Morning, everyone, welcome to Computershare's FY 2023 results conference call. As usual, I have Nick Oldfield, our CFO, and Michael Brown from our IR team with me. We have released a presentation pack that we will talk to. I'll take you through the highlights, then Nick will take you through the financials in a little bit more detail. Following the presentation, we'll open the line for Q&A. Finally, just to remind you, we will be talking in constant currency and US dollars unless we state otherwise. Right. Let's make a start on page two, where you can see some of the pertinent numbers. For FY 2023, Management EPS was up 89%. That does include an extra 4 months benefits from our corporate trust acquisition, CCT.
Management revenue increased by 27% to over AUD 3.3 billion, and with higher yields, we achieved a new level of margin income for the group at AUD 792 million. EBIT ex MI is also recovering, too, with 2H up 70% on the first half. ROIC was up by over 1,000 basis points to 22.5%, and free cash flow was over AUD 500 million. With these earnings, our balance sheet continues to strengthen. Debt leverage now stands at less than 1 times, which we're comfortable with as we pursue attractive acquisitions. We're also pleased to share these strong earnings with shareholders. Now, we've declared a final dividend of AUD 0.40 per share, which is also a new record for Computershare, as well as announcing a AUD 750 million Australian dollar share buyback program to be completed over the next 12 months.
That buyback will be funded by a combination of cash and debt. We have had a history of doing buybacks, but this is our largest to date. Moving to slide three. We have shown this slide before, but there is an important point I'd like you to take away, and that's really about our unique integrated model that is designed to deliver high returns through the cycle. What is the financial strategy that drives our results and delivers these returns? Our financial strategy starts with consistently growing core revenues at GDP plus. These revenues were up 14% in the year, and these high-quality recurring revenues account for over half of the group's total.
That's why we've been building our scale and exposure to underlying growth trends, such as equity-based remuneration, rise in governance trends, and the growth in demand for corporate trust services. There are long growth runways here. We then have the more cyclical trading and event-based revenues, corporate actions, employee share trading, proxy campaigns, for example. They are market-facing, so they can be impacted by wider economic conditions, but they do enhance our margins. We know that they were down this year due to the impact of rapidly rising rates and weaker market conditions, primarily in the first half. Positively, a number of these transactions and events are now recovering. Finally, we purposely seek to collect client cash balances. Without the underlying business lines, we would have very little margin income.
Balances are an embedded feature of our model, an important part of our pricing strategy, which then leads to our goal to deliver 15%+ per annum post-tax ROIC on average through the cycle. Let's move to slide four for a summary of the year. With a lot of moving parts, let me try to be as succinct as possible. In FY 2023, higher interest rates drove record levels of margin income. However, the velocity and the frequency of the rate rises throughout the year also impacted on these market-facing revenues and costs, especially in the first half. We are pleased to see a stronger second half EBIT ex MI performance, and as I said earlier on, it was up 70% versus the first half, and it's pleasing to see that in the second half, margin income and EBIT ex MI both grew.
Now, that's about as succinct as I can get for a year at Computershare, but let's unpack it a little bit more. Let's start off with the margin income. Now, our job is to manage the margin income that balances generate conservatively to deliver good, consistent returns for shareholders. We earned a total net yield of 2.3% for the year, which was over 4 times the yield in FY 2022. In the year, most importantly, we successfully renegotiated capture rates, recapture rates, with many of our banking partners, which is part of why we're able to upgrade guidance last November at the AGM. Also, we have a policy to conservatively lock in, or hedge, as we call it, up to 50% of the total exposed balances. Now, we have hedged around $9 billion of balances so far.
Now, these hedges give us fixed yields and certainty of income for the life of the contract. you know, we're reducing the amount of exposed balances at risk to changes in short-term rates. Now, page 10 in the deck shows our plan in more detail, but in summary, we're really working through a program to secure about $1.5 billion of margin income, the large majority of which will be received over the next five years. We've been able to lock in $1.2 billion of that so far and expect to put the rest of the hedges in place this financial year. Now, it will be a rolling program with the goal of improving the ongoing consistency of our earnings and, of course, protect us, should rates begin to fall. We also know that the rate environment has an impact on these market-facing revenues.
We've seen less IPOs, less M&A, and less bond issuance. That does also have a knock-on impact on balances. However, we are seeing early signs of stability and indeed improvement. You'll see in the deck, we had average balances of $34 billion last year, but we closed the year with an exit rate of closer to $30 billion. What really happened, you know, and caused this decline in Q4? The changes were really down to three main factors. One, we sold our bankruptcy and claims business. Two, the reduction of SPAC balances, and three, some cyclicality in CCT. To be clear, we haven't lost balances to anyone else. There's no structural or significant competitive intensity issues here. Our legacy balances were reasonably stable, excluding the SPACs, that we don't earn much on anyway.
In CCT, bond issuance, which generates some of the new balances to replace runoff, has been well down in the market. Our FY 2024 guidance to balances is always based on the current balances at the time we give the guidance, and that's why FY 2024 forecast has come down in line with FY 2023 actual. Encouragingly, balances have been stable over the past few months, and over time, we expect issuance levels to grow and balances to recover. It's just part of the cycle, and I know that Nick will talk to balances a little bit later. Of course, our main focus was on our core business lines, driving core fee revenues. Core fee revenue grew across all our major business lines. In issuer services, governance services continued to grow.
Registry grew modestly due to a lack of IPOs, which caused a follow-on shortfall in registry work for newly listed companies. Transaction revenues and employee share plans recovered in the second half after the abnormal period in the first half. We continued to roll out the EquatePlus product, and data shows that we're able to gain market share where that system is deployed. US Mortgage Services returned to profit in the second half as we worked hard to reduce the cost base and benefited from lower amort. We also had a full year contribution from CCT, our US corporate trust business, which we're integrating to plan and delivering the expected synergies. We're also simplifying Computershare so that we can intensify our focus on growing our core businesses and deploy our capital in high-quality businesses with higher returns and more recurring revenues.
As I said, we sold a bankruptcy and class actions business in May this year. We're also working on options available to us in our mortgage businesses. All up, Computershare navigated these volatile market conditions well, effectively doubling management EBIT. These results reflect Computershare's ongoing commitment to build and invest in strong businesses with high-quality, recurring fee revenues, with the optionality to higher rates and improved market conditions. Before I hand over to Nick, just some commentary on costs. Importantly to note, you know, all the costs of operating the business are recognized in EBIT ex MI. We manage costs carefully at Computershare. We've always done that. As they say in Scotland, "A penny saved is a penny earned," that's really our mantra. The cost discipline drives operating leverage and are part of today's results.
Our operating costs rose last year, up over 5%. However, there are early but encouraging signs that inflationary pressures are now moderating slightly, and of course, we're evaluating further efficiency opportunities across the group. We're anticipating BAU OpEx costs to be up around 3% in FY 2024. With very low maintenance CapEx requirements and the emphasis on capital-light sub-servicing in US mortgages, our free cash flows are typically very strong and should improve further now that most of the CCT stand-up costs will be behind us. We will continue to maintain a conservative balance sheet with acquisition firepower and deploy these cash flows to strengthen our businesses, make attractive acquisitions in our core, drive technology innovation, and importantly, reward shareholders. Let me move to outlook, and we show that detail on page seven, and I'll talk to guidance for FY 2024.
This year, Management EPS is expected to increase by around 7.5% in FY 2024. Let's just me unpack that a little. We do expect EBIT ex MI to grow around 10%, with the strongest contributions coming from issuer services, Employee Share Plans, and mortgage services. Margin Income is expected to be higher in FY 2024 at around $840 million, as higher net yields offset cyclically lower balances. Our interest expense is also set to increase by around about $30 million, reflecting higher borrowing costs, and as I said earlier, BAU costs will be up around about 3%. We had strong momentum in the second half, and the team are energized about the year ahead and the task at hand. Of course, this is opening guidance with a full 12 months to go before you see the scorecard.
Guidance this year is a little bit more sensitive to client balances, simply because headline rates are higher, and therefore changes are more meaningful. We have locked in a good portion of the Margin Income to de-risk future earnings, and we'll continue to optimize our balances as much as possible to enhance returns. I'll now hand over to Nick to take you through the financials.
Thank you, Stuart. I'll start with our financial results on slide five. Total revenue for the group increased 27% over the PCP. Excluding margin income, it was up 4%. Encouragingly, recurring revenues improved to 84%, helped by CCT. MI increased 323%, reflecting the rises we've seen in global interest rates. Total operating expenses were up 10%. This includes a full year of CCT. Adjusting for this annualization effect, underlying BAU OpEx was up 5.6%, net of the benefits of our cost out programs. You can see this more clearly in our OpEx bridge on slide 16, where we also show the benefits of our ongoing cost out programs. These were $37.9 million in FY 2023, with more expected in FY 2024. Details of future cost out benefits are included on slide 48.
Otherwise, cost inflation has started to moderate in the second half, and we anticipate overall OpEx inflation closer to 3% in FY 2024. EBIT doubled to just over $1 billion, and the EBIT margin improved over 1,000 basis points to 31.8%, both largely attributable to the higher MI. Excluding MI, EBIT was down 25%. Transactional and event revenues tend to be higher margin than our ongoing core client fees, whilst EBIT ex MI also bears the full weight of the inflationary impact on our cost base. We do not attribute any costs to our MI revenue line, despite the integrated nature of our model. As you heard earlier, EBIT ex MI recovered in the second half, up 70% versus the first half, and we expect this trend to continue further into FY 2024 to be up around 10%.
Note that we do expect a similar split between the first half and the second half for EBIT ex-MI in FY 2024, with EBIT more evenly split across the halves. This difference is largely the MI contribution. Interest expense doubled to $138.7 million, with the average cost of debt in the second half, 6.94%. Notwithstanding our lower overall net debt position, interest expense will be higher still in FY 2024, given a full year of higher rates. All our debt is at floating rates to act as a natural hedge to MI in the event rates do fall. As you'd expect, income tax expense was also higher, doubling to $249.4 million, whilst the ETR increased to 27.4%.
This was largely due to Canadian cash repatriation, driving withholding tax. Management NPAT was up 89% to $662.4 million, similarly, Management EPS was up 89% to $1.097 per share. Statutory results are on slides 49 and 50. Statutory NPAT was up 95% to $444.7 million, with a difference largely attributable to the amortization of non-MSR acquired intangible assets of $70.7 million, acquisition-related expenses of $85.6 million, $29.3 million associated with our cost out programs, and $22.5 million related to the impairment of UK mortgage services and voucher services businesses. I'd now like to move on and talk about margin income, starting on slide eight.
Starting with the FY 2023 result, we delivered $775 million in MI at actual rates. At FY 2022 FX rates or constant currency, the result was $792 million, an overall yield of 2.28%, and in line with disclosures in May, albeit the mix is somewhat different. I'll now turn to our guidance for FY 2024. We're now expecting $840 million in MI for the year. To be clear, this aligns entirely with the outlook we provided in May. There, we said we expected $860 million in MI for the year. The difference between the two is, again, simply FX. I'm sure a number of you are thinking: Shouldn't MI for FY 2024 be higher? After all, global interest rates have risen since May.
The answer to that is, well, yes, rates are higher than back in May. The rate rise has been offset by lower than expected balances. We now expect average balances of $29.8 billion for FY 2024. This compares to the expectation of $31.7 billion that we had in May. To the actual average balances of $34 billion that we had during FY 2023. Why have our expectations changed so much? The chart on the bottom right of this slide attempts to explain this. Perhaps the first point to make is that our average balances of $34 billion are themselves a reflection of a mixed year. In the first half, average balances were actually around $37 billion due to higher activity levels in corporate actions and corporate trust.
In contrast, average balances for the second half were a fair bit lower, around $31 billion. Let me bridge this in parts. Firstly, between 1H and the average for the year, we were down $3 billion. This was largely made up of $1.5 billion in corporate trust balances across both the U.S. and Canada as a result of lower issuance. $0.5 billion in issuer services due to lower corporate actions, and $1 billion in runoff of SPAC balances. From the average for the year of $34 billion to our disclosure in May. At this point, we anticipated average balances for FY 2024 to be around $31.7 billion.
This reflected the sale of KCC, which was around $1 billion, a further $1 billion drop-off in CCT issuance, a little bit more of a slowdown in corporate actions. This was really where we were at the end of March, which formed the basis of our disclosure at that Macquarie conference. However, as we entered the fourth quarter, we saw some further deterioration. Firstly, CCT issuance slowed again in April, whilst the residual SPAC balances also moved away. Note that we, we didn't really earn any MI on these SPAC balances anyway. Now, the positive news is that since April, balances have been broadly stable. We closed the year with exit balances of $29.8 billion, this forms the basis of our FY 2024 guidance.
This is consistent with our balances in May and June, whilst July was marginally higher, giving us confidence in the guidance we've provided. To be clear, our guidance for FY 2024 is based on actuals at the end of FY 2023. We simply project forward from the exit rate. We're assuming balances to be broadly flat through the year, so we expect exit balances at the end of FY 2024 to be at levels similar to those of today. This approach to MI guidance is our standard methodology, and so in part, also explains why things have changed since our last disclosure. As Stuart indicated earlier, guidance this year is far more sensitive to rates and to changes in balances. We set this out in a bit more detail on slide nine.
As you can see, a $1 billion movement in balances could have a $50 million impact on PBT. That's simply taking our average cash rate for the year and applying it to the $1 billion of exposed balances. Quite a contrast to a few years ago, when $1 billion movement in balances might have only had a $250,000 impact. In terms of rate sensitivity, a 25 basis point movement will have an impact to earnings of around $22 million. On this slide, we also set out our rate assumptions for the year. These are all sourced from Bloomberg as of the 10th of August. What is encouraging is that we now expect an improved recapture rate across the board in the high 90s as a % of cash rates, reflecting bank appetite for deposits in the current environment.
I'll complete the MI story with slide 10 and talk about our hedging strategy. The total hedge book at the start of FY 2024 is $8.9 billion. This portfolio will deliver $250 million of MI in FY 2024 as part of a total MI value of $1.2 billion over the life of the hedges. Most of the $1.2 billion will be received over the next 5 years. $8.9 billion represents around 36% of our exposed portfolio, and our intent is to try and take this to around 50% to really protect and stabilize MI earnings over the medium term. We want consistency versus the sugar hit and subsequent decline.
We take a laddered approach to hedging such that we look to trade through the interest rate cycle, so we expect to add around $300 million of incremental hedged balances per quarter over the course of FY 2024, with each investment adding around $75 million in total MI lifetime value. Rolling this forward, by this time next year, we'd expect our portfolio to represent around 50% of our exposed portfolio, with a total MI value of $1.5 billion, with the majority of this $1.5 billion flowing through to revenue over the next five years. I'd like to finish with some comments on our balance sheet and cash flow on slide 17.
In the period, we generated AUD 623.6 million of net operating cash flow, representing an EBITDA to cash conversion rate of around 51% at actual rates for the full year. 50 per... 6% in the second half. Free cash flow for the year was AUD 511.1 million. This is after the integration and transition expenses incurred for CCT of around AUD 80 million. Net spend on MSRs was AUD 70.6 million. This compares to amortization expense of just over AUD 100 million, which is helping us reduce the level of invested capital in the business to around AUD 685 million, down around AUD 110 million on the half.
Net debt, excluding non-recourse SLS advanced debt, is just over AUD 1 billion at year-end, some AUD 230 million lower than at December, obviously driven by the strong earnings result. This underpins our improved leverage ratio of at 0.85 times, and is facilitating the AUD 750 million buyback we have announced today. With our positive earnings outlook and strong cash generation, we anticipate being able to fund the buyback whilst also being in a position to invest in accretive M&A, should we choose to do so. I'll now hand back to Stuart.
Thank you, Nick. Close to wrapping up now, but page 18 really shows a high level, sort of 24 priorities. We're very close to completing the systems integration out of Wells Fargo and CCT, and this has been a huge technology and business change undertaken, and one that's gone pretty well to date and should be completed on time. As someone who grew up doing system migrations at CPU, I'm particularly proud of the team's performance to date on this task. As we mentioned before, we are focused on US Mortgage Services. Pleasing to see it return to profit. More work to be done there, and we should have more news on the strategy there by AGM time. We continue to assess new M&A opportunities to strengthen the core business lines and, of course, the recurring revenues.
It's pleasing to see the value of our Equatex acquisition coming through in very strong second-half results, and we'll continue to deploy that technology in other markets. Again, another large tech project that we're reaping the benefits from. As you can see, Computershare is performing strongly, and the model is working well. We're pleased to deliver record results with more to come. Margin income gains are very welcome, of course, and we will use that cash flow wisely, but we'll also be focused on building more recurring revenue across the group, strengthening our moats, using technology to become more efficient, adding more value to clients, and simplifying the portfolio. Thanks very much for dialing in, and we're now going to open the line for questions.
Thank you. If you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star 2. If you're on a speakerphone, please pick up the headset to ask your question. Your first question comes from Kieran Chidgey from Jarden. Please go ahead.
Morning, Stuart and Nick. Couple of questions, maybe just starting on some of your commentary around Margin Income balances. I think, Stuart, you said in your commentary, early signs of stability and improvement. Can you just sort of unpack in a little bit more detail on a month-by-month basis, what you saw through the June quarter and what you're seeing so far through July? Also, just comment around sort of the SPAC and CCT losses over that quarter. I presume the SPAC number's unlikely to come back if that's regulatory change based. Just on CCT, whether or not you sort of see those lower balances as being driven by a lower market issuance, or whether or not there's sort of any concerns around market share within that business.
Yeah, sure. Look, look, I think that the, the, the balance story was really sort of, you know, March and April. Sort of coincided around with the sort of, you know, mini U.S. banking crisis, a little bit of a flight to safety, et cetera, et cetera. That-that's where we sort of saw the sort of CCT, sort of balances, sort of, you know, shift, perhaps out of interest-bearing and into MMF, a little bit of a flight to safety there. You know, when, when I sort of analyze the, the balances within that business, they were, you know, very steady through May and June with no changes, and in July, we've actually seen them creep up again. That's really what we're sort of seeing.
Now, I mean, the balance is there, just to your point about what's happening in the market. I mean, as you would know, sort of bond issuance is a fair way down, and you've got a little bit of a run-off there. Look, I, I don't think it's a competitive pressure. It's just sort of the nature of the market, sort of cyclical. You know, we're hoping that that market settles down. I've always said that it's actually the uncertainty of the rate environment that sort of causes of the bond issuers to be a little bit hesitant in terms of, you know, issuing new. Even though rates are high, interest rates are high, you know, we're not seeing that sort of real rate uncertainty that we did throughout this period.
You know, the, the SPAC stuff, to your point, you know, there was some sort of regulatory changes on that. SPAC balances moved out, you know. It was, we didn't earn a lot of income on that. You know, we did see improvement in some balances come through in issuer services and corporate actions. They actually had quite a strong June, as, as, as, you know, it had been sort of weak throughout the year, but that was positive as well. You know, it, it's, it's always, you know, you know, a little bit difficult to predict balances, but we've got, you know, a, a sort of, you know, a sort of relatively sort of positive outlook on how the market's sort of generally settling down at the moment.
You know, hopefully, we'll see the increases that we've seen in July, you know, continue throughout the rest of the year.
Thanks. Just a second question on EBIT ex Margin Income. Sort of working through the maths, your, your guidance seems to imply around 10% growth in that line year-on-year in 2024. Just wondering if you can unpack a couple of the key drivers in your mind around that, particularly interested how much you're assuming in terms of any rebound in transactional revenue activity or, you know, in the case of Employee Share Plans, further increases in some of the trading activity we saw through second half.
I, I think that when we're looking at sort of EBIT ex MI, you're right. We, you know, we are expecting it up sort of 10% in FY 2024. Of course, some of that's going, you know, at this early stage, has to be assumption-led. We think the main drivers of that will really be our issuer services business, our plans business, also our mortgage business, just from an EBIT ex MI perspective. You know, we're not, you know, factoring in any sort of heroic changes to the corporate action environment. I think it will be a little bit stronger than we saw through FY 2023.
We expect sort of that modestly up, but most of the growth that we're looking for in Issuer Services is gonna be coming through, continued good performance and, you know, entity management, governance services, as well as, you know, a little bit of a full year benefit we've had from some, you know, fee increases that we've, planned to do. You know, our, our plans and, you know, Employee Share Plans and vouchers, you know, we, we think that. You know, we, we talked a lot about latent earnings power in that business, and as, as you know, when there was a sort of great attrition going on, a lot of our clients were issuing stock wider across their organization, deeper into the organization. They tend to have a 12, 24, 36 months of vesting period.
I think what we're, we're seeing is, you know, we're now getting it, that the value of, what, what our clients issued for the companies, and we sort of saw that come through in the second half, albeit helped with the sort of fairly buoyant equity market. We, we, we think that will continue. Our teams have worked incredibly hard in, in US Mortgage Services on Costa, we'll continue to get the benefit of that. In mortgage services as well, we should see, an improvement at an EBIT ex MI level as well. Yeah. Bit of amort in there as well, of course. Yeah. They're really the sort of the core areas where we're expecting to see, you know, increases across the business lines.
Well, thank you.
Your next question comes from Ed Henning, from CLSA. Please go ahead.
Hi, thanks for taking my questions. Just following on from Kieran, can you just talk about how much growth you're anticipating in FY 2024, related to the US Mortgage Services business? If you strip that out, how much lower your guidance would be? As a first question.
That's a good question. look, like, I think that, you know, in terms of just at an EBIT level, you know, we are expecting probably round about, roughly round about $30 million growth in that particular business through FY 2024. In terms of stripping out, even if we were able to, you know, strategically remove that business from us, with the time it would take for regulatory approvals, it would be unlikely that it would go in FY 2024, Ed.
Okay. Okay, now, that's, that's helpful. Then just a second one, you talked about, increasing some fees. Can, can you just touch a little bit more on that, around what divisions you have been able to increase fees? Where, you know, you potentially do see some pricing power, can this offset inflation? Are these lagging a little bit, so you'll still see some benefits flow through, this year and then potentially in the future?
Yeah, look, look, look, fees are clearly, you know, part of the nature of that is the underlying contracts with our clients. Some of them allow sort of CPI, some of them are capped at certain levels, some of them are, you know, 24, 36 month reviews, et cetera. There's lots and lots of ways. I mean, obviously, it's been quite a focus. You know, we've seen, you know, like most businesses, our costs go up, and, you know, our way to recover that is some fees. There is some lag on that, you know, fee increases that have been put in place throughout the second half of the year, we'll get the full year benefit of that sort of coming through, especially, you know, in areas of issuer services, et cetera.
You know, there's also certain types of fees that are a little bit easier to put up pricing. You know, they're not contractually based. You know, some of the fees paid by shareholders and/or employees, et cetera, we've got a little bit more flexibility in terms of what we can do from a pricing perspective. You know, like, I think from a competition perspective, you know, as ever, there's little pockets of aggressive pricing, you know, from some smaller players and some of our businesses around there. You know, generally speaking, the competitive landscape is, you know, fairly positive. It's always a work in progress. We've always got to push harder and harder on this type of stuff.
I think also the, the other point to add on, on fees, Ed, is that we have increased a range of fees on, or a range of pricing on our transaction fees, but because the revenue... because the volumes have been lower-
... just generally, because of market activity, you've not seen that come through the P&L, but it's just another example of, of the lag effect, that when volumes come back in transactions, we should see the revenue come back a little bit stronger.
Okay, that's great. Thank you very much.
Your next question comes from Andrew Buncombe, from Macquarie. Please go ahead.
Hi, guys. Thanks for taking my questions. Just the first one from me is in relation to capital management. You've announced the AUD 750 million on the buyback. How should we be interpreting that in the context of your M&A pipeline? Thanks.
Yeah, so look, when we look at sort of capital management and, you know, how, how we feel about that, we, we look at it, you know, across M&A pipeline, we look at it at, you know, reducing our debt, you know, and then we consider sort of buyback and dividends sort of holistically, as far as returns are for shareholders. I don't think you should be reading any sort of signaling as far as, you know, M&A pipelines are dry, therefore, we're giving back to shareholders. This is really about balance. You know, I, I think, and, you know, discussions, you know, with the, with, with our board, it's about finding the balance, you know? We've got strong cash flows.
I mentioned earlier on that, you know, these cash flows aren't and the free cash flow number, you know, should improve now that we've got a fair amount of the CCT expense down. We're still anticipating sort of growth next year and that free cash flow coming in. The balance sheet supports a balanced view. We will have the ability to execute some of our M&A pipeline that, you know, will add value to the group. We'll have capacity to pay down debt. We reduced debt by, you know, between 12% and 13% in FY 2023, and I've got a tranche of USPP debt in March, that we'll probably pay down. That still gives us plenty of headroom to support the increased dividend and also the buyback.
It's, it's much more about finding that balanced approach, rather than sort of trying to signal anything to the market about, you know, whether it's, you know, lack of M&A opportunities or other things. It's just, you know, we, we talked about the, you know, the, the, the balance sheet improving as a result of, you know, higher margin income and, you know, I think it's the right thing to be able to give back to shareholders.
That's fair enough. My second question is interrelated to that, related to the leverage ratios. Historically, you've provided guidance. From what I can see, it happens FY 2024, but those leverage numbers are going to be considerably below previous targets in FY 2024 anyway. I'm just interested to hear how you're thinking about those leverage ratios over the medium term, or given the current interest rate environment, would it be fair to assume that we're going to be well below those old numbers for some time? Thanks.
Yeah. You know, for, for a, a number of years, we talked about the neutral zone at Computershare being 1.75 to 2.25 net debt to EBITDA, the ratio. That, that was how it is. I, I mean, clearly, we- we're in a very different place now. You know, the, the, the, the world's a bit of a different place. You know, we, we have been rethinking that strategy. You know, we wanna take our time. We wanna get it right, we want to have it be considered, and as I said, balanced. You know, that, that old 1.75 to 2.25, we put that on the shelf. It's not gonna be our target.
You know, I think in, you know, in a little bit of an uncertain world, I think it's good to be where we are from a balance sheet perspective. We're comfortable being, you know, well below that target, but, you know, we will con- continue to consider it, at the group and at the appropriate time, sort of publish a perspective on it.
Great. That's it from me. Thank you.
Your next question comes from Simon Fitzgerald, from Jefferies. Please go ahead.
Hi there. Thank you for taking my questions. The first one just relates to the amortization charge. Nick, if you could give us a bit of help in terms of how to think about that for FY 2024. I can see that there's been a change back to the 9 years in terms of the MSRs, which would obviously help you a little bit in terms of reaching the EBITDA target as well, but maybe if you could just give us a handle in terms of what to expect for FY 2024?
Yes. Sure, Simon. We changed the policy at the half. Effective first of January, the amortization on our performing Mortgage Servicing Rights changed from eight years to nine years, really reflecting the underlying useful life of those assets is actually above nine years, and as you can imagine, runoff has, has slowed considerably in, in the last year or so. It was nine years for a day.
It was nine years. As we saw lots of refi coming through in the marketplace, therefore, reducing that useful life, you know, we prudently reduced it, which resulted in the increased amort charge. Now, as a result of higher interest rates, which means higher mortgage rates, the runoff is practically non-existent, and people are not refi-ing at the moment.
Useful life has really extended out, so we just actually reverted back to the initial policy of nine years.
What I would say, Simon, is as Stuart says, we reverted back to our traditional policy of nine years. We also saw some capital re- recycling transactions in the second half. We sold some MSRs, which further helped the amortization expense in the second half, and you saw that those sales come through in the cash flow statement. Really, the way to think about amortization going forward is that the second half expense is really a proxy for amortization going forward. You know, I think in FY 2024, amortization will be in the region of $80 million, something or something like that.
Okay, that's, that's helpful. Thank you. Then, Stuart, just on the mortgage services business, obviously, it's been pretty tough again. We've got six halves in a row, I think, of EBIT ex MI losses. In terms of selling the business, if you can't find a clean exit, can you sort of talk to us about other sort of strategies, perhaps, you know, selling MSR portfolios or, you know, and how much is the actual platform worth within that capital that's there of $680 million?
Yeah. So if, if we think about the business and its component parts, you've got the, the MSR portfolio, and then you've got the, the servicing business, which, you know, think of it as a platform business. Then you've got the sort of the, the CMC co-issue ability to actually acquire MSRs in the market, sort of chunk of the business, and then you've got some of the ancillary revenues, you know, which is sitting at the side. Think about it in these sort of four elements. As, as we sort of go through that process, I mean, clearly, there is a preference where, you know, you'd be able to have someone who was interested in taking all of it. It'd just be the cleanest exit.
However, you know, we have worked a sort of, sort of dual strategy. There's a lot of interest in this, the MSR book. You know, it's one of the biggest MSR books in the US that would become available, and because origination is fairly low at the moment, because of rates, you know, that's, that's seen as a valuable component. There's also groups out there that are looking for a platform and want to do the servicing component, and also the, the CMC co-issue part is seen as valuable. When we, when we do that strategy, you know, it's not just a search for someone that would take it all. You've always got to have the, the other alternatives.
You know, the sum of the parts might actually be a little bit more valuable, but what's the execution risk, et cetera? You know, we, we factor that all in as, as we sort of go through that process. I think, you know, on, on the flip side, you know, I, I think that the business has done a great job at taking costs out. We did return it to profitability in the second half. We've got more costs out coming back. You know, to, you know, the question earlier on, we do expect Mortgage Services to give quite, you know, a decent sort of, increased contribution through FY 2024.
Look, I think we've got a fair amount of, you know, optionality in terms of the business, but, you know, we'll see how that plays out in the coming months.
Excellent. Just a final question, I know we've explored this a little bit today, but just on the CCT business, perhaps sort of the outlook for fees, just given, you know, lower levels of bond issuance, but also whether they have a good level of visibility in terms of what's coming up, particularly in the ABS and RMBS issuance space.
You know what? Look, if you look at RMBS, you know, the overall market is probably down around about 45% at the moment in terms of deals, et cetera, just at a market level. I think what is interesting for me, though, and, you know, if you remember when we bought this business, we said that, you know, one of the things that we wanna do is what we did up in Canada, which was really about looking at the average per deal, you know, sort of revenues. Forget the margin income side, right? You know, the average per deal and trying to grow that over time.
You know, and then I, I kind of been comparing sort of, you know, sort of 1H 2022 versus our 1H 2023 numbers and, the number of deals that are actually out there, and, you know, the, the deals, you know, are down a little bit, there's no doubt about it. What's interesting for me is we've, we've moved in over... since we've acquired that business from maybe around about an average of $10,000 a deal to almost close to $18,000 a deal, right? Just in terms of what we're actually been doing. That's a really, really positive message, right?
You know, volume of deals are down around about 19% across the, the whole sort of group, you know, but, you know, our deal-based revenue was actually up, you know, almost 30%, sort of, you know, first half, sort of, you know, looking at calendar year 2023 and calendar year 2022. I think that's, that's been part of our strategy in terms of trying to sort of drive the value up in that particular business. Yet, I mean, you are right. You know, the, the market's down at this time. We'll work to regain some of some market share in some of these areas. You know, you know, I, I think, you know, it will come back. You know, no doubt about that. It's just, it's, as I said before, it's.
It's not so much that interest rates are high, it was just the real uncertainty on rates. You know, we're going through a period with now, where, like, no one's expecting 75 basis point increases, right? Coming down or multiple ones of them. Things are settling, and, you know, the balances are telling us, you know, very stable over sort of May and June and increasing into, into July, that there may be some green shoots there. I'm not calling that out yet. I think it's a little bit more stable.
Thank you. Very clear.
Your next question comes from Andrei Stadnik from MS. Please go ahead.
Good morning. Can I ask my first question around what are your M&A target areas? You know, what do you think in terms of timing of potential deals?
We're pretty clear that the M&A that we want to do are in our existing core businesses. You know, we defined that earlier on in the year. You know, we're looking at opportunities within issuer services, we're also looking at opportunities with employee share plans. There's a range of sizes of these opportunities. You know, you'll start seeing some of these flow through, you know, over the next three to six months as, as we sort of work on these, or, or certainly try to get them to do a close. The point is, you know, M&A will be focused on existing verticals, you know, issuer, employee share plans, and corporate trust.
Gotcha. Thank you. Can I ask, then, around the just the SPAC balances? Can you just remind us why SPAC activity impacts your margin income balances, and, like, through which division does that come through?
Well, we've just always included them in our balances, Andre, simply because they were, they were cash balances. Historically, they haven't earned much in the way of margin income, if anything, simply because of the agreements that we had with those, with those clients. As we've said, most of those balances have now moved, moved away as that sort of SPAC, SPAC boom, if you like, has, has come to an end.
Thank you. look, my, my final question, if I can ask this to Stuart, and look maybe a little bit more personal, but, you know, you've had long successful tenure as a CEO, now, what else would you like to achieve for CPU?
Look, it's... There's an awful lot still to achieve in CPU. It's really about the people that we work with, the teams that we create, the culture that we create, what we can deliver for, for customers. You know, I'm super energized with all the work that we've got on. You know, there's always more things to do. You know, if we exit businesses, we have, you know, stranded costs that we want to get into the, there. The ability to look at new technologies and deploy them to make the business even better. There's, there's a lot to do. And, you know, we're also sort of building, you know, over multiple years, a great team, and it's a great culture.
You know, it's a real privilege for me to continue to be able to be part of this organization, and continue to drive it forward.
Thank you.
Your next question comes from Nigel Pittaway from Citi. Please go ahead.
Good morning, guys. I wondered if I could, first of all, return to the margin balances. As you say, the process for setting guidance is relatively mechanical, in that you just take the balance at 30th of June. You have also talked about green shoots in CCT. I know it's difficult, there's a number of moving parts, but where you sit now, do you think guidance for balances being flat on 30th of June is more likely to prove optimistic or conservative?
Look, it really depends on where you think the cycle is. As I said, you know, the CCT sort of, you know, sort of bond issuing stuff, it's really about that sort of, you know, uncertainty in the rate environment that seems to be sort of calming down a bit. I think that there is opportunities for balances to grow, you know, in, in corporate actions. You know, they weren't that flash throughout the year. But, you know, we call it how we see it as it is, and, you know, I think there's, you know, there is opportunity that balances will be higher throughout the year. And, you know, if that's the case, you know, obviously we'll, you know, inform the market at the appropriate time. But, you know, that's really how I see it.
There's definitely opportunities for, you know, improved balances throughout the year.
Okay. That's great. Thank you. Then just maybe sort of on US Mortgage Services, I mean, obviously you've mentioned that, that should be a pretty strong contributor to EBIT margin income growth in 2024, but it does sound as if that's pretty much all cost driven. Question was really just on the revenue outlook. I mean, obviously I understand why things such as other service revenue are pretty subdued at the moment, but do you see any sort of green shoots, I guess, in, in respect to the revenue side on, on mortgage servicing?
Yeah, Nigel, I think, you know, the first thing to, to say in US mortgage servicing is that we've seen really good growth in the, in the servicing portfolio over-
... over the last, over the last 12 months. You know, as, as Stuart said, the, the management team there have done a good job, not only in terms of managing costs, but actually getting out into the market and winning some, some new business. We've got some really good marquee clients, and, you know, we're proud of what we've been able to do there. We do see ongoing portfolio growth over the next, over the next 12 months. Obviously, the from a revenue perspective, we're continuing to transition more to sub-servicing as, versus owned MSR. Of course, as you do that, it kind of dilutes the revenue growth, simply because the revenue from a sub-servicing perspective is lower than it would be if you owned the MSR. We'll see, we'll see ongoing improvement in the servicing portfolio. We're pretty confident about that.
Obviously, also, runoff is slowing, but the revenue growth might not be in line simply because of that change in mix. It'll come through also in the, the amortization line.
Then, just in terms of those sort of recycling MSR trades that you've done in second half, I mean, are they done with, you know, a number of partners? Are they done with a single partner? How have you sort of approached that this time around?
Typically, we've got, we've got two or three key partners that we work with. Typically, what we'll do is we'll identify a pool of MSRs that we that we think is appropriate to sell. We'll go out to a selection of capital partners, and we'll get prices. We'll get bids on those pools, and you know, we'll, typically, we'll take the best, the best deal that we can, that, that we, that we can negotiate. Different partners will have different needs or different interests in terms of the type of MSR that they might have, might be wanting to buy at certain times. They also have different levels of funding capacity at certain times. It's always, you know, to get best execution, we'll tend to typically go out to two or three people.
Okay, maybe just finally, I mean, just on the answer, on the sort of revenue question, it sort of sounds like you're not expecting any sort of major change in terms of level of foreclosures or, or, you know, things such as that, fulfillment, volumes, et cetera.
We, we think that We're assuming that the market conditions in US mortgage servicing are pretty consistent with where they are today through FY 2024. We're not anticipating a major change.
Yeah. Okay. Thanks very much.
Your next question comes from Scott Russell, from UBS. Please go ahead.
Morning, all. Question on the balance sheet capacity, please. The slides... I'm on slide 17, the $2.5 billion by the end of FY 2024. The similar calculation in May, I think you produced a slide saying maximum capacity was $3 billion. I don't think the dividend or the buyback is a factor there, but I do hear you on your comments around reconsidering the leverage ratios. Perhaps on slide 17, can you just explain how the columns there are calculated, the M&A firepower?
Yeah, yes. What, what we've, what we've assumed, Scott, is that the maximum leverage that we could take on is 2.5 x. We've assumed EBITDA is about 5% higher, and so the maximum leverage range gets us to very simple 2.5 times our EBITDA. We've also refined our cash flow forecasts for FY 2024. In our previous disclosure, we'd really looked at a very simplified cutback assumption or estimate around cash flow, that basically said, if we could spend the maximum possible amount on M&A, what would that be? What we've, what we've now done is, we've gone through our more detailed guidance for FY 2024. We refined that cash flow estimate.
We've updated our CapEx, we've updated our dividend assumptions for FY 2024, which weren't reflected previously, to get to that, what we think is a maximum M&A firepower of $2.5 billion. As I said, whilst we're comfortably below the EBITDA leverage range that we've had historically, it's still there, and so we wouldn't be comfortable going much more than 2.5 x leverage for a big acquisition. That's the underlying assumption there.
Could you maybe pro forma this a little bit? The $2.5 billion before the $500 million US buyback, there's another $150 million odd of dividend that you've just declared. That brings us down into $2 billion, and then within that, are you allowing for the EBIT that you would acquire?
I suggest that we take this offline, Scott, in the interest of time.
Okay, sure. Just one other bigger picture question then. There was a reference to ESPs as being a focus area for, for M&A. I know you're deploying EquatePlus into North America at the moment. Would the M&A that you think about in ESPs be more focused around the US or Europe, noting that ESPs is a pretty competitive area amongst the wealth giants these days?
Yeah, it, it, it wouldn't be in North America. You know, we, like, we, we are pretty strong there at the contributory type plans. You know, they're the small scale, sort of retail shop workers saving, you know, $20 a pay packet or whatever. As you point out, there is intense competition at within the wealth management providers in the US. Difficult market for us to play, and has been for a long time, unless we can resolve a wealth management solution. M&A activity will probably be guided outside of the US.
Okay, I'll leave it there. Thank you.
Your next question comes from Siddharth Parameswaran from JP Morgan. Please go ahead.
Good morning, gentlemen. Just a couple of questions, if I can. Firstly, just on slide eight, just the FY 2024 expectations on yields on hedged exposed balances. They haven't risen very much, the 2.83 versus the 2.69 hasn't increased very much, and it's materially lower than the, than what seems to be out there in the current interest rate environment. You know, particularly versus the 5.13%, which you're flagging on the exposed non-hedged. I was just wondering, should we expect that to continue to increase as some of the, some of the hedges from the past roll-off?
Just on your margin income, I mean, as we look forward into, you know, 2024, 2025, I mean, that number is definitely lagging the current yield environment. I'm just wondering if there's anything else which we should think of as to why that number might continue to lag, or if it should actually go up?
Yeah, Sid, it, it, it is lagging, and, and it will lag simply because the book is a representation of the book today that's been built up over time. So, you know, a fair amount of that book, probably 50% or so, was put in place more than 12 months ago, so rates were materially lower then than they are now. That's really what explains why that yield on the current hedge book is in the sort of 2.75%ish range. You're absolutely correct. The current current swap rates are, are, are higher than that, so as the book churns and we add more hedging over time, I expect to see that yield go up.
I, I think when we sat here 12 months from now, that yield will be much closer to 3. I think over the, over the next, over the next few years, my expectation is that the, the steady state yield on that hedge book will be over 3%, and that would, that would be far more aligned with where those sort of medium-term swap rates are. It'll just take us a little bit of time to get there, simply because we've got to allow that book to churn.
Okay, great. Okay. Just a second question just on, on hedging. Just are there any restrictions on how much of your portfolio you actually can hedge? I mean, just, you know, bearing in mind that effectively you're doing it for P&L purposes, but there's a functional mismatch versus the, the client balances. I'm just wondering if there's any rules around it, any regulatory requirements or... Are you comfortable getting up towards that 50% hedged versus the exposed non-hedged?
In terms of regulatory restrictions, there are no regulatory restrictions. In terms of the nature of the hedging that we might do, some of our client contracts would allow for fixed rate deposits, and some would allow for term, you know, for example, if it's escrow money. There we have, you know, flexibility to use fixed rate term deposits. Otherwise, we're using broadly interest rate swaps, which are, which, which are, you know, swaps that we are taking on, and there are no restrictions in any of our contracts or of our, or of our operational frameworks to prevent us from doing those swaps.
That's really why, as a policy, we put some, you know, certain parameters around the levels that we're prepared to go to, to manage, you know, our liquidity risk and to manage, you know, the propensity that we might, you know, that we could see a, you know, significant liquidity cause, which would cause us a challenge. That's why, you know, we're only really now at... Or for FY 2023, we were at 50%, sorry, we were at 30%, 36% or so. We think that we'll go to 50% in the next 12 months. You know, in the current environment, 50% is broadly about where we are comfortable going. Now, clearly, within that 50%, the book will churn.
If balances start to come back and we see a, the, the book going back to previous levels, then, you know, we, we may want to add a little bit more. I, but I think in terms of the, the near term, we're not thinking that we're gonna go much much over 50%.
Okay, thanks. Just one final question, just on the below-the-line cost, the, the quite substantial, I think it was $89 odd million of acquisitions related to integration expenses. Just wondering, I mean, to be honest, that number came in quite a bit higher than I was expecting. Just your guidance for FY 2024, should we expect that number to drop materially?
It'll, it'll drop a little bit in, in 2024. Remember when we did it... When we did the CCT acquisition, we, we called out that there would be significant stand-up costs attached to that acquisition that would be going below the line, and that, you know, the large part of that $89 million is the CCT stand-up costs. Obviously, we get through the TSA at the end of, or the end of October, November, you'll see once we've actually got, the, that business on our environment, that those costs should start to, drop away. You know, I expect it to be a bit, a fair bit lower in FY 2024.
Thank you, for your answer.
There are no further questions at this time. I will now hand back to Mr. Irving for closing remarks.
Well, firstly, thank you very much for joining us. as ever, lots of data that we've put out today. enjoyed the questions. Look forward to seeing many of you over the coming days. Thanks again.