Ally Financial Inc (ALLY) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter Ally Financial earnings conference call. My name is Carolyn, and I am your operator for today. At this time, all participants are on listen-only mode. We will conduct a question-and-answer session towards the end of the conference. (Operator Instructions) As a reminder, the call is being recorded for replay purposes.

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

Thanks, operator. And thank you, everyone, for joining us as we review Ally Financial's third-quarter 2015 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 contents of our conference call will be governed by this language.

This morning, our CEO, Jeff Brown; and our CFO, Chris Halmy, will cover the third-quarter results. We will also have some time set aside for Q&A at the end. Now I would like to turn the call over to Jeff Brown.

Great. Thanks, Michael. Good morning, everyone. We appreciate you joining us today. From our perspective, it was another strong quarter of execution and delivering results. I continue to be proud of my teammates that are adapting to changes in the markets, taking advantage of opportunities to be disruptive, and capturing quality business flows.

Across our businesses, whether that is auto finance, insurance, deposits, or corporate finance, we remain focused on taking care of the customer base. And that, in turn, is advancing our Company.

Before we get into financial results, I want to start by providing an update on a few key focus areas that are noted on slide number 3. First, let's cover the auto finance business. Originations continued to be solid again this quarter at $11.1 billion, and we will surpass guidance previously communicated to you. We would now expect to see originations break through $40 billion for the year.

Obviously, SAAR has been a partial contributor to the strong flow, but we have made nice rebounds in the Chrysler channel. We continue to see healthy flows in the growth channel; and despite some of the media noise, GM flows are steady. Dealer relationships remain robust, and that was reinforced as I spent several weeks visiting with dealers across the US over the past few months, including earlier this week. We have been saying for quite some time this is truly a relationship business, and partnering so closely with the dealers allows us to continuously learn and adapt.

Credit is performing fully within expectations. A current dynamic is the growth in provision for loan losses, given the shift from leases into loans. But over time, those economics improve, and that financing revenue will be less volatile and less subject to leased residual swings. And, yes, we have expanded risk appetite into more nonprime flows, but we are still fairly modest at sub-15% origination allocation and fully underwrite with a focus on the borrowers' ability and willingness to repay. And that is a fact not necessarily true of some of the more deep subprime players.

Further, as we are replacing a portion of lease originations with additional loans, our aggregate risk profile has not meaningfully changed in either a baseline or a stressed economic scenario. We have been steadfast in diversifying the business across a number of dimensions, and this positions us to revive long-term, consistent results through a variety of market cycles as well as changes in competitive dynamics.

We are driving our business through application flow from about 17,000 dealers across all 50 states. And, as you will see later in Chris's materials, we continue to break our own records on application flow.

Now, next, let me touch on the subject of shareholder returns. We have achieved consistent and profitable results, but we know we must continue to find opportunities for improved returns, and we are executing both a near-term and longer-term plan. For the near term, we continue to pursue efforts to improve capital management and get more efficient in how we fund our asset base.

There are two key drivers that will move the needle and they are: number one, expanding the use of deposit funding at Ally Bank, as well as pursuing ways to have greater efficiency between the parent and our Bank. We are making progress growing deposits and booking more assets into the bank, but by no means are we even close to realization of the full opportunity.

And then, number two, addressing the remaining Series G preferred securities. We would like to get these out as soon as possible, and we are in continued dialogue with the regulator of this matter. Now, I know I have been saying that for several months now, but as mentioned on last quarter's call, it takes patience. I can promise you we will be direct and straightforward to the market immediately when there is more to say.

We are appreciative, though, we can at least engage in this dialogue with our regulator, and I remain optimistic. Elimination of G is huge, and it is now really just a matter of time. Obviously, given where the stock is trading, I would love to be buying back shares. That is a major tool currently missing from the toolkit, but we will get there.

I wish I could be in the market defending the stock and creating value for our shareholders -- and given where tangible book sits, this is really Finance 101. These are important initiatives that we believe will make meaningful progress over the near-term and improve the overall efficiency of our financial profile. And they really are unique opportunities for Ally and our shareholders relative to many other financials that have operated with a more normalized funding construct as well as already retired inefficient forms of capital instruments. So I view these as real opportunities for value creation, particularly where the stock trades today.

Now let me shift to the path we're carving for the longer-term. We use the term One Ally, and what this really means is that we fundamentally change the way we interact with our customers and even ourselves on an enterprise basis. Historically, the customer experience has been very separate, business by business; and we did not have a structure in place to have a more integrated view of our customers, which is critical to being able to foster deeper relationships.

This year we have begun to change that. And we are laying the groundwork for having a more holistic customer experience and, therefore, the ability to communicate with over 5.5 million Ally customers about other products and services. We have taken several steps to more proactively offer our auto customers deposit products and vice versa, and we will continue to explore new opportunities within our family of customers to achieve incremental growth.

We have also started a number of technology investments necessary to be even smarter with our customer interactions. Additionally, we are focused on building on our core competencies in digital financial services and responding to the customer feedback for additional products and services from Ally. We affectionately call this Ally 2.0, our next chapter, which is built on a position of strength and the opportunity to grow and thrive.

Ally Bank was built on the foundation to be the original disruptor Bank: a different model, a different approach, a focus on getting customers what they seek in a bank today. We intend to leverage that spirit in how we approach our next wave of products, services, and technologies. We are spending a lot of time thinking about the evolution of customer behaviors, wealth transfer, and demographic trends. And we are not prepared to make any specific product news today, but you can expect to hear more from us in 2016 on our expansion of our offerings.

Overall, we have a lot of enthusiasm about the road ahead. Our foundation is strong. We have a clear plan that will move the needle, and we are well-positioned for the trends in financial services towards more digitally based experiences with a high-touch service component.

Now, turning to slide 4, let me share some highlights on the quarter before turning it to Chris for the deeper dive. Net income was $268 million in the third quarter, which we view as a solid quarter of performance. Core pretax income was $431 million, and our adjusted EPS was $0.51. Our core return on tangible common equity was 9.2%, which is not too bad compared to other financials in this type of rate and market environment, as well as the existing inefficiencies that I previously discussed.

Our adjusted efficiency ratio was 44%, which is in line with our mid-40s target. Our NIM also continued to improve at 2.67% for the quarter, up 9 basis points quarter over quarter. As mentioned, auto originations remained strong at $11.1 billion. And when excluding the GM subvented business, originations were up 36% year-over-year. Incremental to the $11.1 billion in originations for the third quarter is a $607 million transaction we closed to purchase Mitsubishi consumer assets as we stepped in as their banking partner.

But think about that: we had our largest channel drop 83% year-over-year, but we kept originations, credit quality, and profitability all in check. That is really the power of the Ally auto franchise.

Shifting to deposits, we posted growth of $1.8 billion for the third quarter, with balances up 15% year-over-year. And we crossed over a major milestone of exceeding 1 million deposit customers.

And earlier this month, we received great news. For the second consecutive year, Ally Bank was featured as the Best Online Bank by Kiplinger's Personal Finance magazine; and for five years in a row, the bank was named Best Online Bank by MONEY Magazine. This is a true honor for us and a testament to the power of Ally Bank.

So it is pretty clear we have a special asset in Ally Bank, and it is honestly at its infancy stage on what really can be done. So steady and consistent progress again in third quarter. We have our sights on achieving our financial goals for the remainder of the year, and we are focused on creating an even brighter future.

And, with that, let me turn it over to Chris.

Thanks, JB. Let's turn to slide 5. We delivered another quality quarter, with core pretax income of $431 million. Net financing revenue of $981 million was up year-over-year and quarter-over-quarter. Stronger order originations continue to drive earning asset balances higher. We continue to benefit from strong used-car prices. And funding costs continue to come down.

Other revenue declined to $332 million this quarter, driven primarily by lower investment gains, but was still within our expected range. Provision expense of $211 million was up, driven by our strong auto loan growth. And, just to reiterate, provision expense is a direct effect of our loan portfolio growth, as the origination mix shifts to more loan versus lease. And we also have the typical seasonal charge-off increase in 3Q.

Total noninterest expense was $672 million, which is broken out between controllable and non-controllable items. The big driver of the decline quarter-over-quarter and year-over-year is the insurance weather-related losses, which show up in other noninterest expense line. While 3Q is typically seasonally lower than 2Q, we did see a nice benefit on a year-over-year basis. We also continued to make progress on controllable expenses, which were down another $20 million year-over-year. These results drove GAAP net income of $268 million. Remember, for the year-over-year comparison, we had $130 million of discontinued operations income related to our China JV as well as a one-time tax benefit from the sale of the mortgage servicing operations last year.

Looking at key metrics, adjusted EPS for the quarter was $0.51, which was up from 2Q, helped by lower preferred dividends, and is generally in line with consensus expectations. Core ROTCE was 9.2% and our adjusted efficiency ratio was 44% in the quarter. Both metrics are consistent with our year-end targets.

Slide 6 reviews the results by segment. Auto finance had a good quarter, with pretax income of $347 million. Net financing revenue was up, driven by strong originations in retail loan growth, and this was offset by associated higher upfront provision expense. Insurance reported pretax income of $40 million. The benefit quarter over quarter is driven by seasonally lower weather-related losses. Lower investment income is driving the year-over-year decline, which, as you know, is a function of a poor equity market in 3Q.

Mortgage pretax income of $7 million was driven by higher portfolio balances and a small gain on sale of legacy loans. Corporate and other continues to benefit from a lower cost of funds and expense reductions.

We have expanded our net interest margin disclosure on slide 7 to add more transparency around the drivers of our asset yields and funding costs. Overall, NIM was up 9 basis points quarter-over-quarter, driven by lower funding costs and slightly higher asset yields. On the asset side, quarter-over-quarter we saw pretty steady yields across the portfolio, with some upside in lease gains.

Specific to the retail auto book, we have seen yields there pretty consistent in the 5.2% to 5.3% range. The originations we are putting on now are averaging around 5.5%, so you should see the auto loan portfolio migrate up as we optimize our loan mix.

On the funding side, we saw a benefit of 7 basis points quarter-over-quarter and 18 basis points year-over-year. The drivers here are continued deposit growth and lower unsecured debt levels, which were down $1.7 billion quarter-over-quarter and $3.6 billion year-over-year, and drove our interest expense on long-term debt down $83 million year-over-year.

Going forward, our unsecured debt maturities are pretty minimal in 4Q and less than $2 billion in 2016. Further cost of funds reductions will be driven by our continued utilization of the Bank and our ability to fund our assets with deposits. Bank assets represented 69% of the total balance sheet and should trend closer to 75% in the near term, but we continue to be focused on eventually getting that in the 90%-plus range over time. With the seasonality and our NIM, we continue to expect year-over-year NIM expansion.

We have included slide 8 on interest rate sensitivity again this quarter, since it continues to be an important topic for banks. Just to quickly reiterate our position, one of the biggest drivers of our rate sensitivity is the repricing assumptions we use for the retail deposit book. While we have numerous inputs to our interest rate risk model, the assumptions we are currently using result in a pass-through rate of greater than 80% over time.

We do think that it is a bit conservative relative to what historical data would suggest. And if you were to assume a pass-through rate of 50%, we become asset sensitive. Compared to the prior quarter, we become less liability sensitive in the model scenario and a little more asset sensitive in the 50% pass-through scenario.

One reason for the change is our continued progress on migrating dealer floorplan loans off of interest rate floors. As of September 30, over 90% of these loans were repriced directly with short-term interest rates. So, again, while we have modeled a conservative, liability-sensitive posture, we continue to believe this could be more neutral to asset sensitive, depending on pass-through assumptions.

Slide 9 covers deposits. We had another great quarter of deposit growth, with balances up $1.8 billion quarter-over-quarter and $5.5 billion year-to-date. This pace has really exceeded our expectations all year. We have brought our interest expense down and optimized our marketing spend while continuing to see customers drawn to the Ally brand and our digital platform.

As JB mentioned, we surpassed the 1 million customer milestone, growing our customer base by another 36,000 depositors. These new customers represented the majority of our balance growth for the quarter.

And we continue to invest in our digital capabilities by introducing our Apple Watch ATM Locator app, and look for continued advancements in our mobile platform as we expect to begin piloting Touch ID in the first quarter of 2016. As JB stated earlier, Ally Bank continues to rack up the accolades from the likes of MONEY Magazine and Kiplinger's.

On slide 10, capital ratios were higher in the quarter, driven by consistent profitability and DTA utilization. Our estimate for the Basel III fully phased-in common equity Tier 1 ratio was 9.6% for the quarter. We added the chart on the bottom left to help outline the benefit of the DTA to our regulatory capital ratios. If you focus on the blue bar, the balance came down approximately $150 million this quarter, directly benefiting our regulatory capital ratios. So not only do we expect to generate solid net income in capital organically, we will also build excess capital by amortizing our DTA.

On the Series G front, not much new to report at this time. We are still focused on redeeming the remainder of the Series G as soon as possible.

On the bottom right, we show our adjusted tangible book value, which adjusts for tax-effected bond OID and the remaining Series G discount. We saw a nice increase this quarter to $24.30, up $0.65 per share quarter-over-quarter and over $2 per share year-over-year.

Moving to asset quality on slide 11, consolidated charge-offs increased only 1 basis point year-over-year to 61 basis points. This is primarily driven by our retail auto charge-offs, shown in the bottom right, which increased 101 basis points this quarter. As a reminder, the second quarter is typically the lowest, and the fourth quarter is seasonally the highest. So you should expect that number to tick up again next quarter.

In the bottom left, our 30-plus day delinquency rate increased to 2.6%, again as seasonally expected. And similar to losses, we would also expect that number to be up seasonally next quarter as well.

We detail our provision expense in the top right. As we have discussed, retail auto loan provision is the driver and is up primarily due to higher loan balances. Our coverage ratio remains consistent, but auto loan balances are up over $4.8 billion year-over-year and almost $2.8 billion quarter-over-quarter. Overall, still no real change to our view on credit.

As mentioned last quarter, we would expect annualized charge-offs in our retail auto portfolio to approach 1% this year and drift up further next year due to continued portfolio optimization. We continue to feel very good about where we see credit trends. We are staying disciplined in our buy box, and asset quality continues to perform within our expectations.

Now let's turn to slide 12. Auto finance reported $347 million of pretax income in 3Q. We have already covered most of the drivers here: strong loan growth, offset by associated provision expense. Earning assets are up, despite approximately $2 billion of loan sales in the quarter and $5.7 billion since the third quarter of 2014.

Focusing on originations, we had another very strong quarter at $11.1 billion. Digging in a bit, 76% of the originations were funded at Ally Bank. Nonprime originations were at 13.5%, roughly flat from the prior quarter. We saw growth in all non-subvented channels, which were up 36% in total. And our continued progress in the growth channel led to record application volume for the quarter. The more applications we see, the more selective we can be in achieving our target origination levels.

Year to date, our $31.7 billion of originations is roughly flat to last year, which demonstrates the strength and versatility of our franchise, given the significant shift in origination mix this year. And we continued to see these trends early in the fourth quarter, with strong October flow.

This positions us well to be around $40 billion of originations this year, well above our original targets. But we still think the high $30 billion is the right annual range to think about going forward as we optimize our mix and focus on risk-adjusted returns.

On slide 13, you could see our channel mix stayed consistent with the growth channel at 32%. As the GM subvention business trends towards zero, you may see the GM percentage tick down a bit. But overall, we expect this to be fairly representative of our mix going forward. From a product perspective in the top right, you can see that has pretty much reached a new normal as well, with growth in the diversified used business easily replacing the subvented business. We don't expect any issues whatsoever replacing declining subvented volumes going forward.

The bottom two charts summarize the balance sheet. We added a breakout of the lease assets in the consumer chart to outline the shift in the balance sheet going forward. And on the commercial side, balances were up slightly year-over-year.

On slide 14, insurance reported pretax income of $40 million for the quarter. This was favorable to 2Q, where we experienced a seasonal high in weather-related losses. The chart on the bottom left shows that we were not only favorable in losses quarter-over-quarter, but also on a year-over-year basis. This benefit, however, was offset by lower investment income, and the gains we experienced were not as strong as the last several quarters.

Written premiums in the quarter totaled $254 million, down slightly both quarter-over-quarter and year-over-year, as we have seen an increase in dealer reinsurance. As we mentioned last quarter, we launched our new Ally Premier Protection product, which will be our flagship vehicle service contract product going forward, and the nationwide rollout of that platform continues to go very well.

On slide 15, we show results for the mortgage segment as well as corporate and other. Mortgage reported pretax income was $7 million. The mortgage loan portfolio was up again this quarter to $9.7 billion, where we have some bulk purchase activity offsetting amortization of the book. Again, these are primarily high FICO jumbo loans, which we view as a part of our standard balance sheet management process.

In corporate and other, we had a core pretax gain of $37 million. Results continue to show significant improvement from lower funding costs and expense reductions. And also, as a reminder, results for our corporate finance business are included here, which recorded pretax income of $16 million.

So overall, we are pleased with the results and delivered yet another solid quarter. And with that, I will turn it back to JB to wrap up.

Great. Thanks, Chris. So to sum up, the diversification and shifts we experienced in the auto finance business have really allowed us to build a stronger franchise that is positioned for longer-term, steady results. We have diversified not just by vehicle make and dealer, but also by borrower and geography. And we are no longer solely reliant on manufacturer subvention, and our deposit base continues to be an advantage over non-bank competitors in terms of cost and stability of funds over time.

As we mentioned earlier, we remain focused on addressing Series G as well as other capital management actions. Our objective for 2016 is to initiate a dividend and share buyback program and to focus on driving incremental book value per share for investors. We feel good about our long-term prospects and aim to build upon the expertise we have demonstrated in delivering digitally-based financial services to a broad range of customers in a high quality way.

Again, in 2009, when Ally Bank launched, we were a disruptor in the consumer banking space. We know how to deliver innovative, competitive products in a format that most consumers have shown preference to -- and that is in online and mobile forms. We will build on this foundation with additional products and services in the coming year. And, with that, let me turn it back to Michael and hear what is on your minds.

Thanks, JB. As we move into Q&A, we do ask that you please limit yourself to one question plus a single follow-up. If you have additional follow-up questions after the Q&A session, the investor relations team will be available after the call. So operator, with that, please start the Q&A.

(Operator Instructions) Moshe Orenbuch, Credit Suisse.

Chris, I think I heard you say that 76% of the originations were funded in the Bank, and then just under 10% were nonprime. So there is still, I guess -- does that mean that there is another 14% of the originations that could be incrementally funded in the Bank even now? Can you talk about --? Yes.

Yes. It is actually -- we have just shy of 14% in subprime today at about 76%. So the delta is a little bit different. We have historically had some -- what I would call internal restrictions on what can go to the Bank for various reasons. It is something we are actually digging into pretty heavily right now. And we expect that percentage to go up as well as we really normalize the Bank parent construct internally. So the answer to your question is yes, we expect that to rise.

All right. So just to follow up, then, basically it means that you're going to have a higher percentage of ongoing originations funded at the Bank. So as those -- you know, you are going to build those assets, there will be a better spread on those. And then, on top of that, the 76% number could be going up as well.

That is correct. That is correct. So I would expect our originations -- close to 85% of those to start getting directed to the Bank in very short order. And then, obviously, with the funding costs that we have at the Bank, that obviously is where we are focused on expanding our profitability going forward. And then, on the long-term, there is no reason for us to not move that percentage, really, into the 90% as we look to -- you know, continually to normalize those regulatory restrictions at the Bank.

And maybe just a follow-up on the Chrysler. You have continued to increase your penetration. Just talk about the outlook there.

Yes. Listen, the Chrysler channel has been great for us. We have great relationships, really, at the dealership level. We participate both in their retail books as well as their lease books at times. So our penetration is up on a year-over-year basis. We think it will be pretty steady, and there could be opportunities to go up further.

And I have to say, within the Chrysler channel, I mean, we are getting the opportunity to really compete heads up there with other players that are in the space. So I think we are doing a good job -- and, in fact, earlier Monday/Tuesday this week, spent time with a number of Chrysler dealers and just continue to feel pretty optimistic about progress in that channel.

Thank you.

Eric Beardsley, Goldman Sachs.

Just on the Series G, is there anything else that you need to demonstrate to the Fed, or are you just waiting for them at this point?

I think -- look, we are in a very active dialogue with the Fed right now. And, as we stated, we will be very direct and straightforward to the market whenever we have got a conclusion. We have been in dialogue for, really, the past few months on it. And the fact that we are in dialogue, I think, is a positive sign.

I still remain optimistic that we are going to be able to do something. But it is a process. And, hopefully, we will have news to report one way or another the next 30-plus days.

Got it. Great. And then, just on the credit side, given where the mix is, I wanted to hear your thoughts on where the allowance could go moving forward. In the past, you talked about stability. Are we to expect it to stay in this 125 to 130 basis point range over the next year?

Yes. When you think about where our -- and I think you are referring, really, to the retail auto loan book. And, like I said, I expect the overall charge-offs to be around 1% this year and drifting up. So if you think about the coverage ratio of 125 to 130, that should provide us plenty of cushion. So the answer to that is yes, I expect that coverage rate to be in that area.

And then, obviously, Eric, we are going to follow very closely what is going on in the macro economy, what is going on in unemployment. Even this morning, you see claims -- initial claims at a 42-year low. So still positive signs that consumer is pretty healthy right now.

We recognize it is still mixed economic data, but there are a number of positive signs that lead us to believe credit is going to be in good shape for quite a while.

Great. Then just lastly, in the growth channel, are there any OEMs you could point to where you are doing significantly better than you were before, whether it is at Ford or somewhere else?

I would say it really is across the board. We have had some success with other US manufacturers -- the one you just mentioned as well as some of the Korean name plates as well. So it is fairly distributed, but it is a nice mix of nameplates.

Great. Thank you.

Cheryl Pate, Morgan Stanley.

I just wanted to touch upon -- obviously, you have been very successful in growing the market share in the non-subvented channels over the last couple of quarters. We have heard from a couple of other auto finance companies that the competitive environment seems to maybe be getting a little bit more heated again. So I just wanted to get your thoughts on what you are seeing in terms of pricing and terms, and maybe some color you can share around recent originations.

Cheryl, the ones that I always like to look at is -- I look at the quarterly yields that we are originating versus the expected annualized charge-offs for those loans. And for the last couple of quarters, as we kind of changed the origination shift, the yields have been in the 5.5% area, and the losses have been just a tick over 1% -- 1.05% to 1.10% in annualized losses.

So we are not necessarily seeing the competitive environment really affect the auto yields in any major way. Where we are seeing the competition, honestly, has been on the dealer floorplan book. And as we have been pretty transparent, we have taken a lot of our dealer floorplans off of prime rate floors, moved most of them to a 30-day LIBOR to really help compete. Now, that has obviously compressed some of our asset yields over the last year, but obviously sets us up well for a rising rate environment.

That is really helpful. And then, as a follow-up, I just wanted to touch -- obviously, as you more move and more through the Bank in terms of funding and have been successful at growing the deposit platform, how do you think ultimately of the mix of funding and where ABS fits in there as you continue to grow deposits?

Cheryl, it is so nice having the bank in a growing deposit base. We have seen the ABS market be very choppy over the last three months. The credit spreads, the availability of credit, have really been difficult in this market. And to be able to have a deposit base that, you know, right now, that funds almost 50% of our assets is phenomenal. It gives us the ability to back off the ABS markets when conditions aren't great.

And, really, for the first time in a while, you are seeing ABS funding be much more expensive than deposit funding. That wasn't true a year or two ago. So you are seeing that dynamic really change.

So when you think about us adding $6 billion to $7 billion of deposits a year going forward, that 50% is going to continue to rise every quarter. And I would like to see it in the 60% to 70% range. So we feel pretty optimistic about having that growing deposit base and really providing the stability of funding going forward.

Sanjay Sakhrani, KBW.

This is actually Steven Kwok filling in for Sanjay. Thanks for taking my questions. The first one is: you have been making great progress around the efficiency ratio. How should we think about it over the longer term? Could you give us some guidance around how low it could perhaps go over, like, the next couple of years or so?

Yes. We are pretty comfortable today in the guidance we have put out to have that mid-40s level efficiency ratio. What we are balancing now, really, is getting more efficient in the current operations of the Company, but being able to redeploy a lot of those savings into future investments -- whether it is on the technology side or on product innovation side -- to make sure that we continue to build for the long-term future. So my guidance to you over the next year or so would be to look at the efficiency ratio in a very consistent range.

Got it. And how much of the controllable expenses do you have left that you can still perhaps cut out the business?

Well, I think you're going to see -- in the fourth quarter you're going to see continued year-over-year decrease in controllable expenses. So I think you will see more efficiency there. But, like I say, as we get into 2016 and we start launching some new products and initiatives, I don't necessarily expect incremental year-over-year savings as long as we really remain around that mid-40s efficiency ratio.

Got it. And then just in terms of when we looked at the average gain per vehicle, that has been holding up fairly well. Can you provide some outlook on/around that line item going forward?

Yes. Used car prices obviously continue to hold up very well. Our lease dispositions obviously are experiencing pretty good gains. We are still seeing it a little lower on a year-over-year basis. We try to change depreciation and obviously look at it on a total lease revenue basis going forward.

But the one guidance I will give you is we are seeing pretty good October flows. Again, we normally see a pretty big drop-off from 3Q to 4Q. It is a seasonality thing. We have less cars coming off of lease in the fourth quarter, and as well, because of the winter months, you just have usually lower used car prices. So I expect that dynamic to happen again, but maybe not as drastic as it happened last year.

Thanks for taking my questions.

Rick Shane, JPMorgan.

Thanks for taking my question this morning. When I am looking at slide 13, which shows the origination mix, it really shows that you have been able to, through the new standard business, offset the rundown in GM subvented business. One of the things that occurs to me -- and you have showed some additional slides showing standard GM business -- how much is the Ally dealer rewards program driving that shift? Are you finding that dealers who were doing two or three subvented deals a month historically are now just doing an incremental two or three standard deals in order to hit their tiering?

Yes, Rick. It is JB. Thanks for the question. So you are exactly right, and I think this ties back to the strengths of the overall relationships that are out there. And as you can see, the GM flows are pretty constant now. We would expect that to continue.

So the one thing I would say about ADR is: don't view it as a static program. We constantly -- it is part of the reason why we are in front of dealers every single day. And we understand their business. We understand flows that can no longer be directed to us because of the manufacturer changes.

So we work with the dealers on finding customized approaches to enable them to continue to get ADR. So it is a very powerful weapon for us. It is very hard to break. And I think we have seen the exact behavior we want out of dealers and they want out of us. We have responded to changes in the market. They have redirected flows to us. And it is part of the reason why you are seeing the GM channel holding up so well.

Got it. And curious -- you described it as a dynamic program, and that makes sense. Have you seen a meaningful change in the number of dealers that are in your highest tier? Or have you been able to maintain that as a pretty static measure?

I mean, Champions Club -- kind of the highest overall level -- we have lost very few. I think those trends have been very static there. I think even year-over-year, I would call it under two hands of lost dealers. So you are down, I think, about 10, 12 dealers year-over-year.

Got it. That's very helpful. Thank you, guys.

David Ho, Deutsche Bank.

Going a little further on Rick's question, it seems like GM financial continues to be wanting to increase the floorplan penetration, almost double it in the next two, three years. How do you expect that to impact the dealer losses going forward and your ability to go after core business? Obviously, it's no subvented relationship there, but is it more difficult for them to capture share in that realm?

Well, one of the difficulties they will have is -- we talk a lot about the relationships and the great relationship we have. And that is without being said.

But when you think about the cost of funds as well, all of our dealer floorplan book is sitting in our Bank. We have a deposit base at 115 basis points that funds a dealer floorplan book. So from a pricing perspective, we really have that type of power to be able to compete. And when you think of finance companies that compete in the dealer floorplan space, they have to go to the securitization markets. And the securitization markets are more expensive.

So in order for them to conquest dealers away from Ally on price, they are accepting lower profitability. They may choose to do that, but that is the case. A dealer would be -- from a price perspective, we have better pricing power than a finance company.

But having said that, we have lost GM dealers. And we may continue to lose GM dealers. But as we do that, just like on the retail side, we continue to diversify that book. So we are going out and conquesting in other OEM dealer floor plans as well. So as we see the shift happening, the shift happens in dealer floorplan a lot slower than it happens on the retail side. But we are not overly concerned about losing overall balances in that over time.

Okay. That's helpful. And I know it is still early days on the retail bank expansion, but can you remind us -- is the strategy to go after more fee-based products, loan-based products? You mentioned the digital strategy. Is this possible to go do a partnership strategy with some of the other online lending platforms that are out there? And maybe if you can give -- shed some light on that.

Yes. David, it is JB. I would just say all of the above. We have got a number of explorations underway right now, and I think you will start to see some of these things manifest itself early in the first quarter of next year. And so think about that -- the more traditional banking products that you could think a household bank may want to offer, all the way to, you know, how do we tend to transact today, through our mobile device, more direct offerings, things like that.

So we are out exploring both all-out builds from the Ally umbrella as well as partnership opportunities. And, again, we will get a little bit more specific on that in the first quarter of next year.

Okay. And just a quick follow-up on that. Would that impact your capital plans as it relates to the CCAR process and using the balance sheet, et cetera? Or is it just not meaningful enough?

I don't think it will be initially meaningful, but keep in mind, we'll always -- we will always evaluate the growth of the balance sheet and the profitability that brings versus returning capital, whether it is through share buybacks or dividends. So what I would say -- it's an ongoing analysis that we do. But I would not expect 2.0 to have a significant effect from a capital perspective in our upcoming CCAR.

Great. Thanks a lot.

Chris Donat, Sandler O'Neill and Partners.

Just maybe to connect a couple of the questions that have been asked -- but as you think about these new products and mobile offerings and partnerships, you did say, Chris, that the expense ratio is going to be similar. So it is not like we -- like, I assume you have already been investing in a lot of things. We are not going to see any sort of step-up in expenses. Is that right?

Right. Let me give you a perfect example. We have been working on a new auto loan backbone system for the last year or so. And it is a multiyear process to really get us the technology that will really bring us in, what I would say, into the next generation of direct-to-consumer lending. And it is something that we have been working on for a while. It is a part of our expenses today, and it will continue to be a part of our expenses from a run rate perspective.

So we have tried to be very focused on finding expense savings and being able to redeploy those expense savings into investments. And I think that will continue. So as I sit here today, my guidance is: we are going to stick around that mid-40s efficiency ratio, which, honestly, has been about a $300 million savings over the last two years. So it has been a pretty significant decrease. So I wouldn't expect that type of magnitude going forward from any kind of reduction of expenses, but I also don't expect some meaningful increase at this point.

Okay. And then just on a different topic, but as we think about how used-car prices have performed in the last year and some of the benefit from low gas prices, any sort of general expectations you have for used-car price trends in the coming year? I remember JB saying several months ago that probably down 5% to 10% was sort of conventional wisdom. But just wondering what your thoughts are there.

I think it is still conventional wisdom. We still think it would be down 5% to 10%. One of the benefits, obviously, on the demand side has been the unemployment rate in the [non-fund] payrolls number that JB just mentioned. So we are seeing more people get jobs, and therefore a lot of them need used cars, and -- just seeing pretty good demand.

But you have to expect that unemployment, at some point, will start leveling off. The supply will start picking up due to the lease activity in the market over the last couple of years. So we are still continuing to predict a 5% decrease over one year and a 10% decrease over two years.

Got it. That's helpful. Thank you.

John Hecht, Jefferies.

Just thinking about the margin and where it might be going in the near term, first of all, on the yield side, what were the yields on new loans versus retiring loans in the quarter? And then, second, can you give -- can you quantify to us just in terms of where you are putting on new deposits; and maybe near-term capital actions, like the potential retiring of the remainder of Series G, what kind of cost of funds you might expect to see -- what type of, I guess, contraction of cost of funds you might expect to see?

Yes. So on the consumer auto loan front, we are putting loans on around 5.5%. I would say that we are having some run-off in amortization; there are some old loans that were in that area as well. So it is hard to look at on a quarter-over-quarter basis. It doesn't really move the needle that much.

But I do think over time, you are going to see that 5.25%, which is somewhere -- that is where our yields are today on the consumer auto loan. You are going to see that drift up as we put on one of these higher-yielding loans. So I do expect that to increase over the next year or so, with rates being steady.

So on the Series G front, to the extent that we get the opportunity to take Series G out in the near term, we will have to replace some of that with unsecured debt. And you have to kind of look at where our unsecured debt profile is today and call it somewhere around 4.5% for a five-year or something in that type of area.

So the replacement of a 7% after-tax dividend with 4.5% of debt is obviously pretty meaningful savings. The other thing I would point out is we started seeing real good momentum out of the rating agencies. And we have gotten upgrades by a couple of rating agencies, really, over the last few weeks. And now we are really on the cusp of investment grade. So to the extent that we get to that next level and something we are focused on, that should also decrease our costs of funds going forward when we go to the debt markets.

That is great color. Thanks very much. And then, I apologize if you addressed this, but you talk about potential dividends and your focus on getting dividends and repurchases in place in the intermediate future. Do you have a sense of what your total payout might be or your capital returns might be as a percentage of income, or what you might ask for? Is there any way we can kind of quantify how things might shake out in the next year or so?

Yes. It is a little early. And I have gotten this question a few times. And what I try to point people to or guide people to is: if you look at the average payout of a regional bank today in the CCAR process, it is around 75% of their earnings. So that would be the average.

So when I think about the starting point, that is where I start. But keep in mind, we also -- and we highlighted this a bit in the deck -- we have an amortizing DTA, and that amortizing DTA will also create regulatory capital that could give us some potential -- you know, more room.

And I think the other thing -- the other guidance I would give you is: any dividend will be a modest dividend to start with. So we will have a modest dividend, and we will look to grow that dividend over time. But I would point you to this and say that it is going to be modest. And the share buybacks will be much heavier in that percentage, especially given where the stock trades today under book value. It would really be the best return for shareholders.

Thanks very much.

Thank you, ladies and gentlemen. That is the end of the question-and-answer session. I would now like to turn the call over to Michael for closing remarks.

Great. Thank you very much. If you have additional questions, please feel free to reach out to investor relations. Thanks for joining us this morning. Thank you, operator.

Thank you, Michael. Ladies and gentlemen, thank you for your participation in today's conference. That concludes the presentation. You may now disconnect. Have a good day.