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

Thank you for standing by, and welcome to the investor briefing for AFG's 2026 half year results announcement. [Operator Instructions] And finally, I would like to advise all participants that this call is being recorded. I'd now like to welcome David Bailey, Chief Executive Officer, to begin the conference. David, over to you.

Thank you, and good morning all. AFG has delivered a strong first half performance in first half of FY '26, reflecting the disciplined execution of our strategy and the strength of our integrated lending ecosystem. Our 3 strategic pillars: growing our broker network, providing a market-leading technology proposition and delivering higher margins through our distribution network are clearly translating into tangible results. We've continued to expand and strengthen our broker network, now supporting 4,300 active brokers with increasing productivity and deeper engagement across diversified products and services. Our investment in technology is enhancing broker efficiency and driving recurring revenue growth with strong adoption of BrokerEngine Plus and related services reinforcing our position as the aggregator of choice. At the same time, our focus on higher-margin manufacturing through AFG Securities is delivering improved net interest margins and a growing loan book, underpinned by disciplined funding and credit management. When measured against our FY '29 aspirations, the progress across each pillar demonstrates that we are well on track. Structural industry tailwinds, including continued broker market share gains, industry consolidation favoring scale networks and sustainable credit demand further support our trajectory. Importantly, this performance is built on strong foundations, a scaled network, diversified earnings streams, disciplined capital allocation and a robust balance sheet. Having made some opening remarks, Luca and I will now dive a little deeper into the elements of the results. If we could just move to Slide 3 straight away. We are a leading distribution platform, 4,300 active brokers now writing 1 in 10 Australian residential mortgages. So that's an improvement on 1 in 9, sorry, I should correct that. We used to be 1 in 10. We're now 1 in 9 Australian residential mortgages, connecting over 600,000 customers nationwide. The integrated lending ecosystem is driving growth. We're expanding manufacturing and technology capabilities through AFG Securities, BrokerEngine and Fintelligence. We've got strong financial foundation, $715 million in the first half in revenue and $183 million in liquid assets and investments, supporting continued scale and reinvestment. I jump to Slide 4. To be clear, this is a record H1 performance. Profit growth is accelerating with strong operating leverage delivered across the group. There have been record settlements and loan expansion across residential and AFG Securities. Margin expansion and improved cost discipline is driving higher quality earnings. Moving to Slide 5, a sort of snapshot of what the early trading is into the new second half. On the back of half year results, it's important to note there has also been a great start to 2026 calendar year. January lodgements are up strongly across residential and AFG Securities. We've seen growth recorded across all states with strength in New South Wales and Victoria. And the record RMBS issued in -- most recently just drives enhanced funding certainty and a very positive near-term NIM outlook. On Slide 6, I want to emphasize we are a business which has been built to deliver through the cycles. We're growing and consolidating our broker network. It's important to note that we are experiencing -- what we are experiencing is what we have been anticipating. We over-index in larger broker groups, and these groups are growing 2.5x the rest of the network, scale advantages acceleration. Our technology investment is driving efficiency, engagement and multiproduct adoption and higher-margin manufacturing is expanding through disciplined funding and book growth. On Slide 7 is our aspirations for FY '29, and it's important to see how we are tracking against those aspirations. As you can see, we are on track. The structural drivers of industry consolidation, scaled network and resilient funding model are all moving in the right direction. Expanding AFG Securities book and improved NIM is supporting our margin ambitions. -- and there is a clear pathway to sustained earnings growth through productivity, services and mix improvement. On this note, I will now pass across to Luca to provide a financial update.

Thanks, Dave. I'll focus on segment performance, funding and margin dynamics in manufacturing and our capital position. On Slide 9, this half represents a meaningful step-up in profitability. Gross profit increased 16% to $78 million. EBITDA increased 43% to $36 million and ROE improved to 21%. 74% of our earnings are annuity style, and that provides a stable earnings base. Turning to Slide 10. This slide highlights that the majority of our earnings are generated from our high-returning distribution business. It is the core of the group and delivers high-quality predictable cash flows. The segment generated a 37% return on equity and remains the primary focus of our investment, where we are seeing encouraging results. As Dave mentioned, manufacturing, our lending business had a strong half with EBITDA of $14 million, representing an uplift of 141% with ROE strengthening to 30%. I'll highlight that this includes our investment in Thinktank. And if we excluded that, the returns would be stronger again. Central Services remained stable in an inflationary environment, which is a pleasing result given the ongoing investment we are making in technology and platform capability and ensuring that our teams are remunerated in line with market. On Slide 11, I'll focus on cost discipline and cash generation. Gross profit increased 16%, while operating expenses increased 5%. As a result, CTI improved to 56% from 64%. OpEx growth reflects targeted investment in performance-linked remuneration and technology, partially offset by a reduction in headcount. Amortization associated with our platforms increased by $1 million. Importantly, the technology investments we've made in BrokerEngine and our lending platforms are now driving both broker productivity and operational efficiency. Higher settlements per broker increased scale, while automation reduces manual processing per loan. That combination supports operating leverage as volumes grow. As these systems mature and we modernize further components of our lending and back-office infrastructure, we expect additional efficiency benefits over time. The business remains strongly cash generative. Net cash from operating activities increased 50% to $20 million with cash conversion of 85%. We declared a fully franked interim dividend of $0.047 per share, consistent with our payout policy. On Slide 12, distribution gross profit increased 5% to $58 million. Importantly, the quality of earnings within distribution continues to improve. Subscription income increased 11% to $11 million, marking 8 consecutive years of double-digit growth. That growth reflects sustained adoption of BrokerEngine and our broader platform services. Subscription income now represents close to 20% of distribution gross profit, increasing the recurring component of our earnings. Pleasingly, residential margins increased by $1.9 million, driven by record settlement volumes with lodgement momentum continuing into the second half. Upfront payout ratios remained stable at 96.3%. Asset final settlements increased 15%, and we've grown that business at an annualized rate of 22% since acquiring Fintelligence. BBI moderated in the period with competition becoming more rational and performance improving compared to the second half of FY '25. Overall, distribution remains our highest returning segment, delivering a 37% return on equity with a high recurring earnings profile. Turning to manufacturing on the next slide. Gross profit increased 62% to $21 million, whilst the average book increased 23% and following a very strong December, we were able to close at $6.3 billion. The NIM increased to 124 basis points, up 11 basis points on the half, and I'll cover this off in more detail on the next slide. As Dave mentioned, operating leverage delivered $4 million in scale benefits with our cost-to-income ratio reducing 19 percentage points. I'd highlight that we still have a range of initiatives that we can deploy to continue to improve further operational effectiveness in this business. Turning to Slide 14. As Dave mentioned, the combination of book growth and margin expansion is a standout for the half. The increase in our NIM was importantly funding led, not risk-led. Approximately 9 basis points of this uplift was structural, excluding the cash to BBSW spread. The spread contributed around 5 basis points in the half, placing underlying NIM at roughly 119 basis points. During the period, we renewed 3 warehouses at improved margins and completed RMBS issuance priced 25 basis points inside our prior transaction. A further $1.2 billion deal was completed last week on similar terms with strong investor support. 53% of the portfolio is now term funded, reducing our exposure to short-term cost of funds volatility. The exit NIM of 126 basis points provides confidence into the second half with a full period benefit from the funding secured during this first half as well as the recent term transaction. Turning to Slide 15. This highlights the earnings momentum we're building across the business. You can see in FY '24 and early FY '25, the effects of the extraordinary market conditions and government intervention, particularly within manufacturing. Throughout that time, we continued to invest in funding capability, platform infrastructure and broker services. As conditions have normalized, those investments are now translating into improved scale, margin and earnings. The closing book of $6.3 billion represents a roughly $5 billion of incremental NIM compared to the first half. Broker services and broker investments are also contributing incremental earnings as they scale. Together, this provides increasing visibility into second half earnings. Finally, turning to Slide 16. We finished the half with $63 million of unrestricted cash and remain in a net cash position. The trail book net asset of $86 billion provides embedded value. While our strategic investments totaled $56 million and are delivering attractive returns, and Dave will touch on our broker investments program shortly. Importantly, the balance sheet remains flexible with headroom to target gearing and liquidity settings that allow us to continue investing where returns are compelling. I'll hand back to Dave.

Thanks, Luca. I'll jump to Slide #18 to give a bit of an operations and market update. Slide 18, we are growing the network and the value per broker. I mentioned 4,300 brokers with rising productivity and diversified earnings mix. Gross profit per broker is increasing, supported by technology, services and multiproduct adoption. AFG Securities book is now at $6.3 billion with improved NIM, strengthening manufacturing contribution with a high level of confidence that our funding mix and liquidity in the RMBS market is providing protection for any changing economic environments. Flipping to Slide 19, we talk about our distribution strength and market outperformance. As mentioned, AFG now write 1 -- AFG brokers more rightly, now write 1 in 9 Australian mortgages with growth outpacing market volumes. Our residential settlements and closing book continue to expand and the record lodgement pipeline is underpinning sustained momentum into the second half of the financial year. On Slide 20, we demonstrate our earnings mix shifting towards higher-margin products. AFG Home Loans continues to transition towards the higher-margin AFG Securities products. We've seen strong growth in commercial leasing and asset finance settlements and broker services adoption is rising, driving recurring subscription income. On Slide 21, it's clear that the broker channel is now structurally embedded as the dominant channel in the marketplace. Market share is sitting at 77% and trending towards 80% plus. Brokers deliver trusted advice, competition and consumer outcomes endorsed by our best interest duty. It is an efficient, scalable distribution channel for all lenders. Slide 22 is something we're very pleased with. We talk about our manufacturing part of our business with record share and exceptional credit quality. AFG book is now accelerated to $6.3 billion with a strong lodgement pipeline. We achieved record market share on our panel while maintaining a disciplined credit and pricing setting. And the portfolio quality is strong with low arrears and a conservative LBR profile as further evidenced by our most recent term transaction of $1.2 billion. On Slide 23, I want to talk a little bit about our broker investment strategy and a reminder of the key components. It's a targeted minority investments aligned to succession and scale. The capital is deployed at transition points to compound network benefits, and this enhances retention, recruitment and long-term earnings growth. Importantly, what we are seeing is that these businesses that we have invested in are starting to grow in their own right by acquiring books and acquiring businesses. So the network effect of this investment is starting to grow. On Slide 24, a little further, the execution to date is validating our strategy. 5 broker investments completed. And again, these entities are undertaking additional secondary acquisitions. They are earnings accretive from day 1 and building annualized EBITDA contributions. This is a disciplined, repeatable capital deployment model supporting scale and consolidation of the broking industry over the longer term. Slide 25 is a slide we've used previously, but important to reinforce, we are structurally positioned for long-term growth. Structural demand supported by population, employment and credit growth, industry consolidation and technology investment raising barriers to entry, a strong balance sheet and disciplined capital management underpins value creation. A business which has been through a range of cycles over 31 years and continues to grow. A little bit around our outlook and which is now on Slide 27. It's been a successful first half. We expect earnings to accelerate for a number of reasons. Strong January lodgements across residential and AFG Securities support second half acceleration. What we're seeing in January, we're seeing strong numbers come through in February as well, higher margin mix emerging with improved NIM and growing subscription income and operating leverage continuing with a seasonal cost profile supporting this earnings momentum. And the last slide here, as I close, is this why invest in AFG. We are a scaled embedded distribution network at the center of Australia's lending ecosystem. The majority of our earnings is recurring annuity style, generating strong and predictable cash flows, a capital-light model with balance sheet flexibility and sustainable returns. So in conclusion, with momentum in volumes, margins and mix and a platform designed to deliver through the cycles, we are confident in our outlook and in our ability to continue to create sustainable long-term value for brokers, customers and shareholders. I'll now pause and open up for questions.

[Operator Instructions] And your first question comes from the line of Tim Lawson of Macquarie.

Just can you just talk a little bit about the way you think about sort of the trade-offs on NIM versus book growth? Obviously, you've expanded NIM and had good book growth in this half. But obviously runoff is a bit elevated still and your NIM is now above your sort of aspirational target. So maybe just sort of talk through how you're thinking about NIM versus book growth over time.

Morning, Tim, thanks for the question. Look, I think in terms of -- we've always said that we're price disciplined. I think that's not changed. And I think in relation to the NIM, what you're seeing in there is the outcome of strong capital markets and a bunch of work that we've done. I think if you strip out the BBSW to cash spread, we're at or about that sort of through the cycle guidance that we've provided. So about 119. So I think in terms of the volumes, we're happy with where we're at. We did see an elevated period of runoff, particularly through the first half of the half, so that first quarter. That moderated through December and January. And so what we're looking at, at the moment is strong demand for nonbank lending. We seem to be taking share within that, and we're able to extract value where we want to grow the book. But I think in terms of the NIM overall, we're at or about that through-the-cycle NIM that we've guided to now.

I think we've worked really hard at structuring warehouse facilities and bringing -- we brought on another warehouse in late December with Westpac that brings an additional level of flexibility and pricing discipline around that warehouse pricing. And of course, that second term transaction, which we completed subsequent to the half year just provides a little bit more flexibility. Having said that, we are very conscious of our return on capital in that part of the business, as you've seen demonstrated in the past. So pricing discipline is important. But at the moment, we seem to be taking share by maintaining both.

Okay. That's great. Can you also just talk a little bit more about Thinktank. So this seasons earnings in that equity accounted part have moved around a little bit over the last sort of 3 halves. Just trying to sort of understand what the volatility has come from and what you sort of think is sustainable contribution from that part. And I'll get into the equity brokers after that.

Sure, Matt. Look, I'd look at Thinktank in terms of the thematics which hit Thinktank in a similar manner as what has hit our AFG Securities business. So they've been able to grow their book. They've been competitive in the market. They've had some funding relief as they've executed some term transactions. And they've done a couple of -- or one, I think, in the half whole loan sales as well. So we would expect the Thinktank contribution to continue to build. The business is a strong business. And it's receiving the same favorable market conditions that AFG Securities has received. Does that make sense?

Yes. Yes, that makes sense. So you've called out on the equity investments, you can sort of an annualized sort of contribution around that sort of $2 million. Obviously, you expect to make more investments. But is that a similar sort of contribution from Thinktank. I think it was $1.3 million in the half that you called out as sort of equity or book sale. So is the sort of sustainable through a cycle sort of $2 million from each of those, so $4 million for equity account investment right?

I think on an annualized basis, Tim, that's -- I'd separate the 2, okay? So in terms of Thinktank, that's got the same cyclical factors that we talk about in the lending business of AFG Securities. So as long as nonbank lending remains buoyant and capital markets are working in our favor, then you'd expect that to strengthen. And then from a broker investments perspective, the $2 million annualized EBITDA that we talk about, I think that's reflective of what you'd expect through the broader portfolio. Dave sort of touched on with the earnings outcomes that we're seeing in those businesses that we've got investments in and then the flywheel effect that we're getting of them buying books or investing in other businesses, you'd probably see an acceleration of that through time, and that's part of the investment thesis.

Yes. Okay. So on that investment in brokers, the equity other than Thinktank. Is it sort of -- you invested about $10 million so far and you're earning about annualized 20%. Is that the sort of right number or you invested a bit more than that?

Sorry, mate, can you say that question again?

So just in terms of the total investment you've got in that -- the non-Thinktank part on the equity growth you're sort of targeting around a 20% return. I think you've invested something around the $10 million or are you now sort of a bit higher than that?

Yes. We're not targeting anything in particular. All we're looking at is the individual investments make sense on a case-by-case basis and making sure that those returns exceed our hurdle rates. So we're taking an average stake at the moment of the portfolio of 25%. They're making $2 million on annualized EBITDA, and we've invested about $7 million. So you can probably do the math from there, that return is just under 20%, and we'd expect that to continue to build.

[Operator Instructions] And your next question comes from the line of Jeff Cai of Citi.

Just following up on the broker investment side of things. Can you talk a little bit about how you're seeing the pricing competition for these assets, how that might change as sort of the cash rate dynamics moves going forward? And more broadly, when do you sort of expect a sort of a bigger step-up in the number of investments towards 35.

A bit in that question. So in terms of competition for investments, I think we've said all along, we're making this market, and that's been part of, I guess, the building and educating of brokers. And obviously they're looking at their businesses and seeing very strong outcomes or future near-term futures, Jeff. So they're thinking what's the best time for them to take on an equity partner. So there's a bit of work for us to do around helping people understand the value that AFG can bring to it. In terms of scale and at what point do we expect this to accelerate, I think we've been pretty overt with the 35 target, and we've done 5 in just under 12 months. We've probably talked to 2 or 3 prospects every couple of weeks. So we've got a very healthy pipeline of opportunities. And I think in terms of the proposition that we provide brokers is we've got a balance sheet that I think others will struggle to match. So we've got depth that we can do that 35 in. So we're confident in the 29. It's always going to be back-ended because of that flywheel effect, and I don't think anything has changed since we sort of talked about this strategy 12 months ago.

Got it. And then a question on the outlook in terms of the white label mortgage book. I guess with the distribution partnership sort of now reset, do you see most of the rebasing now done? And how should we think about the book growth going forward for that business?

It's a good question. If I can go back a few years, we set up the AFG Home Loans brand as a white label proposition, which then fed into the AFG Securities business. So in other words, how do we learn to distribute product in our own brand, how do we step into something which is then funded by ourselves and we go on balance sheet for risk. What we've seen with the white label partners is that -- and how we approach our white label partners is that ultimately with the white label becomes a test and learn for us, understand the credit experience, understand the nuances of those products, which then allows us to step into funding directly. And if you track AFG Securities' credit profile over the journey, you can see that it's gradually widened to become more and more market -- a more broader market appeal. And so in terms of the transition to -- of AFG Home Loans into a majority funded by AFG Securities hasn't happened by accident, but we suspect with the exit of Advantage during the period or the towards the end of the last period, we are seeing a greater share of that type of business moving into AFG Securities. And we will continue to trust and value our existing white label partners where they're providing something which is something outside of our normal credit appetite. Does that make sense?

And this does conclude our Q&A session for today. I would like to thank our speakers for today's presentation, and thank you all for joining us. This now concludes today's conference call. You may now disconnect.