December 2, 2021

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Ally Financial Inc (ALLY) Q3 2021 Earnings Call Transcript

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Ally Financial Inc (NYSE:ALLY)
Q3 2021 Earnings Call
Oct 21, 2021, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Ally Financial Q3 2021 earnings conference call. [Operator Instructions]

I would now like to turn the call over to your host Daniel Eller, Head of Investor Relations, you may begin.

Daniel EllerHead of Investor Relations

Thank you, and welcome, everyone, to Ally Financial’s third-quarter 2021 earnings call. This morning, our CEO Jeff Brown; and our CFO, Jen LaClair will review Ally’s results before taking questions.

I’ll note that the presentation we’ll reference on today’s call can be found on the Investor Relations section of our website, ally.com. Forward-looking statements and risk factor language governing today’s call can be found on Slide 2, while GAAP and non-GAAP, or core measures pertaining to our operating performance and capital results are on Slide 3. These metrics are supplemental to and not a substitute for U.S. GAAP measures. Definitions and reconciliations can be found in the appendix.

With that, I’ll turn the call over to JB.

Jeffrey J. BrownChief Executive Officer

Thank you, Daniel. Good morning, everyone. We appreciate you joining our call today.

We posted another strong quarter of results as all of our businesses continue to be well-positioned and benefit from a strong and healthy consumer macro-environment. Momentum across our leading businesses reflects disciplined execution underpinned by our do-it-right culture.

We’re excited to announce the acquisition of Fair Square Financial, a digital-first credit card provider which further enhances our suite of consumer products. This is a company we have been following for quite some time and we are pleased to bring this important product set and great leadership team into the Ally family.

On Slide number 4, we continued driving long-term value for all of our stakeholders, as was evident in several purpose-driven actions taken during the quarter. On the customer front, the Cities for Financial Empowerment Fund certified our bank on national account status in recognition of our customer-first approach, citing our industry-leading action to eliminate overdraft fees. We also rolled out a refi now product, expanding access to underserved populations looking to obtain a mortgage.

For our Ally teammates, we increased our minimum wage 18% to $20 per hour, and announced all employees will be eligible to receive Ally stock through our third annual own it grant program, promoting an environment of shared success and an ownership mentality across the company. This is an important program to me and aligns every teammate in advancing our mission. Additionally, earlier this year, we were named a Top 50 Place to Work by Diversity Inc., recognizing the inclusive environment we’ve nurtured over many years.

Among community efforts, we held our annual Moguls in the Making student-led competition, featuring representation from 10 HBCUs, and awarded several scholarships and internship offers to the inspiring group of young men and women who participated. The pride I have in our accomplishments is exceeded only in the confidence I have in our ability to continue driving long-term value for all of our stakeholders moving forward.

Let’s turn to Slide number 5, where I’ll touch on third quarter highlights. Adjusted EPS of $2.16, core ROTCE of 24.2%, and revenues of $2.1 billion represented record-setting third-quarter levels powered by diversified revenues and solid credit trends. The credit backdrop remains strong by nearly all measures and the fundamental drivers of Ally’s performance reflect well-positioned and dominant Auto, Insurance, and Ally Bank platforms. Our agile customer-centric businesses provide us the ability to capture market opportunities in real-time, evident in our results across the past several years and in our long-term outlook.

Within Auto, consumer originations of $12.3 billion and 3.3 million decisioned [Phonetic] applications represented our highest third quarter in 15 years at a really impressive 7.1% yield. The strength and adaptability of Ally’s platform is clearly seen in our industry-leading, comprehensive product offerings, and 12 consecutive years of expanding dealers. Our capabilities and scaled distribution enhance our ability to deliver as the broader auto ecosystem shifts and evolves in the near and long term.

Credit performance remains solid with 27 basis points of retail NCOs, our lowest third quarter on record. We remain well reserved for the eventual and gradual normalization of losses. We’ve maintained a disciplined approach to underwriting and collections, increasing our use of advanced data, enhanced technology, and innovative self-service tools for dealers and customers. But the true strength of our Auto finance business comes back to seasoned Ally teammates that foster great relationships with our dealer partners and a shared sense of pride in winning together.

Overall, consumers remain well-positioned financially with healthy balance sheets, excess savings, and strong wage and job prospects. These dynamics helped mitigate the wind-down of assistance programs and ongoing inflationary trends.

Impacts of semiconductor shortages and resulting OEM production constraints resulted in new record lows for industry inventories. Given consumer demand remains robust, we expect floor plan levels will remain low through the latter part of next year, which provides ongoing structural support for used vehicle demand and values.

Within our insurance business, written premiums of $295 million reflected lower industry sales and floor plan levels, however, Ally Insurance customers are now approaching the 3 million mark. The $6.4 billion investment portfolio within our insurance business generated solid revenues, and Hurricane Ida claims were minimal.

Turning to Ally Bank. Growth and expansion trends continued, reinforcing the scalable, nimble nature of our platform. Retail deposit customers grew for the 50th consecutive quarter and balances expanded to $132 billion, representing year-to-date growth of $7.2 billion. We continue to deepen customer relationships through our differentiated platform that combines leading award-winning digital capabilities with deeply integrated, stable, and secure bank platforms.

Ally Home originations of $3.6 billion nearly tripled compared to the prior-year period. Ally Invest customer assets ended the quarter at $16.3 billion, a 42% increase year-over-year driven by the combined result of market activity and self-directed and managed account growth which surpassed 0.5 million. Ally Lending generated $362 million in originations, more than double the prior-year level, with growth sourced from the healthcare and home improvement verticals as we build out the retail channel.

Corporate Finance posted another solid quarter with HFI balances growing to $6.6 billion and total balance sheet exposure exceeding $11 billion for the first time. Performance across each of our businesses reinforces our ability to deliver as we increasingly meet the needs of our engaged customer base.

Turning to Slide number 6. Performance remains solid across each of the measures shown on the page. In the upper right, PPNR surpassed $1 billion again this quarter and annual expansion in the years ahead will be generated by leveraging the strength of our balance sheet and growth opportunities across all of our businesses. On the bottom right of the page, tangible book value per share reached an all-time high of $39.72. Since becoming a publicly traded company, seven years ago, we’ve demonstrated a clear ability to build intrinsic and financial value. Specifically, we’ve expanded revenues over 60%, grown earning assets over 20%, increased book value over 80%, and delivered a transformed return profile, moving from low single-digits to mid-teens ROTCE.

Turning to Slide number 7. Our acquisition of Fair Square enhances our ability to continue delivering solid results and expanding our reach to even more customers. Adding a credit card capability has been an important objective for us, and today, we’re announcing the opportunity to address this key product gap. This transaction fully aligns with our long-term priorities centered around a relentless customer focus, solid risk-adjusted returns, and long-term value enhancement.

The mortgage, investing, and point-of-sale capabilities we’ve added since 2016 are differentiated through digitally compelling experiences, positioning us to grow within large and attractive addressable markets. By adding credit card capabilities, we’re introducing yet another opportunity to expand our presence in consumer wallets and drive enhanced returns. Through ongoing familiarity with their team and our diligence efforts, we are confident in the strong employee culture and values, deep management execution and risk management capabilities, unique product and positioning in an underserved market, and digitally based tech forward capabilities that are driving accretive growth.

Launched in 2016, this management team has several decades of collective experience in credit card marketing, underwriting, and risk management. The team has successfully executed a strategy to deliver customer-centric differentiated products to an underserved market segment via nimble, modern platforms. While the credit card industry has experienced a pause in growth over the past two years, Fair Square’s Ollo-branded offerings have expanded due to steady customer acquisition in an underserved market. I welcome the Fair Square team to the Ally family and I’m excited for what we will do together in the months and years ahead.

And with that, I’ll pass it to Jen to walk through a few other details on the transaction and our overall third-quarter results.

Jennifer LaClairChief Financial Officer

Thank you, JB, and good morning, everyone.

As you just heard, we are excited to announce the acquisition of Fair Square given the natural fit with Ally and our strategy. This transaction enhances our runway for ongoing momentum as the leading and largest digital bank in the U.S.

On Slide 8, we have provided highlights of their platform and operating approach. Fair Square builds around the customer, a familiar concept at Ally, focusing on digital product engagement and delivery and generating satisfaction scores consistently above the 90% and NPS in the mid-50s. The highly rated products are differentiated through straightforward offerings, seamless platforms, and a brand promise of no surprise fees. The brand and value proposition resonate with consumers and present a compelling opportunity across a large underserved market.

100% of applications are completed digitally and 90% of Fair Square customers engage digitally each month. A snapshot of in-market offerings can be found in the appendix, demonstrating the team’s efficient launch of several products over the past four years. The sophisticated, proprietary risk management and marketing strategies are powered by integrated technology, data and analytics deeply rooted in the management team’s extensive experience.

Growth trends shown in the bottom left have been robust. Account and balance CAGRs of 66% and 74%, since 2017, highlight the success of customer acquisition and loan growth trends, outpacing elevated industry payment rates and lower consumer spend. These trends position Fair Square to accelerate growth and profitability as they rapidly exit the J-curve. The early, scalable nature of this platform and aligned approach are complementary to our existing Ally Bank consumer teams and the DNA of our company.

Standalone after-tax ROA of 5% incorporates mid-teens risk-adjusted margins, defined as total revenues less credit costs and estimated CECL impacts, representing attractive economics. Once closed, we expect the transaction to be accretive to earnings by late 2022, and to full-year 2023, while adding 100 basis points to 150 basis points to our returns as we organically grow the portfolio.

In addition to the accelerated growth opportunities across Ally, we will realize deposit funding synergies by replacing wholesale funding. We’re adding a highly aligned, customer-centric growth engine that meets all of our capital allocation criteria, including delivering customer value through differentiated products and services and accretive and aligned risk-return profiles, and the ability to enhance long-term value for all of our stakeholders.

Let’s turn to Slide 9 to review our strong third-quarter results. We generated core pre-tax earnings of $1 billion for the third consecutive quarter. Net financing revenue, excluding OID, of $1.6 billion reached the highest level on record for the second consecutive quarter, growing 33% year-over-year. Our NII and NIM expansion trajectory continues to be powered by stable earning asset yields, reflecting accretive retail auto trends and elevated used car values, further enhanced by optimized funding costs as the benefits of core deposit growth permanently reduce our dependence on higher-cost alternatives. Our balance sheet uniquely positions us to overcome the headwinds of a flat rate curve.

Adjusted other revenue was $507 million, reflecting another solid quarter of investment gains and diversified revenues from SmartAuction, Ally Home, Invest, and Insurance. As indicated last quarter, we repositioned $52 million of OID expense associated with the retirement of our trust-preferred securities.

Provision expense of $76 million increased seasonally, remaining well below normalized levels as overall credit performance remains exceptionally strong. Non-interest expense of just over $1 billion reflected a continued focus on essentialism across the enterprise as well as investments in business growth and new capabilities. GAAP and adjusted EPS for the quarter were $1.89 and $2.16, respectively.

As previously indicated, we’ve embedded normalized trends in our outlook for used car values and credit trends in 2022 and 2023, and we continue to highlight the permanent structural improvements across our balance sheet and leading growing businesses.

Moving to Slide 10. Net interest margin excluding OID of 3.68% expanded 11 basis points quarter-over-quarter and 101 basis points, or 38% year-over-year. Earning asset yield of 4.68% remains stable quarter-over-quarter, and average earning assets of $172.5 billion reflected ongoing retail auto-expansion, growing lease balances and yields aided by elevated used car values, increased Ally Lending and Ally Home balances, and the ongoing redeployment of excess liquidity. These dynamics offset headwinds from prepayment activity above target liquidity levels and reduced floor plan balances stemming from robust consumer demand and persistent supply constraints.

2021 remains on track to be our fourth full year of retail auto origination yields at or above 7%, while we expect used car values to rise by over 30% year-over-year.

Turning to liabilities. Cost of funds improved 12 basis points, the 9th consecutive linked-quarter decline. We remain confident in our ability to grow net financing revenue and sustain net interest margins well above 3% in both higher and lower rate environments, given balance sheet strength and positioning. Disciplined asset growth over the past several years reflects this focus on differentiated products and services for our dealers, customers, and clients, which we expect to continue across all our businesses over the next several years. Stable, sticky deposits at Ally Bank now represent 90% of overall funding, more than double the 2014 level.

We remain well-positioned for a variety of rate environments and expect improved price elasticity as a result of the industry-leading loyalty we’ve built over the past decade and growing engagement generated through our suite of digitally based financial products.

Turning to Slide 11. CET1 of 11.2% remained nearly 220 basis points above our internal target, equivalent to $3.1 billion of excess capital. We are on track to execute our full $2 billion buyback program in 2021 and recently announced the Q4 dividend of $0.25 per share. Capital deployment actions over the past several years demonstrate our disciplined, dynamic approach and consistent priorities. Shares outstanding have declined 28% since we initiated buybacks in 2016, and we’ve increased our dividend on six occasions over this same time frame.

During the quarter, Moody’s upgraded Ally, bringing us to investment grade at each of the major rating agencies, another testament to the fortitude and strength of our company. Upon closing, the Fair Square acquisition will utilize around 50 basis points to 55 basis points, around one-quarter of our excess capital.

On Slide 12, asset quality remained very strong. Consumer and commercial portfolios continue to exhibit historically strong performance. Consolidated net charge-offs of 19 basis points were less than half the prior year and less than 25% of 2019 levels. Retail auto performance reflected solid payment trends and improved loss given default rates. We expect full-year 2021 retail NCOs in the 30 basis point to 40 basis point range, well below the 1.4% to 1.6% range we underwrite to and reserve against.

As we’ve noted on several occasions, our financial outlook contemplates a steady migration back to normalized levels by 2023, though this could be extended given the continued strength of the consumer. In the bottom right, early and late-stage delinquency trends moved seasonally higher but remained solid overall, an encouraging leading indicator heading into year-end in 2022.

On Slide 13, consolidated coverage of 2.75% reflected growth among Retail Auto, Point of Sale, and Mortgage portfolios. Retail Auto coverage of 3.62% moved lower by 8 basis points quarter-over-quarter as trends generally improved across consumer health and macroeconomic measures. We continue to actively monitor a broad range of variables that may impact credit performance and remain confident our reserves are well-positioned for a variety of economic environments, including downside scenarios.

On Slide 14, total deposits ended at $139 billion, reflecting Q3 retail growth of $2.4 billion as customers consistently keep their money and grow their balances with us. We added 54,000 customers with over 70% from younger generations, who demonstrate a higher propensity and desire to engage digitally. Customer retention remains industry-leading at 96% and balance retention trends, not shown here, remain stable to growing within each annual vintage.

Underlying growth in our multi-product relationships continued in the quarter, offset by our practice of removing accounts with limited or no activity over a six-month timeframe, which we believe is a more accurate portrayal of engaged, active customers. This impacted our reported multi-relationship metric, but excluding this adjustment, we observed net growth for the 18th consecutive quarter, which we expect to continue moving forward.

Turning to Slide 15. We grew customers and balances across all our digital bank platforms. We’ve acquired customers at a 19% CAGR over the past decade, cultivating loyalty and satisfaction, and expanding relationships through our convenient, straightforward offering. Ally Invest and Ally Home continue to derive significant account and volume activity from existing depositors while the steady expansion of Ally Lending’s Point of Sale offering remains a bright spot for growth in a rapidly expanding market. Our formula for success positions us well as we add credit card in the months ahead.

Moving to Slide 16. Auto segment pre-tax income of $825 million reflected the strong platform we’ve built over many years and was driven by net financing revenue growth from ongoing optimization in the consumer portfolio and strong used values, expansion of SmartAuction and ClearPath, and solid credit performance. Retail portfolio trends shown on the bottom right highlight the continued strength in risk-adjusted margin trends, driven by solid origination yields and NCO performance.

Turning to Slide 17. We constantly adapt to dealer and customer needs, evidenced in our multi-year growth of dealer relationships and our ability to source and originate loans in a competitive environment. In the upper left, we surpassed 20,000 dealers who purchased one or more of our auto products across consumer and commercial lending, SmartAuction, and commercial services lending, an important differentiator for Ally as we deepen relationships.

In the upper right, ending consumer assets expanded to $88.7 billion, driven by retail and lease portfolio growth. Average commercial balances ended at $13.9 billion as industry inventories set a new multi-decade low, driven by strong consumer demand and supply chain constraints. We continue to see broad-based health among dealers, evidenced in strong profitability, due in part to lower inventory carry costs and strong demand and pricing for available supply. Auto originations of $12.3 billion represented our highest third quarter since 2006, while we’ve maintained a consistent underwriting approach.

Turning to Insurance segment on Slide 18. Core pre-tax income of $89 million increased quarter-over-quarter and year-over-year. In the bottom left, the $6.4 billion investment portfolio continued providing diversified revenues that enhance segment and consolidated returns. Total written premiums of $295 million reflected prevailing low floor plan levels and corresponding decreased unit volumes. We remain focused on leveraging our large dealer network for future growth through our holistic offerings. We actively assess pricing across our products, staying mindful of inflationary impacts on vehicle repair and maintenance costs.

Turning to Slide 19. Corporate Finance core income of $60 million reflected asset growth, strong syndication and investment income, and solid credit trends. HFI balances ended at $6.6 billion, the highest levels on record, and unfunded commitments of $4.6 billion, position us for ongoing revenue and loan growth.

Portfolio credit performance remains strong and in line with expectations, allowing us to reduce coverage by 12 basis points.

Mortgage details are on Slide 20. Pre-tax income of $6 million reflects direct-to-consumer volume growth and asset expansion, partly offset by a shift from HFS to HFI, normalizing gain on sale margins, and persistently elevated prepayment trends. Ally Home direct-to-consumer originations of $3.6 billion affirmed our expectation to surpass $10 billion in volume this year, ahead of schedule as our compelling digitally based experience continues to resonate.

On Slide 21, we’ve included our financial outlook again this quarter. ROTCE for 2021 excluding reserve releases will exceed 20%, reflecting strong PPNR trends and solid credit performance. We’ve also layered in the return expansion we expect to generate in 2022 and 2023 associated with the acquisition of Fair Square. As I noted earlier, we’ve captured upside opportunities in the uniquely strong environment we’re operating in this year. Importantly, our enhanced and sustained return profile in the mid-teens provides a clear view of our broader objectives and significant progress.

These results will be fueled by revenue-driven PPNR expansion reflected in the mid-to-upper 3% NIM outlook and diversified other revenue generated among our established and broadened consumer offerings. As a reminder, we assume modest investment gain activity but will remain opportunistic in the years ahead. Our outlook incorporates balanced, competitive and operating environment assumptions, including normalized trends across used car prices, credit, and deposit pricing. We’re confident in our ability to continue driving near and long-term benefits for all of our stakeholders.

And with that, I’ll turn it back to JB.

Jeffrey J. BrownChief Executive Officer

Thank you, Jen. I’ll close with a few comments on Slide number 22.

Our results remain strong, our purpose and cause resolute, and the outlook for continued success remains clear and achievable. We’ve built a compelling growth company upon the foundations of disciplined execution and clear prioritization of meeting customer needs through differentiated products and services. With a new, exciting chapter of growth now in front of us, we will continue to execute with a focus on the same values and priorities that have served us well over several years.

And with that, Daniel, back to you and we can head into Q&A.

Daniel EllerHead of Investor Relations

Thanks, JB.

So, as we head into the Q&A, I’ll ask participants to limit yourselves to one question and one follow-up. Operator, I’ll turn it over to you to begin the Q&A.

Questions and Answers:

Operator

Our first question comes from Bill Carcache with Wolfe Research.

Bill CarcacheWolfe Research — Analyst

Thanks. Good morning. Appreciate you taking my questions, JB and Jen.

[Speech Overlap] I wanted to follow up on your comments on — all the detail you provided on the Fair Square deal. It’s certainly smaller and more digital in nature than the prior deal that you guys had announced. Does this provide you with enough of a platform to organically build out the credit card business, or should we just think of it as sort of a starting point that you’d look to add to through other inorganic opportunities over time?

And in terms of outlook, the 100 basis points to 125 basis points is — seems like — certainly quite impressive, but given that the card business is I guess such a high ROE business, it would seem like there could be — if it continues to grow, there could be some longer term potential for greater accretion, to the extent that you guys continue to grow that business. I’d love to hear your thoughts around that.

Jennifer LaClairChief Financial Officer

Yes, sure. Good morning, Bill. I’ll jump in, and JB may want to add.

But — so, first on your question around the platform. So, Fair Square is through the J-curve and they’ve established four meaningful products, and you can see how successful they’ve been with those products with 60%-plus account — active account growth and over 70% loan growth. And so, bringing them into the Ally ecosystem really just gives them more fuel to scale what they’ve already built, and we have very high confidence that they continue to grow at these levels.

And I’ll also note that we have not included synergies across the whole broader $9 million-plus customers that we have within the four walls of Ally here. So the short answer to your question is yes, their platform is absolutely poised for growth and you can see that in their historic results, and we’re expecting to see continued growth out in the future.

And then, relative to the accretion, this is the kind of business that takes some painful growth math just with CECL, so we could certainly increase and accelerate the accretion on both EPS as well as ROTCE in the near term, but the trade-off, Bill, quite frankly, would be longer-term accretion over time. So we want to give them access to liquidity and capital to grow as quickly as they can. We’re very confident in the 100 basis points to 150 basis points of ROTCE in the next couple of years, but that also takes into consideration the growth math on CECL, which we could toggle up and down. But we really just want to focus on the long term here.

And, JB, I don’t know if you want to add anything?

Jeffrey J. BrownChief Executive Officer

I mean, Jen, I think you’ve framed it perfectly.

I mean, Bill, the other thing I’d just say, obviously, really no surprise, that card has been an area of interest for us and so we’ve examined a lot and thought about a lot. But, this is also a really, really good management team. These are card experts, grew up in card, wanted to do something out on their own. There’s a lot of really strong foundations and industry expertise that sits within the leadership team. And so, I think all sides are really excited about what this can mean going forward.

But as Jen said, we’re pleased really about the state of the business today, but I think we see much broader opportunities to scale this business up going forward.

Bill CarcacheWolfe Research — Analyst

Yep. That makes a lot of sense and it’s very helpful. Thank you.

If I could follow up separately with another different question on funding. Understanding that you want to continue to offer a healthy premium on deposits relative to the more traditional banks, but how significant does that premium need to be? Is there still some room for your cost of interest-bearing deposits to continue to migrate lower from here, and then by extension, I know you said, Jen, mid-to-upper 3% NIM, but is it fair to say that there’s a bias toward the upper end of that range? If you could give some thoughts around that? Thank you.

Jennifer LaClairChief Financial Officer

Yes, sure. So, on the funding side, Bill, you’re absolutely right, there is a long runway to continue to bring down the overall cost of funds for Ally below 1%. And I talked about the nine consecutive quarters that we’ve had of lower funding costs and that will continue as we head into 2022, and as you’re pointing out, really fuel that NIM expansion.

And a lot of that is related to CDs repricing. The industry and the sector has largely kind of floored OSA at about 50 basis points, but we still have CDs rolling down. And then outside of deposits, we still have opportunities to rationalize mix and cost. So you’ll see a long runway there.

And then, just in terms of the overall NIM, there is an upside case there. And so, we’ve been guiding toward kind of 3.5% to 4%, and I think with the acquisition of Fair Square, it gives us some additional NIM tailwind here. So I think there absolutely could be an upward bias to the high 3% as we head into ’22 and beyond.

Bill CarcacheWolfe Research — Analyst

That’s really helpful. Thank you for taking my questions.

Jennifer LaClairChief Financial Officer

Thank you, Bill.

Jeffrey J. BrownChief Executive Officer

Thanks, Bill.

Operator

Our next question comes from Sanjay Sakhrani with KBW.

Sanjay SakhraniKBW — Analyst

Hey guys. I wanted to — my first question is just following up on Fair Square. I was wondering if you could just talk about how you expect to focus that business, sort of the end markets today are in that FICO band range that you guys mentioned on the slide, but do you envision to go more up-market?

Jen, you talked about cross-selling it potentially to your customers, and would that bring down the ROA of the business? Maybe you could just talk about that, and maybe also tie that into some of your other consumer finance lending initiatives. Thanks.

Jennifer LaClairChief Financial Officer

Sure, yes. So, thanks for the question, Sanjay.

So, first on the target markets, they’ve largely been focused on a middle-class customer, so think about a customer with about a $70,000 income in that 660 [Phonetic] FICO average level. And what they’ve seen there is a largely underserved market and that’s why they’ve been able to grow so aggressively through a difficult card environment.

And so, priority number one is to allow them to keep their focus on that segment and on the unique opportunities they have to grow. And then, above and beyond that, we do think that they have full-spectrum underwriting capabilities with their digital platforms, their data-driven capabilities. We do believe that they have the capabilities to go more broad-based and full spectrum. As I mentioned, we haven’t modeled that into the impacts that we’ve provided this morning, but that would be upside opportunity.

And then, just as you think about that 5% ROA, we’ve contemplated some growth scenarios there and if we did go up-market, there could be a little bit more pressure on that ROA. But overall it should be very accretive to Ally if you think about where we’re running today.

And as we think about that cross-sell, it’s certainly in the bank, but opportunities within the Auto segment as well. So, we’re really thinking about bringing this product on into the broader Ally ecosystem, and not only do we think there is cross-sell of card, but as we generate more card growth, there is opportunity to cross-sell some of our other products into the card business.

So, a lot of opportunities here. I think we’ve been pretty modest in the projections we’ve provided, and we’re really excited.

Sanjay SakhraniKBW — Analyst

Okay. And then just a follow-up, turning to the Auto business. Maybe you could just talk about how 2022 might be setting up from an origination standpoint? Obviously, Stellantis might be establishing its own captive, so you’ve got some more competition there. Maybe you could just broadly speak on the set? And if you have the supply chain issues — so I don’t know if anything’s changed in your outlook but if you could provide some guidance, that’d be great.

Jennifer LaClairChief Financial Officer

Yes, sure. And, Sanjay, I think we highlighted in our prepared remarks how strong Auto continues to perform, with highest application flow we’ve seen in 15 years, highest origination flow for a third quarter, continuing to see really strong pricing with yields at 7.10% and full-year at 7%. And so, you can see just in our performance that the market is continuing to perform and our position in the market is performing.

As we look into 2022, and we’ll provide a lot more detail as we get into January, but we’re still expecting to see really robust application flow and robust originations, likely in that $40 billion, maybe not quite to $45 billion, so there could be some modest reductions. But overall, Auto continues to perform exceptionally well and we don’t see any signs of that stopping based on market trends, but also our position in the market continues to strengthen with our 12th consecutive year of growing dealers, as well as continued increase in that outflow. So we’re feeling really good about that.

Jeffrey J. BrownChief Executive Officer

And, Sanjay, maybe the only thing I’d add, obviously, Stellantis, sort of, doing what they did, I don’t think that realistically presents any change for us anytime soon. I mean, long-term, could there be implications? Perhaps, but obviously, our focus is on taking care of the dealers. We have incredibly strong dealer relationships. So, yeah, I see that why — the rationale of why they did what they did, but I don’t think it really changes anything from what we’re thinking about in terms of originations or relationships anytime soon.

Sanjay SakhraniKBW — Analyst

Thank you.

Jeffrey J. BrownChief Executive Officer

You got it. Thank you.

Jennifer LaClairChief Financial Officer

Thank you, Sanjay.

Operator

Our next question comes from Rob Wildhack with Autonomous Research.

Robert WildhackAutonomous Research, LLP. — Analyst

Good morning, everyone. One more on Fair Square. The 5% run rate ROA you highlighted in the slides, does that take into account the cost of funds benefit from being part of Ally, and what kind of credit environment is considered in that number?

Jennifer LaClairChief Financial Officer

Yeah, good morning, Rob. It does take into consideration a lower cost of funds as we bring Fair Square into Ally, so there is some synergies there. We overall think that 5% is a very reasonable number, just as we grow the portfolio. And again, it doesn’t include a lot of synergies that we see from a growth and a revenue perspective.

Robert WildhackAutonomous Research, LLP. — Analyst

Okay. And should we just consider like a normalized credit environment as the underlying assumption, then?

Jennifer LaClairChief Financial Officer

Yeah. On the credit environment, they have been outperforming, I think similar to other players in the industry. We would expect that to normalize kind of into a 6% to 8% range over time, and we do include all the CECL math in the guides that we’ve provided the transaction highlights here. But we would expect that to normalize, Rob, from where they are today simply with the outperformance.

Robert WildhackAutonomous Research, LLP. — Analyst

Got it. And then, on the floor plan business, was the decline this quarter in line with your expectations, and when you say lowers through the later part of 2022, is that a meaningful decline from here, or do you think we’re near the [Indecipherable]?

Jennifer LaClairChief Financial Officer

Yeah. I mean, Rob, every time we think we’ve kind of plateaued, we decline a bit more, so now floor plan’s under $8 billion, it’s down about 50% on a year-over-year basis. And that’s due to all of the supply chain constraints and the complexities around chips, but it’s also reflective of a very strong consumer. And so, demand is also driving the inventory levels lower.

I will say I think late ’22, early ’23 is when we would expect that to normalize, and I think some of the chip dynamics could be sorted out. I think the big question is how strong demand will be as we continue into ’22 and ’23.

And just to reiterate, we have not built any kind of the natural hedging upside that we have in used vehicles values and LGD in our credit as you look at that guide. So, to the extent that floor plan stays lower, consumer stays stronger, if anything, Rob, there is upside to the guide that we’ve provided in ’22 and ’23.

Jeffrey J. BrownChief Executive Officer

And, Rob, maybe the only just touch to add, I mean, what we’re hearing from a lot of the dealers right now, certainly a lot of the big names, they’re pre-sold four months to five months out on new cars coming in. And so, to Jen’s point, that’s just going to keep this continued pressure on inventories growing anytime soon.

Robert WildhackAutonomous Research, LLP. — Analyst

That’s very helpful. Thank you.

Jennifer LaClairChief Financial Officer

Thank you, Rob.

Operator

Our next question comes from Betsy Graseck with Morgan Stanley.

Betsy GraseckMorgan Stanley — Analyst

Hi, good morning.

Jennifer LaClairChief Financial Officer

Morning.

Jeffrey J. BrownChief Executive Officer

Hey, Betsy.

Betsy GraseckMorgan Stanley — Analyst

Really interesting acquisition. Wanted to just dig into the excess capital point you were making.

So, the acquisition is taking up about, I think you mentioned a quarter of your excess capital, so as we think about — how do you think about the rest? Is this, hey, we’re going to hold onto it because we’re going to grow this card portfolio at a rapid — at a decent clip, so we want to hold some of that, or — you’re generating a lot of excess capital every quarter, so do we take the rest and buy it back, or is it held for some of this continuation of the retail auto loan growth?

Just want to understand how you’re thinking about that at this stage.

Jennifer LaClairChief Financial Officer

Yeah, Betsy, and you’re right. It’s about 25% of our excess capital. And I think the short answer is it’s all of the above. We’re going to continue to organically grow the balance sheet, and that’s really across every single one of our portfolios: it’s Retail Auto, it’s lease, to the floor plan question, that will come back over time.

We’re going to grow our Ally Lending business, we’ll grow Fair Square and our credit card business. And so, it’s really all of the above. It’s first and foremost continuing to serve our customers and grow our balance sheet.

And then, you’ve seen that we’ve distributed significant amounts of capital through buybacks and the dividend, and we’ll continue to look to distribute capital in that regard as well. It’s really a full portfolio of opportunities that we have ahead of us, and we’re not in a hurry. We still have a great ROTCE guide without rushing to deploy that capital, but really no change to how we’re thinking about our overall priorities on capital allocation.

Betsy GraseckMorgan Stanley — Analyst

Yeah, I guess the reason I ask the question is there’s been some thought that you would use the capital strategically, in this manner, and now that you have the card acquisition, when it closes, done and dusted, do you hold the excess capital or do you get to that optimized capital level, that capital ratio that you’ve got as a target?

I ask because you’re generating a lot of excess capital every quarter, and really, I suppose the underlying question is: can you fund your growth with your earnings, or do you want to lean into growth more aggressively by holding that excess capital to fund it? I guess, that’s really the question.

Jennifer LaClairChief Financial Officer

Yeah, yeah, I mean, it’s a great question. And we’re working through that as we go through our strategic plan right now. And you’re right, that 25% of the excess is actually three months of earnings that we’re deploying through this acquisition. And so, there’s still a lot of dry powder here. And we’re pushing every one of our businesses to think about growth in a different way, think about unconstrained growth, think about how we can be more creative and innovative in the marketplace. And it’s not only growing our balance sheet, it’s looking at technology investments, marketing investments, and just to your point, Betsy, really taking a look at where the opportunities are and smartly deploying that capital so we increase growth and returns.

It’s a great question. We will work through this capital. I mean, this is 25% of our excess, and as we grow through the next few years, we will work through it. It’s just going to take a bit of time.

Betsy GraseckMorgan Stanley — Analyst

And if I could just get one more in on mortgage. I know you have that better.com relationship. Wondering if you could speak to how you think that’s going to impact you as we migrate from refi heavy to a more purchase skewed mortgage environment?

Jennifer LaClairChief Financial Officer

Yeah, Betsy, the relationship is going very well. And you saw that we had our highest origination flow this quarter in the history of our mortgage business. And we’re really finding that that digital platform and the strong customer value and NPS scores are resonating across a wide variety of consumers.

In terms of the shift from refi to purchase, I think that presents opportunities for us. We have a very agile platform. And I think if anything, what you see is more of a shift to HFI just with higher ticket purchases and seeing a strong consumer, especially at the high end, and more of a shift to HFI is what we’re seeing right now.

But we really think that we’re well positioned as we head into a purchase market, simply because of the strong value proposition that we provide.

Betsy GraseckMorgan Stanley — Analyst

Got it. Thank you.

Jeffrey J. BrownChief Executive Officer

Thanks, Betsy.

Jennifer LaClairChief Financial Officer

Thanks, Betsy.

Operator

Our next question comes from Rick Shane with J.P. Morgan.

Rick ShaneJ.P. Morgan — Analyst

Thanks, guys, for taking my questions this morning.

I’d like to talk a little bit about the competitive environment on the origination side. Historically when sales are soft, we see the captives come in and basically subsidize financing. I’m curious if you’re seeing any effort by the captives right now to basically capture premium as a way to enhance their economics in an environment where supply and demand of new cars is so out of whack. And then, also to follow up on that, are you seeing any entrants from the private equity world, given the really compelling economics in Auto Finance at the moment?

Jennifer LaClairChief Financial Officer

Yeah, I’ll start and JB may want to jump in here.

But just on your question on captives, Rick, we’re actually seeing incentives come down because car demand is so high that they haven’t needed to provide any subsidies, and to JB’s point, the backlog, and people are purchasing cars out kind of six months to 12 months from now so they haven’t needed to provide those incentives or those rebates to really create that demand, because demand is so strong. Then the short answer to your question is, no, we’re not seeing that.

Just in terms of the overall environment, including private equity, we haven’t seen any major shifts there, and I think that’s because we play predominantly in that prime segment. And JB made the comment last quarter that it’s kind of boring. In our segment, it is kind of boring. I mean, we’re the number one lender in prime. We have a very high strategic moat around our business because it’s unique, [Phonetic] very sophisticated underwriting and servicing capabilities, it’s hard to enter. It’s kind of outside of the risk profile of more of the regional bank model. And so, we just continue to see very strong application flow and ability to originate in that space, and it hasn’t been disruptive from movement around captives or private equity.

And last but not least, we’re really seeing dealers thrive in this end market, and the percent of profitable dealers is kind of 95%-plus. So not only are we seeing strength in Ally, but all of the 20,000-plus relationships that we have with the dealers are also very strong.

Rick ShaneJ.P. Morgan — Analyst

Hey, Jen, if I can reframe that question slightly. So, I totally understand that incentives are way, way down. I’m just curious when dealers look, particularly franchise dealers, when dealers look at their economics and they can make money selling cars, they can make money financing cars, I’m just curious if they are steering more toward captive finance as a way to actually pick up some of the economics that they just can’t fully capture on the retail pricing at this point.

Jennifer LaClairChief Financial Officer

Yes. No, and in fact, it’s hard to do that right now simply because there’s not a lot of new vehicles. Most captive financing is around new vehicles. If you look at just even the percent used that we’ve generated, it’s the highest level in history from a dollar and percent perspective. And so, as dealers are leaning more into used, it’s actually become harder for them to generate income from captive financing, which is largely again around the new vehicles. Yeah.

Rick ShaneJ.P. Morgan — Analyst

That totally makes sense. Thank you so much.

Jennifer LaClairChief Financial Officer

Thank you, Rick.

Jeffrey J. BrownChief Executive Officer

Thanks, Rick.

Operator

Our next question comes from Moshe Orenbuch, Credit Suisse.

Jeffrey J. BrownChief Executive Officer

Moshe, you may be on mute, if you’re out there.

Daniel EllerHead of Investor Relations

Operator, let’s move to the next in the queue. We’ll come back to Moshe.

Operator

Okay. Our next question comes from Kevin Barker with Piper Sandler.

Kevin BarkerPiper Sandler — Analyst

Good morning. Thanks for taking my questions. I just wanted to follow up again on Fair Square.

I mean, you mentioned the 5% run rate ROA, which implies, it seems, maybe $35 million to $40 million of earnings, and then you outlined, also, it’s accretive to return on equity in 2022, 2023 of 100 basis points to 125 basis points, which would imply well over $100 million in earnings.

Could you reconcile how you would get to the run rate earnings today versus the guidance for over 100 basis points of ROE expansion out in maybe 2023?

Jennifer LaClairChief Financial Officer

Yeah. Thanks, Kevin, for the question. Yes, so, on the ROTCE, the deal is actually immediately accretive simply because we’re putting 25% of our excess capital to work, so there’s a denominator effect there on the ROTCE. So think about day one, we’re accretive. As you look at EPS, it takes just a little bit longer, and we’ll start to see EPS accretion in kind of the back half of 2022. And then, as we indicated for full-year 2023, but that’s essentially the difference. It’s the denominator effect on the CET1.

Kevin BarkerPiper Sandler — Analyst

Okay. And then, when you think about the potential earn back from this acquisition, what was your estimated earn back on tangible book value, given the earnings outlook that you see today?

Jennifer LaClairChief Financial Officer

Yeah. And so, this kind of comes back to the CECL math question, so the earn back can be very quick if we weren’t growing this. But based on our focus on growth, Kevin, it will probably take about five years to achieve the book value earn back. And again, that’s simply because we upfront a lot of CECL costs as we’re growing the card portfolio.

But we really think that we acquired a growth company at kind of a value earn back period, even within the 5%.

Kevin BarkerPiper Sandler — Analyst

Now, I would assume that you thought — I mean, I would assume that the earn back you would theoretically have on a build-out versus a purchase was a lot longer. Is that the assessment that you made, that you’d rather purchase the capabilities and utilize the management team that’s in place rather than build out a potential card product, is that right?

Jennifer LaClairChief Financial Officer

Yeah, absolutely. We really think we’ve got the best of everything here, Kevin, because we’re buying a company that’s largely through the J-curve. It makes sense for them to be part of a bank as they think about scaling, leveraging, funding, synergies, leveraging our brand, our 9 million customer ecosystem. It makes perfect sense for them to kind of come inside the four walls of the bank. It makes perfect sense for us because the painful part of the J-curve is over. And so, we can acquire a growth company without having to pay huge multiples of book, and we can still accrete EPS in short order.

So, like I said, I really feel like we bought a growth company with a more mature company kind of earn back period. And again, this is three months of earnings and about a quarter of our excess capital, so we feel great about the investment that we’ve made. And you kind of heard some of the earlier questions around, well, what else are you going to do, what are the other opportunities to grow, and we feel like this was a great step to advance our growth and our earnings ROTCE trajectory, Kevin.

Kevin BarkerPiper Sandler — Analyst

Okay. Thank you, Jen.

Jennifer LaClairChief Financial Officer

Thank you.

Operator

Our next question comes from John Pancari with Evercore ISI

John PancariEvercore ISI — Analyst

Good morning. [Speech Overlap] I wanted to see if I could get a little bit more color on your 2022 auto expectations. I heard you — in terms of the production expectation that you mentioned to Sanjay. How would you think that would interpret into auto loan outstandings as you look at 2022? And then, separately around your auto price assumption and your — the retail auto yield? Curious how you’re thinking about that as you look at 2022. Thanks.

Jennifer LaClairChief Financial Officer

Yeah. If there’s — strong originations translates into strong balance sheet growth. And so, just as you’re seeing retail auto outstandings grow, we would expect that into ’22 and beyond, John. And the same on lease, right? We’re seeing really strong originations in the lease space, so we would expect both our loan and lease, retail auto portfolios to grow at really robust yields. I mean, this will be our fourth year in a row at 7% yields. We’re not seeing a lot of pressure on pricing right now, so we’re not going to give a specific guide just yet, but I’d say the trends are really positive around continued strong origination flows, outstanding balance growth at robust pricing.

And then, on the commercial side, that’s where there’s a bit more of a question mark in terms of when does that actually turn. JB had mentioned late ’22, into ’23. I think the positive there is we have all these natural hedges from an income statement perspective, so it’s a net positive either way for us. But feeling really good about the outstanding growth, to your question, as well as robust yields going forward.

And by the way, in our guide for ’22 and ’23, we are modeling much more normalized expectations versus what I’m sharing right now, so if anything, there’s a bit of an upside there.

John PancariEvercore ISI — Analyst

Got it. Okay, thanks. Then as you look at the non-auto businesses, ultimately, when we do see the auto picture begin to moderate, how would you characterize where you think the best growth prospects exist right now within Ally to help offset the abatement that you could see on the top line as Auto begins to normalize further out? Thanks.

Jennifer LaClairChief Financial Officer

Thank you. You just actually explained the Fair Square acquisition right there. I mean, we see really robust growth opportunities across every single one of our portfolios. And you see mortgage really picking up, that’s refinance but also purchase, and we’ll see that mix shift. But we’ll see strong balance sheet and gain on sale margin opportunities in mortgage. Definitely, the unsecured space is one that we’re seeing robust growth. We had our highest originations in Ally Lending this quarter, seeing really strong opportunities in retail as we scale that, further scale our Home Improvement vertical, and Healthcare, and Ally Lending. Fair Square, obviously, offers us robust growth opportunities in addition to Ally Lending. And Corporate Finance continues to be a steady grower. So this whole notion of diversification is what we’ve been focused on and we’re really pleased this year to see every one of our businesses scaling up ahead of expectations and a really bright future ahead, not only for our existing businesses but Fair Square as we bring them on as well.

Daniel EllerHead of Investor Relations

[Speech Overlap] Great. All right.

Jennifer LaClairChief Financial Officer

Thank you, John.

Daniel EllerHead of Investor Relations

Thank you, everyone. That brings us to the end of the time today. We appreciate everyone joining, and we remind folks to reach out to Investor Relations with additional follow-ups that you may have.

But, Kevin, I’ll hand it back to you to close the call.

Operator

[Operator Closing Remarks]

Duration: 62 minutes

Call participants:

Daniel EllerHead of Investor Relations

Jeffrey J. BrownChief Executive Officer

Jennifer LaClairChief Financial Officer

Bill CarcacheWolfe Research — Analyst

Sanjay SakhraniKBW — Analyst

Robert WildhackAutonomous Research, LLP. — Analyst

Betsy GraseckMorgan Stanley — Analyst

Rick ShaneJ.P. Morgan — Analyst

Kevin BarkerPiper Sandler — Analyst

John PancariEvercore ISI — Analyst

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