Good day, ladies and gentlemen and welcome to the Ally Financial Q1 2016 earnings conference call. At this time, all participants are in a listen-only mode. [Operator Instructions]. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, today's call may be recorded. I would now like to introduce your host for today's conference, Mr. Michael Brown, Executive Director of Investor Relations. Sir, please go ahead.

Thanks operator and thank you everyone for joining us as we review Ally Financial's first quarter 2016 results. You can find the presentation we will reference during the call on the Investor Relations section of our website, ally.com. I would like to direct your attention to the second slide of today's presentation regarding forward-looking statements and risk factors. The contents of our conference call will be governed by this language. This morning, our CEO, Jeff Brown and our CFO, Chris Halmy will cover the first quarter results. We will also have some time set aside for Q&A at the end. We have with us Diane Morais, CEO and President of Ally Bank to help answering your questions as well. Now I would like to turn the call over to Jeff Brown.

Great. Thanks Michael. Good morning, everyone. We appreciate you joining us today. I am pleased to report it's been a solid start to the year. Performance was strong in the first quarter and our financial targets remain on track. We also took several meaningful steps that will drive enhanced future performance. Let me start with the financial highlights. Net income was $250 million for the quarter. Adjusted EPS was $0.52. Core return on tangible common equity was 9.8%, up about 70 basis points from first quarter 2015. And adjusted tangible book value per share also increased $0.80 quarter-over-quarter and $1.60 year-over-year. Our commitment remains to expand shareholder value and consider all options that will ensure maximization over time. As we get into the details you will understand those actions are continuous in the way we operate the company. We expect value will be unleashed as we continue to deliver quality results. Within our auto finance franchise, originations were healthy, but more importantly our risk adjusted yield increased 52 basis points versus last year. As discussed at Investor Day, we are prioritizing at expanding profitability not targeting specific origination levels and you will see that came through our metrics this quarter. We are committed to using capital efficiently, generating business that drivers the right returns while also preserving our leading position in the marketplace. We continue to maintain robust credit discipline. The aggregate net loss rate was up slightly to 64 basis points in the quarter and fully in line with expectations. Nonprime originations were 12.6%. Nonprime, in particular, is a space you have to be constantly focused on smart risk allocation and only book assets when you can generate the appropriate economics. As we sought to expand margins during the quarter by raising pricing, we simply originated less nonprime volume…

Thanks JB. Let's turn to slide eight. We delivered another solid quarter with $419 million of core pretax income and $250 million of net income. Overall results were very good with excellent fundamentals in our businesses, which has us on track to achieve our financial targets. We did experience weather-related losses in the amount of $26 million for the quarter due to severe hailstorms in Texas during the last two weeks of March that cost us a few pennies per share this quarter. While we typically expect to incur elevated weather-related losses in the second quarter each year, hailstorms have come early and have been severe. Additionally, the flattening yield curve in the first quarter, which was driven by both an increase in LIBOR and a decrease in longer rates, was not with any bank desire to see to start the year. The change in interest rates did impact net financing revenue with some offset in other revenue as we sold some securities at a gain. While you don't see the investment portfolio mark in the income statement, the value of the investment portfolio improved, which can be seen reflected in the healthy increase in our tangible book value per share this quarter. Now looking at some of the line items. Net financing revenue increased over $100 million from last year due to higher earning assets and improved yields mostly on our retail auto portfolio. Other revenue of $380 million was up from last quarter due to investment gains but down from last year, due mostly to the sale of our TDR mortgage loans in the first quarter of 2015 that generated a gain of $65 million. So our total revenue was down slightly quarter-over-quarter, but up significantly year-over-year, especially when you exclude the TDR mortgage sale. On the credit…

All right. Thanks, Chris. Let me just quickly wrap up on slide number 21. We had very strong operational performance in the quarter and one of the biggest takeaways that we want you to have is really the improved profitability on new auto originations. That certainly was not by accident but by focus. We also maintained a disciplined credit philosophy, continue to grow deposits and customers and obviously redeeming the remaining Series A Preferred stock was another important step. Driving long-term shareholder value is a top of importance to me, the Board of Directors and the entire management team. Our capital plan reflects the importance we are placing on returning capital to shareholders. We are working on improve profitability and obviously, the focus on continuing to migrate assets into the bank for other normalization opportunities. We are our customer base, broadening our product offerings and part of that includes expanding into businesses with higher returns and a more diversified revenue stream. And over time, we know we will have less need for capital markets funding, which represents a really unique opportunity for Ally. So we are pleased with the start the year. We have a clear path to achieve our goals in 2016 and beyond and we remain optimistic about the potential for Ally as a great company and a great investment. And with that, Michael, I will hand it back to you for Q&A.

Great. Thanks JB. As we move into Q&A, we do request that you please limit yourself to one question plus one follow-up. If you have additional follow-up questions after the Q&A session, the Investor Relations team will be available. Operator, if could please start the Q&A.

[Operator Instructions]. Our first question comes to the line of Moshe Orenbuch with Credit Suisse. Your line is now open.

Thanks so much. I wanted to talk a little bit about the outlook for improvement in the margin. You talked about the $11 billion in capital markets funding that will be rolling off plus some more general comments about the greater integration with respect to the bank. Could you just maybe give us a little more detail on to that as to how we could expect that to help in terms the cost of funds for the company over the course of the next 12 to 18 months?

Yes. Unfortunately we do not have a lot of unsecured debt rolling off this year. So when we look at the cost of funds opportunities this year, they are somewhat muted, which is why I am guiding a bit to have somewhat of a stable NIM which I think I said in the last quarter as well. We think of the opportunity much more as a longer-term opportunity. So as that $11 billion really rolls off and like I said, it's going to be over the next four years, most of that will be refinanced with deposits as more assets roll into the bank. So we still have some regulatory restrictions over the assets that go into the bank. But we expect that over time they will be lifted. So I think of this much more as a long-term opportunity, but if you think about our unsecured debt yielding somewhere around 4.5% and deposits we put on around 1%, this is a real big opportunity for us in the long run. And as we think about our earnings per share growth potential over the next couple years, this will start to contribute to that, but even longer-term, we would expect even more momentum in EPS growth.

Great. And just related to that, the pace of the sale of super prime assets. How should we think about that?

Yes. I would not expect the pace to be as high as it was this quarter. We had some opportunities this quarter that we took advantage of and we sold about to $2.5 billion of assets. We really look to sell somewhere around $4 billion a year in that. If there are opportunities to sell and take advantage of good bids in the market, we will do that. So that number can go up and down. The other thing I would point out, as we did originate a little less super prime this quarter, which was intentional and all of this really is geared towards just increasing the overall return on equity in the auto business and the overall company.

Great. Thanks Chris.

Our next question comes from the line of Rick Shane with JPMorgan.

Thanks guys for taking my question. I would like to talk a little bit about TradeKing and sort of the walk between the $25 million of revenues that they are generating today and the $80 million of pretax income that you are looking for in 2018. If you start with the daily average revenue trades and double that, that would suggest about $50 million of revenue. If you take the AUM to the number that you are talking about, somewhere between $3 billion and $4 billion, at 75 basis points that would suggest about $30 million of revenue. And then the deposits, I am assuming that a big chunk of the income here is going to be on funds transfer pricing. If you were to take $2.5 billion of deposits at 1%, that would be about $25 million of revenue. So when you total that all up, it's about $105 million to $110 million of revenue, which is basically tripling or quadrupling where you are now, which makes sense. But I am curious how that relates to that $80 million of pretax income? Is that a realistic margin?

Sure. So and I think you have t right, but let me make a couple of comments just about your math. When we look at the deposit synergies, it's really not 1%. I don't look at it versus the cost of where we are raising deposit today. I look at it as incremental deposits will allow us to take out market based funding particularly secured funding. So secured funding comes in a rate today of about 1.5%. And as you think about it over the next couple years, if you follow the forward curve, that obviously increases. So while we look at that $3 billion plus of deposits over time, the synergies there will be greater than you just mentioned on the 1%. So that's one of the drivers there. We also think that the daily average trading volume could more than double. So I know you mentioned double there but we think over time it could be more than that. And let me put it in a little bit of overall context. As we go out a few years, we think it's very reasonable that we can the triple revenue in this organization. They generate about $50 million today in overall revenue. That's with these and their deposit revenue. So we think that could be a triple and we don't think the cost will rise anywhere near that. We think there is great operating leverage in the business, which is somehow how we got to around the $80 million.

Okay. Got it. That's helpful. I am confused by one other thing. When I look at the slides from this quarter for auto finance on the nonprime origination, you show last quarter 13.7% below 620. If I look at the slides from last quarter, it says that 12.6% of originations were below 620 and there is a similar differential between the third quarter numbers as well. Is there something [indiscernible] different?

Yes. What we did is we tried to focus this quarter just on retail originations. So we are just giving you the retail number. I think last quarter.

Ex-lease.

Yes. Without lease. Last time, we gave you all the retail, which is leased and retail loans.

Okay. That's the differential. I saw that you picked up that language, retail quarterly originations.

Yes. As lease originations is becoming less and less, we wanted to focus you on retail.

Got it. Thank you.

Our next question comes the line of Eric Beardsley of Goldman Sachs.

Hi. Thank you. I just wanted to actually go into what you saw during the quarter that caused you to pull back on the subprime and raise pricing?

Yes. Eric, I wouldn't characterize it that way. I would characterize it like that we were looking to expand margins across the credit spectrum and we did that with price. As we did that, we saw less volume come in on the nonprime originations and less volume come in really on the super prime originations. So there was no credit concern in our mind. It was much more about making sure we get the appropriate risk-adjusted profitability and we start to really expand our margins. And because of that, we lost some business.

Got it. And just on the reserve to loans, I guess you mentioned that it could be trending up a little bit more from here due to the mix shift. I guess, what's the right level to think about?

When I think in annualized loss rate, we think it could probably trend up another 10 to 15 basis points this year and our coverage rate is going up a little bit in lockstep with that. So I do think that the coverage rate can continue to tick up, particularly as we do less super prime, but not significantly.

Got it. And then just really quickly, I guess, just the yield you show on that slide 16 that you were referencing, I guess how quickly should we see that bleed through to the total loan yields that you have on the books, just thinking about the duration of the assets being somewhere around two years. Is this something where we are going to get this more meaningfully at this level by year-end?

Yes. We are continuing to see that as we get into the second quarter, so we are continuing to look towards price. So I would expect you will see the yields continue to tick up and you are right, it's a two, two-and-half year asset, so it will take a couple years to fully flow through but I do think you will see improved yields on the retail portfolio from here.

And then obviously, Eric, this is Chris, it takes opportunity to trend the portfolio here and there. We have been doing that in the lowest yielding stocks. So I think that also has the effect of accelerating that yield dynamic as well.

Got it. Great. Thank you.

Thanks.

Our next question comes from the line of Chris Donat with Sandler O'Neill,

Hi Chris.

Good morning. Thanks for taking my questions. This one might be more for Diane. I am just curious with the $3.5 billion of retail deposit growth in the quarter. It's first full quarter since we have had a fed increase. Have there been any lessons either internally or in the competitive landscape around one single rate increase? Or is it really too soon to tell? But it does look like strong growth with a little bit of a rising rate.

Thank you for the questions. And our response around what happened in the first fed move is virtually nothing. No one really moved rates in any kind of meaningful way and there is always day-by-day, competitor-by-competitor, basis point moves here and there. But we don't really expect a meaningful change until we get through the 1%, if that sounds right, which is going to take a few more tightenings. So we feel incredibly well positioned as we head into an eventual rising rate environment and we have got great sophisticated tools to inform our pricing and our strategy.

Got it. And then the follow-up for me is sort of a related question on deposits, but also thinking about TradeKing. Do you feel any risk that as you grow assets under management at TradeKing that you might cannibalize some of your deposit growth? Or do you think that you will be able to grow TradeKing without really tapping into that, even though you are talking about some of the same customers?

Right. We really believe it will largely be incremental growth. And we know that customers that have been in the Ally family today are moving money to other wealth management firms. And our hope is that, once we complete the integration, that money will stay within he Ally family and quite frankly there is tremendous synergy between both the Ally customer base and the TradeKing customer base. So we know that customers need both products and services and having a seamless integrated experience to save and invest in that bank-brokerage combination is going to powerful for the new company.

Got it. thanks very much, Diane.

Thank you.

Our next question comes from the line of Sanjay Sakhrani with KBW.

Thank you. So first question just on capital allocation. Is it fair to assume from an M&A perspective we are done and we are going to focus on return and funding for organic growth?

Yes. Sorry, it's JB. It's hard to say if you are ever really done. I think our focus is going to continue to be opportunistic. And any M&A scenario that we would look at would have to obviously cross a very high hurdle rate. Obviously we are talking about the $80 million on TradeKing. I think we project out of somewhere in the neighborhood of 20% IRR. So that's the type of hurdle rate that any type of deal would have to cross for us to consider. So for now, this was the right time for the TradeKing deal. Would we be opportunistic on other opportunities? Sure. I think that's what we are supposed to do, but nothing is imminent. Nothing's on the horizon. But obviously, I think we are paid to look at a lot of things and we do look a lot of things, day-in and day-out. But again, I think our primary focus is, anything we do would have to achieve a very strong return on shareholder capital and I think our leaning right now is, let's go ahead. Let's successfully close this. Let's integrate TradeKing. Obviously it could happen as early as this quarter before we really buy off anything additional.

Okay. And are there other areas that you are looking at? It sounded like TradeKing checked a box. But is there anything else?

Right now, Sanjay, nothing remotely of this size. Obviously within auto we continue to pay a lot of attention to emerging technologies, things that are driving more the digital front there. But nothing remotely close to this size is on the horizon today.

Okay. And just maybe one quick follow-up for Diane. Could you talk about your confidence in getting Ally Bank customers to transition to the wealth management? Maybe not specific, but just what kind of strategies you might use? You mentioned that your customers have other deposits elsewhere within wealth management platforms. Do we have any statistics on what your market share of a customer's deposits are? Thanks.

So our customers, we have one interesting set that going back seven or eight years, over $9 billion have moved out of Ally to other wealth management firms. I would say we are highly confident in the fact that we have both customer bases are digitally savvy, self-directed and they have a breadth of needs. And I can just tell you qualitatively, we have gotten a number of customer comments since the announcement begging us to hurry up and they can't wait for the combined set of capabilities. So what our teams are focused on right now, Sanjay, is creating an integrated that when a customer comes to Ally, they see all the capabilities that we have at Ally today plus what TradeKing offers and there is marketing that hopefully you are familiar with that we have been doing at Ally under the Ally name, finding those customers at the points that at their decision phase, we are highly confident that we will be to tap into that money movement and create a great experience. So again, early days. We are three weeks since the announcement and we have got a lot of work in front of us. But we feel very confident that it's going to really resonate with that customer base.

Thank you.

Our next question comes from the line of Eric Wasserstrom with Guggenheim Securities.

Thanks very much. Chris, if we could just go back to the NIM for a moment. And I am just looking on slide 10 at the long-term unsecured debt. Can you just remind us what the ALCO strategy is? And how we should think about the liability sensitivity going forward?

Yes. We are actually a bit less liability sensitive this quarter. Some of that has to do a little bit with the rate moving just the way we have positioned our investment security with some longer dated securities. Right now, I would call us fairly neutral. But over time as we build the deposit base and a lot of the long-term debt rolls off and we are not really in the markets as active, we will become much more asset sensitive, particularly if you believe that the pass-through rate will be somewhere closer to 50% on the deposits which is what we believe, the company will become more and more asset sensitive.

Okay. And so as we just think about the cost of funds on a dollar basis going forward and I look at the page 12 and the upcoming debt maturity, should I basically be thinking about it as the entire dollar cost of those 2016 through 2019 maturities goes away and was replaced with the dollar cost of the deposits, assuming the $8 billion to $10 billion a year of incremental deposit growth?

Yes. That's the plan. Exactly.

Okay. And plus then, layered on top of that, the forward curve expectations and some lesser degree of magnitude of the change that we saw in this period?

That's right. That's exactly right.

Okay. Great. Thanks for the clarification.

Our next question comes from the line of Cheryl Pate with Morgan Stanley.

Hi. Good morning. I just wanted to touch first on originations again. It sounds like successfully raising price across the credit spectrum and I am just wondering if you can maybe give us a bit of an update on the competitive environment. It seems like more of the pullback was on the superprime, subprime side. Is that still what you are seeing? Is that the expectations from here? And just wondering if you could give some sort of range around how you are thinking about volume, should the current environment persist?

Yes. From a competitive standpoint, we saw one competitor that was pretty aggressive in the superprime space, used some price and really captured a lot of market share, which is fine, which is probably one of the reasons we lost some market share, given we just lost on price. But I would say that both in the middle of the credit spectrum as well as in the in the upper nonprime or subprime that we play, we didn't really see much change in the competitive environment over the last quarter. So it's been pretty stable. As far as ongoing outlook on originations, we were excited to do $9 billion at the type of margins we did this quarter. The second quarter and third quarter are usually higher origination quarters than the first quarter. And then from a seasonality perspective, you come down in the fourth quarter. So we are fairly confident that we can run somewhere around this rate. But I would really want to put out a target, but we have said that somewhere in the mid to high-30s is really the right range as long as we are getting the right risk-adjusted margin of these loans.

Okay. Thanks. And then just as a follow-up on the expense side. First quarter tends to have some seasonably higher expenses, but efficiency came in right in line with target. Just wondering if you can help us think about the forward look from here, given some technology investment spend but also some better seasonal trends.

Yes. And I just want to clarify something. We did have an uptick in expenses because of weather. But that is actually excluded because its insurance is excluded from our efficiency ratio. And then you are right that in the first quarter, you tend to have higher expenses related to things like payroll and we tend to see that come off as we move forward. My guidance to you is to continue to look at the efficiency ratio will stay somewhere in that mid-40s efficiency ratio, 44% 45% as you move forward to really get operating leverage. But there is not a lot of, what I would call, decrease in annualized expenses from here.

Okay. Great. Thank you.

Our next question comes from the line of Kevin St. Pierre with Bernstein.

Yes. Thanks for taking my call. Chris, maybe if you could remind us how, if at all, the TradeKing deal affected your CCAR ask? And if you are still comfortable with that total payout range that you have guided to in the 70%, 75% range?

Yes. At this point, I don't want to comment specifically on CCAR. JB obviously mentioned that we did request a dividend and a share buyback program. And I just kind of say that it's within the prior guidance we have given. The announced acquisition of TradeKing had really had no effect on our common distribution ask. The only place it really had an effect on was really TruPS. We had $500 million of TruPS that was approved in last year CCAR that we look to actually take out. We made a decision really looking at total capital ratios and Tier 1 capital ratios that it was prudent track to leave that planned redemption of TruPS in the stack at least for the time being. We will revisit that as we go to next year's CCAR. Right now, TruPS is a efficient instrument because it qualifies as Tier 1 capital and obviously the interest expense is tax-deductible. So we decided to leave that in the stack, but overall the guidance we have given on the common distribution remains.

Great. Thanks. And maybe a bigger-picture question for JB. Another solid quarter of near 10% core ROTCE, yet the stock, which looks to be opening flattish, is trading at about a 30% discount to core tangible book. What do you think the market is missing? And what do you need to do to change that perception or whatever the market is missing?

Kevin, thanks for the question. Obviously, it drives all of us mad inside the company and at the Board level as well because we see how much value is here. I think it comes back to continuing to execute the path we are on and adjust if needed. And so we heard a lot of feedback from shareholders last quarter about making sure capital is front and center and we took some additional actions. Again hopefully you saw that in the first quarter on what we did on pricing, what we did in moving some lower returning assets off balance sheet. So part of that is just continuing to remind the world that we get it. Also emphasizing that credit is not nearly an issue like maybe is perceived in the markets today. I think that's one of the big questions what's on the minds of investors and obviously we spent a lot of time talking to investors and I think, frankly last year the fact that we were able to offset the lease dynamic, a lot of people questioned, did you do something stupid on credit and we try to remind the world, no, we haven't. We were very disciplined on what we underwrite last year. We feel very comfortable with that. And so part of this is, continuing to prove that credit really is not going to be an issue. I think Chris has provided some guidance on where we expect credit to normalize but we don't fear that there is some credit bubble or burst that's going to come at us there. And we still think the auto sales environment can be healthy. I think again we didn't come out with an origination target this year, but there were a lot of questions we were facing as we continue to be a growth company and I think we admit it. Look, we are generally comfortable with the size of the auto book and that's part of the reason why we are exploring other areas, namely in Ally Bank. We think it's a great opportunity, a great brand. There are some higher ROE businesses that are out there that we are looking to explore. So unfortunately I think it's going to take some time. I think CCAR will be important validation. The fed sees us on track as well. And it's another step in just getting the company normalized. So it's not easy turning the Titanic. It takes five, six years to get there, but I would say, we are in year four or five of that and in a little more time hopefully the world will get it. And as we continue to grow in book value, I would fully expect the stock to trade up and shorts on the stock I wouldn't want be it, because really believe in long-term upside.

Great. Thank you.

Thanks.

And operator, if we could, we are running out of time, but if we could squeeze one more in please, that would be great.

Our last question comes from the line of David Ho with Deutsche Bank.

Hi. Thank you for squeezing me in. Most of my questions were obviously answered. But just real quickly back to the NIM. Even if you get the strong deposit growth, certainly from TradeKing, then again the ongoing Ally Bank franchise and obviously holding the line on rates and it seems like the leases coming in a little better than expected, would we expect a little bit of upside or a upward bias to the NIM?

Yes. The offset to that is, I do expect to see yields go up and particularly in the auto space. But we also have a desire to grow the mortgage portfolio and grow the investment portfolio, particularly in the second half of the year. As you grow some of those, what I would call capital efficient assets that come with lower yields, it affects the overall NIM. So let me be clear. We expect net interest margin to stay somewhat flat in the near-term, but we still expect to grow our net financing revenue as we grow some of those other lower yielding assets.

Got it. Another one, just real quickly. What struck me was some of the digital opportunities within auto finance that you highlighted that seemed would make sense with the digital capabilities of Ally Bank and certainly TradeKing. Can you talk about real quickly what some of those would be?

David. Obviously we generate $35 billion to $40 billion of originations today through an indirect model, but I think as we think about technology and how consumers transact today, some direct to consumer offering may be important for the franchise over the long run. And that's not to imply that the dealer universe is going away or the indirect models going to change. But obviously as you think about how you probably transact with your bank, it's all done through your iPhone device, I would imagine. So we are looking at technologies there to be again maybe more direct with the end consumer. And then other initiatives, obviously we announced Beepi. I think that was the end of last year, early in first quarter of this year. That's another great partnership there. We have got other products that align more with the digital field. Used lease, for example. So we are looking at ways really to use technology as a weapons to continue to evolve the market forward. But I think through time, you can expect technology to drive a bigger force in really how auto sales are done even on the documentation front. It's not just researching the car, researching dealer inventories, I think the next step is how you get financed ahead, how you consider insurance products ahead. So we are spending a decent bit of money and time really making sure we are front and center in that space.

That's helpful. Thank you.

Thanks a lot David.

Okay. Great. That's all the time we have this morning. If you do have additional questions, please feel free to contact Investor Relations. Thanks for joining us this morning. Thanks, operator.