Ally Financial at RBC Conference: Strategic Focus on Core Businesses

On Wednesday, 05 March 2025, Ally Financial Inc. (NYSE: ALLY) presented at the RBC Capital Markets Financial Institutions Conference, outlining a strategic shift towards its core operations. The company’s decision to divest from its cards business and halt mortgage loan originations aims to solidify its path to mid-teens return on equity (ROE) by focusing on dealer financial services, corporate finance, and its deposits platform. While this pivot has been positively received by investors and dealers, Ally remains vigilant about potential challenges, including tariffs affecting used car prices.

Key Takeaways

• Ally is concentrating on its core businesses, expecting mid-teens ROE.
• The sale of its cards business and stopping mortgage originations are key strategic moves.
• The company is managing capital to support growth and optimize its deposit base.
• Ally is confident in its ability to navigate economic challenges, including tariffs.
• Strong investor and dealer support for the strategy was reported.

Financial Results

• Ally targets mid-teens ROE, maintaining its strategic course.
• Corporate finance generated over $400 million in pretax income last year.
• The deposit base stands at $143 billion, with over 90% FDIC insured.
• Retail auto loan originations are diversified, with less than 40% from GM and Stellantis.
• The corporate finance business has grown to about $10 billion in assets.

Operational Updates

• Ally has exited the cards and mortgage origination businesses.
• Workforce reductions have been implemented to capture efficiencies.
• Record application flow in retail auto indicates strong market presence.
• The focus remains on engaged deposit customers to optimize the deposit base.

Future Outlook

• Ally aims to responsibly grow its core businesses.
• The company is exploring securities repositioning to manage OCI volatility.
• Potential impacts of tariffs on the automotive industry are under close watch.
• Ally is committed to maintaining a strong CET1 ratio amid regulatory changes.

Q&A Highlights

• On diversification: Ally emphasizes that focusing on core businesses enhances diversification.
• On mid-teens return target: The strategy supports the path to achieving mid-teens ROE.
• On retail auto competition: Record application flow allows for selectivity and optimal risk-adjusted returns.
• On deposit betas: Progress is being made toward achieving target betas.

Ally Financial’s strategic focus on its core businesses was well-received at the conference. For further details, readers are encouraged to refer to the full transcript.

Full transcript - RBC Capital Markets Financial Institutions Conference:

John: lot of stuff to cover. But maybe let’s just start from a big picture point of view, Russ. On your January earnings call, you guys talked about more focus. The power of focus is the way that you described it, is really the next phase of Ally. Can you talk a little bit about the strategy of focusing in some of the priorities in 2025 and beyond?

Russ, Ally: Yes, absolutely. Happy to do that, John. And thanks again for having me here today. So we’ve pivoted to a focus on the core. The core is our dealer financial services business, our corporate finance business and our deposits platform.

And those are all areas where we have long history, deep relationships, relevant scale and where we drive excellent returns, excellent risk adjusted returns for our shareholders. And so, yes, what we’ve effectively done is we’ve pivoted to focus on that core. And if you look at January, what we announced, we announced the sale of our cards business. We announced that we were stopping the origination of mortgage loans and putting our mortgage loan book in runoff. And that kind of follows on the back of last year where we exited the Ally Lending business.

We’ve done some other things as well with the focus on the core. We’ve captured some efficiencies and streamlined, and so we’ve done a workforce reduction as well. And then over the course of last year, we’ve really put a focus on capital allocation. And so you’ve seen that we’ve done some transactions utilizing the CRT market as well as using the ABS market to sell loans. So again, all of these in the spirit of focusing on the core.

And I’d say in each case, it’s around allocating capital and aligning the resources of Ally towards the things that are most important to us and the things that are going to drive value for our shareholders. And it’s also, again, in the spirit of businesses where we have the most certainty and the most experience and quite frankly, just the most reason to win. So in our view, this takes some of the uncertainties around our path to mid teens ROE off the table. And so in that sense, makes that it solidifies that path and makes it more certain for us.

John: Okay. Thank you. It’s a pretty meaningful pivot away from the prior strategy. I’m just curious, is diversification important at all to Ally anymore? Or how tight will this focus become?

Russ, Ally: Yes. We don’t see the focus on the core as being a move away from diversification. When kind of when we think about our businesses look, the credit card business and Ally Lending, in the grand scheme of things, they were pretty small. They were less than $5,000,000,000 of total assets. And yes, they were good businesses.

We had great teams running those businesses, but we didn’t really have a path towards scale in those businesses that made sense for Ally. And they would have taken a tremendous amount of investment, both in terms of capital and expenses, to get there. On the other hand, when you look at our core businesses, we’ve made a lot of progress towards making the revenues associated with those businesses more robust and more diverse over the course of the last few years. And so maybe just starting on the auto side, we look at the business today and less than 40% of our retail auto loan originations come from GM and Stellantis. And so the diversification there comes from the diversification across different OEMs, across different types of dealers and across different types of models.

Similarly, we’ve continued to drive the growth of our smart auction and pass through programs. Those are high margin revenues and they’re fee based, so completely separate from the consumer credit that dominates the retail auto side of the business. And then there’s our insurance business. So it’s the majority of our roughly $2,000,000,000 of other revenue. Again, a business that we’re invested in, that we’re continuing to invest in and that we’re looking to continue to grow and also additive to us in terms of both diversification and in terms of the ROE profile of the institution.

And then finally, there’s our corporate finance business, a business we’ve been in for twenty five years. We’ve proven that we can manage the risk in that business over multiple cycles. Last year, that business drove over $400,000,000 of pretax income for us. And we’ve grown that business from roughly $5,000,000,000 of assets before the pandemic to about $10,000,000,000 today, so a place where we’ve proven we can grow it responsibly and at attractive margins. And so when I look across the core businesses, I think there are a lot of ways that we’ve been successful in driving diversification.

And And I think we have a lot of opportunity on the table to continue to drive diversification in those businesses. And again, as I think about the uses for incremental capital, as we thought about the possibility of using capital and time and resources in card and lending versus using it in these core businesses, the choice was pretty clear to us. It’s invest in the businesses where we are driving attractive risk adjusted return, where we have history and relationships and relevant scale. It was pretty clear that the right place for the next marginal dollar was there. And that really kind of that really informed our decision around the pivot towards focus.

And again, I don’t think that takes anything away from diversification. I think if anything, it’s helpful in that I think we have the ability to drive more diversification and risk adjusted revenue risk adjusted returns and more robust revenues from our core businesses than we had going into cards or lending. Okay. Any feedback internally, externally from dealers on this strategy? Yes, absolutely.

I’d say we’ve got a number of investors in the room here, and so I’m not telling anything you guys don’t know. But the feedback we’ve gotten from investors has been really supportive and really positive. On the dealer side, it’s interesting. Our dealers immediately recognized this as an opportunity for us to do more with them. And so I’d say from their perspective, I think the reaction has also been very, very positive.

And when I cut across the rest of the institution, we were just with our leadership team last week and talking a lot about the strategy and the way forward and the power of focus. And I’d say everyone is excited about the power of focus. I think we have just a tremendous amount of confidence in the momentum that we’ve got in our core businesses. We feel great about where we are in the dealer side. We think the record application flow that we continue to drive is testament to the strength of our relationships with dealers.

And again, with the power of focus, we just see more opportunities for us to partner better with our dealers. I’d say in the deposit business, we continue to be really excited about the growth of our engaged customers and their balances and all the momentum we’ve got in that business. And similarly, in corporate finance, just a lot of excitement about the ability to have a little bit more flexibility to grow in a responsible and a prudent way within their existing verticals and also to look at other verticals that they could play in going forward. And so I’d say across the businesses, across our investor group, across our customer base, there’s pretty unanimous support for the power of focus.

John: Got you. The mid teens return target, you alluded to it earlier, it’s not new, but just a two part question. Were you unable to get there without scale in some of these other businesses? And where are you on this journey now today? And does this make it easier for you to get there?

Russ, Ally: Yes. Look, I’d say this doesn’t change our path to mid teens at all. I think that part of it’s unchanged. It probably takes some of the risks around it off the table. And so in our view, it solidifies our path to mid teens, but it doesn’t really change the path to mid teens.

It’s still the same path we’ve talked about before. It’s driven by expansion in margins, both from that ongoing asset mix that we’ve talked about before as well as pricing discipline on both sides of our balance sheet. It’s driven by the growth of other revenues by driving our retail auto NCOs below 2% and being really disciplined around expenses and the allocation of capital. And so none of those things have changed. I think we’ve taken some other variables off the table that make that path a little bit more clear, but nothing’s changed in terms of getting to mid teens ROE.

John: Okay. Also, we’ll dig deeper into all the numbers, but if anyone has questions, you can put your hand up and we’ll get you a microphone. On the margin, let’s talk a little bit about that on the asset side first. You’ve talked about being able to optimize both sides, but talk about some of the catalysts to drive earning asset yields higher over time.

Russ, Ally: Yes, absolutely. And maybe I’ll start with just asset mix. And so as we’ve talked about before, we’ve been running off mortgage loans as well as the lower yielding mortgage securities off of our book and at the same time, building up our retail auto loan and corporate finance book. And so think about that as substituting, call it, roughly 3% assets in terms of mortgage loans and some of the lower yielding mortgage securities with retail auto loans that we’re currently originating today in the high 9s, 10% area and corporate finance loans where we’re getting north of 9%. And so so just some real yield accretion from that movement in terms of mix.

We also continue to benefit from a portfolio yield on the retail auto side that continues to be pulled up by the originated yield. So our portfolio yield on the auto side right now is still sitting just north of 9%, and we’re still originating at in the high 9s 10% area. And then if you kind of just put a longer term context on it and you kind of think about this more long term, like this isn’t really new, right? And you look, for example, at our just within our auto business at the balance between retail auto loans and floor plan financing. Retail auto loans, higher yielding asset versus our floor plan book, which is an attractive asset but doesn’t carry the same yield or ROE.

And you look at that balance, it’s shifted considerably since pre pandemic to where we are today just in terms of getting more retail auto loans for a smaller amount of floor plan balances in effect. And so I think we have a number of things on the asset side that are driving us towards a higher yield to support the NIM expansion.

John: Okay. How about competition in retail auto? What are you seeing there? And if we do start to get some rate cuts in a down rate cycle, how can you protect some of the yields that you’re seeing, risk adjusted yields?

Russ, Ally: Yes. So look, the competitive dynamic continues to be constructive for us. Our application flow is at record levels, as I pointed out earlier. That allows us to be selective in terms of where we play to target what is the best risk adjusted return for our business. We continue to lead the market in the place that’s most important for us, which is that intersection of prime and used.

And so I think we feel pretty good about it. Now if you look over the course of the last year and a half or so, you’ve noticed we’ve taken a lot more S tier. That’s our highest credit quality. That’s the highest credit quality portion of our underwriting spectrum. And that’s been, for the most part, opportunistic where we found that over the recent period, just given the competitive environment, we’ve been able to get attractive risk adjusted yields in that area.

It also means when I look at the loss content of the book we’re originating and informed by the performance we’ve seen in recent vintages, we’re probably underwriting below our risk appetite. And so that gives us a lever that we can kind of exercise to offset any kind of decline in benchmark rates going forward. And so we feel great about kind of being able to continue to originate in the high 9s, 10% area, being able to continue to benefit from our portfolio yield creeping up towards our originated yield. And the fact that we have this lever just gives us more confidence in terms of being able to maintain attractive yields in the face of potentially declining benchmark rates. And again, we’re not looking to exercise that lever in a hurry.

We’re pretty happy with what we’re seeing today, but it’s something that gives us confidence in terms of being able to manage the overall yield and risk adjusted returns on the book.

John: Okay, good. Other side of the balance sheet, you’ve been on this long journey to become really core funded. I think you’ve achieved that. But can you talk a little bit about the opportunities you see to lower funding costs in the near term?

Russ, Ally: Yes, absolutely. We’ve been really pleased with the development of our bank. We’re the largest all digital bank in the country, dollars 143,000,000,000 of deposits, north of 90% FDIC insured, 85% to 90% of our funding stack. It’s just been absolutely fantastic for us. And it puts us in a really great position in that we, as you said, we’re fully deposit funded.

Our outlook in terms of balance sheet growth, while the mix is moving, the overall size of our balance sheet is rather flattish over the course of the next year or so. And it puts us in a position where we can really focus on optimizing within our deposit base. And so we’ve been continuing to grow our engaged customer base and our balances from engaged customers. And at the same time, we’ve been running off some of the more interest rate sensitive kind of back book customers who are more here for the attractive rate. And so we think that’s a positive dynamic in terms of increasing the overall quality of our deposit book over time.

And it’s an opportunity that we have just given the dynamics of our balance sheet and also just the success that we’ve had over many years building this impressive franchise.

John: Okay. Great. Just following up on that, deposit betas have been a big topic since the Fed started cutting rates. You’ve been pretty proactive, especially later in 2024. How are you thinking about the pricing strategy in 2025?

Higher for longer rate environment maybe, but do you feel like you can achieve the 70% cumulative beta goal? Yes, absolutely.

Russ, Ally: We feel good about the progress we’ve made so far. And as we’ve said in prior discussions with investors, we expected this period, this kind of first quarter period to be a little bit slow in terms of repricing just because it is a harvesting period for us. It’s a period where we look to gather a lot of deposits. So we typically gather a lot of deposits in the first quarter. We’ll lose some of those deposits in the second quarter as tax payments flow out.

But so we expected a little bit of slowness in beta realization over the course of this period here. Yes, that being said, we made a cut, I think it was last week or the week before, to take us to $3.70. We feel good about our progress towards the 70% beta. There’s nothing that we’ve seen that, towards the 70% beta. There’s nothing that we’ve seen that would say that we’re off track towards getting there.

I think we still feel very much on track towards achieving our betas.

John: Okay. Good. Very helpful. I wanted to touch on credit a little bit. Retail auto credit, choppy year.

I don’t know what the right adjective is, but you updated loss expectations throughout the year. You did well in the fourth quarter. Talk a little bit about the trajectory you expect throughout the year. What kind of led to the revisions? And then the overcorrection in October, what’s been driving the outperformance recently?

Russ, Ally: Yes. Look, maybe I’ll start with the choppiness point. We try to be very transparent with our investor base around what we’re seeing in the book. And that transparency, obviously, you see a little bit of the sausage making as we go. We saw credit soften in July and August of last year.

We don’t think we were alone in that. We think we saw similar dynamics in other people who have similar books. But we saw that softness. We talked about kind of the 10 basis points at the time that we had seen in NCOs and 20 basis points in delinquencies we saw that were above our expectations at the time. And so we felt the need to in the spirit of that transparency to post the market.

And we also backed away from our 2.1% NCO guide for the year as a result of that. It was clear to us seeing those trends in July and August we weren’t going to be at that 2.1% level. Yes, that being said, we thought about our guide at that point in terms of a continuation of some of those trends that we were seeing. And so we guided higher, obviously, for the remainder of the year. What we actually saw over the course of November and even stronger in December was really just a strengthening in credit performance.

And the biggest part of that was what we saw in terms of flow to loss rates, where we saw flow to loss rates that were a lot lower than our expectations. Our used car prices were stable, supporting us on the severity side, albeit we were still carrying and we’re still carrying today elevated levels of delinquencies. But that favorability we saw in flow to loss rate, combined with the stability in used car prices, gave us a really strong finish to the year. And I’d say kind of sitting where we sit today, so far, 2025 is showing the same kind of strong performance across the book. It’s a lot of the same trends.

It’s flow to loss rates that are strong, stable used car prices. And also, I would point out, yes, we continue to see elevated delinquency levels. And so a lot of the same dynamics that were in place when we spoke to investors in January are, I’d say, are in place today, both kind of positively as well as in terms of the watch item around delinquencies. And again, I chalk it up to that combination of things we discussed in January. It’s the rollover of the vintages away from the more problematic 2022 vintage towards twenty twenty two twenty twenty three and 2024, particularly the back half of 2023 and the 2024 vintages, which are performing very nicely.

And it’s improvements we’ve made in terms of how we collect and all with the backdrop of relatively stable used car prices.

John: Okay. So decent level of confidence in the performance year to date as well? You feel like losses can continue to head lower in ’twenty five?

Russ, Ally: Look, yes, what I’d say is a lot of what we saw and talked about in January is still very much in place, and we’ve seen a continuation of that in ’twenty five. I’d say we feel good about the full year loss guide that we provided back in January. And I’d say, look, we continue to be really focused. We continue to see the benefits in terms of that vintage rollover. We continue to be very focused on our servicing strategies, continuing to use all the devices we talked about in January, the communication strategy, delayed repossessions very selectively and based on our behavioral models as well as the extension strategy as a way of managing credit.

I’d say we still have a watch item out for elevated delinquency levels. That’s something that we’re still paying a lot of attention to. As we mentioned in prior discussions, it’s a watch item for us because it means that we’re just a little bit more sensitive than we otherwise would have been to changes in the macro, where we could see changes in the macro that could drive real changes in terms of flow to loss rates and ultimately NCOs. And so continues to be a watch item. But again, kind of given everything we’ve seen, we feel good about the loss guide that we provided in January.

John: Okay. Great. This is probably a good time to ask about tariffs, if you have any comments on tariffs and

Russ, Ally: Yes. There’s definitely the model. Yes. It’s something we spent a lot of time over the last several weeks, obviously, thinking about in terms of the impact to our business. And there are short term impacts and there are more medium- to long term impacts.

On the short end, yes, there’s a positive to us in terms of what tariffs do to used car prices and existing dealer inventories. So it would help used car prices, and that would help us in terms of severity, Probably help us in terms of lease gains as well. Although on the lease gain side, we have particular mix issues that we’re dealing through as well that would offset that. And then in terms of inventories, obviously, lead to kind of lower floor plan inventories, which means lower balances on our floor plan lines. And also, arguably, some marginally lower insurance revenues related to our floor plan insurance business.

But overall, in the near term, the bigger impact is probably the impact it has on used car prices, which on the margin is probably helpful to us. Longer term over the medium term and the long term, though, it’s a little bit more tricky and a little bit more interesting, and this is where we spend more of our time thinking it through. There’s an affordability impact. And as you recall, the consumer is already dealing with affordability. It’s eased somewhat since the pandemic, but there is still an affordability issue out there.

And tariffs will obviously affect car prices. They affect cars where tariffs are levied directly, but they also affect other car prices, just thinking about kind of supplydemand more broadly. And they obviously will affect used car prices as well, and it will also affect how consumers make decisions around used versus new and around different types of new cars. It will affect the availability of vehicles as well. So there are a lot of implications around affordability and vehicle availability that we’re thinking through and also affects our insurance business in terms of access and cost of parts.

All that being said, we’ve obviously gone through the pandemic and the post pandemic period. And so we’ve managed through much bigger swings and much bigger disruptions to the supply chain. And so we’ve gone through, we’ve got that experience, we’ve got that benefit, and this is obviously going to be smaller than that. And so yes, we’ll look to apply the lessons that we learned going through the pandemic, a much kind of much bigger shift in terms of affordability, car prices and supply chain shock. And we’ll apply that in terms of how we underwrite, how we price residuals.

I think we’ve got a lot more tools today just having come through that experience and a lot more learnings today than obviously we would have had several years ago.

John: Okay. Great. I want to touch on capital and maybe give you an opportunity at the end to tune up anything you need to do for the quarter. But just on capital in general, talk a little bit about it feels like you’re a little bit more offensive in terms of managing capital today. Talk a little bit about your strategy for managing your CET1, particularly with some of the regulatory questions out there.

Russ, Ally: Yes. Maybe I’ll start with the CET1 strategy, which is unchanged for the most part. I know there’s a lot of focus right now on Basel III and in particular AOCI, whether it’s in or out. I think we’re still running with the assumption that AOCI will be in capital in some form over some time frame, unclear when or how. But we’re still operating under the assumption that, that’s going to impact us down the road.

And so we’re looking at our capital ratios with an eye towards that over time. And again, as we’ve said before, we feel great about our ability to manage organically around that as long as the time frame for transition is reasonable. And we have no reason to believe it won’t be. We’ve talked about we’ve historically had a 9% management target. We’ve got roughly a 7.1% CCAR requirement.

And we’ve typically managed more towards our management target plus 20 or 30 basis points for a little bit of cushion. Yes, with the volatility around AOCI, I think our bias is to operate with a larger cushion as we kind of learn how to kind of manage through that. And so you’ve kind of seen that. And you mentioned kind of the move towards kind of being a little bit more offensive on capital. Yes, with the sale of our card business, it’s going to create some capital for us.

We talked during January about potential uses of that capital. Our preference, of course, is to drive responsible growth within our core businesses, first and foremost. That’s given the return environment we see in our outlook for those businesses, we think that’s a fantastic use of capital. And we also talked about the potential for securities repositioning, which is something that many of you may have noticed is something that we’ve acted on recently. Yes, when we talked about eventually share repurchases down the road and certainly some of the moves we’ve made around capital recently, the sale of card, the sale of lending, kind of moving that mortgage book into runoff, the streamlining efforts, other things give us a little bit more flexibility and help us along that path.

But I think those that kind of general thought process around how we use capital is unchanged. Maybe just on the securities repositioning because I imagine you’ll want to touch on that. The way we think about it is probably a little bit different from other people. There’s obviously an NINIM benefit that we captured with the transactions that we did this week. But there’s more than that for us.

There’s a benefit to us in terms of reducing OCI volatility and managing interest rate risk as well. And so as we look at securities repositioning for this trade and potentially any future trade, yes, we look at it thinking about dual benefits as opposed to looking at it necessarily in just strictly an NII payback type mechanism. And so yes, with this trade, as some of you guys have probably seen, we the payback on that just under five years, but that’s not something that we’re kind of committed to or married to. We’re doing this trade both for the NII pickup as well as for the OCI volatility benefit and the interest rate risk management benefit more broadly.

John: Okay. Just to wrap it up briefly, we talked a little bit about credit, but anything else any color you can provide on the quarter to date trends the first couple of months on things like margin and credit? Anything else that

Russ, Ally: you want to flag? Yes, absolutely. There’s nothing new. No changes to our guide. We feel good about the guide on credit.

We feel good about the full year guide on margin as well. I would say some of the things we pointed out in terms of the quarter to quarter dynamics in January are still in place. So it’s our expectation that our net interest margin will be flattish for the reasons we pointed out back in January. And then on the expenses side, we continue to be as disciplined as ever. No change to our full year outlook.

But as we pointed out in January, we do see seasonal uptick due to some comp and benefit items in the first quarter that you’ll see play out. But other than that, there’s really nothing new. Okay, great. Thank you, Russ. Great message.

Awesome. Thanks, John.

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