Ladies and gentlemen, thank you for standing by. And welcome to the Ally Financial's Fourth Quarter and Full Year 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference to your speaker today, Daniel Eller of Investor Relations. Please go ahead, sir.

Thank you, operator. We appreciate everyone joining us to review Ally Financial's fourth quarter and full year 2020 results this morning. We have JB, Jeff Brown; our CEO, and Jenn LaClair, our CFO on the call to review results and take questions. Before beginning, I'll note that the presentation we'll reference throughout the call can be found on the Ally Investor Relations website. On slide 2, you'll find the forward-looking statements and risk factor language that will govern today's call, and on slide 3 and 4 we've included several GAAP or non-GAAP or core measures pertaining to Ally's operating performance and capital results. These metrics are supplemental to, and not a substitute for US GAAP measures, definitions and reconciliations can be found in the appendix. With that, I'll turn the call over to JB.

Right. Thank you, Daniel. Good morning, everyone. And thank you for joining the call today to review our fourth quarter and full year 2020 results. I'm going to start on slide 5. I'm incredibly proud of the way our company and teammates responded during these challenging times. This past year presented one of the most complex operating environments in our company's history as COVID cases accelerated across all 50 states. And that led to considerable uncertainty about the health and welfare of millions of people and businesses. The fiscal and monetary response from the government, combined with the private sector actions providing relief to those impacted was necessary and still remains critically important to the recovery. Across our country, we also confronted the harsh realities of social injustices and racial disparity requiring difficult but necessary dialogue and an intensified call to action for everyone. Sadly, COVID appears to be further accelerating these disparities. As I shared across our company and with our board, the only ways we permanently disrupt the flaws in our system is by each individual making the commitment to change now and after the headlines were less frequent. And candidly, that's part of the reason I share it again today. While the year was full of challenges, signs of hope have emerged as we are now taking a meaningful step forward in the fight against the virus with the rollout of vaccines. And I am proud of how companies and people are responding and recognizing the need for real and lasting social change. I hope America can unite, heal and strengthen together. Further, the sacrifices and work with healthcare, service industry and community focus leaders and organizations is reason for optimism moving forward. At Ally, we build a culture based on doing it right, rooted in an…

Thank you, JB, and good morning, everyone. I'd like to begin by thanking our Ally teammates for their consistent operating and financial performance throughout the many challenges of 2020. Their commitment to our values, hard work, and perseverance is reflected in our strong and accelerating financial trajectory. Let's turn now to slide 9; net revenue of $6.7 billion for full year 2020, expanded for this six consecutive year, representing a 5% CAGR over this timeframe. The sustained top line trajectory reflects margin improvement across both sides of the balance sheet, driven by over a decade of customer growth and relationship deepening. Our balance sheet positioning and revenue momentum this year demonstrate our ability to navigate challenging environments and drive improved financial results in the years ahead. Turning to slide 10; we've included details on our balance sheet reflecting three primary dynamics. First, asset expansion and diversification. We ended 2020 at $176 billion in assets, a $33 billion increase since 2014. Retail auto loan growth has outpaced the decline in lease exposure, reflecting our strategy to broaden our capabilities in distribution. Corporate Finance has tripled in size to $6 billion through prudent entry into additional verticals. And we've grown capital efficient mortgage and investments securities portfolios and added Ally Lending. We expect continued organic loan growth and return optimization moving forward. The second driver has been the transformation of our funding profile shown in the bottom left, where deposit growth and retention have increased stability and reduced cost of funds. Since 2014, our deposit portfolio has nearly doubled to $137 billion now representing 85% of overall funding. As a result, higher cost legacy unsecured debt has declined by 60%. And we've reduced reliance on other wholesale funding, including securitization, facilities and other borrowings. And third, optimization of retail auto portfolio yields,…

Thank you, Jenn. I'll wrap up with a few comments on slide 23. I want to thank my teammates for their tremendous efforts during 2020. The resolve they've shown and balancing a myriad of personal and family obligations while working from home. And taking care of our customers serves as a testament to our ability to do it right. And that reinforces the pride I have in leading our company. The trust and transparency that exists inside Ally simply energizing to our customers and communities, our relentless work will continue as we preserve and build upon the trust and loyalty you continue to show in us. And regardless of challenges we may face in the weeks and months ahead, we will continue to lead with our values and focus on these consistent priorities as we continue to enhance long-term value for all of our stakeholders. Daniel, that's I think it for the prepared remarks. And we'll turn it to you for Q&A.

Thank you, JB. Operator, please begin the Q&A session.

[Operator Instructions] Our first question comes from Ryan Nash with Goldman Sachs.

Thanks. Good morning, everyone. So maybe to just dig in a little bit more on the ROTC progression, so JB, Jenn, the bank is clearly benefiting from the environment as well as investments that you've made in the business and bringing down funding costs optimizing on the asset side. So you maybe just dig in a little bit more on the drivers of getting us to 15% returns. And I think more importantly, can you talk about the ability to sustain these returns, particularly as the interest rate environment may evolve over time, and what are some of the drivers to doing that?

Yes, sure. I appreciate question, Ryan and I'll jump in and JB may want to add. The progression to the mid-teen ROTCE, I think you described it really well, it will be revenue driven positive operating leverage, I just mentioned the NII trajectory next year, which will be, progressing into the mid-teen, coupled with the fact that we'll continue to see other revenue expand over time, minus some of those one time. So when you wrap that all up, we're expecting total revenue in next year to be around 9% or so. And so really nice positive operating leverage driven by that revenue growth and coupled with the fact that on the credit side, we do expect that to migrate more towards normalized levels as we exit 2021, and into 2022, and 2023. So those are some of the big dynamics there. And I would absolutely expect that the 15% is sustainable. And I think that's due to all of the drivers that we kind of just described this morning around consistent customer growth, continued value add across every one of our businesses. We don't see any signs of stopping in the auto segment, continuing to grow relationships, deals per relationship, and just our positioning in the market couldn't be any better than it is today. And we don't see any sign of that stopping over the next several years. And you slide over to the deposits business. And you look at the 10 years of sustained customer growth. And really the transition from customers that were chasing price to really now customers that have bought into the digital transformation. COVID have certainly helped with that. But I do think that is a permanent shift in customer just propensity to purchase digitally. And with cash rich balance sheets across direct banks, as well as the entire industry, I don't think we're going to see a lot of appetite around increased pricing on the deposit side. And then last, but certainly not least, just the rapid scaling that we've seen in our newer customer segments. Every one of our newer customer segments is up 70 plus percent this quarter. And you just continue to see that added value, and the added ability for us to diversify our revenue into these higher return products, whether that's our lending, our invest product, as well as mortgage as well. So maybe a long winded answer, but bottom line here is really confident in getting to that 15% in short order, and sustaining it over the long term.

Got it. Thanks for all the color and maybe if I can dig in a little bit further on the credit expectation. So, Jenn, a couple of things, I think you mentioned 3% decline in used car prices, unemployment ending about 6%. And I also think you mentioned that charge-offs are going to peak in 2021. So can you just give us a little bit more color on where you see charge-offs headed? And then second, I think you said that you think losses are returning to more normal levels in 2022 and 2023. What is embedded in the 12% reserve and the 12% plus returns in terms of where the reserves headed? Is there any assumption of reserve releases? And how long would you expect until we actually get back to that pre-COVID level on the reserve front?

Yes. So, Ryan, maybe let me start with some of the assumptions around reserves and then I'll get to the NCO trajectory, but embedded in our reserves, and you're listening really well. You pretty much captured it. We have a pretty adverse macroeconomic scenario embedded in our modeling. So we use a November forecast. We're exiting 2020 at about 8% unemployment rate migrates down to just above 6% at the end of this year. And because we have a short RNS forecast, we revert to a mean that's over 6.5% in unemployment. So yes, there is definitely some adversity built into that macroeconomic forecast. I also remind you that we have not built any stimulus benefits into our reserve trajectory. So you think about stimulus that has already been ruled out but new stimulus potentially on the horizon, as well as the fact that consumer spending has dropped, and we're seeing savings rates that really all time high low, our highest levels we've seen in recent future. So embedded in our reserves is a lot of kind of conservative assumptions. And so I do think, depending on macros, depending on the continued performance of the consumer, there could be some upside as we continue to roll through 2021. So that's some context around the reserves. Embedded in those reserves, we have NCOs really starting to accelerate in the first quarter, second quarter of this year, and peaking in Q3 and Q4 before returning to more normalized levels into 2022 and 2023. So bottom line here is we are well reserved. We've taken the pain through the income statement in 2020, could potentially be some upside as you think about macro performance and consumer outperformance. And then last but not least, we do not model any kind of reserve release within our forecast. The reserve level will migrate down as we run through NCOs assuming that the projections play out, as I just described.

Our next question comes from Moshe Orenbuch with Credit Suisse.

Great, thanks. And that set of answers actually answers a lot of the questions, but maybe we could drill down a little bit into on the deposit side or the funding side. I mean, one of the things that we've talked about over the years, is both optimizing your mix of funding overall. And then your kind of deposit pricing and some of the comments that you made sounded like you think that's relatively near given, the liquidity at yourself and some of your peers. Could you just talk about the opportunities there? And what that could mean to your cost of funds?

Yes, sure. Thank you for the question, Moshe. So a couple things just is first on the cost of funds trajectory. I think this quarter is a really nice reflection of what we're expecting to see as we continue to roll through 2021 and 2022, which is that cost of funds will migrate down is reflects a couple of things that the full run rate impact of the OSA reduction this year, the CD repricing that will continue throughout 2021 and 2022. If you think about CDs are rolling off at 2% and rolling back on at material levels under 1%. And then to your point on other funding sources, the excess cash we have on the asset side of the balance sheet will be used in part to kind of replace FHLB, our broker deposits. We've terminated our demand notes program. And we haven't been active in the ABS markets either. So we see other sources of funding rolling down at the same time, we continue to see overall deposit growth and pricing move down as well. So hopefully, that gives you a bit of color, Moshe just on what we're expecting, but I think this quarter kind of really summarizes it perfectly, and you'd expect that trajectory to continue.

Got it. And I mean, I think you made a very strong point about the impact of the margin on revenue growth in 2021. But it does sound like there's some of that, that extends kind of beyond and provides further lift, even if there are some elements of current profitability that are kind of better than normal.

Yes, absolutely, Moshe. This is a trend that we'd expect over the next several quarters. And then in your first question you did kind of allude to market pricing. I mean we have cash rich balance sheets across the direct banks. Liability stacks have been optimized. And so there's not -- I don't believe there's a whole lot of appetite across the industry to see pricing increases in 2021 or beyond. And of course, that's the dynamic around loan growth as well. But we feel confident in our pricing and the ability to continue to take down funding costs beyond 2021.

Our next question comes from Betsy Graseck with Morgan Stanley.

Hi, good morning. Okay, one quick follow up and then a separate question, but the rate environment that you're looking for, could you just help us understand just using the forward curve results what is embedded in your outlook? And if rates move higher does that materially change your thoughts around NIM?

Yes, Betsy, I mean a couple things. So we're not embedding any rate increases into our projections right now. But the interesting thing is if you do consider a rising more rapidly rising rate environment, we're really confident in continuing to hit these higher NIM levels. And that's all of the dynamics that we have on pricing in auto on the asset side, as well as in deposits, we think we'll be persistent in almost any rate environment. I mean you never want to say that 100%. But as we look at a variety of different rate forecasts, we continue to see that NIM rolling through just because of the strength of the pricing we have on both sides of the balance sheet.

Okay, so you're saying that if the short end starts moving up, that you can continue to maintain the spread relative to what you're getting on the auto side?

Yes, I mean I think if we do see rates rise, I think it'll be a positive on the asset side, if you think about LIBOR based commercial floor plan. And I think if anything, if you see any interest rate increases across the curve, that's only a net positive for some of our longer duration assets like investment securities, or auto book, mortgage, et cetera.

Okay, and then just separately on loan demand and the portfolio and how it's been migrating, maybe you can give us some sense on what you're seeing on the ground demand for both used and new asking the question, because one of the pushback I get on the call on Ally is, well eventually everyone's going to have one, two or three cars, whatever they need. So shouldn't loan demand pullback, so a little color on that. And if you could give us a sense as to how the portfolio has been migrating from a credit perspective, in the various buckets prime, non -- near prime, sub-prime. I asked that question because the other pushback I get is, hey, used car prices are so strong, that's why credit is doing so well, when used car prices start to stabilize or come down slightly year-on-year, you're going to see the credit quality come through and just wanted to get your sense as to what you're seeing there so we can better address those questions we're getting from investors. Thanks.

Okay. Sure thanks, Betsy. A lot in there let me try to tackle it one at a time. I mean, I think on auto what I direct you to is the performance. And our exit run rate in terms of volumes in terms of pricing continues to persist. And we really don't see that stopping and a couple of dynamics there. One is certainly COVID is helping. We've seen a shift is done from services to durables, and the whole environment around COVID impact on appetite for rideshare, or mass transit has obviously, really spurred demand for personal vehicle ownership. So that is a net plus. But I will say just the resiliency of consumer balance sheets, the high savings rate, above and beyond that dynamic, there is demand that has persisted kind of pretty much off the charts. The second thing that I would say is if you look at just this market, it's a very large and fragmented market, and we have differentiated capabilities. And we see in kind of any environment, the ability to continue to grow dealers, dealer relationships, increase apps per dealer and continue to persist in terms of both originations as well as pricing. And then lastly keep in mind, our forecast, in our forecasts in 2021, and beyond does not embed a whole lot of growth. I mean we're -- we have, I think achievable assumptions in our guide. We're guiding towards the mid-35 or $35 billion in originations, and we're assuming that pricing actually comes down about 50 basis point. So I really think there's strong demand in this environment. I think there's persistent opportunity for us because of our model. And last but not least, the guide does not have really aggressive assumption. And then on your questions on credit, Betsy,…

So then, when we're looking at the net charge-off that should come with what you're baking in for unemployment, and a 3%, down in auto, does that get us to kind of a normalized loss rate of one three to one, six, or is that kind of a decent range? Or do you have a different outcome?

Yes, so this year, we're expecting and NCOs, we've modeled NCOs to increase above that level. Our reserve is at 3.95%, where, as I mentioned earlier, we're expecting and NCOs to really start accelerating, more reflective of frequency versus severity here in the first half, and really peaking in Q3, and Q4 and Betsy, with the 3.95%, reserve level that, those NCOs are higher than that one, three numbers. Now, as we exit 2021, we would absolutely expect NCOs to migrate back into that more normalized range of kind of 13, or 16 that we've seen historically. But we do have those pandemic related NCOs accelerating here in 2021. And potentially room to outperform that.

Our next question comes from Sanjay Sakhrani with KBW.

Thanks. Good morning, I wanted to follow up on some of the questions and comments before, maybe just focusing on the auto yields. Those have been pretty resilient, suggesting it could be worse, I guess. Maybe you guys could talk about the competition there and the environment. Is there something different about this environment where you're not seeing a lot of competitive pressure on those yields? And then maybe just broadly, in terms of thinking about the risks to the targets that you guys have provided, taking the economy aside, what are those risks?

Okay, so a couple of things there, just in terms of auto yields and competition. I mean, Sanjay as you know, this is always a really competitive space. And I think everyone's seeing kind of the performance of this asset class through 2020. And it's been one of the stronger across the consumers. So competition is always strong, I think we could see some more competition heading throughout 2021 year, but in the belly of the curve, where we're playing, we continue to see a lot of opportunity to grow and to put price in the market. But we are mindful of that. And that's why we have baked in kind of a 50 basis point reduction in retail auto origination pricing this year. When I talked to the team heading here in January, I think, they're really pleased with what they saw exiting 2020. And even more pleased with what they're seeing at the outset here in 2021. And then second, just with inventory levels, continuing to be pressured and really pressured here starting the first quarter, because of the strong demand I described. I think used vehicle pricing and pricing overall will remain strong. And then sorry, second --

And the risks.

Risk, okay, risks to the forecast. Okay. Sanjay, I think if we reflect on 2020, I think if we learn anything, it's that things can change very rapidly. And so what I would say the big risk for us is just to be mindful of this environment. I mean we have a lot of changing political landscape changes potentially to the tax rate to regulation to consumer spend consumer behavior. I mean I think we felt 2020 was quite a rollercoaster ride. And I mean I think we're incredibly well positioned to navigate any environment and our performance this year demonstrated that but we're mindful of potential volatility to come. And that would be the biggest risk if we did see anything. But I think as I reflect great performance this year, really well positioned for next year in a variety of rate environments, I think we've established a strong reserve. So feel really good about where we are, but just want to be mindful of the environment.

I think you have done a great job. Just a follow up, M&A. Just curious, JB, any thoughts on where there might be opportunities, if there are opportunities? I know consumer lending has been a focus at that point in time. I mean is that something you're looking to get larger? Thanks.

Yes, I mean, Sanjay, I'd say we really like the position of the existing businesses in the state of the company right now. And obviously, Jenn, and I announced with our board announced the large capital return program. So I think in the short term, we're more kind of hunkered down focused on scale on our existing businesses and the newer businesses. Longer term, I think, as we've said, for quite some time, I mean the unsecured space, we think fits well with the overall consumer position of Ally. We like the asset class. We think it can generate the right types of returns. But we got to be smart on that. And so I think in the near term, it's more kind of head down, focus on what we have in house today. But you always sort of stay open to the things to counter so not nothing imminent.

Our next question comes from Bill Carcache with Wolfe Research.

Thank you. Good morning, everyone. JB, I am sorry if I missed this, I was in different call. But I had a big picture question for you, Ally's net interest margin performance during the rate hike cycle that started in late 2015. And what we've seen from you guys so far in this reserved environment, along with strong credit performance, positive operating leverage, and the ROTCE trajectory that you guys have laid out, it feels like we're setting up for the investment community to gain greater comfort with the -- through the cycle performance of auto as an asset class. So the ability for you guys to deliver on the guidance you laid out is obviously critical, but could you kind of characterize that is beatable or aspirational? Maybe just give us a sense of how much conviction you guys have? Just overall of high level thoughts would be helpful.

Sure, Bill thanks for the question. And obviously, Jenn can go through any of the details on it. But I think inside the house we have this kind of pound outperform mentality that exists. So I think Jenn has highlighted what's embedded in the forecast. I think we obviously we put the 12 plus, and that's our focus really continue driving strong disciplined execution. And I think what you're really starting to see come through now, and the results is a function of the past several years of work and very disciplined execution, the business is scaling really strong positions. So we feel really good about the state of the company now and the sustainability of earnings. And certainly, as you pointed out, the margin is going to be a big component of that. And Jenn, hit all the highlights of several years of kind of seven plus percent yields on the asset side, and you're starting to still see the book migrate up to these new origination yields at a time when deposit costs and funding costs overall continue to come down. And Jenn and her team, I just can't say that enough, what our treasury team and Jenn has been doing to continue optimizing the liability structure. I mean we've been very aggressive their past couple quarters, obviously, in trades we've done on the FHLB side, which just further gives us confidence and strength going forward. So I mean, it's been, it's really been fun and energizing to see the company starting to really strut its stuff. And but we've got a high degree of confidence and in kind of what we're going to be able to deliver going forward. Jenn, obviously, you've got the details so.

Yes, JB, I think you summarized it extremely well. And maybe I just offer two points to add on. One is Bill, on the pricing side, a lot of that, as JB summarize, is already embedded, right, so we've got front book, back book repricing dynamics and retail auto and there's kind of no stopping that. And similarly on the deposit side, the trajectory to come really reflects that robust positioning that we have across the entire liability stuff. So a lot of that is kind of hard coded into our metrics and our forecast. And then on the reserve, I think I mentioned in prior question just, there's a lot of assumptions in there that are fairly adverse. And so our view today is that we've taken the pain, our reserves have peaked. And so potentially there could be some upside there. And then to your question around kind of through-the-cycle performance on auto. We're not projecting any change to kind of our day one CECL assumptions as reserves normalized. And so we continue to outperform at this level potentially there could be some kind of just reverse rating of the entire asset class. Again, not embedded in the forecast.

Got it. Thanks, Jenn. And thanks JB. That's very helpful. Separately, there's been a lot of focus on dealer floor plan levels, taking longer to return back to historical levels and I am just hoping that you could comment on how you guys are thinking about the risk that dealers will be running with less inventory than they have historically or do we revert?.

Yes. Bill, I guess our base case sort of calls for a slow reversion to more normalized levels. And obviously you'll see some offset in our cash balance positions when that starts to happen. But I think the real reality is it's been much slower than the industry expected to see. Now, obviously, that's impacted used car pricing and used car strength and the used car market overall. So while you don't have as many new cars on the lot, the demand by consumers is still remains, it's still very strong. And so they continue to shift in use. So I think our base forecast sort of calls for that slow factory ramp back up more new cars on lot. And that creating a little bit of the more softer use car pricing. So used car prices what Jenn alluded to, but I mean, we're still a ways away. I mean, while we did see some modest improvement, I think under a $1 billion quarter-over-quarter. We're a long way from kind of the 30 plus billion dollar levels that we would have expected in a normal environment.

Our next question comes from Rick Shane with JPMorgan.

Hey, guys, thanks for taking my question. When we look at the day one reserve level to today, there's basically a 60 basis point addition, when you think about the duration of the loans that equates to about 25 basis points a year an annualized charge-off and NCO rate. Given that there has been substantial amortization in the portfolio, since we've entered the COVID scenario, cumulative losses are way below original expectations. And at this point, essentially, about 25% of the book has been underwritten in a post- COVID environment. Is there a huge disconnect between the macro assumptions that you guys are using to set the CECL reserve? And the actual sort of bottoms up experience that you're really seen in the portfolio?

Yes, Rick, appreciate your very well done summary there. Absolutely. I mean, we are seeing a disconnect across macroeconomic factors and servicing performance, whether you look at 30 plus 60 plus or flow to loss metrics. That being said we continue to operate environment of uncertainty. And so as I described earlier, we've been prudent and balanced around setting a reserve using historical correlations to the macros and not embedding a lot of stimulus. To your point, I do think there could be some upside, should A; these macros continue to outperform because they have been outperforming and B; if consumers continue to be as resilient as they proven to be through 2020. And that's some of the upside not only on the reserves, but also the NCO trajectory, as described earlier.

Great, yes. I like the terminology of correlation to macros because that's a lot of what we try to do, and I'll agree with you it has not been nearly as predictive as it has been in the past. Anyway, thank you guys very much.

Thank you, everyone for joining. That concludes the Q&A session. Operator, I'll turn it back over to you.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.