BNK Banking Corporation Limited (BBC) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the BNK Banking Corporation Limited FY '25 First Half Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Allan Savins, Chief Executive Officer. Please go ahead.

Thank you, and good morning, everyone, and thank you for joining us today. My name is Allan Savins, and I am the CEO of BNK Banking Corporation. And together with Steve Kinsella, our CFO, we're pleased to take you through the half year FY '25 results. Our next slide, please. Now, the agenda for today, I will outline the FY -- first half '25 results overview. Steve will outline the financial results in more detail, and I'll conclude with a strategy update and outlook. Next slide, please. We do encourage you to download the presentation from the ASX and review the disclaimer at your convenience. Next slide, please. For the first half '25 results overview, we may move on to the next slide, please. And in summary, BNK's strategic shift towards higher-margin lending is delivering results. The focus on selective, capital-efficient growth is driving stronger returns, reflected in increased net interest income, improved margins and higher fee income. While lending settlements have declined in line with this strategy, the quality and profitability of the portfolio continues to strengthen. With a solid capital position, BNK is well placed to sustain its strategic direction and long-term profitability. And next slide, please. The financial results for the first half '25 continue to demonstrate positive momentum as a result of balance sheet repositioning. The banking sector continued to face challenging market conditions throughout first half '25. Higher interest rates placed pressure on margins, while competition for loans and deposit customers remained intense. Despite this, we achieved an underlying NPAT of $1.8 million, up $3 million or 250% from the previous corresponding period. This represents the last 10 months of consecutive positive underlying NPAT. Statutory NPAT also improved to a positive $320,000, up $2.1 million or 118% from a first half '24 loss. Some other call-outs. Net interest income was up 29% to $11.1 million compared to the prior period. Total income was up 58% to $12.8 million compared to the first half '24, delivering positive jaws as underlying operating expenses rose by 11%, reflecting a balance of investment, disciplined underlying expense management and inflationary impacts. The net interest margin for first half '25 continued its positive momentum as anticipated at the FY '24 full year results to 1.39%, which I will discuss further on the next slide. So next slide, please. Overall, strategic highlights show profit growth momentum. Our net interest margin improved significantly, up 47 basis points compared to the first half '24 and 19 basis points from the second half '24. This demonstrates sustained progress over the year with improvements driven by disciplined pricing strategies, a focus on higher-margin lending and careful management of our funding costs. These results highlight our ability to navigate margin pressures effectively while positioning the business for long-term profitability. Other income in the first half '25 grew significantly, up by $2.6 million or 187% compared to the first half '24. This was primarily driven by the Robusta securitization transaction and an increase in Goldman Sachs off balance sheet volumes. This highlights the value of diversifying income streams beyond traditional balance sheet lending. While lending settlements declined by 29% compared to the first half '24, this aligns with our strategic decision to prioritize selective high-margin lending. This focused approach ensures we continue to optimize the quality and profitability of our lending portfolio. Our emphasis on high-margin assets is showing results with this segment now comprising nearly 22% of the total portfolio. While this shift reflects both portfolio composition dynamics and our strategic focus, we are actively laying the foundations to expand this segment further, delivering improved portfolio profitability in a sustainable manner. Phase 2 of our technology transformation is progressing with key foundational elements being developed to support continued progress throughout 2025. On the capital front, we remain in a strong position with a capital adequacy ratio of 26.98%. This provides us with the capacity to deliver on our strategic initiatives. Our next slide, please. Our loan book, deposits and net interest income. For the loan book, since the first half '24, the loan book has decreased by 20%, reflecting the impact of our strategic focus on transitioning away from lower-margin prime residential loans. While this shift has naturally resulted in a smaller overall portfolio, it has allowed us to prioritize high-margin opportunities that will support sustainable long-term growth. We remain focused on accelerating the growth of profitable new business in line with our strategy to optimize the portfolio and deliver improved and sustainable returns over time. Growing the loan book alone isn't always the solution. Profitable growth is the key to success and remains the primary focus. The deposit book has decreased by 29% since the first half '24, an expected outcome aligned with the reduction in the loan book. Notably, the deposit decline has been managed at a greater rate than the loan book reduction, reflecting a deliberate strategy to optimize our funding mix. This approach has allowed us to strategically manage the runoff of more expensive term deposit funding, contributing to an improved net interest margin and supporting our focus on maintaining a balanced and efficient funding profile. Net interest income reached $11.1 million, up from $8.6 million in the first half '24 and $10.7 million in the second half '24. This shows a solid improvement from the prior half year and year-on-year. While we've seen positive momentum as we've experienced in the past, the trajectory of growth is not always linear due to competitive market forces, but we remain focused on managing these dynamics and maintaining a strong, resilient performance across the business. Next slide, please. Our lending portfolio remains stable from a risk perspective. The portfolio's payment structure remains largely consistent with over 80% of loans continuing its principal and interest. This stability underscores a lower portfolio risk profile as borrowers steadily build equity in their properties. The composition of our residential loan book has remained stable between owner-occupied and investment loans over the past year, reflecting a balanced runoff across both segments. Our goal remains to optimize returns while maintaining a strong diversified lending base. As previously mentioned, high-margin assets now comprise approximately 22% of the portfolio secured by either residential or commercial property. While this shift has been influenced by the reduction in the prime loan book, we've also taken deliberate steps to expand this segment. Our target remains to reach 30% over the medium term, and we're steadily progressing towards this goal through a balanced approach to portfolio composition. We've seen a positive shift in the LVR mix over the past year. In the first half '24, 32.5% of the portfolio had an LVR of up to 60% compared to 37.4% in the first half '25. Meanwhile, the portion of loans with an LVR between 60% and 80% decreased from 60.8% to 56.2%, with the balance above 80% remaining relatively stable. This reflects the current portfolio dynamics and our ongoing focus on maintaining a strong risk profile through a balanced LVR mix. Next slide, please. Importantly, our portfolio metrics and performance continue to be healthy. Offset account balances have decreased slightly, moving from $79 million in June '24 to $77 million in December '24. This slight change reflects continued strength in customer cash flow management, with balances remaining at robust levels. As at December '24, approximately 45% of our loan book is ahead in repayments, up from 42% in December '23. This improvement highlights the financial resilience of our customers and their ability to manage repayment obligations effectively, and these metrics continue to provide an effective buffer for our borrowers. At December year-end, only one mortgagee in possession case was in existence. This has now been settled with no financial loss, reflecting the overall strength and quality of the portfolio. Fixed rate loans now represent just 4% of the portfolio as at December '24, significantly reduced from 16% a year earlier. And by the end of FY '25, we expect negligible balances remaining in the fixed rate portfolio, consistent with our strategy of not originating any new fixed rate business. In terms of arrears, the residential loan book continues to show strong performance with arrears over 90 days reducing to 0.47% in December '24, down from 0.57% a year earlier. And similarly, the commercial loan book has seen a marked improvement with arrears over 90 days decreasing from 1.41% to 0.98% over the same period. So on that note, I'll hand over to our CFO, Steve Kinsella, to present the financial results in more detail. Next slide, please. Thank you.

Thank you, Allan, and good morning, everybody. Our portfolio performed well in a competitive environment. As everyone is aware, the RBA has commenced an interest rate reduction cycle with the recent 25 basis point cut to the overnight cash rate on the 18th of February. The market had anticipated this, and so we saw reductions in term deposit rates, in particular, around the end of the calendar year and leading into the decision. Notwithstanding the reduction, and as Allan mentioned, we have seen a continuation of an extremely competitive environment throughout first half '25, particularly on the asset and lending side. During the period and in that context, we repositioned the portfolio away from the more expensive term deposits on the liability side and consistent with our strategy, did not compete in the lower-margin prime residential space for new business. We have retained a good proportion of our fixed rate maturities coming off low rates and cautiously grew our higher-margin assets. Our return on investments improved relative to the prior corresponding period. These factors all assisted our improved NIM outcome. Expenses grew with some technology investment, transaction fees and inflationary impacts. Arrears meanwhile saw some stabilizing and a slight reduction, consistent with our previous view and the resilience of our customers. Next slide, please. Looking at our results for the half. Our statutory income and underlying income outcome both showed a marked improvement from the losses in the prior comparative period, with both showing positive outcomes for the first half. Our net interest income of $11.05 million was up 29% compared to the prior corresponding period. Our other income was a net improvement in both statutory and underlying terms with the income from the Robusta trade of over $1 million and continued good fee income from our origination and servicing activities generated from the Goldman Sachs warehouse program. The net present value impact from the rundown of our legacy mortgage management book is the only difference between statutory and underlying income and is consistent with prior period treatment. Underlying expenses were up 11% year-on-year with selected investment, transaction fees associated with Robusta and inflationary pressures balanced with careful expense management. We saw vendor expenses associated with our technology upgrade in the period of $845,000 that are included in our statutory results, but not reflected in the underlying results. Credit loss expense for the period was actually a net write-back of $85,000 with a reduced book and reduction in overall arrears in the 90-day plus category. Our tax expense for the period was slightly higher than 30%, with an additional $100,000 tax expense following completion of the FY '24 tax returns. The summation of the above led to a profit of $320,000 for statutory results and an underlying profit of $1.8 million, which is a significant improvement on the underlying loss for first half '24. Next slide, please. This chart shows the walk from first half '24 underlying loss of $1.2 million to the underlying profit of $1.8 million for first half '25. Higher net interest income of $2.5 million, higher fee income and lower credit provision expenses all contributed strongly, partly offset by increases in the cost base and a higher tax charge, as mentioned before. Next slide, please. If we look at the first half key metrics, our on-balance sheet footings showed a decline year-on-year, consistent with our strategic aim of moving away from prime resi and as we allowed that book to reduce. Loans reduced 20%, whilst deposits reduced 29%. NIM improved 47 basis points through this period, and I will discuss this later in the deck. Our underlying cost-income ratio was 81% as we moved into profitability and our capital ratio improved on both the Tier 1 and a total level, largely from a reduction in the book, but in so doing, creating the capacity to invest in selected higher-margin business. Next slide, please. Taking a closer look at our net interest margin. Our NIM for first half '25 rose to 139 basis points, up 47 basis points from 92 basis points for the first half '24. We saw increased margins on the asset book through a combination of reductions in the lower-margin prime residential book, a flow-through of maturing fixed rate loan repricing and some modest growth in our higher-margin products. The competitive markets for funding over the last 12 months meant increases in our term deposit and savings account rates. However, we offset these with the repositioning of the composition of the book. Comparing to second half '24, we also saw a further improvement in our NIM from 120 basis points to 139 basis points, with similar drivers to the year-on-year movement and a slight softening in TD rates became more evident, as mentioned earlier. Next slide, please. Looking briefly at the fixed rate home loan portfolio. As mentioned at our full year results, we've seen ongoing maturities in our fixed rate home loan book. We've been relatively successful at helping customers transition to the higher variable rates on maturity with an average retention rate greater than 60% through first half '25, which is broadly in line with internal targets. The fixed book continues to reduce, and we are now nearing the end of the fixed rate maturities. Whilst we expect there will be some further contribution to margin uplift, it will be of lower magnitude as we progress through calendar 2025. Next slide, please. This chart shows how the composition of our deposit book has changed over the last 12 months. The market for term deposits over the 12 months has been extremely competitive with customers seeking additional yield through either high interest savings accounts and/or term deposits. Whilst there was some softening in term deposit yields available to customers, this was only recently as confidence rose in the prospects of an RBA rate cut. We have looked meanwhile, to actively balance the composition of term deposits with greater funding stability against the impact on margin over the last 12 months as we entered this rate reduction phase of the cycle. Our margin remains an area of acute focus as we outlined at the full year '24 results, and we continue to focus on our cost of funding as a key contributor to overall NIM outcomes. Next slide, please. Our operating expense performance reflects a combination of investment in foundational areas of the tech stack, securitization transaction fees and navigating inflationary pressures across most expense lines whilst maintaining a strong focus on cost control wherever possible. Total expenses increased from $10.3 million in first half '24 to $12.2 million in first half '25. Within this, as mentioned, $845,000 relates to the investment in the technology upgrade, as previously mentioned, which we exclude from the underlying result. There was a further $350,000 of transaction fees associated with the Robusta trade, which is included in professional services and is included in our underlying result. Next slide, please. The loan book remains sound from a credit perspective. Our overall charge for the half was actually a write-back of $85,000 compared to a charge of $352,000 in the corresponding period. Our overall provisioning coverage has increased from 22 basis points of the portfolio to 26 basis points over that period and sits at $3.2 million. The breakdown is provided and shows a reduction in our Stage 3 provisioning, reflecting the 90-day plus arrears improvement. Our Stage 1 provisions reduced largely due to the reduction in the book, whilst we have added to the overlays year-on-year as we continue to refine the provisioning methodology. Next slide, please. Looking at credit quality and arrears. The increase in borrowing rates for customers and household pressures led to more elevated arrears through most of 2024, but we have seen some moderation towards the latter quarter. Our greater than 90-day arrears sit at 0.47% on our residential loan book, and this represents a very small number of accounts. The aggregate total for 31 days plus sits at 1%, which is the lowest over the last 12 months. Given it only takes a few accounts to move this percentage, we can see quarter-to-quarter volatility, but we remain of the view that our arrears position is broadly stable. The recent reduction in the overnight cash rate by the RBA should assist customers, and we've passed on the full 25 basis points to our loan customers. Our commercial arrears remain within tolerance with our 90-day plus arrears sitting at 0.98%, representing 4 accounts. We will continue to monitor closely as this book cautiously grows. Next slide, please. A healthy percentage of customers remain ahead in their payments with a slight improvement from first half '24, which these charts show. Alongside that, our portfolio loan-to-valuation ratio also shows that more than 90% of the book has an LVR less than 80%. Next slide, please. Looking at our capital, we remain well capitalized. With a focus on transitioning the balance sheet towards higher-margin and capital-efficient assets, we have seen an improvement in the overall capital adequacy ratio to 26.7%. This represents a strong capital position, well above regulatory requirements and above Board minimum targets. The increase has been achieved from a reduction in the asset book and increases to capital as outlined with a small initial organic capital contribution with positive statutory earnings in first half '25. We believe the current capital position places us well for future growth in the selected and strategic asset categories. I will now hand back to Allan to discuss our strategy and outlook. Next slide, please.

Thank you, Steve. So just looking at the deck, just ahead of page strategy update and outlook. We might just go to the next slide, please. So strategic progress in first half '25. We've continued the transformation to sustainable profitability. We have made substantial progress on our strategic initiatives with many of the key outcomes already highlighted. Growth and margin remain closely intertwined. Revenue growth was driven by diversification with high-margin assets now comprising roughly 22% of the portfolio, marking a deliberate shift towards profitability. Our focus on risk-weighted asset optimization and recycling capital has positioned us to fund future growth loan growth efficiently. On the funding side, customer deposit to total loan ratio of 93% underscores the stability of our funding base, a critical factor in navigating market conditions. And, of course, net interest margin increased by 47 basis points in the first half -- from the first half '24, reaching 1.39%. And as Steve said, up 19 basis points compared to second half '24. This improvement reflects our ongoing focus on asset mix optimization and disciplined management of effective funding sources. Together, these initiatives are driving both revenue diversification and margin expansion, reinforcing the sustainability of our growth strategy. These results highlight the careful balance we are striking between profitability and stability in a competitive environment. For profitability, our first half '25 result underscores a significant improvement, reflecting the strength and focus of our strategic execution. Underlying NPAT increased by an impressive 250% year-on-year, reaching $1.8 million. This was driven by strong growth in net interest income, highlighting the positive impact of our asset mix and funding strategies. We also maintained a strategic approach to cost management with underlying operating costs increasing by 11% year-on-year, and this reflects a balance of targeted investment and inflationary impacts. Importantly, revenue growth outpaced expense growth, resulting in positive jaws and reinforcing our ability to scale efficiently. And as Steve previously said, our cost-to-income ratio improved to 81%, being a 35% reduction compared to the prior year. These outcomes illustrate steady progress towards enhancing profitability and maintaining our focus on operational efficiency. Next slide, please. As we look ahead to the second half '25, our strategic focus remains, firstly, on driving sustainable growth and positioning the business for long-term value creation. Revenue growth will continue to be supported by our diversified income base, even as we navigate the natural fluctuations in a competitive market. A key priority is monetizing the value from the low-margin, low-profit residential loan book, which is reinforced by last week's market announcement for the sale of partial Bendigo Bank warehouse loans back to Bendigo Bank for a material net profit. This strategic approach will continue to allow us to recycle capital into high-margin opportunities aligned with our medium-term goal of achieving a 30% higher-margin asset composition in the portfolio. We are advancing Phase 2 of our technology transformation throughout 2025, prioritizing long-term value while aligning with the company's risk, compliance and operational goals. In addition, our focus will remain on optimizing margins while navigating a competitive and dynamic environment. Continued asset mix optimization will play a pivotal role as we further execute our high-margin growth strategy and net interest margin performance will be shaped by this approach. On the funding side, we remain committed to sourcing cost-effective funding, leveraging a combination of low-cost funding sources and access to wholesale markets. This disciplined framework ensures we maintain flexibility and stability while continuing to support our strategic objectives. In terms of profitability, our strategic focus on building upon the strong underlying profit achieved in first half '25. While we are optimistic about our continued growth, given our size and scale, we must remain mindful that progress is unlikely to follow a straight path and may experience fluctuations due to the ongoing market competition. We'll continue pursuing high-margin, high return on capital opportunities, particularly through inorganic growth and white label partnerships as these initiatives will play a key role in further enhancing profitability and scaling the business effectively. At the same time, we remain committed to maintaining cost discipline and driving operational efficiency. By keeping a close eye on costs while executing our growth strategy, we aim to sustain a healthy margin and profitability trajectory over the long term. And the company continues to be judicious with its capital and has no plans for a capital raise this calendar year. Next slide, please. So summary and outlook. As we look ahead, we recognize the business transformation is a continuous process. Our strategy is centered on delivering sustainable growth, enhancing margins and improving profitability. Our approach is supported by diversified income streams and strategic portfolio shifts. The focus remains on optimizing our asset mix, prioritizing high-margin lending while ensuring cost-effective funding sources. Through disciplined execution of high-return opportunities and alignment with evolving customer needs, we aim to further strengthen our competitive position. In parallel, we'll advance our technology enhancement and maintain a strong focus on cost discipline. We're pleased to observe the continued resilience of our customer base amid the challenges of high interest rates and inflation with approximately 45% of our loan customers ahead in their repayments, up 2% from a year ago. This resilience is further reflected in our improving residential arrears trends, even as the loan book has reduced and our longer-term arrears for the commercial portfolio have improved over the same period. We remain well provisioned and confident in our ability to navigate the evolving economic environment. And additionally, we will support the ongoing stability of the Goldman Sachs off balance sheet warehouse program, which remains a key pillar in our revenue growth strategy. We are well positioned to leverage any improvements in the economic environment, enabling us to drive forward our strategy effectively. However, we recognize that progress may vary from the current trajectory and could fluctuate due to competitive market dynamics. So thank you, and that concludes BNK's half year FY '25 results presentation. We'll now open up the session to any questions. Steve, do we have any questions, please?

We currently have no questions online.

Okay. All right. We might give everyone the last opportunity to lodge any questions. If not, that will conclude the presentation. Any more questions lodged online, Steve?

Nothing further. I'd suggest we close the presentation.

Yes. All right. Thank you for your time, everybody. This closes the presentation for our FY '25 first half. Thank you.

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