officials onApril 26 downplayed the potential for near-term acquisitions akin to a recentlyannounced agreement to purchase TradeKing Group Inc. — a deal that furthers what CEOJeffrey Brown described as the company's pursuit of "modest and smartdiversification."
Brown,speaking during a conference call to discuss first-quarter , projected that Ally's internalrate of return on the $275 million TradeKing deal would be "somewhere inthe neighborhood of 20%." And, he said, "that's the type of hurdlerate that any type of deal would have to cross for us to consider."
TradeKingcurrently has about $4.5 billion in assets under management and more than $1.1billion in cash and sweep deposits, and it generates more than $25 million inannual trade commissions, Brown said. He estimated that Ally's brokerage andwealth management business would generate pretax income at an annual run-rateof about $80 million by year-end 2018, "with a long potential runway fromthere." The company expects that it can grow client assets to between $12billion and $16 billion by that point in time, accompanied by deposit growth ofabout $1 billion per year and expansion of a nascent digital advisory businessto between $3 billion and $4 billion in AUM as Brown sees "a strongsynergy" with the willingness of AllyBank to adopt digital financial services products, particularly inthe wealth management market.
"Whilerelatively small, we see this as a smart and strategic deal: a new source ofdeposit funding, new revenue streams, new customers, an outstanding managementteam that will be joining ours, and delivering a very solid return oncapital," Brown said. "We would not have done this deal without thoseingredients and outlook."
Thediversification effort comes as part of a broader initiative to ensure Allydelivers "high-quality returns for our shareholders over a longhorizon," Brown explained.
"Whetherit's investor-driven — perhaps fears of auto sales being at the peak or autocredit being too benign — or whether it's simply perception of too muchconcentration risk in one primary sector of the U.S. economy, or even whetherit's environmental factors — Uber impacting car sales or dealer flows, emergingtechnologies, etc. — we know the indirect auto financing model is ever-changingand may not provide the same abilities to grow five to 20 years from now,"he said.
Allyplans to launch a credit card during the second quarter and what Browndescribed as "higher-quality" mortgage offerings later in 2016.
"Theseare also products that we can offer in a compelling way with a digital anddifferentiated experience that our brand is known for," he said.
Respondingto an analyst's question, Brown would not rule out future M&A activity,saying that the company would continue to be "opportunistic." Still,he said that the economics of the TradeKing deal had set "a very highhurdle rate" for future activity.
Althoughhe said that there is "nothing on the horizon," Brown added that"we're paid to look at a lot of things."
Whenasked to elaborate on particular areas of interest, he said, "Obviouslywithin auto we continue to pay a lot of attention to emerging technologies —things that are driving more the digital front there, but nothing remotelyclose to [the size of the TradeKing deal] is on the horizon."