Ally Financial Inc. (ALLY) Q1 2021 Earnings Report, Transcript and Summary

Good day and thank you for standing by. Welcome to Ally Financial’s First Quarter 2021 Earnings Conference Call. [Operator Instructions] I’d now like to hand the conference over to your speaker today, Daniel Eller, Head of Investor Relations. Please go ahead.

Thank you, operator. We appreciate everyone joining us to review Ally Financial’s first quarter 2021 results. This morning, we have our CEO, Jeff Brown; and our CFO, Jenn LaClair, on the call to review our results and then take questions. Before beginning, I will note the presentation we will reference can be found on the Ally Investor Relations website. And on Slide 2, you can find the forward-looking statements and risk factor language that will govern today’s call. And on Slide 3, we have included several GAAP and non-GAAP or core measures pertaining to Ally’s operating performance and capital results. These metrics are supplemental to and not a substitute for U.S. GAAP measures, definitions and reconciliations can be found in it. With that, I will turn the call over to J.B.

Great. Thank you, Daniel. Good morning, everyone. We appreciate you joining us this morning. We recognize it’s a busy morning with a few of us out with results. So, we appreciate you being here. I am going to begin comments on Slide #4. As we convened this call a year ago, we were obviously in the early days of the COVID-19 health crisis that has taken the lives of many loved ones, altered everyday norms, and shed an unfortunate but necessary light on growing economic disparities. Today, through the diligent work and coordination across health and public sectors, vaccine rollouts are accelerating providing increased reason for optimism in our ability to contain the spread of this deadly virus. Likewise, early signs of a broad-based economic reopening in the U.S. continue to emerge, evidenced in the outlook for strong GDP growth, ongoing gains in employment levels, and expanding consumer confidence and spending. We have also seen increased focus and action across the private sector in addressing income disparity and underlying systemic racism, even though more work remains to be done in the years ahead. Over the past many months, I have expressed a view on several occasions that Ally would successfully navigate the complex environment and emerge stronger than before by relying on a consistent set of values and executing. Ally’s first quarter operating and financial results put meaning to these words, demonstrating the value we are building for all of our stakeholders as we deliver on our mission to do it right for our customers, employees, and communities. Ally’s success has always been defined by our relentless customer focus and the vibrancy of our culture. Over many decades, we have built dominant, adaptable businesses within the auto and digital banking ecosystems firmly centered around our customers. Efforts to build the largest auto and digital bank platforms have underpinned significant and sustained financial improvement and enabling us to capitalize on market opportunities in real time, which Jenn will talk about in detail this morning. Our purpose to help customers achieve their financial goals through seamless, innovative financial products and services is evident in everything we do and was paramount throughout the pandemic, shown in the rollout of our comprehensive relief programs and access to credit we provided to all of our consumer and commercial clients. Maintaining our culture has always been a top priority centered around an environment of inclusivity and protecting the well-being of our employees. Over the past year, this approach has taken on a variety of new forms, including expansion of health, family, and financial benefits for our people, dynamically adjusting to virtual and hybrid work environments, and relying on our employee resource groups to facilitate crucial conversations and connect with each other as we confront the disturbing realities of systemic racism and disparate treatment among black, brown, and most recently Asian communities. I am immensely proud of how our Ally teammates have responded to each of these challenges, remaining dedicated during times of great uncertainty and instability, while consistently going above and beyond to deliver for our customers. For the second year in a row, we granted all employees with 100 shares of Ally stock, referred to internally as the own-it grant. Through this action, we are acknowledging the significant contribution each of our employees continues to make, while embedding an owner’s mentality across the entire organization. On social and community causes, we have expanded our ability to drive impact across our leadership team and through the Ally Foundation and Office of Diversity and Inclusion. During the quarter, we marked our 15th year of partnership with the Thurgood Marshall Foundation by increasing scholarships and grant monies, focused on improving access to public policy and financial service industries. Each of these critical components contributes to our ongoing success and generates long-term value for all of our stakeholders. There is excitement at Ally in the success we have generated and the path in front of us as we continue to further leverage our scale and expertise in meeting the needs of our now 9 million and growing Ally customers. Turning to Slide #5, first quarter adjusted EPS of $2.09, core ROTCE of 24.1%, and revenues of $1.9 billion, each represented record setting levels for Ally, reflecting organic and diversified revenue expansion. Within auto finance, consumer originations of $10.2 billion represented our highest level in over 5 years at a healthy 7.2% yield, while the credit performance remained solid. These are powerful examples of our market-leading capabilities and ability to execute on our strategic priorities. Overall demand for new and used vehicles was robust during the quarter, while competition remained balanced, but intense. Industry inventory levels reached multi-decade lows as sales trends were strong and we began to see the early impact of constrained OEM production due to chip-related shortages. These dynamics provided structural support for used car values, which remained at or near record highs. Within insurance, written premiums of $333 million moved higher year-over-year and investment portfolio revenue trends remained robust. Turning to Ally Bank, the trend of organic and accelerating growth continued in the quarter. Retail deposits ended at $128 billion, including customer expansion of 14%, extending the trend of double-digit year-over-year growth every quarter since launching Ally Bank in 2009. Ally Home originations of $1.8 billion grew nearly 2.5x compared to the prior-year period. 45% of originated volume was sourced from existing deposit customers, highlighting our organic opportunity to build increased scale in this core consumer bank product. Ally Invest self-directed customer assets of $14.5 billion expanded 93% year-over-year, reflecting customer inflows and market activity. The team showed resiliency and dedication in a choppy environment, generating steady customer growth and supporting historically elevated daily trading activities. Ally Lending performance was strong during the quarter as we generated $211 million of volume, nearly a threefold increase year-over-year. We expect to officially launch our retail offering here in the second quarter, enhancing our ability to sustain our momentum in this rapidly growing market. Corporate Finance financial results were solid, generating strong syndication income and $1.8 billion in loan commitments, our highest first quarter ever. The outlook for each of these businesses reflects years of steady execution and ongoing discipline, which positions us to achieve our near and long-term financial and strategic objectives. On Slide #6, trends on the top of the page highlight our ability to generate strong earnings and revenues and indicate the rapid resumption of the improving financial trajectory we were on entering 2020. As we have highlighted in the past, we are not overly focused on quarter-to-quarter trends, which we expect will not always move in a linear manner as our focus is centered on long-term value enhancement. On the bottom right, tangible book value per share of $36.16 increased quarter-over-quarter and year-over-year to our highest level on record. Values, culture, and disciplined execution will continue to underpin our approach as we build upon our momentum in the years ahead. Thank you. And with that, I am going to hand it over to Jenn to go through the detailed results.

Thank you, JB and good morning everyone. I will begin with a few broad perspectives on our leading differentiated capabilities that have positioned us for the future and allowed us to generate a strong first quarter, including our highest PPNR and operating income. Starting first within our auto segment on Slide 7, we have built an agile and resilient business, delivering comprehensive products and services. Our market leadership has grown consistently over the past decade, including an over 50% increase in dealer relationships to 19,000 and application volume at the highest levels in Ally’s history. Our broad-based distribution across emerging and traditional dealers provides us real-time insight into opportunities to optimize volume with risk-return dynamics. The powerful combination of our highly skilled field teams and evolving technology platforms, including auto decision capabilities, ensure we deliver a streamlined experience to a broad range of dealers and consumers. Over the past year, we have deployed several digital consumer portals and converted to a modernized retail auto servicing system, evidence of the end-to-end enhancements and data-driven approach. Turning to the industry, personal vehicle ownership offers critical utility to consumers, reflected in the large, resilient and growing auto market. Ally has a lengthy track record of adapting to shifting market dynamics, including a seamless transition to increased used vehicle demand, a trend we expect to continue. And while recent credit trends have been positively impacted by stimulus, auto consistently ranks near the top of the consumer payment waterfall, a trend that has persisted across several cycles reflecting the strong value of the secured asset class. Turning to Slide 8, several years of steady broad-based consumer adoption of digital banking accelerated in 2020 as demand increase for personalized experiences delivered seamlessly and instantly. As the largest all-digital bank in the U.S., Ally is uniquely positioned to benefit from this ongoing evolution. We have consistently grown retail balances and customers at Ally Bank for 48 consecutive quarters and are increasingly leveraging this success as the gateway to our rapidly expanding mortgage, invest and point-of-sale offerings. The strong growth trends across each of these relevant and core consumer bank products demonstrate the meaningful expansion opportunity ahead. Let’s turn to Slide 9 to review detailed results for the quarter. Net financing revenue, excluding OID, of $1.382 billion represents our highest quarterly level, increasing 5% linked quarter and 20% year-over-year. Performance was driven by sustained auto pricing trends and strong used car values, ongoing funding cost declines and benefits associated with redeployment of excess liquidity. Adjusted other revenue of $548 million reflected another solid quarter of investment income and diversified revenue growth from our insurance, SmartAuction mortgage and invest businesses. Provision expense reflects the combined benefit of a modest reserve reduction given ongoing economic improvement and strong consumer payment activity. Retail auto charge-offs reached the lowest level since 2012. Non-interest expense of $943 million reflected a continued focus on essentialism across the enterprise as well as investments in business growth and new capabilities. We generated $1 billion of core pre-tax earnings this quarter driving GAAP and adjusted EPS of $2.11 and $2.09 respectively, a resounding testament to several years of diligent focus and execution. Moving to Slide 10, net interest margin, excluding OID, was 3.18%, an increase of 26 basis points linked quarter and 50 basis points year-over-year. These results highlight Ally’s unique and embedded tailwinds that will drive ongoing NIM expansion over the next several quarters. Earning asset yield of 4.44% improved 10 basis points quarter-over-quarter, reflecting resilient retail auto pricing trends and origination volume, strong lease portfolio yields from elevated used car values as vehicle inventories declined from solid demand and slower production trends and the associated benefits of redeploying excess liquidity into higher earning investment securities given rising benchmarks. Based on strong demand trends, we now expect retail origination yields in the 7% range throughout the remainder of the year. And given ongoing production uncertainties, we see used car values increasing in the mid single-digits for full year 2021. Average earning assets of $176 billion moved slightly lower quarter-over-quarter as dealer floor plan levels declined and mortgage prepayments remain elevated. Notably, we generated growth across all of our remaining loan and lease portfolios during the quarter. Cost of funds improved 17 basis points, the seventh consecutive quarter-over-quarter decline, reflecting improved deposit costs and ongoing wholesale funding optimization. Let’s turn to Slide 11. Total deposits ended at $140 billion. Retail growth of $4 billion was fueled by existing customer balance growth and inflows from 83,000 new customers. Customer trends were strong across all measures. Retention remained industry leading at 96%. Customer growth from younger generations early in their financial journeys with a higher propensity for digitally-based products represented nearly 70% of new customers and multi-relationship customers, shown in the bottom right, grew to 8%, representing the 16th consecutive quarter of growth. Turning to capital on Slide 12, CET1 ended the quarter at 11.1%, reflecting strong earnings and slightly lower risk weighted assets. Earlier this week, we announced the Q2 common dividend of $0.19 per share and we resumed our share buyback program in Q1, executing $219 million of repurchases. We remained on track to achieve our $1.6 billion Board authorized plan during 2021. With the SCB framework set to go into effect beginning July 1, Ally’s strong capital levels and earnings trends position us well moving forward. Our approach to capital deployment remains consistent centered, around investing in growth opportunities across our businesses, delivering innovative and differentiated products and driving long-term shareholder value. On Slide 13, asset quality remained very strong. Trends across our consumer and commercial portfolios were resilient as consolidated NCOs of 41 basis points represented less than half the prior year level. Retail auto portfolio trends improved considerably quarter-over-quarter and year-over-year as charge-offs of $97 million or 53 basis points reflected solid consumer payment trends and improved loss given default rates. Aiding these results were the benefits of a third round of stimulus and ongoing government support serving as a bridge for consumers facing hardships. In the bottom right, early and late-stage delinquencies ended meaningfully below prior year levels, a positive leading indicator for near-term loss trends. Turning to Slide 14, consolidated coverage remained relatively flat at 2.79% as retail auto and Ally Lending balances grew and core plan balances, which carry significantly lower coverage levels declined. Retail auto reserves of $2.8 billion moved modestly lower, reflecting favorable credit trends and improved macroeconomic indicators. Our model forecast assumes gradually improving unemployment through the end of this year, ending at just above 5%. And while we are encouraged by underlying trends across our portfolios and early signs of economic improvement are beginning to emerge, we remain well positioned for ongoing uncertainty. We believe we are carrying sufficient reserves should NCOs exceed its normalized levels due to the pandemic-related activity. Let’s turn to Slide 15 to review auto segment highlights. Net financing revenue expanded quarter-over-quarter and year-over-year from ongoing strength in our retail and lease portfolios. Retail trends shown in the bottom left demonstrate the consistently strong origination and portfolio yield trends where risk-adjusted margins continued to expand. And in the bottom right, per unit gains maintained strong overall level leading to $64 million in overall lease gains. Our focused and differentiated approach to meeting the needs of our dealers and customers drove $803 million in pretax income for the segment and improved risk-adjusted returns. Origination and auto asset trends are on Slide 16. We have continually provided broad access to credit for consumers, utilizing our disciplined and dynamic underwriting approach, while maintaining consistent FICO and non-prime trends. Auto originations of $10.2 billion in the quarter increased $1.1 billion year-over-year and represented our highest Q1 in a decade. In the bottom left, ending consumer assets expanded to $83.8 billion with growth across retail and lease portfolios. On the bottom right, average commercial assets ended at $21.3 billion as inventory levels reached a 10-year low. We expect floor plan balances to remain low for the next several quarters, reflecting strong demand for vehicles and persistent chip and component shortages that are likely to weigh on factory output. Turning to insurance results on Slide 17 core pre-tax income of $130 million increased sequentially and year-over-year. In the bottom left, consistent investment portfolio growth creates a diversified revenue stream and enhances segment returns. Written premiums of $333 million reflected strong F&I trends, and we generated the highest monthly level of vehicle service contract sales since 2013. While we have seen a steady rise in extreme weather events over the past several years, we have mitigated our exposure through reinsurance and renegotiated our policy for 2021 at favorable economic terms. Turning to corporate finance details on Slide 18, core income of $48 million reflected quarter-over-quarter asset expansion, strong syndication and investment income and stable credit trends. HFI ending balances of $6.3 billion increased linked quarter or the year-over-year decline reflected elevated draw activity observed early in the pandemic. Loan commitment volume of $1.8 billion represented the highest Q1 on record and our third highest quarter ever. While utilization levels remained low in the quarter, we are well positioned for loan growth moving forward. We are confident in the strength of our portfolio, evidenced by sustained credit performance and the continued increase in asset-based loans which now comprise 52% of our portfolio, up from 25% in 2014. Mortgage details are on Slide 19, pre-tax income for the segment of $23 million grew quarter-over-quarter and year-over-year as gain-on-sale economics remain strong more than offsetting the ongoing impact of elevated prepayment activity. Direct-to-consumer originations of $1.8 billion, was our highest quarterly volume since launching in 2016. Existing deposit customers represented 45% of volume in the quarter, demonstrating the high-quality nature of our engaged customer base. We see a steady path to $10 billion in originations over the next couple of years as we build scale through existing and new customers. Our all-digital offering allows customers to complete an application in 5 minutes and lock their rate in 10 minutes. On Slide 20, we have included a refreshed view of our financial outlook, given the strong results we have delivered in Q1. We now expect ROTCE expansion into the mid-teens to accelerate into 2021, excluding the impact of reserve release. Our long-term returns will be driven by ongoing momentum across our businesses, embedded balance sheet tailwinds and organic growth across our product offerings. Revenue growth and disciplined expense increases will lead to improved PPNR and operating leverage in the 10% range for 2021. NIM expansion to the low-to-mid 3% range will drive net financing revenue growth in the 20% range year-over-year. We continue to embed a consistent expectation for steady other revenue growth sourced from our broader set of consumer offerings and ongoing insurance activities. And as we have noted in the past, we have made modest investment gains in our forecast though we remain opportunistic and disciplined in our approach. We are proud of the value and growth generated across all our businesses, driving near-term and long-term benefits for our stakeholders. I will close by reiterating the gratitude and pride I have in our Ally teammates that drove our results and positioned us for success over many years by doing it right for our customers, communities and shareholders. With that, I will turn it back to JB.

Thank you very much, Jenn. I am going to wrap up with a few comments on Slide #21. I want to express my gratitude and the deep sense of pride I have in leading this great company. Our results this quarter are impressive, but our broader purpose and cause to serve our customers and communities is what defines the long-term success that remains in front of us. I am entirely confident in our ability to navigate and win through a variety of environments and market backdrops. And I think if you look at the past several quarters, we are really hitting on this point. And we are going to continue to execute with a focus on the same values and priorities that have served us really incredibly well over the past several years. So, really strong quarter. We are proud of the results. Jenn and I and Daniel are super proud of the team. It was really across the board outperformance, but importantly, the outlook that lies in front of us, just we got a lot to go here and we are really proud of that. So Daniel, with that, I am going to hand it back to you, and we can dive into Q&A.

Thanks JB. Operator, you may begin the Q&A session.

[Operator Instructions] Our first question comes from Bill Carcache with Wolfe Research.

Thank you. Good morning JB and Jenn.

Good morning.

Good morning.

Good morning. The NIM outlook seems to keep getting better, can you parse out for us how much of the improvement is coming from various drivers, including the scaling of some of your smaller businesses, and maybe if you could speak to the sustainability?

Yes, sure. I will jump in, Bill and good morning. Yes, our NIM outlook continued to be very strong evidence in this quarter and ongoing through 2021 and beyond only [ph] on some of the key drivers. On the asset side on the balance sheet, we have continued to outperform pricing expectations and retail auto origination flows. If you look at just this quarter, the $10.2 billion in retail auto origination is coming in above 7% yield. And we are now expecting 2021 to have our fourth consecutive quarter of new origination yields at that 7% or above. So, that’s a big driver of sustaining the asset yield over time and then potentially even growing that a bit, and I would offer just some of the other drivers there. Our Ally Lending portfolio continues to grow. That’s coming in at a nice yield, and we continue to see opportunities to put cash to work in loan growth across other categories as well, so great trajectory on the asset side. And then on the liability side, really two drivers there. One is the continued optimization of pricing within our deposit portfolio. So, you see the roll forward on OSA, but we still have CDs rolling down. We will have another kind of $9 billion this year rolling off at over 150 basis points down to under 1%. So, really nice continued trajectory within the kind of the deposit business, and then you have the mix shift as we rolled down other funding types, whether that’s FHLB continuing to roll down or broker deposits rolling down. So, we would expect another several quarters of reduced cost of funds. And so that kind of wraps it up. I think we are well on our way, and I think I have started on Pages 7 and 8, just talking about how business really tenures in the making and what we are really experiencing in ‘21 and beyond is just a roll forward of the strength we have in all of our dominant businesses, and then to your point, in some of the newer segments as well with Ally Lending and Ally Home.

That’s helpful. Thanks. And Jenn I wanted to follow-up on your comments around capital, how important do you think the new SCB framework is to getting to your target level of capital relatively quickly, maybe you can just frame for us what kind of trajectory we should expect for it to take – for you guys to get back down to that sort of 9% CET1 range?

Yes. So a couple of things I would say. Just in the near-term, we are not really limited by the extension of the repurchase, the four-quarter earnings test or even kind of the dividend cap [indiscernible] just because earnings are so strong, we will have about $500 million in capacity in terms of repurchases. So, continuing to like our trajectory towards that $1.6 billion program, that’s – or up to $1.6 billion that our Board has authorized. And then Bill, we like the SCB framework just because it gives us more flexibility around distribution, but honestly we would be revisiting capital distribution even without the SCB framework. But again, anytime you have more flexibility in how you distribute capital, that’s a net plus for us. And then as we look at our total capital levels, we are over 11%. We do expect that to come down. Quite honestly, it’s going to take some time. We will execute our current program and revisited opportunities, starting first with customers and growing our businesses, and we will look at excess capital through repurchases and potentially increases in dividend as well. So it’s – but honestly, Bill, it’s going to take some time for that 11% to roll down to 9%.

Understood. Very helpful. Thank you for taking my questions.

Thank you so much, Bill.

Our next question comes from Ryan Nash with Goldman Sachs.

Hi, good morning guys, and congrats on a really outstanding quarter.

Thank you, Ryan. Good morning.

Good morning. So, JB you talked in December about the need for OEMs to pick up production. Now we are obviously going through this global chip shortage, and Jenn mentioned, you expect floorplan balances to remain low for the next few quarters. Can you maybe just talk about what you are seeing there, and do you think we have actually bottomed on balances and maybe can you just talk about growth outside of dealer, can we see mortgage start to level off as we start to see prepayment speed flow, and just how are you thinking about growth for the other asset categories on the balance sheet?

Sure. Jenn, you want me to start? Yes. So, on the OEM point, yes we have been fairly vocal on this for a while. I mean first, you had the impacts and implications of COVID and factory shutdowns. And so already, we are running pretty light inventories. And then, there has been a variety of factors that have kind of exacerbated problems here. Chip shortages, trucking shortages, Texas weather events, and it’s pretty amazing how some of these kinks in the supply chain can really further disrupt. And so, production is slowly starting to improve, but similar to Jenn’s last comments on capital, I think it’s going to take a while before this really gets normalized. So, I suspect we are at or around the bottom on floor plan, but I don’t see balances really meaningfully rising until probably the back half of this year at best. So, that’s probably one of the weak points overall right now, it’s a bit out of our control. But obviously, as we are pointing out, this leads to really strong used car markets. And obviously, we have been originating north of 50% in used for quite some time here. And so, I think our positioning in the business is holding really well. But it’s going to take some time before inventory gets back up. And I do also think bright spot is consumers want to spend. I mean production is hitting dealer lots. And in fact, I was on the phone yesterday with Rick Hendrick and talking through kind of what they are experiencing in new cars that hit any other dealers. And Rick has got about 100 stores. I mean they are selling within a day or two. And so, you have got this slow production but pretty vicious and aggressive demand out of consumers. So, it’s just going to take a while for things to normalize there. But as you pointed out, some of the growth businesses are being a nice offset to that, and I think as we do look at, it’s been a pretty aggressive refi environment and mortgage environment. But as Jenn highlighted, we feel like we have got a path to really ramp up originations there. So, there are certainly offsets in the balance sheet that can enable us to continue to grow. Jenn, what else would you want to highlight?

Yes. I mean the only other thing I think you can – great job JB. The one other thing I would highlight Ryan, is just that the auto inventory phenomenon is really demand driven. It’s not that like in credit cards some other consumer asset clouds where you are seeing slowdown in demand. So I think that’s a net plus as we think about the consumer. And then really for Ally it’s a win either way. If we continue to see inventory levels lower than expected, we see the offset in used vehicle pricing as well as in terms of benefits to LGD in our loss estimates. And then if we do see inventory pick up, we can put cash to work and grow NII and NIM from that. So net-net it’s kind of a win-win either way.

Great. And if I could ask one follow-up, when I think about all the pieces that you moved through Jenn on the net interest margin, it feels like you have a lot of levers with upside to auto yields, securities yields can expand, there is cash deployment, there is also funding levers, so it feels like getting to that mid-3s should be more than achievable, can you maybe just talk through if we do start to get higher rates as the market seems to be pricing in, can you just talk about the sustainability to those margin trends and if we are to get a margin in the mid-3s, could we maybe even have some – a little bit of upside to the return targets over time? Thanks.

Yes, sure. And I think you hit on it, Ryan. I mean, number one, this is pretty much baked, and it’s reflective of Pages 7 and 8, right? We have been at this for 10 years, and it’s largely roll forward at this point in time. And as we think about rates potentially rising kind of back half of ‘22 and into ‘23, we do see that, that’s sustainable. I mean we think deposit betas will move pretty slowly. We do see continued opportunities to optimize yields and flows in the retail auto space as well as our new businesses coming online as well as, as you pointed out, the ability to redeploy cash into investment securities at higher rates. So number one, absolutely, this is kind of roll forward. Number two, even in a rising rate environment, we see NIM expansion. And then number three, we kind of debated the size of the plus in our 2021 guide on Page 20 here. To your point that, yes, there is opportunity to outperform and it’s kind of across the entire income statement. It’s revenue growth as well as outperformance on credit as well.

Got it. Thanks for all the color.

Yes. Thank you, Ryan.

Thanks Ryan.

Our next question comes from Betsy Graseck with Morgan Stanley.

Hi. Two questions. First, more technical on funding, we were just going through that, but could you ever imagine getting to 100% deposit funding, would that be something that you would want to do or will you want to keep a little bond out there just to keep that channel open?

Yes. I mean I think, Betsy, we want to be diversified in terms of our funding mix. And we really like the trajectory we are on in terms of continuing to increase that percent of deposits, but we would always want to have some access to market funding just from our resiliency perspective. And we do still have the opportunity kind of within the 4 walls of deposits to bring down that brokered deposit percentage. Year-over-year it’s down about $5 billion or so.

Okay. And then bigger picture, when I talk to my colleagues on the auto side and the auto team here, we are always talking about what’s going on with EVs and how that industry is under such pressure from investors to get more green and climate-friendly and blah, blah, blah. So, I am just wondering – I am sure this is something that’s in your discussion in your boardroom conversations, how are you thinking about the EV push, how are you thinking about – how you are positioned for it right now today, anything you need to do for or with your dealers to migrate? And anything you can help us understand as to what’s you are doing on this front?

Yes. So Betsy, appreciate the question. And absolutely, this is a really important discussion across the industry, in our boardroom and our management team. And as we think about EV, we think we’re really well positioned, right? We are underwriting those loans, leases and insurance for vehicles, no matter what kind of vehicle they are. And so as EV becomes a bigger percent of the market, we are absolutely positioned to take advantage of that. And we kind of hit our highest level of EV originations this quarter. So we will continue to grow with the market. We think we’re really well positioned. And I think in terms of capabilities, I think we’re pretty much there. Probably we will learn a bit more as we continue to underwrite these types of vehicles, understanding LGD, understanding on the insurance side kind of what do claims look like, but I think we’re really, really well positioned. And J.B. if you could add anything?

Yes. Again, I think you hit the high points. I mean, Betsy, obviously, you’re aware a lot of the OEMs are pointing like 2035 is pretty big in inflection point. And obviously, we still think vehicles are going to get largely distributed through the traditional dealer network today. So I think as Jenn points out, we’re really well positioned. We want to help lead in that regard. Obviously, it’s an interesting space.

Yes. We’ve gotten a couple of questions on how does this longer-term impact used car prices with the underlying assumption that EV autos have longer shelf life, so to speak, than combustion vehicles. Is that something – I mean, I know that’s like a second or third order effect relative to where we are today and the incredibly hot demand for auto is just writ large, but is that something that you guys have talked about? And do you think that, that’s a fair statement that EV shelf life is longer?

Yes. Betsy, I think it’s still to be determined. I think the technology is really evolving right now, and I think we will learn more. And that was kind of my point around understanding LGD, just trying to understand kind of what does this look like over time. And I think we’re still in the early innings about 1% of vehicle purchases right now. So we will learn over time.

And in the meantime, the demand for cars is still extremely hot, obviously. And so from that last question there, do your dealers have any line of sight for when they think demand today is going to be fulfilled? I mean how many months, quarters, years is it to get that demand to fill in the current space? Do you have a sense of that?

Hey, Betsy. Yes, interesting question. I mean we saw strong demand for vehicles prior to COVID. And I think if anything, COVID we’ve been talking about the last several quarters is really accelerated personal vehicle ownership. And I think this is going to continue to be a strong area for the consumer, and it was before COVID and it will continue. So we don’t see this stopping anytime soon. But one of the data points we shared kind of early in the deck is just how big this market is. So even if you were to see overall consumer demand wane a bit, it’s still a large market, and it’s fairly fragmented. So in spite of kind of changes in consumer trends, we think we have a lot of ability to continue to originate in that $35 billion to $40 billion range of accretive yield.

And dealers are feeling really, really good right now. Obviously, pretty big margins they are making on cars just from the lack of available inventory, so really good time for them.

Okay, thank you.

Thanks, Betsy.

Thank you.

Our next question comes from John Pancari with Evercore ISI.

Good morning.

Hi, John.

Good morning.

Jenn, I think you just referenced in your tail end of your response there that origination range of $35 billion to $40 billion. Is that kind of how you’re thinking about the full year originations at this point in auto? I mean, how close to the $40 billion could we be? And could we even be above that, just given the demand and given the inventory dynamic that you set out on the new side. Could we be looking at originations potentially above that $40 billion?

Yes, John, we don’t have any cap, so it’ll be opportunistic, I’d say out of the gate here in 2021, really strong flow, strong pricing and here headed into Q2, same trends continuing. So we could be closer to that $40 billion and the $35 billion. And if we get above that, it will just be market dependent. But you saw here in the first quarter, we had our highest outflow in the history of the company. We have the highest number of dealers. And so we really like what we see coming in and we will just be opportunistic.

Okay, great. Thanks. And then separately, on the ROE side, I heard you in terms of the upside potential potentially to the 15%. You specifically mentioned 2021 in terms of sizing up the size of the plus there. Could there also be upside potential to your thoughts around 2022 and 2023 or is the abating benefit of credit leverage likely to limit that upside potential for those years?

Yes. John, 2022, 2023 in this environment seems pretty far out there, but we do have high confidence in that 15% number, and we have that confidence because we’re not embedding any reserve releases, and we’re assuming that retail NCOs hit that kind of normalized 1.4% to 1.6% range. So could there be upside to that? Absolutely. I mean we’re sitting here in the first quarter with 53 basis points of retail auto NCOs and so we will see how the path continues in actuals and strong leading indicators there as well. So we will see, but the high confidence is around the fact that we have not embedded really aggressive assumptions on anything, rather than that’s revenue-driven or NCO credit related.

Got it. Okay. Thanks, Jenn.

Thank you, John.

Our next question comes from Moshe Orenbuch with Credit Suisse.

Hi, thanks. Most of my questions actually have already been asked and answered. Maybe we could drill down on a couple of the topics that you’ve talked a little bit about. I think the ability to achieve these plus – over 7% origination yields has been really impressive. And maybe you could kind of just talk a little bit more about some of the specific strategies that you’ve used and related to the fact of competitive developments that are going on in the industry – on your side of the industry right now than in the lending industry?

Yes. Sure, Moshe. Good morning. What I would say is, look, this is a strong market, and we have strong capabilities in the market. And if you look at the market, it’s large, it’s growing. No competitor has kind of over 10% market share. And so there is still a lot of room for us to find opportunities. And then relative to our capabilities, a number of things I’d point out. One is the relationships we’ve had literally over decades. You see not only dealer count continuing to grow, but engagement across those dealers is growing as you think about kind of app per dealer, and we have, we think, significantly more opportunity there, especially on the engagement side. And then second, continuing to evolve our capabilities. And that takes a number of different forms. It’s how we deliver our products through digital means. We’ve continued to help our dealers transition digitally. We’ve continued to lean into used as I’ve talked about for several quarters. And so, just staying focused on our customers, focused on delivering for them, adding new capabilities to be successful for our end consumers and our dealers and just continuing to find that opportunity. And as you pointed out, that 7%, this will be our fourth year in a row of putting yields on the books kind of in that 7% range.

Okay. A follow-up is about the questions around, you addressed it in the last question and a couple of the others about the sustainability of returns post this year. And I guess, maybe are there steps that you’re taking in a year like this where obviously the level of earnings, whether the ability to reduce the equity base, how important is that and the ability to sustain better than 15% returns. And any other steps that you’re taking during 2021 that you’d share with us? Thanks.

Yes. Sure, Moshe. I mean it really starts with our businesses. So we are continuing to invest in differentiated capabilities, and that’s across auto, it’s across our deposit franchise. Those capabilities reduce price elasticity across the board and allow us to continue due to our strong pricing position to deliver that NIM expansion. Continuing to invest in our newer businesses, which are really starting to accrete return here in ‘21 and growing into ‘22 and ‘23. And so you see volumes up in our direct-to-consumer mortgage space and a lot of opportunity there. We’ve talked about that $10 billion number. But with our leading digital capabilities, I think there is a lot of market share opportunity. Ally Lending continues to grow. We’re investing both in human capital as well as digital capabilities there. And then corporate finance as well continues to accelerate. And so absolutely, we’re taking measures across every one of our businesses to remain competitive, remain differentiated. And then as we think about capital deployment, we are in good shape execute the $1.6 billion in share repurchases. We will continue to find other opportunities organically or inorganically to deploy capital accretively. And we see equity coming down, but it’s not – it’s going to take some time to get there.

Great. Thanks and congratulations.

Thank you, Moshe.

Our next question comes from Sanjay Sakhrani with KBW.

Thanks. Good morning and great quarter, and good job. Question on the ROTCE, again, and we get a lot of questions on it, so I figured, let me just get in on that. Jenn, I know you mentioned it’s ex reserve release, and you talked about continued strength in the NIM. And you’re not even being aggressive on revenue expectations. So maybe just taking the other side of that, where are the risks to not achieving those targets in the 2021, 2022 period outside of the economy sort of changing gears?

Yes. So Sanjay, you asked this question last quarter too, so let me kind of reiterate not too much has changed since then, but within kind of the four walls of Ally. There is not too much that can go off the rails. I mean – and we talked about kind of the 10 years of continuing to build dominant businesses on both sides of the balance sheet and much of that NIM trajectory is largely base. I mean about 85% of our retail auto books already at a 7% yield. So that migration up to the 7%, we’re kind of there, and we’re seeing opportunities to sustain that and then some. And then on the deposit side, we’ve talked a lot about just the continued growth there. And as we grow both balances as well as digital capabilities, the beta on that business is going to continue to decline. And so a lot of what we’re seeing in the NIM is baked. And then our new businesses are continuing to accelerate. We’re operating in a digital world and consumers are not only working from home, they are banking from home. And every single one of our new businesses hit records this quarter. And we don’t see any of that slowing down in ‘21 and beyond into ‘22 and ‘23. So to your question, the risk, I really think they are exogenous. I think it’s continued regulatory changes, potential changes in the economy, whether that’s inflationary-driven that could change consumer spend or have some kind of additional kind of economic shock. And then taxes. I mean, to be determined on the tax rate, I think we’re well positioned relative to tax changes. But I really think any kind of risk to the trajectory, are going to come from outside the four walls of Ally.

Got it. And follow-up question is on the dealers. You obviously have increased the penetration of that dealer to – and the dealer counts really high at this point. I mean, could you just talk about the runway for growth from here, whether it’s penetrating those existing – the numerous dealers that you are bringing on as well as just growing that dealer count from here?

Yes, Sanjay, I think it’s kind of all of the above. We’re going to continue to grow dealers, not both the newer entrants as well as traditional dealers. I think we’re not as concerned about dealer counts, but more quality of dealer relationships. So I think we have shared in the past, the vast majority of our dealers give us plus than kind of five contracts per month, and we’re looking to continue to increase dealer engagement and contracts by dealer and then continuing to grow with those who are growing in the industry and some of that traditional kind of M&A led and some of that’s just the growth of kind of the Carvanas and the new entrants. So, you see a lot of opportunity, quite frankly, across the board on all measures.

Thank you.

Thank you.

Our next question comes from Kevin Barker with Piper Sandler.

Thank you. Just a follow-up on the some of your loan origination yields. Are you seeing any impact from increasing competition in the most recent quarter, given the reengagement of some banks in the auto sector or at least the expansion of their credit box? And then also on a follow-up to that, are you seeing any additional competitive forces from more new entrants looking to do direct lending as opposed to establishing dealer relationships and so forth?

Yes. So Kevin, I’ll jump in and J.B. may want to add. But in terms of just the competitive environment, we have seen kind of some of the larger banks and regionals growing originations in this sector. And we would expect that to happen because it’s a thriving market. What I would say is it’s mostly on the two ends of the barbell. It’s predominantly in super prime. And if you look at pricing betas in the super front, they are much higher than they are in the prime space in the belly of the curve. In fact, our price elasticity in that space over time has been really resilient. So we haven’t really felt it in kind of the sweet spot of 620 to 720 FICO and in used. But I think it’s something that we will be managing over time and then in the direct space, very small, very small kind of impacts across the board. And we are well positioned. We have a direct product. So if the market does move towards more direct sales, we are well prepare for that, but not seeing a lot of movement there.

Okay. Are you seeing any impact from more consumers buying cars not on dealer lots, but just doing it online or directly and arranging your own financing or – and I guess maybe that relates directly to your direct lending comments as well, so can leave from that?

Yes. Kevin, I’d say, yes, on your first question, no on your second question. So the Carvanas of the world are absolutely growing, and that digital product is something that’s taking off. Any given digital shopping and then fulfillment through the dealer is increasing. But on your second question, no, not seeing a lot of that at all, financing is largely through the dealers.

Thank you very much.

Thank you, Kevin.

The next question comes from Arren Cyganovich with Citi.

Thanks. In the press release, you mentioned Ally Lending is going to have a retail launch in 2Q. Maybe you could just share a little bit about the launch there and expectations and what kind of product, I’m assuming its point of sale. But is it a soft line, that kind of retail focus?

Yes, sure. Good morning, Arren. So Ally Lending has been expanding into new verticals. And so we’ve originally purchased Ally’s Health Credit Services and has been very successful in the health vertical. We’ve since expanded into home, and about 20% of our originations have grown over the last several quarters through that home launch. And to your question specifically, we’re working towards launching the product in the retail space through our partnership with CECL. And we see a lot of growth opportunity. In fact, this kind of retail is the largest point-of-sale market. So we want to have a product. We have a great offering, and we see growth opportunities, and that’s really what the press release is alluding to.

And I think we’ve probably talked about this in the past, but the – does it make sense to grow this organically or given the competitive environment for point-of-sale lending, does it make sense to maybe buy something a little bit bigger and have a little bit more of a head start?

Yes. Arren, this is kind of a B2B2C. So it’s fairly scalable organically. And we’re demonstrating that, right? And we look at the trajectory of originations just even from when we acquired Ally Lending and we’re well on our way to a couple of billions. So we have a robust platform. We can originate across kind of all verticals. And as we add partnerships onto the platform and merchant counts, we can scale this very quickly organically. I mean that being said, we’re always opportunistic around accretive opportunities, but we really think this is an organic play.

Great. Thank you.

Great. Well, thank you everyone for joining in. That’s all the time we have for today’s call. Feel free to reach out to Investor Relations with any follow-ups. And operator, I’ll turn it back to you.

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