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

Good morning, and welcome to the Judo Bank results briefing for the full year ended 30th of June 2023. My name is Andrew Dempster and I'm General Manager of Investor Relations at Judo. I'd like to begin by acknowledging the traditional owners of the land that we're meeting on today and pay my respects to elders past and present. Our result material was lodged earlier this morning with the ASX. The material is also available on the Investors section of the Judo website. A replay of this session, including the Q&A will be available on our website later today. For today's agenda, as well as taking you through our FY '23 results, we have also brought forward a deep dive on the credit quality of our portfolio. First off, we'll hear from our CEO, Joseph Healy, who will start with an overview of the results. Our CFO, Andrew Leslie, will then discuss our financials in detail. Joseph will then return to discuss credit quality as well as the outlook. After the formal presentation, there will be time for questions with Joseph, Andrew, our Deputy CEO and Chief Relationship Officer; Chris Bayliss; and our Chief Risk Officer, Frank Versace. Thank you, and I'll now hand over to Joseph.

Thank you, Andrew, and good morning to everyone. We're very pleased with extending another strong set of results. Judo is a unique pure-play specialist Destiny bank and our purpose is to be the most trusted SME business bank in Australia. A significant market opportunity exists for Judo, which we have been clear about since day 1. In our view, the SME economy has been [underserved] by a banking industry that had industrialized [and he] skilled. The craft of SME banking have been lost, replaced by our product sales culture. Our strategy is to address what we saw as a market failure, and this has been consistent since our first information memorandum back in 2016. We continue to run our own race and execute our strategy working towards our vision of becoming a world-class SME bank. Whilst a relatively new bank, our management team and Board have over 300 years of collective experience in business banking. When we received our banking license just prior to the pandemic, so in effect, we are a bank born in uncertain times. The experience of our team and the progress we've made despite the operating environment gives us great confidence that we will continue to execute our strategy. Let me briefly remind everyone of the 3 horizons of Judo's evolution. We have completed Horizon 1 of building a bank, and we're now well into our second horizon of scaling the bank, the third horizon is achieving our vision of being a world-class SME bank. By world class, we mean that we will achieve our metrics at scale, including a low to mid-teens ROE, and we will continue to deliver [above] system growth, underpinned by our market-leading NPS and engagement scores as well as a disciplined management of risk reward economics. Our management philosophy is an and, not an or. In other words, we will grow our business and manage margin and operate within a good risk appetite. We have no appetite for trade off between growth, margin and risk. We will manage this equation carefully in a challenging environment that will define the year ahead. Our NPS and employee engagement scores are strong. And as we discussed, our technology deep dive in [indiscernible] -- we are now making significant investments in scalable technology to sustain our current performance and drive ongoing improvements in our unit economics. This will enable our bankers to more easily deliver the core elements of our customer value proposition, service, speed and exercising judgment to meet the needs of our customers, not a racing one-size-fit-all black-and-white policy approach. Moving now to the highlights for FY '23, which has been a truly [indiscernible] year for Judo. Our loan book has grown by $3 billion to now over $9 billion. The continued scaling of our business has produced a profit before tax of $108 million, a sevenfold increase. We achieved profitability faster than any other challenges that we know of just 4 years after receiving our banking license. And achieving our loan book of $9 billion, we are now halfway to our GLA metric scale. Our growth has been driven by continued demand for our relationship-based approach to meeting the financing needs of the SME economy. To match our lending growth, we have established a strong funding base. We have continued to grow our term deposit franchise, underpinned by improving brand recognition. Our TD margins in the second half remain below our through-the-cycle assumption. We've also established a very strong wholesale funding base. And today, we're announcing that we have $3 billion in committed warehouse lines. This is more than our original target of $2.5 billion with a new $500 million facility signed in July. Importantly, $2.1 billion of capacity remains undrawn giving us huge amount of flexibility ahead of the full repayment of the TFS. We've also made significant progress with technology, including the rollout of our digital banking for lending customers and completing the building of our new data platform. We have also continued investing in our origination systems, providing our relationship bankers with improved functionality and reporting. Turning to a summary of our financial results. We have met or exceeded all of our FY '23 guidance metrics. As I have just mentioned, we grew the loan book by $3 billion in FY '23. Our underlying NIM for the year was 3.53%, well above our guidance of over 3%. Our CTI was 54% ahead of our guidance of below 60% and a significant improvement from 76% last year. Our cost of risk was $55 million, the midpoint of our guidance range. The item of these results is a net ROE of 5.1%, which given our stage of maturity and our elevated levels of capital is a highly credible outcome. We have said before that we believe passionately the specialists [speak] generalist every single time. And I believe that these results provide a sense of the potential and the inherent benefit of scale embedded in our unique specialist business model. We are running our run rate towards our vision. A key element of our success is our strong customer value proposition and demand for our relationship-based approach continues to draw us into new markets. We now have a presence in 18 locations with 4 new locations having opened in FY '23. We continue to recruit experienced bankers as well as training our own bankers through our in-house [indiscernible] program. As a result of this program, we have had 15 banker promotions to-date. The homegrown bankers know our culture and the Judo way of banking. We have also credited over 1,200 commercial brokers and continue to grow our broker network. As mentioned a moment ago, our lending NPS has been maintained at an exceptionally high level of plus 65 versus a sector that achieved single-digit at best and more often than negative. Next to our current credit quality. As expected, we have seen an increase in our 90 days past due and impaired assets. We consider this a normalization of credit quality of an ultra low base. In fact, 12 months ago, there are our arrears and impaired metrics were unsustainably low and they would likely increase closer to entry norms as our book matures. We do recognize that there are no direct comparisons for Judo in the market to contextualize the normal level of SME credit quality. We have, however, analyzed other domestic bank disclosures and estimate that our comparable SME sector 90 days past due and impaired loans are currently around 2% across the industry. As you can see, our current level of arrears and impaired SME loans remains well below sector levels on a like-to-like basis and well within our planning assumptions. We do expect that arrears and impaired metrics to continue to increase as our loan book seasoned and as a result of challenges for certain sectors. The majority of customers that face challenges are resolved with asset sales, additional equity contributions, refinancing it to other lenders or the business recovers. In terms of our ultimate cost of risk, we have assumed that an at scale cost of risk will be 50 basis points. This is a very conservative given historical industry data. Our cost of risk includes a considerable level of write-offs as well as an ongoing increase in collective provisioning as we grow. To underscore how conservative this number is, arrears and impaired loans would need to exceed 3% for our cost of risk to go up 50 basis points. Of course, some losses should be expected. However, we have only had 2 customer write-offs in our history. Later in this presentation, I'll provide more information on the exposures we have to set is that the market is understandably interested in. Moving now to provisioning. And while we expect our arrears and impaired levels to increase, we have an appropriately prudent collective provision. The chart on the left shows Judo has collective provisioning that is comparable to the advanced creditor banks and is far higher than any other standardized bank. Further on the right-hand side, we show that vulnerable sectors as a result of the economic overlay we raised this year for envisioning for vulnerable sector is almost 30% above the rest of our portfolio. Our collective provision is based on a conservative economic assumption, and I will cover our economic outlook in more detail later on. Before passing to Andrew, let me quickly summarize the key points I've covered so far. First, FY '23 has been a very strong year for Judo, and we delivered on all our guidance metrics. Second, we are on track to achieve the metrics at scale, and we now reached the halfway point. Third, we are in our Horizon two of scaling the bank and investing in technology to better enable our bankers and customers and drive industry-leading unit economics. Fourth, our asset quality remains robust, remaining within our long-run expectations and below the sector. Lastly, our management philosophy is one of and not all. We will manage growth and manage margin and manage risk. I will come back later to talk about the operating environment and our outlook, but in the meantime, let me pass over to Andrew.

Thank you, Joseph, and good morning, everyone. I'm very pleased to be here today to present Judo's full year 2023 result, our second full year result as a listed company. This has been another great year for Judo. Our headline result for the year is a profit before tax of $107.5 million, which is 7x the PBT generated in FY '22. Lending volumes and margins both grew strongly, contributing to revenue that more than doubled over the year. Expenses increased 45% to support this growth and to invest for the future, resulting in CTI reducing by 22 percentage points with overall very positive jaws. While we've seen an uptick in our level of 90 days past due and impairs, this is in line with expectations and reflects a normalization from the ultra low of FY '22. Importantly, we maintain a prudent provisioning coverage level now at 121 basis points. As Joseph highlighted, we've met or exceeded FY '23 guidance and remain on track for our key business metrics at scale. We've seen another half of strong growth across all lending product lines. GLAs were a touch sort of $9 billion at June 2023, and we subsequently crossed our FY '23 target of $9 billion in the first half of July and anticipate closing August at $9.3 billion. On top of the GLA balance, our undrawn lines of credit now sit at $241 million. We hold liquidity and provisions on these balances, but also earn fee income. Portfolio parameters remained stable. 10% our book is on fixed rates and security levels remain broadly unchanged, with 86% of our portfolio fully or partially secured by real property. Turning now to margins. On this slide, we show the key drivers of underlying NIM since December through June 2023. A reminder that underlying NIM excludes the impact of our TFF preservation strategy. Given the underlying NIM is now largely converged with NIM going forward we will retire this metric. Underlying NIM for the second half was 3.49% and came in at the top end of our 3.3% to 3.5% guidance range provided as part of our trading update in May. This is a touch lower than the underlying NIM of 3.56% for the first half, driven by several key components. Firstly, cost of deposits was 19 basis point drag, reflecting the higher cost of new and existing deposits over the half. While new deposits were originated at a margin of 74 basis points [indiscernible] compared to 47 bps over the first half, this was under our through-the-cycle assumption being an average of 80 to 90 basis points over previous [indiscernible]. Other cost of funding was a 17 basis point drag, predominantly reflecting a higher drawn warehouse balance and the impact of commitment fees on total warehouse funding limits. Lending margin was a 7 basis point drag with some competitive pressure driving lower margins on new originations and proactive repricing due to improving customer credit. Over the half, the TFF contributed a 6 basis point increase and equity contributed a 17 basis point increase, reflecting the benefit of rising rates on fixed rate funding. And finally, treasury and other contributed a 13 basis point increase, reflecting modestly lower liquidity and favorable funding mix over the half. Next to funding mix. Term deposits remain our primary source of funding for loan growth and now set at $6 billion, having grown by about $700 million over the half. This follows a $1.2 billion increase in TDs over the first half, where we took advantage of favorable conditions to get ahead of our funding task. The TD growth predominantly came through the direct retail channel, which was supported by the recent launch into direct SMSF and direct business channels. Intermediate channels also grew other half, albeit to a lesser extent. Drawn funding from warehouses increased by close to $500 million over the half, predominantly reflecting the seeding of new facilities and funding for growth. As Joseph mentioned, we lifted our committed lines to $3 billion in July giving us increased capacity for TFF repayment and flexibility against term deposit competition. In addition, we believe we've now proven our ability to access largely the same wholesale funding sources available to much more established banks. We executed our inaugural public senior unsecured benchmark deal in September '22 and our second Tier 2 transaction in June 2023. I'd now like to make a few comments on our transition to our longer-term funding stack. The TFF has been an important source of funding, helping us to support the SME economy. We are well advanced in our plans to repay the TFF and transition to our long-term funding stack. An important point to note is that there will be a timing difference between refinancing, the self-securitized lending under the TFF and the contractual repayment, which will result in continued elevated liquid assets during FY '24. Note we've included some additional disclosure in our liquids portfolio in the appendix. As previously flagged, at scale, we expect our funding mix to broadly comprise 70% to 75% deposits, 15% to 20% wholesale debt and 10% equity. We've made considerable progress towards these targets and remain confident in our ability to achieve them. At scale, we will represent broadly 1% of the system to term deposits. And with $3 billion of committed warehouse lines now in place and close to $1 billion in other wholesale debt, our at-scale wholesale funding needs are now largely in place. Term deposits remain the core of our funding strategy. And over the second half, we continue to see strong deposit growth, executing on our strategy despite significant headwinds and market disruption including some offshore bank failures and TFF refi [indiscernible] competition. Despite all these pressures, second half margin on new TDs was 74 basis points, below our through-the-cycle assumption being an average of 80 to 90 basis points over BBSW. While in the first half of FY '24 to date, we've seen margins tick back up to the top end of the range. We remain comfortable with our through-the-cycle assumption. Importantly, we've been steadily building our brand in the TD market. And as a nimble player, we have the ability to work through periods of volatility with flexibility across tenors and channels to optimize volume and margin. As noted earlier, we did see a little pressure on lending margins this half. Importantly, however, we compete primarily on service, not price. We continue to earn at least a 50 basis point premium relative to other banks through our relationship-based approach, our speed and our unique judgment based model. We have observed some unsustainable pricing in the SME space over recent halves, in particular, in larger property deals that we believe has been driven by temporary funding cost tailwinds and comparatively poor returns for other banks in mortgages. The other driver of our lower lending margin included repricing for existing customers. As we've said before, we do not charge customers a loyalty tax. We proactively repriced customers to reflect improvements to their risk profile and conversely, will reprice up to reflect any deterioration. Looking forward, we started to see some more rational pricing anecdotally in the market. And we note that our current pipeline margin is around 25 basis points above our back book margin. We maintain a disciplined approach to pricing for credit risk, balancing margin, volume and credit quality. And we continue to see our long-run lending margin assumption in the mid-400s over 1-month BBSW as achievable. Turning now to NIM outlook. FY '24 will be a transitional funding year for us with a number of moving parts. Firstly, we expect deposit costs to normalize towards our through-the-cycle assumption. Secondly, warehouse debt will remain a drag on margins due to the full period impact of line fees and additional drawn balances. Thirdly, on a net basis over the full year, lending margins will be only a very slight drag. The full period impact of the weaker margin in FY '23 will flow through in the early part of FY '24, but improved in the back half of the year. Fourthly, liquidity is expected to provide a benefit as maturing fixed rate bonds roll over at higher rates and the overall level of liquids normalizes as we repay the TFF. And finally, we expect equity to provide a benefit from higher rates relative to FY '23. Looking beyond FY '24, further normalization of liquid assets, a funding mix benefit from deposits and higher lending margins will help support our NIM assumption of above 3%, together with some uplift from product and channel mix. On costs, we saw CTI reduced by 22 percentage points over the year to 54%, demonstrating improved leverage as the business continues to scale and the strong NIM we delivered this year. The increase in expenses over the year predominantly reflects higher employee costs as we continue to grow and higher IT expenses driven by software licensing and IT equipment costs. Judo is still in growth mode and our costs will continue to increase in FY '24, driven by moderating growth in staff levels and full year run rate impact of recruitment in FY '23, higher amortization following project investments made in FY '23 and higher IT expenses from increased licensing, platform maintenance and enhancement costs. We expect the FY '24 expense growth rate to materially slow to broadly half the rate of increase experienced in FY '23. Now to credit quality. While we've seen a tick up in our 90-plus days past due and impaired assets, it's been off an ultra low base. And as Joseph noted, remains well below comparable portfolios of peers. Cost of risk over the second half of $32.3 million came from provision build and the increase in specific provisioning from additional impaired assets over the half. Provisioning levels remained strong at 121 basis points. In line with the normalization of impaired assets, specific provisions increased by $14.5 million over the half. The collective provision balance increased by $15.5 million to 100 basis points of GLAs, driven by several factors: firstly, book growth driving increase in Stage 1 provisioning and stage migration. Secondly, changes to scenario assumptions to reflect a more subdued economic outlook. Thirdly, an increase in the vulnerable sectors overlay to $5 million, reflecting added uncertainty in certain sectors. And finally, partially offsetting these increases was the removal of a large customer overlay, reflecting our business maturity and diversification. We continue to maintain strong capital ratios both at CET1 and total capital levels. We ended the full year with a CET1 ratio of 16.7%. While growth was the biggest driver of capital consumption over the half, CET1 was also impacted by higher risk weights and higher reductions, some of which were one-off in nature. Looking forward, the lower risk weighting from the revised APS 112 standard and organic capital generation from growing profits will help support CET1. In addition, we expect our capital position to be supported by targeted capital initiatives, such as capital relief term securitization and AT1 issuance. We are well progressed with these, including regulatory approvals for an AT1 transaction. And as we show on the right-hand side, we have significant capacity available to introduce AT1 instruments to support our capital stack and continue to support lending growth. Finally, I'd like to close with a couple of key comments. On GLAs, we will continue to grow our loan book within our risk appetite. NIM trajectory will reflect repayment of the TFF and transition to our long-term funding model. FY '24 is a transitional year for funding, and we remain confident in our above 3% NIM target at scale. Costs will reflect ongoing investment in technology and people as we invest to scale with the FY '24 expense growth rate to materially slow to broadly half the rate of increase experienced in FY '23. Cost of risk will reflect ongoing growth and seasoning of the lending portfolio. CET1 will remain strong with capacity to continue to optimize our capital structure. And overall, we remain on track to achieve our key business metrics scale. Thank you, and I'll now pass back to Joseph.

Thank you, Andrew, for that A+ update. I'll now spend some time discussing the operating environment and our exposure to certain sectors. First to the economy. While high inflation and interest rates have been front of mind for almost 18 months. In terms of consumer spending, we're only just beginning to feel the full effect of households adapting to higher interest rates and other household costs. The transmission and monetary policy into household behavior is not immediate. [indiscernible] just suggest it can take between 12 and 18 months to flow through, but overall, we expect a soft landing. Our expectation is that the impact of higher rates and inflation will not be uniform across the economy with some sectors impacted more than others. Commercial real estate, accommodation of food services, retail trade, construction and manufacturing are the sectors which we see as most at risk. As Andrew explained, we raised an overlay in December in anticipation of some deterioration, and we have maintained that overly through June. Importantly, however, the SME sector generally remains a good financial health and [indiscernible] contrast to households, SME [indiscernible] has remained low, and we have observed some proactive [indiscernible] amongst our customer base. Encouragingly, business CapEx has continued to increase. Judo is not a macro play, and we feel confident that our full season credit will enable us to pick strong credit worthy businesses in all sectors as we work through FY '24. Turning now to credit quality. For Judo, the company is young, but not a young management team. As I mentioned earlier, the cumulative commercial banking experience amongst the management and Board exceeds 300 years. This experience has been accumulated through several economic cycles across various institutions and markets. Our Chairman and 3 of the senior management team have held Chief Risk Officer roles in other banks. When developing the original thesis for Judo, risk management was foundational. We are very cognizant of the lessons from history. We have looked in detail at domestic and international data from 2001 to 2015 to understand the key reasons for loan losses have reached a total of $4.5 billion. The key lessons were. First, banks did not properly assess the credit risk and origination. There was little evidence of a 4Cs framework with too much emphasis placed on security. Second, a factor in 45% of losses was borrowers lacking the expertise and experience to manage difficult market conditions. This included borrowers moving into new industries, outside their areas of expertise. Thirdly, commercial real estate accounted for 40% of all losses. And lastly, during periods of increased competition, some lenders give in to the temptation to loosen underwriting standards. We've seen this in the market over the last 18 months with some banks looking to aggressively grow their SME books. Our 4Cs to approach to credit assesses character, first and foremost. The capacity or cash flow; second, the capital supporting the debt on the balance sheet and finally, the collateral security in the event of weakness in any of the first 3Cs. This plays well to the current environment and our ability to back experience business operators who can successfully navigate through all parts of the cycle. This contrasts to the industry, which relies [indiscernible] on security as a key determinant of credit risk. Over the next few slides, I'll discuss the sectors which we consider most exposed to the impact of high interest rates. Before reviewing each of these sectors in detail, we have included this comprehensive table of the credit quality and security coverage of all sectors we lend to. There's a lot on this slide, but the 3 key takeaways are: first, we do not have any material sector concentrations. Second, we are well secured. And third, as I mentioned earlier, while the number of our customers in 90 days past due and impaired has increased over the past 6 months. In total, these customers only account for around 1% of our total customer base. This remains well within our acceptable long-term levels. Turning to commercial real estate. We have performed a thorough analysis of our commercial real estate portfolio and note 3 key differentiators for Judo's portfolio. Firstly, approximately 85% of our borrowers are high net worth and have alternative cash flow sources. Only a small percentage of our commercial real estate lending is to properties for rental income as a sole source of income servicing debt. Secondly, we have very little CBD office exposure. Our office exposure is primarily low, LVR, low-rise metro suburban offices. And lastly, our largest retail exposures are tenanted by nondiscretionary retailers. We have proactively managed down our concentration to commercial real estate, and we remain cautious on this sector as the math suggests that values will decline. However, we will continue to look for transactions on a case-by-case basis and lend to good quality borrowers with the risk reward economics make sense. Next to accommodation, food services and retail trade. In total, this represents 17% of our book. Within accommodation of food services, our exposures are highly diversified and well secured. Within retail, a large proportion of our borrowers are nondiscretionary retailers, including supermarkets, pharmacies and petrol stations, which on balance should perform reasonably well even in a tougher part of the cycle. However, we are maintaining [indiscernible] oversight of this sector given the susceptibility to consumers tightening their [indiscernible]. Next to construction. History is living with examples of banks that have gone into difficulty as a result of taking on excessive construction risk. We made a day 1 policy decision that we had no [indiscernible] for pure construction risk. A large proportion of our exposures to this sector is in equipment finance. Beyond this, we have a strong real estate security for the rest of our exposures, which is primarily to existing customers. We have no direct exposure to any of the large name construction industry collapses. All in all, we have limited concerns about our construction exposure, given it is highly diversified and well secured by real property assets. On manufacturing, which represents 7% of our portfolio, this is a very broad category with some 83 subsectors. Our portfolio is very well diversified and well secured with 85% of these loans secured by real property. Our largest exposures are in food and beverage manufacturing, and we have limited exposure to energy-intensive manufacturing. While there has been some easing of supply chain disruption and labor shortages, inflation in raw material and labor costs are ongoing challenges for the sector, which means we remain very vigilant to the risks in this sector and place additional emphasis on capacity and liquidity given the potential for shocks to impact these customers. As we look forward, we feel confident about the ability of our specialist model to perform through all parts of the economic cycle. We have always seen banking as fundamentally in the business of risk management. Key to our model is the recruitment of experienced business bankers who are supported by experienced credit executives. We operate on a ratio of 1 credit executive to every 7 bankers, which is industry-leading. Our recruitment is supported by our incentive structure that is based on all ships to shore philosophy meaning that no individual sales targets complemented by a major emphasis on equity. Being legacy free, we're also able to invest more in our frontline capacity translating to smaller customer portfolios for each banker. This enables bankers to stay closer to their customers and to take issues early. Our business is built on a foundation of experienced bankers who live to serve our SME customers. It is all that we think about and talk about and that's all we plan for. Before turning to outlook, I want to briefly comment on our culture, which is a key ingredient to our success. In fact, I would say the critical ingredient. It is our X factor. As the management Guru Peter Drucker famously said, culture eats strategy for breakfast. I would add breakfast, lunch and dinner. We are very proud to have received several accolades this year that recognize the unique high-performing culture that we continue to invest. These accolades include the prestigious Financial Times fastest-growing company in Australia, and we drew to #4 across Asia. LinkedIn voted as the #1 company to work for in Australia, and we reached #4 in the AFR best place to work for in Financial Services. We strongly believe that a highly engaged team will produce satisfied customers, which in turn will underpin strong sustainable financial performance. Our deeply experienced team have significant amount of skin in the game with our directors, management and employees owning 8% of the company. Having an equity culture is a core principle of our business. It underpins a strong ownership mindset with our people empowered to drive the business forward. On the trajectory to the key business metrics at scale, we have a simple strategy to deliver a return on equity above our cost of capital. We have put the building blocks in place and we now have a clear track record of successful execution. We have made a significant amount of progress in just 4 years since being granted a banking license. As this slide shows, we have consistently driven improvements in all of our key operating metrics. The inherent benefit of scale are now becoming clear. Our unique specialist business model which has been designed from a blank piece of paper will deliver strong returns when we reach scale. So to conclude, our strategy remains unchanged, driven by our vision of building a world-class SME business bank. FY '23 has been a [tremendous] year for Judo. We have strong momentum as we enter FY '24, and we'll continue progressing towards our metrics of scale. We have a high-caliber board and management team who will continue to work hard to navigate the operating environment and capitalize on opportunities to drive the business forward. We remain a small player in a large addressable market. Remember that our exposures with an average loan size of $2.3 million are mostly skewed to medium rather than small-sized businesses. This is important. We believe periods of uncertainty reinforce the value of our relationship-based approach, where our experienced relationship bankers can assess transactions using our 4Cs of credit framework and exercise judgment. We will continue to grow our lending portfolios, eye slide open to the risks. As you would expect in this environment, we will also maintain a strong focus on our existing customer base especially those in vulnerable sectors to provide support when needed. As Andrew mentioned, we have significant flexibility to manage our funding requirements, we are well capitalized and have a very strong balance sheet. I'd like to finish by saying that there's no precedent for what we've achieved. We are enormously proud of our progress to date, evident in the results that we've announced today. This is a fantastic business with a very exciting future as a unique pure-play specialist bank, a real Australian success story. Thank you, and now we open up for questions.

[Operator Instructions] Your first question comes from Brendan Sproules from Citi.

Look, I've just got a couple of questions on your funding mix, specifically. I'm referring to Slide 16. During the last 6 months, obviously, we've seen quite a bit of deposit competition coming to the market. And I noticed in your funding mix, I think you grew deposits about $700 million, which was about -- funded about half the loan growth over that period. Now, I just wondered just the trade-off that you decided to make during the half. I mean, the average TD seemed to cost you about mid-70s, but obviously, the warehouse facilities would be a little bit more than that. Could you maybe just tell me about the current trade-off between volume and growth that you've had over the last 6 months on deposits? And then I've got a second question.

Do you take that, Andrew?

Yes. Thanks, Brendan. I mean, you're right, we had about $700 million as we called out in terms of deposits. Partly, that was also because we had quite a big first half. So we did a bit of prefunding given the market conditions in the first half. We are -- for the second half, we obviously in balancing the deposits origination. We also had a number of warehouse facilities that we brought on board and so balancing kind of the first seating of those facilities. So there's a little bit of that, that came through. But overall, I mean, deposits still remain our kind of primary source of funding. And I think as we look forward to FY '24, that will be very much the case despite the environment that we're in. And we've had a really good start for the first 2 months this year in terms of the deposit origination. So it is about kind of balancing the funding cost and also, I guess, some of that initial seating that we need to do in the warehouses, noting that a lot of them have had their first seat that's come through.

It's worth just adding Andrew, that we've continued with our emphasis on duration on deposits and staying on the 6 to 9 months and 1 year out of the curve.

Yes. And we have seen that in particular in the direct retail book. That tenor at originations continued to grow. So good tenor in the deposit as well.

And my second question is just on Slide 17, where you look forward on this deposit mix. Obviously, you won a significant step-up in your percentage of deposit funding that you targeted and obviously reducing the amount of wholesale funding, if you -- from where you sit today, obviously, including the repayment of the TFF, I mean just sort of back of the envelope calculations, if you grow your loan book at a similar rate as you did this year, then you're almost going to have a record level of deposit gathering than what you've done I guess, it's in your history.

Yes. I mean the deposit book is growing and it will grow in line with what we've obviously got in terms of the lending book and then that TFF [indiscernible] component as well. The -- we've had a really strong start to -- for the first 2 months here. So we're kind of well on our way to what we expect for that lending point for June '24. We did take the extra warehouse to take us up to $3 billion, and there's a bit of seating that we obviously will need to do with that. But by and large, deposits still remain the primary source of funding. And despite all the kind of the competition and the environment that we hear a lot about, we're just continuing to execute there. We're comfortable with where we've been able to secure pricing -- it is a little bit volatile. It has been volatile. We kind of called that out, but it's still very much within our long term through the cycle, 80 to 90 basis point assumption. And I think the other thing to call out is we've just been continuing to invest in the brand for deposits as well, and we're starting to kind of see the benefit of that come through, just building that brand in the market as being a consistent attractive price offer, in particular in that direct retail market. So it's another big year for us, but we've got the building blocks in place to be able to execute on that deposit strategy, and we're very comfortable with the deposit assumptions and the funding mix assumptions that we've got for FY '24.

And it's worth adding, it's important to keep in context of even at scale. We're going to represent less than 1% of the market. I mean, we're not chasing a material part of the market. We're priced. It's a highly price elastic source of funding. So we remain -- whenever we've needed to access deposits, we've had no difficulty doing so. And I'll ask even, as I say, when we get to a $20 billion lending book, $15 billion deposit book, that's circa 1% market and given our pricing position, it's not something [indiscernible] us about.

Your next question comes from Josh Freiman from Macquarie.

A couple of questions for me. Just I think in the appendix somewhere just on that hedging slide. You guys mentioned you started investments in the capital program on the capital balance, which I think has now been being pretty much on hedged. Are you guys able to provide a little bit more detail on this capital tracker and what the hedge profile is, when it was initiated and it was done as a bullet transaction? And I'll come back to you on the second question.

Yes, thanks for the question. So yes, I mean, we -- this is probably the last kind of component, I guess, that we would do to put in place for our hedging strategy. And we've now post the balance date, we've now kind of started the execution of that strategy. We're kind of actually largely through where we want to be in terms of the hedging. We won't hedge all of the equity bucket, but we're probably looking to hedge about 3/4 of the equity component. And the way that we'll hedge that will be kind of consistent with the way that we've run hedging for the rest of the balance sheet. So the long and short of it is, I think, Josh, is that what you'll see with that in the next slide, if we kind of recut that for pro forma is that, that would be a pretty evenly balanced hedging profile with the [indiscernible] being put in place. And we're well progressed on that program already.

Okay. Thanks for that. I guess, I might touch base with you guys later a bit on the duration. But secondarily, you guys have mentioned that competition in SME started to abate, at least from the lending margin perspective. Should that not eventuate in FY '24 and competition remains pretty intense. How do you guys view the balance in lending growth versus margin management? Would you prefer to slow down growth, ensure you maintain your margins? Or do you at scale targets predicate a trajectory that drives your scale up pretty quickly?

Well, the focus is going to be on, as I've mentioned, Josh, in my remarks, being very disciplined in making sure that as we grow, and we've -- we really -- we view FY '24 as a continuation of FY '23. As we grow it, we won't compromise on margin nor on risk. And I'm going to pass to Chris in a second, but -- what we have seen an easing in some of the pricing in the market as the benefits of TFF start to lead the market in terms of funding -- cost of funding. And NIM pressures that the banks are facing in other parts of their portfolio. And so some of the aggressive pricing that we saw as a feature of late FY '22 and FY '23 that is starting to ease off. Chris, anything you'd add to that?

No. I think just as we answered on deposits, I just think you have to put this into context, where 2% of the market, again, we are not a macro play. We have the ability to find the deals, as Joseph said earlier, where we're not compromising on credit quality. We're not compromising on volume, and we're not compromising on margin. We know where we play, we know how we win. And that's the strategy that we'll just continue to execute. But there's definitely -- we're seeing activity dial back. As you know, I mean, two big banks were going sort of pretty much head to head, and they were using risk appetite and price at the same time. We are definitely seeing more rational pricing for risk now. Where they are still using the price lever to win deals is very much more in that truly commoditized lending, particularly at the lower end, as Joseph said in his presentation, we're a much an [indiscernible] Bank, [indiscernible] bank, where they are still very aggressively competing on prices in the area, say, low dock, but we don't play there. We're not a macro play. We know where we play, we know where we win with 2% of the market.

Yes. It's what -- I mean, it's an important point, Chris, and Andrew did highlight this in his remarks that our service proposition as a pure-play specialist bank, providing high quality of personal high-touch service. And this has been true of all of my experience in SME. SMEs, we've got a high-quality service proposition are not price-sensitive. You've got to be pricing reasonable, but we have found over time that we can price up to 50 basis point premium for a similar risk because of that service proposition. And that's always been part of the whole CVP that we've had in the market from day 1. And as Chris mentioned, we tend to avoid competing in highly commoditized price-sensitive transactions where Judo brings nothing to the table.

And even last year, we've been maintaining that 50 basis point premium, with no point to be compromised on that.

Yes. And Andrew did mention in his remarks that our pipeline has a 25 basis points improvement versus the current [indiscernible].

And that pipeline is a $1 billion -- so it's not a small pipeline.

But we don't want to get involved in the price game. We don't need to as a truly unique specialist bank with highly experienced bankers, customers will pay for that service. And the challenge for us is to maintain a high-touch service proposition.

Your next question comes from Richard Wiles from Morgan Stanley.

I have a couple of questions. The first one, Joseph, on margins. Slide 20 is a bit confusing. I think you say that FY '24 will be a transitional year for funding. And then there will be progress to the at-scale NIM of more than 3% beyond '24. Does that mean you expect the margin to be less than 3% in '24, but then go back above that level in FY '25?

Well, we see -- as Andrew mentioned, it is a transitional year for us as we come off the TFF. And as we're looking -- as we signaled, we do see that there will be a [fad] factor on our current NIM. What is difficult to do is forecast, and we can kind of get line of sight for the first 6 months of FY '24. It's difficult to try and forecast beyond that because we really don't know what's going to happen in the deposit market in particular. It has been a highly competitive market in recent times, but we're not anticipating that, that will necessarily continue to be the case, given margin pressures across the system. So what we're seeing is that there will be a [fad] factor on the current NIM, but we do expect that we'll be able to rebuild that NIM and maintain our goal plus above 3% -- above 3% when we get to metrics as we work towards metrics at scale. Andrew, anything you'd add to that?

No, I mean, I think that's a good summary, Richard. There's obviously a lot of moving pieces, and I think there's less visibility on how that will play out necessarily in the second half. But the upscale, we're very confident in the building blocks are in place there. And the potential, I think, in terms of just the continued progress as we build through the transition of the TFF towards those upscale funding mix stack is very much there. And we're well progressed on that this year, in particular, with the deposit had a really good start to the year in terms of the last 2 months of deposit progress. So that's kind of well underway.

Okay. And then my second question relates to loan losses and in particular, commercial real estate. So you note that your NPLs are well below the industry average at the moment? But Joseph, you also say on Slide 28 that history tells us that commercial real estate accounts for 40% of all loan losses. Given that sector is 22% of your portfolio, but something like 7% to 8% at the major banks, shouldn't we expect your NPL ratio and therefore, your cost of risk to end up well above the industry average as we go through a cycle.

Yes. Well, our commercial real estate book as a percentage of our portfolio is actually just below the industry average for an equivalent book, so it's in the single digits when you add the whole balance sheet. But when I look at our commercial real estate percentage of book, we are, I think, where I've been before, I've seen the figures in 22% to 24%, as a percentage of SME, we are -- we are where the market is. I mentioned on Slide 30, that there are some key differentiators if I can use that term of the Judo portfolio. The first being that 85% of our commercial real estate lending is the high net worth and where there is a second or at least an alternative source of income to service the debt. We only have a very small percentage of our commercial real estate lending that is reliant on rental income from the property to service to debt. I think that's an important characteristic of our business. And secondly, we have very little CBD office exposure. So I feel that the mix of the commercial real estate book which we have been managing down as a percentage of the portfolio because we have been cautious on the sector. I think that's well managed, well diversified and is performing well. Frank, is there anything you would add to that?

No, I think it's a perfect summary. And probably just to reemphasize the fact that we have proactively managed our commercial real estate exposure from 18 months to 2 years ago when we anticipated the changing in the monetary policy cycle and that this would, but this would occur. So we pivoted our strategy to focus more on the investment portfolios of SME customers. And that's a really important feature of the resilience of our current book.

Yes. I mean, Richard, just going back to -- and thanks for mentioning Slide 28 because as we were thinking about Judo's risk appetite, we did study carefully credit losses in this sector, not just domestically, but in other Anglo-Saxon economies. And we also looked at the mistakes that fast-growing banks have made and how they were prosecuting the strategy, those lessons, combined with the deep, deep experience of the management team, have been very much influential in the way that we're running the bank and thinking about risk appetite and thinking about portfolio growth. And I kind of tie it back to another comment that is really important and that is that the management in the company, and I include the directors and I include a lot of the staff, our major equity owners of the company. And so we are running and thinking about risk as an owner of the organization and making sure that the risk appetite is not going to get us -- is not going to be compromised in the sense of seeking asset growth, but on weak risk fundamentals because that's simply -- we totally misaligned with the philosophy and the ownership mindset is very much part of how we think, talk, and act.

Probably the other thing that is relevant from a portfolio composition viewpoint, and it's also mentioned throughout the presentation is that the [indiscernible] compositions elsewhere typically are comprised of a heavy development concentration, which we have virtually no exposure to. And this is the area of the [indiscernible] portfolios that have historically borne a lot of the losses.

Your next question comes from Jonathan Mott from Barrenjoey.

I've got a question that kind of follows up from Richard's question on that Slide 20. Just trying to get my mind around the NIM pressure that you're looking. I know '24 is a transition year, and you've committed to it at scale, but it does look like there's going to be a lot of pressure coming through next year. So I just want to see if we're in the right ballpark with these numbers. But potentially credit growth next year, sort of around $2.5 billion to $3 billion [in buys] somewhere around 25% growth give or take how the economy plays out. But then the margin coming down quite sharply. I know there's liquidity movements as well. But you'd be expecting that the net interest income would only be growing somewhere around 10%. If [lagged] expense growth half the rate it was this year. So if you put those numbers together, you're looking at a pretty flat year next year for pre-provision profit. Now I know they're ballpark numbers, but are we missing anything in that sort of back of the envelope for FY '24? And then I had a follow-up question, too.

Yes. And that's a good question, John. I mean, you're right. There's a lot of moving pieces as we kind of work through this year, and a lot of that is going to be driven by this roll-off of the TFF and the continued progress in terms of the funding transition. So I think we've certainly -- in terms of kind of how we look at the certainty, I guess, of the FY '24. The first half, we've got more certainty on because it's obviously -- it's closer, and we can kind of see some of the trends, in particular around the deposit cost and the competition that we see there. We've got a sense of how that will play out. [indiscernible] I think, the lending margin dynamics. And Chris and the team, we spoke a little bit about that earlier. So from a kind of a first half NIM perspective, we will obviously see a reduction from the highs of the print that we did for June. And that will -- we'll always say that will come back as it rolls off, harder to be as definitive, I think, for the second half because there are a number of levers and how the competition around deposits and the wash-through of lending margins comes through is further away from us. But you're right. I mean, we are going to see some of the growth in terms of income moderate a little bit as we go through this transition. And costs, yes, costs will continue to grow, albeit we're seeing a real flattening of that growth rate. And that's something that we will obviously be working to keep a disciplined handle on.

I mean, it worth just starting as a footer, Andrew, that the way that we think about the company and where we're managing the company is through FY '24. I mean, we've got -- we put back in November '21, we put metrics at scale. For us, those metrics at scale are our contract with the market, we're managing a company to deliver on those metrics at scale. We remain absolutely confident and committed to them. We'll manage the transition of FY '24 as is, but the journey to meeting those metrics at scale, which include a NIM above 3%, we are absolutely committed to it and confident of achieving. So I don't -- I know there's always a temptation to focus on the next 6 months and the next 12 months. We will perform well in a transition year and in a difficult economy, but we will not lose sight of our primary objective is to deliver on the promises we made to the market in terms of achieving the metrics of scale. That's how we think, that's how we plan inside the company and that's how we assess our performance.

If I can take a second question. Just around the deterioration in the 90 days past due that you've seen. But if you look at the total number of accounts, which have gone into areas of nonperforming, you're looking around 41 accounts. I know there's [indiscernible] huge. But it's a sharp rise. You've got a very young book and usually, it takes 2 to 3 years for many loans to season. So when you get a feel for how many of the loans that have now gone into arrears were recently originated. And we're getting to is -- have you seen many accounts where you have lend someone money and very quickly, they've gone into arrears, and this has been an adverse selection that has come through.

Frank, do you want to do that.

Sure. So the direct answer to that question is none. So none of the accounts that we've originated in the last 12 months form part of that cohort.

Last 18 months.

Last 18 months and the -- almost the entirety of it. I think barring 1 account is more than 2 years old. So your initial comments that the book takes a little while to season are absolutely spot on. But it also provides a validation point for the quality of our origination assessment and underpinning the value of the judgment-based approach that we applied origination.

Okay. Well, if you follow that on, you're saying that 1% of your book is nonperforming and that's really good. But if you -- should we then be dividing that [indiscernible] not your book size today that you booked so 2 years ago. Look at well on maturity, you book [indiscernible] a lot in the last 2 years of the loans that you had on your book 18 months to 2 years ago, what percentage of those accounts have now as session gone into nonperforming, is that a better way of benchmarking your asset quality.

Yes. I mean one way to do it, John, would be to look at what that 90 days plus an impaired if we effectively looked at that level over, call it the loan book a year ago. And that 1.99% would be in the order of kind of 1.75% by way of kind of, I guess, a crude vintage-style analysis. So obviously, higher because of the growth. But I think then when you look at some of the other benchmarking that we provided earlier in the pack around kind of, well, how does that compare against the sector and it's -- we've done some analysis try and pick apart to make it apples-to-apples as we can. The sector is currently about 2%. So it's a bit crude, but it gives you a sense that, that 90 days and impaired whilst obviously kind of come up a bit, there's a vintage in the is still kind of within the level that we're quite comfortable with. And the other way to look at it these is what's been the P&L experience and cost of risk over the last 12 months? And we said over -- or pretty much a year ago, but we expect that, that would be in the order to $50 million to $60 million. Well, we've kind of printed pretty much in the middle of that range, $50 million to $55 million for FY '23. So yes, there's been a normalization in 90 days and impaired, but it's been off on [indiscernible]. And the level of provisioning that we hold on the balance sheet, we just continue to build that, and that's a very solid number as we faced the year ahead.

Yes. That point is so important. The provisioning point is very important. We're well providing in terms of -- because we're always looking at our leading and lagging indicators on credit quality and the provisioning sitting at 121 points. We're strongly provided.

Your next question comes from Andrew Triggs from JPMorgan.

The first question just around the time impact for the replacement of TFF. That chart on Slide 20 shows that it's a 2024 impact with the NIM then rising from that trough level in 2024. But the TFF repayment is back end weighted to second half of '24 based on Judo's profile. So why is there not a sort of residual impact at the start of 2025 -- why is it all sort of concentrated into 2024?

Yes. I mean thanks for the question, Andrew. I mean, in terms of what we saw on that page, you're right, we're just showing the impact, I guess, through the FY 2024 year. And if it isn't completely uniform. I mean, we do in terms of the if we think about, I guess, the roll-through of that TFF repayment over FY '24, but there will be an element of that kind of coming through in -- certainly, as we think about it kind of first half, second half, it will be a little bit more drag that we see in the second half. But the other thing that I think -- and this is why there's a lot of moving pieces here, I appreciate that with getting your head around the modeling is that we'll also be continuing to evolve the funding stack at the same time. So the build of deposits, which is also, I guess, ultimately kind of an offset to how that normalization will wash through. So I think, we've called it out that there will be some normalization of that NIM over FY '24, but that also due to the TFF roll off, but that's also kind of coming through as we're building up that deposit mix. And as I mentioned earlier, we've made really good progress on certainly the FY '24 target in the first 2 months of this year.

Second question, just around the TD cost chart that you showed up to the end of June. Comment post you made a couple of comments in your remarks, but post June and July, it looked like kind of TD rates were up a lot, but has come back in August. Can you make some comments on the last couple of months? I think you said that you're still confident of that 80 to 90 basis point spread, but just what you're seeing in the last little while, please.

Yes. No, we are confident in that 80 to 90 basis point guidance that we've put through. I mean the ocean for TD pricing, unfortunately, isn't flat. It does move around a little bit, and we kind of called that out, I guess, on that Page 18. It's partly driven by pricing. It's also driven by, I guess, movements in the swap rate as well during that period. In terms of what we've seen in -- if I think about kind of the first, call it, 2 months of this year, we did see that go up again quite a bit actually in July. We probably saw a kind of above the 80% to 90% range. And that's why we talk about that as, I guess, being an average, but as we look at August, that's actually kind of come back and come back within the range. It's at the top of that range, but it's come back within that range. So it moves around, but we kind of -- we're very comfortable with that 80% to 90% -- we're 1% at best of the TD system. We are nimble in terms of how we look at where we take the our funding needs from. We can be opportunistic as we called out in the first half, which we've got ahead of our funding -- TD funding in the first half of this year. And then we just play across, we've got all of the tenors. We're present in all of those tenors in particular, the longer tenors and channels as well. We've got really good flexibility there with the launch of Direct [SMS], which is performing really well for us. and direct business as well. And we are pretty active with how we look at this part of the market. And then supporting all of that is the investments that we're making just in terms of building the Judo brand. And I think we're starting to see some really steady build benefits of being known as a consistently good deposit offerer in terms of pricing. We're really building that reputation and that consistency means that yes, when we want flow, we can price up for it. But do we necessarily have to always be at the top of the right tables, no. I think that's the benefit of the investment that we're doing in proposition. And so we're very confident in the 80% to 90% range. We're managing to that. I think we've demonstrated that we can manage to that with a massive amount of disruption that we saw in the last 6 months. We still, despite all of that managed within that range, and we anticipate that we will be able to, going forward. This is also -- at some point, we expect that there will be some normalization of activity and competition certainly, when you look at what the major numbers are having to pay in the market. We expect that some of that heat will come out. When that happens, probably I'm not going to put a date on it, but I think that will be part of the ultimate wash through of the TFF that we'll see this year.

Your next question comes from Azib Khan from E&P.

A couple of questions from me, 1 on loan growth, 1 on capital. On loan growth, the loan balance of $8.9 billion in FY '23 feel a little shy of your targeted greater than $9 billion. And I note that you're not providing loan balance guidance for end FY '24. Is the irrational loan pricing prevailing in the market that you've alerted to making loan growth more challenging and the outlook less visible? Or is it some other factor?

I mean, the loan growth, we would have sailed past $9 billion at 30th June other than some delays in settlements with other banks. It's always a problem at the end of June when you go to some of our competitors asking for settlement figures and they take the time getting back to you. So we had the pipeline, and we actually went through the $9 billion within 10 days, I think, of getting into July. I said earlier that FY '24 is going to be a continuation of FY '23 and that we're running our own rates. We are -- there has been a more subdued market, I would say, simply because of the economy. You're not going to expect businesses to necessarily, all businesses to be borrowing given an uncertain economic catalyst. So there has been a slowdown in market activity, but we've always said that we're not a macro player here, and we have a strategic hedge that we don't rely on system growth, per se. I mean we -- 75, Chris correct me here, 75% of all our lending is done as a result of refinancing from a major bank, and that's largely because of service that the customer can't get a hold of a banker or it's taking too long to respond, so we're confident on our assumptions around growth regardless of the economic environment, hence the emphasis on a strategic hedge that we have talked about in the past. We are running our own rates. We have no appetite in FY '24 to grow much faster than growth that we have grown. We said we'd be really clear on that, actually. And again, I repeat, we are managing this company to medium-term metrics at scale, and we've been growing at about net $3 billion per annum, an assumption around $2.5 billion to $3 billion would be a fair assumption. But of course, we're not -- we're going to be very cautious depending on where the economy, what happens in the economy because there's a reasonable [prospective costs]. We're assuming a soft landing. It's not going to be an even soft-landing, it will be soft pockets in the economy and we're going to have to be quite careful about our credit assessment, particularly since we -- as we mentioned in our remarks, the transmission of monetary policy, we're only really at the beginning of that impacting households and businesses. So there's another 12 months at least to run. And so we've really got to be quite prudent in our assessment of risk in certain sectors of the economy, in particular, but notwithstanding that, we're feeling confident about achieving a continuation of what we've done in FY '22. Chris, anything you would add to that?

No. I mean just what I said earlier, Azib, which is we've got a $1 billion pipeline. We've always said the gestation period of an SME from lead to settlement is about 90 days. And that $1 billion of pipeline is at 25 basis points higher than the margin you saw in the second half of last year. So as Joseph said, we're playing our own game. We're not a macro play, and we're very confident about the future.

Yes. And also, Chris, I mean, our history says that 90% of that pipeline is probably is.

Yes, what we call our AAA.

Yes. So it's not -- it's a pipeline, not a pipe dream..

Second question for me on capital, please. The CET1 ratio declined over the half despite the benefit from the revised capital framework. And it looks like organic capital generation in FY '24 will be challenged as a result of the NIM contracting to being sub 3%. If the cost of risk remains within your expectations, can you commit to achieving the at-scale metrics without needing to raise ordinary equity capital?

Yes, very much so, Azib. I mean, I think what you've seen in the last kind of 6 months here, it's been a little bit of lumpiness. We obviously had a very big period of growth, as we always do leading into the -- into June, it was -- I mean we had almost 600 gross originations in June, the month alone, which was a superb effort and demonstrates the momentum. But that causes a little bit of lumpiness, obviously, in terms of the capital consumption. When you look at it maybe quarter-by-quarter, which maybe some of you have been doing. The other thing here is that we had a couple of kind of one-off. We had some deductions, et cetera, and some of them were kind of one-off in nature, some of the debt fees, et cetera. Which again caused a little bit of lumpiness offsetting some of the organic capital generation. So I think that's -- there's been a little bit of movement there that makes the trend a little bit harder to see when you look at it just in isolation. But we're very confident in the ability to get to -- get to the scale book and the upscale economics. I think the other thing to highlight on top of, I guess, the capital print that you see for June is that as has always been part of our capital plan through this upscale period, is a number of other capital initiatives that we have that will supplement the capital stack that you see today on Slide 24. And they include, for example, [term relief self-sec] as well as kind of an AT1 transaction. We will very well kind of progressed with those initiatives, and we've got some other initiatives that we're also looking at. So that will kind of [supplement] capital stack as well as we go through to the second half of the upscale trajectory.

Your next question comes from Josh Freiman from Macquarie.

Thanks for the opportunity to ask another couple of questions. I just want to dial in a couple of people have sort of focused on the first half, second half margin. And you guys have been pretty strong that you're pretty confident on first half margin. If you guys are confident having had sort of 2 months of deposit data, lending margin data, why aren't you guys willing to be sort of drawn on providing guidance for first half margins? And I'll come to the second question, additionally, also.

Look, I think, Josh, we -- I think we've been obviously pretty good at giving the market guidance in the past. And that's just, I think, reflective of say, kind of where we've been. The reality is that there are obviously a number of moving pieces as we've kind of talked through that make it difficult for us to be as definitive and give you an actual number. And that's just, I think, reflective of -- there's just a lot of moving pieces in particular around NIM. So where we can, we've been pretty good, I think, in terms of the -- in terms of the direction of the movements. But it's just a more challenging environment for us to be as specific to give you a specific number.

Yes. I would say, Josh, that we are giving guidance with our metrics at scale, we're saying and we've been very consistent on this, that you've got to look at this bank on the basis that we will be a $15 billion to $20 billion lending book, but halfway, past half we actually [indiscernible] $9 billion, that we'll deliver our cost to income ratio in the lower [indiscernible] that will deliver a net interest margin above 3 that will deliver cost of risk within 50 points. That -- I mean, that's a stronger piece of guidance that you're going to get. And as I've mentioned earlier, we're managing the company to that end because we view that as a contract with markets, promises we've made and promises that our credibility would be called into question if we didn't keep. And that's very strong guidance.

Understood. And I guess a follow-up to that is -- would it be fair given how margins are tracking or reason to assume NII will be broadly in line then in the second half of '23.

No, the expectation should be that it will be higher, we'll still be growing, Josh. I think that's important -- despite kind of the environment we're facing. We're still a growth company. We're still -- we've seen really good momentum in the originations that we've done. I mentioned the figure that we saw in June, and that's continuing through. So the growth is an important part, I guess, of thinking through the profile there.

Thank you. There are no further questions at this time. I'll now hand back for closing remarks.

Okay. Thank you, and thanks, everybody, for your participation in the session and the questions, which we much appreciate. We hope that you can find the information that we provided to be in line with our -- what we've done in the past in terms of the quality of our disclosures, as Andrew mentioned at the beginning, we've included quite a bit on our credit book. And certainly, as it relates to those sectors that are more interest -- most interest to the market. We feel that this is a really strong set of results in a challenging environment in terms of FY '24 and a transition environment in terms of funding mix, but we feel really confident about maintaining our momentum towards achieving those metrics at scale, and we'll manage the bank [indiscernible] and then start with a new horizon beyond those metrics at scale. I'm absolutely thrilled with the performance of the company and the consistency. We've met every guidance we set 12 months ago, we met plus and we're reconfirming our commitment to the metrics at scale and that remains something that we are very confident of. So thanks again for your participation in this call. And I think we can bring it to a conclusion now.