Ally Financial Inc. Q4 FY2021 Earnings Call

Good day and thank you for standing by. Welcome to the Ally Fourth Quarter and Full Year 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Daniel Eller, Head of Investor Relations. Please go ahead.

Thank you, Jiji. And welcome, everyone, to Ally Financial’s fourth quarter and full year 2021 earnings call. This morning, we have our CEO, Jeff Brown; and our CFO, Jen LaClair to review Ally’s results before taking questions. I will note that the presentation we will reference on today’s call can be found on the Investor Relations section of our website. Forward-looking statements and risk factor language governing today’s call can be found on slide two, and GAAP and non-GAAP or core measures pertaining to our operating performance and capital results are on slides three and four. 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 will hand the call over to JB.

Thank you, Daniel. Good morning, everyone. And thank you for joining our call today to review fourth quarter and full year 2021 results. I will begin on slide number five. Ally generated outstanding results in 2021. I’m incredibly proud of the efforts and dedication of our more than 10,000 teammates who delivered yet another year of innovation and focused execution. Over the past few years, we’ve experienced a profound shift in consumer demand and expectations for seamless digital-first banking products in response to COVID-related challenges and advancements in technology. Ally has leveraged these broad-based secular trends to strengthen our position as a disruptive growth company guided by a winning formula to do it right for our customers, employees, and communities. Full year adjusted EPS of $8.61, core ROTC of 24.3% and revenues of $8.4 billion represented record-setting results and evidence of the leading auto, insurance, and digital bank platforms we’ve built. Momentum generated across our businesses positions us well to continue unlocking franchise value in the years ahead. Our recent acquisition of Fair Square, the latest digital-first capability we’ve added to our product suite, will further enhance our trajectory. We closed the transaction in December, ahead of schedule and are well underway with the integration. Looking at auto results, our dealer networks expanded for the 12th straight year in 2021, generating $46.3 billion of originations, our highest level since the early 2000s, sourced from a record 13 million decision applications. This was our fourth consecutive year of origination yields above 7%, demonstrating our strong competitive position, disciplined underwriting, and leading dealer and customer service capabilities. Credit losses remained benign, with 31 basis points of full year retail auto net charge-offs. Our leadership position within the auto ecosystem is clear across these metrics, affirming the strength of our team and the success of our multi-prong strategy to broaden the dealer network and generate solid volumes and accretive risk-adjusted returns. The strength and agility of our business model in a wide variety of operating environments is evident in our performance over the past two years, as we’ve successfully responded to strong consumer demand, high used vehicle values, and reduced inventories. We’ve earned our market-leading position by driving customer value over the long term and we remain focused on achieving continued success as we navigate change in the years ahead. Across our consumer and commercial portfolios, credit remains very strong, supported by robust job prospects, ongoing wage expansion, and the strongest customer balance sheets observed in decades, all of which help mitigate inflationary dynamics. While the pace of credit normalization remains up for debate, we’ve taken a balanced approach in our reserve process, under a view that normalization will occur gradually over the next two years. We proactively enhanced the use of advanced data, automation, and digital tools, increasing customer engagement, and strengthening our ability to mitigate losses. Between 40% and 70% of our auto customer interactions occurred digitally each month, increasing speed and effectiveness while creating a strong customer experience. Within insurance, our compelling value proposition for dealers and consumers is evident in written premium volume of $1.2 billion for 2021, as we expanded dealers and customers. Our investment portfolio grew to $6.5 billion, the highest level since becoming a publicly traded company, reflecting years of steady written policy growth. Turning to Ally Bank, growth accelerated again this year, aligned with the increasing momentum toward a digital-first world. As the leading all-digital and customer-centric bank, we’ve established a scalable platform differentiated by the personalized, seamless modern banking products we’re delivering. We generated our 13th consecutive year of customer and balance growth, as our customer base expanded 10%, while total deposits grew to 89% of funding. Within our digital-first consumer offerings, Ally Home originations of $10.4 billion were more than double the prior year level. Ally Invest customer assets exceeded $17 billion, as self-directed and robo accounts grew to 506,000. Ally Lending volume of $1.2 billion more than doubled and was powered by a 37% increase in merchant relationships across our healthcare and home improvement verticals. Fair Square balances closed the year at $953 million, an increase of 25% since announcing the acquisition in October and 66% year-over-year, reflecting strong customer acquisition, consumer spending trends, and the scalability of the Fair Square approach. And within Corporate Finance, HFI balances of $7.8 million grew nearly 30% year-over-year, through a combination of increased new loans and normalizing drawdown activity among our clients. The CF portfolio, including unfunded commitments, now stands at $12.7 billion, which highlights the success we’ve had in growing this business. As a result of our strong financial position, we were pleased to recently announce a $2 billion buyback authorization program for full year 2022 and a 20% dividend increase to $0.30 per share. As we turn to slide number six, I will reiterate the view I’ve shared on many occasions regarding the link between values and results. I’m confident our record-setting performance and ongoing momentum are directly tied to the clear focus and prioritization of our customers, employees, and communities. Maintaining an authentic and inclusive culture has been a top priority for me during my tenure as CEO. Ally took several actions over the past year, aligned with our Do It Right approach. For our customers, we’ve actively enhanced products, interfaces, and service capabilities, utilizing advanced tech and data innovations, which Jen will provide more detail on. We took the key step of adding a credit card product to our suite of digital-first offerings, and we’re proud to lead the industry in eliminating overdraft fees, earning national account certification from the Cities for Financial Empowerment Fund. For our Ally teammates, we increased Ally’s minimum wage to $20 per hour. We announced the third annual grant of company stock to all employees and expanded health and family benefit programs. We were honored to be named among the Best Places to Work at Forbes, DiversityInc, and numerous other publications and received another perfect Corporate Equality Score from the Human Rights Campaign. Over 40% of our workforce voluntarily participates in one of our employee resource groups, vital elements of how we’re driving a stronger sense of belonging and engagement across our teams. Our deliberate actions to treat people as people and create an inclusive workplace have the added benefit of acting as a powerful retention tool. Within our communities, we marked our 10th year of the employee-led giving back campaign, donating 24,000 hours of time to worthy causes. We hosted our third annual Moguls in the Making student competition, in partnership with several HBCUs and marked the first full year for the Ally Charitable Foundation Actions, donating $15 million of combined employee and company contributions to community, social, and educational causes. On the ESG front, we announced that Ally achieved carbon neutrality and officially established an Environmental Sustainability Office. Taken in isolation, any one of these actions would represent a significant milestone. But when taken together, these actions provide clear evidence of what can be achieved when purpose, creativity, and dedication come together under a shared vision. Moving to slide number seven, I wanted to spend a few moments summarizing the strategic evolution we’ve delivered before handing it over to Jen to walk through the details. Over the years, we built resilient platforms through constant expansion and evolution of our customer-centric offerings. We challenge ourselves each day to look around corners and embrace disruptive forces on behalf of our clients and customers to proactively manage risks and deliver financial solutions that anticipate their needs in a seamless differentiated manner. While performance was exceptional in 2021, the opportunities we built for growth in 2022 and beyond are what I’m most excited about, including continued momentum across our leading customer-centric businesses, delivering diversified and durable earnings, and disciplined capital management. These priorities have positioned us to deliver long-term growth and sustained higher returns, as seen in our track record of delivering or exceeding the financial guidance we’ve provided over the past several years. We continue to focus on deepening customer relationships through digital capabilities that combine leading award-winning products with integrated, stable, and secure bank platforms. We’ve got a really powerful model and considerable financial strengths. The future is bright, and you can be assured we will keep delivering. With that, I will turn the call over to Jen to provide perspectives on our progress and review our detailed financial results.

Thank you, JB, and good morning, everyone. I’d like to start by expressing my gratitude for our dedicated Ally workforce, who powered our growing momentum over the past several years and drove exceptional results in 2021. Before diving into the fourth quarter details, I will review Ally’s multiyear strategic and financial transformation, including the drivers behind our steady execution and strong performance. Beginning on slide eight, we’ve included a view of our comprehensive and expanded product read, reflecting the many capabilities we’ve added since 2014. We provide a broad range of integrated and sophisticated offerings built for and around our consumer and commercial clients. Turning to slide nine, we’re constantly evolving and adapting our capabilities, innovating through tech and data-driven approaches. With each new product launch, redesign, or enhancement, we apply our deeply rooted expertise in disruptive DNA to create unique, safe, and innovative solutions for a broad range of financing and banking needs. Our customer-centric approach focused on delivering compelling value fills growth, creates opportunities for relationship deepening, and diversifies Ally’s balance sheet and earnings. Ally’s compelling growth trajectory and the customer-oriented awards we’ve amassed over the years serve as a testament to the effectiveness of our approach. Turning to slide 10, customers using an Ally product now stands at 10.5 million across our platforms, expanding 52% since 2014. Ally Bank customers have more than quadrupled over this timeframe, as we’ve evolved our capabilities and successfully expanded multi-product relationships shown on the bottom left. In auto, we’ve added nearly 5,500 dealers as part of our multiyear effort to broaden the funnel and increase dealer engagement. This strategy has culminated in a 40% plus increase in application volume, driving strong originations and risk-adjusted returns. Robust product expansion and customer growth have translated to improved balance sheet and earnings covered over the next few pages. Turning to slide 11, our balance sheet transformation reflects two key dynamics; first, the diversification of our asset base, which has grown by $31 billion or 20% since 2014. Over this timeframe, we’ve generated $23 billion or a five-fold increase in Ally Bank consumer and commercial product balances, $13 billion of consumer auto balances, helping to mitigate the pandemic-driven floor plan declines and nearly $14 billion in accretive capital-efficient investment securities. The second driver of our optimization can be found within net interest margin shown on the bottom of the page, where disciplined asset pricing, deposit growth, and active liability management have increased asset yields and improved funding costs. Auto pricing has remained above 7% for four consecutive years, while floating-rate commercial and unsecured products are positioned for further growth and accretion as rates rise. On the funding side, we’ve more than doubled stable sticky deposits since 2014, while retiring $24 billion of legacy unsecured debt with a weighted average coupon of over 5%. These actions drove structurally lower funding costs throughout the prevailing low rate environment and enhanced our ability to control liability costs. Over the years ahead, we expect our balance sheet to drive an upper 3% margin as assets steadily migrate towards $200 billion. Structural enhancements across both sides of our balance sheet drove strong performance over the past two years and position us well for a variety of rates and economic environments moving forward. Turning to slide 12, Ally’s core PPNR has more than doubled since 2014, generating nearly $4.3 billion in 2021, our highest level. Our outlets for annual PPNR expansion will be revenue-driven as we continue to prudently invest in customer capabilities, technology, talent, and brand. In the bottom left, total revenues of $8.4 billion represented record-setting net financing revenue and other revenue, reflecting diversified sources of income and our ability to capture tailwinds in real time. In the bottom right, Ally’s adjusted efficiency ratio, which as a reminder, excludes insurance, reached the lowest level since becoming a publicly traded company as we remain diligent in investment and expense management.

Thank you, Daniel. Good morning, everyone. And thank you for joining our call today to review fourth quarter and full year 2021 results. I will begin on slide number five. Ally generated outstanding results in 2021. I’m incredibly proud of the efforts and dedication of our more than 10,000 teammates who delivered yet another year of innovation and focused execution. Over the past few years, we’ve experienced a profound shift in consumer demand and expectations for seamless digital-first banking products in response to COVID-related challenges and advancements in technology. Ally has leveraged these broad-based secular trends to strengthen our position as a disruptive growth company guided by a winning formula to do it right for our customers, employees, and communities. Full year adjusted EPS of $8.61, core ROTC of 24.3% and revenues of $8.4 billion represented record-setting results and evidence of the leading auto, insurance, and digital bank platforms we’ve built. Momentum generated across our businesses positions us well to continue unlocking franchise value in the years ahead.

Thanks, JB. So as we head into Q&A, I will ask participants to limit yourself to one question and one follow up. Operator, you can go ahead and tee up the first question.

Our first question comes from Ryan Nash at Goldman Sachs. Your line is now open.

Hey. Good morning, JB. Good morning, Jen.

Hi, Ryan.

Hi, Ryan.

So, JB, you outlined in the slides 16% to 18% plus returns in 2022 and the medium-term, I think, Jen said, two years to three years and beyond, and I wanted to maybe focus on the plus. So can you maybe just talk about some of the assumptions that are underlying, maybe give us a little bit more color? And maybe what are some of the sources of upside that we could see over the next one year to two years that are not baked into the 16% to 18%?

Sure. Jen, you want to take it or, I mean, a few I will start with Ryan, and then, Jen, can go through the details. Obviously, I mean, you would look at our levels of reserves, relative to the levels of loss expectations, and I think our guidance on credit, I think, you see, we’ve taken a very pragmatic and gradual normalization to credit, but that would be certainly a big one. And then, obviously, used car prices, I think, Jen has guided, we see them within our financial plan is moderating. But I think if you look at current trends, you look at the environment, I mean, used car prices are still really strong. And as Jen pointed out, we are seeing some very modest uptick in inventory levels. But our outlook, I think, this year is a really robust used car market. So, I mean, those are a couple. Jen’s obviously got all the details behind it, but we feel really good about the outlook.

Yeah. JB, I think, you nailed it. The only thing I would add is just around gains and in our insurance portfolio, we’ve been able to optimize our equity market activity and drive outside gains, and so that potentially, Ryan, could be another area of upside. But I think you’re asking the right question. I think there’s an asymmetric bias here towards outperforming the 16% to 18% plus and it’s past events here as reserves, these used vehicle pricing that JB hit on, plus our ability to generate gains.

Got it. And Jen, if I could just dig into the expectations for the upper threes net interest margin, can you maybe just flesh out some of the assumptions that are underlying this in terms of your assumptions on rates, your ability to drive price in the loan book? And I guess, more importantly, what are the expectations over that timeframe for deposit betas, just given you guys have obviously done a great job building the liquidity on the balance sheet and I’m wondering, can we end up seeing you exceed prior cycles, just given all the work that you guys have done on the deposit side? Thanks.

Yeah. Sure. And I will start first on the yields and then go to liabilities. But on asset yields, 90% plus of our retail auto portfolio was originated at 7% plus yields. And so we are expecting, Ryan, to continue to see retail auto yields continue to migrate up towards that 7% plus. And then if rates continue to increase as we’re expecting, that could potentially go even higher. We also have floating rate assets as we’re growing floor plan. JB mentioned, we’re starting to see some increases in floor plan. Those are floating rate assets. They would migrate higher as rates increase. We’ve increased our asset sensitivity just through pay-fixed hedging activity kind of maxing out our hedging, which will also give us some tailwind. So, net-net, when we wrap this all up, plus Fair Square, Ally Lending, we see a really robust trajectory ahead on asset yields, in particular, if we see rising rates. And then on the liability side, both mix and deposits will help us. We have a much healthier liability stack having run-off, expensive high-cost unsecured debt, our deposit levels are 89% of funding. And then, when you look at the value we’re providing to our customers based on products, our digital platforms, and the fact that we’re core funded now, we do think, Ryan, to your questions specifically around deposit pricing, that overall rates paid will be lower in this next rising rate cycle. So, you wrap it all up in the first couple of pages, the transformation we’ve led, the product capability expansion and the asset side, the transformation of our funding profile, it positions us so well to hit that upper 3% NIM, irrespective of the rate environment and to your question, gives us the opportunity to outperform as well.

Thanks for taking my questions.

Yeah.

Thanks, Ryan.

Thanks, Ryan.

Thank you. Our next question comes from the line of Bill Carcache from Wolfe Research. Your line is now open.

Thank you. Good morning, JB and Jen.

Hi. Good morning, Bill.

Hi, Bill.

Can you discuss the trajectory that you’re expecting for NIM, particularly in light of changes in fed funds and all the moving parts? The guidance on the slide is super helpful, but maybe just a little bit of color and directionally should we be expecting 2023 NIM to be normalizing higher, lower versus 2022?

Certainly. We've been indicating an expectation for net interest margin (NIM) expansion for several years now. This expectation remains consistent, regardless of interest rate trends, due to various factors related to our asset and liability management. Specifically, we're anticipating NIM to grow despite fluctuations in rates. In a rising rate environment, there are additional opportunities to increase yields on earning assets. Key factors contributing to this include floating rate assets and adding short duration sensitive assets like Ally Lending and Fair Square, which will enhance momentum for earning asset yield expansion. On the liability side, our strong brand, customer engagement, and digital capabilities position us well to manage funding costs effectively, even compared to previous rate environments. This strong positioning is expected to support our growth trajectory into 2022 and maintain it into 2023 and beyond. I hope this provides clarity regarding your question.

Yeah.

This is not…

Yeah.

… a rate driven NIM expansion. This is all about structural improvements and transformation.

Got it, that's helpful. As a follow-up, can you discuss the trajectory of the reserve rate and your thoughts on growth in that dynamic as you expand the card business? Starting the year above your initial level should help mitigate those challenges. Additionally, as the card business grows, given its higher loss content, should we expect that at some point you would raise your target capital expectations? Thank you.

Yeah. Sure. And on the overall reserve, it’s largely driven by retail autos. Let me start there and I will go to some of the smaller portfolios. But retail auto right now is at 3.54%. Day one was at 3.34%. So we’re running 20 basis points ahead of day one. And I think that, to JB’s point and his prepared remarks really helps us to manage through any kind of economic cycle that we could see ahead. But if you look at the path of normalization our past history, we would expect over time as NCOs normalize that, that rate would come down from the 3.54% somewhere closer to that 3.34%. So I think if anything, Bill, that gives us some tailwind heading into 2022 and 2023. And then on some of the newer products that, we will have higher coverage levels, I think, we’re very well reserve there. Fair Square, we just put on it a 12% coverage ratio. Ally Lending is close to that. So I think we’re just in a really good spot there. Not going to drive upside, but we will be growing that and the mix may change slightly higher consolidated level. But if you wrap it all up with retail auto being as big as it is, with as high our reserve coverage level from a consolidated perspective, that should come down over time. And then on our capital target, look, we feel that we are very well positioned. We are adding some new portfolios with Fair Square and Ally Lending, but they are about $2 billion today and we will grow to $2 billion to $4 billion from here, but it’s not a big enough percent of our portfolio to really revisit the 9% target. And then also keep in mind, we’re holding 9% against a floor plan balance that is relatively risk-free. So we feel really good Bill about our 9% CET1 target.

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

Thank you, of course.

Thank you. Our next question comes from the line of Betsy Graseck from Morgan Stanley. Your line is now open.

Hi. Good morning.

Hey. Good morning, Betsy.

Hi, Betsy.

A couple of questions here. First, as we’re thinking about the Fair Square integration getting behind you, can you give us a sense as to the timing and the size that you’re going to be thinking about in terms of expanding that portfolio and what the levers are to affecting that?

Yeah. Sure. So we are at about $950 billion in balances today and we see a path medium-term to $2 billion to $3 billion, Betsy, and I think, if anything, they’ve shown an ability to really accelerate those customer growth and balance sheet growth, both are up over 60% year-over-year and the balances are running 25% ahead of just the projections that we shared with you in October. So they’re seeing a really robust growth trajectory. We’re right now seeing kind of a path to $2 billion to $3 billion, but we will continue to monitor and take it from there.

And that’s obviously, sorry, go ahead.

Yeah. I mean, it’s just very compelling customer segment and product focus that is allowing them to continue to grow. And I just find out that they grew during one of the toughest credit card markets in history as we navigated COVID.

So that piece of the portfolio expanding is clearly net positive to NIM. Floor plan is a little bit of a lower NIM contributor and I know in the past, you’ve talked about funding that via securities to help keep the NIM moving higher. How much room is there in that piece of security shift in floor plan? I’m asking a question from the context of your guide for upper 3% NIM. What keeps you from seeing that guide move into low 4%s, as these piece parts are coming through here?

Yeah. Sure. And Betsy, we obviously have upside from floor plan and it’s on a couple of different dimensions. One is the supporting readout. But so as short-term rates increase that will naturally migrate the yield up. And second, to your point on funding, we’re reallocating cash into floor plan. So that gives us another tailwind from a mix perspective. And as I mentioned earlier, in response to Ryan’s question, there’s a lot of opportunity for earning asset yield to continue to migrate higher, plus the fact that we think we’re very well positioned to manage liability costs down. So there is an opportunity to go to that 4% plus. It’s just we tried to provide balanced guidance as we look forward, but certainly there’s upside opportunity there.

Regarding the outlook for used car values, which impacts several areas of the income statement, how should we interpret your modeling of a decline of over 15% by the end of 2023? What was the basis for that assessment in your guidance? Additionally, what pace do you anticipate for this to materialize in the model?

Yeah. Sure. And let me hit on model and then reality. We’ve modeled a straight line reduction from 2021 to 2023, down 15% to 20%. I think if we look at pace of used vehicle values, that continues to increase, and so the reality is, there’s probably upside to that. But again, we’re trying to give you kind of a run rate view of returns. And we will be opportunistic around upside if we were certainly in 2021 here, but the model just assumed kind of straight line reduction there. And then another factor I’d call your attention to because there’s so much focus on used vehicle values. As we exited 2021, the lessee buyout and the dealer buyout were increasing to 60%, 70%, 80% and so that’s muted our ability to harvest gains. It lowers the year-over-year comp as we head into 2022. So just keep that in mind. It’s not quite as big of fallout as I think some folks are modeling at this point in time. And then the last thing I’d say on used vehicle values is, we do have natural hedges, just as we had a hedge with floor plan coming down, used vehicle values going up and impacting lease yields positively. We have the hedge on the reverse, right? So as lease yields come down, we will see floor plan growing and you get all the great dynamics around putting cash to work, floating rate asset increasing. So just keep that in mind that there are positive hedges as used vehicle values come down just like there was as they went up.

Got it. Thanks, Jen. Thanks, JB.

Yeah. Thank you, Becky.

Thanks, Betsy.

Thank you. Our next question comes from the line of Moshe Orenbuch from CS. Your line is now open.

Thank you very much. As you mentioned in your opening comments, you have experienced better loan growth than in recent times, with solid growth in retail auto and across various portfolios. Can you discuss how this growth is expected to trend over the next year or two? I also have a follow-up question. Thank you.

Yeah. Sure, Moshe. And I mentioned assets getting to $200 billion in our medium-term and that’s driven by all the portfolios you just mentioned, I mean, retail auto, we were originating at mid-$30 billion, we had $46.3 billion this year, we’re guiding towards low $40 billion. And so as we continue to see opportunities to originate at a higher level that will obviously take our retail portfolio higher. Also seeing strong growth in lease as well, floor plans, obviously, come back. We saw kind of trough in September and steady growth from there, and I think it will be a little choppy from here on out, we will see, but definitely opportunities in floor plan to come back. And then the unsecured capabilities that we’ve recently added with Ally Lending, with Fair Square, each of those portfolios could get to $2 billion to $3 billion over time. And then last but not least, we’ve seen really nice opportunities to originate in mortgage, we put forward kind of our $10 billion target into this year and we will see how that plays out. But we really like our capabilities and we’ve expanded into new markets with mortgage systems and growth opportunities there. And floor plan continues to be a steady driver. We always talked about, I’m sorry, corporate finance always tends to be a steady driver, we’ve talked about $8 billion to $10 billion in that portfolio. We already hit $8 billion, I think, well on our way to $10 billion, as you look at the total opportunity in that segment. And then we will put cash to work and securities as well. So really across the Board, Moshe, we see really nice tailwinds and opportunities to grow, in addition to the NIM expansion that we’ve been talking about this morning.

Great. Right. And your medium-term kind of forecast talks about PPNR expansion on an annual basis. One of the concerns that investors have had about financials after the reports in the big banks has been expense growth. Can you kind of talk about your plans, because obviously, PPNR expansion means that your revenues got to grow faster than expenses, but just talk about the plans for generating operating efficiencies and how you think about that, particularly in light of the context, the remarks, JB, that you made about minimum wage, phasing that in and kind of how that will integrate into your plan over the next couple of years?

Certainly. We don't focus on individual financial metrics at a single point in time; instead, we manage the company to achieve accretive returns and invest in growth. My earlier remarks about investing in our capabilities, expanding our customer base, and strengthening our balance sheet reflect our overall strategy. As a growth-oriented company, we've experienced mid-single-digit expense growth in recent years, and we anticipate this trend will continue. However, we remain committed to achieving positive operating leverage, expanding PPNR, and maintaining a strong return trajectory, so you can expect further improvements in these areas. With Fair Square joining us in 2022, we will see a month of expenses transition into a full year's impact, which introduces some complexities. Nevertheless, we expect to achieve positive operating leverage as we enter 2023, despite some short-term technical effects due to Fair Square. Ultimately, while we are keenly focused on expense management, our primary goal remains the growth of our businesses and revenue. We experienced a 25% revenue increase this year and are poised for strong growth as we move into 2023, with continued investment and attention to leverage being a constant priority.

Okay. Thanks so much.

Yeah. Thank you, Moshe.

Thank you. Our next question comes from the line of Sanjay Sakhrani from KBW. Your line is now.

Thanks. Good morning. I have a question regarding the retail auto yield. I understand your expectations suggest that it will remain strong. I'm curious since much of it has been influenced by the mix within retail auto. As we consider the potential for competitive pressures to re-emerge, how significant do you believe that will be in affecting the yield over the next few years?

Yeah, Sanjay, yeah, it’s fourth year putting strong origination flows on the books that 7% plus yields and we’re guiding towards similar performance as we head into 2022. And it’s simply a result of the growth in dealers, growth in dealer engagement, where we think we still have significant opportunity for expansion. It’s the continued investment in our capabilities, including our SmartAuction platform, insurance. And so we don’t see any signs that that will slow down as we head into 2022 and beyond. And while competition is always intense, we aren’t seeing that interrupt our flows or impact our performance whatsoever as we head into 2022 and beyond.

And Sanjay, obviously, we are the number one lender in the prime space and one of the largest used lenders. To achieve that level of performance, significant scale is necessary, which we possess. We are large and fast, and dealers appreciate us. We have automated many of our risk-based decisions, allowing us to respond very quickly. We acknowledge that there are players that come and go, but what dealers value about Ally is our stability. This has been a major factor in the significant increase we continue to see in origination flows, and what Jen just projected, even into the low $40 billion, indicates strong year-on-year loan growth.

No. Absolutely. You have executed really well. I have another question regarding competition that relates to some of the questions Moshe was asking about expenses. On the consumer lending side, with the targeted growth you expect for Fair Square, is that primarily through direct marketing? If so, should we not anticipate a significant increase in marketing spend? We've heard that major banks and some card issuers are increasing expenses to acquire new accounts. I'm curious about how you plan to go to market in this area and whether you expect any pressure on expenses as you expand that business. How does this tie into the growth you are anticipating?

Yeah. And I think, Fair Square is a bit unique. It’s similar to what JB just mentioned on auto. It’s kind of a unique product for a unique market. They’re originating in that time space, which is not nearly as competed as the super prime space, and so the direct marketing that they’ve been doing has been highly effective as reflected in the 60% plus increase in customer accounts, as well as the growth in the balance sheet. And all of the expenses attached to that are in the really robust guidance I’ve provided, which is kind of immediately accretive from our ROTC perspective, it will be accretive from an EPS perspective by year-end this year and it will drive operating leverage as we head into 2023. So you can see that our investments are paying off from a growth and profitability perspective. And I think if anything, we can turbocharge that growth by bringing them in inside the four walls of Ally and leveraging our existing customer base, Sanjay, which is not going to require significant additions to our marketing spend.

And how much of that is factor, like, is this cross-sell a big part of the growth expectation or is that just benefit?

Yeah. None of that, Sanjay, is built into any of the numbers that we share. That will be all upside. And again, it will be driven by synergies across our platform much more so than an increase in marketing.

Sanjay, I mean, I would point out, though, what sometimes cross-sell gets knocked and the question of, can you really do it? I think, I mean, if you look at our growth and multi-product relationships, it shows we are actually one of the banks that’s executing in that regard. And so while we don’t necessarily have it embedded in the guidance, I think that’s a clear focus point for us. So how do we use the cross-sell of a massive customer base? I mean, if you think of kind of another 9.5 million customers ex credit card, is even bigger than that existed Ally. That is an opportunity that we will go after.

Okay. Thanks. Thanks, Jen, and to all the participants. That concludes today’s calls. We’re at the top of the hour here. Operator, you may now take us through the disconnect process.

This concludes today’s conference. Thank you for participating. You may now disconnect.