Good morning, everyone, and welcome to Judo's 2025 Investor Day. For those of you I've not yet met, I'm Yien Hong, Judo's Chief Legal and Commercial Officer. I open by acknowledging the traditional owners of the land on which we meet this morning, being the Gadigal people of the Eora Nation, and pay my respects to elders past and present, and also extend that respect to any Aboriginal and Torres Strait Islander people joining us here today in the room and online. This is our second face-to-face Investor Day, and it's heartwarming to see some familiar faces from our first day here in Sydney in 2022. It's also pleasing to see a whole set of new faces this morning joining us in the room today. I also like to warmly welcome some of our customers who have joined us here today for a panel discussion later this morning.
They are the reason for Judo being here, and to some of our bankers and brokers who are the reason that Judo gets to do what we do. We've not chosen this venue by chance. We're here for all that the Sydney Mint represents, being the first branch of the Royal Mint outside England. I think no one can really argue with the fact that being able to print your own money really does help drive economic self-determination. Thus, this place is more than a coin factory. It enabled greater financial stability, and this autonomy really laid the groundwork for local entrepreneurship and the growth of a vibrant small business sector, the sector that we have built Judo from the ground up to support and to advocate for, which you'll hear all about today. It's the fuel that continues to drive us forward.
I've been a banking and finance lawyer for 25 years, having worked at Macquarie, Deutsche Bank in London, and NAB, as well as law firms Herbert Smith Freehills Kramer, and Linklaters in London. This is my sixth year at Judo, and sometimes we joke that the years at Judo can feel a bit like dog years, mainly because what we've achieved in such a short time really is extraordinary. We rarely take the time to celebrate our successes, which is why a day like today has been a good reminder for us to look back on the journey so far. Standing up a bank can feel a bit like a marathon and a sprint all at the same time.
I speak for the team when I say it has not felt like hard work, because—not when you are running alongside a team of like-minded, passionate people who, like me, came to Judo to build a bank, who share a strong focus on a strong purpose and are chasing the same great outcomes for our customers. Obtaining our banking license and the IPO were our two big hills to conquer. Now we find ourselves at a great jumping-off point with this foundational work behind us and the operational leverage, which comes from the payoff on our earlier investment. It continues to be a super fun and exciting place to be, especially with our ongoing focus on the Judo culture and our values.
Preparing for this day has been a good time to reflect on where we are now, and I still marvel every single day that we are running a profitable ASX 200 ADI that is dedicated to supporting so many Australian SMEs through our amazing cohort of talented relationship bankers. It is a tribute to our Judo team members and their energy, as well as your belief in us as shareholders that this has been our reality. The executive team from Judo are here today, and you're going to hear from each of them about what's happening at Judo and what's ahead for us. We're pleased to give you some insights on what we're working on and what we're looking forward to delivering in the near term. Next, you'll hear from Chris and some of our exec team, followed by a panel discussion with our customers, bankers, and brokers.
After the morning tea break, you'll hear from the rest of the exec before finishing with a Q&A section. Again, welcome to all of you, and I'd like to hand to Chris now to kick off today's agenda.
Thank you, Yien, and good morning to everyone here in the room. I think I probably know you all personally, and thank you to everyone that's joining us online this morning. We really are looking forward to updating you on our strategy today, and I'm also excited that you'll get to hear directly from my leadership team, which I can honestly say is the most talented group of executives that I've had the pleasure of working with in a 42-year career. Before moving into the strategy, I wanted to briefly recap on the trading update we provided on the 1st of May and confirm that we remain on track to achieve our updated FY2025 guidance. April was a soft month with all of the public holidays, but we had a strong month of lending in May, resulting in a loan book as I stand here today of AUD 12 billion.
Pleasingly, our pipeline has also grown significantly and now sits at AUD 1.9 billion, up another AUD 300 million from the 1st of May, despite the large amount of settlements that occurred in May. Our NIM guidance is unchanged from the trading update. Costs are under control, and our CTI will be lower than FY2024. On cost of risk, as we've said many times before, this does have the potential to be volatile. In April, our 90 days past due and impaired did see another minor increase to 2.59%, and we still expect our FY2025 cost of risk to be slightly higher than last year in dollar terms. Ultimately, we continue to manage all the levers available to us and target 15% PBT growth on an underlying basis. Now to our strategy.
A recurring question I'm asked is whether the major banks' rediscovered love with business banking is making it harder for us to scale. The short answer is no, and our goal today is to explain why. In fact, I'm more confident than ever in our sustainable competitive advantage and our ability to build a world-class SME business bank with leading ROE. Our raison d'être back in 2016 was to solve what we believe was a market failure in the provision of credit to SMEs, a problem the market could not solve for itself. The major banks were and continue to be on a path-dependent journey of industrialization. That cannot be reversed. Cost-cutting and driving higher returns is a fact of life at a major bank.
The founders considered architecting Judo within a major bank, but in reality, the competition for capital and funding, the need to comply with group policies, the weight of legacy infrastructure, and an environment where executives were on a constant merry-go-round meant the idea of starting a completely new division with a new culture was simply impossible. Literally, the only way to start Judo was to start with a blank piece of paper. Here we are, a bank with no legacy products. For context, a major bank was recently promoting that they were going to reduce 1,200 products to under 450 with their tech transformation. We have just four products. In fact, when I was at Standard Chartered, I had 900 different credit cards alone. Many of these products are actually off-sale, but they are a significant source of revenue, and that makes the complexity very hard to unwind.
Secondly, we have no legacy sales culture. I mean, this really is essential for a business bank. Money is the easiest thing to sell. It's getting it back that requires skill. And when I did my apprenticeship in the 1980s, banks had a risk culture, not a sales culture, and customers respected that. SMEs are not experts in finance, so they need a banker that is. Thirdly, we have no legacy bricks and mortar. I mean, the largest business bank in Australia has 85 business centers. We have zero. The best and only place to assess credit properly is on the customer's premises. Fourthly, we have no legacy technology. We are completely cloud-native, technology as a service, avoiding the multi-billion investments needed to modernize old systems. And we have no legacy compliance. I mean, the majors are investing over AUD 2 billion a year now on their regulatory compliance obligations.
Lastly, but most importantly, we have no legacy people. Now, it's no one's fault, but the reality of a major bank is that half the people have been in their jobs for decades, and it quite simply isn't the bank they joined. This drives disengagement and mixed capabilities. As a result, every policy is calibrated to the lowest common denominator across a vast distribution of people, whereas in Judo, every person has been handpicked for their skills and cultural fit, and they're passionate about SMEs. With the benefits of starting with a blank piece of paper, we set about designing our specialist business model with three key elements. First, a customer value proposition for SMEs and only SMEs. Second, a unique employee value proposition to empower bankers. Third, systems and processes to support growth. Competition comes and goes.
Today, business banking is getting a lot of attention, coincidentally when the economics of a home loan have been eroded and the economy is transitioning from a consumer-led economy of household leverage to a business-led economy of investment. Our focus on the craft of SME banking is enduring. It's all we think about. It's all we talk about. It's all we dream about. We understand that every SME is unique and different, and they value a relationship with a highly skilled, highly trained relationship banker, which is the opposite of the major banks' continued journey of industrialization and an operating system which favors lending against property. What business owners want more than anything is service, the ability to speak to a banker who understands their business and is empowered to make decisions quickly, someone they can build an enduring relationship with over many, many years to earn trust.
Broken down, our customer value proposition has three components. First, smarter judgment. Second, faster decisions. Third, stronger relationships. Why is judgment important? Because every single SME is different, and they all require a solution for their specific situation. They do not want to be told, you know, or when they call the bank, they do not want to simply be asked, "How much is your house worth?" They want to have a conversation about their situation and the opportunity in front of them. Speed is important because SMEs want and need certainty.
If you have an opportunity to secure a new customer, but it comes with a working capital need, then you need an answer immediately, not, "Let's schedule a meeting for next week, and then I'll go and talk to credit, and you should have an answer in about a month." In fact, a fast no is far better than a slow maybe, but a strong sales culture often delivers the latter. Relationships are built over time based on human-to-human interaction. Our customers have their banker's mobile number, and that banker has only got 28 customers. Creating this model is only possible with a blank piece of paper. Bank industrialization and the dominance of a sales culture has replaced judgment for algorithms, scorecards, policies, separated sales from credit, which is fundamentally slow, and it has replaced one-on-one contact with many-to-many via contact centers.
This is how you run large distributed businesses. You have to reduce cost, eliminate variability, and remove conflicts of interest. Once this type of industrialization is implemented, it's impossible to undo. Having an idea to start a bank was one thing. The reality of building a bank is something completely different. We honestly can't find another bank that has been built from scratch anywhere in the world and has been able to scale as quickly as we have. We reached profitability within three years of receiving our banking license, with a market-leading employee value proposition for bankers and a customer value proposition that everyone now says they're replicating. Yet we have the highest NPS in the sector by far. We were granted a full banking license in 2019, the first in decades. We also became the first bank to list on the ASX since Macquarie in 1996.
Building a bank happens in stages. Back in 2016, we planned for sort of three times five-year horizons of growth. The first five years we labeled building the bank, the second five years we labeled scaling the bank, and the third five years optimizing the bank. Ten years in, we have completed the second phase of scaling the bank, and we're entering the exciting phase of optimization, which is also for the accountants in the room known as operating leverage. Raz will cover this later in the presentation, but in short, over the last three years, our technology team has replatformed our core lending system, our core deposit system, and our origination systems. They have re-engineered our data environment, replatformed our credit risk engine, our general ledger, and our digital platform. It's hard to overstate the significance of this achievement.
At the same time, we've built all the supporting functions required to run a bank at scale, including legal, finance, risk, operations, human resources, and marketing. The good news for investors is that the risk of building and scaling is largely over. What does this next optimization chapter look like? It is boringly consistent with the original vision. For us, our consistent, simple strategy has been the key factor of our success. We are and continue to be solely focused on the SME sector. Our strategic priorities are to enhance our core business, grow our TAM, optimize funding, capital, and costs, and create new avenues for growth. Now, Frank and Andrew will cover these areas respectively. The full focus of our technology team is now turning to banker enablement and new products.
If we're honest, the focus of scaling the bank over the last three years, as well as navigating the repayment of the term funding facility, has meant that some important projects were put on hold. Now it's so exciting that the full force of our technology and operations teams has shifted to new products and banker enablement. My job as CEO is to ensure we continue achieving the optimal balance of economics and growth. We are very much a growth company, but we're also a bank, which is valued on ROE. As CFO at the time of the IPO, I was the architect of the key business metrics at scale. Optimizing our pathway to these metrics is our combined objective, and we're well on our way.
Lastly, I'd like to introduce you to Judo's executive team, a team that could run any one of the Big Four banks. The team in front of you has extensive experience operating in the Australian market and knows the landscape intimately. This is important because business banking is a contact sport. You must know the market, understand the economy, and the local regulations. In my experience, business banks must be run by business bankers who understand how to structure and price credit risk. And bankers want a boss who understands the industry they operate and understands the craft of lending. One concern I often get challenged with is that we're a young bank. I'm often told Judo has not been through a credit cycle. I get quite upset by this comment. You know, the bank may be new, but we are not. This is my 42nd year in banking.
I started in 1983, but my first business banking role was in 1988 when I went and lent my first dollar, I should say pound, in Barclays Bank in England. We are all deeply experienced executives with a combined experience of 200 years in banking. Equally, our customers are not startups either. They are seasoned operators. We actually do not lend to startups. As executives, we have seen ups and downs and navigated through uncertainty. Together, we bring the discipline, the experience, and the track record that comes from knowing what it comes to to scale and grow a bank. On that note, I will now hand over to Frank, and I look forward to coming back to the stage later for Q&A and also to wrap up. Thank you.
Thank you, Chris. By way of introduction for those who have not met, my name is Frank Versace. I'm the Chief Strategy and Growth Officer here at Judo. I'm also one of the original employees and have held various positions over the past eight years, including the Chief Relationship Officer role, which runs our banker team. I was also Judo's Chief Risk Officer before assuming my current role. Prior to Judo, I spent almost the entirety of my career in various technical and leadership roles across ANZ and Macquarie Bank, always in the commercial segment. Today, I'm going to cover a number of different topics. Firstly, we're going to talk a little bit more about what Chris just mentioned around industrialization and the market failure that has created Judo's opportunity to bring our unique CVP to market. We'll provide an update on our TAM for the first time since our IPO. Finally, we'll detail some growth opportunities and talk through our channel economics.
As Chris mentioned, the raison d'être for Judo has always been grounded in a firm belief that the market for SME finance is materially underserved. The structural factors within the segment have created an opportunity for Judo to establish a clear set of competitive advantages, which are both highly valued by the SME community and extremely difficult to replicate by our competitors. This is the faster, smarter, stronger that Chris just referenced. The key question, especially against the backdrop of major banks supposedly falling back in love with SME, is whether this market failure and therefore our opportunity to establish genuine competitive advantage is real and sustainable. I'm going to demonstrate why we believe the answers to both those questions are a resounding yes, as well as a considerable scope for growth which lies ahead of us.
To understand the smarter element of the smarter, faster, stronger CVP, it's important to understand the unique nature of the SME economy. No other area of the lending system exhibits the same level of borrower variability across all factors relevant to a lender. SMEs are different to home borrowers, where most are PAYG, and there is only one collateral type. They're different to corporates, where organizational structures and information quality are relatively consistent and efficient. To unpack this a little bit further, the typical number of entities within an SME banked by Judo is four or more. That's four or more balance sheets which house the assets that we typically lend against. That's four or more profit or loss statements that need to be reconciled for internal cash movements and include various ownership structures and need to be properly understood to understand different tax treatments.
These are not structures which lend themselves neatly to algorithms or automation if you want to properly assess them. Despite this, in efforts to lower service costs, the industry has over decades sought to increase the numbers of centrally decisioned credit applications, primarily via the use of probability of default models. The big problem here is that, as with every probabilistic model, the assessments they make are subject to two distinct types of error. Type One errors, also known as false positives, which in banking terms is the likelihood that an uncreditworthy customer is inadvertently approved by a model. The creatively named Type Two errors, or the false negative, which is to say the potential that the model incorrectly declines a creditworthy customer.
The important thing to note here is that banks are significantly more sensitive to Type One, as this represents a potential loss, versus Type Two, which effectively represents the foregone revenue of an incorrect decline. In fact, studies show that banks are up to 10x more sensitive to Type One errors, and consequently, models are calibrated to be far more conservative than they would otherwise need to be. This means the model would decline significantly more lending, up to 10x more lending to good businesses and force them into more rigid terms. These customers are usually easily identifiable to an experienced banker capable of making applying underlying judgment in determining a customer's repayment ability, the sort of analysis that good bankers historically have always done.
These customers represent an important component of Judo's client base, what we refer to as our half moon, the customers which sit outside the perceived appetite of our competitors but are actually fundamentally creditworthy. It also explains how we've been able to keep our risk costs suppressed whilst achieving above system margins. Just to give you an example of smarter being applied to a Judo client, we recently had a hospitality owner who had successfully bought, built up, and sold numerous venues, who had deep industry experience and established supplier contacts over numerous years, was seeking to purchase a new establishment in a startup in a special purpose vehicle. In the absence of historical financials that applied to that vehicle, the application was declined by one of our competitors before the client was introduced to Judo. Let's move to faster.
The pace of commerce often dictates that businesses are required to apply speed and certainty from a lender. There are several factors which structurally embed our ability to deliver high-quality decisions at speed. Firstly, we've spoken at length about the quality of our bankers and the team-based ethos which enables us to empower them properly and to undertake face-to-face decisions in market. Where transaction complexity necessitates, our credit managers are embedded within our banker teams to ensure that assessments occur with the benefit of local knowledge and that, importantly, every customer has the opportunity to meet the ultimate decision maker. This is completely unique as a value proposition in the Australian finance market.
As you'll hear in more detail from Raz, our plans in the area of banker enablement include artificial intelligence investments to drive efficiencies for bankers and provide more impactful insights for our customers. Critically though, even the most advanced AI models draw a critical distinction between prediction and judgment. Harnessing tech advancements to drive greater system speed, increased banker time to engage with customers on value-add activities is central to our present thinking. In addition, over time, we believe there is an opportunity to harmonize the predictive power of AI and the irreplicable elements of human judgment, and this will be core to our long-term agenda. A faster example we often see is a business who needs working capital support to enable the acquisition of new contracts. On usual industry timelines, this application can take weeks or even months, and growth opportunities are often lost.
At Judo, we commit to turning these opportunities around in days, allowing businesses to get on with what they do best. In terms of the stronger element, we have spoken often in high-level terms about the superior relationship offering provided by our model and our bankers. We know that in every customer survey done across multiple years and conducted by numerous lenders, relationship is routinely more highly valued than a cheap price. The big problem is, what does that mean? What is it that is truly valued by a client in terms of the relationship they carry on with a bank? We have done extensive research on this subject through our existing customers and in the SME community more generally to determine a framework that we call the moments that matter.
This provides our bankers with the pivotal moments in the customer journey where client expectations of the bank and the banker are heightened and defines the key actions and behaviors that are required as part of the delivery of our proposition. These include all initial and subsequent lending interactions, insights provided at customer reviews, and how the bank responds through periods of difficulty. A stronger customer example is an introduction made by one of our industry expert bankers to a client looking to scale through acquisition to another client known to be looking to exit. This achieves a positive outcome for all parties and establishes the banker as a genuine partner in the growth plans of the acquiring firm. Moving on to TAM, over the past seven years, we know that our CVP has clearly resonated with many SMEs, driving above-sector growth and industry-leading Net promoter Scores.
The next question is, how big is the market? How much runway remains ahead of us? What enhancements can we make to increase our market penetration? In our prospectus in 2021, we presented independent analysis of the total addressable market, including a conservative figure for unmet credit demand, but excluding several areas of the market that we had yet to enter. At the time, the TAM was sized at AUD 605 billion, and we have now conducted an updated analysis and determined that with the ongoing increase of the SME lending system, our expansion into agri, growth in unmet credit demand, and the addition of high ROE warehouse lending, our addressable market today sits at AUD 814 billion.
Thus, we remain materially below 2% in market share, and whilst there will be parts of this TAM for various reasons that are not yet accessible, there is still significant growth opportunity for our proposition. I now want to expand on some plans for investment and focus that we have agreed for the coming year. In the core business, we'll continue to focus on deepening the share in the new regions and locations we entered in 2025. The warehouse lending business, which we have been incubating over the last year, will be another avenue for growth. This is part of a multi-pronged strategic opportunity that we have identified to partner with high-quality private credit firms to capitalize on the ongoing growth of that segment.
In terms of product mix, we have often stated that our initial product suite had a bias to simplicity, whilst also seeking to accommodate the vast majority of SME lending needs. There is now, there is however scope for product enhancement, and in the near term, we'll be exploring opportunities to enhance our working capital offering where we are presently underweight. We know that working capital is among the most prevalent funding requirements for SMEs and also typically more lucrative from a bank perspective. As such, working capital enhancement plans are designed to drive greater penetration of this market, greater product functionality, and an overall enhanced customer experience relative to our current offering.
The initial thinking here is focused on providing greater payment optionality for customers through our line of credit product as a first step on a multi-year path to provide much greater flexibility and enhanced growth support for Australia's SMEs. Staying with product, but moving to the other side of the balance sheet, again in our early phase, we targeted simplicity and funding stability in the area of term deposits. This strategy has served us well. However, we believe the time is right to introduce new deposit product options to provide additional funding flexibility. Again, this will be sensible and measured. We are currently in the process of building two new at-call products, which will effectively double our deposit TAM. Firstly, the business online savings account, which will be offered via our existing intermediary partners, who currently offer similar products via their platforms.
This product is designed to serve customers with savings held in self-managed superannuation funds, as well as entities seeking to effectively manage their cash flow management. This will be followed by the launch of a high-interest online savings account with a broader audience and more product functionality, and will come online in the back half of FY2026. This savings account is designed to promote consistent savings habits rather than relying on short-term introductory offers. Through this approach, the bank aims to attract customers who demonstrate stable and sustainable savings behavior. Neither of these offerings represent a move into customer transactional accounts, given the cost and complexity issues that would be introduced with these products. Both offer a path to funding cost improvement, given the discount to term deposit funding, which these products are typically offered, and the cost optimization of our term deposit book that these products allow.
As such, as well as the greater market opportunity in the area of deposits and funding, over time, the introduction of these products should allow us to increase our NIM or to expand lending TAM into cheaper lending segments whilst maintaining our current economics. Finally, I wanted to touch on channel strategy and channel economics. One of our key assumptions we made prior to the launch of Judo was that the origination mix between broker and direct would be at 50/50. This was in line with our view of system at the time, and the reality is our book is settled at 75/25 and is not expected to change materially in the core business over the medium term, though we'll be skewed to direct in the area of regional lending and warehousing.
We have conducted a substantive analysis of the broker channel, both in terms of the behavior of our broker portfolio relative to direct, but also a deep dive into the forward-looking trends across the wider system. Firstly, I think it's worthwhile addressing the material differences between the residential mortgages broker system and the nature of the commercial system in terms of understanding the likely outcomes for residential and commercial lending. In commercial lending, our offering is channel agnostic. We have the same credit underwriting standards and processes, unlike what is commonplace in the residential segment. Our bankers always meet the client. We obtain and analyze customer information and determine credit worthiness in the same way, irrespective of origination channel.
Secondly, rather than offering a competing proposition to our relationship offering, our broker partners and Judo bankers fulfill quite distinct functions in the customer value chain, which ensures that we are optimizing the skills and structural advantages of each. Put simply, great commercial brokers need great commercial bankers, and great commercial bankers need great commercial brokers. We have experienced no material difference in terms of margin, runoff, or credit quality between our channels, either direct or broker originated. Internal unit economics suggests a relatively similar cost profile once origination cost benefits of broker originated deals are offset against the upfront and ongoing commissions of those transactions. These facts are critically important to understand that we have no channel conflict, and this has allowed us to forge a genuine tripartite relationship with our valued broker partners.
In terms of our forward-looking strategy, a recent internal study of the broker industry concluded that it was likely that there would be some material shifts over the coming years, which we are uniquely placed to take advantage of in terms of our ongoing support for commercial brokers. Namely, where a decade ago there was a disequilibrium between demand for broker services relative to their supply, today that is no longer the case. With 22,000 brokers in the system equating to roughly one broker for every 1,200 Australians, the industry has likely reached maturity. The vast majority of these brokers are focused on the residential sector, and few of these have the technical capability to provide genuine value add to an SME customer or to a commercial finance transaction.
Where the rest of the industry is compelled to deal with the entirety of the sector, with all of the structural inefficiency that that introduces, we have always been focused on a small group of skilled and experienced commercial brokers who we have integrated into our value proposition. We do not see high-quality brokers as a necessary evil in the way that it is often referred elsewhere in the industry. Our brokers are partners, and we were incorporating that philosophy into our forward thinking. In terms of trends, from here, our belief is that technology will progressively disintermediate brokers operating in commoditized parts of the market or force higher degrees of industry consolidation, whereas those dealing with more complex customer needs will be more sophisticated, more prominent, and more important.
As I just mentioned, this aligns with our strategy from day one in focusing on a small group of capable brokers, and our emphasis over the coming year will be to create more formality in terms of our partnership with these firms, more overtly recognize the role brokers play in the customer value chain and the delivery of our value proposition, as well as establish greater alignment in terms of incentives and financial outcomes with our nation's top commercial brokers. This will enhance our irreplicable competitive advantage we already have in this area and will firmly entrench us as the bank for commercial brokers. Thank you. I will now pass to Jess and look forward to your questions during the Q&A segment.
Thanks, Frank, and good morning, everyone. My name is Jess Lantieri, and I'm Judo's Chief People and Culture Officer. I joined Judo just over three years ago now, and I joined this incredible business because I was really drawn to its deep purpose to serve Aussie SMEs and also because of its standout culture. I want to begin by talking about our culture and why it continues to be fundamental to Judo's success. From the very beginning, we've held the belief at Judo that no company has a culture. Every company is a culture. It's our secret sauce, and it's a collection of the little things we do every day to make Judo a great place to work and attract the very best business bankers in the industry. We were thrilled to be named an AFR BOSS Best Place to Work for three years in a row, recognizing our relentless commitment to culture and being the preeminent employer for SME bankers in Australia.
At Judo, we've set about intentionally creating a culture of teamwork, trust, accountability, and performance, our core four values, and we've hand-selected every single person that's joined our team to ensure cultural alignment to these values. One of the first things we do to preserve our culture is bring all our new starters together for a unique week-long induction program where we give people the space to detox from their prior organization and immerse themselves in the Judo way. No one is exempt from this process. It's a non-negotiable, regardless of role or level, and just ask Raz and Renèe, who joined last year. Time and time again, I hear feedback from our new bankers about just how different their experience is of Judo to the majors from day one.
Just last month, one of our new bankers was telling me that for the first time in her 15-year career as a business banker, she went to visit a customer alongside her credit counterpart and that she'd never experienced that level of collaboration before. The system at other banks simply does not allow for this, yet it's not only possible but encouraged at Judo. That is the difference between a risk culture and a sales culture. There are three things I want to talk about today. Firstly, how we're attracting and retaining the very best bankers in the market through a strategy that is uniquely different from our competitors. Secondly, how we're engaging and empowering our bankers. We're a bank built by bankers for bankers, which empowers and enables them to work with customers in a very different way to the other banks.
Thirdly, how we're actively investing in our bankers to ensure they stay with us and they have long and fulfilling careers at Judo. We're really proud of the exceptional talent we attract across our business, and in particular, the caliber of bankers who want to work at Judo. Today, we have a highly engaged team of 159 relationship bankers and 64 analysts in 29 locations. The bankers who come to us understand and are passionate about the craft of SME banking, banking as it used to be and as it should be. On average, the bankers that join Judo have more than 15 years' experience, and they're highly skilled, highly trained relationship bankers who want to provide excellent service to SMEs. The biggest difference between Judo and the major banks is that we hire bankers for their credit skills, not their sales skills.
We have a rigorous recruitment process, which normally involves three to four interviews, and when a banker is ready to join us, there is only one thing standing in the way between them and the job, and that is a three-hour closed-door, closed-book credit exam, which tests their skills and understanding of judgment-based lending. To this day, the pass rate on our credit exam has never exceeded 50%, so you can guess where the other 50% still work. This is core to all elements of our CVP, which Frank spoke about: faster, stronger, smarter. Not just because the bankers need to have good credit skills in their own right, but because it creates mutual trust and respect with the credit team. This trust, along with our differentiated reward structure, is the foundation of our ability to truly empower bankers.
We have designed our reward structure and way of working that reinforces the behaviors consistent with these values. There is one critical differentiator between Judo and the rest of the industry. We do not have individual sales targets. The Banking Royal Commission showed the dark side of sales targets and how they lead to poor customer outcomes. We have one company-level balance scorecard and an all-ships-to-shore reward model with team-based incentives. The lack of individual sales targets means that bankers can operate in what we call a pod structure: small, agile teams of bankers and analysts focused on generating the best customer outcomes. The absence of individual targets results in strong and effective teamwork and load balancing, where the right customers can be allocated to the right bankers.
In contrast to sales targets, and consistent with our desire to reward and recognize bankers for exceptional credit skills, we make additional rewards available for bankers based on the Judo Belt Scheme. This is a clear, merit-based pathway recognizing exceptional credit skills. In a nutshell, the higher the belt, the higher the lending authority, the higher the incentive opportunity. At other banks, as bankers have evolved into salespeople and credit has been centralized, lending delegations have gradually been diluted. Our Belt Scheme means that bankers have genuine delegated authority to lend. They can confidently visit a customer and shake their hand, knowing they're empowered and have the authority to do that deal. We know this is one of the reasons bankers love working at Judo most. Progression in the Belt Scheme is evaluated against Judo's lending delegation framework by our credit leadership team.
It's based mostly on credit skills along with other performance criteria such as cultural contribution and behaviors. We've seen through this scheme that our bankers are inspired to progress, and it's created momentum within the cohort towards continuously developing credit skills and attaining higher belts. As an indication, we expect about 30% of our banker cohort to receive amount above their standard STI opportunity for this year based on their credit capability and other performance criteria against the company scorecard. With our strategic investment in credit capability and training, we expect to see a significant uplift in the amount of Black Belt bankers in FY2026. We've been able to build this structure with this unique focus because we've had the benefit of building a bank from a blank sheet of paper as our starting point.
The service profit chain underpins a lot of how we think about our business, and the punchline of the service profit chain is this: highly engaged employees result in more satisfied customers and better business outcomes. Hence, investing in our culture, which promotes a highly engaged workforce, is an obsession for all of us. At Judo, we do not subscribe to traditional methods of measuring and monitoring employee engagement, which normally means a tedious, long annual engagement survey of over 200 questions. By the time you get around to implementing the engagement actions, they are already out of date, and the mood of your team might be completely different. We actually measure employee engagement weekly through the Judo Employee Delight Index, or what we lovingly call JEDI.
JEDI is a two-minute short survey sent via text to the whole Judo team each week, which has simple sliding scales and an opportunity to provide comments. We ask about things like how you felt about your week at Judo, your emotional connection to our purpose, your physical energy, your mental energy, and your eNPS. JEDI helps us to listen to our people quickly and respond effectively. It's a regular pulse check. It helps us listen, learn, react, and manage the needs of our people, both big and small, in real time. Let me give you a live example to bring this to life. Just last week, our bankers told us that coffee was a must during this particularly busy period of high lending demand. We listened and rolled out free coffee carts across the country.
Not only are we getting our much-needed caffeine fix, but it's a great way to connect with colleagues and share customer stories. This kind of approach has truly helped us deliver consistently high engagement results and real connection as we grow. It should not come as a surprise that our banker cohort typically has the highest engagement scores across Judo, reflecting their passion for bringing to life our CVP. We recently did a JEDI study that found a direct correlation between banker engagement scores, banker performance, and customer satisfaction. We know that higher banker engagement levels directly correlate to customer NPS. Our data proves the service value chain exists. This unique data set also provides us with powerful insights. We know that at Judo, physical energy, which is fueled by connection with coworkers, is the top driver of engagement.
As such, we spend so much time investing in a collaborative culture. We know this makes us different, and this is why we invest so heavily in culture. Our high engagement levels also translate to low voluntary attrition rates, which has been stable among our bankers and is lower than industry average. Some people have left Judo because they miss a sales culture, and honestly, we're okay with that. Interestingly, in the past two years, we've had only 12 regrettable losses. Eight have gone to commercial broking, and only three have gone back to the majors. The bankers that become brokers have a deep understanding of our CVP and are very strong referrers of new business as they understand us and they're great advocates for us.
Though interestingly, a new trend we're starting to see is that some bankers who've become brokers are actually returning to banking because they miss the culture and the environment of teamwork. Lastly, I want to touch on how we cultivate a strong talent pipeline, which is a strategic focus for my team. Since 2021, we've been running what we call JFactor, our internal annual program to accelerate the best analysts into great Judo bankers. The program combines materials delivered by Judo's own experience, credit, and relationship team, as well as world-class providers like Melbourne Business School. We have, on average, 12-15 analysts annually who complete the program and are promoted to Judo bankers. We're proud of our homegrown bankers that we're adding to our already strong banking team. Now, as a people business, people-related costs make up the bulk of our cost base.
Running a successful analyst development program is actually an effective tool to manage wage inflation while also embedding and protecting our CVP and our culture. In summary, we've not just built a bank; we've built a bank for bankers, the bank we've always wanted to work for ourselves, and a community of exceptionally talented people across our broader business who are deeply aligned with our purpose to support Australian SMEs. Thank you, and I'll now pass to George Obeid to host our customer panel.
Good morning, all. I'm George Obeid, Judo's Chief Third- Party Officer. I joined the business back in February 2017, largely to establish and run the third-party business. I'm so very pleased to host the panel discussion today and introduce some very special guests.
First, we have Faris Dedic, Managing Director of DIG Advisory, COI Capital, and Red Door Finance, Dan Baggett, Director and Owner of DTM Property and Dan Baggett Construction, Ami Mahendran, General Manager of Plenty River Plumbing, and our very own Lucinda Carroll, Regional Director of Agri in New South Wales and ACT. Before we get started, I thought I'd play a few videos which will give you some background on our guest.
In my previous role, I worked in banking. I understood how to analyze a business and what makes a good business tick. I saw a big opportunity in the small business sector with a lot of people retiring without succession plans. With Judo's help, we were able to successfully buy a thriving small business and grow it to then acquire three other businesses with an equipment hire, e-commerce, and garden maintenance.
We know what a good operator Ami is. It was really the trust and the relationship we built with Ami over the years that helped give us confidence that the next business, and now the fourth, will all be successful. Judo were the first bank that actually looked at what work had I done to show that I could grow this business. If you've got a smarter banker that understands what the client wants and is trying to achieve, it makes getting the transaction done much faster and also easier for the customer. We want to grow to 10 businesses, and we want to grow our revenue by five to tenfold over the next five years. Judo Bank have helped get me to where I am today, and I see them being able to help me scale my business in the future.
Our passion is to provide a place where children feel safe, then they get nurtured, and they grow. I was introduced to Hassan and through his broker, Faris. Hassan is an expert in his field, a visionary, and someone we want to be on the journey with. Hassan identifies areas where there's undersupply or there's demand needs for childcare centers. There's enough opportunity within Victoria, and Hassan knows this. My role is to grow the business. When I keep looking into the opportunities around leaseholds, a block of land available, some business to acquire or land to acquire, we just go to see if Judo got an appetite for these projects. We have a very strong pipeline. Smarter banking is using my knowledge, applying all that I've learned to find unique solutions for the client, building a strong relationship with Hassan.
Put that all together, you can get better outcomes and much faster outcomes. We have great plans. Judo steps forward and says, "Yes, we see your vision, and they're supportive of our projects." I'm very thankful to that. Our customers appreciate the speed to market. They appreciate dealing with a banker who's been in region that understands the industries that they're operating in, and they also really appreciate a deep relationship. I grew up on a farm outside of Mudgee, and there's not one day that I don't look forward to going to work. Mudgee Storage Sheds and Mudgee Industrial Park are owned by myself and my wife, Sandy. Judo takes the time to understand your business and 100% supports where you want to go. Great Isolation, it's always been back in my mind.
The ownership of Mudgee Industrial Park and Mudgee Storage Sheds, Judo Bank offered to consolidate the whole thing. Just made sense, given how successful the commercial businesses were in Mudgee. This would just be part of his business, and he would continue to drive wealth and success for his family. Because we had built an existing relationship, we understood the transaction and the opportunity for growth. I'm very excited about the future with Judo. Quick answers, quick decisions. I just think the next five years is going to be a profitable one. I can't wait.
That was excellent. Thank you all for your time. To begin, I'd like to start by just asking each of you to introduce yourselves and also answer one question. Why Judo? What have we done differently? Maybe I'll start maybe at the other end.
Yeah, so I'm Ami. I run a caravan plumbing business. That was the first business I acquired. I've expanded into acquiring an e-commerce business and also a landscape maintenance business, all with the help of Judo. The reason why I chose Judo is when I got started, I didn't have much money to my name. I was 26. I didn't have a property portfolio. I reached out to a lot of people. I raised money from investors, structured a deal with a business that had been around for 30 years and had a retiring owner who was willing to stay around and reinvest a little bit.
We mitigated a lot of the risks, but I just did not get heard when I picked up the phone and called 20-30 different banks, bankers, until I picked up the phone and got on the phone with Judo, and they listened, and they really got into the business and understood the business. Ever since then, they have done the same thing with all my future business acquisitions as well.
Excellent. Thanks, Ami. Faris?
Hello, everybody. Faris Dedic, Managing Director of Red Door Finance, DIG Advisory, and COI Capital Management. It is a financial services group of businesses that crosses residential mortgages, commercial debt advisory, and private credit in a non-bank space. Our core clients are business owners, property investors, property developers, and what we call emerging family offices. Core ticket sizes are AUD 1 million-AUD 150 million and client portfolios between AUD 5 million and AUD 250 million.
Judo plays an integral part to our clients' portfolios as a challenger bank to, obviously, the majors. It provides certainty, consistency, reliability, which is what we sell to our clients. It really challenges the status quo of relationship management. Judo's a deep stakeholder of ours and a great solution for a lot of our clients.
Thanks, Faris.
Good morning, everybody. Ladies and gentlemen, my name's Dan Baggett. I'm the owner of DTM Property Enterprises and Dan Baggett Constructions in Mudgee. We own Mudgee Industrial Park. It's an 11-acre property there that's heavy industrial land that we've been developing for the last 25 years. We own Mudgee Storage Sheds. It consists of over 300 storage sheds. Yeah, look, when I got introduced by Judo Bank through Darryl Groves, a very close friend of mine, he's a broker in Melbourne there.
He was actually my bank manager back when I was 26 years old. He was only 25 at the time, and we still have a very close contact now. He was the fault of me sitting here today introducing him. I have to thank him on that one. He introduced me to Judo, and seriously, it is just next level. I have always struggled with the Big Four banks. That is another story. Judo has actually provided me with diverse commercial and rural lending. They believe in the story, a dream, ambitions that I have. It is all character-based, and I have never, ever experienced another bank like it. Just a personal touch. When we first got introduced, Lucinda, Tom, and Josh came to Mudgee on a personal note and introduced themselves.
That gave me the opportunity to show them my portfolio of properties and just to prove to them that I need a bank to back me. Yeah, I'm looking so forward to the future with Judo. I think we're partners now. I strongly believe that. Lending is about forward projection. It's not historical. Look in the rear-vision mirror. They take me on merit and credit. From a guy from the bush, where I actually started growing up, we come from a very poor family. It's just proven that from starting from nothing and working hard and because I probably classify myself as a very hard worker, they think the saying is, "Work smarter, not harder." I'm probably the opposite. I work hard.
As silly as that might sound, but yeah, there's not a day goes by where I just love going to work. Yeah, I just thank Judo so much for taking me on board, and I really, really appreciate it. I'll never forget it.
Excellent. Thank you, Dan.
I'll have to tell a story, Dan. Last night at dinner, you're getting itchy. I love having the big smoke, but gee, I want to go back to work. I'm Luke Carroll. I'm based in Orange, so it's really nice to be here. It's a bit warmer than Orange here today. I'm the Regional Director for Judo Bank, Regional New South Wales and ACT. I've been with Judo for just over 12 months. Prior to that, I had 20 years across a few different institutions, both domestically and in the U.K.
I'm a country girl too from Northern New South Wales. Small business runs in my blood, farming family, and proud to do that today too. We've got our own small farming business on the side in my spare time at Orange. As I said, it's always run in my blood business. The formative years of the 1990s, we'd go home from boarding school and we'd talk about interest rates and commodity prices and all these things that young kids probably aren't otherwise exposed to. It really instilled in me a passion for small business and the work ethic that Dan spoke about. Never a day went by that I didn't see my parents just slaving just to get things done.
So here I am 20 years later, and I just feel like I'm just about to start my career and the impact and the positive contribution I can give to Regional New South Wales.
Excellent. Thank you very much, Luke. Now, I'd like to open up to questions. If there are any questions, please, there are circling mics that will come around. In the meantime, while you're thinking up your question, I'll start with yourself, Faris. In terms of Judo, why do you bring business to Judo versus the major banks?
For us, and I guess our business, I'm only 31 years old. I'm going to be in this industry for hopefully the next 30 years, depending on how regulation goes and what happens and the defractionalization of the advisory industry. Ultimately, we're on a journey with our clients.
Whether it's true or not, in Australia, they're saying there's over 600 non-bank lenders in the market right now. Our job is to translate the market to our lenders and ensure that we can give them the best solution at any one point in time for their business journey. For us, Judo gives us, I guess, an ace up our sleeve. I always compare it to my team as the La Trobe of business banking. What La Trobe did to residential lending in a non-bank space is what Judo's doing very well in corporate finance. They have a moment in time in that client's journey. These two gentlemen flanked to my side are perfect examples of that. I haven't met them previously.
This isn't scripted, but we've got a very young, ambitious gentleman who wanted to scale a business, wanted to lever up, wanted to leverage purchases of businesses, and he found a banker who would back him. That's a relationship under management model that allowed him to scale and grow his business and be heard and be ambitious. In an economy that isn't, I guess, pro-business, having a bank that is pro-business ensures that clients can grow their portfolios. You have a gentleman to my right who were bank clients and weren't listened to by the banks and couldn't get the right products by the banks and didn't have a relationship business model. For us, we sell that relationship piece to our clients, and Judo exaggerates that. Yes, they're the ones that pay us, but at the end, they so do all the other lenders.
For us, it's getting the best solution for our clients and ensuring that they get the best outcomes and they get the highest return on equity and the highest return on debt and the highest return on investment, and Judo allows them to do that.
How does that differ to the banks at the moment in terms of what their offerings are in market?
I mean, it's tacky because I know this has been drilled into me for Judo Bank, but that stronger, that faster, that mentality that Judo Bank has. If I have a client and I take that client to a major bank, I have to make the client fit the box for obvious reasons, for securitization, for scalability, for the fact that bankers are taking, for the fact that credit's taking the power away from the frontline bankers to be able to decision-make transactions.
I have to really mold the client to fit what it is that the bank wants. Then I'm trying to plug in different banks to find different solutions. If we look at a typical client's portfolio, we might have some of their property lending with a major bank, and then we'll have to put some of their leveraged lending with a private credit provider in a non-bank space, and then we'll have to take some of their development stock to a non-bank financier. What Judo allows us to do is to put it all under one umbrella and, I guess, take the power of what is Australian securitization via PPSAs, GSAs, various different securitization methods to be able to risk create the client accurately and allow the client to grow. The difference with the other banks is they can't give me the product suite.
Sometimes there's an internal bureaucracy. Does the client fit small business, or do they fit business bank, or are they property bank, or are they private banking, or do they fit all three, or do I have one bank or two banks or four bankers, or do I have a transactional bank? With Judo, it's one contact. They give power to their frontline to be able to make a decision and not a decision that I can necessarily influence. They just have well-equipped bankers who are remunerated correctly on a frontline to make the right decisions and then be able to scale the client from there.
Yeah, experienced frontline bankers with the ability to apply judgment and know you and know your client needs, right?
I might say this because I think it's relevant, but all of the bankers that are in the market right now, they get to a point where they can't grow in the banks anymore, right? They hit a certain salary cap, they can't get their bonuses paid or their risk credited on a certain transaction, and they can't grow. Now, like we all know, wherever you're employed, you either want to learn or you want to earn, right? What happens for a lot of bankers in the market is they get to a point where they're not learning anymore. In fact, they're hamstrung. They can't make any decisions, and they're not earning any more money.
What Judo has done very well is they've onboarded those bankers who still have ambition in them and have empowered them to learn the credit process, learn the whole life cycle funnel of the transaction, and their bankers know everything about the business, but also earn, make sure that they don't put their principal at risk, make sure that they're making the right returns on market, make sure that they're getting the net interest margin that the bank needs to get. I can tell as the frontline, I don't run the balance sheet, and that's not my expertise, but I can tell that the frontline is empowered and is aligned with what the balance sheet strategy of the business is.
Excellent. Thank you, Faris. First question.
Hello. I'm not sure if you can hear me, but great stories. Thank you very much for sharing. I'm sort of interested to know, compared to traditional bankers like Judo Bank, can you maybe explain a little bit more about how they assist you in not only sort of lending, but also perhaps business? They're sort of more engaged. They have a different skill set that perhaps even in times when you go through challenges, they're there to support and maybe provide guidance, almost like an advisory style board, etc. So maybe give us a bit more understanding how that works.
Great question. Ami, throw over to you.
Yeah, so I think that's really the crux of it is why I would always stick with Judo, because I recommend everyone in the room to actually try and secret shop the banks, pretend to be a small business owner, and try and approach the business banks, and you'll really get a feel for what it's like as a business owner talking to the small business end of a Big Four bank. I've done it. It's incredibly frustrating. When you talk about Judo, the first time I approached Judo, I had a 45-page slide deck about why this business was a good business, about the customer concentration, the pricing power, the margin dynamics, the working capital profile.
They sat there, and not just the relationship bank I dealt with that day, but numerous that I've dealt with since, including people from Credit and people from other parts of the bank, they spend the time to understand what is the business model. That is what allows them to then understand how to ride the highs and the lows. I've had my business dip at Darsborough and four- or five- fold. I said to them, "Oh, it's going to come off a bit." They understood why, and they were able to then help me through that journey, and they were not panicked on the other side of it. I know tomorrow I can go and save 100 basis points by going to a Big Four.
The amount I'll lose out in terms of how they're going to structure my loan, how they're going to underwrite the risk, and what I can actually do in the future. If I were at this point, I'm 31 as well, and I want to be doing this for a long time. There are going to be good times and bad times. I feel like if you secret shop the banks, you'll answer your own question in terms of understanding the difference in caliber. I couldn't imagine discussing even a simple thing like pricing power or working capital cycles with someone from a Big Four, just respectfully someone from the small business end of a Big Four bank, because I've tried to do that and I've failed.
Excellent. Thank you. Dan, anything else to add?
Yes. I've been building in Mudgee for 37 years, and I've been a developer since I was 26 years of age. I've always bought my first house at 18, half share with my brother. It all sort of derived from where we sort of grew up from nothing to where we are today. Yeah, it actually made a good bank manager. There's been very far and few between, like a NAB bank, like, "Yeah, I might as well mention it. I'm here. I'm here. I speak from the heart, and it's the truth." There were good bank managers years ago, and they gave you a sense of support, and they really believed in what you wanted to do. If you put a business plan in front of them, especially developing wise, we built from a duplex to up to 33 lot subdivision house and land packages.
It was just so hard. It's because there's nothing wrong with the regional managers out in the bush. They all support you because they know the market. I know the market. With all the approvals in place, once it comes to Sydney and into credit down here, they've got no idea what happens in the market up there. That's the real problem that I've faced over the years. It's cost me a hell of a lot of money. Yeah, with the banks today, the major fours, they're all historical lenders. They're always looking in the rear-vision mirror, not like Judo. They look forward. They absolutely appreciate where you've come from and what you are today. Seeing assets that you've actually built from nothing, it's a credit on both sides because it works.
That's excellent. Really raw, honest feedback. Really appreciate that, Dan. Thank you. I'll take a question off the table on my left here. Thanks.
Thank you for taking my questions. Can you just clarify for us, when you first came across Judo, had you been knocked back from a major bank? When you came to Judo, was it product? Was it speed that initially got you over the line when you did not know much about Judo initially? Also, if you're comfortable with it, can you share what was ballpark the initial end that you were looking at when you started with Judo, please, just to give us an understanding of how you joined Judo?
I come from [IC] working investment banking private equity, and then I moved back to Australia, and I wanted to structure a deal. I had a lot of contacts at all the big fours across institutional and emerging credit. Of course, I had to be emerging corporate. I had to be talking to the small business side of the bank. I had a lot of warm introductions. Despite getting warm introductions, I was banging my head against a wall trying to communicate about what I was trying to do. The mindset is so deep. I think every man and his dog in Australia is a property developer. They only know how to ask, "What property do you have?" I actually had that experience for people. When I said I did not have any property, they asked, "Oh, what do your parents have?" That was the experience I had on more than one call.
I actually interacted with Judo by submitting a web form because someone told me, "Oh, try BOQ, try Bendigo, try Judo." I submitted web forms. I was trying to talk to anyone I could. The level of understanding from that very first call, because a relationship director called me the same day, and then they went through, "What am I trying to do? What does the business do?" As I discussed before, "What is the business model?" That was really different. It was not about product or this. I was looking for a cash flow lend, which is something that is not, the banks are just so focused on asset backed purely. Cash flow lending was the product I was after, but really it was the caliber of the person on the other side of the phone that made the difference.
In terms of initial lend, it was AUD 2 million. And then since then, I mean, currently, I think I've drawn over AUD 10 million since I'm with Judo.
Faris?
I might add as well. In our business, we're very particular with the clients we take on because I always say in our business, we're very long-term greedy. So our reputation is everything with who we bank. The clients that we take to Judo aren't non-bankable clients. The clients that we take to Judo are clients who want a little bit more leverage. They're clients who want a faster response time. They're clients who want to have a relationship with their banker. Interestingly, they're clients who don't want to move their banking from their existing bank because it's too much of a headache. I've got a few of those clients.
They have all of their transactional banking and their terminals linked into CommBank for argument's sake, but CommBank will not support the business banking. We go to them and we say, "How about we just take you to Judo? You can leave your core banking as it is. I know you do not want to talk to your bookkeeping or your accountant. Let's put a solution into it." That is why we use Judo. It is not a lender of last resort. Actually, far from it. There is a significant amount of lenders in private credit who are lenders of last resort. Judo is not. I actually think that their credit policy is quite tight at the moment, and there is a lot of work that my team has to put into getting the credit papers right and getting the data right to make sure that it transacts.
An example is, for example, ATO debt, right? A client who goes into ATO debt might not, you'd think that's a bad client, but they could have just had one contract that fell over, and they got AUD 100,000 in ATO debt. I had a recent example where we're restructuring a client at NAB, Emerging Corporate. It was a AUD 42 million transaction. We had to carve out different pieces of the transaction and a particular piece that we took to Judo. We're talking about a 40% LVR. A particular piece that we took to Judo, Judo absorbed, paid out the ATO debt and understood it was just a moment in time because they could look forward. I think that those are examples that are important to articulate. If you want details on lenders of last resort, there's plenty out there at the moment.
As a business matures, the market starts to understand a lot more of where our appetite sits. Knowing that coming to Judo is about finding the right solution to grow with their clients a lot of the time, rather than, I think, to your point earlier, Dan, rather than looking back, it is about looking forward to growing with our customers rather than a point in time. I do not know, Dan, did you want to add anything else on that question?
I have got a lot to talk about. Yeah, look, you just need a really, you need a good solid bank to back you. Yeah, because, like I said previously, it can cost you a lot of money, especially in the developing mind.
If you've got ambitions and goals and legacies to leave to your family, yeah, Judo's, I was so proud of being introduced to Judo because it's a bank that actually works with me, and I wish you were around 30 years ago because, yeah, it would have saved a lot of heartache. Yeah. With the major fours, half of them will probably come to Judo in time. Yeah. It's probably the other half are salesmen that want some points on the board.
A question.
Yeah. Thanks for coming in. How do you manage the sort of narrow product offer? You've got to have transaction accounts. You've got to deal in rates, FX, etc. Other banks will provide that. How do you manage the relationship with the other banks? At some stage, I imagine they'll offer you a big prize to bundle everything up together.
I have four businesses. I want to try before I buy. I actually have my transaction accounting for my business banks with ANZ, CBA, NAB, and Westpac just because I wanted to try. It was a horrible time when I had a home loan. In terms of the product offering, I use cash flow lending. I use equipment finance. I use working capital facilities from Judo. Do I need a transaction account from Judo? Not necessarily. I think I have tried all the Big Four banks' transaction accounting. It is all very same same. Does not make a big difference to me. FX anyway, I do not use Big Four because I ship a lot of goods in from Asia in U.S. Dollars and RMB. If you are using Big Four, you are going to get absolutely killed on the spread anyway. For that, I use FX brokerages.
There is very, the thing that I need for my business is debt to actually scale my business for working capital, equipment, new geographies, buying out my competitors. That type of conversation of, "I want to go and buy my competitor. I want to expand into a new geography." That is something that is very easy with Judo. This is like I have a consolidated operating model that I have for all my companies. My banker will actually go through it every six months and actually go through my holding company model. He will go through my financial model line by line and look at the drivers. That is what helps me get credit back with a positive thumbs up for me to go out and have confidence to go out and buy other businesses. I do not even check with Judo before.
Sometimes I commit to things now because I know that when I go to them, because I'm bankable and I'm sticking within the credit risk rating, they will probably underwrite it. If I don't, then I've probably done something wrong. In terms of transaction banking, yeah, I have transaction banking with all the Big Four, but that's not really what drives my business.
Excellent. Faris?
Also, the rise of brokers in the commercial market is going to significantly change the model of consolidated lending. Clients come to us right now and we shop the client. We take their transactional banking to the best transactional bank. If CBA is not paying them interest on their cash, we take them to a bank that will pay them interest on their cash. We almost broker that transactional piece of their portfolio to the best fitted bank.
We go look at their FX and we take their FX to whomever is going to give them the best spread and whomever is going to give them the best rate. We go take their debt to a bank like Judo. The narrow product suites, narrow but still broad, really. Term debt is term debt wherever you go. An overdraft or a line of credit is an overdraft or a line of credit. Apart from equipment finance, which they have a good product for, there is really not much else you need apart from maybe invoice debtor. If you structure the line of credit tight enough and you know your cash flow swings well, then you can almost manage your business with that product as well. The product suites, it is narrow, but it is very manageable for SME clients.
When you get to EC, a bit different. I do think banks will start losing a lot of edge in terms of that consolidated banking unless it is ASX or there is some sort of benefit in syndicating some sort of their portfolios. In SME, my guys are actively shopping transactions and actively shopping what is the best fit for client.
Yes.
Hi. Thanks for coming and sharing your stories. For those that have had experience or difficulties with other banks, did you feel like it was the bankers that did not understand your business or credit or it was prices and policies in the background that they could not lend to you or that you could not deal with them?
Maybe you, maybe Dan, if you want to start.
Yeah, I just think the major fours are just, they've just got their set ways and you just got to tick mom and dad boxes. And with commercial lending, that's probably been the hardest money that, yeah, I've had to undertake over the years. For instance, yeah, we had 25% LVR. And with Mudgee Industrial Park, the couple of the major fours would not lend on the commercial lend to actually construct the big heavy industrial factories that we've actually built. They always had the comment, "Dan, we'd love to help you, but the risk is too high because it's a commercial build." Yeah, once you get it all built and we'll turn it out, then you come and see us and then we'll look after you. That didn't fit well with me at that point in time.
It's been a sort of struggle over the years. I've owned Mudgee Industrial Park for 25 years and yeah, we're nearly there. With Judo coming on, it's going to guarantee the whole completion of it. It'd be great with Judo, I suppose, when a project like that's actually completed, it creates a target for the major fours to come in and say, "Dan, we're going to offer you this amount of interest, but at the same time, I'm a law guy and I won't be doing anything unless I liaise with Judo." I just hope Judo in time can less their rates to benefit the project. I'm hoping.
On that question around bankers, Faris, you experience a whole vast array of bankers in the area you play. Would you like to add anything to that question?
For context, volume-wise, the residential business that we have writes about AUD 700 million a year of settlements per annum. My commercial debt advisory business originates and settles AUD 2.5 billion a year of credit across all of the major banks. The problem with the banks is it's extremely segmented. That is what happens when you scale a business, right? You need to put SOPs in place and you need to kind of almost take power away from the front line and you need to invest into credit so that you can find efficiency in your balance sheet. You cannot empower your bankers because then how do you grow them? You have risk because your bankers are becoming brokers and they want to work two, three days a week and they want to make the same amount of money. How do you keep them incentivized?
The problem with the banks is not that the banks do not want to do business, it is that they have become so fractionalized in their frontline product offering across multiple different sectors that they simply cannot sit in front of a human and have a human-to-human conversation, which is, "What have you done in the last two years? Where are you today? Where do you want to go in the next two years? And how can we help you as a bank?" That is the problem. On the right side of things, Judo as it grew, it scaled and it wrote the right rate for risk.
What it's done exceptionally well over the last 12- 18 months is start building a bell curve into its interest rates and is really doing a good job in retaining its clients to a point where we do not need to look at refinancing them out on the back of it. Where that interest premium, which is really up to 100 basis points, is justified because they can put the back leverage back into the client's balance sheet to allow them to scale and grow. It is not that the banks are not doing what they are doing. It is simply that they are not empowering the front line to be able to issue a term sheet on the spot.
As they industrialize, they are losing a lot of that experience in bankers in the front line, which further exacerbates the issue. Whereas with us, and built the business from a blank canvas, we're only bringing on bankers with that experience and trying to build out the skill set, right?
The major banks are also trying to, and we've been in conversations with this, they're trying to do a broker-direct-to-credit model, which means that my team can execute transactions straight to credit, which tells you that they're going to keep commoditizing this commercial lending space, which is fine. There's a place for that in the market. However, businessmen want relationships on the ground and they want to talk to people and they want people that they can trust because they feel untrusted in the market and they feel like they're always being hunted by somebody. If it's not the state revenue office, it's the ATO. If it's not the ATO, it's their employees. If it's not their employees, it's payroll tax.
If it's not payroll tax, it's something else to a developer. They're being hunted all the time. For them, that's why they're happy to pay a spread on their interest rate because they say, "Well, my capital partner's there to back me." At the end of the day in Australia, good luck building anything with cash only. It's impossible.
Excellent. Thank you, Faris. On bankers, Luke, has it been difficult in recruiting bankers in regional areas?
Not at all. We have been the recipients, I think, of exactly what these gentlemen have been talking about, is that bankers, they want to learn. They're hungry for knowledge. I was 21 years in banking and I was starting to feel like my skill set was not being valued and it was being eroded.
I just was not having the day-to-day contact because our portfolios were so big where we came from. Tom and I, we joined Judo at exactly the same day together last year and we came from the same old shop. We just felt that we had got to a stage in our career that we were just missing out. No, not at all. I would get inquiries every week or more by bankers and lots of good bankers. The part of that is, though, that we are pretty special, the people that we have here and that walk through our door. We value teamwork. Do not bring single players here to Judo. It just is not going to work. We sort of pile in and we get the job done when that job needs to get done.
We are one degree, there is not even a degree removed from risk. We are so close to them. I feel like at the majors that we felt distant from the credit decision maker. Can you imagine what the customer felt like? Yeah, we talk to people every week about roles at Judo. I would suspect zero problem across the nation.
Excellent. Thank you, Luke. There is another question.
Thank you. I guess the last couple of answers touch on this, but Judo often talks about bringing on a customer to Judo customer and potentially losing them down the track when they are more bankable by the Big Four.
Is it fair to say, boiling all down, that when you feel like you have a growth mindset in your businesses, Judo is a bit of a no-brainer and that perhaps when businesses become more mature, the price becomes more important? Can you just touch on those? Is it the pain point really just the decision-making and the speed of decisions around growth in your business?
Yes, growth needs speed, right? When somebody's going to buy a business or leverage up their business or needs a decision, Judo provides speed and then they provide that capital certainty and potentially more leverage on EBITDA, leverage ratios along the transaction.
As those businesses mature, which to be honest with you, we've been in a market where not a lot of businesses have been allowed to mature, I'd say over the last three to four years, apart from sort of very turbulent years in terms of, I'm talking about SME specifically. There is a point where they become potentially bankable, but it's interesting. You go to a client and you say, "Do you want me to now go take you to a major bank?" They say, "Yeah, that's fine." That childcare client is a perfect example. He is bankable. On his debt load with 150 basis point spread, we're talking about a seven-figure saving.
He turned around and said, "Yeah, let's go to a bank, but what happens when I want to go find the next childcare?" I say, "Then maybe we take it to a non-bank lender and we go and try and find a different situation." If we calculate the additional costs that you would be paying on that lender, maybe you just stay with Judo. There is this point where if they are continuing to grow, there is no other provider in the market in SME, at least, or debt loads up to say AUD 75 million. There is no one else to go to in the market. I can speak from experience.
Absolutely. I think it is also really important to note that price is just one factor. You are looking at quantum, you are looking at covenants, you are looking at the counterparty.
When I'm looking to grow, if you're, I'm sure Dan would think the same thing, but in your business, if you're looking to shave 75 basis points off the debt, when you're underwriting growth options, you're looking at a 20% hurdle rate at least internally in a business. If that's what you're trading off, 75 basis points, like I should just pack up my stuff and go home. Price is not the most important consideration. Someone who can do it over and over again in different structures and exactly what's the next option. Big Four, I could go refinance tomorrow and save as a, but coming up on AUD 10 million of debt, obviously 100 basis points is a lot of money personally to an entrepreneur. What about the next thing? I think it would be incredibly short-term is to look at just price.
Yeah. Excellent.
Yeah, I think if you've got the points on the board with Judo, the money, yes, it is more expensive, but hindsight, it's cheap. The flexibility when they give you a sort of line of credit and the trust starts from day one, and if they trust you to spend that money wisely and invest, because on one, every bit of money I've got, I invest in my Mudgee Industrial Park to give me a return and an asset at the end of the day. I strongly believe Judo will be the superpower lender above the major fours in years to come. Yeah, absolutely. Yeah.
There was a question over front here. Sorry.
Yeah, yeah, that's right, John. No one does want to give me the mic. I had three questions, very mechanical. Ami, first one. I've got a sneaking suspicion you're not the normal profile of a borrower. You don't often hear people talking about EBITDA and plumbing businesses. Can I just find out when you started out and you went to buy the second business, did they make you cross-collateralize or was it done in a brand new vehicle?
I've signed a personal guarantee from day one, and I've signed a personal guarantee on all the businesses. They're all under one holding company, and they have a GSA across everything. I'll continue to do that over and over again. I'm not looking to ring-fence assets or anything like that and have new lines.
They are very open with, they always tell me, "You structure it however you want to, and we'll just make sure we have security on the back end to protect us." They allow me, right now I'm doing an investment into backing someone else who's buying out a small business in the States, and that's under my holding company. Again, it's all collateralized under the holding company. No, I haven't asked for separate ring-fencing debt.
George, two questions for you.
Yep.
First one is, can you talk to us, you run the third-party business, can you talk to us about the commission payments that go out the door? Can we find out upfront?
Yeah, it's fairly standard in terms of where markets are. It's 0.6% upfront and a trail and commission of 0.3%. As noted earlier, we only partner with the top brokers in market.
Part of that commission is for them to ensure they understand our risk appetite, where we play, and present a transaction to us that in around seven, eight times out of ten are deals that Judo will do one way or another. Structuring, to Faris's point earlier, working at what the right solution is for the client.
Okay. Final question, George. George, like I'm old, I remember those old John West ads, "It's not the salmon you reject that matters." Run the third-party business. Had a lot of stuff today about the belt system, which is all very impressive. Is there a rejection rate that we actually see Judo reject, or is it everyone works within their delegated authority and it's the banker that ends up rejecting?
It's a collaborative approach. If it's a banker that sits on the lower end of the scale or top, they'll engage with a banker that sits up higher. They sit in a pod structure, as Jess mentioned earlier, and they will collaborate and work through what that solution is. In terms of rejection rate, as I said, the stats that we're working on at the moment are around seven, eight deals out of ten where we're saying yes one way or another if it's in the way it's been presented or if it's around discussing, structuring, working through a solution that best suits the client needs.
The bank has got the delegated authority to say up to AUD 10 million, but that still needs to be approved centrally?
No, no, no, no. I'm saying if they sat lowered down the belt level, but if they sat higher, then they've got their discretion.
They will work with either their colleagues or with our risk partners to ensure that there is a consistent approach to what they're looking at and what they're approving. Ultimately, it's their discretion in market and ensuring they're bringing the right clients to Judo.
That's great. Thank you.
No worries at all.
Just for reference, 40% of our loans, statistically, 41% to be exact, that get put up to Judo from email to presentation aren't accepted by Judo. I think there's a lot of conversation here about backing new businesses and startups and ventures and taking on risk where others won't take on risk. I can tell you independently, they don't take on all risk, right? They take on, in my business, 41% of transactions that are presented aren't taken up the line. We're lucky.
We write volume, so we know all the Black Belts or the belt, whatever they're called now, Black Belts, right? And they have discretion, and we know what they'll take, what they won't take. Are they going to take a 60% first mortgage deal on some sort of residual stock? Yes, they will. Are they going to take a fully secure business loan? Yes, they will. Are they going to take a startup that's not presented to the sophistication that he's not a normal Judo client? No, they're not. They don't write risk. That's not just issuing term sheets for the sake of it. Actually, what they do very well is they don't issue a term sheet unless they meet the client face-to-face, whereas I can go get a term sheet from NAB tomorrow without the bank convening the client.
One last question off the back.
Good morning. Got a question for Faris. Frank said earlier that they're about to roll out a new business online savings account. What proportion of your customers do you think would be interested in that type of product? Is there a big need for it? What sort of terms and conditions and rates do you think Judo needs to apply to that online savings account for it to get meaningful take-up?
I'm yet to see the product in full, but the clients that would benefit from those are the disciplined clients who would make AUD 100, put AUD 20 in the bank account to the side to pay the ATO, and would normally either put that money in a redraw or would put their money in a line of credit or would put that money sitting on the side. I assume the product would be, I don't know, what's the pricing on it?
3%, 4%, 5% sort of at cash, call it. It would just be clients who want to park their ATO cash whilst they're waiting to pay for their whatever comes due, POI, GPOI, GI. It'd have to be money at call on, say, 60-90 days, but maybe some particular lockups for longer-term parts of capital. And then pricing would have to be at cash or within 100 basis points of cash.
Just to follow up, I mean, Judo's talked a bit this morning about how big their TAM is in certain areas, deposits and funding. We've heard a lot about loans, but deposits and funding are pretty important to ensure that they can generate a decent return for shareholders. Is there a lot of demand for this type of product, or is it going to be very, very niche?
There is demand. There are two sides to it. I always have this running joke with Judo Bank, "Why would you be a bank if you're not going to take deposits?" Because it's too hard, right? It's great that that product's rolling out. Just how I said before, where we're brokering clients where they have transactional banking and where they have various different parts of their portfolio. Subject to the product, it needs to be considered that there are clients who would deposit cash at Judo Bank in their business account that aren't clients of Judo Bank if the product's structured correctly. I think that that needs to be important. It's just like how we have investment clients who won't put money into our pooled fund, but they'll put money at La Trobe's pooled fund, and they'll have money at call on 60 days, but they don't have any lending with La Trobe.
I keep comparing Judo to La Trobe, but for me, it's a very similar business going in a very similar direction, challenging very similar parts. Yes, there is demand. Clients sit on cash. A lot of clients sit on cash, and you may see emerging corporate clients actually leveraging off the product over time.
I've got AUD 1 million sitting in ANZ. I should have talked to Faris. It just sits there interestingly.
I'll get you the full list.
Excellent. Thank you very much for your time and honest feedback. Please join me in thanking our panelists. On that note, we'll take a morning tea break and be back in 20 minutes or so. Thank you. [audio distortion]
Welcome back, everyone. I hope you enjoy hearing from our guest panelists, and I hope some of you—I saw some of you bail them up, during the morning tea break, to keep the discussions going, which is fantastic. I never tire hearing from our customers, brokers, and our bankers about the real impact that we're making in the SME sector and the communities we operate in. Stories like these are what has kept me in the banking industry for most of my career. For those of you that I haven't met yet, my name is Renèe Roberts , and I have been Judo's Chief Risk Officer since September last year, about five dog years. Joining Judo was natural for me, having always believed in what is our purpose: backing small and medium enterprises, and because Judo is one of the most capable, courageous, and credible organizations I've encountered.
I've worked in major banks and regulatory regimes across multiple geographies. Early in my career, I was a business banker. Lending my first dollar back in the summer of 1989, I have assessed credit, managed portfolios, and dealt with challenging customers. Crucially, I wouldn't be here if I didn't believe Judo was match fit and poised for sustainable growth. As you heard from our panelists, Judo is meeting a need in the market: a bank that truly banks customers who are themselves courageous and building their future. All of my colleagues are here for the same reason. We believe in the sector, have worked in the big banks, and now feel like we are back doing what drew us to banking in the first place.
Over the next 10 or so minutes, I will cover our risk management context, our approach to managing credit risk at a transactional level, and our credit risk approach at a portfolio level. The three key messages I want to leave you with on this slide are that we operate successfully in a broad and complex risk environment. A banking license is important and is a privilege, and being APRA regulated is a good thing. It's a real benefit. It makes us domestically and internationally comparable, and it requires us to meet high standards. Judo stands out among Australian financial service companies. We are much smaller than our major competitors, and we see this as an advantage by the way we can be nimble when they are not: smarter and faster. We consider a banking license to be a privilege and a responsibility.
It enables us to take deposits and also meet rigorous high standards, something the non-banks are unable to do. Being APRA regulated sets us apart from the other smaller financial services companies that we are often compared to, including La Trobe. Being APRA regulated means that we must comply with over 50 prudential and reporting standards. To do this, we have built a robust risk management capability with a very experienced team of specialists. APRA is a regulator that is forward-looking, ensuring depositors can have confidence in the stability of the bank that they have trusted their money to. Indeed, in my previous life as APRA's Head of Banking Supervision, we expected Judo to put all of the systems in place to ensure compliance with prudential, legal, and social license obligations.
When I arrived here, it was really pleasing to see the depth of implementation of a sound risk management framework and then the resulting risk culture. We have achieved a significant amount in the six years since receiving our banking license. We recently transitioned from APRA's new bank supervision team to the mid-tier team. Now, this is a major step and recognition of our development in size and complexity, and now we feel like the pea plates have truly come off. With everything that has been built here, our focus is now on optimization, in contrast to many of our peers who are still modernizing. You will hear from Raz next up about our technology journey and how well placed we are.
As far as risk management goes, we are also very well positioned to better use technology to optimize our policies, processes, and systems to support Judo becoming even stronger, smarter, and faster. Now, my remit as CRO includes the full spectrum of risks that Judo deals with, as shown on this slide. We have a solid framework for managing each of the key risks and provide extensive reporting to management, board, and regulators. Now, while all of these risks require diligent management, today I'm going to talk primarily about credit risk. It is our biggest risk. We are in the business of lending money and taking risk, and that's what really it's all about. My job is not to say no, but to make sure that we are achieving an appropriate balance of risk-reward that will enable us to continue to grow a viable and sustainable business.
All of us here at Judo, me included, are here because of the way we do things, especially our approach to lending. We have incredibly deep credit expertise. Across my credit team, we have an average of 23 years' experience, totaling 837 years in total. We empower through judgment. We value credit expertise, and we use that expertise. And our credit people meet customers. They go out and stand side by side with our bankers. The customer, and you heard it again, earlier, the customer wants all of these things, especially they want a banker that is able to make decisions. Chris talked about Judo being built from a blank sheet of paper. This is incredibly powerful.
Starting from scratch means we've been able to create a specialist business model built on several critical and strategically reinforcing elements, shown on the slide, with credit risk management at the heart of our business. These strategic elements, you may have seen something like this in previous slides and presentations from Judo, but what I really want to emphasize today is how important this is, and your takeaway should be how difficult this is to replicate. Our approach to transactional credit risk understands that every SME is unique and has different risks. Over my career, many attempts have been made to make SMEs homogenous. It doesn't work. As Frank discussed, assessing SME credit doesn't lend itself to automation or simplification. Understanding a customer's creditworthiness requires deep understanding of the business and the people running it.
In this way, our approach to assessing credit is very similar to being bottom-up stock pickers. We rigorously apply the four Cs of credit of assessing credit: character, capacity, capital, and collateral to each borrower's application. Character is the first and most important aspect and includes a detailed assessment of a business owner's capability, evidence that they understand the risks of their own business, assessing their history of navigating business cycles, and their commitment to repay. Our customers, Ami and Dan, who you just met, clearly demonstrate these character traits. Next is capacity or cash flow, which is understanding the drivers of earnings for a customer and their ability to repay. Historical financials are not enough. Next year will always look different, which is why industrialized processes don't work. Backward-looking ratios never tell the whole story.
Customer-specific factors and changes to the operating environment mean that there is no substitute for understanding a customer's business. The third is capital. Understanding the point at which debt becomes equity and what a business needs to absorb a shock. Working this out is the true skill of a banker. Customers need to have their own capital, often referred to as skin in the game. Our job is to provide the debt. Finally, collateral, or the second exit, if character, capacity, and capital fail, which does happen. Most of the industry is obsessed with property collateral because, to Frank's point earlier and also to Dan's point, they have deskilled their workforces and lost the bankers who know how to assess credit.
While the major banks say they are recruiting lots of business bankers, their overarching risk appetite still means that lending that they are doing is largely commoditized secured lending. Our bankers and credit execs can and do apply their judgment, which enables us to provide more tailored structures that better suit our customers' individual circumstances while also remaining within our risk appetite. Now, this does not mean that we just do unsecured lending. In fact, we have very, very high levels of property collateral against our loans. The difference is collateral is not the only thing we look at, nor is it what we rely on. The way we assess transactional credit is the way major banks used to assess credit before they began their process of industrializing. All we are doing is bringing back the skill of SME business banking.
Next, and in my view, the most critical strategic element of our business model is technically capable and appropriately incentivized bankers. Jess has touched on this already. This is a major differentiator from the rest of the sector. Other banks have evolved into sales cultures, which necessitates segregated credit functions. By definition, bankers with sales targets must not have the authority to approve loans. The absence of sales targets and our ability to focus on recruiting bankers for their credit skills means that they can be trusted. We attract the most competent bankers in the market. We test them meticulously. We invest in their capability, and we empower them to make smart and faster decisions. Where a second set of eyes is required, our credit risk team is in market, sitting alongside our bankers, visiting customers, and ensuring our customers always have access to whomever is making the decision.
This is why, as a matter of principle, we do not have individual sales targets. The last point that I want to make in this set of strategically reinforcing elements is portfolio sizes. We have been astounded at how much a customer needs to borrow from a major bank before they have a dedicated relationship banker. Often, it is at least AUD 5 million, and in some cases, even more. We can over-index on banker numbers to provide a premium relationship-based service because we are not saddled with the same legacy costs our competitors have. Our target of 40 customers per banker at scale, 28 today, is a fraction of the industry average and will enable us to sustainably deliver our premium service, which also means we can remain close to customers and proactively manage emerging risks.
To round out our approach to credit risk management, I want to briefly touch on our approach to banking through all parts of the cycle and how our strong approach to assessing and monitoring credit risk at a transactional level is complemented by our rigorous approach to monitoring credit risk at a portfolio level. On the previous slide, I covered the transactional level approach, and while correctly assessing risk at the point of origination is important, businesses are dynamic, and so it's just as important that we monitor and manage customers when they are on our books. Our low ratio of customers to bankers is key. Staying close to our customers and having regular contact means that we pick up early warning signs if and when there are issues.
This allows us to do two things: offer support and advice in the very early stages, which might help a customer get back on track. If a customer is facing an issue but is not being cooperative, we might reach the conclusion that they might be better off with another financier. There is often a window where this is very possible. We have a good track record of seeing customers that have experienced some form of distress, either return to performing or refinance. Unfortunately, there are also occasions when our customers' businesses are close to failing and/or may have failed. We have invested heavily in our asset management team, which consists of some of the most tenured people in the industry.
We have three people in our asset management team with over 20 years' asset management and solvency experience, and they are complemented by another three that have over 10, and they have two with over 5. This team does an extraordinary job of helping our customers in their most difficult times through what is often a very long process. Unlike a mortgage customer, in distress, where forbearance or foreclosure are the main options, given the nature of every business in trouble is different, the best course of action requires supreme judgment and care. While the bottom-up approach requires a lot of judgment, we also employ a top-down approach to managing the portfolio, which is more structured. We maintain strict risk appetite settings for sectors and geographies to avoid excessive concentration risks. The considered way that we entered agri and now warehousing demonstrates our prudent approach.
Similarly, we've maintained our day-one policy decision to avoid lending to greenfield construction. Our goal is to have a portfolio that mirrors the SME economy with good diversification. We are well on our way to this goal, but have some variances. We remain underweight in the agri sector, and it's unlikely that we'll match system for some time. We're also relatively underweight commercial property lending. This is because we made a proactive decision at the beginning of the interest rate cycle to increase interest rate buffers, require high interest coverage, and we've taken a conservative posture on valuations. Our commercial property portfolio is also different to other banks in that most borrowers are SMEs with strong alternative trading incomes or very healthy personal balance sheets. Importantly, though, we are never closed to any sector.
We are less than 2% of the market, and we believe that there are winners and losers in every sector throughout the economic cycle. We supported businesses through COVID, including gyms and hospitality businesses. They have been fantastic, long-standing customers. Our sector appetites will change over time, but where a deal stacks up on character, capacity, and capital, we will be happy to support. The last thing I want to talk about is how do we think about credit portfolio management and credit losses. You are all familiar with our at-scale cost of risk metric, our 50 basis points. There is no consistent definition of SME among the banks, so good comparable data is hard to find. Based on the data available, the 30-year average for SME credit losses is around 29 basis points. We assume 50 basis points to be conservative.
The 50 basis points is what we expect credit losses to be through the cycle, but we should expect periods where it's higher and periods that are lower. In terms of our P&L, we are required to provision upfront on new lending. While we continue to grow, our P&L expense is likely to remain above the 50 basis points. The reason for this is what's known as seasoning. We conservatively assess customers when they are new to bank. As they demonstrate a track record of business performance and repayment, their risk profile, ideally their probability of default, improves, and we end up holding less provision. That might be when Dan gets his discount. At scale, the P&L normalizes. In conclusion, Judo's risk foundations are very strong, comparable with any other bank. Optimizing our approach further will support our path to scale. Now you will hear from Raz, who will talk about our technology journey. Thank you.
Good morning, everyone. My name is Raz Fornarino. I am Judo's COO. I joined Judo in July 2024 because I was in awe of the journey that Judo had been on and really excited about the journey Judo was about to go on. Prior to joining Judo, I had various senior roles across the Australian banks, including ANZ, NAB, and ME Bank, where I worked in both customer-facing and back-office operational roles. I started my career in 1982 when bankers were the backbone of the community and everything was paper-based. Banking has changed significantly over the last 40 years as technology has allowed us to do things more efficiently and differently. What has not changed, though, is the customer's desire to have a strong and lasting relationship with their bankers.
My role at Judo is to ensure our bankers have everything they need to be able to deliver our relationship banking CVP for our people and our customers at scale. As a young bank, Judo has come a long way. Chris briefly touched on this. The task of building the bank from scratch was not for the faint-hearted. We made strategic decisions to focus on immediate priorities throughout our short history. In the build phase, our core objective was to prove the business case and reach profitability quickly. To do this, Judo kept our technology lean, relying on tactical off-the-shelf solutions. The scale phase was about building future-ready foundational technology to support Judo's growth. That phase is now complete, and I'll talk a little bit more about that in the next slide.
We are now firmly in optimized phase with a clear plan to leverage our strong tech foundations to harness data and insights using modern tools such as AI to empower our bankers and deliver on our CVP. I also want to remind everyone that Judo is early in our journey. Completing the build phase and scale phase in eight years is no small feat. It is a testament to Judo's strength and agility. In 2023, we told you we would build for scale and continue to invest in existing capabilities. Since then, I am pleased to report that our replatforming is behind us. As Chris mentioned, over the past three years, we have successfully delivered a significant change program to replatform our bank, one that any bank in Australia and, in fact, the world would be envious of and would find extremely hard to replicate.
Just this month, we've successfully completed phase two of Judo's core banking transformation journey, building on the strong foundation established in our initial go-live in mid-2024. This ambitious project, which kicked off in July last year, was complex and high-demanding and demanded a relentless effort from all of our team. Over the period of seven months, we designed, built, and migrated our deposit products covering direct and intermediate channels across retail, business, and security-linked accounts. In total, around 63,000 accounts were successfully migrated, marking a major milestone in Judo's broader program of modernization. All core products, lending, and term deposits are now live on Thought Machine. This strategic shift enables the bank to significantly improve operational efficiency, reduce technical debt, and accelerate time to market for future innovations.
Additionally, we've implemented Oracle's General Ledger and Enterprise Resource Planning System to support corporate operations, and it deployed a market-leading credit risk engine from Moody's to enhance risk assessment efficiency. With these foundational investments completed, Judo is now set to scale. Judo is a simpler bank today. Our technology platform is the benchmark that other incumbent banks are investing heavily to achieve. We have a flexible technology stack, which reduces operational risk and lowers ongoing maintenance costs. This flexibility means we can respond quickly, ensuring our systems remain robust and efficient. With our native cloud architecture, integration and expansion is easier. This enables us to expand our capabilities easily as our needs grow. We also utilize best-in-class SaaS providers, which allows us to streamline upgrades and adopt innovation easier and quicker.
This strategic combination allows us to embrace change quickly, enhance our service offerings, and deliver exceptional services to our customers. As Frank mentioned earlier, we are developing two new deposit products. With our deposits now on Thought Machine, we have the flexibility to build, test, and bring new products to customers in just over 12 months. This will take incumbent banks years to do. Our plan going forward is simple. Understand what is stopping our bankers from spending more time with their customers, then eliminate, streamline, or automate those processes. Our bankers today have on average 28 customers, although some have up to 50, but the average is around 28. With the technology changes we have planned, we can deliver significant efficiencies and create additional capacity, so bankers, in theory, should be able to maintain larger portfolios.
Our near-term priorities are to focus on a range of initiatives to create capacity and increase the productivity of our bankers. Essentially, the plan is to supercharge banker productivity. Initially, we will implement a new process for how bankers complete margin changes. Today, our bankers spend on average 30 minutes on each margin change. The new process, which is currently being tested and will be rolled out before the end of this month, will take this process down to two minutes, giving bankers significant time. Other initiatives on the slate include digitizing customer documentation and making documents available to customers for signing through the Judo Customer Portal. The ability to ingest data and information from third-party sites such as Equifax and Creditor Watch and populate our origination platform, eliminating the need for our bankers to do that.
Simplifying and streamlining the way we perform annual reviews and rewiring our discharges process, our loan modification process, our loan structuring process, and our variation process, and a range of other initiatives and activities so that we can empower our bankers to deliver on Judo's CVP, smarter risk assessment, faster decisions, and stronger relationships. We are also thinking about what other technology investments we need to make to augment our existing capabilities. The most obvious of these is AI, specifically GenAI and Agentic AI. GenAI and Agentic AI provide us with significant opportunities to uplift the customer experience and simplify our core operational processes. There is no lack of information, research, case studies regarding AI, and our existing vendors and partners are falling over themselves to showcase their capabilities in this space. All are keen to work with Judo because of our modern technology stack and our proven agile approach.
However, we must take a considered and thoughtful approach to identifying the right business problems we want to solve with AI. The use of AI needs to be targeted and tied to improving the way our bankers are able to more effectively engage with our customers. We have started on our AI journey and are testing different capabilities against known banker problems. For example, completing a credit memorandum in most banks can take bankers days, including downloading external PDFs, interpreting complex financial and legal data, and re-entering findings into core systems. This results in inefficiencies, risk of errors, and delays in loan assessment and approval processes.
We have developed and are trialing a working proof of concept that will automate data integration from external providers to Judo systems, extract and categorize transaction-level data, and flag revenue or expense anomalies from bank statements, provide a draft credit memorandum based on Judo's requirements, and conduct compliance checks against Judo policies to ensure lending is within Judo compliance tolerances. This is all done whilst ensuring there is a banker in the loop to verify and edit. Our focus in all of this is to create capacity to allow our bankers to spend more time with their customers so that they are able to deliver against our CVP of smarter, faster, stronger. Thank you, and I'll hand over to Andrew Leslie.
Thank you, Raz, and good morning, everyone. For those I haven't met, my name is Andrew Leslie, Judo's Chief Financial Officer. I joined Judo back in 2019 when the loan book was, and I remember this, it was a mighty AUD 640 million. It has been amazing to see the customer base and the business grow over the last six years. We provided a Q3 trading update and revised guidance to the market on the 1st of May. What I wanted to do today was to take the opportunity to step back a little and discuss two of the key drivers of our ROE at scale, namely the overall drivers of our net interest margin and the key factors impacting our operating expenses going forward. I will then spend a moment to pull together some of the initiatives my colleagues have spoken to and how all of these drive operating leverage. Let's start firstly with NIM.
Now, NIM for us is a very different story compared to the rest of the banking sector. Firstly, we are a pure-play SME lender, differentiating on service, structure, and speed. We are not a mortgage bank operating in a highly commoditized and competitive environment. Secondly, we do not rely on transaction accounts for funding, so we are not going to experience NIM compression in the same way that every other bank is now facing in a falling rate environment. Thirdly, we are still growing to scale with all the benefits this brings, including improved wholesale funding options and liquidity management. On the left-hand side of the page, you can see here, we outline our medium-term NIM drivers, and as you can see, we have many levers here. Starting first with lending.
Our loan book takes several years to turn over, and as a consequence, the benefits from front-book lending margins in the mid-fours is taking a few years to wash through, demonstrated by the gradual increase in our blended lending margin. Now, front-book margins from our core business will be partly offset as we expand into warehouse lending. This is high ROE business for us, so it's something that makes sense for us to pursue, but it does come with a slight drag on NIM with margins closer to 4%. Next, on the funding side, we will continue to see tailwinds from funding supported by several factors. First, a higher mix of deposits, which is our cheapest source of funding. Second, the introduction of savings accounts, which provide us with diversification and funding cost benefits over time. Lastly, some further optimization of wholesale funding.
In addition, we'll see some further benefits from tighter liquidity management with minimal impacts in the medium term from our replicating portfolio. Our guidance, as you all know, is for an exit NIM in June 2025 of 3%. Now, this will represent a close to 40 basis point increase since June 2024. We're getting very close to achieving our at-scale NIM of above 3%, with the simple maths for this on the right-hand side of the slide. I do want to spend a moment now to unpack the movements in our lending margins, which are a key driver of our NIM trajectory. In the past 12- 18 months or so, we've had greater focus on balancing growth and economics, ensuring that our lending margins appropriately reflect our service premium, funding costs, and risk. On this chart, you can see the improvements we've delivered here over the past two years.
As a result of this shift, our blended lending margin is now sitting at 4.3% compared to the 4% level the book was generating back in June 2023. A reminder that front-book margins can move around somewhat due to lending mix and market dynamics. For example, larger loans at lower margins or agri loans, which are typically at slightly higher margins. On this chart, you can see the typical spread of margins across the book. We do not take a one-size-fits-all approach, and we seek to price appropriately for each customer and situation. The improvements in margins you can see on the chart are a key driver of our NIM trajectory and are a result of the focus we have had on balancing the overall economics of the portfolio. Let's spend a moment now on our funding strategy, which is another key driver of NIM.
There are a number of components to this strategy, which we continue to optimize as we scale. Firstly is the ongoing growth in our deposit book as we progress towards our at-scale target of 75% of total funding from deposits. Deposits are our cheapest form of funding, so more deposits in the funding stack equals a lower overall cost of funding. Secondly, product mix. Today, deposit funding is derived solely from term deposits. But with a TD book of now well over AUD 9 billion and a rollover rate of 70%, we are now actively working on a savings account offering, as you've heard. This will help reduce our reliance on TDs and give us the flexibility to optimize flows and reduce overall deposit costs. We had a question on this earlier. This is more around how we manage the book rather than a cross-sell play.
In addition, now that we are on our new deposit core banking platform, we are considering other investments and refinements to our TD offering to increase capability and flexibility. Outside of deposits, there are a number of other opportunities available to enhance our funding strategy. This includes ongoing optimization of warehouse funding, continued presence in public debt markets, and other funding and ROE initiatives such as loan sales. Overall, the funding strategy has been designed to help the bank scale, maintain diversification and flexibility, and improve overall funding costs and economics. Next to costs. As you've heard, the foundations for our bank are now built. Non-customer-facing roles are reaching maturity, and amortization from past CapEx is now largely in the cost base, with annual CapEx more stable going forward. We are also a simple business with no legacy agenda, as you've heard from Chris and Raz.
We have a simple, focused product set and business model. Simplicity helps keep our costs low and our investments slate efficient. Going forward, cost growth will be much more leveraged to revenue growth. For FY20026, we have previously flagged some wage inflation expected for customer-facing roles. In addition, we will be making some further investments in the front line, including hiring of new bankers and frontline staff, banker upskilling, and banker enablement. Overall, we expect to see positive CTI progress for FY2026, supporting our operating leverage trajectory. One of the most compelling parts of our story in the near term is this significant operating leverage we have in the business. Operating leverage for us is multifaceted. Hopefully, you have been listening to my colleagues today because it combines all of the things that we have been running through across this morning.
I want to spend a moment here just to sum up the initiatives we've discussed to show you how they drive operating leverage. Firstly, we have an expanding TAM, as Frank spoke about. We're growing our geographic footprint in the regions, and we're adding more bankers. Second, we're growing our market share with above-system lending growth in our core business, given our unique CVP and our modest market share to date, our differentiated approach to the broker market, and you heard Faris talk about that earlier, and enhancements to existing products. Thirdly, we're delivering very solid NIM expansion or price growth, I guess, for some of the generalists in the room.
This dynamic is supported by multiple factors, including our disciplined approach to pricing for risk, the evolution of our funding stack, including enhancements to our existing TD product, as well as the introduction of the new savings account products, and tighter liquidity management. Fourth, we are generating additional revenue from our new warehouse business, and we expect to generate more other operating income from new products over time. Last, as I covered on the previous slide, cost growth going forward will be more moderate. We have a simple and focused business model, which helps keep our costs low with significant leverage from our existing investments in people and systems. All these factors contribute to significantly positive revenue to cost jaws over the near term, driving the strong profit trajectory we have highlighted in our PBT growth guidance for FY2026.
As you can see from this chart, we are on the cusp of significant operating leverage over the near term, which is further highlighted when backing out the contribution of the term funding facility from the past couple of years, which supported higher headline profit. Thanks again, folks, and I will hand back to Chris.
Thanks, Andrew. I am going to start my conclusion with the slide I have used consistently since my appointment as CEO, the service profit chain. As CEO, I really am passionate about this model. I deeply believe highly engaged employees provide great service for customers. Those customers tell other customers, and this in turn delivers great results for our shareholders. As Jess said, our JEDI correlation data proves this relationship exists.
I truly believe our culture is our secret sauce, and having built Judo from a blank piece of paper, we've had the incredible opportunity to build the company that we've always wanted to work for. I started my presentation talking about the lack of legacy. While no legacy tech systems and processes are key, by far the most important factor has been no legacy people. We've been able to recruit people passionate about our purpose and are experts in their field across all parts of the business. Most importantly, for our customer value proposition, we have amongst the best relationship bankers in the country who are empowered to build enduring relationships with their customers. Hopefully, it's obvious that as we continue to satisfy customers like Faris, Dan, and Ami, we can continue to grow and deliver strong results.
Hopefully, it's also clear that we have an executive team that knows how to run a business bank and are passionate about Judo and the opportunity in front of us. Our key business metrics at scale are the financial outcome of everything we've discussed today. We provided these metrics at the time of our IPO, and they continue to be our binding contract with the market in terms of our financial aspirations. We're proud of our growth to date, and of course, we still only have 1.5% market share. We're not far away from our at-scale GLA target of between AUD 15 billion and AUD 20 billion, and the continued expansion of the TAM, we certainly do not see AUD 20 billion as the end point for our loan book growth. We are funding ourselves largely with deposits, which, as Renèe said, is the Holy Grail of being a bank.
We have built a AUD 10 billion deposit book with a single TD product, and as Frank set out, we are now taking our first step of diversifying our deposit base with a savings account. Along with our maturing wholesale funding program, this will lower our cost of funds and improve our funding diversity, as set out by Andrew. This lower cost of funds can either then be passed through to the NIM, or it can enable us to access more of the TAM with a lower gross margin expectation. Costs, as Andrew talked about, are now benefiting from scale, and from here, our investments will be completely growth-focused. As Jess said, we are the preeminent destination for SME bankers. We have absolutely no issues at all attracting the talent that we need to keep growing our loan book.
In addition, the investments Raz is making will give bankers more capacity to deliver our CVP. Renèe's covered our approach to credit risk and how all the different elements of our model help us manage risk both bottom-up and top-down. As a bank, we are in the business of assessing risk, which is why we recruit and reward our team based on their risk capability. Frank's explanation of the types of risk we take should also give you comfort that the lending we are doing is no different to what the major banks were doing 20 years ago. As our panel said, they simply can no longer do it. The sum of all these components is a target ROE in the low to mid-teens. FY2026 is an important year for our ROE trajectory and shows that we have a clear pathway to achieving sector-leading returns.
In closing, we're proud of what we've built and know that our model is impossible to replicate. To build what we've built with our unique culture and business model is only possible when you start with a blank piece of paper. However, it's not for the faint-hearted, and it's hard to see how another Judo will ever be built because so many stars need to align to get as far as we have. We've navigated a significant amount of complexity to turn our vision of 10 years ago into a reality. With the build chapter now complete, we've reached a threshold point in our journey where we can focus on what's next and how we can optimize and achieve our vision of being world-class.
We love talking about Judo, and I know I speak on behalf of the team when I say it's been a privilege to have your attention here this morning. I'll now invite my exco to the chairs here, and we look forward to answering any of your questions. Then it's a wrap, and we invite you to join us for some lunch. Thank you. Andrew, you're going to facilitate asking questions?
Yeah.
By Jason, who runs our agribusiness, Ben, who runs our core business around all the states, and obviously, you've already met George, and I'll divert any questions as appropriate to Ben, Jason, and George.
Thank you, Chris. We do have roving mics, so please just put your hand up if you have a question. We'll take our first question from John Mott.
John Mott from Barrenjoey. A question. If you think about the journey since the IPO from a stock market perspective, the one area that we've been consistently disappointed with has actually been credit growth volumes, where we've consistently seen it miss where we thought it was going to get to, and we've consistently downgraded our forecasts. It's taken longer to get to that at scale than we thought. Now, when we look at it and we speak to people out there, it really turns out that you're really a transaction bank when you have customers come to you at a transaction stage, whether it's Dan or the other guys who were up on stage before.
What we're then finding is that they're getting to a stage where they've finished their transaction, and then they're rolling off either to another bank or refinancing or asking for that Dan's discount, as we're all going to be talking about. Therefore, either you've got to sacrifice margins and the scale is the economics aren't as good, or the growth doesn't come through. How do we think about this, especially given that you're now riding 75% of the flow through broker? Originally, it was a 50% target, as you mentioned before, and the brokers are actively incentivized when their customers are coming towards that phase to ask for a discount or refinance externally. Does that really put the economics at scale z at question?
Yeah, no, look, it's a great question. I mean, obviously, the IPO was pre-COVID, and COVID did change some of the original assumptions that we had. I mean, the way that we think about growth at the moment, I think I took you through these building blocks when we last spoke on the trading update, is if you think about an average loan size of what it is, about AUD 2.5 million, and we have 160 bankers, but 2.5, and we have what the banker originally one loan, just one loan per month, then put that into your spreadsheet, and you'll see we should easily get AUD 5 billion of growth or AUD 5 billion of gross originations. The run-off of the book, we believe through the cycle is about 20%. So on a AUD 12 billion book, that's rolling off at AUD 2.5 billion.
5-2.5 is AUD 2.5 billion of growth, which is, and we always say that we think about our growth between AUD 2 billion and AUD 3 billion. It has generally oscillated between AUD 2 billion and AUD 3 billion, and run-off has been elevated in the last year, as you know, and that is why we downgraded by AUD 300 million three weeks ago. It was purely because of elevated run-off. It was not about gross originations. You are absolutely right. Our CVP really connects well with customers when they want to do a transaction. We are a transaction bank. We do not generally do straight refinancing from a major bank. It is pretty much non-existent. There is always a trigger. The customer wants something. Maybe they want their house back that they provided as security four years ago, and now they do not think they need to do that anymore. There is generally an underlying transaction.
I think for us, as we bed down the relationship proposition, it's getting the margin expectation, as you heard from our guests earlier, because they value that we'll be there for them in the future. When you build a bank from a blank piece of paper, it's hard to prove that your customer value proposition is real. We always said this, that we thought that our margin would increase over time because we establish a brand. I think Judo has well and truly arrived now. We have an AUD 12 billion book. We have the best bankers in the market. Those bankers build established relationships with them. We're very strong in region, where relationships are even more entrenched in the regional areas and also in agriculture. We're always thinking about averages of averages. It's averages of averages in terms of our margin expectations.
It's averages of averages in terms of average loan size. I think as our business grows and matures, we will be able to manage the margin expectation and the growth expectation that underpin metrics at scale. In the past, we've generally had to trade. We sort of traded one off against the other in the early stages, particularly during COVID. I think what happened during the COVID era, and I think Renèe talked about this with regards to the way the banks didn't support businesses that were reliant on heavy footfall, particularly hospitality, gyms, et cetera, we did a lot of loans during COVID. In fact, if you look at the APRA stats between March 2020 and March 2021 for the Big Four banks, you'll see they went backwards. The system actually shrank. We doubled the size of our balance sheet.
We went from that AUD 600 million that you talked about, Andrew, to nearly AUD 2.5 billion during COVID. And a lot of those loans were, if we're being honest, they probably were a little bit more commoditized in nature than the original thesis. They weren't quite the—they were only in the half-moon because of the COVID event, where the banks, where the rearview mirror just didn't work. I mean, during COVID, you can't originate with a rearview mirror. The rearview mirror meant nothing anymore. You had to be able to assess forward-looking. And we were able to do that. But now, and we were able to do that at a lower margin expectation than we currently have because we had the turn-for-new facility. Today, our funding costs have normalized. We have a higher margin expectation. The banks have fallen back in love with SME. COVID is behind us.
They're now relending to some of those customers. And some of them, we just have to, we're just happy to let them leave. We have seen run-off a little bit elevated, as you know, and that's been the difference between the growth that we originally signaled. Fundamentally, we believe that we can grow our book between AUD 2 billion and AUD 3 billion for the next two or three years to get to that AUD 20 billion out-of-market of metrics at scale at the NIM expectation that we've flagged. Yes, we do.
Just following up on that last point, you said there's a whole lot of loans written during COVID. It's now, let's just say, as you came out of that three years ago, you're seeing an elevated run-off rate than you thought, not the five-year, but it's faster than that. The book duration is shorter.
You have got to pedal a lot faster on the front book to grow that book. Are we going through a period now where you are just running off a lot of the hump that went through during COVID, or are we actually in a stage now where the duration of the book is not five years, it is four years or three years? Because if that is the case, the economics totally change.
No, we are happy with the 20% run-off.
We are just going through a hump of COVID customers, and you are comfortable that once we are most of the way through, how much further should we see before we actually start to see the book accelerate?
A lot of it was the system lowered the price of credit with the term funding facility, we believe, between 50 and 100 basis points. The whole system did. We were caught up in that.
That is when you'll remember, I think it was the August 2023 results when we published a NIM of 3.5, but we had a gross margin of 4, not 4.5, but we had a weighted average cost of funding of 30 basis points, not 1. The maths was different. Now that deposits have gone up to sort of the 80-90 basis points, we are getting our 4.6. We're not chasing growth for the sake of growth. As I said, the economics need to work for us as well. A lot of it has just been transitionary as we've come off the COVID era. The term funding facility has been repaid. Today, as we stand here today, we originate at 4.6. Our average cost of funding is 1%, as Andrew said, and we're happy with the NIM guidance that we've given over three.
We'll have an exit NIM of over 3. And we think of growth going forward between AUD 2 billion and AUD 3 billion a year.
Good morning, Matthew Wilson Jarden. Perhaps a question for Renèe and Andrew sort of combined. Renèe, you've spent some time at APRA. Just to draw upon the net interest margin chart, there's an optimization opportunity as you move from MLH to LCR. Could you talk to that, give us some color of what that journey sort of looks like, a time frame, and the potential upside to margin? And I have a second question.
Maybe I'll start. Thanks, Matt. I mean, yes, and we've talked about this over a while now, that we, as a new bank, started with all of the training wheels, P-plates, across all of our settings, capital, liquidity, et cetera.
For us, this has been a bit of a journey in terms of the liquidity that we're operating at. I mean, COVID and the TFF, another distortion of that. I mean, it was a good thing to have the TFF, but another distortion of that is obviously what it did to our liquidity because we had to hold, we had to hold MLH on top of the, on top of the whole TFF allocation. We've been managing that down. You can see that with how we've been running the MLH levels and also the actual dollar levels of liquids across the book. It is a long way of saying this is a bit of a journey for us. We are on the journey in terms of how we are operating and the liquidity levels that we need to operate at.
We've been managing that liquids book more tightly over this last 12 months. We're also getting a better yield on that liquids book. We took some liquids on when rates were very low. We brought a bit of yield forward at that time. Those things are not earning very much at all. They're maturing, and we're rolling them at things closer to the cash rate. For us, the journey in terms of liquidity is one where, as we demonstrate our ability to operate the bank effectively, to manage to our liquidity settings with the appropriate frameworks, and Renèe will be able to add to this, we think that we've got the ability to operate that tighter and more effectively. That has been a bit of a journey, again, for us this year with the TFF gone, just demonstrating that.
That is part of the overall liquidity journey for us. Whether it's MLH or LCR or whatever the regime is, there's a bit of a way, I think, for us to go. That is through us demonstrating how we can manage those levels. Renèe, you'll have perspectives too on this.
Yeah, thanks, Andrew, and thanks, Matt, for the question. Look, I think it is interesting because we work very closely with APRA, obviously. When you transition from the new bank regime, which is an odd regime because there isn't really prudential standards that govern it, you end up with certain metrics and you need to sort of level set them. We're still in that process of level setting those, even with MLH. We're certainly working with APRA to mature that and be better at it in their eyes as well.
There's a bit of a threshold that they look at, which is when you're an SFI or a non-SFI, and that's at that AUD 20 billion asset threshold. We are on our way there. We will need to start thinking about how we sort of transition away from an MLH regime into something more mature around probably the AUD 17 million as we start moving to AUD 20 million. Even then, there's a transition period. APRA do talk to us all the time about you need to start thinking about what you're going to look like when you're an SFI as opposed to a non-SFI. It's on the radar, not for next year, probably not the year after, but there or thereabouts.
I think it's fair to say, though, our liquidity holdings are only going in one direction.
Yeah, and that's because we've done the shadow calcs, obviously, as part of being prepared. Our shadow LCR is very high, as you would expect, because we're just a TD deposit book today. Now, even with the introduction of some savings accounts, I think we've got a structural advantage there in terms of just pure liquidity metrics because we don't, as I said, don't rely on that huge kind of transaction funding element that most other banks do. This is about us maturing. It's about us demonstrating the ability to operate it and operate effectively. Certainly, yeah, when you do the raw calcs, we've got a high shadow LCR.
A question on your Black Belt bankers. You've got 159 bankers today. How many are Black Belt? How long does it take to become a Black Belt? Once you are at scale, 200 bankers, how many Black Belts do you need in that model to hit all those scale metrics?
Frank, d o you want to say that?
Thanks for the question. It is interesting because I might give a bit more color to the Black Belt Scheme, actually, because it is quite unique, even at an industry level, because when a banker transitions into black belt, as well as getting the higher discretion, what we also trust them with is a slightly different process for how they think about credit and credit risk. If you think about what the primary role of a banker is, in the first instance, it is to understand at what point debt risk becomes equity risk. At what point of leverage on a particular asset or on the underlying assets that we are lending against us.
The Black Belts actually have more discretion in being able to determine that outside of an LVR framework, which has come in place in the rest of the industry. If you think about a commercial property that the rest of the industry determines, debt risk becomes equity risk at 70% because that's typically where the LVR regimes start and finish. We give those bankers a bit more flexibility to take into account the wealth of the sponsor, the quality of the tenant, whether it's an A or a B grade asset, what the location is, what the WALE is, all that sort of thing. In addition to the discretion, they get a little bit more flexibility to determine the policy measures that sit behind and the structure of the transaction. That's a long-winded way of saying today we don't have heaps.
It's less than 20 Black Belt bankers. But we do have internal programs that are about upskilling from a capability point of view to have that increase materially over the next two to three years. We would hope to have more than 50% of our population in the next couple of years that would sit in that framework.
Thank you.
I think one of the things that I think Jess touched on it, I mean, one of the bits of the thesis back in 2016 that I think we underestimated was the degree of deskilling that has occurred. This 50% pass rate on the credit exam is pretty depressing. And so the original thesis back in 2016, we would have been at 100% Black Belts. I mean, Black Belt is basically Judo. But also, how do you get a banking license?
You do not start by telling APRA you are going to have 160 Black Belts. There is a journey that we have had to go on in terms of the type of bankers we have been recruiting, truly understanding their credit skills, what development needs they might need. We have a great apprenticeship program inside Judo. One of the real successes of Judo has been the conversion of our analysts into bankers. We have 60 analysts today. If you are modeling, if you are thinking about how to model our cost base three or four years out, with all the work that Raz is doing, you should be thinking of those 60 analysts as bankers with fewer than 60 analysts coming back in to backfill those roles because we would have automated a lot of the roles that they do for us, which is a lot of the stuff that Raz touched on.
Yeah, so question around wage inflation.
On the analysts to banker conversion, yeah, and the Black Belts.
Yeah, look, we have called out as part of what we said at the trading update last month, how we are thinking about investments for next year. One of them is around kind of wage inflation for bankers. There are components to that. There is a component, a little bit of component around overall wage inflation for the banker population. For us, there is also an element of this upskilling. The promotion to Black Belts, I mean, we have spoken about that, Jess and Frank earlier today. That is an element as how we think about the journey that we are now on. We have got a population there, but we want to keep investing in that population. Part of that is you will see that in terms of the salary or wage inflation.
The big part is then the empowerment that that gives the banker, what that means in terms of the service proposition. We're really doubling down on that through this program and the ability to service the customer in a way that is very different from what you hopefully heard from the panel in terms of how the rest of the sector operates. That is a good investment for us to make. We think that will have really good dividends in terms of the service proposition and just the efficiency then of the way that those bankers operate as Black Belts.
Thanks. Andrew Lyons from Jefferies. Andrew, maybe a question for you that's related to John's earlier question, but focusing more on the lending spread side of things as opposed to volumes. You're targeting mid-fours for your lending spreads now.
When we look at RBA data and combine the sort of the lending done to small and medium enterprises by the industry, it sort of averages a spread of between 2.5% and 3%. Even if we focus only small enterprises, it's like 3% to 3.5%. I'm just wondering if you can perhaps at a very high level just help us to understand the gap between what the industry is charging, the RBA's definition of small, medium enterprises, and your target, perhaps breaking it out by size, product, risk, and service.
Yeah, look, I mean, the stats are a bit unhelpful as it relates to our business because they are at the system level. The system is the system that works for some customers. You've hopefully heard from the panel today what that means for our customers and who we target.
The spread, though, and we did provide a bit of information on the spread that we typically see. It's not a one-size-fits-all. We do price at a customer level and a situation level across the book. We do charge more for that service proposition. I mean, you heard on the panel today, but it varies by situation. There is no kind of one set of numbers really in terms of where we benchmark versus system. We do not compete on price. I guess that's probably the key takeaway. When you try and reconcile our numbers, what we talk about in terms of our front book, what you're seeing in that blended lending margin, it's different to those RBA stats because it's a big system. It's a system that has been commoditized to focus on property.
We do a different type of lend, and we bring a different customer service proposition, and we charge for that.
Yeah, I mean, just to build on that. Again, averages of averages. The range, we will have some customers borrowing at less than 2%, and we will have some closer to 7%. The average is about 4.5%. As Andrew said, I mean, Faris would have told you if he has a 60% loan-to-value deal with an established operator, three years great financial results, no speed bumps, no story, not in growth mode, does not want anything interesting, he is not going to bring it to us. The big banks will just fight over that every day of the week. I think, as Andrew said, the system margin reflects the system. I will remind you of the half-moon sort of diagram that we gave earlier.
That's not the lending that we're doing. We're doing the lending that banks used to do that was bread and butter 20 years ago, but unfortunately, today isn't. We can get a better margin for that. Yeah, we did a lot of analysis on this back at the time of 2016 when we were designing the bank. We found that it was up to about 100 basis points. Then over 100 basis points, customers decided that the price differential was too much. I think, though, as I said earlier to John's question, as we're establishing our brand, we're establishing our customer value proposition, we're proving that we have better business bankers, we're proving that they can make decisions quickly, we're rolling out our Black Belt.
People like Ami, they'll just, I honestly, within reason, because he can make a hell of a lot more, a better return than 100 basis points on whatever it is he wants to do next. I think it's the certainty of knowing that we'll support our customers and we're there for them and that we can make a decision. Look, it's different for different customers, right? We're certainly in confidence that we can get that 4.5%. As I said earlier, a decision that we'll have to make is as we start to expand our deposit products, we start to bring down the weighted average cost of our deposits by having things like IOSA and BOSA. We will have a decision to make.
Do we just pass that through to the NIM and have a higher NIM, which obviously translates to higher ROE, or do we use it to expand our TAM? Do we then say, if we can reduce the average weighted cost of deposits from between 80 and 90 to 50 basis points, do we drop our gross margin expectation from 4.5 to 4.2 and go after a bigger slice of some of those more commoditized deals, or do we defend even stronger, John, the back book? Yeah. Yeah. Those are decisions that are in front of us.
I think we have a question over here from Jeff.
Good afternoon. Question on Outlook. On your FY2026 target of 50% PBT growth, can you give a bit more color on what you mean by stable economic conditions?
Does a stable backdrop imply at least AUD 2.5 billion of loan growth, which is the middle of your target?
I mean, all we mean by that is that there is no significant shock to the economy that we have not got line of sight of. I mean, we think the economy is in good shape. We think the soft landing has happened. As I said, the economy is transitioning from a consumer-led economy of the last two decades, which has been a story of household leverage, to one of investment-led now from businesses. Interest rates are falling. That is great news for businesses. Consumers have got more to spend. We are quite positive on the economy.
All we meant by that was if there's some major shock, if there was another outbreak of COVID or there was some significant rise in interest rates because of some dislocation around the world, then it was just a, it was no more than that.
Got it. A quick question on TAM. If all goes well, what percentage of the agri lending TAM or AUD 39 billion do you expect to capture within the next one to three years?
I mean, Jason, I'll pass to you. I mean, we're very underweight on agri at the moment. We made a decision on day one when we launched Judo, we decided not to go into the agricultural sector, largely because how do you build a bank from a PowerPoint presentation? You start in the capital cities. You don't start with a banker in Mackay or a banker in Orange.
We built the business from the capital cities first. We have a rule that we will not lend to a customer that is more than 200 km away from a banker. That sort of constrained us initially with regards to starting in the capital cities. Now that we have been lending for six years, we do have a strong appetite to expand regionally. Our CVP connects much stronger there. We have more entrenched relationships, as you heard from Dan earlier in his relationship with Lou. We are significantly underweight. It is about somewhere between 17% and 20% of the economy that is agri, and 7% of our book is that. We are massively underweight. I mean, Jason, why do you not just talk to where we play, where the half-moon is in the agricultural sector and how we win?
You would have heard from Dan. He's a real stereotypical kind of customer that we see in Judo agri world. What he did not really talk about was the fact that we funded him into quite a large farm as well, like a cattle farm. Where we kind of win and where we differentiate ourselves compared to the majors is we take a holistic approach to customer assessment. He's got the industrial sort of storage sheds in the commercial business that underpins the trade-up story of the cattle farm. At a major bank, that would just blow their mind because they would try and jam it into either the commercial segment or the agri segment, and each segment would not know both parts of the business, if that makes sense. We continue to expand. We are still continuing to hire into new regions.
We'll be 31 locations by the end of June and continuing to expand that. Plus we'll also be hiring more people into the existing locations where the Judo proposition's landed really well to continue to kind of expand that. I don't anticipate we'll get anywhere near system that 17%-19% anytime soon, but we'll continue to expand and put people in the right locations.
It is a significant point of difference for us that we can bank the customer and we can bank the regional town as opposed to you've got an agri banker and a commercial banker. I mean, we're not going to name it. You were telling me, Jason, about one competitor where an agri banker can literally not do a commercial loan because it's on a different system that they don't have access to.
Yeah, I've come out of a major bank myself and sitting in the credit chain of a major. You look at a transaction like a Dan, you'd just be swinging it over the fence to the commercial credit guy, to the agri credit guy. When underlying, if you have a banker like Lou and Tom sitting on the transaction who understand the group from a holistic perspective, from our perspective, that's a much stronger transaction. You've got diversified income streams, diversified asset bases, and a customer that works hard with an ability to repay through the commercial business and then through the trade-up of the cattle business. Just understanding the business.
And to Andy's question, how much is that worth? Is that worth 100 basis points or 150 basis points, 200 basis points?
We have agreements with customers like Dan too that once he hits milestones, we will revisit the pricing. Playing the kind of bookends to what Chris was saying earlier, you onboard customers in the 5%-7% margin range, ratchet them down as they hit milestones and protect them and keep them.
I think the agri business is an interesting one to draw some of the threads that we've talked about already because you typically get a more loyal client base in the agri segment that places a higher value on our value proposition, is prepared to pay a higher margin, and then churns less. As agri becomes a greater proportion of the overall book, you can take that as a bit of a read-through for where we think some of those metrics will go in the longer term also. Yeah.
Take our next question from Andrew Triggs.
Thank you. Andrew Triggs from JP Morgan. A couple of questions, please. Just interested in the progress on your warehouse lending strategy. I think the last time you gave an update, there was only one exposure from memory. I am just interested in the nature of that exposure, the learnings so far on that journey. I think you had also spoken about it being a bit slower ramp-up than expected. Why has that been the case, and what is the sort of progress of the path from here? The second question is around the impact of rate cuts. Obviously, you have got partially hedged through the ITOC portfolio. Just keen to understand if there are any other distortions we should be aware of with respect to hedging of deposits or the yield on liquids.
I'll start with the warehouse business, and then I'll pass to you, Andrew. We've got our second customer now on the warehouse business. That was good news. Our second customer settled last week. This business, the thesis around why we believe there was an opportunity to provide wholesale warehouse funding to the non-bank financial sector absolutely holds true. We've had no issues at all in generating demand. We've got a pipeline, not pipeline in the way that we defined the AUD 1.9 billion, we have a very specific definition around that, but more of a pipeline, a full pipeline, which includes leads, etc., of well over AUD 1 billion for warehouse lending. I think what's caught us a little bit off guard is the gestation period for a warehouse loan is longer than it is for an SME.
We've always guided the market, the investors to sort of a gestation period of about three months for an SME loan. I think with warehousing, it's probably closer to six months. The due diligence does take longer, obviously. We are lending to a non-bank that's against the underlying receivables. What we do is we bring our skill set around understanding counterparty debt to their business, and we look at every single one of their receivables. We don't just take it as a basket. We go in and we look at all of the receivables. As you would expect, we look at all of the operational processes that support those in terms of how they originate those loans, how they service those loans, etc. The due diligence has been taking longer than we thought. It's actually not on the credit side.
It's actually on the operational side. Sometimes we give them feedback that we need their operational processes to improve, to meet the standards that we hold ourselves accountable to as an ADI. Actually, a lot of that feedback has been welcomed by those customers because it's free due diligence for them. It has just meant that it's taken us a little bit longer to pull those deals through the pipe. As I said, our second customer is now on board, and we've got a steady stream of customers ready to settle. Very excited about that. It will be at a slightly lower gross margin. We've always flagged that.
We sort of think about that more like a 4% gross margin business, but much higher ROE because the risk weight on these, the risk weight, our average risk weight, as you know, on our portfolio is about 80%. Whereas on these warehouse deals, with the right diversification and the right first loss taken by someone else, we can get the risk weight down to sort of 30%. They're very, very accreative to ROE, but they may be a slight headwind on gross margin and hence NIM, which Andrew flagged earlier. Do you want to take the second question?
Yeah. In terms of the interest rate component, yeah. I mean, we run a balanced book. We have most of our equity hedged, but we have a portion that is unhedged. That unhedged portion is in the kind of immediate term, exposed to rate movements.
We have a portion also of our deposit book, especially the much shorter tenor, that's just not economic to hedge. We leave that unhedged. We've also got, obviously, our asset finance book, which is fixed rate. Yeah, we have provided in the past a bit of a sensitivity in terms of rate impact. It's kind of immediate term or near term in terms of the impact. It's factored into our NIM guidance. Hopefully, you have a better understanding of the many levers that make up that NIM and the many components to that NIM trajectory that are quite positive for us.
I think the other point on this is that we just have a very different and are facing a very different situation to the rest of the sector in terms of a falling rate environment because we do not have those free transaction accounts, which is a big part of, obviously, system funding. We are all TD funded. We did not enjoy that tailwind on the way up, and we are not going to have to face that headwind on the way down. Structurally, we think that we are relatively better placed, whether that be on the asset side in terms of where banks will go to try and preserve NIM. It is very hard to do that in retail. It is very hard to do that at the sophisticated commercial end. SME is less price transparent. That is where we, that is all of our assets.
On the liability side, TDs is also a place where the system tries to manage economics on the way down when you're facing a reduced spread from that, from where you're lending and the interest in a falling rate cycle versus transaction accounts. Because we pay for TDs, that's already kind of factored into how we think about our economics. We think that we're relatively well placed. This is something that will be interesting to see how it plays out for the sector. Might take our next q uestion from Ollie.
Sorry. Hi. Olivier from E&P. Just on the private credit partnership, you didn't seem to say too much in the formal presentation. I mean, what does that actually entail? Bank. Who would own the client? Who would own the risk? Can you go into a little bit more detail on that?
Sure. I can take that. There's a couple of different components to it. I suppose the background is this is an expanding part of the market. It's an expanding part of the market globally. We're probably slow followers from an Australian market point of view. It's somewhere around 10%. It's hard to get a firm grasp on what proportion of the system it is. In other jurisdictions like the U.S., it's sort of somewhere north of 50%. In some jurisdictions within the U.S., it's materially north of that. We think that this is a global trend that's going to continue in this market. Our first thought is, rather than thinking of it as an overt competitor, because we don't really cross over, maybe at the end of our appetite, we start to see private credit start to compete with us on certain customer profiles.
The real opportunity is how do we become the bank that partners with private credit? Warehouse funding is obviously one part of that. We can provide the wholesale lines to enable leverage into the private credit funds. There are other opportunities, even at a transactional level. The nature of private credit funds is typically because they're charging elevated margins, and they're generally funding customers through some sort of event. Mature businesses that end up in private credit have generally had an experience with something. They've lost a contract. They've had something, they've had some sort of event or some sort of shock that has necessitated them to move outside the traditional banking system and into private credit.
Typically, once they're rehabilitated, for want of a better phrase, they seek to come back into the major banking system and avail themselves of the cheaper rates that are on offer. The opportunity for us in that situation is to partner with these funds to understand when those customers' risk profiles are normalizing and that we can see an opportunity to provide liquidity back into the fund and to take that customer on. Generally, the liquidity requirements of the funds are shorter than what you would find in a bank also. Even where there are portfolios of stronger clients, they want to move them on at some point to realize some of the liquidity within the fund. Again, transactionally, there are lots of opportunities for us to partner.
On the other side, from a risk point of view, it's very helpful having lenders that are north of you on the risk curve. When clients within our portfolio have some difficulty, there are lenders that are already willing and able and often able to do it in a more capital-efficient way than we can, given the regulation that we're subject to and they're not, to take those clients on. That's just a flavor of the sort of thing we're doing. There are a number of really good, high-quality private credit firms that we've already started these sorts of conversations and have sort of informally had this sort of partnership with.
You mentioned the alignment of broker remuneration. I mean, not all of the brokers are on the same deal. What are you seeing in the trends in those commissions?
You've mentioned that there's a lot more brokers. Obviously, if you look at, say, the mortgage industry, it has become very commoditized because of the growth of brokers and the expansion of their market share. I mean, the confidence that that's not going to occur in SME lending.
Structurally, very, very different, the two markets. I mean, the overt incentives in mortgages and residential are to chase the cheapest price around the market. It's very much a commodity, whereas commercial lending is very different. Structurally, also, you pay a broker 0.6% upfront in mortgages. There's a AUD 600 application fee if that. In commercial lending, it's very different. We normally pay a charged application fee somewhere between 0.5%-1%. You're covering your broker cost upfront.
The propensity to churn outside of a material event or some sort of material change in the risk profile just is not there. As I said, discrepancies between our direct channel and our broker channel have just not been a feature of our business from either a run-off or a margin or a credit quality viewpoint. The second thing, and I will throw to George in a second to provide any additional color, but in terms of the question around alignment of incentives, we are looking at ways to recognize more overtly the absolute. We have only accredited 1,000 brokers because of all the things we mentioned before in terms of looking for quality commercial originators.
Even the cream at the top of that group, we're looking to more overtly recognize them in terms of the delivery of our value proposition to hopefully generate additional stickiness in the book and greater alignment between broker incentive and ours. One of the things we're doing is thinking about things like what we're calling a tide grant, which is part of our marketing budget, which is designed to promote customer loyalty. The broker in the true tripartite sense of a tripartite relationship is an important component of that. How do we integrate the broker and fund some of their marketing activity in a tripartite way? We're thinking of just unique schemes like that. George, I don't know if you had anything to add.
No, that was excellent, Frank. Just expanding on that as well, we are definitely seeing a structural shift at the moment, to your point, around mortgage brokers wanting to diversify into commercial. It is a complex environment. A lot of them are starting to realize that. I sit on the MFAA board, and we discuss diversification quite a lot. My angle is always around mentoring or leaning on a commercial broker like the likes of Faris to help educate, upskill. From our perspective, it's only a positive in that if you've got less experienced brokers wanting to do commercial, we've got the expertise. We partner them with commercial brokers to then get the transactions over to us. It's working for us versus the banks where all they're going to be trying to drive is a lot more of that commoditization. This is where you put it.
This is a system. Whereas with us, it's around understanding a customer, breaking down the problem statement, and then helping those clients and those brokers that are looking to diversify. The other part that we're starting to see is consolidation. I think Frankie mentioned that earlier as well. Consolidation, as digitization starts to ramp up, as the competitive environment, we're seeing a lot more bankers go out to become brokers, as we said earlier. There's a lot more consolidation. More brokers are starting to partner with the likes of Faris and Simplicity and a few other bigger groups. That avenue is giving us more of a platform to go into those groups and then to really understand how we can support the greater business. From my perspective, it's only a real positive in terms of that diversification strategy.
It opens up our TAM, but also in a more measured way via the consolidation of the industry rather than us having to try and get to all those brokers ourselves. That sort of answers your question.
Thanks, George. Take our next question from Nathan.
Hi there. Nathan Leads from Morgans. Just two questions, if I could, please, on the deposit side of things. Firstly, in the trading update, you mentioned how volatility in the swap curve had caused an expansion in the deposit spreads. Just where are we now and how much of that sort of flowed, I suppose, into FY2026, given the front backbook? Secondly, you talked today about these new business saver accounts.
Thinking about that in terms of the 75% target for the overall funding once you hit that scale, how much of that are you hoping will be covered by these new accounts, which brings down your average funding cost?
Thanks, Nathan. Yeah, starting, I guess, with a bit of an update in terms of the market. It is volatile, as we have been calling out. Folks can have a look at what's happened with the swap curve. It was obviously very volatile, in particular, a month or so ago. We've seen that come back a little bit. I think most importantly, the key, I guess, what's happened since we spoke a month ago, we've obviously now had the rate cut. That has provided some certainty, I think, in terms of certainly the pricing or the headline pricing dynamics in the TD market.
We have been adjusting our rates down as a consequence of that. I think during the month of May, we moved a couple of times, two or three times, actually, with the actual rate cut being an important kind of catalyst for that. There is speculation, obviously, of what is going to happen next month. I think I was vox popping a few folks out at morning tea on that and got some very different views. We can all guess what is going to happen in July. If there is another rate movement, that is an opportunity again for the system. We are obviously a component of that to think about those headline pricing levels. That is helpful in being able to adjust those headline levels for what the swap rate has been doing. This is really, I guess, just part of the environment that we are in right now.
For us, structurally, and we put the data up again, when you look at the average cost of TDs, which over the 10-year period that we put up on the slide, that now includes all of the COVID noise and includes, obviously, all of the noise over the last couple of months. For branchless banks, that is sitting still at a 72 basis point average. We are still quite comfortable with that 80-90 range for our kind of through-the-cycle assumption for TDs. I think with the movement that we have seen in the headline rates of late, that has been obviously helpful moving towards that level. The savings account initiatives that Frank spoke about, and we were obviously quite excited about this and bringing our proposition to a new TAM in terms of deposits.
For us, this is around us giving ourselves more flexibility and optionality in terms of how we fund ourselves through TDs. We had a question before from Richard in terms of, is this a cross-sell play? It's not. It's more around giving ourselves optionality in terms of which market we go to for deposits. It's also helpful in a falling rate environment because the retail TD or the retail deposit customer tends to move to a shorter tenor, including to kind of an at-call maturity. This is also good for us to look at at this point in time from a market perspective. Of course, it's something that we can do because of what Raz has spoken about in terms of our platform for deposits moving on to Thought Machine.
That gives us a lot of flexibility and actually kind of speed and nimbleness in terms of how we develop that product. It's not so much about us doing a cross-sell. It's not so much about us kind of changing necessarily that 75% target, but it gives us more optionality around that. Ultimately, kind of over time, it should actually help us bring our overall blended deposit cost down. We have the ability to revisit that assumption. Chris and I and the team, we talk about this quite a bit. We're just going through our annual planning and our three-year funding planning that we do. We've got a range of scenarios in there. It's certainly a very big market, as Frank spoke about. Our ability to think about more deposit funding with the move into savings product is definitely there for us.
Look, it's one step at a time. We want to establish ourselves with these products, see how the market responds. If need be, we can update and amend those targets. It gives us optionality, and we're quite excited about that and what it will do for our overall deposit strategy.
Just on that optionality, having these new online savings accounts, all things being equal, should actually reduce the cost of our TDs because we can switch where we go. You can be more scientific around how you manage your TD book, around rollover rates and tenure and what have you because you've got another product that you can use to fund your balance sheet if you want to sort of switch off TDs, for instance. Obviously, simple supply and demand. If we need less TDs, then we won't be paying as much for them. Yeah, that's MLH versus LCR.
Yeah, so question for in case you didn't hear is around whether moving into these new products impacts the LCR, the LCR, which we spoke about earlier. Look, LCR is more sophisticated. Obviously, it looks at outflows in a 30-day period. MLH is a more simple, cruder, I guess, tool to measure liquidity. Yes, that's going to be an element that we need to balance. We've certainly got ambitions to grow, as you've heard, to the 15, 20, and beyond in terms of our loan book size. The 20, as Renèe mentioned, is typically kind of that point where the LCR comes into play. It is something that we need to balance. It's why I don't think you'll see us have the vast majority of our deposit book come necessarily from savings. It's certainly not our intention at this point.
It is adding that into the mix. It is giving us the optionality, as Chris said, and then the ability to effectively look across two markets to manage that. TDs are good for us as a growing bank because it has and gives us tenor on the liability side. That is a good thing to have as a fast-growing bank. Our next question from Richard.
Richard Wiles, Morgan Stanley. I have two questions. One relates to the cost of risk, and the other relates to capital. On the cost of risk, you have talked about your ongoing ambition to grow the loan book. You still think you can do AUD 2 billion-AUD 3 billion of loans per annum. You want to get AUD 15 billion, then you want to get AUD 20 billion. Chris, I think you said today your ambition is to grow beyond that.
Then Renèe said, while you're growing, cost of risk is going to stay above 50 basis points. Should we simply conclude that the cost of risk will be above 50 basis points for many years into the future?
I think we've got to be clear what we mean by the cost of risk. Whilst you're growing, the charge to the P&L can be more than 50 basis points because under the accounting standards, you take your provisions upfront. Just so we're clear what we mean by the 50 basis points, we mean underlying loss rates. If our portfolio was static, if it did not grow another dollar for the next five years, then the P&L charge should be under 50 basis points because the only thing that's changing is your underlying losses.
When you're in growth mode, you have to take the provisions upfront, which is why we always try and reconcile it when we do our full-year results in terms of what the—and we give guidance around the dollars as opposed to percentage because we're taking the growth into effect as well. No, the 50 basis point loss rate, we're very comfortable with. As I said, the whole sector, the whole system for the last 20 years has averaged 29 basis points. There have only really ever been two peaks. One was in the late 1980s when it peaked well over 1%, and then after the GFC. In both cases, it recalibrated to the mean within 18 months. That 29 underlying loss rate is—we're comfortable with our 50. It's slightly higher. Where does 50 come from? There was no great science. It's higher than 29.
What the building blocks of it, crudely, it's a PD of 2 with a loss given default of 25 basis points. So 25 basis points of 2 is 50. The PD of 2 should calibrate to an over 90s and impaired numbers of about 3.3. We're at 2.59, so we're under that at the moment. The 3.3, all of our experience tells us you have a Q rate of about 40%. The simple maths is if you're over 90s and impaired at 3.3, a Q rate of 40% equals a PD of 2. PD of 2 with a loss given default at 25 basis points equals an underlying loss rate of 50. We're very happy with that underlying assumption with all of our growth in front of us.
The underlying loss rate should be 50 or below. The new business strain means that the cost of risk through the P&L over 50 basis points for several years to come. That's what you're selling it.
Yes, yes, yes.
My second question—
Because you're going to take your collective provision on your growth. Yeah, yeah, yeah.
My second question relates to capital. I think you've said on slide 41, no new CET1 required. Does that mean that you're comfortable that if you achieve your AUD 2 billion-AUD 3 billion of loan growth per annum, that you won't get to a point where you need additional capital to sustain your growth? And could you perhaps support that answer by telling us where you think your CET1 needs to be? What's the lower floor for your CET1?
Yeah. So first of all, yes, we are comfortable. Please do not be putting a dividend into your model anytime soon because obviously, largely comes from retained earnings. We still have a CET1 higher than what we are gliding to.
What are you gliding to, Chris?
We have always had to assume somewhere between the regionals and the majors. The regionals, obviously, it is sub 10%, but they are mortgage banks with 35% risk-weighted assets on their home loan books. The majors are advanced banks, so they get the benefit of lower risk RWAs on their advanced models. We have always guided the market to somewhere between sort of 11%-11.5%.
If the ROE did not quite reach your target of late to mid-teens, let's say it was double-digit, let's say it was closer to 10, does that call into question your ability to fund the growth with your existing capital base?
Yeah. I mean, if we do not deliver the economics of the metrics at scale, which Chris has outlined, then yeah, it will challenge the organic capital generation of the bank. I think that is kind of your—I think it is kind of the point you are making. Yeah, all of the pieces are kind of reinforcing in terms of how the economics will deliver. The planks for capital, one, the equity that we took largely through the private rounds and then the final component as part of the IPO. We started with a big dollar equity base, if you like. That dollar equity base, though, throughout our longer-term modeling does grow as we generate organic capital. The components of the pieces need to kind of come together, absolutely.
It is why for us, we talk so much about that NIM because a really important part for us is the NIM and ensuring that that is a key component for where the organic capital generation is going to come. We start with a big dollar equity base. We grow that through the delivery of the model and the organic capital. We grow the overall business with a carefully calibrated glide path in terms of that loan book growth so that we are not kind of consuming capital too quickly on that journey. There are lots of questions from John around kind of where we would be. You can kind of see the bookends, if you like, of where we have been kind of growing the book.
The final piece is obviously then the regulatory journey, which Renèe spoke about in terms of the actual capital settings, which are obviously confidential for every bank. All those components fit together around that capital piece. Yes, we are confident that we're not kind of coming back to market to deliver those metrics at scale. We have, as you all know, kind of been supplementing the core capital with hybrids, AT1s when they were a thing, and Tier 2 as well. Other capital tools that we have in the toolkit too. I think that's also important. We did our capital relief term sec deal, and loan sales is another option that would be available to us and give us another tool in the toolkit.
We are running the stack more efficiently, obviously, as we grow and as we get kind of closer to that point. There are a number of components there that give us confidence that we have what we need and are not going to kind of come back to market with the plans that we put forward.
I would also just double down on the previous answer around warehousing as well, which is very capital efficient for us. Depending on what assumptions you make around how much of the growth is through the warehousing line, that is at a much, much lower risk weight. We can do 2x-3x the volume of warehouse lending with the same capital that is required for a core SME loan.
Next question from Brian.
Brian Johnson MST. Chris, just going back over everything you have said today. Quite a bit. We can see that 75% of your flow comes from a third party. Often third parties do not necessarily have the bank lenders' best interests. They want to get loans out the door. We have bankers that seem to have higher delegated lending authority, which means they have the capability to actually do. We can also see today that basically, I think right at the beginning, you said the arrears rate has actually risen over May. When you have a look at the provision cover, it is at the lower end of some of the peers. Can you just talk to us about this rise in the arrears in an environment where you can see a massive amount of excess liquidity sloshing around the system, whether it is in household deposits, business deposits, basically RBA exchange settlement accounts? You can also see that we have also had two lower interest rates.
Why is your arrears rate actually rising?
Look, I mean, first of all.
If you can detail the sector or some kind of explanation behind it.
Yeah, there's no sectoral bias. There's no read-through to the economy with regards to our arrears numbers. I mean, 2.59%, as I said, the thesis is 3.3%. Our job is not to have that down at 1% so that we're leaving money on the table in terms of just sort of doing more commoditized lending ourselves. We are in the business of taking risk. Our job is to find the right balance between the intersection between the volume that we want at the margin that we want and the cost of risk that we want. We are still played by the law of small numbers with regards to, so five customers account for 40% of that number.
There is nothing that links them together from a sector perspective. The largest one is actually a microbrewery. I think a lot of microbreweries have had a tough time with a changing consumer taste with regards to the cost of living crisis and rising input costs, etc. The second one is actually a pharmacy. It is linked to the change around the prescription rules and 30-60 days. There is less foot traffic going through the pharmacy. The third one is actually a bean bag manufacturer into the university segment. This was impacted by a change around student numbers. The fourth one is a wholesale importer of goods to the construction industry. That sort of goes on a little bit of a cull from the construction industry, but it is a provider into the construction industry. Nothing links these customers.
There was nothing fundamentally wrong with our credit assessment. It's just that sometimes things don't go your own way. That is still why we're a little bit cautious. We're not, in terms of the guidance we give on that lead indicator, because it can be a little bit choppy. I was also stating it's a gross number. These deals are well secured. There's a AUD 50 million loan that's in there that is very well secured. I mean, it's a 50% loan-to-value transaction. We're not going to lose any money on it. There's no read-through of the 2.59% to an underlying loss rate. I mean, we use averages of averages. As I said, the core maths is if that number gets above 3%, then we would start to be concerned because it would suggest a PD that's higher than 2%.
Again, it largely depends on the mix of customers that are in that particular cohort at any particular point in time.
Chris, just a second question that flows on from that setup. When you have a look, I've never ever been to one of these presentations where everyone does say, "We've got the best bankers." Have there been any cases of the bankers tipping in a little bit more when the loan was actually probably already troubled? Has there been bankers that are exercising their delegated authority to tip in more?
No. First of all, they've got no incentive to do that. They're not on sales commission. There's no stand in the naughty corner if you've had a bad debt. There are none of those cultural attributes to our business.
The one thing I would say is, the impairment that we give from a customer value proposition means that the customer can meet the decision maker, and that decision maker can make a decision quickly. Every single loan, every single one, 100% of those loans that are done by the bank are hindsighted by credit. They are still reviewed afterwards. It is after the decision has been made. If the people in Renèe's team and that hindsighting believe that there was something untoward around that particular decision, then the belt will be removed straight away. We have procedures and processes around that. 100%.
How often does that happen, Chris?
Oh, we.
I can take that one, Chris. Very infrequently. Renèe and I both sit on our off-track panel, our consequence management framework, and it is very few and far between that we would see instances of malicious behavior from bankers. I think in the last six months alone, it might be two.
Two.
It's been two. Yeah.
Take our next question from Tom.
Thanks. This is Tom from Citi. Just a question around the metrics at scale with regard to costs. Now, Chris, these were set many moons ago, and we've had a lot of inflation since then, tech spend, and we're still adding new capabilities like savings deposits, which would have a cost attached to that as well. Nevertheless, the 30% or approach to 30% cost to income is stuck. Does that reflect a slower approach to that 30%, or are you more confident that the operating leverage will cover these costs in positive?
Yeah, no, look, it's a great question. I mean, we always say that the metrics scale will not all happen at the same time. The first one that will happen, obviously, is the NIM. We're pretty much already there over 3%, or we are already there over 3%. The cost of risk is through the cycle, the assumption that we've just said. We certainly don't have an underlying loss rate of over 50 basis points, as we see here today. The costs are leveling out now. They are definitely higher than the financial model that we had at the time of the IPO, as you said, largely as a result of inflation. We probably expanded. I think there's been a significant amount of wage inflation, in particular, with regards to bankers. All the major banks have fallen back in love with recruiting business bankers.
In terms of the CapEx, we flagged at the time of the IPO that it was going to be AUD 100 million for five years. We've spent AUD 90 million of it, but we're pretty much at the end. We will definitely go over AUD 100 million. I mean, we think about our CapEx rate of about AUD 20 million a year. I'm pretty proud of the fact that back in 2019, we weren't that far off in terms of costing out what the full replatforming of the entire bank would cost, and we're pretty much bang on what we said we would be. The key determinant of the cost income ratio is revenue. I think at a AUD 20 billion book, depending on what NIM you put in, if you put a 3.1% NIM in versus a 3.5% NIM in, you'll get a different cost income ratio.
Our job is obviously to expand that with augmenting our product set. One of the things we think a lot about is other operating income. Everyone wants to talk about NIM, but there is other operating income. There are a lot of things that we can do. We only have four products. We have not yet started to think about how do we solve some of our customers' other needs with regards to white labeling. We do not have a receivables finance product. We do not have a trade finance product. We do not white label corporate credit cards or FX solutions or what have you. All these are in front of us. We are confident around the metrics at scale. The exact path to them is in front of us, but we have plenty of levers to use.
We have one final question from Ed. Thank you.
Thank you. Ed Henning from CLSA. Thank you for taking my question. I just want to circle back to John's initial question on the run-off. You gave some good detail on the COVID hump and also the 20%. Obviously, you've grown over time and got bigger, and your customers have got bigger and grown with you. With that run-off, we spoke to some of your customers today, and they were talking about the bigger they get, you get offers from major banks. Can you just talk about in your planning and how you think about, as you see the run-off and that 20%, are you concerned that they're the bigger customers rolling off where you're writing smaller customers on a smaller loan base? And how we think about that with your growth going forward.
Yeah, it's a great question. Again, it's averages of averages. Just to unpack where does 20%, where did the thesis of 20% come from? Bear in mind that big banks' base is higher than that. 8% is structural. 8% of our book rolls off simply because of the way we've structured the facilities, the capital and interest repayments. About 5% is what I would class as asset sales in the ordinary course of business. We're certainly experiencing that where customers are either deleveraging or just selling assets or, in Ami's case, selling entire businesses. We've had it happen a couple of times, as was talked about earlier. When you're NAB, if one customer is selling an asset over here, there's a good chance a customer over here is buying it. It sort of washes itself out. We're generally only one side of that equation.
As we get bigger, there's a better chance we'll be on both sides of that equation, particularly if there's a broker involved, or we're able to play a role in connecting businesses together, as was talked about earlier. There's 5%, which is just other stuff. Sometimes it's us encouraging the customer to leave because maybe there's a deterioration in their creditworthiness, and we might be referring them to private credit or taking a stance which is different to their own. Maybe the loan has become completely commoditized, and we just believe we're better off recycling that capital than we are keeping it on the books at a sub-economic return. That all adds up to sort of 18%. We rounded that up to 20%.
As I said, it's been higher, and it's been largely the latter, where there were loans that we originated during the COVID era, where the banks were closed. They didn't want to do them. We did them at a certain price because we had the term funding facility. That has normalized. We just have a decision to make as to whether we—but we certainly have a better understanding now than we did five years ago about what a Judo customer looks like. If we do have a customer on our books that we don't believe particularly values our CVP anymore, they don't really need the relationship. They're a mature business. They're not going to be doing that much. If the economics are below our cost of capital, then generally we're okay because there's nothing wrong with our origination machine. We can originate assets.
Letting a customer repay at two and a half over swap, and reoriginating that loan at five over is something that we're going to do. I know it makes it hard predicting exactly what the rate of growth is going to be. For me, it's the intersection between the growth, the NIM, and the cost of risk that's most important. We will not just be growing at any price and damaging our NIM as a result.
With that, you see obviously capacity in your bankers and obviously growing your bankers and also the broker market. If you do have higher value loans roll off, you might need to roll on multiple smaller loans, but you've got that capacity in the system. That's part of your plans, I guess, in your growth.
That's right. I mean, as I said, again, averages of averages. The building blocks of AUD 5 billion of originations is one loan per banker per month, AUD 2.5 million. We have customers that are borrowing AUD 50 million off us. If that banker does a loan, we do not say you are done for the year. We have plenty of capacity, and even more so now that we are really into the reengineering of our processes. There is no doubt about it. If our bankers were sat here today, the processes that they operate with are not as efficient as the processes we promised them at the point of recruitment. Because we have been distracted by the infrastructure required to build a bank, the replatform from tactical investments to the more strategic platforms. Obviously, when you are in the middle of replatforming, you do not go reengineering all your processes at the same time.
That has been the hard work of actually how do you build and scale a bank from scratch. As I said, it is all largely in the rearview mirror now. We have all of the platforms that we need, and we are really getting into a phase now of capacity release for our bankers at the same time that we are recruiting new bankers in new regional centers where they start with—they literally start with a blank, with an empty portfolio. I think if you are modeling run-off rates, you should be thinking about the warehouse business as well, because that obviously is more replicating in nature because the underlying borrower is generating their own receivables. As that pays down, if we are doing our job correctly, there will be new receivables coming in to replace them. That should not have a run-off rate anything like as high as the core business.
It's pretty much done, Josh. Yeah. I mean, Ben, do you want to—I mean, Ben can talk to that because Ben knows these customers, literally customer by customer, but we're largely coming to the end of this .
Yeah, that's exactly right. We are, I mean, most of those loans have now run off or come off or even actually converted out of a COVID-style loan into something else because the customer may have gone and done something else, but we've continued to support them. Yeah, we should see that kind of normalize in terms of the run-off of those types of customers. I think to Chris's earlier point, we have seen an increase in asset sales over the last six months as customers have deleveraged as well.
I suppose now going into the market now with interest rates kind of coming off and hopefully continuing to come off, we should see that also slow as well. I think, yeah, in terms of your thinking, the COVID loans that we wrote will have kind of stabilized or no longer be running off.
Chris [audio distortion]
You know, we've got an NPS in the 60s. We will, I mean, don't get me wrong, we will follow the customer down in terms of price. I said the range is between 2%-7%. We do not, you know, in the ordinary course of business, I do not want to tell a customer, "I'm sorry, your creditworthiness is too good for us now. Can you? We were happy to see you leave." But yes, absolutely you will. Yeah. No, absolutely. Yeah.
We funded Dan into this farm that he's been looking at since he was five. He'll probably buy another one. He'll want to develop the next Mudgee industrial complex, right? They don't stop. That's why customers like Dan are ideal Judo customers because they continue to do things.
Raz made a point earlier that one of the highlights we said was we've changed the process for how easy it is for a banker to change price from 30 minutes to two minutes. That's because we change price a lot, right? Sometimes it'll go up. Sometimes they've missed a covenant, you know, or there's a deterioration we want to add 50 basis points on. Sometimes we'll take it down, right? Our pricing is dynamic. These are not mortgages where it's set once and we never touch it again.
We are moving price constantly on our customer base. Oh, in terms of what? The money we made off the TFF? Yeah.
Thanks, Matt. We've been wildly ambitious with our agenda, saying that Q&A would finish at 12:30, but we should take our last question from Jason, and then we'll head out to lunch.
Like your last, Jason Shao from Macquarie, I'll just ask one question. I mean, you've introduced all these new initiatives recently in the slides about such as savings, warehousing, and some of the other ones listed here. But you haven't really changed your at-scale metrics. I'm wondering, is it just because a lot of these initiatives are quite new and you're still waiting to see the impact of them financially? Or do you see risks to your core SME lending and term deposit business, and that's sort of offsetting some of the pressures there?
No, look, it's more the former, Jason. So, I mean, taking the deposit investments for, you know, as an example, you know, we want to establish ourselves in the market. We know that coming out with a new, you know, with a new product into a new TAM, you know, takes a bit of effort. It was not that long ago, actually, when we were putting our first TD out in the market, and you've got to establish yourself. That just takes a bit of time. We want to see how, you know, how that goes and how, you know, how long it takes us to kind of ramp that up. Now, we've got, don't get me wrong, very good folks in our business that have done this before at other shops.
I mean, our TD team are all, you know, kind of ex-U Bank and ex-ME Bank. So they know how to do these things. And so we have an expectation on how these things will work. But ultimately, it takes, you know, you've got to establish yourself and do it in the right way and do it in a measured way. Warehouse lending is an example of that. I mean, Chris spoke about some of the challenges that we've had, not at all with the opportunity or the size of that pipeline, but actually just when you actually get into it, just, you know, getting those customers onto their first bank warehouse and what it means for them. So, you know, these are all levers that we have. They're all options that we have. And we're quite excited about it.
You know, you wait until you've actually got a bit of a track record there before kind of, you know, being too specific about, you know, contributions to the overall economics. We're quite excited by this investment slate. The investment slate to date, as Raz has spoken about, has been a lot about just getting these foundations in place. You know, we've got a really, you know, really interesting and exciting, you know, portfolio of things that we're going to work on over FY26. We're really looking forward to bringing some of that to market.
In theory, those metrics could improve?
It certainly gives us optionality around those metrics. I mean, as Chris said, what the deposit, you know, moving to savings does, it gives us potentially, and we're not kind of saying this is an FY2026 thing, but potentially gives us a funding benefit. Now, how that rolls through the business, whether it goes to NIM, and so therefore would go, I guess, to one of our metrics of scale, or whether it goes to how we think about the growth opportunity and what it means in terms of being able to service our customers. There are options there, I think. That is all ahead of us.
We will call that a wrap. Thank you so much for your time. I think we have taken four hours of your day. We really do appreciate you joining us this morning. As I said, we love talking about Judo. We really do appreciate your support. Thank you again for joining us.