Good day, and thank you for standing by. Welcome to the Ally fourth quarter and full year 2021 earnings conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today, Daniel Eller, Head of Investor Relations. Please go ahead.
Thank you, Gigi, and welcome everyone to Ally Financial's fourth quarter and full year 2021 earnings call. This morning, we have our CEO, Jeff Brown, and our CFO, Jenn LaClair, to review Ally's results before taking questions. I'll note the presentation we'll reference on today's call can be found on the investor relations section of our website, ally.com. Forward-looking statements and risk factor language governing today's call can be found on slide 2. GAAP and non-GAAP or core measures pertaining to our operating performance and capital results are on slides three and four. These metrics are supplemental to and not a substitute for U.S. GAAP measures. Definitions and reconciliations can be found in the appendix. With that, I'll hand the call over to JB.
Thank you, Daniel. Good morning, everyone, and thank you for joining our call today to review fourth quarter, and full year 2021 results. I'll begin on slide number five. Ally generated outstanding results in 2021. I'm incredibly proud of the efforts and dedication of our more than 10,000 teammates who delivered yet another year of innovation and focused execution. Over the past two years, we've experienced a profound shift in consumer demand and expectations for seamless digital-first banking products in response to COVID-related challenges and advancements in technology. Ally has leveraged these broad-based secular trends to strengthen our position as a disruptive growth company guided by a winning formula to do it right for our customers, employees, and communities.
Full year adjusted EPS of $8.61, core ROTCE of 24.3%, and revenues of $8.4 billion represented record-setting results and evidence of the leading auto, insurance, and digital bank platforms we built. Momentum generated across our businesses positions us well to continue unlocking franchise value in the years ahead. Our recent acquisition of Fair Square, the latest digital-first capability we've added to our product suite, will further enhance our trajectory. We closed the transaction in December ahead of schedule and are well underway with integration. Looking at auto results, our dealer network expanded for the 12th straight year in 2021, generating $46.3 billion of originations, our highest level since the early 2000s, sourced from a record 13 million decision applications.
This was our fourth consecutive year of origination yields above 7%, demonstrating our strong competitive position, disciplined underwriting, and leading dealer and customer service capabilities. Credit losses remained benign with 31 basis points of full-year retail auto net charge-offs. Our leadership position within the auto ecosystem is clear across these metrics, affirming the strength of our team and the success of our multi-pronged strategy to broaden the dealer network and generate solid volumes at accretive risk-adjusted returns. The strength and agility of our business model in a wide variety of operating environments is evident in our performance over the past two years as we've successfully responded to strong consumer demand, high used vehicle values, and reduced inventories. We've earned our market-leading position by driving customer value over the long term, and we remain focused on achieving continued success as we navigate change in the years ahead.
Across our consumer and commercial portfolios, credit remains very strong, supported by robust job prospects, ongoing wage expansion, and the strongest customer balance sheets observed in decades, all of which help mitigate inflationary dynamics. While the pace of credit normalization remains up for debate, we've taken a balanced approach in our reserve process under a view that normalization will occur gradually over the next two years. We proactively enhance the use of advanced data, automation, and digital tools, increasing customer engagement and strengthening our ability to mitigate losses. Between 40% and 70% of our auto customer interactions occur digitally each month, increasing speed and effectiveness while creating a strong customer experience. Within insurance, our compelling value proposition for dealers, and consumers is evident in written premium volume of $1.2 billion for 2021 as we expanded dealers and customers.
Our investment portfolio grew to $6.5 billion, the highest level since becoming a publicly traded company, reflecting years of steady reinvestment growth. Turning to Ally Bank. Growth accelerated again this year, aligned with the increasing momentum toward a digital-first world. As the leading all digital and customer-centric bank, we've established a scalable platform differentiated by the personalized, seamless, modern banking products we're delivering. We generated our thirteenth consecutive year of customer and balance growth as our customer base expanded 10%, while total deposits grew to 89% of funding. Within our digital-first consumer offerings, Ally Home originations of $10.4 billion were more than double the prior year level. Ally Invest customer assets exceeded $17 billion as self-directed, and robo accounts grew to 506,000.
Ally Lending volume of $1.2 billion more than doubled and was powered by a 37% increase in merchant relationships across our healthcare and home improvement verticals. Fair Square balances closed the year at $953 million, an increase of 25% since announcing the acquisition in October and 66% year-over-year, reflecting strong customer acquisition, consumer spending trends and the scalability of the Fair Square approach. Within Corporate Finance, HFI balances of $7.8 billion grew nearly 30% year-over-year through a combination of increased new loans and normalizing drawdown activity among our clients. The CF portfolio, including unfunded commitments, now stands at $12.7 billion, which highlights the success we've had in growing this business.
As a result of our strong financial position, we were pleased to recently announce a $2 billion buyback authorization program for full year 2022 and a 20% dividend increase to $0.30 per share. As we turn to slide number six, I'll reiterate the view I've shared on many occasions regarding the link between values and results. I'm confident our record-setting performance and ongoing momentum are directly tied to the clear focus and prioritization of our customers, employees, and communities. Maintaining an authentic and inclusive culture has been a top priority for me during my tenure as CEO. Ally took several actions over the past year aligned with our Do It Right approach. For our customers, we've actively enhanced products, interfaces and service capabilities utilizing advanced tech and data innovations, which Jen will provide more detail on.
We took the key step of adding a credit card product to our suite of digital-first offerings, and we're proud to lead the industry in eliminating overdraft fees, leading to Bank On National Account certification from the Cities for Financial Empowerment Fund. For our Ally teammates, we increased Ally's minimum wage to $20 per hour while we announced the third annual grant of company stock to all employees and expanded health and family benefit programs. We were honored to be named among the best places to work at Forbes, DiversityInc and numerous other publications, and received another perfect corporate equality score from the Human Rights Campaign. Over 40% of our workforce voluntarily participates in one of our employee resource groups, a key element of how we're driving a stronger sense of belonging and engagement across our teams.
Our deliberate actions to treat people as people and create an inclusive workplace have the added benefit of acting as a powerful retention tool. Within our communities, we marked our 10th year of the employee-led Giving Back campaign, donating 24,000 hours of time to worthy causes. We hosted our 3rd annual Moguls in the Making student competition in partnership with several HBCUs and marked the 1st full year for the Ally Charitable Foundation actions, donating $15 million of combined employee and company contributions to community, social, and educational causes. On the ESG front, we announced Ally achieved carbon neutrality and officially established an environmental sustainability office. Taken in isolation, any one of these actions would represent a significant milestone. When taken together, these actions provide clear evidence of what can be achieved when purpose, creativity, and dedication come together under a shared vision. Moving to slide seven.
I wanted to spend a few moments summarizing the strategic evolution we've delivered before handing it over to Jen to walk through the details. Over the years, we've built resilient platforms through constant expansion and evolution of our customer-centric offerings. We challenge ourselves each day to look around corners and embrace disruptive forces on behalf of our clients and customers to proactively manage risks and deliver financial solutions that anticipate their needs in a seamless, differentiated manner. While performance was exceptional in 2021, the opportunities we built for growth in 2022 and beyond are what I'm most excited about, including continued momentum across our leading customer-centric businesses, delivering diversified and durable earnings and disciplined capital management. These priorities have positioned us to deliver long-term growth and sustain higher returns, as seen in our track record of delivering or exceeding the financial guidance we've provided over the past several years.
We continue to focus on deepening customer relationships through digital capabilities that combine leading award-winning products with integrated, stable, and secure bank platforms. We've got a really powerful model and considerable financial strengths. The future is bright, and you can be assured we will keep delivering. With that, I'll turn the call over to Jen to provide perspectives on our progress and review our detailed financial results.
Thank you, JB, and good morning, everyone. I'd like to start by expressing my gratitude for our dedicated Ally workforce who powered our growing momentum over the past several years and drove exceptional results in 2021. Before diving into the fourth quarter details, I'll review Ally's multi-year strategic and financial transformation, including the drivers behind our steady execution and strong performance. Beginning on slide eight, we've included a view of our comprehensive and expanded product suite, reflecting the many capabilities we've added since 2014. We provide a broad range of integrated and sophisticated offerings built for, and around our consumer and commercial clients. Turning to slide nine, we're constantly evolving and adapting our capabilities, innovating through tech and data-driven approaches.
With each new product launch, redesign, or enhancement, we apply our deeply rooted expertise and disruptive DNA to create unique, safe, and innovative solutions for a broad range of financing and banking needs. Our customer-centric approach focused on delivering compelling value, fuels growth, creates opportunities for relationship deepening, and diversifies Ally's balance sheet and earnings. Ally's compelling growth trajectory and the customer-oriented awards we've amassed over the years serve as a testament to the effectiveness of our approach. Turning to slide 10, customers using an Ally product now stand at 10.5 million across our platforms, expanding 52% since 2014. Ally Bank customers have more than quadrupled over this timeframe as we've evolved our capabilities and successfully expanded multi-product relationships shown on the bottom left.
In auto, we've added nearly 5,500 dealers as part of our multi-year effort to broaden the funnel and increase dealer engagement. This strategy has culminated in a 40+% increase in application volume, driving strong originations and risk-adjusted returns. Robust product expansion and customer growth have translated to improved balance sheet and earnings covered over the next few pages. Turning to slide 11, our balance sheet transformation reflects two key dynamics. First, the diversification of our asset base, which has grown by $31 billion or 20% since 2014. Over this timeframe, we've generated $23 billion or a five-fold increase in Ally Bank consumer and commercial product balances. Thirteen billion of consumer auto balances, helping to mitigate the pandemic-driven floor plan declines, and nearly fourteen billion in accretive capital-efficient investment securities.
The second driver of our optimization can be found within net interest margin shown on the bottom of the page, where disciplined asset pricing, deposit growth, and active liability management have increased asset yields and improved funding costs. Auto pricing has remained above 7% for 4 consecutive years, while floating rate commercial and unsecured products are positioned for further growth and accretion as rates rise. On the funding side, we've more than doubled stable, sticky deposits since 2014 while retiring $24 billion of legacy unsecured debt with a weighted average coupon of over 5%. These actions drove structurally lower funding costs throughout the prevailing low-rate environment and have enhanced our ability to control liability costs. In the years ahead, we expect our balance sheet to drive an upper 3% margin as assets steadily migrate towards $200 billion.
Structural enhancements across both sides of our balance sheet drove strong performance over the past two years and position us well for a variety of rate and economic environments moving forward. Turning to Slide 12, Ally's core PPNR has more than doubled since 2014, generating nearly $4.3 billion in 2021, our highest level. Our outlook for annual PPNR expansion will be revenue-driven as we continue to prudently invest in customer capabilities, technology, talent, and brand. In the bottom left, total revenues of $8.4 billion represented record-setting net financing revenue and other revenue, reflecting diversified sources of income, and our ability to capture tailwinds in real time. In the bottom right, Ally's adjusted efficiency ratio, which as a reminder excludes insurance, reached the lowest level since becoming a publicly traded company as we remain diligent in investment and expense management. Moving to Slide 13.
Our disciplined and rigorous risk management approach has driven consistently strong credit outcomes. Consolidated Net Charge-Offs have remained below 1%, while retail auto losses have outperformed our 1.4%-1.6% guidance in six of the seven past years. These trends reflect the high quality, high utility of our loan and lease products, consistent, disciplined underwriting capabilities, modernized collection and servicing practices, and more recently, tailwinds associated with stimulus and historically strong collateral values. As JB mentioned earlier, we expect credit to steadily normalize through 2023, which our reserve levels accommodate. Risk management is a key pillar within our strategic plan as we apply deep experience, extensive data, and sophisticated approaches in our assessment, pricing, and servicing across our balance sheet. Turning to Slide 14.
Our diligent focus on accretive capital deployment is reflected in our expanding returns and over 70% increase in tangible book value per share. Our capital strategy remains focused on long-term value creation, evident in our robust growth trajectory, both organic and inorganic, as we've executed opportunistic tuck-in acquisitions to augment capabilities. This disciplined approach has resulted in $16 billion of RWA expansion, even while we've returned $6.5 billion in excess capital to shareholders through buybacks and dividends. Current CET1 levels remain well above our internal and regulatory targets, a testament to our approach and the strength of our position moving forward. Now let's turn to Slide 15 to review detailed results for the quarter. Net financing revenue excluding OID of $1.66 billion grew 27% year-over-year, representing our highest quarterly result.
Adjusted other revenue of $533 million reflected solid investment gains and growing momentum across our diversified product offerings. Provision expense of $210 million included the day one reserve build of $97 million associated with closing Fair Square and the seasonal rise in NCOs, even as loss frequency and severity trends demonstrate continued strength. Non-interest expense of $1.1 billion was driven by actions highlighted over the past, including variable costs across our businesses from customer and revenue growth, investments in our brand, security and tech capabilities, and purposeful investment in our workforce and benefits, allowing us to drive employee engagement in the top 10% of all companies, a critical advantage for us as we navigate competitive labor markets.
GAAP and adjusted EPS for the quarter were $1.79 and $2.02 respectively, both of which include $0.09 related to a state-specific tax item and one month of Fair Square results. Moving to Slide 16. Net interest margin excluding OID was 3.82%, 90 basis points higher than prior year and our sixth consecutive quarter of expansion. Earning asset yields of 4.75% grew quarter-over-quarter as we redeployed low-earning cash into higher-yielding loans and investment securities. Average earning assets grew to $172.9 billion, ending balances increased by over $6 billion, representing our strongest linked-quarter growth in over five years, with all loan balances increasing. Turning to liabilities, cost of funds improved 8 basis points, the tenth consecutive linked-quarter decline.
Ally continues to remain well-positioned for a variety of rate environments as we've cultivated strong customer loyalty and engagement through our expanded suite of digitally-based products. We've strengthened pricing and data on both sides of the balance sheet, and tactically utilized hedging strategies to bolster our overall asset sensitivity and NIM positions. Turning to Slide 17. CET1 of 10.3% reflected risk-weighted asset growth, including $3.5 billion of floor plan balance increases and the impact of closing Fair Square, which taken together represented 75 basis points of capital consumption. Despite these impacts, CET1 remains $1.9 billion above our internal target. We recently announced our second consecutive $2 billion buyback authorization and a 20% increase in our common dividend to $0.30 per share.
Since the inception of our capital program in 2016, we've reduced shares outstanding by 30% while increasing our dividend 7x . The quality of our capital position has improved as we've leveraged our investment-grade rating and proactive liability management to bolster liquidity, funding, and our financial profile. On slide 18, asset quality remained strong throughout Q4 as consumer and commercial losses remained historically low. In the upper left, consolidated net charge-offs of 35 basis points were nearly half prior year and 60% below 2019. Retail auto trends, shown on the bottom, reflected solid customer payment trends and improved loss-given default rates supported by strong collateral values. Early and late-stage delinquency trends reflected seasonal activity remaining well below prior year and 2019 levels, an encouraging signal heading into 2022.
On slide 19, consolidated coverage of 2.67% reflected growth across our retail auto, point-of-sale, and mortgage portfolios, plus the addition of reserves for Fair Square. Retail auto coverage of 3.54% moved lower quarter-over-quarter by 8 basis points as trends continued to improve across consumer health and macroeconomic measures. Blue Chip forecasts indicate unemployment levels will remain at approximately 4%. As a reminder, under our CECL reserve approach, we incorporate this outlook for full employment into our 12-month reasonable and supportable period before migrating to the historic mean of 6.5% by month 36. This methodology reflects the prudent approach we've adopted under CECL to manage uncertainty, minimize volatility, and maximize transparency. Turning to slide 20, retail deposits ended at $134.7 billion.
Q4 increased $3.1 billion, representing our 6th straight year of growth at or above $10 billion. New and existing customers continue to drive our performance, reflecting our compelling products and their desire to keep their money and grow their balances with us. We generated our 51st consecutive quarter of customer growth, adding 226,000 in 2021, while retention remains industry-leading at 96% as we launched our largest brand campaign to date during Q4. On the bottom right, customer demographics show the compelling opportunity we have to deepen relationships as nearly 70% of new customers are from younger generations early in their financial journey, and with a high propensity for digital engagement. Turning to slide 21, our expanded product suite positions us for ongoing growth. We've generated six years of multi-product relationship deepening that continues to accelerate across all products.
We've leveraged our large and growing depositors to build scale within each of these offerings, and we've seen a steady increase in growth from customers who are new to Ally altogether. These trends reinforce the momentum of our brand and the relevance and quality of our diversified digital platforms. Moving to slide 22, Auto segment pre-tax income of $839 million reflects our adaptable leading business model. Revenue growth reflects the multi-year optimization of consumer and commercial lending strategies, in addition to tailwinds from strong credit and elevated used car values. We included retail portfolio trends in the bottom left, where origination yields remained above 7% again in 2021, which we expect to continue as we generate over $40 billion of volume annually moving forward.
On the bottom right, lease activity reflects the impact of record used car values and elevated lessee and dealer buyout activity, which tempered realized gains in 2021. Within our financial outlook, we assume steady normalization of these trends, providing us yet another opportunity to demonstrate our ability to effectively navigate changes within the auto ecosystem. Within our financial outlook for revenues and credit, we've embedded an assumption for used values to decline by 15%-20% cumulatively by the end of 2023, even as recent trends indicate ongoing resilience. Execution within auto reflects our diversified full spectrum capabilities, expanded market reach, experienced underwriting, and increased use of technology. Turning to slide 23, our agile, adaptable platform enables us to source strong volume across a variety of environments.
In the upper left, we generated $46 billion of origination volume in 2021, sourced from our network of over 21,000 dealers. Ending consumer assets expanded to $89 billion, shown in the upper right, reflecting retail and lease portfolio growth, while ending commercial balances grew for the first time in five quarters, ending at $16 billion. This was driven by a 15% rebound in industry inventories, a modest but positive trend occurring ahead of our expectation for growth later this year. Q4 auto originations of $10.9 billion represented our highest fourth quarter since 2004, while we've maintained a disciplined underwriting approach. Turning to our insurance segment on slide 24. Core pre-tax income of $67 million reflected investment gain activity modestly below prior quarter results, but well above historic levels.
In the bottom left, the $6.5 billion investment portfolio continues to add revenue generating capabilities, enhancing segment and consolidated returns. Total written premiums of $268 million resulted in $1.2 billion of full-year written premiums, our fourth consecutive year above $1 billion. Overall, we are pleased with the resilient counter-cyclic value of our insurance business and remain focused on more fully leveraging our large dealer network for future growth. Moving to slide 25. Corporate Finance core income of $75 million reflected revenue growth from meaningful year-over-year asset growth, strong investment and syndication income, and solid credit trends. HFI balances ended at $7.8 billion, the highest level on record for Ally, while unfunded commitments of $4.9 billion position us for ongoing expansion. Our portfolio is comprised of high quality, diversified loans built through steady, deliberate execution across our experienced team.
We remain confident in the continued disciplined growth of this business moving forward. Mortgage details are on slide 26, where pre-tax income remained relatively stable during the quarter as asset growth helped to mitigate normalizing gain on sale margins and persistently elevated prepayment trends. Ally Home originated $2.9 billion in direct-to-consumer volume in Q4, exceeding $10 billion for our full year 2021, well ahead of schedule. Having steadily grown our national reach over the past two years, we've improved our opportunity to generate strong volume as we prioritize attractive returns. A wrap up on slide 27 with our financial outlook. We've consistently demonstrated earnings expansion and improved returns through several years of execution. Our clear vision, priorities, and strategy have positioned Ally to continue generating meaningful and sustained value in the years ahead.
We expect ROTCE of 16%-18%+ over the medium term, defined as the next two to three years and beyond, as we further leverage our leading businesses and high-quality balance sheets to drive financial performance. Notably, while our return targets do not depend on uniquely strong macroeconomic trends or pockets of transitory dynamics, we will remain opportunistic, capturing upside beyond these ranges. Results will be fueled by revenue-driven PPNR expansion derived from an upper 3% NIM profile and diversified revenue generation among our established and broadened consumer offerings. We've included several of the key variables and assumptions embedded within our forecast, including benchmark interest rates, credit expectations, and used vehicle value trends.
Based on the balanced approach we've taken in our outlook and the strong momentum across all our businesses, I am confident in our ability to consistently generate profitable growth, enhance book value, and sustained returns. With that, I'll turn it back to J.B.
Thank you so much, Jen. I'll close with just a few comments on slide number 28. Our purpose and cause will remain centered on our customers, employees, and communities. We build a profitable, compelling growth company by meeting customer needs through differentiated products and services. Ally has pivoted to an exciting era of growth. The dedication of our 10,000 plus Ally teammates fuels my confidence in the ability we have to drive an even brighter future. With that, Daniel, back to you and head into Q&A.
Thanks, J.B. As we head into Q&A, I'll ask participants to limit yourself to one question and one follow-up. Operator, you can go ahead and tee up the first question.
As a reminder, to ask a question, you will need to press star one on your telephone. To withdraw your question, press the pound key. Our first question comes from the line of Ryan Nash from Goldman Sachs. Your line is now open.
Hey, good morning, J.B. Good morning, Jen.
Hey, Ryan.
Hi, Ryan.
J.B., you know, you outlined in the slides 16%-18%+ returns in 2022. In the medium term, I think Jen said 2-3 years and beyond. I wanted to maybe focus on the plus. Can you maybe just talk about, you know, some of the assumptions that are underlying, maybe give us a little bit more color and maybe what are some of the sources of upside that we could see over the next one to two years that are not baked into the 16-18?
Jen, you want to take it or, I mean, I'll start with Ryan, and then Jen can go through the details. Obviously, I mean, you look at our levels of reserves relative to the levels of loss expectations, and I think our guidance on credit. I think you see we've taken a very pragmatic and gradual normalization to credit, but that would certainly be a big one. And then obviously, you know, used car prices, I think as Jen has guided, we see them within our financial plan as moderating. I think if you look at current trends, you look at the environment, I mean, used car prices are still really strong. As Jen pointed out, we are seeing some very modest uptick in inventory levels.
I, you know, our outlook. I think this year is a really robust used car market. I mean, those are a couple. Jen's obviously got all the details behind it, but we feel really good about the outlook.
Yeah, J.B., I think you nailed it. The only thing I would add is just around gains. In our insurance portfolio, we've been able to optimize our equity market activity and drive upside gains. That potentially, Ryan, could be another area of upside. I think you're asking the right question. I think there's an asymmetric you know bias here towards outperforming the 16%-18%+, and it's path of NCOs, reserves, it's used vehicle pricing that J.B. hit on, plus our ability to generate gains.
Got it. Jen, you know, if I could just dig into the expectations for the upper threes net interest margin, can you maybe just flesh out some of the assumptions that are underlying this in terms of, you know, your assumptions on rates, you know, your ability to drive price in the loan book? I guess more importantly, you know, what are the expectations over that timeframe for deposit betas just given, you know, you guys have obviously done a great job building the liquidity on the balance sheet, and I'm wondering, you know, can we end up seeing you exceed prior cycles just given all the work that you guys have done on the deposit side? Thanks.
Yeah, sure, I'll start first on the yields and then go to liabilities. On asset yields, you know, 90%+ of our retail auto portfolio was originated at 7%+ yields. We are expecting, Ryan, to continue to see retail auto yields continue to migrate up towards that 7%+. If rates continue to increase as we're expecting, that could potentially go even higher. We also have floating rate assets as we're growing floor plan. You know, J.B. mentioned we're starting to see some increases in floor plan. Those are floating rate assets. They would migrate higher as rates increase. We've increased our asset sensitivity just through the pay-fixed hedging activity, kind of maxed out our hedging, which will also give us some tailwind.
You know, net-net, when we wrap this all up, plus Fair Square, Ally Lending, we see a really robust trajectory ahead on asset yields, in particular if we see rising rates. On the liability side, both mix and deposits will help us. We have a much healthier liability stack having run off expensive high-cost unsecured debt. Our deposit levels are 89% of funding. When you look at the value we're providing to our customers based on products, our digital platform, and the fact that we're core funded now, we do think, Ryan, to your question specifically around deposit pricing, that overall, rates paid will be lower in this next rising rate cycle.
You know, you wrap it all up in the first couple of pages, the transformation we've led, the product capability expansion and the asset side, the transformation of our funding profile. It positions us so well to hit that upper 3% NIM, you know, irrespective of the rate environment, and to your question, gives us opportunity to outperform as well.
Thanks. Taking my questions.
Yep.
Thanks, Ryan.
Thanks, Ryan.
Thank you. Our next question goes to the line with Bill Carcache from Wolfe Research. Your line is now open.
Thank you. Good morning, J.B. and Jen.
Hi, Bill.
Hey, Bill.
Can you discuss the trajectory that you're expecting for NIM, particularly in light of changes in Fed funds and all the moving parts? You know, the guidance on the slide is super helpful, but maybe just a little bit of color on directionally, should we be expecting 2023 NIM to be normalizing, higher or lower versus 2022?
Yeah, sure. Bill, I'll jump in here. We've been guiding towards NIM expansion now for years. If you take a step back, this has been a guide irrespective of the rate trajectory, and it's all the things I just described to Ryan around the transformation of our asset side and balance sheet as well as our liability stack. Bill, we are expecting NIM to expand irrespective of rates. That said, in a rising rate environment, we do think that there's an accelerated opportunity to expand earning asset yields.
Just walk through some of the drivers there around floating rate assets, growing floor plan at the right time, adding, you know, short duration asset sensitive assets like Ally Lending and Fair Square, that will all give us growing momentum in a rising rate environment to continue to see earning asset yield expansion. Then on the liability side, the healthier stack we have, plus the fact that we're so well-positioned from customer brand engagement, digital capabilities, we do think that we'll be able to hold funding costs much better in this rate environment or rising rate environment than the last one. That'll fuel that trajectory into 2022 and allow us to sustain it into 2023 and beyond.
That's some of the dynamics there, Bill, and hopefully that helps to answer your question.
Yeah.
But this-
Yeah.
This is not a rate-driven NIM expansion. This is all about structural improvements and transformation.
Got it. That's helpful. Separately as a follow-up, can you speak to the trajectory of the reserve rate and how you're thinking about growth math dynamics as you grow the card business? The fact that you're starting off the year above your day one level should help dampen those headwinds. You know, sort of tacking onto that, as the card business grows, given sort of that's a higher loss content business, should there be some expectation that at some point you would raise your capital, you know, target capital expectations? If you could just touch on that. Thank you.
Yeah, sure. On the overall reserve, it's largely driven by Retail Auto, so let me start there, and I'll go to some of the smaller portfolios. Retail Auto right now is at 354. Day one was at 334, so we're running, you know, 20 basis points ahead of day one. I think that, you know, to JB's point in his prepared remarks, really helps us to manage through any kind of economic cycle that we could see ahead. You know, if you look at the path of normalization or past history, we would expect over time as NCOs normalize that rate would come down from the 354 somewhere closer to that 334. I think if anything, Bill, that gives us some tailwinds heading into 2022 and 2023.
on some of the newer products that, you know, will have higher coverage levels, I think we're very well reserved there. Fair Square, we just put on at a 12% coverage ratio. Ally Lending's close to that. I think we're just in a really good spot there, not gonna drive upside, but we'll be growing that and the mix may change a slightly higher consolidated level. you know, if you wrap it all up with Retail Auto being as big as it is with as high a reserve coverage level, from a consolidated perspective, that should come down over time. on our capital target, look, we feel that we are very well positioned.
You know, we are adding some new portfolios with Fair Square and Ally Lending, but they're, you know, about $2 billion today, and we'll grow to $2-$4 billion from here, but it's not a big enough percent of our portfolio to really revisit the 9% target. Then also keep in mind, we're holding 9% against a floor plan balance that is relatively risk-free. We feel really good, Bill, about our 9% CET1 target.
That's very helpful. Thank you for taking my questions.
Thank you. Of course.
Thank you. Our next question comes from the line of Betsy Graseck from Morgan Stanley. Your line is now open.
Hi, good morning.
Hey, good morning, Betsy.
Couple of questions here. First, as we're thinking about the Fair Square integration getting behind you, can you give us a sense as to the timing and the size that you're going to be thinking about in terms of expanding that portfolio and what the levers are to affecting that?
Yeah, sure. So we're at about $950 million in balances today. You know, we see a path medium-term to $2 billion-$3 billion, Betsy. You know, I think if anything, they've shown an ability to really accelerate both customer growth and balance sheet growth. Both are up over 60% year-over-year, and the balances are running 25% ahead of just the projections that we shared with you in October. They're seeing a really robust growth trajectory. We're right now seeing kind of a path to $2 billion-$3 billion, but we'll continue to monitor and take it from there.
That's obviously. Sorry, go ahead.
I mean, it's just very compelling customer segment and product focus that is allowing them to continue to grow. You know, I would just point out that they grew during one of the toughest credit card markets, kind of in history as we navigated COVID.
That piece of the portfolio expanding clearly net positive to NIM. Floor plan, you know, is a little bit of a lower NIM contributor. I know in the past you've talked about funding that via securities to help keep the NIM moving higher. How much room is there in that piece of securities shift into floor plan? I'm asking the question from the context of, you know, your guide for upper three NIM. You know, what keeps you from, you know, seeing that guide move into low fours as these piece parts are, you know, coming through here?
Yeah, sure. Betsy, we obviously have upside from floor plan, and it's on a couple different dimensions. One is it's a floating rate asset, so as short-term rates increase, that will naturally migrate the yield up. Second, to your point on funding, we're reallocating cash into floor plan. That gives us another tailwind from a mix perspective. As I mentioned earlier in response to Ryan's question, there's a lot of opportunity for earning asset yield to continue to migrate higher. Plus the fact that we think we're very well positioned to manage liability costs down. There is an opportunity to go to that 4%+. It's just we try to provide balanced guidance as we look forward, but certainly there's upside opportunity there.
Separately on the outlook here for used car values, which does, you know, feed into a couple of parts of the income statement. How should we think about what you've got here, the modeling 15%+ decline by year-end 2023? Like, how did you get to that assessment in the guide? What kind of pace are you thinking about that coming through the model?
Yeah, sure. Let me hit on model and then reality. We've modeled a straight line reduction from 2021 to 2023, down 15%-20%. You know, I think if we look at the pace of used vehicle values that continues to increase. The reality is there's probably upside to that. Again, we're trying to give you kind of a run rate view of returns, and we'll be opportunistic around upside as we were certainly in 2021 here. The model just assumes kind of straight line reduction there. You know, another factor I'd call your attention to because there's so much focus on used vehicle values. As we exited 2021, the lessee buyout and the dealer buyouts was increasing to, you know, 60%, 70%, 80%.
That's muted our ability to harvest gains, and it lowers the year-over-year comp as we head into 2022. Just keep that in mind. It's not quite as big a fallout as I think some folks are modeling at this point in time. Then the last thing I'd say on used vehicle values is we do have natural hedges just as we had a hedge with floor plan coming down, used vehicle values going up and impacting lease yields positively. We have the hedge on the reverse, right? As lease yields come down, we'll see floor plan growing, and you get all the great dynamics around putting cash to work, floating rate asset increasing. Just keep that in mind that there's positive hedges as used vehicle values come down just like there was as they went up.
Got it. Thanks, Jen. Thanks, J.B.
Yeah. Thank you, Betsy.
Thanks, Betsy.
Thank you. Our next question comes from the line of Moshe A. Orenbuch from CS. Your line is now open.
Great. Thanks. Thanks very much. You had, and you alluded to this in the opening comments, but you've got kind of better loan growth than you've had in a while, both you've got you know reasonable growth in you know in retail auto and then kind of growth across the portfolios. Could you talk about how that is likely to trend over the next year or two? Then I've got a follow-up. Thanks.
Yeah, sure, Moshe. I mentioned assets getting to $200 billion in our medium term, and that's driven by all the portfolios you just mentioned. I mean, retail auto we were originating at mid $30 billion. We hit $46.3 billion this year. We're guiding towards low $40 billion. As we continue to see opportunities to originate at a higher level, that will obviously take our retail portfolio higher. Also seeing strong growth in lease as well. Floor plans obviously come back. We saw it kind of drop in September and steady growth from there. I think it'll be a little choppy from here on out. We'll see. Definitely opportunities in floor plan to come back.
The unsecured capabilities that we've recently added with Ally Lending, with Fair Square, and each of those portfolios could get to $2 billion-$3 billion over time. Last but not least, we've seen really nice opportunities to originate in mortgage. We pulled forward kind of our $10 billion target into this year, and we'll see how that plays out, but we really like our capabilities, and we've expanded into new markets, with mortgage systems and growth opportunities there. You know, floor plan continues to be a steady driver. Corporate Finance always tends to be a steady driver. We've talked about $8 billion-$10 billion in that portfolio.
We already hit $8 billion, I think well on our way to $10 billion as you look at the total opportunity in that segment. We'll put cash to work in securities as well. Really across the board, Moshe, we see really nice tailwinds and opportunities to grow in addition to the NIM expansion that we've been talking about this morning.
Great. Right. You know, your your medium term kind of forecast talks about PPNR expansion on an annual basis. One of the concerns that investors have had about financials after the reports of the big banks has been expense growth. You know, can you kind of talk about your your plans? Because obviously, you know, PPNR expansion means that your revenue's got to grow faster than expenses. But just talk about the plans for generating operating efficiencies and how you think about that, you know, particularly in light of the context, you know, of the remarks, J.B., that you made about, you know, minimum wage, you know, phasing that in and, you know, kind of how that will integrate into your plan over the next couple of years.
Yeah, sure. Moshe, just as a reminder, we don't manage kind of single line items point in time. We've been managing the company to drive accretive returns, and we've been investing in growth. What I shared with you in the first couple pages around continuing to invest in capabilities, grow customers, grow our balance sheet, grow returns, that is the focus of us, in general. We've been investing as a growth company. We've seen kind of mid-single digit expense growth over the last couple years. We'd expect to continue to see that. As we've demonstrated in the past, we're focused on positive operating leverage, PPNR expansion, robust return trajectory, and you should expect more of that to come from a PPNR as well as operating leverage perspective.
Now, I will note that with Fair Square coming in into 2022, we'll have one month of expenses rolling forward to 12 months. There's some nuances there. We do see positive operating leverage as we get into 2023. Definitely just some technical impacts this year from Fair Square. You know, you wrap it all up, a lot of focus on expenses. For us, it's really around growing our businesses and growing revenue. We saw revenue up 25% this year. We have a very robust trajectory as we head into 2023, 2022 and 2023. We'll keep investing, but leverage is front and center all the time.
Thanks so much.
Yeah. Thank you, Moshe.
Thank you. Our next question comes from the line of Sanjay Sakhrani from KBW. Your line is now open.
Thanks. Good morning. I guess I got a question on the retail auto yield. I mean, that's, I guess your expectations are that continues to remain strong. I'm just curious. I know a lot of it's been driven by mix inside of retail auto, but as we think about just maybe competitive forces coming back into play, how much of a factor do you think it plays into that yield going forward over the next couple of years?
Yeah, Sanjay, you know, it's the fourth year of putting strong origination flows on the books at 7%+ yields, and we're guiding towards similar performance as we head into 2022. It's simply a result of the growth in dealers, growth in dealer engagement, where we think we still have significant opportunity for expansion. It's the continued investment in our capabilities, including our SmartAuction platform insurance. We don't see any signs that that will slow down as we head into 2022 and beyond. You know, while competition is always intense, we aren't seeing that interrupt our flows or impact our performance whatsoever as we head into 2022 and beyond.
Sanjay, just, you know, obviously a reminder, number one lender in the prime space, one of the largest used lenders. To get that type of performance, you need to have significant scale, which is something we bring. You know, I think we're large, we're fast, the dealers like us. We've automated a lot of our risk-based decisions, so we respond very quickly. You know, yes, we recognize other players come and go, but I think the one thing what dealers appreciate about Ally is our stability, and that's been one of the big drivers why we continue to see a big uptick in origination flows and why Jen just guided even, you know, into the low $40 billion is pretty strong loan growth year-over-year.
No, absolutely. You guys have executed really well. I guess maybe another question on competition and that follows along some of the questions that Moshe was asking in terms of expenses. On the consumer lending side, that targeted growth that you expect for Fair Square, I mean, like, is that just more direct marketing, and therefore there shouldn't be a significant ramp-up in marketing spend? Because, you know, we've heard the big banks as well as some of the card issuers talk about ramping up expenses to get new accounts. I'm just curious sort of how you expect to go to market there, and do you expect some pressure on expenses as you build that business out? How does it factor into the growth that you're expecting?
Yeah. You know, I think Fair Square is a bit unique. It's similar to what JB just mentioned on auto. It's kind of a unique product for a unique market. They're originating in that prime space, which is not nearly as competitive as the super prime space. So the direct marketing that they've been doing has been highly effective as reflected in the 60% increase in customer accounts as well as the growth in the balance sheet. All of the expenses attached to that are in the really robust guidance I've provided, which is kind of immediately accretive from a ROTCE perspective. It'll be accretive from an EPS perspective by year-end this year, and it'll drive operating leverage as we head into 2023.
You can see that our investments are paying off from a growth and a profitability perspective. You know, I think if anything, we can turbocharge that growth by bringing them in inside the four walls of Ally and leveraging our existing customer base, Sanjay, which is not gonna require significant additions to our marketing spend.
How much of that is a factor? Like, is this cross-sell a big part of the growth expectation, or is that just a benefit?
Yeah.
The added benefit.
None of that, Sanjay, is built into any of the numbers that we shared. That'll be all upside. Again, it'll be driven by synergies across our platform much more so than increase in marketing spend.
Okay.
Sanjay, I mean, I would point out, though, that you know, sometimes cross-sell gets knocked, and the question of can you really do it? I think if you look at our growth in multi-product relationships, it shows we are actually one of the banks that's executing in that regard. While we don't necessarily have it embedded in the guidance, I think that's a clear focus point for us of how do we use you know, the cross-sell of a massive customer base. I mean, if you think of kind of another 9.5 million customers plus credit card, it's even bigger than that exists at Ally. That is an opportunity that we will go after.
Great. Thank you.
Thank you, Sanjay.
Our next question comes from the line of Arren Cyganovich from Citi. Your line is now open.
Thanks. Maybe not to stay on card for too much, but you know, it is kind of an exciting new area for you. What's the strategy for 2022? Are you gonna rebrand to Ally? Are you gonna go you know, upmarket a little bit? Or are you just gonna kind of let them operate under that Fair Square brand for the near term?
Yeah. Thank you, Arren. We agree it's an exciting opportunity, and the short answer here is we're gonna let them continue to execute the way they've been executing over the last five years. It's been a tremendous product growth story for them, and we don't wanna interrupt the execution on that front. In parallel, you know, we are looking to rebrand their cards. We will do so by year-end. And we do think that there's product expansion opportunities as we just talked about over time, but that's gonna be something we grow into as we think about the broader Ally customer ecosystem. Then last but not least, just a huge shout-out to that team. It's just been a tremendous experience bringing them on board.
They know what they're doing. They've got decades of experience in card, and we couldn't be more excited about the team, the products, the opportunity ahead in the card space.
Great. Just lastly, there's been, excuse me, a little bit of concern about credit in the personal installment loan space with a lot of new entrants into the market. You know, what are you seeing within Ally Lending on the credit side?
I mean, I would point to our performance, which has been robust. I think it's a rapidly growing market, so there's no surprise that there's new entrants in that space. We feel really well-positioned, especially in the verticals where we're focused. Home improvement, healthcare, are dominant areas for us. We've continued to be able to grow merchants in that space as well as originations and balances. You know, we're not surprised that there's some new entrants, but we feel really good about our products and our performance. Just as a reminder, we're not kind of BNPL, the pay-in-four product that's getting a lot of scrutiny across the industry, just in terms of consumer-oriented practices. This is a traditional installment product. We go through traditional credit underwriting.
We have robust credit risk management around this product, so feel great about the opportunity ahead.
Great. Thanks. Thanks, Jen, and to all the participants. That concludes today's calls. We're at the top of the hour here. Operator, you may now take us through the disconnect process.
This concludes today's conference. Thank you for participating. You may now disconnect.