MyState Limited (MYS) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the MyState Limited FY '22 Results Webinar. [Operator Instructions] I would now like to hand the conference over to Mr. Brett Morgan, Managing Director. Please go ahead.

Thanks, Ashley, and good morning, everyone. Thanks for joining us to discuss MyState's FY '22 results. I'm Brett Morgan, MyState's Managing Director and CEO; and with me is Gary Dickson, our CFO. On behalf of MyState Limited, I'd like to acknowledge the traditional owners of the land on which we are meeting today, and pay my respects to the elders past, present and emerging. Gary and I will speak to the investor presentation lodged with the ASX earlier this morning and available on our website. I'll provide an overview for the year before handing over to Gary to take you through the financial results in more detail. This includes information behind the growth of our loan book and deposit book for the year as well as our capital strategy. I'll then outline our short- and medium-term outlook. And we welcome questions at the end of the presentation. On to Slide 3. First, the business overview and a quick recap of our 2025 growth strategy. Now Slide 4. As outlined on Slide 4, our overarching ambition is to grow our share in deposits, lending and our funds under management. The unique combination of services offered by MyState Bank and TPT Wealth means we can help people across all life stages. We do this through our core offering of everyday banking products, home and investment loans, asset management, commercial lending and our trustee services business. These products and services are delivered through our key channels. For MyState Bank, this encompasses digital, brokers, mobile lenders in Tasmania as well as our Tasmanian branches and contact center. For our TPT Wealth business, our key channels include digital and relationship managers. And given the importance of a strong and positive culture, which is critical to the success of our growth strategy, we have 3 key values that we live by every day: creating customer wow, chasing the better and collaborating to win. With the support of our investors through a $55.5 million capital raise in June '21, we launched our 2025 growth strategy and have just completed the first year. On to Slide 5 and our highlights. Our investment in the growth strategy is delivering. We have grown our home loan book by 25.5%. Our 30-day arrears are considerably below industry benchmarks at 0.41%, which is a reflection of our conservative approach to home lending. And our growth rate in home lending was broadly matched by our growth in customer deposits, which increased by 25.1% over the year. We also increased our new-to-bank customers by 14.8%, and we delivered our second highest net profit after tax on record at $32 million. Gary will talk you through our NPAT in some detail. but I wanted to note that the profit result was delivered at a time when we had significantly increased our investment to support our growth strategy. Alongside this and in line with our strategy to increase direct lending into our funds, our TPT Wealth commercial loan book grew by 33.9%. We are continuing to build the wealth management side of our business, and there are some good signs here. Our Net Promoter Score of plus 43 reflects our continuing commitment to our customers. It proves that we are delivering the best possible service and that customer experience is at the core of everything we do. Turning to Slide 6, and we've achieved a lot in the first year of our growth strategy, and I wanted to share a couple of key call-outs. The investment into our distribution capability and capacity has delivered great momentum across both our MyState Bank and TPT Wealth lending books. The investment in marketing has supported acceleration in our customer and customer deposit growth. Our growth in TPT Wealth business lending has directly contributed to improved returns for TPT Wealth investors. We've won a number of awards, which is a reflection of the quality products and services we offer and value we deliver to our customers and partners. And we have embedded in new culture -- the new culture values across the business, and these have supported an increase in employee engagement. On to Slide 7. For MyState, sustainability across our operations is about how we create value for all stakeholders over the long term. We are making a conscious effort to integrate tangible changes to the way we operate our business in the 6 key areas, which are: governance, sustainability, digital enablement and data security, supporting our customers, helping people be their best and community investment. I'm pleased to say that during FY '22, we calculated our baseline scope 1, 2 and 3 greenhouse gas emissions footprint as well as identifying and prioritizing MyState's climate risks and opportunities in the short, medium and long term. We also committed to calculating the finance emissions from our loan book in FY '23. Once we understand our combined operational and finance emission impact, we'll explore appropriate emission reduction targets and initiatives. During the year, TPT Wealth also became a signatory to the principles of responsible investing (sic) [ Principles for Responsible Investment ] or PRI. As a new signatory, TPT is fully committed to the adoption of the principles, and we expect to increase transparency in our use of ESG data over the next few years. Our progress for the business in this space includes important ongoing work for our most valuable -- vulnerable customers, our screening of vendors' modern slavery assessments. Collectively, these measures will help create strong foundations for the business and protecting it long into the future. On Slide 8, and at MyState, we're keen supporters of the communities in which we exist and serve. You'll note the many areas which we support on this slide, but I particularly want to call out our ongoing support for the MyState Foundation. By assisting not-for-profit organizations for over 20 years, the foundation is helping young Tasmanians reach their full potential, and we're making a real difference in our community. I'll now hand you over to Gary to take you through the financial results in greater detail.

Thanks, Brett, and good morning, everyone. . Moving to Slide 10. Total operating income was up 1.2% with net interest income down slightly and other banking and wealth management-related income up 12.6%. The upfront investment in building our distribution capacity and brand resulted in an increase in the cost-to-income ratio to 68.4% and pre-provision operating profit was 17.4% lower than the prior year. While net profit after tax was down 11.9% to $32 million, as Brett mentioned, this result is the second highest NPAT outcome on record. As foreshadowed at the time of the capital raise in June 2021, this investment in growth has led to dilution in EPS and ROE for the year. The Board has declared a final dividend of $0.115 per share, equivalent to a payout ratio of 79.2% of after-tax earnings. This decision is in line with our current dividend guidance range and strikes the right balance between pursuing our growth strategy and rewarding shareholders with dividends. Slide 11 shows the key drivers of our second highest net profit after-tax result on record. Net interest income was 1.5% lower on the prior year due to a lower net interest margin, reflecting above-system home loan book growth and more competitive landscape, particularly for fixed rate home loans, partly offset by lower funding costs and a higher average balance sheet. Other banking income was up 16.6%, reflecting the increase in home loan settlements and transaction volumes. Wealth management income was up 8.8%, driven by trustee services-related revenue. Total operating expenses increased 12.9%, and I will cover the key drivers behind this uplift in the next slide. Net bad and doubtful debt expense was in line with the prior year. On Slide 12, we provide some detail behind the increase in operating costs due to our investment in marketing, our distribution capacity as well as higher lending and transaction volumes. Personnel costs were 8% higher, reflective of our investment in growth-related roles, primarily in distribution and operations. FTE at 30 June was approximately 9% higher than the year before. The increase in marketing spend of $3.9 million has contributed to customer acquisition, particularly retail deposits. The uplift in other expenses is primarily volume driven and includes lending-related valuation fees and higher payment system costs following the growth in customer deposits. Total operating costs were 3.6% lower in the second half of the year relative to the first half. Turning to Slide 13. The chart bottom right shows that housing loans comprise 98% of our loan book. 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 home loan applications and settlements were up strongly on the prior year by 89% and 93%, respectively. MyState has continued to provide strong customer service with no deterioration in home loan approval times despite the significant increase in application volume, partly reflecting the increased investment in our underwriting capacity. The geographic distribution of our home loan book continues to broaden with 35% of the book in Tasmania and approximately 62% in the eastern states of Australia. On Slide 14, the chart bottom right shows that MyState's home loan book growth of 25.5% equates to approximately 3x system growth. The chart bottom left highlights that this growth was mainly driven by lower-risk owner-occupied lending with a loan-to-valuation ratio of less than 80%. MyState also continues to be a strong supporter of the First Home Loan Deposit Scheme. Fixed rate lending as a proportion of total flow was 24.5% in FY '22 with the mix shifting towards variable rate loans in the second half following the significant steepening of the yield curve in early FY '22. Fixed rate flow in the months of June and July was less than 5% of total new settlements. Runoff remains a sector-wide challenge and for MyState was 33% higher than the prior year. Repayment speeds remained elevated but are starting to moderate, and the heightened level of discharge activity reflects the number of competitively priced offers in market and cash back incentives for refinances. Turning to Slide 15. Maintaining high credit quality remains a key focus and underpins our balance sheet strength. The growth in greater than 90% LVR loans is primarily attributable to our ongoing support of the First Time Loan Deposit Scheme. Scheme loans now comprise approximately 14% of the book. 30-plus days arrears are 14 basis points lower than 12 months ago at 0.41% and continue to remain considerably below industry benchmarks for both the major and regional banks. There are no longer any customers receiving COVID-related assistance. 61% of borrowers are ahead of their repayment schedule with nearly half of those borrowers more than 10 payments ahead. At 30 June, there was 1 mortgagee in possession in Queensland. On Slide 16, the chart top right highlights the total collective provision has reduced consistent with the lower level of arrears and the underlying credit quality of the lending book. At 30 June, the key assumptions used to determine the forward-looking economic overlay were revised to incorporate the latest observed economic data, including a higher official cash rate, stronger levels of employment and lower near-term house price growth. A scenario weighting of 70% base case and 30% moderate recession was used with price falls under the moderate recession scenario of minus 20% across FY '23 and FY '24. While arrears levels are lower than 12 months ago, the flow-on effect of recent increases in the cash rate and expected future increases may not become visible for months. On that basis, forward-looking economic overlay remains unchanged from 31 December 2021. The majority of the general reserve for credit losses was transferred to retained earnings following adoption of APS 220 on 1 January this year. Provision coverage ratios are shown in the chart bottom left as a percentage of both credit risk-weighted assets and gross loans. Ratios are consistent with pre-COVID levels in June 2019. Slide 17 shows that customer deposits represent 73% of our funding mix with growth in our award-winning Bonus Saver account. In response to the steepening in the yield curve, we've seen customers move to term deposits in the last quarter of the financial year. MyState has passed on the majority of the increases in the cash rate to depositors. The issue of senior unsecured medium-term notes in June and November 2021 introduced further tenor to the pool of wholesale funding. MyState Bank's reliance on securitization reduced during the year as a result of the increasing customer deposits, but remains an important source of funding and provides additional capital flexibility. Turning to the next slide. The reduction in NIM of 29 basis points over the year reflected above system growth in the home loan book, customer preference for lower margin fixed rate home loans in the first 3 quarters of the year, elevated retention discounting and runoff, partly offset by lower funding costs. Funding cost benefits were evident in the first half of the year but subsequently plateaued and then began to rise in line with market expectations for future interest rate increases. Exit NIM in June 2022 was 1.57%, in line with average NIM for the second half. Turning to capital on Slide 19. MyState has largely deployed the $55 million of ordinary share capital raised in June 2021 to support loan book growth. On 8 August, MyState announced it had mandated Westpac and Ord Minnett to act as joint lead managers in preparation for a potential additional Tier 1 capital issue to enable the next stage of growth. A potential perpetual non-call 5- to 5.5-year floating rate wholesale capital note may follow subject to market conditions. The proposed issue amount is up to $50 million with the ability to raise more or less. 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 30 June 2022. Moving to wealth management on Slide 20. Operating income was up 8.8% on the prior year, driven by trustee services related revenue. Funds under management over the year reduced 3.9% to $1.062 billion. TPT Wealth has enhanced its distribution capacity and seen growth of 33.9% in the commercial lending book, the key asset class for our income funds. TPT is now also a signatory of the UN Principles for Responsible Investment, a prerequisite to growing FUM in target segments of the wealth market. Finally, on Slide 21. The pie chart show the increased allocation to direct mortgages across our 3 income funds in FY '22 and the target asset allocation. This change in asset allocation has been a key driver of the 51 basis point increase in returns for investors this past year. Higher investor returns lead to an improved competitive position in the market and will help drive FUM acquisition moving forward. I'll now hand you back to Brett to talk about our outlook.

Thanks, Gary, and I'll now take you through our outlook. We appreciate we're in uncertain times and the sector is competitive, but that also plays to our strength. We'll continue to execute our 2025 growth strategy. Our ambition of increasing our market share across deposits, lending and funds under management doesn't change. We are very focused on improving our customers' digital and human experience across MyState Bank and TPT Wealth. And we will continue to simplify our products, processes and systems. As we grow, we will deliver operating leverage as well as ROE accretion and EPS growth. On to Slide 24. And we are in a unique -- we are a unique, proven business with a strong brand and position in Tasmania, which has consistently delivered in the past and is now delivering on the early stages of our growth strategy. We'll now answer any questions you may have.

[Operator Instructions] There are no questions at this time. I'll now hand the conference back to Mr. Morgan.

Thanks, Ashley, and thanks, everyone, for your time today. And Gary and I look forward to catching up with many of you over the coming weeks. Thank you.

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