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

Good morning, everyone, and welcome to BNK's FY '26 Half Yearly Results Investor Presentation. My name is Matt Vaughan. I'm the Head of Investor Relations at BNK, and I'm joined today by Allan Savins, our CEO; and Steve Kinsella, our CFO. For today's presentation, it's divided into 4 segments with Allan giving us the results overview to begin with, followed by a closer look at our financial results presented by Steve. And then Al will then present the strategy update and outlook, followed by a short question-and-answer session where participants submit questions via the Q&A module in the window. [Operator Instructions] We encourage all participants to download the presentation from the ASX website and review this disclaimer at your own convenience. I'll now throw to Allan, who will give us the results overview.

Thank you for the introduction, Matt, and good morning, everyone. I'm pleased to now take you through the half year FY '26 results, which demonstrate continued progress in repositioning BNK for more sustainable and high-quality earnings. In first half '26, we continue to rebalance the portfolio towards higher return capital-efficient assets, supporting an improvement in asset mix and further strengthening our net interest margin. We also advanced key strategic initiatives, including the commencement of senior secured investments and measured growth in commercial lending, further diversifying our earnings base. These outcomes were achieved alongside disciplined cost management and prudent balance sheet settings. Starting with the headline results for the first half '26. Net interest income rose 5% to $11.6 million, supported by continued asset mix optimization and more deliberate funding management. NIM increased to 1.88%, up 49 basis points versus the first half '25. Net income rose 4% on the prior corresponding period to $13.2 million. Operating expenses were flat on a statutory basis at $12.2 million despite ongoing inflationary, regulatory and capability uplift pressures. Turning to earnings. Underlying NPAT was $0.44 million, down 76% on first half '25. This reflects lower other income from reduced Goldman's warehouse originations, higher credit loss provisions and targeted investment in resources to enhance capability, factors which together offset the improvements delivered in margin and net income. It's also worth noting that last year's first half result included income from the Robusta term transaction, which did not occur or recur in first half '26, creating a timing impact on the reported result. For the balance sheet shape, we achieved over $160 million growth in higher returning assets. This was deliberate, driven by purposeful execution to improve margin quality, reshape the portfolio and focus on segments that contribute more strongly to earnings. Capital remained strong at 27%, up 21 basis points in the first half '25, providing capacity to support targeted growth while maintaining disciplined execution. In summary, the first half '26 delivered stronger margins, a modest statutory and underlying profit and a strong capital base that supports the next phase of our strategy. This slide connects financial outcomes to execution. First, our strategic shift towards higher return, capital-efficient assets continue to deliver through the half. Higher return segments now represent 43% of the total portfolio, driven by good momentum in commercial, senior secured investments and targeted residential categories. Second, commercial lending remains a key contributor to this mix shift. The portfolio surpassed $190 million, up 40% since 30 June '25, demonstrating market demand supported by focused execution within our risk appetite. Third, we launched our senior secured investment capability, settling 3 transactions. This marks a meaningful extension of our strategic model, broadening BNK's reach and creates a scalable capital-efficient earnings stream that complements our funded lending book. And capital remains a strategic enabler, supporting our ability to scale high-return segments. Our multiyear repositioning is progressing as intended with growth now increasingly coming from higher return, earnings accretive segments, while the lower-margin residential book continues to unwind naturally. This slide summarizes the key value drivers that underpin our medium-term path to stronger profitability and reflect the project progress now taking shape across the business. We've already delivered the initial 30% uplift in high-return segments, and there's further upside as commercial and senior secured investments continue to scale. These segments are increasingly shaping the structural earnings base. Margin performance continues to improve with NIM trending towards the medium-term goal of above 2%. That's been driven by a more deliberate mix and disciplined funding execution. And with the investment-grade rating now in place, we have broader, more efficient funding options that support further margin strength over time. We're continuing to lift the risk-adjusted return profile of the portfolio, balancing selective prime lending with prudent growth in higher return segments while maintaining resilience and consistent credit performance. Together, these levers, growth in the right segments, sustained margin discipline and a stronger portfolio return profile create a clear and credible pathway to the medium-term uplift in profitability that we are working towards. This slide brings together the key balance sheet and margin dynamics that are shaping our earnings profile. Starting with the loan book. The chart shows the numerical impact of our portfolio reshaping. From the lower opening balance at June '25 due to the prior period being on our land bank sale, coupled with the natural attrition in the prime residential book, total loans increased by $80 million in the half, driven by commercial growth, the start of our senior secured investments and a more targeted approach to residential lending. This progress offset the intended runoff in lower return residential lending and supported a shift towards segments that deliver stronger risk-adjusted returns, resulting in a portfolio that is contributing more effectively to earnings. Turning to deposits. The funding base remains stable and is supported by a considered approach to pricing and mix even in a competitive environment. This has been critical to protecting and expanding the margin. The key development on this slide is margin performance. NIM increased from 1.39% to 1.88% over the previous corresponding period, and this uplift is now flowing directly into earnings. The chart shows a consistent uplift in NIM over several periods, highlighting this improvement is structural. We are now seeing the benefits of the multiyear strategic shift towards higher return segments and more deliberate liability management with the portfolio earning more per dollar deployed as these segments scale. This slide shows how the composition of the BNK funded lending portfolio continues to shift by design towards stronger risk-adjusted returns while maintaining a stable risk profile. Commercial origination now represents approximately 20% of the funded book and a key driver of the higher return mix previously outlined. Senior secured investments broaden the platform. The establishment of our senior secured investment capability expands BNK beyond traditional funded residential and commercial lending, adding a capital-efficient and diversified earnings stream within our risk appetite. These arrangements are tailored facilities to established nonbank financial institutions, where demand for appropriately structured funding remains strong and often underserved by traditional providers. This allows BNK to participate in attractive, well-secured asset pools in a capital-efficient way. Residential remains selective as we continue to prioritize high-return verticals and maintain tight credit selection, while the lower prime -- lower-margin prime segment naturally attracts over time. Our approach is to prioritize value-accretive lending rather than pursuing growth in low-margin volume. The mix continues to shift towards higher return on capital segments, increasing from 22% in December '24 to 43% by December '25. This reflects a deliberate rebalancing of the book towards assets with stronger risk-adjusted returns and a broader set of capabilities that diversify earnings without compromising our risk settings. This slide highlights that the repayment profile remains stable with principal interest repayments dominating for both residential and commercial customers, a pattern that supports a consistent and resilient risk outlook. Commercial is now approximately 75% principal and interest, reflecting the higher quality, longer-dated property secured business we are writing, all of which contributes to a more predictable and stable risk profile over time. This slide illustrates that our residential portfolio mix has remained largely stable year-on-year, notwithstanding the aggregate book size has been reduced. Under-occupied loans continue to make up the majority of the book, which supports portfolio resilience and aligns with our broader risk management strategy. The charts here show that most customers across both residential and commercial remain on track or ahead with their repayments. This consistently reflects the strength of our origination standards and the financial resilience of our customers. We continue to manage their commitments effectively even as broader economic conditions remain mixed. Furthermore, across both the June and December '25 half year periods, around 25% of commercial customers have remained ahead of their repayments. This is a particular noteworthy given the commercial book grew around 40% in the December '25 half. Maintaining a consistent level of early repayment behavior while the book expands at this pace highlights the resilience of our commercial borrowers and the quality of the portfolio as it scales. This slide provides a clear view of our residential loan book broken down by loan-to-value ratio and geography. What it shows the portfolio that remains both well balanced and fundamentally low risk. Starting with geography. The state-based distribution remains consistent and balanced. There are no signs of concentration risk with exposure spread across the major markets in a way that provides resilience against localized economic or housing market movements. From an LVR perspective, the weighted average LVR of 62% highlights the strong equity position across the book, providing a meaningful buffer against potential market volatility. The combination of a well-diversified geographic footprint and a conservative LVR profile provides confidence in the strength and durability of the residential portfolio. This slide provides a closer look at the commercial loan book, which remains a key contributor to the high return strategy. Firstly, our geographic exposure reflects deliberate positioning in markets where asset quality is strong and borrower profiles match our risk appetite without any undue reliance on a single region. Secondly, the underlying collateral profile remains conservative. The weighted average LVR is 64% with the majority of loans written below 70%. This reflects the nature of the new business we are writing, first ranking property secured facilities with assets having good alternative use appeal. This structure has helped maintain a consistent risk posture as the book grows. As noted earlier, the commercial portfolio has grown to more than $190 million, up 40% from the 30 June 2025 period. Importantly, this growth has been achieved within our established guardrails. Overall, the combination of geographic diversification and conservative settlement LVRs reflects our considered approach to collateral and portfolio construction as the commercial book scales. This slide brings together the key indicators of portfolio performance and credit quality across both the residential and commercial books as at 31 December '25. Firstly, for residential, which remains the largest portfolio cohort at $732 million. The average loan size of $393,000 reflects a well-seasoned and constructively structured portfolio. The portfolio remains highly granular with modest individual exposures and a maximum single loan of $5 million, which is itself supported by conservative LPR of 35.7%. This level of diversification limits concentration risk and underpins the resilience of the portfolio. Offset balances totaled $79 million, broadly stable compared with previous periods and provides an additional buffer within the portfolio. In terms of arrears performance, 90-plus day arrears stood at 1.37%. End of the December half year, we have 1 residential mortgage in position case with no expected loss. Turning to the commercial book. The average loan size is around $600,000, consistent with a diversified portfolio of smaller scale property secured facilities. The largest single exposure is $3.2 million and is supported by good equity coverage, which reinforces the overall risk position of the portfolio. In terms of arrears performance, 90-plus day arrears stood at 1.84% off a small base with no mortgage in possession cases. We continue active account level management. Alongside this, and as highlighted earlier, 25% of the customers remain ahead of repayments through the period. And on that note, I shall hand over to our CFO, Steve Kinsella, to take you through the financial results in more detail.

Thank you, Allan, and good morning. The half saw quite a dramatic shift in the interest rate environment, quickly pivoting from potential further reductions in the cash rate to an expectation of increased cash rates, which has continued subsequent to the recent cash rate increase in February. Whilst competition remains strong on the lending side, the changed outlook also led to much sharper pricing in the deposit space with attractive term deposit yields becoming more prevalent for customers, creating some net interest margin headwind. Notwithstanding the changed environment, our NIM continued to improve. This was driven by an expanded commercial loan book, a focus on high-return residential lending whilst the prime book continued to attrite and a continuing focus on liability management and cost of funding. Arrears whilst higher than this time last year are within Board-approved risk appetite and are attributable to a very small number of accounts that are being actively monitored. We have a robust capital ratio that will continue to support the areas of growth targeted for FY '26 and beyond. As we enter the second half, we continue to focus on new opportunities on both the asset and liability side of the balance sheet. Looking at our results for the half. Our net interest income showed an improvement of 5% to the prior comparative period. Other income was down due to the absence of any significant transactional income in this half compared to the realized profit from the Robusta trade in the first half of 2025. These transactions are lumpy by nature, and so will create some volatility in earnings dependent on their timing. Operating expenses were flat on a statutory basis, but up 7% on an underlying basis, with the latter excluding core banking upgrade costs incurred in the prior corresponding period. Whilst work continues in this area, no third-party costs were incurred in the first half '26. The credit loss provision expense increased relative to first half '25, with the latter reflecting a reversal or benefit in that half. Statutory NPAT was $419,000 for the half, an improvement from first half '25. Underlying NPAT was $437,000, that was down from the first half '25, reflecting the absence of those significant trades, increased investment in resources and the increased credit costs relative to a positive benefit in first half '25. This chart shows the walk from first half underlying NPAT of $1.8 million in first half '25 to the underlying profit of $0.4 million for first half '26. Higher net interest income of $0.5 million reflects the reshaping of the loan book despite an absolute reduction in size from a year earlier. Commission expense is down $0.4 million with lower but more targeted volume growth, whilst the absence of any significant trades in this half has contributed to a drop in the other income line, along with lower origination volumes for the Goldman Sachs warehouse during the half. Credit loss expenses, as outlined, contrasted with a first half benefit. CPI, along with investment in capability and capacity uplift led to the higher employee expenses. Looking at some key metrics. Total assets are 20% lower than first half '25 with the sale of assets out of the Bendigo warehouse and natural attrition in the lower-margin prime residential book. The focus on growing selected parts of the loan book with higher return assets and target investment in our senior secured lending led to some small growth in total assets from the end of FY '25. Consistent with the reduction of the loan book, deposits reduced from first half '25, but were up slightly from the end of the second half '25. Our net interest margin continues to improve and for first half '26 was 1.88%. This was up 18 basis points from the second half '25 and 49 basis points from the first half '25. The cost-to-income ratio was 92%, up from the PCP, reflecting lower noninterest income and higher employee expenses. Capital adequacy ratio remains strong. Our liquidity ratio was still robust 20% at the end of first half '26 and remains well above our minimum requirements. Net tangible assets per share rose slightly to $1. Looking at our NIM on a quarterly basis over the last couple of years, this chart shows the focus on improving the net interest margin over that period from an exceptionally low sub-1% to a more sustainable level, approaching our medium-term target, with each quarter showing continued momentum. Naturally, as the margin has improved, it makes continuing gains at the same pace more challenging and further improvement may be more gradual. The current uncertain rate and macroeconomic environment will create both challenges and opportunities that we will carefully navigate to preserve and where possible, improve the gains made to date. Taking a closer look at the net interest margin and what has driven that 49 basis point increase over the last 12 months. We saw increased margins on the asset book through a combination of reductions in the lower-margin prime residential book, flow-through of maturing fixed rate loan repricing, which is now largely concluded and some growth in our higher return segments, particularly commercial lending and the initial investments in our senior secured exposures. This has been supplemented with careful and considered liability management. This chart shows how the composition of our deposit book has changed over the last 12 months. The funding environment has remained highly competitive. Customers seeking additional yield have gravitated towards either higher interest savings accounts and/or term deposits. And we saw term deposits slightly increase as a proportion of total funding. With the anticipation of higher cash rates, absolute term deposit rates increased towards the end of the half. We have been selective in replacing maturing TDs with a slight rebalance and increase in the proportion of term deposits ahead of anticipated rate rises. We've looked to actively balance the composition of term deposits with greater funding stability against the impact on margin over the last 12 months, while responding to the rate environment as it develops. The sale of assets out of the Bendigo warehouse allowed us to reduce the corresponding securitization notes on issue, which further assisted the funding position. Our margin remains an acute area of focus, and we continue to see our cost of funding as a key contributor to overall NIM outcomes. We will look at additional opportunities to diversify our funding sources, balancing liquidity with costs. Total expenses were flat to first half '25. Our operating expense performance reflects wage CPI and super uplifts and investment in our resources, continued technology spend to support BAU operations and targeted capability improvements across the business. With no notable transactions in the half, our professional fees were lower. We continue to navigate inflationary pressures across most expense lines to ensure we maintain cost discipline. Excluding the core banking project expenses from the first half '25, underlying costs were up 7%. Looking at credit quality and arrears. Both our residential and commercial arrears are higher than first half '25 and second half '25. As Allan pointed out, this does reflect a small number of accounts in each category. For residential, we saw an uptick across both prime and higher return residential, some of which was expected as the book continued to reduce on the prime side and further seasoned. The arrears comprise 19 loans more than 90 days in arrears as at 31 December. The average loan size in the residential arrears books is $488,000 and the weighted average LVR of this cohort is 61%. In the case of commercial, the 90-day plus arrears consists of 4 accounts. We believe the numbers in this book are not inconsistent with what we see across the industry. The volatility in the quarter-to-quarter numbers highlights the impact that 1 or 2 accounts can have on the arrears percentage. Whilst arrears are higher than previous periods, they remain within our Board-approved risk tolerance. This cohort continues to receive close oversight with individual account level management and direct engagement with customers to work through solutions. Our focus remains on early intervention, maintaining portfolio resilience and ensuring any issues are well contained. The chart on the bottom left shows the probability of default across the nondefaulted book. This illustrates that for both commercial and residential, we are not seeing any signs of broader credit quality deterioration in the portfolio. Following the recent cash rate increase of 25 basis points in February and the change to an interest rate increase bias from the RBA, we will naturally continue to monitor and look to manage any early signs of stress in the book. A healthy percentage of our customers remain ahead in their payments with over 40% of all customers ahead. Alongside that, our portfolio LVR also shows that more than 90% of the book has an LVR less than 80% and has remained broadly consistent over the last 12 months. The loan book remains sound from a credit perspective. Our overall charge for the year was a charge of $454,000 compared to a benefit of $85,000 in the prior corresponding period. Our overall provision coverage has increased from 26 basis points of the portfolio to 37 basis points over that period and sits at $3.6 million, up from the $3.1 million held last year. The breakdown is provided and shows a reduction in our Stage 1 provisioning, largely reflecting the book reduction in the residential book. Our Stage 2 and 3 provisions increased with the uptick in arrears shown previously, whilst overlays year-on-year are down slightly but broadly consistent as we continue to refine the provisioning methodology and cater for risks that may not be incorporated into the standard ECL model. The capital ratio continues to represent a strong capital position, well above regulatory requirements and above the Board minimum targets. The reduction from June '25 represents growth from our targeted high-return assets, a small organic contribution from earnings as well as lower deductions in a couple of areas such as the NPV of the legacy mortgage management book and deferred tax assets. The current position provides sufficient headroom for targeted growth over FY '26 and into FY '27. I will now hand back to Allan to discuss our strategy and outlook.

Thank you, Steve. This slide summarizes our progress against the 3 pillars that guide our strategy, growth, margin and profitability. It showcases how these came through in our first half '26 performance. On the growth, the continued reshaping of the portfolio is evident with higher return assets now representing 43% of the book. This reflects the deliberate shift we've been making towards segments that deliver stronger risk-adjusted returns. On margin, the uplift highlighted earlier is evident here. NIM has improved to 1.88%, ahead on both prior halves. The improvement reflects asset mix optimization and purposeful funding management with second quarter '26 delivering an even higher NIM of 1.93% and for profitability, while the result for the half was modest, we delivered a positive statutory and underlying outcome. Net interest income and net income both increased in the first half -- on first half '25. And we maintained a measured cost base as we continue to invest in strengthening capability and capacity. Overall, this slide demonstrates that the strategic priorities we set are translating into tangible outcomes with a structurally stronger margin position, improved portfolio mix and clearer pathways to more sustainable earnings as these initiatives continue to scale. This slide sets out our medium-term strategic focus across our 3 pillars: growth, margin and profitability and how we intend to build on the progress we've made through the first half '26. In terms of growth, our focus remains on scaling high-value capital-efficient opportunities, particularly in commercial and senior secured and targeted residential segments. We're now operating beyond the original 30% high return asset target, and we'll continue to grow selectively in areas where returns justify capital deployment. Strategic partnerships and product expansion also remain important enablers, helping us to broaden distribution and deepen reach without adding structural complexity. On margin, our objective is to further strengthen the structural drivers that support NIM over the medium term, including scaling the segments that deliver the strongest returns, broadening and diversifying our funding sources and maintaining a controlled and consistent approach to pricing. The recent investment credit grade rating from S&P provides an additional flexibility to enhance funding efficiency over time. Importantly, the focus here is on maintaining a structurally sound margin position. And on profitability, the focus is on achieving sustainable and balanced growth whilst maintaining a disciplined approach to risk and reward. That means maintaining a cost control, improving operating leverage as scale builds and taking a whole of balance sheet approach, pursuing high-return assets while also lowering the overall cost of funds and improving our funding mix. While our medium-term targets of ROE and cost to income remain in place, our emphasis on squarely on the underlying drivers that lift returns over time, scale, effective cost management and a stronger portfolio return profile. And finally, this slide sets out the core priorities that will guide our execution in the period ahead. These are the actions that continue to turn the strategy into outcomes. Sustain NIM through thoughtful asset mix decisions, selective origination and continued focus on funding efficiency, scale the higher return segments, including commercial and senior secured, always within defined risk settings and with a continued emphasis on lending quality, continue to grow noninterest income as part of a more diversified earnings profile, maintain cost control while investing in the capability and capacity uplift that supports growth efficiency and operational resilience. And specifically on technology, we'll continue to progress targeted improvements that align with our capacity and strategic priorities while strengthening our risk, compliance and operational capabilities. I'd also note that while we continue to incur the normal BAU costs associated with operating our core banking platform, there was no investment spend in the first half. We use that time to reassess priorities, explore delivery options and refine the scope to ensure any future investment aligns with our strategic direction and regulatory requirements. As that work progresses, we do expect some core banking costs to flow through in the second half. These costs will reflect the work required to shape and progress the core banking road map rather than full implementation and are incorporated into our planning. Our focus remains on sequencing this investment carefully and ensuring that any future commitments are made with a clear line of sight to value, risk and capacity. And finally, we'll deepen our partnerships and broaden the reach of our current products while positioning ourselves to introduce new offerings through both our existing channels and external parties to provide alternative and complementary distribution. These priorities reflect a continued focus on purposeful delivery, strengthening the areas that matters most for sustainable performance and long-term value creation. That concludes the first half '26 investor presentation. We've covered the progress we've made across the business, the continued improvement in the quality of our portfolio mix and the areas of focus that will guide our work over the coming periods. With that, I'll now hand back to Matt who will moderate the Q&A session.

Thank you, Allan. [Operator Instructions] Currently, we've just got the single question. Steve, I think this is for you. Question on NIM pressure. Slide 18 references the sustained increase in pricing for deposits and over recent months. Given this, is it right to think that NIM may be close to peaking?

Thanks, Matt. I don't think we would say NIM has necessarily peaked. But obviously, we can't outline specifically what a future NIM would be. That said, I think the slide illustrated we have seen quite positive momentum in our net interest margin over a number of consecutive quarters, and we see some of that momentum continuing. I think it's to be tempered a little bit with the current rate environment and the uncertainty, obviously, around where rates are heading with the RBA upcoming meetings. But we do see further potential upside. So I think it's not necessarily peak would be the short answer to that. As outlined in my presentation, it gets harder as the absolute level of NIM increases to maintain the pace of growth that we've seen in that. But nonetheless, we do see some further potential small upside.

Second question, where do you see the focus on future asset book lending growth? Are there any other opportunities than commercial and residential?

Yes. Thanks, Matt. We're always considering options that support our execution, growth and efficiency. Our approach is to stay flexible at the end of the day and choose options that best aligns with our strategy and delivers the best long-term value without adding unnecessary complexity. We're not targeting any fixed percentage split of the portfolio. What matters is allocating capital to those segments that deliver the best risk-adjusted returns for us. Ultimately, the mix will naturally evolve as opportunities present themselves, but our focus will still remain on a balanced and resilient portfolio as we grow.

Thank you, Allan. Are there any further questions that we've just open to right now? If anyone else wants to answer a question, we'll give you a few moments to enter into the module. Okay. We don't have any further questions. So that concludes the session. Thank you, everyone, for attending.