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

Welcome to the Judo Capital Holdings Limited First Half FY '24 Results Call. [Operator Instructions] I would now like to hand the conference over to Mr. Andrew Dempster, General Manager, Investor Relations. Please go ahead.

Thank you, operator. Good morning, and welcome to the Juda Bank results briefing for the half year ended 31st of December 2023. My name is Andrew Dempster, I'm the General Manager of Investor Relations at Judo. I'd like to begin by acknowledging the traditional owners of the land we're meeting on today and pay my respects to Elders past and present. Our results material was lodged earlier this morning with the ASX, and the material is also available on the Judo section -- Investor section of the Jio website. A replay of this session, including the Q&A will be available on our website later today. Turning to today's agenda. We'll first hear from our CEO, Joseph Healy, who is going to provide an update on our performance against the strategy for the half. Then our CFO, Andrew Leslie, will discuss our financials in detail. Joseph will then return to discuss the operating environment as well as the outlook. After the presentation, there will be time for questions with Joseph, Andrew, Deputy CEO, Chris Bayliss; Chief Risk Officer, Frank Versace; and our COO, Lisa Frazier. Thanks, and I'll now hand over to you, Joseph.

Thank you, Andrew, and good morning to everyone. Before launching into this morning's results presentation, I want to say a few words about the CEO succession announcement we've just made. Today is one of mixed emotions for me. Having invested in all consuming 9 years in building Juno with Chris, David and others, I'm sad to be leaving whilst at the same time, pleased that in stepping down, it gives Chris an opportunity to take over as CEO. So much in life is about timing, and this is the right time for this transition to take place. I believe that this is a textbook CEO succession move with Chris seamlessly taking on the role, which will ensure that the business will not miss a heartbeat in executing on our strategy, which Chris was instrumental in shaping. I've worked closely with Chris now for the past 9 years, starting when Judo was just a PowerPoint, and even before then, when we were both senior executives at NAB, I have no doubt that he will be an excellent CEO for Judo. There's no one better place to take on the role. At the end of this presentation, I'll pass to Chris for him to say a few words, but for now, let's move on to the results presentation. As with previous results announcements, I'd like to begin this morning's presentation with a review of the unique journey that we've been on for the last 9 years. A consistent theme of our journey has been the volatility in the operating environment, which continues to be a feature today. In our short history, we have successfully navigated far more volatility than in a normal economic cycle. In particular, since receiving our banking license in 2019, we have navigated the pandemic and the fastest succession of interest rate hikes in living memory. Despite this, we have delivered consistent strong growth and improving profitability, prudently managing the levers we have available and staying focused on our goal of creating a world-class SME bank. Importantly, a hallmark of our journey has been the absolute consistency of our strategic narrative ever since 2015 when we were a PowerPoint. Again, as with previous results announcements, I want to remind everyone that our journey has always had three distinct horizons. Horizon 1 was about building the bank and getting it to market; horizon 2 was investing and scaling the bank; and horizon 3 is about building a world-class SME business bank. This has always been our vision and remains unchanged today. We have completed the first horizon of building a bank, and we're now well advanced into the second horizon of scaling a bank. We have continued to execute our plan in a disciplined manner, making investments to enable sustainable long-term growth and market-leading economics. We're executing our clearly laid out strategy whilst balancing the realities of our funding stack transition and the ongoing impact of higher interest rates on the economy. We are committed and very much on track to achieve our goal of becoming a world-class SME business bank that delivers ROE in the low to mid-teens. In managing the business, we continue to run our run rates. The number of business bankers in our ranks continues to grow as we recruit top talent from the market and develop our own analysts and promote them to bankers. We currently have 133 business bankers in 18 locations around the country, and our bank numbers will continue to grow over the remainder of this year, particularly as we execute our plan to expand further into the regions. We have also continued to accredit more commercial brokers who remain an important distribution channel for us. Our Net Promoter Scores remains market-leading, especially for lending, which compares to negative low single-digit business banking NPS scores for the rest of the sector. We acknowledge the renewed energy that some other banks are putting into SME banking, which for a long time would be the purely served sector of the banking market, but we remain absolutely confident that we can achieve our performance goals by playing to our unique strengths as a pure-play specialist bank. Moving to the highlights for the 6 months to 31 December, '23. Our profits before tax increased 24% to $67 million and albeit at a slower rate than recent halves, our loan book grew by $800 million at a multiple of systems, notwithstanding an uncertain environment. We have demonstrated our strategic agility by increasing our front book lending margin to 464 basis points in the December quarter, up from 390 basis points in the June quarter. Our asset quality remained within our expected long-run assumptions. Write-offs were lower than expected, arrears and impaired loans have increased as expected and as flagged at our last results as our book continues to season in a softer and uneven economy. On the funding side, we have pleasingly grown our term deposit base by an additional $1 billion to now over $7 billion. Our growth was achieved with pricing at the top end of our expected long-run range of 80 to 90 basis points over swap, given heightened competition for deposits during this period of TFF prepayment. We have continued executing our TFF refinancing strategy, having repaid the initial tranches and are on track to repay the remainder by the end of the financial year. We have sufficient funding available to repay the remaining TFF outstanding with an undrawn committed warehouse capacity and elevated liquidity. Andrew will provide more detail on this shortly. Lastly, our capital position remains strong and has benefited from an inaugural capital release term securitization and AT1 transactions, we remain the best capitalized bank in the country. Turning to a summary of our financial results, all of which, of course, were preannounced on 23 January. But to recap, we have delivered above system lending growth. Our NIM was 3.02%, including the well-flagged impact of the TFF refinancing. Our CETI was 53% versus stable versus last half as we continue to invest in the business. Cost of risk was $27 million with lower-than-expected write-offs, as I already mentioned. Our ROE was 6% annualized which represents strong progress towards our at-scale target of ROE in the low to mid-teens. I should add here that we remain committed to and confident in achieving our metrics at scale. Turning to margins. We prioritized margins this half and the strong improvement in our front book margin demonstrates that as a pure-play specialist bank, we are agile and can move quickly in adapting and adjusting our performance metrics. The lending margin of 464 basis points for the December quarter reflects continued strong demand for our premium service amongst SMEs who value our relationship-based proposition. It also reflects our reduced appetite for larger, more commoditized commercial real estate lending where risk reward economics can be challenging at current interest rates. Commercial real estate deals are generally finely priced and by virtue of doing less of this kind of lending, we have seen our average front book margin increase. We also continue to review our existing customers, ensuring pricing is appropriate and reflects any changes in risk profile. This has seen pricing for some customers decrease while others have increased. Going forward, we will continue to balance margin and growth dynamically to deliver optimal economics for the business. Our ability to do this is a key competitive strength of our business model. Next to growth. Growth has remained strong and well above system. In the last half, our net growth was moderated from prior periods, driven by several factors. Firstly, as just discussed, our emphasis on margins has meant that we've done less low-margin commoditized lending. Secondly, we have been managing our overall growth whilst prudently managing our funding transition. While we have ample warehouse funding available, our preference is to fund as much of our growth and the TFF refinancing from relatively cheaper deposit funding. Once the TFF refinancing is complete, we will be free to use all deposit growth to fund lending. Thirdly, as mentioned, our reduced appetite for commercial real estate lending means that we have foregone some lending volume in the market. This stance towards commercial real estate is not a permanent shift, and I do want to emphasize that. We have had a degree of caution about the economics of lending to this sector. And as a result, our portfolio weightings for commercial real estate is below our risk limits. However, the long-term fundamentals of property are strong, and we will regularly review our appetite for the sector. Offsetting the reduced appetite for commercial real estate, we continue to see attractive lending growth in agri and health. As previously mentioned, we established specialist teams in these two sectors about 18 months ago, and I'm delighted with the progress that the teams are making. Expanding into the regions and continue to grow agri lending will be a key driver of growth going forward. We have plans to establish at least five new regional locations by the end of the calendar year. The fourth factor impacting net growth is that we experienced higher-than-expected runoffs in the half. Cost amortization is stable at 8%, we have seen elevated paydowns. Some customers have chosen to deleverage in response to higher interest rates. We've also been vigilant about managing risk in our existing book, resulting in an increase in number of customers refinancing with other banks, given our risk appetite. While the higher runoff has impacted headline growth this half, we believe that this is partly in response to the current economic environment. Overall, we remain very comfortable with our long-run assumption of our 20% runoff. While conditions are currently uncertain, it is increasingly looking like a soft landing for the economy, and we are ready to pivot our business, which, as I mentioned, is a key advantage we have as an agile specialist lender. Now let me turn to risk. Banking is, of course, our risk reward business and managing risk reward has to be a core competency of a well-managed bank. Our business model is predicated on our ability to identify and lend to SMEs using our 4 Cs credit framework and risk reward pricing. Whilst we have achieved higher margins this half, this is not a reflection of a change in our transactional level risk setting. As I called out in the prior slide, a driver of our higher front book lending margin has been doing less commercial real estate lending. So it's more a case of doing less commoditized lending than doing higher risk lending. On the slide, we have shown our average credit risk grade for our portfolio. And as you can see, our credit risk grading has remained stable. We have also shown the security coverage levels for the portfolio. It's evident from the chart that the portfolio shifted towards being more partially secured with an offsetting reduction in fully secured lending. So there has been a slight shift in our security metrics, but no real change in our 4 Cs assessment of risk with an emphasis on robust cash flows and financial leverage. Further evidence of our risk [ savings ] remaining unchanged is that we continue to decline around half wall applications that we receive. So let me to sum up the last few slides by simply saying that we're managing this business dynamically balancing margin growth and risk given the prevailing economic environment. Now moving to the credit performance of the portfolio. As mentioned earlier, our 90-day arrears in impaired loans have increased as expected and as flagged at our last results. Importantly, the current level of arrears and impaired loans at 173 basis points remains comfortably below the 330 basis points level that equates to our 50 basis points through the cycle cost of risk assumption. The increase in arrears and impaired loans is a function of a continued seasoning of our portfolio as well as the broader economy with higher interest rates and inflation impacting customers in more vulnerable sectors. We are also observing an element of indigestion in our numbers where we have more loans entering arrears and impaired than exiting. We have no concerns about this because SME loans can be complex, and we take our time to reach a satisfactory resolution. It is common for delinquent SME loans to take more than 12 months to remedy, and tying this indigestion will normalize as more delinquent loans are resolved. Overall, we expect the 90 days past June period will continue to increase as the portfolio matures, but we'll be comfortably within the 330 basis point assumption underpinning a 50 basis points cost of risk, given the resolution remedies are shown in the pie chart. Before handing to Andrew, I want to spend a moment on our term deposit business. Being an ADI has always been a core part of our investment thesis, so that we have access to the $2 trillion deposit market. Because of our higher margin lending, we are able to provide market-leading deposit rates on a sustainable basis. We have built a powerful deposit franchise that we now have over $7 billion in term deposits from 42,000 customers. 72% of our deposits have been raised via direct channels, reflecting the strong and growing recognition that our brand has amongst depositors, helped by our many awards and their expanding product range, which now includes direct SMSF and business products, which have both been launched in the last year. We're managing our term deposit business with an increasing level of sophistication, responding to a very dynamic and competitive market. Andrew will discuss our pricing in more detail shortly, but we're now consistently achieving strong inflows without needing to price as aggressively. Even with $7 billion term deposit book, we still have continued scope for growth as we currently account for a very small fraction of the overall market. The strength of our deposit franchise can be overlooked and underappreciated, but it has been a core part of our success, and we are well positioned to continue growing our deposit business to fund our lending growth. On that note, Andrew, I'll hand over to you, and I will be back later to talk about the operating environment and the outlook.

Thank you, Joseph, and I'm very pleased to be here today to present Juno's first half 2024 results. During the half, Judo delivered a record profit result with a profit before tax of $67 million, up 24% compared to the second half of 2023. As most of you would be aware, we pre-released our key financial metrics a month ago, and there are several key drivers I'd now like to highlight. Firstly, our profit result was driven by both an improvement in pre-provision profit and a lower cost of risk expense. Secondly, we successfully grew our loan book by 9% or 3x system growth to $9.7 billion. Thirdly, expenses were well managed with positive jaws this half. And finally, as Joseph has already discussed, we've seen an increase in 90 days past due and impairs, which I note comes with a corresponding increase in our total provisioning levels. Turning now to margins. On this slide, we show the key drivers of NIM from June to December 2023. Our net interest margin for first half '24 was 3.02%, with several moving parts. Firstly, as previously flagged, most of the NIM drag over the half was due to the continued execution of our TFF refinancing strategy with relatively cheaper funding refinanced at higher rates. This represented a 27 basis point drag over the half. Secondly, deposit costs had a negative impact on NIM, with new TVs raised at the top end of our long-run assumption of 80 to 90 bps over 1-month BBSW, given TFF refinance competition. Thirdly, increased use of warehouse funding plus additional funding from the term securitization and AT1 transactions was a 6 bp drag to NIM. Fourthly, despite the improvement in front book margin, the blend of lending margin on the book caused a 4 bp drag to NIM, largely due to the full period impact of lower margin originations in second half '23. Offsetting these headwinds was the impact of rising rates on the equity component of the funding base, contributing an 8 bp favorable movement to NIM and treasury and other contributing a 9 basis point benefit. Next to funding mix. Term deposits remain our primary source of funding, having grown by $1 billion over the half to deliver a total book, which today is over $7 billion. We continue to demonstrate strong deposit gathering capabilities with volumes remaining strong despite the highly competitive environment as the system refinances the TFF. Our TD franchise continues to strengthen, and pleasingly, we are achieving high retail deposit rollover rates at around 65% for the half. Drawn funding from warehouses increased by close to $500 million to $1.4 billion. And today, we have $1.35 billion in undrawn capacity available as contingency to refinance the TFF, having recently closed out one of our early warehouse providers. Finally, we executed two inaugural transactions over the half, the first to market SME backed $500 million capital relief securitization issue and our inaugural $75 million AT1 issue, meaning we now have proven access to largely the same funding sources as the more established banks. I'd now like to make some comments on our TFF refinance profile and outlook for liquidity. On the TFF, we are well advanced in our plans to repay all TFF funding by June 2024. We Firstly, we repaid $390 million in the first half of 2024. Secondly, as you can see from the green bars in the chart, during the half year, we reduced the funding component by $1 billion, and we plan to refinance the remaining $1.2 billion linearly each month over the second half. Thirdly, as we've called out previously, a timing difference between this linear refinancing of lending assets and the contractual TFF repayments will result in continued elevated liquid assets during the second half. And the blue bars in the chart highlight this component. This preservation strategy, whilst dilutive to NIM, generates net interest income, which flows into our capital base and supports lending. And finally, on liquidity, we expect our mix of liquids to reduce over the remainder of FY '24 and normalize to about 20% of average lending assets from FY '25 onwards after the TFF is repaid. This next slide outlines further details on the transition to our upscale funding stack, namely a 60% TD mix by June 2024. As I mentioned earlier, we grew TDs by $1 billion in the first half. Now this mix contribution was partly offset by the upsized term securitization and AT1 issues that settled over the period. Our path to 60% TDs by June 2024 is now relatively straightforward. In simple terms, in the first half, we grew our TD book by $1 billion, and we expect to see another $1 billion of TD book growth in the second half. This, together with the full repayment of the TFF and no planned term sec or hybrid issues, will see the mix shift significantly towards our June 2024 target. At scale, we expect our funding mix to broadly comprise 70% to 75% TDs, 15% to 20% wholesale debt and 10% equity, and we remain confident in our ability to achieve this. Let's turn now to some observations on the term deposit market. Firstly, as we've seen numerous times, our TD pricing assumption of 80 to 90 bps over the 1-month BBSW is a through-the-cycle assumption. This means at times we will be above within or below the range. And you can see this in the chart on this slide. TD margins move with both the swap rate and market conditions with our margins also impacted by our own volume requirements. The second point I want to call out is the convergence in margins across the sector over the last 18 months. TD margins for the major banks and regionals, which were negative in June 2023, have trended higher and converged and are now closer to branchless bank margins. However, the step-up in major and regional bank margins over this period has been much larger than that for the branchless banks who themselves have generally remained at or below 80 bps. Finally, it's worth noting that we are now able to achieve TD margins broadly in line with those paid by the branchless bank segment. When we first launched, we typically needed to price at a premium at the top of this segment to attract our required flow. This dynamic is very much a result of our value proposition to consistently pay customers attractive TD margins and continued marketing investment, which together are helping us establish our brand and reputation in the retail deposit market, where we now take the majority of our flow. Turning now to NIM drivers over the next few halves. We expect second half 2024 NIM to be in the range of 2.7% to 2.8%, with trough NIM to occur during this period. We expect a gradual improvement in NIM over first half and second half 2025, with full year 2025 NIM to be between 2.8% and 2.9%. We expect the impact of TFF refinancing to be a significant drag on NIM in second half '24 and to a degree in first half '25 as relatively cheaper funding is refinanced at higher rates. Offsetting this impact, however, are a number of high conviction drivers. Firstly, liquidity will be a material benefit, initially more in terms of higher yields on the liquids book and also due to normalizing liquidity levels following repayment of the TFF. Secondly, we expect the ongoing impact of higher front book margins on new loans as well as continued earn-through of higher margins on the back book to provide a tailwind. Thirdly, we expect to benefit from relatively lower cost deposits becoming a larger portion of our funding mix, in particular, into FY '25. And lastly, we'll also receive some benefit from wholesale funding optimization. This includes reviewing our warehouse capacity, noting that we recently executed an example of this with the closure of one of our early warehouse providers. Now to expenses. Costs grew 4.5% over the half, reflecting higher employee costs from the full run rate of recent recruitment, amortization on recently completed projects and some nonrecurring items. Cost for the half also benefited from timing of some activities that will fall in the second half, for example, some planned marketing activity. FTE growth has predominantly come from frontline and technology teams with other areas now largely at maturity. In the near term, we expect costs to continue to grow due to higher employee costs, reflecting the full run rate from recent recruitment, higher amortization expense as investment projects complete and higher IT expenses from increased licensing, platform maintenance and enhancement costs. We're continuing with our 5-year CapEx investment program, including investments in new technology projects, upgrades to existing systems, including our core as well as digital and data initiatives. Overall, we expect FY '24 CTI to be between 55% and 57%, and thereafter for cost growth to trend towards CPI. Turning now to asset quality. Our impairment expense for the half was $26.8 million, lower than the level experienced in the second half of 2023, with limited write-offs of only $5.9 million. The impairment charge was driven by growth in the loan book, stage migration and an increase in specific provisioning from additional impaired assets. 90-plus days past due and impaired has increased as expected to 1.73% of GLAs at the end of the half. This increase reflects ongoing portfolio seasoning, the current economic environment and in digestion, as Joseph described earlier. Importantly, this level remains comfortably below the 3.3%, which equates to our 50 bps through the cycle cost of risk assumption. Provisioning levels in response have continued to strengthen, with provision coverage finishing the half year at 1.34% of GLAs. In line with the increase in impaired assets, specific provisions increased by $16 million over the half. The collective provision balance increased by $5 million to $88.7 million, and this was driven by growth in the loan book and some credit deterioration. In addition, we've increased the vulnerable industry economic overlay by $2.1 million to $7.1 million. We continued to maintain strong capital ratios both at CET1 and total capital levels. We ended the half with a CET1 ratio of 16.2%. Growth was the biggest driver of capital consumption at 140 basis points, whilst organic capital generation from earnings continues to grow, contributing 60 bps this half. The term securitization transaction provided a pro forma benefit as at June 2023 of 80 basis points. We also settled our inaugural AT1 transaction over the half, which added 90 basis points to Tier 1 and total capital ratios being 17.1% and 19.3%, respectively. Against this backdrop of strong capital, we have no hybrid or term securitization issues planned for second half of 2024. In conclusion, we are pleased with the first half results, which we've delivered whilst continuing to execute on our TFF refinancing strategy and during what has been a more challenging economic environment. As you know, we provided details on our outlook and guidance as part of our January pre-release, which Joseph will cover in more detail over the following slides. Thank you once again, and back to you, Joseph.

Thank you, Andrew. I'll now quickly cover the operating environment and our outlook. And I'll then hand over to Chris for a few remarks before we open up for questions. Firstly, on the environment, the impact of higher rates is clearly still working through the economy. As a result, our report to lending remains dynamic with our appetite to lend to different sectors regularly reviewed. It should be remembered that we make lending decisions on a case-by-case basis. We do not have blank exclusions for all industries. That said, near term, we rate property, retail, hospitality and manufacturing as amber in terms of our lending appetite. We will still lend to these segments, but only where the risk reward economics make sense. We are more positive on agri and health, and we also see opportunities in professional services. While the remainder of FY '24 is not without challenges, it has been pleasing to see the RBA and other market commentators become more upbeat about the outlook for the economy in recent months, with consensus now expecting a soft landing. As inflation and rapid increases in interest rates fade into the rear-vision mirror, our expectation is that business confidence will improve, driving greater demand for credit. On our FY '24 guidance, which is outlined on this slide, this guidance was provided in our prerelease on 23rd January. But to recap, we expect lending growth to remain above system with lending assets to be between $10.5 billion and $10.7 billion by the end of June this year. As Andrew explained, we expect NIM for the second half to be in the range of 2.7% to 2.8%, which includes the impact of refinancing the term funding facility. We will continue to be disciplined in terms of costs and for CTI to be between 55% to 57% for the full year. And we expect arrears and cost of risk to be higher than the second half, but within our internal planning assumptions. The net outcome of all of this is a profit before tax of between $107 million and $112 million for the year, which will support strong capital generation. Looking further ahead to FY '25, and as flagged, we are targeting profit growth of 15% or higher. The key element of this lending will be lending growth of between $2.5 billion and NIM of between 2.8% and 2.9%. The drivers on NIM were well covered by Andrew earlier, so let me just touch on some of the underpinnings of our lending growth assumptions. Firstly, the hiring of additional bankers in addition to those we've already hired in the first half of this financial year. Secondly, continued expansion into the regions, including increased agri business lending, which is of higher margin; and thirdly, an ongoing strengthening of the Judo brand within the SME economy. In addition, a more stable economy should support an acceleration in lending growth. We do expect competition to remain intense. However, we believe the nature of our unique competitive advantage and our agility will allow us to achieve our growth objectives. We will continue to manage our costs carefully, and we expect the cost of risk to remain broadly stable. So let me conclude. We continue to be disciplined in our approach to managing the business in an uncertain operating environment. The impact of higher interest rates is still working through the economy. Consequently, our report to lending will be -- remain very dynamic with lending appetite for different sectors under regular review. We expect the intensity of competition to remain as it has been in recent times, but we are confident that the unique competitive characteristics of Judo will continue to allow us to run our own race and achieve our performance goals. We are well positioned to grow with strong capital and funding and a great team of bankers with a very special organizational culture, which differentiates Judo in the sector. There's still much to do, and there are still headwinds in the operating environment. However, we deeply understand the risk reward economics of SME banking, and we remain confident in our ability to achieve our metrics of scale, including our low to mid-teens ROE. So before opening up for questions, Chris, I might hand the mic to you.

Thank you. Thanks, Joseph. Look, I'm truly excited by the opportunity of becoming CEO of Judo, the company we cofounded together 8 years ago now with David Hornery, I have enormous passion for our company and our team. As most people know, it's far more than a job to me, it's part of my life as I know it has been for you, Joseph. Along our 8-year journey together, you have asked me to lead most of the key functions, whether it be the risk function, finance, because I was the CFO, tech and ops. And more recently now, our bank nationally and our marketing team, I'd like to think I bring an intimate understanding of the business and the priorities ahead. It really has been one of the great privileges of my career to work so closely with you, Joseph and play my part in bringing to life our vision to establish Australia's first dedicated SME business bank and bringing back banking the way it used to be or banking the way it should be. Your legacy together with our core purpose of providing a compelling funding alternative for SMEs will be something the entire Judo leadership team carries into the future. For me, personally, this role is a bit in tribute to my 40th year in the banking industry. I actually started as a teller with Barclays Bank in the UK when I was 16 years old. And since then, there isn't much I haven't done in banking with roles that spanned all aspects of retail and business banking in the U.K., Europe and Asia Pacific. Whilst I won't assume the CEO role until mid-March, my agenda is simple, which is execution. Firstly, execute on doubling down on our customer experience and truly being Australia's most trusted SME business bank. It's our higher purpose. Judo speed, service and relationship-based approach is what sets us apart. For the last 18 months, you've had me with my sleeves rolled up with our bankers, brokers and customers. And as a result, I have an intimate understanding of their needs and also how we can now enhance our CVP with the benefits of scale, a strong relationship with our regulator and also the structural shift occurring in the economies it moves from consumer led to business led. Secondly, execute on delivering the metrics at scale with a razor-sharp focus on driving ROE above our cost of capital as soon as possible. I'm as committed to the metrics of scale as you, given I was part of their design as CFO when we IPO-ed the company in 2021, and I feel this is actually a personal contract that I have with the market. And thirdly, execute on driving our growth agenda, including some immediate momentum, as you said in the presentation around recruiting more bankers, expanding further into the regions and capitalizing on the improving prospects of the economy, whilst continuing to invest for future beyond metrics at scale and ensuring we create a world-class SME bank enabled by great technology. So as I said, I'm very, very excited and going to miss you terribly. But we have a very, very bright future ahead. So with that, I'll hand back to you, Joseph.

Thanks, Chris. Well, we're now open for questions. Andrew, I might throw it back to you.

Over to the operator. Thank you.

Your first question comes from Matthew Wilson with Jefferies.

Matt Wilson, Jefferies. Your 4 Cs approach to underwriting credit should come to the fore in a more challenging economic environment, indeed and how it marks at each comes to mind, the best loans in the worst times. Most of your competitors are procyclical credit factories, they don't price for risk. Could you comment how you see the opportunities going forward in this environment?

Yes, I'm happy to take -- Chris, actually, why don't you take it because you're going to be --

Well, yes it's a great question. I mean as I mean everyone's aware, of course, in an economy where mortgages have largely gone ex growth, there's no shortage of focus on SMEs from the other banks. But we're playing our own game. As you said, Matt, it's the thesis that we originally set out. And Judo was built off the premise of the market value was occurring. We were trying to bring back banking the way it used to be done by highly skilled, highly trained business bankers operating in market with the impairment to actually make lending decisions. SMEs are not commoditized home loans, they don't fit nicely with centralized scorecards or algorithms. And I think we're proving that through the growth profile we've achieved over the last 4, 5 years and the margins that we're getting. So we are very, very confident. Hence, we're doubling down on expanding our banker numbers. We'll probably be recruiting over 20 bankers over the next 12 months. As Joseph said, we'll be expanding into the regions, at least another five locations. And our CVP is connecting -- probably connecting more so now with the economic sort of headwinds that we've had over the last couple of years than we launched 5 years ago. So all the announcements around other banks coming into SME land, have largely been referencing tech and digitization agendas. And they're largely focused on the smaller end, the sort of the S of SME, which is more akin to sort of consumer lending. But for us, as you know, our sweet spot has always been those SMEs that want to borrow sort of between $1 million and $10 million, where they are a little bit more complex. They have a story to tell. They want to have a relationship with a relationship banker and where we get the margins that are associated with that.

But it's worth just adding as a footnote, Chris, that -- and it goes back to the opening slide in this whole presentation on the journey of Judo Bank. I mean we are a banking license in April '19. And then literally, no sooner had we had that and the COVID pandemic hit the market in early 2020. We saw an opportunity to paraphrase President Obama, don't waste a crisis. And we saw an opportunity that if we were skillful in our targeting of certain sectors, certain businesses within the sector, given that the industry would -- the banking industry would pull back that if we could grow our business in a world where we were very disciplined in risk award. And I remember the discussion that Frank, you and I, David Hornery had at that time, then it represented a unique opportunity. And that culture or that philosophy to banking is a hallmark of who we are. And so, as the others in the industry tighten up in certain conditions, we believe that there's an opportunity always opportunities to grow, but you must never compromise in the 4 Cs. So the key is not to compromise on quality but hold in there, be focused and see opportunities where others fear to go, if I can use that term.

Yes. And just one other question, if I may. For us, older folk, interest rates look to be back at more normal levels, and I think about it 2 plus 2 equals 4 from a growth and inflation perspective. And therefore, when you think about the structural nature of the business model, is it predisposed to rates where they currently are or much lower rates?

Look, I mean, I think, Matt, as we think about the -- certainly our near-term view on rates is that we'll see rates at levels that they are for the majority of this calendar year. I think one of the things that we've seen, I guess, is the impact of the rate of the changes that has impacted the customer base and the lack of certainty on kind of where rates will end up. And I think that -- it's really that change and the speed of that rate increase that has been challenging for not only our customers but more broadly in the economy, it's that adjustment. I think now where we sit with some more certainty, that has certainly kind of helped in terms of allowing the customer base to better kind of plan through in terms of investments and the structural costs, I guess, of credit for their businesses. So it's probably been more, I think, the rapid rate rather than the absolute level, what's been the biggest impact of late.

Yes. And if we head into interest rate environment and let's say, in 2025 that see the cash rate being reduced, that's only going to help business confidence and that's only going to help our business. So, it's pleasing that we feel as if we're at the peak on the interest rate cycle, we'll likely to be at this level. But I'm with you, Matt, I mean, these are actually not abnormal levels. These are quite normal levels of interest rates. And so it just -- it takes the economy, both household and business sector time to adjust to what is actually quite normal. But I think it's good that, that adjustment is taking place because then you should see much more rational decision-making, both at the household level in terms of debt borrowing and business investment making.

Next question comes from Andrew Lyons with Goldman Sachs.

Firstly, Joseph, I just add my congratulations on a wonderful career. Secondly, I had two questions, maybe just on margins. The first one, Slide 21, you've noted that the TFF refinancing will be a significant drag on NIMs in the second half of '24 and into the first half of '25. Now I note that the $500 million average reduction in TFF had a 27 basis point adverse impact on 1H '24 NIMs, and you still have more than 3x this amount on average to run off by June. Just in light of this, can you perhaps just be a bit more explicit as to the extent of the expected NIM headwind that you have assumed from the TFF runoff implicit within your NIM guidance?

Yes. No, great question, Andy. So in terms of the second half '24, we will see a higher NIM, I mean, to your point, given where we're at with the TFF repay, we will see a higher NIM drag in that second half '24 from TFF refi. And that will be in the order of about 35-odd basis points, consistent with what we had said at the previous results. So that's pretty much kind of playing out as we expect. And it represents, I guess, that roll down in the average TFF balance over that half to full repayment. Remembering that the math there is the delta between, I guess, our marginal funding cost and the hedged cost of TFF, which you'll see in the average balance sheet was 60 basis points for the swap -- for the half year. So that's the impact on second half '24. And as I kind of called out, that's offset by -- to a degree by a number of kind of high conviction drivers, which I've already talked to liquidity lending and the funding piece. And then, for first half '25, because we do have some of that benefit that we've had through second half '24, there will be a drag, I guess, from, I guess, the run rate, if you like, of the refinance TCFF component, which will be probably about half of that level that we will see in second half '24. And again, just represents, I guess, the movement in the average kind of balance sheet over that period. And I think then during first half '25, we've called out, again, the various factors that we'll see that will offset those -- the TFF drag. I think what we've also done, which people will note is we've provided some outlook on how we see all of that adding up, if I can put it that way. So the second half '24 NIM of $2.7 billion to $2.8 billion and that FY '25 NIM of between $2.1 million and $2.9 million. So it will be a gradual improvement off that trough NIM that you'll see in the second half '24 with the benefit of the normalized liquids, the improvement in the lending margins and also the funding mix come through for '25.

That helps contextualize just the offsets that are required. Then just a second question, I guess it's around funding of growth. On Slide 20, you noted that your TD pricing gap to all peers is closed. But this does appear and maybe only come incidentally, but it does appear to have happened at the same time as you have slowed your asset growth somewhat. So I guess my question is, to the extent this gap remains tighter going forward, do you think this will limit your ability to fund growth going forward?

Yes. Look, I mean, I think when you actually look at what the growth that we've delivered in TDs over the various halves, I mean, we've -- the $1 billion growth net growth that we achieved in the first half was up obviously what we've done previously. So we are continuing actually to take greater deposit flow out from the market as we build the brand. I think that's first and foremost important and it goes to some of Joseph's comments around the continuing strengthening of the franchise. In terms of the costs or the pricing that we're paying, I mean, we have seen those costs through the margin through the first half, really at the top end of that 80 to 90 basis point range, but we've navigated that over what has been a continued period of competition. And frankly, as we look forward to the second half of '24 and our guidance, we're assuming that we are still seeing a margin that's at the top end of that range. So there's no doubt that we're in this competitive deposit market environment. But in spite of that, we've been able to increase our net flows and kind of manage within that margin. And we see that continuing through second half '24 with some easing in the competition and pricing coming through in FY '25.

It's worth adding here, Lisa, you might want to comment on this, but we had a $900 million, which on a $7 billion book is a material on a rollover. Could you comment on just how well that went.

Yes. I think Andrew mentioned it in the details that the 65% rollover for our book was really pleasing to show the investments we've made in origination in digital banking are coming forth with high net promoter scores in the mid-60s that are supporting the ability for us to grow our TD book.

Your next question comes from Jonathan Mott with Barrenjoey.

I'd just like to ask a question, if I could, just about the dramatic improvement in the front book spreads, 4.6% for December quarter, up from around 3.9%. Now I totally understand the mix impact to less commercial property and small size. But when you look at Slide 11, you talk about the risk profile is pretty much unchanged. And I'm just struggling to understand how this works. You talk about banking as a risk gain that's risk priced. How do you get such a much wider return takeaway different property or anything else, but how do you get to such a wider return without having to go further out the risk curve. It doesn't seem particularly logical. Is it security? Is it volume? How have you actually been able to achieve this? And why wouldn't you just continue to do this much more profitable business?

No, Jon, it's Chris. Look, it's a mix of all those things. I mean, there's no doubt about it that the margin does generally contract with the larger the loan. So our most profitable loans are probably the ones we're seeing some between $1 million and $5 million and least profitable are the ones that are over $15 million, $20 million. The latter, as I'm sure you would appreciate, given that we're still in the middle of scaling the bank, we have very limited appetite to take unsecured positions over those larger loans. So they tended to be fully secured, which is why they largely represent the corporate real estate that Joseph referred to. And so those loans, if you think about the sort of the $15 million, $20 million, $25 million loans that we were doing, they would have been 50%, 60%, 70% loan-to-value, so fully secured, which is why the pie chart security coverage has changed slightly. But what we were saying around those is the economics just don't work at the moment with rates where they are, you're talking about all at rates of sort of 8%, 9% and yields are probably half of that. So those loans at the moment don't work unless they're 50% loan-to-value. And to win those in the market, we would have to price them at sort of 2.5%, 3%. So the margin that we're getting on the loans between 1 and 10 hasn't changed. So it's exactly the margins that we used to get. And that's represented through the average portfolio credit risk grade. And they do -- I mean they're still large -- I mean, a lot of them are still property secured. But in the mix there, there are more partially secured, there's more lending against balance sheet, lending against cash flows. And so, it is literally just a mix issue. Once we get over $15 million, we have fully secured positions. And so they have higher security coverage and lower margin.

So just rolling through this, if the economy improves, hopefully, we'll start to see confidence continue to improve and demand to credit pick up. Do you think there's going to be sufficient volume for you to continue to grow back up towards the top end of those growth targets. Looking at the traditional $1 million to $5 million SME loans without having to dilute returns by going for the big ticket CRE loans?

Yes. No, no, I get the question, Jon. I mean, look -- and as Joseph said, I think, in the commentary, we're not saying that we won't go back into CRE loans as the economy heads for a soft landing and certainly as interest rates start on their downward trajectory. But we've got a lot of other levers to pull. I mean this is a business that is still mid-flight in terms of scaling. We talked about recruiting another 20-plus bankers in the next 12 months, expanding further into the regions. The regions have been really successful for us. I mean, if I can give you some context for that, take Newcastle as an example. I mean we only opened Newcastle 3 years ago with two bankers. And already, we've got a book of $400 million with four bankers. So those portfolios are already at scale of the $100 million per banker. Our Geelong business is at $250 million, Canberra business is another $250 million. And in the regions, we can get -- largely, we can get better margins. And also there's less reliance on brokers, the banks generally have much stronger networks there. I think Joseph mentioned, agri has been really successful for us. We only launched our agri business 2 years ago. It's 17% of the TAM, the total addressable market, and yet our book is less than 2% of our balance sheet. In 2 years, we've grown that book to $380 million. And the margin on that book is at about 4.7. So it's much higher than the margin of the rest of the book and we get scale benefits as well. Now the balance sheet is bigger, it provides us more flexibility. You can imagine with a smaller balance sheet, you have more restrictive concentration limits, whether they're geographical industry, customer size or LGD-related. And so, this is one of the real benefits of scale. So for all -- and then overlay the improving macroeconomic conditions. So hence, we're very confident in the guidance that we're getting.

Sorry, just one last question on agri because I remember the back of the IPO process, you said you weren't particularly focused on agri because it's very specialized. You needed a lot of bankers out in rural areas and that have deep connections and it was going to be very difficult to attain that number of bankers. What's changed --

What's changed, Jonn, just continued scaling of the business. As we said, when we launched Juno, we said that we had no appetite for agri. And internally, we've sort of set that benchmark to the book of around $5 billion. And we launched the business, as you'd expect us to be concentrated in the capital cities where we could really double down on getting the talent agenda correctly, getting the culture set. And as that has been achieved, now we can grow into the regions. So building out the East Coast, for instance, it's very easy for us to go into likes of Newcastle, Gold Coast, Sunshine Coast. And as we go into the regions, you just get pulled into the agricultural sector. And we've largely got bankers there that are -- they're a mix of strong agri skills but also strong commercial skills because in those sort of regional TAMs, they go hand in hand.

We were -- I mean, one of the conditions of looking at the agri sector was being able to identify an experienced agri bank card and an experienced agri credit executive who would then develop a strategy and develop the risk appetite. Frank, you might just want to comment on that?

Yes, absolutely. We've been able to find the right people, and that will continue to be the strategy going forward, both on the relationship side and on the risk side as we continue to expand our exposure to this segment, which we think, given the economic circumstances, we'll continue to hold up well.

Your next question comes from Tom Strong with Citi.

I just had two. Firstly, on asset quality. In your FY '25 guidance, you talked to a cost of risk to remain broadly stable. Can you just provide some thinking around your confidence there given such a sharp pick up in the 90-day arrears in the impaired assets in the last 6 months?

Sure. So I might take that one. So first of all, and as Andrew and Joseph mentioned, the pickup in both 90 days and impairments was largely predicted based on what we had seen historically. I think it's also important to understand that cost of risk is a forward-looking measure, so that the cost of risk at any given point in time is a 12-month forward-looking outlook. And as Andrew mentioned in one of his responses to the questions around interest rates, the susceptibility of customers to interest rate distress is typically upgraded during a shock than it is to the absolute level of interest rates, and we expect that to be far more stable going forward.

Yes. I think the other the other key thing to emphasize because as Frank mentioned, we did anticipate the increase that we have seen, and we are anticipating further increases. Our whole modeling has been predicated on a 50 basis points through the cycle cost of risk, which would require a 90-days past June impaired figure at about 330 basis points. The industry average at 90 days past due and impaired our business banking sits at 200 to 220. So right now, as we look at the portfolio and we look forward, we remain comfortable with our assumptions, even though we are looking at as expected a rising number in terms of that 90 days past in period, but well within our risk appetite and modeling assumptions.

Okay. Great. And just second question on the operating environment on Slide 27. You flagged, I guess, a number of amber buckets here, but they're also the largest exposure in terms of property and a combination the like and you're more predisposed to the smaller buckets. Are you confident of enough opportunities being in these buckets to write these higher margin loans? Because while the front book margin did expand over the half, it was on the smaller bucket of loans and now was kind of seeing less, I guess, attractive segments and a [indiscernible] competitive market. So I'm just trying to understand your confidence in being able to sourced enough for these higher-margin deals and the smaller segments so that you can offset this TFF drag on NIM.

Sure. So I might kick that one off. What we're trying to highlight on that slide is what we're thinking from an industry perspective, but I think it's really important to highlight, as was mentioned through the presentation, that we still remain open to doing business in these particular segments. Our philosophy has always been that we will focus more on the transactional economics. And there are still really great customers that operate in businesses that find the prevailing economic conditions more challenging. And in fact, our operating model actually works more effectively sometimes for those sorts of customers, and you are able to attract kind of outsized margins given that typically the approach of the rest of the industry is to either go risk on or risk off on a particular on a particular segment because they don't have the ability to delve into the transaction level details in the same way that we do. So we certainly weren't looking to project that we are not participating in those particular industries. We will continue to lend to strong businesses in those segments. And part of this, I think, explains where we see some of the opportunities for margin going forward.

Your next question comes from Andrew Triggs of JPMorgan.

First question just relates to the front book lending NIM, please. So it was $464 million for the quarter, but the pipeline sits at 4.5%. Just given the back book tends to season and seasons to lower, I guess, blended margins over time. What would that 4.5% pipeline if you blended that into the book or that could be consistent with in terms of an overall blended portfolio asset spread, please?

Yes. I mean it's Andrew here. And just kicking off, I guess, the -- I mean, that pipeline number, it does move around a little bit. So I think in the -- as we closed December that was sitting at about 4% to 4.5%. I mean it's a little bit higher actually today. So it does actually move around a little bit and it's not inconsistent, I think, with the 4.6% the December quarter number that we highlighted on Slide 9. So as we look forward, I think in terms of the margin performance, clearly, it's impacted by the mix, and we've talked a lot about that in terms of as much about the lending that we haven't done that there is a contribution to that front book lending margin. But the pipeline, we think actually does kind of support really the level of lending margins that we're likely to see on the front book kind of going forward and has historically done that based on history for us.

Maybe the book seasons, right? So if you were to -- are you saying a 4.6%, 4% blended front book NIM is over time, if you blended that into the back book would spit out about 4.5%, which is the upscale metric target?

Yes. That's -- that I guess, Andrew, that's the thesis. And I mean, it seasons, yes, it does season. But it goes both ways. I mean, we annual renewal for every customer, and we view every customer annually on a formal basis, some go up, some go down depending on the risk profile. And as you can imagine at the moment with the economic headwinds that we've had an increasing interest rates, a number of those have actually been increasing, not reducing. But you're right. I mean, the thesis, the original thesis was always that we would originate the front book would always be slightly higher than the back book for the reasons that you said. And roughly, it was always at yes, originated at sort of 4.65% and have -- be comfortable with an overall book of about 4.5%. You take your overall cost of funding of 1% off that, you drag from your liquids establishment fees and brokerage offset themselves and you sort of get to a NIM of around 3.1%, 3.2%, which is the metric to scale effectively.

And just the Slide 11, which talks about the security level. So that was pitched as a small change in the half, but I mean, they are portfolio averages, right? So this isn't that quite a sizable move. It implies quite a sizable change in the sort of -- or the percentage of loans that you're originating with full security, noting that NAB's equivalent number is 75% fully secured at the September half?

Yes. I mean we're certainly seeing it, and I think that December stack bar shows the impact very much of the larger, typically kind of commercial backed higher security, full security lending and the impact of doing less of that in terms of the overall security coverage levels. So that is a very material driver of what you see in terms of that half-on-half trajectory.

I think it's also important, Andrew. So it's Chris. Just to remind everyone what partially secured means. So I think definitions around fully secured, partially secured, our balance sheet security are really important. So obviously, balance sheet secured means balance sheet, debtors, stock, personal guarantees, recurring revenues, et cetera. Partially secured is largely property, but it's just can be up to the market value as opposed to the fully secured where it's only up to the sort of the due to extended value, which is generally a haircut of, say, 30%. So the partially secured --

Yes, but this goes to the right back to the whole thesis of Judo. We have emphasized the 4 Cs of credit in an industry that defaulted to the last C being collateral. And that resulted in the market failure that gave birth to Judo. Our assessment of risk is very disciplined around that 4 Cs hierarchy of character, cash flow, capital, then collateral. So the fact that our fully secured is below, let's say, the average of the big banks, I think, is an endorsement of the whole business proposition.

I might just add a footnote to this discussion as well because from the beginning of our journey, we've maintained quite strict portfolio appetite settings on a whole range of things, including the proportion of the book that would be unsecured. And we had at various stages when we had a much less mature loan book and we were susceptible to short-term fluctuations in the sorts of assets where we're riding pushed up against those limits. Over the last 12 months, we have been well and truly within those appetite settings and continue to be materially below an appetite setting that has remained consistent since we listed the business. And so -- and appetite setting that was essentially sculpted to mold to the 50 basis point cost of risk.

Yes. And just ask a brief second question on capital. In terms of the -- you've talked in the past about the runoff of some of the lending that was done on the government guarantee loan scheme being a headwind to the risk weights. Is that fully rolled off or is there a little bit more to come on that? And what impact would that have on capital intensity?

Yes. It's a good callout, Andrew. I mean I think the -- I mean we are kind of seeing that still trickle through in terms of the overall risk weights on the book. I mean, you can see the numbers [ move ] a little bit. So there is still that within the portfolio, but that's kind of the amortizing through. And as we think about capital consumption kind of going forward, it's still very much driven really around what we're expecting in terms of loan growth. The last couple of halves have probably been a little bit unhelpful for trying to get a sense of what that is because of terms second other capital initiatives that we've done. But as we look for the second half of 2024, we would expect kind of capital consumption over these next 6 months to be, call it, between kind of 15 and 20 basis points a month, give or take. So that's kind of our kind of near-term expectation how that will come through.

And is that supported by -- I presume that the approach on liquid assets was unhelpful to capital in the period. So holding -- I presume you held alternative liquid assets, which does have a high risk weight.

It's a good call out, Andrew, and we've tried to highlight that a little bit on Slide 25 for those of you trying to unpick it. And you'll see in the other items bucket that there's a, call it, a 15 bps drag. So about half of that 30 basis points there that is associated with the RWAs on the elevated TFF liquids. And so that is also an element that will go away from being a drag, if you like, once we get into the next financial year.

Your next question comes from Azib Khan with A&P.

Joseph, congratulations also from me on a fantastic career. First question is for you, Joseph, 6 months ago, you were mentioning that in terms of loan book growth, $2.5 billion to $3 billion per annum was a fair assumption. You're now looking at growth of about $1.7 billion this year and you're guiding to $2 billion to $2.5 billion in FY '25. I appreciate your point about reduced CRE appetite and changes to risk appetite more broadly as well as higher runoff. But of these factors, is it fair to say that it's the higher runoff that's taken you most by surprise in the last 6 months? And how much longer do you think the customer deleveraging that you're seeing plays out?

That's a great question. Well, there's two parts to that question. I mean I still believe that in normal economic conditions, and we've not enjoyed the normal economic conditions over the last 12 to 18 months. Our natural growth rate is in that $2.5 billion to $3 billion, which is what we were doing in 2021 and '22 and '23. So I don't see that as being a stretch. I would say that is normal. We have -- obviously, we did temper our growth rate in the half just gone to the reasons I outlined in my remarks, including a reduced appetite commoditized commercial real estate lending. It is worth adding as a footnote that commercial real estate lending is circa 22% to 25% of all SME lending. It's a big part of the economy. If you look at the SME book at any of the banks, you'll find commercial real estate in that 22% to 25% of the portfolio weighting. So when you kind of cool your appetite for that, it does impact your growth. But we did emphasize that we are temporarily cooling our appetite. It's not a statement about our future intention, and we do anticipate growing again in commercial real estate within the risk limit settings. On the second part of that question around the higher level of runoff, I think -- and Chris, you can comment on this, I think that we were a little surprised on the higher level of runoff. I mean, our modeling assumption, which has held true up until the last half has been around 20%, which is made up of about 8% natural principal interest amortization and then about 12% of just natural deleveraging of customers getting surplus cash flow. And then there's an element of leakage out to competition. But given the way interest rates move, we did see a much higher level of deleveraging by businesses through asset sales and other means. I don't think that's sustainable. I think that's a one-off adjustment to adjust the pace with which interest rates have increased. So when we looked at this and we spent a lot of time modeling the data, we believe that 20% is a sound assumption for a go-forward runoff rate. Chris, anything to add?

No. I mean -- yes, I mean, look, it's a great question. And just to give you a sort of a sense -- to your specific question around how much of the growth was offset by those -- certainly the posture on corporate real estate and also accelerated runoff. So we grew that by about $800 million. And if you sort of look back sort of a prior half, that would have been about $200 million higher if we hadn't taken the stance that we took on corporate real estate, and it would have been about $140 million higher if we hadn't had the accelerated runoff. So you add those together and you get growth of sort of 1.1, 1.2. We think it's annualized to support the regional guidance, the 2 to 2.5. The runoff -- we've gone -- we've tried to give a lot of disclosure on Slide 10 around that runoff. And you can see that certainly in the second quarter of 2024, it was really quite accelerated at 25%. If I give you the sort of the January number, January was 19%. So it's dropped back to what we were seeing over 9 months ago. Asset sales were a big part of that. So there was $180 million in the half of just asset sales from customers, which has largely been deleveraging as a result of just a lot of assets just don't work at the sort of interest rates in terms of the economics of holding those assets, that will definitely slow down. So, we're very confident -- our internal modeling has always been 20%. We've always said that it's back at 20% in January or slightly below. So it's an assumption that we're still confident in.

And just a question for Andrew on NIM. You've had a couple of questions, Andrew, about the NIM trajectory going into FY '25. Just wanted to check one component of that. With the liquids normalizing to 20% in due course, is that something that could be done in the first quarter of '25 once the TFF is out of the way or are there reasons why it's going to take a bit longer?

Look, I mean, we will manage that down in a sensible manner, Azib. But clearly, once we get through the TFF for the second half of 2024, the benefit that we get from liquidity is very much more balanced towards just lowering that level of liquids. So liquids -- it's important to note when we talk about the liquids benefit in NIM, there's two components to it. Firstly, it's the yield that we get on those liquids, and that will be a much bigger component in the near term for second half '24, where we have quite a bit of the treasuries that actually come up for renewal, about $1 billion-odd. So we get the benefit of higher rates from when those were initially put into the book. So that is a bigger component in the near term. But you're right. Once we get through the TFF, the ability for us to just operate at a much lower liquids level will be a key component of how we manage the treasury book. And how we run that down kind of really goes to, I guess, the maturity and the laddering that we have across that portfolio. That's a big -- the size is the bigger prize for us from a NIM benefit in 2025.

Your next question will be from Nathan Lead with Morgans.

Just a couple of questions for me. So the first one, I suppose, goes to the ability to deliver the at scale and beyond gross loan target. And it comes down to just the ability, I suppose, to retain and attract top flight bankers in the context, I suppose, during a period when your share price was falling and that was pretty intense competition from other banks in that space. So just wanted to hear, I suppose your experience in being able to retain and attract.

Nathan, it's Chris. I mean, I think if there's been one overarching hallmark of success for Judo, it's been our ability to attract the very best bankers in the country. I mean our employment brand has actually never been stronger, which is why we were confident to give the guidance that we gave earlier around sort of an extra 20 bankers in the next 12 months and expanding into the regions. There's also a number of banks have been talking about the continued sort of slimming down of their banker workforce. But that is not an issue for us at all. There's no shortage of business bankers that want to be part of our story.

It's worth just adding, Chris, as a footnote that we have lost -- in a market where all the other banks are hiring business bankers, we have lost two or three to the major banks with a queue of people looking to join us because it is a very differentiated and unique proposition that's run by bankers who understand that are passionate about SME banking. So I mean, our ability to hire and retain that talent because hiring is one thing, actually retaining the talent is another and a bigger test of the strength of the employment proposition.

Nathan, as you'd be aware, I mean, there is a structural shift occurring with regards to the growth of the broking industry. And we built Judo as a real strategic partner of commercial brokers. And whilst we do have some bank attrition, it's a very small number. As Joseph said, those bankers are not going to the major banks, they're actually sort of going to sort of work down the sort of commercial broking routes. That's sort of healthy for us because we have real advocates of Judo then in the broking industry that really understand our business model. So there's a certain degree of that, which we feel is probably quite healthy, actually.

Yes. That's fantastic. Second question for me. NPS is obviously very high, albeit it came off during the period. I'm just interested is it in terms, I suppose, what's the right way to put this, the price elasticity of your customers to higher margins. Just given you've got such a high NPS, is there a potential that you could actually price higher and not leave much in volume or is it quite price sensitive?

Nathan, again, it's Chris. I think we've been testing that over the last 6 months as you've seen from the elevated margins. So it's a great question. The original -- I mean we did a lot of research on this when we were architecting Judo back sort of 7, 8 years ago. And all the research we did then said that customers' SMEs were very price inelastic for a margin up to sort of 50%, maybe up to 100 basis points versus what they might be able to get elsewhere. So that's a premium for the service to speed the ongoing relationship. And after that, it did tend to tail off. It's averages of averages, but generally, I think that's probably still true. But it has been interesting because we've -- as you can see from the margin performance, we have sort of been testing that a lot over the last couple of months. But I still feel the thesis of due there is to have a gross lending margin that on average is about 50 basis points higher than the major banks.

We got a very good service to get here.

And our NPS is still supporting that.

Your next question comes from Richard Wiles with Morgan Stanley.

Can you talk a little bit about your strategy for business deposits, in particular, what are your goals for business turn deposits? Do your customers tell you they want you to offer business transaction accounts? And would you have a role to play in facilitating your customers merchant acquiring and payments perhaps via a partnership with a third party at some point in the future?

Richard, it's Chris. Look, I mean, our strategy on deposits, I think, has been really clear from day 1. I mean, the thesis of Judo was on the lending side of the balance sheet. And without want to say include about deposits have sort of been fueled for our lending growth. And so we're really targeting that $1 trillion of highly commoditized consumer deposits. We have -- we do have our SME customers that want business deposits, and we have -- and we provide that we provide those deposits now, but they are just term deposits. Transactional banking is not something that we've had an appetite for. And we don't get a lot of requests from that to be honest. SMEs more and more, they behave just like we do as consumers. They're very happy to have their banking in different jam jars. And that, for us, whilst there's an obvious benefit in terms of core free funds, it comes with significant cost and complexity in terms of providing that service and ultimately, to scale gain. I mean we've got 4,000 business customers. You would need a lot more business customers with transactional banking before you would rely on that as any part of your funding stack. So providing transactional banking to 4,000 customers is just going to be lots of cost and complexity and no funding benefit. So look, it's never say never. It's always -- it's something that we continue to reevaluate. But we don't need it from a risk perspective. We can access the data that we need in other ways, directly into accounting packages, straighten bank statements, et cetera. And it's not something that is being pulled from us by SMEs business deposits, yes, and we provide those. But still, from a funding perspective, it's the $1 trillion of consumer deposits, which is the core part of our funding strategy.

Okay. That's clear. And can I ask a question about term deposits more broadly. Slide 20, I think it shows that CD rates have sort of gone up into the end of '23, despite the fact that the market is now pricing in rate cuts at some point in the next 12 months. What do you think is going to happen on industry pricing for term deposits in the near term? And do you have a sense for how long the pricing could stay above the top end of that 80 to 90 basis point range that you talk about?

Yes, Richard. It's Andrew here. I mean, yes, what you can -- I mean it is volatile, as you can see. And we have seen at the end of December and actually into the first 2 wo weeks of January, we saw pricing remain actually elevated. I think it was a bit of a pull for liquidity heading into the December balance day. What we have seen since then is pricing kind of come down in the last 2 weeks of January and through February. So there are these little pockets of ups and downs. I think our planning assumption and certainly all of our guidance for NIM, et cetera, assumes that we're just going to be operating towards the top end of that 80 to 90 in terms of our origination at our cost and really through this final 6 months of the TFF transition. I think what we'll probably see is a bit of competition probably pick up ahead or in that kind of last quarter knowing that, that is when some of the final maturities are due. And it looks like the system is kind of repaying that on contractual maturity dates. I think as we look then into '25, our thesis, which we've talked about for some time is that with that coming out of the system, we'll see a more normalized level of supply and demand in terms of coming through on the pricing. And from a planning assumption, we're still assuming that we're in that 80 to 90 range but more towards the bottom than the top that we're kind of seeing in this financial year.

Particularly, Andrew, just kind of adding a footnote, particularly given the NIM pressures in the industry. we're not placing a big bet on this, but the NIM pressures in the industry in ex TFF world has got to lead to softening in deposit pricing, got to. So there's only upside there. I think we're done. Okay, listen, I might just say a few remarks in wrapping up. Well, first of all, thanks, everybody, for the questions and for the participation in this call. This is always a highlight of the -- of results today actually because we learned a lot just from the questions. I do hope that -- and I hope you've got a sense that we learned from the feedback from the last half from the end of August when there was a reasonable amount of criticism on the quality of our disclosures and hopefully, you will have seen us listen and address that criticism and feedback in the information that we provided today. We obviously look forward to the ongoing dialogue as we continue to grow Judo. But for me, personally, of course, this is the last time that I'll be on this call as the CEO. So I want to thank you for your support of our company and your always constructive commentary on how well we're doing and the things that we could do better. So the only thing for me to say is keep on placing a big buy price on our share price and get it across $4 in a couple of years' time. So thank you, everybody.

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