Humm Group Limited (HUM) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to hummgroup H1 '23 Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker, Rebecca James, Chief Executive Officer. Please go ahead.

Good morning. Thank you for joining us for our half year '23 results presentation. My name is Rebecca James, CEO of hummgroup, and I'm joined today by our CFO, Adrian Fisk. Today's results are an outcome of initiatives taken over the course of the past 12 months to align with our core offering in bigger ticket items and ensure that we are in the strongest position to continue to grow our business in a profitable and competitive manner. During the period, we have grown our receivables book by over 27% to $3.8 billion in the half, with the overwhelming majority of it in what we would call financing bigger ticket items for small to medium businesses and consumers. Less than 2% of our business finances small items in the buy now pay later sector. We provide an average loan of $4,500 in our consumer finance business and an average loan value of $100,000 in our commercial business. We've continued to invest and enhance our superior credit decision engine, which has delivered net loss to ANR of 1.95% in the first half '23, a 90 basis point improvement on PCP. In the current environment, we are acutely aware of the need to manage our costs, and we've already removed more than $14.9 million, including a reduction in marketing, payroll and other operating costs. Our balance sheet position is strong and remains one of our key differentiators in the market with $103 million of unrestricted cash, $1.1 billion in warehouse headroom, $100 million in undrawn debt and a well-diversified and sophisticated funding platform. This half, we have introduced our new measure of normalized cash profit after tax. We believe this metric more closely represents cash performance and eliminates volatility for noncash items, particularly depreciation and AASB 9 provisions, given the material receivables growth that is occurring in the business. For consistency and transparency, we'll be including both normalized cash profit after tax and our previous metric cash net profit after tax in this result and also at the full year. Normalized cash profit after tax was $38.5 million with cash impact of $16.7 million. I'll provide a detailed walk-through of this performance shortly. And finally, we've proposed a fully franked interim dividend of $0.01 for the half. On Slide 4, you'll see the profile of our 2 businesses. Our vision is to be the favored way to pay for bigger purchases. It's a vision that speaks to both our future and our heritage spans our entire suite of products and capitalizes on our strengths in funding and securitization. We often get asked how our 2 businesses fit together. And on this slide, you can see the characteristics of each business. While the end customer distribution and purchase average transaction value differ, the core expertise of the business, what sits within its DNA in credit decisioning and management, along with funding and securitization are leveraged to serve both businesses. It is that capability, which enables us to deliver an exceptional customer experience in the areas of speed to yes, a priority for our merchant and broker partners and speed to scale and settlement. On Slide 5, you'll see that in FY '23, the company made significant progress in executing its strategy to streamline operations and reduce costs while improving profitability and growth in key areas. As we committed to at our FY '22 results, noncore small ticket products, humm NZ and hummpro AU and NZ have closed. All receivables will have run off, enabling the systems to be switched off and costs removed by 30 June 2023. We have also delivered substantially on our cost-out initiatives and removed $14.9 million of costs half-on-half and are on track to deliver $20 million to $25 million of annualized cost savings going forward. Unprecedented material Central Bank tightening drove a rapid increase in funding costs of between 300 and 400 basis points depending on geography. To mitigate against this, the company has executed several pricing initiatives. In our commercial business, while there was slight margin compression in the first quarter, the front book net interest margin is now at a higher level than the prior 12-month period, an even stronger result when combined with volume of $744.8 million, up 72% on PCP. Consumer repricing initiatives also commenced with a series of increases to merchant services fees, annual and monthly account keeping fees and interest rates. Front book MSF yield in humm 'Big things' now sits 80 basis points higher than the back book, and the company expects further yield improvement in the second half. Turning to Slide 6, and you can see our normalized cash profit after tax to cash NPAT walk. Given the impacts of credit provisions, depreciation and costs associated with suspended products, we believe this removes volatility and is a more accurate reflection of the cash profitability of the business. Normalized cash profit represents statutory net profit after tax, adjusted for material infrequent items such as legal provisions, one-off transaction costs, restructuring redundancy cost, items which were previously included in cash NPAT, noncash items such as depreciation and AASB 9 provisions and operating losses of suspended products notified to the market, hummpro, bundll NZ, humm NZ and humm UK, including related retreat costs with these products ceasing to impact the business from 30 June. Normalized cash profit after tax of $38.5 million was 2% up on PCP, which reflects growth in hummgroup's core businesses within commercial, humm AU "Big things' and the Australian and New Zealand Cards business. I'd now like to discuss the strong performance of our commercial business in the first half. The landscape of small and medium enterprise lending is rapidly changing. For the first time, nonbank lenders have overtaken banks in providing SME loans. Aith a total addressable market of $45 billion in Australia and $8 billion in New Zealand and an increasing preference to access finance via brokers, we are well placed to continue our strong growth trajectory. Our focus is on delivering exceptional service to brokers who are our sole channel. As a specialist SME lender, we specialize in asset finance for capital-intensive businesses, and we see opportunities to broaden our industry and product offerings. Finally, we offer an exceptional SME experience with 24-hour approval and same-day settlement. Our full spectrum of lending from low documentation to full credit assessment allows us to meet the varied needs of our clients focusing on underserviced areas of the market. Flexicommercial is the leading provider of specialist asset finance in the market with over $1.94 billion in receivables. Our business primarily offers equipment finance to growing small- and medium-sized enterprises, which help them to fund the purchase of revenue-generating assets, our top 3 assets being transport, construction and light commercial vehicles. Our market-leading service is how we've stood out in the broker channel and has been underpinned by an investment in technology, which allows us to drive efficient decisions and differentiates us from traditional lenders. 80% of deals are decisioned on the same day, up from 45% just 6 months ago and 39% of approved deals are automated, making us quicker, nimbler and easier to work with than those traditional lenders. The commercial business has continued to see excellent momentum. As you can see on Slide 10, quarterly volumes have grown rapidly since the third quarter '20 with first half '23 volumes of $744.8 million, up 72% on PCP. Normalized cash profit after tax is up 12% on the previous corresponding period to $19.3 million. We have seen net interest margin improvement in the second quarter of 2023. While we experienced slight margin compression in the first quarter due to the unprecedented increase in funding costs, the benefits of our repricing initiatives executed in the second quarter are now flowing through. Our front book NIM is now higher than the prior 12-month period, which is an excellent result, and we will remain disciplined on a go-forward basis to protect this position. Our commercial business benefits from broad-based sector exposure with industries' priorities in logistics, civil engineering and agriculture. We prioritize assets that have strong retained value and strong demand on the resale market, ensuring low concentration risks. Our average ticket size is $100,000, providing a diverse portfolio that can withstand fluctuations in individual sectors. I'd like to just touch on our strong credit performance and the strategies that we've implemented to achieve it. Our credit performance has remained consistently strong. The 30-plus days past due has consistently declined, thanks to our improved underwriting, better collections capabilities and improved systems. The benefits of this investment can be seen in the delinquency chart on the bottom of the page with only 0.5% of accounts becoming 30-plus days past due. We've also achieved volume growth while maintaining credit quality. Our net loss to ANR of 0.5% has improved 10 basis points on PCP. This is a testament to our disciplined underwriting standards and our commitment to maintaining a high-quality portfolio. On Slide 12, you'll see our broker-led strategy is gaining significant momentum in New Zealand, with volumes up 173% on PCP. We have accelerated the adoption of the broker-led equipment finance model, while also maintaining our existing profitable channels. This has allowed us to expand our market reach while continuing to generate strong returns from our existing business lines. We've taken a page out of the Australian playbook, and we've made refinements to suit the local market. We are confident that this approach will allow us to replicate the success of the Australian model in New Zealand. We're currently transitioning from a lower-yielding government leasing business to equipment finance. While there's been a slight uptick in losses, we are still maintaining historical lows. We anticipate that our long-run credit performance in equipment finance will be similar to that of our successful Australian business. I'd now like to talk about the performance of our consumer finance business for the half. I'd like to start by discussing some of the key dynamics at play currently in the consumer finance sector. Firstly, as the market definition of buy-now pay-later is attributed almost solely to small ticket paying for financing, which is less than 1.2% of total receivables, we've rebranded this segment to point-of-sale payment plans to more accurately reflect our products and services. The turbulence experienced by unprofitable players should not distract from the fact that this form of finance is preferred by both merchants and customers. After a period of intense competition, which has impacted back book yield, the playing field is starting to level with competitors who relied on unsustainable merchant pricing, often below the cost of capital, struggling in this new environment. humm will be the beneficiary. Selecting merchants from the fallout will align with our bigger ticket strategy. This is evidenced by the growth in distribution over the last 2 months, adding over 600 new points of presence and front book yield that is now 80 basis points higher than the back book. The sector is also awaiting the treasury's review into buy-now pay-later. hummgroup overall supports the intent of the options paper in increasing consumer protection. hummgroup supports bringing BNPL within the application of the National Credit Code to require BNPL providers to comply with responsible lending requirements, which are calibrated to the level of risk of buy-now pay-later products and services, often referred to as Option 2. Regardless of the outcome of the review, hummgroup provides finance in both regulated and unregulated segments, and we are well placed to adapt and have appropriate systems already in place. On Slide 15, you can see the makeup of our consumer finance business. NZCards, humm90, which is our Australian card product and humm 'Big things' are all point-of-sale installment products, enabling purchases of multiple services with a current average ticket size of $4,500. Each of these products are profitable with room for growth. NZCards volume of $381.1 million grew on PCP by 6%, with customer spending habits normalizing after the pandemic. In the first quarter '23, we saw a reduction in our receivables, driven by accelerated paydowns, which is consistent with the market and has been driven by surplus savings as demonstrated by the graph on the right of this slide. However, we are encouraged to see that growth in receivables has recommenced in the second quarter. Normalized cash profit after tax was down by 26% to $12.5 million, and this was a result of lower gross income due to the accelerated paydowns and interest-bearing balances across the market that I just mentioned. Looking to the second half, our back book repricing initiatives executed in the first half will flow through and help improve our profitability in the second half of the year. On Slide 17, you will see volume growth in our Australian cards portfolio of 19% on PCP, and that indicates that our customers spending behaviors are beginning to normalize following the pandemic, but it's still below pre-COVID-19 levels. AUCards receivables are growing in line with our increased volume growth. However, due to the long-term interest-free period associated with these products, income from interest-bearing balances from our long-term interest-free volumes will be realized in future periods. AUCards normalized cash profit of $2.7 million was a result of lower operating income from lower interest-bearing balances and marginally higher funding costs, offset by reduced operating costs in response to the prevailing market conditions. Looking to the second half, strong volume growth in long-term interest-free travel in the first half of '23 will translate into incoming future periods, typically 12 months from our origination. Point-of-sale payment plan segment volumes of $604.6 million was down 7% on PCP. This was driven by a return to growth in big ticket core volumes, which were up $22 million and reflects the runoff of decommissioned predominantly small ticket products, accounting for $67 million in reduced volume. humm AU 'Big things' normalized cash profit after tax of $8.2 million was offset by AU 'Little things' and net of offshore. In the second half, we expect increased diversification and improved pricing with a renewed focus on growth as the competitive dynamic materially changes. In relation to offshore operations and as announced at the AGM, hummgroup has ceased promotion and business development activity in England, instead focusing on growing the successful Irish business and has maintained the credit license to service merchants in Northern Ireland. This focus has seen volumes in the Irish business grow by 15% on PCP. In Canada, the business has come to commercial terms with more than 1,250 locations across veterinary, dental, auto, hardware and home plus an additional 2,600 contractors within the home improvement industry. Speed to scale has been a focus and software integration, providing with access to an additional 6,500 dental practice and 2,000 veterinary clinics. The current market environment will see increased market share with high yields as a result of targeted merchant onboarding. I'd now like to hand over to Adrian, who will walk us through the financials.

Thanks, Becca, and good morning. I'm here today to discuss the financial performance of hummgroup for the half year ended 31 December '22. As Becca has mentioned, we have updated how we communicate our results to better reflect the underlying performance of the business. We have adopted a new measure: normalized cash profit after tax. Normalized cash profit removes material infrequent items that have been previously captured as part of our cash NPAT measure. It also excludes noncash items such as AASB 9 provisions, which are required by accounting standards to be booked as we grow receivables. We note that actual losses and recoveries are still included in the normalized cash profit measure. Other noncash items such as depreciation are also removed. This line moved significantly between the period as we impaired assets this time last year, lowering depreciation in the current period. Further, we've excluded cash NPAT losses in our suspended products, which we expect to be wound down by 30 June this year. We consider that normalized cash profit represents the best measure of our ongoing earnings for the hummgroup as we navigate this transition phase. For example, AASB 9 provisions were a tailwind in the prior period as COVID macro provisions were released and they are a headwind in this period as we grow our commercial and consumer book. For consistency and transparency, we'll be including the normalized cash profit measures, cash NPAT and the component parts for this half and the full year results. On Slide 21, we've shown a normalized cash profit after tax of $38.5 million for the period ended 31 December '22, which is up from $37.9 million in the prior comparative period. Gross income was up 10% to $243.7 million, reflecting growth in receivables across the commercial and consumer businesses. Net income is down over the period by $15.1 million, reflecting a squeeze in margin attached to rising cost of funds, and I will cover this in detail in an upcoming slide. Our credit impairment comprises net loss and provision movements. There has been a $6.3 million improvement in net losses on the prior period, which has been offset by a $21.9 million provision swing between the periods. The prior period had $16.8 million in provisional releases. And this year, we increased provisions by [ $5.1 ] million, largely resulting from growth in the receivables book. From a cost perspective, we are pleased with the reductions across marketing, people and other operating costs, offset by certain costs during the period, which I'll also discuss. This leads to a cash NPAT, using the prior measure, of $16.7 million, which is a reduction in the prior period as a result of the reversal of the AAS 9 provisions of $14.6 million, offset by the benefit that we received from lower depreciation. Our tax expense was $5.2 million with an effective tax rate of 22%, and this is lower mainly due to the recognition of offshore losses and our perpetual [ note ] interest. Finally, on dividends. Consistent with our Strategy Day last year, the directors have determined that humm will continue to pay dividends and set out a fully franked dividend of $0.01, which equates to $5 million. We consider that it's important to strike a balance between dividends for investors and investing in growth. The amount is consistent with our previous guidance of 30% to 40% of cash NPAT. We will transition this measure to normalized cash profit following our discussions with our Board in April, and we will update the market at our full year results. Consistent with the prior period, our investors will be able to utilize hummgroup's dividend reinvestment plan. On Slide 22, the hummgroup executive team have made good progress on our cash-out initiatives and remain committed to our target of $15 million to $20 million as we transform the cost base of this business through modernizing our legacy products and technology platforms. Putting aside the reductions in depreciation attached to impairments taken this time last year, we have delivered a $14.9 million in savings from reductions in marketing that were focused on our small ticket suspended products, 'Little things' along with our U.K. business. We have lowered our people cost and reduced our head count by 126 in Australia and New Zealand over the last 12 months. In addition, we have moved our call centers from Adelaide and Auckland to Manila. We have also managed cost increases during the period, which have included our investment in offshore, which will reduce in the second half due to our decision in November '22 to retreat from U.K. into Ireland. There are a couple of additional costs associated with the failed transaction with LFS and we have also calculated the notional cost associated with inflation and payroll on payroll and nonpayroll costs. The next Slide 23 sets out our cost-to-income ratio for the commercial business, the consumer business and the consumer business excluding costs associated with suspended products. As I said, we are proud of what the commercial team have achieved with our sub-40% cost-to-income ratio, and we consider that this business has achieved operational leverage, which will enable us to grow without commensurate increases in costs. We are also implementing further technology enhancements across Australia and New Zealand to enhance our speed to decision and speed to yes along with operational back-office improvements. In the consumer business, we are targeting a 50% cost-to-income ratio and note that despite good progress in cost removal, this ratio has been affected by reductions in net operating income resulting from higher cost of funds and a squeeze in margin. If we eliminate the cost of fund increases, our pro forma CTI measure would be 53.5%. We continue to focus on a number of initiatives, including simplification of products, technology-enabled transformation, particularly in our call centers and back office functions, platform cost reduction by migrating to the cloud, noting that we're experiencing higher OpEx as we migrate at our point-of-sale payment platform to the global sales force Q2 platform. We recommit to our in-year cost savings of AUD 15 million to AUD 20 million and annual cost savings of AUD 20 million to AUD 25 million. Further, we are on track to meet our CapEx budget disclosed at the full year of AUD 18 million. On credit risk management on slide 24, our credit performance demonstrates the strength of our credit team and their long history of credit decisioning. We make this statement without hubris as we are conscious that we are living in uncertain times, and we are keenly focused on early credit indicators. hummgroup has made investments in systems and in processes that have delivered over recent years and include a forward platform with digital identity, fingerprints, biometrics, automatic verification and authentication tools. We have comprehensive credit reporting, bank statements online for income verification, enhanced decisioning tools and credit scoring. We have machine learning models and improved our collections capability. These have directly contributed to lower losses and further, we have been successful with our collection strategy and debt sale programs over the last 12 months, which have seen a material improvement in recoveries. The net loss to ANR for the group is 1.95%, which is a 90 basis point improvement on the prior comparative period. Big ticket net loss to ANR is flat at 2.5%, and this has been stable for many periods, representing our long history in this market and focus on verticals such as solar, home improvement, auto and medical. Little things net loss to ANR has fallen to 2.7% as a result of closure of suspended products and reduction in volumes from little thing merchants. AU and NZ cards have improved over the period, and we are particularly focused on the NZ economy and impacts on more targeted interest rate measures. Commercial continues to demonstrate low losses, showing resilience in the SME sector and recoveries from a strong second-hand market. I note that this ratio is also benefiting from higher growth and a larger denominator, and we anticipate that it will normalize over-time. On slide 25, we included this table the first time at our full year results to provide investors with transparency of the movement in net loss, AASB9 macro provision releases and AASB9 provision movements per product. It highlights the point I made at the start of my presentation that net losses have improved significantly period-on-period, which benefited from reversals in macro provisions taken during COVID and reductions in provisions from improvement in those items that I outlined on the previous slide. While we have not seen any deterioration in losses or arrears, we had increased the macro provision in New Zealand slightly as we watch the unemployment metrics. We continue to maintain a conservative credit provision settings with credit provision coverage being 3.9% in consumer and 2.2% in commercial. While we are confident in our credit processes, we recognized that we are experiencing historical low credit losses, and the market is uncertain as we navigate through stimulus being removed from the economy, rising household costs and fixed rate mortgages rolling into variable. We also historically see seasonal increases in losses from Christmas period, and we are focused on the wind-down of our suspended products. On slide 26, the treasury team have worked very well alongside our banking partners to execute a funding plan that positions hummgroup to continue to grow the business prudently. In recent years, we've been focusing on improving the capital efficiency of our balance sheet. We have introduced mezzanine in our facilities, which has had the effect of reducing capital employed in a warehouse from, say, 20% to 8%, and this has freed up capital that has allowed us to continue to fund our growth. In challenging markets, we have executed well in the last half, 2 commercial facilities, 2 commercial mezz facilities to ensure that we continue to invest in that business and drive growth. We've executed a AUD 250 million commercial, AUD 210 million point-of-sale payment plan term deal when some businesses were struggling to get deals away. We also have AUD 150 million growth facility that has replaced our syndicated debt facility, which enabled us to invest in the growth of our business, particularly the commercial business. This facility is more fit for purpose for the business, providing growth capital. We finished the year with AUD 102.8 million in unrestricted cash and AUD 50 million drawn on the growth facility. The cash usage during this period predominantly relates to investment in the capital to support the growth of the commercial and consumer businesses. On slide 27, the last 12 months have seen unprecedented increases in the cost of funds as swap rates have moved ahead of the RBA and RBNZ benchmark rate increases. hummgroup is disciplined on margin and focused on protecting and improving NIM. We have a strong hedging program in place that has sheltered us again to rate increases, would see our term books hedged to around 80%, and our cards business hedged approximately 60%. We perform detailed merchant-by-merchant, broker-by-broker analysis on pricing, along with a focus on the marginal cost of funds for each receivable originated by term. Where relationships do not meet our return hurdles, we have increased pricing or excited relationships. We have moved pricing in the market across all products and importantly, have recaptured our NIM in the commercial business that exists at the start of the calendar year '22. Repricing the consumer book is more complex as we are limited in our ability to pass on pricing movements in areas like credit cards. In BNPL, we have moved rates across all verticals, but the transmission mechanism to take more time, given contractual notification periods and the time it takes for new volume to flow into receivables, for example, to install a solar panel. I note that we moved another 50 basis points in the last week. We expect the consequential NIM squeeze to take time to flow through the books as the back book repricing is replaced by fund book pricing. Further, it's worth noting the cost of fund has increased as we have secured mezzanine financing in our warehouses, which has improved the capital position and the return on equity, but results in a higher interest expense. On slide 28, with commercial, we delivered another strong half performance from the commercial team with volume at AUD 744.8 million, which represents a 72% increase on the prior period, with receivables growing to AUD 1.94 billion. The margin squeeze that we discussed in the previous slide impact commercial for about 4 months, and we are now seeing receivables originated at prices that reflect the current cost of funds observed in the earlier part of the year. This 4-month squeeze occurs as we were unable to pass on swap increases to brokers at the same pace of swap rates. The originations over this period will flow through the book and the P&L as back-book yield and will be replaced by originations at higher rates. The normalized cash profit for this business increased by 12%, and we consider that we are well placed to continue to responsibly grow this book with 2 new warehouses and our corporate growth facility. On slide 29, we committed in prior periods that we will continue to provide the detail of our value drivers for both the commercial and the consumer business to assist our investors understand the performance of the individual businesses. In commercial AU, volume growth continues to be strong with AUD 638.7 million originated in the past 6 months, taking our total receivables in AU to AUD 1.72 billion. Product yield has improved to 9.8%, and our average front book pricing for the December month was over 10.5%. Cost of funds has increased with base rate increases as well as mezz that was introduced in this book in the last 12 months. Net loss to ANR is at a historic loss of 0.6% for the period and benefits from a large denominator that will normalize over time. In Commercial New Zealand, volume increased to AUD 106.1 million from strong growth that commenced in Q4 of FY '22 as we established this broker business in New Zealand. Product yield is down to 10.4% due to mix in this product as we move to a similar business model as we have in Australia. With cost of funds at 5.8%, you can see the impact of RBNZ tightening in the New Zealand market, along with a higher mix of originations in the last 12 months. Net loss to ANR again continues to be strong at 0.2%, and this is enhanced by an order book of government assets. On the following slide, in Consumer Finance, we have seen a reduction in normalized cash profit of 7% to AUD 19.2 million, which is largely attributed to margin compression and reductions in receivables attached to paydowns in the cards NZ business. On the following slide, in slide 31 in humm Australia, we have seen good growth in the big things business, with volume of AUD 297.4 million across solar and health. Front-book product yield has benefited from yield enhancement initiatives discussed, and this has been offset by back-book yield that was written in a very competitive environment, leading to a total yield of 14.2%, down from 14.9%. The cost of funds increased to 3.5% is largely base rate and market changes. The normalized cash profit for big things was AUD 8.2 million, which is slightly down on the prior period, but this demonstrates that this is a profitable product. Little things has reduced in volume by AUD 15.5 million over the period as we focus on this being a companion product for big things. The product yield to 9% has improved as we have increased MSF and net fee changes over the year. You can see that the yield benefit in big things versus little things and the relative unit economics of these products. We're pleased to say that we have lowered the cash losses for this product to AUD 3.2 million versus AUD 6.1 million in prior periods. On slide 32, consumer finance: cards, volume and receivables have returned in Cards New Zealand with product yield improving over the period. We note that in the first quarter, we witnessed higher paydowns, and we have now returned to growth in the second quarter. This period was also impacted by volatility in currency markets, particularly the Aussie, New Zealand FX market. The normalized cash profit for the business is AUD 12.5 million, which is down on the prior period of AUD 14.8 million, and we are very pleased with the net loss to ANR of 3%. AU Cards has grown to AUD 266 million, with our travel partners beginning to return to growth. Yield has improved slightly, and we note that travel growth will have a delayed transition to revenue as the products have a 9 to 12-month interest-free period. Normalized cash profit is AUD 2.7 million, and we see opportunities to improve the scale of this business and lower costs. With that, I'd like to thank you, and I hand back to Beck to do final lines.

Thank you. Now to our outlook, which you'll find on slide 34. hummgroup is well positioned to navigate the current economic environment with its strong balance sheet, profitable products and leading credit capabilities. We'll continue to take to focus on our core and has aligned to humm's unique market position in financing bigger ticket purchases. hummgroup anticipates that it will deliver profitable growth across all products in FY '23 with gross income increasing as volume and yield initiatives gain traction in the second half, with second half normalized cash profit after tax anticipated to be higher than the first half. With that, I'd like to conclude today's presentation and hand back to our moderator for today's Q&A session.

[Operator Instructions] And I show we have a question from John Marrin from CLSA.

Just forgive me for -- if I ask any questions here that you've already detailed. I'm just jumping through quite a few different results this morning. But I'm a little bit confused by the market's reaction to be quite honest. I think as I go through your numbers, they look pretty good and pretty close on model. In fact, I think you came on a net profit basis, you actually came in ahead of my model. So I guess maybe I just want to understand -- I actually thought that NIM could actually be under a little more pressure given the interest rate rises. But maybe you could just help me understand what that walk looks like over the next couple of half years as you reprice the portfolio on both sides.

Yes. Thanks, John. If I start with the commercial business, so what we saw was a period of about 4 months where we saw a squeezing margin as a result of swap rates increasing quicker than we passed on rates through to our brokers. And we're pleased to say that we've actually recovered the NIM from the time at the start of the year, which is a good result. There is some of that book that will sort of flow through the book, but all new originations will be originated at that sort of NIM pricing. So we think that's a good outcome. We're also well-hedged in those books. So we're hedged at about the 80% level, and we have been for some time. So we'll benefit from those hedges. You can see that we've got quite a large AUD 66 million market gain on our derivatives, which represents the value we have obtained on those slots. In relation to the Consumer business, we have raised rates. We have raised rates in the cards business. We've obviously limited a little bit in terms of just the size of which those rates can be in the market, and we're sort of being very cautious around that. But we have moved rates across, and we'll start to see those flowing through into the next year. Again, those books have been well hedged and we've outlined the cost of funds in the back-end of those slides, which actually has a cost of funds and NIM. In relation to BNPL, again, we've been moving through pricing since about June of last year. And so we've been moving both price increases and [indiscernible] increases. The transition mechanisms are a little bit more complex here because we've got contractual repricing in terms of just the timing and also it takes time to install solar panels, for example. So they come through a bit slower. But again, we're going to see that pricing increase. The critical thing is we're actually seeing competitive dynamics, the real pressure that was on the competition abate. And so we've seen opportunities, as Beck mentioned most recently to actually improve pricing as well. So it will still have parts back book flowing through. I suspect over the next 12 months that we're originating strongly at the moment.

Do you think we can get some NIM stabilization going into next year or is there some more compression? I know the front book repricing will have an impact there, but how do we look at NIM next year?

Yes, I think we will get some stabilization, certainly. I think we're anticipating that rates will sort of start to top out. I think the 3-year rate is pretty flat at the moment and we're not seeing 3-year rate movement really and hope it doesn't. So I think if that 3-year rate stabilizes, then we will have more stabilization on NIM. The biggest impact was actually the former period where we saw such a significant increase of 200 to 300 basis points in rates.

So on the commercial side, pretty strong momentum there. I think I had that volume up 74%. You came in at 72%. So pretty admirable. I mean as we look at that business going forward, like, I mean, can you just give us some color around how the year-over-year growth rates look against these tough compares? And maybe help me understand like just how much the shift towards brokers is going to drive new volumes.

We're still seeing very strong demand in both areas of our business, but particularly in commercial. Sentiment among small and medium businesses has -- it's showing to be really resilient and the feedback that we're getting from brokers is very similar to that. And so from the second half trajectory, we're seeing very continued strong volume growth. And also as we transition our New Zealand business into this equipment finance business as well, that is driving a lot of growth for us. So from a commercial perspective, we see consistent growth going into the second half. And also in our consumer business, I think we have been pleased that despite the slow on increases from a pricing perspective, our volume has continued to grow. And that is also, I think, a testament, even though the consumer is a little bit more depressed, I would say, from a sentiment perspective, the verticals that we're in and our focus on the deputies over once. So still very strong growth for us in dental, veterinary, automotive, home and home improvement. So the growth outlook for us into the second half and just what we're seeing in January and February is very strong.

Just a couple more before I jump. I think you mentioned there was an uptick in charge-offs in the commercial side somewhere. Can you just elaborate on that a little bit?

Yes. I think there was like a miniscule uptick, I think, of about 10 basis points in the New Zealand commercial business, but it's still 0.5%. It's less than 1%. And really, that's us transitioning the business. Previously, it was a small ticket leasing business with small businesses. We had a big concentration in government, but again, historical low in that area of the business, and we're seeing it track very much in line with our Australian business.

Right. I think I mean, obviously, we're way below normal in terms of bad debts. And so like as we move forward through the next few periods, I mean, do we see that normalize? And does that help continue to drive growth or is that sort of a -- could that be a limiting factor?

Look, we think that -- and it will normalize in terms of the denominator effect that we have in the business. We're still very -- we're not in terms of our early indicators and our view of the credits that we're currently writing, which is a lot of bank grade credit in that market. We're not anticipating losses to drop-up at all, but we're quite positive on that market that as the banks sort of -- as we compete harder and then we're actually getting more of the bank grade credits, and we think that will be good from a loss perspective. John, we have got a couple of questions on the line that we might just switch to if you're okay with that.

So moving to questions that have come over the webcast. The first question that's been posed is, can we expect any further one-off costs related to the change in product mix coming through in the second half?

At the moment, no. We are basically working through all of the sort of different products and sort of reducing costs, all the direct costs attached to those individual products are being reduced. We've taken the one-off items that related to the UK in terms of redundancies in that market. We have no further plans on that front. And what we're continuing to work through is the shared costs and getting those costs down.

Great. I'll cover 2 more questions coming in from the webcast before we wrap-up. The next question is, how confident are you that margins will improve into the second half? I think you've covered off on that one already, but any further comments on that, Adrian?

No, I don't think anything more than what I've said previously. So as we sort of mentioned, the front book pricing is continuing to increase and we're hoping that rates in the 3-year market start to stabilize. There might be some increase in that. It's sort of hard to make these predictions in this market just given the complexity of what we are looking to, but we're very acutely focused on NIM as a business, and we're laser-focused on the current cost of funds and originating assets have good prices.

Great. Final question from the webcast, and apologies for those who haven't been able to get to, we will look to respond to those outside of the call today. Final question coming through is, if normalized NPAT is the best measure for the business to -- best metric for the business, then why is the dividend based on the cash NPAT number?

That is the right question to ask. So we're currently in the process of discussing the dividend policy with our Board and we'll finalize that as part of our strategy in April. The challenge we had today is that we think that normalized cash profit is the best representation of our cash and our profits moving forward. Given some of the adjustment, cash NPAT is probably the best measure. If you look back at our cash outcomes for the half, on which we paid dividends on the history, but it was the right measure for now, but we will be updating that with the Board. These things will start to normalize other than depreciation and provisioning. And so therefore, we'll be putting a new measure to the Board and then to the market pretty soon.

Thank you very much. Back to the operator, I think before we have our closing statement from Beck this morning.

I'm showing no further questions in the queue. That concludes our Q&A session. At this time, I would like to turn the call back over to Rebecca James, CEO for closing remarks.

Thank you for your time. Adrian and I look forward to meeting with many of you one-on-one over the coming days. Thank you very much.

This concludes today's conference call. Thank you for participating. You may now disconnect.