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

Good morning. Welcome to the Judo Bank FY '25 results briefing. My name is Andrew Dempster. I'm the General Manager of Strategy and Investor Relations at Judo. I'd like to begin today by welcoming -- sorry, by acknowledging the traditional owners of the land from which we are all joining today. Today, we're going to follow our usual format. Firstly, our CEO, Chris Bayliss will provide an overview of our performance. Our CFO, Andrew Lesley, will then run through the detailed financials, and Chris will then return to discuss the outlook. We then have time for Q&A. And also, as usual, our documents have been lodged with the ASX this morning, and our webcast is being recorded and will be made available on our website later today. On that note, I'll hand to Chris.

Thanks, Andrew, and good morning, everyone, and thank you for joining us. It's a pleasure to present Juno's full year results for FY '25. Since 2016, we've always said there would be 3 chapters to Judo's path to being a world-class SME business bank. Chapter 1, we labeled Build a bank, which essentially made riser capital, launch the value proposition, develop the best banker employment proposition and the best broker proposition, obtain our banking license and, of course, get to profitability. Chapter 2 was labeled scale the bank, which essentially meant pivot to the public markets, diversify the funding and capital base, replatform to our strategic and scalable technology and largely complete geographical expansion. With this set of results today, I'm excited to say that it really does feel like chapters 1 and 2 are now firmly behind us. This year, we've continued to execute with discipline and deliver strong outcomes for our customers, our people and our shareholders. So as we start to talk about guidance into FY '26 later in the presentation, it is clear we are now firmly transitioning to Chapter 3, which we labeled optimize a bank or what we call operating leverage. At the end of this next chapter, we will have built a world-class SME business bank and could off metrics at scale, and this is now well and truly in sight. But let me start with what underpins everything we do. the service profit chain. I start every presentation with this because it's the only way to maintain sustainable long-term competitive advantage and could off culture. At Judo, we've always believed to the highly engaged employees have great customer outcomes, and those outcomes drive growth and returns. It's not just a theory. It's a model we live by, and our data proves it. Our weekly measure of employee engagement remains very strong. I mean, you fundamentally cannot delight customers more than you delight your own employees. This level of engagement has driven lending NPAs to plus 53 and deposit NPAs to staggering plus 67. These are sector-leading numbers, and they're translating into real financial performance, including an 80 basis point uplift in ROE which is an important step towards achieving our at-scale ROE target of low to mid-teens. Okay. Turning to the numbers. We've delivered a strong result and our operating leverage I just talked to has clearly emerged in the second half of the year. Lending growth was 16%, almost double system growth taking our GLA to $12.5 billion at the midpoint of our revised guidance. And importantly, we had a record month of growth in June. NIM came in above our guidance range at 2.93% and supported by tailwinds across lending, liquidity and wholesale funding. NIM improved throughout the year and was 3.04% in the second half, 23 basis points and above guidance reflecting our first clean period with no residual drag from the term funding facility. Our strong loan growth and improving NIM combined with disciplined cost management, saw our CTI improved to 52.4% for the full year, and importantly, down to 48% in the second half. The 46% increase in other operating income also helped this metric. It really is quite satisfying to see our CTI below the symbolic 50% mark as it is a clear signal of the operating leverage now emerging in the business. Our cost of risk was higher than last year in dollar terms, but as a percentage of GLA, cost of risk was 66 basis points, down from 72 basis points in FY '24, trending towards our at-scale metric. And the main drivers were continued seasoning of the portfolio is expected offset by the benefits of proactive portfolio management. PBT grew 14% to GBP 125.6 million, which was just below the profit guidance we first provided to the market in January 2024, which, of course, was over 18 months ago now. And considering the volatility in the operating environment during that time, we consider this to be a strong result. And it does reflect our agility and ability to manage all the levers at our disposal and our commitment to doing what we say we're going to do. We've had a clear and simple strategy to build a world-class SME business bank, which we have been consistently executing for the past 8 years. and our FY '25 results are really are just another brick in the wall. As I said at the start, this year has been marked by continued focus to scale the bank driven by purpose. We have looked, and there is no other bank anywhere in the world that has scaled as quickly as we have. From 15 locations at the time of listing to 31 today, relationship banking numbers have grown to 161. All our strategic flexible, scalable platforms are now in place, whether that be our digital platform, data platform, credit risk engine, core banking, our current modern technology platform is the benchmark and not just for banks in Australia, but for incumbents around the world who are now investing heavily to catch up. It really has been a huge 18 months of building infrastructure, which we can now optimize marked by excellent execution. Later in the presentation, I will go through the plan to enable our bankers to improve productivity, leveraging this very strong technology foundation. Now after a subdued quarter 3, we saw record net growth in the June quarter, driven by our differentiated value proposition and successful regional expansion. We have opened 10 new locations this year, marking our largest expansion since FY '22, accelerating our aggregate and regional growth strategy. Agri lending now makes up 7% of our book from a standing start 3 years ago. But despite the strong growth, we remain underweight compared to the industry average of around 20%. And with other banks continuing to exit regional markets to reduce costs, we still have a significant runway ahead of us. And the regions really do offer better margins, larger deals and higher NPS where our CVP is particularly compelling. We've also made strong progress in our SME warehousing lending business, establishing 2 facilities with a combined limit of $165 million and we've built a very healthy pipeline. And our willingness to offer smaller warehouse lines and the major banks, combined with our deep credit expertise is allowing us to capture market left underserved following Credit Suisse's exit. Our economics are increasingly driven by the existing loan book, and our blended lending margin remained stable at 4.3%. Now front book margins can move with mix such as growth in our warehouse business as well as competition for lending. We, like others, are seeing a lack of discipline in pricing for risk. We did see a decline in margins on new lending in quarter 4 to the low 4s, but pleasingly, this has already reverted back to the mid 4s in our lending since then. Our gross originations for the year exceeded $4.7 billion despite strong competition. And our lending pipeline has remained strong at $1.9 billion, supporting continued origination momentum. We remain disciplined and priced appropriately for the risk we take. Runoff, which was elevated did peak in quarter 3, but it moderated in quarter 4 as we cycle through the tail end of low-margin COVID era loans. Overall, our strength continues to be judgment-based lending, applying the 4 Cs of credit, character, cash flow, capital and collateral in that order. It allows us to support strong businesses with the capital I need while maintaining price discipline and delivering sustainable economics. So FY '25 has been another year of disciplined execution, tight management of the levers available to us to continue scaling the loan book sustainably. Moving to funding. Our deposit franchise continues to go from strength to strength. The success of our deposit franchise really is one of our biggest achievements. Earlier, I meant that our deposit business has a Net Promoter Score of plus 67%, which reflects how easy we are to deal with and the consistent market-leading pricing that we can offer because of our specialist model. Our deposit book actually grew at 2x system and now exceeds $10 billion, with 71% of flows coming through the direct channel. Rollover rates are increasing and brand awareness is driving solid growth, but equally, Judo is still a new brand for many potential customers. And so this simply highlights the growth opportunity ahead of us as our brand recognition continues to build. We're also realizing major benefits from our recent migration to Fort Machine, which has delivered a step change in product flexibility for deposits. After just 3 months of being on the new platform, we've introduced several new TD tenors, helping us to manage maturity profile with increasing sophistication. We've also been able to be more targeted with the use of loyalty bonuses. We are also planning to launch 2 new savings products this financial year, our wholesale savings account, which we launched before Christmas and a direct online savings account, which will be launched after Christmas. These initiatives will enable improved diversification and they will give us flexibility and the ability to manage our deposit base with more science and better pricing. Now lastly, before handing to Andrew, a word on credit quality. Our key metric of 90 days past due and impaired assets has remained stable at 2.43%. Additions and resolutions are largely balanced. And as I said earlier, write-offs totaled $39 million or just 34 basis points of average GLA. In fact, since lending our first dollar over 8 years ago, our cumulative write-offs are still only $75 million or less than 10 basis points a year on average. This is the benefit of being a true relationship bank that specializes in SME lending. Our judgment based approach to lending means we do not simply look through the rearview mirror. We fundamentally assess the owners skill, their experience, their track record, the drivers of cash flow in the working capital cycle and the appropriate point of leverage for the business. On top of these regular interactions with our customers means we have the ability to act quickly if circumstances change. And so for these reasons and based on our experience to date, we remain very comfortable with our assumption of a 50 basis point cost of risk through the cycle. On that note, I'll hand over to Andrew to run through the financials, and of course, I'll be back later to run through our strategic priorities and the outlook for our company. Andrew.

Thank you, Chris, and good morning, everyone. In FY '25, Judo delivered a solid financial result with underlying profit before tax of $125.6 million, up 14% on last year. ROE also increased, up 80 basis points to 5.3%. The result was underpinned by continued loan book growth, ongoing improvement in NIM and disciplined cost control. On a half-on-half basis, profit before tax rose 22%, highlighting the inherent operating leverage in our business model. Turning first to NIM. Second half '25 NIM was 3.04%, a 23 basis point improvement from the first half, with full year NIM of 2.93%. Notably, both second half and full year NIM exceeded our guidance. On this slide, you can see the key drivers of NIM from December 24 to June 25, and most components were largely positive. Other cost of funding, which reflects mix and wholesale funding sources, had a 6 bp favorable impact. Lending margins contributed 10 bps, showing the benefits from higher lending margins and proactive portfolio management. The treasury portfolio had a 6 bp positive impact. largely due to the reinvestment of maturing low rate fixed rate bonds and tighter liquidity management. As you can see in the chart, deposit margins and equity had relatively minor impacts. Deposit margins had a 1 basis point unfavorable impact with blended deposit costs rising to 87 basis points in the second half, up from 85 basis points in the first half. And I'll unpack this later in the presentation. And the equity component of funding had a small drag on NIM as falling interest rates were largely offset by our investment term of capital hedging strategy. Moving now to our expectations for NIM in FY '26. We are actively managing NIM to remain above 3%, which is our at-scale target. For FY '26, we expect NIM to be in the range of 3% to 3.1%. In the first half, NIM is expected to be around 3%, slightly lower than second half '25. This reflects modest pressure from current deposit and lending market conditions as well as the impact of RBA cash rate decisions. And for context, our FY '25 exit NIM was 2.93%, impacted by higher deposit costs. In the second half, we anticipate NIM will improve to around 3.1%, supported by several key tailwinds, but namely funding mix and the launch of our new savings products. As Chris outlined, we will launch 2 new savings products in FY '26, a key driver of our NIM trajectory for the year ahead. In a falling rate environment, there is a growing preference from customers for shorter tenor TDs and at core products. Now this presents a strategic opportunity for us to enter the Accor savings market. Our strong asset yield means we're well placed to offer competitive savings rights, reinforcing our ability to attract and retain customers, just like we're doing in the TD market. We will also benefit from enhancements to our existing TD offering, enabled by our new core deposit platform. This includes the introduction of new tenors and a more targeted loyalty bonus offering. Additionally, we expanded our distribution footprint, and we launched with a second wealth platform provider that's already delivering strong inflows. Together, these initiatives will broaden and diversify our deposit base, enhance our flexibility in managing funding mix and ultimately, lower funding costs reinforcing our ability to sustain a NIM above 3%. Next to deposit margins. As you'll recall, we swapped the majority of our deposits back to a 1-month rate to manage interest rate risk. Accordingly, our TD margins are a function of headline rates and the swap rate. During the second half of '25, there was a disconnect between market headline rates and the swap curve, driven by macro uncertainty and the timing of anticipated rate cuts. While headline rates for the branchless bank segment did fall, the swap curve experienced heightened volatility. And as a result, the margin on our 1-year TDs written in the second half of '25 was above our through-the-cycle expectation of 80 to 90 basis points with the full run rate impact creating a headwind for first half of '26 NIM. Despite this, we remain confident in our through-the-cycle TD margin assumption of 80 to 90 basis points. As we view the recent volatility as temporary rather than structural. Looking ahead, we've seen some early signs of stabilization. As uncertainty around cash rates have eased, year-to-date margins on the new TD book have improved. Maintaining originations around current levels should benefit NIM in the second half of '26. Now to funding mix. Term deposits remain the cornerstone of our funding strategy and now represent 68% of our total funding stack. Our deposit book grew to nearly $10 billion by the end of FY '25 with $1.4 billion in net growth, driven primarily by retail -- direct retail customers supported by a high retail rollover rates of 70%. Beyond deposits, we continue to optimize our wholesale funding program. We have proven access to a diverse range of funding sources and our profile in capital markets continues to strengthen. We were particularly pleased with the pricing we achieved on our recent Tier 2 and senior unsecured issuances which came in significantly tighter than our previous transactions. And we're actively exploring a number of funding and ROE optimization initiatives, including potential loan sales to further enhance flexibility and efficiency. Moving to operating expenses. In FY '25, our CTI ratio improved by 220 basis points to 52.4%, reflecting the operating leverage inherent in our business model. Underlying OpEx, excluding the nonrecurring costs incurred in FY '24, grew by 2%. The largest component of our cost base, employee expense rose modestly by 3% largely due to wage inflation. Importantly, while the average number of bankers increased, total FTE was lower than FY '24. This reflects the increasing maturity of our enabling functions and our continued focus on investing for growth. Looking at the half-on-half performance, Employee costs declined by 13%, driven by incentive outcomes and some volatile items such as payroll tax, which we flagged at the half year. IT expense and amortization increased as expected, following the successful implementation of several new systems. Turning now to our expectations for OpEx for FY '26. FTEs will increase primarily in growth-related areas, including bankers, credit servicing and deposits. And as previously flagged, we're also planning for some above wage inflation growth in banker salaries. We are also in-sourcing select IT roles. As a result, IT expense will remain broadly stable with CPI and new system costs largely offset by in-sourcing. Intangible amortization will increase, reflecting the full year impact of newly implemented platforms and some new investments. And lastly, other expenses are expected to track broadly in line with inflation. While we are a growth business, cost discipline continues to be a priority. Overall, we expect FY '26 CTI to be below 50%. This reflects our focus on ongoing cost control and revenue-linked investments that support growth across both net interest income and other operating income. Turning now to asset quality. Impairment expense for FY '25 was $75.5 million or 66 basis points of average GLAs, continuing the downward trend from 72 basis points in FY '24. The movement in impairment expense over the year reflects general portfolio seasoning, a rise in specific provisions across several sectors and growth in the loan book. Our collective provision coverage ended the year at 0.95% of GLAs, down 10 bps from FY '24. The net movement reflects growth in the loan book and an increased weighting to downside economic scenarios, offset by some loans migrating from collective to specific provisioning and changes in our customer mix. Despite the decline in collective provisions -- collective provision coverage, total provision coverage increased to 1.49% of GLAs. That's up from 1.39% in June last year. As Chris mentioned earlier, asset quality remains broadly stable as evidenced by our arrears ratio. Looking ahead, we expect economic conditions to stabilize through FY '26 and supporting continued resilience in credit performance. Finally, to capital. We continue to maintain strong capital ratios at both CET1 and total capital levels. We closed FY '25 with a CET1 ratio of 13.1%. There were 2 key drivers of CET1 movement over the half. Growth was the primary contributor to CET1 consumption at 90 basis points. Pleasingly, organic capital generation improved in the second half, contributing 40 basis points supported by rising profitability. We expect this trend to continue as operating leverage builds over time. Looking ahead, we have a range of proven initiatives available to support our growth strategy and maintain capital strength. Thanks again, folks. And I'll now hand back to Chris.

Thank you, Andrew. Now of course, many of you will be familiar with this slide from our Investor Day, which explains the key elements of the next phase of our strategy, which is optimizing the platform we've built. It is completely consistent with the original vision. For us, our consistent, simple strategy has been a key factor of our success. We are and will continue to be solely focused on the SME sector. Our strategic priorities are to enhance our core business, grow our TAM, optimize our funding and capital and create new avenues for growth. And the full focus of our team has now turned to bank enablement and new products in order to achieve the optimal balance of growth and economics. Whilst we are a growth company, of course, we're also a bank. And as such, we are valued on our ROE, and we remain committed to achieving our at-scale metrics with an ROE in the low to mid-teens being the most important. Turning to the macro outlook. We expect conditions for SMEs to improve. Credit demand remains robust and business confidence is lifting, although some sectors still face pressure. We expect to remain in an easing cycle and lower interest rates should boost spending, which will be a helpful tailwind to many of our customers. An improving economy should also allow SMEs to pass on higher input costs which is still growing at around 5% per annum. This has all been reflected in recent business confidence surveys. In addition, we are hopeful of some positive outcomes for SMEs from the productivity [indiscernible] table in Camber today. Lastly, and importantly, as I mentioned earlier, Judo is relatively well positioned in a falling rate environment, primarily because we do not have the 0 cost transactional accounts or fixed rate mortgages of our competitors. Next, this slide outlines the key elements of shaping our strategic focus for the year. On the previous slide, I covered the easing cycle and how we are a benefit relative to our other banks and conditions this year should improve for consumers and for our customers. Whilst the lending market is competitive, especially for commoditized lending, we remain confident in our differentiated smarter, faster, stronger customer value proposition. However, we're not complacent, and we remain disciplined in pricing for risk. We're also leveraging the investments we've made in our new technology platforms, empowering our bankers and driving productivity. We continue to innovate and mature our relationships with commercial brokers with the creation of a broker black belt program, which aligns the interest of brokers with our own balancing growth, margin and asset quality to drive portfolio economics. We're expanding our working capital offering to boost other operating income. Our warehouse lending will continue to build, as I mentioned earlier. On funding, our established franchise and technology replatform has created optionality, which have also heard us cover extensively this morning. In addition, we continue to evaluate new balance sheet optimization levers, including loan sales, which have the potential to significantly boost our near-term ROE. Lastly, we will continue to manage our liquids book tightly to drive improved returns and benefit NIM. Next, touching on the ongoing investments in our customer value proposition. With our technology platforms in place, we are now able to drive the productivity improvements that we've flagged for many years. Over the next 12 months, we're unlocking banker capacity, with initiatives, including rebuilding loan modification and margin change processes, making them faster and more efficient, streamlining annual reviews through smarter workflow and simplifying variations and increases accelerating turnaround times for our customers. Finally, we're using the new data platform to deliver customer insights to our bankers enabling them to be more proactive in addressing customers' changing risk profile and needs. These initiatives will mean our bankers will have more time to spend with our customers and its larger portfolios and continue driving growth. All of this translates to the operating leverage I talked to in my opening slide. We're progressing towards our at-scale ROE target, and our PBD trajectory reflects that, from $32 million, excluding the TFF in FY '23 to the guidance that I'm about to talk through of $180 million to $190 million of PBT in FY '26. This is a result of the consistent execution of a clear, simple strategy, which we architected 8 years ago. And the profit growth, of course, does not stop in FY '26 either. But this coming year is an important step change towards our at-scale ROE and shows the true earnings potential of our model. Now to guidance. We have previously provided FY '26 profit growth guidance. And today, we're providing more granularity on the composition. Starting with GLA. We're targeting a loan book of between $14.2 billion at $14.7 billion by June next year. We will continue to drive growth in the loan book from consolidating our position in the regions, lifting banker productivity, growing our warehouse lending. But as I said earlier, we will continue to price for risk as we navigate competition. On NIM, as Andrew has outlined, NIM will be a story of 2 halves, with the first half NIM expected to be around 3%, and second half NIM to increase to around 3.1%. And so accordingly, for the full year, we're targeting a range of between 3% and 3.1%. Our FY '26 CTI ratio is expected to be below 50% as revenue growth outpaces expense growth on a full year basis. Growth in other operating income is also expected to contribute to our CTI. Cost of risk is expected to be in the range of 60 to 65 basis points, modest improvement from FY '25 with seasoning of the existing portfolio and upfront provisioning on new lending. The sum of all these is a PBT in the range of between $180 million and $190 million, reflecting significant growth versus FY '25 and a very strong ROE trend. By the end of FY '26, we will have made significant progress with ROE improvement. In closing, FY '25 was a year of solid financial results and strategic progress, and I remain very excited about our differentiated proposition in our future. which we went to great lengths to articulate at our Investor Day on the second of June. We have multiple opportunities to grow lending and other operating income, and we're exploring funding and capital optimization to support that growth with disciplined risk management. Our executive team is arguably one of the strongest in the sector. Our workforce is highly engaged. We have the happiest customers on both sides of the balance sheet and we continue to be guided by our purpose to be Australia's most trusted SME business bank. We're managing all the levers at our disposal, and FY '26 will be about optimization and operating leverage as we continue our clear trajectory towards delivering our at-scale ROE in the low to mid-teens. So thank you, everyone. And we now look forward to taking your questions.

[Operator Instructions] First question comes from Matthew Wilson from Jarden.

Jarden. I wonder if you could add more color to your new savings account product. Can you talk about how you intend to gather customers here, the pricing methodology -- should we think of it akin to Macquarie's products? And ultimately, when you think about where you want to see your deposit mix going forward vis-a-vis TDs versus savings, how should we think about that?

Look, Matt, I'll take that. It's a great question. Thank you. First of all, of course, this was -- this optionality wasn't available to us in the early years of Judo when we started Judo -- we wanted to make sure that we had a bias to long-dated TDs, so that we have stability on the liability side of the balance sheet. So it's really exciting that now that we've got a $10 billion balance sheet that we can actually introduce on new products with shorter-dated tenure. It's also made possible by our replatforming onto the Fort machine core banking system. But yes, think of it as -- it's a high interest savings account. So these are the savings accounts. You have to make a payment each month to get special bonus rate. Statistically, we can -- we know exactly how those products perform from our history at NAB and our history with UBank, et cetera. It should be a product that over time as it builds, we'll have a margin advantage of maybe, say, 30 basis points over TDs. And that's how we think about it. And we've built a great franchise. Our brand is very strong there. We have well over 50,000 deposit customers. And so we think we can launch that product with a high degree of awareness of who due and that we can attract a very, very different customer base to the 1 that is currently supporting us on TDs. So we're really excited about this. I mean, it's a product that we wanted to bring to market for some time. It does add to our NIM story as well as diversifying our deposit base over a much, much larger cohort.

Just a follow-up, if I may. You mentioned loan sales a couple of times in the presentation. How do we think about the economics of that? How do you identify the loans that you will divest to or the natural buyers? How does it impact the relationship.

Thanks, Matt. Look, this is really another tool in the toolkit that we are considering as part of overall optimization of the balance sheet. As you know, we did the self-term sec earlier earlier in our journey. And so this is another tool in the toolkit that we are exploring. In terms of the economics, I mean, there are things that we're probably holding up our sleeve at this stage. But these -- I think the important thing for us in exploring this tool as a bank that has SME assets and the asset yield that we have is that the economics for this tool versus a mortgage bank is actually quite materially different. It's more attractive whether that comes through an upfront premium, whether it comes through the -- how we think about a servicing fee, et cetera. So they are all things that we have available to us. But it is another tool in the toolkit around balance sheet, velocity, ROE optimization Again, it kind of builds on this theme of more scale, established business, we can actually look at these types of things, and it is something that we are considering. And it is a very good market to be considering these types of initiatives.

Next, we have Jonathan Mott from Barrenjoey.

Chris, a quick question. I just wanted to go through some of the math around the growth in the loan book. And we've talked about this a bit before, but I want to go into a bit more detail -- so to get to the targets at the midpoint, the $4.5 billion that you're going for total loans, you usually talk about an average next year, let's pick a number, 170 bankers doing 1 loan a month at an average of million per loan size, originating around $5 billion roughly of new loans. And to get back to the target, you're looking around $3 billion of runoff which implies quite an elevated runoff again in FY '26 of around 24%. I just wanted to get a feel, is that kind of a new reality for your book with a 75% broker originated book the runoff rate is just going to land at a higher level than you had originally estimated around 20%? And then I've got a follow-up question.

Yes. No, thanks, Jon. I'll take that. First of all, there's no correlation with the penetration in brokers. We can talk about that, but brokers do not churn out our books. The -- your math is broadly correct. The average loan size has ticked up a little bit, what we think it will next year to about $2.7 billion. So I'm very confident on our gross origination number, which is essentially your math. So I've got it to $5.2 billion. So that's 100 -- as you said, about 170 bankers. -- average loan size of $2.7 billion, 1 loan per month per banker, which is not an overly heroic assumption, gives you GBP 5.2 billion of gross originations -- and the reason if we're being honest, the reason we've expanded the range here, the range of 14.2% to 14.7%. It is a bigger range than we normally give. And that's because I'm less confident on exactly what that runoff number will be. So if you take the low end of the 14.2 and the high end of 14.7, yes, you've got a runoff of between sort of 22% and 27%. And -- you're absolutely right. And I think with the nature of competition at the moment, the lack of discipline, certainly that we're seeing with regards to the pricing for risk, we felt it was prudent to guide the market with a slightly higher runoff at that low point of around about 23% -- 22%, 23%. And I still maintain that the thesis of 20% is robust, but it's -- we are seeing a lot of competition at the moment. We're seeing a lack of discipline with regards to pricing for risk -- and so we just thought we'd be prudent on that. But I'm very, very confident on the gross origination number of that sort of $5 million, $5.2 billion. Now regards to brokers, they do not actively churn us. That is -- the contract we have with them does not allow that. And but we are seeing a significant increase in the number of brokers. And so what we're seeing now is sort of one broker lose a loan to another broker. But it's not a reflection of our concentration at 75%.

Okay. Can I just follow on? And you did mention it as well, sort of the one loan [indiscernible] per annum. And this slide on a be half, but it doesn't seem like a particularly challenging target. Now given that 3/4 of the loans are originated by brokers, it means that the proprietary loans that you're assuming each banker makes is one loan every 4 months. Is that really good enough? Or can you get your bankers to get out there and to say that originate, work harder and sell more to increase your front book sales?

Yes. Look, it's a great question. I mean there's average of average in there, John. So obviously, that is an average. But we do a lot of smaller facilities as well as finance. What of our biggest challenge is still that the process is to originate sort of a $2 million loan or the same as a $10 million loan. -- so that's a lot of the work that we're now investing in the business in terms of streamlining those processes. But yes, you're absolutely right. I mean we -- the capacity for our bankers to originate at a higher metabolic rate is the key focus for the next 12 months. But until we've seen it, it's not something that we're actually going to embed into our guidance. But I mean, the -- we still decline our bankers would decline 50% of the loans that are referred to them by brokers. We declined them very quickly. I mean, that's a very -- a key part of our value proposition. If we're going to say no, we say no straight away. But there isn't a 100% conversion rate of all the loans that come through our brokers. We have a much higher conversion rate than on direct, which is why we have a preference for broker originated loans. But yes, you're right. I mean, the productivity opportunity in front of us with regards to our bankers is significant.

Next, we have Andrew Lyons from Jeffries.

Just 2 questions. Firstly, just on the fixed cost leverage in the business, which really came through in the second half of the year with a close to 10% improvement in your CTI to a little below [indiscernible]. Now you note in your guidance, you expect an improvement in your CTI in FY '26 to below 50%. But I guess I just have 2 questions. Just firstly, to the extent the revenue environment is different to your sort of current base case, how quickly do you think you can respond from the perspective of expenses -- and then secondly, do you think you'll see the CTI in FY '26 improved vis-a-vis the second half 25 levels, which was, as I said, a bit below 48%.

Yes. Thanks, Andy. I'll take it in those 2 parts. I mean I think in terms of speed, I guess, of us being able to flex that cost base. Let's start with, I guess, the composition of the cost base, and it's largely our people. And so there is an element around us planning our footprint, our investment, but it is effectively a people linked cost base. And the key component there, I guess, is that we are increasingly investing for growth in that cost base with functions that support the business largely at maturity. So the new FTE that we're putting in is largely revenue linked and I think you saw that to a degree in FY '25, but it will be a greater component of our FY '26 trajectory. But it's largely people -- we have a little bit of what I guess you'd call kind of fixed costs in terms of amortization and IT expense, which is really about running the business. And whilst we've had some step-up in that amortization profile, as the intangibles relating to our systems have been stepping into the cost base. That is kind of largely done. There's a bit of a step-up, as I called out in my notes, for FY '26. But we're pretty much operating there with the full amortization of those new system investments and the run costs of those system investments kind of in the cost base. So -- so this largely comes down to our view on our people, where we want to invest the footprint, but largely kind of revenue linked. So it's a different dynamic, I think, going forward than I will say 2 years ago. In terms of first half, second half dynamic, we typically do all other things being equal, see higher step-up of costs in first half versus second half because we go through an annual remuneration review and people are the biggest part of our cost base. So you kind of see that step up in the first half, but you don't get it again in the second half. So there are some first half, second half dynamics. And then the other kind of relevancy, I think, in terms of cost movements, which I called out in the speech was the second half of '25, where we did see that employee expense was lower because of a little bit of volatility we had in the first half, but actually largely the incentive movement and the final incentive outcome. The key bit here, I think, is the operating leverage in the business. And you're starting to see that with the profit growth that we delivered this year, but also the guidance for next year. And hence, that CTI for the year being below 50%. I think again, that will be a bit of a tale of 2 halves, where we'll see much more significant operating leverage in that second half of '26.

That's great. And then just a second question just on your NIM. You've delivered a [indiscernible] second half NIM after 2811th half, but your exit NIM, you noted was down at 2.93. So you're clearly still getting a lot of volatility in your NIM. And as a company that provides NIM guidance 12 months out, I guess, how do you get confidence just given this level of volatility. And I guess more importantly, over time, how do you think you can perhaps manage the business to better control the volatility that you do see subject to sort of front book lending standards and deposit costs?

Yes. No, thanks, Andy. Look, let's deal with the volatility we saw in that exit NIM. Yes, a little bit lower there at 2.93%. Really 2 factors drove that. They were a little bit specific to that particular point in time. Firstly, the timing of the RBA cash rate decision at the end of May, -- and we do have a little bit of short-term impact, especially as it relates to really short-term deposits that take a little bit of time to wash through. It's very short term. That washes are in kind of a matter of 1, 2 or so months. for the component of the deposit book that we don't hedge, that very short-term stuff, we don't. So you get a little bit of that, and that was a bit of a flavor that we saw in that exit NIM being the June exit NIM, just to be clear, the 2.9 -- and then the other component, which was relevant for that month of June is it was a massive origination month. I mean, it was the largest that we had on record significant growth -- and we have to pre-fund that, and we had to actually prefund it because of the size of that volume. And so you just had -- you had a bit of funding drag on that month. So yes, a bit of volatility, but specifically those 2 drivers for June. As it relates to the forecast that we provided for FY '26, how we've got confidence in that A lot of those drivers for FY '26 NIM are things that are going to be in our control. And the big call-out is the initiatives that we have with our deposit book, namely those 2 new deposit products. And for us, opening up a second TAM with the out savings deposit market just allows us to be much more flexible with how we look at volumes in the TD market versus the volumes in this new market. And so a reduction of reliance on TD volumes means we can be much more nuanced about how we think about pricing. And that is a big driver of the NIM movements in FY '26. So we have quite good confidence around that. And I think the second piece there is it's been a little bit of a flavor of the last couple of our results is just what we've been able to do with the treasury book -- this is 1 where we've been managing it a little bit tighter in terms of levels of overall liquidity. You can see that in the stats and we're expecting that to be a bit of a trend in FY '26 as well. Again, more mature, more stable, predictable kind of balance sheet with no TFF funding in there. We can manage it a bit tighter. And secondly is just the roll-off of these fixed rate bonds that were low yielding. We took the [indiscernible] during the TFF. They gave us a bit of yield in, but they're a real drag on our treasury book. And as those roll off, we just replace them with assets closer -- yielding closer to the cash rate. You can see that trajectory in the step-up of the yield on treasury. It's been a discount to to the cash rate. We're expecting that to step up and be a small premium to the cash rate going forward. So a lot of these things are kind of mechanical in our control. We've talked a bit about lending margins we're going to assume that over the course of the year, they're kind of fairly stable with that blended lending margin. So this is a story of the other side of the balance sheet, driving more of those NIM movements in '26.

Next, we have Nathan Lead from Morgans.

Chris and Andrew, thanks for your presentation. Maybe if I can just draw you back on to that NIM discussion a little bit more. Previously, you've talked about what the exit rate was for your guidance period. So 2.93x second half, '25, 3% for first half, 3.1% per second. Could you talk about what your exit rate is? And then -- just what the drivers are of NIM changes going into FY '27, just so we can sort of think about where the earnings growth could come or be driven by through the NIM for that year?

Yes. Thanks, Nathan. I'll start on the question. Look, if you kind of trace through, I guess, the trajectory that we're calling out with where we finished the second half [indiscernible], but an exit -- the 3% that we're guiding to for first half, the 3.1% we're guiding to for the second half, you get a sense of what the trajectory is going to look like. Again, back to my previous answer to the previous question about a lot of this being driven by what we're doing on the deposit side. We've got 2 exciting things that we're doing in FY '20 we're going to launch an intermediated savings account, and we're going to launch a direct online savings account. And the intermediated account, we're going to launch quite soon pre-Christmas. But the -- and then the direct online account is 1 that we're going to look to launch after Christmas. And that's probably the product where we will take more volume, a little bit like we've done in the TD book where we've really grown and are growing that retail -- that direct retail proposition. So I think more volume we will get from that product that we're launching later. And again, the more volume that we take in these products, the less reliance that puts us solely on the TD market, and that's going to be a trajectory that I think continues into the exit NIM for '26, but also into 27. It's not yet about us getting lower costs from those savings products. I think as Chris talked out, they are things that are ahead of us. This is about just establishing ourselves in the market. And so as you think further beyond FY '26, the ability for us to start to be more scientific about how we price all of these products and get a funding benefit is really ahead of us. So the trajectory is one where we're going to see, I think, some improvement through the year, especially into that second half of '26. And then beyond that, it's around optimizing those products. On top of that, we're still going to have some fixed rate treasuries that are going to mature in FY '27, so that story does not stop. This year ahead in '26, we're going to have that dynamic again in 2017. So that's another factor supporting supporting NIM beyond this financial year.

I'll just comment that with the other side of the balance sheet as well on the lending side because this is where I do. I am very optimistic about the trajectory of NIM. We've got -- we've still got some huge opportunity in terms of changing the mix of our originations to be accretive to gross lending margin. We're still massively underweight on equipment finance. It's still about 5%, 6% of our book. really, we want that to be over 10% of our book, and we get much better margins on equipment finance. It's probably the residual component of replatforming that we still need to do. Secondly, on lines of credit. Our line of credit product of ones is quite clunky. It is a much, much higher margin product. It comes with line fees, et cetera. And there's some ways that we can innovate around that. For instance, we could bring a card product, et cetera, to that facility. And we think we can drive that much higher than it is today as a percentage of our book. We really, as I said earlier, we really haven't developed a compelling CSME products. The -- where we can get higher margins for those lower value loans. And then this expansion into the regions into agri. We can drive much, much higher margins, as I said earlier, and that's still underway to 7% of our book versus the system at 20%. The second thing is competition. The nature of competition cannot continue at the level that it is. We're seeing a real lack of discipline in regards to pricing for risk. It's not a strategy. It's not sustainable. And if we fast forward 12 months out from here, I certainly think we'll be in a different environment. And also, Compounding that will be the drag on NIM that the major banks will suffer from a falling rate environment. We do not have the same headwind there in terms of the exposure to core free funds. So for all those reasons, I think there's as much opportunity on the asset side as it is on the liability side. At the end of the day, we have levers. This is not a commoditized home loan lending business. We have a lot of levers, we can change the mix of our products, we can change. And we've still got a huge opportunity to develop new products that we've talked about in the past, things like equipment like receivables, finance, trade finance, et cetera. So as you start to think about FY '27, FY '28, there's still a lot of options in front of us, which will all be accretive to NIM.

Excellent answer. Thank you, Chris. My second follow-up question is just to do with provisioning. I noticed with your scenario weightings, you've increased the weighting to the downside scenario. Can you just tell us what you're seeing out there that's got you worry that you've increased that weighting?

Yes. Look, Nathan, this is more around how we derive sensible lost distribution curves that go into our collective provision and our overall provision assessment. So what we have found, if you look at the inputs to those economic scenarios is that actually the kind of macroeconomic forecast data is looking a little bit better than it was, again, over that kind of 12-month period than it was a year ago. So -- so as a consequence of that, those PDs that the models are driving actually get better. And so as the base case macroeconomic scenarios look slightly better over that forward period. As we've said, we see that economic conditions stabilizing over the next 12 months. In order to have a sensible kind of loss distribution curve that really drives a sensible kind of tail and an exponential set of outcomes is that we've just increased the downside weights to really reflect that. As you'll recall, we've -- we're operating on our new credit risk engine. And so we've been operating that now over the full year. And we've got more granularity in terms of how we actually assess credit risk grades, et cetera. And so this is all really, I guess, just as we continue to refine the overall assessment tools that were used to drive our [indiscernible] and the overall outcome here is that we've got a collective provision that has kind of been around that 1% level, and that feels appropriate to us, notwithstanding the specific provision build that we've had which you'd expect in this economic environment.

Next, we have Jason Shao from Macquarie.

I have another question around the potential whole loan sales. I appreciate you are still keeping the economics [indiscernible] at the moment. I just want to ask if the decision to do so or consider doing so is more return-driven or funding driven. And how do you consider the balance between potentially selling of your loan [indiscernible] and your scale GLA target?

Yes. Look, I mean, Jason, this is -- as I said, this is really another tool in the toolkit for us. as to how we think about the overall balance sheet in terms of balance sheet velocity and ROE optimization Clearly, doing a loan sale also has benefits from a funding perspective because it reduces the overall kind of funding ask. And so it's interesting from that perspective too for us because -- to date, we've been pretty simplistic with our options in terms of how we fund the balance sheet. It's largely term deposits. So it does have some benefits in terms of funding, but the driver here is around balance sheet velocity. This is a great tool for a business that's growing. And we are growing, as Chris called out, we're growing at 2x system. And so it is a helpful tool to consider as part of the overall -- the way that we manage the balance sheet and capital and ROE. And as I said earlier, it's an attractive tool for a bank like us that has an attractive yield, and that leads to quite attractive economics vis-a-vis a mortgage business.

And my second question is around warehouse lending. I think you mentioned a pipeline of $1 billion for the process of onboarding some of those customers were looks a bit longer than you expected. How is that progressing at the moment? And is there any more color [indiscernible] around internal margins in these customers? And what type of customers that have taken up [indiscernible] warehousing?

Yes. Jason, I'll take this. It's -- look, it's going really well in terms of the market opportunity. As I said, we we really pretty much have the market to ourselves in terms of doing smaller warehouse facilities and the major banks, again, to the SME economy. And we really are leveraging our expertise around assessing credit. We've drawn down 2 facilities so far. I think we've got the third one actually drawing down this week. It's probably a little bit slower than we originally anticipated. The due diligence for a warehouse line is definitely longer than a normal corporate, can be anything up to like about 6 months because as well as doing the credit due diligence, we have to do the operational risk due diligence and the sort of all their practices around AML, KYC, et cetera, et cetera. So that's probably taking a little bit longer than we originally anticipated. And also, we're finding that the customers that we're supporting don't have a significant stock of loans to put immediately into the facility. And so in many respects, we're funding the forward flow. So we can put a $50 million facility in for a customer but it might take 12 months, if you like, for that facility to actually draw. Now we get rewarded for that because we're taking nonutilization fees as you would expect us to do for the use of the capital. but actually predicting the pace at which it's actually going to become drawn GLAs is probably a bit more difficult than we originally assumed. But as we establish a track record and operating with them, we'll get better at doing that. But we're thinking about adding sort of another $0.5 billion of growth to that business in the next 12 months. And -- but the opportunity is there. So there's no issues at all with the market opportunity. It's just the gestation period to getting a fully drawn loan on our balance sheet is probably just taking a lot longer than we thought it would.

I'm sorry, any color you can give on the difference versus your [indiscernible].