MyState Limited (MYS) Earnings Call Transcript & Summary

Good morning, ladies and gentlemen, and welcome to the 2020 Annual General Meeting of MyState Limited. My name is Miles Hampton, and I am the Chairman of the Board. This is our first AGM using online technology. If, for any reason, there should be a break in the broadcast, please remain online, and we will overcome the issue and resume as soon as possible. I note that there is a quorum of not less than 25 members present in person or by proxy, and therefore, declare this Annual General Meeting of MyState Limited open. Present today are the following Board members. In Sydney, we have Managing Director and Chief Executive Officer; Melos Sulicich, non-executive Directors, Sibylle Krieger and Vaughn Richtor. In Melbourne, we have non-executive Directors, Andrea Waters; and Warren Lee. And in Hobart, with me, we have non-executive Director, Bob Gordon; and we are joined also by Mr. Danny McCarthy, the signing partner of our external auditor, Wise Lord & Ferguson. There have been no apologies. The notice of meeting governing this meeting was published in accordance with Corporations Act and also published on the ASX and MyState website. In accordance with our usual practice, it has been determined to take the notice of meeting as read. Before we commence the presentations and items of business, I'd like to take a moment to provide a quick explanation of how voting and questions will be managed during the meeting. In respect to voting, in accordance with the company's constitution, it has been determined that voting on all business before today's meeting will be conducted by a poll, which will be opened shortly. Christina Piccolo from Computershare Investor Services has been appointed the returning officer. Proxies, which have been lodged by shareholders prior to the proxy submission deadline of 48 hours before the meeting, will be displayed on the screen for each item of business and will be incorporated in the poll on each resolution. Any undirected proxy votes given to the Chairman will be voted in favor of the relevant resolutions. You can cast your vote on any resolution at any time during the meeting until the poll is declared closed. You can also change your vote on any resolution during the meeting regardless of whether your vote was initially cast at this meeting or cast before the meeting. Time will be provided at the end of the meeting to enable shareholders to finalize votes before the poll is closed. To cast your vote, click the Voting icon, which is highlighted on the screen. This icon will appear on your screen once the poll is formally opened. When you click on the Voting icon, the resolutions will be displayed. Simply select your choice of for, against or abstain for each resolution. There is no need to submit as the system will automatically update. When the poll is closed, your final selection will be recorded. Turning to questions. We welcome questions from shareholders and will give ample opportunity to raise matters of concern through the meeting. Questions that were received from shareholders prior to the meeting have been addressed in presentations of our Managing Director and myself. [Operator Instructions] If a question is raised relating to the Chairman or Managing Director's address, it will be answered at the conclusion of those addresses. Questions relating to other items of business will be dealt with when we are dealing with those items. And finally, time will be allocated prior to the poll being closed to answer any late questions that have been raised. Depending on the volume of questions raised during the meeting, we may not be able to answer each question individually. However, please note that questions will be moderated. And if a number of shareholders ask a similar question, in the interest of efficiency, one response will be provided. I now open the poll for resolutions. Voting may now commence once the voting icon appears on your screen. Ladies and gentlemen, I'd now like to present my Chairman's address. The company recorded a statutory net profit after tax of $30 million compared with $31 million in the previous year. The result was after an impairment charge of $4.9 million principally related to COVID-19 loan provisions. It is very pleasing to note that core earnings, as measured by net operating profit before impairment and tax, increased 12.9% to $47.9 million. The improved core earnings result reflects in part the tailwind of reduced funding costs. But it also reflects the significant investment and effort that has been made over recent years to transform our business. Whilst the operating result was strong and the capital position well above both regulatory and internal benchmarks, the Board came to a decision to not pay a final dividend. We did not take this decision lightly recognizing that many shareholders rely on dividends to fund living expenses. But with the uncertainty surrounding the impact of the pandemic-induced recession on employment levels and home prices, the Board came to the view that it was prudent that we bolster our capital position by not paying a dividend. Barring unforeseen circumstances, we anticipate resuming dividend payments after the end of the first half of the current financial year. In light of the circumstances, the Board reduced non-executive Director fees by 20% for the 6-month period from May 2020. Further, the executive team elected to forgo any short-term incentives for FY '20, and there were no executive salary increases in 2020. While these decisions themselves do not have a material effect on profitability and capital strength or the financial performance of the company, they reflect the recognition of the hardship that many shareholders and customers will be experiencing. MyState has traditionally had very low impairment expense, reflecting a prudent approach to lending. However, under accounting standards, we are obliged to consider our provisioning looking forward and to recognize the possibility of future losses. Management undertook a detailed analysis looking at various scenarios involving the key parameters of unemployment and house prices. The impairment charge that we booked reflected a middle ground. The provisions may have to be adjusted up or down as new information becomes available. As a consequence of COVID-19, we have had nearly 2,000 customers seek assistance. Over the recent period, many customers who had sought assistance have recommenced loan repayments. However, it is expected that there will be a number of customers who may not be able to recommence repayments. In working with this group of customers, we will bring empathy to their situation and explore all avenues to help them. But unfortunately, in some circumstances, the best interest of the customer may be served by selling their property. Where this is necessary, we will work closely with individual customers to assist them through this process. I'll speak briefly about strategy. In terms of the bank, the Board and the senior management have, for several years, had a focus on building a digital bank. As one of the smaller listed banks, we are disadvantaged by a higher cost of funds, higher regulatory capital requirements and the diseconomy of a lack of scale. We are targeting a lower cost operating model that will ensure we can continue to compete whilst providing high-quality services. Last year, I commented on our plans to transform the TPT funds management business and create a platform for national growth. 2019/'20 saw a significant further progress, and we expect to complete the transformation by the end of the current financial year. Ladies and gentlemen, I would like to acknowledge the passing late in 2019 of Stephen Lonie, who had been a Director of MyState since 2011. The knowledge and experience that Stephen brought to the Board was invaluable, and his contribution was always insightful. We extend our condolences to his wife, Jenny, and his family. Ladies and gentlemen, the significant progress we continue to make in modernizing our banking business reflects the hard work of the MyState team during very challenging circumstances. And on behalf of the Board, I say thank you to all of our team. That concludes my Chairman's address. I will now invite our Managing Director, Mr. Melos Sulicich, to address the Annual General Meeting.

Thank you, Chairman, and it's my pleasure to add my welcome to our shareholders to yours. It's indeed an unusual time, but I'm pleased that we're able to utilize the technology that we have to hand to talk to you about what we're achieving at MyState. Given the format, I'll be relatively brief. But I'd like to take you through our achievements, the impacts of COVID-19 on the business, our strategy and the outlook for the company. As I said at our full year results announcement, the year in review has been like no other in our history. It's been a year of slow economic growth, increased competition, ongoing regulatory change and global uncertainty, not to mention the difficulties posed by vicious bushfire season, followed by a global pandemic, the likes of which none of us have ever seen in our lives. With all of these external issues going on around us, at MyState, we continued our focus on improving our capability and culture; simplifying, modernizing and digitizing the business; making it simpler, easier and better for customers to interact with us; and maintaining a laser-like focus on our balance sheet strength. In doing this, we significantly reduced the cost and risk of operating. The Chairman has already touched on the financial results, so I won't dwell on these other than to say, our underlying business is performing exceptionally well at the moment. Were it not for the impact of COVID-19 and the resulting provisions for potential credit losses, we would have reported a profit well in excess of the prior year. This strong result reflects the benefits of our investments over the last 6 years in our strategy of simplifying the business, digitization and growth of our balance sheet as well as our continuing expansion in mainland states. Given that our focus is a retail deposit-led business, customer deposits grew 7.6% to $3.9 billion, or just over 69% of MyState Bank's funding. And retail deposits were up 15.5% over the year, improving our deposit mix and helping to lower our funding costs. The increase in retail deposits is especially pleasing and proof that our core strategy is working and has set us up well for the future. 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 $5.3 billion, with home loan growth of 5.1% being 1.7x national system. And we're really pleased with our participation in the government's First Home Loan Deposit Scheme. This helped us to grow our loan book in the latter months of the year, and with this growth has continued through the early months of the new financial year. An increase in our customer Net Promoter Score, which measures customer advocacy, to plus 48, is a reflection of our continued focus on customer service as we progressed our digital strategy. The core of our strategy is to make financial services simple and trustworthy, and our customers are endorsing our execution of this strategic objective. We responded quickly and decisively to the COVID-19 pandemic, firstly, concerned for the health and safety of our staff and then to support our customers through the uncertainty of what lay ahead. All office and call center staff moved to work from home from late March with no loss of productivity. Given the current situation in Tasmania, many have now opted to return to the office in Launceston or Hobart, but flexible working practices will remain as we see an opportunity to allow staff the flexibility of office or home working environments into the future. Loans to nearly 2,000 customers experiencing hardship had repayment deferred or was switched to interest-only after discussions with those customers. Our call center staff and all branches remained open throughout the period, ensuring that we were providing customers with the service they needed. Our main focus over recent years has been to transform MyState Bank 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. Our Wealth business, rebranded as TPT Wealth during the year, also has undergone some additional restructuring. Fund administration and accounting have been outsourced and new digital funds management and lending platforms are being introduced, positioning this business to attract mainland investors. We're now moving TPT Wealth to become a digitally enabled funds management business and early signs are here are also very encouraging. We have a clear digital growth strategy, a significant opportunity to build our business and a very scalable platform. We've reached a clear leverage point in our transformation, and we are very excited about our prospects for the future. The extent of COVID-19-related assistance is -- provided to customers is summarized on this slide. At the 15th of October, almost 2,000 customers had received some form of assistance, which represented a total loan balance of $645 million or around 12% of the total loan book, which is broadly in line with the experience of other banks. And as you can see here, many customers are now beginning to resume normal repayments. The majority of loan assistance provided related 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're reviewing each customer situation at the 3-month check-in, and again, at the end of the 6-month period. And so far, repayments have restarted on over 44% of affected mortgages. We continue to work with our customers individually to arrive at the best outcome for each of them through this period. To date, nearly 870 of the customers requiring assistance have either repaid their loans or recommenced repayments. And of the other 1,088 customers, we're focusing on those who we have classified as working in high-risk industries, those that have been hardest hit in the economic downturn. We've already contacted most of those customers, and nearly 2/3 of these have or will shortly commence repayments. By the time we get to the end of the initial 6 months period, we expect that we will have significantly fewer customers seeking extra assistance. As a consequence, we believe that we are very well provided for any possible credit losses that may eventuate from the current economic situation. Following the latest accounting standards, we increased our collective provision and general reserve for credit losses by $4 million between the 31st of December and the end of the financial year. The majority of the increase in the collective provision was based on our view of the impacts of COVID-19 and doesn't reflect any deterioration in our underlying credit quality or lending standards. We're assuming a slow and bumpy economic recovery, and the increased provision reflects changes in the economy, unemployment and assumptions in respect of residential property prices. These changes are reflected in the forward-looking economic overlay of $2.5 million, increasing the collective provision. We'll revisit this provision at the end of December. However, as I said, we are comfortable that the assumptions we've made in determining the overlay are both prudent and conservative. 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%. And as a consequence, we're very comfortable with our level of provisioning. I'll now turn to 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 a first car or investing for a more comfortable retirement, we're focused on customer needs and customer outcomes. As I said previously, with a customer 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 of making the business simpler, our product simpler and more transparent and has helped us to reduce the cost to serve. We'll continue to develop our digital banking and wealth management capabilities, growing our share of eastern state markets. We'll grow the number of customers who bank with MyState Bank and a result will grow our retail deposits. For MyState Bank, this will involve building brand awareness, continuing to automate and digitize 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, fueled by increased marketing expenditure. This transformation is occurring with the highest number of new customers on record joining MyState Bank in a single month occurring in September, and the first quarter of the year being the highest on record for both home loan applications and home loan settlements. For TPT Wealth, we'll continue to invest in contemporary, scalable products and expand into mainland states supported by additional distribution, marketing and an investment in digital technology. We remain focused and agile with a strong focus on growth, margins and cost management. And this is underpinned by a strong and robust risk management framework and risk culture, as evidenced by the very positive outcomes in our governance, culture, remuneration and accountability review that we completed during the year. So finally, to our outlook, and we see a very bright future for MyState. We're investing more in building the MyState Bank brand on Mainland Australia and will soon start a new campaign in Melbourne, which is designed to boost our brand and increase the number of customers who bank with MyState Bank. We're improving our digital marketing in TPT Wealth and are already seeing some promising results from investments coming from new markets. We expect TPT Wealth funds to benefit from being more easily accessible on the mainland. We expect MyState Bank's balance sheet to continue to grow. We continue to see positive results in the current period. When compared to quarter 1 last year, our home loan settlements were up 40%, and we had our highest ever settlements volumes in the first quarter of a financial year. Since the end of June, our total home loan book is up 1.1%, nearly 4.5% annualized and about 2x system growth. Our customer deposit book has continued to grow strongly, with deposits up 1.5% since the end of June. All of this has helped our net interest margin grow to 1.19% for the first quarter, with September net interest margin growing to 1.95%. We continue to reengineer our cost base improving productivity and investing in further growth. We'll have our new trustee management system in place around the end of the year, which will be the last technology plank in TPT Wealth's transformation. We're making progress on improving our funds' returns and differentiation and are excited about the prospect that this presents to us, with funds under management already having grown nearly 2% since the end of June. We've had a very strong first quarter with management reports showing revenue increasing by over 9% compared to the same period last year, and net profit after tax and before one-off restructuring costs up nearly 22% on the same quarter last year. If the trend seen in the first quarter continues for the balance of the year, the full year result will likely be materially ahead of last year. We'll provide a further update when we announce the first half year results at the end of February next year. These are clearly a very good set of financial metrics. 6 years ago, we adopted a strategy to transform MyState into a highly scalable, digital banking and funds management business. The operational efficiencies and the improvements we've made since then are now flowing through to the bottom line and setting us up for a very bright future. So I'd like to thank all of our staff and my Board for their support and focus during what has been indeed some very unprecedented times. I'd like to thank our customers for choosing to bank with us and our shareholders for supporting us. Thank you for your time, and I'll now hand back to the Chairman.

Thank you, Melos. Before we commence the formal items on business, I'd just like to invite shareholders -- to our shareholders, if they have any questions relating to my presentation or that of Melos, if they might like to submit them. I'll give you a few moments, but if they come up later in the meeting, we'll deal with them at the end of the meeting. There being no questions submitted in relation to the presentations at this time, I will now move forward in the agenda. The first item of business is to receive and consider the financial statements and reports, and no resolution is required on this item. The directors have had prepared and have approved the financial statements included in your 2020 annual report. The auditor's report is unqualified. Questions are now invited in relation to the annual accounts, the directors' statement and reports or about the conduct of the audit in preparation and content of the auditor's report. Questions may be directed to the company or the external auditor, Mr. Danny McCarthy. I will give shareholders a few moments to lodge any questions relating to this, the first item on the agenda. Ladies and gentlemen, no questions have been lodged, and I will therefore move forward to the second item on the agenda. Agenda Item 2 proposes to shareholders my reelection as a non-Executive Director. And Director, Bob Gordon, will temporarily assume the chair for this agenda item.

Thank you, Miles. Item 2 for the meeting is to consider and, if thought fit, pass the following ordinary resolution, that Miles Hampton, who retires from the office of Director via rotation in accordance with Clause 62 of the Constitution and ASX Listing Rule 14.4, being eligible and offering himself for reelection, be reelected as a Director of the company. I note that the Board, in the absence of Mr. Hampton, has voted unanimously to endorse Mr. Hampton's reelection. I note that there have been no questions submitted in relation to this item of business. The proxy votes received prior to the meeting should now be displayed on the screen. Thank you. I will now relinquish the chair and Mr. Hampton will resume as chair for the remainder of the meeting.

Thank you, Bob. Agenda Item 3 is for the meeting to consider and, if thought fit, pass the following ordinary resolution, that Andrea Waters, who retires from the Office of Director by rotation in accordance with Clause 62 of the Constitution and ASX Listing Rule 14.4, being eligible and offering herself for reelection, be reelected as a Director of the company. I note that the Board, in the absence of Mrs. Waters, has voted unanimously to endorse her reelection. I will give shareholders a moment to lodge any questions in relation to the proposed resolution. No questions have been received. Proxy votes will now be displayed on the screen. I'll move now to the fourth item on the agenda, which is to consider and, if thought fit, pass the following nonbinding ordinary resolution, that for the purposes of Section 250R(2) of the Corporations Act 2001 and for all other purposes, the remuneration report, which forms part of the Director's report for the year ended 30th of June 2020, be adopted. The remuneration report is set out on Pages 31 to 46 of the 2020 annual report. The vote on this resolution is advisory-only. The relevant voting exclusions and details about the outcome of this vote are included in the notice of meeting. Some questions have been submitted in relation to the proposed resolution. When I say questions, in fact, I think there's a suggestion that we consider including in the report, take-home remuneration in addition to the existing disclosures. And I will discuss that matter with the Board when we next meet. We have also been -- a questioner has proposed that we should give consideration to providing more details in respect to the hurdles applying to executives in their STIs. Again, I'll take that question to the Board when we next meet. But I think that's the only question in relation to Agenda Item 4. So I'll now move to the proxies. The proxies are now displayed on the screen. Thank you. I'll now move to Agenda Item 5, which is to consider and, if thought fit, pass the following ordinary resolution, that the issue of 16,822 fully paid ordinary shares in the company to or for the benefit of the Managing Director and Chief Executive Officer, Mr. Melos Sulicich, under the 2017 ELTIP, be approved for the purposes of ASX Listing Rule 10.14 and for all other purposes. In accordance with the Corporations Act and ASX Listing Rule requirements, the company will disregard any votes cast in favor of this resolution by the company's key management personnel or closely related parties, as described in the full voting exclusion statement set out in the notice and Explanatory Memorandum for this meeting. I will give shareholders a moment to lodge any questions relating to the proposed resolution. There are no questions in relation to this proposed resolution. I'll now move to Agenda Item 6. Agenda Items 6 is to consider and, if thought fit, pass the following ordinary resolution, that for the purposes of ASX Listing Rule 10.14 and all other purposes, the company be authorized to offer the Managing Director and Chief Executive Officer, Mr. Melos Sulicich, participation in the 2020 ELTIP, which may entitle Mr. Sulicich to be issued a maximum number of 77,351 fully paid ordinary shares in the company on the terms set out in the Explanatory Memorandum to this notice of AGM. In accordance with the Corporations Act and ASX Listing Rule requirements, the company will disregard any votes cast in favor of this resolution by the company's key management personnel or closely related parties as described in full in the voting exclusion statement set out in the notice and Explanatory Memorandum for the meeting. There are no questions in relation to Agenda Item 6, and the proxy votes will now be displayed. Thank you.

Ladies and gentlemen, during the course of the meeting, a number of shareholders have asked some questions that -- general questions that I'd like to now turn to. The first question, and I'll summarize it. COVID has been a great example of a black swan event and provides an opportunity for all companies to learn about how they manage unexpected events. What would you say has personally been the biggest lesson you have learned regarding risk management during this crisis? That's a pretty good question in this very challenging time. In terms of risk management, all shareholders would expect that particularly as a bank and a publicly listed bank of that, that we would have well-documented risk management processes, and we do. But this is a crisis that is so unique, as perhaps all black swan events are, and the biggest learning that I have had is I take documented plans as a given. What you can't take as a given, however, is having at the table the experience that will guide an organization through a challenging period. And I'm very proud to be able to say, I believe you have that in our Board and our executive. Shareholders will be aware that Mr. Sulicich had indicated that he was leaving us in June this year. We managed to persuade him when it was evident how serious the COVID circumstance was that he would stay. And having his experience with us, leading the management team making sure that the organization was responding appropriately to all of the unique circumstances alongside a well experienced Board, no amount of documentation can prepare you fully. But if you have good documentation, good plans and you have people with experience, then you can get through most challenging circumstances. Another question relates to whether or not the company is contemplating producing an environmental, societal and governance report? I will take this question to the Board, but we have talked about it in the past. And when we did so, took the view that we were a very small company. We're trying to run the business as lean and efficiently as we possibly can. But that being said, I will take it back to the Board, but I do not give an undertaking that we will do so. Just that we will revisit it. We do, however, lodged a corporate governance statement, which is a separate report. I've been asked a question in relation to my own tenure at MyState. We have a Board renewal program that has been underway for some time to make sure that the Board is refreshed on a regular basis. And I don't give any commitment. I've been asked if we would make a commitment that will -- the Board will appoint a Chair in the next year. I don't give that commitment. What I do give a commitment is that we have a Board succession plan and our intention is to follow that plan. We have a question that's been asked of one of our non-executive Directors who doesn't have the ability to answer that question. I will ask for that Director to make contact with the questioner who is representing the Australian Shareholders' Association. A last call for questions, ladies and gentlemen. If there are no further questions, I'll pause briefly to allow shareholders to finalize voting. [Voting]

And I now declare the poll closed. The formal results of the poll will be lodged with the ASX later today, and you can access these results by going to the ASX or the MyState Limited website. There being no further business for this Annual General Meeting, I'm very sorry that I can't offer you scones and cream and a cup of tea with the Directors, but maybe next year. Thank you for attending today, and I declare the meeting closed.