MyState Limited (MYS) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the MyState Limited FY '23 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Brett Morgan, Chief Executive Officer. Please go ahead.

Thanks, Travis, and good morning, everyone. Thanks for joining us for MyState's FY '23 results. I'm Brett Morgan, MyState's Managing Director and CEO. With me is Gary Dickson, our CFO. Today's investor presentation was lodged with the ASX earlier this morning and is also available on our website. I'll provide an overview for the year before Gary takes you through the financial results in detail, including performance across our lending, deposit and wealth management divisions. I'll then cover our outlook and provide an update on FY '24 targets. We welcome questions at the end of the presentation. And we'll turn to Slide 4. MyState provides retail banking, trustee and funds management products and services to Australians through its 2 brands: MyState Bank and TPT Wealth. 2 years ago, we embarked on the growth strategy, and I'm very pleased to say that 2 years in, we're on track. Our investment in marketing and distribution is delivering record levels of new customers. Our customer base has grown in Tasmania and across the Eastern Seaboard. We're taking market share across our key portfolios of home lending and customer deposits. Over the past 2 years, our home lending book has grown by 43% with nearly 2/3 of our home loan customers now originating from the Mainland Australia. Customer deposits are up 40% over the same period. Turning to Slide 5, now to FY '23 highlights. As you can see, MyState has performed strongly across key metrics. We've delivered above system growth in mortgages and deposits. Home lending was up 14.1% or 2.9x system to $7.8 billion. Deposits grew 12.3% or 2x system to $6.2 billion. We welcomed a record 25,690 new-to-bank customers, an increase of 33% over the previous year. All of this growth was achieved whilst maintaining positive customer advocacy, as evidenced by our Net Promoter Score of plus 35. We've increased core earnings by more than 30% to $57.7 million, the highest on record. MyState Bank has a sharply lower cost-to-income ratio, down 641 basis points to 60.8%. Our earnings per share increased 16.8% to $0.355 per share. These results demonstrate the growth strategy is working. Turning to Slide 6. Over the past year, Australians have experienced high inflation, cost-of-living pressures and the fastest increase in interest rates in more than 30 years. Despite these challenging conditions, we continue to see strength in employment markets, housing market resilience and, most importantly, customer resilience. At MyState, I'm proud of the way our Tasmanian-based team has responded and provided support to those customers who are struggling. We have put in place programs to identify and support customers who need it. For example, we call every customer rolling off fixed-rate mortgages to ensure they understand the best available options as they transition to higher repayments. Turning to Slide 7. At MyState, we understand the importance of ESG, and we're making tangible changes to the way we operate our business in 6 key areas. We now measure our most material Scope 3 finance emissions, those greenhouse gas emissions associated with residential mortgage lending. We continue to encourage customers to adopt these statements with an additional 18,540 customers signed up for these statements. The MyState Foundation supports more than 20 community groups focused on providing greater opportunities for youth. I'll now hand over to Gary for a detailed look at the numbers.

Thanks, Brett, and good morning, everyone. Slide 9 contains a snapshot of the key financial metrics of the business. And as you can see, the results for the year are very positive. As Brett noted, core earnings of $57.7 million were up 30.3%; while net profit after tax increased 20.2%, the highest full year profit on record for the group. Top line revenue growth of 14.4% outstripped cost growth of 7.1%. The bank's cost-to-income ratio fell sharply by 641 basis points to 60.8% with our investment in marketing and distribution continuing to drive MyState's growth momentum and improving our operating leverage. The group cost-to-income ratio was 64%, an improvement of 440 basis points. In terms of MyState's balance sheet, total capital and return on equity moved positively during the year. MyState's capital position strengthened in the past due to the inaugural issue of additional Tier 1 capital in August '22. And at 8.7%, ROE is in line with our regional bank peers. The Board has declared a final dividend of $0.115 per share, in line with the interim dividend and equivalent to a payout ratio of 65.3% of after-tax earnings for the year. This decision is in line with our current dividend guidance range and strikes the right balance between pursuing growth while continuing to deliver shareholder returns via dividends. Slide 10 shows the key drivers of our highest full year net profit after tax result on record. Net interest income increased 20.3%, primarily due to a larger average balance sheet, partly offset by a small reduction in net interest margin. Other banking income declined 10.8%, reflecting lower loan fee income with higher switching fees seen in the prior year and lower transaction fee income as customers take advantage of low or no fee products. The small decline in wealth management income was driven by lower management fees from a decline in average fund. Operating costs increased 7.1%, which I'll cover in more detail in a moment. The prior year benefited from a write-back of the collective loan loss provision from COVID high levels and a gain on sale of a property held in Rockhampton. Slide 11 shows that total operating expenses increased 7.1%, driven by higher personnel, technology and other costs, with the latter primarily volume-related and due to some nonrecurring items. Personnel costs were higher due to salary increases, reflecting the higher inflation environment, and FTE was flat year-on-year. Marketing spend was in line with the prior year and has been directed to customer acquisition-focused activity, which has seen a 33% increase in new-to-bank customers, approximately 2/3 of which have come from the East Coast of the Mainland. The uplift in technology spend reflects higher software maintenance fees and Software-as-a-Service system amortization. The uplift in other expenses of $3.9 million was partly volume-driven and includes lending-related costs such as interest rate change notifications and payment system costs following the growth in customer deposits. Nonrecurring items of approximately $2 million includes the accelerated amortization of IT system spend. Cost pressures remain elevated and are expected to persist in the current inflationary environment, coupled with ongoing investment spend in the regulatory cyber data and compliance areas. Turning to Slide 13. Average NIM fell 4 basis points, reflecting the competitive pricing pressure in both the home loan and retail deposit markets. Exit NIM in June '23 was broadly in line with average NIM for the second half at 1.54%. While we expect NIM will remain under pressure, some relief may be in sight as cash-back offers are progressively withdrawn and deposit trends normalize. We will continue to carefully manage growth to optimize capital and returns. Turning to Slide 14. MyState recorded strong home loan book growth of 14.1% or just under 3x system growth. The home loan portfolio has now grown 43% since June '21 to $7.8 billion. Relative to FY '22, home loan settlements were down 13.8%, reflecting the slowdown in system credit growth and the competitive lending environment. Our relationships with key brokers remain strong, and our competitive home loan approval times reflect the investment we have made in underwriting capacity and capability. While runoff remains a sector-wide challenge, both discharge activity and paydown levels were lower with the overall runoff rate decreasing from 32% to 26.6% in the current year. Competitive pressure in the refinance market persists despite cash-back incentives for refinance is being progressively withdrawn by many competitors. Effective 1 April 2023, MyState is one of the first banks to withdraw its cash-back incentive. RBA system housing growth began to moderate in the later months of 2022, and MyState has experienced a resulting slowdown in home loan application flow. Looking forward, we expect housing credit growth to be around 4%, and we are targeting to grow the home loan book at approximately 2x system. Turning to Slide 15. Maintaining high credit quality remains a key focus and underpins our balance sheet strength. Our focus remains on low-risk owner-occupied lending. Loans with an LVR of less than 80% make up 75% of the total book. The growth in 85%-plus LVR loans over the past 3 years is primarily attributable to our participation in the Federal Government-backed First Home Loan Deposit Scheme. Scheme loans comprise approximately 16% of the book and account for 81% of loans with an LVR greater than 85%. The charts on the right show an increase in both 30-plus and 90-plus-day arrears, reflecting the rapid increase in interest rates seen since May '22 when the RBA first increased the official cash rate from historic lows of 10 basis points to 4.1% today. Home loan customers have shown remarkable resilience to date, partly a consequence of the strong employment markets across Australia. At June '23 -- 30 June '23, MyState arrears levels continue to be below industry benchmarks, and there are only 5 mortgage in possession loans for a total value of $1.1 million with no loss expected. On Slide 16, the chart on the top right highlights the increase in the total collective provision, consistent with the increase in the level of arrears and the rising interest rate environment. At June 30, 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, stable levels of employment and assumed house price falls in FY '24 and '25. The probability of a moderate recession scenario was increased from 30% at June '22 to 40% at December '22, and this assumption remains unchanged at 30 June '23. Key assumptions in the relevant scenario weightings are set out in the appendix of the pack. While arrears levels and resulting provisioning levels have increased, the full effect of increases in the official cash rate, any future increases and the impact of stickier inflation will continue to become more visible over the coming months. Provision coverage ratio shown in the chart bottom left, at 30 June '23, the ratio as a percentage of credit risk-weighted assets is 37 basis points. This compares to the ratio at 30 June 2019 or pre-COVID of 30 basis points. The ratios at June and December '21 reflect the estimated impact of COVID-19 at those points in time. Slide 17 shows that customer deposits continue to represent 73% of our funding mix with the flagship Bonus Saver account growing during the year and customers move into term deposits in response to rising interest rates. In line with our retail deposit-led growth strategy, MyState has grown at 2x system. And to support savers, we have increased the rates on our Bonus Saver account in line with changes in the official cash rate. The issue of senior unsecured medium-term notes in October '22 brought further tenor to the pool of wholesale funding. And in December, MyState issued its first public RMBS transaction since 2019. Turning to Slide 18. MyState's total capital ratio increased by 302 basis points, reflecting organic capital generation, the inaugural issue of additional Tier 1 capital in August '22 and the capital relief term RMBS transaction I mentioned earlier, partly offset by growth in risk-weighted assets and capitalized origination costs. Under APRA's revised capital management framework, the total capital ratio benefited by 112 basis points, driven by the application of new credit risk weights under the revised framework and the new methodology to calculate the allowance for operational risk. The countercyclical capital buffer increased by 1% at the same time. Moving to wealth management on Slide 20. TPT Wealth continues to deliver a stable source of income to the group. Operating income was down 3.5% on the prior year with lower funds management fee income, reflecting a fall in average fund. Trustee services income was also marginally lower year-on-year. Our focus remains on growing our cash and income funds with an increased allocation to direct mortgages, delivering improved returns to income fund investors. Significant opportunity remains for the locally based commercial lending team to drive a strong loan origination pipeline over the short to medium term in our Tasmanian heartland. I'll now hand you back to Brett to talk about our outlook.

Thanks, Gary. I'll now take you through our outlook. Turning to Slide 22. Given the less certain macro environment, we are providing a 12-month outlook. In FY '24, we are targeting to grow lending at 2x system and for customer deposits to remain above 70% of total funding. We will continue to invest in our business, whilst we'll maintain the improved cost-to-income ratio achieved in FY '23. Noting the strong growth in earnings per share and return on equity over the past 12 months, we expect FY '24 results to be in line with FY '23. Turning to Slide 23. To wrap it all up, MyState is at a strong FY '23. We posted a sharply higher core earnings, up more than 30%, and a record profit of $38.5 million. We've delivered strong above-system growth in customer deposits and home lending. Our market share has grown significantly with increases across Victoria, New South Wales, Queensland and Tasmania. We've welcomed a record number of new customers, up 33% over the year, and we've done this efficiently with our bank cost to income falling by 641 basis points. Looking back, you can see that the growth strategy is working. When we look ahead, we're optimistic that we'll continue to execute well and generate the benefits that come with scaling the business. Gary and I will now answer any questions you may have. Over to you, Travis.

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

I just got a few. Can you provide any further detail on the margin pressure on home loans? Like how much is sharp rates for new customers versus repricing the back book?

Nathan, it's Brett. So we see some -- so in terms of front-book pricing on new customers, we've seen cash back scale back and slightly less competition in the market in terms of other front-book pricing increasing. So in terms of back book, we do see customers with the cash-back offers in market, customers continue to shop around. So I guess, to answer your question, less front-book risk. There continues to be a little back book, but our front-book/back-book spread are relatively tight. So for our portfolio, we don't see too much impact -- marginal, but a little bit, but not too much impact going forward.

Okay. And so you kind of answered another question I had in terms of the competition around pricing going forward. Are you expecting it to get worse or better? And I was kind of hoping for some commentary around loans. I think you covered deposits. Like is that where more of the pressures still might come from?

Yes. So on the lending side, probably pressure easing a little bit. You've heard quotes from other organizations about returns from mortgage lending. So we've seen competition easing a little bit. On deposits, the interesting thing we're thinking about is the TFF. Our component of TFF started $185 million. By the end of this month, it will be sub-$100 million or about close to 1% of our funding. Across the market, it's much higher than that. So obviously, the deposit competition is somewhat reflective of that. A big piece of that ends in the end of September, I think, a lot of paydown and before the next tranche starts. So our view is deposit competition will remain relatively hot for a very short period of time, then we'll see a bit of relief post the paydown of the TFF. I guess the other phenomenon that's happening is customer choice where customers who have traditionally sat in low interest-bearing transaction accounts are taking choices about getting a better return for themselves, which -- so they should. And so we see that playing out a little bit. We also see ourselves being a beneficiary of that, and you can see that through our growth in new-to-bank customers. So we see that sort of challenger approach supporting our growth in customers and growth in balances as well.

And I might just add a point, Nathan. So I think following the RBA leaving the cash rate on hold in both July and August, we have 3 of the 4 major bank economists suggesting that we're already at the peak cash rate. We have seen a back-off in swap rates, and we have seen competitors starting to move their term deposit pricing down. So for example, 1-year TD rates coming down from sort of the early 5s into the sort of high 4.90s. So we are seeing a little bit of that, and we've moved accordingly as well.

Okay. It's very helpful. Moving into the fixed rate customers, I believe you still have the bulk of yours to mature still. But is there any comment you can make to how the ones that have matured are performing as the rest of your book? And perhaps another one around that, like what percentage have an LVR above 80%?

Yes. So our fixed rate book is around 20%, and a lot of it is to mature, but those in the next sort of 12 months. For those that have, performance had been pretty good. So in terms of retention, we've retained, and it's in the deck, around 73%. About of those retained 1 quarter ago back on a fixed rate, 3/4 is going to variable rate. In terms of performance, they're broadly performing in line with the portfolio. So it's about the same as the portfolio in terms of arrears performance or customers struggling. Then in terms of LVRs, was that your next question, sorry, Nathan?

Yes, if you've got that sort of data in terms of how they are spread, the fixed rate book?

Yes, we don't have it at hand, but we can -- yes, we don't have it at hand.

All right. The only other thing, Bendigo called out fraud, game costs and uplifting financial crimes theme. Is that something MyState has experienced or something you need to be considering?

Look, I mean I think, Nathan, from our perspective, what we've seen in FY '23 is, I mean, our fraud cost has not been significant, that's for sure. One of the things that we track is, obviously, some of our customers have experienced loss. So what we focus on is a very strong program around education of customers. So that's an active program that we run, like all banks.

Sort of education, invest into prevention, invest into detection. I mean what we have, as Gary pointed out, there has been a small -- relatively small loss for our business related to customers impacted by scams. And customers have been also impacted a bit like across the industry. But in terms of our situation, it's negligible.

[Operator Instructions] The next question comes from Alastair Hunter from Ord Minnett.

Just a couple of questions, if I may. Firstly, just on the capital ratio, the 11.2%, as to what sort of level under the new guidance you want to sort of target that in over the next few years?

Yes. Alastair, so I mean we tend to -- the way we think about it is we'll run our CET1 ratio at a buffer to the rating agency capital requirements. So from a Fitch perspective, that ratio is generally around 10%. And from a Moody's perspective, probably more like sort of 10.5% to 10.75%. And then -- so you'll there, as you highlighted, the CET1 ratio was 11.22% at June 30. In terms of a target range, we also focus on our total capital levels. So the Board -- and we disclosed this in our financial statements, the Board has currently set a minimum total capital ratio target of 14%. And we -- and as you'll see on one of the slides there, we're currently at about 15.4%.

And in terms of funding the excess growth above what you're sort of internally generating, which I think, back-solving it, is sort of around the 5%, 6%, you can sort of fund organically and then the rest is net incremental funding. What's the sort of outlook, again, mix between, I suppose, securitization, markets and other capital funding opportunities?

Yes. So in terms of funding the growth, it's predominantly about retail deposit-led. But as you point out, if you go to the chart on Page 17, the funding mix, you can see that we have over the last 3 years significantly run down our securitization as a percentage of total funding. So we do have appetite to move that securitization ratio back to around sort of 20%, 21%. And obviously, that securitization that we do is capital relief.

Yes. And then just on the noninterest income side, if you can make sort of comments about our outlook for both the TPT Wealth business, seemed to, in the second half, go into loss; and the banking fees, as to how you see the customer dynamics and volume effect flowing through into the '24 year.

Yes. I mean from a TPT perspective, both on the fund management side and also on the trustee services side, we'd certainly be looking at like mid-single-digit revenue growth. And then what was the second part of your question?

Banking fee.

Banking fee income, yes, I mean I think as I sort of highlighted in the presentation, we obviously have seen some, and this is a sector-wide thing, again, some customer behavior around switching to lower fee or no fee products. So we'd expect that revenue line to sort of broadly be in line with last year, potentially growing in line with customer numbers.

And then finally, just I suppose on the earnings outlook that you've flagged today for sort of a flat year, is it a reasonable assumption that it somewhat reverses the pattern in half years that we've seen this year of sort of perhaps a flattish first half and then growth in the second half is what we'd expect for '24 within a flat year-on-year? And secondly, I suppose just in a longer-term profitability sense, I note your disclosures today have a WACC in there of just under 11%, 10.9% with your ROE being for the full year around 8.7%. How do you see the pathway to delivering cost of capital returns across the aggregate MYS business, yes, 3-years horizon?

Yes. I mean I think for ourselves, there, it's really about that operating leverage that we've started to realize and you can see with the cost-to-income ratio coming down. So you're quite right when you look at it, I mean, we're effectively a mono-line home loan provider. So when you think about that return on equity, one of the challenges the industry faces is that it is currently below the -- slightly below the cost of capital. So for us, it's really about driving that operating leverage, which we see a significant opportunity to do over the medium to longer term.

And then in terms of half-on-half, I mean the competitive pressures that we're currently facing and the industry is facing, we see them, as we discussed, playing out in a certain way. So your assumption would be broadly correct around we expect the near term to be a touch more challenging and then the second half to be a bit more positive.

[Operator Instructions] The next question comes from [ Louise Gregg ], Private Investor.

Just my questions are related to the dividend. Can you rather say what is the Board's dividend payout policy range? And can you also explain why the dividend has been cut in light of the results which you have described as strong, sharply higher and record?

So with the -- so thanks, Louise, for the question. The dividend policy is 60% to 80% payout ratio. So the Board policy is [ 6% to 8% ]. We have embarked on a growth strategy, and we're also very cognizant of the stock that we are. So we strike the balance between paying out what we see as a good dividend and also retaining capital to support our growth and delivering longer-term returns to shareholders as well. So that's the rationale for the decision around the dividend. We just paid out at about 65% of earnings.

Right. I think from our viewpoint, an extra $1 million in the dividend to keep it the same as last year would have been perceived better than that and wouldn't really move your payout ratio too far from where it currently is.

I appreciate the feedback. Thank you.

At this time, we're showing no further questions. I'll hand the conference back to Brett for closing remarks.

Thanks, Travis, and thanks, everyone, for joining us on the call today, and we look forward to catching up with some of you in the months ahead.