Ally Financial Inc (ALLY) 2020 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Ally Financial Third Quarter 2020 Earnings Call. (Operator Instructions) As a reminder, today's call is being recorded. (Operator Instructions)

I would now like to introduce your host for this conference call, Mr. Daniel Eller, Investor Relations. You may begin, sir.

Thank you, Kevin. We appreciate everyone joining us to review Ally Financial's Third Quarter 2020 Results. This morning, we have our CEO, Jeff Brown; and our CFO, Jenn LaClair, on the call to review results and take questions.

Before beginning, I'll note that the presentation we'll reference throughout the call can be found on the Ally investor relations website. On Slide 2, you'll find the forward-looking statements and risk factor language that will govern today's call. And on Slide 3, we've included several GAAP or non-GAAP metrics, which we refer to as core measures, pertaining to Ally's operating performance and capital results. These metrics are supplemental to and not a substitute for GAAP measures. Definitions and reconciliations can be found in the appendix.

With that, I'll turn the call over to J.B.

Thank you, Daniel. Good morning, everyone, and thank you for joining us to review our results. Slide #4 includes highlights from the third quarter, demonstrating performance across all of our lines of business. I'll begin with a broader perspective on these results, which serve as further validation around our ability to continuously deliver. Our steady execution over the past several years positioned us for success in a variety of operating environments. We're guided by a consistent set of strategic priorities and a customer-centric philosophy to always do it right. Our results show this focus is resonating, particularly during challenging environments as we're operating in today. This simple but effective approach echoes throughout the culture at Ally and shows up in the innovative, engaging and leading actions we've taken on behalf of our customers and is further evidenced within our community efforts where we've committed time and increased resources to effect positive and lasting change.

Turning to the quarter. Adjusted EPS was $1.25 and core ROTCE was 15.2%. These record-setting levels reflected revenue expansion from embedded balance sheet tailwinds and diversified income sources, combined with credit outperformance. Our balance sheet strength is apparent across capital, liquidity and reserves, where levels remain near the highest in Ally's history. In auto, we decisioned 3.2 million applications, generating $9.8 billion of consumer originations, our highest quarterly volume in 5 years. We continue to leverage our broad market reach, interacting with over 90% of franchise dealers in the U.S. Auto market trends remain encouraging. Industry new vehicle sales closed the gap to prior year levels throughout the quarter, in fact, the rebound in sales over the past 5 months took 5 years to achieve, following the past financial crisis. Used vehicle sales have demonstrated particularly strong performance, outpacing prior year levels every month since May.

As a result, overall dealer profitability rebounded to the highest levels in several years during the quarter more than offsetting a difficult Q2. Ally's new origination yields of 6.95% represented another quarter of disciplined underwriting, and combined with net charge-offs of 64 basis points drove expanded risk-adjusted returns. This was the lowest third quarter loss level for Ally since 2013 when our portfolio consisted mainly of new subvented loans.

Generally speaking, the U.S. consumer entered 2020 on solid footing and has demonstrated a higher degree of resiliency, despite significant and ongoing challenges, aided by meaningful and necessary fiscal stimulus. While recent trends suggest a broader recovery is underway in various pockets of the economy, we're mindful of the currently expired stimulus benefits and the ongoing uncertainty around the outlook of COVID.

Unemployment levels remain above pre-pandemic levels. Labor participation has declined, and recent layoff announcements have picked up across harder-hit travel and entertainment industries. The growing disparate impact being felt across educational, income and racial backgrounds is troubling and speaks to a more fundamental issue we're facing as a society, reinforcing for us the corporate citizenships commitments we've made. Against this backdrop, we're remaining focused and balanced. We're proud to continue serving our customers, including actions we've taken to keep them in their cars and homes. Our deferral program serves as a real-time example of this where our higher-than-industry take rates were driven by the early, easy and largely digital approach we provided our customers in a time of uncertainty.

Beyond strong performance, we've heard from many who described how the program provided them with a crucial opportunity to devote focus and attention to unexpected life events they faced as a result of COVID. Again, this is doing it right. And while many questioned the level of actions we took earlier this year, Jenn will show you the stout performance of the deferral population in just a few minutes.

Within insurance, written premiums of $333 million increased meaningfully quarter-over-quarter despite persistently low dealer inventories, while retail underwriting stabilized throughout the quarter. Investment income remained robust, highlighting our ability to generate diversified income.

Turning to our consumer and commercial banking products. Momentum continued to build during the quarter. Total deposits increased 13% year-over-year, including a record third quarter, driving $17.1 billion of retail growth in 2020. Our retail deposit customer base of $2.2 million expanded for the 40th consecutive quarter. 2/3 of account openings continue to be sourced from younger generations, and the vast majority of inflows still come from us -- to us, excuse me, from traditional banks, plus practically no outflows to neo banks. Ally Home, Ally Invest and Ally Lending continue to make considerable progress towards our long-term objectives. We generated the highest origination levels since launching our mortgage offering with improving loan profitability.

Our partnership with Better.com is another example of providing our customers with elegant, simple and largely digital experiences. Brokerage accounts at Invest grew 16% year-over-year. Ally Lending generated $167 million of volume and entered the retail point-of-sale segment through 2 key partnerships. Our capabilities in health care, home improvement and retail position us well in the rapidly growing payment ecosystem. Corporate Finance held for investment balances ended at $5.9 billion, a 17% increase year-over-year, while credit performance remained stable.

Turning to Slide #5. We've included a snapshot of our competitive advantages, which will position us to generate sustainable expansion for years to come. Our established Auto and Insurance businesses are foundational to our ongoing success and results, representing market-leading businesses with prudent products, services and scale. We've grown our dealer base for 10 years, expanding our reach through both established and emerging players. Our use of technology and digital tools within Auto has dramatically expanded this year. We modernized our entire servicing platform; our -- increasing the use of data analytics throughout the underwriting process; have completely rebuilt the technology stack on SmartAuction, our online digital auction site; and have rolled out digital self-service tools and portals, which, again, simplified and streamlined the deferral experience for our customers. So while this is a mature business, we continue to make it stronger.

Ally Bank was an early disruptor, and we continue to leverage the momentum behind our digitally focused products in a customer-centric manner. We've differentiated through frictionless experiences built through a data-driven approach and innovative tech. Our scalable platform is established but nimble. Our customer base has grown rapidly, remains loyal to Ally and are active users within our ecosystem. We're offering a broad array of products through award-winning platforms and service levels. Combined with an amazing culture and continued edge on finding ways to disrupt our industries, these attributes represent a sustainable and attractive path forward.

Let's turn to Slide #6 to look at customer trends. Over the years, we've fielded a variety of questions regarding the feasibility and long-term prospects of the direct banking model and our ability to diversify our Auto platform. The data and metrics shown over the past 10 years provide a clear indication of the outcomes we've generated. At Ally Bank, our conviction in a direct bank strategy has never wavered. It has been reinforced by accelerating consumer preferences for digital products and excellent customer service, both foundational elements of our platform.

Customer trends, in the upper left, have grown at a 19% CAGR since 2010. We're seeing steady progress and deepening relationships, ending 3Q at just over 7% of our 2.2 million depositors for customers who also use a Home or Invest product. And on the bottom, our growth in dealers over the past 10 years has led to a 13% CAGR in application volume, giving us market visibility and enhancing our ability to meet our return objectives. Moving forward, we remain focused on being able to continue offering our 8.5 million customers with the innovative financial products and service levels they've shown an increasing appetite for.

On Slide #7, EPS in the upper left demonstrates the near-term result of our long-term planning and execution, a theme that carries across revenue growth of 4% year-over-year, shown in the upper right, and deposit expansion in the bottom left. Tangible book value in the bottom right grew quarter-over-quarter to $34.56 and, adjusting for day 1 CECL impact, were well above $37 per share, reinforcing the intrinsic value of our company. We're remaining thoughtful in our execution. Our actions continue to be guided by our values, culture and long-term strategic objectives.

With that, Jenn, it's all yours to review the detailed results.

Thank you, J.B., and good morning, everyone. Let's jump in first on some of our key operating metrics. I'll begin on Slide 8 with a review of monthly trends in our Auto segment.

Consumer application and origination momentum continued this quarter, reflecting our adaptable business model, dealer resilience and stronger-than-anticipated consumer demand. The recovery in sales from the trough in April has been driven by a combination of 3 factors, including a shift toward personal vehicle ownership replacing mass transit and ridesharing where usage has declined 50% to 70% from pre-COVID levels. The utility provided by owning a car, including the added flexibility and control in an uncertain COVID environment, and an increased consumer propensity to purchase a car as spending on entertainment and travel has been reduced. As these sudden and meaningful consumer shifts have unfolded, we've remained a focused and dependable partner for our dealers. We're actively expanding our market reach, evidenced by the increased loan purchase program we announced with Carvana last month, and the dynamic and evolving support for emerging and more traditional dealers.

We've continued to be mindful of the credit environment and have managed an effective and dynamic underwriting approach. In the bottom left, used car gain per vehicle averaged over $2,400, the highest level in 7 years, leading to the highest quarterly gains in 5 years. We now expect full year 2020 used car values to rise by more than 5% year-over-year, benefiting NII and net charge-offs. Moving into 2021, we expect used vehicle values to decline modestly, though steady demand and low new vehicle inventories will continue to be a tailwind longer term.

Commercial balances, shown in the bottom right, grew in August and September, following the trough in July. As OEM production levels have largely normalized, we expect balances to slowly rebuild through the latter part of next year.

Let's turn to Slide 9 to review consumer product trends. Momentum and progress among our digitally based consumer offerings continued in Q3. Retail deposit balances and customer growth reached their highest third quarter level for Ally. Balances expanded despite record tax outflows as payment deadlines were delayed into Q3. And our customer base expanded every month this quarter, reflecting the appeal of our award-winning offerings.

Direct-to-consumer mortgage originations reached $1.3 billion in the quarter. Elevated trading activity continued at Invest with customer assets ending the quarter at $11.1 billion. Growth in both channels continues to be sourced from existing customers, with 64% of new brokerage accounts -- account openings and 54% of mortgage originations coming from existing Ally customers. These metrics reflect our large organic growth opportunity as customers continue to seek ways to expand their Ally relationships.

Slide 10 includes a snapshot of key balance sheet metrics. We've taken deliberate actions over the past several years to strengthen our balance sheet, allowing us to focus on executing for our customers in this challenging environment. Liquidity levels remain strong and our evolving funding profile continues to provide opportunities to lower our cost of funds and patiently deploy liquidity. Capital levels remain well above regulatory minimums, and reserve levels ensure we're prepared for a variety of potential credit outcomes. While many unknowns remain around the full extent and ongoing impacts related to COVID, we have confidence in the strength of our balance sheet and our proven ability to navigate.

Let's move to Slide 11 to review detailed financial results for the quarter. Net financing revenue, excluding OID, of $1.209 billion, grew $146 million linked quarter and $14 million year-over-year. This represents our highest quarterly results, and more importantly, resumes our trajectory of NII and NIM expansion, powered by the combination of stable earning asset yields from retail auto yield expansion, lease gains and a well-positioned investment security portfolio, declining cost of funds as we continue optimizing the deposit portfolio and reducing higher-cost funding and steady loan growth. These dynamics uniquely position us to overcome headwinds associated with lower rates, elevated prepayments and negative carry from excess liquidity.

Other revenue of $471 million reflected strong realized investment gains and robust mortgage fee income. Within this line item is a charge related to the early pay down of certain FHLB debt, an action that reduces excess liquidity and accelerates NIM as we replaced 2.8% debt with low-cost deposits.

Entering 2020, other revenue was projected to generate approximately $400 million per quarter, reflecting growing insurance, mortgage and SmartAuction results. We've generated meaningfully higher income this year from strong investment activity, reinforcing our ability to generate diversified revenue.

Provision expense of $147 million was materially lower linked quarter and year-over-year driven by improved frequency and severity across consumer portfolios and stable, strong commercial performance. Noninterest expense declined seasonally $80 million quarter-over-quarter and increased $67 million year-over-year driven by recurring themes, including revenue-related business expenses and volume-driven costs of our growing customer base, investments in technology-related items and higher insurance expenses where we experienced a more active Q3 weather season.

We're continuously working to identify and reduce spend across nonessential areas while also investing in our businesses to fuel revenue and customer growth. Key metrics at the bottom reflect the solid performance generated across our company during the quarter.

Slide 12 includes balance sheet and NIM results. Net interest margin, excluding OID, of 2.67% expanded quarter-over-quarter, reflecting embedded dynamics I just reviewed where retail auto portfolio expansion, strong lease gains and deposit cost improvement drove margin expansion despite NIM pressure from premium amortization and excess liquidity. Average earning assets expanded quarter-over-quarter to $180.1 billion driven by consumer auto and cash offsetting the impact of lower commercial balances and elevated mortgage prepayment activity. Retail auto portfolio yield, excluding hedge impacts, expanded 6 basis points quarter-over-quarter and 17 basis points year-over-year. Average commercial auto balances declined $4.8 billion quarter-over-quarter, though expansion occurred in August and September.

Cost of funds improved 31 basis points, the fifth consecutive quarter-over-quarter decline, a trend we expect to continue over the next several quarters. These fundamental drivers will propel ongoing NIM expansion, paving a path to 3% as we move through 2021.

Detailed deposit trends are on Slide 13. Total deposits grew to $134.9 billion as retail balances expanded to $120.8 billion compared to $101.3 billion a year ago. Customer retention, measured as those who maintain an account with us over time, remains strong at 96%, demonstrating consistent loyalty and engagement.

On the bottom right, we ended the quarter with over 2.2 million customers, growing at the highest level for a third quarter ever. In the bottom left, retail portfolio rates declined 38 basis points linked quarter and 88 basis points year-over-year, reflecting disciplined pricing actions and a shift to liquid products and expected trend in a flat rate environment.

Let's turn to capital on Slide 14. Q3 CET1 of 10.4% reflected ongoing earnings growth and a continued pause in our share repurchase program. Last week, we announced the Q4 common dividend of $0.19 per share payable on November 13. We are well underway with our CCAR 2020 resubmission and are on track to submit our revised capital plan in early November.

For participating banks, there remains much to be determined by the Federal Reserve regarding specific outcomes of this process, but we remain confident in the positioning of our balance sheet, our robust capital and our proven approach to risk management. Capital actions over the past 5 years, shown on the bottom, reiterates our disciplined approach to deploying capital. Shares outstanding have declined 23% as we repurchased at attractive levels relative to our growing tangible book value, while we increased the dividend on 5 separate occasions. These actions occurred as we grew risk-weighted assets, optimized our leading businesses and expanded product offerings. We look forward to returning to a normalized environment when we can resume dynamic capital deployment.

Turning to Slide 15. Credit performance remains strong and better than anticipated, reflecting a combination of broad-based consumer and commercial resilience and our expertise and dedicated approach within servicing and collections, including efforts to increase engagement through easy-to-use digital tools for our customers. The consolidated net charge-off rate of 41 basis points declined 17 basis points quarter-over-quarter and 42 basis points year-over-year.

In the upper right, net charge-offs of $122 million declined $145 million year-over-year driven by retail auto and Corporate Finance. In the bottom left, retail auto net charge-offs of 64 basis points improved quarter-over-quarter, a departure from the typical seasonal trend of rising NCOs through the second half of each year and represents less than half the prior year level of 1.38%.

Delinquency trends remained solid as both 30- and 60-plus results ended meaningfully below prior year levels. We remain encouraged by the performance across our portfolios, including deferred and nondeferred populations.

Let's turn to Slide 16. Given credit results year-to-date, we're lowering our retail auto NCO outlook for full year '20 to less than 1.2%. And if trends continue to outperform, we could be closer to 1%. Our consolidated reserves ended the quarter at $3.4 billion as coverage of 2.87% moved slightly higher quarter-over-quarter. Retail auto reserves and coverage levels remained stable overall. These levels reflect our balanced approach and contemplate rising NCOS driven by elevated levels of unemployment and ongoing uncertainty related to COVID and the economy.

Our current baseline forecast assumes unemployment remains elevated, ending 2021 around 7%. Consistent with prior quarters, we do not include any stimulus-related benefits in our reserve modeling. We continue to expect retail auto losses to peak as we move through 2021, and we believe our current reserve level is sufficient to absorb this expected increase. Absent significant further deterioration due to the economic outlook, we would not expect any additional build.

Moving to Slide 17. I'll briefly touch on the auto deferral program. As of quarter end, 99% of COVID deferrals have expired. 96% of participants have had 2 or more payments due, and 89% remain current or paid in full. Later-stage performance migration has remained favorable to our expectations and is reflected in our Q3 credit metrics. In addition to strong consumer trends, we diligently prepared for each stage of the deferral program, launching new digital tools that drove higher engagement and payment rates among participants. We are pleased with the program on many fronts, most notably the support it provided to our borrowers, reflective of our customer-first values.

On Slide 18, I'll highlight a few additional metrics in the auto segment. Net financing revenue expanded quarter-over-quarter and year-over-year, reflecting growth in the retail margin and strong lease gains that more than offset over $10 billion in lower earning assets driven by inventory levels. Noninterest expense grew, reflecting the added resources and capabilities deployed within our servicing and customer care centers. And as you can see in the bottom right, portfolio yields continue to migrate higher while loss content remains strong. Overall execution within auto reflects the resilience of the auto asset class as well as our unique ability to adapt and continue to meet the needs of our dealers and customers.

Detailed origination and asset trends are on Slide 19. Q3 auto originations of $9.8 billion expanded quarter-over-quarter and year-over-year, while average FICO and nonprime levels remained stable. Used volume represented 55% of originations or $5.4 billion, our highest quarterly used volume, reflecting our ability to respond to market and consumer demand in real time.

In the bottom left, ending -- consumer assets expanded again in Q3, ending at $82.9 billion driven by retail and lease balance growth. On the bottom right, average commercial assets declined, though ending balances expanded.

Insurance results are on Slide 20. Core pretax income of $65 million increased $26 million linked quarter and was essentially flat year-over-year. Written premiums of $333 million grew $66 million quarter-over-quarter, reflecting a rebound in retail F&I activity more than offsetting lower dealer inventory levels. Trends steadily improved throughout the quarter, and we expect stabilizing to improving performance as dealer inventories build.

Turning to Slide 21. Corporate Finance pretax income of $60 million grew $28 million quarter-over-quarter and $16 million year-over-year, reflecting steady credit performance and asset growth. Unfunded commitments of $3.8 billion reflect our disciplined but opportunistic approach to growth. While utilization remains lower, given the environment, our ability to lend and generate growth comes in a challenging backdrop. Portfolio metrics reflect our prudent approach to risk management. 47% of balances are asset-based, 65% of the portfolio has contractual LIBOR floors, while criticized and nonaccrual loans continue to perform well in the current economic backdrop.

On Slide 22, mortgage pretax income of $26 million expanded versus prior quarter and prior year as strong gain-on-sale activity more than offset elevated prepayment-related impacts. Direct-to-consumer originations were solid as mortgage -- as low mortgage rates generated strong refinance activity, which was 63% of our volume in the quarter.

I'll close by reiterating how proud I am of our Ally teammates who remain the driving force behind our accelerating operating and financial results, as demonstrated in our consistent book value growth and expanding return profile. We remain focused on doing it right for our customers, communities and shareholders.

And with that, I'll turn it back to J.B.

Thank you, Jenn. I'll wrap up with a few comments on Slide #23. Like Jenn, I want to thank all of our associates for their tremendous efforts. They continue to give day in and day out. And I've witnessed firsthand how many of them are juggling a variety of personal and family obligations while working from home but have taken on each challenge with the devotion and commitment to do it right.

The significant pressures and strain brought on by COVID and the difficult social issues that have unfolded have presented challenges beyond anything I've witnessed in my career. But what I've seen in the actions and response by our people serves as a bright spot and a tremendous source of pride for me in leading this great company.

For our customers, we will continue to work relentlessly to preserve and grow the trust and loyalty you have in us as your financial partner, no matter what lies ahead. It's who we are. And within our communities, we've stepped up our actions in recent months to effect positive change in several ways, most publicly with the launch of the Ally Foundation, a channel that will allow us to quickly and efficiently support the many causes and efforts being carried out by worthy individuals and organizations today.

Whatever uncertainty and challenge lies ahead of us, I'm confident in our team's ability to continue successfully navigating on behalf of our customers, which enhances long-term value for our shareholders.

With that, Daniel, back to you and time for Q&A.

Yes. Thanks, J.B. (Operator Instructions)

Operator, you can now queue up the Q&A.

(Operator Instructions) Our first question comes from Ryan Nash with Goldman Sachs.

So maybe I'll start, Jenn, you saw a nice bounce back on the margin this quarter to 1Q's levels, and now you're talking about a path to 3%. Can you maybe just talk about some of the drivers to the path? I know you referenced some of them in the prepared remarks. What's embedded in them, as well as timing?

And also, if we see liquidity come down as dealers pick up, it seems like to me, these tailwinds could actually see us go above 3%. So I was curious if you could just give us some color on the numbers as well as the moving pieces on the path to 3%.

Yes. Sure, Ryan. Appreciate the question. So a couple of things. This quarter, we saw our NIM expand about 25 basis points. And as I had messaged a couple of weeks back, that was exactly what we were expecting. As we move forward from here, we would expect the NIM to continue to expand. Likely not quite at that level each quarter, but we do see a really nice path in Q4 and into 2021 in terms of expanding up to that 3% mark.

Now in terms of some of the drivers, let me hit a few highlights. So on the asset side, as you can see, we've continued to see our retail auto portfolio yields migrate up, and that's as a result of kind of 9 trailing quarters of new origination yields coming on the books at 7%. We were almost at 7% this quarter. So we'll continue to see that nice increase in retail auto originations, which should offset some declines because of rates in other areas in prepayment. And so that should stabilize our overall earning asset yield.

Now to your point, there could be some opportunity for that asset yield to even expand as commercial balances come back and cash is redeployed into commercial balances and we continue to grow Corporate Finance. So at a minimum, it will be stable.

And then on the liability side, cost of funds came down over 30 basis points. We continue to -- expect to continue to see cost of funds come down. OSA rate is at 60 basis points. And then you've got CDs, over 2%; repricing, down below 1%, which creates just this nice tailwind. And then last but not least, we continue to look for liability management opportunities to further take down cost of funds. And you saw we early retired some FHLB debt.

So to your point, nice path forward. I think strong dynamics on both sides of the balance sheet. And I'd say, at a minimum, we'll be migrating towards that 3% kind of as we enter 2021.

Got it. And if I could do a follow-up. I'll stick with Daniel's guidance of just one follow-up. J.B., you obviously have a huge windfall of revenue right now given all these tailwinds that Jenn just referenced on the margin. Can you maybe just talk about just the magnitude of positive operating leverage you're targeting and what adjusted efficiency ratio? And potentially, what return do you think is doable in this kind of environment?

And I'll just tag on to that. Just given the fact the stock continues to trade below tangible book value, can you maybe just talk about your willingness to get much more aggressive on returning capital in the coming quarters before the valuation potentially expands in a meaningful way?

Sure. You got it, Ryan. And obviously, we're happy to follow up with you offline on any of these. Jenn, maybe you want to start on kind of operating leverage targets, things like that, and then maybe I'll take the capital one because, obviously, that's a complicated question in light of the Fed, CCAR 2.0 and the environment.

But maybe, Jenn, you can take the first part.

Yes. Sure. Yes, so on operating leverage, I just describe the path on the NIM, which ties into our path on net interest income, and we're anticipating continued revenue growth from net interest income.

On other revenue, we've seen some outsized opportunity to take market-related gains over the last couple of quarters. We'd expect that to normalize a bit down to kind of that 4.25% level. But overall, because of the strength in NII and continued strong performance in other revenue, we would expect growth there, which, to your point, Ryan, is going to drive positive operating leverage, especially if you kind of adjust for some of these outsized gains that we're seeing in the other revenue line item.

From a return perspective, it's still early as we think about 2021, but we are expecting to get back to kind of pre-COVID return levels kind of over the next kind of 12 to 18 months, assuming that our path on the macros continues to be accurate. And if anything, 2020 has taught us things can move pretty quickly. But based on what we're seeing right now, we should be able to return to pre-COVID levels here in short order.

And then just on capital return, I know J.B. will want to jump in on this, but priorities remain the same: continue to invest in customer-related growth. I think the fact that we see a strong earnings path ahead allows us to continue to do that. And then it will be up to the Fed and kind of CCAR 2.0 to see where we have the ability to start repurchasing shares again.

But J.B., I'm sure you want to jump in on that as well.

Yes. I mean I'd start with really pleased with the results and pleased, Ryan, with your recognition of the increasing pace and kind of inherent strength that's starting to show through the income statement. So very focused there. And I think with that, it provides us a lot of opportunities.

As Jenn referenced in her prepared remarks, this concept of essentialism, that's something that we're very focused on inside of Ally. So really, what is it? It's simply the disciplined pursuit of less. So I think what we're being very focused on is driving as many efficiencies as possible, utilizing technology kind of up and throughout the entire corporation, and then using some of those savings to continue reinvesting in technology and digital tools and really making us even stronger for the long run.

On capital overall, again, I do think the theme that we talk about at Ally, and you're certainly hearing it being echoed from Chairman Powell is just the amount of uncertainty that exists. I think we've been extraordinarily pleased with the state of the consumer right now. The consumer is performing incredibly well, and obviously, that's showing up in our results.

And so we think there's plenty of numerical reasons to support pretty aggressive and pretty dynamic capital returns in the immediate future. But you got still ongoing uncertainty with COVID, you don't understand the full implications if we have a change in the political landscape. And so all these are dynamics we're facing. But I think we're just focused on keeping our head down, executing, seeing strong revenue growth really come through the entire company, and that affords us a lot of opportunities and, hopefully, a lot of opportunities for our shareholders as well.

Our next question comes from Sanjay Sakhrani with KBW.

J.B., you talked about a very strong rebound in originations and the relatively quicker rebound relative to the previous cycle. I guess, if you -- if we peel back the onion a little bit on the trends, how much of this is sustainable? Can some of this be a pull-forward of demand? And when we think about where it's coming from, is it share gains as well?

Yes. I -- Sanjay, thanks. I do think it is fairly sustainable. Now obviously, $9.8 billion, it's a pretty robust quarter. And I think as we pointed out, it's the highest level that we've seen in 5 years. But I think there's still opportunities to see levels remain here or within this relative range. I think as Jenn pointed out, you are starting to see a fairly meaningful shift in the decline in public transportation. I don't think that's necessarily short-lived. Maybe it's an alteration in the environment for the next couple of years, but obviously, that affords us a lot of opportunity.

And I think when I go out and talk to dealers and certainly engage with our Auto team, I think our expansion into these alternative channels, the Carvanas of the world, the DriveTimes and EchoParks and other players like that, coupled with the 19,000 franchise dealers that we're touching, it's pretty powerful in our ability to sustain strong originations.

And I think the other important point is we have been extraordinarily price disciplined. I mean, as Jenn points out, our 6.95%, we'll round it up and call it 7%. I mean this is -- we've been very focused on booking high-quality earning asset yields. If we gave up a touch of price, we could expand that box and go well north of $10 billion a quarter in originations. We've just chosen to be very price-disciplined, very price-focused, not chase the super prime product because you just don't generate all the attractive returns for us that we want to chase.

So for us, we feel really good about our position. We feel really good about where we're playing in the credit environment, and we think there's more room to run there.

Okay. And my follow-up is on credit quality, coupled with sort of returns. Jenn, you mentioned that if the trends continue, you could be 1% for the fourth quarter into the year. I guess, if we marry that, maybe what are the factors there? How comfortable do you feel about credit? I see the deferral trends look really favorable. But then if you couple that with the NIM discussion before, as we look into 2021, I mean, shouldn't the returns actually be higher than what you were expecting going forward? Because I don't know that we've seen 3% NIMs in the past.

Yes. Appreciate the question, Sanjay. And I think a lot comes back around credit and the ultimate path around delinquencies and NCOs. And I think what we're observing and the industry is observing at large is just the disconnect between the macroeconomic factors and delinquency trends. And so while we're incredibly pleased with the performance year-to-date and Q4 is shaping up to be strong, we also want to be mindful of the environment that we're in and what the ultimate path does look like, how the path of COVID and the economy shapes up. And so I think at this point, we're just being really cautious around that.

Now I would like to reiterate as well that while we could see kind of 1% or less than 1.2% for full year 2020, we do have a retail auto reserve that's 4x that. So just from an income statement perspective, we should have taken most of the payment, and we did that in the first quarter. So we did it early, we did it large, and we're going to just continue to be mindful of the environment.

But absolutely, if performance continues like this, if delinquency rates continue to trail kind of 30 plus, down 100 basis points, then that credit loss could get pushed out kind of mid-2021 or beyond, and that, obviously, would impact our returns.

But I think, as I described just a couple of minutes ago, I think the fundamental drivers of our returns are very solid from NIM perspective. NII growth, continuing to see -- other revenue continue to be strong, maybe not quite at these levels, but strong. And to your point, we do see a really attractive path on expanding returns, which we've been talking about for some time now, Sanjay.

Our next question comes from Rob Wildhack with Autonomous Research.

Just a question on your partner relationships here. I noticed there -- and you highlighted that you've upped your commitments to Vroom and Carvana. How has those opportunities evolved as we've kind of gone through 2020 and gotten into this new paradigm? And what effect do those changes and evolutions have on your partnership strategy more broadly?

Yes. Rob, appreciate the question. I mean I would say our partnerships with some of the newer entrants are very similar to what we have more broadly across auto and supporting all of our dealers, which -- we want to be there for them in all environments, and we want to be opportunistic. I think what has been a big win for us here in 2020 is just the growth in some of these new dealers, and we've been able to grow with our partners' growth. We had kind of record levels of inflows and retail auto flows this quarter from those new partnerships.

So we're going to continue to support all of our dealers. Our strategy has been around increasing application reach. You can see that in some of the customer metrics page we shared. Applications continue to grow at a 13% CAGR. And we feel good about our positioning in -- across the board in our dealers.

And the other thing I'd say, and we talk a lot about this, is just the modernization of auto continues. You see consumer shift to more digital purchasing behaviors. And because we have the partnerships that you just mentioned, we're able to shift with changing dynamics across consumer preferences as well.

Got it. Got it. And then just a quick one on capital and capital return. At 10.4% CET1 right now, that's obviously a little lower with the CECL adjustment. Do you have 1 eye on that fully phased-in CECL capital level when you're thinking about capital return? Or is it a little too early to be thinking about that yet?

No, we're always thinking about that. Yes, we think about that all day.

A lot.

I think the headlines around capital, one, we feel great about the position. These are the highest capital levels we've had in history. We're some kind of $3.3 billion above our implied CET1 requirement from the SEB. And you couple that with the rest of the balance sheet with a $3.4 billion reserve, we feel like we are in a really strong position across the balance sheet.

And then as we move forward, as we were just talking about, we see a strong path on earnings growth. And so the question now is where do we deploy the growing capital from earnings? And it'll follow kind of the same path that we've been talking about. Customer growth is #1. We'd expect RWA to pick up as commercial balances pick up. That's probably the most obvious driver of capital deployment.

We continue to see growth across every one of our businesses, whether that's our Ally lending business, Corporate Finance, DTC Mortgage, consumer auto as well as the commercial side. And so that would be kind of path 2.

And then I think J.B. summarized it really well, we would like to move into a more normalized situation when it comes to repurchases, especially with where our stock is trading relative to very strong book value growth.

Next question comes from Betsy Graseck with Morgan Stanley.

So in listening to your prepared remarks, I feel like I'm in a parallel universe, in the land of plenty. It's really exciting.

Thank you. You've been a strong supporter for a while. We notice that, and we appreciate it. We're just executing the mission, heads down.

Our goal is to make you look right.

Well, I appreciate that today, especially on a Friday. So my question here is one that I know I'm going to get from investors, which is around the sustainability. And I think, Jenn, earlier in your prepared remarks, you highlighted how you do anticipate to see some steady demand going into 2021. I'm wondering if you could give us some color, some comments that can support that, just to give people some understanding of why you think some of these tailwinds are going to continue for at least several more quarters here.

Yes. Sure. And we appreciate the question and anticipated it, which is why we added Page 5 to our earnings materials today, which is just about the positioning of our businesses. And if you start first on the Auto side, Auto continues to be a really strong-performing asset class throughout 2020. And it's where we play in kind of the prime segment, but it's really across the board and super prime as well, and you're just seeing strength across the board.

And then when you look at where we sit in the industry with our scale, with the breadth of products that we offer, with the partnerships we just touched on, we feel really well positioned to continue to see that outflow grow. We've closed the gap on a year-over-year basis. We had record used application flow. And so just the positioning of our model where we can take advantage of unique pockets within a growing and strong asset class, we absolutely see a sustainability there. And for full year 2020, we're likely to be pretty darn close to where we were last year from origination perspective and pretty close to that 7% yield, which remains at kind of record levels to the underlying benchmark. So great flows, great sustained pricing within Auto. And again, we don't see any sign of that stopping just yet and aren't anticipating that stopping.

And then on the consumer side, you just think about the shift in banking around digitization, and we're already there. We're kind of 100% digital. You see the flows that we have, the strong retention on the deposit side, and we've done that with record declines in pricing. So we feel really well positioned to meet the needs of our consumers and deposits.

And then continuing the theme of digitization, that's where you see Ally Invest and also our DTC mortgage products picking up, and they're able to kind of draft off of the strong performance that we've had on the deposit side.

So I feel really, really good about all of our businesses in this environment. And we added that customer slide as well because not only are we positioning ourselves well from a product perspective, but we're seeing that customer growth that we can continue to harvest over time. And that is showing up in the scale that we are seeing in our new businesses.

Okay. Got it, yes. No, that's helpful. So more legs to the stool and penetrating client base successfully, so I get that.

On -- one other question on the capital return for you and J.B. is around the SCB. So the question I got from somebody the other day was does the SCB change how flexible and nimble you can be? Is there a change in the buyback capability that the SCB gives you?

Yes. So I mean let me first start with the SCB, the rate, and then just the guidance that we've received around the SCB. So first of all, it implies kind of a required CET1 of 8%. We already manage the company at 9%, so there's really no change there in terms of how we think about overall capital levels. And then at least how they originally positioned the SCB, it should actually give us more flexibility because as long as we're managing capital deployment above that 8%, we should be able to really more dynamically deploy our capital as we move through the quarter.

So if anything, Betsy, it should be a net positive just in terms of timing and magnitude of capital deployment. But as J.B., I think, highlighted very well, there's still a lot of questions around how the FRB will respond to CCAR 2.0. And we think we're well prepared for that, but we're mindful that there's still some uncertainty there.

Our next question comes from Moshe Orenbuch with Crédit Suisse.

Most of my questions have been asked and answered, but I think the -- I mean, to me, the most interesting part of the quarter has been the -- what you had predicted after Q2 of PPNR improvement has certainly happened. And I think you alluded to the ability to kind of continue to optimize your -- the right-hand side of your balance sheet. And maybe if you could spend just a minute or 2 on how much room you think there is, both in terms of deposits replacing other liabilities as your balance sheet kind of normalizes in size and also kind of deposit pricing. I think you lagged a little bit your peers at the beginning of this downward trend and are starting to catch up now. So maybe if you could just talk about that a little bit.

Yes. And I appreciate that, Moshe. And we're optimizing both sides of the balance sheet. And I think steady earning asset yields are really important. But on the liability side, you're absolutely right. We have a wide variety of opportunities to continue to optimize, and the most obvious and impactful one is on the deposits. We -- take OSA, we dropped OSA rate 50 basis points this quarter down to 60 basis points, and that was kind of in record time. If you look at great financial crisis, it took some 35, 36 months to get to this point, and the industry kind of came down in a couple of months. So just very accelerated decline in OSA rates. And so you'll see that roll forward from partial year to full year as we head into 2021. And then you also see CDs were pricing down. So CDs will reprice from over 2% down to less than 1%. That creates a nice tailwind for us.

And then as we've continued to see flows, we can start -- or continue to replace some of the brokered deposits with retail deposits. And if you look kind of a year ago, brokered deposits were about 15% of our deposit stack, that's down to 10%. So we'll continue to let that flow.

And then on -- and in terms of the other liabilities, unsecured, we had about $2.2 billion in unsecured roll off in 2020. We'll keep kind of the volume the same, but the rate will be better. So we'll be bringing down cost of unsecured. Gets a little bit less of an impact in 2021, but we'll have a nice roll forward there.

And then in terms of other liabilities, you saw exactly -- or I pointed out the FHLB early retirement. We're going to continue to look for ways to take down some of this more expensive debt because of this really strong tailwind we have from both deposit flows and pricing.

And then last but not least, it just -- it gives us such a strategic advantage because while we have this cash, we can use that excess cash to replace higher-cost liabilities, and we're not forced to kind of invest into putting duration in our securities portfolio at less than 1%.

So we feel just really great about dynamics on both sides of the balance sheet and the ability to continue to optimize liabilities, take down that funding cost for several quarters to come.

Great. And I certainly didn't mean to minimize the impact of pricing on the asset side, but I do -- the follow-up I wanted to ask was about -- you mentioned kind of in passing that you're expecting plus 5% used car values this year, and I think that kind of had been minus 3% to 5% in the past. And could you just talk a little bit about how that might have impacts going into 2021 given where used car values -- I mean, which are probably, in actual terms, 15%. They may not sustain that, but they're up substantially higher than that as of now.

Yes. And if -- maybe I'll just dial it back to kind of late '19 and heading into '20. If you look at off-lease supply, we were hitting a peak here in 2020 simply because of supply side dynamics. We were expecting to see a kind of 3% to 5% decline in overall used vehicle values this year.

Now 2020 has really shaken everything up kind of across the industry. We saw a precipitous drop in the second quarter as auction lanes kind of dried up. But as the auto asset class has continued to remain strong, consumer demand for vehicles, COVID related, has continued to accelerate. And new vehicle inventories are at kind of 9-year lows, down 27% year-over-year. We're just seeing demand for used spike up kind of to unprecedented levels. We're in the mid-teens here in Q3, and that's expected, Moshe, to continue into Q4 and be strong, quite frankly, in the first half of 2021.

Now at some point, we do expect it to normalize a bit. And so while we're expecting overall 2020 used vehicle pricing to come about -- up about 5%, we do think it'll normalize down a couple of percentage points heading into 2021 with strength in the first half and some pressures in the last half. But I will say bigger picture that off-lease inventory does start to come down heading into 2022, so there could be some sustained tailwinds kind of over the next 12 to 18 months simply because of that.

And I mentioned there are $2,400 in kind of gain per vehicle, and that's predominantly in the SUV and truck category, which continues to be in high demand across our consumers. Some of the other categories, the small cars and smaller vehicles don't have quite demands that we've seen in our book.

Next question comes from Bill Carcache with Wolfe Research.

So we clearly see the benefit in your numbers as you guys have leaned into used and more of your business has remixed there. How high would you be comfortable letting that used versus new mix get? Is there any reason not to let it get too high? And then could you also maybe give some color on the relative difference in profitability of new versus used, just at a high level?

Yes. Sure. So Bill, we don't have any cap on used. I mean used has really strong risk-adjusted returns. We're very comfortable managing the credit risk. We know how to price it. We have no cap there. So we'll just continue to be opportunistic across new and used, and we'll let the numbers play out.

In terms of profitability, I think I've shared in the past that the pricing on a used vehicle tends to be kind of 100, 150 basis points higher than a new vehicle, and the delta on credit risk tends to be just 20, 30 basis points or so. So you can kind of do the math around that, but we absolutely get paid kind of 3x, 4x the increase in credit risk and the yield that we see on the used car front. And in this environment, with used vehicle values continuing to outperform, that return only gets a bit higher.

Got it. Very helpful. And as a follow-up, if I may, can you go a little bit deeper into your outlook for dealer floor plan lending? Any constraints on the production side there, still? And when -- a little bit more on perhaps when balance growth could start to resume there?

Yes. I mean the OEMs are back into kind of full speed ahead production. I think they're about at 100% manufacturing levels as they were pre-COVID. I think what's driving the slower build in terms of inventories, there's just a very strong pent-up and very strong demand. Again, going back to Auto, continues to be an asset class winner in this environment. So as quick as they're manufacturing the cars, they're kind of getting sold off a lot.

So what we've seen is kind of a trough here in July. And then we picked up about $1 billion in August and September, continuing to see it slowly come back. But Bill, we wouldn't expect to be back to pre-COVID levels in our floor plan book until late 2021.

Great. Thank you, everyone, for joining us this morning. And if you have any further questions, feel free to reach out to investor relations. But that concludes today's call. Operator, take it over.

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