Dive Brief:
- About eight months into the job, Ally CEO Michael Rhodes said this week he’s taking a “hard look” at areas of opportunity for the bank, noting its credit-card business is not at the top of the list when it comes to investment.
- During a Wednesday appearance at an annual Goldman Sachs financial services conference, Rhodes indicated the bank is committed to managing expenses in a more controlled way, as part of its pursuit to bolster its return on equity.
- Rhodes’ comments Wednesday seemed to give credence to a Bloomberg report last month that the Detroit-based lender is weighing a sale of its credit-card business. “I look, in a world of limited capital and limited expenses, where my next dollar goes – it’s not going to go there, despite the fact that it’s a very strong business,” Rhodes said of Ally’s card unit. “It’s going to go into other things.”
Dive Insight:
Rhodes became CEO of the $193 billion-asset bank in April, following the departure of its former chief executive Jeffrey Brown. Prior to joining Ally, Rhodes spent a brief stint as the CEO of Discover; he left not long after Discover announced it had agreed to be acquired by Capital One. Rhodes spent about a dozen years at TD before his time as Discover’s CEO.
“When you’re new in the job, you always take an opportunity to see, what would you do differently?” Rhodes said Wednesday. “One place is clearly on the expense line.”
Over the past several years, the digital bank’s expense growth rate has been 5% to more than 10% per year, he said.
“This year has been different,” he said. “Our controllable expenses, we guided to a less than 1% increase on a year-over-year basis, and we’re going to achieve that,” he said.
The bank, which reported an 11% return on equity in the third quarter, is focused on a mid-teens ROE target, “and we very much believe we can do this,” he said.
Rhodes shied away from estimating a timeline for that, but said “the table is set,” when it comes to managing expenses and credit losses, and improving net interest margin.
As far as the possibility of restructuring its securities portfolio to reach its target sooner, “it’s on the table,” Rhodes said.
During the bank’s third-quarter earnings call in October, Rhodes acknowledged “the next few quarters will be choppy.”
Ally has tightened underwriting after it experienced recent rockiness in its retail auto loans segment. Ally’s auto franchise, its largest segment, is one of three core businesses for the bank, along with deposits and corporate finance. Those are the areas of strongest opportunity and will be the focus of the bank’s investments, Rhodes indicated.
The bank works with 22,000 auto dealers, a prospect Rhodes called “clearly a source of strength.” Ally also has $40 billion more in deposits than it did in 2019, on a roughly $200 billion balance sheet, he noted. And the bank has long-standing sponsor relationships in corporate finance, he said.
Consumer auto and corporate finance are higher-yielding assets the bank has brought in to replace lower-margin business such as mortgage, securities and commercial auto, which Ally has been “burning off” since 2019, Rhodes said.
In mortgage, the bank no longer originates to its balance sheet and is now doing mostly originate-to-sell on the secondary mortgage market.
“That feels like the right model for us,” he said.
In January, the bank sold its point-of-sale financing business to Synchrony, as part of a broader endeavor to boost profitability and to direct resources to scaled businesses.
Ally CFO Russ Hutchinson noted in September the lender has cut underperforming segments and is repricing those it’s remaining in, a strategy the bank planned to continue.
Ally has tapped a financial adviser to find buyers for its credit card business, Bloomberg reported last month, citing unnamed sources. At the end of the third quarter, the bank had about $2.1 billion in credit card loans, on average, and 1.3 million active cardholders, according to an earnings presentation.
“All this stuff, we continue to look at,” Rhodes said Wednesday. “We’re taking a hard look at everything.”