Resimac Group Limited (RMC) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by and welcome to the Resimac Group's First Half FY '23 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 and good morning, everyone. I'm pleasured to welcome you to Resimac's results investor conference call for the half year ended 31 December 2022. As mentioned, I'm Scott McWilliam, the CEO of Resimac, and with me is Jason Azzopardi, our CFO. We'll be talking to the investor presentation lodged with the ASX this morning and welcome questions at the end of this session. In today's presentation, we'll take you through our performance highlights, an overview of the macroeconomic environment, the quality of our portfolio and our mid-term focus. I'd ask you to turn to Page 3. I'm pleased to report the group continues to demonstrate strong profitability with a normalized NPAT excluding the impact of fair value movements on derivatives of $40.7 million for the first half. Our cost to income ratio of 42.2% remains at industry lows at a ratio we believe is sustainable going forward. Our home loan portfolio increased to over $14.7 billion compared to prior corresponding period, however, is lower than the record highs we reported at 30 June '22. The lower AUM is driven by us originating $2.4 billion of settlements and higher prime runoff as large banks are targeting refinance with aggressive interest rates and cashbacks. Our asset finance offering remains steady and has progressed well throughout the year and we've set out $210 million during the period. And finally, I'm pleased to report the Board has declared a fully franked interim dividend of $0.04 per share. Moving to Page 4. The macroeconomic environment has evolved significantly compared to the full year results 6 months ago. The aggressive pricing cycle has continued through 2023 with more increases forecast in coming months as Central Banks struggle to contain inflation. A number of economists are now forecasting a cash rate of 4.1% by 30 June 2023. Rate increases are clearly placing downward pressure on home loan market activity with December '22 purchases 30% lower than December '21. This has fueled aggressive change for refinance activity by the large banks, particularly in the prime space. Whilst we understand the need to tame inflation, the RBA has a precarious position with $300 billion of fixed rate home loans expiring over the next 12 months. The RBA will need to wait for these fixed rate portfolios to roll off to today's rates against the true impact of this tightening cycle and what it will have on the economy. Whilst we are experiencing increase in early stage arrears, our portfolio remains in great quality. We have a lot of confidence in the credit quality of our portfolio and the limits that we have in place. As highlighted on Page 4, 5 and 6; we provided some insights of that portfolio. Some of the call-outs in relation to the portfolio include as of 31 December, our specific provisions were a record low of $2.5 million. Of that, collective provisions remain unchanged. We increased our collective provision materially at 30 June 2022. This increase was driven by a $9 million increase on our macroeconomic overlay. Whilst this was an outlay to our peers at the time, it's proven to be prudent in hindsight. I'll now hand over to Jason to talk through some of the financials.

Thanks, Scott. Turning to Page 8. In line with our year end, we have included a normalized NPAT number excluding the impact of fair value on derivatives. This NPAT number was $40.7 million for the first half, higher than second half '22 albeit second half '22 was impacted by the one-off $9 million macroeconomic overlay loan impairment expense. As Scott mentioned, our cost to income ratio of 42.2% has increased. However, 40% to 45% cost to income ratio range is a realistic medium-term target for the group. Our operating expenses were higher and this was predominantly driven by an increase of about 20 FTE and the inflationary impact on employment expenses. We are committed to ensuring our operating cost base reflects the current challenging home loan market in the second half. Return on equity for the period was 20.8% annualized. This has decreased from previous highs as our asset finance book absorbs upfront capital whilst in the book [ increase ], a timing drag unrolling. Future growth in the asset finance portfolio will be really accretive in the future. And finally, as Scott mentioned, the Board has declared a fully franked interim dividend of $0.04 per share, an annualized dividend yield of circa 7%.

Thanks, Jason. I would now ask everyone to move to Page 9. Home loan settlements were lower driven by the aggressive pricing and cashback targeting prime loans refinancing broadly what is a 30% drop in system growth from December '21 to December '22. Pleasingly, home loans has reported strong settlement in our specialist portfolio of $1.6 billion, which is broadly in line with the previous half. The settlement outlook for this calendar year is challenging. The RBA term funding facility provided to the ADIs as well as unusually high household savings and cashbacks providing large banks with a competitive advantage albeit temporarily. Moving to Page 10. Our home loan AUM increased slightly compared to December '21, however, was a decrease on the highs of 30 June. Since the RBA term funding facility was fully drawn down, we've reported 3 consecutive halves of prime AUM runoff. We expect this uneven playing field to continue into FY '24 or broadly calendar year '23 until the TFF is repaid and household savings are drawn down. Pleasingly, our higher margin specialist portfolio continues to grow and our broad range of products are assisting under-serviced parts of the market. Moving to Page 11. I'm pleased to report our NIM management strategy. So our home loan NIM stabilized in 1 half '23 increasing 4 basis points compared to the second half of '22. Despite the BBSW curve moving from an inversion to cash rate to a curve tracking ahead of anticipated RBA rate increases, we have managed our repricing strategy accordingly to offset these BBSW increases. The benefits of our repricing strategies would be larger if not impacted by the drag of BBSW increasing in advance of the cash rate. In 1 half '23 alone, NIM was impacted 21 basis points from this drag. This drag will impact us again in second half '23 whilst the tightening cycle continues. Funding costs increased 8 basis points driven by an increase in our RMBS track and annual repricing of our warehouses. Whilst the signs are early, nonbank RMBS issuance in early second half '23 appears to indicate RMBS pricing peaked in the first half. In summary, we're pleased with our first half profitability and sales performance in what is a challenging market. Our strategic focus on NIM management over AUM growth has been successful with NIM increasing 4 basis points during the period. As we have seen early stage arrears pick up in December and January, we remain confident Resimac's portfolio will absorb this stress. Furthermore, our conservative approach to provisioning over the last 2 years ensures our provision coverage is more than sufficient to absorb any potential credit losses arising from arrears. Despite the challenging operating market for nonbank, our strategy is to continue to grow assets under management where our NIM hurdles are met. Our focus will be in niche prime as well as specialist home loans as well as commercial asset finance segments. Over the short term, we expect the prime market to remain aggressive with banks continuing to write loans below cost of capital and continuing the cashbacks. Our strategy will be achieved through leveraging our global funding program to provide quality lending solutions to brokers and consumers in Australia and in New Zealand. I'll now hand back to the moderator and happy to take any calls.

[Operator Instructions] The first question comes from Jonathan Mott from Barrenjoey.

I've got a couple of questions if I could. The first one just on Slide 11 where you give a breakdown of the home loan repricing of 197 basis points. Can you break down how much of that is a result of mix of movement into the nonprime or specialist versus your prime book and how of that actually addresses repricing above cash rates or any other movement sort of mix breakdown?

So the first on the reprice, the reprice is 22 basis points above cash rate on that. The mix is embedded in -- it's very difficult for us to split out mix increase as part of our organic runoff and it's very difficult for us to give a certain number. But we repriced in totality 22 basis points over and above cash rate.

And just a more general question. You talked about this a bit already. Just the economics at the moment that the banks are actively cross-subsidizing using their deposit spread advantage and competing really aggressively in the mortgage market and the prime space. I think that comment said many times that the banks are now pricing below their own cost of capital. Does it actually make economic sense for you guys to be writing prime loans at the moment given where spreads are, some banks still pricing forward for prime mortgages, the cashback and the brokerage? Do you basically just have to become a specialist in the nonprime area until the economics change and deposit spreads get eroded away?

Yes. Look, the short answer, Jonathan, to your question is yes. But when we think about our business and the markets and the core segments that we play in. The prime markets for a business like ours is a market that we step in and can step out of and very much determined by how great these banks are and what's happening in credit markets where our relationship and our brand is very much focusing on new price basis market of home loans and obviously wanting to grow out in asset finance for a number of reasons. They are markets that allow us to compete in, to be attractive in and to resonate with through all cycles including this one. It doesn't make a lot of sense. I'll probably answer the first part of your question. It doesn't make any sense for us to be competing with the banks at the economics that we're talking about. I'm talking prime there by the way.

[Operator Instructions] Your next question comes from Brendan Sproules from Citi.

Just a couple of questions for me as well. The first is on the movement in the specialist assets under management. I mean you had quite good settlements during the period of $1.6 billion, but the book's only grown sort of $200 million. It does look like refinancing or repayments in that book have really accelerated this period. Could you maybe make some comment on that dynamic and who your main competition in this market that seems to be winning share?

Yes. Look, I think what broadly the market is talking about the fees and elevated activity in terms of refinance activity in the prime market. The reality is we're seeing a lot of refinancing activity across different product types and different asset partners. So we have seen a pickup in activity even across the new prime and specialist, which is no great surprise considering the movements that borrowers are facing on a monthly basis with interest rates going up. So we are in a period across all products, whether it be prime, nonprime and overlay even into other financial products where we're seeing heightened activity where borrowers are looking around to make sure they're actually on the best possible product. So that is -- and we don't expect that necessarily to die down. I suppose when we think about our book make-up, we're confident that we can hold AUM in those particular markets where we want to be competing, we're happy to compete. But we do expect -- as we continue to move our way through this tightening cycle, we do expect the refinance activity to remain above average levels.

And just to add to that, Brendan, is I think in a period of elevated interest rates, some customers throughout their home loan journey will move from specialist to prime. And I think in a scenario where people's interest repayments are increasing so rapidly, brokers and customers will be pushing for that potentially more than they would have in the past, which will put some pressure on our AUM.

Yes. That's a very good point. My second question is also on Slide 11. I mean 1 of the challenges of pricing home loans is to generally push up the rate when the cash rate moves up. But obviously the BBSW during the period did have quite an elevated spread relative to the cash rate. How has that impacted your NIM in this period and what's the outlook? I know you've guided to lower NIMs in the second half. To what extent is that spread between cash rate and the 30-day BBSW going to be a driver of that guidance?

It'd be great to know. I'd love to answer your question, Brendan. But as you're probably well aware, we haven't had a month of where rates haven't increased. So we actually haven't got a period of stabilization. We started this cycle with BBSW under cash and we still don't really know where it's going to settle above cash. But what we have seen in that BBSW number in the half are a couple of things. One, the benefit we're getting where it was inverted to cash has disappeared and I've called out that lag between the RBA cash right now reprice. So RBA Day, the BBSW is pretty much already priced in the cash rate increase. Our ability to reprice our portfolio is probably 10 to 12 business days after that occurs. So we effectively got this drag of our entire funding platform getting hit with BBSW before we can reprice the yield side and that hurt us quite a bit in that first half. And the repricing that we did do was to compensate for one, the loss of that inversion but also that drag. Whilst there's a monthly repayment cycle in the second half, we see that as the biggest headwind for our NIM because we will get hit on that drag again. We are very, very keen to see the cycle stop for a period of time, but we can see some stabilization in bills as well and see how this liquidity in the system that was keeping an inversion in the past, does that still exist and where does it sit long term. What we think about it is 10 basis points above cash just using historical averages, but we can't put a hand on our heart and be really strong on that.

It's interesting. If I could just push my luck for another question. How does the NIM change in the December month versus say that average that you're showing here in the first half of 1.75%?

I think fairly flat because we did a lot of our repricing earlier in the half. So if you're asking if it impacted NIM, it hasn't. There's not a dramatic difference in that because as runoffs increased in the latter part of the half, we've had a bit of a yield runoff as well as getting the benefit of the reprice on the other end, but we still got that lag impact in December from that December increase.

Your next question comes from Andrew Tan from Bell Potter.

Just a few questions from me. You mentioned the warehouse repricing and I guess expressed the RMBS issues getting a little better. Are you able to clarify kind of the increase in warehouse pricing and also I guess the reduction in the spreads and the RMBS issues post the first half?

Yes. So the first half, we had a relatively small amount of volume of warehouses that were repriced. We have about $2 billion of warehouse renewals coming up in Q4 so they'll be subject to price reviews at that stage. Look, we're actually heartened by 1 of our warehouse renewals didn't increase in price. So it really does depend on the type of warehouse and the relationship we've got with them and where their cost of funds are at so it's hard to give guidance on that. RMBS pricing, we've got obviously the usual chart, we have it here on Page 12 of the investor presentation. You can see in the first half that the small amount of RMBS issuance that we did in the half was at higher prices and we've deliberately with benefit of having lower settlements, we've been able to sit in our lower margin warehouses for those times. We've been asked to see -- there's been a couple of deals that are priced in this half already that have been -- I don't want to say oversubscribed, but had plenty of demand for investors and the pricing is coming in about 5 basis points to 10 basis points lower than those spreads that we have on there. So we're hoping that those prices have peaked there. As I said in my earlier comments, early days but we've got good cause to believe that won't be going up from here.

And the other thing. just adding to Jason, is that we also the lack of supply of RMBS in the market is also helpful. There's not a lot of production coming out of major banks because they're will have funded through deposits. So talking to investors, we are seeing a lot of investors today that let's say are attractive to the yields today and therefore, we expect to see a lot of issuance over the next couple of months and potentially over the rest of this calendar year being well oversubscribed.

I guess with the fixed rate coming up with the big 4 banks and other participants. Do you view that as an opportunity to win some share or will the refinance market to the variable loans be so competitive that you don't really expect to compete in that I guess fixed rate cliff runoff?

Yes. Look, Andrew, it's a bit of an unknown. I mean it'd be nice for us just to sit back and think that the banks won't throw everything at those customers to retain them. So let's just assume that they're going to do it because they're obviously so aggressive at the moment as system activities come off, retention is such an important strategy in this market. So those large 4 that make up the bulk of that $300 billion of roll off, they'll do everything they can to try and retain them. But then that said, for us that are looking to refinance activity, it definitely presents an opportunity. The bulk of those loans will be prime so the question is how attractive can we get. But the reality is a lot of those customers will move purely just based on the fact that their rate is increasing significantly with the incumbent. And so therefore, they'll be looking for a new relationship.

Will most of those refinancings have serviceability kind of constraints, which means they have to look at elsewhere then?

Well, it probably goes 2 ways, Andrew. Some of that is serviceability as an issue and maybe kind of caught up into a term that [ lenders ] like to use in terms of the mortgage treatment so they can't go anywhere and that's true. Those are all kind of at the fringes at very low rates may not be eligible for refinance in a higher interest rate environment. But our view is it most will. Serviceability even at these higher servicing rate, i.e., 300 basis points above the rates that we even have today, we're not seeing that is the reason why, let's say, applications have been declined. So there's still lot of strength in the system. There's still a lot of borrowing power out there. There's still very strong serviceability in the system. What we're finding is a lot of borrowers and even brokers are sitting on their hands because they just want to see probably the RBA starting to signal that we're getting close to that targeted or terminal cash rate so then borrowers can make decisions with a bit more certainty.

And just lastly, on the common [ OpEx ] in the cost base. How should we look at that? I guess like if you look at the first half run rate of OpEx is about $43 million. How do we look at I guess the OpEx base going forward?

So it's the stuff that we've got to move through in the context of this environment. Our view is that this market will be challenging for the short to medium term and so therefore, we need to look at our cost base over the short to medium term. Our focus, as we mentioned earlier, is very much at that niche prime and specialist home loan market as well as growing our asset finance. So when we think about our cost base and we think about where we want to invest, it will be around those particular segment. The reality is we're writing that business and we are an origination business and so therefore, we need to be prudent and look at our cost base as we see this market especially in prime and production from prime being soft for a period of time.

Your next question comes from Tom Camilleri from [indiscernible].

Just a question on the asset finance business unit now. Could you just help us understand the economics of asset finance at the moment? Where the loan book sits at the moment? We saw settlements in the past due loans decline. And then just on that product and how you see competition in the space and why are you confident on that $1 billion target? It seems like this isn't a perfect time for you to pivot through this type of higher NIM product?

So I'll quickly just start on a couple of the numbers and I'll let Scott talk to the competitive environment where we see the business going. The book is about a bit over $500 million at the moment. Target NIMs are about 2.5% to 3% depending on the product type. It can be higher depending on how far we are at the risk basically. At the moment, we're pretty conservative with the credit risk that we're taking in there. It's got a small contribution to NPAT at the moment, but we're investing in it in terms of capital for funding and on platform to scale that business up. Scott, I'll let you talk about competitive environment and strategy.

Yes. So we are still committed to an annualized production by FY '24 of about $1 million in settlements and we believe that is still the right target considering the opportunity and the fact that we're coming off to a very low base. So that is something that is still very much a focus of the business especially as we continue to roll out new products and also kind of stand up new technology in that particular part of the market. It is competitive. Whilst a lot of banks have stepped out of that market, it is a competitive market especially across nonbanks, but it's also very large and a very mature market and it's extremely well supported from a funding perspective. Whilst historically Resimac has almost exclusively spoken about funding from an RMBS perspective, the reality is the ABS market and even the CMBS market are very deep, very mature and very active today. And our funding partners participate and our debt investors participate in both of those markets and we've had very pleasing conversations with some of that support. So we believe it is our opportunity to take market share. We believe it's there to take and we are in a position now where technology funding capital and the operating model are shaping up really well as we enter into FY '24, which is why we're out there with, I'd say, a healthy target of 24%, but still remains. Even $1 billion in annualized production by the time we get to '24, it's still a small part of the market so we believe that it's a smaller target, but the right one and also a target that we believe that will continue to grow off in future years.

Yes. The industry or the settlements that we can see seem like they're holding up okay in this environment. But can you also talk to the split between consumer and commercial and what you'll go after there?

Yes. So we are really at this stage as we kind of rolling our business model into that market, we are mostly consumer focused -- sorry, commercial focused I should say. And there's a lot of learnings through commercial. It's easier for us to tackle commercial and the reality is your customer experience as well as your delivery is very different through consumer than it's through commercial. So commercial leans more to our strength today. Technology and the further investment in technology is even more important when you ultimately get to that consumer space. So those numbers that I referred to earlier as you think about that target of $1 billion, that is predominantly commercial and we'll make sure that we test our products and build our relationships through commercial before we then tap the consumer part of the market, which has been just the next evolution or the next opportunity in terms of asset finance for Resimac.

Yes. And it plays a lower impairment risk as well. And then just following up to that impact a bit, just on loan impairments. Can you help us think about how this line moves as you pivot to a greater share of specialist loans in the book? I saw a really good result this half, just need some help on forecasting that line going forward.

Yes. Look, I think the thinking about loan impairment expenses obviously the balance sheet side is provisioning and it's probably worth even just thinking about the last couple of years. We took a really large COVID provision when COVID hit across our book. From memory, it was about $18 million. We didn't release that to our P&L and take a sugar hit like some other institutions did and we did that for 2 reasons. One, we knew we were factoring in we had good AUM growth into the future, which we did have since then and obviously we were going to start scaling up asset finance. So that's allowed us to build up that provision very conservatively. Also at 30th of June we took a $9 million macroeconomic overlay, which was questioned by some as being over conservative and I think now where we sit today, we have a provision that is very, very good coverage for any potential future loss that we have in the future. So even if the mix is changing in the AUM, looking at our arrears, looking at -- we've even got a chart on Page 4 here, which will show you when we look at all of our arrears and I'm talking about 31-plus days and we look at all of the LVRs for everyone in arrears, we can only see $10 million of loans where they've got a dynamic LVR of 90% or more with no LMI. So for us even with arrears tipping up, the book is very conservative historically in terms of how we've originated it so we're in good stead. But even if we do incur losses, we have got a really large provision there to absorb it. So the correct answer to your question, I don't see loan impairment expense being a very large number in our P&L certainly in the second half and I hope to obviously be saying the same thing in 6 months.

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

Yes. Look, thanks very much. Thank you for your time, everybody. As usual if you do have any further questions, please feel free to reach out to Jason and myself. We're happy to answer any questions you have. Enjoy the rest of your day.

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