Ally Financial Inc.

Good day, and thank you for standing by. Welcome to the Ally Financial's third quarter 2023 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw the question, simply press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Sean Leary, Head of Investor Relations. Please go ahead.

Thank you, Carmen. Good morning and welcome to Ally Financial's third quarter 2023 earnings call. This morning, our CEO, Jeff Brown, and our CFO, Russ Hutchinson, will review Ally's results before taking questions. The presentation we'll reference can be found on the Investor Relations section of our website, ally.com. Forward-looking statements and risk factor language governing today's call are on slide two. GAAP and non-GAAP measures pertaining to our operating performance and capital results are on slide three. As a reminder, non-GAAP or core metrics are supplemental to and not a substitute for U.S. GAAP measures. Definitions and reconciliations can be found in the appendix. And with that, I'll turn the call over to J.B.

Thank you, Sean. Good morning. We appreciate you joining us to review our third quarter results. I'll begin on slide number four. Before we get into the quarter, I'd like to spend a couple of minutes talking about last week's announcement that I will be leaving Ally in the next few months. Let me start by restating my confidence in the strategic, operational, and financial positioning of the company, as well as my deep trust in the leadership team to flawlessly execute during and after this transition period. Ally has delivered a remarkable transformation, built an incredibly strong foundation, and is positioned to thrive. I'm honored to have led our company and my teammates through some of the incredible things we've accomplished during these nearly nine years as CEO. I came to Legacy GMAC to help with the financial restructuring that I thought would take three to four years. Nearly 15 years later, we transformed a captive finance company funded in the capital markets into a leading automotive franchise, the largest all-digital bank in the country, and a very special brand. We successfully navigated the great financial crisis, returned $20 billion to the U.S. Treasury coming out of TARP, and became an investment-grade publicly traded company. Starting from basically zero, we've grown to 140 billion of deposits, serving 3 million customers. Our auto and insurance teams serve more than 22,000 dealers across the country, offering them a comprehensive set of products and services that help them grow their businesses. And we've consistently given back to the communities in which we work and live, including the launch of the Ally Charitable Foundation in 2020. But as I've said many times on these calls, what I'm most proud of is the culture we build along the way. It's this team and this culture that will drive Ally to continue to disrupt, innovate, and deliver value for all of our stakeholders going forward. As we'll cover on today's call, the company is stronger than ever in position for substantial earnings growth over the next several years. Leaving Ally is a difficult thing to do, but I'm excited to see the next chapter of evolution and innovation, this time from the perspective of a customer. I think it's very important to state there was no disagreement with our board or regulatory, financial, or operational concern. This was really the only call that could have pulled me away from leading Ally. My relationship with Rick Hendrick, his family, and the Hendrick Automotive Group excites me as I transition for my final chapter over the next 20 plus years. Now I, in my entire time in the banking industry, has blessed me in ways I never dreamed. It has truly been an honor for me. I won't say goodbye quite yet, as I suspect I'll be with you again in January, but thank you for the support all of these years. And with that, let's turn to slide number five to get into the quarter. Adjusted EPS of 83 cents, core ROTC of 13%, and revenues of $2 billion reflect another solid quarter of execution in a dynamic environment. I do want to highlight a few notable items impacting the quarter. We recorded a $30 million restructuring charge associated with a workforce reduction. We expect the actions we've taken will drive $80 million in annualized savings heading into next year as we manage towards meeting our expense target. Additionally, we continue to evaluate ways to monetize certain tax credits and we're able to realize some of those benefits this quarter with the release evaluation allowance. We also realize benefits from certain state law changes. While we don't expect these items to occur every quarter, the tax team has done an excellent job over the years identifying ways to drive book value and capital accretion. In aggregate, non-recurring tax items provided a $94 million benefit worth $0.31 per share. These items are included in GAAP results, but we've excluded them from adjusted EPS and core ROTC-8. Moving to operational performance, we continue to see solid results across the company. Within auto finance, we generated record application volume of $3.7 million, which resulted in $10.6 billion of originations and attractive risk-adjusted returns. Originated yields for the quarter were 10.7%, while 40% of our volume came from within our highest credit quality tier, as we continue to capitalize on strong returns within this segment. In total, we've now achieved a cumulative pricing beta of 95% in retail auto, which reflects our consistent approach to dealer engagement and positions us well for yield expansion from here. Net charge offs in the quarter were 185 basis points, which was in line with guidance and up quarter over quarter given typical seasonality. Russ will go into more details on credit shortly, but we feel good about what we're seeing in terms of delinquencies, flow-to-loss rates, and vintage performance. Within insurance, we continue to successfully grow and deepen dealer relationships, as $324 million of earned premiums was our highest figure since 2009. Turning to Ally Bank, total deposits of $153 billion are up $7.1 billion year over year. We added 95,000 customers in the quarter, which results in 307,000 on a year-to-date basis in Ally record. We're now serving 3 million retail deposit customers, providing another proof point that our brand is resonating with consumers. 1.2 million active credit card holders, continue to represent long-term opportunities for the business, and the launch of a one-ally experience will be completed in the coming months. Corporate finance continues to deliver accretive, disciplined growth as nearly 100% of the $10.6 billion portfolio is in a first lien position. On slide number six, we wanted to directly address some of the critical items that we're navigating and what's top of mind for investors. From an interest rate perspective, we've talked for multiple quarters about the near-term challenges of a rapidly rising rate environment. Operationally, throughout this cycle, the businesses have been disciplined in managing pricing on both sides of the balance sheet. We've also leveraged our strong ALCO processes including an active hedging program to soften the financial impact from higher for longer rate scenarios. Beyond the near-term pressure, the momentum we have on the asset side of the balance sheet positions us well for margin expansion when rates stabilize. Actively managing credit risk remains a top priority. We've refined our buy box to eliminate underperforming segments and added significant price, particularly in riskier segments, to compensate for potential volatility. Based on where we see things today, we'd expect retail auto NCOs of 1.8% for the full year, which is in line with the range we provided in January. This is a unique environment where unemployment remains historically low. However, persistent inflation is a challenge for many consumers. Delinquencies remain a watch item, but we saw another quarter of shallowing in terms of year-over-year change, and flow-to-loss rates remain strong. And consistent with prior guides, we assume a meaningful step down in used vehicle values for the remainder of the year. The investments in data science and technology we've made within our collections and servicing teams will drive solid performance even in a challenging environment. We have a much deeper understanding of consumer payment patterns and more options to get consumers current and staying in their cars. Given the near-term revenue pressure, we further heightened our focus on expenses. Looking to 2024, we'll continue making prudent investments that see a path for less than 1% controllable expense growth and roughly 2% on a total expense basis. I'll share more details in a few pages. On the regulatory front, we continue to evaluate the proposals released in recent months and are preparing for increased capital and liquidity across the industry. However, we believe that regulators should fully study the implications of these proposals, and we are working closely with BPI and other advocacy partners. we will continue to be disciplined in allocating capital across our various businesses to optimize risk-adjusted returns. Slide number seven shows the success we've had creating scale across allied banks and deepening relationships with engaged customers. As mentioned, year-to-date customer growth of 307,000 is an ally record, and we now have 3 million retail deposit customers who hold $140 billion in balances. The portfolio is granular, diversified, and 92% of balances are FDIC insured. Customer retention is held steady at 96%, reflecting our industry-leading ability to maintain relationships once customers experience Ally. The bottom half of the page highlights how our offerings have led to an engaged customer base And the key benefits of that engagement, we've steadily grown our checking, or what we call our spending product, to more than 1 million customers. Across that population, 77% also have a liquid savings account. More than 1 million deposit customers either leverage our smart savings tools, utilize direct deposit, and or have an ally-invest relationship. we're approaching 300,000 multi-product customers across the consumer bank as we've seen consistent adoption from deposit customers across Invest, Home, and Card. The benefit of engagement is meaningful. As an example, deposit customers who also have an invest relationship have a balance two times those who don't. Our brand, digital offerings, and customer experience continues to hit the mark, and we remain optimistic about the growth potential within the consumer bank moving forward. Moving to slide number eight, we provided a snapshot of our current funding stack and available liquidity. We're core funded with deposits as they account for 87% of our funding, but importantly, we have multiple sources of liquidity beyond deposits. On the right side, we show total available liquidity of $64.2 billion representing 5.6 times uninsured deposit balances. We meaningfully increase our capacity at the discount window within the quarter to further strengthen the quality of our contingent liquidity. We pledge auto finance key contracts at the discount window for the first time and are appreciative for the engagement with the Federal Reserve as we work together through that process. The events of March emphasized, again, the importance of contingency planning and ensuring multiple avenues of liquidity being available at all times. The foundation of our funding profile is a mature consumer deposits franchise, and we maintain access to multiple other sources of liquidity, including a solid and stable relationship with the home loan bank. Slide number nine provides a summary of how we're thinking about recently proposed changes to the regulatory environment. For Ally, the most meaningful impact of the Basel III endgame proposal is the phase-in of OCI. As a reminder, we have not reinvested in the AFS portfolio in over a year and expect natural OCI accretion of around $500 million after tax annually, assuming the forward curve plays out. In terms of the proposed changes to RWA, our net impact is not material as the addition of operational risk RWA is effectively offset by a lower risk weight on retail exposures, including our retail auto portfolio. I'm confident we can naturally build capital to meet increased requirements in advance of the proposed implementation periods. The proposed requirements for long-term debt would result in incremental issuance for Ally, given all our long-term debt sits at the parent company. The amount of issuance will depend on several factors as we optimize parent and bank level liquidity positions. On all these issues, we are actively engaged in our industry response, including coordination with peer banks and the Bank Policy Institute. We will continue to evaluate the regulatory landscape and adapt as needed but feel comfortable in our ability to navigate the changes given our strong liquidity and capital position. Let's turn to slide number 10 to talk about our expense outlook. As we previewed on the second quarter earnings call, we are committed to 1% growth for the expenses we can control. When factoring things like FDIC fees and insurance commissions and losses, we expect total operating expense growth of around 2%. We have taken specific actions over the past year to reduce expense growth, including a hiring freeze in mid 2022 and a reduction in workforce in recent weeks. It's also important to keep in mind that expense growth this year was impacted by the normalization of weather losses and consumer credit losses. In total, we still anticipate 2023 expenses a little over $4.9 billion And given the actions we've taken to date, we expect 2024 to be right around $5 billion. So around $100 million of growth, with 80% of that coming in the form of non-controllable items. We will continue to make the right investments to fuel the company for the long term, but the specific actions we've taken and continued focus on efficiency are driving us to very modest growth in total. With that, I'll turn it over to Russ to go through the detailed financial results.