Resimac Group Limited (RMC) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Resimac Group HY '22 Investor Call. [Operator Instructions] I would now like to hand the conference over to your speakers today, Mr. Scott McWilliam, Chief Executive Officer; and Mr. Jason Azzopardi, Chief Financial Officer. Please go ahead, gentlemen. Thank you.

Thank you. Good morning, I am back to welcome you to Resimac's results investor conference call for the half year ended 31 December 2021. I'm Scott McWilliam, CEO of Resimac, and with me is Jason Azzopardi, our CFO. We will be talking to the investor presentation lodged with the ASX this morning and welcome questions at the end of the call. In today's presentation, we'll take you through our first half performance as well as an update on the FY '24 targets and progress on our strategic priorities. The macroeconomic environment has changed significantly compared to where we were only 6 months ago, when large parts of Australia were in lockdown and Omicron was only just into [indiscernible]. Fast forward to today and the economic outlook looks more [ polished ]. International stakeholders are opened and will be imminently and restrictions are largely aided. Latest inflationary Omni data indicates an RBI rate rise will eventuate earlier than expected, most likely later in calendar year. And to throw an entirely new variable into the mid to have vertical attention or escalation in Eastern Europe, which have potential repercussions across the globe. Recent increases in fixed rate home loans and our indication that home loan interest rates have bottomed, with variable rates likely to increase our 2022 progresses. We are confident in the strength of the Australian property market, both in terms of property value and home loan activity. The [indiscernible] currently having a stockpile of [ $250 million ] in savings during the pandemic. Furthermore, our customers are well placed to continue to service their home loans in an increasing rate environment. On average, our prime customers have managed [indiscernible] ahead on their repayments with our specialty customers. I have close to 2-year buffer across the set repayments. Supporting our customers throughout the pandemic and other extenuating circumstances continues to be a key priority for us. Notwithstanding, we are pleased to see the number of customers who have met our [indiscernible] financial as at 31 December actually reduced only 174 customers. Looking now at Slide 2 of the investor presentation, I wanted to highlight the 4 brands within Resimac Group. Resimac Australia increased assets under management by 13%. This was fueled by the outstanding success of our flexible specialist products, where our settlement increased 190% to $2.1 billion. We're also delighted in our new origination platform that went live in December 2021, providing scale benefits to our loan application process that will facilitate our next phase of growth. We're particularly proud to launch such a large [ Chinese ] project like the organization made record settlements during the half. Homeloans.com.au continued to increase brand awareness and build [indiscernible] -- materially contributing to our FY '24 settlements target. We launched our new statement brand promise across trading and back book pricing at prompted the surge in 5-star reviews and positive feedback. We expect this new approach to has an impact on our ability to retain customers and with other online home loan providers. Our above-line maketing campaign [indiscernible] and embedded into Foxtel and Kayo Summer of Cricket is also providing strong impetus into the second half. Resimac Asset Finance is a key growth engine for the group and is scaling rapidly. At December, quarter settlements were circa $400 million annualized with a significant growth in future years. We've commenced a project to implement a new origination platform, which will go live in Q1 FY '23. Furthermore, we've implemented a number of funding initiatives providing further improvement to our cost of funds. Over in New Zealand, our Resimac brand continues to be recognized as the leading New Zealand home loan non-bank lender. I'm pleased our new core banking system seamlessly been lined early in January for our new game customers, providing them with a new market-leading online banking spirits. We expect the Australian environment to go live [indiscernible].

Can I please ask everyone to turn to Slide 4, where I'll provide an overview of our performance. During the first half, the group generated a net profit after tax of $53.5 million, a 6% increase compared to third quarter of '21 and in line with the second half of last year. This profit increase compared to the first half of '21 is underpinned by our home loan assets under management increasing [ 13% ] and lower loan impairment expenses as the impact of COVID on our customer serviceability receives. Net interest income increased 3% driven by higher AUM, partly offset by lower margins at the continued low rate home loan environment over the past 12 to 18 months past industry pressure on portfolio years. Operating expenses increased $4.3 million or 13%, driven by our 100% write-off to the P&L of our core banking and origination project and a highly competitive [indiscernible] . The higher net interest income was offset by operating expenses, resulting in our cost to income ratio increasing 230 bps to 33.4%, a ratio that remains in industry lines despite the increase in [ fuel ]. I'm particularly pleased we continue to optimize our use of capital with our return on equity at an industry high level of 31.3%. As a result, we have increased the first half '22 interim dividend by 67% to $0.04 fully franked.

Thanks, Jason. Now moving on to Slide 7. I'm happy to report, our home loan business continues its growth trajectory with Resimac settling a record to prime settlements in the period of $3.5 billion, up 63% compared to first half '21. Most pleasing is our ability to remain nimble and quickly take market share when offering opportunities arise. With prime home loan rates of record lows and the added cap -- entitlement CapEx, we have moved our focus to an underserviced part of the specialist market, writing to $2.1 billion of special settlements, an increase of 190% compared to first half '21. The record settlements during the period demonstrates the stronger resilience of the group, Resimac record segments written by simultaneously taking a major project implementing our new originations platform. Home loan market competition remains increased. Therefore, I'm pleased that we continue to demonstrate the ability to increase our assets under management above system. Our home loan portfolio increased 13% to $14.6 billion highlighted by a 35% increase in our higher-margin specialist portfolio. Finally, our treasury function continues to deliver outstanding results. Whilst RMBS margin bottomed out in the second half of last financial year, we continue to issue RMBS bonds at lower margin than our last 4-year average, the benefit of which will continue to be received and a beta cost of funds in coming years. Furthermore, originations and AUM scale are helping us to achieve a lower overall cost of funds. I'll now quickly touch on our strategy before moving to questions. Please turn to Slide 16. We hold true to our mission of being a customer [indiscernible] company that made prime ownership, financial freedom and best on success, more achievable to everyone. Our Resimac brand and home loan businesses in Australia and New Zealand are designed to offer a broad set of products with flexible lending solutions that cater for a modest audience facilitated a predominantly proved third-party mortgage brokers. This is our largest channel, our largest opportunity measured by [indiscernible] and a market and strategy we've been refining and executing on for many years. We built this business on a promise of superior service to both living customers, and that promise remain unchanged. Homeloans.com.au is our new online direct-to-consumer brands, servicing a growing audience who refer to engage online and directly. This brand's low-rate C3 brand commence continues to regulate strongly as demonstrated by the overwhelming favor of the customer reviews and industry awards. We believe the market will continue to grow at a multiple system as customers become more and more comfortable transacting online. It is a customer-led digitally enabled low touch point channel targeted at a specific volumes. The growth of this channel is a strategic priority for the group. Resimac asset finance enables us to service what we believe is an under-serviced market. This is a logical and adjacent opportunity for business to offer high-margin products to new and existing audiences, leveraging off our existing funding infrastructure and distribution backlogs. [indiscernible] is growing faster than we originally anticipated and are expected to materially increase further when we implement our new originations platform in Q1 FY '23. In summary, our strategy is to continue to grow our assets under management above system by leveraging the strength of our brand across Homeloans and Asset Finance . We will achieve this with a deep and unrelenting customer focus that enables us to deliver better and multiple lending solutions to Australians and New Zealand. We believe our current investment in digital transformation, combined with the growth of our broker direct brand and show dealing position us to settle at least $8 billion in home loans and $1 million in assets finance in FY '24. These targets remain on track, on time and unchanged. I'll finish there and hand it back to the moderator to facilitate any questions.

[Operator Instructions] Your first question is from the line of Andrew Tan from Bell Potter.

Scott, Jason, just the user question about NIM, I guess, what -- how do we look at the shape of NIM in the second half?

Thanks. Yes, look, I think the second half will probably be -- probably if we think about the next 12 months, so obviously, there's good 3 levers in market talking about the home loan prices. The two main factors there is -- or three, a mix of what we're originating. So you can clearly see in this half with the record specialist settlement we've done that's a positive for the blended pricing in the book. The runoff over the last 12 months has been much higher than the industry has seen previously and certainly that we've stated in the past. We are seeing that value with fixed rates moving out -- new fixed rates moving out. And then -- but the new business rates for prime and even some specialist products are still really low. So in summary on that, on pricing, we still see some compression on the interest income so over the next 6, 12 months before it hits the absolute bottom. Funding costs, we're continuing to originate our new RMBS deals and our warehouse pricing remains broadly flat. So we expect the lending cost of funds to continue to come down. We probably don't see the offset of the savings on our liability side offsetting the assets. And then BBSW, unfortunately don't have the answer for that for you, but clearly something you can want to turn on a daily basis. But we watch good interest, obviously, how that will move in the next 12 months. It's not going to be as benign as it has been. But very interestingly, it hasn't got a lot -- haven't -- the one month hasn't moved at all with everything that's been going on recently. Six months have moved down slightly, which can be a little bit of a bellwether for the future, but not materially. So at this stage, we're just taking a pretty neutral view on it.

Yes, yes. So I guess, in terms of an exit kind of NIM at 31 December, like I presume it was lower than a 191 bps?

Yes, that's correct. That's the average for the half, no?

Yes. So how would we look at that? Is it -- is the exit NIM 180 bps or 185 or whatever?

Yes. Well, if you take the -- yes, you take what the balance is at the start and put that average in the middle, that's about right, yes, what your exit NIM is.

Okay. All right. In terms of the collective provision, am I correctly saying that you haven't really written anything back in terms of that COVID overlay?

Yes. So yes, we're not -- we don't -- we removed the way at year-end from COVID overlay as such. And what we do is on a loan-by-loan basis where treating anyone who was in hardship in the past on an individual basis. So we've been quite conservative on how we treated them. So the answer is specifically to your question, we haven't written anything back, and we retain quite a bit of services in that provision.

Yes. Okay. Because I guess that 23 bps provision hasn't really changed from the second half. And I guess a lot of your peers have kind of within that collective provision back, so let's say, is there anything different in your book? Or is it more of a conservative business factor?

Yes. No, there's nothing different. If anything, I'd say, if I think about the competitor you're referring to, have restacked, i'll actually say that our book is all conservative in demands. So they're probably just being more aggressive in that vision back, which is not bad. I'm not opposed to their strategy or say anything against that. But we will look at it at year-end. And I have a really good view of whether we are over-provisioned or not. Just to offset that to future, we do expect with the [indiscernible] our aim for that is that the collective division will start to build up, as when we'll start to take a larger collective division in [indiscernible]. So -- but yes, we've got quite a bit of conservatism in there for sure.

On Slide 12, if you're looking at our year performance, you can see the work there is actually exactly where you want to be when talking to the performance of the book, those not move tracking well below historical average is attracting globalized spin off. So yes, we certainly on the provisioning side and the book performance itself is [ only second ] to none.

Okay. And just a final question about IT costs. Is that kind of elevated at this stage? Or is that kind of the run rate going forward? Or was that kind of brought forward investments given the number of new platforms that you're working on?

Yes. Look, this year is clearly the combination of our major projects, and has a lot of cost in there, the majority of the project cost. Look, we've always said that we expect to continue investing in the business from a technological point of view. It certainly, I wouldn't expect it to go up. We probably think we've spent less in future years than we spend this year. So yes, I -- wouldn't say that it's going to keep increasing. I would expect there to be some drop off in that, but not the whole project cost isn't going to come out. We're not going to have any projects at all. We will continue to organize this -- the 2 main plants of tech now that underpin from application to settlement and the post settlement experience to the customer. They're cloud-based, they're very, very good basis of software. We need to keep investing in those to get the most scale benefit out of them, and that's what -- as large or as expensive as what we've done this year.

Okay. But in terms of the distance between kind of the ongoing vessels, kind of upfront project work, is it material? Or is it just more like the mill mark rather than the $5 million or $10 million mark.

Sorry, what was it same that again, sorry?

[indiscernible] Okay.

Premium, I'd say Yes. So I think we've been -- I'll be looking at bank premiums next year at a high level, that's how I'm thinking about it at this time.

[Operator Instructions] Your next question is from the line of John Hynd from Wilsons.

Perhaps if we could start on the book. Obviously, prime is trending lower in terms of originations. It has been for a couple of halves. And I've read your commentary around competition increasing. Is this, I guess, shift -- is it strategically by design with you guys now? Are you perhaps moving more to specialists because you're leveraging the technology that you've got, is the first part of the question. And then the second part of the question is, with homeloans.com, where is that product? You're saying it's growing ahead of expectations. Where is that product trending? Like where are you -- what category you're growing in? Is it attracted to a prime or a specialist type customer? And perhaps give us an indication on maybe the size and where you expect it to get to like what percentage of the loan book, where do you expect to get to in that regard?

Yes. Okay. John, remind me if I don't add them the right order and the [ instruction ]. So I think the first one, yes, there has been a trend down in relation to prime, and we forecast for that. So we just like to turn our attention to where is it we can take market share, where the night is not finely seeing, where the less aggressive from a NIM is quite perspective. And coupled with [indiscernible], coupled with obviously a competition in that particular market. We continue to service that market, that prime market. We continue to have what we are a very strong price in the market, but a very competitive environment. It's leading up to probably than the end of last year -- last calendar year. And so in a changing prior to that was where do we grow the one service and on to that strategy is going very well. So the prime market is still a very important market to us. Technology investment job is more likely to help on the prime side, in terms of driving a lower cost operating model, more efficiency, more automation, better broker and customer experience than it does probably from the specialist side. So the tech actually is more supportive of prime growth. And then leading into your question related to Homeloans.com.au where the technology is a really important part of that service or value proposition because it is all around high automation, lower touch, speed and flexibility. We see the technology underpinning the growth of homeloans.com.au, as we think about those targets, we've kind of set ourselves internally and obviously, we'll call out straight to the FY '24. That market is growing and will continue to grow above system. I'm talking about the online market. So we're not in a new play. That market will continue to grow. We just see significant growth in that sector. We don't see necessarily taking market share late from buying. We just see taking market share away from -- bricks-and-mortar distribution. And that opportunity, we think with our brands and our positioning and the investment in technology that we see ourselves as a major player in the online space, which entail is laying more towards prime and specialists. That said, I think specialist is a different opportunity in the online market, but it's likely to follow down the prime.

That's great. I think you did a good job with my long-winded question, Scott. The second question I had, just around IFS, if you could -- just give us some more color there. I mean it looks to me like the book has halved on a year -- on a half-on-half basis. Correct me if I'm wrong, -- but now -- but you're talking about having a run rate of $400 million. Can you perhaps let us know when you roll -- when you -- I guess, when you execute on your strategy there, how do December look, how did January look and how is February looking? Maybe to give us -- give us [indiscernible]

I'll let Scott answer that, John. But you're succeeding that question, the asset finance book at halved.

Yes. I might be -- I've got a couple of results on, so I might be overlooking something there.

Yes. I mean it's coming up a low base and the AUM is probably close to triple -- But like -- it's small, let Scott talk about the settlement run rate in the half.

Yes, sure. Yes. So John, it has halved. it's probably doubled or tripled, it's actually it's going online. And as I mentioned earlier, we're really pleased with the growth of that particular channel where the last quarter annualized, it's about $400 million in settlements. Look, it is coming off a low base, like Jason said, and it is kind of tracking how we expect it to. And we will remain -- concerning probably is the right word. But we -- our expectations in the short term are reasons there as we kind of grow out on this book, but that stock offers the multiple. Technology is just as important in asset finance as it is in the [indiscernible] . In some cases or even more going where direct-to-consumer asset finance, you're talking in segments, you're not talking hours or days for approval to technologies. So the run rate of asset finance each quarter continues to improve. So we're exiting those quarters -- each quarter on a high settlement. So it's tracking really well into FY '23. FY '23 is a really important growth trajectory as we think about our target for $24 billion in settlements. So that's to your financial view. So we're tracking into FY '23, how we expect. The loan origination system was alone heavy in terms of that continued growth in FY '23. As we enter '24, when we mediate writing circa $80 million a month before there about as we come into '24 and land a $1 billion number for FY '24 ideally high.

[Operator Instructions] There are no further questions at this point. I would like to hand the floor back to your speakers today for any closing. Please go ahead, gentlemen. Thank you.

Look, thank you very much for those shareholders here. Thank you very much for your support. Obviously, we are happy to take any questions outside of particular forum and enjoy the rest of the day. Thank you.

Thank you. Ladies and gentlemen, that does conclude our teleconference for today. Thank you for your participation. You may all disconnect. Thank you.