Latitude Group Holdings Limited (LFS) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the Latitude Group Holdings Limited FY '22 Results. [Operator Instructions] I would now like to hand the conference over to Mr. Matthew Wilson, Head of IR. Please go ahead.

Thank you, Lucy, and good morning and welcome to the Latitude 2022 results call. I am Matthew Wilson, Head of IR, and I'm joined by our MD and CEO, Ahmed Fahour; our CFO, Paul Varro; and also our incoming CEO, Bob Belan. I would like to begin by acknowledging the Wurundjeri people who are the traditional owners of the land from which I'm hosting this meeting today and I pay my respects to their elders past and present. [Operator Instructions] Over to Ahmed to begin the presentation.

Well, thank you, Matt, and good morning, everyone. Well, it's a terrific morning for us, and I know many of you would have seen the various announcements that we are going through. So, as is our usual practice, I'll take you through just a quick overview, and then Paul Varro will dive into the detail, and then we're going to leave some time for some Q&A and there will be some instructions after we finish as to how to do those various questions and answers. But let me just begin before I get into the results, just for a minute to introduce the management team, on the deck that was distributed, if you go to Slide 5, there's a picture with the senior management team of Latitude. And that senior management team, there's some names and positions there and the executives and the key people who are running this business. I'm really proud to have led this management team through probably one of the most difficult and complex business and health environment that we've witnessed certainly in my lifetime, when you combine the 2 together. It feels like it's already past us, the whole COVID world, but certainly the ramifications of COVID and the implications as it relates to supply chains, inflation, interest rates and all of those things are still raining upon us, even though the health outcomes of COVID has started to fade away. This is the management team that helped work this company through that difficult time period. And I particularly just want to take one moment to talk about Bob Belan and just give him a chance to say hello to all of you and just do a short introduction of himself. Bob will meet many of you once he's got his feet under the desk after April 1, when he is running the show and he's going to look forward to coming around and meeting many of you on a one-on-one basis to get to know you, along with our CFO and our Head of Investor Relations. Bob has been an excellent executive. We were very fortunate, we bought a terrific business in Symple Loans. And back then, in 2021, when we identified it, that was my first opportunity to have met Bob. And I have to say when I came to the Board and we talked about the acquisition of Symple Loans, we talked about 3 great advantages of buying this business and the first one was around the technology and I'll talk a little bit about what that technology has done for us. The second part was the ability to integrate and create a world-leading platform that allows us to migrate and close off and deal with the historical legacy systems that we have. And then the third element I said to the Board is that, we get fortunate to inherit a management team and a leader who is considered, in my opinion, among one of Australia's finest, even though he's not really Australian, we have adopted and accepted him. So let me just hand over to Bob, just to say a few words on his impending leadership role.

Okay. Thanks, Ahmed, and Good morning to all of you. I'll just make a few quick remarks. I'm looking forward to speaking more with you all in the coming months. I wanted to start by extending our thanks on behalf of the executive team of the company, more broadly to Ahmed for his leadership through what's ultimately been a very challenging and volatile time in our industry and then frankly, industries much more broadly. Under Ahmed's leadership and the leadership of this group, the foundations that are needed for this business to aggressively compete and win in the marketplace are now in place. And having spent the last 16 months deeply embedded in this business, learning about this business, it's very, very clear to me that we have an incredible amount of potential to now build upon those foundations and unlock into the future. And so, very keen to be working with the Board, with this executive team and with the company more broadly to bring that to life and to capitalize on our potential in the months and years ahead. With that, Ahmed, I'll pass it back to you.

Thank you, Bob, and thanks for those words as well. If I could take you all to Slide 7 of the investor deck that you all have with you, and I'll just mention those Slide numbers hopefully, you have that with you. And as usual, please remember that there are some questions there, but obviously when the call finishes, you'll have Matt Wilson on speed dial, by all means get on to him and he'll be able to clarify and give you whatever you need to further support this. But if I could just start with Slide 7, and I've done this Slide in the last couple of results settings, where I will lay out for you in summary what I think in looking in the rearview mirror and that's what these accounts are, looking backwards into our business as opposed to looking forward. But if you look back in the rearview mirror of the past year and think about where we were when we were having this conversation at the beginning of 2021 and we looked at 2020 and we thought about what was going to transpire throughout the year '22. There are many highlights here that I feel incredibly proud of and [ they achieved ]. And the first and the most important achievement is that, we made a profit of $154 million, $153.5 million approximately cash NPAT profit and for the half $60.5 million. And in of itself, this is the point. This is a business that just sailed through one of the choppiest waters that you could imagine and has produced a really solid profit in this environment. And what's interesting and I think really notable, that we highlighted in 2022 that was achieved is in the second half of the year as the more normal settings started to our emerge of our environment, our volumes have started to grow again. This business in 2022 did $8 billion of volume and in the second half, we did $4.2 billion. That second half volume number is up 14% half-on-half, which is a staggering growth in the environment, which shows you that, as this kind of, this next phase starts to emerge and we get out of the choppy waters that we've been in, you can see what the top line potential of this business is. Also what's really, really pleasing is, for the first time in 5 halves of reporting, our receivables are now starting to grow again and this growth in receivables wasn't because debt repayments reduced like we thought they were going to, debt repayments remained elevated right through 2022, which is all the excess cash that's in the economy working its way through. You all are very well aware, 2 years ago, we had a household savings ratio in the order of 20-something percent. Today, it's back to 7%, normal is around 5%. So, we're nearly back to normal and you can see that ratio on the right-hand side of Slide 7, where the savings ratio is nearly back to normal. Now this is a good sign for Latitude with excess debt repayments should start to now normalize in the coming periods. But some of you will also be potentially concerned, whereby the buffers are starting to now reduce and what does that mean for the economy. And we can talk about that in due course, but what it means for Latitude is very good opportunities in the near future. In addition, what's been really important for us has been this absolutely bulletproof balance sheet, robust balance sheet that we've had that we've put in place back in 2020 to see us through the most difficult of times and it had been that. Some of you, in the period 2021, had some criticism of Latitude that we were too conservative, our balance sheet was too careful that we weren't growing in this environment, that we were doing only the highest quality business in terms of our lending and that we "missed out" on some aggressive lending that many others undertook at that time period. Yes, we take responsibility for being very careful and very thoughtful doing our lending, but keeping our balance sheet strong. We operated a tangible equity ratio way above our target of 6% to 7%. We did a lot more high-quality business of CR1s and 2s, and we reduced the scope of our CR4s and 3s at that time period. We are very happy with where we are today, because now that the market is opening up and that there are opportunities, we have the best balance sheet of the NBFIs in Australia and New Zealand that is able to grow just like we did in the second half when many of our competitors stopped growing and were unable to fund growth given the interest rate and the equity environment. This is the value of the conservatism that we had in place over the last couple of years to keep our company strong, safe, profitable. And now we're in a position to take advantage of the growth. In addition to that, we used the period around COVID to also acquire Symple Loans, integrate Symple Loans. And as we called out in the middle of last year, we finally turned on the origination of personal loans and auto loans in the second half of 2022 to originate the variable rate loans, PL loans onto our books. We are a major beneficiary of that and I'll talk about that in 1 minute, but have a look at the numbers of what growth we experienced in the second half, especially around our money lending business that Bob and his colleagues, Paul and others in the team have led and the success that they've achieved. [ My healthy nap ] also getting the CEO job I should say. The other thing that we called out and that was a source of huge growth for us and one that we're really proud, and we said we would be back with and that is in the area of travel and using our credit card platform that we have. We are very proud to show you that 28 Degrees, one of Australia's leading travel cards that we have, grew 31% half-on-half and 45% year-on-year to close the year at $1.8 billion of value. This is one of Australia's leading travel cards and Australian's love using it and you can see what the results of that is. I really want to congratulate David Gelbak and the Pay team, who did an outstanding job growing this business and really, really that team really leveraged to the travel opportunity that was in front of them and that continues to be in front of us in the year ahead. We adjusted our dividend to reflect one of our policies, but very importantly, the Board and all of us see some immediate opportunities to grow organically even further in the coming period, but also we see a number of inorganic opportunities emerging in the second half of this year and we want to have our business, our platform and our capital ready to be deployed to take advantage of the market disruption that's emerged. This is the benefit of your company being strong, capable, capital strong and being able to take advantage of organic and inorganic opportunities as they emerge. Now, let's talk about some of the negatives that did emerge in 2022 and there's no question, there's a couple of negatives that we've had to absorb that everybody is suffering from, and the most obvious one we're talking about is the incredibly steep interest rate increases that have taken place in Australia, for all Australians including those businesses and finance companies that borrow from the capital markets. In essence, we've had a 300 basis points increase in the cash rate in Australia and 400 basis points in New Zealand. On top of that, many players in the marketplace have also increased some of their margins on top of the funding increase. So when you add those into a business, it can have a dramatic impact on all of us. Those in the non-banking sector don't have a deposit book to offset against those interest increases that are occurring. So, we just take that like everybody else does, plus the margin increases that the banks ask for. You will see in our accounts that in the second half of this year, our interest expense, in absolute dollars, went up over $14 million compared to the first half of 2022. That's $40 million off the bottom line without management or anybody doing anything. When you look at the 300 basis points, that 300 basis points increase that's occurred, will have an annualized effect, the full-year effect in 2023 of a minimum of $120 million every time the Reserve Bank raises its rates, that is the interest expense increase to us. So just to give you the mathematics, which we've disclosed in this document, every 100 basis points move in the RBA rate, costs unmitigated is a $40 million increase in our interest expense. Now obviously, it's not all that $120 million because management takes pricing actions to deal with that, and I'll come back to that in a second. The second point I wanted to make is that, repayment rates as the challenge as I mentioned earlier, I had thought would come down much earlier in 2022 and it did not happen in '22. The amount of cash that was in our society was very high. The savings ratios were really high and that cash remained available throughout all of '22 primarily and had led to elevated repayment rates. This repayment rates will come down, it's only a matter of when, it hasn't happened yet, but I suspect you'll start to see that occur towards as the year progresses 2023. Let me just skip to just a couple of pages and then I'll hand over to Paul Varro very quickly, I'll just cover the couple of other Slides in a fairly rapid rate. If I could take you to Slide 8, I've spoken about the volume of the business and I've given you some of the statistics and the receivables and I'll come back to our risk-adjusted income and our net interest margin in a minute. But I did want to highlight another good year of cost management, every year this company has been known for productivity and investments in technology to drive that digitization. The benefit of automating our organization and digitizing is that, we can continue to invest, we have the capital, the profit and the ability to continue to invest to increase and improve our time to yes and time to cash for our customers. This is one of the most important KPIs that any financial institution can do, which is time to yes and time to cash and that's one of the real powers of the Symple technology platform that we've implemented in our company. Our cost can also come down, you would see that we've reduced our expenses in both percentage terms and in absolute dollars, and we've also been able to, when we have more technology and get more productivity, we have significantly less headcount. We have reduced our headcount by the end of 2022 compared to the end of 2021 by approximately 20%. We've reduced it from 1,300 roughly to 1,000 where we sit today. If I could take you now to this really important to Slide 11, which gives you a little bit more color around our interest yields and our cost of funds. It's a diagram that explains to you what's happening with our pricing versus our cost of funds and how we're different to a traditional bank and how we work. For example, prior to the COVID period as we call it, which is 2020 to 2022, Latitude, it has a really good, what we call interest income. Interest income isn't just pure interest dollars, it's also merchant service fees and -- that we calculate and that we create a percentage return on that, but it includes our merchant fees, as well as the pure interest fees that we collect of our credit cards and some of our loans. And you can see where our cost of funds are, which is both our borrowing and also the margin that the banks charge us and the investors charge us in our business. And you can look back and Paul will give you some data, which should tell you historically what the yield number is and the red line being the cost of funds, and you can see roughly that we operate a very healthy margin in terms of our income versus our cost of funds. During COVID period, the cost of funds fell down, but so did our pricing to the market. So we had a lower cost of funds and we passed on the benefit to our customers and maintained as much as we can of our margin, but actually, what you will see in that period and I don't mean to steal Paul Varro's thunder because he really does like this slide, which is on Slide 21. What you can see and this is very important that you understand this about Latitude. We decided in that COVID period to pivot our business to the highest quality customer, and we wrote a lot more CR1s and 2s and the rate of interest that we charge those customers is lower. We passed on and therefore, Latitude made a lower margin, we passed on more to our customers than the cost of funds that was passed on to us that was lowered by the Reserve Bank. Now you ask this question, why did you do that? Well, the reason why you do that is a higher-quality customer is a lower-margin customer, but it's a lower-risk customer. And that's why our net charge-offs and bad debts are low, because the quality of the customer base that Latitude has. So, when you look at the risk-adjusted, i.e., cost of capital, adjusted margin, we're actually better off as an organization because you're dealing with high-quality customers, lower charge-offs, and you're dealing with a lot less risk in your organization in what was a tumultuous period. Now here what's really interesting, because of the higher repayment rates that occurred with the higher-risk customers that we had, our receivables shrunk. Our receivables fell from $7.5 billion to $6.5 billion in that first year, literally, we lost over $1 billion of receivables by people paying down their debt. And that means less income for us in that time period. In the last 6, 7, 8 months, since the middle -- towards the middle of last year to where we sit today, the red line has taken off. I just talked about our cost of funds rising extremely rapidly. We have tried to recover that cost of funds increase by passing on a higher cost to our customers to recover that. But you can see that the net interest margin has been squeezed because your ability to pass on the cost is not as fast as the cost that's being passed on to us from the Reserve Bank and our lenders with their margin increases. So, that gets squeezed. Let me just say this [ darting ] and something for you all to think about which I'm sure, as analysts, many of you understand. Non-bank financial institutions tend to do worse in a rising rate environment because they don't have deposits to offset against that margin crunch. But the reverse happens in the other way around. So what goes around comes around. And you can see on that red dot, where we probably are, you can probably draw it. But at some stage, that cost of funds in the next probable 6 months -- in the next 6 months is going to flatten off and that's what we're seeing. It's going to flatten off. And then at some stage, it will go the other way. But our yield continues to rise as we price the front book and then eventually the portfolio catches up and that yield rises. And what I will leave you with is a very important point. For the first time in the last number of years, for the first month actually, we started to see that margin finally flatten off towards the end of last year and for the first time it's a tiny, tiny amount that we've just started to see now that margin stabilizing. Now clearly, if there is another Reserve Bank rate rise, there might be 1 or 2 between now and June, at least 1 it sounds like, but potentially 2. If that is the case, then this choppy water continues in the first half of 2023, but eventually, you're going to start to see that margin widen again and that will probably start happening in the second half of this year and certainly by the first half of 2024. So let me finish off. I've spoken about the success of -- on Slide 12 of the Symple integration into our business. We are delighted to say that that is on track, on budget. It's going to deliver the expected synergy benefits that we've outlined to the market. And just one bit of factual data, you can read all the information of all the great volume numbers and performance numbers, and all that kind of good stuff, but this is really powerful statistic on the bottom of Page 12. When we started the year in 2022, 96% of all the loans we did were fixed rate loans and you know the implications of that. When you've got a fixed rate loan portfolio, when interest rates are moving in a volatile world, you can't adjust your back book. But the beauty and the power of the business that we bought in Symple, which not many other of our competitors have an ability to do, because they all do fixed rate loans, it's a variable rate product. And the more variable rate that we do, we're able to, not only adjust our front book, but more rapidly you can adjust your back book pricing as well. Where we sit today, already 61% of the volume that we wrote in 2022 is variable rate volume. So this is powerful. Within 18 months, we will have the ability to manage front book and back book, which this company has never been able to do, and what great timing to have got that in place to handle the period ahead. And then just to finish off with the last 2 points and hand over to Paul, I'm really pleased to say, a year ago, we said that we were going to launch our business into Asia, and we opened up a tiny little operation in Singapore. We said that we would go to Malaysia, we did. We're up and running, and I'm really proud of our team. We have 50,000 customers already in Singapore and Malaysia. We got 500 merchants and some of those are on the pretty picture on Page 13. And we are really doing well and we're very excited over the next 3 to 5 years of what this business can do. In closing, let me just say that we are really pleased, the Board has confirmed that we have a dividend of $0.04 a share at 100% franked. I know some of you would be disappointed that we don't continue to pay the absolute amount, but I put it to you this way, the opportunities that are in front of us are really, really exciting. If we kept paying you the higher dividend, it means that the dividend in your hands is worth more than the investment returns that we can make. We see opportunities that are going to deliver on the expected rate of returns that we would want and the capital that we have in place can be deployed to take advantage of the market that's in front of us. You will see the great returns on this capital because the period in front of us is really, really exciting. On that point, let me hand over to Paul to give you a little bit more color and detail around our financials.

Thanks, Ahmed. If we move to Page 18, what we're going to do is just taking you through some of the key metrics for the second half and for the full year. I won't go into all the details that's here, I'll save some of those and highlight in the following pages. But really just wanted to highlight 4 key points. First, our cash NPAT, as Ahmed said, really solid result at $154 million for the year and $61 million for the half. I'll deconstruct that in the subsequent pages. We have seen some green shoots in our lead indicators and as you can see there, volume up 8% for the year. Receivables up 2% and 3.5% versus June for the first time in 5 halves that receivables have grown. So really good momentum there because it gives us obviously the opportunity to earn. Our portfolio remains in excellent shape with our credit remaining strong and stable. And as you can see, the good OpEx discipline as well with lower OpEx year-on-year and half-on-half. Obviously, our rate yield has been impacted by cost of funds and I'll talk about that a little bit later. Finally, a strong balance sheet with TER stable at 8.5%. And the dividend, as Ahmed said, reduced to 4% to reflect the growth setting. If we turn to Page 19, I'll take through some of the operational details of the results. So firstly, Page 19, on the top left-hand side, good volume momentum, so up 8% versus '21 for the full year and 15% for the half. Good contributions by both [ SBUs ], they're paying up 14% led by 28 Degrees and Money continues its really strong momentum, up 15%. Bottom left chart, you can see there our repayments. And although they are still above the long-term average that we would say in 2019, they did moderate somewhat down to 101%, which obviously helps growing our receivables base, and you can see there, the combination of the higher volume and a slightly lower repayments manifest in these higher receivables, up 3.5% versus June, ending just under $6.5 billion. The bottom right of the page, though, whilst ending receivables were up, they were slightly down on an average basis, down 1.8% for the half, which does drive some of our income, which I'll take you through. If we now turn to Page 20, I'll deconstruct some of those key P&L drivers. So on top left of Page 20, takes you through our operating income. And as you can see, down $45 million year-on-year. And the chart really speaks for itself. Firstly, $4 million due to lower assets which I just described, which is a lower earning assets or average for the period. And then $41 million on margins, of which cost to fund is $43 million of that. In terms of the margin analysis, you can see that on the bottom left-hand side of the page. Two key drivers of that margin analysis: firstly, we did do pricing actions in the back half of the first half and through 2022, which has lifted our interest income. And as we've disclosed in previous earnings announcements, previously that interest income was declining. So we've not only tapered or arrested that decline, but we've actually increased interest income by 13 basis points along with a 9 basis point increase in other income. So overall a healthy 22 bp increase in income, but obviously that wasn't enough to offset in particular the speed and the rapid increase of our cost of funds up 153 basis points, clearly off the back of the unprecedented RBA increases. Now Ahmed has already talked a little bit to Page 21, just to explain the chart, again, you can see there our revenue yield on the top line. And in the dark blue zone at the bottom of the chart, you can see our cost of funds. And then in the middle the light blue zone is our operating income yield. And you can see some of those strategic pricing changes, as well as the better mix that we underwrote in 2020 and 2021, diluted our yields from that 15.82% revenue yield down to 14.65% for the second half of '21. But as you can see, as we started to make our pricing changes, we've not only arrested that decline, it's tapered in the first half of '22 and now we're starting to grow again. Now obviously, in the second half of '22, we weren't able to completely compensate for the large increase in cost of funds, but certainly with the run rate changes that we've made in the second half of the year and some planned changes in 2023, we expect that revenue yield to continue in a positive trajectory going forward and really aligns to that chart that Ahmed took you through previously. If we move to Page '22, the portfolio remains in great shape. We've shared this same page a number of times, as you can see, top left-hand side is our origination. since 2019. And this really speaks to the quality of the originations that we've been putting on book since then. You can see our CR1 and 2, which is our highest quality customers, up from 64% and maintaining at that 70% rate. Those higher quality new originations in interlay with the existing portfolio delivers a really high-quality outcome. You can see on the bottom left-hand side there, our delinquency is low and stable for quite some time. The top right is really how those lower delinquencies manifest into our charge-offs, and you can see charge-offs there stable and slightly down seasonally versus the first half. Our provisioning remains prudent and you can see there, as a coverage of our annual charge-off rate still at 1.6%, which is higher than our historical average at 1.3x. This high-quality book, as Ahmed said, provides a great platform from which to grow going forward, as well as to really navigate any of the headwinds going forward as well. Page 23 is really just an outcome. So it's our risk-adjusted income, and I've already spoken to our operating income, as well as our charge-offs separately. I did want to dwell on Page 24. So our cost down and productivity focus continues to deliver benefits and will do going forward. And you can see there, cost down 18% year-on-year and 10% on the half. Three main reasons that you can see there, firstly, our simplified FTE and organizational structure as we basically evolved into our SBU. SBUs delivered lower FTE savings, as well as the non-repeatable reduction in our STI. We optimized our marketing and in particular loan to spend on BNPL, which was de-emphasized in the half. But also we just block and tackled, really looked at reducing external spend on rents, but some of which reduced that OpEx down by 18% for the half. You can see some of our productivity metrics along the bottom part of the page there, both spread out in the second half versus same time last year. And then finally if we move to Page 25. Our strong funding program continues to deliver with 6 warehouse extensions for the half, and we also called 2 transactions in a very choppy time. And I think that really speaks to the strength of our funding program. What those transactions does is support a really balanced maturity profile, but also provides us $1.3 billion worth of headroom to grow. And then you can see there bottom right-hand side, as I've said before, our TER remained stable and obviously provides a really good position for us to either manage difficult positions, or from which to grow.

I think, Paul, if you want -- I think if you combine both that debt and equity point, which is, we have the equity capital, we have the balance sheet strength, but we also got the debt strength to take on some of the opportunities that are coming in front of us.

Yes. Now, I'll hand it back.

Okay. Thanks very much. Well, look we've concluded our summary introduction. And well done, Paul, just like in terms of our numbers, very efficient. So we're happy to take any questions. I'll hand back to Matt, what's the instruction and how people do that?

[Operator Instructions] And I'll pass it over to Lucy to manage that. I believe there are 5 questions at this moment.

[Operator Instructions] Your first question comes from Minh Pham from Barrenjoey.

Yes, 2 questions, if I may. The first one is just on Slide 16. You note that one of your strategies to be well positioned for growth in high-quality customers. Six months ago, I do recall you said you had opportunities up the risk curve, particularly in CR3 and CR4s as peers continue to struggle with funding. We can see on Slide 22 that the customer origination mix shift has been quite modest. So could you just clarify what your organic customer growth strategy is, particularly in relation to the underlying credit risk appetite?

Sure. Thank you for that first question. Yes, look, it's a really -- it's a very important point because during the year, earlier year, this is the same slide that we used last time and we identified growth opportunities that we could see in the marketplace. The CR3s is a really vital and highly profitable opportunity for us. And then we have identified, for the medium-term, i.e., not just right this very second, but over the coming months and years for us. The majority of our business and you'll see here, this captures both our Pay business, i.e., credit card, sales finance, as well as our personal loans and auto business. And if we broke these into the credit card payments business, our finance and into the Money business, what you will find is, in the second half of this year, there was an increase in the CR3s as it relates to our personal lending business, where we did see opportunity for growth. But interestingly, the growth that we experienced around credit cards, as you may remember, like 28 Degrees just as an example, is actually a lot of CR1s. And so, the weighted average of what you see shown some stability there in terms of what it looks like, but where we specifically see it is in the personal lending space and we will continue to grow in that higher-margin spot that's there. The flip side, I might add is that, we are still, relatively speaking, being careful because as we enter Australia, certainly unusual environment in this next 6 to 12 months, it's a bit uncertain which way Australia is going to tip. And I do not think it's in the company's best interest, certainly not in the next 6 months to tilt the business too far away from the steady course of the last year or 2. But as soon as the next 6 months clarity really emerges as to whether there is stress, not stress, we can pounce and we can pounce very hard on that point. And I'm sorry, what was your second question? Maybe you've said it and I've got it already.

No, that was very clear. I didn't actually ask my second question, so I'll ask it now. Just -- maybe just a further clarification. You've cut your dividend today to -- and you said to position yourself to growth and you've mentioned that there are inorganic opportunities that you want to explore. But I did want to pick up a point on Slide 25 and you have been saying that you are quite cautious, the capital strength protects against adverse scenarios. So just trying to get an understanding of whether there is any concern about bad debts and some of it's not actually surplus capital? And on the part of M&A, could you provide a bit more detail about what you could be exploring?

Yes, I mean, obviously, for the latter part of your question, all I can say is good try. But no, I mean, we're not going to talk about that. But it's fair to say, though, that we are alert, aware. You only have to pick up the newspaper and realize that there are opportunities that will emerge in that space. You also know we are incredibly disciplined in the way we approach it. We know what value means. We know what kind of dollars we'll deploy and what kind of returns and what kind of risks we're prepared to take and the Humm experience is a very good point in that. We know we could do something and we're very clear on what that prices. And if the prices don't match our value expectations, we move on. So that's all I would say to you about that point. On the other point which I think is a really important point about our capital. I'm going to get Paul Varro to answer that question. But we are, I wanted to say, incredibly comfortable with our position and I'll get Paul to talk to you about some of the leading indicators about bad and doubtful debts and 90 days past due, just to give you a sense that we are sitting in this really, really strong position. And if anything, we've actually got the capacity to take on more, but we're just being thoughtful and careful until we see where this economy lands before we let this V8 engine rev because we're only really in about second gear at the moment.

Thanks, Ahmed. I mean, maybe turn back to Page 23, where we've got some of the loss analysis there. You can see in the second half, net charge-offs, slightly up 21 basis points. But if you deconstruct that result, it's only actually up 8 bps from a gross charge-off basis. Recoveries were slightly lower and then we had some one-offs in 2021 that helped the 2021 comparative. So, an 8 bp increase is actually relatively small increase in terms of gross charge-offs. In terms of the 8.5%, we actually feel really comfortable around that level, because obviously, again, it gives us that buffer notwithstanding, we're still making a lot of excess spread, remember, in -- so even if charge-offs do elevate and we do expect delinquencies and charge-offs to increase in 2023 because of inflation, we believe there is enough capacity obviously and firstly, our excess spread before we even have to worry about your 8.5% TER ratio. But even if you do go there, it's still above our target of 6% to 7% and that's why we say we feel confident in that buffer both to weather difficult conditions going forward, but also from a basis from which to grow.

Your next question comes from Josh Freiman from Macquarie.

Can you hear me?

Yes.

Look, first up, [indiscernible] Ahmed on your last results, congratulations. If I sort of go to my first question, you mentioned in the presentation repricing changes of about 400 basis points in the Pay side of the business, but conscious that 50% of that is interest free. Can you guys please provide some more color on how repricing initiatives work for the sales finance portion of the business? So, did they like step rate change assumptions in sales finance arrangements? And if so, what's the delay around that repricing on contracts?

Yes. I'm going to get Paul Varro to -- just conscious of the time and after the call, Josh, we'll give you a bit more -- just color and explaining some of that, but Paul, why don't you [ methodically ]...

Thanks for the question, Josh. We really think about pricing on the sales finance portfolio in 3 main ways. There's obviously the APRs, which you can see on Page 21 which you're referring to, which is the 400 basis points increase that we've already done. And as you rightly point out, and as we state because we have 50% of interest free customers at any given time, that dilutes the impact of that APR. There's no step change or anything that goes on, essentially we can apply those changes to the entire portfolio once we've given the appropriate customer communications and advance warning. The other dimension that we think about is, annual fees and account keeping fees whereby we can lift those and we so choose and then obviously the third dimension is our merchant service fees, whereby we can go back to merchants and actually talk to them about potential increases in their merchant service fees.

And all of those come together in the Pay business to generate what we call interest income. So it's a combination of all 3 of those.

And so, really, Josh, the only step nature would be on the merchant service fees. As soon as we make a change on APRs or account keeping fees, they flow -- for the entire book, they flow through to the full portfolios. Merchant service fees, if we increase the merchant service fee, we defer and recognize that over the average period of the loan, so that dilutes the initial impact of the merchant service fee.

And Josh, what's the other question?

Yes, I was just going to ask the second. Notable items continue to weigh on statutory earnings. I think in FY '22, they account for sort of 60% of cash earnings. But if I recall correctly, they're supposed to tail off. How should we sort of consider that moving on from here, especially in light of your reduced dividend, which I guess could potentially be used to fund an acquisitive growth strategy, which could further increase notables?

Yes, look, it's fair enough. But I think we flagged quite a bit with our accounting change that we made last year that we're no longer putting in below the line anymore operating expenses as it relates to the way we were doing it in the past and we've absorbed that in the P&L. But for example, right now, the operating expenses has significantly higher expenses that were in past periods in the old methodology were viewed as one-off and put below the line, we just taken those above the line and I'll give you very good examples of that in due course when we come and see you guys around, for example, our cloud service fees, right now they are no longer capitalized, but they're actually part of our operating expenses, which we disclosed in our disclosure documents. But the way you should think about this is, we flagged last year when we bought the Symple business that they would be $40 million below the line as a one-off integration cost as it related to that and that is just going exactly as we had disclosed to the market and was always going to be there. The Humm transaction, we had announced that to the market and we've been very clear about what that would be, what that would cost and what the benefits were going to be and it is unfortunately not going to come back again. And that cost has to be absorbed, but it's not part of our ongoing costs. So I think the way you should be thinking about this is, there's no question, like any other company in Australia, M&A and one-off items are by that nature one-off and if you do M&A, it will be an expense and it will not be there. It will not affect our dividend capacity and our excess cash flows that are emerging, our #1 priority with our cash flows is to fund the receivables growth. And if M&A is good and produces value, then we will undertake it, but if it's not, we'll just focus our capital on what looks like to be a pretty amazing opportunity for us to go shooting for some fish in a barrel.

Your next question comes from Tom Strong from Citi.

I've just got 2 questions. The first is on the NIM, perhaps just to follow on from an earlier question. You make this statement on Slide 11 that the second half is the trough NIM and you've announced repricing efforts, which will take some time to come through. But we're going to have some averaging in those previous cash rate hikes and the economists are sort of lifting expectations of further cash rate hikes. Can I just get some, I guess, your thoughts on the trajectory of the NIM perhaps in the first half and over the course of the year just given those dynamics?

Yes. Look, thanks Tom for that. Obviously, I'm not in a position today to provide you with a forecast and I certainly don't have a crystal ball that it feels like every day, like some people say, it's going to go up a little bit more, and that's going to cap out, it's virtually impossible to work out. But what it does seem, and I'm just interpreting this like you're probably interpreting it, and I may or may not be right, but I pulled out my old economics degree here that economists and I'm sort of thinking this through, but it seems that the top of the curve pricing will probably get there sometime in the middle of this year and there might be 2 rate rises in front of us. It seems from what everybody is saying. And I just want to be very clear, I'm guessing here. But our expectation is, 1, to potentially 2 more that's going to come in and we're going to hit the top. So, therefore, what that means is that, red dot looks like by about the middle of this year, looks like it might reach the top of the mountain and it looks like there is a potential to go sideways for a while. If that's the case, then that squeeze in that first half of '23 is going to continue, that's the bottom line. That squeeze is going to keep going because our front book pricing can't go up as fast as the cost of funds goes up in any one immediate half year reporting period. But what you can see occurring in our business, and remember, in 2023, we have to absorb an increasing interest expense of $120 million where we stand today, just where we stand today, an increase on 2022. So 2022, we've disclosed to the market a 100 basis points is $40 million, 300 basis points, which is what it had so far is by definition $120 million. So, that's what we have to absorb in our business in 2023. That said, we've also disclosed that the front book pricing that we've got has moved at such a pace, but there is about a 9-month lag in that process. So once we get past that squeeze in the first half, the second half, assuming there's a flattening, you should start to see that squeeze start to reverse. And what you've got on the bottom of Slide 11 is the growth in receivables, so the absolute profit is obviously the margin times the assets that are in place. So, you've got assets growing and we're growing very nicely. A squeeze in that first half and then the beginning of the un-squeeze, what's the reverse of a squeeze, an opening, the jaws opening and clearly, you would know, Tom, and you can sort of see it in the graph, where NBFIs do really well is when rates start to reverse. And I don't know when that's the case. But if you believe towards the end of the year that might be the case, as some economists are saying, that's a really exciting period for Latitude. So that explains the answer you're looking for?

Yes, that's pretty clear. And I might just go to my second question then, if I can, just around asset quality. We saw some pretty stable 90-day arrears and you seem pretty comfortable across the portfolio. But if we look at, I guess, 30-day numbers as a leading indicator, they're about 30 basis points higher than the PCP. I wonder if you could just make some comments about how you're seeing conditions in the first quarter just noting that they're seasonally difficult period, a more difficult quarter, but in terms of just what you're seeing in terms of any deterioration from, I guess, household stress on top of that seasonality?

Yes. That's the normal trend you just called it out, Tom, it's just a very seasonal effect of where first half, second half is always the second half as you lead up into Christmas, it's a normal trend. But if you looked at it on a PCP basis, and look at even back a couple of years ago, even go back we haven't been previously on, we are very, very comfortable with where we are. I mean, if you look at it pre-COVID by any measure, this portfolio is probably -- I can honestly say to you, it probably -- even looking back 10 years and you may know, Tom, when I worked at NAB, we looked at this portfolio at GE and I've disclosed that publicly before. I can look back as far back as I can look and all the internal data and this portfolio is probably the best it's looked ever.

Yes. No, I appreciate that. I was just wondering if on top of the -- yes, my question is around, I guess, taking out the typical seasonality, are you seeing any signs of, I guess, additional stress coming through that line with what you are seeing?

Nothing, we can't see anything. And I can tell you that as a point, right through the start of December 31, there is nothing that concerned us in the 30-day past due.

Your next question comes from Andrei Stadnik from MS.

Can I ask my first question around the growth in Money? The volumes were much stronger in New Zealand compared to Australia. I just wanted to see like what the background was behind that growth in New Zealand.

Look, the New Zealand business has a terrific growth profile. But, I mean, if you look at the first half, we had a little bit -- it was a bit softer actually than what we really wanted. So in some ways, it's a little bit of the benefit of a slightly softer time period when you do the comparison. In an absolute sense, it is moving along in a more normalized way. I think what you're really seeing also, to be frank, is the New Zealand market is a little bit ahead of the Australian market in many ways, but on the interest rate settings side of things, but also what I would call the normalization, that's probably the right word, the normalization of their economy where there isn't this excess household savings that held the consumer back from accessing NBFIs. So I wouldn't read too much more than that. If anything you want to read something positive, i.e., this gives you a sense of the opportunities for the Latitude business in Australia as we normalize the economy with normalized settings and the benefits that we see in front of us.

Yes, please. And my second question I wanted to ask just around, I guess, the market and maybe kind of 2-sided question in terms of the marketing and the potential for regulatory changes in Buy Now Pay Later. I mean, there was some action from ASX, just wondering around how that might have changed your approach to marketing. And then looking forward how would potential for extra Buy Now Pay Later regulation and how would that impact you versus your competitors?

Okay. Well, we disclosed in the ASX that Buy Now Pay Later is 0.3% of our receivables. That's a third of 1%. So quite clearly, it's really no impact on our business at all in any sense, it's not worthy of a conversation. And so, it's a business that is a very, very small part of our economics and our activity and we're reviewing -- even that's small part of our business that we're just about to complete as to whether we even want to keep going in that tiny space. We're much more interested in the regulated business, that's where we've always operated, our interest free, sales finance business, it's a big part of our business, it's 55% to 60% of all of our activity and quite frankly, a little bit more regulation would be a good thing because Buy Now Pay Later has been operating, some player don't even do credit checks. I think it's bad for all players in the non-bank sector that have different approaches. I think creating a responsible set of behavior by all players where they do minimum credit checks, we welcome, we support, that's what we do, and that's what we would like to see everybody doing.

Your next question comes from Jason Shao from Macquarie.

Two questions from me, please. The first, given the inflation we're seeing and higher cost of living, have you noticed an increase in credit card applications coming through Latitude given that potentially people struggling to meet cost of living, which is similar to trends we're seeing in the U.S.? And related to that, have there been any material changes in credit and suitability outcomes?

On both counts, the answer is no. We're not seeing any pickup in applications of customers. And you can see [ nation ] of our business. Our quality of the customer applying to Latitude has not changed at all. As a matter of fact, it's still remaining -- the level of CR1s and s is approximately 70% of our portfolio and we don't -- in fact, we don't write CR5s, which is those people who are really struggling to get credit. Our business doesn't take those applications and they are rejected. So if there is -- and there doesn't seem to be any signs at the moment in our book that we see that indicate that there is any stress.

Have those buckets changed? Have those requirements changed as expenses have gone up and now you've also raised the rates on your credit cards, have those sort of requirements gone strict as to what constitutes a high-quality customer?

Those kinds of portfolio changes, we did a couple of years ago where we went really, really strict and we pivoted the business towards the CR1 and 2, which is outlined in the graph. And as I've said earlier, I think we've been beneficiaries of that by having this really clean balance sheet, be it lower growth in the last few years that anybody else would have liked, but I think we've been the beneficiary of that level of conservatism.

Okay. And just quickly on the second one. And just quickly on the second question. On the repricing of your credit card book and on customer response, have you noticed an increased book since you've repriced? And what is competitor -- competing credit card offerings done as well?

No, I think you can see what others have done better than I can, as an analyst, but we have not seen any change. If anything our credit card business is growing and with our existing customers who we do work with, a lot of that was the travel area, you would have seen people love to travel, we deal with high-quality customers, our customer profile is strong. They only -- they know sort of used up what they can afford to repay, our repayments look good. They are clear. And I feel very blessed that we have a business that is so strong and with customers that are able to repay. If anything, I think my customers are probably a little bit too well-off, because I'd like them to slow down a little bit the excess repayments that they made in there. So I don't mind them holding onto our money for just the normal time period that they wanted. And so, you can see that in our data, we've got debt repayments that are higher than normal and that's actually the reverse of kind of what you are saying, which is that excess repayment as opposed to excess drawing, reflects a very, very strong quality customer base. Look, thank you very much, Jason, I think there's just one person trying to get in with 1 last question. We are bit over time, but maybe we'll take that if we can very quickly?

Your next question is a follow-up question from Josh Freiman from Macquarie.

Josh, the last question we're going to pay for the day, it's my last meeting.

No worries. Understood. I guess, I just want to follow up on my second question. Fair enough on the corporate development and notable items. So I understand you can't sort of predict those moving forward. If I exclude those in totality, you still have sort of $40 million in FY '22 from restructuring, asset work in progress and decommissioned facilities. I guess, that's probably a little bit more predictable on your side, and they seem to be sort of somewhat occurring, I mean, not at the same quantum, but how should we think about those moving forward? Would you say it's fair to expect those to go to 0 next year?

Look, we obviously can't predict all these things. And I know, Paul, is chomping at the bit to have a long conversation which he will. Paul, why don't you -- outside of those couple of big ones, why don't you just mention just to give Josh and the rest of the group a bit of clarity as to that point. And look, our objective I just want to be absolutely clear and Bob is here in the room, is we want that to be 0, just so that we're really, really clear, we want it to be 0. We're going to do everything in our power to make that 0 and remove those non-transactional amount. But Paul, why don't you just quickly explain what actually happened?

Yes, Josh. So we recognized that the notable items have increased, that's why we also increased our disclosures on those particular items. But as Ahmed said, the biggest number in the corporate development is the Symple integration costs and obviously, the Humm transaction costs. So sum of those 2 are around about $36 million. There's a little bit left over for some fee funding for the international business. In terms of restructuring, that is a one-off cost in there, because we moved to the SBU structure. So that's the Pay and Money structure that we evolve to this year. And so, we had redundancies associated with that change. And so, that's $15 million -- the $15 million that you see in the restructuring costs, we may have some restructuring costs going forward. But it will not be as big as what we've had this year, because we've moved to the SBU structure. And then in terms of the fixed asset impairments, some of those are also related to obviously the Symple acquisition as well. So, we wrote-off some of those legacy platforms, [ at the Q2 ] platforms replacing, as well as retiring some of our cards infrastructure that we know longer need, as well as some of our environments. Again, we take a really disciplined view of what goes into that bucket but obviously acknowledge that it's been a big kind of increase year-on-year and that's why we've increased the disclosure on that.

And the beauty about where you sit right now, Josh is, you're right, because if next year when sitting here, you should absolutely, leaving aside that Symple -- as you said the Symple and the M&A, leaving that aside, our objective is to get that to 0. And I've got, Bob here and Paul and Matt and I, and we're saying to you that is our intention to get that to 0, because you want to write this, you get a cost structure that is really sustainable. Now I do want to emphasize, Josh, just remember, that the Symple integration will be completed, we've sent to the marketing full disclosure in the middle of this year and so the year-end accounts will reflect the finalization of that $40 million of one-off costs. But we've also disclosed to the market that you're going to get $40 million of benefit -- synergy benefits that are going to appear in our P&L -- in the P&L and the beauty about that is, you pay that $40 million once, but you get that $40 million over time every year into the future. And so, that's the power of this business and this investment because that's an investment, it's not an expense, it's an investment in a sustainable business. Okay. We've gone over time, we're going to see a lot of you next week on our road show and we're going to spend a lot of time going through all of this. But from me, I'd like to close as my final public results for Latitude and the Chief Executive, and same to many of the analysts on the call, I've known probably you guys for several decades now, some of you were only about 5 years old when you started probably, but I can say that nothing has given me a greater privilege than to do this job and to do this work and I've really enjoyed it and I thank you for the level of professionalism and the way you guys all conduct yourself. Thank you all very much and thank you, and I wish you all the very best.

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