Heartland Group Holdings Limited (HGH) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the Heartland Group FY '23 Half Year Results. [Operator Instructions] I would like to turn the conference over now to Mr. Jeff Greenslade. Please go ahead.

[Foreign Language] Good morning, and welcome to the June results or -- sorry, December results or half year results for Heartland. I'm Jeff Greenslade, the Chief Executive of the Heartland Group. I'm joined by the Deputy Chief Executive, Chris Flood; the Heartland Bank CEO, Leanne Lazarus; the Chief Financial Officer of the group, Andrew Dixson; and the General Counsel, Phoebe Gibbons. I'm going to touch on some highlights and some commentary on the operating environment before Andrew will take you through the results in detail. Before I do so, just a little bit of technical housekeeping. You will note that we are reporting both in a reported sense and an underlying sense. Reported obviously complies with NZ GAAP. The underlying results are endeavored to give you an insight to the performance of the business after taking out non-operating or extraneous impacts such as equity investments or the de-designation of derivatives. As you'd expect, it flows through to other operating income substantially, but it also has impact to a lesser extent on NII and expenses. So with that noted, I will just give you the highlights. So as you can see and on the Page 6, we had good growth and in a relative sense of incredible growth of balance sheet of 10%, and that drove, in NII terms, an increase of 12% of the revenue in reported sense; and 13.6% in an underlying sense, and that then resulted in an NPAT of $48.7 million, which is plus 2.4% up on a reported basis and $54.7 million, which is a 16.2% in an underlying sense once the extraneous one-off items are excluded. During the course of the half, impairments remained stable at 29 basis points. We saw an improvement in the underlying cost-to-income ratio came down 40 basis points to 42.7%. And that's very important given our focus on efficiency. If you add back those nonoperating items, the cost-to-income ratio was 44.8%. NIM contracted during the course of the half and an underlying since it is at 4.02% and 3.97% in a reported sense, which is down just under 30 basis points. Now that's been caused by a range of factors, the mix of the book, particularly the growth we've seen in Reverse Mortgages has contributed to that, which is a positive. We've also seen the shift in the risk of the motor book, which has also resulted in a decline in lending yields, which has contributed. But also, in an environment of rising interest rates, we did not take the opportunity to increase our margin. We were very prone to pass on the benefits of increased rates to our depositors; less so to our borrowers, we gave them time to adjust. And in the case of Reverse Mortgages in both countries, in some cases, we didn't pass on those increases at all. Turning now to the operating environment. What was the environment like and what can you expect for the remainder of the year? Three things stand out when we were despised to. Here is the risk environment where the macroeconomic conditions continue to be for. So obviously, there's a focus on credit risk. For us, it remains stable, and that really reflects the weight of Reverse Mortgages in the book and the growth we're getting from those books, which are very resilient from a risk point of view. Motor, we saw the impairments increase to what we call normalized rates, and then Leanne will pick that up in a bit more detail. Just reflective of the environment post-COVID has resulted in those NPLs returning to more normalized levels. We still maintain a level of caution in terms of some areas of our business and accordingly, we have decided to retain the economic overlay of $8 million. The second environmental factor for us is clearly technology. We see this as the pathway to a differentiated proposition around efficiency and scale. When it comes to technology, the view that we take is the banking industry has not yet fully embraced the benefits of technology. There are a number of reasons for us. There's -- the industry is set with legacy systems, a multitude of distribution platforms and a general lack of interconnectivity within systems and processes. And this translates into the time it takes to process customer requirements, and that comes at a cost. And because that model reflects the banking industry in more or less the same way, banks tend to sort of concentrate around a cost-to-income ratio of mid-40%. We believe that there's an opportunity to break free of this paradigm and to focus on mentally on automation and self-service and fully digitalize our platforms and move into a different area in terms of cost-to-income ratio. And we demonstrated what was possible with our online loan proposition by offering a platform that is only accessible online, there is no branches or [indiscernible] there's only accessible online. The cost of providing that was extraordinarily low and that enabled us at times to be able to offer market best rates. So this is the future. That's what you can expect from us in terms of the operating environment. It requires change, not trimming, but taking a fresh approach to how we allocate our resources to make sure that they are focused on value contribution rather than just activity or the structures of an organization plan or mantra very much is that if we look like the other banks we will perform like the other banks, and that's not our intention. And that moves nicely to the third operating environment that is prevalent and we'll continue, it's steady, it's growth. We are seeing growth in the banks, and we'll continue see it. If you see on Page 7, there's a table there that Andrew will go in more detail. But as you can see in those businesses like Reverse Mortgages, we're getting 20% growth in Australia, at 44% in New Zealand. In asset financing, where we are servicing the infrastructure development needs in New Zealand, we're getting 13% growth motor CCCFA returning to interest levels of growth at around about just under 11%. And we're seeing some green shoots returning to our home loan offering post the CCCFA issues. And then finally, we are looking forward to developing more growth in Australia with our livestock offering, particularly as we move towards a bank license. So I will now hand over to Andrew Dixson, the Chief Financial Officer, who will go into more detail around the financial results.

Thank you, Jeff. Good morning, everyone. I'm on Slide 9, which bridges NPAT for the first half of FY '23 with NPAT for the first half of '22. This was presented on an underlying basis, which excludes the impact of one-off items in each financial period, as noted on the slide. I will talk to those items as I run through the individual components of profit and loss and I would note these one-off items are consistent with those flagged during our issuance and profit guidance. Also, please note that Heartland Group's results for the first half of FY '23 include StockCo Australia, the entire period as a result of the acquisition in May '22. This means that the prior period comparatives do not include this. I will call out the impact of StockCo Australia in terms of its contribution to the individual components as we go through the results where applicable. So firstly, NPAT. On a reported basis, NPAT was $48.7 million for the half, an increase of $1.1 million or an increase of 2.4%. On an underlying basis, this was $54.7 million, an increase of $7.6 million, which is 16.2% higher than the prior comparative period. In terms of the individual items, net interest income on an underlying basis was $140.8 million, which was an increase of $16.9 million, of which StockCo Australia contributed $11.5 million. Reported net interest income was $138.9 million, which includes a one-off $1.9 million interest expense on the bridging facility, which was utilized to acquire StockCo Australia. This bridge was repaid on the 13th of September using proceeds from the recent equity raise. In terms of the impact to NII. The result was driven by a decrease in net interest margin of 29 basis points, and the reduction was from 4.3% in the first half of '22 to 4.02% in the first half of '23. I would note that NIM only reduced 8 basis points from the second half of 2022. This reduction was combined with $1.2 billion higher average interest-earning assets compared to the prior period, which was made up of $1.1 billion higher average receivables and around $100 million higher average liquid assets. StockCo Australia contributed just under $400 million to this figure. I will cover the movement and net interest margin in more detail on the following slide. Receivables grew $316 million from June -- 30 June 2022, which was a 10.1% annualized growth rate, noting this excludes the impacts of changes in FX rates and I'll cover the key components of this growth on Slide 12. Other operating income underlying, and an underlying sense was $8.9 million, which is an increase of $2 million or 28.3% higher than the prior period, and this was primarily driven by an increase in the upfront Reverse Mortgage income with continued growth in originations across both portfolios. Reported other operating income was $2.8 million, a decrease of $4 million and this is where some of the significant one-off impacts we're seeing. Firstly, it was a $3.6 million loss contributed by the derivatives that were de-designated from prior hedge accounting relationships in FY '22, with there being no impact on the first half of '22. The de-designation resulted in a large mark-to-market accounting gain on these derivatives, which was recognized in the second half of FY '22. While these hedges were removed from their accounting relationships, the majority we retained to manage interest rate risk and to continue providing their intended economic benefit. This, however, results in the mark-to-market gain taken previously being unwound as a loss as the cash flows from these derivatives are realized. The impact of this will primarily be seen in the current financial year. The second one-off item in this part of the P&L related to a $2.4 million fair value loss on Heartland's equity investment in Harmoney shares. And this compares to only $0.1 million fair value loss in the first half of '22. The fair value as of the 31st of December '22 takes into consideration the final bid asked price on the final trading day of Harmoney shares for the period on the ASX, which was AUD 0.4875. There were no trades occurring on the final day. Turning to operating expenses. On an underlying basis, operating expenses were $63.9 million, an increase of $7.5 million, which is 13.3% higher than the prior comparative period. StockCo Australia contributed $4.5 million to this increase, while the remaining $3 million increase, primarily driven by a 4.8% increase in staff expenses due to an increase in average full-time equivalent employees many of whom are focused on our technology projects and our Australian ADI and dealers, and this was combined with general labor cost inflation amidst a tight labor market. There was also a commensurate increase in upfront Reverse Mortgage expenses, which are largely offset by the increased upfront Reverse Mortgage income previously mentioned. The balance of the increase related to increased general administrative costs, these were, in part, offset by reduced marketing expenditure. The underlying cost of income ratio improved to 42.7%, just down 40 basis points on the prior comparative period. Finally, on operating expenses, we do expect there to be some one-off transaction costs in the second half, which will not impact the underlying metrics. And this principally relates to our exploratory work on the ADI license, including the potential acquisition of Challenger Bank. Impaired asset expense was $9.2 million, which is up $0.7 million on the prior period and the impairment expense ratio was 0.29%, 4 basis points lower compared to the prior comparative period. While the receivables portfolio recorded strong growth during the year, impairment expense benefited from the continued runoff of high-risk portfolios being replaced with the strong growth in high-quality portfolios such as Reverse Mortgages in both countries and the addition of StockCo Australia. Book quality improved within core portfolio such as motor with a higher proportion of growth from franchise dealers and high quality of import following tightening to lending standards in the lack of CCCFA changes. While we experienced an initial uptick in motor arrears during the period, this has moderated to align to pre-COVID levels and the ordinary seasonal increases experienced in particular, our key indicators being unemployment remains low. In all, credit quality remains sound, and our portfolio has continued to prove resilient. The economic overlay of $8 million taken in the prior financial year remains unchanged at the end of the period and is considered sufficient protection against the potential impacts in the future deterioration in the economic environment. Turning to Slide 10, the key performance measures. So focusing on NIM and the decrease from 4.3% in the first half of '22 to 4.02% in the first half of the current financial year, the contraction in NIM was partly due to a continued shift in the portfolio mix towards high-quality assets, and this contributed around 11 basis point decrease. The change in portfolio composition was a result of the continued runoff in the higher risk portfolios with personal lending and unsecured SME lending by reducing and business and rural relationship lending experienced larger repayments of high-risk exposures. At the same time, there has been strong growth in high-quality portfolios such as Reverse Mortgages and online home loans. This impact was offset by the acquisition of StockCo Australia, which contributed an equivalent 11 basis point improvement in NIM. There was also margin compression in individual portfolio NIMs, which contributed a further 29 basis points decrease in overall NIM. And this was driven by a few factors. Firstly, cost of funds increased during the period after being -- with the cash rate being at record lows in both countries for a long period of time. We saw a rapid and sharp increase. Heartland intentionally delayed passing the full impact of these increases on to some customers and in the case of Reverse Mortgages in New Zealand and Australia did not pass on the full increases. With deposits, Heartland was quick to pass on the benefits of the rising cash rate. It is believed while this did not maximize our potential NIM, it was a socially responsible and more sustainable approach, and this has positioned Heartland to fund future receivables growth. Competitor activity in Heartland's key portfolio is primarily asset, finance and motor also intensified during the period with aggressive pricing from smaller competitors attempting to grow their market share. Heartland proactively manage pricing to remain competitive while protecting its market position. Through proactive portfolio pricing and margin management, the compression on NIM has stabilized over the back end of the period, and Heartland's underlying NIM did record only an 8 basis point decrease on the 6 months to 30 June 2022 and is expected to remain stable going forward. Just as a final note, while we have seen other banks reporting no expansion, it is worth noting those banks that have access to the Reserve Bank's funding for lending program, whereas Heartland did not have suitable eligible collateral to participate. This has enabled other banks to share in about $19 billion of funding at low OCR rates during this period. In terms of cost-to-income ratio, we have seen this continued its downward trajectory decreasing to 42.7% on an underlying basis, and that's down 40 basis points compared with the first half of '22. Costs are being tightly managed despite inflationary pressures. Nonperforming loans did increase primarily in the business and motor portfolios. In business, the increase was driven by several large exposures that have strong security and have longer-term remediation plans in place. In Motor, we saw an increase in arrears in the first 4 months of the half due to rising costs impacting household budgets, and this was reflected in the percentage of motor book arrears increasing from 3.17% at 30 June to 3.99% at 31 October. However, this has since moderated with the percentage of the motor book arrears falling to 3.73% by the end of the half, and this reflects a return to pre-COVID-19 levels of arrears at this point in the financial year. Furthermore, the subsequent seasonal increase, which we tend to experience in January 2023 has been at a same level to January 2022. Moving to Slide 11 on shareholder return. Our underlying return on equity remains solid at 12.1%, and this is in line with the prior comparative period. Our underlying EPS of $0.082 per share was up $0.002 per share on the prior period. We have declared a fully imputed $0.055 per share dividend, which provides a very strong dividend yield at 8.7%, which is an increase from 7.4% in the prior period, and we have set the discount on the DRP at 2% for this dividend. Finally, returning -- sorry, moving to Slide 12, growth of receivables, which charts the growth in the first half of the financial year by division. Leanne and Chris will cover this in detail later in the divisional summary. However, it's another first half of fantastic growth, double-digit growth, seeing $316 million from 30 June 2022, which is a 10.1% aggregate annualized growth rate excluding the impact of changes in FX rates. Excellent growth was experienced in our core portfolios with standout performances across both Reverse Mortgage portfolios. Australia recording $128 million of growth, which is nearly 20% annualized growth; and New Zealand recorded $87 million of growth, which is an annualized growth rate of 24%. New origination increased significantly, offsetting the continued strong liquidity profile of the books. Asset Finance and Motor Finance also continued the strong growth profiles with annualized growth rates of 13.4% and 10.1%, respectively. Business lending contracted by $35 million, which was driven by lower floor plan utilization of stock inventory levels remained impacted by global supply chain and erratic shipping conditions. Finally, the Harmoney portfolio continue to run off in personal lending, and there's very little of that left to run off, and this contributed to an improved risk profile and quality of lending book. Finally, online home loans grew $28 million in the first half, which was an annualized growth rate of 19.3%. This growth was lower than previous periods, which was driven by a sharp decline in property sales and new mortgage volumes in New Zealand. I'll hand over to Jeff for a strategic update.

Thank you, Andrew. I'll give a strategic update and about our sustainability before handing over to Leanne and Chris. So our strategic activity is really focused on 3 areas, each representing points of differentiation. Firstly, our best or only products, and Leanne and Chris will pick up on progress there in New Zealand and Australia, respectively. Secondly, as I mentioned earlier, technology, the work we're doing there is our pathway towards efficiency and ultimately, a superior cost-to-income ratio, which will take time, it may wobble over time, but that is our [indiscernible]. So things that we have achieved in the last period, we have seen -- our Heartland mobile app users grow by 46%, and we see that as the major medium for self-service. Very importantly, we've seen inbound for our calls have gone down by 7%. And that is a major indicator of utilizing costs, the amount of calls that the organization takes will ultimately have a target of 0 inbound calls. Those things have flowed through to the underlying reduction in the cost-to-income ratio that Andrew has covered. We've also are close to finishing the upgrade of our core system, which has been a long process. But it's a very important milestone for us in terms of future proofing and giving us a basis for future efficiency. The third element is Australia, and this is where we have a unique opportunity to access accelerated growth in Australia, unlike any of our peers in New Zealand. During the course of the year, we raised just under $200 million of equity, and we're very pleased to have attracted a number of Australian institutions as part of their capital rise and it's very important for us for the future to give us a stronger base in Australia of investors for raising capital. I'd also like to point out and thank the strong support we got from our New Zealand shareholders in that issuance. During the course of the period, we increased our market share in Australia in Reverse Mortgages to just under 36%, and we're also substantially through the process of embedding the acquisition of StockCo into our business. During the course of that period, we used some of the proceeds of that capital raise to repay the bridging facility, which funded the StockCo acquisition. And of course, we announced a share purchase agreement in respect of Challenger Bank. Our Challenger Bank is -- the contract there is obviously conditional on us obtaining necessary consensus to become licensed as a bank in Australia. Challenger itself is a relatively small bank, has just shy of $400 million of receivables, which is spread across residential mortgages, auto and asset finance. So the book is small and very consistent with our risk appetite. So it doesn't come with any legacy issues in terms of its back book. Whilst this [ anti-statement ] go back quite a considerable period, it is effectively a new organization, Challenger put us through a major overhaul. So they've got a new platform, a cloud-based core system and their pathway in terms of digitalization has commenced. So as you can imagine, this is an excellent base for us in terms of our plans for Australia. And our plans for Australia are once we obtain the license, is to refinance the wholesale funding, which supports our Reverse Mortgages and Livestock with deposits. And that gives us the potential for an uplift in margin. But more importantly and more enduringly access to a much deeper pool of funding to fuel the growth that we are experiencing and intend to continue to experience in Australia. Once that's underway, we will then also look at introducing new products, motor loans and asset finance into Australia, utilizing the distribution networks that we have in Australia by our partners in New Zealand that have distribution and manufacturing in Australia. And then thirdly, building on a superior cost-to-income ratio, the objective is to introduce online home loans in the same way we have New Zealand offered our competitive product. Moving then to sustainability. Sustainability has 3 streams: environmental, social and economic. In terms of environmental, much of our activity has been on our own footprint, our direct contribution, and we've seen quite a significant reduction in our contribution to greenhouse gas emissions at 56%. But admittedly, that has been assisted by the COVID lockdowns but nonetheless, we have learned a lot and have locked-in some great opportunities to further improve our contribution in terms of emissions. We're also working with our customers to help them in their transitions, and we are funding the new generation of vehicles. We have a discounted rate for our customers who wish to take up the EV or hybrid vehicles. We're also working with various industry groups to learn and discover better ways in which we can control not just our own direct footprint, but also how we help with our own communities in terms of their impact on the environment as well. Turning to social equity, 2 things to call out, in particular, we achieved a Rainbow Tick accreditation, which we're very proud of. I have worked really into that, and so we're very pleased to have reached that milestone. Secondly, we completed the sixth Manawa Ako internship. It started early in beginning as targeting Maori rangatahi but we have included Pacific as well. And this was the sixth group of rangatahi that we had through the organization. And every time we have one of these internships, we learn more ourselves about how we can become more accessible and more accommodating to try and bridge the gap between Te Wiki o and Te Reo Maori. Economic prosperity, we as discussed, the -- we enjoyed the highest percentage growth of main banks in terms of deposits. And I think that loyalty was a reflection of some of the service propositions, but particularly the way that we were very prompt to pass on rising interest rates to our depositor base, and that has given us a very strong normal funding base to assist in fueling our growth. Similarly, with our Reverse Mortgage customers, we have grown quite consistently in both countries at high levels, helping out the senior demographics in both countries in terms of how they need their retirements. And as we discussed, we did not increase our NIM during this period. We made the conscious decision to behave in a social responsible way in terms of our depositors and in our borrowers and particularly for our Reverse Mortgage customers in both countries, not passing on all of the increases at all. We occupy leading market positions in the Reverse Mortgage businesses in Australia and New Zealand. And with that leadership comes responsibility and what we believe we are doing is not just socially responsible, it is the sustainable things to do in terms of the shareholders' best interest and just look at the growth we're getting. Almost 20% in 1 country and 24% in the other, I think that speaks for itself in terms of underpinning how is the social responsibility. Now I'll hand over to Leanne Lazarus, the Chief Executive of Heartland Bank and will close through the New Zealand division summary.

Thank you, Jeff, and good morning to all. So the New Zealand Bank strategic focus has been on business as usual growth, driving higher quality and lower risk assets and frictionless service at a lower cost. Our actions have been underpinned by our sustainability agenda and creating a positive work culture and environment. Our matapono and value underpins our decision-making. Within the diverse portfolios of the bank, we continue to develop automated solutions to digital platforms to enable our enhanced customer experience and drive efficiency and disciplined execution throughout the bank. As Jeff mentioned, our core banking system upgrade is nearing completion. I'm going to turn to Page 18 to go through each of the portfolio performances and starting with Reverse Mortgages in New Zealand. Reverse Mortgages has remained resilient to economic conditions. The increase in the cost of living is driving demand. There is an increased awareness and acceptance of Reverse Mortgages. We experienced strong growth of 24% or annualized growth for the 6-month period, that's 24%, new business loan-to-value ratios at 10%, and portfolio loan-to-value ratios at 19%. And Heartland is recognized as New Zealand's leading Reverse Mortgage provider as demonstrated by our market share. Turning to asset finance, Page 20. We achieved annualized growth of 13.4%. However, we did see our nonoperating income in this portfolio decreased by 4.8%. This is primarily due to NIM deterioration due to the impacts of interest rate changes required to maintain competitive pricing as well as the lag of the time it took us to fully reprice our fixed rate loan. Significant digital development is underway in this part of our business to support future scalability and efficiencies. We do see a demand in our core asset segments for trucks, trailers and yellow goods. We had less of a focus on the logging sector and we've had strong activity in logistics. Following on to our business portfolio as outlined on Page 21 of the presentation. Our business portfolio includes the historical relationship book that continues to ramp down, contributing to a book that is lower. It also includes [indiscernible] which is loans to motor and truck dealerships secured against stock. Negative loan books was driven by the lower floor plan utilization and stock inventory levels, remain impacted by global supply. We expect to see an improvement in this session in the second half of this financial year as stock arrivals continue throughout 2023. In our Open for Business portfolio, which is unsecured lending to our small and medium enterprise sectors, Heartland has followed a cautious approach since COVID 2020. Our strategy reset occurred in the second quarter of our first half of the financial year due to sensitivities that this sector is experiencing at the challenging macroeconomic environment. We are comfortable with the book contraction that has occurred for the 6-month's period as we move towards higher quality and lower risk assets. I'll now turn to Motor Finance as outlined on Page 23 of the presentation. Our book is at $1.46 billion of receivables as at the 31st of December 2022. For the 6-month period, we achieved growth of 10.9%. Growth has been a product of market share gains and higher quality end of the market. We saw a shift in the mix, 75% of business originating from key partnerships and branded partners. So there has been a change to our portfolio mix. However, we have seen a nonoperating income decrease and that's primarily driven by competitive activity and the change in our portfolio mix. Competitive activity in the motor industry has been very aggressive and smaller motor vehicle financiers attempt to grow their market share in the higher quality end of the market. Heartland's response to this have been to manage interest rates in order to remain competitive and ensure growth was achieved. This also once again impacted on our numbers. We had increased lending to new generation vehicles that was 14% of 1 new vehicle lending in the first half of the financial year, and we launched a green vehicle lending rate in December of '22. Our motor arrears, as Andrew and Jeff have highlighted, did see an increase in the first 4 months of the finance -- half year. But then we saw this declining in this November and December period. We have strong partnerships with our key branded partners, which we're confident of continued strong growth in the second half of the financial year. Turning to personal lending, which has now become a small part of Heartland's portfolio. It's expected to remain so in the prevailing market conditions. The principal drivers of contraction is in our Harmoney book, which is close to new business and is running off. Like with our Open for Business, we are comfortable with contraction in this book and unsecured portfolio. Our online home loans have seen growth of 19.9% in the first half of the financial year. We expanded our online loan criteria and had a significant focus on digital enhancements particularly with an enhanced approval process for quicker decisioning to customers. Within this portfolio, we see significant opportunities as we have a lower acquisition cost and extremely competitive interest rates. And finally, turning to Rural, which could be outlined on Page 26. Receivables decreased in the 6-month period by 3.8%, driven by the normal seasonal fluctuations in Livestock. Our focus remains on our core sheep, beef and dairy direct, which continues to be our primary focus, together with our Livestock business. We were well positioned into the second half following normal seasonal fluctuations, and we expect to see this portfolio recover in the second half. The Rural portfolio will also benefit from legacy loan rundowns contributing to a book that is lower risk. And finally, before I hand over to Chris Flood, I just want to quickly mention the impact of the flooding and cyclone on our customers. The flooding in Auckland had limited impact to our portfolios, particularly at our home loans. The impacts of the cyclone will have more of an impact on our commercial Rural Livestock portfolios. We see this as more business disruption rather than loss of assets and we are working with our customers to understand the impact of and the support required. I'll now hand over to Chris Flood.

Thank you, Leanne, and good morning, everybody. I'm on Page 28, Australian Reverse Mortgages. And as discussed by previous speakers, it has been a very strong growth period for Heartland. A couple of things driving that demographics, obviously, with more baby boomers now entering into -- well into retirement. The cost of living increases in both countries are real and are outpacing the income that retirees are receiving. And so that has created pressure and I think there's a growing awareness in both countries of the product. For a long period of time, we were the only business advertising in both countries and with increased competition comes more advertising. So growing awareness and greater acceptance has led to a bigger market for us in Australia. We remain the leading provider in that market. And so we expect continued strong growth in the year ahead. We're in focus now on ensuring we have the best processes we can employ to be efficient and effective in terms of our operations and this business will very much benefit from being part of a wider Australian business in the fullness of time. Just turning quickly to Page 29 and the -- some of the metrics there, I'll just call out a couple. The first point to note is these metrics in terms of average LVR and weighted LVR, have really changed. The reasons for people taking -- drawing down the loan have changed, though, however, and we are seeing increases in the amount that has tend towards retiring existing debt. And we think that will be a continued trend to see. But as you'll see from the way that LVR, which is still running at circa 20%, there has been no real change in the overall position. Turning now to Page 30. And while the growth at 6.7% is relatively modest in the first half of this financial year, it was achieved in what were very difficult market. So as a consequence, there's an excellent performance with events in South Wales and Queensland was severe and had a significant impact, and also the COVID lockdown in China. And it came at the same time as we had draws in U.S., and so they've destocked and so commodity prices came under some pressure, noting the weight gain value-add [indiscernible] price fall. So it doesn't have a risk implication for Heartland, but it meant that we had to lend against a lot more stock to grow at similar sort of rates. Performance measures I look to the number of new to bank customers and a number of referring partners we have and both have steadily climbed. Commodity prices will strengthen again and stock as well positioned to benefit from that. And like Reverse Mortgages, this business will also benefit from being a part of a larger business in Australia. I'll hand now back to Andrew.

Thanks, Chris. So moving to Slide 32 and New Zealand funding liquidity. So at a consolidated level, Heartland Group increased borrowings by $158 million to $6.3 billion. And this was a combination of growth in both Heartland Bank in New Zealand and Heartland Australia, partially offset by the full repayment of the StockCo acquisition bridge facility. Heartland Bank increased borrowings by $250 million to $4.6 billion with deposits growing $480 million out of just over $4 billion, which is a 13.4% increase. This was driven by competitive pricing on targeted products with a particular focus on building out Heartland's Notice Saver offerings. As previously mentioned, Heartland Bank was quick to pass on the benefits of the rising interest rate environment to its depositors, and this resulted in experiencing the highest growth rate in deposits of any other bank in New Zealand during the first quarter. This growth enabled a reduction in other borrowings, which reduced by $231 million to $519 million following repayment of Heartland Bank and $150 million retail bond and a $77 million reduction in the amount drawn under its committed auto warehouse, reducing our reliance on and creating capacity in its wholesale funding programs. Total liquidity strengthened, increasing by $147 million to $775 million, particularly off the back of deposit promotions around across November and December. The result in the liquidity ratio speak for themselves and are well in excess of regulatory minimums. Turning to Slide 33 and Australia. Heartland Australia increased borrowings by $168 million to just under $1.4 billion, which is a 14% increase and to cater for the growth being experienced in the Reverse Mortgage book. Reverse Mortgage securitization warehouse maturities were extended by 2 and 3 years, respectively, and aggregate senior limits were expanded by $50 million, providing additional headroom to fund future growth in the portfolio. Heartland Australia now has access to committed Reverse Mortgage loan funding of just under $1.5 billion in aggregate and continues to actively progress further extensions to its warehouse funding programs. A further $80 million in aggregate of medium-term notes were issued in the half, taking the total outstanding issuance under this program to $360 million as of 31 December '22. StockCo Australia increased its borrowings by $15 million to $344 million, with the new facility that was executed on acquisition operating as expected. Further funding facilities are planned to cater for projected growth ahead of the proposed acquisition of Challenger Bank and commencement of deposit raising activity. Moving to Slide 34 on capital. Following the equity raise completed in September '22, the group's capital position strengthened and now sits at just over $1 billion, which is 13.7% of total assets. Heartland Bank's regulatory capital ratio reduced to 13.15% at the end of the period following the removal of any bank dividend restrictions by the Reserve Bank. Heartland Bank continues to operate significantly in excess of current regulatory minimums and is well positioned to meet the Reserve Bank's future capital requirements, which are for a core capital ratio of 11.5% and a total capital ratio of 16% by the 1st of July 2028. In order to accelerate this journey, diversify its capital base and accommodate future projected growth in the medium term, Heartland Bank is considering an offer of Tier 2 capital notes. More details are provided in our market release, and full details are expected to be issued mid-March. Just to state that no money is currently being sought and applications cannot be currently made for this. Finally, on Slide 35, regulatory update. Heartland continues to monitor and process the significant volume of regulatory change with the key area being the changes to the CCCFA, whereby Heartland Bank implemented new processes and technologies to deal with us. We also have an ongoing focus on the opening implementation of mandatory climate-related disclosures. Additional changes include the Financial Markets Amendment Act, which comes into force in early 2025. The deposit takers bill, which includes the introduction of a depositor compensation scheme and consumer data rights. I'll now hand back to Jeff.

Thank you, Andrew. So to summarize, this is a good result. We're seeing good growth coming through in an environment of economic uncertainty. There's also been against a backdrop of substantial strategic activity, as I mentioned, upgrading our core system, integrating stock code and the process approvals that we're going through with regulators on both sides of the [ testament ] in order to become a bank in Australia. We expect this to continue both the growth that we're seeing, plus this very strong focus on strategic activity because this is the organization that we are. We are building a differentiated bank in New Zealand and Australia, 1 which is a solid base in New Zealand on its best running products, access to accelerated growth in Australia and is efficient and create a virtuous circle of doing more at lower cost. A lot of hard work has gone into the half's result, and there is more hard work to come. And I'd like to thank Chris Flood, his team in Australia; Leanne, her team in New Zealand; and also, interactive Chief Financial Officer, Andrew for his work in terms of putting those all together, but also extend my thanks to the wider Heartland fellows that we innovate. Thank you for your commitment and your diligence. And finally, I'd like to thank our shareholders for your continued support. Now we'll hand over to the moderator for questions.

[Operator Instructions] Our first question comes from Grant Lowe with Jarden.

Just around the Challenger Bank timelines. I dropped off the call for a period there. So apologies if I missed anything but in terms of the timelines associated with those around -- also around the additional costs you expect in the second half for the [ vote ] in the fleet, please?

I think it's been hard to hear, but I think the question was around the timelines for Challenger Bank and then secondly, the cost in the second half. So I'll deal with the first part of that question, if I've got it correctly. I wish I knew the answer to that question about how long it's going to take. It is a process with 2 regulators. They don't give us timetables. We endeavor to give them timetables, but actually it's in their hands. We're unaware of any major issues, but it's just an initiative process that we need to work through with both sets of regulators. Andrew, the -- I think the question of cost associated with the...

Was it a question of quantification?

Yes, that's right, quantification.

Yes. So the costs principally related to due diligence and documentation and exploring the acquisition rather than getting the license itself. That will be in the region of about $2 million.

Okay. Great. And in terms of -- have you -- you're obviously doing a lot of work on this behind the scenes. Have you got an indication of the potential size of any equity raise down the track to support regulatory requirements once the bank is established?

Not yet. Obviously, we've announced the bank is considering a Tier 2 offer. So that's the only capital-related activity at this point in time.

Right. Okay, yes. In terms of the home loans book, obviously, there was a target out there of $495 million for year-end. You can't do much about the state of the mortgage market. But in terms of the strategy for that -- for the second half, is that maintaining the same sort of strategy and effectively wait until the good market starts to pick up again? Or is there anything in particular change in strategy with that product?

Very much the long -- the product has suffered, if like not just from the downturn in the property market, but the CCCFA. It took a while to work those issues through because we've got a purely online approach, it's much more complex requirements for us to meet the responsible lending requirements. But now we're getting sort of -- if like an understanding around that area that is resulting -- we see perhaps -- the big change is more of a pivot towards refinancing. And that has a number of advantages. So your finance of people who have already been approved by another bank, and they are -- in this environment, we expect refinancing into a higher market, but I want to say every possible sent they can. So that's where we aim to be positioned is more towards the refinance market.

Okay. That's great. In terms of just trying to understand the cost side of things into the second half. So you've called out obviously receivables -- opening receivables will be higher. You called out that NIM is expected to be flat and that the NPAT result in the second half is likely going to be similar to first half. There's only a few line items between those various numbers. What -- that sort of implies to me that you're expecting an uptick in OpEx. Obviously, everyone's expecting -- experiencing cost pressures. Is that sort of a correct interpretation of those various variables?

No, I don't think so. We'll continue to focus on control of costs. There will be inflationary pressures continuing. We are -- we do have a higher headcount focused on in the main technology products, which are drawing to a close. So I would say that we would see OpEx at similar levels to the first half.

Okay. That's great. And in terms of just the net core economic assumptions underpinning that $8 million economic overlay. Obviously, the impairments remain fairly benign at the moment, you've got that economic overlay. Can you give us an indication of the sort of those levels of unemployment or otherwise that sort of factor into the quantification of that? And why give us a sense of what that -- how much of a downturn that effectively could support?

I think for us, unemployment is the most closely correlated factor driving any of our risk models. And in terms of the overlay though, it's also linked to some of our larger legacy loans where there are some lumpy exposures. So we're still just remaining a degree of caution around those that are more of, if you like, a portfolio both portfolio a judgment call in terms of the round, which suggests to us the right thing currently is to maintain the level where it sits.

Sorry, can I just clarify? Your comment, I think, was around the fact that we expect our profit to be similar to the first half and the second half?

That is correct, yes. So obviously, receivables are up and NIM is flat, which implies that net interest income will be up, but the bottom line, obviously remains flat. So I'm just trying to understand whether that's a cost thing or an impairment thing. There's only a few line items between those various numbers, obviously.

So we expect to see growth and profitability in the second half. So yes, number is expected to be stable. We expect continued receivables growth, costs will be controlled and our loss experience to continue at current levels. So that will produce a profit, which is in excess of the first half.

So similarity was used in the sense, the ingredients are similar.

Our next question comes from Wade Gardiner with Craigs Investment Partners.

Just looking at your -- the Reverse Mortgage books, both New Zealand and Australia, it looked to me like origination was strong, which you sort of explained. But I was expecting to see maybe a fall in repayments just given where property markets gone. Can you sort of talk to sort of a bit of color around that? And would we see some sort of normalization of that in the second half?

You're absolutely right, Wade. The repayments have come down, not significantly, but they are lower than we had anticipated. So that's hard to judge, we then might return to what we would call normal levels. But for the first half of this year, it has been lower than we budgeted for.

Right. So I guess I'm just trying to understand the -- what's a normal rate because lower repayments will essentially boost the value of your book. So in terms of the receivables growth, what was sort of the normalized level versus what was boosted by the lower repayments. Is that possible to quantify?

I could do some work on that and quantify it for the half. But it's -- most of the growth has come from increased netbanking customers as opposed to retraction and repayments. We can go into more detail, but typically, repayments have set between 12% and 15%, 16% over a long period of time. So it's kind of hard to understand what is normal. We do track reasons why people are repaying. And what we did notice though is that the highest limit of repayments we saw was during that period of a couple of years, where particularly you say, Sydney and Melbourne, property prices were at record highs. Now that was, if you like a correlation, it's not necessarily proof, but that was correlated. And then secondly, we've seen the repayment rates coming down since the property markets have called. So again, correlation, not necessarily proof, but that's the sort of the assumption that we think is valid is that movements in property prices do influence the repayment rates.

Okay. You talked about the core system upgrade and sort of greater levels of automation. Can you sort of give some examples of where we're going to see this?

So across our portfolio, particularly within our middle and our back office, creating efficiencies within that automation of our processing across those parts of our business. And our core system upgrade is going to be an enabler for us to accelerate their automation. So the primary focus in our middle and back office as well as we continue to develop our mobile app functions for our customers to sense of.

So things that we will be measuring -- understand the things that we measure to see how that's going, is, for example, obviously, uptake in the mobile app is very important. So that's the pathway to self-service. So if people don't have it, they can't access self-service. So uptake is very important to us. That's one factor that we look to. Secondly, the decrease in inbound calls. So that's a major cause of cost and extra processing. And then behind those 2 things is just what's happening in the middle in terms of how we make things happen, where do we -- to what extent we can automate those processes. We have specialists and customer journeys that are constantly mapping out the customer journeys, finding bits we can take out, bits that are replicated and things that we can automate. And indeed, one of the things that Leannes' team is looking at is the role of robots in terms of some of those functions.

And following the sort of the system upgrade, is there an opportunity to reduce some of the staff numbers associated with it? Or is this sort of just an ongoing, staff numbers will continue to increase with the size of the books?

A lot of the staff we're carrying under the contracts is effectively related to the projects. So the project itself will close, and then there will be reductions. But you never know what comes down the pipe is just the next thing that we need to do. But certainly, the project has absorbed a lot of resourcing, which will come to an end once it's completed.

I won't say the significant [indiscernible] undertaken.

What's that, sorry?

I won't say there is a significant body of work to be undertaken in this area.

Right. Okay. So we won't see so sort of a reduction in the cost and the cost-to-income ratio as a result of that sort of project coming to an end and staff numbers reducing?

What we will look to do is, we are driving efficiency programs throughout the bank as we look at all of our cost lines and our practices and how we run more efficiently.

And our next question comes from Stephen Hudson with Macquarie Securities.

Just a couple from me. I'm not sure if I missed it, but can you potentially quantify the funding pass-through issue around Reverse Mortgages and what that cost you in terms of NIM? Secondly, Chris, I think you mentioned that your weighted average LVR across your Reverse Mortgage book had remained pretty steady at sort of 20%. But I just wondered if you can give us a stock range. I haven't got that in front of me, but that would be useful. And then maybe one for Andrew, just on the Challenger strategy around becoming an approved deposit taker. Do we read anything into the funding availability and cost in terms of the MTN program as you push into being an ADI? Or is the MTN program is still pretty much unchanged as you see it?

I'll start with that one first. So what I foresee happening once we acquire -- safely acquire Challenger Bank is that program will be reset. Currently, it's issued by Heartland Australia Group, which is rated. Challenger Bank is not rated at the moment. So we will seek to get a credit rating and probably 2 credit ratings for the bank as that will enable us to reestablish or reset the program out of Challenger Bank. That issuance will be by a bank, obviously, and the paper will be repo eligible. So we will reap the margin benefit of doing so. So that's the MTN program. Your question around impact of half or not passing on the full benefit, I don't have a hard figure in terms of the NIM impact, but what I will say is in Australia, it was around about 40 basis point that we haven't passed on. In New Zealand, that's much bigger than that, that it's around about 150 basis points. So reasonably significant.

Stephen, in terms of the weighted LVR, I'll give you the range over the last 5 years, I don't have in hand but it's been relatively consistent through that period. So it's been higher. So if you look at 2019, it's up around 25%, that's come back obviously on the back of the previous sort of increases in the quarterly index movements.

Actually, the risk of jamming the call. Jeff, I might just lob one in to you. You talked about the sort of the cost-to-income ratio and your aspirations, obviously, to beat the bigger banks on that score. Obviously, you've got a high NIM and so I think if my math is right, your sort of 43% probably translates through to something closer to where the bank's now. Where do you think it could get to in the next five years if you get your technology stack right, and in terms of your aspirations in Australia come through.

Yes. As we've said in the previous question, you need to spend in order to get there. So certainly got to -- what's going on at the moment with the systems upgrade, we've got work going on in other areas, and that will continue. So that's not going to be a short-term thing, and it will grow the cost-to-income as we go through this period, and we invest to get to where we go. Because what we're doing is changing, not trimming. And that's the important thing to keep in mind because the paradigm that exists as well we've got to break out of. So that will take time. Now I'm not going to give it at this stage, a timeframe or a target for that. But what I can say is that where banks currently sit around the sort of mid-40s or something, you need to be significantly below them. So obviously, something in the 30s is where we need to be aspiring towards, but that's not a hard wide target or setting on a timeframe around it. But just to give you an indication that it can't just be 1% or 2% better. It's got to be a quantum difference.

As there are no questions online, I will now pass to Jeff Greenslade to close the call.

Thank you very much for your attendance. It's very much appreciated. And obviously, if you have anything else you wish to ask us, Nicola Foley is available to take that. But once again, thank you for your support. [Foreign Language].

This concludes today's call. Thank you for your participation, and you may now disconnect.