Resimac Group Limited (RMC) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Resimac Group FY '21 Investor Call. [Operator Instructions] I would now like to hand the conference over to your speakers today, Mr. Scott McWilliam, Chief Executive Officer; and Jason Azzopardi, Chief Financial Officer. Please go ahead, gentlemen. And thank you.

Thanks, James. Good morning. It's my pleasure to welcome you to Resimac's results investor conference call for the year ended 30 June '21. My name is Scott McWilliam, CEO of Resimac. With me is Jason Azzopardi, our CFO. We'll be talking to the investor presentation lodged with the ASX this morning and welcome any questions at the end of our presentation. As I think back 12 months ago, even 6 months ago, I don't know if anyone could anticipate that a large portion of our population would be in lockdown again today. My heart goes to out to anyone who's been infected by the virus. Supporting our impacted customers through these terrible times continue to be the key focus for the business. However, notwithstanding trials and tribulations brought about by COVID-19 and other adverse events, the Resimac Group has had a great year. We were pleased and humbled to be awarded Non-Bank of the Year of the 2020 Australian Mortgage Awards, a recognition of the compelling brand proposition we offer to our third-party distribution partners and also our customers. Reading that growth has been well placed to service the increasing strong residential property market demand through the strength of our multichannel distribution model, which now includes 2 new brands that we launched in FY '21: our new direct-to-consumer channel brand homeloans.com.au; as well as Resimac Asset Finance, which enables us to offer a full suite of lending products to customers and commercial borrowers. Looking now to Slide 2 of the investor presentation. I want to highlight our [ consumer ] brands within our core group. Moving on to [Audio Gap]

[Audio Gap] on the prior year. We also issued our lowest margin Prime and Specialist RMBS transactions since the GFC, reflecting strong investor demand for our mortgage-backed securities. homeloans.com.au, launched in September '20, has contributed to the growth of our direct consumer assets under management, which increased by 10% to $1.9 billion. The lower cost of funds from Prime loan has supported our aggressive growth strategy with strong lead generation and driving effective cost per settlement and a market-leading front-end technology to provide customers with a seamless online application process. Resimac Asset Finance launched early in the calendar year on the back of our 100% acquisition of IA Group. We launched a new brand to the broker channel in April with strong support from our broker partners. This was followed by the launch of our new online direct-to-consumer channel. By restructuring the business as warehouse facilities, we have been able to reduce the cost of fund, enabling us to offer competitive loan products across consumer and commercial finance. Over in New Zealand, our Resimac brand continues to go from strength to strength, reporting $405 million in settlements in FY '21, up 81% on the prior year. Our securitization program in New Zealand followed the same trend in Australia, with our RMBS Prime deal issued at materially lower senior margins compared to previous years. Furthermore, the new origination system launched in August paved the way for faster and more streamlined loan processing for brokers in New Zealand. Can I please ask everyone to turn to Slide 4, where I'll provide an overview of our performance. In FY '21, the group generated a statutory profit after tax of $107.6 million, up 92% compared to FY '20. To provide the market with a true underlying recurring profit of the business, we normalize our profit where we received one-off income items unlikely to be repeated in future periods. The normalized profit after tax of $104 million excludes the fair value gain on [ an accounting perspective ]. This profit increase is underpinned by a 29% increase in net interest income to $242.7 million, driven by a combination of home loan assets under management increasing 11% and home loan interest -- net interest margin increasing 17 basis points to 207 basis points. The higher net interest income, combined with our continued cost discipline, resulted in a significantly lower cost-to-income ratio of 32.1% for the year, a decrease of 580 basis points. I'm particularly pleased we continue to optimize our use of capital with our return on equity at an industry high level of 36.9%, an increase of 1,140 basis points. As a result, we have increased the FY '21 final dividend to $0.04, bringing the full year fully franked final dividend to $0.064, a 113% increase in FY '20. Finally, moving to Slide 5, I wanted to call out our operating expenses and loan impairment expense. Firstly, operating expenses increased $8.5 million or 14% compared to FY '20. As I outlined in the half year, our core banking replacement project is well advanced, with $7.8 million of costs incurred in FY '21. The cost of this project has been fully expensed in the profit and loss statement. We expect a further $4 million of costs to be incurred in FY '22, specifically related to this project. Secondly, loan impairment expense of $2.7 million decreased 88% compared to FY '20. You will recall last year, we raised a COVID overlay of $16.4 million. This overlay is now released and all loans credit risks are assessed individually within our expected credit loss model and will remain so going forward. We remain conservative on the potential credit risk on loans currently or previously in hardship or [ arrear ] payments. The movements in our collected provision are summarized in the table on Slide 13.

Thanks, Jas. Moving on to Slide 8. I'm pleased to report our home loan business and growth trajectory continues, with Resimac setting a record home loan settlements of $4.8 billion, up 3% compared to FY '20. Most pleasing is the momentum we built in the second half, [ settling ] $2.7 billion, an increase of 25% compared to the first half. This growth is built on the strength of our broker and direct brands in both Australia and New Zealand. The home loan market competition is fierce. Therefore, I'm pleased we continue to demonstrate the ability to increase assets under management at a multiple of system. Our home loan portfolio increased 11% to $13.8 billion across all products and channels. Once again, the second half momentum is evident, with annualized AUM growth in the second half of 14% compared to 8% in the first half. Finally, our treasury factory function continues to deliver outstanding results. The second half featured record low senior margins on our RMBS issuance with our high-quality portfolio and origination strategy resonating well with investors globally. As reported to the market on Friday, we priced a $1 billion Prime RMBS at levels not seen since before the GFC, including 3-year notes pricing and builds by 68 basis points. This lower cost of funds allow us to aggressively target product segment where we believe we can take market share. Our cost of funds will continue to benefit into FY '22 and beyond from these lower RMBS margins. As mentioned earlier, we are pleased to report the Board has declared a fully franked final dividend of $0.04 per share, resulting in a total dividend for FY '21 of $0.064 per share. I'll now quickly touch on our growth strategy before moving on to questions. So if I can ask you, please move to Slide 16. Our mission is to create a digitally enabled nonbank lender, providing innovative, competitive and accessible lending solutions to more homeowners, consumers, businesses in Australia and New Zealand. Our Resimac-branded home loans businesses in Australia and New Zealand are designed to offer a broad suite of products with flexible lending solutions aimed at a wider audience, facilitated predominantly through third-party brokers. This is our largest channel and largest opportunity measured by AUM and a market and strategy we've been refining and executing on for many, many years. We built this business on the promise of a superior service to brokers and customers, and that promise remains unchanged. Homeloans.com.au is our new online direct-to-consumer brand, servicing a growing audience who prefer to engage online and directly. We believe this market will continue to grow as customers become more and more comfortable transacting online. It is a customer-led digitally enabled low touch points channel targeted at a specific audience. The growth of this channel is a strategic priority for the group. Resimac Asset Finance enabled us to service what we believe is an under-serviced market. It is a logical and adjacent opportunity for the business to offer new products to new audiences, leveraging off our existing funding program and distribution platform. Consistent with our home loan strategy, a strong digital experience for underpinning the delivery and service proposition across asset finance. Finally, our strategy is to continue to grow our assets under management at a multiple of system. We believe our current investment in digital transformation, combined with the growth of our brand across brokers and also the direct channel in Australia and New Zealand position us well to settle at least $8 billion in home loans and $1 billion in asset finance in FY '24. I'll now hand it back to you for questions.

[Operator Instructions] The first question comes from John Hynd.

Congratulations on a good result. If we could perhaps just touch on the outlook for your NIM. Second half was down a little bit. Could you perhaps help us understand that a little bit better and perhaps -- how much of a benefit do you expect the recent RMBS issuances that have been done at quite attractive rates. How much do you expect that to impact your NIM in '22 and beyond?

Yes. Thanks for the questions. Look, I think the way to look at NIM is in 2 factors. One is the home loan pricing. Now clearly, we are seeing very, very competitive pricing on new business in the market, and that is continuing. And there's absolute pressure. We're not immune to that pressure on yields. The yield factor in FY '22 will largely be dependent on back book runoff. We are seeing a lot of competition in the market. And we are seeing when that back book runs off, it can be a hit on our yield. We -- obviously, our hedge to that is the amount of nonspecialist settlements that we can originate in FY '22. So we do expect yields to continue to decline in FY '22, but we think we're going to hit the bottom in FY '22. In terms of cost of funds, I've tried to best demonstrate the benefit of RMBS issuance on Slide 10. And what I've got on that chart there is how much we've originated in RMBS in each year and what the margins were in each year for the RMBS. Now most of our RMBS deals, there are few exceptions, are 4-year deals. So that allows you to start projecting about what's turning out on our RMBS and what will -- and what benefit we're getting from the new RMBS. In summary, we're going to get the benefit from these low-margin RMBS for the next 4 years. And the longer we continue with these low margins that we've been able to originate in the second half, our blended cost of funds is going to continue to benefit from that.

Great. And just 2 more for me. With the ABS business, conscious that you probably don't want to discuss the products publicly just yet. But I mean how receptive have the broker's network been to date? And can you perhaps give us some color on the book in the second half? I think it was about $80 million in the first half. I mean we were able to sort of drive that business this period, and I guess then with the quality of statements around the targets you've got for $1 billion by FY '24.

Yes. John, you're right. Yes, that's all right. So I'll go back to the first piece is we are seeing month-on-month growth in settlements through that channel. And which obviously is encouraging, albeit we haven't fully launched ourselves to all of the distribution yet because it's important that we've got the process and the technology right to take advantage of that opportunity that I touched on earlier, where we do believe it's an under-serviced market. So our investment in technology within asset finance is pretty similar to the way that we think about the investment in technology and digitalization within high growth business. And we will be prepared -- the business will be prepared to have production to support more than $1 billion of settlements in a year by FY '24. And we're encouraged by just albeit we're coming off a low base. We're obviously doubling or tripling the book, that's the way we kind of think of it. And that is likely to happen for the next couple of years because we are coming off the low base. And we believe those targets that we set are very realistic.

Right. And just one more on that guidance slide. Sorry.

And did you touch on quality or maybe that base?

On the quality. Sorry, I was -- I thought I was talking about quantitative or qualitative. And just one more on that guidance slide. They're pretty aggressive targets. How do you -- I mean how do you plan to get there? And how much -- when you think -- when you step back and you think about the environment you're playing in, how much is perhaps incumbents not playing as much in your space and pulling back? And how much is Resimac taking share?

Look, I think as we grow and continue to grow AUM at a multiple of systems we then -- we are obviously taking market share. But when we step back and have a look at that kind of number when we're kind of forecasting out of what are the targets we set ourselves and how we're setting up the business today to give ourselves the best chance to do those targets, when you break them down into monthly settlements and you think about the size of system, there's still not big numbers. It is a $400 billion a year home loans market. So we're making statements that we believe with the service proposition and the technology to support that, we're looking to take more than $8 billion of that. It gives you a lot of comfort because I wouldn't call them overly aggressive. And the same to be said for the asset finance as well. In a very, very large market, and we believe there is an opportunity for us to -- and in the near term, and I'll call 3 years the near term, to take 1% or 2% of that market. So when you bring it back to monthly settlements and you look at our business and the different channels and brands that we have, when we think about them in isolation, we believe that they're very achievable.

Our next question is from Tim Lawson.

Really just almost a follow-up to the discussion you've been having already. But in terms of the core system you put out the investment, how important is that in being able to sort of do the volumes you're talking about?

So in terms of doing the volumes, Tim, what we're rolling out in terms of our new origination system, which we've actually just rolled out in New Zealand, and we will be rolling out in Australia staggered rollout in Australia between now and probably the end of October is that particular system that probably more supports production. It's that particular system that allows us to find scalability when thinking about settlements. The core system that you touched on is probably more important when we're thinking about user experience, because it very much then supports the back-end experience with our customers when we're thinking about the weighted average life of our customer, which is obviously extremely important, because it's that particular system that also is supporting that banking experience and that mobile app experience that we're looking to roll out in New Zealand and in Australia in the near term. So the origination system, which we just rolled out in New Zealand and just about to roll out in Australia is more about helping us in supporting production and also reducing turnaround times and driving scalability. The second piece is more about UX.

Yes. Okay. And when that expense that's currently going through the P&L is done, does that disappear? Or do they get -- those costs remain in some other way in the business?

It's a good question. So we -- look, we think our investment in process and digital, we'd like it to continue. We -- this is a large transformational project. It would be definitely the highest cost one-off project. We want to continue to invest to build scale into this business. We have very, very large growth ambitions. So the honest answer, we don't have that mapped out what we do post the transformation project because it is so large for us. But we want to continue to invest in this business long term and keep positioning it for future growth. So I don't want to commit and say definitely, yes, because there will be an element of spend. Whether it's the same amount of that project, it's to be determined.

Tim, we don't have any -- there's no plan for us to go through a project of this size in the near term. I've been told you only replace your call banking system once in your career. But what we will be doing going forward is I don't think you actually ever invest. So you have to stop investing in technology and driving kind of that -- those digital outcomes, which is all around speed, flexibility and user experience. What we will do going forward is we'll continue to build applications on top of the foundation, which is that core banking system that we are in the process of replacing. So we won't be looking at projects at this size in terms of individual project size from a dollar perspective nor from a time period perspective, but we will continue to invest in and around that platform, especially from an application perspective to continue to improve that user experience, which benefits us internally from an efficiency perspective, but obviously, very much driven by the user experience at the Street level.

[Operator Instructions] Our next question is from [ Michael Kent ].

Yes, fantastic results. I note that you've increased profit like 80%, 90% for the last 2 years. How do you think that the market should be -- or maybe internally, how do you measure your performance? Is it a combination of return on equity, profit growth? I mean I'm just curious as to what sort of internal measures you have for performance and what your objectives might be in that regard.

Yes, good question because internally, we don't necessarily spend a lot of time looking at the numbers that dropped out of the bottom of achieving our KPI. So the number that we do look at internally around cost-income ratio is something that's kind of a demonstration of whether the business is, obviously, is growing and looking for efficiencies within process and the system also demonstrates the cost discipline. And it's sometimes easier during strong times for costs to build some back in those costs, and that's obviously something that we're very focused on and so is the Board. And the other piece is return on equity. We run a capital-efficient model. We'll continue to run a capital-efficient model. And I think that's -- there are probably 2 measures that we talked about quite a bit internally. And the other piece is -- and which is probably becoming a growing KPI when we think about internal conversations, which should then just resulting in greater settlements, greater AUM and a growing profit is customer insights. We are very much focused on moving towards more of a data-driven organization to build out on the intel that we have today. Things around predictive analysis and things like that is something we spend a lot of time talking about. So that the measure of customer experience is probably a KPI internally that we talk about quite a bit. So I'd say across those 3 measures, they probably get 80% of the airtime.

Okay. What about dividends? Is there much discussion about that internally? I notice you've got a pretty big store of franking credits there. I mean it's great to see the increased dividend, but you probably could increase your payout ratio from 25% and still have enough room for growth, would you?

Yes. Look, we're mindful of supporting the organization or investing back in the organization for further growth. We still see ourselves as a growth stock more than a yield stock. And I believe with the improvement in our payout ratio, albeit still modest in that kind of 20% to 30% range. We recognize the importance of obviously delivering those profits back to shareholders. But growing -- investing internally on technology and investing in our funding program is critical to our growth. And we will continue to support what I'd say is a modest payout ratio. And in time, we'll move towards what we believe will be a healthy blend between a growth stock and a yield stock.

Mike, just to add to that, we've always run a very capital-efficient business, which is clear in the rally. We're talking about some ambitious growth targets, and we do need capital for that. Asset finance requires a bit more capital than highlights in the funding structure, as Scott's alluded to. So we are reinvesting capital either into the projects that we're doing or into our funding programs, which will deliver long-term benefits to shareholders. We've got the track record where we've done -- we've had efficient use of capital as now, and we'll continue to do that. But we're not sitting on piles of cash and not using it efficiently, I can assure you.

Our next question is from Andrew Tan.

Well done, and thanks for your efforts on managing the business. Just a question about the comment about warehouse funding. I guess the margin that was elevated during COVID. So is there a benefit from that normalizing, I guess, going forward?

Yes. So you generally do. So our warehouse pricing or margins would generally follow market pricing. So obviously, the first round of [ curve ], let's say, 12 months ago where credit spreads moved out, so does warehouse pricing. But obviously, as credit spreads have moved in, in the term markets, will then so will warehouse pricing. On average, and I'm not saying happens, it's correct every day of the week. But generally, the warehouse pricing will trade at a slight premium to the term pricing. And the reason for that is, by definition, it is a warehouse -- the objective is to move from that warehouse into the term market. So the economic benefit need to be more attractive to move into the term market to support that process. But the 2 generally move together. There might be a slight lag between warehouse pricing to term market, but they're generally priced pretty similar.

Okay. So...

And if you expect -- should warehouse pricing stay where it is today for the whole of FY '22, that would be a tailwind to NIM compared to '21. The average warehouse pricing in [ '22 ] will be lower than '21.