MyState Limited (MYS) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the MyState Limited FY '20 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Melos Sulicich, Managing Director and CEO. Please go ahead.

Good morning, and welcome to MyState's investor conference call for the year ended 30th of June 2020. I'm Melos Sulicich, Managing Director and CEO of MyState Limited; and also on the line from Melbourne is Gary Dickson, our CFO; and in Hobart, Mandy Khanna, our Chief Risk Officer. We'll be speaking to the investor presentation, which has been launched with the ASX, and is also available on the MyState Limited website and the paid numbers of those referred to in the top right-hand corner of the pages. As you see, the agenda for today's call, I'll cover the highlights and achievements for the year. Gary will then take you through the financial results, including details of our loan book, the assistance systems we provide to customers as a result of the pandemic and result in provisions. And Mandy is also on the call to answer questions about our COVID processes and provisions. After Gary's slides, I'll go through our strategy and outlook, after which the moderator will advise how you can ask questions that you might have at the time. I'll just begin with Slide 4. The year-end review has been like no other in our history. It's been a challenging year of slow economic growth, increased competition, lots of regulatory change, increasing global uncertainty, and not to mention the difficulty posed by ambitious push-by season and finally, a global pandemic, the likes of which none of us have ever seen in our lives. And with all of these external issues going on around us, at MyState, we continue our focus on improving our capability and culture, simplifying, modernizing and digitizing the business and maintaining a laser-like focus on our balance sheet strength. In doing this, we significantly reduced the cost and risk of operating despite the strong headwinds facing the sector. Through all of these headwinds, we're very pleased with our core earnings or pre-provision operating profit, which was up 12.9% to $47.9 million before tax and provisions for credit losses. Statutory profit was down 3% on the prior year. But after discount, the profit on sale of the financial planning business in the prior year, statutory profit after tax of $30.6 million was up 1% on the prior year. This strong result reflects the benefits of our investments over the past 6 years, and our strategy of simplifying the business, digitizing and growth of the balance sheet as well as continuing expansion into the mainland states. Given our focus as a retail deposit-led business, customer deposits grew 7.6% to $3.9 billion at 69.1% of MyState bank's funding, up 0.5% from the 30th of June 2019. And really pleasingly, retail deposits were up 15.5% over the year, thus improving our deposit mix and lowering funding costs further. Income growth outpaced expenses with our cost-to-income ratio improving 195 basis points to 62.8%. And we continue to grow our loan book with an increase of 4.7% to $5.28 billion, with home loan growth of 5.1% being 1.7x system growth. And we're really pleased with our participation in the government's First Home Loan Deposit Scheme. We reserve 985 loans in the scheme for first homebuyers to the end of June, more than any of our non-major peers and coming very close to the maximum allocation of 1,000 loans. An increase to plus 48 from plus 42 in our Net Promoter Score, which measures customer advocacy, is a reflection of our continued focus on customer service as we progressed our digital strategy. We responded quickly and decisively to the COVID-19 pandemic concern for the health and safety of our staff, and to support our customers. All of our office and call center staff work from home from late March, communicating digitally with customers and colleagues with no loss of productivity. Some have now opted to return to our office in Hobart, but flexible working practices remain and will continue to remain into the future. Loans to more than 1,800 customers experiencing hardship have been switched to interest-only or had payments defer or paused after discussions with impacted customers. Our customer care center and all branches have remained open throughout the period, ensuring that we're providing our customers the service that they need. Given the uncertainty surrounding the economic outlook, the Board has resolved not to pay a final dividend in order to maintain the group's strong capital position. Additionally, the Board has resolved to adjust the company's dividend policy going forward to a payout ratio of 60% to 80% of post-tax earnings from our previous position of 70% to 90% of post-tax earnings. The $0.1425 fully franked interim dividend represents a payout ratio of 43.4% for the full year. Subject to external and economic conditions and barring unforeseen circumstances, we expect to resume payment of dividends for the first half of financial year '21. Given the situation, the Board have reduced non-Executive Directors' fees for the 6-month period from May 2020 by 20%, and the Executive team have elected to forego any short-term incentive payments for FY '20. And additionally, there will be no executive or management salary increases during the normal salary cycle for 2020. Our main focus over recent years has been to transform MyState into a digital, scalable business that attracts a growing number of retail customers across Australia's Eastern States. This momentum is growing, and we're exceptionally well positioned for the future and the future of banking. In response to the increased level of digital transactions and prolonged and now rapid decline in branch transactions, 6 of MyState Bank's 13 branches will be closed during the first half of this financial year, including all of our remaining branches in Central Queensland. Our wealth business rebranded its TPT Wealth during the year has also undergone some restructuring, moving to more of an asset management model. Fund administration and accounting have been outsourced and new digital funds management lending platforms have been introduced, positioning the business to attract mainland investors. We believe we've reached a clear leverage point in our transformation, and we are very excited about our prospects for the future. On to Slide 5 and our key metrics show a robust business. As I mentioned, core earnings were up 12.9% to $47.9 million from $42.4 million in 2019, an outstanding result in any circumstance. After provisions for possible credit losses, net profit after tax was $30.1 million compared to $29.8 million from continuing operations in financial year '19. Statutory net profit after tax of $31 million in financial year '19 included a $1.2 million profit on the sale of the financial planning business. So all in all, a very strong operating result for the year. On a statutory basis, earnings per share were $0.3286. The increase in core earnings was driven by an 11.3% increase in net interest income to $99.5 million. This came from growth in the balance sheet, disciplined margin management and products mix management and a significant increase in retail deposits and lower wholesale funding costs. Expenses remained under control, with a cost-to-income ratio down 195 basis points to 62.8% despite increased investment in marketing and digitization. Our return on tangible equity was a very credible 12.77% with return on equity for the year a respectable 9.2%. The capital adequacy ratio at 30th of June was 13%, with a core equity Tier 1 ratio of 11.1%, which is comfortably above regulatory requirements. As I mentioned earlier, we're pleased with the growth in our loan book and our competitive position in the market, and in particular, we're pleased with the growth of our customer deposits. I'll now hand over to Gary, who will talk through the financial outcomes in more detail before I come back at the end.

Thanks, Melos, and good morning, everyone. The results summary on Slide 7. Despite the challenging environment, we're very pleased with the ongoing momentum achieved this financial year, particularly in the second half. As Melos has mentioned, pre-provision operating profit was up 12.9% on the prior year. Total operating income was $128.9 million, up 7% on the previous year, with net interest income up 11% to $99.5 million, benefiting from balance sheet growth, disciplined margin management, a significant increase in retail deposits and lower wholesale funding costs. Net interest margin for the year of 1.86% was up 6 basis points on FY '19 and was also 6 basis points higher in the second half. Exit NIM in the month of June was 1.87%. That's despite a challenging environment with increased competition in the low-risk owner-occupied lending market with a loan-to-valuation ratio of less than 80%. As Melos mentioned, we're extremely pleased to almost reach our maximum allocation of 1,000 loans in the federal government's First Home Loan Deposit Scheme. While operating expenses increased 3.8%, income growth exceeded cost growth, and we experienced positive jaws with the cost-to-income ratio falling 195 basis points despite increased spending on our digital transformation and marketing. Net profit after tax on a continuing basis was up 1%. MyState continues to remain comfortably capitalized above regulatory minimums with a total capital ratio of 13.01% at 30 June. Statutory earnings per share decreased to $0.3286 per share, but on a continuing basis, was up slightly from $0.3284 per share in FY '19. The dividend payout ratio of 43% for the year is in line with APRA's most recently issued guidance to ADIs. Turning to Slide 8. This highlights that while we continue to operate in a highly competitive market, focused management of deposit rates and lending rates and lower wholesale funding costs have driven an improvement in net interest margin of 6 basis points on the prior year. The RBA has reduced the cash rate by 125 basis points since June 2019, with flow on effects to both the earning rate on assets and the cost of funding. While home loan margins remain under pressure, funding markets eased in the second half of last financial year in anticipation of these cash rate changes, and MyState has benefited from the tailwinds of a continued fall in wholesale funding costs and the narrowing of the BBSW-OIS spread during FY '20. Term deposit margins have continued to reduce as the book rolled to lower rates following the RBA cash rate changes, and our cheaper at call savings account generated strong inflow in the second half of the year. More recently, retail deposit pricing has benefited from the heightened levels of liquidity being held across the system as a consequence of COVID-19 and the broad package of initiatives implemented by the federal government to support the economy. As I mentioned, exit NIM in the month of June was 1.87%. Looking forward, we expect net interest margin to remain under pressure with competition in the home loan market intensifying, higher levels of liquidity being held by ADIs in response to elevated market volatility, albeit this has stabilized more recently with lower funding costs to provide some margin support. Turning to Slide 9. Operating costs continue to be well managed. Headline cost growth of 3.8% reflects ongoing investment in technology to build our digital capability and an increase in marketing to build awareness of our brand. Marketing spend during the period has also contributed to customer acquisition, which is focused on building the bank's franchise on Australian's Eastern Seaboard. Digital marketing is enabling us to reach a broader population with new online and mobile products. Underlying cost growth was approximately 3.3% after excluding one-off investment costs relating to the rebrand of our Wealth Management business from Tasmanian Perpetual Trustees to TPT Wealth, a launch of a new managed funds platform in early December, redundancy costs as we continue to reengineer and automate processes and COVID-19 related costs. Operating leverage within the business continues to improve with personnel, administration, governance and occupancy costs relatively flat since the first half of FY '19. Today, 2/3 of MyState's customers are using Internet banking. In response to the continuing decline in branch transactions, which is accelerated during the pandemic, earlier this month, we announced MyState Bank's 4 Central Queensland branches and 2 branches in Tasmania will close, along with TPT Wealth Devonport branch and some rationalization of corporate office locations in Tasmania. These changes will result in a one-off restructuring cost of approximately $2.4 million before tax in the first half of FY '21. On Slide 10, you can see that net profit after tax grew by 1% from $29.8 million in the previous year, after excluding the contribution of the financial planning business, which was sold in June 2019. Net interest income benefited from balance sheet growth, focused management of margin and reduced funding costs. Other banking income was down $2 million or 13% on the prior year, reflecting the ongoing fall in transaction-related fees, partly COVID-19 related in the fourth quarter of the year and the uptake of fee-free products, such as our Glide transaction account and our award-winning Bonus Saver account. Wealth management income was up slightly due to higher funds management and trustee fees. Operating expenditure includes the growth in technology and marketing spend and the one-off investment costs I noted earlier. As Melos mentioned, we've also reported a noncash impairment expense of $4.9 million, reflecting an uptick in total and 90-plus days arrears balances in the home loan portfolio during the year and an increase in the collective provision for possible credit losses as a result of the deteriorating economic environment due to the COVID-19 pandemic. Impairments overall remain at historic lows, and arrears remain well below relevant 30-day and 90-day benchmarks. The prior comparative period included a write-back to provisions of $0.2 million, primarily due to a lower number of restructured loans. Turning to Slide 11. We've maintained our focus on low-risk owner-occupied lending with a loan-to-valuation ratio of less than 80%, while also being a strong supporter of the First Home Loan Deposit Scheme. Loan book growth was slow in the first half, finishing 1% higher at 31 December 2019, but was much stronger in the second half with total lending book growth of 4.7% by year-end. Lending momentum returned in the second half of the year with strong application flows towards the end of the calendar year and very high applications under the First Home Loan Deposit Scheme. To June 2020, approximately 500 of the 985 reserved scheme places were funded, equating to $200 million of new home loan settlements. Home loan growth for the year of 5.1% compared to system growth of approximately 2.9%. The geographic distribution of our loan book continued to broaden, with just under 40% of our loan book in Tasmania and 57% in the Eastern states of Queensland, New South Wales and Victoria. As our loan book becomes more nationally representative, it reduces concentration risk, and we expect this trend to continue. Moving to Slide 12. The chart on the top right-hand side illustrates the consistent focus on lower LVR loans with 79% of the home loan book in the less than 80% LVR category. The average LVR across the portfolio is 57%. This high credit quality contributes to the strength and stability of our business. We support this with strong customer service and fast turnaround times, and the quality of our book demonstrates the success of our channel strategy and service culture. As I noted earlier, impairment levels remain at historic lows, with only 2 mortgages in possession today. Credit conditions are expected to remain challenging due to the impact of COVID-19 on the economy and consequently, borrowers. And we will continue to do our utmost to support our customers through the crisis. Approximately 11% of our loan portfolio has been placed on loan repayment pause due to difficulties faced by customers during this period. I'll provide some further detail on our COVID-19 affected portfolio and the flow-on impact to credit loss provisions in the next section. On Slide 13, the chart on the top right-hand side highlights that more than 2/3 of our funding continues to be sourced from customer deposits. During the year, the funding mix has been enhanced by lower cost at core customer deposits, primarily through our award-winning Bonus Saver account. Its fee-free savings account was awarded a 5-star rating by Canstar and received Mozo's Experts Choice Award. Retail deposit growth of 15.5% for the year reflects our enhanced product and service proposition and resulting in increased level of engagement with customers. Securitization remains an important component of the funding mix, and we completed a $400 million public RMBS transaction in September 2019 under the ConQuest securitization program, which continues to attract strong and broad investor support. In early April, Moody's changed their outlook for the Australian banking system from stable to negative, reflecting our view that the broad and growing scope of economic and market disruption from COVID-19 will increase the strain on Australian bank's operating environment and loan performance. On 24 April, Moody's subsequently placed MyState Bank on review for downgrade, prompted by this change in outlook on the broader banking system. This review remains ongoing and following our annual results release, management will meet with Moody's to discuss key matters of interest from a credit rating perspective, including capital funding and the impact of COVID-19 on the loan portfolio and credit loss provisions. Turning to capital on Slide 14. MyState remains well capitalized with all capital ratios comfortably above regulatory minimums. The group's total capital ratio at 30 June 2020 was 13.01%. Our common equity Tier 1 ratio and Tier 1 ratio were 11.07%, well positioned to meet the expected changes to APRA's capital standards. Subsequent to year-end, $25 million of Tier 2 qualifying subordinated notes issued by MyState Bank in 2015 were redeemed on the first available call date of 14 August 2020. These notes were replaced by $25 million of Tier 2 qualifying subordinated notes issued by MyState Limited on the 10th of July 2020, improving the group's overall regulatory capital efficiency by eliminating the minority interest haircut of approximately 20 basis points at a group level. Despite the group's strong capital position and as Melos mentioned earlier, the Board has determined that no final dividend will be paid in respect of FY '20, given the challenges and uncertainties that COVID-19 and the resulting economic environment present. As I mentioned, the dividend payout ratio of 43% for the year is in line with APRA's most recently issued guidance in late July with expectations that ADIs will retain at least half of their earnings in 2020. Moving to Wealth Management on Slide 15. After showing a steady increase throughout the year, funds under management reduced by $101 million to $1.07 billion by year-end as equity markets fell from their high point in mid to late February and customers withdrew money from both our income and growth funds to provide themselves with liquidity and certainty in uncertain economic times. This outflow was much smaller than what we've seen in similar situations in the past, and investors have now started to move back into these products more recently. Revenue for the year was up 1.3% on a continuing basis with higher funds management revenue and trustee fees. The rebranding to TPT Wealth and the new investor portal represent the first step in a multiyear program that positions the business for growth nationally. We've outsourced funds administration and registry portal administration to a leading third-party provider. This will enable efficiency benefits as the business gains scale. A project to replace the legacy trustee system has commenced with a target completion date towards the end of the first half of FY '21. Product rationalization is taking place, and we closed the platform mortgage fund in September 2019, simplifying our portfolio. The subscale equity fund will be closed on the 30th of September 2020, with investors able to move to other equity funds offered by TPT Wealth. I'll now provide some further detail on our COVID-19 affected portfolio and the flow-on impact to credit loss provisions. The extent of COVID-19 related assistance provided to customers is summarized on Slide 17. At 30 June, approximately 1,800 loans are subject to some form of assistance. The total loan balance outstanding of $574 million represents around 11% of the total book, which is broadly in line with the experience of other banks. The majority of the assistance provided, approximately 77%, relates to customers who have opted for a loan pause. A smaller number of customers have moved to interest-only payments or reduced their monthly repayment amount. We are reviewing each customer situation at the 3-month checking point. And so far, repayments have started on about 18% of affected mortgages. We'll continue to work with our customers individually to arrive at the best outcome for each of them through this period. Slide 18 shows that MyState has increased the collective provision and general reserve for credit losses by $4 million since 31 December 2019. And the majority of the increase in the collective provision is based on our view on the impacts of COVID-19 and does not reflect any significant deterioration in our underlying credit quality. We are assuming a slow economic recovery and the increased provision reflects significant changes to the economic outlook impacting growth in the economy, unemployment and assumptions in respect to residential property prices. This is reflected in a forward-looking economic overlay of $2.5 million, increasing the collective provision, which was booked in June. The increase incorporates the top-up to the general reserve for credit losses, or GRCL for stage 1 loans. That is loans that are 0 to 30 days in arrears. Under AASB 9, we recognized a 12-month expected credit loss for stage 1 loans, which is then topped up via the GRCL to reflect a lifetime expected credit loss. At 30 June 2020, we moved from contractual life to actual average loan life when recognizing the lifetime expected loss for stage 1 loans. This is in line with industry practice. Provision coverage ratios are shown in the chart on the right-hand side as a percentage of both credit risk-weighted assets and gross loans. It's worth reiterating that MyState Bank's loan book predominantly consists of high-quality housing loans, the vast majority of which are owner-occupied with a loan-to-valuation ratio of less than 80%. Slide 19 summarizes the key assumptions used to determine the forward-looking economic overlay, incorporating the estimated impacts of COVID-19 as at 30 June. Relative to the assumptions used at 31 December 2019, the proposed overlay reflects a significant change to the base case economic outlook given COVID-19 impacts. This includes lower GDP, higher unemployment and a reduction in residential property prices, a shift in weightings of the scenarios used in the calculation of the provision towards an increase in the downside economic scenario. At 30 June 2020, the scenario weightings: a base case 50%, moderate recession 45% and strong recovery 5%. In the moderate recession scenario, house price declines peak at around 12% and unemployment peaks at 13%. Based on the scenario weightings highlighted in the chart, the probability weighted forward-looking economic overlay, which increases the collective provision, is $2.5 million. As I mentioned, this amount was booked in June. I'll now return you to Melos to talk about our strategy and future outlook.

Thanks very much, Gary. I'll just take you through our strategy, including a brief view on the Tasmanian economy and the banking sector. As Slide 21 says, we aim to make a genuine difference to our customers and communities every day. Since 2001, the MyState Community Foundation have provided grants of $2.3 million to help more than 130 not-for-profit organizations in Tasmania. In addition, we provided support to Football Tasmania to help 9,000 Tasmanian kids get back into football in 2020, and that's the round ball from Ballgame. We support the Tasmanian community in a number of other ways. We run the MyState Student Film Festival, which attracted 300 entries from 1,500 students, and it's helping to give young people a start in the film industry that they otherwise wouldn't get. Now to the Tasmanian economy, which has continued to grow, although momentum slowed recently, as you'd expect. Economic growth was 2.6% year-on-year, helped by a small increase of nearly 1% in population growth. Population growth in recent years has supported the economy strongly, putting Tasmania in a much stronger position to face the challenges, which lie ahead. Whilst the numbers on this slide are somewhat backward-looking and already a little dated, what is clear is that the Tasmanian economy is better placed today than it has been for a very long time. As Gary mentioned, despite our mainland growth, the Tasmanian share of our loan book at 30 June is around 14%. Tasmanian house prices remained resilient with a 5.9% increase over the year, and home building commencements growing by 2.5%, and the house prices in Hobart and the rest of Tasmania have held up in recent months. The government has initiated a campaign to encourage local visitors in order to boost the tourism industry. And when the state borders eventually reopen, Tasmania will be in a great position to capture a higher proportion of domestic tourism. Now on to Slide 22 and the impact of COVID-19 on the economy and unemployment is really difficult to foretell, although we all know that unemployment is going to be higher in the future than it is today. We're expecting a slow and uneven recovery given soft consumer and business confidence. Credit growth will be lower as more cautious consumers and businesses strengthen their own balance sheets. Given this, it isn't surprising that we're seeing very strong and sustained competition in new lending. Industry operating costs are likely to remain under pressure with increased focus on balancing customer service with cost efficiency. That's why we've recently taken some difficult decisions. Our customers are telling us that they want more functionality from online and mobile banking, and we expect customers to emerge from the current situation with a very different set of values, probably including increased austerity, which will put further pressure on growth in the short term. In summary, we're very -- in a very uncertain world, and it's difficult to predict the future. So we're positioning ourselves for the future. COVID-19 and the impact on the economy have resulted from extreme societal changes that we've all had to make. I think this has increased regulatory intensity and scrutiny. As you'd expect, regulators have wisely taken decisions to revert -- to defer or slow down some legislative changes. APRA's favorable capital treatment for deferred and restructured loans is helpful. And we do welcome APRA's announcement of last week in respect of bringing back to the table the Basel III reforms. We've seen continued, if not heightened focus from the regulators on culture, particularly risk culture. Whilst much of the regulatory changes were put on hold, it's nonetheless still coming. So we're expecting the coming years to be filled with more and deeper conversations with regulators. We are still of the view that the regulatory landscape is unfairly tilted against banks who use a standardized capital method and continue to talk to the regulators about evening up the playing field. During the year, MyState undertook a governance, culture, remuneration and accountability self-assessment. This was voluntary. We thought we'd get ahead of the regulatory requirement. This assessment showed that we've matured our nonfinancial risk management system substantially, and our framework has improved significantly in recent years, particularly since the Hayne Royal Commission. Whilst there are some areas of improvement identified, none were significant, and we are comfortable with our risk settings and that our risk culture is appropriate for our business at this time. I'll now turn to Slide 23 in our strategic priorities. We see our purpose is to help people achieve their dreams, whether it's saving a deposit for a house, taking out a personal loan for your first car or investing for a more comfortable retirement. We're focused on customer needs and customer outcomes. As I mentioned previously, with a Net Promoter Score of plus 48, we must be doing something right. Our mission is to make financial services simple and trustworthy. This has driven our strategy in making the business simpler, our products simpler and more transparent, and helped us to reduce the cost to serve. Ultimately, it is up to our customers to decide if they trust us. But first, we must be trustworthy, and that means doing the right thing by them. We'll continue to develop our digital banking and wealth management capabilities, expanding our share of Eastern State markets, particularly in growing the number of customers who bank with MyState and as a result, growing our retail deposits. For MyState Bank, this will involve building brand awareness, automating and digitizing further operations and then growing our balance sheet. Our transformation into a national digital bank is already attracting new customers and deepening relationships with our existing customers. And we expect this growth to continue driven by increased digital marketing. For TPT Wealth, we'll continue to invest in contemporary scalable products and expand in the mainland states, supported by additional business development resources. In all of our operations, we'll remain focused and agile with a strong focus on growth, margins and cost management, always underpinned by a strong and robust risk management framework and risk culture. Slide 24 shows the progress we've made so far towards transition of MyState Bank into a digital business. You can see that we had a very low start to our journey. However, you can also see from the bar chart that over the last 2 years, digital transactions have increased by 27%, and branch transactions have fallen by 29%. Over the same period, the proportion of our customers registered for Internet banking has grown by more than 20% to 65%, and the proportion receiving e-statements has grown by 150%, in part reflecting a change in our customer demographic and customer behavior. Whilst we've made headway, there's still significant room for us to improve further here. During the year, we invested in robotics technology to increase the efficiency of our back-office processes, with many previously manual tasks now undertaken by robots. This has helped us to upgrade our customer service, contributing to the excellent Net Promoter Score I've mentioned. We were delighted with Canstar awards for our Bonus Saver accounts and Mozo also gave Experts Choice Awards and selected MyState Bank as the best choice for small business bolstering savings. On Slide 23, you can see that since 2013, that's 7 years in the making, we've been on a journey, a journey of updating, upgrading and digitizing our business, and have been at the forefront of many innovations. We've done this because we recognized a long time ago that customers' needs and preferences are changing, and we needed to move to remain relevant. One of the most exciting developments has been our introduction, just last month, of artificial intelligence-driven banking service available through our mobile banking app and internet banking. We're one of the first banks and certainly the smallest bank in Australia to offer such a holistic artificial intelligence-driven solutions to allow customers to manage their banking in the most efficient way and helping them achieve their financial goals. The features of this service include analysis of a customer's monthly cash flow, purchases and other historical spending habits, providing warnings about balances and regular bills and advice on opportunities to save small balances in savings accounts. Already a number of customers are making additional savings and are reaping the benefits of understanding their spending habits better. In just 6 weeks, we've seen some customers save an extra $1,000, something that's almost impossible to do in rounding up small change. The service was based on extensive research by us with customers saying they wanted insights and advice to stay on top of their finances and save. We expect to help attract new customers looking for a sophisticated, personalized digital banking service as well as improving existing customers' banking experience and help deepen our relationships with them. In recent weeks, we've also launched phase 1 of Open Banking, well ahead of the October-mandated implementation date. This makes -- marks MyState's first step in the customer data rights regime with Phase 2 planned to conclude in the middle of next calendar year. Moving on to Slide 26, you can see that TPT Wealth is now far away through its own significant transformation from a manual and paper-based trustee-oriented business to a funds management-focused business, focused on income funds for the growing retirement population of Australia. We've already outsourced some administrative functions and provided customers with a digital front end to make investments and manage their money. And we've just released a new loan origination platform for this business to manage its investments. And by the end of the year, we will replace the outdated trustee system with a modern digital-based contemporary system. We've also recently closed 2 subscale funds, and we'll be making changes to some of our other income funds during the course of the year ahead to better align our products with what customers are seeking. Importantly, we are now also investing in marketing and distribution in order to drive this business to a new level. This is a really exciting prospect to us. And finally, we see a very bright future for MyState. On the revenue side, we expect MyState Bank's balance sheet will continue to grow with continued disciplined margin mix management. We anticipate TPT Wealth's funds under management will begin to benefit from distribution on the mainland. And whilst this will take time, we are already seeing some encouraging early signs. We'll continue to reengineer our cost base, improving productivity and investing in further growth and marketing. As mentioned earlier, we have done some recent significant reorganization in TPT Wealth. And 6 bank branches will be closed during the current half, including our remaining 4 branches in Central Queensland. All of this will provide cost benefits and optionality going forward and thus more headroom to grow the business by selectively and focused marketing spend. As I said, TPT Wealth's legacy trustee system will be replaced by the end of the first half, and progress will be made on further product differentiation. Among the changes in the coming year, there will be further investment in robotics technology to reduce operating costs and increase scalability, and we'll also increase investment in marketing to grow MyState Bank's retail funding and TPT Wealth's funds under management. 6 years ago, we adopted a strategy to transform MyState into a highly scalable digital banking and funds management business. The operational efficiencies and improvements we made since then are flowing through to the bottom line and setting us up for a very broad future. Thank you for your time. And I'll now hand back to the operator who will introduce any questions that you may have.

[Operator Instructions] Your first question comes from Nick Caley with Baillieu.

Just on the -- you said $2.4 million of costs in FY '21 restructuring. Did you actually -- I might have missed it, did you actually quantify what synergies that will deliver?

So in the current year, it will pay for itself enough. And then in future years, it will give us optionalities as to whether we take that to the bottom line or invest that in marketing and other activities.

Okay. And will it -- just as you -- will you normalize that $2.4 million? Or you just take it as part of expenses?

We'll show it separately, but ultimately, we'll take it as part of expenses through the year because as I said, it will normalize itself out during the year.

Okay. Secondly, just with the first home loan scheme that you're participating in, do those loans come with sort of fees of any description?

Yes, there's an application fee. There's a settlement fee. It's a relatively basic product that customers take, but yes, there's a small fee, a couple of small fees upfront, but no ongoing fees.

Your next question comes from Nathan Zaia with Morningstar.

I just had a quick follow-up on the branches. Is the aim to eventually have no branches because I assume these are branches that are closing have no other one in close proximity anyway?

I'm sorry, Nathan, I can't understand you. There's a lot of echo where you are.

Can you hear me better now?

That's better. Yes.

Just -- I was just going to ask quickly on the branches. Is the aim to eventually have no branches because I assume the ones that are closing have no other one in close proximity anyway?

Well, we're closing the resultant network in Central Queensland. We have no branches left in Central Queensland. There'll be 7 branches left in Tasmania. Those 7 branches support a pretty strong deposit base in Tasmania. So we got no current plans to do any more branch restructuring in Tasmania. That's just obviously something that we'll watch over a period of time, but they certainly support a really strong customer base down there at the moment. So at this stage, we're not envisaging any further closures.

Okay. And just on the deferral customers that have moved to interest-only, do you have any idea how many of those are managing that interest-only payment using savings or offset accounts versus their lower income covering it?

I might perhaps just get Mandy if she can to give a quick response to that. She might have some better data than I've got at hand.

Thanks, Melos. Look, I mean we've actually saw that in terms of interest-only, this is the best option for the customer. So they -- kind of based on their financial circumstances, they could afford to make the interest-only payments. I wouldn't say we have insights to say where they're making the payments from, but I can definitely say that they're making the payments and they are also -- as we go through the check-in process, customers are moving off -- back to principal and interest payments as well. So yes.

Okay. And just one final one, if I can, on the dividend. Understandable, preserving capital in these times, but just a comment about the first half 2021 dividend. Is it really just like -- I'm not sure what would have changed from now to then? Is it more just waiting to see what happens with the mortgage customers that are currently deferring we might have more clarity on that? Or...

Well, we should have more clarity on that because a lot of those will come to an end in this half. Some of them will kick forward into early in the next half, but most of them we envisage will sort of come to some sort of conclusion or decision point this half. We just have a better view on the way forward in the first half '21. So we'll review that decision -- we'll review that at that time, and the Board will make a decision based on the information that we've got at hand. We've made a call right now. It's a difficult call for many investors, we understand, but it's also a call that gives certainty to investors that we don't want to sort of hang around with the hope of a dividend for a period of time that may or may not come. And in that -- on that basis, we're confident or hopeful at this point in time that we'll be paying dividends in the first part of next year for the first half of this year, but clearly, it's a really uncertain environment so we'll just have to make that call at that time. And if we get more outbreaks, more closures of the economy, that will sort of bring one outcome. If the economy starts to open up and we start to see more people in jobs and the economies start to flow again, that will bring a different outcome. So we'll consider all that at that time.

[Operator Instructions] Your next question comes from [ Graham Curtin ], a private investor.

We met at the ASX presentation. One of my historical facts, I was the previous Director of Tasmanian Perpetual Trustees and retain a sizeable holding in the company through myself, my wife and my super fund. Very clean balance sheet. Great results in terms of presentation. Just a couple of quick questions. In terms of the -- if I can call it, the loan-to-value, the LVR of 80%, has there been any analysis in terms of what number those people are on JobKeeper? Because obviously, if things get strained, then the horizon might change.

I might perhaps get Mandy just to talk a little bit about how we see that part of the book, and how we see the book on loan pause and what we're seeing from customers at the moment. Mandy, do you want to just provide some comments to [ Graham ] there?

Sure. Thanks, Melos. So look, just before I get into answering your specific question, it's important to understand the strategy we adopted in terms of providing assistance to our customers. And consciously, we made the decision that speaking to our customers directly will give us the best insight because the past is not going to be predictive of the future, and we spoke to all customers when we started on the journey of providing assistance. The conversations helped us design a solution that is most suited to them. And as part of the 3-month check-in also endeavored to speak to all our customers, we've had -- we've done about 90% of the calls with a 90% success rate of speaking with our customers. And it's actually in these calls that we've gathered more information to understand who's in JobKeeper, who's in JobSeeker and therefore, what the potential next steps for those customers could look like. Again, the JobKeeper, JobSeeker information varies by state. And I will say the Tasmanian portfolio is really a bellwether for the rest of our book because it's kind of given us insight to understand how customers are navigating the lifting of restrictions on account of the pandemic and their responses. So we've seen a marked reduction in the customers who have assistance with us already at the 3-month check-in point in Tasmania, and that's essentially taught us a few things in terms of how we deal to our customers in the other states as those restrictions start to ease. I wouldn't say, at this point, we have a large number of customers on JobSeeker. We have a few customers on JobKeeper. But again, as Gary mentioned, the quality of our book and the mix of our book, which is like you called out, [ Graham ], they are less than 80% portfolio. The mix in terms of interest-only, owner-occupied, et cetera, gives us a lot of comfort in terms of designing strategies that's the best suited for customers and help them navigate the next few months.

Okay. Cool. Just in terms of going forward in the loan market, obviously, over time, about 20% of the book has been LVR over 80%. What's the sort of strategy at the moment? I presume you're not exactly chasing anybody who can't satisfy a more conservative approach?

Absolutely. Look, again, depending on the customer situation, we will encourage customers to start making some sort of payment if they are able to make those payments. So instead of complete loan falls, move to interest-only or reduced payments. We're also conscious of the fact that the interest capitalizes and, therefore, adds to the customer's balance. And making that distinction really clear and upfront with the customer and having that conversation with them is really important for us. Look, not all customers will be able to make payments. So we'll have to work with them and their financial counselors to understand what's the best outcome for them. Providing a loan deferral indefinitely may not be the best outcome for all customers. So we just -- it's a case-by-case kind of strategy, and which is why we're very comfortable with the fact that our contact with the customers are so high. And our strategy is consciously to speak to every single customer.

And just a question. In terms of chasing new loans, you're not exactly chasing anything over an LVR of 80%, are you?

Look, there's a little bit of above 80% LVR that we still have. That's related to the first home loan deposit scheme.

Is that underwritten to any degree by the government? I understand that totally. So that's done? Okay.

Yes. That's underwritten to 15% by the government. So the new loans that are coming on the books, so the people that have got -- obviously got capacity to pay and -- at the moment. So they're important. So I'm quite comfortable with those loans. We have -- and we've got quite a few of them. So we actually just today seized taking applications for those on the mainland just to make sure that we've got a proper -- a book to sort of appropriately balance -- just to adjust it with balance...

Just so in Central Queensland, closing the branches up there. What's the marketing play there to sort of maintain your exposure? Is it radio, TV or the subset of second degree stations?

Yes, it's a little bit above the line. There's a lot of digital, and a lot of customer comps. So we've got a really strong customer comps team who spend a lot of time collectively with the customers and individually -- for customers. So our aim is to maintain our -- as many customers. Obviously, when you close branches, there are some fallout with customers who only like to go into branches in their local area. So we'd expect that -- we expect to keep most of our customers in Central Queensland. They have adopted most of our digital banking technology over the last little while, and they're very comfortable with that. So we'll just -- we'll keep marketing. We'll keep promoting ourselves to...

You have got -- have a representative from some of the major banks there?

We've got staff up there. In fact, we've got some IT staff that are from the previous Rock acquisition which have the workforce in Central Queensland. Yes.

All right. The balance sheet looks great. I mean life is what it is, and it's good to see a very clean financial outcome. Just life is life. Let's hope we go forward and then things get better next year.

Your next question comes from Sinclair Currie with NovaPort Capital.

Just was interested in that digital adoption number of accounts online. Just is there any sort of benchmarking versus the majors of how you -- how your numbers look relative to the majors and where you'd want to be? And I guess the next part of that question would be following on -- post all these lockdowns, et cetera, have you seen an increased willingness or any sort of changes to customer behaviors that you think will be sustained around branch banking versus online?

I'll tackle the second part of it first. Now since the start of March, we've seen a 30% reduction in branch transactions and a commensurate increase in digital transactions. And most of our customer base is still in Tasmania, our transactional customer basis is still in Tasmania. Tasmania has, to a large degree, moved back to relatively normal way of living. And the reduction in branch transactions persist, and so we see that as a permanent change. In terms of how we compare with other banks, every bank's got a different customer base. I suspect that our customer base in Tasmania is a little bit less digital savvy than some other organization's customer bases, but we've built a fantastic system, which can support that customer base. We've still got branches in Tasmania to support that customer base and we've now got some really strong digital marketing skills internally to grow a new customer base and grow more customers especially. So we've started to pick more and more customers up. We're using the cost savings to invest more into marketing to let more people know that -- who we are and that we exist. And our view is that given the competitive landscape in the environment, in the market, now is our time to shine. We can really stand up. We haven't got any customer remediation issues. We haven't got any legal issues going on. We've got a good clean balance sheet, and we can drive the business quite hard with a lot of digital marketing along the eastern seaboard over the period ahead.

Your next question comes from Shawn Burns with Contango.

Just a couple of questions. Just on the change to the payout ratio. I know that the ROE is improving as well. Is that -- have you -- is that done with the thought that -- and you've used the share price metrics to improve that as well. Is that -- does this put you in the midpoint there at 7 years? And the growth you're pursuing, does that give you a steady state? That payout ratio, you're claiming that, that would -- you won't need any further equity and that can carry your growth going forward. Is that your best guess where that payout puts you in terms of having a sustainable capital model going forward?

Yes. I think the Board took the view that with the landscape moving forward that a lower payout ratio gives us more optionality in terms of growing the business going forward. So our aim is to continue to grow. And retaining more earnings in the business as distinct from going and raising more equity is a more efficient way of being able to grow the business, notwithstanding the fact that we also understand that where -- a lot of our shareholders are looking forward to the dividend. So just trying to get that balance right between future growth and paying shareholders a dividend. We just took the view that we'd probably be topping in the current environment.

In the current environment. Is that -- so does that mean you don't think you'd need to -- you can grow without equity, raising equity at that payout ratio? Or is that still -- you still need to raise some equity depending on growth, I suppose, but [ on the original ] assumption?

It's a bit of a circular question and answer, that one. Given we are what we are, we have to put aside some equity every time we set a loan. Now the faster you grow, the more capital you need. And if we grow too quickly, then clearly, we have to go to the markets to get more support -- to get more capital, but our aim is to be as self-sustaining as we can.

Okay. The second question I just had was on -- in terms of just on your -- if I reading these numbers right, you did increase about $9 million increase there, sitting there to cover about $500 million in some type of stressed loans. And I see your above LVR is actually [ $260 million]. I think above 90% LVR is [ $350 million ]. Is that -- I mean that -- and in your assumptions, from what I've been working out looking at that graph, you're probably assuming housing prices fall by about 8% over next year. I suppose my question is, I mean that looks a little bit light. I suspect you've done a lot of work on this. Is that -- and that's a function of probability of loss on default and you've also got that small commercial book. I suppose you just wouldn't mind to give a bit of more granularity around how you've got on that. Is that -- are you expecting that you won't get many people falling over or that loss on default will be very small, given your security? Or is it mainly covering that small commercial book?

I'd like to get Gary to take that one, if you want, Gary.

Yes. Thanks, Melos. Shawn, look, I mean on the -- probably a couple of points. The first one is in terms of our unsecured consumable for personal loan book, it's relatively small in the grand scheme of things and also the commercial lending portfolio. In terms of the approach that we've taken, you're right, I mean on Slide 19, it's sort of set out the key underlying assumptions that we've used recognizing that there are probably 2 key things here. Obviously, the unemployment rate drives the probability of default. And then any assumptions around house price declines will drive the loss-given default. Probably the bigger, the more sensitive factor is the unemployment rate driving the probability of default. So what we've done is we've done a range of stress testing scenarios. And we've compared the outcomes of those stress tests with what our AASB 9 provisioning model effectively tells us, and we're comfortable with the overall level of provisioning, recognizing that the majority of our book is that sort of owner-occupied residential mortgage lending.

This is our last call for questions. [Operator Instructions] There are no further questions at this time. I'll now hand back to Mr. Sulicich for closing remarks.

Thanks very much. And I'd just like to thank everybody for your interest in MyState. As I said, it's been an interesting and difficult year for everybody. We all understand that. We are very focused on the future. And given the work that we've been able to do over the last 6 years in restructuring the business, we're very confident and very comfortable with a very bright future ahead. So thank you again for your interest and your attendance and look forward to catching up with you in the next little while.

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