Resimac Group Limited (RMC) Earnings Call Transcript & Summary

Good day, and welcome to the Resimac HY '25 Investor Call. [Operator Instructions] I would now like to turn the conference over to Ms. Susan Hansen, Interim Chief Executive Officer. Please proceed.

Thank you, Chris, and good morning, everyone, and thank you for joining us today for our half year results presentation. Like Chris said, I'm Susan Hansen, Interim CEO, and I have with me James Spurway, our CFO; Andrew Marsden, our CTO; and Anny Chen, our General Manager of Capital Markets. As we reflect on the first 6 months of financial year, it is clear that while we faced external challenges, we are seeing green shoots emerge with several positive signs of growth and resilience in our business. We remain confident in our strategy, and we are on track with our objectives set at the start of the financial year. In considering the macroeconomic environment, Australia's economy has certainly been impacted by ongoing pressures throughout 2024. We've seen a decline in business growth and rising insolvencies, which have affected both households and business lending. The elevated cash rates, while effective in curbing inflation have led to a slowdown in economic activity and hopefully, the RBA moving last week brings some relief. GDP growth for the September 2024 quarter was only 0.3%, marking the third consecutive quarter of minimal expansion. Much of the slowdown is driven by subdued household spending as consumers grapple with low disposable income and higher cost of living. Despite these external economic pressures, the group has remained focused on executing our internal strategies to drive sustainable growth. In the 6 months leading up to December 2024, both the home loans and asset finance portfolios have grown. Our resilient home loans portfolio has arrears later than the industry average with a marginal increase in coverage for bad debts. Our asset finance portfolio has surpassed $1.2 billion in assets under management, a testament to our ongoing diversification of product offerings. However, we've seen an increase in delinquencies consistent with the broader industry trend. As a result, we've been proactive in increasing provisioning in line with this growth. We're also making strategic investments in collections and recovery activities to mitigate risks and ensure the long-term health of our portfolio. Moving forward, we are committed to maintaining a disciplined approach to risk management while also driving innovation through continued digitalization and automation. Technology is key in enabling us to offer more efficient and personalized services for our people, customers and brokers. The team has most recently been integrating artificial intelligence with the use of bots in previously manual and time-consuming processes and already starting to see efficiency gains. This is just one part of our broader ambition to build a culture of innovation at Resimac. I'd like to take a moment to address the leadership transition. In December, we announced that Pete Lirantzis will assume the role of CEO after completion of the migration of the Westpac auto back book. I'm grateful for the continued support of the Resimac team and will be delighted to hand the reins to Pete at what will be an exciting time for the company. I have full confidence that Pete's leadership, tenacity and skills will help us achieve our ambitions and take Resimac to the next level. Now looking at the Westpac auto book migration, this weekend marks a critical milestone for the data migration of the back book onto the Resimac balance sheet. It has required meticulous planning over the past months. And I'd like to take a moment to thank the team at Resimac and our partners for their support throughout this process. A period of [ hypercare ] will follow the migration to ensure a smooth transition for our new customers and partners. As a result of the strategic acquisition, the back book brings a new focus and expertise to Resimac in consumer auto finance and novated leasing. After the migration of the hypercare phase, this presents an exciting opportunity to expand these product offerings to both new and existing customers. In parallel, we streamlined our operations in New Zealand and ceased originating new home loans as of July last year. However, we continue to service our existing customers, and I'm pleased to report that our portfolio is performing in line with expectations. At the heart of everything we do is our people and culture. The dedication and resilience of the Resimac team have been integral to our success. A huge thank you to all of our employees for their ongoing hard work and commitment. We've also seen some productive developments in our workplace culture. In January this year, we relocated our offices to 201 Kent Street, bringing our teams closer together on 2 floors. This move has already had a positive impact on collaboration and employee engagement. Looking ahead, we're excited to celebrate Resimac's 40th anniversary later this year, marking 4 decades of helping people and businesses achieve their financial dreams. This milestone underscores our long-standing commitment to delivering value to our customers and partners, and we look forward to continuing this legacy. Finally, I'd like to emphasize that Resimac remains well funded and capitalized, positioning us strongly to navigate any challenges that may arise in the macroeconomic environment. We are confident that the green shoots we're seeing will lead to sustainable growth in the coming months. In conclusion, while the economic backdrop has presented its share of challenges, we are encouraged by the resilience of our business and the opportunities ahead. With our strategic focus, commitment to innovation and dedicated people, we are well positioned to continue delivering value to our stakeholders. Thank you, and I look forward to continuing this journey with all of you. I will now pass you on to James to provide more detail on our financial performance. Thank you, James.

Thank you, Susan, and good morning to everyone. I'm pleased to present you with an update on Resimac's financial performance for the first half of 2025 financial year. So turning to Slides 8 and 9 of the results presentation. The group has reported a first half '25 normalized net profit after tax, excluding fair value movement on derivatives of $15 million, and the Board has approved a fully franked interim dividend of $0.035 per share, recognizing the significance of stable dividends for its shareholder base. The group's normalized NPAT was below that of second half '24, primarily due to the significantly higher level of impairment expense recognized in the period, which we'll cover later. It is particularly pleasing to report that our operating profit before impairments and tax has increased by over 20% to $35.9 million, indicating positive signs of balance sheet growth alongside ongoing cost management disciplines. Our normalized cost-to-income ratio has improved by nearly 5% to 53.1%, demonstrating our disciplined cost management, AUM growth and diversified revenue strategies. Normalized income has increased by nearly $6 million in first half '25, attributable to the growth in our average assets under management during the period, coupled with a $2.5 million increase in fee income as a result of settlement fees being introduced on certain home loan products. In respect of our cost base, we continue to remain disciplined with our normalized cost base decreasing slightly in the period despite an increase in business activity. Disciplined cost management will continue to be a priority for the group, especially as we focus on automation, simplification and system integration to drive and capture operational efficiencies. To support our automation initiatives and the recent acquisition of the Westpac auto portfolio, there has been an increase in resources and employment costs. This increase in the resource base is essential for developing and deploying new product capabilities, such as those in the consumer finance and novated lease segments, and integrating the Westpac auto portfolio into the Resimac ecosystem. In respect to the portfolio acquisition, as Susan has mentioned, the transaction is expected to settle this weekend, adding approximately $1.5 billion in AUM to the group's asset finance business. The transaction is projected to contribute approximately $6 million and $12 million to FY '25 and FY '26 operating profit, respectively, noting that this is before the consideration of provisioning, impairments and tax. The acquisition of the portfolio supports the group's strategic growth and diversification objectives into the novated lease and consumer segments, and it provides Resimac with an increased market reach and customer base with approximately 100,000 new customers. Back to first half '25 results though. The primary factor for the reduction in normalized NPAT for the period was an impairment expense, which amounted to $14.8 million or $9.3 million higher than second half '24. The impairment expense includes 2 components: net write-offs and collective provisioning. Net write-offs for the period totaled $6.6 million, an increase of $2.9 million compared to second half '24. The majority of the balance is attributed to the Asset Finance business, which experienced $6.8 million in net write-offs, partially offset by $250,000 in net recoveries for the home loans portfolio. Regarding the Asset Finance business, approximately 60% of the net write-offs consisted of equipment assets and 40% comprised of passenger and light commercial vehicles. The second component of the impairment expense is collective provisioning as required by Australian Accounting Standards under AASB 9. The movement in collective provisioning was $8.2 million in first half '25, $6.4 million higher than second half '24. This $8.2 million movement is split $1.3 million and $6.9 million between the home loans and asset finance portfolios, respectively. I will come back to collective provisioning in a moment. Turning to Slide 10. The normalized NPAT walk from second half '24 to first half '25 highlights the key movements after tax from the prior period, noting that the shift in loan impairment has been the major driver. AUM growth contributed $2.2 million with average AUM growing over $300 million during the period. Other income increased by $3.1 million, primarily due to the increased fee income on our home loan products and group AUM -- group NIM compressed by 5 basis points to 148 basis points, reducing NPAT by $1.1 million. Turning to Slide 11. Group NIM decreased by 5 basis points during the half due to lower yields on home loans, offset slightly by an increase in Asset Finance. Our home loans NIM fell by 6 basis points, primarily due to reduced new business margins. During the period, the campaign was launched to boost the broker activity and application levels by enhancing product features and offering competitive pricing in line with our internal return on capital requirements. The asset finance portfolio's NIM remained similar to second half '24. However, NIM has contracted on full year '24 levels, mainly due to higher origination volumes in the equipment and auto space, which has a lower NIM as opposed to secured business loans. Moving to Slide 12. Investor interest remained robust for our RMBS issuances throughout the period. The group successfully issued $2 billion in RMBS deals and the senior margin on the prime deal priced at 110 basis points, 5 basis points lower than FY '24, while the senior margin pricing on the specialist deal remained unchanged. Our warehouse facilities continue to receive substantial and varied support from both domestic and offshore banks, providing more than sufficient capacity to meet our assets under management growth objectives. Our debt and working capital buffers remain well positioned to capitalize on portfolio growth opportunities. At the outset of the second half of FY '25, the market anticipated a reduction in the cash rate as evidenced by the 1-month swap rate fluctuating between 5 to 15 basis points below the RBA cash rate prior to the rate cut. This negative basis spread will benefit the group's net interest margin, considering the timing difference between our funding cost resetting and the rate reductions taking effect for our customers. Moving forward, market expectations of further rate reductions in 2025 are expected to provide additional tailwinds for our funding costs, which will undoubtedly benefit our customers as well. Now turning to Slide 13. During the first half of 2025, home loan applications increased significantly to $4.3 billion, reflecting a substantial rise from $2.9 billion in the second half of '24. In alignment with the growth strategy, the group initiated a home loan campaign aimed at revitalizing brokers associated with Resimac and boosting application levels, resulting in a 48% increase in application volumes and a 25% increase in active brokers submitting applications. The increase in applications has translated into settlement volumes of $2.4 billion, a 5% increase in second half '24. Due to the time delay between application and settlement, a portion of the first half '25 applications have settled in the second half '25 calendar year, providing further momentum into second half '25. Consistent application and settlement volumes were also observed in our prime product offering with $1 billion settled during the period. While prime products have lower NIM, they require less capital and offer attractive returns for the group. Resimac remains focused on enhancing the broker experience with an emphasis on ease, speed, consistency and relevance. During first half '25, the group undertook several initiatives in its digital transformation, introducing and deploying several bots, AI and automation tools to improve productivity and efficiency for staff in the home loan distribution network. These initiatives are achieving their intended outcomes, resulting in improved processing times for application and credit assessment activities. In the Asset Finance business, the number of loan applications increased by 10%, with application and settlement volumes remaining consistent with prior period of $700 million and $400 million, respectively. During the period, Asset Finance implemented a new rate card and credit matrix designed to simplify transactions for brokers. Additionally, an auto decisioning tool tailored to the automotive sector was introduced, enhancing efficiencies and productivity. Moving to Slide 14. The group has reported assets under management of $14.2 billion for the first half of 2025, reflecting a 2% increase since June '24 and a 6% increase from December '23. The growth in home loan settlements has contributed positively to AUM with the portfolio reaching $13 billion. Over the next 12 months, the group will focus on reducing discharge volumes by enhancing customer retention efforts and thereby promoting further growth in AUM. Our asset finance offering has shown significant growth with AUM rising by 10% in the first half of 2025 and closing at $1.2 billion. The group remains focused on sustainably growing the portfolio, although our recent increase in arrears and write-offs does require a cautious approach considering current conditions in the SME sector. As of December '24, the portfolio maintained a balanced distribution between auto, equipment and secured business loans. Looking ahead, the acquisition of the Westpac auto portfolio will add approximately $1.5 billion to our asset finance portfolio, further diversifying it with novated leases and consumer finance products to be included on the balance sheet. Moving to Slide 15 and 16. In alignment with market trends, the arrears performance of our home loan portfolio deteriorated during the first half of '25. The percentage of loans in arrears for over 90 days in our prime product increased to 81 basis points, which is broadly consistent with our ADI peers. For our specialist products, the rate of loans and arrears for over 90 days rose to 2.32%, reflecting benchmark trends. Over the past 12 months, the group has observed an increase in the number of customers requiring financial assistance correlated with cost of living challenges. Of the $800 million of loans classified in Stage 2, approximately 40% were under hardship arrangements. This rise in hardship loans is partly due to the industry broadening the definition of hardship following the ASIC hardship review. During the period, the group enhanced its financial assistance frameworks by adopting the recommendations published in the ASIC review, demonstrating the group's commitment to customer-centric solutions and supporting its clientele in challenging circumstances. These financial hardship considerations are integrated into the group's collective provisioning to ensure adequate loss coverage in the event of default. It's important to note that a customer's financial hardship status does not translate to an increase in credit losses for the portfolio though. Recent statistics released by ASIC indicate a significant rise in corporate consultancies over the past 6 months, reflecting the adverse effects of reduced consumer confidence, increased cost of living and higher interest rates on businesses across all sectors. This trend is evidenced in the group's asset finance portfolio, which has seen an increase in arrears and loss rates, particularly in the equipment and auto sector. During the period, the group modified its asset write-off policy to recognize impairments earlier. As of June '24, assets were written off after 180 days in arrears, adjusted to 150 days at December '24, and plan to further reduce to 120 days by June '25, aligning to industry best practice. This change has led to the recognition of an additional $3 million of impairment expense in the first half of '25 with a similar impact expected in the second half. Management considers that the rise in arrears for the asset finance business is not necessarily indicative of underlying credit issues, but rather reflects the challenges associated with growth. With the acquisition of the auto portfolio from a major ADI, the group will have the opportunity to further enhance its capabilities in credit risk management, collections and recoveries, leading to a more efficient business operation. Moving to Slide 17. The overall expected credit loss provisioning for the group has increased from $46.1 million to $54.3 million with a coverage ratio of 38 basis points, 5 basis points higher than 30 June '24. The composition of the collective provision has been influenced by the challenging economic climate as a result of cost of living pressures and higher interest rates, which in turn have impacted arrears levels and net write-offs. The group remains prudently provisioned on its home loan portfolio, maintaining a coverage ratio of 29 basis points. During the first half of '25, there's been a slight increase in arrears levels within our Specialist Products segment and New Zealand portfolio. Furthermore, the group has observed an uptick in financial hardship applications, which are classified as Stage 2 in our collective provisioning. Despite these developments, we remain confident in the resilience of our portfolio against any potential deterioration in the macroeconomic environment. The housing market continues to be buoyant, supported by recent and anticipated interest rate cuts, providing relief to households. As of 31 December '24, the average dynamic loan-to-value ratio for the portfolio stood at nearly 60% compared to 61% in June '24. Consistent with prior periods, impairments have been minimal with the profit and loss statement recording $250,000 of net recoveries. The asset finance portfolio continues to show consistent growth. As the portfolio has continued to expand and mature, the collective provisioning coverage has increased to 132 basis points, up from 86 basis points at June '24. This rise in the coverage ratio is attributed to changes in the asset mix, net write-off experience, higher arrears levels and a revised write-off policy. So in review, the first half of the 2025 financial year has been marked by significant progress and achievements for our company. Not only have we relocated to a new premises that promotes collaboration and innovation, but we have also successfully executed as soon to complete the acquisition and integration of the Westpac auto portfolio. Our financial performance has improved with notable improvements in settlement volumes translating to AUM growth and a significant improvement in operating profit. We remain committed to cost control whilst appropriately supporting strategic growth initiatives and ongoing automation. While we face challenges such as increase in impairment expenses driven by write-offs and arrears levels, we are confident in our ability to navigate these challenges and to continue delivering value to our stakeholders. Thank you, and I'll now hand you back to the moderator to facilitate the Q&A session.

[Operator Instructions] And your first question is from Tom Strong with Citi.

The first question I just wanted to ask was around the asset finance NIM was broadly stable over the half, but the exit NIM shows about 20 basis points of contraction. Can you just touch on what's driving that exit NIM lower?

Tom, it's James here. In terms of the exit NIM being 20 basis points lower, that's going to be reflective of product mix. So we are pushing more into the Autos and Equipment space as opposed to the secured business lines, which do have a significantly higher NIM. So that's predominantly product mix changes.

And just as a follow-up on that, I mean, I think you mentioned before or implying then that the NIM on this asset and sort of equipment exposures is lower than the secured business. I was a bit surprised by that given presumably the ECL would be higher on those exposures. Can you sort of talk through that dynamic?

That's a good question. So in terms of the NIM, yes, it's probably around about -- about 70 points on the top of my head, low from a yield perspective. The collective provisioning, yes, is very different because the secured business lines are being backed by residential property as opposed to the [indiscernible] auto -- I mean, Autos and Equipment, it doesn't have that backing.

Okay. So the ECL is much higher than on those loans [indiscernible]. And can I just ask around the -- I guess, some of the other income lines, loan management expense and the commission income have sort of jumped around a bit. Can you just talk about what's driving those lines? And is that sort of a new baseline for what we can expect in the second half?

Is that in the actual 4D in the financial report?

Yes.

Yes. So we did have a change in accounting policy back at 30 June. So first half -- I mean, second half -- first half '24 has not been restated. So we had the trail commission and the trail commission used to go through commission fees, which is below the line -- below NIM, and that has been reallocated upwards. So when we get through doing FY '25 -- I mean, FY '25 financials, it will all be like-for-like. So we do call that out as part of our [ disclosures ].

Yes, perfect. That does make sense. And if I could just push my luck to ask a final question. Just with the acquisition of the Westpac book coming on, I mean, my understanding with the accounting standards is that you'll have to establish a new ECL for the book. Is that right? And sort of how does that come into your thinking around the profit contribution over the next 18 months?

So yes, we'll have to take into account, at 30 June, we'll have to create a new ECL. Now the magnitude of that ECL is yet to be determined. We have bought the portfolio at a discount. A portion of that discount is there to compensate for expected credit losses. So at this stage, we don't actually envisage a material collective provisioning being raised.

And Tom, it's Andrew here. And what I would also add to James' response is that it is a well-seasoned back book of prime auto loans originated by a major ADI there.

The next question is from Rodney Forrest with Sublime Funds Management.

Just one question, please. It's regarding the strategic intent of the equity stakes. So MoneyMe, Humm and B&K Bank, it's around $45 million of equity co-investments. Just wondering the strategy moving forward. Is it to -- Duncan is a pretty true operator, buys discounted assets. So just thinking, is it to return capital, divest those? Or is it to roll them up and create a bigger group because Pete, obviously, CEO coming in has a history of Duncan. So just appreciate any commentary around the intent of those holdings, please.

Rodney, it's Susan speaking. And the holdings were purchased because we're familiar with the industry, we're familiar with the companies, and they were purchased at what we believe was a very good value. We are able to understand a lot more about those companies, how they operate, how they fit in our wider portfolio, and we continue reevaluating the strategic holdings. I hope that answers your question.

Somewhat. Yes.

There's a bit of an optionality play there, Rodney. And it is something that we are constantly reviewing. And I'm sure it will come up as part of the discussions with the Board in a strategy session we're going to be holding in a couple of weeks' time. From my perspective, there is opportunities to -- obviously, if we divest potential return on capital or we redeploy that capital into other growth initiatives.

That makes sense to reinvest back in the book and ROEs. And the second question is just on the large franking credit balance you've got. It's pretty good, obviously now 10.5% fully franked yield. Is there any future view on specials as the business becomes stronger and the collective provisions can be added back? Or how do you think about the future dividend path from here? Because the annual report spoke to about restoring back to $0.08.

And so certainly, Rodney, we are not averse to paying dividends, given returns to shareholders, identifying that we have excess capital, and we are fully aware of the franking credits that are there. So I hope that answers your question.

At this time, there are no further questions. This does conclude our question-and-answer session as well as the conference for today. Thank you for participating, and you may now disconnect.