Those of us who lived in Victoria, there's a sort of saying when we start a press conference or a meeting like this, which is: "We're good to go," anyhow. The premier who used to say that is now gone. We are good to go, and good morning, ladies and gentlemen, and I'm very pleased to welcome you to today's AGM. We also take the opportunity to welcome shareholders who are watching this AGM via live stream. A recording of the AGM will be available on our website after the meeting for those shareholders who are unable to join us today. Shareholders who are in the room today will have the opportunity to ask questions during the AGM. I encourage you to ask questions.
I'll do the easy ones, and I'll pass the more difficult ones on to my colleagues. As we have a quorum for this meeting, I'm pleased to declare the meeting officially open. I would like to start this meeting by acknowledging the traditional custodians of the land on which we are meeting and pay respect to elders, past and present. I will start by recognizing our directors who are in the room with me in Melbourne today. They are John Fraser, Manda Trautwein, Jennifer Douglas, Mal McHutchison, David Hornery, and Mette Schepers. We're also joined by Yien Hong, our company secretary, and our auditors, PricewaterhouseCoopers, represented by Sam Garland.
Of course, you all know the executive management team, our CEO, Joseph Healy; our Deputy CEO and Chief Relationship Officer, Chris Bayliss; our CFO, Andrew Leslie; our CEO, COO, Lisa Frazier; our CRO, Frank Versace; and our Chief Third Party Officer, George Abeid, and our Chief People and Culture Officer, Jessica Lanteri. I would also like to welcome our Judo Bank employees who are present in this room and virtually. It has been another year of growth and momentum for our company as we continue on our path of building a world-class business bank. At our full year results in August, we announced that Judo had achieved or exceeded the targets set by the board, including profit before tax of AUD 107.5 million, and a loan book of over AUD 9 billion, with depositors providing AUD 6 billion for us to lend back to Australian businesses.
This clear progress demonstrates that our model resonates with our customers and that we have the trust of the SME community as we continue to deliver on our key strategic commitments. However, as a board, we express our disappointment at the market's reaction and the performance of our share price against these solid achievements. It's important to note that our culture at Judo is supported by a very high level of equity ownership across the company. Your board and management team hold a significant amount of equity in this business, with some members making the decision to purchase more on top of this. Management's variable compensation is largely delivered in equity, and together, management, directors, and employees own around 8% of Judo's stock. Judo's ownership mindset is a fundamental tenet of our culture.
We are thus highly aligned with you, our shareholders, in wanting to see the business deliver for us all. And like you, we are frustrated with the current share price against what we have achieved since achieving our banking license in April 2019. When we presented what I and the board considered a sound full-year result in August, we were all taken aback by the fall in our share price. We asked ourselves, was this a verdict on strategy, the results themselves, or what some may perceive as uncertain times ahead? Over the past weeks, I have met with Judo's substantial shareholders to listen to their feedback and their views on this, and I welcome your additional perspectives today. While there are a range of views, no one took fault with our singular core strategy of a small business-focused bank.
It has been noted in some of these meetings that Judo is often viewed through the lens of a traditional bank financial model. That is not how we run our bank. Judo is unique and more agile in so many ways, and we have a range of levers we control to ensure we manage returns against our risk appetite, always considering the dynamics and operating environment of our business. What came across loud and clear in these meetings is that our clear strategy, our uncomplicated business model, our specialist offering with a focus on relationship banking, are absolutely resonating, but that we must continue to focus on delivery. It's important to note that the fundamentals and economics of our business model have remained firmly as we set them at the outset.
We remain clear on how we will achieve our core financial targets while taking acceptable levels of risk. We continue to have a very strong belief that over time, the fundamental economics of our business are capable of delivering a return on equity in the low to mid-teens. We have a clear customer value proposition, which is differentiated by service, speed, and judgment. We offer a simple set of products that meet the needs of a large addressable market. Equally, we have a robust funding strategy with term deposits at the core, complemented by wholesale funding through a sophisticated treasury function. What we must not do is react to the short-term vicissitudes of the market, but rather listen to where we might need to do it better in either explaining or reporting our plans and progress and improving the clarity of our numbers.
We have been fortunate to have strong support from a number of blue-chip investors, many of whom have supported us from well before the IPO, and some before we even had a banking license. We thank these investors for their support and patience. It is essential for us to continue engaging with the investment community to find more long-term investors to support us, as we continue building our business to scale and beyond. This year, we welcomed 78 new team members and now employ over 550. Our team provides personalized service to more than 3,800 SME customers across numerous industries nationwide, as well as over 35,000 deposit customers. The latter benefiting from highly attractive deposit rates across a range of maturities.
I also want to highlight today, our dedicated teams in technology, cybersecurity, operations, finance, and treasury. Those behind our digital face, who provide support to our deposit customers, as well as our bankers, through a range of capabilities and functions that combined make up a dynamic bank. There is no doubt in my mind that our presence has had an outsized impact on competition in the banking market, whether it be in small business, SME, now being rediscovered by the major banks, or in term deposits, where the inertia tax still rules. We have definitely shaken things up. We know from feedback and our high Net Promoter Scores, that we are seen as a bank that consistently backs business. Our relationship-centered model is a competitive advantage in these uncertain economic times.
The value of the direct relationships our bankers have with our SME customers, the in-depth knowledge of their businesses, help our customers navigate the current economic challenges, as well as the opportunities they face. Maintaining our strong risk management framework and robust governance practices is crucial to the sustainability and success of our bank, as we operate in a complicated regulatory environment. Our experienced management team deeply understands the inherent risks in banking, and the importance of risk management is a key function of every member across the business, from the board down. This will continue to be the measure of our model. FY23 has been a foundational year for Judo's environmental, social, and governance strategy. Sustainability and social responsibility will continue to sit firmly on the leadership agenda, particularly as we face into the ongoing evolution of climate risk disclosures.
A large part of sustainability at Judo means supporting our customers in the changing landscape. Although early in our journey, we are committed to the ongoing alignment of our business practices with sound ESG principles. I want to pay tribute to the team of Judo, who are committed to our purpose of being the most trusted SME bank in Australia, and every day deliver exceptional banking services for this critical sector of the economy. While we still have a lot to do, we have the right model and the right culture to deliver our strategy and to build for the long term. I'm proud of the contribution we are making and the competition we have brought to the SME sector in Australia. I want to thank our shareholders for your continuing support, and I will now invite our CEO, Joseph Healy, to provide his insights for the year.
Well, thank you, Chair, and may I also extend a very warm welcome to everyone in the room and online to our second AGM as a public company. I want to start by thanking all of our shareholders for their support. In just four years since being granted our banking license, Judo Bank has reached profitability faster than any other challenger bank globally. We have now established ourselves as a viable alternative to the incumbent banks, having brought back the craft of SME banking to the Australian market. As our Chair highlighted, we have met or exceeded all of the financial metrics we set for ourselves since the IPO in November 2021. Like you, as a significant shareholder in this company, management and the board are incredibly frustrated and disappointed that none of this progress is reflected by the equity market.
We want nothing more than to see the share price improve, and we are working hard to help the market better understand the unique nature of our business model. The current share price implies our return on equity will never improve beyond that we reported in financial year 2023. I want to emphasize that we have a very clear path to return on equity above our cost of capital, and we are making strong progress with this plan. We continue to have very high conviction that we will deliver and show ongoing improvements in the returns, and our share price will reflect the value that we've created through our unique business model. Financial year 2023 was an exceptional year for Judo. As well as exceeding our guidance, we celebrated several major milestones.
As the chair mentioned, we grew our team to over 550 employees in 18 locations nationally. The strength of our brand in the employment market is exceptional. We continue to recruit among the best bankers in the market and continue to be pulled by our customers into new regions. We grew our loan book to AUD 9 billion, or by 46% to 3,800 customers in FY 2023, and our deposit book grew by AUD 6 billion up by 46%, with 35,000 term deposit customers. We signed committed warehouse facilities of AUD 3 billion, exceeding our target of AUD 2.5 billion, giving us significant flexibility from a funding perspective. We completed our first benchmark senior unsecured transaction, our first term securitization transaction, and our second Tier Two transaction....
We have also just announced our inaugural AT1 transaction. This was a long-planned capital initiative that is only now possible that we've achieved sufficient scale. We are delivering on our strategy. The Judo management team and board consists of very experienced business bankers with first-hand experience of navigating through all parts of the economic cycle. We are drawing on our collective experience to prudently manage the business now for continued growth and returns. We have also recruited amongst the most experienced business bankers in the market, whose credit skills are tested extensively and who, on average, have 15 years of experience, and they are supported by a very experienced credit team of credit executives with, on average, 25 years of experience.
We understand the challenges facing the SME market better than anyone, and have been proactively adapting our appetite for lending in certain sectors as the economy continues to evolve. We are cautious about sectors that will potentially be impacted by reduced household discretionary spending. However, we have a much more positive outlook on sectors within the economy, such as agriculture and health. In line with the broader banking industry, we saw some pressure on the lending margins through financial year 23. Pleasingly, however, our pipeline margins are improving. At our results update back in August, we indicated that our pipeline margins were 25 basis points on average above our existing book. This positive trend in pipeline margins has continued as a result of a disciplined focus on risk-reward pricing.
There is also evidence that risk-based pricing pressures have somewhat eased in the SME market, as banks address NIM deterioration, driven by higher funding costs and intense competition in the household mortgage market. While there is a renewed focus by some banks on the SME sector, we are very confident that our differentiated CVP and our size, being less than 2% of the market, together with the power of specialization, gives us the ability to be nimble, with levers available to adapt quickly to changing conditions. There is no question in our minds of our ability to achieve a gross lending margin of 450 basis points, which underpins our at-scale NIM target of above 3%, operating at all times within approved, board-approved risk settings.
The impact of return to normal interest rate settings is still working its way through the economy as household budgets adjust. We anticipate that this transmission of higher interest rates has another 12 months to play through. We have given extensive disclosures on our credit quality portfolio, and while it's inevitable that we will see some increase in arrears and impaired loans as our book seasons, we reported in August that as of 30 June, we had 0.41% of our 3,800 customers in 90 days past due or impaired. Our credit quality metrics remain comfortably below industry benchmarks. It's also important to note that arrears do not automatically translate into losses, given our proactive approach to working with customers and our strong security coverage.
We are monitoring the financial health of our customers very closely, and one advantage of our high touch model is that we can engage at Point Easy to assist when issues are emerging. This is in contrast to that what you see in other banks that have less resources focusing on their customer base and tend to adapt, and tend to get involved at a much later stage, at Point Hard or Point Complex. I do want to emphasize that we have consciously been building strong diversification of our customer base across industries and geographies, with an average loan size of AUD 2.3 million. In terms of funding, we have a robust funding strategy, underpinned by term deposits and complemented by a whole range of wholesale funding channels.
Term deposits are a highly commoditized, price-driven product, and we are uniquely positioned to sustainably pay competitive rates for term deposits. Our major competitors for term deposits are largely mortgage-based banks with a NIM of 2% or lower. As a specialist SME lender, we have much higher spread on our assets, enabling us to pay attractive TD rates without sacrificing our long-term economics. Our term deposit base is now over AUD 6 billion, and the strength of our brand continues to improve, as evidenced by high customer retention rates and a high net promoter score. We have complemented our term deposit strategy with a comprehensive wholesale funding strategy. We now have largely the same tools in our toolkit as other more established banks, with warehouse facilities, NCDs, senior unsecured debt, term securitization, and hybrid capital.
The higher funding costs across the sector in part reflects the banking industry having to replace some AUD 188 billion of the RBA's Term Funding Facility, the so-called TFF. The refinancing of the TFF was always going to place pressure on deposit pricing, but we believe this is temporary rather than a structural adjustment. While deposit margins have been somewhat volatile since the beginning of the calendar year, as the sector has been repaying the TFF, we have seen strong inflows, and our recent TD margins have largely been in line with our long-run expectations. We expect industry NIM pressures will see deposit rates return to historical settings once the TFF is no longer a feature of bank funding models. From a Judo perspective, we are well advanced in the refinancing of our TFF, and we'll have this completed by June 2024.
Today, with more undrawn capacity in our warehouse facilities than we have outstanding on our TFF, meaning that we could repay the TFF at will, if we so desired. To continue scaling, we are making a number of strategic investments. We have very clear visibility of our cost base and how it will continue to grow as we invest in technology. While we'll be growing our employee base in financial year 2024, beyond this, we do expect cost growth to moderate. We remain very confident of our ambition of a CTI that is approaching 30%, with many domestic business banks and international challenger bank peers reporting similar ratios.
On capital, as many of you know, we have raised AUD 1.5 billion of equity capital as part of a carefully sculpted plan, which will enable us to reach a point of being capital self-sustained. Hybrid capital and capital relief, term securitizations, are now options available to us to augment our capital growth and our funding growth. Before concluding, I do want to say a word on the myth that all smaller banks are competitively disadvantaged. This one-size-fits-all framing ignores the specialist and unique nature of Judo Bank and the fact that we are legacy-free. I've already touched on some of the characteristics and metrics that make Judo unique and not a mini-me of the larger banks. Being a smaller, more agile, nimble bank, soundly funded, with deeply experienced management team and a crystal clear strategy, is a unique strength, not a weakness, of this very special bank.
In time, the market will better understand this. Of that, I am very confident. Our conviction in the long-term prospects of our business is as strong today as ever, and the opportunity for Judo remain vast. It is difficult for any of the bank, incumbent banks to replicate what the unique characteristics of Judo Bank's business model. We will continue to run our own race, continue to execute on our strategy, working towards our vision of building a truly world-class SME business bank. Finally, I would like to extend my warm thanks to my colleagues and to our board for their passion and hard work over the past year. And to you, our shareholders, thank you for your ongoing support as we continue to execute against our plan. Thank you, Chair, and back to you.
Thank you, Joseph. We will now move to the items of business for this meeting. The notice of meeting was dispatched to all shareholders on the 26th of September, 2023, and I propose to take that as read. Any shareholders who wish to ask questions at today's meeting will need to show the Judo or Link staff their yellow or blue shareholder voting card first and make their way over to the, over to the standing microphone. There will be an opportunity to ask questions at the end of each item of business, and again, at the conclusion of all the vote, voting items. Please note that there are, is a limit of two questions per shareholder. Voting during this meeting is by being conducted by our share registry, Link.
If you have already lodged a proxy, you will not be able to vote again unless you advise Link when you registered your attendance today that you wish to change your votes. All other shareholders here with us in the room who have not yet voted will be able to vote using the voting cards provided by our share registry. The meeting has been convened to consider the FY 23 financial reports, and the 3 resolutions are set out in the notice of meeting and explanatory materials. There is a voting exclusion in relation to the vote on the remuneration report, and the approval of leaving entitlements, as explained in the notice of meeting and explanatory materials. The resolutions put to the vote at the AGM will be decided by poll.
For all those shareholders who are in attendance, who have already provided a proxy and do not wish to change their votes, there is no need to vote again. Moving to item one. Item one of the notice of the meeting is to receive and consider reports of directors and the auditors, the income statement, balance sheet, and cash flow statement for the year ended June 30, 2023. There is no requirement for directors to approve these reports. Are there any questions or comments on the tabled and ordered consolidated financial reports for the company and its controlled entities for the period ending June 30, 2023?
There are no questions, Chair.
Thank you. Item two is the re-election of the director. The next item of the business concerns the re-election of Mal McHutchison as a director of Judo. I'd like to invite Mal to say a few words.
Thank you, Chair. Is that microphone working? Yep. Okay, good. Good morning. Over the last three and a half years since joining the board of Judo, it has and continues to be a pleasure to serve as a non-executive director. I serve on the Rem and Nom committee as well. I believe over my time, I've significantly contributed to the ongoing success of Judo. By way of background, my career started in the finance industry many years ago, and the earliest part of my career began with a variety of roles in the finance arm of General Motors, known as GMAC, where I was in the front line of broker financing, credit, collections, and securitization.
Relevantly, I spent over three years in the investment bank at Macquarie in Sydney, where I sat on numerous boards for them and was involved in a number of capital raises, exits, and public market preparations. Over my career, I've been fortunate to have been a CEO across three different businesses, from banking automation to IT services, and now in education, where I'm presently the group CEO of Modern Star, the largest provider of educational resources in Australia and backed by one of Australia's largest private equity groups.
... This present day CEO lens on the business sector, culture, and performance allows me to contribute uniquely to the organizational makeup here at Judo. I'm particularly focused on supporting and developing the technology team, as well as supporting the board in their consideration of technology-related matters. I complement the skills and experience of my fellow directors, and as both the CEO and in the banking industry, believe my operational experience remains useful in the guiding and stewarding of the bank. I seek your endorsement for re-election.
Thank you, Mal. I now move on to the resolution to be voted on by the shareholders, as set out in the notice of meeting and accompanying explanatory materials, which is taken as read, being the re-election of Mal McHutchison. The board has considered Mal's experience and knowledge and recommends, with Mal abstaining, that shareholders vote in favor of this resolution.
Are there any questions or comments from shareholders in relation to this resolution?
Thank you, Chair. There are no questions.
Thank you. I now ask shareholders to vote on the resolution only if they have not already done so by proxy or have already voted but advised Link that they wish to change their votes. I'll now pause for the votes cast prior to the meeting to be displayed on the screen. According to the votes cast prior to the meeting, which is displayed on the screen, 98.24% voted in favor of the re-election of Mal McHutchison. The results of the poll for votes cast today will be calculated by our share registry and released to the ASX shortly after the meeting. The next item of business concerns approval to adopt a remuneration report set out in the directors' report for the year ended June 30, 2023.
The vote on the resolution is advisory only and does not bind the directors or the company. However, any discussion on this resolution and the outcome of the vote will be taken into consideration by the Board Remuneration and Nominations Committee when considering the future remuneration arrangements of the company. Please note that there is a voting exclusion on this resolution. The Board recommends that shareholders vote in favor of this resolution. Are there any questions or comments from directors in relation to this resolution?
Thank you, Chair. There are no questions.
Thank you. I now ask shareholders to vote on the resolution only if they have not already done so by proxy or have already voted, but advised Link that they wish to change their votes and are not subject to the voting exclusion. I will now pause for the votes cast at the meeting to be displayed on the screen. According to the votes cast prior to the meeting, which are on the screen, 95.86% voted in favor of the resolution for the adoption of the remuneration report. The results of the polls cast today will be calculated by our share registry and released to the ASX shortly after the meeting. Item four is approval of leaving entitlements.
The next item of business concerns approval to give to benefits to executive key management personnel in connection with them ceasing to hold that office or position of employment with Judo, as explained in the notice of meeting and explanatory materials. Please note that there is a voting exclusion on this resolution. The board recommends that shareholders vote in favor of this resolution. Are there any questions or comments from shareholders in relation to this resolution?
Thank you, Chair. There are no questions.
I will now ask shareholders to vote on the resolution only if they have not already done so by proxy or have already advised Link that they wish to change their votes and are not subject to the voting exclusion. I will now pause for the votes cast prior to the meeting to be displayed on the screen. According to votes cast prior to the meeting, which are on the screen, 97.89% voted in favor of the resolution for the approval of leaving entitlements. The result, the results of the poll for votes cast today will be calculated by our share registry and released to the ASX shortly after the meeting. Moving on to general Q&A. Now that we have finalized the items of business, we will now address the questions that were submitted prior to the AGM and any questions from shareholders in the room.
I remind those present that any shareholder who wish to ask questions will need to show the Judo staff their yellow or blue voting card first and make their way over to the standing microphone, and I ask that shareholders limit themselves to two questions each. The questions submitted prior to the AGM are: For those investors who truly believe Judo's business model and subscribed at IPO, how should we view Judo's decreasing share price at this moment? Does the board and executive team think that current share price reflects Judo, the company's performance and achievements so far? Does the company have any plan to deliver returns to shareholders? Thank you for this question, which has been discussed both during mine and the CEO's presentations earlier in the meeting.
The second question, does Judo intend to diversify business in foreseeable future to add any other income streams other than lending? Thank you for this question. The answer is no. As a pure play SME business lender, we believe our simple product suite meets the needs of SME businesses. We have a significant growth runway, with less than 2% market share on the lending side, and for term deposits, which are less than 1% of the market. As such, we do not feel we should expand our product suite and add to complexity. While this may of course, be reconsidered over time, we'll always stay core to our purpose of being the most trusted SME business lender. Now, these were the only two questions submitted prior to today's meeting. As such, I'd now like to open for questions in the room.
If you'd like to ask a question, please make your way over to the standing microphone, and I ask that shareholders limit themselves to two questions.
Chair, I'd like to introduce shareholder, Craig Saunders.
Chairman, thank you for your directness in confronting the share price today. My question is: What will be the catalyst to see a reversal of what we've seen to date? I acknowledge that you've hit all your targets. You're dancing the steps right, but people don't seem to be liking the dance. So what will cause that change? Because at the moment, it seems that all the surprises are on the negative side. You announce a notes issue, the share price goes down. How do we shift where we are?
Yes, I smiled when you said that, because it seemingly, whenever we announce something positive, the share price doesn't seem to respond to that. Clearly, performance is key. And we're absolutely committed to that. As a small cap, we do suffer the syndrome of sitting in the ASX 300, so it's less attractive to the larger institutional investor. But equally, the team are earnestly searching for other long-term investors. I know they're off to Europe in November to talk to investors there. They were in Japan earlier this year. So there is a concerted program around expanding our investor base, expanding the number of people who are prepared to buy our stock. It's incredibly frustrating where we've ended up, notwithstanding the continued positive news.
Performance is key, as I've said, but also working hard around looking for and identifying new long-term investors. Thank you for your question.
Chair, I'd like to introduce Meena Wahi from the ASA.
Thank you, Chair, for addressing shareholders' concerns today. Can you just put your microphone down? Yes, that's better. Thanks, Peter, for your presentation. My question is more, you've touched upon this, and so did the CEO, but the shareholders are obviously concerned about the drop in the share price. And as a company that does not pay a dividend, how is a retail investor going to perceive or should perceive Judo Bank, if they wish to invest their, you know, retirement fund or their saving that they put aside for investment?
Well, I wouldn't want to give anything more than general advice to a retail investor. But, as you have seen from management and the board's actions, we've been buying shares. So that would be a vote of confidence in where we see the business moving. If your question is about relative TSR, then that also is something that management and the board, and particularly management, are highly aligned with when they have most of their variable compensation provided by way of stock. And, it doesn't, as you can well imagine, when the share price falls, their variable compensation has actually fallen. Fell, fallen as well. Their premium price options are well out of the money in all the instances that they've been granted.
So the incentive to management to ensure we perform and grow to meet the market's demands and thus the share price respond is quite clear.
Thank you.
Thank you for your question.
Thank you.
Chair, I'd like to introduce shareholder, Andrew Walden.
Hi. I haven't got a question as such, more a piece of feedback that hopefully is a bit constructive in terms of how to deal with this. I share your frustration at the share price at the present time. It strikes me that what Judo does have is the opportunity to show some leadership to the market, and perhaps that's in the form of reporting. I'm aware of things like Extensible Business Language. XBRL is a reporting language of digital reporting that's been available to the Australian market for over 10 years, and presently has absolutely nobody delivering their reports in that form.
If it's about storytelling and a question of explainability to the market, both in terms of investors themselves and also potential business development from new clients, perhaps XBRL is something that could be looked at as a reporting language that can add value to the business.
Andrew, thank you for your question. I can't say I'm an expert in XBRL, but your observation very much coincides with our thinking, particularly in how we market the business. And I know, for example, that the marketing team and our economics team have now started to show economic reports state by state, as we start to drive more understanding of how we see business conditions and further develop the brand and resonance of Judo with the market. All of that combined, hopefully over time, to see a response in our share price. Oh, my friend Chris is not gonna get up and ask a question. Well done, Chris. He said he was gonna give me a curly one, and he hasn't, I didn't give it to him. Any other questions from the room?
There are no further questions.
Thank you. Well, ladies and gentlemen, that concludes the business of this meeting. I now declare the meeting closed, and thank you for your attendance here today and for your support. Please see a Link representative to hand in your voting card. Feel free to stay and join us for refreshments with management and the board. Thank you.