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

Well, good morning, everyone. My name is Peter Hodgson, and on behalf of the Board, I'd like to welcome you to the 2024 Judo AGM. I'd like to begin by acknowledging the traditional owners of the land on which we are meeting today, and pay my respects to elders past and present. I want to acknowledge our directors, and they are John Fraser, Manda Trautwein, Jennifer Douglas, Mal McHutchison, David Hornery, Mette Schepers, and Chris Bayliss, our CEO and Managing Director. We are also joined by Yien Hong, our Company Secretary, and our auditor PricewaterhouseCoopers represented by Sam Garland. I would also like to acknowledge the rest of our executive management team: our CFO, Andrew Leslie; our Chief Risk Officer, Renee Roberts; our Chief Operating Officer, Ross Fornarino; our Chief Strategy and Growth Officer, Frank Versace; our Chief People and Culture Officer, Jessica Lantieri and welcome our Judo Bank employees who are present in this room and virtually. As I reflect on the 12 months since our last meeting, it's fair to say the economic environment has continued to present many challenges and various travails, which have had a considerable impact on small business and consumers alike. Nonetheless, the Australian economy has demonstrated resilience with many businesses able to maintain margins and preserve robust balance sheets. However, in certain sectors, particularly those relied on consumer discretionary spending, some are suffering the impact of high inflation, higher interest rates and ever-increasing energy costs. Like others, I must also call out the burden of productivity, staffing rules and regulation, additional taxes, charges and other imposts placed on the private sector. It isn't easy to run a small business these days. Against this backdrop, I am satisfied by 2 things: first, the Judo team's resilience and agility to achieve a strong set of financial and operational results despite the challenging environment. And second, the way our bank provides meaningful support to our customers as they navigate through this uncertainty. Throughout the year, we have worked through the challenges and complexities experienced by our customers and helped many of them capitalize on the opportunities in this tough environment. As a unique relationship bank that is purpose-built for small and medium businesses, our customers will always be at the core of all our decisions every day at all levels. Now more than ever, our team's experience and capacity to build trust, along with a deep understanding of each customer is essential and a clear competitive advantage in these uncertain times. Judo reported strong financial and operating performance for the 2024 financial year, delivering to our guidance targets while scaling the organization. We are making consistent progress towards our vision of creating a world-class SME-focused bank. We are determined on disciplined execution of a clear strategy, backed by the trust we have cultivated with our customers. We are particularly committed to the competition we have introduced in the Australian banking sector, be it with lending or deposits. We believe we are challenging the status quo and giving SMEs a better way to bank. As relationship experts, we back people and businesses so that we can grow together. In expanding into new regions and segments, as we are, we will have more capacity to serve more customers across Australia. By supporting underserved corporates of this country, we are not only meeting a crucial market need, but also invigorating our economy and communities with fresh opportunities for growth and innovation. Over the year, our engagement with shareholders, both at the Board and executive levels has been extensive, and we remain dedicated to continuing our communication to provide clear insights into our performance and plans. It is pleasing that the market has begun to recognize our progress. This year, the Board managed our transition in Judo's leadership team, allowing the bank to smoothly forge into the next phase of growth. We farewelled our previous CEO and Founder of Joseph Healy. Alongside David Hornery and Chris Bayliss, Joseph was instrumental in Judo's foundational journey. Under his leadership, Judo was able to achieve critical milestones, including securing a banking license, raising $1.5 billion in equity and transitioning to the bank public markets. The Board was delighted to appoint Chris Bayliss as our new CEO and Managing Director. Chris, a key leader in building Judo, holds strong vision and passion for addressing the needs of the underserved SMEs in this country. The Board supports his vision and plans and strategy for Judo, and you'll hear more about this when Chris presents. Chris has continued to enhance Judo's leadership team by welcoming 2 new senior executives. Ross Fornarino as Chief Operating Officer; and Renee Roberts, as Chief Risk Officer. Both have brought further depths to a deeply experienced leadership team with combined experience of close to 200 years in commercial banking, both in Australia and overseas. Importantly, operating in a complex regulatory environment, demands the highest standards of governance and risk management. Since being granted a full banking license by APRA 5 years ago, we have built a robust risk management framework. This has been crucial to the delivery of the bank's strategic goals and continued sustainable growth. The substantial risk experience of the Board and management ensures that the bank's future progress will continue to be underpinned by the highest standards of risk management. Our business bankers are supported by a capable team of risk technology, operations, people, culture, legal and commercial and finance professionals. And now with a substantial balance sheet and the largely complete build-out of our technology platforms in the rearview mirror, we can sustainably push into new regions and markets and capture a larger share of the SME banking market. There is no doubt in my mind of Judo's impact on the competition in banking wherever we choose to play. I do note that everyone now seems to have rediscovered business banking since Judo launched, well, at least for the time being. We welcome the competition in the knowledge that ours is the one true specialized model. We also know from feedback and our high Net Promoter Scores that we are seen as a bank that consistently supports and backs business. And our commitment to excellence is reflected, not only in how we serve our customers, but also the positive experiences of our team in the workplace. This environment helps us to attract top talent and industry leaders, reinforcing as a best-in-market employer. Turning to our Board. John Fraser will be retiring as a Director of Judo will effect of the -- at the conclusion of the AGM today. John has been a Nonexecutive Independent Director of Judo since October 2018. He's been a key member of the Board Risk Committee for which he acted as Chair as well as a member of the Board Remuneration and Nominations Committee. John was also an early investor into Judo. On behalf of the Board, Executive Management and shareholders, I would like to thank John for his exceptional contribution to Judo over the past 6 years. We are well advanced in our plans for appointing a new non-Executive Director with deep banking experience. In closing, I want to extend my thanks to our shareholders for their ongoing support and confidence in the bank. We share your commitment to seeing our business succeed, and we are confident our strong fundamentals for growth will deliver positive returns for all of us. On behalf of the Board, I would like to thank my fellow directors, our customers, stakeholders and investors for your continued support. I'm also grateful to our exceptional team at Judo, whose dedication to our customers are at the heart of everything we do. Looking forward, I am incredibly optimistic about the future of Judo. Our vision is clear, and I'm confident that we are well-positioned to continue our journey of success. And I now invite our CEO and Managing Director, Chris Bayliss, to provide his insights for the year.

Good morning, everyone. Let me add my own welcome to the 2024 Judo AGM. For those I haven't met, my name is Chris Bayliss, and it's a privilege to address you today as your CEO. It's actually my 41st year in banking, which includes time working in Australia and overseas. And right from my earliest training at Barclays back in the 1980s, I've seen the value that a highly skilled, highly trained relationship banker can provide to their customer. This is why I'm so passionate about the role that Judo plays for small- and medium-sized businesses and why I'm so excited about the future for our business. Judo is not a job for me. It's a passion. Since cofounding Judo with Joseph and David back in 2016, I've been the Chief Relationship Officer, the Chief Operating Officer, CFO and Deputy CEO and it was an honor to assume the role of CEO back in February. I'd like to start by talking about how we're delivering on our strategy. This year, we've continued executing our simple strategy to build a world-class SME business bank, and execution is a core part of our DNA at Judo. This is a skill built over several years as we successfully navigated the challenges of building a bank from scratch. We've maintained our sector-leading NPS score at plus 59% versus the rest of the sector, which is in low single digits at best. And this underpinned our loan book growing 3x faster than the rest of the sector. We now serve almost 4,500 lending customers, diversified across sectors and geographies, consistent with our day 1 goal of having a portfolio that reflected the broader SME economy. And our employment brand is one of our greatest assets, and we've recruited top talent right across our business, including bankers as well as risk, finance, strategy, technology, operations and HR. And it's my firm belief that A players attract A players and talent is a culture, and we will continue to invest in the things that make Judo a great place to work. Technology is one of our key enablers. And over the last -- the past year, we've executed a significant technology transformation. We've successfully re-platformed a new core lending platform, a new credit risk engine, a new general ledger and new digital and data platforms. And these systems are best-in-class and hugely scalable and will enable us to continue our ambitious growth agenda and deliver significant operating leverage. Over the past 12 months, we've also successfully transitioned our funding mix, including repaying $2.8 billion to the RBA, representing Judo's outstanding share of the term funding facility. We were able to achieve this through the strength of our market-leading term deposit franchise, which now has over 50,000 customers. We've also built a strong treasury function, which punches well above its weight and have proven access to all the same funding channels as the major banks. The ability to achieve all these in 12 months underscores our execution capability and the benefit of being an agile, pure-play specialist bank. Now to our FY '24 performance. Our strong operational performance has translated pleasingly into strong financial performance. We met or exceeded all the guidance metrics, which we provided to the market. We delivered 20% lending growth and profit before tax of $110 million on an underlying basis. With our support functions now largely reaching scale, our expense growth slowed significantly. And credit quality was in line with expectations. Although the operating environment has been challenging for some customers, our relationship-led model enables us to proactively work with our customers. While the number of customers in arrears is likely to remain volatile, pleasingly, we saw a flattening in our lead indicators in the June quarter. We continue to hold strong levels of capital with CET1 at the 30th of June of 14.7%, which remains the highest of any listed bank. The Tier 2 transaction we completed last week. It was another successful marker of our progress in making our capital and funding more efficient. The deal was multiple times oversubscribed, underscoring the increase in awareness and confidence that investors have in Judo. It's appropriate to also provide a Q1 FY '25 trading update and trading conditions for the financial year-to-date have been positive. We've maintained good lending momentum with our loan book now reaching $11.3 billion at the end of September. Our pipeline also remains strong at over $1.2 billion, a healthy level for this time of year. The margins for new loans have remained in the mid-400s as we continue to price for risk. And on funding, as we expected, competition for TDs has eased slightly while swap rates have been volatile, overall deposit margins and our funding mix are in line with our assumptions. Our liquidity levels have also normalized following the repayment of the TFF as flagged to the full year results. We also remain on track to achieve our NIM guidance, including an exit NIM of 3% in June '25. In respect to credit quality, as you would expect, we continue to watch this very closely. Our 90 days past due and impaired loans have remained stable since June, closing at 2.34% at the 30th of September. And while some segments of the economy experienced challenges, operating conditions have generally been much more stable in recent months, and most of our SME customers continue to demonstrate resilience and successfully adapt to their business models. In summary, we're continuing to execute our clear and simple strategy. We're on track to achieve our FY '25 guidance and we'll demonstrate clear operating leverage from the second half of FY '25. So looking forward, I'm very excited about the outlook for the business. After 8 years and lots of hard work, we finally have the bank we dreamed of. We have the foundations of a strong bank underpinned by our obsession with customers, our challenger mindset and our deep banking experience. My focus now is to drive operational performance and deliver our at-scale metrics, particularly return on equity in the low to mid-teens. So as we look ahead with our core SME lending franchise [ homing ] and with greater scale, we now have an increasing number of growth options. This includes geographic expansion and reviewing adjacent products to meet more SME lending needs. Our expansion into the regions is proving very successful and is continuing at a solid pace. And our relationship-led approach to banking really resonates strongly in the regions, and we're receiving a warm welcome, especially as some of our competitors withdraw. We now have 25 locations nationally with 4 new locations added since FY '24 results, being Ballarat, Coffs Harbour, Dubbo and Mildura, and our aim is to have 30 locations by June next year. We're also looking at other ways to further drive our ROE, including capital and funding initiatives. This is an exciting time for our business, and I'm very confident that we will achieve scale and deliver target ROE, and this really is the equivalent to reaching base camp in my view. I'm privileged to work with an exceptionally talented and passionate team, and I'd like to thank them for their hard work and dedication. And finally, I'd like to thank our customers and our shareholders for your ongoing support of Judo on our journey to building a world-class bank. Thank you.

Thank you, Chris. We will now move on to the items of business for this meeting. The Notice of Meeting was dispatched to all shareholders on the 23rd of September 2024, and I propose to take that as read. When you registered for your attendance today, you would have either been issued a yellow, blue or red attendance card. Shareholders with yellow or blue card are welcome to ask questions. Visitors who are issued a red card are welcome at today's meeting, but a reminder that they are not entitled to ask questions. If you think you have been issued with the incorrect card, please see the Link staff at the registration desk. Shareholders with a yellow or blue card, who wish to ask questions at today's meeting will need to show the Judo staff their card first and make their way over to the standing microphone where they will be asked for their name. There will be an opportunity to ask questions at the end of each item of business, and again, at the conclusion of all voting items. Please note that there is a limit of 2 questions per shareholder. This meeting has been convened to consider the FY '24 financial reports and the 6 resolutions as set out in the notice of meeting and explanatory materials. As explained in the Notice of Meeting and explanatory materials, there is a voting exclusion in relation to the vote on the remuneration report, the approval of the grant of deferred share rights and performance rights to the Chief Executive Officer and Managing Director, Christopher Bayliss, and the approval of further issues under Judo Capital Holdings Limited Omnibus Incentive Plan. The resolutions put to the vote at the AGM will be decided by poll. Voting during the meeting has been conducted by our share registry, Link. The results of the poll for votes cast today will be calculated by our share registry and released to the ASX shortly after the meeting. For all those shareholders who are in attendance who have already provided a proxy and do not wish to change their votes, there is no need to vote again. Now item 1 of the notice of meeting is to receive and consider the reports of the directors and of the auditors, the income statement, balance sheet and cash flow statement for the year ended 30 June 2024. There is no requirement for shareholders to approve these reports. Are there any questions or comments on the tabled and audited consolidated financial report for the company and its controlled entities for the period ended 30 June 2024?

There are no questions.

Thank you. The next item of business concerns the reelection of Jennifer Douglas as a Director of Judo. I'd like to invite Jen to say a few words.

Thank you, Peter, and hello, everyone. I feel honored to be putting forward myself for reelection today to the Judo Board. Since I first joined the Board in 2021 in preparation for our float, Judo has achieved significant milestones and growth. I'm particularly proud of the market-leading advocacy scores that we have that have really enabled this growth given that our business customers are really at the center of everything we do. During my time on the Board, I've supported the business by bringing my experience in operating in a listed ASX environment, coupled with my significant experience in establishing and growing customer-centered businesses, in managing major technology decisions and platforms and building teams of high-caliber individuals. I bring a very broad nonbanking perspective to the table from my involvement across diverse industries as an executive and a non-executive director. As Chair of the Remuneration and Nomination Committee, I've worked very closely with the business to evolve our remuneration framework to ensure that it stays fit for purpose to attract and retain the really highly talented and passionate group of people that we need to grow this business now and moving forward. That role has also included facilitating Board and CEO succession, including facilitating the very smooth transition of our CEO during the past year. Moving forward, I'm really excited about Judo's future and really excited about working with the whole Judo team to unlock future growth and more value for our business customers, for the communities we serve and you, our shareholders. And I humbly submit myself for reelection. Thank you.

Thank you, Jen. I now move on to the resolution to be voted on by the shareholders as set out in the notice of meeting and accompanying explanatory materials, which is taken as read, being the reelection of Jennifer Douglas. The Board has considered Jen's experience and knowledge and recommends, with Jen abstaining, the shareholders vote in favor of this resolution. The votes cast prior to the meeting on this resolution are now being displayed on the screen. According to the votes cast prior to the meeting, which are on the screen, 99.69% voted in favor of the reelection of Jennifer Douglas. Are there any questions or comments from shareholders in relation to this resolution?

Chair, there are no questions.

Thank you. I now ask shareholders to complete their yellow voting cards for this resolution. The next item of business concerns the reelection of David Hornery as a Director of Judo. I'd like to invite David to say a few words.

Thank you, Peter. Good morning, ladies and gentlemen. I've met and got to know many of you over what's been almost 10 years of the Judo journey. But for those that I haven't met, I haven't had the chance to meet, by way of brief background. Post 30-plus years of banking at Macquarie ANZ, now both here and offshore. I was one of the co-founders of Judo back in 2015, '16, along with Judo and Chris. And at that time, a small group of very dedicated others. Then working alongside Joseph as the co-CEO for the first 5 years and stepping up onto your board in 2021 when we listed the company. Joining the Board as well as the risk and audit committees and knowing the business as well as I do has provided the opportunity, along with my fellow directors, to oversee and contribute to a number of things: One, the continued excellence in the service proposition that we deliver to our customers, strategic rigor as Judo continues to grow and scale strongly, robust governance frameworks and a continuation of our focus on embedding risk management right into the fabric of the company. And probably most importantly of all, a continuation of the very unique culture that has been a characteristic of Judo really from the very outset. At a personal level, my fundamental belief in the importance and the value and the uniqueness of that relationship-centered offering that Judo brings to the Australian small- to medium-sized enterprise market remains as strong and as unique as it did at our very outset. And I think, and as you heard the Chairman and Jen talk about is clearly valued by that community as much today as it ever has been with Net Promoter Scores, as you saw on the screen earlier of plus 59, which is absolute best of breed. So it's been a unique opportunity for me to continue to contribute in that way and an honor to have served on the board for the past 3 years and an absolute honor to be nominated for another 3 years to continue to serve. Thank you.

Thank you, David. I now move on to the resolution to be voted on by the shareholders as set out in the notice of meeting and company explanatory materials, which is taken as read, being the reelection of David Hornery. The Board has considered David's experience and knowledge and recommends, with David abstaining, that shareholders vote in favor of this resolution. The votes cast prior to the meeting on this resolution are now being displayed on the screen. According to the votes cast prior to the meeting, which are on the screen, 97.86% voted in favor of the reelection of David Hornery. Are there any questions or comments from shareholders in relation to this resolution?

Chair, there are no questions.

Thank you. I now ask shareholders to complete their yellow voting card for this resolution. The next item of business concerns the approval to adopt the remuneration report set out in the directors' report for the year ended 30 June 2024. The vote on the resolution is advisory only and does not bind the directors or the company. However, any discussion on this resolution and the outcome of the vote will be taken into consideration by the Board Remuneration and Nominations Committee when considering the future remuneration arrangements of the company. There is a voting exclusion on this resolution. The Board recommends that shareholders vote in favor of this resolution. The votes cast prior to the meeting of this resolution are now being displayed on the screen. According to the votes cast prior to the meeting, which are on the screen, 99.10% voted in favor of the resolution for the adoption of the remuneration report. Are there any questions or comments from shareholders in relation to this resolution?

Chair, there are no questions.

Thank you. And I now ask shareholders to complete the yellow voting card for this resolution. The next item of business concerns approval to grant deferred share rights to the Chief Executive Officer and Managing Director, Christopher Bayliss, as explained in the Notice of Meeting and explanatory materials. There is a voting exclusion on this resolution. The Board, with Chris abstaining, recommends that shareholders vote in favor of this resolution. The votes cast prior to this -- to the meeting on this resolution are now being displayed on the screen. According to the votes cast prior to the meeting, which are on the screen, 98.64% voted in favor of the resolution for the approval of the grant of deferred share rights to Christopher Bayliss. Are there any questions or comments from shareholders in relation to this resolution?

Chair, there are no questions.

Thank you. So I now ask shareholders to complete the yellow voting card for this resolution. Moving to the next item of business, which concerns the approval to grant performance rights to the Chief Executive Officer and Managing Director, Christopher Bayliss, as explained in the notice of meeting and explanatory materials. There is a voting exclusion on this resolution. The Board, with Chris abstaining, recommends that shareholders vote in favor of this resolution. The votes cast prior to the meeting on this resolution are now being displayed on the screen. According to the votes cast prior to the meeting, which are on the screen, 97.86% voted in favor of the resolution for the approval of grant of performance rights to Christopher Bayliss. Are there any questions or comments from shareholders in relation to this resolution?

Chair, there are no questions.

Thank you. So I now ask shareholders to complete the yellow voting card for this resolution. The next item of business concerns approval of future issues under the Judo Capital Holdings Limited Omnibus Incentive Plan as explained in the Notice of Meeting and explanatory materials. There is a voting exclusion on this resolution. The Board recommends that shareholders vote in favor of this resolution. The votes cast prior to the meeting on this resolution are now being displayed on the screen. According to the votes cast prior to the meeting, which are on the screen, 98.40% voted in favor of the resolution for the approval of future issues under Judo Capital Holdings Limited Omnibus Incentive Plan. Are there any questions or comments from shareholders in relation to this resolution?

Chair, there are no questions.

Thank you. So I now ask shareholders to complete the yellow voting card for this resolution.

Now that we have finalized the items of business, we will now address the questions that were submitted prior to the AGM from any share -- from shareholders and from any shareholders in the room. I remind those present any shareholder who wish to ask questions will need to show the Judo staff their yellow or blue shareholder card first and make their way over to the standing microphone where they'll be asked for their name. And I do ask that shareholders limit themselves to 2 questions each. The questions submitted prior to the AGM were, when does Judo Bank intend to initiate dividend payments to its shareholders? Well, as a fellow shareholder, I would be very happy to receive a dividend, and I can assure you that this topic is regularly discussed by the Board, and we will look to pay dividends in due course. However, right now, we're holding high levels of capital and this capital is to fund lending growth. We recognize the importance of dividends to retail shareholders, and we look forward to seeing more retail shareholders joining our register. We also recognize that shareholders are a valuable retention to office staff, because many of our employees hold Judo shareholdings. So dividends are very much high on our agenda. The next question is, what is the climate action plan and what steps are taken to -- for responsible lending? The Board acknowledges the importance of climate change, and we have an emissions reduction plan that references best international frameworks. We are looking to achieve emissions reductions by reducing our operational and value chain emissions. And we'll continue to review our plans as our business grows. We have published our emissions in our annual report, which can be found on our website. The [ holy force ] of Judo as a business bank is founded on lending responsibly. You can read the details of sectors we won't lend to in our annual report. The next question is, does Judo bank consider its remuneration plan, fair and reasonable and why? We think the quantum and structure provides appropriate balance between fair pay and strong alignment of incentives with our shareholders. We've done extensive benchmarking of our remuneration plan against similar size companies and other listed banks. We specifically think that banks are a relevant benchmark because these are the companies we primarily compete with for talent. As you know, we have initiated a range of changes to our rem structure over the past year, notably the increased weight into long-term incentives for our senior executives. We also have engaged extensively of investors and proxy advisers on our remuneration structure and the strong vote in favor of the remuneration report would suggest they are supportive of the framework. Now those were the only questions submitted prior to today's meeting. And as such, I'd like to open now the room for questions. If you'd like to ask a question, please make your way over to the standing microphone. And again, I ask that you limit yourself to 2 questions each.

Thank you, Chair. This is a shareholder, Meena Wahi from the Australian Shareholders' Association.

Peter, my question is, first of all, just as a way of introduction, my name is Meena Wahi, and I'm a voluntary company monitor with Australian Shareholder's Association. I've had the pleasure of meeting with you prior to the AGM. So thank you for your time, and I asked you my questions there. I wish to ask what is Judo bank doing to better communicate with the retail shareholders?

To communicate with retail?

Yes, better communicate with retail shareholders so as to build the relationship and engagement?

Thank you, Meena. Indeed, thank you for your question. I think this is your third time of attendance. You've asked a question every time, so I'm very grateful for that because we like the questions. Look, it's a good question. And as I tried to suggest in our presentation and with Chris, we went back a year or so, back to do an investor perception survey to see how people were thinking about Judo and what we might do around communication. And a lot of what you have seen and, indeed, the results, perhaps in the way the market receives us, is an outcome of that perception of that study and then the work around communications, be it investor days, investor meetings and so on and so forth, which you would expect to see a listed company produce. Retail is slightly more difficult for us to communicate with. You can see the material, our advertising material, our general material around Judo. The very fact we've got 50,000 term depositors that, essentially, retail investors or retail depositors suggest we're making some progress there, but we really do want to grow our retail investor base, and that's very much on the agenda for the year or 2 ahead. Thank you.

Thank you, Chair. There are no further questions from the room.

Okay. Well, ladies and gentlemen, that concludes the business of this meeting. I now declare the meeting closed, and thank you for your attendance here today and for your support. If you have a yellow voting card, please see a Link representative to hand it in, and please do feel free to stay with us and have refreshments, hopefully, sausage rolls. Thank you.