Welcome everybody to the Challenger 2021 first half results presentation. Following the presentation, we will open the call for questions. To ask a question during this time, please press star one on your telephone keypad. I'll now hand over to Challenger's Head of Investor Relations to open today's session.
Good morning. I'm Stuart Kingham, Challenger's Head of Investor Relations, and welcome to our 2021 online half year results briefing. In a moment, I'll ask Richard Howes, Challenger's Chief Executive Officer, to open today's session. The presentation will be followed by a question and answer session. Could I please remind those asking a question just to clearly state your name and the organization you represent when asking that question. I'll now hand over to Richard.
Thanks very much, Stuart. I'll commence the presentation by providing some highlights of the half year, both financial and strategic. I'll talk about the success of our growth and diversification strategy, and how the bank acquisition that we announced late last year will see us continue this growth and help us achieve our vision of providing financial security for retirement. I'll hand over to Chief Financial Officer, Andrew Tobin, for a more detailed look at our financial results before making some final comments on the outlook. I'm pleased with the start we've made to financial year 2021, and I'm optimistic about the opportunities for our company going forward. Our strategy of diversification has delivered strong growth and business momentum. We're on track to achieve our profit guidance for the full financial year. We're strongly capitalized, and we have appropriate portfolio settings in place to take the business forward.
We'll continue to prudently deploy our excess cash and liquid investments over the second half. We're excited about our acquisition of a bank, which we announced in December, and expect to receive the regulatory approval for as early as March. It will allow us to significantly enhance our offering to retirees in the form of government-guaranteed term deposits. The familiarity of this product will enable us to acquire more customers directly and at earlier stages in their journey to retirement. The bank will be an important driver of growth over the medium term. Our financial performance was in line with expectations. Normalized net profit before tax was down 14% to AUD 196 million compared to the previous half. While statutory net profit after tax was up significantly to AUD 223 million. It included the partial reversal of the negative investment experience from the pandemic-related sell-off.
Challenger's financial performance in the first half of the 2021 financial year reflects steps taken to move to a more defensive investment portfolio setting in the earlier stages of the COVID-19 pandemic. These resulted in significantly higher levels of cash and liquidity. As we had flagged, we're prudently deploying this excess liquidity position. We're halfway through this process. Reflecting this, pre-tax normalized ROE was 11.5% for the half. We expect this to increase as we continue to deploy the balance of our excess cash and liquid assets. Group assets under management grew strongly, up 13% during the half to AUD 96.1 billion. Our funds management business achieved market-leading growth with net flows of AUD 6.4 billion. There was also good growth in the Life book, particularly in the second quarter. It was driven significantly by Index Plus net inflows, reflecting new clients and an expanded product offering.
The growth in the Life book demonstrates the benefit of the diverse products and distribution channels that we've built. Institutional sales, Japanese sales, and retail lifetime annuity sales, primarily through independent financial advisors, all contributed to this growth. Life has AUD 1.5 billion in excess regulatory capital, ensuring we're in a strong position. Our PCA ratio of 1.63 times remains above the top end of our target range, being 1.3x-1.6x the minimum amount set by APRA. Our CET1 ratio is 1.09x . These settings are appropriate given our growing and broadening customer franchise. Reflecting the board's confidence in our business performance and the strength of our capital position, it has declared a AUD 0.095 per share dividend, fully franked.
Overall, the outcomes for the first half demonstrate that Challenger has emerged from the COVID-19 crisis in a strong position, well-placed to take advantage of opportunities to grow our business through our continued focus on providing our customers with financial security for retirement. To achieve that goal, we continued to make good progress implementing our strategy in the first half. At the end of last year, the federal government released its Retirement Income Review, highlighting the need for better solutions in retirement. The growing focus on retirement solutions reinforce the important role that we play in addressing this need for retirees. To help make this a reality for more Australians, we continue to work with super funds as they develop tailored offerings for their members in retirement. At the same time, we're improving the experience we provide for customers.
We've upgraded our investor online portal and simplified and enhanced the rollover processes, which is driving strong reinvestment rates among our direct customers. Our funds management business remains the fastest-growing Australian active funds manager and is making great progress in exporting its compelling offer into offshore markets. We continue to explore new boutique opportunities for Fidante Partners and to support the rollout of new CIP Asset Management products. Our fourth pillar, maintaining leading operational and people practices, is critical to our success. I'm proud to say that throughout the COVID-19 crisis, we maintained high employee engagement as measured through regular pulse check surveys. Our risk culture remains strong, and our commitment to gender equality was recognized with our inclusion in the Bloomberg Gender-Equality Index for the second year running.
Through this strategy, we've created a compelling product offering for our customers to support our vision to provide financial security for retirement. Our funds management business offers customers strong returns through investments in equities, alternatives, real estate, and fixed income. The business supports people through their working lives as they accumulate wealth and when they get into retirement. Our life business, with market-leading annuities alongside institutional retirement solutions, provides guaranteed income for older Australians, converting savings to income throughout retirement. As part of a balanced portfolio, our life products provide financial security and peace of mind for many Australians. The combination of the funds management and life businesses have helped support customers in their retirement journey. We have market-leading positions in both businesses. Both have continued to grow over the past half year. Both have diversified their income streams.
Challenger is a company with strong business momentum operating in a conducive environment. The federal government's Retirement Income Review, released late last year, highlighted the importance of finding better solutions for retirement, and that's precisely what we do. As I mentioned earlier, our funds management business is the fastest growing active manager in the country, significantly outpacing all its major rivals, including Fidante, where net flows tripled. These market-leading organic flows were driven across retail and institutional. Our performance in retail was particularly noteworthy, with net flows up 32% compared to the previous six months. Our leading retail distribution capability was recognized by Zenith Investment Partners in naming Fidante Distributor of the Year. Zenith highlighted the quality of the boutiques and their ratings across the product suite. They recognized the growing funds under management, excellence in reporting, and the quality of advisor support.
In our life business, Challenger remains the number one provider of annuities in Australia. This chart clearly illustrates the success of our long-standing strategy to diversify our product range and broaden our distribution channels. Over the past five years, we've achieved compound annual growth in sales of 11%. We've done this during a period of major disruption that dramatically impacted our term annuity sales. Our sales composition has changed deliberately and significantly. We believe we're well-placed to continue to grow from here. We've been successful in building and broadening our activity with institutions. We've continued to benefit from our partnership with MS Primary in Japan. We've also been successfully building new relationships with independent financial advisors and will now benefit from the stabilization in the advisor market that we're now seeing. We're now further strengthening our offer for customers with the addition of a banking license.
As you may recall, we announced the acquisition of MyLife MyFinance, a small ADI, in December. I'm looking forward to adding term deposits to our customer offering in the near future. The familiarity of government-guaranteed term deposits will enable us to acquire more customers directly and at earlier stages in their journey towards retirement. Together with other product development opportunities, this will drive growth over the medium term and beyond. A bank provides a natural complement to our business, and it will directly support our purpose to provide customers with financial security for retirement. We're still progressing through the regulatory approval for the bank acquisition. It's important that we integrate the business well, including from a risk and compliance perspective. We're working hard to make the integration as seamless as possible for customers, for employees, and for all stakeholders.
It's a highly strategic acquisition for Challenger and reflects our confidence in the broader role that guaranteed products will play in retirement, and the growth that we will enjoy as a result. The bank will provide us with direct access to customers, both in retirement and earlier in their journey toward retirement, through the AUD 1 trillion term deposit market. Term deposit sales are less reliant on retail financial advice and are familiar and trusted products, as well as being government guaranteed. Owning a bank also provides us with future product innovation opportunities, and we're confident that we can leverage Challenger's existing leading capability and brand to take full advantage of these over time. This acquisition is a powerful demonstration of our appetite for growth and our willingness to pursue broader opportunities.
It shows that we'll make prudent investments for the longer term with a clear commitment to building on our leading position in providing financial security for retirement. I'll now hand over to Andrew to go through the financial results in more detail.
Thanks, Richard. Good morning, everyone. As you have already heard today, our first half 2021 financial results reflect the strong business momentum that we have derived from our strategy to diversify our product offering and distribution footprint. The results also reflect Life's prudent investment portfolio settings and capital position that have been maintained over the half. Given the significant changes to Life's investment portfolio following the COVID-19 market related sell-off in the second half of last financial year, the most meaningful observations in this period's results are to the last sequential half being 2H20 rather than 1H20. The key callouts in the slide pack have been prepared on this basis, with the 1H20 data also included for completeness. Looking at the group result on this chart, the main headlines are as follows.
Net income for the period was AUD 325 million, down AUD 50 million or 13% compared to the second half of 2020, driven by Life cash operating earnings, which were down by 17%. Funds management income was relatively stable over the half, with higher management fees offsetting a fall in performance fees. In response to the revenue outcomes, we remain disciplined with our expense management, with expenses declining by AUD 16 million or 11% compared to 2H 2020. Expense reductions related mainly to non-personnel costs, including occupancy, travel and entertainment, marketing and advertising, and professional service fees. Overall, group net profit before tax declined by AUD 32 million or 14% compared to 2H 2020 to finish at AUD 196 million, broadly in line with our expectations. The EBIT margin of 61% declined by 90 basis points, and normalized pre-tax ROE was also lower at 11.5%.
The ROE outcome reflects lower earnings in the half and higher average levels of capital following the equity that we raised in June last year. Looking at the group result in some detail, the decrease in normalized profit before tax from AUD 228 million to AUD 196 million was primarily driven by a AUD 33 million lower contribution from normalized capital growth in the Life business. This was due to the change in investment portfolio composition and a lower capital growth factor applied to the alternatives portfolio for the half, which has no overall impact on statutory profit. In addition to the decline in normalized capital growth, Life's cash earnings fell by AUD 17 million, which was broadly offset by expense savings of AUD 16 million across the group.
Normalized net profit after tax was AUD 137 million, down AUD 15 million or 10%, reflecting lower pre-tax earnings and an effective tax rate of 30% compared to 33% in 2H20. In terms of statutory profit, which includes valuation movements on Life's assets and liabilities, we've posted a positive investment experience profit of AUD 87 million after tax, representing the partial reversal of prior period negative investment experience. I will provide further details on this shortly. Overall, we posted a statutory net profit after tax of AUD 223 million for the half. Moving on to the key headlines of Life's financial performance. Total sales for the period were AUD 3.4 billion, up 10% on 1H20. Pleasingly, we generated solid sales uplifts across all product categories. The annuity book posted a net inflow of AUD 158 million.
Other Life sales posted a net book growth of AUD 551 million, translating into overall Life book growth of AUD 709 million or 4.7%. This was a strong reversal of the net outflow that was reported in 2H 2020. Life earnings before tax decreased by AUD 46 million to AUD 193 million, reflecting lower cash operating earnings, as I have already outlined, offset by expense savings of AUD 4 million. Life's normalized return on equity was 12.5% for the half, below our through the cycle target, reflecting the prudent investment portfolio settings that were in place over the half. Let me talk through Life's key business drivers in a bit more detail. Firstly, focusing on sales. Given the seasonal nature of our sales profile between the two halves, the sales charts show a more meaningful comparison to the prior corresponding halves.
Total Life sales increased by 10% to AUD 3.4 billion, with annuity sales contributing AUD 2.2 billion and other Life sales AUD 1.2 billion. Domestic annuity sales were AUD 1.6 billion, representing an 11% increase on the PCP. Domestic term sales were 2% higher at AUD 1.3 billion, supported by a more stable advisor market and good reinvestment rates supported by both independent financial advisors and also direct customers. Pleasingly, we saw Lifetime sales of AUD 347 million, representing an increase of 64% compared to PCP. Lifetime growth was supported by increased penetration into the IFA segment and reinsurance of a closed Lifetime portfolio from an institutional client. MS Primary sales increased by 15% to AUD 543 million and represented 25% of total annuity sales for the half.
We expect the Japanese sales volumes to moderate in the second half and glide toward the minimum annual volume agreed with MS Primary, which is JPY 50 billion or approximately AUD 700 million per annum. Other Life sales representing Challenger's institutional guaranteed Index Plus products were AUD 1.2 billion, up 5% on PCP, supported by a number of new clients and expanded product offering. The line on the chart represents the percentage of long-term sales being domestic, Lifetime, and Japanese sales. We had a record period of long-term sales, which represented 41% of total sales, up from 35% in the PCP. This next chart shows the composition in the context of the life book growth that is being generated. Total life book growth was AUD 709 million, or 4.7%, and this was largely driven by other life inflows of AUD 551 million. The total growth compares favorably with prior periods over the last five years.
The annuity book increased by AUD 158 million, or 1.3%, of opening liabilities, supported by the 12% annuity sales growth in the half. The maturity rate on the annuity portfolio was 16% in the half, and we are forecasting this to fall to between 11%-12% in the second half, reflecting the seasonal nature of our past sales profile. The overall positive book growth reflects the product and distribution diversification that has been constructed over the last couple of years, including expanding our relationship with MS Primary in Japan, an increasing focus on institutional sales opportunities, and working with a wider range of independent financial advice networks. Challenger is focused on growing its long-term annuity portfolio as it embeds significant value. This chart highlights the component parts of life's total annuity and other liabilities, which now stands at AUD 15.8 billion, up from AUD 15.6 billion in the PCP.
The increased volume of Japanese sales combined with the lifetime sales meant that the new business sales tail was nine years in the half. This metric has increased from 6.5 years back in 2016. The continued shift to longer term annuities has resulted in the combined lifetime and Japanese policy liabilities now representing 46% of the total life book. It is now larger than our term annuity portfolio at 35% for the first time, and this proportion has nearly doubled over the past four years. The Japan policy liability value has now increased to AUD 2 billion. Pleasingly, the institutional Index Plus fund liabilities grew by 25% over the half to AUD 3 billion and now represents 19% of the life book. This is represented by the green section on the bar chart. Turning now to life's investment portfolio.
A key observation is that there has been no material change to relative asset allocations since 30 June, and the investment portfolio is in good shape. The investment portfolio increased by AUD 1.3 billion to AUD 19.6 billion at 31 December, reflecting net book growth, positive valuation gains, and retained earnings. The fixed income portfolio was grown by AUD 800 million to AUD 14.8 billion, representing 76% of Life's total investment assets, which is consistent with the allocation at 30 June. Life targets to hold at least 75% of the fixed income portfolio in investment grade exposures, and the actual investment grade being 86% at 31 December. This reflects the defensive portfolio settings, including the elevated levels of cash and liquids in the portfolio. We started the half with AUD 3 billion of cash and liquids and have been gradually deploying this excess holding during the half.
This can be seen on the left-hand side of the chart with the cash holding at balance date falling from 16% at June 30 to 11% at December 31. It is important to note that the average cash balance in 1H 2021 of 13% was higher than the average of 2H 2020 being 11%. This is shown in the far-right bar charts and informs the earnings profile in 1H 2021 compared to 2H 2020. The credit performance was resilient in the face of the uncertain COVID-19 market environment as well. In fact, we saw a net reversal of credit defaults in the period, equating to nine basis points on the portfolio. The property portfolio was unchanged at AUD 3.3 billion, with the asset allocation falling by one percentage point due to the growth in the overall investment portfolio. Property valuations were relatively stable in the half, and I will highlight this further shortly.
The alternatives in equities and infrastructure asset categories both increased by approximately AUD 200 million in the period, with the relative portfolio allocations being similar to 30 June. Alternatives represent 4% of the portfolio, and equities and infrastructure represent 3%. There are a number of components to the margin movement in the half. The key takeaway, though, is that the margin reflected the portfolio composition and high levels of cash and liquids that were held at the start of the year. As this is gradually deployed over the second half, we are forecasting the margin to improve from the 1H21 position. Looking at the detail. The 1H21 COE margin was 2.55% and decreased by 55 basis points compared to 2H20. The attribution of the change can be seen on the chart as follows. The normalized capital growth contribution was the most material change, declining by 35 basis points.
This was due to the asset allocation changes made to Life's investment portfolio at the end of last year and a reduction in the normalized growth factor for the alternatives portfolio from 3.5% last year to 0% from 1 July 2020. Lower earnings on shareholder funds impacted the margin by six basis points due to lower interest rates and a lower product cash margin of 14 basis points was generated. As noted on the chart, the key movements in the product margin were as follows.
Other income fell by 13 basis points due to the 2H20 period, including a one-off life risk revenue of AUD 10 million from an early contract termination and lower investment yield across the portfolio of 39 basis points following the compositional change to the investment portfolio and elevated levels of cash and liquids held compared to prior periods. Offsetting this decline in margin were lower interest expense of 27 basis points due to the lower interest rate environment and product mix, and a yield uplift of 11 basis points from the partial deployment of the opening cash and liquids balance into high yielding assets during the half.
As I've noted, the continual and gradual deployment of Life's excess cash position in the second half of the year is expected to support an increase in the 2H 2021 yield by 20 basis points to 30 basis points, and this is shown on the far right of the chart. I'm also pleased to highlight that our property portfolio is performing better than anticipated at the start of the year. We are now forecasting full year rent reductions of AUD 10 million-AUD 12 million from abatement negotiations, compared to AUD 22 million that we forecast at the start of the year. This next slide outlines the breakdown of pre-tax investment experience profit for the period. The AUD 238 million gain in the fixed income portfolio represents a positive valuation outcome of AUD 200 million from credit spread movements in the half, AUD 25 million of normalized growth, and AUD 13 million from the recovery of prior period defaults.
The valuation uplift represents the reversal of a significant portion of the unrealized valuation losses recognized in 2020 as a result of the COVID-19 market related impact on the portfolio. The AUD 43 million investment experience loss on property mainly reflects a small valuation loss of AUD 10 million compared to our assumed normalized growth assumption of 1% or AUD 33 million for the half. All the direct properties were again independently valued at 31 December, consistent with our approach at 30 June. This resulted in small valuation downgrades in the retail segment of the portfolio, largely offset by minor uplifts in the office portfolio. No properties were sold in the period. All of the valuation loss is unrealized.
The equity and other infrastructure gain of AUD 34 million reflects a AUD 42 million valuation gain on the portfolio, reflecting higher domestic and global equity markets in the half, offset by a normalized capital growth expectation of AUD 8 million for the half. The alternatives portfolio, consisting of absolute return funds and general and life insurance exposures, posted a neutral investment outcome for the period. Sub-asset category valuation movements offset each other, and we assume no normalized capital growth on the alternatives portfolio. Looking at policy liabilities, the total valuation loss here was AUD 104 million, represented by a AUD 172 million loss from the illiquidity premium component of the discount rate used to value policy liabilities, offset by a gain of AUD 64 million on interest rate and inflation hedging outcomes, and a AUD 4 million contribution from the net reversal of new business strain on sales.
Overall, we reported a pre-tax investment experience profit of AUD 125 million for the half. Turning now to capital. Challenger Life Company's position remains strong with AUD 1.5 billion of excess regulatory capital, broadly consistent with the excess position at 30 June. The group also held AUD 137 million of cash in addition to this capital. Challenger Life Company's regulatory capital base of AUD 3.9 billion increased by AUD 379 million over the half. This reflects Challenger Life's retained earnings, additional equity injected via the share purchase plan proceeds, and the net increase in additional Tier 1 capital following the issue of Challenger Capital Notes 3. The prescribed capital amount increased by AUD 448 million over the half.
Historically, this was mainly a result of deploying life's excess cash and liquidity balance at 30 June into high yielding assets, including fixed income, equities, and alternatives, as well as the increase in investment assets driven by the book growth that was generated in the period. The capital intensity increased from 10.7% at 30 June to 12.2% as a result of the asset allocation changes made. Amidst the uncertain market conditions from the pandemic over the half, it was pleasing that S&P also recognized Challenger Life's capital strength in the period and confirmed CLC's A rating. Looking at CLC's capital ratios on the next slide. Consistent with our planned actions to deploy the excess cash and liquids balance in the period, the PCA and CET1 ratios both fell over the half. The PCA declined from 1.81x at 30 June to 1.63x at 31 December.
This is significantly above APRA's minimum requirement of one times and remains above the upper end of our target 1.3x to 1.6x range. The common equity ratio declined to 1.09x , compared to 1.2x at 30 June. As noted in our MyLife MyFinance bank acquisition announcement on 23 December, we plan to distribute AUD 100 million from CLC in the March quarter to fund the acquisition and capital requirements to support growth of the bank. This is expected to reduce CLC's PCA ratio by approximately four basis points on a pro forma basis. Our plan is to continue to deploy the excess cash and liquids balance into primarily investment grade fixed income opportunities in the second half. Following these actions, CLC's regulatory capital ratio is expected to remain around the top end of the target PCA range over the course of FY 2021. Turning to funds management.
Net inflows for the half were very strong at AUD 6.4 billion, with Fidante Partners net inflows near tripling compared to PCP to AUD 5.8 billion, and CIP Asset Management reporting net inflows of AUD 659 million. Average FUM increased by 7% over the half to AUD 85.9 billion, with a 9% increase from Fidante Partners and a 1% increase in CIP Asset Management. Given the strong total net flows, it is important to highlight the record closing FUM balance of AUD 91.2 billion, which is 6% higher than the average FUM for the half. Net income was AUD 81 million, or 1% higher than 2H20, noting that funds management generated AUD 8 million, or 11% increase in FUM-related fees, which was offset by a AUD 6 million decline in performance-related fees.
Disciplined expense management saw AUD 5 million of savings compared to 2H20. Overall funds management's pre-tax profit was AUD 35 million, up AUD 5 million or 18% compared to 2H20. Looking more closely at Fidante Partners, this slide shows the breakdown of retail and institutional flows, as well as providing an overview of investment performance. The chart on the left shows the AUD 5.8 billion of net Fidante flows split into retail and institutional net flows. We saw a record AUD 1.9 billion of retail net flows. Institutional net inflows were AUD 3.9 billion for the half, mainly weighted to fixed income allocations. This was supported by an 11% increase in the institutional client base over the half. The charts on the right outline Fidante Partners' investment performance. 54% of funds achieved first or second quartile performance over one year. 81% of funds have achieved first or second quartile performance since inception.
Another way to look at performance is relative to benchmark. This is also a very strong outcome, with 76% of FUM outperforming benchmarks over one year and 88% outperforming over five years. Finally, turning to dividends, reflecting the confidence in future business performance and strength of our capital position, the board has declared an interim dividend of AUD 0.095 per share, fully franked. The dividend represents a 46.6% payout of normalized EPS and is within the board's target payout ratio of 45%-50% of normalized earnings. With the dividend reinvestment plan in place, the net cash dividend payout ratio is expected to reduce by approximately 2%. In conclusion, our results today are in line with our expectations set at the start of the period.
They reflect the compositional changes that were previously made to Life's investment portfolio, prudent deployment of Life's excess cash and liquids investments during the half, very strong growth in funds management net flows and FUM. Also disciplined expense control. The business outcomes also demonstrate the momentum that is building from a more diversified distribution and product offering, which means that Challenger is well-placed for future growth. I will now hand back to Richard for his comments on strategy and outlook before rejoining the call for the Q&A session. Thanks, Richard.
Thanks very much, Andrew. As Andrew has demonstrated, we've really turned a corner following a period of significant disruption and are now well-placed to grow from here with a strong balance sheet and significant sales momentum in both Life and Funds Management. We're focused on building on this momentum across our Funds Management, Life, and banking businesses. Looking first on our non-guaranteed businesses, Funds Management forms a very exciting part of Challenger's future. We expect its contribution to earnings to grow. We will achieve that through organic growth from existing boutiques, as well as via new boutiques and partners. We're expecting growth to come from North America, Europe, and Asia, as well as from Australia. I'm confident we can leverage our leading distribution capability to keep growing funds under management at industry leading levels.
During the next six months, we'll complete our program to deploy Life's excess cash and liquidity position. We'll maintain appropriate investment portfolio settings that reflect our growing and broadening customer franchise. The Life business has emerged from the disruption to the industry in good shape. We'll continue to deepen our relationships with independent financial advisors and increasingly deal directly with customers through enhanced digital capabilities. We expect that our strategy of partnering with super funds to develop retirement solutions for members will create new opportunities. The federal government, in its Retirement Income Review late last year, emphasized the need for better outcomes for retirees. Challenger is well-placed to contribute to the industry's response. During the next couple of months, we expect to complete the acquisition of MyLife MyFinance. We'll integrate the bank into the broader business.
We will expand the bank's current term deposit suite by offering a wider range of tenors, and we'll be focused on achieving break even for this business in FY 2022. The acquisition signals our willingness to invest in growth opportunities. It's emblematic of the type of investments we will make in the future, and I'm confident it will accelerate our growth over the medium term. We're on track to achieve a full-year result within our FY 2021 guidance range of AUD 390 million-AUD 440 million. Reflecting our prudent deployment of Life's excess liquidity position, earnings are expected to be weighted towards the second half of this year. Our key through-the-cycle targets remain unchanged, and we expect normalized pre-tax return on equity to improve as Life's liquidity and capital is deployed.
As you would expect, we'll not reach our target this year given the gradual deployment that we've already taken. We enter the second half of 2021 in good shape, having withstood industry and COVID-19 related disruption of recent years. Our strong performance in funds management, momentum across life, and new opportunities in our banking operations mean that Challenger is well-placed for future growth. Thanks very much for your time. Andrew and I will now take your questions.
Thank you and welcome to the Q&A session. To ask a question, please press star one on your telephone keypad and wait for your name to be announced. The first question comes from Simon Fitzgerald from E&P. Please go ahead, Simon.
Hi there. Thank you for taking my question. The first question I have relates to the rental abatements, the revision from AUD 22 to AUD 10 to AUD 12. I was just wanting, firstly, for you to elaborate how much of that may have been spent in the first half 2021, but also with the additional AUD 10 million-AUD 12 million in rental yield. I imagine it's not really material enough to warrant a revision to your guidance. Had you thought about bumping up or at least revising the guidance given the change in the rental abatements? That's the first question.
Simon, it's Andrew here. I might grab that question. Thanks very much for the question. We've called out today that an improvement in the rental abatement expectation. At the start of the period, as I mentioned on the call, we expected AUD 22 million, and we revised that guidance to AUD 10 million-AUD 12 million. Overall, you could think of that broadly as about half of that taken in the first half in the second half. It's quite immaterial in the scheme of the overall results. Yet, the second part to your question in terms of guidance, all of these things feed into our guidance thinking. At this stage, we're comfortable with our guidance range and reaffirming that today, noting that there are a number of things that go into determining the outcome across the period.
Okay, thank you. That's clear. The second question regarding the deployment of cash into high yielding fixed income assets. At the moment, I can see that you're targeting AUD 1 billion in the second half of 2021, remembering that the full amount you were going for previously was AUD 3 billion. I was just wondering, have you spent a little bit more than a gradual deployment for the first half 2021? Maybe you could just sort of elaborate in terms of how much has been spent so far versus what you've got left to do.
Thanks for the question, Simon. Yeah, look, we're about halfway through that deployment. We've put about AUD 1.25 billion into fixed income. We've also made some investments into equities and alternatives. We have about half of that deployment into fixed income to go. I'm comfortable that the way we're deploying that is consistent with both what we said during the capital raise and then also what we said at the full year results when we last spoke.
Okay. Just one final question. Again, it relates to the redeployment. I do recall at the time that you first started talking about this. Credit spreads have probably moved pretty significantly since then. I think the A grades are down 61% since April last year and B grade down around 48%. Can you talk about what this means for your targeted 20-plus returns when you first started talking about the redeployment of capital into high yielding fixed income assets, please?
Sure, Simon, totally fair question given the way, the extent to which markets are moving around. We've deployed the capital in the way we said we would, and the returns we're generating are in line with those that we said that we would return. You're right to remind participants on the call that the guide we'd given there was in deploying the capital we'd raised and in redeploying the AUD 3 billion of excess cash and liquidity into higher yielding assets we would generate at the margin ROEs in excess of 20%, and we're very much on track to do that. No doubt tighter spreads makes that more challenging at the margin, but I remain comfortable with the lead we gave you guys on that.
Okay. Thank you.
Thank you, Simon. The next question comes from Matt Dunger from Bank of America. Please go ahead, Matt.
Thank you very much, gentlemen. Step down in cost, Andrew spoke to AUD 16 million from the expense savings. Can you talk about, Andrew, when these were implemented? Have we seen the full period benefit in the first half? And also, any expected costs, and the timing of those on the banking license? Will we see a material cost uplift?
Yeah. Thanks, Matt, for the question. I called out specifically some categories of expense, if you like. Lower marketing and advertising, travel, entertainment, occupancy, et cetera. There's run rates that will still continue to play out in the second half and we'll benefit from. The point to your question around the bank is that we've called out specifically, in sort of the guidance statements in the analyst pack, the impact of the bank. That'll be about AUD 3 million of profit before tax impact. Assuming that we take ownership of the bank at the end of that March period and have ownership for the June quarter, therefore, that'll have about an AUD 3 million sort of loss impact in the current period of time. That's probably the way to think about it.
Great. Thank you very much. If I could just ask a follow-up question on the Japanese sales. You were talking about expanding the relationship with MS& AD. How do you expect they're incentivized to do more than the AUD 670 million of sales per annum, which you've got locked in for the next five years?
Matt, thanks for the question. It's Richard. I might grab that one. The thing we're calling out in this result is that the sales performance through our partnership with MSP has been going very well. In part, that reflects how strong MSP's sales outcomes in the December quarter, for example, have been into their market. There are benefits both to Challenger and to MSP in the reinsurance arrangements. Both sides of that benefit from the business that is written. That said, we're basing our planning on the minimum contractual requirement of JPY 50 billion, which at average exchange rates over the reporting period, as you point out, corresponds to around AUD 670 million. Clearly, we're achieving run rates in excess of that, so it would be unsurprising if we exceeded it ultimately. Our planning is based only on that minimum at this stage.
Thanks, Richard. Thank you.
Thanks, Matt.
Thank you, Matt. The next question comes from Kieren Chidgey from Jarden. Please go ahead, Kieren.
Morning, guys. Just a couple of questions, if I could. Starting with the ROE target. You're at 11.5% in first half 2021. Andrew, I think you flagged a 20 basis points-30 basis point uplift as you fully redeploy into higher returning classes in the second half of 2020 in terms of life margins. On my numbers, that'll put you on track for around 13%, so still shy of the 14% group target. Just wondering what else sort of is required across the group to get you back in that target range at group level on ROE. Is it just the full run rate once you've fully deployed that capital, or are there other things actually required to boost you?
I'll take that, Kieren. Thanks for the question. I think you're right to call out that the main feature of the likely ROE outcome for this year is just the excess of cash and liquidity and excess of capital and gradual deployment thereof throughout the period. In other respects, as I look at the ROEs that we're generating on the investments that we're making, those are in line with the 20% plus ROE guidance that we gave during the capital raise and the results announcements. Taking a step back from that, it's worth bearing in mind that this is a through the cycle target, tighter spreads at the moment, it makes that at the margin, more challenging than it might otherwise be.
It's also worth just reflecting on our intention based on the growing and broadening customer franchise to remain around that top end of our target range. In that sense, it's important to consider the lower risk characteristics of our earnings profile in that context when you're thinking about that.
Okay. The ability to get back to target or above target in 2022, this stage, you're saying it's more reflective of where credit spreads are at this juncture?
We've not changed our target. That remains our through the cycle target. It's a function of where spreads are at the time we deploy and a range of other things. It's worth thinking about in that broader context, I suppose, Kieren.
Okay. Second question, apologies, I might have missed a comment that sort of related to Japan. Obviously, you've done a fair chunk of your sort of full year minimum agreement with them through first half, probably around 80%. Just interested on comments on sort of full year basis, whether or not, given they are experiencing higher sales based on your commentary more generally, there's scope to do over that AUD 6 billion-7 billion this year. Secondly, given the stronger sales coming out of Japan, where you think the maturity rates on the overall book will head into 2022. I know you flagged 27%-28% for this year, but just interested in any commentary beyond that.
Okay. Thanks, Kieren. I think given where we are in terms of the run rate, it would be unsurprising if we were to once again exceed that minimum contractual volume of 50 billion JPY. Our planning is based on those minimums at this stage. It's obviously a function both of how strongly MSP's foreign currency annuity business is performing in Japan, as well as the quota share dynamic between our two organizations. Very happy with and pleased with how that's performing and wouldn't be surprised if it eclipses, but as it's done previously, but our planning is based on the 50 billion JPY minimum. Kieren, just remind me what the second part of your question was.
Just the maturity-
Oh, the maturity rate. Sorry about that.
Richard. Yep.
Yes, I think the thing to bear in mind is that the maturity rate was sort of front-ended in this half. We have lower maturity rates into the second half of the year. It'll drop to sort of 11%-12% for the second half. Then, I think in some of the modeling I've seen amongst analysts out there, a lower maturity again in FY 2022 would be a reasonable thing to expect as well.
All right. Thank you.
Thanks, Kieren.
Thank you, Kieren. The next question comes from Anthony Hoo from CLSA.
Good morning, guys. Thanks. Can I just ask a couple of questions? Just on the bank acquisition, you've talked a little bit about it in slide 10, can you also talk about what sort of ROE you expect from the business, particularly in relation to your group target? Also, what sort of capital levels you aim to hold there. Then secondly, just following on from the earlier question, just around your maturity profile for annuities. Outside of the strong sales in Japan, I'm just wondering, can you give us some insight into what gives you your confidence around FY 2022? Thank you.
Great, Anthony. Thanks for the questions. We will think about the bank in terms of the returns we target for that in the same way that we think about the broader group. Our ROE target of 14% above the RBA cash rate will apply to that business as well. Obviously, it's a sub-scale balance sheet at the moment, with assets and liabilities materially less than AUD 200 million, and lower capital accordingly. That's why we're flagging FY 2022 as being how we're thinking about the timing of breakevens. In terms of how the ROE and capital intensity works, it's instructive to look at our fixed term annuity business as kind of an economic analogy to that. We'll be using the same lending franchises and investment capability, if you like, on the fixed income side, to build the investment strategy for the asset side of the ADI.
In terms of capital intensity, there are differences at the margin. In particular, capital tends to be a lot more stable for the ADI, given the book value mechanics of the capital regime. In terms of the capital charges for asset risks, they're similar. There's a lot of good comparisons that can be drawn to the fixed term annuity business in terms of how the profitability signature and capital intensity and so forth will work for the ADI. Anthony, the second question you asked was around maturity rate and what gives us confidence there. The weighted average tenor of the business we wrote over the half was nine years, and that has remained high for a long period now. It reflects, among other things, record lifetime annuity sales in the period, significant contributions from our MSP partnerships, as you've called out.
In many ways, our purpose to provide financial security for retirement revolves importantly around our ability to provide a lifetime of income to Australian retirees. I'm optimistic about the role we can continue to play in that regard, and that will continue to translate into long-term liability writing.
Thank you.
Thank you, Anthony. The next question comes from Ashley Dalziell from Goldman Sachs. Please go ahead, Ashley.
Thanks. Good morning, everyone. Just an initial question on the GIR sales. Obviously, another pretty strong result in the December quarter. Recognize some of the commentary today around efforts to really build out that distribution plus some new client relationships seem to be being developed on that product. It's been a volatile sort of sales product or item for you, but just given some of the increased focus and efforts on the distribution for that product, are you able to help shed kind of any light for us on what a sort of normal run rate is likely to be there going forward for sales? Secondly to that, are you able to help us just with a sort of spot refresh on the margin differential of those sales relative to the domestic lifetime product, please?
Yeah. Thanks, Ashley. It's understandable you're sort of focused on Index Plus/GIR given the success we've been having in recent periods, not just this half, but others in recent times. What that sort of is emblematic of is that the payoffs, if you like, from our strategy to deliberately diversify our distribution efforts. In this case, it is still the case, as you're alluding to, that institutional business like this will tend to be lumpy. It's difficult to predict exactly what it's going to be period to period. Some of the things I reflect on in feeling good about that business and its trajectory is that there's a broader range of institutional customers that we have participating in those products, and the product range itself broadens. We have different tenors, but also different reference indices and different collateral pools.
Recently, one of the innovations that we have brought in is that the collateral pool includes annuities themselves, which means we're able to offer even higher rates of guaranteed alpha against the index over longer tenors, and we're finding that that's attracting a broader range of customers at longer tenors. Importantly, I'm definitely comfortable with the way that side of the business is growing, albeit that it will continue to be lumpy and difficult to predict half period to half period.
As to your question on margin, the interesting thing here is that the margin achievable will be a function of the collateral pool, the tenor, and both of those things will in turn drive the capital intensity of that particular tranche of the product, which then will in turn drive margin because, as with all of our business, the way we run the business is in targeting ROE outcomes and being informed by the ROE that will be driven by our pricing. Particularly for this type of product and comparing this type of product to, say, our retail annuities, for example, the margins can be quite different. The ROE is similar.
Okay. Appreciate that. Thank you.
Thanks, Ashley.
Thank you, Ashley. The next question comes from Nigel Pittaway from Citi. Please go ahead.
Good morning, guys. Just a quick question actually on slide 19, if I could. Obviously, there you are flagging that 20 basis points- 30 basis point improvement from redeploying assets. I'm just checking that is growth of any sort of roll-through of sort of a negative impact from lower spread. If that's the case, just whether there's any other sort of items other than that sort of 20 to 30 basis point benefit, the roll-through of lower spreads that you think would be meaningful for sort of thinking about margins in the second half.
Nigel, it's Andrew here. Yeah, 20 basis points- 30 basis points is the expectation from the continued deployment of the cash and liquids balance that we've got. It does reflect our expectations of the margins that we can generate in the second half, recognizing the current spread environment. There's no one-offs to your question as well. There's no sort of one-off life risk items that may pop up that we've called out specifically in this current period sort of margin comparison. It's a complete sort of read-through of expectations of a normal sort of deployment of that cash and liquids balance.
Just to be clear there, is that just the redeployed cash and the sort of margins available? If you look at the rest of the book, you still got to factor in spread contraction roll-through on the rest of the book other than the cash being redeployed. Am I thinking about that correctly?
It's the cash deployment or the margins we're generating from that cash being deployed. If you think about the product margin in the period, other than the sort of the lower other income item that we've called out being a life risk change, there really wasn't a contraction in that product cash margin. The 20 basis points-30 basis points, the best way to think about that is the expectation of the excess cash and liquids that we're deploying in the second half.
Yeah. Okay. You're saying everything else neutralizes that, because presumably, things like less competitive term deposit pricing, that sort of stuff that sort of flows all through that.
It's, yeah. It's a factor of different things in there, but that's right. There's nothing that we're thinking about that's one-off in nature that will impact the second half.
Okay. Thank you.
Nigel, maybe the only slight nuance to call out in terms of the impact of deployment on margins and profit generated is, it's kind of easier in the case of fixed income because other than what the default rates tend to turn out to be from one half to the next, it's predictable. To the extent we've deployed some money into equities and alternatives, you can have timing differences in terms of when and where those returns turn up. In terms of what the impact is in any six-month period, you've just got to bear that in mind.
Yeah. Fair enough. Okay. Thank you.
Thank you, Nigel.
Thanks, Nigel.
The next question comes from Siddharth from JP Morgan. Please go ahead.
Good morning, gentlemen. Just a couple of questions, if I can. Firstly, just on the bank. The chart view shows quite helpful. It shows that there's about a 40 basis points, 50 basis point boost to, I suppose, just the cost of selling term deposits versus actually selling annuities. I was just wondering, looking forward, are we likely to think that really you could replace most lines which you're selling today and put them into the banking environment? Because that 40 basis points to 50 basis points is probably just a worst-case improvement that you could get. Presumably, it's even better for things like the wholesale products you sell. Maybe if you could just comment on how we should think about the future of the life company. Is it likely to be actually that most of what you're going to be selling in the future is going to be through the bank?
It's a good question, Sid. Just one thing to highlight in making those comparisons, we're comparing to average term deposits there. We will operate the ADI with a view to ROE outcomes. To the extent that we've been in a position where we've been able to offer fixed-term annuity rates above what average term deposit rates are, we see that will translate into an attractive product offering that we can offer retirees and pre-retirees. It's a much bigger market as well, a AUD 1 trillion term deposit market, we can see really important growth prospects there. It may be that for some advisors and some customers, they'll prefer to take a term deposit rather than a term annuity. There will be other customers for which term annuities still remain their preference.
For example, rolling money from a super fund into a term deposit keeps it within the tax umbrella of the super system. That can be not impossible, but it can be a little more complicated in terms of term deposits. We expect both businesses to continue, but we definitely open our eyes on the fact that term deposits will be a preferred product to term annuities for some customers. What we're aiming at here is the broader opportunity and that the growth we expect from the ADI and from term deposit growth will far eclipse any drop in term annuity sales.
Okay. If I could just ask a question on your discussions with APRA around running your investment mix through a bank. We don't see this for any bank that I am aware of anywhere globally that runs the kind of investment mix that you are proposing to run through the bank. Just could you just comment on what their thoughts are on this, whether there is any implications for liquidity, and also whether you propose dropping your normalized approach to reporting profits?
Okay. Yeah, that's a smart question. Just to clarify what we meant in terms of using our investment capability within the life business to assist the asset strategy on the ADI side, we're really talking about our lending franchises there and our fixed income investment capability. That's very well suited to a bank balance sheet. In many ways, a bank is built to borrow from depositors and lend those deposits out to households and businesses. You wouldn't expect to see exactly the same balance sheet, not by any stretch. It'd be unlikely you'd see commercial properties and equities owned on the ADI balance sheet, for example. Some of the lending activity that we do on the life balance sheet is very relevant and applicable to that environment.
Okay. That's quite clear. Basically, there'll be more in the risk assets in the life company. That's the way we should think about it.
Yes. The more capital-intensive assets, which equities and property obviously represent, and alternatives represent, yes, you would expect those not to be a feature on the ADI balance sheet. The life company will still continue to have fixed income within its investment portfolio. The ADI will be generally lending activity. One question you also asked there was normalized earnings. Sid, as you know, the purpose of normalizing our earnings is to remove the period-to-period volatility associated with credit spreads and other investment market risk premiums moving around. Because the bank reporting regime is essentially a book value regime or an historical cost regime, there's less of a need to normalize those earnings. You won't expect to see the same reporting framework that we use in life ported across.
Okay. Just one final question from me. Just these GIR products where, after expenses, you pay a margin over reference index rates. How can this economically work? Maybe if you could just explain the logic of that, please.
Yeah, sure. In the same way that on a fixed annuity, we pay a margin above swap to the customer or a margin above the government bond rate. We talk about our lifetime annuities, for example, paying customers around 130 basis points over government bond rates. The way we economically make money in that case is that we're capturing the spread difference between that 130 basis points above the bond rate and then the total investment return we make across Statutory Fund No. 2 and Statutory Fund No. 4. It's that spread that drives our profitability. Likewise, you can think about GIR as having a certain cost of funds. We promise to pay, let's take an example, the Morgan Stanley capital index net of withholding tax plus a certain small modest margin.
We will then go into the swap markets and hedge out the MSCI risk. Then we are left with a margin to BBSW, in that case, as a cost of funds. Then the collateral pool that we back that liability with is a range of credit assets, typically, the spread of which is higher than the cost of our hedging costs plus the margin that we're paying to the customer. Similar to the annuities business, it's about capturing the spread between what our assets earn and what we're promising to pay, including hedging costs.
Okay. Thank you.
Thanks, Sid.
Thank you, Sid. The next question comes from James Cordukes from Credit Suisse. Please go ahead.
Morning, guys. I just have two questions. The first on the guidance. It's quite a large range, especially if we consider the implied second half guidance. We can see there's a big step-up in the COE margin in second half. What are some of the other swing factors you're thinking about that could see you hit the top or the bottom of the range and what's holding you back from narrowing it?
James, it's Andrew. Excuse me on my great question. There's a number of things that go into sort of thinking about guidance. It's the same range as we've had in prior periods. That's one thing to note. We're halfway through the year, so again, it's probably a bit too premature to sort of narrow and pinpoint the range at the moment. We've also delivered a pretax profit today of AUD 196 million, which is about I think 47% or thereabout, so at the midpoint of that guidance range as well. We are calling out the fact the expectation is that the earnings will be weighted to the second half. That really represents the gradual deployment and further deployment of that excess cash and liquids position that we've highlighted today. There's always going to be a number of potential ups and downs that determine the result.
Richard mentioned before, distributions from the equity and alternative portfolio or property rentals. There's a number of different things that go into our thinking. As we progress throughout the period, we'll sort of get more comfort around that. We think today is still appropriate to maintain that guidance range. The other item that we've called out today and discussed today is the bank. There's an impact that we're expecting of around about AUD 3 million in the second half result. Minor in the scheme of things, but that's just another example of things that can move around a little bit.
Yeah. All right. Thank you. Look, just a second question. The Retirement Income Review came out last half. Has that provided a bit more clarity to some of the large funds to start moving forward and how are your discussions going with those funds around distribution arrangements?
Yeah. Thanks, James. As you would know, we've been in conversation and running workshops with large super funds for really a number of years now. We've been, I'd like to think, part of the process of funds and the industry coming to terms with the differences between retirement and accumulation. Those conversations are very productive. Certainly, it's the case that the focus on the retirement phase, that the Retirement Income Review has created, is bringing more focused attention in that area. It's worth saying that it's difficult for the funds to move ahead in a precise way without clarity on exactly what the covenant is going to look like, draft legislation for that. In many ways, these funds are creatures of legislation.
As productive as our conversations have been, and given the importance of the retirement phase, it is important from a public policy perspective that we continue the journey and get clarity on what that covenant will look like.
Okay. Thank you.
Thank you, James. The next question comes from Simon Fitzgerald from E&P. Please go ahead.
Hi there. Just a quick follow-up question in regards to the bank. You did talk about how sort of that driving medium-term earnings. I was just wondering if we could have a little bit more detail in terms of, is this going to be from new products that you expect to offer? Are you going to be targeting sort of customers pre-retirement? Maybe you could also touch on whether the sort of current asset pools that you have at the moment, whether that can support a higher TD rate that's currently being offered by MyLife MyFinance?
Okay. Thanks for your follow-up question, Simon. Perhaps just taking a little bit of a step back. It's worth mentioning that the possibility of an ADI within Challenger is something we've looked at quite a lot and over a number of years. We've looked at, for example, the counterfactual of building and applying for a license ourselves. The opportunity to acquire MyLife MyFinance represented an opportunity for us to get a contemporary fit for purpose license and core banking system. It uses Temenos T24, which is a very contemporary system, really very fit for our purpose and gives us a platform to build the capability that we want on there. Also to say that it has a functional term deposit offering in the market at the moment.
Not as competitive as, say, our term deposit rates, and we think we've got a role to play in improving that competitiveness. We also see that there's an opportunity to access broader distribution channels as well. An important feature of our strategy, which I alluded to in the presentation, is that we will be targeting the direct market more. The familiarity and government guarantee that goes with term deposits puts us in a position where we can more directly acquire customers than has been the case within our annuities business. It also gives us an opportunity to bring on board customers and provide solutions to them earlier in their journey towards retirement. That's not to say that we're deviating from our mission to provide financial security for retirement, but we've got an opportunity here to build relationships with customers earlier.
There are product innovation opportunities that will avail themselves in due course, as you're alluding to. Our real focus in the shorter term is around term deposits and broadening out the range of channels that we can go to market with that. We will continue to go into the advice market. It gives us an opportunity to go directly. There are deposit broker markets which have been very productive for some of the non-major bank, regional banks and neobanks in recent times, and that'll be an opportunity for us as well. That's how we're thinking about the immediate term growth. Then longer term, there'll be opportunities for product innovation as well.
Thank you.
Thanks, Simon.
Thank you, Simon. The next question comes from Andrei Stadnik from Morgan Stanley. Please go ahead.
Thank you. Good morning. I wanted to ask two questions. Firstly, on Challenger some of the strategies towards the bank. Do you see an opportunity to drive faster growth in term deposits than in term annuities? Particularly given how big the term deposit market is. Also, given how aggressively banks have been actually reducing price in term deposits. Recently, we saw a good example of that this morning with Suncorp as well, the margin benefit they got from really reducing the price available to their customers. Do you think the term deposit market, and also combined with the simpler selling mechanisms, rather than the statement of advice, do you think there's actually a sales growth opportunity as well?
Andrei, I do think the timing is really quite good in this regard. It is true that term deposit pricing has been backing off considerably. There's an opportunity for us in continuing to target our ROE targets to be able to price those term deposits competitively and win share, given, as you say, it's a much bigger market. It's a AUD 1 trillion market. There are other channels which we can avail ourselves of that have been less the case in term deposits, for example, the deposit broking channel. It's also true that some of the channels that we use currently for term annuities can be simpler in terms of term deposits. For example, a financial advisor only needs to issue what's called a record of advice versus a more compliance-laden statement of advice in talking to their clients about term deposits.
The anecdotal feedback and the feedback from the work we've done with advisors suggests that there's good prospects there. Likewise, our institutional channels can also represent a market for term deposits. I do think, both in terms of broadening the reach more generally, but also in terms of the timing, that it's a good time to be implementing this initiative.
Thank you. Can I ask a second question on the funds management side? It's delivering very strong flow momentum, but it's having fairly modest impact in terms of group profit. What do you think you need to do to translate what the funds management business have to have a bigger impact at group level? In particular, you alluded to seeing more wins out of North America and Europe. Does that mean you're happy to look for inorganic growth opportunities in North America and Europe?
It's pleasing that the earnings outcomes from FM have been growing. That's on the back of strong organic growth in net flows. It's also true that the sources of growth are not just domestic, but offshore as well. Not only are we enjoying growth on the back of new boutiques that we bring on board and other partnerships that we create within Fidante, but exporting the capability we have within the Fidante family to Europe and North America and Japan and Asia. There's good opportunities for that going forward, as well as opportunities to bring on more managers. We see FM playing an increasing role from a profitability point of view. It's a business that scales very well from that perspective.
Thank you.
Thank you, Andrei. The next question comes from Shaun Ler from Morningstar. Please go ahead.
Hi. Good morning, everyone. Thanks for taking my question. I guess I'd just like to continue the conversation on the bank. I appreciate that lots of concerns have been answered, I just wanted to dig a little bit deeper into the rationale. My understanding was historically, Challenger has sought to differentiate itself from TDs, it seems to be there's some change of tonality over here. I guess, is it wrong for us to think that there will be some form of potential cannibalization given rates are so low anyway? You guys expect this to sit side by side with the annuities just to provide more optionality. I guess the follow-up from that is also how soon could you expect this TD channel to contribute a larger portion of earnings? I guess given the significantly smaller customer base relative to other banks.
Some time frame around here would be great. Thank you.
Thanks very much for the question, Shaun. Strategically, the premise for the acquisition is around being able to serve our target customer base in broader ways. We see that guaranteed product issued by both the life company and the ADI have a really important role to play in both the journey to retirement and in retirement for our customers. There is a familiarity that comes with term deposits, which mean that a broader range of distribution is available to us. More than anything, our ability to serve in these broader ways will drive strong medium and longer term growth for our business into the future. It will certainly be the case that some customers choose a term deposit over a term annuity, and partly that's due to the simplicity and familiarity of the product.
There'll still be a really important role for term annuities to play, and even more importantly, for lifetime annuities, which uniquely provide peace of mind by ensuring that no matter how long you live, no matter what happens to markets or inflation, those basic living needs can be met. I think that the two guaranteed parts of our business, if you like, life and the ADI, will work very well together in providing financial security for our customers in retirement.
All right. Got it. Thanks.
Thanks, Shaun.
Thank you, Shaun. As we have no further questions at this point, I will now hand it back over to you, Stuart, to close today's session.
Great. Thank you very much for your interest in Challenger. Mark and I are available on the phones if you've got any further questions. Thank you and have a good day.