Ally Financial Inc. (ALLY) Q1 2019 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Ally Financial First Quarter 2019 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] And as a reminder, this conference call may be recorded. I would now like to hand the call over to, Mr. Daniel Eller, Executive Director of Investor Relations. You may begin.

Thank you, Amanda. We appreciate everyone joining us this morning to review Ally Financial's first quarter 2019 results. You can find the presentation we'll reference throughout the call on the Investor Relations section of our Web site ally.com. On slide two of the presentation, I direct your attention to our forward-looking statements and risk factors. The contents of today's call will be governed by this language. On slide three, we've included some of our key GAAP and non-GAAP or core measures. These and other core measures are used by the management, and we believe they are useful to investors in assessing the company's operating performance and capital measures, please keep in mind these are supplemental to and not a substitute for U.S. GAAP measures. The supplemental slides at the end include full definitions and reconciliations. Today, we have our CEO, Jeff Brown; and our CFO, Jen LaClair on the call to review our operating and financial results. We have time set aside after the prepared remarks for Q&A. And with that, I'll turn the call over to Jeff Brown.

Thank you, Daniel. Good morning, everyone. We appreciate you joining our call. Jen and the entire finance organization have done a terrific job focusing on efficiency opportunities across the company, including in our financial close process. So you're now seeing our cadence shift about a week ahead from where we’ve historically announced results, and that's a big win for us inside the house. On slide number 4, let me cover the first quarter highlights. We had a very solid quarter across the company, but I believe stellar execution in our auto and deposit franchises. Performance this quarter keeps us on track with our long-term strategic objectives and 2019 financial outlook. The adjusted EPS of $0.80 was up 17% year-over-year. Core ROTCE of 10.9% increased 37 basis points compared to the prior year period. Revenues exceeded $1.5 billion in the quarter, a 5% increase year-over-year, while our risk profile was consistent. We remain the market leader in auto finance, a position we’ve maintained through our constant and unrelenting focus on our customers. We leverage our expertise we've built over the past 100 years to continuously focus on how to adapt the business to a variety of operating environments. We partner with more than 18,000 dealers across the US, offering a full suite of finance and insurance products across the entire credit spectrum. Over the past few years, we focused on digitization at the dealership level, increased auto-decisioning, while expanding relationships across a broader universe of dealers and emerging players. This approach resulted in 3.2 million decision applications during the quarter, the highest on record for us. We originated 9.2 billion of loans and leases at attractive levels during the quarter. Newly originated auto yields exceeded 7.5% in the period, compared to 6.5% in the prior year, an increase of 108 basis points while net charge-offs declined 15 basis points year-over-year. Our diversified strategy allows us to take advantage of market opportunities. Within the Auto Finance universe, used lending was at or near its highest historical level in 2018. Our position and expertise in the segment drove used originations above 50% for the fifth consecutive quarter, reaching 56% in 1Q 2019. This is a prime example of how we have adapted the business in response to a shifting market and the needs of our customers. Looking closer at credit, performance in our Auto portfolio improved year-over-year, and as you just heard another quarter of increasing portfolio yields and declining loss rates. We actively monitor metrics across our portfolio along with macro trends, and we continue to see positive signs around the overall health of the US consumer. Employment conditions remain robust. Wage growth has continued to accelerate in 2019, and the consumer balance sheet remains well-positioned, looking at both debt-to-income and payment-to-income trends. All these factors support a consistent and stable outlook for the Consumer in the near term. Our balance sheet is well-positioned and predominantly comprised of fully secured assets that have demonstrated high priority in the payment waterfall over many cycles. Turning to deposits, we ended the quarter with over 113 billion in balances, an increase of nearly 16 billion year-over-year. This quarter, we experienced exceptionally strong retail growth of 6.3 billion, our highest quarter ever and equal to over 50% of our full-year 2018 growth. Performance was driven by our consistent approach to the customer, including industry-leading service levels, compelling differentiated product offerings, a world-class mobile banking experience, and all of that bundled with attractive rates. Record retail balance and customer growth levels demonstrates the strength of our nationwide digital model. Nearly two thirds of the retail growth came in the form of liquid deposit products this quarter with the main source of inflows from traditional banks. We added 120,000 new deposit customers in the first quarter, over 50% of our full-year 2018 growth driving us to 1.77 million total depositors. Momentum in customer and balance growth reflects a combination of Ally's compelling brand and value proposition that has been highlighted throughout our recent marketing campaign, Better is Out There. Appetite for direct digital banking products continues to grow as consumers prioritize products with greater value and increased utility, elevated service levels, and high transparency and convenience. Digital deposits meet many of these criteria and have continued to grow, and still represent less than 10% of the retail deposit market share today, a nice path forward given our industry-leading position and value proposition. Looking at our other businesses, momentum continued across the invest in home offerings, while corporate finance had another solid quarter of asset expansion. Ally Invest account growth reached the highest quarterly level since we acquired the business in 2016. Ally Home direct-to-consumer originations of 400 million were the strongest levels we've seen since we launched this offering in late 2016. To further enhance the digital experience, today we're announcing a partnership with better.com, an industry-leading customer experience and origination platform. Customers will be able to complete an application in under three minutes and lock a rate in under 10 minutes. Ally and Better are aligned in driving a high value, simple, scalable cost-effective experience for our customers, and the relationship fits within our existing strategy for this space. We also believe this partnership will allow us to meaningfully reduce our cost structure and expense base and deliver a superior customer experience. We ended 1Q with 166,000 existing Ally customers who have two or more bank products with us, an increase of 11% versus the prior quarter and 48% year over year. Our strategy from the beginning has been to offer our customers a differentiated and digital Ally experience across traditional bank products. We're pleased with the momentum we're gaining in these areas. This approach leads to accretive earnings and increases deposit customer retention over the longer term. From a capital perspective, we announced a Board-approved share repurchase program of $1.25 billion, a 25% increase to the existing repurchase plan that will close out in June of this year. As a Category 4 bank, we had the flexibility to announce earlier than we have previously as we were not subject to the CCAR submission calendar this year. Repurchasing shares at attractive levels remains an efficient use of shareholder capital for us. Let's turn to slide number five to review a few of our key metrics. Trends on this slide demonstrate our continued execution. Year-over-year, where trends are more comparable due to seasonality, each metric is meaningfully higher. In the upper left, adjusted EPS was $0.80 per share in the first quarter, up 17% compared to the prior year period, while adjusted total net revenue of $1.535 billion expanded by $70 million year-over-year. And compared to 4Q, these metrics were impacted by two fewer days this quarter. Deposits on the bottom left increased to over $113 billion and now represent 70% of our funding base compared to 64% in the first quarter of last year and 43% looking back to 1Q 2014. This trajectory demonstrates the consistent and meaningful progress we made in growing a stable, efficient source of funding that serves as the customer entry point to Ally Bank. On the bottom right tangible book value increased on a linked and year-over-year basis to $31.42 per share, an important indicator of the inherent value we're building for shareholders. We are well-positioned to execute both financially and operationally moving forward. We hear the increasing narrative around economic uncertainties and our management team remains focused and mindful of the risks out there while actively looking for opportunities to build upon our momentum. And with that, I'll turn it over to Jen to take you through the detailed financial results.

Thank you, JB, and good morning everyone. Let's turn to slide six for review of our detailed financial results. As JB mentioned a few moments ago, results this quarter position us well against the 2019 financial outlook provided on our last earnings call. At this point in the year we're trending in line with expectations across every line item. Net financing revenue excluding OID was $1.139 billion linked quarter down $25 million and year over year up $70 million, increased net interest income was driven by burning asset growth across our business lines and in capital efficient categories, optimization in auto where portfolio yield left continues to migrate toward our new volume pricing and robust growth in our deposit book which allows us to fund asset expansion while also reducing higher cost alternative funding sources. We expect NII growth throughout the rest of 2019. Adjusted other revenue of $396 million increased modestly compared to Q4 in the prior year period, provision expense of $282 million increased by $16 million quarter over quarter and $21 million year over year. The increase versus the prior year period was primarily due to higher asset levels, lower reserve of leases related to hurricane activity and reserves in our corporate finance portfolio related to Q credits. Importantly within auto our net charge offs were lower in the linked quarter and year over year comparison. For performance here affirms that consistent and disciplined underwriting and collection strategies we've been executing for some time now along with a consumer that continues to have a solid financial profile. We'll cover more detail on credit in a few moments. Non-interest expense increased by $26 million in linked quarter and $16 million compared to the prior year, increases versus Q4 were largely due to compensation seasonality that occurs in Q1. On a year over year basis we drove operating leverage gains as revenue growth of 5% outpaced 2% higher expenses. This is a key focus area for us across all our businesses particularly in our growth products where we continue to build capabilities and scale. Expense trends versus the prior year were driven by items that should be familiar to you including volume and revenue based activities and disciplined investments in our businesses, digital and tech capabilities and brand. We expect expense growth to continue throughout 2019 on an absolute basis, but remain committed to driving operating leverage over time through revenue growth and efficiencies. Looking at key metrics for the quarter, GAAP and adjusted EPS were $0.92 and $0.80 per share, Core ROTCE of 10.9% and adjusted efficiency ratio of 48.9%, a decline of 120 basis points from Q1 2018, and a tax rate of 22.8%, slightly below our 23% to 24% expected in annual run rate. Turning to slide seven, I'll review balance sheet and net interest margin. First from an industry perspective over the past several quarters, benchmark rates have experienced an elevated level of volatility while the shape of the forward curve has persistently flattened. We've been managing to a relatively neutral interest rate risk position for some time now, which has reduced our NIM volatility relative to more asset sensitive balance sheet. We think the neutral position continues to be appropriate particularly with volatility in the curve and a wide range of perceptions on the Fed's next move. We continually assess re-pricing and data dynamics and thoughtfully manage interest rate risk across both sides of the balance sheet. Net interest margin excluding OID was relatively stable at 2.69%, declining 3 basis points quarter-over-quarter reflecting lower seasonal lease income and ongoing earning asset diversification while NIM was unchanged versus the prior year. Year over year average earning assets grew 7% to $172 billion including $2.2 billion of higher auto related balances and over $8 billion of capital efficient asset growth unsecured is now 8% of funding down from 19% five years ago. A significant part of our liability optimization strategy. Through 2020 we have another $3 billion of high cost debt scheduled to mature with an average coupon of 5.8% and moving forward we may accept wholesale funding markets with a modest amount of issuance at prices well inside these levels. Asset yields increased 10 basis points in linked quarter and 52 basis points compared to the prior year. Retail auto portfolio yields moved up 8 basis points quarter over quarter and 57 basis points year over year to 6.47%. The sustained trend of originating loans above 7% will steadily drive the portfolio yield higher over the next two years through the ongoing turnover of the book. Lease portfolio yield of 5.56% was consistent with our expectations as gained normalized quarter over quarter and used car prices declined around 1% year over year. In commercial auto, the portfolio yield increased by 25 basis points in linked quarter and 89 basis points compared to the prior year. As a reminder 99% of our floor plan assets priced of floating rate indices, which leveled off in Q1. Moving to liabilities the ongoing migration of our funding base to deposits over the past several years accelerated this quarter, average deposit growth of $5.5 billion financed earning asset out the growth of $2.2 billion the roll down of $1.3 billion in high cost unsecured and $1.9 billion lower secured funding. Turning to slide eight, we'll look closer at some of our key deposit details. In the upper right you can see the meaningful growth of our deposit portfolio ending at over $113 billion fueled by a record $6.3 billion of retail growth. Customer retention remains strong at 96% and an indicator of overall customer satisfaction and high brand loyalty. We are now at 70% deposit funded and expect to steadily move to 75% to 80% over time. In the bottom left, retail deposit rates increased 21 basis points in linked quarter reflecting the December Fed hike resulting in a portfolio beta of 44% since the beginning of the tightening cycle aligned with our expectations and outlook. Our current forecast shows no Fed tightening actions for the remainder of 2019 and we believe this will drive the last re-pricing activity across this space and perhaps competition continues to grow in the digital space and it has intensified over the past 12 months to 18 months but as the largest fully digital deposit gatherer we are well positioned to remain thoughtful and disciplined around pricing and growth. In the bottom right, we added 120,000 customers reaching 1.77 million total deposit customers. New customers accounted for 56% of our balance growth while 44% of growth came from robust augmentation among existing customers and momentum among millennials continued representing 59% of new account openings. We've achieved strong deposit results through a combination of the item JB mentioned earlier including high customer service and strong loyalty, differentiated products, disruptive, impactful marketing and great rates. Let's turn to capital on slide nine. CET1 of 9.3% increase compared to Q4 in the prior year due to earnings growth and the roll down of the disallowed DTA. We repurchased around 1.3% of outstanding shares this quarter, representing a decline of over 17% since the inception of our buyback program executed at attractive levels relative to book value. Earlier this month, our board approved a $1.25 billion share repurchase program that will begin in July of this year. This represents a 11% of our current market cap and a 25% increase compared to the current repurchase plan. Additionally, the Board recently approved the second quarter dividend of $0.17, payable on May 15 aligned with the first quarter. And regarding CECL implementation and the opportunity to phase-in capital, we are well positioned to incorporate the impact into our ongoing capital management processes. We expect to continue our trajectory of capital distributions and ongoing focus on investments and growth in our businesses. Asset quality details on slide 10. Consolidated net charge-offs came in at 73 basis points this quarter, down 11 basis points year-over-year, reflecting the consistent performance of our portfolio and focus on risk management. In the upper right, consolidated provision expense in Q1 of $282 million was up $21 million compared to the prior year, driven by higher Auto loan balances and uptick in our retail coverage ratio at 1.5%, reflecting macroeconomic improvement trends that have slightly moderated, reduced hurricane-related releases and increased reserves in the Corporate Finance portfolio related to few credits. In the bottom left, retail auto net charge-offs were lower by 15 basis points year-over-year, the fifth consecutive quarter of a year-over-year decline. Looking at delinquency trends in the bottom right, 60-plus increased 1 basis point year-over-year and 30-plus declined by 5 basis points over the same period. We expect to see slightly higher year-over-year delinquency levels throughout the remainder of 2019, reflecting the higher mix and seasoning of our use portfolio. Taken together, these trends align with our expectation for net charge-offs to be on the low end of our 1.4% to 1.6% range for the full-year. We are pleased with the consistent performance in our portfolio, a reflection of stable credit in recent vintages that comprise the majority of our balances today. On slide 11, Auto Finance pre-tax income of $329 million was down $6 million versus prior quarter and up $61 million versus prior year. You've heard us talked about optimizing auto and this is evident across our operational and financial results. Retail net financing revenue grew year-over-year as earning asset expanded and higher yielding originated volumes replaced lower yielding older vintages. This is fueled by the full spectrum of products we offer, our disciplined approach to credit and underwriting and diversified distribution network, which leads to strong relationships at the dealer level and continued access to higher AF flow. During Q1, we decision a record level of applications, representing a 9% increase year-over-year, which enhances our ability to generate consistent volume at strong risk adjusted margins without changing our credit by box. We also improve dealer engagement within the growth channel where 40% of dealers send us at least five deals a month, an increase of five percentage points year-over-year. And over the past 12 months, we exited RV and Transportation Finance with a strategic profile and return did not align with our broader objectives. In the bottom right, you can see the increase in estimated retail and new origination yields up 108 basis points year-over-year, driving a retail portfolio yield higher by 57 basis points over that same timeframe. With an average duration of around 2.5 years, approximately 40% of the book turns over each year. This would drive the portfolio yields steadily higher overtime toward seven-plus percent, where new originations are coming on. Let's turn to slide 12. Originations in Q1 were $9.2 billion, an increase of $1 billion quarter-over-quarter and down $300 million versus the prior year. Growth in used accounted for 49% and 56% of originations respectively, while non-prime remained steady at a 11%. Originations through these channels allowed us to offset the impact of lower new vehicle sales. Broadly speaking, our strategic positioning over the past few years is demonstrated here in real time performance. We've been mindful of auto ecosystem shift and build an adaptable platform that positions our franchise for the long-term. At the dealer level, we aligned with trends in the used category, where momentum has continued to build. Moving to the bottom left, consumer assets grew around $2 billion year-over-year to $79.8 billion as growth in retail auto balances offset a slight decline in lease balances. And looking at commercial assets on the bottom right, average balance is normalized at around $35.6 billion. Let's turn to the Insurance segment results on slide 13. Core pre-tax income of $80 million this quarter was up $18 million compared to the prior year. Underwriting income, net of losses increased $9 million year-over-year as earned premiums continued to grow. Realized gains moved higher by $9 million, reflecting higher equity markets. Written premiums of $305 million were $30 million higher year-over-year, driven mainly by higher rates and portfolio growth of our dealer plus an inventory offering. We continue to see strong written premium trends and diversification through our growth channel efforts. Slide 14 has our Corporate Finance segment results. Core pre-tax income of $9 million was down on a linked and prior year basis, driven by reserve activity and two separate factor specific exposures. Those loans have been on our watch list and were classified as non-performing in Q4. The overall portfolio performance continues to be strong and within our expectations, as non-accrual loans remain below our historic average. Ending HFI assets grew over $300 million during the quarter and are up 17% compared to the prior year, as we surpassed past $5 billion in Q1 balances. Our experienced Corporate Finance team remains focused and disciplined in an intensely competitive environment, ensuring execution of deals aligns with our risk appetite across each of our diversified categories where we lend. We expect the portfolio growth rate to remain in the mid-to-high teens throughout the remainder of 2019, as we navigate competitive dynamics. In slide 15, mortgage pretax income of $13 million this quarter increase $5 million from the prior year period as net financing revenue increase and asset levels grew. We purchased around $1.2 billion of bulk mortgages during Q1 and originated $400 million of direct to consumer loans. And as JB mentioned at the beginning of the call we are announcing our partnership with Better.com this morning. This aligns with our culture and prioritization of customer-centered streamline digitally based products. Through this partnership, we are providing customers with an end-to-end digital mortgage experience of clearly differentiated offering in this space. The platform is scalable and underpinned by best-in-class economics which we will realize at an accelerated pace. We remain aligned with our strategy to grow direct-to-consumer originations to around $3 billion per year and enhance ROE at the enterprise level over time. We're excited about the opportunity as we begin rolling this out over this summer. Before handing it back to JB, I'll close by saying we'll remain focused on delivering for our customers in building long-term value for our shareholders. Our successful results this quarter are a direct reflection of our consistent execution and risk management within each of our business lines. Our steady accretion of adjustable tangible book value per share ending at $31.42, an increase of 14% year-over-year is a testament to the inherent value we've built for shareholders over time. And with that, I'll turn it back to JB.

Thanks, Jen. On slide number 16, our priorities for 2019 and key themes remain consistent with what I've laid out on prior calls. We take great pride in being a comprehensive, adaptive and digitally focus consumer in commercial finance provider and believe our dominant franchises are well-positioned for the long-term. In 2019, we will pass several milestones across our businesses including our fifth year since becoming a publicly traded company, 10th year since launching Ally Bank, 20th year in corporate finance and our 100th year in auto finance, demonstrating our deep industry experience, the resiliency of our franchises and the ability to take advantage of future market opportunities. We are focused on leveraging expertise and our history to build a stronger company for the future, including discipline, risk management and purposeful capital management. At the Center of Culture is a do it right mentality, which our more than 8,000 Ally teammates applied at every interaction with our customers within our communities and on behalf of our shareholders. We thank you for your interest and support. And with that I think we can now head into Q&A.

Thanks, JB. So operator, we would ask that you begin the Q&A here in a moment. And before doing so, we'd ask participants to limit yourself to one question and one follow-up. Amanda, if you could start the Q&A please?

Absolutely [Operator Instructions] The first question is from the line of Chris Donat of Sandler O'Neill. Your line is open.

Good morning. Thanks for taking my questions. Jenn, I wanted to ask one just on the -- on the originated yield, and I think it's pretty clear that we're expecting the average yields in the portfolio to rise with those, but can you just remind us on some of the seasonality there because the benchmark rates did look like they decreased quarter-on-quarter, but then you saw a nice pickup in the originated rates quarter-on-quarter. So I'm just trying to understand the dynamic there and expectations going forward?

Sure. Thanks, Chris, and good morning. So, you're absolutely right. We do have seasonality that runs through our origination yields and think about it by the first half of the year we typically have a higher percent of used which drives our yields up a bit. And in particular, as we go into Q2, you'll see that shift in our mix -- our originated mix to the used segment. So we are running around 7.56% in Q1, we'd expect that level to continue into Q2, and for full-year, we're expecting to be kind of in the low-to-mid 7% range on full-year originated yields. In terms of the benchmark, we obviously had just a terrific quarter in terms of total auto originations at $9.2 billion. We're expecting with applications up 9% year over year to continue to see constructive and strong flows which has helped to just support pricing overall across our business. So while benchmark rates have come down, we've been able to maintain our pricing so far this year. And to your last point about the portfolio, we were at 5.80% in 2018. The portfolio yield on retail was about 6.14% last year, so as we continue for two years in a row to have the yields above 7%, you're absolutely right, we would expect the total book portfolio yield to continue to migrate up over the next couple of years.

Okay, thanks so much. And then as a follow-up and related to this, as you're able to maintain pricing and grow your applications, can you comment on the competitive environment here, it seems like if you're growing applications, I would expect some degradation in your pricing, but is it a more benign environment than you saw, say a year ago or can you just give us some comparison on where we are on that?

Yes, sure. It's really been steady as you go. We haven't seen any major changes in the competitive environment. I think what you're seeing in terms of the application increase is really just continuing to focus on the dealer, continuing to lean in where there's opportunities in the market, and as JB mentioned in 2017 and 2018, used it at an absolute all-time high as far back as the data goes, and we've got a model that allows us to lean into use when there's opportunities there, so that's really what you're seeing in terms of our success, it is just the diversification of our distribution channel, the full product spectrum that we offer to our dealers as well as just being able to lend and find opportunities across the market.

Got it. Thanks very much.

Thank you, Chris.

Thank you. Our next question comes from the line of Betsy Graseck of Morgan Stanley. Your line is open.

Hi, good morning.

Good morning, Betsy.

Two questions; one, just wanted to ask about the increased buyback announcement that you made during the quarter, and you did that with an expectation for CET1 to be in range, so I just wanted to get a sense as to how you are managing the average earning asset growth, the loan growth, do you think that it's going to slow down a bit as we go through the next four to eight quarters, or are you expecting that just the improvement in returns is going to be able to keep the CET1 where you want it, just if you could talk through that a little bit?

Yes, sure. The buyback announcement I think underscores our consistent focus on repurchasing, especially as our stock continues to trade below book value. So, no surprises there in terms of our strategy to continue to lean into buybacks. Relative to the CET1 ratio at 9%, we're not going to pull back on opportunities across our businesses to grow assets. You saw just the robust growth we've had in retail auto, continuing to lean in on corporate finance; and with our better.com partnership announcement, we think we can accelerate our lending in the home lending and mortgage space as well. So we're not expecting to pull back at all-on prudent and high ROTCE asset growth. The way that we're going to continue to build capital is exactly what you said it's continuing to get better returns. We've been focused on ROTCE organic earnings growth. And then, we'll also look at opportunities across our balance sheet to just continue to optimize.

Okay. And that's helpful. Yes, go ahead.

Yeah, I was just going to add, Betsy, keep in mind that the products that were leaning into are capital efficient, so think about mortgage for example has a 50% RWA versus 100% in retail auto, so that helps to manage our CET 1 ratio as well.

Right. Actually that leads into the second question on the announcement that you made with the partnership around mortgage originations, and you indicated that you thought you could get an improvement in efficiencies on a relatively quick path. Could you just help us understand how you will migrate your current origination process to the online, and over what kind of timeframe you think you're going to be able to migrate that and how much…

Yes.

How much uptick in margin you're expecting to get as a result of this partnership?

Yes, sure. So we currently outsource our origination platform so the transition that you'll see and we're going to work through this over the summer and should be ready to go back half of this year. But the transition is really from one vendor to another. It's not like we have any substantial build around. Now it's really just a vendor management shift. The way that I see this is there're two things we want to optimize against. One is just a differentiated exceptional experience for our customers and we think through Better.com, we are going to achieve that. If we look at the experience and you go through just how quickly and easy it is for our customers, it will be truly a differentiating factor for us. And then the second thing is to be successful in this business and to drive ROTCE higher. We have to have an incredibly efficient front to backend digital operating platform and we believe with Better and some of the other vendors that we've selected that our operating platform is unique in the industry in terms of the efficiency it provides. And you couple that with the fact that mortgage requires half the RWA as other asset classes and we think we'll be very accretive in terms of the returns that will get pretty much out of the gate here with this new partnership.

Okay. And you're going to be unique in the industry because you're going to be fully digital whereas others aren't, is that your point?

Yes, the point is fully digital, very selective in terms of how we piece together our front to back office, operating platform, and that's going to take down. We've been very careful about how we've invested in the space. We will have some costs coming down internally just based on our old originating platform and as we move over to better we'll shed those costs and move into a much more efficient operating platform.

Okay. Thank you.

Thank you, Betsy.

Thank you. Our next question comes from the line of Sanjay Sakhrani of KBW. Your line is open.

Thanks. Good morning. I have a question about used car prices, obviously those remain fairly strong despite persistence strength recently, could you just talk about what's driving that strength and if you expect that strength to continue? And then maybe just how that would affect remarketing gains going forward?

Yes, sure, and good morning, Sanjay. So a couple of dynamics there, one is if you look at new vehicles the price of new vehicles has continued to escalate and we actually saw new vehicles sales coming down about 5% coming into the first quarter here and so as new vehicle sales have come down there's been an increased demand for used, it's got a great value proposition for customers, dealers actually make substantially more from a used vehicle sale versus new and then that's true for Ally as well. So think about it kind of the trifecta of benefit to the customer, benefit to the dealer and benefit to our Ally as well. We've been guiding towards kind of a 3% to 5% decrease year-over-year in used vehicles, we've been outperforming that we're down 1%, I will say if you look linked quarter used vehicle prices were down about 7%, so we kind of peaked in Q4 and came down a bit. And so we continue to model into our residuals as well as into our provision expense, this assumption around the 3% to 5% decline. Now you've got to keep in mind the market has outperformed but we will have the peak lease, off-lease vehicles coming into the market this year at about 4 million units and as you see that increase in supply we'll just have to manage the dynamics around demand and so far demand has outpaced the supply, but I think with the off lease vehicles and the peak we're going to hit here in 2019 we just have to be watchful, but we've been conservative both in terms of the residuals as well as in our provision expectations.

Thanks. Second question just on capital return under the new regulatory paradigm and like of C-car maybe you could just talk about how you think about capital adequacy and the associated buffer in relation to CECL as well. So it was very strong share buyback program you guys announced. Is that something that's indicative of the new paradigm or something else? Thanks.

Sure. I mean I think let me go to our announcement I think our announcement is just continuing our strategic priority around share buybacks in light of the fact that we trade under book value we think that's a very accretive risk free use of our capital, and so, no changes there in terms of our strategy to lean into share buybacks. As we look out on the horizon and we revisit our target and goal framework and the 9% that we put out there we revisit that all the time relative to financial health of the company. Our risk appetite and now with CECL on the horizon and potentially some changes with SEB it is something that we're going to consider. We do think that 9% at this point in time is the right level for us. But to your question there could we may continue to revisit and see under CECL or SEB effect gives us an opportunity. Now on CECL and I mentioned this in my prepared remarks we do have an opportunity to phase in the additional capital and as you've got cut off it's a three year phase in and but you've got to take 25% for four years. We do think that that new pre impact in it gives us an opportunity to really fee impact in it gives us an opportunity to really fold that into just our normal capital management processes. So a lot in there, I'd say no significant changes in our strategic focus around buybacks, we think the seasonal impact is manageable and we'll continue to revisit the 9% target.

Thank you.

Thank you, Sanjay.

Thank you. Our next question comes from the line of Kevin Barker of Piper Jaffray. Your line is open.

Good morning.

Good morning, Kevin.

Just a follow-up one more time on capital, have you given any consideration around your tangible common equity ratio in addition to the CET1 especially with the addition of mortgages or the growth in mortgages on the balance sheet, it appears you combine that with the buyback and your TCE ratio may go sub 7%, which would be probably one of the lowest amongst the peer group as we go into late 2019/early 2020?

Yes. I mean it is something that we look at and we are mindful of kind of it's going below 7%. We know that's a metric that the industry looks at, for us we've been much more focused on CET1 as our binding constraint. And we'll continue to just focus on growing earnings, growing capital organically, making sure we're getting the right returns and we do think that we'll continue to grow both the TCE as well as our CET1. Keep in mind, we do have a fully secured balance sheet and so we like to remind everybody that our returns may be a bit lower but we do have just a very valuable collateral.

Okay. Great. And then, as far as the operating efficiency and some of the moves you made in improving efficiency especially in this quarter do you expect the expenses to continue to drive lower as overall percentage of the asset base given with the deposit you've made so far.

Yes. On expenses, we don't have a specific target. What we're focused on is growing revenue faster than expenses to drive that operating leverage. We're very mindful of our level of investments but we see big opportunities for expansion across all of our businesses and we don't want to trade short term earnings for a long term opportunity to expand our returns and so we're going to continue to lean in growing our business. There is some variable cost attached to that. We're going to continue to grow new product adjacencies like that continuing to lean in on Ally and best opportunities ally home and just continuing to build out of a consumer franchise in all of our dominant businesses. So short answer is we're focused on positive operating leverage and we'll manage expenses within that.

Okay. Thank you very much.

Thank you.

Thank you. Our next question comes from the line of Moshe Orenbuch of Credit Suisse. Your line is open.

Thanks. Good morning. This is actually James [indiscernible] on for Moshe. We were surprised at the strength of origination yields and we're wondering what role higher loan applications and active dealer growth might be playing in origination yields and strong credit. Can you talk about what we might expect for growth in active dealers and applications over the next few years and what impact that might have on the origination yields.

Sure. Our whole strategy is around growing applications and that's all about continuing to look for diversification opportunities and distribution. JB mentioned the metrics around continuing to see five-plus percent growth in our growth channel coupled with the fact that we're focused on further engagement within each of those dealers and I shared the metric around the percent of dealers giving us five or more apps has continued to grow over time. So, you're absolutely right. We're going to continue to see the drive, higher applications through our distribution network and the engagement of our distribution network. While we grow applications, we also grow our flows and that allows us to be very picky about which applications we have proven, what we put on our balance sheet. And so the comment was made earlier, underlying benchmark yields have come down, but your pricing hasn't. It's just continued flow of new applications has allowed us to maintain that yield. As we go through the year, we're going to continue to focus on making sure we get the right flow. We expect to have origination yields in the kind of mid to low 7% range, and that will continue to drive up our total portfolio yields over time.

That's good color. And on the gross dealer channel, you said you're always working to drive engagement which makes sense. How much more runway do you think there is? I mean, we know it's a competitive space, but you guys have a rewards program. So can you talk to what we might expect there?

Yes. I mean, I'd say two things. One is we're going to continue to grow the number of growth dealers. And that's as we look at that growth channel, it's traditional dealerships, but it's also some of the new players in the market, the Carvana, the DriveTime and the CarMax, we're going to continue to be leaders in this space and continue to evolve our model and diversify within, but within the growth channel. And then second to that and this is where the team has really focused over the last quarter is within those dealerships just making sure that we're getting the right amount of flow, and you're absolutely right, our Ally Dealer Rewards programs helps us not only to bring in the number, but also to bring in the engagement level that we need and we're going to continue to focus on both of those. And I think the trajectory that we've demonstrated over the last couple of years we're going to continue.

That's helpful. Thank you.

Thank you.

Thank you. And that does conclude our question-and-answer session for today. I'd like to turn the call back over to Mr. Daniel Eller for the closing remarks.

Great. Thank you. So, thank you for joining our call today. If you do have any additional questions please feel free to reach out to the Investor Relations. That concludes today's call.

Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Everyone, have a great day.