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

Thank you for standing by, and welcome to the investor briefing for AFG's 2024 full year results announcement. [Operator Instructions] I would now like to hand the conference over to Mr. David Bailey, CEO. Please go ahead.

Thanks very much, and good morning, everyone. I'm here today in Perth with our CFO, Luca Pietropiccolo. You'll hear from Luca shortly. In the interim, what I might do is just walk through at relative pace some of the highlights within the presentation itself, and then Luca will talk about the financials and I'll come back and do a little bit of a wrap-up around that with some commentary around what we're seeing in the market at the moment. So before I get started, I will just call out the pages I am on within the presentation and hopefully you can follow along. So moving to Page 3 straight away. So 2024 represents 30 years for AFG. So it's our 30-year birthday and it's a business which has grown from success to success since it started in the early days within Perth, Western Australia. So those 30 years gives us experience in financial services, and it's proven through -- it's a business model which has been proven through the different market cycles we've been experiencing. We now have over 4,000 brokers within the AFG Group. Now the brokers are our core asset, and they operate in a residential and commercial mortgage market these days within Australia, which is over $800 billion in size and has proven to be relatively resilient with strong economic momentum. Our portfolio of investments operate across the value chain within finance. And so that includes Thinktank, which is in the commercial mortgage and securitization space intelligence, which is in the asset finance broking space, and, of course, BrokerEngine, which provides tools for our brokers to make them more efficient and look after their customers in an increasingly digital manner. In terms of the broader mortgage market, the mortgage brokers now share 74% of all originations flowed through the Australian market from a residential perspective. AFG is responsible -- or AFG brokers are responsible for 1 in 10 of those mortgages. Our trail booked through that history has continued to grow. This represents the 20th consecutive year of book growth, that trail book, which provides predictable cash flows, sits at around $214 billion. Our AFG Securities book, which is part of our Manufacturing segment, it's pleasing to announce that, that book has returned to growth. It sits at the year-end at $4.4 billion. And our brokerage services, we have around about 5,000 brokers subscribing to some of our technology services, which represents significant growth over a period of time. Quickly turning to Page 4. This strategy hasn't changed over time, particularly over the last 5 years. And AFG's strategy continues to be the aggregator of choice not just for our brokers, but also for our lending partners and it's delivering higher-margin products through a national network and our catch raise is a fairer financial future for all. And we'll do that via our strategic pillars, which includes growing our broker network, providing market-leading technology and delivering higher margin through our distribution. Through those segments, which I've just mentioned, distribution and manufacturing, distribution this year represents 78% of FY '24 gross profit, and manufacturing, of course, is the balance of 22%. Jumping straight through to Page 6, some of the highlights we talked about previously, the 74% broker share. It is the preeminent and dominant channel across the market. 74% remains the record high. We talked about our 4,000 brokers, which help sustain our footprint across the marketplace. Our residential loan book is also at a record high of $200 billion. And AFG Securities is well positioned now as the funding and competition cycle returns, and I'll touch on that shortly. The financial highlights, which Luca will talk to very, very shortly, includes a $54.1 million distribution earnings, which is up 20%, a 13% increase in broker subscription, and the Fintelligence gross profit increased by 7% and overriding across the business, there's been a $3 million cost reduction in operating expenses. Our Manufacturing business is well documented as most nonbanks have had issues with competition and funding costs across the marketplace. There's been a really a story of 2 halves. We've seen over the last 6 months us taking the decision as the market and level of competition has started to turn back to more normal cycle, more original cycle. We've started to see originations build in that part of the business. And of course, our investment in Thinktank has been impacted by the similar features as our own AFG Securities business, and therefore, our contribution -- of our 32% earning contribution from that part of the business has been impacted because of those market conditions. If I jump to Page 9, the 3 strategic pillars. We think we've made really good progress over the last 6 months and gives us some optimism about where the future looks over the next 2 years. We'll continue to grow our broker network and growth in AFG's share of the broker market has continued, has been supported by record recruitment for the period. We've introduced a concept or a business strategy called Partner Connect, which ostensibly is spot and refer and we are starting to see over 350 brokers have already signed up to that where we will help fulfill transactions on their behalf, generating additional margin for that broker but also for AFG, and there's been a 122% increase in brokers using Fintelligence over the -- since we acquired that business just over 2 years ago. Our broker leading technology proposition. You'll remember, 12 to 18 months ago, we said that we were going to undertake a level of investment within our technology part of our business. I'm pleased to say that we are over the hump of that. And we are looking to -- but we will continue to look to improve broker efficiency. Our first-to-market proposition with BrokerEngine Direct is on track to be delivered in this half of FY '25. We'll continue to invest in Fintelligence market-leading platform, and that will be launched in an updated version similarly in first half of FY '25. We have around 1,400 subscribers in FY '24 to recurring revenue streams, including market-leading compliance and market services. Our other strategic pillar is around delivering higher margin through our distribution. Our manufacturing book in terms of AFG Securities has returned to growth, reaching $4.4 million, which is up 8% on December 2023, and we're continuing to deliver alternate lending products. AFG Securities has 3x the market share of the nearest nonbank lender within our panel, and we feel as if there are other opportunities for us to continue to grow that aspect of our business. On Page 10 and 11, there's some summary around economic conditions. I think the market has been well inundated with people's views on the marketplace. Suffice to say, the things that we are focused on is in terms of inflation. We're starting to see the impact of -- cost of living continues to impact, but we are starting to see this trend down across the market. Unemployment is increasing. However, it's well below the long-term average. And while some uncertainty remains, cash rate reductions are expected in 2025, all things being equal. And so, all of that leads to a return to growth on the positive outlook on Page 11. We talked about confidence in the housing market and the index is there. The annual house price growth part of the market is solid, and it's just driving increased level of credit growth across residential and commercial. On Page 12, we talk a little bit about the market's broker share. So it is the preferred distribution channel in the residential market. AFG continues to embed itself as a provider of crucial services in the Australian financial system. If you look over the last 6 years, 2,100 branches have closed, including 800 in regional areas. So lenders are increasingly relying on the broker channel. Brokers provide, and we've always known this, a trusted support to customers and local communities, and the demand is growing for aggregators that provide leading compliance and effective services supported by technology, which fits nicely into our strategy around our technology builds and refreshes. The delivery of our new broker technology will enable our brokers to continue to grow efficiently and we expect to continue to increase broker numbers within the AFG network. In terms of the market conditions for the nonbank market share, there's a slide on Page 13, which shows the start of the bounce back of nonbank activity in the marketplace, which is really benefiting from improved funding conditions. The TFF obviously had a funding advantage as well as deposit books. But we're starting to see front book, back book pricing differential close to just around 9 basis points, remembering that, that was peaking towards 52 bps. So the positive trends in the funding market and cash rate reductions expected in FY '25 just increased the level of confidence we have around the AFG business model, and in particular, the AFG Securities as a nonbank lender. So we'll continue to invest what our strategy has been over a period of seeing book decline is continue to look to grow that AFG Securities book, which will mean we'll use some of those funding cost benefits that we've achieved over the last 2 to 3 months being contributed towards a book growth strategy to provide longer-term earnings benefit as opposed to short-term gains. On Page 15, a little bit more around our broker network and some of our recent investments. We're very, very pleased with both our investments in Fintelligence and in BrokerEngine. You can see down the bottom of those slides, the number of users that Fintelligence Ambition Cloud has driven over a period of time and the continued growth in BrokerEngine subscribers. Those BrokerEngine subscribers are up 140% since acquisition. And the BrokerEngine is the key linchpin of our technology strategy, which is all driven around making our brokers -- providing our brokers with more time and creating higher levels of efficiency in the way they process and work with our customers in a increasingly more digital manner, still providing that choice and competition to Australian consumers. Slide 16 is an important one where we talk about increasing average earnings per broker. So over 4,000 brokers being the core of our business model. Diversification has driven growth in AFG's gross profit by about 9%. You can see there how that's been broken up. We're generating $36,000 gross profit per AFG broker in FY '24, 74% of earnings from diversified products. And the pie chart on the right demonstrates some of those -- the diversification of the income that's being driven. Residential volumes over the period have demonstrated solid momentum. In particular, we experienced strong quarter 4 lodgment, which have really continued into the new financial year. And some of that's been supported by recruited broker volumes. So in other words, those brokers that we've recruited over the last 12 to 18 months are starting to hit their straps in terms of new originations to the AFG network. The middle chart there talks about the large group, which generates significant scale. Small and medium groups still represent 60% of our volume. The larger broker group settled 10x more than the average, and recent recruitment as an indicator of 7 large groups is expected to generate over $2.5 billion in settlements on an annualized basis. So that fuels our level of optimism as we move into the FY '25 and beyond. Whilst the payout ratio has increased to 96%, you must remember, it includes a shift towards larger groups, which then generate higher payout ratios. But as we talked earlier and Luca will talk about as well, the average generation of income per broker is on the increase. The residential loan book now sits at $200 billion, which, as everyone would know, generates a stable annuity revenue stream and importantly, runoff has improved. So what we're seeing in terms of the broader dynamic in the marketplace is that the level of refinance has started to soften. We're seeing runoff improve. It was at 35%. It was at 39% at the same time last year -- sorry, half FY '23 half year, which is elevated by which -- at the time as we're aware, it was elevated by increased bank competition and the introduction or the presence of cashbacks. Moving to Slide 18. Our AFG Home Loans market share has started to grow again. You can see there, we achieved 7% in the second half, which is -- the first half was 6%. The main driver of that was AFG Securities. We've also launched 2 new white label partnerships with Brighten and also with Longview, which is a shared equity scheme, which is just in a fledgling state, but has looking-- showing positive signs of being an element that provides a different type of product to consumers wishing to get into the marketplace. Our asset finance business settlements grew by 21% to $3 billion and that represents 5% market share, we believe. Reminder that FY '23 that was around about 3%. We've launched Partner Connect, which is a referral solution for residential brokers to refer asset finance within AFG. And the chart below just shows the build of asset leasing and asset finance business that we've driven through the business. Commercial remains continued important part of our business. Commercial credit growth is sitting at around about 8%. Our settlements within the commercial business is up 18% to $4.5 billion, and we have a $13 billion trail book, which includes Thinktank White Label. So the opportunity to increase broker market share in commercial continues to replicate the success of residential. Our digital strategy is highlighted on Page 19. It's probably where most of the focus of our technology build has been over the last 12 to 18 months. We delivered a modern API services, and we're very proud of the fact that we've been able to achieve items such as that modern API services, cloud native program, upgraded our Flex CRM interface. We've introduced multi-factor authentication with enhanced 24/7/365 monitoring and, obviously, the Partner Connect and Ambition launch as well as the Ambition Cloud, which is the crucial part of the technology build within or the technology offering within Fintelligence is on track for the first half of FY '25. All of these elements will introduce -- or will deliver reduced risk, complexity and cost for our brokers and for our business and a more modern scalable architecture, which is built for growth. We talk -- one of the linchpins of our business or our business strategy is, we believe, good brokers are going to get busier. So increasing broker productivity becomes an important focus for us. And Direct lodgment with BrokerEngine has been the main technology focus over the last 12 to 18 months. Significant project has been to enhance BrokerEngine and workflow management for our brokers. And we've delivered a new interface and additional functionality in FY '24, and we're very, very close to moving into BrokerEngine Direct. In fact, it's in pilot at this stage where the broker will be able to lodge deal directly to a lender via their play online system without having to double entry data, which most aggregators technology requires them to do. So we believe that on average, that will save a broker around about 90 minutes per deal; will drive reduced costs in terms of documentation, which will be embedded within the platform; create a significantly better customer experience; and also and just as importantly, improve security across the business. On Page 20, we talk about AFG Securities. AFG Securities, we've talked about these 2 halves. AFG Securities has had a year of 2 halves. So I think when we last spoke to you as part of investor call, we were starting to see signs of improved opportunities for AFG Securities. We've now doubled our market share footprint and continuing to build. So we remain #1 nonbank on the AFG panel. Lodgment steadily grew in FY '24 and quarter 4 delivered $1 billion, which is the third highest quarterly result that we've ever recorded. Settlements from this will continue to flow through in FY '25. Front book to back book pricing differential, as we talked about earlier, has narrowed. The NIM, however, does remain below average and is affected by competition and multiyear pricing of warehouses. The June exit NIM was around about 109 basis points. And as I said, we're quite comfortable at this point of time to continue to look to grow the book with the view that we're taking a longer-term view around a book of size is important for us as we move into the future. The new origination platform, which we introduced in the first half of this current financial year is settling and starting to deliver scaled efficiencies. I talked earlier about our investment in Thinktank. Those earnings from Thinktank have been affected by similar market conditions as AFG Securities with a lower NIM and a higher level of runoff. Importantly, though, their loan book has grown to $5.8 billion from $5.3 billion at June 2023. And the contribution, obviously, is softer, but the fact that they've been able to maintain and grow their book is an important feature as we look moving forward into future financial performance. The quality of our loan book remains very strong. And you can see there, 75% around in prime mortgages, 40% of balances are below $500,000 and 85% have an LVR below 80%. You see the size and the level of offsets across the business across each of those accounts. Whilst arrears are more elevated than what we're used to, they are still in line with the major bank averages and our loss provisions remain prudent at $3.3 million. We've experienced no losses over the current financial year. Our credit assessment techniques remains strong. We don't have anything that we -- at this stage that we believe will turn into a loss. And a reminder that the cumulative losses across this book over 15 years have been just $260,000. On Page 22, we talk about our funding costs, which is showing positive signs. The book in itself has -- runoff has reduced from a high 42% down to 35%. Part of that is due to less competition in the market. And part of that has also been us using some of the NIM savings that we've -- NIM benefit to ensure we can retain some of those customers. The loan book, again, consistently grown and is up 8% compared to December 2023. Funding margins within the warehouses have improved with lower funding costs achieved in some warehouses and some in the current negotiation. And the average NIM for FY '24 is 113 bps. And obviously, during the year, we issued $1.5 billion in securitization bonds to the marketplace. I'll pause there and pass across to Luca on the financials.

Thanks, Dave, and good morning, everyone. So I'm just starting on Slide 24. So as Dave mentioned, the challenging first half of the year, that earnings deterioration ceased in the second half as we started to see a return to more normalized operating conditions particularly, the repayment of the TFF free kick and consequently, an increase in the ability of the nonbanks to compete. The final quarter of the year strengthened again with our strongest lodgment in both our Distribution and Manufacturing segments for over 2 years. This has put us in a good spot to start FY '25, and Dave will touch on the outlook shortly. For the year, our NPAT was down $8 million to $29 million. This reflected the deterioration in Manufacturing segment, the outcome of the well-documented challenges that nonbanks faced, and Dave talked through earlier. Elsewhere, the business performance was particularly solid. Our earnings from our annuity style income from our core higher returning distribution business with earnings increasing 20% year-on-year. The Distribution segment is not only a point of differentiation, but it continues to be a highlight, supported by our investments and provides a portfolio of growth options as we look forward. As you would expect, our operating expenditure requires some adjustment and the result of that was a reduction of $2.6 million year-on-year. If I focus on underlying NPATA, you will see that the trail commission adjustment is lower this time than last year. I expect this trend to continue as we see historically higher levels of runoff reset. The higher runoff was the outcome of a record expansionary then record contractor monetary policy combined with record cash backs and the flow on an impact to elevated levels of fixed mortgages, which have now largely transitioned to variable. The runoff rates stepped down in the first half and then again in the second half. If I look more broadly, the lower earnings outcome flowed through our operating cash flow and return on equity with both outcomes lower than the same time last year. We have declared a fully franked dividend of $0.04 per share. This represents a 60% payout ratio. The ex-dividend date is 9 September, and the dividend will be payable on 11 October. Turning to Slide 25. This slide summarizes the reporting segments, which we transitioned to in the first half. By focus first on distribution, which is our core business. It provides particularly strong returns of 38%, with that return, including the more recent investments we've made, not only in technology and BrokerEngine but also our Fintelligence business. As I said before, the result is underpinned by our annuity style income generated from the trail commissions. This segment delivers consistently strong returns with no credit exposure and this year represented nearly 80% of our earnings. The segment generated earnings of $54 million, up 20% year-on-year. And as Dave mentioned, during the year, we did invest heavily to improve our technology proposition and we expect our second half FY '25 result to benefit from that investment once we finalize that program. On Manufacturing, which is our securitization program and where we take the credit risk, the earnings of that segment are materially down on the prior period at $15 million. Consequently, we saw a return on equity significantly reduced, although it's still a reasonable 12%. As was outlined earlier, the book returned to growth in the second half and we closed just shy of last year's $4.47 billion, loan book balance at $4.44 billion. The average book through the year was $4.2 billion compared to $4.8 billion in the prior year. Despite the second half book growth, it did come at the expense of NIM and our second half NIM decreased to 111 basis points comparative to our first half at 116. Clearly, the higher book balance will be a benefit to our earnings as NIMs improve. I know Dave touched on it a little bit earlier, but I do just want to emphasize the quality of the book with another period in which we did not take any losses despite increased arrears across the market. Turning to Central Services, which recorded a loss of $26 million, which is 6% higher than the prior year, largely driven by that technology-related activity. On Slide 26, this slide shows the gross profit we generated from our business segments. I think this slide summarizes the business well in terms of numbers. It shows that our distribution business generates 78% of our gross profit. Within our distribution business, we have a diversity of high-returning growth options. And finally, that our Manufacturing segment provides exposure to the returns that credit markets give when the conditions are right. On our Distribution business for the year, it represented $106 million of gross profit split across the 3 key drivers. Firstly, our residential trial and upfront commission, which combined declined by 1.6% as the payout ratio lifted to 96%, although I'd note that the rate of increase slowed. The second is the higher margin income we generate from our broker network in white label and other asset classes. Our white label business had a particularly volatile year with volumes down 30% as our partners focused on volumes from their proprietary channels. The third part is obviously our investment in Fintelligence, BrokerEngine, which continue to outperform our internal expectations and reported 12% growth year-on-year. Turning to Slide 27. Our operating costs, overall, again, we saw a decline with declines across most categories year-on-year. The one category that saw an increase was in technology. There are 2 elements to this. We have seen a general increase in service costs, primarily relating to use of our cloud-based technology, that's fee cost increases, but also an increase in the level of consumption as we move to an increased database business. The second is the cost associated with transitioning platforms as we deliver our new technology capability. It will take some time to decommission the older platforms, but we would expect in future periods that some level of duplication costs are removed. Looking forward to FY '25, I expect to see the following in relation to our cost base. The commencement of amortization of our new technology platforms will begin. You will see that we currently have $34 million of capital work in progress. We will amortize most of that over 8 years, which will see our amortization costs increase by roughly $3 million a year. Some of that work in progress will commence amortizing in the first half and some will commence later in the financial year. Turning now to our balance sheet and cash flow. As you know, AFG has a very strong cash-generating assets, and we have $190 million in cash and other liquid assets. This puts us in a great position combined with our high returning Distribution business to find opportunities to invest for our brokers to improve their businesses, but also for our shareholders to grow returns. The chart on the right shows that we traditionally have a very high cash conversion ratio. And for the year, we finished at 107%. The orange and pink bars at the end of the chart showed why we made the decision to temporarily reduce our dividend payout to 50% to 60% for 24 months, of which we are now halfway through. As Dave mentioned, we have now seen that expenditure peak, and FY '25 will see us return to a more normalized level of expenditure. I'll finish on Slide 30. And I did just want to take a minute to demonstrate the criteria outlined on Slide 29 in action and that the outcomes of the discipline that we show in making our investments, delivering a stable portfolio of growth options. The slide shows to the left, the key investment that we've recently made. The industry trend that we are or anticipate taking advantage of and how we anticipate realizing the benefits of those investments. Clearly, we are further advanced with some of these investments like Thinktank, which we invested in, in 2018 and has a carrying value of $33 million, with its loan book balance at $5.8 billion, as Dave mentioned before. While the earnings were down this year across that investment, it has been particularly strong. On Fintelligence, we spent some time talking about the strength of that business in December last year and its market-leading proposition underpinned by its technology offering. It is outperforming our investment expectations and with settlements now in the asset finance space exceeding $3 billion. We are looking to leverage that further and in line with our strategy to deliver higher margin either through white label or manufacturing. BrokerEngine has provided us technology platform to deliver our industry-leading direct lodgment solution. We are partway through that now and expect that investment to deliver a range of benefits in FY '25. Finally, we have spoken previously about AFG looking to invest directly into select broking groups. Work during the year continued on this initiative. As you would expect, these investments will need to meet our investment hurdles that I discussed on the previous slide. I'll leave it there. And thanks, everyone, and hand back to Dave.

Thanks, Luca. I just thought I'd spend a little bit of time on the outlook and part of that outlook is really seeing what we're seeing in the market in FY '25. And on Slide 32, you can see it's been a particularly strong period of -- a strong month, where we've seen growth in lodgments and lodgment activity across the marketplace. Lots of documentation about the softness in Victoria, but we've still been able to grow Victoria. And part of that is really driven around recruitment activity coming to fruition into -- and starting to feel that at the start of FY '25. So, WA in South Australia, the highest growth rate. AFG Home Loans is up by 80% and AFG Securities is up 186%, which demonstrates the trend that we've been referring to around that book. Whilst we're not through August at this point of time, one of the things I would call out is we're experiencing a year-on-year growth of about 13% on the residential side of the business and in excess of 150% to the AFG Securities business in the month of August year-on-year. So, our resi-lodgments in July and August have remained strong. On Page 33, it's just -- there's a table there or a graphic there, which really just indicates where we're seeing the world and how we think we can play in to react in that. So, we think brokers can become bigger and busier. We talk about that market share. There's been settlement growth of 7% per annum. Brokers are moving away from the contractor model into employee model. So, the businesses themselves are maturing and they're looking for an aggregator partners that can help in that process. So, part of that is consolidation is coming. We celebrate 30 years of AFG that, therefore, implies that there've been some brokers around from 20 to 30 years. We are looking to transition that business, which is part of our strategy is to how do we facilitate that consolidation and enable some of the younger brokers in the marketplace wishing to grow and wishing to make a career of mortgage broking and how do we facilitate that technology to drive efficiency. We're continuing to improve our technology, our offering and the diversification for a broker moving forward will be critical. And we believe we tick all 4 of these elements quite strongly and the proposition is resonating into the marketplace. So, on Slide 34, in summary, we believe we're strategically positioned to continue to deliver earnings growth. Credit markets will continue to improve. The broker is a critical channel. There's been a return of nonbank competition. And again, AFG has a preeminent position within our lender panel as a nonbank being 3x the size in terms of originations or any other nonbank lender. Product diversity generates 74%, which fits into that concept that we've had since we started 30 years ago. Our brokers grow, we grow. So, providing more opportunities for our brokers to generate income provides more income for AFG. And our growth strategy is based on 3 pillars: being grow our broker network, provide market-leading technology and deliver higher-margin products through distribution. So, I guess, in summary, and just to close and take some questions, the way we look at the world is the broker is the dominant channel. We believe that channel will continue to grow. We are a larger player within that dominant channel. Through diversification strategies, our revenue per broker is growing. We're recruiting more brokers, and we have increased optimism around our securitization book and our other avenues to grow earnings as we move into FY '25 and FY '26. On that note, I will pause and I think, yes, we've got some questions. So, thank you.

[Operator Instructions] First question today comes from Tim Lawson at Macquarie.

Just maybe you can expand, David, on the hubbing sort of strategy where you're trying to help with that transition of older brokers into new brokers, just where you're at with that? You talked about that for a year or so now.

Yes. So, it's fair to say we've spent a lot of time doing the research and looking at the market in terms of how the model works in other industries. And we have an active pipeline of opportunities, and we're moving through those opportunities at the moment at various stages of initial due diligence, nonbinding indicative offers and a formal documentation of agreements. So, not quite there yet, but we are working hard on achieving our first couple of investments in the next 6 months.

Okay. So, it implies that pricing has got closer to where you're more comfortable with that you might...

Yes, we've talked a while around -- there's 2 elements, Tim. One is pricing and valuation elements. The other one is in all due respect to our brokers, these are taking longer than we thought because we are reliant when we go through a due diligence process on getting returns of the information. So, these are small businesses that are not buying our Fintelligence or investing in a Thinktank. So, there's -- it just takes longer to get that type of return of information and due diligence because brokers are doing what they do best and that's helping their customers and flowing through opportunities to generate income.

And just a question on the sort of front book mix. You talked about your sort of mix of prime, but clearly, there's more competition in prime. Can you just talk about where you're seeing prime versus near prime of having to find it in terms of the front book?

Yes. We are generating our flow. If I look at the current, growth in flow has really been facilitated is predominantly prime, Tim, but in places where our serviceability calculators are a little bit more generous. So, customers are prime in nature, want to buy the bigger house go to a bank and they just don't quite service yet, but our servicing is a little bit more generous because we don't have to apply the 3% buffer. We can apply a 2.5% buffer.

Yes. And just last question for me. Just on the maybe expansion comments on the equity investment line just sort of been a bit softer over the last little while, just where you see the outlook for that?

The equity investment. So I'm assuming the major component of that, Tim, would be Thinktank. So Thinktank has been operating in a similar market as us in terms of there's been a higher level of runoff across their book. They've been challenged on NIM as most others have in the marketplace. Their target market, there's still a very, very good and robust business. But what we've seen is they've been able to grow their book over a period, but that's been the detriment of margin. So, there's a similar level of optimism within the Thinktank business as we have within our Securities business.

Your next question comes from Tom Strong at Citi.

My first question is just around the level of competition in the mortgage market. I mean you're in the nonbank, so see improved funding costs as RMBS spreads come down. I mean what are you expecting to see with regards to competition? Is it sort of remaining rational? Or do you think front book spreads will come down?

That's a good question. The basis point to define is rational, Tom. I think we're pleased to appear rather irrational. It's not irrational. You talk -- there's talk about front book pricing and major discounting the standard variable rate. Anyone who takes that rate at the moment in terms of what their discounted standard variable rate is probably needs to go see a broker. So look, it's a lot better than it was. There's been places where -- I think the big thing was the elimination of the cashbacks, to be honest, Tom. So yes, I feel there are places we can play and contribute and generate product, which is in that 70% one income prime suburb of Sydney or Perth or Brisbane. So yes, banks are looking for volume, but they're not cutting each other's throats like they have over the last 2 years.

And just a question on the distribution business. I mean in terms of your hopes to build out the broker network, I mean, I saw, if you look at the first half, there was little growth, but some good growth in the second half. Is that mostly just from the Partner Connect initiative? And what can we sort of expect from broker growth over the next 12 months?

Look, we are really, really encouraged. We talked about those 7 broker groups we were on over the financial year, which are large broking groups. So to move broking groups, it takes time -- to move aggregator, sorry. So they're starting to hit their straps and our pipeline of potential recruits with the rollout of our new technology platform in terms of BrokerEngine and going direct to apply online. We have a number of -- what we are offering. Other aggregators will talk about a workflow tool, but it's nowhere near as refined as in advance, they're trying to build it and the director supply online lodgment. I mean I'll talk about that 90 minutes per transaction on average. It's created a pipeline of brokers, which we have a level of confidence that they will see what we're offering. So the Partner Connect is early days comparatively. We've got 350 brokers with agreements on that Partner Connect, but the early signs of that are very, very positive and pleasing.

And just add to that as well, Tom, if we think about where we have made that investment and the BrokerEngine Direct Lodgment, 1/3 of those subscribers on BrokerEngine are AFG brokers as well. So it provides an opportunity for us to have a really constructive discussion with the aggregator and the additional functionality that BrokerEngine Direct will be providing to the AFG brokers.

Your next question comes from Gavin Allen at Euroz Hartleys.

And just quick one for me. I apologize it's in and out of the call and different things. But I think you mentioned white label was down 30% over the year, just wondering if there is any levers that you can pull to make this more attractive to your network. Like do you have scope to sort of control your own weather a little bit on that front?

Look, I think we are -- I think the benefit of the white label product is that in times where it's relatively tougher for securities to work. White label generally provides a buffer for us. Ideally, if we've got a choice, we would put that business towards AFG Securities every day of the week because of the long-term earnings benefit. But in terms of what we've done with the white label product is we've introduced a loyalty program with customers where they can generate additional cashback via their spend with the business called Grow Your Money. So that sort of sits over the top of the AFG Home Loans program. Ideally, the thing with AFG Home Loans, if the providers of the white label product has no appetite or their service proposition falls over because of whatever reason, we will suffer. And that's why our focus is on continuing to build out the securities business, but there will be elements of -- we've seen some great introduction of business with Brighten, as an example, as a contract to some of the other white label partners, but they will come in and out of the market like most other white label providers.

And just one quick last one for me. Just on the direct lending side. You've been very public about focus on volume there. And recognizing that NIM was down again a little bit in the second half, just wondering is that about as low as you go? And the reason I ask that is, can we begin to sort of forecast this based on volume with a reasonable expectation that NIM is at least kind of stable, do you think? Or is it too early to tell?

Yes. I'll just say, I'll probably take a leaf out of our behavior during the time of cashbacks and significant competition in the marketplace. We actually stood out of the market because our return on capital on those mortgages were below our desired level. So it's fair to say that Luca talked about the return on capital or return on equity on our broking business and on our manufacturing business, we're probably at that point around now. So I think there's some reasonable level of confidence that, Gavin.

Your next question comes from Michelle Wigglesworth of Australian Ethical Investments.

I've got 2 questions. The first is your comment about getting some near-prime loans and prime in nature, but don't quite meet serviceability buffers. If rates come down, do you think that those borrowers will then be able to go to major banks and you won't be able to get those volumes? That's my first question. And my second question was on broker revenue. You said that's increasing. Apologies if I missed this on the slide, but can you disclose that? And is that something you could think about disclosing if you don't, so we could see the trends?

Yes. I'll get Luca to talk about the disclosure because I'm at risk of being going to CFO mode. But in terms of -- while he's looking at the slide, in terms of your first question around potential runoff as interest rate reduces. We would look to -- as the market moves, we will move and we will respond to those customers, you will remember that those customers are -- there's obviously cost of those customers coming into the mortgage in the first place, cost for those customers to move. Our general view is our history shows that it's not just -- once they're in the loan, they're relatively comfortable. And if there -- if you treat them appropriately, they stay for a period. So serviceability changing and buffering changing doesn't drive immediate exit us out of the marketplace or out of the loan book, Michelle.

Like the new volumes that you would have otherwise got, does that mean you won't get them now or if rates come down?

I think everything is relative. So as rates go down, prices go up, and therefore, they need a bigger loan size. So the serviceability calculation is quite dynamic in that respect. So it's not as simple just to say one thing happens, the other thing happens. Our experience has been in a rising market, there are opportunities to obtain customers around serviceability. And similarly, in a falling market, based on the dynamic of house prices and the like, there's an opportunity to also based on that servicing calculation to retain those customers or attract new customers.

Okay. And I realize I didn't clarify my second question very well. I mean revenue per broker. You were saying that your revenue per broker will increase as a -- when we talk about payout ratios and so forth, but we should be looking at revenue per broker.

I thought you might let me get up there, Michelle, with the revenue question in total. So we haven't shown the revenue per broker, but there is a gross profit per broker on Slide 16. And yes, I think the way that we think about the overall AFG proposition is what's the integrated margin look like. And that comes through in the portfolio of different options we're providing for our brokers and lead into our strategy. So that's absolutely the way that we think about our distribution network and how we work with them for that win-win.

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

I have a couple of questions. So first question, another one on the AFG Securities book. You said you'll use some of the funding cost benefits to invest in book growth. Do you have a sort of target or aspirational growth rate or book size you're sort of working to for AFG Securities? And how much operating leverage do you actually have in that business?

I'll answer the second part of that question first, Richard. In terms of the operating leverage, we think we are well placed with -- I mentioned earlier, we talked about the introduction of a new software or new panel workflow tool for our AFG Securities business, which enables us -- which drives efficiency from not just an operations perspective, but also a credit assessment perspective. So we're very comfortable in terms of leverage around a number of people required and workflow improvements we've made to that part of the business. And we'll see those benefits wash through effectively now that platform is ceded. In terms of the target broking -- target size of the AFG Securities book, I think the best way of looking at it is we ultimately want to get to around about -- we've always said we want to get to around about 10% of all our flow into an AFG product and hopefully more over time. And the best way of sort of gaining a feel to that is maybe around about 50% to 55% of that white label flow would be linked to AFG Securities product.

Okay. And that's sort of a medium-term aspiration. If you look at the sort of period ahead, the FY '25 year, do you have a sense of how much growth you can get in the portfolio? You're obviously going to manage it or we will have a volume margin trade-off. So can you give us an idea of how much growth you're sort of looking for?

I guess I'll have a look at the first, we're in August now. So we've got lodgments, we've given you some guide on that. So it gets you sort of the first -- almost the first half in terms of lodgments. The second part of the question is it depends on what competition does, right? So we will be disciplined and those sort of [indiscernible] earlier. We'll be disciplined around the returns that we want to make out of this portfolio. We've done it before. So it's hard to give you a guidance because we just want to make sure that we are giving ourselves the flexibility around maintaining profitability and maintaining returns on equity.

Okay. And I have a question about the industry more broadly. The mortgage industry balances, so not flow, but balances -- growth in balances has picked up a touch as the year has progressed. We're sort of tracking at 5 or 6 or probably low 5s at the moment, whereas earlier in the year, we were probably the sort of low to mid-4s. So there's obviously a little bit of optimism coming back into the market about growth. It's probably related to less runoff. However, the RBA minutes revealed that the Board seriously considered a rate hike. That's probably not something that's front of mind for borrowers who are probably thinking more about when are we going to get the first-rate cut rather than the potential for a rate hike. You've got 4,000 brokers who are effectively your partners, who are close to the front line. How do you think higher for longer or even a rate hike would affect sentiment and growth in the mortgage market?

That's a really good question. I can talk about what our brokers -- and there's a different feel and a different view across the market, depending on where you're operating, Richard. So the brokers in Victoria are probably a little less optimistic around where they're sitting in the marketplace. And I think there's some regulatory issues in terms of taxes and the like, which are impacting that level of optimism. Preapproval, confidence within the broader broker and customer set. There was an article in the industry magazine the other day around preapprovals are one of the highest levels for brokers and brokers' customers who tell me that customers are still focused on getting in and making sure they don't miss the market. But there's a little bit of a supply issue. It's clear this is the first time I've seen a market where there's some people who are very, very eminently comfortable in terms of meeting a 25 basis point freight rise but there are some others who are probably hurting a little bit in CBA and Westpac yesterday probably referenced those in terms of the younger borrowers are probably hurting a little bit more. Most brokers aren't speaking to are relatively optimistic. And that, a, the customers are talking about moving, talking about investment properties. We're starting to see some of our brokers who have relationships with investment businesses or housing investment businesses are indicating there's a lot of now reverse inquiry back into Victoria. So looking for an investment property, they were moving and looking at Queensland and WA. There's heat coming into that market now and maybe Victoria is the market that they will go invest in now. So a long, long way of answering, there is a level of optimism and there's a level of optimism in the broader customer base and the level of inquiry remains strong. $8 billion worth of lodgment inquiries -- or lodgments in July will be a similar number in August. That tells me things are pretty robust.

Thank you. That does conclude our question-and-answer session. I'd like to hand back now for some closing remarks.

Thanks very much, and thanks, everyone, for your time. I've just seen it's an hour. So I appreciate your time today, and we look forward to catching up with you in the coming weeks.

Thank you. That concludes our conference for today. You may now disconnect your lines.