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

Thank you for standing by, and welcome to the Heartland Group 1H '25 Half Year Results Conference Call and Webcast. [Operator Instructions] I would now like to hand the conference over to Mr. Andrew Dixson, CEO, Heartland Group. Please go ahead.

Good morning, and thank you for joining the Heartland Group results presentation for the first half of financial year 2025. I'm Andrew Dixson, the Heartland Group Chief Executive; and with me today is Leanne Lazarus, Chief Executive of our New Zealand Bank, Heartland Bank; and Michelle Winzer, Chief Executive of our Australian Bank, Heartland Bank Australia. Also with us is Kerry Conway, Chief Financial Officer of Heartland Bank. I will start on Slide 5, which is a summary of the first half's result. Net profit after tax for the first half of financial year 2025 was $3.6 million. On an underlying basis, this was $10.7 million. Acknowledging this is a reduced NPAT from our historic standards and follows last week's announcement on impairment, it reflects 3 components. An increase in net operating income of $12 million, up 8.4% on the prior comparative period. This was a result of continued strong growth of Reverse Mortgages in both countries, recording annualized growth rates above 15% and the strong performance of our Australian Bank. There was a $49.6 million impairment expense in the New Zealand Bank, as announced last week, a result of the active derisking and repositioning of some of the New Zealand Bank nonperforming loans. There was also a $31.6 million increase in operating expenses due to an $11.4 million uplift related to the regulatory and operational requirements of the Australian business becoming an authorized deposit-taking institution in Australia, a $2.8 million of additional depreciation and amortization, primarily related to the core banking system upgrade in Heartland Bank and $7.7 million related to one-off expenses. In addition to the strong Reverse Mortgage growth being experienced, livestock market confidence is returning in Australia, flowing through to increased application volumes and livestock purchases, and you'll see the growth experienced in the second quarter and the momentum taken into the second half later in the pack. The Australian funding transition to being primarily funded by deposits was substantially progressed during the first half, and the bank is expected to be at least 80% deposit funded by the end of the financial year. This is having a very positive impact on net interest margin, which is expected to accelerate into the second half. Net interest margin did remain stable in New Zealand, but is expected to expand in the second half with exit NIM projected to be above 4%. Overall, Heartland remains very well capitalized with strong liquidity and has had no changes to its credit ratings. We expect underlying NPAT for FY '25 to be at least $45 million. You will note in the pack and in the release, we have increased transparency in our reporting, particularly around the credit performance of our portfolios, which demonstrate a clear improvement in origination quality in New Zealand since changes were made post 2020. We have also increased disclosure around the second half outlook and our expectations of key metrics. Moving to Slide 6, group financial results. Kerry will detail financial performance of each bank. But in addition to the headline comments I've just made, I would note 2 balance sheet movements. Firstly, liquidity. The Australian Bank has done an exceptional job in deploying excess liquidity into both core lending growth and managing that funding transition. Secondly, on receivables, while the headline number is down $143 million, there were some notable reductions in areas of our business that are not core and core focus, including a $76 million reduction across our nonstrategic asset portfolios and an $80 million wholesale facility repayment. A quick note also on comparability, and Kerry will provide more detail on this, but the acquisition of the ADI and its impact on capital, liquidity and operating expenses does mean comparisons with the first half are not necessarily on a like-for-like basis. Moving to Slide 7, reported versus underlying. One-off items had a $7.1 million impact on profit for the first half. We have broken out the detail of these items into the P&L line impacted as well as the entity in which they were incurred. The key items here relate to post-acquisition assurance engagements required by regulation as a condition of approval and one-off staff exit costs. Moving into the second half, we expect there will be immaterial differences between reported and underlying subject to any fair value movements or nonrecurring expenses. In particular, the de-designation of derivatives is expected to be around about $150,000 in the second half. Moving to Slide 8, group strategy. Our purpose and strategy is to ensure capital is deployed into value-accretive activity measured by return on equity. For us, that means providing specialist banking products where the risk and return is calibrated to meet a 12% to 14% ROE ambition. This will involve delivering more from our cost base, that is improving operating leverage, including through automation and technology. Secondly, leveraging our investment in Australia to fuel the growth opportunities in its chosen markets. Thirdly, restoring asset quality in New Zealand, starting with the active derisking and repositioning of nonperforming loans that has already taken place. And finally, recycling capital from New Zealand portfolios that are not meeting return on equity thresholds. Our target markets are clear, and we aim to be the leading provider of funding solutions for older New Zealanders and Australians, the preeminent provider of Rural Finance in New Zealand and Australia with a focus on Livestock Finance, the preferred vehicle financier in New Zealand and the provider of innovative and competitively priced deposits in New Zealand and Australia. Our focus points for the second half. In New Zealand, simplification of the New Zealand Bank through realization of nonstrategic assets. While the origination of unsecured lending has ceased, further product rationalization is required. Margins have stabilized and are expected to expand. Asset quality is expected to benefit from enhancements to collections, recoveries and write-off strategies that we announced last week. Cost growth is expected to be a peak investment and requires moderation. In Australia, strong growth in Reverse Mortgages and livestock portfolios generating sustainable profits is expected to continue. Margin acceleration is also expected and costs are expected to remain stable. On our FY '28 ambitions, we recognize the need to deliver on these. Despite the near-term financial impact seen here, we are confident they remain achievable, and we will detail plans underway to meet these ambitions at our full year announcement later in the year. Moving to Slide 9, nonstrategic assets. This slide provides an overview of the individual nonstrategic assets and portfolios together with movements since 30th June 2024, which has largely been from customer repayments and refinancing. Rural Receivables are a $122 million portfolio of agricultural lending with a skew towards dairy farming exposures in the South Island of New Zealand. At this stage, the primary realization strategy is to exit each exposure on a file-by-file basis through a combination of refinance to alternative financiers where possible or otherwise through the sale of underlying security. Business Receivables are comprised of a $60 million diversified portfolio of New Zealand SME lending. Exit strategies are consistent with those in the Rural space, being a mix of external refinancing and sale of underlying security. We are also contemporaneously exploring portfolio level exits for both Rural and Business portfolios with discussions ongoing with several parties. Heartland's Online Home Loan portfolio is being wound down through organic repayment, which we anticipate to have largely completed by the end of first half FY '26. Our property portfolio is comprised of 2 dairy farms located in Canterbury and Otago. Both farms are profitable, underpinned by increased production and current milk prices. The farms are currently being prepared for sale during the next available market window, which is likely to be this coming spring. Our investment properties consist of a block of 16 apartments in Northland. These will be marketed for sale in the coming months with an exit in full targeted by the end of 2025. Moving to Slide 10. We have provided some projections for realization time frames for each class of nonstrategic assets and portfolios, which we will continue to report against. These represent our current best estimate of a responsible and commercial approach to realization that will continue to evolve over time. As repayment occurs, common equity Tier 1 capital will be released and will become available for the redeployment into lending portfolios, which align with current business strategy and meet hurdle rates of return on equity. Slide 11, capital. The majority of the group's capital was deployed to our banking investments with both banks maintaining strong regulatory capital ratios. Given capacity and access to hybrid capital instruments, capital generated from NSA realization and projected growth in profitability, there are no issuances of ordinary share capital planned to meet future requirements. Finally, on Slide 12, shareholder return. We have declared a $0.02 per share dividend for the interim period, representing a 7.9% yield. This reflects a balance of considerations regarding our capital management plan, the financial result and shareholder returns. I will now hand to Leanne and Kerry to discuss the New Zealand Bank.

Thanks, Andrew, and good morning, everyone. From a New Zealand Bank perspective, the financial position remains robust across New Zealand and the wider banking group with capital and liquidity ratios well above Board and regulatory minimums. Net profit after tax, NPAT for the bank on a reported basis was $0.9 million for the half, a reduction of $25 million on prior year. As Andrew talked to, underlying results exclude the impact of $2.8 million pretax one-off items, largely related to loss on derivatives as discussed in previous periods and which is now materially unwound and costs related to required assurance following the ADI acquisition. Management expect the difference between underlying and reported results to be minimal in the second half and thereafter in FY '26. The bank's first half NPAT of $3.1 million was in a challenging economic environment with performance materially impacted by impairments as discussed at the investor announcement last Tuesday. It is a reduction of $38 million on the prior year. Profit before impairments of $54.6 million for the half is a reduction of $10 million, 15% on prior year. The key driver to the deterioration is a $10 million increase in expenses with income roughly flat compared to the same period last year. I'll walk through further detail in the coming pages. Moving to Slide 15, Receivables. Receivables in New Zealand retracted $268 million, 11% in the half to $4.8 billion. $27 million, 1% of the retraction is in the core business portfolios, $167 million in portfolios we are not actively driving and $76 million, 30% reduction in nonstrategic assets, as just discussed by Andrew. Leanne will talk to more detail on individual portfolio performance later. Moving on to Slide 16, net interest margin. The rapid decline in the OCR, combined with subdued credit demand across the market has fueled aggressive pricing competition. Taking a balanced approach to pricing through this challenging period saw net interest income holding roughly flat to the prior year at $105 million. Although ending Receivables retracted $268 million, average interest earning assets were roughly flat to the prior year at $5.5 billion and NIM was also roughly flat at 3.78%. NIM has benefited from yield improvements. However, this has been offset in the first half by cost of fund increases with average cost of funds up 39 basis points. The first half cost of funds, however, was down 7 basis points on the second half last year and is projected to reduce a further 47 basis points in the second half. Cost of funds has been actively managed down through reducing the mix of more expensive wholesale funding, proactive term deposit pricing and driving volume into cheaper core products. As a result, NIM is expected to expand in the second half to around 3.9% with exit NIM projected to be above 4%. On to operating expenses, Slide 17. Operating expenses of $62.1 million or up $10.5 million, 20% on the prior year. This is driven by structural changes, one-off benefits in FY '24 not repeated in '25, investment in staff capability and new amortization. In the chart on the page, the first half '24 OpEx of $51.6 million has been rebased for the structural changes and nonrepeating one-offs. Structural changes are as a consequence of a regulatory requirement, resulting in staff moving from the Group, HGH, to the New Zealand Bank at a cost of $3.4 million, noting, however, that this is neutral at a total group level. In FY '24, there were benefits to operating expenses, which are not planned to repeat in FY '25. Firstly, $0.9 million relating to staff costs, which were capitalized as they were related to investment projects. And in FY '24, there were no discretionary payments, but the current assumption is that they will be reinstated in FY '25, driving an increase of $1.2 million. So on a like-for-like basis, that takes the FY '24 staffing base to $57 million. From there, staff costs have increased 4% versus the prior year through inflationary increases and investment in capability required to run a more complex organization. In addition, the costs of the core system upgrade delivered in FY '24 have now begun to amortize in FY '25 with a first half impact of $2.8 million. In the second half, costs are expected to increase further to $66 million due to the full half impact of both staff transfers and recruitment undertaken in the first half, additional amortization largely from the implementation of the Workday general ledger and planned investment in IT security. We are now confident that the appropriate capability is in place to position us to deliver sustainable growth and therefore, do not expect material uplifts in base OpEx. On to Page 18 and 19, impairment provisions and nonperforming loans. I won't spend too long on impairments since we covered in a lot of detail at the release last week. But as a recap, impairment expense increased $41.6 million to $49.6 million in the half, with the increases relating predominantly to the Motor Finance and business lending portfolios where the collectability of customer arrears has been impacted by deteriorating customer conditions. Later in the pack, there is more detail at a portfolio level to provide some transparency on credit quality. On to funding and liquidity, Slide 20. Retail deposits remain resilient, and the bank retains a strong liquidity position, well above Board and regulatory requirements. Retail deposits grew modestly by 1.5% in the first half with growth primarily in call and savings products, aligned with our strategy of growing lower-cost funding sources. With lending contracting, excess funds have been used to repay $317 million of more expensive wholesale funding sources, which is a 65% reduction. In addition, we took the opportunity to reduce the bank's securitization facility in December by $280 million. With further interest rate cuts expected, these actions, together with a continued active pricing strategy on term deposits, is projected to see cost of funds continue to reduce into the second half. Finally, moving on to capital, Slide 21. With a regulatory capital ratio of 15.05%, the New Zealand Bank continues to operate significantly in excess of regulatory minimums and is well positioned to meet the RBNZ's future higher capital requirements. No share capital issuance is expected or forecast in the capital plan for the foreseeable future with all of the future core capital requirements either already existing or to be derived from future profits. I'll now hand over to Leanne to discuss the New Zealand Bank strategy and portfolio performance.

Thank you, Kerry, and good morning. I am now on Slide 22. Over the first half of the financial year, particularly quarter 2, the shape of the New Zealand Bank has evolved. With this shift, I've identified 3 key priorities to drive our focus for the remainder of the financial year. Uplifting the quality of lending portfolios through strong credit risk management and simplification. We have identified where there is work to do. Creating efficiency through digitalization and eliminating costly manual processes. And ultimately driving strong sustainable growth, focusing on quality business in our core portfolios, streamlining and enhancing existing product offerings and launching new product offerings to complement our existing portfolios and broaden our reach. I'll now talk to growth, which reflects our commitment to delivery of margin targets that's not at the expense of volume growth. We have actively focused on maintaining growth in our core high-margin portfolios of Reverse Mortgages, Rural Lending and Motor Direct. Again, our rebalancing of channel mix towards a higher proprietary digital mix is key to building margin. We are also looking at where we can launch new product offerings within our existing lending portfolios. An example of this is a proof-of-concept product that will enable people to access their equity in their home to purchase a retirement village property. This product will be piloted with a premier provider of aged care living solutions. Turning to quality. We've taken an action to bring forward the rebuild of the Motor scorecard to improve the quality of the business coming through our door. I expect this to be completed in the second half of this financial year. We've completely overhauled and reshaped our collections business, investing in systems, process and capability improvements. We have a proof-of-concept in place that should rebalance Motor acquisition towards direct channels, working closer with dealers and have commenced work more broadly on working with dealers directly. Our experience is that direct lending comes at a superior margin and credit quality. We are continuing to remove distraction that the nonstrategic asset portfolio brings. We have developed a clear strategy for the exit of NSAs, as Andrew has earlier shared with you. We now have a dedicated team established and supported by the group we are now working through a structured program to run this book off. On to efficiency. This reflects our continued commitment to get on top of our cost control through running a well-managed business and also through automating and improving the experience for customers and our teams who supported them. Costs increased over the first half of the financial year, primarily as investment was necessary to develop, enhance and reshape as well as replace existing processes and systems, all aimed at realizing meaningful efficiency gains while positioning the New Zealand business for quality sustainable growth. As we've spoken about earlier, the core system upgrade is now complete, and you've seen this reflected in our financials, but this has enabled us to shift focus to extract value from some of the build in our front and back office. We have invested in and we are well advanced in bringing to the market in April our new Motor origination system, partners platform. This will significantly enhance capacity, speed and conversion through automation and is a material step forward in realizing cost release activities. We have invested in processes, people and capability in our direct multichannel as we see strong growth opportunities and enhanced returns from this channel, which we are now executing. We have implemented a new human resource and finance system called Workday across both New Zealand and Australia, and this is to manage the trans-Tasman business. Our digital agenda, which focuses on customer experience as well in our front office has progressed by increasing self-service across large areas of our customer base and increasing mobile app usage. Mobile app customer usage reached 54% in December of '24, and we're targeting a 60% target by the end of this financial year. The usage to date has resulted in a reduction of customer calls by 35% overall. Within our retail business, this has seen customer volumes reduced by 38% when we compare to the same period last financial year. Our customers now have the flexibility to manage their loan repayments for Motor Finance. And since the arrears self-management features one click went live in October of last year, over 2,500 customers have self-managed their way out of arrears, amounting to more than about [ $800,000 ] paid via the app. Over the second half and into financial year '26, we expect to start to realize the benefits of this investment in the first half of this financial year, and I will talk more to this at the full year results. I'll now turn to Pages 23 to 27. I'm confident about Heartland Bank's future, but I would like to spend some time elaborating on last week's impairment announcement and the following slides pertain to current credit quality in the bank. There are 3 points that I'd like to highlight here. The New Zealand Reverse Mortgage book is very strong with minimal credit risk. Nonperforming loans arise when there are properties that are not settled or loans repaid within the 12 months of the departure of the borrower. We provide additional transparency to demonstrate the superior quality of lending across our core portfolios and credit quality insights across other portfolios, some of which are in wind-down mode. Turning to our Reverse Mortgage portfolio, which you can find on Slide 23. We've seen another pleasing result in the second half with strong portfolio growth of 15%. Receivables have grown to $1.2 billion. This reflects our continued support for New Zealanders to live a more comfortable retirement through access to equity in their homes. We currently have over 11,000 Reverse Mortgage customers who are primarily using a Reverse Mortgage to assist with home improvements, debt consolidation and to ease the pressure of everyday expenses. Our Reverse Mortgage portfolio is high quality. The weighted average loan-to-value ratio is 24.6% and only 0.2%, 6 loans as at December '24 had an LVR or a loan-to-value ratio over 75%. Since December, this has decreased to 3 loans. We believe that there will be continued strong demand for this product as a new generation enters retirement and the need to recover their cost of living. I've already mentioned the proof-of-concept retirement Village Access Loan. This is part of our focus to launch complementary products to support seniors and broaden our market. Next, the Rural business, which you can find on Slide 24. We saw the rural book contract less than we anticipated in the first half, with contraction reflecting the normal seasonal reduction of our Livestock book as well as the exit of approximately $21 million of exposure considered to be high risk. Livestock Finance now enters the seasonal growth period through to June of '25, and we are encouraged by improved economic outlook for the agri sector. The New Zealand farm gate payout, the New Zealand dollar and lower interest rates. Nonperforming loan analysis demonstrates the superiority of new lending over pre-2020 as discussed last week. Moving to Slide 24, our Motor portfolio. Motor Receivables are holding up well in challenging times. There is much economic data available that details the challenges faced by this industry and in particular, the impact of new car sales, which are markedly down year-on-year. Our overall Motor book contracted as a result in the first half. We do, however, expect to return to growth in the second half. Growth through New Zealand Bank's direct channel was up in the first half as we continue to invest in processes and capability given the opportunity for further growth in this area. The direct-to-market strategy will be an important part of the quality efficiency and growth strategy in the second half and going into financial year '26. As I've already mentioned, our experience is that direct lending comes on at superior margins and credit quality. Recent loans are also better quality than old ones. The chart on this slide compares credit quality using loss curves between Motor loans written pre-2020 and written post-2020. The key point here being that old loans were showing at a 6.5% loss rate after 4 years, while newer loans show an equivalent loss rate of 2.7%. The conservative definition of loss here being that includes all 180 days past due, some of which will be restored or recovered. As advised in our update last week, we have adopted a more prescriptive approach to our arrears management practices, and we are seeing improved outcomes already starting to flow through. Lending originated post-2020 is performing better than loans originated pre-2020 with a loss rate of 2.7% compared to 10.8% for the pre-2020 period. Turning to Slide 26, Asset Finance. Reduced growth in assets in the Asset Finance book reflects subdued economic activity and aggressive competitor positions on price and credit standards. Heartland Bank has held its stance on credit quality and risk appetite. As a result, we've seen lower application volumes. We expect growth to return somewhat in Q4 of this financial year following further interest rate reductions and as customers recommence capital investment in their businesses. We are well positioned for this uplift. And briefly covering our other portfolios, which can be found on Slide 27. There are 2 groups here. Portfolios in runoff or slowdown mode, personal loans, Open for Business and Home Loans, all considered noncore on strategic or margin grounds. Business and wholesale portfolios, which are complementary to core business like Motor, or include some loans within the nonstrategic asset portfolio. Once again, credit analysis confirms superiority of newer loans, noting personal loans is not material and is now closed. Home loans is clean, but generates an insufficient margin. So to conclude and looking forward, the New Zealand Bank is uplifting the quality of our lending portfolios through strong credit risk management and simplification. We will be creating efficiency through our digitalization to eliminate costly manual processes, and we are driving strong sustainable growth, focusing on quality business in core portfolios, streamlining and enhancing existing product offerings. I will now hand over to Michelle Winzer, the CEO of our Australian Bank; and Kerry Conway, New Zealand Banking Group CFO, to take you through the Australian Bank update.

Thanks, Leanne. I'll start with the financials. Heartland Bank Australia achieved a first half NPAT of $13.1 million on an underlying basis in a challenging economic environment. NPAT of $13.1 million is a small reduction of $0.1 million, 1% on the prior year, with net operating income increasing $12 million, largely offset by increases in OpEx. However, it's important to note that due to the acquisition of the ADI in April last year, the first half '25 results are not comparable on a like-for-like basis to the prior year since the cost of the ADI have now been absorbed and materially higher liquids are required to operate as a bank. I will walk through the detail in the next few pages where we have rebased the prior year to compare metrics on a like-for-like basis. Like New Zealand, Heartland Bank Australia's financial position is robust with capital and liquidity ratios well above board and regulatory minimums. Moving to Receivables on Slide 30. Receivables grew 12% from December to $2.3 billion with growth of 15% in Reverse Mortgages. Livestock has been subdued in the half. However, December and January have seen promising growth. Michelle will cover portfolio performance in more detail later. On to net interest margin, Slide 31. Net interest income of $43.4 million is up $11.7 million, 37% on the prior year, supported by momentum in Reverse Mortgages driving 11.5% Receivables growth, coupled with the transition from wholesale to retail funding. Prior year NIM of 3.16% has been rebased to 2.40% for the impact of additional liquids now required. And so that now means that the first half '25 can be compared on a like-for-like basis. From 2.40%, NIM has expanded 35 basis points to 2.75% through delivering on funding optimization, driving a 38 basis point uplift, partially offset by lower growth in the higher NIM Livestock business. The funding optimization strategy is tracking well with deposit funding now at 61%, and that will increase further to beyond 80% by the year-end. In addition, wholesale funding has decreased by AUD 294 million in the first half. These combined have resulted in cost of funds improvements to 5.75% exit, and that's compared to 6.56% cost of funds pre-acquisition. The December exit NIM of 3.13% is up 29 basis points on the rebased June '24 exit NIM of 2.84%. This expansion is expected to accelerate in the second half with June exit NIM projected to be larger than 3.60%. On to OpEx, Slide 32. Operating expenses were $25.5 million, up $11.4 million, 81%. Similar to NIM, the cost base is not on a like-for-like basis this year due to the inclusion of the ADI costs following the acquisition. Rebasing prior year costs, the like-for-like starting position is $21.3 million, increasing $4 million, 19% to $25.4 million in the first half of '25. Cost increases are driven by investments in staff and other costs required to support banking operations as well as fund and drive growth. Costs are expected to remain about flat in the second half, improving the cost-to-income ratio to 46.9%. On funding and liquidity, Slide 33. Heartland Bank Australia has made significant progress transitioning from wholesale to deposit funding with a AUD 294 million reduction in the wholesale in the period. Deposit mix is now at 61% versus 53% at the end of FY '24, and we're expecting that to increase to beyond 80% by the end of this financial year. The MLH surplus at December was elevated at AUD 111 million, driven by additional deposit raising to support the repayment of one of the securitization facilities. Following the repayment, this has now stabilized at around $70 million. As discussed earlier, funding optimization has driven around 80 basis points reduction in cost of funds compared to a pre-acquisition position. Finally, on to capital, Slide 34. Like New Zealand, Heartland Bank Australia's capital ratio of 20.56% is well in excess of board minimums, which include a conservative buffer above APRA minimums. As a result, the bank is well placed to support its growth ambitions through existing capital reserves and future sustainable profitability. I'll now hand over to Michelle to discuss the Australian Bank's strategy and portfolio performance.

Thank you, Kerry, and good morning, everyone. I'm on Slide 35. I'm pleased with the overall first half results for the Australian business and the momentum that we built to close out the half. The 2 quarters in the half were markedly different for us. The first quarter saw a slower pace in lending growth as we worked on bringing together the 3 businesses and evaluated our structure and processes. This was also a period for us to review the quality of the book and identify if there were any improvements we needed to make to our processes and controls. We established new risk management frameworks and enhanced our credit management plans. We deepened the quality of data we were receiving to enable earlier identification of potential issues in the portfolios, and we enhanced our reporting across all parts of the business. Second quarter performance was very strong, resulting in a first half '25 NPAT of NZD 13.1 million. We reviewed our strategy, and we reestablished our goal to deliver best or only products to the 3 segments in the market, Reverse Mortgages, Livestock Financing and Deposits. We are clear on the potential in Australia and have focused our energy on being the best at what we do. Our key areas of focus in the business remain business growth, service excellence and distribution diversification. To achieve our growth, we have reviewed our product holdings within our 3 markets. We identified some additional groups where our offering could meet more customers' needs and expanded our product offering in 2 segments, launching a new savings account, MySavings in February and Feedlot Finance product late in the half. We also relaunched the Heartland Bank Australia brand in market and updated our Livestock brand to StockCo by Heartland Bank. Being a bank in Australia is opening up new markets for us and increasing the businesses and customers who are keen to work with us. This has helped to build a strong pipeline of opportunities in the second quarter FY '25, which has continued into quarter 3. The growth in our Reverse Mortgages business has been really strong with 4 of the top 10 monthly new business origination months occurring in the last 7 months [Technical difficulty] several results in January '25. Our key focus area for service excellence has been retention of our valued customers in all segments, and we've implemented a new retention program across the business to achieve this, reviewing our full end-to-end process to deliver improvements and removing friction in our customer experience. This resulted in a reduction in our origination process for Reverse Mortgages from over 60 days to less than 20 days. With significant opportunity in the market, we are setting the business up for growth and ensuring we can scale to support our customers when they need us. This review process identified several areas of the process that we could automate and make life easier for our customers and reduce the requirement to provide information multiple times. Our work in this space will continue in the second half and beyond. We also reorganized our Livestock teams to improve the experience our customers received. In relation to diversifying our distribution, we aim to continue delivering lending volume growth by enhancing our distribution channels, including broadening our partnerships to deepen penetration into targeted segments. For our Reverse Mortgages business, we've established a business development team who are accrediting over 50 brokers a month. We now have over 4,000 partnerships in place. We are now focusing on building the relationships with those brokers and making sure that the number of active brokers within that group increases. For our Livestock business, we have also connected the broker and agency networks in the states where we don't have regional Livestock managers present and have rearranged where our teams are located to ensure the best coverage across the country. We have established a new partnership with AuctionsPlus to deliver finance directly through the AuctionsPlus platform. AuctionsPlus are Australia's leading online agri marketplace to provide finance solutions to Livestock sales. This will commence in second half '25. We have also launched an exclusive naming rights sponsorship for the Herefords Australia's 60th anniversary show and are connecting with other key bodies within the livestock industry. In our deposit business, we are establishing arrangements with new intermediaries to diversify our business opportunities and connect with customers in different segments. Pleasingly, our funding optimization strategy has been executed as planned. We now have over 60% of our funding via deposits and continue to repay our wholesale funding as it matures. We expect to get to above 80% deposit funded by year-end. We have reduced the excess liquidity that we had at the start of the financial year and are now well positioned in relation to our minimum liquidity holdings. Moving on to the next slide and talking about our Reverse Mortgages lending performance. This book has grown by 15% since June '24, and we delivered record new business results in first half, resulting in over 9,000 active loans, up from 8,663 in December '23. The strong performance has continued in January with January being our highest month ever, setting us up for continued growth in the second half FY '25. The NOI for the portfolio was $34.7 million for the half. Competition is intensifying with nonbanks and fintech innovators expanding into this market. We've expanded our partnerships and broker networks, and that contributed 62% of new business in the first half 2025. Our weighted average LVR is 24% with a nonperforming loan rate less than 1% with our average loan size of $198,000. Moving on to our Livestock Finance portfolio. There is increased optimism in the farming communities and strong interest in working with StockCo or Heartland Bank for their financing solutions. Despite the slow first quarter, the second quarter, our Livestock business saw the largest volume of livestock purchases per head since second quarter FY 2022. This is across both cattle and sheep. We expect the increased application volumes that we saw in November and December '24 to continue in the second half. Overall growth for the half was down by $1 million. Our NOI was $6.4 million for the half. The result for the first half was, however, impacted by the full repayment of some of StockCo's nonperforming loans, reducing our NPLs from $70.5 million in June '24 to $40.4 million in December '24. Whilst this impacted growth of the portfolio, it was a positive outcome for the business. And you can see in the graph the turnaround in the business performance with growth projected for the full year. I mentioned in the full year results that I was focused on bringing together the culture of the 3 businesses, and this remains a key focus. We've enhanced our communication internally and brought together many functions to be across all 3 of our segments. This has created economies of scale and enhanced our customer experience offering as well. It's been necessary to spend additional money this first half to engage experts to review parts of the business and to ensure we are set up for success in the future. Despite this, we've reduced our CTI from above 64% post-merger to 52.4% in December '24. With the significant work on the wholesale to deposit conversion, our corporate simplification plan, further digitization and automation, we expect this to reduce further over the second half. The retail conversion activity has delivered solid improvements in our NIM, delivering an exit margin of 3.13% and month-on-month improvements over the half. We've brought together our risk and compliance teams in the business to ensure we have a crisp focus and can continue to mature our risk culture. Our impairment expense ratio for December '24 was 0.08%, up from 0.03% in June '24. The uplift in first half '25 impairment expense ratio was driven by recognition of a StockCo single name individually assessed provision. We are happy with the asset quality of our NPLs, and they are a low percentage of our Receivables, and we feel we are appropriately provided for following our review of the portfolio. In summary, whilst our first quarter growth was slow, our second quarter delivered best ever results across our Livestock, Reverse and Deposit businesses. We had strong momentum leading into the end of the half, and this has continued beyond the end of year break. Our restructure is finalized, and we have the right people in place to deliver continued improvements in the business in the second half. Our focus is on keeping the business simple and disciplined in our consistent service experience and expanding our partnerships to connect with customers in different ways. I have a high-quality executive team in place who are working extremely well together to deliver the best outcomes for the business and our shareholders. We continue to work very well with our Board and their support has been critical to the success. With the plans and people I have in place, I am optimistic about our full year results. Back to you, Andrew.

Thanks, Michelle. So on to Slide 39, looking forward, trading conditions are expected to remain challenging in the second half, particularly within forestry, transport, agriculture and construction. That said, we continue to expect strong growth in Reverse Mortgages, but have moderated growth expectations in other core lending portfolios as the economy recovers. As stated previously, our expectations for margin is to exit the year above 4% for New Zealand and for OpEx growth to moderate by the end of FY '25. We also are focused very strongly on the implementation of enhanced collections, recoveries and write-off strategies for the Motor Finance portfolio in New Zealand. In Australia, confidence is improving for farmers and is expected to positively benefit AU Livestock Finance. We also expect the continuation of strong growth in Reverse Mortgages and to continue to see margin benefits come through as the funding mix reaches its target state of above 80% deposits. In terms of guidance for the full year, we expect underlying NPAT to be at least $45 million. I will now open for Q&A.

[Operator Instructions] Your first question comes from Wade Gardiner from Craigs Investment Partners.

I've got a couple of questions. Previously, you talked about a target cost-to-income ratio of getting down to about 35%. And I know that, that was under a different structure. But can you sort of talk about where you expect the cost-to-income ratio to sort of get to over the next couple of years? Is there a new target there we should expect? Because what you're implying for this even in the second half is a much-elevated level from what we had saw before?

Yes, I can answer that, Wade. So it's Kerry here. The -- as we've talked about in both of the banks earlier today, we have invested more than originally expected this year to focus on automation and also really resourcing to run a more complex organization. We still have a focus on automation to drive cost out, but an improving cost-to-income ratio is going to take longer. Going back to what Andrew talked about, particularly on nonstrategic assets, our focus is on driving a better ROE targeting 12% to 14% in the ambition period.

Wade, it's Leanne. Just adding on to that, all of the initiatives that we've previously spoken about are initiatives that are either underway or will commence in the new financial year. So it's not as though those initiatives will not be proceeding.

But are you willing to put a target around where we should see that level to get to? Under this new structure, are we talking about a target of, say, 40% now versus the 35% that was targeted before? Or are we looking at a higher number?

We'll come back at the full year, as I've said, Wade, in terms of the longer-term ambitions and the components thereof. As we've stated, we remain confident in achieving those. In terms of specifically around the cost-to-income ratio, the near-term target is to get the ratio back to the 4 on the front of it. That occurs in Australia as we exit this financial year. So we have strong commitment to getting there for Australia. New Zealand, obviously, is sort of in the late 50s at the moment. As we move into FY '26, the goal will be to get that down with the 4 on the front of it.

Why are Home Loans now not core?

We announced at the AGM that they were nonstrategic. They don't meet the return on equity thresholds.

I noticed in the slide pack, you referred to the first half dividend being a 77% of the rolling underlying and targeting 50% for the full year. What should we expect going forward? Is this a change in policy at all or?

No, the policy remains the same, Wade, and the commitment to pay out at least 50% remains the same. Obviously, there's a number of consideration that goes into the dividend setting from the Board. So I can't tell you what the number is going to be, but we'd expect to continue with the current policy settings.

And just finally for me, on Slide 25, you talk about sort of the losses for pre-2020 motor vehicle loans versus post-2020. So what portion of that book, that $1,598 million book is pre-2020 and what portion is post-2020?

We'll come back to you on that, Wade.

[Operator Instructions] Your next question comes from Grant Lowe from Jarden.

Well, there's a lot going on in the numbers. Sort of quite hard to sort of disentangle. So hopefully, my questions are reasonably straightforward. So in terms of the NZ cost base, there has been some changes in terms of head office stuff being put into there, et cetera, et cetera. But in terms of the $66.1 million second half run rate, is that likely to be a go-forward run rate into the next year? Or is there any sort of ups and downs we should expect from that position?

Yes. Yes, as I talked about, so the uplift in the second half is really the full half impact of some investments that we've done in the first half. And we're really expecting -- we feel that the capability is now appropriate. So that should be roughly the, sort of, equilibrium go forward, if you like. The IT security investment in the second half of $1 million won't be repeating, but there's not other significant ins and outs that I'm expecting.

I mean, that's quite a step up from previous events sort of incorporating some of the additional amortization and head office stuff. That's cool. Around -- I guess it's exactly the same question for Australia, a little bit trickier to -- obviously, with the start up. But the $25.6 million flat on first half into next -- into the second half, how should we think about that going into next year?

So the second half, we're expecting the second half OpEx to be around $25 million, which is flat on the first half. That should be around -- that should be a sort of stable cost base going into '26. We've done a fairly significant restructure across the business that is now fully completed and in place in the business. So I expect our cost base to remain flat. Certainly, we have tried to set the business up to be able to achieve the growth that we need to achieve across the businesses, and that's what we are working to there. There may be some movement in there. We're certainly investing in our technology and trying to improve the automation that we have in the business, but we expect that cost base to continue.

That's useful. So in terms of the -- like at the FY -- sorry, at the equity raise about 9 or 12 months ago, the cost base in that pack was sort of estimated to be around AUD 42 million for the Aussie Bank, call it, NZD 45 million. If we look at the '25, '26 times 2, that's sort of about a $6 million step up. Do you have any sort of -- I appreciate these things are difficult to estimate at the time, but do you have any sort of view as to where the major sort of cost increases have come from?

Yes, I can talk to that, and Michelle, please jump in. So similar to the New Zealand Bank, what we found since acquisition is the complexity of the organizations pushing together has required an uplift in capability. So we have invested in both banks and capabilities to ensure that we can most properly manage that complexity. And there's also in Australia, there are some IT costs, which are higher than we initially expected related to the core banking system.

We also did a significant amount of deep dives into the business just to be really clear about the portfolio that we had and the quality of the book so that we had the right processes and controls in place. I mentioned that in my brief. That was extra work that we completed in this first half.

And then just, I guess, it's sort of linked to Wade's earlier question. But just at the sort of big picture level, the $200 million target by FY '28, that wasn't, I don't believe, mentioned in the slide pack. How should we think about this now? Obviously, the cost side of things has stepped up quite a bit. It looks very challenging to get sort of close to that number now.

Yes. So it is mentioned in the pack, albeit briefly on Page 8. So we remain confident in achieving those ambitions despite the obvious near-term challenges, which you've highlighted. We're going to come back with a detailed overview of the plans underway to meet these goals at our full year result.

There are no further questions at this time. I'll now hand back to Mr. Dixson for closing remarks.

Thank you very much, everyone, for joining us today and for your continued engagement and support. And we will speak again soon. Thank you.

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