MyState Limited (MYS) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the MyState Limited Half Year '26 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Brett Morgan, Chief Executive Officer. Please go ahead.

Yes. Thanks, Darcy, and good morning, everyone, and thanks for joining us for our Interim 2026 Results Briefing. I'm Brett Morgan, MyState's Managing Director and CEO; and with me is Gary Dickson, our CFO. Earlier today, we lodged our 1 half '26 financial results with the ASX, and these are also available on our website. With respect to today's agenda, I will begin with an overview of the interim results and an update on the progress against our priorities before Gary takes you through the financials in more detail. I will then end the presentation with a summary of our ongoing priorities, after which we will welcome questions. Before I kick off, I would like to say that I'm proud of the progress we've made since completing the transformational merger between MyState and Auswide a year ago. Moving to Slide 4. In the first half, we delivered double-digit profit growth, both on a reported and pro forma basis. On a reported basis, underlying NPAT was up 18.4%. On a pro forma basis, which incorporates Auswide's earnings for the full period, underlying NPAT was up 23% on 1 half ' 25 and up 13% on 2 half '25. These details have been provided in our ASX announcement. Home loan book growth over the period reflects MyState Bank growing broadly its system and the deliberate decision to use the Auswide balance sheet to grow the higher-margin equipment finance business. This decision to prioritize equipment finance was at the expense of the Auswide home loan portfolio, which contracted 4% over the half. Decisions paid off with our equipment finance business growing 64%. Pleasingly, we saw a significant acceleration in home loan application volumes in the second quarter, and the Auswide home loan book has now returned to growth. We also saw an increased contribution from our high-returning wealth business. We made good progress with the integration of our 2 retail banks over the half, with annualized run rate synergies of $10.4 million, slightly above previous guidance and the successful transition to a single banking license in December. We are well capitalized, which gives us flexibility to invest and grow into the future. The Board has declared an interim dividend of $0.12 per share fully franked, up from $0.105 a share in 1 half '25. Gary will talk more about the dividend later. Slide 5 provides an overview of some of our key metrics. Underlying earnings per share rose 11.1% over the half to $0.166 per share. And our net promoter score, a measure of customer advocacy, increased by 11 points to plus 65, up from plus 54 at the full year. Turning to Slide 6. As previously mentioned, we've made good progress on integrating our retail banks, with 98 out of the 215 integration initiatives complete. Following 12 months of integration and change, earlier this month, we surveyed all of our staff to understand their perspective on risk culture and risk management and also the level of employee engagement. Both results are very positive and reflect the significant progress we have made in aligning our culture and operating model. In December, the group transitioned to a single banking license, delivering immediate capital, revenue and efficiency benefits. As an example, we were quickly able to optimize the level of liquidity we hold. After extensive market research and consideration, earlier today, I shared with our staff the decision to adopt MyState as a single future bank brand for our retail bank. We are currently planning for this transition, and look forward to the opportunity to build and leverage a single brand into the future. We also progressed other key initiatives over the half, including the build of our new loan origination system, vendor assessment for a single core banking system and ongoing supply chain consolidation. The integration budget remains unchanged at $29 million. Turning to Slide 7. During the half, we focused on driving value across each of our business lines. Our home lending growth profile improved every month through the half, with December delivering the highest month of growth over the half. Pleasingly, second quarter applications were 35% above Q1 applications. To strengthen our deposit business, in December, we launched Hello Saver, a hassle-free online savings proposition to attract customers beyond our Heartland markets. This complements our existing branch and partnership gathering -- deposit gathering capabilities. Selfco, our higher-margin equipment finance business, continues to go from strength to strength. In the first half, the loan book grew 64%, and the business contributed 6% of the group's underlying NPAT. Our TPT Wealth business continued to build on recent positive momentum. Trustee Services funds under management grew 11% to $531 million, reflecting the investment into our new compensation trust business line. We've also continued to drive efficiency through a range of process enhancements, which supported TPT's 27% profit increase over the period. Pleasingly, our higher-returning equipment finance business and wealth businesses delivered 11% of the group's underlying NPAT over the half. I will now hand over to Gary, who will take us through the financial results in more detail.

Thanks, Brett, and good morning, everyone. Slide 9 contains a summary of this half's financial performance relative to both the first and second halves of FY '25, with the second half, including the addition of Auswide for approximately 4.5 months. The financial analysis included in subsequent slides focuses on 1 half '26 relative to 2 half '25 being the more representative period for comparison purposes. Our key financial metrics, including operating income, core earnings and underlying NPAT were all well above last period's result. And as Brett mentioned, underlying NPAT was up 23% and 13% on the last 2 halves on a pro forma basis. Total operating expenses were also up, primarily reflecting the addition of Auswide. Costs continue to be well managed, with operating expenses broadly in line with 1 half '25 and 2 half '25 on a pro forma basis, with merger-related synergies largely offsetting underlying inflation-based cost growth. The bank's cost-to-income ratio improved by 60 basis points over the half, while the group cost-to-income ratio improved by 40 basis points. Underlying return on tangible equity improved 20 basis points to 9.4% in the half. Turning to Slide 10. Underlying NPAT of $28.2 million was up 18.4% on the prior period, driven by higher net interest and other banking income, partly offset by increased operating expenditure due to the larger merged group cost base. Underlying NPAT excludes merger-related integration costs and fair value adjustments totaling $0.9 million, which are all included in the statutory NPAT result of $27.3 million. Net interest income increased 12% due to a larger average balance sheet, while other banking income rose 32%. Wealth management income rose 12% due to higher trustee services income and loan establishment fees associated with the commercial lending portfolio. Selfco, our equipment finance business, continues to scale and has moved from being broadly breakeven at the time of acquisition to contributing $1.8 million of underlying NPAT for the half. Slide 11 provides a more granular breakdown of drivers of the change in net interest margin for the half. NIM was down on the most recent half, but higher on the prior corresponding period. During the half, key themes for NIM were home loan and deposit price competition, customer switching behavior, the impact of reductions in the cash rate, higher capital relief securitization and running 2 bank balance sheets. These impacts were partly offset by a positive contribution from the higher-margin Selfco business. Exit NIM in December 2025 was slightly higher than average NIM in the half, partly due to the benefits of moving to a single banking license on 1 December, which provided, for example, the opportunity to optimize our MLH or liquid asset portfolio. Looking forward, the recent increase in the cash rate, operating a single balance sheet and a growing Selfco loan book, all support NIM. Slide 12 provides a breakdown of operating costs in the half. The increase in expenses, including people and technology costs, primarily reflects the inclusion of Auswide in the group for the full period. On a pro forma basis, operating expenses in the half were broadly in line with 1H '25 and 2H '25, with $5 million of realized merger-related synergies largely offsetting underlying inflation-based cost growth. Underlying expense growth remains a focus and continues to be well managed. Slide 13 provides a summary of the anticipated ranges and timing of synergies, and the cost of integration on an annual basis through to FY '28. For the outer years, these represent our current best estimates and the actual timing may differ. Both integration and the realization of synergies is proceeding as expected. As we've previously disclosed, the merger is expected to yield annual pre-tax cost synergies of $20 million to $25 million in FY '28. We've provided a range with respect to integration costs, noting that our best estimate remains $29 million. The current annualized synergies achieved till 31 December of $10.4 million are expected to offset underlying cost growth in FY '26. Turning to Slide 14. Our home loan portfolio increased by 0.4% to $12.9 billion at 31 December. As Brett noted earlier, momentum continues to build in the home lending space, with a significant uplift in applications in the second quarter. The group continued to focus on low-risk owner-occupied lending as reflected in our loans with an LVR of less than 80%, making up approximately 79% of the total book. High LVR lending is generally provided to borrowers eligible to participate in the Australian government's 5% deposit scheme. The chart at the top right of this slide highlights the credit quality across the group continues to improve, with 90-day arrears at 28 basis points, well below the sector's average and down from 44 basis points at 30 June. Home loan customers continue to demonstrate resilience, with both employment and housing markets remaining stable across Australia. Moving to Slide 15. The chart on the bottom right highlights the customer deposit ratio remained broadly stable at 70%. During the half, we saw a move from term deposits to at-call savings products. As Brett mentioned earlier, in December, we launched a new savings product, Hello Saver, to support deposit growth by providing customers with a competitive digitally offered savings account. This product will also provide additional flexibility to run-off more price-sensitive deposits. Securitization remains an important source of funding and with the backdrop of very positive wholesale funding market conditions in October 2025, MyState issued its largest ever capital relief term securitization at the lowest cost to date for the Conquest program. Slide 16 shows the group remains well capitalized, with dividends supported by the organic generation of capital. Pleasingly, the move to a single banking license on 1 December improves our ability to manage capital more efficiently. As at 31 December, the total capital ratio was managed down to 16.9%, following scheduled eligible Tier 2 subordinated debt redemptions in July and September, totaling $37 million. MyState's strong capital position provides us with the flexibility to continue to invest in key initiatives and grow our home loan and equipment finance books. Turning to Slide 17. TPT Wealth has continued its recent strong momentum. In the first half, revenue was up -- was $8.3 million, up 12% on the prior period, driven by growth in commercial lending activity and trustee services income. Trustee Services funds under management grew 11% to $531 million due to growth in compensation trusts and managed funds FUM increased 2%. Slide 18 provides a snapshot of our equipment finance business, Selfco. Selfco's target market is Australian small businesses seeking to purchase business-critical assets used to generate income. The majority of the book by asset type comprises trucks and trailers. Selfco originates loans nationally via the broker channel, supported by BDMs on the ground in key states. As noted earlier, we've prioritized investment in Selfco to take advantage of its strength as a fast-growing, higher-margin business. The loan book has grown 135% since the merger, and its revenue and cost profile continue to improve as the book grows. Overall, credit quality remains sound, with credit loss provisioning in line with historical loss rates. The business contributed 6% of the group's underlying NPAT in the first half. Finally, moving to Slide 19. The Board has declared an interim dividend of $0.12 per share fully franked, representing a payout ratio of 72.2% of underlying net profit after tax. The interim dividend is up $0.01 and $0.015 per share, respectively, on the prior 2 periods. The Board considered a range of factors when declaring this half dividend, including MyState's capital position and growth outlook as well as underlying growth in earnings per share. The dividend reinvestment plan will be offered to shareholders at a discount of 1.5%. I'll now hand you back to Brett to summarize our key priorities as we look ahead.

Thanks, Gary. Over the next 6 months, we will continue to execute on our integration priorities to deliver synergies and ultimately, shareholder value. We will accelerate growth in our retail bank, scale our equipment finance business and target growth in our funds and private trustee business. We will also seek and consider inorganic opportunities that deliver value for our business and shareholders. Moving to Slide 22. MyState Group's investment case is clear. As this interim result demonstrates, we have made good early progress to extract cost synergies and the business and key financial metrics are trending in the right direction. We are well capitalized, have a track record of profitability, an attractive dividend yield and are targeting double-digit EPS growth based on full run-rate merger synergies. We have an experienced management team that has a proven ability to execute, and we look forward to profitably growing our retail banking, wealth and equipment finance businesses into the future. Gary and I will now answer any questions you may have. Over to you, Darcy, to moderate.

[Operator Instructions] Your first question today comes from Nathan Lead from Morgans Financial.

Just a couple of questions from me. So first up, you mentioned that the exit NIM was stronger than the average for the half. Can you just make a comment on what sort of improvement came through there?

Yes. Nathan, yes. So, exit NIM was a couple of basis points higher than the average of 1.46% for the half. So the sort of benefit to the month comprised the run-off of some excess liquidity that we had off the back of our term securitization deal that we did back in October. So, that just takes a little bit of time to sort of run down. And we do, through the move to a single ADI bank balance sheet, it gave us the first real opportunity to optimize our MLH portfolio. So that -- they were sort of 2 of the key sort of contributors.

Okay. Great. And then secondly, looking at the mortgage book, it was obviously a bit flat during the period, but you said how it had returned to growth. What sort of levels of growth are you targeting going forward, noting that there's some pretty strong system growth in mortgages out there at the moment?

Yes. Nathan, it's Brett. Good to talk to you. As I shared, each month, we had accelerated growth. And early, we decided to sort of prioritize Selfco growth. And to be honest, it had a bit more of an impact than we were expecting. So, slightly disappointing from that perspective. But kind of over the last few months, we've been growing closer to market and our expectation is we'll grow at or above market for the next period.

Okay. Cool. And then when I look at Slide 14, where it's got the chart there showing your sort of the risk profile of the mortgage book, I mean, it's way below where sort of competitors' averages are. I mean, does that give you an opportunity, I suppose, to take on more risk within the mortgage book and therefore, greater return? Or is it something that you're doing partly, I suppose, to invest capital into the higher-risk equipment finance -- high risk, higher return equipment finance book?

Yes. The short answer is both. So, we have historically been a very, very conservative lending organization as evidenced by the incredibly relatively low 90-days arrears rate. So, I mean, one of the benefits -- and with that comes sort of lower margins as we appreciate. So, one of the opportunities for us is absolutely consider within our home loan book where we've got a relatively low investment investor loan profile, and we have a very high sort of sub-80% lower LVR investment profile. So, we do have a lot of capacity within our appetite to grow that, and that is an active action. The second part is we are allocating some capital to -- continue to allocate a bit of capital to Selfco equipment finance business. The returns on that business are strong, and we're happy and proud to continue to grow that business and allocate capital to support NIM into the future.

Your next question comes from Alastair Hunter from Ord Minnett.

Just interested a little bit on the decision today you've announced of the one brand, MyState. Can you sort of talk through what that will consecutively now mean for some of your product decisions and technology platform, both at the core banking and origination?

Yes. Absolutely. So today was announcing the decision -- Alastair, it's good to talk to you. Today was announcing the decision. And I guess the thinking behind -- I guess, the thinking behind it was we did extensive research in our home markets of Tasmania and Queensland and more broadly. And MyState is relatively very strong brand in Tasmania. And across the rest of the country, we have an opportunity with our brand to position it in a way to support growth. So, we took the decision to go with one brand given the cost profile of trying to operate 2 brands or a new brand and the relative strength of MyState with the size of the customer base. So it made a lot of sense. We will now go into work on things like how we're going to position the brand to attract lots more customers into the future and the rollout of the brand or the name, I'll call it, because the brand doesn't effectively change too much. We're very customer-centric, service-centric group of people who really care for customers as evidenced by our net promoter score. So the actual final positioning we're working through now, and we'll roll that out in the pursuing period. So the impact on core banking systems, it's not tied. So, we continue to -- and getting closer to finalizing our assessment and decision on core banking providers and other matters don't necessarily change. This is simply how we want to position our brand name into the future. So it's just -- and today is only a decision and sharing that decision. It's not actually about rolling it out at this stage. So customers -- there's no impact to customers at all at this time.

And then just on the synergy table that you put out, the update in terms of your sort of scheduling of expected timing. So the push out of implementation costs from this year to next year, but increasing this year's gains in terms of expected run rate by sort of $1 million, $2 million, respectively. Can you just talk through what actually has driven that in the actual project scenario?

Yes. So in terms of -- I guess, there's 2 sides. One is extracting the synergies and one is investing or spending money to extract the synergies. So in terms of the actual synergies, we have executed in line with plan and actually found a few additional savings that we didn't imagine, and we're learning that our purchasing power is stronger and it helps with vendor costs and things like that. So, we've actually had some, I'll call them, some small wins, relatively small wins to extract a bit more value across that. And as a profile, it's broadly 1/3 is vendor related, 1/3 related to the Board and exec consolidation right upfront and 1/3 is related to reduced duplication and that's across systems, some people, those sorts of things. So, we expect that sort of the profile to continue -- sorry, except the Board exec. And that profile will continue into the future. In terms of the spend, we have actually been able to execute a bit more in-house than requiring third-party consultants. But in terms of the progress, we're in line with where we expect it to be. So, we still provide that range of expected costs, and we still expect the maximum cost to be $29 million over the horizon.

And I think the only thing I'd add, Alastair, is we've -- I think we've previously sort of communicated that the first half of this financial year has always -- was always going to be a sort of phase of deep analysis as we work through the key decisions around the core banking system, brand, et cetera. So yes, sort of confident with where that forecast is for FY '26. And as I sort of indicated in my earlier comments, FY '27 and FY '28, there's always scope for the sort of timing profile to change a little bit.

And if I can ask, it's probably for you, Gary, on the Selfco business, excellent result, particularly given the initial sort of breakeven position on acquisition. The Slide 18 data, the bottom right, Gary, the monthly Selfco revenue. So the 31st December numbers, is that the month of December? Or is that the average for December to December?

So, that's the month of December. So then, obviously, what you'll also -- what we also need to think about there is -- so that's effectively a pre-provision operating profit number, obviously. So as I mentioned, we're providing -- so building the collective provision as the book grows in line with historical loss rates. So, you need to allow for bad and doubtful debts and then, of course, tax. And yes -- but you can see from that profile that it's a particularly strong uplift month-on-month.

So given that -- I mean, the run-rate ROE on that is substantially above what you can extract from home loan at the moment. What are you sort of thinking about in terms of your capital allocation going forward in terms of putting money into growth of Selfco versus trying to recommence growth back in the home loan book?

Yes. I mean, I think one of the things we see from a group perspective is one way of getting margin -- sorry, the margin ROE, EPS accretion is through growth in the capital-light, higher returning business of TPT Wealth. And also, as you highlight, the higher returning Selfco book, they're both currently sort of low double-digit ROE. And as the Selfco book scales, yes, it's certainly one avenue to get accretion into our return on equity from a group perspective.

And our thinking is we will continue to grow the Selfco business as a proportion much more quickly -- as a percentage more quickly than the home loan growth, which would be accretive. We're conscious of the diversification that it brings, which is a positive without being too overexposed to it over time.

And finally, before I freed up to others, just on the deposit side, your 2 sort of big initiatives. You mentioned your Hello launch product side on the at-call and then you've also got within the Auswide franchise, the Elders alliance. So, can you just talk perhaps in terms of what you're seeing post period end and sort of growth across those because it does look like you're struggling relative to system to grow your at-call deposits from those 2? What's your ambitions to get growth back in your deposit at-call book?

Yes. So yes, the headline deposit growth rate does show some subdued growth. There's a couple of factors for that. We did our significant securitization, a couple of securitization in the half, which reduced our need for deposits. If we break out deposits down our sort of direct called prime deposits, our preferred deposits grew quicker than 0.4%, so grew around 2% over the half. And that's sort of our branch deposits and digital deposits and Elders. So it did grow faster than that number. We ran down the sort of higher cost third-party deposits. In terms of Elders and Hello Saver, Hello Saver was a soft launch in December and is getting some nice momentum. We're starting to promote it now. So it's seeing some benefits from that. With Elders, the prime time of the year is starting into the half -- into the full year. So, we expect to see a significant acceleration in the growth of Elders. So they complement our sort of branch distribution network and our capability to raise deposits online and more generally. So, yes, my expectation is we'll see an acceleration in those.

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

I just had a bit of a follow-up on the deposit one to start. Can you -- in terms of the cost of deposits, so this mix change that you're getting from term to at-call, that's not supportive of NIM in any way? Like are they pretty much just matching customer demand at this point?

Yes, it's matching customer demand. We call it broadly neutral depending on where we are in the rate cycle, but it's just basically a customer behavior. We're generally seeing that people are switching and TD pricing sort of moves around a bit. But yes, I'd call it broadly neutral, Nathan.

Okay. And just with Selfco, can you just remind us the strong growth you are getting, is that -- do you put it down to just it being relationship-based? Like it's not driven by sharp rates at all, is it?

No, no. So, it's a business that's been around for a long time, and they had some structural challenges as warehouse funded, but they built over time. The systems process had the people and the energy to go and the relationships -- it's broker distributed and the relationship. So, what we've done is freed them up from the constraints they had, which was funding and capital effectively. And so we've allocated capital to support the business grow. They haven't changed the risk profile dynamics. If anything, we ensure the oversight on risk management is tighter than it has ever been within the business, but they're naturally very conscious of the risk profile given their long tenure in that types of businesses. So, no, effectively just providing them the access to funding capital to allow them to accelerate on the platform that was already in place.

Okay. So, you would have no concerns that you can't keep growing quickly without underpricing for risk like you -- that's...

No, I wouldn't.

That's no constraint at all?

No, I wouldn't do it, Nathan. I'm just very conscious of the credit risk and other risks that surround that type of business. So Rob, the GM and other people within the business have been in this industry for 20-plus years. And so they understand inside out and they understand the risk return profiles of the business. So no, confident that we will not take any risk -- any adjustments to the risk profile.

Okay. And just very quickly, you pointed out investment in broker distribution. Can you just elaborate what that means? Is that adding people or process or...

Yes. There's a couple of things. We've consolidated the broker team. So, one of the early sort of consolidations in our retail banking part of the business, we consolidate the product team, the broker distribution team. And we also took the decision to bring in some -- a few people in leadership roles to lead the team going forward. And we have -- that did also bring some higher expectations and some capability that we're very happy with. So, that investment was at a leadership level, and that's flowing through to our performance in market now. Separately -- sorry, Nathan, separately to that, we're continuing to invest in our loan origination system, which will provide us with that sort of operating scale capability when we launch that.

There are no further questions at this time. I'll now hand back to Mr. Morgan for any closing remarks.

Yes. Thanks, Darcy, and thanks, everyone, for joining today. And Gary and I look forward to catching up with some of you over the months ahead. Thanks a lot.

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