Ally Financial Inc (ALLY) 2016 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Ally Financial Incorporated Q4 2016 earnings conference call. (Operator Instructions).

As a reminder, today's conference is being recorded.

I would now like to introduce your host for today's conference call, Mr. Michael Brown, Executive Director of Investor Relations. You may begin.

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

I'd like to direct your attention to the second slide of today's presentation regarding forward-looking statements and risk factors. The content of our conference call will be governed by this language. I'd also like to note slides 3 and 4 of today's presentation, where we've disclosed some of our key GAAP and non-GAAP or core measures. These, and other core measures, are used by management. And we believe they are useful to investors in assessing the Company's operating performance and capital measures, but they are supplemental to, and not substitute for, US GAAP measures. Please refer to the supplemental slides at the end for full definitions and reconciliations.

This morning our CEO, Jeff Brown; and CFO, Chris Halmy, will cover the financial results. We'll 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. Thank you for joining our call. Before we cover the details on the numbers, which were in line to favorable versus expectations, let me spend a couple of minutes reflecting on the year as a whole.

2016 was another solid year for the Company as we continued to build and position Ally as the leading digital financial services company. From an earnings perspective, full-year adjusted EPS was up 8% from 2015. You should expect EPS growth to accelerate over the next few years to result in the 15% EPS CAGR that we've talked a lot about. That's the type of growth potential that is embedded in the strength of the opportunities before us, and the power of the franchise and foundation we've built.

A few primary components of our earnings growth trajectory: first, optimizing returns in the auto finance business. Our retail auto loan margin was up $141 million last year, and we see that accelerating to offset remaining declines in the lease portfolio.

Second, deposit growth is very powerful as we reduce high-cost debt and efficiently grow our earning asset base. We posted record positive growth in 2016, with balances up $12.5 billion for the year. And we see that accelerating, going forward, given the compounding effect that we're getting from both new and existing customer expansion. Deposit growth will be further supported by the new product introductions and expanding our brand presence in the marketplace.

Third, capital management. We're buying back a lot of stock at a discount, which is very accretive.

And, fourth, we've laid the groundwork for product expansion and diversification initiatives. On the auto finance side, we're introducing new segments and relationships outside our traditional channels. We acquired TradeKing, which provides a wealth management platform we can significantly grow for many years to come. Within the next couple of months you should expect the official customer day-one launch.

We introduced a direct mortgage offering towards the end of the year, a long runway for growth and a massive addressable market. And we introduced an Ally CashBack credit card, another key consumer lending product.

We've discussed our strategy for a while now: expand our customer offerings and diversify to not only grow earnings, but to strengthen the overall franchise to drive shareholder value. Deposits and customer growth are critical underpinnings.

So we made great progress on the strategic path in 2016, and those efforts set us up well to deliver our targeted results and eventually get multiple expansion.

Now we lay out those targeted results on slide number 6, in line with what we provided in an industry conference in December. Chris will get into the dynamics across the line items; but the punch line is we expect strong earnings growth in 2017 and see that really accelerating in 2018 and 2019.

Could we hit a 15% growth rate in 2017? It's possible, but could be a stretch, given the lease book transition that's still in progress. As that dynamic stabilizes in 2018, along with a shallower trajectory on provision, EPS growth should accelerate about 15%; and, again, result in around a 15% CAGR over the next three years. Key drivers again: improving returns in retail auto, as well as deposit growth driving top-line net financing revenue to around $5 billion in 2019.

Another very important point: none of my guidance assumes any changes in the regulatory backdrop or tax structure which could potentially provide some meaningful upside. We think some of the regulatory changes being evaluated are likely to take time, but could eventually bring relief and a better balance for banks, corporates, and consumers.

On the tax side, whether we're talking about corporate tax reform, which would be very meaningful to Ally, or the House plans calling for reduction in the marginal tax rates to US households being considered, these are all favorable factors for strengthening the economy and, frankly, the outlook on consumer spending in durable goods.

Further our new president and the administration are clearly focused on the preservation of US-based jobs. And that, too, has very positive implications for our auto, insurance, and banking businesses. Employment is already running close to full strength. So all of this sets up very favorably on our thoughts and outlook for the next few years.

And, with that, I'll turn it over to Chris to walk you through the financials.

Thanks, JB. I'll start on slide 7. Let's look at 4Q results near the middle of the page. Overall, a good, clean quarter as core trends remain solid and we experienced some favorability across the businesses. Net financing revenue, excluding OID, was $991 million which was slightly favorable to December guidance, as commercial auto balances remained stronger going into year-end. Relative to last quarter, net financing revenue was impacted by seasonally lower lease revenue.

Other revenue of $392 million was positively supported by both equity gains and syndication income in our corporate finance business. Provision expense was $267 million for the quarter. Retail auto losses came in line with prior guidance, and we had a small reserve release on the mortgage portfolio, given favorable loss performance.

Noninterest expense of $721 million was a bit better than expected due to our continued expense focus across the Company, as well as some lower state and local non-income taxes. Our effective tax rate was around 35%; and for the second quarter now, we had no preferred dividends. That resulted in $0.54 of EPS for the quarter when you adjust for OID.

On the next several slides, I'd like to pull the lens back and look at the annual results over the last three years. We can see some seasonal impacts on a quarterly basis. But looking at the annual results gives you a good sense for the progress we've made, as well as the forward trajectory.

Let's start on slide 8 with adjusted EPS growth. Earnings per share grew 19% in 2015, and 8% in 2016, for a 13% CAGR over the past two years. Keep in mind that our EPS growth would have been more pronounced in 2016 if it wasn't for the severe weather losses we experienced earlier in the year. Over the past two years, our self-help story of deposit growth, NIM expansion, and lower preferred dividends have been key drivers.

Going forward, deposit growth and NIM expansion will continue to be important. We will also benefit from share purchases and incremental income from new products.

Looking at total revenue on slide 9, which combines net financing revenue and other revenue: top-line revenue was up about $500 million over the last two years. That's notable, given our expenses are flat to 2014, and we're returning lots of capital; so getting a lot of leverage from the capital and expense base.

Looking at the net financing revenue components on slide 10, the main story here is that growth in retail auto loans is being funded by deposits, and is more than offsetting declines in the lease book. The lease NII decline will be a headwind again in 2017 as balances come down and used vehicle values decline. But we still expect net financing revenue growth to accelerate in 2017, and even more so in 2018, as margins expand and our balance sheet grows. Again, deposit growth is key as we have attractive uses, particularly with a lot of high-cost unsecured debt rolling off over the next few years.

On slide 11 we have the other revenue component broken out by several of the revenue streams. This has been pretty consistent over the last few years, with some ups and downs across the different components. We expect other revenue to be flat to slightly higher in 2017, but would expect more material growth in 2018 and beyond due to the mortgage origination platform and wealth management expansion. Obviously very important as we seek to strengthen and diversify the Company.

On slide 12, provision has been increasing in conjunction with our delivered strategy to capture better profitability on our retail auto loans as well as growth in that portfolio. Although net losses increased, we also have to book provision to compensate for loan growth as well as some increases in our coverage ratio. Provision will be up in 2017; and 2018, to a lesser extent, given a similar dynamic. But over the next few years we would expect provision to start to level out, given the impact from growth, and mix shift should normalize.

The noninterest expense line is detailed on slide 13. We achieved our targeted mid-40s efficiency ratio last year, and we're at 45% again this year. We've made some investments in new product initiatives, technology projects, and continue to support loan servicing and deposit marketing. As we've discussed at the December conference, we expect expenses to be up around $150 million next year as we ramp up marketing efforts and continue to grow wealth management, mortgage, and deposits, all critical to our strategic path to diversify and expand revenues.

You can think about that as a run rate of around $760 million per quarter, with an additional $50 million in the second quarter due to higher weather losses.

Switching to the balance sheet on slide 14, we continue to see modest but steady earning asset growth. There's a shift within consumer auto, with leases being replaced by retail loans that will stabilize in 2018. Commercial auto has been running fairly strong, given the higher mix of SUVs and trucks which have higher unit prices, as well as growth in dealer inventories.

We also expect to eventually grow the securities and mortgage portfolios, which are efficient from a capital perspective. Getting a normal capital requirement at Ally Bank will be important to efficiently growth these portfolios.

Clearly, deposit growth underpins a lot of what happens to the balance sheet, so let's look at deposits on slide 15. Deposits have grown steadily over the past seven years, but really accelerated nicely in 2016. The secular shift continues to favor direct banks as they grew faster than traditional banks, and Ally continues to pick up market share among the direct bank competitors.

We're getting the compound benefit of growth from new customers as we've seen historically, but also getting increased growth from existing customers as they transfer more of their savings to Ally. This is such a critical driver of our earnings path, and we expect to accelerate deposit growth over the coming years, given the compound growth effect as well as favorable demographic trends.

Turning to slide 16, another driver of deposit growth is our brand awareness and market presence. Awareness picked up nicely in 2016, given some of our efforts with the Do It Right marketing campaign; and our Ally Lucky Penny contest was a big success. Introducing new products is also part of this self-reinforcing cycle. More products increase our market presence which drives more customers. Those customers are then primed to look at expanding their product relationships or increasing their deposits with Ally. All important factors strategically to grow, diversify, and strengthen the franchise to drive shareholder value.

Switching gears to net interest margin on slide 17. NIM can move around a bit due to seasonal factors, so let's focus a minute on the full-year results. NIM was up 6 basis points year-over-year to 2.67% when you back out OID. A lot of the same themes continue that we've previously discussed. Retail auto loan yields continue to climb higher, and average balances were up $3 billion in 2016. Leases are higher-yielding, but those balances are declining.

Commercial auto balances are a bit elevated, and the yield is floating higher with the increase in benchmark rates. The mortgage and securities portfolios have drifted higher, but that should also accelerate over the next few years, given the higher expected interest rates.

You combine all that, and asset yields were up around 14 basis points for the full year.

On the liability side, unsecured debt didn't decline last year due to refinancing our costly preferred securities, but we expect the footprint to decline dramatically over the next few years to be a key driver of NIM expansion. Secured debt yields have moved higher, but the balance has continued to decline, given the strong deposit growth.

Deposit yields have held pretty steady at about 115 basis points. We haven't moved our rates at all since December's tightening, but we'll continue to watch the competitive dynamics here. That's key for us and really all banks: optimize deposit pricing relative to growth to benefit as much as possible from a rising rate environment.

We have some pretty balanced assumptions incorporated into our forecasts, and interest rate sensitivities, and expect to continue to see NIM drive higher from here.

On slide 18, capital ratios have been pretty steady as we generate earnings and distribute more to shareholders. In the fourth quarter, risk-weighted assets kicked up seasonally with commercial auto balances, which brought the ratios down a touch.

Our DTA was up slightly this quarter, driven by the OCI impacts as you've seen at other banks, given the recent rate move. We bought back another 8.7 million shares in the open market this quarter for a total of 17 million since CCAR.

In total, we used $326 million of capital on share buybacks in the second half of the year. Combined with dividends, we distributed around $400 million to shareholders in the last six months. We expect to utilize an additional $450 million in the first half of this year based on last year's CCAR approval. Shares outstanding are coming down nicely, as shown in the bottom left.

Moving to asset quality on slide 19. Consolidated net charge-offs were up seasonally to 88 basis points, while the coverage rate came down a few basis points from the prior quarter due to a higher mix of commercial auto. Provision expense for the fourth quarter was $267 million, up from the prior year, driven by retail auto loan growth and the deliberate origination strategies we've discussed.

The bottom right shows the retail auto portfolio net charge-offs were up 35 basis points year-over-year to 1.56%. You can see the full-year 2016 net charge-off rate in the call-out table of 1.24%, up 29 basis points from 2015.

We broke out the impact of all loan sale activity on the portfolio, which was about 8 basis points for the year. Overall we continue to feel good about US economy and the performance of our loan book.

Let's move to the segments, starting on slide 20 with auto finance. A big driver we keep discussing is the lease portfolio declining. In the table in the middle right, you can see net lease revenue was down about $100 million this quarter versus last year. In 4Q 2015, used vehicle prices held up better than expected, and our lease yield was around 6.5%. This year it was 5.75% -- not bad; just not as favorable as 2015.

So the lease portfolio is declining. That's a headwind for earnings, but obviously brings down our exposure to volatility and residual risk. The good news is we're largely offsetting that headwind with success on the retail and commercial lending side, as well as other dynamic outside of auto finance.

If you look at the profitability from our retail auto loans in the bottom right, our net financing revenue was up $321 million for the full year, driven by higher balances and higher yields. That's partially offset with an increase of $180 million of provision expense. We're net up $141 million in risk-adjusted margin for the year; so a great job by the business of optimizing returns and shareholder capital.

As far as future positioning, a lot of the same themes should be expected on the traditional business. But we're expanding outside the traditional channels, as JB discussed. Carvana is an online lender that we've teamed up with to provide financing, and we'll be purchasing a modest amount of loans from them. Carvana has a great team, and we're happy to partner with them.

Our transportation and equipment finance team that joined us last quarter continues to make great progress, and has started booking loans. And the BlueYield acquisition we announced last quarter gives us some capabilities on the direct side which we will leverage going forward. All these new specialty areas aren't going to be huge over the near-term, but they provide incremental diversification, avenues for attractively deploying capital, and could be more meaningful over the long run as we continually adapt to an evolving marketplace.

Consumer auto originations, on slide 21, were solid at $8.2 billion this quarter, bringing the full-year to $36 billion supported by record application volume as we prioritize risk-adjusted returns over volume. Our origination mix was similar to the prior quarter, and we've consistently been in the low 40s range on used volume over the past year.

Yields on originations in 4Q were around 5.7% with NAALR, or expected losses, still around 1.2%. So we continue to feel good about margin expansion on the portfolio.

The bottom chart summarizes the balance sheet. On the consumer side, lease balance declines are being offset with retail auto loan growth. Commercial auto average balances were up $3.3 billion from the prior year due to higher inventory levels and mix, as consumer preference shifts towards SUVs and trucks.

There continues to be a lot of focus on used vehicle prices, so let me provide a quick update on slide 22. Used car values continued to decline in the fourth quarter in a similar magnitude as a third quarter, and well within our expectations. There are various public used vehicle indices in the marketplace, such as Manheim and NADA, that calculate changes and proceeds differently.

The NADA index came down approximately 6% in the current quarter versus the prior year. The NADA index is more consistent with Ally's performance; but, keep in mind, different methodologies such as vehicle age do create differences. The Ally index saw an average used price decline of 5.5% in the current quarter from a year ago.

Obviously, used car values have the largest impact on our lease portfolio. So even with the year-over-year average price decline, we still saw a healthy 5.75% auto lease yield in the quarter, with the fourth quarter typically the weakest of the year. As a reminder, we still expect a roughly 5% annual price decline in 2017, which would still put our annual lease yields at approximately 6% for the year.

On slide 23, the insurance business reported pre-tax income of $69 million. This is up $13 million from the prior quarter due to seasonally lower weather losses. Written premiums were strong at $237 million, up $15 million from the prior year, driven by increased vehicle inventory insurance rates and higher dealer floor plan balances.

Operationally, the business continues to deliver steady results, and is positioned to continue momentum as we completed the national rollout of Ally Premier Protection last year, and look to further develop our growth channel in 2017. The business has been transitioning over the past few years, and we expect to grow steadily from here.

On slide 24, the mortgage finance segment contributed $15 million in the quarter, up $6 million from the prior year. Asset balance growth from $3.8 billion of bulk purchase activity executed over the last year drove higher net financing revenue, while credit performance remained strong with minimal losses in 2016.

Noninterest expense was up versus the prior year due to asset growth and the buildout of our direct-to-consumer offering, Ally Home, which we launched in December. We did a lot of R&D in this area over the last 18 months, and we expect to demonstrate a nice growth path in this business, particularly as you get into the second half of the year.

On slide 25, our corporate finance business reported pre-tax income of $31 million, up $22 million from the prior year. The held for investment portfolio is up 24% to $3.2 billion, driving higher net financing revenue. Other revenue benefited from approximately $5 million of gains on equity investments in the quarter, as well as some higher syndication income.

Credit performance remained strong, and provision expense was down in the quarter due to some small recoveries and lower reserve build. Our corporate finance business provides solid returns, and we feel good about the opportunities to continue to grow the business going forward.

So just to wrap up before turning back to JB, the auto finance business is doing well: optimizing returns, reducing residual risk, and positioning for continued incremental diversification. We expect auto finance profitability to grow over time.

Insurance is a solid business, with expansion coming from our growth channel which should increase written premiums, moving forward. Mortgage is fairly small right now, but we expect that to really expand over the next few years, given the market opportunity. Corporate finance has been growing as expected, and is a nice business with excellent profitability.

We'll likely introduce a separate wealth management segment over time that will provide some meaningful income, particularly in 2018 and 2019.

The earnings growth foundation has been set, with deposits and lower cost of funds fueling our businesses. And we are now in a great position to build on it for many years to come.

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

Thanks, Chris. I'll conclude with a quick recap of our priorities for the year, which are likely familiar to most of you. You've heard us talk a lot about deposit and customer growth, and that's the real key driver from so many perspectives, so we have to keep the strong momentum going there. We introduced several new products and planted seeds in 2016. In 2017, we want to demonstrate the next stage growth path for these products. We're doing this in a gradual and prudent way. So it won't be massive out of the gates, but you should start to see the growth opportunity emerge particularly in the second half of the year.

In auto, we've done a great job optimizing the returns on that business in managing the risk return profile of the originations, and we'd expect the risk-adjusted margins to expand again in 2017.

On the credit and expense side, we're focused on maintaining a disciplined approach to risk management and expenses to maintain efficiencies and drive operating leverage.

As most of you know, we continue to have some inefficiencies in our bank operating structure, particularly the leverage ratio requirement. We hope to see that normalize this year, to get on a level playing field to other banks in the industry to fully optimize our funding construct. It's important; and I can assure you, we keep working away at it.

On the capital side, we were happy to get share buybacks going in 2016, and we expect to buy even more in 2017. It's early in the CCAR process, but we're making more money now than before, and we'll continue to lean into capital returns, given the current market valuation.

The combination of these factors should drive accelerated EPS growth and expanded returns going forward. As we've mentioned, 2017 growth may be shy of 15%, but still very solid, and then really accelerate in 2018 and 2019.

We've got the right opportunities with continued balance sheet management, and the right operational ingredients to deliver these results. So thanks for your time today. Hopefully you hear a very optimistic tone; it's intended.

And with that, let me turn it back to Michael.

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

So operator, with that, if you could please start the Q&A?

(Operator Instructions).

Betsy Graseck, Morgan Stanley.

A couple of questions on the outlook for NIM, and how you mentioned that you expect to see some improvements, still, going forward. And I know part of that is a function of the deposit beta. And the question is two things: one, give us a sense of growth in deposits you are expecting over the next 12 months, in dollars; as well as how you expect that deposit beta to traject. Because I know what you put in your Q, and it doesn't seem like that's happening yet. Just want to know when you think that flex point is.

So let me start with the NIM expansion. The biggest piece of the NIM expansion on the cost of funds side will be really just the absolute growth in deposits versus the unsecured debt coming down. And that's important, because it has less to do with the beta than it has to do with the sheer turnover of the liability side. So deposits will really replace the unsecured debt, as well as replace some of the secured debt, which -- the cost of that has moved up just with benchmark rates.

As you look at the growth in deposits, we grew retail deposits over $11 billion this year; total deposits over $12.5 billion. We expect that to accelerate somewhat in 2017, so we think the retail deposits will grow in excess of what they grew in 2016 to a nice extent. We also think we may take advantage of some of the brokered CDs, particularly as our TradeKing acquisition brings in some incremental deposits. So that will also be a bit of a tailwind for us.

When I think about deposit betas going forward, obviously there was a very muted reaction to the last two rate moves. Nobody has really moved much at all, particularly in the online savings or in the money market accounts. There's been some movement on the CDs, but it's pretty small. We don't think we're going to see any real dramatic change in the stance of rates over at least the next few months. We're watching it closely.

As the Fed continues to raise interest rates there's going to be a point obviously where there's going to be some reactions out of the banks, but we still think it is going to be fairly small. We've been pretty transparent that we model most of our pass-through rates around 75%, 80%. But our expectation, at least for us, is it will be somewhere at 50% or less. And obviously we haven't seen it move at all yet.

Okay. And then maybe if you just have a comment on the used car price declines that you are looking for. You highlighted that 5% price decline, which is what you've been kind of modeling to, or managing to, over time. Any pressures on that? I know you said 2017, looking for the same kind of decline. But given the mix and the desire for different kinds of autos, I'm wondering if you are seeing any shift in that as you go through the year?

We really saw the shift start at the end of the third quarter where cars had been particularly poor performers. And, honestly, there's been some specific cars, even within the GM fleet, that have not done very well that has kind of dragged the overall cars down. Having said that, the trucks, particularly the pickup trucks, have done fairly well and have held in there.

Since we've had a continued expectation of price declines when we set our leases three years ago, we set residuals lower for cars that would come off of lease in 2017. So while we continue to expect that 5% decline, we still expect the lease yields to be somewhere around 6%. And we still expect to have some level of gains.

I also always want to caution people that when you look at the leases and you look at cars coming off of lease, it's very seasonal, meaning fourth-quarter is always the worst; the second quarter is always the best. So we try to look at it on an annualized basis. So I would expect lease yields to be a little higher in the second quarter and a little worse in the fourth quarter.

Yes. Okay, thank you.

Chris Donat, Sandler O'Neill.

Chris, I just wanted to explore again on the deposit price, and then sort of how you're thinking about it because you said you are going to watch the competitive environment closely. I'm just wondering, what are your trigger points? Is it when you see competitors raise? Or do you actually wait to see if you are seeing action in your own deposit book -- either you are seeing less growth or outflows?

I'm trying to understand where you are going to -- at what times are you likely to make a move, if and when competitors change?

We look at both dynamics. But keep in mind, there is growth today in deposits. And that growth has been strong; particularly, the growth rate in online deposits is strong as well. So as long as we continue to see the increase in our overall deposits and the growth in our book, both from deposits as well as customers, we'll be pretty consistent with our deposit rates.

Now that can obviously change, given the market dynamic. But what I will tell you is that we're the biggest online depositor today, so we're a little bit of a bellwether. And we have no intention of leading rates up. So we'll see.

Got it. And then, Chris, just to go back to something that was in your slide deck from your Investor Day in February -- at that point, relative to used car prices, there was a comment about a 1% change in used car market value equates to about $50 million in revenue on an annual basis in 2016 and 2017. Has anything in your mix shift changed that sensitivity, or does that still basically hold?

No, like a 1% move worse than our expectation -- so, let's say, instead of going down 5%, used car values went down 6%. The biggest sensitivity is obviously on the lease side. So a 1% move would be about $50 million in 2017. That drops to somewhere -- $25 million to $30 million as you get to 2018 just because the portfolio is significantly reduced.

Got it. Okay. Thanks very much.

Sanjay Sakhrani, KBW.

Hi, this is actually Steven Kwok filling in for Sanjay. My question is around credit. When we look at the year-to-date results, it's up about 35 basis points on both the delinquencies and charge-off side. Can you talk about your expectations for 2017, and also around your reserve methodology?

I do expect charge-offs to go up again in 2017. It's a bit of what I would call the continued seasoning of the book, particularly as you are getting 2015 vintages starting to really hit their peak loss periods in some of the early 2016 vintages. I do not expect it to go up to the same magnitude as we saw from 2015 to 2016, so that 29 basis points.

I do expect it to rise, however, particularly in the first half of the year. I think you'll see more of the leveling off happen in the back half of the year, given that's where we saw some of the increase in the quarterly charge-off rates.

Now on the provisioning side, our provision was up about $200 million from 2015 to 2016. So once again, I'd expect the provision to be up driven by charge-offs, as well as some increase in the coverage ratio. I do not expect the coverage ratio to go up as much as the overall charge-off rate. But we do expect that coverage ratio to really start to float up. It was 1.42% in the retail auto portfolio for the fourth quarter, but you should expect that.

We were running kind of a couple basis points a quarter this year, and I would expect that to continue in 2017.

Great. That's very helpful. And my second question is around the CCAR process. The Fed released some new methodology around perhaps eliminating the qualitative exam for Ally. Can you talk about the potential impacts to you?

The rule came out -- I think some people might've seen that last night. The rule came out -- it was very similar to the NPR that they put out in the fourth quarter, so not a lot of changes. For a bank like Ally, below the $250 billion mark, the qualitative really moves out of the annual CCAR process and really goes into what they call the --

The routine monitor.

Yes, like routine monitoring by the Fed. So our expectation is they will look at it in the third quarter, and it will just be kind of routine. So our actual capital distribution will be based on the quantitative assessment that happens within the second quarter.

So I don't think there's a big change. We've obviously done very well on the qualitative side the last few years. So I don't think it has much of an impact to what we expect to do on the capital side, but obviously takes a little pressure off some of the operations.

Great. Thanks for taking my questions.

Eric Wasserstrom, Guggenheim Securities.

Chris, could you just talk about your balance sheet growth expectations relative to what you're thinking about with respect to SAARs, please?

We expect SAAR to be somewhat flat as we look at 2017. We think it will kind of go sideways a bit. And whether it goes up or down -- we've said this a lot -- whether SAAR goes up or down, let's call it 1 million units -- it's not really going to have a big effect on us. Particularly given that our used volume is somewhere like 40% to 45%, and the used sales are pretty steady over the last few years as well.

So when I think about the balance sheet growth, we expect the auto balance sheet to remain pretty flat. The leases will continue to come down. Our retail auto loans will go up. So you can think about the leases will come down about $1 billion a quarter, and retail auto loans will go up about $1 billion a quarter. So it will keep pretty flat.

I think where we were surprised a little bit at the end of the year -- and we expect to run a little hot, I think, in the first half of the year on our commercial balances, so commercial balances are up. It's a great business in the sense that it has no losses in that business, but the yields tend to be a little lower than the overall portfolio. So it puts some pressure on NIM. But it's a good kind of low loss business, and it's all LIBOR type-based, so if rates to go up we do have a little leverage there.

Great. Thanks. And then just within the auto growth, can you just talk about what the FICO composition will look like relative to where you were, let's say, in the second half of this past year, and how that relates to the NAALR expectation?

We expect it to be pretty steady. I would tell you that our FICO has drifted up a bit in the fourth quarter. And the reason for that a little bit is seasonality, meaning the fourth quarter tends to be the quarter you see mostly new cars; you see a lot of incentives from the manufacturers around the holidays. So you tend to have higher credit quality customers in the fourth quarter.

But I think our credit quality -- the way we look at the competitive environment today, our credit quality and our NAALR should be pretty consistent going forward; which is one of the reasons as we start looking out to 2018, we start seeing what I would call a flattening of our provision because we think the overall credit quality of the book will be pretty similar.

Thanks very much.

Jack Micenko, SIG.

With the Ally home originations, just curious how you're thinking about the volume? Are you going to flow the 30 years through and keep ARMs? What is your target there? And then is there any servicing escrow balance assumption in your deposit/rate outlook?

There is no servicing deposits or escrow deposits in any of our assumptions. When we think about Ally Home -- and we have pretty modest assumptions of originations. And most of those originations will be conforming. Whether they are fixed or floating, most of that stuff will go off to the GSEs.

The only production we expect to keep is the jumbo production. When we think about it over the next couple years, our assumptions are somewhere around $5 billion of originations. We probably keep $1 billion, $1.5 billion of those originations on the balance sheet. We continue to buy some bulk mortgages, as well, to bring the overall balance sheet in mortgage up. But we get some nice fee income associated with those conforming originations.

Okay. And then your investment securities balance grew nicely on the quarter, but it was kind of flat on the year. How do we think about 2017 securities growth with the loan portfolio sort of balancing out between auto lease and auto loan -- kind of a flattish top line on the securities book. Is that net growth from here? How should we think about that?

We have -- relative to the size of our balance sheet when you think of our peers across the banking industry, our investment portfolio is pretty small. It is somewhere at 13%, somewhere in that type of range. We would like to move the investment portfolio higher. We think it's good for liquidity, some of the strength of our liquidity ratios.

The thing that's preventing us from doing that at the moment is the leverage ratio requirement that we have at Ally Bank. And because of that we've really held back from growing it.

Our expectation is that leverage ratio will be lifted at some point this year. And once that happens, our expectations will grow the securities portfolio a bit higher. So hopefully in that second half of the year, you will see real growth there. And most of that growth will be in liquid products.

All right. Great. Thank you.

David Ho, Deutsche Bank.

I just want to talk about the expenses real quick. The $150 million that you highlighted -- I just want to make sure what base you're growing that off of potentially, and how much flexibility you have there?

Well, we wanted to make sure that we were pretty transparent to the overall market that expenses are going up. And then we look at the overall expenses, there were just shy of $3 billion in total noninterest expense; I think it was $2.94 billion. So we expect the $150 million to kind of grow off of that.

A lot of that growth is really going to come from the marketing side, and really driving some of the new products. And things like wealth management -- JB mentioned in his prepared comments how over the next couple of months, we're going to rebrand that. And we'll have a customer day one. And once we have that customer day one, we're going to put real marketing behind that to really growth the wealth management segment.

Likewise, we just started Ally Home. And we're looking at it in very kind of moderate way, and making sure operationally we have everything handled. But once we start feeling good about the operations you'll start seeing us put some more marketing dollars behind that. With that also just comes just variable expenses as that portfolio really grows.

We've also, in that corporate finance team, we've hired -- in that corporate finance group, we've hired some specific teams within that group to help grow that portfolio as well.

So all of these are just some incremental expenses really driving some of the new products and new businesses. And we're really going to focus on operating leverage, though. So while expenses are going up, we expect to really see revenues rise, as well. And as we start getting out a couple of years -- 2018, 2019 -- we start seeing that mid-40s efficiency ratio really come down.

Got it. And then as a relates to some of the business expansion, it seems like it's a little bit more back-end loaded in terms of the timing in 2017. And obviously if rates rise, you would have probably a little more pressure on the investment gains before you recoup that towards the back half of the year. Is that the right way to think about it?

David, that's a good point; meaning higher rates will give us less opportunity to harvest gains out of the investment portfolio. We did have some real success in 2016 doing that, particularly in the first half of the year, given rates were lower than people expected.

So to the extent that we see rates continue to rise, we'll have less gains to harvest. But the offset obviously is just higher balances and higher NII, which we would obviously like to see. The rate environment is going to move around, though, so we'll see how the gains (multiple speakers) through.

Got it. Great. Thank you.

Moshe Orenbuch, Credit Suisse.

Thanks. You guys had talked a little bit -- a lot, actually -- about kind of the deposit pass-through rates and all that kind of stuff. Could you talk a little bit about kind of the composition of the liabilities? I know you're starting pretty soon to start to see debt mature. Have you thought about how you're going to replace that? And does it matter whether you kind of get that relief on the leverage ratio? And can you talk about how that will phase in over the next couple of years?

As I look at overall deposits, we expect overall deposits to obviously continue to grow. I think it was somewhere around 54% of overall funding. Over the next couple years, we want that to grow to 75% of overall funding, and we think that could be realistic. With that, I expect the unsecured debt to continue to come down. We've got about $12 billion of maturity over the next three years. Our expectation is that we are not going to refinance that.

Now having said that, we have this leverage ratio restriction. And because of that leverage ratio restriction, Ally Bank needs incremental capital. That capital comes from liquidity at the holding company. So to the extent that that gets delayed, it may cause us to do some additional liquidity raises at the parent where we can push liquidity down.

But I think if I take a longer-term view, over the next 2 to 3 years, our view is that none of that $12 billion will really be needed within the Company, and we can bring that down.

And then I think the other trade-off that you'll continue to see is we've had some big liquidity facilities at our bank and holding company on the secured side. Most of those are LIBOR-based type facilities, and we'd like to bring those down dramatically, as well; so you'll see overall secured funding come down. I think you'll continue to see us active in the securitization markets, but I think some of the private facilities that we have will come down.

Got it. Just another question. Two years in a row of down 5% used car values -- it's a little unfair to kind of ask beyond that. But 10% is a pretty hefty move. Do you think things start to stabilize after that? How do we think about kind of on a longer-term basis?

Yes; I think as you start getting out to 2018 and 2019, hopefully you start seeing some real stabilization. So we've seen a pretty dramatic move in 2016. We think that continues with the off-lease vehicles. But you are getting more to a steady state with the amount of vehicles that get leased by the OEMs on an annualized basis. So they should be able to handle some of that used car volume, and it should be a little bit more of a steady state.

But some of it depends just on how the OEMs incent the new cars. And I always say, used car values have more to do with where new car prices are than anything else. So some of it depends on OEM behavior, and we all hope and expect that OEM behavior will be better this time around than it was pre-crisis.

Got you. Thanks very much.

John Hecht, Jefferies.

JB, you just started touching a little bit on sort of OEM behavior. I'm wondering if you could give us a rundown of the competitive behavior across the various kind of segments of your business now. Is it lightening in certain categories? Is it still tightening? And how do you feel about 2017?

This is Chris. Maybe I'll start and then JB can jump in. It's been pretty public out there that on what I would call the super prime -- the prime to super prime side -- that you saw some what I would call regional type players back away a bit. We did see some price increases in the fourth quarter by some of the major competitors. And we think that is very healthy for the market, particularly given just the higher interest rates.

So the only thing on the -- it's still a competitive market. The only thing on what I would call the prime to super prime side is that the credit unions continue to keep pricing low, and they've picked up a little bit of market share. Now they will tend to be a little bit of a lager when it comes to raising prices, so I think they are worth watching on the top side. So that's where you're seeing most of the competitive there.

In more of the other end of the spectrum, the subprime side, without naming names, just one large player what I would say step away a bit and go a little bit upstream. And you saw another large bank kind of go in and take some of that volume. I think you probably know who that is. But all in very rational way, so still a competitive environment. We're starting to see some prices move up, which we think is a good thing, along with benchmarks; but, overall, rational.

And then John, maybe the only other thing I'd add -- obviously Chris was in on the retail component within commercial floor plan, still very competitive there, particularly by a large captive continues to be very aggressive. And, frankly, we've got to maintain our discipline around pricing and ensure we are in appropriate returns. But floorplan is probably where it is most competitive today. So we're obviously happy to see that balances continue to be very stable to up. But we've got to be mindful of what that could mean for the longer-term.

That's great color, guys. Thanks very much. And the second question -- I imagine this is for Chris. Chris, the off-lease remarketing, there was a little bit of a lower gain this quarter. Obviously there is some seasonality, and then some expected components of that. How should we think about the next few quarters with that factor?

Gains -- I think we had about $10 million of gains in the fourth quarter. I would expect the first quarter to be somewhere in that ballpark; meaning particularly in January February, you don't tend to get many gains because of the winter months. It starts to pick up more when you get to March.

As you get to the second quarter, however, we do expect to realize some gains in the portfolio, and really associated with just better used car sales in the second quarter. So I would expect first quarter to be pretty similar, second quarter to actually start to move up a bit. As you go through the summer months, it is probably pretty similar. And then it tails off again in the fourth quarter.

All right. Thanks very much, guys.

I'm not showing any further questions at this time. I'd like to turn the conference back over to our host.

Great. Thank you. If you have additional questions, please feel free to reach out to Investor Relations. Thanks for joining us this morning. Thanks, operator.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.