Ladies and gentlemen, thank you for standing by, and welcome to the Resimac Group FY 2022 investor call. At this time, all participants will be in a listen-only mode. There will be a presentation followed by a question and answer session, at which time if you wish to queue for a question, you will need to press Zero followed by One on your telephone keypad. I would now like to hand the conference over to our speakers today, Mr. Scott McWilliam, Chief Executive Officer, and Mr. Jason Azzopardi, Chief Financial Officer. Please go ahead, gentlemen. Thank you.
Thank you. Good morning, everyone. It's my pleasure to welcome you to Resimac's results investor conference call for the year ended June 30th, 2022. I'm Scott McWilliam, CEO of Resimac, and with me is Jason Azzopardi, our CFO. We'll be talking to the investor presentation live with the ASX this morning and welcome questions at the end of the call. In today's presentation, we'll take you through our performance highlights, an overview of the macroeconomic environment, the quality of our portfolio, and our focus for FY 2023. Starting on page three, I'm pleased to report a strong FY 2022 result. Normalized NPAT increased to AUD 404.4 million. However, if we exclude the large non-cash fair value gain on interest rate swaps, normalized NPAT decreased to AUD 86.2 million.
We believe it's important to call out this one-off large non-cash fair value gain as we expect it to unwind through the P&L in future years. Our home loan portfolio increased to over AUD 15 billion for the first time, driven by a 30% increase in settlements compared to FY 2021. In addition, our asset finance offering continues to gain traction with brokers, settling over AUD 400 million in FY 2022, up 200% compared to FY 2021. Finally, I'm pleased to report the board has declared a fully franked final dividend of AUD 0.04 per share, taking the full-year dividend to AUD 0.08 per share. Moving to page four. The macroeconomic environment has evolved significantly compared to our half-year results in February. The RBA narrative quickly moved from a period of stability to a rapidly increasing cash rate environment, driven by rampant inflation domestically and internationally.
The current rate environment is creating consumer uncertainty, negatively impacting mortgage activity in the overall market. While higher interest rates and inflation is placing pressure on household budgets, we remain confident our portfolio can absorb further interest rate increases. The unemployment rate remains at record lows. The portfolio has significant prepayment buffers, conservative credit assessment, and a low loans-to-value ratio, as demonstrated on page six. I'll now hand over to Jason to talk through financials.
Thanks, Scott. Turning to page nine, I'm pleased to report that statutory and normalized profit is broadly in line with last year, excluding one-offs. As Scott mentioned earlier, our FY 2022 normalized profit of AUD 104.4 million includes a large one-off pre-tax AUD 25.7 million fair value gain on our fixed rate loan interest rate swaps.
We have disclosed an additional NPAT line on this table to exclude the fair value gain on these swaps. Referring to that NPAT line that does exclude the swaps, I would like to call out the half-on-half performance, in particular, the AUD 37 million in second half 2022. This performance was adversely impacted by our decision to take a conservative approach to our provisioning, increasing our collective provision macroeconomic overlay by AUD 90 million. This can be seen in the loan impairment expense line on the same table. We will reassess our provision coverage at half year. However, at this stage, we don't expect to increase our collective provisions further in FY 2023. Moving to net interest income. This decreased 2% driven by lower margins, partly offset by higher AUM. We will touch on both of these in more detail shortly.
Finally, OpEx increased 12%, driven by increasing FTE as we invest in growth segments, in particular, our asset finance business and technology development. This growth in FTE was compounded by inflationary wage pressures as experienced across the industry.
Thanks, Jason. Moving to page 10. FY 2022 settlements increased 30%, driven by our focus on high-yielding specialist products in preference of prime, where we made the strategic decision to avoid lower yielding prime market, compounded by large cashbacks offered by the ADIs. Second half 2022 settlements were softer, driven by seasonality, lower prime settlements as mentioned, and the short-term impact of a new origination system rollout. I'm pleased to report, as a result of our investment in origination technology, we are today offering market-leading application turnaround times to brokers. Moving to page 11.
I'm pleased to report home loan AUM increased 11%, highlighted by our specialist portfolio increase. Prime decreased 5%, driven by the continued highly competitive environment. On page 12, we can see the trend of lower NIM continued in the second half. Lower yields and the rapidly increasing BBSW in advance of cash rate rises offset the benefits we received from our lower funding tracker rate. Our NIM decreased 26 basis points for the year, driven by yields decreasing 30 basis points as a result of back book runoff and competitive new business pricing across both prime and specialist. The average BBSW blended with BKBM increased 9 basis points during the year, with BBSW spiking in Q4 in advance of cash rate rises.
The BBSW movement in advance of our ability to reprice the back book had a 3 basis points impact on our full year NIM. Our blended cost of funds decreased 13 basis points, driven by our flexible warehouse portfolio and low margin RMBS issuance in the last 18 months, driving our tracker rate down. We will continue to leverage the strength of our brand in the funding markets as capital markets pricing increases off record lows. Moving to slide 15. Resimac's funding program remains a key pillar for the sustained success of the group. The group issued close to AUD 6 billion of Australian and New Zealand RMBS in FY 2022, as well as increasing a number of warehouse facilities in both home loans and asset finance.
Capital markets pricing has increased over the past three months, and we expect our next issuance to be priced at a higher margin than the recent record lows. We remain diligent in our return on capital hurdles on new originations, factoring in elevated cost of funds, and remain strategic on timing of new issuance. Moving on to slide 16. The reduction of our specific provisions continues, with a total of only AUD 4.2 million at June 2022. This is testament to the credit quality within the portfolio, our collection processes, and the benefit we have received from a period of rising property prices. As mentioned earlier, we have maintained a cautious approach to provisioning while we navigate the next 12 months. We have increased our collective provision to 27 basis points of total loan AUM, 4 basis points higher than FY 2021. We acknowledge this is conservative.
However, shareholders can be reassured we are significantly provisioned for any potential macroeconomic shocks and future AUM growth. We will continue to reassess the coverage ratio at each balance date. I'd now like to quickly touch on strategy before moving to questions. We hold true to our vision of being a customer-obsessed company that makes homeownership, financial freedom, and business success more accessible to everyone. Our Resimac branded home loans and asset finance businesses are designed to offer a broad suite of products with flexible lending solutions that cater for a wider audience, facilitated predominantly by brokers. We built this business on the promise of superior service to brokers and customers, and that promise remains unchanged. Our strategy is to continue to grow our assets under management in our core niche operating markets by leveraging the strength of our brands across home loans and asset finance.
We'll achieve this with a deep and unrelenting customer focus that enables us to deliver better and more accessible lending solutions to Australians and New Zealanders. We will continue to invest in technology and customer experience design to support increased scalability, achieve a lower cost operating model, and provide brokers and customers with a superior experience. Lastly, we are supported by more than 10 warehousing banks represented by large domestic and offshore global banks. We will continue to leverage our global funding program to provide reliable access to funding throughout changing market conditions. I'll now hand the call back to the moderator, and we're happy to take questions.
Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. As a reminder, if you wish to queue for a question, please press zero followed by one on your telephone keypad and wait for your name to be announced. That is zero followed by one on your telephone keypad. Thank you. Your first question is from the line of Minh Pham from Barrenjoey. Please go ahead with your question. Thank you.
Hi. Thanks for taking my questions. Two questions, if I may. The first one just on loan losses. It looks like you've taken credit impairments of 12 basis points of loans. You've increased provisions, and that does appear higher than what your peers have done this period. Most banks and non-banks are still releasing provisions. What are you seeing there that they might not be? Looking at arrears on the 90 days by product, prime arrears have risen slightly over the past couple of years, or do you think you're just applying more conservatism? A second question, if I could after.
Of course. Hi, [Min]. How are you? Thanks for the question. Look, we acknowledge we're being quite conservative. We've had, you know, significant growth in our AUM in the last two years. We just want to be prepared for any potential shocks that may come, ensure that we've got coverage for any future shocks. We do acknowledge it's conservative. We think that we've got enough provision there to navigate whatever happens, and we also believe we've got enough for growth throughout FY 2023. We don't think we're going to need to increase that at all in 2023. We thought it was the right time to take it now given the uncertainty, acknowledging it is conservative.
Great. Thank you. Just a second one on settlements. The asset finance settlements, the AUD 1 billion target's been maintained for FY 2024. You've removed the AUD 8 billion home loan settlement target, I assume, given the slowing outlook there.
Are historically higher in asset finance, and this is a new book of business. Do you think now is the right time in the cycle to be growing this business? How do you ensure that your credit appetite is being fairly priced?
Yeah, look, despite the fact current arrears and delinquency levels, probably, you know, dispute that, you know, where, the arrears and delinquencies for asset finance are just as strong and in some cases even stronger than mortgage portfolios. The reality is, you know, over longer term, you know, you would expect high losses through that asset class. We've built this business off, you know, very strong credit discipline, which is why, as opposed to buying an existing business to bolster up, you know, the size of asset finance, we've done it organically. We run it through our models. We run it through our technology. We run it through our people.
That credit discipline that I think we've demonstrated over decades across the mortgage book is no different to how we're approaching it with asset finance.
Can I just add, as part of the collective provision increase that we had in there, we started beefing up our collective for RAF, asset finance, and that's a 53 basis points coverage for the asset finance business. It's. We still have a pretty conservative book in that area where over 40% of our loans are secured by residential property. The provision is such now that even if we're releasing through home loans, we think we've got enough collective provision there for both segments in through FY 2023.
Yeah. Mate, I'll add just a last point to that.
Our approach to, you know, mortgage asset origination, where we lean probably more than most non-banks to the conservative side, is really no different to how we're approaching our AUM growth with asset finance. You know, we do like, we like the clean side of prime, we like the clean side of near prime, which is how we've built the Resi mortgage business. We'll take the same strategy into asset finance.
Great. Thank you. Thanks, guys.
Thank you. Your next question is from the line of Tim Lawson from Macquarie. Please go ahead with your question. Thank you.
Hi, gentlemen. Thanks for taking my question. Just on the NIM, it's helpful to give us that 3 basis points impact you called out earlier. Could you talk about the sort of second half and the extra rate NIM that you're looking at, given there's been obviously competition and repricing going on?
Yeah, sure. We see exit NIM for the year in around the mid-1.60%s for home loans. That's where that's at in a normalized environment. There was a bit. The thing we had in the last couple of months was BBSW increasing in advance of it. When we normalize for that's where we see the NIM. As we get through this rate rise period in the next few months, we think about BBSW as a spread above cash on about 10 basis points. What we're doing now, we're pricing our new originations in line with the capital hurdles and the returns we require on new originations.
So, targeting that new business NIM where we think bills will land and a bit of a movement in capital markets, which will slowly move our tracker rate out on cost of funds. You know, we'd like to think that it's and of course the repricing on the back book that we've done through this cycle. We'd like to think that that exit NIM we can keep that broadly in mind for FY 2023 is what we're targeting.
Yeah, okay. Just with the sort of tightness in labor markets and wage inflation, this year you obviously implemented the core banking system in New Zealand, talking about applying it in Australia. Your plans beyond that in terms of the internal spending on, you know, systems, et cetera, what happens to that spend? Do you moderate that a bit or you just keep going with spending that you think it still needs commercially justified?
Yeah, look, you know, the reality is, you know, I think you know, spending on technology is now seen just a BAU expense, but it's a different spend. You know, we've spent, you know, the best part of two years spending on infrastructure technology, which obviously are long projects and expensive projects. The way we think about, you know, our spend, let's say halfway through this financial year or the start of next calendar year, is it'll be more around application technology. Where we're investing in application to support CX, to support scalability, to support broker experience. It's really more smaller ticket, you know, smaller projects that are supporting really kind of our broker and our customer focus.
Again, it's also kind of an add-on or complementary to the infrastructure spend we've spent to date.
Yeah. Okay. Thank you. That's all my questions.
Thank you. Once again, that is zero followed by one on your telephone keypad, and wait for your name to be announced. Your next question is from the line of Jeff Cai from Jarden. Please go ahead with your question. Thank you.
Good morning, all. A question on the margins. Can you talk through how much repricing you've done on the mortgage-backed book, from May to August versus the cash rates? You know, how has the runoff rates been in July and August so far?
Yeah, sure. The first question, the reprice through the May to August period, we repriced on the total portfolio. Obviously, it's different in different product types and segments, 24 basis points over and above the cash rate. That's necessary because if you think about BBSW, below cash and now seeing that, you know, where we expect it to be above cash, there's an immediate, you know, circa 20 basis points increase in your funding costs, just on that BBSW normalizing for want of a better term, over the period. For us, it was effectively a pass-through of that increase.
You know, we're continuing to monitor that and we'll, you know, approach that proactively if we need to do that again in the next couple of rate rises. The second question was. Sorry, Jeff.
The runoff.
Yeah. Not so the same.
Go on, go on.
Yeah. Look, obviously, first half was high in runoff in that, you know, competitive environment. Second half, we certainly saw runoff decrease materially. We haven't had any material spike in runoff in the last couple of months as a result of either the environment or us going over and above cash rate. In saying that, you know, the market is off in terms of activity, and a lot of it is due to uncertainty across the market on where rates will land. There's a lot of noise every four weeks, customers are getting a letter on rate increases. That's you know, putting a bit of a damper on activity and people moving. It's a bit of watch this space on runoff, I think for everyone in the industry. I think we're.
Most participants are seeing runoff remain at fairly stable levels for where they've been in the second half.
Got it. Sorry, the exit NIM of mid-1.60%, is that the exit NIM for June or July post all your repricing?
Sorry, did you say what was exit NIM for June?
No, in terms of when you made the comment that exit NIM was in the mid 1.60%s, is that for June or is that for July post some of your repricing?
Yeah. The June exit NIM was mid-1.60%s, I said.
Just another one on asset finance. Can you talk through, you know, how big is the book currently and then how will your new origination system sort of boost growth in 2023?
The book obviously is coming off a very small base, you know, broadly in line, you know, with settlements around AUD 400 million. We will be rolling out our products on our new origination platform in stages. Our largest segment being consumer finance, across auto and equipment, we will be rolling out in the next two or three months, followed by other products in a staged rollout over the next nine months. You know, the purpose of investing in the origination technology upfront is for two reasons to create ease and speed for our broker network and also to support scalability within the business. You know, we are tracking towards the FY 2024 target that we set, you know, 18 months ago.
We still feel as though that is very much achievable. We're very much buoyed by what we're seeing with some more mature players in that space that have been in the market for probably a decade. The market is probably deeper and wider than we had thought when we first stepped into it. You know, we believe that, you know, target AUD 1 billion by FY 2024, you know, leveraging off technology spend up front and targeting, you know, those markets, more on the conservative side of prime and near prime, you know, will more than support that number, you know, as we think about kind of higher AUM and higher settlement numbers beyond FY 2024.
Great. Thank you.
Thank you. Your next question is from the line of Andrew Tan from Bell Potter. Please go ahead with your question. Thank you.
Hi, guys. Another NIM question here. You know, I guess you're saying an exit NIM of, you know, 1.65%, and I guess FY 2022 was 1.81%. Like, are you able to give like a waterfall from the 1.81% to 1.65% to see which buckets have changed?
Well, Andrew, I think, like, looking at the second half average was 1.71% for NIM.
Yeah. Yeah.
Probably rather look at the full year, that's the one. The main driver in the second half is the BBSW spike. If you think about the first half, it was relatively flat. That's probably where you're seeing the difference in terms of the average and the exit, 'cause we were hit quite materially later in the year. It's effectively the two levers of yield and BBSW would have been the waterfall effectively.
Yeah, yeah. The BBSW.
I'm just trying to make sure I am being approached similar. Sorry?
Yeah. The BBSW impact, or I guess that's the spread between the cash rate and the BBSW. How much more was there because it's, yeah, I guess the spreads widened within rising cash rate environments.
Is that a question?
Yeah. I guess there's two buckets, right? You've done some repricing and then maybe spreads kind of gauged you. How do we look at those two buckets?
Yeah. I think. Look, FY 2022, I think we should think about it, how we've been thinking at margin in the past. To simplify it is we've had yields compressing for most of the year. We've had and we've had BBSW start to move out. The main driver has been we've always talked about can we match the decrease in yield on our asset side with the reduction on our pricing and our liability side. That's always been the challenge and, you know, we've been pretty transparent that, you know, we believe yield pricing on yields was gonna be more aggressive. That's what's happened.
What we're seeing is a bit of a stabilization because the new business pricing is not significantly below the back book runoff that we were seeing. We're pricing new business higher, and we're seeing BBSW move out. The repricing we've done in the back book should fully offset that BBSW repricing and hopefully be able to even offset any funding cost increase that we may incur on a tracker rate as we start to issue new RMBS in the future off that coming off those record lows.
Forgive me if I didn't see it, but did you spit out the kind of the NIM for asset finance?
No, we didn't. We're targeting, you know, double the NIMs in asset finance. You know, we'd like to target sort of low threes in terms of asset finance NIM. That's what we're targeting. We've got different types of products and the blend, that's where we're aiming to come at it.
Okay. Just in terms of runoff, I guess are you seeing it return to kind of historic levels, which is, you know, circa 25% kind of levels? Is that where you're seeing it run off to?
The historic level for prime is 25%. That's probably what we've seen in the market overall. We've definitely seen a slow up of refinance activity, there's no doubt about that, but it was significantly elevated. Near prime and specialists, you know, you expect those to be a bit higher than that, only probably around 30%. Look, we've seen all product types revert back to what we'd seen in a couple of years before that large peak that we had in the first half.
Okay. All right. Thanks very much.
Thank you.
Your next question is from the line of Richard Wiles from Morgan Stanley. Please go ahead with your question. Thank you.
Good morning, gentlemen. I've got two questions that relate to slide 11 on the home loan AUM. The first really relates back to the prime book and this concept of runoff. This is the prime books sort of continued to shrink during the second half. How much of that is due to, you know, this elevated runoff, and how much of it is due to you just stepping out of the market for new lending because of the competitive pricing? What are your expectations going forward? Do you think you'll get some growth back in the prime portfolio?
Yeah, good question, and that's where kind of the risk, you know, in runoff is sort of greatest in this environment where it is still extremely fiercely competitive. You know, really the market where the major banks are playing at the moment, and they seem to be kind of jumping over each other just to hold AUM in that space. Yeah, there is a challenge in terms of, you know, runoff and book growth in that prime space. Now that said, where we play and where we target in that space is not necessarily chasing after, you know, your typical owner-occupied principal and interest, you know, mum and dad, you know, metro type loan below 80%.
You know, we look for niche markets in the prime markets where we see reasonable return, you know, on capital, and try and stay away from, you know, some of those more automated or desperate banks that's just kind of chasing that one customer. In doing so, you know, in this market, you know, that is challenging. You know, holding that AUM book for prime will be a challenge, but we kind of know where we want to play and we know where we don't want to play. Sorry, Richard, was there a second question?
Yeah, there is. There's a reference on this slide to the direct-to-consumer channel, particularly your homeloans.com.au business. I'm just wondering if you can give us sort of your views on how that direct-to-consumer channel is evolving relative to your expectations. Do you think Australians are embracing that channel at the pace that some of the industry participants may have expected?
Yeah, look, good question. You know, in this particular environment and there's kind of a lot of you know, different and choppy data points. Look, I think the reality is, looking over the last three years, you know, that online space, that digital online distribution market, has definitely taken market share away from the bricks-and-mortar distribution. It doesn't really impact broker. They're two totally different propositions. You know, there has been, you know, growth in that sector, and the best indication of that is that we're seeing new participants come into it, you know, including CBA recently, and they've been in it for a while. NAB is also buying a few brands out there, whether it's UBank, 86 400, so on and so forth.
It is very much a prime borrower, your target. It is a rate-driven prime borrower that's attracted to that model. To be, you know, a dominant player in that space, you need to deeply understand what that customer journey or what that customer experience needs to be. It needs to be, you know, an automated, streamlined, low-touch, low-friction, digitally enabled channel. If you can't offer that, well, then you're probably just playing at the edges. It'll be interesting to see how that market performs probably over the next 12 months, moving through what is a slightly different cycle we're all in at the moment. It very much is, you know, it carries a lot of the characteristics I mentioned earlier with Prime.
The fact that the banks are stepping into it, they just, they will see it as an extension of their prime offering.
Do you have a view on where it could get to as a percentage of the total market for originations on a multi-year view? I mean, I've heard numbers as high as 30%. I don't know how realistic that is. Do you have a view on how much can come through the direct channel?
Look, I think, you know, in the near term or medium term, I think 30% is a stretch. You know, when you think about it, you almost need to take the entire market away from business banking, retail banking, bricks-and-mortar banking, because broker represents 70% of the market. You're effectively saying you've got a broker and online market, and every other traditional distribution channel just disappears. I can't see that happening over the short, medium, and even kind of near long term. That said, it is a growing market. You know, customers today are more comfortable, and the pandemic.
Okay, pardon for the interruption while we reconnect the speakers. Please stand by. Ladies and gentlemen, please stand by while we reconnect the speakers. Okay. Do we have the speakers back on the line?
Yeah, we do. We're not sure where we got kicked off the call, but I was probably halfway through a question from Richard.
Yes, Mr. Wiles, line is still open. Please go ahead. Thank you.
Thank you.
Yeah, Richard, I'm not sure really where we lost you. Did I answer your question?
Well, the last bit I heard was that it's a growing market and customers are getting more comfortable with the direct channel.
Yeah.
I'm not sure how much you've said after that.
Yeah. No, I think it was just soon after that, we realized we were just kicked out of the call. Yeah, look, it is a growing market. I don't see it going backwards. I only see it growing. I only see it taking market share from traditional, you know, kind of bricks-and-mortar type distribution. I think customers will become more and more comfortable with it. I think it's really just up to the lender to play in that space to make sure that they're offering, you know, the experience that someone that wants to transact online requires from that relationship. You know, and it is about low touch. It's about something that's automated, something that's easy, because it requires a little bit of upfront effort from the customer because they're effectively entering into a wholesale, you know, relationship.
Thank you.
Thank you.
Thank you very much. There are no further questions from the phones, gentlemen. Please continue. Thank you.
There are no further questions, did you say?
Yes, sir. There are no further questions from the phones.
Okay. Thank you, everyone. Thank you for your time. I know a few of you will be catching up later with one-on-one. As always, if there's any specific questions that you have, please feel free to reach out to Jason or myself. Enjoy the rest of the day and enjoy your weekend.
Thank you very much. Ladies and gentlemen, that concludes our teleconference for today. You may all disconnect. Thank you.