Ally Financial - Q1 2023

Transcript

Operator (participant)

Good day, and thank you for standing by, and welcome to the First Quarter 2023 Ally Financial Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a Q&A session. To ask a question during the session, you will need to press star one one on your telephone. You will then hear a message advising your hand is raised. To withdraw the question, simply press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Mr. Sean Leary, Head of Investor Relations. Please go ahead.

Sean Leary (Head of Investor Relations and Enterprise FP&A)

Thank you, Carmen. Good morning. Welcome to Ally Financial's First Quarter 2023 Earnings Call. This morning, our CEO, Jeff Brown, and our interim CFO, Brad Brown, will review Ally's results before taking questions. The presentation we'll reference 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 J.B.

Jeffrey Brown (CEO)

Thank you, Sean. Good morning. We appreciate you joining us this morning to review our first quarter results. I'll begin on page number four. Adjusted EPS of $0.82, core ROTCE of 12.5%, and revenues of $2.1 billion reflect continued execution across our businesses in a dynamic operating environment. Net interest margin remained resilient at 3.54% as a result of disciplined pricing on both sides of our balance sheet. Originated yields on retail auto averaged 10.9% for the quarter, reflecting our ability to leverage dealer relationships to originate strong risk-adjusted returns. Since the start of the tightening cycle, we've added 455 basis points of price into the market, implying a beta of nearly 100% while remaining disciplined on risk content.

The total portfolio yield will continue to move upward towards newly originated yields, which represents a nice tailwind for the foreseeable future. While operating results were in line with expectations, adjusted EPS is below consensus, driven by a 10-cent headwind from valuation adjustments of certain equity investments. Despite the $41 million impact this quarter, these investments have generated accretive returns for Ally. Given the events in our industry that transpired in March, we thought it was important to spend additional time highlighting our deposits franchise and overall liquidity position. Retail deposits finished the quarter up $813 million. We also added a record 126,000 net new deposit customers. Our retail deposits exceed $138 billion, of which 91% are insured by the FDIC. Our insured deposit balances increased $4 billion within the quarter.

In addition to retail deposits, we maintain access to multiple other funding sources and currently have total available liquidity of $43 billion. For context, our liquidity position is 3.6x our uninsured deposit balances. Common equity Tier One was relatively flat quarter-over-quarter at 9.2%. Current CET1 exceeds our SCB regulatory minimum by $3.5 billion, and I absorbed another year of the CECL phase-in. Operational highlights reflect the strength of our leading franchises. Within auto finance, we decisioned more than 3.3 million applications in the quarter. Said another way, we evaluated $100 billion in potential originations this quarter and booked $9.5 billion of loans that met our risk-adjusted return hurdles. Consumer demand remains strong. Net charge-offs were 168 basis points.

Results within the quarter were in line with expectations. Brad will provide detailed commentary on our credit outlook later. Within insurance, written premiums of $307 million were up meaningfully and reflect continued momentum as we grow and deepen dealer relationships. Turning to Ally Bank. Total deposits of $154 billion were up $11.5 billion year-over-year. Consumer engagement and adoption trends across our other Ally Bank product offerings remain strong. 1.6 million customers across credit card and point-of-sale lending provide opportunities to deepen relationships and diversify our earnings profile. Corporate finance remains focused on serving customers while delivering strong risk-adjusted returns. Our held-for-investment portfolio of $10 billion was flat quarter-over-quarter. In terms of credit quality, the portfolio is all first lien positions.

Our CRE exposure is limited in size, concentrated entirely within the healthcare space, and represents approximately 1% of total loans on the balance sheet. Turning to slide number five. A strong purpose-driven culture is more important now than ever. We maintained a consistent focus on culture over the past decade, it's fueled significant progress strategically and financially. Our focus remains on driving long-term value for all stakeholders, that is only made possible by delivering for our employees, customers, and communities on a daily basis. For our employees, the first year of our Own It Grant program vested, providing 100 shares of Ally stock to those employees who have been with us for the past three years, further strengthening the owner's mentality we embrace across the organization. I'm particularly proud of the enhanced benefits we've offered to our associates and their families to help manage mental health.

For our customers, we continue to enhance digital capabilities across our product suite to ensure we're offering a seamless customer experience. For our communities, we continue to advance the equality in women's sports through partnerships like the one announced in February with The Walt Disney Company. I'm more confident than ever that our culture will be a critical differentiator in both the good times and tough times. Turning to slide number six. We've highlighted the strength of our consumer deposit franchise. Over the past 14 years, we've built a sustainable model focused on doing the right thing for our customers. The steady growth from new and existing depositors demonstrates their desire to keep their money at Ally and grow with us. Our customer base is now 2.8 million strong, with growth led by millennial and younger cohorts, signaling the continued opportunity ahead.

Our performance throughout the market volatility in March highlights the overall strength of our consumer deposit business. 91% of our deposits are insured with the FDIC. Average balances within uninsured deposits are some of the lowest among peers. The portfolio in total has an average account balance of approximately $50,000. Our customer-centric approach continues to resonate, evidenced by 96% customer retention. Importantly, we've delivered this performance while consistently providing best-in-class technology and customer service and pricing below top-rate payers. Moving to slide number seven. We provided incremental detail on trends within our retail deposit portfolio. The composition of our portfolio and the strength of our brand enabled us to navigate the volatility of the past several weeks with minimal impact.

Looking at the bottom left, we had our strongest quarter of net customer acquisition since 2009, which is essentially the best quarter in our bank's history. Since we've reached deposit core funding, we've been able to focus on growing and deepening customer relationships. On the bottom right, we've seen a gradual decline in uninsured balances over the past year. In total, uninsured balances are down $4.4 billion year-over-year, more than offset by $6.9 billion of insured deposit growth. Outflows among uninsured accounts were elevated the week of March 13th, were more than offset by strong inflows. For new customers during the market volatility, the Ally brand resonated as a source of strength as they look to diversify their deposit balances across institutions.

Looking ahead, I remain confident in our ability to balance growth and pricing given our 88% deposit funding in multiple market-based alternatives. On slide number eight, we've highlighted the depth of our nondeposit funding sources. Recent events have highlighted the resiliency of our deposits book, we will continue to maintain access to multiple alternative sources of liquidity for risk management and diversification purposes. In the case of Home Loan Bank advances or repo agreements, we can access more than $30 billion of incremental funding in a matter of hours. Importantly, we found that Home Loan Bank advances in the month of March were executed efficiently despite the elevated activity seen in the industry. Brokered CDs continue to serve as an efficient complement to the retail book, we have access through several firms and across the maturity curve.

Our unsecured debt issuances are investment-grade and a key source of parent company liquidity. Based on our current liquidity profile and liquidity risk metrics, we don't have to issue any unsecured debt in 2023, but we will remain opportunistic depending on market conditions. Obviously, there's been pretty modest big issuance since early March, but we expect markets will start to open as stress starts to wane. We have a mature securitization platform that is well-known in the market that we can leverage to match fund retail auto assets. We have grown the retail deposits book by almost $60 billion over the past five years, which has reduced our need for other funding. Today, we leverage these options more opportunistically, allowing us to optimize cost of funds and manage duration.

I know this is a lot more to cover than normal, but given the volatility of the past month, we wanted to highlight the significant access we maintain to nondeposit funding. Moving to slide number nine. We provided a snapshot of our current funding stack and available liquidity. Again, we remain core funded with deposits making up 88% of our funding footprint. On the right side, we summarize our total available liquidity position of $43 billion, which is up nearly 30% in just the last six months. In total, this liquidity is 3.6x uninsured deposit balances. We have seen time and time again that liquidity is the single most important factor for a healthy bank. We have always prioritized prudent liquidity risk management, and will continue to do so going forward.

Obviously, it was an interesting quarter, but we fared well, and I'm proud of how the team responded. We are well-positioned from a variety of perspectives, and while some of the defensive but prudent actions pressure the next six months of earnings guidance, long term, we still forecast the impressive return expansion. With that, I'll turn it over to Brad to cover our detailed financial results.

Bradley Brown (Interim CFO)

Thank you, JB. Good morning, everyone. I'll begin on slide 10. Net financing revenue, excluding OID, of $1.6 billion was down year-over-year, driven by higher funding costs given the rapid increase in short-term rates, largely offset by strength in auto pricing, higher floating rate assets, our hedging program, and growth in unsecured products. Adjusted other revenue of $433 million included the $41 million impact from certain equity investments, as mentioned by JB. Underlying momentum continued across our insurance, SmartAuction, and consumer banking businesses. We continue to see a path for further expansion and remain committed to achieve our target of approximately $2 billion this year. Provision expense of $446 million reflected the expected increase in charge-offs and modest reserve build to reflect the evolving macro environment.

Non-interest expense of $1.3 billion reflects investments in our businesses and in technology. We remain focused on diligent expense management and expect the paces of increases to decline in the quarters ahead. GAAP and adjusted EPS for the quarter were $0.96 and $0.82, respectively. Moving to slide 11, a net interest margin excluding OID of 3.54% was in line with expectations and decreased 41 basis points year-over-year and 14 basis points quarter-over-quarter. As we've mentioned on prior calls, despite underlying momentum on asset pricing, the impact of ongoing increases in short-term rates and the repricing dynamics of our balance sheet creates some near-term margin pressure. Our NIM thesis is largely unchanged as we still see full-year NIM in the 3.5% range this year before inflecting higher. I'll share more detail on NIM dynamics shortly.

Our retail auto pricing and origination strategies continue to drive current earning asset yields higher and will generate significant tailwinds in future periods. Total average loans and leases are up $13 billion versus prior year, with more modest growth of $1.5 billion versus the fourth quarter. Earning asset yield of 6.71% grew 47 basis points quarter-over-quarter and nearly 200 basis points year-over-year, reflecting the continuation of trends we've highlighted previously, including strong originated yields within retail auto, growth in higher-yielding assets, and over $50 billion of floating rate exposure across the loan and hedging portfolios. Retail auto portfolio yield expanded 29 basis points from the prior quarter as newer originations continue to comprise a larger portion of the portfolio.

Including the impact of hedges, yields reached 8.49%, up 51 basis points quarter-over-quarter. We expect yields will migrate toward 9% as we exit 2023. commercial portfolio yields continued their expansion given their floating rate nature. Turning to liabilities, cost of funds increased 67 basis points quarter-over-quarter and 241 basis points year-over-year. The increase in deposit costs was in line with expectations shared last quarter and reflects higher benchmark rates and a competitive market for deposits. Moving to slide 12, we provided some color on our interest rate risk positioning and hedging strategy given the volatility in rates for the past year and how we dynamically position ourselves for a variety of outcomes.

Given our naturally liability-sensitive position, we've leveraged our hedge program to mitigate near-term NIM pressure and to reduce the duration of our AFS securities portfolio. While we've routinely hedged our fixed-rate auto assets and securities portfolio, new hedge accounting rules we adopted last year provided incremental flexibility and capacity. Throughout the first quarter, we increased our pay fixed position as rates markets presented opportunities to lock in an incremental hedges at attractive rates. The increased pay fixed position, shown on the bottom of the page, provides significant protection against a potential higher for longer scenario, which candidly is more our house view on rates. Effective notional at quarter end was $35 billion, and the positive carry on these hedges will generate meaningful NII over the coming year as the retail auto portfolio migrates toward current originated yields.

Putting all of this together, we are relatively neutral from a rate risk perspective in the near term but expect to benefit from lower rates over a longer horizon given our core funding through liquid savings deposits. Slide 13 provides incremental detail on our outlook for margin. We've seen modest pressure to our 2023 full year NIM outlook, but continue to expect it will be around 3.5%, though we may see quarters slightly below that level. This outlook is based on the forward curve as of quarter end, which has Fed funds peaking at 5.25% before declining to 4.5% in December of this year.

This modest adjustment to NIM relative to last quarter is a result of strategic action we felt appropriate given recent events, including maintaining higher cash balances and changes to our retail auto origination outlook, which is lower than previously expected and higher in the credit spectrum. An accelerated rotation into CDs as seen across the industry added incremental pressure. Despite the headwinds, underlying operational trends remain resilient and are shown at the bottom of the page. Strong momentum in auto pricing has supported our expectation for the portfolio yield to hit around 9% as we exit 2023. Since last year, we've added 455 basis points in a targeted fashion and are currently originating loans near 11%. On the deposit side, pricing has moved in line with expectations shared on last quarter's call.

We expect continued movement in deposit costs as the portfolio fully tracks toward current yields on liquid savings and CD mix continues to increase. This is a dynamic environment and there are a range of possible outcomes, but we remain confident in our balance sheet posture and corresponding NIM trajectory. While there continues to be a lot of focus on the near term NIM trough, we continue to see a steady migration up to 4% over time, even without the benefit of rate cuts. Turning to slide 14, our CET1 ratio was relatively flat, 9.2%, given our disciplined approach to capital allocation. We announced another quarterly common dividend of $0.30 per share payable this quarter.

We are not currently contemplating share repurchases, which will be market dependent, and we remain focused on ensuring loan originations across our consumer and commercial portfolios meet our return hurdles. At current levels, we exceed our 7% regulatory CET1 operating minimum by $3.5 billion. We phased in another quarter of capital impact from the transition to CECL, which was worth 19 basis points this quarter. Two more phase-in periods remain, with the total impact fully phased in by the first quarter of 2025. We remain focused on maintaining prudent capital levels while investing in our businesses and supporting our customers. Slide 15 provides detail on AOCI in our securities portfolio, which currently comprises 17% of average earning assets.

As a reminder, we hold securities as a core part of our overall liquidity position and generally classify them as available for sale, which supports our intention to manage the portfolio with a through-the-cycle view by maintaining hedging and monetization flexibility. Unrealized gains and losses of the AFS portfolio are included in tangible book value, but as a Category IV bank, we have opted out of including AOCI in regulatory capital and are mindful of pro forma CET1 levels. The top left of the chart shows pro forma CET1 would be 6.9%, slightly below our Fed requirement, with a number of important distinctions to make. First, this impact doesn't contemplate a potential phase in similar to CECL. Second, it doesn't consider any change in rates before implementation of the impact.

Third, it ignores the consistent accretion we will see absent moves in rates and spreads as the securities accrue to par. Adjusted tangible book value per share at quarter end was $32, up $2 quarter-over-quarter. When excluding the impact of AOCI, that figure increases to $44, up 13% since the beginning of 2022. The box in the center of the page provides a high-level summary of the accretion we expect, assuming stable rates. We see around $400 million of AOCI annually, which corresponds to approximately 25 basis points of CET1 and more than $1 of book value per share. The bottom of the page highlights a few additional aspects of our securities portfolio.

Roughly 20% of the portfolio's interest rate risk is hedged via the pay fixed swaps we just discussed. The portfolio is comprised primarily of highly liquid securities that can be leveraged to generate Federal Home Loan Bank and repo capacity, as JB mentioned earlier. Let's turn to slide 16 to review asset quality trends. Consolidated net charge-offs of 120 basis points reflected a combination of seasoning within retail auto and an increased proportion of higher-yielding unsecured consumer assets. First quarter net charge-offs of 168 basis points were largely in line with the guidance we shared last quarter as key drivers of performance largely offset one another. In the bottom right, 30-day delinquencies declined 32 basis points quarter-over-quarter. Typical seasonality was impacted by lower tax refund benefits.

60-day delinquencies reflected similar trends. Also reflect our strategic shift in collection practices to provide more time to work with customers in avoiding repossession, which has led to favorable flow-to-loss rates. We expect increases in delinquencies and continue to monitor the cumulative impact of inflation on consumers. Our investments in servicing and collection practices improves our ability to communicate with and support our customers. Slide 17 shows that consolidated coverage increased 2 basis points to 2.74%, which reflects additional reserve build in the unsecured portfolios. The total reserve increased to $3.8 billion or $1.2 billion higher than CECL day one levels. We continue to model a worsening macroeconomic environment with unemployment exceeding 6% under our reversion to historical mean methodology. We also contemplate the unique nature of the current environment, given largely unprecedented inflationary pressures over the past year.

Retail auto coverage of 3.6% was flat quarter-over-quarter and remains 26 basis points or roughly $600 million higher than CECL day one. As the remaining weighted average life of our existing portfolio is slightly less than two years, we believe these reserve levels very appropriately cover expected lifetime losses. Slide 18 highlights actions we've taken in retail auto across underwriting and pricing given the current environment. We now anticipate we'll originate around $40 billion this year, slightly lower than the expectation communicated last quarter. As we always do, we'll continuously refine our appetite for loan growth as we move throughout the year. Our unique model, combining a high-tech platform with a high-touch human element, continues to serve us well.

Our underwriting and origination strategy is always informed by front book vintage performance, and the bottom of the page provides some insight into the actions we have taken. As you can see, our origination mix has skewed toward higher credit tier segments on a year-over-year basis. We've added significant price across the entirety of the credit spectrum, but our pricing action has been very targeted. The middle of the page illustrates our elevated pricing actions in segments that present higher credit risk. Most of our first quarter price actions occurred near the end of the quarter, limiting their impact on first quarter results, but will become more meaningful in the second quarter. The bottom right previews how we expect our pricing and underwriting actions to unfold over the coming months and impact second quarter results.

We anticipate slightly more super prime volume as we've modestly reduced pricing within that space. We remain competitive at the intersection of prime and used, where we've been able to generate our strongest volume and solid risk-adjusted returns while adding considerable price. In lower credit tiers, we continue to increase our selectivity as well as our risk pricing premium. We see the impact of our recent pricing actions already taking shape, with super prime or S tier loans accounting for 40% of originations in the past couple weeks. We continue to see attractive opportunities in the market, we remain a consistent partner for our dealers while being extremely disciplined in the current environment. On slide 19, we show our latest view on used vehicle values given year-to-date trends.

We maintain a cautious outlook for the entirety of 2023, despite the 8% increase year to date. Consumer demand has been strong to start the year, but given the dynamic macro environment, we feel it's prudent to remain balanced. The bottom of the page highlights this, along with what has unfolded so far and our current outlook for 2023. Our guide in January assumed a 13% decline in values this year. Given year-to-date performance, our base case now assumes a 9% decline on a full year basis or a 15% decline from current values. Beyond 2023, the ongoing lack of quality used vehicle supply is expected to keep auction prices above pre-pandemic levels. Slide 20 includes the latest in our retail auto net charge-off outlook.

First quarter losses of 1.68% were in line with our 1.7% guide as favorable used values were offset by elevated loss frequency. A variety of factors will continue to influence performance throughout the year, including used vehicle values, front book performance, delinquencies, flow-to-loss rates, and the denominator impact of lower origination volumes. The tightening actions we've taken will drive future performance and primarily impact net charge-off rates beyond 2023. The bottom half of the page frames up some of the tailwinds and headwinds relevant to performance as we continue to navigate the current environment. As just discussed, although we've updated our used values outlook for 2023, we remain conservatively postured relative to some industry forecasts. Keep in mind, a 1% change in used values in isolation is worth approximately 2 basis points of net charge-offs.

Flow-to-loss rates remain favorable versus pre-pandemic levels given the strategic actions we've taken across servicing and collections, which include increased digital outreach and repo timing updates. Delinquency rates were elevated in 1st quarter versus our expectations and do present a headwind. We observed a smaller benefit from tax refunds than in prior years, and without continued flow-to-loss favorability, elevated delinquencies pose risk to future defaults. Additionally, the macro environment continues to pressure consumers. We currently expect unemployment to peak around 4.6%, but are equally mindful of the ongoing impact of inflation. Net-net, no change in the outlook at this time. Moving to Ally Bank on slide 21, retail deposits of $138 billion increased $813 million quarter-over-quarter, reflecting the resilience and strength of our leading all-digital franchise.

Total deposit balances of $154 billion increased $11.5 billion year-over-year. We delivered record customer growth, adding 126,000 new customers in the first quarter, our 56th consecutive quarter of growth. Given where we are in the tightening cycle, we've begun to see an increased consumer appetite for time deposits. The bottom left shows our retail deposit mix, where retail CD composition increased 6 percentage points quarter-over-quarter. We do expect this migration to continue for the next couple of quarters, though the rate of change should slow. The new CD volume we've observed has been concentrated in the 11- and 18-month products. Turning to slide 22, we continue to drive scale and diversification across our digital bank platforms and maintain a balanced approach to loan growth given the environment.

Ally Invest remains a nice complement to our deposit platform, and 86% of new account openings were from existing Ally Bank customers. The 1.6 million customers across card and lending provide further opportunities ahead. We will remain disciplined in underwriting, which will temper near-term growth, but remain confident in the outlook for these businesses over time. Let's turn to slide 23 to review auto segment highlights. Pre-tax income of $442 million was a result of continued pricing actions offset by higher provision. Looking at the bottom left, originated retail auto yield of 10.91% was up 134 basis points from the prior quarter, reflecting significant pricing actions.

As mentioned previously, we put 455 basis points of price into the market since last year and are continuing to see solid flows with originated yields near 11%. The bottom right shows lease portfolio trends, where average gain per unit has continued to perform well. Dealer and lessee buyouts declined further to 76%, while we also benefited from stronger than anticipated used values. Turning to slide 24. We continue to realize the benefits of our leading agile platform underpinned by a high-tech and high-touch model. Consistent application flow shown in the top left enables us to be selective in what we approve and ultimately originate. First quarter results showed a further decline in approvals, now 31%. In the upper right, ending consumer assets of $94 billion were flat quarter-over-quarter.

Commercial balances ended at $19.3 billion as new vehicle supply gradually normalizes, used supply remains constrained. Turning to origination trends on the bottom half of the page, consumer auto volume of $9.5 billion demonstrates our ability to add price in the market while maintaining solid origination volume, putting us on track to originate around $40 billion this year. Lastly, used accounted for 64% of originations in the quarter as we enter the typical used vehicle selling season. Non-prime volume of 10% is slightly below pre-pandemic trends. Turning to insurance results on slide 25. Core pre-tax income of $27 million decreased $47 million year-over-year, driven by elevated investment gains in the prior year period. Total written premiums were $307 million, up 16% year-over-year, reflecting higher dealer inventory and growth in other dealer products.

This should be a nice tailwind to earn premium over time. First quarter results were impacted by severe weather events, which resulted in $14 million of weather losses, including $7 million incurred during the last week of March. Going forward, we remain focused on leveraging our significant dealer network and holistic offerings to drive further integration of insurance across our existing auto finance dealer base. Turning to corporate finance on slide 26. Core pre-tax income of $72 million reflected growth in the loan portfolio and favorable syndication and fee income. Net financing revenue was driven by higher asset balances as well as higher benchmarks, as the entire portfolio is floating rate. The loan portfolio continues to be highly diversified across industries, with asset-based loans comprising 59% of the portfolio and a first lien position in virtually 100%.

Commercial real estate exposures makes up about $1 billion, which is less than 1% of Ally's consolidated loan book and is entirely related to the healthcare industry, which we think will continue to perform well. Our $10 billion HFI portfolio is up 20% year-over-year, but relatively flat quarter-on-quarter as the team leverages their expertise to navigate a highly competitive market and a disciplined approach to growth. Mortgage details are on slide 27. Mortgage generated pre-tax income of $21 million and $197 million in direct to consumer originations reflecting current market conditions. We remain focused on a great experience for our customers, but refrain from any specific volume targets. Before closing, I'll share a few thoughts on the outlook for 2023. Slide 28 contains our financial outlook as we see it today.

Last quarter, we provided our thoughts on earnings trajectory for 2023 and beyond. As I noted during that call, the dynamic environment makes it harder than ever to provide granular guidance, and events in the past three months have only heightened that difficulty. We remain committed to transparency. Based on what we know today, we see adjusted EPS closer to $3.65 in 2023 relative to the roughly $4 we shared in January. We still anticipate NIM in the 3.5% range, but the outlook has ticked down by approximately 5 basis points or about $0.25 per share. The decline is due to factors covered in depth already, including higher CD rotation, higher cash balances, and lower retail auto originations. Additionally, the guide last quarter did not contemplate the activity on certain equity investments discussed previously.

This drove another $0.10 of unfavorability. The right side of the page lists the detailed assumptions embedded in our current outlook. Notably, all of these ranges are consistent with the January guide, but a modestly lower revenue outlook results in slightly lower EPS. Last quarter, we provided a framework to think about earnings expansion beyond 2023. While we haven't included a specific EPS figure for 2024, we continue to expect earnings growth. The ultimate timing of that expansion will be the result of multiple variables, including interest rates, liquidity and capital levels, and origination strategies. However, we feel strongly in the margin tailwind embedded in the balance sheet today. We've booked loans at 9%, 10%, and now above 10% for several quarters. This will create asset yield expansion in an environment where deposit pricing has stabilized or is potentially declining.

Consistent with my message last quarter, earnings expansion over the next several years will occur as NIM moves past the trough and migrates back toward 4%. We think that migration occurs under the forward curve or a more conservative scenario where rates remain elevated for the next year or more, which underscores the power of our balance sheet and pricing approach over the past year. We continue to view mid-teens as the return profile of the company based on all the structural enhancements we've made over the past several years, and remain confident in our ability to continue to execute and drive long-term profitability. We acknowledge that 2023 will continue to be a dynamic year given macroeconomic headwinds and volatility. Importantly, no one should take the removal of the outer period outlook as a fundamental shift in guidance.

The company will migrate toward that $6 per share outlook. Obviously several moving pieces at the moment may impact the pace in which we get there. With that, I'll turn it back to JB.

Jeffrey Brown (CEO)

Thank you, Brad. I want to close by reiterating the strategic priorities that guide everything we do. First and foremost is ensuring we maintain strong alignment between our culture and all stakeholders. We're focused on highlighting the differentiated offerings across our businesses for both consumer and commercial customers. We'll continue finding ways to disrupt the industry and remove friction for customers by delivering leading digital experiences. Even more important in this dynamic environment is our disciplined approach to risk management and capital allocation. I remain incredibly proud to lead our company, and over time, I'm confident these priorities will serve us well and deliver value for all stakeholders. With that, Sean, back to you and into Q&A.

Sean Leary (Head of Investor Relations and Enterprise FP&A)

Thank you, JB. As we head into Q&A, we do ask the participants limit yourself to one question and one follow-up. Carmen, please begin the Q&A.

Operator (participant)

Thank you. Ladies and gentlemen, as a reminder to ask a question, simply press star one one to get in the queue. One moment for our queue to build. All right. We have our first question from the line of Sanjay Sakhrani with KBW. Please proceed.

Sanjay Sakhrani (Managing Director and Senior Analyst)

Thanks. Good morning. Appreciate that. Can you guys hear me?

Jeffrey Brown (CEO)

Yes.

Bradley Brown (Interim CFO)

Yes.

Sanjay Sakhrani (Managing Director and Senior Analyst)

All right. Sorry about that. Good morning. How are you? I appreciate that there's a lot of things in flux, and it's sort of hard to predict, maybe just a question first on credit and your expectations. I know there's a lot of puts and takes that you guys outlined on that slide 20, as we think about the reserve rate, do we feel like going forward, there should be modest changes to the reserve rate from here, all else equal, and you just kind of reserve to growth? Maybe you could just talk about that in general.

Bradley Brown (Interim CFO)

Yeah. Good morning, Sanjay. It's Brad. Yeah, absolutely. I guess a couple of things I would highlight. First, you know, retail auto is the big driver there. You saw that coverage stay the same here this quarter. We really don't see at this point, you know, any significant drivers of increase going forward in that product. Away from that, you did see a slight build for some of the unsecured consumer assets. That, you know, that did drive a bit, and that was just 2 basis points you saw this quarter. As you mentioned, I mean, there, you know, the, the uncertainty is certainly more than ever. But given a lot of the dynamics we've talked about two things.

One, we feel really good about our risk-adjusted approach in terms of capital allocation and what we're putting on the books today, from an overall risk management perspective. Ultimately, we really do think it does make sense to really re-retain this conservative posture around capital, just given the uncertainty, both economically in the macros but also, the dynamics around just potential regulatory response to the early turmoil we saw in early March, I should say. Lastly, it's really about growth, right? From a balance sheet perspective, you know, we don't, we don't really have significant asset growth in the forecast. Of course, that is a driver in terms of potential increases in build as well.

Again, coming back to the risk management approach and interactions there tactically be even more, you know, conservatively postured going forward. We feel good about where we are and what the outlook entails.

Sanjay Sakhrani (Managing Director and Senior Analyst)

Maybe just to follow up on the greater super prime mix. Understandably, you know, you're seeing growth because you've sort of pulled back on rates. Could you just talk about the competitive backdrop there and sort of what drove that and where that's coming from? If we might see that work its way into prime, I guess that would be a little bit of a risk. Maybe JB, you could talk about that. Just a follow-on to that. How does that then play into credit quality? Does that start affecting it positively and then we could have some more positive implications to the provision? Thanks.

Jeffrey Brown (CEO)

Sure. Sanjay, I'll start, and then Brad, obviously feel free to dive in. I mean, I think, we look at the shift into greater super prime right now is, you know, pretty modest overall, Sanjay. I don't think it's gonna be all that big of a driver right now. I mean, the market continues to stay pretty competitive. I would say we've seen some bigger names kind of dial back and step back. On the retail front, obviously there was a bigger announcement that was out there about one of the other competitors stepping back from commercial lending. They weren't really a huge player like we were. You know, the market's still competitive.

We think this is just about trimming risk on the edges, wanting to have a slightly more conservative posture as, you know, again, back to this theme, there's a lot of uncertainty that's out there. I think, you know, this intersection of prime and used is still the space we like to play. It's still a very big market, and I would expect that's where you're gonna see the vast majority of our originations going forward. I mean, you know, the start April, the market's probably moved a hair more into the super prime space. We're taking advantage of that, but I don't think it's gonna be a big driver of, you know, change in NIM guidance or any change in credit guidance going forward.

Bradley Brown (Interim CFO)

Maybe I'll add a little bit just in terms of, you know, as others pull back, that is more opportunities for us and looks at volume. I think JB really framed that up well in terms of the vast nature of the industry and really how, you know, we probably have, you know, the best look out there. We can really, you know, pick the spots where we see the most value. In terms of the credit impact of that, you know, I would say, you know, we guided that. We've been really microsegment analysis, analyzing around, you know, really the risk management aspects. To that point, you know, we will, as I said in the prepared comments, we will see an impact of that as those actions take hold.

Certainly all of that is embedded in our expectations and what we've guided.

Jeffrey Brown (CEO)

Yeah. Sanjay, maybe one last point. I think maybe the only slight pivot this time is, you know, we probably would've told you we would've been, you know, $43 billion-$46 billion of origination flow. I think our outlook now is probably more in the $40 billion-$43 billion, just as we trim risk on the edges. I mean, some of that is factored in, obviously, to the guide, the timing, all those things that Brad talked about. To the extent you get better market clarity, we see the consumer continuing to perform, you see losses in line. And as you said, there are a lot of puts and takes, and that was part of the reason we put the enhanced disclosure in there on page 20, just to give some sensitivity of the different variables. That's maybe the one we're watching.

If and if you see stronger consumer strength continue, you see DQs sort of slow down a bit, you know, we may lean back into originating a little bit more. Right now, I think our house view is, you know, we trimmed $2 billion-$3 billion of originations out of the outlook.

Sanjay Sakhrani (Managing Director and Senior Analyst)

Thank you.

Bradley Brown (Interim CFO)

You got it. Thanks.

Operator (participant)

Okay. One moment for our next question, please. It comes from the line of Rick Shane with J.P. Morgan. Please proceed.

Rick Shane (Head of Consumer and Specialty Finance)

Thanks, guys, for taking my questions this morning. When you talk about the migration upwards in terms of credit quality, my expectation is that won't really have much impact in 2023 in terms of your target loss rate. When we think about the prior 2024 guidance of 1.6% NCO rate, are you sort of solving back to that? How do we think about the interplay between solving towards that 1.6% NCO rate and the NIM and sort of being on the efficient frontier in terms of margin?

Bradley Brown (Interim CFO)

Yes. Hey, good morning, Rick. I guess, you know, overall in terms of when we kinda think about the guidance for the route, you know, we were pretty prescriptive last quarter. The trajectory we see through this year and then ultimately what we were looking at in 2024 as well. I don't think those pieces have changed really at all. You know, to JB's point around, you know, really, you know, trimming some of the origination expectations around some of these tightening underwriting aspects, you know, marginally I think will be helpful. We also have though, the dynamic we highlighted around, you know, some of the challenge vintages from sort of that late 2020 to 2021, early 2022.

You know, so that remains front and center in terms of watching that performance within expectations. That did drive, you know, some of that expectation as well. You know, again, we feel, you know, good about what we've put out there. You know, as we talked about a lot, there are certainly puts and takes here. When you think about those dynamics around, you know, macro that has gotten slightly better, at least in the baseline 12 months. We have this strong labor situation with, you know, customers that are challenged. Cost of living is higher and wage growth necessarily hasn't kept up with that. All of that to say the pieces around those dynamics kind of lead us to still be comfortable with what we, what we set forth previously.

Rick Shane (Head of Consumer and Specialty Finance)

Got it. Okay, that's helpful. My follow-up is a little bit of a non-sequitur, but when we hear about things like golf ball and baseball sized hail in the Midwest, which we've heard reports of as we move through April, makes us think about the insurance business. Can you just provide an update in terms of storm damage quarter to date?

Jeffrey Brown (CEO)

Rick, it's JB. Good morning. I think as we said in our prepared remarks, you know, unfortunately, the last week of March, you know, cost us kind of $7 million-$10 million. That was more expensive than normal. I think as we think through Q2, think that's where we've got big reinsurance coverage that is renewed, is in place. You know, the outlook would be for Q2 for that to be sort of covered and protected. Obviously, you know, we watch a lot of this, you know, hail, storms that pop up quickly. They're hard to navigate. Otherwise, you know, the dealer body does a great job of moving cars, trying to get cars protected in a, you know, known weather events when you see a weather event coming.

Unfortunately, these hail storms are just hard to predict. It nicked us up in first quarter. We don't, you know. Again, the reinsurance coverage is there to protect us this quarter, so shouldn't be a big driver.

Rick Shane (Head of Consumer and Specialty Finance)

Great. Thanks, JB.

Jeffrey Brown (CEO)

You got it. Thank you, Rick.

Operator (participant)

Thank you. One moment for our next question, please. It comes from the line of Ryan Nash with Goldman Sachs. Please proceed.

Ryan Nash (Managing Director of Equity Research)

Hey, good morning, guys.

Jeffrey Brown (CEO)

Morning, Ryan.

Bradley Brown (Interim CFO)

Morning.

Ryan Nash (Managing Director of Equity Research)

Brad, a couple of questions on NIM. I guess one, how have beta expectations evolved? I guess second, where and when do you expect the NIM to trough? Third, can you maybe just parse out the comment that you made that you expect the NIM to migrate back to the 3.75%-4%, even in the higher for longer? What are some of the drivers that would get you back towards that level? Thanks. I have a follow-up.

Bradley Brown (Interim CFO)

Okay. Yep. Good morning, Ryan. Sure. On beta, a couple things, and I talked about in the prepared comments as well, but certainly price in our deposits, you know, really did proceed within expectations that we talked about on fourth quarter through the first quarter. I think looking forward, you know, fundamentally, we don't really see anything that is changing our outlook at this point. You know, we had sort of this, you know, through the cycle, you know, upper 60s, 70-ish % on liquid savings from a beta perspective. We did call out as well, we have seen some rotation into that 11- and 18-month CD product.

That, you know, is not surprising given where we are, you know, in the cycle and customers feeling a bit more confident to lock in a little bit of term from that perspective. You know, overall, you know, liquid savings and portfolio holistically, you know, really don't have any significant update or change in expectations on beta. Regarding NIM overall, I would say a couple things. One is, you know, we did experience the pressure that we've talked about, right? Near term, you know, certainly that was evident this quarter. I would say there's nothing structural that's changed there in terms of the guidance that we have out there in that 3.5% range.

You know, auto pricing, you know, continues to be, you know, a huge driver there, you know, putting on putting on origination that, you know, almost 11%. See that full year 2023 probably at 10.5%+ for full year 2023. Again, significant tailwinds for this year. Ultimately, you know, kind of getting to that question too in terms of, you know, higher for longer, that is gonna benefit us, you know, now but even more so in the outer periods as deposit pricing stabilizes and ultimately declines, just given the repricing dynamics of the balance sheet that we continue to highlight. I think as far as trough goes, you know, we see that, you know, really this year, as we said, you know, we'll bounce around that 3.50%, maybe slightly below some quarters.

There's just a lot of dynamics there, as you well know. We've tried to be, you know, very transparent around the hedge position that we have and really leveraging the power of the balance sheet to make sure we can mitigate the near-term pressure that we've talked about. From an overall Fed funds perspective, you know, those expectations are all over the place. It makes it probably even more difficult to put something, you know, really prescriptive. Again, confident in that range, a 3.5% trough. Probably you'll see us dip down this quarter and third quarter as well. Again, we don't think that's, you know, below 3.4% or something like that. Overall structurally, no shift.

You know, some tweaks here, including, don't forget, we've been very conservative from a liquidity posturing perspective, protecting, you know, Ally. JB highlighted the importance of liquidity, that does matter. Our cash balance is at almost $10 billion at end of the quarter. Again, that's, you know, something we'll be, you know, continuing to be watching and optimize where we can, but I don't think there's anything more important at this point than making sure we're liquid and can support our customers through volatility.

Ryan Nash (Managing Director of Equity Research)

Got it. Maybe that's one of exchange questions in a little bit of a different way. You know, JB, you're now expecting a little bit lower originations. How much of this is really macro-oriented concerns versus specific concerns that or behaviors that you're seeing in the market in terms of performance? You know, if I look at some of the comments on slide 20, you know, it seems like even though unemployment is better, losses are not. How are you factoring, you know, sticky inflation into, you know, the forecast and, you know, both from an allowance and from a charge-off perspective? Thank you.

Jeffrey Brown (CEO)

Yeah, I mean, Brad kinda covered, and Brad, feel free to dive in over overall reserve levels, and we feel comfortable there. I think, you know, Ryan, we're closely watching DQ trends, you know, both 30-day and 60-day. They're a little higher than we'd want to see, but importantly, flow-to-loss has been performing better. The big question is how does that stick? You know, do we see consumers, have they been able to fully absorb this higher inflation environment? That sort of, you know, our outlook is really let's be more conservative and posture to protect the house going forward. If that, you know, means we give up $2 billion of originations, we'll do that.

Again, to my earlier comments, to the extent we start to see DQs perform maybe favorably, you start to see more of these tailwinds that were referenced on that page start to materialize, I think we'd lean back into originations a little bit more. That's the nice thing. I mean, you know, I talked about we see $100 billion of paper every quarter. You see tightening in approval rates. I think they were down to, like, 31%. I mean, you can tweak the wheel pretty quickly and get back to higher degrees of flow. To the extent we see a stronger, you know, consumer continuing to emerge, that would give us more confidence to lean into originations a little bit more. Those are some of the watch items.

I also think, you know, let's be honest, there were a lot of changes that transpired, you know, from 8 March going forward. You know, capital preservation is certainly on everyone's mind and on regulators' mind. We think just being prudent, building a little bit more excess capital right now is probably a smart thing to do. You know, obviously, we don't know what regulatory changes may or may not come with respect to capital, but we think being a little bit more in preservation mode right now probably makes the most sense. That's, you know, that's obviously factored into the guidance and the outlook and the direction we're having with our auto teammates and our broad teammates here at Ally.

Ryan Nash (Managing Director of Equity Research)

Got it. Thanks for the call.

Jeffrey Brown (CEO)

Okay, thank you.

Operator (participant)

Thank you. One moment for our next question, please. One moment for our next question. Yes, it's coming from the line of Betsy Graseck with Morgan Stanley. Please proceed.

Betsy Graseck (US Large Cape Bank Analyst and Global Head of Diversified Finance Research)

Hi. Good morning.

Jeffrey Brown (CEO)

Hey, Betsy.

Betsy Graseck (US Large Cape Bank Analyst and Global Head of Diversified Finance Research)

Okay, one follow-up and then another question. Just on the solve side there, I know we had the discussion earlier around the outlook for net charge-offs, and I know last quarter you put in the slide deck the trajectory, I think, expecting that NCOs are gonna go to 1.2% this, you know, coming quarter. I just wanted to understand, take your temperature on how you're feeling about the trajectory that you put in there. Does that make sense? I know you've got the outlook for delinquencies increasing a little bit more than typical, but then your actions on, you know, repo'ing and digital outreach, you know, having a positive impact. Maybe you could just help us understand that trajectory specifically. Thanks.

Bradley Brown (Interim CFO)

Yeah. Morning, Betsy, it's Brad. Yes, you hit it. I think we still feel good about that, 1.2% we guided here for the quarter. You mentioned most of the critical aspects. I think the one piece is used values, right? We've been, again, transparent there in terms of, you know, recognizing the up performance that we've seen so far this year, but also remaining cautious and prudent and balanced as we kinda look at that outlook going forward.

Jeffrey Brown (CEO)

Yeah.

Betsy Graseck (US Large Cape Bank Analyst and Global Head of Diversified Finance Research)

Okay.

Jeffrey Brown (CEO)

Maybe the only other little factor, just looking at refunds, tax refunds been a little slower this year. You know, sometimes that does have a downstream impact to what goes on your auto customers. I think as Brad said, based on everything we see today, the guidance we gave last quarter for Q2 is fully intact, and we feel good.

Betsy Graseck (US Large Cape Bank Analyst and Global Head of Diversified Finance Research)

Okay. Second question has to do with the securities portfolio. I know you spoke earlier about AOCI, you know there's a risk that it has to go under reg cap, that's probably over a phase-in period. I understand all that. I'm just wondering, do you have any plans to change how you're investing in securities from here on in? Is there any changes contemplated to composition or duration, or do you keep on doing what you've been doing with the securities book? Thanks.

Bradley Brown (Interim CFO)

Yes. Hey, Betsy. Yep, it's Brad again. Yes, you know, as I said, we're pretty much all AFS. You know, given the complexion of our balance sheet, you might imagine things like HTM was never a big part of our strategies given the nature of our balance sheet, and we're used to managing liability sensitivity. From an overall strategy perspective, I would say we just really haven't been reinvesting. We've been cautious really through the last couple years in growing the portfolio more than anything, just around rate volatility. That said, you know, we are holding reinvestments, you know, cash yields right now. You saw we're building cash. Holistically, we just don't really see any significant change in strategy, a core part of our liquidity. obviously we're gonna, you know, continue to be balanced around it, and we'll see what happens from here.

Betsy Graseck (US Large Cape Bank Analyst and Global Head of Diversified Finance Research)

Okay. Thank you.

Sean Leary (Head of Investor Relations and Enterprise FP&A)

Great. Thank you, Brad. Thank you, JB. I'm seeing we're a little bit past the hour here. That's all the time we have for today. If you have any additional questions, as always, feel free to reach out to investor relations. Thank you for joining us this morning. That concludes today's call.

Operator (participant)

You may now disconnect. Goodbye.