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

Thank you for standing by, and welcome to the Heartland Group 1H '26 Half Year Results Call. [Operator Instructions] I would now like to hand the call over to Mr. Andrew Dixson, CEO, Heartland Group. Please go ahead.

Thank you, and good morning, everyone. Welcome to the Heartland Group 2026 Interim Results Call. I'm Andrew Dixson, Chief Executive of the Heartland Group, and I'm joined today by Leanne Lazarus, Chief Executive of Heartland Bank New Zealand; Michelle Winzer, Chief Executive of Heartland Bank Australia; and Kerry Conway, Chief Financial Officer of the Heartland Banking Group. So I'm going to start on Slide 5, the executive summary. And I'm very pleased to announce a strong turnaround in net profit after tax for the first half of the 2026 financial year of $48.8 million, which was $46.1 million on an underlying basis. Underlying return on equity was up 540 basis points from the first half 2025 to 7.3%, which is 142 basis points above the second half of 2025. Our strategic reset, focusing on core portfolio growth and strong arrears management, has built on momentum from the second half of the 2025 financial year to deliver considerable improvement in all key metrics across the business. Average net interest margin expanded 51 basis points to 3.92% from favorable deposit market conditions in both jurisdictions and Heartland Bank Australia benefiting from the full year of its funding transition. Operating expenses remained steady, up $3.6 million, which included $1.9 million of restructuring costs and the remainder of the increase from investment in marketing and technology programs, which I will discuss in some detail a bit later. There was a significant improvement in asset quality metrics with an impairment expense ratio of 0.35%, which was a reduction of 105 basis points and a sharp reduction in nonperforming loans. Prescriptive collections and recoveries policies are [indiscernible] with Motor Finance arrears continuing to perform better than industry average. Aggregate receivables growth of $157 million was steady at 4.3% on an annualized basis. However, this included $173 million of nonstrategic asset realization, which continues to progress ahead of expectations at an overall recovery rate in excess of 90%. Underneath this, Reverse Mortgages are consistently delivering strong growth across both banks with annualized growth rates of over 15% in New Zealand and around 19% in Australia. Despite usual seasonality and some extreme weather impacts, Livestock Finance saw nearly 15% growth in Australia. There was a retraction in our Motor and Business Finance portfolios, but this reflects our strategic shift to quality. At our AGM last year, I highlighted 2 critical themes for Heartland in FY '26. Firstly, investing in a targeted technology uplift to resume and reinvigorate digital transformation within each bank. With vendor selection and contract finalization in December, both technology programs are now underway within each bank to deliver greater capability and efficiency to meet customer demand at scale. Secondly, ensuring capital is deployed efficiently into return on equity-accretive activity against the backdrop of continued regulatory change. It has improved, and there is more work to do to reach our targets. Successful nonstrategic asset realization and recent regulatory capital decisions have positioned Heartland extremely well for growth with excess capital held across the group. I'll conclude the summary by announcing an interim dividend of $0.035 per share and affirming our full year 2026 net profit after tax and return on equity guidance. Moving to Slide 6, group financial results. I will discuss the differences in reported and underlying briefly on the next slide, and Kerry will unpack the individual bank performance in more detail later. However, Heartland reported an underlying NPAT for the first half of 2026 of $46.1 million with all key metrics showing a strong improvement from the prior comparative period. Net operating income was up $15.4 million. The cost-to-income ratio reduced 304 basis points to 54.6%, and the impairment ratio reduced to 0.35%. Moving to Slide 7, reported versus underlying. As previously noted, we have minimized the gap between reported and underlying NPAT with only a $2.7 million difference for the first half, which is primarily due to a $3.1 million fair value gain from the full exit of our Harmoney equity investment above its carrying value. While we will retain the 2 NPAT measures for the remainder of this financial year, it is our intention to adopt a single statutory reported measure from FY '27, and we are already transitioning towards this with our recording of certain one-off costs within reported net profit after tax. Moving to Slide 8, technology investment. I'm pleased to confirm that investment in multiyear technology programs has commenced for each bank with Pega selected in New Zealand and Constantinople in Australia. In New Zealand, the program will leverage investment in our modern Oracle core banking system to unify origination and servicing activities across our product sets, enabling greater automation. In Australia, the program will consolidate its 3 origination and servicing platforms into a single banking solution. These platforms will integrate with other key investments made in finance, people, data and contact center platforms, being Workday, Snowflake and Genesis, to deliver new capabilities with each bank, including embedded AI capability, resulting in greater operational efficiency and enhanced customer intermediary and employee experience. Implementation has commenced with Reverse Mortgages for each bank, and this will progress through other product sets. The anticipated implementation costs for these technology programs are estimated to be no more than $17 million over a 3-year period, being approximately $11 million in New Zealand and $5 million in Australia in local currency. On Slide 9, capital, Heartland remains well placed to cater for organic growth with excess capital held across the group, following nonstrategic asset realization and recent RBNZ decisions on capital settings. In December 2025, the RBNZ announced final decisions on key capital settings for deposit takers, which are set to benefit Heartland Bank from a reduction in total capital requirements relative to the 2028 settings previously determined, the removal of additional Tier 1 capital instruments while allowing a higher mix of Tier 2 capital, and more granular and reduced risk weights, particularly in the productive sectors of the economy that Heartland Bank focuses on, being small business and Rural lending. These settings are targeted for implementation in October 2026 with the Reserve Bank of New Zealand providing further information about this process on 27 February 2026. In addition to these changes and effective 1st of March 2026, the RBNZ has reduced Heartland Bank's transitional capital overlay, which was imposed after the acquisition of now Heartland Bank Australia, by 1.5%, from 2% down to 0.5%. The remaining capital overlay is expected to remain in place until the Reserve Bank of New Zealand implements a formal group supervision policy for deposit takers, which is expected to come into force in December 2028. The Reserve Bank has also indicated it will review reverse mortgage risk weights in 2026. As at 31 December 2025, Heartland Bank holds approximately $125 million of regulatory capital in excess of expected regulatory requirements. And applying expected risk weight changes to the 31 December 2025 balance sheet, that excess is approximately $190 million. Moving to Slide 10, nonstrategic asset realization. This continues to progress ahead of expectation and is tracking to be largely concluded by the end of this financial year. In the first half of 2026, the total value of NSA has reduced by nearly $190 million, creating more than $21 million of available capital. Since the establishment of the NSA portfolio and a dedicated team, Heartland has achieved a recovery rate in excess of 90%. Moving to Slide 11, shareholder return. Heartland has declared a first half interim dividend of $0.035 per share, up $0.015 per share on the first half of 2025. The dividend payout ratio of 72% for the first half exceeds Heartland's target of at least 50% of underlying NPAT, reflecting Heartland's turnaround in performance and the excess capital position. While return on equity has improved, we are some ways from our target. However, factoring in this excess capital would have ROE at around 8.6%. Looking forward on Slide 12. Heartland affirms its FY 2026 guidance to deliver an underlying return on equity of at least 7% and underlying net profit after tax of at least $85 million. Net interest margin remains on track to meet Heartland's FY 2026 underlying average and exceed NIM guidance, while further asset quality improvements in the first half have resulted in a positive adjustment to the FY '26 underlying impairment expense ratio guidance. Heartland has also revised its underlying CTI ratio guidance due to the first half retraction in certain Heartland Bank portfolios and the impact of investment in the bank technology programs. In addition, underlying OpEx guidance has now been provided at a Heartland Group level, which was previously only provided at the respective bank level. I'm pleased now to hand over to Leanne and Kerry to discuss our New Zealand Bank's performance.

Thank you, Andrew, and good morning. This is Leanne Lazarus, the Chief Executive of the New Zealand Bank. Heartland Bank New Zealand reset its strategy in financial year 2025. The results today highlight the progress we are making and the positive momentum that is building, following the strategic reset and tight strategic focus in our specialist areas. After we refined our lending portfolios, we have seen consistent growth in Reverse Mortgages, further momentum in our Rural portfolio, and a strategic shift to higher-quality motor and business finance. While receivables remain below plan, we have confidence in our outlook with solid lending pipelines going into the second half. Over this period, we have delivered significant improvements in asset quality, exited assets within the nonstrategic asset portfolio ahead of expectations, seen expansion in the bank's net interest margin and have been disciplined in cost management. The bank also received capital overlay relief effective 1 March from the Reserve Bank of New Zealand. This reflects the focus we have put on derisking the bank, completing all transitional work relating to the acquisition of Heartland Bank Australia and exercising appropriate risk oversight of our Australian subsidiary. Over this period, the New Zealand Bank also embarked on an automation program that leverages and integrates with our upgraded core banking system, which I will talk to later. In summary, there are 3 key areas of focus for the second half. These are growth, cost discipline and execution of the technology program. I will now hand over to Kerry Conway to go through the financial performance of the New Zealand Bank.

Thanks, Leanne, and good morning. The financial position remains robust across New Zealand and the wider banking group with capital and liquidity ratios well above board and regulatory minimums. Reported net profit after tax for the bank in the first half of '26 was $31 million, an increase of $30 million versus first half last year. Profit before impairments and tax of $54 million is an increase of $2.1 million or 4.1% versus first half last year. As Andrew talked about, underlying results exclude the impact of $2.7 million pretax one-off items, largely related to fair value changes in equity investments. For the rest of this section, I'll talk to results on an underlying basis. In a challenging economic environment, the underlying NPAT of $28.3 million is an increase of $25 million versus first half last year, [ matching ] the material impact of impairments in first half '25. Profit before impairments and tax for first half '26 is $54.6 million, an increase of $3.2 million. I'll go through more detail in the following pages. Moving to receivables, Slide 16. Receivables retracted $254 million, 10%, in the 6 months to December '25, exiting at $4.5 billion. In our core portfolios, Reverse Mortgages maintained growth momentum at 15% annualized and Rural grew 8% annualized, excluding Livestock, which has seasonal contraction. However, this growth has been more than offset by retraction in the Motor, Asset Finance and Business Relationship portfolios, which continue to be impacted by economic headwinds and heightened competition, as well as the impact of a strategic shift to higher quality in the Motor portfolio. $173 million or 68% of the total retraction was driven by successful nonstrategic asset execution, as discussed earlier. The retraction in receivables is driving around $7 million net interest income reduction. However, this is largely offset by NIM improvement. Leanne will talk in more detail to individual portfolio performance later. Moving on to net interest margin, Slide 17. December exit NIM of 4.11% was steady to the June exit position. NIM continues to track strongly, and we expect to exit the financial year greater than 4.20%. This is slightly lower than the initial expectation of 4.25% as a result of changes in portfolio mix and earlier-than-planned pricing adjustments. Average NIM continues to expand, up 27 basis points versus first half last year to 4.05%. Gross yields have gone down 88 basis points, but this has been mitigated by active funding management, which saw cost of funds reduce by 122 basis points half-on-half and 85 basis points versus the full year '25. The OCR has dropped 100 basis points from June '25 to today. Coupled with soft credit demand, this has resulted in intensified pricing competition in some of our key portfolios. We've endeavored to maintain a balanced pricing strategy, while actively managing cost of funds to drive NIM expansion through exiting $159 million of wholesale funding since June '25 and more aggressively pricing term deposits in line with funding needs. Average NIM is expected to expand further through the second half as cost of fund benefits continue, and growth is focused on higher-NIM portfolio. The outlook for the FY '26 is expected to be greater than 4.10%. Moving on to operating expenses, Page 18. OpEx of $62.6 million is up $0.5 million on the first half last year. However, on a like-for-like basis, when adjusted for the transfer of staff from HGH during FY '25, the underlying movement is a reduction of $1.1 million. Staff costs increased $2.2 million to $35.1 million. Of this increase, $1.5 million is driven by one-off costs related to structural changes and $0.6 million result from the reintroduction of a long-term incentive scheme. In light of the impact of subdued growth, recruitment has been actively managed to contain costs, with FTE down 6% since December '24, as well as a reduction in contractors, resulting in inflation impacts being absorbed by lower people costs. IT and [ amort ] costs increased $0.3 million, reflecting higher contract renewal costs. And marketing increased $0.4 million, a deliberate investment in growth, particularly to support Reverse Mortgages. Operational expenses reduced $1.8 million. $1 million of this is due to a classification change of debt collection costs to contra revenue. However, the remaining reduction reflects focused cost control with reduced spend across legal, professional fees, travel and office-related expenditure. The management fee reduction of $2.1 million is another reflection of the staff transfers with all core banking teams now sitting directly within Heartland Bank New Zealand. The CTI ratio of 53.8% increased 0.6% compared to first half '25. 1.3% of this uplift was a result of lending contraction reducing revenue. And of this, 0.7% was attributable to the NSA reduction. Moving to impairments and provisions on Slide 19. Net provisions decreased $2 million to $65 million. Collective provisions reduced by $7 million to $40 million as a result of, firstly, improvements in staging mix in Motor, Asset Finance, Business Relationship and Open for Business; and secondly, a reduction in Motor provisioning rates. Specific provisions increased $5 million to $26 million, largely driven by the NSA portfolio. First half '26 impairment expense of $11.5 million is $38 million lower than first half '25, with the key driver being the nonrepeat of large write-off activity related to the change in approach last year. Components of the $11.5 million are: $7.7 million in write-offs net of recoveries; $10.8 million increase in specific provisions; partially offset by $7 million collection provisions decrease, predominantly driven by material improvements in staging of Motor arrears. The impaired asset expense ratio of 50 basis points reflects a material improvement in asset quality and collections activity. We expect the full year outlook to be higher than the first half due to stabilization in the Motor portfolio, i.e., we would not expect further material CP releases in the second half. Next, asset quality on Page 20. The total nonperforming loan ratio continues to improve, down 18 basis points from the first quarter to 3.04%, key drivers being a large number of NSA repayments through the quarter and continuing improvement in Motor and Business Finance arrears. The ratio excluding NSAs and noncore lending was down 29 basis points to 2.07%. In Motor, improvements in collections, write-off and recovery strategies continue to have a positive impact with NPLs down $4 million to $28 million. Total arrears at 4.2% continues to be better than market of 5.8%, and in fact, HBL showing continued improving trend in Q2, while the total market deteriorated. In Rural, the sector continues to perform strongly, supported by high commodity prices, and as a result, performance is stable with limited NPLs. In Business Finance, operating conditions continue to be challenging with market liquidations continuing to increase, up 17%, alongside an 11% increase in year-on-year company closures. The most affected industries remain construction, property, hospitality and transport, with construction and transport representing a significant portion of our business lending portfolios. Despite these challenges, however, business NPLs dropped to $9 million from the first quarter '26, marking the first quarterly reduction since June '24. Finally, moving on to capital, Slide 36. With a regulatory capital ratio of 17%, the NZ Bank continues to operate well above the current regulatory minimum of 14.5%, demonstrating a strong capital position and readiness to support future growth transitioning through the impending regulatory changes. Capital optimization continues to be a key focus with further capital releases in the first half, including $20 million relating to the realization of NSAs. ROE has improved from 0.5% this time last year to 5.9% in the second half of last year to now 7.6% in the first half, and we're well on track to deliver better than 6% for the full year. I'll now hand over to Leanne to discuss the New Zealand Bank strategy and portfolio performance.

Turning to Slide 22, Reverse Mortgages. Reverse mortgage lending has performed consistently through the first half, closing the period at $1.3 billion. This reflects annualized 15.2% growth since June 2025. Throughout the first half, we have reviewed and simplified our lending standards to align to market opportunities and streamline our processes, resulting in increased conversion rates, which drove a material improvement in approval times with application to settlement reducing by 19 days from July of 2025 to December of 2025. We're seeing encouraging traction in Village Access loans, which continue to gain momentum and broaden our growth mix. We have invested in a refreshed marketing campaign to raise awareness and education, and we've also expanded regional coverage. This investment, combined with strong pipeline development, is expected to drive further growth in the second half to achieve the full year growth outlook of 18%. Turning to Slide 23, our Rural portfolio. Overall, the Rural portfolio is performing well, and execution is tracking to plan. The Rural portfolio closed at $578 million, minus 9.9% annualized since June 2025. This reflects normal seasonal contraction in Livestock Finance. Excluding Livestock Finance, Rural grew by $15 million, representing 8% annualized growth. That underlying performance highlights the strength and resilience of our core Rural lending activity. Notably, the Livestock Finance seasonal growth returned earlier at the end of the period than it did in the previous year. The growth ambition of 9% is driven by: new partnerships and intermediary channels, which are opening incremental flow and accelerating origination; expanding our regional coverage; strong customer relationships, supported by local on-the-ground presence; and supportive market conditions in the agricultural sector. Turning to Slide 24, Motor. Overall, Motor Finance reflects a clear quality reset. The deliberate strategy of focusing on high-quality intermediaries to improve asset quality has had an impact on the Motor dealer portfolio. However, we are writing high-quality business and seeing improved credit outcomes across the Motor portfolio. We have moved decisively towards quality used assets, higher-grade franchise dealers and scalable direct-to-consumer channels, positioning this portfolio for more resilient, sustainable growth as conditions continue to normalize. Motor Finance closed at $1.65 billion, minus 4.8% annualized since June 2025. Direct-to-consumer lending continues to perform strongly, growing 27.8% on an annualized basis in the first half. This reflects disciplined credit settings, sustained customer demand and improved digital execution. In contrast, dealer volumes declined by 7.3% on an annualized basis, consistent with our deliberate shift towards higher-quality intermediary partners with a focus on quality used vehicles and franchise dealerships. A key positive is the material uplift in franchise exposure. As at the 31st of December 2025, franchise dealerships represent over 50% of dealer origination, up from 40% a year earlier. This shift materially improves portfolio quality, loss performance and recoveries. and aligns Heartland Bank with larger, more resilient dealer groups as the dealer market continues to consolidate. Heartland Bank now expects the financial year 2026 Motor receivables to be flat on the financial year 2025 closing position. This is largely a consequence of conditions stabilizing and the continuation of enhancing partnerships. I will now turn to Business Finance, Slide 25. Our business finance portfolio stood at $690 million as at the 31st of December 2025 and remains predominantly weighted towards Asset Finance, which accounts for $551 million of the portfolio, with the balance in Business Relationship lending. Receivables declined by $90 million or 22.8% annualized since June 2025. This reflects the continued challenging trading conditions across several industry sectors, specifically transport and construction, rather than any deterioration in credit quality. In this environment, Heartland Bank have remained disciplined in our approach to origination, deliberately prioritizing quality and risk-adjusted returns as business stress has remained elevated. This contraction is, therefore, consistent with our strategy. We have been selective in deploying capital, remaining tighter -- remaining tight credit standards and avoiding quality -- lower-quality growth, which positions the portfolio for more defensively through this part of the cycle. Importantly, as we move into the second half of the financial year '26, we are starting to see encouraging signs of momentum. The Asset Finance pipeline has continued to build. This strengthening pipeline points to early signs of stabilization in underlying demand and suggests the market conditions may be beginning to improve. Our teams are now focused on converting this pipeline into funded receivables, while continuing to apply strong credit discipline. Heartland Bank now expects financial year 2026 business finance receivables outlook to be minus 19%. And finally, turning to Slide 26, the New Zealand technology program. Through our technology program, we are modernizing and simplifying the way we work and the services we provide to our customers, making sure that they have a seamless and straightforward experience, while reducing complexity and cost. Over the years, Heartland Bank has invested significantly in upgrading: our core banking system, Oracle; our HR and finance systems, Workday; data, which is Snowflake that we use; and telephony, Genesys. Heartland Bank is now partnering with Pega to deliver a technology platform that will leverage and fully integrate with our upgraded modern core banking system. The new platform will replace existing legacy systems and manual processes with a single platform, further modernizing the bank's technology foundations to strengthen control, resilience and competitiveness. The cost to implement the platform is estimated to be under $11 million over a 3-year period. In closing, following the reset in the last financial year, Heartland Bank has demonstrated positive momentum with improved asset quality and disciplined cost control. As we move forward, our priorities include turning our strong lending pipeline into growth during the second half of 2026, executing on our marketing campaign for Reverse Mortgages and expanding our Rural portfolio through intermediary partnerships and regional growth. Our technology program's first phase is advancing well. And we expect nonstrategic asset exits to be completed by 30 June 2026. The successful realization of nonstrategic assets and the recent Reserve Bank of New Zealand's capital decisions will further strengthen the New Zealand Bank's foundation, positioning the bank for sustained growth and continued value creation. This concludes the New Zealand Bank's update. I will now hand over to Michelle Winzer to go through the Australian Bank's performance.

Thank you, Leanne, and good morning, everyone. I'm on Slide 28. I'm Michelle Winzer, the Chief Executive for Heartland Bank Australia. I'm pleased to report a period of significant achievement for the Australian business. We have successfully carried the momentum from FY '25 into the first half of FY '26, delivering a performance that reflects the strength of our specialist banking model. We remain focused on our vision to be Australia's leading specialist bank, enriching customers' lives through financial freedom. In Reverse Mortgages, our performance remains market-leading with the first half yielding record monthly growth. We are focused on refining our customer value proposition and forging key strategic partnerships, directly enhancing our reach and ensuring Heartland remains the first choice. While our Livestock portfolio experienced the typical seasonal softening during the colder first quarter, we finished the calendar year with strong momentum with December net growth at record month levels. Our focus this half has been on continuing to improve the way we operate and the service we provide to our customers, as well as building the awareness of our brand in market. Strategic partnerships remain a key growth lever across our entire portfolio. A couple of the key highlights for the first half are: our NPAT for the first half is up 39.1% on the prior comparative period of first half '25. Our exit NIM was 3.96%, ahead of our outlook to market, up 37 basis points since June '25. ROE continues to improve as we scale, being 7.7% for the first half with momentum to improve further. In quarter 2, we finalized and signed the transformation project contract and are well progressed to commence our first pilot with Reverse Mortgages from the 1st of July '26. But while the transformation project was being finalized, we continued to enhance our core business to ensure we remain successful, pending completion of the new platform. Our focus areas remain business growth, service excellence and diversified distribution. In relation to business growth, by the close of business '25, the Reverse Mortgage portfolio delivered strong and sustained growth, expanding by $188 million to reach $2.17 billion. This performance reflects continued strength in application inflows, effective operational execution and the scalability of the growth model. From July 25 to December '25, Livestock finance increased from $254 million in receivables to $273 million. The Livestock teams have worked on strategies for business development, including establishing strong relationships with Livestock agency partners through a dedicated service offering. This has resulted in an increase in new opportunities coming through as relationships have strengthened. We continued our focus on building our deposits to optimize our funding positioning in the market, which enabled us to repay our MTN funding early. We finished the half with a deposit funding mix of 86%, and this has driven the increase in our exit margin to 3.96%. We've maintained our strong focus on asset quality and disciplined nonperforming loan management, which has resulted in a stable impairment ratio at 10 basis points. In relation to service excellence, our key focus areas have been a well-established focus on service delivery, enabling us to maintain our service standards for Reverse Mortgages. In the reverse mortgage space, scalable growth is driven by education, broker confidence and responsible lending oversight. Following the launch of our inaugural customer satisfaction surveys, we now have sufficient baseline data to commence full reporting in the second half of FY '26. The results for the first half were NPS of 56 and CSAT of 89% for Reverse Mortgages. This is materially higher than the financial services industry benchmarks where the median NPS is approximately 30 to 40 and CSAT average is 75 to 80. Our StockCo customer survey results also demonstrate solid performance, recording NPS of 46% and CSAT of 86%, placing the business above industry norms and supporting confidence in customer advocacy and retention. We'll use these insights from the surveys to further improve the experience our customers and brokers receive. In relation to diversifying our distribution, our key areas of focus have been the disciplined management of partners and distributor relationships to enable us to help more customers with their needs. This includes the addition of a new aggregator partnership with Specialist Finance Group, bringing established compliant advisers with strong client relationships. The addition of another deposit intermediary has strengthened our funding stability and enhanced liquidity flexibility with access to broader customer segments. Our focus on partnerships and sponsorships has continued in the Livestock business with a key reestablished partnership. We are active in the market in the areas that help our customers most, including helping with extreme weather events. I'll now hand back to Kerry to cover the financials.

Moving to Slide 31, Net Interest Margin. Average NIM expanded 93 basis points to 3.68%, primarily driven by a meaningful reduction in cost of funds. A key driver of this outcome has been our deliberate transition away from wholesale funding and towards retail deposits as well as liquidity balances now normalized since we are no longer needing to prefund large securitization rate base calls or wholesale funding maturities. These actions have delivered 121 basis points improvement in cost of funds versus December last year to 4.39%. Looking ahead, we expect NIM to contract slightly in the second half to finish the year above 3.75%. The average NIM is expected to expand further in the second half as the full benefit of the funding optimization flows through with the outlook for the full year average NIM being greater than 3.70%, and that's compared to 3.01% for FY '25. Next, Page 32, operating expenses. OpEx of $28 million is up $4.8 million versus prior year. Staff expenses have increased $2.1 million in the period, which is a combination of the full impact of additional staff onboarding during FY '25 focused on increasing capability and capacity to support growth as well as investment to support the new technology program. IT and communication costs increased $0.8 million, which includes $0.6 million of project-related costs, and these will accelerate through second half '26 being the key driver of the change in full year OpEx and CTI expectations. Reverse mortgage fees are customer onboarding costs and increased $1.7 million directly attributable to the record first half growth. The first half CTI ratio of 51.5% is down significantly from 56.4% last year. Second quarter CTI increased from the first quarter to 53.5%, and this relates to one-off costs from the early repayment of the final MTN, which impacts revenue as well as increasing costs related to the Tech program. If we normalize for the one-off costs, first half CTI was 47.8%. The one-off MTN early repayment cost will be offset by lower deposit costs in the second half. The FY '26 underlying CTI ratio is now expected to be less than 50%, an increase from our original estimates, reflecting the increased cost from investment in the technology program. On to funding liquidity, Slide 33. As discussed in reference to NIM, the bank has successfully transitioned from wholesale to retail deposit funding with 86% of funding at December now retail deposits, up from 81% in June. Current liquidity is optimal and above Board and regulatory minimums. Finally, moving on to capital, Slide 34. Like New Zealand, HBA capital ratio is robust at 19.5%, meeting prudential standards. The NIM benefits from deposit funding are being realized along with the benefits of increased scale from the bank's growth, driving further improvement in ROE. The ROE for the bank shows a strong improvement from 5.9% in first half '25 to 7.7% in first half '26. As a result, the bank is well placed to support its growth ambitions organically through existing capital reserves and future sustainable profitability. I'll now hand back to Michelle to talk through portfolio performance.

Thank you, Kerry. I'm on Slide 35. In relation to the reverse mortgage performance, we achieved continued strong growth of 18.9%. Lending growth, tightening our liquidity positions and amalgamation of positive funding initiatives this year have contributed to strong growth in reverse mortgage income. Our broker engagement has improved materially with NPS increasing from 4 to 34, driven by service quality and process efficiency while communication and technology remain focus areas. As I mentioned, our turnaround times remain low. Competition is very strong with nonbanks and fintech innovators continuing to enter this market. But despite this, we continue to increase our market share. Our weighted average LVR is 25% with a nonperforming loan rate of less than 1%. Our average loan size is $215,000. Moving on to Slide 36. In relation to the lending performance for Livestock Finance, we saw the highest gross cattle and sheep purchases on a rolling 12-month basis in second quarter '26. Recent extreme weather events in Australia with floods and fires have impacted growth volumes early in second half '26, and we are working closely with customers and agents to support them in their recovery. Nonperforming loans remained stable at $37.9 million as at 31st of December, and our book is appropriately provisioned for in line with expected credit losses and prevailing economic conditions. We have uplifted our internal processes in relation to nonperforming loans to ensure we have stronger and earlier connections with customers. Our outlook for FY '26 is for growth of 20% plus. Progressing our platform transformation is our key priority over the coming year and will ensure we provide a better customer and staff experience. We have continued to mature our risk capability with improved frameworks and have met all our regulatory obligations. Moving on to Slide 37. Heartland Bank Australia's technology program will consolidate its 3 origination and servicing platforms into a single cohesive solution. The transformation project is based around the new lending and core banking platform that will deliver greater capability to our customers, allowing us to grow in all key product lines. We currently have the 3 separate cores and servicing solutions, and this means many processes are duplicated or are inconsistent. Many of the manual tasks now being performed will be automated. The automation will provide efficiency, but more importantly, will reduce the operational risk associated with manual processes, with new functionality able to be deployed across all products. And this will enable our employees to operate in one platform across all products with reduced overhead to manage the solution. AI will be leveraged to improve both the customer and our employee experience. Our partner is Constantinople, run by experienced bankers who work with Australian clients and understand the unique domestic landscape across our products. We will maintain ownership of all functions supporting our operational growth. In terms of the timeline, we are on track for delivery with new reverse mortgage customers to be originated in July on the platform. Migration of existing reverse mortgage customers will commence in October. In closing, our CTI -- whilst our CTI was slightly elevated, it included a nonrecurring early break fee and project expenses for our platform transformation. We continue to work on the culture in the business and aim to build a team and workplace environment that is engaging for all, and I thank our people for their contribution to the business. Our first half performance has been robust, delivering against all strategic benchmarks. We are well-positioned to meet our full year commitments backed by a clear road map. Our competitiveness is driven by a data-led approach, strategically leveraging customer feedback to stay ahead of evolving market trends. This year also marks a milestone in our ESG maturity. We have completed a comprehensive assessment to embed material environmental, social and governance priorities directly into our core strategy, ensuring our growth is both sustainable and evidence-based. To support this evolution, we are refining our organizational structure and investing in a significant technology uplift to equip our people for future requirements. We have high confidence in our ongoing platform transformation and the substantial benefits it will unlock for our customers, partners and employees in FY '27. I would like to thank the Board for their continued support as we build this foundation for the future. And I'll now hand back to Andrew.

Thanks, Michelle. So just to recap, Heartland has delivered steady progress towards its guidance for the financial year 2026, supported by net interest margin expansion, improved asset quality metrics, strong reverse mortgage growth in both countries, cost control and accelerated NSA realization. As we look forward, in addition to executing our technology programs, we continue to focus on quality, broadening our reach and awareness in reverse mortgages and increasing our regional presence. Thank you all for joining the call. I'd like to acknowledge the efforts and hard work of our staff and support of our shareholders during this first phase of turning around business performance. I will now open up for questions.[Operator Instructions] Your first question comes from Grant Lowe from Jarden.

Hi team. Can you hear me okay? Great. So just around the cost side of things. So I'm just trying to reconcile the $195 million. I think that's the Group total for the full year in terms of guidance. How does that compare to the $189 million provided at FY '25? I think there's some moves between different parts of the business, but I understood the $189 million to be the Group number.

We didn't provide a Group number in terms of guidance for this year. So you're talking about the FY '25 number?

I'm talking about the FY '25 slide pack on Slide 8, there was a number of $189 million in the Group section. I'd interpreted that to be the full year expectation.

No. Well, no, it wasn't. We only provided the individual bank guidances for FY '26.

Right. Okay. So the $195 million, how much of that -- coming back to the -- sorry, the technology investment of $17 million. Just thinking about how much of that is capitalized versus expense, what should we see in the P&L versus capitalized on the balance sheet?

I haven't got the exact numbers of the totals, but I think to answer your question, there's very little capitalization in FY '26. We will see capitalization of some of the New Zealand delivery costs, but not in Australia due to the nature of the build.

Okay. So most of that will be expensed and some of that will be coming through in the second half '26 is what you're saying?

Yes. So part of the uplift in the Australian expenses expected in the second half is -- impact is largely driven by project investment, tech investments.

Yes. Okay. And just in terms of how you think about that $17 million spend, what sort of metrics do you think about when it comes to the return on that in terms of payback period, cost savings or however else you sort of think about that?

From a New Zealand perspective, the way that we've been looking at the business case is kind of twofold. So we're looking at significant efficiencies in the product portfolios, which will drive OpEx savings, but also greater capacity to grow our core portfolios.

Very similar in the Australian business, Grant. It will deliver efficiencies, but it will enable us to grow further.

Yes. Okay. So do you have sort of like a payback period or sort of return metric in mind or is that more sort of?

This is a subject for the Investor Day, Grant. So we'll be presenting this. You need to see this over a long-term period, which is 5 years. So the idea is to present these technology projects in detail, including the costs in detail, including the benefits in detail and how that [indiscernible] but you'll have to wait until June, sorry.

Yes, that's fine. So just around -- no particular order to these questions, but the full year dividend. So you talked about the meaningful step-up in the half, obviously, and you've talked to excess capital and the Reserve Bank reducing that overlay. How should we think about the likely payout on the go forward from here? Because obviously, you've been sort of targeting 50% plus. Does that now sort of step up?

No, we're not changing our policy. So we haven't changed our policy to pay out at least 50% of underlying NPAT subject to all of the usual caveats around prudent capital management and the like. What we've signaled the payout ratio is related to our excess capital position, primarily at this stage driven by the NSA realization. Obviously, we're not in the business of preempting regulatory change, although what has been announced is expected to provide a considerable amount of excess capital. We wish to put that capital to work to drive organic growth rather than alter our dividend policy. So I don't want to set an expectation that we're changing here, but it is good to be able to increase that payout ratio.

Yes. Okay. And then just around -- so I'm sort of juggling at 2 or 3 results today. So apologies if I missed the context of that. But just with the impairment side of things. So I think the impairments for the half were 0.35% and I think the guidance for the full year is less than 0.45%. What was the -- I think there was some write-back in the New Zealand motor portfolio release of previous provisions. So what was the quantum of that roughly?

It's about $7 million in total, so reduction in collective provisions. So really, what we're saying is that that's really stabilized. I wouldn't expect a repeat of that quantum in the second half.

Yes. Okay. So a reasonable position to assume would be whatever was done in the first half, plus $7 million would be sort of a baseline expectation from our side of things at least?

Yes, plus we will need to continue to monitor specific provisions.

Yes. Understood. Okay. Yes, I think that -- just on the -- sorry, last one. Just on the NIM, that lifted through the period, and you've lifted the guidance for the full year 10 basis points. On the exit for the average. So on the exit run rate, is that like a reasonable starting point for assuming going into FY '27? So obviously, the deposit funding side of things has lifted to 86%. Are we kind of like 3.75% is a reasonable sort of starting point for next year?

Certainly -- the NIM will start to level at that 3.75% level. It is a very competitive market. We are at the deposit ratio of about 86% is the maximum we would want to get to. So that is certainly what we're working towards, Grant.

Your next question comes from Wade Gardiner from Craigs Investment Partners.

Just a few questions from me. So just going back to the $17 million on tech investment over 3 years, so roughly $6 million a year. So are we looking essentially at about $3 million in the current year? Would that be right? That's not lumpy in any way?

Sorry, just back to my earlier point, because of the difference in nature of the build across New Zealand and Australia, Australia's cost will be essentially expensed at a cash payment, whereas the New Zealand costs will be spread -- but more of the New Zealand implementation costs will be spread over the implementation period. So you'll see amortization coming through. So I think in the second half, there's an uplift of.

We've got -- the majority of our expenses will be in '26 and '27.

Sorry, that's in Australia.

Yes. And the New Zealand ones will partially be spread over 3 to 5 years.

As an amortization?

Yes. So part of the cost.

So when is the -- in New Zealand, if you're amortizing it, does that mean you're essentially paying upfront on a cash flow basis?

We're paying as we deliver. So not all upfront, no.

So just breaking it down in the second half at a Group level, what will be the P&L impact of this? I'm just trying to normalize, if you like.

High level, I haven't got detailed numbers in front of me. I mean we will go through this at the Investor Day, but it would be $1 million to $2 million.

Okay. Now I'm not a tech expert, but why are you -- why do you have different platforms in NZ versus Australia, one is Pega and one's Constantinople?

We did look at the same solutions across both sites, Wade. We are solving for different problems and different issues across the businesses. New Zealand have invested heavily in their core where Australia's core is well out of date, it's 8 years old and required a significant improvement. And we're bringing together all of our products from multiple systems onto the one. We were able to deliver the Constantinople solution, an integrated solution a lot faster for Australia. So when we worked through the different options, that was a better option for us.

And how compatible are they?

In what -- they are completely different platforms. So in New Zealand, we've invested in our modern Oracle core, and we are now leveraging that core. So we've made a decision to put Pega. In Australia, as Michelle highlighted, this is about speed to scale and capital efficiency in a high-growth market. So we're trying to get there a lot quicker given the opportunity that Michelle has before. And this is a complete managed platform model. So you get the solution all in one go quicker basically. So they're totally different. They're not compatible in that sense. However, the ancillary systems, as I mentioned earlier, the Workdays, the Snowflakes, the Genesis are all compatible and will be integrated into each platform. So they're deliberate strategic choices, not any inconsistency in approach.

Okay. Given the excess capital, why are you continuing with the DRP this time around?

It's a good question. We've always operated it. So we wanted to continue with it for the time being. And like I said, we're not in the habit of preempting regulatory outcomes or opportunities that are before us. So we've offered it there for our retail shareholders.

Okay. And finally, I mean, this is a question, I guess, has evolved over a few years. But given what's happened with house prices over the last few years, particularly in Auckland, has that had an impact on the average LVR in the New Zealand mortgage book?

No, it has not.

Is that because of essentially you're refreshing the book every couple of years or it just seems hard to imagine that it wouldn't have some impact or is it because you're not revaluing them?

We are revaluing it. But -- and we can go through this more specifically because I'm just mindful of time as well in the individual sessions, just around the quarterly reviews around valuations, how we're managing the portfolio, how we're lending to customers, the lending standards and just managing that against house price and valuations. And so we've actively managed LVR quite strongly and what we lend to customers.

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

Well, thank you again, everyone, for joining the call, and all back there. Thanks.

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