Gentlemen, thank you for standing by, and welcome to the Ally Financial First Quarter 2022 Earnings Conference Call. At this time, all participants are on 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 then the one key on your touchtone telephone. Please be advised that today's conference is being recorded. If you require operator assistance at any time, please press star then 0. I would now like to hand the conference over to your speaker host today, Mr. Sean Leary, Head of Investor Relations. Please go ahead.
Thank you, Olivia. Good morning, and welcome to Ally Financial's First Quarter 2022 earnings call. This morning, our CEO, Jeff Brown, and our CFO, Jen LaClair, will review Ally's results before taking questions. 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 are on slide two. GAAP and non-GAAP measures pertaining to our operating performance and capital results are on slide three. 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. With that, I'll turn the call over to JB.
Thank you, Sean, and welcome to your first earnings call in your expanded role as the Head of Investor Relations. I've worked directly with Sean for over 13 years at Ally, and he will be a terrific liaison with the analyst investor community. He's a great asset for our company, and welcome to the role, Sean. We do appreciate everyone joining us this morning to review our first quarter results. I'm gonna begin on slide number four. Performance this quarter remained very strong, and our results underscore the scale and durability of our growing businesses. We've been operating in a rapidly evolving environment for several years now, and the start to 2022 certainly continues that trend.
In addition to lingering pandemic uncertainties, geopolitical unrest and more pronounced signs of inflation are being met with rising interest rates, and the expected normalization of the Federal Reserve balance sheet. Before getting into our results, I also want to acknowledge and express our deep empathy for those impacted by the war in Ukraine. The stories and images are tragic, and our thoughts are with all of those suffering through this terrible humanitarian crisis. We are certainly hopeful for a rapid resolution, but recognize the ramifications could be long lasting. This operating environment has driven market volatility that will continue in the near term. However, I remain confident in Ally's outlook, given the strength of our businesses and consistent focus on disciplined long-term execution. The U.S. consumer remains healthy, with historically low debt servicing levels, significantly elevated household savings, and a tight labor market that's coming with strong wage growth.
These trends are driving increased consumer spending, reflected in robust originations, pricing, and loan growth across Ally. Our industry-leading auto and insurance businesses have deep, mutually beneficial relationships with their dealer customers and have proven ability to drive growth and significant value through multiple economic cycles. Across Ally Bank, we continue to see solid customer momentum and engagement. The integration of Fair Square, now Ally Credit Card, our newest bank capability, remains on schedule and the business delivered a great first quarter. We remain confident in the differentiated value proposition provided by all of our digital consumer banking businesses and expect meaningful accretive growth over the next several years. Ally's success has always been defined by our relentless customer focus and the strength of our culture. Our deliberate actions for all stakeholders remain rooted in our "Do It Right" philosophy.
In January, we announced our new CoverDraft capability, which provides Ally checking account customers protection against accidental overdrafts at no cost. This follows our announcement to fully eliminate overdraft fees in 2021, the first in the industry, and a testament to our commitment to delivering a customer-centric banking experience. It has been great to see other banks follow as well. In February, we hosted our 2nd annual Supplier Diversity & Sustainability Symposium, created to build and expand relationships with minority-owned businesses. We're well underway with the celebration of Financial Literacy Month in April, a key part of our continuous efforts to support economic mobility across our communities. I'm proud of our nearly 11,000 Ally teammates for their relentless execution in living our values in meaningful ways every day. Let's turn to slide number five, where I'll touch on a few highlights from Q1.
First-quarter adjusted EPS of $2.03, core ROTCE of 23.6%, and revenues of $2.2 billion reflected continued momentum and a great start to the year across our diversified platforms. The backdrop across consumer and auto markets remained strong during the quarter, and we are well-positioned to sustain robust operating and financial results this year and beyond. This positioning reflects years of disciplined execution of building adaptable platforms that will allow us to grow and capitalize on market opportunities in a wide variety of operating environments. More specifically, we remain confident in our long-term outlook for a sustainable ROTCE profile of 16%-18%+, with the potential for outperformance in 2022 as the environment normalizes. Our earnings trajectory has positioned us to execute the $2 billion buyback program for the second consecutive year.
Yesterday, we announced our second quarter dividend of $0.30 per share, up nearly 60% from a year ago. Our nimble customer-centric businesses provide us the ability to capitalize on emerging trends evident in our results across the past several years and in our sustainable outlook. Within auto, consumer originations of $11.6 billion represented our highest first quarter in 11 years, sourced from 3.2 million decision applications, with originated yields once again exceeding 7%. Despite low levels of inventory in new unit sales, consumer originations were up 14% year-over-year, demonstrating the agility and scale of our auto business, allowing us to consistently generate volume at attractive risk-adjusted returns. Credit normalization through the first quarter has been in line with expectations and retail NCOs of 58 basis points remain well below pre-pandemic levels.
We continue monitoring broader market indicators of consumer health, including wage and price inflation, employment conditions, and overall payment trends. While the current inflationary environment will add some pressure to households, consumers are generally well-positioned with healthy balance sheets. As you've heard from us before, we've made significant investments in our ability to engage our auto customers through expanded digital channels, coupled with enhanced analytics within our servicing teams. From an industry production perspective, we're still seeing low levels of inventory driven by persistent supply chain challenges and strong consumer demand. These dynamics continue to result in lower floor plan balances, and structural support for used originations and values. We saw modest normalization in the first quarter, but expect floor plan balances to remain low for quite some time. Within insurance, written premiums of $265 million reflected lower overall inventory levels.
Investment portfolio performance remained strong, while weather claims benefited from lower exposure. Turning to Ally Bank, organic and accelerating growth trends continued. Retail deposit customers now exceed $2.5 million, expanding 8% year-over-year and representing our 52nd consecutive quarter of growth. Retail balances grew to $136 billion and account for nearly 90% of our funding profile. Our consumer engagement and product adoption trends remain robust. Ally Home originated $1.7 billion in the quarter, despite the headwind from higher mortgage rates and slowing refinance volume. Ally Invest customer assets grew to $16.8 billion, a 10% year-over-year increase, while accounts expanded 7%. Ally Lending volume of $442 million more than doubled year-over-year as we expanded merchant relationships, and volume in the healthcare and home improvement verticals.
Ally Credit Card surpassed $1 billion in loan balances in the quarter and now has over 800,000 active cardholders, up 73% from prior year. I was in Wilmington about a week ago with our new teammates, and we celebrated 1 million account openings. Nice milestones for this business. Corporate Finance posted another steady and solid quarter, with the held-for-investment portfolio exceeding $8 billion and credit performance remaining very strong. Performance across our businesses reinforces our broad customer reach, adaptable platforms, years of disciplined execution, and ability to meet our financial and operational goals. I remain incredibly proud of all of our teammates and highly confident in their ability to continue to execute in a rapidly changing environment. With that, Jen, over to you.
Thank you, JB, and good morning, everyone. I'll begin on slide six. The strength of our financial performance again this quarter reflects our disciplined operating approach, and the continued execution against our long-term strategic priorities. Despite ongoing shifts in the broader market, the strength of Ally's Auto and Digital Bank platforms is reflected in our ability to protect and improve our market share, grow and diversify our income sources, and generate a solid, sustainable return. Our comprehensive product offerings now serve more than 10.5 million customers with a clear path to ongoing expansion. On slide seven, we've provided a few metrics we are watching closely relative to consumer health. With over 10.5 million total customers, including over 2.5 million depositors and over 1 million monthly consumer loan applications, we have unique data and insight into ongoing consumer trends and performance.
The average savings account balance at Ally has increased 20%-30%, including a 23% increase in the lower balance accounts. While inflation, in particular gas prices, impacts spending levels and real wage growth, our retail auto portfolio has virtually no exposure to consumers most sensitive to higher gas prices. We've also included a delinquency snapshot across our loan portfolios. Increases off the 2021 lows remain gradual and overall levels remain well below 2019. While key consumer health indicators reflect a strong starting point, we expect normalization in the months ahead and will leverage our proprietary data to inform prudent underwriting and servicing strategies. Let's turn to slide eight, where we've included a snapshot of key measures demonstrating the strength of our balance sheet. Our funding, capital, and liquidity remain robust and above pre-pandemic levels.
Our stable, cost-efficient deposit portfolio has increased to 88% of total funding, up from 64% in Q1 2018, positioning us well in this rising rate cycle. While wholesale funding balances have materially declined, we maintain access to multiple efficient funding alternatives, and improved execution levels as we've earned an investment-grade rating in recent years. Allowance for loan losses of 2.63%, or $3.3 billion represents over 2.5 times our reserve level in 2018 and approximately $700 million higher than our CECL day one requirement. Our CET1 level remains elevated at 10%, which results in approximately $1.5 billion of excess capital relative to our internal operating target, and nearly $3 billion above our SCB requirement, positioning us well to support accretive customer growth and capital return.
Detailed results for the quarter are on slide nine. Net financing revenue excluding OID of $1.7 billion, grew roughly 23% year-over-year. This represents the 7th consecutive quarter of expanding net financing revenue. Performance in the quarter was driven by strength in auto pricing and origination volumes, growth in accretive consumer products, including our credit card and point-of-sale offerings, normalization of excess liquidity, and proactive hedging activity, partially mitigating impacts from short-term rate increases. Adjusted other revenue of $508 million reflected strong investment gains, and diversified revenues from SmartAuction, insurance, and our consumer businesses. While our financial outlook assumes mid-$400 million per quarter, we remain opportunistic, capturing upside from favorable market conditions.
Provision expense of $167 million reflects robust origination activity, and the anticipated gradual normalization of credit performance, although trends remain favorable, as we'll cover in a few moments. Non-interest expense of $1.1 billion includes seasonal compensation items, the first full- quarter of credit card operations, and investments in business growth, brand, and technology. We expect the year-over-year expense increase to moderate over the remainder of 2022 as the quarter was impacted by certain non-recurring items. Excluding the acquisition of Fair Square, we expect full-year operating expense growth consistent with prior years. As a reminder, Fair Square is projected to be EPS accretive by the end of 2022, and to drive positive operating leverage in 2023. GAAP and adjusted EPS for the quarter were $1.86 and $2.03 respectively.
Moving to slide 10, net interest margin excluding OID of 3.95% expanded 13 basis points quarter-over-quarter and 77 basis points year-over-year, reflecting significant and sustained improvement. Overall margin expansion reflects the structurally enhanced balance sheet we have built over several years. Earning asset yield of 4.86%, grew 11 basis points quarter-over-quarter and 42 basis points year-over-year, reflecting the same NII drivers I just mentioned. Due to strong auto demand, we continue to see elevated prepayment activity in retail auto, driving a linked quarter decline in the portfolio yield. The originated yield exceeded 7% again this quarter, and we still expect the portfolio to move closer to originated yield over time, especially as prepayment activity normalizes with used car pricing.
While prepayment activity presents a headwind to retail portfolio yields, we have natural offsets as higher vehicle values benefit lease residuals and loss severity. Looking forward, we expect earning asset yield expansion driven by the strength of our market position, disciplined pricing, especially as rates increase, and organic growth across our newer consumer portfolios. Turning to liabilities, cost of funds declined 4 basis points, the 11th consecutive quarter-over-quarter decline and 39 basis points year-over-year, reflecting the multi-year transformation of our funding profile. The differentiated value proposition of Ally Bank is evident in the growth of our deposit portfolio and the stickiness of our customer base over a wide variety of interest rate and operating environments. While we constantly evaluate competitive dynamics, we expect overall deposit rate paid relative to Fed funds will be favorable to the prior tightening cycle.
The growth and strength of our businesses on both sides of the balance sheet, will support a strong net interest margin and net interest income expansion from here. Turning to slide 11, our CET1 ratio declined modestly to 10% as strong earnings supported robust loan growth and nearly $600 million in share repurchases. Yesterday, we announced a dividend of $0.30 per share, and we remain on track to execute our $2 billion buyback program, reflective of Ally's strong capital levels and earnings trajectory. We recently submitted our 2022 CCAR results, which we believe confirm the strength of our capital position in a severe stress and support our 9% CET1 internal target. On the bottom of the slide, shares outstanding have declined 13% since we resumed share repurchases in 2021, and 32% since the inception of our buyback program in 2016.
Capital deployment priorities remain centered around investing in the growth of our businesses, delivering innovative and differentiated products, and driving long-term shareholder value. On slide 12, asset quality remains strong. Results reflect the gradual, and expected normalization across our consumer portfolios and continuation of historically low losses in our commercial portfolios. Consolidated net charge-offs of 43 basis points moved up by 2 basis points year-over-year. Retail auto portfolio performance reflected solid consumer payment trends, and favorable loss-given default rates supported by strong vehicle collateral values. In the bottom right, delinquencies have increased as expected, which will drive higher net charge-off activity over time. We continue to expect gradual normalization to 1.4%-1.6% NCO level in the medium term, with the expectation of 1% or less in 2022. On slide 13, consolidated coverage declined 4 basis points to 2.63%.
Retail auto coverage of 3.49% declined 5 basis points but remains 15 basis points higher than CECL day one levels. Our baseline forecast assumes gradually improving unemployment, ending the year at approximately 3.5% before reverting to a historical mean of 6.5% under our CECL methodology. As part of our reserving process, we consider a range of potential scenarios, including recession, stagflation, and protracted geopolitical conflicts. As discussed, we evaluate consumer health real-time, including rapidly rising inflationary impacts and real wage growth. We remain confident our reserves are appropriate for a variety of economic environments, including potential but unexpected downside scenarios. On slide 14, total deposits remained at $142 billion as retail balance growth offset the rolldown of broker deposits.
Retail balances increased $1.3 billion quarter-over-quarter, even as seasonal tax payment activity was elevated in March. Our portfolio includes significant balances from affluent depositors, generally more susceptible to tax liability outflows. Due to the financial strength of our customers, we would expect tax payment outflows to be elevated in Q2, temporarily pressuring deposit growth. We added another 42,000 customers, our 52nd consecutive quarter of customer growth exceeding 2.5 million overall. Our customer loyalty and engagement are reflected in industry-leading and consistent retention of 96%, and multi-relationship expansion for the 17th consecutive quarter, ending at 9%. On slide 15, we have included a chart that shows the stable nature of our growing deposit portfolio.
Since the launch of Ally Bank in 2009, every single annual vintage of deposit customers has grown their balances over time, reflecting more than 13 years of continuous growth. Over this time, we've made substantial investments in the Ally brand and product capabilities. The powerful combination of industry-leading customer service, expanding digital products and tools, and competitive rates differentiates us from our competition. Gives us confidence in our ability to remain disciplined as we navigate a rising interest rate environment. Turning to slide 16, we continue to drive scale and diversification across all our digital bank platforms. Deposits serve as the gateway to our other banking products, including Ally Lending, Ally Credit Card, Ally Invest, and Ally Home, which enhance brand loyalty, drive engagement, and deepen customer relationships.
A significant portion of Ally Invest account openings and Ally Home direct-to-consumer volume is sourced from existing depositors, lowering acquisition costs and accelerating organic growth and balance sheet diversification. We also see a clear path for expansion among our newer point-of-sale lending and credit card products. Our focus on delivering digital-first integrated capabilities supports our outlook for growth and accretive returns in the years ahead. Let's turn to slide 17 to review Auto segment highlights. Pre-tax income of $725 million was driven by expanded net financing revenue sourced from strong originations and solid credit performance. Starting at the bottom left, the originated yield again exceeded 7%, which we expect for the 5th consecutive year in 2022. Consumer demand for auto remains robust, reflecting the high utility of the auto asset class and driving strong used vehicle values.
With low inventory and robust used car pricing, consumers are accelerating trade-ins, resulting in elevated prepayment expense, impacting the portfolio yield by approximately 30 basis points. As inventory grows over time, we expect this activity to normalize, driving yields above 7% before any benefit from rate increases. On the bottom right, we've included lease gain trends. Lease gains were robust in the quarter, driven by used vehicle dynamics. As we've discussed for some time, the upside remains muted as approximately 85% of the units terminated were purchased by lessees and dealers. This is another trend that will gradually normalize. As inventory levels increase and used values decline, we expect fewer lessee and dealer buyouts, which should be another positive for Ally over the medium term.
While strong used car values have been a benefit to results to date, there's a natural hedge to normalization, including higher retail auto yields, favorable off-lease vehicle dynamics, and increased floorplan balances. Turning to slide 18. Our leading agile platform is built to adapt to dealer and customer needs in a comprehensive and innovative manner, reflected in our performance and the multiyear growth of our dealers. Our focus continues to migrate towards deepening these relationships, driving strong application trends, which we expect to exceed 13 million again this year. In the upper right, ending consumer assets expanded to $90 billion, up 7% on a year-over-year basis. We expect to see a robust market that is supportive of our outlook for $40 billion-$45 billion of consumer originations in 2022. Commercial balances ended at $17.3 billion, reflecting a gradual and modest normalization of inventories.
Turning to origination trends on the bottom half of the page. Auto volume of $11.6 billion, up 14% from prior year, represents our highest first quarter in over a decade. We provide a broad access to credit for consumers utilizing our full- spectrum underwriting capabilities while maintaining consistent FICO and non-prime trends. Turning to insurance results on slide 19. Core pre-tax income of $74 million decreased year-over-year, driven by the impact of lower industry sales, dealer inventories, and record investment gains in the prior year period. Robust investment income of $64 million reflected our ability to drive gains opportunistically in volatile markets. On a year-over-year basis, underwriting income declined $18 million as favorable loss performance was offset by lower P&C premiums. Total written premiums of $265 million reflected lower unit sales and inventory levels across the industry.
Within Ally, we see significant opportunity to improve dealer penetration and grow this highly accretive business, and we are excited to have Daniel Eller, our former investor relations executive, in his new role leading this business. Turning to Corporate Finance on slide 20. Core income of $68 million reflected expanding net financing revenue driven by disciplined growth in the portfolio, strong other revenue from investment gains, syndication income, and growth in unused commitment fees and stable credit trends. The loan portfolio remains diversified across industries and is floating rate, which positions us well for expected rate increases. The quality of our portfolio is evident in our consistent credit performance and asset-based loans comprising 54% of the portfolio. Our $8 billion HFI balance is up 28% year-over-year, reflecting our strong expertise and disciplined growth within a highly competitive market. Mortgage details are on slide 21.
Mortgage-generated pre-tax income of $11 million, reflecting tighter margins on conforming production and reduced demand for refinancing activity. Ally Home DTC originations of $1.7 billion was relatively flat on a year-over-year basis, but down linked quarter given the contraction in the overall mortgage market. Mortgage remains a critical product for our customers who value a modernized and seamless digital platform. We added four new states to our platform this quarter, now active in 46 + D.C. We are prioritizing a strong experience for our bank customers and enhanced risk-adjusted returns, which may lead to changing origination levels in any given quarter or year. On slide 22, we've again included our financial outlook considering the rapidly evolving operating environment.
Since we provided guidance in January, we've seen accelerating geopolitical conflict, increased inflationary pressure, and a significant move in rates as the market expectation for Fed funds has increased over 100 basis points since our January update, a key watch item as we manage pricing on both sides of the balance sheet. Despite that volatility, we're confident in Ally's ability to generate a 16%-18%+ return over the medium term, with the expectation 2022 will be at the high end of that range. Performance will be fueled by strong revenue growth, annual PPNR expansion, and normalizing used vehicle value and credit performance. Our outlook embeds balanced, competitive, and operating environment assumptions, specifically in autos and deposits. The earnings and return profile of the company has structurally improved, and we remain focused on driving near and long-term benefits for all of our stakeholders.
With that, I'll turn it back to JB.
Thank you, Jen. I'll close with a few comments on slide number 23. First, I remain deeply grateful and proud to lead our company. Our results this quarter are impressive. Our broader objective to serve our teammates, our customers, our communities, and our stockholders is what defines our company's long-term success. We've built a structurally enhanced, more profitable company through strategic execution across our business lines, balance sheet optimization over many years, and differentiated products for our customers, all of which positions us for a very strong long-term outlook. We will continue to execute with a focus on the same values and priorities that have served us well over several years. With that, Jen, Sean, back to you, and we can go into Q&A.
Thank you, JB. As we head into Q&A, we do ask that participants limit yourself to one question and one follow-up. Olivia, please begin the Q&A.
Ladies and gentlemen, if you would like to ask a question at this time, you will need to press the star then the one key on your touchtone telephone. Please stand by while we compile the Q&A roster. Our first question coming from the line of Bill Carcache from Wolfe Research. Your line is open.
Thank you. Good morning, JB and Jen.
Hey, good morning, Bill.
Morning, Bill.
Morning. Hi. I wanted to dig into the impact of used car prices a bit more. In your outlook, you've said that you're assuming 15%-20% decrease between 2021 and the end of 2023. That's an average, correct? Just to clarify, where do you expect used car prices to be at the end of 2023 relative to 2019 levels?
Yeah, sure. Thank you, Bill. Very important question as we've seen very elevated used car prices, even coming into 2022. The guide that we have provided is a -10% - 15% on average for 2023. If you think about the point-to-point decline from first quarter of 2022 to fourth quarter of 2023, it's obviously significantly larger than that. You know, keep that in mind. It's sequential, and it's a steep drop-off. Now, I do think the dynamics around used car pricing is really important as you look at the total earning asset yield and income statement for Ally. You know, as we would see used car pricing come down, we would expect to see tailwinds in our retail loan portfolio yield.
As I mentioned, elevated prepayment activity has created about a 30 basis point drag on retail auto portfolio yields. Even within the lease business, as we'd expect used vehicle values to come down, LVO and DVO should normalize, and that should give us access to more gains just even within lease. Then last but not least, we are expecting inventory to come up as used vehicle values come down, and that should create, you know, more growth in a floating rate asset as we head into a rising rate environment. A lot of just natural hedges around used vehicle values. I think Ally really wins either way. If used vehicle values remain robust, we'll see elevated contract values, strong originations, strong lease yields, lower LGD.
If it moderates down, you're gonna see a lot of tailwinds in commercial floor plan as well as retail auto yields. I think from a credit perspective, we've been pricing appropriately for LGD. We have reserves qualitatively and quantitatively to cover, and it's certainly included in our 1.4%-1.6% guide as well. Hopefully that gives you some color, Bill. It's really important to look at this holistically across Ally.
Understood. Maybe just following up on that. Is it reasonable to conclude based on everything that as you explained it, Jen, that 1.4%-1.6% NCO rate in your outlook for 2023-2024 reflects all the other moving parts associated with used vehicle prices if they were to decline to 2019 levels, that you have confidence that the achievability of the numbers that you've laid out if used vehicle prices were to normalize back to 2019 levels?
Yeah, I mean, in the guide, just to be really clear, we have that 10%-15% average annual decrease, and that would flow through all of our yields as well as into our assumptions around NCOs. You know, just keep in mind, we also have qualitative factors, and we've been very mindful of the uncertainty in this operating environment, the elevated contract values that we're originating against. Like I said, we're pricing sufficiently for that and guiding toward it in that NCO guide as well as establishing qualitative and quantitative reserves around that. I think we're very well covered in the guide.
Okay. It's just that there's a lack of confidence that the improvement that Ally has seen in its earnings growth and ROTCE post-COVID is sustainable. You, you've laid out clearly that there are structural reasons for the improvement. I think that just helps get at the sustainability question even if you did have sharper normalization in used car prices. Thanks for taking my questions.
Of course. Thank you, Bill. I think that's a really important point. Also, you know, as JB always tells us, there is a bull case around used vehicle pricing if you think about inventory levels and continued supply chain constraints. You know, I think the guide that we've provided is pretty conservative relative to what we're actually experiencing across our dealers today.
Yeah. I mean, to that point, we even talked to some of our big dealers. I mean, they're again, they continue to be another quarter in, and they're pre-sold, you know, four, five, six months out of everything they have coming in on production. It's a pretty fascinating dynamic that we're seeing right now. Great questions, Bill. We obviously, you're seeing us lean into the sustainability story here. We feel really confident that we got a great outlook and really strong position for the future.
Our next question coming from the line of Ryan Nash with Goldman Sachs. Your line is open.
Hey, good morning, JB. Good morning, Jen.
Morning, Ryan.
Hey, Ryan.
Maybe just to start on the net interest margin. Jen, you know, you reiterated an upper threes NIM, which, you know, also factoring additional 100 basis points of rate hikes. Can you maybe just unpack for us what's included in there in terms of asset repricing, and more importantly, you know, deposit betas? And then second, can you maybe just talk about how you expect betas to progress over, let's say, the first 100 - 150 basis points relative to the second 150? And how are you expecting the pricing strategy to differ, and what gives you the confidence that it's going to be favorable relative to last time? And then I have a follow-up.
Yeah, sure. So let me start first, Ryan, on the asset yield, and I just hit on some of the dynamics there. You know, starting with retail loans, we're continuing to see robust originations. We'll have our fifth year of putting new originations on the books at over 7%. As we would expect used vehicle values to come down, we'd expect a really nice tailwind on lower prepayments in our retail loan portfolio. Then even in lease, you know, as inventory returns, we should see growth there. Just, it's important that we have this natural hedge with used vehicle values coming down. LBO and DBO dynamics should shift with that and help to neutralize some of the decrease from lower vehicle values. Then of course, we would see inventory levels coming up.
I mentioned floor plan, 100% floating rate. As rates come up, we'll be growing that portfolio at the right time. We also have a mix, better mix dynamic as we've run off excess cash. We're also growing our unsecured products, so think about Ally Lending and Ally Credit Card at very healthy yields. All in, Ryan, we would expect our earning asset yield to continue to expand well into the 5%, and that's with a rising rate environment, but even absent that with the favorable mix that we'll have. You know, noteworthy is, and we talk about this a lot, the originated yield on retail auto relative to the portfolio. Just even through April year to date, we've been able to put pricing in the market.
In fact, we've added about 40 basis points of price so far, and that's, as you know, way out ahead of Fed funds increases. Feel really good about the earning asset yield expansion and the growth attached to that as well. On the liability side, look, we are in such a different place today than we were in the past, and especially in 2018 and the last rising rate cycle. If you think about, we're almost 90% core funded. We're investment grade. We have access to alternative funding sources. Quite frankly, we've continued to invest in a very competitive value proposition around digital tools, brand, the multi-product relationships that we've been building, the consistent retention that we've driven.
We feel great from a consumer value perspective as well as from an Ally balance sheet perspective that we'll be able to hold rates at a lower level relative to Fed funds in this next rising rate cycle. Now, I mean, I know, Ryan, we've gone back and forth a lot on beta math. As you know, we're starting at a significantly lower pricing position this time around. Beta could, you know, we've run scenarios where beta could potentially be a little higher. I think what's important is even when we run those scenarios, we're still seeing a path to that upper 3% NIM that's supporting our 16%-18% + ROTCE guide. Hopefully that gives you a bit of color.
Yeah, no, that's helpful. Maybe if I can ask a follow-up, a two-part question. JB, when we met in December, you talked about the franchise being able to generate $6-$7 a share of earnings. Obviously the world has changed a bit in the past few months. Just wondering if you could talk about how you expect earnings to progress as the cycle progresses. Do you still feel as comfortable, you know, outside of a recession? Can we see those type of earnings, and what are the drivers? Then second, Jen, you know, you mentioned on the call that earnings has structurally improved. When I talk to investors, you know, they do struggle to understand what took us from kind of $12-$12.5 pre-pandemic to $16-$18 post-pandemic.
Can you maybe just talk about, you know, what are the main drivers that should make profitability structurally higher and why you think they are sustainable? Thanks.
By the way, Ryan, I think you're on question four or five, but that's all right.
You want to just start, Jen?
Because see, I think these are very much connected. The key drivers as we continue to reiterate is just, you know, in retail lending, we have changed our focus from subvented super-prime paper to prime. You've seen our market position and the continued performance we've had in retail auto, and that just generates a higher earnings trajectory as well as a higher return on tangible common equity. Just the mix shift inside the four walls of auto has been very powerful. And then, I mean, look, we've added a lot of new product capabilities which are accelerating. We shared the numbers around Ally Lending as well as Ally Card. Obviously, you know, Ally Card is a 5% ROA product driving very significant and accretive returns, Ally Lending as well.
The growth of our newer products is really helping to propel our earnings trajectory and the guide towards the 16%-18%+ return on tangible common equity. You know, we can't underestimate the power of our liability stack, and you've been out there saying, you know, Ally has transformed the liability stack more so than any other bank out there. We agree with that, and that is a big part of our structural improvement in our profitability. Hey, if you want to point investors to our track record, look at our 2021 return on tangible common equity hit 24%. We just printed over 23%. I could see, Ryan, this year getting to ± 20% , and then we have a very healthy guide to 16%-18%+.
We've got a great track record. I think we have a very reasonable set of assumptions going into the future. You know, 16%-18%+ return is very healthy because of all those dynamics.
Well said.
Thanks, Jen, and no follow-ups.
Oh. Thank you, Ryan.
Thanks, Ryan.
Appreciate your good questions.
Thanks, guys.
Jen just told you we're not coming off of that, what I told you in December. Yeah, all good.
Thank you, Ryan.
Thank you.
Our next question coming from the line of Sanjay Sakhrani with KBW. Your line is open.
Thanks. Good morning. Obviously, you guys alluded to the fact that people are getting jittery about consumer credit, and I appreciate the color you provided on slide seven on how it's affecting your portfolio. I'm curious how it's affecting your underwriting and the decisions that you're making going forward. Do you guys envision it impacts any of your loan growth expectations, especially on the unsecured credit side?
Yeah. Good morning, Sanjay. The way that our underwriting strategy is positioned is really to look through the cycle. We're not making big shifts based on macroeconomic forecasts that we know will not be perfectly correct or even remotely correct in some circumstances. Our position on underwriting has always been to look through the cycle. We've largely done that in retail auto. I will say we make some tweaks around the edges. We are seeing elevated contract values, and we're mindful of potential LGD impacts down the road. We've put additional pricing in to cover off on LGD. We've also been mindful of that as we've established quantitative and qualitative reserves around the portfolio. We do make tweaks around the edges.
I think that we are incredibly well positioned as we think about both the pricing and the reserving that we have. Then on the unsecured side, very similar approach that we're taking. You know, I shared a slide in the presentation just around the data that we're looking at. That will help us to make tweaks as well. Again, it's not going to be a wholesale change in our underwriting, but we will be mindful of that making tweaks. Underwriting is important, but servicing as well. As we see any kind of deterioration or we see delinquencies pick up in pockets, you know, over time, we'll be able to be incredibly proactive from a servicing perspective as well.
You know, I just noted in response to Ryan's question that we've been mindful of this environment, and we've been taking pricing up in retail auto by way of example. We've increased pricing a couple of times, and it's about 40 basis points just year to date through April here.
Okay, great. Just to follow up on some color on the reserves expectations. I know, Jen, you sort of went through some of the comparisons relative to CECL day one. Just on the qualitative side, if we compare today versus CECL day one, how, what's the difference in the qualitative assumptions given, you know, how the market or the investment community is sort of positioned and the macro is considering deterioration from here? Thanks.
Yeah, sure. I mean, look, as we came through the pandemic, we had qualitative reserves around COVID. As we've headed into 2022, we've again considered qualitative factors, especially relative to inflation, recession probability, and in particular, in retail auto have established some qualitative reserve factors there. Overall, from a quantitative and a qualitative perspective, you know, retail auto's up some 15 basis points from day one CECL, so we think we're in a really good position there. As I've continued to note, we essentially have a recession built in to our assumptions on our reserves. If you think about after year three, unemployment rate hits 6.5%.
For all those reasons, Sanjay, and I think what you're pointing to, we have a really robust reserve and really strong balance sheet as we enter 2022 and continue to navigate an unbelievable amount of uncertainty. Okay. Thank you, Sanjay.
Our next question coming from the line of Betsy Graseck with Morgan Stanley. Your line is open.
Hey, good morning. This is Jeff Adelson on for Betsy.
Hi, Jeff. Good morning.
Hey. Morning. Good morning, JB and Jen. It seems like you're perhaps suggesting some NIM upside from here, just given all the benefits you've talked about coming through today on the earning asset yield side over time as used car prices normalize. I know we're already sitting here today at a 3.95% NIM, and you're sticking to the upper 3% guide. Just wanna understand how you're thinking about the probability of going higher from here, or you know, how much conservatism is embedded in the guide. On the slide, you did mention you're monitoring the shape of the yield curve. Can you just remind us what you're embedding in your expectations right now on the yield curve, and maybe how much of an impact inversion has for your NIM profile?
Let me just start with the assumption around the yield curve. We're now expecting Fed funds forwards to hit about 2.5% at year end, and then migrating up to about 3% early 2023. Against that, we are expecting kind of through time to continue to hit that upper 3% NIM. I will say it could bounce around a little bit from quarter to quarter as we continue to have low deposit pricing and asset yield expansion kind of early 2022. Then as deposit pricing picks up in some of the later quarters, you could have NIM bounce around, quite frankly, over the next kind of 6-8 quarters.
I think what's important is that we still see a clear path to that sustainable higher NIM, simply because of the structural improvements we have on both sides of the balance sheet. Hopefully, that helps in terms of just the NIM. You know, from an inversion perspective, that's something we're watching very carefully, and we're not putting a lot of duration on the books right now. We've been mindful of kind of adding to our securities portfolio. As I talked about in mortgage, we're being really selective about what we put into HFI, just to make sure that we do manage duration and potentially ahead of an inversion.
You know, the other watch item, and I mentioned this in my prepared remarks, is simply making sure we're disciplined and diligent around deposit pricing.
Got it. That's helpful. Just as a quick follow-up, I'm not sure if I missed this already, but just wanted to understand in the back of the slide deck why the interest sensitivity profile seemed to have been more impacted in the 100 basis up scenario for the instantaneous rate scenario?
Yeah. Well, I mean, you have to look at the underlying assumptions as we move from fourth quarter 2021 to first quarter 2022. Keep in mind our forward assumption also increased 100 basis points, so this is 100 basis points on a 300 basis point assumption. You're talking about a very, very steep shock relative to even where we were in the fourth quarter of 2021. Now, as I've talked about in the past, we have hedging activity that helps to mitigate part of that very steep ramp up in interest rates. Essentially, it's just the pull forward of 100 basis points on Fed fund forwards.
Thanks, guys.
Thank you.
Our next question coming from the line of Moshe Orenbuch with Credit Suisse. Your line is open.
Great. Thanks. I think I wanted to talk a little bit about the originations level and, you know, the yield and the pricing comments that you made. I guess, you know, pretty remarkable just given that some of the large banks that have reported have not been nearly as robust. You know, like, what do you see as driving that specifically? Is it a competitive advantage versus some of the competitors that are wholesale funded? You know, can you talk a little bit about what, you know, has given you that? Is it some of the partnerships? Just talk about that and, you know, how it relates to both the volume and pricing.
Yeah. Sure, Moshe. I think it relates to just our overall strategy in auto, which is to focus on the prime segment. I think you know, super prime's been impacted simply because of vehicle availability.
Right.
Where we're underwriting in prime, and in particular at the intersection of used and prime, there's still a terrific amount of transaction volume. Some of that's driving churn in the portfolio, but there is a terrific amount of demand still in the system that's driving transactions and driving originations for us. I mean, as we take, you know, kind of a step back, we think there's some 4-5 million customers that are on the sideline right now just because they cannot find a vehicle to purchase. Not only are we expecting this very strong origination volume to continue this year, we'd expect it in the future, and there could be some mix shift for more new as it becomes available versus just the used and the new. It's related to our segment.
It's related to our scale, our relationships. We're at well over 21,000, continue to grow. We're driving app flow through those dealer relationships. Moshe, it's really all of the above. It's the very important segment we're in, prime and used, and it's obviously the capabilities that we're bringing to that segment that has continued to fuel just very accretive originations for years.
Got it. Thanks. Maybe to kind of follow up on one of Brian's questions. You know, you talked about the natural hedges in terms of the earnings outlook and things that could, you know, help mitigate whatever, you know, whether it's the normalization of used car values or rising rates and the like. Are there any kind of active steps that you're taking that you would add to that? Like things that you're doing, you know, kind of, you mentioned obviously pricing, but are there other things, you know, that the company's doing to kind of position for, you know, the rest of 2022 and 2023?
Yeah. I mean, look, we're not at all complacent on anything. I mean, we're very focused on continuing to serve all of our customers, you know, starting first with the dealers, making sure we're there to support originations. You know, we've continued to expand not only our traditional dealers, but our newer dealers, Carvana, EchoPark, a number of the newer entrants. You know, we're not getting complacent at all, continuing to drive that engagement and that application flow. We're also mindful of dynamics around consumer health, and so we're monitoring that very closely. I included that extra slide this morning to give you a sense for how closely we're monitoring the data to inform, as you pointed out, Moshe, pricing but also servicing strategies.
I mean, we are expecting delinquencies to continue to normalize, charge-offs to continue to normalize, and we've continued to invest heavily in human capital, technology, and digital capabilities in the servicing side of the house as well. You know, I think your point on hedges is really important. As I pointed out earlier, while there's a lot of headlines around used vehicle pricing coming down, continuing to see offsets to that, whether it's the LBO, DBO dynamics, whether that's an increase in inventory that we'll see in the floor plan book or even continued origination unit opportunities that we would expect it to grow from here if used vehicle values come down.
Again, Moshe, it's continuing to do a lot of what we've been doing in the past, but just monitoring the consumer health and making sure that's in consideration in originations as well as underwriting strategy.
Great. Thanks so much.
JB, I don't know if you wanna add. No.
Well covered.
Thank you, Moshe.
Our next question coming from the line of Rob Wildhack with Autonomous Research. Your line is open.
Good morning, JB. Good morning, Jen. Just wanted to ask.
Hi, Rob.
On expenses quickly. On expenses, you said that this year was gonna be consistent with past years in terms of expense growth. If we dig into that at all, do Fair Square and more credit card or Ally Lending business change the expense profile such that there are some puts and takes within the business lines there?
Rob, just to clarify, I mentioned Ally standalone expense trajectory for full- year will be similar to what you've seen in the past. That excludes credit card. You know, in the Ally standalone expenses, you expect a lot of the same themes that you've heard me talk about in the past. We're scaling our businesses. There's variable costs attached to that, continuing to invest in technology and marketing brand to fuel that growth, cybersecurity as well. You know, credit card, I think we've been very clear on our performance expectations. ROTCE accretive day one, EPS accretive by year-end 2022, and operating leverage accretive by 2023.
You know, as JB hit on and I hit on my prepared remarks, we are well underway to hit that guide and those robust performance expectations from Ally Card. Then just, you know, I think it is important to take the big picture in mind. We do not manage expenses point in time, line item by line item. We are investing over time for positive operating leverage and accretive returns, and certainly we've been delivering that. We had a mid-teens plus positive operating leverage in 2021. We would expect to see operating leverage and PPNR expansion over time, but we're not managing line item by line item, quarter by quarter, Rob, just to clarify.
Got it. Thanks. Then just on the deposit side, looking at the rate tables there, you know, you guys are still at 50 basis points. A lot of your peers haven't moved either. Why do you think that's the case? Why do you think those haven't repriced yet?
Yeah, look, I mean, there's still a lot of liquidity in the system today. You know, I think it's gonna take some time for loan growth to catch up to excess liquidity available on bank balance sheets. I think that's number one. I think, you know, if you look at the 50 basis points relative to the average across the industry, it's still competitive. Last but not least, I think, you know, just mindful of the continued capabilities that Ally has invested in in terms of digital, brand, customer service, we do think we offer value above and beyond just rate. I think it's gonna take some time, Rob, quite frankly, to see pricing come through. We have seen CD prices elevate a bit across the industry.
You'd expect that early in a rising rate cycle as the industry is trying to lock in lower cost funding. Not a lot of growth in those products just yet.
Thanks, Rob.
That's very helpful.
Thank you.
Thank you.
Thank you, Rob.
Sean, we're a little past the hour. I think that's all the time we have for today. If you have any additional questions, please feel free to reach out to Investor Relations. Thank you for joining us this morning. That concludes today's call.
Ladies and gentlemen, that does end our conference for today. Thank you for your participation. You may now disconnect.