Ally Financial Inc (ALLY) 2014 Q1 法說會逐字稿

Good day ladies and gentlemen. Welcome to the first quarter 2014 Ally Financial Inc earnings conference call.

My name is Meena and I'll be your operator for today. At this time all participants are in listen-only mode. We will conduct a question and answer session towards the end of this conference. If at any time during the call you require assistance, please press star 0 and an operator will be happy to assist you. As a reminder this call is being recorded for replay purposes.

I would like to turn the call over to Mr. Michael Brown, Executive Director of Investor Relations. Please proceed sir.

Thanks, Meena. Thank you everyone for joining us as we review Ally Financial's first quarter 2014 results.

You can find the presentation we'll reference during the call on the investor relations section of our website Ally.com. I'd like to direct your attention to the second Slide of today's presentation regarding forward-looking statements and risk factors. The contents of our conference call will be governed by this language.

This morning our CEO, Michael Carpenter; and CFO, Chris Halmy will cover first quarter results. We'll also have some time set aside for Q&A at the end. To help answer your questions we also have with us Jeff Brown, the CEO of our Dealer Financial Services business; and Bill Muir, Ally President. Now, I'd like to turn the call over to Michael Carpenter.

Good morning and thank you for joining the call, our first call as a publicly traded Company. We were very pleased to have achieved another milestone in April and completing the IPO, which also allowed us to return another $2.4 billion to the US taxpayer. And for those who on the call who are new investors in Ally, we welcome you and we certainly look for a productive relationship.

As a result of the IPO, the US treasury has now received more than it originally invested in Ally. I'll touch on that in a moment. But first let me begin with a high level overview of the results and then Chris Halmy will give you the next level of detail.

Net income for the first quarter was $227 million with earnings per share of $0.33. This reflects an increase from net income of $104 million in the fourth quarter and net income in the first quarter of last year was about $1 billion. But that was driven largely by gain on the sale of Canadian operations which, was $900 million. So taking that into account quarter over quarter results are also very strong.

Core pretax income, excluding repositioning items which has been the metric we focused on over the last several years, was $339 million for the quarter. Double the fourth quarter and over 50% ahead of the quarter a year ago. Results were driven largely by significant improvement in Ally's cost of funds, which I'll talk more about in a moment.

As we look at our two core franchises we saw continued strong performance. Auto originations were up $1 billion from the fourth quarter to $9.2 billion. And importantly we continue to diversify our business in new and used originations, away from GM and Chrysler. Our originations with diversified non-GM, non-Chrysler dealers, were up 40% year over year and now represent 19% of our total consumer originations.

At Ally Bank, retail deposits grew $2 billion in the quarter, a 17% increase year over year, which is a demonstration of the tremendous strength of this terrific franchise and its appeal to an increasing number of consumers.

Performance in the quarter was strong, but we know we have more work do to improve our core return on tangible common equity. Those of you who participated in the IPO road show know that we have a clear path to get to a double-digit return by the end of 2015. That plan is centered on three key areas which are noted on Slide 3. Expansion of NIM particularly by cost of funds improvement, reduction in controllable expenses, and regulatory normalization as we leave the TARP program.

The first, let me talk about in the quarter. Cost of funds were down 15 basis points from the fourth quarter and 55 basis points from the first quarter of 2013, driven largely by the execution of the liability management strategy and continued increase in deposits. Net financing revenue increased 24% and NIM improved 46 basis points year over year.

Our controllable expenses in the first quarter were down $20 million from the fourth quarter of 2013 and $70 million from the first quarter of last year and we expect to see continued progress on that front. Our efficiency ratio improved from 64% in 2013 to 55% in the quarter.

And as we told all of you with the strategic transformation that has preoccupied us over the last four years, behind us and a more simplified and stable organization we know there is more room for continued progress on this front. And that is very much part of our plan.

The third area of expected improvement is regulatory normalization, which I know is an area that some of you were skeptical about. I'm pleased to report that during the quarter we achieved two very important milestones from a regulatory point of view. The first one is that our Corporate Finance Business, formerly called Commercial Finance has been contributed to Ally Bank effective today. This will enable that business to significantly improve its cost of funds and become even more competitive in the segment. And this is obviously with the approval of our regulators.

In the second area in which our regulators have recently given us approval, it is to allow Ally Bank to initiate paying dividends to the parent. And then we expect that to be substantial beginning in the second quarter of this year.

So we are encouraged by the fact that we've made real progress in the first quarter on the three dimensions of the profit improvement plan that we outlined to everybody to get to double-digit return on equity and we're committed to continuing to execute against that plan.

If I can take you to Slide 4. Slide 4 just very quickly gives you a snapshot of where we stand with regard to TARP. And as you all know exiting TARP is not only an objective, it's a key part of the profit improvement plan.

At the time of the IPO, as you can see on this chart, we have not only repaid $17.2 billion which was treasury's investment, but a half a billion more than that. In the first quarter, but received in total between the IPO and other private placements, $5.4 billion. And obviously that's, from their point of view, very pleasing. They continue to retain a 17% ownership in the Company, which is obviously several billion dollars more of value. So I think it's fair to say that US treasury is pretty happy at this point.

Our objective very simply, our job is to continue to execute on the three point plan that we described to drive value for all of our shareholders. And we're also committed to having treasury not be a shareholder, as soon as possible.

With that let me turn it over to Chris.

Thanks, Mike and good morning everyone. Let's walk through some more details in the financial results on Slide 5.

Overall we had a very good quarter and we are well on track with our expectations. Core pretax and income, excluding repositioning items, was $339 million in the first quarter, up from $161 million in the fourth quarter and $207 million last year. Keep in mind that we had the $98 million CFPB charge in the fourth quarter, that pressed those results. But even excluding that charge we were up $80 million of core income this quarter.

Let's walk through some of the line items. Net financing revenue of $865 million was up $24 million from the fourth quarter and $168 million year over year. [The amounts] that have driven our net financing revenue have remained fairly consistent, which are material improvement in the cost of funds yields, coupled with fairly stable asset yields and modest earning assets growth.

We expect continued meaningful improvement in the net financing revenue over time that will drive better shareholder returns particularly on a year over year basis. Other revenue of $321 million was pretty flat quarter over quarter and down $182 million year over year, largely due to exiting the mortgage business.

Provision expense of $137 million was also pretty flat quarter over quarter and year over year. This quarter we continued to build our consumer auto loan reserve, but that was more than offset by a reserve release against our mortgage portfolio, that has seen stable performance against a backdrop of improving economic conditions. So our provision expense was on the low end this quarter and we can see this increase somewhat as we move through the rest of the year.

The non-interest expense of $710 million was down over $150 million, both quarter over quarter and year over year. Clearly the big driver of the quarter over quarter decline was the CFPB charge and the primary driver year over year was the exit from the mortgage business. However, we've also begun to make some progress in reducing overhead costs and I'll cover more on expenses in a minute.

Overall these results drove $227 million of net income and after taking out $68 million of preferred dividends, results in earnings of $0.33 per share. This was up from the fourth quarter even if you strip out the CFPB charge. And when compared to the quarter of 2013, as Mike mentioned, just remember we took about a $900 million gain on the sale of our Canadian operations during that period.

We've also highlighted on the page some other key metrics that we watch. Our unadjusted return on tangible common equity for the quarter was 4.9%, with core ROTCE of 6.5%. For the core ROTCE we back out impacts from OID and our deferred tax asset, which we feel is a more appropriate measure of core profitability. We're targeting to get this core ROTCE number to a double-digit level over the next couple of years.

From the efficiency ratio perspective we back out our insurance business and as Mike discussed we improved to 55% this quarter. We're targeting to get this down to the mid 40s over the next two years as we focus on reducing our non-interest expense. Again overall we feel very good about these results, but there's more work to do as we continue down the path of achieving our shareholder return targets.

Let's turn to Slide 6 and look at the results by segment. I'll go through details in each of the segments in a minute, so I'll just touch on a few highlights here. Auto finance pretax income of $339 million was up from the fourth quarter, given the CFPB charge last quarter, as well as strong lease performance. Year over year auto finance was pretty flat as provision expense continues to normalize off lower levels.

Insurance had pretax income of $74 million this quarter which is up quarter over quarter, due to higher investment gains and up year over year primarily due to lower weather related losses. Mortgage turned positive this quarter with $17 million of pretax income, driven by the reserve increase I mentioned earlier. You can think about this largely as a break even segment going forward, although we could experience some modest additional provision favorability throughout this year.

Corporate and Other improved again this quarter to a loss of $91 million, given the continued progress in reducing cost of funds and our controllable expenses. And as we mentioned last quarter, we're targeting this to be a break even segment by the end of 2015.

Let's turn to net interest margin on Slide 7. NIM was up 14 basis points to 2.53% this quarter due to the continued improvement in the funding costs. Cost of funds was down 15 basis points quarter over quarter, as we completed the $9.7 billion call program to take out high cost legacy debt. With the call program now complete, the pace of quarter over quarter improvement will start to slow to a large degree, but we expect continued meaningful year over year improvement.

And there's a lot more we can do longer term from a liability management standpoint it drive cost of funds lower. On the asset yield side, we were up eight basis points this quarter due to better than expected lease performance driven by a continued strong used car market. We expect used car prices to moderate, so we could see asset yields come down somewhat later in the year as a result.

Overall we feel good about where we are on NIM and while we have had some dramatic quarterly improvements recently we still expect steady and measured progress from here. Let's look at expenses on Slide 8.

This is a new Slide we added this quarter given our increased focus on the topic and a driver of shareholder return. We're already starting to see some improvements with controllable expenses down $20 million from the fourth quarter despite the fact that comp and benefits were up seasonally. Year over year we're down $70 million given the overall streamlining of the Company, as well as exiting the mortgage business, which impacted the servicing expense line in particular.

Other non-interest expense was down quarter over quarter given the CFPB charge in the fourth quarter, as well as lower exclusivity fees given our historical OEM agreements have rolled off. As a reminder, Other non-interest expense, as presented here, includes our insurance losses, so that line can be a bit lumpy on a quarterly basis.

We typically see higher weather related losses in the second quarter due to hail storm damage on dealer inventory, so you should expect a seasonal bump next quarter in this line item. But overall we feel real good about the progress we've made on this quarter on expenses and similar to the NIM story, we'll continue to make steady progresses on expenses over time.

Let's move to funding and liquidity in Slide 9. Total Parent Company liquidity ended the quarter at $10.2 billion, a $3.1 billion decline verses prior quarter, driven by $3 billion of unsecured debt maturities and the redemption of high cost legacy global debt.

With $7.7 billion of maturities through the end of 2015 and $8.2 billion over the next 24 months, we continue to remain very comfortable with coverage levels and view our current liquidity profile as more indicative of a normalized level. Given our strong liquidity position, our liquidity management strategy going forward will focus on optimizing liquidity and efficiently funding loan growth, which is centered around increasing assets funded at Ally Bank.

The upper right chart shows total assets ended the quarter at $148.5 billion with Ally Bank now representing 66% of our total assets, up from 57% in the first quarter of 2013. As we continue to execute on our customer centric strategy, we expect further growth in retail deposits at Ally Bank which grew $2 billion in the quarter and now accounts for 43% of our total funding.

In addition to our strong deposit growth we continue to have robust access to the capital markets, completing five securitization transactions in addition to renewing our $11.5 billion syndicated credit facilities. These secured credit facilities, which provide liquidity to both the parent and Ally Bank, have been renewed over the last four years each time with continually more favorable terms.

We also issued $1.3 billion of unsecured debt at average coupon of approximately 3.1%. While unsecured issuance will moderate going forward, we will continue to opportunistically access this market. Let's turn to capital on Slide 10.

Our Tier 1 common ratio increased 30 basis points this quarter to 9.1%, primarily due to our improved net income and reduced dividend burden on the MCP that we repurchased last year. As mentioned in previous quarters, Basel III is not significant for us. For example we estimate Basel III would actually increase Tier 1 common from 9.1% to 9.3% this quarter =, primarily due to differences in the way our DTA is treated.

Ultimately, we expect this will flip and Basel III will be a modest hit of 20 to 40 basis points on capital ratios. Importantly, we were pleased to receive a non-objection to our CCAR submission with a stressed Tier 1 common ratio of 6.3, which we view as an adequate cushion to the 5% minimum. Let's move to asset quality on Slide 11.

The story on this page is consistent with what you've heard in previous quarters as we continue to expect to see charge offs follow seasonal patterns on a quarterly basis and continue to increase somewhat year over year. In the upper left corner, consolidated charge offs remain unchanged at 53 basis points relative to the past two quarters and slightly higher year over year.

Looking at the chart in the bottom right corner, retail auto net charge offs increased slightly quarter over quarter due to a one time recognition of additional recoveries in the fourth quarter of 2013. Otherwise this rate would have declined versus the prior quarter, as losses moderate from this seasonal fourth quarter peak.

In the bottom left corner, consistent with seasonal trends, our first quarter delinquency rate declined by approximately 76 basis points and was six basis points higher year over year. Finally, our commercial book continues to demonstrate its strong collateral position with no losses for the quarter.

Overall the take away here is that asset quality results were completely in line with our expectations and we continue to anticipate seasonality quarter over quarter and a gradual increase in charge offs year over year due to the normalization of our retail portfolio. Now let's turn to Slide 12 and go through the segment results starting with auto finance.

We reported pretax income of $339 million which is up $132 million from last quarter and relatively flat to prior year. The fourth quarter CFPB charge did flow through this segment but excluding that we were still up $34 million quarter over quarter.

Net financing revenue continues to be strong with lease re-marketing gains as one of the primary drivers of the variance both quarter over quarter and year over year. We're realizing better than expected results on our lease book given an increase in vehicle turn ins, at a time of continued strong used car prices. While values have remained strong going into the second quarter this is something we expect to moderate throughout the year.

You can see provision has increased as the portfolio continues to shift back to a more normalized mix. But just to be clear, our origination mix is not materially shifting. For example, our mix of non-prime has remained fairly flat since early 2012. It's simply due to the fact that our on balance sheet portfolio is still normalizing, as the more conservative 2010 and 2011 vintages roll off.

In terms of the auto balance sheet you can see that the pace of growth has slowed a bit verses last year, but we do expect to see continued modest earning asset growth given our current origination levels.

Now moving to originations, we provided a chart here that breaks down our business by dealer channel. We continue to be a dominant player in the GM space, but we've also experienced some good growth with non-GM and non-Chrysler dealers. And as Mike mentioned earlier, we've grown that business 40% year over year to comprise 19% of our total consumer originations.

We have some great momentum in the used space which we can leverage as a base to build deeper relationships with new dealers in the future. Continuing on originations let's flip to Slide 13.

Total originations increased to $9.2 billion up to $8.2 billion last quarter and down from $9.7 billion a year ago. Favorability quarter over quarter was primarily driven by strong used and leasing business.

If you look at the year over year comparison much of that decline was driven by lower Chrysler subvented volumes partially offset by the growth in non-GM and non-Chrysler originations we mentioned earlier. There's obviously still a lot of aggressive pricing going on in the super prime space, which we'll continue to evaluate.

But as we've stated previously we're more focused on profitability and asset quality over market share or growth. In the bottom left you can see these originations resulted in continued growth in our consumer portfolio both quarter over quarter and year over year.

And in the bottom right, we show our commercial portfolio, which averaged $32.6 billion this quarter up from $31.6 billion last quarter and $32 billion from a year ago. And while penetration levels from both GM and Chrysler dealers are down year over year, the quarterly decline is starting to level off a little bit.

No let's turn to Slide 14 and talk about insurance. Our insurance business reported pretax income of $74 million this quarter up $7 million from last quarter and $13 million from a year ago. The quarter over quarter increase was driven by higher realized gains in our investment portfolio, partially offset by seasonally higher weather related losses on our dealer floor plan insurance business.

If you look year over year, we had lower earned revenue driven by the run off of our Canadian personal lines business, which was more than offset by lower weather related losses. Last year we experienced early spring hail storms, which led to higher than normal losses in the first quarter. Looking at the chart you can also see that our written premiums of $244 million is up both quarter over quarter and year over year.

Over on Slide 15 we show results for both mortgage as well as the Corporate and Other segments. Mortgage reported pretax income of $17 million, which is up both quarter over quarter and year over year. And the main driver here is the provision release I've already covered, driven by improving economic conditions and solid performance of the book.

The remaining mortgage HFI portfolio continues to decline and was around $8 billion at the end of the quarter. Credit characteristics remain fairly stable and we continue to maintain the reserve of over 4% against this portfolio, relative to current charge offs of 60 basis points.

Now focusing on Corporate and Other, you can see that net financing revenue continues to improve, driven by lower cost of funds. Other revenue was down this quarter as we took a one time charge when we accelerate deferred expenses associated with the debt we called during the quarter.

We also made progress quarter over quarter from a non-interest expense perspective, but relatively flat year over year as we had certain expenses reimbursed last year, under statements of work, as we exited mortgage international businesses. As a reminder, much of the expenses in this segment is related to unallocated global functions expense and reducing these expenses is a major area of focus for us.

Now turning to Slide 16 our retail deposits grew 5% versus last quarter and 17% year over year. Our total deposit book now stands just shy of $55 billion and represents 43% of our funding profile. While the $2 billion of growth in our retail deposit book is a testament to the strength of the Ally Bank brand, as I mentioned before, we will continue to remain focused on optimizing liquidity and interest expense.

And in order for us to execute on our plan, we are not relying on this high level of sustained deposit growth. Rather we would expect annual deposit growth closer to $5 billion per year versus the current run rate of $7 billion to $8 billion. We continue to grow our loyal and sticky customer base, with nearly 1.6 million accounts and approximately 825,000 primary customers, representing an increase in our customer base of 19% year over year.

As you see in the bottom right chart, lower cost money market and online savings products now represent 39% of our deposit mix. As we previously discussed, we are not a top rate payer and we continue to be successful in reducing our average retail interest rate over time, which improved around 10 basis points year over year.

Ally Bank's customer centric franchise was awarded a number of accolades during the quarter, which reflect our commitment to service and transparency. You can see those listed here.

Overall we believe that the continued growth of stable deposits at our leading direct bank franchise will enable us to efficiently fund more assets at the bank, improve our ROTCE, and drive shareholder value.

With that I'll turn it back to Mike to wrap up.

Very quickly we are pleased with the quarter. The financial improvement. We're pleased with, importantly, we're very pleased with the progress on our two core franchises. The fact that our auto franchise continues to be strong and it is increasingly diversified.

And as Chris was just describing the Bank has come to a level of critical mass and customer acceptance that I think gives it a lot of forward momentum that is very beneficial to our business. Most importantly as we've said to investors, our target is double-digit return on equity. And there is a three part plan to getting from here to there, cost of funds improvement, controllable expense improvement, and regulatory normalization.

I think we've demonstrated in the quarter that all three of those things are happening and we commit to making those things continue to happen on a go forward basis.

With that, Michael we're ready to take questions.

Meena, we're ready to take questions from investors. If you could just remind them how to queue up to ask a question.

Thank you sir.

(Operator Instructions)

Your first question comes from the line of Mr. Sanjay Sakhrani from KBW. Please go ahead. Your line is open sir.

Great. Thank you. Good morning. I know you guys have talked about taking down controllable costs, something like 20%, and I guess you guys made some progress this quarter. Could you just talk about the pace at which you expect to bring those down?

And then secondly if I look at Slide 9 and that debt maturity schedule, of what's left, how quickly do you think you can refinance some of what's remaining in terms of maturities? Thank you.

Let me start with the expense side. What I would lead you to believe here is that it will be slow steady measured progress on the expense front. So we don't want to give the impression that it will be a dramatic drop one quarter and then going up another quarter. We have internal initiatives going on to basically streamline the operations and cut costs. So I would lead you to look at it as slow progress on a quarter over quarter basis over the next couple of years.

On the funding front, we obviously still have some large maturities over the next couple years, but that really begins to normalize as you get to 2016. We will not refinance a lot of the unsecured maturities with additional unsecured debt. A lot of that will be really refinanced through just growing the deposit platform. We'll go into the unsecured markets on an opportunistic basis. You should expect most of that to be refinanced through either excess liquidity or just the growth of the Bank, that we have on hand.

Okay. One more follow up if I may. Obviously getting to put the commercial assets into the Bank is a positive. I mean was that something you guys were anticipating when you were forecasting out your expectations or is that something incremental? Thank you.

No. That's something we anticipated. It's something that we approached the regulators on the first time, a year ago. And we didn't know exactly when it would happen, but we did anticipate that it would happen. Similarly on the dividend issue. We anticipated that it would happen with the question as to timing.

All right. Great. Thank you very much. Congrats on the IPO.

Thank you.

Thank you sir. Your next question comes from the line of Brian Foran from Autonomous. Please go ahead. Your line is open.

Hi. Good morning.

Good morning.

On the deferred tax asset, I mean I know there's an inherent variability and it depends on earnings, it depends on gains that come in a given quarter. But when you look at the quarter over quarter decline, was there anything unusual or is this, so to speak, a run rate we can think about in terms of DTA consumption going forward?

Honestly nothing really unusual. The decline was really driven by the net income that we generated this quarter. So I would lead you to believe that you should expect a similar kind of decline going forward.

Then on credit quality. If I look at the year over year changes in the retail auto delinquencies, both for you and the industry, everyone's got a slightly different number, but it's the same general pattern. Delinquencies were stable in 2012, they started to run up in 2013, and now they're back to somewhere between slightly higher or slightly lower on a year over year basis.

As everyone reports 1Q 2014, is there any kind of vintage analysis or anything like that you can kind of give us? As we look forward are the new monthly production numbers producing lower earlier delinquencies? Should we expect the delinquency to actually start to moderate from here? Or just on anything that you can kind of parse apart that trends. Why were delinquencies running in 2013 and why did delinquencies seem somewhere between stable and better across the industry in 2014?

What I would say is you always have to remember in the auto business it's a lot of seasonality when it comes to delinquencies. So as an example, the fourth quarter will always be the highest quarter and you tend to have first quarter always being the lowest quarter really driven by the tax refunds time of the season.

From our book, we continue to see a year over year increase as our overall book just normalizes. But the pace of that year over year increase has really started to slow. So I don't think we're at that peak rate yet from our book's perspective. We think it'll continue to float up from here.

But I think you can think about it as our book is really starting to normalize. And the truth is it's probably on our expectations if not a little bit better right now. And I think some of this is really just based on an improving economic conditions particularly when it comes to unemployment rate.

Thank you.

I'd make the --

Go ahead.

I was just going to add one comment. Which is, if you look at obviously we track this by vintage, by quarterly vintage. I think if you were to go back a couple years what you would see is the delinquencies were coming in favorable to projections.

Then what's happened over the last year or two is they're still favorable but they're less favorable to projections. Okay, number 1. Number 2, and Chris just said this the last minute, delinquencies equals unemployment. You tell me what unemployment's going to be, I'll tell you what the delinquencies are going to be.

At least the general economy as it relates to employment is not getting any worse. So understandably reasonably stable delinquency environment. And I would simply add to that we have not, others may have, but we have not gone out and reached on the credit spectrum in terms of business mix.

If I could sneak in one last one. Just as capital builds we've got the gains coming or if capital should build as we move through the year, so you can kind of see path to a 10% Basel III ratio reasonably quickly.

Can you just remind us your philosophy, the trade off between letting capital and tangible book value grow, versus doing things in the debt in preferred books, which may require an up front hit to capital but return future returns?

What I would say is that we are very comfortable with our current capital levels. So as we -- as we start to see improved earnings over the next couple years and we start to really build that excess capital, we're very focused on how we should really deploy that to really maximize shareholder returns. There are different ways we can do it, like you mention, debt calls and cleaning up our capital stack and things like that.

So it's something we're focused on. But what I would say is we need to build that capital throughout this year before we make any real decisions on how do it. The last piece of that is obviously any use of capital needs to go through a CCAR process. So I would point you to that from a timing perspective as we get towards the next CCAR process will really be the next time where we can make decisions or at least put forth recommendations on how we should utilize some of that capital.

Thank you very much.

Thanks, Brian.

Thank you. Your next question comes from the line of Mr. David Ho from Deutsche Bank. Please proceed.

Good morning. Thanks for taking my question. Any sense of what the straining factor will be in terms of your capital deployment aspirations nearer term? Now that you have been through a couple CCARs and -- is 8.5 still your baseline for looking at excess deployment -- capital deployment?

And were there any kind of -- is there any kind of color or more confidence on what you could do with the preferreds and the capital structure?

What I would say is we expect the Tier 1 common ratio to continue to be our restricter. When you look at the past CCAR we just went through, we passed that with a stress ratio of 6.3% which represents 130 basis point cushion to the 5%. We think that's a pretty good cushion.

It met our expectations. So we feel pretty comfortable about where our capital levels are today. And like I said the increased earnings we expect over the next year, we really think about that as generating excess capital.

As for our level of confidence to deploy that capital it's all going to depend on our conversations with our regulators and our next CCAR submission. I would say we do not expect dramatic changes in the balance sheet or risk position of the Company from last year's CCAR process til next year's CCAR process. It should be fairly consistent. But that's all we have as a --

I'd make one other observation which is from the regulator's point of view. There's a big difference between wandering in and saying gee we'd like to take all this excess capital and do a stock buy back. Versus going in and saying we'd like to take this excess capital to improve the underlying earnings performance and therefore safety and soundness of the Company. Those are two completely different conversations with the regulator.

If you take Chris' point, that he just made, we're very confident, since we don't anticipate the nature of the business dramatically changing in the next 12 months, we're very confident that the excess capital we will generate will be perceived as excess capital by the regulators. And therefore there will be a dialogue for the most efficient use of that excess capital. And I think this is case where the shareholders' interest and the regulators' interest are actually precisely aligned.

Okay. That's helpful. Another one on expenses going forward. Obviously you had some nice tailwind on the controllable side. Any reason why we wouldn't expect the expense reductions to kind of flow to the bottom line?

Anything regulatory related? Anti-money laundering or maybe talk about your run rate investment spend in the business, does that need to go up? And if so, by how much?

There's nothing unusual that we see on the horizon that will take us off our path to continued decline in the overall controllable expenses. Now having said that, our focus is really on our unallocated global functions and reducing the expenses in those global functions.

We will continue to invest in both the auto business and the banking business through things like technology and people and process. So the expense path that we laid out to get an efficiency ratio down to the mid 40s, takes into consideration additional investments that we expect to make in the business.

Okay. So no major ramp in the used car area or the leasing business to really get your volumes up there?

Well we've been growing quite rapidly in the used car and we've grown quite rapidly in the leasing business. But I think the way we look at the world is there's going to be modest growth in SAAR going forward. And we would expect our earning assets to grow modestly on a go forward basis.

And from a regulatory capital point of view that's a pretty stable scenario which is the basis on which Chris said the excess capital, the earnings we generate will be excess capital for exactly that reason. We do not anticipate a major drive to massively accelerate the growth of any particular line of business. That's not our agenda right now.

Great. Thanks for taking my questions.

Thanks David.

Thank you sir. Your next question comes from the line of George Brickfield from Jefferies. Please proceed.

Good morning everybody. Couple questions. First on the lease re-marketing gains that you had in the quarter, what drove the improvement there? The Mannheim Index has been up this quarter, but not that much, so can you talk about why that was so strong?

Yes there's really two dynamics. One is we had more vehicles really coming off of lease in the first quarter than we had last quarter and even last year. So as we ramped up our leasing business a few years ago we're starting to see many more cars come off of lease.

We also saw very strong performance in the overall used car prices in the month of March, where most of those trade-ins happen. So that's really what drove some of the gains. I would tell you, and I said it in prepared remarks, that we saw some of that flow through even to April, so we feel pretty good about that now.

George, just to point out one thing from an accounting point of view. What that lease gain recognition is, is the difference between the realized, what's actually going on, and what our expectation was. So when we put our plans together, we had a conservative view of used car prices and we still do. We have a view of the world which is used car prices are going to back off over time. And that is what was in the plan that we talked to investors about.

To the extent that we were wrong and the used car market is stronger, then that requires a re-adjustment of the residual values in the portfolio and that has to flow through the income statement. And so to a degree, it's a metric that is, how badly did we guess -- or estimate. Guess is the wrong word. We estimated conservatively and the market is stronger than we anticipated.

Great. Thank you. That's helpful. Switching topics. At the Bank at this point, what percentage of your originations are you now doing at the Bank?

Right now we do about 70% of our originations at the banking entity. So that's pretty strong. I would also point out over 95% of our dealer floor plan is at the Bank as well.

We expect the overall percentage of originations at the Bank to increase over time as we get out of TARP and potentially can go down credit a bit -- what can go into the Bank. So it's around 70% today and our expectation is it'll increase.

Great. Thank you. These questions kind of feel like nitpicking at this point.

Can you give us any color on the dividend that the bank is going to pay to the whole Company in terms of size or impact it'll have on your costs of funds?

Yes. It's something that we've anticipated. What I would say is it'll be a meaningful size meaning $1 billion to $1.5 billion in the second quarter. You should not expect to see that going forward. It'll be much smaller on a quarterly basis.

But you can think about that as the parent Company therefore would receive additional liquidity and not need to go access the capital markets to generate that liquidity. It's something we've anticipated in our plan and obviously helps keep us out of the unsecured debt markets and therefore helps bring cost of funds down.

Okay, and then final question, just any update on the China sale closing process?

Right now we still anticipate this'll happen within 2014. A lot of it is just dependent on regulatory approvals in China, which are somewhat unpredictable for us. But we expect it to happen by the end of the year.

All right. Great. Thank you very much everybody.

Thanks, George.

Thank you sir. Your next question comes from the line of Kirk Ludtke from CRT Capital Group. Please go ahead. Sir your line is open.

Good morning everyone.

Morning, Kirk.

You've touched on some of this, but I'd like to maybe talk about your plans for diversifying away from GM and Chrysler. Over the years you've mentioned that the dealer is really key to your strategy. These floor plan penetration rates that GM and Chrysler are down year over year, but actually your floor plan assets are up. Can you talk about the floor plan business that you're conquesting and what the value proposition is for new dealers to switch over to Ally?

Why don't I start there? This is JB, Jeff Brown. Our floor plan as you pointed out, I think we saw continued strong growth in average balances there on a quarter over quarter basis. Which is really the metric we tend to focus on more than penetration levels.

Obviously we've experienced very high penetrations with GM dealers, Chrysler dealers. It's really their independent decision to make. And the key value proposition is really what we go out and sell everyday, which is it being the one stop shop, being the preferred lender, being a holistic provider. Really no other competitor that we face can offer every product that we can.

Retail new, retail used, leasing, insurance, floor plan. So for us it's really the strength of our product offering and also being able to do it on a nationwide scale, really all 50 states. So that's really been historically the way we've been able to maintain such strong levels and capture really the type of dealer relationships that we do.

We do continue to, as you noted, we are making progress in diversification efforts. I think as Mike and Chris both pointed out represented 19% of originations this quarter. Having said that, you can still see that the volume of business that we're doing with GM remains very strong. We've been there. They are a key partner for us. We are a key partner for them. We would expect that to continue going forward.

But I think obviously what we've been saying over the past three or four years is it's really not about a contract. Really the relation starts at the dealer. And for us it's been a lot of hand to hand combat over the past three or four years, but we've made progress.

Really selling those dealer capabilities, selling the partnership, selling the platform and that's starting to make great progress. So we were very pleased with the 19%, but obviously both GM and Chrysler remain very important partners to us and you should expect that going forward.

Mike, I don't know if there's anything you want to add.

I think the only thing I would add is the wholesale business, the floor plan business, from one perspective, is a very straightforward business. From another perspective it's not. This is a business not a lot of people can do and certainly not a lot of people can do and risk manage. This is a business that requires substantial expertise and substantial infrastructure.

The fact that we have an organization that is in these dealerships everyday and knows what's going on in their business, has a lot to do with it. From the dealer's point of view, this is the life blood of their business. Without having a good floor plan relationship they could lose their franchise.

They are all very well aware that in 2008 all these banks that today think this is the greatest business since sliced bread, in the financial crisis decided when they needed to shrink their balance sheet the easiest, quickest way to shrink your balance sheet was to walk away from all these dealers. And so they have an acute sense of the importance and the fragility.

By the way I would also add that switching is not easy. We are so embedded as would any other supplier be in their relationship. So when you look at these numbers where we have $33 billion or thereabouts, if you took BofA, JPMorgan, Wells Fargo, GMF, Santander and Capital One and added them all together, they don't add up to our size in this business.

And so yes, we've lost a little bit of share over time, but frankly I wouldn't mind a few more businesses where we have 60% market share. That would be okay. So it's a very solid, very defensible, in a competitive sense, business.

That's great.

Sorry to give the long lecture about the business, but I think it's important to understand it.

I agree. Thanks. On the origination side. So you generated $900 million of GM subvented volumes in the quarter. That was down $400 million year over year. Where do you see GM subvented volumes going over the next year or two?

I mean, largely stable to slightly down from what you saw this quarter. I mean, we're doing a lot more on the GM lease front than we've done in the past. So we're seeing more of the business flow through, the lease product verses retail subvented product. We will continue to have growth there, but it's probably in the neighborhood of what you saw this quarter.

I think the important thing to add to that is GM -- when we talk about subvented business we're talking about where does the OEM want to spend their promotional dollars? I think GM, in general, is on a strategy of trying to preserve margin and spend less money on promotional dollars.

There's two dimensions to this. There's the dimension of how much subvented business does GM want do as part of their marketing program? And what is our share of it? The former I believe they're sort of trying to constrain. And the second, our share is in the 60%, 65% range and has been there for quite some time.

Excellent. Thank you. You've touched on the -- if I can sneak in a couple more. I think you've touched on some of this earlier in the call, but I just wanted to maybe put some numbers on it. Where do you see sub-prime as a percentage of the total portfolio in a year or two?

It's roughly what we're doing today is in the neighborhood of 10% or 11% of originations. And I'd say ultimately that's where you should expect the balance sheet to season to. If you think back post crisis, we really weren't doing any of that paper.

The balance sheet today is more in the neighborhood of kind of 8%. So it's got a little bit more growth of on balance sheet. But I would expect our origination mix to remain about constant with where it's at today.

Okay. Interesting. So you think you can grow the earning assets without materially taking up sub-prime?

Yes we do.

Okay. And then lastly on the funding mix, I guess your deposits are 43%. I think you've said in the past you think they'll go over 50%. Is that the upper limit? 50%? 50ish?

No. Listen, I think that's where we're looking to get it to over the next couple of years. I don't necessarily think it's the upper limit. We're focused right now though on really growing the deposits in the most economical way possible. So we're focusing on continuing to decrease our cost of funds and interest expense.

Which is why we're leading people to look at the growth to be somewhere around $5 billion a year. But to the extent that we get to the 50% mark and we still view deposit growth as economical, I think we'll continue to grow it. So I think 50% is really the figure you should look out for the next couple of years.

Chris let me follow on the question. Which is if the capital markets remain as efficient as they are today in securitization, I don't think we would see deposits going up to 70%, 80%.

I think that's correct. I think the other thing we always think about internally is once you get to that mark and continue to grow deposits, how can you deploy those deposits and other type of assets as well in the future?

Fantastic. Thank you very much.

Thanks, Kirk.

Thank you sir. I would now like to turn the floor over to Mr. Michael Brown for closing remarks.

Great. Thanks, Meena. Thanks everyone for joining us. If you have additional questions, please feel free to reach out to investor relations. Thanks, Meena.

Thank you sir. Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Have a good day. Thank you.