Good morning, and welcome to the Judo Bank First Half 2025 results briefing. My name is Andrew Dempster. I'm the General Manager of Investor Relations at Judo. I'd like to welcome the traditional owners of the land that we're meeting on today and acknowledge elders past, present, and emerging. Today we're going to follow our usual format. Firstly, we'll hear from CEO Chris Bayliss, who will provide an overview of the performance of the business over the last six months. Then we'll hear from Andrew Leslie, our CFO, who will run through the financials in detail, and Chris will then return to run through the outlook. We'll then have time for Q&A, and of course, our documents have been lodged with the ASX this morning, and the webcast is being recorded and will be made available on our website later today. On that note, I'll now hand to Chris.
Thank you, Andrew, and good morning, everyone, and welcome to our first half update. Now, before I get into the results, I did just want to talk to another announcement we've made today, that Peter Hodgson will be stepping down as Chair with David Hornery to succeed him. Now, David and I have, of course, worked closely together since we co-founded Judo in 2016, and I'm very much looking forward to the next chapter of the company with David. But I'd like to acknowledge the huge contribution that Peter has made to our company. In his time, you know, really as Chair since the very beginning, I'm delighted also that he's remaining on our board and Chair of our risk committee. Now to the results.
It's been a year since I took over as CEO, but as I've said many times, as a founder, this is just not a job for me. I love this company, and I'm passionate about its success. I've been involved in architecting the strategy since the very start, and so this presentation is simply confirmation that we've carried on with our momentum, continued to tick off many of the milestones that take us to our key business metrics at scale, and the most trusted SME business bank in Australia. Before turning to the detail of the results, I'd like to spend a moment on our Service Profit Chain, which guides me every day and reflects my core belief of how we will deliver value to our people, customers, and shareholders. Judo's purpose has always been to solve a market failure in the provision of financial services to the SME economy.
The market failure was created by the industrialization of the incumbent banks, resulting in a cookie-cutter approach to credit assessment, reflecting a general deskilling and disempowerment of frontline bankers. In a service industry, everything has to start with the people serving your customers. So our solution has been a return to traditional business banking, providing businesses with access to highly skilled, highly trained relationship bankers who are empowered to use their judgment to meet our customers' needs. When you build a company from a blank piece of paper, no legacy people is probably the most important opportunity in front of you. We've handpicked everyone that works for Judo, and it's my firm belief that the quality and engagement of our employees directly translates to customer satisfaction. In fact, find me any service company where customer satisfaction is higher than staff engagement.
This underscores the importance of culture to our success and is something I'm passionate about and I truly believe is a key differentiator of our business. This slide on your screen now shows the formula in practice. Our highly engaged team continues to deliver a leading NPS, which is delivering growth at multiples of system. This is translating to scale benefits and will allow us to sustainably deliver one of the highest ROEs in the sector. Now to the results. Over the past six months, we've successfully managed all the levers to produce excellent financial performance with profit before tax up 33%. Our lending growth remains well above system, supported by our unique customer value proposition and our expansion into the regions. NIM was strong with positive tailwinds, meaning that we've upgraded our NIM guidance for the second half and the full year. Expenses are also being very closely managed.
Our credit quality metrics have remained stable, and our impairment expense has benefited from proactive portfolio management initiatives, which I'll talk a bit more about later. At our full year result last August, we did highlight the significant operating leverage inherent in our business model, which has been masked by the TFF. Now, with the TFF completely washed through our numbers, along with strong lending growth and disciplined cost control, we're well positioned to demonstrate significant operating leverage in the second half of 2025 and beyond. Moving on to our lending franchise, we continue to perform very well. Over the half, we've added 15 more business bankers, taking the total now to 159, putting us ahead of schedule to recruit a total of 20 new bankers this financial year.
We've also added five new regional locations, half of our FY2025 target of 10, meaning we're now in 26 locations nationally and on track with our guidance of 31 by June. Our NPS remains leading, market leading at plus 51, significantly higher than any of the incumbent banks who are in low single digits at best, and we're achieving a good balance of growth and economics with margins on new lending consistently above the NIM thesis of 450 basis points. Over the next two slides, I will unpack our net lending growth, which reflects both gross originations and run-off. Our gross originations in December were actually a new record for Judo at AUD 2.3 billion. We really have maintained excellent momentum in the capital cities where our bankers are continuing to originate strong levels of new business while also managing larger existing customer portfolios. Our regional expansion has had tremendous traction.
Our proposition really resonates with regional customers where relationships are more entrenched, credit decisions are made on the ground, brokers less prevalent, and the other banks are withdrawing. Agri lending is actually now 5% of our loan book from a standing start of just three years ago, and given many of our Agri bankers have only been with us for a few months, our top line will continue to benefit as they ramp up their pipeline. Lastly, we're also leveraging our core capability in assessing business credit to incubate a warehouse lending business to support private credit and NBFIs that lend to SMEs. I mean, there really is a unique opportunity for us here with very few competitors. It really is another market failure.
Pleasingly, we also settled our first warehouse facility of roughly about AUD 50 million earlier this month, and we have a very strong pipeline of leads. Our overall pipeline of applications approved and accepted loans remains healthy at AUD 1.1 billion and margins all over 450 basis points, noting the seasonality in this figure. And this really does set us up well to deliver strong growth in the second half, and hence we are reconfirming our previous GLA guidance. Turning now to run-off, as we've flagged, we are focused on achieving an appropriate balance between growth, margins, and risk for our portfolio. Through the half, we've completed some proactive initiatives which resulted in higher run-off, but have also contributed to an increase in NIM and the lower cost of risk reported in this result.
One of the key advantages of our specialist model is our ability to proactively manage our portfolio at a customer-by-customer level, especially when it comes to pricing for risk. I mean, on average, our bankers have portfolios of just 28 customers, well below the industry average of roughly 100. This means if a customer is facing challenges, our bankers normally see the early warning signs quickly, and they engage with the customer very, very quickly. We always seek to work with customers, but there will be often occasions when we simply are not aligned on their future strategies, and when this happens, a funder with a different risk appetite may be more appropriate. We've also repriced some customers that were originated during the COVID TFF period when funding costs and hence the price of credit was much lower.
This included some customers showing signs of deterioration and where we're perhaps more disciplined in pricing for risk than our competitors. Pleasingly, we're not seeing a significant change in run-off due to increased competition. While the other banks are undoubtedly more focused on business banking, they are mostly competing for highly commoditized lending where price is the main lever or larger corporate loans that drive their market share. Our sweet spot always has and remains non-commoditized, judgment-based lending where the ability to structure is a key value add. Typically, they're loans between 2 and 15 million, where our CVP of relationship, speed, and judgment gives us a competitive advantage. Looking forward, we do expect run-off to moderate over the second half, and we also remain comfortable with our long-term thesis assumption of run-off of 20%. Finally, before I hand to Andrew, I'll turn to credit quality.
Our key metric of 90 days past due and impaired loans has remained stable at 2.3%. As we had expected, this ratio has been more stable as our loan book has seasoned and the number of additions and resolutions has been more equal. Our portfolio management initiatives, which we discussed on the last slide, as well as a more stable economic environment, have helped reduce the rate of new additions. We've also continued to work with customers to achieve resolutions over the half, reflecting a combination of cures, external refis, and asset sales. And as I said, this process takes time as every customer is different. We continue to watch credit quality closely. Overall, we believe our relationship model benefits through all parts of the economic cycle, which gives us confidence in our at-scale cost of risk assumption of 50 basis points of GLA.
So on that note, I'll now hand over to Andrew to run through the detailed financials, and I look forward to coming back and discussing the outlook with you. Andrew.
Thank you, Chris, and good morning, everyone. This half, Judo delivered solid financial performance with underlying profit before tax of AUD 56.7 million, up 33% compared to the second half of 2024. The result reflected strong operating performance as we continued to scale the business while prudently managing risks and costs. Statutory net profit after tax was up 70%, partly driven by non-recurring costs in the prior half and a lower effective tax rate in the current half. Firstly, turning to margins. First half 2025 NIM was 2.81%, within the guidance range for the half. On this slide, we show the key drivers of NIM from second half 2024 to first half 2025. Firstly, as expected, the TFF was an 18 basis points drag on NIM, and that reflects the residual unwind of TFF funding benefits we had in second half 2024.
This is now the last half with any TFF impact. Secondly, deposit costs had a three basis points negative impact on NIM, driven by elevated term deposit costs due to swap rates, and I'll expand on this in a moment. Other components were largely positive. Other cost of funding, which reflects wholesale funding sources, had a four basis points favorable impact on NIM, driven by continued optimization of the warehouse program and relatively favorable pricing for NCDs. Higher lending margins contributed eight basis points to NIM, largely from higher margins on new lending and proactive portfolio management. Equity had a minimal impact on NIM as interest rates were broadly stable in first half 2025 compared to the prior half, and lastly, treasury management had a six basis points impact on NIM.
This was due to the roll-off of low-yielding fixed-rate bonds together with a reduction in the level of average liquids held post-repayment of the TFF. Turning now to NIM trajectory. As we expected, NIM progressively improved throughout the first half, following trough NIM in the month of June 2024. This trend will continue in the second half, where exit NIM for June 2025 is expected to recover to 3%, closer to our at-scale assumption. Beyond second half 25, NIM trajectory will continue to benefit from the tailwinds seen this half, namely the wash-through of higher front book margins, higher deposit funding mix, and ongoing optimization of liquidity and wholesale funding. You'll note we've shaded cost of new deposits as neutral for second half 25, which I'll discuss on the following slide.
As outlined on this slide, you'll note that our TD margins are a function of headline rates and the swap rate, given that we hedge our deposits to manage interest rate risk. During the half, we saw headline term deposit rates fall for the branchless bank segment, as shown by the dark navy line in the chart on the left. However, over the same period, the swap curve experienced heightened volatility due to changing expectations over interest rates. Overall, the cost for new deposits for the half was 86 basis points over one month BBSW, down from the 90 basis points seen in the prior half, and this is the midpoint of our long-run expected range of 80 to 90 basis points. Stepping back, despite TD margins being slightly above our original assumption for the half, our strong lending margins and liquidity benefits are providing positive tailwinds to NIM.
As such, we are upgrading NIM guidance to the top end of the range for both the second half and the full year. Next to funding mix, term deposits remain our primary source of funding. Over the half, we grew our TD book to AUD 9 billion, with close to AUD 1 billion of net growth coming from direct retail TDs. We continue to be very pleased with the performance of our deposit franchise. The direct retail channel now accounts for 68% of flows, up from 57% two years ago. This has been supported by a high retail rollover rate, which has now increased to 70% and a deposit NPS of plus 67. We have plans to invest in additional product or channel capability to further strengthen our deposit offering.
In terms of other funding, we have an ongoing program to optimize the wholesale funding stack with proven access to a diverse range of funding sources. Moving to operating expenses. Underlying OPEX, excluding non-recurring costs in the last half, grew moderately by 4%, largely from higher employee costs. And this is driven by three key factors. Firstly, wage inflation and the higher super guarantee, which was partly offset by lower average FTE. Secondly, we had several employees moving to system maintenance roles after completing major IT projects in second half 2024. And thirdly, there were some expense items such as payroll tax, which can be volatile. Technology and amortization costs increased slightly over the half, with movement in other expenses reflecting timing. Looking forward, average FTE will be broadly stable in the second half. FTE growth has largely come from new relationship bankers with non-customer-facing areas approaching maturity.
This will support operating leverage going forward. We expect a small step up in IT and amortization expense in second half 2025 post some planned investments. We are managing the cost base closely. Overall, we expect the dollar value of operating expenses in second half 2025 to be fairly similar to that incurred in the first half. This will see the CTI ratio improve in second half 2025 and total CTI for the financial year to be broadly stable versus last year. Turning now to asset quality. Impairment expense was AUD 28.8 million for the half, or 51 basis points of GLAs. Impairment expense benefited from two factors. Firstly, as Chris mentioned, proactive portfolio management, which has resulted in a reduction in Stage 2 collective provisions. Secondly, a lower level of new impairments, as evidenced by some stabilization in our 90 plus days past due and impaired ratio.
Provision coverage was broadly stable. Total provision coverage reduced by two basis points to 1.37% of GLAs, and collective provision coverage reduced three basis points to 1.02%. The collective provision reflects stable asset quality, while our expectations for the economy are broadly unchanged from June 2024. We continue to recognize an overlay for vulnerable industries to reflect ongoing uncertainty for some parts of the economy. We do note that impairment expense can be volatile, and as such, we've left our cost of risk guidance for the full year unchanged, being a broadly stable dollar value to that incurred in FY2024. Next to capital. We continue to maintain strong capital ratios both at the CET1 and total capital levels. We ended the first half with a CET1 ratio of 13.8%. Growth was the main driver of CET1 consumption at 120 basis points.
Risk weight on lending was also a drag of 20 basis points, driven by lending mix. Pleasingly, organic capital generation improved with increasing profitability in the first half and we expect this trend to continue into future periods. In the first half, Judo was an early adopter of APRA's proposal to phase out AT1 capital. Our AUD 125 million Tier 2 transaction completed in the first half and was very well supported by investors and it contributed 130 basis points to total capital levels. We have a number of proven initiatives available to support our growth strategy going forward. Lastly, let's recap on our second half 2025 performance drivers. Firstly, on lending growth, we are managing all our levers and maintain our existing GLA guidance for the year. Strong originations are expected to continue with new regions and warehouse lending ramping up and runoff moderating.
Secondly, net interest margins will continue to gradually improve. With the residual TFF drag now gone and the tailwinds from the first half continuing, we have now upgraded NIM guidance to the top end of the range for both second half and the full year. Thirdly, we expect operating expenses to be fairly similar in dollar terms to that booked in the first half, with CTI and operating leverage to improve in the second half. Finally, on cost of risk, given the potential for this line item to be volatile, we have maintained our cost of risk guidance for the full year, being broadly stable versus FY2024 in dollar terms. Overall, we're on track to deliver our FY2025 guidance and remain focused on balancing growth, economics, and risk across the business. Thank you once again, and I'll now hand back to Chris.
Thank you, Andrew. Now, this slide that you've got on your screen now recaps our clear and simple strategy to become a world-class SME business bank. As I said earlier, a strategy that has not changed since day one. Our core competitive advantages are our relationship-based approach using judgment and speed, and the strategic enablers of our business are a culture of empowerment, our DNA of execution, and the powerful benefits of scale, and consistent with my belief in the service profit chain that we discussed earlier, engagement, NPS, and ROE are our key measures of success. We've reached a size that gives us increasing optionality for the next phase of growth.
On the subject of growth, over the past six months, we've continued to drive our core business and achieve a strong balance between growth and economics as we've expanded into new regions, aligned our organizational structure, replatformed our core technology systems, and reset our funding stack. Looking forward to the next six months, we remain focused on executing the four key areas outlined on this slide. First, regional expansion, which has been a core element of our strategy for two years now. After opening five new locations in the last six months, we aim to open another five by the end of this financial year. And the core enabler of this strategy is our employment brand, which really does allow us to access the very best bankers in town. Second, adjacent segments.
I mean, short term, this is focused on continuing to progress our warehouse lending business, which enables us to turn a competitor into a customer. Third, adjacent SME products. We're very aware that whilst our core product set meets probably 80% of the needs of businesses, it's not 100%. And we do want to close the gap on the remaining 20%, which intuitively will also build out our other operating income line. We continue to evaluate options in trade and data finance and also a broader asset finance business, whether organically or through M&A. That said, there's unlikely to be anything in the near term. Lastly, on specific ROE drivers, we continue to assess opportunities to drive productivity, reduce our funding costs, and manage our capital. With our core business humming, we really do have the opportunity to assess these options and continue driving a growth well above system.
Now to the economy. I mean, business conditions are varied, and some sectors continue to face challenges, but overall, conditions are generally more stable. Businesses are adjusting to higher interest rates, and credit demand is strong. Interest rates are, of course, highly topical with an RBA decision due later today, but regardless of what happens and whether there's a cut today or down the track, rate cuts have several positive implications for Judo. Firstly, lower rates will provide a welcome improvement to customer cash flows. I mean, we expect that this would in turn be beneficial for business conditions. Rate cuts also lower borrowing costs. Both of these factors should underpin continued demand for business credit, and while Judo is not a macro play, this would be an incremental positive for us.
Second, at a sector level, other banks typically see NIM compress when rates fall because of their core free funds. We do not have this headwind because we are funded by TDs, which will reprice. So we do believe this environment should provide support for our growth and lending margins. For completeness, we have included our sensitivity to interest rates on the slide. And as you can see, a rate cut would be a slight drag to FY2025, but honestly, small enough that we'd be able to absorb it within our guidance. Now to guidance. We continue to target 15% PBT growth on an underlying basis and a GLA range of between AUD 12.7 billion and AUD 13 billion. We have revised our second half and full year NIM guidance to the top end of the respective ranges previously provided for the reasons that we've already discussed and Andrew set out.
We are maintaining our full year CTI guidance, importantly, however, because H2 should see an improvement compared with the first half as revenue continues to grow and expense growth continues to moderate, and on cost of risk, we've retained our existing guidance, noting that credit quality can be volatile. We are now on the verge of realizing the inherent benefits of scale that we've been talking about since receiving our banking license almost six years ago. The corporate support functions required to run a bank are largely built, meaning that cost growth will mostly be driven by our frontline functions, as Andrew set out. This was visible in the second half of FY2024 and again in today's results. The combination of slowing cost growth and continued lending growth and several NIM tailwinds means that revenue growth should fall straight through to the bottom line.
We really are very well positioned to deliver a step change in our CTI ratio and ROE in this second half and beyond. In closing, we consider this to be another 12 months of doing exactly what we said we would do and successfully executing our clear and simple strategy to scale our bank and drive ROE. Our core franchise is humming, and with our investments in regional expansion and warehouse lending, we expect our strong growth to continue. Our now significant balance sheet gives us greater optionality. We are focused on achieving an appropriate balance between growth, economics, and risk, and we're closely managing all of our levers to drive better returns. Our technology investments are largely complete, and we have now transitioned to enterprise-grade platforms that enable us to scale. We're focused intently on driving ROE through improving productivity and disciplined allocation of capital.
And the operating environment has stabilized, and we're a relative winner as we enter a rate-cutting cycle. And we have an exceptional team that are deeply experienced and aligned on our goal. So in short, I remain very, very excited about the outlook for our bank. Thank you for listening to us this morning. Myself and Andrew will now look forward to taking your questions.
Thank you. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by as we compile the Q&A roster. Our first question comes from Matthew Wilson from Jarden. Your line is now open.
Yeah, good morning, Wilson. Good morning, Team. Matthew Wilson from Jarden. Very clear and easy-to-understand results. So some technical questions. Firstly, your tax rate now, given the extent of deferred tax assets you have and the expanding profitability in the business, is it fair to say that you could run the tax rate slightly below 30% going forward whilst you utilize those tax benefits? And I've got a second question.
Thank you, Matt. Yeah, look, in terms of that effective tax rate, we called out that it was a bit of an impact in this result. It was an effective tax rate of 28%. We're not expecting that to carry on an ongoing basis. The effective tax rate for us should be around that 30% level. It was really this half a bit of a one-off, I guess, in terms of how the income tax impact of those incentive schemes were really impacted by the rising share price. It relates to those incentives and effectively the probability of getting that DTA back. And there was a bit of a reversal you'll see in the tax calc. So I think it's one that's impacted this half. But from an ongoing basis, we're expecting that to be closer to the effective tax rate.
We'll always have a little bit of a drag from some of the non-deductibles, but it was really a reflection in this half around the movement in the share price, which was positive, obviously.
Okay. Secondly, where are you seeing most of your external refinances heading to? Obviously, it's trended higher. Has there been any pattern there with respect to a particular bank or competitor picking up that share?
No, Matt, that's Chris. No, honestly, not really. I mean, we see some of it go back to the major banks, some to private credit, but there's no material. As I said, it's not being driven by competition as such. It's being driven by us relooking at the customer, whether we think it's being appropriately priced for risk. I mean, the one thing I would add is this is one of the real advantages of being tied to the brokers so closely. We have incredible relationships with our brokers that support us, and so if we do have a customer that we feel would be better served by someone else, the brokers are a great asset for us in helping that.
Yep. Just finally, more of a comment on the cash rate, which you covered extensively in the presentation. You've been a banker for a long time. Credit growth is very healthy. Aggregate asset quality is pristine by historical standards. Do we really need a rate cut?
Oh, mate, I'll take that as a rhetorical question because I'm not going to get drawn into a media headline. We'll know at 2:30 P.M. But the economy is strong. I mean, we think SMEs have adjusted to rates at this level. We're seeing very strong credit growth. We're definitely transitioning from a consumer-led economy to a business-led economy. We're seeing our business customers now start to really invest in labor-saving technology, doubling down on their CBP, deglobalized supply chains. Regardless of whether there is or isn't a rate cut this afternoon, we're very bullish about trading conditions for the SME economy and for our bank.
Yep. No, that makes sense. Thanks for that, Chris.
Thank you. Our next question comes from a line of Jonathan Mott from Barrenjoey. Please go ahead.
Thank you. A couple of questions, if I could as well. The first one, just wanted to tie together a couple of pieces that you've given us. The first one you said on the new lending and the portfolio management, you're saying that a lot of the accounts that you've exited have tended to be in property, accommodation, and hospitality. But when we go through the detail on the balance sheet, you can actually see that accommodation and food services have increased from 10% to 12% of gross loans. So it seems to be that you're offboarding and exiting a number of these accounts in the food, accommodation, and hospitality sector, but you're also adding a lot more. So can you talk about that?
Does that also explain the change in the front-book spread up to 4.7% that you're actually exiting lower margin and adding higher margin in that sector?
I mean, John, right back from the original thesis, as you would know, we've always said that our guidance of sort of the overall book at around 450 basis points is averages of averages. We do see a range in our book from customers that we charge, say, 2.5% to 7, 7.5% over swap. And we always had this assumption that our front-book margin would be slightly higher than our blended back-book margin. That's less of an issue now, given that we've got such a big existing book now, close to AUD 12 billion. But we're not a macro play. So we are very supportive of the hospitality accommodation industry. We look at every customer case by case. As I said earlier, the increased runoff really does reflect a lot of it reflects pricing for risk.
That's where we have definitely lost some customers where we believe we're seeing deteriorating trends. We believe there's an adjustment required to the price for that risk. Sometimes a competitor will take a different position on that. We're not a macro play. I wouldn't draw any conclusions at all about the ins and outs.
Okay, and a second question, if I could. I think you said at the moment you've got about an average of 28 accounts per banker, and that's well lower than the major banks. One of the things that changed over the last couple of years, and I want to make sure this is still the case, is that you're about 80% broker-driven, previously targeted about 50%. So I would suggest that the bankers are actually going out there and actively chasing the customer to the extent that you probably thought when you did the business plan. Does that mean that you can now increase the number of average customers per banker, and you can actually see some more scale benefits on an account per banker level?
Yeah, look, it's a great question. John, I mean, we are definitely seeing a structural shift towards brokers. I mean, it's hard to get any real empirical data on this, but I would say they're 35% of all flow now. And I think the aspiration of us getting to 50/50, as you said, the original thesis that we would at scale that we would have 50% of our book through brokers, 50% direct, I don't think we'll achieve that if we're being honest. We've always said, though, that we're relatively agnostic to that because the broker model is so efficient for us. I mean, just to put that into context, when we get because there's 22,000 brokers in this country, and we only deal with about the best 1,500 of them. They know our CBP intimately. We spend a lot of time at their PD days.
And so when we get a deal from one of our brokers, there's an 80% chance we will convert it into our funnel, and then it flows through to a completion. If our bankers were walking around industrial states handing out business cards or asking for referrals, their conversion rate would be 20% at best. So it's a very efficient model for us. Yes, it comes at an expense, obviously, in terms of brokerage. But we actually think those two relatively offset each other. But you're right in your thesis that that should mean intuitively that our bankers should be able to manage a larger customer base because of that dynamic and because the business development aspect of their role is not as time-consuming.
Does it also mean you can accelerate credit growth faster, providing you can fund it? Don't want to get off that topic after what we've seen the last few days. But does it also mean that you can grow faster because you've got a bigger distribution network effectively than you originally planned?
Yeah, that's right. I mean, there's certainly another tier of brokers that we're starting to give some thought to. Not the one that, as I said, there's 22,000 brokers in this country. There's only 1,500 of them that I would say are dedicated commercial brokers that are largely ex-business bankers of the big four banks, but there's another couple of thousand brokers that do SME, but it's a different proposition for them. They're not experts in SME credit. They probably do home loans, but we're giving a lot of thought to how we access those brokers now and provide them with a better service than they experience from the major banks, but absolutely. I mean, as you know, we have always very carefully sculpted our growth. It has never been growth for growth's sake. We're always optimizing the balance between protecting the NIM, managing our capital appropriately.
You've grilled us in the past around our capital assumptions associated with our growth. We've always said that with guidance, and we're guiding to AUD 13 billion, between AUD 12.7 billion and AUD 13 billion now. If the market gave us the opportunity to do AUD 14 billion, we wouldn't take it. We are carefully sculpting the balance between capital, NIM, risk, and also culture. We don't want to grow too quickly. We're putting on 20 more bankers this year. If we put on 100 new bankers, which we could, there's plenty of regions for us to go after, that would be very, very difficult for us in terms of managing our culture and also the operational systems associated with that. So we have a very, very carefully thought-through growth plan, which we don't want to divert from.
Thank you.
Thank you. Just a moment for our next question, please. Next, we have Andrew Triggs from JPMorgan. Please go ahead.
Thank you. And good morning. First question, just to follow on from John's question. I think in the past, you provided credit scoring metrics on new book growth. Perhaps if you guys could give us a sense of whether that's changed at all as we've seen that improvement in the front-book lending margin.
Yeah, no, thanks, Andrew. Look, there's been no fundamental change to our risk settings in terms of the origination for the last half. And our PD is kind of broadly stable from what you've seen in the past. You're right. We used to provide that chart, and that was under our previous master scale. But when we do with our new master scale now, which has more granularity in it as we think about the overall credit risk assessment, that's been kind of broadly unchanged. So the economic driver has really been around that proactive back-book management, as Chris mentioned.
Okay. Thank you, Andrew. And just a question on the deposit side. You've talked about some of the savings products you're developing. Could you, Matt, perhaps elaborate on these? How material could they be in your funding mix? Do they lead to significant changes in tech spend? And is there any change in how the regulator might view the bank, given you've sort of avoided to some extent transaction accounts as an example on the basis that it would save you cost and also perhaps a little bit more operational risk if you're managing transaction accounts for customers?
Yeah, no, I'll take this. We have no intention of doing transactional banking. We always said that Judo was built out of a market failure. There is no market failure in the provision of transactional banking accounts. We don't have the scale. And also, we don't have an appetite for the operational risk and the cyber risks, etc., that are associated with those. We are thinking about retail deposits, which the regulator loves. I mean, that's their preference. And we're exclusively term deposits today. And so the obvious products that we don't have is a high-interest savings account, HISA , also the business equivalent of that. So we're looking at some of those products, but we're not going to be doing transactional banking. And we don't want to get on the drug of a free float.
Yeah. This is an evolution rather than a revolution, I think, Andrew.
And in terms of the level of spend, this is a much lower CapEx year than last year. And we're looking at leveraging, I guess, some of the investments that we've made on our core lending platform for deposit capability. And it's also as much about us just moving to a platform that gives us a little bit more flexibility in terms of how we think about the existing products as much as it is about thinking about potential new products, as Chris mentioned. So it's an evolution. It's a much lower level of investment spend given kind of what we've already invested on the core lending side. And we think that investments with this new platform will just give us some additional flexibility in terms of how we manage what is now a AUD 9 billion deposit book.
Andrew, could it get to in terms of a ratio of deposits, do you think, noting that probably the TD market growth is a bit constrained given a lot of the savings rates available are higher than term deposit rates?
Yeah. Look, I mean, things move around at the very macro level in terms of the level of TDs versus non-TD product across the system. But TDs are a AUD 1 trillion pool that can move around a little bit. We're 1% of that. And we are typically paying as a branchless bank. We pay towards the top of those league tables. And so our ability to attract TDs is very strong. I mean, despite, as you've said, what we've seen over the last six months, we increased retail TDs by AUD 1 billion. And we've had a pretty good track record of growth there. So I think there's certainly elements that can happen at a macro level, especially with rate speculation moving around. But we're really pleased with the deposit franchise. We've been able to grow with those existing products that we've got.
We are looking at some investments that will give us some more flexibility and continuing to just build out that channel and product mix, I think, will just position us well for future growth in that book. We provide a guidance that we expect that to get up to 75% when we're at scale. We've made good progress on that, moving from 64%-66% of the funding stack this half. We did a Tier 2, so that meant we didn't need to do as much in terms of deposits, but that book's been growing well. We provide a guidance that we'll get that around that kind of 70% level in the next six months.
Can I just build on that, Andrew, in terms of the TD market?
Because I think this is a really important point. As Andrew said, it's a AUD 1 trillion system.
So at AUD 9 billion, we're not even 1%. So whether that moves around here or there doesn't really impact us. But what's really important is flow rather than stock. So the average tenure of a TD in this country is about three to four months. So let's be generous and say four months. So the system replenishes itself three times a year. So AUD 1 trillion book is AUD 3 trillion of flow, which is AUD 250 billion a month of flow. And the average tenure of our TDs at point of origination is one year. So we don't suffer that same degree of chasing our tail. But the opportunity in a flow sense is huge for us. So we are building out these other products because we want more optionality, and we think they'll also lower our overall cost of funding.
But it is not because we are worried about the size of the TD market or our ability to access it.
Okay. Thank you.
Thank you. Just a moment for our next question, please. Next, we have Richard Wiles from Morgan Stanley. Please go ahead.
Good morning. I've got a couple of questions, please. The first one's a pretty simple one relating to the guidance. You upgraded the margin forecast, and you say expenses are closely managed, but you didn't upgrade the guidance for the profit before tax. Is that because the margin change is quite small, or is there some sort of offset elsewhere in the income statement?
Yeah, look, I think, Richard, part of the upgrade for us is just increased confidence, I think, in terms of where we're looking at for the full year. We obviously set this guidance over 12 months ago in terms of the profit growth for this year. But with the trends that we've been able to book, I think, for the first half, certainly from a NIM perspective, we're willing to upgrade that. We've seen really good momentum in terms of the NIM trajectory. So very confident in those trends. And some of that is largely mechanical in terms of what kind of comes through from a NIM perspective now, given those drivers, the tailwinds on lending margin, liquidity, etc. But we're managing all the levers here.
We did call out there can be some volatility in the numbers, but we're kind of more confident and increasingly confident in the result for the full year.
Okay. Thank you. And then I just want to ask you about your sort of medium-term expectations around the lending book. When you listed, you sort of based the upper end of your AUD 15-20 billion medium-term loan target or your at-scale target on roughly 200 bankers at AUD 100 million each. Have you got any evolving thoughts on either the number of bankers or the loans per banker in the medium term?
No, I don't think it's really changed significantly. I mean, our average loan size is still I think it's gone up a touch to about AUD 2.3 million now. The earlier question around the portfolio sizes, I think, was a fair one. I think if we're going to be more concentrated on broker than we thought, then I think portfolio sizes, you could think about those being a little bit larger. But a AUD 20 billion book managed by 200 bankers with footings of about AUD 100 million each, it still feels a reasonable assumption. Of course, that will never be our actual reality because that would have assumed that we stopped growing because we're not going to stop growing at a AUD 20 billion book. We've always said that metrics of scale are just a waypoint when we start to throw off superior economics in terms of ROE.
We will always be recruiting bankers. That denominator will always make that AUD 100 million lower, which is why today we only have 28 bankers per banker because we keep recruiting bankers. The denominator keeps increasing. I think the core thesis hasn't changed.
Okay. Thanks, Chris.
Thank you. Our next question comes from John Storey from UBS. Please go ahead.
Hey, guys. Thanks so much for giving me a chance to ask a few questions. First question is just really about the NIM guidance for the second half of the year and just related to page 19 in your financial results pack. It looks like your actual net lending spread was down roughly about 14 basis points, kind of half on half, and a lot of the value that you actually got in terms of the margin performance came through on net-free funds, which was up roughly about 10 basis points, so just wanted to get a sense around, one, the hedging on the value of your net-free funds. What does that look like, and then why are you not calling out your replicating portfolio on equity in terms of your margin outlook for the second half of 2025? That's my first question.
Thanks, John. Yeah, look, I mean, a couple of pieces in that, so I might kind of step through them one by one. Yeah, in terms of, I guess, as we think about really the second, let's focus on the second half, which I think was the core of your question. Look, lending margins for the second half, we expect will be a similar kind of tailwind benefit to the second half NIM, largely really as a reflection of, I guess, the wash-through of these higher front-book margins that we are booking. And you'll see in the quarterly front-book lending margin chart that we've seen that go up to 4.7 in the December quarter.
So there's an element of wash-through of that that will support the NIM guidance for the second half, as well as just as we think about that proactive portfolio management exercise, that will also have some run rate benefits that come through in terms of the lending margin over the second half. It's a little bit difficult to see all the moving pieces when you're looking at the average balance sheet because that looks at monthly movements, whereas when we do the NIM waterfalls, we do that off daily averages. So they're the ones to kind of focus on in terms of the moves between periods. In terms of liquidity, we're also going to get benefit. We saw that in the first half. It was a combination of both an uplift in yield, and you'll see that in the pack. We've been able to increase the yield on Treasuries.
That's because we've rolled off some fixed-rate bonds and reinvested it kind of closer to current cash rate. We had some of those maturities in the first half. We've got some more to come of those fixed-rate bonds in the second half. So that's going to support an increase in the yield on those Treasuries. And we've been running liquidity a little bit tighter post-TFF, and we'll probably get a little bit of that benefit too in the second half. So they're the two big drivers, the big blocks of green, if you want to put it that way, in terms of lending margin for the second half and tailwinds, I think, beyond that.
In terms of the replicating portfolio or equity, as we've got it marked in our NIM waterfall or in ITOC investment term of capital, that was a little bit of a drag, as you'll see, one basis point in the first half. Depends a bit what happens with rates there, but that is effectively reflective of hedging that we put on equity. We took a reasonable hedge out on that. We ran unhedged when rates were zero. We thought that was a sensible decision to do. And we put that on when rates were further up. So a little bit different to what the banks have done because they've been running those portfolios really through the cycle. So that's, as you know, it's a little bit of a grey bar on first half and expect that similarly on the second half.
But that replicating portfolio for us, similar to industry, it's a three-year portfolio, and it will spread out any movement in rates on the equity portion of our balance sheet over a three-year kind of rolling monthly period.
Okay. Thanks, Andrew. The second question I had was just around probability weightings in terms of your expected credit losses. Just a kind of conceptual question on why your downside and your severe downside scenarios have increased. And then just the impact of those assumption changes just on your new business strain in terms of how that rolls into Stage 1s, particularly in the context of how quickly your book is growing at the moment.
Well, well done, John, for getting a long way down into the accounts. I think you win the prize for that one. Yeah, look, as you've noted, we've made some changes to the way that we construct our economic scenarios. And just to be clear, this is economic scenarios as it relates to the calculation of credit loss. So this is getting into the technicalities, I guess, of how we look at and size our expected credit loss provision. What we did during the half is we moved to a, as I mentioned a little bit earlier, we moved to a more granular credit risk grade scale. And this is, I guess, part of us maturing as a business. We have much more granularity now in terms of the assessment. And correspondingly related to that is how we think about the economic scenarios that sit alongside those.
So they're kind of taken together. And ultimately, what we're trying to do, and I'm getting a little bit technical here, is to have a sensible distribution curve. And it is a curve. And so the economic scenarios, as well as the risk grades, go to how we construct that curve. So at a tight level, we've got more granularity now, and we made appropriate adjustments to reflect that. Overall, all of those changes have not really made a fundamental impact to how we think about assessment of the ECL provision and how we think about the probability of default. We've calibrated this quite carefully over this half to ensure that that's the case.
And so really, this is a tool now that gives us a lot more granularity, but it's not a tool that we have used to give us kind of different outcomes in terms of the ECL assessment.
Okay. Thanks very much, Andrew. Appreciate it.
Thank you. Our next question comes from Nathan Lead from Morgans Financial Limited. Please go ahead.
G'day, Chris and Andrew. Thank you very much for your presentation. Look, just the first one for me is just to comment that the blended lending margin is stabilizing the second half 2025 at 4.3%, particularly given you've got the front book at 4.7%. Are you still expecting the long-term 4.5%, particularly given that sort of stabilization at 4.3%?
I mean, yes, yes is the short answer, Nathan. As part of, I guess, thinking about that trajectory and the wash-through, it does take a bit of time for that lending margin to fully wash through given the duration of the asset side of the book. But we're seeing very positive trends in terms of that blended margin. That's ultimately the margin that hits the sides of NIM. We've called out the very strong front-book lending margins and really good performance of the business in the half. But that does take a little bit of time to wash through. That front-book performance was probably about a third of the NIM lending margin benefit. And so there's a little bit that takes a bit of time to wash through. So in terms of the blended lending margin, we have guided to that 4.3%.
There's a little bit more to go on that. There's probably always a delta between the front book and the blended lending margin, but we feel pretty positive about that. I look at that every month, and that number is kind of ticking where we want it to be. But it does take a bit of time for that to wash through the front book to the blended margin.
Okay. Got it. All right. Second question for me. Just in terms of the other operating income, I know it's relatively small, but I suppose when we look at it versus the majors, it's, relatively speaking, pretty small. What are you thinking in terms of your at-scale targets for that other operating income? Are you expecting it to ramp up quite meaningfully?
Look, it's a great question. I mean, today, we only have a few products, really, that contribute to that, largely bonds and guarantees, which are a core part of our lending franchise. I mentioned in my presentation that we continue to think about some of the products that we don't provide at the moment, trade and debtor finance in particular, that they are heavy fee income products, which would absolutely prop up the other operating income line. We're very focused on it, obviously. By definition, it doesn't consume capital, so it turbocharges ROE. But we're not in a position to give any specific guidance on how we're thinking about that. We're not going to be rushed into an M&A transaction, etc. We were always looking for the right opportunities, but it is something that we're very focused on.
Yeah. Okay. Great. And maybe if I could just ask you a question, Chris. You mentioned in the presentation about how the target loans is $2-$15 million. I've heard you, I think, speak before about more a $1-$10 million sort of range. So has that changed over time? Is there a desire to chase larger size?
It's a great question. I mean, when we launched Judo back in 2017, our maximum loan was $5 million. But there's an element of diversification as well. With a much larger book, we're able to also think in terms of a more diversified portfolio with larger single exposures than perhaps we would have accepted three, four, five years ago. So there's an element of just prudently managing the risk dynamics of the portfolio. But I think what's really interesting, I mean, when we launched Judo, we were very much focused on loans between $1 and $10 million, as you said, because that's where we thought the market failure was. That was the part of the market where we believed that the industrialization of the major banks had created an opportunity to do judgment-based relationship banking the way it used to be done.
It's, to our surprise, if you like, that we're being pulled into the larger loans. We're not sort of pushing ourselves there. The relationships that we have with those 1,500 brokers in particular is that they bring to us deals for AUD 15, AUD 20, AUD 25, AUD 30 million, which is a surprise to me. It wasn't part of the original thesis. But because we have a bigger balance sheet now, and we've also recruited bankers with that particular skill set as well, it is part of the TAM, if you like, that we're now playing in. So you're absolutely right. I wasn't sure if anyone would spot that, but I purposely revised AUD 1 to AUD 10 to AUD 2 to AUD 15 just to make that point that the TAM is expanding for us as the opportunities are being brought to us.
Fantastic. Thank you very much.
Thank you. Just a moment, please. Next, we have Brendan Sproules from Citi. Please go ahead.
Hi, good morning. It's Brendan from Citi. Just a follow-up question around the longer-term lending margin, which I know you've covered a couple of times the questions here. One thing I noticed is the average risk weight is going up and has been consistently going up, at least for the last couple of halves, by about 150 basis points. I mean, as we look forward in the medium term and you approach this 4.5% lending margin, is this really we're going to see higher average risk weight go up? And this is a sign of a strategy of you moving more away from where the majors play into areas, as you pointed out, that are relatively unserviced but do come with better margins and slightly higher risk profiles?
Yeah. I mean, there's a little bit of that, I guess, Brendan, in the sense, I mean, kind of building on Chris's earlier point around size. The way that those standardized rules work, for example, is there is a category where you've got the SME loans that have the 75% risk weight depending on kind of size of loan and also the turnover of the business. And then you kind of move into the next category where it's 85%. So this is all in the APS 112. And so there is a little bit of an element of, as we do some of the bigger loans, we've got a little bit more in that category, and that's kind of seeing that number kind of creep up. So that was my reference, I guess, to the mix there.
And I think as the book, certainly as the book diversifies and we've got more size, there is an ability for us to play the spectrum that we have. But it is very much around just seeing some of those kind of movements. And that's obviously what you've seen kind of to date in the numbers. I think as we think going forward, the element that we haven't kind of seen have an impact yet on those numbers is the warehouse lending business. We have done now our first draw, and that typically has kind of a lower risk weight because of the diversification benefits. So there'll be a few other things that play into that. But we're managing that, I guess, broadly across the overall economics and balancing the economics and the risk.
But yes, that number has moved up a little bit, and part of that reflects just some of that mixed movement.
I mean, it's a great question, Brendan. I mean, we are a standardized bank unlike the majors, so APS 112 very much dictates those risk weights. We don't want to be a slave to thinking about every customer on the basis of a pure ROE because we're building out a balanced portfolio. But I think, as Andrew said, that the warehousing business in particular is a very good opportunity for us to think quite strategically about which assets do we want to originate directly onto our balance sheet where maybe there are penal 112 rules, whereas if we let someone else originate them and we become the warehouse provider to them, we actually get a capital benefit from doing that.
So we are thinking about quite strategically about the warehouse business. It's going to be something that we're going to be very thoughtful about. We're not rushing into. And what assets do we want to originate directly versus which assets do we want to originate through a warehouse?
Okay. And just in terms of your provisioning outcome, I mean, you have pushed up your lending margin. You've brought on new business at a higher spread. You've had, as I just mentioned, you had a higher risk-weighted assets. When I look at your collective provision expense on page 14 of your 4D, I think in June 2024, you wrote about AUD 1 billion of loans, and you added AUD 17 million of collective provision. This period, you also added AUD 1 billion of loans and added only a third of that, AUD 6 million. Just given the risk profile, and you make comments around deteriorating risk grades here, I mean, have you got how do we why are we seeing such differences in the collective provision from period to period?
Yeah. No, it's a great question, Brendan. And the answer to that is really around what's happened in Stage 2. So this is a story very much around the Stage 2 provision balance. And you can see this most clearly. It's in the stats in '09 where the absolute level of Stage 2 provision has decreased in dollar terms. So yes, we've grown the book. The book's grown. But because of this proactive portfolio management focus that we've had over the last half, we've actually seen that Stage 2 component reduce by about AUD 6-AUD 6.5 million. So that's really the key driver there in terms of the collective outcome. Overall, look, we think we've got a prudent level. We've seen that come down by three basis points, but it's really a story of what's happened in that Stage 2 bucket.
I think that's the key point.
The overall collective provision coverage has been stable. We've always targeted that sort of just over 1%. It feels right to us for a business of our size and maturity and our exposures to SME. But yeah, I mean, we have focused wherever the customer's in Stage 2 , that's when there's the opportunity to make sure that you understand what has caused the deterioration, what are the customer's strategies, because that's when the refinance window is still open if we decide that it's a customer that belongs with an institution that's got a different risk appetite to us. Once it goes into Stage 3, you're in workout. You really are in terms of enforcing your security and what have you. So assets that are in Stage 2 are a particular focus for us in terms of our relationship proposition.
Okay. Thank you.
Just a moment for our next question, please. Next, we have Jason Steed from Macquarie. Please go ahead.
Hi, guys. Thanks for taking my questions. Just first question on lending margins. So your lending margins of 4.7% are very strong, and they continue to improve half on half. Just curious, what proportion of the improvement in lending margins is due to lending mix changes either between segments or risk profiles, and what proportion is actually just simply repricing your front book up? And I've noted you've obviously done the portfolio review, so just excluding that component, please.
I don't think there's any particular insights there. I mean, every customer is different. We're not a macro play. It's not that we have a particular that we risk on for one segment and risk off for another. I mean, I look at it customer by customer, state by state, segment by segment. I mean, unless you've got some insight.
No. I mean, there's a bit more Agri, Jason, that obviously has a bit of a higher or tends to have a Agri in region tends to have a higher margin. But I think in terms of what we've seen with the proactive portfolio management, is it a mix of risk-related or price-related reasons? It's often both in terms of how we've thought about that process and the customer.
But in terms of what's driven the absolute kind of front book lending margin, there's a bit of that Agri mix. But I think it's just been a greater focus on managing the economics. We're very cognizant of this. It's not growing for growth's sake, but balancing the growth and the economics or the margin and risk. And I think you really see that with the result.
I mean,
I think it's yeah, you are absolutely right, Andrew, to point out the Agri and regional. I mean, as I said, this is a real growth agenda for us because we do get better margins in the regions and with our agricultural customers because the relationships are just so much stronger there. And we do have a strategy of recruiting the best, generally the best banker in town that has those relationships. And customers want to bank with that banker.
Brokers are less prevalent as well. So obviously, they often put downward pressure on the margin. And also, we're not seeing the undisciplined pricing pressure that we were seeing 18 months ago from our competitors. It's still extremely competitive, but the price lever was being used at quite an extreme level 18 months ago, and we're just not seeing that now.
So if I had to summarize, most of it's just coming down to potentially a less competitive environment and maybe a bit more in Agri and regional.
When I say less competitive, more discipline from our competitors.
Okay. Yep. Thanks, and maybe just next question on your bankers. How has the competition for business bankers been in maybe the last year considering other banks are also looking to grow in the space? Have you found bankers sort of asking for more money for you to bring them across?
Look, I have a very strong view, Jason, that if people join you for money, they'll leave you for money. So we've never used salary as a core part of our value proposition. We attract the bankers that are passionate about what they do. They want to do relationship banking. They want to be empowered to make decisions. They want to work for a bank that all we think about, talk about, and dream about are SMEs, that all of our technology is enabling them to spend more time with their customers. We want people that want to be part of our story, not bankers that just don't want to be somewhere else. And so they're quite different, I think.
I mean, they're bankers that really are attracted to being part of Judo, and that, I think, is why our culture is so strong and why our employee engagement is so strong. Now, don't get me wrong, there's no shortage of competition for our bankers. I mean, one of the major banks announced yesterday that they're going to be recruiting 200 bankers over the next couple of years. But in our history, we haven't really lost. I think we've lost. It's still high single digits in terms of the number of bankers that we've lost back to the major banks because they don't want to go back to an environment of sales targets and widget counting and policy says yes, policy says no, 100 customers in their portfolio versus 30 or 40 with us. So we're very clear on what our employment value proposition is for our business bankers.
And as I said earlier, it particularly resonates in the regions where the corporate center is very distant and credit decisions are being made a long, long way away from the customer. So it's not something I worry about at all, and we certainly have no problem at all attracting the very best talent.
Great. Thanks.
Thank you. Our next question comes from Oliver Coulling from E&P Financial Group. Please go ahead.
Hi, guys. Thanks for taking my questions. Hopefully, you can hear me okay.
Yes.
Yeah.
Far away.
Yeah. Just on the deposit capability and, I guess, moving into potentially other products like high-yield savings accounts, etc., I mean, pragmatically, what does that mean in terms of what you actually need to do with your systems? Is there an estimate that you can give us on the cost of that investment? And then what do you think it would do to your NIM long term, if any change?
Yeah. I mean, I think as we mentioned earlier, we're in the very, very final stages of migrating our deposit book onto a new platform, Thought Machine. That is because that platform is very, very flexible in terms of new products. That really is the end of our entire replatforming strategy, which I talked to in my speech, and so adding new products to that is the whole reason why we've gone to that platform so we can do it very quickly. We guided to 100 million of CapEx post the IPO. It seems a long time ago now, and that hasn't changed. Of that 100 million, we will have consumed about 90 million of it by the end of this financial year, and that, again, signifies that the big era of CapEx is largely behind us.
As we referenced earlier, the sole reason we're doing products like HISA is to provide benefit to our NIM. They are products where you generally get a lower cost of funds. We have no concerns with the TD market, the size of the TD market, the size of the flow that we can access. We have an incredible brand now with our deposit franchise. We probably don't talk enough about the strength of our deposit brand. I mean, we're getting 70% rollover rates now from our deposit customers and an incredible NPS of over 60. So we don't have any concerns with our current product set, but we are very, very focused on lowering the overall cost of our deposits through new products like HISAs and the business equivalent, the BOSA.
Okay. Perfect. And just on ongoing cost of risk, obviously, good outcome in the first half. You're calling out volatility, and there usually is a reasonable amount of seasonality in terms of your impairment expense that actually flows through the P&L. But I guess the level of conservatism that's built in considering the first half outlook, where the provisioning levels are and the resolutions that you're getting on your current arrears in terms of maintaining that guidance?
Yeah. I mean, look, we've certainly seen those asset quality metrics stabilize as we called out. But we're not calling victory on asset quality. I mean, there's still uncertainty out there. We've increased our vulnerable industry overlay. We've made some tweaks there in terms of what's in and out of that. So we're continuing to look at this. But there can be some volatility in that number, as you noted. We're plagued a little bit by the law of small numbers, and we just want to be prudent with what we're guiding to for the full year. There is obviously a link to what happens on the origination side versus what we're actually booking from a cost of risk, P&L expense as well. And it's all about kind of managing those levers, as I think we've demonstrated in this half.
But yeah, we are being prudent there because we don't think this is a point to be calling victory on that yet.
Okay. Thanks for that. Appreciate it.
Thank you. Our next question comes from Brian Johnson from MST Financial. Please go ahead.
Thank you very much for the opportunity to ask two questions, and congratulations on a great operating result. Just digging into the result a little bit further, and I just wanted to premise this on the fact that we know that the ATO is trying to claw back a lot of their collectible debt, a lot of which comes from SMEs. We've got quite big pay rises that came through 1 January. You've got a higher contribution levy on the back of that. On the flip side, however, we've got a lot of excess liquidity still swapping around the system, and we've got private credit seemingly willingly re-firing away perhaps some of the riskier loans.
But I suppose against the backdrop of all of those complicated stuff, if I actually have a look on page 35, I can see that you've increased the weighting to the downside and severe downside from 30 to 40. You've decreased the upside from 15 to five, which all feels very comforting. But then when I have a look down below that, on the actual scenario, I can see that basically the upside scenario is going down. I can see the base case is going down. I can see overall it's gone down, but I now see this granularity where the downside and severe downside has gone from 1.4 to this undisclosed range between 1.23 and 1.59. If I was to line up the 1.4, has that also gone down?
Can you just, I think, perhaps a little bit more information on that would actually be quite instructive because I can't work out whether your provision coverage has actually gone up or down. Because when we have a look down below that, we can certainly see that the Stage 3 collective provisioning is going up, and so is the individually assessed provision.
Yeah. No, thank you for the question.
Yeah. Sure thing.
Look, there's certainly a few things that are going on in terms of the movements and the introduction of the severe downside, which I think puts us more in line with industry in terms of the weightings. Part of the reason for introducing that was just the additional granularity that we get, and therefore, I guess, the PD outcome with that new master scale. So you have to look at what we've done in terms of those economic scenarios together with the additional granularity that we've got with the new master scale. And those changes together have left a relatively stable from a weighted kind of PD perspective. So there's a few things happening around the edges around that in terms of how we've then created the loss curve distribution with the introduction of a severe downside.
And we did that because if we just left the master scale without any change to the economics, we would have had a pretty flat loss distribution curve. So overall, I'm going to kind of pull it back overall. The provision coverage, it's 1.02. It's down three basis points to the 1.02, but broadly stable overall from what we had in the June for the second half.
So that downside and severe downside, which was 1.4, is that still 1.4? Is it actually a lower number or higher?
In terms of the ratio to the weighted?
Yeah. Yeah.
Oh, it would be. I'll probably have to come back to you, Brian, on that. But we have shifted with the reduction in the upside and with more now on the downside to a more downside-weighted curve. So we've got more, I guess, at the tail end in terms of that loss distribution curve. So it probably would be greater.
And then going back to my ramble at the very beginning, private credit is certainly re-firing away some of the rubbishy stuff. Is that right?
Yeah. Look, I'm in private credit.
You're in about 20%, Brian, I think.
Yeah. So in terms of, I guess, part of, I guess, what we've seen in terms of refi activity, look, we do see some business refi out to private credit. There's certainly, as a non-regulated segment, they can be quite quick in terms of how they look at originations. Very asset-focused. It's typically property. But we tend to see them more, I guess, at the edge of our risk appetite. As part of the proactive portfolio management, we have had some refi out to private credit. And as Chris kind of called out in his presentation earlier, sometimes if there's just a misalignment, it may be that there is a different funder that's more aligned to a customer's risk profile.
So we have seen a little bit of that and continue to at the edge of our risk appetite.
I think it's interesting, Brian. I mean, if you look at, as Andrew made reference to the law of small numbers. If you look at our over 90 days and impaired at 2.3%, 230 basis points, five customers make up 40% of that number, and we won't lose any money on those five customers. So by definition, they've all got good assets, if you like, but we obviously are more focused on debt serviceability. So it is very conceivable that those customers could find their way to private credit.
And the ATO?
Yeah. Look, I mean, we don't see, I mean, a lot of that. I mean, I think the ATO is obviously crystallizing a number of liquidations and what have you. But I mean, generally, I think those customers are, I mean, from what I can see, they're customers that don't generally have a lot of bank debt. And so it's not something that we see a lot of in our portfolio.
Fantastic. Just a second one, if I may, and I apologize because I think I asked this question last time around, but I'm just intrigued. When we have a look at it, you're originating a book primarily through brokers, but we can see some of the major banks, BizConnect, GoBiz, Biz, whatever, these direct digital models where they originate the business loan. Do you guys feel the need to invest in the tech for that, or is that not really required?
No, not really. I mean, I think those are very, very commoditized loans, cookie cutter, no speed bumps, no story to tell. They just sail through an algorithm, and generally, the tech is pretty much all the same, and it just comes down to price. That's not an effective use of our capital. We could never outspend them on the tech side either. When I said our sweet spot is between two and 15 million, I mean, by inference there, I'm saying that we're really not competitive when you get to a loan below a million dollars where that algorithmic approach to credit assessment, the economics just don't make sense for us.
Fantastic. Congratulations on the share price pop today. Thank you very much.
Thank you. Thanks, Brian.
Thank you for all the questions. This concludes the Q&A session. I will now turn the conference call back to management for closing remarks.
Look, thank you, everyone, for joining us this morning. Always no shortage of questions. There's some I'm grateful you took there, Andrew. But look, for us, solid set of results, doing what we said we would do. We have an exceptional team. A big thank you to our team because this is their result. And we're very, very excited about the future for our company. And we're just getting started in terms of demonstrating the operating leverage that is now in front of us. So thank you for joining us. Have a good day.