Thank you for standing by, and welcome to Resimac Half-Year 2024 Investor Call. All participants are in a 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. Scott McWilliam, CEO. Please go ahead.
Thank you.
Good morning, everyone. It's my pleasure to welcome you to Resimac Group's results briefing for the six-month period ended 31 December 2023. I'm Scott McWilliam, the Chief Executive Officer of Resimac, and I'll be taking you through our half-year results this morning and welcome your questions at the end of the call. I'm also joined by our Chief Treasury Officer, Andrew Marsden, and our Group Financial Controller, Santo Ahmed. As previously announced to the market, James Spurway starts on the 1st of May as Resimac's Chief Financial Officer. In today's presentation, I'll take you through our performance highlights, an overview of the macroeconomic environment and the competitive landscape, the quality of our portfolio, and the key focus areas and outlook for FY 2024 and beyond.
Today, let me start by saying that after reporting more than 12 months of home loans' AUM decline during the most aggressive refinance market I've seen in my 25 years of banking, I'm pleased to announce that we've been able to stabilize our home loans book and grow our asset finance book. As a result, we have reported a normalized net profit after tax of AUD 26 million, excluding the impact of fair value gains and losses on derivatives, and an interim fully franked dividend of AUD 3.05 per share. I'll ask you to turn to Slide three. The group has had a solid half-year. While home loans still remain the bulk of our AUM and settlements, our asset finance business is growing at a pleasing pace. We've been on a journey of strategically diversifying our portfolio and is now having a meaningful impact on our overall numbers.
I'm pleased to announce that the first half 2024 we settled AUD 380 million in asset finance, up 36% compared to the prior half, and grew the book by 52% over the six-month period. As of earlier this month, I'm also pleased to say that our asset finance portfolio reached a milestone of AUD 1 billion of AUM. Our investment into expanding our asset finance sales team and deploying a new broker origination platform have resulted in record asset finance applications during the second quarter. I'm also happy to report that production levels in our core home loans business have recovered as unprecedented competition pressures in the mortgage market have abated in the first half.
Off the back of a series of new growth and retention initiatives, AUM in the home loans book has stabilized with AUD 2 billion in settlements in the period, up 54% compared to second half 2023, and importantly, 60% of that occurring in the second quarter. The volume of applications has increased in the half by 65% compared to the prior six months, providing us with a healthy pipeline of applications to generate AUM growth in the second half.
Exercising a strong cost discipline has enabled us to reduce our operating expenditure by 10.5% compared to first half 2023 and 6% compared to second half 2023. This has largely been fueled by technology investments that are now starting to enable us to execute operational efficiencies. We are making great progress with our digital transformation roadmap and rolled out several digital initiatives that have been deployed and tested over the past year.
This included a new treasury management system that is the first of its kind in the Australian market, supporting further scale in the group's funding program and driving efficiencies in our investor and markets reporting functions. Our broker partners have seen the benefits of a number of automation and digitalization improvements. On the home loan side, it is now quicker and easier to submit loan applications, and we are providing faster turnaround times for approvals. In asset finance, we've launched a new origination platform that gives brokers a better experience, including real-time deal tracking and faster decisioning. For our home loans customers, we are enabling them to do more. As well as offering additional product features like multi-offset accounts, we have enhanced our online banking capabilities and will be introducing a mobile app over the coming weeks.
We are also in the process of implementing a new customer discounts program designed to help ease the cost of living pressures today as well as assist with retention efforts. Supporting our customers as cost of living pressures persist is paramount. We've made major changes to the way that we service and support them, particularly for customers in hardship and needing financial assistance. I'm pleased to say that in first half 2024, our customer service metrics are at their highest level on record. In our FY 2023 results briefing, we spoke about headwinds in the mortgage and funding markets that were coming to an end. Specifically, the Term Funding Facility allowing ADIs to heavily discount new business rates and offer large cash backs were coming to an end, and the adverse spread cycle in capital markets were easing.
In first half 2024, particularly second quarter 2024, we saw early signs that these headwinds were beginning to ease. Moving on to Slide four, you can see that refinance activity has reduced in the December period by 15.3%, with owner-occupied and investment loan activity picking up. As inflation begins to fall and the cash rate outlooks become more favorable, and with markets beginning to price in rate cuts later this year, it is now producing an environment that benefits non-ADIs like Resimac and provides potential BBSW tailwinds looking forward. On Slide five, you can see that the market dynamics shifting in the first and second quarters of the first half. The first vertical line down quarter one shows the positive impact on applications, settlements, and also discharges as ADIs started withdrawing and phasing out their cashback offers and also increasing new business pricing.
The second vertical line shows the results of a well-timed response where we deployed several new business initiatives to drive volume. I'll ask you to move to Slide six. Resimac's new business initiatives, coupled with the progress we continue to make in our digital transformation roadmap, have had a positive effect on the underlying health of our home loans distribution network. The number of brokers that submitted applications in the first half 2024 increased significantly compared to second half 2023, with broker applications up almost 80%. Moving on to Slides seven and eight, we continue to manage credit risk prudently. With a resilient portfolio where the average loan-to-value ratio is less than 65% and, importantly, more than one-third of our customers are more than 12 months ahead of their repayments, arrears across home loans and asset finance are trending upwards, albeit in line with industry.
Our balance sheet remains conservatively provisioned against credit losses, with more than AUD 40 million of provisioning being held for our home loans portfolio compared with only a small number of home loans without lenders' mortgage insurance and LVR above 90% and more than 30 days in arrears as of 31st December. Moving on to Slide 10, our cost-to-income ratio of 48.8% increased half-on-half, which is a product of net interest income headwinds from lower AUM and tighter margins. Pleasingly, operating expenses were down as a result of strong cost discipline and technology optimization. Loan impairment expenses for the first half were AUD 3 million, primarily reflecting a rapid growth of asset finance portfolio. Although arrears are rising, the low LVRs of our portfolio have ensured losses remain low at this stage of the cycle. Our home loan-specific provision at 31 December was only AUD 1.9 million.
Our conservative collections provision of AUD 44.3 million for the group provides us with confidence that we can more than absorb losses or potential losses for home loans and asset finance segments should they arise. Return on equity for the half was 12.5%, lower than previous periods, primarily a result of falling net interest income but still comparable to banks and non-banks. Moving to Slide 11 and 12, you can see that first half 2024 was a story of two distinct quarters in our home loans business. In the second quarter, we made the strategic pivot to focus on AUM growth across niche prime and specialist loans. Now onto Slide 13, our asset finance offering continues steady progress, settling AUD 400 million in the first half. We remain focused on increasing asset finance this year to more than AUD 1 billion of annualized settlements by the fourth quarter.
Moving to Slide 14 and 15, in funding, credit spreads are narrowing, providing a more favorable outlook. Resimac, like our competitors, has experienced NIM compression, but we continue to manage NIM prudently. Group NIM was down 7 basis points, driven by higher home loans cost of funds and partially offset by higher asset finance margins. Home loan NIM was down 14 basis points, driven by higher cost of funds and lower replacement new business margins, whereas asset finance NIM increased 52 basis points, driven by higher new business margins and runoff of lower NIM books. Investor appetite remains strong for our RMBS issuance, and we're optimistic that RMBS deals in the second half will price at a lower cost of funds than the first half 2024.
There is a broad and diverse support for our domestic and offshore banks for our warehouse facilities, with more than sufficient appetite to meet our AUM growth objectives. Debt and working capital buffers are well-positioned for portfolio growth. As we switch our strategic focus to ramping up originations to grow our home loans AUM, we remain focused on our broker and customer growth strategy to be a lender of choice focusing on niche markets that we can lead. Our growth aspirations for our asset finance business remain high. We are on track to double our asset finance settlements in FY 2024, underpinned by a wider broker reach and a significantly improved digital experience for our broker partners. While we have seen an increase in early-stage arrears across the last 12 months in line with market, we remain confident that Resimac's portfolio will absorb this stress.
Furthermore, our conservative approach to provisioning over the last two years ensures that our provision coverage is more than sufficient to absorb any potential credit losses. As we continue to process our digital transformation and we move to a phase to begin to optimize the investments we've made in platforms, we'll also continue to invest in new technologies to support AUM growth, operational efficiency, and improved customer experience. To conclude, the operating environment is far more predictable and positive compared to prior periods, given the growth opportunities, funding markets, and macroeconomic outlook. We've ended first half 2024 with a solid pipeline of home loans and asset finance applications, providing us with a stable runway for growth across both books further this year. I'll now hand back to the moderator to facilitate the question and answers portion of this phone call, and I'm happy to add to any questions. Thank you.
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 Tom Strong with Citi. Please proceed.
Good morning and thanks for taking my question. Firstly, I just want to ask about the growth initiatives that you deployed in the second quarter. If I look at these results, I can see the marketing spends and employee costs down year-over-year, yet you've expanded your distribution and active brokers. I was just wondering if you could, I guess, elaborate more on what those initiatives are and how you're going about it.
Yeah, sure. Thanks for your question, Tom.
So part of it, Tom, to be perfectly honest, is the environment actually allowing us to be more active. Yeah? I'd like to give us all the credit, whilst we should, where we've executed well on the strategy, is sitting and looking at an environment that allows us to compete was imperative for us to then start growing again. And obviously, we could see those signs probably midway through last calendar year, and banks were clearly pulling back, and there was obviously a lot of pressure on them to justify offering lower cost of capital. So one was the environment. The second one was we really just targeted specific areas.
We didn't focus on those areas where clearly the banks were very aggressive, i.e., mum and dads, principal interest, less than 70% LVR, metro areas where everyone's just jumping all over themselves to write those assets at very, very thin margins. We really focused around investor and interest only in the prime market, and we very much simplified our offering in the near prime and specialist market just to make it a little bit easier for our brokers, especially with our wide BDM team re-engaging in the market as we switch from a NIM bias to an AUM bias strategy.
Yeah. No, that makes sense. Thank you. And just a second question, if I can, just around the volatility from the fair value losses and gains on derivatives. I mean, they're quite sizable relative to the impact in this result.
Can you just comment on what's driving those gains and losses? Is it sort of hedging or otherwise, and what should we expect going forward?
Sure. Hey, Tom. It's Santo Ahmed. Santo Ahmed, I'm the Group Financial Controller. So I'm assuming you're referring to Page 21 with the financial position where we've got the derivative financial liabilities? I'm talking about the charge taken through the statutory profit to the AUD 8 million result. Yeah. Absolutely. Yeah. So part of that is due to two things that we've got flowing through there. So we've got the interest rate swaps per our policy. Any of the interest rate swap gains and losses that go through the OCI, and on top of that, we've also got cross-currency swaps that we have in place, and any gains and losses that go through that OCI as well.
So overall, that number, that normalised figure that we've got in there includes AUD 5.4 million in changing our fair value, and then once we've tax-effected that, that is the AUD 3 million-AUD 3.5 million that's going through the OCI.
Yeah. That's helpful. Thank you.
Was that your question? Thanks very much. 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. Your next question is from Jeff Cai with Jarden. Please proceed.
Good morning and thanks for taking my question. A question on asset finance. So now that you sort of delivered the AUD 1 billion target early on, I mean, how should we think about the next phase of growth over the next one to three years and how you're looking to sort of manage the margin volume trade-off?
Yeah.
Thanks for your question, Jeff. So I mean, look, we're coming off a low base. So we should be thinking about growth significantly above system as we come off a low base. So whilst we're doubling settlements or forecast double settlements in FY 2024 compared to 2023 and obviously significantly growing our book as you're coming off a low base, those targets will remain quite aggressive going forward until it gets to a size where it's closer to system. So in growing our asset finance book is a strategic priority, and our investment in technology is helping us do that. Whilst we've actually just rolled out an originations platform that's definitely helped us pick up business from brokers, which is around obviously a stronger experience, faster turnaround times, greater automation, we'll continue to make further investment, and also we'll continue to roll out new products.
Asset finance is quite a broad segment. At the moment, we're predominantly playing in commercial auto and equipment. In time, we will step into, and likely before the end of this calendar year, we'll step into the consumer market, but we'll also look at other assets that broadly sit underneath that umbrella. So our growth aspirations for that book are significantly different to how we think about the more mature home loans book.
Got it. Thank you. And then a question on margins on Slide 14. The funding margin is still a bit of a headwind for this half, given your expectations and what you're seeing in terms of the debt market spreads becoming more tighter. Should we expect that funding margin piece to be a tailwind for next half?
Look, I think no.
I think the way that we look at it and the way that we're forecasting is it feels like your exit of, let's call it, June of this year is going to be pretty close to what your second half average will be. So it feels like we're close to NIM then stabilizing, and probably two different stories between home loans and asset finance. Asset finance NIM, despite that comment that I made or that question in relation to AUM growth, we're quite comfortable that we can maintain that NIM going forward with asset finance. When we think about home loans, home loans NIM is likely to kind of stabilize, I'd say, around that 155, 150 level before potentially starting to grow again.
Okay. Thank you.
There are no further questions at this time. I'll hand the conference back over to Mr. McWilliam for closing remarks.
Thank you, everyone.
Enjoy the day, and obviously, more than happy to take one-on-one meetings if it helps you with your research.
Thank you. This will conclude our conference for today. Thank you for participating. You may now disconnect.