Resimac Group Limited (RMC) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Resimac FY '24 Investor Call. [Operator Instructions] I would now like to hand the conference over to Susan Hanson, Interim CEO of Resimac Group. Please go ahead.

Thank you, Hamony. Good morning, everyone, and welcome to Resimac Group's results briefing for the period ended 30 June 2024. I am Susan Hansen, the Interim Chief Executive Officer, and I will commence by providing a business update, before I hand over to James Spurway, our Chief Financial Officer. James joined Resimac in May this year and he will walk us through our financial performance. There will be an opportunity to ask questions at the end. Once I provide some closing remarks in relation to Resimac's key focus areas for FY '25 and beyond. We have other executives available for questions, such as Andrew Marsden, our Chief Treasury Officer, who can provide insight into our funding program and NIM. In early July, Scott McWilliam resigned as CEO of Resimac Group, and I stepped in as Interim CEO. Firstly, I would like to acknowledge the contributions Scott made to Resimac since the merger of Homeloans in 2016. Scott served as Co-CEO and CEO for both Homeloans and Resimac Group. He navigated the company through the difficult period of COVID. We saw tremendous growth in AUM over his tenure and the establishment of our Asset Finance business. He has left a lasting legacy. Most of all, everyone liked Scott, his personal disposition and pleasant nature made Resimac a great place for people to thrive, find opportunity and have a good sense of belonging. I'm sure many of you join me in thanking Scott and wishing him and his family all the very best in his new endeavors. Consistent with our desire to keep stakeholders informed, we disclosed an early view of our FY '24 financial performance. approximately 4 weeks ago on the second of August. As part of this release, we were pleased to announce that the group has posted 8 consecutive months of AUM growth since November 2023. We are confident these are positive signs that our home loans portfolio has turned a corner and returned to growth trajectory. We also provided a normalized NPAT range of $42 million to $44 million. You have most likely been provided a slide deck. And if you turn to Slide 4, for the FY '24 highlights, you can see the group's final FY '24 normalized NPAT was $43.1 million, excluding the impact of fair value gains and losses on derivatives. And the Board has declared a fully franked dividend of $0.035 per share. This, together with the interim dividend is $0.07 per share for the financial year. If I can turn to Slide 5. The group experienced several highlights during the financial year. Firstly, the AUM of our Asset Finance business reached $1 billion. After intense competition, our Home Loan portfolio returned to growth with 8 consecutive months of growth. Our digitalization transformation journey continues with the launching of our mobile application. The group repositioned its strategy to focus on growth, whilst remaining disciplined in the areas of credit and cost control. We are committed to continued improvement on our client broker partners' experience. In the second half of '24, we delivered quicker assessment decisions and several automation and digitalization improvements. On the Home Loan side, we are delivering a fast assessment experience and automating document generation. In Asset Finance, we are delivering enhancements in our new origination platform, giving brokers a better experience, such as instant credit decisioning on our auto products. The next aspect I would like to address is Resimac's decision to cease originating in the New Zealand market. After some challenging years with material AUM outflow, limited loan origination and reduced profitability, it was decided that the group would undertake a strategic review of the business. The outcome of this review was to cease originations and put the portfolio into runoff while the group remained committed to servicing its customers and other stakeholders in New Zealand. As the portfolio runs off, capital will be repatriated to the group which will then be redeployed into growth opportunities that meet Resimac's return on capital hurdles. Before I hand you over to James to talk us through the financial performance of the group for FY '24, I would like to thank everyone at Resimac for their warmth and the support I have been offered in this interim role. I am truly grateful. Now I may pass it over to James.

Thank you, Susan. So turning to Slide 7 and 8. As Susan mentioned, the group reported normalized NPAT of $43.1 million for FY '24, and the Board have approved a fully franked final dividend of $0.035 per share, representing the FY '24 dividend of $0.07 and a normalized dividend payout ratio of 65%. Our cost-to-income ratio for FY '24 was 53.1%, an increase from 43.6% reported in FY '23, primarily due to net interest income headwinds from lower AUM and tighter margins. Despite an increase in the cost-to-income ratio, disciplined cost control was maintained in FY '24 with a 3.3% or $2.8 million reduction in operating expenses. This expense reduction was largely attributed to prior investments in technology, enabling operational efficiencies. The continued investment and adoption of technology and automation remain front and center of Resimac's growth strategy to building a scalable business, and this will be an ongoing focus for the group in FY '25. Loan impairment expenses have increased significantly year-on-year, primarily reflecting the ongoing build and seasoning of our Asset Finance portfolio. Our collective provision for the Asset Finance portfolio has been aligned with overall loss expectations for the asset class and is in line with industry peers and benchmarks. Turning to Slide 9. We've also included a normalized NPAT walk from FY '24 to FY '23, identifying the major drivers, net of tax. As I said before, the FY '24 normalized NPAT, excluding the fair value movement of derivatives, was $43.1 million. In comparison to prior year, NPAT is down $30 million primarily attributed to average time loan AUM being $1.8 billion lower in FY '24. In FY '22 and FY '23, competition among the major lenders was intense with customers offered enticing cash back incentives and low interest rates. Many of these major lenders had access to cheap funding financed by the term funding facility offered by the RBA as part of the federal government's economic stimulus policy during the COVID-19 pandemic. During this time, competition was intense, margins were low and the group elected not to compete on price and prioritize NIM preservation, which resulted in significant refinancing activity and the slowing in home loan applications and settlements, which is reflected in the group's FY '24 opening AUM. With the first tranche of the term funding facility maturing in September '23 and the second in June '24, access to cheap funding has reduced and competition has eased. As a matter of correlation, in October '23, Resimac's Home Loan AUM balances bottomed out and returned to positive AUM growth in November '23, with growth being recorded for 8 consecutive months. The other major factor that has contributed to a reduction in profitability has been a contraction in NIM. Turning to Slide 10. Group NIM was down 12 basis points during the year, driven by higher Home Loan cost of funds that were partially offset by shifting AUM mix towards Asset Finance. Home Loan NIM was down 22 basis points, primarily driven by higher cost of funds and lower new business margins. The gap between our back book grades and front book grades have closed, reducing the potential impact of repricing risk in future periods. Our exit NIM for the Home Loans portfolio at 30 June '24 was 134 basis points compared to our exit NIM of 140 basis points at 31 December. NIM contracted due to higher cost of funds, and we're optimistic that the cost of funds will reduce going to FY '25. As to the Asset Finance portfolio, NIM increased by 70 basis points over the period, driven by higher new business margins and runoff of lower NIM loans. During the period, the Asset Finance business experienced a 72 basis point increase in the dollar-weighted average interest rate charged to customers, with this rate closing at nearly 10%. Our exit NIM for our Asset Finance portfolio at 30 June '24, was 375 basis points, and management anticipate that NIM will decrease as the portfolio mix changes as more asset and auto deals are written and new products introduced. Now moving to Slide 11. Investor appetite remains strong for our RMBS issuances. RMBS deals in the second half were priced at a lower cost of funds than in the first half of '24, which will have a positive impact on FY '25 NIM and NPAT. There is broad and diverse support from domestic and offshore banks for our warehouse facilities, with more than sufficient appetite to meet our AUM growth objectives. Our debt and working capital buffers continue to be well positioned to support portfolio growth opportunities. Last week, we announced our fourth public bond issuance for the 2024 calendar year, a $1 billion nonconforming RMBS with the 2 senior tranches being priced at margins of 95 basis points and 135 basis points over respective base rates accordingly. The market is anticipating underlying base rates to reduce in 2025 as well, which will also provide upside on our funding costs and NIM. Now turning to Slide 12. Resimac's new business initiatives, coupled with the progress we continue to make on our digital transformation road map, are having a positive effect on the underlying health of our Home Loan distribution network. Resimac remains committed to enhancing the broker experience with a focus on ease, speed, consistency and relevance. We see these components as necessities to compete in the market segments we operate. I'm pleased to report the number of brokers that submitted home loan applications in FY '24 increased significantly compared to FY '23, with broker application volumes increasing by 28%. Increase in applications have translated into the settlement volumes of $4.3 billion, an increase of $500 million in FY '23, and we expect this positive momentum to be maintained in FY '25. As for the composition, FY '24 experienced a shift back to Prime home loans, with $1.9 billion being settled in the financial year, a reflection that the intense competition in the prime space amongst the major lenders somewhat eased. The group is not adverse to pursuing the Prime home loan product, knowing that it generates a lower NIM. But for a nonbank lender like Resimac, it also requires significantly less capital and, therefore, it generates a very attractive return on capital. Over the past few years, we've been on a journey of strategically diversifying our portfolio and it's now having a meaningful impact on our overall numbers. In FY '24, we settled $800 million in Asset Finance, up 50% versus FY '23, and we grew the book by 77% over the last 12 months. The number of broker applications also increased significantly, with applications increasing by 37% on FY '23. The composition of the portfolio is becoming well diversified, with a balanced split of settlements between auto, asset and skilled business lines being written during the period. Moving to Slide 13. The group has reported FY '24 AUM of $14 billion, an increase of nearly 4% on December '23. The growth in our Home Loans settlements has translated into positive AUM growth, with the portfolio growing 3.5% in second half '24. Our Home Loans AUM bottomed out in October '23 and has since posted 8 consecutive periods of growth and continues to show strong momentum into FY '25. Our Asset Finance offering continues to make steady progress, with AUM achieving the $1 billion target set back in FY '22. The growth in settlements of $800 million in '24 has resulted in our closing AUM of $1.1 billion, and the group remains committed and focused on sustainably growing this portfolio. Moving to Slide 14. The arrears performance for our Home Loans portfolio has improved during the financial year. 90-plus days arrears have reduced as a percentage of the portfolio, with our Prime products outperforming our ADI peers and our Specialist products also improving. With the Asset Finance portfolio, arrears increased in FY '24 to 46 basis points, reflecting the ongoing seasoning of the book accompanying with the acquisition of a portfolio from [ its Home ] Group. The 30-plus day arrears for our asset finance ABS issuance also outperformed the Fitch Dinkum Index during the period. As to the broader market and outlook, the persistent high cost of living continues to exert pressure on household incomes, leading to increased hardships and higher arrears levels across the Australian lending market. To support this, Asset's money market, MoneySmart released research finding that 47% of the Australian adults with debt have struggled to make repayments in the last 12 months, primarily due to cost of living pressure. In the commercial space, ASIC reported a 39% increase in companies entering external administration, clearly indicating the slowing of the economy and flow on impact to households and commercial activities. As a result of this, ASIC has shifted its focus to credit providers, including nonbank lenders in anticipation of these challenges, which is evident from their hardship review published in May this year. The longer interest rates remain high, more and more consumers will experience financial hardship, and the group continues to remain committed to supporting its customers through this uncertainty. Now moving to Slide 15. The overall expected credit loss provisioning for the group has increased from $45.9 million to $50 million in FY '24, with a corresponding increase in the coverage ratio from 33 basis points to 36 basis points. The composition of the expected credit loss provisioning has been impacted by the underlying product mix with the Asset Finance business increasing its contribution to group AUM. We continue to remain prudently provisioned on our Home Loan portfolio, with a coverage ratio of 28 basis points. We are confident in the resilience of our portfolio against the deterioration in the macroeconomic environment. House prices have continued to rise, both in capital cities and regional areas, continuing to add to the resilience of our portfolio against macroeconomic adverse conditions. As of 30 June '24, the average dynamic loan-to-value ratio for the portfolio was 61.2%. The portfolio also had less than $20 million of loan exposure, with arrears greater than 31-plus days and LVR greater than 90% and no LMI. This is a testament to the sound lending practice undertaken by the group over the years. The Asset Finance portfolio has grown significantly in FY '24. As part of this growth profile accompanied with the seasoning of the portfolio, the collective provisioning coverage has increased to 86 basis points, up from 42 basis points in FY '23. This coverage ratio brings the portfolio in line with internal loss expectations, industry benchmarks and peer performance. In summary, FY '24 NPAT is reflective of where the balance sheet was 12 months ago. Today, the group's balance sheet has returned to growth and remains well positioned to capitalize upon growth opportunities. Our financial and human capital will be deployed accordingly to support these opportunities as and when they arise. I will now hand you back to Susan to take you through the outlook and priorities for FY '25.

Thank you, James. So 2025 marks the 40th anniversary of Resimac. This, as some of you may know, is an important milestone. I think everyone is excited about the new premises we are relocating to in January, which are very close by, but allows all to work in close proximity to each other. For 40 years, Team Resimac has provided quality products to our customers. These products have been backed by strong core competencies in credit and underwriting, distribution, funding, data, technology and most importantly, our people. Our people is Resimac's strength. I'm confident in the capability, competence and commitment that will drive our business success. We continue to diversify both in terms of the scale of our 2 core lending businesses of mortgages and active finance as well as expanding range of products we offer. We are always seeking value-accretive opportunities, which will contribute to performance. As we evaluate these opportunities, we remain disciplined. We embed a return on capital requirement in everything we do. We focus on deploying our capital in an efficient manner, whether it be human, financial or otherwise, to ensure the group operates efficiently. I will now hand the call back to our moderator to facilitate the question-and-answer portion of the call, and we are happy to take your questions. Thank you.

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

I just want to ask I guess, a question around the strategy. If we go back a couple of years, the previous management team took the view to sort of ramp up Asset Finance, given the headwinds that the home loan book and market was under. And now we see an environment where you've stabilized and started to grow the Home Loan AUM and the sort of challenges emerging in Asset Finance around asset quality and competition. So I was just wondering how you're thinking about the allocation of capital going forward between those 2 segments.

Tom, it's Andrew Mason here. Thank you for your question. Tom, we still see a very long-term and reasonable opportunity in the asset finance space. So very much the focus is there. I think as James and Susan, about why we have seen the competitive or the fierce competitive landscape in mortgages, particularly the prime space over the last 12 to 18 months. And it's really the adaptable business model that we have, where we can refocus, repivot to the core part of our business, which is resi mortgages at the end of the day. We are a lot more comfortable with the outlook in the operating environment today than we were, say, 12 or 18 months back. We have a view, a probably more landed view on the macro and the credit environment. So again, we're very confident that there's a reasonable risk return opportunity in the prime mortgage space -- sorry, the broader mortgage space, while still having a good balance in the Asset Finance market itself.

Okay. Great. That's pretty clear. And just a follow-on question. I mean you've taken a view to increase the collective provision coverage in the Asset Finance portfolio. From a risk-adjusted return perspective, have you changed your pricing in that market to reflect that?

Yes. So look, we -- I would say that the -- particularly in the Asset Finance product suite, we have a very granular product offering or sort of pricing structure, I should say. It is a product segment where we can have a lot more efficiencies in pricing for risk there. So again, it is in line with the outlook. So we do take into account the macro environment, our outlook for credit performance but also managing returns at the same time.

We also look at the underlying customers as well. So it comes down to customer quality. And when you're talking about return on capital, beefing out -- if we do have experienced losses and stuff and so forth. We are building out our collections and recoveries capabilities as well.

Your next question comes from Jason Shao from Macquarie.

Your growth in home lending book is quite a positive. It sounds like there is a bit of a focus on growth over margins. How do you view the trade-off between book growth and maintaining pricing on the new mortgages? And is this partly driven by anticipated funding cost benefits you expect to see in FY '25?

Jason, Andrew again. Look, again, we do have some comfort as should all originators in the mortgage space. We're operating in a market where cost benefits have passed through from a pricing perspective there. What I would say is we've seen a normalization in the mortgage market. Again, I bring it back to the Prime segment in the last 12 to 18 months, where both ADI and non-banks cost of funds are being reflected in mortgage pricing itself. So the abnormal environment that we saw during the TFF phase or when TFF was being deployed, that has always reversed, and we are seeing -- we do have an outlook for more stable returns in the mortgage space. And again, those opportunities should benefit overall growth over the next reporting period.

As I highlighted in the presentation, we do apply a return on capital, I guess, discipline. And the Prime space, obviously, margins are lower, but also the capital requirements are lower.

Great. And also related to that, curious around your strategy between Prime segments and Specialist segments of your mortgage book. I'd like to mention competition in private space is sort of somewhat eased over the last 12 months, but they are still quite competitive, especially when you're comparing to pre-COVID levels. Do you see a shift in focus towards Specialist segments as part of a longer-term strategy for Resimac? Or do you still prefer to be overweight in Prime lending?

Look, I think it's been a very much have a bias towards Prime. We do like the nonconforming on the Specialist segment as almost a countercyclical mortgage opportunity there itself. There will be times where we decide to pull back in segments of the nonconforming market due to concerns with the macro or the credit environment, there will be other times where we do want to focus on the high-risk, high-return segments of that nonconforming space. What I would say, Jason, is that we have created a dominant market share of that nonconforming market. We see with the new Prime product or the Prime [ altered ] product that accounts for around 85% of our production.

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

I just have a question on the falling funding costs. Obviously, your net interest margins have been impacted, I guess, over the last few years by higher funding costs. To what extent will these falling funding costs feed into better NIMs looking forward?

So what I would turn -- I will defer to James. But we are seeing the higher funding costs that the group booked over the last, say, 2 to 3 years. There is a -- that dynamic in the back book that will roll off over the next period. We've seen a reasonable history of improving -- I would say, wholesale funding costs at the moment are quite stable. That will flow through to the P&L shortly. As James touched on, we are seeing very good coverage in our public bond transactions. That has manifested through to materially tighter pricing in both the senior and mezzanine bonds, and we are seeing that reflected as our bank facilities are repricing as well.

And those components just take a little bit of time to flow through to our NIM and profit.

And maybe just a follow-up question. I mean, obviously, a lot of your competitors, particularly the nonbanks in this space are equally benefiting from these falling funding costs. To what extent do you think they quickly get priced through into customer pricing in both home loans firstly, and then asset finance secondly?

Jason, sorry, Brendan, I bring it back to the notion that the consumer credit market in Australia is one of a pass-through nature. So to the extent there are sustained changes in wholesale cost of funds, that will ultimately flow through to pricing to The Street, whether it's mortgages or asset finance products.

Your next question comes from Jeff Cai from Jarden.

A question on the new CEO. Can you give us some color on what are the, I guess, the key attributes the Board is looking for? And whether you're looking for a candidate that's to continue on with the AUM growth strategy or someone who's probably going to pivot a little bit more towards the returns-focused approach?

Thank you for your question, Jeff. So the Board is acutely aware that the appointment of the CEO is perhaps our most important duty. And we are going through a significant process of transformation, and this is the opportunity for the Board to leave a -- lean in and drive the process of transformation to develop senior talent. And as part of the process of appointing the next CEO, we're assessing the key attributes, skills, behavior, experience that we require in the next phase. So the process, Jeff, is still underway. Does that answer your question?

Can you give a bit more color in terms of what are the key attributes? Like are you looking for someone who is more continuing on with the AUM growth strategy? Or someone who's a bit more, I guess -- a bit more disciplined in terms of returns focus when you sort of go through that process?

So I would say, most certainly, we're looking for somebody who can add value in the organization, undoubtedly. And we're going through digital transformation phase, so technology. But it's a mix of all those attributes. And as I've said, we're still going through the process. So having defined them -- we're still going through the defining phase.

Got it. And then a quick question on credit quality on Slide 14. Can you talk a little bit about how the arrears trends have trended since June? They have obviously improved a little bit in this half, perhaps at seasonality.

Look, I would say if we start with the resi portfolio first, very much a stabilization in short end and longer-dated delinquencies. And again, Jeff, we have -- I think when we last caught up, we were talking about trends across the industry there. A lot of the dynamics in delinquencies in the mortgage book, very much attributable to the current rates environment, the consecutive rate increases from the RBA had a pronounced impact on the performance. But again, that has been reflected across the industry there. We are seeing an increase in our later-stage arrears due to an increase in hardship applications. Again, that is a dynamic we do see across the industry. We've taken quite a conservative approach with reporting hardships in our delinquency statistics as well. But what I would say as a corollary to this is that our outlook are for losses on the mortgage portfolio is probably as low as it has been for at least in recent history there. The strength in the housing market is providing a lot of comfort around the ultimate performance post the default and delinquency phase itself. On the Asset Finance side, we are seeing -- I use the term normalization in the performance of that book, is a relatively unseasoned portfolio that we have. So again, with the risk settings that we have in the origination and underwriting stages of the Asset Finance portfolio, we do expect it to perform in line with industry peers. And there would be an expectation as well that when the book -- the business is mature and the book quite seasoned that we will outperform the rest of the industry, in line with our mortgage portfolio.

[Operator Instructions] There are no further questions at this time, and that does conclude our conference for today. Thank you for participating. You may now disconnect.

Thank you, Harmony.