Release Date: July 17, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Ally Financial Inc (ALLY, Financial) reported a second quarter adjusted EPS of $0.97 and $2 billion in revenue, reflecting solid financial results from consistent operational execution.
- The company saw strong improvements following the first quarter earnings trough, with NIM excluding OID of 3.3%, up 14 basis points quarter over quarter.
- Ally Financial Inc (ALLY) generated $9.8 billion in auto originations with retail auto originated yields of 10.6%, and 44% of the volume in their highest credit tier.
- The insurance business produced $344 million in written premiums, up 15% year-over-year, driven by continued momentum in F&I and P&C products.
- Corporate finance delivered its highest quarterly earnings ever, driven by a customer-focused approach and strong market conditions.
Negative Points
- Net financing revenue excluding OID was lower year over year, driven by higher interest rates.
- Provision expense increased from the prior year due to higher net charge-offs, particularly from the 2022 vintage.
- Retail auto net charge-offs were 181 basis points, reflecting pressure from the back-book, specifically the 2022 vintage.
- Adjusted non-interest expense was up 3% year over year, driven by growth in the insurance business and historically elevated weather losses.
- Deposits were down quarter over quarter and flat for the year, in line with expectations for seasonal tax outflows.
Q & A Highlights
Q: Michael, you've been in the role for about two months. What are your initial impressions of the company and any potential changes to the strategy?
A: Michael Rhodes, CEO: I am grateful to have inherited a well-respected and well-positioned company. My primary focus is on executing the current plans. While we will continue to optimize our use of capital, don't expect any significant near-term shifts.
Q: Russ, regarding credit performance, when do you think we will start to see credit outperform seasonal expectations given the tighter underwriting and burn-off of the 2022 vintage?
A: Russell Hutchinson, CFO: We expect typical seasonal increases in NCOs for the remainder of the year, but this will be mitigated by the burn-off of the 2022 vintage. We anticipate making progress towards NCOs in the 1.6% to 1.8% range over the medium term.
Q: Michael, could you talk about your opinion on the strategy of being a monoline in auto and the potential for diversification into other areas like credit cards?
A: Michael Rhodes, CEO: The auto business is a very attractive ecosystem for us, including commercial lending, insurance products, and value-added services. We have a compelling reason to win in this space. On the banking side, our digital bank is remarkable, and we will continue to allocate resources to areas where we have defensible reasons to win.
Q: Russ, was there anything from a competitive standpoint affecting the originated yield, or was it simply a mix?
A: Russell Hutchinson, CFO: It was simply a mix. Our pricing was consistent across credit tiers, and we had a higher quality credit mix this quarter. We are not reading any long-term trends into this.
Q: Russ, you mentioned the year-over-year delinquency 30-plus day moderating going forward. Is that versus the 60 or the 73 basis points?
A: Russell Hutchinson, CFO: The 73 basis points is based on the end-of-quarter delinquencies, which were impacted by the day of the week. On a daily average basis, the increase is more like 60 basis points. We expect continued moderation in delinquency rates.
Q: Russ, can you talk about the outperformance of the 2023 vintage versus 2022 and the impact of tighter underwriting?
A: Russell Hutchinson, CFO: The 2023 vintage benefits from being underwritten at lower vehicle prices and tighter underwriting standards. We have consistently tightened our underwriting, particularly from Q2 2023 onwards, resulting in improved performance.
Q: Michael, could you discuss capital levels and the appetite for loan sales or securitization?
A: Michael Rhodes, CEO: We have several attractive tools for managing capital, including CRTs and ABS markets. We are being thoughtful about capital allocation, especially in anticipation of Basel III regulations.
Q: Russ, does the 60-plus day delinquency rate give you more confidence in the charge-off trajectory?
A: Russell Hutchinson, CFO: Yes, favorable trends in flow to loss and improvements in our servicing model give us confidence in the credit outlook.
Q: Russ, should we consider the negative tax rate as the new norm given the ongoing EV lease volume?
A: Russell Hutchinson, CFO: While we expect continued EV lease originations, which drive down the tax rate, there will be natural ebbs and flows. We remain confident in our NIM guidance despite the headwind from EV leases.
Q: Russ, could you elaborate on the impact of residual guarantees on EV leases and their effect on NIM?
A: Russell Hutchinson, CFO: The residual value guarantees provide significant protection against declines in value. While lease gains on this portfolio may be muted, we have anticipated this in our NIM guidance.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
