Thank you for standing by, and welcome to Latitude Group Holdings Limited 1H22 results conference call. All participants are in a listen-only mode. There will be a presentation followed by question and answer session. If you wish to ask a question, you will need to press the star key, followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Matthew Wilson, GM Investor Relations. Please go ahead.
I would like to begin by acknowledging the Wurundjeri people who are the traditional owners of the land from which I am hosting this meeting today, and pay my respect to their elders, past, present. There will be an opportunity to ask questions at the end of the presentation. Please press star one to register a question. I will now pass over to Ahmed Fahour for her to begin the presentation. Thank you.
Well, good morning, everybody, and thank you so much for dialing in. I'm pleased to announce that you would have already read, I'm sure, that Latitude has made a cash net profit after tax of AUD 93 million, and that we have maintained our dividend for the third half in a row at AUD 0.0785 per share, and this dividend is 100% fully franked. This is a terrific result in a very challenging market environment, both domestically and around the world. I'm going to focus on slide 13, which is available to you in the presentation deck, and highlight a few key essential factors that have driven this successful outcome. Then Paul Varro, our CFO, will take you through the details behind the numbers and behind the business' performance.
The number one success that we've achieved in our cash profit has come through focusing on our customers and focusing on both the merchant and the consumer and providing the services around installments, sales finance, our card propositions, and our personal loans and auto loans products. These four products produce 100% of the profit of Latitude. We once again maintained our volume at AUD 3.7 billion for the half. On top of that, we have one of the strongest consumer finance balance sheets in the Australian marketplace. Our tangible equity ratio at 9.2%, our surplus equity is well in excess of our target range of 6%-7%.
What that gives you an indication of is how strong our capital position is, and potentially we are carrying a lot of surplus capital, but we believe this is prudent for the environment that we are looking at today. We have prudent provisioning, 1.6 times NCO, and that is an increase on where we were before COVID set in. We have very conservative funding and lots of headroom, which positions us for growth in the coming period that we see emerging in 2023 and 2024. Our cash is strong as well and we maintain our high margin, which gives us an opportunity to continue to invest in the customer experience, and we have strong capital discipline. I'm pleased to report to all of you that the Symple transformation is on track and on budget.
We are delivering the new Symple platform that we acquired late last year, and now we have this available for all of our customers in Australia for our personal loan and auto products, as they apply. This new variable rate offering, which is delivering all the results that we expected, and we're very much looking forward for the rest of the year, and it's delivering in terms of the volume and the opportunities that we see ahead of us. I'm also pleased to say that I mentioned earlier this year that one of the things that we would expect to see as a recovery post-COVID in the near term is travel. What this result shows you is that we're not disappointed. The travel segment is booming, and we are real beneficiaries of that. We have the famous 28 Degrees card.
It is growing double-digit, 23% half-on-half and 29% year-on-year. What's fantastic is a big part of that growth in the last six months was actually domestically driven, and we see signs now of the international component really taking off and continuing beyond June thirtieth. Last but not least in this result, you would see that we are a very disciplined player when it comes to mergers, acquisitions, and our corporate portfolio. We see lots of opportunities. We did not obviously fulfill on the Humm opportunity, and I think it's been well documented. The discipline that we take, we're prepared to pay a price which can produce an outcome. If we can't get it at that price, we will move on. That is the bottom line.
On the other hand, internally within our organization, we also have disciplines about where we're focused, where our capital will be, and the kinds of returns that we expect to deliver. On that basis, we announced already that we will be divesting our insurance business. It is not a big part of this company, and it's one which would be much better handled by a specialty insurance company who can take it to its full potential and allow us to redeploy the capital that was in that business into our core businesses, which are successful and profitable. In summary, there is no question that Latitude Financial is the most profitable and successful consumer finance company in Australia and New Zealand. As a matter of fact, there aren't many people who make a profit, let alone the kinds of cash flows profit.
What I'm particularly pleased about is in the challenging environment of the last few years, we didn't cut any corners. We invested in the company, we positioned it for growth, and we have one of the strongest balance sheets, which Paul Varro will take you through, in a few minutes. 2022, like 2021 and 2020, is still very much a COVID-infected environment and economy. One of the telltale signs of this unusual past few years has been the amount of excess cash that has been pumped into the economy. One of the negatives that's emerged from that is clearly inflation. Inflation is a manifestation of the excess cash that's available relative to the supply constraints that we've seen during COVID.
What it's meant for Latitude is that this excess cash has meant a bigger debt repayment into the portfolio than was the case pre-2019. You can see on slide 13 an illustration. It shows you that our business has tended to, in the last couple of years, have 10% higher debt repayment on those receivables than pre-COVID. I already said at the AGM, this one-off situation that's emerged during COVID, a very unusual time period, has led to a significant reduction in our receivables, which also means a reduction in our revenue. This is COVID-induced. This is not a fundamental part of the economy, and it is one-off in its nature, and it will dissipate in the coming year.
It'll take a little bit of time to work its way through the economy, but there are signs already in the month of August, just now, you can see how inflation is being tackled, how interest rates are moving, and what it means for excess cash sitting in the economy. It will start to decrease, and what that will mean is the growth that we experience will be able to stay in our balance sheet and give us the upside in the coming years that was taken away from us in the past two years.
What that's allowed us to do is, because COVID is a temporary phenomenon that will work its way through, what that allows us to do is to look through that and focus on 2023 and 2024 to determine what the board determined was our dividend for this half. To look for where our cash is and where our future lies, and we're very excited by it. The only other comment I would make about the challenges of 2022, in particular in the second quarter for us, which is April to June, has to do with the funding market and interest rates. Now, we all know, everyone on this call, on this webinar, that interest rates have really taken off, and there is some to go for the rest of this year.
We anticipated and were strongly of the view that this was going to happen, and we had started to position our business in the way we priced our products, and we immediately started to do those repricings in April, right through June. Now, clearly, your cost of funds goes up much faster than your ability to fully reprice on the front book, and it takes some time for the rate increase to offset the cost of funds increase to be offset by pricing changes that we make. That won't fully address and adjust until 2023, and therefore, we play catch up in the rest of 2022, but eventually you get there. Paul Varro will walk you through some of that. We've begun it. We know it's gonna come through.
We will be able to deal with it fully in 2023 and 2024. There is a mismatch that does occur right now in this result, but more importantly into the second half. With that in background, let me just very quickly touch upon just a few slides, and then I'll hand over to Paul Varro in that part. If you go to slide 14 in the deck that you have, just some quick data points to support some of the comments I've been making. Volume I've already spoken about, and some of the exciting opportunities that we're already seeing in the lending business. Our PL business continues to grow market share in Australia and New Zealand, and has continued this trend over the last four years.
As of June 30th, we sit with 13.5% market share in personal loans in Australia. If you go back to when I started in this job, we were sitting at below 8% market share. We continue to grow, and we've documented this in previous reports of ours, but you will see that this is one of the trends of one of the reasons why we have bought Symple was to continue to grow in this exciting area of personal loan, and also, I might add, in the auto space. Another really strong feature of this company I talked about is the strength of our balance sheet and the strength of the customers that we've been doing business with.
Back in 2019, the higher risk grades, what we call CR4s and CR3s, which are higher risk customers, we price for all of those risks. That customer base was 36% of our portfolio. Today, in 2022, that's down to 29%. The inverse is the highest quality customer base, what we call CR1s and CR2s, we have increased that portfolio to be over 70% of all the flows of what we have. With that in mind, what that means is those customers, 'cause we risk price, they would get a lower price than those that are higher risk customers because of the way we do pricing.
Therefore, you might see that our RAI margin, risk-adjusted income, has come down a touch, but that's because we have a higher quality customer base, and we price those at a different level in there. We have an opportunity with lower prices that these customers get to also have the benefit of lower provisioning and lower bad debt charges, which is why you've got to look at this thing holistically. One of the hallmarks of our management team is to also invest in productivity and to invest in the digitization of the organization. When you digitize the organization, you have less expenses and less costs inside the company. Today, you can see that in this result, our absolute costs are down 9% on the second half of 2021.
This has continued the trend that you've seen in this company for several years, which is excellent cost discipline while running the company well and running the company strongly. Today, we have just over 1,000 FTEs. In 2018, we were closer to 2,000 FTEs. You can see we don't need as many people, but what we do is we're investing in the technological and digital capabilities of this organization to be able to work with the customer in the way they want to be worked with. Last but not least, our charge-offs. We have continued to demonstrate very strong discipline there with a low charge-off, which reflects the quality of the customer base that we have. One indicator that Paul will go through in the deck is 90 days past due.
This is a very temporary indicator to tell you what's going on with customers who might miss payments as opposed to charge-offs. I'm pleased to say to you that we sit at 80 basis points. That is even down further on where we were in 2021, which is down on 2020, which is down on 2019, and it is a remarkable result. We would be one of the very few consumer finance companies in the world that would report 80 basis points on non-mortgage, non-mortgage consumer finance companies. As a matter of fact, that number is so strong, it is even better than two of the four major banks in Australia who have a higher 90 days past due for their non-mortgage consumer portfolio.
We're very proud of the strength of the balance sheet, the quality of the customer that we work with, and the partners and the merchants that we have. In closing off, I just wanted to touch briefly on slide 16, which highlights all of the successes of what we've achieved with the Symple transaction and the new technology we've implemented in this company. We're not fully there yet, but we have really made big inroads, and the front end of our business is now originating on both the fixed and the variable rate product. I'm really pleased and proud of this team and this organization for all of those successes. In the coming 6-9 months, we will complete the backbook migration, and we will be the beneficiaries of years to come of this platform that we now have.
On slide 17, I'm also pleased to announce and report to you all that our international business in both Singapore and Malaysia is up and running, and we are working with customers. We've got 30,000 of those in Singapore. Literally, in the last six months, we've built up a terrific merchant base, and we are working very closely with our Australian major partner in Harvey Norman in both Singapore and in Malaysia. We have two more announcements to make in the coming period. We have signed contracts with two large retailers who have over 200 stores in Malaysia, and we're looking forward to rolling out Latitude's capabilities in those two Southeast Asian markets.
To close, which is where I started with, the dividend that you see there of 7.85 cents on the first half of 2022, which is 100% franked, will be paid on the twenty-sixth of October, and the company goes ex-dividend on the twenty-third of September. We've given a little bit of extra time. I just wanna make a note. It's slightly different to previous ones. Just a little bit of extra time of when the stock goes ex-dividend to give all of our shareholders time, because we have a dividend reinvestment plan, and we wanna just give our shareholders some time to fill in the form if you wish to reinvest the the dividend amount that you get into buying shares in the company. Obviously, it is transaction cost-free to do so.
The dividend and the franking credit still comes to you even if you elect to do the DRP. It goes without saying that at the share price on the seventeenth of August, this dividend represents an annualized dividend yield of 10%, which is extremely attractive and I hope is a good reward to our shareholders for investing in our company. I'm gonna stop at this point. We'll take questions later, but Paul will now dive into a couple of the really important financial results. It's over to you, Paul.
Thanks, Ahmed. If you move to page 22, what we thought we'd do is just lay out some of the key metrics of the half. I wanna go through them in a lot of detail. I'll do that in the subsequent pages. Four key points to make on this page. Firstly, on the left-hand side, solid cash NPAT result of AUD 93 million, above consensus of AUD 90 million. Continued strong rate underpinned by an excellent net charge-off results and also strong discipline in our OpEx, with flat OpEx year-on-year and down half-on-half, as Ahmed alluded to. The third point is around our strong balance sheet, again, with TER increasing to 9.2%, coupled with stable returns at ROE strong at 12%, and our return on average gross receivables steady at 3% as well.
I'll talk about that, a little bit later. Then finally, on this page, consistent EPS results as well. If we turn over to page 23, I'll take you through some of the key operational drivers of the result. Ahmed Fahour's already spoken to some of these, so I'll just quickly skip through them. On page 23, top left, 2% volume growth, up 2% year-on-year, led by money, at +9. Bottom left-hand side there, just a little bit more detail on the repayment rate. As you'll see, consistent with 2021, elevated payments. For the half, a payment rate of 100%. Compare that to the first half of 2019 at 89%, and you can see that real difference in the payment rate relative to our normalized 2019 levels.
What those higher repayments do is make it harder for us to grow receivables. As you can see there on the right-hand side, receivables down 2.8% year-on-year, or about AUD 180 million. But flat half-on-half, and really steady, as we go into 2023. If we turn to page 24, I'll just take you through some of the key P&L drivers of the result. Top left-hand side of page 24 is our operating income, down AUD 39 million year-on-year. 11 million of that is due to our lower receivables, which I just talked about. The other 28 million is on yield, down 87 basis points. Really, there's three main reasons behind that 87 basis points.
The first one, as Ahmed alluded to, is the much better risk mix that we've been originating over the past few years. That comes at a lower interest income, but also some strategic pricing changes we made on GO and Gem late in the first half of 2021, persisted for four and a half months in 2022. What we did do is reprice those products as we saw cash rates go up. The benefit of that repricing, along with the new business pricing that we did in PL and autos, will help us out in the second half and into 2023 as well.
Not surprisingly, higher funding costs up 29 basis points, and then a good 32 basis points, which is due to 28 Degrees increasing its volume and its interchange and lower loyalty cost as part of the value proposition changes we made on the GO product when we decreased APRs last year. If we turn to page 25, this is really the proof point of what Ahmed Fahour was saying. The portfolio remains in extremely good shape. As you can see there on the top left-hand side, CR1s and CR2s now at 71% of our originations. This is really driving quality assets that are well-seasoned, given how long we've been acquiring those. Bottom left-hand side is your delinquency, so 30 days past due, 90 days past due, and you can see there, sustained very strong performance and better year-on-year.
Lower delinquencies manifest in the top right-hand chart as lower charge-offs. Charge-offs for the half at 2.37%, down 17 basis points versus the prior year, but up seasonally. With those lower delinquencies, we've sustained good performance over what is now a two-year period, we're appropriately provisioned at a provision rate of 3.74. That coverage of 1.6 times our annual charge-off rate is still higher than our long-term averages. When we look at the unemployment forecast, clearly we feel very good about the portfolio, going forward. If we move to page 26, those high-quality assets and decreased charge-offs with the lower 17 basis points really underpin our risk-adjusted income.
You can see there on the bottom left-hand side, the combination of our risk-based pricing driving the increased quality at lower charge-off levels gives us what we believe to be an appropriate rate yield for the quality of the book at 9.5%. This is an appropriate return as it reflects the quality, the seasoning, and the risk of the book going forward. Obviously, as I said before, we have our pricing actions that we've already implemented to help us in the second half of 2022, but also we have capacity to reprice more should we need to. A change of pace now. If we move on to page 27, just on costs. Our productivity programs and our cost discipline have delivered flat OpEx year-over-year and down on the half.
This has really allowed us to absorb our listing costs year-over-year, our international expansion, as well as additional operating expense investment into the business as well. So a good, strong result for OpEx. I wanna leave you with really two last page. The first page is all about our P&L resilience. The combination of our ability to price for risk, our disciplined underwriting, our high quality, well-seasoned book, and our OpEx discipline really manifests and delivers significant excess spread with a 3% AGR. That excess spread really generates positive cash, either for investment in the business or to return to shareholders, but it also provides a significant buffer in uncertain times. You can see there at 3%, it's a significant multiple of our annual charge-off number, bearing in mind this is also a post-tax ratio.
Lastly, on page 29, our funding and balance sheet strength. Yet another strong half for Latitude, strong diversified funding program. We've got AUD 2 billion of limits, a very well-balanced maturity profile that really allows us to access the market opportunistically. With that maturity profile, we don't have to access the market in the next 12 months should we not choose to. Finally, as I said from the outset, the strong capital base, at 9.2% TER, allowing us, to weather difficult periods, but also giving us a great position, from which to grow. I'll now hand it back to Ahmed Fahour to make any closing comments.
Thank you very much, Paul. Look, the only thing that I just wanted to add to what Paul was saying was that we have spent a lot of time in the last, you know, four or five months also thinking about how do we enhance a number of these customer experiences and also setting up the business for what we consider to be a changing regulatory environment that has emerged over the past few months. We are really proud of how we've positioned the business to be able to anticipate some of those things that are going on.
One good example of that is when we set up the very small buy now, pay later business that we have, which many of you know is less than 1% of our business. When we set that up, we did not run that business without a credit check. Most people thought that, you know, it got around all the regulatory environment, which at that time, it did. Right now, the reality is that the things that we thought was appropriate, which is if this is credit, if a customer's gonna take money, we have a responsibility to at least check that it's the right thing for them to do for even what is a small amount of money. We took it upon ourselves to do that.
Yes, we didn't add as many customers and do as much business as other people did, but we did the right thing. Now we look back and we realize with the change of environment, we can see we did do the right thing, and we never caused any harm for our customers, and we did the right thing by the community in how we did that. That's a reflection of the low, bad, and doubtful debt charges. Our net charges are among the lowest in the world for a consumer finance company due to the quality of the business and the great customer base and the prudent approach that we've taken over the last few years.
I'm so proud of our company in how we are disciplined about those things, and I just wanted to add that as a closing comment. We're very happy to take your questions. Please, follow the instructions of the operator.
Thank you, Mr. Fahour. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you are on a speakerphone, please pick up the handsets to ask your question. Your first question comes from Josh Freeman from Macquarie. Please go ahead.
Hey, guys. Thanks for taking my question. Just to check, you can hear me?
Yes.
Perfect. Just a couple of questions from me. I know in prior results, you guys had sort of been looking for elevated repayment rates to normalize, and it looks, I guess, pretty cyclical looking at the chart in the pack. I guess, at what point are you guys expecting this to normalize now that macro events have changed?
Thank you very much for that question. Yes, we've been waiting for the excess cash in the economy to work its way through. We had hoped at the end of the Delta wave at the end of last year, and remember, it was only November last year, that we had anticipated that the excess cash being doled out in the economy would start to dissipate. Unfortunately, two things have happened in the first half of this year, which is Omicron hit and state governments continued to support consumers and Australians in the economy.
Then secondly, when the extra AUD 750 was supposed to end as of thirtieth of June, the federal government announced that it would extend until September. One of the things that we've attached in the deck that we gave out today is slide 35, and what it shows is a correlation between our repayment rate and the excess household liquidity. You can see it's a perfect correlation. That alone has been driving this excess amount. Now, what is really clear in this document is that it is very, very fast approaching that the excess liquidity is gonna be worked its way through.
By your own modeling, the higher interest rates and the repayments required to meet the higher mortgage rates that are out there, and quite frankly, the higher cost of living, has meant excess cash in the economy is being soaked up. Now, I did some back of the envelope calculations myself, and if you put some assumptions about what's fixed rate, what's variable rate, et cetera, et cetera, it looks like about AUD 2 billion a month is being taken out with each of the rate rises that's announced by the government. Now, you'll have your own models that will do that. Matt Wilson and I have been intellectually debating this number but I think you'll find it's somewhere in the order of AUD 2 billion-plus per month. That is going to really start to kick in.
The average Australian will pay an extra AUD 8,000 per annum to support higher debt repayments associated with the mortgage repayment. Now eventually, probably by the end of this year, that is gonna start to bite and that excess liquidity is gonna disappear, and there should be some normalization into 2023.
Thanks, Ahmed. I won't ask you to send the analysis to me. Maybe I'll give it a stab on my own first.
Yeah. I would like you to do that, and then I'd like you, me, and Matt Wilson to have a little debate with each other on it.
That sounds good. Just second question from me, and it's just with respect to the capital position. You guys have noted a target capital range of between 6%-7%, and you guys currently have a position of 9.2%.
Yes.
You've also delayed the dividend and initiated a DRP. Is it possible for you to reconcile these outcomes for me?
Yeah. It's. Well, there are two different points out there. One is a capital position, and one is when we're paying the dividends and things like that. What we try to do is. Well, our capital is sitting there, obviously way above our range. What that means is that we have an opportunity to grow our receivables without having to use up or draw upon capital from the market or from anybody else. It's a really important point that when we grow, we tip capital into our trust structures, into our warehouses, you know, as our equity to support our funding arrangements. We're sitting there very comfortable with the capital position.
In terms of the dividend, we paid the dividend in October, but what we try to do is to pay the payments and the cash flow management. We introduced this DRP program, and we're trying to match when the trust structures, how they fall between growth and when you put cash into and when you take cash out of it. One of the things that we did, this is getting into an inane amount of detail, but just to give you, just a little bit of insight.
When we were implementing the new Symple platform, just as an example that we have, rather than write the receivables, all the receivables that we had, rather than write them into and put them in on a monthly basis into the trust structures immediately, we actually put them onto the corporate balance sheet. We did that for a little while just to be prudent, to make sure everything works and all the systems work. We did that, and then we're now gonna put them back into the trust structure. We just have a slight timing issue in the way all of that flows work.
By and large, you should not interpret that anything other than just literally a timing issue around the corporate capital versus the trust capital that we have in place, where we feel we're in a really good position and we're really looking forward to it because we've got actually excess capital, and I'm really don't wanna be sitting there with 9%. Now, partly it's, you know, how does the economy shape up? Actually, what I'm really excited about is that we can grow, and we don't need to go back to the market for capital, whereas I think you'll find others are not in that comfortable position that we're in.
Okay, thanks. I guess just to follow up, I'm a little bit confused because isn't the DRP sort of just a bit of a drip feed of you guys going back to the market asking for capital?
Well, DRP, there's no discount, there's no nothing there. It's just to give. What we're really worried about with the, you know, in terms of some of the feedback that we get is our stock is illiquid. A lot of our investors have said, "You know, liquidity is the single biggest issue. There isn't enough shares if I wanna buy stock." There are some of our shareholders, which is on the record, who do wish to actually buy more shares, and they're finding it really difficult to do that. What we've done is we've made it available to everybody so that we don't play any differentiated game because I don't want the shareholders, those that are excited about buying our stock to take away any more liquidity that we already have. Does that make sense to you?
I'm happy after this phone call for Matt and us to give you more information about that.
Oh, the-
I don't anticipate it's gonna be a big number, by the way.
Yeah. No, the liquidity point makes sense. Thanks. Thanks for that.
Okay. Fantastic. No problems.
Thank you. Your next question comes from Simon Fitzgerald from Jefferies. Please go ahead.
Hello. Thank you for taking my questions. Just the first one here, obviously, net charge-offs historically low. You've mentioned also the fact that your quality of your customer is improving in the last two halves. Then also, obviously, the 90-day past due, very good performance there as well. I'm just interested to know whether you're looking at sort of fine-tuning the approval process potentially to sort of stimulate a bit more volume given those trends, or do you expect those 90 days to sort of track back towards historical levels?
Yeah. Look, that's a great question. You're absolutely right. What's the use of having a pristine balance sheet if you don't actually do something with it? You know, it's back to that point. You know, we're sitting there with excess capital. We're sitting at 9%. Got a great balance sheet. We've got a beautiful customer profile, and we wanna grow. Actually, bad debt charges being so low gives you huge headroom for us to grow into. With the new Symple platform that we've put in place, what we've done is we've been doing some refining of our risk grades, and we've gone from 9 risk grades to 27, Paul. I think 27 risk grades.
We've really got our 27 different points of where we can calculate the return on equity that we would make per customer and get the pricing positions correct. There is actually an emerging opportunity right now, particularly around CR3s, not so much the 4s, but CR3s, where there is huge potential for us because it's very attractively priced in terms of how we do it to take advantage and to be out there in the marketplace when others we know other non-bank lenders are really struggling due to their funding, their cost, their liquidity and their capital position. We're in a position to provide services on the new Symple platform at the right pricing to position that.
This is definitely, I can assure you, a huge opportunity subject to the economy holding up, which we think it will, in 2023, and we will be beneficiaries of that. Paul, did you wanna just add a comment about that?
Just to chip in as well, Simon, it's a great question. Just to let you know, we're constantly refining those underwriting settings. At the moment, we're running champion challenges on the limit assignments for our personal loans. The gate's always been open. We've always had those risk appetites available at CR2 and CR3. One way to drive some more of those assets onto the book is via our limit strategy. We'll hold a cohort that we call a champion out and compare it with a challenger cohort, whereby we'll issue higher limits to that. We'll then see how those perform vintaged over time. Then if that performs better on a risk-adjusted basis, we'll implement that into the main scorecard.
We're constantly doing that every few months to make sure that we're refining our settings to make sure we optimize it on a risk-adjusted basis.
Okay, that's helpful. One other question. You mentioned obviously the price increases that came through. I think you mentioned that you started those in April. I'd be interested to know just in terms of the volume impacts that, you know, may have came through in just price elasticity of just those recent months where the price changes came through, please.
Yeah. Look, it's fair to say that we led the market in April and particularly in May. There's no question that our volume was impacted in the month of June because we were focused on the profitability as opposed to just chasing volume. We were not prepared to not properly price for risk and funding costs. We knew it'll come back, and then June was not a great month. July, it started to stabilize. The first two weeks of August, it looks like we're back fully on track, and the price has been absorbed. It looks like the market is, you know, others are responding, it seems, to the cost of funds rising.
You know, what others do, they do. We are focused on profitability. We obviously want it to grow. We're focused on recovering our costs, and putting the best deal possible. I have to say we're breathing a sigh of relief to see that in the first couple of weeks of August that normalization has occurred. There was a bit of an impact in that second quarter.
Okay. Thank you for that.
Thank you. Your next question comes from James Ellis from Bank of America. Please go ahead.
Good morning. Thanks very much for the opportunity to ask questions. Just I've got two questions on costs, and then secondly, you-
How many calls?
In relation to operating costs, just look, well done on a, you know, a good cost performance in the half. Just wondering if there's much more to go there in terms of reducing the absolute cost base. There is a reference to full synergy benefits from the Symple acquisition. Then in terms of Ahmed Fahour, your announcement of your retirement today, look, congratulations on how far you've taken, you know, this business in your time and see that's well done. Just want to get your comments on why you thought, you know, now was a good time to make that announcement, particularly as it comes to sort of a handful of weeks after the, you know, the announcement on the options being pushed out by 18 months.
Questions on costs and the retirement announcement time.
Sure. Well, James, I'd hope I could get through this whole half year results without even talking about that. I do appreciate your very kind words, and thank you. It's 4 years or so, and I think you know very well, like all of you know very well, you know, COVID was a real challenge. You know, the working from home and running a company and trying to keep everything strong and safe during this very challenging period. You know, it does take its toll on people, and it felt like we were experiencing 5 years in a matter of 18 months. Just finishing this point before I come to your cost question.
Look, the reality is that the business is positioned brilliantly for the growth opportunities in the next 3-5 years. There are some really important organic and, you know, to some extent, inorganic opportunities that are being presented to the company. Those important decisions that the company will need to make in the coming year or 2 are ones that will positively affect this company for many years to come.
The way I was thinking about it, and in discussing it with the board chairman and discussing it with the rest of the board, is that it's important, it's time, and that, you know, you wanna be able to give somebody else a go to make and to lead this company and to work with the implementation for many, many years to come. That's just not me. I've got other things I wanna do with my life. I'm really committed for whatever, you know, energy that I've got left to transition from being a day-to-day CEO to actually working on opportunities that have an impact on Australia as a whole and on community, and they're things that are just important to me on a personal and private basis.
The options agreement had nothing to do with the company, between me and the company. It was between me and the shareholders, and that was a market transaction. The first options that I bought over a year ago, I paid for those out of my own pocket. So they're options that I paid for, and I invested in the company. That's all it is. What I've done now is just reinvest in the company again because I actually believe in its future. It's not about me. I'm not the company. What I am is the current temporary custodian as a CEO, along with the board.
I actually believe in this company, and I believe in its potential, and I believe in its future, which is why I was prepared to invest my own money into it, not just a year and a half ago in the lead-up to an IPO, but actually to do it now gives you an indication, even though I was contemplating in the back of my mind, I knew retirement was gonna come at some stage in 2023. I've always felt that was five years would be long enough for a CEO. And that's why I did it. I invest in this company just like you're all investors in this company, and it is my expectation, without me to be able to continue to grow and to prosper.
Now, to go back to your first question and not to indulge too much in my own portfolio is to go back to your really important question about costs of this company. You know very well, James, that we have worked really hard on productivity, cost management, and so forth, and we've right-sized the company with, I would argue, a really lean and effective cost structure. What my ambition is, and as you would've seen in the previous question, it's a little bit less about me in the coming year.
Certainly, the ambition that we've given ourselves is to hold that cost structure as flat as possible while we grow the business and benefit from the increasing volume and increasing productivity and increasing volume and revenue, which will then enable it to go to the bottom line much faster with that lean cost structure. What we wanna do is if we can hold together the costs, the bad and doubtful debts, the net charge-offs, and all these other variables, and then the only thing that goes up is revenue, that's gonna drop to the bottom line really rapidly and really, really quickly.
Thank you.
All right. Thanks very much. Next question.
The next question comes from Victor German from Macquarie. Please go ahead.
Thank you very much. I was hoping to follow up on two points that were made during the presentation in your section, Ahmed Fahour. When you talked about clearly, you know, unusual times around last couple of years, which resulted in that revenue pressures that you've seen, which makes a lot of sense. I guess all of those times have created an opportunity for you to see very low impairment charges as well. I'm just really interested in your thoughts around if we do see normalization, how that plays out in terms of the credit quality outlook, and whether to what extent reductions in your provisions is a proven measure at this point in the cycle.
The second question, on dividend, you talked about very attractive dividend yield, which obviously at current levels, as you said, looks very attractive and unusual. If we were to normalize BDD charges to some extent and reduce those provisions, the dividend ultimately or the dividend at current levels is above your cash EPS. To what extent do you think that dividend is actually sustainable as conditions normalize? Thank you.
Yeah. Hey, Victor, thanks very much and good to hear from you. Look, this is a very sophisticated question and on a short phone call like this, you know, to give it the respect that it needs, it's a long and you know, deep dive. I know that we're gonna have a meeting ultimately with you guys and go into intimate detail as we did with other analysts and so forth and so on. I'll try to give a macro answer to the two points that you make and see if this goes some way to satisfying your point. Yes, COVID was an unusual time period in the sense that it led to certain outcomes that drove through this excess cash.
It drove down our receivables, which then lowered our revenue because those customers weren't taking out loans from us because they paid down their debt. What was interesting is when we did do volume, because we still grew the business by, you know, something in the order of AUD 3.7 billion of volume, you know, over AUD 7.5 billion annualized, the volume that we did, which was a very healthy amount of volume that we were writing. What Paul Varro said, and I was trying to indicate, is we were writing CR ones and twos at a much greater pace than we had ever written before.
That, Victor, is a really important difference point, which is you would know very well that the provision that you need to put aside or the charge-offs ultimately that you get from a CR1 and 2, the probability of default, you know, for a CR1 is less than 1%. Therefore, if you keep writing these CR1s, your bad and doubtful debt charge will go down, not just because of the macro economy, but because of that. Now interestingly, to borrow a little bit into your second question, our internal models for the customer a pattern that we're seeing and the business that we're writing as opposed to the ones that sat on your book and charged off from years ago.
All that business we wrote during COVID, of which 70% was CR1s and CR2s, the model will tell you that we should take out more provisions, like we should actually it should be lower. We've got overlays on top of it to be conservative, to for want of a better word. Paul Varro is probably, you know, closing his eyes. He doesn't, you know, necessarily may communicate that in a different way. The bottom line is actually our provisions could have been actually released even potentially even more if we had not done overlays from a pure model point of view. The fundamental driver of that is the customers that we have today versus what we had in 2019. Now, to go into your second question, which is this sustainable?
It absolutely is sustainable because while we are entering an uncomfortable economic environment, potentially with house price, some people say house prices might come down a little bit, you know, consumers might be, you know, potentially in trouble. You know very well, Victor German, and every analyst on this call knows very well, there is one key factor that drives all of this, and that is unemployment. We all know, we've all been around for decades and decades. Well, maybe you're not that old as me, but we've been around long enough to know when somebody has a job, your bad and doubtful debt is not going to, you know, rise that rapidly. We have currently 3.5% unemployment in this country. We haven't seen that since the 1960s. It's unprecedented.
We have people way ahead in terms of paying down their mortgage debt, way ahead of where they should've been, and I think we have a strong, resilient economy. The good news for Latitude is, with the way interest rates are, many of the non-bank competitors are unable to have the sophisticated operational management and funding arrangements that we have, and we're able to continue to provide, as I was saying earlier, to CR, not just one and twos, but to the CR threes, that middle Australia group with access to funding, access to loans. Therefore, as that picks up in 2023, but particularly towards the second half of 2023 and all of 2024, we are going to be major beneficiaries.
Yes, bad and doubtful debt charge might go up a little bit, but we have 300 basis points of excess spread, which is defined as our cash net profit divided by average gross receivables. It's on one of the slides. We call it ROGA. The ROGA on slide 28. If you took that number, that tells you we have 300 basis points over and above the 2.5% net charge-off that we have today. We could double and half again, 150% higher, and we'd still be making money. Very few consumer finance companies in the world will be able to tell you that. Next question, please.
Thank you. Your next question comes from Brett Le Mesurier from Perpetual. Please go ahead.
Thanks very much. I'm just looking at the cost of the securitization on your average balance sheet. It looks like historically it's been around 2.5% over bills.
Yes.
Now, given that bills are up, you know, to around 2% at the moment, the cost of your securitization funding is around 4.5% at the moment. Would that be correct?
Yep. Yes.
Okay. You talked about the improved pricing on your receivables. Has that gone up by a similar amount? Because when I look at the change in the average rate you've earned, it actually went down from second half 2021 to first half 2022.
Yes.
Is that the cost of funding that's being depressed?
By the improved credit quality that you're raising?
Yes and yes. When you reprice, you're only repricing on the front book, and half of our book is already locked in. Half the book is your fixed rate portfolio. That's not affected. The remainder is your variable rate portfolio, which is about AUD three and a half billion. When you reprice, you reprice the front book, you're not repricing the back book. Yeah.
Sure.
Therefore, the repricing, even though the rate increase that we put into the market, which varies depending upon the product from somewhere between 100-300 basis points. We reprice by between 100-300 basis points, and you've identified the 200 basis points increase in the cost of funds, right? We've picked up that on the front book. But as you can tell, if your book is about 3 years in duration, roughly 3 years in duration, it just takes time for the front book new volume to be able to get the total portfolio to match the front book, the front book repricing with the cost of funds increase. Does that make sense in the answer to that?
Absolutely.
There is a timing difference there, which is what you're really referring to, and that's why you just need a bit of time, and it won't even come close to catch up in the second half, but it will start to catch up in 2023, and it'll be fully baked in in 2024.
Okay. Thanks very much.
Your next question comes from Jason Shao from Macquarie. Please go ahead.
Hi. Just checking you can hear me.
Yes, Jason.
Yeah. Hi. How are you going? Just got a question around buy now, pay later. I appreciate your long history in dealing with personal credit. But given buy now, pay later is a relatively new product, how do you see the credit outlook for buy now, pay later, especially given where other buy now, pure-play buy now, pay later is trading? Seems like the market's quite concerned around the credit environment around that. Just keen to hear your thoughts on the buy now, pay later credit aspect. Along with that, just also given where they're trading at the moment, do you see any inorganic opportunities for BNPL in the sector? Thanks.
Thank you for that. I mean, buy now, pay later is less than 1% of our business. You know, what we see in our own portfolio, and Matt Wilson just indicated to me I should be more precise. Rather than say less than 1%, he said the number is 0.2%. So just to give it to you very specifically, what he's really trying to tell us all is, we don't really know anything about buy now, pay later, because it's an insignificant part of our business. But clearly, we see what is operating in the market. You know, we're in the long-term sales finance, point of sale and also online installments business and personal loans and so forth.
We do observe that there's no question that the buy now, pay later, especially the small ticket ones, what you see right now, you get an instant feedback. Because they're on such a short duration, they don't really sit on your balance sheet for very long. It's, you know, 8, 10 weeks at most. Straight away, what you write and what you lose becomes very apparent. It is very, very clear it is a challenged environment. Why is this a challenged environment? Because a lot of those buy now, pay later players made a fundamental mistake when they started this business, you know, when they started doing this business 5 years ago. Instead of treating it as credit, which is what we did when we did our small amount, they treated it as marketing.
When you treat credit as marketing and you don't do a credit assessment, and you don't think about how people are gonna repay you, it's gonna come and bite you in the bum. Our discipline in just continuing the credit discipline, while we weren't beneficiaries of the huge, you know, hoo-ha that occurred in 2020 and 2021, where, you know, some companies went crazy with their share prices and so forth, we didn't benefit from any of that. We certainly shouldn't be penalized for any of the consequences of their behavior.
Thanks.
Thank you.
There are no further questions at this time. I'll now hand back to Mr. Fahour for closing remarks.
Okay. Well, thank you very much, everybody. I'm sorry we went over 7 minutes, but we wanted to take as many of these questions as we can. It's been an absolute privilege to take you through all of this. I'm really proud of our company. We've got a lot of work to do this second half. You know, the challenge in the economy, inflation and so forth is really quite challenging. Interest rates are gonna continue to rise right throughout the rest of this year, and it looks like there's another 100 basis points coming through. We're gonna keep adjusting our business. We're gonna keep pricing right. We're focused on profitability, and we're gonna position this business for continued growth in 2023 and 2024. Thank you all very much.
That does conclude our conference for today. Thank you for participating. You may now disconnect.