I would now like to hand the conference over to Mr. Brett Morgan, Chief Executive Officer. Please go ahead.
Thanks, Darcy, and good morning, and thanks for joining us today. I'm Brett Morgan, MyState's Managing Director and CEO, and with me is Gary Dickson, our CFO. Turning to slide two. Last night, after market close, we lodged our 1H25 financial results with the ASX, and these are also available on our website. With respect to the agenda, I will start with an overview of the first half result before Gary takes you through the financials in more detail. I will then run through an update on the merger with Auswide before Gary and I welcome questions. Moving to slide four. Our merger with Auswide Bank is effective today. We are excited by the prospects for the combined group, and we'll be working hard to ensure its success.
We are a strongly capitalized group and remain confident in our ability to execute on all of the key financial deal metrics previously disclosed. With respect to MyState's standalone first half result, our underlying earnings were in line with the prior comparative period. It's been an exciting half as we worked through the merger approval process while continuing to grow the number of new-to-bank customers and increasing our lending and deposit books. Pleasingly, our borrowers remain resilient, and overall credit quality is sound. Customer advocacy is also strong with an NPS of plus 55. The board considered a number of factors, including merger-related transaction costs, when determining a fully franked interim dividend of AUD 0.105 per share. This is equivalent to a payout ratio of 77% on a MergeCo underlying pro forma basis. Gary will provide more context regarding the dividend shortly.
Turning to slide five. During the half, MyState continued to balance growth and returns. We delivered an underlying NPAT of AUD 7.5 million in line with the first half of FY24. We also welcomed over 7,800 new-to-bank customers and increased our home loan and deposit books. Maintaining our focus on growing our quality lending book underpins our balance sheet strength. Our total capital position strengthened over the half and is now sitting at 17%, providing capacity to invest in profitable growth initiatives. Moving to slide six. The underlying financial strength of MyState has provided us the opportunity to invest in several important strategic priorities. During the half, we successfully met key milestones and progressed efforts to obtain the necessary approvals for the merger with Auswide.
The merger with Auswide Bank, effective today, delivers MyState a significant increase in scale, capital base, home loan, and deposit portfolios, as well as a larger and more diverse customer base and broader geographical footprint. In early July, MyState Bank successfully launched our new mobile app and internet banking platform, delivering a significant upgrade to our customers' digital experience. We also delivered digital enhancements to our lending processes, which have supported a reduction in decision times and an acceleration in loan applications. Moving to TPT Wealth, we have continued to focus on optimizing our trustee services business, which has resulted in lower costs for the business and better service for our clients. On the investment services side, we continue to pursue opportunities to support fund growth. I will now hand over to Gary, who will take us through our financial results in more detail.
Thanks, Brett, and good morning, everyone. Slide eight contains a snapshot of the financial performance of MyState for the first half of FY25. As Brett has already noted, MyState delivered a stable underlying profit for the half. We grew our top line revenue by 1.6%, and net interest margin remained relatively stable on both the first and second halves of FY24. We continue to closely manage our operating expenses. The increase during the half was driven by an uplift in personnel costs and strategic investments in technology capability. We remain strongly capitalized with our total capital ratio increasing by 60 basis points to 17%. Turning to slide nine, underlying NPAT of AUD 17.5 million, which excludes merger-related costs, was driven by higher net interest and wealth management income, lower bad and doubtful debt expense, offset by increased operating expenditure. Statutory NPAT includes AUD 1.6 million of merger-related transaction costs.
Net interest income increased 1.3% due to a larger average balance sheet, partly offset by a one basis point decline in net interest margin. Wealth management income rose by 6.1%, with both trustee services and investment services income contributing. Bad and doubtful debt expense fell during the half, with a decline in the collective provision reflecting borrower resilience, as evidenced by an improved cure rate and a resulting decrease in the overall loss given default assumption. More information on our provisioning is provided in the additional results information section at the back of the pack. Slide 10 provides a granular breakdown of operating costs for the half. Total costs were up 3% on the second half of FY24 and were broadly in line with the first half of FY23. The increase in staff-related costs reflects the impact of underlying salary inflation and variable base remuneration, partly offset by lower FTE.
The uplift in technology costs reflects the strategic investment in key customer, risk, and regulatory initiatives. During the half, we continued to optimize our marketing investment to support brand consideration and customer acquisition. Turning to slide 11 and the bank's net interest margin, average NIM of 1.45% was steady on both the prior half and the first half of FY24. NIM continues to be impacted by home loan competition and retention-related activity, retail deposit competition and switching, an increase in securitization, and a higher level of liquid assets. December exit NIM was above average NIM for the half. Moving to slide 12, MyState's home loan book portfolio increased 0.3% to AUD 8 billion during the half. We continue to focus on growth in low-risk owner-occupied lending, and loans with an LVR of less than 80% make up 77% of the total book.
Both applications and settlements were steady on the prior corresponding period. During the half, our time-to-decision loan applications significantly improved following investments in digital and underwriting capability. Elevated loan book run-off remains a sector-wide challenge driven by fixed-rate maturities. At 31 December, the fixed-rate book comprised only 5% of the portfolio. MyState's home loan customers have continued to demonstrate resilience, partly a consequence of stable employment markets across Australia. At 44 basis points, our 90-day arrears remain below industry average. Turning to slide 13, in October 2024, we issued our largest securitization term deal, which provided MyState with additional flexibility to run off more price-sensitive deposits. Securitization as a proportion of the total funding mix remained steady on June 2024. Over the same period, customer deposits as a percentage of our funding mix improved to 69.7%, driven by growth in transaction and offset account balances and term deposits.
Moving to slide 14, MyState remains well capitalized, with the total capital ratio increasing 60 basis points to 17%, supported by profit generated during the period and a reduction in credit risk-weight intensity, partly offset by the FY24 final dividend. MyState's strong capital position provides us with the flexibility to continue to invest in key initiatives, including growing our lending book. Turning to slide 15, the board has declared an interim dividend of AUD 0.105 per share for shareholders on the register at the record date of 5th of March 2025. Key factors the board considered in determining the dividend were as follows: MyState's strong capital position, underlying pro forma earnings, which include Auswide earnings for the half inherent in the acquisition balance sheet, MyState merger-related transaction costs, and the spirit of a merger of equals and the agreed merger exchange ratio.
The dividend represents a payout ratio of 77% of MergeCo pro forma underlying profit or 97% of pro forma statutory profit. Moving to wealth management on slide 16, TPT Wealth provides the group with income diversification. Revenue increased to AUD 7.2 million in the first half, driven by positive contributions from both trustee services and investment services. TPT's operating efficiency also improved in the half, with the cost-to-income ratio declining by 126 basis points to 77.3%. TPT remains focused on providing trustee services and increasing FUM across our range of cash and income funds. Despite the improved investment returns across these funds, FUM declined in the first half following the finalisation of some larger stakes. I'll now hand you back to Brett to provide an update on the merger with Auswide.
Thanks, Gary, and turning to slide 18. Slide 18 includes the updated corporate profile of the group. Following the merger, the group comprises two banks: MyState Bank and Auswide Bank, Selfco, an equipment finance business, and TPT Wealth, a trustee services and funds management business. Based on yesterday's close, MyState had a market capitalization of approximately AUD 765 million, with its position reaffirmed in the ASX 300. Moving to slide 19. On slide 19, we provide a pro forma snapshot of the key financial metrics across the two organizations and as a merged entity as at 31 December 2024. The slide highlights the combined entity will have a significantly increased scale. The numbers exclude the impacts of synergies, integration costs, and any purchase price accounting adjustments. A number of the Auswide metrics, which you may be familiar with, have been restated to align with MyState's definitions.
The merged group will have improved financial resilience, greater funding flexibility, increased operating leverage, and the ability to pursue growth opportunities. The merger with Auswide further diversifies the home loan book across the Eastern Seaboard, as set out on slide 20. Turning to slide 21. As previously disclosed, the transaction is expected to yield annual pre-tax cost synergies of AUD 20 million-AUD 25 million per annum over a three-year period. More than 50% of the full run rate synergies are expected to emerge in the first 18 months post-completion. Pre-tax integration costs of around AUD 29 million are anticipated, with the majority expected to be incurred in the first two years post-completion. Realization of synergies have commenced, with a single board and executive leadership team in place on day one. Moving to slide 22.
In recent months, the MyState and Auswide management teams have collaborated and developed detailed day one and day 90 integration plans across multiple work streams, including people and culture, technology, finance, risk, and governance. In the first full year, we will be executing on and capturing immediate cost synergies while consolidating our group functions and supply chain contracts. We will also commence the execution of our technology consolidation, ensuring the stack is efficient and fit for purpose. In years two and three, we will complete our operational systems integration, remove business duplication, and embed process efficiencies. Fully integrating the banks is expected to take three years. So there is a lot of work to do. We have the team and key capabilities in place to successfully integrate and make the merger a success. Moving to slide 23 and 24.
The board and executive team that will lead the merged group are in place. The board comprises four non-executive directors from MyState and three from Auswide. Sandra Birkensleigh is the chair of the merged group, and Warren Lee continues as the chair of TPT Wealth. I'd like to acknowledge the significant contribution of Vaughn Richtor as the outgoing chair of MyState and look forward to continuing to work with him as a director on the board. I would also like to acknowledge Steve Davey as a retiring director and thank him for his significant contribution to the group over the past three and a half years. As previously shared, the management team that will lead the merge business is in place, and I look forward to working with them and the broader team to grow our business, serve our customers, and deliver value to shareholders.
Gary and I will now answer any questions you may have. Over to you, Darcy, to moderate.
Thank you. If you would like to ask a question, you'll need to press the star key followed by the number one on your telephone keypad. If you would like to cancel your request, please press star two. If you are on a speakerphone, please pick up the handset to ask your question. Your first question today comes from Nathan Zaia from Morningstar. Please go ahead.
Morning, Brett and Gary. You can hear me okay?
Yeah, we can hear you. Hi, Nathan.
I just had a question around loan growth, and I've seen in some competitors' numbers what can happen to margin pushing hard in this market. But if competition for deposits and loans was to remain where it has been over the last quarter to six months, would you be content with holding loans flat, or is a lack of growth now a view on what spreads might be on offer in the short term?
So, Nathan, I think our aim is to grow at a round system, given where margins are at, and I think that's economically okay for us to do. We have accelerated in January. We actually had a record January applications month. So we have accelerated a little without changing price. We've improved our service. We've delivered a few improvements in our service proposition, which have rapidly improved turnaround times, and that's supported growth in the volumes, well, growth in application volumes in January. So where the margins are now, I mean, they are competitive, and the aim is to accelerate a little bit in the first half, in the second half, to sort of beat market growth.
Okay. Okay. And so the acquisition of Auswide didn't have any impact in your thinking as well as purely down to needing to improve service levels? Is that fair?
Service levels supported the growth in applications without. So it's important that we provide that good quality service. In the last quarter, in December, we were in the top quartile of providing service based on a broker survey. So we've made some improvements to get there, and we're stable in that sort of good turnaround times. We would have liked to have seen a little bit more growth than we had. So, yeah, I mean, a little bit more, but not too much. So we're comfortable with where we are. We're comfortable we didn't deploy capital for non-economic reasons. So we have the capital to deploy at the appropriate time.
And Nathan, probably the other factor just to highlight is the fact that overall run-off remains at elevated levels. So you can see in the slide on slide 12, it was just under 28% for the half. Now, that's partly driven by fixed-rate maturities. And as I noted in my comments, the fixed-rate book's only 5% of our portfolio now, but we would like to see that run-off rate return to sort of long-run averages over time.
Okay. And the other question I had was around operating expenses, and you called out an uplift in investment spend. So I was just curious, how do we think about that? Is that a rebasing higher? Does that fall in the coming years? And is there any benefit you get over the short to medium term from that spend? Or, yeah, just whatever detail you can provide on that would be good.
Yeah. So, I mean, one of the things to call out on slide 10 again is the uplift in technology expense. Now, that uplift between the second half and the first half is driven by a number of investments that we've made across our customer-facing platform. So, as we'd mentioned six months ago, we went live with our new mobile app and internet banking platform. So you're starting to see the amortization of that investment flow through the numbers. And then there's been a range of other investments in fraud capability, regulatory compliance requirements as well. So that's starting to flow through.
I think, Nathan, the other thing to consider is the cost base is about equivalent to what it was in the first half of 2023. So we have been conscious of only making investments such as our new digital banking experience to support our customer growth and balance growth over time. So it's early days of the deployment of that, but obviously the costs are hitting the bottom line now from that.
Okay. And so is there any guidance you could give to what second half might look like on the first half as well?
Yeah. What we've sort of still projecting is overall, and I'm talking on a MyState standalone basis here, overall cost growth of around sort of 6%. So it'd be very much in line with the first half.
Okay. All right. That's it from me. Thanks, guys.
Thanks, Nathan.
Thank you. Your next question comes from David Fraser from MST Financial. Please go ahead.
Morning, Brett. Can you hear me?
Yeah, I can hear you. Hi, David.
How are you? Brett, just I guess you've had your head under the bonnet for six months on the merger now. You talk about AUD 20-25 million of cost out. Is there risk to the upside on that cost out over the next two to three years as you implement the merger?
I'd say we're confident that that's sort of broadly the number we're going through, and we have been going through a detailed plan, execution plan around all the facets of that. I mean, the first part is we've delivered some synergies on day one through our consolidated board and management team, and we've identified numerous areas that, as we consolidate, and we're focusing on prioritising some of that consolidation through supply chain and other aspects that will deliver that. So our current view, as we continue the integration planning, given today's day one, is that that guidance is still appropriate.
Okay. Thanks. And then just both top-down questions here, but on the revenue/income side, you've pretty well diversified geographically with the two acquisitions, the merger. Is there any products that you can actually put into the other markets that you're not in already, and vice versa, that can actually give you some revenue synergies? And then counter to that, is there any risk that there's any products that are going to cannibalize each other?
Yeah. So MyState has been fairly Tasmanian-centric while the growth has happened through the East Coast. TPT Wealth has been Tasmanian-centric. Auswide's been Queensland-centric. Auswide does offer a few more products than MyState, and particularly they've recently purchased an asset finance business, Selfco, and we're already leveraging the broader geographic opportunity for Selfco. So there is an opportunity to take asset finance more broadly. There is an opportunity to take TPT Wealth and trustee services and funds into the Queensland market. So it does provide many opportunities for us. I didn't allocate any value to that as part of the scheme implementation. We considered only the cost, but definitely there is opportunity, and we will be exploring where it makes sense in deploying that. But one key one is Selfco.
It's a higher returning asset and a team in place, and there's real opportunity to roll that out more broadly.
Great. And then I guess last one is a macro question, just your view on what's happening in Queensland and Tasmania being your major markets and what the impact of yesterday's rate cut will be. And I guess, do you have a house view on how many more rate cuts this year?
Nice broad question. So I guess, I mean, Queensland's economy is broadly going well and is a larger population, so it's a nice opportunity to invest into for the group to continue that investment expansion in Queensland. Tassie's a touch more, we're quite large in Tasmania as a business, so the opportunity for us is to continue to serve our customers really well and grow it. But the market is the market here. So I guess in terms of borrower resilience, the nice thing is the Queensland and Tasmanian customers are showing the most resilience out of our lending portfolio. So the performance of those two geographic regions has been our strongest. So it gives us a lot of confidence that the customer base and the ability to expand and through Victoria and New South Wales, particularly the East Coast, is there.
In terms of our house view on rates, Gary, did you want to take that one?
Oh, look, I'll make a couple of comments. I mean, the first one is even looking at yesterday's rate cut, we were probably not as bullish as what the market was suggesting. That sort of 85%-90% probability of a rate cut, we were probably more at 70%. So that was proven for us to be wrong. But I mean, I think as the governor said yesterday, it's going to be very much data dependent. So my personal view would maybe be one more this calendar year, but at the end of the day, it's going to depend on the data that flows as we go forward.
Great. Thanks, Gary. That's all from me.
Thanks, David.
Thank you. Once again, if you would like to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Miles Hampton from Beechworth Holdings. Please go ahead.
Thank you. I have a number of questions. I'd have to start off by saying I'm very disappointed at the reduction in dividend to the long-standing MyState shareholders. Again, it's part of the price. You wouldn't have had to reduce the dividend if you hadn't done the merger. And my simple question is, when do you expect to be getting back to at least the dividend that was being paid before?
Yeah. Hi, Miles. So your point about the dividends being paid to all shareholders is correct. And it was as part of the merger, as part of the reasons that Gary pointed out, was considered by the board when declaring the dividend. We have considered both the near-term and the long-term and the value that will be created through the merger, and notably the synergies. The targeted synergies of AUD 20-25 million are equivalent to 8-10 cents of EPS for the group. So it's about executing on those synergies and having the ability then to pass those benefits on to shareholders. So as we execute those, the board will consider, and then obviously with the aim of executing those well for the benefit of shareholders.
But you actually haven't answered my question, have you? You're not going to.
The board will consider at each result the dividend. So the dividend policy remains unchanged at this time. Obviously, the new merged board will consider the dividend policy, but the dividend policy remains at 60%-80% of profit. The board considered that and a number of other factors, and that will continue to do that into the future.
Okay. You're not answering the question, but I'll ask you another question. Return on equity has fallen again, this time from 7.7 to 7.5. When do you expect to see a recovery in return on equity?
So obviously, we have capital to deploy to grow the business, and we only deploy that capital as the economic returns make sense for the business and shareholders. So as I shared earlier, we have accelerating our lending growth and targeting to grow its system through the half, which will support revenue on the basis that the margins make sense. As part of the synergy, as part of the merger, we also have the opportunity to extract some synergies. And as I shared, we've done that on day one through a single board and executive team, which will deliver some value to shareholders. So a number of these opportunities will support the ROE over time.
I guess, Miles, I was there. I mean, we're clearly disappointed with the loan book growth in the first half. And as Brett indicated earlier, we're looking to return that level of growth to system in the second half. I mean, obviously, return on equity for the half is impacted by the fact that our expense growth did outpace our income growth. So just sort of, I guess, emphasizes the importance of getting the growth margin trade-off right as we go forward and make sure that we're growing both ROE and EPS while also clearly executing on the integration plan and extracting the synergies.
Okay. Some more questions. Did Selfco make a contribution in this half to Auswide?
No. So, as the merger is effective today, what we have presented is the first half standalone result.
No. I said to Auswide.
Oh, to Auswide, sorry.
You show us the Auswide contribution, sorry, pro forma AUD 5.4 million after tax. I just asked the question, was there a positive contribution from Selfco to that?
They were incorporated into the Auswide results. So their revenue and costs were incorporated into the Auswide results.
Taken as given, Brett, but my question was, was it a positive contribution or not?
Broadly, a break-even contribution in the time that they've owned Selfco.
Fine. I note from page 19 of your presentation that the Auswide first half profit was AUD 5.4 million after tax, excluding impact of merger costs. That's actually quite a substantial reduction on the first half in the previous year. Can you explain why, and did you expect that to be the case?
As we went through the DD process on the merger, we were aware of their projections as they were aware of our projections, and the board was fully aware through the DD process what we expected to see. We're comfortable that the business is performing broadly in line with what we expected. And so we're comfortable that we understood the merger of equals.
You expected the result in the first half to be down on the result of the previous first half?
That's right. Noting that it was up quite strongly on the second half of FY24, we have seen some of the margin recovery that was expected, and we're expecting a stronger second half relative to the first half.
My fingers crossed. You mentioned that the exit NIM in December was above the 1.45. Can you share with us what the exit NIM was?
Yeah. It was around 147, Miles.
In the ordinary course of events, do you expect that to continue?
One of the things, obviously, with yesterday's cash rate decision, that will have an impact. We estimate a 25 basis point cut in the cash rate on an annualized basis for MyState to be around sort of one to one and a half basis points of NIM. On the Auswide side, it's around two basis points. That's just in terms of the structure of each balance sheet. Obviously, there are tactical things that can be done from a pricing perspective, noting that both banks will be passing through the full 25 basis points to borrowers.
Don't interrupt. You've actually quite answered my question again.
The market remains competitive, Miles. Clearly, most banks are exposed to a declining interest rate environment. So I've sort of tried to articulate what that sensitivity is.
Okay. Moving then to TPT, I note that FUM has fallen again. And somewhere in the documentation, you note that because of some larger stakes being wound up, it went backwards. But that surely is just business as usual. FUM has stayed static now for well over 10 years. And every time we come out and we say we're going to make it better, it just either stays the same or drops a little bit. Just as you've identified that the banking business needs to grow, if TPT can't grow inside the MyState umbrella, surely the board should be considering exiting it. It has been static for a long time.
Yeah. So it's to put past that. So we continue to pursue opportunities that make sense within the organic business and, as we've shared, make it more efficient, but continue to pursue opportunities for revenue and growth. The business itself, as part of the merged group, becomes a smaller part of the merged group. So it's important. It's strategically important to the group. The board continues to consider all aspects of the business, including TPT and the strategic relevance of these businesses to the group going forward.
What is the strategic importance to the group, Brett?
It diversifies the revenue for the business and provides a high return. It's a high-returning business at scale.
It's a high-returning business at scale.
It has the opportunity to deliver a high return on equity.
Yes, but the company's been saying that for 10 years.
Appreciate that, Miles. The board does consider, and as you would appreciate, does consider the strategic options for all aspects of our business, including TPT, and always actively considers these.
One final question. This is not to do with the results, but I have a question. MyState has a reported board policy that all directors will hold shares. Can you tell those online whether the new chair is going to purchase shares in MyState or have the board determined to vary the policy as they are entitled to do?
So the board is effectively formed today, given today's completion. The expectation of the board is that the CEO and the directors hold a certain amount of shares, purchase a certain amount of shares in MyState. There has been no change to that policy. And so as at today, the expectation is that incoming directors will abide by that policy. That is today's board's position.
Okay. Thank you. That's all.
Thanks, Miles.
Thank you. Once again, if you would like to ask a question, please press star one on your telephone and wait for your name to be announced. As there are no further questions at this time, I'll now hand back to Mr. Morgan for any closing remarks.
Yeah. Thanks, Darcy. And thanks, everyone, for joining us today. We look forward to catching up with some of you over the months ahead and wish you a very good day.
That does conclude our conference for today. Thank you for participating. You may now disconnect.