Good day, and thank you for standing by. Welcome to Humm Group H1 2023 Results Conference Call. At this time, all participants are on a listen-only mode. After the speaker presentation, there'll be a Q&A session. To ask a question during the session, you will need to press star one one on your telephone. You will hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. To ask a question or comment on the web, please type your question in the box located on the left-hand side of the screen. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker, Rebecca James, Chief Executive Officer. Please go ahead.
Good morning. Thank you for joining us for our half year 2023 results presentation. My name is Rebecca James, CEO of Humm Group. I'm joined today by our CFO, Adrian Fisk. Today's results are an outcome of initiatives taken over the course of the past 12 months to align with our core offering in bigger ticket items and ensure that we're in the strongest position to continue to grow our business in a profitable and competitive manner. During the period, we've grown our receivables book by over 27% to $3.8 billion in the half, with the overwhelming majority of it in what we would call financing bigger ticket items for small to medium businesses and consumers. Less than 2% of our business finances small items in the buy now, pay later sector.
We provide an average loan of AUD 4,500 in our consumer finance business and an average loan value of AUD 100,000 in our commercial business. We've continued to invest and enhance our superior credit decision engine, which has delivered net loss to ANR of 1.95% in the first half 2023, a 90 basis point improvement on by PCP. In the current environment, we're acutely aware of the need to manage our costs. We've already removed more than AUD 14.9 million, including a reduction in marketing, payroll, and other operating costs. Our balance sheet position is strong and remains one of our key differentiators in the market with AUD 103 million of unrestricted cash, AUD 1.1 billion in warehouse headroom, AUD 100 million in undrawn debt, and a well-diversified and sophisticated funding platform.
This half, we've introduced our new measure of Normalised cash profit after tax. We believe this metric more closely represents cash performance and eliminates volatility for non-cash items, particularly depreciation and AASB 9 provisions, given the material receivable growth that is occurring in the business. For consistency and transparency, we'll be including both Normalised cash profit after tax and our previous metric, Cash Net Profit After Tax, in this result and also at the full year. Normalised cash profit after tax was AUD 38.5 million, with Cash NPAT of AUD 16.7 million. I'll provide a detailed walkthrough of this performance shortly. And finally, we've proposed a fully franked interim dividend of AUD 0.01 for the half. On slide four, you'll see the profile of our two businesses. Our vision is to be the favored way to pay for bigger purchases.
It's a vision that speaks to both our future and our heritage, spans our entire suite of products, and capitalizes on our strengths in funding and securitization. We often get asked how our two businesses fit together, and on this slide you can see the characteristics of each business. While the end customer distribution and purchase average transaction value differ, the core expertise of the business, what sits within its DNA in credit decisioning and management, along with funding and securitization, are leveraged to serve both businesses. It is that capability which enables us to deliver an exceptional customer experience in the areas of speed to, yes, a priority for our merchant and broker partners, and speed to sale and settlement.
On slide five, you'll see that in FY 2023, the company made significant progress in executing its strategy to streamline operations and reduce costs while improving profitability and growth in key areas. As we committed to at our FY 2022 results, non-core small ticket products, Humm New Zealand and Hummpro Australia and New Zealand have closed. All receivables will have run off, enabling the systems to be switched off and costs removed by the 30th of June 2023. We have also delivered substantially on our cost-out initiatives and removed AUD 14.9 million of costs half-on-half and are on track to deliver AUD 20 million to AUD 25 million of annualized cost savings going forward. Unprecedented material Central bank tightening drove a rapid increase in funding costs of between 300 and 400 basis points, depending on geography. To mitigate against this, the company has executed several pricing initiatives.
In our commercial business, while there was slight margin compression in the Q1, the front book net interest margin is now at a higher level than the prior 12-month period, an even stronger result when combined with volume of AUD 744.8 million, up 72% on PCP. Consumer repricing initiatives also commenced with a series of increases to merchant services fees, annual and monthly account keeping fees, and interest rates. Front book NSF yield in Humm Big things now sits 80 basis points higher than the back book, and the company expects further yield improvement in the second half. Turning to slide six, you can see our Normalised cash profit after tax to Cash NPAT walk.
Given the impacts of credit provisions, depreciation and costs associated with suspended products, we believe this removes volatility and is a more accurate reflection of the cash profitability of the business. Normalized cash profit represents statutory net profit after tax, adjusted for material infrequent items such as legal provisions, one-off transaction costs, restructure and redundancy costs, items which were previously included in cash NPAT. Non-cash items such as depreciation and AASB9 provisions and operating losses of suspended products notified to the market, Humm-pro, Bundle New Zealand, Humm New Zealand and Humm U.K., including related retreat costs, with these products ceasing to impact the business from 30 June. Normalized cash profit after tax is AUD 38.5 million, with 2% up on PCP, which reflects growth in Humm Group's core businesses within commercial, Humm AU Big things and the Australian and New Zealand cards business.
I'd now like to discuss the strong performance of our co-commercial business in the first half. The landscape of small and medium enterprise lending is rapidly changing. For the first time, non-bank lenders have overtaken banks in providing SME loans. With a total addressable market of AUD 45 billion in Australia and NZD 8 billion in New Zealand and an increasing preference to access finance via brokers, we are well-placed to continue our strong growth trajectory. Our focus is on delivering exceptional service to brokers who are our sole channel. As a specialist SME lender, we specialize in asset finance for capital-intensive businesses, and we see opportunities to broaden our industry and product offerings. Finally, we offer an exceptional SME experience with 24-hour approval and same-day settlement.
Our full spectrum of lending, from low documentation to full credit assessment, allows us to meet the varied needs of our clients, focusing on underserviced areas of the market. FlexiCommercial is the leading provider of specialist asset finance in the market, with over AUD 1.94 billion in receivables. Our business primarily offers equipment finance to growing small and medium-sized enterprises, which help them to fund the purchase of revenue-generating assets. Our top three assets being transport, construction, and light commercial vehicles. Our market-leading service is how we've stood out in the broker channel and has been underpinned by an investment in technology, which allows us to drive efficient decisions and differentiates us from traditional lenders.
80% of deals are decisioned on the same day, up from 45% just six months ago, and 39% of approved deals are automated, making us quicker, nimbler, and easier to work with than those traditional lenders. The commercial businesses continue to see excellent momentum. As you can see on slide 10, quarterly volumes have grown rapidly since the Q3 2020, with first half 2023 volumes at $744.8 million, up 72% on PCP. Normalised cash profit after tax is up 12% on the previous corresponding period to $19.3 million. We have seen net interest margin improvement in the Q2 of 2023. While we experienced slight margin compression in the Q1 due to the unprecedented increase in funding costs, the benefits of our repricing initiatives executed in the Q2 are now flowing through.
Our front book NIM is now higher than the prior 12-month period, which is an excellent result. We will remain disciplined on a go-forward basis to protect this position. Our commercial business benefits from broad-based sector exposure with industries, priorities in logistics, civil engineering, and agriculture. We prioritize assets that have strong retained value and strong demand on the resale market, ensuring low concentration risks. Our average ticket size is AUD 100,000, providing a diverse portfolio that can withstand fluctuations in individual sectors. I'd like to just touch on our strong credit performance and the strategies that we've implemented to achieve it. Our credit performance has remained consistently strong. The 30-plus days past due has consistently declined thanks to our improved underwriting, better collections capabilities, and improved systems.
The benefits of this investment can be seen in the delinquency chart on the bottom of the page, with only 0.5% of accounts becoming 30-plus days past due. We've also achieved volume growth while maintaining credit quality. Our net loss to ANR of 0.5% has improved 10 basis points on PCP. This is a testament to our disciplined underwriting standards and our commitment to maintaining a high-quality portfolio. On slide 12, you'll see our broker-led strategy is gaining significant momentum in New Zealand, with volumes up 173% on PCP. We have accelerated the adoption of the broker-led equipment finance model while also maintaining our existing profitable channels. This has allowed us to expand our market reach while continuing to generate strong returns from our existing business lines.
We've taken a page out of the Australian playbook. We've made refinements to suit the local market. We are confident that this approach will allow us to replicate the success of the Australian model in New Zealand. We're currently transitioning from a lower yielding government leasing business to equipment finance. While there's been a slight uptick in losses, we are still maintaining historical lows. We anticipate that our long run credit performance in equipment finance will be similar to that of our successful Australian business. I'd now like to talk about the performance of our consumer finance business for the half. I'd like to start by discussing some of the key dynamics at play currently in the consumer finance sector.
Firstly, as the market definition of buy now, pay later is attributed almost solely to small ticket paying for financing, which is less than 1.2% of total receivables, we've rebranded this segment to Point of Sale Payment Plans to more accurately reflect our products and services. The turbulence experienced by unprofitable players should not distract from the fact that this form of finance is preferred by both merchants and customers. After a period of intense competition, which has impacted back book yield, the playing field is starting to level with competitors who relied on unsustainable merchant pricing, often below the cost of capital, struggling in this new environment. Humm will be the beneficiary selecting merchants from the fallout who align with our bigger ticket strategy.
This is evidenced by the growth in distribution over the last two months, adding over 600 new points of presence and front book yield that is now 80 basis points higher than the back book. The sector is also awaiting The Treasury's review into buy now, pay later. Humm Group overall supports the intent of the options paper in increasing consumer protection. Humm Group supports bringing BNPL within the application of the National Credit Code to require BNPL providers to comply with responsible lending requirements, which are calibrated to the level of risk of buy now, pay later products and services, often referred to as Option two. Regardless of the outcome of the review, Humm Group provides finance in both regulated and unregulated segments, and we are well-placed to adapt and have appropriate systems already in place.
On slide 15, you can see the makeup of our consumer finance business. New Zealand Cards, Humm90, which is our Australian cards product, and Humm Big things are all point-of-sale installment products, enabling purchases of goods or services with a current average ticket size of AUD 4,500. Each of these products are profitable with room for growth. New Zealand Cards volume of AUD 381.1 million grew on PCP by 6%, with customer spending habits normalizing after the pandemic. In the Q1 2023, we saw a reduction in our receivables, driven by accelerated pay downs, which is consistent with the market and has been driven by surplus savings, as demonstrated by the graph on the right of this slide. We are encouraged to see that growth in receivables has recommenced in the Q2.
Normalized cash profit after tax was down by 26% to AUD 12.5 million. This was a result of lower gross income due to the accelerated pay downs and interest-bearing balances across the market that I just mentioned. Looking to the second half, our back book repricing initiatives executed in the first half will flow through and help improve our profitability in the second half of the year. On slide 17, you will see volume growth in our Australian Cards portfolio of 19% on PCP. That indicates that our customer's spending behaviors are beginning to normalize following the pandemic, but are still below pre-COVID-19 levels. AU Cards receivables are growing in line with our increased volume growth. However, due to the long-term interest-free period associated with these products, income from interest-bearing balances from our long-term interest-free volumes will be realized in future periods.
AU Cards normalized cash profit of $2.7 million was a result of lower operating income from lower interest-bearing balances and marginally higher funding costs, offset by reduced operating costs in response to the prevailing market conditions. Looking to the second half, strong volume growth in long-term interest-free travel in the first half of 2023 will translate into income in future periods, typically 12 months from our origination. Point of Sale Payment Plans segment volumes of $604.6 million was down 7% on PCP. This was driven by a return to growth in big ticket core volumes, which were up $22 million and reflects the run-off of decommissioned predominantly small ticket products, accounting for $67 million in reduced volume. Humm AU Big things normalized cash profit after tax of $8.2 million was offset by AU Little things and NET-A-PORTER Offshore.
In the second half, we expect increased diversification and improved pricing with a renewed focus on growth as the competitive dynamic materially changes. In relation to offshore operations and as announced at the AGM, Humm Group has ceased promotion and business development activity in England, instead focusing on growing the successful Irish business and has maintained a credit license to service merchants in Northern Ireland. This focus has seen volumes in the Irish business grow by 15% on PCP. In Canada, the business has come to commercial terms with more than 1,250 locations across Veterinary, Dental, Auto, Hardware, and Home, plus an additional 2,600 contractors within the home improvement industry.
Speed to scale has been a focus and software integration providing with access to an additional 6,500 dental practices and 2,000 veterinary clinics. The current market environment will see increased market share with higher yields as a result of targeted merchant onboarding. I'd now like to hand over to Adrian, who will walk us through the financials.
Thanks, Bec. Good morning. I'm here today to discuss the financial performance of Humm Group for the half year ended December 31, 2022. As Bec has mentioned, we have updated how we communicate our results to better reflect the underlying performance of the business. We have adopted a new measure, Normalised cash profit after tax. Normalised cash profit removes material infrequent items that have been previously captured as part of our Cash NPAT measure. It also excludes non-cash items such as AASB 9 provisions, which are required by accounting standards to be booked as we grow receivables. We note that actual losses and recoveries are still included in the Normalised cash profit measure. Other non-cash items, such as depreciation, are also removed. This line moves significantly between the period as we impaired assets this time last year, lowering depreciation in the current period.
Further, we've excluded Cash NPAT losses in our suspended products, which we expect to be wound down by June 30 this year. We consider that Normalized Cash Profit represents the best measure of our ongoing earnings for the Humm Group as we navigate this transition phase. For example, AASB 9 provisions were a tailwind in the prior period as COVID macro provisions were released, and they are a headwind in this period as we grow our commercial and consumer book. For consistency and transparency, we'll be including the Normalized Cash Profit measures, Cash NPAT, and the component parts for this half and the full year results. On Slide 21, we've shown a Normalized Cash Profit after Tax of AUD 38.5 million for the period ended December 31, 2022, which is up from AUD 37.9 million in the prior comparative period.
Gross income was up 10% to $243.7 million, reflecting growth in receivables across the commercial and consumer businesses. Net income is down over the period by $15.1 million, reflecting a squeeze in margin attached to rising cost of funds. I will cover this in detail on an upcoming slide. Our credit impairment comprises net loss and provision movements. There has been a $6.3 million improvement in net losses on the prior period, which has been offset by a $21.9 million provision swing between the periods. The prior period has $16.8 million in provisional releases. This year we increased provisions by $5.1 million, largely resulting from growth in the receivables book.
From a cost perspective, we are pleased with the reductions across marketing, people and other operating costs offset by certain costs during the period, which I'll also discuss. This leads to a Cash NPAT using the prior measure of AUD 16.7 million, which is a reduction in the prior period as a result of the reversal of the AASB 9 provisions of AUD 14.6 million, offset by the benefit that we received from lower depreciation. Our tax expense was AUD 5.2 million with an effective tax rate of 22%. This is lower mainly due to the recognition of offshore losses in our perpetual note interest. Finally, on dividends, consistent with our strategy day last year, the directors have determined that Humm will continue to pay dividends and set out a fully franked dividend of AUD 0.01, which equates to AUD 5 million.
We consider that it's important to strike a balance between dividends for investors and investing in growth. The amount is consistent with our previous guidance of 30% to 40% of cash NPAT. We will transition this measure to normalized cash profit following our discussions with our board in April, and we will update the market at our full year results. Consistent with the prior period, our investors will be able to utilize Humm Group's dividend reinvestment plan. On Slide 22, the Humm Group executive team have made good progress on our cash out initiatives and remain committed to our target of $15 million to $20 million as we transform the cost base of this business through modernizing our legacy products and technology platforms.
Putting aside the reductions in depreciation attached to impairments taken this time last year, we have delivered $14.9 million in savings from reductions in marketing that were focused on our small ticket suspended products, Little Things, along with our UK business. We have lowered our people cost and reduced our headcount by 126 in Australia and New Zealand over the last 12 months. We have moved our call centers from Adelaide and Auckland to Manila. We have also managed cost increases during the period, which have included our investment in offshore, which will reduce in the second half due to our decision in November 2022 to retreat from U.K. into Ireland.
There are two additional costs associated with the failed transaction with LFS. We have also calculated the notional cost associated with inflation and payroll on payroll and non-payroll costs. This slide sets out our cost to income ratio for the commercial business, the consumer business, and the consumer business, excluding costs associated with suspended products. As I said, we are proud of what the commercial team have achieved with our sub 40% cost to income ratio. We consider that this business has achieved operational leverage, which will enable us to grow without commensurate increases in costs. We are also implementing further technology enhancements across Australia and New Zealand to enhance our speed of decision and speed of yes, along with operational back-office improvements.
In the consumer business, we are targeting a 50% cost-to-income ratio and note that despite good progress in cost removal, this ratio has been affected by reductions in net operating income resulting from higher costs of funds and a squeeze in margin. If we eliminate the cost of fund increases, our pro forma CTI measure would be 53.5%. We continue to focus on a number of initiatives, including simplification of products, technology-enabled transformation, particularly in our call centers and back-office functions, platform cost reduction by migrating to the cloud, noting that we're experiencing higher OpEx as we migrate our point-of-sale payment platform to the global Salesforce Q2 platform. We recommit to our in-year cost savings of AUD 15 million to AUD 20 million and annual cost savings of AUD 20 million to AUD 25 million.
We are on track to meet our CapEx budget disclosed at the full year of AUD 18 million. On credit risk management on slide 24, our credit performance demonstrates the strength of our credit team and their long history of credit decisioning. We make this statement without hubris, as we are conscious that we are living in uncertain times, and we are keenly focused on early credit indicators. Humm Group has made investments in systems and in processes that have delivered over recent years and include a forward platform with digital identity, fingerprints, biometrics, automatic verification and authentication tools. We have comprehensive credit reporting, bank statements online for income verification, enhanced decisioning tools, and credit scoring. We have machine learning models and improved our collections capability.
These have directly contributed to lower losses. Further, we have been successful with our collection strategy and debt sale programs over the last 12 months, which have seen a material improvement in recoveries. The net loss to A&R for the group is 1.95%, which is a 90 basis point improvement on the prior comparative period. Big Things' net loss to A&R is flat at 2.5%. This has been stable for many periods, representing our long history in this market and focus on verticals such as Solar, Home improvement, Auto, and Medical. Little things' net loss to A&R has fallen to 2.7% as a result of closure of suspended products and reduction in volumes from Little things merchants.
AU and NZ Cards has improved over the period, and we are particularly focused on the NZ economy and impacts on more targeted interest rate measures. Commercial continues to demonstrate low losses, showing resilience in the SME sector and recoveries from a strong secondhand market. I note that this ratio is also benefiting from higher growth and a larger denominator, and we anticipate that it will normalize over time. On slide 25, we've included this table, we included this table at the first time at our full-year results to provide investors with transparency of the movement in net loss, AASB 9 macro provision releases and AASB 9 provision movements per product.
It highlights the point I made at the start of my presentation that net losses have improved significantly period on period, which benefited from reversals in macro provisions taken during COVID and reductions in provisions from improvement in those items that I outlined on the previous slide. While we have not seen any deterioration in losses or arrears, we have increased the macro provision in New Zealand slightly as we watch the unemployment metrics. We continue to maintain conservative credit provision settings, with credit provision coverage being 3.9% in consumer and 2.2% in commercial. While we are confident in our credit processes, we recognize that we are experiencing historical low credit losses, and the market is uncertain as we navigate through stimulus being removed from the economy, rising household costs and fixed rate mortgages rolling into variable.
We also historically see seasonal increases in losses from Christmas period. We are focused on the wind down of our suspended products. On slide 26, the treasury team have worked very well alongside our banking partners to execute a funding plan that positions Humm Group to continue to grow the business prudently. In recent years, we've been focusing on improving the capital efficiency of our balance sheet. We've introduced mezzanine in our facilities, which have had the effect of reducing capital employed in a warehouse from, say, 20% to 8%. This has freed up capital that has allowed us to continue to fund our growth. In challenging markets, we have executed well in the last half. Two commercial facilities, two commercial mezz facilities to ensure that we continue to invest in that business and drive growth.
We've executed a AUD 250 million commercial, a 210, Point of Sale Payment Plan term deal when some businesses were struggling to get deals away. We also have a AUD 150 million growth facility that has replaced our syndicated debt facility, which has enabled us to invest in the growth of our business, particularly the commercial business. This facility is more fit for purpose for the business, providing growth capital. We finished the year with AUD 102.8 million in unrestricted cash and AUD 50 million drawn on the growth facility.
The cash usage during this period predominantly relates to investment in the capital to support the growth of the commercial and consumer businesses. On slide 27, the last 12 months have seen unprecedented increases in the cost of funds, as swap rates have moved ahead of the RBA and RBNZ benchmark rate increases. Humm Group is disciplined on margin and focused on protecting and improving NIM. With a strong hedging program in place that has sheltered us against rate increases, we'd see our term books hedged to around 80% and our cards business hedged to approximately 60%. We perform detailed merchant by merchant, broker by broker analysis on pricing, along with a focus on the marginal cost of funds for each receivable originated by term. Where relationships do not meet our return hurdles, we have increased pricing or exited relationships.
We have moved pricing in the market across all products. Importantly, have recaptured our NIM in the commercial business that exists at the start of the calendar year 2022. Repricing the consumer book is more complex as we are limited in our ability to pass on pricing movements in areas like credit cards. In BNPL, we have moved rates across all verticals. The transmissions mechanisms take more time, given contractual notification periods and the time it takes for new volume to flow into receivables. For example, to install a solar panel. I know that we moved another 50 basis points in the last week. We expect the consequential NIM squeeze to take time to flow through the books as the back book repricing is replaced by front book pricing.
Further, it's worth noting the cost of funds has increased as we have secured mezzanine financing in our warehouses, which has improved the capital position and the return on equity, but results in a higher interest expense. On slide 28, with commercial, we delivered another strong half performance from the commercial team with volume at AUD 744.8 million, which represents a 72% increase on the prior period, with receivables growing to AUD 1.94 billion. The margin squeeze that we discussed in the previous slide impact commercial for about four months, and we are now seeing receivables originated at prices that reflect the current cost of funds observed in the earlier part of the year. This four-month squeeze occurs as we were unable to pass on swap increases to brokers at the same pace of swap rates.
The originations over this period will flow through the book and the P&L as back book yield and will be replaced by originations at higher rates. The normalized cash profit for this business increased by 12%, we consider that we are well-placed to continue to responsibly grow this book with two new warehouses and a corporate growth facility. On slide 29, we committed in prior periods that we'll continue to provide the detail of our value drivers to both the commercial and the consumer business to assist our investors understand the performance of the individual businesses. In commercial AU, volume growth continues to be strong with AUD 638.7 million originated in the past six months, taking our total receivables in AU to AUD 1.72 billion.
Product yield has improved to 9.8%, and our average front book pricing for the December month was over 10.5%. Cost of funds has increased with base rate increases, as well as MEZ that was introduced to this book in the last 12 months. Net loss to A&R is at a historic loss of 0.6% for the period and benefits from a large denominator that will normalize over time. In commercial New Zealand, volume increased to AUD 106.1 million from the strong growth that commenced in Q4 of FY 2022, as we established this broker business in New Zealand. Product yield is down to 10.4% due to mix in this product as we move to a similar business model as we have in Australia.
With cost of funds at 5.8%, you can see the impact of RBNZ tightening in the New Zealand market, along with a higher mix of originations in the last 12 months. Net loss to A&R again continues to be strong at 0.2%. This is enhanced by an older book of government assets. On the following slide, in consumer finance, we have seen a reduction in normalized cash profit of 7% to AUD 19.2 million, which is largely attributed to margin compression and reductions in receivables attached to pay downs in the Cards NZ business. On the following slide, in slide 31 in Home Australia, we've seen good growth in the Big Things business with volume of AUD 297.4 million across solar and health.
Front book product yield has benefited from yield enhancement initiatives discussed, and this has been offset by back book yield that was written in a very competitive environment, leading to a total yield of 14.2%, down from 14.9%. The cost of funds increased to 3.5% is largely base rate and market changes. The Normalised cash profit for Big Things was AUD 8.2 million, which is slightly down on the prior period, but this demonstrates that this is a profitable product. Little Things has reduced in volume by AUD 15.5 million over the period, as we focus on this being a companion product for Big Things.
The product yield to 9% has improved as we've increased MSF and max fee changes over the year. You can see that the yield benefit in Big Things versus Little things and the relative unit economics of these products. We're pleased to say that we have lowered the cash losses for this product to AUD 3.2 million versus AUD 6.1 million in prior periods. On slide 32, consumer finance cards. Volume and receivables have returned in Cards New Zealand, with product yield improving over the period. We note that in the Q1, we witnessed higher pay downs, and we have now returned to growth in the Q2. This period was also impacted by volatility in currency markets, particularly the Aussie New Zealand FX market.
The normalized cash profit for the business is AUD 12.5 million, which is down on the prior period of AUD 14.8 million. We are very pleased with the net loss to ANR of 3%. AU Cards has grown to AUD 266 million, with our travel partners beginning to return to growth. Yield has improved slightly. We note that travel growth will have a delayed transition to revenue as the products have a 9 to 12 month interest-free period. Normalized cash profit is AUD 2.7 million. We see opportunities to improve the scale of this business and lower costs. With that, I'd like to thank you and hand back to Bec to finalize.
Thank you. Now to outlook, which you'll find on slide 34. Humm Group is well positioned to navigate the current economic environment with a strong balance sheet, profitable products and leading credit capabilities. We'll continue to take steps to focus on our core and align to Humm's unique market position in financing bigger ticket purchases. Humm Group anticipates that it will deliver profitable growth across all products in FY 2023, with gross income increasing as volume and yield initiatives gain traction in the second half, with second half Normalized cash profit after tax anticipated to be higher than the first half. I'd like to conclude today's presentation and hand back to our moderator for today's Q&A session.
Thank you, ma'am. As a reminder to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. To ask your question or comment on the web, please type your question in the box located on the left-hand side of the screen. Please stand by while we compile the Q&A roster. I show we have a question from John Marr from CLSA. Please go ahead.
Hi. Thank you. Can you guys hear me?
Yes, we can.
Hello.
Thank you, John.
Okay, good. Good morning, guys. Just forgive me for if I ask any questions here that you've already detailed. I'm just jumping through quite a few different results this morning. You know, I'm a little bit confused by the market's reaction, to be quite honest. You know, I think, you know, as I go through your numbers, it's they look pretty good and pretty close to our model. In fact, I think you came on a net profit basis, you actually came in ahead of my model. I guess maybe I just wanna understand. You know, I actually thought that NIM could actually be under a little more pressure given the interest rate rises.
Maybe you could just help me understand what that walk looks like over the next, you know, couple half years, you know, as you reprice the portfolio and on both sides.
Yeah. Thanks, John. If I start with the commercial business. What we saw was a period of about four months where we saw a squeeze in margin as a result of swap rates increasing quicker than we passed on rates through to our brokers. And we're pleased to say that we've actually recovered the NIM from, we're back to the NIM we were at the start of the year, which is a good result. You know, there is some of that book that will sort of flow through the book, but all new originations will be originated at that sort of NIM pricing. You know, we think that's a good outcome.
We're also well hedged in those books, we're hedged about the 80% level, we have been for some time, we'll benefit from those hedges. You can see that we've got quite a large $66 million market gain on our derivatives, which represents the value that we've locked in on those swaps. In relation to the consumer business, you know, we have raised rates. We've raised rates in the Cards business. We're obviously limited a little bit in terms of just the size at which those rates can be in the market, we're sort of being very cautious around that. We have moved rates across, we'll start to see those flowing through into the next year.
Again, those books have been well hedged and we've outlined the cost of funds in both in the back e-edge of those slides, which actually has the cost of funds and NIM. In relation to BNPL, again, we've been moving through pricing since about June of last year, sorry. We've been moving both price increases and MSF increases. The transition mechanism's a little bit more complex here because, you know, we've got contractual repricing in terms of just the timing, and also it takes time to install solar panels, for example. They come through a bit slower. Again, we're gonna see that pricing increase. The critical thing is, we're actually seeing competitive dynamics. The real pressure that was on the competition abated.
We've seen opportunities, as Bec mentioned, most recently, to actually improve pricing as well. We'll still have part of this back book flowing through, I suspect, over the next 12 months, but we're originating strongly at the rates at the moment.
Do you think we can get some NIM stabilization going into next year, or is there some more compression? I know the front book repricing will have an impact there, but how do we look at NIM next year?
Yeah, I think we will get some stabilization, certainly. You know, I think we're anticipating that rates will sort of start to top out. I think the three-year rate is pretty flat at the moment. We're not seeing the three-year rate move materially and hope that it doesn't. I think if that three-year rate stabilizes, then we will have more stabilization on NIM. The biggest impact was that sort of four-month period where we saw just such a significant increase, 200 to 300 basis points in rates.
Right. Okay. On the commercial side, you know, pretty strong momentum there. I think I had that volume up 74%. You came in at 72, so pretty admirable. I mean, as we look at that business going forward, like, I mean, can you just give us some color around, you know, how the year-over-year growth rates look against these tough compares? Maybe help me understand, like, just how much the shift towards brokers is gonna drive new volumes.
Yeah. Thanks, John. We're still seeing very strong demand in both areas of our business, but particularly in commercial. Sentiment among small and medium businesses, has, it's showing to be really resilient. The feedback that we're getting from brokers, is very similar to that. From a second half trajectory, we're seeing very continued strong volume growth. Also as we transition our New Zealand business into this equipment finance business as well, that is driving a lot of growth for us. You know, from a commercial perspective, we see consistent growth going into the second half.
Also in our consumer business, I think we have been pleased that despite the flow on increases from a pricing perspective, our volume has continued to grow. That is also I think a testament, even though the consumer is a little bit more depressed, I would say, from a sentiment perspective, the verticals that we're in and our focus on necessities over wants, so still very strong growth for us in dental, veterinary, automotive, home, and home improvement. The growth outlook for us into the second half and just what we're seeing in January and February is very strong.
Okay. Okay, great. Let me just a couple more before I jump. I think you mentioned there was an uptick in charge-offs, in the commercial side somewhere. Can you just elaborate on it a little bit? Help me understand what's happening there.
Oh, no, I think, yeah. I think there was a, like, a minuscule uptick, I think of about 10 basis points
Okay
in the New Zealand commercial business. It's still 0.5%. It's less than 1%. Really that's us transitioning the business. Previously, it was a small ticket leasing business for small businesses. We had a big concentration in government. You know, again, historical low in that area of the business. We're seeing it track very much in line with our Australian business.
Right. I mean, I think, I mean, obviously we're way below normal in terms of bad debts and... Like as we move forward through the next few periods, I mean, do we see that normalize? Does that help, you know, continue to drive growth? Is that sort of a, could that be a limiting factor?
No, look, we think that, I mean, it will normalize in terms of the denominator effect that we have in the business. We're still very, we're not in terms of our early indicators and our view of the credits that we're currently writing, which is a lot of bank rate credit in that market. We're not anticipating losses to drop up at all. We, and we're quite positive of that market. As the banks, sort of, you know, as we compete harder and then we're actually getting more of their bank rate credits, and we think that will be good from a loss perspective.
John, we got a couple questions on the line that we might just switch to if you're okay with that. Moving to questions that have come over the webcast. The first question that's been posed is, can we expect any further one-off costs related to the change in product mix coming through in the second half?
At the moment, no. We are basically working through all of the sort of different products and sort of reducing costs. All the direct costs attached to those individual products are being reduced. We've taken the one-off items that related to the U.K. in terms of redundancies in that market. We have no further plans on that front. What we're continuing to work through is the shared costs and getting those costs down.
Great. I'll cover two more questions coming in from the webcast before we wrap up. The next question is, how confident are you that margins will improve into the second half? I think you've covered off on that one already, but any further comments on that, Adrian?
No, I don't think anything more than what I said previously. As we sort of mentioned, the front book, pricing is continuing to increase and, we're hoping that rates in the three-year market start to stabilize. You know, there might be some increase in that. You know, it's sort of hard to make these predictions in this market, just given the complexity that we're all looking into. But we're very acutely focused on NIM, as a business and, you know, we're laser-focused on the current cost of funds and originating assets at good prices.
Great. Final question from the webcast, apologies for those who I haven't been able to get to. We will look to respond to those outside of the call today. Final question coming through is, if normalized NPAT is the best measure for the business to, the best metric for the business, then why is the dividend based on, based on the Cash NPAT number?
Thank you. That is the right question to ask. We're currently in the process of discussing the dividend policy with our board, and we'll finalize that as part of our strategy in April. The challenge we had today is that we think that Normalised cash profit is the best representation of our cash and our profits moving forward. Given some of the adjustments, Cash NPAT is probably the best measure. You know, if you look back at our cash outcomes for the half, on which we paid dividends on the history, that it was the right measure for now. We will be updating that with the board. These things will start to normalize other than depreciation and provisioning.
Therefore, we'll be putting a new measure to the board and then to the market for June 30th.
Thank you very much. Back to operator, I think before we have our closing statement from Bec, this morning, please.
Thank you. I'm showing no further questions in the queue. That concludes our Q&A session. At this time, I'd like to turn the call back over to Rebecca James, CEO, for closing remarks.
Thank you for your time. Adrian and I look forward to meeting with many of you one-on-one over the coming days. Thank you very much.
This concludes today's conference call. Thank you for participating. You may now disconnect.