Ally Financial Inc. (ALLY) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the fourth quarter 2014 Ally Financial earnings conference call. My name is Ian, I'll be your operator for today. [Operator Instructions] I'd like to turn the call over to Mr. Michael Brown, Executive Director of Investor Relations. Please proceed, sir.

Great, thanks. And thank you everyone for joining us, as we review Ally Financial's fourth quarter and full year 2014 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 Slide 2 of today's presentation regarding forward-looking statements and risk factors. The content of our conference call will be governed by this language. This morning, our CEO, Michael Carpenter; and our CFO, Chris Halmy, will cover the fourth quarter results. We'll also have some time set aside for Q&A at the end. To help in answering your questions, we also have with us Jeff Brown, the CEO of our Dealer Financial Services business. Now, I'd like to turn the call over to Michael Carpenter.

Good morning and thank you for joining the call. Let me start by taking you through a few highlights for 2014. 2014 was a tremendous year for us and our actions advanced a number of strategic priorities. On the top of the list was to improve our shareholder returns, largely driven by the three-point plan that we laid out at the time of the IPO in April. I am pleased to say that we exceeded our expectations for the year with $1.6 billion of core pre-tax income, up 90% from 2013, and net income of $1.2 billion, which was up from $361 million a year before. Our performance resulted in a core return on tangible common equity of 7.9% for the year, and we remain committed to our target of 9% to 11% run rate by the end of this year. Our adjusted earnings per share was $1.68, and when considering the China sale that closed in January, our tangible book value was increased over $3 a share from the end of 2013. Our second priority was to build on the strength of our leading auto and deposit franchises. Our auto business had a very strong year that exceeded our expectations, with $41 billion in total originations, the highest level since 2007. And importantly, our diversification efforts showed continued progress with an increase of 45%, 50% if you exclude the very specialized RV market in the non-GM, non-Chrysler, what we call growth channel. Ally Bank continued to post strong and steady results with deposits up 11% and improved productivity. And the final key priority was to assist in getting the U.S. Treasury fully repaid. And as I am sure you all saw, we exited TARP at the end of the year. I am pleased to report that the taxpayer received a profit on the Ally investment of $2.4 billion for total proceeds of $19.6 billion. The phrase, free at last, comes to mind. Overall, a strong year and we accomplished what we said we would do. But I know what everyone wants to hear is what about 2015 and the impact of GM's announcement on Buick, GMC and Cadillac leasing, staying 100% internalized with GMF, beginning in February. If I turn you to the next slide, the answer that really lies in the foundation that we laid since 2009. And on Slide 4, we recap the evolution of our auto franchise and some of the changes in the competitive dynamics along the way. When we first talked to investors, when I talked to investors, all they wanted to talk about was the GM and Chrysler offering increments, and we said don't worry about it. We then have the banks who deserted the market in droves, reentering the market. We are really committed this time and we are here for the long-term. We had GM buying AmeriCredit, TD bought Chrysler Financial, GM launched the Wells Fargo subvention program, Chrysler cuts a deal with Santander to form Chrysler Capital, and now we have the GM initiative that we talked about. And through all of this, we have powered through all of this competitive activity, because of the strength and uniqueness of our business model. And we've modified that model during this period of time and that's detailed on the bottom of this chart. I'm not going to go through line-by-line on how we have adopted our model, so that overtime we have transformed that business from a captive that was 80% dependent on subvented to a market-driven model that is centered on serving the needs of the auto dealer. We did this in anticipation of OEM-supported business declining overtime and our desire to not have the risk of being dependent on automakers for our originations. And so we have taken numerous deliberate steps over the course of the last several years. These include establishing a dedicated sales force, aimed to target a non-GM and Chrysler dealers. Launching a Dealer Rewards program that is tailored to all franchise dealers and financing more of the dealers used vehicles, which is a captive, was an irrelevant objective and an untapped market for the company. These along with other steps of the building blocks that have helped position us to target and win business from a broad range of dealers, all while OEM relationships have evolved. Turning to Slide 5, let me show you some of the metrics that demonstrate the success of this transformation. Five years ago, we began laying the groundwork and building infrastructure to support the diversification of our auto business and those efforts are paying-off big time. Our dealer relationships have continued to expand with a compounded annual growth rate of 25% since 2010. And in 2014, we decisioned 9.1 million applications from these dealers, 2.5 times what we did four years before. Our used originations have increase with an annual growth rate of 25%, and in 2014 this accounted for 29% of our originations. We have gone from being a minor player, not focused on the used business to number two in this market. And because it is so fragmented, there is still substantially more growth opportunity for us. And our efforts to grow outside of our traditional strong GM/Chrysler relationships have gone from strength-to-strength. In 2004, those originations accounted for $8.3 billion of our originations, which was 45% higher than year before. And the pie chart on the bottom right, which is the first time you've seen this data, shows you the array of brands that the franchise dealers that we support are involved with. And it is the breadth and depth of our competitive offerings and the fact that we are in and of the industry that has allowed us to achieve this success. So let's turn to Slide 6, where I'd like to share my perspective on the recent announcement by GM. While we were not surprised by the idea of GM growing their captive, we were surprised that they would exclude any competition in the lease space, where Ally has done such a great job for them over the last several years. And frankly, we don't see how auto sales are increased by having less, otherwise known as no, options for consumers and dealers. In early January, GM announced they would exclusively offer leasing for GMC and Buick vehicles, they get in February through their captive and Cadillac leases would soon follow in March. This will absolutely not impact our strong relationships and commitment to GM dealers and we will continue to support the channel. Let me start by saying that this action will have minimal financial impact in 2015, and we continue to be committed to the ROTCE targets we established for the year. Let me also reiterate that we have been continuing to position the business to succeed in an environment that did not include a lot of OEM supported business. We remain confident with franchise we've built and we view this actually as another opportunity to prove to the market that our success is not driven or dependent on manufacturer support. So let me turn to the numbers on Page 6. The impact of the announced lease actions, albeit during the year, but on a full year basis, these brands would have accounted for $5.2 billion on our originations on a full year basis. Now, the initiatives that I touched on before and the momentum that I showed you a moment ago, will allow us to remain on track to be in the high $30 billion range for originations, which is what our IPO plan was based on. Now, I am sure there are people on the call, who will say, well, that's all well they could. But what happens if all the GM leasing goes away or even further, let's suppose, they internalize all of the incentive business. If all the GM incentivized business were to go exclusively with their captive, we still believe that our plans laid over a five-year period that would demonstrate results, will allow us to offset any loss in origination and allow us to achieve our origination goals. Remember, this is a very fragmented business, which even as a leader, our share is in the mid-single digits and we have the kind of growth momentum I described a moment ago. We have a product suite of sales force and an infrastructure that is better than the competition, because we are in and of the industry. We are not a bank that dabbles, we are not a captive. And while we've made a tremendous progress in the growth channel, as shown on the right-hand chart on this page, even though we've done so well, we today only have 4% of the new and used non-subvented market, which is about half of where some of our competitors are today. So as we free up capital from the subvented GM leasing business, we believe we can redeploy profitably in these other areas and increase share. Based on our estimates, every 1% increase in the growth channel is worth about $2.5 billion of incremental originations, which represents a meaningful opportunity. Let me try to be a little bit more precise on how we will approach expanding of non-GM business, although I suspect by now it's pretty obvious. First, we will continue to grow our used business. Today, we have 4% of the used market. We are growing very rapidly. We would expect that to continue and we will gain share, as we shift capital into that segment. Next, we will continue to expand our business with other franchise dealers, other than GM and Chrysler relationships. For example, even though we're doing well and we have 4% share of the 10,000 non-GM/Chrysler relationships we have, over 6,500 of those do a very modest level of business with us today. And we believe we can increase that penetration with those dealers over the near term. We will also continue to have conversations with other auto makers to see how Ally can drive more value in their channels. And these OEMs are a lot more interested in talking to Ally now that we're out of the TARP, than they were before. And as we have in the past, on the product front, we'll continue to introduce original innovative competitive products that drive value in the marketplace, and we have demonstrated the agility to respond to these market dynamics. This is what we have done successfully for the last several years. The lawyers won't let me do the math, but you can. Now, we certainly used to having a few skeptics in the audience, more than a few sometimes, and for that group I would say, that even if you don't believe that we can achieve the plan I have described, and we are highly confident we will, we still have options to redeploy any excess capital that is released. For example, now that we are out of TARP, we can consider growing assets outside of the auto space more aggressively, or, and I get a feeling that some of our shareholders would find this pretty attractive. Address higher cost liabilities on preferred debt in our capital structure, which would also drive return on equity. I should make the observation that those decisions are subject to Federal Reserve approval under the CCAR process. So in summary, we have a range of options to handle these shifts in our business, which occur with some regularity. And while the specifics may be a surprise of direction, we've dealt with this over five years. We have a battle-tested team. We've shown what we can do. We view this as another opportunity to evolve that business and we remain optimistic about the future potential, and we are committed to the plan that we showed investors at the time of the IPO. Let me turn you to Slide 7, because one of the things we emphasized on the road show was the plan to get to double digit for ROTCE. And this shows you in a snapshot where we are. We've said we've gone from 3.1% to 7.9%, and I thought it might be helpful to break the pieces apart. During the IPO we outlined this three-point plan, we started with a 3.1% base for ROTCE. If you look at the first leg of the stool, NIM expansion, we made significant progress getting our cost of funds down 50 basis points year-over-year, which drove the majority of the ROE improvement. But as we have completed the program we outlined at the time of the IPO, we still think there are other opportunities in this area, again subject to CCAR. We also described our objectives on the expense front. We have a substantial objective relative to our controllable cost base, which is about $2 billion, and we take it out about $200 million and we have specifics against another $100 million. So we are very well on the way to completing what we said we would do in terms of the cost side of the equation. The third leg of the stool was regulatory normalization, which I think some of our investors were less confident about than the first two, and we always thought it would take a little bit longer. We've had some significant progress in this regard, but now that we are out of TARP, we expect to get significant regulatory relief with Ally Bank in the near future. So as we head into 2015, we expect that we have some fairly significant opportunities to redeploy excess capital to address inefficiencies on our capital structure. And again, we remain committed for that 9% to 11% target. So in conclusion, we have met or exceeded the expectations for the past year, and we are committed to executing the remainder of the plan. With that, let me hand it over to Chris, to walk through more detail on the financials.

As Mike mentioned, we delivered solid results across many of our financial metrics, and on Slide 8, you can see demonstrated in the various charts the tremendous progress we made in 2014. It's important to us as a management team to deliver on the expectations that we set out during the IPO process, and in 2014 we exceeded those expectations. We almost doubled our core pre-tax income from 2013. Our cost of funds improvement accelerated and was down 50 basis points, which drove our net financing revenue of $500 million or about 17%. And on the expense side, despite the earning asset growth and revenue improvement, our non-interest expense was down 13%, driving positive operating leverage. So overall, we feel great about 2014 as we reflect back to the full year results. Now, let's switch gears and get into the details on the fourth quarter on Slide 9. With core pre-tax income, excluding repositioning items of $396 million, the fourth quarter was another solid quarter for us, despite being affected by some seasonal factors and normalization in the performance of our lease portfolio. You can see the decline in the lease yield show up in our net financing revenue, which at $835 million, was down about $100 million quarter-over-quarter. Around $80 million of that decline was due to the drop in lease revenue. Year-over-year net financing revenue was pretty flat as lower lease revenue was largely offset by lower cost of funds. Other revenue of $370 million was up $46 million year-over-year due to stronger investment gains and pretty flat quarter-over-quarter. Provision expense of $155 million was well in line with our expectations and up quarter-over-quarter, due to typical seasonal patterns in our retail auto book. In general, we continue to see a very stable credit environment. Our auto vintages continue to perform in line to slightly better than our expectations and our mortgage book continues to trend favorable, which resulted in reserve releases throughout the year. Total non-interest expense of $653 million was down $212 million year-over-year, due largely to the CFPB charge last year, and down $89 million quarter-over-quarter, driven primarily by lower insurance losses. So overall, these results drove $177 million of GAAP net income, which includes in approximate $150 million charge for the debt tender offer, we previously disclosed. We added back the repositioning charge when we walked to our adjusted EPS metric of $0.40 for the quarter. We've also highlighted on the page some of our other key metrics. Our core ROTCE of 7.1% was up nicely year-over-year, but down seasonally quarter-over-quarter. From an efficiency ratio perspective, we ticked up slightly to 50%, given the lower revenue for the quarter. So overall a solid quarter, but as Mike mentioned, we plan to continue to make progress on addressing the capital structure, lowering our cost of funds and chipping away the expenses to further improve the earnings profiled company. Let's turn to Slide 10 and briefly look at the results by segment. Auto Finance pre-tax income of $310 million was up significantly year-over-year, but down quarter-over-quarter due to lower lease yields and higher seasonal charge-offs. Insurance, with pre-tax income of $86 million was up slightly year-over-year and quarter-over-quarter. Lower insurance losses in the fourth quarter are a nice hedge to somewhat offset higher auto charge-offs. Remember, the opposite tends to happen in the second quarter. Mortgage was up this quarter, given lower provision and additional progress on expenses. The main story on the corporate and other line item is the significant year-over-year improvement in the corporate cost of funds and centralized expenses. Let's turn to net interest margin on Slide 11. For the full year of 2014 versus 2013, NIM was up 33 basis points, given the progress we made addressing the liability structure and cost of funds. In the fourth quarter, our asset yield was impacted by the net lease yield as we talked about at an Investor Conference in December. That resulted in NIM dropping about 30 basis points this quarter from 3Q. As we head into 2015, we expect our NIM to rebound, as we continue to make progress on cost of funds, with some large bond maturities as well as targeted liability management trades. Moving on to Slide 12, let's discuss deposits. As you'll see in the top-right corner, retail deposits grew by $1.2 billion in 4Q and are up 11% year-over-year. As we've mentioned before, we were targeting around $5 billion of deposit growth per year, and we came in right around that level. This is why we've kept our rates more stable than some of our competitors and have been very disciplined with our marketing spend. We'll continue to invest in this franchise and expand our customer base, and to continue to be very well-positioned to benefit from the continued shift towards digital retail banking. We now have over 900,000 loyal customers. Let's turn to capital on Slide 13. We generated some good capital organically this year, which resulted in our Tier 1 common ratio increasing 80 basis points on a year-over-year basis. Quarter-over-quarter our network income to common was offset by the seasonal asset growth in our commercial auto portfolio. The pro forma for the China sale, which closed in early January, our Tier 1 common ratio was 10.2%, which we feel gives us a good amount of excess capital heading into the CCAR process. We submitted your 2015 CCAR capital plan in January, and as we have previously messaged, this plan did include proposed capital actions to address some of our capital structure inefficiencies. Let's move to asset quality on Slide 14. In the upper left corner, consolidated charge-offs continue the seasonal pattern, increasing to 68 basis points driven by our retail auto charge-offs shown in the bottom right. Retail auto losses increased to 110 basis points this quarter in line with seasonal expectations. This is up from a normalized 98 basis points in 4Q '13, which included a non-recurring recognition of some additional recoveries, which artificially lower the losses last year. As a reminder, you should expect charge-offs to seasonally decline in the first half of the year, but trend modestly up on a year-over-year basis. In the bottom left, our delinquency rate increased to 2.73%, again as seasonality expected. Delinquencies are a point-in-time measure and typically increase from March 30 to December 31. Year-over-year delinquencies were up 38 basis points, which is consistent with our expectations and normalization of our portfolio. Finally, our commercial auto book is shown in the top right, where we once again had negligible losses for the quarter. Overall, the takeaway here is that we feel very good about where we see credit trends, and asset quality continues to perform in line or better than expected. Now, let's turn to Slide 15 and go through the segment results starting with Auto Finance. I know we spent a lot of time this morning talking about the auto business, so I'll just make a few quick comments here. We reported pre-tax income of $310 million, which is up $103 million year-over-year, but down $105 million from last quarter. Obviously, the year-over-year delta is impacted by the $98 million CFPB charge we took last year. And as we've been messaging the decline in net financing revenue was driven by lower net lease revenue, which you can see was down $37 million year-over-year and $78 million quarter-over-quarter. Our net lease yield came in at 5.5% right around our expectations. Provision was up, driven mainly by asset growth year-over-year and seasonally higher losses quarter-over-quarter. And we continue to see steady asset growth, which was up 3% year-over-year despite executing two off-balance sheet securitization in 2014. For the origination discussion, let's flip to Slide 16. The originations in the quarter were $9 billion, which we feel good about given the seasonal nature of the business. These origination levels were driven by strong performance across multiple channels and were higher in every product year-over-year with the exception of subvented loans. In the top left, you can see that our momentum in the growth channel continues with originations of 37% from the prior year and now represent 22% of total auto originations. In the top right, you can see that the outsized levels of subvented business we had in 3Q normalized, and we continue to have strong performance in the new standard rate business and the used business. The bottom two charts summarize the balance sheet. The one thing I would point out here that is the seasonal growth in commercial balances, which average $33.2 billon in the quarter, but were also up 5% year-over-year. Let's turn to insurance on Slide 17. Our insurance business reported pre-tax income of $86 million this quarter, up $20 million year-over-year and $26 million from last quarter. The big driver of the quarter-over-quarter improvement was the lower weather losses you can see in the chart on the bottom left. Written premiums in the quarter totaled $248 million. And as a reminder, our written premiums tend to follow the seasonal patterns of our auto book, so that was the primary driver of the quarter-over-quarter decline. From a year-over-year perspective, our increased auto loan originations help drive higher new and used vehicle service contracts. Over on Slide 18, we show the results for both mortgage as well as our corporate and other segment. Mortgage reported pre-tax income of $19 million, which is up both year-over-year and quarter-over-quarter. The main driver here is the provision release, which was a result of continued strong performance of the book. You can see that the HFI portfolio balance was pretty flat quarter-over-quarter, but we did have some ins and outs. For a balance sheet management and investment perspective, we made the decision to purchase around $750 million of mortgages during the quarter. This is a strategy that you could see more of going forward. These are high-quality jumbo mortgages where you can get a very nice return on equity. And at the same time, we transfer around $600 million of legacy TDR mortgages out of the HFI portfolio and into held-for-sale, and we'll consider selling these during the year. Looking at corporate and other, you could see that we had a pre-tax loss of $19 million, which has improved significantly year-over-year, as we've made progress reducing our cost of funds. So overall, we had solid quarter to cap off what's been a real tremendous year for Ally. And with that, I'll turn it back to Mike.

Thanks, Chris. Let me reiterate a few key points, so it will wrap up, and take questions. First of all 2014 was a year of solid performance. We saw our diversification efforts getting traction. Deposit growth continues to be strong and steady and contributing to our cost of funds efficiency. We remain focused on achieving our core ROTCE goals and efficiency ratio targets by yearend. Looking ahead, the TARP exit was a major positive and will contribute to our anticipated regulatory normalization. We expect to be able to broaden our mix of business at Ally Bank, have more control over our pricing strategy and redistribute capital in a more appropriate manner. We are confident about our ability to offset the GM decision and originate the levels that are appropriate and fit with our business plan. And we also believe we have plenty of opportunities to deploy access capital in a fashion that is positive for shareholders. So with that, I want to thank you all for joining us. And I'll turn it back to Michael.

Thanks, Mike. As we move into Q&A, we request that you please limit yourself to one question plus one follow-up. If you have additional follow-up questions after Q&A session, the IR team will be available after the call. So with that Ian, please start the Q&A.

[Operator Instructions] Now, we have a question from Cheryl Pate of Morgan Stanley.

Appreciate the detail you gave on GM leasing this morning. Just wondering if we can maybe take that a step further and sort of understand the commentary around 2015? When we sort of think out a little bit further as some of these leasing volumes start to come down, how do you think about the leasing business more generally with subvented volumes looking like about 80%? And to sort of add on to that, where are sort of the opportunities that you think here sort of could best replace maybe some of the volume that may come on the leasing business?

I'll make a couple of comments and my colleagues obviously can add to it. I mean, we would obviously expect the proportion of our originations in the lease category to diminish. We would expect the amount balance sheet devoted to leases to shrink. It is also an asset class which is obviously is consumptive of regulatory capitals. So it freeze-up regulatory capital. The returns in the lease business have been pretty extraordinary the last several years, because of the unusual high prices in used cars. I think we've said before, we talked about it on the latest call, we are expecting used car prices to decline overtime as more supply comes on the market. And so we look at the leasing product prospectively, as not as meaningfully, more attractive than most of the rest of the product mix frankly. And then how does it get substituted? Well, essentially what we'll be doing is building out rest of the business. We may do leasing with other OEMs for example, but I think more generally, the loan product categories in general, with an emphasis on the things I talked about, with the emphasis on non-GM, non-price of the channel, the emphasis on used where we're getting significant growth. So that's the way I think the portfolio is going to shift over time.

And just as a follow on to that. Clearly, as you highlight sort of shrinking leasing business that is capital consumptive, how does that maybe change your thinking or does it on liability management and some of the longer dated more expensive debt that you have outstanding?

I don't think it changes our thinking right now. We really do expect that our origination volume will continue to be in the high-30s. So from a plan perspective that's where we had planned it all along. We expect to continue to do liability management and we expect to really address these capital structure inefficiencies over the next two years. So that plan is in place. I think one of the things Mike alluded to is to the extent that our originations are lower than we might have expected, when we have more access capital than we expected, we can potentially accelerate some of the liability management or capital actions.

We have Don's question in the queue now.

Yes, Mike, I was wondering if you can talk a little bit about your comment on regulatory relief in the bank and then maybe the relative ROAs as you replaced lease with some more lending.

Well, in terms of regulatory relief in the bank, I would say over the last year we have gotten some regulatory relief as we obviously passed CCAR, we got upgraded to financial holding company, all of those things very positive. So we got the ability to pay a dividend from the bank for example, we have the ability to put our corporate finance business in the bank, all of those things are very positive and very material. But the number one negative about Ally as far as both the Fed and the FDIC is concerned has been governmental issue. And we have been held to a different standard in many regards, in terms of capital ratios, in terms of control of our deposit pricing, in terms of the eligibility of some assets to going to the bank, there are numerous ways, in which because of government ownership, we've been held to higher standard. Now our expectation is, and our understanding with the regulators is those constraints, now that we're out of TARP, will go away, it will take some time administratively. I would say the biggest area of impact is the ability to actually put our subprime business in the bank rather than have the subprime business at the holding company. That would be the single near-prime.

I'll take the second question, Don, which is really a question around ROA. But one thing I would mention is the lease product has been very profitable for us. However, with the declining used car prices, our expectation is that profitability of lease still will remain very good. It's not as high as it used to be. So when we look other offsets, in particular let's say the used business, we think the profitability, the ROA in the used asset is very comparable to the lease asset. So to the extent that we continue to grow our diversified channel and continue to grow in used, we expect the profitability of those assets to be very comparable to the profitability that's potentially lost on some of the GM leases.

Again, we have another question for you. This one is from the line of Sanjay Sakhrani from KBW.

When we think about the GM business, realistically what do you think is the trajectory of that business over the next three years when we consider lease and loan originations?

Are you talking about the OEM supported business or the business with the GM dealer network, those are two different things.

I guess both, but if you can comment on both.

I think that we have tremendous relationships with the GM dealers and I think our share of their non-OEM supported business will continue to grow. Many of them have other franchises, and increasingly saying, look, I've also got this franchise or that franchise, you've done great for me on GMC, why don't you come and help me out on my whatever it is franchise, so did that. With regard to the manufacturing supported business, the honest answer is, it's in the hands of GM to decide what they want to do. I personally don't think having one captive supplier for year lease business is going to help you sell any more cars. In fact, I think they will sell less cars. Now, they obviously see it differently. And we've seen in Chrysler for example, Chrysler went and sold first with Chrysler Capital and then a year later decided to move to open architecture. So the OEMs have a way of zigging and zagging, until they get it right. I also think the subvented lease decision is different than the subvented loan decision, so I think the answer is TBD. And so for that reason we have to have a strategy where we can basically say, whatever happens we can live with that. And we'll be successful in any case and that's what the strategy has been for five years. When I came on Board it was very simple, 80% of the business was GM subvented business and we basically said, we got to get market driven and we got to get to a point where we're not dependent on this contract, we're not dependent on manufacture's supported business, because otherwise we are always vulnerable to the decisions that they may make. And this is a big company and a new CEO comes in, they go this way, another one comes in they go different way. We did not want to be subjective to that or at risk for that. I'm not being critical, I'm just saying, this is what big companies are like. We said, our business model is we want to earn our spurs everyday from people that are allocating business based on how well we're doing, and not other considerations, and that means the dealers. I don't want to communicate that we don't care about GM, for example. I would argue the success of the leasing program has everything to do with the amount of support we've given them, the amount of information, the lease pull-ahead programs. We had other people that would go in and say, you should do this, you should do that, you should do the other thing and we are going to continue to do that. We're going to continue to be supportive, but you should expect us not to have more eggs in one basket. We don't want to have enough eggs in any basket that we're vulnerable.

And then the follow-up, along those lines when we think about your non-GM even Chrysler mix, I mean what are the opportunities there? I mean how quickly can you grow that 1% market share that you guys talk about on Slide 6? I mean at what rate can we see increases there?

Well, I guess I would say past is prologue, all right. I mean we started a separate sales force; what, three years, I will say three years ago, I think it was when we started a separate sales force. Last year we were up 15%. Now, did we do something special last year? No. What we did was keep doing what we've been doing. And deals get to a point of, these guys are doing, I'll give them a try, right. And then it's, these guys are doing a good job and I really want to give them more of my business, and that is the glide path. Now, whether the growth rate next year is 25% or 50% or some amount of number, I don't know, but the trajectory is very clear, same in used. And I'll make one other point. This is a massively fragmented business, all right. I mean, we're talking about, our market share is like 5% and we're the market leader. We can't figure out where to get another 1% from. We should have a serious conversation.

You have another question that's from the line of Moshe Orenbuch at Credit Suisse.

Mike, you talked about the potential for capital release if there is kind of shrinkage as a result of these kind of market share shift. Could you talk a little bit about how that kind of factors into your submission for CCAR?

Yes. I mean, as you know, Moshe, as well as anybody, we are not allowed to discuss with anybody our CCAR submission, otherwise we get thrown into the regulatory duck out. So however, having said that CCAR is all about capital actions, right. And in our case, capital actions dwell around three issues. They dwell around, number one is long-dated debt, long-dated expensive debt. And don't take these in order of priority by the way. So the number one is long-dated debt, where the Federal Reserve has obviously shown a willingness to allow us to use capital to deal with that. Number two is Series A. And number three is Series G. And again, don't take my orders as meaning anything in particular, because each of those securities has very different characteristics, from a capital impact, and earnings impact, to this impact, to that impact. So it's a bit of a balancing act. But that is qualitatively very different than going to the Fed and saying we want to pay a dividend or we want to buyback stock, because when we go to Fed on CCAR, we say we are doing things to improve the safety and soundness of the company, it's not going outside the company. And so as a general observation, we have reasonably receptive audience. The question becomes pace, is the way I would describe it. It's not a question of principle, it's a question of pace. And obviously, the balance from their point of view is what do you want to do and what's the cushion left after you do it in the stress test for ourselves. So I think I look at this as, we have made a submission. It's based on a set of expectations that we have. But we also know that if the reality turns out to be different than the expectations, for any reason, we have the ability to go back to the Fed, mid-course, and say, we'd like to do more and more outside, and that's about as specific as I can get.

Moshe, I think to your point too is, we don't expect a dramatic change in the balance sheet during 2015. While we expect lease to come down and free up capital, we do expect to redeploy that capital into other assets particularly in the diversified auto space. So at this point, our base assumption and expectation is not that we will free up the capital and try to accelerate some of the capital inefficiency actions. Our first priority is to redeploy that capital into incremental profitable asset. So if you look at the 2015 CCAR submission, you should not think about that as really contemplating this action. In particular, we were not aware of this action or GM's decision, as we were creating the CCAR submission. So this is really new to us. But to extent that changes, we'll alter that course through the year.

And just as a follow up, you had kind of also alluded to the idea of other assets and at one point had mentioned kind of jumbo mortgages. Are there other assets that you are kind of considering in that same vein?

The jumbo mortgages are a very nice profitable business. It has a good return on equity. So we're comfortable doing that. It's very much of an investment strategy for us at the moment. We will contemplate additional type of the assets on the books outside of auto, outside of mortgage, and it's something that we're looking closely at. I would say that now that we are no longer a TARP institution, we have a lot more freedom to get on our front foot, play a little offense and look at alternative asset classes, particularly as we continue to growth our banking institution going forward. So there are some possibilities outside of this auto space.

I would just add one comment, which is, because we still have inefficient capital structure, because of long-dated debt, Series A and Series G. We look at everything in relation to that. In other words, those things provide a hurdle, if you will, for other things we might kind of make sense.

We have another question for you, and this one is from the line of David Ho of Deutsche Bank.

My understanding is that from my checks that the dealers are already ones that actually wanted GM Financial to take over the subvented lease. And given that [indiscernible] between the lease business and the floorplan business in the retail, why wouldn't they want to go after retail? And then, separately, GM Financial seemed underpenetrated versus the other captives outside the lease business as well. What's the risk of them kind of normalizing now that their cost of funds is coming down in capacity and products are going up?

Well, there's a lot of questions all wrapped into that one, most of which should be directed to GM. But I would say that if you think about it, the only business that the OEM controls is the leasing business and the subvented lending business, which we've laid out to you very clearly on Page 6. Beyond that, they have to compete for the business, whether its floorplan or regular-way loans or whatever it is, just like we do and just like anybody else does. And despite that, I mean I forget what our share is today of wholesale in GM channel, but it's still north of 50%. And despite the fact that frankly they're out there with pricing, which is below their cost of funds. So they certainly can be more aggressive. The strategic questions for GM, and I'm certainly not qualified to address them. But first question is how much capital do you want to devote to a business, where a bank that is competitively advantaged and has a lower cost of funds and a piece on leverage is making 7% return on equity, you got to believe, you're going to sell a lot more cars, and that will make sense, right. And then secondly, how big a balance sheet do you really want to have, and how much pain do you want to take to get from here to there? I can't answer any of those questions. I can just respond to them competitively. Look, I have very simple view though, we will compete with anybody on a heads up basis. What pisses us is when we don't get the chance to compete on heads up basis.

And Chris, are there meaningful expense offsets to a smaller lease business from GM? And will there be potentially more expenses related to shifting assets or increasing assets to go out there, some of the growth channels and other OEMs or is it just kind of more rejiggering the cost structure of this?

What I would say is that to the extent that the expenses come down in the lease business, which will happen, we will look to reallocate that towards the growth channel to be able to drive incremental business in other places in the auto business.

So really knowing that impact?

Not really.

Not unless the balance sheet comes down

We have another question for you, and this one is from the line of Eric Beardsley of Goldman Sachs.

Just a follow-up on the relative ROE question. If were looking at net lease yields in the fourth quarter at 5.5%, that's a surprise level, when you're talking about doing used cars at similar ROA. Where does that imply that you think net lease yields are going over the next year or two?

We think net lease yields will be in the 5% to 6% range. We think this is somewhat of a normalized range. But if you look at for example the used business, we book used business with yields of 6% to 7%, so it's probably 100 basis points higher. Now, you'll just have to remember we obviously have to deduct the losses out of the used business, which kind of normalize at a bit versus the leases. And obviously, you don't take the residual risk when you do that, but you take the volatility and the loss risk.

And then, just as you think about the lease business, would consider selling your auction platform to GM or someone else?

Absolutely not. It is a huge competitive advantage. We have probably a $500 car advantage for us as physical auction. And so on even up basis in the leasing business, we are substantially cost advantage. We have the superior information advantage, because we really know what the hell is going on in used market. We don't just use ALG data like everybody else does. We have a very good system for tracking supply demand of the level of individual vehicles that enables us to manage risks in times better. It's a huge strategic asset in the leasing business. And I think to the point, where I mean I can say this now, I mean the other guys that have been pushed to the sidelines here is U.S. Bancorp. What did U.S. Bancorp used to do with their off-lease vehicles? Answer, come to our auction. So that's a huge competitive advantage in the business and I would never dream of selling it to GM or anybody else for that.

And Ian, we have time for one more question.

That question comes from the line of Ken Bruce of Bank of America.

I think you've been generous with the information around the lease business. I guess, maybe just a follow-on to Eric's question on the relative lease yields, 5% to 6% in lease. Would subvented leases be any difference than that or are they in that same 5% to 6% range? And then I guess, as we're thinking through that rotation to higher use penetration, then we should in fact see the yields by as higher, if I'm understanding kind of the mix shift that you're expressing here through this change?

So from a perspective of whether it's subvented or non-subvented, I would say they are both in the same range, although majority of this business really is subvented-type business on the lease front. And I think your answer is correct that to the extent that we put on more used business as a proportion of our book, you should expect to see yields tick up from that, but I would also say that you should also expect to see losses continue to tick up as well. We don't think either will be overly significant as we ramp up this book though.

And then maybe this is the nuance question, but within used I think there is a higher concentration of near-prime in the used segment. I guess, is that going to change your view around where near-prime shows up in the portfolio as a whole or would that be managed separately?

No, it doesn't change our perspective at all, where it shows up. I mean we are a full spectrum player. We've always said we're a full spectrum player. We're comfortable with that. As long as we're getting the right risk adjusted returns, regardless of where we play in the credit spectrum, we are very comfortable with that risk.

Thank you very much for your question. I'll now hand back to Michael Brown for closing remarks. End of Q&A

Thanks, Ian. If you have additional questions, please feel free to contact Investor Relations. Thanks for joining us this morning. Thanks, Ian.

Thank you, ladies and gentlemen. That concludes your conference. And you may now disconnect.