Ally Financial (ALLY) Q4 2019 Earnings Call Transcript

Ally Financial (ALLY 0.13%)
Q4 2019 Earnings Call
Jan 22, 2020, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Ally Financial fourth-quarter earnings conference call. [Operator instructions] I would now like to hand the conference over to your speaker today, Daniel Eller, head of investor relations. Thank you. Please go ahead, sir.

Daniel Eller -- Head of Investor Relations

Thank you, operator. We appreciate everyone joining us to review Ally Financial's fourth-quarter and full-year 2019 results this morning. You can find the presentation we'll reference about the call on the investor relations section of our website at ally.com. I'll direct your attention to Slide 2 of the presentation, where we have our forward-looking statements and risk factors.

Contents of today's calls will be governed by this language. On Slides 3 and 4, we've included some of our GAAP and non-GAAP or core measures. These and other core measures are used by management, we believe they are useful to investors in assessing the company's operating performance and capital results. Please keep in mind, these are supplemental to and not a substitute for U.S.

GAAP measures. Supplemental slides at the end include full definitions and reconciliations. This morning, we have our CEO, Jeff Brown; and our CFO, Jenn LaClair on the call to review our results and take your questions following the prepared remarks. With that, I'll turn the call over to J.B.

J. B. Brown -- Chief Executive Officer

Thank you, Daniel. Good morning, everyone, and thank you for joining our call. I want to start by saying how proud I am of our results this year. 2019 reinforced the strength and adaptability of our businesses.

That's powered by thousands of Ally teammates who drove operating and financial performance to new levels and increased value for our shareholders. This marks the fifth consecutive year since becoming publicly traded, that we're able to say, we've achieved the highest results or returns across several of our financial and operating metrics. The consistent ability to drive improvement and deliver on our goals is centered around our relentless customer focus. Looking closer at some of our highlights for the year.

Adjusted EPS was $3.72 for 2019, a 12% increase year over year. Core ROTCE of 12% remains solid and within our expected range, even when considering the impact of lower rates on OCI. Total revenues exceeded $6.3 billion, a 5% increase versus the prior year. All of our businesses contributed to these solid results.

In auto, strong customer engagement across our broad product offerings, led to improved risk-adjusted returns. We originated 36.3 billion of loans and leases, a $900 million increase year over year. We increased volume despite slowing new vehicle industry sales. This was fueled by a record 12.6 million decisioned applications, reflecting our extensive reach across the market.

Retail auto yields expanded 46 basis points on our $72 billion portfolio, driven by originated yield improvement. Full-year originated yields exceeded 7.4%, while net charge-offs of 1.29% declined 4 basis points reinforcing our consistent approach to underwriting and ability to drive strong risk-adjusted returns. Our dealer base has expanded for 23 straight quarters, resulting in relationships with over 90% of U.S. franchise dealers.

Moving forward, our focus is to continue in strengthening and deepening relationships with our dealer partners. Our insurance division continued to enhance our dealer value proposition, evidenced by the 1.3 billion in written premiums we generated in 2019, a 12% increase year over year and the highest volume in over a decade. Turning to our deposit and consumer bank product offerings, we saw sustained progress throughout the year. Deposit balances ended at 120.8 billion for the year driven by retail deposit growth of 14.6 billion.

This represented 16% year-over-year growth, nearly three times the industry growth rate. We added another 322,000 deposit customers, ending at 1.97 million overall, a 20% increase versus 2018 in the highest annual growth in the company's history. Importantly, underlying trends continued, with millennials representing nearly 60% of new customers and the majority of incoming balances came to Ally from traditional banks. Our industry-leading retention reflects the combination of our award-winning digital experience, best-in-class customer service and consistently competitive rates.

Our deposit portfolio is now within the range of a core funding financial objective, representing an important milestone for us. This should not imply we take our foot off the gas with respect to deposit inflows. Deposits are essential core funding, customers are a terrific asset that we want to grow. We simply say this as a testament to how far we've come in scaling our deposit book.

Ally Home DTC originations of 2.7 billion during the year, represented an increase of four times year over year. The focus of our team and the growing partnership with Better.com drove our ability to deliver a meaningfully differentiated all-digital experience for our customers and positions us well as we head into 2020. Ally Invest self-directed accounts grew 15% year over year. Obviously, there have been a lot of changes in the market and players in this space over the past year.

We're focused on adapting to these conditions and the industry changes. We closed on the Health Credit services acquisition during the quarter and are rebranding this offering as Ally Lending. We acquired a portfolio of around 200 million and generated 67 million in new volume. We're encouraged by the early results and see strong potential in our ability to generate high-quality growth, incremental profits across our established and expanding consumer offerings.

Turning to corporate finance, held-for-investment loans of 5.7 billion grew 23% year over year. Asset expansion this quarter was a result of execution by experienced teams, including those related to new verticals launched in 2019. Our approach to credit and underwriting remains disciplined and consistent throughout the year. Keep in mind the strong track record of this portfolio over the past 10 years, averaging around 15 basis points of losses.

On capital management, we distributed 1.3 billion to shareholders through repurchases and dividends and 11% increase year over year. Our all-in yield exceeded 11%, placing Ally among the highest CCAR participating banks, and we just announced another uptick in the common dividend to begin in February. And during the quarter, S&P upgraded Ally's investment grade, the second major rating agency to do so in 2019, reflecting the overall strength and position of our company. This was an exceptional year for Ally.

Let's turn to Slide 6. We are pleased to close out the year by meeting or exceeding every metric we provided in our 2019 outlook in January of last year. We accomplished this against the backdrop of heightened interest rate volatility that weighed on the banking sector. Jenn will provide you with our summary 2020 outlook in a few moments, but in short, financial progress will accelerate in 2020, which reflects the embedded tailwinds that are unique to Ally and a continuation of strong operating trends across our businesses.

Let's move to Slide 7 to review our key metrics. In the upper left, adjusted EPS was $0.95 per share in the fourth quarter, an increase compared to the prior-year period. Adjusted total net revenue remained above 1.6 billion again this quarter. In the bottom left, deposits grew to $120.8 billion as tangible book value on the bottom right increased to $35.06 per share, a 17% increase year over year.

Across these metrics, you can see the ongoing trends of improved results and the intrinsic value that we continue to build. And with that, I'll hand it to Jenn to take you through the detailed financials.

Jenn LaClair -- Chief Financial Officer

Thank you, J.B., and good morning, everyone. In 2019, we delivered another year of sustained financial progress through operating discipline and consistent execution against our objectives. On Slide 8, 2019 adjusted EPS of $3.72 has more than doubled since 2014, representing a 17% CAGR over this time frame. Full-year core ROTCE of 12% increased 53% or 415 basis points over the past five years.

Excluding the impact from lower rates on OCI, ROTCE was modestly favorable to 2018. Our ongoing financial progress has resulted from momentum across all of our businesses, disciplined capital deployment and a healthy macroeconomic backdrop. Revenue trends are on Slide 9. We exceeded 6.3 billion in 2019 revenues, an increase of 1.35 billion or a 27% increase since 2014.

Over this time frame, we've averaged 5% annual revenue growth through three fundamental drivers. First, momentum across every business within auto and insurance, we've diversified and deepened our dealer relationships, increasing application flows and improving risk-adjusted returns. In mortgage, we established a growing pipeline of direct-to-consumer origination through a strong partnership with Better.com. And in corporate finance, we've continued to grow prudently by hiring experienced teams in new verticals.

Second, transformation of our funding profile. Since 2014, deposits have more than doubled to 120.8 billion, and now represent 75% of funding, a 30 percentage point increase, while unsecured debt with an average coupon of 6% has declined by over 12 billion. And third, dynamic and effective interest rate risk management. We've managed repricing dynamics across our balance sheet, resulting in predictable and stable net interest margin and net financing revenue growth every year.

The path we're on reinforces our ability to execute and solidifies our expectation to drive accelerated 2020 revenue and net interest margin expansion, a key differentiator for Ally. Moving to Slide 10. Let's look at earning asset trends. We ended 2019 with 172.7 billion in earning assets representing growth of 29.5 billion since 2014.

Risk-weighted assets have grown 14.4 billion, demonstrating capital-efficient expansion. We expect continued growth across our business lines, while investment security growth will be more tempered as we've neared our objective. Since 2014, retail auto lending has expanded by 14 billion, more than offsetting lease balance declines of 11 billion and a reduction of 675 million in lease net revenue. Our full spectrum lending capability, combined with a broader reach across the market without tied to one manufacturer product type has led to increased outflow, consistently strong volumes and attractive risk-adjusted returns.

Let's turn to Slide 11. Adjusted efficiency ratio for full-year 2019 was 47.4% and operating expenses were just over 3.4 billion. Insurance-related expenses, shown in the top portion of the chart, grew 6% year over year, reflecting elevated weather impacts in 2019 relative to historically low losses in 2018 and variable commission-based expense supporting ongoing written premium and revenue growth. All other expenses of 2.4 billion grew 4.6% year over year, reflecting a slowed pace relative to last year's level.

These trends are consistent with objectives we've provided centered around our core business growth and disciplined investments in technology and brand. Revenue growth will outpace expense growth again in 2020, driving further improvement to our adjusted efficiency ratio. Let's turn to Slide 12 to go through our detailed results. Net financing revenue, excluding OID for the fourth quarter of 1.164 billion declined on a linked-quarter basis in line with our expectations as we discussed on the call last quarter.

The decline was driven by several components we anticipated, including lower lease gains, reflecting seasonality and lower per unit gains on trucks and SUVs; lower commercial balances, reflecting a four-year low in industry inventory levels and including impacts from the strike; and the effect of lower benchmark rates, which resulted in increased premium amortization and impacted certain products with contractual resets. Despite these impacts, this result was our third highest quarterly NII results over the past five years. And more importantly, we are reiterating our expectation for 2020 that net financing revenue will exceed 5 billion, while net interest margin will expand by double digits. Revenue growth will be driven by many of the same drivers you've heard from us before, including the embedded benefits of rising retail auto portfolio yields and our improving funding profile.

Adjusted other revenue of 458 million increased 34 million quarter over quarter and 65 million year over year, driven by strong investment gains and growth in earned premiums within our insurance segment. We expect an ongoing quarterly trend for this line item in the 400 to 425 million range. Provision expense of 276 million increased 13 million quarter over quarter and 10 million year over year. Variance to the prior quarter reflected seasonally higher NCOs.

Credit performance was strong throughout 2019, and origination profiles remained consistent across credit attributes that we assess, including LTV, FICO, term, DTI and PTI. Noninterest expense increased 42 million quarter over quarter and 76 million compared to the prior year, driven primarily by volume-based activities, where full-year auto applications increased 9% year over year. Deposit accounts expanded 24% and written premium volume increased 12%, an ongoing investment in technology and brand. Ally ranks among the top five fastest-growing bank brands in the U.S., while our awareness scores are at the highest levels on record.

Also reflected in expenses in the quarter were HCS-related impacts. Moving to quarterly key metrics at the bottom. GAAP and adjusted EPS were $0.99 and $0.95 per share, core ROTCE of 11.2% and adjusted efficiency ratio was 49.4%, and our effective tax rate was 21.7%. Our normalized full-year tax rate of 22.8%, adjusted for the Q2 valuation allowance release, slightly favorable to our full year expected range of 23% to 24%.

Let's move to Slide 13. Net interest margin, excluding OID, of 2.66% declined 6 basis points quarter over quarter, driven primarily by lower lease gains. Full-year NIM of $2.68 was 2 basis points below prior year and in line with our outlook to remain relatively stable despite significant rate volatility. We continue to be relatively neutral to rates and feel confident about the strong interest rate risk profile of our balance sheet.

While we continue to prefer a steeper curve, we are not overly dependent on rates to improve our margin. Overall, asset yields decreased on a linked-quarter and prior-year basis, driven by seasonally lower lease gains and declining benchmarks impacting commercial auto, mortgage and investment security portfolio yields. These impacts were partly offset by the continued expansion of retail auto yields. We've shown the retail auto portfolio yield, excluding the hedge, a tool we use in our overall management of interest rate risk as the hedge impact was somewhat elevated linked quarter.

Importantly, we continue to expect the portfolio to migrate closer to new volume yields as we've generated seven consecutive quarters of new retail origination yields above 7%. Lease portfolio yield was 5.19% for the quarter. Full-year used car values declined approximately 1% year over year, outperforming our expectations and declined over 3% in Q4. We continue to embed a 5 to 6% used car value decline in our financial projections for 2020, reflecting supply dynamics.

Floorplan balances declined quarter over quarter and year over year, reflecting the reduced inventory levels I mentioned earlier. Turning to funding. Trends remained favorable, with cost of funds declining 11 basis points quarter over quarter as mix and pricing trends continue to improve across our products. Retail deposits grew 2.4 billion during the period, and we remain steadfast in our drive to increase value for our customers while being disciplined in our pricing approach.

Year over year, unsecured balances declined another 2.5 billion. On Slide 14, we'll cover some deposit highlights. In the upper right, total deposits ended at 120.8 billion, driven by retail growth, our 40th consecutive quarter where we generated double-digit percentage growth in our portfolio on a year-over-year basis. We achieved record deposit and customer growth this year, even as we reduced rates and competition increased, including higher-priced alternative offerings from established and emerging players.

Customer retention levels remained at an industry-leading 96%. Our customers continue to demonstrate strong loyalty to Ally, reflecting our overall value proposition and the long-term stability of the platform. In the bottom left, retail deposit rates declined 12 basis points linked quarter, reflecting pricing actions over the past several months as our mix remained consistent. And as J.B.

mentioned, we wished our objective to be 75% funded with deposits. This is a significant achievement and provides us with increased flexibility around our growth needs and pricing strategy. We will continue to balance margin opportunities with a relentless focus on delivering strong value for our customers. We were recently recognized as the best online bank by Money Magazine for the seventh time.

Maintaining our customers' trust and loyalty, will remain at the center of our strategy. On the bottom right, we added 322,000 new deposit customers during the year, a continuation of the record-setting trend we've seen over the past couple of years. Existing customers drove 35% of growth or 5.1 billion in 2019, the highest level we've observed, demonstrating the overall strength of the consumer and the desire of our customers to grow their relationships with us. Let's move to capital on Slide 15.

CET1 of 9.5% with stable linked quarter and year over year, reflecting earnings growth and our focused approach in managing risk-weighted assets. We continued repurchasing shares during the quarter, since mid-2016, we have reduced shares outstanding by 22.6%, and we've returned over 3.8 billion to shareholders through repurchases and dividends. Our approach to capital management remains unchanged as we practically assess growth opportunities, we continue to prioritize delivering unique customer value and maximizing long-term shareholder returns. On Slide 16, we have included a page on CECL perspective.

We expect to report a daily reserve increase of 106% or 1.3 billion at the low end of our expected range of 105 to 115%. This represents an estimated CET1 impact of 17 to 19 basis points. Given the expected increase in complexity and volatility associated with CECL, we're providing you with an early look at our disclosures. Beginning with our Q1 filing, we plan to attribute allowance impact from NCL activity in the portfolio, changes in growth or portfolio size and all other drivers, including portfolio mix and macroeconomic variable changes.

Our approach includes a one-year reasonable and supportable forecast, followed by a 24-month linear reversion to the mean. Variables we use, including unemployment, are based on historical data beginning from the Great Recession in January of 2008 through the current period. Our intention is to be balanced and transparent in our approach. And as we learn more this year, we will continue to augment and refine our disclosures.

Even as the transition to lifetime loss reserving represents a significant increase to our existing allowance and a new normal for reporting, we continue to reiterate the underlying risk profile of our balance sheet and lifetime loan profitability does not change. Let's turn to Slide 17 to review asset quality details. Consolidated net charge-offs were 91 basis points this quarter, increasing 6 basis points year over year. In the top right, consolidated provision expense was 276 million, an increase of 10 million compared to the prior year due to higher asset balances and modestly higher auto NCOs.

In the bottom left, the retail net charge-off rate increased 1 basis point year over year to 1.49%, reflecting consistent origination trends, strong used vehicle values and continued consumer strength. In Q1, we expect around 5 basis points in higher retail auto NCOs due to a system conversion that I'll discuss momentarily, though provision will not be impacted. 30-plus and 60-plus delinquencies in the bottom right increased year over year by 6 and 5 basis points, respectively, reflecting the increased mix of used and seasoning of our portfolio and servicing approaches that have consistently resulted in improved flow to loss trends. Activity and trends and credit performance remain fully aligned with our expectations.

On Slide 18, auto finance pre-tax income of 401 million declined 28 million linked quarter and increased 66 million compared to prior year. Net financing revenue growth was driven by retail auto asset growth and increasing portfolio yields. We decisioned nearly 2.9 million apps, a 7% year-over-year increase in our strongest fourth quarter ever. Moving forward, we will continue to focus on generating strong risk-adjusted returns through application volume growth and increased dealer penetration.

As I mentioned a moment ago, we deployed a new core consumer servicing and accounting platform in January. We converted 4.6 million customer contracts, the largest system conversion in our company's history. This modern platform is highly adaptable and scalable and fully integrates with our customer-facing and internal platforms. We have been planning for this transition for a while and the successful rollout positions us well for the future.

In the bottom right, you can see the progress we've made over the past several years, expanding retail auto portfolio yields, which will continue as the portfolio migrates closer to new origination yields, while losses have continued to stabilize or improve. Benchmark declines persisted through 2019, along with a heightened level of competition in auto. But through our expansive dealer network, we generated strong risk-adjusted returns and volume within our mid- 30 billion stated objective. Turning to Slide 19.

We originated 8.1 billion of consumer loans and leases in the quarter. Growth in used volume accounted for 44% and 49% of originations, 3 percentage points lower than prior-year periods as we saw strong increases in lease. From an underwriting perspective, our average FICO of 691 and non-prime volume of 12% in the quarter remained consistent. In the bottom left, consumer assets grew year over year to 81.1 billion as lease balances moved slightly higher and retail loans grew by 1.7 billion.

And on the bottom right, average commercial balances of 31.9 billion declined year over year and quarter over quarter as dealer inventories reflected industry and strike-related impacts. On Slide 20, insurance reported core pre-tax income of 86 million in the quarter, an increase of 20 million linked quarter and 7 million versus prior year. Earned revenue increased 16 million year over year, reflecting strong written premium trends over the past several quarters. Written premiums of 335 million in the period represented the highest Q4 since becoming a publicly traded company, driven by increased volume and rates across our product offerings.

Slide 21 has our corporate finance segment results. Core pre-tax income of 50 million was up 4 million linked quarter and 25 million year over year. Ending HFI asset levels grew 700 million during the quarter, while year-over-year assets increased by over 1 billion, with 90% of the growth in asset-based products. Credit performance remains strong and in line with our expectations.

We're very pleased with the highly diversified nature of this portfolio and the accretive returns it generates. On Slide 22, mortgage pre-tax income of 2 million was down versus prior quarter and prior-year periods, reflecting the impact of premium amortization as rates declined and prepayment activity increased and impacts from a prior quarter loan sale of 300 million that generated gains that did not repeat. We originated over 1 billion of direct-to-consumer loans, the first quarter to exceed this level and the fifth consecutive quarter of increased origination volume. 56% of originations were sourced from existing Ally customers, while 84% of originated volume was generated through our partnership with Better.com.

We remain very pleased with the all-digital platform and streamlined customer experience provided through this partnership, evidenced through our strong customer NPS, reduced cycle times and improving cost per loan. Let me wrap up on Slide 23 with our full-year 2020 expectations. We expect to build upon our momentum in 2020, driving increased EPS expansion and solid return on equity results. Keep in mind, this reflects a stable reserve under CECL.

Expansion in EPS and ROTCE will be driven by top line revenue growth of 6 to 9%, fueled by ongoing execution across our business lines and driving positive operating leverage. We remain focused on disciplined expense management and improved efficiency ratio demonstrated by our expectation to lower this metric by 50 to 150 basis points in 2020. Looking at retail auto net charge-offs, we expect to be on the low end of our stated 1.4% to 1.6% NCO range, driven by our consistent underwriting trends and a healthy consumer backdrop. In closing, we had a strong year with growth in pre-tax and pre-provision income, while we generated operating leverage gains.

This led to achieving our 2019 full-year financial objectives and positions us for accelerated improvement in 2020. And with that, I'll turn it back to J.B.

J. B. Brown -- Chief Executive Officer

Thanks, Jenn. On Slide 24, I'll spend a few minutes reviewing our strategic priorities for 2020. In 2020, we'll build upon the operating and financial momentum we've established. Our dominant auto and direct deposit franchises that have tremendous scale are well positioned to produce stable and improved results.

This reflects our multiyear efforts to position these businesses for long-term strength and ongoing growth. We see opportunities to expand the way we serve our growing customer base at Ally. We've made important investments in our capabilities over the past few years through enhancements to our existing products and the additions of new offerings. It's clear to us, as we look at consumer trends, that there is a rapid and growing desire for convenient financial products with excellent service levels, key characteristics of every Ally product offering.

The significant improvements we've driven over the past five years provides a strong foundation for our company. We constantly assess opportunities to deliver for our customers and drive value for our shareholders. Allocating investment resources through a consistent set of parameters, including differentiated customer value, accretive financial return profile and alignment with our overall strategy to maximize long-term value through disciplined capital deployment. It's through this lens that we've assessed expansion into Ally Home, Ally Invest, and most recently, Ally Lending, and it's with the same logic that Jenn and I discuss all the time that will guide us into the future.

Finally, Ally's culture remains critical to our success, and I am particularly proud of what I see every day in the way our associates operate. We've created a place where people enjoy working and are proud to say they're employed at Ally. We've altered our benefits and philosophies to make our employee value proposition even stronger. We've created one of the most passionate and inclusive environments for all of our teammates.

This leads to lower turnover, deeper pride and energy, well above industry average engagement scores and ultimately, a better company for all, and that's what you can see from our results. Our 8,700 teammates remain focused on continuous advancement and improvement, delivering for our customers and our shareholders. It's because of this, what I am confident in our ability to continue delivering in 2020 and beyond. Thank you.

And Daniel, we can now head into Q&A.

Daniel Eller -- Head of Investor Relations

Sure. Operator, please see up the Q&A.

Questions & Answers:

Operator

[Operator instructions] And our first question is from Ryan Nash from Goldman Sachs. Your line is now open.

Ryan Nash -- Goldman Sachs -- Analyst

Hey, good morning J.B. Good morning, Jenn.

J. B. Brown -- Chief Executive Officer

Good morning.

Jenn LaClair -- Chief Financial Officer

Good morning.

Ryan Nash -- Goldman Sachs -- Analyst

So J.B., thanks for all the color on the auto business. I wanted to start with the competitive environment. So you've been able to expand the auto yields almost 50 basis points throughout the year, given the shift toward used and the continued optimization of the portfolio. However, we've now heard others talking about competition increasing, particularly in parts of the market where you play, so just wanted to get a sense for what you're thinking competitively, and what you think this means for origination yields going forward? And then I have a follow-up.

J. B. Brown -- Chief Executive Officer

Sure. Sure. Thanks for the question, Ryan. So I mean, obviously, we've stayed in tune in the past couple of days with other key competitors in the space, kind of, in their commentary.

What I'd say is we're not really feeling it yet. It's still -- particularly in the bank space, a pretty rational environment now. So we're confident in continuing with the origination trends at similar levels you've seen from us over the past couple of years. Obviously, we've been pretty consistent in doing 9 billion-ish a quarter.

And I think in terms of pricing power, we still feel really good about where things stand. Obviously, for us, what maybe makes us a little more unique is just the scale we have within auto. The deep relationships we have and then obviously, the outreach for us. I mean, we're seeing a lot more application flow this year.

And this just gives us confidence in our ability to: a, book originations; and b, book them at the very attractive levels. So for us, not really feeling it yet, but obviously, mindful that it's a dynamic environment out there.

Ryan Nash -- Goldman Sachs -- Analyst

Got it. And then maybe a follow-up on credit. Thanks for the color on CECL, the impact will largely be driven by growth. You just talked about originations.

So how should we think about earning asset growth? And then second, given your credit outlook of the low end of the targeted range, what are you assuming in terms of used car prices going forward?

Jenn LaClair -- Chief Financial Officer

Sure, Ryan. So on your first question on earning asset growth. Look, as we go into 2020, we see opportunities to grow across all of our portfolios. We'll continue to find opportunities in retail auto and to J.B.'s comments, we're not seeing any slowdown there.

We outperformed our mid-$30 billion origination target and pricing continues to be robust. So we'll be growing in retail auto and opportunistic in that portfolio. Corporate finance grew over 23% over $1 billion this year. We'll continue to find opportunities in that portfolio.

And then some of our newer products, you see DTC mortgage ramping up really nicely this year. We're pretty close to that $3 billion target we set. We'll continue to look for opportunities in mortgage and then HCS is just getting off the ground, but good trends there so far. So I would think about 2020 growth along the same lines as 2019 growth.

We will be slowing down investment securities a bit. We kind of hit our funding, our target portfolio, mix target for security, so that will slow down a bit. But the loan categories will grow in line with 2019. And then on to credit, I mean, we've been guiding toward lower used car prices for some time now, 3 to 5% on a full-year basis, we did outperform that fourth quarter, we did see some softening.

It showed up in NII and in our NIM and we're projecting that to go down about 5 to 6% next year. And that's really what drives up our NCO rate to the low end of that 1.4 to 1.6% range.

Ryan Nash -- Goldman Sachs -- Analyst

Got it. Thanks for all the color.

Jenn LaClair -- Chief Financial Officer

Absolutely.

J. B. Brown -- Chief Executive Officer

Thanks, Ryan.

Operator

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

Moshe Orenbuch -- Credit Suisse -- Analyst

Great, thanks. And very impressive kind of growth on the deposit front, particularly given the moves you've made on pricing. Just curious if you could kind of talk a little bit about your views as to how that kind of goes into this year and next. Do you see that just the online space just continuing to take share? I mean, how will you be able to continue to do that?

Jenn LaClair -- Chief Financial Officer

Yeah, sure. Moshe, I appreciate the nice comments, and we agree. We're very pleased with the performance of our deposit business, and we don't see any signs of that slowing down. And in fact, you see the record volume and the record customer growth, and that's in spite of the increased competition, as well as taking rates down from kind of the peak OSA rate of 2 20 down to 1 60.

And so we'll continue to optimize really across our customer strategy. That's a very important part of our continued expansion to new products. We want to continue to grow our customers. We'll be mindful of the value we're providing but we're also going to be focused on margin and OSA.

I mentioned the decrease we've had that will roll forward into 2020 and create that nice double-digit NIM expansion I talked about. And then on CDs, CDs right now are about 2 50. They'll be rolling off around 1 80. So we'll see some nice margin lift on the CD front as well.

But you know, I'd say, overall, no change to our strategy. We continue to find opportunities to grow both deposits and customers. And it's a great place to be to have the margin expansion come with that.

Moshe Orenbuch -- Credit Suisse -- Analyst

Got it. And could you talk a little bit about the kind of evolution of Ally Lending and in terms of -- you had spent a lot of money during Q4, you had mentioned as part of that process of kind of getting them up and running. But how does that kind of get to a more, I guess, normal efficiency? And maybe what that means for the prospect of incremental acquisitions as you go forward?

Jenn LaClair -- Chief Financial Officer

Yeah, sure. And I'm not sure I would say a lot of money. It's a very, very small amount in terms of the expense increase. Yeah.

Just as a reminder, we really like this business. The market is about 130 billion. It's growing at almost 20%. And the variable risk-adjusted margin is kind of in that 9, 10% range.

ROA in the 3 to 4% range and ROTCE above 20%. So Moshe, our focus is really around ramping up growth in the portfolio, making sure we get the right marginal return profile. And over time, we're very confident that we'll see the total financial profile accelerate into 2020 and 2021.

Moshe Orenbuch -- Credit Suisse -- Analyst

Got it. Thanks so much.

Jenn LaClair -- Chief Financial Officer

Thank you, Moshe.

Operator

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

Betsy Graseck -- Morgan Stanley -- Analyst

Hi, good morning.

Jenn LaClair -- Chief Financial Officer

Hi, Betsy.

Betsy Graseck -- Morgan Stanley -- Analyst

I just wanted to dig in a little bit on the expense side, you indicated earlier that your systems conversion occurred in January. And when I look at the outlook for operating leverage this coming year in your guidance, obviously, better than what you've been generating over the past year was just solid, but you've got an acceleration ramp in there. So I just wanted to understand how much of that is coming from the systems conversion benefit that you should be getting this year? And then if you could speak to other levers that are driving that outlook?

Jenn LaClair -- Chief Financial Officer

Yeah, sure. And Betsy, I think you captured it nicely. I mean we are focused on positive operating leverage. That is what we delivered here in 2019.

That is, again, our focus in 2020. And you see that in our efficiency ratio guidance coming down 50 to 150 basis points. In terms of the overall expense story for Q4, really, for full-year 2019 and into 2020. It's all the same themes that we've been talking about.

It's variable cost attached to growing our businesses. Q4, we had an outsized impact from insurance because we've hit record highs in terms of written premiums and earned premiums. And so we see variable cost attached to our Insurance business. We also have grown, as you've seen, our application flow on the auto side, up 9% year over year, deposit accounts, up 24%.

So we'll continue to see that variable cost increase in line with revenue. And then we continue to invest in brand and technology, the system conversion that's been largely capitalized, so that will roll forward into 2020. But keep in mind, that's embedded in the guidance that we're giving around positive operating leverage. And then last but not least, some modest investments in new products like HDS, obviously, hit this quarter.

But -- so I'd say pretty modest in terms of that new product impact.

Betsy Graseck -- Morgan Stanley -- Analyst

OK. So, this systems conversion really isn't an outlier in terms of its impact on the 2020 efficiency outlook?

Jenn LaClair -- Chief Financial Officer

Well, I mean, it's embedded in our guidance there. It was a pretty material investment that we made. You think about we've completely upgraded our whole servicing platform in the auto business, which was over four and a half million accounts. And by the way, huge shout-out to the team who accomplished that.

I mean, we had almost no friction in terms of the conversion and customer feedback has been really strong to date, so we've kind of hit that big milestone. The expenses will roll forward in depreciation kind of over the next couple of years, but it's embedded in the guidance we provided for 2020.

J. B. Brown -- Chief Executive Officer

Yeah, Betsy, it's been an effort that's been literally under way for about five years inside the company. And as Jenn pointed out, we just successfully rolled it out after the turn of the year, but amazing effort, particularly given how minimal customer disruption was experienced over, kind of, three to four days when you're converting over four and a half million accounts, that was quite impressive. But from a financial perspective, it's already been partially embedded, and we'll have a little bit more to come.

Betsy Graseck -- Morgan Stanley -- Analyst

Thank you.

Operator

Thank you. Our next question's from Sanjay Sakhrani from KBW. Your line is now open.

Sanjay Sakhrani -- KBW -- Analyst

Thanks, and good results. I guess maybe we could tease out a little bit, sort of, what the HCS acquisition means to 2020 and maybe over the near term. Can you just talk about, sort of, how we expect it to factor into growth?

Jenn LaClair -- Chief Financial Officer

Sure. So on HCS, we had modest impact here in Q4. Next year, it's really going to depend on the growth opportunities that we see. We brought over about a $200 million portfolio, had some modest costs there and some modest provision.

We originated about $70 million in new originations this quarter. And we want to ramp that up as quickly as possible, but the total impact for 2020, No. 1, it will be pretty immaterial; and No. 2, it will depend in large part around the opportunities that we see.

We're new in this space, and so we're going to be thoughtful about how we pace it. And the growth that we are confident that we've embedded into our 2020 outlook. We also -- that business is largely focused on healthcare. We are also looking for opportunities in other verticals on improvement, in particular, in auto, where we've got a very expansive dealer network, and we see some good synergies there.

Sanjay Sakhrani -- KBW -- Analyst

And when you say home improvement, you mean like personal lending with home improvement or something else?

Jenn LaClair -- Chief Financial Officer

Yeah, point-of-sale lending with home improvement, consumer investments.

Sanjay Sakhrani -- KBW -- Analyst

OK. And you guys would grow that organically or through acquisition?

Jenn LaClair -- Chief Financial Officer

We have the platforms. So the acquisition that we closed on in October is largely a purchase of the platforms. So that would be an organic expansion of that platform into new verticals.

Sanjay Sakhrani -- KBW -- Analyst

OK. Got it. And one final follow-up question on used car prices and remarketing gains, that dropped pretty significantly in the fourth quarter. Is there anything to read into that? And sort of how we should expect it to progress over the course of this year?

Jenn LaClair -- Chief Financial Officer

Yeah. Sanjay, we were expecting that, and we've been expecting lower used vehicle values for some time. In Q4, specifically, we saw trucks and SUV values declining a bit, and that's just the phenomenon we've been talking about around the supply side dynamics, where we hit a peak here in 2019. The peak continues in 2020.

And then it does start to subside, actually in 2021, but we should see some near-term pressure which is why we have continued to guide down in, kind of, 5 to 6% in used vehicle prices in 2020. But to us, not a big surprise, and it was in our forecast.

Sanjay Sakhrani -- KBW -- Analyst

OK, great. Thank you.

Jenn LaClair -- Chief Financial Officer

Sure. Thank you.

Operator

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

Eric Wasserstrom -- UBS -- Analyst

Thanks very much. Jenn, I wanted to just circle back on a couple of issues related to the net interest margin. The -- is the -- I was backing into the marginal origination yield on auto from the bottom of Slide 18. In the fourth quarter, getting a number of around 7.1%.

Is that ballpark correct?

Jenn LaClair -- Chief Financial Officer

The origination yield in Q4, it's -- that's pretty close, and it was above 7%. The full year is 7.44% in Q4, seasonality upon seasonality, so it came down a bit.

Eric Wasserstrom -- UBS -- Analyst

OK. So as -- so in terms of the double-digit NIM expansion guidance. What -- how should we frame out what yield that implies?

Jenn LaClair -- Chief Financial Officer

Yeah, sure. And keep in mind, the double-digit NIM expansion is really reflective of a lot of drivers, the auto origination yield is a part of that. So we'll expect our current portfolio, which is full year about 6.60% in origination yields to migrate up toward that over 7% origination yield that we've been putting on the books for the last seven consecutive quarters. And in 2020, we expect new origination yields to remain above 7%.

So there's just this natural tailwind in terms of the repricing up. You saw this year, we had a 37 basis point increase in new origination yields which translated into 46 basis point increase in the portfolio, those trends will continue into 2020. So that's kind of driver No. 1.

Driver No. 2 is what I talked about a little bit earlier around our deposit portfolio as we've repriced down OSA that rolls forward into 2020. And then with the CD deposit repricing, that creates a tailwind as well. And then there's other dynamics, we've got over $2 billion in unsecured rolling down at over 6.5% coupon.

And so we've got some nice liability management tailwinds there as well. So all of that will contribute to that double-digit margin expansion next year.

Eric Wasserstrom -- UBS -- Analyst

And just on that last point, and this is my last question and then I'll get off. But the unsecured -- back of the envelope, I was calculating about 2 basis points of NIM benefit from the shift -- from the repayment of the high cost debt. Is that -- again, is that ballpark correct?

Jenn LaClair -- Chief Financial Officer

Eric, I don't have the exact number right in front of me, but I think it's a bit higher than that. Yes. And it depends a little bit on the timing. We've got one -- we had almost $1 billion coming off in the first quarter at over 7%, 7 to 8% coupon.

So the timing of that matters as well. And we can follow-up with the exact math, but I think 2 basis points seems a little bit low.

Eric Wasserstrom -- UBS -- Analyst

Got it. OK. Thanks very much.

Jenn LaClair -- Chief Financial Officer

Thank you, Eric.

Operator

Thank you. Our next question comes from the line of Rob Wildhack from Autonomous Research. Your line is now open.

Rob Wildhack -- Autonomous Research -- Analyst

Good morning, guys. You've talked a lot about the dealer count obvious to something that's grown nicely in the past few years. Can you give us some context around the growth and performance is coming from the expansion of the dealer count versus the success you're having on a per dealer basis? And then what you think the growth levers and opportunities are from here?

Jenn LaClair -- Chief Financial Officer

Yeah. Rob, I would say, the growth that we're seeing in application volume, it's really coming from both the dealer count and deeper penetration into those dealers. I will say with the number of consecutive quarters, we have growth in dealer count and the fact that we have relationships with 90% of dealers that the go-forward priority will be around apps per dealer, about 70-plus percent of our dealers give us less than five apps per month, and we see tremendous opportunity in increasing apps and quality of the dealer relationship. So that's really going to be the focus going forward, continuing to bring in more apps, more looks and then increase the quality of what we originate and continue to expand the risk-adjusted returns, but it does shift a bit from count to quality.

J. B. Brown -- Chief Executive Officer

Maybe the only other point there. You asked about performance, I'd say it's been very consistent with -- we haven't seen the new dealers have been onboarded, maybe in the past 18 months or so, really perform any differently from a credit perspective on accounts. So it's been very consistent with the rest of the book.

Rob Wildhack -- Autonomous Research -- Analyst

That's great. Thank you, guys.

Jenn LaClair -- Chief Financial Officer

Thank you.

J. B. Brown -- Chief Executive Officer

Thanks, Rob.

Operator

Thank you. Our next question comes from the line of Kevin Barker from Piper Sandler. Your line is now open.

Kevin Barker -- Piper Sandler -- Analyst

Thank you. In regards to your comments on CECL, which I thought were very helpful, could you provide some quantification around the incremental impact to your provision expense in 2020, given what you've laid out there? I understand you're going to keep reserves to loans stable, but just overall, the impact on provision expense.

Jenn LaClair -- Chief Financial Officer

Yeah, sure. So Kevin, I think you're getting at some of the day two impact. So as we've put our guidance out there, we've been mindful of where we're growing the portfolio, and we are seeing growth across every single one of our businesses. But we've embedded in there, those increases in reserves.

So auto -- retail auto will be growing modestly. We're now reserving over 3% versus the 1.5% we were reserving before, and that's all embedded in the guidance that we gave you, but it's a fairly modest impact as we head into 2020. Now we have to keep in mind, that's what we know. There are factors here that we'll have to continue to work through as we're new to CECL, and that's around just the macroeconomic variable changes.

If we see growth opportunities in the portfolio, we want to continue to originate at strong risk-adjusted returns and not let CECL move back, so there are some unknowns there. And then the last thing I'd say about CECL is with the way in which we've approached the reversion to the mean, we have included the great recession. And so we've got kind of an embedded kind of headwind just from the macroeconomic assumptions that we've made that's already embedded in there, and that should reduce some of the volatility as we go forward just from a macro perspective.

Kevin Barker -- Piper Sandler -- Analyst

So would you say -- would it be fair to say that you're taking a more conservative view on the economic outlook and assuming somewhat of a slowdown versus what -- wide industry standards in order to just remain conservative around the provisioning?

Jenn LaClair -- Chief Financial Officer

Yeah. I mean, what I would say is we've just been very balanced in how we've looked at just the longer-term trend in the portfolio and that the assumptions that we've made are all embedded in the day one.

Kevin Barker -- Piper Sandler -- Analyst

OK. And then would this -- the implementation of CECL have an impact on how you think about certain asset classes that are currently on your balance sheet that may be lower yielding, but maybe tougher to hold in a post-CECL environment?

Jenn LaClair -- Chief Financial Officer

Yeah. Look, I mean, we're always trying to optimize yield and risk-adjusted returns, but that's not related at all to CECL. We -- as I mentioned in my prepared remarks, I mean, nothing has changes in terms of the long-term profitability of our various portfolios, and we want to continue to focus on what's important to us, which is driving value for our customers and long-term shareholder value as well.

Kevin Barker -- Piper Sandler -- Analyst

Thank you for taking my question.

Jenn LaClair -- Chief Financial Officer

Absolutely. Thank you.

Operator

Thank you. Our next question comes from the line of Rick Shane from JP Morgan. Your line is now open.

Rick Shane -- J.P. Morgan -- Analyst

Hey guys. Thanks for taking my question. Look, we spend a lot of time thinking about asset and liability mismatches. I'd like to think about this in a slightly different way, which is sort of compare your asset gathering franchise with our deposit gathering franchise.

It strikes me, one, as a traditional business. And I don't mean that in a pejorative way, where the other is very cutting-edge and innovative, and you've cited the awards you've received. I'm curious when you look at those customer bases, what differences you see, particularly from a demographic perspective, and how will that evolve over time, will you see convergence?

Jenn LaClair -- Chief Financial Officer

Yeah, Rick, I appreciate the question. And I think we are innovative across all of our businesses, I wouldn't say just on the deposit side. In auto, you can see a lot of the partnerships that we've created with some of the new entrants. It has positioned us very well for the modernization of auto, and we will continue to lead in that space.

And then I look at what we're offering through Better.com is an absolute top-notch digital, fully digital end-to-end customer experience that has some of the highest NPS scores across the industry. And I would say we are absolutely leading and cutting-edge in terms of the product that we have out there. And I'd say the same thing with what we just acquired the new platform with HDS, now Ally Lending. We are leaders in that space as well, and we'll continue to grow and lead in there.

So our goal is to be innovative across all products, not just on the liability side, but also on the asset side. J.B., I don't know if you might add anything in there.

J. B. Brown -- Chief Executive Officer

No. Great.

Jenn LaClair -- Chief Financial Officer

But we don't see this big difference across the two. And I just -- I mean you did ask about customer profile, and our deposit base tends to be more of a mass affluent customer from a balance perspective, but we're growing millennials at a very rapid pace from an account number point of view, and we do see overlap, certainly overlap in terms of the Ally Lending customers, we're bringing in, Better.com and mortgage. I mentioned the 56% of the new originations are coming from the existing deposit business. So we certainly see a lot of overlap across all of our businesses on the asset and liability side and even with Invest.

Rick Shane -- J.P. Morgan -- Analyst

Got it. No. And look, I appreciate that you need to be innovative across all of your business products. I really -- I like the answer to the second part of the question in terms of that customer profile.

I'm curious when you look at it, have you had more success selling loans to depository customers or deposits to borrowing customers?

Jenn LaClair -- Chief Financial Officer

It's the former. It's mining our deposit business for new asset opportunities. And mortgage is a great example of that. And then not just outside of Lending, but in the Invest space, over a third of our new Invest customers come from the deposit platform.

And as we continue to add new product and to invest in advisory capabilities, we see that very big connection only continuing to grow.

Rick Shane -- J.P. Morgan -- Analyst

Thank you guys for your time.

Jenn LaClair -- Chief Financial Officer

Thank you.

J. B. Brown -- Chief Executive Officer

Thanks, Rick.

Operator

Thank you. Our next question is from John Hecht from Jefferies. Your line is now open.

John Hecht -- Jefferies -- Analyst

Thank you, guys, very much. Most of my questions have been asked and answered. First one is out of curiosity, Jenn, it seemed like you suggested that the day two impact was modest. I'm wondering, are you able to share with us, is it -- our adjusted EPS in 2020, the guidance -- would it have been higher under the accrual method or would have been generally in the same range?

Jenn LaClair -- Chief Financial Officer

It would have been higher. And that's just because we have to reserve at a higher rate than we had under incurred, No. 1. And then because we do have to prefund day one impact in 2021, just capital levels will be a little bit elevated, especially in the back half of this year.

John Hecht -- Jefferies -- Analyst

OK. And then second is you talked about strong growth in applications but the originations were generally flat. Is that an indication of being more selective in terms of what you're pulling through the funnel? Or is there any other commentary around that?

Jenn LaClair -- Chief Financial Officer

Yeah. I mean, John, our strategy over the past several years has really been around quality, driving risk-adjusted returns. And we do that by increasing application flows, the more looks you get, the higher bar you can set in terms of what you book on your balance sheet. And tying this to the competitive question, we continue to increase our region.

Haven't seen any sign of that slowing down. And that -- the more applications we bring in, the more selective we can be around what we book, and we don't see any signs of that slowing down here in the first quarter or expecting that to slow down here in 2020.

J. B. Brown -- Chief Executive Officer

And John, I'd just say that ties into the initial question we got from Ryan Nash as well about giving us confidence around pricing power as well, that's all integrated together.

John Hecht -- Jefferies -- Analyst

Thanks very much, guys.

Jenn LaClair -- Chief Financial Officer

Thank you.

Operator

Thank you. That's all the time we have now for questions.

Daniel Eller -- Head of Investor Relations

OK, operator, thank you. That concludes today's call. Feel free to reach out to investor relations for any follow-ups.

Operator

[Operator signoff]

Duration: 64 minutes

Call participants:

Daniel Eller -- Head of Investor Relations

J. B. Brown -- Chief Executive Officer

Jenn LaClair -- Chief Financial Officer

Ryan Nash -- Goldman Sachs -- Analyst

Moshe Orenbuch -- Credit Suisse -- Analyst

Betsy Graseck -- Morgan Stanley -- Analyst

Sanjay Sakhrani -- KBW -- Analyst

Eric Wasserstrom -- UBS -- Analyst

Rob Wildhack -- Autonomous Research -- Analyst

Kevin Barker -- Piper Sandler -- Analyst

Rick Shane -- J.P. Morgan -- Analyst

John Hecht -- Jefferies -- Analyst

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