Resimac Group Limited (RMC) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to Resimac Half-Year 2024 Investor Call. [Operator Instructions] I would now like to hand the conference over to Mr. Scott McWilliam, CEO. Please go ahead.

Thank you. Good morning, everyone. It's my pleasure to welcome you to Resimac Group's Results Briefing for the 6-month period ended 31 December, 2023. I'm Scott McWilliam, the Chief Executive Officer of Resimac, and I'll be taking you through our half-year results this morning and welcome your questions at the end of the call. I'm also joined by our Chief Treasury Officer, Andrew Marsden; and our Group Financial Controller, Santo Ahmed. As previously announced to the market, James Spurway starts from the 1st of May as Resimac's Chief Financial Officer. In today's presentation, I'll take you through our performance highlights, an overview of the macroeconomic environment and the competitive landscape, the quality of our portfolio and the key focus areas and outlook for FY '24 and beyond. Today, let me start by saying that after reporting more than 12 months of home loans AUM decline during the most aggressive refinance market I've seen in my 25 years of banking, I'm pleased to announce that we've been able to stabilize our home loans book and grow our asset finance book. As a result, we have reported a normalized net profit after tax of $26 million, excluding the impact of fair value gains and losses on derivatives and an interim fully franked dividend of $0.035 per share. I'll ask you to turn to Slide 3. The group has had a solid half year. While home loan still remains the bulk of our AUM and settlements, our asset finance business is growing at a pleasing pace. We've been on a journey of strategically diversifying our portfolio and is now having a meaningful impact on our overall numbers. I'm pleased to announce that first half '24, we settled $380 million in asset finance, up 36% compared to the prior half and grew the book by 52% over the 6-month period. As of earlier this month, I'm also pleased to say that our asset finance portfolio reached a milestone of $1 billion of AUM. Our investment into expanding our asset finance sales team and deploying a new broker origination platform have resulted in record asset finance applications during the second quarter. I'm also happy to report that production levels in our core home loans business have recovered as unprecedented competition pressures in the mortgage market have abated in the first half. Off the back of a series of new growth and retention initiatives, AUM in the home loans book has stabilized with $2 million in settlements in the period, up 54% compared to second half '23. And importantly, 60% of that occurring in the second quarter. The volume of applications has increased in the half by 65% compared to the prior 6 months, providing us with a healthy pipeline of applications to generate AUM growth in the second half. Exercising a strong cost discipline has enabled us to reduce our operating expenditure by 10.5% compared to first half '23 and 6% compared to second half '23. This is largely being fueled by technology investments that are now starting to enable us to execute operational efficiencies. We are making great progress with our digital transformation roadmap and rolled out several digital initiatives that have been deployed and tested over the past year. This included a new treasury management system that is the first of its kind in the Australian market, supporting further scale in the group's funding program and driving efficiencies in our investor and markets reporting functions. Our broker partners have seen the benefit of a number of automation digitalization improvements. On the home loan side, it is now quicker and easier to submit the loan applications, and we are providing faster turnaround times for approvals. In asset finance, we've launched a new origination platform that gives brokers a better experience, including real-time deal tracking and faster decisioning. For our home loan customers, we are enabling them to do more, as well as offering additional product features like multi offset accounts. We have enhanced our online banking capabilities, and we'll be introducing a mobile app over the coming weeks. We are also in the process of implementing a new customer discount program designed to help ease the cost of living pressures today, as well as assist with retention efforts. Supporting our customers as cost of living pressures persist is paramount. We've made major changes to the way that we service and support them, particularly for customers in hardship and needing financial assistance. I'm pleased to say that in first half '24, our customer service metrics are at their highest level on record. In our FY '23 results briefing, we spoke about headwinds in the mortgage and funding markets that were coming to an end. Specifically, the term funding facility, allowing ADIs to heavily discount new business rates and offer large cashbacks were coming to an end, and the adverse spread cycle in capital markets were easing. In first half '24, particularly second quarter '24, we saw early signs that these headwinds were beginning to ease. Moving on to Slide 4. You can see that refinance activity has reduced in the December period by 15.3%, with owner-occupied and investment loan activities picking up. As inflation begins to fall and the cash rate outlook becomes more favorable and with markets beginning to price in rate cuts later this year, it is now producing an environment that benefits non-ADIs like Resimac and provides potential BBSW tailwinds looking forward. On Slide 5, you can see that the market dynamics shifting in the first and second quarters of the first half. The first vertical line down quarter 1 shows the positive impact on application, settlements and also use charges as ADIs started withdrawing and phasing out their cashback offers and also increasing new business pricing. The second vertical line shows the results of a well-timed response where we deployed several new business initiatives to drive volume. I'll ask you to move to Slide 6. Resimac's new business initiatives, coupled with the progress we continue to make in our digital transformation roadmap has had a positive effect on the underlying health of our home loans' distribution network. The number of brokers that submitted applications in the first half '24 increased significantly compared to the second half '23, with broker applications up almost 80%. Moving on to Slide 7 and 8. We continue to manage credit risk prudently, with a resilient portfolio where the average loan-to-value ratio is less than 65%, and importantly, more than 1/3 of our customers are more than 12 months ahead of their repayments. Arrears across home loans and asset finance are trending upwards, albeit in line with industry. Our balance sheet remains conservatively provisioned against credit losses, with more than $40 million of provisioning being held for our pipeline portfolio compared with only a small number of home loans without lenders mortgage insurance and LVR above 90% and more than 30 days in arrears as of 31st December. Moving on to Slide 10. Our cost-to-income ratio of 48.8% increased half-on-half, which is a product of net interest income headwinds from lower AUM and tighter margins. Pleasingly, operating expenses were down as a result of strong cost discipline and technology optimization. Loan impairment expenses for the first half were $3 million, primarily reflecting a rapid growth of asset finance portfolio. Although these are rising, the low LVRs of our portfolio have ensured losses remain low at this stage of the cycle. Our home loan specific provision at 31 December was only $1.9 million. Our conservative collection provision of $44.3 million for the group provides us with confidence that we can more than absorb losses or potential losses for home loans and asset finance segments should they arise. Return on equity for the half was 12.5% lower than previous periods, primarily a result of falling net interest income, but still comparable to banks and non-banks. Moving to Slide 11 and 12. You can see that first half '24 was a story of 2 distinct quarters in our home loans business. In the second quarter, we made the strategic pivot to focus on AUM growth across niche, prime and specialist loans. Now on to Slide 13. Our asset finance offering continues steady progress, settling $400 million in the first half. We remain focused on increasing asset finance this year to more than $1 billion of annualized settlements by the fourth quarter. Moving to Slide 14 and 15. In funding, credit spreads are narrowing, providing a more favorable outlook. Resimac, like our competitors, has experienced NIM compression, but we continue to manage NIM prudently. Group NIM was down 7 basis points, driven by higher home loans cost of funds and partially offset by higher asset finance margins. Home loan NIM was down 14 basis points, driven by higher cost of funds and lower replacement new business margin, whereas asset finance NIM increased 52 basis points, driven by higher new business margin and runoff of lower NIM books. Investor appetite remains strong for our RMBS issuance, and we're optimistic that RMBS deals in the second half will price at a lower cost of funds in the first half '24. There is a broad and diverse support for our domestic and offshore banks for our warehouse facilities, with more than sufficient appetite to meet our AUM growth objectives. Debt and working capital buffers are well positioned for portfolio growth. As we switch our strategic focus to ramping up originations to grow our home loans AUM, we remain focused on our broker and customer growth strategy to be a lender of choice, focused on niche markets that we can lead. Our growth aspirations for our asset finance business remains high. We are on track 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. While we have seen an increase in early-stage arrears across the last 12 months in line with market, we remain confident that Resimac's portfolio will absorb the stress. Furthermore, our conservative approach to provisioning over the last 2 years ensures that our provision coverage is more than sufficient to absorb any potential credit losses. As we continue to process our digital transformation and we move to a phase to begin to optimize the investments we've made in platforms, we'll also continue to invest in new technologies to support AUM growth, operational efficiency and improved customer experience. To conclude, the operating environment is far more predictable and positive compared to prior periods, given the growth opportunities, funding markets and macroeconomic outlook. We've ended first half '24 with a solid pipeline of home loans and asset finance applications, providing us with a stable runway for growth across both books further this year. I'll now hand back to the moderator to facilitate the question-and-answers portion of this phone call. And I'm happy to answer any question. Thank you.

[Operator Instructions] Your first question comes from Tom Strong with Citi.

Firstly, just want to ask about the growth initiatives that you deployed in the second quarter. If I look at these results, I can see the marketing spends and employee costs down year-on-year, yet you've expanded your distribution and active brokers. I was just wondering if you could, I guess, elaborate more on what those initiatives are and how you're going about it?

Yes. Sure. And thanks for your question, Tom. So part of it, Tom, to be perfectly honest, is the environment actually allowing us to be more active. Yes, I'd like to give us all the credits whilst we should, where we've executed well on the strategy is sitting and looking at an environment that allows us to compete was imperative for us to then start growing again. And obviously, we could see those signs probably midway through last calendar year as banks were clearly pulling back and there was obviously a lot of pressure on them to justify offering loans below cost of capital. So, one was the environment. The second one was we really just targeted specific areas. We didn't focus on those areas where clearly the banks were very aggressive. So, i.e., mum and dad's principal interest less than 70% LVR, metro areas where everyone's just jumping all over themselves to write those assets at very, very thin margins. We really focused around investor and interest only in the prime market and we very much simplified our offering in the near prime and specialist market just to make it a little bit easier for our brokers, especially with our wide BDM team reengaging in the market as we switch from a NIM bias to an AUM bias strategy.

Yes, no, that makes sense. And just a second question, if I can, just around the volatility from the fair value losses and gains on derivatives. I mean, they're quite sizable relative to the NPAT in this result. Can you just comment on what's driving those gains and losses? Is it sort of hedging or otherwise? And what should we expect going forward?

Sure. Tom, it's Santo. Santo Ahmed, the Financial Controller. So, I'm assuming you're referring to Page 21 with the financial position where we've got the derivative financial liabilities?

I'm talking about the charge taken through the statutory profit to the $8 million, that result.

Yes. So, part of that is due to 2 things that we've got flowing through there. So, we've got the interest rate swaps policy, any of the interest rate swap gains and losses that goes through the OCI. And on top of that, we've also got cross currency swaps that we have in place and any gains and losses that are going through that OCI as well. So, overall, that number, that normalized figure that we put in there, includes $5.4 million in changing fair value. And then once we've tax affected that, that is the [ $2.5 million ] that's going through the OCI.

Yes. That's helpful.

Was that your question? Okay.

[Operator Instructions] Your next question is from Jeff Cai with Jarden.

A question on asset finance. So, now that you sort of delivered the $1 billion target early on, I mean, how should we think about the next phase of growth over the next 1 to 3 years and how you're looking to sort of manage the margin volume trade off?

Yes. Thanks for your question, Jeff. So, we're coming off a low base. So, we should be thinking about growth significantly above system as we come off a low base. So whilst we're growing kind of doubling settlements to a forecast double settlement in FY '24 compared to '23, and obviously significantly growing our book, as you're coming off the low base, those targets will remain quite aggressive going forward until it gets to a size where it's close to the system. So in growing our asset finance book is a strategic priority and our investment in technology is helping us do that. Whilst we've actually just rolled out an originations platform, that's definitely helped us pick up business from brokers, which is around obviously a stronger experience, faster turnaround times, greater automation. We'll continue to make further investments and also we'll continue to roll out new products. Asset finance is quite a broad segment. At the moment, we're predominantly playing in commercial, auto and equipment. In time, we will step into -- and likely before the end of this calendar year, we'll step into the consumer market, but we'll also look at other assets that broadly sit underneath that umbrella. So, our growth aspirations for that book are significantly different to how we think about the more mature home loans book.

Got it. And then a question of margins on Slide 14. The funding margin is still a bit of a headwind for this half. Given your expectations and what you're seeing in terms of the debt market spreads becoming more tighter, should we expect that funding margin piece to be a tailwind for next half?

Look, I think -- no, I think the way that we look at it and the way that we're forecasting is, it feels like your exit of, let's call it, end of June of this year is going to be pretty close to what your second half average will be. So it feels like we're close to NIM then stabilizing and probably 2 different stories between home loans and asset finance. Asset finance NIM, despite the comment that I made to that question in relation to AUM growth, we're quite comfortable that we can maintain that NIM going forward with asset finance. When we think about home loans, home loans NIM is likely to kind of stabilize, I'd say around that 155, 150 level before potentially starting to grow again..

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

Thank you, everyone. Enjoy the day. And obviously, more than happy to take one-on-one meetings if it helps you with your research.

Thank you. This will conclude our conference for today. Thank you for participating. You may now disconnect.