently rallied around initiatives, that help us better serve our 11 million customers and drive industry change. An 88% customer satisfaction score across more than 380 million digital interactions is proof that when you do it right, customers notice and appreciate it.
Culture can't be taken for granted and needs to be nurtured daily. To that end, we've consistently prioritized building our culture and creating a sense of belonging. We are not focused on winning awards, but we do take pride when others recognize what we do for our employees, including being identified as a top employer across multiple dimensions.
Our teammates continue to invest in the communities in which we live and work. In 2023, Ally teammates donated over 60,000 hours of their time to support our communities. Our 50-50 media pledge has shed light on women's sports, and we're encouraged to see this has really moved the needle in terms of visibility and investments by other brands. Our mobiles in the making program has opened new doors and brought incredibly talented associates to Ally over the past 5 years. The energy of the event each year is infectious, and gives me tremendous pride in what we can accomplish together.
I truly believe culture is a differentiator and remain a key driver of Ally's success moving forward.
And with that, let's turn to Page #6 and get into the results. Full year adjusted EPS of $3.05, core ROTCE of 11.5% and revenues of $8.2 billion reflected our ability to deliver solid financial results while continuing to position for earnings growth over the years ahead. NIM of 3.35% was impacted by the rapid tightening we've seen over the past 2 years. With the tightening cycle likely behind us, we are well positioned for meaningful NIM expansion going forward.
There are a few notable items in the quarter I wanted to touch on before diving into operational results. This morning, we announced that we've reached an agreement to sell Ally Lending. This transaction allows us to allocate capital to our highest-returning businesses and focus on strengthening relationships with our consumer and dealer customers. The operations were moved to held for sale, and we recorded a goodwill impairment within the quarter. The fourth quarter impacts which Russ will cover in more detail, are excluded from adjusted EPS. We expect the sale to close in the first quarter and generate 15 basis points of CET1 at closing and modestly increase tangible book value. The sale is also accretive to earnings going forward.
Additionally, within the quarter, we deconsolidated $1.7 billion of retail auto loans from the balance sheet through securitization transactions, adding 9 basis points of CET1. From a cost perspective, the benefit of the head count actions we announced in the third quarter and completed in the fourth quarter are fully embedded in our expense run rate going forward. Fourth quarter results also include a $38 million FDIC special assessment being incurred across the industry. Our charge was among the lowest in the industry, reflecting the composition of our deposit base. The impact of the assessment is also excluded from adjusted EPS.
Moving to full year operational highlights. Within Auto Finance, consumer originations of [ 40 billion were ] sourced from a record 13.8 million applications, a testament to the scale of our business in mutually beneficial dealer relationships. The average originated yield of 10.7% increased nearly 250 basis points on a full year basis driven by robust application flow, disciplined pricing and underwriting. Importantly, nearly 40% of our full year volume was in our highest quality credit tier, which will be a tailwind to the loss profile as those loans season.
Full year net charge-offs in retail auto were 177 basis points, in line with the guidance we gave a year ago. We continue to see encouraging performance trends across vintages and flow to loss rates, which will cover when we get to credit shortly. Insurance earned premiums of $1.3 billion were the highest since our IPO.
Now turning to Ally Bank. 2023 was an outstanding year in terms of deposits performance. Despite the disruption stemming from the March banking events and the decline in deposit balances across much of the industry, we delivered solid deposit growth every quarter in 2023. We also saw record growth in customers and now serve more than 3 million customers with $142 billion of deposit balances.
Ally Credit Card now serves more than 1.2 million active cardholders with $2 billion of balances. Despite elevated net charge-off activity in the near term, returns in the card business are compelling, which we'll cover in more detail shortly.
And finally, Corporate Finance continues to generate steady loan growth and accretive returns. The business delivered record earnings and a 25% ROE in 2023 and the quality of the book remains strong.
Let's turn to Slide #7 to talk about Ally's market-leading franchises. Within Dealer Financial Services, 22,000 dealer relationships resulted in nearly 14 million consumer auto applications in 2023, a record for Ally. In terms of originations, that's more than $400 billion in consumer auto volume decision, which allows us to be selective and optimize returns. Again, $1.3 billion of insurance earned premiums is the highest since our IPO, and we see a long runway ahead as we leverage synergies with our auto finance team.
I mentioned the impressive scale and growth we've seen in the consumer bank on the previous slide, but we're equally pleased with the quality of our customer base. Ally Bank depositors are highly engaged with more than 1 million consumers leveraging core product features across deposits and invest. That engagement continues to drive customer retention that has stayed above 95% since we launched the bank in 2009. Both Dealer Financial Services and Ally Bank have a robust scale, but remain nimble and able to pivot in response to evolving market dynamics. That has served us well in this environment and gives me confidence in our ability to deliver earnings growth going forward.
Turning to Slide #8. We Total revenue of $8.2 billion represents a 76% increase since 2014. Net financing revenue of $6.2 billion is up 80% through the strategic positioning of the auto finance business and the consistent growth in high-quality deposits and other revenue is up more than 50% as we've grown fee-generating businesses like insurance, smart auction and our auto pass-through programs.
At the bottom of the page, we highlight our revenue growth across Insurance, Corporate Finance and Credit Card. Revenue from these businesses have nearly doubled over the last 9 years, and we see opportunities for further growth going forward.
On Slide #9, you can clearly see we've driven substantially higher margin through transformation on both sides of the balance sheet. Despite facing pressure from this historic rise in short-term rates, NIM is up 80 basis points since 2014 and is more than 50 basis points higher than where we were just a few years ago. Looking ahead, we see our retail auto yield continuing to expand as we originate new loans at higher yields than our current portfolio.
Disciplined growth and higher-yielding Corporate Finance and Credit Card loans coupled with the continued decline in lower-yielding mortgage and securities are also a tailwind to earning asset yields. Our asset yield momentum is unique in the industry and combined with our strong deposit franchise supports our confidence in our attractive NIM trajectory.
On Slide #10, we've again provided a snapshot of our funding stack and liquidity position. We're core funded with deposits making up 88% of our profile and have multiple efficient funding sources, including unsecured, secured and short-term vehicles like the FHLB. Total available liquidity is $63.5 billion is 5.5x our uninsured deposit balances. Our conservative liquidity profile remains a key priority and source of strength for Ally. Deposits remain at the core of our funding position and the performance we saw in 2023 against a very challenging market backdrop, highlighted the unique strength of our consumer bank.
Let's turn to Slide #11. As we said many times before, we are committed to optimization across our businesses to generate capital, drive risk-adjusted returns and invest in our scaled franchises. We took several meaningful actions in the quarter that demonstrate our commitment. The pending sale of Ally Lending allows us to further prioritize our highest returning and scaled businesses that directly serve our auto and deposit customers.
At closing, we expect the sale of Ally Lending to add 15 basis points to our CET1 ratio and modestly increased tangible book value. The transaction is also accretive to earnings going forward. During the quarter, we sold $1.7 billion of retail auto loans via the securitization market to free up capital that can be redeployed to further support our dealers and consumers. We sold seasoned loans that were originated in a lower yield environment at breakeven economics demonstrating market appetite for our loans. We will continue to look opportunistically and ways to sell loans to create capital and better serve our dealers and consumers.
In addition, we will continue to progress initiatives that we started over the past 12-plus months to generate capital and optimize returns. We've meaningfully curtailed our origination appetite with a focus on eliminating underperforming segments, particularly within auto and card. The head count actions we took in 3Q, and completed during the fourth quarter have reduced the cost base of the company. We'll see the full $80 million benefit in 2024.
Tax actions in 2023 also added $100 million of capital. We've not reinvested in the securities portfolio and has put minimal mortgage volume on the balance sheet since 2022. In this quarter, we moved $4 billion of non-agency MBS from AFS to HTM, reducing OCI volatility. The securities are a subset of our investment portfolio, but do not qualify as contingent liquidity.
With changes to the regulatory framework on the horizon and the compelling origination opportunities we have within auto finance, you should expect capital optimization efforts will remain a top priority for us moving forward. And with that, I'll turn it over to Russ to cover detailed financial results.
Thank you, J.B. Good morning, everyone. I'll begin on Slide 12. Net financing revenue, excluding OID, of $1.5 billion was down year-over-year, driven by higher funding costs given elevated short-term rates. Strength in fixed asset pricing was a partial offset during the quarter and positions us for NIM expansion through 2024 and beyond. Adjusted revenue of $500 million was up year-over-year and quarter-over-quarter, reflecting continued momentum across our diversified product offerings and solid investment gains. .
We're now at the quarterly run rate we previously guided to and expect continued expansion over time. Several years of strong conquest volume and normalization of dealer inventories created a nice tailwind for insurance revenue. And we continue to see growth in both smart auction and the consumer auto pass-through programs, which enable us to better monetize application flow.
Provision expense of $587 million reflected solid credit performance in retail auto, with losses on the low end of our guidance and elevated losses in card as we highlighted at an investor conference last quarter.
Provision expense also included a $16 million benefit as we move the Ally Lending assets to held for sale designation in anticipation of a 1Q sale. This benefit has been excluded from adjusted metrics, including earnings per share. Noninterest expense of $1.4 billion includes 2 significant onetime items. First, a $149 million write-down of goodwill associated with the Ally Lending sale that brings the Ally Lending related onetime items to $133 million in total, netting out the provision benefit. And second, we incurred a $38 million charge from the SDI special assessment associated with the 2023 banking crisis.
Both items have been excluded from adjusted metrics including adjusted earnings per share. Excluding these onetime items, expenses were up around 1.5% on a year-over-year basis, right in the middle of the range we provided in December. Our effective tax rate during the quarter was negative 20% on a GAAP basis. Excluding the impact of lending, the tax rate was around 10%, which was better than expected as we saw strong EV volume during the quarter. GAAP and adjusted EPS for the quarter were $0.16 and $0.45, respectively.
Moving to Slide 13. Net interest margin, excluding OID, of 3.2% decreased 6 basis points quarter-over-quarter in line with the expectations and resulting in a full year NIM of 3.35%. Earning assets were down on a linked quarter basis, driven mainly by the sale of $1.7 billion of retail auto loans within the quarter. Margin has been pressured as we progressed through the tightening cycle given the liability-sensitive nature of our balance sheet. But we have performed well in terms of pricing on both sides of the balance sheet, retail auto pricing has achieved a 95% pricing beta and has exceeded expectations.
Strong pricing has moved retail portfolio yields up 100 basis points in the past year, as we've talked about before, we see that yield expanding as origination yields are well above 10%. Looking forward, we expect earning assets to be generally flat, but with favorable mix dynamics is lower yielding mortgage and securities are running off and being replaced by higher returning retail auto, corporate finance and credit card assets. So on the asset side, both mix and natural portfolio turnover within retail auto will be tailwinds in 2024 and beyond.
Turning to Liabilities. Cost of funds moved up within the quarter in line with expectations. Since tightening began, we've seen a cumulative deposit beta of around 70%, which compares well to peers, particularly in the context of $4.6 billion of Ally retail deposit growth and record customer growth in the year where industry balances contracted. We remain confident in our path to 4% NIM.
We have assumed the Fed is done tightening, but we are not dependent on Fed cuts. Rate cuts will impact the pace of NIM expansion, but not the destination. The pace of rate cuts implied by the current forward curve would accelerate our path to 4% NIM towards the middle of next year.
Turning to Page 14. CET1 of 9.4% and increased quarter-over-quarter. As we mentioned before, the sale of lending will add another 15 basis points upon closing in March. Given we have another CECL phase-in, we expect a relatively flat CET1 ratio in the first quarter as the Ally Lending sale benefit will be offset by CECL phase-in.
Our TC EBITA ratio increased by more than 50 basis points within the quarter, driven by an increase in OCI as benchmark rates declined. We recently announced our quarterly dividend of $0.30, which remains flat to prior quarter. As J.B laid out, capital actions we undertook during the quarter and actions that we continue to execute upon reflect our commitment to generating capital, strategically investing in our highest returning businesses and driving long-term value for shareholders.
Tangible book value per share up 100% since our IPO, excluding the impact of AOCI, which we expect to accrete to par over time.
Let's turn to Slide 15 to review asset quality trends. Consolidated net charge-offs of 177 basis points reflected seasonal trends and elevated activity within corporate finance and credit card. Retail auto net charge-offs of 221 basis points in the fourth quarter were at the low end of the guidance we provided on our third quarter earnings call. In commercial auto, we recognized charge-offs of $19 million, which were previously reserved for resulting in minimal P&L impact within the quarter.
In the bottom right, 30- and 60-day retail auto delinquencies reflect seasonal increases. Importantly, the year-over-year increase in 30-day delinquency rates declined for the fourth consecutive quarter.
Moving to Slide 16. Consolidated coverage decreased 16 basis points to 2.57%. The decrease within the quarter was mainly driven by mix dynamics, including the pending sale of Ally Lending, which carried a coverage rate of 9% and growth within commercial auto, which has a lower coverage rate given its low loss content. The decline in coverage rate was also impacted by the recognition of losses on credits within Corporate Finance and Commercial Auto, for which we previously had specific reserves that do not need to be replenished. The total loan loss reserve of $3.6 billion declined approximately $250 million, driven mainly by the movement of Ally Lending assets to held for sale and the retail auto loan sales. Retail auto coverage of 3.65% increased 3 basis points, entirely driven by loan sales executed within the quarter, which was comprised of seasoned loans with lower loss content.
As a reminder, for our CECL reserving process, we leverage a 12-month macroeconomic forecast, which has unemployment increasing to 4.4% this year. Longer term, we assume unemployment increases to approximately 6% under our reversion to mean methodology.
Let's turn to Slide 17 to discuss retail auto credit in more detail. On a full year basis, charge-offs of 1.77% were in line with the guide we provided a year ago. And within the fourth quarter, net charge-offs of 2.21% were on the low end of our most recent guide. Within the quarter, Improving front book performance, coupled with stable flow to loss rates was more than enough to offset softness in used values, which ended the quarter around 5% lower than we assumed when providing 4Q guidance.
Looking at delinquency trends, the year-over-year rate of change declined again for the fourth consecutive quarter with 30-plus up 86 basis points year-over-year, 82 basis points, excluding the impact of loan sales. We have been active in optimizing the buybacks to remove underperforming segments and maximize due the cycle adjusted returns. Our curtailment actions began in mid-2022, and the cumulative impact of those actions has been significant in terms of volume, but even more so in terms of loss content removed from our origination profile. We continue to be encouraged by granular performance monitoring with all origination vintages showing improved performance as they season.
In terms of specific cohorts, the most seasoned parts of the portfolio from 2021 and earlier continued to outperform price loss expectations and have passed their peak loss period. The 2022 vintage, more specifically the second half of 2022 is showing elevated loss content versus expectations. But again, the vintage has consistently shown improving performance over time. It's early to evaluate the 2023 vintage, but we are encouraged by initial performance indicators and our shift up the credit spectrum in April of 2023 meaningfully reduced the absolute loss content on our most recent vintages. The 2023 vintage has started to outperform 2022 in terms of delinquency after 12 months on book. And we expect that outperformance to expand as we move forward given the underwriting changes we've made over time and the shift into super prime in April. It's important to remember the first 6 months of any vintage is noisy, and we really start to get a good look closer to 12 months. On the page, we've shown more detail comparing month 7 to 12 of the 2022 and 2023 vintages. And as you can see, the 2023 vintage curve has started to bend favorably, and we expect that to continue over time.
We know delinquency trends by vintage or focal area, but we also look at the same trends on an actual loss basis. And on that basis, the 2023 vintage looks even better relative to 2022. As you all know, we've actively refined our approach to collections over time, including extension of repo timing. In total, that's resulted in more churn in the delinquency buckets, but a meaningful improvement in eventual losses. So delinquency trends are encouraging and loss performance is even more encouraging. As we sit here today, we feel our underperforming originations are ring-fenced to the second half of 2022. With yields over 9% for that cohort, these are still financially attractive loans.
With that vintage entering its peak loss period now, it will be the primary driver of NCO performance in the first half of 2024, which will also see increasing unemployment based on consensus economic estimates. Later in the year, we expect the 2023 vintage will start to drive losses down on a seasonally adjusted basis. We'll talk more about the overall guide later, but putting the retail credit performance together, we expect losses to increase in 2024, but are confident our annual NCO rate will remain below 2%.
On a seasonally adjusted basis, we'd expect higher losses in the first half of the year and then improving performance as new originations reached peak losses.
On Slide 18, we provide an outlook for used vehicle values, which declined 9% in 2023 and have declined 26% from their 2021 peak. We are assuming another 5% decline in 2024 with much of that decline occurring in the first half of the year. That would result in a total decline from peak levels of just over 30%. We continue to expect used values will stabilize and ultimately settle around 20% higher than pre-pandemic levels. With new vehicle production below prepandemic levels for nearly 4 years, used supply will remain 15% below historical norms over the next several years and provide structural support for used values.
Turning to Slide 19. We help our dealers sell as many cars and trucks as possible. As we have said before, we encourage our dealers to send us all of their application volume. We leverage our differentiated go-to-market approach, coupling high tech and high touch to earn their partnership. We decisioned over $400 billion of potential loan volume in 2023. Record application flow enables us to be dynamic in what we originate. Our ability to pivot up or down the credit spectrum give us confidence in our ability to continue to book strong risk-adjusted yields. Our pass-through programs allow us to better serve our dealers while providing a mechanism to monetize a greater share of our application volume.
Turning to origination trends on the bottom half of the page, fourth quarter volume of $9.6 billion resulted in $40 billion of consumer originations for the year across a diverse set of dealer partners used comprised 65% of originations while the percentage of nonprime originations remained at 9%. The unique scale of our auto franchise and the depth of our relationships with our dealers give us a durable competitive advantage that enables us to be selective and dynamic in what we originate.
Let's turn to Slide 20 to review auto segment highlights. Pretax income of [ $294 million ]was lower year-over-year, driven by higher provision and noninterest expense. Provision reflected typical seasonality and while expenses were the result of elevated repo costs across the industry and requisite spend to support the strength and scale we just highlighted.
Looking at the bottom left, originated yield of 10.8% was up 124 basis points from the prior year, reflecting significant pricing power throughout 2023. Importantly, 43% of our retail volume was in our STR, which represents the highest concentration within that tier in more than a decade. The total portfolio yield increased 8 basis points within the quarter, including a lower contribution from the hedge portfolio. Excluding hedge, the natural portfolio yield increased 27 basis points this quarter reflecting the repricing momentum that will continue going forward.
The bottom right shows lease portfolio trends. Gains declined quarter-over-quarter, driven by a decline in used values and lower termination volumes, partially offset by a reduction in dealer and lessee buyouts.
Turning to insurance results on Slide 21. Core pretax income of $62 million included the highest premium earned since our IPO and solid investment gains. Total written premiums of $333 million increased 17% as we remain focused on increasing dealer relationships and benefit from normalizing inventory levels. Insurance losses of $93 million were up $30 million year-over-year driven by portfolio growth, increased GAAP losses and the cumulative impact of inflation. We have provided additional detail and loss performance given the normalization of our GAAP losses over the past year and the increase in our nonweather P&C losses.
Non-weather P&C includes losses from our garage insurance product and inventory fast, which have increased over the past year. We've been very active in terms of loss prevention and pricing for increasing loss activity and are confident in the growth opportunities ahead for insurance.
Moving to Ally Bank on Slide 22. Retail deposits of $142 billion increased $4.6 billion year-over-year and $2.2 billion quarter-over-quarter, demonstrating the scale and resiliency of our franchise. We grew our customer base for the 15th consecutive year, a net customer growth of 359,000 for 2023 is the highest in Ally Bank's history. We now serve as a relentless ally for more than 3 million customers. We also continue to see growth in multiproduct customers and maintain our industry-leading customer retention rate of over 95%.
Turning to Slide 23. Ally Credit card provides a direct-to-consumer digital product offering with a compelling return profile. From an ALM perspective, Card provides a floating rate asset with an attractive margin and further diversification to our liability-sensitive balance sheet. From a customer perspective, the existing near-prime product fits well with a meaningful portion of our auto and insurance customers. And we're actively developing a product set that would meet the needs of our deposit customers.
In addition to delivering a great customer experience, we remain focused on credit management and measured prudent growth within the card business. Losses in the portfolio have increased in recent quarters and are expected to peak in mid-2024. The dynamics in our portfolio mirror what has been observed across the industry, specifically weaker performance in the 2021 and 2022 near prime cohorts, which have been the most impacted by inflation. For Ally, those cohorts represent a majority of the total portfolio, resulting in a more pronounced increase in portfolio level loss rates.
Beginning in 2022, we took significant credit tightening actions on both new and existing accounts. We reduced exposure in higher-risk segments by over $300 million in 2023 because of our tightening actions, including a 20% reduction in new accounts, coupled with reductions in credit lines. Heading into 2024, we expect these tightening actions on new and existing accounts to curtail more than $500 million of exposure.
In terms of overall portfolio performance, the return profile in Card is compelling, even in this period of elevated losses. Gross revenue yield including fees of 27% provides significant return resilience to absorb loss volatility. Assuming losses increased to 13%, we still see risk-adjusted margins of 10% and a pretax ROA of approximately 2%. Assuming normalized losses of 9%, we expect a mid-teens risk-adjusted margin in line with expectations when we entered the business in 2021, driving a pretax ROA of 5% and enhancing the overall return profile of our largely secured balance sheet. Those economics reflect Ally's consolidated cost of funds and include all operating costs, excluding expenses from the 2021 acquisition of Fair Square and allocation of corporate overhead.
While we have moderated our growth ambitions in the near term, we continue to view Card as a key part of our long-term strategy and financial profile.
Let's move to Slide 24 and talk about 2 other products offered within the consumer bank. Ally Home and Ally Invest. Mortgage is the largest purchase consumers make, and Ally Home is a leading digital experience we offer to further deepen the relationship with our customer. Our operating model centers on a variable cost structure, enabling us to limit earnings volatility in periods where origination volumes are depressed. Most of the volume in Ally Home comes from deposit customers, and less than 20% of loans originated are retained on balance sheet.
Ally Invest is a key aspect of the overall deposit value proposition, providing customers seamless money movement between brokerage and savings. In total, Ally Invest customers maintained $13 billion in traditional deposits with Ally and maintain an average balance that is double that of non-invest deposit customers. Ally Invest is profitable on a stand-alone basis and offers another compelling experience to drive engagement and retention.
Mortgage results are on Slide 25. Mortgage generated pretax income of $24 million and $224 million of direct-to-consumer originations, reflective of the operating environment. Operating expenses declined nearly 20% on a year-over-year basis, reflecting the benefits of our partner model. We remain focused on a great customer experience for customers rather than a specific origination target.
Turning to Corporate Finance on Slide 26. Full year 2023 pretax income of $307 million is the highest since our IPO. Our team is made up of industry experts with a long history in the business. Over the past 5 years, ROEs have been 24% on average, including 25% in 2023. Our $11 billion HFI portfolio is up 7% year-over-year, reflecting disciplined growth.
On the bottom left, we highlight net charge-off history. Charge-offs in this business are driven by specific exposures and, therefore, inherently choppy. Across the total portfolio, our average annual NCO rate was 30 basis points since 2014. Excluding health care cash flow loans, the NCO rate was 7 basis points. When performance began to deteriorate in 2020, we promptly ceased health care cash flow originations. This portfolio is in runoff and accounts for less than 1.5% of loan balances.
We feel good about our corporate finance portfolio entering 2024. Criticized assets make up 10% of the portfolio, which is less than half of the historical run rate. Nonaccrual loans are an all-time low of 1%, and our reserve is nearly 1.6x our nonaccrual loan balances. We provided a little more context than usual given the macro concerns around C&I and some of the recent net charge-off activity within health care cash flow. Corporate Finance is a great business for Ally with a long track record of delivering through many economic cycles.
Before closing, I'll share a few thoughts regarding the coming year. Slide 27 contains our financial outlook for 2024. As you know, the operating environment remains dynamic. We've talked regularly about the tailwinds that will drive our net interest margin, and our outlook remains consistent. We expect expansion in 2024 and see an exit rate around 3.4% to 3.5%, which puts the full year average just under 3.3%. In terms of updates to our outlook from previous calls, our recent capital actions are good for profitability and capital generation, but also impact our starting point for NIM expansion. The sale of Ally Lending has impacted our near-term NIM outlook by around 3 to 4 basis points. When combined with curtailments in the card business, our NIM outlook for 2024 now incorporates 5 basis points of near-term impacts given the gross margin on those products. The impact of these actions on NIM are more than offset by lower credit costs and lower expenses.
In addition to lending and card impacts, we also have higher securities balances in the near term based on the OCI rally, which could be a modest headwind to NIM if it sticks. We continue to be confident in our NIM expansion for 2024 and see an exit rate between 3.4% and 3.5%. However, these factors caused our starting point for NIM expansion to tick down. We have assumed the Fed has done tightening, but we are not dependent on Fed cuts. Given the 4Q [indiscernible] in rates, we took the opportunity to add to our pay fixed hedge exposure, which protects margins [indiscernible] not materialize in March as the forward curve is suggesting. We do not expect a meaningful impact on our 2024 NIM, whether or not the Fed commences cuts in March. The pace of Fed cuts implied by the current forward curve would, however, accelerate our path to 4% NIM towards the middle of next year versus the very end of next year in a more flat rate scenario. We have continued to position the balance sheet in such a way that near-term NIM expansion does not require lower rates.
Turning to other revenue. We expect 5% to 10% of growth in 2024, driven by continued momentum in insurance, smart auction and the auto pass-through program. Asset levels are expected to remain relatively flat year-over-year, but with a favorable mix benefit of higher-yielding loans replacing securities and mortgage. In terms of credit, we see retail auto net charge-offs increasing versus 2023 as our underperforming vintages make their way through peak loss in the first half of the year. But as I said, we're confident retail auto losses remain below 2% for the year.
Total charge-offs for the company of 1.4% to 1.5% reflect the increase in retail auto and credit card, partially offset by the sale of Ally Lending. We remain committed to cost discipline and have updated our prior expense guide to reflect the sale of Ally Lending. In total, we see expense growth of less than 1%, and we now expect controllable expenses to decline by more than 1%. We've taken another meaningful cut of expenses to reflect the sale of Ally Lending. We are currently estimating full year tax rate of 18%. However, we continue to realize benefits from EV tax credits and broader tax planning strategies that will likely result in quarterly fluctuation like 2023. So a lot of moving pieces within the P&L, particularly around the sale of Ally Lending, but not a real change in our outlook. With the tightening cycle potentially behind us, we are confident the company is set up for meaningful earnings expansion over the next several years. We see a clear path to 4% net interest margin and a mid-teens ROE over the medium term. The exact timing will be driven by several factors, including rates in consumer health.
We acknowledge continued uncertainties heading into 2024. However, we remain confident in our ability to continue to execute against the controllables and drive long-term shareholder value. And with that, I'll turn it back to J.B.
Thank you, Russ. The strategic priorities we've established guide everything we do and are unwavering, and will remain essential for Ally's long-term success for years to come. First and foremost, we've worked to ensure a strong alignment between our culture and all our stakeholders. We built differentiated offerings across our businesses for both consumer and commercial customers and seek to find ways to highlight our unique position in the market. We'll continue finding ways to disrupt the industry and remove friction for customers by delivering leading digital experiences.
This morning's call highlighted some of our recent actions, which make it apparent with our disciplined approach to risk management and capital allocation is only heightened in this dynamic operating environment. We've executed a remarkable transformation and I'm confident in the team's ability to leverage these priorities going forward, allowing Ally to thrive for many years to come.
As this is my final time with you, I want to thank you all for all the support. I'm very proud of the long-term progress. And sometimes that gets lost in the quarter-to-quarter progression, but wrapping up the year and looking back to when I went into this role, it is really amazing how far Ally has come. It was just 15 years ago, this company was on the brink of extension to today, a thriving and well-respected company and brand that is uniquely positioned to financially benefit as rates begin to normalize. It has been a true honor to serve as CEO. And now as I transition to a substantial customer with Hendrick Automotive, I will continue to be vested in the long-term success of Ally. Thank you all so much. And with that, Sean, back over to you for Q&A.
Thank you, J.B. As we head into Q&A, we do ask the participants limit yourself to 1 question and 1 follow-up. Carmen, please begin the Q&A. .
It comes from the lines of Ryan Nash with Goldman Sachs.
J.B. I just want to say that it's been a pleasure working with you and best of luck at Hendrick.
Thank [indiscernible] I appreciate that.
Maybe 1 strategic question for -- I guess, for each of you. J.B. or Russ, maybe just talk about the decision to sell Ally Lending. Was this part of a broader review? And are there any further changes. And then, Doug, congrats on being named Interim CEO. Any changes we should expect to you, whether on the auto strategy or the broader company strategy? And I have a follow-up.
Great, Ryan. I guess I'll start on on the Ally Lending decision. I think you rewind the clock to kind of all the March banking events there. And I think what that forced everyone to do is just take a really honest and hard look at all of our businesses, our position, figure out where we have scale, where we didn't have scale. And Synchrony's got a great CEO and [indiscernible]. And Brian and I kind of compare notes a couple of times over the second quarter. And we just started talking about a potential path for them to do something here. And I think this is really a win-win for both companies. I think this is going to be a highly accretive business for Synchrony. I think Brian and Brian, his CFO, are really excited about it. They're doing the right thing with respect to a lot of the Ally teammates going along with the acquisition.
And so for them, I think it fits right into their platform. It's going to be accretive for them. And then for us, as we mentioned, it really enables us to focus more on the scale businesses we have at Ally and obviously put and deploy capital in that regard. And so I think it came to fruition towards the end of the year. Obviously, as we mentioned, we'll expect to close that transaction in the first quarter. But I think when we look at the business footprint today, we feel really comfortable where things are at. This was just a unique position and a unique situation with this business fitting right in for Synchrony and for Brian. The rest of the company, we feel is largely intact.
We like everything going on in credit card today, so -- and in commercial finance, corporate [indiscernible]. I don't want anyone to imply anything beyond that. I think this was just a unique situation. We feel really good about it. So that's kind of the backdrop of the story there. And then Doug, maybe you want to talk just kind of your thoughts going into this year.
Sure. Yes. And I think the simple answer to your question, Ryan, is no, no change relative to our priorities, our focus, our business plans. Very confident that we've got the right priorities where we've got a very well thought-out plan. And a plan myself and the rest of the leadership team has a lot of confidence in relative to our ability to meet or seed expectations. So I think we're very well situated there relative to reference in the auto business. We pointed this out in the prepared remarks, but the competitive environment is certainly favorable, the success that we've had in driving application flow, no doubt is a differentiator for us. And hopefully, you see that in the success that we've had in building our yields and improving the returns to [indiscernible] and our ability to be nimble and selective relative to where we play, as well as our ability to originate at higher volume levels, depending on capital related capacity there.
So a lot of reasons to feel good about the future as well as the plans that we've got in place today. So hopefully, that answers your questions.
No, it does. And maybe just 1 follow-up. Russ, you gave a lot of color on credit. Maybe can you just expand on the comments regarding how you see credit improving throughout the year. And when we do get to the end of the year, where do you expect to be on a seasonally adjusted basis? And should we expect that to become more the medium-term run rate for the company just given all the tightening that you've done and the move up into the [indiscernible]?
Great. Thanks, Ryan. It's a great question. Happy to provide additional clarification here. As you saw, the NCO rate on retail auto for 2023 came in right in line with the guidance we gave about a year ago at 1.77%. As we pointed to in the call, we're seeing elevated losses on our 2023 kind of second half vintages. Those vintages are really ending and entering their prime in terms of loss development through the first half of 2024. And so we expect that to drive our loss rate overall for 2024 up a tick from the 177 we printed in 2023. That being said, we're confident as we look at over the course of the full year, that will keep our NCO rate below 2% across the full year. .
But again, on a seasonally adjusted basis, we'll enter 2024 elevated based on that [indiscernible] half vintage, but as we pointed out during the call, as we enter the back half of the year, we're really going to see a lot of the benefit from the curtailment actions that we started putting in place, and we'll see those 2023 vintages really start to drive our loss experience in the second half of the year, and we'll see that improvement.
And our next question, 1 moment, please, comes from Sanjay Sakhrani with KBW.
J.B. Good job as CEO of Ally and good luck .
Thank you, Sanjay. I appreciate that very much.
Maybe we could just Russ talk about the progression of the NIM. I know it sounds like you guys haven't baked in what the forward curve is assuming. But let's just assume it's correct. Maybe you could just talk about the natural tailwind to the NIM as we're sort of moving -- we're remixing and then sort of what the liability sensitivity would imply over the course of the next year or so?
Yes. That's great. Happy to do that, Sanjay. Look, I think as we said on the call, if you take the current forward curve as it is, 6 cuts in 2023, 2 more cuts in 2025. Obviously, a rate outlook that's favorable relative to where we were a quarter ago. Based on that outlook, we think we get to our 4% NIM kind of right in the smacked up middle of 2025. And that being said, we think about our business in terms of a variety of interest rate environments. And certainly, to the extent that the forward curve didn't materialize as it's currently constructed and we're in a more flattish environment that would extend the path to 4% NIM towards probably the very end of 2025.
And so again, we don't like to run our business in a way where we're dependent on Fed cuts. But the way that based on -- look, based -- we look at it based on a number of different scenarios and a range of different outcomes, and I think that's kind of where we are. Current rate curve, middle of 2025, more flattish scenario takes us to the very end of '25. And I would say, look, we took the opportunity last quarter during the rally to further put on pay fixed hedges, and that gives us some insulation through the course of '24 such that we think in a variety of potential rate outcomes, our outlook for '24 is pretty much unchanged. So we kind of stand by our 3.4% to 3.5% exit rate, even in a world where we don't see that first Fed cut in March.
Okay. Great. That's very helpful. And I guess my follow-up question, I guess this is for you, J.B. It might be a question for the Board. Just -- where are we with timing of a final CEO? I think it's obviously taking a little bit longer than we thought. Doug, obviously sounds very qualified. So I'm just trying to get a sense of sort of how we should think this plays out over the course of the next months or so?
Yes. I mean, Sanjay, I think I appreciate the question. And what I would say is the Board has been very hard at work. These things not always go in a perfectly straight line, but there's been an extraordinary amount of effort in interviewing. And I think what I've appreciated about our Board and I have been involved in it is not willing to sacrifice. I mean we want to get a great operational leader, a great cultural leader, somebody that understands the nuances of banking. And so we've been very disciplined in that regard. I would expect over the coming quarter we will be in a position to announce somebody permanent. But again, it's still a very fluid process. I think very fortunate to have Doug here, ready to go, have a really strong leadership team behind Doug. Doug's got the full support of them. He's got the full support of the Board, the customer base. And he's been around the block. So our employees know him and he's going to slide right in. So I'm not worried at all about continuity in this interim period. But I think over the next few months, that should be your baseline expectation to when we'll have a permanent candidate. But again, no sacrifices here. We're going to make sure we get the right next leader to build on the foundation we have in place today and carry the company forward.
One moment for our next question, please. And it comes from the line of Jeff Adelson with Morgan Stanley.
I guess I just wanted to circle back on the net interest margin commentary. As you kind of think about the potential benefit from the forward curve here, getting you to a 4% mark by mid-2025, just trying to understand what kind of assumptions you have in there for your deposit beta? And as we think through the first couple of quarters of 2024, do you think that you kind of reached as close to the peak as you can get on your deposit rate given that you kind of held that OSA rate study. And let's say the forward curve continues to price in more rate cuts, would you be looking to maybe add a little bit more in the way of hedges as you see opportunities and maybe that would defer the eventual benefit to getting to 4% if you do that?
Great. Thanks, Jeff. Thanks for your question. Look, I think as we think, and maybe I'll start on deposit pricing and kind of maybe you've seen we put in another set of rate reductions on the CD side this morning, our second so far in 2024. And so we're definitely seeing some benefits already from the interest rate environment. All that being said, as we think about our deposit pricing and rates, we look at -- our expectation is that we don't see our deposit pricing adjusting immediately, but it does adjust. And to the extent that there are further rate cuts in 2024, we'll see that in our deposit pricing, but we'll see it in a delayed way.
In terms of our deposit beta, we've been running around 70%. That's still our expectation going forward in terms of deposit beta. And so I think -- hopefully, I answered most of your questions there, but let me know if I've missed some.
And just on the hedging, the opportunity to do more there.
Yes. Look, I think our sense is the Fed is done on tightening. We obviously are somewhat opportunistic in the market in terms of just kind of looking at what the outlook is. We took advantage of an opportunity in the fourth quarter where there was a real rate rally to take some of the variability off the table for us over the course of '24. Hard for me to project kind of how the markets will behave kind of going forward. But look, certainly, if there are opportunities that make sense for us, we'll pursue those. But again, I'm not going to speculate on the rates. .
One moment for our next question, please and it comes from the line of Rick Shane with JPMorgan.
Jeff, I'm really glad I got on the line. It's been a pleasure covering your company, and I've really admired what I see is your commitment to the culture in [indiscernible] and it really is a great legacy. So congratulations.
Thank you, Rick. That means a lot to me. And 1 of the CEOs I greatly admire is at the top of your firm that always prioritizes people and does things the right way. So it's been an absolute honor leading Ally and appreciate your consistent support as well, Rick. So thank you.
I wanted to talk a little bit about 2 trends in terms of auto. What we keep hearing is tightening of credit and raising of rates. The borrower quality is going up, but essentially affordability is going down. Russ, you showed us Slide 17 where you basically start to balance that out in terms of the impact on credit. But I am curious, when you think about loss frequency given the decline in affordability, is this really ultimately going to be a net positive? One thing I would mention is that when I look at that slide, it doesn't contemplate the impact of the huge decline in gas prices during the sort of comparable windows. The [indiscernible] vintage sort of peaked or was on as gas prices were going up sharply, the '23 seasoning as gas prices are going down. So I think when you sort of neutralize for that, I'm curious if you actually think frequency will improve?
Yes. No, it's a fair question. As you can imagine, we pay a lot of attention to credit. We're constantly looking at vintages on a monthly basis and even subsegmenting within that to understand the performance of our book. I would characterize, obviously, the losses on the 2022 book is being elevated. It's interesting that, that elevation in loss content is coming at a time when employment is so strong. And so we characterize that as something that is very much driven by inflation and a number of our borrowers struggling with this inflationary environment. So that impact is not lost on us. .
That being said, as you can imagine, we monitor our credit quite closely. We also pay a lot of attention to servicing, and we've made a number of adjustments to how we service in particular timing of repossession. We have found we get better outcomes, delaying repossession. It feels giving our collectors additional time to work the credits and giving our borrowers a little additional time tends to work out in our favor, and we're getting better outcomes by doing that. And so we can see that in terms of the way that we look at our delinquency roles as well as our flow to loss. Our flow to loss rates have continued to be favorable going through this cycle.
You can imagine, we're looking at our vintages at a much more granular level than what's available publicly. And so when we look at Page 17, that chart in the bottom middle, and you can see that 2023 vintage is starting to bend away from the 2022 vintages in a favorable way. What gives us confidence there in that trend continuing and expanding is our more granular look as we look month to month. And as we pointed out on the call, the first 6 months of any vintage is a little bit choppy as they season. But as you can imagine, as we're looking at this on a month-to-month basis, looking at improvement through March, April, May, and even getting an early read on June, July, August, gives us a lot of confidence in that curve continuing to bend. And we look at it again, looking at delinquency, looking at flow to loss and actually looking at loss development as we look across these vintages.
So we totally hear you on the point, inflation is definitely a factor. But again, our kind of more granular analysis gives us a lot of comfort that, one, we boxed the issue to the second half of 2022, and that the 2023 vintages show great improvement and -- great improvement as you look month-to-month and also gives us confidence in terms of our overall outlook around our retail auto NCOs .
Terrific. That's a very helpful answer. .
One moment for our next question, please. It comes from the line of John Hecht with Jefferies.
Good luck with everything J.B., definitely enjoyed working with you. Just with respect to NIM this year, how do we think about the yield side? I mean, you guys have obviously done a -- you have been very effective at increasing the new loan yields. How much more is there to go on that front given rate stabilization in the macro and mix shift?
Yes. Look, I mean, Fourth quarter yield expanded again to 10.8%, giving us 10.69% over the course of the year, a great outcome. And remember, that's an outcome where we've ramped up our concentration [indiscernible]. And so we've moved up credit at the same time that we've moved up pricing. We've shown overall a 95% beta on the way up in terms of rates that's really helped and supported us.
Now as we think about the outlook for auto, I would say, I think we've got a couple of natural advantages. Number one, we just see a tremendous amount of application volume, and that gives us a lot of information and a lot of flexibility with our dealers in terms of how we have the ability to move up or down and how we have the ability to use pricing as a lever. That's a competitive advantage that I think is unique to Ally, just given the scale we have and the depth of our relationships with dealers and it gives us a lot of confidence in our ability to optimize our yield and on a risk-adjusted basis in order to preserve our yield going forward.
At this point, I don't think we expect our yield to continue to rise, but we do expect that we can basically use credit and pricing to maintain yield as we move through 2024.
Maybe 1 to add on there is, though, obviously, new originations continue to come on higher than the overall portfolio yield. So you've got this nice natural tail that's going to show itself. So you would expect the overall portfolio yield to continue increasing for the next several quarters.
Yes, yes. That's right. When I talk about yield, I was really focused on the origination yield, maintaining near the level where it is today. But obviously, in the portfolio side, that is a natural tailwind. Also on the portfolio side, we do have some benefit from again, ongoing retail auto originations, credit card, corporate finance at the same time that we see securities and mortgage with obviously lower yields rolling off. .
Okay. Great. Very helpful. And then a follow-up question, Russ. -- peaking charge-offs from the '22 vintage first half of this year and then maybe some stabilization or favorable movements and losses as we move from there. How do we think about the ALL over the course? Is it stable? Or do you move it up a little bit due to the peak charge-off cycle and then it starts to recede, how do we think about the trajectory there?
Look, there are a lot of factors that go into the ALL. We have a pretty thorough process. And we're looking at the macro environment, so there are a whole set of macro assumptions that go into that. I think as I mentioned during the call, some of those built in a natural conservatism in terms of our expectations for the progression of unemployment rates in the near term. And then we also factor in a mean reversion factor. So in our models, we have unemployment kind of mean reverting to 6% over the medium term. And so a lot of factors that go into that ALL, hard to comment on the outlook for that going forward, but I think our general expectation is to assume it's kind of flattish.
That's all the time we have for today, folks. So if you have any additional questions, as always, please feel free to reach out to Investor Relations. Thank you for joining us this morning. That concludes today's call.
Thank you, everybody, and you may now disconnect.