Thank you for standing by, and welcome to the MyState Limited 1H 2024 results conference call. All participants are in listen-only mode. There will be a presentation followed by a 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. Brett Morgan, Chief Executive Officer. Please go ahead.
Thanks, Kayleigh, and good morning, everyone. Thanks for joining us for MyState's first half 2024 results. I'm Brett Morgan, MyState's Managing Director and CEO. With me is Gary Dickson, our CFO. Today's investor presentation was launched with the ASX earlier this morning and is also available on our website. I'll provide an overview for the first half of FY 2024 before Gary takes you through the financial results in detail, including performance across our lending, deposit, and wealth management divisions. I'll then provide an update on our key priorities for the second half of FY 2024, including progress on our guidance. We welcome questions at the end of the presentation. Turning to slide four. Since May 2022, Australia has experienced the fastest rise in interest rates and inflation in more than 30 years.
The rapidly changing environment has impacted customers and the economy, and as a business, we've moved quickly to adapt.
While the operating environment has changed, our strategic ambition to profitably grow our share of home lending, household deposits, and funds under management has not. I am sure everyone on the call is aware that there has been significant competition across home lending and deposit markets, which has translated into industry-wide pressure on net interest margin, or NIM. As a consequence, we have temporarily targeted a lower rate of lending growth relative to the strong growth we achieved in FY 2022 and FY 2023. In other words, we took the decision to target lending growth at market for FY 2024 and remain ready to accelerate as conditions become more favorable. In a high-inflationary environment, our focus remains on extracting operating efficiencies and managing expenses while continuing to invest in key strategic priorities. It is well documented that many Australians are feeling the impact of higher costs of living.
Despite the pressures, pleasingly, credit quality remains sound. Our capital position has strengthened over the half, and we have further diversified our funding base. MyState ends the first half of FY 2024 in a good position, and the board has declared a stable, fully franked interim dividend of AUD 0.015 per share, representing a payout ratio of 72.6%. Turning to slide five. Since launching our growth strategy in mid-2021, we have grown our home loan portfolio by 45% and our customer deposits by 37%. Increasing the scale of the bank and managing costs has resulted in a 20% improvement in our operating efficiency. As I noted earlier, the operating environment has changed, and I'd like to share in more detail of how we're responding. Heightened competition has led us to target a lower rate of home lending growth in the short term.
While applications and settlements were lower in the first half, we continued to invest in retention activities, including contacting every customer coming to the end of their fixed-rate mortgage term. Our plan is to accelerate growth as conditions become more favorable. During the first half, we completed a AUD 500 million RMBS transaction, our largest on record. This gave us the flexibility to reduce some of our higher-cost corporate deposits. Importantly, we continue to invest in customer experience initiatives that will support retail deposit growth. We continue to help customers in the face of cost-of-living pressure with personalized engagement and support for borrowers facing financial difficulty. While there has been a small increase in 90-day arrears to 0.39% below industry averages, I'm pleased to say we have negligible write-offs and not a single mortgagee in possession loan.
We continue to invest in protecting and supporting customers, including ongoing investment into cyber resilience as well as scam education, detection, prevention, and response. In a period of high inflation, our operating costs have fallen in absolute terms at a time when we continue to invest in key strategic priorities and people. Turning to slide six. It has been a challenging six months, and I'm really proud of how our team has managed the business. We grew the business, we managed costs well, we strengthened the balance sheet, and we are well positioned to accelerate. As of 31 December, our loan book was 1% higher to AUD 7.9 billion, and we welcomed almost 7,700 new-to-bank customers, up 4.5%. While core earnings and earnings per share eased 5.3% and 5.8% respectively, the interim dividend was stable at AUD 0.015 per share.
I'll now hand it over to Gary for a more detailed look at the numbers.
Thanks, Brett, and good morning, everyone. Slide eight contains a snapshot of the key financial metrics of the business. As Brett noted previously, core earnings of AUD 26 million were down 5.3% on the previous half, with net profit after tax similarly lower. Top-line revenue fell 2.9% half-on-half and was impacted by NIM compression over the period. The decline in NIM of 9 basis points to 1.46% was in line with our recent guidance. Operating expenses were well managed in the period, especially given the current inflationary environment, with total operating expenses falling 1.5%. However, with the decline in revenue, the group's cost-to-income ratio rose 170 basis points to 65.7%. In terms of MyState's balance sheet, total capital increased to 15.6% at 31 December. Driving this uplift were contributions from profit and capital relief securitization. At 7.7%, return on equity declined 60 basis points from the second half of FY 2023.
The interim dividend is equivalent to a payout ratio of 72.6% of after-tax earnings for the half, in line with our current dividend guidance range of 60%-80%. Moving to slide 9, which shows the key drivers of half-year net profit after tax. Net interest income declined 2.5%, the result of the fall in net interest margin in the half, partly offset by the positive contribution from a larger average balance sheet. Other banking income declined 5.9%, reflecting reduced loan and transaction fee income on lower overall volumes. Wealth management income fell by 3.6%, with reduced investment services income partly offset by higher trustee services income. Operating costs were tightly managed, falling 1.5% and 4.3% respectively on the second and first halves of FY 2023. This was particularly pleasing given the impact of higher inflation during the period.
Slide 10 provides a more granular breakdown of first-half operating costs, which have declined for two consecutive halves. At 31 December, FTE was 3% lower compared to 30 June, with this benefit broadly offset by salary increases. There were lower staff-related incentives in the second half of FY 2023. We deliberately reduced our marketing spend in the half and expect to increase this spend in the second half to support customer and retail deposit growth. Technology spend was largely flat, while other expenses declined in large part due to previously disclosed non-recurring items. On an underlying basis, total operating costs increased by around 1.5%, well below the prevailing rate of inflation over the period. As Brett noted, increased scale in the bank has improved the operating efficiency ratio by 20% since June 2021. Turning to slide 12 and the bank's net interest margin.
As we noted in our market release in December last year, we constantly seek to optimize the trade-off between growth and margin. While we deliberately slowed growth, NIM fell 9 basis points from the second half of FY 2023, impacted by price competition in both home loan and retail deposit markets, customers switching from transaction and lower-rate savings products, an increase in securitization, warehouse funding, and a higher level of liquid assets. NIM reached its low point in October 2023 and has since improved. The exit NIM in December was marginally below the average NIM for the half. We will continue to carefully manage growth to optimize capital and returns. Moving to slide 13. Maintaining sound credit quality remains a key focus and underpins our balance sheet strength. The MyState home loan portfolio increased AUD 77 million to AUD 7.9 billion in the first half, which represented 0.5x system growth.
Relative to FY 2023, both applications and settlements were lower, reflecting the competitive lending environment. Importantly, our relationships with key brokers remain strong, and our home loan approval times reflect the investment we have made in underwriting capacity and capability. Our focus remains on low-risk owner-occupied lending. Loans with an LVR of less than 80% make up 77% of the total book, and growth in the half came entirely from this segment. While run-off remains a sector-wide challenge, both discharge activity and paydown levels were lower in the second quarter. Home loan customers have shown remarkable resilience to date, partly a consequence of the stable employment markets across Australia. As Brett noted pleasingly, our 90-day arrears at 39 basis points remains below industry average, reflective of our prudent approach to lending. Turning to slide 14.
The chart on the top right highlights the increase in the total collective provision, consistent with the increase in arrears in a rising interest-rate environment. At 31 December, the key assumptions used to determine the forward-looking economic overlay were reviewed to incorporate the latest observed economic data. These assumptions and the relevant scenario weightings are set out in the appendix. Provision coverage ratios are shown in the chart bottom left. At 31 December, the ratio as a percentage of credit risk-weighted assets was 41 basis points. The ratio at December 2021 included COVID impacts. At 31 December 2023, there were no mortgagee in possession loans, and actual loan losses remain negligible. Turning to slide 15.
As Brett noted in September 2023, we issued our largest-ever securitization term deal of AUD 500 million, coupled with the addition of a new warehouse securitization as a proportion of the total funding mix, increased to 19.6%. Over the same period, customer deposits as a percentage of our funding mix declined slightly to 69.5%. This reduction was largely a consequence of the RMBS transaction and provided us flexibility to run down more price-sensitive deposits. We have continued to experience growth in our award-winning Bonus Saver Account, with balances increasing nearly 6% since 30 June. The Term Funding Facility at AUD 78 million, which represents only 0.9% of our total funding, will be fully repaid by 30 June 2024. Turning to slide 16.
MyState's total capital ratio increased by 16 basis points to 15.6%, reflecting organic capital generation via retained earnings, the term RMBS and warehouse transactions I noted earlier, partly offset by dividends paid during the half, an increase in lending, and higher holdings of liquid assets. Moving to wealth management on slide 18. TPT Wealth continues to deliver a stable and diversified source of income to the group. While operating income in the first half was slightly down from the prior period, TPT's underlying expenses were 12% lower, which has driven a solid uplift in net profit after tax. Pleasingly improved returns to investors supported growth in funds under management to just over AUD 1 billion at 31 December. TPT remains focused on providing trustee services and increasing FUM across our range of cash and income funds. On our end, back to Brett to talk about our outlook.
Thanks, Gary. I'll now take you through our key growth, revenue, and efficiency initiatives planned for the second half of the year. Turning to slide 20. We will be launching a new digital banking experience for our customers. In line with our purpose, the new digital experience is designed to make banking with us easier and enhance the customer experience across MyState Bank's products and services. Customer testing has been very positive. Combining an improved customer experience together with additional marketing support sets us up to accelerate growth in retail banking customers. On the trustee services side, TPT remains focused on its core trust and estate offering in Tasmania while expanding into specialist services such as compensation trust nationally. Growing the TPT Cash and Income Funds remains a priority, and an expanded trustee offering will assist as well as generate additional fee income.
We are continuing to focus on a range of productivity initiatives across all parts of our business, including further automation, leveraging existing and new technology solutions, and increasing customer self-service. Turning to slide 21. Looking ahead and based on the current operating environment, we expect performance for the full year to be in line with the guidance provided in December. To wrap it up, MyState is navigating a challenging operating environment. We grew the business, we manage costs well, we strengthen the balance sheet, and we are well positioned to accelerate. Gary and I will now answer any questions you may have. Over to you, Kayleigh.
Thank you. 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're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Nathan Zaia with Morningstar. Please go ahead.
Morning. Just two questions from me. The first one is getting your loan growth to tick up again a little bit. How do you do that without it straining NIM, or has pricing on some loans and deposits improved enough where you feel like you can come back into the market without it hurting?
Do you want to ask both questions, Nathan, or we can go one by one? Or is that?
Up to you.
Yeah. Okay. So to accelerate growth in mortgages, we have been growing up to four times system, then two times, and then targeting one times. We're slightly below that at the moment. To accelerate, we took ourselves out of the First Home Buyer Deposit Scheme, and we're going to re-enter there. That will help a little bit. That's about sort of 10% of the market and a bit more for us. We can tweak some pricing, which we have done, and just on the edge of a couple of credit enhancements we can make. So a few tweaks will help us accelerate, which we've already put in place.
Okay. And the second one, investor as a percentage of flow has picked up. And I guess I have two parts to this question as well. Is that intentional because you're seeing more competition in owner-occupied? And the second part is, it's still only 20% of the loan book. Would you be comfortable with it getting up to 25%-30%?
Yeah. We have some appetite to increase our investor book. I mean, historically, we are a owner-occupied P&I, and as you know, Nathan, that's the lowest margin business. But it's also the lowest risk business, so hence why our risk position's strong. But yeah, we do have appetite to increase our investment lending a bit. The performance of the book is very strong as well, and it's actually a bit better than our owner-occupied business. So yeah, comfortable, and we'll target a bit more lending in that space.
But you wouldn't be able to give a range how much of the book is comparable to some of the majors, an okay way to think of it, or you wouldn't want to go that high?
We wouldn't go that high. We'll still stay a bit more conservative in that. We do have appetite to increase it well above the current level.
Okay. Thanks, Brett.
Thanks, Nathan.
Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Alastair Hunter with Ord Minnett.
Morning, Brett and Gary. I'll just ask a few questions starting with cost performance. On the personnel cost side, you flagged the sort of 3% FTE offset by the wages. Just interested as to whether with the incentives, there was any accruals sort of undertaken in the first half, or given where profitability is, you've sort of not been accruing a run rate through the first half?
Yeah. No, we're high, Alastair. We have been accruing. So probably the best way to think about it is if you normalize the second half of 2023, you're sort of at about AUD 49 million. So that grew to roughly AUD 50 million in the first half of 2024. So as I mentioned, the underlying expense growth is about 1.5%, so well under that rate of inflation. As we sort of project forward into the second half, we'd still be sort of guiding an uplift in the second half of around sort of 5% on the first half. And as we noted in the presentation, that'll be a little bit of marketing as we re-enter really into the sort of retail deposit space.
Thank you. Then just on the technology sort of investments and spends, just noting from the cash flow, quite a high first-half spend on the intangible items is just around AUD 5 million, which is sort of two or three times your sort of normal run rate. Obviously, at some point, they'll start to hit an amortization charge for you. Can you give us a little bit of an understanding as to what sort of the individual projects, the sizable ones were that you were spending on in that period, and the sort of profile, whether they're the three- to four-year amortization or the 10-year core system type amortizations that will expect that AUD 5 million to amortize over?
Yeah. The majority of that AUD 5 million that you note, Alastair, is the one core or the one key technology project that we have, and that's the internet banking, mobile banking upgrade. And the sort of the total cost of that project, I think we've previously sort of disclosed, that's going to be in the order of AUD 10 million. And we're looking to go live with that towards the end of this financial year. And that project's on track.
And so hence that sort of a 10-year amortization?
It would probably be, yeah, more likely five years.
Yeah. Thank you. And then just in terms of a couple of other questions, on the home loan application pipeline, just interested in what you're seeing in terms of January, February, and how you sort of expect the 1.5 sort of billion of applications you had in the first half, how you sort of assess that that will look for the second half of the fiscal year?
Yeah. So we're seeing an increase in applications, particularly over the past few weeks, I would say. It's building up, so we expect those to keep building based on our positioning and re-entry into the first home buy deposit scheme market. And yeah, so where are we at Fed? So we expect to see that flow through pretty soon. But the application pipeline's building nicely.
Thanks. Then ethically which remains, some your numbers are very, very strong. You've got a forward-looking sort of overlay sitting there, the AUD 1.6 million in your provisioning. At what sort of timeframe is that sort of realistic? Should we continue to see deteriorating arrears but nothing that's causing you write-off concerns? When is it time that that looked at in terms of potentially writing back some of that excess?
Yeah. I mean, I think, as you know, we revisit those assumptions every six months. So I think we'll have, again, another sort of two-three, four months of clarity around people, how customers are coping with the rise in interest rates that we've seen. Well, our in-house view is that we certainly are at the peak of the cycle with cuts to come at some point in the back end of this calendar year. So we'll look to reassess that at 30 June. But I guess our base case would certainly be a soft landing. So under that scenario, it's more likely that you would see a potential unwind of that provision rather than an increase. But we'll need to work through that at that point in time.
Thank you. Final one, just on the non-interest income, obviously, still remaining under pressure, but there's one area that we're looking for some growth in the income funds within the wealth business. Modest improvement but not sort of, I suppose, commensurate with the flows we're seeing market-wide into interest-sensitive deposits or products managed funds. What can you do to get the, I suppose, the fund growth in that income side accelerating into what is currently, I suppose, a sweet spot for that type of products?
So when we embarked on the strategy, and one of the key initiatives for us was to increase our direct lending into those funds to get the rates up. The returns were below bank TDs, to be honest, Alastair. So they just weren't exciting for investors. What we've managed to do, what's been done, is have more direct lending, which is strong-performing lending into those funds, improve the returns. And those returns are now up towards the 6% mark for one fund at least. And we're starting to see the low point was around August, September. And we're starting to see some positive momentum into those funds, and that's continued into the new year.
Thank you. No more questions?
Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. We are showing no further questions at this time. I'll now hand back to Mr. Morgan for closing remarks.
Thanks, Kayleigh. Thanks, everyone, for joining us on the call today. We look forward to catching up with some of you over the months ahead. Thanks.
That does conclude our conference for today. Thank you for participating. You may now disconnect.