Good morning, everybody. Before we get started, I'm just going to read some disclosures. For important disclosures, see the Morgan Stanley Research Disclosure website at morganstanley.com/researchdisclosures. The taking of photographs and use of recording devices is also not allowed. If you have any questions, please reach out to your Morgan Stanley sales representative. With that, we're kicking off the Second Day Of Our 16th Annual Financials Conference With Ally Financial. This morning, we'll be showcasing two businesses at the center of Ally's recent power of focus strategy, specifically dealer financial services and corporate finance. Now, while these two businesses today are different, today we'll be digging into the common strategy between them, specifically the emphasis on helping commercial customers win, as well as how they are helping Ally achieve its medium-term target. Joining me on stage this morning is Doug Timmerman. Welcome back, Doug.
Thank you.
President of Ally Dealer Financial Services since 2021. He's been in the auto finance business at Ally for more than or almost 40 years, making his inaugural appearance at our conference, and I think any conference, is Bill Hall, President of Ally's corporate finance business since 2006. Bill also co-founded the structured finance division in 1999 and has spent his entire career in middle market lending. Welcome, Bill.
Thank you.
Finally, someone who investors know already pretty well, Sean Leary, Chief Financial Planning and Investor Relations Officer who leads all line of business in corporate financial planning in addition to investor relations. Welcome back, Sean.
Good morning, Jeff. Let's get into it. Doug, let's start with you. Dealer Financial Services, the business has clearly evolved over time. You were GM's captive finance provider. You're now an independent competing in the dealer F&I office, along with some changes to origination mix over that time period. Can you talk about the evolution of the business and your competitive advantage today at Ally?
Sure. Yeah. I think our evolution is a great story. I think it's a testament to the franchise. It's a testament to the team executing against our priorities, for sure. As we like to say, if you think about our momentum and the power of focus, we also know that our future is bright. From my standpoint, if you think about what differentiates us, it has simply a lot to do with who we are and what we do. We're very unique in our size and scale. We're the largest. We're also very unique if you look at the products and services we provide. Most of our competitors provide one or two. We provide a full spectrum of products and services, arguably across all the dealer's needs.
We also think that we're very unique relative to our subject matter expertise and our relationships, and confident that we're very unique in our approach. If you look at the consumer side of our business, for example, where we're obviously highly automated, we're digital, we're also high touch. Our sales teams are very active on the dealer showroom floor, essentially working the day to help the dealer solve problems. They have the subject matter expertise and the full suite of products and services to touch every aspect of the dealer's business. Our consumer underwriters are arguably our secret sauce. Consumer underwriters, their day is focused with inbound calls and outbound calls, helping dealers structure deals to help them sell more cars and trucks. From a dealer's perspective, job number one is selling cars and trucks. We align perfectly there.
If you think about our suite of products, we've got a full suite of commercial lending products. If you ask the broker community who's most active in buy-sells, Ally Financial is going to be top of the list. Our remarketing services are in high demand. Smart Auction is a great asset to us as well as our dealers. Our insurance business is aligned to what's really important to the dealer. If you look at the profitability of a dealership, F&I is critically important. We provide not only the products, F&I products for the dealer, we also provide the training and the consulting associated with those products, and of course, property and casualty insurance on top of that. We have what we call a pass-through business, which also helps dealers sell cars and trucks. If you add it all up, obviously, we're very unique.
Because we're unique, it gives us an opportunity to gain unique commitments from the dealer. Case in point from that is our focus on gaining the dealer's commitment to sending us all of their applications. By doing so, that's helped us grow our consumer business. It's helped us significantly improve the returns of our consumer business. It allows us to be selective. It allows us to concentrate our volumes in the segments that have the very best risk-adjusted returns. It also allows us to be nimble when competition ebbs and flows. It also allows us to adjust as macros change. Very, very importantly, and oftentimes missed, is the fact that it also allows us to hold incremental rates above the competition. Punchline is we're very, very unique. We're much different than all of the competition in a big, big way. We're very difficult to replicate. And arguably, I don't know if there's really a competitor out there that's even attempting to replicate what we do for our dealer customers.
That's great. As we think about the power of focus, one thing Ally's talked more about is diversifying within those focus areas. Can you talk about how you've been able to diversify your origination channel and how you've been able to drive some nice growth in the fee revenue component? You touched upon some of the aspects there already. Those are less rate, credit, capital sensitive. What opportunities are there for that to continue going?
Yeah. I think, one, we've got momentum in arguably every aspect of our business. Just like every business, you're trying to find competitive advantage. I lined out our competitive advantage that ties to the consumer side of the business and really our business overall. Some good examples are our Smart Auction business. We've really been focusing on, call it the large consignor segment. Our leverage point for that segment is we offer up our Smart Auction technology to those large consignors. We make a commitment to modify that to their wants and needs. In some cases, even put their name on that technology. Every time a transaction is done, obviously, there's economics associated with it. We participate in those economics. If those deals do not transact on their platform, it spills over to Smart Auction. We get more volume that way.
It is just a great leverage point relative to Smart Auction back to our technology. If you think about our insurance business, it is about leveraging our relationships. So 22,000 dealer relationships. Essentially, the effort in simple terms is coordinating the auto finance team and the insurance teams, getting the auto finance team really good at prospecting their dealer customers, getting the insurance team really good at proving out to those prospects that we are a better provider. We have had a tremendous amount of success in that regard. There is still a lot of opportunity in that regard. Then our pass-through business is a leverage off our application flow. Again, we gained the dealer's commitment to sending us all of their applications. Some of those applications do not fit our risk appetite.
We pass those applications on to two others, essentially helping dealers connect with finance sources that they normally wouldn't have access to. Again, hits the points that's most important to a dealer, and that is helping them sell more cars and trucks. Again, we get an opportunity to participate in the economics, but without taking any credit risk. There are leverage points in everything we do. We obviously focus on those leverage points. Great momentum and great opportunity as we think forward as well.
If we step back from Ally and look more at other players in the competition, we've been hearing a lot more about competition re-entering the space of late. Are you seeing this? Has it caused you to make changes in how you're approaching the market? How is it impacting pricing and spreads, maybe as we think about that 9.8% you put on last quarter or two years?
Yeah. Yeah. I mean, the businesses in the industry are always competitive. I'd say competition is generally pretty balanced. If you look at the very top end of the super prime segment, rate competition is probably a little bit more aggressive than it was three months ago, six months ago. If you look at the deep subprime business, some of the traditional lenders are starting to re-enter into that segment. Where we play, which is in the middle credit segments, I'd say it's been more consistent. Again, we focus on the middle credit segment because we feel that's where the best risk-adjusted returns are. It requires a certain level of sophistication to play in that segment. It's a little bit difficult to enter. You have to be consistent. You can't come in and out. Very importantly, that's the most profitable segment for our dealers as well.
Playing into the segments that's most important to them, obviously, is a critical value prop as well.
Okay. Great. So maybe slightly less focused on the S tier as you see more competition or maybe.
Yeah. S tier is very broad. When I say the top end of the super prime segment, that's S tier, but it's the portion that we really don't play in.
Got it. Okay. Great. Let's talk about tariffs. Multi-part question here. So bear with me. Let's discuss the current environment and how you're positioned to navigate this uncertainty. Is this pressuring affordability on new and used vehicles? What are the potential impacts to your vintage losses if auto prices increase further? You've taken steps to curtail your risk post-2022. Is there anything else you're doing incrementally today to position for that uncertainty or volatility? Maybe you can then just touch upon consumer demand with pull forward dynamics that you're seeing today.
Sure. Yeah. There is obviously still a lot of uncertainty relative to tariffs. We are monitoring very closely. I think it is kind of important to think about our position today. I would say if you look at our purchase policy, if you will, our purchase policy is relatively conservative versus a historical perspective. Despite the fact that it is conservative, if you look at our yields, our risk-adjusted returns, and our volumes, they are all very, very, very healthy. If you look at our vintages, for example, 2023, every quarter of 2023, the vintages are very healthy and they are high returning. Our 2024 vintage, also healthy, high returning, even a little bit better credit performance in the 2024 vintages. The first half of 2025 is going to look very much like 2024.
We feel like we're well positioned relative to credit and how we're underwriting the business today. I think what's also important is to recognize that essentially two-thirds of our origination flow is used. On a relative basis, that's a good place to be. If you line out all the OEMs, we're really heavily skewed towards those OEMs and those franchises that will probably be impacted less because of tariffs. A lot of things position us well. Sometimes I get a question of, is this going to be similar to the pandemic or what we say, the hangover of the pandemic? I don't see tariffs having near the impact as it relates to inflation, volatility, or affordability challenges. We're watching. We're going to obviously be very measured, very balanced as we think through it.
Hopefully, we'll learn more in the next 60 to 90 days and, of course, play accordingly. Just real quick, have you noticed that uptick in pricing in April, May, and then maybe is it sort of. Very much on the margin. We watch transaction prices across all makes, all models, very much on the margin. Okay . Consumer demand is still very healthy. Yeah.
Just one more for you, Doug, before we switch over to Bill. There is a lot being thrown at the consumer right now. We just talked about tariffs, but there is a resumption of student loan payments. We have got DOGE impacts on government workers, stock market volatility, etc. How would you say the consumer is handling all this at this point and any read into your portfolio as a result of that?
Sure. Yeah. A lot of things to monitor. I think that's one of the things that we're really good at for sure. Relative to the consumer and health, certainly where we play, we see the consumer being very healthy. Again, we like those vintages and performances that I spoke to. Those are very healthy. I think that fits well. I think if you look at delinquencies, net charge loss, flow rates, we like the trends that we're seeing. Flow to loss rates are running at historic lows. We've done a lot on the collection side of our business. We've brought in some really good talent. We've invested big in our digital technologies, essentially better connecting with consumers at the right time and the time of stress, helping them bridge to better places.
Overall, the trends feel good and the consumer feels healthy from our standpoint relative to the segments that we play in.
Okay. Great. Thanks for that, Doug. Bill, let's move over to you now. So corporate finance, that's the other piece of Ally's commercial portfolio in addition to floor plan. You have seen some really strong asset growth there. It's grown from $2 billion in 2014 to $10 billion today. You have really strong ROEs, low losses. Starting high level, can you just talk about the business, how it fits into Ally's ecosystem, who your customers are, and how do you go to market and compete?
Sure. Good morning, everyone. I'm delighted to be here. Ally has about $35 billion of commercial assets on its balance sheet, and corporate finance represents about $11 billion of that. Fundamentally, we're middle market leveraged lenders. We have multiple verticals and lines of business, but our core product is senior secured, first-out floating rate loans to companies or entities that are owned by leading private equity firms or private credit firms. We serve as agent for virtually all of the loans that we do. We think that's critically important because it allows us proprietary access to proprietary due diligence. We control the documentation. To the extent there's a hiccup, we control really the workout of the credit. Fundamentally, it's also critically important because it allows us to develop relationships that we've enjoyed for over decades now.
If you look at our revenue, we're thrilled with the fact that virtually all of our revenue, the vast majority of our revenue, comes from deep relationships that we've had for many, many years. Also, by serving as agent in all of our deals, it affords us an opportunity to recognize a lot of fee income. In fact, about 20% of our gross revenue comes from fee income. A great example of that is syndication income. Over the last three or four years, we've syndicated over $8 billion of loans to other lenders, mostly other regional banks, and in the process, generated over $100 million of syndication income. It's funny that, Doug, you'd think peripherally, Doug's business and the corporate finance business don't have a lot in common, but the value proposition is virtually identical. Doug's team and the business has been around for over 100 years.
Our business has been around for over 25 years. We think we're among the longest-tenured players in the middle market leveraged lending space that's had the same leadership team backed by the same source of capital. We are very, very proud of that. Our value proposition to our clients mimics what Doug does for his dealer community. That is, through thick and thin, we have been a consistent provider of speed, certainty, and creative solutions for our customers. We are not in the market and out. We have always been a consistent source of financing and ideas for them. As a result, we believe we benefit from some of the strongest relationships in the private equity or the leveraged finance industry. As I said, we've been at it for 25 years.
For anyone that's interested, we're very easy to diligence because all the information is out there, and you don't have to do a lot of guesswork to validate our success over a couple of decades now.
You're just right up the road, so.
Right up the road.
Feel free to stop by if you want to chat with Bill. You also provided a new disclosure in the first quarter earnings doc talking about your vertical loan balances by vertical. You also recently announced a new one focused on infrastructure and energy. Can you talk more about these different verticals and the products you offer across those verticals and how you're able to drive those strong yields and healthy fee income growth we see?
Sure. We have three principal lines of business. One is sponsor finance. Another is private credit finance. The third line is what we call specialty finance. I'll start with sponsor finance because that's really what our roots are. We have a client list of leading middle market private equity sponsors where we're generalists, but we finance their investment activities. We're generally at about 50% of the enterprise value when we make a loan, which we think is very conservative. On average, actually, our stats would show about 40%. We have had a terrific loss record over the year. One of the most important things we learned is to choose your partners very, very carefully. We're proud of our roster of clients. We have a couple of defined niches like defense and aerospace.
Generally, it's our reputation in the market as a consistent provider of thoughtful, creative capital that's been a differentiator for us. I'll speak more about the private credit finance business because it's been getting a lot of airplay recently in the press. We basically provide wholesale financing to leading asset managers, private credit providers that allow them to leverage and scale their business. We have a portfolio of about $4 billion in loans that we've made to the leading private credit providers. We're collateralized by a diversified pool of about 1,300 different loans. It shows to me the resiliency of that portfolio and the strength of that portfolio. We also have an ability, those are mostly asset-based loans, all revolving credits.
We have an ability to the extent there's a deterioration in the collateral pool of the loans that are collateralizing our facility, we can give haircuts to how much we're lending against that collateral. We think it's a very, very safe, thoughtful way to participate in the growth of the private credit market. It's something that we've done very, very successfully. We think we have an outstanding roster of the leading private credit providers. Lastly, we have something called specialty finance, which has three businesses at the moment. One is basically healthcare, real estate financing, technology, venture capital financing, and something that we're just about to launch, which is energy and infrastructure. Our healthcare real estate business is about $2 billion in outstandings. We finance assisted living facilities, medical office buildings, skilled nursing facilities.
Again, we're teaming with leading institutional investors that are backing their assessment of value with significant risk capital in a deal. Our average loan to value is somewhere probably around 65% or 60%. We feel very, very confident in our exposure there. The performance of the portfolio, even through COVID, was exceptional. We have a technology finance business, which has done extraordinarily well. It's a smaller business, $500 million to $600 million of loans. There again, we're backing leading venture capital private equity firms that are backing their assessment of value with significant risk capital. Those deals were 15% to 20%, 25% of the enterprise value. Lastly, I won't say too much about it because we just onboarded the team. We haven't done our first deal yet. We were going to get involved in project financing for basically electricity generation.
The investment thesis is there is an insatiable demand in the country for electricity generation. We are going to do everything we can to participate in a very, very thoughtful way. It is a diversified pool of businesses, but the core tenet is the same. We are backing sophisticated institutional investors that have significant risk capital below our senior secured position. All of the businesses, individually and collectively, have what I think is very, very significant growth potential.
Okay. Great. That's electric stuff. Middle market leveraged lending seems pretty competitive, though. What's your secret sauce? How are you able to compete with these large banks and private equity firms given the scale that they have?
I think Doug mentioned that throughout your career, it's always been competitive. The competitors come and go. There's constant competitive threats. Our business is the same. The first thing I want to say is Ally's been a perfect platform for us to develop and grow the corporate finance business over 25 years. We started at DeNovo, and now we're over $11 billion. Ally has a unique deposit platform, which serves as the oxygen for our business. It's viewed in the market as extraordinarily stable. As many of you know, over 90% of our deposits are FDIC insured. That gives us an aura of tremendous stability. We have a cost of capital that's competitive, particularly relative to the other non-banks that we compete against. Ally itself has been a terrific platform.
Really, the secret sauce, as Doug alluded to, it comes down to the team and the reputation that the team has developed in the market for so long. We are not going to win deals because of the quantum of funds that we're lending to people. People want us to be their counterparty because they know if their company hits a speed bump or there's opportunity or there's threats, that we are a deliberative, thoughtful partner through thick and thin that's going to help them be successful. It is the team and our reputation that's carried the day.
As we all start paying more attention to this business from here, can you talk a little bit more about your philosophy on credit risk? How have you been able to navigate multiple cycles through periods of growth with such low levels of average losses? Do you think you need to take on more risk to grow here?
Our business is pretty simple. You can get 99% of the stuff right. The one thing that matters, the critical success factor for a lending business, is your core competency has got to be the ability to assess and manage secured commercial credit risk. That's what we do. We are very, very conservative. The entire culture of our organization is culture-centric. Everything that we do is under the lens of how do we make the smartest credit decisions that we possibly can. I would say our track record over many, many business and credit cycles has validated our approach to credit. It's the single most important success factor if you're evaluating a credit platform, in my humble opinion. How have they done through a cycle? We're proud of our results and how we've done.
Just last one for you, Bill. Under Ally's more focused strategy, it is clear you view the business as an important driver to reaching mid-teens returns here. How do you think this business, how big do you think this business can get under Ally? Do you have any thoughts on medium-term or long-term projections from here?
If you look back, I won't make any predictions. If you look back over the past four or five years, we've doubled the size of the business, tripled the profitability. As I said earlier, if you look at the individual components that make up the entire entity of corporate finance, each one of those businesses has a very, very compelling growth story for it attendant to that. We're convinced we can do that without altering our very, very conservative risk profile because something we'll never do is chase growth at the expense of loosening credit standards. That's not us, never will be.
Okay. Great. I just want to pause and see if there's any questions from the audience. Feel free to chime in at any point. Otherwise, we can continue. Doug, I mean, sorry, Sean, too many of you up here. Let's wrap up with you. You've laid out the journey to mid-teens returns. That's underpinned by NIM expansion, normalizing credit losses, disciplined on expense management. Can you talk about your journey in a little bit more detail here? And then maybe we can talk about the quarterly trends from here.
Sure. Thanks, Jeff. I'll hit your question in reverse order if that's all right.
Sure.
In terms of near-term results, I'd start by saying that the operational momentum and strength that we saw in the first quarter has really continued all the way through the month of May. If you look at the auto business, Doug talked a little bit about strong application flow. This has the potential to be a second consecutive all-time record from application volume specifically. That's led to really strong origination volumes. We expect to be up double-digit % year over year in terms of consumer auto originations with yields that are pretty consistent with the strong yields we saw in the first quarter. From a deposit standpoint, we've talked about tax season in particular. We're now through the tax season for this year.
While we will have a sequential decline in deposit balances just like we did last year, feel really good about the momentum of the business and, frankly, deposit gathering for the full year is ahead of our own expectations, largely driven by strong balance retention throughout the year. On net interest margin, look, we've said it before, but just to reiterate, we expect to fully offset the 20 basis point headwind associated with the sale of card on April 1. Drivers, of course, are we made a couple of OSA moves pretty late in the quarter in Q1. You are seeing a full quarter of benefit there. We have a nice CD repricing tailwind that we highlighted in the disclosure in April.
Even beyond that, just the continued roll-on, roll-off of 3% yielding mortgage and securities being replaced by the auto assets and corporate finance assets that Bill and Doug are generating creates a nice tug on margin upward over time. Look, a lot of focus on the back half of the year. I would say in the near term, our trajectory is going to be influenced by rates. We've spent a lot of time with investors talking about how we are near-term asset sensitive. To the extent we get into an easing cycle in the back half of the year, particularly an aggressive easing cycle, that is going to be a bit of a headwind to margin compression or margin expansion in the near term. From our perspective, the direction and travel is incredibly clear. So too is the destination.
Look, on credit, Michael hit this at a conference pretty recently. I would say we remain very encouraged by what we're seeing in our portfolio. That continued through the month of May, remaining appropriately cautious of everything that's going on in the macro that Doug talked about. Generally speaking, losses right in line with our expectation for the quarter. Overall, two months into the quarter, feel really good about results. More importantly, feel really good about the momentum in the businesses the guys have talked about today. Look, as it relates to mid-teens, we can appreciate that this is a show-me story. We are very confident in the direction that we're headed. That confidence comes from all the actions we've taken in recent years.
If you just sort of step back over the past 18 to 24 months specifically, we've reduced interest rate risk. We've reduced credit risk. We've simplified the organization. We've exited non-core businesses. We've driven the CET1 level quite a bit higher than it was two or three years ago, all while maintaining what we think is a uniquely strong deposits institution with 92% FDIC insurance. Even more encouraging than the actions is we're starting to see the inflection point in earnings, which is really a testament to the steps that we've taken. It can get really easy to get caught up in any individual quarter. I would just reiterate that our earnings expansion story is actually quite simple. In terms of margin, Doug's business is putting loans in the balance sheet at 500 basis points over Fed funds.
Bill's business, we're more like 200 to 400 basis points over SOFR. Of course, it comes with less credit risk than the consumer side of the house. As you know, Jeff, liquid deposits priced well below Fed funds. We're going to continue to invest capital in those businesses, again, all while running off 3% mortgage and securities balances over time. When you put all that together, that's kind of how you get to that upper 3% NIM. On credit, Doug talked about what we're seeing on the front book. Remain really comfortable with the credit position of the loans we're putting onto the balance sheet and that roll-on, roll-off dynamic. Mindful of macro, but feel really good we're going to move below 2% over time. Lastly, on cost, it's been 18 months straight of controllable expenses being flat to down.
You can expect that discipline to continue. Total expenses will drift up a little bit higher. Frankly, that's a good thing because it comes along with fee income in the insurance business. Upper 3's NIM, normalizing credit, and a lot of focus on capital and expenses is sort of the path to get us to mid-teens. Like I said, we can appreciate this is a show-me story, which is why, from our perspective, we're more focused on execution than ever.
Okay. Great. Anything else you want to leave with investors today before we depart here?
I don't think so, Jeff.
Okay. Great. I think we'll put an end to it here. Thank you guys so much for attending our conference. We look forward to talking further.
Thank you. Thanks, John.
Thank you.