Good day, ladies and gentlemen, and welcome to the Ally Financial Incorporated Q4, 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to introduce your host for today's conference call, Mr. Michael Brown, Executive Director of Investor Relations. You may begin.

Thanks operator and thank you everyone for joining us as we review Ally Financial's fourth quarter and full-year 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. I would also like to note the Slides 3 and four of today's presentation where we have disclosed some of our key GAAP and non-GAAP or core measures. These and other core measures are used by management and we believe they are useful to investors in assessing the company's operating performance and capital measures, but they are supplemental to, and not a substitute for, U.S. GAAP measures. Please refer to the supplemental slides at the end for full definitions and reconciliations. This morning our CEO, Jeff Brown and our CFO, Chris Halmy will cover the financial results. We will have some time set aside for Q&A at the end. Now, I would like to turn the call over to Jeff Brown.

Thanks, Michael. Good morning, everyone thank you for joining our call. Before we cover the details on the numbers, which were in-line to favorable versus expectations. Let me spend a couple of minutes reflecting on the year as a whole. 2016 was another solid year for the company, as we continue to build and position Ally as the leading digital financial services company. From an earnings perspective, full-year adjusted EPS was up 8% from 2015, you should expect EPS growth to accelerate over the next few years to result in the 15% EPS CAGR that we talked a lot about. That’s a type of growth potential that is embedded in the strength of the opportunities before us and the power of the franchise and foundation we've built. A few primary components of our earnings growth trajectory; first, optimizing returns on the auto finance business, our retail auto lending market was up a 141 million last year and we see that accelerating to offset remaining decline and lease portfolio. Second, deposit growth is very powerful as we've reduced high cost debt and efficiently grow our earning asset base, we posted rapid deposit growth in 2016 with balances up 12.5 billion for the year and we see that accelerating going forward giving a compounding effect that we're getting from both new and existing customer expansion. Deposit growth will be further supported by the new product introductions and expanding our brand presence in the marketplace. Third, capital management, we're buying back a lot of stock at a discount, which is very accretive. And fourth, we've laid the groundwork for product expansion and diversification initiatives. On the auto finance side, we're introducing new segments in relationships outside our traditional channels. We acquired TradeKing, which provides a wealth management platform we can significantly grow for…

Thanks, JB. I'll start on Slide 7; let's look at 4Q results in the middle of the page. Overall, a good clean quarter as core trends remains solid and we experience some favorability across the businesses. Net financing revenue excluding OID was 991 million, which was slightly favorable to December guidance as commercial auto balances remains stronger going into year-end. Relative to last quarter net financing revenue was impacted by seasonally lower lease revenue. Other revenue of 392 million was positively supported by both equity gains and syndication income in our corporate finance business. Provision expense was 267 million for the quarter. Retail auto losses came in-line with prior guidance and we had the small reserve release on the mortgage portfolio given favorable loss performance. Non-interest expense of 721 million was a bit better than expected due to our continued expense focus across the company, as well as some lower state and local non-income taxes. Our effective tax rate was around 35% and for the second quarter now, we had no preferred dividends. That resulted in $0.54 of EPS for the quarter when you adjust for OID. On the next several slides, I would like to pull the length back and look at the annual results over the last three years. We can see some seasonal impacts on a quarterly basis, but looking at the annual results, [we see] (Ph) a good sense for the progress we've made as well as the forward trajectory. Let's start on Slide 8, with adjusted EBITDA EPS growth. Earnings per share grew 19% in 2015 and 8% in 2016 for a 13% CAGR over the past two years. Keep in mind that our EPS growth would have been more pronounced in 2016 if it wasn’t for the severe weather losses we experienced earlier in…

Thanks, Chris. I'll conclude with quick recap of our priorities for the year, which are likely familiar to most of you. You've heard us talk a lot about deposit and customer growth and that's a real key driver from so many perspectives. So we have to keep the strong momentum going there. We introduced several new products and plan exceeds in 2016, in 2017, we want to demonstrate the next stage growth path for these products. We're doing this in gradual and prudent way so won't be massive out of the gates, but you should start to see the growth opportunity emerge particularly in the second half of the year. In Auto, we've done a great job of optimizing the returns on that business and managing the risk return profile, the originations and we expect the risk adjusted margins to expand again in 2017. On the credit and expense side, we’re focused on maintaining a disciplined approach to risk management and expenses to maintain efficiency and drive operating leverage. As most of you know, we continue to have some inefficiency in our bank operating structure, particularly the leverage ratio requirement. We hope to see that normalize this year to get on a level plain fields to other banks in the industry to fully optimize our funding construct. It's important and I can assure you, we keep working our way at it. On the capital side, we were happy to get share buybacks going in 2016 and we expect to buy even more in 2017. It's early in the CCAR process, but we're making more money now than before and will continue to lien in the capital returns given the current market valuation. The combination of these factors should drive accelerated EPS growth and expand the returns going forward. As we've mentioned, 2017 growth maybe shy of 15% but still very solid and then really accelerate in 2018 and 2019. We've got the right opportunities with continued balance sheet management and the right operational ingredients to deliver in these results. So thanks for your time today, hopefully you will hear a very optimistic tone it's intended. And with that, let me turn it back to Michael.

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

[Operator Instructions] Our first question comes from Betsy Grasek with Morgan Stanley.

HI good morning. How are you? A couple of questions on the outlook for NIM and how you mentioned that you expect to see some improvements still going forward and I know part of that is a function of the deposit data and the question is two things. One, give us the sense of growth and deposits you are expecting over the next 12 months, as well as how you expect that deposit data to reject. Because I know what you put in your queue and it doesn’t seem like that's happening yet. Just wanted to know when you think that flex point is?

Yes, so let me start with the NIM expansion. Okay, the biggest piece of the NIM expansion on the cost of funds side will be really just the absolute growth in deposits versus the unsecured debt coming down. And that's important, because it has less to do with the data than it has to do with the sheer turnover of the light over these sides. So deposits will really replace the unsecured debt, as well as replaced some of the secured debt, which the cost of that has moved up just with benchmark rigs. As you look at the growth in deposits, we grew retail deposit over 11 billion this year, total deposits over 12.5 million. We expect that to accelerate to somewhat in 2017. So we think the retail deposits will grow in excess of what they grew in 2016. To a nice extent, we also think we may take advantage of some brokerage CDs particularly as our TradeKing acquisition brings in some incremental deposits. So that will also be a bit of a tailwind for us. When I think about deposit basis going forward, obviously there was a very muted reaction to the last two rate moves, nobody has really moved much at all, particularly in the online savings or in the money market accounts, there has been some movements on the CDs, but it's pretty small. We don’t think we’re going to see any real dramatic change in the stance of rates, although at least in the next few months. We are watching it closely, as the Fed continues to raise interest rates, there is going to be appoint obviously where there is going to be some reaction out of the banks. But we still think it’s going to be fairly small. We have been pretty transparent that we modeled most of it; most of our pass through rates around 75% to 80%. But our expectation at least for us is it will be somewhere at 50% or less and obviously we haven’t seen it move at all yet.

Okay, and then maybe if you could have a comment on the used car price declines that you are looking for, I mean you highlighted that 5% price decline, which is what you have been kind of modeling to or managing to over time. Any pressures on that? I know you said 2017 looking for the same kind of decline, but given the mix and the desire for different kinds of autos, I'm wondering adjusting any shift in that as you go through the year?

Yes. We really saw the shift start at the end of the third quarter, where cars have been particularly poor performers and honestly there has been some specific cars even within the GM fleet that have not done very well. That has kind of dragged the overall cars down. Having said that, the trucks you know particularly the pickup trucks have done fairly well and have held in there, since we've had a continued expectation of price declines, when we set our leases three years ago, we set residuals lower for car that would come off at least in 2017. So while we continue to expect that 5% decline, we still expect the lease yields to be somewhere around 6% and we still expect to have some level of gains. I also always want to caution people that when you look at the leases and you look at cars coming off of lease its very seasonal. Meaning fourth quarter is always the worse; the second quarter is always the best. So try to look at it on an annualize basis, so I would expect lease yields to be little higher in the second quarter and a little worse in the first quarter.

Okay. Thank you.

Thanks Betsy. Next question.

Our next question comes from Chris Donat with Sandler O'Neill.

Hi thanks for taking my question. Chris just wanted to explore again on the deposit price and sort of how you are thinking about it, because you said you are going to watch the comparative environment closely. I'm just wondering what are your trigger points is it, when you see competitors raise or do you actually wait to see if you are seeing action in your own deposit book, if either you are seeing less growth or outflows. I'm trying to understand where you are going - at what times are you likely to make a move if it went under…

We look at full dynamics, but keep in mind there is growth today in deposits and that growth has been strong, particularly the growth rate in online deposits is strong as well. So long as we continue to see the increase in our overall deposits and the growth in our book, both from deposits as well as customers, we will be pretty consistent with our deposit rates. Now, that can obviously change given the market dynamic. But what I’ll tell is that we would - we are the biggest online depositor today. So we are a little bit off a bellwether and we have no intension of leading rates up. So we will see.

Got it. And then Chris, just to go back to something else in your slide deck from your Investor Day in February. At that point, relative to used car prices, there was a comment about 1% change in used car market value equates to about 50 million in revenue on an annual basis in 2016 and 2017. Has anything in your mixed shift changed that sensitivity or does that still basically hold?

No, like 1% move worst in our expectation, so let's say instead of going down 5%, used car values went down 6%. The biggest sensitivity obviously on the lease side. So a 1% move would be about 50 million in 2017 that drops to somewhere 25 million to 30 million as you get to 2018, just because the portfolio is significantly reduced.

Got it. Okay, thanks very much.

Thanks Chris.

Our next question comes from Sanjay Sakhrani with KBW.

This is actually Steven Clark filling in for Sanjay. My question is around credit. Well when we look at the year-to-date results, it's up about 35 basis points on both the delinquencies and charge offs side, can you talk about your expectations for 2017 and also around your reserve methodology?

Yes, I do expect charge offs to go up again in 2017 and it's a bit of what I would call the continued seasoning of the book, particularly as you get in 2015 vintages starting to really hit their peak loss periods in some of the early 2016 vintages. I do not expect it to go up to the same magnitude as we saw from 2015 to 2016, so that 29 basis points. I do expect it to rise however, particularly in the first half of the year. I think you will see more of the leveling off happen in the back half of the year given that’s where we saw some of the increase in kind of the quarterly charge off rates. Now on the provisioning side, our provision was up about $200 million from 2015 to 2016. So once again, I expect the provision to be up driven by charge off as well as some increase in the coverage ratio. I do not expect the coverage ratio to go up as much as the overall charge off rate, but we do expect that coverage ratio to really start to flow up. It was 142 in the retail auto portfolio for the fourth quarter, but you should expect that. And were running kind of a couple of basis points a quarter this year and I would expect that to continue in 2017.

Great that’s very helpful. And then my second question is around the CCAR process. The Fed released some new methodology around perhaps eliminating to qualitative exam for Ally; can you talk about the potential impact for you?

Yes, I mean the rule came out, I think some people might have seen that last night. The rule came out; it was very similar to the NPR that they put out in the fourth quarter. So not a lot of changes. For a bank like Ally below the $250 billion mark, the qualitative really moves out of the annual CCAR process and really goes into what they call the - like routine monitoring by the Fed. So, our expectation is to look at it in the third quarter and it will be just kind of routine. So, our actual capital distribution will be based on the quantitative assessment that happens within the second quarter. So, I don’t think there is a big change; we’ve obviously done very well on the qualitative side in the last few years. So, I don’t think it has a much of an impact to what we expected to do on the capital side, but obviously takes a little pressure off some of the operations.

Great. Thanks for taking my questions.

Thanks.

Our next question comes from Eric Wasserstrom with Guggenheim Securities.

Thanks very much. Chris, could you just talk about your balance sheet growth expectations relative to what you are thinking about with respect to SAR please?

Yes. I mean we expect SAR to be somewhat flat, as we look at 2017. I mean we think it will kind of go sideways a bit and whether it goes up or down, we said this a lot, whether SAR goes up or down let's call it a million units, it's not really going to have a big effect on us. Particularly given that our used volume is somewhere at 40% to 45% and the used sales are pretty steady over the last few years as well. So, when I think about the balance sheet growth, we expect the auto balance sheet to remain pretty flat, the leases will continue to come down, our retail auto loans will go up. So, you can think about the leases will come down about $1 billion a quarter and retail auto loans will go up above a $1 billion a quarter. So, it will keep pretty flat. I think where we were surprised a little bit at the end of the year and we expect to run a little hard I think in the first half of the year on our commercial balances. So, commercial balances are up, it’s a great business in the sense that it has no losses in that business, but the yields tend to be a little lower than the overall portfolio. So it put some pressure on NIM, but it’s a good kind of low loss business and its all LIBOR type based. So, if rates do go up, we do have a little leverage there.

Great. Thanks. And then just within the auto growth, can you just talk about sort of what the FICO composition will look like relative to where you were let say in the second half of this past year. And how that relates to the nearer expectation?

Yes. We expect it to be pretty steady. I mean I would tell you that our FICO has drifted up a bit in the fourth quarter. And the reason for that a little bit is seasonality meaning the fourth quarter tends to be the quarter you see mostly new cars, you see a lot of incentives from the manufactures around the holidays. So, you tend to have a higher credit quality customers in the fourth quarter. But I think our credit quality - the way we look at the competitive environment today, our credit quality and our nailer should be pretty consistent going forward, which is one of the reasons as we saw looking out to 2018, we start seeing what I would call a flattening of our provision, because we think the overall credit quality of the book will be pretty similar.

Okay. Thanks very much.

Our next question comes from [indiscernible].

Hey good morning. With the Ally Home origination, just curious how you are thinking about the volume, are you going to flow the 30 years through and keep arms and what is your target there? And then is there any servicing escrow balance assumption in your deposit/rate outlook?

Yes, there is no servicing deposits or escrow deposits in any of our assumptions. When we think about Ally Home and we've pretty modest assumptions of originations and most of those originations, will be conforming whether they are fixed or floating, most of that stuff will go off to the GSEs. The only production we expect to keep is the jumbo production. When we think about it over the next couple of years, our assumptions are somewhere around $5 billion of originations, we probably keep a 1 billion or 1.5 billion of those originations on the balance sheet. We continue to buy some bulk mortgages as well to bring that; overall balance sheet in mortgage up, but we get some nice fee income associated with those conforming originations.

Okay and then your investment securities balance grew nicely in the quarter, but it’s kind of flat on the year. How do we think about 2017 securities growth with the loan portfolio sort of balancing out between auto lease and auto loan. Kind of a flattish top line on the securities book. Is that net growth from here, how should we think about that?

Yes. We have relative to size of our balance sheet when you think of our peers across the banking industry, our investment portfolio is pretty small, its somewhere at 13% somewhere in that type range. We would like to move the investment portfolio higher; we think it's good for strength of our liquidity ratios. The think that's preventing us from doing that at the moment is the leverage ratio requirement that we have at Ally Bank and because of that we've really held back from growing it. Our expectation is that leverage ratio will be lifted at some point this year and once that happens, our expectations will grow the securities portfolio bit higher. So hopefully in the second half of the year you will see real growth there and most of that growth will be in liquid products.

All right. Great, thank you.

Our next question comes from David Ho with Deutsche Bank.

Goo morning. Just want to talk about the expenses just real quick, the 150 million that you highlighted just want to make sure what base you are going that off of potentially and how much flexibility you have there?

Well we wanted to make sure that we were pretty transparent to the overall market that expenses are going up and when we look at the overall expenses, they were just shy of 3 billion in total non-interest expenses; I think it was 2.94 billion. So, we expect the 150 to kind of grow off of that. A lot of that growth is really going to come from the marketing side and really driving some of the new products, and things like wealth management JB mentioned in his prepared comments. Over the next couple of months we're going to rebrand that and we will have a Customer Day One and once we have that Customer Day One we're marketing behind that to really grow the wealth management segment. Likewise we just started Ally Home and we're looking at it and very kind of moderate way and making sure operationally we have everything handled, but once we start feeling good about the operation you will start to see it but some more marketing dollars behind that with that it will also comes just variable expenses as that portfolio really grows. We've also in that corporate finance group we've hired some specific teams within that group to help to grow that portfolio as well. So all of these it's just some incremental expenses really driving some of the new products and new businesses and we're really going to focused on operating leverage though. So while expenses are going up, we expect to really see revenues rise as well, and as we start getting out of couple of years 2018, 2019, we start to seeing that mid-40s efficiency ratio really come down.

Got it, and then as it relates to some of that business expansion it seems like it’s a little more backend loaded in terms of the timing in 2017 and obviously if rates rise, you would have probably a little more pressure on the investment gains before you kind of recruit that towards back half of the year is that the right way to think about it?

Yes, that's a good point. Meaning higher rates will give us less opportunity to harvest gains as of the investment portfolio. We did have some real success in 2016, during that particularly in the first half of the year, given rates were lower than people expected. So to the extent that we see rates continues to rise, we will have less gains to harvest. But the offset obviously is just higher balances and higher NII, which we would obviously like to see. The rate bar is just going to move around there, so will see how to gain that interim.

Got it. Great, thank you.

Our next question comes from Moshe Orenbuch with Credit Suisse.

Thanks. You guys had talked a little bit a lot actually about kind of the deposit pass through rates and all that kind of stuff. Can you talk a little bit about kind of the composition of the liabilities? I know you are starting pretty soon to start to see debt mature. If you thought about how you are going to replace that and does it matter, whether you kind of get that relief on the leverage ratio and can you talked about how that will kind of phase in over the next couple of years?

Yes, I mean as I look at overall deposits, we expect overall deposits to obviously continue to grow. I think it was somewhere around 54% of our overall funding. Over the next couple of years, we want that to grow to 75% of overall funding and when you think that could be realistic. With that I expect the unsecured debt to continue to come down; we've got about $12 billion of maturity over the next three years. Our expectation is that we're not going to refinance that. Now, having said that we have this leverage ratio restriction and because of that leverage ratio restriction Ally Bank needs incremental capital, that capital comes from liquidity as a holding company. So to the extent that gets delayed it may cause us to do some additional liquidity raises at the parent where we can push liquidity down. But I think, if I take a longer term view over the next two to three years, our view is that none of that $12 billion will really be needed within the company and we can bring that down. And then I think the other trade off that you will continue to see is we've had some big liquidity facilities at our bank and holding company on the secured side. Most of those are LIBOR based type facilities; we like to bring those down dramatically as well. So you will see overall secured funding come down, I think the convenience here is active in the securitization markets. But I think some of the private facilities that we have will come down.

Got it, just another question I mean, two years in a row of down 5% used car values, it’s a little unfair, I going to ask beyond that but 10% is a pretty hefty move, I mean you think things start to stabilize after that, how do we think about kind of on a longer term basis?

I think as you stock in out to 2018 and 2019, you hopefully will start seeing some real stabilization. So we've seen a pretty dramatic move in 2016, we think that continues with the off lease vehicles, but you are getting steady state with the amount of vehicles that get least by the OEM's on an annualize basis. So they should be able to handle some of that used car volume and it should be a little bit more of a steady state. But some of it depends just on how the OEM's incent the new cars and I always say used car values have more to do with where new car prices are, than anything else. So some of it depends on OEM behavior and we all hoping expect that OEM behavior will be better this time around than it was pre prices.

Got you. Thanks very much.

Our next question comes from John Hecht with Jefferies.

Good morning guys. Thanks. So, you just started touching a little bit on sort of a OEM major, I'm wondering if it give us a rundown of the competitive behavior across the various kind of segments in your business now, is it lightning of certain categories that still tightening and how do you feel about 2017?

This is Chris, may I’ll start and then JB can jump in. It's been pretty public out there that’s on what I would call the super prime. The prime to super prime side, the system, what I would call regional type players back a way a bit. We did see some price increases in the fourth quarter by some of the major competitors and we think that is very healthy for the market, particularly given just the higher interest rates. So the only thing on the - it’s still a competitive market, the only thing what I would call the prime to super prime side, is that the credit unions continue to keep pricing low and they have picked up a little bit of market share. So now they will tend to be a little bit of lager when it comes to raising prices, so I think they are worth watching on the top side. So that’s where you are seeing most of the competitive there. In more of the other into this spectrum, the subscriber prime side, without naming any just a one large player, what I would say step away a bit and go a little bit upstream and you saw another large bank kind of go in and take some of that volume. I think we probably know who that is. But all in a very rational way, so still competitive environment. We starting to see some pricing move up, which we think is a good thing along with benchmarks, but overall rational.

And then John, may be the only other thing I would add obviously Chris listed on the retail component within commercial floor plan still very competitive there, particularly by a large cap that continue to be very aggressive and frankly we have got to maintain our discipline around pricing and ensure we're in appropriate returns, but floor plan is probably where its most competitive today. So we're obviously happy to see what balances continue to be pretty stable to up, but we got to be mindful what that could mean for the longer term.

That’s great color guys. Thanks very much. And second question, I imagine this for Chris, Chris the off lease remarketing, there was a little bit of lower gain this quarter, obviously there is some seasonality and then some expected components to that. How should we think about the next few quarters with that factor?

Yes, gains - well I think we have about $10 million a gains in the fourth quarter, I would expect the first quarter to be somewhere in that ball park, meaning particularly in January and February you don’t tend to get many gains, because of the winter months. It starts to pick up more when you get in March. As we get to the second quarter, however, we do expect it to realize some gains in the portfolio and really associated with just better used car sales in the second quarter. So I really expect first quarter to be pretty similar, second quarter to actually start to move up a bit as you go through the summer months, it's probably pretty similar and then it tails offs again in the fourth quarter.

All right. Thanks very much guys.

Thanks John.

And I’m not showing any further questions at this time. I would like to turn the conference back over to our host.

Great, thank you. If you have additional questions, please feel free to reach out to Investor Relations. Thanks for joining us this morning. Thanks operator.