Good morning, and welcome to the Judo Bank first half 26 results webcast. My name is Andrew Dempster. I'm the GM of Strategy and Investor Relations at Judo. I'd like to begin today by acknowledging the traditional owners of the land from which we all are joining today, and we're going to follow our usual format this morning. Firstly, we're gonna hear from our CEO, Chris Bayliss, who will give an overview of our performance. Secondly, our CFO, Andrew Leslie, will give an update on our detailed financial performance, and then Chris will return to discuss the outlook and guidance. We'll then open up the lines for Q&A, and also letting you know that our documents have been lodged with the ASX this morning. The webcast is going to be recorded and will be available later today on our website. On that note, I'll now hand to Chris.
Thank you, Andrew, and good morning, everybody. I'm very pleased to be joining you this morning to present our first half results for FY 2026. Now, 2026 is a significant milestone for us, marking the 10th year of our journey. Over this time, we have progressed from literally a blank piece of paper in 2016, writing our first loan as a non-bank in 2018, to now a national business bank with a market-leading CVP. In 2019, we obtained a full banking license that hadn't been awarded for many decades, and in 2021, we were the first bank to list on the ASX since Macquarie in 1996.
In these 10 years, we have scaled with 171 bankers in 32 locations, and we now have a balance sheet that sits with AUD 13.4 billion of lending and AUD 10.9 billion of deposits. We have nearly 5,000 business customers and believe we have made a meaningful difference to how they access the funding that they need and deserve. I'm often asked, "What was the most significant challenge of the last 10 years?" Without doubt, it was finding the intersection between a clear vision, converting that into an investment thesis, and operating as a regulated ADI. Initially, we traded off a lot of the investments in technology and process design to control our cost base and to get to profitability quickly. So it's very rewarding to stand here today with all our strategic, scalable, AI-enabled technology in place.
We are now focused on delivering productivity improvements to our bankers, more flexibility and better experiences to our customers, and operating leverage to our shareholders. Navigating the last 10 years has been complex and has not been a straight line. For example, we didn't expect a pandemic, but overall, we have successfully executed every one of the strategic priorities we architected in 2016. We're proud that as a bank that is just 10 years old, our CTI ratio is better than all the regional banks and two of the majors, and we're not far behind the other two, giving us clear line of sight to having the best CTI in the sector. The operating leverage we are delivering means we also have the highest earnings growth in the sector.
So in summary, as we celebrate the tenth year of Judo, we are confident we can deliver an ROE in the low to mid-teens, which will be the strongest of all listed banks in Australia. Now to the Service Profit Chain . This slide is always at the beginning of my presentation because it remains at the core of how we operate the bank. We watch these metrics like a hawk. The core premise of this philosophy is that engaged employees will deliver satisfied customers. These build your brand and, in turn, deliver great results for shareholders. Our employee engagement remains strong as we continue to invest in our culture. This metric is actually so important to us that we measure it weekly, and it's continued to translate into very happy customers, with our lending and deposit NPS remaining sector-leading.
For me personally, I'm delighted that we've been able to sustain this level of customer satisfaction as we've scaled, reflecting that a customer obsession is now embedded into our DNA, and hopefully, our Valentine's Day marketing campaign at the weekend demonstrated just how much we love our customers. The resulting ROE and EPS improvement show the model is working. ROE has improved 180 basis points year-on-year, and the EPS is up 46% year-on-year. Few other companies can claim these numbers, particularly amongst listed banks. So in summary, we have a clear and simple strategy, which continues to prioritize culture as a competitive advantage, leading to high customer satisfaction and underpinning continued revenue and profit growth. Now to the result.
We have delivered a first-half PBT of AUD 86.5 million, which is up 26% half on half and up 53% versus the prior corresponding period. This is the operating leverage I talked about earlier. We've continued to deliver above-system lending growth, underpinned by our clearly differentiated CVP, growth in banker numbers, and productivity initiatives. Our NIM was broadly stable, in line with our guidance, but tailwinds from cheaper funding costs will now flow through into the second half of the financial year. Andrew will talk more about this later. We have delivered CTI below 50%, also in line with our guidance, balancing cost control with disciplined investment in growth and productivity. Credit quality remains in line with guidance and within thesis.
And so, combined, I'm delighted that all these core metrics have led to material profit growth and a significant step-up in ROE, putting us on a clear trajectory to our at-scale target. Now to lending growth. As I've already stated, our loan book sits at AUD 13.4 billion, up AUD 900 million over the half. Pleasingly, our growth is well diversified across regions and sectors, and we're seeing strong momentum in warehouse lending now that a number of the forward flow lines we wrote last year are starting to draw. We continue to attract the very best bankers in the market, with the total number increasing from 161 to 171 in the half. If there's actually one aspect of our business I'm personally most proud of, it's the talent that chooses to come and work for us.
Our employment brand really is second to none. We've also just opened another location in Devonport and have plans to open 3 additional locations as our geographic expansion continues. We are, however, very deliberate in opening new locations, and we'll only go there if we can attract the very best banker in town. Business banking really is a people business. We also continue to credit more commercial brokers who are educated in Judo's risk appetite. We provide a unique proposition to commercial brokers, which has continued to evolve with the launch of Broker Black Belt. This is already delivering high growth from these brokers, and it's important to note that in a system of over 20,000 brokers, we only work with the top 10%. This is very different to how the system for home loan broking works. Our risk assessment practices for broker-introduced and direct business are identical.
In terms of blended lending margins, despite continued competition, they remain broadly flat as we manage all the levers to achieve the optimal balance of growth and economics. I want to now spend a moment on the component parts of growth, gross originations, and attrition. I don't think anyone would dispute we are an origination machine. We excel with the speed at which we operate, how we think about structuring loans, our approach to how we assess risk under our Four Cs Framework, and that every customer gets to meet the decision maker. When a customer wants a new, increased, or changed facility, we're in our sweet spot. And so our gross originations were very strong over the half, particularly leading up to Christmas, which is a key deadline for businesses. In fact, in December, we set a new 10-year record for gross drawdowns.
With 32 locations, we've seen growth nationally. In particular, we're seeing our investment into the regions translate into strong growth, with Agri lending now representing 8% of our book, up 23%, half on half. As I said earlier, warehouse lending is also gathering steam, with several new customers onboarded over the half. On a state basis, WA and SA have really been our top performers. We're also seeing our investments in productivity to begin to deliver results. We have moved from building technology to optimizing it, and this is now translating to bankers having more time to spend with customers and drive growth. On the other side of the equation, attrition does remain more elevated than our 20% thesis for a range of reasons.
We have a detailed understanding of why customers leave, and the step-up in attrition is largely due to three non-regrettable factors. First, the economics don't make sense, or second, there's a concern about the risk, or third, there's quite simply just an asset sale. For example, attrition in quarter four included two well-flagged customer exits, totaling nearly AUD 100 million, where the balance of risk and margin did not make sense for us. So for these reasons, in this environment, attrition feels more like 25%-30% in the immediate short term. But we continue to believe 20% is the right through the cycle assumption, and we're simply not prepared to compromise on the economics of our book because we don't need to.
You know, at 2% market share, we can balance attrition with higher originations, because internally, we simply focus on producing the desired net growth, sculpted to the optimization of our capital. And pleasingly, with our new technology platforms, our bankers are able to deliver the higher originations without it impacting our cost base. Accordingly, this confidence in our net growth, supported by the strong momentum we have in our pipeline, has led us to upgrade the lower end of our June 2026 GLA guidance by AUD 200 million, with a revised range of AUD 14.4 -AUD 14.7 billion. Lastly, before handing to Andrew, let me discuss asset quality. Overall, the book is performing in line with guidance and our thesis.
We did see a modest increase in our over 90 days past due and impaired, but this really is just the law of small numbers still driving volatility with a below-scale denominator. The increase, in particular, was driven by a small number of exposures in December across different sectors. There are no systemic issues across the portfolio that cause me any concern. I would also stress these metrics are reported on a gross basis, agnostic of the underlying security, and also reflects a point in the cycle where we are still seeing the wash through of customers who face challenges during the downturn. To underscore this point, as the top chart shows, our portfolio PD is improving. This is a key measure of credit risk at the individual transaction level. Timing of resolutions also impacts our risk metric, as SME loans are not like mortgages. They're all different.
They take different times to resolve, which adds to lumpiness. But notwithstanding this, we remain very comfortable with our long-run write-off assumption of 50 basis points of average GLA. On that, I'll now hand over to Andrew to go through the financials in more detail.
Thank you, Chris, and good morning, everyone. In the first half of FY 2026, Judo delivered a strong financial result with profit before tax of AUD 86.5 million, up 26% on the prior half. This was driven by a continued above-system growth in the loan book, a stable net interest margin, and lower cost of risk charge. On a half-on-half basis, net profit after tax increased 32%, earnings per share rose 32%, and return on equity improved 140 basis points to 6.9%, demonstrating the strong operating leverage of our business. Over the next few slides, I'll walk through each of the key drivers of financial performance in turn. Starting first with NIM.
This slide sets out the key drivers of net interest margin from June 2025 to December 2025, and overall, the outcome were consistent with what we flagged at the FY 2025 result. Running through the drivers, starting with the green positive bars. First, the treasury portfolio, which had a 7 basis point positive impact on NIM, largely due to the reinvestment of maturing low-yield fixed-rate bonds. Next, are the cost of funding. This delivered a 1 basis point favorable impact due to mix and continued optimization of wholesale funding. As you can see from the chart, these benefits were partly offset by three factors: First, equity, which had a 4 basis points drag on NIM, as the impact of falling interest rates was partly offset by our investment term of capital policy in place.
Second, deposit margins were unfavorable by 3 bps, with blended deposit costs increasing in first half 2026, as the more expensive deposits that we wrote in the second half of 2025 washed through the book. Finally, lending margins had a 2 bps drag, reflecting lower front book margins in the final quarter of FY 2025, as well as some changes in mix as we scaled warehouse lending, which is a lower margin but a higher ROE product. Moving now to our expectations for NIM in second half 2026. We are upgrading our second half 2026 guidance for NIM from 3.1% to 3.15%. The more positive outlook for NIM is primarily a result of the improvement in the cost of new deposits over the half, which I'll address in the next slide. Wholesale funding should also deliver us a modest benefit.
Lending margins are expected to remain broadly stable, and we will balance lending margins against funding costs to deliver to the overall NIM result, especially in the current environment. Finally, we anticipate a more neutral impact from treasury activities and equity over the remainder of the year. Overall, we will continue to manage NIM above 3%, which remains our at-scale target. Next, to deposits and deposit margins. We continue to grow our deposit franchise, supporting the ongoing momentum in our loan book. The franchise continues to perform well, with retail rollover rates now increasing to above 70%. As I touched on earlier, the blended deposit margin was 92 basis points in the first half, up from 87 basis points in the prior period.
Now, this increase primarily reflects the flow-through impact of higher priced TDs that we originated in second half of 2025, when heightened uncertainty around the cash rate outlook and the broader global macro conditions resulted in some significant volatility in the swap curve. In contrast, during the first half of 2026, new TD margins declined sharply to 78 basis points, slightly below our through-the-cycle expected range. This reduction was largely due to the stabilization of the swap curve as greater certainty emerged around the direction of interest rates. In addition, during the half, we introduced new TD tenors and launched our first at-call savings product. These enhancements have given us more strategic flexibility and improving pricing. As illustrated in the bottom chart, term deposit margins can be volatile, and as such, we continue to expect a through-the-cycle TD margin of 80-90 basis points.
Now, let's turn to the overall funding stack. Over the half, we continued to strengthen and diversify our funding mix while making further progress towards our at-scale funding target. Deposits remain our lowest cost source of funding and are critical in our ability to scale the loan book. Over the half, we achieved another AUD 1 billion in deposit growth, taking the book to just shy of AUD 11 billion or 69% of total funding. After seven years of offering only term deposits to our customers and following the transition to our new technology platform last year, we are now expanding our product suite to include at-call savings. The rollout of these is tracking to plan, with an intermediated savings account launched last October and a direct online savings account launching soon.
These at-call products will provide greater flexibility in managing deposit flows across products and channels while continuing to support our strong brand for competitive rates. Wholesale funding markets remain an important source of diversification and flexibility for us. This includes warehouse funding, which we continue to optimize, as well as our full suite of wholesale debt and hybrid structures. Our track record as an issuer continues to strengthen, and we are seeing progressively improved pricing outcomes. During the half, we issued a new Tier Two instrument, which priced 120 basis points tighter than our previous Tier Two transaction. Overall, we will continue to grow and optimize our funding stack, which remains a key lever in supporting our sustainable growth and improving economics. Turning now to operating expenses. In the first half of 2026, our cost-to-income ratio increased slightly by 60 basis points to 48.5%.
But importantly, this was down 890 basis points compared to PCP. Looking at the drivers, employee costs increased 16% half on half. As discussed back in August, second half 2025 was impacted by several volatile items, notably final incentive outcomes and payroll tax. A more meaningful comparison against first half 2025 shows that employee costs in the most recent period were up a more modest 3%. And this increase reflects the continued recruitment to support lending growth, wage inflation, including superannuation, which was higher following the annual review cycle, and the normalization of incentive accruals and payroll tax. Non-employee expenses increased in total by 6% over the half, primarily driven by higher amortization from our technology investments and timing of some marketing and project activity.
Looking forward, we expect and continue to expect full year FY 2026 CTI to be below 50%, with an improvement in the second half versus the first half as operating leverage continues. While FTE will increase to support lending growth and the launch of our at-call deposits, we expect other operating expenses to remain broadly stable in dollar terms compared to the first half. Turning now to asset quality. Impairment expense for first half 2026 was AUD 40.1 million or 62 basis points of average GLAs, lower than the prior half. This primarily reflects a slowdown in the rate of new impaired loans. At the end of the half, collected provision coverage was 89 basis points, down 6 bps.
This movement reflected a combination of factors, including strong lending growth and changing mix in the book, proactive management leading to customer exits and repayments, ongoing seasoning of the book, and continued improvement in the macro environment. New impaired loans were in line with our expectations and were concentrated in the more vulnerable sectors where we carry an overlay, including discretionary retail, manufacturing, and construction. During the half, we increased the overlay to reflect some continued challenges for manufacturing and construction and their associated sectors. In addition, we increased resources focused on identification and intervention of early-stage arrears. Looking ahead, we expect economic conditions to be favorable through the remainder of the financial year, and these factors should continue to support resilience in credit performance going forward.
Overall, we remain comfortable with our collective provision coverage and our total provision coverage, which was 1.43% of GLA. Finally, to capital. We continue to maintain strong capital ratios at both CET1 and total capital levels. We closed the first half with a CET1 ratio of 12.6%. Growth was the primary contributor of CET1 consumption at 90 basis points. Pleasingly, organic capital generation improved in the first half, contributing 50 basis points of capital, supported by rising profitability. And we expect this trend to continue as operating leverage builds over time. Looking ahead, we have a range of proven initiatives available to support our growth strategy while maintaining capital strength. We have one existing public term securitization issue outstanding, completed in 2023. And while this type of transaction remains an option, we're also exploring private structures, including line sales.
These options would allow us to optimize capital and balance sheet velocity to support our growth going forward. Thanks again, folks, and I'll now hand back to Chris.
Thank you, Andrew. I'll start to wrap up with the slide that explains the key elements of our current strategy, which as we've already spoken about, is optimizing the bank we've built. For us, our consistent, simple strategy has been a key factor of our success. We are, and will continue to be, solely focused on the SME sector. It is the most profitable sector in banking today. Our four strategic priorities have not changed. First, enhance our core business. Second, grow our TAM. Third, optimize our funding, capital, and costs. And then fourthly, create new avenues for growth. As we have discussed, in the middle of last year, we completed the implementation of our core systems. Since then, our focus is banker productivity and the development of new ROE accretive products.
Andrew's already covered the progress we've made with the new deposit products, and in the coming slides, I will expand on other optimization work. Ultimately, as a bank, we are valued on our ROE. Our focus now is to balance growth and returns in order to deliver our at-scale ROE in the low to mid-teens. So looking ahead, our focus is to unlock the next phase of growth by building on the foundations we've put in place. We have multiple levers, but we are approaching them in a disciplined and targeted way, consistent with how we've always run the bank. Our core lending franchise remains our growth engine, supported by our relationship-led proposition and strong broker partnerships. Our Broker Black Belt program, which was launched during the half, supports our top 15 commercial broking partners and is delivering strong results, including a 30% increase in their pipeline.
This gives us the confidence to progressively roll out the program to the next tier of brokers, which we're very excited about. It will continue to differentiate us from other banks in a market where brokers control about 40% of business lending flow now. As discussed already, warehouse lending is now well established, providing an additional channel for growth and diversification. There really is a gap in the market for smaller, non-bank financial institutions to access funding below, say, AUD 100 million, that we're leveraging with limited competition. At the same time, scale is giving us increasing optionality on funding and capital. New savings products, wholesale diversification, and balance sheet optimization all improve flexibility and resilience. Importantly, operating leverage is not only about lending growth. Productivity is also key. The investments we've made are enabling us to grow more efficiently without a material increase in costs.
This combination of disciplined growth, funding optionality, and productivity improvement is what underpins our confidence in continued ROE progression. Now, banker enablement and productivity is a personal passion of mine. Our objective is simple: We're investing in our proposition of smarter, faster, stronger, giving our bankers more time and a sharper edge. As we've discussed over many slides this morning, now that we've built all of the new scalable technology, our focus is freeing up banker capacity. Utilizing our existing capability in tech and data, AI, process reengineering, and people development, we are simplifying processes that currently consume banker time. For example, how our bankers process loan modifications, margin changes, annual reviews, and variations are all being made faster.
As a proof point, our gross originations per banker have increased by AUD 2.6 million a month in the second half of 2025, to AUD 2.8 million per month in the first half of 2026. And assets under management per banker has also increased half on half. We already have the lowest ratio of customers per banker in the sector, and these initiatives will create even more capacity for bankers to stay close to their customers. We're also using our data platform to provide better customer insights, enabling bankers to be more proactive in managing risk and identifying opportunities. And while it remains early days, we see significant potential for AI to create capacity for both bankers and other parts of the business. Now, AI won't replace banker decision-making, rather, it strengthens the quality, speed, and consistency of the judgment they already apply.
This is a key driver of operating leverage. We can grow without a significant increase in cost, and that flows directly through to CTI and ROE. Importantly, this is not a one-off initiative. It's an ongoing productivity program that compounds over time as scale increases. Scale really is our best friend now. Now, turning to the broader macro outlook, trading conditions for SMEs continues to be favorable. The Australian economy is demonstrating solid momentum, underpinned by an improvement in private sector conditions and a strong rebound in consumer activity in the first half of FY 2026. This improvement in trading conditions is flowing through to business confidence and activity, and this, in turn, has led to strong business credit demand, which has been consistently above long-run average for the past two years.
While economic conditions, economic growth remains constructive, it continues to be constrained by capacity shortfalls across the economy, in particular with skilled labor. This is an incentive for SMEs to invest in productivity-enhancing initiatives, including automation, technology, and operational efficiency, which is supporting ongoing demand for business lending. And we have a clear role to play in this productivity agenda, providing the capital that businesses require to grow. Now to guidance. Starting with GLA, we're targeting a June 2026 loan book of AUD 14.4 -AUD 14.7 billion. As already stated, this range has narrowed as we have greater confidence in the trajectory of our lending. Growth will be continued to be driven by investment in the regions, improvements in banker productivity, and further progress in our warehouse lending business.
As always, we remain disciplined and continue to price for risk as we navigate a competitive lending environment. Turning to margins, as Andrew's outlined, we're upgrading the second half NIM guidance to approximately 3.15%, primarily reflecting benefits from funding costs. For the full year, this supports a NIM outcome at the upper end of the previously guided range of 3%-3.1%. On costs, CTI will be lower in the second half, with operating leverage becoming more evident. In terms of credit, we continue to expect cost of risk to be in the range of 60-65 basis points, representing a modest improvement on FY 2025. So taking all this together, we remain comfortable with full-year PBT guidance of AUD 180 million-AUD 190 million, and this does imply a strong second-half earnings outcome.
By June 2026, we expect to have made meaningful further progress on ROE. In closing, the first half of FY 2026 has delivered strong financial performance and continued strong execution against our key priorities. We've continued to execute consistently, with operating leverage emerging and profit growth of over 50% year-on-year. I'm very excited about the growth opportunities ahead as we continue to strengthen our lending franchise and invest in banker enablement, broker relationships, and our CVP. We have a clear productivity agenda, which will give our bankers more time and enhance our specialist relationship-based proposition. Alongside this, we're actively optimizing funding, capital, and costs through a number of levers. The strength of our executive team, the engagement of our people, the consistently high advocacy from customers continues to differentiate Judo.
Together, these factors are supporting an ongoing progress towards an ROE in the low to mid-teens, which will be the strongest of all banks in Australia. So thank you for your time this morning. We now look forward to taking your questions.
Thank you. To ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star one one again. Please have two questions per person. If you have more questions, you can press star one one to re-queue. Please stand by as we compile the Q&A roster. First question comes from the lines of Matthew Wilson from Jarden. Please go ahead.
Yeah, good morning, team. Matthew Wilson, Jarden. Hopefully, you can hear me okay.
We can, Matt. Yep.
Yep. CBA like to hold themselves out as the, the only rational player in the industry. However, your comments that accompany slide seven in relation to non-regrettable losses, attrition, and the drivers thereof, clearly say that's otherwise. Could you add some more color to that experience that you're seeing out in the marketplace?
Well, I mean, I'm not gonna give specific examples, Matt, but, you know, of the Big Four, you know, one bank is consistently there, you know, one bank is never there at the moment, and two of the banks are inconsistent, and they're using both the price and the risk lever to win business.
Yep.
Price was very prevalent as a lever twelve months ago.
Mm-hmm.
What we're seeing now, actually-
Mm-hmm
I s the risk lever being used more, presumably as they're trying to protect their, their NIMs. And the challenge with using price as a, as a lever to win new business is it ultimately infects your existing customer base. And that's where-
Yep
Y ou know, the big drag on NIM comes from. But it's just not consistent, Matt. It's different in different states.
Yep.
As I said on, in my presentation, business banking is a people business.
Yep
B ut, you know, two, two of the banks in particular, as they're seeking to grow quite aggressively, are, are definitely, from our experience, using price and risk as a lever. I'll give you an interesting stat, Matt-
Thank you. Yep.
I'll give you an interesting stat, Matt, if I, if I could. Because I look at-
Yep
As you'd expect, I look at every single customer that refinances away from us, to understand the underlying reason. And in 2024, so I'm going back, you know, over a year, of the-
Yep
O f the customers that we lost to the major banks, on credit grounds, that we, where we didn't want to support it on credit grounds, there was public data available within 12 months of the refinance that showed 50% of them failed, or closed.
Wow. Thank you for that. And a second question: if I dig into the appendix, slide 28, there's some useful credit quality metrics. When we look at the movement in 90 days past due and impaired, it looks like property operators were the key contributor to the delta in the 6 months. That's 20% of your book. They went from 1.17% to 2.06%. Can you also add some more color to, you know, the nature of the loans there that are driving that change?
Look, it'll be obviously, the mix will have changed. What drove the increase on the over 90s, in particular, was one customer, actually, or it was 75-
Yep
T hree-quarters of it was one customer. They're operating actually in the child-
Yep
I n the childcare sector. It was-
Yep
Actually, an established operator. It's a new greenfield site. It hasn't come on stream as quickly as, as they would have liked, as we would have liked. We're, we're still supporting-
Yep
A nd working with them. That's why it's in arrears. We're not ready to restructure it, and we're well secured. So look, every one of these has got a story behind them.
Yep.
As I said, we are plagued by the law of small numbers. I know I can't use that script for much longer, but it's still, you know-
No
T he denominator is still only, only AUD 13.4 billion.
Yep
W e have lumpiness in that number, but it's not causing me any underlying concern at all.
No worries. Thank you. That makes sense. Cheers.
Thank you. Next comes from Tom Strong, from Citi. Please go ahead.
Oh, good morning, Chris, Andrew, and thanks for taking my questions. My first question is just on deposit margins. If we look on slide 12, it shows a new margin, we're saying that, that doesn't seem to involve with it. Spends most of the time below that 78. So can you just reconcile those two numbers and what we should expect over the next 12 months as that averages in?
Yeah, you cut out a little bit, Tom, but I think the question, the gist of it was around, I guess, what we've seen with blended movements in blended and movements in the front book deposit margin, which I'm happy to talk to. I mean, what we've... You'll recall back, you know, April, May, you know, about, you know, in last year, that we did see deposit costs spike, really off the back of significant volatility in that swap curve. And so, you know, that cohort that we wrote in, in that half has started to now come through in terms of that kind of blended margin, that we saw in first half 2026. And that's really why you see the green line in that chart kind of tick up.
A reminder that it takes about eight months for, on average, for, you know, the deposit, you know, those deposit costs to kind of wash through the book, given the longer duration in our, in our TD book, perhaps, versus system. So what you've now seen, I guess, is, from a front book perspective, is we have seen a much more, as I called out in the, in the, in the speech, a much more stable swap curve. And so that volatility has kind of come out in terms of what we've been originating on the front book. And, and those front book, deposit costs, you know, were 78 basis points in the, in the half.
So that hasn't washed through in terms of the blended margin, but as you think forward into the second half of 2026, that's really the key driver of, of why we're, we're calling out the NIM, the NIM upgrade. It's really driven by those, you know, those deposit costs kind of, kind of coming through. So, you know, there's always a mix of things there. We've got a mix of tenors, there's different spreads across there. We've been, pricing quite dynamically and much more dynamically now with our new tenors, across, across the whole spread.
But, you know, underpinning the second half 2026 NIM guidance and that upgrade to 3.15%, that's really driven by what we've seen in the front book deposits, and that, expecting that kind of to start to wash through in the second half.
Just to build on that, we are getting a significant benefit from the new technology that we've deployed as our core for deposits. It gives us a lot more flexibility in terms of how to manage tenors and therefore bring a better science, if you like, in terms of how to optimize the returns on our TD book. So that's. We have a lot more levers at our disposal now than we did, say, six months ago.
Great. Thanks for that. And just a second question on capital. I mean, you say on the capital slide, you don't need additional equity to support your loan growth, but you're entertaining alternative capital efficient options. Like, I understand that there's demand for your assets in terms of loan sales, but given they would be revenue dilutive to do that, can you just talk about why you'd be entertaining some of those structures, given it probably hurts the scale and metrics and the path to metrics and scale?
Well, I mean, fundamentally, it'll come down to optimizing the ROE. So, we don't know, you know, at this stage, the economics of, of a loan sale or, in doing another-- obviously, we understand the economics of a no- capital relief term securitization, but it will, it'll just come down to maximizing ROE. And also, we're keen to give ourselves new levers. So, you know, we are a bank that's, you know, that's, maturing rapidly, and the more levers that we have around how to optimize funding and capital, the better. And so, loan sale is a lever that we haven't, currently got, and, and so, building that into our arsenal of, of, of how we, of how we manage capital and funding is, is, is an important lever to have. But I'll let you build on it.
Yeah, I mean, it's adding to that, Tom, it is for us, it's about having the tools in the toolkit. And we've always talked about that across our funding and capital stack. We want to have all of these tools in the toolkit. So we've done a capital relief term securitization. That is an option for us. It's probably got more attractive than when we did that in 2023. Loan sales are another option for us, and we're kind of considering all of that. But primarily for us, this is around the strong growth that we're seeing in terms of the lending book and how we can kind of best support that growth in a capital efficient and an ROE efficient way, as Chris said.
So this is about having optionality, and really kind of maximizing the growth in the business against, you know, the ROE that we're building towards.
That's very clear. Thank you.
Thank you.
Thanks, Tom.
Thank you. Our next question comes from Andrew Lyons from Jefferies. Please go ahead.
Thanks, and good morning. Just two questions in relation to your guidance. Firstly, you've upgraded your NIM guidance in the second half. Can you just perhaps help us to understand how reliant that is on new deposit spreads remaining below your long-run target range of 80-90 basis points over the half? Or have you actually built a bit of fat into that and do assume some normalization of those spreads over the course of 2H?
Yeah, I'll take that, Andy. Thanks for the question. I mean, we've certainly seen deposit costs on the front book be more favorable, and a lot of people are getting excited about what they've seen in the last month or so, pre the rate rise. So we've seen. You know, that number moves around a little bit in terms of what we're seeing on a month-by-month basis. But as we think about the second half, you know, we're assuming that there is a little bit of normalization in that deposit, in that front book deposit cost. We've seen some repricing already from some of the smaller players off the back of the RBA rate rise.
And so we're, as I said in my comments, we're, you know, we're still happy with that 80-90 basis point range. Depending on kind of the dynamics, we're probably gonna be towards the bottom of that range as it relates to the second half. But underpinning the NIM upgrade to 3.15% is really the wash through of the front book that we've already written in this, you know, in this half, just gone, washing through the book. These things take, as I said earlier, 8 months to wash through. So we're really looking at what we've already written. What does that mean when that kind of washes through, as opposed to, you know, needing to see certain conditions, you know, in the second half to underpin that?
So a lot, a lot of confidence, I think, in that NIM,
Yeah
I n that NIM figure, based on what we've already written in the deposit book to date.
Okay, that's really helpful. Thank you. And then just a second one. Obviously, you couple that NIM guidance upgrade with a tightening, I guess, to the volume range, which is a net upgrade. It would appear as if the revenue outlook that you're talking to in the second half is better than what you had been budgeting at the beginning of the year. Just given that the PBT range remains unchanged, and I recognize that it is a, you know, 5% range, can you just talk to how you're thinking about the need to reinvest the better revenues back into the business as opposed to letting it fall through to the bottom line? And I think that's particularly relevant, just given the presentation does highlight the operating leverage that you think exists in the business.
Yeah. Yeah. No, it's a great question, Andy. Firstly, you know, lending for us, net lending growth for us does tend to be a little bit back-ended. So I think you need to think about the timing, I guess, of that GLA, how it flows through, and kind of and therefore, the question of kind of that revenue piece. As we've always said, January and February, pretty quiet months for us. We're not kind of seeing—It's not a straight line to that GLA, so it does tend to be a little bit back-ended, especially after the summer period, where we see some pretty, you know, we don't see a lot of movement in the book, until things kind of really start to get going in the final quarter.
So it does tend to be back-ended, and so that, you know, you need to take that into consideration in terms of, in terms of that revenue piece. Yes-
Yeah
We are, though, investing in productivity and in growth with our bankers. And while, you know, we will deliver a better second half CTI than we see in the first half, a little bit of that extra revenue will be consumed by, you know, by costs. But for us, really, this is, you know, with that GLA upgrade and with that NIM upgrade, this is about increased confidence, I think, in what we're delivering in the second half, and, you know, we're very comfortable with that, with that range in terms of profit. And, you know, there are other things that will impact that, too. You know, your view on rates will probably impact, you know, where you sit in that range as well.
But, yeah, revenue, a little bit back-ended, and increased confidence, with those, with those upgrades in terms of that profit, profit range.
Thanks. I appreciate the color. Helpful.
Thanks, Andy.
Thank you. Next, we have John Storey from UBS. Please go ahead.
Morning, guys. Hopefully, you can hear me, and, congrats on a great set of results. I just wanted to touch on, the lending book. Obviously, a lot been said about it already this morning, but just trying to reconcile some of the growth that you've actually seen in terms of GLAs, and just reconcile it back into the productivity of the relationship bankers themselves. That's the first one. And then tied to this is really just around the client numbers that you actually show. Obviously, the book's growing a lot quicker than what your actual customer numbers are. So maybe just get a little bit more color on that would be helpful.
Yeah, absolutely, John. I mean, I'll take that. So you're absolutely right. The average loan size is increasing slightly. It's still just a touch below AUD 3 million, but it has increased. That's largely as a result of the fact that as we've expanded into the regions, you know, the ticket size of lending in agriculture, I talked about that being up 23% in the half, they're generally a little bit higher in terms of average size. Also our warehousing business, as you'd expect, does increase the average as well. So yes, in terms of the average loan size, that has gone up.
The productivity of our bankers has gone up as well, as a result of a lot of the initiatives that I talked about in the presentation. And so the combination of both of those means that our gross origination number is much higher. I think, as I said, in December, our gross originations were the highest we've ever had in the history of the company. But we always sculpt to a net growth. So if the attrition hadn't been as high, we would have probably pulled down the gross originations a little bit, and that may have manifested itself in a slight improvement on margin, because ultimately, we sculpt net growth to capital. You know, I've been asked time and time again in the past-
Yeah. Yeah
If the environment gave you the opportunity to take more growth, would you take it? No, we will optimize returns as we sculpt to the capital, the capital position.
Thanks, Chris. And maybe just on my second question, just around the funding stack. I think the average balance sheet that you provide is very interesting. The first time that we see at-cost savings products coming into the funding stack. It's obviously only at AUD 9 million, so it's a small number now, but you can actually get a sense of what that actual cost differential is just relative to your term deposits and your intermediated term deposits. Maybe you could just give a little bit of color on growth that you are seeing in the savings products and how you expect the mix of this to probably shape, I guess, you know, certainly more over the course of 2027, would be helpful.
Yeah, great. Thanks, John. Yeah, so we're closed the half with about AUD 50 million in the intermediated savings account. That's the first of these two products that we're launching.
Yeah.
It's launched, not direct. It's launched through one of our partners. And that's been helpful.
Yeah
F or us just in terms of managing flow and testing it and establishing it. So we're probably doing about 20-25 million AUD net growth now in that. So that's kind of sitting at around kind of 75 million AUD at the end of January. So that's, you know, so that's kind of slowly building, and we'll, you know, we'll continue to chip away there.
And, that product, just to be clear, that product is a very simple pricing proposition. It's just a price. There's no kind of tiers or bonuses because it's offered through an intermediary, and that is a little bit cheaper than, you know, what we've been seeing with our kind of through the cycle TD, you know, TD cost assumption. But that's not really the main game for us. The main game for us is the direct online savings account, which we're launching very soon, and we're really looking forward to bringing that to market to our customers. And that will be a product that we expect to take more flow in, that direct product.
So very similar strategy, very similar approach that we took to our TDs when we launched TDs almost seven years ago now. Where we started in intermediary, we worked with our partners, especially as being new in that outcore space, and then we moved into direct. And over time, as you can see with our TD book, we've taken a lot more and continued to take a lot more in that direct. So that's the main game for us. But the intermediated-
Yeah
A ccount is a good start, and again, gives us a little bit more flexibility. We'd like to add more partners to that, over time, but we've just got one partner that we've got there for the moment, with the main game really being this direct online product that we're launching soon.
Okay, thanks so much, Andrew.
Thank you. Just a moment for our next question, please. Next, we have Brendan Sproules from Goldman Sachs. Please go ahead.
Good morning, team. Just a question on the operating leverage. I saw you've added another 10 bankers since June. As you look forward, and you've also indicated there's gonna be investment in roles supporting some of this lending growth, and deposits, I mean, how are you gonna balance adding bankers here, or is there much more productivity to be realized through the existing force?
I think it's a, it's a bit of both, Brendan. I mean, we, we've always said that we, you know, we're comfortable recruiting, you know, no more than sort of 2 bankers per month. So, you know, we, we like to think about sort of growing the workforce by about 20 bankers per year. That's largely on cultural grounds as well. We don't want to onboard too many too quickly, so that we can make sure that we embed them properly into the organization's culture and its risk appetite. You know, the 32 locations I talked about earlier, as I said, we've, we've got 3 other locations we're targeting at the moment.
We won't go there till we can find the talent, so whether we recruit those in the next six months or not will largely be about the talent. We're really starting to build out the other regions now. The ones where we've already opened, as you can see, we've got huge growth in our regional and Agribusiness.
Mm.
And so, there's no shortage of opportunity for us to keep adding more bankers to those regions as we're getting established with our brand and our CVP, and with the broker network there, et cetera. So, I think we'll always be recruiting bankers for the foreseeable future because we're 2% market share, and we've got a huge opportunity to keep expanding. It won't be new locations, though, beyond the three that I just talked about. And then on the productivity benefits, first and foremost, we want that to be invested into the relationships that our bankers have with their, with their customers. Better insight, spending more time with them.
And so, you know, there will obviously be a trade-off, whether we need the amount of bankers to manage the AUD 20 billion book that was part of the original thesis. We always said 200 bankers for AUD 20 billion. I'm sure 200 bankers with today's technology, you know, the tools that we're bringing to them, and an increasing average loan size, I would imagine that would have increased significantly now, but it is gonna be a bit of both.
Thank you. And just a second question on your credit provisioning. We're seeing a continued fall in the underlying collective provision, despite quite strong loan growth. Where does sort of the board management see that provisioning coverage in terms of a minimum level? I mean, it just continues to fall half by half. Is there gonna be a point where you kind of hit a minimum and then it will have to need to grow with lending growth?
Yeah, it's a great question. I mean, my personal view is I probably wouldn't want to see it go below sort of 80 basis points, personally. At the moment, it's at 89. It's topped up because we have, you know, a higher specific provision. Our Stage Twos are particularly low at the moment. You know, our origination PD has been improving, which has played out in the coverage as well. So very, very happy with its level of coverage at 89 basis points and total coverage at 144. But I certainly, you know, with all my experience, and I've been a Chief Risk Officer three times in my career as well, I probably wouldn't be comfortable seeing it fall below 80.
Thank you.
Thank you. Next, we have Andrew Triggs from JP Morgan. Please go ahead.
Thank you. Good morning, Chris and Andrew. So just following up on asset quality, if we put the two charts together on slide 8, it seems like the credit quality, the average customer is getting better, but the size of the tail is increasing. Is that a fair way to look at it? And when do you actually expect to start to see the tail improve meaningfully, especially given, you know, the broader, you know, SME conditions do appear to be reasonable or getting a bit better at the moment?
Yeah, I mean, all, it... You're absolutely right. All of our lead indicators are positive. Our close monitoring files-
Mm
Y ou know, the ones that don't show up in the, in the arrears metrics, they've improved month-on-month-
Yeah
F or six months in a row now. The, you know, our impaired to GLA is down seven basis points in the half, which is the first reduction we've seen since June 2022.
Mm.
So the lead indicators are positive. And as I said, our origination, our portfolio PD is improving, and that's also matched by our origination PD as well. So we don't want to say it's peaked because we are plagued by the law of small numbers still. It is lumpy. But certainly, I would hope to start to see it on a firm downward trajectory.
Chris, is that still the case, including another potential rate hike? How resilient do you think SMEs are to rate hikes?
I don't think that would impact credit quality at all. We stressed. I mean, when we originate a customer, we add, we stress test to another 200 basis points on current rates, so we know that they can service at 200 basis points higher than they are now. I think, you know, that's not something that concerns me at all. I mean, we obviously, we're 2% of the market share. We know our customers intimately. We originate, you know, with one eye on what's gonna happen in terms of the rate environment. We back the best operators that have proven that they have the experience to operate in different parts of the economic cycle.
So two more rate increases certainly wouldn't be a factor for us to be concerned about our book.
Thank you. And just a second question on term deposits. So, I haven't done the math, but given that the mix shift that the big banks are reporting around their deposit portfolios, it would seem like the term deposit market, at best, is sort of not growing, with the savings pool or savings account pool being the main source of growth in the deposit system. What, what's the implication? Is that right? And what are the implications for Judo, given that currently you're quite reliant on the term deposit market, notwithstanding the advent of the savings product?
Yeah, let me put that into context. So, well, first of all, the TD market, if history is of any guide, when interest rates start to increase, customers move back into TDs because they like the immediacy of a higher rate, if you take, say, a one-year TD. And we saw obviously the move, as you said, into cash accounts when interest rates were falling. So, whether that occurs or not, time will tell, but it would suggest that that would be the case. But let's put the TD market into context. It's a AUD 1 trillion system, so there's, you know, AUD 3 trillion of deposit accounts, but AUD 1 trillion of them are TDs.
The average duration of a big bank TD is about four months, so they turn over three times a year. So that's AUD 3 trillion of flow. So that's AUD 250 billion of flow every month, and we have the highest rates in the rate comparison sites, and we're less than 1% market share. So what's happening to the TD system is not a factor on how we think about growing our deposit book, but I would expect the TD system to start increasing again, as I said, because generally it does when rates increase.
Yeah, we've been pretty consistent in growing that deposit book half on half on half by about AUD 1 billion net growth. So yes, the system can move around, but, you know, we're such a small part, and, you know, there's a customer there that wants a great rate, and and that's our competitive advantage. So, we're not so concerned by that, Andy, and certainly as, you know, as we move into a rising rate cycle, we tend to see more of those customers looking at that certainty of TDs, as Chris said.
Makes sense. Thanks.
Thank you. Just a moment for our next question, please. Next, we have Jason Shao from Macquarie. Please go ahead.
Hi, guys, thanks for taking my question. The question's on your term deposits. You noted, in one of your charts, that your rollover rates for your term deposits have sort of continued to improve over the years. Just curious if that's driven mostly by Judo being leading on price in the market, or is that partially driven by brand awareness? And especially if it's the latter, do you think this leads to any improvements, on pricing, over the longer term?
Yeah, it's a great question.
Yeah.
Shall I take it?
You can take it if you want.
Look, the thing about rollover rates is you have to be consistent.
Yeah.
You can't be schizophrenic. You can't be high in the rate comparison sites one day and then low the next day. You've got to be consistent. And as long a nd once you've got a loyal customer base, you know, we've got over 50,000 deposit customers, and as you said, our brand is strong now. When I wear my Judo T-shirt, you know, around town, so many customers stop me because they're deposit customers, to talk about the bank. So we, you know, we've got a very, very strong brand there now. And the rollover rates, you're absolutely right. If you've got a high brand and high rollover rates because you're consistently in the rate comparison sites at the top end, you can start to...
People, you know, will continue to roll with you even if you're number 2 or number 3 or number 4. Because even in this digital world, the, you know, the process of moving to another customer and doing the KYC yourself all over again and the digital onboarding, it's still quite time-consuming. And so customers like the fact that they can bank with a bank that has a good rate, and they know that at rollover, it's gonna stay a good rate, then you get rollover rates in the high 70s. I mean, we've, you know, as you know, I was at NAB for many, many years in the retail business, and we know exactly how customer behavior works in this on deposits.
Thanks. And sorry, just to follow up on that, and how do you think that plays into pricing over time?
Well, it should improve pricing over time.
Yeah, and we've seen that, Jason. We've used to have to always be at the top of the league table. So if someone priced up, we had the price above them, because we didn't have a brand. You know, if I look back, you know, 6 odd years ago, when we really were still establishing ourselves in the market, it hasn't been the case, actually, probably for a little while now, where we'll be consistently good, we'll be up there, and we're a brand that I think is more recognized now, up the top of those league tables.
You know, but the credit union that comes in, that not a lot of people have heard of, that comes at the top of the price table, we don't have to chase that in the way that we probably used to, given the brand recognition that we've built. So I think you've already seen some of that benefit come through in terms of pricing. But, you know, every half that we get better brand loyalty, better rollover, you know, we can just optimize that more. And part of the introduction for us of the new tenors is the ability to really leverage that at the margin a little bit more.
So, you know, we'll have customers that will roll with a great rate in a 6-month or a 12-month, but there's always that cohort of customer that's a little bit more rate sensitive, and that's where we can perhaps have a slightly better rate in the, you know, the 7-month or the, you know, the 8-month, and still be able to keep that customer. So this is the optimization that we're now able to do, because of the brand recognition, because of the investments we've made in the deposit platform, with the, the technology platform, and the introduction of these, of these tenors. And y ou know, we've got more that we want to do there, but, this has given us a lot more flexibility with, with the product.
Thanks. And just onto my second question: so it seems like funding costs have improved, and you're speaking to better margins. And Judo is still looking to achieve that scale by growing its book. I mean, with better margins, how do you think about the balance between the better funding costs and stronger volume growth, or is the focus for Judo heavily on returns?
Look, it's a balance. But yes, we're not, we're not going to trade off economics for growth. But with TD pricing being favorable, what we find is a lot of our competitors will start to pass that through in terms of, in terms of the way they're pricing for credit. So we're not immune from that. But it's a balance. Yes, we know the net growth that we want to grow by, and we're not going to exceed that. So we will, you know, let cheaper deposits flow through onto the NIM, if we can do the same net growth. But if we find that our competitors are passing it through, then we'll obviously have to do the same to remain competitive.
So it's a balancing item. Ultimately, we manage the NIM.
Thanks, guys, and congrats on the result.
Thank you.
Thank you. Next, we have Jonathan Mott from Barrenjoey. Please go ahead.
Yeah, hi, guys. We've been following you now for quite a few years, coming on five years now, and the metrics at scale that you put out just before IPO, around that time, talked about, you know, getting to AUD 15 -AUD 20 billion and getting that low, low to mid, mid-teens ROE. And the one there was the approaching 30% cost-to-income ratio. When we think about it, it's probably taken a couple of years longer than originally anticipated to get to those metrics at scale, and the inflation environment has been a lot higher than you were probably anticipating. So getting to a 30% or the cost base that you needed in dollar terms is just going to be larger.
So do we need to think about it that the 30%, approaching 30%, is no longer realistic, just given the inflation environment and the revenue that you're going to have? Or is the metrics at scale probably somewhere around 20, 20-25 billion before you can get to that 30% cost-to-income ratio, given the inflation environment?
Yeah, John, look, it's. You, you're absolutely right. I think in this, as you said, with the amount of inflation and the pandemic and everything, and all the other headwinds that we've had since the original thesis, the cost-income ratio approaching the low 30s% is definitely anchored to the AUD 20 billion now, not the AUD 15 billion. We've got the NIM there. What we haven't got, you know, yet, is the other operating income starting to flow through. We've talked a lot about, you know, at this stage of the build of the bank, we're starting to think, I talked about it in my slides, about other highly ROE-accretive products like trade finance, receivables finance, et cetera, where, you know, they are very high ROE products.
So you should be factoring some of those in to think about how we would get to the ROE. But you're absolutely right. I mean, I think at a AUD 20 billion loan book, I would be disappointed if we didn't have a cost-income ratio beginning with a 3, getting down to, you know, the low threes. So you're probably right, John. It probably is a loan book slightly higher than AUD 20 billion now.
Mm.
But it would a t AUD 20 billion, I would certainly hope that the cost-income ratio would begin with a three.
Thank you.
Thank you. Just a moment for our next question, please. Next, we have Richard Wiles from Morgan Stanley. Please go ahead.
Good morning. Your progress on achieving your guidance metrics for this year suggests that you're managing the competitive environment well, and you're sort of managing the volume margin trade-off. I have a couple of questions that relate to the metrics in the medium term. The first is on capital, and the second is on ROE. I'll start with the capital-
Andrew, you say capital generation is positive, but slide 16 shows it's actually negative. Growth in RWAs of 90 basis points outstripped the profit of 50 basis points, so that means the CET1 ratio is heading down. Can you tell us when you think the profit will cover the RWA growth so that your capital generation isn't negative? And in the meantime, if this current trend continues, when does the CET1 ratio become a constraint? Is it 12%, is it 11.5%? How should we think about capital becoming a constraint to your growth?
Yeah. Well, I'll cover the last bit. Yeah. 'Cause, you know, it hasn't changed from the original thesis. So Richard, we've always said that we think about capital optimized CET1 at about 11.5%. So to put that into context, you know, the average of the regionals, I think, is 11.1%, and the average of the majors is 12.1%. The regionals are mortgage banks, largely ex-growth, so we would want to hold more capital than them. The large banks are advanced banks. They get huge benefit from their advanced accreditation. So, you know, we think it's appropriate to be slightly lower than them. So we've always pegged ourselves at the midpoint between the two.
So that's how I think about capital being optimized at 11.5. The other aspects of the question. Yeah, and so we've, you know, we've obviously got capital still for growth there, Richard, based on, you know, based on, based on those comments from Chris. We are getting more capital efficient. There's no y ou know, we're not shy about that. We started post the IPO with, you know, with the capital that we, that we needed to get us to a self-sustaining place, and we're a lot closer to that, obviously, now, being a couple of years on our journey. We are still a consumer of capital, as you, as you note.
But the benefit or the contribution from profit has increased, and I called that out. It went from 40 basis points to 50 basis points over the half. That is an element that will continue to improve as we see the operating leverage. It's why operating leverage is really important to us as we're kind of growing into these economics, but also as it relates to the capital journey. So we are getting more closer to those capital levels, as you would expect. We've sculpted the you know the loan book and how we think about growth in our multi-year plans against that.
And operating leverage is important for us because that has started and will continue to narrow that gap to a point where we, you know, we get to self-sustaining. We're also looking, given the strong growth that we had in the first half, as I called out, on capital kind of optimization. So we've executed a term securitization before. That is very much an option for us. The economics of that certainly better than when we did that in 2023. And loan sales is another option for us. It's another tool in the toolkit that we can use to manage capital around the edges.
But the real thing for us is sculpting that lending growth and delivering on that operating leverage, so that we're offsetting that lending growth with organic capital or profit contribution to the waterfall.
Okay, thank you. My second question relates to returns. I think it's sort of similar to the line of questioning from Jonathan Mott. You know, you highlighted, Chris, at the start of the presentation that you're at your 10-year anniversary. I think at the time of the IPO, most market participants thought you planned to get, you planned to get to your metrics at scale within this timeframe. Certainly, I think you had a sort of 10-year model that had you getting there. But today, the ROE is only 7%. It is going up, but can you give us an idea on how long it's gonna take you to get to a double-digit ROE?
Alternatively, similar to Motty's question, you know, when do you get that, AUD 20 billion+ of loans and a cost-to-income ratio below 40%, approaching that 30%? How long do we have to wait?
Yeah, I mean, you, you're right, Richard. The ROE trajectory for us has been, you know, pretty kind of stable, if you wind back absent this half around that kind of 5, 5.5%. But this half, it's moved up to, you know, just shy of 7%, and we've got earnings for the second half of this year that are kind of backended across the year. So we're gonna see more operating leverage, and therefore more progress on that ROE in the second half. So we haven't moved that metric perhaps as fast as we had anticipated 10 years ago, partly because of pandemic and, you know, some of the inflationary cost inflation impacts that had, along with everything else.
But the pleasing thing for us now is that ROE is now moving, and it's moved quite significantly in a half, and we're on that journey. So I think delivering on that is an important proof point for us. And the operating leverage is really now this part of the journey. We're seeing great top-line growth that we're delivering through lending. We've got a NIM that's expanding, with, you know, with some positive tailwinds kind of under that. We've upgraded, obviously, for second half of this year. We've got operating leverage in the cost base, and we've got other operating income that is still very much ahead of us.
So all of those things will really support that ROE trajectory, going forward, and we remain really confident in that. The building blocks of the business are very much there in terms of the economic, and delivering on that economic model. I mean, double-digit, so 10% ROE, Richard, I mean, it should be an FY 2027
S tory at some point. It won't be, you know, I don't know. Certainly, we should be there by the exit of FY 2027, but at some point during FY 2027, the trajectory that we've got, the momentum that we've got, operating leverage is our best friend. We're not paying a dividend, you know. It, we'll have that capital therefore to fund the growth of the loan book. It would be, you know, we're knocking on the door of double-digit ROE now.
Okay. So it sounds like from the comments you've both made, that this, the improvement in ROE you're seeing now is an indicator of the momentum you have in the business?
Yes.
Yep.
Yeah, absolutely.
Yeah. Okay. Thank you.
Thank you. Just a moment for our next question. Thank you. Next, we have Nathan Lead from Morgans. Please go ahead.
Hi, Chris and Andrew. Thanks for your presentations. Just two or three from me, if you don't mind. So first up on the NIM, obviously, you're a bit over 3% now, but previously you've talked about having, you know, a NIM composition of, you know, mid-4% for the lending margin, cost of funding about 1%, and, you know, 20-30 basis point drag from liquid. So that sort of implies 3.2%. Is that number still achievable in your mind?
Yes, absolutely. That's what we're managing to. Today, as you said, you know, the forward pipeline of our lending is around about that 4.3. The deposits are slightly below the thesis, and the drag of the liquids is there or thereabouts, hence we're giving guidance of 3.15 for the second half. So I think if there's any you know, the warehouse business is, I suppose, just a little bit of a change on that original thesis of the 4.5 - 1 - 0.3, 'cause the warehouse business, you know, does have a margin that's slightly lower than the rest of the book. But it's highly-
Mm-hmm
Accretive to ROE. I mean, so, so that, that's a trade-off I'm prepared to take because the risk-weighted assets on our warehouse lending is below 50%. So, you know, that might drag that down slightly. We'll still absolutely protect the 3% NIM, but you'll see the benefit of that come through the ROE line.
I guess to add-
Okay.
I guess to add to that, Nathan, you know, we've, you know, we've obviously upgraded to 3.15, so not quite 3.2, but,
Yeah
A nd a lot of that driven by what we're seeing in terms of funding costs. We've talked, you know, in the past about also getting, you know, some better benefits through tighter liquidity management. Now, we probably are where we are for the moment, but we are high when you look at us versus other banks on an MLH basis. So, you know, that's something for us to mature into over time. It's not something we're kind of calling out in the near term. We've got some other things that we can do in terms of the treasury book, in terms of just the rollover of fixed-rate bonds. Now, a bit of that's happened, so we're not expecting that to be a big contributor into second half, but there's some, you know, other things there.
Continued optimization of warehouse and more deposits in the deposit stack. You know, we're still growing deposits actually faster than the lending book on a net basis, so we're eking out a little bit more deposits in the funding stack, and that will give us a little bit more as well. But look, 3.15 is what we're guided to for second half. We've had some really good momentum there. I think going forward, it's gonna be much more, much more incremental in terms of, in terms of benefits, but, you know, that's a, that's a pretty good base level and certainly supports, you know, those kind of long-term economics, even at, even at 3.15.
Yep, that's great. My second question was something that you just referenced there. So obviously, a bit of a NIM kicker from the treasury side of things, with the repricing in this period. You've said neutral for the second half.
Yeah.
Is there much left to go on that repricing? So could you give us an idea of how out of market it is and how much of a future NIM benefit it could be?
Yeah. Look, there's a little bit to go. I think a lot of the benefits you've seen in treasury, which have been as much about managing tight liquidity levels, which as well as that repricing of the fixed rate portfolio or rollover the fixed rate portfolio, a lot of that has kind of come through, which is why we're calling that out as being more neutral. We've still got a little bit of that fixed rate portfolio to come off, you know, over you know, over the next kind of 8, 12 or 18 months, but it's pretty small, and it's also as the balance sheet gets bigger, that just has a bit of a less effect as well.
And I think with the tightness that we're kind of seeing in credit markets at the moment, we're not, you know, we're not expecting to see, you know, huge material uplifts in the same way. So there definitely, there's benefits there. They're positive from a NIM perspective. They're in our control, but they're not gonna be as material kind of going forward just as the overall balance sheet's grown, and there's less of that to roll off.
Okay, great. Thank you for that. And then the third question is, you called out the first half, 26 net deposit margin, 78 basis points, but can you just talk us through what actually happened in the Q2 and where that's actually sitting at the moment, just to give an indication of how it's rolling-
Yeah
T hrough into the second half?
Yeah, look, the last two months, in terms of the front book deposit costs have been pretty favorable. I mean, you can all see that with the public data, and you can do the math on it, and I'm sure you all have been. So they've been quite favorable. So it has been a little better. But that's a short-lived piece, I think, because we have seen some quite, you know, we have seen a number of players already starting to reprice off the RBA rate rise, and obviously, the movements kind of that have happened with swap curves. So it's bounced around. It has been favorable.
It's been favorable towards the end of the first half just gone. But we have seen repricing already occur, so, you know, we're not expecting that we're gonna see deposit costs kind of prevail at these current low levels, and that's not what we're needing to assume for the guidance that we've put through, and it's not what we're seeing in terms of some of that repricing up that we've already seen in the market.
Okay, great. Thank you.
Thank you. Next question comes from Ed Henning , from CLSA. Please go ahead.
Thank you for taking my question. Can you just touch a little bit more on potential securitization or the loan sale? And obviously, I understand the benefits on ROE and capital, but can you just talk about, you know, your ability to see more gross originations significantly higher than the AUD 1.5 billion in the quarter by, you know, more increased utilization of bankers and brokers to really refill that hopper if you do one of those transactions?
Yeah, absolutely. As I said in the presentation, you know, we don't have an issue with origination. We sort of constrain our origination to sculpt to the growth that we want, which is sculpted to the capital that we want. So, if we did do a loan sale, as an example, then we certainly wouldn't have any concerns that we wouldn't be able to replace that. Now, we'd wanna replace it in an orderly way so that we don't consume it too quickly, and then therefore erode the benefits of doing the sale in the first place. But we're not y ou know, we're 2% market share. We have, you know, the highest NPS in the sector. We have a compelling CVP. System credit growth is running at 9%-10%.
There's no reason at all why we shouldn't be able to grow at a higher rate if we chose to do so.
All right, thank you. And just further to Richard's questions before, and on the same vein, you know, currently, you're growing around AUD 2 billion per year, and you said you don't need to do anything on this to achieve your target. Can you continue to grow about AUD 2 billion per year to get to organic capital generation, so you don't need to do a transaction or raise capital?
Yeah, I mean, y eah, as I said earlier, Ed, that net lending growth that we're kind of been targeting and delivering on, that's been carefully sculpted against the capital and the capital runway. So, you know, we don't need to raise any common equity to be able to achieve that. We will look at loan sale or securitization around the edges to kind of manage capital, and as an ROE tool as well, really. But from a kind of a higher level, that capital journey against net lending has been kind of sculpted against our requirements, and hence our comments that we've consistently made around our CET1 that we've raised in the IPO and what that enables us to do.
Okay, thank you. Just one further one. You touched on before about trade finance and receivable finance. Can you just give a little bit more color on that, where you are on the journey and potential ramp-up there of that, improving your non-interest income?
Where we are on the journey really is with... You know, this is the point in our journey where we said we would evaluate those types of products. We weren't going to do it till the technology replatforming had been complete. You know, the current loan facilities that we have, you know, they sort of satisfy 80% of the funding needs of SMEs. So this really is icing on the cake for us. Trade finance is particularly attractive because it really consumes very little capital at all. And so that's sort of a here and now for us, thinking about how we could leverage the new investments we've made in the technology to start thinking about bringing those products to our customers.
So, I'm not saying that they're gonna be, you know, they're gonna be part of our product lineup in the next 12 months, but they're certainly on the radar now. You know, all of our focus now is on banker productivity, thinking about how we optimize funding through the new products we're about to launch there, and how we optimize ROE by solving some of the lending needs of SMEs that we don't currently have a solution for.
Just with that, will you need to invest in the technology to get those capabilities or add those on?
Look, whether we build or partner or buy is an open question for us.
Okay. That's great. Thank you for your time.
Thank you. Just a moment, please. Next, we have Brian Johnson from MST. Your line is now open.
Thank you very much for the opportunity to ask some questions. I had three. If we go through to slide seven, you actually talk about non-regrettable losses within the loan portfolio. What I find disturbing is I can't think of a single bank that haven't spoken to me about some non-regrettable losses, and also quite a few of them tell me that they're kind of losing them to private credit and Judo. When we have a look at that, could you just give us a feeling as to these non-regrettable losses that you've had kind of going out? Have you gone back and had a look at how you originated them in the first place, and what were the characteristics of them?
Yeah, so I don't have a concern. As I said, Brian, I personally look at every single customer that refinances away from us to understand exactly that point. Was this an issue with how we originated the loan? And they're all for different reasons. Some where you know maybe the customer has the risk profile has improved significantly, and it's now being aggressively sought after by a major bank because it you know it slipstreams through their credit policies and their more algorithmic approach to approaching credit, but at a price that just does not make sense for us. There are others where they're using risk levers to attract customers.
We've seen another number recently, where from a risk perspective, it's, they're, it doesn't meet our criteria or particularly for the price. You know, we're very disciplined around pricing for risk. But I can assure you, I look at every single loan, and I'm not unhappy with the reasons that we're losing that particular customer. I'm unhappy in terms of what they all add up to, in terms of the overall metric, you know, in terms of particularly for the last quarter at 30%. But I don't have any concerns with our underlying origination.
Chris, would your loan loss charge have been materially higher had you not been able to shed these bad loans?
Well, as I said to you, as I said, I think I can't remember. I think it was Matt, the first question. When I go back and do some vintage analysis, the loans that we let go in 2024, to, well, just let go to banks and private credit, as you referenced, private credit, that we didn't want to protect on credit grounds. 25% of them had a public notice that we could read in the papers or what have you, that said those businesses within 12 months had either failed or had closed. And interestingly, of the ones we lost to the Big Four, 50% of them had had a notice in the media that they had failed or closed.
Great. So, Chris, am I incorrect, just going back to the fundamental question: If it had not been for this very hungry market where some players aren't really pricing for risk, your loan loss charge would have been higher?
Not necessarily, because they, you know, they could have been fully secured. They were in our workout area, where we might have, you know, we would have worked through with the customer. All I'm saying is it's generally a combination of price and risk. So when I gave you a good example last time. We had an AUD 60 million customer in the Agri space that we were pricing. We'd actually taken it off private credit, where the risk profile had improved, but it was probably at the edge of our risk appetite. We were charging 6% over swap for it.
The customer, two years later, had not been performing in line with what we thought they, their projections showed. We were started to get concerned by it. Interestingly, though, Brian, it had AUD 120 million worth of security, so it was 50% loan to value. So we were never gonna lose any money on that deal. But it was refinanced to one of the Big Four at 2% over swap.
Yeah.
Now, now, we are not gonna do that on any day of the week. If we'd kept it, would we have lost money? No, but we are not gonna take that sort of risk for that type of price.
Okay, so but am I right in assuming there's been something similar happened in this half? There's been another two, sort of the same dynamic.
There was another one which was largely a hangover from COVID. It was a property sort of industrial land in New South Wales. Again, very well secured. It was a disputed sale which took some time for us to resolve, and that finally repaid, and was actually, the asset was sold actually on that one, so it wasn't refinanced away, and that was an AUD 40 million deal. And so that's the AUD 100 million I was referring to earlier. Those two customers represented an AUD 100 million of the run-off in December.
Chris, the next question is kind of related to this, but if you actually have a look at your ECL provisioning, even though the probability weightings to base case, upside, and downside, adverse and severe look the same, the reality is that you're increasing the downside weighting but reducing the severe downside. Then, if I have a look at the actual ECL scenarios, you've reduced the upside from 55 to 53, the base case from 76 to 71, the downside from 109 to 102, and the severe downside from 142 to 137, which sees overall the severe and downside cover has gone down from 121 to 113. It seems to me that is largely what has underwritten the loan loss charge that we see in the result.
Can we just get some comfort on this? Because some of your peers are actually increasing their downside and severe downside to avoid the risk out in the future. Could we just get some comfort on that, please?
Yeah, one of the additions, I guess, to add to that, Brian, is what we've seen, and you can see it, I guess, in what's come through in terms of the collective and the overall provision coverage, is that collective coverage has come down, and that's really a result, I guess, of you know, of all of this as it relates to a P&L perspective. What we've had in the period is because of that higher attrition in the book, more of what we've got kind of coming through has been in that Stage 1 . It hasn't, it's been a much more recent assessment of credit.
And so overall, when you look at the, you know, the ECL across the different weighting scenarios, this is in Note 10 for those following along at home, you can see those numbers have come down, and that's really due to this mixed component of what's happened in the book, where we've had more attrition and we've had, you know, more new lending, I guess, in the book, and so you've got less as a proportion sitting in that kind of Stage 1. Sorry, more kind of sitting in Stage 1 and less sitting in Stage 2. The overall weightings that we've taken to those scenarios, just to confirm, has not, you know, has not kind of changed.
We've held that downside at 30% and the severe downside at 15% from a weighting perspective. But the ECL levels that those weighted scenarios deliver have decreased, largely due to what's happened with that kind of mix in the book.
Okay. The next one that I had was just coming back to your guidance slide. One of the problems I sense you might have, you might disagree, this is even a problem, but with your guidance for this year at AUD 14.7 billion, but the metrics of scale figure starting at 15-20, we're now finding out today, scale is probably closer to 20 than 15. I'm just wondering if we could add to that slide when you think you'll be paying a dividend, if at all? Because it does seem, you know, when we have a look at it today, we can see more reference to kind of artificial ways of creating capital, whether it's a loan sale or a securitization.
I'd just be interested, when do we get so organically capital generative that you can hold your capital ratio steady at 11.5%, but also start to fund a dividend? And what would be that dividend?
Yeah, I mean, it's a little away to be specific on the policy, Brian, but certainly when we get to that crossover point in terms of the ROE against our kind of level, we'll have a decision to make around where we deploy that capital. Is that to continue to grow and grow, you know, grow above system, or is there an option to also see some of that deployed in terms of a dividend? So that'll depend on the opportunities that we see at the time, and also the economics of the business, and the ability to continue to eke out kind of higher returns, you know, across the portfolio.
But we are building towards that point, and, you know, as we were talking about earlier with Richard's questions, I think for the first time now, we actually have been able to kind of deliver a material kind of move in that ROE, and this is the start of this multi-year operating leverage journey that we're on.
Yeah, I suppose the only point is, though, is that the capital ratio is coming down quickly, and even if you have a look at the profit before tax you're guiding, it will continue to basically fall.
Yeah.
Just the mechanics of your profitability-
Exactly
V ersus your growth.
Yeah, exactly.
It is not unreasonable to conclude that when we come along to the next result, this guidance slide will have changed, that AUD 15 billion will have been replaced with another number?
Look, we're not, we're not kind of changing the metrics at scale at this point, but there'll be an evolution at some point where we just talk about ROE.
Yeah, that's, that'll be the next evolution, right?
You know, we're kind of, as you've noticed, we're pretty close to the bottom end of that GLA range. We've got the NIM now above 3%, and we can talk about where that'll land, but that's that metric is kind of cleared now. You know, we're demonstrating, you know, where we are in terms of the asset cycle, and the CTI is the one that's gonna come last. But we wanna be able to provide some clarity to the market in terms of that journey and that downwards journey. But there'll be a point where we just talk about ROE, and the, you know, the building blocks to that.
Could I push my luck with just one final question? Macquarie destroyed the at-call deposit market, destroyed the home lending market, very competitive pricing. The other day, their operational briefing, they did flag that the next thing they're gonna look at is the term deposit market. It kind of feels to me from your presentation, we all know TDs have gotten better. We can see it in every single result. But does that actually create a degree of risk for Judo, given that you've always priced your TDs at kind of like the highest rate card in the market, and we can see perhaps a fairly severe disruptive force that's coming in that spot? Does that create more of a risk for Judo than perhaps it does your peers?
Yeah, it was interesting, the comments from Macquarie, and we obviously noted them. I mean, they've been, they used to be a bit of a competitor in the TD tables. They haven't been for a while. They've been priced certainly away from the branchless bank segment, which we're in. But look, I mean, they're a good competitor. They're a great brand. I think the difference for us is, you know, we're a challenger, and we are an SME bank, so our asset yield is not, you know, is not kind of diluted by mortgage asset yields. And so our competitive advantage with that asset class has always been to pay a competitive rate.
You know, if you look at the branchless banks that we compete with, you know, they're all mortgage banks. Most banks are mortgage banks, and so y ou know, we've always wanted to bring a competitive rate to the TD market, and looking at that, you know, looking at that asset yield as a way for us to be able to do that. When you look long term across the branchless banks, it's historically been in that kind of 80 or, you know, 80-odd basis point kind of range, and our planning assumption hasn't changed for years, has been that we'll be 80-90 basis points.
You know, when you look at the majors, the regionals, they've historically been much lower. You know, Macquarie hasn't been really active in certainly the segments and the customers that we look at, of late.
Yeah. The other point I'd make, Brian, on this is the average size of our TD is AUD 100,000. So these are generally retiree type customers, and they generally have more than that available to invest. It's just they spread it across ADIs-
Yeah
B ecause they're very aware of the AUD 250,000 government guarantee. And so, you know, I think for us, as long as we have a rate that's up there, we continue to invest in our brand, we continue to invest in the digital experience, and we still have a less than 1% market share in terms of the TD market. Yeah, I mean, it's not something that gives me too much concern at this stage.
Thank you very much. Thank you. I appreciate it.
Thanks, Brian. Okay, I think that's all the questions. So look, as thank you so much for joining us this morning. We always love talking about our company. So I hopefully, today's results have demonstrated that we just continue to execute against our simple strategy. We've reconfirmed our existing guidance for FY 2026. We really is, you know, scale really is our best friend now, and the operating leverage is starting to come through. So we've enjoyed talking to you this morning, and I'll have all wish you all the best for the rest of the day. Thank you.
Thank you.