Judo Capital Holdings Limited (JDO) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen. Unlike the past 2 years when pandemic restrictions forced this event online, I'm very pleased that we are able to offer today's AGM as an in-person event. Shareholders have the opportunity to ask questions during the AGM in the room today. We're also taking the opportunity to live stream this AGM via our website and will provide a recording of the AGM for those shareholders who are unable to attend us to join us here today. As we have a quorum first meeting, I'm pleased to declare the meeting officially open. Welcome to the 6th annual general meeting for Judo Capital Holdings Limited and the first as a public company. I am your Chair, Peter Hodgson. I’d like to begin by acknowledging the Traditional Owners of the lands on which we meet today. I'd also like to pay my respects to Elders past and present. I'd like to introduce our directors, who are in the room with me in Melbourne with the exception of John Fraser, who is unable is join us here in Melbourne but is dialing in from Sydney. The directors here with me are Manda Trautwein, Mette Schepers, Mal McHutchison, David Hornery and Jennifer Douglas. We're also joined by Yien Hong, our company secretary, and by our auditors, PricewaterhouseCoopers, represented by Sam Garland. I would also like to introduce the members of the Executive Management Team: our CEO, Joseph Healy; our deputy CEO and CFO, Chris Bayliss; our COO, Lisa Frazier; our CRO, Frank Versace; our Chief Marketing Officer, Kevin Ramsdale; our Chief Relationship Officer, Angelo Manos; our Chief Third-Party Officer, George Obeid; and our newly appointed Chief People and Culture Officer, Jessica Lantieri. Finally, I’d like to welcome our Judo Bank employees who are also present virtually. Next Tuesday, November 1, marks the first anniversary of Judo’s floating on the ASX and thus becoming publicly listed. This was a noteworthy accomplishment, providing an opportunity to welcome a whole new set of shareholders. But it was just one step in a transformational year for your company. In August, we announced our full year results, exceeding all the targets we set in our IPO Prospectus and indeed, exceeding the budgets that we had set management. These results reflect the benefits of Judo’s transition to a public company – and the great momentum the business has built towards delivering our key strategic commitments. We believe the simplicity and focus of our strategy is even more relevant today than it was 5 years ago when we set out the basis and rationale for Judo. Our strategy and our growth have been built on a clear, unwavering focus on SMEs and a personalized relationship model that is unique in the Australian market. We now stand as a team of over 465 people. Our team provides specialized financial services to more than 2,800 SME customers across numerous industries nationwide. And we have grown to over 20,000 deposit customers. Our unique funding model allows us to offer highly attractive deposit rates across a range of maturities while still offering our borrowing customers attractive lending rates. We have continued to rapidly scale our operations, with a presence in 16 locations across Australia, including 2 new specializations in the Agriculture and Health sectors. We know from feedback and our Net Promoter Scores that we're seen as a bank that listens, a bank that learns and a bank that boldly backs business. There is thus no doubt in my mind that Judo has brought much needed competition to the SME market. And that competition has brought lasting benefit to the Australian economy. The last 3 years have seen us overcome a range of major challenges, in particular, scaling our growth business through a global pandemic. There is also no denying that today's uncertain geopolitical and economic environment continues to confront SMEs. While we are conscious of headwinds for some businesses, I am encouraged by the energy, ingenuity, and absolute adaptability of our customers I also recognize that for us all as shareholders, the volatile outlook and rapidly rising interest rates have resulted in a disappointing share price performance since the IPO. However, set against this, we remain optimistic about our performance and the ability for our specialist model to continue to thrive. We have demonstrated a clear competitive advantage in uncertain times. That’s what makes Judo different and that is why we are so confident of our future. In fact, now more than ever, the direct relationships our bankers have with our SME customers, and the in-depth knowledge this brings to their businesses, has proved vital. As our customers adapt to the challenges and opportunities facing them, we are with them every step of the way. We know our customers. Our strategy remains unchanged and we continue to make progress on our clear path to becoming a scale player in Australian banking. With public listing comes additional responsibility in reporting and an increased focus from investors, equity analysts, proxy advisors and of course the media. This is in addition to the extensive regulatory environment in which we operate. The deep expertise of our management - supported by an outstanding broader team -- has seen us meet these rigorous requirements, whether that be market updates or investor presentations, through to refining Judo’s position and approach to areas such as environmental social and governance standards. I want to pay tribute to our people who have worked hard over the past year in often difficult circumstances. Their health and wellbeing are an area of key focus for your Board. Our governing framework is now well embedded across the organization from the Board down. A culture of robust risk management is also entrenched in everything we do, and it will continue to be the measure of our model. While we still have a lot to do, we have created solid foundations for growth. We continue to build a team that is passionate about working with and supporting the SME economy. We believe we have the right model and the right culture to deliver our strategy and to build for the long term. I am particularly proud of the contribution we are making, and the competition we have brought, to the SME sector in Australia. I thank you our shareholders for your continuing support. I now invite our CEO, Joseph, to provide his insights for the year.

Thank you, Chair, and may l also extend a very warm welcome to everyone. This is a highly symbolic day for Judo, our first AGM as a public company. I would like to echo the Chair’s comments and say how delightful it is to see some of our shareholders in person. Thank you very much for attending this morning. While many of you are familiar with our business model, allow me to recap on the purpose and the key elements of our business model. Judo is a unique, pure-play SME bank dedicated to serving the Australian’s SME economy. Our purpose is to be the most trusted SME bank in the country and our vision is to build a world class SME Bank. One of the unique characteristics of Judo is that of specialization. We believe passionately that specialists outperform generalists. Being a unique specialist bank allows us to focus all our attention on the SME economy. It is all that we think about, and it is all that we talk about, it’s all what we plan for. Judo was born out of the belief that SMEs were being poorly served by the banking industry. An industry had increasingly industrialized SME lending. There had been a clear market failure, with many good quality SMEs unable to access credit on sensible terms and conditions. Where they could get credit, the processes were often slow and often torturous. Not surprisingly, SMEs were universally dissatisfied with the way that banking system was meeting their needs. The industrialized operating model of the banking industry is one of expediency rather than one of service; it is a product and sales-centric rather than relationship-led model. The high levels of dissatisfaction were evidenced by universally low levels of customer satisfaction and net promoter scores that were consistent features of research. Now there is no doubt that the major banks have re-energized their passion for SME lending, and this is welcome. Re-energizing a strategy, however, does not mean that cultural habits and values will change. Such change does not occur easily, if at all, in organizations where the cultural concrete is firmly and rigidly set. In architecting Judo Bank, we wanted to go back to the fundamentals of SME Banking or to the craft of SME Banking, were relationships trump products. We call this “SME banking as it used to be, SME banking as it should be.” By building a successful bank from a PowerPoint is no easy task. This is underscored by the fact that all 3 of the other banks that were issued banking licensed by APRA in 2019 have not survived. We believe the reason to Judo has succeeded while others have not, is the emphasis we placed on what we call “3 Must Haves” which we identified at the beginning of our journey: Let me recap on those 3 must haves. First, we determined a 5-year view on capital needs, and a path to profitability inside 3 years. We were really clear on the resources we needed and the flight path and timeline we would follow, rather than taking a piecemeal approach in growing a company. This approach allow us to bring on blue-chip shareholders to a register, shareholders who are sophisticated institutions and able to support our capital needs as we grow. Back in 2016, we determined that our 5-year capital requirement -- equity capital requirement was going to be from $1.5 billion. The second must have that we were absolutely focused on was the clarity on the problem that we were seeking to solve the market failure that we saw in the way that the banking industry is serving the SME economy. And we were also crystal clear on the nature of our competitive advantage and how we were going to succeed and compete in the marketplace. Adjacent to this focus was a major twice cut once approach to building a robust and sustainable technology-enabled business model. The third must-have was to recruit a high-caliber management team who are passionate about the purpose of the company, and we were willing to contribute a material amount of their own personal capital in order to ensure a very strong alignment with the business of success. This was, in essence, building an owner-centric mindset or a founder-centric mindset, which we viewed has been critical to the culture as we grew the company. As we have grown, we've also been mindful of the pitfalls that have been a feature of fast-growing bank elsewhere. And those pitfalls primarily focused on poor risk management and inappropriate or an inadequate funding strategy. So from the beginning, we avoided any over reliance to short-term funding, and we built a stable funding base based largely based on long-dated deposits. As an SME lender, we delivered -- the SME lending allows us to deliver superior margins and it provides more headroom for us to provide attractive deposit rates to our customers and do so whilst maintaining our net interest margin. This is a significant and sustainable competitive advantage of Juno. A robust risk appetite strategy also informs our business strategy and incorporates the cumulative commercial banking experience of your leadership team, which is in excess of 200 years. It's a leadership team that fundamentally sees banking as in the business of risk management, central to risk management within a bank is culture, which is far more important, in my opinion, than volumes of policies. The power of culture as a foundation and driver of competitive advantage and superior performance is often underestimated by businesses, but not by Judo. One of my priorities as CEO is to preserve the unique culture that we have today as we grow. Our culture as the management go Peter Drucker famously said, “Eat strategy for breakfast.” And we would add for lunch and dinner. A great culture combined with a strong competitive advantage is a powerful combination in driving shareholder economics. We recently surveyed our people and those that have joined over the last 6 months in particular, and we asked them what were the characteristics that they saw in the company, and they highlighted our culture and our people has been real strengths of the organization. Pleasingly, the emphasis on culture and people is a key characteristic of the company. This is very exciting, in my opinion, as it says a lot about the future of the business and our ability to differentiate and deliver superior economics. As the Chair pointed out, it's almost 1 year since we completed a successful IPO. Pleasingly, at our full year results back in August, we reported that we had exceeded all the financial targets that we have set out in our IPO prospectus. And those included a 73% growth in our loan book, which took our loan book at the end of June to $ 6.1 billion. We also pleasingly passed an important milestone in becoming profitable, delivering a pro forma profit to the end of June 30 at $ 15.6 million, which was more than double the profit that we had in the prospectus. This is a remarkable achievement as there are no other examples globally of any new bank going from a PowerPoint to profitability, sustainable profitability within such a short period of time, something that we are enormously proud of. Scale now is our best friend, and we believe that our profitability will continue to grow significantly as we continue to scale the business. And in that context, I'm pleased to inform you that the first quarter of the current financial year, we continue to perform strongly. Our profit before tax to 30 September for the quarter to 30 September was over $23 million. This is more than our full year FY '22 pro forma profit of $15.6 million. The growth in our profit clearly demonstrates the operational leverage in our business model. Year-to-date, lending growth and our pipeline activity continues to be strong, and our closing balance at the end of September is on track for the FY '23 guidance that we announced to the market won't be able to our first year results. Our net interest margin has also been very strong. We expect our first half underlying net interest margin to be towards the upper end of our guidance range of 3.3% to 3.5%. Our funding costs continued to benefit from favorable deposit terms and deposit margins throughout the first quarter. And while conditions are currently favorable, we do expect a favorable -- the favorable funding environment to normalize somewhat in the coming months and as a result, we expect our second-half underlying net interest margin will trend back towards the sustainable level closer to 3%. We have also made significant headway in recent weeks in our wholesale funding in the fall funding markets, issuing our inaugural senior unsecured notes and finalizing 2 new committed warehouse facilities. These extra funding channels demonstrate our impressive treasury capabilities. On the lending side, we have over 90% or 91% of our lending is based on flooring rates, which priced off 30-day BBSW. And that continues to allow us to reprice as funding costs change. In the current climate, perhaps the most topical issue in a lot of shareholders' minds is that of credit quality. I'm pleased to report that our customers continue to be in good financial health. Our arrears at the end of September is better or stronger, I should say, than the strong position that we reported at the end of June. Whilst the external environment is undoubtedly more volatile as the Chairman commented, we will remain steadfast in our commitment to a 4Cs approach to credit risk management. That is that we'll continue to focus on the character of the borrowers, the capacity or the cash flow to service debt, the capital already sits in the balance sheet of the business to support debt and collateral. This has been our approach from day 1 to assessing credit risk, and it continues to serve us well in ensuring that the quality of our portfolio is in good health. Whilst major economic shocks are not our base case, we also believe that we are exceptionally well placed from a capital perspective to withstand a severe downturn. By focusing on our game and playing to our unique strengths and not being distracted by others, we are confident in achieving our FY '23 guidance and longer term in achieving the metrics of scale that we have announced to the market. We remain confident in our ability to get to a low 30% CTI in the medium scale, and we look forward to updating the market in more detail early in 2023 on how we're going to get to that low 30% CTI. Shareholders will find that coming my speaking some slides that we've released to the ASX this morning, which provides some greater detail around some of the numbers that I've just touched on. Let me now turn to outlook. As I've mentioned, we are enormously proud of the success that we have achieved to date, but we are by no means complacent about the challenges that the future holds. The dual management team is at and alive to the risks that are in the economy that could emerge in 2023. However, we remain very confident in a matter of what conditions we are asked to deal with, that we will perform very well in the year ahead. In terms of the interest rate environment, we see this as very much a return to normal, moving away from the ultra-low rates that have been a feature of recent years. We believe our operating model has what we call a strategic hedge dealing with whatever environment we have to face. Our relationship bankers maintain a very small portfolio of customers, which means they can maintain a close eye on emerging issues and respond quickly to changing conditions. We also have the capacity in our relationship team to capitalize on market conditions should they present themselves. Our judgment based lending, and as I said, our focus on the 4 Cs of credit means that we will -- we will continue to place emphasis on a forward-looking approach when it comes to assessing credit risk rather than relying -- over relying with backward-looking financial metrics. We believe that our robust credit assessment process enables us to select the right business to customers to do business with. And as mentioned at our full year results back in August, some 45% of all credit applications that we receive are declined at the outset because they don't fit with our risk appetite. And a further 25, approximately 25% are declined during the credit assessment process because they don't fully meet our 4C framework when they are subject to closer scrutiny. The strategic hedge embedded in our business has given us the confidence to be clear on the guidance that we gave to the market in terms of our FY '23 outlook. When we achieve our guidance and when we look at the loan book and achieve our guidance of over EUR 9 billion of lending by the end of this financial year, we will effectively be halfway towards achieving our medium-term metrics at scale, proving beyond any doubt, the strength of our CVP. In conclusion, we remain very focused on our purpose to be the most trusted SME business bank in Australia. We're also very focused on the vision that we have for the company, which is to build a world-class SME bank. Finally, I'd like to thank the Judo team and our Board for their passion and hard work over the past year and to thank you, our shareholders, for your ongoing support as we continue to execute on the strategy and business plan that we have outlined for your company. Thank you. Chairman?

Thank you, Joseph. He doesn't always thank the board, I might add, but it's very good to hear it today. We will now move to the items of business for this meeting. The notice of meeting was dispatched to all shareholders on the 26th of September 2022, and I propose to take that as read. Any shareholders who wish to ask questions at today's meeting will need to show [ Vajda or Link ] staff, their yellow or blue shareholder voting card first and make their way to the standing microphone. There will be an opportunity to ask questions at the end of each item of business and again at the conclusion of all the voting items. Please note that there is a limit of 2 questions per shareholder. Voting during this meeting is being conducted by our share registry link. If you have already lodged a proxy, you will not be able to vote again unless you advise link when you registered your attendance today, but you wish to change your votes. All other shareholders here with us in the room who have not yet voted will be able to vote using the voting cards provided by our share registry. This meeting has been convened to consider the FY '22 financial reports and the 2 resolutions are set out in the Notice of Meeting and explanatory materials. There is a voting exclusion in relation to the vote on the remuneration report as explained in the Notice of Meeting and explanatory materials. The resolutions put to the vote at the AGM will be decided by poll. Item 1 of the notice of meeting is to receive and consider the reports of the directors and of the auditors, the income statement, the balance sheet and cash flow statement for the year ended 30 June 2022. There is no requirement for the shareholders to approve these reports. Are there any comments or questions on the tabled audited consolidated financial report for the company and its controlled entities for the period ending June 30, 2022.

Thank you, Chair. There are no questions on this item of business.

Sorry. No questions. All right. Okay. So the next item of business concerns the reelection of myself and other directors. I will ask Jennifer Douglas Chair of the Remuneration Committee and Nominations can we just step into share this item of -- for the meeting. But before I hand over to my fellow directors, I would like to say a few words about my own reelection. I have been privileged to be a Director of your company and indeed Chair of the Board through an extraordinary journey, marked by the achievement of the banking license in our IPO last year. I've sought to provide a guiding hand and counsel to our management team drawing on some years to many perhaps, of experience in a range of roles in banking and finance and in times often uncertain economic circumstances. I offer myself for reelection to continue to serve Judo and its shareholders.

Thank you, Peter. I now hand over to Mette Schepers to say a few words.

Thanks, Jennifer. Good morning, ladies and gentlemen. I have been a member of your board since April 2019 I'm a member of the Risk and Audit Committees. Prior to joining Judo, I was a senior executive for a number of financial services companies, global listed and privately held, including ANZ and Mercer. And prior to that was in professional services, working with PwC in both Australia and the Netherlands. I believe my skills, my knowledge and international experiences continue to complement my fellow Board members and that I also augment the Board with gender, culture and cognitive diversity. So I'm pleased to offer myself for reelection. Thank you.

Thank you, Mette. Now I'll hand over to Manda Trautwein for a few words.

Good morning, ladies and gentlemen. I'm delighted to be here today and grateful for the opportunity to be standing for reelection. I'm a chartered accountant and CPA, who have spent most of my career working in public practice, advising SME and mid-market businesses. I've also studied and elected in Applied Finance to Master's degree students at Macquarie University for more than 6 years in both Sydney and Melbourne. Apart from my accounting and finance skills, which allow me to contribute as Board as Chair of the Board Audit Committee. I believe that my experience of working with SME business, allow me to bring a unique lens to the sort of challenges that SME businesses face, including in relation to obtaining funding. I've also been able to be -- have a front row seat to witness how SME businesses have responded to the sort of challenges and disruption caused by COVID-19 and the current global economic situation. Currently, in addition to being on the Board of Judo Bank, I'm also on the Board of another ASX-listed company called Task Group Holdings, which is an enterprise-level software company, where I'm currently Chair of the Board Audit analyst Committee. Ladies and gentlemen, with your endorsement, it would be my great pleasure and honor to continue to serve on the Board of Judo Bank. Thank you.