Australian Finance Group Limited (AFG.AX) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Australian Finance Group Limited Investor Briefing for 2025 Full Year Results. [Operator Instructions] I would now like to hand the conference over to Mr. David Bailey, Chief Executive Officer. Please go ahead.

Thank you, and good morning, and thanks for joining Luca and myself today. It's a pleasure to present AFG's full year results for financial year '25, a year that marks further progression in our journey of strategic execution, resilience and growth. Over the past 2 years, we've navigated a challenging economic cycle marked by rising interest rates, inflationary pressures and nonbank funding disadvantages. Through disciplined capital allocation, investment in technology and a focus on broker support, we've emerged a better business with a more diversified income base and better positioned to capture the opportunities ahead. Financial year '25 has delivered a robust set of results, underscoring the strength of our business model and the value of our broker-led distribution network. This broker-led distribution operates in a market which is dominated by the broker channel. Our broker network continues to be a cornerstone of our success with over 4,200 brokers across Australia, AFG supports 1 in 10 residential mortgages nationally. Broker market share has reached 77%, and our network has grown by over 200 new recruits this year alone. Importantly, 58% of our brokers are now writing multiple product classes, a testament to our efforts in enabling diversification and deepening broker relationships. As highlighted in our December release, the economic environment with low unemployment and lower cash rates is good for our business. Cash rate reductions in the first half of FY '25 have begun to stimulate market activity with July 2025, marking our highest residential [ lodging ] month on record, over $10 billion. Lower funding costs are flowing through to improved net interest margins and our AFG Securities loan book grew 23% to $5.5 billion and remains in growth mode. These trends provide momentum into FY '26 and beyond. Our diversified earnings base continues to expand with nearly 75% of the income relating to annuity style income. Our income now comes from sources beyond traditional residential mortgage aggregation, including commercial lending, asset finance, our own loan manufacturing, White Label products and broker services. Subscription income rose 13% to $21 million, driven by increased adoption of BrokerEngine Plus and other value-added services. Manufacturing earnings surged 53% to $16 million, supported by scalable processes and prudent risk management. These results reflect the hard work, innovation and commitment of our team and our broker partners. Over the past 2 years, we've invested in technology, expanded our product suite and made strategic acquisitions that are now contributing meaningfully to our bottom line. Our capital position remains strong with $182 million in investments and liquid assets and high-performing investments, providing us the flexibility to reinvest where returns are compelling. With those opening remarks, I might just turn straight to the presentation, if I can and jump to Page 3 of the deck. A couple of highlights there. We've been operating for 31 years. And through those 31 years, we've been continuing to deliver innovative solutions in the finance industry. As I mentioned, 4,200 brokers, which represents 1 in 6 of all brokers operating in the marketplace are coming from AFG. 550,000 customers are being supported each year by AFG brokers. The year has seen distribution earnings contribute 81% of our business and manufacturing 19%. Our residential mortgage book in an environment where we've had high levels of activity has grown by 5% on a number of $211 billion, which is an indication when you have such a large loan book or a trail book sitting there, the ability for it to grow is a testament to the work of our team and our brokers. Broker services is the other important aspect, 3.8 services, which is an increase of 6% on FY '24 and the number of services adopted by our brokers. We saw an increase of 9% in our asset finance business. And as mentioned earlier, our loan book within AFG Securities sits at $5.5 billion, which is an increase of 23%. Importantly, also, our investment in Thinktank represents 32%, of which $6.8 billion of their loan book, which is an increase of 17%. So we have a strong market position underpinned by market-leading broker technology, experience management and disciplined capital management. If I jump ahead to Page 5. I wanted to talk about our strategy. And previously, we've talked about having 3 strategic pillars within our business, and we believe we are delivering on this strategy. Our first strategy -- strategic pillar is grow our broker network. So we've seen the increase in number of brokers, and we've also completed 3 investments in broker investments over the period, which help solidify and expand our footprint within the distribution side. Strategic pillar 2 is about providing market-leading technology. 50% of the users are now on BrokerEngine Plus with a strong Net Promoter Score approaching 50. It's driven -- we've also invested in technology within our manufacturing business and delivered $2.5 million in annual efficiency gains within AFG Securities, which have been able to use to scale without the corresponding increase in headcount. Our strategic pillar #3 is delivering high margin through our distribution network. We've talked about the AFG Securities loan book growing by 23% and that important number of 58% of brokers writing multiple products. Jumping to 25, where we've got financial highlights. I want to talk about really the EBITDA by segment. So gross profit, the distribution business is up 10% to $68 million, plus 17% in diversified product margin and an additional $2 million in broker subscription services. The larger loan book within the manufacturing business has translated into a 53% increase in earnings at an EBITDA level of $16 million, driven by a $10 million interest margin and an 8% reduction in underlying cost to income for that part of the business. We'll talk a little bit later around the arrears and product sets which sit within that $5.5 billion book, but we have -- we are witnessing improving arrears and no losses. The other important thing I'd like to call out is that 73% of annuity style earnings within the business, which helps set up the business as we look forward to expand and grow. Jumping to Page 8, we talk a little bit about our broker network. So more broadly, we're seeing broker share move over the period from 75% to 77% -- we believe it's moving towards 80% and moving comfortably towards that number. There might be digital opportunities from other lenders, but brokers win on trust, competition and choice. And we have a structural advantage underpinned by the best interest duty. Our own broker network has grown 5%, which again represents 1 in 6 of brokers in the marketplace. And consolidation is one of the things we've pinned our strategy around. We believe that's continuing to occur within the marketplace. Our consolidation, we will see more larger groups exist within the broader marketplace. We do over-index, as we've said before, in the larger broking groups, and we see that as a real opportunity for future growth. We continue to deliver great value to our broker network. Distribution earnings are up 9%. A reminder again that within that residential business, a majority is annuity style income, and it provides predictability and a platform for growth. It's also benefiting clearly from that record settlement, which are flowing through. And brokers are also adopting additional products through the offerings that we provided, be it through Partner Connect or a use of technology or marketing tools. Manufacturing earnings drive up by 27%, securities book being that 23% growth number and an improving NIM, which Luca will talk about in his section. The chart on the right is something which is really important. And I do look back to when the business listed back in 2015 and the transition of a business which was predominantly aggregation and broker-related -- mortgage broker related and seeing -- reflecting how that residential or that earnings or the gross profit has changed over that time. So that now $38,000 per broker is existing from our network. And you can see through that chart, whilst the residential services have maintained a relatively flat number, we've been able to execute against our strategy to drive additional earnings through the group. Quarter 4 lodgements, and this is on Page 10. Now quarter 4 lodgements are up 19% to about $28 billion, and July was stronger again. As I mentioned in the preamble, July was our best ever month with $10 billion worth of lodgements, which helps fuel our quarter -- quarter 1 FY '26 numbers, it starts in a good place. August has been something slightly different, still strong, stronger in the second half of the month to date, primarily on the back of that interest rate change, which has happened. So we expect a strong finish to August as well. A record pipeline is existing. So we've increased lodgements through the network by 18%, which translated into increase in settlements by about 15% for the year. And again, you can -- I talked about that residential closing book, which has moved from $200 billion to $211 billion over the period. There has been an improved level of runoff in the broader residential book, which has assisted in that growth of the book, but it's down from its peak levels of 28%. Our actuarial analysis, it's probably sitting at around 26% now. Diversification on Page 11 is one of the key parts and one of the things that excites me about the result that we're presenting today. We can see the growth in earnings over the time, but we're also across 3 different avenues. We've seen our AFG Home Loans book return to growth. We've also seen an increase in the number of brokers writing more than one product class. So commercial mortgages up 14%, loan book to just over $5 billion. We've seen an increase in settlements within AFG and intelligence within the asset finance space. Insurance revenue -- insurance referrals are beginning to grow as our personal loans. And we have a pipeline of new opportunities to fit within that Partner Connect platform to enable our brokers to offer additional services to their customers and provide a complete financial package for them as they transition through their own life cycle. The other important thing is the take-up of BrokerEngine Plus. We invested significantly over the last couple of years within that part of the business, and we're starting to see the returns on that business. So the subscriptions that have increased 28% to 3,700 and includes 3,000 AFG brokers representing a take-up of around 50% of our users. There's also a higher take-up of additional services we're offering, including the marketing, compliance and PI insurance. The story for AFG Securities on Page 12 is that of growing volume and improving NIM. Settlements are up 65% and is in line with a record high. AFG Securities sits at about 4.3% of our own market share, which is the highest result since FY '22. And if you remember, back in FY '22, it did benefit from an abnormal funding market. The strong quarter 4 momentum, similar to the residential broking business, the strong quarter 4 result provides strong momentum into FY '26. The other important piece is that investments we've made within technology and the back office within AFG Securities has helped contribute to a lower cost-to-income ratio. The net interest margin, and again, Luca will talk to this a little further, has improved. There is a bit of noise and white noise around the second half of the year, which we've talked about previously around the cash to build spread and the negative or the inverted -- inverted cash rate there, which has helped in terms of the overall NIM. But more importantly, we're seeing cost of funds improving within warehouse renewals and the existing RMBS market remains strong and robust. And we have -- and we do expect a -- a stronger second half -- or first half, sorry, of this financial year in terms of RMBS markets. The investment in Thinktank contributed $2.5 million for the year. Again, that's 32% interest, which is up $0.4 million. Thinktank increased their book to $6.8 billion. They are -- their NIM will be benefiting from the same things as that of AFG Securities. So the outlook for that part of the business remains positive. On Page 13, the credit quality is most important. We've been able to grow our book by 23% over the period. We have seen an improvement in runoff -- but do note that in a period of historical cash rate reduction cycles, it does impact the runoff rate over that period. We've established funding through 4 warehouses. We undertook $1.2 billion in RMBS during FY '25. We've just mandated another RMBS issuance, which will occur in all things being equal in September. And we also included our inaugural private placement, which doesn't sound like much, but it also validates the actual AFG program where we can actually originate and originate warehousing out of warehouses into not just the RMBS market, but other markets in -- to provide a variation or diversity of funding. Our excellent loss history is maintained. You can see the data there. 95% of our book has no adverse credit experience. The balances -- the retro product in particular, concentrates on the smaller and more -- I think there's some self-selection there. So balances are below $500,000. Again, a reminder, we've been doing this business for 15 years through the cycles. And we've lost just $268,000. We were able to leverage our homegrown advantage in terms of data and insights from other lenders to help assist in improving arrears. We have increased our ECL prudently to 3.7%, and that's primarily by the fact that we've grown the book to $5.5 billion. And we will continue to work with our borrowers. Hardship is stable as at 30 June at 0.5%, which is in line with December. But we did -- I do note, we did see some -- a further slight improvement in that in July. I will pass now across to Luca to talk about the financials.

Thanks, Dave. I'll start on Slide 15. The momentum we saw at the end of FY '24 has carried through into FY '25, and that's reflected in the strength of our second half results. At a headline level, underlying NPATA was $40.8 million with our statutory NPAT up 21% to $35 million. Gross profit has lifted 12% or $15 million with growth across both distribution and manufacturing. I'll step through the gross profit component shortly. I did just want to spend a minute on the operating cost base given there's a few moving parts within that. Total OpEx was $96.6 million, consistent with our first half run rate of $48.5 million. That number, however, includes several one-off costs, which we have highlighted on the slide. If we normalize for these, then half 2 OpEx was $46 million, a step down from the first half. Broadly, the cost base was well controlled and our cost-to-income ratio decreased from 63% to 56% in the second half. Reductions were delivered across most categories year-on-year. As we flagged at the half year, we did make targeted investments, including new sales roles and new initiatives such as our broker investments program. These roles are income generating. We also converted a number of fixed-term contractors to permanent employees, which improves financial efficiency, but is classified differently in the P&L. The new roles this year, combined with wage growth, the super guarantee charge and higher bonuses reflected stronger operating performance lifted our team costs by $7 million year-on-year. That accounts for the majority of the ongoing operating cost base increase. Looking ahead, we made several changes to the team late in the financial year. And as a result, we anticipate people costs being slightly higher in FY '26, driven by wage growth and the SGC. Finally, on OpEx, we prudently lifted our ECL provision in line with book growth. Dave touched on the quality of our book. And at the end of the year, the ECL stood at [ $3.5 ] million and represents 0.07% of the outstanding loan book balances. Further detail on book quality is available in the pack. Turning to shareholder returns. We've declared a fully franked final dividend of $0.053 per share with a record date of 9 September and a payment date on 8 October. Looking forward, our dividend payout ratio for FY '26 and beyond will sit between 50% and 70% of adjusted NPAT, providing flexibility to reinvest where returns are compelling or return excess cash to shareholders if appropriate. I'll touch more on our capital management approach shortly. On to Slide 16. This summarizes the performance across our segments. Distribution continues to be our core business, contributing $68 million in EBITDA, up 10% on FY '24. Manufacturing delivered $16 million in EBITDA, up 52%, driven by record book size and record settlements. Central Services recorded an increase in total costs of $28 million. Cost held centrally increased by 13% or $2 million if I normalize for one-off costs associated with uplifting of make provision on our Perth office. Before I move off this slide, I want to highlight the return on equity for our distribution business, which is at 39%. This is clearly a strong return and is evidence of the returns available to our shareholders where we choose to reinvest in the business. Turning to Slide 17. As I mentioned earlier, gross profit grew strongly, up $15 million year-on-year or 12%. Within distribution, the breadth of our earnings base is clear on this page. Distribution gross profit recorded the strongest growth we've seen in some time. As we've highlighted before, growth in settlements across the broker network does increase broker payments, but this year, settlements rose 15% and as a result, contributed an extra $1 million to GP. The breakeven on the upfront is settlements growing at around about 7% per year. Importantly, our strategy of continuing to expand the products and services available to our brokers, enabling them to better serve their customers is proving effective. These business lines delivered healthy double-digit growth year-on-year. On the other hand, as we noted at the half year, asset finance aggregation income declined with the decline accelerating in the second half. Strong settlements growth here was more than offset by higher payout levels as competition intensified. We have seen competitive pressure ease more recently, but we expect the first half of FY '26 will reflect a similar year-on-year decline. Moving to manufacturing, and I won't spend too much time given Dave's earlier comments, but we've delivered solid book growth with NIM benefiting from the carry on the basis swap risk. Turning to Slide 18. We have gone through a period of targeted investments in uplifting capability and continuing with that broadening of our earnings base. This slide helps to illustrate the main drivers of earnings growth and is similar to the one discussed at the half. It aims to show that we are seeing as the main drivers of our earnings growth and how they may flow into FY '26. On broker services, as mentioned earlier, we are continuing to see solid growth in users on our BrokerEngine platform and the $1 million here reflects the uptake -- the higher uptake as we continue to enhance the platform. It's early days in our broker investments program, but we've now converted 3 of these investments, and we are encouraged by the pipeline. Importantly, we are disciplined and of the roughly 40 we've reviewed in FY '25, only 3 made sense right now for both the broker and AFG. Perhaps if I can elaborate, we are seeing 2 broad groupings: smaller businesses in the $0.5 million to $0.7 million EBITDA and larger groups in the low single-digit millions. There is no cookie-cutter model. Brokers serve their customers differently. So ensuring we are confident with the investments we are making is critical to the long-term success of this program. On AFG Securities, to be clear, what we are showing here is simply the impact of a higher opening book. We've touched on the NIM and the benefits we saw there from the base of swap risk, but we still see ourselves focused on responding to the competitive environment in order to grow our book and a changing interest rate environment generally leads to an elevated runoff as customers inquiry lifts with brokers. Overall, this slide demonstrates that we are actively investing to broaden our earnings base -- these initiatives should provide ongoing tailwinds into FY '26 while ensuring we remain disciplined in execution. Turning to Slide 19. This slide demonstrates the strength of our financial position and where we differ from many in the sector. Our cash generation is both predictable and diversified. Travel commissions provide actuarially proven earnings, while broker services income continues to grow and is becoming an increasingly reliable income stream as brokers embed our services into their processes. As long as we deliver services our brokers value, this income provides high-quality recurring cash flows. The predictability of these cash flows gives us the confidence to invest through the cycle, supporting sustainable returns for our shareholders. We maintain a strong balance sheet, $64 million in unrestricted cash, $87 million in trail net assets and $49 million in strategic investments. Cash conversion this year was 90%, which typically sits closer to 100% and this year is simply the impact of timing with last year at 107%. We finished the year with $12 million in net cash, providing capacity to fund growth and maintain prudent gearing. Finally, on Slide 20, our capital allocation framework remains focused on long-term value creation. We regularly review our portfolio of investments to ensure capital is deployed only into strategically aligned assets that exceed our internal hurdle rates. At the same time, we place strong value on preserving balance sheet strength so that we remain agile and able to respond to opportunities as they arise. Our aim is to deliver predictable earnings growth through margin expansion, efficiency gains and disciplined capital deployment, particularly into AFG Securities and our broker investments program. And when compelling growth opportunities are limited, we return surplus capital to shareholders. This has been a period of consolidating our earnings base. The investments we are making are targeted, scalable and already contributing to results. Our dividend policy provides flexibility to invest where returns are attractive while also supporting shareholder value through consistent distributions. Our focus remains on sustainably growing EPS and return on equity. With that, I'll leave it there. Thanks, everyone, and I'll now hand back to Dave.

Thanks, Luca. I'm just going to turn to the outlook, which commences on Page 22. And the charts on this page are pretty self-evident. There's something which has been -- we've used and disclosed previously, that multiple case rate reductions are forecast in the medium term, supporting a strong outlook for residential and commercial. Whilst market conditions are subject to a dynamic macroeconomic environment, there are some overriding thematics, which are supporting our business. We are seeing the cash reductions washing through, which is increasing and improving market confidence and activity and nonbank funding costs are currently decreasing in the cash reduction cycle. So feeling in terms of those high-level macros are going to be supportive of the business over the period. Brokers on Page 23 are increasingly integral to the marketplace. Consumers value the broker channel and providing competition and choice. We're seeing the average mortgage size increase while cost of living pressure remains. Brokers achieved an average of 35 basis point rate reduction. So the overriding thematic in terms of why someone would continue to use a broker remains self-evident there. They are -- brokers are the most important channel for lenders. We're seeing continual branch closures and it's the only -- at 77%, which we feel grows to 80% and potentially a little higher, we feel that they are the only channel that's going to provide sustainable and reliable volume to all lenders' balance sheets. And the brokers needs are evolving and the industry consolidation is continuing, and we expect that to continue. And we've positioned our balance sheet to invest in broker proposition to meet those evolving needs, whether it be through investment in technology or continually focused on helping our brokers consolidate or grow their own individual shares in the marketplace. If I turn to Page 24, we can talk about our results for what the start of the new financial year looks like. The results are comparing to July 2024, which shows a high level of increased volume from '24 to '25 across most aspects of our business. The AFG Home Loans business is probably down a little bit, but the beneficiary of that has been the AFG Securities business. I will note that in August, those numbers are still relatively strong or are strong. And in fact, the AFG Home Loan number in comparison to -- August year-to-date compared to -- or month-to-date compared to the same time last year, the AFG Home number is actually flat rather than negative. So it's looking a bit better there. Increased level of activity across all parts of the market. Importantly, our 2 biggest markets being Victoria and New South Wales are experiencing strong growth in July and also into August. Slide 25 is something -- is a slide that we introduced in December -- December repack, and it really talks about our aspiration. So when we talk about those 3 strategic pillars, executing against those strategic pillars, we believe we've got a line in the sand as what our aspiration would like to be, all things being equal in the marketplace. On the left-hand -- sorry, in the middle there, we say what the current percentage or current statistics are and what our aspiration has been. So those aspirations haven't changed since December, which is around what we'd like to achieve. And I think it's fair to say where we are right now, 6 months into that journey, there's nothing's changed in terms of our outlook about those aspirations into the future. So we feel as if we're on the right path, and we feel as if those FY '29 aspirations are something that we could really shoot for. A final slide here is really about positioning AFG and how we can look to capture future growth opportunities. There's 4 elements that we look at the marketplace that drive market value creation. The first is the macro. We do see favorable market conditions. We see population growth. The labor market is strong, and there's cash reductions in the pipeline. The industry itself is evolving. So that's the other part of the thematic, which improved -- which assists in our outlook. There's emerging trends towards favoring larger integrated aggregators, and we're starting to see that happening in the marketplace by technology and obviously, our investments so year-to-date in terms of our broker investment proposition. The sector itself -- we're seeing credit growth accelerating. We're falling -- nonbank funding costs are reducing and the constrained housing supply assists in all aspects of our business. And the AFG difference, which I think is really important is 31 years. Now we are Australia's first aggregator, and we're the only one with the lending business. But probably one of the other things that I'd like to highlight there is that we have traded through a large number of cycles over those 31 years. So we do have a significant level of experience in running businesses through different parts of the cycle. We've got products and services that deepen our broker loyalty and network growth, generating good return on capital and strong leadership within the business. I always feel awkward saying that given that I'm the leader. But with, again, a proven execution through the cycle. So looking ahead, we remain cautiously optimistic. While macroeconomic conditions continue to be dynamic, we are a stronger business than we were 3 years ago. The structural shift towards broker-led lending, combined with our scalable platform and proven execution positions AFG to continue delivering sustainable growth and shareholder value. I'll pause there and open up for questions.

[Operator Instructions] Your first question comes from Richard Wiles from Morgan Stanley.

I've got a couple of questions. One is about the industry in general and the second one is about your position in it. So on the industry in general, David, the majors recently have been really emphasizing reinvestment in their proprietary networks and of course, have been hiring more mortgage writers. Have you seen any change in their approach to brokers? I mean they're obviously trying to do more in proprietary. But has it changed their approach to brokers like risk appetite, types of loans they're willing to accept? And have you seen any sort of early efforts to increase price differentiation between the broker channel and the proprietary channels?

Richard, the short answer is no. All lenders, and I'll talk about the majors and also Macquarie in that place, remain pretty well engaged into our business. So we've always said that banks with their own proprietary channel are entitled to try and grow their part of the business. But I think you've got to go where the customers go. And at the moment, with 77% moving to 80% and the benefit of best interest duty, banks need to continue to participate in that part of the market. And if I look at -- despite the talk about wanting to originate more business through the proprietary channel and investing in those, I can say that I'm not aware of many brokers within the AFG network who leave the network and to rejoin a financial institution. And if I look at the flows from 12 months ago in terms of outflows and the percentages, there's not been a large movement downwards between lenders from, say, 12 months ago to where they are today. So the overriding and I'm going to use that word again, thematic is that you've got to respect where the customers want to go. And at the moment, the customers are looking for choice, competition and convenience, and that's what a broker can provide.

Okay. And that brings me to the second question. You've referenced a number of times the broker share at 77%, likely to keep growing to 80% and perhaps beyond. You also said, David, that I think you do -- you have 1 in 6 brokers in the country. So I think that was a reference. So a bit above 15%. I'm interested in whether you think the broker industry in terms of numbers can keep growing. Slide 23 shows those numbers. Also, within the broker industry itself, given your service proposition for the brokers, given your sort of bolt-on broker acquisition strategy, do you have a target for your share of the industry? Does 1 in 6 become 1 in 5 eventually? Can you have a bigger share of a growing industry?

Look, our proposition -- our view on the marketplace is that we do think ultimately, consolidation will happen. So we talk about those 22,000, 23,000 brokers. I think we need to define those brokers in terms of how active they are and how regularly they're lodging loans and whether there's someone who might be a part-time broker or someone who's just getting into the industry. We think that over time, you'll have a number of brokers -- I referenced AFG being around for 31 years, which means some of our brokers have been around for 20 to 25 years, and they are looking to exit the industry at some point, and that's where our broker investments program assists in those exit programs and to bring in new brokers. We do think consolidation will happen over time. We're seeing that consolidation happen. And we do feel over time that there is a possibility or a real possibility that the broker numbers may reduce. But right now, it's a good time to be a broker and there's opportunities. The real successful brokers will be those who can build a network, build a customer base and continue to look after those. And we think our strategy around providing additional services to those broker to provide their customers helps make those customers sticky and return back to them. So if you've got a broker who's offering a home loan, who can now offer an asset finance opportunity or a commercial or self-managed super fund opportunity to assist in small business, those types of additional services just drive a stickier customer and therefore, a stickier broker with AFG.

And if I could, I'd like to ask one more question. You talked about 58% of the brokers writing more than one product now. What sort of number can that get to? I assume there's sort of a natural limit. It won't get to 100%. Can it go a lot higher from here? And also, what's the sort of revenue -- average revenue uplift you get from a broker who's writing multiple products versus, I suppose, the 42% who aren't writing multiple products. Is there a meaningful revenue uplift?

I'll leave the math on that one to our CFO, Richard, but I'll get him time to get his mind right. But that 58% kind of grow, the answer is definitely we'd like to ultimately achieve 100%, but know that 100% isn't ever likely to be achieved. I think the real answer is it's not just one service, but it's actually more than one. So we've used a statistic around 3.8. Can we provide additional services to the broker? And importantly, with our technology, make it easier for them to refer that business or actually undertake that business themselves. So the headline number of 58% is important, but it's actually the number of repeat customers or types of customers and additional services. So can you -- can the broker provide an asset finance deal? Can it provide a referral for life insurance or income protection insurance? Can it provide a referral for home insurance? Can it provide additional services in terms of whether it be a reverse mortgage or a settlement -- a settlement agents referral? Can it be another transaction, which might be utility services such as connections. Those are the sorts of things which provide a greater customer experience, which is seamless within their technology, but we're not -- we're simply referring those to a third party who can execute and use their expertise to execute. So in terms of the numbers, I'll pass across to Luca.

You would think I'd get a better answer in the time that you gave me to prepare for it. But Richard, it's a great opportunity for AFG brokers to service their customers better. There's a slide in the pack, Slide 9. Not all services create equal in terms of the revenue and the margin that we produce. But you can see on that slide is roughly about 1/3 comes from our diversified products and subscription income. As Dave said, we think we can grow both the number of products and probably the revenue we generate out of those things. So there's 2 different multipliers within that.

[Operator Instructions] Your next question comes from Tim Lawson from Macquarie.

Just clarifying on the comments on August AFG home loan volume being flat. Can you just sort of unpack the securitization part of that versus the White Label and remind us how long -- I think it was NAB that's no longer writing White Label, if that's -- please correct me if I'm wrong, but how long you've got to cycle that sort of, I guess, a little bit structurally weaker White Label versus a more profitable securitization side?

Sure. So NAB decided to cease their White Label operation through Advantage and had a run time of 3 or 4 months. We elected to turn that off effective 1 July. So to be honest, we were of the view that, that White Label was probably closer to the end of life than the start of life, Tim. And we've started to not promote that product as much as we had some of our other White Labels. So I think at one point towards the end of the financial year, we're probably only writing around about $50 million into that program. So the numbers that you'll see for July and August are excluding any AFG Home Loans numbers -- sorry, Advantage numbers or NAB numbers other than some deals which may have been in the pipe at the time that we ceased taking new applications. So I think the short answer is to that is that July was down predominantly because we didn't have a White Label in Advantage operating and our new Alpha product or refreshed Alpha product had not yet launched. July -- so that was July. August, what we've seen so far in the month is that our new White Label or refreshed White Label with Adelaide Bank or Bendigo Adelaide Bank has been launched. And so that's taking up some of the volume which was missed with Advantage, but we are seeing particularly strong periods within AFG Securities. So the split, we've always talked about that 50-50 split. It probably sits around something closer to 55% to 60% within AFG Securities and the other balance being the traditional White Label program. Does that make sense?

Yes. Okay. So it sounds like the securitization product is still growing and you're sort of cycling a bit of change through that White Label, that lower margin component of that home loan activity.

That's correct. Correct.

And just on your comment on runoff. Obviously, it's improved a bit, but just in terms of just like what you're sort of seeing now, what you're having to do to improve that? Or is just that that's the natural reduction. We can see obviously that refi modules are down, but just sort of understand your ability within that securitization product to impact the runoff rate?

Look, I think like all lenders and particularly when you -- we are 100% reliant on broker, the challenge is always when a customer is wanting to refinance through a broker or the broker will need to go through that best interest duty program. That generally drives a need for -- or we do get an early insight into that information because clearly, we can see deals being prepared in the system. So we can be a little bit proactive around offering a rate to a customer -- a new rate to a customer to try and steady the ship in terms of that refinance proposal. But predominantly, there's not a lot you can do other than compete on price on those and really have a more -- be a bit more scientific in terms of that customer and whether they actually have the capacity to refinance to the level that they're looking to refinance at.

Yes. And then maybe a couple of questions on NIM. So obviously, some good momentum there. Can you maybe talk to just the -- maybe quantify the benefit you've got from the rate cuts that sort of is somewhat temporary and trying to understand the sort of underlying competitive environment and referencing that to your slide that still has sort of an aspirational target of 120. Obviously, I assume that's sort of an average through a cycle, but that's -- obviously, we're not that far away from that in the second half.

I'll pass that -- our CFO who's been looking forward to this question. Tim?

So probably the best way I'll guide you to Slide 12. What we've said is the half 2 NIM was 119 basis points, but that did include the tailwinds of the lower BBSW and the cash rate benefits and the carry that we get between any cash rate decrease in the repricing that we have. So what we said is 119 for the half 2. If we normalize for that, it's 115. So there's about 4 basis points of Advantage for one of a better word in that second half number. What we said with reference to the 120 basis points in the outlook is that's a through the cycle kind of number. Internally, we're definitely -- everybody is going to have a view on the cash rate outcomes throughout the course of this financial year, and that will play through into how it impacts the NIM. It remains very tight, [indiscernible] is what I'd say, and we're a price taker.

Yes. Okay. So it looks like there's a small improvement on top of the -- on top of the sort of cash flow benefit but it's not.

Yes. we try to sort of normalize it for people because it's hard to see through. And so what we've said is $115 million in the second half be $113 million in the first half on a like-for-like.

Yes. And that $113 million was pretty clean.

Yes.

Yes. I think the other thing that's worth mentioning is that there is a recycling of some of the older cost of funds in terms of the old term deals, which were done at a particularly higher rate than they are now. So that will give a little bit of a tailwind as those -- not just the warehouses, but the RMBS deals start winding down, but that's going to be a slow process rather than an immediate uplift. So there's a few basis points which will come back through that over time purely because if you do a term deal at 110 versus 150 or 160, your cost of funds over time will improve as those -- that funding vehicle winds down.

Yes. Okay. That's very clear. And then just last question for me, just on the cost. Could you just sort of talk through again what you said around the second half cost, I'm not sure I caught that correctly.

Yes, sure. So -- for the second half, what we saw was a number of one-off costs, Tim. There's probably about $2 million of one-off costs in that second half. There's some restructuring costs that we did with the team, and then there's some [ make good ] and there's some technology stuff. So we've called out $2.5 million of second half one-off costs. The other primary uplift in the first half is obviously we had the full half of depreciation. So I guess the run rate normalizing for that is about $46 million in terms of the normalized OpEx second half.

Yes. Okay. And so just to clarify that you've got -- and this is obviously maybe pre and post-tax numbers, but you've got a one-off restructuring expense of $1.1 million in that reported to underlying NPATA. Is part of that captured in the sort of what you've talked about?

So we've stripped in the underlying NPATA. So we've tried to be as clean as we can. So that has removed that cost to give you a line of sight as to what we think the recurring earnings is of the business in the second half for the year.

Okay. So the $1.1 million is effectively just a tax-affected number relative to your 2-odd.

Yes.

Your next question comes from Jeff Cai from Citi.

A question on payout ratio. The resi upfront payout ratio improved about 20 bps half-on-half, but was flat year-on-year. Is that a sign that payouts to brokers is peaking or slowing? Or is it more mix related? And then more broadly, how should we think about the outlook of the payout ratio going forward?

Jeff, welcome. So a little bit of column A and a little bit of column B, to be honest with you, Jeff. So -- what we've said in the past is there is a natural ceiling for the payout ratio. And so at some point, that pace of change will slow. But within that, the different brokers have a different payout ratio. So it has definitely got a little bit to do with where is the volume coming from within the overall mix. So we are seeing probably more just a function of what happened in the first half versus the second half and our overall slowing in any rate. I wouldn't read too much of that, but there is a natural ceiling on the payout ratio.

Got it. And then a question on the margin versus volume trade-off. The headline NIM likely expands next year given the lower funding cost and goes above your through-the-cycle target of 120 how should we broadly think about how you manage margin versus volume trade-off? Is there -- should we expect a greater focus on volume growth going forward as you redeploy some of these margin benefits?

I think the answer is -- the quick answer to that is yes. But I think the counter to that, Jeff, is we've always been a business that looks at our return on capital on parts of the business. And if you look through historically, we have slowed lending where that return is no longer available to us. But we feel right now where we are, we've got an underlying opportunity to grow volume, and that's what we're focused on. And -- but we'll also be mindful of the impact that has on our return on capital.

There are no further questions at this time. I'll now hand back to Mr. Bailey for any closing remarks.

It's just close to 9:00, so I'll let you get back to [indiscernible] David. But thanks very much for joining us today. I appreciate your support and look forward to catching up with a lot of you over the next few weeks. Thank you.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.