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 speaker's presentation, there will be a question- and- answer session. To ask a question during the session, you will need to press star one on your telephone. 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, good morning, everyone, and I appreciate the time you've taken to listening to this presentation. I thought we'd start off by announcing we're very pleased to announce a reported NPAT, which is up 36% to AUD 24.97 million for the half. The corresponding underlying NPAT for the same period is up 41% to AUD 24.88 million, which drives an interim dividend increase of 9% to AUD 0.059 per share.
The underlying impact or supporting areas of the result, and the highlights were around a residential settlement volume being up by 24%. 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 AUD 2.96 billion, which is up 18% on the prior comparative period. Residential trail book is up 5% to AUD 160 billion, and the AFG Home Loans trail book is up 9% to AUD 10.7 billion.
The key takeouts for the year show a revenue increase of 11% to AUD 371 million. Strong cash flow generation from the trail book's continuing, which is always a feature of our business. AFG brokers and broader industry performed well during the various COVID-19 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 first home buyers as well as upgraders, and there's been a strong level of refinance activity. Importantly for us is that customers are seeing brokers as the avenue of obtaining best advice around their home loan, which is the largest expense in their household budget during a period of crisis.
AFG Securities settlements volumes did decrease with a reduced credit appetite, that was forecast by us at our June 30 results presentation. 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 Loans settlements were up 17%, that was really driven by a mix. As we said, we reduced our focus on AFG 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 AUD 8.7 billion. The strategic and market outlook. The market outlook, we feel that the market and the business has adapted for uncertainty, but uncertainty remains in the marketplace. We've recorded record residential settlement volumes during FY 2021, and the start of the second half of FY 2021 is very encouraging. While the timing and impact of the withdrawal of these initiatives and the extent that demand has been dragged forward is unclear, we do remain positive about the outlook for the industry and in the willingness of the government to respond further if necessary.
AFG Securities COVID-19 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 two customers. Interest-only arrangements are at 0.57% 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 awaiting a court case, given the closing arguments are complete and the judge has 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 four majors during the COVID-19 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, trail book asset, financial asset, and subordinated capital total AUD 267 million. 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, Thinktank 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 trail book increased 9% to AUD 10.7 billion. Settlement volumes were down 6% to AUD 1.47 billion, with a changing mix toward white label funders as AFG Securities reduced its credit appetite during the initial stages of the COVID-19. Since the funding market has stabilized, there has been a measured increase in credit appetite and mix back towards AFG Securities during the first half of FY 2021. In particular, settlements of AUD 446 million 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 appetites have been implemented, and December and January volumes are in line with the prior year. 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 and competitive products. In the first half of FY 2021, the net interest margin included the benefit of an inverted BBSW rate, which lowered the cost of funds compared to the first half of 2020. We successfully completed a AUD 700 million term transaction in July 2020, as well as our first non-conforming transaction of AUD 500 million 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 AUD 32 million 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 AFG 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. An average loan size of circa AUD 500,000, and the distribution shows that the loans are where our population broadly resides.
At December 31, 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 impressive numbers with prior periods. No losses have been incurred on non-LMI insured loans. Loans, as I said, in COVID hardship, has reduced to 0.02%, and there's a further 37 loans where customers are paying interest only.
A reminder, at the onset of the pandemic, the combined numbers were closer to 10%, which is a reflection of the work the team have done in terms of working with those customers, but also our overriding credit policy. Thinktank has had another successful period. Whilst settlements have decreased to 65 million on the back of a softer commercial market due to COVID, there are signs of improvement, but some continued short-term impact is expected. The profit contribution from the investment increased 102% for the half to AUD 2.3 million.
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 first brokers in the fourth quarter of FY 2021. This will bring a full broker experience and be complemented with a 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.
Mentioned earlier that the commercial market has been subdued during the COVID-19 pandemic, and this has also been reflected in the AFG business numbers. The important part to remember about the AFG 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 trail book and growth in the white label trail 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 AUD 2.6 million. As Dave mentioned earlier, it's allowed us to increase the interim dividend to AUD 0.059 per share.
Moving on to the summary balance sheet. AFG maintains a strong debt-free balance sheet with the pillars listed there, contributing to a foundation of AUD 267 million 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 trail book is now up to AUD 96 million.
Moving on to the next slide on the impact of trail book accounting. We've talked about the growth in the white label trail book for a number of years now, and how the profit would run ahead of cashflow. As that book begins to mature, the cashflow has started to catch up and that's driven an increase in underlying profit of 41% above half one FY 2020. 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 have increased 8% in 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. Going back to FY 2017, we've mentioned previously the volume bonuses that are now no longer part of the industry, and that's contributed to some of the decrease in other income. Thank you, everyone. I'll now hand back to Dave to continue.
I'm just going to jump ahead to the January 2021 trading. On the back of a very strong half, what we've seen in January, which is traditionally a very quiet period, is that brokers returned to the offices very early in January, and that was in response to demand from clients. Residential lodgments are up 28% on the prior period to AUD 4.8 billion, and settlements of AUD 3.7 billion.
We've built a very strong pipeline as we move into the second half of the year. AFG Home Loans lodgments are up 4% on January 2020, which again, was a strong month for AFG Home Loans. AFG Securities were 3% higher than January 2020. 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. That pipeline is built nicely at this point in time. Despite various lockdown periods, brokers around the country have maintained high levels of activity and are the preferred channel to access home loans across the country.
In conclusion, the first half of FY 2021 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 first home buyers, 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 then for AFG's position within the industry. Following initial uncertainty in the funding market, AFG is now well positioned to continue to expand. AFG Securities continues to grow the loan book, representing a stable earnings platform for future years. We're also delivering a technology refresh to enable brokers to more efficiently deliver choice and competition to customers. Our industry advocacy, 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 protection will continue. AFG is well positioned in the industry with the ability to adapt to uncertain and changing market conditions. Thank you very much. I will just pause and allow the facilitators to open up for questions.
Thank you. Ladies and gentlemen, if you wish to ask a question today, please press star followed by one on your telephone keypad and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. Once again, it is star one if you wish to ask a question today. Your first question comes to 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 home loan data you do produce. 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. Is that AUD 100 million number you've called out in December sufficient to grow the book?
Yeah, it is, Tim. Your typical runoff rates, that you'll see in a securitization program in the market, use an average runoff of around about that 22%-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. Even at those levels, it's really your high 20s, you've still got enough volume coming in the front door to grow the book.
Just the level of competition. How are you getting that sort of level of lodgement and 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 for customers who don't want a variable rate. The feedback we're getting from the market is that a fixed rate interest rate, whilst attractive, does come with annual fees. 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 most banks with a fixed rate product are not providing an offset account. The conversation 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.
Probably the most important part of this, Tim, is turnaround times and consistency of credit. You would've seen in our mortgage index, which we released in early January, the average days, the turnaround time to unconditional, it's sitting in the mid-20s. That number is still being maintained. AFG, our current turnaround times are at one day for a conditional and seven days for unconditional, which is industry leading. The experience the brokers are getting in an environment where the market is clogged up is a very good one.
Okay, thanks for that. 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, whether you released provisions or just held them from what you had at June.
Yeah, the biggest drive there really is activity around conferencing. Without a big conference in the half, a lot of the cost from that line comes out. The provision for expected credit losses has been maintained at basically the same level as December 31.
Okay. Last question from me. Just the equity account profits 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?
Yeah, that's primarily Thinktank for the half. The MAB investment only came in late in the half, for about a month or so. The Thinktank contribution there is really off the back of their growth, obviously. We take our percentage share of their profit into the P&L. Being a securitization business, they've continued to grow the book and benefited from inverted BBSW over the past six months as well.
Yeah. Okay. Thank you.
Your next question today comes on the line of Brendan Sproules from Citi. 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 trail commissions? Also, what impact did the higher repayments that we're seeing in the system across most lenders have on your trail book, and also what you pay away to your actual brokers?
Yeah, 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. 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. Regardless of what product it is or which lender it comes from, the payout to a broker is the same.
Just to follow up on that, what about the difference in mix? You'd have a higher mix of upfront commissions relative to trail in this period, given the sharp level in settlements. Is there a higher rate on the upfront?
Yes, there is. Yeah. The trail payout ratio is based on a historical agreement at that point in time. If it was a loan from five years ago, the payout ratio on the trail there is based on the loan from five years ago. From an account perspective, you're effectively recognizing five years' worth of trail income in the month that you settle that loan, and that'll be recognized at the current payout ratio.
Just a second question I have, just following up on the operating expenses. You obviously mentioned the impact of having no conference. Obviously, you're now sort of tracking at less than AUD 50 million for the year. Is the sort of AUD 55 million operating expenses had in FY 2020 a more reasonable guide to your cost base going forward, assuming that your conference does resume now the COVID impacts are lessening?
Yeah. Look, 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. I think the other thing that's worth remembering is that as AFG Securities business continues to grow, we'll need to invest in additional people there. There will be some pressure on the line from that perspective. The technology build that is occurring, 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.
Okay, thank you.
Your next question today comes from the line of Azib Khan from Morgans.
Thanks very much. Morning, David and Ben. Question for you, firstly, Ben. On the net interest margins, can you please walk us through the NIM movement from second half 2020 to first half 2021? 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.
Yeah, you obviously had a couple of months at the start of the second half of last year that had a normal BBSW position. By normal, I mean you're typically 10-15 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 BBSW and cash reduced slightly, but at the same time, very few lenders, us included, passed that rate cut on. That would 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 is fair to say we are not immune from that.
Just to be clear on that, Ben, in terms of the 16 basis points NIM increase from second half 2020 to first half 2021, 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 2020, and it was around 15 basis points inside the cash rate versus 10 - 15 basis points wider. 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 any growth challenges for that business over the next six months?
I think the important part of our observation there, Azib, is that we've got a notion of every month, around about AUD 5 billion - AUD 6 billion worth of home loans to fish from. Not all of those customers are looking for a fixed rate product. For various reasons, non-banks just can't get a swap to work for a fixed rate product. That doesn't necessarily exclude us from the balance of the market. 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. That's what we're seeing to date in terms of building the volumes back up within AFG Securities and the volume which is coming through at the moment, I'm very pleased with.
Right. Do you currently have a fixed- rate product in the white label suite?
Yes. We've got one with Adelaide Bank, and one with Advantedge.
Okay.
That's it. Yeah.
Okay. Just a question on Thinktank. Is it fair to say that the increase in the profits of Thinktank was pretty much entirely driven by the basis risk tailwind coming through the NIM?
No. They're running a successful business in their own right and growing their loan book reasonably significantly year-on-year. I'd say it's probably more loan book growth than NIM impacts, to be honest.
Sorry, didn't you say the settlements in Thinktank were down?
That's just from us.
They've introduced themselves to the PLAN, FAST and Choice aggregators as well as Connective.
Yep.
Right. Okay, that makes sense. Just one last quick one. With Mortgage Advice Bureau, can you just quickly explain that alternative broking model and how it is different?
Sure. Mortgage Advice Bureau is the leading aggregator in the U.K., so it's listed in the U.K. So they've come out to Australia, and this is effectively a 50/50 joint venture with them. Their proposition is one of nurturing the customer, nurturing leads, and fulfillment. Their model is also an employed broker model, predominantly employed broker. So they look to grow businesses because businesses are attracted to them because they offer a new way of working, an academy to allow brokers to train within the business. Also lead referral and fulfillment for organizations which are looking. An example of that might be a home construction company looking to build their business by offering a finance facility, but not wishing to have a broking business within their business.
The proposition is, it's not a franchise, it's not a license model, it's just an alternate model, is that we'll feed you leads, we'll make sure that those leads are well-credentialed, and then we'll fulfill on the back of those leads through the broking and through that relationship. That's why it's been the most successful U.K. model. They're strongly of the belief of controlling the broker via employment as opposed to subcontract, which happens mostly in Australia. It's just an alternate model that's out there in the marketplace.
Thank you.
Once again, ladies and gentlemen, if you do wish to ask a question today, it's star one on your telephone. Hi, it seems that 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 over to see you in due course. Every time we seem to be booking trips, some border security issue pops up. We look to try and catch up very shortly. 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.