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 2024. My name is Andrew Dempster, I'm the General Manager of Investor Relations for 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 with the ASX this morning and the material is also available on the Investors section of the Judo website. We're very pleased to be joining you today for our first result video webcast. For today's agenda, we'll first hear from our CEO, Chris Bayliss, who will run -- who'll provide an update on our performance and strategy; our CFO, Andrew Leslie, will then discuss our financials in detail. And after -- and then, Chris will return to discuss the operating environment, as well as the outlook. After the formal presentation, there will be time for Q&A. On that note, I'll hand over to Chris.

Thanks, Andrew. Thank you, and good morning, everyone. I really am delighted to be presenting my first set of results, as CEO this morning. It's been 6 months now since I took on this role and as a co-founder with Joseph and David, we'd like to think it was a textbook succession event. And as a co-founder, this is not a job for me. I'm passionate about this company and the difference it can make to the success of SMEs throughout Australia. And I couldn't be happy with the progress we're making. Since my appointment, I've been repeatedly asked, what changes will I make? And the honest answer is just to continue scaling the bank we have now built and have been involved in every major strategic decision since Judo was founded. We're a bank built for purpose to be Australia's most trusted SME business bank, and we are a unique pure-play specialist banking, as it used to be, banking as it should be. And it really is a very simple model, highly trained and experienced bankers, empowered to use their judgment to make decisions quickly and in turn, build an enduring relationship with their customer anchored off trust. But having a clear purpose and strategy is one thing, the reality of actually how to build a bank is something else. There was no playbook. No one had done this before. And the journey is certainly not easy. It involved a lot of trade-offs traversing the intersection between a clear purpose in CVP and investment thesis to raise capital and getting a banking license. For example, balancing tactical and strategic investments, particularly in technology to manage the path to profitability and create a compelling thesis to raise $1.5 billion in capital. Launching as a non-bank back in 2018 also meant using warehouse funding, which restricted us to big bank commoditized lending and certainly not the sweet spot we play in today. And similar to becoming an ADI and gaining access to the deposit market, which was key for our ability to scale, meant complying with all of the ADI prudential standards of a big bank and initially only using the price lever to gather deposits. But today, these challenges are behind us. We have now been a licensed bank for 5 years. Our loan book exceeds $10 billion. Our deposit funding is over $8 billion. We fully repaid the term funding facility, and we've been included in the ASX 200 Index. We have raised all of our equity capital, and we're now very close to completing the transition of all our strategic and scalable tech platforms. So the challenges of building are over, and we're now finally able to run and scale the bank we dreamed of 8 years ago. And scale opens up an array of new opportunities that will support continued above system growth and progress towards our at-scale metrics. Turning now to the results, we've delivered strong performance in line or better than the guidance we provided throughout the year. Our lending growth has continued at multiples of system with GLAs at the top end of our guidance, balancing growth, margins and risk. We've continued our regional expansion, opening 4 new locations and adding 21 bankers during the year, and we've actually added another 4 locations since the end of June. And our NIM is at the top end of our guidance, and we've now, of course, completely repaid the term funding facility. Pleasingly, CTI, our cost to income ratio at 55% was at the low end of our guidance, as we prudently managed our cost base and the structural changes, we of course, announced some months back. And cost of risk is $70 million was, however, at the top end, but in line with the expectations we set in May, and we're now seeing positive signs that arrears are flattening, if not reducing. And lastly, our profit was comfortably within our guidance range. Later in the presentation, after Andrew has spoken, I do want to discuss the inherent benefits of scale in our business model. The term funding facility has, of course, given us a significant tailwind in terms of profitability and capital, but it has unfortunately masked our underlying operating leverage that will become very clear in the next few years. And so, whilst the headline PBT growth may appear flat, we're seeing material uplift in productivity, not least flat year-on-year FTE, whilst our banker numbers and locations are now increasing and will continue to do so. A frequent question I've been asked a lot since my appointment is what type of CEO, am I? And the answer is, one who is -- someone who's passionate about the service profit chain, passionate about our culture and because our culture really is our secret source. Having highly engaged employees provide great service for customers, those customers tell other customers, and all this delivers great returns for our shareholders. And it was my reason for Judo. When we talk about a company free of legacy, the biggest legacy we didn't have was legacy people. We were able to recruit people passionate about our purpose, passionate about SMEs and people, who are A players in their field of expertise, whether that be in finance, risk, technology, legal, marketing or HR. However, most importantly for our customer value proposition, we have amongst the best relationship bankers in the country. Those bankers are empowered to build enduring relationships with our customers, and that is banking as it used to be, banking as it should be. My personal goal is to build and lead the company I've always wanted to work for where the service profit chain is humming. And [indiscernible] highly engaged staff, which we measure weekly, not annually, delivering an industry-leading NPS, driving multiple of system growth, and this is translating into the scale benefits I mentioned on the last slide. The ultimate test of the service profit chain is, of course, ROE over the long term, and we believe this continued focus on our people is the biggest lever we have to deliver our at-scale ROE target. As I said at the outset, our strategy remains clear and simple, and I put it here to reconfirm my personal commitment to it. We're focused on solving what we believe is a market failure in the provision of credit to SMEs. Our core competitive advantages are our relationship-based approach using judgment and speed through the best business bankers in the country. The strategic enablers of our business are cultural impairment, DNA of execution and the powerful scale benefits. And as we grow, we will leverage our capabilities into new adjacent opportunities fully aligned with our core franchise. Engagement, NPS and ROE are our key measures of success. A question I know is on the minds of a lot of investors is the competitive advantage, as the big banks have clearly stated that they have fallen back in love with SMEs. We've also seen the emergence of private credit, although this actually provides us with an opportunity that I want to talk to later. There's no question, competition has increased, but it is largely in specific segments where major banks have doubled down on their existing strengths. For example, there is strong competition in the over $10 million well secured lending at one end of the spectrum, as well as low doc, low relationship lending at the other end. And the private credit firms are mostly focused on high-risk, high-reward lending and specialize in that. Whereas Judo's core segment of judgment-based lending to SMEs, who want to borrow between, say, $2 million and $10 million is a segment, where incumbent major banks do not appear to be investing. Why? Because relationship bankers are expensive, and they run contrary to the big banks' focus on cost out and automation or centralization. And I would remind everyone that despite our rapid growth, we are still only 2% of the SME system with plenty of growth ahead of us. By focusing on our sweet spot, we believe we have the right balance between growth, margins and risk to maximize ROE. As you can see, we've now reset our lending margins since the period of ultra-low funding costs in FY '23. Competition for SME lending using price as a strategy has definitely eased, as we always said it would. And we're now back to our core thesis that drives NIM of over 3%. Andrew will talk to this in more detail, as he unpacks the trajectory of NIM later in today's presentation. But importantly, we have not adjusted our risk appetite to achieve higher margins, risk grades and security have remained stable. And so with our core business humming and our increasing scale, our focus is now on driving growth and economics. On this slide, I've outlined the 4 broad areas of opportunity that we will continue to evaluate to unlock growth in ROE. First, regional expansion, which has been a core element of our strategy now for 18 months. We now have 14 regional locations with 4 new locations opened in the past year, and we aim to open another 10 locations over the next 12 months. Second, adjacent segments, we have several options. We are progressing a warehouse, our lending business to support private credit and NBFIs that lend to SMEs, given the very attractive structure and economics of this market, which leverages our core capability of assessing SME credit and allows us to actually turn a competitor into a customer. Third, adjacent SME products, and our core product set today meets the debt needs of about 80% of SME customers. We do, however, want to close the gap on the remaining 20% and also build out our other operating income line. And lastly, on specific ROE drivers, we continue to assess opportunities to drive productivity faster, improve our CTI and manage our capital and risk-weighted assets. I said at the start of the presentation, I'm often asked what I will do differently? I'm also asked what will keep me awake at night? And the honest answer to the latter is how we now effectively sequence and prioritize all of the opportunities available to us, as the build phase is well and truly over. On that note, I'll now hand over to Andrew to run through the financials.

Thank you, Chris, and good morning, everyone. This year, Judo delivered another strong financial performance with statutory profit before tax of $104 million, including one-off costs for CEO and a succession of restructuring, which we flagged back in May. Excluding the one-offs, our underlying profit before tax was $110 million, up 2%, driven by strong growth in the loan book and ongoing investments. During the year, we continued to execute on the transition of our funding stack. We successfully repaid the TFF, and we achieved this largely from growth in term deposits. This increase in deposits saw NIM moderate throughout the year. And whilst headline profit growth was modest, we have significant underlying operating leverage in the business, which Chris will unpack later in the presentation. In terms of asset quality, 90 days past due and impaired although up year-on-year, has improved since the March quarter and is now flattening. And overall, our provisioning levels remain strong. As Chris discussed earlier, we've demonstrated that as a specialist SME lender, we are agile and can shift our focus rapidly to balance growth, economics and risk. Our loan book closed at $10.7 billion for the year, at the top of our guidance range. This represents $1.8 billion increase or 3x system growth. While there was some variability in front book lending margins due to mix, the margin over the second half was on average in the mid-400s over swap. And this level supports our at-scale NIM target of above 3%, which is based on an average blended lending margin of 4.5%. Importantly, in the month of June, which is our highest origination month of the year, we achieved front book lending margins at this level. We also finished the year with a record AAA pipeline of $1.8 billion at an average margin of 4.5%. And I'd also note that the spot pipeline margin has now increased to above 4.6%. So this all sets us up well for FY '25. Moving now to NIM. FY '24 NIM was 2.94%, which was 4 basis points above the top end of our guidance range for the year. The second half '24 NIM was 2.85%, also above our guidance range for the second half. The primary drivers of NIM over the second half were largely in line with our guidance. Firstly, deposit costs continued to normalize. The cost of new deposits averaged 90 basis points for the half, which was at the top of our guidance range. And the average blended margin was 80 basis points for the half. Second, the TFF was a drag on NIM of 39 basis points. Second half was the period with the greatest NIM impact given we repaid most of the TFF towards the end of the period. Thirdly, we achieved a 6 basis point benefit across other funding costs, which was largely optimizing our warehouse capacity and terms. Fourthly, lending margins were a tailwind, as we saw improvements in front book margin and proactive management of existing customers. Lastly, treasury management. So this was the main driver of our performance versus guidance. During the half, we saw benefits from improved yields on the treasury book and close management of liquidity. As planned, we materially reduced the level of liquids we held as we repaid the TFF. Let's turn now to the outlook for NIM. June '24 was the trough point for NIM, and we expect NIM to gradually improve through the course of '25 with the June '25 exit NIM of 3%. We reaffirm our FY '25 guidance for NIM of between 2.8% and 2.9% and also now provide half-on-half guidance being 2.75% to 2.85% for the first half and 2.9% to 3% for the second half. Now as we've mentioned previously, there will be a drag on NIM from the TFF in the first half of 2025 roughly half the drag that we experienced in second half '24. While the TFF was fully repaid in June 2024, second half NIM received tailwind with around $600 million of TFF funding benefit. There are a number of high conviction drivers that support our NIM trajectory in FY '25. First, liquidity will be a material benefit, as the level of liquids we need to hold has reduced significantly following repayment of the TFF. Second, we expect a continued tailwind from the ongoing impact of higher front book margins on new loans, as well as continued earn-through of higher margins on the back book. We are forecasting our blended lending margin will increase towards 4.2% for FY '25. Third, with the TFF now repaid, we expect to benefit from relatively lower cost deposits, becoming a larger portion of our funding mix. We are assuming the cost of new TDs trends to the low end of our 80 basis point to 90 basis point expected long-run average for FY '25. And fourthly, we will see some continued benefit from optimization of wholesale funding. All up, these drivers will support an exit NIM in June '25 of 3%. Over the year, we saw a material shift in our funding mix towards our at-scale targets. Strong customer appetite for our term deposit products, coupled with repayment of the TFF, saw deposit funding increase from 50% of our funding stack in June '23 to 64% by June '24. So that's above guidance, which was 60%. We're very pleased with the performance of our deposit franchise. Retail TDs represented 76% of deposit growth in FY '24, supported by strong rollover rates, which are now consistently in the mid- to high 60%. Going forward, deposits will remain our primary source of funding, while we continue to optimize our wholesale funding sources post repayment of the TFF. Moving now to operating expenses. Underlying OpEx, excluding non-recurring costs, grew 13% over the year, largely due to higher employee IT and amortization costs. The higher employee costs were driven by higher average FTEs for the year. Of note, however, is the growth in average FTE slowed significantly in the second half with noncustomer-facing areas approaching maturity. FTEs of 543 at June '24 was flat compared to June '23, following the restructure announced in May. Higher IT expenses were primarily due to an increase in IT licensing fees for new platforms implemented during the year. Amortization expense saw a step up during the year, increasing to $12.1 million. Now this was driven by 2 key components: one, the commencement of amortization on new platforms we implemented during the year, which shifted from whipped in use on the balance sheet; and 2, a reduction in useful life of some existing platforms due to be replaced, which saw an acceleration of amortization. We expect the FY '25 cost-to-income ratio to be broadly stable with that delivered this year, as we continue to prudently manage costs. FTE growth will largely focus on new bankers to support our growth agenda. Amortization and IT expenses will step up again in FY '25 to reflect the transition to our at-scale platforms with other expenses to increase that inflation type levels. Turning now to asset quality, our impairment expense for the year was $70.1 million, which equates to 72 basis points of GLAs. This was driven by growth, as well as continued seasoning of the book and the impact of more challenging operating conditions for SMEs. Provisioning levels have continued to strengthen accordingly. And provision coverage increased to 1.39% of GLAs, with collective provisions increasing from 1% to 1.05% of GLAs. Specific provisions have also continued to increase, as the loan book seasoned. Write-offs totaled $30.9 million for the year, and that represents 13 customers. We retained our vulnerable industry economic overlay for FY '24, noting this has reduced, as our new credit risk engine, more dynamically incorporates economic assumptions into our underlying collective provision assessment. Let's turn now to the 90-plus days past due and impaired ratio. 90-plus days past due and impaired was 2.31% of GLAs at June. Now this ratio has increased from 1.09% 12 months ago, but pleasingly, after increasing for several quarters, we have seen this metric flatten from the level reported in March. Importantly, this ratio remains below 3.3%, which after factoring in cures and recoveries is the level, which equates to our at-scale through the cycle, 50 bps cost of risk assumption. Now as shown in the bottom chart, the key driver of the reduction was a pickup in customers reaching a resolution. So that includes cures, recoveries and write-offs. As we've said in the past, SME customers are complex, and in times of stress, we take time to work with them constructively to achieve an optimal outcome. While resolution rates can be lumpy, we do expect to see a more balanced ratio of resolutions versus additions, as the portfolio matures. Lastly, to capital. We continue to maintain strong capital ratios both at CET1 and total capital levels. We ended the second half with a CET1 ratio of 14.7%. Growth was the biggest driver of capital consumption at 150 basis points. There was a 30 basis point drag from risk weights on lending, which can be volatile depending on security and lending mix. Organic capital generation from earnings contributed only 30 basis points this half. Now this was low, but reflected trough NIM from the TFF, the one-off costs we absorbed and elevated CapEx from our tech replatforming program. We anticipate capital generation to improve in future halves post these headwinds. Other items delivered a net 20 basis point benefit, largely driven by reduced liquidity. We have a number of proven initiatives available to support capital levels and our growth agenda, including AT1 issuance and capital relief term securitization. Thank you, once again. And I'll now hand back to Chris.

Thank you, Andrew. Look, in terms of looking forward, I wanted to start by saying what a great team we have here right across all of Judo. We have a great culture. We've got a great employment brand. It really is our secret sauce and probably the thing I'm most proud of in the build of Judo. We attract A players in all parts of our business. And whilst we're often referred to as a new bank, we're certainly not new to banking. I mean this is my 41st year in banking, and we have a bench of executives, who are very, very experienced bankers. Andrew, Frank, Jess and Yien, they should all be well known to you, and we're delighted to have recently been joined by Razz Fornarino, who was previously the Chief Operating Officer of ME Bank and had a long executive career at NAB and ANZ. And next month, Renee Roberts joins us as our new Chief Risk Officer from APRA, where she was Executive Director of Banking. She was responsible for the supervision of all banks across Australia. And prior to that, she had an extensive banking career, as the Group Executive of -- one of the Group Executives of NAB, and so she'll also be well known to many of you. Our employee value proposition has never been stronger, linked to our focus on culture, and we believe we are the preeminent destination for business bankers in Australia. Next, on to the environment, the economy has, of course, been resilient for the past 2 years. What we're seeing from our customers is a focus on passing on high input costs, maintaining margins and strong balance sheets. There's a definite shift in the economy from being consumer-led to business-led, as the household leveraging story is over. And the top chart here shows how business investment has continued post-COVID, particularly as SMEs look to offset increasing costs with investments in labor saving productivity, doubling down on their CVPs and managing deglobalize supply chains. The outlook, of course, is still uncertain, and there's no doubt, higher rates are still working their way through the economy. But I would stress that we are not a macro play. We are 2% of the market. Our business model is to back the best entrepreneurs, sponsors, owners, back the winners, who know how to pivot during different stages of the economic cycle, it's why we stayed open supporting SMEs during COVID. And we believe that our model works best in periods of volatility when backward-looking models are of limited use and forward judgment is needed to assess credit properly. Before turning to guidance, I wanted to discuss operating leverage, which I touched on briefly in my opening slides. Our target of 15% profit growth for FY '25 could be interpreted as modest for a growth business. But when adjusting for the impact of the term funding facility, you can see here the true operating leverage we will deliver in FY '25 is significant. In fact, in the order of 60%. The term funding facility has been a helpful tailwind to our profitability and capital, but at the same time, it's distorted our profit and loss. And now that we've successfully refinanced the term funding facility, the true operating leverage will become clear. The steps we've taken to manage our cost base and our investments in technology will mean that revenue growth simply from growing the loan book will now translate directly into profit growth. And our cost growth will remain above inflation, as we continue to invest. However, we've reached a point of maturity, where costs will largely be revenue linked, as the upfront investment needed to build a bank is nearly complete. And with our scalable tech platforms now in place, we're on the verge of delivering significant jaws and growth in ROE. And the trajectory of our profitability in FY '25 will continue into FY '26. Our FY '25 guidance is provided on this slide. We are reiterating our target for 15% growth in profit before tax. Underpinning this guidance, we expect lending growth to remain above system with GLAs to be between $12.7 billion to $13 billion in June next year. This range is, of course, consistent with our original FY '25 guidance issued 6 months ago and has been narrowed, reflecting our goal of prioritizing economics, as well as growth. We continue to expect NIM in FY '25 to be in the range of 2.8% to 2.9%, gradually improving throughout the year due to the high conviction drivers that Andrew set out and our June '25 exit NIM will be 3%. We will continue to be disciplined in terms of cost and expect our CTI to be broadly stable in percentage terms. And we expect cost of risk to be stable in dollar terms. FY '25 is likely to improve -- FY '25 ROE is likely to improve slightly, but will be a story of 2 halves, as operating leverage clearly emerges in the second half of the year and sets the trajectory for FY '26 and beyond. And lastly, I want to provide my own personal commitment to achieving metrics at-scale, hence, including them again on this slide. In closing, with the build done, we have a clear strategy to now scale our world-class SME business bank that delivers ROE in the low to mid-teens. We've navigated a significant amount of complexity to turn our vision of 8 years ago into a reality, and we've now reached a threshold point in our journey. With our core lending franchise performing well and our now significant balance sheet, we have increasing optionality for growth. We're expanding our presence into new regions, and we're looking at adjacent products and segments to augment our growth. And we have an advantage, as a cloud native bank with a simple product set. Our transition to strategic, scalable platforms is nearly complete, which underpins our ability to deliver significant operating leverage, as well as our lending proposition, we've also built an incredible deposit franchise that can fund the majority of our growth. And we have an exceptional team, who are highly execution focused. So in short, I mean, this is my eighth year of Judo since the start of our journey, and I really have never been more excited about the outlook for our bank. So with that, thank you for listening. And myself and Andrew will now look forward to taking any questions.

[Operator Instructions] And our first question is going to come from the line of Matthew Wilson with Jefferies.

I am at the CBA result last week, they bemoaned the negative spread on TDs. You've seen subsequent pricing moves by the majors. If we move back to a world of a positive TD spread, which was in place pre the GFC, how would that improve your NIM, given that you continue to include sort of an 80 basis point negative spread in your NIM assumptions going forward? Or does it get competed away?

No. I mean, Matt, I mean, the math is relatively simple, as you said. I mean, we -- our margin is 80 basis points over swap nearly $10 billion of deposits now. So that would be $80 million that would flow directly to the bottom line. I mean, we do think you'll also see that CBA last week, I mean, our premier TD rate is the 1-year rate, and you will have seen some downward movement on that last week. I think CBA dropped 40 basis points. That's not a direct comparison with where we compete. As you know, we compete in the branchless bank space. But we always said that we believe that once the term funding facility was repaid, we believe that the competition for TDs would moderate, and that would manifest itself in lower margins. But yes, I mean, if we got to, I think like in the U.K., I was there 4 weeks ago, and yes, I mean, they can't understand that we pay over swap for our TDs. And as you say, the impact on NIM would be significant. I don't know, Andrew, what would -- it would be a NIM of over 4%, presumably.

Very significant. But I think we've put our guidance out there, Matt. That's where we think and that's where we're managing to. And look, I think the only add to that comments from Chris, is that we have started to see a little bit more rationality in the deposit pricing market, and that needs to wash through. Swap -- the volatility in swap rates is probably the other component there, and that has been a little bit unhelpful of late, but some stability there and also just more rational pricing, I think, is what will bring that front book deposit margin, which we have been at the top end of that 80 to 90 range. We have been at 90 basis points that we expect that will kind of come down through the year to the bottom end of that range.

Excellent. And if I could just ask one more question. In your outlook comments, you talked to an economy that is transitioning from consumer-led to business-led. That's very positive from a structural perspective in this country for too long we've lived on the back of a non-productive home loan. What gives you confidence that, that transition is actually taking place? And what parts of the economy do you think will be big participants and how are you front-and-center those sectors?

Yes. Thank you, Matt. I mean, as you said, I mean, the household leveraging story is definitely over. We're seeing systems credit growth at 7%, 8%, even higher in some areas. We think that's a reflection of the fact that the good businesses are just getting on with life. I don't think interest rates are going anywhere soon in terms of downward trajectory and also the pressures around labor and increased costs. And so, what we're seeing is businesses that are doubling down on investing in productivity and labor-saving technology, they're investing in their CVP, their customer value proposition. They're investing in energy transition. They are investing in the deglobalization of supply chains. And we're seeing it as a quite a broad spread across our customer base. As you know, I will keep reminding everyone with 2% of the system, our business model is to back the best businesses, the best entrepreneurs, the best sponsors, and they are the ones that are actually pivoting and actually starting to invest now and you're seeing that through our lending growth.

And our next question is going to come from the line of Jonathan Mott with Barrenjoey.

Just a question on Slide 19, if I could, which is the capital slide. If we look through the CET1 obviously come down a lot in the half, a bit more than we're probably anticipating. If we roll forward with the credit growth over the next year, 2 years, you're probably going to get a bit tight on capital, as you approach the $20 billion scale economics. Now the majors are running the CET1 ratio at around 12%, maybe a bit around that number, it's where the market is kind of comfortable with it. How low do you think you can take that CET1 ratio, while maintaining investor confidence? And second part, just around -- you talk about -- I'll ignore AT1 because it's not common equity, but term securitization another risk-weighted asset management tools, what are you thinking you could do to try and generate some additional capital?

I mean, I'll take the first part, and I'll hand over to Andrew for the second part, Jon. I mean, Jon, obviously, we've been having this conversation for many, many years now. I mean, I remember pre the IPO talking about this topic. And in terms of our original projections for the thesis of Judo and those metrics at-scale and they haven't changed. I mean, I've consistently said that our thesis was to have a CET1 ratio that was somewhere between the regional banks and the major banks. So as you said, the major banks are about 12% and the regionals are sort of high 10s, 11%. That's reflecting the fact that the regional banks are largely home loan banks. And of course, the major banks get the benefit of advanced accreditation. But also, we don't want to run our capital levels too skinny because we're still going to be a high-growth business beyond the $20 billion book. And that still remains our thesis that underpins those metrics at-scale.

And I guess, on the second part of the question, Jon, in terms of other kind of capital options. I mean, as we've said before, we do have a number of options available. So the AT1, the capital relief term securitization, they are trades that we did for the first time last year. As some of you will have noted, we pay a bit of a first issue of premium there, but we've proven our access to those capital options. And so, they are options that we genuinely have available to us. And we'll continue to look at these to make the capital stack more efficient as we do get closer to that end point, as Chris articulated. RWA management is, I guess, a bit of a general term, but there are things that we can do there, I guess, with the scale now of the book and how actively we think about that -- how we manage the risk-weighted asset piece that we just have some options that we probably didn't a couple of years ago. So the point here is, we've got a plan. We're managing to that. And we do have options available to us that we will look at to make the stack a bit more efficient going forward.

I mean, Jon, also one thing just to reiterate is I talked in my presentation about some of the options that are in front of us. One of them is warehouse funding to the NBFI or private credit funds that support SMEs, and I would underline to support SMEs. The risk-weighted assets on warehouse facilities are considerably lower, considerably lower than the risk-weighted assets on our core business. And so we are also factoring in some assumptions around some of that growth being in that particular segment.

Can I ask a second question on Slide 12, where you show the front book lending margin. I think Matt just asked about the deposit side and on the lending side, also there's a lot of moving parts. But we've seen quite a lot of volatility on the front book margin, you can see 4.6% down to 4.3% in the June quarter than the exit margin at 4.5%. You mentioned there's a bit of a mix in that. Can you give a bit more color on the driving factors around that, that's leading that front book spread to move around so much?

Yes. Absolutely, Jon. As you said, it is largely mix. So our core business loans are roughly around about 4.8%. Asset finance can be as high as 5% sometimes. It's pulled down by our home loans. So home loans can be in the sort of the 3% -- mid-3s. In that particular case, you're absolutely right. In May, actually, what was pulling that average down of 4.3% was a higher concentration in home loan strangely in May. They were 15% of that month's originations, where it's generally about 10%. And I would stress we don't do home loans, as a stand-alone product. We only do them, as part of a cross collateralized package with an SME. But I think what was particularly pleasing for me is that in June '24, we had the highest amount of originations ever for Judo, well over $0.5 billion of originations, and they were done at 4.5%. And that particular month had the normal mix, if you would like, in terms of products. And the pipeline, as Andrew said, is now at 4.6%. We are definitely seeing competition using price as a strategy, easing. And so, we really are back to the average front book margins now preterm funding facility.

And our next question is going to come from the line of Richard Wiles with Morgan Stanley.

So thinking about your metrics at-scale, it looks like you're on track to hit the loan target, the bottom end of the loan target in 2027. You've done a good job of managing margins recently, and you've expressed confidence to get the margin above 3% at the start of 2026. But I'm sort of interested in the cost to income and the ROE targets, particularly the ROE. Chris, you continue to express confidence in your low to mid-teens ROE target. Can you give us an idea of when you expect to reach that target? Is it 2 years or 3 years away? Is it 5 years away? Is that a longer duration target? How should we be thinking about that?

Thanks, Richard. I'll start on that one. So you're right, look, I think we are getting close to the metrics at-scale. We'll probably hit that low -- the low end of the GLA target probably at the end of FY '26 based on the kind of the forecast that we've got for '25. So we're starting to kind of get in the ballpark in that year. The NIM, as you noted, the exit NIM we've provided guidance to that we will reach that at the end of FY '25. So there's -- we're starting to kind of hit some of those numbers in FY '26. CTI is probably the one that we will achieve last, I think, as we just kind of continue to scale the business and continue to build the income part of the CTI ratio. So costs are going to continue to grow. I think you've seen that cost growth level out, as we said we would manage towards. And there's a little bit more of that to go and a little bit more leveling out of the dollar cost growth to go. And then really, it's a story of what happens with the income, which as we continue to build into that GLA range, we will continue to get that operating leverage. So the CTI1 is probably one that comes last in terms of the sequencing of when we will get to those metrics at-scale. You've asked us before how that ROE trajectory will come about and when we'll kind of get to that -- get to the double-digit crossover threshold that and winding through these metrics is probably a little bit away, but it's in much closer touching distance than we were a year or so ago. And we're very confident of getting there with, I think, that underlying operating leverage that you can see in the business and that we tried to draw out on Chris' latter slides in terms of the underlying profitability of the business. That is very much there. And that will be part of this sequencing with that CTI metric kind of coming last, as we build the income on top of the cost base.

And our next question is going to come from the line of Andrew Triggs with JPMorgan.

First question just around digging into the NIM walk from the 2.63% in '24 NIM to get you back towards 2.75% to 2.80% for first half of '25. Just interested in the component of liquidity that will boost that. So perhaps to ask for the June spot balances, what was trading and securities, as a percentage of the loan book, noting that it was about 34% across the average of the half, but that obviously will go to 20% over time. So just interested on a spot basis, what did that look like in June?

Yes. So we've -- you're right. We brought it down. I mean, on an average balance sheet basis, it was in the 30s for the second half. And we still have been -- had carried a bit of extra liquidity with most of that TFF kind of back ended in terms of the payment. So there's a bit of that, that we still need to wind down in first half '25. But we -- the level that we're kind of managing towards Andrew, is much kind of less volatile, I think than what you've seen in the past. So 34% is where we were for the second half and 20% is what we expect that average to be in the first half '25. And there's probably a little bit more tightening that we can do on that in the second half and that we will achieve to manage to, as we kind of work through kind of the roll-off of that book. So that liquidity that you can probably see on the NIM drivers on Slide 14, there's an element of that -- of the absolute dollar impact that's reducing. The other piece though there that is a bit of a contributor if you're working through the numbers, is just a slight improvement to -- on the yields that we're getting from that liquids book because some of that's rolling off from fixed rate as well. So we've called that out in previous results. It is a bit of a secondary impact, as well as the volume impact.

And second question, just how do you expect the sort of additions to the NPL bucket to trend over the remainder of the year. So we've seen about a 20% decline in the additions to NPLs quarter-on-quarter, but how do you see things? And do you expect a lag to an improvement post the start of the RBA cutting cycle?

Yes. Look, I mean, we've -- the metric that we obviously use here is 90 days past due and impaired, and that has flattened, and it's flattened because we've had a much more balanced level of the additions to resolutions. We've called that out and provided a bit of disclosure on Slide 18 on this. We've been dealing with this indigestion, where we had more things tipping in than were coming out. And we've started to see that 90-day and impaired metric flatten, 2.63% in margin. It's come down to 2.31% in June, and it's been flat in July as well. So it's a much, much different profile. I think when you look at the 30 to 89 days well, that has come back. And so, we've got kind of less coming through that as a whatever you call an early, early indicator as well. So I think going forward, we expect this to be more balanced, and that is also reflected in ultimately the cost of risk, the P&L cost of risk guidance that we've put for FY '25 as being broadly stable from a dollar perspective. And that obviously means that with a larger book but that will be a little bit lower from a basis point of GLA ratio. So we're starting to see some helpful early lead indicator signs that we might be seeing this asset quality kind of flatten in terms of outlook.

And our next question is going to come from the line of Andrew Lyons with Goldman Sachs.

Chris, maybe a first question for you. You now have 144 bankers and expect, I think, to add another 20 in FY '25. From memory, at the time of your IPO, your metrics at-scale was premised on about 200 bankers. Now despite this growth and the differentiation you believe that your bankers bring to business, you're still originating about 75% of your loans through brokers, which is well ahead of the broader system and your target of 50% at-scale. Can you perhaps just talk to how the penetration of broker lending in business banking has played out in the market and for Judo, particularly versus your own expectations.

Yes. No, it's a great question, Andy. I mean, we are definitely seeing a structural shift, I think, in terms of the dominance of brokers in SME lending now. I mean, we think they probably represent 35% to 40% now of all flow. I think originally, if you go back to the original thesis of Judo, we hope to sculpt that 75% number that you talk about down to sort of 50% to 50%. I'm not sure that's achievable anymore. I think -- I mean, I think I'd be very comfortable at 60% to 40%. I would add that from an economics perspective, we're relatively agnostic to that number because we get a huge productivity benefit from broker-introduced loans. As we -- there's 19,000 brokers in this country, we only deal with about 1,300 of those and they are sort of dedicated SME brokers that we spend a lot of time with. We spent a lot of time with their PD days. They know us well. They know our risk appetite well. And so, because of that, we get a very, very high conversion rate. So we get about an 80% conversion rate, whereas, obviously, if we're originating direct with a billboard on the side of a tram, we would be getting much, much lower conversion rates, which is obviously what the big banks get. The push into regional and agri in particular, I think, will help us there. Relationship banking is even more about the actual individual banker, their background, their experience, their networks. And we do find that as we go -- as we expand into the regions, we get a higher direct just through the strength of those relationships and also in agri lending as well. So this is a big driver for us. As you know, we're going to open another 10 regional locations this year. And I'm hoping that, that will have some impact on that 75%, but it is a structural shift. I mean, the brokers are just growing and growing. It is -- it has flattened a little bit in the last 12 months, and maybe it's reaching a point of saturation, I don't know. But it is something that we're very focused on.

That's helpful. And what gives you confidence that, that increased penetration versus plan of brokers isn't going to result in pressures on profitability like we've seen over the last sort of 20 years or 30 years in mortgages.

Look, it's a great question. I think -- I mean, that's an interesting question for big banks that have got huge direct distribution networks, but for us, we built Judo as the best friend of commercial brokers. So in architecting Judo, this was a big, big part of our business model. We -- as I said, we have very, very high conversion rates. So if you were to drop 80% conversion rates down to 20%, which is probably what you'd get with direct and a bigger marketing spend, then that for us equally substitutes the 60 basis points upfront that we pay and the 30 basis point trail. They also help us with the ongoing relationship management of the customer as well. They stay very close to the customers, which we leverage as well. So I've always been relatively agnostic. For me, the direct really is just a natural outcome of business bankers doing their job well and getting referrals from existing customers being part of the community networking. It was never about marketing. It was never about billboards. It was just about being in the network. And as I said, in regional locations, the power of that is far more pronounced.

Great. Thanks, Chris. And maybe, Andrew, just a second question for you. I just note towards the back of the pack, you've introduced an ITOC, which appears to be hedged at the 3-year duration. Can you perhaps just provide a bit more detail around the strategy and just confirm that you've applied that to the entire capital base?

Yes. So you're right, Andy, we have implemented an ITOC investment term of capital replicating portfolio. It is on a 3-year monthly rolling structure, so quite consistent with how the rest of the sector does it. And we've hedged in terms of the level that we've hedged, we've hedged a level that kind of makes sense for what -- for where we're at not dissimilar probably to where, again, some of the banking sector is hedged. We maintain a little bit of flexibility around that. As you'll recall, we hadn't hedged capital when rates were flat at close to 10 basis points, so we basically put that on as rates have come up. So that will be a little bit of a drag over the next little while. If we see kind of rates head the way that I think the forward curves are predicting. But we've had the benefit of that being unhedged, I guess, as we've kind of come up the rate cycle. But the structure, it's very consistent with the sector. It's a monthly 3 year. And we've kind of hedged that again, as you'll see on the left-hand side of that Page 32 such that we have a very minimal kind of interest rate risk through the overall book, which is ultimately what we're triangulating against.

And our next question is going to come from the line of Victor German with Macquarie.

I was first just hoping to follow up on the NIM question. Obviously, quite a lot of volatility, particularly in the month of June, I'm assuming with all the repayments happening. Maybe to start off, the 2.63%, is that effectively a June margin? Or is it essentially an exit margin? Or is it possible that exit margin was a bit higher than that once you remove all the volatility.

Yes. No, look, that was a June margin, Victor. And as we've called out, it's trough NIM for us because that month was the month that we still had the last piece of the TFF when we paid that off during that month. So that's, if you like, I guess, our monthly kind of starting point, the trough NIM. The walk from there, the key components that we've called out on Slide 14, we obviously have a drag still from the TFF. This is an averaging, where we still had benefit from TFF in that second half NIM. So there's an averaging out of that for first half '25. I think as you think about the blocks in the first half '25, most of that residual TFF drag is going to be offset by what we're doing with the treasury and the liquids book. So call it about 3/4 of that. And so, really, where you're at from a NIM once you looked at those 2 big factors is you're probably down in the order of about kind of 5 basis points off the second half, which puts you kind of bang in the line -- in the middle of our kind of guidance range. And then as you can see from Slide 14, there's some unders and overs with other factors that drive that NIM. But we are very confident in our NIM and in guidance. We've given you very specific guidance now in the first half and the second half. And we're kind of really managing through -- this wash through of the TFF and the continued build that we will get from the lending margin front book wash through and just that funding stack rebalancing that we've been progressing over the last 6 months.

No, that's helpful. And I think Andrew kind of alluded to that you probably will be running down liquids. If you can maybe give us any sort of color on what impact that would have on average interest-earning assets because you've given us guidance for GLAs. I mean, would it be fair to assume that average interest-earning assets will grow less than GLAs, as a result of that liquids rundown, maybe any sort of color on that would be helpful?

Yes. Look, the GLA, I guess, what's probably helpful on the liquids are -- is liquids as a percent of GLAs, we talked -- and Andrew asked a question on this earlier, we talked about that moving from low 30% down to 20% of GLAs over the second half '24 into first half '25. The liquids, as a percent of GLAs, as at July was about 25%. And at -- and for July, that's going to move down to 23%. So there's a little bit of a reduction between that June ending position and July ending position. And this is something, where we will kind of continue to right size that in a world, where we've fully repaid the TFF and just appropriate for our scale. So I think there's -- that level of liquids is moving around a bit, much less than it has over the last 12 months, but you will still see that as a percent of GLAs, which is kind of how we talk about it. And it's a good way to think about it from modeling perspective, reduce from, I guess, that kind of ending point for June, again, into July, and we'll get a little bit of that more, eking out a bit more efficiency, as we kind of go forward through the rest of the first half.

Right. So you basically -- and within that 2.63% margin, there was effectively 25% of liquids, which will reduce to 23% over the course of the half.

Yes, as a percent of GLA. So there's still -- we still carried a little bit of that book because most of that TFF was repaid towards the end of that period. So we've just been managing that level of liquidity we hold on top of that, and a bit of that, we were still carrying elevated at the full year. But we'll continue -- the stance on this is we will continue to optimize that level of liquidity, which has been a factor dragging our NIM, as you all know. There was a price to pay, I guess, for access to the TFF, but we will be managing that more efficiently from a volume perspective going forward. And then there's also a little bit of it that secondary benefit, which is around just the yield that we're getting on that portfolio. We will expect a little bit of an improvement to -- through '25.

And then just maybe on lending margins, I mean, kind of already been discussed on the call that it looks like deposit spreads are coming in. There was an article, I think, in the AFR timely talking about this today, which presumably is -- should be a tailwind for your funding costs. Usually, banks tend to compete on one side of the balance sheet, and if the competition is lessening on the deposit side, they tend to compete a bit more aggressively on the lending side. How do you think those trends -- the positive trends on the funding side will transpire to lending margins?

I'll take that, Victor. I think what we're seeing is -- which is what we sort of predicted that we would see a couple of years ago, it's really the impact of the term funding facility, now that that's being repaid. We're not seeing the price lever being used as a sort of a competitive strategy as it were. And so, yes, I mean, we -- I mean, you'll know from the history of Judo that our -- this time last year, our gross margins were down at sort of the low 4s. But at that point, we had extraordinarily cheap funding from the term funding facility. And I think that's true of our competitors as well. And so, I think we're just seeing a normalization now back to SME margins that were sort of pre-COVID. And as I said, as Andrew said, the pipeline, which is a huge pipeline of $1.8 billion, that's at 4.6%. So we're comfortable with the guidance we're giving on that.

And our next question is going to come from the line of Nathan Lead with Morgans.

Just 3 quick ones for me, if you don't mind. So first up, Chris, I've heard you describe your sort of target NIM as being a sort of comes together as 450 basis points from your lending margin, a blended cost of funding of about 130 basis points liquids drag. So that brings us to 320 basis points. Obviously, you're exiting FY '25 at 300 basis points. Do you still think 320 basis points is reasonable? And if so, what sort of drives the -- or closes the gap between those 2 numbers?

Well, I mean, the 2 other things that are obviously a component of NIM when you're modeling it will be brokerage and establishment fees, they generally offset each other. So just for the sake of completeness, we're not going to sort of giving you the easy math to our NIM. But on the 3.2%, I mean it's -- yes, the difference between a 4.5% margin and a 4.6% margin, the difference between an 80 basis point assumption for deposits and 75 basis points, the return we're getting on our liquids. Our liquids, as Andrew said, is 23% in July. I mean, that is on a continued downward trajectory that is not the end of thesis. So when we talk about metrics at-scale, we're obviously continuing to scope down the amount of liquidity that we're holding, as we continue to mature as a bank and hopefully also switch from an MLH bank to an LCR bank as well. But...

Look, I mean, probably add to that, Nathan, I mean, the other -- whilst you're right, we've called out that exit NIM of 3% at the end of FY '25. I think as you think about those big high conviction drivers that we had on our NIM forecast slide, a lot of that is still to -- it won't all have washed through, for example, what we're seeing on the front book in terms of lending, that won't have all washed through into the NIM in full by the end of FY '25. So there's going to be a bit of a tailwind still beyond that point, which is -- which obviously supports our above 3% at-scale NIM guidance. So the wash through of what's happening on the lending book. Deposits in terms of the overall funding stack, we think we'll get to another good leg up in terms of the contribution of that. It moved from 50% to 64% over the last 12 months. That's going to move up again at the end of -- by the end of June 2025. There's probably a little bit more that we will do in terms of increasing that to the at-scale at 75% of the funding stack. And as Chris said, just continued kind of tighter management of liquidity, tightening the screws a little bit on wholesale funding. So all of the factors that you see on Slide 14, they're not all done and washed through by the end of June '25, which is why we call out an exit NIM. And you'll get a little bit more of that benefit that we will -- I think we'll provide that solid sustainable NIM base that you'll see that's the upscale of above 3%.

The second question is just about the gross loan growth. Obviously, you're guiding for $2 billion to $2.3 billion. Is that kind of where you see kind of steady state going forward now? Or do you sort of see yourself accelerating back into that sort of mid to high $2 billion type run rate over time?

Look, I think it's a great question. I think, obviously, we've sculpted back to Jon's earlier question around capital. We've sculpted our capital carefully as well. So if the market gave us the opportunity to do another $1 billion this year, we wouldn't take it because of the way that we're managing capital. I think the entry into our warehouse business, I think that could see that lending book accelerate quite significantly because it is very, very low RWAs as well. So we could do that and manage capital at the same time. But yes, I mean, I think growth between sort of $2 billion and $3 billion is probably our sweet spot at the moment. And then, we continue to invest in about 20 bankers per annum, which feels about right for us. We don't want to go more aggressive than that because we'll start compromising on the quality of those A players and bedding down from a cultural perspective. So I think -- yes, I think sort of 2 next year and somewhere between 2, 2 and 3 in FY '26, FY '27 would be a fair assumption.

And then finally, I mean, I suppose a bit of a detailed one for Andrew. Just the liquids book, just can you give us a bit of an update on the maturity, timing and I suppose the duration of what you're actually investing in on that book. You had a handy slide, I think, a year or so ago on that, but it's dropped out. Just wondering if you can just give us an update?

Yes. I mean, maybe just a little bit of color on it, Nathan. I mean, we -- a lot of the story of our liquids book has been around the TFF. We've talked about that a little bit already. And so, we've kind of layered up really against -- ultimately against that TFF repayment profile. And that kind of included, I guess, some specificity around how we thought about tenor of that book and also the fixed versus floating of that book. We did have some -- probably some more fixed, as a percent of that liquids book at the beginning of that TFF journey. So I think in terms of kind of color going forward, I mean, it will be -- we will kind of manage this in a much more kind of BAU sense going forward. There will be a little bit of transition, I think, from what was fixed into floating in terms of that mix of the liquids book. And in terms of duration, we're looking to -- we're not looking to do anything probably as complex as we had before around the TFF. So the guidance that we give on that and the way that I think to think about it from a modeling perspective is, as we've called out, we're in the low 30% of GLAs last half. We're moving to 20%. The spot numbers around June being 25%, moving to 23%, but that's going to kind of continue to be managed down. And I think in terms of the yield on those assets, which is probably really the other input for modeling, that we expect to kind of trend back towards 1-month BBSW. That have been a little bit suppressed because of some of the fixed nature of what we had in that book, but that will trend closer towards BBSW, as we move through FY '25.

And our next question is going to come from the line of Brendan Sproules with Citi.

I just had a question around your outlook, particularly around asset quality and I'll just refer you to Slide 17, at 72 basis points of the loan book average GLA this year for impairment, but it looks to me if you keep that dollar amount the same that basis point drops to sort of in the mid- to high 50s. I was wondering how do we sort of close the circle on that given that you've obviously have much stronger lending growth this year, but also continue to expect the portfolio to season. So I imagine the specific provision, which was a major contributor in growth last year will continue to rise.

Yes. I mean, there's some different ways to come up with the, I guess, the top-down modeling, which I'll run through. But your -- yes, I mean, your math is correct. If holding the dollar cost of risk broadly stable, which is our guidance means that, that as a basis point of GLAs is going to come down. Now we have obviously been building that -- the provision on the balance sheet, as we've been growing, and that's been a key factor of the GLA, the cost of risk impact on the P&L. But yes, I mean, in terms of how we -- some simple kind of benchmarking, I think, to think about what's appropriate for FY '25 is that, as we've said, 50 basis points is our kind of through-the-cycle assumption. So if you think about what the net additions will be to GLAs during the year, that range of 2 to 2.3 at 50 basis points, call it about $10 out of -- in terms of composition from new additions for the P&L cost of risk. And then probably the second component there is what happens with specifics and that being in the order of kind of 50 basis points of call it the whole of GLAs, which kind of gives you the bulk of that kind of difference. So it is going to go down based on our modeling for -- as a ratio to GLAs, but we're kind of confident with that number, noting that I think the earlier comments that we've made around what's happening with the forward-looking metrics, which is obviously the 90-day and impaired, where we've seen that flatten.

That's helpful. And just a second question on some of your deposit spreads. I know the benchmark yield curve has been moving around quite a bit of late.

Yes.

But when we get into a rate cut environment, which I think most economists have maybe early in 2025 calendar year, does history show that the spread actually widens on TDs in a rate cut environment, given that deposit rates tend to lag, as they did on the way up on the way down? And is that a risk, I guess, to your second half margin guidance that you provided here today?

Yes. Look, volatility in the swap has been unhelpful for us. And it's been an unhelpful start to the year because we obviously saw what happened to that volatility with all the speculation around movement in rates, a good couple of weeks ago. And that did see the absolute cost that we pay come out a little bit. So that -- so the volatility in the swap right is a risk. Your comments around what happens in a falling rate environment, I think are relevant in that. The other comment that's interesting in terms of behavior with the TD customer, in a falling rate environment is that we do see more interest in the shorter tenor because depending on kind of where you are on the -- with the rate cycle, those rates can potentially have a higher headline rate than some of the longer-dated -- some of the longer-dated TDs. So there's a -- volatility is unhelpful, clearly for what we pay. But there's also in a falling rate environment, a behavioral element too. I think stepping back from that, though, Brendan, the kind of the economic piece here is that in a rising rate environment, when you have at-call deposits, that's a tailwind to your -- ultimately, to your overall deposit cost and your funding cost and other banks benefited from that in the last couple of years. We do not have at-call. And so that has not been necessarily a tailwind for us. But in a falling rate environment, that clearly becomes a headwind for the sector. Now that is not a headwind that we will have because we don't have at-call, we just have TD. So I think it's going to be interesting to see how the overall sector manages that potential headwind and what that means for deposit pricing, which will ultimately kind of impact, I think, the competitive environment on TDs. And it was noted earlier in the call that there has been some movement by other banks already ahead of falling rates. So it's going to be one to watch. We are not kind of being overly aggressive with assumptions here. We're sticking to that 80 basis point to 90 basis point range with volatility and the swap curve kind of being one that is -- that does create some volatility month-to-month pricing.

And our next question is going to come from the line of Azib Khan with E&P.

Chris, you've had a couple of questions on capital. I just want to place it together and make sure I'm understanding this, okay. So it sounds like, Chris, on one hand, you're saying there's enough common equity to take you to an at-scale loan book. But then on the other hand, in response to Nathan Lead's question, it sounded like you said, you don't want to ramp up your loan growth too much because you're -- you need to manage your capital position. But if you can get to your at-scale loan book earlier, why isn't that something you would do?

Because Azib, we've made assumptions around our regulatory settings. So as you can imagine, when we got our ADI license, we didn't start with a capital ratio from APRA, that was aligned to the major banks, that 11.5% that I'm talking about. So we started with a higher level of capital, as you'd expect. We've had our banking license for 5 years now. And I can't talk about what our potential regulatory settings are on capital. But obviously, we -- I mean, we've always sculpted to a downward trajectory. But getting that sculpting right is essentially the answer to your question.

I think the add to that, Azib, is that it's what's happening with the organic capital generation in the bank as well. And we've called out that for this result, we did see that low, and it was low for various factors. It was low because of the actual profit that we generated in the second half was low because of trough NIM, the factors we've talked about also some of the investments we've been doing in terms of CapEx and also the impact, I guess, of the provision build on the capital drag as well. These are things that are going to be increasingly behind us, as we move forward. And that's before you start to overlay the very significant operating leverage in the business that Chris called out in his earlier slide. So the other factor I think you need to think about with the capital bridge is just the increasing role of organic capital generation, as half-on-half as we go forward. And that will be an increasing offset to what has been capital consumption just from growth. So there's a couple of other factors at play that I think are also important to note. But that organic capital generation is one, where I'll be speaking more and more about over the next couple of halves, as we start to really see the economics of the underlying business come through.

Also, to Chris, you've mentioned that you look at funding SME warehouses because it's quite capital efficient. Can you achieve a margin of 450 basis points over swap on that sort of lending? Or will that be lower margin?

Look, I mean it will be deal-specific, Azib. But generally, I mean, we're happy to continue giving out guidance of 4.5%. We're factoring that into our -- into our growth assumptions. So yes, I mean, again, it will be averages of averages. Some of them will be lower. What I will say is that there's generally a direct correlation with that type of lending between the margin and the risk-weighted assets and so, ROE. And so, I mean some of these lends can be sort of 30%, 30%-plus ROE. So if there is a little bit of trading off of margin to achieve that, then we would obviously take that. But at the moment, in terms of the balance of how we think we will be originating loans, particularly over the next 12 months to 24 months, we're comfortable with that average margin of 4.5%.

And just one more, if I may. So you've obviously bolstered your provision coverage. It's now sitting at 139 basis points of the loan book. However, if I try to compare -- and I know it's hard to do an apple-for-apple comparison here, but if I take a look at some of the business lending provision coverages of a couple of the major banks, which excludes the institutional books, just the Australian business lending book, they're sitting at about 180 basis points to 190 basis points. Does that sort of range you're headed into in due course? Or do you believe there's a reason why your book commands a lower provision coverage?

Yes. Look, it's a tricky one Azib getting the benchmarking here. I appreciate because there's not a lot of really good disclosure for what is a like-for-like portfolio for us. It's one of the challenges we appreciate. Look, ultimately, we're comfortable with that provision level. I think finding good comparisons is difficult because there are always other things in those books even at the more disaggregated disclosure for the other banks. We've got some other elements that are in our book. We've got a little bit of home loans in there. So how do you -- getting a true like-for-like is challenging. The message on this is, look, we're continuing to build that provision balance, and you can see that with the disclosure that we've provided. And we've continued to build that provision balance, as we've actually seen the forward-looking metric being 90-day and impaired flatten over the last quarter. So look, we're comfortable with that. I appreciate the disclosure like-for-like is difficult. But we go through a very rigorous process here, and we're comfortable with how that provision is playing out in terms of the balance sheet level.

And our next question comes from the line of Brian Johnson with MST.

Congratulations on the results pack. Very good disclosure. I had 2 questions, if I may. The first one is your competitors just in the last few weeks seem to be talking about Westpac sharply changing some of its pricing metrics. And I appreciate that you've got to do this at a point of time, but could you just run us through the pricing metrics that you're seeing on both the deposits and the lending side from competitors, even just over the last few weeks.

I think, Brian, certainly on the lending side, as I said, there's no doubt about it the big banks are falling back in love with SMEs, and they will always use the pricing lever, as a way of getting short-term traction. And what we're seeing is them playing the bookends, as I said in my presentation, so very competitive sort of on that above $10 million fully secured type lending and also at the sort of the lower -- sort of below $1 million. And certainly, on Westpac, we see at the lower end. Our sweet spot is between $2 million and $10 million, where it is very much relationship banking. We've always said that price should not be determinant, as why a customer wants to bank with us. And we're able to get better economics, as a result of that. But absolutely, I mean, we see pockets of it as well. One of the -- I think one of the biggest challenges that banks have is consistency, particularly it's interesting when I'm asked who my -- who our major competitors are. My first question of response is which states are we talking about because it's different in different states, depending on the individuals that are there. And that's just one of the challenges of when you run these huge organizations and the amount of scale that you've got. On the deposit side, it's -- we compete with the branchless banks. We understand that. We understand that despite everything I just said on the lending side, price, it is a commoditized product. TDs, it is all about -- it's generally all about price. For us, our brand has matured tremendously over the last 5 years, as an ADI. We don't have to be #1 anymore because we have an established customer base of nearly 50,000 customers. Our rollover rates are around 70%. We can get very, very strong rollover rates now when we're #3, #4 in the price comparison sites. And that's largely because if number -- whoever is #1 is someone that the customers never heard of, then do they really want to do the whole onboarding, KYC, AML checks all over again. And so, as we get a more established brand and a bigger and bigger customer base and higher and hold those 70% rollover rates, we think we'll be able to generate even better returns from that side of the balance sheet.

Yes. The only extra color to add on that, Brian, is we have still seen the majors be competitive in the intermediated deposit market. So that is still a bit of a flavor that comes through. It's a less transparent price market there rather than versus the direct retail. So we've seen -- we still have seen a little bit of competition there. But look, as Chris said, on the retail, which is our -- where we take the majority of our flow, we're competing with those branchless banks, and competition there has eased a tad and because of that dynamic around NIM and trying to manage the overall NIM. So yes, we've seen a little bit more rational pricing, I think, across the board in the retail space as well.

The second question, if I may. Just if we go to kind of think about all the slides, but if we zoom in on Slide 31, your loan book is still heavily concentrated to property operators, which I see is all secured, which is great. But we can see that the 90 days past due gapping up quite sharply year-on-year, and I suspect it's probably down half-on-half, but it is certainly up quite a bit. But also, we've got this weird dynamic at the moment, where a lot of asset values in the property market probably haven't been mark-to-market. Could you just run us through what you've done to ensure that the value of the underlying collateral, how much have you stressed those commercial real estate presumably that's sitting behind those property operators. Can you just run us through what you've done to check the veracity of the valuations given that we know at a systemic level, a lot of this stuff hasn't been mark-to-market than property values.

Yes. I mean -- so first of all, I mean, just at the headline comment, I want to distress, Brian, that we are still played by the law of large numbers. So of that 2.31% over 90 days, 50% of that number or actually 47% of that number is actually just 5 customers. And so, as you can imagine, depending on which segment -- sector you then throw one of those 5 numbers into, it creates -- it does create some of those sort of outlier stats that you're referring to. I mean, part of our business model is really, as I said, it's old school relationship banking. We would -- we do an annual review at the very least on every customer. But the ones that we're more concerned about, we would do our quarterly reviews. We've got covenants in there. We would have LDR covenants. We would -- we revalue assets, as part of our credit origination process, as you'd expect. But also, we would have expected to have bankers. They're in market. We would expect them to have their finger on the pulse. If there's something that's happened in terms of an asset devaluation, we would expect them to pick that up. But I'm not sure what else...

Yes. And I mean, in terms of the specifics, I guess, Brian, on the rental hiring real estate. I mean that -- as a portion that's not dissimilar to the overall portion of the SME market. So we have kind of structured the book with diversification at an industry level. That CRE bucket itself is obviously -- it's diversified across components. And typically, what we see for that customer is it's not just a straight property lend. We have a significant portion of that book, where property value is not the only exit around 85%, where we will have some other element, for example, income of the sponsor because SMEs typically use property as a wealth diversification, as much as they might use it for the underlying business. So there's some other dynamics there that are helpful for us, as we think about the underwriting and the risk across that path going forward.

I think that's a really important point, Andrew. I mean, we don't do sort of dry stand-alone commercial -- commercial property lending, where the only income source is the property. It's generally trading businesses. They've diversified into property as part of a wealth creation strategy. They have an element of rental income from it, but they also have the trading income from that business as well. And as you'd expect, Brian, we apply the normal haircuts that you would expect in terms of bank value versus market value. So generally, for this type of lending, we would be below 70% of the market value.

Could I just push my luck with one other question just on credit underwriting generally. Could you walk us through -- so we've got 3 or 4 major banks that have got products that basically interrogate SMEs accounting platform, which I suspect gives a much better credit underwriting standard than normally we would get. Could you just walk us through -- I know that you tend to use people more than machines. But can you just talk us through what access your clients are getting using AI, using data to basically be confident that you're picking up any problems in the cash flow of the business as early?

Yes. Look, I think, Brian, as you said, taking an API to an accounting platform, it's not as -- I think from a credit underwriting perspective, I mean, it's got a lot of challenges, not least when you're accessing an accounting platform, you're not accessing nicely produced monthly management figures with a profit and loss and balance sheet, you're generally of accessing debits and credits. The -- it's fine if it's one customer, one borrowing entity, you put 10 customers in a group, a holding company, subsidiary, affiliated businesses, you have trading businesses, property holding companies, et cetera, it gets far more complicated. And so, for us, yes, I mean, it is old school, but we rely on skilled bankers actually using the actual accounts produced by the accountant and they will be consolidated appropriately to make our credit assessment. Now we are looking going forward, as to how we can obviously use AI and direct feeds to accounting platforms or to make sort of covenant monitoring easier and make annual renewals easier. But I think in terms of upfront credit assessment, certainly for the types of lending we do, then I think I'm not convinced that the productivity benefits would outlie the additional risk that you're taking or not, particularly with said complex groups.

And I would now like to hand the conference back to Chris for any further remarks.

Well, look, thank you, everyone. It's been -- as I said, it's been a delight as -- it's my first set of results, as CEO to present what we believe are a very clean set of results. It's been 8 years for me since the start of Judo. As I said, building a bank is not for the faint-hearted, it's got lots of different challenges associated with it. But finally, we think the build phase is over. Scale is our best friend, and we've never been more excited about the prospects for our company going forward. So again, thank you, for joining us. And I'm sure, we'll -- I'll chat to a lot of you again soon on the roadshow that will follow this.

This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.