Resimac Group Limited (RMC) Earnings Call Transcript & Summary

Thank you for standing by and welcome to the Resimac FY '23 Investor Call. [Operator Instructions] I would now like to hand the conference over to Mr. Scott McWilliam, CEO. You may now go ahead.

Thank you. Good morning. It's my pleasure to welcome you to Resimac's results investor conference call for the year ended 30 June 2023. I'm Scott McWilliam, CEO of Resimac. And with me is Jason Azzopardi, our CFO. We'll be talking to our investor presentation lodged with the ASX this morning and welcome questions at the end of the call. In today's presentation, we will take you through our performance highlights, an overview of the macroeconomic environment, the quality of our portfolio and our focus for FY '24 and beyond. Today, we announced another year of strong shareholder returns. I'm pleased, over the last 12 months, we've made significant progress on our strategic objectives amidst extremely challenging macroeconomic environment. The resilience of the business throughout the cyclically -- cyclical challenges is testament to the strength of Resimac's brand in home loans and capital markets. Strategically, we continued to deliver on our diversification agenda for Resimac Asset Finance, continuing to lay the foundation for scale on several fronts. Firstly, our cloud-based origination system recently went live, giving us the ability to expand our broker reach with a market-leading application process. We've materially increased our funding capacity with a global bank adding to our extensive list of incumbent banking partners. And finally, we've created an asset finance back office team in Manila to drive cost efficiency as we scale originations and AUM. We are encouraged by the growing demand for our commercial auto and equipment and secured business loans as we head into FY '24. Our home loans business in Australia and New Zealand faced headwinds throughout the year driven by low system activity, the uncompetitive TFF facility, fiercely competitive behaviors by the major banks with large upfront cashbacks and discounted interest rates and an aggressive monetary tightening cycle environment. We managed NIM prudently from an origination and retention lens in FY '23, albeit this came at the cost of lower AUM, particularly in Prime. The economic operating environment for home loans remains challenging, albeit improved since earlier this year. Housing credit growth remained lower compared to 12 to 18 months ago, driven by low supply and RBA peak rate uncertainty dampening confidence. We expect the end of this tightening cycle to improve consumer confidence. Furthermore, cashbacks for home loan refinancers have largely been removed, albeit a small number of lenders, including ANZ, continue to offer small cashbacks today. Funding markets remain opened and viable. Spreads moved wider during the year, but we're starting to see them tighten back to historical levels. Put simply, our market-leading funding program remains buoyant. Although arrears continued to track higher in the -- although arrears were higher during the year, we're pleased to see credit losses remain low, with only 4 loans without LMI [ that have ] 31-plus days in arrears and a dynamic LVR greater than 90%. Furthermore, we remain conservatively provisioned on our balance sheet. Finally, our people remain the cornerstone of our success, driving consumer outcomes and operational efficiency. I'm proud that the efforts of our teams have sustained during this challenging year. And I am confident we have the platform for success moving into FY '24. I'll now hand over to Jason Azzopardi to expand on the financials.

Thanks, Scott. Starting on Page 7 of the investor presentation. I'm pleased to report the group continues to generate strong shareholder returns, reporting an FY '23 normalized NPAT of $73.7 million. This normalized NPAT excludes fair value movements on our interest rate derivatives. Our cost-to-income ratio of 43.6% increased year-on-year, a product of net interest income headwinds from lower AUM and higher operating expenses. During the second half, we have executed a number of cost-saving initiatives, which will result in lower operating expenses moving forward. We are targeting lower OpEx in FY '24 and expect to achieve that. Loan impairment expenses remained low at $2.2 million for the year. As Scott mentioned, arrears have increased over the year, albeit stabilized in the last couple of months. The low average LVRs of the portfolio have ensured losses remain low at this stage of the cycle, demonstrated by our home loan specific provision on our balance sheet at 30th of June '23 of only $1.8 million. Our conservative collective provision of $40.6 million provides us confidence we can absorb future losses in both the home loan and asset finance segments as and when they arise. Return on equity for the year was 18.6%, lower than previous year's, as our asset finance book requires higher capital ratios in the book build phase, a timing drag on ROE. I'm pleased to report the Board has declared a fully franked final dividend of $0.04 per share, a payout ratio of 43.5% on a normalized basis and a yield of 8.74% on the closing share price at 30th of June. Moving to Slides 8 and 9, you can see the impacts of the home loan market headwinds we have faced in the second half, particularly in Prime where AUM runoff continued. The lower Prime AUM is a direct result of the anticompetitive TFF funding advantage that was handed to the ADIs, allowing the big 4 in particular to target refinancers with aggressive new business interest rates and cashbacks during the year. These headwinds are gradually being removed, and we are hopeful we are reaching the bottom of the AUM cycle. During FY '23, we made the strategic pivot to focus on specialist originations, where returns were higher than the Prime segment where ADIs were admittedly writing new business below their costs of capital. We managed to keep the specialist AUM broadly flat during the year despite a soft second half where system activity softened. Our asset finance offering continues to make steady progress, settling $482 million during the year. We remain focused on increasing asset finance settlements to $1 billion of annualized settlements in FY '24. Moving to Page 10. I'm particularly pleased to report our prudent NIM management resulted in our NIM remaining broadly flat compared to FY '22, decreasing 5 basis points to 176 basis points. This represents a first half NIM of 175 basis points and a second half NIM of 177 basis points. The June exit NIM was 172 basis points. BBSW increased in line with the cash rate, increasing from 85 basis points to 410 basis points during year. Despite the BBSW curve moving from an inversion to cash rate towards curve tracking ahead of anticipated RBA rate increases during the year, we have managed our repricing strategy accordingly to offset those BBSW increases. Pleasingly, BBSW is resetting circa 5 basis points below cash in August. Funding costs increased 11 basis points, driven by an increase in our RMBS [ tractor rate ] and repricing of our warehouses. We utilized warehouse capacity at lower costs where possible to avoid issuing RMBS at peak pricing. Our warehouse pricing events have been completed. And furthermore, we were pleased to announce to the market yesterday a $750 million Prime deal was priced with senior margins of 125 basis points [ over billed ], 20 basis points lower than the RMBS we issued in the first half of '23. This pricing, along with the normalization of ADI funding costs, provides us optimism for AUM growth moving forward. And finally, I wanted to say a huge thank you to our finance team, who have worked tirelessly over the year-end. I'll now hand over to Scott to provide a strategy and outlook overview.

Thanks, Jason. Our strategy and focus for the next 12 months and beyond are broadly unchanged. Our strategic focus on NIM management over AUM growth in FY '23 was successful, but with the recent changes in the home loans market and the normalization of credit spreads in capital markets, we've started to ramp up our home loans origination activities. As Jason mentioned, our growth aspirations for asset finance remains high. We are targeting to double our asset finance settlements in FY '24, underpinned by a wider broker reach and a significantly improved digital experience for our broker partners and customers. Whilst we've seen an increase in early-stage arrears across the last 12 months in line with market, we remain confident Resimac's portfolio will absorb any stress. Furthermore, our conservative approach to provisioning over the last 2 years ensures our provisioning coverage is more than sufficient to absorb any potential credit losses arising from arrears. And lastly, our cost management will continue to be a major focus for the business in FY '24. I'm pleased to say that our investment in operational efficiency processes and core technologies over the last few years should help us to drive a lower operating expense in FY '24. I'll now hand back to the call moderator. And we're happy to answer any questions.

[Operator Instructions] Our first question will come from Minh Pham with Barrenjoey.

Just 2, if I could. And firstly, just on the 90-day arrears that you've seen in home loans, I think I'm not sure if there was a bit of a restatement from the disclosure last half, but it does look to -- specifically for the specialist home loans, it does look like that 1.3% are back to arrears levels seen in 2012 for your portfolio. Just interested in whether or not there's been some credit appetite change as well. It is quite a significant trend growth compared to what we've seen for your peers. Are you seeing it in specific cohorts [ or ] vintages? And yes, whatever detail you could provide.

I'm sorry. Were you referring back to 2012...

Yes. So Slide 5. I think you provided a similar longer-dated arrears chart in your presentation last half. And it kind of just looks like the specialist home loans arrears are well above what you saw in 2012, 2013 levels, but yes, I wasn't sure if there was a restatement or what you're seeing there.

No restatement. We didn't think anyone took notice from 10 years ago, Minh, but I'm glad that you do. [ That's a detail you show ], but look...

You provided the chart last half, sir.

Yes, we did. We did, no doubt. Look. Specialist arrears have definitely increased. It's a combination in there of near-prime and specialist loans. I would say that, whilst they have increased, they're certainly coming off extreme lows. What we are seeing is, certainly in the last few months of the year, that they've actually -- we saw a really significant spike initially. And that started to stabilize now, which we're pleased to see. I think the other comment there is the LVRs of those arrears are still very low, so from a credit risk loss perspective, we're feeling very comfortable in terms of potential loss.

Yes. And are you seeing it in specific cohorts [ or ] vintages? Is it the 2020 to '21 mortgages that you're seeing it in, or is it also just the natural seasoning of the book?

No. No, we're not. We -- no. And that's initially why we had that chart on Slide 4 in terms of showing the last couple of years' originations and the LVRs of those, because -- and probably our initial theory was that would be the case. We're seeing it more in more seasoned vintages probably more in the 3 to 4 years where people have taken on additional debt since taking on the home loan rather than it being a product of the new originations but no specific industry bias, no specific geographical bias. It's pretty broad, but I wouldn't say it's skewed towards that. Sure, there are people from the last 2 years who potentially have overstretched, but it's not isolated to that. It's not something systemic. We just think it's an across-the-board affordability/costs of living, whether that's taking out new debt or taking on additional debt since you took on your home loan.

Great. And maybe just a second question, on margins. Thanks for providing some exit NIM guidance. It does appear to have held up better than peers. And obviously that's a function of the pricing decisions you made and where you chose to grow volumes this half, but given your stated guidance to grow home loan AUM in FY '24, do you expect that some of that will lead to margin declines as you try to bring that back to growth next year?

Yes, yes. So I think you're right. We did manage NIM pretty tightly. I mean I can't speak for others, but we certainly made some pretty difficult decisions during the year in repricing above the cash rate. And that's how we've been able to manage that book. And we've always talked about a variable loan book being a good hedge against funding costs, so we're quite aggressive on that. And we might have taken a bit of pain in AUM because of that. In terms of NIM outlook, we have stated that we believe we're getting close to AUM trough. [ I mean there's ] AUM growth opportunity there, but certainly, in the first half of '24, we are expecting to keep NIM broadly flat with the exit NIM for June.

Our next question will come from Tom Strong with Citi.

Firstly, I just want to ask on the asset finance growth. I mean you're sort of seeing it peak in settlements and still targeting $1 billion run rate by the end of FY '24. Can you just perhaps comment on what you're sort of seeing around the level of pricing in that market? I mean [ if sort of you're hearing ] feedback as to whether pricing has been irrational or not. And could you just perhaps comment on what you're sort of seeing in that segment against your maintained ambitions there?

Yes. Look. It is a competitive environment. We're seeing a number of nonbanks and also just kind of more mature banks in that space targeting different risk profiles, targeting different audiences; and so it is competitive. And so therefore, it is a price competitive environment. We will maintain our NIM kind of in and around our return hurdles, so whilst we are saying that we're doubling our volume, let's be briefly honest here. We're still coming off a pretty low base. We're 2 years into this particular strategy. We have spent a lot of time, effort and dollars in terms of getting the shop right. That's across talent and technology and positioning as well as our kind of our funding program. This is the first full year we'll have the opportunity to leverage all of those investments, and we will broadly be targeting commercial auto and equipment. As I mentioned earlier, secured business loans, we like. We like the return and also the risk hurdles, but it is a competitive environment. We have seen pricing come in from a number of players, but we've broadly held our pricing in line with our own return hurdles. And our expectation is that doubling our originations, coming off, let's call it, $500 million, targeting $1 billion for the year, is a more-than-reasonable target. It's slightly aspirational, but I'd say it's a target that we need to set with the investments we've made to date. And we're also comforted by the fact that we've seen even [ near-based ] peers punch out some pretty impressive numbers. So it is a [ deep ] market. We're not necessarily always chasing the same audience or origination channel, but we see a lot of growth in -- especially in commercial auto and equipment.

Yes. And just to add to what Scott said, Tom, is, half of our originations are broadly auto and equipment, where I think you're alluding to the -- some of the price specials that are being out there. And it hasn't been constant throughout the year. There has been the odd promotion, but the other half in terms of secured business loans, we're not probably competing against some of the brands you're talking about. And the NIMs there are not too aggressive, so we're feeling comfortable off the low base that we're coming from, as Scott said. We can maintain our target NIMs in that business and still hit our targets.

Okay, fantastic. That's very clear. Just the second question, just around the cost of funds. [ We're seeing Prime ], with that deal you've just announced, at 125 basis points. It kind of looks back to historical levels of sort of FY '17 to '20. What's your expectations around the specialist senior margin? I mean it's quite elevated in FY '23 at 177. What's the sort of normalized level there? And would you expect it to track back like the Prime has?

Yes. Look. Good question. And first, we need to ask ourselves actually what is normal, but Tom, I've got the same view. It feels like credit spreads, whether it be nonconforming or prime, are starting to track back to, let's call it, historical levels. So the way that we think about it is pricing for prime, I would say, normal levels is anywhere between 110 to 130. I'm talking nonbank here, so if you take prime as the benchmark, we'll then add 20 to 25 basis points on top of that. And it probably gives you your range for nonconforming. So if we say Prime, in a normal environment, take the [ book ends at normal ], call it, 110 to 130, well then really you're talking kind of 135 to 155, I would say, then for nonconforming. And whilst we have just obviously priced and announced a Prime deal, we're also in the market with a nonconforming trade, a larger nonconforming trade. And whilst we'll probably bring currency into this trade, we are starting to see a tightening of spreads even for nonconforming.

And the one thing I'd add to that is on Slide 11 of the investor preso; is although those senior margins were a lot higher in '23, we didn't issue much in '23, when you look at that compared to previous years. We had significant warehouse limits. We utilize warehouse where we could, before repricing events, to manage our cost of funds. And already, with that Prime deal we've done in August of $750 million, that outweighs the total prime issuance in '23, so in terms of impact on [ tractor rate ], that spike visually is large, but it's not as bad as it could have been [ had we had to issue ] a lot more in that year.

And Tom, it's also helpful where -- let's be honest. Warehouse pricing really based on return levels are with kind of some timing in there, so it is helpful, to see it come in. I would say where we -- the peak of this particular cycle, we're getting to the top of that, where it becomes somewhat subeconomic. So I think, the market coming in, especially coming in so quickly, circa 20 basis points in the last 4 to 6 weeks, whilst it feels normal, that's quite a big movement. So the demand for the underlying asset across all nonbanks, just not Resimac, has been very healthy over the last couple of weeks. And we expect that to continue. And to be honest: It actually is helpful having some of the larger brands back in the market. ING's trade at [ 1 10 ] was definitely helpful at resetting levels. And we expect that will be helpful for us when we are talking about pricing with our warehouse providers. As we're seeing cheaper spreads rolling off from earlier deals, we're rolling -- we've got more expensive deals out there that are more recent, but in terms of just managing the pipeline, having the market coming in, resetting levels [ in term markets ] is definitely helpful when we're talking pricing with our warehouse providers.

Our next question will come from Jeff Cai with Jarden.

Just a question on mortgage book runoff. That's deteriorated a little bit in the half. Just interested in your thoughts to that. Do you see the worst is over for runoffs? And to what extent has -- the 1% like-for-like refi from the major banks has had an impact on your book, so far.

So yes. I'd sincerely hope the worst is behind us, and it feels like it is. We're looking at some of those grassroots that -- if we're looking at the decisions other parties are making; the major banks pulling back on cashbacks, pulling out altogether. I think we'll see them, all the major banks, exit or be fully out of it over the next couple of months. I think [ that's the only outlier ] there, and maybe some costs still have something to do with that. We're also seeing, let's say, a normalization or banks moving back to more sustainable interest rate levels as well, so that's helpful. And the other parts that will probably take a little bit longer is just a pickup in overall activity as consumers get used to a higher interest rate environment, but obviously it feels like we're at the peak or nearing the peak of this tightening cycle. So that can only help with consumer confidence. I'd say the -- are you referring to the 1% serviceability buffer for like-for-like refinance...

Yes, yes.

Yes. Look: Not specifically. I don't think that kind of 1% dollar for dollar really is creating any more activity. I think it was [ fierce enough ]. And we were one of the earlier banks to lower our buffer to 2%. And it sounds like most of the nonbanks have kind of followed suit, so I wouldn't call that out as necessarily having a heavy weighting on overall refinance activity or the aggressive nature of it, but it is helpful. It is pleasing to see some of the banks returning to more sustainable or normalized pricing.

Got it. Just a question also on costs: I mean it sounds like you've got pretty good visibility on costs given your cost-out initiatives. Can you give us some color on how we should think about the costs outlook into '24 and, I guess, the range of outcomes of -- in terms of how much lower it could be?

Yes. Well, without putting dollar numbers to it, if we can look at the table on Page 7, you can see the half-on-half operating expenses there. And some of the decisions we made late in the first half will flow through to the second half. Look. We are expecting to get -- to be lower again, in the first half of this year, on OpEx.

Our next question will come from Richard Wiles with Morgan Stanley.

Scott and Jason, I've got a couple of questions on the pricing in the mortgage market that you've referred to. We know it's improved a lot over the last few months. Can you talk about some of the recent trends? Are you continuing to see pricing improve in both the prime and specialist market? And can you also comment as to whether the lenders who aren't offering cashbacks, particularly the major banks -- whether they're competing more on rate to keep their business against those who are still offering the cashbacks?

Yes. Look. It's interesting. We're seeing the major banks move on 2 fronts. They're obviously the first ones to remove or reduce cashbacks, but they've actually been probably more visible in terms of increasing their new business pricing. So the majors have actually moved on both. They've moved new business pricing out and they've also removed cashbacks. We're probably seeing the second-tier banks hold their interest rates. They appear to be more competitive. I'm talking just prime here, by the way. They appear to be more competitive than the majors, holding a few of the cashbacks but also holding interest rates, but we are starting to see a trend of even that pricing moving out. It may be that the second-tier banks are looking at this market, thinking, "Look. Here is an opportunity for us to try and grow originations by holding rates," and some of them holding cashbacks, but every day, we seem to see a movement away from cashbacks or a movement up in price.

And Richard, what was your first question?

The first question was really about the recent pricing trends, so which I think you've partly answered, but -- and we know rates are a lot better than they were back in sort of March, April. The question was really are they continuing to improve through July and August. And I get the sense your answer is yes.

Yes, yes. It depends. [ So you're asking ] improved. [ If you ask the ] customers: They don't like which way they're heading. For us and the competitive environment, well then, obviously, we do.

Yes. And your comments on new business pricing, are you referring to both simple mortgages, where there's a headline rate; as well as the more common sort of discounting relative to the standard variable rates that the majors have?

Yes. Look. Good question because it's sometimes hard to see through some of the carded rates, really know what's happening in the background, but our broker partners are probably the best source of information for us, where the feedback we're getting is that they seem to be holding on a number of those carded rates. They may chase a particular deal because of the LVR or loan size, but as a whole, they seem to be holding firm on those higher rates as they look for a better return on investment.

[Operator Instructions] Our next question will come from Marcus Barnard with Bell Potter.

I've got a couple of more questions on the asset finance business. Just how big is the book? How big does the book need to get to before it's breakeven? And roughly what's the term of the loans you're selling? I'm assuming it's about 3 years, but can you let us know?

Yes. So the book is about 650 million [ value in ]. It's a profitable business; slight -- very slight profit, small profit, but it's [ past ] breakeven. When I allude to ROE drag: As you're building out the warehouses and the capital that you need to put in them, they just -- it's just in advance of the returns that you get, so just it's the timing drag on ROE that we expect to rectify. And your last question was term of products market. So we have 2 key products in that segment. The first one is auto and commercial equipment -- sorry, auto and equipment in the commercial space. Sorry. And they'll -- they're generally fixed products, 3 to 5 years -- 2 to 5 years, generally 3. And our other ones are secured business loans which are secured against residential property. And they're probably more in the 12 to 18 months, but they can revolve. They can roll, regulate those loans.

That's great. And have you told us what sort of interest margin you charge over your cost of funding on that? I know you've given a sort of guide that it's on ROE, but what sort of rates do you charge on that business?

We're targeting -- I mean there's various rates, depending on the fixed-rate term. And SBLs, actually the majority of that is variable, but look. We're targeting a NIM in the high 2s in that business.

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

Thank you. Look. I'd like to thank all of our shareholders for their continued support. And as always, if you do have any further questions or you would like to catch up with Jason or myself for a one-to-one, we're more than welcome to arrange that. And look: On behalf of the Board, again we'd like to thank you for the support. And Jason, I'd like to thank you and your team for putting together a very, very clean set of numbers. Enjoy the rest of the day, everybody.

Thanks, everyone.

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