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

On behalf of the Board and management of AFG, I would like to welcome you to Australian Finance Group's 2020 Annual General Meeting. As a courtesy to all shareholders and guests present, please turn off or silence mobile phones to avoid disrupting the meeting. It is past 9 a.m., we have a quorum present and I declare the meeting open. Please ensure you have registered, and even if you are not a shareholder, have obtained a registration card. The meeting agenda will be as follows: introductions and housekeeping, my Chairman's address, then our CEO's address, the formal business and close. In Perth, we are joined by nonexecutive Directors, Brett McKeon, Craig Carter, Melanie Kiely and Jane Muirsmith. Executive Director, Malcolm Watkins, joins us today via teleconference from Queensland. I would also like to introduce our CEO, David Bailey; our company's Secretary, Lisa Bevan; our CFO, Ben Jenkins; and our COO, John Sanger. We also welcome [ Fiona ] and [ Rosalind ], representing Ernst & Young, the company's auditors. They are in attendance and will be available to take questions from shareholders. [ Kisome ], representing our share registry, Link Market Services, is also in attendance. Are there any apologies to be noted? Silence is no. Before moving on to the formal part of the meeting, I will now provide a brief address and then invite David Bailey, our CEO, to address the meeting. To recap the year that was, the 2020 financial year has been highly successful for AFG. AFG reported a net profit after tax of $38.1 million, a 15% increase year-on-year. All divisions of the company have delivered growth and overall lodgements were up 22% year-on-year. Our combined residential and commercial loan book is sitting at $163 billion, supported by 2,975 brokers now accessing over 70 lenders on our panel. AFG spent the first part of the financial year considering and managing the potential flow-on effects from the February '19 findings of the Hayne Royal Commission and its proposed regulatory recommendations. We announced a Connective merger in August '19. COVID-19 struck the Australian community in February 2020. And all the while, we have been proceeding with the implementation of an improved broker technology platform. It has indeed been a very busy 18 months. I would like to thank AFG staff, our brokers, my fellow Board members for their support of the company and each other during what has been a remarkable and challenging year. Once again, I would like to thank you all for your attendance and for your continued support of AFG. I will now hand over to our CEO, David Bailey.

Thank you, Tony. I would also like to extend my appreciation to those of you able to attend in person, and for all shareholders who've taken the time to participate in today's meeting through the proxy voting process. As Tony touched upon, AFG has had a very successful year. Our annual results released in August have demonstrated the company's resilience during a time of extraordinary upheaval in the economy, reporting its best financial result to date. AFG's residential loan book is now at more than $154 billion, representing growth of 5% on FY '19. Today, rather than focus on the year that was, I propose to discuss the past few months and our view of where the market may be headed, especially given how rapidly the market is moving. Due to a range of factors, we've been preaching a more moderate impact on residential pricing since the beginning of the pandemic, although less alarmist than others, where the press can accelerate the spiral of pessimism. So in much the same way today, we'll be reading less into the immediate bounce back that is being reported. Perhaps preferring a slow build, but thankfully, not from the 30% decline that others were forecasting. Turning to our current trading. I will start with our Residential Broking division. You may remember that our September quarter mortgage index reported record lodgement activity. Given the high level of economic activity across the broader economy, it is pleasing to see October volumes continue the momentum. Significant government incentives at both the federal and state level have targeted the first home buyer market. As a result, first home buyer market share activity has increased to 23% in October, up from 15% in the same period last year. The major lenders have been dominant in this segment, capturing 65% of loans issued to first home buyers in October. Whilst remaining stable, the refinance boom evident in the months during the broader national lockdown now appear to have returned to more traditional levels from a peak of 38% in April 2020 to 21% in October. This is a decrease in year-on-year from 26% in October 2019. Upgraders have maintained a strong position in the market. Those who are confident in their own personal financial circumstances during the pandemic are looking for opportunities to move to a larger home. With the increased proportion of first home buyers in the market and the early refinancing activity, the average loan size is flat compared to October 2019. A look at October trading shows increases in lodgements across the country. Lodgement volumes for October exceeded $6.7 billion. This is the highest figure that the company has ever recorded and represents a 16% increase from October last year. We saw the largest percentage increase in volume with lodgments increasing 41% from the same period last year in WA. This was followed by Queensland with a 30% increase and South Australia with 25%. New South Wales and Victoria also recorded year-on-year increases of 7% and 11%, respectively. As brokers have navigated the challenges of this period of market disruption, their role as a trusted support for their customers has meant they have continued to deliver competition amongst lenders and choice to our customers across the country. The major lenders have seized the opportunities presented by favorable funding conditions and have aggressively targeted market share growth with generous cashback offers and very competitive fixed rates for new customers. This has seen the major lenders regain market share from the nonmajors. They now hold 60.1% of the market, up from circa 52% in the same period last year. The non-ADI's ability to compete and retain existing customers in the residential mortgage market is being negatively impacted by the very low funding pricing available to ADIs through the RBA's term funding facility support package. Whilst we are very supportive of the government's actions to ensure liquidity in the market, we're hoping to see non-ADI lenders, including our own AFG Securities business, be afforded access to similar funding lines. The introduction has led to unintended negative consequences for competition. Looking at our own securitization business, we slowed lending in the last quarter of FY 2020 due to the potential ongoing dislocation in the funding markets. The uncertain outlook necessitated a cautious approach to lending for a period and a key reason for the equity raise conducted in May 2020. However, funding markets returned at a faster rate than expected and was support provided by the AOFM, the AFG Securities division is now growing again. Subsequent to the equity raise, we completed 2 term transactions, totaling $1.2 billion. This included $500 million in our inaugural nonconforming trade. Both issues were well supported across the market from both domestic and international investors, which is a testament to the quality of our originations and ongoing customer management. I'm also pleased to report that our hardship and arrears numbers in the AFG Securities loan book continue to be better than a large number of our other lenders. Those customers in full deferral remain at just 0.38% of our total book. Those entering into a payment arrangement, mainly converting to interest-only, sit at 1.6%. Combined, this percentage of the book sits at 1.98%, which is significantly inside the circa 10% initially reported to the market at the time of our equity raise in May 2020. On the regulatory front, our preparations are well underway for the introduction of the new legislative requirements of the best interest duty for mortgage brokers and the proposed changes to the responsible lending laws. We took preemptive steps at the beginning of the year to prepare for the introduction of best interest duty and demonstrate to customers that they've always been and will remain the #1 priority. Our brokers are well positioned to meet these new requirements. Looking at the market today, we are seeing property prices being supported by a strong underlying demand for residential mortgage finance. Record low interest rates are expected to be maintained for an extended period, and in fact, the RBA has signaled this. The federal government budget announcements included a welcome focus on homeownership as one of the pillars of return to growth. Their expenditure on measures to increase employment and investment and targeted measures to help first home buyers and to stimulate the construction industry support our industry. The proposed tax cuts will help household budgets, which is a positive for homebuyers. And as a major intermediary for access to credit, brokers will continue to play a vital role for homebuyers and increasingly for business borrowers. Finally, with the proposed merger with Connective Group Proprietary Limited, we still await satisfaction of the noncustomary condition outlined at the time of the transaction was announced, which is a decision by the court surrounding the Connective shareholding dispute. In conclusion, AFG remains resilient and well positioned to expand our already significant footprint in the Australian market. I would like to extend my thanks to our staff for their adaptability and commitment to the company, as we dealt with office shutdowns across the country, and to our network of brokers for their unwavering support of their customers during these extraordinary times. I look forward to another successful year of the company, and I thank you for your continued support of our business. I would like now to hand over to Melanie to conduct the formal business of the meeting.

Thank you, David, and good morning, everyone. Before I open the floor to questions, I'd just like to outline the voting procedures as indicated. Further to Note 8 of the explanatory notice -- of the notice -- notes of the Notice of Meeting, in the interest of equitably representing the views of all shareholders, we intend to call a poll in relation to each of the resolutions considered at this meeting. The poll will be conducted at the end of the meeting. Each person who signed in today will have received either a yellow voting card, a blue card or a red card. If you're holding a yellow voting card, you can vote and ask questions. If you're holding a blue card, you may ask questions, but you can't vote. And red cards are for visitors who may neither ask questions or vote. I'll outline the poll procedures prior to conducting the poll. The results of the poll will be released on the ASX after the votes have been counted, and we refer you to the Notice of Meeting for details of voting exclusions, and copies of the notices are available. The proxy results for each resolution, which have also been released to the market prior to this meeting, will be shown on the screen behind me. And to the extent that open proxy votes are held by the Chairman of the meeting, those proxies will be cast in favor of the resolution. Now with regard to questions, if you have any, please can you state your name and whether you're a shareholder in your own right or an attorney, proxy or corporate representative of a shareholder. You will be invited to ask questions now as we discuss each of the resolutions at the -- or as we discuss each of the resolutions at the end of the formal part of the meeting. I'll now open the floor to questions. Please begin by clearly stating your name. No questions? Okay. Thank you. As there are no further questions, I'll move on to the formal proceedings of the meeting. The Notice of the Meeting. I've been advised by the company's secretary that the notice of the meeting has been properly circulated. And if there are no objections, I'll take the Notice of the Meeting as read. Additional copies of that notice are available if you want them. I've received confirmation that the presentation materials for today's Annual General Meeting have been lodged on the ASX in accordance with the listing rules. Any directed proxies that are not voted on a poll at this meeting will default to the Chairman of the meeting, who is required to vote those proxies as directed. Any undirected proxies that default to the Chairman of the meeting will be voted in favor of the resolutions including where the resolutions are connected directly or indirectly with the remuneration of a key management personnel. A copy of the minutes of the last AGM of the company held on the 22nd of November 2019 are available at this meeting if any shareholders wish to inspect them. I'll move on to the first item. The first item on today's agenda relates to the financial report of the company for the financial year ending the 30th of June 2020, together with the Director's report and the auditor's report. It's not necessary to formally pass the 2020 financial reports. However, as shareholders are gathered here today, it's a convenient time to ask shareholders whether they wish to address any matters in these documents. I now invite any shareholders to comment or ask questions on the reports. Questions may be also asked of the auditors in relation to the conduct of the audit, the content of the audit report and accounting policies adopted by the company and the independence of the auditor in carrying out the audit. If any shareholders have a question or comment, please raise your yellow or blue card, and again, please begin by clearly stating your name. Do we have any questions? Okay. As there are no further questions, we'll move on to the next item of business. As I advised earlier, we will conduct a poll in relation to each of the resolutions considered at this meeting, and the persons entitled to vote on this poll are all holding yellow voting cards. Once you finished marking your card, please place it in one of the ballot boxes that will circulate the room after all the resolutions have been read. If there are any aspects regarding voting of which you're uncertain, please don't hesitate to ask the Link staff, who'll be circulating the ballot boxes after reading all the resolutions, and they'll be happy to help you with any questions. Okay. I'll move on to Item 2 of the agenda, the election of the Director. As stated in the Notice of the Meeting, a Director, other than the Managing Director, must retire from office no later than the longer of the third AGM or 3 years following that Director's last election or appointment. Retiring Directors are eligible for reelection. Brett McKeon was last elected as a Director at the 2017 AGM, and he retires and being eligible, offers himself for reelection to the Board. All Directors' details are set out in the Directors' report on Pages 11 and 12 of the 2020 Annual Report and at Page 5 and 6 of the Notice of the Meeting. So I won't repeat all those details at this stage. We now move to Item 2, and I move the following resolution that Brett McKeon, who retires as a Director of the company in accordance with Rule 8.1(e) of the company's constitution and being eligible be reelected as a Director of the company. The proxies received for Resolution 2 are displayed on the screen and show a majority in favor of the resolution. Are there any questions or comments at this stage on that? Okay. If there are no further questions, I'll now put the resolution to a poll. Please can you complete your voting card for this resolution? [Voting]

Okay. We'll now move to Item 3 on the items of business, the adoption of the remuneration report for the financial year ending June 2020. Under the Corporations Act, listed companies are required to include as part of their Director's report, a remuneration report, which includes specified information. The Directors have prepared a remuneration report for the period ending 30th of June 2020, and it's included on Pages 19 to 34 of the annual report, which has been made available to shareholders. The Corporation Act also requires company to put to shareholders a nonbinding vote to enable shareholders to voice their opinion on matters included in that remuneration report. I'll remind key management personnel and their associated parties that voting exclusions apply to this resolution under the Corporations Act and excluded parties should not vote. I now move the resolution that the remuneration report for the year ending 30th of June 2020 be adopted. The proxies received for Resolution 3 are again displayed on the screen and show a majority in favor of the resolution. Again, are there any questions or comments on this resolution? Okay. If there are no further questions, I'll now put the resolution to a poll. Once again, can you please complete your voting card for this resolution? [Voting]

Okay. We'll now move on to Item 4, the grant of the 2021 LTI awards to Executive Director, Malcolm Watkins. The company is seeking approval for the proposed award of performance rights under the company's long-term incentive plan to Malcolm Watkins, Executive Director, pursuant to the ASX listing Rule 10.14, which requires the company to obtain shareholder approval in order to issue securities, which includes the issue of performance rights to a Director under an employee incentive scheme. In addition, under Sections 200B and 200E of the Corporations Act, the company is seeking shareholder approval for the pro rata vesting of performance rights to Malcolm Watkins in the event of cessation of his employment in limited circumstances under the terms of the company's long-term incentive plan. I draw your attention to the voting exclusions applicable at Item 4 as detailed in the voting exclusion statement at Page 4 of the Notice of Meetings and remind you that excluded parties should not vote. I now move the resolution in Item 4 that approval be given for the purposes of ASX Listing Rule 10.14 and Sections 200B and 200E of the Corporations Act and for all other purposes, to grant 17,140 performance rights to Executive Director, Malcolm Watkins, under the company's long-term incentive plan as set out in the explanatory notes accompanying the 2020 AGM Notice of Meeting. The proxies received for this resolution are once again on the screen next to me and show a majority in favor of this resolution. Again, any questions or comments? No? If there are no further questions, I'll now put the resolution to our poll. And once again, if you could please complete your voting card for this resolution? [Voting]

I now refer to Item 5 of the agenda, the ratification of prior issue of shares. On the 13th of May 2020, the company announced that it would undertake an accelerated pro rata nonrenounceable entitlement offer and placement to institutional investors to raise approximately $60 million. On the 25th of May 2020, the company issued 12,979,760 ordinary shares under the placement to institutional investors at an issue price of $1.15 per share. ASX listing Rule 7.4 permits the shareholders of the company to ratify the previous issue of securities. The effect of approving Item 5 will be to refresh the company's 15% placement capacity under ASX Listing Rule 17.1 -- 7.1, so that this capacity would be the same as if the placement of shares have been issued with shareholder approval. I now move the resolution at Item 5 that for the purposes of ASX Listing Rule 7.4 and all other purposes, shareholders ratify and approve the issue of 12,979,760 fully paid ordinary shares in the company previously issued at $1.15 per share as described in the explanatory notes accompanying the Notice of the Meeting. The proxies received for Resolution 5 are again displayed on the screen, and show a majority in favor of this resolution. Again, are there any questions or comments? If there are no further questions, I'll now put the resolution to a poll. And once again, could you please complete your voting card for this resolution? [Voting]

Okay. Now that all resolutions have been read, please ensure that you've properly completed your voting card, and kindly lodge your voting cards in the ballot boxes that are now circulating the room. Okay. Have all persons who intend to vote now voted? Still got a few more there. Excellent. It appears that all persons have now voted. As it does not appear as those anyone who wishes to vote who has not yet done so, I therefore declare the polls closed. Rather than adjourn the meeting, I will ask the share registry and our company secretary to calculate these poll results and to announce them to the ASX when that's completed. That now concludes the formal business of the AGM. I now invite shareholders with yellow or blue cards, you may have questions or comments to ask them now. Any questions, comments? Thank you, everyone, for your attendance and interest, and we look forward to your continuing support throughout the year. Thank you for coming. I now declare the meeting closed.