Resimac Group Limited (RMC) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Resimac results teleconference. [Operator Instructions] I would now like to turn the conference over to your speakers today, Mr. Scott McWilliam, and Mr. Jason Azzopardi, Please go ahead, gentlemen. Thank you.

Thanks very much. Good morning, everyone. It's my pleasure to welcome you to Resimac's results investor conference call for the half year ended 31 December 2020. My name is Scott McWilliam, CEO of Resimac. And with me, Jason Azzopardi, our CFO. We will speak into the investor presentation, which has been lodged with the ASX. In today's presentation, we'll cover off on a few topics: our first half performance, an update on our COVID-19 hardship payment portfolio as well as strategic priorities, including our core banking IT project. In the interest of time, we will not speak at every slide, but the main performance highlights and the business activities to allow for sufficient time for questions at the end of this presentation. The call moderator will provide instructions for you to ask questions at the end of the presentation, and we welcome any questions you may have. Can I please ask everyone to turn to Slide 3. Jason will start with performance highlights underlying our strong performance compared to first half '20, our previous corresponding period.

Thank you, Scott. In 1 half '21, the group generated $50.5 million of profit after tax, an 88% increase compared to first half '20. This profit increase is underpinned by a 45% increase in net interest income to $122.1 million, driven by a combination of asset under management growth across all products and channels and higher margins across the portfolio. We will expand in our growth in both AUM and margins as we proceed throughout the call. The higher net interest income, combined with our continued cost discipline, resulted in a significantly lower cost-to-income ratio of 31.1% for the period, an 1,100 basis point decrease. And finally, we are pleased to report annualized return on equity of 38.7% for the period. The group also settled $2.14 billion of home loans during the period. While slightly down on the previous corresponding period, we're pleased with settlement remaining strong during the period of extreme economic uncertainty, including lengthy Victorian lockdowns. Home loan assets under management continued its strong growth, growing above system by 14% to $12.9 billion. Our growth is underpinned by our consistent and timely service offering to third-party -- to the third-party channel. Furthermore, we are pleased with our position as leading New Zealand nonbank, where assets under management growth increased 35% annualized during the period and our recently rebranded direct-to-consumer channel, homeloans.com.au, which ended the half with record settlements 84 months after launch. I'm also pleased to report that the Board has declared a fully franked interim dividend of $0.024 per share, a 100% increase on the prior year. Moving on to Slide 5, I'd like to call out our 13% increase to operating expenses. In line with our previous correspondence in FY '21, we commenced our transformational core banking IT project. This project is the largest in Resimac's history and will transform the banking experience for customers and the loan origination process, developing a fully digitized platform for customers and for brokers. During the half, we incurred $3.5 million of operating expenses in relation to this project. We have fully expensed all project costs, as and when they occurred, rather than capitalizing and expensing into the future. We expect to incur a further circa $4.5 million of costs in relation to this project in the second half '21 as the project nears completion. Moving on to Slide 8. We have provided a detailed analysis of our group net interest margin. Home loan pricing decreased 20 basis points during the period, driven by the full period impact of the 25 basis point customer interest rate cut in March '20 and the organic yield runoff from the aggressive price competition in the Australian home loan market. Our funding costs [indiscernible] the margin we pay above BBSW on our RMBS and warehouse facilities increased 7 basis points during the period as pricing of both funding instruments increased during COVID. Over the last 3 to 4 months, we have negotiated material decreases in warehouse pricing and recent market RMBS pricing indicates our impending $1.5 billion RMBS deal will be priced well below our recent issuance. We expect both warehouse and RMBS pricing to provide new tailwinds in 2021. And finally, BBSW continued to reset lower during the period with an average BBSW of 8 basis points during the half. BBSW is currently resetting at 1 basis points -- 1 basis point and we expect this to remain the floor.

Thanks, Jason. Moving to Slide 10. Our portfolio continues its outperforming -- its outstanding performance with arrears as at December '20 lower than pre-COVID arrears as at December '19. Furthermore, we increased our collective provision by $2.9 million to $33.5 million as at 31 December '20, further strengthening our balance sheet covering the potential future credit losses. Moving to Slide 13, we provide an update on our COVID payment deferrals. At a high level, the number of customers on payment deferrals decreased from 3,195 to just 524 as at 31 December 2020. Customers on payment deferrals represent $294 million of loans. The weighted average dynamic LVR of these loans is 71% for prime and 73% for specialist. Only $22 million of loans without LMI have a dynamic LVR of 90% or higher. And lastly, our COVID overlay of $16.4 million remained in place as at 31 December 2020. We will review the appropriateness of this overlay at 30 June 2021. Moving to Slide 16. On Slide 16, we outline the key focus areas for the next 6 months. In summary, the opportunity to continue to grow assets under management and market shares in our core home loan market is enhanced by the property market rebound and also low interest rates in Australia and New Zealand. Once our assets under management now exceed $15 billion, Resimac market share is still less than 1% of market. We remain focused on providing end-to-end solutions for Australian and New Zealand customers, combined with an outstanding service offering. Digitization. The group is undertaking a significant overhaul of its digital and customer experience applications as well as implementing a new core system. Our aim is to create simple and easy-to-use technology-based solutions to deliver seamless digital experience. We're halfway through this project, and we expect to be completed later this year. Resimac Asset Finance. On the 1st of February, as announced, I'm pleased to report again that we moved to 100% ownership of IA Group, now rebranded Resimac Asset Finance. This channel provides access to a new market diversifying earnings over the coming years. We do recognize asset finance as a high-growth channel. Leveraging Resimac's distribution and funding expertise, we expect this channel to provide AUM and margin growth in the future. That concludes the presentation. I now hand back to the moderator to facilitate any questions.

[Operator Instructions] your first question is from the line of Damien Williamson from Bell Potter.

On the result. Can you just give us -- there's been a bit of a negative reaction in the share price, which I can suspect is relating to the softer settlements. Can you outline how competitive the market is in terms of settlements, and in particular, the major banks offering all these very low fixed-rate mortgage products and how that's -- how you're seeing that's impacting your settlement pipeline?

Yes, sure. And you're right, it is an extremely competitive environment out there. It is a growing market out there. If you look at the last 2 quarters of home loan lending commitments, they've grown significantly and it's a tailwind for our business, just like other lenders leading into calendar year '21. It is a competitive market, we are writing a sufficient amount of prime loans into that market. The back end of the first half was stronger than the first quarter. And that's because there's obviously still a lot of noise in relation to uncertainty in relation to COVID in that first quarter. We're seeing a strong pipeline and strong momentum coming into this calendar year. We expect it to continue to be very competitive, but we are obviously pleased with the volume and the pipeline we've seen today.

Okay. And just also another question on turnaround times. I think in the severe lockdowns back in around April, I was -- I think [indiscernible] were noting that some of the major banks, in particular, ANZ with their turnaround times on mortgages were up around 40 days. Your turnaround times on mortgage approvals typically remain like 24, 48 hours in that top of range. Has that helped with your mortgage loan book growth?

Yes, it does. And our turnaround times despite pickup in volume leading into the end of the first half, our turnaround times today are inside of 48 hours, and on most days, actually inside 24 hours. Our turnaround times moved down midyear, let's say, kind in the heart of COVID after 4 or 5 days. But as you mentioned, Damien, when we were at 4 or 5 days, the market was still at 20 days. And it is an important part of our service offering, speed and certainty for those who have been on these phone calls and listen to Jason and I impart it's an important part of our value proposition and we continue to offer that today. And I think that really does underpin the pipeline that we're looking at.

Okay. And just as a final question, just on the influence of the RBA and the quantitative easing, you're seeing unprecedented scenario where you got back to 9 basis points below RBA cash versus scenario you faced not so long ago, but back to being 50 basis points above RBA cash. Did you say that when -- how long do you to see bank bill remaining at these levels below or just saying going back to 10, 15 basis points above RBA cash at some stage later this year once the term funding facility, say, unwinds? Or do you happen to have an expectation on what's going on there?

Just to make sure I answer your question, are you specifically talking to BBSW or talking to credit?

Yes. That's in terms of the bank bill swap product because that's obviously been a massive tailwind on your net interest margin.

Yes. Well, I think it's probably best to refer to what the RBA is saying and has been pretty consistent in their messages in this month. And that is very much focused, obviously, on the labor market and they're focused on credit be deployed into the market. I think they've made statements all the way up to 2023, they're looking to hold the cash rate where it is. I think if you have a look at what your major bank analysts are forecasting in relation to BBSW, they're forecasting minimal change to BBSW for the next 6 to 12 months and potentially running up to what is the cash rate today, 10 basis points in 2022 through 2023. Our outlook and our expectation is for BBSW to remain low.

For BBSW to remain below RBA cash for the rest of the year into next, potentially into next, that's what you...

Correct. Yes. And that's with the major bank home loan.

[Operator Instructions] Your next question is from the line of Tony Mitchell from Ord Minnett.

Well done on your results. Just on the home settlements front, do you expect that number to continue to decline because the major banks are getting a bigger part of the market? I know you've only got less than 1%, but I'd be interested in your comments on that.

Interestingly, as they continue to decline, I think our settlements trajectory has been from the mid-3s to above the year last year and this year down slightly on the prior comparative period. I think it's important to think about the half would just come in, in terms of Victoria in a lockdown for most of that half and 0 property sales there. So it went from a buy and refi market to only a refi market. So we see -- we don't see settlements continuing to decline as such. We see what we said as actually quite strong in the period given what happened with the economic uncertainty. We've also been investing internally in a transformational project where that's taken a lot of our focus as well. So for us, we see settlements at a level now where we want to continue into the second half and then grow from there. The market is not heavy, but we don't -- we absolutely see -- we absolutely see opportunity to grow.

Are you disappointed? You've just come out with an absolutely cracker result and the stock market knocks you down. Would you say that's due purely to the settlement thing? Or do you see anything else that would lead someone to sell off like this?

Well, we're probably just as surprised as yourself in terms of just the early response this morning. Let's see where the market ends at the end of the day. They're digesting our numbers, especially understanding where we're investing at this stage and in the future. So we're surprised. But I don't think the settlement numbers would be a shock because I think we provided guidance at the end of last year. And where we've landed at 2.1% is probably better than where we actually provided guidance to the market in November. So I don't see that as a surprise or it should not be a surprise. But to Jason's comment is we're not sitting here worried about settlements numbers right now when we look at the opportunity going forward. And that's making that comment purely in relation to the market we're playing in today. I'm ignoring new markets that we're entering into.

I mean we're just focused on -- I think we continue to focus on what we can control, and that's increasing the performance of the business as we're continuing to do, and the market will work itself out. It's been a solid trajectory upwards and there'll be little bounces, but nothing's changed fundamentally in this business. So we are very, very confident on the outlook.

Okay. Can you just outline the money you're spending on the IT. How much is that? Can you just illustrate how much it's going to improve the efficiency of the organization, and obviously, comment on digitalization as well.

Yes. I'll start just on the financials. So we spent $3.5 million in this half and we've taken the accounting approach to fully expense that set rather than it being a drag on the P&L in the future, mainly because it is cloud based and we don't have full ownership of it. We decided the appropriate treatment was to write it off. In the second half, we expect to spend about $4.5 million, which will also be in the P&L, so $1 million up on this half. And then in FY '22, we think, we expect that would be $1 million to $2 million in total. And so the benefits it brings, huge efficiencies and scale benefits for us. It's how can we grow that settlement number and keep the cost base flat at a high level from a financials perspective, and Scott might want to talk about the digitalization benefits.

Yes. There's probably -- there's a number of benefits to it. Let's talk internally, it's all about to Jason's point at the end, it's all about cost efficiency and scale. And so how is it that Resimac can settle $4 billion in a half if the opportunity presents itself without materially changing our cost base. And therefore, it requires investment in our core systems and we're excited by the functionality that kind of modern cloud-based technology delivers to the organization. The other piece that's really important is actually just remaining relevant in the market. And that is consumers today and their expectations of financial services companies in terms of their banking functionality is heightened in this market. So it's important that we remain relevant. It's important that all of our customers have the common features and the functionality they need from a banking perspective. So we also look at the back end experience. And we think, okay, well, what is it that we're not offering customers today despite our -- obviously, our strong growth over the last 3 years, where are those pieces, where are those pain points we're not covering of on. And our digital platform and our digital experience obviously, continuing the investment we're making, it'll require further work to make sure that we are in front of that curve in terms of providing a true digital experience to customers. So we see that it's a scale piece, it's an internal cost efficiency base, but it's also a big driver of AUM going forward as well.

Right. Where do you expect the cost to -- after -- so when will it be fully finished, so you're ready to get the benefits of it?

So at the end of this calendar year is when we expect to, let's call it, stand up or drop that main environment into the business and kind of obviously both for customers to see that benefit as well, that's existing customers as well as new customers. But I think when you think about technology and digitization and the fact that a big part of our service offering going forward is you never really finish your digitization journey, but what we're calling out is obviously costs that relate to a replacement of our core systems, and we don't expect to be replacing our core systems for the next 10 or 15 years.

Right. So where will the cost-to-income ratio once you've -- once the new system is operational fully, where do you expect the cost-to-income ratio to go? It's now 31.1, where do you expect that to go?

We'd like it to go as low as possible. But at the end of the day, it's a subject of growing income faster than we grow expenses. And this one-off expense in '21 won't be there in '22. And then we want to, as we talked about, continuing to grow the business, how can we settle $5 billion, $6 billion, $7 billion per year and maintain the cost base. And obviously, that brings revenue benefits. What this project also does is enhances our current customers' banking experience and we know that needs improving, and that's going to help us with retention, which also helps with our book growth.

And it would be a given to say that you -- the expenses that you're doing for the IT were obviously built in your profit forecast?

The profit forecast in the outlook, the guidance we've given?

Yes.

For FY '21.

Correct. That $4.5 million is included in that.

Your next question is from the line of Andrew Tan from Bell Potter.

Thanks for the presentation, it's really well thought out. I just had a question. Firstly, to clarify the IT cost of $8 million. Is that a one-off? So next year, aside from the $1 million to $2 million you might spend extra in FY '22, that is not going to be repeated?

No.

Not that particular project. No, right. Yes. So the $1 million to $2 million will definitely be in, Andrew, in FY '22. But that project will complete and that's a circa $10 million project. That's a one-off project. Yes.

Okay. And in terms of NIM, I guess, in the slide, you alluded to warehouse pricing coming down at the end of the half. Can you quantify, I guess, that -- I guess, NIM tailwind from reduced warehouse pricing?

Yes. We've got 7 warehouse providers, a mix of offshore and onshore. So some of the pricing has been negotiated, some of them -- some of the repricing events are still to occur. But we have got attractive rates. So we've obviously got a mix between warehouse and RMBS. We're moving AUM out of warehouses into RMBS as we're completing new issuance. I think the best bellwether potentially for you will be yesterday we mandated our $1.5 billion RMBS deal, which means the pricing for that will be out pretty soon, Andrew. And you'll be able to gauge -- compare that pricing to the RMBS issuance that we've done and you can see the differences in the market pricing. I know we have different RMBS, but it will be a decent bellwether for you.

Yes. But it will only reflect a portion of your book, I guess, the portion that's funded by the warehouse and a portion that's funded by this new issue?

Exactly. Exactly. So it's not -- it's not that amount the total book, but it's obviously a portion of it and then we're trying to increase the percentage of all the repricing that we're doing in 2021 to offset the competition in the market for new business, which is obviously driving yields down for everyone in the industry.

Okay. And I guess, in the second half, you have a BBSW tailwind of 7 bps based on the average in the first half. So how do you look at kind of balancing NIM versus volume growth? I guess with some of these NIM tailwinds it probably can let you be more aggressive to get home similar growth?

That's right. Yes. And you've got, obviously, the organic squeeze or runoff on NIM that you have on your book, which has been there forever and a day is kind of further amplified in this heavy rate refinance market as well as obviously competing for new business. But you pointed out the 2 tailwinds and that is, obviously, there's still further movement in terms of the average BBSW over the period as well as a tailwind in terms of credit spreads relating to new term issuance, but also warehousing. But as you also called out, that can take time to move through the entire $13 billion book.

Okay. And just lastly, on the $2.1 billion settlements done in the first half, can you provide like Q1 versus Q2 split?

Q2 was stronger than Q1. I don't have the exact amount on me, but there may be $100 million or $150 million difference.

Your next question is from the line of Ray Gin from Australian Ethical Investors.

Getting back to the NIM. With all that moving parts there, is your exit NIM around about what the period NIM was, 2.11?

Sorry, say that again, what's the end -- the 31 December NIM?