Ally Financial Inc (ALLY) 2015 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Q4 2015 Ally Financial earnings conference call. My name is Sandra and I'm your operator today. (Operator Instructions) As a reminder, this call is being recorded for replay purposes.

I'd now like to hand the call over to Michael Brown, Executive Director of Investor Relations. Please go ahead, sir.

Thanks, Sandra, and thank you, everyone, for joining us as we review Ally Financial's fourth-quarter 2015 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 side 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 fourth-quarter results. We'll also have some time set aside for Q&A at the end.

Now I'd like to turn the call over to Jeff Brown.

Thanks, Michael. Good morning, everyone. We appreciate your joining us today. Let me start by saying that operationally and financially, we had a strong quarter and overall year. I'm beyond proud of what my teammates delivered in 2015.

Now to hit the highlights, we posted net income of $263 million for the quarter and $1.3 billion for the year. From a core pre-tax income basis, we delivered $446 million for the quarter and $1.8 billion for the year. This reflects increases in profitability on all fronts, and Chris will walk through more details in just a bit.

I do want to spend a minute on the stock price. I hope it goes without saying that I'm obviously disappointed by the performance of the stock, which I believe does not reflect the strength and results, the quality of this Company and our leading franchises, and the ability to deliver real returns for shareholders. There may be some technical dynamics -- i.e., a transitioning investor base -- impacting us. There may be some elevated auto fears impacting us.

Frankly, I don't care to make excuses and make guesses. I care about delivering results that create value.

We continue to do things every day from an operational and financial perspective that will create shareholder value over time. We continuously explore all options for value creation and daily stress test our outlook and thesis. This management team has been relentless in delivering what we promised and 2016 will be no different in that regard.

I've seen new investors coming into the stock, including more natural long-term holders in addition to our current shareholders adding to their existing positions, which does provide some validation of the path we are on, despite day-to-day fluctuations in equity prices.

Further, we have frequent and constructive dialogue with our shareholders. We welcome the input of our shareholders and analyze their thoughts and suggestions thoroughly and often in discussion with our Board. We are all aligned in our commitment to maximize shareholder value, both operationally and strategically.

I think Ally at today's levels is an extremely compelling investment opportunity. This Company has the strongest online bank in the US, period. This Company has the strongest auto finance franchise in the US, period. We aren't like other standalones that are struggling or have credit fears.

Clean book, clean balance sheet, strong franchises, great teammates, alignment with consumer trends, and still relatively early in our journey of building an even better Ally. These are all the ingredients that make me so bullish and confident.

As you know, we entered 2015 having just exited the TARP program and focused on executing the next chapter of our multi-year transformation. We had two incredibly strong franchises along with some objectives to accomplish to drive value and the ability to truly begin to pursue how we could expand upon our core strengths and move the Company forward.

I'm proud to say that we accomplished those objectives. We created value in the enterprise, we maintained our strong risk discipline, and we're now focused on the next set of goals.

On slide number 3, you can see some of the progress during the past year. We posted adjusted EPS of $2, up 19% from the prior year. We achieved a sustainable core ROTCE of more than 9%. We hit our efficiency ratio target, which drove positive operating leverage.

We exceeded our origination target with $41 billion of profitable business. We continued to grow retail deposits and exceeded our target with $7.5 billion of growth. And we redeemed all of the Series G preferred securities, which now enables us to pursue options to return capital to shareholders. These were all key accomplishments that position us well for 2016.

You will hear much more about our goals for this year and beyond at our upcoming investor day on February 11, but in short, we plan to number one: deliver approximately 15% of EPS growth this year. Number two: initiate a common dividend and share repurchase program, subject to CCAR. And number three: approach our business with a disciplined philosophy on the use of capital. We have great franchises with significant expansion opportunities, but we are focused on making sure we deploy capital in a way that maximizes shareholder value, not ways that just maximize growth.

Now turning to slide number 4, let me highlight the steps we took to achieve a core ROTCE of 9.4% for the year. In our IPO plan, we committed to a multiyear endeavor to get from about 3% to over 9%, more than tripling performance in this area.

Much of our progress came from NIM expansion, lowering our cost of funds through deposit growth, and addressing high cost legacy debt. We also grew the balance sheet with low loss auto assets.

Another 275 basis points of improvement came from expense rationalization. We streamlined on a number of fronts and improved the efficiency of the Company while still preserving the ability to reinvest in our core operations. And lastly, we made progress on regulatory normalization while receiving approval to redeem Series G and Series A preferred securities as well as being able to fund assets with a FICO score 620 and above at Ally Bank and utilizing lower-cost deposit funding for larger piece of our core auto business.

While there were some offsets, like a decline in investment gains and reduction in our leasing portfolio, overall we did achieve a sustainable and growing core ROTCE of more than 9%.

Slide number 5 offers a snapshot of additional key financial metrics and our progress over recent years. Each of these metrics has trended in the right direction. As I mentioned earlier, we delivered $2 of adjusted EPS, an increase of 19%.

We created enterprise value with adjusted tangible book value of over $24 per share, an increase of 9% year over year. And our efficiency ratio is on target at approximately 45%. Strong momentum on all fronts and a demonstration of the commitment and ability to achieve the targets that we publicly established. Credibility matters.

On slide number 6, we outline operational performance over the past year, and this will tell a similar story. We have met or exceeded our targets and achieved momentum in the business. The auto finance business was tested this year. While we have been transitioning to be able to withstand the decline from legacy subvented business, this was the year that the strength and resiliency was tested and proven.

We fully replaced all the incentivized volume and delivered quality originations. The agility of our auto team allowed us to expand our dealer network, add new financing relationships, and direct more capital to our broad network of active dealers. And I'll share more of this in just a moment.

The insurance business has also been taking important steps to drive solid performance. The new Ally Premier Protection service contract continues to roll out and represented almost half of our service contract volume in the fourth quarter. This product is critical to our diversification efforts in the insurance business and the team is doing a great job of getting it into the marketplace dealer by dealer.

We also took steps to adjust floorplan insurance premium in certain areas where there is a propensity towards more weather-related losses to ensure we are getting the right risk-adjusted returns.

The deposit business continues to grow and thrive and be a cornerstone to our overall success. Importantly, this business is getting more efficient as well, with interest expense down about 4 basis points year over year.

And our corporate finance business posted some significant growth last year: up approximately 30%, and recently added another vertical aimed at the technology sector. This is core middle-market lending with quality ROEs and is almost entirely funded inside of Ally Bank.

Lastly, we continue to optimize the mortgage portfolio by replacing runoff, and we added about $4 billion over the course of the year through bulk purchases. These are high credit quality jumbo loans that provide nice returns, given their risk weighting, as well as put a touch more duration on an otherwise very short balance sheet. Overall, a strong year and we are poised for continued progress.

On the next three slides, I'm going to take a deeper dive into our auto business. Quite simply, I want to dispel any notions of excessive growth, lack of disciplined risk-taking, fear of a looming auto bubble impacting the health of the Company, or any comparison of Ally against other stand-alone auto companies.

To be fair, 2009 was really when we began a deliberate, multiyear transformation process to diversify the business and position the Company to thrive outside of any exclusive incentivized arrangements for contractual agreements. On slide number 7, you can see our product mix, and how we have further diversified the business as we put the capital previously used for the legacy and subvented business to use in other areas of the market.

In the top right chart, you can see the walk to replace that volume. We essentially redeployed the capital to all other areas of the business and drove increases in GM standard business, Chrysler business, and expansion in our growth channel.

The pie chart on the bottom gives you a sense of what comprises our growth channel. And you can see it represents a number of nameplates across the market because we are well represented in dealerships across the US. On average, we grew this channel by one contract per month per active dealer. This was steady and thoughtful growth across a broad network of 11,000 dealer relationships.

Our shift in mix also includes an increase in used vehicle financing, where we see attractive risk-adjusted returns. The used market is multiples of the new car SAAR. We frankly aren't concerned about a drop, given how we've position the originations machine.

Turning to slide number 8, I want to spend some time on our model, how we underwrite and fund the business, and the quality of our portfolio. There seems to be a lot of theories on what will be next for the auto industry and how auto finance assets will perform, so let me hit it straight on.

There is no other market participant that can be compared to Ally on an apples-to-apples basis. We have a unique position in the market and a finely honed proprietary underwriting process that is nearly 100 years in the making.

Our go-to-market approach focuses on a high service level and deep relationships. We know our customers and we know how to help them be successful while also allowing us to be successful. It focuses on a broad suite of products and services aimed at dealers, automakers, consumers, and even the newer online marketplaces. And as a full spectrum lender, our approach is proven expertise and ability to adapt across many credit cycles.

Now let's turn to the balance sheet. We're predominantly a prime lender. Our retail originations are 86% prime assets. Any incremental increase in non-prime assets moves us towards a more normalized mix of business that is appropriate for the full spectrum nature of our model.

Our retail auto loans with a FICO score of less than 620 comprise less than 8% of the total balance sheet, and we posted an annual loss rate of 58 basis points in 2015. If you look at our deeper subprime component, we do about 1% in the sub-540 FICO range. Subprime players, including one that we often get compared to, are well over 40%.

This is a very different model. This is a high quality balance sheet generated from the business that has been consistently profitable, including during the Great Recession. Underpinning this operation is a strong and diversified liquidity profile. We have a large and growing and stable retail deposit base by which we fund the business while remaining a well-respected participant in the auto securitization market. When considering all these factors, we believe the way we approach the business is unique and unlike our competitors.

Moving to slide number 9, I want to conclude with some observations on the auto industry. We continue to feel good about the overall health of the industry. Manufacturers and dealers are healthy. The consumer is showing signs of strength and new auto sales will continue to be strong.

But our ability to grow EPS is again not directly correlated to SAAR, which tracks new vehicle sales. Overall, we remain confident in the market and our ability to generate returns, even if SAAR begins to moderate.

Now with that, let me hand it over to Chris.

Thanks, JB. Turning to slide 10, we delivered another solid and consistent quarter, with $446 million of core pre-tax income, bringing us to $1.8 billion for the full year 2015. Net financing revenue increased to nearly $1 billion for the quarter, driven by continued strong auto originations and improving net interest margin. The notable story is looking at the full-year net financing revenue of around $3.8 billion, which is up over $200 million from 2014.

Other revenue of $358 million was up this quarter, which is generally in line with our quarterly expectations. On the credit side, losses performed slightly better than expected this quarter, with provision expense of $240 million, which was up due to typical seasonality in our retail auto loan portfolio.

We've discussed for the past few quarters another driver of provision expense is the fact that we are growing the loan portfolio as the origination mix continues to shift to loans over lease. The increase in total provision expense year over year is also driven by a reserve release last year in the mortgage segment as the credit quality of that portfolio improved.

Total noninterest expense was $667 million for the quarter, which we break out between controllable and noncontrolled items. Controllable expenses were down $13 million year over year as we continue to manage costs and increase efficiencies across the business segments.

Overall, noninterest expense is down over $150 million on an annualized basis since 2014, so obviously we've made real progress on creating operating leverage. These results drove GAAP net income of $263 million for the quarter.

Moving to key metrics, our adjusted EPS for the quarter was $0.52, which was up $0.12 year over year, helped by improved core earnings and lower preferred dividends. Core ROTCE was up to 9.8% and our adjusted efficiency ratio was 44% in the quarter. Both metrics are better than expectations we laid out almost two years ago and obviously we now have our focus on additional ROE expansion, as JB just commented.

Turning to slide 11, auto finance had another solid quarter, with pre-tax income of $333 million, strong asset growth, and a good mix of originations drove higher net financing revenue, which was partially offset by the expected increase in retail charge-offs. Insurance reported pre-tax income of $78 million, quarter-over-quarter favorabilities primarily driven by stronger investment income. Mortgage pre-tax income of $9 million benefited from low provision expense as charge-offs decreased.

In the corporate and other segment, we generated $26 million in pre-tax income. The delta in the quarterly results is driven by the fact that we lowered our funds transfer pricing allocation as a result of reduced cost of funds.

On slide 12, we've continued our enhanced disclosure of earning assets and net interest margin. Overall, NIM was essentially flat quarter over quarter, but up 33 basis points year over year. Lower funding costs and higher asset yields drove the benefit year over year.

You can see our retail loan yield ticked up a bit this quarter, given the more balanced credit mix we've been originating. And we'd expect to see continued modest and gradual movement higher from here. As an offset, our higher yielding lease portfolio is expected to continue to decline around $1 billion per quarter.

Cost of funds was down 20 basis points year over year and essentially flat quarter over quarter. Driving the reduction year over year was a $2.8 billion decrease in long-term unsecured debt, while deposit balances were up $7.5 billion. Given our limited unsecured debt maturities over the next year or so and the recent rise in LIBOR, we would expect NIM to stabilize in this range for 2016.

Longer term, we see a real opportunity with the amount of unsecured debt that we can ultimately replace with the significant deposit growth that we are seeing. And despite the Fed's initial move, banks have largely kept deposit rates unchanged.

Moving to slide 13, we're very pleased with the strong and consistent deposit growth, with balances of $1.9 billion quarter over quarter and $7.5 billion for the year. Even with solid deposit growth, we remain disciplined in retail deposit rates, which decreased both quarter over quarter and year over year.

We've purposely focused our marketing dollars to capture the seasonal money in motion this time of the year and we are off to a great start in 2016. We also have several new technologies to enhance the deposit platform that we will be rolling out in the coming weeks.

On slide 14, capital ratios were lower in the quarter, driven by the remaining $1.3 billion redemption of Series G preferred. In 2015, we utilized about $2.7 billion of common capital to normalize the capital and liability structure. We've continually looked for ways to deploy capital that provide the best shareholder value as opposed to just aiming for maximum balance sheet growth and we'll look to continue that trend in 2016.

The bottom left chart shows the disallowed DTA. Year over year, the disallowed DTA has come down 20%, which is directly accretive to our capital ratios. The disallowed balance was up modestly in the quarter due to OCI movements, but we still expect to continue utilizing the DTA at a pretty solid clip.

On bottom right, we show our adjusted tangible book value per share, which adjusts for tax-affected bond OID, and is now at $24.60, which is up about $2 and 9% year over year.

Moving to slide 15 on asset quality. I know this continues to be a hot topic, and as JB explained earlier, we have a very prime balance sheet. Consolidated charge-offs in the fourth quarter were 72 basis points and for the full year 2015 are only 58 basis points on our average loan portfolio of $105 billion. From a coverage perspective, you can see in the table in the top left that we maintained a coverage ratio of around 94 basis points, which is also consistent from the third quarter.

On the $64 billion retail auto loan portfolio, the total charge-off for the fourth quarter were 121 basis points, which was better than the 125 basis point expectation we mentioned at an industry conference in December. For the full year 2015, retail auto loan charge-offs were 95 basis points, which was right in line with our expectations and what we communicated to you earlier in the year.

On the retail auto loan portfolio, we continue to expect a modest increase of 10 basis points to 15 basis points a year for the next couple of years, given the mix optimization. But that is more than offset by the better yields we are experiencing.

In the bottom left, our 30-plus-day delinquency rate increased to 2.91%, also driven by seasonality. In the top right, we show a detailed provision expense trend. Again, retail auto seasonal charge-offs drove the increase.

We continue to watch our vintages very closely and overall, we feel very good about credit trends. With stable to improving unemployment, the overall environment continues to show healthy signs and asset quality continues to perform in line or better than expected.

Now let's turn to slide 16. JB covered a lot of detail on our auto segment, so I'll just highlight a few key points. Auto finance reported $333 million of pre-tax income in 4Q. On a year-over-year basis, strong net financing revenue was partially offset by increased provision.

Earning assets are up $3.8 billion year over year, despite executing $3.5 billion of loan sales. Quarterly originations were strong, at $9.3 billion, up 3% year over year, and the growth channel originations were up 57%.

Focusing on the bottom right of the page, Ally's growth dealer relationships were up 8% year over year to almost 11,000. And we're not just getting into more dealerships, we're improving our penetration over time with these dealers.

On slide 17, you can see our channel mix stayed somewhat consistent, with the growth channel now at 33% and the GM business down to 40%. I would point out that our penetration in Chrysler has increased substantially since last year and now stands at 26% of originations. In the top right, you can see we've reached more of a normalized mix, with growth in the diversified used and new standard business replacing the subvented business.

The bottom two charts summarize the balance sheet. One item to mention is the seasonal uptick in commercial balances, which we always see in the fourth quarter.

On slide 18, insurance reported pre-tax income of $78 million for the quarter. Strong investment gains and lower claims on vehicle service contracts drove the increase quarter over quarter. The bottom left chart shows loss is down quarter over quarter and year over year. Our quarterly loss ratio of 23% reached its lowest point in six years as the quality of vehicles that we insure continue to improve.

Written premiums in the quarter totaled $222 million, down both quarter over quarter and year over year, as we've seen an increase in dealer reinsurance participation. And we also shut down our smaller agent channel to focus on the core platform.

As JB mentioned, Ally's flagship VSC product, Ally Premier Protection, has successfully launched nationwide. The new product represents 45% of total volume in the fourth quarter and we believe there is real upside from here.

On slide 19, we show results for the mortgage segment as well as corporate and other. Mortgage reported pre-tax income of $9 million. The mortgage loan portfolio is essentially flat quarter over quarter as we continue to execute bulk purchases to offset amortization of the book. We purchased over $4 billion of primarily high FICO jumbo loans over the last year.

In corporate and other, we had core pre-tax income of $26 million, which includes $9 million of pre-tax income from our corporate finance business. The corporate finance assets are up $800 million year over year and we see potential to continue growing that business. So overall, we are really pleased with the results and delivered yet another solid quarter and year.

And with that, I'll turn it back to JB to wrap up.

Thanks, Chris. So to sum up, the past year has really demonstrated a lot of momentum. We achieved the goal set out in the two-year plan to restore profitability, and Ally is well positioned to provide reliable results with a long runway for steady growth.

We're confident on our near-term EPS growth plan and the adaptability of our operations to overcome any shifts in the market. And going forward, we will have a deliberate focus on prudent capital deployment and prioritizing profitability and shareholder value over growth. Obviously, we look forward to sharing more details on our go-forward strategy on February 11.

And with that, Michael, I will turn it back to you and we can get to Q&A.

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

Sandra, if you can please start the Q&A?

(Operator Instructions) Cheryl Pate, Morgan Stanley.

Congratulations on a strong performance. I think the stock price has obviously reflecting a pretty bearish expectation from investors. And I was just wondering if maybe you can help us think through some additional detail on the reserving policy in terms of expectations for residual values, used car pricing, and sort of the stressing that you go through there.

And then related to that, can you maybe give us some more detail on how to think about the portfolio today relative to where we were in the last credit cycle? Thanks.

Sure. Let me start. I think the first thing to point out is that we expect our charge-off rate to drift up another 10 basis points to 15 basis points over the next year. And that really has to do with the normalization of our mix as some of the older vintages roll off and some of the new mix that we're putting on comes on the books.

We've been pretty open about where we see used car prices coming down. We've actually been wrong -- meaning used car prices have held up pretty well over the last year or so. And we haven't necessarily seen the dip that we've expected. But we still expect that and we still model those used car prices to come down about 5% a year.

Now, as the lease portfolio runs down, obviously our risk to used car prices continues to come off the books as well. And while used car prices have an effect on the overall charge-off rate, it's much less significant on the retail portfolio than it would be on the lease portfolio.

And when I think about losses in a stress type environment and if you go back even to the Great Recession, I would say that losses tend to double. So if you have a loss rate that is somewhere in the 1% to 1.25% type rate, it can go to 2% to 2.5%. And that's really during the worst of the recessions.

I think during the Great Recession, we only had three months where that rate was that high, so it wasn't that significant. But during a normal recession -- the recession that you saw back in the 1980s or the 1990s -- I would expect the loss rate to go up maybe 50% or 50 basis points to 75 basis points in our book. And that would keep us still very profitable.

So when we think about the overall book -- where we're going, the originations we've put on -- we think this book is going to be very profitable even through a crisis.

Great, thanks. And just one follow-up, if I may. I think related concerns have -- there's been a sort of question on the ABS market. Just wondering if you could give us some color on the trends there and also plans on the deposit growth front? Thanks.

Sure. One of the great levers we have is while we use the securitization market, we obviously have the lever to increase the deposits if we need to. And deposit growth has been great. It's been $7.5 billion. It exceeded our expectations in 2015 and we're off to a great start in 2016.

We actually did a recent securitization after the turn of the year that went extremely well. The ABS market has held up pretty good. Given some of the turmoil in the unsecured markets as well as the equity markets, it's amazing how well the ABS market has actually done this year. But having said that, unlike some of our competitors, we have the lever to pull to increase the deposits if we need to in order to fund those new originations.

Great. Thanks very much, guys.

Moshe Orenbuch, Credit Suisse.

Great. Thanks very much. I guess maybe JB, you mentioned the ideas and plans to accelerate the return on common equity. Could you talk a little bit about how the mortgage and commercial businesses fit into that?

Because I guess I'm struck with the stock here at two-thirds of adjusted book value as to whether in fact pulling back on some of those things and kind of looking to return more capital might be of greater interest than expansion. And just also maybe could you mention how does the DTA figure into your plans for capital return?

Sure. Thanks for the question. So look, I think you bring up a very fair point, given where the stock currently trades, at the high hurdle rate to consider any type of growth objective versus thinking about capital returns.

I think, as you know very well, in this type of regulated environment with the CCAR process, capital returns are not as fluid as one may want to believe. So you seek to try to balance all these angles all the time.

With respect specifically to the mortgage business, one of the advantages relative to auto -- it's part of the reason we like it -- is 50% risk-weighted asset funds through the FHLBs. It's a very efficient asset and it generates a pretty attractive ROE. Think about it in the 14%, 15% type of range there. So some modest expansion there, some modest diversification there makes sense to us.

On the corporate finance book, given the success we've had in moving that business into the Bank, that's generating returns in the neighborhood of 17%, 18%. So growth in those arenas seemed to make sense to overall contribution of ROE growth over a longer horizon.

I think as we've said, auto businesses kind of hovers in this 9%, 10% type of range, given the risk profile that we're comfortable with. So these other areas provide steps toward that ROE expansion in addition to the continued financial engineering expense normalization that we continue to go after.

So that's on that piece. And then Chris, do you want to highlight on DTAs?

Yes. Obviously, the amortization of the disallowed DTA is creating capital for us. I would point out, however, that the Fed, when they put out their guidance around capital returns, really focus on the earnings and the earnings power of the Company as opposed to the amortizing DTA.

So when I think about capital return, I think about it as a percentage of our earnings and a little less about the amortization of the DTA. Think about the amortization of the DTA as incremental capital that we can use to either grow some of these high ROE type businesses.

Great. Thanks very much.

Chris Donat, Sandler O'Neill.

Thanks for taking my question and thanks for the pronunciation, actually. Wanted to ask on the -- and I know you're going to give us more detail at the investor day. But just as we think about your origination platform and how you've been able to move more into the used channel, there's so many concerns around used car prices.

Can you give us some color on what you would expect to happen in the used car market, say, if prices go down not 5%, but 10%? Does that create much more opportunity for you to originate on used or does it sort of weigh on you? I'm just trying to figure out if there are sort of offsets on the new channel or on recovery values if something goes bad in used car pricing?

I don't think about it as a determinant on the originations, but obviously on the amount we lend against the car and the LTVs all are determinant on those car prices. But keep in mind: in a used car, when we originate a loan for a used car, the predictability of where the value of that car is going over the next few years is pretty consistent. We can predict that pretty well.

Where you really see the drop off is really on a new car, once it rolls off a lot. You see a much bigger drop in the value of that car and it's much harder to predict because it's a brand-new car and you haven't seen it. So if we're out financing two-, three-, four-year-old cars, believe me -- from a loss perspective, we are very comfortable with that.

Honestly over the last year, as we've gotten more and more into used, where we've really exceeded from a loss perspective, where we've done better than expected, really has been in the used car channel. It's been very consistent. So I wouldn't think that the overall drop in used car prices that we are expecting is going to be a significant driver really of our loss rate in used cars at this point.

Okay. And then is it fair to say as your mix shift moves towards more used on your balance sheet, that your loss content is likely to shrink just because the used are so much predictable than new?

What you see is the dynamic between the frequency and the severity. As you do more used cars, your frequency increases, but your severity is actually better and much more predictive. So I would say it's fairly balanced and we keep to where our loss projections are going to be.

Right now, we're doing about 40% of our business in used. So when I tell you that I think losses will tick up another 10 basis points to 15 basis points, that takes that assumption into account.

Okay. Got it. Thanks, Chris.

Eric Beardsley, Goldman Sachs.

Thank you. Just to follow-up on your comment that you look to prioritize shareholder value over growth. I guess given the runoff in the lease portfolio, is that something that you would consider selling and also the auction business?

No. First of all, keep in mind: we are still in the leasing business. So while our GM subvented lease has come down and will continue to come down pretty significantly, we still do leasing and we still do it in other channels. So it's not a business we're looking to exit and therefore really not looking to sell it. We have a pretty good infrastructure around lease and we feel like we do very well.

The other thing -- it's a core offering, along with the SmartAuction channel that we have, which is a significant offering we have to our dealer relationships. And at this point, we don't have any plans really to divest of that.

Okay. Great. And just to follow up on the charge-offs. On the 14% of originations that were subprime, what's your charge-off expectation on those loans specifically?

If you think about our what we call kind of non-prime -- anything under 620 -- the rate is around 3%.

Okay. Great. Thank you.

On an annualized perspective. Keep that in mind, guys. People often think about our non-prime channel. Our non-prime channel is a 3% loss channel; it's not a 10%, it's not an 8%, it's not a 12%. It's a 3%. And when I look at the charge-offs even in the fourth quarter in that non-prime segment, it's $75 million. That's it.

Great. Thanks.

Eric Wasserstrom, Guggenheim Securities.

Thanks very much. I just wanted to circle back on the capital question for a moment. Because your fully faded-in number of 8.7% would put you at the lower end of the peer group and probably among the lower end of CCAR banks, given your risk exposure. So how do you think about the long-term sort of adequacy of capital and what would be your target accretion subsequent to some sustainable level of capital return?

The way we think about it today is a 9% common equity Tier 1 ratio is really the benchmark that we look at and where we have set some of our Board targets. And we believe that's appropriate for the risk profile of the assets that we have on the books and the assets we plan to originate in the next few years.

Now, having said that, I realize that's lower than most of the other CCAR banks, but it's lower because we have a lower loss asset compared to a lot of the other regional type banks. So we're very comfortable at that 9%. The fully phased in is that 8.7%; I expect that to rise over 9% when we actually get fully phased in. And when you think about CCAR, it actually uses the transitional number, which is that 9.3%.

So when I think about our capital floating over the 9% number as we generate earnings and even accrete the DTA, I think about that as incremental capital that we can deploy. So whether that deployment is either going to be through returning it to shareholders, through dividends and share buybacks, or other type of growth that we think the growth really creates long-term shareholder value.

And Chris, what would be your expectation for sort of annual accretion to that figure?

I want to keep it down towards the 9%. So this Company is going to generate -- we're going to generate over $1 billion of earnings a year, and my expectation is we should be able to deploy that.

So Eric, I think what Chris is basically saying look, 9% is kind of the go-forward target. So as we generate returns that would take us in excess of that, you can kind of back in to our overall capital deployment strategy, which would be again subject to CCAR and would be a combination of some dividend and buybacks.

Thanks very much.

Ken Bruce, Merrill Lynch.

Thank you and good morning. I guess my name is easier to pronounce. First of all, congratulations on a good year. You are clearly frustrated by the stock performance, as I think many of us are.

I'm interested in what you think the market needs to see from Ally. You've delivered on all the targets, as you point out. Credibility matters, and you seem to have basically hit your targets and then some. Clearly, the market is thinking about this in a very different context. You seem to be linked to some of the other public nonprime lenders, which, unfortunately, the history has not been all that great for those companies in this industry in general. So I guess I'm interested in what you think you need to do change the way the market perceives Ally?

Ken, thanks for the question. I think obviously it's spot on and I think it's part of what we tried to take a step forward and do today, which was really look -- we had been very focused on delivering what we put out to all of you.

We don't try to get out over our skis. We try to deliver on what we promised to you because we do believe credibility matters, and over a longer horizon, you generate book value. You put points on the board, eventually the stock is going to come around.

There have been a number of theories and we spend a lot of time talking to investors. We spend a lot of time talking to the analyst community as well and try to understand is it the credit cycle? Is there fear that Ally is subject to a big credit bubble?

We tried to dispel that today because as we look at our balance sheet and as we look at the Company, you are not going to find a much cleaner book out there. And while yes, we took some additional steps to more nonprime lending this year, it was all done again in conjunction with what transpired with the leasing book and done in a very reasonable way.

So we try to dispel is there a credit bubble here? Should Ally be linked to other nonprime auto players? And we've been saying that since the IPO, which is really, we're different from that other name. It's a very different Company, a very different model. We'll perform differently through the cycle [points] itself differently. So we tried to take that on a little more head-on today.

The other question that we often get is well, geez, can SAAR get any better? Can auto sales get any better? And if SAAR starts to moderate, are you no longer a growth company? Do you have risks that your numbers are going to come off and you are going to have to go through an expense cutting process?

And what we tried to dispel was look, 40% of what we're doing today is in the form of used lending. You have 257 million vehicles on the road and about 50% of those are very aged models. So you are going to continue to see the cycle churn. Whether it's in new car, whether it's in used car, there's great opportunities for us. So we believe we can continue to perform well, even if SAAR drops 2 million, 3 million units.

So for us it's we got to demonstrate there's not a credit fear. There's not an auto bubble. And then we also got to demonstrate that there's smart and reasonable growth. Growth in disciplined usage of the balance sheet. We've commented on that on this call. But also growth in EPS, growth in returns.

There's a number of things that we were saddled with -- legacy preferred instruments, high cost debt. And that's still got -- while we've done a great job on the capital security side, the debt impact is still real and we show it on the margin page. Through time, as we can normalize this Company, get more into the Bank, there is still substantial growth in terms of financial performance that can be obtained and ultimately returned to investors.

So for us -- yes, we're frustrated. We're frustrated with the market. I know the analyst community has been very supportive of us. And our focus is through time, you keep executing, you keep delivering, that stock price is going to come around. But we appreciate the support, Ken, and appreciate the congratulations on a good year.

Yes. One follow-up. I guess as you think about car prices maybe falling 5%, obviously you kind of pointed out that that's been persistently better than expected. What is it that you are looking at that makes you think that used car values or just car prices in general could see that 5% reduction over the next year or so? Just so we can kind of understand what goes into the model?

Sure. It's really a supply-and-demand dynamic. And as leasing picked up a few years ago, a lot of those cars are coming off lease, creating incremental used car supply into the market. Where we've really been surprised over the last year or so has been on the demand side. So the demand has really risen and met that supply hurdle.

So as we look forward, we continue thinking that the demand may not be as robust as it's been. And we're pretty conservative on that, but it's really that supply/demand dynamic that makes us believe some of the used car prices will come down.

David Ho, Deutsche Bank.

Good morning and I definitely share the -- sympathetic on the stock price here. Can you talk a little bit about on competition and how that's changed this year so far? I know it's pretty early, but it seems like there's a little more competition from smaller players? And then what are your prospects or prediction for any kind of market disruption and where do you think you could take share in that scenario? Thanks.

Competition has been pretty steady over the last year. I don't think we've seen any real incremental competition, at least for the retail auto loans, that we're overly concerned about. Obviously some of the smaller players, even though a lot of the credit unions have been very competitive with us, particularly in the high FICO type space, we've seen more of the competition really on the dealer floorplan side. It's a very low loss business and we see a lot of the big banks really competing for that business pretty aggressively from a pricing perspective.

But I would say that in the retail channel, it has been pretty steady over the last year or so. We've actually started to see some areas or pockets where prices are increasing over the last couple of months, which I think is a positive sign, given some of the short end rates have actually come up a bit. So I think you are seeing some good momentum there and hopefully that continues.

When I think about kind of through the cycle and gaining market share and disruptions, one of the places we often think about or focus on really is the capital markets. And when you see disruptions in the capital markets and where liquidity is either going to get more expensive or more difficult to obtain, having the large deposit base that we now have should allow us to really take some market share because we feel pretty confident in the liquidity that we have. So I'd point you to that over the cycle, we think that's one of the places of strength for us where you will see us really grow the market share.

Okay. Thanks. And separately, on credit, one of your competitors on the bank side called out some weakness in some particular MSAs due to energy. And it seems like Texas is a fairly larger exposure for you guys. Can you comment on any weakness in those MSAs?

Yes. We're watching -- we watch this stuff very closely and we continue to watch it closely. Now, Texas is a big state and Texas has a very diverse business environment today. So it's not all energy, but there are pockets within places like Texas or Oklahoma or West Virginia that obviously rely on a lot of the energy sector.

We're not seeing much change in the book right now, so we're not seeing any significant rise in delinquency in those areas. But it's something I would tell you that we are keeping a pretty close eye on and to the extent that we need to either pull back or make decisions around places that could be under pressure from an unemployment perspective, we will do that. But right now, we're not seeing anything significant.

Great. Thanks for the color.

Sanjay Sakhrani, KBW.

Thank you. I guess I wanted to follow along with some of the questions that were asked previously. JB, appreciate all the comments at the outset of the call, but you mentioned that you guys would consider all the options to drive shareholder value.

Obviously, we've talked about some of them and maybe you could just kind of go through them a little bit. Obviously, there's a disconnect between fundamentals and the stock, but what options do you have available to you in this backdrop? And I guess one of the questions on a related matter is just when we think about your capital return expectations, is it possible that more of a focus is given to the share buyback versus dividend? Thanks.

So some of the strategic options -- obviously, the question that has come up in front of us is could the Company be sold? Could it be sold in total? Could it be sold in pieces? Would you be open to that?

I think obviously, we have a strong belief in the outlook of the Company, but we also have a strong understanding of the regulatory environment. And while you've seen some recent progress and a few bank deals getting done, you would have to go back precrisis before you could see any type of deal that approach anywhere near our size.

So I don't want to imply that a sale in total is not possible, but my phone is open every single day and it's not ringing. So let's take that as at this point in time, don't see that as a realistic possibility. Again, could it be considered at some point in the future? Absolutely.

Then there's other theories about look, you do have an incredibly strong auto finance franchise. You have an incredibly strong Ally Bank. Could you maximize value by taking those franchises and carving them apart?

I'd say there were a number of theories that were brought to us when we were in the TARP and we were owned by Treasury. And those might have made sense back in the day when the franchises were run separate, but today, how we run the Company, it's much more integrated platform. You've got over around $100 billion of the asset base that sits inside of Ally Bank. You have 99% of the dealer base what's funded inside of Ally Bank.

So today, the Company is much more integrated and combined. So again, I don't ever want to say nothing is possible, but I think some of theories that have been expressed are more difficult to contemplate in this type of regulatory environment.

And then you get into other considerations around pockets of assets and look at this stock price. It's really hard to generate an appropriate return on capital and wouldn't you can do better off reducing the balance sheet and exploring a bigger capital return.

And that gets squarely into discussions with your regulators. The regulators don't particularly want to see you stop originating to generate excess capital to go over a two-, three-year horizon to return that capital back to shareholders.

So it's a complicated dynamic and CCAR has complicated capital returns for banks. But it's a reality we live in. We try to optimize and maximize and we try to be very smart and disciplined with how we deploy capital.

Again, the auto business -- I think you probably heard a little bit of a shift today. We're not coming out with an origination target for 2016. We will keep the machine running. We will be very smart; we will ensure we're generating appropriate ROEs, appropriate risk-based returns, and that's going to be our focus going forward.

And then the other additive products that we talked about -- mortgage, corporate finance, etc. Those are small additions that we find help contribute to the overall growth in the ROE story.

So those are just a few. The Board is very open; management is very open. We're not set in our ways. We seek to have open dialogue with all of our shareholders, but obviously we have an appreciation of kind of the environment we're in, the regulatory environment we're in, and really what we believe and don't believe is capable today or not.

Great. And I guess a follow-up. Just Chris, maybe you could help us with when we think about the capital return this year, how should we think about how much and mix? Thanks.

You know, we continue to look at that 75% of earnings as the level we're targeting. We did receive the CCAR scenarios late last week. We're going through them; we're digesting them. So obviously over the next month or two, we will be crunching the numbers and going through the stress tests. And we'll have to make kind of the final decision on what we are going to submit for our capital returns.

So I don't have any better information just because the numbers haven't been calculated yet, but we're still targeting something in that area. I would also say to your earlier question, Sanjay: we do expect that share buybacks would be higher than the dividend. So we would skew this much more towards the share buyback side.

All right. Thank you.

Thank you for your questions. We will now hand back to Michael Brown for closing remarks. Thank you.

Thanks, Sandra. If you have additional questions, please feel free to reach out to investor relations after the call. Thanks for joining us this morning. Thanks, Sandra.

Thank you.

You're welcome. Thank you, ladies and gentlemen. That concludes your conference call for today. You may now disconnect. Thank you for joining and enjoy the rest of your day.