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

Good morning. My name is Andrew Dempster, and I'm the General Manager of Investor Relations at Judo Bank. It's my absolute pleasure to welcome you to our virtual update this morning on our technology strategy and CTI. We are in Melbourne today, which is the traditional lands of the Wurundjeri people, and I would like to pay my respects to elders past, present and emerging. This morning, you will hear from our CEO and Co-Founder, Joseph Healy, as well as our COO, Lisa Frazier, and our CFO, Andrew Leslie. The formal presentations will last for about 40 minutes, and we've left lots of time for Q&A at the end of the session. Our material was lodged with the ASX this morning and is also available on the Judo website. A replay of this session and our Q&A will also be available on the website later today. Lastly, the presentation material and the presentation itself may contain forward-looking statements or opinions. And in that regard, I will just draw your attention to the last slide of our presentation. I will now hand you over to our CEO and Co-Founder, Joseph Healy. Thank you.

Good morning to everyone joining us on the call this morning. It's great to have you with us, and it's a great way to start the week. We're very pleased to be presenting our deep dive on our technology strategy in CTI. In addition to the deep dive, we've also included a brief trading update, which demonstrates that we are on track to achieve our FY '23 guidance. We remain very committed to providing the market with detailed information, informative disclosure to help you better understand our business and its future prospects. Later in the year, we're going to do a deep dive on our credit portfolio and our unique culture, but the focus today, as Andrew mentioned, is very much on our CTI. I'm joined on today's call by our Chief Operating Officer, Lisa Frazier; and our CFO, Andrew Leslie. Andrew is well known to most of you and perhaps Lisa less so. Lisa joined Judo in August 2021, and her remit covers technology, operations and products. Lisa also takes the lead in our strategic planning, in particular having bring to life our ambition of building a world-class SME Bank, which is a great customer experience at the heart of our strategy. I'll shortly hand over to Lisa to take you through the key elements of what we mean by an experience-based strategy and the role that technology plays in bringing it to life. After Lisa's presentation, Andrew will walk through the financial implications of the investments and the flight path to our CTI at scale as well as providing a high-level update on how we are performing in the current financial year. We're leaving plenty of time at the end for Q&A, and I'm very much looking forward to hearing -- hear your questions. Before passing to Lisa, I want to recap on some of the important themes in the next couple of slides. Themes that are central to understanding the Judo thesis. We are a purpose-led bank, and our purpose is to be the most trusted SME business bank in Australia. Our business was born out of a belief that there had been a market failure in the provision of SME banking services by the major banks, in particular, as they have continued to industrialize their operating processes. And that failure was evident in the numerous customer -- poor customer satisfaction surveys that have been a feature of the industry for such a long time. In building Judo Bank, we wanted to bring back the craft of SME banking, where relationships or as Lisa will highlight, where customer experience trumps products. Being a specialist bank means that all we think about and all we talk about is SME banking. And this creates a great advantage for us in both in our agility and our speed in moving and making decisions in contrast to the sometimes poor-moving and heavily bureaucratic nature of the more complex banking system. We have built Judo into what I believe is a truly unique bank. There is no Judo Bank lookalike anywhere else in the world. I believe the uniqueness of the Judo Bank business model is evident in our financial performance to date. Globally, no other start-up has got to profitability in the time scale that Judo Bank has. And in fact, there are many start-ups that have a longer history than Judo that are still struggling to reach profitability. A big factor in that, we'll talk about this today and the nature of our experience-based model, but another big factor has been the caliber of the management team that has -- that is running the bank. I have never worked with a more cohesive, more energized and a more talented management team that we have running the bank today, something I'm enormously proud of. The achievements of the bank have also been recognized in numerous awards. And I call out just a couple of these. Recently, we were recognized in the Financial Times top 500 growth companies in Asia Pacific as #4, which was an amazing achievement, which also saw us not only #4 amongst the top 500 growth companies in Asia Pacific, but as the fastest growth company in the financial services sector. Last week, we were also recognized by LinkedIn as the #1 company in Australia and then the AFR best company -- place to work. These are just some of the accolades that we have -- numerous accolades that we've achieved over the course of our very short history. In fact, it was only last week that we celebrated the fourth anniversary of becoming an ADI. We've done a lot in a very, very short time frame. I want to move on and just kind of recap on an important picture of how we have conceptualized and visualized the evolution of Judo Bank. This is a slide that you saw in the half year results back in February, which talks about the 3 horizons. Horizon 1 was all about building a bank and getting it to market with technology that was fit for purpose but not necessarily fit for future. This approach contrasts with other models that emphasize technology -- models, both here and elsewhere in the world, that focus on technology and building technology, but not being clear on the nature of the economics and viability of the business strategy. We felt it was important that the economics -- to be demonstrated the economics of our model first and build the future banking business model second. This, as I see, is in contrast to the fintech fab that dominated the thinking of so many others as they launched new challenger models around the world. Horizon 2 is largely about investing in technology and building the scale to enable our bankers to deliver a greater experience and our customers to enjoy a greater experience from us. We are now very firmly in Horizon 2 executing a clear plan to build the scale benefits that are inherent in our model, and were always inherent in the vision that we had for the company. Horizon 3 is about building a world-class SME bank, a bank that is growing consistently above system, achieving on a sustainable basis the economics that we have flagged in our market -- at scale metrics that we announced to the market back in November '21, but also in addition to those financial metrics, delivering best-in-market customer NPS and by some margin as well as best-in-market employee engagement and again, by some margin. When we look at our NPS score to date, which is plus 66, this is in an industry that often struggles to get into positive measures. So as I say, by some margin, and that's our focus. Moving on to the main focus of today's presentation, which is our CTI. At the time of the IPO, we outlined our metrics at scale, as I mentioned, and we demonstrated confidence, which we have repeated in all of our updates since then, our confidence in achieving those goals. Just to recap, the picture we painted is that we will have a business with a low to mid-teens ROE with a lending book at scale of between $15 billion and $20 billion, a net interest margin of at least 3%, a cost of risk within 50 basis points and our CTI approaching 30%. The CTI target approaching 30% is not one that the industry -- observers of the banking industry are necessarily familiar with because there is no precedent for that outcome. Notwithstanding that fact, we do not see it as an heroic ambition, an heroic goal. And there's 2 reasons for that. First of all, as you can see from the slide, if you -- we are a 3% NIM bank, whereas the rest of the sector tends to operate on a sub-2% NIM. We benchmarked the CTIs for the rest of the sector, assuming that those banks were achieving a 3% NIM instead of 2%, and as you can see from the slide using that measure and against most recent disclosures from the other industry participants, that all of them would achieve a CTI comfortably in the mid-30% if they were achieving a 3% NIM. But that's not the main driver behind our 3% NIM. The other key driver behind our -- sorry, our 30% CTI is that we do not carry any significant legacy or infrastructure costs, the costs that our competitors are burdened with. We have designed Judo from a blank piece of paper with no legacy branch network, no legacy infrastructure, no legacy people and no legacy culture. And we have built a modern technology platform, which is cloud-based and provides us with significant flexibility as we grow the bank. Of course, the CTI percentage is to the ROE goals that we've set ourselves, but another important measure for us in thinking about CTI is the quality of our costs. The incumbent banks, some of which have existed for well over 100 years, carry significant amount of deadweight costs in their cost base. Our goal is not only to be efficient as we're building Judo to scale, but to ensure that the quality of our cost remains high with a large proportion of our costs remaining customer touching. At scale, somewhere between 65% and 70% of our FTE will be in roles that touch the customer, which is far superior to other banks, which pay a large tax for internal bureaucracy and complexity. Andrew will come back on to discuss this important theme in his presentation, but on that note, I'll now hand over to Lisa, who will explain the technology strategy and the investments we're making, which are key to delivering our at-scale CTI metrics, Lisa?

Thank you, Joseph, and good morning, everybody. Today, as Joseph outlined, I will be sharing with you our technology strategy in detail and the path to achieve our at-scale metric of approaching 30% for CTI. CTI is a metric amongst many that contribute to divining Judo's aspiration to be a world-class SME bank. It is not a metric to be pursued in the absence of strategy, so I will start with a refresher on our strategy, as Joseph mentioned. I will then cover our key investment areas in tech, data and digital, explain how we will measure scale over time. And lastly, our implications for CapEx over the coming years. You have heard us speak about our strategy as an experienced company. In a digital economy, there are essentially 3 business models: Product, experience or platform. Successful businesses need to be good at all 3, but must excel at 1 to outperform the competition. Banks today are predominantly product companies. Think about the advertising you see from the industry, largely communicating products and pricing. Judo is different. Our business model is predicated on the experience we deliver to customers via our relationship bankers, an experience that includes a dedicated banker that knows our SME customers and their businesses personally, an experience that customers are willing to pay for. Reducing costs and improving CTI is not new to the industry. In fact, for decades, innovation in banking has focused on removing transactions using technology, starting with the ATM some 60 years ago, to mobile app banking today, customers can self-serve 24/7 or more tasks than ever before. Convenience is great. However, the unintended consequence has been a disintermediation of banking relationships. How close are you, the people you know, to your or their bank. For SME customers, this has led to low levels of financing, long wait times for answers to their needs and frustration, as no one seems to know them, care about them or their businesses even if they've been customers for years and years. At Judo achieving CTI will involve technology, data and digital to do the following: Firstly, enable our bankers to achieve service levels that delight customers at scale. Secondly, drive efficiencies across all Judo, e.g. in operations, risk management and finance reducing the future FTE needs we require as we continue to grow. Let me now walk you through all 3 and their contributions in our path forward. Technology: Judo's approach is to leverage technology to support human relationships, AKA relationship banking at high efficiency. While there is a valued role for technology to enable customer self-service, it is insufficient to serve SMEs well. We are focused on using technology to enable banker and customer relationships i.e. achieving our competitive advantage. We have a purpose-built, modern cloud-based tech stack and leverage adoptive technology principles. As you are familiar, cloud-based modern technology offers a cost advantage. And this, combined with the absence of decades of legacy systems, means we have a lower cost to run our technology. The services that do not differentiate us, we buy and adopt, not adapt or customize. This is critical to managing technology, total cost of ownership or TCO. We keep track of any necessary customizations to ensure we keep our systems clean and that they are used for the purpose they were designed for. We have another important advantage that is often overlooked. We have a flexible tech stack. By that, I mean we can cherry pick solutions and technology providers to best meet our business needs and continue to optimize TCO going forward. A flexible tech stack also means we can cost effectively build what differentiates us. This is the structural cost advantage of Judo. We are not precious about our technology decisions. If there is a better mousetrap, we'll find it and use it and it costs us a fraction to change. I will talk about this later, but the move of deposit origination and our new digital app build were completed in roughly 12 months, short time frame by industry standards. The flexible tech stack capability drives our ROI on our CapEx investments and importantly, contributes to all our at-scale metrics, not just CTI. Joseph described earlier our 3 horizons. We have updated our technology strategy for Horizon 2, scaling. Judo started with small investments in technology, our preference was to focus our capital on establishing our relationship bank, hiring bankers, improving our customer value proposition in market. Technology in the early days of Judo was completely outsourced to numerous providers. While this model was proven then, it is insufficient for scaling going forward. In fact, TCO is best optimized by a balance between the economics of outsourcing, the criticality of having a knowledge base in-house to run the bank and the ability to build what differentiates us. To that end, we will be doing 4 things in technology, one, building new capabilities internally, including investing in engineering; two, optimizing our cost of delivery removing high-cost providers via in-sourcing or striking different new more cost-effective partnerships; three, consolidating what is working, e.g. scaling our automated testing capability; and four, building the banking experience that enables our bankers to substantially outperform the industry. Moving to the role of data and insights. Data is essential to our experience strategy and achieving CTI. My experience in using data is that it is an asset that is generally underutilized. Why? Well, because the data and insights are often not in the hands of the frontline or decision makers. The design for data use cases, advanced analytics and even AI often fails as the insights are difficult to access or action. Our data strategy is founded on empowering bankers and customers using a cloud-based data platform built to scale to deliver reporting, insights, advanced analytics and leverage artificial intelligence in the future. We will deliver capabilities to bankers to enable them to scale their portfolios. Here is how we will approach this for bankers. As a banker, give me the information I need to serve customers well, e.g. application status, upcoming settlements or even open servicing tickets. Two, as a banker make things easier for me, upload open data for information gathering, use automated spreading and automated document creation. And lastly, help me prioritize where I need to focus each day from risk indicators, price insights, customer events or reminders. This is certainly exciting times ahead for bankers and customers going forward at Judo. But bankers are not our only focus. In fact, we must leverage data across all of Judo. We believe in a distributed data model with security that enables our teams within Judo to self-serve data and insights. The data and insights team within my group is small, and they are responsible for data manufacturing and data tools, data quality, data governance and the advanced analytic capabilities, but they do not provide the everyday reporting. Remember my earlier point about data in the hands of the front line. The data platform and insights tools we are building enable self-service. One example is our relationship bank who today leverage the reporting tools we have created and have built their own dashboards. This is the most effective and efficient way to supply of meaningful data and insights to the relationship banking team. Thirdly, digital. Digital is table stakes. It is important to customers. I am pleased to share that last week, we began the rollout of Judo's new digital banking experience as pictured here. Our lending customers will have digital access to their account information and product information. Rolling out digital will remove hundreds of calls to our bankers from customers who are seeking latest balance information, statements or other transactional information requests. And in the coming weeks, we'll launch the new digital banking experience for deposit customers. This will enable us to retire the existing deposit digital banking experience, which will result in lower calls to our customer support team due to better reliability and better design. The Judo expense base is largely consists of people. We do not have branches in hundreds of locations nor do we own data centers. Essentially, we are people with laptops and mobile phones. Therefore, digitization broadly is important in delivering improvements in our processes and services to enable our bankers to spend more time with customers and our support staff to focus on higher-value activities. This is a focus of our future investments, so where to next? It is important to remember our bank is young. Yes, we are scaling, but we are still building. In fact, there are major capabilities yet to be built. We operate with banking basic capabilities to support our processes and our customers. We will be introducing proven technologies such as CRM, workflow and ERP to reduce future cost growth. These platforms have known industry benefits as illustrated here, with workflow platforms achieving up to 30% on various processes, CRM systems contributing to productivity in the similar range and even ERP systems can generate up to 25% improvement in efficiency. To date, we have achieved our financial results with systems required to operate a bank. Going forward, we are investing in systems that enables us to scale the bank. Starting in FY '24, technology for scale will be the focus of new investments. Collectively, these investments will help scale our banker portfolios and will slow down future recruitment needs in areas such as operations, finance and risk while our lending and deposit books continue to grow. Together, these investments are a major contribution to the reduction of our expense growth rates. While we have new areas to invest ahead, it is important to recall we have achieved much in recent times with the build of our existing capabilities. In fact, over the last 2 years, we have stepped up investments to scale Judo. These investments included core banking with lending in 2021, account origination with the introduction of nCino, the data platform and information security. Even though these capabilities exist today at Judo in line with our flexible tech stack strategy, we continue to evaluate providers over time and will make changes appropriate to our business. Let me share the benefits of our 2 most recent investments. The first example here is leveraging nCino for origination of our deposits. We introduced nCino for our lending applications in 2021. In short order, we were able to see the benefits of the platform in lending. We made the decision to follow fast with deposit origination. Since going live in November 2022, we have originated $1 billion in deposits. We've added new products, SMS FTDs and business TDs, and we've improved complete rates. We've reduced our operational cost with less calls down by 80%. We've achieved a higher Net Promoter Score by 9 points, which by the way, is in the 60s. And we lowered the technology team time used to run origination, awesome outcomes. The second example is around the new data platform. Back in early '21, when I started at Judo, the team and I completed an assessment of the scalability of our tech stack. The one platform we determined that would not scale was our data platform. The architecture build and run costs would not meet Judo's future needs. As a result, we have built a new platform suitable to grow and scale with the business. From the early days of Judo, our data platform was in AWS and built and run by external resources. We decided to completely overhaul the data platform at a cost of just $2.8 million and bring the build and run capability costs in-house. We now have a single reporting data platform running in Azure, enabling our business teams to perform analysis, gather insights and meet regulatory requirements. Total cost of ownership of the platform has come down by 50%. We have higher reliability and a lower cost for future build. The platform is in flight to be leveraged for operational data capabilities and as of March, we used it to meet open banking requirements, but we're very proud of this outcome. We will continue to invest in upgrading these earlier 4 investment areas as they contribute to all our at-scale metrics. So I'm going to shift gears now and talk about scaling. How will we know we are on track to scale? Good question. When scaling businesses measuring what matters really does matter. My time with previous start-ups in San Francisco demonstrated time and again the importance of unit economics as the measure of scale. Without a compass, CapEx investments and OpEx costs can grow but not necessarily have the right balance of revenue versus profitability. At Judo, over the last 12 months, we have put in place unit economics, our scale measure. Let's start with a short introduction to unit economics. Essentially, unit economics measures the marginal cost to manufacture a widget. In our case, a widget is an SME loan. We detail top down and bottoms up all the activities that contribute to the cost to acquire, originate, settle and service a loan, and here is unit economics in action. At Judo, an average loan requires 60 hours to originate and 30 hours to service. The chart illustrates how unit economic measures the time spent across roles at Judo supporting an SME loan. Our bankers spend the majority of their time on business development and credit assessment, but also spend time servicing customers all good activities. Measuring unit economics help us optimize where bankers, analysts, credit and support staff should ideally spend their time in the future. Over time, our unit economics analysis tells us 2 things. One, where do we invest to have the highest impact on CTI, i.e. identify the largest areas for scaling up the bank; and two, tells us how well our previous investments are performing in reducing CTI. Here is now our most recent set of opportunities identified. As you can see, several opportunities exist for bankers in business development, building the application, collecting information, reducing rework and streamlining operational support. In servicing, we also see ways to reduce banker time spent, having the digital bank capabilities, I mentioned earlier, is one of them, improved covenant management, streamlining annual reviews and simplifying our variations processes. We have seen our previous investments are contributing to scaling Judo. I mentioned earlier, digitization and process optimization are key contributors to CTI. Here are 2 examples of how unit economics have proven we can reduce time spent and improve quality. The first example is settlements. From unit economic analysis in August '22 and again in February '23, we saw a 15% reduction in the unit economics of settlements. The example here refers to document production and data automation. We leverage multiple legal partners to prepare our loan documents. The process relied on e-mail and checklists are largely manual effort. With the implementation of the LIXI API standard, our loan data is now uploaded to our legal partners automatically, reducing time spend, costs and error rates. In fact, our bank has received back 1 hour and our ops team up to 45 minutes per every loan. The second example on the right is related to servicing again from the unit economic analysis over the same period, we saw a 23% reduction in the unit economics of servicing, largely driven by the new statement automation capability we built. An example in build for this month is our annual review process, which has not kept up with the business. We have streamlined the annual review process and improved reporting and tracking. Annual reviews will be completed in shorter time. Bankers and analysts will save 30 to 45 minutes per review and more time staying on top of what needs to be done each month. And this is just the beginning. We are also piloting a use case with open data to support annual reviews, potentially shortening the time to complete the review to evaluate our customers' business performance. So let's move to what all this means for total CapEx investments. Taking a 5-year view, starting with the IPO FY '22, the chart on the left breaks down the expected mix of our CapEx investment by area of focus. We will continue to make ongoing investments in the foundations way, e.g. core banking, origination and information security. This involves platform upgrades and developing new tools and capabilities on these existing platforms. Digital and data will grow their share of investment as well. This incorporates advanced analytics and adding new features to digital. And we will continue to meet our regulatory and compliance commitments. It is of note that our investment is lower relative to other banks as we do not have large remediation programs, nor their level of product complexity in our business. Simplicity is Judo's best friend, I like to say. As I mentioned, earlier in FY '24, we will -- as I mentioned earlier, starting in FY '24, we will invest in the new capabilities around scaling, which includes CRM, workflow and ERP. Our CapEx spend will grow from FY '22, which was a lower investment year. We are planning for FY '24 to be a catch-up year before reverting to the $20 million range per year. We believe our $100 million CapEx investment envelope holds. We are investing for scale, which supports our CTI metric achievement. Each of the investment areas described here helped to change the structure and mix of our cost base at scale with a focus on quality costs, i.e., the banker customer experience and support while reducing the expense growth rate in corporate functions. The Harvey balls here describe the expected impact over the years to come. In summary, new investments in productivity systems will help to minimize manual tasks, improve the efficiencies of our analysts, our operations and corporate functions. Enhancements to our existing technology will support the growth of our business and enable us to redefine and optimize existing processes and reduce the overall total cost of ownership of technology. Investing in our data strategy impacts all teams as we give our people the information and insights they need to prioritize their time and drive their own effectiveness. Digital will focus on enabling customer self-service of low-value tasks. It will also help our bankers service customers at scale with their portfolios. And lastly, regulatory and compliance investment will also allow us to continue to meet our commitments efficiently. All of what I've discussed today is only possible if we have the necessary team. My leadership team is in place and has the depth of experience to execute on our technology, data and digitization strategy while continuing to build to expand and grow the bank and run the bank day-to-day. As you can see, Euan Walker, Peet Vermeulen, Ada Caguin and Michael Collins are all seasoned executives with deep functional experience to lead the key elements of our tech, data and digital strategy and protect us as we grow. Combined with our product, operations and strategy leaders, Patrick Nolan, Ryan Marchant and Kate Schade, we are the team that designs, builds and runs Judo's engine. Over the last few years, we have recruited across tech data and digital. While recruiting was slower in FY '22, the availability of talent in FY '23 is improved. We have a few specialist roles to place and a number of roles to support our technology strategy. With that, I will close and thank you for your time. I look forward to your questions, and I will now hand to Andrew.

Thank you, Lisa, and good morning, everyone. Today, I'll be providing some details on the building blocks of our at scale CTI and some color on our cost base today and how we expect it to evolve. I'll then close with a short trading update on our financial performance year-to-date. I want to begin with some context to our CTI journey. At the time of our IPO, we disclosed to the market our at-scale metrics, including our CTI target of approaching 30%. Since that time, we have grown significantly, and our CTI has halved from 98% to 53% today. Our loan book is now halfway to our at scale metric, and we are a profitable and growing company. This demonstrates the significant impact of scale on our business. As you can see from the chart, by far, the most meaningful driver of our CTI going forward continues to be scale. And a $20 billion loan book is not the end of our story. Our CTI will continue to improve as we grow. The investments and initiatives that Lisa has outlined, coupled with our significant total addressable market, and our market-leading customer value proposition will provide us with the platform to continue to grow and deliver world-class economics. As this slide outlines, there are other revenue factors impacting our CTI too. Other operating income and other net interest income movements, which includes normalized funding costs, lower liquids and channel mix are other factors that will impact the revenue side of the CTI metric. As a high-growth bank, cost movements are comparatively small drivers of our CTI trajectory. Whilst we'll continue to invest in customer and banker costs and tech and data, support, risk and corporate function costs will remain relatively neutral to CTI. And I'll unpack those components more on the following slide. Despite the impact of recent inflation, we believe our at-scale CTI metric of approaching 30% remains an appropriate target in light of our investment plans and the benefits derived from scale. We are growing into this target not shrinking towards it. I want to turn now to the composition of our cost base. We have a high-quality cost base that will increasingly be structured to deliver a world-class customer and banker experience, while also keeping the bank safe, well run and well regulated and helping us maintain our competitive advantage in customer relationships and service quality. Clearly, as a growing bank, we will continue to invest with costs increasing as we scale. While costs will grow next year in part due to the run rate impact of the investments we've made in FTE this year, the cost airplane is leveling out. We are nearing the peak level of staff we require and won't see the same rate of growth in FY '24 costs that we had in FY '23 with single-digit cost growth to follow in future years. As mentioned earlier, investments in our customer and banker experience and tech and data will continue to grow to support scale. Let me just spend some time on these 2 components. Firstly, on customer and banker experience, the growth largely represents spend on our banker workforce, rising to about 200. At that stage, we expect the efficiencies from our investments to streamline a lot of manual processes currently performed by our analysts, enabling them to focus even more on customer relationships. This will, we hope, see many of our analysts promoted to bankers with 9 successfully promoted during our short history. Our primary goal here is to continue to invest in our leading service proposition. Secondly, on tech and data, as Lisa highlighted earlier, there is still some growth yet to occur in the near to medium term as we finalize building these teams and continue our investment plans. As we grow, licensing and vendor costs as well as CapEx amortization will increase commensurate with our investments. The investments we're making will enable us to scale with modest net cost increases in other areas with the absolute mix of support and corporate functions reducing. Overall, the return of the investments Lisa has outlined are significant as we put in place the platform for long-term growth. Turning now to the quality of our costs. As a reference, we believe somewhere between 15% and even up to 30% of typical bank sector costs do not apply to us and are not value adding from our perspective. This includes a number of elements. Firstly, branch and ATM occupancy and FTE run costs. Secondly, investment spend on fixed type initiatives, customer and system remediation and reg and compliance costs applicable to larger banks. And thirdly is what we call the complexity tax inherent within the rest of the sector. This includes costs to maintain legacy systems and products, duplicative teams and costs of operating in multiple segments and jurisdictions. We've also benchmarked ourselves against other successful challenger banks in the U.K. and see many similarities with them. For example, the portion of spend on technology and data is very similar, and these challenger banks in the U.K. have successfully operated in the high 20s to 30% CTI range, which is a helpful benchmark for our approaching 30% CTI metric. I'd now like to provide you with an update on our financial year-to-date results. For the year to 31 March, we delivered a profit before tax of $87 million and annualized ROE of 5.5%. This reflects a PBT of $34 million in the quarter, and 27% higher than our first half average. We are very pleased with this result, which has been underpinned by our strong underlying NIM, in particular, at 3.57% year-to-date that's marginally higher than the first half. This translates to a reported NIM of 3.29% year-to-date. And against this backdrop, CTI has again improved to 53%. The margin on new TDs for the quarter was 68 basis points over BBSW. As we called out at first half, the funding environment is competitive. We are in the TFF refi window for the sector and volatility has increased given events offshore. Despite this, we have continued to attract above-average deposit flows, growing our deposit book by over $200 million since mid-March. Lending growth in the third quarter has been good. We have a large pipeline of $1.5 billion and expect a few big months ahead as we head into the June year-end period, which typically sees our largest lending volumes. Asset quality remains benign with no negative underlying trends emerging. Overall, 90-plus days past due in impaired is still at low levels and is in line with the sector. Whilst there's been some growth, this represents a handful of customers across a range of sectors with no discernible trends. Finally, CET1 ended at a very strong 19%, which is now reported under the revised APS 112 standard. Now to guidance. Given the strong underlying margin over the quarter, we now expect second half '23 underlying NIM to be within the range of 3.3% to 3.5%, which is higher than the previously guided 3.1% to 3.3% range. There's been a few factors driving this change. Firstly, TD margins were lower than anticipated through the first part of the quarter. Note that TD margins on new originations in April have now increased to the top end of our 80 to 90 basis point guidance range. This range, however, is the long run average price range that branchless banks have paid to be #1 in the TD market and is the assumed margin embedded in our at scale NIM. In addition to the impact of TD margins, we've also managed the timing of some treasury activities during the period, including wholesale, debt and hedging, which helped support our NIM. Of note, our underlying NIM performance during the quarter was achieved without additional TFF self securitization, which remains at 80% or $2.3 billion. We remain mindful of TFF repayment and are taking an active approach to treasury management, balancing funding, liquidity and NIM. As we've talked about previously, we continue to progress our warehouse optimization program. And I'm pleased to confirm that we have now reached our targeted $2.5 billion of committed warehouse capacity having recently signed agreements with 2 financiers for an additional $750 million of capacity with pricing of those new facilities in line with existing facilities. On expenses, we reaffirm guidance provided at the first half. On cost of risk, we've had no write-offs this quarter. The book remains in great shape, but we retain our prudent approach and are reconfirming our FY '23 cost of risk guidance to be within the $50 million to $60 million range for the year. So other than upgrading our underlying NIM guidance, we reiterate all our FY '23 targets. Now over to Joseph for some closing remarks.

Thank you, Andrew. One of the things that we feel very passionate about and we feel is very important in understanding the Judo thesis, is to understand the nature of being a pure-play specialist bank, a pure-play SME bank. We believe that in all walks of life specialists outperform generalists and an organization that's strongly focused on one of the economy, deeply experienced management team, an organization that all that it thinks about and talks about is how do we build an SME bank that is seen as the best not the biggest, but the best in the market. As Lisa underlined in our presentation, our relationship-centric model is essentially an experience-based model and not a primarily product or a platform-based model. A loan from Judo is ultimately no different from a loan from any other bank, but the experience in getting that loan and the service that follows the loan are the fundamental points of competitive advantage for Judo. And this is reflected in our NPS score at plus 66. It's also reflected in the strong above-system growth whilst maintaining sound risk reward disciplines and in the growth trajectory that we've outlined in our metrics of scale. That whole experience-based thesis to the nature of our competitive advantage is something that we do not take for granted and it's something that we will continue to invest in and it is at the core of our strategy. Other banks emphasize technology of products, as Lisa mentioned, we emphasize customer experience. We believe it is so important as a point of differentiation. Our model is predicated on having amongst the best SME business bankers in the country. And we go through that and we maintain a rigorous recruitment process of interview -- extensive interviews plus a credit assessment test for those planning and thinking of joining the company. The pass rate on that credit assessment test is still below 50% and it has been for the last 3 or 4 years and we will not compromise. We can -- the average experience of our relationship bankers dealing with our customers is 15 years. The average experience of the management team running the company is over 200 years of banking experience. This is a young company with deeply experienced people throughout. Our relationship-centric model is supported by our cloud native technology platform, as Lisa mentioned, and we are excited about the potential for developing that platform, as Lisa outlined in her presentation. The significant operating leverage that we have in our offering is reflected in the legacy free nature of our business and the commitment that we have to continuing to invest in our relationship banker network which, as you saw on the slide and at the at-scale slide that Andrew just showed you that we are still on track and plan to have 200 relationship bankers in the field by the time we get to scale with technology there to really ensure that they are focusing on the right things in terms of our customer experience. The key message here is the power of specialization and its ability to outperform the generalist all the time. And this is a big focus for us as well as a point that Lisa emphasized, in keeping our business model simple, avoid complexity and the complexity tech that Andrew referred to. It is something, again, that we think a lot about. The Judo's strategy and its core underpinning, in my view, have a remarkable clarity, a remarkable simple nature and a remarkable focus. Let me now just draw some concluding remarks before turning over to Q&A. We continue to execute our strategy successfully, our strategy that is clear and simple. It's a strategy that you could explain to anyone and that is understood even by those that have no real understanding of the banking industry. We are building and are very committed to building a world-class SME bank with relationship and experience at the heart of the way that we think about the business. Our legacy-free pure-play specialist model means we can deliver a high customer touch, value proposition whilst delivering sustainably attractive industry-leading economics. We are very much in Horizon 2 in scaling the bank, making necessary investments to support the continued growth in the company, whilst making sure that our costs as they grow are quality costs and not deadweight costs. Our purpose, as we think about our investments, is to make sure that the customer experience and banker experience are front and center of how we spend our money. And our at-scale CTI at 30% is not something that we see as a heroic outcome even though there is no market precedent for it. We remain very confident and continue to grow and support the SME economy and build a world-class bank and doing so by running our own race. So an emphasis that we've placed on how people should think about Judo's growth trajectory. We are running our own race and in control of the way that we're growing our company. We are hugely excited about the future for Judo as a genuine, incredible challenger bank. As I say, not seeking to be the biggest, but definitely seeking to be the best in the market. So thank you for your time this morning. We are really looking forward to your questions and observations. And on that note, I'll hand back.

[Operator Instructions] And I show our first question comes from the line of Andrew Lyons from Goldman Sachs.

Just 2 questions. Firstly, a question on your NIMs. You've noted your third quarter NIM has been supported by deposit pricing in the first 2 months of the year that then subsequently normalized. But we've been hearing a lot about competition on the lending side of the balance sheet, particularly in mortgages. So I'd just be keen to get a bit of an update just in relation to what you're seeing in lending spreads within the SME space? And then I've got a second question, please.

Andrew, thanks for your question. I mean, I think in terms of the lending margin, the dynamics there, we haven't really seen a material change from what we talked about at the first half. There's definitely spots of competition on the lending side. But from a margin perspective, I think the dynamics that you saw in the first half really remain unchanged, which are really around the fixed rate component of our book and also, I guess, just the activity around the back book. But those dynamics, and I think the impact of them, we haven't really seen a material change in the third quarter.

Appreciate it. And then just a second question just around your ability to compete with the majors in the usage of data. You've spoken a lot today about the investment you're making in your data capability, which does make a lot of sense. But just to what extent are you at, I guess, a structural disadvantage versus your peers in relation to accessing data, both from the perspective of your relative scale but also just due to not having a transaction banking offering and what might otherwise be some cash flow insights that you would garner from having such an offering?

Great. Thank you. Look, I think there has been a lot of talk about the value of a transactional account and the data that underpins it. But we don't see that as value trade-off because of the access that our customers give to their data and now on top of that with open data. And so in fact, I actually would turn it around to say we have a cost-effective benefit because we actually don't have all the data infrastructure required to support the transactional banking account. So time will tell, though. So this is early days for open data, and we are working with our bankers on using it. But that, in essence, I think, actually leads to a cost advantage for us. Also, we have such a small team working very closely with the bankers and other parts of the organization, our agility to design data use cases and get them into prod is actually much faster. I mean I built and ran the AI platform at Wells Fargo. And so this context for us at Judo, we are very, very, very, very fast compared to big banks.

Lisa, can I add a footnote to your comments because it goes back to the whole relationship model. It's important that people remember that we run a very low ratio of customers to banker. We're currently seeing at around average of 25 customers per banker, over 10, that will grow, but not into the hundreds. That means there's a high touch and deep connection with the customer. Relative to an industry that a lot of SMEs are catered for out of contact centers but also even where they are looked after by a banker, that banker can be looking at 100-plus customers. So I would say that our high-touch model provides a much stronger customer experience, but also a much stronger risk management focus that more than compensates for any history of data collection that might perceived to be an advantage held by others.

And actually, our next question comes from the line of Jonathan Mott from Barrenjoey.

Just got 2 questions, if I could. Just first 1 again on the NIM. I just want to make sure I'm understanding it correctly in the read-through since the early years. Really, it was just a timing difference on the TDs where you've made more money in that sort of month of March because pricing had pushed up to the 80 to 90 basis point range you previously talked about. Now you're expecting it to stay in that range. So why it won't have a benefit that will flow into FY '24? So it's more a timing benefit into FY '23? And then I've got a follow-up question.

Thanks, Jon. Yes, I mean, you're correct. This is very much a timing issue in terms of those TDs. I mean we called out at the first half that we were seeing more competition and we were seeing some repricing. We were expecting that those TD margins would settle in that 80 to 90 basis point range. And it's really just been the timing of how that has actually played through in reality for the quarter and we have kind of seen a bit of a benefit of that, which obviously were banked in the result. But I think from a go-forward perspective, we are now originating TDs in that range, things to remain volatile, but our expectation is that that's where we will be. And it is that range that's baked in, if you like, to our upscale NIM target of above 3%. So there's kind of no really -- no real change on that.

And then if I can have a follow-up question, if I could. Just on the unit economics that Lisa was talking about, the cost for now to originate alone, you gave us quite a bit of data but there was no breakdown between the cost to originate service, broker originated loan versus a proprietary originated loan. So 2 parts to the first. Number one, how much cheaper is it to originate a broker loan given, hopefully, the broker is seeing a lot of that work in collections and helping you out there? And if it's similar, wouldn't that imply given there's lower revenue because you've got to pay the brokerage out that growth is a higher CPI and lower ROE, particular break out the cost of originating a broker versus the proprietary loan?

So the unit economic analysis to date has not actually differentiated between a broker loan and a direct loans. So we've done this as batches of lines as they come through on the unit economic analysis in our time periods. We can look to do that going forward. But at this stage, we haven't done that type of analysis yet. I mean, the brokers represent an important channel to us as does our direct. And so we will continue to use unit economics to optimize both going forward. We see differences because, as you said, the brokers do provide services around the information they provide around their customers that is valuable to us. And our customers sometimes have got good relationships with their bankers and they prefer to go direct. So either way, we'll continue to serve both direct and broker channel.

I might just add a footnote again, if I can because this is something, obviously, that we study carefully. We can say that there's no difference credit-wise between a broker originated loan and an organic originated loan. We've studied this, our risk -- line risk management team has studied this at length. The 70% to 75% of all of our lending, including our organic will come as a refinance side of another bank. And they tend to be what -- the organic tend to be well prepared in terms of our information needs based on their previous experience in meeting the requirements of other banks. I keep on seeing in forums like this that we continue to decline about 40-odd percent of all applications that come into Judo right at the very beginning, and that's gone up slightly in recent months. but there's no difference. Now we've always taken a view that at scale, that the organic channel will marginally be more attractive to us relative because you're avoiding the costs and you're getting some of the benefits of the unit economics that Lisa has talked about. So at scale, we see that at the margin, a direct originated loan will be more attractive to us than a broker originated loan on the assumption that the risk profile remains this agnostic to which channel.

Yes. Did you haven't worked out exactly how much that is at the moment by breaking down the unit economics of each channel to work out with the ROE of these channels?

Not yet. So that hasn't been the focus in the first 12 months of the establishing the routine and the analysis, as you mentioned earlier, it is really detail, and it is very thorough. And so we started and we'll expand over time.

And I show our next question comes from the line of Brendan Sproules from Citi.

I have a couple of questions. Firstly, just on the net interest margin. I just want to follow on from Jonathan's question around the timing issue. I think you saw this in the first half that your average TD margin hedged over the 1-month BBSW was sort of 47 basis points and you're now telling us that front book pricing of that is sort of at the top end of that normalized range. So going forward, should we think about a sort of a 40 basis point difference between the back book, which is still a bit a benefit for you in this quarter versus the front book, which has moved to the top end of the range?

Yes. Thanks for the question, Brendan. I mean, your observations, I think, around where we've done that new origination on TDs is correct. And part of, I think, what we're kind of seeing through is obviously the -- is when some of those loans were -- sorry, when some of those deposits have actually kind of washed through in terms of supporting the underlying NIM or the NIM for this result for this quarter. I think as -- so it's a bit of a story of how the front book and the back book on the TDs is rolling through. But we will see from this NIM point that we've printed for the third quarter. We will see that prima facie with other factors. We will see that reduce as we -- as all of the book reprices per our expectation, our previous guidance in that 80% to 90% range, and there will be a component of that, that does see the overall NIM reduced. But the play-through of that is obviously impacted by the mix of those deposits as the total funding stack of alls. And also how, I guess, the timing of the -- when those were written actually comes through. So there will be a reduction. We're expecting that as we get from, I guess, this point to the upscale 3%-plus NIM, but those deposits or the repricing of the current book all the way through is going to take a bit off in terms of the NIM. And there's room to do that, I think, versus the print and the outscale level.

Can I add a footnote? This feels prerogative to jump in. Look, I think it's important to keep in mind the extraordinary environment that exists around the deposit market right now. Because of the problems that we saw offshore with the U.S. banks and the -- some of the European banks, the refinancing of the TFF. So we are seeing exceptional levels of competition in the deposit market, the economics of which are not sustainable for a lot of the major players. So -- the key for us is to make sure that we're managing through this period. I mean protecting our economies, which we are doing, given where we are priced, made the assumptions on our pricing. But we see that the competitive pressure on deposits to be a phase that we're going through now that will not sustain itself, it may be 6 months or 9 months, but this is not a resetting of deposit pricing in the banking industry because that would have a significant impact on the profitability of the sector. And I don't think that will happen.

Okay. I've got a second question, just on asset quality. You're just trying to understand, obviously, you're a relatively newer book that's starting the season I noticed impaired assets are 41 basis points, I think, for the financial year-to-date, and that's up from 20, I think you said at the half. What sort of level of impaired assets that percentage of the loan book would be sort of a normal level for this business? Now I know you've got a metric of scale at the cost of risk of 50 basis points. But how would we sort of equate that into impaired assets? And what would be the normal level once you book fully seasons that you would expect sort of through the cycle?

Yes, thanks for the question. I mean a couple of observations and comments on that, Brendan. I mean, as you've noted, yes, impaired -- we've seen an increase in the quarter. 90 days plus is stable. And kind of overall, you add those in aggregate. And I think it's important to look at that in aggregate as an overall measure of asset quality. That is at about 63 basis points, which is pretty much bang in line with the sector. There will be some movements in and around these buckets as things season. And the other thing -- the other factor, I think, is just of note for the quarter is whilst the impairs have increased, there hasn't been any write-offs as well. So all of these things need to settle to a normalized level. Kind of in saying that, we haven't called out specifically where we would see an at scale or through the cycle level of impaireds. I mean I think the way that we -- and the guidance that we've provided of the 50 basis point cost of risk at scale is really the best measure only because it can be compared to sector data. So -- that's really the number that we focus on managing how things progress through the different buckets is a factor of timing as much as anything else. I think the real kind of point and take away on asset quality is whilst we've seen a bit of movement, those overall levels are within what we would expect when we benchmark against the sector. And importantly, there's been nothing that we've seen in the book that's led us to have any change in terms of the cost of risk guidance, but we are reaffirming for the full year of $50 million to $60 million.

Yes. We do know that historically, going right back to the 1990s that the average over that whole cycle has been around 30 basis points. And while we've said 50, that's just taking a conservative approach. I would be very surprised if we find ourselves operating at that level at scale, but that's what we've made the assumption. And people keep seeing we're a young bank, we are a young banking, but our customers are our mature businesses in the mean. I mean, 70% to 80% of the business we've written over the last 4 years has been from dissatisfied customers of other banks. We're very vigilant, particularly in this environment to make sure that we're not taking the problem customers of other banks. But just given the industrialization of the banking operating model as it relates to SME and that poor touch has been a feature of the model that we found customers that have said either through a broker or through networks that actually think about Judo as a specialist bank that really understands SME banking because it's an experience-based service proposition, as we've talked about. And we get those good businesses coming to us, and they have got long histories of being supported by banks over time. I think that's something that we will bring out when we do our credit deep dive later this year because if there is a myth that we've got a young book, we've actually got a book full of very established businesses with strong credit track record, and we need to kind of inform the market much more of that. We don't have any industry exposures. We're not like a Silicon Valley Bank with a heavy concentration in any particular industry or geography, geographically well diversified. We've always said that we want to build a credit book that looks like the economy with the right kind of weightings, ex some sectors which we won't have no appetite for, but broadly that we were building towards a portfolio construct rather than set walking into whatever that construct might look like. This is a very purposeful driven approach through credit risk management, both by industry and by geography. And so I'm looking forward to revealing that information later this year actually because the book is actually -- set us of very mature businesses, not young businesses.

And I show our next question comes from the line of Jarrod Martin from Credit Suisse.

Joseph, I just wanted to discuss the long-term assumption of the margin greater than 3%. Anyone that's been an observer of banks over multiple decades, margins go down over time. And so whether -- and a large component of your cost/income reduction to 30% comes from the revenue side. And we're going into an environment where clearly the focus has previously been on mortgages, but now we've got banks focusing on SME. And so perhaps if you could make a couple of comments on why you think that 3% margin is sustainable?

Sure. Let's see, what -- the thing to keep in mind as we think about how we're going to grow our business even when we get to $20 billion loan, which will be circa 3% of the market. So this is not a -- we're not presenting Judo as a major market player. We're going to grow by, as I've said, running our own race and be quite targeted in the type of risk that we want, consistent with the portfolio composition that we are working toward and working with businesses that value the Judo proposition, the experience that we talked about, as I mentioned in my remarks, I mean, a loan from Judo once banked is no different from a loan from any other bank, a dollar is a dollar. But the experience on how you get that loan and the experience that you have once the relationship is established is where our point of difference is. And we believe that -- and I know this from deep experience that customers generally will -- are happy to pay up, up to -- our assumption is up to 50 basis points for that experience. You start to lose customers when they experience fades and you industrialize. But there are so many good businesses that want certainty of access to credit because they're looking to buy something or make investment decisions, and they don't want to wait for 8 weeks or a maybe yes, maybe no. So I think so long as we stay true to that customer value proposition, and given that our growth projection in the context of the market is modest, I feel that we can select the credit and customers that fit our profile and not find ourselves competing with the main street, if you will, the major banks on highly commoditized style lending and that's always been our ethos. And through all my years of experience around SME banking, businesses, generally, and I mean the vast majority are happy to pay a premium for a great relationship. It goes to the power of specialization versus generalization. And I'm very confident that we can continue to grow that and maintain our customers even though at the margin there might be cheaper options. But with cheaper options, both cheaper and poorer customer experiences and a lot of businesses simply don't want that. So at the proposition, I think, has been proven and the economics that Andrew talked to demonstrate that, and we've been very consistent. We're not looking to be a big-scale player. We're looking to get to scale at 20. And then there's a big -- there's a story beyond 20, but it's not being the biggest business bank in the country by compromising on risk reward economics to achieve that because that's been a consistent theme of the way that we've talked to this business in the marketplace that we can achieve the growth, that we have set out at the attractive -- the economics that we believe are market-leading was like compromising on risk to get volume. So that's a formula that's proven and the more that we prosecute into that strategy, the more and more confident I am. I don't believe that the others in the industry can replicate what we do, by the way. Even though a lot of banks clearly back focused on SME banking and because to your point, mortgage is now not really seen as a growth segment. But delivering the kind of proposition that Judo is a pure-play specialist bank delivers is a very hard thing for a big scale, bureaucratically encumbered organization to do in a sustainable way. So there's no magic formula here. It's just doing well the things that we believe are really important to so many SME customers, and that's our secret sauce.

Okay. A follow-up question maybe for Andrew or yourself. Just on competition for relationship bankers. I know you're talking much more about promoting analysts. What's the competition like out in the market in terms of being able to actually recruit relationship bankers?