Ladies and gentlemen, thank you for standing by, and welcome to the investor briefing for AFG's 2021 Half Year Results Announcement. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Mr.
David Bailey, CEO for Australian Finance Group. Thank you. Please go ahead.
Thanks very much and good morning everyone and I appreciate the time you've taken to listen into this presentation. I thought we'd start off by announcing we're very, very pleased to announce a reported NPAT which is up 36% to $24,970,000 for the half. And the underlying corresponding underlying NPAT for the same period is up 41% to $24,880,000 which drives an interim dividend increase of 9% to $0.059 per share. The underlying impact or supporting areas of the result and highlights were around a residential settlement volume being up by 24%. Home loans now AFG Home Loans now services over 27,000 customers.
The securities book AFG Securities book which is a subset of the AFG Home Loans book stands at $2,960,000,000 which is up 18% on the prior comparative period. Residential trial book is up 5% to $160,000,000,000 and the AFG home loans trial book is up 9% to $10,700,000,000 The key takeouts for the year show a revenue increase of 300 of 11% to $371,000,000 strong cash flow generation from the trial books continuing, which is always a feature of our business. AFG Brokers and broader industry performed well during the various COVID lockdowns across the country, including enjoyed the benefit of the support through the government stimulus. The strong financial result drives an increase of 9% on the half year dividend per share. Government stimulus initially supported increases in 1st homebuyers as well as upgraders and there's been a strong level of refinance activity.
Importantly for us is that customers are seeing broker as the avenue of obtaining best advice around their home loan and then which is the largest expense in their household budget during a period of crisis. AFG Security settlements volumes did decrease with a reduced credit appetite and that was forecast by us at our 30 June results presentation. And then we did say we would still look to build that once the market returned. And I'm pleased to say we are returning to those volumes and I'll touch on that a little later. AFG home loan settlements were up 17% and that was really driven by a mix.
We changed as we said we reduced our focus on IFG Securities during a period of uncertain market conditions and moved the focus towards white label funders. Since July 2020, volumes have steadily increased in this part of the business. The commercial loan book is up 5% to $8,700,000,000 The strategic and market outlook. The market outlook, we feel that the market and the business has adapted for uncertainty. The market has adapted, but uncertainty remains in the marketplace.
We recorded residential record residential settlement volumes into during FY 'twenty one. And at the start of FY 'twenty one the second half of FY 'twenty one is very encouraging. Whilst the timing and impact of the withdrawal of these initiatives and the extent that demand is being dragged forward is unclear, we do remain positive about the outlook for the industry and the willingness of the government to respond further if necessary. AFG Securities COVID-nineteen related hardships continue to improve. I'm pleased to say as of yesterday, the payment deferral hardship arrangements now represent 0.2% of our loan book, which is to customers.
And interest only arrangements are at 0.57 percent of the book, which is around about 37 customers. We've also seen a conducive RMBS funding market return in the half and cost of funds remain competitive as a result of the reductions in the BBSW. In terms of the Connective merger, we're still waiting a court case given the court closing arguments are complete and the judge is retired to consider his decision. During the pandemic, brokers have grown their market share of the mortgage industry. Many of these customers, we believe, will not return to bank direct.
Government initiatives have contributed to greater market share for the 4 majors during the COVID period. Brokers are important to smaller lenders. The competition and choice they bring as they expand their credit appetite. We remain well positioned in the industry and able to adapt to market changes. We're well capitalized, a strong balance sheet, no debt and a strong brand.
Unrestricted cash, trial book assets, financial assets and subordinated capital totaled $267,000,000 Strong cash flow generation of the business model, including annuity style revenue from the existing book is a feature of our business. We're undertaking our new technology refresh, which represents significant focus on improving technology to support brokers and customers as they embrace the new ways of working. We've invested in growth opportunities including technology for brokers and customers, think tank manufacturing and our investment in Mortgage Advice Bureau, which is a different offering for brokers. Our existing warehouses are restructured and rolled over and the AOFM have already been refinanced out of one of those arrangements.
If I
turn to AFG Home Loans, the trial book increased 9% to $10,700,000,000 Settlement volumes were down 6% to $1,470,000,000 with the changing mix towards flexible funders as AFG Securities reduced its credit over time during the initial stages of the COVID-nineteen. Since the market the funding market has stabilized, there's been an increased there's been a measured increase in credit appetite and mix back towards AFG securities during F1 first half of FY 'twenty one. In particular, settlements of $446,000,000 in AFG securities, whilst it was a decrease of 35%, the book remained higher than in June 2020. Following measured slowdown of activity in June 2020 during the COVID pandemic and we did broadcast this, a reestablishment of credit rights has been implemented and December and January volumes are in line with the prior year. So the business is back and building in that part of the business.
AFG Securities proposition to brokers and their customers remain with fast turnaround times, consistent credit decisioning and important competitive products. In the first half of FY 'twenty one, the net interest margin included the benefit of an inverted BBSW rate, which lowered the cost of funds compared to the first half of twenty twenty. We successfully completed $700,000,000 term transaction in July 2020 as well as our first non conforming transaction of $500,000,000 in October 2020. Since the broader lockdown, AFG Securities lodgments have steadily increased to historic volumes. February volumes are on track to be in line with the prior year.
Total subordination of $32,000,000 at December 31, 2020, while requirements may increase in the short term with book growth AFG remains well capitalized. A key ongoing feature of our program has been the arrears performance and this continues to be excellent. 50% of our book has an LVR less than 70% with prime loans greater than 80% all covered by LMI. A reminder that that is the underpinning part of our IFG securities book. National house prices remain strong across most markets.
The next slide really displays the key characteristics of our program. The LVR bands as previously discussed, the reasonably an average loan size of circa $500,000 and the distribution shows that the loans are where our population broadly resides. At 31 December 2020 in a book of 7,833 loans, there are only 26 loans in arrears greater than 30 days, which is consistent in terms of important impressive numbers with prior periods. No losses have been incurred on non LMI insured loans. And loans, as I said, in COVID hardship has reduced to 0.02%.
And those with a further and there's a further 37 loans where customers are paying interest only. A reminder, at the onset of the pandemic those numbers were closer the combined numbers were closer to 10%, which is a reflection of the work the team has done in terms of working with those customers, but also our overriding credit policy. Think Tank has had another successful period. Whilst settlements have decreased to $65,000,000 on the back of a softer commercial market due to COVID, there are signs of improvement and some continued but some continued short term impact is expected. The profit contribution from the investment increased 102% for the half to $2,300,000 I want to talk briefly about our continued investment in technology.
This is something we've been talking about for a while. We are getting close to launching our new broker portal, which we will call Suite 360 and that will be on track to introduce the 1st brokers in the Q4 of FY 'twenty one. This will bring a full broker experience with complement and be complemented with rollout including training and onboarding and data migration of the existing brokers of the Flex system. In a world where brokers' time is increasingly tied up with compliance, the system will allow the broker to become more efficient on their day to day work and allowing a greater level of service to their customers. I mentioned earlier that the commercial market has been subdued during the COVID-nineteen pandemic and this has also been reflected in the IFG business numbers.
The important part of remember about the IFG business program is that it targets brokers who've never written residential mortgages before. In a period where we've had unprecedented levels of mortgage volume applications, brokers have had less time to concentrate on other services such as AFG business. I would add that we do have 32 lenders on the panel for mortgages, short term and trade receivable and asset finance products and allows an option for a broker to service their customers. I just thought I'd last pass across now to Ben to talk a little bit about the financials.
Thank you, Dave, and good morning, everyone. Cash flows from operating activities were up 53% on the same period last year. The increase in operating cash flows was due to a number of factors including high residential settlements and trial book and growth in the white label trial book. In addition, the growth in the AFG securities loan book and elevated NIM contributed strongly to the growth in cash flow. It also includes investment of technology during the half of $2,600,000 and as Dave mentioned earlier, it's allowed us to increase the income dividend to $0.059 per share.
Moving on to the summary balance sheet. OFG maintains a strong debt free balance sheet with the pillars listed there contributing to a foundation of $267,000,000 and a debt free position that allows us to grow into the future and provides a good platform. It means we're well positioned to undertake future strategic growth and investments for both organic or inorganic opportunities. The total net asset of the trial book is now up to $96,000,000 Moving on to the next slide and the impact of trial book accounting. We've talked about the growth in the white label trial book for a number of years now and how the profit would run ahead of cash flow.
As that book begins to mature the cash flow has started to catch up and that's driven an increase in un buying profit of 41% above half 1 FY20. You can also see there the average loan life has decreased slightly across the book and that's off the back of higher refinance activity over the last period. Moving on to other income. Service fees has increased 8% in the half which includes broker services such as compliance, professional indemnity insurance and marketing services which is really pleasing. The prior periods were particularly busy in terms of conferencing activity.
And going back to FY 'seventeen, we've mentioned previously the volume bonuses that are now no longer part of the industry has contributed some of the decrease in other income. Thank you, everyone. I'll now hand back to Dave to continue.
So I'm just going to jump ahead to the January 2021 trading. And on the back of a very strong half what we've seen in January which is traditionally a very quiet period is that brokers return to the offices very, very early in January. And that was in response to demand from clients. So residential lodgments were up 28% on the prior period to $4,800,000,000 and settlements of $3,700,000,000 So we've built a very strong pipeline as we move into the new the second half of the year. AFG Home Loans Lodgments were up 4% on January 2020, which again was a strong month for AFG Home Loans.
AFG Securities were 3% higher than January 2020. So whilst settlements were 34% below on a comparatively softer pipeline and we've talked about the pipeline building and building from the time of the pandemic slowdown and every month we've increased volumes into the AFG Securities pipeline. So that pipeline is built nicely at this point in time. And despite various lockdown periods, brokers around the country remain have maintained high levels of activity and are the preferred channel to access home lines across the country. So in conclusion, we the first half of FY 'twenty one is a positive result with a 41% growth in underlying NPAT, which does demonstrate the ongoing success of the earnings diversification strategy and the broker channel increasingly being the preferred means for Australian customers to access home loan products.
The residential mortgage sector has performed strongly during the COVID pandemic and government initiatives assisted the market including 1st homebuyers to drive record lodgment volumes. While the timing and impact of the withdrawal of these government initiatives and the extent that demand has been dragged forward is unclear, we do remain positive about the outlook for the industry and for the company and for AFG's position within the industry. Following initial uncertainty in the funding market, AFG is now well positioned to continue to expand. AFG's securities continues to grow the loan book, representing a stable earnings platform for future years. AFG is we're also delivering a technology refresh to enable brokers to more efficiently deliver choice and competition to customers.
Our industry advocacy is something we were very proud of during the post Royal Commission period, remains very strong and important to us. And we're continuing to advocate for valuable regulation and compliance to support borrowers and maintain competition in the market. In summary, we believe we have a well capitalized and strong balance sheet. Our considered approach to lending and balance sheet will and our considered approach to lending and balance sheet protection will continue. IFG is well positioned in the industry with the ability to adapt to uncertain and changing market conditions.
Thank you very much. I'll just pause and allow the facilitator to open up for questions.
Thank you. Your first question comes from the line of Tim Lawson from Macquarie. Please ask your question.
Hi, guys. Thanks for taking my question. Just in terms of the securitization book, can you just talk about the recent sort of levels of refi and runoff and how that flows through into the book growth in the next sort of half? We've seen the level of refi sort of moderate in that high line data you do produce. And just based on that sort of level of settlement or lodgment, however you want to talk about it, that needs to get done to see that book grow?
So is that $100,000,000 number you've called out in December sufficient to grow the book?
Yes. It is, Tim. Your typical run off rates that you'll see in a securitization program in the market use an average runoff of around about that 22% to 23%. It's fair to say it was probably slightly higher than that with all the refinance activity earlier in the half, which is moderating slightly. But even at those levels, it's certainly your high 20s.
You still got enough volume coming in the front door to grow the board.
And just the level
of competition. So how are you getting that sort of level of lodgment settlement in that AFG securitized book given the level of competition from the major banks?
Sure. I think the areas where we've been concentrating with our brokers is we've still got a good rate to customer for customers who don't want a variable rate. And the feedback we're getting from the market is that a fixed rate interest rate was attractive does come with monthly sorry, annual fees. And so the comparative rate does push it above that 1.99 rate that most people are advertising. We're also seeing customers who are coming into cash and banks, most banks with a fixed rate product are not providing an offset account.
So the conversation with from brokers with customers is if you're looking for some flexibility, the variable rate does stack up quite well and allows you to put extra funds in against your mortgage at the time. The other most and probably the most important part of this, Tim, is turnaround times and consistency of credit. We've got you would have seen in our mortgage index, which we released in October sorry, in early January, the average days, the turnaround time to unconditional are sitting it's sitting in the mid-20s. That number is still being maintained. AFG, you can get our current turnaround times are one day for an unconditional and 7 days to sorry, one day for conditional and 7 days for unconditional, which is industry leading.
So the experience the brokers are getting in an environment where the market is clogged up is very good one.
Okay. And then just on the other expenses line, it looks like they're sort of back to a level that's more consistent with sort of pre COVID levels for the half. Just trying to understand whether there's any one offs in there with your release provisions or just held them from what you had at June?
Yes. So the 2 biggest drivers the biggest driver there really is activity around conferencing. And so without a big conference in the half, a lot of the cost of that from that line comes out. The provision for expected credit losses has been maintained at basically the same level as 30 June 31 December.
Okay. And then last question for me. Just the equity accounted profit kicked up a bit as well versus history. Can you just talk about what's going through that line and what the outlook might be?
Yes. So that's primarily Think Tank for the half. The MAB investment only came in late in the half for about a month or so. And the think tank contribution there is really off the back of their growth obviously. We take our percentage share of their profit into the P and L.
So being a securitization business, they've continued to grow the book and benefited from inverted BBSW over the past 6 months as well.
Yes. Okay. Thank you.
Next question today comes from the line of Brendan Sprues from CB. Please ask your question.
Hi, good morning and thanks for taking my questions. Look, I'd just like to ask around the commissions that you pay to your brokers. It looks like the percentage has increased reasonably substantially this period. Could you maybe talk about some of the drivers of that, particularly around the mix between upfront and trial commissions? And also what impact did the higher repayments that we're seeing in the system across most lenders had on your trial book and also what you pay away to your actual brokers?
Yes. So the average pay away is just over 94% and it has increased slightly during
the half.
That's probably the similar levels to what it has over previous periods. And that's just driven by the competitive pressures that are in the market from other aggregators and the pressure that puts on the margins we retain to keep our brokers essentially. The mix in product from lender doesn't have any impact on the payout ratio at all. So regardless of what product it is or which lender it comes from, the payout to a broker is the same.
And so just to follow-up on that, what about the difference in mix? You have a higher mix of upfront commissions relative to trial in this period given the sharp level of settlements. Is there a higher rate on the upfront?
Yes, there is. Yes. The trial payout ratio is based on historical agreement at that point in time. So if it was a loan from 5 years ago, the payout ratio on the trial there is based on the loan from 5 years ago. So there is a difference from a cash perspective, from an account perspective.
The you're effectively recognizing 5 years' worth of trial income in the month that you settle that loan and that will be recognized at the current payout ratio. Right.
Just a second question I have, just following up on the operating expenses. You obviously mentioned the impact of having done conference. Obviously, you're now sort of tracking at sort of less than $50,000,000 for the year. Is the sort of $55,000,000 operating expenses that you had in FY 2020 a more reasonable guide to your cost base going forward, assuming that your conference does resume now that COVID impacts are listening?
Yes. Look, I mean, the conferencing activity and those sorts of bits and pieces will be there. I think they will occur. It's just a matter of timing. And I think the other thing that's worth remembering is that as that after securities business continues to grow, we'll need to invest in additional people there.
And so there will be some pressure on the line from that perspective. And the technology build that is occurring is obviously the majority of it is capital at this point in time, but there's also some need to invest in people and other items there to continue to develop that.
Your
next question today comes from the line of Azib Khan from Morgan. Please ask your question.
Thanks very much. Good morning, David and Ben. Question for you. Firstly, Ben, on the net interest margins, can you please walk us through the NIM movement from the NIM movement from second half twenty twenty to first half twenty twenty one? In particular, I'm interested to know what exactly was the benefit from the inverted BBSW and what sort of front to back book pricing headwind you're seeing at the moment?
Yes. You obviously had a couple of months at the start of second half of last year that had a normal BVSW position. So by normal, I mean, you're typically 10 to 15 basis points above the cash rate. That obviously inverted and we were sitting around about 14, 15 basis points inside the cash rate for a decent period there. That was a reasonably big driver obviously of the increase in NIM.
The other factor would be when the RBA cut the cash rate to 10 basis points, the gap between BSW and cash reduced slightly. But at the same time, very few lenders, us included, passed that rate cut on. So that will be the other main contributor to it. A little bit came away with some increased cost of funds across the period from both warehouses and term transactions. And your typical front book, back book pressures, I think the industry typically talks about a basis point a month.
It's fair to say we're not immune from that.
So just to be clear on that, Ben, in terms of the 16 basis points NIM increase from second half 'twenty to first half 'twenty one, what do you make to be the benefit from basis risk from the swap curve?
That's not a number that we've publicly disclosed. I think you can look at where the BBSW was comparative to the cash rate and in which months for the halves and get a pretty clear picture on that. The BBSW inverted towards the end of FY 'twenty. And it was around 15 basis points inside the cash rate versus 10 to 15 basis points wider. And now it's sitting about 9 basis points on average inside.
Okay. Thanks. David, question for you. You made some comments earlier about the demand for fixed rate home loans and how you've got a compelling variable rate proposition. Can I take that to mean, David, that you think the fact that AFG Securities isn't offering a fixed rate product that doesn't really pose a challenge any growth challenges for that business over the next 6 months?
I think the important part of our observation there, Zub, is that we've got a notion of every month around about $5,000,000,000 to $6,000,000,000 worth of home loans to fish from and not all of those customers are looking for a fixed rate product. And for various reasons and various non banks just can't get a swap to work for a fixed rate product. But that doesn't necessarily exclude from the balance of the market. And we think we're well placed using our data and understanding of our brokers to develop products which allow us to fish into places which customers aren't looking for a fixed rate product. So that's what we're seeing to date in terms of building volumes back up within AFG Securities and the volume which is coming through at the moment, I'm very pleased with.
Right. And do you currently have a fixed rate product in the white label suite?
Yes. Got one with Adelaide Bank and one with Advantage. Okay. That's a good share, yes.
Okay. Just a question on Think Tank. So is it fair to say that the increase in the profits of Think Tank was pretty much entirely driven by that the basis risk tailwind coming through the NIM?
No. I mean they're running a successful business in their own right and growing their loan book reasonably significantly year on year. So I'd say it's probably more loan book growth than NIM impact, to be honest.
Sorry, but didn't you say the settlements in Think Tank were down?
That's just from us.
So they've introduced themselves to the Plan Fast and Choice aggregators as well as Connective.
Yes. Right. Okay. That makes sense. Just one last quick one.
With mortgage at BioSpiro, can you just quickly explain that alternative breaking model and how it's different?
Sure. Mortgage Advice Bureau is the leading aggregator in the U. K. So it's listed in the U. K.
And so they've come out to Australia and this is effectively a fifty-fifty joint venture with them. And their proposition is one of nurturing the customer, nurturing leads and fulfillment. So and their model is also an employed broker model, predominantly an employed broker. So they look to grow businesses because they are businesses that are attracted to them because they offer a new way of working an academy to allow brokers to train within the business and also fulfillment lead referral and fulfillment for organizations which looking to and an example of that might be a construction company or building a home home construction company looking to build their business by offering a finance facility but not wishing to have a broking business within their business. So the proposition is it's not a franchise, it's not a license model.
It's just an alternative model as we will feed you leads, we'll teach you we'll make sure that those leads are well credentialed and then we'll fulfill on the back of those leads through the broker and through that relationship. And that's why it's been the most successful U. K. Model and they're strongly of the belief of controlling the broker via employment as opposed to subcontract, which happens mostly in Australia. So it's just an alternate model that's out there in the
marketplace. Thank
Hi. Since we have no further questions on the line today, I would now like to hand the conference back to your presenters for closing remarks.
Thank you very much for your time today for those on the East Coast. We remain ever hopeful of being able to see you in due course. Every time we send you the booking trips, some border security issue pops up. So we look to try and catch up very, very shortly. But thanks for your participation today and speak soon.
Ladies and gentlemen, that does conclude today's conference call. We thank you all for your participation. You may now disconnect.