MyState Limited (MYS) Earnings Call Transcript & Summary

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

Thanks, Jamie, and good morning, everyone, and thanks for joining us for our full year 2026 results briefing. I'm Brett Morgan, MyState's Managing Director and CEO; and with me is Gary Dickson, our CFO. Today, we launched our FY '26 financial results with the ASX, and these are also available on our website. I will begin with an overview of the annual results and the key execution highlights before Gary takes you through the financials in more detail. I will then return to summarize our priorities before we open the call for questions. Moving to Slide 4. FY '26 was an important year for MyState. It was our first full year operating as a merged group, and I'm pleased to report that the merger thesis is translating into results. We delivered strong earnings growth, improved operating leverage, meaningful synergy realization and a more diversified earnings profile while maintaining a strong capital position and increasing dividends. Underlying NPAT increased 41% to $58.3 million. Underlying earnings per share increased approximately 12%, and we delivered $11.8 million of run rate synergies and remain on track to achieve our FY '28 synergy target. Our higher-return businesses, Selfco and TPT Wealth, are making an increasingly important contribution to group earnings and demonstrate the benefit of a more diversified portfolio. We've made excellent progress with the integration of our two retail banks this year, and importantly, execution risk continues to reduce. During the year, we transitioned to a single banking license, made all major strategic integration decisions, and have clear line of sight to the next phase of value creation through further integration milestones. MyState remains well capitalized, giving us flexibility to invest and grow into the future. With this context in mind, the Board declared a fully franked final dividend of $0.125 per share. This has resulted in a full year dividend of $0.245 per share, $0.03 per share higher than FY '25. Slide 5 provides a snapshot of some of our key metrics. Pleasingly, retail banking momentum increased in the second half, and our total loan book and customer deposits increased by 7% and 4%, respectively, for the full year, a good result in what is a highly competitive market. The investment in our high-return businesses has delivered an improved earnings mix with Selfco and TPT contributing over 11% of the group's underlying NPAT. Turning to Slide 6. These results reflect the team's strong execution capability. We delivered growth across our key business lines, continue to diversify and improve our earnings mix and further strengthen the strategic position of the group. Following the move to a single banking license, momentum significantly improved with our home loan portfolio increasing by nearly 6% to $13.6 billion. Our deposit book grew by 4% on the prior year to $10.6 billion. Customer deposits made up 70% of our total funding. Selfco, our higher-margin equipment finance business, continued to grow strongly with the loan book up 134%. The business contributed $3.9 million of the group's underlying NPAT. Our TPT Wealth business also continued to build on recent positive momentum. Trustee services funds under administration increased nearly 18% to $560 million, reflecting the success of our investment in the new trust business line. Overall, TPT's operating income increased nearly 11% to $16.4 million, driven by improved Trustee Services business performance. Turning to Slide 7. And as previously mentioned, integration continues to progress well. Since the merger, the team have completed 158 integration initiatives, which has delivered $11.8 million in run rate synergies. A major milestone was achieved in December '25 when the group transitioned to a single banking license, delivering immediate capital, revenue and efficiency benefits. All key integration decisions have now been made. Remaining integration initiatives are tracking to plan, including a single loan origination system, a single core banking platform, a single retail banking brand and operating model optimization. We remain on track to deliver our target run rate synergies of $20 million to $25 million by the end of FY '28. 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 year's financial performance. For comparison purposes, FY '25 includes a contribution from Auswide and Selfco for approximately 4.5 months following the merger in February 2025. Our key financial metrics, including operating income, core earnings and underlying NPAT, were all well above last year's result, driven by the addition of Auswide and Selfco for a full year, growth in the home loan and equipment finance portfolios, an uplift in net interest margin of 3 basis points and realized synergies of $10.7 million. On a pro forma basis, underlying NPAT was up 22% on the prior year. The increase in total operating expenses reflects the addition of Auswide and Selfco for a full year. Costs continue to be well managed with operating expenses up only 0.8% on FY '25 on a pro forma basis with merger-related synergies largely offsetting inflation-based cost growth, our investment in higher returning businesses and broader capability across the group. The group's cost-to-income ratio improved by 156 basis points. Underlying return on equity improved 80 basis points to 9.7%. Turning to Slide 10. Underlying NPAT of $58.3 million was up 41% 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 $2.1 million, which are all included in the statutory NPAT result of $56.2 million. Net interest income increased 37% due to a larger average balance sheet, while other banking income rose 58% on higher lending, transaction and commission fees and a gain on sale of investments recognized in the first half. Wealth management income rose 11% 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 contributed almost 7% of the group's underlying NPAT for the year. Slide 11 provides a more granular breakdown of drivers of the change in net interest margin. NIM improved by 3 basis points over the year to 1.5% and improved 8 basis points in the second half relative to the first half. The uplift in the second half reflects the growing contribution from Selfco, a supportive cash rate profile and the liquidity and funding benefits following the move to a single banking license in December '25. We expect retail banking competition to remain robust. For MyState, future retail margin pressure will be partly mitigated by an increasing contribution from Selfco. Noting also that exit NIM in the month of June of 1.58% was higher than average NIM for the second half, primarily reflecting the benefit of increases to the cash rate in February, March and May '26. Slide 12 provides a breakdown of operating costs for the year. The increase in expenses, including people and technology costs, primarily reflects the inclusion of Auswide and Selfco in the group for the full period. On a pro forma basis, underlying expense growth over the past four halves has been relatively flat. Growth year-on-year was 0.8% with $10.7 million of realized merger-related synergies, largely offsetting underlying inflation-based cost growth and the investment in our higher returning businesses and capability across the group. Slide 13 provides a summary of the anticipated ranges and timing of synergies and the expected 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. The integration program and the resulting realization of synergies are proceeding as expected. As we've previously disclosed, the merger is expected to yield annual pretax cost synergies of $20 million to $25 million on a full run rate basis by the end of FY '28. The total cost of integration for the period through to June '28 is now expected to be $32 million. The change from our previously disclosed estimate reflects the decision to implement a modern AI-enabled core banking platform in partnership with MyState's long-term technology provider, TCS, and a small adjustment for higher inflation across staff and vendor costs. We believe this investment will strengthen the group's long-term competitive position, enhance our operating capabilities and position us to deliver further productivity and growth over time. Given the move to a new core banking platform, a portion of the investment will now be capitalized, reducing the impact of integration costs over the 3 years of the program. The resulting capitalized spend will be depreciated over an assumed useful life of 10 years from the go-live date. Turning to Slide 14. Our home loan portfolio increased by 5.8% to $13.6 billion at 30 June. The group continued to focus on low-risk owner-occupied lending. Loans with an LVR of less than 80% make up 77% of the total book. High LVR lending is generally provided to borrowers eligible to participate in the Australian government's 5% deposit scheme or is covered by lenders mortgage insurance. Applications and settlements were both stronger in the second half with home loan book growth of approximately 11% on an annualized basis. Following the federal government budget announcements in May, application volumes in June and July were down approximately 7% on the average for the year. The chart at the bottom left of this slide highlights the credit quality across the group remains resilient with 90-day arrears at 32 basis points, down 12 basis points from June '25 and well below the sector's average. Moving to Slide 15. The chart on the bottom right highlights the customer deposit ratio remained stable at 70% as we continue to gather deposits across our digital branch and partnership channels. In December, we launched a new savings product, Hello Saver, to support deposit growth by providing customers with a competitive digitally offered savings account. Pleasingly, in the second half, this product gathered significant momentum and provided additional flexibility to run off more price-sensitive, higher cost deposits. In April '26, MyState issued its largest ever senior unsecured floating rate note for $250 million, which contributed to a lengthening of the tenor of our wholesale funding. Securitization remains both an important source of funding and capital management tool, and MyState will continue to be a programmatic issuer in this market. Turning to Slide 16. The group remains well capitalized with strong organic capital generation. Pleasingly, the move to a single banking license in December improved our ability to optimize the deployment of capital and supported accelerated loan book growth. The total capital ratio was managed down to 15.8% following Tier 2 capital redemptions of $52 million during the year. MyState's strong capital position provides the flexibility to continue to invest in key initiatives and grow our home loan and equipment finance books. Turning to Slide 17. TPT Wealth's operating income increased 11% to $16.4 million, driven by strong growth in trustee services revenue. Trustee Services funds under administration grew by 18% to $560 million due to growth in our newer compensation trust business line. Managed funds FUM and revenue was steady. And pleasingly, TPT's NPAT was up 12% on last year. 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 portfolio is diversified across a range of asset categories with an average loan size of approximately $80,000. Selfco originates loans nationally via the broker channel, supported by BDMs on the ground in key states. During the year, we prioritized investment in Selfco to take advantage of its strength as a fast-growing, higher-margin business. The loan book has grown 235% 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 7% to the group's underlying NPAT in FY '26, up from $0.6 million in the prior year. Finally, moving to Slide 19. As Brett mentioned, the Board has declared a fully franked final dividend of $0.125 per share payable on the 22nd of September. The full year payout ratio was 71.5% of underlying NPAT and 74.1% of statutory NPAT, both close to the midpoint of the Board's target range. The dividend reinvestment plan will be offered to shareholders at a discount of 1.5%. The growth in dividends over the past four halves reflects the benefits of increased scale, the contribution from higher returning businesses and the realization of merger-related synergies. I'll now hand you back to Brett, who will summarize our key priorities as we look ahead.

Thanks, Gary. Looking ahead, our priorities remain unchanged and are centered on driving sustainable shareholder value. We will continue to execute our integration program and deliver the benefits of the merger while maintaining a disciplined focus on growth, efficiency and capital management. We see further opportunities to grow our retail bank, scale our equipment finance business and expand our funds and trustee services franchises. We will also assess and pursue inorganic opportunities where they create value. We enter FY '27 with clear priorities, good momentum and a strong platform from which to deliver the next phase of value creation. Turning to Slide 22 and to close, MyState's investment case remains clear. FY '26 demonstrates that the merger thesis is delivering. Earnings have grown, integration execution is on track, the earnings mix has improved, and the next phase of value creation is visible. We have a diversified source of earnings across retail banking, equipment finance, managed funds and trustee services. We have delivered $11.8 million of run rate synergies with the FY '28 target run rate unchanged. High returning businesses now contribute around 11% of NPAT, and our capital position gives us flexibility to invest and grow. We have a track record of profitability, an attractive fully franked dividend yield, and a strong team focused on executing a clear strategy that will deliver long-term value. Gary and I will now hand -- now answer any questions you may have. Over to you, Jamie, to moderate.

[Operator Instructions] Our first question today comes from Alastair Hunter from Ord Minnett.

Going to start with just on the new technology platform that you're putting in for the core system. Can you give us a feel for when you sort of expect the go-live to be? And I presume the sort of synergies that one would expect from that consolidation of the 2 to 1 system going to be outside the envelope that you've sort of provided for the $20 million to $25 million. So I'm just interested in what quantum of benefits we would expect once you do hit go-live with the common core new system?

Thanks, Alastair, and good to chat. It's Brett. So we're targeting for the -- us to be operating on our new core banking platform before the end of FY '28 is the current time line. So no change to when we think the integration will be completed. Then in terms of the benefits, you're right. We haven't considered additional benefits from moving to a more modern AI-enabled core banking platform as part of the synergies. Those will be -- long into the future will be more productive business, able to serve our customers better, have a better platform for growth. So we see that separate to the integration -- the delivery of the synergies through the integration. So in terms of quantum, that just supports us to scale efficiently long into the future is how we see.

So the original -- out of the $20 million to $25 million, you had $6 million to $7 million of technology savings sort of identified, that is still your sort of expectation of the consolidation of 2 to 1 systems longer term?

Yes.

Yes, longer term. Yes.

And if I can ask about Selfco appetite, obviously, it's been an exceptionally accretive acquisition as part of the Auswide deal. In terms of the current operating environment from a risk return perspective, are you moderating sort of growth rate? Or do you -- I think you've identified a $40 billion market opportunity. Are you still foot flat down in terms of pacing or pursuing profitable growth in Selfco?

Yes. So we -- obviously, with the geopolitical challenges that exist in the market today, through the year, we took a deliberate decision to slow it down a little bit and particularly in the transport logistics sectors, we put in additional controls for new customers, which meant we missed some business, but that's okay. We were comfortable taking a more conservative approach in terms of going forward. And you can see the quality with 90-day arrears in the 20-something basis points. In terms of go forward, our appetite is to broadly grow at about the same absolute pace, that rate that we've been growing it at today as we bring it into our organization and embed it well and build the efficiencies and the processes out that we want, we think it's going to be a very good part of our business, but we're conscious of growing at about the same absolute rate that we've been growing at.

Just to clarify, absolute, you're talking dollar millions, not percentages, right?

Correct. Correct.

And then on provisioning, probably one for Gary. In terms of your Slide 30 in terms of your forward risk adjustment overlay, you've increased your overlay and your mix of split between the buckets. The change in your forward outlook seems to be an improvement in economic recovery rather than a decrease in the economy. So it seems a little bit conflicting, conservative to put the money away. So I think that's good. But I'm not quite sure I understand bucket allocation that you've given on Slide 30.