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

Good morning, everyone, and welcome to BNK Banking Corporation Limited's FY '26 Financial Results Presentation. My name is Matt Vaughan, I'm the Head of Investor Relations at BNK. And today, I'm joined by our CEO, Steve Kinsella; and our CFO, Judith Newman. Today's presentation will commence with an overview from Steve, followed by Judith presenting BNK's results in detail and then followed again by Steve providing an update on BNK's strategy and outlook for FY '27. At the conclusion of this, we will then hold a short Q&A session at the end and participants can submit questions via the Zoom interface at any time during the webinar. We'll then collate all the questions and any questions will then be answered in the Q&A session at the end. Just a quick note on the disclaimer for this presentation. We won't go into it in detail, but we do encourage you to download the presentation from the ASX website or from the BNK website and review the disclaimer at your convenience. I'll now hand over to Steve for the overview for the presentation. Thank you, Steve.

Thank you, Matt, and good morning, everyone. I'm pleased to take you through the full year FY '26 results, which show a continuation of our progress to sustainably improve the business on several fronts. For FY '26 key outcomes, our underlying NPAT was $1 million. This is down on FY '25 and represents the absence of any portfolio transactions during the year, which, by their nature, have a variable impact on results within any period. An increase in investment in our people and a more normalized impairment expense compared to the prior year, which was a credit following the reduction of the balance sheet in FY '25. Statutory NPAT was a loss of $3.7 million as we wrote off the remaining goodwill of $3.5 million, which was previously foreshadowed in our previous release. This has no impact on our regulatory capital, but enables a cleaner balance sheet going forward. The usual adjustments for the legacy mortgage management book and core banking upgrade are also reflected in the statutory result, but excluded from our underlying results, consistent with prior periods. Pleasingly, net interest income rose 10% on FY '25 to $24 million, supported by a continued asset mix optimization and focused cost of funding management. This then reflected in our net interest margin, which increased 44 basis points on FY '25 to 1.96%. The commercial loan book saw healthy growth to $247 million. Overall net income rose 3% on the prior corresponding period, which is also a good result given the absence of any portfolio transactions. FY '26 also saw our initial investments into senior secured lending and expectations this portfolio will continue to grow, generating healthy returns. Our capital ratio remains strong at 24.6%, enabling further balance sheet growth over FY '27. Turning to the strategic highlights. We continue to refine and rebalance the portfolio and saw healthy growth in our fully secured commercial loan book. Investment in the senior secured portfolio also commenced. And through the year, we've invested $60 million with $20 million repaid and a year-end balance of $40 million. We do expect continued and cautious growth in this area over FY '27 in transactions that are NIM and return on capital accretive. Net interest income and overall income both grew over the year. Following the receipt of our investment-grade rating from Standard & Poor's, we were able to launch an NCD program to further diversify funding sources. This program is now up and running and meeting our expectations. We are conscious that many households and businesses are feeling pressures from the higher rate and inflationary environment. Nonetheless, our arrears remain well within tolerances through active early engagement with customers. Investment continues in the technology platform, and we are nearing completion of the initial phase of the upgrade to our core banking infrastructure. Expense growth largely reflected an investment in our people and capability as well as some smaller technology uplifts such as new telephony. This slide brings together the key balance sheet and margins that underpin our earnings profile. The loan book increased by just over $90 million year-on-year, driven by commercial growth, the start of the senior secured investments and a more targeted approach to residential lending with some net reduction in the latter. This combination led to stronger risk-adjusted returns. For deposits, the funding base remains stable and is supported by a considered approach to pricing and mix in an ongoing competitive environment. Term deposits have grown as a proportion of customers seek maximized returns in the higher rate environment. The combination of the loan book composition and our funding approach enabled a structural NIM increase from 1.52% to 1.96% over the previous corresponding period. If we go back to FY '24, we can see the NIM was an unsustainable 1.06%. Whilst further growth in NIM gets ever harder, we are now at more sustainable levels to underpin future earnings. Our portfolio mix continues to evolve in line with our strategic focus. Fully secured commercial lending now represents approximately 25% of the book and is a key driver of the higher return mix previously outlined. Senior secured investments broaden our asset mix and provide healthy risk-adjusted returns. These are warehouse arrangements with tailored facilities to established nonbank financial institutions, where demand for appropriately structured funding remains strong and often underserved by traditional providers. As mentioned, growth in this area will continue over FY '27 and will typically be in small step changes to the aggregate balance. Residential remains selective as we continue to maintain tight credit selection with an overall reduction during FY '26. Our approach is to prioritize value-accretive lending rather than pursuing high growth in low-margin assets. The mix continues to shift toward higher return on capital segments but also diversifies earnings without compromising our risk settings. Looking at the portfolio repayment profile, this remains relatively stable. Principal and interest repayments remain at over 80% of the residential book, notwithstanding an increased proportion in interest only. As the book has grown in commercial, this is at approximately 75% principal and interest, reflecting the higher quality, longer-dated property secured business being written, contributing to a more predictable and stable risk profile over time. The residential portfolio mix has remained consistent year-on-year, notwithstanding the aggregate book size has reduced. Owner-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 show that most customers across both residential and commercial remain on track or ahead with their repayments. This consistency reflects the strength of our origination standards and the financial resilience of our customers who continue to manage their commitments effectively, notwithstanding broader economic challenges. The percentage ahead in the commercial book reduced as the book grew just under 30% during the second half with obviously most recent cohorts less likely to get ahead. The residential loan book remains both well balanced and fundamentally well secured. From an LVR perspective, the weighted average LVR of 61% highlights the strong equity position across the book, providing a meaningful buffer against potential market volatility. The state-based distribution remains consistent and balanced with a slight increase to Western Australia since the half year results. 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. The combination of a well-diversified geographic footprint and a conservative LVR profile provides confidence in the strength and durability of the residential portfolio. Taking a closer look at the commercial loan book, which remains a key contributor to our balance sheet growth over the year and now constitutes 25% of the total book, as previously mentioned. The underlying collateral remains conservative. The weighted average LVR is 65% with just under half the book sitting below 70% LVR. New business is all first ranking property secured facilities with assets that have good alternative use appeal, providing a consistent risk profile. The geographic exposure also reflects deliberate exposure in markets where asset quality is strong and borrower profiles match our risk appetite. Overall, the combination of this diversification and conservative LVRs reflects our considered approach to collateral and portfolio construction as the commercial book continues to grow. Looking at those 2 portfolios. This slide brings together the key elements of them and the credit quality across both residential and commercial books. Residential, which remains the largest portfolio cohort at $707 million, slightly reduced from $732 million at the half. The average loan size of $405,000 reflects a well-seasoned and conservatively structured portfolio. It remains highly granular with modest individual exposures and a maximum single loan of $5 million with an LVR below 40%. The top 20 residential loans have a weighted LVR of 58%. The level of diversification limits concentration risk and underpins the resilience of the portfolio. Offset balances totaled $79 million, and this is consistent with the previous periods and provides an additional buffer within the portfolio. In terms of arrears performance, the 90-plus days arrears stood at 0.47%. And as at 30 June, there were no residential mortgagee in possession cases. Turning to the commercial book. The average loan size is around $659,000 and again, consistent with a diversified portfolio of smaller scale property secured facilities. The largest single exposure remains $3.2 million and is supported by good equity coverage. In terms of arrears performance, 90-plus days arrears stood at 0.87% off a small base with no mortgagee in possession cases. We continue active account level management. And alongside this, as highlighted earlier, approximately 20% of customers remained ahead on repayments throughout the period. I will now hand over to our CFO, Judith Newman, who will take you through the financial results in more detail.

Thank you, Steve, and good morning. I'm pleased to deliver our FY '26 financial results today. [Technical Difficulty] our commercial lending portfolio, introduction of senior secured lending and our continued focus on liquidity management and deposit rate positioning. Pleasingly, FY '26 saw us deliver an increase from [Technical Difficulty] Our underlying NPAT profit of $1 million was achieved against a backdrop of heightened external uncertainty and ongoing inflationary pressures. Here, we can see the walk in key movements between the underlying NPAT in FY '25 of $3.8 million through FY '26 underlying NPAT of $1 million. Gains achieved in net interest income have been offset by the reduction in other income driven by the absence of any portfolio transactions during FY '26. There was a $2.9 million net reduction spanning other income, other expenses and credit loss provision with a $900,000 tax benefit relating to the portfolio transactions of FY '25. Portfolio transactions will be variable in timing but form part of BNK's operating landscape. In addition to this, our credit loss provision increased further, driven by the growth in our commercial loan book. An uplift in investment in our people and technology occurred as we build capability within the team and look to improve technology platforms. The key metrics of BNK at the 30th of June demonstrate not only the growth in our underlying assets and liabilities, but also the utilization of both capital and liquidity to drive positive outcomes for the group whilst remaining within BNK's risk appetite and regulatory thresholds. The uplift in our net interest margin of 44 basis points to 1.96% is derived through delivery against our product strategy and strong liquidity management. Capital adequacy remained strong at 24.6% and our spot liquidity ratio was 20.7%. BNK's net interest margin grew 44 basis points to 1.96% in FY '26 with both lending and deposit books contributing positively to the uplift. The growth in commercial lending and the addition of the senior secured program of investments has delivered strong uplifts. On the funding side, whilst term deposit pricing remained elevated, we saw a net contribution from our overall cost of funding to the NIM outcome. As we entered the fourth quarter of the year, elevated rate expectations in the market intensified competition for retail and term deposit industry-wide, reducing our net interest margin in the final quarter as foreshadowed at the Q3 trading update. Over the second half of FY '26, driven by 3 RBA rate cash -- RBA cash rate increases, customers have been actively seeking high-yield returns for their funds. In a highly competitive market with term deposit rates rising, we have seen a shift in BNK's funding mix from at call towards term deposits. In addition, we also witnessed higher levels of competition for savings accounts across online deposit channels. During the second half of FY '26, we established BNK's NCD program following the receipt of our investment-grade credit rating from Standard & Poor's in late 2025. This has enabled us to further diversify our funding channels to support and complement our liquidity management and manage margins. As noted, BNK's operating expenses increased by 10% over the year to $26.6 million. Employment costs remain the main driver of this increase with targeted roles in the team that will support our growth agenda. We have continued to invest in our technology base as we laid further foundations for the technology changes planned. We saw a reduction in professional fees during the year, driven by the absence of any portfolio transactions during FY '26. The reduction in our overall arrears level further demonstrates the credit quality within our loan portfolio. In residential, we have seen reductions across the arrears categories -- each of the arrears categories. And in commercial portfolio, we have achieved a reduction in our over 90 days. Although commercial's lending total arrears greater than 31 days have increased marginally, the accounts are well contained with only 2 loans over 90 days and well within management's risk tolerances. The probability of default graph demonstrates the likelihood that borrowers will fall into arrears within the next year. The very small percentage movements across the year reinforces the credit quality and stability of the borrowers within our loan books. The customer repayment profile demonstrates our customers remain resilient and well positioned to manage external pressures with 38% of our portfolio ahead of their repayments and a further 61% on time. In addition, our portfolio LVR continues to demonstrate sound credit quality being well secured with 98% of our loan book now below 80% LVR. BNK's credit quality and loss provision increased by $575,000 during the year with the overall provision aligned to the uplift in our commercial lending. Our overall coverage has moved from 33 basis points up to 37 basis points, reflecting an uplift from $3.2 million to $3.7 million. Movements in Stage 1 provisions reflect the uplift in commercial lending and the associated high credit risk attached to writing these loans. Stage 3 loan provisions, loans more than 90 days in arrears or in hardship fell by 48% from June 2025, reflecting BNK's improved arrears positions across the group from active early engagement with customers and stronger collection procedures. In addition to our collective provisions, we also assess any heightened risk within the portfolio as an additional overlay. During FY '26, we have increased these overlays, recognizing some additional risks in the current economic environment. Overall, BNK remains suitably provisioned for its lending portfolio and risk appetite. BNK's capital ratio reduced during FY '26 as we grew the overall balance sheet with higher commercial lending as aligned to our strategic targets. The current position of 24.59% represents a strong capital position, well above regulatory requirements and board minimum thresholds. BNK remains well capitalized with sufficient headroom to deliver continued growth in line with our strategic goals into FY '27. I will now pass back to Steve to provide an update on our strategy.

Thank you, Judith. The economic environment remains challenging for growth. Higher interest rates, stubborn inflation, global geopolitical tensions on multiple fronts and recent federal budget changes have all created an environment of caution in the real estate sector with flow-on impacts on general confidence. Many households are feeling financially pressured. The subdued activity is leading to more heightened competition in lending markets, while deposit markets continue to see investors looking for higher yields. Notwithstanding the various challenges, BNK is well positioned to continue to grow. Our smaller size enables us to adapt quickly and exploit opportunities that arise, and we are focused on 3 key areas. Our strategic focus is across these 3 key pillars: profitability, customer experience and upgrading the technology platform. They are all interrelated. We established a pathway to profitability with a rebalancing of the portfolio. We've established a mix of assets, which will generate positive margins and returns on capital. Our focus will now be on disciplined growth of the book to achieve further scale at positive margins for sustainable profitability. As referenced, we did not undertake any portfolio transactions in FY '26, but we do expect these to continue, though their precise timing is always difficult to predict. By the [indiscernible] nature, we view these transactions as supplementary to growth in our core income. A sharpened focus on liability management and diversifying our funding has also helped with the overall margin management, and we will continue to optimize in that area. Cost growth in FY '26 has been about ensuring the right capability and capacity to support growth and resilience through FY '27 and was primarily focused on additional staff and some tech uplifts. While some further growth can be expected in FY '27, this will primarily be focused on the next phase of our technology platform upgrade. Arrears management has been focused on early and active engagement with customers to work through solutions. To date, this has shown positive outcomes and will remain a key area of ongoing attention for us. As I said, given BNK is a relatively small ADI, efficient and effective use of our capital is paramount, and our approach will be one of exploring avenues to recycle capital and enable continued business growth. Underpinning the ability to grow the book will be a focus on customer experience. We have developed a number of partnerships to leverage complementary capabilities and expertise across products and services. This will remain an area where we look to expand the depth and breadth of such partnerships. This will enable stronger and positive outcomes for customers that we could not provide in isolation. BNK is also a bank for brokers, primarily through the Better Choice brand. We do not have a B2C offering on the lending side and deliberately so to ensure we are focused entirely on creating a level of excellence in that space without any risk of internal conflict or dilution of effort. This will extend from onboarding through to application through to settlement and geared around a defined mix of digital products and services that can support brokers and their end customers. Driving excellence in customer experience leads to a need to ensure the technology underpinning our operations is modern, robust and fit for purpose. As referenced in the first half '26 results, we had paused investment spend to reassess and affirm the direction of travel on the technology front. Our core banking platform and supporting loan origination platform will undergo upgrades, which will unlock many opportunities for BNK and further improve the customer experience. A number of these phases are expected to complete through the course of FY '27. We know this area is not without challenges and are complex pieces of work that require careful and risk-conscious deliberate steps to bring to life. A further and more fulsome update on the technology strategy and progress will be shared around the time of the Q1 FY '27 trading update. These 3 pillars: profitability, customer experience and technology enablement will be supported by a foundation of robust risk management and compliance to ensure that we meet the ongoing challenges posed by the environment in which we operate. That concludes the formal part of the presentation. With that, I'll now hand back to Matt, who will moderate the Q&A session.

Thank you, Steve, and thank you, Judith. We have a few questions here, but just a reminder that you can submit any questions now in the Q&A session through the Zoom interface that you're currently logged into. And I'll start with our first question now, which I think is best answered by Judith. Can you please provide an overview of what spending was capitalized to help reconcile underlying profit to fall in NTA? I'll turn that around to you, Judith.

Yes. No costs were capitalized during FY '26. The movement between the statutory and the underlying profits can be located on Page 9 of the annual report, and they include our spend on our core banking system, the write-back of our net contract assets that is a normal business expense during the year and the impairment of the goodwill. The fall in the NTA is driven by the statutory NPAT reduction, excluding the goodwill, which is always excluded from any NTA calculations.

Thanks, Judith. The next question was, can you please talk more to the tech spend? Therefore, how much into the spend is BNK? And what are the desired outcomes of the spend? And when will these outcomes start to materialize?

Thank you, Matt. I will take that question. We are at the Phase 1 of the spend outlined in the longer-term strategy, and that is really upgrading the core infrastructure to be cloud-based, and we expect the conclusion of that to occur through the course of this quarter. We will then look at the level of spend we need to undertake for Phases 2 and 3, particularly Phase 2, and that will form part of the broader and deeper tech update that we will give, as I said, around the time of the Q1 trading update.

Thank you, Steve. The next question, you call out that the NCD program was established in FY '26. How do you see this funding channel fit into your overall funding needs going forward?

Thanks, Matt. Yes, our NCD funding channel, we've seen a steady uplift. At June 30, that was $11 million. As we've progressed into FY '27, we've seen a steady increase in those funding receipts, and we see this to be just a complement to our ongoing funding mix as the program expands further.

Thanks, Judith. The next question, how will organic growth and the costs which come with upgrading and maintaining the core banking platform close the gap between current share price and NTA?