Resimac Group Limited (RMC) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Resimac FY '25 Investor Call. [Operator Instructions]. I now like to hand the conference over to Mr. Pete Lirantzis. Thank you, and over to you.

Thank you, and good morning, everyone. I'm delighted to welcome you to Resimac's investor briefing on our full year results for the period ending June 2025. I'm Pete Lirantzis, newly appointed Chief Executive Officer of Resimac, having stepped into the role April this year. It's a privilege to host my first full year investor call. Joining me today is our Chief Financial Officer, James Spurway; and our Chief Treasury Officer, Andrew Marsden. Before we begin the results presentation, I'd like to acknowledge Susan Hansen, who stepped into the interim CEO role during the financial year. And her deep experience as a Board member to guide this company through a pivotal period is greatly appreciated. Under her leadership, we delivered strong results, successfully completing an acquisition of the Westpac consumer auto portfolio, which positions us well for the next phase of growth. Thank you, Susan. In today's presentation, we'll cover an overview of the economic environment and competitive landscape, our key performance highlights, the financials, which James will walk us through. And finally, I'll wrap up with our priorities for financial year '26. As we at Resimac step into the next stage of building our new capabilities, I want to say a big thank you to our management team, our staff for their amazing dedication. It's been a tough year, but we've turned those challenges into meaningful opportunities. Thank you. To set the stage for our performance, it's worth looking at the broader Australian context. The financial year '25 competitive environment saw modest easing, particularly in the prime mortgage space as bank costs on funds continue to normalize. The macro backdrop was mostly benign and characterized by a gain in inflation control and the start of the monetary policy easing cycle. The shift to an easing cycle is expected to provide relief to households, businesses, improving mortgage serviceability and stimulating demand. Furthermore, the strength of the labor market, reasonable business conditions did provide support to the underlying performance of our loan book. The housing sector continued price growth in most major cities across Australia, a trend fueled by prolonged imbalance between housing supply and high population growth. However, we do remain cautious as global events, geopolitical developments may adversely impact the Australian economy. If you're looking at the presentation, I'm turning into Page 3, which outlines Resimac's financial year mission and core purpose. Resimac is a strong, resilient brand that has been tested through many economic cycles since its foundation in 1985. We have built a strong market position in mortgages and have diversified into asset finance over the past 5 years. Since I've taken on the role as CEO in April '25, I've been collaborating closely with the Board and our senior leaders to sharpen our focus and strategy. I've taken a fresh look at our leadership structures, bringing in new leaders for our operations, credit, technology, product, sales and distribution departments to add critical capability that will enable our future growth aspirations. We still have work to do. The most efficient player will win. It's critical to make things easier and provide consistent and convenient services to our brokers and customers and fast decision-making is now just table stakes. Our asset finance products, our focus remains on sustainable growth with a disciplined approach to writing the right business. Today, with a seasoned book, we have work to do, leveraging deep data insights that will enable us to strengthen our collections and recoveries capabilities. In financial year '25, we have refined our credit model to incorporate our learnings, improve how we prospect and target key segments of the SME sector. This is going to be ongoing in financial year '26. With the mantra of the most efficient win in financial '26, our priorities will continue to include capturing operational efficiencies, supporting customers' growing needs, implementing intelligent technology and improving distribution performance. Our financial year '26 centers on back to the core approach. sharpening focus and investment on home loans products as the engine of our sustainable growth and renewed focus on delivering a better experience for customers and strengthening that relationship with our brokers. Turning to Page 4, titled Financial Year Performance Highlights. The group built strong momentum through financial year '25, evidence of our key metrics, AUM growth and profit. Following a drop of normalized profit, NPAT since the post-COVID period in financial year '21, early signs of recovery are now emerging across our 5 metrics outlined in this slide. Normalized profit has improved by 13% on financial year '24. Breaking that down half-on-half, normalized profit improved 19% on the first half of '25 and 43% on the second half of '24. Return on equity has increased to 12.5% in the second half of '25 from a 7.2% in first half of '25. We prioritized returning capital to our investors this year, returning $75 million by a total dividend of $0.19, which includes $0.12 with a $0.12 special dividend. We have seen strong mortgage settlements growth of 14%, which increased AUM to $13.4 billion after a steep decline between the peaks of December '22 and December '23. In our Asset Finance business, we continue to see an increase in AUM of 27% to a $1.4 billion close at the end of the financial year. In 2025, we celebrate 40 years and have surpassed $50 billion in securitization issuance. We've also secured new banking and investor relations to support strategic AUM growth. Lastly, over the last 4 months, covering December, holidays and New Year period, the Resimac team migrated 100,000 new auto and novated lease customers, which contributed $4.5 million to our operating profit. As I said, early signs of recovery with more work to do to ensure we keep the momentum going. Moving on to slides labeled Financial year '25 Highlights on Page 5. Key callouts from this dashboard are as follows: -- our normalized profit has returned to year-on-year growth for the first time since financial year '21, noting that normalized operating profit, excluding once-off fair value gains and losses on derivatives and impairment expense, -- in our home loans portfolio, we continue to build on the momentum since switching to growth from December '23. Our home loans applications grew 17% to $7.6 billion, a direct result of our successful campaign to reengage our broker network, which led to a 14% increase in active brokers. The strong application growth translated into 14% rise in settlements to $4.9 billion in the financial year. Looking ahead, we're focused on deepening these broker relationships and expanding our network. A core part of our strategy is to improve our conversion rate by reducing the time to yes, which will enhance our overall broker and customer experience. Our asset finance business has also shown significant momentum. Settlements grew by a robust 30% to $900 million. Our Asset Finance business performance has reflected what has been going on in the SME sector, in addition, was impacted by changes in viral policy. As mentioned previously, we have since adjusted our credit policies, enhanced our collections and recoveries capabilities, a discipline and investment which will continue into this year. The consistent performance in both our home loans and Asset Finance segment underscores our ability to execute our growth strategy effectively and maintain a balanced high-quality loan book. Moving on to Page 6. The Second half 2025 highlights. This slide highlights the strong momentum that we've been built -- that has been built in the last 6 months. Our normalized NPAT has increased with a relatively stable cost-to-income ratio and a reduction in the impairment expense from its peak in the 6 months to September '24 half. We are on a positive trajectory at 30th of June '25. Our assets under management stood at $15.9 billion, a $1.8 billion increase since December '24. A significant portion of this growth, $1.1 billion is directly from our strategic acquisition of the Westpac Autos portfolio. Our home loans AUM has increased by $500 million or 4% during the financial year, driven by consistent settlement volumes. Excluding the acquisition of the consumer auto portfolio, our asset finance offering has continued to show sustainable organic growth with AUM rise by 27% in 2025 to close out at $1.4 billion. The group remains committed to sustainable growth in this portfolio, although we will take a cautious approach given the prevailing conditions in the SME sector. The acquisition of the Westpac Auto consumer portfolio was a strategic milestone, diversifying the portfolio with new novated leases and consumer finance products. The back book provides a great foundation to develop our presence in the auto market. We are also encouraged by the funding support we have received. Our funding and capital program was strengthened during the period. Our banking syndicate comprises a broad mix of domestic and foreign banks with aggregate funding limits now exceeding $10 billion. Our global securitization program continues to be well supported with our bond transactions during the period being oversubscribed and delivering lower cost of funds. We have more than sufficient funding capacity to support our growth objectives, and we'll continue to strive for greater efficiencies in our liabilities management function. In summary, the 2025 financial year was a period of significant progress and achievement for the group. Our financial performance improved with operating profit demonstrating strong positive momentum. We successfully acquired and integrated a $1.5 billion bank portfolio, adding nearly 100,000 customers, and our assets under management have returned to a growth trajectory. We remain dedicated to delivering value to both our customers and shareholders, providing the group with a solid foundation for sustainable growth. I would now like to hand over to James to run through the financials.

Thank you, Pete. Good morning, and thank you for joining us today to discuss Resimac's financial results for the financial year 2025. Before I provide an overview of the financial performance for the year, I'd like to echo Pete's comments and thank Susan for her guidance and support during the year. I'd like to extend a warm welcome to Pete in his new role as CEO. His commitment and enthusiasm for technology and artificial intelligence will be instrumental as we position Resimac for future success. Now turning to Page 10 for a summary of the overall financial performance for Resimac Group Limited. The group reported normalized net profit after tax, excluding fair value movement on derivatives of $39.7 million for FY '25, and the Board have approved a fully franked final dividend of $0.035 per share, representing a full year '25 dividend of $0.19, including a $0.12 dividend -- special dividend declared and paid in June. The group's normalized NPAT of $39.7 million was $3.4 million below that of FY '24, primarily due to the higher level of impairment expense recognized during the year, a significant component of which was disclosed at first half '25. It is particularly pleasing to report that our normalized operating profit before impairments and tax for FY '25 has increased by 13% to $78.6 million compared to FY '24. What is more promising is the continued momentum that the business has built with second half '25 normalized operating profit increasing $6.8 million or 19% on first half '25. And compared to the second half of '24, normalized operating profit increased $12.8 million, representing a 43% improvement. These growth metrics reflect a positive trend in the balance sheet and effective capital deployment, while the business has largely maintained its cost-to-income ratio in support of this growth trajectory. Our normalized cost-to-income ratio of 53.6% was 50 basis points higher in FY '25 than FY '24, primarily due to additional costs incurred to support the acquisition and integration of the autos portfolio acquired from Westpac and the subsequent servicing of that portfolio. During the period, the group successfully acquired the Westpac Autos portfolio, which immediately added circa $1.5 billion to our assets under management. The portfolio is broadly comprised of 60% novated leases and 40% consumer finance products, providing a platform for strategic growth and diversification in these areas. The year-on-year increase in the group's expense base is largely due to that acquisition, servicing and collections activities required for this portfolio. Instead of expanding internal resources, the group opted to retain the incumbent firms that specialize and oversee the existing servicing and collections activities. This approach not only mitigated transaction risk, but it also provided the flexibility to adjust the resource base as the portfolio scale and complexity evolves over time. This model also allows for efficient scaling as we contemplate the introduction of new products in the future. Returning to normalized NPAT. The primary reason for the decrease was the impairment expense of $22.6 million, representing an increase of $14.7 million compared to FY '24. This expense consists of 2 main components, net write-offs and collective provisioning. Net write-offs for the year totaled $15.8 million, an increase of $10.7 million compared to FY '24. The Asset Finance segment accounted for the majority of these net write-offs, largely due to a policy revision that harmonized our write-off procedures with industry best practices. Under the updated policy, exposures are now written off at 120 days past due instead of 180 days, and this change is estimated to have contributed approximately $6 million to the overall increase in write-offs. The remaining balance reflects the natural seasoning of our portfolio. The second component of the impairment expense is a $6.8 million movement in collective provisioning as required by Australian accounting standards. This is $4 million higher than FY '24 and reflects growth in the home loans portfolio, an increase in the coverage ratio for the asset finance business due to historical performance and the recent acquisition of the consumer auto portfolio. I'll discuss provisioning in more detail shortly. Now turning to Slide 11. The normalized operating profit walk from FY '24 to FY '25 highlights the key drivers of our financial performance with the shift in our AUM being the most significant contributor. Growth in our average AUM, which increased by over $1.2 billion, contributed $18.3 million to operating profit. This growth was significantly bolstered by the acquisition of the consumer auto portfolio in February '25. Regarding NIM, the group's year-end NIM decreased by 1.5 basis points to 154 basis points for the full year, resulting in a small reduction on the group's operating profit. The group also experienced a rise in other income with the revision of our fee structures across our home loan products contributing an additional $6.8 million on prior year. As already mentioned, our operating expense base has increased primarily due to the acquisition and integration costs associated with the new consumer auto portfolio. These expenses will remain elevated during first half FY '26 and are projected to decrease as the portfolio amortizes throughout FY '26 and FY '27. The group continues to remain disciplined with our normalized cost-to-income ratio broadly consistent with FY '24 despite an increase in business activity. Looking ahead, the group will continue to prioritize cost management with a continued emphasis on automation, simplification and system integration to realize and sustain operational efficiencies. Turning to Slide 12. Looking at our group NIM, I'm pleased to note that our second half '25 NIM expanded by 12 basis points on first half '25 to 160 basis points and was 7 basis points higher than second half '24. Whilst we did see a 5 basis point NIM contraction in the first half of FY '25 compared to the second half of FY '24, this was a deliberate and strategic decision. This contraction was the direct result of a targeted home loan pricing campaign designed to stimulate growth and strengthen our relationships with our broker partners. These tactical pricing decisions were made with a clear focus on generating accretive returns on capital and building a portfolio of high-quality, sustainable assets rather than prioritizing short-term margin preservation. In our home loans portfolio, we observed a 6 basis point expansion in NIM during the second half of FY '25. This NIM expansion was primarily driven by the Reserve Bank's rate reductions and favorable repricing within our floating rate funding programs. The group remains well positioned to originate prime mortgages, which offer attractive returns at lower risk profile. While significant growth in this segment would naturally have a dilutive effect on our overall NIM, we remain focused on achieving our return on capital requirements. Turning to our Asset Finance business. We experienced a 37 basis point contraction in NIM in the second half of FY '25. This contraction was anticipated and was directly related to our strategic acquisition of the consumer auto portfolio. 60% of the portfolio is novated leases. And by their nature, novated leases deliver lower margins but also carry a lower risk profile. While this acquisition has temporarily compressed our second half FY '25 NIM, we expect to see a gradual increase in asset finance margins throughout FY '26 as the portfolio continues to amortize. Overall, the positive NIM outcome for the group just demonstrates our effective balancing of growth initiatives, return on capital and ongoing margin management. Now moving to Slide 13. Our funding strategy in FY '25 has been a testament to our financial strength and market leadership. We have successfully navigated a dynamic interest rate environment by leveraging a diversified and robust funding platform, and the results clearly demonstrate our ability to attract and maintain strong investor support with the group's bond issuances to date exceeding $50 billion. Investor interest in our residential mortgage-backed security issuances remain exceptionally strong. Throughout FY '25, we successfully executed $4.3 billion in RMBS deals. This included 2 prime and 2 specialist transactions, all of which were significantly oversubscribed, underscoring the market's deep confidence in our loan book. A key highlight was the pricing on these deals. The senior margin on our 2 prime deals priced at 110 basis points, a notable 5 basis point reduction compared to the prior year. For our specialist deals, we saw a margin reduction of 20 basis points on one transaction and a stable margin on the other. Building on our securitization success, we recently completed our second asset-backed securitization transaction, a $500 million deal backed by commercial auto and equipment loans. The transaction was met with significant interest from both domestic and international investors and was substantially oversubscribed. This strong demand allowed us to price the senior tranche at a margin of 95 basis points. This transaction not only diversifies our funding mix, but also validates the quality of our asset finance portfolio in the eyes of the market. Our warehouse facilities continue to be a cornerstone of our funding strategy. We have maintained strong and varied support from a broad mix of both domestic and offshore banks, providing us with more than sufficient capacity to meet our AUM growth targets. This support, coupled with our well-positioned debt and working capital buffers, gives us the flexibility to proactively pursue new portfolio growth opportunities as they arise. Regarding the interest rate landscape, the RBA's cash rate reduction in February brought to fruition the market's anticipation of a rate cut. This has led to a sustained market expectation for further cuts as evidenced by the 1-month swap rate trading consistently below the RBA cash rate throughout the second half of '25. This negative basis spread has positively impacted our NIM as the reset of our funding cost is timed differently from the rate adjustments on our customer loans. Looking ahead, market expectations for further rate reductions in 2026 are expected to provide additional tailwinds for our funding costs. Now turning to Slide 14. Our home loan applications grew by 17% to $7.6 billion, a direct result of a successful campaign to reengage our broker network, which led to a 14% increase in active brokers. This strong application growth translated into a 12% rise in settlement volumes to $4.9 billion. Looking ahead, we're focused on deepening these broker relationships and expanding our network. A core part of our strategy is to improve our conversion rate by reducing the time to yes, which will enhance the overall broker and customer experience. Our asset finance business also showed significant momentum. Applications increased by 17% and settlements also grew by a robust 17% to $900 million. This demonstrates the health and diversification of our business. Moving to Slide 15. At June 30, '25, our assets under management stood at $15.9 billion, a $1.7 billion increase since both June and December '24. A significant portion of this growth, $1.1 billion is directly from our strategic acquisition of the consumer auto portfolio in the second half of the year. Our home loans AUM has increased by $500 million or 4% during FY '25, driven by consistent settlement volumes. As we have communicated previously, our focus is now shifting to enhance our customer retention efforts and reduce discharge volumes. To that end, we have recently implemented AI-driven insights into retention initiatives, which are being supported by a dedicated retention team. The group is confident that this strategic investment in customer experience and operational efficiency will provide growth in AUM. Excluding the acquisition of the consumer autos portfolio, our asset finance offering has continued to show sustained organic growth with AUM rising by 27% in 2025 to close at $1.4 billion. As Pete said, the group remains committed to sustainable growth in this portfolio, although the increase in arrears and write-offs in FY '25 requires a cautious approach given current conditions in the SME sector. The acquisition of the consumer auto portfolio was a key strategic milestone, diversifying our portfolio with the new novated lease and consumer finance products. We recognize this is a back book portfolio that will run off throughout FY '26 and FY '27. Moving to Slide 16. While the first half of the year saw a spike in arrears due to economic pressures fueled by cost of living challenges and higher inflation, our home loan portfolio demonstrated marked improvement in the second half of '25. The full pass-through of RBA interest rate reductions from February 2025 to our customers has provided them meaningful relief. Our prime loans in arrears for more than 90 days declined to 45 basis points, outperforming our ADI peer group, while specialist loans in arrears also improved with an 87 basis points decrease to 1.5%. Consequently, the group has observed a normalization of arrears levels, a trend also evident in our asset finance portfolio, which experienced a significant improvement in arrears in second half '25. This is particularly notable given the continued upward trend of insolvencies reported by ASIC in the SME sector, which we continue to monitor closely. After a period of higher arrears and loss rates in the first half of 2025, the group strengthened its collections and recoveries functions. We made strategic investments in new personnel and enhanced our processes, which has yielded substantial benefits. This remains a key priority as a robust collections function is vital for effective credit risk management and loss mitigation in the lending industry. The adjustment of the group's asset finance write-off policy from 180 to 120 days in arrears has also contributed to the reduction in arrears levels. While this policy modification has led to decreased arrears, it has resulted in an incremental impairment expense of approximately $6 million being recognized in FY '25. Additionally, this change impacts our collective provisioning modeling, which is based on historical portfolio performance. So moving to Slide 17. Our overall expected credit loss provisioning has increased from $54.3 million at December '24 to $60.9 million, while our coverage ratio decreased by 3 basis points to 35 basis points. Several factors have influenced this change. First, we continue to transition our write-off policy for the asset finance portfolio from 180 days in FY '24 to 120 days by 30 June '25. This change has meant that the group recognizes credit losses earlier, which while increasing our provisions, ensures our financial position more accurately reflects our performance. Second, the acquisition of the consumer auto portfolio had a dilutive effect on our reported coverage ratios, and this is primarily due to the significant weighting of novated leases within the portfolio, which have an inherently lower risk profile. Finally, our provisioning benefit from a reduction in the loss given default assumption for our home loans portfolio. This 50 basis point reduction in the loss given default was supported by the portfolio's historically strong performance, combined with the sustained strength of the housing market. Now turning to the individual portfolios. The home loans portfolio remains prudently provisioned with a coverage ratio of 22 basis points on a gross loan balance, which excludes the impact of offset accounts. This 7 basis points is lower than first half '25 and 4 basis points lower than June '24. This reduction is due to an improvement in portfolio performance, particularly arrears, along with a downward adjustment to the loss given default assumption, which contributed a 3 basis point decrease in the home loans coverage ratio. Additionally, the macroeconomic overlay as specified by accounting standards was adjusted to reflect a more positive economic outlook and reduced uncertainty. The portfolio's average dynamic loan-to-value ratio remains consistent at 61.2%, providing the group a significant equity buffer. This, combined with the buoyant housing market, interest rate reductions and arrears performance reinforces our confidence in this book's resilience. Our asset finance portfolio saw substantial growth in FY '25, primarily due to the acquisition of the consumer auto portfolio. This led to an increase in stand-alone provisioning. However, the coverage ratio at FY '25 was 116 basis points, a reduction of 16 basis points from December '24. This decrease is due to changes in our asset mix, primarily the addition of $700 million of Novated leases at 30 June '25, the significant improvement in arrears performance in second half '25 and the final transition to the revised 120 value write-off policy. Before I hand back to Pete, I want to highlight our capital management strategy this year, which is designed to continually optimize our capital structure and drive shareholder value. A key part of this strategy during FY '25 was the strategic review of our noncore assets. The group decided to divest from its shareholdings in several listed investments, which were considered as not central to our core lending and securitization business and reallocate this capital directly back to its shareholder base. This facilitated the group to pay a fully franked special dividend of $0.12 per share in June '25, which not only provided a direct return to shareholders, but also passed on valuable franking credits to our Australian-based shareholders. This action is expected to improve our return on equity in FY '26 and beyond. During FY '25, we also launched an on-market share buyback program, acquiring 4.7 million shares at an average price of $0.86 a share. This initiative represents an additional method employed to facilitate the effective return on capital and is anticipated to enhance both our return on equity and earnings per share in FY '26 and beyond. To further optimize our capital, the group repaid $25 million of its issued secured capital notes, demonstrating our ongoing commitment to strategically manage our debt and strengthen our financial position. Finally, the Board has declared a fully franked final dividend of $0.035 per share, bringing our total dividend payout ratio for the year, excluding the special dividend, to 80%. This reflects our commitment to providing stable and consistent returns. When combined with the special dividend, our total dividend yield for the year exceeded 20% -- in closing, I'd like to reiterate our commitment to a robust and dynamic capital management plan. We will continue to assess the business capital needs, ensuring we can support our growth initiatives while also optimizing our capital requirements to deliver long-term value. We're excited to build on the progress we've made in FY '25, knowing there's still a lot of work ahead. Thank you, and I'll now hand you back to Pete for final comments.

Thank you, James. And for those of you who are following on the investor deck, I will be talking to Page 19, our financial year '26 priorities. I'll wrap up before we open up with questions on a couple of points. Since I started as CEO a few months ago, one of my main priorities has been reviewing and realigning the group strategy, including where and how we compete and ultimately, how we can win. We've got more work to do here, and that really excites me. We will continue to invest in our people, enabling new ways of working, leveraging AI and investing in technology to improve productivity and efficiency and emphasize the importance of developing new tools to enable not only individual productivity, but also value-creating capabilities for our customers, brokers and staff. We will make -- we will focus on investing in our home loans to sharpen our market position and regain our competitive edge, leveraging the strength and reputation of Resimac's brand built over the decades. We will continue to invest in our service levels for our brokers and customers, including fast turnaround and fostering deeper relationships. Security remains front of mind, along with our continuous focus on compliance and governance uplift programs. Most importantly, the world is changing rapidly and technology via agentic AI, intelligent automation and digitalization is no longer just a pillar to be implemented. It will be the foundation for how Resimac operates, competes and creates value. This will enable new models of collaboration, fundamentally shifting the dollars on business performance and reshaping value propositions. Our key focus area will position Resimac to deliver lasting value to our customers, brokers, funders and shareholders as we move into the next phase of our growth. To these stakeholders, I'd like to extend my sincere thanks for your continued support throughout the year and going forward as we grow and evolve as a business. Finally, I would like to extend my thanks to the Board for their support and for placing the trust in me as CEO during this pivotal phase in Resimac's growth trajectory. Thank you to you all for your time today. I will now open the call to questions.

[Operator Instructions] Your first question comes from Jason Shao from Macquarie.

Two for me, if I may. In first half '25, you spoke about pivoting into a strong AUM growth strategy. Excluding the Westpac book acquisition, the book only increased marginally, while originations wasn't meaningfully higher, but margins were stronger in the business. So how happy are you at the moment to invest pricing into growing your book at this stage of the cycle?

Jason, it's Andrew here. Look, I'd say we are seeing some reasonable volume opportunities in the market, particularly in the mortgage space itself. We are looking at ways in which we can manage NIM. And obviously, that's a big objective for everyone in our space at the moment. There are some tailwinds, as James has pointed out, with respect to funding costs. We're just sitting back to see how the broader market, including the banks, reacts to lower cost of funds throughout the market there.

And just on the acquisition itself, does it allow you to originate novated lease and auto finance? Or is it currently just a book that's simply run off? And what would be the life remaining on that?

Yes. So it's got -- I mean, it's got a very defined tail to it. So it's probably got another 2 years or so to run off. We're not originating new novated collateral just yet. We're building the platform, investing, as Pete touched on in the tech and the brand and the offering, so we get it right. But we're effectively managing the amortization of the book and where we can refi the consumer loans into our existing platform, that's where the immediate focus is.

Your next question comes from Andrew Tan with Bell Potter.

Just a follow-on question to the Westpac book. Like what is the profile of the runoff of the book in terms of profit contribution? I noticed it was $4.5 million in this year. Like what does it look like next year and the year after?

Andrew, for next year, from an operating profit contribution, we're looking at around about $10 million to $11 million. And then for the following year, around about $5 million.

Okay. In terms of the cost-to-income ratio, Pete, did you have like a trajectory in mind? I noticed the second half cost to income increased because of the Westpac support costs. But I guess, where do you see that cost income going from here?

I'm working through that at the moment, and we don't want to normally give forecast just as yet, but that's something that I'm working with the group. But obviously, we're not looking at increasing with efficiencies and how we're going to be operating a new model that is targeted to come down.

Okay. With the AUM growth, was it back ended to 30 June isn't like -- so yes, in terms of origination growth, like was this Q4 greater than Q3?

Yes. So we've seen some reasonable volumes come in. Apologies in markets in calendar terms here. But so second quarter, third quarter of the financial year and again, some reasonable volumes over the final quarter itself. Pleasingly, we have seen some uptick in prime mortgage volumes. And as we've previously communicated to the Street, to the market, that's very much the result of the abatement of the -- that fierce competitive environment that we saw coming out of COVID.

And Andrew, I'll just add to that. That third quarter was higher than the fourth quarter, and that was the outset of the campaign that we're running a flow on with applications being settled from January through to March.

Okay. So when you say third quarter, you're talking about calendar year, is it?

No, I'm talking from January -- January 31 March.

Okay. And so does the application growth give you a good line of sight on what kind of settlement growth you get in FY '26?

Look, I'd say there's a lot of variability to volumes out there. It's a very commoditized competitive space there. We do have confidence. We've got conviction in what our origination strategy is. And I'm not sure if James has any more to add to that. But maybe one final thing to say the environment is far more predictable than what it has been in previous periods.

Okay. And just lastly, I noticed that you got your latest ABS issue out and the senior tranche was 95 bps, which is a lot lower than last year. Does that just point to the better quality of the book? Or is it funding markets being more favorable? Yes. So what's the driver of that decreased funding cost?

Look, there's a few dynamics at play at the moment. Whilst we're relatively new to the asset finance and ABS space, -- we have had some great support by a lot of the asset managers and debt investors that support our mortgage, our RMBS program. We have seen the performance of the asset finance book improve, particularly over the last 6 months itself. We are maturing that business internally from an operational perspective. But look, at the end of the day, we have seen great momentum in financial markets, in credit markets. The bid is very strong as James and Peter both touched on our books. primary bond book so far this year have been heavily oversubscribed.

I guess given the performance of books improved, does that make your provisioning that you kind of took in the first half of the financial year in hindsight look a bit conservative?

On the provisioning side of things, look, we did have a spike in arrears in the first half, and that did have a flow-on impact as a result of some of those write-offs that we did take in the first half as well. You could probably say probably slightly conservative, but what we've done is we've actually built out our recoveries and collections capabilities. So we have enhanced that. And as a result of that, our arrears levels have come down, which does have a significant impact in that provisioning methodology.

Our next question comes from Jeff Cai with Citi.

First one, just on margins versus volume. Can you briefly unpack on how you think about the trade-off between margins, volumes and returns going forward? I guess given your exit NIMs are well up from lower funding costs, to what extent are you willing to sort of drive margins down a little bit and chase much stronger growth into next year? And is it mainly in prime? Or can it be a bit more in terms of specialist mortgages?

So Jeff, I don't need to basically to your question here. But look, it is -- we do have adaptive or dynamic management tools with our A&L management. I bring it back to sort of a baseline principle that we are operating in a commoditized and competitive marketplace there. So we will see opportunities during FY '26 where we may choose to adjust pricing to increase volumes or increase market share. Other times, we'll be quite happy to sit back and take volume or reduce volumes to maximize returns or NIM in certain segments of our loan product offering.

Got it. And then the second question in terms of investments and costs. There was quite a lot of, I guess, comments in terms of investing for growth and building new platforms. To what extent should we expect a bit of a step-up in the cost base going forward at a holistic view? Or how should we think about that going forward?

That's something that -- it's Peter here, Jeff. That's something that we're analyzing at the moment. We're obviously trying to look at where there's opportunities to invest, but there's also a follow-on of efficiency gains. So I'm currently working with the Board and senior management team to look at where the capability needs to be and how we offset that with sensible efficiency gains.

I will just jump in and just add that, yes, our second half '25 cost base has increased. and that increase is primarily due to the supporting of the Westpac Autos portfolio. And that portfolio is on foot for FY '26. Yes, it runs off because it's based on a volume, I guess, agreements with our third-party providers. So as that portfolio amortizes, our cost base will reduce, but there will be a step-up in FY '26 to reflect that.

And my closing comment there, Jeff, is, as Andrew said, it's a commoditized market, the most efficient will win, and that's what we're striving for.

Our next question comes from KyVan Tang with FSI.

Look, just staying on the cost front. You did mention during the presentation that you retained the servicing teams of the autos business that you acquired. I was wondering, is that an area that you're potentially looking to revisit in trying to manage those costs going forward? And what is it about the servicing of the autos that you don't -- in your existing servicing teams that you feel that they can't handle that you retained all the servicing teams of the acquired business?

Yes, great question. Look, that was just a bit of a volume play, to be honest, with 100,000 customers coming over. It just came down to a decision around whether we wanted to internally resource up to be able to support that given that it was a runoff portfolio. So to derisk the transaction, we went with keeping the incumbents as a result of that. And that enabled us to have a scalable model, which as that portfolio runs down, the cost base will reduce further. So going forward, we haven't made any determination around whether we look to change our resource base here internally to support our existing portfolio. We haven't looked at that.

Great. And maybe just to help me understand, I think just doing a quick sort of like-for-like half year, is it a timing thing? It just looks like your underlying cash flow generation did improve in the second half compared to your first half. Was that just a function of the first half bringing on that autos portfolio that sort of into the cash generation side?

Yes, that's correct. It was essentially a timing issue with the Westpac Autos portfolio coming on. That's correct.

There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.