MyState Limited (MYS) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to MyState Limited First Half '22 Financial Results Investor Call. [Operator Instructions] I will now like to hand the conference over to Brett Morgan, Managing Director and CEO. Please go ahead.

Yes. Thanks, Lexy, and good morning, everyone, and thank you for joining us today. My name is Brett Morgan, MyState's Managing Director and CEO. And with me today is Gary Dickson, our CFO. On behalf of MyState Limited, I'd like to acknowledge the traditional owners of the lands on which we are meeting today. I'm joining you from Muwinina land. However, we have people joining us from across the country. So I wanted to acknowledge the traditional owners of those many lands also and pay my respects to the elders past, present and emerging. You should have all received a copy of both the results announcement and investor presentation that we lodged with the ASX this morning. These are also available on our website. I'll provide a brief business update before handing you over to Gary to take you through the financial results, including the details behind our strong loan book and customer deposit growth during the half. I'll then outline our 2025 growth strategy and outlook, and we'll welcome questions at the end of the presentation. Before Gary and I step through the presentation, I wanted to share that I'm thrilled to have joined MyState last month. And one of the key reasons I wanted to join MyState was about the growth strategy. And on that point, I wanted to take the opportunity to recognize and thank Melos Sulicich, the recently retired MD and CEO, for the exceptional job he did leading the business and laying the foundations for the growth strategy. So thanks, Melos. I'm happy to share MyState's growth strategy is on track. For the first half, we announced that our loan book grew by 11.4% or 3x system to over $6 billion. The significant growth during the half was driven by a strong uplift in applications and settlement volumes, which were up 117% and 116%, respectively, on the previous corresponding period. Our customer deposits grew by just shy of $5 billion as at 31 December, up 12.4% over the half and now represent approximately 75% of funding. There was strong growth in our award-winning Bonus Saver account, up almost 20% on 30 June '21 driven by the digitization acquisition of new customers. Our stat net profit after-tax decreased by 2.4% to $16.6 million. The decrease was primarily driven by higher operating expenditure as we commenced execution of the growth strategy and specifically made significant investments in distribution focused roles, marketing and brand building to support our growth strategy. Marketing costs of $5.8 million were up 90% on the previous corresponding period. Our net interest margin declined 17 basis points during the half to 1.77% and was impacted by the strong competition in the lending market for new home loans and customer preference for lower-margin fixed-rate loans. To support and enable our growth strategy, MyState raised $55.5 million in ordinary share capital in May '21. The deployment of new capital during the half saw a dilution in return on equity and a reduction in earnings per share on the previous corresponding period. But as our results have shown, our growth strategy is on track, and the execution of MyState's growth strategy announced in 2021 is well and truly in execution. As foreshadowed at the time of the capital raise, our earnings per share and return on equity have been diluted as we've deployed the capital in support of our growth strategy. We've invested in marketing and distribution capability and capacity, which has resulted in significant growth across both our home lending business and our customer deposits. We have grown home lending at 3x system and had record growth in customer numbers. I'll speak more to you about the outlook and strategy shortly. But for now, I'll hand you over to Gary to take you through the financial detail.

Thanks, Brett, and good morning, everyone. Moving to Slide 7. As Brett mentioned, we're focused on deploying the capital raised in June 2021 and growing our loan book as quickly as possible. Total operating income was up 3.4%, with growth in lending assets more than offsetting the decline in net interest margin. The upfront investment in building our distribution capacity and brand resulted in an increase in the cost-to-income ratio to 68.8%, and pre-provision operating profit was 16.3% lower than the prior comparative period. Net profit after-tax was down 2.4% to $16.6 million. As Brett mentioned, and as foreshadowed at the time of the capital raise, this investment in growth has led to dilution in EPS and ROE for the half. The Board has declared an interim dividend of $0.125 per share, in line with the prior comparative period and equivalent to a 79.4% payout ratio of after-tax earnings. This decision is in line with our current dividend guidance range and strikes the right balance between pursuing the significant organic growth opportunities for both MyState Bank and TPT Wealth and rewarding shareholders with dividends. Slide 8 shows the key drivers of the softer statutory net profit after-tax result for the half. Net interest income was up 1.1% and benefited from a higher average balance sheet, partly offset by lower NIM reflecting the competitive home loan environment. Other banking income was up 21%, reflecting the increase in home loan settlements and transaction volumes. Wealth management income was up 5.6% driven by trustee services-related revenue. As noted earlier, our investment in distribution and marketing contributed to an overall increase in operating expenditure of $6.6 million or 15.6%. The net bad and doubtful debt write-back reflects the further improvement in arrears and the more positive economic outlook following the reopening of major capital cities on the Eastern Seaboard. The prior half year result was impacted by restructure costs incurred in closing 4 bank branches in Central Queensland and a reorganization of the TPT Wealth business. On Slide 9, we provide some detail behind the increase in operating costs due to our investment in marketing, our distribution capability and capacity as well as higher lending volumes. Personnel costs in the half were higher, reflective of our upfront investment in growth-related roles, primarily in distribution and operations, with FTE at 31 December approximately 12% higher than the year before. As Brett mentioned, the increase in marketing spend of $2.7 million has contributed to customer acquisition, particularly retail deposits, and a significant improvement in prompted brand awareness for MyState Bank on the mainland. The uplift in other expenses is primarily volume-driven and includes lending-related valuation fees and higher payment system costs following the growth in retail depositors. Turning to the next slide. The chart bottom right illustrates that MyState continues to focus on home loans, which comprise 98% of lending assets at 31 December. As noted at the FY '21 full year results announcement, MyState ceased originating personal loans in June 2021 given the growth in monoline providers and the shift in consumer preference to buy now, pay later products. Customer needs for personal loans are now satisfied by a referral arrangement in a similar manner to that of general and health insurance. The chart at the top right shows that both applications and settlements are up strongly on the prior comparative period by 117% and 116%, respectively. MyState has continued to provide market-leading customer service with no deterioration in home loan approval times despite the significant increase in application volume, partly reflecting the increased investment in underwriting capability. The geographic distribution of our loan book continued to broaden, with 38% of the book in Tasmania and 59% in the eastern states of Australia. On Slide 11, the chart bottom right shows that at the half year ended 31 December, MyState's home loan book growth of 11.4% equates to 3x system growth. The chart bottom left highlights that this growth is mainly driven by low-risk, owner occupied lending. MyState also continues to be a strong supporter of the First Home Loan Deposit Scheme. Reflecting recent customer preferences, fixed rate lending as a proportion of total flow was 34% in the current half versus 24% in the prior comparative period. Runoff remains a sector-wide challenge and was 48% higher than the previous corresponding period. Repayment speeds are elevated due to the low interest rate environment, and the heightened level of discharge activity reflected the number of very competitively priced fixed-rate offers in the market and cash-back incentives for refinances. We expect prepayment fees will begin to slow once interest rates start rising, and we have seen lower levels of discharge activity in December and January following recent increases in fixed rate pricing across the market in response to a steepening yield curve and the cessation of cash-back incentives by some providers. Slide 12 highlights that continued high credit quality remains a key focus and 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 is primarily attributable to our ongoing support of the First Home Loan Deposit Scheme. At 31 December, loans with some form of COVID-19-related assistance accounted for 0.05% of the book. The appendix includes an update on the level of assistance provided to customers. As of 3rd of January this year, 8 customers were receiving some form of assistance. And today, I'm pleased to say we only have 1 customer on interest-only payments receiving assistance. Our 30-plus days arrears continue to remain considerably below industry benchmarks for both the major and regional banks. On the next slide, the charts to the right highlights the total collective provisions and the general reserve for credit losses have reduced, consistent with lower arrears and the stronger-than-expected economic recovery as major Australian cities have exited lockdowns. At 31 December 2021, the key assumptions used to determine the forward-looking economic overlay were revised to incorporate the latest observed economic data and the improved outlook for Australia. The unemployment rate is reduced from 6.6% in December 2020 to 4.2% in December 2021, and the housing market remained strong with double-digit growth experienced nationwide in 2021. The improvement in the economic outlook and a significant reduction in COVID-19-impacted customers led to the overlay being reduced by $0.6 million at 31 December. Since 30 June 2020, $0.4 million has been reclassified to the core collective provision and $1.2 million has been released to profit and loss, the latter amount representing 48% of the original overlay. Given the ongoing prevalence of the Omicron variant, it remains appropriate to hold some of the overlay with $0.9 million still remaining. MyState's provision coverage ratio is shown in the chart bottom left, and as a percentage of both credit risk-weighted assets and gross loans, ratios are now consistent with pre-COVID-19 levels in December 2019. Slide 14 shows that approximately 75% of our funding is sourced from customer deposits, as Brett mentioned. Growth in our core customer deposit is up 16% on 30 June 2021, reflects current consumer preferences, with our award-winning Bonus Saver account driving the digital acquisition of new customers. Following the first-time issue of senior unsecured notes in June 2021, a further issue of $100 million occurred in November, introducing further tenor to the pool of wholesale funding. MyState Bank's reliance on securitization reduced during the half 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 over the medium term. At the same time, it provides additional capital flexibility. Turning to the next slide. The reduction in NIM over the half reflected competition in the market for new home loans; customer preferences for lower-margin fixed-rate loans, including existing customers switching from variable to fixed-rate loans; elevated retention discounting, runoff, partly offset by lower funding costs. Average NIM was down 17 basis points on the prior comparative period. The funding cost benefits evident throughout FY '21 have continued but have plateaued in more recent months. Exit NIM in the month of December was 1.70%. Looking forward, we expect net interest margin to remain under pressure with competition in the home loan market still intense, although margin pressures may begin to diminish as the front to back book gap reduces. The outlook is also improving due to expectations the RBA will start increasing the official cash rate at some point in the second half of the calendar year. Turning to capital on Slide 16. MyState remains well capitalized with all capital ratios comfortably above regulatory minimums. The group's total capital ratio decreased 103 basis points in the period to 13.81%, and the group's common equity Tier 1 ratio decreased by 147 basis points to 11.61% as the capital raised in June 2021 was deployed to support balance sheet growth. Tier 2 capital was further bolstered by the issue of $25 million of 10-year subordinated notes in November 2021. And our capacity to issue additional Tier 1 capital and further Tier 2 capital and securitization will provide further capital flexibility going forward. APRA's revised capital management framework effective 1 January 2023 is expected to provide a capital benefit of 30 to 40 basis points for CET1 capital and 60 to 70 basis points for total capital relative to the actual capital position at 31 December 2021. Finally, moving to Wealth Management on the next slide. Operating income was up 5.6% on the prior comparative period and 10.2% on the previous half driven by trustee services-related revenue. Funds under management over the half remained relatively flat, down 1.6% to $1.088 billion. TPT has enhanced its distribution capability to drive growth on the Eastern Seaboard to complement its team in the heartland market of Tasmania. Pleasingly, our 3 income funds were all recently awarded a 4-star rating from SQM Research. The significant change agenda of the past 2 years is now broadly complete, and following the recent feature changes to our range of income funds, we are looking to further differentiate returns by increasing the proportion of direct lending with the potential to generate improved yield for investors. I'll now hand you back to Brett to talk about our strategy and future outlook.

Thanks, Gary. I'll now summarize our strategy and outlook for the medium term. Noting the operating environment, MyState is very well positioned to execute on our growth strategy. There are a number of well-documented macro forces at play, which creates significant opportunities for MyState to leverage. In response to market forces, I want to particularly highlight we're in a strong position in our Tasmania heartland to further accelerate growth and increase market share and, at the same time, accelerate growth on the mainland as we expand across the Eastern Seaboard. We have and will continue to simplify our banking and wealth propositions, ensuring they are relevant for current and future customers. We will continue to grow our high-quality lending book. We have and will continue to deliver industry-leading service across our branch, Australian-based contact center and digital channels. As previously shared, MyState's overarching ambition is to grow our share of deposits, home lending and funds under management across both our heartland in Tasmania but also with expansion across the mainland. We have a focused strategy that will continue to build on our achievements so far: our strong financial position; demonstrated execution capability, including our evolution into a digitally enabled bank and funds management business; and leading customer experience and efficacy levels. The 2025 growth strategy is also underpinned by our 4 strategic priorities of customer experience and acquisition, increased distribution capacity and capability, enhanced operations and culture and capability development. Now to our objectives over the medium term and some closing remarks. In the medium term, we will continue to grow our lending book faster than system whilst maintaining asset quality. We also expect our operating leverage to improve in line with business growth. Over the medium term, we are targeting return on equity accretion as capital is deployed and also earnings per share growth. For the remainder of the financial year, both will remain diluted as we continue to deploy the capital we recently raised and invest to deliver customer and lending growth. We commenced the second half of the financial year in a strong position with our 2025 growth strategy well on track. Gary and I will now answer any questions you may have, and I'll hand back to the operator to facilitate that.

[Operator Instructions] Your first question comes from Nathan Zaia from Morningstar.

Firstly, I'm not sure of the way you would think about it. But in terms of the operating expenses and the increase, is it possible to get a breakdown how much is going towards attracting customer deposits versus growing the loan book?

Yes. Thanks, Nathan. I mean in terms of the focus of our marketing spend, it's very much been on the depositor side rather than the home loan side. So I'd think about it in those terms.

And so the rest of that increase is more about the loan book -- with that $6.6 million increase, the marketing, deposits; and the rest, about loans?

Sorry, say that again, Nathan.

Like the increase you had in the actual expense base, so the increase that you attribute to marketing, we can put down to attracting more deposits, but the rest of the increase was more about the loan book growth. Is that right?

So from a marketing perspective, so the increase is reflective of, yes, the customer acquisition initiatives that we've done primarily on the retail depositor side. But there's an element of the brand building spend as well, which has been an important component as well. Particularly, we launched a campaign into the Melbourne market, our Numbers & Feelings campaign. So yes, we've progressively just increased our spend from a brand perspective as well.

And thinking about the cost base going forward then, if these rates of growth to slow, would cost come down here? Or is this sort of a cost base you need to support this larger bank that you're becoming?

I think what we'd be looking to do is to increasingly see the operating leverage come through. I mean I think from a short-term perspective, the level of expense growth that you can expect to see relative to the prior comparative period would be at a similar level in the short term. So obviously, expenses were up just over 15%. I think you could expect to see that through to the full year, but then the operating leverage will start to come through. So I'm just going to sort of, I guess, reinforce the point that this is about an upfront investment predominantly in those growth-related roles.

Yes. Okay. Yes, that's what I was trying to get at. So if the growth does then reverse, do those costs come out?

There will be an element of that, particularly some of the volume-related expenses that you can see in our other expense line in that chart on Page 9.

Yes. Okay. Just had another one on the customer deposit base. You showed 68%. Is that call? Do you have at hand what share of that would be a transaction versus online savings account or even what percentage is paid less than 0.01% or something like that?

Yes. I mean from a mix perspective, I mean our transactions account probably around about 11% or so.

Sorry, is that of the total customer deposit?

No, sorry. That's total funding.

Total funding, okay.

And then from a savings account perspective, that's around about 1/3 of our total funding. And as you'd be aware, we've seen, probably over the past 12 to 18 months, a strong consumer preference for that at call money. We are starting to see customers move into TDs, certainly over the past couple of months.

All right. And is there anything you can just say on the -- so has there been any change to your approval times in recent months or in the half? I don't know, you did 90% of your 2021 land settlement in 1 half, so quite come uplift.

Yes. So I mean, obviously, the majority of our new flow is through the broker channel, and time to unconditional on that turnaround time is of critical importance there. So over the past 12 months, we've been pretty steady at around 2 days for time to unconditional -- sorry, time to conditional.

Yes. The volume increases -- the turnaround times have remained unchanged and very strong. So there's a great, consistent broker experience and customer experience around certainty of decision, which is a critical differentiator for us.

[Operator Instructions] Your next question comes from Alex Hay from E.L. & C. Baillieu.

Just a couple of questions about sort of going forward. Can you just talk a bit about the growth you've had in relation to your funding side, the growth of loans and how much is fixed vis-a-vis variable? Are you matching off for those in a rising rate environment, the loans with the cash and such? Then I got a cost question.

Yes. Alex, I mean from a loan book composition and flow perspective in terms of fixed and variable, our fixed-rate flow for the half was around 34% of total settlements. And as a proportion of book, our fixed-rate book is about 28% of the total book. So that's up from about 23% back in June. And again, what we've seen as a consequence of the steepening in the yield curve and a range of fixed-rate price increases across the market, again, we've sort of seen application flow for fixed-rate loans start to trend down over recent months.

Okay. Next thing, I understand, obviously, you raised money last year and you've gone from there. But your cost-to-income ratio and your margins, et cetera, obviously, you mentioned before the cost would be similar this half. So therefore, we expect next financial year and beyond that the cost-to-income ratio and return on equity start sort of moving in a better way as such, moving up.

Yes. I mean I think at the time of the capital raise, what we indicated was clearly EPS and ROE dilution in the first year, in FY '22, as we look to deploy the capital as quickly as possible. With regards to FY '23, I mean we'd be looking to, yes, obviously, improve both ROE and EPS. And then from the following year onwards, you'd start to see some real accretion relative to that position back in FY '21.

Okay. And in relation to the $55 million you raised, is that now sort of fully deployed in the loan book? I guess my question is that, going forward, have you still got more dry powder to continue the same for growth in the next 12 to 18 months?

Yes. So we're still running a little bit of excess regulatory capital. You can see in the capital chart. And we've also got quite a bit of additional flexibility from a capital perspective. So for example, we don't have any additional Tier 1 capital in our capital mix at the moment. So that's a format that we're looking at, at the moment. There's scope for a little bit more Tier 2. And also, we've run our securitization down to about 13% of our total funding. And the securitization that we do is capital relief, so there's quite a bit of capital flexibility we feel there going forward.

[Operator Instructions] Your next question comes from Carlos Gil from Microequities. There are no further questions at this time. I'll now hand back to Mr. Morgan for closing remarks.

I wanted to thank everyone for taking the time to join the call. We truly appreciate it and look forward to catching up with some of you in the coming weeks. Thank you.

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