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

Welcome to Judo Market Update. [Operator Instructions] Please be advised that today's conference is being recorded. We have scheduled this briefing to 60 minutes. [Operator Instructions] I would now like to hand the call over to your first speaker today, Chris Bayliss, CEO. Please go ahead.

Well, good morning, everyone, and thank you for joining us at such short notice. I know that no one had this call scheduled in their diary, so I do appreciate you finding the time to join us. As you'll already have seen, today, we're providing an update on Judo's asset quality and trading performance as we approach the end of FY '26 next week. Let me -- I want to start by saying we continue to see strong underlying momentum in the business. All of our key metrics around customer satisfaction, growth, NIM, costs and capital are on target to meet or exceed the previous guidance that we have provided. However, in the past couple of weeks, we've experienced some asset quality issues that we're actively managing. Specifically, we've had -- unexpectedly, we've had a deterioration in a small number of exposures, well, actually 3 specifically, across different sectors in different states. I want to stress these are borrower-specific issues for 3 different reasons, but being so close to the year-end, we just have limited time to resolve them. Prior to these customers, we were literally going to land on the pin in terms of the previous guidance that we've given for cost of risk. But as a result of these exposures, we have no option but to increase our specific provisions and the specific provisions not collective by circa $20 million with an FY '26 cost of risk now expected to be in the range of $116 million to $122 million. We also expect 90-day past due and impaired loans to be around 3% of gross loans and advances at the end of June, again, reflecting the same 3 exposures. Our collective provision coverage at the end of June is expected to remain broadly in line with the March '26 position, which was 94% -- 94 basis points of GLA or 1.9% of standardized credit risk-weighted assets. And this continues to include a prudent overlay for the macroeconomic uncertainty. I do want to reiterate that these are very different issues with these customers and not a symptom of anything more systemic. We remain confident in the overall quality of our portfolio and our credit origination processes. But turning to the broader business, our operating performance remains strong. Lending momentum has maintained very strong with GLA above $14.4 billion as at today, and we expect to finish the year in the next couple of days in the range of $14.6 billion to $14.7 billion, which is at the top end of the previous guidance that we provided. Net interest income is performing ahead of expectations, and we expect to land at about 3.2% for the second half of '26, supported by favorable deposit costs. And again, this is above the guidance we've previously given of 3.15%. Blended and front book lending margins remained stable at 4.2% and the pipeline remains very strong. On the funding side of the balance sheet, blended deposit costs were 62 basis points over swap in April and May and new TD costs is at around about 75, 76 basis points over swap in the fourth quarter to date. Now on costs, we continue to manage expenses very tightly with cost-to-income ratio expected to improve in the second half, exactly in line with the guidance that we've previously provided. So putting everything together, we now expect FY '26 profit before tax to be in the range of $163 million to $169 million, representing around 30% growth on FY '25. With regards to FY '27 outlook, I now want to provide some color with regards to our FY '27 expectations. We expect to deliver FY '27 profit before tax of $210 million to $220 million, representing around 30% growth year-on-year. This reflects ongoing lending growth, continued operating leverage and the strength of our SME-focused model as we navigate a period of economic uncertainty. And on capital, we expect to finish FY '26 with a CET1 ratio of around 12.4%, which is a strong position. Given this strength and our ongoing profitability, we are today also announcing a management CET1 operating target range of 11% to 12%. And our recent term securitization demonstrates that we have multiple levers to actively manage capital, providing increased optionality and the potential to consider capital management initiatives in due course. So to close, while today's update is partly a result of the macro environment, it is nevertheless disappointing. I want to stress, we remain very confident in the strength of our underlying business. We are a profitable, well-capitalized bank with a clear growth trajectory, producing circa 30% profit growth this year and another 30% profit growth next year. Most importantly, we are focused on supporting our SME customers, managing risk prudently and delivering sustainable return for shareholders. So we obviously look forward to updating you more fully at our full year-end results in August. But for now, this was the update we wanted to provide, and we'll hand over to Andrew. With Andrew, I'll look forward to taking any of your questions.

[Operator Instructions] First, we have Tom Strong from Citi.

Just with regards to these 3 loans, can you just give us a sense of the exposure at default for the 3 of them? And you mentioned that these issues weren't apparent in the customer-by-customer review undertaken in the third quarter. But I guess in hindsight, were there signs there that should have been caught in that review or at the time of origination in just terms of how much risk you're taking on for these customers?

Yes, that's -- it's a great question, Tom. The -- no, I mean, the short answer is no. We didn't have line of sight on these 3. They are very different. And in the ordinary course of business, these 3 would just be part of the wash. It's just that our business model, obviously, is to work with our customers and manage resolution of these files. These ones literally -- they weren't -- and I can tell you, they weren't sat in the over 90s bucket, and we were just looking at them with a glass half full lens. They deteriorated very rapidly. These things happen. One actually went into voluntary administration. So it wasn't really even significantly in arrears with us. But I won't go into the specifics of them. But no, we did not have line of sight of them. As I said, we were -- in terms of the updates that we've given recently, we were going to land on the pin in terms of the guidance that we've given. And if these 3 files had to manifest themselves next month in July, they would have just been BAU. We would just work with the customers as we normally do. But we just literally had no headroom left to suck them up with so close to year-end. And so we've had no option but to raise these things on them. But we are still working with these clients, and we're still hopeful of resolution. But prudently, we need to raise the provisions and top it up accordingly.

[Operator Instructions] Next, we have Jonathan Mott of Barrenjoey.

Yes. I just wanted to get a bit more detail on these exposures as well. If you look at the increase in the non-performing loans, it looks like it's up by about $60 million, $65 million. And I think that goes to the previous question, which was how much was the EAD. So it's quite a substantial hit that you've taken on these. So a bit of a question on that. When you talk about your exposures, usually, you say the average exposure is around $2 million, $3 million, sometimes up to $5 million. These look like they're very large exposures. Are they $20 million each? And why is it that you've got 3 relatively large exposures to the size of your book, all coming through simultaneously? Are there lots of $20 million loans out there? Just that these seem unusually large compared to your communications?

Yes. The exposure at default for these is around about somewhere between sort of $70 million and $80 million in terms of the underlying loan for these 3. It's not spread evenly, Jon. I don't want to go into specifics for reasons of customer confidentiality and what have you. There is a relatively large one in there versus the other 2. And it's relatively well secured, but we're taking a very conservative perspective on what the property would be worth if we had to go down that route. But yes, I mean, we -- yes, we do have -- we -- as you know, our loan size has increased from when we started Judo, we did our first loan 8 years ago. The maximum loan size was $5 million. But now that we've got nearly a $15 billion book, we do -- we have raised the single large exposure limits to match customer demand and broker appetite to refer those types of loans to us. But it isn't 3x 20, no. I said the gross exposure is between sort of about $70 million, $80 million. And all of the lending we do has different characteristics to it. Sometimes we'll lend against goodwill or stock and debtors and the working capital cycle, sometimes against property. These 3 are a mix of those. A mix of those.

Next, we have John Storey from UBS.

I guess just following on from the line of question from the first 2. Obviously, you got market assumptions around long-term loss rates roughly about 50 basis points, and obviously you reaffirmed that this morning. How do you think about the business model and some of the market guidance that you provided just given the announcement today? And how should the market think about it?

Well, thanks. I mean, as I've said, the guidance that we've given on all of the other operating metrics for the company, we are going to meet or exceed. And in particular, with cost of risk, the guidance that we've given in the last -- or since we listed, we've been pretty accurate in the guidance. The macroeconomic overlay at the moment, the conditions in which SMEs are operating is tough. And we forecast as best we can. And as I said, until literally the last couple of weeks, we were confident that we were going to pretty much land bang in line with the guidance that we've given for this year, which we gave a long time ago. So that guidance was given well before some of the headwinds that SMEs are facing with regards to interest rates, inflation, tax changes, et cetera. We've always said that the 50 basis points was through the cycle. I think we would take the position that we're at the extreme end of that cycle at the moment. And there's nothing in the underlying book, the distribution of all of the other losses that make up the sort of the $95 million, if you like, excluding these 3, that gives me any reason to be concerned. So hence, we wanted to make that clear this morning. We're confident in our origination practices, the way that we support customers. We're not a fair weather banker. We don't just -- it's not the second the customer goes into arrears. We put a for-sale sign up and foreclose. We want to stick with our customers. We're a relationship bank. Sometimes those plans go as per what the customer intended, sometimes they don't. So as I said, if these -- if we had line of sight of these 3 months ago, it might be in a different position. And we haven't stopped dealing with these customers. So we're not saying that they won't be resolved in the next couple of months. It's just that when they manifest themselves so close to year-end, we didn't feel we had any option but to make the disclosure that we've made this morning.

[Operator Instructions] Next, we have Ed Henning from CLSA.

I've got a couple of questions, if that's okay. Just following on with the exposures, can you just talk about the security you have behind them? Is it all property? Is it inventory? And what kind of haircut you're assuming on this in your provisioning currently, is the first question.

Yes. Look, it's a mixture, Ed, as I think I said. Actually, for these 3, it actually is a mixture. I mean, first of all, I would stress that for any customer that we're -- any trading business property company, we generally always take a GSA, a general security arrangement, so a floating charge. And we'll always take directors' guarantees. And on these 3, we also have directors' guarantees. So you can imagine that the directors have got a very vested interest in making sure that we ultimately don't lose any money. They are a mixture. The industries I think we've given is sort of a financial planning type industry. That's generally -- those businesses are valued against future revenue, underlying sort of annuity streams from business that's been referred either on the wealth side or on the mortgage side. Another one was a window sort of manufacturer. So it was sort of a trading line, working capital facility. So you've got a lot of working capital type assets in there with regards to stock and debtors, et cetera. And the other one was more property. It was more property secured. And we've just taken a conservative position on what those properties might be worth if we had to foreclose. I mean, that's one of the challenges all banks have in terms of finding the sweet spot between working with your customer and them selling properties as a going concern versus bank foreclosure and the bank selling them through a receivership model. Obviously, these -- when we raise provisions, we always assume the latter to take a worst-case position. But against market value, in the ordinary course of business, it would be a different scenario.

[Operator Instructions] Next, we have Nathan Lead from Morgans.

Just wanted to, I suppose, just ask you questions about in terms of the revenue growth going into FY '27. Just in particular, I suppose, just on the NIM, so you're talking about exiting at 3.2% NIM better than what you're expecting for the second half. Are you expecting that to be sustained or improved going into FY '27?

Yes. Thanks, Nathan. It's Andrew here. Yes, so we will finish this year, as we called out in the release, actually a little bit better than we thought, our update 2 months ago, we were guiding to 3.15% for the NIM in the second half of this year. And as you've noted, the NIM of 3.2% or over is where we expect to land for the second half. So that's actually quite a pleasing trend, I guess, in the underlying business. Now that's been -- what's been driven by? It's really been driven by these favorable deposit costs, which we've been calling out, and you can see that in the numbers we've quoted in this release, where the blended TD cost has still been quite favorable. But we're seeing that close and revert back to that 80 to 90 basis points quite quickly, I guess, as the swap curve flattens with rate expectations kind of changing. So we're originating. If I look at June month-to-date, we're originating at the low end of that 80 to 90 basis point range. And that will take a little bit of time to flow through the numbers, obviously, for next year, but we've been calling out that we expect that we'll have some reversion there back to that range, that kind of long run through the cycle range. So what does that mean for NIM next year? We've kind of been saying think about that 3.15% that we were guiding to in the second half of the year as a sensible level in or around that for next year. We'll provide, I think, some more specificity and more color as we get to the full year result. But with where the NIM is now at, with where the deposit book is at, with the additional that core deposit product we have in the mix, we've got some good levers here to manage that through the year. And I think it will be broadly flat through the year around that level. There's other things that go into the NIM as well in terms of lending margins and wholesale costs. But there's some offsets there. And so I think that level is a good base for thinking about next year.

Next, we have Brendan Sproules from GS.

Brendan Sproules from Goldman Sachs. Look, I've got a question around your guidance for FY '27, profit before tax between $210 million and $220 million. Now currently, consensus is above $250 million. Could you maybe talk about what your expectations are around the cost of risk for next year? Obviously, you've had 3 independent exposures this year, but it does seem to me that you're implying significantly higher than your long-term guidance of 50 basis points.

Yes. Thanks, Brendan. I might take that one. I mean, you're right. We are taking into account, I think, the macro environment that we've certainly experienced and the experience of this year and obviously, the announcement today in terms of that cost of risk for next year. And if anything, this year has taught us a little bit about the uncertainty and wanting to take a little bit of conservatism there. So we have incorporated that into the news for next year, and that is -- that's certainly a component, I guess of our outlook -- of our guidance for next year.

[Operator Instructions] Next, we have Sally Hong from Morgan Stanley.

Can I just ask you a question about the FY '27 PBD guidance. Can you bridge FY '26 guidance to the FY '27 guidance of $210 million, $220 million, like across loan growth? I think you spoke about margins already, but costs. And I think just a little bit more color on the cost of risk assumption because are you basically expecting the same for the year as FY '26?

Yes. Thanks, Sally. You were cutting in and out a little bit there. But I think, yes, the question around providing a bit more color around FY '27 and some of the components. Look, we'll certainly do more of this at the result. But I think the color for today and what we wanted to put out to the market today is that we are taking a bit more of a conservative stance for next year. And that really reflects the macro environment that we are in and wanting to be a little bit more conservative and prudent for next year given that backdrop. We still see very good origination opportunities. And I think you can see that with the pipeline number that we provided and the margin of the pipeline that we provided in the release today where that pipeline has actually built up a little bit as we've headed into May. And so we certainly see good growth opportunities, but I think we're mindful of the environment that we're in, and we want to give ourselves a little bit of flexibility there in terms of that kind of top line growth. In terms of NIM, as I mentioned earlier, look, we might see that come a little bit back from the 3.2% or better that we've guided for the second half. That is really because that has been supported by the abnormally low TD costs that everyone's had a benefit of. And so we are assuming some reversion there. And there's some -- as I said, there's some levers and other things that will operate to support that number. But that will come back a little bit as those deposit costs normalize as we have been expecting and planning. And then in terms of cost of risk, which is obviously the other key component for the profit for next year, that's clearly one where we have had an eye to the experience that we've been through for this year and where we've guided for the landing position for this year. And we wanted to take that into FY '27 and again, assume a bit of conservatism there given the macro backdrop.

Next, we have Carlos Cacho from Macquarie. Carlos of Macquarie, please go ahead.

Sorry, I was just on mute.

Carlos, we can hear you. Go ahead.

Sorry, Carlos, could you please redial? Next, we have Olivier from E&P.

Can you hear me okay?

Olivier, how are you?

Yes, not too bad. Can I just dig in again to that FY '27 guidance question? So consensus is around $365 million on PBT pre-provision. Is your implied number there not materially different to that? Or does it sound like you might slow down CLA growth over '27 and therefore, what you're implicitly guiding to is a bit lower than that?

Look, we -- Olivier, we obviously want to maintain a little bit of flexibility, as I said in my earlier response. But we've still got very strong growth opportunities ahead of us. And you can see that, I think, through the build in the pipeline. We know the CVP is very strong. We've seen good growth from some of our newer areas of origination, for example, the investments we've made in agri and also the warehouse business. So we've got good opportunity there. But I think we -- at the same time, we do want to maintain a little bit of conservatism and flexibility, I think, in terms of how we think about the year that is ahead. And so that's had a little bit of bearing, I guess, in terms of how we think about the range of outcomes that we're looking at for next year.

Yes. Okay. Excuse me asking a second question, but it sounds like the vast majority of the slippage is related to you being, say, a bit more conservative around realized cost of risk in '27. Is that fair to say?

Yes, that's right. Yes. No, we've certainly taken a conservative perspective there for next year, given, as I said, the experience that we've kind of seen for this financial year, and we've had an eye on that as we look for the forecasting for next year.

Next, we have Carlos from Macquarie.

I know you're obviously not directly exposed to mortgages. But just given the budget and the impact we see on the housing market, I was wondering how much of your security is to residential property? And so what's the risk around security of your book and potential credit quality from the deterioration we're seeing playing out pretty quickly now?

Yes. Look, it's not significant. I mean, our mortgage book is about 10% of our entire exposure, and that's generally where it's cross-collateralized. So we don't do stand-alone home loans. We do home loans for our SME clients where they want to use the security to cross-collateralize. But that book is 10% of our total GLA book. There would be an element of investment properties in the portfolio that are not mortgages. So they've been pledged as part of sort of a corporate loan. But again, what would that be? Andrew, maybe.

Yes. It's not a big part of our business. It's -- and yes, it's often, most of the collateral is a commercial property backed and the home loan, as Chris, you were saying, it's part of -- it's just part of overall collateral.

Next, we have Andrew Lyons from Jefferies.

Your loss rate is going to be well above your 50 basis points through the cycle cost of risk this year and remain elevated next year and it's certainly multiples of the major banks. Now I can see that there are material differences in your book mix. But are you having to take too much risk to maintain your lending spreads in that sort of low to mid-4% range?

No, no, we don't think -- as I said, we don't think so. Prior to these 3 exposures, we were bang in line with the guidance that we've previously given. We do think we're at a point of the economic cycle where there's going to be definitely stress on that 50 basis points and possibly, as you said, for this year and next year, we could possibly be slightly above it. But these -- we're very happy with the underlying book and the origination practices that support that. The rest of the cost of risk is distributed as you'd expect, across different sectors, different states. It's not -- we don't believe it's a reflection of any sort of -- it's not any active decision to take more risk to get the margin. The margin is generally on relationship banks. I mean, all of our clients tell us that, that's why they pay the premium to get a proper relationship banker. So short answer is, no. And as I said, if it hadn't been for these 3 exposures that have popped up so close to year-end, we wouldn't be having this call, and we would be bang in line with the guidance that we gave over a year ago in terms of that cost of risk line.

Thank you for all the questions. That concludes our Q&A session. I will now hand the conference back to Chris for closing remarks.

Yes. Well, again, thank you, everyone, for joining us. I know that this wasn't in your diary or a scheduled call. So we do appreciate you joining us and for so many questions. Yes. Look, today's update is disappointing for us, partly a result of the macro, but it's partly the result, as I said, these 3 exposures are so close to year-end. We remain extremely confident in the strength of our underlying business. All other aspects of the guidance that we've given, we will be meeting or exceeding, and we'll provide far more color on that on results day. But metrics around customer satisfaction, growth, NIM, costs, capital are all -- we're all at the high end of guidance, if not exceeding guidance. So we're very, very comfortable with our core franchise. The guidance we've given for next year, it does reflect an element of conservatism given the macro uncertainty. And I'm sure you can understand why we would want that posture. But we remain very, very comfortable with the core business. So thank you for joining us, and we'll obviously talk in more detail on the results day in mid-August.

This concludes today's conference call. Thank you for participating. You may now disconnect.