Ally Financial Inc (ALLY) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ally Financial Q1 2016 earnings conference call. (Operator Instructions) As a reminder, today's call may be recorded.

I'd now like to introduce your host for today's conference, Mr. Michael Brown, Executive Director of Investor Relations. Sir, please go ahead.

Thanks, operator, and thank you, everyone, for joining us as we review Ally Financial's first-quarter 2016 results. You can find the presentations we'll reference during the call on the Investor Relations section of our website, Ally.com.

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

This morning, our CEO, Jeff Brown, and our CFO, Chris Halmy, will cover the first-quarter results. We'll also have some time set aside for Q&A at the end. We have with us Diane Morais, CEO and President of Ally Bank, to help in answering your questions as well.

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

Great. Thanks, Michael. Good morning, everyone. We appreciate you joining us today. I'm pleased to report it's been a solid start to the year.

Performance was strong in the first quarter and our financial targets remain on track. We also took several meaningful steps that will drive enhanced future performance. Let me start with the financial highlights.

Net income was $250 million for the quarter. Adjusted EPS was $0.52.

Core return on tangible common equity was 9.8%, up about 70 basis points from first-quarter 2015. Adjusted tangible book value per share also increased $0.80 quarter-over-quarter and $1.60 year-over-year.

Our commitment remains to expand shareholder value and consider all options that will ensure maximization over time. As we get into the details, you'll understand those actions are continuous in the way we operate the Company. We expect value will be unleashed as we continue to deliver quality results.

Within our Auto Finance franchise, originations were healthy. But more importantly, our risk-adjusted yield increased 52 basis points versus last year. As discussed at Investor Day, we are prioritizing expanding profitability, not targeting specific origination levels; and you'll see that came through our metrics this quarter.

We're committed to using capital efficiently, generating business that drives the right returns while also preserving our leading position in the marketplace. We continue to maintain robust credit discipline. The aggregate net loss rate was up slightly to 64 basis points in the quarter and fully in line with expectations.

Nonprime originations were 12.6%. Nonprime in particular is a space you have to be constantly focused on smart risk allocation and only book assets when you can generate the appropriate economics.

As we sought to expand margins during the quarter by raising pricing, we simply originated less nonprime volume, and we're completely fine with that. But generally, we feel good originating in this range and we continue to focus on the higher end of nonprime contracts.

Overall application flow was the strongest in the history of the Company. So we're able to book the kind of business that fits within our holistic strategy. Our approval rates and even book-to-look rates declined this quarter as we're being even more selective on what comes to the balance sheet.

The deposit business continues to surge in growth of both customers and balances. We surpassed $70 billion in total deposits in the first quarter, which is strategically important to us as we normalize our Bank funding. We feel very good about the Ally Bank brand and the potential to build on these positives trends in the coming months.

On the regulatory front, we're pleased Ally Bank became a state member bank, and we now have the Federal Reserve as our primary federal regulator. This was another step in our efforts to normalize the Company and achieve a regulatory structure that is more aligned with the Company we are today.

Our CCAR plan was submitted earlier this month. And as we committed to you, Ally has requested the initiation of a common dividend and share repurchase program for 2016. These will obviously be major milestones for our Company.

Overall, business fundamentals are strong. We feel comfortable with the trends we're seeing, but we will adapt and adjust if needed, like we've always done.

Now turning to slide number 4, I want to reinforce our strategic focus for strengthening our financial profile as well as positioning our Company for long-term success. First, let me touch on the financial profile.

Auto Finance is still the core of what we do, and the type of business we do at Ally is designed to provide attractive, risk-adjusted returns through market cycles. We've engaged in thoughtful growth that prioritizes returns as well as maintaining the strong customer relationships that have been a part of our success for years.

Optimizing capital continues to be top of mind, day in and day out.

Now let me shift to EPS growth and the key drivers. First, earlier this month we announced the redemption of the Series A preferred. There will be no more preferred dividends in the capital stack.

Next is continuing down the path to achieve a more normalized regulatory environment. Becoming a state member bank was important, and we are now in a position to work towards additional steps such as greater efficiencies between the parent and banking subsidiary and more normalized bank capital requirements.

These are fairly unique and sizable opportunities for Ally shareholders. We expect to see additional EPS growth as operating leverage continues to improve and as we diversify our product offerings and create new revenue streams.

We've also not steered away from making smart investments, namely in technology that will make the organization more efficient over time. And we expect to be able to use share repurchases as an important tool for driving shareholder returns and overall capital allocation.

We also know that to build long-term value in the stock we need to continue to strengthen and enhance our franchises. Let me emphasize by saying we believe we're already in a position of strength and an enviable spot in digital financial services. So our mission is to build on our core competencies, respond to the needs of our loyal and growing customer base, diversify our revenue streams and higher-ROE businesses.

But to level-set, let me explain our philosophy on diversification. We start with the views and feedback from our customers, then with a realistic perspective on the ability to generate quality returns and balance within our Board-approved risk appetite. As we've explored a variety of businesses, these have served as the governing principles.

So today, whether it's investor-driven, perhaps fears of auto sales being at the peak or auto credit being too benign, or whether it's simply perception of too much concentration risk in one primary sector of the US economy, or even whether it's environmental factors -- Uber impacting car sales or dealer flows, emerging technologies, etc. -- we know the indirect auto financing model is ever-changing and may not provide the same abilities to grow 5 to 20 years from now. We simply don't wait. Our job is to ensure the Company will thrive and deliver high-quality returns for our shareholders over a long horizon.

Modest and smart diversification delivers on that mandate. But to be overly clear, we're committed to Auto Finance and know there are still incremental opportunities in the emerging digital areas.

Technology is playing a greater role in the sector, and consumer preferences are shaping the way vehicles are purchased, sold, and financed. Ally is playing a leading role in that evolution.

Earlier this month we announced that Ally would acquire TradeKing and add online brokerage and digital wealth management to our product offerings. I'll provide a deep dive on that in a moment, but we know this is the perfect fit for our customer base and franchise; and early feedback has been overwhelmingly favorable from our customers.

As you know, we also announced that we would be launching a credit card in the second quarter and higher-quality mortgage offerings later in the year. The addition of these products speaks to the ongoing feedback we hear from our existing customers as they seek additional ways to do business with Ally. These are also products that we can offer in a compelling way with a digital and differentiated experience that our brand is known for.

Lastly, we expect to continue to grow our Corporate Finance business, which has generated strong returns and recently expanded its footprint in the technology sector. Overall, we know these initiatives will significantly strengthen our Company over time by reinforcing strong customer relationships, normalizing our funding profile, diversifying revenues, and expanding ROE -- again, all with the focus of driving long-term shareholder value.

Now let's talk about the TradeKing acquisition on slide number 5. We know Ally can be the premier digital financial services company, and a natural step in that journey is the addition of online brokerage and wealth management. We know that the investment products at TradeKing and the savings products at Ally are a powerful combination for customers, and we see significant upside.

Here are a few reasons why. 50% of our customers have said they would consider a digital wealth management solution. These customers have a combined net worth of about $2.4 trillion.

About a quarter of Ally Bank customers have a net worth of over $1 million. We know there is significant potential within our existing customer base to add wealth management solutions to their Ally portfolio products.

When you look at the industry overall, there is also a compelling case for adding digital wealth management. This is a growing segment in the market; and as digitally savvy customers, including Millennials, accumulate more wealth, they will be looking for additional services.

The digital wealth management market is expected to expand to $7 trillion by 2020. Digital wealth management currently makes up about 25% of the market and is expected to continue to grow.

We know there is a strong synergy with Ally Bank customers and their willingness to adopt other digital financial services products. Ally is currently the only top 25 bank without wealth management; and given the trends in this space and the characteristics of our customer base, we know this was a strategically beneficial step for the Company to take at this time and we know will create meaningful shareholder value.

On the top of slide number 6 you can see highlights about TradeKing. As we previously announced, we'll acquire the company for about $275 million. We expect to close between the second or third quarter.

Currently, TradeKing has about $4.5 billion in client assets. The business currently has over $1.1 billion of cash and sweep deposits. This is a critically important piece of the deal for us, getting meaningful costs upon savings.

Already today, the business generates over $25 million in annual trade commissions, which will add fee income to Ally's revenue stream. This transaction will lower our need for capital markets funding and improve our return on equity over time.

By year-end 2018 we estimate the brokerage and wealth management business to generate an annual pretax income run rate of about $80 million, with a long potential runway from there. This will have a meaningful impact to our financial profile and exceeded a very high hurdle rate for continued investment in the business.

While relatively small, we see this as a smart and strategic deal: a new source of deposit funding, new revenue streams, new customers, an outstanding management team that will be joining ours, and delivering a very solid return on capital. We would not have done this deal without those ingredients and outlook.

On slide number 7, there's more granularity on our expectations. We expect to grow client assets from $4.5 billion today to a range of $12 billion to $16 billion by the end of 2018. We project deposits to grow by about $1 billion per year. And we're confident we can take the digital advisory business, which is in its infancy, and grow that to about $3 billion.

We know consumer preferences are on our side. The customer bases are poised for strong synergies, and we're entering the industry at the right time.

This deal also demonstrates the confidence we have in the strength of the Ally brand and the success we have achieved in growing our deposit products. In only seven years we've created a franchise with well over 1 million customers, $70 billion in deposits, and dozens of awards and accolades. We believe in the ability to advance that level of momentum in this new venture as well.

With that, let me turn it over to Chris.

Thanks, JB. Let's turn to slide 8. We delivered another solid quarter, with $419 million of core pretax income and $250 million of net income. Overall results were very good, with excellent fundamentals in our businesses, which has us on track to achieve our financial targets.

We did experience weather-related losses in the amount of $26 million for the quarter due to severe hailstorms in Texas during the last two weeks of March. That cost us a few pennies per share this quarter. While we typically expect to incur elevated weather-related losses in the second quarter each year, hailstorms have come early and have been severe.

Additionally, the flattening yield curve in the first quarter, which was driven by both an increase in LIBOR and a decrease in longer rates, was not what any bank desired to see to start the year. The change in interest rates did impact net financing revenue, with some offset in other revenue as we sold some securities at a gain.

While you don't see the investment portfolio mark in the income statement, the value of the investment portfolio improved, which can be seen reflected in the healthy increase in our tangible book value per share this quarter.

Now looking at some of the line items, net financing revenue increased over $100 million from last year due to higher earning assets and improved yields, mostly on our retail auto portfolio. Other revenue of $380 million was up from last quarter due to investment gains, but down from last year due mostly to the sale of our TDR mortgage loans in the first quarter of 2015 that generated a gain of $65 million. So our total revenue was down slightly quarter-over-quarter but up significantly year-over-year, especially when you exclude the TDR mortgage sale.

On the credit side, losses performed in line with our expectations, with a quarterly decrease in provision expense being driven by seasonality and the annual increase due to the growth in the retail loan portfolio and the higher coverage rate we've been discussing for several quarters. Total noninterest expense was $706 million, which we break out between controllable and noncontrollable items. The biggest reason for the increase this quarter was driven by weather-related losses.

These results drove GAAP net income of $250 million. And keep in mind that last year's results include the sale of our China JV, which generated a $400 million gain in discontinued operations.

Looking at key metrics, our adjusted EPS for the quarter was $0.52, which was flat to prior quarter and prior year. Core ROTCE was also flat on a quarterly basis at 9.8%, but up significantly from the prior year. And our adjusted efficiency ratio was 45%, which was within our targeted range.

Turning to slide 9, Auto Finance had another solid quarter with pretax income of $337 million, up 10% year-over-year, reflecting the strong underlying performance of our primary business. Year-over-year, strong net financing revenue was partially offset by the projected increase in retail charge-offs while expenses remained flat.

Insurance reported pretax income of $50 million. Unfavorability versus the prior year is primarily driven by the higher-than-expected weather losses.

As we mentioned at the Investor Day, you can see we started to break out the Mortgage Finance and Corporate Finance segments for more transparency around how we run our business and our focus on growth initiatives. Mortgage pretax income of $2 million is flat year-over-year, as we expect this segment to grow in both assets and income from here.

Corporate Finance earned $11 million this quarter, as assets continue to grow. In the Corporate and Other segment we generated $19 million of pretax income. The large decrease year-over-year is associated with a gain on sale of TDR mortgage loans last year.

On slide 10, we showed the detail behind our earning assets and net interest margin. Overall, NIM was up 16 basis points year-over-year but down 5 basis points quarter-over-quarter.

Our asset yields have continued to rise; and in particular you see retail auto loans up 5 basis points on higher balances. We continue to focus on originating auto loans that offer greater risk-adjusted return and profitability, and we expect that dynamic to continue throughout the year.

The balance sheet is generating about $1 billion per quarter in net interest income.

On a year-over-year basis, funding costs declined, but we did see an increase in the quarterly cost of funds, so let me address that. In order to refinance the Series G preferreds in the fourth quarter, we issued unsecured debt that was outstanding for all of the first quarter. In addition, as LIBOR increased with the rise in Fed funds, the cost of funds associated with our secured debt and our unsecured debt that we swapped to floating has also increased.

We also continued to see an increase in deposit balances, as you can see here. Deposit rates have been pretty stable, so the rise in Fed funds has not affected our deposit rate offering.

With that, let me turn to slide 11. We're very pleased with the strong and consistent deposit growth, with balances up $3.5 billion quarter-over-quarter and almost $8.5 billion year-over-year. We continue to see growth from existing depositors adding balances and products to their Ally relationship, which represented about a third of our growth for the quarter.

We also continue to grow new customers at a very healthy clip of over 50,000 this quarter, which contributed to about two-thirds of our deposit growth. About half of these new customers are in the attractive Millennial demographic. We've also seen our brand awareness rise in the first quarter to 52%, which should propel further customer growth throughout the year.

On slide 12, let me make a couple comments about our capital markets funding and liquidity position. There is no doubt that the markets have been choppy since the end of last year, which has created some tiering among issuers. However, the ABS market has been very receptive to Ally's securitizations, as you can see from the spreads we've been paying on recent transactions.

In the first quarter, we completed over $5 billion in new secured funding and renewed our large syndicated credit facility. This is the benefit of having a mature and credible securitization program.

As a regulated financial holding company, we hold significant liquidity on hand to mitigate any risk to market disruptions. To be blunt, we hold enough liquidity to fund all planned originations for about three years without the need to issue unsecured debt or term securitizations in the case of a market disruption. This gives us the ability to pick our spots in the markets and avoid periods of turmoil, just like we did at the end of last year.

As you can also see in the chart on the bottom right, we have very manageable unsecured debt maturities over the next few years, so our liquidity position is very robust.

On slide 13, let me tie this all together and talk about the expected evolution of our funding profile. We've made tremendous progress since 2013 getting the cost of funds down and expanding net interest margin. The short-term story is that NIM is going to be fairly stable, as we've issued some debt to take out preferreds, which is a great bottom-line trade.

But long-term, there is still tremendous earnings potential with getting the unsecured debt footprint down and funding more assets in the Bank with deposits. Today, our $70 billion in deposits represents just over half of our funding, and we have over 70% of our assets in our Bank subsidiary. Our expectation is that we'll continue to grow deposits $8 billion to $10 billion per year, so that our overall percentage of deposit funding will continue to rise.

In addition, we expect that the percentage of assets booked at Ally Bank will also continue to increase, allowing us the benefit of using those deposits. As deposits grow, our reliance on capital markets will decrease.

Over time, we will issue less unsecured debt, less securitizations, and decrease our credit facilities. In fact we have about $11 billion of unsecured debt rolling off naturally over the next four years, and we don't expect to refinance any of it.

A larger deposit base over time will also make us less sensitive to rising interest rates and will boost net interest margin and overall profitability. So this is a dynamic that will drive long-term EPS growth outside of everything we're accomplishing operationally and strategically -- and this is unique to Ally.

On slide 14, capital ratios increased this quarter from consistent earnings and further utilization of our DTA. Our fully phased-in Basel III Common Equity Tier 1 ratio was 9.2% for the quarter, while our total capital ratio was 13%. Adjusted tangible book value per share increased by almost $0.80 to $25.40.

The sizable increase was driven by earnings as well as a positive mark this quarter on our investment portfolio that benefited from the move in interest rates. For perspective, the goodwill and intangible generated from the TradeKing investment will deduct about $0.60 from our adjusted tangible book value per share, or about one quarter's worth of earnings.

The bottom left chart shows the disallowed DTA, which has come down by about $300 million over the past year to $826 million. I expect that rate of decline to continue as we expand earnings.

Moving to slide 15 on asset quality, consolidated charge-offs for the quarter were 64 basis points, down 8 basis points quarter-over-quarter and up a modest 3 basis points year-over-year.

Focusing on the retail auto loan portfolio, total charge-offs for the quarter were 108 basis points, which was down seasonally quarter-over-quarter but up year-over-year, in line with previous guidance. We continue to expect a modest increase for the next couple of years given the mix optimization. But as I mentioned earlier, that is more than offset by better yields we are experiencing.

In the bottom left our 30-plus-day delinquency rate declined to 2.2%, also driven by seasonality. As a reminder, the first quarter is typically the lowest point of the year for delinquencies; so you should expect this number to tick up on a quarterly basis from here.

In the top right we show a detailed provision expense trend. A couple things to point out here.

The quarter-over-quarter decrease was primarily driven by seasonally lower retail auto charge-offs. The year-over-year increase was driven by a growing retail auto loan portfolio, as well as commercial auto, mortgage, and Corporate Finance allowance releases in the first quarter of 2015 that did not repeat.

You'll also notice that our retail auto loan coverage rate ticked up to 1.35% in the quarter. This was primarily driven by the sale of around $2.6 billion of higher-quality auto loans in the quarter as well as some continued mix normalization of the portfolio.

All the fundamentals of the business continue to be in line with what we discussed at our Investor Day. We continue to prudently manage the risk in our portfolio; performance continues to be in line with expectations; we've modestly shifted the profile of the loan portfolio, but much of that is starting to normalize as origination mix has largely stabilized. And we're getting more than compensated for the modest increase in risk through additional yield capture.

On slide 16, Auto Finance had a very good quarter as we reported $337 million of pretax income. Total revenue was up 13% year-over-year with no increase to noninterest expense, which drove a 10% increase in pretax earnings.

The auto business is demonstrating its ability to grow revenue organically through its strong dealer relationships while becoming more productive on the cost front, resulting in strong operating leverage. Earning assets are up slightly year-over-year, but down quarter-over-quarter, primarily driven by the $2.6 billion of loans sales and a declining lease portfolio.

Quarterly originations were solid at $9 billion, driven by several factors. We experienced record used volume for the quarter; we grew non-subvented originations 10% year-over-year; and growth channel originations were up 23% on an annualized basis.

And we were able to accomplish this while also improving the profitability of the originations. Looking at the chart on the bottom right, you can see we increased the yield on our originations by 59 basis points year-over-year to 5.85%. But more importantly, we were able to do this by only taking 7 basis points more of credit risk and decreasing the amount of nonprime originations.

We accomplished this by using price to originate a little less superprime and a little less subprime, as we saw the best opportunity in the middle of the credit spectrum. As we laid out during our Investor Day in February, we're focused on risk-adjusted profitability of our originations, not market share or volume, to make sure we're optimizing the use of our capital efficiently.

A bit more on originations on slide 17. You can see our channel mix in the top left, where the growth channel continues to show great momentum. In the top right you can see the growth in the used business is now on par with new business.

The bottom two charts summarize the balance sheet. On the consumer side we continue to see modest year-over-year growth given the asset sales. On the commercial side we did experience slightly higher average balances than seasonally expected.

On slide 18, Insurance reported pretax income of $50 million. The main driver of the variance both year-over-year and quarter-over-quarter was the $26 million of weather-related losses we experienced in late March.

Written premiums totaled $222 million, flat to last quarter but down year-over-year. As we mentioned last quarter, we shut down our smaller agent channel to focus on the core platform, so you're seeing that come through the numbers on a year-over-year basis.

We also continue to make good progress on our growth channel initiative, with written premiums up 51% year-over-year, which is more than offsetting any attrition we see in the GM channel.

On slide 19, we show results for the Mortgage Finance segment. We split out our ongoing mortgage business and moved the legacy portfolio, which included loans originated prior to 2009, to the Corporate and Other segment. While this segment is relatively nominal from an earnings perspective this quarter, we expect that as our assets grow the segment will produce meaningful operating leverage and income contribution.

The mortgage loan portfolio experienced net growth of $3.6 billion year-over-year and $1 billion quarter-over-quarter driven by bulk purchase activity of high-quality jumbo loans. The portfolio currently has an LTV of around 60% and an average FICO score of 770. As we've discussed, we expect to start adding direct originations to this portfolio starting in the fourth quarter.

Slide 20 gives the results from our other new segment, Corporate Finance. These results were previously included in the Corporate and Other segment.

Corporate Finance reported pretax income of $11 million. We're seeing positive net financing revenue trends driven by asset growth, which was up almost $900 million year-over-year.

Provision was flat quarter-over-quarter but up $11 million year-over-year, driven by loan growth and recoveries last year that did not repeat. We also do not have any direct lending exposure to the oil or gas industry in this portfolio. Corporate Finance is another growth area, and we expect upside as we leverage our brand and expertise to continue growing this higher ROE business.

So overall, we're very pleased with the fundamental results in our businesses and delivered yet another solid quarterly performance. With that, I'll turn it back to JB to wrap up.

All right. Thanks, Chris. Let me just quickly wrap up on slide number 21.

We had very strong operational performance in the quarter. One of the biggest takeaways that we want you to have is really the improved profitability on new auto originations. That certainly was not by accident, but by focus.

Also maintained a discipline credit philosophy, continued to grow deposits and customers. And obviously, redeeming the remaining Series A preferred stock was another important step.

Driving long-term shareholder value is of top importance to me, the Board of Directors, and the entire management team. Our capital plan reflects the importance we are placing on returning capital to shareholders.

We know we'll have less need for capital market funding, which represents a really unique opportunity for Ally. So we're pleased with the start of the year. We have a clear path to achieve our goals in 2016 and beyond, and we remain optimistic about the potential for Ally as a great Company and a great investment.

With that, Michael, I'll hand it back to you for Q&A.

Great. Thanks, JB. As we move into Q&A, we do request that you please limit yourself to one question plus one follow-up. If you have additional follow-up questions after the Q&A session, the Investor Relations team will be available. Operator, if you could please start the Q&A.

(Operator Instructions) Moshe Orenbuch, Credit Suisse.

Thanks so much. I wanted to talk a little bit about the outlook for improvement in the margin. You talked about the $11 billion in capital markets funding that will be rolling off, plus some more general comments about the greater integration with respect to the Bank.

Could you just maybe give us a little more detail on that, as to how we could expect that to help in terms of the cost of funds for the Company over the course of the next 12 to 18 months?

Yes. Unfortunately, we do not have a lot of unsecured debt rolling off this year. So when we look at the cost of funds opportunities this year, they're somewhat muted, which is why I'm guiding a bit to have somewhat of a stable NIM, which I think I said in the last quarter as well.

We think of the opportunity much more as a longer-term opportunity. So as that $11 billion really rolls off -- and like I say, it's going to be over the next four years -- most of that will be refinanced with deposits as more assets roll into the Bank.

So we still have some regulatory restrictions over the assets that go into the Bank, but we expect that over time they will be lifted. So I think of this much more as a long-term opportunity. But if you think about our unsecured debt yielding somewhere around 4.5% and deposits we put on around 1%, this is a real big opportunity for us in the long run.

As we think about our earnings-per-share growth potential over the next couple years, this will start to contribute to that. But even longer-term, we would expect even more momentum in EPS growth.

Great. Just related to that, the pace of the sale of superprime assets, how should we think about that?

Yes, I would not expect the pace to be as high as it was this quarter. We had some opportunities this quarter that we took advantage of, and we sold about $2.5 billion of assets.

We really look to sell somewhere around $4 billion a year in that. If there are opportunities to sell and take advantage of good bids in the market, we'll do that. So that number can go up and down.

The other thing I would point out is we did originate a little less superprime this quarter, which was intentional. All of this really is geared towards just increasing the overall return on equity in the auto business and the overall Company.

Great. Thanks, Chris.

Rick Shane, JPMorgan.

Thanks, guys, for taking my question. I'd like to talk little bit about TradeKing and the walk between the $25 million of revenues that they're generating today and the $80 million of pretax income that you're looking for in 2018.

If you start with the daily average revenue trades and double that, that would suggest about $50 million of revenue. If you take the AUM to the number that you're talking about, somewhere between $3 billion and $4 billion, at 75 basis points that would suggest about $30 million of revenue.

And then the deposits, I'm assuming that there's going to be -- a big chunk of the income here is going to be on funds transfer pricing. If you were to take $2.5 billion of deposits at 1%, that would be about $25 million of revenue.

So when you total that all up, it's about $105 million to $110 million in revenue, which is basically tripling or quadrupling where you are now, which makes sense. But I'm curious how that relates to that $80 million of pretax income. Is that a realistic margin?

Sure. I think you have it right, but let me make a couple of comments just about your math. When we look at the deposit synergies it's really not 1%. I don't look at it versus the cost of where we're raising deposits today.

I look at it as those incremental deposits will allow us to take out market-based funding, particularly secured funding. Secured funding comes in a rate today of about 1.5%; and as you think about it over the next couple years, if you follow the forward curve that obviously increases.

So while we look at that $3 billion-plus of deposits over time, the synergy there will be greater than you just mentioned on the 1%. So that's one of the drivers there.

We also think that the daily average trading volume could more than double. I know you mentioned the double there, but we think over time it could be more than there.

Let me put it in a little bit of an overall context. As we go out a few years we think it's very reasonable that we can triple the revenue in this organization. They generate about $50 million in overall revenue; that's with fees and their deposit revenue. So we think that could be a triple, and we don't think the cost will rise anywhere near that.

We think there is great operating leverage in the business, which is somehow how we got to around $80 million.

Okay, got it; that's helpful. Hey, and I'm confused by one other thing. When I look at the slides from this quarter for Auto Finance on the nonprime origination, you show last quarter 13.7% below 620. If I look at the slides from last quarter, it says that 12.6% of originations were below 620; and there is a similar differential between the third-quarter numbers as well. Is there something (multiple speakers) different?

Yes, what we did is we tried to focus this quarter just on retail originations. So we're just giving you the retail number.

Ex-lease.

Yes, without lease. Last time we gave you all consumer, which is leased and retail loans combined.

Okay, that's the differential. I saw that you picked up that language -- retail quarterly originations.

Yes.

As lease originations are becoming less and less, we wanted to focus you on retail.

Got it. Thank you.

Eric Beardsley, Goldman Sachs.

Hi, thank you. I just wanted to actually go into what you saw during the quarter that caused you to pull back on the subprime and raise pricing.

Eric, I wouldn't characterize it that way. I would characterize it like -- that we were looking to expand margins across the credit spectrum, and we did that with price. As we did that, we saw less volume come in on the nonprime origination and less volume come in clearly on the superprime originations.

So there was no credit concern in our mind. It was much more about making sure we get the appropriate risk-adjusted profitability and we start to really expand our margin. And because of that we lost some business.

Got it. Just on the reserve to loans, I guess you mentioned that it could be trending up a little bit more from here due to the mix shift. I guess, what's the right level to think about?

I think, when I think of the annualized loss rate, we think it could probably trend up another 10 to 15 basis points this year. Our coverage rate is going up a little bit in lock-step with that. So I do think that a coverage rate can continue to pick up, particularly as we do less superprime, but not significantly.

Got it. Then just really quickly, I guess, just the yield you show on that slide 16 that you were referencing, how quickly should we see that bleed through to the total loan yields that you have on the books? Just thinking about the duration of the assets being somewhere around two years, is this something where we're going to get this more meaningfully at this level by year-end?

Yes, well, we're continuing to see that as we get into the second quarter, so continuing to look towards price. So I would expect to see yields continue to tick up.

You're right; it's a 2-, 2.5-year asset so it will take a couple years to fully flow through. But I do think you'll see improved yields on the retail portfolio from here.

Then, obviously Eric, as Chris takes opportunity to trim the portfolio here and there, we've been doing that in the lowest-yielding stuff. So I think that also has the effect of accelerating that yield dynamic as well.

Got it. Great; thank you.

Chris Donat, Sandler O'Neill.

Good morning; thanks for taking my question. This one might be more for Diane. I'm just curious with the $3.5 billion of retail deposit growth in the quarter. It's the first full quarter since we've had a Fed increase. Have there been any lessons learned either internally or in the competitive landscape around one single rate increase? Or is it really too soon to tell?

But it does look like strong growth with a little bit of a rising rate.

Thank you for the question. In our response around what happened in the first Fed move, it is virtually nothing. No one really moved rate in any meaningful way. There is always day by day, competitor by competitor basis point moves here and there.

But we don't really expect a meaningful change until we get through the 1% Fed funds rate, which is going to take a few more tightenings. So we feel incredibly well positioned as we head into an eventual rising rate environment, and we've got great, sophisticated tools to inform our pricing and our strategy.

Got it. Then the follow-up for me is a related question on deposits, but also thinking about TradeKing. Do you feel any risk that as you grow assets under management at TradeKing that you might cannibalize some of your deposit growth? Or do you think that you'll be able to grow TradeKing without really tapping into that, even though you're talking about some of the same customers?

Right. We really believe it will largely be incremental growth. We know that customers within the Ally family today are moving money to other wealth management firms, and our hope is that once we complete the integration that money will stay within the Ally family.

Quite frankly, there's tremendous synergy between both the Ally customer base and the TradeKing customer base. So we know that customers need both products and services, and having a seamless integrated experience to save and invest in that bank-brokerage combination is going to powerful for the new Company.

Got it. Thanks very much, Diane.

Sanjay Sakhrani, KBW.

Thank you. First question just on capital allocation. Is it fair to assume from an M&A perspective we're done and we're going to focus on return and funding for organic growth?

Yes. I mean -- Sanjay, it's JB. It's hard to say if you can say you're ever really done. I think our focus is going to continue to be opportunistic.

Any M&A scenario that we would look at would have to, obviously, cross a very high hurdle rate. Obviously, we're talking about the $80 million on TradeKing; I think we project out at somewhere in the neighborhood of 20% IRR. So that's the type of hurdle rate that any type of deal would have to cross for us to consider.

So for now, this was the right time for the TradeKing deal. Would we be opportunistic on another opportunity? Sure; I think that's what we're supposed to do.

But nothing imminent, nothing is on the horizon. But obviously, I think we're paid to look at a lot of things, and we do look at a lot of things day in and day out. But again I think our primary focus is anything we do would have to achieve a very strong return on shareholder capital.

I think our lean right now is: Let's go ahead; let's successfully close this, but integrate TradeKing. Obviously could happen as early as this quarter, before we really bite off anything additional.

Okay. Are there other areas that you're looking at? It sounded like TradeKing checked a box, but is there anything else?

Not right now, Sanjay. Nothing remotely of this size.

Obviously within auto we continue to pay a lot of attention to emerging technologies, things that are driving more the digital front there. But nothing remotely close to this size is on the horizon.

Okay. Just maybe one quick follow-up for Diane. Could we -- could you talk about your confidence in getting Ally Bank customers to transition to the wealth management? Maybe not specific, but just what kind of strategies you might use.

You mentioned that your customers have other deposits elsewhere within wealth management platforms. Do we have any statistics on what your market share of a customer's deposits are? Thanks.

Our customers -- we have one interesting stat that, going back seven, eight years, over $9 billion has moved out of Ally to other wealth management firms. I would say we're highly confident in the fact that we have -- both customer bases are digitally savvy, self-directed, and have aggressive needs.

I can just tell you qualitatively, we've gotten a number of customer comments since the announcement telling us to hurry up. And they can't wait for the combined set of capabilities.

What our teams are focused on right now, Sanjay, is creating an integrated experience so when a customer comes to Ally they see all the capabilities that we have at Ally today, plus what TradeKing offers. The marketing that hopefully you are familiar with that we've been doing at Ally, under the Ally name, finding those customers at the points that they're at the decision phase, we are highly confident that we'll be able to tap into that money movement and create a great experience.

Again, early days. We're three weeks into the announcement, and we've got a lot of work in front of us. But we feel very confident that it's going to really resonate with our customer bases.

Thank you.

Eric Wasserstrom, Guggenheim Securities.

Thanks very much. Chris, if we could just go back to the NIM for a moment. I'm just looking on slide 10 at the long-term unsecured debt. Can you just remind us what the ALCO strategy is and how we should think about the liability sensitivity going forward?

Yes, we're actually a bit less liability sensitive this quarter. Some of that has to do a little bit with the rate movement, just the way we have positioned our investment securities with some longer-dated securities.

Right now, I would call us fairly neutral. But over time, as we build a deposit base and a lot of the long-term debt rolls off, and we're not really in the markets as active, we will become much more asset sensitive. Particularly if you believe that the pass-through rate will be somewhere closer to 50% on the deposits, which is what we believe, the Company will become more and more asset sensitive.

Okay. So as we just think about the cost of funds on a dollar basis going forward, and I look at the page 12 and the upcoming debt maturity, should I basically be thinking about it as the entire dollar cost of those 2016 through 2019 maturities goes away and was replaced with the dollar cost of the deposits, assuming the $8 million to $10 million a year of incremental deposit growth?

Yes. That's the plan, exactly.

Okay. Plus then, layered on top of that, the forward curve expectation and some lesser degree of magnitude of the change that we saw in this period?

That's right. That's exactly right.

Okay, great. Thanks for the clarification.

Cheryl Pate, Morgan Stanley.

Hi, good morning. Just wanted to touch first on originations again. It sounds like successfully raising price across the credit spectrum, and I'm just wondering if you can maybe give us a little bit of an update on the competitive environment. Seems like more of the pullback was on the superprime, subprime side.

Is that still what you're seeing? Is that the expectation from here? Just wondering if you could give some sort of range around how you're thinking about volume should the current environment persist.

Yes, from a competitive standpoint, we saw one competitor that was pretty aggressive in the superprime space, used some price and really captured a lot of market share. Which is fine -- which is probably one of the reasons why we lost some market share, given we just lost on price.

But I would say that both in the middle of the credit spectrum as well as in the upper nonprime or subprime that we play, we didn't really see much change in the competitive environment over the last quarter. So it's been pretty stable.

As far as the ongoing outlook on originations, we obviously were excited to do $9 billion at the type of margins we did this quarter. The second quarter and third quarter are usually higher origination quarters than the first quarter, and then from a seasonality perspective you come down in the fourth quarter.

So we're fairly confident that we can run somewhere around this rate; but I don't really want to put out a target. But we've said that somewhere in the mid to high 30s is really the right range once we're getting the right risk-adjusted margins on these loans.

Okay, thanks. Then just as a follow-up on the expense side, first quarter tends to have some seasonably higher expenses, but efficiency came in right in line with target. Just wondering if you can help us think about the forward look from here, given technology investment spend but also some better seasonal trends.

Yes, and I just want to clarify something. We did have an uptick in expenses because of weather, but that is actually excluded because insurance is excluded from our efficiency ratio. Then you're right that in the first quarter you tend to have higher expenses related to things like payroll, and we tend to see that come off as we move forward.

My guidance to you is to continue to look at the efficiency ratio. We'll stay somewhere in that mid-40%s efficiency ratio, 44%, 45% as we move forward to really get operating leverage. But there's not a lot of what I would call a decrease in annualized expenses from here.

Okay, great; thank you.

Kevin St. Pierre, Bernstein.

Yes, thanks for taking my call. Chris, maybe if you could remind us how, if at all, the TradeKing deal affected your CCAR ask, and if you're still comfortable with that total payout range that you've guided to, in the 70%, 75% range.

Yes, at this point I don't want to comment specifically on CCAR. JB obviously mentioned that we did request a dividend and a share buyback program. I'd just say that it's within the prior guidance we've given.

The announced acquisition of TradeKing really had no effect on our common distribution ask. The only place it really had an effect on was really TruPS. We had $500 million of TruPS that was approved in last year's CCAR that we looked to actually take out.

We made a decision, really looking at total capital ratios and Tier 1 capital ratios, that it was prudent to leave that planned redemption of TruPS in the stack at least for the time being. We will revisit that as we go to next year's CCAR.

Right now, TruPS is a pretty efficient instrument, because it qualifies as Tier 1 capital and obviously the interest expense is tax deductible. So we decided to leave that in the stack.

But overall, the guidance we've given on the common distribution remains.

Great, thanks. Maybe a bigger-picture question for JB. Another solid quarter of near 10% core ROTCE, yet the stock -- which looks to be opening flattish -- is trading at about a 30% discount to core tangible book. What do you think the market is missing? And what do you need to do to change that perception or whatever the market is missing?

Yes, Kevin, thanks for the question. Obviously, it drives all of us mad inside the Company and at the Board level as well, because we see how much value is here. I think it comes back to continuing to execute the path we're on and adjust if needed.

We heard a lot of the feedback from shareholders last quarter about making sure capital is front and center, and we took some additional actions. Again hopefully you saw that in the first quarter in what we did in pricing, what we did in moving some lower-returning assets off balance sheet. So part of that is just continuing to remind the world that we get it.

Also, emphasizing that credit is not nearly an issue that maybe is perceived in the market today. I think that's one of the big questions that's on the minds of investors; and obviously we spent a lot of time talking to investors.

I think, frankly, last year the fact that we were able to offset the lease dynamic, a lot of people questioned: Did you do something stupid on credit?

And we've try to remind the world: No, we haven't. We were very disciplined in what we underwrote last year. We feel very comfortable with that.

So part of this is continuing to prove that credit really is not going to be an issue. I think Chris has provided some guidance on where we expect credit to normalize. But we don't fear that there is some credit bubble or burst that's going to come at us there.

We still think the auto sales environment can be healthy. I think, again, we didn't come out with an origination target this year, but there were a lot of questions we were facing. Can we continue to be a growth Company?

I think we sort of admitted, look, we're generally comfortable with the size of the auto book, and that's part of the reason why we're exploring other areas, namely in Ally Bank. We think it's a great opportunity, a great brand. There are some higher ROE businesses that are out there that we're looking to explore.

Unfortunately I think it's going to take some time. I think CCAR will be important validation that the Fed sees us on track as well. And it's another step in just getting the Company normalized.

It's not easy turning the Titanic. It takes five, six years to get there. But I'd say we're in year four or five of that. A little more time and hopefully the world will get it.

As we continue growing book value I would fully expect the stock to trade up. And shorts on the stock, I wouldn't want to be because I really believe in long-term upside.

Great. Thank you.

Operator, we're running out of time, but if we could squeeze one more in, please, that would be great.

David Ho, Deutsche Bank.

Hi; thank you for squeezing me in. Most of my questions were obviously answered, but just real quickly back to the NIM. Even if you get the strong deposit growth, certainly from TradeKing, then again the ongoing Ally Bank franchise and obviously holding the line on rates and things like the leases coming in a little better than expected, would we expect a little bit of upside or bias -- upward bias to the NIM?

Yes, the offset to that is, as I do expect to see yields go up, in particular, in the auto space, but we also have a desire to grow the mortgage portfolio and grow the investment portfolio, particularly in the second half of the year. As you grow some of those what I would call capital-efficient assets that comes with lower yields, it affects the overall NIM.

So let me be clear. We expect net interest margin to stay somewhat flat in the near term. But we still expect to grow our net financing revenue as we grow some of those other low-yielding assets.

Got it. Another one, just real quickly, what struck me was some of the digital opportunities within Auto Finance that you highlighted. That seemed to -- would make sense with the digital capabilities of Ally Bank and certainly TradeKing. Can you talk about real quickly what some of those would be?

Yes, David, obviously we generate $35 million to $45 million of originations today through an indirect model, but I think as we think about technology and how consumers transact today, some direct consumer offerings may be important for the franchise over the long run. That's not to imply that the dealer universe is going away or the indirect model is going to change; but obviously if you think about how you probably transact with your bank, it's all done through your iPhone device, I would imagine.

So we're looking at technology there to be, again, maybe more direct with the end consumer. And then other initiatives, obviously we announced Beepi; I think that was end of last year, early in first quarter of this year. That's another great partnership there.

We've got other products that align more with the digital field. Used lease, for example. So we're looking at ways really to use technology as a weapon to continue to evolve the market forward.

But I think through time you can expect technology to drive a bigger force in really how auto sales are done, even on the documentation front. It's not just researching the car, researching dealer inventories. I think the next step is how you get financed ahead; how you consider insurance products ahead.

So we're spending a decent bit of money and time really making sure we're front and center in that space.

That's helpful. Thank you.

Okay, great. That's all the time we have this morning. If you do have additional questions, please feel free to contact Investor Relations.

Thanks for joining us this morning. Thanks, operator.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program, and you may now disconnect. Everyone have a great day.