Ally Financial Inc.
Q3 2018 Earnings Call Transcript

Published: 25 Oct 2018

[Operator:]

Good day, ladies and gentlemen, and welcome to the Ally Financial Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct the question-and-answer session and instructions will follow at that time. As a reminder, today's conference is being recorded. I'd now like to introduce your host for today's conference Mr. Daniel Eller, Executive Director of Investor Relations. Sir, please go ahead.

[Daniel Eller:]

Thank you, Liz. And thank you, everyone, for joining us this morning as we review Ally Financial's third quarter 2018 results. You can find the presentation we'll reference during the call on the Investor Relations section of our website, ally.com. I'd like to direct your attention to the second slide of today's presentation regarding forward-looking statements and risk factors. The contents of our call will be governed by this language. On slide 3 of the presentation, we've included some of our key GAAP and non-GAAP, or core measures. These and other core measures are used by management, and we believe they are useful to investors in assessing the company's operating performance and capital measures. They are supplemental to and not a substitute for U.S. GAAP measures. Please refer to the supplemental slides at the end for full definitions and reconciliations. This morning, our CEO, Jeff Brown, and our CFO, Jenn LaClair, will cover the financial results. We have time set aside after the prepared remarks for Q&A. With that, I'll turn the call over to Jeff Brown.

[Jeffrey Jonathan Brown:]

Thank you, Daniel. Good morning, everyone, and thank you for joining our call. Let's start by reviewing highlights for the third quarter on slide number 4. Results were strong this quarter and again, many of our operating metrics reached the best levels we've seen as a publicly traded company. Adjusted EPS of $0.91 was up 41% year-over-year. Core return on tangible common equity was 13.7%, an increase of 340 basis points on a year-over-year basis. Total net revenue surpassed $1.5 billion, also a new high for us. The ongoing improvement in earnings and EPS results were driven by strong top line revenues, continued earning asset growth, sustained credit performance, and ongoing capital management. Within our Auto Finance segment, we originated $8.1 billion of loans and leases in line with the prior year level while expanding risk adjusted margins. We put meaningful price increases into the market again this quarter while maintaining a consistent credit mix. This trend illustrates our competitive advantage and strong market leadership position in the industry. New origination yields on retail loans were up over 130 basis points year-over-year. As we've discussed in the past, the consumer auto book turns every two to two and a half years on average providing a solid path for our future earnings profile. Jenn will provide additional detail on this dynamic in a few moments. Credit trends remain on solid footing with retail auto net charge offs coming in at 132 basis points, a decline of 13 basis points compared to the prior year level, while retail auto portfolio yields expanded 38 basis points. Our credit performance is driven by a few familiar themes, including our consistent approach to underwriting, enhancements in our collection strategy, and the strong macroeconomic and consumer backdrop. On the auto optimization front, our teams continue to press forward in broadening our reach in the marketplace. Several years ago, we deliberately positioned our Auto Finance business to be ready to address the changing needs and preferences of our customers and dealers. Our results have consistently reinforced the effectiveness and sustainability of this approach. We continue to originate in the mid $30-billion range and have steadily grown dealer relationships every quarter over the past five years. For some added context, around 60% of our growth channel dealers send us under five contracts each month. Taken by itself, this stat may seem a bit nuance, but for us, it outlines the success we've had in maintaining volume, while highlighting the opportunity we have to continue deepening dealer relationships by leveraging our product capabilities, service levels and market position. Our teams have demonstrated ongoing success in our auto business as we've grown and diversified the dealer base, including partnering with emerging market players, enhance dealer relationships and product penetration, produce solid origination volume, and driven improve risk adjusted returns. Moving to deposits, we ended the quarter with over $101 billion in total deposits, including $2.9 billion in retail balance growth, which was one of our best third quarters ever. This represents an increase of $11.3 billion in total deposit growth year-over-year or 12%. Exceeding the $100-billion threshold is an important milestone for us. Since 2008, we have grown our retail deposits by 10x to $85 billion, and obviously delivering that growth with zero branches. On the customer front, we added another 57,000 deposit customers, our strongest third quarter ever, and a continuation of the growth we've experienced every quarter since we launched Ally Bank. We're pleased to be awarded Best Online Bank by MONEY magazine in October, affirmation of our strong value proposition. In looking at our adjacent product offerings, we're seeing deeper penetration across Ally Invest, Ally Home and Ally Card. Customer growth has been consistent in these products and we're now seeing an acceleration in the number of multi-product customers. In fact, this metric has grown every month since 2016. While there's still work to be done, I'm encouraged by the progress our teams continue to make and the opportunity for even deeper penetration. You've heard me emphasize this point in the past, but it's worth reiterating. We've been thoughtful in our digital product expansion efforts with the concise objective being to meet the needs of our customers in a simple, straightforward manner. Before I hand it over to Jenn, I'd like to go over a few key metrics we monitor on slide number 5. Across each of these metrics, you can see the progress we've achieved with record highs across the four quadrants. As noted earlier, adjusted EPS was $0.91 this quarter. Jenn will walk through an updated view of 2018 in a moment, but the underlying drivers of our performance are attributable to consistent execution within our business lines and capital management actions combined with a favorable economic backdrop. Looking in the upper right in our total revenue trends, you can see what I mentioned earlier in that total net revenue surpassed $1.5 billion in the third quarter, fueled by expanding net financing revenue. Deposits in the bottom left show the 12% year-over-year increase and the strong retail performance trends. Tangible book value on the bottom right increased again this quarter on a linked and sequential basis, including the OCI impacts related to rising rates. Across each of these metrics, I'm confident in our ability to execute on our strategic and financial path. Our progress is evident in our results, and as always, we're focused on continuing to serve our customers and drive improved shareholder returns. With that, I'll turn it over to Jenn to walk through more details on the quarter.

[Jennifer LaClair:]

Thank you, JB. Let's turn to slide 6 where we'll review detailed line items for the quarter. Net financing revenue excluding OID was $1.129 billion in the quarter, up $14 million linked-quarter and up $30 million year-over-year. The increase versus the prior year was driven by earning asset growth and meaningful expansion of retail and commercial auto yields, which more than offset the increased cost of funds related to deposits. NII has grown every quarter this year, and we are confident about our ability to achieve an annual run rate of $5 billion. Adjusted other revenue of $392 million increased $36 million linked-quarter and $11 million versus the prior year. Q3 included a $16-million gain related to auto loan sale activity. And as a reminder, in Q2, this line item included the seasonal expense associated with our reinsurance policy. Provision expense of $233 million was up $75 million quarter-over-quarter, reflecting seasonal net charge-off activity, but down $81 million versus the prior year. Year-over-year trends were driven by our consistent underwriting and collection approaches, the favorable consumer and macroeconomic backdrop, and hurricane reserve activity. We'll take a closer look at our detailed credit metrics in a moment. Noninterest expense was $32 million lower compared to prior quarter. Expense growth versus the prior year was due to three primary factors we've previously discussed, including the continued investment in our core businesses, including digital and technology capabilities; the build out of our adjacent product offerings, where we are focused on driving scale over the medium-term; and a moderate increase in insurance loss expenses, including modest impact from Hurricane Florence. Compared to the prior quarter, expenses were down due to weather losses that are typically highest during Q2 each year and certain one-time items that did not repeat. Our tax rate was 19.6% this quarter, benefiting slightly from a state law change. Quarterly taxes can bounce around a bit, the result here puts us in line with or slightly favorable to our expected run rate of 23% to 24% on a full year basis. And then, turning to some of our key metrics

[Jeffrey Jonathan Brown:]

Great. Thanks, Jenn. I'll wrap up on slide number 19 with a quick revisit of our strategic priorities. Our communities, customers and associates remain at the center of our do it right mentality at Ally. I'm encouraged in how this approach has become embedded in our culture. This has been a leading driver of our execution. Our strategic efforts are in full swing and results in the Auto Finance and Insurance affirm this sentiment when looking at profit trends, dealer growth and originated volume. We've not waivered on prioritizing our customers and optimizing risk adjusted returns, and we will continue to do so as we move forward. Our deposit and customer trends remain robust, a testament to the quality and service level of our leading digital bank and unique brand we created nearly a decade ago. We are realizing the benefits of our position and recognize the tremendous opportunity before us to leverage secular trends in the space. I want to thank my teammates for great results again this quarter and ask every one of them to continue to do it right for our customers, communities and shareholders. With that, Daniel, back to you for Q&A.

[Daniel Eller:]

Thanks, JB. As we head into Q&A, we ask the participants to limit yourself to one question and one follow-up. Operator, please queue the first question.

[Operator:]

Our first question comes from the line of Sanjay Sakhrani with KBW. Your line is now open.

[Sanjay Sakhrani:]

Thanks. Good morning and good quarter. Question on the origination slowdown. Can you just talk about what particularly drove that slowdown? It seems a little bit like GM's relevance of that mix is slowing. Could you just talk about that trend?

[Jennifer LaClair:]

Good morning, Sanjay, and thank you for the question. I'll kick this off and JB may want to jump in here. I don't know if I would characterize it as a slowdown. I think we've been pretty vocal in terms of hitting a $35-billion origination number this quarter end – or sorry, for full year. And certainly the $8.1 billion in our year-to-date performance positions us very well to hit that number. If we take a step back and just look at our auto strategy, the focus here is really around optimizing our risk adjusted returns and we certainly see and you saw in the yield expansion we've had, as well as the consistent credit performance that we've had that we're well on our way to continuing to optimize in this space. Coupled with the fact that we continue to grow dealers. We've grown every single quarter over the last five years, continue to see increases in the application flows and the origination flows coming from those dealers. So, I think we feel really good about our market positioning. We feel good about the volume of flows we're seeing, as well as what we're putting on the books. But JB, you maybe want to jump in here and add some additional color?

[Jeffrey Jonathan Brown:]

Yes. Sanjay, I mean thanks for the comments on the quarter. We obviously feel the same. So I appreciate your recognition of that. Yeah. I think you just point out the $8.1 billion we did is consistent with third quarter last year. And as Jenn gave in her prepared remarks, we are seeing inventory levels down, which is kind of a normal cycle in third quarter as manufacturers are getting ready for model year changes and things like that. And while you may challenge us and say, yeah, but you're doing so much more in used today. Why would that be impacted, but still new car and people coming into dealerships to look at new cars that ultimately get turned to used. It's just less flow into the dealerships while people are waiting for the new model. So, we look at the $8.1 billion as right on target with our expectations for the quarter.

[Sanjay Sakhrani:]

Okay. Great. And my follow-up question is on the risk adjusted yields or returns you're getting. I mean, those seem to be improving quite nicely. Could you talk about what's driving that, specifically, and how you expect it to sort of trend going forward?

[Jennifer LaClair:]

Yeah, sure. As we look at retail originations, Sanjay, what we've been able to do in this space is just continue to add price in the market, and that's a reflection of our market positioning both with new and used. And essentially, what we've done on a slight lag is pass through underlying benchmark increases into the market, and we've caught up a bit over 100% of those, coupled with the fact that our mix shift has moved from new to used, and that adds a little bit more price in the market as well. As we look forward, we'll continue to optimize around that yield and, certainly, as benchmark rates continue to move up, we would continue to put that price in the market. And that's on the retail side. Obviously, on the commercial side, we're kind of 99% plus variable rate there. So, the rates just naturally flow through.

[Sanjay Sakhrani:]

Okay. Thank you.

[Jeffrey Jonathan Brown:]

Thanks, Sanjay.

[Jennifer LaClair:]

Thank you.

[Operator:]

Our next question comes from Don Fandetti with Wells Fargo. Your line is now open.

[Donald Fandetti:]

Jeff, so if you look across consumer finance, credit has been just coming in better than expected. That seems to be the case here at Ally. But a lot of investors sort of view it as transitory. I was wondering if you could talk about the sustainability of that. And I assume into 2019, you feel pretty good about your charge-off rate, although your delinquencies did tick up a bit. And just to kind of wrap it up, if you could talk about your outlook on used car pricing and if it continues to hold up pretty well.

[Jennifer LaClair:]

Yeah. Sure. Good morning, Don. Yeah. I mean, on credit, so certainly some industry trends that are applicable here to Ally, I mean, tax reform, the underlying macroeconomic environment with kind of record low unemployment rates. Certainly, that has been a benefit to Ally through this year and has impacted used car price, and I'll come back to that in just a minute. But coupled with that, Ally has some specific benefits on the credit line item, one being that we've really moved through those riskier 2015, 2016 vintages and have been very deliberate about putting consistent credit risk and credit consumer profile on our books. And so, you see that benefit rolling through in 2018 as well. And we've also taken some efforts here to really upgrade our collections capabilities. We think we're best-in-class on that front. But as we've moved through the last couple of years, we've seen opportunities to continue to improve our strategies there. So, I'd say it's a combination of both a great environment, as well as our specific Ally strategies to improve credit and our risk-adjusted returns. On used pricing, we have been expecting used vehicle prices to deteriorate in the range of 2% to 5%. We've been pricing that into our residual values in the lease portfolio. Certainly, this year, there's been outperformance there, which has benefited the credit line item. If you do look at supply and demand dynamics in the used space, though, there's a lot of vehicles coming off-lease. And we do expect over time to decline in the range of 2% to 5% on average as we look out into 2019 and beyond. But, overall, we continue to have a positive outlook on the consumer. We feel great about our ability to originate within our credit box and to continue to put price in the market.

[Donald Fandetti:]

Thanks.

[Operator:]

Our next question comes from Eric Wasserstrom with UBS. Your line is now open.

[Eric Wasserstrom:]

Thanks very much. Jenn, just to follow-up on the NIM discussion for a moment, having heard everything you've said about the duration of the asset classes and where the incremental loans are coming on and all of that, still when I look at your slide on the components of interest income and interest expense, your funding costs increased sequentially and year-over-year at a faster rate than your yields expanded. And so, I guess my question is, how do we think about that trend over the next, let's say, six quarters? Is there a period of time in which you think it reverses or is this just going to be an issue of trying to keep on top of and pass through the increasing cost of funds?

[Jennifer LaClair:]

Yeah. So, a lot in that; let me just address it one at a time. So, on NIM, I think we've been pretty vocal that we would expect that to be fairly stable moving forward. And certainly, you see that on a linked quarter basis. On a year-over-year basis, we do tick down and we've talked a lot about the lease normalization and we're through that. So, we would expect here on out to be relatively stable. What is driving that? So, a couple of things. One is our strategy is really around continuing to grow net interest income coupled with EPS expansion and ROE expansion. And so, in that framework, we're looking to put earning assets on the books, such as expanding our securities portfolio that may have a marginally lower yield, but is accretive both from an NII as well as from an ROE perspective. And we're looking to kind of close the gap with our peer group in the securities portfolio. We're growing out mortgage, which we like the ROE on. Again, it has, relative to our book, a moderately lower yield. So, that is also compressing NIM a bit as well. And so, part of what we see in NIM is just part of our – part and parcel of our strategy to grow NII to the $5 billion as well as to expand our ROE. In terms of the asset and liability beta question, we certainly at some point see the asset beta moving more quickly than the deposit beta, but that's just going to take some time and it's a reflection of the underlying benchmarks. I think we've been pretty vocal on our deposit beta moving in that 30% to 50% range against the fed funds sort of kind of 2%, 2.5%. We're well in line with that and it'll depend on the shape of the yield curve how quickly we get to that asset beta moving faster than the deposit beta.

[Eric Wasserstrom:]

And just one follow-up on commercial auto, if I may. You highlighted the strength in the yields there, but it looks like your volumes are down about $2.5 billion year-over-year. So, how do we interpret that, because it seems like you might in fact be perhaps pricing yourself out of that market a bit?

[Jennifer LaClair:]

Yeah. And JB made this comment and I did as well in my prepared remarks, but we are seeing inventory levels come down in particular in GM, and we think that's a net positive for the industry just from a supply and demand perspective. It does take our floor plan down a tad bit as you're pointing out. But we're not seeing any changes in terms of pricing ourselves out of that market whatsoever, it's more just the inventory dynamics.

[Eric Wasserstrom:]

Okay. Thanks very much.

[Jennifer LaClair:]

Thank you.

[Operator:]

Our next question comes from Moshe Orenbuch with Credit Suisse. Your line is now open. Moshe Ari Orenbuch - Credit Suisse Securities (USA) LLC Great. Maybe following-up on the margin question, you pointed out 132 basis points increase in the originated yield in over the course of the year. But by the same token, 105 basis points of that has come in the last two quarters. And I guess since you originate maybe I don't know a little – in the neighborhood of a tenth of your portfolio each quarter, I mean, it does – it is going to take a little bit of time for that to roll in. But – I mean, could you talk a little bit about where that originated yield is coming in for Q4? And how do we – I mean, it seems like you should be – this should be coming in at an accelerated pace as we go into 2019.

[Jennifer LaClair:]

Yeah. Good morning, Moshe. Yes. There is some seasonality in terms of new and used mix which impacts that originated yield. So, as we move into Q4, which is really more of a new vehicle market, we're still seeing really strong yields but we would expect our full-year yields to be around 7%. And you're absolutely right, as we go forward, and we included some of the dynamics in the presentation, but as our portfolio continues to mature in those older, lower-yielding vintages roll off, we'll see these much-higher yield vintages roll back on, which is just a nice and natural embedded tailwind. But you're exactly right, it's going to take two years or so for us to catch up to that 7% yield. And the nice thing about it is it's just a natural tailwind in the book now that we have the higher-yielding originations coming on and the lower-yielding originations falling off. And it's a pretty rapid repricing asset class if you think about we repriced 40% of it a year. And if you take a look at our entire balance sheet, we have about 50%, 60% of our earning assets that repriced this year due to commercial and corporate finance and some of the activities that we've had around hedging. Moshe Ari Orenbuch - Credit Suisse Securities (USA) LLC Got it. Thanks so much.

[Jennifer LaClair:]

Thank you, Moshe.

[Operator:]

Our next question comes from Betsy Graseck with Morgan Stanley. Your line is now open.

[Betsy L. Graseck:]

Hi. Good morning.

[Jeffrey Jonathan Brown:]

Hi, Betsy.

[Jennifer LaClair:]

Good morning. Hi, Betsy.

[Betsy L. Graseck:]

Hey. A couple of questions on the deposit side. I think you mentioned during prepared remarks that the last week or so you had record openings. Could you give us a sense of the year-on-your deposit growth and how it's tracking to date just so we get a sense as to how successful that campaign has been?

[Jennifer LaClair:]

Yeah. Sure. I'll jump in here, Betsy. I mean, the campaign we just launched we've been incredibly pleased with the results. In fact, we've hit daily account opening records multiple consecutive days in a row. So, we've been just extremely pleased out of the gates there. And keep in mind, that's on the heels of Q3 where we had record account opening as well. And some of the statistics I shared, the 35th consecutive quarter of double-digit year-over-year deposit growth, it obviously feels really good to be on the heels of that and continue to have this record-level account growth. From a balance perspective, we're right in line with where we expected to be this year. We're continuing to see kind of robust flows out of the gate here in October. Still some time left to go rounding out the full year, but we are certainly very pleased with the balance sheet growth that we've seen relative to our beta and relative to our marketing activities.

[Betsy L. Graseck:]

Okay. And then just to follow-up on that is, obviously, rates are rising the deposit betas are moving up a little bit. But your deposit retention rate, as you highlighted on slide 9, very high and stable. So, I'm wondering, do you think that that will translate to, over time, better debt ratings or better liquidity coverage ratios that then you can use to optimize the balance sheet more? Just wondering how long that tail is to see those kind of benefits.

[Jennifer LaClair:]

Absolutely. And thank you for that question. And we agree with your sentiment there. And S&P actually just upgraded us to positive outlook. So, we're looking to continue to make progress with our agencies and get to investment grade. And then, in addition to that, I think we've proven we can continue to grow balances at reasonable beta levels. And that allows us to continue to optimize the liability side of the balance sheet. I mentioned the $5 billion in high cost unsecured debt we have rolling down through 2020, and we've got more to come beyond that. So, we'll continue to just look for ways to be smart in terms of growing that deposit balance sheet and optimizing our cost of funds. Absolutely.

[Jeffrey Jonathan Brown:]

Betsy...

[Betsy L. Graseck:]

In your...

[Jeffrey Jonathan Brown:]

I'll say it, I just – I mean, I think the agencies have been way too slow to reflect the progress we've made. And, I mean, it's hard to argue on the stability of the book. I mean, obviously, we're very pleased with the 96% retention and rate plays a role in that, technology plays a role on that service, brand, et cetera. But we really believe we've established ourselves as a primary savings bank. The quality of the deposit book is really unmatched. I mean, I'd be hard pressed to find another financial putting up 96% retention rates of their customers over a very long horizon. So, all these things through time we hope will yield deposit of benefits and really recognition that the model we put in place is the one that's here to stay. And again that other stat that Jenn pointed out in her prepared remarks, 58% of the customers coming in the door this quarter are millennials. So, it's a really powerful trend and powerful for the long-term outlook of the company.

[Betsy L. Graseck:]

Cool. All right. Thank you.

[Operator:]

Our next question comes from Kevin Barker with Piper Jaffray. Your line is now open.

[Kevin J. Barker:]

Good morning. You've laid out some longer term scenarios where you're trying to grow earnings and grow the return on tangible equity. But as you consider your return on assets compared to the peers, it's still well below. Do you have a target or looking to set a target for return on assets over time, maybe by lowering the efficiency ratio to take into account the relatively high cost of funds compared to the peers?

[Jennifer LaClair:]

Yeah. It's Jenn. Good morning, Kevin. We don't have a specific target around ROA, although I'd say that's a natural outcome of the guidance that we've put out there where we are looking to continue to grow our ROE. And we have put some guidance out there relative to our efficiency ratio as well coming down to kind of low 40% level. So, naturally, we would see ROA expand as we execute on our medium financial trajectory. And that's through a number of different levers. I mean, we are looking to continue to invest in our new products. We've got Ally Invest, which is just a terrific growth engine for us. And back to the comments that JB just made, the deposit platform is really creating a nice way to leverage our deposit base into these new products. And just this year, we see a 20% increase year-over-year on the account opening. And so, as we get some of these new adjacent products in full swing and we'll see the revenues start to accelerate there, that's a revenue category that doesn't track any capital or doesn't have any assets attached to it, we would naturally see ROA expand over time.

[Kevin J. Barker:]

Okay. And then given the net charge-off rates are coming in below your guidance, going in the early 2019 you got it to lower used car prices or that's your expectation, would you expect the charge-off rate to revert back to your original guidance for 1.4% to 1.6%?

[Jennifer LaClair:]

Yeah. We aren't moving off kind of the 1.4% to 1.6% as a longer term horizon. We'll be below that this year in part due to used vehicle prices coming in better than we expected. But really, it's about the risk profile we put out there and the consistency in the originations that we see. And over time, we'd expect to be back into kind of that 1.4% to 1.6% range. And used vehicle prices, I'll just reiterate. Certainly, that hits on the credit line item. It hits on our lease residuals. But our residuals have come down significantly on a year-over-year basis. They're roughly half the impact, as we think about deltas and used vehicle prices, that they were even last year. So we've brought down that sensitivity to used vehicle prices to some extent.

[Kevin J. Barker:]

Okay. Thank you for taking my question.

[Jennifer LaClair:]

Thank you.

[Jeffrey Jonathan Brown:]

Thanks, Kevin.

[Operator:]

Our next question comes from Arren Cyganovich with Citi. Your line is now open.

[Arren Cyganovich:]

Thanks. I've been impressed by the ability to pass through the increases in yield and I'm surprised that the competitive intensity has an increase. And maybe you could just talk a little bit about how you've been able to do that and whether or not the competitive intensity is lessened at all or if you're seeing any changes on that front. Thanks.

[Jennifer LaClair:]

Yeah. Good morning, Arren. Thank you for the question. It's, I think, a direct reflection of our market positioning. And January of 2019, we're going to hit 100 years in this business, and over time we've built very deep dealer relationships. In addition to that, we play across the entire spectrum. And so, you tend to see some really tough competition in that super prime space where you've got a lot of large banks leaning in and credit unions. And certainly, I'd say that competition has intensified in that space. But that's only one part of our business. We really land across the entire kind of belly of the curve. And so where we play, which is across all different areas with a very robust spectrum of products and services, we're still seeing opportunity. And we've talked a lot about used over the last couple of quarters. And if you look at Q3, Q3 had one of the lowest new vehicle rates we've seen in the last couple of years, but it had one of the highest used vehicle sales. And so, when you play in a lot of different places, you can find pockets of opportunity and, certainly, that's been the case for us throughout this year.

[Arren Cyganovich:]

Thank you. And then, maybe just if you have any update on CECL, where you are in that process and if there's been any movement in Washington to help mitigate that.

[Jennifer LaClair:]

Yeah. Sure. On CECL, the focus has really been around operationalizing the different changes that we're going to make. So, we've got our modeling teams working hard to get ready for that. We do plan to be running in parallel in 2019. I think we've made a lot of progress against that and, net-net, we'll be very well-prepared for the changes if they come. That being said, there are certainly a lot of questions around what will happen from a capital standpoint. And the way we view this, quite frankly, is we're not putting any additional risk on our portfolio. We don't think that we should have to carry extra capital related to an accounting change. And so, we've been very vocal in D.C. around the impact to Ally, and JB has been in D.C. just even these past couple of weeks and as part of a FAC (49

[Arren Cyganovich:]

Thank you.

[Jennifer LaClair:]

Thank you.

[Operator:]

Our next question comes from Rick Shane with JPMorgan. Your line is now open.

[Richard B. Shane:]

Good morning, guys. Thanks for taking my question. When we look at the dynamics of higher rates and where we are in the cycle, there is some pressure on demand for new cars. I'm curious if you are seeing – and again, with manufacturers it's no secret, they like selling cars and one of the tools they use to do that is providing more aggressive financing. What's the competitive landscape look like from the manufacturers and the captive auto finance companies at this point?

[Jennifer LaClair:]

Yeah. I'll start it and JB may want to jump in on this front. But the fact that we've been able to lean in on used has, to some degree, shield us from OEM behaviors. And our expertise in that space coupled with the fact that consumers are leaning into used this year, I think, disproportionate to what we've seen in the past, has positioned us really, really well in this space. And so, we've been somewhat immune to OEM behavior and just continuing our strategy, which has been to focus on the dealers, focus on adding value to them, and being ready for really production across any type of vehicle nameplate, new, used, really full spectrum in this space.

[Jeffrey Jonathan Brown:]

And obviously, Rick, I mean, (51

[Richard B. Shane:]

Great. And that actually – Jenn, your response leads exactly to where I was interested in going. As you look at that mix in terms of used, it's obviously come up substantially on a year-over-year basis. How high could that go in an environment where the OEMs are more aggressive?

[Jennifer LaClair:]

Yeah. Look, we don't have any targets around this. I mean, our strategy is to be opportunistic. We see areas across the market where this makes a lot of sense for us and, certainly, we make very good money on used and we'll continue to look for opportunities there. As we look through kind of our medium horizon, we'd expect to continue to grow that modestly. It does kind of fluctuate from quarter-to-quarter just based on seasonality between new and used. But, over time, we'd say we'd remain kind of in that 50% to 55%. But again, our strategy is to optimize and to continue to look at pockets where we get the right risk adjusted returns.

[Richard B. Shane:]

Terrific, guys. Thank you very much.

[Jennifer LaClair:]

Thank you.

[Operator:]

Our next question comes from Chris Donat with Sandler O'Neill. Your line is now open.

[Christopher Roy Donat:]

Hi. Thanks for taking my question. Just to follow-up on Rick's, as we look at the – on page 10 of your supplement and the penetration rates for GM and Chrysler, and they've been declining over the course of the year, is that partly a function of – well, I'm trying to understand the dynamics. I'm guessing part of it's the shift toward used and away from new. But also, there's that – your typical seasonality that the fourth quarter's better for new? Just trying to make sure I'm understanding what's going on in the penetration rates.

[Jennifer LaClair:]

Yeah. And so, I mean – and we've talked a lot about our diversification strategy across originations, and we've really been focused on that growth channel. So, as we continue to build out the growth channel, we'll continue to see GM and Chrysler as a percent of our originations to come down. And that's been a deliberate part of our strategy. And you take the lease portfolio, by a way of example, and we've run off 50-plus percent of originations and lease from the GM book. And in spite of that, we've been able to grow net interest income every single quarter through that transition. And so that's really been our strategy, is to continue to diversify the sources of our originations. And we shared some really nice metrics around dealer growth, the increase in applications flows that we have that's up kind of in rough numbers, 50% since 2016, and so that's really where we're focused and those metrics around penetration are all reflection of that.

[Christopher Roy Donat:]

Got it. And then as my follow-up, Jenn, just wanted to ask on the tax rate. I think the range is still the same as it is in your outlook for full year 2018. But should we assume it's a little bit lower now given what – you had the state tax benefit in the third quarter, so when we think about the full year tax rate is going to be still in the range toward the lower end, is that fair?

[Jennifer LaClair:]

Yeah. Chris, I think that's spot on. I mean, we jumped down to 19.6%. You'll always see kind of some lumpiness in the tax rate from quarter-to-quarter. But for full year, we're trending kind of in that same range probably on the favorable to slightly better than that range for our full year.

[Christopher Roy Donat:]

Got it. Thanks very much.

[Jennifer LaClair:]

Thank you, Chris.

[Jeffrey Jonathan Brown:]

Thanks, Chris.

[Operator:]

And that's all the time we have for question-and-answer session today. I'd like to turn the call back to Daniel Eller for closing remarks.

[Daniel Eller:]

Thank you. I'll just remind participants, if you have any additional follow-ups, feel free to reach out to Investor Relations. Thank you very much for joining us this morning.

[Operator:]

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program and you may now disconnect. Everyone, have a great day.