Thank you for standing by. Welcome to the MyState Limited H1 FY23 conference call. All participants are in a listen only mode. There'll be a presentation followed by a question and answer session. If you wish to ask a question via the phone, you will need to press star key followed by the 1 on your telephone keypad. I would now like to hand the conference over to Mr. Brett Morgan, CEO. Please, go ahead.
Thanks, Rachel. Good afternoon, everyone. Thanks for joining us to discuss MyState's results for the first half of FY 2023. I'm Brett Morgan, MyState's Managing Director and CEO. With me is Gary Dickson, our CFO. Today's investor presentation was lodged with the ASX earlier this morning and is also available on our website.
I'll provide an overview for the half before Gary takes you through the financial results in detail, including our performance across lending, deposits, and wealth management divisions. I'll cover our outlook and provide a further update on our medium-term targets, which I first shared at our AGM last year. We welcome questions at the end of the presentation. Before we turn to the slide pack, I'm pleased to say that 18 months into our 2025 growth strategy, we are on target.
Our investment in marketing and distribution is delivering record levels of customer growth. Our customer base has grown in Tasmania and across the eastern seaboard states of Victoria, New South Wales, and Queensland. We are taking market share across our key portfolios of home lending and savings. Over the past 18 months, our home loan book has grown 39% to AUD 7.6 billion, with nearly two-thirds of our home loan customers now from outside of our home state.
Before I go further into the numbers, it's important to understand the reason for our performance, and that's our people and our purpose. Turning to slide four. Last year, our team told us that our purpose wasn't resonating. We knew something had to change, so we asked our team to work together to develop a new purpose.
Our purpose, developed by our team, was launched internally in December. It is: We're a Tasmanian-based financial services company with big ambitions. We make managing your money easy to help you achieve what matters most. We invest in our people and communities. Together we can thrive. We are together for the better. Whilst our new purpose was only launched a couple of months ago, it's already helped guide a number of our decisions.
We believe that embedding our purpose into our business every day will deliver real benefits to our staff, customers, and investors. Turning to slide five. MyState provides retail banking, trustee, and funds management products and services to more than 170,000 Australians through its two brands, MyState Bank and TPT Wealth.
Our award-winning products and services are used by customers across all life stages, from their first transaction account to savings or investing, buying a home, borrowing for commercial purposes, right through to estate planning and administering trusts. Turning to slide 6. Now to the numbers. As you can see, MyState performs strongly across key metrics. We've delivered a record net profit after tax of AUD 20.1 million, up 20.7%.
We've delivered strong above system growth in deposits and the second fastest growing home loan book in Australian banking. Home lending was up 10.5% or 4.3 times system growth. Deposits were up 13.5% to AUD 6.3 billion. We grew household deposits at 2.6 times system.
Our return on equity has increased to 9.2%, up 113 basis points. We achieved this more efficiently with a sharply lower cost-to-income ratio, which is reduced by 558 basis points to 63.2%. We saw a strong uplift in new customers with 14 and a half thousand new to bank customers, a 54% increase on the previous corresponding period. All of this with one of the best Net Promoter Scores in the industry at +46.
These results demonstrate that our 2025 growth strategy is working. Turning to slide 7. An important aspect of our strategy is growing our market share, both here in Tasmania and also across the eastern seaboard.
As you can see, we've had significant gains in every state along the eastern seaboard, with Victoria leading the pack on every measure, home loans, deposits, and new customer growth. Melbourne's been a key market for us and is a key market for us, and we have made a considered investment into that market. When coupled with our competitive products and award-winning service, it's really boosted our market share. Gary will now take you through the financials in detail.
Thanks, Brett. Good afternoon, everyone. Slide 9 contains a snapshot of the key financial metrics of the business. As you can see, the results for the first half are very positive. Core earnings of AUD 30.3 million were up 36.7%, while net profit after tax jumped 20.7%. As Brett mentioned, the highest half-year profit on record for the group. With strong top line revenue growth of 16% outstripping cost growth of 6.6%, the cost-to-income ratio fell sharply by 558 basis points.
Our investment in marketing and distribution is now clearly driving MyState's growth momentum and improving our operating leverage. In terms of MyState's balance sheet, total capital and return on equity, or ROE, moves positively during the half.
At 9.2%, ROE compares favorably to our regional bank peers and is on track to meet our target of cumulative growth of 30% over the 3 financial years to 2025. The board has declared an interim dividend of AUD 0.115 per share, which is in line with the 2022 final dividend and equivalent to a payout ratio of 62.5% of after-tax earnings.
This decision is in line with our current dividend guidance range and strikes the right balance between pursuing growth while continuing to deliver shareholder returns via dividends. Slide 10 shows the key drivers of our highest half-year net profit after tax result on record. Net interest income increased 21.3%, primarily due to a larger average balance sheet.
Other banking income declined 7.1%, reflecting lower loan fee income, with higher switching fees seen in the prior period as customers took advantage of lower fixed rate loans. The small decline in wealth management income was driven by lower management fees, partly offset by higher trustee services income. Operating costs increased 6.6%, which I'll cover in more detail in a moment.
The prior period benefited from a revaluation gain on a property held in Rockhampton, which was subsequently sold in early 2022, and a write back of the collective loan loss provision from COVID high levels. Slide 11 shows that total operating expenses increased 6.6%, driven by higher personnel costs and other expenses that were primarily volume related.
Personnel costs were higher due to salary increases and a small increase in FTE, the latter reflecting the full period impact of the investment in growth-related roles, which commenced in FY 2022. The small uplift in marketing spend has been directed to customer acquisition focused activity, which has seen a 54% increase in new to bank customers, approximately three quarters of which have come from the eastern seaboard.
The uplift in other expenses was primarily volume driven and includes lending related costs such as interest rate change notifications and payment system costs following the growth in customer deposits. Turning to MyState Bank specifically, and slide 13, relative to the second half of FY 2022, NIM improved 14 basis points, reflecting the positive leverage to a rising rate environment, partly offset by competitive pricing pressure.
Exit NIM in December 2022 was below average NIM for the half.
While we expect NIM will remain under pressure, the dynamic of funding costs running significantly ahead of the ability to reprice assets is expected to moderate moving forward. We will continue to carefully manage activity to optimize growth and returns. Turning to slide 14. MyState recorded strong home loan book growth of 10.5% or over 4.3 times system growth. The home loan portfolio has now grown 39% since June 2021 to AUD 7.6 billion.
There was a record AUD 1.6 billion of settlements in the half, testament to the strength of our relationships with key brokers and our strong customer service, with competitive home loan approval times reflecting the investment we have made in underwriting capacity.
While runoff remains a sector-wide challenge, both discharge activity and pay down levels were lower, with the overall runoff rate decreasing from 35% to 28% in the current half. Cashback incentives for refinances remain a feature of the market. RBA system housing growth began to moderate in the later months of 2022. MyState experienced a resulting slowdown in home loan application flow towards the end of the calendar year.
Looking forward, we are targeting to grow the home loan book at a multiple of at least two times system. Turning to slide 15. Maintaining high credit quality remains a key focus and underpins our balance sheet strength. Our focus is on low risk owner-occupied lending.
Loans with an LVR of less than 80% make up 76% of the total book, and the growth in 90% plus LVR loans over the past 3 years is primarily attributable to our ongoing support of the federal government backed First Home Loan Deposit Scheme. Scheme loans now comprise approximately 16% of the book and account for 82% of loans, with an LVR greater than 90%.
The charts on the right show a small uptick in 30 plus and 90 plus day arrears, but these continue to be below industry benchmarks. On slide 16, the chart on the top right highlights that the total collective provision has increased, consistent with the modest increase in the level of arrears and the rising interest rate environment.
At 31 December, the key assumptions used to determine the forward-looking economic overlay were revised to incorporate the latest observed economic data, including a higher official cash rate, stable levels of employment, and house price falls across both FY 2023 and FY 2024. The probability of a moderate recession scenario was increased from 30% at June to 40% at December. Key assumptions in the relevant scenario weighting to set out in the appendix on slide 33.
While arrears levels remain low, the flow-on effect of increases in the cash rate and any future increases are expected to become more visible over the coming months. On that basis, and in line with our stated assumptions, the forward-looking economic overlay was increased. Provision coverage ratios are shown in the chart bottom left, ratios are consistent with pre-COVID levels in June 2019.
Slide 17 shows that customer deposits continue to represent 73% of our funding mix, with the flagship Bonus Saver account growing strongly during the half and customers continuing to move to Term Deposits in response to the rising rate environment. In line with our retail deposit led growth strategy, MyState has grown at a multiple of system and our aim is to be fair to both borrowers and savers.
As an example, we've increased the rate on our Bonus Saver account by the same amount as the change in the official cash rate. The issue of senior unsecured medium-term notes in October brought further tenor to the pool of wholesale funding. Finally, in December, MyState issued its first public RMBS transaction since 2019. Turning to the next slide 18.
MyState's total capital ratio increased by 173 basis points, reflecting organic capital generation via retained earnings, the inaugural issue of Additional Tier 1 capital in August 2022, and the capital relief term RMBS transaction completed in December, partly offset by growth in risk-weighted assets and capitalized origination costs.
Slide 19 presents a capital walk based on the December 2022 capital position to show, on a pro forma basis, MyState's capital position under APRA's revised capital management framework, which was effective from the first of January. The bank expects the total capital ratio to increase by approximately 130 basis points following the application of the new credit risk weights under the revised framework and the new methodology to calculate the allowance for operational risk.
The countercyclical capital buffer increased by 1% on the same date. Moving to wealth management on slide 21.
TPT Wealth continues to deliver a stable source of operating income to the group. Operating income was steady on the prior period, driven by an increase in trustee services related revenue, offset by lower funds management fee income. On slide 22, the pie charts show the current and target allocation to direct mortgages across our 3 income funds.
The current allocation of 44% provides significant opportunity for the locally based commercial lending team to drive a strong loan origination pipeline in the short to medium term. The uplift in direct lending and rising interest rates have been the key drivers of increased returns for investors. Higher investor returns lead to an improved competitive position in the market and will help drive FUM acquisition moving forward. I'll now hand you back to Brett to talk about our outlook.
Thanks, Gary. I'll now take you through our strategy and outlook. MyState is well placed to continue to benefit from the willingness of Australians to switch banks. As you've heard, execution of our 2025 growth strategy has delivered increased market share with significant gains in Tasmania and every state along the Australian seaboard, including Victoria, New South Wales, and Queensland. Executing our focus strategy sets us in good stead to deliver on our targets.
On slide 24, at MyState, our ESG focus is on the six key areas outlined on the slide. I'm pleased to say that during the last six months, we've made some good progress, including the release of our first TCFD reporting. We've also commenced the process of measuring our Scope 3 financed emissions to understand our total greenhouse gas emission footprint.
We have supported flood-impacted customers in New South Wales and Queensland, and have been investing further into scam detection and sharing steps with customers on protecting themselves from scams. We know that progress on ESG is a journey. We are proud to be taking steps to positively impact our customers and the wider stakeholder groups with whom we work. Turning to slide 25. At our AGM last year, I outlined five targets.
As you can see from the slide, we're tracking well against them. On bank lending, our growth is 4.3x system, well above our target of more than 2x system growth. On funding composition, our customer deposits were 73%. Again, well above our target of more than 65%.
On earnings per share, we're up 8.3 over the 5-year average and on track for our target of 30% cumulative growth over three years. Looking at operating efficiency, we're meeting the short-term target cost-to-income ratio of 63%. We delivered a return on equity of 9.2% annualized. We are on track to deliver a cumulative return of 30% over three years. Turning to the next slide and to wrap it up, MyState has had a strong first half.
We've posted a record profit, revenue is up 16% and cost to 6.6%. We've delivered above-system growth in deposits and home lending. Our market share has grown significantly with increases across Victoria, New South Wales, Queensland, and Tasmania. Looking back, you can see that our 2025 growth strategy is working.
When we look ahead, our growth strategy gives us a very clear pathway to deliver the benefits that come with continuing to scale our business. Gary and I will now answer any questions you may have. Over to you, Rachel.
Thank you. If you wish to ask a question, please press star then one on your telephone keypad. If you wish to cancel your request, please press star two. If you're using a speakerphone, please pick up the handset to ask your questions. Your first question comes from Nathan Zaia with Morningstar. Please go ahead.
Afternoon, Brett and Gary. I just had a couple of questions. The first one was on the NIM. Down in the second quarter, and you're saying it's down again, or the exit NIM's down again, on the first half average. Can you just walk through some of the key drivers behind that trajectory over the half?
Yeah, sure. Thanks, Nathan. I mean, I think what's happening with our NIM sort of reflects the fact that, you know, we are a small player, and we need to be competitive on both sides of the balance sheet, both from a home lending perspective. Obviously growing the home loan book at a multiple of system, we're looking to fund the majority of that book growth through retail deposits.
As I mentioned, one of the things we have done is we have passed on the increases in the cash rate to our savings-based customers in a more timely fashion than what others may have.
Obviously, in the sort of second half of last calendar year, we did see a widening in wholesale credit margins, largely in response to the macro macroeconomic uncertainty and the narrative around rising inflation. Of course, the geopolitical risk as well. We did also see, as you can see in one of the slides, customers moving to TDs, which have been offering higher rates. In some respects, we've seen our funding costs on that side, run ahead of our ability to reprice assets.
I think from our perspective the key is that we're continuing to grow net interest income. Obviously that has a flow on effect to the increases that you've seen in ROE and EPS.
Targeting 2 times system still, as long as you're comfortable with the total Net Interest Income growth, then not as worried about what it does to margins?
Oh, look, we're...
That's sort of the way to think about it?
Yeah. I mean, we're constantly sort of managing that volume margin trade-off. You know, as we look forward, there's clearly lots of moving parts and the way that will impact NIMs, hard to estimate with a high degree of sort of precision. Certainly, you know, there's obviously the future potential increases in the cash rate. We will see some tailwind from fixed rate borrowers moving to variable rate loans.
Wholesale funding markets this calendar year have certainly improved relative to the second half of last year. What I can say is NIM was pretty much flat in the month of January.
Okay. Just the only other question I had, I think you have more of your fixed loan customers rolling off later, just given the timing of your loan growth. Of the fixed loans that have matured so far, can you comment on what sort of percentage have stuck with or are still MyState customers?
Yeah, sure. We've got the fixed rate maturity schedule on slide 34. What we've seen to date is effectively 80% of our customers are staying with us. Of those that stay with us, around 5% are refixing and 95% are moving to variable rate.
Yeah.
Yeah. Just to add to that, Nathan, it's Brett here. We're incredibly conscious of, you know, customers that went in at 2% and got a great deal and are coming out at 5%. We've got a program in place where we're calling every customer well before the rate expires, talking them through the options and holding their hand through the process.
We've actually invested a little bit of, we invest some capability and resources into the maturing fixed rate book and the customers and, yeah, really making sure they have a good experience through that. We think that's a key component of both retaining and making sure, you know, they get a good experience on the way through.
Okay. Thanks for that, Brett. Can I just follow up on that as well? I'm assuming it's a small number, but do you have any sense of how many customers that are rolling out of their fixed would fail current serviceability test?
When these loans were written, they were written, you know, they were assessed at based on the current rate. We assessed them with, at the prevailing variable rate with a 3% buffer back in the day. And a lot's moved in their life, you know, cost of living is up, but also incomes are broadly up, and there's all sorts of things moving. They wouldn't fail based on their, you know, when we assessed them originally. Now we'd be reassessing with another 3% buffer.
We haven't given the, somewhat complexity, the full reassessment you need to do to assess it. When we talk with customers, you know, any customer who's having challenges, we just talk through with them, you know, how we can support them on the way through, like any customer.
In the most part, I mean, the other thing I can share is that all those customers that have gone from fixed so far and matured, the arrears, rates are definitely no higher than the portfolio. It's a performing. They're performing. A lot of customers that went on to those fixed rates are also, they just got a great deal.
Yeah.
That's it.
Okay. Thank you.
Once again, if you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. The next question comes from Alastair Hunter with Ord Minnett. Please go ahead.
Thank you very much. Can I just ask in regards to your 2025 sort of growth strategy? Obviously, when that was set, the macro environment and interest rate credit growth outlooks were quite different. In terms of how you're sort of looking forward from today and what sort of setting adjustments in terms of how you're positioning the business have changed from what you were looking at a year ago to now?
Yeah. When we set the strategy right, I mean, the market was going a bit faster and the world was a touch rosier. What you'll see on slide 14. There's a couple of things I'll point to. On slide 14, you'll see that, you know, the market's slowed, and we've slowed down a little bit too, so we're not, definitely not chasing high levels of growth for growth's sake. We shared some targeting at the AGM around that.
Our aspiration is definitely grow at double market for ourselves, so we continue to, you know, get the leverage and the benefit of operating scale. The key for us is to scale up and get that real benefit, which you've seen through the positive jaws the last 6 months to continue to scale our business given our fixed cost base.
Firstly, you'll see that our growth rate has come off a bit as the market has slowed. We've made some adjustments to credit policy and tightened a little bit. We never loosened credit policy at all to support the growth. We invested in marketing and distribution. We have looked at our credit policies and made a couple of adjustments on the tightening side given the macro environment. At its heart, our target is more than 2 times system.
We have been running at more than 4 times system, but as I said, we're comfortable in the business that we can run at 2 times and deliver the value.
Thank you.
At least.
If I use your sort of 30% ROE cumulative 3 years, it's okay, so 10% ROE is sort of the ambition per annum. In terms of where the sort of front book margins are contracting to within the housing book and noting you're obviously targeting that lower LVR area that from the 1st of January has had some reduced capital needs for this competitive base, are you comfortable that, you know, a 10% ROE on a new sub 80% LVR mortgage is achievable or achievable?
So-
At, you know, the sort of volumes that you've been generating over the last few halves?
Yeah. I mean, in isolate, I mean, margins go up and down over time. That's the first point. It's about, you know, funding mix and all those sorts of things. I think the other part with our business is we've got the retail banking piece, MyState Bank. We've also got TPT Wealth, which we've got a funds business and a trustee business. As we aim to scale that side of the business up, that delivers strong ROE as well.
It's balancing between the two. We're conscious of the current returns, I guess, on mortgages and we don't stand ourselves out to be number one, two, or three on pricing either. We're not chasing volume for volume's sake.
We're conscious, right at the moment, at this moment, the returns are a bit below. Of course that changes over time as the market moves. We've seen that over the long term.
I think the only other thing I'd add, Alastair, is that there's the margin component obviously to what's driving ROE, there's also the operating leverage component. That's where, you know, we see the real sort of opportunities, which is that ability to effectively drive the volume using the same sort of level of core infrastructure and core cost base.
Yep. No, that makes sense. One final question just on capital levels with the pro forma numbers for January, the 11.15 CET1. Is there a level that you can talk to in terms of what the board has sort of approved as your sort of target range on the new adjusted basis?
Yeah. I mean.
Expected to sit.
Yeah, I mean, I think the sort of target range would be, sort of around the 11 to 11.50. I mean, I'd probably make a couple of observations from a capital perspective. We are generating more of our capital needs organically. You know, obviously, the dividend has been set at the sort of lower end of the payout range. We're trying to strike that balance between providing returns to shareholders via dividends and also reinvesting in the business and getting share price appreciation.
We've got quite a bit of flexibility from a capital perspective through the sort of capital relief securitization program that we run.
Thank you.
Once again, if you wish to ask a question, please press star 1 on your telephone and wait for your name to be announced. We'll just pause if there's any more questions to enter the queue. There are no further questions at this time. I'll now hand back to Brett for closing remarks.
Yeah. Thanks, Rachel. Thanks everyone for joining the call today, and we look forward to catching up with, some of you over the next month. Thanks a lot. Cheers.