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…

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…

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.