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

Thank you for standing by, and welcome to Heartland Group Holdings Limited Fiscal Year 2023 Full Year Results Briefing. [Operator Instructions] I'd now like to hand the conference over to Jeff Greenslade, CEO. Please go ahead.

Thank you. [Foreign Language]. Welcome everybody to the Heartland financial year 2023 results. [Foreign Language]. I'm Jeff Greenslade, the Chief Executive of Heartland Group Holdings Limited. I am joined by the Deputy Group CEO, Chris Flood; the Group CFO, Andrew Dixson; and the CEO of the Heartland Bank, Leanne Lazarus. Before I turn to the results, just one piece of accounting housekeeping, as we have done in the past, we are reporting both in terms of accounting reported standards and underlying, and that is important just to give everybody a sense of how the business is performing once it's normalized for technical non-cash items, such as fair value adjustments for investments or a more complex issue of de-recognition of hedging, which Andrew Dixson will be more than happy to take us through in a moment. I'm going to speak briefly to the financial highlights, talk about the key strategic matters that are occupying us, and then I will hand over to Andrew, who will go through the accounts. And then Leanne will take us through the New Zealand operations, and then, Chris Flood will pick up the Australian operations, and they will come back to me to close. So starting with financial highlights. We grew to just under $6.8 billion during the course of the year. That's just over 10%. And that drove NPAT in normalized terms of $110.2 million or 14.6% up on the previous period and just under $96 million, just under 1% above the previous period for reported NPAT. NIM contracted during the period. The usual suspects were to blame, the mix of the book, greater growth coming from reverse mortgages, as a proportion of the book delayed in passing on the increases in deposits. But also, there is a cohort of Asset Finance and Motor Loans, which where we increased market share and there were some margin sacrifice taken in terms of doing that, and they're working their way through the system. As you can see in the normalized margin, the reduction from the first half is only 2 basis points, as that book is working its way through the system and being refinanced at higher rates. The cost-to-income ratio in an underlying sense was down slightly at 42%. It was 45% in reported perspective, and that really reflects the fair value adjustments go through that line. So a very pleasing result for cost-to-income ratio. Impairments were up 7 basis points to 36 basis points. That's mainly coming through in the motor book, where we've seen an increase in arrears. The motor book is very correlated to unemployment. And whilst unemployment has remained very low and stable, we've done the least and are prudent to increase our provisions going forward. They are provisions, not expenses, I hasten to add. ROE and EPS were down during the year, and that really reflected the fact that we rose capital, about $200 million last year. So obviously, at the moment, we are sitting on more capital, more shares than we had yet have time to utilize in terms of earnings, so that will write itself and we'll get the ROEs moving back up into those 12% and beyond levels. Finally, the Board was pleased to declare a $0.06 per share dividend, which brings the full year to $11.15. Turning on to the strategic update, I just want to cover off 3 things, just some commentary on businesses' usual performance before Christ and Leanne give you more detail. Secondly, talk about our efficiency focus as measured by our cost-to-income ratio, and then finally, Australia. So the pleasing aspect of the growth that we experienced of just above 10%, was it -- it occurred during a time of subdued growth at property market that was going through a correction. And that fact that we unlike the other banks in the industry did not benefit from the funding for lending program. So we did not have the benefit of that. And also, during that period, we exited $90 million of non-core loans. So that growth that we achieved is very impressed. And what sets us apart is where it came from, the core products that have been generating that growth. The reverse mortgage books in Australia and New Zealand, they both grew by more than 20%. The motor book, which grew by 13.5% despite the fact that the market declined by around about 6%. And our Asset Finance business, which grew by 8%, facing it probably a more competitive market than the others, but a reflection of the investment in infrastructure we're seeing in New Zealand and also the dependency on trading. So very well placed in terms of business-as-usual growth, and we expect that to continue. Turning now to the next area, which is frictionless service at the lowest cost, and what this really means is efficiency. And we measure efficiency through our cost-to-income ratio. And the cost-to-income ratio really is what does it cost us to produce a dollar. And so currently, we are spending $0.42 to generate $1 of earnings. And that is about the same as the best of the major Australian banks. So what that says is that we have used technology to replace scale. So we're performing, as if we had the same scale, as those major banks. Normally, small banks of our size would have a cost-to-income ratio of [ anywhere ] from $0.60 to $0.80. So how have we managed to do that? And that's through, I guess, being an early adopter of digitalization at the front end, so we managed to reduce our distribution networks. We don't have branches with restricting -- and restricting telephony, and we are increasingly using platforms. We're now moving all the way through the service value chain to digitalize and automate in order to progress our move towards a lower cost-to-income ratio. And that is going to be primarily through the mobile phone. Our ambition is for our customers [ will ] have a mobile phone to do everything they need to do on a mobile phone, whether it is to get an account balance or as Leanne will talk about, to change the profile of their loans rather than going through the indignity of having to apply for flexibility, we believe customers should have a self-help when it comes to changing the nature of the lending. And also, we wish to move towards the 0 inbound calls again, something that Leanne will talk to about in a moment. We believe that our customers need to ring us, we have [ failed ], everything that they need to know, everything that they need to do, should be available on a mobile phone. And there are some pleasing numbers in this presentation that demonstrates the uptake and utilization of the mobile phone. But what in particular stands out for me and that is that now 54% of our customers, who are visiting our reverse mortgage websites are doing so on a smartphone. And that says volumes about the trend and the myths about demographic resistance to technology. So for us, we have depositors in that 60-plus age group, and clearly our reverse mortgage customers by definition are all at 65 and beyond age group. The fact that we're seeing such a take-up of smartphone usage is quite impressive and augers well for the future. So whilst we're at 42%, we've been very pleased with that approach. We are not going to stop there. It's not parity that we are seeking with major banks. We want to create a meaningful distance between us and other banks in terms of the cost-to-income ratio. Again, we want to set ourselves apart, as we have done with our products, with our focus on efficiency. I don't think I believe any other bank in Australasia that is setting the cost-to-income ratio, as being one of their key drivers to incentivize management. So we're looking at ways to get ourselves to 35% and Leanne will talk about that in more detail about how we're going to do that. Our matapono [Foreign Language] is Mahi toa and Mahi tipu, which is to be bold and to evolve and adapt and that's certainly something we intend to do, as we move towards that target of 35% cost-to-income ratio. Turning now to Australia. Very pleasing results. We now have a 38% market share in Australia. We are the leader in that market. We are the leaders and Livestock, obviously, didn't have a great year in terms of climatic conditions or the pricing cycle. But during the course of the year, we greatly expanded our footprint in Australia increased the number of customers and animals that we are funding, and Chris Flood will talk about that a bit more in a moment. Clearly, the primary focus is on obtaining our bank license in Australia, and that's what's occupying a lot of my time. We are making progress. Obtaining a bank license is necessarily a methodical and a thorough process, and the process we're going through is no exception. To give you an idea, the fastest application for a start-up bank, we are not a start-up bank, we're different. We've got a good start with what we're doing. But nonetheless, is just illustrative to understand that Judo Bank broke the record of getting a license within 18 months. We started this process in February. We won't take as long as that because we aren't a start-up bank. We're buying into an existing bank with a track record. We are changing the business plan, but these things take time. And I'm sorry, I can't give you a -- an expected completion date other than it is top of my list of things to do. Before I hand over to Andrew, I just want to sort of touch on sustainability. We are shifting a lot more emphasis into this, as you would expect. And we have in the process of appointing Michael Drumm, the former Chief Risk Officer of the Bank to be Head of Compliance with part of that role to look after sustainability. We have 3 pillars to our sustainability strategy, one is environmental; second is people; and third is financial wellbeing. In terms of the environment, there are 3 areas that we're focusing one is on measuring. So we've adopted an environmental risk screening tool to help with our decisioning process, and increasingly, it's going to be important in terms of our reverse mortgage business. We've undertaken the ANZSIC analysis to understand our exposure to customers with high emissions. The second area is contribution, what are we doing to help, and currently, we see ourselves very well positioned to assist in the electrification of the motor fleet and the number of EVs that we have funded over the last year has doubled. And then finally, there's our own footprint. So we have achieved a 17% baseline deduction. We did very well in terms of first -- Scope 1 to Scope 2. Some of those huge steps forward, however, were offset by the fact we have been doing a lot of travelling to Australia for obvious reasons, and that has meant that our Scope 3 emissions reductions have to a certain extent offset the good work we're doing in 1 and 2. In terms of people, our flagship achievement really is Manawa Ako, the internship that we run for initially Maori and now opens up for Pasifika. We had more than 100 alumni come through. We're [ onto about ] our sixth intake. Every intake that comes in enriches our experience. We get better as we learn more about how do we be -- become accessible to rangatahi in terms of an employer of choice. We've seen that convert into a rich source of talent. Many of the alumni work part time or full time for us. And while they have learned a lot more about Te Ao Pakeha, we are continuing to learn a lot more about being an employer of choice for Te Ao Maori. We also maintained our Rainbow Tick and became accredited, as a Hearing Workplace. And finally, once again, we were recognized, as the Savings Bank of the year sort of reflecting the value that we give to our customers. Financial wellbeing, our contribution really is 2 things that stand out for me. One is the Extend product that we developed in during COVID, which as I referred to earlier, and Leanne will talk a bit about more in terms of our One Click Deferral program. It is a means for customers to self-help when it comes to organizing their cash flows, the way in which they prefer to service and repay their loan to meet their circumstances, whether it be to accelerate repayment or to slow down repayment depending on what their circumstances are. I think it's a very important tool, not just in terms of visibility and savings on cost, but also to treat our customers with dignity. Secondly, we now have 48,000 Australians and New Zealanders living in their own homes, as a result of having a reverse mortgage with us, and that's a very important contribution to social wellbeing in both countries. All right, I will pause there and hand over to Andrew, who will take you through the details of the financial results. Andrew?

Thank you, Jeff. Good morning, everyone. So I'm on Slide 11, which summarizes the Group's financial performance and position for FY '23. And as is customary now is reported on both a statutory reported basis and what we term underlying, which excludes the impacts of significant one-off items. These are amplified in the current financial year, so I will spend a little bit of time just working through those. Firstly, profit on a reported basis was $95.9 million, an increase of $0.7 million or 0.8% on prior year. On an underlying basis, this was $110.2 million, which is an increase of $14.1 million or 14.6% in the prior year. I'll cover each component of the financial result in subsequent slides, but I just want to just to walk through the key impacts of the $14.3 million difference between reported and underlying NPAT. So firstly, net interest income was impacted by $1.9 million interest expense related to the $174 million bridging loan, which was used to acquire StockCo Australia. This loan was fully repaid in September 2022, using the proceeds from the equity raise. Secondly, and this is where the bulk of the actions at other operating income was impacted by 2 key items. Firstly, a $9.1 million loss contributed by the derivatives that we de-designated from their prior hedge accounting relationships in FY 2022. You may recall that the de-designation resulted in a $16.7 million mark-to-market accounting gain recognized in 2022. This mark-to-market gain is subsequently unwound, as a loss, as the cash flows from these derivatives are realized. The remaining $7.7 million will unwind across the next 2 financial years. So we will see this item again in the future, albeit with a reduced impact. Secondly, we have a $4.5 million fair value loss resulting from the -- our investment in Harmoney. The fair value, as at 30 June 2023 was determined using the last traded price of Harmoney shares on the Australian Stock Exchange, which was $0.32 per share on 30 June 2023. Finally, in terms of the one-off significant items, operating expenses were impacted by $2.2 million of transaction and other costs in relation to the potential acquisition of an ADI in Australia. I would note additionally, there are $6.4 million of costs that are directly attributable to applying to become an ADI, which have been capitalized, as an intangible asset. For the remainder of the presentation, I will refer largely to underlying results and appreciate that there is a few items there to digest. Appendix 3 of the presentation provides further details and a reconciliation between reported and underlying results. Moving to Slide 12, growth and profitability. I'll step through the components, which bridge impact year-on-year. Also note that Heartland Group's results for 2023 include a full year of StockCo Australia, which impact the prior year comparatives, and I'll call out the impact of StockCo Australia's contribution to which line items separately, as I go through them. Underlying net interest income was $283.9 million, an increase of $35.6 million or 14.3% higher than the prior year, of which StockCo Australia contributed $21.8 million. This result was driven by continued strong net interest margin, which was 4%, combined with just over $1.1 billion higher average earning -- interest earning assets. $392 million that was contributed by StockCo Australia. Year-on-year receivables grew $625 million, which was just over 10% annual growth, noting this excludes the impacts of changes in foreign currency. Underlying other operating income was $16.9 million, which was up $3.1 million or 22.7% on the prior year, and this was primarily driven by an increase in upfront reverse mortgage income following the continued strong receivables growth experienced in both New Zealand and Australia. Underlying operating expenses were $126.2 million, up $14.9 million or 13.4% on the prior year. $8.9 million of those increase related to StockCo Australia, with the residual $6 million increase, a combination of increased upfront reverse mortgage expenses, which are offset by the income previously mentioned and higher staff expenses. Jeff mentioned the drive towards a lower cost-to-income ratio. And if we look at the marginal cost-to-income ratio, StockCo's marginal CTI was around 40%. And of the residual growth in net operating income compared to growth in operating expenses, the marginal CTI was about 36%, so you can see we're starting to demonstrate their pathway down. Underlying impaired asset expense was $23.2 million, which was up $7.5 million on the prior year. This was due to the provisioning impact on book growth combined with the slower runoff in the Harmoney portfolio, and an increase in late-stage arrears in the Motor and Asset Finance portfolios. Further, motor provisioning has been increased to allow for the potential impact of rising unemployment. Moving to Slide 13, net interest margin. Underlying NIM decreased 16 basis points to 4% in 2023, with proactive portfolio pricing and margin management stabilizing them in the second half, with underlying 2023 NIM only decreasing 2 basis points compared with the first half. The contraction in NIM has been mainly due to margin compression in individual portfolios with Heartland quick to pass on the benefits of the rising cash rate towards deposits and intentionally delaying passing the full impact of these increases on to some borrowers. While this did not maximize potential NIM was a socially responsible and a more sustainable approach. Secondly, a continued shift in portfolio mix towards high-quality assets continued, where we saw a reduction in personal lending and unsecured SME lending, as well as the business and rural relationship portfolio is experiencing larger repayments of high-risk loans, and this was replaced by strong growth in the high-quality portfolio, such as reverse mortgages and to a lesser degree, online home loans. Further to this, individual portfolio quality has improved. For example, in the motor portfolio, with the wage and the franchise new origination has increased. Market share has also been grown at the expense of margin in some markets, most notably in motor. And finally, there's a small pool of older Motor and Asset Finance loans, which were written at historically lower margins will continue to be repaid and refinanced at higher margins. These impacts were partly offset following the acquisition of StockCo, which is a higher-margin portfolio. And while this portfolio was relatively flat, which will be discussed by Chris later, growth is expected in FY '24 is expected to contribute positively to NIM. Overall, the outlook for NIM in FY '24 remains stable, but it does remain subject to changes in the portfolio mix. Slide 14, cost-to-income ratio. Underlying operating expenses increased $14.9 million from the prior year, with $8.9 million of this increase contributed by StockCo Australia. The remaining $6 million increase was mainly driven by a 4.6% increase in staff expenses due to an increase in average full-time equivalent employees, combined with general labor cost inflation. We also had an increase in upfront reverse mortgage expenses, which again was offset by the corresponding upfront reverse mortgage income. And finally, there was an increase in travel expenses, as travel resumed following COVID-19 travel restrictions being lifted, albeit, this remains lower than our historical average, and there were some increases in the general administrative costs. Heartland's underlying cost-to-income ratio has improved 53 basis points from the prior year 42%. Moving to loan provisions. So underlying impairment expense was $23.2 million, which is up $7.5 million on the prior year. Underlying impairment expense ratio was 36 basis points, which is up 7 basis points on FY '22. And this is due to increased late-stage arrears in Motor and Asset Finance, as borrowers adjust to higher interest rates. This has not translated into increased losses, as unemployment remains low. Motor losses show a strong correlation with unemployment. And while this relationship is non-linear, we have included an allowance in our motor provisioning based on a weighted range of unemployment forecast. Impairment was also impacted by a slower runoff in the Harmoney book. In terms of overlays, we have utilized $5.6 million of the $8 million general economic overlay taken in FY '22 to allocate to specific loans in the business relationship and Asset Finance portfolios, which have most -- been the most impacted by low economic growth. These specific provisions, together with the $2.4 million of the general economic overlay remain on foot, as at 30 June 2023. The outlook for FY '24 is expected to provide broadly similar credit outcomes, as the current financial year with borrowers continuing to adjust to higher interest rates, which appear to have peaked, supported by low unemployment and good economic activity in the sectors that we serve. Slide 16, shareholder return. Underlying return on equity of 11.9% decreased 68 basis points on the prior year, reflecting a strengthened capital position following the equity raise in the first half of 2023, with that equity raise [ to hit as a ] full earnings benefit. Equity to total assets was 11.4% in the prior year and that increased to 13.3% in the current financial year. A like-for-like comparison [ would say ] return on equity well above 12%. A fully imputed interim dividend of $0.06 per share has been declared, delivering a dividend yield of 9.3%, an increase of 2.2 percentage points on the prior year and retaining Heartland amongst the top dividend yield stocks in both New Zealand and Australia. A 2% discount will apply to the DRP. Moving on to Slide 17, which will be talked in more detail on the divisional summaries. Strong period of growth saw FY 2023 increase receivables by $625 million, producing an aggregate annual growth rate of 10.1%. The second half of the financial year saw a pleasing acceleration of growth in both motor and Australian reverse mortgages, supported by Livestock New Zealand. The Household segment saw $374 million of growth, an annual growth rate of 15.3%, largely driven by reverse mortgages and motor. The runoff of the Harmoney portfolio has continued, albeit more slowly, as well as personal loans that Heartland itself originates, which contribute to an improved risk profile and quality value NIM book. The New Zealand business segment saw a decline of $31 million, mainly driven by contraction in our business relationship books, as well as wholesale lending and open for business, which was partially offset by strong growth in Asset Finance. So the New Zealand Rural segment saw $11 million of growth at an annual growth rate of 1.7%. Livestock Finance and the Rural Direct channel grew 11.6% and 11.2%, respectively. Finally, Australian reverse mortgages recorded $164 million of growth, producing an annual growth rate of 20.7%. Moving on to Slide 18, New Zealand funding liquidity. Heartland Bank increased borrowings by just under $400 million, which is an increase of 9.2% to $4.7 billion, with the shifts in funding towards deposits and pleasingly no impact of investor sentiment following the impact [indiscernible] of fraud. Deposits grew 14.8% to $4.1 billion, driven by our competitive pricing on targeted products, including Heartland's Notice Saving -- Saver offerings, which were awarded Canstar New Zealand awards in both July 2022 and July 2023. In the first and second quarters of FY 2023, Heartland Bank experienced the highest growth rate in retail deposits of all main and domestic banks in New Zealand. Other borrowings decreased by $134.4 million, and this was largely due to the maturity of our inaugural $150 million retail bond. The amount drawn in Heartland Bank's committed auto warehouse was also reduced by $41 million. This was partially offset by Heartland Bank's successful issuance of $100 million of subordinated notes to the retail market in the second half of 2023. These notes qualify as Tier 2 capital for regulatory purposes. This issuance further diversifies and strengthens Heartland Bank's capital base, positioning it well for meeting the increased Reserve Bank of New Zealand capital requirements in the future. Overall, total liquidity remains strong, and Heartland is holding liquidity well in excess of its regulatory minimums. Turning to Slide 19, Australian funding and liquidity. Heartland Australia increased borrowings by $282 million during the year and has access to committed Australian reverse mortgage loan funding now of $1.54 billion in aggregate. $80 million of medium-term notes were issued during the financial year and Heartland Australia's April 2023, $120 million MTN maturity was refinanced, taking aggregate outstanding issuance under the program to $240 million. Reverse mortgage securitization warehouses were extended by 2 years and 3 years, respectively, and aggregate senior limits were expanded by $100 million during the year, providing additional headroom to fund growth in the portfolio. There are a number of initiatives in late stages of progress to further -- provide further reverse mortgage funding headroom, as well as maturity date extension, as we continue to see strong growth in this portfolio. Finally, moving to capital on Slide 20. Following the equity raise completed in September 2022, group capital increased $1.03 billion, which is 13.3% of total assets, positioning us well for future growth opportunities. Additionally, Heartland Bank's capital -- total capital ratio at 30 June increased to 14.69% following the $100 million Tier 2 issuance, and this is an increase from 13.49% in the previous period. This has accelerated the journey to meet the future capital requirements, which are for a common equity Tier 1 ratio of 11.5% and a total capital ratio of 16% by the 1st of July 2028. I'll now hand on to Leanne, who will cover the New Zealand divisionals.

Good morning, and thank you. The New Zealand business update will focus on 2 key areas: one on growth and performance; and the other one, our commitment to efficiency. So starting with growth and performance on Page 22. The New Zealand business demonstrated resilience with overall growth in receivables of 7.8% year-on-year. Total net operating income for the New Zealand business increased by 1.8%, of which 1.6% in net interest income and the difference in other operating income. The interest and net interest income was only 1.6% versus the 7.8% year-on-year receivables growth, largely due to the contraction in portfolio NIMs. We are well aware that the cash rates in New Zealand have seen a rapid and sharp increase, which has created a difficult environment in which to manage margins. Heartland intentionally delayed on passing the full impact of these increases into some of our borrowers. And in the case of our reverse mortgage customers did not pass on the full increase. NIM compression was also due to the continued shift in portfolio composition towards lower risk exposures. Personal lending and unsecured SME lending continue to reduce. Business and rural relationship lending experienced larger repayments of the higher-risk loans. Motor Finance experienced market share gains at the expense of margin. And with our deposit -- and our general margin compression was due to a shift in the asset quality and competitive pressures. With regard to our depositors, we were quick to pass on the benefits of the rising cash rate. Turning to Page 23, the graph highlights the portfolio mix of household contributing to 57.7% of the book, business 28% and rural 14.3%. As you will see, there was double-digit growth in reverse mortgages, motor, home loans, Livestock Finance, and then we had Asset Finance at 7.8%. For the remaining portfolios, there was a shift in portfolio composition towards the lower risk exposures. Moving to the household on Page 24, starting off with Motor Finance. As you will see, Motor Finance receivables increased by 13.5%. Net operating income decreased by 11.9%. As I previously mentioned, the market share gains was at the expense of margin, as well as a shift in asset quality. New business, however, did increase by 11.6% with overall growth of 13.5%. Digitization, as well as expansion of our network were key contributors towards our growth. With regard to our reverse mortgage portfolio, we had growth of 23.2% in New Zealand. Net operating income increase of 30.3%. We continue to see and experience strong demand due to the cost of living and cash flow pressures faced by older homeowners, as well as an increased awareness and education, as well as acceptance of reverse mortgages. And Page 25 of the presentation outlines portfolio analytics for the New Zealand reverse mortgages. When we look at our outlook for New Zealand reverse mortgages, it continues to remain positive with additional demand from cost of living pressures. Moving on to online home loans. Whilst this growth was subdued, we did see a growth increase of 14.1%, NOI increase of 18.2%. Heartland has remained very disciplined with respect to our pricing strategy. Our low-cost digital origination platform allows us to remain competitive. We've seen strong retention rates of exceeding [ 19% ] for both customers, whose interest rates came up for renewal during the period of this financial year. With regard to customer lending, this portfolio is not actively originating. Moving on to Page 26, Business. Asset Finance receivables, as I said, increased by 7.8% year-on-year and operating income decreased by 0.5% compared with FY '22. Our focus remains on freight transport and the yellow goods sectors. Once again, NIM was impacted by the mix of new business, improved profile, lower margins being repaid and replaced, and we expect to see a positive contribution towards margin in the second half of FY '24. Wholesale lending receivables decreased by 9.9%, and this reflects lower utilization of limit, as a result of unpredictable inventory conditions in the second half of '23. Our business relationship receivables decreased by 9.9% or 8.2% actually, as this portfolio continues to transition away from legacy businesses to loans, which present a lower risk. Open for Business, Heartland stopped actively originating open for business loans in the second half of this financial year. Moving on to Page 27, our rural portfolio, and this portfolio is made up of Livestock Finance, rural relationship and rural direct. We saw receivables increase to 1.7%. We saw net operating income increase to 13.5%. Key contributor being Livestock Finance growth of 11.6%. I'll now turn to our second area of focus, Page 28, our commitment to efficiency. So Heartland's ambition is to achieve an underlying cost-to-income ratio of less than 35% by 2028, and we will achieve this both through revenue growth and ongoing automation and digitization initiatives. Key to achieving our ambition is increasing customer self-service functionality and improving efficiency through streamlining and digitizing our internal ways of working. Working in tandem, we will realize synergistic benefits from combining straight-through origination with streamlined digital back-end processing, while building out features necessary for customers to self-serve. This activity is intended to provide customers with frictionless service, as well as provide a foundation for Heartland's future scalable growth. We have a very clear road map with 4 key initiatives that has been built, and this will be delivered through a systemized program of work that advances digital, self-service and automation capabilities. We have used data to inform our insights to drive our action. The 4 initiatives that's outlined in the presentation talks to our 0 inbound calls into our bank. We will digitize basic banking requests to enable customers to self-serve via the Heartland mobile app. Features will be developed to address the top reasons for customers calling us. We have an ambition to reduce inbound customer call volumes by approximately 73% by June of 2025, and then the remaining by '28. As an example, delivering 7 new mobile app features will address 40% of current call volumes. Our next initiative is One-Click Deferral that Jeff spoke about a little earlier on. Our customers will be offered increased flexibility for them to manage their Motor Finance loan repayments digitally via the app, and this includes our customers that are in arrears. We will develop 7 new mobile app features and functions to enable customers to self-manage their repayments, reducing the need for them to call up us at Heartland. The third initiative is around process automation, which we will continue to automate back-end operational systems to streamline the way in which we work, as well as improve efficiency. And our ambition is to automate 65% of current operations and collections manual processes by June of 2025. And our fourth initiative is in our motor space. So motor digitization, where we continue to enhance Motor Finance digital capabilities for faster and easier ways in which to -- for customers to access vehicle finance. We intend to roll out 7 branded online origination platforms to Motor Finance dealer partners in this financial year and thereafter continue to roll out further enhancements. Now key to the success of our program is customer adoption and behavior. We have a very strong focus on transforming customer adoption of our digital platforms, which will include driving awareness of features and usage of self-service. We will measure this through the mobile app uptake, as well as active use of mobile app. And finally, in addition to this program of work, the upgrade of the Heartland Bank's core banking system is nearing completion and is due to go live within this calendar year. This upgraded system provides us a platform on which to deliver increased levels of automation and digitization, positioning Heartland for increased scalability in the future, both from a growth and an efficiency perspective. I'll now hand over to Chris Flood.

Thanks, Leanne, and good morning, everyone. I'm on Page 30, just briefly talking to the slide just sets out the strong growth that's been talked about in Australia, $270 million, 16.5%. It also highlights the operating income benefit of having StockCo on the books for a full 12-month period. Looking at Slide 31, now and breaking that growth down a little more detail. It was clearly a reverse mortgage story, up 21%. StockCo was flat, and I'll come to that. Just note that the Australian receivables now are just under $2 billion, and I sort of reflect on when we bought the reverse mortgage business in 2014, that was a book of $378 million, which just shows fantastic growth rates. Turning now to Page 32 and looking at the reverse mortgage book in a little more detail. Demographics continue to work with us with more Australians over 30 -- over the age of 65, and that's set to continue also benefiting from greater awareness. The compound growth rate of the book over the last 5 years now is sitting at 23%. So that's a fantastic result. And we expect those, sort of rates to continue. Helped in part by the cost of living increases that Australians and the New Zealanders are experiencing and that's driving some behavioral changes in the book with more regular advances and people supplementing their existing incomes, withdrawings on the reverse mortgages and also more people retiring with modest debt. Not only did we write more business than anyone else in Australia, but we're also recognized by industry groups with the Australian Mortgage Awards Excellence and a finalist in the Best Banking Innovation Group as well. Page 33 simply sets out the -- some of the stats, and I'm happy to take questions from that later. And then lastly, just want to touch on the Australian rural book, our StockCo book, which experienced modest growth. When you look at the underlying performance, it was actually excellent. There were a few things that impacted on the growth rates. First of all, weather across the East Coast of Australia at the start of the financial year, slowed production and you will recall, it was very wet and combined at the same time as the U.S. drought and which saw a lot of U.S. farms destock. And so that, combined with the China COVID lockdowns and a slowing in the economy saw the commodity prices drop. So what that meant is as we were realizing stock and farmers were replacing it, they were replacing it at a lot lower cost, and that led to a flatter growth. When you look at the underlying result, as I said earlier, customer numbers were up some 11%, cattle numbers are up 29%, sheep were largely flat, and that's a product of the lamb market churning quite quickly. We are now confronted with processor capacity issues that Australia are importing people from South America, [ who are ] experienced to improve that, but it will take some time to clear, but the prospects for the year ahead are very, very bright. We're focused -- we repositioned the focus to target intermediation, so you've seen a strong relationship with Elders, who are one of the largest rural services companies in Australia, and then also independent Livestock agencies. So -- and that will be supported by continued digital development, which will improve the efficiencies and the scalabilities of the business. I'll hand it back now to Jeff Greenslade.

Thank you, and thank you to the others. So the outlook for us really is, [ I guess, one or more ] of the same, very strong continued performance around those products that set ourselves apart, the reverse mortgages in both countries, which benefit from a strong demographic demand for the product, and that demand is not at all impacted by macroeconomic conditions. Secondly, the motor book, again, the utility of cars coming through despite a tougher environment in the market demonstrating strong demand for cars and for finance. And then thirdly, the Asset Finance book, which has that strong dependency upon the infrastructure spend, which is -- looks like it's going to continue and the need for trucks is the main way of getting freight around the country. So that group of products really sets us apart, not subject to the vicissitudes of the residential property market. Secondly, what sets us apart is Australia. So we have this tremendous opportunity to grow in Australia in a much bigger market, and we're not wide-eyed Kiwi's going out to the great unknown. We are there already. We're already #1 in reverse mortgages. We're #1 in lifestyle. We are working towards getting a bank license, so once that is gained, we will utilize the distribution partnerships that we already have in place with manufacturers and distributors in Australia to roll out auto and tracking finance and occupy a unique position in Australia, as being a bank-funded operator in those markets. The third thing that sets us apart is this unrelenting commitment to efficiency. We are constantly moving towards improvement in all of our processes to take out manual processes to automate and shift everything that we possibly can on to the mobile phone in order to both lower the cost of onboarding, lower the cost of customer service, but improve customer service. Sitting, waiting on a telephone for [ 30 minutes ] for your bank to pick up is not good service. That's not the way to interact with your customers. So reflecting on our performance over the last 10 or so years since we became a bank, our matapono has held us in good stead, particularly as I referred to earlier Mahi toa and Mahi tipu of being bold and adapting and evolving. And over that period since we've become a bank, we have more than -- we've doubled our profits more than 3x. And that is a combination of our willingness to innovate, our focus on best [ or owning ] products, our ability to transcend geography and to operate in Australia. So we expect those initiatives and that those values to continue to guide us into the future. So turning finally to guidance, the range for FY '24 is $116 million to $122 million. There is underlying profitability. So that excludes the impact of fair value adjustments or the de-designation of derivatives. It also excludes the impacts of integrating Challenger Bank. So when we settle, we will recast guidance based on a -- on the outcome of how that [ sales process ] transpires. So finally, I'd like to thank all the people of Heartland for their exceptional efforts. And once again, interesting year, some turbulence still continuing, however, we have managed and produced, I think, a very credible result despite that turbulence. So [Foreign Language]. Thank you also to our shareholders for your ongoing support. [Foreign Language]. Thank you all. So we'll open up for questions. I believe we've got some more time.

[Operator Instructions] Our first question will come from the line of Grant Lowe with Jarden.

Hi, team. Can you hear me okay? Hi, team. Can you hear me okay?

We can. Hi, Grant.

Hi, team. So just a few questions from me. Just looking at the NPAT -- underlying NPAT this year of $110.2 million, is that directly comparable to the guidance that was provided previously, which I understand was reported NPAT, except for the fair value moves and derivatives. I come out with a number, if I just add those back to reported NPAT, I'll come back with a number slightly lower. How should I think about that?

Yes, it is. And also on top of that, as we did last year, the -- or as we did at the half, I should say, we had the interest expense on StockCo [ book ], which is stripped out. We've also stripped out costs related to costs incurred to-date related to the potential acquisition of Challenger.

But Andrew, the -- in terms of percentage terms, those 2 other items were 90%, is it?

Yes.

Yes.

Yes. Okay. Yes. I think it's a little bit difficult to unpack with tax impacts. So just to be clear, though, the fair value moves and the derivatives are non-taxable items presumably?

Correct.

Yes. Okay. Then just looking at the impairment expense. Obviously, the economy is still holding up fairly well and unemployment and the like. I appreciate that it is all based on forward-looking assumptions that you're required to expense on a forward-looking basis. So just in terms of the -- the breakdown in terms of the $9.4 million uplift in impairment expense year-on-year. Can you just provide a rough breakdown of how much of that was motors versus the personal lending?

Yes. So around about $5 million was motors, of which that's about $2 million -- just over $2 million related to asset making allowance for future -- potential future unemployment levels with the residual related to the deterioration in the arrears profile, particularly the late-stage arrears.

So are those arrears that are currently -- loans that are currently in arrears?

Correct. Yes.

And so, I guess that implies circa $4.5 million on personal or so. So just looking at -- so looking at those 2, the personal obviously has been winding down for some time. What would you -- does it move sort of a catch all for the remainder of that loan book with Harmoney and the stuff on your own balance sheet. That looks like -- sorry, just to rephrase it, could we expect more things deteriorate further from here materially?

Well, so that both books, so both the Harmoney book and the Heartland originated book, and now an unwind derisk very little of the Harmoney portfolio lift, which was maybe $4 million in each country. So I don't expect there to be a huge impact going forward of that book. Obviously, we will see how unemployment flows through because that -- both of that -- both books are correlated to unemployment as well.

Yes. Okay. And just in terms of the assumptions that went into that from a macroeconomic perspective in terms of unemployment rates or otherwise.

So are you talking exact unemployment in terms of the cases. So we've included the cases in our financial statements, you can pull those out. So we've got an upside, downside in the central case. In terms of the outlook from FY '24 to '26, that moves from the current level up to sort of 5% and then 6%. Those aren't exact numbers, but just to give you a ballpark. And then, we've [ probability of items ] across those scenarios.

Got it. Okay. So if unemployment did track to those sorts of levels, are you confident that you've sort of captured in today's impairments that on a forward-looking basis, I suppose, is the question?

Absolutely. So that's the point of it. What we've done is based on our data that we have, we've done a regression analysis to unemployment. And what we see is, it's a non-linear relationship. Losses start really biting when we get north of sort of 5.5% and to sort of 6% unemployment, which at the moment is not forecast at all in the next couple of years.

Our next question will come from the line of Wade Gardiner with Craigs Investment Partners.

Hi. Can you hear me okay?

Yes.

Hello. Yes. I have -- just a couple of questions from me. First of all, the economic overlay $2 million less, any thoughts of keeping that. What was the rationale sort of using it versus keeping the provision there and expensing these items given that certainly from [ where I'm seeing ] the economic environment is still very uncertain?

Yes. So we have, I guess, an abundance of caution because we could we see that area is less impacted by unemployment. That's the correlation that we use for particularly Motor. So economic activity is what we think is most correlated to the business market. And what we saw was some customers during the course of the year, the tail end of COVID impacting them and just lower activity coming through, so to utilize that for the regional purpose that was intended. So like, as you say, we don't see ourselves quite out of the wood yet in terms of business sector. We're hopeful that it will be a short and shallow recession, but the mindset was to err on the side of caution. It's going to retain [Technical Difficulty] of that overlay.

Okay. What's the rationale, I don't think, you commented in the pack about structuring Challenger [indiscernible] Challenger under Heartland Bank. What was the rationale for that structure versus sort of keeping it outside of New Zealand Banking and having it as a -- out to Australia [indiscernible]?

Quite a long story behind that. But if I -- the short version is that's -- that became the easiest route in terms of both regulators. When I -- when we catch up go with the [indiscernible] division.

What's that sorry?

When we catch up, I can give you a bit more granularity. It's a -- there's quite a bit, too. But that's like a sizzling summary.

Yes. Okay. Just interested in the impact of higher interest rates on -- for those reverse mortgage books. I mean, I understand the cost of living argument and therefore, more frequent withdrawals, but is there a natural cap do you think in terms of where customers will allow the sort of LVR to get to? It is sort of ticking up a bit.

The LVRs have not moved significantly, but customers are conscious of it. And I suspect anecdotally, and by looking at the performance of the book, because customers repay well before mortality sets in i.e., after about 7 years to 8 years. I suspect you're right that at the back of people's minds, they've got how much of the house equity they want to preserve, so that they've got enough to go either into care or into a smaller place elsewhere. So I think that is a -- we can't prove that scientifically. But I think -- I think the logic is clear that people, yes, they do have a kind of a backstop equity that they like to have.

[indiscernible] statement, yet, at all [indiscernible].

No. It's fair enough. We saw the acceleration of repayments happening when property prices were accelerating in Melbourne City. We saw an increase in repayments. And again, anecdotally, because people felt that this is the bigger -- the bigger the market, it will never get us because this now is the time to catch up and maximize the value of the house. In this environment, we're seeing repayments coming down. So yes, it's early days to work out exactly what is going on. But we're seeing the pipeline go up and repayments going down, as interest rates and inflation have moved up.

And with that, I'll hand the call back over to Jeff Greenslade for any closing remarks.

Thank you all very much for attending. Much appreciated. Once again, thank you to all. Thank you for your support. And we look forward to catching up with you in the next week or so for more detailed questions.

That will conclude today's meeting. We thank you all for joining. You may now disconnect.