Ally Financial Inc. 2026 Q3 Earnings Call

Good morning and welcome to Ally Financial's third quarter 2026 earnings call. This morning, our CEO, Michael Rhodes, and our CFO, Russ Hutchinson, will review Ally's results before taking questions. The presentation reference can be found on the investor relations section of our website, ally.com. Forward-looking statements and risk factor language governing today's call are on page 2. GAAP and non-GAAP measures pertaining to our operating performance and capital results are on page 3. As a reminder, non-GAAP or core metrics are supplemental to and not a substitute for US GAAP measures. Definitions and reconciliation can be found in the appendix. With that, I'll turn the call over to Michael.

Thank you, Dan, and good morning, everyone. I appreciate you joining us today for our third quarter earnings call. While I'll discuss the quarter in more detail in a moment, I'd like to take a step back and start with the bigger picture. We delivered another quarter of meaningful progress against the priorities we have laid out, and those results reflect a broader story unfolding across Ally. Ally is a stronger company today than it was just a few years ago. We've made deliberate choices about where to invest and grow, and our results reinforce that we are on the right path. Over the past two years, retail, auto, and corporate finance assets have grown nearly 15%. Core ROTCE has increased from 5% to 13%. Retail NCOs have declined by more than 30 basis points. We have returned meaningful capital to shareholders while also building our capital base.

Taken together, we've built an Ally that is positioned to deliver stronger returns, greater resilience, and sustainable growth. Now let me be clear, this isn't the finish line, but I am proud of what we have achieved. Simply put, our strategy, backed by disciplined execution, is working. Moving to financial results, third quarter adjusted EPS of $1.34 was up 16% year-over-year. Adjusted net revenue of $2.3 billion increased 9% year-over-year, and with non-interest expenses flat, we delivered another quarter of meaningful operating leverage. CET1 of 10.2% was up 10 basis points year-over-year, and we remain pleased with our ability to execute a story of and, not or. That is, we are growing our core businesses, maintaining strong capital levels, and returning capital to shareholders. Our Focus Forward strategy remains simple yet powerful.

Importantly, none of this happens without our people, and our differentiated brand and culture continue to amplify that strategy. Our teammates bring our promise to do it right to life every day with an unwavering commitment to show up for our customers, communities, and each other. Our Life Today campaign continues to highlight Ally's unique ability to meet customers where life and money intersect in today's world. Building on our history of disruption and innovation, last month, we announced Loyally, our first-ever loyalty experience. Moving beyond complexity to deliver meaningful value through discounts and seamless experiences with the simple fee-free model our customers know and love. More importantly, initiatives like Loyally demonstrate the investments we're making to strengthen customer relationships and position Ally for the future. Ultimately, our focus is not on delivering compelling results in any single quarter.

It's about ensuring the progress we are delivering today translates into a company that is stronger, more resilient, and capable of generating higher returns for years to come. While I'm pleased with this quarter results, my conviction is grounded in the momentum we see across our franchise and the opportunities ahead of us. We know the path will not always be linear, but the direction is clear. With that, let's turn to slide 5. Our market-leading franchises continue to be a source of strength, underpinned by deep customer relationships, differentiated capabilities, relevant scale, and disciplined execution that continue to position us well in the markets we compete. We continue to build on the momentum across each business, with execution translating to accretive growth and improved returns. In dealer financial services, our dealer-centric through the cycle approach is paying dividends.

In auto, we decisioned 4.8 million applications, up 20% year over year, as our refined go-to-market strategy continues to expand the top of the funnel and further our reach in our industry. That application flow translates to $12.9 billion of originations, up 10% year over year. As we leverage the scale and infrastructure we've built, the focus remains on maximizing risk-adjusted returns. That means pairing attractive growth with a disciplined credit posture. Our data-driven approach to portfolio management and dynamic underwriting continues to translate into more durable credit performance. Importantly, consumers have continued to demonstrate resilience as they navigate an evolving macro backdrop. We remain encouraged by the performance we're seeing across the portfolio. Within insurance, written premiums of $388 million increased $3 million year over year, and a 75% increase year over year in conquest activity reflects continued momentum across the business.

Insurance continues to generate diversified, capital-efficient, accretive earnings, evidenced by a year-to-date ROE of approximately 30%. More broadly, our differentiated go-to-market strategy in dealer financial services allows us to support dealers across the entire ecosystem, strengthen relationships, expanding our opportunity set, and enhancing the value of the franchise. Corporate Finance delivered another impressive quarter, generating a 22% return on equity. Our portfolio now stands at $15.8 billion, up 40% year over year. Non-accrual loans and criticized assets remain at historic lows, underscoring the credit-first mindset that's long defined our business. Our established partnerships, underwriting expertise, and speed and certainty of execution remain core strengths of the franchise and support attractive, consistent returns. At the digital bank, our differentiated value proposition and ability to provide exceptional products and experiences continues to drive customer growth that consistently outpaces industry averages.

We now serve 3.6 million customers, up 7% year-over-year, and marking our 70th consecutive quarter of growth. We continue to track highly engaged customers who skew towards Millennial and Gen Z. Our national brand, digital-first operating model, and unmatched experience position us exceptionally well as consumer preferences continue to evolve. In aggregate, these results reflect the strength of our franchises and the benefits of the investments we've made to expand products, build capabilities, and create long-term value. We've been clear about what we have set out to accomplish, and our results today represent another step on our path to mid-teens returns. While that path may not always be linear, our conviction continues to grow. My confidence is based not only on this quarter's results, the momentum we see across our businesses, and the opportunities ahead of us.

With that, I'll turn it over to Russ to walk through the financials in more detail.

Thank you, Michael. I'll begin by walking through third quarter performance on slide 6. Net financing revenue, excluding OID, of $1.8 billion was up 10% year-over-year. Growth was in our core portfolios and lower funding costs supported continued NII expansion. Adjusted other revenue of $579 million was up 4% year-over-year. We continue to see solid momentum across our diversified revenue streams: insurance, SmartAuction, and pass-through programs. Provision expense of $529 million was up $114 million year-over-year, primarily due to CECL reserve builds associated with continuing strength in asset growth. Our retail auto portfolio grew to $2.4 billion in the quarter, which led to nearly $90 million of CECL reserve build in the period. Over time, this growth contributes to future earnings but presented a 3Q headwind of roughly $0.20 to EPS and 200 basis points to ROTCE.

We saw 9% operating leverage as adjusted non-interest expense of $1.2 billion was relatively flat year-over-year, reflecting ongoing discipline and weather losses which were slightly favorable to our baseline expectations. Let's move to slide 7 to discuss margin in detail. Net interest margin, excluding OID, of 3.66% increased 3 basis points quarter-over-quarter as the full benefit of second quarter deposit pricing actions was largely offset by losses on lease termination. Retail auto portfolio yields, excluding the impact from hedges of 9.2%, was down sequentially, but given current originated yields, we anticipate the portfolio yield to migrate higher over time. Consistent with commentary at an industry conference last month, lease yields in the quarter included a $16 million loss on lease terminations, reflecting continued pressure on Stellantis auction prices and residual values stemming from broader brand and recall-related overhang.

Given the current mix of our lease portfolio coming to termination, we expect the resulting pressure to persist into 4Q. Looking beyond that, we would expect the headwind to abate as we move through 2027 and the portfolio continues to shift towards a more diversified OEM mix. Importantly, since announcing our partnership with a pure battery electric OEM in March 2024, approximately half of our lease origination volume includes residual value guarantees, reducing the proportion of the portfolio subject to volatility and residual value. We continue to deliver strong earning asset growth, supporting the ongoing remixing of our balance sheet into higher return assets. Average earning assets were up 7% year-over-year, with growth continuing to be concentrated in retail auto and corporate finance. Ending retail auto assets were up 8%, while corporate finance loans were up 40%.

Growth in these asset classes continues to replace the runoff of lower-yielding mortgages, providing a structural tailwind to net interest margin over time. On the liability side, cost of funds decreased 3 basis points quarter-over-quarter, driven by the full impact of deposit pricing actions taken during the second quarter. Deposit customers grew for a 70th consecutive quarter and are up 70% year-over-year, reflective of the strength of our brand and unique value proposition that Michael highlighted earlier. Given the expectations for a series of Fed hikes, I want to provide color on how we expect our margin trajectory to unfold given the composition of our balance sheet. Movement in benchmark rates impacts the pace and magnitude of remaining NIM expansion to our upper 3s target. We remain confident across a range of Fed paths.