Pepper Money Limited (PPM) Earnings Call Transcript & Summary

Welcome to the Pepper Money Limited 2024 Full Year Results Briefing. [Operator Instructions]. I would now like to hand the conference over to Mr. Gordon Livingstone, Investor Relations at Pepper Money. Please go ahead.

Good morning, everyone, and welcome to Pepper Money Limited's 2024 Full Year Results Presentation. My name is Gordon Livingstone, Investor Relations at Pepper Money. I would like to begin by acknowledging the traditional custodians of the land on which we meet today, the Gadigal people of the Eora Nation. We pay our respects to each of their elders past and present. Today, Pepper Money's CEO, Mario Rehayem, will provide a business update, after which Pepper Money's CFO, Therese McGrath, will take us through the financial performance. After some closing remarks by Mario, there will be an opportunity to ask questions, which can be either via the phone or submitted via the portal. I will now pass over to Pepper Money's CEO, Mario Rehayem.

Thank you, Gordon, and thank you to everyone that has dialed in today. Pepper Money delivered strong performance across all key drivers. In total, we delivered $7 billion in originations in calendar year 2024. Mortgage originations grew 27% second half 2024 versus first half, supporting an annualized originations growth for mortgages of 5% on PCP. Our Asset Finance business also delivered higher originations growth with the second half of the year up 3% versus first half. While Asset Finance originations were down 13% on PCP, this was due in part to the soft market conditions, ongoing cost of living pressure suppressing demand as well as our continued focus on the right balance of risk and returns on assets originated. Total AUM, which is a key foundation of future profitability, closed 2024 at $19.1 billion, placing us in a strong position as we enter 2025. Our volume growth did not come at the expense of margin. Net interest margin improved across all asset classes, supported by improved funding, product and business mix. Total NIM at 1.97% increased 12 basis points versus the prior comparable period. Mortgage NIM at 1.65% increased 8 basis points on PCP and Asset Finance increased 5 basis points to 2.55%. Asset Finance NIM expansion was not at the cost of taking on more risk. We did the opposite and weighted originations over 2024 to low credit risk Tier A customers, who accounted for 70% of calendar year 2024 originations and at year-end make up 64% of asset finance AUM. Our underlying profit being profit before tax and loan loss expense grew 9% year-on-year to $209.2 million. Given the increase in loss expense taken in the first half of 2024 relating to elevated late-stage arrears and increased insolvency, net profit after tax at $98.2 million closed 12% down on calendar year 2023. In line with the funding and capital management strategy we discussed 12 months ago and at the half year, we led the market in whole loan sales, completing 7 transactions over the year totaling $2.5 billion. When this is taken with the $2.7 billion raised through public securitizations in 2024, the business drove a high efficient and diverse funding structure over 2024. We ended the year with $124 million in unrestricted cash. As a result, the Board have declared a final fully franked dividend of $0.071 per share, representing a 60% payout ratio on pro forma net profit after tax for the second half of 2024. Incorporating the $0.05 per share interim dividend paid, we will return in excess of $53 million to our shareholders in fully franked dividends in respect to our performance in 2024, an uplift of 41% on PCP. Our mission is to help people succeed, which guides our financial performance. Our X-Factor program, customer experience, employee experience and partner experience was launched in 2024 to provide guiding principles to how we operate. I am proud how this has translated, and our Net Promoter Score across all product classes materially outperforming the industry. In a time of when customers are facing cost of living pressures and high interest rates, our mortgage business achieved a Net Promoter Score of 16 when the industry had significant net detractors with a score of minus 5. Our employees continue to be highly engaged. We maintained our outstanding engagement score of 75 over 2024. Our managers are seen as leading from the front and our employees say they are respected and heard. Our focus on our partners is a core competency of Pepper Money. It is why we have such a strong distribution footprint with 4,804 active mortgage brokers and 1,480 active introducers in asset finance. Like our customer MPS, our partners continue to call Pepper Money out as the lender they would most like to work with. Turning now to Slide 5. Our financial performance was supported by a range of notable achievements across our businesses. In mortgages, our focus on identifying profitable segments where customers' needs are not best served by traditional lenders has seen our self-managed super fund mortgage solution launched Q4 2023 growing to contribute 6% of mortgage originations in 2024. Our Sharia lending solution, which was only launched in June 2024, is tapping an unmet need and at year-end accounted for 2% of mortgage originations for 2024. Alongside new product development, we continue to review, modify and improve our credit policies as this is a proven way to drive accretive growth. We expect to continue our rollout of new products throughout calendar year 2025 and have a number of new offerings, which we are set to pilot in the first half of this year. I spoke about Pepper Product Selector, or PPS, at the half year. This is an API solution that is seamlessly integrated to mortgage aggregator CRM, providing real-time credit assessment, product selection and approval. PPS not only saves a broker time but gives the broker confidence of both speed and probability to "yes" for the customer. PPS provides customers with more choice and transparency. From May to June 2024, we piloted real-time PPS with a major aggregator. Over this period, volumes increased 29% for them at a time when all other channels in Australia increased 11%. We have now fully embedded PPS within this aggregator. Given the success, we have a plan to roll out to other major aggregators over 2025. In Asset Finance, our SOLANA originations platform continues to support our partners and customers alike. Automation and API connection direct to our partner CRM has delivered auto approvals for over 53% of Tier A customers and greater than 70% for novated lease customers over 2024. Our speed to yes is a key driver of customer and partner satisfaction and is strengthened further by our ability to provide real-time payments, an area where we lead versus the competitors. In respect to funding and capital, as I just mentioned, we raised $5.2 billion across public term securitizations and Whole Loan Sales program. Public term securitization included our 40th non-conforming mortgage public securitization, PRS 40, and raised $2.7 billion in 2024, and we completed 7 whole loan sales over 2024 totaling $2.5 billion. Over the past 3 years, the strength and diverse nature of our funding program has successfully raised in excess of $5 billion each year. We retired $55 million of corporate debt in the second half of 2024 and have retired a further $27.5 million in 2025 to-date. We also implemented an on-market share buyback, where we acquired 11% of stock traded over September to the end of November 2024. Turning now to mortgages in Slide 6. While market conditions for mortgages were generally soft, as noted at the half year, if interest rates remain stable, then the market should also stabilize over the second half. This is what happened. And on a positive front, as interest rates start to fall, we do expect to see market growth expand. Our mortgage originations at $4.1 billion grew 5% on PCP. Growth in the second half was strong with originations up 27% on first half and product mix skewed to prime. For full year, prime accounted for 48% of mortgage originations. Mortgage volumes benefited from new products launched in Australia. Our Self Managed Super Fund mortgage launched in October 2023 is performing well ahead of expectations as we focus on delivering a seamless process for brokers and customers alike. Likewise, our Sharia lending is building positive momentum, albeit from a low base. Over 2024, we executed 5 mortgage whole loan sales, 3 prime and 2 non-conforming. Whole loan sales see the equitable notes and loans sold to a third party with Pepper Money retaining the servicing of the loans. AUM, therefore, transfers from lending to servicing. As Pepper Money continues to service these loans, we benefit from the generation of a capital-light annuity style income. Mortgage lending AUM dropped by 19% on PCP to $10.2 billion. Other than the $1.5 billion transferred under whole loan sales, as I noted, we also experienced high attrition in New Zealand, mainly from the HSBC portfolio acquired end of 2023. This attrition followed the 100 basis point reduction in the official cash rate that the New Zealand Reserve Bank implemented from Q4 2024. Mortgage NIM stabilized over the year. Our funding and product mix strategies allowed us to grow mortgage NIM on a like-for-like basis from 1.57% in 2023 to 1.65% in 2024. The accelerated runoff of the New Zealand portfolio also marginally benefited NIM. I also need to flag given the growth in prime originations that we have continued to balance risk and returns. 75% of our mortgage portfolio is at LVRs below 70%. The mortgage NIM walk and credit performance will be covered by Therese in the financials. I will note, however, our mortgage customers have been highly resilient. And as such, our credit performance remains well within historic averages. Turning to Slide 7. Our mortgage business delivered strong growth over the second half of the year. Our expanded credit policies, tactical promotions and new products helped to deliver an uplift of $0.5 billion in originations second half over the first half. Growth came from prime with originations nearly doubling half-on-half to $1.3 billion. Our weighted index LVR remained constant at a historic low of 55%. Backend front book pricing is more or less equalized, and we have achieved the third consecutive period increase in NIM with second half NIM at 1.72%, up from 1.6% in the first half 2024 and up 21 basis points on second half of 2023. Net interest margin uplift is a factor of stable interest rates and stable BBSW as well as mix. Now turning to Slide 8. Pepper Money benefits from the diversification of our businesses, mortgages, asset finance and a growing servicing business. We actually reached a milestone in 2024 with our Asset Finance business celebrating its 10th birthday since we started from scratch back in 2014. When the mortgage business was facing into intense market competition, heightened customer attrition following 13 interest rate rises and unfavorable funding margins compared to banks who had TFF, we were able to accelerate growth from the Asset Finance business. And when the asset finance market has been soft and competition heightened, we have been able to leverage our strengths in mortgages to grow as we did over the second half of 2024. Our Asset Finance business delivered solid results for the year given tough market conditions. Without doubt, the asset finance industry experienced a deterioration in credit performance, as customers in this segment are being impacted by the ongoing pressures of cost of living and high interest rates, which has seen late-stage arrears increase. As we spoke about at the half year presentation, Australia has experienced some of the highest levels of insolvencies, as the government protections under COVID-19 have been fully removed. While the level of new insolvencies remains higher than longer-term average, we are starting to see the rates stabilize. In Asset Finance, we delivered originations of $2.9 billion, down 13% on prior comparable period. Our novated lease business continues to grow well ahead of system with originations at $1.4 billion, up 32% on PCP. Given macro conditions, we took a more prudent approach to our consumer and commercial products and focused on Tier A customers. Consumer originations at $800 million were down 26% on PCP and commercial originations also at $800 million reduced by 39% on 2023. As part of our funding and capital management, we executed 2 whole loan sales in Asset Finance, 1 in June and 1 in November, both for $0.5 billion. Whole loan sales sees the AUM moved from lending to servicing. After whole loan sale, AUM for Asset Finance closed 2024 at $5.6 billion, down 2% on December 2023. As I noted, given both increasing insolvencies and the cost of living pressures on consumers, we focused over the first half of the year on growing our Tier A customers while being more conservative on Tier B and Tier C. Novated lease customers are typically Tier A. In total, Tier A customers accounted for 70% of Asset Finance originations over 2024 and represents 64% of AUM at year-end close. Asset Finance net interest margin at 2.55% increased 5 basis points versus 2023, driven by customer rate gains and funding and portfolio mix. Turning to Slide 9. Like our mortgage business, Asset Finance delivered volume growth over the second half of 2024. Originations for the second half at $1.5 billion increased by 3% over the first half. We continue to deliver solid growth in novated lease, which accounted for 47% of origination mix both in the first and second half. Given the size of our novated lease portfolio, we are now getting scale benefit in how we fund, which in part has helped to deliver an increase in net interest margins. One of the keys to ongoing growth in asset finance is strong and deep distribution. We had 1,480 active introducers over 2024 and our asset finance partner Net Promoter Score at 27, highlights how we are making it simple and easy for them to do business. Our Asset Finance platform API integrates into our introducer CRM, removing the friction from them when dealing with customers and makes a material difference in speed to yes. Again, Therese will cover off NIM and credit performance in detail in the financials. So I'll now turn to Slide 10. Our loan and other servicing business is the provision of independent loan servicing to the market and includes our whole loan sales servicing program, servicing for non-operational owners of loan portfolios, for example, our appointment as administrator of the Treasury Corporation of Victoria's new commercial and industrial property tax and loan portfolio acquisition. Loan and other servicing AUM grew 130% versus 2023, given the extension of our whole loan sale strategy into non-conforming mortgages as well as a further whole loan sale in asset finance. Over the year, we completed 7 whole loan sales totaling $2.5 billion, of which asset finance made up $1 billion, non-conforming mortgages, $900 million and prime mortgages $600 million. Typically, whole loan sales are executed in May, June and in November, December. Building our loan and other servicing business via whole loan sales is part of our overall capital management strategy as it is capital-light. Whole loan sales allows us to recycle capital against growth opportunities. It provides an annuity style income and no incremental cost to the business given the loans are already being serviced, and it provides us with a defensive earnings stream across credit cycles. Servicing AUM closed 2024 at $3.3 billion, up from $1.4 billion at the end of last year. Total operating income increased to $11 million for 2024, which represents 4% of total operating income for the year. Now turning to funding on Slide 11. Total warehouse capacity at 31, December 2024, was $10.8 billion, 16% higher than 31 December 2023. This reflects the increased origination volume in mortgages and asset finance over the second half of 2024. As always, we take a balanced approach to funding, and we maintain around 4 months of warehouse funding headroom. This allows us to continue to originate if markets lock up and importantly, are also able to fund growth as opportunities emerge. Over 2024, we completed 3 public term securitizations, 2 residential mortgage-backed securities transactions and 1 asset-backed securities transaction, raising $2.7 billion from public markets. As previously noted, we complemented our public term securitizations with a further $2.5 billion raised from whole loan sales, bringing our total funds raised to $5.2 billion. We have now raised more than $41 billion from debt markets across 64 transactions since 2003. We have long strong relationship with investors with over 100 always supporting the business. Our reputation and performance is exemplary. We have called every note at the first available call date. In 2024, we completed our 40th non-conforming mortgage public securitization, PRS 40, which at 1.25 billion was the largest Australian dollar securitization in our 24-year history. Before turning over to Therese to run through the financials, I would just like to spend some time touching on our ESG strategy and initiatives. Turning to Slide 12. Pepper Money has been built on a mission to help people succeed. As we deliver on our mission and continue to build on our strategy, we seek to create sustainable value for our customers, employees, the communities in which we work and for our shareholders. Over 2024, we strengthened the Pepper Money Board's oversight and commitment to ESG with the establishment of the Board Environmental, Social and Governance Committee with a stated objective of ensuring good governance and our sustainability initiatives and providing end-to-end oversight for our ESG strategy. This is in line with existing and emerging environmental, social and governance considerations, including mandatory climate-related financial and other reporting requirements. I won't run through all our 2024 ESG achievements as I've covered some of the customer and partner initiatives already. So today, I'll just focus on community and our people. Our key community programs are brought together under Pepper Giving, an initiative run by volunteers across the company and our way to empower employees from across Pepper Money to give back to local communities, either financially or through volunteering opportunities. The committee allocates resources through 4 programs of Big G, Medium G, Small G and volunteering opportunities. And over 2024, we donated $200,000 based on employee recommendations to a range of charities and community programs. You have heard me say that our people are at the heart of our success. The ongoing strength of our employee engagement is a testament to the capability of our leaders and the culture we have built, which is underpinned by our values of can-do, balanced and real. Our annual employee engagement score remains strong at 75 with a favorability score of 74. Our high participation rate of 88% demonstrates our employees are confident that their voices will be heard. Pepper Money fosters an environment that values diversity at all levels through a desire to achieve understanding, respect, inclusion and continuous learning. As at December 2024, our workforce was 55% female, 45% male and 46% of senior management roles were held by females. I will hand over now to Therese to run through the financials, after which I will make some closing comments before opening to questions.

Thank you, Mario, and good morning, everyone. Slide 13 provides a summary of the key financial measures of our business. As Mario has already covered volume in detail, today, I will focus on net interest margin, credit performance, expense management and returns. Turning to net interest margin on Slide 14. At the time of our first half results, I noted we changed our accounting treatment for mortgage trail commission to align with market practice following a shift across the banking industry. We adopted the change effective 1, January 2024. The change results in a financial asset and financial liability being booked that reflects an estimate of the net present value of ongoing trail commission expense over the expected life of the underlying mortgage. Historically, we recognize trail commission liability and trail commission expense on a monthly accrual basis. As this amount has been deemed immaterial, 2023 has not been restated in the financial statements. However, to provide a like-for-like comparison in this presentation, net interest margin has been revised across all periods. Total operating income remains constant. The positive trend in net interest margin experienced over the first half of 2024 continued over the second half. NIM for the second half of 2024 at 2.03% improved 11 basis points on first half 2024, following the first half where NIM improved 11 basis points over the second half of 2023. The improvement in net interest margin was delivered by the flow-through of pricing initiatives, which drove a further 15 basis points improvement in customer rates and the stabilization in BBSW. The marginal variance in funding margins is down to mix following whole loan sales. Overall, we continue to see funding margins improve. Turning to mortgages. Our mortgage business reported the third consecutive period-on-period improvement with NIM increasing by 12 basis points to 1.72% second half 2024 versus first half 2024 and up 21 basis points on second half 2023. Mortgage NIM benefited from the ongoing flow-through of customer rate changes following OCR increases over 2022-2023, stable BBSW and mix of business, including both product and business mix given the accelerated runoff of the New Zealand HSBC portfolio acquired in December 2023. Our Asset Finance business, which is the graph on the lower right-hand side, also saw NIM increase versus the first half of 2024 and second half of 2023 in much the same way as mortgages. Pricing initiatives improved the average customer rate by 32 basis points net of mix versus the first half of 2024. Our asset finance customers and partners value our speed to yes and our ease of doing business. While we did see some spot rate volatility in the third quarter of 2024, in the main spot rates have proved more stable and only impacted second half 2024 NIM by 15 basis points versus the adverse movement of 32 basis points experienced in half 1 2024. Now turning to Slide 15, credit performance. Without doubt, the economic environment and cost of living pressures have proven challenging for a number of customers. On a positive front, the mortgage market has proven to be very resilient and our mortgage customers have been managing. However, we've experienced some deterioration in credit quality, particularly over the first half of 2024 in our asset finance business, so I'll cover asset finance provisions first. As I noted at the time of our first half results, we have seen a heightened number of insolvencies in Australia as well as an increase in late-stage arrears, both of which impacted asset finance. This saw us lift specific provisions for asset finance to $42.1 million at June 2024 versus $37.5 million in December 2023. Over the second half of 2024, while insolvencies and late-stage arrears continue to be elevated versus historic rates, the rate of increase has stabilized. Further, some companies who were in administration have now cured, allowing prior period provisions to be revised. This has helped support a release in the specifics at year-end of $4.7 million versus the first half of 2024. As such, asset finance specific provisions remained flat year-on-year. In terms of asset finance collective provisions, following the completion of the whole loan sale in June and November, we released the collective provision held against the pool of loans sold. The collective provision for Asset Finance also saw the benefit from favorable customer mix as originations continue to be weighted more heavily to customers with the lowest probability of fault, namely Tier A customers, which include a high proportion of novated lease. Tier A customers made up 64% of Asset Finance closing AUM. However, we considered it prudent given the pressure of interest rates and cost of living and how they are weighing on asset finance customers to increase the post-model overlay for this segment by $7.3 million on December 2023. This is included in Collective. Therefore, our asset finance collective provisions increased by $6.5 million net on December 2023 and $11.1 million on June 2024. The net changes in provisions resulted in our coverage ratio for Asset Finance increasing to 1.7%, up from 1.57% June 2024 and up from 1.56% as at December 2023. Over the same period, Asset Finance AUM remained constant. I should note, our approach to risk saw a shift originations over 2024 in Asset Finance to Tier A customers. So as we move through 2025, the overall profile for Asset Finance should start to rebalance given 64% of closing AUM is made up of customers with the lowest probability of default. Now turning to mortgages. Our mortgage customers have proven resilient. This has seen us release $6 million in post-model overlay versus December 2023 from collective provisions, which have also reduced in line with AUM following the 5 whole loan sales executed over 2024. Mortgage-specific provisions remain low and relate to a small number of loans. Typically, specific provisions in mortgages are around 2 to 4 basis points of mortgage AUM. In total, our provision coverage ratio for mortgages remains strong and at 0.21% at December 2024 and remains in line with long-term average. To close out on credit performance, let's turn now to Slide 16. As I covered the key movements under provisions, I will focus on arrears. 90-plus day arrears are a strong indicator of future losses. Mortgages closed December 2024 at 1.47%, marginally down from June 2024 and in line with the long-term average when the experience under COVID is removed. As previously noted, our mortgage customers have remained resilient. Likewise, Asset Finance 90-plus days arrears at 0.32% of AUM at December 2024 is marginally down versus June 2024. As I mentioned, as the origination profile for Asset Finance over the year was weighted to novated lease Tier A customers, I do expect the overall arrears profile as we move through 2025 will start to rebalance. And again, we remain well provisioned and continue to hold $10 million in post-model overlays, $8 million against asset finance and $2 million against mortgages. So turning to expenses on Slide 17. We are disciplined in our approach to cost management. Our focus on driving efficiencies given our scale platforms and ongoing process improvement program continues to deliver benefits. Normalizing for the movement in impairments, our operating expenses were flat year-on-year. Ongoing process efficiency supported an 8% reduction in FTE year-on-year. The reduction in headcount in turn helped delivered an overall decrease of 2% in employee expenses, offsetting salary and wage inflation and higher bonuses. The increase of 3% in marketing expense is down to the timing of the start of a new sponsorship arrangement. Normalizing for timing, marketing expense remains flat year-on-year. Technology costs increased by inflation of 3%, and we continue to derive benefits from our scale of platforms. After impairments, operating expenses increased by 4%. The increase in impairment and fair value relates to the revaluation of equity investments and intangible assets, which we undertake at least annually to reflect their current market estimates. Adjustments are taken through the face of the profit and loss. Following on from other expenses, corporate interest increased due to higher BBSW and margin versus prior comparable period. Total expenses closed 2024 at $246.7 million, up only 4% on PCP. Turning to our pro forma income statement on Slide 18. I have covered most of the key movements already in the P&L, so to summarize, total operating income reduced only marginally 1% on PCP. The increase in net interest income and gains from whole loan sales did not fully offset the increase in loan loss expense experienced in the first half of 2024. Strong cost management, FTE reduction and efficiency gains were offset by one-off increase in impairments and fair value as well as the impact of BBSW on corporate interest expense. These factors resulted in EBITDA reducing 5% versus PCP to $188.5 million. Net profit after tax on both the statutory and pro forma basis was $98.2 million for the year. However, our underlying profit measured by profit pretax and loan loss expense at $209.2 million was up 9% on PCP. For completeness, I've included our core operating metrics on Slide 19. As these have been covered, I will turn directly to cash on Slide 20 and then on to the balance sheet. Unrestricted cash closed December 2024 at $124 million, up from $121.1 million in December 2023. Cash was supported by strong operating performance and the benefits of whole loan sales. Over 2024, the business paid down $55 million in debt, returned a 17% increase in cash to shareholders in dividends versus prior year and undertook an on-market share buyback, acquiring 11% of share volume traded over September to November and completed the acquisition of the 35% interest in Stratton for $41.7 million, all funded from cash reserves. Post year-end, we have retired a further $27.5 million in corporate debt. This will support lower corporate interest expense over 2025. Turning now to our balance sheet on Slide 21. As you would expect, the main movement has been in loans and advances, which, at $16 billion at December 2024, has followed the movement in AUM, including whole loan sales net of loan loss provisions. We originated $7 billion in new financial assets over 2024, asset growth financed by the issuance of 3 public term securitizations of $2.7 billion and a further $2.5 billion of whole loan sales. Given the increase in mortgage originations, particularly over the second half of 2024, we increased warehouse capacity to $10.8 billion over the period, up from $9.3 billion in December 2023. Net assets at 31 December 2024 at $856 million were marginally down from $863 million in December 2023, given the movement in loans and advances. Net tangible assets to loans and advances at 4.3% was up from 3.8% PCP. Following the maturity and repayment of Pepper Money's corporate debt facility, a new syndicated 3-year revolving credit facility was established on the 23rd of May 2024. Given demand, we were able to increase the size of the facility from $200 million to $270 million. At the end of 2024, the facility was drawn at $125 million. As I just noted, subsequent to year-end, a further $27.5 million has been retired. I've already covered sources and uses of cash. We closed December 2024 with unrestricted cash balance of $124 million. Retained earnings reflect the profit delivered by the business net of dividends paid. And given the strength of our capital position, the Board has lifted the final dividend payout ratio to 60%, the upper point of the range, which will see a final dividend of $0.071 per share paid on the 17th of April 2025. Overall, the NPAT delivered in calendar year 2024, $0.121 per share or $53.2 million will be returned to shareholders in dividends, an uplift of 41% on 2023. Thank you, and I'll now hand back to Mario for closing comments.

Thanks, Therese. Before running through the outlook and opening to questions, I just want to touch on how we have continued to evolve our strategy as we reached a key strategic milestone of having helped over 500,000 customers in August 2024. Our mission, which has been constant for 24 years, to help people succeed and our values of can-do, balanced and real remain the same as they are the foundations of everything we do. Our vision has been reframed, and we seek to be the people's first choice non-bank. This has seen us set a new aspiration to help over 1 million customers by the end of 2029. To deliver on our mission and vision, our pillars for success have been reviewed and aligned to our aspiration. Our pillars of experience, performance and brand link our vision and mission to our strong values and culture. Experience captures how we seek to always deliver market-leading experiences that deliver customer, partner and employee value through every interaction. Performance is our operating model. Our focus on continuing to create and develop a high-performance operating infrastructure that drives sustainable profitability and brand is how we are known, how we will continue to build and protect our brand to drive recognition and choice. This then translates into what we call the Pepper Money house. This house is what guides what we do. It is why our employee engagement remains so consistently high, and it provides all employees with a clear vision, mission and guardrails for our culture and how we deliver on our commitment to our customers and our partners, while always operating with the highest integrity to build and protect our brand to drive recognition and ultimately become the people's first choice non-bank. So to close with what I think 2025 will bring, let's turn to Slide 24. We have seen the RBA reduce the OCR. In the first reduction since May 2022, there is expectation of further interest rate reductions to come. And we are finally seeing inflation moderate and consumer confidence improve. Funding markets have weathered the storms of the last few years and have come out strong. We have seen the intense competition in the mortgage market, largely fueled by the TFF held by the banks ease materially and as bank funding advantages removed as they pay back TFF. And our performance over the second half of 2024 has been strong with both mortgage and asset finance volume increasing and NIM expanding. I am encouraged by how resilient our mortgage customers remain, but I also recognize that conditions for some asset finance customers still remain difficult. But all in all, I do feel confident as we move through 2025. We are prepared to capture more opportunities as they become available. Over the 24 years we have been in business, we have successfully managed through all cycles. We have managed our customers through the rate rises, we have sought new opportunities and we have launched new products such as Self Managed Super Fund mortgages and Sharia lending. Our constant investment has delivered scaled technology and processes. We have sufficient funding headroom available. We have shown how we are positioned to capitalize on growth as it returns. We are diversified, both in terms of scale of our 2 core lending businesses of mortgages and asset finance as well as the growth from our loan and other servicing business unit, which delivers a capital-light annuity style income stream from our whole loan sales strategy. We are disciplined, whether it be how we manage credit, expenses or capital. We remain, as always, well provisioned. With $19.1 billion in assets under management today, this provides us with a strong base to deliver in 2025. Thank you. And I will now hand back to the operator for questions.

[Operator Instructions]. Your first question comes from John Li of Goldman Sachs.

Congratulations on the results. I've just got 2 questions on my side. Firstly, just around the net interest margins. Like historically, you guys have provided like an exit rate. So I was just wondering, if you guys are able to give any additional commentary as to how the NIMs, either at a group level or with specifically to mortgages or asset finance, how it's tracked maybe in like the final quarter?

Sure. The exit NIM for the group is 2.08%, and that is broken up with mortgages landing at 1.7% and the asset finance at 2.69%.

Got it. And then the second question would be, it's good to see that mortgage originations and asset finance originations have been improving in the second half. I'm just wondering how much of this is actually cyclicality, how the competitive landscape is looking? And are you guys now kind of reverting focus back into mortgages going forward?

Yes. Look, it's a good observation. And we have always been very proud of our ability to control what we originate. We have an ability to know when to play and when to chase that market share. So if we feel that the market is priced right, then we will definitely have an ability to tap into our extensive distribution network and increase volume. With mortgages, what we have seen is that there is an opportunity for us to take advantage of a number of things that is cost of funds, stable BBSW. We're in more control of the NIM now because of the BBSW and that gives us more confidence to then put the foot down and accelerate volume. We've also seen a normalization now that the banks are paying back or paid back the TFF. So we do see probably back to long-term averages by way of the arbitrage between where banks are priced versus where Pepper is priced. We have never been a price taker. Our customers and our brokers use us for purpose, not for price, and we have an ability to always grow volume whenever we see that the market is ready for it.

Our next question will come from Jeff Cai of Jarden.

A question on credit quality in the asset finance book. We can see that both losses and arrears are coming down, but you still increased the coverage level for this business. So just interested in how we should think about this. Are you mainly increasing coverage mainly out of caution or are there signs of underlying deterioration? And then more broadly, do you think that we've actually passed the peak in loan losses from the asset finance book?

Jeff, no, great question. What we are doing is being very prudent when it comes to the asset finance book. At the beginning of the year, we definitely saw heightened specific positions as a result of both the insolvency, elevation in insolvencies and also in late-stage arrears. That's really normalized, and we're actually starting to see a downward trend. However, the one thing that we did note is the cost of living pressures and plus market conditions quite weighted on the asset finance customer, certainly more so than the mortgage customer who really did prove resilient. So that's why we made the decision to increase the post-model overlay at the end of the financial year from literally $0.7 million last year to $8 million at the end of this year. It's a prudent approach to make sure we've got coverage. I think the other thing as well, just to note is when we were pulling everything together, we had not seen an OCR reduction. Now that the RBA has started the OCR reduction, we might see some more stabilization and return. Very importantly, as Mario and myself have both noted, we shifted the originations over calendar year 2024 to be weighted to Tier A customers who have the lower probability of default. At the end of the year, 64% of asset finance AUM was actually Tier A customers. So again, we've got the possible upside of a rebalance as we move our way through 2025 as well.

And then on Slide 9 on the asset finance book, we can see that the front book lending rates are well above your back book, likely to provide you with lots of capacity to pursue stronger volume or maximize margin. So just interested in your thoughts on how do you balance the margin versus volume trade-off going forward? And to what extent should we expect much stronger volume growth from this business?

Yes. Look, for us, it really is driven by mix and where we define and have targeted what mix we like. And that is obviously going to be net of losses or the risk that we're taking and what returns we're going to derive out of that. So -- and the difference that you see from a front book to a back book, it's very different to the mortgage book because the mortgage book is practically 100% variable. So when you are looking at that, there is always going to be a difference between front and back book when it comes to auto because of the swap rates and they are locked at fixed rate. So that's the main reason behind that. And you'll see that there is -- a lot of that is just accounting for the swap rate movements at the time. Our biggest driver at the moment is, Therese's earlier point, we took some heat out of the asset finance book by focusing predominantly on Tier A and novated lease until we found that there is some stability in the macro environment. And then that way, we are now looking to reenter areas where it will be more B and C, but we always keep that finger on the pulse on a monthly basis to see where we're going to originate next.

The next question is from Tom Strong of Citi.

My first question is just around the whole loan sales. I mean you had a big year this year with $2.5 billion sold. Clearly, you want to extract value from the balance sheet, but also the conditions for origination were quite poor, just given where that relative pricing tension was. Given the conditions have improved with funding costs, do you expect to sort of grow the balance sheet more strongly going forward? And what's a normalized level of whole loan sales, do you think what we're seeing at the moment?

Yes. Thanks, Tom. We did originate $7 billion. So it isn't a small number in total originations for the year. I just wanted to take note of that. With regard to the whole loan sale strategy, it has always been predicated on what is the actual economics that are going to be derived from a sold versus retained basis. We are very comfortable with the level of whole loan sales that we executed on in 2024, and we are inundated, to say the least, with both onshore and offshore interest to expand that program. Again, irrespective of what the market is doing, if the markets are tightening on whether it be from the debt markets or not, that's all going to play part in our model of whether it's going to be worth retaining the assets or selling the assets. We are very confident that we will continue the whole loan sale program as long as it ticks the box from an economic standpoint for us internally. Just to remind you that we have been doing this in maybe a smaller scale since 2016. So this is not a new way of us optimizing our balance sheet. But at the same time, we are becoming much more efficient. You can see that in the significant increase in our dividend payout with 42% on that or 41%, should I say, the payouts.

60%, yes.

Yes. And then we also then went down the path of paying down some debt and you can see that clearly from there, there was around $55 million paid out in debt in 2024 with another $27.5 million paid out in February this year. So this is all coming from our ability to recycle our capital from the whole loan sales.

Yes. No, I appreciate that. Well, I guess another way of asking that is, as we sit here today, would you say the economics of retaining on your own balance sheet have improved significantly over the last 6 months in that equation?

They have, but also the premiums on the whole loan sales follow suit. So you wouldn't pick one over the other, if that makes sense. As the market tightens, the investors know that we can get a certain deal done at a certain price, and they have to factor that into the price that they are looking at the whole loan sales. If anything, the whole loan sale premiums will start to increase as the weighted average life of loans or the attrition slows down because that is a major driver of price.

Yes, that's very clear. And if I could just ask another question just around what you're seeing from a competition perspective in the asset finance and auto market. I mean, several of your peers have called out quite challenging dynamics in that space. Can you just perhaps comment on what you're seeing from a competition sense across your various sort of origination channels?

To put it simply, competition is fierce. And I don't expect it to change for some time. But for us, we take a look over the fence, so to speak, and we understand what our peers are doing and our competition is doing, but it doesn't alter how we execute on our strategy. We have a very, very diversified revenue stream created by different products, different segments that we play in the market, but one of the most extensive distribution footprints that we can leverage off. And that for us is how we are looking to be ahead of the game. The other piece that we have is that we are far more advanced in our technology. Our ability to be able to have a speed to yes and real-time payments is a big favorite for our introducers, and we will continue to invest in our technology stack to ensure that we keep on being relative to our introducers. We are sitting at now $5.6 billion. And if you think about the amount of whole loan sales that we've done with our, I'd say, finance book, that would sit in excess of $7 billion in that perspective. And now we are 10 years in. So we are starting to get more of, what I would say, really impactful data to understand where to play and where not to play and how best to price the risk.

[Operator Instructions]. Our next question will come from Jason Shao of Macquarie.

First one on mortgage margins. They have improved and it looks like it's been mostly driven by customer rates. I know you have called out the accelerated attrition in your HSBC New Zealand book, which I assume is lower margin. But what else has really driven that increase in margins given that it seems on the mortgage side, your front book rates are pretty close to that in your back book? Is it mix within mortgages or have you done pricing actions over the period?

There is a number of things there. One, we've got a stable BBSW. We've had cost of fund improvements across our warehouses. We've got new products that are driving accretive NIM. We've also revamped our retention strategy, which has assisted us as well with our retention of our customers because as we noted last year that we were -- we had heightened attrition rates, which were hurting our NIM over time. And then obviously, for us is that cost control of knowing where to play and where not to. We have been able to accelerate our prime, but at the same time, the prime that we've been originating has been lower we are but very strong returns on the risk that we are taking. And that is the #1 focus point for this business at the moment is continually going down this path of looking at accretive NPAT growth whilst being laser-focused on our return on invested capital.

And you mentioned benefits from BBSW. How much of that is in Australia versus New Zealand? Because it looks like Australia BBSW hasn't really changed too much from first half to second half.

Yes. The reason why I brought it up was that was one of the major impacts to our NIM was the volatility in the BBSW. So I'm just bringing that we are now starting to come back to that normalized environment compared to where we were a year ago or 1.5 years ago. When we look at it from a New Zealand perspective, what you mentioned there, where we are getting a little bit of a positive kick in NIM is how we have structured the HSBC book and how that impacts the NIM from attrition. So the higher the attrition, the more it actually impacts the NIM in a positive way.

Great. And just second question, just on whole loan sales as well. I'm just curious to hear which loans do you generally select to do the whole loan sales? And within both mortgages and assets finance, which prime or non-prime segments have you done more of?

Every investor has a different appetite or different guardrails of where they like to invest. The great thing is that in the majority of the cases, if not all, it always is a vertical slice of our natural production. So we are not going out there and originating to order and then be stuck with those assets if that deal doesn't go through. It is naturally a vertical slice of natural -- of our production.

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

Thanks. I'll just hand over to Mario to close.

I'd just like to thank everyone that joined us today, and thanks again for the ongoing support. For us, the growth outlook, we are very, very optimistic and confident that if the macro environment permits, we will be able to grow across a number of areas of our business. One is to become more efficient in what we do, and that's what our aim has been year-on-year: Improving our processes and our tech stack, introducing more products, expanding our distribution footprint, and all of this will contribute to all improved metrics across our balance sheet and across the board. For us, just a reminder, we're not a price leader. People come to Pepper for a purpose, and we are very confident that we will look to grow as the market permits. Thank you.

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