Everyone, we'll start the next fireside chat session with Ally Financial, Russ Hutchinson, the relatively new CFO, but I feel like you're the face of the franchise. Russ, let's just start here at a very high level. You've been in the chair for about eight months now. Just talk about some of your biggest priorities that you have for 2024 and beyond.
Yeah, thanks, John. Thanks for having me here. Thanks, everyone, for giving us your attention for 30 minutes. I'm fully immersed in Ally's Do It Right culture at this point. It feels like I've been an ally forever. As many of you know, I spent a long time covering the company. I've known the management team for a number of years. And so it really does feel like I've been part of the Ally story for a long time. And you know, I'd say, look, we continue to focus on our culture. We're focused on our employees, our customers, our communities. As many of you know, we've been focused on execution. You know, that means our customers across our dealer franchise and our deposit franchise. It means managing our risks across credit and interest rates. And it means managing our resources.
You know, when I kind of tick through each of those things, you know, the strength of our dealer franchise and our deposit franchises really gives us a lot of confidence around the NIM expansion that we've been talking about the last few quarters. You know, when we think about managing our risk, that's obviously something that we focus very closely on. And we manage it across both how we think about credit risk as well as interest rate. We look at the risk across all the different portfolios that we have. You know, when we think about our resources, we think about both expenses and capital. You know, we took some actions late last year in terms of expenses, and we're seeing the benefits of that now.
You know, and similarly, in terms of capital, we've taken real actions in terms of just how we think about capital and how we allocate capital across our businesses. I'd say at this point we continue to focus on allocating capital towards our highest return businesses and, you know, highest return on a risk-adjusted basis. So I'd say that, you know, in a summary, those are kind of how I think about the priorities, my priorities, and also Ally's priorities over the foreseeable future.
Okay, great. I do have a number of prepared questions, but, as always in these sessions, if you do have questions, put your hand up and ask them. So CEO search. You know, you showed up in the chair. JB announced he was moving on. Doug is in the spot now. Can you give us a quick update in terms of how that search is progressing?
Yeah. So look, I'm not directly involved in the search. You know, I'd say our board is very focused on it. The search is ongoing. You know, I'd say I'm pleased. Our board is very focused on finding the right person for the job. And kind of the right person for the job is, you know, someone with the skill set, the capabilities, and the experience to continue to move us forward as a company. You know, it's a digital-first bank. And I think they're also focused on getting someone who's the right culture. You know, I referenced the do-it-right culture. That culture runs deep at Ally, and I think it's really important to us to find someone who's not just gonna carry the franchises forward, but also carry the culture forward.
I think the board has taken a lot of confidence having Doug in place and having this leadership team in place. You know, we're not stopping or pausing. We're gonna continue to move the franchise forward. We're gonna continue to advance the culture and give the board as much time as they need to find the right person.
Okay, great. You talked about the balance sheet in your earlier comments. That's one of the key topics here. You recently sold Ally Lending. You've done some other optimization, or you've talked about it, at least. Can you expand on this and give us some color in terms of how you see the balance sheet trending from here?
Yeah, that's a timely question. The Ally Lending sale closed on Friday, so on March first. And so with that, we deconsolidated over $2 billion of assets. 280 of our associates started the week working for Ally and ended the week working for Synchrony. And so, you know, when you think about our balance sheet post the sale of Ally Lending, it's relatively flat over the next couple of years. And underneath that, there's a lot of things moving around. And I'd say moving around, you know, for the positive in terms of improving the overall profitability of the company. You know, I'd say, you know, on the Auto side, we'll continue to see some modest growth both across the commercial side in terms of floor plan and inventory levels normalizing, as well as continued increasing in the size of the retail loan book.
You know, on the other side of that, you know, we'll continue to see our mortgage portfolio, our both loans and securities, continue to run off. You know, we'll see some growth in our corporate loan book and Corporate Finance. You know, and you know, in credit card, obviously, we're being very cautious there, just given some of the challenges in the industry on credit. But you'll see some minimal growth, you know, certainly over the course of this year. You know, and some very moderate growth, you know, over the course of the next couple of years in that portfolio as well. You know, all of that is basically a mixed migration towards our higher yielding, higher returning assets, and away from, you know, some of the lower yielding stuff. And so all good things from a balance sheet perspective.
Okay, good. It's a good segue into Auto. You had a good year in 2023, $40 billion in originations, 10.7% yields. Surprising to many investors. Just a really good year. Talk a little bit about competition in the Auto space today, how you're differentiating yourself, and what lies ahead.
Yeah, maybe I'll start with a differentiation point. You know, when we think about Auto, our message is pretty simple. We wanna help our dealers sell as many cars as possible. And so what really differentiates us is we ask our dealers to send us all their apps. You know, we wanna see as much application volume as possible. And, you know, we're coming off a year where we saw record application volume. And, you know, even early this year, early in the year this year, we continue to see record application volume. You know, I think, you know, part of the strength of our Auto franchise is just the tremendous scale that we have and the depth of the relationships with dealers. I mean, we're there to help make their businesses better. And we can support them across a broad range of credits.
You know, we support them through lending to them directly as dealers to support their inventories. We provide insurance on their floor plan, and we provide insurance products through their F&I offices. We also support them with our SmartAuction. And so our relationships in the industry and with our dealers is just, it's particularly deep. And I think that gives us a real advantage that helps us drive that application volume. And I think we sit here at a time now where the competitive environment is favorable to us. You know, a number of our competitors have either pulled back or exited entirely. You know, and it's no secret what's going on. They're facing a lot of the same pressures that we're facing. A lot of folks are on RWA diets.
And in that environment, they really have to focus on the businesses that are, you know, and the franchises that are absolutely most important to them. And so do we. And so, you know, you saw us make moves on our Ally Lending business. For us, Auto is the core. It is, you know, it is an incredibly important franchise for us. And so that's where we're directing our capital. But we're benefiting from an environment where others are pulling capital away from Auto. And, you know, I think that dynamic is gonna persist. You know, a number of our competitors have taken the hard step of exiting the sector entirely. And, as you know, it's hard to come back.
You know, with regulatory headwinds that are gonna continue with the impact of CECL, I think it just becomes even harder for folks to think about reentering or kind of rebuilding their franchise after pulling back hard. We've taken this opportunity to deepen our relationships with dealers, to really deepen the moat that exists around our franchise. And so I'd say, overall, I think we feel pretty good about the competitive environment. And, you know, I think we feel, we feel really great about, you know, our ability to really leverage our relationships.
Okay. Just following up on that, the pricing environment. I mean, a strong year. You had over 11% origination yields in the fourth quarter. What kind of expectations do you have for that going forward? And what kind of levers do you think you have?
Yeah, you know, look, I think the steady march up in our portfolio yield, and we've shown this in previous quarters where we show our portfolio yield, you know, kind of sitting in the fourth quarter about 9% marching up. Because, as you said, as we originate loans at higher yields, and, you know, last year we averaged 10.7% over the year. In fourth quarter, we were actually at 10.8% for the fourth quarter. As we continue to book new loans at those yields much higher than our portfolio yield, there's just a natural march up in terms of our portfolio yield. And we'd shown an illustration before where we show that march approaching 10% over the medium term. That's still very much intact. And so, you know, we feel pretty good about the pricing dynamic.
We feel even better given how we've actually moved up credit at the same time. And so if you look at the distribution across our various credit tiers, we're booking over 40% of our loans in what we call our S Tier, which is our top credit tier. You know, that would historically be more like 30%. And so we've simultaneously, you know, basically increased pricing at the same time that we've moved up credit. And, you know, I think that just puts us in a great position going forward. To the extent that, you know, as benchmark yields came down, we continued to see stabilization in the credit environment. It gives us flexibility to protect our yields by moving within that credit spectrum. We're in no rush to do that. And where we sit today, we don't see any reason why we'd need to.
But it's a lever that we've got to help us support these yields, you know, for the foreseeable future. So we feel pretty good about the pricing environment that we live in right now on the Auto side.
Okay, good. Other side of that, on deposit pricing. You've talked about starting to reprice downward. I think you've said you've done it, at least publicly, you've done it twice. Any update on deposit trends to start the year? And what are you thinking on the pricing strategy from here?
Yeah, we are delighted by where our deposit franchise is. You know, we've continued to see strong growth in balances so far this year. You know, last year, even with all the turmoil in the industry, we grew balances. We had a record year in terms of customer growth. And so we feel like we've got a lot of great momentum on our deposit business. You know, where we sit today, you know, we're really happy with it, particularly given, you know, you look at our balance sheet and, you know, our funding stack is 88% deposits. You know, as I said, our balance sheet is pretty much flat over the next couple of years. And so we sit in this interesting spot where the strength of our deposit franchise has really put us in a position where we can focus more on optimization versus chasing balances.
Of course, we have to do that in a way that's true to our value proposition to our customers. But, as you pointed out, we have taken some actions. You know, we've run multiple rounds of reductions in pricing on our CD products. You know, you take, for example, our 12-month CD, we've taken it down a total of 75 basis points so far this year in terms of pricing. On Friday, we made our first move on liquids. We took 5 basis points off of our MMA rates. And so where we sit today, I think we're in a great position where we can really focus on optimizing our deposit portfolio versus chasing deposits.
Okay. You mentioned 88% of your funding is from deposits. Is that optimal for you? How do you think about optimizing it longer term?
Yeah, look, it feels pretty good. That being said, we've kept our foot in the door across a variety of funding sources because we think that's prudent and the responsible thing to do. You've seen us tap the ABS markets. You've seen us tap the unsecured markets. You know, we hit FHLB. We hit brokered CDs opportunistically as we think about short-term cash. And so, you know, we keep a diverse array of funding sources. You know, but obviously, having a stable deposit base, you know, 92% FDIC insured, you know, as the anchor of our liability structure, you know, puts us in a position where I think we feel really great about that.
My favorite topic, the margin. You have some tailwinds in the margin. You talk a little bit maybe about the path to 4%. What does it take to get there? The timeline? And is that sustainable, you think, over time?
Yeah. Look, 4% is sustainable. We expect to get there in 2025. You know, and I would say, you know, as we think about, you know, our NIM with respect to rates, you know, we'll get to the guidance a little bit later. You know, we still expect to exit the year at 3.4%-3.5%. We still expect to be at 3.25%-3.30% for the year. You know, and I would say that 2024 trajectory really doesn't depend on what the Fed does. You know, obviously, we hope the Fed cuts. That'll certainly be a positive in terms of accelerating our path to 4% during the course of 2025. But we've taken a lot of the rate risk from a NIM perspective off the table for 2024. You know, when you think about our NIM overall, that NIM trajectory is choppy, right?
You see some of that this quarter. When we spoke to folks after earnings in January, you know, we talked about some of the factors that impact Q1 NIM, right? So the sale of lending, you know, took some NIM off the table. You know, when you kind of go through the list of things, that kind of last OSA increase that we did in December, obviously, took some, you know, CD, the CD rollover took some NIM off the table. And so when we talked to the street in January, we talked about NIM being down for the quarter. And obviously, obviously it is. The good news is that all of those factors, yeah, those are things that impact us in the first quarter, but they're not persistent headwinds on the business.
What is persistent, though, is what we're seeing on the Auto side in terms of that rollover of the Auto portfolio, you know, as we continue to originate in the high 10s on a yield basis. That part is persistent. That continues. And that's what really gives us comfort in that NIM trajectory over the rest of the year and over the course of 2025. You know, but obviously, it's choppy. It's not gonna be a straight line. And we obviously will try to give people as much transparency as we can as we go through that.
Yeah, it's hard to stop it with both going the right direction.
Absolutely.
Yeah. Okay. On the other revenue line, you've talked about up 5%-10% for the year. What's driving that expansion? Anything to call out there?
Yeah, look, I think we continue to see really great opportunities in the Auto side of our business, particularly in insurance. You know, last year we did $1.3 billion of premiums in the insurance business. We continue to see a great runway in that business, you know, both on the P&C side in terms of insuring dealer floor plan as well as on the F&I side. You know, of our 22,000 dealers, only about 10% use our insurance products. So just a tremendous amount of runway in terms of the ability to grow. You know, we put new leadership into that business a little while ago, and we've really emphasized the coordination between, you know, our Auto coverage team and our insurance coverage team. So really use the strength of the Auto franchise to drive growth on the insurance side of the house.
And, look, we saw that over the course of last year. We expect that to continue. You know, we've got some other good guys in-house as far as non-interest revenue go. The SmartAuction, it continues to grow. I mean, that SmartAuction volume is up 60% since 2019, and it continues to go, including through our white label products. And then we've got servicing streams that are growing as well. So fourth quarter, we deconsolidated some assets through the ABS markets, about $1.7 billion of retail Auto loans. We keep a servicing stream on that going forward. And so that's helpful in terms of non-interest revenue. We also get non-interest revenue through the loans that run through our pass-through programs. And so we're building up some additional forms of non-interest revenue as we go. So I think we feel pretty good about the 5%-10%.
Okay, good. You have to give me a little bit to get this question out. I want to make sure I get the cadence right. But on credit, you're talking about retail Auto losses ticking up slightly versus 2023, but staying below 2%. You gave us some of the vintage detail. So 2023 is performing better than 2022. And then you've talked about the first half of 2024 being a little bit higher, but then leveling off, potentially starting to come down. Is that the right guide? And how should we think about that? The second half losses are going to be leveling out.
That sounds right as I kind of parse through it. You know, and I know we'll get to the quarterly guide a little bit later. But I'd say, look, we're still confident. So our expectation is losses tick up from 2023. So 2024, we expect losses to tick up from 2023. But we're confident we'll hold below 2%. And, you know, I'd say, as I kind of parse through the dynamics there, you know, we've talked about our second half 2022 vintages before. You know, those vintages are showing elevated loss content. Great thing about the Auto asset is it's relatively short. You can adjust on the fly, but you also get information real time. So about six months after origination, we really kind of start to see how a book's developing. And then our books hit peak losses 12-18 months in.
So when you think about that second half 2022 vintage, it's really kind of going through its peak loss periods in the first half of this year. And so, you know, we're seeing some of that in terms of elevated first half 2024 NCO rates. But as we get into the back half of 2024, we'll really start to see, you know, kind of more of the loss content driven by the 2023 vintages. You know, we've provided some additional color when we reported fourth quarter, just showing how those 2023 vintages were diverging in terms of NCO rate and delinquency away from the 2022s, showing favorability. And that's continued.
And so, you know, that favorability, you know, reflecting all of the curtailment that we put in place over the course of 2023, is really what gives us confidence in terms of how we think about the back half of 2024. And so kind of where we sit today, you know, I'd say, you know, overall, our outlook on losses is still same place it was a month ago. It's, you know, higher up based on those second half 2022 vintages. You know, but again, based on the kind of the as we roll into kind of more of the loss content driven by the 2023 vintages, we expect to contain and hold under 2% for the year. You know, I'd say used car prices are also a factor that is impactful to us in terms of where we see NCO rates.
When we reported the quarter, we talked about used car prices being soft, you know, back in January. I'd say that softness has persisted. Used car prices we've seen over the course of the last year have been choppy. They were choppy going through the strike experience we saw over the course of last year with both positive favorability at times and then obviously ending the year with some negative development and softness. You know, again, that softness has persisted, but it doesn't change our medium-term view of used car prices. That medium-term view is really informed by the, you know, just the supply demand dynamic that we see going forward.
A lot of that driven by, you know, what we're seeing in terms of new car pricing, but also just what we saw in terms of new car deliveries over the past few years and how that feeds the used supply going forward. And so while we expect used car prices are going to be choppy and we'll have periods of favorability and we'll have periods of softness, you know, our general expectation is unchanged. We expect them to kind of settle out 20% above pre-pandemic levels. So for us, that means on an Ally Used Vehicle Index basis around 120%.
Okay, good. Sticking on credit, you provided some insights on card and Corporate Finance. Any updates there? Any changes that you're thinking there?
Yeah, I'll start with Corporate Finance. That business is very much on track with expectations. It's set up for another strong 2024. You know, as you know, that portfolio is at historic lows in terms of criticized assets and non-performing loans. So it's in great shape. There's not a lot of CRE in there. It's less than 1% of the portfolio. It's all healthcare-related stuff. There's no office CRE in there. So we feel great about that portfolio. You know, on the credit card side, just switching over, you know, obviously challenges in the industry with credit on the credit card space. I'd say those challenges are exaggerated for our book. You know, we entered relatively recently through an acquisition. So our credit card book really looks almost like entirely a front book.
It doesn't have the benefit of some of the backbook of the seasoned vintages, which tend to provide some stability and credit as we go through periods like this. We're also near prime focused. So I think our book is overall kind of more impacted by the industry. You know, we talked about, I think when we did the quarter, we talked about losses increasing through the first half of the year. You know, we still expect losses this quarter around 13%. We expect losses to peak in the second quarter. You know, we do expect favorability in the second half of 2024. You know, a lot of that is based on what we're currently seeing in terms of delinquencies. We've seen some stabilization and then some improvement over the course of February. Our expectation is we'll continue to see improvement. It's largely seasonal.
We typically see improvement through the course of March and April. And so, you know, we expect that seasonality to hold. And kind of based on what we've seen, plus that seasonality, it gives us some confidence, you know, in losses peaking out in the first half of the year.
Okay, perfect. Thank you. Want to touch on capital and guidance as well before we end here. But you generated some capital from the sale of Ally Lending. You deconsolidated some retail loans. Is 9% still the right target? And how are you thinking about managing capital going forward?
Yeah, no, it's a great point. I'm glad you went back to the sale of Ally Lending. So closed on Friday, generated 15 basis points of CET1. You know, we have the CECL phase in, which will offset that. And then we also had the portfolio sale, which provided some benefit that we saw in the fourth quarter. We continue to be incredibly disciplined around capital in terms of how we deploy it towards the best possible returns. You know, then on the 9%, I think the 9% is still the appropriate target level for us from a management perspective, just given the risk that's on our books. It still puts us, you know, 200 basis points in excess of our SCB minimum of 7%. I would say, though, you know, with new capital regulations coming, we're obviously in a position where we are building capital in advance of that.
You know, I'd also say the inclusion of AOCI in particular, you know, introduces another form of volatility to capital. And so where you've seen us target 9% but actually hold a buffer to that, you know, call it 9.2, 9.3 in general, yeah, I think the expectation is, as AOCI becomes a more real part of the capital picture, that we probably look to increase the size of the buffer. I don't think we've settled on a specific level yet, but I think that's kind of a safe assumption is to see that buffer increase, but the 9% target generally hold. And, you know, look, you know, at Ally, share repurchases have always been part of our discussion. They're on pause while we build capital ahead of the new regulations. But they're still a part of the consideration.
Obviously, you know, we recognize the importance of capital return to our shareholders and being good stewards of capital. So that's always going to be part of the conversation for us, albeit on pause as we build capital ahead of these new regulations that are coming in.
Okay, good. Niraj, yours.
Yep, sure. Can you give us an update on your LTD need? And then when you think about the rising growth of unsecured issuance, how are you thinking about narrowing the gap versus some of your traditional peers of the captive finance? There just is such a wide gap on where you fund versus others. How are you looking to address that?
Yeah, look, you know, on the LTD question, look, I think it's still early days in terms of, you know, what that regulation is going to look like. You know, it is obviously impactful to us as it's currently drafted with the requirement at both the holding co and at the IDI level. I'd say we have some flexibility in terms of how we manage assets between those levels. That's certainly something to think about if the regulators do stick to this dual IDI holding co requirement. And obviously, depending on, you know, whether they hold at 6% of RWA or they look for a different level, it's probably too early to, you know, to quantify the magnitude at this point. But, you know, obviously, it's something we're thinking about. It's something that would be impactful to our business.
You know, I'd say, as you think about our NIM trajectory, it doesn't change our outlook in terms of the sustainability of a 4% NIM in the medium term. You know, depending on implementation timeline, et cetera, it obviously could impact us, but it doesn't stop us from getting to the 4%.
Let's wrap up. We might steal an extra minute of your time here. We're going to put the guidance up really quick. We covered most of the inputs, and this is the guidance slide you filed this morning. Talk about how some of the moving pieces here, how the 1Q input factored into your full-year outlook and anything that you want to flag there.
Yeah, maybe I'll just hit a few points quickly, just given the timing. You know, and I'd say I think the headline is accurate. No update to full-year guidance. As I kind of tick through some of the Q1 impacts, the net interest margin, you know, 3.10%-3.15%, you know, we told everyone back in January we expected, you know, NIM to be down in the first quarter, just given some of the factors that I raised earlier, things like the sale of lending, you know, some of those more recent changes to OSA, the CD rollover. You know, a lot of those factors, again, they're factors that impact us in the quarter, but they're not permanent or persistent headwinds. I'd say, in addition, lease termination volumes were lower than we expected so far in the quarter.
That could reverse itself in coming months, and so that may turn out to be a good guy later on. But that's certainly something that impacts the guidance we provide now at 3.10%-3.15%. The good news, again, is, you know, all these factors are things that impact us in the quarter, but they're not persistent. And so it really doesn't change our view on the full year 2024. And so you can see that is very much unchanged. You know, on the non-interest expense line, again, you know, unchanged from where we were before. We still see controllable expenses down more than 1%. Total expenses, you know, I think we show kind of up 2% year-over-year.
You know, as we think about, sorry, on the quarter, you know, as we think about that, you know, one thing to keep in mind is the sale of Ally Lending closed on Friday. And so we actually carried the expenses of the 280 people through two out of the three months. And so, you know, that's just something to think about as you're adjusting your models. You know, obviously, as we go through the years, we have the full benefit for the year of the expense actions we took late last year. And then, obviously, the Ally Lending expenses roll off starting, you know, effectively this past Monday. And so we have that benefit through the year. You know, I'd say on the total expenses versus controllable, we carve out the FDIC and insurance expenses.
You know, I'd just say on the insurance side, you know, those expenses are generally a good guy. You know, the way that business is run, we effectively have offsetting revenues to offset both the sales expenses as well as the loss expenses. And so to the extent that we're able to grow that business more quickly, we could see more expenses. You know, again, it's a good guy. And so we like separating that out from our controllables. You know, NCOs we spent some time talking about. You know, we're at 2.2%-2.3% for the quarter. You know, again, no change to the outlook for full year 2024. Up, but, you know, we still think, again, confident that we'll be below the 2% mark. And consolidated NCOs unchanged. You know, 1.4%-1.5% for the full year, 1.5%-1.6% for the quarter.
I think that just about covers it. I know we're out of time.
Very comprehensive, but we appreciate it, Russ. Thanks for the time. Thanks to the team for preparing this. Appreciate it.
Great. Thanks, everyone.