Great. Continuing the session, I'm very pleased to have Ally Financial with us up next. From the company, we have CFO, Russ Hutchinson. Russ, thanks for joining us.
Great. Thanks, Jason. Thanks for having me.
I guess maybe before we dive into details, you know, it'd be great if you could maybe hit on some of the macro themes surrounding Ally, including trends you're seeing in, you know, key businesses and maybe your top priorities as CFO.
Yeah, great. No, that's a great way to start.
We could just put up the first ARS question as Russ answers. Sorry.
Sure. So look, you know, we have two market-leading franchises that we're really proud of, Dealer Financial Services and Ally Bank. And I'd say they, you know, they give us the you know the combination of really great momentum on both the asset and the liability side of our balance sheet. On the asset side, we've taken a number of steps in terms of capital allocation, you know, just to manage the mix of assets we've had. We've taken a number of initiatives on the pricing side, all directed around really kind of maximizing the returns on the business through capital allocation and pricing. You know, on the Ally Bank side, on the deposit side of our balance sheet, you know, we've gotten to the point now where we're fully deposit funded.
That comes from fifteen years of relentless focus as allies for our customers. You know, and we're really proud of the fact that we've gotten to this level of kind of core deposit funding. It positions us really well to focus on optimization around our deposit base, focusing on our most engaged customers and really kind of taking our foot off the gas as far as it goes towards growth. And that just gives us more flexibility that we've exercised over how we price our deposits. So both things that give us a lot of momentum on both sides of the balance sheet that we're really proud of. You know, just spending a little bit more time on the Dealer Financial Services side of our franchise, that we're really proud of our 22,000 dealer relationships.
Our relationships are deep. We've taken this opportunity where a lot of our competitors have been pulling back over the last couple of years, and we've really deepened and strengthened those relationships. You know, we are on track again to attract fourteen million applications. You know, we did that last year. That's up from roughly twelve and a half million applications two years ago, and that application flow really allows us to be selective and to really push price, and it's a direct reflection of the strength of our overall dealer relationships. We're leveraging those relationships on the insurance side of our business as well as we build out our other revenue. We've got great momentum within the F&I department at our dealerships, offering our F&I-based insurance products, and we've also got great momentum on the floor plan insurance side.
We've signed up a couple of OEMs over the course of this year, and it's really helped us fuel growth on the insurance side of our business, again, driving that other revenue growth, so as I look at our two kind of market leading franchises, I think there's a lot that we're really proud of, and as I think about our priorities as a company over the next few years, it's really just kind of continuing to build on our relentless focus on our customers, both on the dealer side as well as on the consumer side. It's managing our risks, and it's just being, you know, really, really disciplined around capital allocation and expenses. You know, I know we'll spend a lot of time here talking a lot about credit.
Maybe before I go into that, you know, just talk about our 15% ROTCE target. We're absolutely committed to it. You know, as many of you know, credit has been challenging over the course of this year. We talk a lot about credit. You know, we try to provide a lot of transparency around credit, even quite frankly, when it highlights some of the difficulties that we have in terms of forecasting credit. We have. You know, we have adjusted our outlook on retail loan credit a few times this year, as many of you know. I'd say over the course of the quarter, our credit challenges have intensified.
Our borrower is struggling with high inflation and cost of living, and now more recently, a weakening employment picture. And so, you know, we're seeing that. You know, all that being said, you know, we're committed to our 15% ROTCE target. You know, we'd admit the road is harder and the timeline to get there is longer. You know, that being said, as a management team, you know, as many of you know, we've taken a number of steps over the course of the last 18 months to really bolster the profitability of the enterprise. You know, we've taken actions in terms of pricing and curtailment. You know, we've sold our Ally Lending business. We've deconsolidated nearly $3 billion of retail auto loans through the securitization markets.
We executed our first of hopefully many CRT transactions earlier this year. You know, and we've taken significant actions, you know, just around, you know, curtailing, for example, our credit card business, you know, moving our mortgage and our securities portfolio to predominantly a runoff, and also taking actions on the expense side of our business. So we've shown that we'll take actions to make sure we lock in our mid-teens ROTCE target over time. You know, we acknowledge the road is harder, and we're going to have to do more, and we're committed to do that in order to make sure that we deliver upon that, you know, even in the face of our recent credit challenges.
So, my guess is you're probably going to ask us to elaborate a little bit more on what we're seeing in terms of credit.
Go for it.
Yeah. So maybe before I kind of jump into the main event, retail auto, I'll just spend some time on some of the other, the other credit portfolios or the other loan portfolios. So on the commercial side of the house, both commercial auto as well as our corporate finance business, you know, we actually haven't seen any losses so far this year. And I'll knock on wood as I say that, we haven't seen any losses. Those portfolios both, you know, continue to perform extremely well as we would have expected them to. You know, on the credit card side of the house, as you know, we pointed to elevation in NCOs middle of last year. You know, we put a lot of curtailment in place.
That portfolio is now stable, and performing very much in line with the expectations that we set at the beginning of the year. And so we feel good about where we are from a credit card perspective. And then, as you know, we have a significant mortgage loan portfolio. It's very high quality, it's seasoned, yet also very well behaved. And so across the kind of non-retail auto assets, which is about $50 billion of loans on our balance sheet, I'd say credit is performing in line or better than our expectations. And so with that, let's turn to auto. And so as I said earlier, you know, on the retail auto side, our credit challenges, you know, have intensified over the course of the quarter.
In July and August, you know, we saw delinquencies up about 20 basis points versus our expectations, and we saw NCOs up about 10 basis points versus our expectations. You know, we're clearly dealing with a cohort of borrowers who have been struggling with cost of living and now are struggling with an employment picture that's worsened. Unemployment up approximately 50 basis points, you know, since the beginning of this year. You know, in particular, you know, we spend a lot of time looking at the late stage delinquencies, so looking at 61-day-plus days past due. You know, those delinquencies in particular we're looking at, because, you know, those reflect really kind of that pool of struggling borrowers.
And as that pool of struggling borrowers in those later stage delinquency buckets has grown, you know, it gives us pause in that as we kind of think about that ten basis points of underperformance on NCOs in July and August, you know, our sense is, you know, there's that that's probably going to expand as we come in coming months, just given the size of this population of struggling borrowers. And so that's really kind of one of the things that's put us on notice around credit development. Maybe what I'll do is just turn for a minute and talk a little bit about the vintage dynamics because I've spent a lot of time talking about 2022 versus the 2023 and later vintages.
You know, I mean, maybe I'd start by saying, you know, kind of even with the credit trends we've seen and with, you know, NCOs trending ten basis points above our expectations, as I look on a linked month basis, you know, July and August on a seasonally adjusted basis, you know, NCOs actually came down. And I think that's a reflection of this rollover of the portfolio from losses driven predominantly by that 2022 vintage to moving to the 2023 vintage.
The 2023 vintage, you know, has the benefit of a significant amount of curtailment, particularly when you look at, you know, the second half of 2023 as, you know, our level of curtailment, you know, basically progressed, starting in the second half of 2022, but then really, you know, kind of re-upping on additional curtailment in the first quarter of 2023. And then we put in successive rounds of curtailment through the second half of 2023 as well. So when we look at the two vintages from a delinquency perspective, 2023 continues to outperform 2022.
And so that gives us, you know, some confidence around the level of curtailment we put in place and the actions we've taken so far. That being said, the 2023 vintages is contending with a different macroeconomic backdrop than what 2022 contended with at this point in its life cycle a year ago, right? The 2023 vintage was originated in a roughly 3.5% unemployment world, and we're sitting now at 4.2%. And so that comparison between 2022 and 2023 is going to get harder to make as 2023, you know, deals with an increasingly difficult macro environment.
But right now, as we sit here today, you know, 2023 continues to outperform, even dealing with that macro environment. And so, you know, if I kind of turn to, you know, kind of the outlook and kind of how we think about credit going forward, you know, maybe I'd start to say, you know, we continue to expect to benefit and, you know, we continue to feel great about the curtailments that we've put in place. You know, we are obviously taking a very close look at credit.
You know, a lot of the curtailment is based on analysis of very much at the segment and subsegment level within our portfolio, and we've taken a lot of actions in terms of cutting out segments that are underperforming, while at the same time repricing segments that we've stayed in. We're going to continue that work and continue that effort going forward as we see these credit trends emerging. You know, and so, as you know, as I said before, our sense is just kind of given the buildup of late stage delinquencies, you know, kind of given that ten basis points of underperformance versus expectation that we've seen the first couple of months of the quarter, you know, our sense is that, you know, we'll see some underperformance going forward.
We'll take a hard look at our reserves as we head towards the end of the quarter. Yeah, right now, just kind of given that delinquency bucket, I'd expect that we could see reserves move up. Yeah, all that being said, and in the face of these credit challenges, you know, we still remain adamant about our 15% mid-teens ROTCE target. You know, and there's a couple things behind that. You know, number one, the loans, when you kind of look at these recent vintages, yeah, they're underperforming our expectations in terms of loss and ROE. Yeah, but on the other hand, they're still attractive loans. They're still written at risk-adjusted margins that are higher than what we wrote pre-pandemic, you know, even with elevated credit costs.
And so they're overall accretive to the ROE of the enterprise. Then number two, just as a management team, we remain committed. Yeah, we've shown that we're willing to take actions, and we're going to continue to take actions. As you can imagine, we're looking at every aspect of our businesses and really looking at them with a lens towards capital and expense optimization. And so again, you know, notwithstanding the credit challenges that we're facing, and notwithstanding the fact that we face a harder road going forward, we remain committed to delivering on that 15% ROTCE. Yeah, albeit it's probably a longer road than we had entertained a few months ago.
I guess we started out the year thinking retail auto charge-offs for 2024 would be 1.9%. That number kind of progressively ticked up. I think on the July call, you were kind of thinking 2.1%. You know, kind of given what you just said, any kind of updated thoughts to where that figure, you know, ends up this year, and then kind of when do you kind of expect losses to peak?
Look, you know, we're trying to be as transparent and kind of tell the world everything we know as soon as we know it. And at this point, you know, July and August are 10 basis points up. We're looking at kind of what's rolling through the delinquency buckets. We think that pressure escalates over coming months as loans kind of rotate through the buckets. Yeah, I'd say we're going to. Yeah, obviously, we'll see how the quarter plays out, and we'll come back in October when we report the quarter, and we'll probably have more to say in terms of kind of what we see at that point.
You mentioned upward pressure to reserves. I realize you kind of calculated as a quarter end, but you know, maybe if the quarter ended today or kind of what are you thinking, putting numbers to that, how we should think about it?
Yeah, I think we'll report that with the quarter. You know, there's a process. There are a number of factors that get involved. You know, and obviously, there are a number of constituents throughout the institution who opine on it. Yeah, my view, just kind of based on what we've seen in terms of kind of what's in the delinquency buckets right now, my sense is up, but it's kind of premature to put a number on that.
Okay. I guess while charges have been trending higher, so has net interest margin. And, you know, you've talked to this kind of 5 - 15 basis points expansion. I think you've kind of thought 3Q at the low end of that. Maybe just expand on some of the margin dynamics and, you know, the rate outlook is, you know, probably shifted-
Yeah
- since July and, you know, just maybe talk to how you think that impacts your NIM trajectory.
Yeah. So look, we continue to feel great about, you know, kind of the long-term drivers of NIM expansion. So you look at the portfolio repricing on the auto loan side, just as, you know, kind of you think about, you know, originated yields that, you know, so far continue to trend around 10.5% or above versus a 9.2% portfolio yield. There's just a natural gravitational pull upwards in terms of overall yield. You know, at the same time, on the cost of funds side, you know, we've been pretty forward-leaning in terms of taking pricing out of our deposit book, particularly on OSAs. And so we continue to benefit from lower cost of funds going forward.
And so, you know, I think we feel pretty good about the medium and longer-term trends around net interest margin. Yeah, that being said, as I've said before, you know, the size and the ultimate pace of Fed cuts does affect us on a quarter-to-quarter basis. It doesn't change our view towards a 4% NIM over the medium to long term, but it does affect us in a particular quarter. You know, so for example, back in early August, you know, we saw a real shift in terms of the forward curve and kind of how the market was thinking about rates going forward. You know, we went from a period where most of our questions were: What happens if we're at 5.50% forever?
And, you know, we immediately pivoted to a world where, at that point, the market was anticipating 150 basis points between now and the end of the year. If that kind of size and pace of cutting would put some near-term pressure on our book, yeah, ultimately, you know, that pressure is over a quarter or two, and then ultimately, you know, and then ultimately becomes a tailwind for us as our deposits reprice. And so maybe just to talk a little bit about that kind of near-term pressure and how that works. We have about $60 billion of floating rate exposure through floating rate assets and hedges. That's... You know, think about that as an immediate 100% beta. So when you get those large shocks to interest rates, you know, that $60 billion of exposure reprices immediately.
Now, that repricing kind of hits in the short term. In the medium term, it's overwhelmed by the liability sensitivity of our balance sheet. That is, our large liquid deposits book will reprice with a 70% beta, but over time, there's a lag between rates coming down and when we put in our changes to deposit pricing. We'll get to the 70% beta, but it's not as immediate as it would be on a contractual floating rate asset or a hedge. And so large reductions in the Fed funds rate, large kind of rapid reductions in the Fed funds rate, lead to near-term pressure on our net interest margin, so it affects us on a quarter-to-quarter basis.
But as you play that forward, yeah, that pressure actually turns into a tailwind as the true liability sensitive nature of our balance sheet materializes. You know, and you know, when you kind of think about it, so the size and the pace, obviously if you know, easier to adjust to a 25 basis point cut than a 50 basis point cut at one go. And easy, obviously, to adjust if the pacing of cuts is more gradual as opposed to concentrated within the course of a particular quarter. You know, as we look at the forward curve right now, it currently prices in about 100 basis points of cuts over the remainder of this year.
You know, whether that happens or not, I don't know. Anyone's guess. But if that were to play out, it would put pressure on our net interest margins, you know, certainly over the next, the next couple of quarters. Yeah, probably kind of lead us to a scenario where our NIM is kind of more flattish as opposed to expanding for the next couple of quarters. All that being said, of course, that NIM expansion and that trajectory to 4% NIM very much intact as the deposit book reprices. It's just, it takes a couple quarters to get there. Yeah, when I turned to third quarter in particular, and, you know, you referenced the 5- 15 basis points.
You know, we talked, you know, at the end of second quarter about, you know, just some of the pressures kind of limiting that NIM expansion for the third quarter. One of them we talked a lot about was just the overall level of lease gains. And so we had anticipated, just based on the leases that we had outstanding, that our termination volume would be lighter. That would put a, you know, that would put a headwind on NIM in the quarter. You know, in addition to that, I'd say lease gains came in a little bit soft. I mean, used car prices were overall pretty good. But just due to composition in terms of what was coming back from lease, our lease gains were a little soft.
So that put additional pressure, you know, on our NIM in the quarter. And so, you know, think about kind of the lease dynamic putting six to seven basis points of linked quarter pressure on our net interest margin. As a corollary to the credit discussion we just had and a buildup of those late stage delinquency buckets, we've also seen pressure from nonaccrual loans. Yeah, which is an interesting one and probably more significant than you might anticipate. So when a loan goes more than 90 days past due, we put it in nonaccrual status. We don't just lose the current net interest income on that loan, but we also write off the prior 3 months of interest revenue.
It has a, you know, it has a meaningful impact on, you know, on our net interest income and our margin ultimately, during the quarter. We're seeing that impact us as well. You know, and then another factor that's impacting us is actually OCI. Yeah, so we've seen this great rate rally. It's probably reduced our OCI by about $600 million after tax, which is a good thing. But there's also a denominator impact. So as the securities portfolio gets written up, the denominator goes up without an offsetting increase in net interest income. That is also a couple of basis points of headwind on NIM.
It's overall, on balance, a good guy, but it is a bit of a headwind on NIM. And so taking into account a number of the headwinds that we have in the quarter, you know, we actually see -- we see NIM declining in the third quarter, as opposed to expanding. Again, it's a number of factors that hit us in the third quarter, you know, some of which we obviously knew and talked about, and some of which, you know, are kind of more credit and market related. All that being said, you know, yeah, we still have a lot of conviction around our 4% NIM trajectory.
Yeah, albeit we'd admit that there's kind of more uncertainty around the timing of when we'd get there.
All right. So it sounds like, I guess, pointing to a sub-3% NIM for the third quarter.
No, not sub 3%.
Okay.
We were at 3.3 in the second quarter.
Right.
So we're pointing to NIM declining from there.
Got it.
But we didn't, we didn't say three.
Got it. I guess maybe, I guess if the forward curve plays out, guidance for the full year was 3.3% . I guess, how would you think about the trajectory, given you'll have some kind of maybe catch up?
Yeah, look, I think we'll probably come through in the, you know, when we report the quarter, to talk a little bit more about guidance for the year. You know, and obviously there's a lot of variability within the quarter that's just driven by kind of what the Fed does in terms of the pace of overall cuts. So I will come back to that with kind of a little bit more information in October.
That's fair. Maybe talk a bit about just the overall balance sheet, and just how we should think about that looking out. You know, you're certainly growing certain parts of the business, retail auto, corporate finance, other areas you talked about scaling back card and exited Ally Lending earlier this year. So just, you know, how do you think about the overall balance sheet?
Yeah, yeah. We continue to look at the balance sheet with an eye towards capital optimization, and so you think about, you know, a flattish balance sheet going forward, but within that flattish balance sheet, we continue to grow our retail loan portfolio. We'll continue to grow our corporate finance portfolio. Those are both kind of relatively higher return assets for us. Yeah, and businesses that, you know, obviously we've got real depth and real opportunity to win in. You know, on the other side of that, you know, we moved our mortgage business, you know, kind of to an off balance sheet play, you know, at the beginning of 2023 . You know, and so we continue to see our mortgage portfolio run off.
You know, we've been making minimal reinvestment on our securities portfolio, and so that portfolio also continues to run off. And so we're in effect, we're kind of running off some of these lower return portfolios, and we're kind of growing in areas where we get higher returns. Yeah, I'd also say just within the auto finance business, you know, we look at our dealer relationships really as relationships. And so we look at them on a comprehensive basis, and we're looking at, you know, the retail loan volume from the dealer, relatively higher ROE product. We look at how much commercial credit we have extended to the dealer, which is a relatively lower ROE. And so we're constantly looking to kind of optimize that balance between the kind of retail loan element of it and the commercial element.
Then, at the same time, obviously trying to drive and continue the momentum that we have on the insurance side, which drives an attractive, kind of low capital consumption, other revenue line for us. So, you know, as we think about the balance sheet, it's really very much with an eye towards, you know, kind of how do we kind of optimize for kind of getting the best risk-adjusted return for the enterprise? You know, you pointed to cards, you know, from a loss perspective, cards has been relatively well behaved, very much, you know, kind of reflecting the amount of curtailment we put in. We're still very cautious, just kind of given kind of what we're seeing in the macro environment. We're still taking a cautious view of that business.
And so we, you know, we certainly don't have our foot on the accelerator there in terms of growth.
Got it. And maybe, you know, talk about kind of some of the liability dynamics. Maybe just auto yields have been, certainly a bright spot. I think portfolio yields in the second quarter, 9.2%. Recent vintages north of 10%. You know, we did see a rally in 2- and 3-year swap rates of late. Just maybe how we think about the asset yield there looking out. And then, you know, you kind of talked about the 4% NIM earlier and, you know, just how does kind of recent dynamics impact when you think you could achieve that?
Yeah. No, and I think you're exactly right. Kind of the core dynamic remains very much intact in that we're originating at yields that are meaningfully above our portfolio yield. And so, you know, we're still today kind of sitting at a 10.5% yield, a 10.5% plus yield, you know, at the same time that our portfolio yield is 9.2%. And so we feel really good about the margins on the loans that we're originating today. Yeah, I think you're right to point out the swap curve. Some of our competitors will price their loans off of the swap curve, and two-year swaps in particular have come in meaningfully over the course of the quarter.
And so, you know, we do anticipate that we'll see some more of that competition. And that'll play kind of different parts of the credit spectrum, you know, for specific competitors. All that being said, you know, we continue to get great yields on the paper that we're underwriting today. And we continue to do that in an environment where, you know, we know we've got significant curtailment in place, and we expect to continue to put curtailment in place. But we are anticipating that there should be some pressure on yields moving forward.
Yet at the same time, we'll see some benefit in terms of our cost of funds, because our cost of funds will come down as well, and so we can protect the margin as we move forward. Yeah, I think kind of given what we're seeing on the credit side, we're still pretty cautious. But, you know, we will get through that, and as we get through credit and as we see positive development on the front book, you know, we'll also look at places where we can start unlocking some of the curtailment that we put in place.
You know, as you know, as you kind of look at the sum total of the curtailment we've put in place on the auto side, you know, if you compare first quarter of 2023 to first quarter of 2024, I mean, we've increased the proportion of our mix that goes towards our highest credit tier by 10 percentage points, right? We went from, you know, 30-ish% S- tier paper to north of 40% S- tier paper, you know, over the course of 2023. You know, we've added 12 points to our average FICO. We've lowered our LTVs.
You know, we've put a lot of curtailment in place, and as we, you know, as we continue to see favorability on the front book, yeah, we'll look for opportunities to release some of that curtailment. That's certainly not today, given what we're seeing in terms of credit. Yeah, but as you think about kind of pricing and margin over the longer term, we certainly expect that we'll use that lever as we move forward, as a way of protecting our margin and kind of locking in our path to that 4% NIM.
The other piece of guidance you talked to is kind of fee income up 12% for the year, kind of tracking to that in the first half. Just, you know, maybe talk to is that numbers are still doable? You know, I think insurance is probably a key driver of that.
Yeah.
I don't know if you can work that in as well.
Yeah, we're still on track with respect to that 12% other revenue growth for the year. As you pointed out, insurance has been a strong engine of that growth. You know, our insurance business working very close with our auto business. You're really just leveraging the depth of the relationships that we have with dealers. And as you know, we've gotten into a couple of new OEM relationships on the floor plan insurance side that have been really helpful in terms of building revenue on that side of the business as well. So we continue to feel good about that. Yeah, we continue to have momentum with our SmartAuction product, which also adds to our other revenue line.
So again, we feel pretty good about kind of where we are from another revenue perspective.
...And then I guess on expenses, you know, I think the guidance for you is controllable expenses down more than 1%, up less than 2% overall. I guess maybe just talk to expenses. If, you know, revenue is going to be softer than expected, certainly through the third quarter. Can you talk to any kind of offsets we see on expenses and as you begin to put together the 2025 budget, with NIM entering next year at a lower than expected clip, just how you're thinking about that?
Yeah, no, it's a great question. You know, first, you know, as far as this year goes, we're still very much on track, down more than 1% on controllables, and up less than 2% on expenses overall. You know, as you pointed out, with the growth of the insurance business, that, you know, the great thing about the growth of the insurance business is you get the revenues right away, you get the expenses right away. And so, yeah, with the growth of insurance revenue, we also see growth in insurance expenses, and that's really what's driving that 2% overall expense growth versus the greater than 1% decline in controllable expenses.
And just maybe to focus on that kind of greater than 1% decline on controllable expenses. We've taken meaningful actions to reduce the expense levels across the organization, and so we're achieving that 1% while absorbing some additional costs around the servicing and collection, just given what's going on on the credit side of the portfolio, and also a lot of investments that we've made that we've had to make in cybersecurity and in kind of other areas on the franchise. And so, you know, we have taken real actions on expenses to achieve that controllable expense target.
You know, as you pointed out, you know, as we kind of go into planning for 2025, we're taking a hard look at expenses across the organization. You know, similar to past years, you know, we've kind of typically used first quarter January to talk about the coming year in terms of what we see in terms of the plan. So that's certainly our intention this year. But yeah, obviously, given the trends we've seen in the business, you can assume that yeah, every aspect of our businesses is very much kind of under the microscope with a real focus on both capital and expense efficiency.
Got it. And maybe on capital, we've certainly seen Ally grow its capital buffer over the last several quarters. You referenced your first credit risk transfer transaction earlier. Maybe how should we think about Ally continuing to tap the capital markets and, you know, how do you plan to use this excess capital? And, you know, maybe when you're thinking about share buyback and the like.
Yeah. So look, you know, while the specter of Basel III is out there, we're in capital build mode. You know, I think we expect we'll start to get some kind of visibility around Basel III over, you know, coming days or weeks, anybody's guess. But as long as that's out there, we're very firmly in capital build mode. You know, we've done a lot of kind of interesting proactive things over the course of the last eighteen months with respect to capital, and it's our expectation we'll continue to do that. You know, you mentioned CRT. We think CRTs are really attractive opportunity for us from a capital perspective.
You know, and that it really gives us an opportunity to manage the capital load associated with a number of our retail auto loan assets. But maintaining, you know, maintaining obviously our relationships with dealers, maintaining our ability to speak for their volume. And so we really like the CRT and, you know, it's a capital markets transaction. It's kind of there when it's there, and we'll look to opportunistically use that going forward. We haven't committed to any kind of specific volume or cadence, but it's certainly something that we expect to continue to do. And similarly, you know, we use the ABS markets for deconsolidation. We'll certainly look for opportunities to deconsolidate loans as well.
And then of course, we're taking a hard eye in terms of just kind of what we're originating, you know, again, with an eye towards capital optimization and expense efficiency.
Got it. And then one of the things we get questions on, you know, negative tax rate.
Yeah.
The second quarter from your guidance for the year is, you know, flat to negative 5%. You know, clearly, EV leasing channel is a driver of that.
Yeah.
Let me just talk to kind of, you know, how that works, your expectations, and just how do we think about tax rate maybe for next year?
Yeah, you know, it's a good question. I understand a lot of people kind of struggle with kind of how to think about that, how to model it, how to anticipate it. You know, I guess number one, I'd say we don't have any real kind of firm commitments around EV leasing volume. And so, you know, the actual kind of level of volume in a given quarter is going to kind of move around. You know, and I think that kind of makes the forecasting effort a little bit more challenging.
Because, you know, on the one hand, the economics of EV leases are no different, but the P&L construction in terms of the timing and the placement of the economics are different, and so that makes it hard to estimate. The way I think about it is, you know, if, you know, for a quarter where we do, let's say, $500 million of EV leases, you'd expect about $80 million of tax benefits. So I kind of model the rest of the business at an effective tax rate of, call it 22%-23%, and then just take kind of the level of lease volume.
It's kind of that $500 million of EV leases, $80 million of tax benefits, and that's kind of how I would, how I think about kind of modeling the tax rate, as you think about us going forward.
Got it. I guess since the CFO has even said you've kind of been very consistent with this kind of mid-teen type ROTCE-
Yeah
... target, I guess can you talk to Ally's ability to sustain that, you know, longer term?
Yeah. Look, you know, I think we continue to be committed to it. You know, we acknowledge the credit headwinds that we're facing today, but you know, quite frankly, even with the credit headwinds, you know, we still just look at the return on the loans that we're originating. We look at the return on the recent vintages, and they're still attractive. You know, we look at the net revenue dynamics within our business, with the portfolio roll over on the auto side and with cost of deposits. Yeah, and we look at, you know, quite frankly, a lot of the actions that we've taken around capital and expense optimization over the last eighteen months.
And also with the kind of an eye towards, you know, just a kind of a continuation of that theme moving forward. Yeah, we feel 15% is the right target for the institution. We feel it's achievable. It is absolutely sustainable. You know, we acknowledge the road is harder and we'll have to do more to get there, and that kind of puts some uncertainty around the timing. But we're absolutely committed to it, and we again stand by it as what we think is kind of the achievable, sustainable, the right target for the enterprise.
Got it. And maybe, as we kind of come to a close, I mean, anything else you want to share in terms of how the quarter or the year is kind of shaping up?
I think you hit everything.
Great. With that, please join me in thanking Russ for his time.
Great. Thank you.