Ally Financial (ALLY) Q4 2021 Earnings Call Transcript

Ally Financial (ALLY -1.56%)
Q4 2021 Earnings Call
Jan 21, 2022, 9:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and thank you for standing by. Welcome to the Ally fourth quarter and full year 2021 earnings conference call. [Operator instructions] Please be advised that today's conference is being recorded. [Operator instructions] I would now like to hand the conference over to your speaker today, Daniel Eller, head of Investor Relations.

Please go ahead.

Daniel Eller -- Head of Investor Relations

Thank you, Gigi, and welcome, everyone, to Ally financial's fourth quarter and full year 2021 earnings call. This morning, we have our CEO, Jeff Brown; and our CFO, Jenn LaClair, to review Ally's results before taking questions. I'll note the presentation we'll reference on today's call can be found on the investor relations section of our website, ally.com. Forward-looking statements and risk factor language governing today's call can be found on Slide 2 and GAAP and non-GAAP or core measures pertaining to our operating performance and capital results are on Slides 3 and 4.

These metrics are supplemental to and not a substitute for U.S. GAAP measures, definitions, and reconciliations can be found in the appendix. With that, I'll hand the call over to JB.

Jeff Brown -- Chief Executive Officer

Thank you, Daniel. Good morning, everyone, and thank you for joining our call today to review fourth quarter and full year 2021 results. I'll begin on Slide No. 5.

Ally generated outstanding results in 2021. I'm incredibly proud of the efforts and dedication of our more than 10,000 teammates who delivered yet another year of innovation and focused execution. Over the past two years, we've experienced a profound shift in consumer demand and expectations for seamless digital-first banking products in response to COVID-related challenges, and advancements in technology. Ally has leveraged these broad-based secular trends to strengthen our position as a disruptive growth company guided by a winning formula to do it right for our customers, employees, and communities.

Full year adjusted EPS of $8.61, core ROTCE of 24.3%, and revenues of 8.4 billion represented record-setting results and evidence of the leading auto, insurance, and digital bank platforms we've built. Momentum generated across our businesses positions us well to continue unlocking franchise value in the years ahead. Our recent acquisition of Fair Square, the latest digital-first capability we've added to our product suite will further enhance our trajectory. We closed the transaction in December, ahead of schedule, and are well underway with the integration.

Looking at auto results. Our dealer network expanded for the 12th straight year in 2021, generating 46.3 billion of originations, our highest level since the early 2000 sourced from a record 13 million decision applications. This was our fourth consecutive year of origination yields above 7% demonstrating our strong competitive position, disciplined underwriting, and leading dealer and customer service capabilities. Credit losses remained benign with 31 basis points of full year retail auto net charge-offs.

Our leadership position within the auto ecosystem is clear across these metrics, affirming the strength of our team and the success of our multipronged strategy to broaden the dealer network and generate solid volumes and accretive risk-adjusted returns. The strength and agility of our business model in a wide variety of operating environments is evident in our performance over the past two years as we've successfully responded to strong consumer demand, high used vehicle values, and reduced inventories. We've earned our market-leading position by driving customer value over the long term, and we remain focused on achieving continued success as we navigate change in the years ahead. Across our consumer and commercial portfolios, credit remains very strong, supported by robust job prospects, ongoing wage expansion, and the strongest customer balance sheets observed in decades, all of which helped mitigate inflationary dynamics.

While the pace of credit normalization remains up for debate, we've taken a balanced approach in our reserve process under a view that normalization will occur gradually over the next two years. We proactively enhanced the use of advanced data, automation, and digital tools, increasing customer engagement and strengthening our ability to mitigate losses. Between 40 and 70% of our auto customer interactions occur digitally each month, increasing speed and effectiveness while creating a strong customer experience. Within insurance, our compelling value proposition for dealers and consumers is evident in written premium volume of 1.2 billion for 2021 as we expanded dealers and customers.

Our investment portfolio grew to 6.5 billion, the highest level since becoming a publicly traded company, reflecting years of steady written policy growth. Turning to Ally Bank. Growth accelerated again this year aligned with the increasing momentum toward a digital-first world. As the leading all-digital and customer-centric bank, we've established a scalable platform differentiated by the personalized, seamless, modern banking products we're delivering.

We generated our 13th consecutive year of customer and balance growth, as our customer base expanded 10% while total deposits grew to 89% of funding. Within our digital-first consumer offerings, Ally Home originations of 10.4 billion were more than double the prior-year level. Ally Invest customer assets exceeded 17 billion as self-directed and Robo accounts grew to 506,000. Ally Lending volume of 1.2 billion more than doubled and was powered by a 37% increase in merchant relationships across our healthcare and home improvement verticals.

Fair Square balances closed the year at 953 million, an increase of 25% since announcing the acquisition in October and 66% year over year, reflecting strong customer acquisition, consumer spending trends, and the scalability of the Fair Square approach. And within Corporate Finance, HFI balances of 7.8 billion grew nearly 30% year over year through a combination of increased new loans and normalizing drawdown activity among our clients. The CF portfolio, including unfunded commitments, now stands at 12.7 billion, which highlights the success we've had in growing this business. As a result of our strong financial position, we were pleased to recently announce a 2 billion buyback authorization program for full year 2022 and a 20% dividend increase to $0.30 per share.

As we turn to Slide No. 6, I'll reiterate the view I've shared on many occasions regarding the link between values and results. I'm confident our record-setting performance and ongoing momentum are directly tied to the clear focus and prioritization of our customers, employees, and communities. Maintaining an authentic and inclusive culture has been a top priority for me during my tenure as CEO.

Ally took several actions over the past year aligned with our do-it-right approach. For our customers, we've actively enhanced products, interfaces, and service capabilities, utilizing advanced tech and data innovations, which Jenn will provide more detail on. We took the key step of adding a credit card product to our suite of digital-first offerings, and we're proud to lead the industry in eliminating overdraft fees, leading to bank on national account certification from the Cities for Financial Empowerment Fund. For our Ally teammates, we increased Ally's minimum wage to $20 per hour while we announced the third annual grant of company stock to all employees and expanded health and family benefit programs.

We were honored to be named among the best places to work at Forbes, Diversity Inc., and numerous other publications and received another perfect corporate equality score from the human rights campaign. Over 40% of our workforce voluntarily participates in one of our employee resource groups, a key element of how we're driving a stronger sense of belonging and engagement across our teams. Our deliberate actions to treat people as people and create an inclusive workplace have the added benefit of acting as a powerful retention tool. Within our communities, we marked our tenth year of the employee-led giving back campaign, donating 24,000 hours of time to worthy causes.

We hosted our third annual Moguls in the Making student competition in partnership with several HBCUs and marked the first full year for the Ally Charitable Foundation actions donating 15 million of combined employee and company contributions to community, social, and educational causes. On the ESG front, we announced Ally achieve carbon neutrality and officially established an environmental sustainability office. Taken in isolation, any one of these actions would represent a significant milestone. But when taken together, these actions provide clear evidence of what can be achieved when purpose, creativity, and dedication come together under a shared vision.

Moving to Slide No. 7. I wanted to spend a few moments summarizing the strategic evolution we've delivered before handing it over to Jenn to walk through the details. Over the years, we've built resilient platforms through constant expansion and evolution of our customer-centric offerings.

We challenge ourselves each day to look around corners and embrace disruptive forces on behalf of our clients and customers to proactively manage risks and deliver financial solutions that anticipate their needs in a seamless, differentiated manner. While performance was exceptional in 2021, the opportunities we built for growth in 2022 and beyond are what I'm most excited about, including continued momentum across our leading customer-centric businesses, delivering diversified and durable earnings, and disciplined capital management. These priorities have positioned us to deliver long-term growth and sustain higher returns as seen in our track record of delivering or exceeding the financial guidance we've provided over the past several years. We continue to focus on deepening customer relationships through digital capabilities that combine leading, award-winning products with integrated, stable, and secure bank platforms.

We've got a really powerful model and considerable financial strengths. The future is bright, and you can be assured we will keep delivering. With that, I'll turn the call over to Jenn to provide perspectives on our progress and review our detailed financial results.

Jenn LaClair -- Chief Financial Officer

Thank you, JB, and good morning, everyone. I'd like to start by expressing my gratitude for our dedicated Ally workforce who powered our growing momentum over the past several years and drove exceptional results in 2021. Before diving into the fourth quarter details, I'll review Ally's multiyear strategic and financial transformation, including the drivers behind our steady execution and strong performance. Beginning on Slide 8, we've included a view of our comprehensive and expanded product suite, reflecting the many capabilities we've added since 2014.

We provide a broad range of integrated and sophisticated offerings built for and around our consumer and commercial clients. Turning to Slide 9. We're constantly evolving and adapting our capabilities innovating through tech and data-driven approaches. With each new product launch, redesign, or enhancement, we apply our deeply rooted expertise and disruptive DNA to create unique, safe, and innovative solutions for a broad range of financing and banking needs.

Our customer-centric approach focused on delivering compelling value fuels growth, creates opportunities for relationship deepening, and diversifies Ally's balance sheet and earnings. Ally's compelling growth trajectory and the customer-oriented awards we've amassed over the years serve as a testament to the effectiveness of our approach. Turning to Slide 10. Customers using an Ally product now stands at 10.5 million across our platforms, expanding 52% since 2014.

Ally Bank customers have more than quadrupled over this time frame as we've evolved our capabilities and successfully expanded multiproduct relationships shown on the bottom left. In auto, we've added nearly 5,500 dealers as part of our multiyear effort to broaden the funnel and increase dealer engagement. This strategy has culminated in a 40-plus percent increase in application volume, driving strong originations, and risk-adjusted returns. Robust product expansion and customer growth have translated to improved balance sheet and earnings covered over the next few pages.

Turning to Slide 11. Our balance sheet transformation reflects two key dynamics. First, the diversification of our asset base, which has grown by 31 billion or 20% since 2014. Over this time frame, we've generated 23 billion or a five-fold increase in Ally Bank consumer and commercial product balances.

13 billion of consumer auto balances helping to mitigate the pandemic-driven floorplan declines, and nearly 14 billion in accretive, capital-efficient investment securities. The second driver of our optimization can be found within net interest margin shown on the bottom of the page where disciplined asset pricing, deposit growth, and active liability management have increased asset yields and improved funding costs. Auto pricing has remained above 7% for four consecutive years while floating-rate commercial and unsecured products are positioned for further growth and accretion as rates rise. On the funding side, we've more than doubled stable, sticky deposits since 2014, while retiring 24 billion of legacy, unsecured debt with a weighted average coupon of over 5%.

These actions drove structurally lower funding costs throughout the prevailing low rate environment and have enhanced our ability to control liability costs. In the years ahead, we expect our balance sheet to drive an upper 3% margin as assets steadily migrate toward 200 billion. Structural enhancements across both sides of our balance sheet drove strong performance over the past two years and position us well for a variety of rate and economic environments moving forward. Turning to Slide 12.

Ally's core PPNR has more than doubled since 2014, generating nearly 4.3 billion in 2021, our highest level. Our outlook for annual PPNR expansion will be revenue-driven as we continue to prudently invest in customer capabilities, technology, talent, and brand. In the bottom left, total revenues of 8.4 billion represented record-setting net financing revenue and other revenue reflecting diversified sources of income and our ability to capture tailwinds in real time. In the bottom right, Ally's adjusted efficiency ratio, which, as a reminder, excludes insurance reached the lowest level since becoming a publicly traded company as we remain diligent in investment and expense management.

Moving to Slide 13. Our disciplined and rigorous risk management approach has driven consistently strong credit outcomes. Consolidated net charge-offs have remained below 1% while retail auto losses have outperformed our 1.4 to 1.6% guidance in six of the seven past years. These trends reflect the high quality, high utility of our loan and lease products; consistent, disciplined underwriting capabilities; modernized collection and servicing practices; and more recently, tailwinds associated with stimulus and historically strong collateral values.

As JB mentioned earlier, we expect credit to steadily normalize through 2023, which our reserve levels accommodate. Risk management is a key pillar within our strategic plan as we apply deep experience, extensive data, and sophisticated approaches in our assessment, pricing, and servicing across our balance sheet. Turning to Slide 14. Our diligent focus on accretive capital deployment is reflected in our expanding returns and over 70% increase in tangible book value per share.

Our capital strategy remains focused on long-term value creation, evident in our robust growth trajectory, both organic and inorganic as we've executed opportunistic tuck-in acquisitions to augment capabilities. This disciplined approach has resulted in 16 billion of RWA expansion, even while we've returned 6.5 billion in excess capital to shareholders through buybacks and dividends. Current CET1 levels remain well above our internal and regulatory targets, a testament to our approach and the strength of our position moving forward. Now let's turn to Slide 15 to review detailed results for the quarter.

Net financing revenue, excluding OID, of 1.66 billion grew 27% year over year representing our highest quarterly results. Adjusted other revenue of 533 million reflected solid investment gains and growing momentum across our diversified product offering. Provision expense of $210 million included the day one reserve build of 97 million associated with closing Fair Square and the seasonal rise in NCOs even as loss frequency and severity trends demonstrate continued strength. Noninterest expense of 1.1 billion was driven by actions highlighted over the past, including variable costs across our businesses from customer and revenue growth, investments in our brand, security and tech capabilities, and purposeful investment in our workforce and benefits allowing us to drive employee engagement in the top 10% of all companies, a critical advantage for us as we navigate competitive labor markets.

GAAP and adjusted EPS for the quarter were $1.79 and $2.02, respectively, both of which include $0.09 related to a state-specific tax item and one month of Fair Square results. Moving to Slide 16. Net interest margin, excluding OID, was 3.82%, 90 basis points higher than prior year and our sixth consecutive quarter of expansion. Earning asset yields of 4.75% grew quarter over quarter as we redeployed low-earning cash into higher-yielding loans and investment securities.

Average earning assets grew to 172.9 billion, ending balances increased by over 6 billion, representing our strongest linked quarter growth in over five years, with all loan balances increasing. Turning to liabilities. Cost of funds improved eight basis points, the tenth consecutive linked quarter decline. Ally continues to remain well-positioned for a variety of rate environments as we've cultivated strong customer loyalty and engagement through our expanded suite of digitally based products.

We strengthened pricing and beta on both sides of the balance sheet and tactically utilized hedging strategies to bolster our overall asset sensitivity and NIM position. Turning to Slide 17. CET1 of 10.3% reflected risk-weighted asset growth, including 3.5 billion of floorplan balances, balance increases, and the impact of closing Fair square, which taken together, represented 75 basis points of capital consumption. Despite these impacts, CET1 remains 1.9 billion, above our internal target.

We recently announced our second consecutive $2 billion buyback authorization and a 20% increase in our common dividend to $0.30 per share. Since the inception of our capital program in 2016, we've reduced shares outstanding by 30% while increasing our dividend seven times. The quality of our capital position has improved as we've leveraged our investment-grade rating and proactive liability management to bolster liquidity, funding, and our financial profile. On Slide 18, asset quality remained strong throughout Q4 as consumer and commercial losses remained historically low.

In the upper left, consolidated net charge-offs of 35 basis points were nearly half prior year and 60% below 2019. Retail auto trends shown on the bottom reflected solid customer payment trends and improved loss given default rates supported by strong collateral values. Early and late-stage delinquency trends reflected seasonal activity remaining well below prior year and 2019 levels, an encouraging signal heading into 2022. On Slide 19, consolidated coverage of 2.67% reflected growth across our retail auto, point-of-sale, and mortgage portfolios, plus the addition of reserves for Fair Square.

Retail auto coverage of 3.54% moved lower quarter over quarter by eight basis points as trends continue to improve across consumer health and macroeconomic measures. Blue Chip forecasts indicate unemployment levels will remain at approximately 4%. As a reminder, under our CECL reserve approach, we incorporate this outlook for full employment into our 12-month reasonable and supportable period before migrating to the historic mean of 6.5% by month 36. This methodology reflects the prudent approach we've adopted under CECL to manage uncertainty, minimize volatility, and maximize transparency.

Turning to Slide 20. Retail deposits ended at 134.7 billion. Q4 increased 3.1 billion, representing our sixth straight year of growth at or above 10 billion. New and existing customers continue to drive our performance, reflecting our compelling products and their desire to keep their money and grow their balances with us.

We generated our 51st consecutive quarter of customer growth, adding 226,000 in 2021, while retention remains industry-leading at 96% as we launched our largest brand campaign to date during Q4. On the bottom right, customer demographics show the compelling opportunity we have to deepen relationships as nearly 70% of new customers are from younger generation, early in their financial journey and with a high propensity for digital engagement. Turning to Slide 21. Our expanded product suite positions us for ongoing growth.

We've generated six years of multiproduct relationship deepening that continues to accelerate across all products. We've leveraged our large and growing depositors to build scale within each of these offerings and we've seen a steady increase in growth from customers who are new to Ally altogether. These trends reinforce the momentum of our brand and the relevance and quality of our diversified digital platforms. Moving to Slide 22.

Auto segment pre-tax income of 839 million reflects our adaptable, leading business model. Revenue growth reflects the multiyear optimization of consumer and commercial lending strategies in addition to tailwinds from strong credit and elevated used car values. We included retail portfolio trends in the bottom left, where origination yields remained above 7%, again in 2021 which we expect to continue as we generate over 40 billion of volume annually moving forward. On the bottom right, lease activity reflects the impact of record used car values and elevated lessee and dealer buyout activity, which tempered realized gains in 2021.

Within our financial outlook, we assume steady normalization of these trends, providing us yet another opportunity to demonstrate our ability to effectively navigate changes within the auto ecosystem. Within our financial outlook for revenues and credit, we've embedded an assumption for used values to decline by 15 to 20% cumulatively by the end of 2023 even as recent trends indicate ongoing resilience. Execution within auto reflects our diversified full-spectrum capabilities, expanded market reach, experienced underwriting, and increased use of technology. Turning to Slide 23.

Our agile, adaptable platform enables us to source strong volume across a variety of environments. In the upper left, we generated 46 billion of origination volume in 2021, sourced from our network of over 21,000 dealers. And consumer assets expanded to 89 billion, shown in the upper right, reflecting retail and lease portfolio growth while ending commercial balances grew for the first time in five quarters, ending at 16 billion. This was driven by a 15% rebound in industry inventories, a modest but positive trend occurring ahead of our expectation for growth later this year.

Q4 auto originations of 10.9 billion represented our highest fourth quarter since 2004, while we've maintained a disciplined underwriting approach. Turning to our insurance segment on Slide 24. Core pre-tax income of 67 million reflected investment gain activity, modestly below prior quarter results but well above historic levels. In the bottom left, the 6.5 billion investment portfolio continues to add revenue-generating capabilities, enhancing segment, and consolidated returns.

Total written premiums of 268 million resulted in 1.2 billion of full year written premiums, our fourth consecutive year above 1 billion. Overall, we are pleased with the resilient counter-cyclic value of our insurance business and remain focused on more fully leveraging our large dealer network for future growth. Moving to Slide 25. Corporate Finance core income of 75 million reflected revenue growth from meaningful year-over-year asset growth, strong investment and syndication income, and solid credit trends.

HFI balances ended at 7.8 billion, the highest level on record for Ally, while unfunded commitments of 4.9 billion position us for ongoing expansion. Our portfolio is comprised of high-quality, diversified loans built through steady, deliberate execution across our experienced team. We remain confident in the continued disciplined growth of this business moving forward. Mortgage details are on Slide 26, where pre-tax income remains relatively stable during the quarter as asset growth helped to mitigate normalizing gain-on-sale margins and persistently elevated prepayment trends.

Ally Home originated 2.9 billion in direct-to-consumer volume in Q4, exceeding 10 billion for our full year 2021, well ahead of schedule. Having steadily grown our national reach over the past two years, we've improved our opportunity to generate strong volume as we prioritize attractive returns. I'll wrap up on Slide 27 with our financial outlook. We've consistently demonstrated earnings expansion and improved returns through several years of execution.

Our clear vision, priorities, and strategy have positioned Allied to continue generating meaningful and sustained value in the years ahead. We expect ROTCE of 16 to 18% plus over the medium term, defined as the next two to three years and beyond as we further leverage our leading businesses and high-quality balance sheet to drive financial performance. Notably, while our return targets do not depend on uniquely strong macroeconomic trends or pockets of transitory dynamics, we will remain opportunistic capturing upside beyond these ranges. Results will be fueled by revenue-driven PPNR expansion derived from an upper 3% NIM profile and diversified revenue generation among our established and broadened consumer offerings.

We've included several of the key variables and assumptions embedded within our forecast, including benchmark interest rates, credit expectations, and used value -- used vehicle value trends. Based on the balanced approach we've taken in our outlook and the strong momentum across all our businesses, I am confident in our ability to consistently generate profitable growth, enhance book value, and sustained returns. And with that, I'll turn it back to JB.

Jeff Brown -- Chief Executive Officer

Thank you so much, Jenn. I'll close with just a few comments on Slide No. 28. Our purpose and cause will remain centered on our customers, employees, and communities.

We built a profitable, compelling growth company by meeting customer needs through differentiated products and services. Ally has pivoted to an exciting era of growth, the dedication of our 10,000-plus Ally teammates fuels my confidence in the ability we have to drive an even brighter future. And with that, Daniel, back to you and head into Q&A.

Daniel Eller -- Head of Investor Relations

Thanks, JB. [Operator instructions] Operator, you can go ahead and tee up the first question.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from the line of Ryan Nash from Goldman Sachs. Your line is now open.

Ryan Nash -- Goldman Sachs -- Analyst

Hey. Good morning, JB. Good morning, Jenn.

Jeff Brown -- Chief Executive Officer

Good morning, Ryan.

Ryan Nash -- Goldman Sachs -- Analyst

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

Jeff Brown -- Chief Executive Officer

Sure. Jenn, do you want to take it or -- I mean, a few I'll start with, Ryan, and then Jenn go through the details. Obviously, I mean you look at our levels of reserves relative to the levels of loss expectations. And I think our guidance on credit, I think you see we've taken a very pragmatic and gradual normalization to credit, but that would be certainly a big one.

And then obviously, used car prices, I think as Jenn as guided, we see them within our financial plan is moderating. But I think if you look at current trends, you look at the environment, I mean, used car prices are still really strong. And as Jenn pointed out, we are seeing some very modest uptick in inventory levels. But our outlook, I think, this year is a really robust used car market.

So I mean, those are a couple. Jenn's obviously got all the details behind it, but we feel really good about the outlook.

Jenn LaClair -- Chief Financial Officer

Yeah, JB, I think you nailed it. The only thing I would add is just around gains in our insurance portfolio. We've been able to optimize our equity market activity and drive outsized gains. And so that potentially, Ryan could be another area of upside.

But I think you're asking the right question. I think there's an asymmetric bias here toward outperforming the 16- to 18-plus percent and its passive NCOs reserves, it's used vehicle pricing that JV hit on plus our ability to generate gains.

Ryan Nash -- Goldman Sachs -- Analyst

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

Thanks.

Jenn LaClair -- Chief Financial Officer

Yeah, sure. And I'll start first on the yields and then go to liabilities. But on asset yields, 90-plus percent of our retail auto portfolio was originated at seven-plus percent yields. And so we are expecting, Ryan, to continue to see retail auto yields continue to migrate up toward that seven-plus percent.

And then if rates continue to increase as we're expecting, that could potentially go even higher. We also have floating-rate assets as we're growing floorplan. JB mentioned we're starting to see some increases in Floorplan. Those are floating-rate assets.

They would migrate higher as rates increase. We've increased our asset sensitivity just through basic hedging activity kind of maxed out our hedging, which will also give us some tailwinds. So net-net, when we wrap this all up, plus Fair Square Ally Lending, we see a really robust trajectory ahead on asset yields, in particular, if we see rising rates. And then on the liability side, both mix and deposits will help us.

We have a much healthier liability stack having run off expensive, high-cost unsecured debt, our deposit levels are 89% of funding. And then when you look at the value we're providing to our customers based on products, our digital platform, and the fact that we're core funded now, we do think, Ryan, to your question, specifically, around deposit pricing that overall rate paid will be lower in this next rising rate cycle. So you wrap it all up in the first couple of pages, the transformation we've led the product capability expansion and the asset side, the transformation of our funding profile, it positions us so well to hit that upper 3% NIM irrespective of the rate environment and to your question, gives us opportunity to outperform as well.

Ryan Nash -- Goldman Sachs -- Analyst

Thanks for taking my questions.

Jenn LaClair -- Chief Financial Officer

Yep. Thanks, Ryan.

Operator

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

Bill Carcache -- Wolfe Research -- Analyst

Thank you. Good morning, JB and Jenn.

Jeff Brown -- Chief Executive Officer

Hi. Good morning, Bill.

Bill Carcache -- Wolfe Research -- Analyst

Can you discuss the trajectory that you're expecting for NIM, particularly in light of changes in Fed funds and all the moving parts? The guidance on the slide is super helpful, but maybe just a little bit of color on directionally. Should we be expecting 2023 NIM to be normalizing higher or lower versus '22?

Jenn LaClair -- Chief Financial Officer

Yeah, sure. And Bill, I'll jump in here. And we've been guiding toward the NIM expansion now for years. So if you take a step back, this has been a guide irrespective of the rate trajectory, and it's all the things I just described to Ryan around the transformation of our asset side and balance sheet as well as our liability stack.

And so Bill, we are expecting NIM to expand irrespective of rates. That said, in a rising rate environment, we do think that there is an accelerated opportunity to expand earning asset yields. Just walk through some of the drivers there around floating-rate assets, growing floorplan at the right time, adding short-duration asset-sensitive assets like Ally Lending and Fair Square that will all give us growing momentum in a rising rate environment to continue to see earning asset yield expansion. And then on the liability side, the healthier stack we have plus the fact that we're so well-positioned from customer brand engagement, digital capabilities.

We do think that we'll be able to hold funding costs much better in this rate environment, a rising rate environment than the last one. And so that will fuel that trajectory into '22 and allow us to sustain it into '23 and beyond. So that's some of the dynamics there, Bill. And hopefully, that helps to answer your question.

This is not a rate-driven NIM expansion. This is all about structural improvements and transformation.

Bill Carcache -- Wolfe Research -- Analyst

Got it. That's helpful. And then separately, as a follow-up, can you speak to the trajectory of the reserve rate and how you're thinking about growth net dynamics as you grow the card business, the fact that you're starting off the year above your day one level should help dampen those headwinds? And then sort of tacking on to that, as the card business grows given sort of that's a higher loss content business or should there be some expectation that at some point, you would raise -- your target capital expectations? If you could just touch on that. Thank you.

Jenn LaClair -- Chief Financial Officer

Yeah, sure. And on the overall reserve, it's largely driven by retail auto. So let me start there, and I'll go to some of the smaller portfolios. But retail auto right now is at 354, day one was at 334.

So we're running 20 basis points ahead of day one. And I think that to JB's point in his prepared remarks, really helps us to manage through any kind of economic cycle that we could see ahead. But if you look at the path of normalization in our past history, we would expect over time as NPAs normalize, that rate would come down from the 354 somewhere closer to that 334. I think, if anything, Bill, that gives us some tailwinds heading into '22 and '23.

And then on some of the newer products that will have higher coverage levels, I think we're very well reserved there. Fair Square, we just put on at a 12% coverage ratio. Ally Lending is close to that. So I think we're just in a really good spot there.

Not going to drive upside, but we'll be growing that and the mix may change a slightly higher consolidated level. But if you wrap it all up with retail auto being as big as it is with as high a reserve coverage level from a consolidated perspective that should come down over time. And then on our capital target, look, we feel that we are very well-positioned. We are adding some new portfolios with Fair Square and Ally Lending, but they're about $2 billion today.

And will grow to two to four from here, but it's not a big enough percent of our portfolio to really revisit the 9% target. And then also keep in mind, we're holding 9% against the floorplan balance that is relatively risk-free. So we feel really good, Bill, about our 9% CET1 target.

Bill Carcache -- Wolfe Research -- Analyst

It's very helpful. Thank you for taking my questions.

Jenn LaClair -- Chief Financial Officer

Thank you. Of course.

Operator

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

Betsy Graseck -- Morgan Stanley -- Analyst

Hi. Good morning.

Jeff Brown -- Chief Executive Officer

Hey. Good morning, Betsy.

Betsy Graseck -- Morgan Stanley -- Analyst

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

Jenn LaClair -- Chief Financial Officer

Yeah, sure. So we're at about 950 in balances today. And we see a path, medium term to two to 3 billion, Betsy. And I think if anything, they've shown an ability to really accelerate both customer growth and balance sheet growth.

Both are up over 60% year over year, and the balances are running 25% ahead of just the projections that we shared with you in October. So they're seeing a really robust growth trajectory. We're right now seeing kind of a path to two to 3 billion, but we'll continue to monitor and take it from there.

Betsy Graseck -- Morgan Stanley -- Analyst

And then that's obviously -- sorry, go ahead.

Jenn LaClair -- Chief Financial Officer

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

Betsy Graseck -- Morgan Stanley -- Analyst

So that piece of the portfolio expanding clearly net positive to NIM. Floorplan is a little bit of a lower NIM contributor. And I know in the past, you've talked about funding that via securities to help keep the NIM moving higher. How much room is there in that piece of security shift into floorplan? And I'm asking a question from the context of your guide for upper three NIM.

What keeps you from seeing that guide move into low fours as these piece parts are coming through here?

Jenn LaClair -- Chief Financial Officer

Yeah, sure. And Betsy, we obviously have upside from floorplan, and it's on a couple of different dimensions. One is it's a floating rate asset. So as short-term rates increase, that will naturally migrate the yield up.

And second, to your point on funding, we're reallocating cash into floorplan. So that gives us another tailwind from a mix perspective. And as I mentioned earlier in response to Ryan's question, there's a lot of opportunity for earning asset yield to continue to migrate higher plus the fact that we think we're very well-positioned to manage liability costs down. So there is an opportunity to go to that four-plus percent.

It's just we try to provide balanced guidance as we look forward. But certainly, there's upside opportunity there.

Betsy Graseck -- Morgan Stanley -- Analyst

And then separately on the outlook here for used car values, which does feed into a couple of parts of the income statement. How should we think about what you've got here the modeling, 15% plus decline by year-end '23? Like is that -- how do you get to that assessment in the guide? And what kind of pace are you thinking about that coming through the model?

Jenn LaClair -- Chief Financial Officer

Yeah, sure. And let me hit on model and then reality. We've modeled a straight-line reduction from 21 to 23, down 15 to 20%. I think if we look at pace of used vehicle values it continues to increase.

And so the reality is there's probably upside to that. But again, we're trying to give you kind of a run rate view of returns, and we'll be opportunistic around upside as we were certainly in '21 here, but the model just assumes kind of straight-line reduction there. And then another factor I'd call your attention to because there's so much focus on used vehicle values. As we exited 2021, the lessee buyout and the dealer buyouts was increasing to 60, 70, 80%.

And so that's muted our ability to harvest gains. It lowers the year-over-year comp as we head into 2022. So just keep that in mind. It's not quite as big a fallout as I think some folks are modeling at this point in time.

And then the last thing I'd say on used vehicle values is we do have natural hedges just as we had a hedge with floorplan coming down, used vehicle values going up, and impacting lease yields positively. We have the hedge on the reverse, right? So as lease yields come down, we'll see floorplan growing, and you get all the great dynamics around putting cash to work, floating-rate asset increasing. So just keep that in mind that there's positive hedges as used vehicle values come down just like there was as they went up.

Betsy Graseck -- Morgan Stanley -- Analyst

Got it. Thanks, Jenn. Thanks, JB.

Jenn LaClair -- Chief Financial Officer

Thank you, Betsy.

Jeff Brown -- Chief Executive Officer

Thanks, Betsy.

Operator

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

Moshe Orenbuch -- Credit Suisse -- Analyst

Thanks very much. You alluded to this in the opening comments, but you've got kind of better loan growth than you've had in a while, both -- you've got reasonable growth in retail auto and then kind of growth across the portfolios. Could you talk about how that is likely to trend over the next year or two? And then I've got a follow-up. Thanks.

Jenn LaClair -- Chief Financial Officer

Yes. Sure, Moshe. And I mentioned assets getting to 200 billion in our medium term, and that's driven by all the portfolios you just mentioned. I mean retail auto, we were originating at mid-30 billion.

We hit 46.3 billion this year. We're guiding toward low 40 billion. And so as we continue to see opportunities to originate at a higher level, that will obviously take our retail portfolio higher. Also seeing strong growth in lease as well.

Floorplans obviously come back. We saw it kind of trough in September and steady growth from there. And I think it will be a little choppy from here on out. We'll see, but definitely opportunities in floorplan to come back.

And then the unsecured capabilities that we've recently added with Ally Lending with Fair Square. Each of those portfolios could get to two to 3 billion over time. And then last but not least, we've seen really nice opportunities to originate a mortgage. We pulled forward kind of our $10 billion target into this year.

And we'll see how that plays out, but we really like our capabilities, and we've expanded into new markets with mortgage systems and growth opportunities there. And Floorplan continues to be a steady driver. We always talked about -- I'm sorry, corporate finance always tends to be a steady driver. We've talked about eight to 10 billion in that portfolio.

We already hit eight. I think, well on our way to 10 billion as you look at the total opportunity in that segment. And then we'll put cash to work in securities as well. So really across the board, Moshe, we see really nice tailwinds and opportunities to grow in addition to the NIM expansion that we've been talking about this morning.

Moshe Orenbuch -- Credit Suisse -- Analyst

Right. And your medium-term final forecast talks about PPNR expansion on an annual basis. one of the concerns that investors have had about financials after the reports of the big banks has been expense growth. Can you kind of talk about your plans? Because obviously, PPNR expansion means that your revenue is going to grow faster than expenses.

But just talk about the plans for generating operating efficiencies and how you think about that, particularly in light of the context remarks, JB. that you made about minimum wage, phasing that in, and kind of how that will integrate into your plan over the next couple of years?

Jenn LaClair -- Chief Financial Officer

Yeah, sure. And Moshe, just as a reminder, we don't manage kind of single line items point in time. We've been managing the company to drive accretive returns and we've been investing in growth. And what I shared with you in the first couple of pages around continuing to invest in capabilities, grow customers, grow our balance sheet, grow returns.

That is the focus of us just in general. And we've been investing as a growth company. We've seen kind of mid-single-digit expense growth over the last couple of years. We'd expect to continue to see that.

But as we've demonstrated in the past, we are focused on positive operating leverage, PPNR expansion, robust return trajectory, and you should expect more of that to come from a PPNR as well as low operating leverage perspective. Now I will note that with Fair Square coming into 2022, we'll have one month of expenses rolling forward to 12 months. So there's some nuances there. We do see positive operating leverage as we get into 2023, but definitely just some technical impacts this year from Fair Square.

But to wrap it all up. A lot of focus on expenses, but for us, it's really around growing our businesses and growing revenue. We saw revenue up 25% this year. We have a very robust trajectory as we head into '22 and '23, and we'll keep investing, but leverage is front and center all the time.

Moshe Orenbuch -- Credit Suisse -- Analyst

Thanks very much.

Jenn LaClair -- Chief Financial Officer

Thank you, Moshe.

Operator

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

Sanjay Sakhrani -- Keefe, Bruyette and Woods -- Analyst

Thanks. Good morning. I guess I got a question on the retail auto yields. I mean that's I guess your expectations are that continues to remain strong.

I'm just curious, I know a lot of it's been driven by mix inside of retail auto. But as we think about just maybe competitive forces coming back into play, how much of a factor do you think it plays into that yield going forward over the next couple of years?

Jenn LaClair -- Chief Financial Officer

Yeah, Sanjay. Its fourth year putting strong origination flows on the books at seven-plus percent yields and we're guiding toward similar performance as we head into 2022. And it's simply a result of the growth in dealers, growth in dealer engagement, where we think we still have significant opportunity for expansion. It's the continued investment in our capabilities, including our SmartAuction platform, insurance.

And so we don't see any signs that that will slow down as we head into '22 and beyond. And while competition is always intense, we aren't seeing that interrupt our flows or impact our performance whatsoever as we head into '22 and beyond.

Jeff Brown -- Chief Executive Officer

And Sanjay, just obviously a reminder. We're No. 1 lender in the prime space, one of the largest used lenders. And to get that type of performance you need to have significant scale, which is something we bring.

And so I think we're large, we're fast. The dealers like us we've automated a lot of our risk-based decisions. So we respond very quickly. So yes, we recognize their players come and go, but I think the one thing what dealers appreciate about Ally is our stability, and that's part of the -- been one of the big drivers why we continue to see a big uptick in origination flows and why Jenn just guided even into the low 40 billion is pretty strong loan growth year on year.

Sanjay Sakhrani -- Keefe, Bruyette and Woods -- Analyst

No, absolutely. You guys have executed really well. I guess maybe another question on competition and follows along some of the questions that Moshe was asking in terms of expenses. On the consumer lending side, that targeted growth that you expect for Fair Square, I mean, like, is that just more direct marketing and therefore, there shouldn't be a significant ramp-up in marketing spend because we've heard the big banks, as well as some of the card issuers, talk about ramping up expenses to get new accounts.

I'm just curious sort of how you expect to go to market there? And do you expect some pressure on expenses as you build that business out? And how does it factor into the growth that you're expecting?

Jenn LaClair -- Chief Financial Officer

Yeah. And I think Fair Square is a bit unique. It's similar to what JB just mentioned on auto. It's kind of a unique product for a unique market.

They're originating in that prime space, which is not nearly as computed as the super prime space. And so the direct marketing that they've been doing has been highly effective as reflected in the 60-plus percent increase in customer accounts as well as the growth in the balance sheet. And all of the expenses attached to that are in the really robust guidance I've provided, which is kind of immediately accretive from an ROTCE perspective. It will be accretive from an EPS perspective by year-end this year and it will drive operating leverage as we head into 2023.

So you can see that our investments are paying off from a growth and a profitability perspective. And I think, if anything, we can turbocharge that growth by bringing them inside the four walls of Ally and leveraging our existing customer base, Sanjay, which is not going to require significant additions to our marketing spend.

Sanjay Sakhrani -- Keefe, Bruyette and Woods -- Analyst

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

Jenn LaClair -- Chief Financial Officer

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

Jeff Brown -- Chief Executive Officer

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

Sanjay Sakhrani -- Keefe, Bruyette and Woods -- Analyst

Great. Thank you.

Jenn LaClair -- Chief Financial Officer

Thank you, Sanjay.

Operator

Our next question comes from the line of Arren Cyganovich from Citi. Your line is now open.

Arren Cyganovich -- Citi -- Analyst

Thanks. Maybe not to stay on card for too much, but it is kind of an exciting new area for you. But what's the strategy for '22? Are you going to rebrand to Ally? Are you going to go upmarket a little bit? Or are you just going to kind of let them operate under that Fair Square brand for the near term?

Jenn LaClair -- Chief Financial Officer

Yeah. Thank you,. We agree it's an exciting opportunity. And the short answer here is we're going to let them continue to execute the way they've been executing over the last five years.

It's been a tremendous product growth story for them, and we don't want to interrupt the execution on that front. In parallel, we are looking to rebrand their cards. We will do so by year-end. And we do think that there's product expansion opportunities as we just talked about overtime.

But that's going to be something we grow into as we think about the broader Ally customer ecosystem. And then last but not least, just a huge shout-out to that team. It's just been a tremendous experience, bringing them on board. They know what they're doing.

They've got decades of experience in card, and we couldn't be more excited about the team, the products, the opportunity ahead in the card space.

Arren Cyganovich -- Citi -- Analyst

Great. And then just lastly, there's been a little bit of concern about credit in the personal installment loan space with a lot of new entrants into the market. What are you seeing within the Ally Lending on the credit side?

Jenn LaClair -- Chief Financial Officer

Yeah. I mean I would point to our performance, which has been robust. I think it's a large -- it's a rapidly growing market. So there's no surprise that there's new entrants in that space but we feel really well-positioned, especially in the verticals where we're focused.

Home improvement, healthcare are dominant areas for us. We've continued to be able to grow merchants in that space as well as originations and balances. So we're not surprised that there's some new entrants, but we feel really good about our products and our performance. And just as a reminder, we're not kind of the NPL, the pay-in-four product that's getting a lot of scrutiny across the industry just in terms of consumer-oriented practices.

This is a traditional installment product. We go through traditional credit underwriting. We have robust credit risk management around this product. So we feel great about the opportunity ahead.

Arren Cyganovich -- Citi -- Analyst

Great. Thanks.

Daniel Eller -- Head of Investor Relations

OK. Thanks, Jenn, and to all the participants that conclude today's call. We're at the top of the hour here. Operator, you may now take us through the disconnect process.

Operator

[Operator signoff]

Duration: 64 minutes

Call participants:

Daniel Eller -- Head of Investor Relations

Jeff Brown -- Chief Executive Officer

Jenn LaClair -- Chief Financial Officer

Ryan Nash -- Goldman Sachs -- Analyst

Bill Carcache -- Wolfe Research -- Analyst

Betsy Graseck -- Morgan Stanley -- Analyst

Moshe Orenbuch -- Credit Suisse -- Analyst

Sanjay Sakhrani -- Keefe, Bruyette and Woods -- Analyst

Arren Cyganovich -- Citi -- Analyst

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