Ladies and gentlemen, thank you for standing by. Welcome to the Resimac Group FY 2021 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 key 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 Jason Azzopardi, Chief Financial Officer. Please go ahead, gentlemen, and thank you.
Thanks, James. Good morning. It is my pleasure to welcome you to Resimac's results investor conference call for the year ending 30 June 2021. My name is Scott McWilliam, CEO of Resimac, and with me is Jason Azzopardi, our CFO. We will be talking to the investor presentation notes we gave you this morning, and welcome any questions at the end of our presentation. If I think back 12 months ago, even six months ago, I don't think anyone could anticipate that a large portion of our population would be in lockdown again today. My heart goes out to everyone who has been affected by this virus. Supporting our impacted customers through these difficult times continues to be a key focus for the business. However, notwithstanding the trials and tribulations brought about by COVID-19 and other adverse events, the Resimac Group has had a great year.
We were pleased and humbled to be awarded Non-Bank of the Year in the 2020 Australian Mortgage Awards, in recognition of the compelling brand proposition we offer to our third-party distribution partners and also our customers. Resimac Group has been well-placed to service the increase in strong residential property market demand through the strength of our multi-channel distribution model, which now includes two new brands that we launched in FY 2021. Our new direct-to-consumer channel brand, homeloans.com.au, as well as Resimac Asset Finance, which enables us to offer a full suite of lending products to customers and commercial borrowers. Looking now at slide two of the investor presentation, I want to highlight the four brands within the Resimac Group. Resimac [audio distortion] 8% on the prior year. We've also issued our lowest margin prime and specialist RMBS transaction since the GFC, reflecting strong investor demand for our mortgage-backed securities.
homeloans.com.au launched in September 2020 and has contributed to the growth of our direct consumer assets under management, which increased by 10% to AUD 1.9 billion. The lower cost of funds from Prime [line] has supported our aggressive growth strategy, with strong lead generation and a driving effective cost per settlement and a market-leading front-end technology providing customers with a seamless online application process. Resimac Asset Finance launched earlier in the calendar year off the back of our 100% acquisition of IA Group. We launched the new brand to the broker channel in April with strong support from our broker partners. This was followed by the launch of our new online direct-to-consumer channel. By restructuring the business's warehouse facility, we've been able to reduce the cost of funds, enabling us to offer competitive loan products across consumer and commercial finance.
Over in New Zealand, our Resimac brand continues to go from strength to strength, reporting NZD 405 million in settlement in FY 2021, up 81% on the prior year. Our securitization program in New Zealand follows the same trend of Australia. With our RMBS Prime deals issued at materially lower senior margins compared to previous years. Furthermore, the new origination system launched in August paved the way for a faster and more streamlined loan processing for brokers in New Zealand.
Can I please ask everyone to turn to slide four, where I'll provide an overview of our performance. In FY 2021, the group generated a statutory profit after tax of AUD 107.6 million, up 92% compared to FY 2020. To provide the market with a true underlying recurring profit of the business, we normalize our profit where we receive one-off income items unlikely to be repeated in future periods. The normalized profit after tax of AUD 104 million excludes the fair value gain on our equity investments. This profit increase is underpinned by a 29% increase in net interest income to AUD 242.7 million, driven by a combination of home loan assets under management increasing 11% and home loan net interest margin increasing 7 basis points to 207 basis points.
The higher net interest income, combined with our continued cost discipline, resulted in a significantly lower cost-to-income ratio of 32.1% for the year, a decrease of 590 basis points. I'm particularly pleased we continue to optimize our use of capital with our return on equity at an industry-high level of 36.9%, an increase of 1,140 basis points. As a result, we have increased the FY 2021 final dividend to AUD 0.04 and the full-year fully franked final dividend to AUD 0.064, a 113% increase on FY 2020. Finally, moving to slide five, I wanted to call out our operating expenses and loan impairment expense. Firstly, operating expenses increased AUD 8.5 million or 14% compared to FY 2020. As I outlined at half year, our core banking replacement project is well advanced with AUD 7.8 million of costs incurred in FY 2021.
The cost of this project has been fully expensed in the profit and loss statement. We expect a further AUD 4 million of cost to be incurred in FY 2022, specifically related to this project. Secondly, loan impairment expense of AUD 2.7 million, decreased 88% compared to FY 2020. You will recall last year, we raised a COVID overlay of AUD 16.4 million. This overlay is now released, and all loans credit risk are assessed individually within our expected credit loss model and will remain so going forward. We remain conservative on the potential credit risk on loans currently or previously in hardship that resume payments. The movements in our collective provision are summarized in a table on slide 13.
Thanks, Jas. Moving on to slide eight. I'm pleased to report our home loan business growth trajectory continues, with Resimac setting a record home loan settlement of AUD 4.8 billion, up 3% compared to FY 2020. Most pleasing is the momentum we built in the second half, settling AUD 2.7 billion, an increase of 25% compared to the first half. This growth is built on the strength of our broker and direct brands in both Australia and New Zealand. The home loan market competition is fierce, therefore I'm pleased we continue to demonstrate the ability to increase assets under management at a multiple of system. Our home loan portfolio increased 11% to AUD 13.8 billion across all products and channels. Once again, the second half momentum is evident, with annualized AUM growth in the second half of 14% compared to 8% in the first half.
Finally, our treasury function continues to deliver outstanding results. The second half featured record low senior margin on our RMBS issuance with our high-quality portfolio and origination strategy resonating well with investors globally. As reported to the market on Friday, we priced a AUD 1 billion Prime RMBS at levels not seen since before GFC, including three new notes pricing at bills plus 68 basis points. These lower cost of funds allow us to aggressively target product segments where we believe we can take market share. Our cost of funds will continue to benefit into FY 2022 and beyond from these lower RMBS margins. As mentioned earlier, we are pleased to report the Board has declared a fully franked final dividend of AUD 0.04 per share, resulting in total dividends for FY 2021 of AUD 0.064 per share.
I'll now quickly touch on our growth strategy before moving on to questions. Can I ask you please to move to slide 16? Our mission is to create a digitally enabled non-bank lender, providing innovative, competitive and acceptable lending solutions to more homeowners, consumers, businesses in Australia and New Zealand. Our Resimac branded home loan businesses in Australia and New Zealand are designed to offer a broad spread of products with flexible lending solutions aimed at a wider audience, facilitated predominantly through third party brokers. This is our largest channel and largest opportunity measured by AUM and a market and strategy we've been refining and executing on for many, many years. We built this business on the promise of a 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.
We believe this market will continue to grow as customers become more and more comfortable transacting online. It is a customer-led, digitally enabled, low touchpoints 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 under-serviced market. It is a logical and adjacent opportunity for the business to offer new products to new audiences, leveraging off our existing funding program and distribution platform. Consistent with our home loan strategy, a strong digital experience will underpin the delivery and service proposition across asset finance. Finally, our strategy is to continue to grow our assets under management at a multiple of system.
We believe our current investment in digital transformation, combined with the growth of our brand across brokers and also the direct channel in Australia and New Zealand, positions us well to settle at least AUD 8 billion in home loans and AUD 1 billion in asset finance in FY 2024. I'll now hand it back to you for questions.
Thank you. Ladies and gentlemen, we will now begin the question- and- answer session. You may register a question by pressing zero one on your telephone keypad, and wait for your name to be announced. That's zero one to register. If you do wish to cancel, please press zero two. Our first question comes from [John Hind]. [John], your line is open.
Good morning, Scott and Jason. Congratulations on a good result. Thanks for taking my question.
Thanks, [John].
Great. If we could perhaps just touch on the outlook for your NIM. Second half is down a little bit. Could you perhaps help us understand that a little bit better? Perhaps, how much of a benefit do you expect the recent RMBS issuances that have been done at quite attractive rates, how much do you expect that to impact your NIM in 2022 and beyond?
Yeah. Thanks for the question. Look, I think the way to look at NIM is in two factors. One is the home loan pricing. Clearly, we are seeing very competitive pricing on new business in the market. That is continuing. There's absolutely pressure. We're not immune to that pressure on yields. The yield factor in FY 2022 will largely be dependent on back book run-off. We are seeing a lot of competition in the market. We are seeing when that back book runs off, it can be a hit on our yield. Obviously, our hedge to that is the amount of specialist settlements that we can originate in FY 2022. We do expect yields to continue to decline in FY 2022, we think that we're going to hit the bottom in FY 2022.
In terms of cost of funds, I've tried to best demonstrate the benefit of RMBS issuance on slide 10. What I've got on that chart there is how much we've originated in RMBS in each year and what the margins were in each year for those RMBS. Now, most of our RMBS deals, bar a few exceptions, are four-year deals. That allows you to start projecting about what's rolling, what's turning out of our RMBS, and what benefit we're getting from the new RMBS. In summary, we're going to get the benefit from these low-margin RMBS for the next four years. The longer we continue at these low margins that we've been able to originate in the second half, our blended cost of funds is going to continue to benefit from that.
All right, great. Thanks very much. Just two more from me. With the ABS business, conscious that you probably don't want to discuss the product publicly just yet. How receptive have the brokerage network been to date? Can you perhaps give us some color on the book in the second half? I think it was about AUD 80 million in the first half. Were you able to sort of drive that business this period? I guess with the qualitative statements around the targets you've got for AUD 1 billion by FY 2024-
Yeah.
... of origination.
You're right. I'll go back to the first piece is, we are seeing month-on-month growth in settlements through that channel, and which obviously is encouraging. Albeit, we haven't fully launched ourselves to all of the distribution yet because it's important that we've got the process and the technology right, to take advantage of that opportunity I touched on earlier, where we do believe there's an underserviced market. Our investment in technology within asset finance is pretty similar to the way we think about investment in technology and digitalization within home loan business. We will be prepared, the business will be prepared, to have production to support more than AUD 1 billion of settlements in a year by FY 2024.
We're encouraged by just, albeit, we're coming off a low base, where obviously doubling or tripling the book, that's the way we kind of think of it. That is likely to happen for the next couple of years because we are coming off low base. We believe those targets that we've set are very realistic.
All right. Just one more on that guidance slide. Sorry.
Did you touch on quality? I might have missed that bit.
On quality? Sorry, I was talking about quantitative, or qualitative. Just one more on that guidance slide. They're pretty aggressive targets. How do you plan to get there? When you step back and you think about the environment you're playing in, how much is perhaps incumbents not playing as much in your space and pulling back? How much is Resimac taking share?
Look, I think as we grow and continue to grow AUM at a multiple of systems, we are obviously taking market share. When we step back and have a look at that kind of number, when we kind of, we're forecasting out of what are the targets we've set ourselves. How we're setting up the business today to give ourselves the best chance to hit those targets is, when you break them down into monthly settlements and you think about the size of systems, they're still not big numbers. It is a AUD 400 billion a year home loans market. When we're making statements that we believe, with the service proposition and the technology to support that, we're looking to take more than AUD 8 billion of that. It gives you a lot of comfort, because I wouldn't call them overly aggressive.
The same can be said for asset finance as well. It is a very large market. We believe there is an opportunity for us to, in the near term, and I'll call three years the near term, to take 1% or 2% of that market. When you bring it back to monthly settlements and you look at our business and the different channels and brands that we have, w hen you think about them in isolation, we believe that they're very achievable.
Great. Thanks very much, guys. I'll jump back in the queue.
Welcome.
Thank you. Our next question is from Tim Lawson. Tim, your line is open.
Hey, guys. Thanks for taking my question. Really, it's almost a follow-up to the discussion you've been having already. In terms of the core system, you've put up the investment. How important is that in being able to do the volumes you're talking about?
In terms of doing the volumes, Tim, what we're rolling out in terms of our new origination system, which we've actually just rolled out in New Zealand, and we will be rolling out in Australia, staggered rollout in Australia between now and probably the end of October. It's that particular system that probably more supports production. It's that particular system that allows us to find scalability when thinking about settlements. The core system that you touched on is probably more important when we're thinking about user experience, because it very much then supports the back-end experience with our customers when we're thinking about the weighted average life of our customer, which is obviously extremely important because it's that particular system that also is supporting that banking experience and that mobile app experience that we're looking to roll out in New Zealand and in Australia in the near term.
The origination system, which we've just rolled out in New Zealand and just about to roll out in Australia, is more about helping us in supporting production and also reducing turnaround time and driving scalability. The second piece is more about UX.
Yeah. Okay. When that expense that's currently going through the P&L is done, does that just disappear, or do those costs remain in some other way in the business?
It's a good question. Look, we think our investment in process and digital, we'd like it to continue. This is a large transformational project. It would be definitely the highest cost one-off project. We want to continue to invest to build scale into this business. We have very, very large growth ambitions. The honest answer, we don't have that mapped out what we do post the transformation project because it is so large for us. We want to continue to invest in this business long term, and keep positioning it for future growth. I don't want to commit and say definitely yes, because there will be an element of spend. Whether it's the same amount of that project is to be determined.
Okay. Thank you.
Look, Tim, there's no plan for us to go through a project of this size in the near term. I've been told you only replace your core banking system once in your career. What we will be doing going forward is, I don't think we actually ever invest. Yes, stop investing in technology and driving those digital outcomes, which is all around speed, flexibility, and user experience. What we will do going forward is we'll continue to build applications on top of the foundation, which is that core banking system that we are in the process of replacing. We won't be looking at projects of this size in terms of individual project size from a dollar perspective, nor from a time period perspective.
We will continue to invest in and around that platform, especially from an application perspective, to continue to improve that user experience, which benefits us internally from an efficiency perspective. Obviously, very much driven by the user experience at the street level.
Thank you.
Once again, ladies and gentlemen, if you would like to ask a question, please press zero one. Our next question is from Michael Kent. Michael, your line is open.
Yeah, good morning, guys. Yeah, fantastic result. I note that you've increased profit, like, 89 % the last two years. Maybe internally, how do you measure your performance? Is it a combination of return on equity, profit growth? I'm just curious as to what sort of internal measures you have for measuring performance and what your objectives might be in that regard.
Yeah. That's a good question, because internally, we don't actually spend a lot of time looking at the numbers that drop out of the bottom of achieving our KPIs. The numbers that we do look at internally are around cost income ratios. I think that's kind of a demonstration of whether the business obviously is growing and looking for efficiencies within the process and the system, also demonstrates the cost discipline. It's sometimes easier during strong times for costs to build, to back in those costs. That's obviously something that we're very focused on, and so is the Board. The other piece is return on equity. We run a capital efficient model. We'll continue to run a capital efficient model.
They're probably the two measures that we talk about quite a bit internally. The other piece, and which is probably becoming a growing tagline when you think about internal conversations, which should then just result in greater settlements, greater AUM and a growing profit, is customer insights. We are very much focused on moving towards more of a data-driven organization, to build out on the intel that we have today. Things around predictive analysis and things like that is something we spend a lot of time talking about. That, the measure of customer experience is probably a KPI internally that we talk about quite a bit. I'd say across those three measures, they probably get 80% of the air time.
Okay, thanks. What about dividends? Do you get much discussion about that internally? I notice you've got a pretty big store of franking credits there. It's great to see the increased dividend, but you probably could increase your payout ratio from 25% and still have enough room for growth, couldn't you?
Yeah, look, we're mindful of supporting the organization or investing back in the organization for further growth. We still see ourselves as a growth stock more than a yield stock. I believe with the improvement in our payout ratio, albeit still modest, in that kind of 20%-30% range. We recognize the importance of obviously delivering those profits back to shareholders. Growing, investing internally on technology and investing in our funding program is critical to our growth. We will continue to support what I say is a modest payout ratio. In time, we'll move towards what we believe will be a healthy blend between a growth stock and a yield stock.
Right. Thanks, Scott. Good work.
Just to add to that. We've always run a very capital-efficient business, which is clear in the rally. We're talking about some ambitious growth targets. We do need capital for that. Asset finance requires a bit more capital than home loans and the funding structures that Scott's alluded to. We are reinvesting capital, either into the projects that we're doing or into our funding programs, which will deliver long-term benefits to shareholders. We've got the track record, where we've had efficient use of capital up to now. We'll continue to do that. We're not sitting on piles of cash and not using it efficiently, I can assure you.
Thanks.
Thank you. Our next question is from Andrew Tan. Andrew, your line is open.
Goodday, Scott. Good day, Jason. Thanks for the questions and well done, and thanks for your efforts in managing the business. Just a question about the comment about warehouse funding. I guess the margin of that was elevated during COVID. Is there a benefit from that normalizing, I guess, going forward?
Yeah. You generally do. Your warehouse pricing or margins will generally follow market pricing. Obviously, the first round of COVID, I would say 12 months ago, where credit spreads moved out, so did warehouse pricing. Obviously as credit spreads have moved in the term markets, so will warehouse pricing. On average, and I'm not saying it happens, it's correct every day of the week. Generally, your warehouse pricing will trade at a slight premium to your term pricing. The reason for that is, by definition, it is a warehouse. The objective is to move from that warehouse into the term market. There you can understand it needs to be more attractive to move into the term market and to support that process. The two generally move together. There might be a slight lag between warehouse pricing and term market, but they generally price pretty similarly.
Okay.
If you're expecting warehouse pricing to stay where it is today for the whole of FY 2022, there would be a tailwind to NIM compared to FY 2021. The average-
Yeah.
The average warehouse pricing for a [audio distortion] would be lower than 2021.
How do we look at that? I guess, is it similar to that RMBS chart you put in that slide 10?
Well, it's not. To Scott's point, if price is at a small premium to where recent pricing is. The thing is, every time we do an RMBS, we can't just immediately go back to all our warehouse providers and get a reprice that we only got two months ago. The new issuance is assisting us with warehouse pricing. Some of the offshore warehouses may be six months renewals, and we might have to wait a four-month period before we can reprice that. What it is the RMBS pricing is a great benchmark for us to allow us to act with our variety of warehouse providers, and we just negotiate and work hard on every basis point on that, regularly.
Is that a perfect guess?
I don't want to pin down on a basis point number. I'd rather look at total cost of funds. I might just take that away and come back to you, Andrew.
Okay. I guess it was a headwind of 4 basis points in FY 2021, so it should be a tailwind of 4 basis points, at least, in FY 2022.
Yeah. To split that first half 2021 was a headwind of 7 basis points and was a tailwind of 2 basis points in the second half. We would expect that tailwind, new originations coming on and a full year of lower warehouse costs. We expect funding costs to be a tailwind in FY 2022, as I noted earlier, yields will be a headwind.
With the run off of the back book, what's driving that? Is it early repayments of borrowers, or is it refinance activity?
It's both. We're seeing it across the market with our peers. There's a lot of people looking at their personal balance sheets. There's a variety of factors that we're seeing. We're doing everything we can, but the reality is there's a lot of back book pricing that's a lot higher than front book. People are looking at that and making a change, and we're doing everything to make sure that change is to stay with us on that home loan journey. Sometimes, it's difficult for us to retain if we find out too late. That's a real big focus for the business at the moment, is how can we keep originating at the levels we are and increasing that, but also retaining a loan is as important as originating one. We've got a number of initiatives in place to try and reduce that.
Okay. Just jumping to the Resimac Asset Finance side. Is it loss-making at the moment? Are you absorbing a loss within the business-
No.
... as you start that business up?
No. I don't know. We bought a profitable business. It is still a profitable business. Andrew, like growing any book, it is a slow start as you are investing in the program. You are investing in technology. You are investing in staff. Then before you find that kind of hockey stick, it takes two to three years out. No, it is a profit-making business today. Obviously, we have high in terms of its contribution to the overall group in three to five years' time. We think about things like NIM that you are just talking about. It helps you kind of balance your NIM trade-off, albeit, it is risk adjusted. It is a market we are keen to grow and we see great opportunity in. The performance of that book, despite the fact it is still relatively small, has been exceptional.
Okay, great. Just lastly, just about the IT costs. I just wanted to understand whether that... Is that AUD 4 million in FY 2022 incremental to AUD 7.8 million, or is it really a net reduction of AUD 3.8 million that's going to be expensed?
No. AUD 12 million. It's AUD 4 million of OpEx in FY 2022, not AUD 11.8 million.
Okay.
That's what you're asking, right?
Yeah, for one-off expense this year. Okay, got it.
Yeah. AUD 7.8 million this year, AUD 4 million next year on that project.
Okay, great. Thanks very much.
Cheers, Andrew.
Thanks, Andrew.
Once again, ladies and gentlemen. If you would like to ask a question, please press zero one on your telephone and wait for your name to be announced. Our next question is from [Stanley] from Bell Potter. Stanley, your line is open.
Hi, Scott and Jason. I'm assuming that's me. Yeah, congrats on a good result . Look, just a quick question. There's obviously a reasonably big uptick, j ust wanted to understand the profile of that going into FY 2022?
Yeah. Obviously, strong momentum in the second half. If we break down into quarters, a strong fourth quarter, with obviously healthy momentum running into FY 2022. That answers your question?
What was the main driver of that? What caused the uptick in the fourth quarter?
Look, we were pretty targeted. I think we kind of made some statements as well, that we're going to be fairly targeted, especially in relation to the near prime market where we saw opportunity, especially where we could see credit specialist RMBS deals. It was very much supported by quite a targeted campaign around the near prime market. To test that market as well for depth and quality. Yeah, that was probably the main driver behind it, and well supported by our broker community.
Okay. What was the split between the third and fourth quarter?
I don't have the split in front of me, Steve, but the fourth quarter was stronger than the third quarter.
Okay. Should we be looking at it as if it's sort of a run rate of the fourth quarter going into the first half? Obviously, it's difficult to look that far forward, but would that be your expectation?
Look, Steve, I think that's kind of fair. But obviously we're sitting here today, what we're entering and it looks like they're going to be here for quite some time. Yeah, I think that's a fair assumption to make getting into the first quarter with a bit of uncertainty around that second quarter, which should be no surprise.
Yeah. Okay, great. That's all from me. Yeah, look, congrats again on a fantastic result.
Thank you.
Thanks.
We appear to have no further questions at this time. I'd like to turn back to my presenters.
Thank you, everybody. Appreciate you taking an hour out of your day to listen to our results. On our asset finance business year. We're looking forward to executing on our core banking platform within the next six months, which, again, will benefit the businesses, but also our borrowers, and our broker partners. Take care. Thank you very much.
Ladies and gentlemen, that does conclude today's conference. Thank you all for attending. You may disconnect your lines.