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

Hello. My name is Krista, and I'll be your conference operator today. At this time, I would like to welcome everyone to the investor briefing for Australian Finance Group's 2023 full year results announcement. [Operator Instructions] Thank you. David Bailey, CEO, you may begin your conference.

Thanks very much. And good morning, everyone, and thank you for joining us. I'm joined -- with me is our CFO, Luca Pietropiccolo. And the purpose and the way this meeting will unfold is that I will -- myself and Luca will do a quick walk-through of the presentation and highlight some key points that we want to emphasize. And then we'll open ourselves up for questions. So if I just go to Page 3 of the presentation from the starting point. And I think the thing that we wanted to sort of provide some level of context was, as you know, we're operating in a market where brokers are now writing about 70% of all residential mortgages. And the market itself is around about a $535 billion market for residential mortgages and $245 billion in commercial financing. To the right, if you look back on where the business has been over the last 5 years. We've been able to bring into the stable of our businesses a number of investments which are now driving additional earnings and -- revenue and earnings into the business, the first one being Thinktank; second, Fintelligence. BrokerEngine is the -- a technology enabler. And obviously we've got the AFG Home Loans business which sits there. It's been a good year for AFG in terms of aggregation and its position in the marketplace. Last year, we were rewarded the MFAA best aggregator award. And it was very pleasing to note that in 2023 we went back to back on that. So AFG, in its business, writes 1 in 10 residential mortgages, so our brokers, our 3,800-odd brokers, are writing 1 in 10 mortgages across the country. The business is supported by a trail book which generates -- of $206 billion. Our NPAT for the period was $37 million, driving a return on equity of 24% and an operating cash flow from trading of $52 million. Turning on the page to talk about our business model, as a refresher. We operate across a large number of verticals within the business -- within the finance sector, from residential mortgages through to equipment finance and personal loans. Our aggregation services is -- are services which we allow our brokers to generate access to customers and then access driving annuity-style earnings through commissions with brokers. We have a loan distribution business, which primarily is our AFG Home Loans business, which allows us to generate additional margin over and above that which we generate from traditional broker loans. And then we have our loan manufacturing business, which is AFG Securities, where we are manufacturing mortgages and managing those from cradle to grave. And in exchange for that, we generate a net interest margin through the business. The -- so the business itself, as I mentioned, 1 in 10 mortgages written across the country; over 3,800 brokers, be it asset finance or residential or commercial brokers. And they access a panel of about 80 lenders. Our blueprint, turning to Page 5, is really around those 3 pillars of aggregation services, loan distribution and loan manufacturing. The aggregation services business has a -- of residentials has a loan book of $195 billion and a commercial mortgage book of $12 billion. Luca will talk about the importance of that in terms of how it drives annuity-style earnings, but also the thing that we're particularly pleased with this year is obviously the asset finance volumes. And with -- combining those with the volumes that we achieve with our investment in Fintelligence, we now achieve $2.6 billion worth of settlements, which is up from $1.5 billion in the prior year. And you then start looking at where we're generating our earnings from. The business started back in -- nearly 30 years ago as an aggregator. Now 35% of its earnings is being driven from being an aggregator. And we're now 65% of our profit before tax being driven from both our loan distribution and loan manufacturing side of the business. A highlight [ from ] FY '23, which we'll talk about on Page 6, talks about and reinforces this earnings diversification which has been a journey we've been on for a number of years. And what's important is it's continuing to deliver resilience and strong platforms for growth: so as we mentioned, 65% of underlying earnings from annuity-style income streams; strong growth from the new markets, so -- and strategic investments, which were the ones I talked about at the start of the meeting, and now contributing around 32% of our profit; balance sheet and cash flow generation and -- combined to drive a 3-year TSR of 29%, which compared to the S&P small industrials index is nearly twice that achieved. And the other focus of the business is continuing to invest for growth, so there's an uplift to capability and efficiency to deliver through the cycle. So we're investing in our people. We have strong employee engagement; ongoing investment improving broker -- the broker proposition, driving efficiencies and digital capabilities for our brokers and for our business. And our strategic investments are creating new market options, which we can talk about a little later. The financial summary, without stealing Luca's thunder, here talks about a 2% growth, above-system growth, of the loan book of $195 billion; a NIM for the period of 136 basis points on our AFG Securities business. It contributed up to $37.3 million. $12 million of that has been contributed from our strategic investments. Cash realization -- that $52.1 million represents a cash -- of cash flow represents 108% of realization. And the unrestricted cash sitting on the balance sheet is about $60 million. We talk about the underlying ROE of 24%. And our FY '23 loan book losses, so those losses attached to the AFG Securities business, were 0. And finally, when we talk about shareholders' returns of 29% for the period, and -- underpinning that is total dividends paid during the period of $43.8 million, which represents a 60% payout ratio. I'll just jump now to market and operations update, which is on Page 9. We talk about the impact of our diversification strategy. There's 3 charts here which talk about both the growing broker network, the growth in residential as a growing contribution from new products and also the gross profit from each of those periods. And this compares to a period of the business pre COVID, during the peak period of stimulus. So it's we were very clear, in the prior year, that we had a year which was out of the box in terms of the level of activity in the marketplace. And you can see there we've just sort of highlighted where we were during peak stimulus and where we are now currently and compared that to a pre-COVID period. So the business has gone through [ a sugar hit ] of activity in the prior period or during the period of peak stimulus. What's pleasing is actually the trend in terms of earnings against pre COVID and as at the time of listing is that the momentum is being maintained and grown in a post-COVID environment. So broker numbers. The investment in Fintelligence has allowed us to continue to grow those broker numbers. We'll talk about Fintelligence, the importance of Fintelligence and BrokerEngine, as part of this presentation, but the beauty of Fintelligence, for example, is that it allows us and our brokers to access new revenue streams and now allow those brokers to diversify their business just as we are diversifying our own business. And we talk about 65% of our earnings are coming from -- have a recurring earnings profile. So the aggregation gross profit there is matched. We can see clearly the total volume of the gross profit is softer in FY '23 compared to FY '22, again against that backdrop of a stimulus. And almost 60% of that gross profit is from recurring trail or broker service fees, which is really important when you think about consistency of earnings on a go-forward basis irrespective of where the cycle is. The majority of our earnings in AFG Home Loans are from an ongoing loan book. This includes AFG Securities NIM and white label trail commission. So the higher-margin annuity-style business is less volatile just -- to lower and softer settlements. So we've been through a period. And on Page 11, when we talk about it's been quite a period of challenging conditions. And the chart on the left, in terms of the RBA cash rate, is well documented. And how the housing market has reacted to that has been well documented and discussed in every newspaper across the country, so I won't, we won't labor on this other than to the fact that we are seeing housing prices returning despite the challenging economic conditions. And that seems to be underpinned by the low unemployment, supply constraints and record migration, which will continue to support housing prices on a go-forwards basis. We feel that we are at the end of that rate rise cycle. There may be 1 or 2 more to come, depending on the level of economic activity, but that level of activity, if those brokers -- sorry, of those customers if there are, sorry, more rate rises will drive further activity through our broker network as well. I'll just kind of talk about the backdrop in terms of what happened because of that level and those challenging conditions, in terms of what's actually happened, which again is on Page 12, where we talk about our level of competition from an AFG Securities perspective has been impacted by the ADIs' ability to access cheap funding, be it via the -- initially the TFF but also the deposit arbitrage they have between the margin that they're able to generate from deposits versus actual cash rate which is communicated to the market. So whilst the TFF is in the process of being repaid, there's been this big backwash of margin which -- from a deposit margin basis, which has enabled them to help fund an extraordinary level of competition in the marketplace as most of the ADIs and, in particular, big four chase market share. And we can see on the chart on the right what that's meant from a nonbanks market share. When they don't have the capability of the cheap funding and they do not have that cheap funding has translated into very, very sharp pricing and which is then further supported by cashbacks, but the good news is what we're starting to see is there's only one lender in the marketplace, a significant lender in the marketplace, still offering its cashback. That cashback offer is very limited in terms of where it has been in -- both in terms of the dollar value and the type of customers that it's focused on. All other majors have walked away from that. And we're starting to see front-book pricing increase, which means our products, over time, we expect, will become more and more competitive, but it won't be an overnight transition. If I just turn to the aggregation business on Page 13. Broker is the dominant residential channel. And all banks are accepting brokers where customers want to access their products. And that's an area of our continued focus, so there's things that -- there are some elements which are driving our level of confidence in terms of broker and aggregation services. So we do have that period of time 2 to 3 years ago where customers took out a fixed-rate product. They are now starting to roll off. We talked about that last year. We are still in a period of high refinance levels, so we can see here $17 billion is due to expire in FY '24. And our data is telling us brokers are assisting 61% of those customers to remain with their existing lender. And of those that have moved, a majority have financed it through an AFG broker. Our ongoing investment to improve the AFG broker proposition with investments in Fintelligence and BrokerEngine are delivering new services and delivering efficiencies for our brokers. You can see the commercial market is becoming an increasingly important aspect for lenders to access customers. And we see our footprint with broker within the commercial market as being another area of future growth. And Fintelligence is providing a service offering to deliver growth in asset finance, with future margin enhancement capability to come from establishing a white label offering in the first instance. The chart on the right-hand side just illustrates the growth that we've had and experience within our asset finance and leasing business; and obviously that trail, which Luca will talk about in terms of its importance in driving ongoing annuity cash flow for the business and supporting our growth initiatives. The AFG Home Loans business has been impacted by a strong level of ADI funding advantage, but importantly, from our perspective, while it's been constrained and our ability is constrained, our network has -- well, our sales network is able to still manage to maintain us as the #1 nonbank lender on our panel, sitting at around #6 in terms of total flow coming through the business, so -- and that's an important part of our business and a future part of our business. And we're seeing some of those products become increasingly more competitive. And we've actually added another new white label partnership with Brighten. Brighten is a business which its core business, amongst other things, concentrates on areas which we don't have exposure to within our other white label stable or within our securities business, so it does open a new market for us. And that market is really around providing solutions for nonresidents and expatriates; as well as some other niche products which Brighten do very, very well. And AFG Securities. Against that backdrop of really competitive pricing and rising interest rates, we've maintained our pricing discipline. And as a consequence on that, there have been periods and significant extended periods where our business in that area has been less competitive, so the volumes that we've been writing within AFG Securities has meant that the business has slowed. And we've made adjustments in the business on the way as it's transpired, so the pressure on rate to customer combined with funding costs has impacted our NIM. So the NIM for the full year sits at around 136, but to be clear: We did refinance 2 warehouses in the month of May, which then obviously, for a period of 364 days, that repricing will be -- was set at a time in the market when it was probably at its highest in terms of cost of funds. And so we'll wear those NIM headwinds for a period of around about 12 months, although we are starting to see some green shoots in terms of the RMBS market and contraction in pricing on those as well. The securities funding. We remain well funded. We have a history of issuing through the cycle. The book growth has been affected by that competition. We've had higher levels of runoff that we -- than we would have liked, but at the same time, we are resolute in ensuring of the -- ensuring our return on equity and return on capital is at a level which is suitable for shareholders. So I mentioned those 2 warehouses extending in -- until May 2024. And that warehouse capacity now provides us an opportunity to develop new products and participate in that fixed to variable flow which is about to happen -- which is ongoing. Beyond FY '24, our expectation is NIM would return back to those 130 to 140 marks. Book quality is one of our badges of honor, from my perspective in terms of our arrears performance is ahead of most institutions in the marketplace. 77% of that book is prime. 42% of the book have a loan balance below $500,000. You can see a chart there in terms of the number of AFG home loans which have an offset balance. That's not to say that we don't have customers which are being impacted by the change in economic circumstances. We are working with those customers, and -- but we feel, where we're sitting at the moment in terms of all loans being originated above 80% LVR have mortgage insurance -- our history in terms of losses on that portfolio. And we think our underwriting standards remain strong. And you can see there in comparison to where we sit with our peers, on the bottom right-hand side. Our strategic investments. Luca will talk a little bit more about those in terms of their impact on earnings. For BrokerEngine, we've seen the number of subscribers continue to lift since we took our initial entry into that. So 2,300 subscribers. 77% of those are AFG brokers. The average subscriber retention is around about 5 years. And we see BrokerEngine as an area of continued and ongoing investment for the business. We see -- our view of the market is good brokers are going to get busier. And as brokers -- good brokers get busier, we suspect there will be some consolidation in the marketplace from the lower- to the higher-volume brokers. Those brokers will be looking for technology which takes time out of the transaction, and that's the beauty of BrokerEngine. And our planned investment with BrokerEngine is such that it will continue to take time out of a broker's day; and allow them to launch from the BrokerEngine system directly through to apply online, which is the gateway most lenders use in the marketplace. Fintelligence is an important part. I've talked about Fintelligence as an important part. And we're very, very pleased with the growth that we've been able to achieve within Fintelligence. And we've -- there's 2 aspects of that. We are seeing our brokers set up their own asset finance business using the Fintelligence platform, but we're also seeing really good, positive signs from our spot and refer business from the pilot that we've insured and we've undertaken. And our view is that we would like to continue to roll that out at a higher pace, subject to ensuring we have the back-office capability to appropriately fulfill those needs. Thinktank. We've talked about Thinktank since -- for over 5 years. And that loan book sits in a niche market of $5.3 billion. It's very successful in terms of the commercial, residential and SMS lending, 17 years experience. And they're getting increasingly diversity of product. And that contributed a significant level of earnings to our business for FY '23 as well. I might pause there and pass across to Luca to provide a financial update.

Thanks, Dave. And good morning, everyone. So I'll start on Slide 19. As Dave mentioned, this year's financial result has been very solid. This was despite some significant headwinds that the strength of our diversified earnings base evidenced. A few key points on this slide: The group's return on equity remained strong at 24%. This reflects our prudent approach to capital management and the approach we took during the year with our securities business to protect shareholder returns rather than chase volumes at subeconomic levels. The cash generated from the business is a highlight, $52 million generated in operating cash flow. That represents a cash conversion ratio of 108%. As Dave mentioned earlier, we have over 65% of our earnings that are recurring in nature. The benefit of our trail book and the size of our loan book, that security plays through in our cash performance. On the dividend. We paid nearly $44 million in FY '23 to our shareholders. The payout ratio is 60% for the full year dividend. We will pay out $0.107 per share, and that will be fully franked. Dividend record date is 5 September and the payment date is 22 September. I'm now on Slide 20, if I focus on the earnings performance. The table to the right of the slide shows the key drivers of our earnings. We achieved record revenue this year just in excess of $1 billion, up 9% year-on-year. The gross profit excluding trail for the year was $144.7 million. This was up on the previous year, as we include the full year benefit of Fintelligence and BrokerEngine. Excluding our strategic investments, our gross profit reduced by nearly $7 million, which largely reflected the upfront margin reduction. That reduction was partially offset by the growth we saw year-on-year across all other lines of income in our aggregation business. On the trail book, you can see that this had a significant impact on performance this year. This is a noncash accounting adjustment. I do want to explain the dynamics within this, though. Primarily this is the outcome of our runoff rate sitting at elevated levels. We use the average of the last 4 years in determining our trail book valuation. When you think about that period of time: We have cycled out of -- or out of the pre-COVID period. And now that 4-year period reflects the low interest rates, record fixed-rate loans that are rolling off and unprecedented levels of incentives in the form of cashbacks, so you expect that runoff to be higher. We see that as artificially high and expect that to reduce. While the cash rate increases have had an impact, it is much less of an impact given that it [ only affects the latest tranche ]. I'll cover off on gross profit and OpEx in more detail on the next slides, moving to Slide 21. And I'll focus, first, on our distribution business. You can see here that nearly 75% of our gross profit comes from the capital-light portion of our business. This part of the business has benefited from AFG's full service broker offering and its diversification strategy. Our earnings from the residential business have remained relatively steady, as the trail book continues to provide the foundation for earnings, while our upfront payout ratio has increased. And the settlements reduced from record highs that were reported last year. Elsewhere in our distribution business, our white label earnings have held up, again benefiting from the trail and despite a significant reduction in volumes. Those white label volumes were 29% down year-on-year, as our partners sought to use other channels. Pleasingly, though, we've seen our white label volumes lift in July and August. Services income, which reflects fees we receive for our full broker service offering, remained steady at $20 million. On our higher-margin loan manufacturing business, the NIM was broadly flat year-on-year, with the average size of the book increasing 20% to $4.8 million. That said, the book did close lower year-on-year at $4.5 billion. As Dave mentioned, the NIM was 136 basis points for the year. We did refinance 2 of our warehouses in May. They were about 20 basis points higher. We expect the full year impact of that in FY '24. And our average NIM in June was 116 basis points. Moving to operating expenses then. I'm now on Slide 22. Our operating costs increased $17.3 million year-on-year. Excluding the impact of the full year contribution of our acquisitions, OpEx increased for $13.5 million. Consistent with the half year, the themes are the same. As mentioned then, there were 3 primary drivers. Our employee costs have increased $5 million, driven by elevated levels of activity associated with our higher book and higher runoff level in our securities business, while our higher project activity in our technology space also contributed to the increase in employee costs. Our broker-facing event costs increased year-on-year as COVID restrictions were removed. Those costs were partly offset by sponsorship income. As you would expect, as we focus on IT, our D&A costs also lifted, and that was an extra $3 million year-on-year. The chart to the right shows that our second half operating costs decreased, and within that, much of the reduction occurred in the final quarter. Our cost-to-income ratio is 61%. And normalizing for the effect of the rapid deterioration in the NIM, the cost-to-income ratio is actually closer to 55%. I will skip over Slide 23 given Dave has mentioned the strength of our strategic investments not only in terms of their performance but also in terms of the contribution to our earnings. Finally, on Slide 24. One of the strengths of our financial position is the powerful cash-generating nature of our businesses and, further to that, the annuity style of those cash flows. The chart to the left of this slide shows the strong cash conversion rate and the distribution of those cash flows back into the business and back to our shareholders. I want to highlight the absolute level of cash returned to our shareholders in FY '23. It represented over 80% of our operating cash flows. As Dave mentioned, the payout ratio this year and for this investment cycle will be between 50% and 60%. The decision to reduce the payout ratio for the next period is made to maintain our prudent approach to capital management, as we choose to invest in the business to strengthen and grow our earnings. I'll hand back to Dave to talk through the growth options and our outlook.

Thanks, Luca. And so I'm just going to jump to Page 26 here. We are seeing this period as an investment in growth initiatives on the back of some of the investments we've made in more recent periods but also to leverage our capability into the future. So digital technology is delivering a step change for AFG brokers. I've talked earlier about the fact that good brokers are going to get busier. All those brokers are looking for options and ability to enable a smoother and efficient customer experience but, more importantly, take time out of their day, so building a flexible ecosystem and continuing to develop a flexible ecosystem, of which BrokerEngine is a part, is important. Digital trust is an increasingly important part of our offering. And included in that is an enterprise data methodology which, as you know, has supported digital maturity and creates new opportunities for us. And again, continuing our momentum of our investments and grow our distribution network. BrokerEngine is the centerpiece of that growth and it's already evident in terms of the numbers that we're seeing through. We will accelerate our ownership within BrokerEngine. And we'll continue to invest in platform innovation, creating further broker recruitment opportunities. Fintelligence, we anticipate increasing ownership. We have an option or there's a put-and-call option there. We anticipate ongoing investment in terms of the size of our investment in that business and capitalize on the asset. There's been a rapid asset finance growth and -- across the marketplace. And like in the commercial business and historically in the residential business, brokers are becoming even more important in terms of accessing that market on behalf of lenders. We will maintain our balance sheet strength to diversify income streams and deliver higher margins, so Thinktank continues to be self-funding from a strong period of loan book growth and continues to diversify into -- we will continue to diversify into higher-margin products where capital returns are compelling. And most importantly, part of that is maintaining a balance sheet strength to provide the flexibility to respond to changes in the marketplace, [ as it should evolve ]. So we talk about prudent capital management which underpins sustained positive shareholder returns. We do have a -- strong and reliable cash-generating assets within the business, and that's being used to grow and diversify income streams. The dividend payout ratio temporarily reducing for a period of up to 24 months is all linked to this investment cycle and allow us to capitalize on the opportunities and the investments we already have in play. So looking further forward. The challenging conditions are stabilizing. We are seeing -- despite the last period, we are seeing green shoots in terms of the marketplace. We had -- and our brokers continue to provide competition and choice in all rate environments. We think nonbanks are better placed to compete as ADIs lift front-book pricing and that removal of cashback means that more nonbanks can come to the marketplace. We have a proven track record, as nonbank pricing becomes more competitive, to enable us to gain more than our fair share of -- through our network, of that. The industry is transitioning. It's allowing AFG to grow its broker network, differentiating by its technology and quality, so that means we are seeing consolidation of brokers into bigger broking groups. And they are looking for a flexible IT and platform solution. We believe BrokerEngine provides that, but also it also provides a platform where brokers can interface with our technology platform at an easier and more convenient manner. The higher funding costs and competition represent headwinds that will reduce AFG's FY '24 NIM, but we do see, we are seeing some green shoots in terms of pricing within the RMBS market, which seems to have really just appeared over the last 2 weeks. And the record refinancing activity and migration underpins broker and settlement activity. I mean we know, every time there's a movement in interest rate environment or whenever there's a refinance opportunity, a broker will participate in that. The prudent cash -- capital management, with our annuity-style earnings, helps underpin AFG's investment strategy and allows us to deliver future growth into the marketplace. I might pause there and take some questions. Thank you very much.

[Operator Instructions] Your first question comes from the line of Tom Strong from Citi.

The first question sits around the size of the sort of investment spend that you're flagging over the next 24 months. I mean, could you put some numbers around, I guess, the investment that you are anticipating here? And how do you think about that from a returns perspective given that the payout ratio from brokers continues to rise?

Tom, thanks. It's Luca here. I think, as Dave mentioned, the investment strategy really is around supporting our brokers. And you can see us speak earlier about the diversification of our income streams, and part of that is the services income that we receive. And so that investment is about, I guess, moving away -- or making sure that we have that diversity in our income streams. In terms of the level of investment, you can see -- I guess I'd link that back to the dividend reduction. We see a future payout of around 50% to 60%. We want to maintain the balance sheet strength that we've got and the flexibility that, that gives us as well. So I think that's probably the best way to think about it. We'll probably give a little bit more color around the investment come November, when we have a chart about that, in a briefing day.

Got it. And if I could just ask a second question, on the NIM. And clearly the June exit NIM showed quite a bit of compression during the half year to 116. Just around your thoughts about getting this back to 130, 140 basis points beyond FY '24. I mean, what's the sort of building blocks to get there? Is that sort of the green shoots in RMBS? Or do you sort of need something bigger like a rate cut through the cycle to get back to those type of NIMs you've seen historically?

Tom, it's Dave. There's a couple of elements to that. The first part is that we are -- we did refinance warehousing and, since timing is everything, probably at the worst part of the cycle, so we -- but the step back up: If you look at our book, we talk about 70% of our book being prime. We've been on a journey to increase our level of near prime or sort of nonprime business in a conservative and considered manner. And we are seeing majority of our future not -- operating in prime where the market makes sense for us, but more importantly we have a number of products being developed at the moment, which are areas which are under-serviced by the majors, based on our data, which we will commence rollout in September in pilot mode, which will attract an additional level of margin, but it will take a while to turn that ship, as you know, and as the book [ goes ] from a margin perspective. So yes, we do expect -- we've hit the peak time in warehouse funding, and -- but we're also seeing opportunities to develop and promote new products which will take that weighted average customer rate at a higher level, which generates additional margin.

Okay, great. That makes sense. And if I can just ask one final question, to push my luck.

[ Sure ].

Just in terms of the gross profit in the residential trail business was good disclosure, incremental disclosure. It did show the average book was up 8% over the year, but the gross profit from the trail was down 3%. Can you just talk through the dynamics there, I guess, of the payout ratio between, I guess, a competitive sense versus, I guess, overall [ trail rate ]?

Yes. I think probably, on Slide 21, Tom, the key part to that answer is in that, that retained for AFG. So you can see there that pay-away back to the broker had increased 9% year-on-year. As that's -- whilst the books increased, and we'd expect that to continue to increase, that retained has fallen a way. And that sort of links back to our investment and diversification strategy, around we see increasing pressure on those lines, Tom. And having a differentiation strategy is important there.

Your next question comes from the line of Minh Pham from Barrenjoey.

Minh, are you there? Perhaps, Krista, if we can move to the next question and come back to Minh...

Certainly. Okay, your next question comes from the line of Tim Lawson.

I'm just really interested in -- with the securitization book. You called out runoff, I believe, but how are you seeing runoff at the moment versus sort of origination levels? Are there any sort of stabilization in that or normalization of that runoff at the moment? Or still elevated around that 40%.

Look. What we're seeing right now is that -- probably towards the end of the financial year, a little bit of a phenomenon where the runoff was accelerated as customers tried to move. You would have seen it in our mortgage index at the end of those cashback offers. And what that drove is a number of refinances out of the -- out of most prime businesses across, into taking access to that cashback. So it was probably elevated as -- most elevated at -- in that June quarter as customers wanted to grab hold of that cashback from CBA or NAB or a Westpac. And what it's looking like at the moment, we're still processing a little bit of that backlog, but as we talk about the front-book, back-book pricing and the front-book pricing compared to the majors sort of put more margin back into that front-book pricing, we're getting to a period where it's certainly not at that 40% ongoing.

And originations. I mean, how far are you -- I mean -- so there's some normalization, but how far are you away from, like, front-book pricing?

Look. I think originations for the next 3 months in particular will be subdued as they have been over the last 12 months.

[Operator Instructions] Your next question comes from the line of Minh Pham from Barrenjoey.

David, Luca, can you hear me?

Yes, we can, Minh.

Yes. Second try. Just 2 questions, if I could. On Slide 12, you highlighted the nonbanks' market share over the past couple of years. And it's highlighted that 17% was arguably too high if we draw a line over a longer period where cash rates were probably a bit more normalized. Would we find that the nonbank market share has actually been 10% over a longer time period? So you've actually just had a boost from ultra-low interest rates. Do you think that the rate bases have settled where it's kind of settled now for the sector more broadly?

Yes, look. I mean, as a starting point, this is our data, so it's not market data, Minh, but do I think 10% is a maintainable level? No. I think, as -- we've seen, if you look at our data, we've had -- we got to a period where it's 50-50 with majors versus the balance of the marketplace. And at one point, AFG, in its own right, was doing roughly 8% to 10% of that flow. So does it sit at 10% longer term? No. I think it sits somewhere between a 10% and 17%, to be honest.

All right. And I mean we've spoken a bit about margins today. And you've provided some detail on some of the new products that you'll be bringing to market, but just thinking about margin from a, I guess, broader perspective, if competition continues to remain intense, does it make sense to write prime loans at all? Shouldn't you just be pivoting more aggressively to high-risk products to protect margins?

I think it's fair to say we've been very considered in our pricing strategy. And we haven't been writing a lot of prime business, pure-prime business which is going head-to-head with a major, but we have -- we do -- the prime business we have been writing over the last period have been those ones which are prime but aren't just a tick and flick into a major bank's computer system where a computer says no or yes. It's there's always a story behind it, Minh. So it's still a prime business, but the structure of the customer is a little different than just a -- I always call it a husband who's a policeman and a wife that's a teacher and which are quite easy to substantiate and approve a loan for. So our brokers do specialize in those and -- some of those products, and that's the type of product we've been writing in prime. And we generally can write a few of some of that loan -- those prime loans with a few extra basis points on those, but one of the things we are looking at and continuing to evolve -- so those products we're talking about which we'll be beginning to roll out in September are still prime in nature, but they are -- they don't quite fit that prime matrix from a lender's -- a major's -- lender's perspective -- and allows us to provide a little extra margin into those products, which ultimately over time will help build that net interest margin back up again or the rate to customer again. And they -- so they're the type of products, which you will see those launched in September.

Yes. And I think previously you've provided disclosure on some of those high-margin products that you've had. Apologies if I missed it. Did you provide it in the slide deck today?

No. [ Actually that's ] -- no, Minh, we haven't...

Yes. I think the skews for the residential products that you've had in previous disclosure.

We'll go back and check that.

Your next question comes from the line of Azib Khan from E&P.

A couple of questions from me. Firstly, on the front book margin improvement that you've alluded to, David, is there any segment in particular where you're seeing that improvement most? Is it basic variable home loans where you seeing that improvement the most?

Yes. We only write variable, Azib, so in fact, that's a quite easy answer -- question to answer, yes. It's...

But of the variable, would it be in the basic segment, as opposed to standard?

Yes.

Yes, yes.

And I couldn't -- looking across all of the segments, like, how much of a gap are you now seeing between the front book margin and the back book margin? Has it closed quite significant?

Are you talking more generally in terms of our business? Or the broking business, distribution...

In terms of your business...

Yes, yes, yes. Look. I think there's still a little bit of way to go, but it's probably sitting at 20 basis points, 25 basis points.

And would that be true for the broking business or for the aggregation business more broadly as well?

Look. I think that gap might be a little higher for some of the majors. They've got a lot of, what's the right word, back book inertia there, but we are seeing it come in.

Okay. And also I've got a question on funding. So correct me if I'm wrong, but I think your last RMBS term transaction was in September. And what we were seeing up to that point was a widening in spreads despite increased credit enhancement. What has been your observation since then? And are spreads still elevated? Have they elevated further? [indiscernible].

Yes. So spreads probably went a bit wider post our September term deal last year. And that's been maintained that wider probably up until about 2 weeks ago, and we saw that dam being broken. We have a lot of -- that dam being broken, I think, within the last 2 weeks, we've seen, as an example, ING come in and process a term deal at [ 1 10 ], which was significantly lower than the previous 10 transactions of that ilk. So I do feel, the last 12 months in particular, there's been a level of uncertainty around the housing market and rising interest rates, customers' ability to pay. I think it's clear that most of the lender's experience today has been that those fears have been unfounded; and that's why we're seeing some pricing, [ just that ] whole demand-supply. Investors need to put their money to work. They can't sit out of the market forever. And we're starting to see those squeezing of those margins back into -- it's not necessarily higher levels of credit enhancement that we've experienced, but we are seeing some level of squeezing beginning in terms of the RMBS market.

Okay, just one final question, if that's okay. So just taking a look at Slide 16 and the arrears trends. So obviously a notable uptrend coming through in 30-day arrears. What sort of cure rates are you expecting there? And because these 30-day arrears, I mean, are getting -- I mean kind of there is that notable uptrend. How close -- I mean, can you give us an idea of where -- what trigger levels are for amortization events in the warehouse facilities?

Azib, we're coming off such a low base. I think in total, in terms of arrears, we're still sitting at around 40 customers. So we know in the -- trigger levels in terms of arrears on those things.

And in terms of the cure rates that you expect, do you expect these 30-day arrears, a lot of them, to cure? And to meet that kind of 90-day arrears -- could you drop down towards the 90-day arrears rate at the moment?

We are concentrating on those 30 days because we don't want them to roll into 90 days. And we're having some good success on those rolling through. There will be and all lenders will have [ a ramp ] of those customers due to their own personal circumstances. And I think I've mentioned on previous calls most situations which lead to a 90 days is due to a life event. It's not because the customer doesn't want to pay anymore -- whether it be a divorce, domestic violence or a loss of job. And we're not seeing those elements in terms of loss of job impacting the marketplace. So there will always be an element of 90, but we're not seeing anything at this stage that says it's -- we'd be unable to manage what we've been managing and seeing coming through at the moment.

And we have no further questions in the queue at this time. David, I'll turn the call over to you.

Thanks very much, Krista. And thanks, everyone, for tuning in. And we look forward to seeing you all over the next couple of weeks as we move around the country. Thank you.

This concludes today's conference call. Thank you for your participation, and you may now disconnect.