Ladies and gentlemen, thank you for standing by and welcome to the Resimac Group HY 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 your 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. It's my pleasure to welcome you to Resimac's results investor conference call for the half year ended 31 December 2021. I'm Scott McWilliam, CEO of Resimac, and with me is Jason Azzopardi, our CFO. We'll be talking through the investor presentation launched with the ASX this morning and will welcome questions at the end of the call.
In today's presentation, we'll take you through our first half performance, as well as an update on the FY 2024 targets and progress on our strategic priorities. The macroeconomic environment has changed significantly compared to where we were only six months ago, when large parts of Australia were in lockdown and Omicron was only just starting to rear its head. Fast-forward to today, and the economic outlook looks more positive. International and state borders are open or will be imminently, and restrictions are largely eased.
Latest inflation and employment data indicates an RBA rate rise will eventuate earlier than expected, most likely later this calendar year. To throw an entirely new variable into the mix, geopolitical tensions are escalating in Eastern Europe, which has potential repercussions across the globe. Recent increases in fixed rate home loans are an indication that home loan interest rates have bottomed, with variable rates likely to increase as 2022 progresses. We have confidence in the strength of the Australian property market, both in terms of property value and home loan activity, with households currently having a stockpile of AUD 250 billion in savings due to the pandemic. Furthermore, our customers are well-placed to continue to service their home loans in an increasing rate environment.
On average, our prime customers have nearly four years ahead on their repayments, with our specialist customers, they have close to two years buffer across their weekly repayments. Supporting our customers throughout the pandemic and other extenuating circumstances continues to be a key priority for us. Notwithstanding, we are pleased to see the number of customers who have met our financial hardship assistance at that 31 December actually reduced to only 174 customers. Looking now at slide two of the investor presentation, I wanted to highlight the four brands within Resimac Group. Resimac Australia increased assets under management by 13%. This was fueled by the outstanding success of our flexible specialist products, where our settlements increased 190% to AUD 2.1 billion.
We're also delighted that our new origination platform went live in December 2021, providing scale benefits to our loan application process that will facilitate our next phase of growth. We're particularly proud to launch such a large change project while the organization wrote record settlements during the half. homeloans.com.au continued to increase brand awareness and build steadily towards materially contributing to our FY 2024 settlements target. We launched our new fairness brand promise across fees and backfill pricing that prompted a surge in five-star reviews and positive feedback. We expect this new approach to have a material impact on our ability to retain customers and compete with other online home loan providers. Our above-line marketing campaign, featuring brand ambassador Adam Gilchrist, and embedded into Foxtel and Kayo's Summer of Cricket, is also providing strong impetus into the second half.
Resimac Asset Finance is a key growth engine for the group and is scaling rapidly. Our December quarter settlements were circa AUD 400 million annualized with a significant growth in future years. We've commenced a project to implement a new origination platform, which will go live in Q1 FY 2023. Furthermore, we've implemented a number of funding initiatives providing further improvement to our cost of funds.
Over in New Zealand, our Resimac brand continues to be recognized as a leading New Zealand home loan non-bank lender. I'm pleased our new core banking system seamlessly went live early in January for our New Zealand customers, providing them with a new market-leading online banking experience. We expect the Australian environment to go live mid this year.
Can I please ask everyone to turn to slide four, where I'll provide an overview of our performance.
During the first half, the group generated a net profit after tax of AUD 53.5 million, a 6% increase compared to first half of 2021 and in line with the second half of last year. This profit increase compared to the first half of 2021 is underpinned by our home loan assets under management increasing 13% and lower loan impairment expenses as the impact of COVID on our customer service, serviceability recedes. Net interest income increased 2%, driven by higher AUM, partly offset by lower margins as the continued low-rate home loan environment over the past 12-18 months places industry pressure on portfolio AUMs. Operating expenses increased AUD 4.3 million or 13%, driven by a 100% write up to the P&L of our core banking and origination project. A highly competitive labor market.
The higher net interest income was offset by operating expenses, resulting in our cost to income ratio increasing 230 basis points to 33.4%, a ratio that remains at industry lows despite the increase in the period. I'm particularly pleased we continue to optimize our use of capital with our return on equity at an industry high level of 31.3%. As a result, we have increased the first half 2022 interim dividend by 67% to AUD 0.04, fully franked.
Thanks, Jason. Now moving on to slide seven. I'm happy to report our home loan business continues its growth trajectory, with Resimac settling a record home loan settlements in the period of AUD 3.5 billion, up 63% compared to first half 2021. Most pleasing is our ability to remain nimble and quickly take market share when opportunities arise.
With prime home loan rates at record lows and the added customer entitlement of cashbacks, we have moved our focus to an underserved part of the specialist market, growing AUD 2.1 billion of specialist settlements, an increase of 190% compared to first half 2021. The record settlements during the period demonstrates the extraordinary resilience of the group, given these record settlements were written by simultaneously taking a major project implementing our new origination platform. Home loan market competition remains fierce. Therefore, I'm pleased that we continue to demonstrate the ability to increase our assets under management above system. Our home loan portfolio increased 13% to AUD 14.6 billion, followed by a 35% increase in our higher margin specialist portfolio. Finally, our treasury function continues to deliver outstanding results.
While RMBS margins bottomed out in the second half of last financial year, we continue to issue RMBS bonds at lower margins than our last four-year average, the benefit of which we'll continue to receive and have been a cost of funds in coming years. Furthermore, origination at an AUM scale are helping us to achieve a lower overall cost of funds. I'll now quickly touch on our strategy before moving to questions. Please turn to slide 16. We hold true to our mission of being a customer-obsessed company that makes home ownership, financial freedom, and business success more achievable to everyone. Our Resimac brand and home loan businesses in Australia and New Zealand are designed to offer a broad suite of products with flexible lending solutions that cater for a wider audience, facilitated predominantly through third-party mortgage brokers.
This is our largest channel, our largest opportunity measured by AUM, and a market and a strategy we have been refining and executing on for many years. We built this business on a promise of superior service to brokers and customers, and that promise remains unchanged. homeloans.com.au is our new online direct-to-consumer brand, servicing a growing audience who prefer to engage online and directly. This brand's low rate fee-free brand promise continues to resonate strongly, as demonstrated by the overwhelmingly favorable customer reviews and industry awards.
We believe this market will continue to grow at a multiple of system as customers become more and more comfortable transacting online. It is a customer-led, digitally enabled, low touchpoint channel targeted at a specific audience. The growth of this channel is a strategic priority for the group. Resimac Asset Finance enables us to service what we believe is an underserviced market.
This is a logical and adjacent opportunity for the business to offer high-margin products to new and existing audiences, leveraging off our existing funding infrastructure and distribution platforms. This business is growing faster than we originally anticipated, and we expect it to materially increase further when we implement our new originations platform in Q1 FY 2023. In summary, our strategy is to continue to grow our assets under management above system by leveraging the strength of our brand across home loans and asset finance. We will achieve this with a deep and unrelenting customer focus that enables us to deliver better and more acceptable lending solutions to Australians and New Zealanders.
We believe our current investment in digital transformation, combined with the growth of our broker and direct brands in Australia and New Zealand, position us to settle at least AUD 8 billion in home loans and AUD 1 billion in asset finance in FY 2024. These targets remain on track and unchanged. I'll finish there and hand it back to the operator for questions.
Thank you, sir. Ladies and gentlemen, we will now begin the question-and-answer session. 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 Andrew Tan from Bell Potter. Please go ahead. Thank you.
Hi, Scott. Hi, Jason. Just the usual question about NIM, I guess. How do we look at the shape of NIM going in the second half?
Hi, Andy. Yeah, look, I think the second half will probably be, if you think about the next 12 months, obviously there's the three levers in margins. Let's talk about the home loan pricing. Two main factors there is, or three, the mix of what we're originating. You can clearly see in this half with the record specialist settlements we've done, that's a positive for the blended pricing in the book.
Yep.
The runoff over the last 12 months has been much higher than the industry has seen previously, and certainly, you know, that we've seen in the past. We are seeing that abating with fixed rates moving out. The new business rates for prime and even some specialist products are still really low. In summary on that, on pricing, we still see some compression on the interest income side over the next six to 12 months before it hits the absolute bottom. Funding costs, we're continuing to originate our new RMBS deals and our warehouse pricing remains broadly flat. We expect the blended cost of funds to continue to come down.
We probably don't see the offset of the savings on our liability side offsetting the assets. Then BBSW, I unfortunately don't have the answer for that for you, but clearly something you can monitor on a daily basis. We watch with interest, obviously, how that will move in the next 12 months. It's not gonna be as benign as it has been. Very interestingly, it hasn't gone a lot. The one month hasn't moved at all with everything that's been going on recently. Six months has moved out slightly, which can be a little bit of a bellwether for the future, but not materially. At this stage we're just taking a pretty neutral view on it.
I guess in terms of an exit kind of NIM at 30 on December, like, I presume it was lower than the 191 basis points?
Yes, that's correct. Yeah, that's the average for the half, mate.
Yeah. How would we look at that? Like, is it, you know, is the exit NIM, you know, 180 bits or 185 or whatever?
Yeah. Well, if you take what the balance was at the start and plonk that average in the middle, that's about right, yeah, what your exit NIM is.
Okay. All right. In terms of the collective provision, am I correct in saying that you haven't really written anything back in terms of that COVID overlay?
We removed the layer at year-end from COVID overlay as such. What we did is on a loan-by-loan basis, we're treating anyone who was in hardship in the past on an individual basis, so we've been quite conservative on how we treated them. The answer is specifically to your question, we haven't written anything back, and we retain quite a bit of conservatism in that provision.
Yeah. Okay. 'Cause yeah, I guess that, you know, 2023 ECL provision hasn't really changed from the second half. I guess a lot of your peers have kind of written that, you know, collective provision back. Let's say, is there anything different with your book or is this more of a conservative factor?
Yeah. No, there's nothing different. If anything, I'd say, if I think about the competitors you're referring to or have written back, I'd actually say that our book's more conservative than theirs. So they've probably just been more aggressive writing that provision back, which, you know, is not a bad. I'm not opposed to their strategy or saying anything against that. We will look at it at year-end and have a really good view of, you know, whether we're over-provisioned or not. Just to offset that for future, we do expect with the way RAF will grow and our aim for that is that, you know, the collective provision in the RAF will start to build up.
Yeah.
You know, as the book grows, we will start to take a larger collective provision in RAF. Yeah, we've got quite a bit of conservatism in there for sure. Especially Andrew, if on slide 12, if you're looking at our risk performance, you can see, you know, the word benign is actually exactly where you wanna be when talking the performance of the book. You know, those numbers are tracking, you know, well below, you know, historical averages. They're tracking well below 2H prior period. Yeah, we're conservative on the provisioning side and the book performance itself is arguably second to none.
Okay. Just a final question about IT costs. Like, is that kind of elevated at this stage or is that kind of the run rate going forward? Yeah, or they kind of brought forward investment given the number of new platforms that you're working on?
Yeah. Look, this year is, you know, clearly the culmination of our major project and has a lot of cost in there, the majority of the project cost. Look, we've always said that we expect to continue investing in the business from a technological point of view. It certainly. I wouldn't expect it to go up. We probably think we'd spend less in future years than we've spent this year.
Yeah, I wouldn't say that's gonna keep increasing. I would expect there to be some drop off in that, but not the whole project cost isn't gonna come out and we're not going to have any projects at all. We will continue to optimize this, you know, key. We've got two main points of tech now that underpin from application to settlement and the post-settlement experience for the customer. They're cloud-based.
They're, you know, very, very good pieces of software, but we need to keep investing in those to get the most scale benefit out of them, and that's what we'll do. They won't be as large or as expensive as what we've done this year.
Okay, look, in terms of the difference between kind of the ongoing versus kind of one-off project work, is it material or is it just more like the AUD 1 million mark rather than the AUD 5 million or AUD 10 million mark?
Sorry, what was it? Say that again, sorry.
I guess, yeah, like
Yeah, it's AUD 3 million, I'd say.
Yeah.
I think we'd be looking at it going AUD 3 million less next year at a high level. That's how I'm thinking about it at this stage.
All right. Yeah. Okay, great. Thanks, guys.
Thank you, sir. Once again, ladies and gentlemen that is 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 next question is from the line of John Hynd from Wilsons. Please go ahead, sir. Thank you.
Oh, good morning, Scott and Jason. Thanks for your presentation and thanks for taking my questions. Perhaps. Yeah, hi. Perhaps if we could start on the book. Obviously, prime is trending lower in terms of originations. It has been for a couple of halves, and I've read your commentary around competition increasing. Is this, I guess, shift, is it strategically by design with you guys now? Are you perhaps moving more to specialists because you're leveraging the technology that you've got? Is the first part of the question. Then the second part of the question is, with homeloans.com.au, where is that product? You're saying it's growing ahead of expectations. Where is that product trending? Like, where are you, what category are you growing in? Is it attractive to a prime or a specialist type customer?
Perhaps give us an indication on maybe the size and where you know, where you expect it to get to, like what percentage of the loan book, where are you expecting to get to in that regard?
Yeah. Okay. John, remind me if I don't answer them in the right order. I don't answer any questions. I think the first one, yes, there has been a trend down in relation to prime, and we forecast for that. You know, which is why we turned our attention to where is it we can take market share, where are the majors not focusing, where it is less aggressive from a NIM sweep perspective, and, you know, coupled with the TFF, coupled with obviously a lot of competition in that particular market, you know, we continue to service that market, that prime market. We continue to have what we're telling you, a very strong price in that market. A very competitive environment, it's leading up to probably the end of last year, last calendar year.
I think that's showing, I mean, prior to that was, you know, where do we grow that's underserved? Obviously, that strategy's worked very well. The prime market is still a very important market to us. The technology investment, John, is more likely to help on the prime side, in terms of driving a lower cost operating model, more efficiency, more automation, better broker and customer experience than it does probably on the specialist side. The tech actually is more supportive of prime growth. Leading into your question relating to homeloans.com.au, where the technology is a really important part of that service or value proposition because it is all around high automation, low touch, speed and flexibility. You know, we see the technology underpinning the growth of homeloans.com.au.
As we think about those targets, you know, we've kind of set ourselves internally and obviously we'll call out to the street for FY 2024. That market is growing, you know, and will continue to grow above system. I'm talking about the online market, so where homeloans.com.au play. That market will continue to grow. We just see significant growth in that sector. We don't see it necessarily taking market share away from broker. We just see it taking market share away from traditional bricks and mortar distribution. And, you know, that opportunity, you know, we think with our brand and our positioning and investment in technology, we see ourselves as a major player in that online space, which again, is leaned more towards prime than specialist.
That said, you know, I think specialist is an opportunity in the online market, but it's likely to follow that of prime.
That's great. I think you did a good job with my long-winded question, Scott. The second question I had, just around AFS, if you could, just give me some more color there. I've said, I mean, it looks to me like the book has halved, on a half-on-half basis. Correct me if I'm wrong. But you're talking about having a run rate of 400. Can you perhaps let us know when you roll, when you, I guess, when you execute on your strategy there, how did December look, how did January look, and how's February looking? Maybe to give us a little comfort around that.
I'll let Scott answer that, John, but do you see in that question the asset finance book it halved?
Yeah. I've got a couple of results on, so I might be overlooking something there.
Yeah, it has halved. I mean, it's coming up from a low base, and the AUM is probably, you know, close to triple the prior. Okay. Like, you know, it's small, but I'll let Scott talk about the segment run rate in the half.
Yeah, sure. Yeah. John, it hasn't halved. It's probably doubled or tripled. It's actually going the other way. Hence I mentioned earlier, you know, we're really pleased with the growth of that particular channel, where the last quarter annualized about AUD 400 million in settlements. Look, it is coming off a low base like Jason said, and it is tracking how we expect it to. We will remain, you know, conservative probably is the right word. Our expectations in the short term are reasonable and fair as we kind of grow out on this book that's slightly different to the mortgage book.
Technology is just as important in asset finance as it is in the mortgage space, and in some cases probably even more important where it's, you know, direct to consumer asset finance. You know, you're talking seconds, you're not talking hours or days for approval. Technology's really important. The run rate of asset finance, you know, each quarter continues to improve. We're exiting each quarter on a higher settlement. It's tracking really well into FY 2023. FY 2023 is a really important growth trajectory as we think about our target for 2024, which is AUD 1 billion in settlement for that particular financial year. We're tracking into FY 2023 how we expect. You know, the loan origination system will do a lot of the heavy lifting in terms of that continual growth in FY 2023.
As we enter 2024, we're literally writing circa, you know, AUD 80 million a month or thereabout as we come into 2024. To land an AUD 1 billion number FY 2024, ideally higher.
Great. Thank you very much. I'll jump back in the queue.
Thanks, John.
Thank you, sir. Once again, that is 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. There are no further questions at this point. I would like to hand the floor back to your speakers today for any closing. Please go ahead, gentlemen. Thank you.
Made it easy on us this time. Look, thank you very much. You know, for those shareholders there, thank you very much for your support. Obviously we're happy to facilitate, you know, any questions outside of this particular forum, and enjoy the rest of the day. Thank you.
Thank you, sir. Ladies and gentlemen, that does conclude our teleconference for today. Thank you for your participation. You may all disconnect. Thank you.