MyState Limited (MYS) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the MyState Limited FY '21 Results Investor Call. [Operator Instructions] I would now like to hand the conference over to Mr. Melos Sulicich, Managing Director and CEO. Please go ahead.

Thank you, and good morning, everybody, and thanks for joining us to discuss MyState's results for the full year '21. I'm Melos Sulicich, Managing Director and CEO; and also on the call with me is Gary Dickson, our CFO. We speak to the Investor Presentation lodged with the ASX early this morning, which is also available on our website. You can see from the agenda on Page 2 that I'll provide a brief business update before handing over to Gary to take you through the financial results in detail, including the details behind our nearly 20% growth in net profit after tax earnings per share and our strong capital strategy. I'll then outline our 2025 growth strategy and outlook. And as usual, we'll welcome questions at the end of the presentation, and the call operator will moderate these questions. So first to the business overview and key highlights on Page 4. Just like to provide a quick recap of the tremendous evolution that MyState's made over the past 5 years. In a very disciplined and deliberate manner, we've transformed from a branch-based credit union to a customer base that was largely concentrated in Tasmania to now being a digital bank with an increasingly geographical diverse customer base. Today our new customer origination is increasingly being done online. Our processes are more customer-focused. We're driven to provide account opening, account servicing and transaction processes are at the front of what customers are looking for in today's world. We've also simplified and digitized our processes, making them more intuitive and faster, and have artificial intelligence-enabled customer insights that we deliver to our customers to help them manage their financial well-being. All of this means our customers find us easy to deal with, leading to deeper and longer-lasting relationships. On Page 5, you can see that as a result of our evolution, we're now incredibly well positioned for accelerated growth. Over many years, we've achieved consistent above-system loan and deposit book growth, and we now have 60% of our home loan booked on mainland Australia, a big change from a few short years ago. And pleasingly, with this, we have continued to grow our Tasmanian book. Our 2025 strategy will enable us to rapidly accelerate our growth profile. This bold strategy built on our strong solid financial position and our demonstrated execution capability and our leading customer Net Promoter Score to access growth via our digital offering. Our recent share placement and entitlement offer, which raised $55.5 million, gives us the balance sheet strength and flexibility to rapidly accelerate growth across both our banking and Wealth Management businesses. The key highlights on Page 6 show that we've delivered an outstanding result for the 2021 financial year, a period in which we saw considerable challenges and volatility in the operating environment. Our results underline the effectiveness of our recent strategies with a focus on driving strong customer acquisition through increased marketing and sales investment; deliberate, disciplined and focused investment in innovation; and laser-like view on managing operating expenses while maintaining a culture obsessed with delivering positive customer experiences and a continuous eye on driving the cultural transformation required to manage a bank in a modern world. You'll see evidence of these in the presentation this morning. And as you can see here, our headline KPIs continue to head in the right direction. Net profit after tax increased 20.9% to $36.3 million, while earnings per share increased 19.2% to $0.132 -- sorry, $0.392 a share. Operating expenses were managed carefully, leading to the cost-to-income ratio, excluding one-off restructuring costs, decreasing 153 basis points to 61.3%. Our net interest margin increased by 10 basis points to 1.96%, underpinned by increasing customer deposits and lower funding costs. Customer deposits were up 13.2% over the past 12 months, helped by our award-winning bonus -- MyState Bank Bonus Saver account, up to 319% since June last year. All of these initiatives saw us achieve peer-leading return on tangible equity of 14.1%, up 133 basis points on the previous corresponding period. It's important to note that these good figures were possible due to the trust our customers place in us because we focus on their interests, and our increasing ability to attract new customers is a result. Over the past year, we've welcomed 17,000 customers, and this number is continuing to increase on a rolling 12-month basis. We continue to be one of the customer advocacy leaders in the sector with a customer Net Promoter Score of plus 47. Ongoing investments in new marketing initiatives will further support this growth going forward. With a customer funding ratio of a healthy 73.4%, we can comfortably support growth. Other savings also allowed us to increase our marketing investment along the Eastern Seaboard. However, it's our digitization strategy which has transformed MyState into a digital, scalable business and positioned us so well for the future. It's changed the way our customers interact with us, and the continuing growth in online banking has enabled us to expand our online services, offer more intuitive and innovative products and services and reduce the number of branches we operate as customers continue to move to digital service offerings. Turning to Slide 7, you can see more detail on our key metrics and performance drivers. Our total loan book was up 6% over the year to $5.6 billion, led by an uplift in second half applications and settlements. You can see from the graph on the right that MyState return on equity compares well to peers, significantly higher than other regional banks. The directors have declared a final dividend of $0.13 per share fully franked, taking the full year dividend to $0.255 a share. All of these shows that a multiyear transformation journey is really bearing fruit, and we're well placed to harness this increased momentum because we now have the fundamental structures in place that allow us to take advantage of evolving market conditions and customer needs. I'll talk to the outlook and strategy shortly, but for now, I'll hand over to Gary to take you through the financial detail.

Thanks, Melos, and good morning, everyone. Moving to the results summary on Slide 9. All key financial metrics have moved positively during the year, and we will remark that the underlying momentum of the business is more challenging, albeit more positive than expected external environment. Total operating income was $138.5 million, up 7.5% on the prior year, 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 1.96% was up 10 basis points on FY '20's level of 1.86%. That's despite a challenging environment with increased competition in the low-risk owner-occupied lending market with the loan to valuation ratio of less than 80%, which we target. Operating expense excluding restructure costs increased 4.9%, resulting in positive JAWS at a similar level to that experienced in FY '20. The cost-to-income ratio improved by 153 basis points to 61.3% with the benefits of process reengineering and automation driving improved operating leverage. As Melos has mentioned, we achieved around 20% growth in both net profit after tax and EPS for the year, with net profit up 20.9% to $36.3 million and EPS up 19.2% to $0.392 per share. The Board have declared a final dividend of $0.13 per share. MyState remains comfortably capitalized above regulatory minimums with a total capital ratio on 30 June 2021 of 14.8%. Slide 10 shows the key drivers of the 20.9% increase in statutory net profit after tax after allowing for restructure costs incurred in closing 4 bank branches in Central Queensland and a reorganization of the TPT Wealth business. Net interest income benefiting from a higher average balance sheet, lower funding and focused margin management. Wealth Management income declined due to lower average funds under management, partly reflecting the impact of COVID-19 on investment markets in the second quarter of calendar year 2020 and lower trustee fees. Net bad and doubtful debt expense was $5.9 million lower, with the prior period expense of $4.9 million reflecting in part the increase in 90-plus days arrears at 30 June 2020, but principally a significant increase in the forward-looking economic overlay in response to the uncertainty created by the COVID-19 pandemic. The current period write-back of $1 million was a result of reduced arrears and the improved economic outlook, in particular for unemployment and house prices. On Slide 11, you can see we continue to manage operating cost growth while maintaining an ongoing investment in our capability, marketing and digitization program. The uplift in marketing spend of $1.1 million during the year has contributed to customer acquisition, particularly retail deposits as we build the bank's franchise on Australia's Eastern Seaboard. Digital marketing is enabling us to reach a broader population with new online and mobile products. Restructuring costs of $2.6 million from the closure of MyState Bank's 4 Central Queensland branches and 2 branches in Tasmania along with some rationalization of corporate office locations in Tasmania. The resulting annualized savings of approximately $2.1 million continued to reinvested in growth-related initiatives across MyState Bank and TPT Wealth. There are now 7 branches continuing to service Tasmania with the broader Australian customer base serviced entirely via digital platforms and supported by the Tasmanian-based customer care center and [ for ] services such as those provided by Australia Post. Personnel costs in FY '20 benefited from the forfeiture of short-term incentives due to the impacts of COVID-19. In 2021, we've also selectively grown distribution capability across Tasmania, Victoria and New South Wales and invested in leadership programs for the senior management team. Turning to the next slide. Our loan book growth was above system in FY '21, led by home lending at 1.3x system and up 6.8% on the prior year with a significant increase in applications and settlements in the second half of the financial year. The chart at the top right shows that both applications and settlements were up strongly on the prior year, while the chart below it shows that housing loans continue to make up the majority of our loan book. We have maintained our focus on low-risk owner-occupied lending with a loan to valuation ratio of less than 80% while also continuing to be a strong supporter of the First Home Loan Deposit Scheme. We've continued our solid momentum into FY '22 with home loan applications up 69% in Q4 FY '21 relative to pcp. Going forward, maintaining quality lending growth remains a key focus. With the market for personal loans having changed dramatically in recent years with the growth in the number of monoline providers combined with a shifting consumer preference to buy now, pay later products, MyState ceased originating personal loans at the end of May. Customer needs for personal loans are now satisfied by a referral arrangement in a similar manner to that of general [ and health insurance ]. Slide 13 highlights that continued high credit quality underpins our balance sheet strength. As I mentioned previously, we continue to focus on low-risk owner-occupied lending with an LVR of less than 80%, and the growth in greater than 90% LVR loans reflects our ongoing support of the First Home Loan Deposit Scheme. At 30 June, loans with prior COVID-19-related assistance that are currently receiving further assistance now only account for 0.2% of the book. In the appendix, we have provided an update on the level of assistance provided to customers following the latest Delta outbreak and subsequent lockdowns across Mainland Australia. As of the 16th of August, 56 customers have sought assistance, the majority of whom are based in New South Wales. While the Australian economy has performed more strongly than expected over the past year with strong house price growth and declining unemployment levels, the ongoing disruption caused by the pandemic is expected to continue to impact on economic activity. MyState Bank will continue to support impacted customers over the coming months. Our 30 past day arrears remain considerably below industry benchmarks for both the major and regional banks. On the next slide, the chart on the top right highlights that approximately 73% of our funding is sourced from customer deposits. Our funding mix continues to be enhanced by growth in lower cost at call deposits which increased 49% on the prior year. We've also seen significant growth in our award-winning Bonus Saver Account, which was up 319% since 30 June 2020, due to increased online acquisition. This fee-free savings account was awarded a 5-star rating by [ Canstar ] and received Mozo's Experts Choice Award. In June 2021, we issued senior unsecured medium-term notes totaling $50 million for the first time. And by 30 June 2021, we fully drawn down our allowance under the RBA's term funding facility. MyState Bank's reliance on securitization reduced during the year as a result of the increasing customer deposits. It remains an important component of the funding mix and is expected to contribute around 20% to 23% of the bank's funding for the foreseeable future. Slide 15 shows that while MyState continues 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 10 basis points on FY '20. The RBA has reduced the cash rate by 140 basis points since early June 2019 with flow-on effects to both the earning rate on assets and the cost of funding. Term deposit margins continued to reduce as the book rolled to lower rates following RBA cash rate changes. Our Bonus Saver Account generated strong inflows, and retail deposit pricing continues to benefit from increased liquidity across the system due to the broad package of federal government initiatives to support the economy. While the lending market remains highly competitive, our lending book continues to grow as a result of the bookings, Tasmania reaching a record high of over $2.1 billion and ongoing diversification across the Eastern Seaboard. Exit NIM in the month of June was 1.89%. Looking forward, we expect net interest margin to remain under pressure with competition in the home loan market intensifying, with lower funding costs, while positive in recent times, to be a neutral contributor in the period ahead. Turning to capital on Slide 16. MyState remains capitalized with all capital ratios comfortably above regulatory minimums. The group's total capital ratio on 30 June 2021, was 14.84%, an increase of 183 basis points on the prior year. Our common equity Tier 1 ratio and Tier 1 ratio is 13.08%. The proceeds of our main capital raise will be deployed to rapidly accelerate our deposit and lending growth. Our capacity to issue additional Tier 1 capital and further Tier 2 capital and securitization will provide further capital flexibility going forward. Moving to Wealth Management on the next slide. From a financial perspective, TPT Wealth had a disappointing year. Income from Wealth Management activities was $2.2 million or 14% lower than the prior year, driven by lower fees from trustee-related services and management fees. While funds under management grew 3.4% during the year and closed at just over $1.1 billion, driven by growth in our income funds, average funds under management were approximately 4.5% lower than the prior year. Significant restructuring initiatives have been undertaken in TPT Wealth over the past 2 years, with fund administration and fund accounting outsourced, investment management for TPT Wealth's growth funds outsourced and TPT Wealth's core lending and trustee systems replaced. In early 2021, we enhanced our distribution capability to drive growth on the Eastern Seaboard while remaining focused on the strong competitive position TPT Wealth commands in Tasmania. Pleasingly, our fixed term fund was recently awarded a 4-star rating from SQM Research. The significant change agenda is now broadly complete and will enable efficiency [ benefits as ] the business gains scale. Almost [ 30% of ] investors have transitioned to our new digital portal, and we are looking to further differentiate returns across our range of funds by enabling investment in longer-term assets with the potential to generate improved yield for investors. I'll now return you to Melos to talk about our strategy and future outlook.

Thanks very much, Gary. Turning to Page 19. Whilst many of the macro challenges continued with the ongoing effects of COVID-19 creating a more volatile business environment, MyState remains well positioned for continued growth. Our focus remains on continually simplifying, automating and improving productivity to enable us to invest and innovate to grow retail deposits, home loans and our managed fund investment products. In terms of specific challenges, we've outlined targeted responses to enable us to accelerate our growth trajectory. For example, our simple, easy and low-touch origination processes mean that we're well placed in a competitive banking environment to grow retail deposit funding efficiently. Our simplified business model and continuous increase in automation addresses challenges posed by increasing regulatory requirements. And because we're a trusted brand with a deep care for our customers, we're able to respond adeptly to the challenging -- the challenge of changing out and increasing customer demands. Despite a more volatile environment, we believe we can confidently grow market share, and indeed, we're well placed to do so. More recently, we've seen a solid and sustained increase in our Tasmanian book. At the same time, we see significant and sustained increase in home loan applications in Mainland Australia. This will move to settlements and increasing book growth in the period ahead. Slide 20 summarizes our 2025 strategy. Our overarching ambition is to grow our share in [ deposits ], lending in FUM. Our focused strategy will enable us to deliver on this by building on our achievements so far. Our strong financial position, demonstrated execution capability and leading customer Net Promoter Score. The 2025 strategy is also underpinned by our 4 strategic priorities of customer experience and acquisition, increased distribution capacity, enhanced increasingly productive operations and significant expenditure on culture and capability development. The acceleration of our growth strategies across both banking and wealth management will enhance our evolution as a digital bank and funds management business. This, in turn, means our growing customer base across the Eastern Seaboard will find that MyState is easier, more trustworthy and intuitive to deal with, allowing us to achieve deeper relationships with our customers. In closing, on Slide 21, we're currently focused on rapidly accelerating our balance sheet and improving our operating leverage in line with business growth. We're targeting ROE accretion over time as new capital is deployed. In FY '22, we expect earnings per share and ROE will be diluted while this new capital is being deployed, and we also expect operating expenditure, particularly marketing and sales investment, will rise to support growth. We've transformed the business and remain extremely well placed to take advantage of [ current ] market conditions. We commenced a new financial year in a strong position, and the operational efficiencies that we've made in recent years are enabling our growth to accelerate. As you may be aware, I've recently informed the Board that I'll be retiring at the end of this year. I've thoroughly enjoyed what will be 7.5 years at MyState and firmly believe that the business is really set for significant growth in the near term. But I also know that it's my time to hand the reins to someone else to drive the business. I'm absolutely thrilled to be able to deliver such a strong result and lead such a vibrant business as I close out my executive career. I'll now hand back to the operator, who will moderate the Q&A.

[Operator Instructions] There are no questions at this time. I'll now hand back over to Melos Sulicich for closing remarks.

Okay. Thank you very much for that. And no questions probably means it's just a very good result and everyone's comfortable with what they've seen. So thanks again for your time. If you do have any further questions or need more information, let us know what we can do to assist you. Good morning and have a great day. Thank you for your attendance.