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Ally Financial Inc  (NYSE:ALLY)
Q4 2018 Earnings Conference Call
Jan. 30, 2019, 9:00 a.m. ET

Contents:

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Q4 2018 Ally Financial Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions) As a reminder, this conference call may be recorded.

I would now like to introduce your host for today's conference, Mr. Daniel Eller, Executive Director of Investor Relations. Sir, you may begin.

Daniel Eller -- Executive Director of Investor Relations

Thank you, operator. We appreciate everyone joining us this morning as we review Ally Financial's fourth quarter 2018 results. You'll find the presentation we will reference throughout the call on the Investor Relations section of our website, ally.com.

On page 2 of the presentation, I'd like to direct your attention to our forward-looking statements and risk factors. The contents of our call will be governed by this language. On slides 3 and 4 of the presentation, we've included some of our GAAP and non-GAAP or core measures. These and other core measures are used by the management team and we believe they are useful to investors in assessing the company's operating performance and capital measures, but they are supplemental to, and not a substitute for, US GAAP measures. Please refer to the supplemental slides at the end for full definitions and reconciliations.

Today, we have our CEO, Jeff Brown, and our CFO, Jenn LaClair, on the call to review our operating and financial results. We do have time set aside it after the prepared remarks for Q&A. And with that, I'll turn the call over to Jeff Brown.

Jeffrey Brown -- Chief Executive Officer

Thank you, Daniel. Good morning, everyone, and thank you for joining our call. Let's begin with a recap of 2018 on slide number 5. 2018 was a year of disciplined execution and measurable progress for Ally. The foundation for success we've built over the past several years is evident in our operating metrics and financial results.

Adjusted EPS of $3.34 for full-year 2018 was an increase of 39% year-over-year. Core ROTCE of 12.3% was up over 250 basis points compared to last year and our adjusted total net revenue exceeded $6 billion in 2018.

These results reflect, number one, the impressive and growing earnings power of our dominant franchises and market positions we continue to optimize; number two, the ongoing momentum in our new product areas and overall success of Ally Bank in the direct banking space; and number three, the continued focus to optimize the capital structure and drive long-term value to our shareholders.

In auto, we originated $35.4 billion of loans and leases in 2018, maintaining our industry-leading position while expanding risk-adjusted margins. Auto continues to be a great business for us, fueled by deep relationships with our dealer customers and our consistent focus to make them and the OEMs even better.

Through mix and pricing, we drove estimated originated retail auto yields over 7% in 2018 compared to 6.2% in 2017, while the credit profile of originations remain consistent. Our dealer base and application volumes have grown every year since 2014. In 2018, we decisioned a record 11.6 million applications sourced from nearly 18,000 dealers, which drove our increase in full-year origination volumes. We've had steady progress in our diversification efforts where the growth channel and used volumes increased consistently in 2018.

I also want to point out that, within the growth channel, over one-third of the originations are sourced from specialty and direct dealers. The auto and insurance businesses have proven their long-term resiliency. We've consistently adapted to the needs of our customers in changing market conditions. This may be a 100-year-old business for us, but we adapt, innovate and take care of the customer each and every day . The market position we've established within auto today has never been stronger in the history of the Company.

Credit performance in our portfolio remained solid throughout 2018. On a full-year basis, the retail auto loss rate declined, while the portfolio yield increased versus the prior year. Net charge-offs for full-year 2018 of 133 basis points were down 15 basis points year-over-year against a portfolio yield increase of 34 basis points.

We know there's a lot of focus on the state of the economy and the health of the consumer. Everything we see across our portfolios reinforces that the consumer remains healthy. Employment conditions are strong across the country, wage growth is accelerating, tax reform and falling gas prices have been incrementally beneficial. All of this leads to a strong consumer balance sheet. We'll continue to monitor trends, but our data remains favorable.

Turning to deposits. We ended the year at $106.2 billion in balances, up $12.9 billion year-over-year, driven by our leading online deposit franchise. Deposits remain a powerful product for us as we reduce high-cost debt and efficiently grow and diversify our earning asset base. Our 14% year-over-year retail balance growth compares to an industrywide retail growth of around 2%, an indicator of our strong value proposition and momentum in direct digitally based banking.

We were in line with our beta expectations throughout 2018; and in 4Q, experienced the largest quarterly growth ever in both retail balances and new customers. For the year, we added another 230,000 deposit customers, ending at 1.65 million.

Millennial customers accounted for 55% of new account openings during the year, an attractive future prospect considering the generational wealth transfer of $30 trillion that will occur over the next three to four decades.

The growth in customers is strategically aligned with our approach to adjacent products and capabilities. Our invest and mortgage products provides us with access to large addressable markets, representing attractive growth opportunities for us moving forward. Multi-product customers across our business lines continue to grow where over 90% of our card customers, nearly half of our direct-to-consumer mortgage customers and roughly one-third of our incoming invest customers are existing deposit account holders.

In corporate finance, pre-tax income was up 26% year-over-year, while held-for-investment asset levels increased 19%. We've driven steady, measured portfolio growth in this book, while remaining disciplined in our credit approach.

And looking at capital management, we remain diligent in returning capital to shareholders in 2018. We increased common distributions 26% year-over-year as we repurchase shares at attractive levels and continue to increase the dividend, resulting in a 2018 payout of 94%.

In total, these results demonstrate the strength of Ally and the meaningful progress we've made along our strategic path.

Let's turn to slide number 6. Jenn provided an updated 2018 outlook on our call last quarter. I'm pleased to say that we delivered across every metric as we closed out the year. And as I detailed a moment ago, drivers center around our performance in our dominant franchises, including our auto optimization efforts and stable credit performance, along with the continued momentum in our deposit platform and growth products.

These improvements include investments we've made across the company that position us to increase returns over the long term and evolve with consumer preferences and trends across financial services.

Jenn will provide you with our 2019 outlook, but, in short, we expect the financial progress to continue as we deliver along our strategic path.

I'll go over a few key metrics we monitor on slide number 7. We saw record results across each metric again this quarter. In the upper left, adjusted EPS was $0.92 per share in the fourth quarter, up 32% compared to the prior-year quarter. Adjusted total net revenue grew to nearly $1.56 billion in the quarter as net financing revenue expanded.

In the bottom left, deposits increased to $106.2 billion, which now represents about 66% of our funding base. Tangible book value, on the bottom right, moved higher on a linked and year-over-year basis to just under $30 per share, a strong indicator of the inherent value we've built.

I'm encouraged by these results. And you should expect improvements across each of these metrics as we move through 2019.

And with that, Jenn will take you through the detailed financials.

Jennifer LaClair -- Chief Financial Officer

Thanks, J.B. Let's turn to slide 8 to review our detailed results.

Q4 results were solid and trended in line with our expectations across every line item. Net financing revenue, excluding OID, was $1.163 billion in the quarter, up $34 million linked quarter and up $50 million year-over-year. We grew net interest income every quarter this year and grew earning assets 3% and 8% on a linked and year-over-year basis.

Adjusted other revenue of $393 million was up modestly compared to Q3 in the prior-year period. Provision expense of $266 million increased by $33 million quarter-over-quarter, reflecting the expected seasonally higher net charge-off activity, while declining $28 million versus the prior year.

Throughout 2018, and again this quarter, the year-over-year trends reflect our improved loss experience in the retail auto portfolio, driven by disciplined underwriting and collection activities, along with a favorable consumer macroeconomic backdrop.

Hurricane-related activity has largely run its course through the numbers, with no meaningful impact in Q4 results and about $10 million remaining in reserves. We'll provide some more detail on our credit metrics in a moment.

Non-interest expense was down on a linked-quarter basis and up compared to the prior-year quarter. Drivers of higher year-over-year expense consisted of items we've discussed in the past, including growth in volume and revenue-based activities, continued investment in our brand and core businesses, including the ongoing enhancements to our digital and tech capabilities and the build-out of adjacent product offerings, where have invested prudently and we remain focused on driving scale over time.

Looking at key metrics for the quarter, GAAP and adjusted EPS of $0.70 and $0.92 per share respectively, core ROTCE of 13.4% and adjusted efficiency ratio of 46.9%. Our tax rate was 21.5% this quarter, resulting in a full-year tax rate of 22.1%, incrementally positive versus our full-year expectation of 23% to 24% as we executed certain tax strategies.

Over the next few slides, I'll recap the annual trajectory of several metrics beginning on slide 9. Adjusted EPS of $3.34 in 2018 was nearly double our 2014 results, representing a 19% CAGR over that time period. 2018 core ROTCE of 12.3% has increased 445 basis points, or 56%, since 2014. And as J.B. touched on earlier, execution along our strategic path is evident in our financial metrics, and we remain confident in our ability to continue driving strong returns moving forward.

At a high level, improvement over the last five years has been propelled by the optimization of our leading auto finance business, which highlights our execution as a national full spectrum, full product suite lender; strong credit performance, driven by our disciplined underwriting practices and enhanced collection strategies; the growth of our deposit portfolio, allowing us to reduce our reliance on high-cost capital markets funding and grow our customer base; benefits associated with our capital management strategy, including consistent share repurchase activity along with tax reform and a favorable macroeconomic environment.

Let's turn to slide 10 to review adjusted total net revenue. 2018 results continued a trend of steady growth every year since going public, exceeding $6 billion for the full year, an increase of over $1 billion since 2014, driven by growth in earning assets, including capital efficient asset classes and beta discipline on both sides of the balance sheet with expanding auto yields and growth in stable, efficient deposits that have replaced $10 billion of unsecured maturities.

Keep in mind, we've expanded net financing revenue during this time frame, while our lease portfolio declined by over 50%, including a $680 million decline in lease net revenue. This momentum keeps us on track to achieving $5 billion in annualized net financing revenue over time. We continue to be relatively neutral to rates and feel confident about the strong risk profile across our balance sheet category.

Adjusted other revenue in 2018 was $1.535 billion, an increase of $97 million since 2014. Over time, we've offset lower investment gains and reduced fee income from the decline in lease terminations, with higher insurance and Ally Invest revenues. Moving forward, we'll continue to generate fee income growth through our insurance, SmartAuction, Invest and Ally Home offerings.

Moving to slide 11, period-end balances in 2018 of $170.8 billion represents earning asset growth of over $27 billion since 2014, while RWA has increased by $16 billion as the balance sheet is comprised primarily of secured assets and new origination volumes coming on at yields in excess of current portfolio levels.

In auto, the growth in retail and commercial assets more than offset the lease balance decline of $11.1 billion as we reduced our residual exposure. We've been clear about our intention to thoughtfully grow less capital intensive assets that carry a marginally lower asset yield, including securities and bulk mortgage.

The investment securities portfolio represents around 17% of earning assets today and we continue to expect this to migrate toward 20% over time. Since late 2017, when our capital requirements at Ally Bank normalized, we've steadily grown our liquidity portfolio which is accretive to income and carries a strong credit and return profile.

On slide 12, we have a snapshot of our loan and lease portfolio, which demonstrates the strong credit profile across each line item in consumer and commercial portfolios. Our focus on risk-adjusted returns remains central to our strategy and long-term financial trajectory.

Our commercial auto floorplan portfolio is a floating-rate, well-collateralized asset that has performed exceptionally well over many cycles. Annual losses have averaged around 8 basis points over the past four decades and under 2 basis points since 2012.

You can also see the year-over-year improvement in losses with consolidated net charge-offs declining 10 basis points. Non-interest expense and efficiency ratio trends are on slide 13. Adjusted efficiency ratio for full-year 2018 was 47.6% and expenses were $3.26 billion, up compared to the prior year for reasons we have talked about in the past, including volume-driven growth in our core business lines, the ongoing enhancements of our digital capabilities, and increased spend related to marketing and brand recognition, along with the build-out of new product offerings where we're focused on driving operating leverage over time.

Under 5% of the expense base is attributed to these initiatives and we are seeing strong customer and revenue trends that continue to gain momentum. Over time, we expect revenue growth to outpace expense growth, an obvious component of driving improvements to the efficiency ratio. Disciplined expense management will remain a focus area for us across the enterprise.

I'll turn back to a review of quarterly results on slide 14 with balance sheet and NIM. Net interest margin, excluding OID, was flat quarter-over-quarter at 2.72%, in line with our expectations. On the asset side, overall yield increased 12 basis points linked quarter and 45 basis points compared to the prior year.

Earning asset balances increased, driven by seasonally higher dealer floorplan balances and investment security purchases. Retail auto portfolio yields moved up 19 basis points quarter-over-quarter as new originations were above 7% again this quarter, while lower yielding vintages continued to pay down. This resulted in a full-year retail auto portfolio yield of 6.14%, an increase of 34 basis points year-over-year and on the upper end of our 6% to 6.2% expectation.

Commercial auto yields increased 15 basis points quarter-over-quarter, the third consecutive quarter with an increase of this magnitude as short-end rates continue to rise. Lease portfolio yields increased to 5.82% due in part to strong used car values that performed above expectations. We continue to embed a supply driven decline in used car values in our financial projections.

Moving to the right-hand side of the balance sheet, the ongoing optimization of our liability stack (ph) continued again this quarter. Retail deposits grew during the period, while the unsecured footprint declined. Over the past five quarters, over $5 billion of institutional unsecured debt has matured with a weighted average coupon of 4.5% and we have another $3.7 billion scheduled to mature through the end of 2020, carrying an average coupon of 5.3%.

Deposit details are on slide 15. Q4 was an exceptionally strong quarter for us, with customers and balance growing at record levels. In the top right, we ended the year with $106.2 billion in total deposits, driven by Q4 retail deposit growth of $4.5 billion. Average deposit balances also demonstrated consistent growth trends.

Customer retention rates remained solid at 96%, a testament to Ally's strong value proposition and the high brand loyalty of our customers.

In the bottom left, you can see that retail deposit rates increased 15 basis points linked quarter. This resulted in a cumulative portfolio beta of 35% since the beginning of the tightening cycle, in line with our medium-term expectations relative to Fed funds.

And over on the bottom right, you can see the steady growth of customers and balances we've experienced since 2016. Nearly 70% to 80% of our balanced growth comes from new customers and the remainder from existing customers. In total, these metrics demonstrate that our 1.6 million customers stay with us and consistently grow their balances over time.

Moving to capital on slide 16. Q4 CET1 was 9.1%. Keep in mind, elevated year-end floorplan balances drove higher RWA and we also had higher share repurchase activity in the quarter. Outstanding shares are now down 16.3% over the past two-and-a-half years since the inception of the buyback program at an average price of $23.39, well below tangible book value.

2018 total capital distributions of $1.2 billion were 26% higher than 2017. And we recently announced an increase to our dividend, the fourth increase since mid-2016.

Let's look at asset quality details on slide 17. Consolidated charge offs were 85 basis points, down 16 basis points year-over-year, as credit performance remain on solid footing across our portfolios. Consolidated provision expense was $266 million in Q4, down from $294 million in the prior year. Retail auto coverage remained flat quarter-over-quarter at 1.49%, reflecting a stable credit performance and consistent underwriting practices we've executed over the past few years.

Compared to the prior year, reserve levels normalized as a result of hurricane-specific reserve activity. Retail auto net charge-offs in the bottom left declined 26 basis points year-over-year, continuing the trend of lower year-over-year quarterly loss rates.

Looking at delinquency trends in the bottom right, 60-plus and 30-plus delinquencies increased year-over-year. As we've previously discussed, the increase in 30-plus delinquency rate is mainly due to the increased used origination volume in 2018. And while 60-plus delinquencies are higher year-over-year, the drivers are related to the increased use of collection strategies we've put in place mid-year that resulted in slightly higher delinquencies, but measurable improved flow to loss (ph) trends. Delinquencies remain in line with our expectations and are consistent with being on the low end of our 1.4% to 1.6% net charge-off range.

On slide 18, auto finance pre-tax income of $335 million was down $48 million versus prior quarter and increased $50 million versus the prior-year period. Retail net financing revenue grew and provision expense declined year-over-year, more than offsetting $15 million lower net lease revenue.

Used car values have remained strong, exceeding our expectations and driving higher gains per vehicle in Q4. Compared to Q3, lower pre-tax income was driven by seasonally higher net charge-offs in a prior-quarter loan sale gain that did not repeat, offset by higher net financing revenue.

In the bottom right, you can see the meaningful progress we've made over the past two years expanding the retail auto portfolio yield, while maintaining stable to improving losses, driving improved risk-adjusted spreads in auto.

Let's turn to slide 19 to review origination and balance trends. In the top left, originations were $8.2 billion in Q4, bringing full-year 2018 to $35.4 billion with improved risk-adjusted return. Growth in used volume during the quarter accounted for 47% and 52% of originations, highlighting our continued diversification and optimization momentum.

In the upper right, our non-prime volume was consistent at 10%. In the bottom left, consumer assets grew $2.1 billion year-over-year to $78.9 billion, where retail auto increases more than offset leased portfolio decline.

And looking at commercial assets, average balances increased quarter-over-quarter to $36.6 billion due to seasonally elevated inventory levels and higher vehicle value.

Let's turn to insurance segment results on slide 20. Core pre-tax income of $78 million this quarter increased $30 million linked quarter and was down slightly from the prior year. The year-over-year variance was driven by marginally lower investment income.

Written premiums of $298 million during Q4 increased $33 million versus the prior year. We've seen increased volume every quarter throughout 2018. This trend has been fueled by strong vehicle service contract volumes and increased rates on dealer inventory products.

The insurance business continues to deliver steady results for us and is well positioned with our national Ally Premier Protection product and progress in our growth channel.

Turning to slide 21, we have our corporate finance segment results. Core pre-tax income of $25 million in Q4 was down on a linked and prior-year basis. The decline was driven by non-recurring fee incomes and lower investment gains in prior periods. This was partially offset by higher net financing revenue as new origination activity drove higher asset levels.Ending HFI asset levels grew over $200 million during the quarter.

Competition was intense throughout 2018 in this space, but we remain focused on prioritizing credit and risk-adjusted returns in our originations. We have experienced teams, a highly diversified portfolio, and deal structures that are well-aligned with our risk appetite. Corporate finance provides attractive returns and we are constructive on the opportunity this business provides us going forward.

Looking at mortgage on slide 22, pre-tax income of $15 million this quarter was up $7 million linked quarter and up $13 million from the prior year. Net financing revenue increased as asset levels grew, primarily in bulk mortgage purchase activity and direct-to-consumer volume. Growth in these products drove non-interest expense.

Let me wrap up on slide 23 with our full-year expectations for 2019. We are replacing the medium-term outlook we provided early last year as we're entering into the latter part of the original time frame. Combined with actual performance through year-end 2018, we've achieved or remained consistent with each metric in the medium term guidance, including an EPS CAGR that will be at or above 18%, improved core ROTCE in the 13% range and ongoing efforts to drive an improved efficiency ratio through positive operating leverage.

Building upon our momentum, we expect to see continued expansion of EPS and ROTCE in 2019. Steady top line revenue growth of 4% to 6% will be fueled by ongoing execution in our business lines, including the ongoing optimization within our auto portfolio, the structural benefits associated with growing deposits which allows us to roll down high cost unsecured debt and measured growth in capital-efficient assets.

We remain focused on disciplined expense management and driving improvement in our efficiency ratio in 2019 and beyond. You've heard us talk repeatedly about generating positive operating leverage in our new product offerings over time, and we have seen positive trends and revenue momentum throughout 2018 that we expect to continue in 2019. As J.B. mentioned earlier, we continue to see increased multi-product customer levels providing a future growth platform.

Looking at retail auto net charge-offs, we expect to be on the low end of our stated 1.4% to 1.6% net charge-off range, driven by our consistent underwriting trends in a healthy consumer backdrop.

I close by saying Q4 continued a trend of improved financial performance across 2018 in the past several years. We generated record EPS, ROTCE, deposit levels and auto applications in 2018. We expanded risk-adjusted returns, while investing in our businesses and future growth prospects.

Asset quality was excellent and our balance sheet remained strong and well-positioned. Capital returns to our shareholders increased to their highest levels as we opportunistically repurchase shares.

Looking into 2019, we expect to continue our strong trajectory as we focus on executing for our customers and delivering long-term value for shareholders. And with that, I'll turn it back to J.B.

Jeffrey Brown -- Chief Executive Officer

Thanks, Jenn. It has certainly been terrific progress in results during your first year in the CFO chair.

On slide number 24, I'll walk through our strategic priorities for 2019, which represents the how in achieving the financial outlook Jenn just covered. This year, we'll continue to build upon the momentum we have established as our strategic efforts are now in full swing.

We are a comprehensive (technical difficulty) commercial finance provider with dominant franchises well-positioned for the long term. Across the financial services landscape, it's clear that secular trends are increasingly migrating to digitally based products and services. Consumers expect simplicity and transparency and -- more than ever -- a focus on convenience and strong customer service. These have been cornerstones to our approach from the beginning. The customer remains at the center of our do-it-right mentality.

2019 will be our 100th year in auto and the 10th year since Ally Bank was launched -- milestones that reflect our deep industry experience, the resiliency of franchises and true ability to take advantage of market opportunities.

Within auto finance and insurance, we'll continue optimizing risk-adjusted returns, while maintaining a strong focus on credit discipline and future growth opportunities.

On the deposit side, and within our digital product offerings, you should expect that we will continue to focus on customer growth and improvements in operating leverage, and we'll continue to be efficient in our capital deployment.

Our culture is critical to our long-term success and I'm particularly proud of what my teammates have accomplished across the company in 2018 and over the past several years. We'll keep our relentless focus on our customers, communities and shareholders as we move forward from here.

So, as we've entered 2019, I thought I'd share five simplistic reasons why Ally should have your support. One, we excel at managing credit. It's a key core competency established over the past 100 years and over a variety of economic environments.

Two, we're adaptable. We've proven we thrive when a challenge comes our way. This adaptability has led to extraordinary and resilient franchises inside of Ally.

Number three, we take care of our customers -- new ones and existing ones. We don't take the strong retention levels in brand awareness lightly. This is deeply embedded in our beliefs.

Four, we're using and investing in technology to our advantage. We see our digital strategy and capabilities as a critical component of our competitive strength and market position.

And number five, financially, we're poised to continue a very positive trend.

This is a credible team. We deliver what we say we will deliver and we have 8,000 teammates focused on continuous advancement and improvement. We will continue to win by keeping our heads down and executing the plan.

I am very proud and honored to lead our great company, especially as we embark on the next 100 years.

Thank you. And I think we can now, Daniel, head to Q&A.

Daniel Eller -- Executive Director of Investor Relations

Yeah. Thanks, J.B. So, as we enter Q&A, we ask that participants limit yourself to one question and one follow-up. IR will be here afterwards if you want to reach out with further questions. So, operator, with that, let's begin the Q&A.

Questions and Answers:

Operator

Thank you. (Operator Instructions) And our first question comes from Rick Shane from JPMorgan. Your line is open.

Richard B. Shane -- JPMorgan -- Analyst

Hey, guys. Thanks for taking my questions this morning. When we go back and look at the slide on the unsecured maturities, the 19 maturities are actually relatively low cost, but you have 7.5s and 8s maturing in 2020. Is there any opportunity to call those sooner and take advantage of the arbitrage between the deposit costs and refinancing those notes?

Jennifer LaClair -- Chief Financial Officer

Rick, good morning and thank you for the question. Certainly, we look at liability management all the time. It's part of our routine elco (ph) process. And appreciate your perspective here. As we look at other options to generate returns, it's definitely on the list, where our stock is trading today at a discount to book value. We've been leaning heavily into share repurchases. Certainly, you saw that in Q3 when we increased our share repurchase about 3% and 16% since the inception of our buyback program. We just -- we really like the returns we're seeing from buybacks.

Now, we'll continue to look at liability management. And as you mentioned, through 2020, we've got about $3.7 billion coming due at a coupon over 5%. And with our very strong deposit performance exiting 2018 and entering 2019, we'll continue to accrete that value over time .

Richard B. Shane -- JPMorgan -- Analyst

Got it, OK. And then, just one follow-up question related to deposits. When we compare your deposit costs on sort of the digital banking model versus the brokered model followed by other consumer finance companies, it appears that there is about a 30-basis-point advantage in terms of deposit costs. When you think about the operating and marketing expenses associated with operating that digital bank, does that actually net out to a positive return?

Jennifer LaClair -- Chief Financial Officer

Yes. We are very conservative and prudent in terms of how we deploy our branding expense. We did have a promotion in Q4. I think we've garnered multiples of what we were expecting in terms of balance sheet growth, and we're seeing strong retention on that investment as we've come into Q1 .So I'd say net-net, our strategy around deposits has been largely to lag some of the leaders in this space and to be prudent with our expenses around branding and I think we're well positioned and certainly, we feel very good about the trade-off between total cost to deposits in the volume we've brought in 2018 and heading into 2019.

Richard B. Shane -- JPMorgan -- Analyst

Jenn, thank you so much.

Jennifer LaClair -- Chief Financial Officer

Thank you so much Rick.

Operator

Thank you. Our next question comes from Arren Cyganovich from Citi. Your line is open.

Arren Cyganovich -- Citigroup -- Analyst

Thanks. On retail auto, just curious what your outlook would be for 2019. You had moderate growth in 2018. And just curious as to how you're seeing the momentum into next year?

Jennifer LaClair -- Chief Financial Officer

Yes, sure. Good morning, Arren. Our strategy in auto is really not to chase volume, but to focus on risk-adjusted returns. And, certainly, here in 2018, we originated $35.4 billion, which is spot on with where we were targeting kind of to bring in volumes. And we're very pleased with new origination yields coming on at over 700 basis point, which is up over 80 basis points on a year-over-year basis. So, very pleased with performance during 2018.

As we look ahead into 2019, still seeing a lot of opportunities to continue to have success with this strategy. Used continues to be a very strong strategy for us. We've picked up from 45% of our mix used in 2017, up over 52% in 2018, and we'll plan to continue to focus on used and, certainly, focus on the growth channel. So, seeing a lot of opportunities there as we head into '19 and no change in our strategy.

And, certainly, you couple that with stable credit, we've been originating consistent mix of credit over the last couple of years and we feel really good about the positioning both on volume and quality heading into 2019.

Arren Cyganovich -- Citigroup -- Analyst

Thanks. And, I guess, just following up on your last comment on credit, you guided to the low end of the 1.4% to 1.6% in retail auto. What gives you the confidence there? I would think that the outlook for used car prices might be a little bit more negative than it has been recently.

Jennifer LaClair -- Chief Financial Officer

Yes, sure. And, certainly, we've been guiding toward deteriorating used car prices for some time now. In 2018, it outperformed. I think spot, we're up about 4%; average up about 1% in used vehicle prices. We've been anticipating that to trend downwards, supply driven versus demand driven. And that is incorporated into our guidance around hitting that low 1.4% to 1.6% range. So, we agree with you and we have thoughtfully considered that as part of our guidance heading into '19 .

Now, you have to couple that with a lot of dynamics around the health of the consumer. J.B. mentioned still performing, very strong credits. Rounding out the fourth quarter, it was exceptionally strong. And net charge-offs down 26 basis points year-over-year and we're seeing some strong trends as we head into 2019 as well.

Jeffrey Brown -- Chief Executive Officer

Arren, I only think I may add (ph) -- just spent time with a lot of auto dealers last week, is they are seeing pressure, just how expensive new car prices have become and you've seen the OEMs pull back to some degree on incentives that are out there. So, part of that factors into us thinking the used car market is going to hold up. As Jenn alluded to, we continue to model for about a 4% or 5% decline in prices, but our outlook right now is used is going to continue to have pretty strong demand just given how expensive new car prices have become.

Arren Cyganovich -- Citigroup -- Analyst

Great, thank you.

Jeffrey Brown -- Chief Executive Officer

Thanks.

Jennifer LaClair -- Chief Financial Officer

Thank you.

Operator

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

Christopher Roy Donat -- Sandler O'Neill -- Analyst

Good morning. And thanks for taking my questions. Jenn, I wanted to ask one on deposit pricing as it looks like the Fed might not be likely to raise rates here. But I'm just wondering what's sort of embedded in your guidance as far as what you do with deposits. Should we expect kind of no change from here or does it really depend on what's going on in the competitive landscape? Or if you're able to generate solid yields off loans, does that also affect how you think about deposits? Just trying to get what factors are in play.

Jennifer LaClair -- Chief Financial Officer

Yes. Good morning, Chris. And I think you nailed it. Essentially, we don't have any additional rate hikes built into our forecast at this time. And assuming a pause from the Fed, we would expect to see some easing on deposit pricing coming into 2019. Now, you've got to take that in the context of the competitive landscape. We still have a desire to grow balances and we've got a lot of liability management and optimization opportunities that are unique to Ally. So, we're going to continue to lean in on deposits. We're expecting that there'll be some easing on pricing, but it's going to largely depend on the competitive landscape.

Now, certainly, we manage beta on both sides of the balance sheet. So, love where you headed with the yield question. We have our portfolio -- our retail auto portfolio is at 6.14%. We put on new origination yields over 7%. So, as you think about the natural tailwind, even if we don't get any incremental rate increases, we'll have a natural 40 to 50 basis point increase per year in the next couple of years on the retail auto side. So, all of those dynamics, we feel play out favorably for us as we head into 2019.

Christopher Roy Donat -- Sandler O'Neill -- Analyst

Okay. Just for benchmarking where you're putting on new loans, should we think about like using -- like looking two to three years out on the yield curve to -- as where you're typically targeting your pricing. So, it looks like average yields were kind of flat in the fourth quarter versus the third quarter, but they were exiting -- exited the fourth quarter down a bit. I just wonder if that puts downward pressure on that 7% number or not.

Jennifer LaClair -- Chief Financial Officer

Yes. So, you're exactly right. It's the two to three-year price point on the curve. And you can't really look at any quarter because there is seasonal mix changes. I would just look at it, full year, we've put on about 80 plus basis points of price. As we head into next year, even if we don't have any incremental uptick on the yield curve, we'd still expect to add in about 40 basis points of pricing.

Christopher Roy Donat -- Sandler O'Neill -- Analyst

Okay, awesome. Thank you.

Jennifer LaClair -- Chief Financial Officer

You're welcome.

Operator

Thank you. Our next question comes from Moshe Orenbuch from Credit Suisse. Your line is open.

Moshe Ari Orenbuch -- Credit Suisse -- Analyst

Great. Maybe just to expand on that a little bit, when you think about how you're pricing, is it off the captives, is it off banks when you're thinking about the yield? Like, where's the biggest -- who is the biggest driver of the competitive dynamic for the yield pricing?

Jennifer LaClair -- Chief Financial Officer

Good morning, Moshe. Appreciate the question. We are pricing based on a lot of different dynamics. First and foremost, it's the credit profile of our borrowers. Second, we look for opportunities across all sorts products and across the full spectrum. And so, you'll see, we typically lean into the belly of the curve. We're not overly exposed to super-prime and subprime is running around 10%, 11% right now. So, we feel very comfortable with where we're positioned.

Certainly, the OEMs and captives have leaned in heavily on the super-prime space. Seeing credit unions in there as well. We're not overly exposed to that part of the curve. So, we feel good about our positioning. Now, we continue to see opportunities in used. Continue to see opportunities in the growth channel and that's where we'll continue to focus in 2019.

Now, our overall pricing and credit management is really, as we've talked about several times, focused on risk-adjusted returns. And certainly, you see that in our performance this year with the portfolio yield up 34 basis points and charge-offs coming down 15 basis points. So, we'll continue to focus on risk-adjusted returns above all else.

Moshe Ari Orenbuch -- Credit Suisse -- Analyst

On the other side of the balance sheet, we just heard from one of the other large online banks that they're spending a lot of money to kind of relaunch their brand. Kind of how do you think about that? Obviously, your efficiency is going to be significantly better than theirs. But kind of how do you think about that in terms of the -- any changes that you see in the competitive environment in 2019?

Jennifer LaClair -- Chief Financial Officer

Yes. It's very competitive. And as a result of that, we've continued to lean in on our core competencies around brand and technology. That's nothing new for us. It's really a continuation of where we've been focused over the last couple of years. I think we're really pleased with the efficiencies that we've seen in our marketing spend. We'll continue to focus on refining that. Obviously, we watch every dollar and we're prudently investing not only in brand and technology, but in our core businesses and in the new businesses that we see.

Moshe Ari Orenbuch -- Credit Suisse -- Analyst

Okay, thanks.

Jennifer LaClair -- Chief Financial Officer

Net-net, we feel good about where we are in terms of our investments.

Operator

Thank you. Our next question comes from Don Fandetti from Wells Fargo. Your line is open.

Donald Fandetti -- Wells Fargo -- Analyst

Jeff, I'm curious if you could provide us your latest thoughts on how digital is impacting the dealership business, auto sales in general? And then, how do you think you're positioned? I know you have this interesting Carvana relationship. Maybe you could provide us the latest on that. What kind of growth that's providing and how you sort of compete with alternative bank or banks that might come in for that type of business as well?

Jeffrey Brown -- Chief Executive Officer

Sure. So, thanks for the question, Don. So, I'd start by saying the indirect channel is still really the dominant channel of how consumers access loans. So, the vast majority is still through the dealer. Having said that, dealers have dramatically invested in their own technologies and infrastructures to make the process for consumers more efficient. So, dealers are evolving, getting more user-friendly, more friendly websites, offering potential for financing through their websites. But still the reality is, I think it's 94%, 95% of all auto loans are sourced through the indirect channels. So, part of our strategy has helped the dealers to understand capabilities that are out there, who is being more efficient than others, and so helping the dealers really evolved into a more user-friendly environment, and I think that will remain a key part of our strength.

But one of the stats, and I think it's the first time we've shared it, is within our growth channel, which is obviously representing more than 50% of the originations we're putting out right now, about a third or a little over a third within that growth channel is coming from what we call our specialty indirect providers. And those would be names like Carvana, CarMax, DriveTime, our CSG group as well. And so, we are well-positioned there. We're mindful that trends may accelerate in that space today. And it's part of the reason we've established relationships with a number of those names. So, hopefully, that covers more or less, Don, what you were after.

Donald Fandetti -- Wells Fargo -- Analyst

Yes. So, just to clarify, of your growth channel, a third or higher of the growth is coming from the sort of specialty like Carvana. That's a pretty material percentage.

Jeffrey Brown -- Chief Executive Officer

Exactly. And that's part of -- Jenn and I both try to stress some of the adaptability of the franchise. There's been a number of points really. It's been four years remain in the CEO chair, and I've been here 10 years, and I can count on multiple hands the number of times people thought the demise of our auto finance business. But part of our strategy is, every single day, continue to adapt, continue to be mindful of the future, be mindful of trends. And so, that was a core component of our theme today, really, how we've adapted our business model to changing macro conditions and changing environment conditions and competitive conditions.

Donald Fandetti -- Wells Fargo -- Analyst

And just a follow-up, are the risk-adjusted returns on that type of origination just as good, I would think, by default? Maybe a little bit lower just because maybe you have to share some economics or something of that nature?

Jennifer LaClair -- Chief Financial Officer

Yes. It's a good question. No, we don't change our risk-adjusted returns expectations across any channel. We're very consistent on how we originate. And we've got retail forward flows with Carvana and all of our partners and the risk-adjusted returns look favorable there. Now, they get the benefit of our balance sheet and we get the benefit of the increased flows. So, the relations have worked out really well. But we don't adjust any of our return expectations across our different distribution channels.

Donald Fandetti -- Wells Fargo -- Analyst

Thank you.

Jennifer LaClair -- Chief Financial Officer

Thank you.

Operator

Thank you. Our next question comes from Sanjay Sakhrani from KBW. Your line is open.

Sanjay Sakhrani -- Keefe, Bruyette & Woods, Inc. -- Analyst

Thanks. Good morning and good results. With the risk-adjusted yields improving steadily, I assume there's not been a whole lot of change from a competitive standpoint. I guess, have you guys seen any changes because it seems it's been in quite a favorable -- you guys have been in a favorable situation for some time now. And then, secondly, that improvement in the risk-adjusted yield, how much of it has been driven by mix to used versus new?

Jeffrey Brown -- Chief Executive Officer

Yes. Sanjay, good morning. Thanks for the questions. I'll take part one. Jenn can take part two. I think with respect to the competitive environment, I'd say, overall, it's pretty stable. We haven't seen any meaningful shifts other than the ones we talked about earlier this year. There was one large player that migrated more out of the used space. But for the most part, the past six months, it's been stable and pretty rational. It's still very competitive. I don't want to imply that competition is decreasing. it's still a very competitive market. But I think we've all found niches where we all can play successfully there. So, competitive. It's still pretty rational. And then, Jenn, with --

Jennifer LaClair -- Chief Financial Officer

Yes, sure. Yes. Good morning, Sanjay. As we look at our expansion in risk-adjusted returns, there are kind of three main drivers there. One is just our ability to continue to originate at high volumes at the prices that we have been, which have largely, at this point, passed on 100% of the rate increase -- a little over 100% of the rate increases to date. So, that is the leading driver in terms of the expansion on the yield side. And then, you couple that with our ability to originate at very consistent credit quality, those are really the two main drivers.

And then, to your question, to a lesser extent, it's around the mix of used versus new. It is a driver, but it's a much smaller driver compared to the other two.

Sanjay Sakhrani -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay. And my follow-up question on sort of the residual gains, obviously, they've trended quite high over the past couple of quarters. I'm just curious where you guys see 2019 shaking out because it seems to be at pretty high level?

Jennifer LaClair -- Chief Financial Officer

Yes, sure. We've been anticipating sort of a supply driven decline in used vehicle values. And if you look at off-lease vehicles in 2019, it spikes up to its highest level. I think there's about $4 million vehicles coming off-lease. And as a result of that, all else being equal, we'd expect used vehicle values to drive about 3% to 5%. That's what we've modeled into our forecast for 2019. Now, there's other dynamics at play there. Obviously, health of the consumer, gas prices. So, that's not the only dynamic. And, certainly, we outperformed that here in 2018.

Sanjay Sakhrani -- Keefe, Bruyette & Woods, Inc. -- Analyst

Okay , great. Thank you.

Jennifer LaClair -- Chief Financial Officer

Thank you, Sanjay.

Operator

Thank you. Our next question comes from Eric Wasserstrom from UBS. Your line is open.

Eric Wasserstrom -- UBS -- Analyst

Thanks. Just to follow-up on a few of the questions that have been asked about pricing, and I realize that there has been many. But, Jenn, could you just specify, you've alluded to it in a couple of ways, but how did the marginal price change from third quarter to fourth? Can you just clarify that for me?

Jennifer LaClair -- Chief Financial Officer

Yes. So, coming into fourth quarter, our origination yield was about 7.33%. And I believe that ticked down just a little bit from third quarter, and that's largely just a reflection of the mix. We tend to move into more of a new vehicle market in the fourth quarter. As we go into 2019, we'll have some seasonality around originations just depending on mix as well. But, net-net, that 7.07% origination yield is up 80 basis points -- 80-plus basis points compared to 2016. And so, if you kind of look at our book that reprices every two to two-and-a-half years, you'd expect our portfolio to continue to trend up from 6.14% to over 7% over the next two years. We'll continue to see that origination yield go up.

Eric Wasserstrom -- UBS -- Analyst

And, J.B., just to follow-up on Sanjay's question for a moment, I think the one large player that you're referring to, I think, recently indicated that it's now their intent to come back into used in a greater way. And I think, historically, they were the number one provider of financing and it's still a highly fractionated market. But can you just maybe relate that expectation maybe to how it's influencing your thoughts on used pricing, if at all?

Jeffrey Brown -- Chief Executive Officer

Yes. Really not influencing yet today and we're really -- the reality is, we're not seeing it or feeling it. Obviously, we've heard those comments as well. But within the market and within the dealer force, we're just -- we're not seeing any real change right now. And, obviously, the results and trends show. We're still getting a nice portion of years. But as you point out, it's a large market, you know, couple of times, multiple of the new car market is very fragmented. So there is opportunity for everyone to play, but I think we've really emerged in the dealer body as a strong partner and book and used volumes.

Eric Wasserstrom -- UBS -- Analyst

Thanks very much.

Jeffrey Brown -- Chief Executive Officer

Thank you.

Operator

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

Betsy Graseck -- Morgan Stanley -- Analyst

Hi. Good morning.

Jennifer LaClair -- Chief Financial Officer

Good morning, Betsy.

Betsy Graseck -- Morgan Stanley -- Analyst

I just had a question on the interplay for expectations for balance sheet growth, increasing capital return and the CET1 ratio. I'm just wondering if there's -- if you could give us some sense as to where you're thinking you're flexing all those things. And is there any change in where you think the CET1 could go on a normalized basis?

Jennifer LaClair -- Chief Financial Officer

Yes, sure. So, first, on balance sheet, we're going to continue to grow our asset base and we've got opportunities across all of our portfolios. You look at auto, we will continue to find opportunities there at the right risk-adjusted returns. Certainly, we've been leaning in. In corporate finance, the portfolio is about $4.6 billion. We'll continue to look for opportunities to grow that business. And then, we've talked a lot about our capital efficient assets. We've been leaning in to our securities portfolio. We think we're a bit under invested there and we're about 17% of our portfolio in securities. We plan to grow that to about 20%. And then, certainly, seeing opportunities in mortgage. Mortgage, we've been growing via bulk. We see DTC really taking off and we're getting the right operating model in place around mortgage. So, we'll continue to lean in there as well. So, we're anticipating kind of mid-single digit total asset growth coming into 2019.

Now, on capital returns, certainly, that's been a key focus of ours. We've increased our distribution to shareholders in '18, about 26% year-over-year. Certainly, we're mindful as we go throughout 2019, there are a lot of dynamics around the regulatory environment, CECL. And so, we'll be mindful of that.

Now, on the CET1 ratio, we did get down a bit this quarter. We had about 9.1%. Some of that was just because of seasonal impact from floorplan on the commercial auto side. We do see that moderating coming into the first quarter here. So, we're running about historic levels here in terms of our total CET1 ratio now.

Now, as we go forward, we feel very good about our ability to continue to generate earnings organically. I think we'll be well-positioned as we see the different dynamics around CECL and the regulatory environment play out.

Betsy Graseck -- Morgan Stanley -- Analyst

But do you feel like the 9% CET1 kind of -- I don't know if target is the right word, but level is appropriate given all the rules and regs that changed for a bank your size? Do you think that you would ever bring that down? And maybe you could talk through a little bit how you see CECL playing out because there has been some mixed messages from regulators. It's not in their stress test on a go-forward basis, but maybe the one-time charges. So, just let us understand how you're thinking about that. Thanks.

Jennifer LaClair -- Chief Financial Officer

First of all, we feel very good about the 9% CET1 ratio. If you look at our portfolio, and we included a slide in the earnings presentation today, we have an almost fully secured balance sheet. We've done, I think, an exceptional job managing the risk and understanding the risk in our portfolios. And I'd say, point one, we feel really good about the 9%.

Now, there's a lot of play in terms of the regulatory environment, potentially some relief from a capital perspective as we look at the SCB (ph), some of the enhanced prudential standards. We'll continue to learn more as we go throughout this year. But all else being equal, we feel very good about the 9% CET1 target ratio.

Betsy Graseck -- Morgan Stanley -- Analyst

Would you bring that down? When you say very good, I'm wondering like maybe it's too high. Is that kind of the message that you're sending? Or --?

Jennifer LaClair -- Chief Financial Officer

Yes. I don't think -- I think from the current constructs that we're operating in today, the 9% is the ratio that we feel very good about. Now, I think as we get more detail around CECL, the enhanced prudential standards and, specifically, the SCB (ph), there could be some changes to that. And we will keep communicating as we know more throughout 2019 on it.

Betsy Graseck -- Morgan Stanley -- Analyst

Okay. Thank you. Appreciate that.

Jeffrey Brown -- Chief Executive Officer

Thanks, Betsy.

Jennifer LaClair -- Chief Financial Officer

Thank you. Appreciate that.

Operator

Thank you. And that does conclude our question-and-answer session for today's conference. I'd now like to turn the call back over to Daniel Eller for any closing remarks.

Daniel Eller -- Executive Director of Investor Relations

Yes. Thank you, everyone, for joining us this morning. And, as always, feel free to reach out to investor relations with any additional follow-ups.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect . Everyone, have a wonderful day.

Duration: 66 minutes

Call participants:

Daniel Eller -- Executive Director of Investor Relations

Jeffrey Brown -- Chief Executive Officer

Jennifer LaClair -- Chief Financial Officer

Richard B. Shane -- JPMorgan -- Analyst

Arren Cyganovich -- Citigroup -- Analyst

Christopher Roy Donat -- Sandler O'Neill -- Analyst

Moshe Ari Orenbuch -- Credit Suisse -- Analyst

Donald Fandetti -- Wells Fargo -- Analyst

Sanjay Sakhrani -- Keefe, Bruyette & Woods, Inc. -- Analyst

Eric Wasserstrom -- UBS -- Analyst

Betsy Graseck -- Morgan Stanley -- Analyst

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