Ally Financial Inc. (NYSE:ALLY) Q3 2020 Earnings Conference Call October 16, 2020 9:00 AM ET
Company Participants
Jeffrey Brown - Chief Executive Officer
Jennifer LaClair - Chief Financial Officer
Daniel Eller - Investor Relations
Conference Call Participants
Ryan Nash - Goldman Sachs
Sanjay Sakhrani - KBW
Rob Wildhack - Autonomous Research
Betsy Graseck - Morgan Stanley
Moshe Orenbuch - Credit Suisse
Bill Carcache - Wolfe Research
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the Ally Financial third quarter 2020 earnings call.
At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question and answer session. To ask a question during the session, you will need to press star, one on your telephone. As a reminder, today’s call is being recorded. If you require any further assistance, please press star, zero.
I would now like to turn today’s conference call to Mr. Daniel Eller, Investor Relations. You may begin, sir.
Daniel Eller
Thank you Kevin. We appreciate everyone joining us to review Ally Financial’s third quarter 2020 results. This morning, we have our CEO, Jeff Brown, and our CFO, Jen LaClair on the call to review results and take questions.
Before beginning, I’ll note that the presentation we’ll reference throughout the call can be found on the Ally Investor Relations website.
On Slide 2, you’ll find the forward-looking statements and risk factor language that will cover today’s call, and on Slide 3 we’ve included several GAAP or non-GAAP metrics, which we refer to as core measures, pertaining to Ally’s operating performance and capital results. These metrics are supplemental to and not a substitute for GAAP measures. Definitions and reconciliations can be found in the appendix.
With that, I’ll turn the call over to JB.
Jeffrey Brown
Thank you Daniel. Good morning everyone, and thank you for joining us to review our results.
Slide No. 4 includes highlights from the third quarter demonstrating performance across all of our lines of business. I’ll begin with a broader perspective on these results which serve as further validation around our ability to continuously deliver.
Our steady execution over the past several years positions us for success in a variety of operating environments. We’re guided by a consistent set of strategic priorities and a customer-centric philosophy to always do it right. Our results show this focus is resonating particularly during challenging environments as we’re operating in today.
This simple but effective approach echoes throughout the culture at Ally and shows up in the innovative, engaging and leading actions we’ve taken on behalf of our customers and is further evidenced within our community efforts where we’ve committed time and increased resources to effect positive and lasting change.
Turning to the quarter, adjusted EPS was $1.25 and core ROTC was 15.2%. These record-setting levels reflected revenue expansion from embedded balance sheet tailwinds and diversified income sources combined with credit outperformance. Our balance sheet strength is apparent across capital, liquidity and reserves where levels remain near the highest in Ally’s history.
In auto, we decisioned 3.2 million applications generating $9.8 billion of consumer originations, our highest quarterly volume in five years. We continue to leverage our broad market reach, interacting with over 90% of franchise dealers in the U.S.
Auto market trends remain encouraging. Industry new vehicle sales closed the gap to prior year levels throughout the quarter. In fact, the rebound in sales over the past five months took five years to achieve following the past financial crisis. Used vehicle sales have demonstrated particularly strong performance, outpacing prior year levels every month since May. As a result, overall dealer profitability rebounded to the highest levels in several years during the quarter, more than offsetting a difficult Q2.
Ally’s new origination yields of 6.95% represented another quarter of disciplined underwriting, and combined with net charge-offs of 64 basis points drove expanded risk-adjusted returns. This was the lowest third quarter loss level for Ally since 2013, when our portfolio consisted mainly of new subvented loans.
Generally speaking, the U.S. consumer entered 2020 on solid footing and has demonstrated a higher degree of resiliency despite significant and ongoing challenges aided by meaningful and necessary stimulus. While recent trends suggest a broader recovery is underway in various pockets of the economy, we’re mindful of the currently expired stimulus benefits and the ongoing uncertainty around the outlook of COVID. Unemployment levels remain above pre-pandemic levels, labor participation has declined, and recent layoff announcements have picked up across harder hit travel and entertainment industries. The growing disparate impact being felt across educational, income and racial backgrounds is troubling and speaks to a more fundamental issue we’re facing as a society, reinforcing for us the corporate citizenship commitments we’ve made. Against this backdrop, we’re remaining focused and balanced.
We’re proud to continue serving our customers, including actions we’ve taken to keep them in their cars and homes. Our deferral program serves as a real time example of this where our higher than industry take rates were driven by the early, easy and largely digital approach we provided our customers in a time of uncertainty.
Beyond strong performance, we’ve heard from many who describe how the program provided them with a crucial opportunity to devote focus and attention to unexpected life events they faced as a result of COVID. Again, this is doing it right, and while many question the level of actions we took earlier this year, Jen will show you the stout performance of the deferral population in just a few minutes.
Within insurance, written premiums of $333 million increased meaningfully quarter over quarter despite persistently low dealer inventories, while retain underwriting stabilized throughout the quarter. Investment income remained robust, highlighting our ability to generate diversified income.
Turning to our consumer and commercial banking products, momentum continued to build during the quarter. Total deposits increased 13% year-over-year including a record third quarter, driving $17.1 billion of retail growth in 2020. Our retail deposit customer base of $2.2 million expanded for the 40th consecutive quarter. Two-thirds of account openings continue to be sourced from younger generations and the vast majority of inflows still come to us from traditional banks, plus practically not outflows to neo banks.
Ally Home, Ally Invest, and Ally Lending continued to make considerable progress towards our long-term objectives. We generated the highest origination levels since launching our mortgage offering with improving loan profitability. Our partnership with Better.com is another example of providing our customers with elegant, simple and largely digital experiences.
Brokerage accounts at Invest grew 16% year-over-year. Ally Lending generated $167 million of volume and entered the retail point-of-sale segment through two key partnerships. Our capabilities in healthcare, home improvement and retail position us well in the rapidly growing payment ecosystem. Corporate finance held for investment balances ended at $5.9 billion, a 17% increase year-over-year, while credit performance remained stable.
Turning to Slide No. 5, we’ve included a snapshot of our competitive advantages which will position us to generate sustainable expansion for years to come. Our established auto and insurance businesses are foundational to our ongoing success and results, representing market-leading businesses with prudent products, services and scale. We’ve grown our dealer base for 10 years, expanding our reach through both established and emerging players.
Our use of technology and digital tools within auto has dramatically expanded this year. We modernized our entire servicing platform, are increasing the use of data analytics throughout the underwriting process, have completely rebuilt the technology stack on Smart Option, our online digital auction site, and have rolled out digital sell service tools and portals which again simplify and streamline the deferral experience for our customers, so while this is a mature business, we continue to make it stronger.
Ally Bank was an early disruptor, and we’ve continued to leverage the momentum behind our digitally focused products in a customer-centric manner. We’ve differentiated through frictionless experiences built through a data-driven approach and innovative tech. Our scalable platform is established but nimble, our customer base has grown rapidly, remains loyal to Ally, and are active users within our ecosystem. We’re offering a broad array of products through award-winning platforms and service levels, combined with an amazing culture and continued edge on finding ways to disrupt our industries. These attributes represent a sustainable and attractive path forward.
Let’s turn to Slide No. 6 to look at customer trends. Over the years, we’ve fielded a variety of questions regarding the feasibility and long-term prospects of the direct banking model and our ability to diversify our auto platform. The data and metrics shown over the past 10 years provide a clear indication of the outcomes we’ve generated. At Ally Bank, our conviction in a direct bank strategy has never wavered. It has been reinforced by accelerating consumer preferences for digital products and excellent customer service, both foundational elements of our platform.
Customer trends in the upper left have grown at a 19% CAGR since 2010. We’re seeing steady progress and deepening relationships, ending 3Q at just over 7% of our 2.2 million depositors for customers who also use a Home or Invest product. On the bottom, our growth in dealers over the past 10 years has led to a 13% CAGR in application volume, giving us market visibility and enhancing our ability to meet our return objectives. Moving forward, we remain focused on being able to continue offering our 8.5 million customers with the innovative financial products and service levels they’ve shown an increasing appetite for.
On Slide No. 7, EPS in the upper left demonstrates the near term result of our long-term planning and execution, a theme that carries across revenue growth of 4% year-over-year shown in the upper right and deposit expansion in the bottom left. Tangible book value in the bottom right grew quarter over quarter to $34.56, and adjusting for day one CECL impact were well above $37 per share, reinforcing the intrinsic value of our company.
We’re remaining thoughtful in our execution and our actions continue to be guided by our values, culture, and long-term strategic objectives.
With that, Jen, it’s all yours to review the detailed results.
Jennifer LaClair
Thank you JB, and good morning everyone. Let’s jump in first on some of our key operating metrics. I’ll begin on Slide 8 with a review of monthly trends in our auto segment.
Consumer application and origination momentum continued this quarter, reflecting our adaptable business model, dealer resilience, and stronger than anticipated consumer demand. The recovery in sales from the trough in April has been driven by a combination of three factors, including a shift towards personal vehicle ownership replacing mass transit and ride sharing, where usage has declined 50% to 70% from pre-COVID levels. The utility provided by owning a car, including the added flexibility and control in an uncertain COVID environment and an increased consumer propensity to purchase a car as spending on entertainment and travel has been reduced. As these sudden and meaningful consumer shifts have unfolded, we’ve remained a focused and dependable partner for our dealers, rapidly expanding our market reach, evidenced by the increased loan purchase program we announced with Carvana last month and the dynamic and evolving support for emerging and more traditional dealers. We’ve continued to be mindful of the credit environment and have managed an effective and dynamic underwriting approach.
In the bottom left, used car gains per vehicle averaged over $2,400, the highest level in seven years leading to the highest quarterly gains in five years. We now expect full-year 2020 used car values to rise by more than 5% year-over-year, benefiting NII and net charge-offs. Moving into 2021, we expect used vehicle values to decline modestly, though steady demand and low new vehicle inventories will continue to be a tailwind longer term.
Commercial balances, shown on the bottom right, grew in August and September following the trough in July. As OEM production levels have largely normalized, we expect balances to slowly rebuild through the latter part of last year.
Let’s turn to Slide 9 to review consumer product trends. Momentum and progress among our digitally-based consumer offerings continued in Q3. Retail deposit balances and customer growth reached their highest third quarter levels for Ally. Balances expanded despite record tax outflows as payment deadlines were delayed in Q3, and our customer base expanded every month this quarter, reflecting the appeal of our award-winning offerings.
Direct-to-consumer mortgage originations reached $1.3 billion in the quarter. Elevated trading activity continued at Invest with customer assets ending the quarter at $11.1 billion. Growth in both channels continues to be sourced from existing customers with 64% of new brokerage account openings and 54% of mortgage originations coming from existing Ally customers. These metrics reflect the large organic growth opportunity as customers continue to seek ways to expand their Ally relationship.
Slide 10 includes a snapshot of key balance sheet metrics. We’ve taken deliberate actions over the past several years to strengthen our balance sheet, allowing us to focus on executing for our customers in this challenging environment. Liquidity levels remain strong and our evolving funding profile continues to provide opportunities to lower our cost of funds and patiently deploy liquidity. Capital levels remain well above regulatory minimums and reserve levels ensure we’re prepared for a variety of potential credit outcomes.
While many unknowns remain around the full extent and ongoing impacts related to COVID, we have confidence in the strength of our balance sheet and our proven ability to navigate.
Let’s move to Slide 11 to review detailed financial results for the quarter.
Net financing revenue, excluding OID, of $1.209 billion grew $146 million linked quarter and $14 million year-over-year. This represents our highest quarterly results and more importantly resumes our trajectory of NII and NIM expansion powered by the combination of stable earning asset yields from retail auto yield expansion, lease gains in a well positioned investment security portfolio, declining cost of funds as we continue optimizing the deposit portfolio and reducing higher cost funding, and steady loan growth. These dynamics uniquely position us to overcome headwinds associated with lower rates, elevate prepayments, and negative carry from excess liquidity.
Other revenue of $471 million reflected strong realized investment gains and robust mortgage fee income. Within this line item is a charge related to the early pay down of certain FHLB bets, an action that reduces excess liquidity and accelerates NIM as we replace 2.8% debt with low cost deposits.
Entering 2020, other revenue was projected to generate approximately $400 million per quarter, reflecting growing insurance, mortgage, and Smart Option results. We’ve generated meaningfully higher income this year from strong investment activity, reinforcing our ability to generate diversified revenue. Provision expense of $147 million was materially lower linked quarter and year-over-year, driven by improved frequency and severity across consumer portfolios and stable, strong commercial performance.
Non-interest expense declined seasonally $80 million quarter over quarter and increased $67 million year over year, driven by recurring themes including revenue-related business expenses and volume driven costs of our growing customer base, investments in technology-related items, and higher insurance expenses where we experienced a more active Q3 weather season. We’re continuously working to identify and reduce spend across non-essential areas while also investing in our businesses to fuel revenue and customer growth. Key metrics at the bottom reflect the solid performance generated across our company during the quarter.
Slide 12 includes balance sheet and NIM results. Net interest margin excluding OID of 2.67% expanded quarter over quarter, reflecting embedded dynamics I just reviewed, where retail auto portfolio expansion, strong lease gains and deposit cost improvement drove margin expansion despite NIM pressure from premium amortization and excess liquidity. Average earning assets expanded quarter over quarter to $180.1 billion, driven by consumer auto and cash offsetting the impact of lower commercial balances and elevated mortgage prepayment activity.
Retail auto portfolio yield excluding hedge impacts expanded six basis points quarter over quarter and 17 basis points year over year. Average commercial auto balances declined $4.8 billion quarter over quarter, though expansion occurred in August and September.
Cost of funds improved 31 basis points, the fifth consecutive quarter-over-quarter decline, a trend we expect to continue over the next several quarters. These fundamental drivers will propel ongoing NIM expansion, paving a path to 3% as we move through 2021.
Detailed deposit trends are on Slide 13. Total deposits grew to $134.9 billion as retail balances expanded to $120.8 billion compared to $101.3 billion a year ago. Customer retention, measured as those who maintain an account with us over time, remains strong at 96%, demonstrating consistent loyalty and engagement.
On the bottom right, we ended the quarter with over 2.2 million customers, growing at the highest level for a third quarter ever. In the bottom left, retail portfolio rates declined 38 basis points linked quarter and 88 basis points year over year, reflecting disciplined pricing actions and a shift to liquid products, an expected trend in a flat rate environment.
Let’s turn to capital on Slide 14.
Q3 CET1 of 10.4% reflected ongoing earnings growth and a continued pause in our share repurchase program. Last week, we announced the Q4 common dividend of $0.19 per share payable on November 13. We are well underway with our CCAR 2020 resubmission and are on track to submit our revised capital plan in early November. For participating banks, there remains much to be determined by the Federal Reserve regarding specific outcomes of this process, but we remain confident in the positioning of our balance sheet, our robust capital, and our proven approach to risk management.
Capital actions over the past five years, shown on the bottom, reiterates our disciplined approach to deploying capital. Shares outstanding have declined 23% as we repurchase at attractive levels relative to our growing tangible book value while we increased the dividend on five separate occasions. These actions occurred as we grew risk-weighted assets, optimized our leading businesses, and expanded product offerings. We look forward to returning to a normalized environment when we can resume dynamic capital deployment.
Turning to Slide 15, credit performance remains strong and better than anticipated, reflecting a combination of broad-based consumer and commercial resilience and our expertise and dedicated approach within servicing and collections, including efforts to increase engagement through easy to use digital tools for our customers.
The consolidated net charge-off rate of 41 basis points declined 17 basis points quarter over quarter and 42 basis points year over year. In the upper right, net charge-offs of $122 million declined $145 million year over year, driven by retail auto and corporate finance. In the bottom left, retail auto net charge-offs of 64 basis points improved quarter over quarter, a departure from the typical seasonal trend of rising NCOs through the second half of each year and represents less than half the prior year level of 1.38%.
Delinquency trends remained solid as both 30 and 60-plus results ended meaningfully below prior year levels. We remain encouraged by the performance across our portfolios, including deferred and non-deferred populations.
Let’s turn to Slide 16. Given credit results year to date, we’re lowering our retail auto NCO outlook for full year ’20 to less than 1.2%, and if trends continue to outperform, we could be closer to 1%. Our consolidated reserves ended the quarter at $3.4 billion as coverage of 2.87% moved slightly higher quarter over quarter. Retail auto reserves and coverage levels remained stable overall. These levels reflect our balanced approach and contemplate rising NCOs driven by elevated levels of unemployment and ongoing uncertainty related to COVID and the economy. Our current baseline forecast assumes unemployment remains elevated, ending 2021 around 7%. Consistent with prior quarters, we do not include any stimulus-related benefits in our reserve modeling.
We continue to expect retail auto losses to peak as we move through 2021, and we believe our current reserve level is sufficient to absorb this expected increase. Absent significant further deterioration due to the economic outlook, we would not expect any additional build.
Moving to Slide 17, I’ll briefly touch on the auto deferral program.
As of quarter end, 99% of COVID deferrals have expired, 96% of participants have had two or more payments due, and 89% remain current or paid in full. Later stage performance migration has remained favorable to our expectations and is reflected in our Q3 credit metrics.
In addition to strong consumer trends, we diligently prepared for each stage of the deferral program, launching new digital tools that drove higher engagement and payment rates among participants. We are pleased with the program on many fronts, most notably the support it provided to our borrowers reflective of our Customer First values.
On Slide 18, I’ll highlight a few additional metrics in the auto segment. Net financing revenue expanded quarter over quarter and year over year, reflecting growth in the retail margin and strong lease gains that more than offset over $10 billion in lower earning assets driven by inventory levels. Non-interest expense grew, reflecting the added resources and capabilities deployed within our servicing and customer care centers, and as you can see on the bottom right, portfolio yields continued to migrate higher while loss content remains strong.
Overall execution within auto reflects the resilience of the auto asset class as well as our unique ability to adapt and continue to meet the needs of our dealers and customers.
Detailed origination and asset trends are on Slide 19. Q3 auto originations of $9.8 billion expanded quarter over quarter and year over year, while average FICO and non-prime levels remained stable. Used volume represented 55% of originations or $5.4 billion, or highest quarterly used volume, reflecting our ability to respond to market and consumer demand in real time.
In the bottom left, ending consumer assets expanded again in Q3, ending at $82.9 billion driven by retail and lease balance growth. On the bottom right, average commercial assets declined, though ending balances expanded.
Insurance results are on Slide 20. Core pre-tax income of $65 million increased $26 million linked quarter and was essentially flat year over year. Written premiums of $333 million grew $66 million quarter over quarter, reflecting a rebound in retail F&I activity more than offsetting lower dealer inventory levels. Trends steadily improved throughout the quarter and we expect stabilizing to improving performance as dealer inventories build.
Turning to Slide 21, corporate finance pre-tax income of $60 million grew $28 million quarter over quarter and $16 million year over year, reflecting steady credit performance and asset growth. Unfunded commitments of $3.8 billion reflect our disciplined but opportunistic approach to growth. While utilization remains lower given the environment, our ability to lend and generate growth comes amid a challenging backdrop.
Portfolio metrics reflect our prudent approach to risk management. Forty-seven percent of balances are asset based, 65% of the portfolio has contractual LIBOR floors, while criticized and non-accrual loans continue to perform well in the current economic backdrop.
On Slide 22, mortgage pre-tax income of $26 million expanded versus prior quarter and prior year as strong gain-on-sale activity more than offset elevated pre-payment related impacts. Direct-to-consumer originations were solid as loan mortgage rates generated strong refinance activity, which was 63% of our volume in the quarter.
I’ll close by reiterating how proud I am of our Ally teammates who remain a driving force behind our accelerating operating and financial results, as demonstrated in our consistent book value growth and expanding return profile. We remain focused on doing it right for our customers, communities and shareholders.
With that, I’ll turn it back to JB.
Jeffrey Brown
Thank you Jen. I’ll wrap up with a few comments on Slide No. 23.
Like Jen, I want to thank all of our associates for their tremendous efforts. They continue to give day in and day out. I’ve witnessed firsthand how many of them are juggling a variety of personal and family obligations while working from home but have taken on each challenge with a devotion and commitment to do it right. The significant pressures and strain brought on by COVID and the difficult social issues that have unfolded have presented challenges beyond anything I’ve witnessed in my career, but what I’ve seen in the actions and response by our people serves as a bright spot and a tremendous source of pride for me in leading this great company.
For our customers, we will continue to work relentlessly to preserve and grow the trust and loyalty you have in us as your financial partner, no matter what lies ahead. It’s who we are. Within our communities, we’ve stepped up our actions in recent months to effect positive change in several ways, most publicly with the launch of the Ally Foundation, a channel that will allow us to quickly and efficiently support the many causes and efforts being carried out by worthy individuals and organizations today.
Whatever uncertainty and challenge lies ahead of us, I’m confident in our teams’ ability to continue successfully navigating on behalf of our customers, which enhances long term value for our shareholders.
With that, Daniel, back to you, and time for Q&A.
Daniel Eller
Yes, thanks JB.
As we head into Q&A, I’ll remind participants to limit themselves to one question and one follow-up. Operator, you can now queue up the Q&A.
Question-and-Answer Session
Operator
[Operator instructions]
Our first question comes from Ryan Nash with Goldman Sachs.
Ryan Nash
Hey, good morning Jen, good morning JB.
Jeffrey Brown
Good morning, Ryan.
Jennifer LaClair
Hi Ryan.
Ryan Nash
Maybe I’ll start - Jen, you know, you saw a nice bounce back on the margin this quarter to 1Q levels, and now you’re talking about a path to 3%. Can you maybe just talk about some of the drivers to the path - I know you referenced some of them in the prepared remarks - what’s embedded in them as well as timing, and also if we see liquidity come down as dealers pick up, it seems to me these tailwinds could actually see us go above 3%, so I was curious if you could just give us some color on the numbers as well as the moving pieces on the path to 3%.
Jennifer LaClair
Yes, sure Ryan. Appreciate the question.
A couple things. This quarter, we saw our NIM expand about 25 basis points, and as I had messaged a couple weeks back, that was exactly what we were expecting. As we move forward from here, we would expect the NIM to continue to expand, likely not quite at that level each quarter, but we do see a really nice path in Q4 and into 2021 in terms of expanding up to that 3% mark.
Now in terms of some of the drivers, let me hit a few highlights. On the asset side, as you can see, we’ve continued to see our retail auto portfolio yields migrate up, and that’s as a result of nine trailing quarters of new origination yields coming on the books at 7%. We were almost at 7% this quarter, so we’ll continue to see that nice increase in retail auto originations which should offset some declines because of rates in other areas in prepayment. That should stabilize our overall earning asset yield.
Now to your point, there could be some opportunity for that asset yield to even expand as commercial balances come back and cash is redeployed into commercial balances and we continue to grow corporate finance, so at a minimum it will be stable.
Then on the liability side, cost of funds came down over 30 basis points. You would expect to continue to see cost of funds come down - you know, OSA rate is at 60 basis points, and then you’ve got CDs over 2% re-pricing down below 1%, which creates just this nice tailwind. Then last but not least, we continue to look for liability management opportunities to further take down cost of funds, and you saw we early retired some FHLB debt.
So to your point, nice path forward. I think strong dynamics on both sides of the balance sheet, and I’d say at a minimum we’ll be migrating towards that 3% as we enter 2021.
Ryan Nash
Got it, and if I could do a follow-up, I’ll stick with Daniel’s guidance of just one follow-up. JB, you obviously have a huge windfall of revenue right now, given all these tailwinds that Jen just referenced on the margin. Can you maybe just talk about the magnitude of positive operating leverage you’re targeting and at what adjusted efficiency ratio, and potentially what return you think is doable in this kind of environment?
I’ll just tag onto that, just given the fact the stock continues to trade below tangible book value, maybe just talk about your willingness to get much more aggressive on returning capital in coming quarter before the valuation potentially expands in a meaningful way. Thanks.
Jeffrey Brown
Sure, you got it, Ryan, and obviously we’re happy to follow up with you offline on any of these. Jen, maybe you want to start on operating leverage targets, things like that, and then maybe I’ll take the capital one, because obviously that’s a complicated question in light of the Fed and CCAR 2.0 and the environment.
But maybe Jen, you can take the first part?
Jennifer LaClair
Yes, sure. On operating leverage, I just described the path on the NIM, which ties into our path on net interest income, and we’re anticipating continued revenue growth from net interest income. On other revenue, we’ve seen some outsized opportunity to take market-related gains over the last couple of quarters. We’d expect that to normalize a bit down to that 4.25 level, but overall because of the strength in NII and continued strong performance in other revenue, we would expect growth there which, to your point, Ryan, is going to drive positive operating leverage especially if you kind of adjust for some of these outsized gains that we’re seeing in the other revenue line item.
From a return perspective, it’s still early as we think about 2021, but we are expecting to get back to kind of pre-COVID return levels over the next 12 to 18 months, assuming that our path on the macro continues to be accurate. If anything, 2020 has taught us things can move pretty quickly, but based on what we’re seeing right now, we should be able to return to pre-COVID levels here in short order.
Then just on capital return, I know JB will want to jump in on this, but priorities remain the same - continue to invest in customer related growth. I think the fact that we see a strong earnings path ahead allows us to continue to do that, and then it will be up to the Fed and CCAR 2.0 to see where we have the ability to start repurchasing shares again.
JB, I’m sure you want to jump in on that as well.
Jeffrey Brown
Yes, I’ll start with really pleased with the results and pleased, Ryan, with your recognition of the increasing pace and inherent strength that’s starting to show through the income statement, so very focused there. I think that provides us a lot of opportunities.
As Jen referenced in her prepared remarks, this concept of essentialism, that’s something that we’re very focused on inside of Ally, so really what is it? It’s simply the disciplined pursuit of less, so I think what we’re being very focused on is driving as many efficiencies as possible, utilizing technology up and throughout the entire corporation, and then using some of those savings to continue reinvesting in technology and digital tools and really making us even stronger for the long run.
On capital overall, again I do think the theme that we talk about at Ally, and you’re certainly hearing it being echoed from Chairman Powell, is just the amount of uncertainty that exists. I think we’ve been extraordinarily pleased with the state of the consumer right now - you know, the consumer is performing incredibly well and obviously that’s showing up in our results, so we think there is plenty of numerical reasons to support pretty aggressive and pretty dynamic capital returns in the immediate future.
But you know, you’ve got still ongoing uncertainty with COVID, you don’t understand the full implications if we have a change in the political landscape, and so all these are dynamics we’re facing. But I think we’re just focused on keeping our head down, executing, seeing strong revenue growth really come through the entire company, and that affords us a lot of opportunities and hopefully a lot of opportunities for our shareholders as well.
Ryan Nash
Appreciate all the color. Nice quarter.
Jeffrey Brown
Thanks Ryan, appreciate you.
Operator
Our next question comes from Sanjay Sakhrani with KBW.
Sanjay Sakhrani
Thank you. JB, you talked about a very strong rebound in originations and the relatively quicker rebound relative to the previous cycle. I guess if we peel back the onion a little bit on the trends, how much of this is sustainable? Can some of this be a pull-forward of demand, and when we think about where it’s coming from, is it share gains as well?
Jeffrey Brown
Yes Sanjay, thanks. I do think it is fairly sustainable. Now, obviously $9.8 billion, it’s a pretty robust quarter, and I think as we pointed out, it’s the highest level that we’ve seen in five years. But I think there’s still opportunities to see levels remain here or within this relative range. I think as Jen pointed out, you are starting to see a fairly meaningful shift in the decline in public transportation - I don’t think that’s necessarily short lived. Maybe it’s an alteration in the environment for the next couple of years, but obviously that affords us a lot of opportunity.
I think when I go out and talk to dealers and certainly engage with our auto team, I think our expansion into these alternative channels - you know, the Carvanas of the world, the Drive Times and Echo Parks and other players like that, coupled with the 19,000 franchise dealers that we’re touching, it’s pretty powerful in our ability to sustain strong originations.
I think the other important point is we have been extraordinarily price disciplined. I mean, as Jen points out, our 6.95, we’ll round it up and call it 7, this is--we’ve been very focused on booking high quality earning asset yields. If we gave up a touch of price, we could expand that box and go well north of $10 billion a quarter in originations. We’ve just chosen to be very price disciplined, very price focused, not chase the super prime product because you just don’t generate all the attractive returns for us that we’d want to chase.
So for us, we feel really good about our position. We feel really good about where we’re playing in the credit environment, and we think there’s more room to run there.
Sanjay Sakhrani
Okay, thank you. My follow-up is on credit quality coupled with returns. Jen, you mentioned if the trends continue, you could be 1% for the fourth quarter into the year. I guess if we marry that, maybe what are the swing factors there, how comfortable do you feel about credit? I see the deferral trends look really favorable, but then if you couple that with the NIM discussion before, as we look into 2021, shouldn’t the returns actually be higher than what you were expecting going forward? I don’t know that we’ve seen 3% NIMs in the past.
Jennifer LaClair
Yes, appreciate the question, Sanjay. I think a lot comes back around credit and the ultimate path around delinquencies and NCOs. I think what we’re observing and the industry is observing at large is just the disconnect between the macroeconomic factors and delinquency trends, and so while we’re incredibly pleased with the performance year to date and Q4 is shaping up to be strong, we also want to be mindful of the environment that we’re in and what the ultimate path does look like, how the path of COVID and the economy shapes up. So I think at this point, we’re just being really cautious around that.
Now, I would like to reiterate as well that while we could see 1% or less than 1.2% for full year 2020, we do have a retail auto reserve that’s four times that, so just from an income statement perspective, we should have taken those [indiscernible] and we did that in the first quarter, so we did it early and we did it large, and we’re going to just continue to be mindful of the environment.
But absolutely if performance continues like this, if delinquency rates continue to trail 30-plus down 100 basis points, then that credit loss could be pushed out mid-2021 or beyond, and that obviously would impact our returns. But I think as I described just a couple of minutes ago, I think the fundamental drivers of our returns are very solid from a NIM perspective, NII growth, continuing to see other revenue continue to be strong - maybe not quite at these levels, but strong, and to your point, we do see a really attractive path on expanding returns, which we’ve been talking about for some time now, Sanjay.
Sanjay Sakhrani
All right, well thank you, guys. Good quarter.
Jennifer LaClair
Thank you.
Jeffrey Brown
Thanks Sanjay.
Operator
Our next question comes from Rob Wildhack with Autonomous Research.
Rob Wildhack
Good morning guys. Just a question on your partner relationships here. I noticed there--and you highlighted that you upped your commitments to Vroom and Carvana. How have those opportunities evolved as we’ve gone through 2020 and gotten into this new paradigm, and what effect do those changes and evolutions have on your partnership strategy more broadly?
Jennifer LaClair
Yes Rob, appreciate the question. I would say our partnerships with some of the newer entrants are very similar to what we have more broadly across auto and supporting all of our dealers, which we want to be there for them in all environments and we want to be opportunistic. I think what has been a big win for us here in 2020 is just the growth in some of these new dealers, and we’ve been able to grow with our partners’ growth. We had record levels of inflows in retail auto flows this quarter from those new partnerships, so we’re going to continue to support all of our dealers.
Our strategy has been around increasing application reach - you can see that in some of the customer metrics. Pace of shared applications continue to grow at a 13% CAGR, and we feel good about our positioning across the board in our dealers.
The other thing I’d say, and JB talked a lot about this, is just the modernization of auto continues. We see a consumer shift to more digital purchasing behaviors, and because we have the partnerships that you just have mentioned, we’re able to shift with changing dynamics across consumer preferences as well.
Rob Wildhack
Got it. Then just a quick one on capital and capital return. The 10.4% CET1 right now, that’s obviously a little lower with the CECL adjustment. Do you have one eye on that fully phased in CECL capital level when you’re thinking about capital return, or is it a little too early to be thinking about that yet?
Jennifer LaClair
No, we’re always thinking about that. Yes, we think about that all day.
I think the headlines around capital - one, we feel great about the position. These are the highest capital levels we’ve had in history. We’re some $3.3 billion above our implied CET1 requirement from the SCB, and you couple that with the rest of the balance sheet, it was a $3.4 billion reserve, and we feel like we are in a really strong position across the balance sheet.
Then as we move forward, as we were just talking about, we see a strong path on earnings growth, and so the question now is where do we deploy the growing capital from earnings, and it will follow kind of the same path that we’ve been talking about. Customer growth is number one - we’d expect RWA to pick up as commercial balances pick up. That’s probably the most obvious driver of capital deployment. We continue to see growth across every one of our businesses, whether that’s our Ally Lending business, corporate finance, DTC mortgage, consumer auto as well as the commercial side, so that would be path two. Then I think JB summarize it really well - we would like to move into a more normalized situation when it comes to repurchases, especially with where our stock is trading relative to very strong book value growth.
Rob Wildhack
Got it, thank you.
Jennifer LaClair
Thank you, Rob.
Operator
Our next question comes from Betsy Graseck with Morgan Stanley.
Betsy Graseck
Hi, good morning JB, good morning Jen.
Jeffrey Brown
Hey Betsy.
Jennifer LaClair
Morning Betsy.
Betsy Graseck
In listening to your prepared remarks, I feel like I’m in a parallel universe in the land of plenty. It’s really exciting.
Jeffrey Brown
Thank you. You’ve been a strong supporter for a while. We notice that and we appreciate that. We’re just executing the mission, head down.
Jennifer LaClair
Our goal is to make you look right.
Betsy Graseck
Well, I appreciate that today, especially on a Friday.
My question here is one that I know I’m going to get from investors, which is around the sustainability. I think Jen, earlier in your prepared remarks you highlighted how you do anticipate to see some steady demand going into 2021. I’m wondering if you could give us some color or some comments that can support that, just to give people some understanding of why you think some of these tailwinds are going to continue for at least several more quarters here.
Jennifer LaClair
Yes, sure. We appreciate the question and anticipated it, which is why we added Page 5 to our earnings materials today.
It’s just about the positioning of our businesses. If you start first on the auto side, auto continues to be the really strong performing asset class throughout 2020, and it’s where we play in kind of the prime segment, but it’s really across the board in super prime as well, and you’re just seeing strength across the board. Then when you look at where we sit in the industry with our scale, with the breadth of products that we offer, with the partnerships we just touched on, we feel really well positioned to continue to see that outflow grow.
We’ve closed the gap on a year-over-year basis. We had record used application flow, and so just the positioning of our model where we can take advantage of unique pockets within a growing and strong asset class, we absolutely see sustainability there, and for full year 2020 we’re likely to be pretty darn close to where we were last year from an origination perspective and pretty close to that 7% yield, which remains record levels to the underlying benchmark. So great flows, great sustained pricing within auto, and again we don’t see any sign of that stopping just yet and aren’t anticipating that stopping.
Then on the consumer side, you just think about the shifts in banking around digitization, and we’re already there. We’re 100% digital. You see the flows that we have, the strong retention on the deposit side, and we’ve done that with record declines in pricing, so we feel really well positioned to meet the needs of our consumers in deposits. Then continuing the theme of digitization, that’s where you see Ally Invest and also our DTC mortgage product picking up, and they’re able to draft off of the strong performance that we’ve had on the deposit side.
So feel really, really good about all of our businesses in this environment, and we added that customer slide as well because not only are we positioning ourselves well from a product perspective, but we’ve seen that customer growth that we can continue to harvest over time, and that is showing up in the scale that we’re seeing in our new businesses.
Betsy Graseck
Got it. No, that’s helpful, some more legs to stool, and penetrating client base successfully, so I get that. Thanks for the color.
One other question on the capital return for you and JB is around the SCB. The question I got from somebody the other day was, does the SCB change how flexible and nimble you can be? Is there a change in the buyback capability that the SCB gives you?
Jennifer LaClair
Let me first start with the SCB, the rate, and then just the guidance that we’ve received around the SCB.
First of all, it implies kind of a required CET1 of 8% - we already manage the company at 9%, so there’s really no change there in terms of how we think about overall capital levels. Then at least how they originally positioned the SCB, it should actually give us more flexibility because as long as we’re managing capital deployment above that 8%, we should be able to really more dynamically deploy our capital as we move through the quarter. So if anything, that should be a net positive just in terms of timing and magnitude of capital deployment.
But as JB, I think, highlighted very well, there’s still a lot of questions around how the FRB will respond to CCAR 2.0, and we think we’re well prepared for that; but we’re mindful that there’s still some uncertainty there.
Betsy Graseck
Got it. Thanks so much. Appreciate it.
Jennifer LaClair
Thank you Betsy.
Jeffrey Brown
Have a good weekend.
Betsy Graseck
You too.
Operator
Your next question comes from Moshe Orenbuch with Credit Suisse.
Moshe Orenbuch
Great, thanks. Most of my questions have been asked and answered, but to me, the most interesting part of the quarter has been what you had predicted after Q2 of PP&R improvement has certainly happened. I think you alluded to the ability to continue to optimize the right-hand side of your balance sheet, and maybe if you could spend just a minute or two on how much room you think there is, both in terms of deposits replacing other liabilities as your balance sheet normalizes in size, and also deposit pricing. I think you lagged a little bit your peers at the beginning of this downward trend and are starting to catch up now, so maybe if you could just talk about that a little bit.
Jennifer LaClair
Yes, I appreciate that, Moshe. We’re optimizing both sides of the balance sheet, and I think steady earning asset yields are really important; but on the liability side, you’re absolutely right - we have a wide variety of opportunities to continue to optimize, the most obvious and impactful one is on the deposits. Take OSA - we dropped OSA rates 50 basis points this quarter down to 60 basis points, and that was in record time. If you look at the great financial crisis, it took some 35, 36 months to get to this point, and the industry kind of came down in a couple of months, so just a very accelerated decline in OSA rates, so you’ll see that roll forward from partial year to full year as we head into 2021.
Then you also see CDs re-pricing down, so CDs will re-price from over 2% down to less than 1%. That creates a nice tailwind for us. Then as we’ve continued to see flows, we continue to replace some of the brokered deposits with retail deposits, and if you look a year ago, brokered deposits were about 15% of our deposit stack - that’s down to 10%, so we’ll continue to let that flow.
Then in terms of the other liabilities, unsecured, we had about $2.2 billion in unsecured roll-off in 2020. We’ll keep kind of the volume the same but the rate will be better, so we’ll be bringing down cost of unsecured. It gets a little bit less of an impact in 2021, but we’ll have a nice roll forward there.
Then in terms of other liabilities, you saw exactly--or I pointed out, the FHLB early retirement, we’re going to continue to look for ways to take down some of this more expensive debt because of this really strong tailwind we have from both deposit flows and pricing.
Then last but not least, it gives us such a strategic advantage because while we have this cash, we can use that excess cash to replace higher cost liabilities, and we’re not forced to invest into putting duration in our securities portfolio of less than 1%, so we feel just really great about dynamics on both sides of the balance sheet and the ability to continue to optimize liabilities and take down that funding cost for several quarters to come.
Moshe Orenbuch
Great, thanks. I certainly didn’t mean to minimize the impact of pricing on the asset side.
A follow-up I wanted to ask was about--you know, you mentioned kind of in passing that you’re expecting plus-5% used car values this year, and I think that kind of had been minus 3% to 5% in the past. Could you just talk a little bit about how that might have impacts going into 2021, given where used car values which are probably up in actual terms 15%, they may not sustain that, but they’re up substantially higher than that as of now?
Jennifer LaClair
Yes, and maybe I’ll just dial us back to late ’19 and heading into ’20. If you look at off-lease supply, we were hitting a peak here in 2020, so simply because of supply side dynamics, we were expecting to see a 3% to 5% decline in overall used vehicle values this year. Now, 2020 has really shaken everything up across the industry. We saw a precipitous drop in the second quarter as auction lanes dried up, but as the auto asset class has continued to remain strong, consumer demand for vehicles COVID-related has continued to accelerate, and new vehicle inventories are at nine-year lows, down 27% year-over-year, which has seen demand for used spike up to unprecedented levels. We’re in the mid-teens here in Q3, and that’s expected, Moshe, to continue into Q4 and be strong, quite frankly, in the first half of 2021.
Now, at some point we do expect this to normalize a bit, and so while we’re expecting overall 2020 used vehicle pricing to come up about 5%, we do think it will normalize down a couple percentage points heading into 2021 with strength in the first half and some pressures in the last half.
But I will say, bigger picture, that off-lease inventory does start to come down heading into 2022, so there could be some sustained tailwinds over the next 12 to 18 months simply because of that. I’d mention the $2,400 gain per vehicle, and that’s predominantly in the SUV and truck category, which continues to be in high demand across our consumers. Some of the other categories the small cars and smaller vehicles don’t have quite the demand that we’ve seen in our book.
Moshe Orenbuch
Thanks very much.
Jennifer LaClair
Thank you Moshe.
Operator
Our next question comes from Bill Carcache with Wolfe Research.
Bill Carcache
Thanks. Good morning JB and Jen.
Jeffrey Brown
Hey Bill, good morning.
Bill Carcache
We clearly see the benefit in your numbers as you guys have leaned into used and more of your business has re-mixed there. How high would you be comfortable letting that used versus new mix get? Is there any reason not to let it get too high? Then, could you also maybe give some color on the relative difference in profitability of new versus used, just at a high level?
Jennifer LaClair
Yes, sure. Bill, we don’t have any cap on used. Used has really strong risk-adjusted returns. We’re very comfortable managing the credit risk. We know how to price it. We have no cap there, so we’ll just continue to be opportunistic across new and used and we’ll let the numbers play out.
In terms of profitability, I think I’ve shared in the past that the pricing on a used vehicle tends to be kind of 100, 150 basis points higher than a new vehicle, and the delta on credit risk tends to be just 20, 30 basis points or so, so you can kind of do the math around that. But we absolutely get paid three, four times the increase in credit risk in the yield that we see on the used car front, and in this environment with used vehicle values continuing to outperform, that return only gets a bit higher.
Bill Carcache
Got it, very helpful. Thank you. As a follow-up, if I may, can you go a little bit deeper into your outlook for dealer floor plan lending, any constraints on the production side there still, and a little bit more on perhaps when balance growth could start to resume there?
Jennifer LaClair
Yes, I mean, the OEMs are back into full speed ahead production. I think they’re about 100% manufacturing levels as they were pre-COVID. I think what’s driving the slower build in terms of inventories is just the very strong pent-up and very strong demand, again going back to auto continues to be an asset class winner in this environment. So as quick as they’re manufacturing the cars, they’re getting sold off the lots, so what we’ve seen is a trough here in July and then we picked up a billion dollars in August and September, continuing to see it slowly come back.
But Bill, we wouldn’t expect to be back to pre-COVID levels in our floor plan book until late 2021.
Bill Carcache
Understood. Thank you for taking my questions.
Jennifer LaClair
Sure, thanks Bill.
Daniel Eller
Great, thank you everyone for joining us this morning, and if you have any further questions, feel free to reach out to Investor Relations. That concludes today’s call.
Operator, you can take it over.
Operator
Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect and have a wonderful day.
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