Ally Financial Inc (ALLY) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2012 Ally Financial earnings conference call. My name is Darcel and I will be your operator for today. At this time, all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions).

I would now like to turn the conference over to your host for today, Mr. Michael Brown, Executive Director of Investor Relations.

Thanks, Darcel, and thank you, everyone, for joining us as we review Ally Financial's fourth-quarter 2012 results. You can find the presentation we will reference during the call on the investor relations section of our website, ally.com.

I would like to direct your attention to the second slide of today's presentation regarding forward-looking statements and risk factors. The content of our conference call will be governed by this language.

This morning, our CEO, Michael Carpenter; Senior Executive Vice President of Finance and Corporate Planning, Jeff Brown; and our CFO, Jim Mackey, will cover the fourth-quarter results. We will also have some time set aside for Q&A at the end and in helping answer your questions, we also have with us Bill Muir, who runs our Auto business, and Ray Schrock, from Kirkland & Ellis.

Now I would like to turn the call over to Michael Carpenter.

Good morning, everybody, and thank you for joining us. We would like to take a few minutes and look back at 2012, although we are all very focused on 2013 at this point. We are very pleased with our results for 2012. Full-year net income was $1.2 billion, up from $157 million loss in 2011.

Now we will talk to you in a few minutes on a lot of moving parts in our financials and taxes were a large part of that improvement. So we'd like to focus our attention on the real operating results and from that perspective, our core pretax income leaving aside certain ResCap and repositioning items, was $1.1 billion for 2012, up from $865 million in 2011 and we think of that as being more reflective of the operating performance of the Company.

Underneath all of that, our premier auto finance franchise continued to do extremely well despite increased competition. Asset growth year-over-year up 18%; not too many banks can say that about their loan portfolios.

Net financing revenues increased every quarter during the year. And importantly, our mix of origination was both more profitable and more diversified as we went through the year.

We are extremely pleased with the momentum of Ally Bank. Our retail deposits far exceeded our expectation at $7.4 billion, up from $5.9 billion the previous year and we achieved all-time high records in brand awareness, which is now up to around 45%, customer satisfaction, which is extremely high, retention rates for customers and awards for the performance of our various websites. So we really think Ally Bank today is truly the leading online bank platform.

At the same time we have substantially strengthened the financial profile of the Company. The strategic transformation, which really consists of distancing ourselves from the mortgage servicing business and the sale of our international operations adds to our financial strength enormously. Just the I/O sales alone generate $3 billion of regulatory capital and will improve our Tier 1 common ratio to a little over 10% on a pro forma basis.

We have closed the Canadian transaction. We will touch on that and the rest are coming along.

We also importantly faced 2012 with a wall of debt maturities, not the least of which was $7.4 billion that we owed the FDIC and that was all resolved. And as you look at the Company going forward, we no longer have the same kind of wall of debt to deal with.

On page 4, just touching on the international sales, we signed three definitive agreements in the fourth quarter. One was to sell Ally Credit Canada and ResMor to Royal Bank of Canada. That transaction closed last Friday; represented about 45% of the proceeds we expect to get from the I/O sales.

We have an agreement to sell ABA Seguros, which is our Mexican property and casualty company, to ACE Group, and also an agreement to sell our European, Latin American, or Chinese joint venture to GM Financial. Those transactions other than Canada are expected to close -- some will close in the first quarter; some will close in the second quarter, and there may be some stragglers as we go through the year.

As you can see on this page, we are expecting to get proceeds approaching $9 billion and a premium to tangible book value of about 20%, which I really think considering these are non-core franchises for us is very indicative of the underlying values in the auto finance business.

Let me turn to page five and touch on the bankruptcy of ResCap. We are very, very pleased with ResCap's asset sales, which will yield around $4.4 billion in proceeds and most of which will be in the bank, I think all of that will be in the bank by the end of February. The sale to Walter closed on January 31. Berkshire Hathaway purchase of mortgages will close today and the Ocwen transaction should close before the end of the month, in total bringing in around $4.4 billion in proceeds.

I would point out to you that Ally's support created hundreds of millions of dollars of this value for creditors. Our support allowed for a going-concern sale, debt financing of over $200 million, stalking horse bids for mortgage assets, and on and on and on, hundreds and hundreds of millions of dollars of value created by Ally for the benefit of the ResCap creditors.

Now the creditors who are looking at a huge pile of cash have got to decide how to divide the proceeds among themselves and whether to accept or reject Ally's $750 million settlement offer.

I would like to remind you that Ally put the settlement offer on the table not based on the merits of any claims, but to enable an expeditious resolution. Many of my constituents think that expeditious has long since passed. Ally can withdraw the offer at any time if creditors do not wish to settle expeditiously.

As you know, a very experienced mediator, Judge Peck, has been appointed. We believe this is very constructive and we will do our best to cooperate with the process that he has defined. Having said that, our advisers have looked carefully at the theoretical claims of veil piercing and fraudulent conveyance and so on since before Ally withdrew its support for ResCap. We did not withdraw our support for ResCap without knowing the answers to those questions. And we are extremely confident that such claims are completely without merit.

All of the discovery done over the last several months has strengthened our conviction on these points and stiffened our resolve. A finding of veil piercing, which would be necessary to hold Ally accountable for ResCap's rep and warrant claims would be unprecedented in American jurisprudence. And I quote knowledgeable counsel.

The way the ResCap bonds are trading and chatter on the street suggests that some creditors believe that Ally is prepared to be held to a ransom payment unrelated to the merits. None of our Board, our shareholders, or our regulators will allow that and management would not recommend it. If we have to go the litigation route, we will. We are fully confident in our position, yet we hope for a resolution in the near term.

So with that, I would also like to touch on Ally Bank for a minute. We are, under the heading of distancing ourselves from the mortgage servicing business, we are exploring the sale of the MSR of Ally Bank and also the business lending operation. We have said on the chart we are encouraged by initial interest.

We are actually pretty far down the path. We have a number of very serious bidders and we hope to move forward with that shortly. That will obviously significantly curtail loan production at ResCap, yet we will still -- excuse -- me at Ally Bank -- after we close the ResCap platform sale and we will still have at Ally Bank about $10 billion of held for investment mortgage loans. I will reflect that when I first looked at the Company, and I looked at the previous few years history, it had at one time $135 billion of mortgages and to still be alive and walking is a pretty good result after all of that and thank you to the Federal Government as well.

So with that, let me hand over to J.B. to talk about the momentum in the franchises.

Great. Thanks, Mike. Before Jim takes us through the details of the fourth quarter, I am going to talk about momentum we see across our core US auto franchise and our deposits business at Ally Bank. Inside the Company we've been very deliberate with our associates, but 2012 was about creating momentum and 2013 is about capitalizing on it.

First on the US auto franchise on slide 6, we have fully transitioned from our legacy captive finance days to an independent market-driven competitor. We have done this by executing on our dealer-centric strategy and we have outlined on the top of this slide four key components that have led to our success and in turn to the success of our thousands of dealer customers -- premium service, a unique and comprehensive product offering, infrastructure scale and breadth, and an unrelenting industry focus.

Obviously auto finance has become a very competitive environment but it's our very deliberate dealer-centric strategy that has allowed us to be successful. We maintain very consistent, stable, attractive asset growth and this same strategy will drive our success as we move forward.

You can see that we crossed the $100 billion mark in US auto earning assets, something we're very proud of. We have been diversifying our product offerings and as a result this asset base as well.

New subvented rate loans from GM and Chrysler dealers made up 20% of our originations in 2012 versus 58% in 2009 and going back to the captive days, that number was over 80%. We set out three years ago to focus on growing our used business and Bill Muir, Tim Russi, and their teams have successfully done so.

We have also leveraged our unique infrastructure, risk management, and long-term experience in growing our lease originations. As many of you have followed Ally for the last few years know, diversifying our asset base has been a clear and stated objective. We have known the subvented loan contracts with the manufacturers were set to expire and we have successfully positioned the Company to thrive whether we have a contract or not. The contracts only cover exclusive rights to a certain percentage of subvented loans and today those loans now comprise only 15% of our earning asset base.

Now slide number 7, as an independent banking partner, what Ally offers the dealers and OEMs is truly unique in the industry. It boils down to service, product, scale, and focus.

First, we are setting the bar for industry service standards. We don't offer a commoditized experience. We offer a hands-on business partnership that extends beyond just simply making loans to dealers and customers. Our goal is to add value across the dealers' business and compete on the full spectrum of products and services we provide. We also offer innovative and tailored solutions for dealers and OEMs, so we can help our partners maximize sales and profitability.

Second, we offer the broadest product suite in the industry. This extends across prime and non-prime loans, leases, floor plans, vehicle service contracts, floor plan insurance, as well as auction products. Our goal is to be fully integrated with the way our dealers do business so they can focus on selling more cars and let us handle the rest. This creates an all-in relationship with the way we do business with our dealers. We are all in with them and we want them to be all in with us. It means being the dealers' preferred lender to be their ally.

Third, our infrastructure and scale is second to none. We have over 2000 experienced professionals whose sole focus is to foster that all-in relationship with our dealers. As an independent company, we have established an infrastructure on the retail loan application side where we now see almost 7 million applications a year, which is up from less than 3 million pre-2010. When it comes to managing nationwide marketing programs, we don't think there's anyone out there that can match what we can offer.

Let's take lease programs for an example. Nobody has the front-end risk management and access to data to design a program like we can and roll it out across all 50 states. But also nobody has our smart auction infrastructure and industry experience to manage the back end of the program like we can when those cars come off lease.

Fourth, we have an unrelenting long-term industry focus. We have multigenerational relationships with many of our dealer customers. We have been a trusted partner for them through good times and bad. We still continue to work hard to win their business everyday and we strive to build new relationships across the industry.

Dealers know the auto finance business is what we do. We are in and of the industry. We don't treat it like a commodity and they know we are not going to leave them if the going gets tough.

So on the auto side, we see some great momentum but we are not coasting. We continue to hire new people, invest in new technology and develop new products to help our dealers and OEMs be more successful.

Now let's turn to deposits and Ally Bank on slide 8, where we also see some really exciting momentum.

As Mike mentioned, we saw retail deposit growth accelerate this year to $7.4 billion, which you can see in the bottom left chart. Ally Bank is now one of my leading brands -- correction -- the leading brand in the direct banking marketplace. We stuck to our brand promise of offering customer-friendly competitive products while providing absolute best-in-class customer service. And we benefited as the banking market has experienced a real shift in how customers want to do banking.

More and more people are processing transactions on their smartphones and the Internet and fewer people are going into branches. The rates we offer are competitive and consistent, but they are by no means at the top.

Our goal is to maintain steady growth of sticky deposits that are customer relationship-based and founded on the Ally brand. Once customers try us, they like us, and tend to open up additional accounts and send additional savings our way.

The functionality of direct banking is also continuing to evolve. In this quarter, we rolled out our second-generation mobile app. Technology continues to make it easier and easier to bank without having to set foot in a physical branch.

We've got great momentum at Ally Bank, are building a loyal customer base and we get pretty excited when we think about the longer-term opportunities that may arise from this franchise in the future.

Finally before I hand it over to Jim, let me talk about the Company's strong credit profile on slide 9. From an asset quality perspective, our balance sheet has been very clean for several years now. Obviously we had some off-balance-sheet contingencies that we have also had to deal with, but the short-dated low-loss auto assets we have are among the cleanest in the banking industry.

Now we have some opportunity for further improvement across other aspects of our credit profile as a result of the strategic transformation in progress. With respect to earnings, we expect to have a more stable and attractive earnings profile going forward as the Company is streamlined to limit volatility and as our cost of funds continues to improve.

With respect to capital, the sales to international businesses will result in a gain that builds retained earnings and removes around $30 billion of risk-weighted assets, which obviously significantly improves our Tier 1 common ratio.

And with respect to liquidity, we have now worked through the few years of heavy unsecured debt maturities, as Mike mentioned. This gives us much more flexibly as we go forward and while we will always maintain appropriately conservative liquidity posture, we can now focus much more on optimizing liquidity and profitability versus just sourcing liquidity on a less price-sensitive basis.

We remain focused on improving our credit ratings. We don't feel they are appropriate where they are now and we hope to see some movement soon. So we have tremendous momentum across our businesses but there's still a lot of work to do and we are looking forward to what our team is going to accomplish in 2013.

With that, Jim, let's go through the details.

Thanks, J.B. Let's turn to slide 10 and go through the fourth-quarter and full-year results. I will draw your attention to the middle of the slide, where we highlight a core pre-tax income number of $308 million. That excludes $289 million of repositioning charges that we took during the fourth quarter to better position us for improved profitability going forward.

These items are detailed in footnote 3 and include $94 million due to the risk mitigation actions related to our legacy pension obligations, which we mentioned on the call last quarter; $148 million from our early repayment of certain high cost FHLB debt in order to reduce funding costs going forward; and $46 million for advisory, legal, and other items associated with our strategic transformation.

Now let me walk you through the line items starting at the top of the page. Net financing revenue of $667 million was up for the quarter and year over year primarily driven by lower cost of funds and earning asset growth particularly in the lease portfolio. Other revenue of $629 million was down quarter over quarter due to strong MSR hedge performance last quarter and were up year over year primarily due to stronger mortgage gain on sale revenue and loan processing fee income.

Provision expense of $92 million was down slightly for the quarter due to qualitative or directional auto loan reserve release that was somewhat offset by auto loan growth. Year-over-year provision was up due to a similar but larger reserve adjustment we had in the fourth quarter of last year.

Controllable expenses of $592 million were up this quarter, driven by higher volume related to broker fees that we paid ResCap on direct-to-consumer mortgage production and our other non-interest expense of $304 million was relatively flat quarter-over-quarter and year-over-year as lower mortgage rep and warrant expense was offset by higher insurance-related losses.

The largest item affecting net income this quarter was a $1.3 billion release of a portion of the deferred tax valuation allowance, which we discussed on our last call. While this release affects GAAP net income and tangible common equity, a large portion of this release will be offset for regulatory capital purposes by a disallowed DTA deduction, so the impact on our regulatory capital ratios is minimal.

Finally, our international businesses which we are selling, earned $100 million this quarter and we show that on the discontinued operations line item. We put a slide in the appendix, which breaks out this component, if you are interested.

Now let's turn to slide 11 and talk a minute about net interest margin. We provide you the details of margin for the ongoing businesses only, so it excludes our discontinued operations, and you can see it's up meaningfully compared to prior periods.

The improvement was largely driven by a reduction in our cost of funds as we are funding our growing portion of our earning assets with deposits and continue to repay higher cost unsecured debt. You can see our cost of funds improved 47 basis points since last year and 24 basis points compared to last quarter.

We also had improving earning asset yields as we are benefiting from lower cash levels after repaying $8.2 billion of debt in the quarter and we have a more profitable asset mix as well.

Going forward we would expect our asset yields to remain relatively stable, but for our NIM to improve, as cost of funds continues to decline as more assets are funded by deposits and we consider additional liability management strategies to reduce funding costs further.

Now let's turn to slide 12 and talk about asset quality. You hear that losses and delinquencies ticked up this quarter but it's very important to keep a few things in mind. First of all, these losses are in line with our expectations and consistent with what we've been messaging for the last several quarters. We always expected to increase off the unsustainably low levels we saw earlier this year.

Second, there is seasonality in the numbers and you see that industry-wide as auto losses and delinquencies typically increase in the second half of the year and reach a high point in the fourth quarter. We also had the impact this quarter of an accounting policy change where we accelerated some charge-offs related to Chapter 7 bankruptcies, and this is similar to what you saw other banks do earlier this year.

Third, we had some noise in our numbers given the movement of loans to discontinued operations as well as the fact that the rate of our portfolio growth has slowed from last year when we were still catching up from the crisis. So you've got a denominator impact and that of course is just arithmetic.

Fourth, as you know, our asset mix has become more balanced. We are originating more non-subvented used in non-prime loans. Of course we are being compensated for that through expanding NIM as we showed you on the previous page, but obviously you are going to see an impact in credit performance over time.

Just to put it into context, while you should see some improvement in performance in the first half of the year due to the normal typical seasonal trends as a result of the more balanced mix, you would expect to see our retail auto losses continue to build over time and we would say 80 to 100 basis by range over the coming years is reasonable but of course that compares favorably to our long-term historical trends.

On slide 13, let's go through the results by segment. As you know, given the movement of our international businesses to discontinued operations, we have redefined our segments this quarter to best reflect our new corporate structure. We now have three operating segments, Auto Finance and Insurance, which collectively make up Dealer Financial Services as well as Mortgage Operations.

We've also made some changes to the way we allocate certain expenses between our corporate and other line item and the operating segments. Expenses that are more permanent in nature such as various deposit-related expenses like marketing, FDIC fees, and deposit operations are now allocated to the operating segments. The expenses which we expect to drive down over time such as various corporate overhead costs that were previously absorbed by the businesses that we are selling will remain in corporate and other.

We have restated historical results to be consistent across the periods presented and you can see the summarized results in the table at the bottom of slide.

So now I will walk through the details on each segment on the next few slides. So on the 14 related to Auto Finance, given the sale of the Canadian operations, the Auto Finance segment has been redefined to just include Ally's US Auto Finance business. It also includes a de minimis amount of international operations that aren't being sold and those assets are less than $150 million.

For the fourth quarter, Auto Finance has a total pretax income of $371 million, which is up 10% quarter-over-quarter and 30% year-over-year. We had strong net financing revenue of $776 million, which is up compared to last quarter and the prior year.

The improvement is due to continued growth in our lease and retail portfolios as well as higher commercial balances during the quarter due to elevated dealer inventories. You can see in the chart on the bottom right the net financing revenue in Auto has been up for four consecutive quarters and fourth quarter 2011 has proved to be the trough as we discussed last year.

Provision expense was down compared to last quarter just driven by reserve releases that I mentioned earlier. We continue to incorporate more historical data into our models and see predicable trends in our portfolio. This gives us more and more confidence in the accuracy of our model reserves and allows us to rationalize our qualitative reserves, which had been running abnormally high.

Noninterest expense was up compared to prior periods and was largely driven by the timing of some expense allocations which hit our corporate and other line item last quarter but are being pushed to the operating segments this quarter. You will see an offsetting dynamic in corporate and other.

Now let's turn to slide 15 and look at auto originations and asset levels. On the top left, you can see consumer originations were $8.9 billion, which is essentially flat to a year ago. However, our US consumer asset base grew by $800 million this quarter, which you can see on the bottom left chart. We feel good about this level of consumer originations, particularly given the hypercompetitive environment we're in right now.

As we said last quarter, we are focused on profitably expanding our dealer relationships and maintaining a strong focus on risk management. We're not going to grow for growth's sake and we continue to see our origination volumes fluctuate somewhat based on the amount of volume coming through our dealer channel and other market dynamics.

But again, originations in this range are great for us. It allows us to continue to grow our balance sheet and improve profitability.

We show in the top right our US origination mix. You can see here used, leased and diversified now comprise over 50% of our consumer originations and this compares to 45% last year and this number was only 14% three years ago. You can see GM and Chrysler related new subvented loans were down to 19% this quarter from 27% in the fourth quarter of 2011.

The bottom right chart shows our commercial outstandings and it increased over $3.2 billion from a year ago to $32.5 billion as dealer inventory levels were on the high side this quarter. If dealer retail sales improve as expected in 2013, we would expect to see these levels moderate.

Regarding Insurance on slide 16, our Insurance operations reported pretax income of $27 million, up $13 million from last quarter and this is primarily due to better investment portfolio income but was down $53 million from a year ago, driven mainly by higher weather-related losses due to Hurricane Sandy.

Of the $117 million in losses we had this quarter, $31 million are attributable to Sandy. As a result you can see our loss ratio increased to 45% from 34% a quarter ago and 30% a year ago.

Investment income increased $55 million to $34 million quarter-over-quarter and this is primarily due to the investment portfolio impairments that we recorded last quarter.

Dealer Products & services, or DP&S, continued to see strong written premiums with $239 million originated this quarter, which is up from $232 million a year ago. You can see there's clearly a seasonal pattern to our written premiums, which is why we are down for the quarter.

For the full year, DP&S written premiums grew to $1.2 billion, the highest level since 2008. This business is obviously an important part of our overall value that we bring to our dealer relationships. Approximately 80% of the US dealers with floorplan financing through Ally also carry floorplan insurance with the Company.

Now let's turn to slide 17. I want to make a few brief comments about mortgage operations. We recorded pretax income of $100 million, which is flat to last year but down from the third quarter, where we saw very favorable MSR hedge performance. We saw continued strong originations of $9.8 billion, which resulted in $131 million in gain on sale.

Refinancing activity, which includes HARP, accounted for 86% of loan production. Just as a reminder, we have been maintaining production levels to facilitate the ResCap bankruptcy process, as Mike mentioned earlier, but we would expect to see volumes decline materially in the coming quarters, which follows the ResCap platform sale.

Now let's turn to be Ally Bank franchise and I will expand on a couple things that J.B. mentioned. Our deposit franchise continues its momentum. We had $2.9 billion of additional retail deposits. We had the benefit this quarter of particularly strong growth in savings balances from both new and existing customers.

If you look at the chart on the bottom right of the page you can see our deposit mix continues to shift to more savings accounts while we maintain a consistent balance of brokered CDs of under $10 billion. Ally Bank continues to be well-positioned as consumer preference shifts away from branch banking. In this quarter, we further enhanced our value proposition with the launch of our next generation of our mobile banking app in November.

We also experienced steady expansion of our loyal customer base, which increased to more than 1.2 million customer accounts this quarter and that's up 20% year-over-year.

On slide 19, we lay out some of the metrics that we look at related to Ally Bank and the brand. If you look at the top left, you can see our retention rates have consistently been above 90%. The chart at the top right, you can see we've experienced consistent growth in customer transactions. We grew to over 7.2 million this quarter. That's a 14% increase from last quarter and a 76% increase from a year ago. This reflects the growth in our transactional accounts like checking, savings, and money market accounts.

But not only do customers like saving with us, but they also like using us for more banking transactions on a monthly basis.

Bottom left chart shows our improved brand awareness, which increased to an all-time high of 44% in the quarter and on the bottom right, we show you the results of our customer satisfaction surveys, where we hit an all-time high of 94% in the fourth quarter.

So again, we feel great about the momentum here. The direct banking model has really taken hold and we look forward to seeing continued results in 2013.

So before I turn it back over to Mike, I want to just make a few quick comments on funding and liquidity on slide 20. You can see in the top right chart that our parent company liquidity dropped from $26 billion to $16 billion. But importantly you can also see the upcoming debt maturities have decreased significantly, largely driven by the TLGP debt we repaid in the fourth quarter. So we continue to maintain robust liquidity coverage versus upcoming maturities and we have a time to required funding of over two years. In fact you can see that our maturities of $7 billion over the next two years are less than what we repaid just in the fourth quarter alone.

We will continue to be opportunistic issuers in the capital markets. In 2012, we completed new global secured and unsecured funding transactions totaling more than $28 billion including $5.3 billion during the fourth quarter.

We will also continue to diversify our funding base and in January we launched a nonprime auto ABS transaction, which was met with -- that was from our parent company -- which was met with a significant amount of investor demand. That gives us additional funding flexibility at the parent level as we move forward.

With that, I'll turn it over to Mike to conclude.

So that's a look in the rearview mirror and I would like to just talk about what our plans are for 2013, what our priorities are on page 21, and I'm sure by now they should be pretty, pretty clear.

But the first one is to complete the strategic transformation, which is to say to finish the distancing of ourselves from the aspects of the mortgage business we find unattractive, and to complete the IO sale. When we are done with that, the Company will about shrink in half in terms of total employment, so this is as dramatic a transformation as I have witnessed and clearly we have a lot of adjustments to do as we go through that process.

Now a couple words on that in a minute but we essentially are becoming a company that has two major activities. One is a world-leading auto finance franchise both in auto finance and in insurance where I think our strategy should be pretty clear to everybody. We are very dealer-centric although we have very strong OEM relationships as well. We have product breadth, high-level service, high-level innovation, and trying to help our dealers make money as opposed to for us to drive market share.

We are very anxious and continue to grow the world-class online direct bank that we have, Ally Bank. We think it is a market leader in all respects and it is advantageous to us to continue to see it grow.

And very importantly, the fourth bullet on the chart, we realize that our return on equity for new Ally is not where it needs to be. And so we are very focused on how do we move pro forma ROE admittedly in a transition year that's in the mid-single digits to the double-digit return on equity? It's certainly a strong focus of this management team and we do have a path to get from here to there. That path really consists of three things.

One is continuing to find liability management opportunities and growing Ally Bank to reduce our cost of funds. We've done that successfully and are going to continue to do that.

Secondly, we need to reformat ourselves to the new company from the point of view of organization structure and from the point of view of the efficiency with which we run our business.

Thirdly, we have historically been held to a higher standard from a regulatory point of view, whether its capital or FICO scores or whatever it is and so we think over time we will have a regulatory level playing field and those three things together will give us the opportunity to get to a double-digit ROE level.

Very importantly, last on the list but by no means least, is repaying U.S. Treasury and we are working on dealing with the MCP in the near future. I think coming out of 2012, we feel we have very, very significant momentum and we are very well-positioned going into 2015. I think these objectives are perfectly achievable.

So thank you all for your attention and we will turn it over to questions.

Operator, we are ready to take calls from investors.

(Operator Instructions). Eric Selle, JPMorgan.

Good morning, looking at the slide on delinquencies, it's obviously higher. You guys are lending deeper because of used and leased. Is that rise in delinquency because of lending deeper or are we seeing the consumer kind of weakening up in the fourth quarter?

And I guess my question is to get to that, the root of that question is what is the delinquency trend on new retail? Is it that big of a jump or is that jump because of used and leased? I think I'm referring to slide 12.

I will make a couple comments and then I think Bill Muir will add to it. The first thing I will say is we definitely have a different asset mix now that we are exiting the depths of the crisis. So over time I think the mix will impact our loss in delinquency trends. It will be more normalized I'll call it.

The impacts that you are seeing I will say the last three quarters are really more driven by the denominator impact I talked about, the seasonality -- if I look at our delinquency trends this year versus others in the industry, say Wells, very, very similar type of performance, as well as the accounting policy change.

So I don't want to minimize the mix difference because that will become a larger driver of our performance over the coming years, but this quarter it's more of an arithmetic thing. Bill?

Yes, you have to kind of put it in perspective because this is certainly a business that's been transitioning. If you go back to the pre-crisis timeframe, call it 2005, 2006, 2007, delinquencies were running in the neighborhood of 3%. Losses were running like 1.5% to 2%.

Now, we actually have a different mix of business today, actually a better mix of business, but as kind of growth goes down a little bit from 50% a year growth rate, I think what you are going to see with us is that delinquencies are going to trend back up towards 3% in the fourth quarter, the seasonally weak time of the year and kind of 2% for the rest of the year and that will be kind of more normal for our book of business. And losses are going to trend back towards 1%, maybe a little bit less which will still be better than they were historically because we're still actually booking a better portfolio than we did if you go back to the pre-crisis days.

So I think you are going to have to give us another two quarters or so before you actually see this thing trend out, but that's kind of our indication of where you should expect to see it go.

Eric, let me make one very important comment, which is that's our delinquency and loss development is equal to or better than our pricing models, so there is nothing in here which should cause concern. And the degree to which we have done more leasing for example or done more subprime at the margin and so forth, all of that is priced to achieve a satisfactory margin on a risk-adjusted basis and there is absolutely no evidence of deterioration of credit performance relative to those models.

Yeah, we are consciously trying to get away from super prime subvented business. It is not a high-value proposition.

I'm sorry I am interrupting. I could barely hear the last and I appreciate all this, and I guess another thing is you are growing the portfolio so you are going to experience early losses. I mean the hazard rate is early on in a loan's performance, so you are going to - as you grow the portfolio inherently there's going to be a rise in delinquency on top of the rest of the stuff you guys disclosed.

And I guess that comes in my second question. That's what's driving the increase in asset yield as well -- on slide 11.

Yes.

My next question is there's a $10 billion decline in liquidity. The TLGP payment explains $7.4 billion, kind of offset by your earnings in the quarter. What is the $2 billion plus delta? Is that some cash that's going with the asset sales or is there something else there?

No, really it's just funding growth on the balance sheet.

Okay, funding growth, all right. Then my final question is what do you guys expect to do with your sale proceeds? You have paid off TLGP, you mentioned MCP. I think there's going to be several billion left over. Is there any idea what you will do with those net proceeds? Is it reduce debt? Invest in the business? What are the priorities of that liquidity?

The first priority is to deal with the MCP and that really is a conversation with the Federal Reserve and when we get through that hurdle, then we'll figure out the rest of it.

But generally if you -- if I just plop $10 billion in your lap, Michael, would you use that $10 billion to reduce debt or invest? I mean, what would you do - first priority of liquidity? I guess I should ask generally not from asset sale. (multiple speakers)

I would say we certainly want to fund the normal growth of our business. And beyond that we think there's a lot we can do on the liability management side where we can advantageously reduce our costs.

For example, we have $10 billion of very high cost bonds which are callable today. That would be another use of excess liquidity, but first priority is fund the growth in our business and second priority would be to reduce our cost of funds through liability management.

Okay, thanks a lot. I will cede the questions but I really do appreciate your time.

Those are great questions. We appreciate it.

(Operator Instructions).

No more questions today? I guess we're predictable and boring in our old age or something like that.

Okay, well if that's it --

Pardon the interruption. You do have a call that comes from the line of Bernie Casey, Fort Washington.

Maybe you explained this, but sequential US consumer originations second quarter, third quarter, fourth quarter decreasing. What -- can I read anything into that or --?

This is Bill Muir. What you are seeing in our business is a transformation taking place, as we said before. While originations, say, for the full calendar year were down a little bit in 2012 from 2011, we saw almost a $6 billion reduction in the amount of subvented retail business and business supported by things like bonus cash. This kind of business that back when in the post crisis era when we were kind of appointed as the captive to help GM and Chrysler emerge from bankruptcy, we were supporting all of that kind of business in order to help them get back on their feet. But over the long haul, that's not the place where we want to focus.

And so as -- so we are basically almost flushing that dependance on that type of business through the system while we maintain total amount of originations and so what you are seeing is that we are growing in areas that we think is our future. We are growing in areas like the used financing. We are growing in lease and growing in a diversified non-GM, non-Chrysler base.

So what you are seeing is it looks like we are standing still but actually we are significantly transforming the business and I think you're going to see that again in 2013 as we pretty much have wean ourselves from that subvented business.

Bernie, we don't disclose this or talk about this usually. If you look at the value, the risk-adjusted value of what we put on the books from origination in 2012, it was up about 14% from what we did in 2011. That should flow through the earnings statement over time.

And we did mention that in this origination level range we are still growing earning assets on our balance sheet. So we grew earning assets roughly about --

We grew earning assets 18%, so that's --

In other words, what happened in 2012 is exactly what we wanted to happen.

Thank you.

Brian Monteleone, Barclays.

Thanks, good morning. I just wanted to make sure I understand something you said on slide 3, which is that the strategic transformation streamlines the Company and provides CCAR capital benefits. So thinking back to CCAR last year obviously the repurchase issue was a big factor in the way that stress test came out. So I just want to make sure I understand this year's CCAR submission.

The ResCap bankruptcy is still in process, does that CCAR submission assume that there is no further liability related to ResCap and put back or what exactly should we take away from that bullet point?

Brian, this is J.B. We're not going to get into details on what's embedded in the CCAR submission and particularly with respect to ResCap. What we will tell you is again May 14 or 15 of 2012, ResCap was de-consolidated from Ally Financial. And as Mike pointed out, we feel very confident in our case and our separation from ResCap.

And obviously going into CCAR this year, just all the things done from an IO perspective; $3.1 billion created just by IO alone, obviously we are in the process of selling the bank's MSR that also enhances Tier 1 common as well.

So we are not naive in knowing what the Fed is going to pay close attention but we feel much better about the quality of the submission and the numbers in the submission this year.

Okay, great. Thanks, guys.

George Brickfield, The Seaport Group.

Good morning. Could you guys talk about your retail deposit growth? It was high -- well above trend in the most recent quarter. What were the factors that drove that and do you think that's sustainable going forward?

I think -- it's interesting. I think there are a number of things sort of coming together at the same time in the sense -- to be truthful, it surprised us how strong the growth was particularly towards the end of the year and that growth continues in the early part of this year and my own view is it's not one particular thing. It's getting to a sort of a critical mass point, if you will where we've seen a big jump in our brand awareness to a 45% level.

Our pricing is no more competitive than it has been over the last several years and we keep getting recognized as the top online banking website. ING DIRECT, which was arguably the major player, is now owned by Capital One, so that's a discontinuity. The world is moving towards online banking anyway. I can't remember the last time I was in a branch, that's for sure. And you add all of that together and I actually think it's no one specific thing. It's a critical mass thing. This is a franchise we've invested hundreds of millions of dollars in now over four or five years and I think it's really ticking up.

Okay, thank you.

Hopefully I will be proved right in that statement.

That would be great. Just on the -- going to leasing business for a second, I believe it was after the second quarter of 2010 on the earnings call you talk a little bit about why the leasing business didn't always make sense for a non-captive financial. Could you guys just talk about either what's going on in the market or how you guys have evolved? This is now a very key part of your business, so why does leasing makes sense for a non-captive today?

Well, from our standpoint, first of all, just the market dynamics around leasing has settled into a very good situation where we don't have the binge kind of programs that we saw historically from manufacturers that ultimately hurt residual values and brands and so on. So we've got very positive kind of underlying fundamentals in terms of used car prices and the predictability of residual values and so on and we monitor that.

To the extent that we feel that the supply-demand and that flow is continuing in a very favorable way, we will continue to want to participate in the market because we have some things -- not only do we have like the data in order to assess this and make good risk judgments but then we also have something that's a little bit unique among all the other non-captive players in this business and that is we have a physical infrastructure to actually manage the return of vehicles.

Most financed non-captive finance sources, basically you do a retail loan. At the end, the customer pays off the loan and keeps the vehicle and you don't have to worry about it, but with a lease you actually get the vehicles back and you have to do something with them and we have -- over the course of many years, including our online auction, developed that physical infrastructure to manage them effectively.

And just to give you an example, our competitors in the non-captive bank arena who do some leasing alongside of us when they get a vehicle back, you know what they do with it? They give it to us. So we have some unique attributes that actually help us participate in this business better than others but fundamentally we like the way the market looks right now.

Great, and then just my last question. Is it -- are you keeping the Canadian -- do you have a Canadian auto insurance business? Is that not being sold? Is that retained?

It's basically a small branch operation out of our US business where we do some floor plan insurance for the ongoing wholesale finance that is now being run by the Royal Bank of Canada plus we do support some F&I products, some extended warranty business that is done there, but it's relatively small. It's only a fraction of what our ongoing insurance business is and we run it as a branch out of the US.

Okay. Thank very much.

Okay, great. That's all the time we have this morning. If there's any additional questions, please feel free to reach out to investor relations. Thanks for joining us this morning. Thank you, Darcel.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.