I said there would be three chapters to Judo's path to being a world-class SME business bank. Chapter one we labeled Build a Bank, which essentially meant raise our capital, launch the value proposition, develop the best banker employment proposition and the best broker proposition, obtain our banking license, and of course, get to profitability. Chapter two was labeled Scale the Bank, which essentially meant pivot to the public markets, diversify the funding and capital base, re-platform to our strategic and scalable technology, and largely complete geographical expansion. With this set of results today, I'm excited to say that it really does feel like chapters one and two are now firmly behind us. This year, we've continued to execute with discipline and deliver strong outcomes for our customers, our people, and our shareholders.
As we start to talk about guidance into FY26 later in the presentation, it is clear we are now firmly transitioning to chapter three, which we labeled Optimize a Bank or what we call Operating Leverage. At the end of this next chapter, we will have built a world-class SME business bank anchored off metrics at scale, and this is now well and truly in sight. Let me start with what underpins everything we do: the service profit chain. I start every presentation with this because it's the only way to maintain sustainable long-term competitive advantage anchored off culture. At Judo, we've always believed that highly engaged employees give great customer outcomes, and those outcomes drive growth and returns. It's not just a theory; it's a model we live by, and our data proves it. Our weekly measure of employee engagement remains very strong.
You fundamentally cannot delight customers more than you delight your own employees. This level of engagement has driven lending NPS to plus 53 and deposit NPS to a staggering plus 67. These are sector-leading numbers, and they're translating into real financial performance, including an 80 basis point uplift in ROE, which is an important step towards achieving our at-scale ROE target of low to mid-teens. Turning to the numbers, we've delivered a strong result, and that operating leverage I just talked to has clearly emerged in the second half of the year. Lending growth was 16%, almost double system growth, taking our GLA to $12.5 billion at the midpoint of our revised guidance. Importantly, we had a record month of growth in June. NIM came in above our guidance range at 2.93%, supported by tailwinds across lending, liquidity, and wholesale funding.
NIM improved throughout the year and was 3.04% in the second half, 23 basis points above guidance, reflecting our first clean period with no residual drag from the term funding facility. Our strong loan growth and improving NIM, combined with disciplined cost management, saw our CTI improve to 52.4% for the full year and, importantly, down to 48% in the second half. The 46% increase in other operating income also helped this metric. It really is quite satisfying to see our CTI below the symbolic 50% mark, as it is a clear signal of the operating leverage now emerging in the business. Our cost of risk was higher than last year in dollar terms, but as a percentage of GLA, cost of risk was 66 basis points, down from 72 basis points in FY24, trending towards our at-scale metric.
The main drivers were continued seasoning of the portfolio, as expected, offset by the benefits of proactive portfolio management. PBT grew 14% to $125.6 million, which was just below the profit guidance we first provided to the market in January 2024, which, of course, was over 18 months ago now. Considering the volatility in the operating environment during that time, we consider this to be a strong result. It does reflect our agility and ability to manage all the levers at our disposal and our commitment to doing what we say we're going to do. We've had a clear and simple strategy to build a world-class SME business bank, which we have been consistently executing for the past eight years. Our FY25 results really are just another brick in the wall.
As I said at the start, this year has been marked by continued focus to scale the bank, driven by purpose. We have looked, and there is no other bank anywhere in the world that has scaled as quickly as we have. From 15 locations at the time of listing to 31 today, relationship banker numbers have grown to 161. All our strategic, flexible, scalable platforms are now in place, whether that be our digital platform, data platform, credit risk engine, core banking. Our current modern technology platform is the benchmark, and not just for banks in Australia, but for incumbents around the world who are now investing heavily to catch up. It really has been a huge 18 months of building infrastructure, which we can now optimize, marked by excellent execution.
Later in the presentation, I will go through the plan to enable our bankers to improve productivity, leveraging this very strong technology foundation. After a subdued quarter three, we saw record net growth in the June quarter, driven by our differentiated value proposition and successful regional expansion. We have opened 10 new locations this year, marking our largest expansion since FY22 and accelerating our agri and regional growth strategy. Agri lending now makes up 7% of our book from a standing start three years ago. Despite this strong growth, we remain underweight compared to the industry average of around 20%. With other banks continuing to exit regional markets to reduce costs, we still have a significant runway ahead of us.
The regions really do offer better margins, larger deals, and higher NPS, where our CVP is particularly compelling. We've also made strong progress in our SME warehouse lending business, establishing two facilities with a combined limit of $165 million, and we've built a very healthy pipeline. Our willingness to offer smaller warehouse lines than the major banks, combined with our deep credit expertise, is allowing us to capture a market left underserved following Credit Suisse's exit. Our economics are increasingly driven by the existing loan book, and our blended lending margin remains stable at 4.3%. Front book margins can move with mix, such as growth in our warehouse business as well as competition for lending. We, like others, are seeing a lack of discipline in pricing for risk. We did see a decline in margins on new lending in quarter four to the low fours, but pleasingly, this has already reverted back to the mid-fours in our lending since then.
Our gross originations for the year exceeded $4.7 billion, despite strong competition. Our lending pipeline has remained strong at $1.9 billion, supporting continued origination momentum. We remain disciplined and price appropriately for the risk we take. Runoff, which was elevated, did peak in quarter three, but it moderated in quarter four as we cycled through the tail end of low margin COVID-era loans. Overall, our strength continues to be judgment-based lending, applying the four Cs of credit: character, cash flow, capital, and collateral in that order. It allows us to support strong businesses with the capital they need while maintaining price discipline and delivering sustainable economics. FY25 has been another year of disciplined execution, tight management of the levers available to us to continue scaling the loan book sustainably. Moving to funding, our deposit franchise continues to go from strength to strength.
The success of our deposit franchise really is one of our biggest achievements. Earlier, I mentioned that our deposit business has a Net Promoter Score of +67, which reflects how easy we are to deal with and the consistent market-leading pricing that we can offer because of our specialist model. Our deposit book actually grew at two times system and now exceeds $10 billion, with 71% of flows coming through the direct channel. Rollover rates are increasing, and brand awareness is driving solid growth. Judo is still a new brand for many potential customers. This simply highlights the growth opportunity ahead of us as our brand recognition continues to build. We're also realizing major benefits from our recent migration to Thought Machine, which has delivered a step change in product flexibility for deposits.
After just three months of being on the new platform, we've introduced several new TD tenors, helping us to manage maturity profile with increasing sophistication. We've also been able to be more targeted with the use of loyalty bonuses. We are also planning to launch two new savings products this financial year: a wholesale savings account, which we launched before Christmas, and a direct online savings account, which will be launched after Christmas. These initiatives will enable improved diversification, and they will give us flexibility and the ability to manage our deposit base with more science and better pricing. Now, lastly, before handing to Andrew, a word on credit quality. Our key metric of 90 days past due and impaired assets has remained stable at 2.43%. Additions and resolutions are largely balanced, and as I said earlier, write-offs total $39 million, or just 34 basis points of average GLA.
In fact, since lending our first dollar over eight years ago, our cumulative write-offs are still only $75 million, or less than 10 basis points a year on average. This is the benefit of being a true relationship bank that specializes in SME lending. Our judgment-based approach to lending means we do not simply look through the rearview mirror. We fundamentally assess the owner's skill, their experience, their track record, the drivers of cash flow in the working capital cycle, and the appropriate point of leverage for the business. On top of this, regular interactions with our customers mean we have the ability to act quickly if circumstances change. For these reasons, and based on our experience today, we remain very comfortable with our assumption of a 50 basis point cost of risk through the cycle. Now, on that note, I'll hand over to Andrew to run through the financials, and of course, I'll be back later to run through our strategic priorities and the outlook for our company. Andrew.
Thank you, Chris, and good morning, everyone. In FY25, Judo delivered a solid financial result with underlying profit before tax of $125.6 million, up 14% on last year. ROE also increased up 80 basis points to 5.3%. The result was underpinned by continued loan book growth, ongoing improvement in NIM, and disciplined cost control. On a half-on-half basis, profit before tax rose 22%, highlighting the inherent operating leverage in our business model. Turning first to NIM. Second half 25 NIM was 3.04%, a 23 basis point improvement from the first half, with full-year NIM of 2.93%. Notably, both second half and full-year NIM exceeded our guidance. On this slide, you can see the key drivers of NIM from December 2024 to June 2025, and most components were largely positive. Other cost of funding, which reflects mix and wholesale funding sources, had a 6 basis point favorable impact.
Lending margins contributed 10 basis points, showing the benefits from higher lending margins and proactive portfolio management. The treasury portfolio had a 6 basis point positive impact, largely due to the reinvestment of maturing low-rate fixed-rate bonds and tighter liquidity management. As you can see in the chart, deposit margins and equity had relatively minor impacts. Deposit margins had a 1 basis point unfavorable impact, with blended deposit costs rising to 87 basis points in the second half, up from 85 basis points in the first half. I will unpack this later in the presentation. The equity component of funding had a small drag on NIM, as falling interest rates were largely offset by our investment term of capital hedging strategy. Moving now to our expectations for NIM in FY26. We are actively managing NIM to remain above 3%, which is our at-scale target.
For FY26, we expect NIM to be in the range of 3%- 3.1%. In the first half, NIM is expected to be around 3%, slightly lower than second half 25. This reflects modest pressure from current deposit and lending market conditions, as well as the impact of RBA cash rate decisions. For context, our FY25 exit NIM was 2.93%, impacted by higher deposit costs. In the second half, we anticipate NIM will improve to around 3.1%, supported by several key tailwinds, namely funding mix and the launch of our new savings products. As Chris outlined, we will launch two new savings products in FY26, a key driver of our NIM trajectory for the year ahead. In a falling rate environment, there is a growing preference from customers for shorter tenor TDs and at-call products. This presents a strategic opportunity for us to enter the at-call savings market.
Our strong asset yield means we're well placed to offer competitive savings rates, reinforcing our ability to attract and retain customers, just like we're doing in the TD market. We will also benefit from enhancements to our existing TD offering, enabled by our new core deposit platform. This includes the introduction of new tenors and a more targeted loyalty bonus offering. Additionally, we've expanded our distribution footprint, and we launched with a second wealth platform provider that's already delivering strong inflows. Together, these initiatives will broaden and diversify our deposit base, enhance our flexibility in managing funding mix, and ultimately lower funding costs, reinforcing our ability to sustain a NIM above 3%. Next to deposit margins. As you'll recall, we swapped the majority of our deposits back to a one-month rate to manage interest rate risk. Accordingly, our TD margins are a function of headline rates and the swap rate.
During the second half of 2025, there was a disconnect between market headline rates and the swap curve, driven by macro uncertainty and the timing of anticipated rate cuts. While headline rates for the branchless bank segment did fall, the swap curve experienced heightened volatility. As a result, the margin on our one-year TDs written in the second half of 2025 was above our through-the-cycle expectation of 80 to 90 basis points, with the full run rate impact creating a headwind for the first half of 2026 NIM. Despite this, we remain confident in our through-the-cycle TD margin assumption of 80 to 90 basis points, as we view the recent volatility as temporary rather than structural. Looking ahead, we've seen some early signs of stabilization. As uncertainty around cash rates has eased, year-to-date margins on the new TD book have improved.
Maintaining originations around current levels should benefit NIM in the second half of 2026. Now to funding mix. Term deposits remain the cornerstone of our funding strategy and now represent 68% of our total funding stack. Our deposit book grew to nearly $10 billion by the end of FY2025, with $1.4 billion in net growth, driven primarily by direct retail customers, supported by high retail rollover rates of 70%. Beyond deposits, we continue to optimize our wholesale funding program. We have proven access to a diverse range of funding sources, and our profile in capital markets continues to strengthen. We were particularly pleased with the pricing we achieved on our recent Tier 2 and Senior Unsecured issuances, which came in significantly tighter than our previous transactions. We're actively exploring a number of funding and ROE optimization initiatives, including potential loan sales, to further enhance flexibility and efficiency.
Moving to operating expenses. In FY25, our CTI ratio improved by 220 basis points to 52.4%, reflecting the operating leverage inherent in our business model. Underlying OpEx, excluding the non-recurring costs incurred in FY24, grew by 2%. The largest component of our cost base, employee expense, rose modestly by 3%, largely due to wage inflation. Importantly, while the average number of bankers increased, total FTE was lower than FY24. This reflects the increasing maturity of our enabling functions and our continued focus on investing for growth. Looking at the half-on-half performance, employee costs declined by 13%, driven by incentive outcomes and some volatile items such as payroll tax, which we flagged at the half year. IT expense and amortization increased as expected following the successful implementation of several new systems. Turning now to our expectations for OpEx for FY26.
FTEs will increase, primarily in growth-related areas, including bankers, credit, servicing, and deposits. As previously flagged, we're also planning for some above-wage inflation growth in banker salaries. We are also insourcing select IT roles. As a result, IT expense will remain broadly stable, with CPI and new system costs largely offset by insourcing. Intangible amortization will increase, reflecting the full-year impact of newly implemented platforms and some new investments. Lastly, other expenses are expected to track broadly in line with inflation. While we are a growth business, cost discipline continues to be a priority. Overall, we expect FY26 CTI to be below 50%. This reflects our focus on ongoing cost control and revenue-linked investments that support growth across both net interest income and other operating income. Turning now to asset quality.
Impairment expense for FY25 was $75.5 million, or 66 basis points of average GLAs, continuing the downward trend from 72 basis points in FY24. The movement in impairment expense over the year reflects general portfolio seasoning, a rise in specific provisions across several sectors, and growth in the loan book. Our collective provision coverage ended the year at 0.95% of GLAs, down 10 basis points from FY24. The net movement reflects growth in the loan book and an increased weighting to downside economic scenarios, offset by some loans migrating from collective to specific provisioning and changes in our customer mix. Despite the decline in collective provision coverage, total provision coverage increased to 1.49% of GLAs, up from 1.39% in June last year. As Chris mentioned earlier, asset quality remains broadly stable, as evidenced by our ARIES ratio.
Looking ahead, we expect economic conditions to stabilize through FY26, supporting continued resilience in credit performance. Finally, to capital. We continue to maintain strong capital ratios at both CET1 and total capital levels. We closed FY25 with a CET1 ratio of 13.1%. There were two key drivers of CET1 movement over the half. Growth was the primary contributor to CET1 consumption at 90 basis points. Pleasingly, organic capital generation improved in the second half, contributing 40 basis points, supported by rising profitability. We expect this trend to continue as operating leverage builds over time. Looking ahead, we have a range of proven initiatives available to support our growth strategy and maintain capital strength. Thanks again, folks, and I'll now hand back to Chris.
Okay, thank you, Andrew. Now, of course, many of you will be familiar with this slide from our investor day, which explains the key elements of the next phase of our strategy, which is optimizing the platform we've built. It is completely consistent with the original vision. For us, our consistent, simple strategy has been a key factor of our success. We are, and will continue to be, solely focused on the SME sector. Our strategic priorities are to enhance our core business, grow our TAM, optimize our funding and capital, and create new avenues for growth. The full focus of our team has now turned to banker enablement and new products in order to achieve the optimal balance of growth and economics. Whilst we are a growth company, of course, we're also a bank.
As such, we are valued on our ROE, and we remain committed to achieving our at-scale metrics with an ROE in the low to mid-teens being the most important. Turning to the macro outlook, we expect conditions for SMEs to improve. Credit demand remains robust, and business confidence is lifting, although some sectors still face pressure. We expect to remain in an easing cycle, and lower interest rates should boost spending, which will be a helpful tailwind to many of our customers. An improving economy should also allow SMEs to pass on higher input costs, which are still growing at around 5% per annum. This has all been reflected in recent business confidence surveys. In addition, we are hopeful of some positive outcomes for SMEs from the productivity roundtable in Canberra today.
Lastly, and importantly, as I mentioned earlier, Judo is relatively well positioned in a falling rate environment, primarily because we do not have the zero-cost transactional accounts or fixed-rate mortgages of our competitors. Next, this slide outlines the key elements shaping our strategic focus for the year. On the previous slide, I covered the easing cycle and how we are a benefit relative to our other banks, and conditions this year should improve for consumers and for our customers. Whilst the lending market is competitive, especially for commoditized lending, we remain confident in our differentiated, smarter, faster, stronger customer value proposition. However, we're not complacent, and we remain disciplined in pricing for risk. We're also leveraging the investments we've made in our new technology platforms, empowering our bankers and driving productivity.
We continue to innovate and mature our relationships with commercial brokers, with the creation of a broker black belt program, which aligns the interests of brokers with our own, balancing growth, margin, and asset quality to drive portfolio economics. We're expanding our working capital offering to boost other operating income, and our warehouse lending will continue to build, as I mentioned earlier. On funding, our established franchise and technology replatform has created optionality, which you've also heard us cover extensively this morning. In addition, we continue to evaluate new balance sheet optimization levers, including loan sales, which have the potential to significantly boost our near-term ROE. Lastly, we will continue to manage our liquids book tightly to drive improved returns and benefit NIM. Next, touching on the ongoing investments in our customer value proposition.
We continue to innovate and mature our relationships with commercial brokers, with the creation of a broker black belt program, which aligns the interests of brokers with our own, balancing growth, margin, and asset quality to drive portfolio economics. We're expanding our working capital offering to boost other operating income, and our warehouse lending will continue to build, as I mentioned earlier. On funding, our established franchise and technology replatform has created optionality, which you've also heard us cover extensively this morning. In addition, we continue to evaluate new balance sheet optimization levers, including loan sales, which have the potential to significantly boost our near-term ROE. Lastly, we will continue to manage our liquids book tightly to drive improved returns and benefit NIM. Next, touching on the ongoing investments in our customer value proposition.
With our technology platforms in place, we are now able to drive the productivity improvements that we've flagged for many years. Over the next 12 months, we're unlocking banker capacity with initiatives including rebuilding loan modification and margin change processes, making them faster and more efficient, streamlining annual reviews through smarter workflow, and simplifying variations and increases, accelerating turnaround times for our customers. Finally, we're using the new data platform to deliver customer insights to our bankers, enabling them to be more proactive in addressing customers' changing risk profile and needs. These initiatives will mean our bankers will have more time to spend with their customers, manage larger portfolios, and continue driving growth. All of this translates to the operating leverage I talked to in my opening slide. We're progressing towards our at-scale ROE target, and our PBT trajectory reflects that.
From $32 million, excluding the TFF in FY23, to the guidance that I'm about to talk through of $180- $190 million of PBT in FY26. This is a result of the consistent execution of a clear, simple strategy, which we architected eight years ago. The profit growth, of course, does not stop in FY26 either. This coming year is an important step change towards our at-scale ROE and shows the true earnings potential of our model. Now to guidance. We have previously provided FY26 profit growth guidance, and today we're providing more granularity on the composition. Starting with GLA, we're targeting a loan book of between $14.2 billion and $14.7 billion by June next year. We will continue to drive growth in the loan book from consolidating our position in the regions, lifting banker productivity, and growing our warehouse lending.
As I said earlier, we will continue to price for risk as we navigate competition. On NIM, as Andrew has outlined, NIM will be a story of two halves, with first half NIM expected to be around 3% and second half NIM to increase to around 3.1%. Accordingly, for the full year, we're targeting a range of between 3% and 3.1%. Our FY26 CTI ratio is expected to be below 50% as revenue growth outpaces expense growth on a full-year basis. Growth in other operating income is also expected to contribute to our CTI. Cost of risk is expected to be in the range of 60- 65 basis points, a modest improvement from FY25, with seasoning of the existing portfolio and upfront provisioning on new lending.
The sum of all these is a PBT in the range of between $180 million and $190 million, reflecting significant growth versus FY25 and a very strong ROE trend. By the end of FY26, we will have made significant progress with ROE improvement. In closing, FY25 was a year of solid financial results and strategic progress. I remain very excited about our differentiated proposition and our future, which we went to great lengths to articulate at our investor day on the 2nd of June. We have multiple opportunities to grow lending and other operating income, and we're exploring funding and capital optimization to support that growth with disciplined risk management. Our executive team is arguably one of the strongest in the sector. Our workforce is highly engaged.
We have the happiest customers on both sides of the balance sheet, and we continue to be guided by our purpose to be Australia's most trusted SME business bank. We're managing all the levers at our disposal, and FY26 will be about optimization and operating leverage as we continue our clear trajectory towards delivering our at-scale ROE in the low to mid-teens. Thank you, everyone. We now look forward to taking your questions.
Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, press star one one again. Please have one question and one follow-up per person. If you have more questions, please re-queue. Stand by while we compile the Q&A roster. First question comes from Matthew Wilson from Jarden. Please go ahead.
Yeah, good morning, James. Thank you, Matt Wilson. Jarden, I wonder if you could add more color to your new savings account product. Could you talk about how you intend to gather customers here, the pricing methodology? Should we think of it akin to Macquarie's products? Ultimately, when you think about where you want to see your deposit mix going forward, you know, vis-à-vis TDs versus savings, how should we think about that?
Look, Matt, I'll take that. It's a great question. Thank you. First of all, of course, this optionality wasn't available to us in the early years of Judo. When we started Judo, we wanted to make sure that we had a bias to long-dated term deposits so that we had stability on the liability side of the balance sheet. It's really exciting that now that we've got a $10 billion balance sheet, we can actually introduce some new products with shorter-dated tenure. It's also made possible by our replatforming onto the Thought Machine core banking platform. Yes, think of it as a high interest online savings account. These are the savings accounts where you have to make a payment each month to get a special bonus rate. Statistically, we know exactly how those products perform from our history at Macquarie and our history with Ubank, etc.
It should be a product that over time, as it builds, will have a margin advantage of maybe, say, 30 basis points over term deposits. That's how we think about it. We've built a great franchise. Our brand is very strong now. We have well over 50,000 deposit customers, and we think we can launch that product with a high degree of awareness of who Judo is and that we can attract a very, very different customer base to the one that's currently supporting us on term deposits. We're really excited about this. It's a product that we've wanted to bring to market for some time. It does add to our NIM story, as well as diversifying our deposit base over a much, much larger cohort.
Thank you. That makes sense. Just to follow up, if I may, you mentioned loan sales a couple of times in the presentation. How do we think about the economics of that? How do you identify the loans that you will divest to other natural buyers? How does it impact the relationship?
Thanks, Matt. Look, this is really another tool in the toolkit that we are considering as part of overall optimization of the balance sheet. As you know, we did the self-sec term sec earlier in our journey. This is another tool in the toolkit that we are exploring. In terms of the economics, there are things that we're probably holding up our sleeve at this stage. I think the important thing for us in exploring this tool as a bank that has SME assets and the asset yield that we have is that the economics for this tool versus a mortgage bank is actually quite materially different. It's more attractive, whether that comes through an upfront premium, whether it comes through how we think about a servicing fee, etc. They are all things that we have available to us.
It is another tool in the toolkit around balance sheet velocity, ROA optimization. Again, it kind of builds on this theme of more scale, established business. We can actually look at these types of things. It is something that we are considering. It is a very good market to be considering these types of initiatives.
No worries. Thanks, team.
Thank you.
Thank you. Just a moment for our next question, please. Next, we have Jonathan Mott from Barrenjoey. Please go ahead.
Yeah, Chris, I've got a quick question. I just wanted to go through some of the maths around the growth in the loan book. We've talked about this a bit before, but I wanted to go into a bit more detail. To get to the target, say the midpoint of $14.5 billion that you're going for total loans, you usually talk about an average next year. Let's pick a number, 170 bankers doing one loan a month at an average of $2.5 million per loan size. You're originating around $5 billion roughly of new loans. To get back to the target, you're looking around $3 billion of runoff, which implies quite an elevated runoff again in FY2026 of around 24%.
I just wanted to get a feel, is that kind of the new reality for your book with a 75% broker-originated book, that the runoff rate is just going to land at a higher level than you had originally estimated around 20%? I've got a follow-up question for.
Yeah, no, thanks, John. I'll take that. First of all, there's no correlation with the penetration in brokers. We can talk about that, but brokers do not churn out our books. Your math is broadly correct. The average loan size has ticked up a little bit, or we think it will next year to about $2.7 billion. I'm very confident on our gross origination number, which is essentially your math. I've got it to $5.2 billion. That's 100, as you said, about 170 bankers, average loan size of $2.7 billion. One loan per month per banker, which is not an overly heroic assumption, gives you $5.2 billion of gross originations. The reason, if we're being honest, the reason we've expanded the range here, the range of $14.2- $14.7 billion, it is a bigger range than we normally give. That's because I'm less confident on exactly what that runoff number will be.
If you take the low end of the $14.2 and the high end of $14.7, yes, you've got runoff of between sort of 22% and 27%. You're absolutely right. I think with the nature of competition at the moment, the lack of discipline, certainly that we're seeing with regards to the pricing for risk, we felt it was prudent to guide the market with a slightly higher runoff at that low point of around about 22%, 23%. I still maintain that the thesis of 20% is robust, but we are seeing a lot of competition at the moment. We're seeing a lack of discipline with regards to pricing for risk. We just thought we'd be prudent on that. I'm very, very confident on the gross origination number of that sort of $5 billion, $5.2 billion. In regards to brokers, they do not actively churn us. That is, the contract we have with them does not allow that. We are seeing a significant increase in the number of brokers. What we're seeing now is sort of one broker lose a loan to another broker. It's not a reflection of our concentration at 75%.
Okay, can I just follow on? You did mention it as well, sort of the one loan per month or 12 per annum. This might sound a bit harsh, but it doesn't seem like a particularly challenging target. Now, given that three-quarters of the loans are originated via brokers, it means that the proprietary loans that you're assuming each banker makes is one loan every four months. Is that really good enough? Can you get your bankers to get out there and, I hate to say it, but originate, work harder, and sell more to increase your front book sales?
Yeah, look, it's a great question. I mean, there's averages of averages in there, John. Obviously, that is an average. You know, we do a lot of smaller facilities as well, asset finance. One of our biggest challenges is still that the processes to originate a $2 million loan are the same as a $10 million loan. That's a lot of the work that we're now investing in the business in terms of streamlining those processes. Yes, you're absolutely right. I mean, the capacity for our bankers to originate at a higher metabolic rate is the key focus for the next 12 months. Until we've seen it, it's not something that we're actually going to embed into our guidance.
You know, we still decline. Our bankers would decline 50% of the loans that are referred to them by brokers. We decline them very quickly. That's a key part of our value proposition. If we're going to say no, we say no straight away. There isn't a 100% conversion rate of all the loans that come through our brokers. We have a much higher conversion rate than on direct, which is why we have a preference for broker-originated loans. Yes, you're right. I mean, the productivity opportunity in front of us with regards to our bankers is significant.
Thank you.
Thank you. Next, we have Andrew Lyons from Jefferies. Please go ahead.
Are you there, Andy? We can't hear you.
Can you hear me now?
Yeah, got you now, Andrew.
Yeah, hi, sorry about that. Just two questions. Firstly, just on the fixed cost leverage in the business, which really came through in the second half of the year with a close to 10% improvement in your CTI to a little below 48%. You note in your guidance you expect an improvement in your CTI in FY26 to below 50%. I guess I just have two questions. Firstly, to the extent the revenue environment is different to your sort of current base case, how quickly do you think you can respond from the perspective of expenses? Secondly, do you think you'll see the CTI in FY26 improve vis-à-vis the second half 25 levels, which was, as I said, a bit below 48%?
Yeah, thanks, thanks, Andy. I'll take it in those two parts. I mean, I think in terms of speed, I guess, of us being able to flex that cost base, let's start with, I guess, the composition of the cost base, and it's largely our people. There is an element around us planning our footprint, our investment, but it is effectively a people-linked cost base. The key component there, I guess, is that we are increasingly investing for growth in that cost base with functions that support the business largely at maturity. The new FTE that we're putting in is largely revenue-linked. I think you saw that to a degree in FY25, but it will be a greater component of our FY26 trajectory. It's largely people. We have a little bit of what I guess you'd call kind of fixed costs in terms of amortization and IT expense, which is really about running the business.
Whilst we've had some step up in that amortization profile as the intangibles relating to our systems have been stepping into the cost base, that is kind of largely done. There's a bit of a step up, as I called out in my notes for FY26, but we're pretty much operating there with the full amortization of those new system investments and the run costs of those system investments kind of in the cost base. This largely comes down to our view on our people, where we want to invest, the footprint, but largely kind of revenue linked. It's a different dynamic, I think, going forward than it was, say, two years ago. In terms of first half, second half dynamic, we typically do all other things, but you can see a higher step up of costs in first half versus second half because we go through an annual remuneration review when people are the biggest part of our cost base. You kind of see that step up in the first half, but you don't get it again in the second half. There are some first half, second half dynamics. The other kind of relevancy, I think, in terms of the cost movements, which I called out in the speech, was the second half of 2025, where we did see that employee expense was lower because of a little bit of volatility we had in the first half, but actually largely the incentive movement and the final incentive outcome. The key bit here, I think, is the operating leverage in the business. You're starting to see that with the profit growth that we delivered this year, but also the guidance for next year. Hence, that CTI for the year being below 50%. I think, again, that'll be a bit of a tale of two halves, where we'll see much more significant operating leverage in that second half of 2026.
That's great. Thank you very much. Just a second question on your NIM. You've delivered a 3.04% second half NIM after a 2.81% first half, but your exit NIM, you noted, was down at 2.93%. You're clearly still getting a lot of volatility in your NIM. As a company that provides NIM guidance 12 months out, I guess, how do you get confidence just given this level of volatility? More importantly, over time, how do you think you can perhaps manage the business to better control the volatility that you do see subject to sort of front lending standards and deposit costs?
Yeah, no, thanks, Andy. Look, let's deal with the volatility we saw in that exit NIM. Yes, you know, a little bit lower there at 2.93%. Really, two factors drove that. They were a little bit specific to that particular point in time. Firstly, the timing of the RBA cash rate decision at the end of May. We do have a little bit of short-term impact, especially as it relates to really short-term deposits that take a little bit of time to wash through. That's very short-term. That washes through in kind of a matter of, you know, one, two or so months. For the component of the deposit book that we don't hedge, that very short-term stuff we don't. You get a little bit of that. That was a bit of a flavor that we saw in that exit NIM being the June exit NIM, just to be clear, the 2.93%. The other component, which was relevant for that month of June, is it was a massive origination month.
I mean, it was the largest that we had on record, significant growth. We have to pre-fund that. We had to actually pre-fund it because of the size of that volume. You just had a bit of, you had a bit of funding drag on that month. Yes, a bit of volatility, but specifically those two drivers for June. As it relates to the forecasts that were provided for FY26, how have we got confidence in that? A lot of those drivers for FY26 NIM are things that are going to be in our control. The big call out is the initiatives that we have with our deposit book, namely those two new deposit products. For us, opening up a second TAM with the out savings deposit market just allows us to be much more flexible with how we look at volumes in TD, the TD market versus the volumes in this new market. A reduction of reliance on TD volumes means we can be much more nuanced about how we think about pricing. That is a big driver of, you know, of the NIM movements in FY26. We have quite good confidence around that. I think the second piece there is it's been a little bit of a flavor of the last couple of our results, is just what we've been able to do with the treasury book. This is one where we've been managing it a little bit tighter in terms of levels of overall liquidity.
You can see that in the stats. We're expecting that to be a bit of a trend in FY26 as well. Again, more mature, more stable, predictable kind of balance sheet with no TFF funding in there. We can manage it a bit tighter. Secondly, it's just the rolloff of these fixed-rate bonds that were low yielding. We took them on during the TFF. They gave us a bit of yield then, but they're a real drag on our treasury book. As those roll off, we just replace them with assets yielding closer to the cash rate. You can see that trajectory in the step up of the yield on treasury. It's been a discount to the cash rate. We're expecting that to step up and be a small premium to the cash rate going forward. A lot of these things are kind of mechanical in our control. We've talked a bit about lending margins. We're going to assume that over the course of the year, they're kind of fairly, fairly stable with that blended lending margin. This is a story of the other side of the balance sheet driving more of those NIM movements in 2026.
That's great. Thank you.
Thank you. Next, we have Nathan Lee from Morgan. Please go ahead.
G'day, Chris and Andrew. Thanks for your presentation. Maybe if I can just draw you back onto that NIM discussion a little bit more. Previously, you've talked about what the exit rate was for your guidance period. At 2.93% exit for second half 2025, 3% for first half, 3.1% for second. Could you talk about what your exit rate is and then just what the drivers are of NIM changes going into FY27, just so we can sort of think about where the earnings growth could come, you know, be driven by through the NIM for that year?
Yeah, thanks, thanks Nathan. I'll start on the question. Look, if you kind of trace through, I guess, the trajectory that we're calling out with where we finished the second half 304, but an exit NIM of 2.93%, the 3% that we're guiding to for first half, the 3.1% we're guiding to for the second half, you get a sense of what the trajectory is going to look like. Again, back to my previous answer to the previous question about a lot of this being driven by what we're doing on the deposit side. We've got two exciting things that we're doing in FY26. We're going to launch an intermediated savings account, and we're going to launch a direct online savings account. The intermediated account we're going to launch quite soon, pre-Christmas. The direct online account is one that we're going to look to launch after Christmas.
That's probably the product where we will take more volume, a little bit like we've done in the TD book, where we've really grown and are growing that direct retail proposition. I think more volume we will get from that product that we're launching later. The more volume that we take in these products, the less reliance that puts us solely on the TD market. That's going to be a trajectory that I think continues into the exit NIM for 2026, but also into 2027. It's not yet about us getting lower costs from those savings products. No, I think, as Chris talked out there, things that are ahead of us. This is about just establishing ourselves in the market. As you think further beyond FY26, the ability for us to start to be more scientific about how we price all of these products and get a funding benefit is really ahead of us. The trajectory is one where we're going to see, I think, some improvement through the year, especially into that second half of 2026. Beyond that, it's around optimizing those products. On top of that, we're still going to have some fixed-rate treasuries that are going to mature in FY27. That story does not stop. This year ahead in 2026, we're going to have that dynamic again in 2027. That's another factor supporting NIM beyond this financial year.
I'll just supplement that with the other side of the balance sheet as well on the lending side, because this is where I do, I am very optimistic about the trajectory of NIM. We've still got some huge opportunity in terms of changing the mix of our originations to be accretive to gross lending margin. We're still massively underweight on equipment finance. It's still about 5-6% of our book. Really, we want that to be over 10% of our book, and we get much better margins on equipment finance. It's probably the residual component of replatforming that we still need to do. Secondly, on lines of credit, our line of credit product, if we're honest, is quite clunky. It is a much, much higher margin product. It comes with line fees, etc. There are some ways that we can innovate around that. For instance, we could bring a card product, etc., to that facility. We think we can drive that much higher than it is today as a percentage of our book. As I said earlier, we really haven't developed a compelling S in SME product where we can get higher margins for those lower value loans. This expansion into the regions into Agri can drive much, much higher margins, as I said earlier.
That's still underweight at 7% of our book versus the system at 20%. The second thing is competition. The nature of competition cannot continue at the level that it is. We're seeing a real lack of discipline in regards to pricing for risk. It's not a strategy. It's not sustainable. If we fast forward 12 months out from here, I certainly think we'll be in a different environment. Also, compounding that will be the drag on NIM that the major banks will suffer from a falling rate environment. We do not have the same headwind there in terms of the exposure to call-free funds. For all those reasons, I think there's as much opportunity on the asset side as there is on the liability side. At the end of the day, we have levers. This is not a commoditized home loan lending business. We have a lot of levers. We can change the mix of our products. We've still got a huge opportunity to develop new products that we've talked about in the past, things like equipment, like receivables finance, trade finance, etc. As you start to think about FY2027, FY2028, there's still a lot, a lot of options in front of us, which will all be accretive to NIM.
Excellent answer. Thank you, Chris. My second follow-up question is just to do with provisioning. I noticed that with your scenario weightings, you've increased the weighting to the downside scenario. Can you just tell us what you're seeing out there that's got you worried that you've increased that weighting?
Yeah, look, Nathan, this is more around how we derive sensible loss distribution curves that go into our collective provision and our overall provision assessment. What we have found, if you look at the inputs to those economic scenarios, is that actually the kind of macroeconomic forecast data is looking a little bit better than it was over that kind of 12-month period than it was a year ago. As a consequence of that, those PDs that the models are driving actually get better. As the base case macroeconomic scenarios look slightly better over that forward period, as we've said, we see that economic condition stabilizing over the next 12 months. In order to have a sensible kind of loss distribution curve that really drives a sensible kind of tail and an exponential set of outcomes, we've just increased the downside weights to really reflect that.
As you'll recall, we're operating on our new credit risk engine. We've been operating that now over the full year. We've got more granularity in terms of how we actually assess credit risk grades, etc. This is all really, I guess, just as we continue to refine the overall assessment tools that we use to derive our ECL. The overall outcome here is that we've got a collective provision that has kind of been around that 1% level. That feels appropriate to us, notwithstanding the specific provision build that we've had, which you'd expect in this economic environment.
Excellent. Thank you, Andrew.
Thank you. Next, we have Jason Shao from Macquarie. Please go ahead.
Hi guys, thanks for taking my question. I just have another question around the potential online sales. I appreciate you're still keeping the economics close to your chest at the moment. I just want to ask if the decision to do so or consider doing so is more return-driven or funding-driven? How do you consider the balance between potentially selling part of your loan book and your at-scale GLA targets?
Yeah, look, I mean, Jason, this is, as I said, this is really another tool in the toolkit for us as to how we think about the overall balance sheet in terms of balance sheet velocity and, you know, an ROE optimization. Clearly, doing a loan sale also has benefits from a funding perspective because it reduces the overall kind of funding ask. It's interesting from that perspective too for us because, to date, we've been pretty simplistic with our options in terms of how we fund the balance sheet. It's largely term deposits. It does have some benefits in terms of funding, but the driver here is around balance sheet velocity. This is a great tool for a business that's growing. We are growing, as Chris called out, we're growing at a two-time system. I t is a helpful tool to consider as part of the overall way that we manage the balance sheet and capital and ROE. As I said earlier, it's an attractive tool for a bank like us that has an attractive yield. That leads to quite attractive economics vis-à-vis a mortgage business.
Thanks. My second question is around warehouse lending. I think that today you mentioned a pipeline of $1 billion for the process of onboarding some of those customers, whereas it was a bit longer than you expected. How is that progressing at the moment? Is there any more color you can give around return on margins on these customers? What type of customers have taken up these warehouses?
Yeah, no, Jason, I'll take this. Look, it's going really well in terms of the market opportunity. As I said, we really pretty much have the market to ourselves in terms of doing smaller warehouse facilities than the major banks, again, to the SME economy. We really are leveraging our expertise around assessing credit. We've drawn down two facilities so far. I think we've got the third one actually drawing down this week. It's probably a little bit slower than we originally anticipated. The due diligence for a warehouse line is definitely longer than a normal corporate. It can be anything up to about six months because as well as doing the credit due diligence, we have to do the operational risk due diligence and all their practices around AML, KYC, etc., etc. That's probably taking a little bit longer than we originally anticipated.
We're finding that the customers that we're supporting don't have a significant stock of loans to put immediately into the facility. In many respects, we're funding the forward flow. We can put a $50 million facility in for a customer, but it might take 12 months, if you like, for that facility to actually draw. We get rewarded for that because we're taking on utilization fees, as you'd expect us to do for the use of the capital. Actually predicting the pace at which it's actually going to become drawn GLAs is probably a bit more difficult than we originally assumed. As we establish a track record and operating rhythm, we'll get better at doing that. We're thinking about adding another half a billion of growth to that business in the next 12 months. The opportunity is there. There's no issues at all with the market opportunity. It's just the gestation period to getting a fully drawn loan on our balance sheet is probably just taking a lot longer than we thought it was.
I'm sorry, any color you can give on the return difference versus zero?
Yeah, look, it's a double-edged sword. On the gross margin, it will be a drag on NIM because essentially we'll be getting in the high threes, but highly accretive to ROE. There's no reason at all why the vast majority of these warehouses shouldn't be at a risk weight substantially below 50%, if not below 30%. If you can get a high threes gross margin on a risk weight below 50%, you can do the maths. You're talking about an ROE considerably higher than 20%. Very accretive to ROE, but a slight drag on NIM. As I said earlier, we have other components in terms of mix where we can balance that out. By dialing up equipment finance, dialing up lines of credit, dialing up our expansion into the regions and our agricultural book, it's all averages of averages. As a standalone product, it will have a gross margin lower than the average of the bank.
Thanks so much.
Thank you. Just a moment for the next question, please. Next, we have Richard Wiles from Morgan Stanley. Please go ahead.
Good morning, everyone. I've got a couple of questions. The first one relates to term deposits. I think it's fair to say that the rates on high interest online savings accounts today mean that demand for term deposits is lower than it was in the past. You know, 4.5% or thereabouts on a high interest online savings account from the major banks, a reward saver, is a pretty attractive rate versus TD rates. We haven't seen TD levels rebound to where they were pre-COVID. It leads me to ask, are you still happy with your 80 to 90 basis point margin assumption for TDs? That's based on long-run averages in an environment where there was more demand for TDs.
Yeah, I'll take that, Richard. First of all, the term deposits system is actually still growing. It was up 10% in the last 12 months, and we delivered 20% growth, so two times system. It's a massive market. It's a $1 trillion system on its own. The average duration of a big bank term deposit is about four months. The system replenishes itself three times a year. A $1 trillion stock is $3 trillion of flow. That's $250 billion of flow every month. We largely have the number one rate in the rate comparison side, and we don't need, and we don't want all that flow clearly. We still think that we have a lot of ability to manage different tenures, different cohorts of customer. We've now got more flexibility around the bonus rate, and we can actually differentiate that now by tenure and by customer cohort.
We remain very comfortable with that assumption. In fact, in July, we've had another rate cut. We saw deposit rates actually at the lowest they've been in the whole of this calendar year so far. I think our core assumption around that being sort of 80 basis points, 88, 90 basis points is sound. As Andrew said, things like optionality around a loan sale could change that dynamic because that would free up a significant amount of liquidity for us. The new products that we've got in terms of the business online savings account and the high interest online savings account will also enable us to diversify away from that and take the reliance on that term deposit product. We've got a huge amount of flexibility around emerging in terms of how we fund the balance sheet. Yes, I'm very confident in that long-run assumption that supports the new.
I think the other thing, Richard, is it is a bit of a different demographic customer base. I mean, our average TD customer, it's a 60-year-old customer. It's a customer that's in that late accumulator, early retiree bucket. It's a customer that, you know, we think probably has, you know, several TDs. They like TDs because of the certainty. That is, and has consistently been, I guess, the core demographic of that TD customer base for us. You're right, at a system level, it moves up and down a bit depending on where we are in the rate cycle. The savings account demographic is a little bit different. You know, we've been doing a lot of work around this. We've got a team that have operated these at other banks, as Chris referenced earlier.
You know, we've got a slightly different assumption about what we think that average deposit size will be as a consequence of this being a slightly different customer. I think it's, for us, about opening up a second TAM with, you know, some overlap, but also some different customer dynamics within those markets. For us, at 1% of the TD TAM, there will always be a customer that likes the certainty and, for us, likes that attractive rate that we can offer in the TD market.
Okay, thank you. My second question relates to the guidance. In late May, you provided FY26 PBT growth guidance of 50%. I would have assumed your first-time guidance was conservative. You provided it earlier in the year than you had previously. Today's guidance implies 43% to 51%. At the bottom end, it's a modest downgrade to your initial guidance. What's changed?
Yeah, look, I think, Richard, it's a bit of reflection of the, you know, some of the environmental factors that we've seen. When you look, for example, on the deposit side of the balance sheet, sticking with that for the moment, you can see what happened in that April-May period where there was just this very significant disconnect. We've got that in one of the slides, with the deposit margin in our pack. That's going to be something that is going to wash through and impact our first half a little bit. There's a little bit of that factor. There's a little bit of the competitive dynamic and runoff, as Chris mentioned as well. It's a little bit reflective, I think, of the current market conditions that we're seeing. There are things that we think will kind of wash through the book. We remain pretty confident with the underlying operating leverage that's inherent in a business model. It's very significant profit growth. We've trimmed it a little bit just based on some of the things we've seen in the back half of the second half that will impact the first half of 2026.
I think it's an extension of how I answered John Lott's question that we're, you know, at the end of the day, we're a bank that lends money. The key determinant of our future revenue is going to be the GLA. We have expanded the guidance, the range from $14.2- $14.7 billion. It's not a story of origination. We're very, very strong on origination. We can predict origination. It's a huge market that we play in. We're still only 2% of the market. What we're finding it harder to predict is exactly what the runoff rate will be at, and so we've just embedded a little bit of conservatism into how we're guiding the market on that.
Okay, thanks, Chris.
Thank you. Next, we have Brian Johnson from MST Financial. Please go ahead.
Hi, thank you very much for the opportunity to ask two questions. Just looking on page 46 of the result as opposed to the slides, when we have a look at the cost outcome in the second half of the year, it was $115 million in the first half, $116 million in the second half, but most of it is the employee benefits expense going from $71 to $61.8 million. A $10 million delta half on half is quite big. You attribute some of that to the incentive payment. Could we find out, if possible, what was the incentive payment that was accrued in the first half? What was the incentive in the second half? What is the assumption on the incentive payment next year? I appreciate you probably don't want to answer that question, but given it seems to be such a material driver of the cost outcome, I don't think it's unreasonable to basically see what you're saying there because the REM report doesn't read as particularly positive, perhaps as we would have thought at the first half and then over the second one.
Yeah, no, look, thanks Brian. It's a good point. It is a driver, as you've rightly pointed out in terms of that first half, second half dynamic. As a consequence, the second half employee expense is lower than we would expect on a run rate basis. I think what you saw in the first half is probably a better sense, all other things being equal, in terms of what that, you know, kind of normalized expense base would be. There's been a few volatile items in that first half. The way that payroll tax came through the year was a bit disproportionate between the two halves. You're right, the real driver there is what that incentive accrual was. In the REM report, it's a 65% outcome. That's in the numbers. Last year we paid 80%. Crude maths, if you go into the note on employee expense, you can see that the performance-related incentives, $23.7 million for FY25. It's crude maths, but if you took that and moved that from 65% up to 80%, which was last year's payout, you'd have a better sense of what that would be. It's crude maths, but that's probably the best way to think about the delta. I call it kind of five bucks when you do the maths. That is probably the largest single factor in that first half, second half dynamic.
John, I don't know about anyone else, but the quality of this line, I couldn't hear much of what you said. I assume it will come through in the transcript. The second one that I had is one question that I asked at the first half as well. When we have a look year on year and half on half, you've basically, half on half, moved the weighting to the base case down from 55% to 50%, and the downside and severe has gone up from 40% to 45%. When we actually have a look half on half, you can see that the upside scenario has gone down from 60 bps to 55 bps. We can see that the base case has gone down from 85 bps to 76 bps. What we can see is that the downside scenario has gone from 123 bps to 109 bps, and the severe downside from 159 bps to 142 bps. I'd just like to understand, I guess the fact rates coming through makes everything better, but the decline is pretty marked. Could we just get an explanation as to why you're so comfortable with these downside and severe downside cover numbers coming down at a time when we see, for example, for the major banks, they're naturally going up?
I think it relates in part, Brian, to the economic inputs, I guess, that we've got in those scenarios. You wind back a year ago, and we probably put more pessimistic or more cautious, I guess, on the economic outlook for the 12 months ahead. When you look at what those inputs are for these next 12 months, we're seeing some signs of stabilization. I think this is something that some of the other banks have called out in terms of those inputs that are going into the models. As a consequence of that, those metrics have kind of come down across all of those scenarios. It is a reason why we have increased the weighting to those downside scenarios to get a more sensible loss distribution and a coverage level, a CP level that we think is kind of more reflective of where the book should be, which is kind of in or around that 1% level.
I suppose, Andrew, the only observation I'd make is you're saying at scale 50 bps, the loan book lasts three years. Just raw maths, that would suggest that number shouldn't be 1%. It should be perhaps closer to 1.5%.
Yeah, I mean, for us though, because the book is growing, we'll always have, you know, it'll be suppressed by the new lending that we're putting in, putting into the book. I mean, as Chris said, you know, originations for FY25, $4.7 billion. You know, we've called out what we expect in terms of gross originations for next year, and that new lending that we're putting in, different to a mature bank, obviously, where you've got much more stable GLA and GLA growth. Because of our above system growth and the fact we've got so much that we're putting into the book, I guess that's in a 12-month period and therefore attracting a much lower, you know, much lower provision, that is, that I guess suppresses that collective, versus a more stable bank. I mean, we still do benchmarking on this, and I appreciate it is hard to do to get a complete like for like, but that 0.95%, that's across the whole book. If you take out home loans, it's about 0.98%, it's probably closer to 1%. And that's kind of middle of the pack, versus the public disclosure.
CBA is the same number, I think.
Yeah, CBA is probably in the nineties, low nineties, I think the last number that we looked at, ANZ a little bit higher, we're pretty much in line with NAB. Whilst we do do that benchmarking, I think another key factor there is just the significant gross volumes that we're putting into the book every year, which attracts a lower provision because it's in that first kind of 12 months period and we haven't seen as much of that kind of stage migration that you perhaps otherwise see in a more mature book.
Without debating the point, I mean, Commbank is about 70% housing as well. Anyway, thank you very much.
Yeah, that was their business number there.
Thank you. Next, we have Andrew Triggs from J.P. Morgan.
Thank you. I'm actually getting the same horrendous audio quality as Brian, so I'll persevere. First question, just back to the operating expense outlook into FY2026. Obviously, 2024 saw very strong cost growth of 13%, it was 2% in the year just gone. Would you just weigh this from thinking about something like sort of high single digits given some of the headwinds that you've called out in the slide, or could it even be a bit higher than that?
Yeah, I think it depends probably what base you use, Andrew. I think, per the earlier questions with some of the volatility and some of the one-off, and the way that the incentive accrual came through, normalizing for those things is probably appropriate if you think about what's the right base to start with in terms of your question around growth. We've always kind of guided to around that kind of mid, mid single digit growth. We'll probably see it a tad higher off a normalized expense base for FY2026. Again, noting the fact that we are adding additional bankers, adding revenue related FTE during the year, noting the comments that we've called out about seeing a little bit of banker REM inflation that's above kind of the standard wage inflation, and also just a little bit of extra OpEx that we've got in terms of some discovery around additional kind of revenue products, ROI, and the launch of the new deposit products. We've got a little bit of extra OpEx relating to some of those factors. That's kind of probably seeing it a little bit higher, but still very much in that kind of single digits, especially when you look at it on a normalized basis.
Okay, thank you. Second question, just on the new lending margin of 4.1% for the fourth quarter, you put that down to mix and competition. Just specifically, what mix impacts are you talking about there? Why do you think competition will get better in FY25? Just to be clear, are you still expecting a blended margin to hold around that 4.3% level for the first half?
Yes, I'll take this, Andrew. Yes, look, we are. I mean, the front book margin, it can be quite volatile month on month, depending on exactly what you said, mix and competition. That mix can be on the positive side. It can be a higher mix towards agri and regional, equipment finance. On the lower end, it can be certainly a higher mix towards warehousing, or we've had some of the warehousing facilities draw down in the last couple of months. I think it's averages of averages. I think if you look at, for instance, FY25 as a whole, we originated $4.7 billion of new loans at an average margin of 4.5%. In FY24, we originated $3.9 billion of loans at an average margin of 4.3%. We're very confident, you know, over the last two years, we've originated well over $8 to $9 billion at an average margin of 4.4%.
We're happy that in the long run, when you go through the different, you know, you take out the month-on-month volatility, we can maintain that margin at the level that we've set out. I do think we are in a period at the moment where there's a significant amount of competition. As I said, what we're seeing is a lack of discipline around pricing for risk. We will just withdraw. We're not going to price assets that are not reflective of their risk profile. As I said, that's not sustainable. That's not a sustainable strategy for our competitors. Over the long run, we're comfortable with our margin guidance that we've given. If you look back two years and you take out all of the volatility quarter on quarter, then you, as you said, get a very stable front book origination margin of between that 4.3% and 4.5%.
Thank you.
Thank you. Just a moment for our next question, please. Next, we have Olivier Coulon from E&P Financial Group. Please go ahead.
Yeah, hi guys. I wanted to clarify in terms of the guidance. Are you assuming loan sales in that guidance, and what would be the profit impact, if any, in FY26? You obviously spoke to upfront, you know, potential profit if you do, you know, if you do manage to sell those at a lower kind of IRR than the kind of loan yield.
Yeah, look, Ollie, we haven't provided guidance around what we expect a loan sale impact to be. It's too early for us to do that. Whilst it's something that we're exploring, we haven't provided any specifics around that, no.
Okay, so I take it that kind of the guidance is on a BAU basis.
That's right. That's correct.
All right, thanks.
Thank you. Thank you for all the questions. I will now pass back to Chris.
Okay, thank you for joining us, everyone. What has that been, sort of an hour and a half? We've obviously had some feedback during the call that the sound quality wasn't great from your end. It's been perfect from our end. We've heard the questions perfectly. There will be a full transcript, obviously, of the Q&A session. Also, this will be on our website, streaming live. You know, the recording will stream, so everyone should be able to catch up on anything that they missed. Apologies for that.
To wrap up, we think this was a strong set of results. We just continue doing what we say we're going to do. We're just sticking to the strategy that we've had now for the last eight years. Importantly, we're demonstrating significant momentum now in the business as scale becomes our best friend. We get to optimize all of the new platforms that we've got in place and make significant progress towards that ROE target in the mid-teens. Thank you for joining us all this morning. I'm sure we'll be talking to many of you over the next couple of days and weeks ahead as we start our roadshow. Thank you.
Thanks very much.