Afternoon, ladies and gentlemen. My name is Stuart Robertson, and I am the Chairman of Solvar Limited. On behalf of the board, I'd like to welcome and thank you for taking the time to attend our 2023 annual general meeting of the company. This is our very first AGM to be held in a hybrid format and in a new location in the Melbourne CBD, allowing for greater shareholder participation. For those shareholders attending online, I can assure you that you will have the same opportunity to participate today as you would if you attended the meeting in person. This includes being able to ask questions through our web phone system, the online platform, and also vote using an electronic voting card online. I'll discuss these processes a little later.
If you are having any difficulties in navigating the online portal, I encourage you to download the online portal guide from the bottom right-hand side of your screen. If we experience technical issues that impact the online portion of the meeting, I'll assess the circumstances and communicate further with you. If continuing the online portion of the meeting is impossible, you'll be emailed instructions on how and when to rejoin the meeting if this is occurring. I hereby declare the meeting open. I'm advised by the Company Secretary that the notices of meeting have been properly dispatched, and the quorum of members is present and I call the meeting to order. With us today, we have my fellow directors, Mr. Scott Baldwin, Managing Director, Mr. Symon Brewis-Weston, Non-Executive Director, and Ms. Kate Robb, Non-Executive Director.
We also have our Company Secretary, Mrs. Terri Bakos, Chief Financial Officer, Mr. Siva Subramani, and from our auditors, BDO, Mr. Benjamin Liu. I'd like to start by reflecting on this year's achievements, and we'll conclude with comments regarding the outlook for FY 2024. Following my address, Scott Baldwin, Managing Director, will give a short presentation on Solvar. FY 2023 is best described as a year where we had strong accomplishments delivered in an environment of complex global macro challenges. During FY 2023, the Group continued growing its loan book to AUD 910.1 million, up from AUD 733.4 million the prior year. While revenue grew to AUD 209.3 million, up from AUD 187.9 million the prior year.
Our strategy of not only growing the loan book, but also diversifying the business, both from a product and geographic perspective, has been the correct strategy. In addition, our distribution remained well-balanced between direct and intermediated channels, which has been an important focus for the Group. The backdrop to these results was the macro environment in which we operate. The world has become more unstable and volatile since our last AGM. As a non-bank lender, movements in interest rates have an impact on the Group's margins and the competitive environment. While interest rate rises can be added to new loans written, the auto finance lending market is typically fixed rate. This means existing loans or the back book do not reprice, and so it takes time for the new loans to become a material portion of the overall loan book.
The magnitude and speed of interest rate changes, where central bank interest rates, both in Australia and New Zealand, materially increased in a relatively short space of time, had an adverse impact on the Group's back book margins. The increased global volatility served to highlight the strength and resilience of our business. We've always focused on being a profitable business and not chasing growth at any price, so that continues to underpin how we grow. Q1 FY 2024, continued that approach, with the Group delivering AUD 6.2 million in net profit after tax and a growing loan book, which ended the quarter at AUD 925.7 million. Our strategic focus is on markets that are underserviced. At our core, Solvar addresses consumers' non-discretionary demand for finance.
While the make of a vehicle is discretionary, the need to have a vehicle for many is not. Families need cars to get their children to school, to get to work and participate in society. We operate in a market that funds AUD 40 billion in annual lending volumes, and we are well-placed with substantial headroom to increase our market share in the coming years. In May 2023, we announced that a subsidiary of the Group, Money3, had been served proceedings filed by ASIC in the Federal Court in relation to five consumer loans written between May 2019 and February 2021.
The matter is still ongoing, and therefore, we're unable to comment, other than to say the next scheduled court hearing is for mid-February next year, and we're of the view that we have appropriate processes in place that comply with our obligations for responsible lending. With deteriorating trading conditions in the second half of FY 2023, the Group delivered on the revised FY 2023 guidance of AUD 48 million statutory net profit after tax. This result was only possible due to the significant commitment of the wider Solvar team. The Group's loan book grew to AUD 910.1 million, which was up 24.1% on the prior corresponding period.
New loan originations of AUD 535.3 million, which was up 14.6% on prior corresponding period, and revenue of AUD 209.3 million, which was up 11.4% on prior corresponding period. The Group currently has access to around AUD 1 billion in wholesale funding provided by international institutions and major banks in Australia and New Zealand. Solvar has sufficient capacity to continue growing its loan book as planned. This is reinforced by the Group's exceptionally strong balance sheet, providing flexibility to capitalize on opportunities as they arise. During FY 2023, the Group completed a AUD 15 million share buyback and announced a total of AUD 0.165 per share dividend, which were fully franked per share for the financial year.
With the substantial franking credits available to the company, the board was determined to maximize the value of these in the hands of shareholders, and therefore, in April, announced an increase in the maximum dividend payout ratio to 90% of net profit after tax. During financial year 2023, we increased resources focused on compliance, governance, risk, and cyber resilience. The expansion of the group's corporate headcount is a strategic investment aimed at supporting our future growth plans. These new resources will assist our efforts to streamline operations and drive ongoing productivity improvements at business unit level. The International Monetary Fund's World Economic Outlook is forecasting advanced economies' growth to slow to 1.4% in 2024 as policy tightening starts to bite, but with core inflation remaining stubbornly high and not returning to target until 2025 in most cases.
While the Australian market is on track for a relatively soft landing, growth in the New Zealand market is likely to remain patchy. The impact of interest rate increases I referred to earlier, along with the inflationary impact of the expenses on the business, results in guidance of a full-year normalized net profit after tax of AUD 25 million-AUD 30 million for FY 2024. I thank my fellow directors, our Managing Director, Scott Baldwin, his management team, and the staff of the Solvar Group for continuing to build the company into a leader in the industry. Shareholders participating today can submit written questions at any time during the meeting proceedings by clicking on the Ask a Question button on their screen and then selecting General Business or a specific resolution. Once you finalize your question, click on the Submit button.
To ensure questions reach us in time, I ask that you submit them during the course of the meeting. Shareholders wishing to participate and ask questions via our web phone facility should click on the Ask a Question button on their screen and then select Go to Web Phone. By then clicking on the green phone button, you'll be connected to the meeting, and by pressing star one, you can ask a question specific to certain resolutions or general business. Shareholders participating in person will have an opportunity to ask questions at set times during the procedure of the meeting. Please note, if you have a question that is specific to a resolution, we will answer it as we address the resolution. If you have a general shareholder question, it will be addressed after the formal business of the meeting is completed.
If we are not able to get through all of the questions today, or if there are specific questions that would be better addressed on an individual basis, we'll respond to them after the meeting. If we receive multiple questions that are similar, we'll try to amalgamate them into one or choose the answer to the broadest question, which will cover off the others. I'll now hand over to Scott to conduct the presentation.
Thank you, Stuart, and thank you, shareholders, for attending today. We've been through the board of directors, but just to introduce the management team, here with me today is Siva Subramani, the CFO. Since in the last 12 months, we've had Pushkar Pendse join us as Chief Operating Officer, comes from BMW Finance, building out some of our skills in technology and operations. Tessa Georgis, our head of People and Culture. Craig and Brian, who run our business units, Money3 and Automotive Financial Services. And you'll hear a lot about our discussing an increase in governance and compliance. Dave Morton, as the head of Credit Risk and Compliance, is one of those additional heads to our executive team.
The Solvar Group, much of this will likely be known to the shareholders, but we estimate our market opportunity is around AUD 40 billion a year, and that is funded vehicles of all types, commercial and consumer in Australia and New Zealand, the funding that occurs every year. The industry, from the best that we can tell, is growing about 1%-3% a year across both countries. We do feel that there has been a backlog certainly in Australia. I think Equifax, the credit bureau, has forecast recently there's over 500,000 cars that weren't purchased over the COVID period. So we're expecting higher than normal new car sales over the next few years.
Now, why new car sales are important to us as a primary funder of used vehicles, is typically every time a new car is sold, a used car is sold as well because of the trade-in, typically speaking. Our group, we forecast this year will fund north of AUD 500 million across Australia and New Zealand. We also think that our market share will continue to grow, particularly as we see a retreat in competition. In both markets, in Australia and New Zealand, we are starting to see other lenders in this space either pull back significantly or stop lending altogether.
We think the strength of our balance sheet and the management of our receivables and our track record of collections puts us in a strong stead to continue to grow our business through this period of time. Just to give you a little bit of flavor about what we are funding, 80% of that AUD 925 million is cars, as you can see there in the middle. We have a growing portion of commercial lending. That is a mixture of new vehicles and used, still principally cars, I must add, but for commercial purposes. We have a small portfolio of personal loans. It has been there for some time.
It's very strategic importance to the group because what we try to do is bridge the gap between the first, second, and third car that a person will buy by funding their unsecured needs through that period of time. Hasn't been a part of our business that we strategically look to grow, but it has been important for us to keep consumers dealing with us for their borrowing needs. Our track record as a group, we certainly have been around for over 20 years now, advanced well over AUD 3 billion worth of funds into secured assets, and more importantly, collected over that period of time. Just moving to the next slide.
The business units that trade today, so you'll be aware, if you've followed our history, we've acquired a few businesses, but the three that are trading today is Automotive Financial Services, which is focused on near-prime consumer credit risk as well as commercial. And then we have the Money3 brand, which provides a consumer product. And you would say that that is a specialist focus, so older vehicles and slightly higher credit risk applicants, and Go Car Finance, which does the spectrum in New Zealand. Go Car is only in New Zealand. The assets that sit within that, that portfolio, just to give you a little bit more color of those that look, you know, you can see it's predominantly cars. There are motorbikes, utes, vans in there as well, but predominantly cars.
In terms of our key strategy, one of the strengths we see of our business is our collection strength. We have a strong focus in Australia and New Zealand of strong, well-focused collections teams that are there to collect the funds from the customers. We also have a fairly conservatively leveraged business, which we think holds us in good stead through challenging times, particularly when we see the macroeconomic headwinds. The conservative balance sheet is putting us in a good shape to be able to weather this storm and come out at the other end in a stronger position than what we went into this. In terms of one of our other key strengths has been a diversified introduction source, so brokers principally in Australia, but we deal with brokers in New Zealand.
Dealerships, we have direct relationships with dealerships. We also have relationships with a number of third parties that provide introduction services, typically ones that run websites, and collect customers that way. And the final sort of arm to our diversified distribution in Australia is direct to the group. So we've always focused on having a broad spectrum, not just focused on one distribution channel, and that has and will continue to put us in good shape to be able to receive applicants from customers. The products that the group has. Now, this has changed slightly over time, so keeping you up to date with what's, you know, the products that the group is offering. You can see there, consumer finance with Money3, consumer and commercial with AFS.
There is a tiny amount of commercial business in New Zealand, but it didn't warrant putting it here. There's the focuses for our businesses, and with inflation and rising car prices, you'll note that the loan amounts are creeping up there. The average size loan is much lower. The average size loan in the Money3 consumer vehicle is only around that AUD 12,000-AUD 15,000. In Automotive Financial Services, it's approximately AUD 20,000-AUD 25,000, and similar at Go Car in New Zealand. There's been many questions over the last number of months about the interest rates we are charging to consumers, and you'll see there that we have a range of interest rates that are offered to consumers, depending on their credit quality.
Now, that is our assessment of the consumer's credit quality, and that is the range for which we offer those interest rates to consumers. I'm trying to answer some questions before they may come up, but many people have asked, have we become conservative over the COVID period and over the last two or three years? And you'll note that the top end of the interest rate range at Money3 has come down a little bit as we have stopped lending to riskier cohorts of borrowers, but still have quite a large addressable market and quite a large range of credit risk that we are funding today. Some of our historical performance. I always like to start with the loan book here, 'cause the loan book is the predictor of next year's revenue.
You know, the larger the loan book grows, the revenue will take care of itself through cash flow. But we're at AUD 925 million today at the end of the quarter. This Q2 is typically the quarter where you'll see some good growth, particularly coming into the Christmas period. The standout for the Q1 has been the growth in the Australian business. There has been some contraction in New Zealand. We've talked a lot about the headwinds that we faced in our business there, as ... Which all seemed to start from the one-off extreme weather events that they went through in March, April earlier this year. They have impacted our customers and our profitability, but ...
Hence, why we've had a cautious approach to lending there, and that loan book has actually contracted some. But the Australian business has grown, which has replaced all of that, and grown through the Q1 . We think that a lot of the issues in New Zealand now are in the rear-vision mirror. We're starting to lend more into that market and start to see some better results coming out of there. We really think Q2, the second half of the year, is where we start to see some loan book stabilization and growth in New Zealand, which will accelerate those numbers toward AUD 1 billion.
Revenue, revenue is a function of cash collection, so for every dollar we collect, a percentage of that dollar is converted into revenue, so it really is just a function of the loan book. We're quite comfortable with the growth that we've had. We certainly have called out that we think, you know, that we will, we have some headwinds, but we'll still grow throughout this period of time organically. And, I think one of the other opportunities we see to grow over the next 12 months, too, will be the acquisition of other business assets if they come at reasonable prices. Just to call out a couple of things that we achieved last year or did. You'll note that we paid AUD 0.165 fully franked dividend.
We also completed a AUD 15 million share buyback last year, and the net tangible assets behind the company, so this is the equity portion per share is around AUD 1.62. Nearly all of that money is sitting in the loan book or in cash. Probably of far more interest is the last quarter's results. Sorry, this is last year. I was getting ahead of myself. Quite good growth in the last financial year driven by that loan book growth. I take it most people have seen these. We'll move forward to interest expense and then Q1. What we've tried to do here is give people a bit more color of where our cost of funds are going.
So this is an update from what we put out a couple of months ago. We are anticipating that our, the debt that we have in place today is sufficient to meet our goals of continuing to grow beyond AUD 1 billion. The facilities that are there today, we still will continue to work to try and improve the cost of fundings, but you, you'll note that over the last 3 years, we've taken the- If we just focus on the, the margin from 10%- 5%. So we've, we have improved our cost of funds over a three-year window by 5%, and I understand the last 10 months that we've, you know, we've lost quite a bit of that with interest rate increases, base rate increases.
But we still think that there is some room there, but it's probably not in the next 12 months. The other thing that has come up in terms of a lot of questions is about how much of our portfolio do we have hedged today, hedged against interest rate risk? One of our facilities is completely hedged, which represents around 30% of our total portfolio. We made a conscious decision not to hedge our high-margin business, but to hedge our low-margin business, and that policy decision stays in place today. And as our business continues to grow and as we continue to increase our market share of better quality applicants, investors should expect to see that percentage of hedged interest rate risk continue to increase. Q1, this is where I was jumping ahead to before, sorry.
Revenue, revenue growth has been good, AUD 55 million. The, the bit that I'd like people to take away is that the, as the back book rolls off, the front book that we have been writing is starting to impact and lift our revenue yield on our average portfolio. What, what I'm trying to say there is that old loans that we wrote in 2021, 2022 are paying out quite rapidly, which are at lower interest rates than the, the loans that we are writing today. So the benefit is starting to, to come through, and you saw, a little bit of that get there in, in Q1. Across the group, now we, we have, another rate rise that occurred this week, so there's more to pass on to end consumers. Our experience has been that when...
If we pass interest rates on to, through our lending products too quickly, that our volumes of originations fall off quite quickly. So, we every time there's an interest rate rise, we step out over the next couple of months, interest rate increases in our products, so that the front book does reprice up at a higher margin than has been there. It just takes us a couple of months. So we still have more work to do to pass on what is now 425 points of rise in Australia.
But we're sort of about two-thirds of the way there, and every time an interest rate increase comes through, yes, it affects around 70% of our portfolio, but we are passing that on, and you should expect to see that revenue yield continue to improve. Bad debt in the Q1 has, as we forecast, ticked up. A lot of that is actually movement in New Zealand, and as I was saying earlier, we expect the second half of this year to be better than the first half of this year, just in terms of bad debt performance as we get to the tail end of dealing with the one-off weather events that occurred in New Zealand. Loan book at AUD 925 million and still growing. Q2 should be a fairly strong growth month for us.
Just in terms of the outlook, before I hand back to our chairman, in terms of the market, we're actually seeing a reduction in competition. It's taken us a few years to get to AUD 500 million of lending per annum. We think we'll go north of that this year again, and that is us taking market share from our competitors. We also think that the market is growing a little bit as well, which will help drive growth into the future as well. And I think the final part is we through COVID, we saw a massive amount of stimulus come from governments in both Australia and New Zealand, which had the impact of accelerated repayments to our customers on their loans.
The loan book will grow as people trend back to paying out their loan, their loans on time, which will also help grow our, our loan book and hence our revenue in the future. We've talked about those. We expect our loan book. So just in terms of the financial outlook, we do foresee our loan book getting pretty close to or just north of AUD 1 billion this year. We're maintaining our guidance, our normalized guidance, in the range of AUD 25 million-AUD 30 million per annum, and we're quite comfortable with where we see our arrears and bad debts.
...trending for this year. With that, we'll, I'll hand back to the chairman, Stuart, for the rest of the formal parts of the meeting.
Thank you, Scott. We'll now proceed to the formal aspects of the meeting, but before doing so, I would remind you all that only shareholders or their appointed proxies and corporate representatives are entitled to vote or speak at this meeting. As each of the resolutions before us today will be decided by poll, I hereby appoint Mr. Jim Kompogiorgas of Link Market Services as Returning Officer for the meeting. Votes will be counted after the end of the meeting, and results will be published on the ASX and the company's website. Shareholders can cast their vote using the physical voting card that they received upon registering today, or the electronic voting card that they received after validating their online registration. If you're participating online and have not yet received your voting card, press the Get Voting Card button on your screen.
You'll be asked to enter your security holder reference number or holder identification number, plus postcode if you're in Australia, or country if you're outside Australia. If you're attending in person, you can vote as each resolution is heard. The Returning Officer will collect your voting cards at the conclusion of the formal aspects of today's meeting. If you are voting online, you'll be able to finalize and submit votes up until 5 minutes after the meeting ends. I'll remind you at the end of the meeting. The proxy votes that have been submitted prior to today's meeting will be set out on the slide shown for each resolution. For some context, the current number of Solvar shares on issue is approximately 209 million.
Shareholders have appointed the chair of today's meeting, myself, as proxy for up to 107 million shares to vote either for, against, or with discretion for all resolutions. As indicated on the proxy form and in the notice of meeting, my intention as chair is to vote all discretionary or undirected proxies held by me in favor of each resolution. With members' permission, I would like to take the notice of the meeting, including explanatory memorandum, as having been read. Now to the formal business and resolutions. 2023 annual report. To receive the financial statements of Solvar Limited for the year ended 30 June 2023, together with the directors' report and the auditors' report, as set out in the annual report. As advised, we have Benjamin Liu, our audit partner from BDO, with us today.
We have received no questions prior to the meeting on the accounts or conduct of the audit. Are there any questions in relation to these accounts and the conduct of the audit for the company's auditor? Terri, have our online or web phone shareholders posed any further questions?
No, they haven't, Stuart.
Okay, thank you. As there are no questions, I hereby table the accounts, and we shall move on to the formal resolutions. Resolution 1, the remuneration report. This resolution is to consider and adopt the remuneration report for the year ended 30 June 2023. On screen now are details of the valid proxies received prior to the meeting. Are there any questions in relation to this resolution? Terri, are there any online or web phone questions in relation to this-
No.
-resolution? Thank you. I will now put the resolution to a vote. Please cast your vote if you wish to vote. Let's move to the next resolution. Resolution two is the re-election of Symon Brewis-Weston as a director. This resolution is to consider the re-election of Mr. Symon Brewis-Weston as a director of the company. Details of Mr. Brewis-Weston's qualifications, background, and experience are contained in the explanatory memorandum attached to the notice of meeting. On screen now are the details of the valid proxies received prior to the meeting. Are there any questions in relation to this resolution? Terri, are there any online or web phone questions in relation to this resolution?
No, there's not, Stuart.
Thank you. I will now put the resolution to a vote. Please cast your vote if you wish to vote. Let's move to the next resolution. Resolution number three: issue of performance rights to Mr. Scott Baldwin under the Employee Equity Plan. This resolution is to consider the issue of performance rights to Mr. Scott Baldwin. Details of the issue to Mr. Baldwin are contained in the explanatory memorandum attached to the notice of meeting. On screen now are details of the valid proxies received prior to the meeting. Are there any questions in relation to this resolution? Yes.
Yeah. I note that the base for the LTI is 15 cents per share in earnings. I think that's about AUD 31.5 million in net profit. We've already sort of heard that with the repricing of the back book and that you know a lot of the business's profitability sort of should be restored. And I'm just sort of curious why that was the number that was sort of landed on, when it just seems as if the repricing of the book, as opposed to exceptional performance, is going to exceed those that sort of profit and subsequently the growth. So I'm not quite sure what performance shareholders are actually paying for with respect to those numbers.
Thank you. I might... Symon, as Remuneration Committee Chairman, do you want to answer that, or do you want me to take it?... I'll start. So thank you for the question. So the LTI obviously split 50/50 between EPS growth and total shareholder return. And on the EPS growth is what you're referring to in terms of the base number that we use?
Yeah.
Yeah. Just to make sure we're all on the same page, that LTI is vesting over three years, and a compound annual growth rate has to exceed a certain percentage. I think it's above 10%. I don't have it in front. 12.5%, sorry, to get to that-
Per year.
-per year, to get to that number. Now, what we already know from the last couple of years is a large part of our expense line is, to some extent, not, is market driven, being interest rates. And so we felt that it was important to have a stretch target that was, to an extent, achievable as well, on a compound annual growth rate. So, to your question there, on a 12.5% compound annual growth rate over three years on an EPS starting at 15, you're well on your way back to where we said we would be, with a little bit of wiggle room for the known unknowns, being predominantly interest rates. So to answer your question, what are shareholders paying for?
They're paying for Scott to lead the company, to do everything internally that we can do to get the company beyond AUD 1 billion, beyond the AUD 50 million in net profit after tax number. I don't know, Scott, if you want... Oh, sorry, Symon, if you want to add some more to that.
Why not leave it?
You need to talk into this so people online.
At the end of the day, what you're really trying to do is have market measurable data that empirically is very easy to see. So EPS is a great measure. There's a lot of companies in the market do that. And secondly, on the other side of the coin, not only does the management team, Scott, in particular, have to get a compound average growth rate, but on the other side of the coin, they need to also compare to benchmarks in the ASX. And to get for Scott to do exceptionally well, he have to also be, not only 12.5% compound, but he also has to achieve in the top 75th percentile of companies that we're indexed against in the ASX 200, so, or 300, sorry. So that's a dual mechanism.
So one is certainly within his control. The second is actually how to show our shareholders actually get rewarded beyond that. So that's, it's dual edge. Probably the final point to make is when you're setting these, ultimately, the board still has discretion, but-
Mm-hmm.
There's a hefty component there that's 50% is market comparable as well. So it's a fine line between setting something that's achievable and unachievable. People often forget those that were set last year. There's a long way back from where that starting base comes. So these are done on an annual basis, so we get to reset the opportunity for the management team again next year, given the circumstances that face and the issues that facing shareholders. So people often forget that what was set last year and the year before. If you look at that from a management point of view, there's a lot of work to do over the next 12 months to get that anywhere near being in the money. So looking at one unit set in isolation doesn't always give you the broader picture.
So we felt that setting at that target as if it was, was a stretch for the team to get to, but not unachievable. And if we did that in conjunction with reaching the 75%, comparable, you know, market share, then, in terms of performance on a total shareholder return basis, then the management team would have done a pretty good job over the next three years. Thank you for the question.
Is there any further questions? No. Terri, are there any online or via web phone?
No, there's not.
Thank you. I got a little ahead of myself there. We'll now put the resolution to a vote. Wait a minute. Please cast your vote if you wish to vote. Okay. Ladies and gentlemen, that concludes the formal business of the meeting. The directors and company management would be pleased to take any questions you may have regarding the company after the formal closure of the meeting. If you have not yet voted and wish to do so, please vote now. Voting will be open for five minutes after the conclusion of the Q&A session. I thank you all for your attendance, and I close the meeting at 2:35 P.M. We'll now answer any questions from shareholders, including online questions and web phone. Terri, are there any questions that were submitted during the meeting?
At the moment, no, but I'm waiting for those to come through. But we actually have a few questions that were previously posed to us-
Okay.
that we might address
Yep.
in the interim.
Let's go to these questions, and thank you for those who submitted the questions. Is there any update on ASIC proceedings with Money3 with management's view on likely financial and operations impacts? Scott, I might pass to you for that.
Thank you, Stuart. In regard to the matter with ASIC that's at hand at the moment, there really is not a lot that we can say because it's an open matter. Once there's something that we can comment on, we will make a market announcement. But I'm not in a position really to comment on that at this point in time. I will add, though, because in the second part of that question is: what are we doing? What are we doing in our business today, in response to the action brought by ASIC?
We've called out in our expenses, and part of the reason why we said our profit would be a little bit lower this year is an investment in a number of staff focused on compliance and governance, like Dave Morton, who you saw in my executive team. There's also other staff that we've brought in with specific focus on internal audit. This is not a direct response to ASIC, but it is about us as we continue to grow, investing in compliance and governance for the group, so that the business is well placed and on a well footing to continue to grow through this next cycle, and have good governance and good controls within our business. I hope that answers the question.
Thank you. Next question: an update on the contracted margin position on the back book, and whether there's been any improvement or further deterioration? Siva, I might ask you to respond to that question.
Sure. Thank you. Thank you, Stuart. As we all know that there's been significant increase and actually accelerated increases in interest rates by the central banks, both in Australia and New Zealand. Over the course of FY 2022, the rates increased, and there was one recent increase last week. Why kind of highlight that is in the FY 2022 or FY 2023 results, we had a partial impact of these rate raises as they were moving up. While in FY 2024, we are feeling the full year impact of that. So that's primarily affecting the back book in terms of the margins, so the interest rate increases would directly affect the margins. What we are doing with that is we started repricing our front book.
So the back book is at a fixed rate, so we can't reprice the back book. So we alternatively started repricing the front book, and over the course of FY 2023 and FY 2024, and we are continuing the process of repricing it. What this means is the benefit of these repricing will start to come in FY 2025 and 2026, and partially in 2024 as well.
So this is one of the reasons why we had to deal with a significant reduction in our forecast guidance for FY 2024, as in the timing of the interest cost increases predominantly coming in FY 2024, while the benefit of the repricing coming in FY 2025 and 2026, which also gives us the confidence that by FY 2026, we should restore a lot of the lost profitability that happened in FY 2024 or expected in FY 2024.
Thank you, Siva. Another question. Let's. I'll do this first, and then I'll go back to that. Yeah. Any improvement in the operations of the New Zealand business? Scott, I might ask you to answer that question.
Thanks, Stuart. So over the last six months, we've made a lot of effort to change things in New Zealand. The first one being contracting the loan book. We have looked at the bottom credit risk portfolio that we have, and we stopped lending to that segment, given that the country's in a recession and we think that things are going to deteriorate further. We also have made some changes to the management team in New Zealand, and have leveraged, pushed the strength there in terms of separating out and having focus on the collection side. We have really strong collections in the Q1 , which is why you've seen some good results coming out there.
We're also in the process of retiring some of the software in New Zealand to drive some operational efficiency in the group. We expect that to come through by Christmas, is when we will have put notice through. So that simplifying that business, trying to make it look a little bit more like the Australian operation and taking out any complexities there. They've been the key initiatives. I'm saying that I think this year, New Zealand will continue to contract, but we are getting it ready for a period of growth.
As I called out before, about some of the changes of government in New Zealand, there are opportunities that we think will come through, with a new National government in New Zealand in the new year as they start to change policies, particularly around petrol-powered cars, and removing of some taxes, that we think is going to drive some growth in that better credit quality consumer segment in the business in New Zealand.
Thank you, Scott. Next question: You recently announced that legal action was being taken against ASIC. Are you able to update the progress of this and to provide your most likely and worst estimates of its impact upon the company's profit? I might just jump in there and say that, look, it's too early for us to tell. It is ongoing. As I said, the next hearing is in February. What I will say is that it relates to five loans in a period where we wrote over 36,000 loans in that period. We're confident about our processes and our training regime that we have in place. But as to estimates, it's way too early to get into that at the moment.
The next question: You recently announced that a dip in margins was expected in the 24 and 25 financial year due to changes in interest rates and delays with passing these on. Are you able to provide estimates of the likely impact upon the company's profit? Scott, I might start with you.
Oh, look, the headwinds that we identified coming into this year were principally bad debts, inflationary pressures in our OpEx, and cost of funds. The best estimate at the conclusion of going through multiple scenarios there was that we thought profit this year would be between AUD 25 million and AUD 30 million. We maintain that. You'll note that we did a slight increase at the end of the Q1 , 'cause things are trading well in line with what we expected. You know, last year, we produced AUD 48 million.
So, you know, depending on where we land, we still maintain that we are, you know, going to be down around AUD 20 million this year as a result of those three headwinds, and, and a big part of that being the, the funding cost. I will add that, please look at the revenue yield that is coming off in Q1 has improved, and we anticipate, that shareholders should see that, that, that improve depending on the, the product mix throughout the rest of the year.
Thank you. One more question online, and then I'll ask the room. As the Solvar loan book grows, interest rate risk is much more important to the company because non-equity funded loans represent a much bigger proportion. What are the considerations to decide or in deciding the company's interest rate hedging policy? Should we have a clearer hedging policy, given debt-funded loan book growth going forward? Would higher proportion of hedging help reduce the earnings and share price volatility? I'll start, and then I'll throw it to Scott and Siva. So historically, we've obviously been predominantly equity funded. As we moved up the credit curve into the lower yielding products and some more near-prime lending, which is, you know, technically a lower margin business, that is fully hedged. I think Scott made the point previously, but that book is fully hedged.
We chose and have chosen not to hedge the higher margin business for a few reasons. Predominantly, firstly, hedging within a warehouse is not necessarily possible. We have warehouse facilities, is not necessarily possible when you're doing a non-conforming loan book. So that's a, that's a hedging policy at the overall corporate level, so that's a little bit more complicated in doing that. Also, we felt there was... If we had hedged at the time of the rising interest rates, the cost of applying those hedges, hedges aren't free, so the cost of applying those hedges would have reduced, to some extent, our FY 2023 numbers as well. So we took the decision not to hedge, not to hedge that book.
Siva or Scott, I don't know if you want to add any more to those.
I might let Siva-
Sure.
some analysis on that.
I'm happy to sort of also share what's our hedging policy as well. To Scott and Stuart's point, where the margins in the business are low, we do go for 100% hedging. Across the book, as of today, that would be roughly 30%. But going back to the policy, we look at two key factors. One is how much of the portfolios within the book are leveraged, so, i.e., how much of variable rate debt we have. The other part is to do with the price elasticity of our lending products. As in whether we can, you know, increase the forward book or front book, and that will compensate for the increase in the interest rates in the back book.
That has been part of the strategy that's been there for quite a number of years. And we'll continue to apply, on the back of, these accelerated interest rate rises to see whether we need to increase those limits than what we had in the past.
Thank you. There's no more online questions. I'll ask the room if there's any further questions. Sure.
So I was looking at Credit Corp's results the other day, and they're sort of having a dabble in car finance, and they're pretty familiar with subprime customers. And they didn't really have much detail, but they did mention that they were sort of pulling back from the market, and the reason stated was to do with used car pricing. I know you guys don't seem overly concerned about that, and I was wondering, well, I guess, the impact of used car pricing potentially on the quality of the security that the business holds, and why they're pulling back yet, you know, Solvar is not?
Great question. Do you want to-
Yeah, the Credit Corp business has a much larger exposure per consumer for a used car than we take in what you call the specialist or more risky end of credit. So I understand why they see it as a perceived higher level of risk. I get that, where, you know, typically, that Money3 product is targeted at someone around AUD 11.5 thousand-AUD 12.5 thousand typical loan for their car, and they're borrowing that money in 3-4 years. So, it's a relatively short duration. I think Credit Corp's about 5. So it's a slightly shorter loan and a smaller dollar amount. The other part that you should consider, too, is that we went through a period of time through COVID, where used car prices went up.
They were actually dragged up by new car pricing. As new car pricing comes down, that will impact used car pricing. But inflation and older assets aren't coming down like those. Think of the balloon of the body of cars that were purchased at inflated prices, which is cars in that sort of 1-3 years of age. That's where you're going to see the highest level of depreciation, and we have very little exposure to that cohort of asset in our book. Like the. If you look at what is the number one assets in our book, a Commodore, which they don't make anymore, Falcon, a Camry, and a Magna.
Like, that portfolio of sort of 5- to 7-year-old cars is where we've been funding, and they are highly likely to stay on the road longer than they used to. Like, it used to be, the average car stay on the road about 12 years. That is extending, which is a benefit for us, 'cause people are investing in their used car to keep them on the road longer, because new cars are more expensive. Some cars are still challenging to get into the country, but we haven't seen significant depreciation in that cohort. And if I put it to you another way, if you've got a AUD 10,000 car depreciating by 10%, it's not that big a deal. If you've got a AUD 40,000 car by the same percentage depreciation, you've got a lot more credit risk exposure.
It just and we, if you consider that of our 65,000 customers in Australia, we still don't repossess one car a day. So we're not reliant on an auction house to generate a return. It's our preferred method would be to work with the customer and get them to keep them in their car, keep them paying, you know, keep them participating in society and have that cash flow, even though it might be at a reduced rate. It tends to work better for us in the long term.
Can I just add to that? So, we're not chasing growth at any price either. So in fact, if you look at our New Zealand business, that's contracted over time. So, profitable growth is important to us as well. So, we are taking market share, but it's not at any price.
Another one just on credit quality. Is that all New Zealand? Because there was a near doubling of substandard loans versus-
It's going from sort of 0.1 to-
Well, okay.
Point 2, is it? So-
Yeah, right.
Which one are you referring to?
It's, um-
You're talking about, it's about AUD 1 million-
Yeah
-of deterioration? I think... that's from your slide from August, isn't it, that you're referring to?
I'm just looking at the credit quality analysis.
Yeah. So I don't have it in front of me, but I think, I think I know the slide you're referring to.
Page 76.
Of the annual report.
Of the annual report, yeah.
Yeah.
So there's about a 25% growth in the carrying amount of the loan book, but there was significantly larger growth in the cohorts of lower quality loans.
Yeah. I think the short answer to your question is a big...
Sorry?
The short answer to your question is a big portion of that came from New Zealand. Especially in the first half of the calendar year, there were a number of weather events that happened that led to, like, the floods and the various events, coupled with subsequent higher inflationary pressures had ticked up the arrears bucket over the course of the second half of financial year or first half of calendar year 2023. That's the predominant reason why that's been there. We expect that a portion of that, yes, has continued into the Q1 , but we expect as to Scott's comment earlier, by calendar year 2024, that should have improved significantly.
Right. So the percentage of the overall carrying value should fall back a fair bit. Is that what you're saying?
I think we've seen the bad debts in New Zealand, and they are moving through. But, but my only caution here is the macroeconomic environment, as a result you know, as a result of inflation is likely to have an impact on our business. We've come through this far, it's been pretty good. You know, like, our arrears have had marginal movement, but bad debt is starting to tick up, and this is some of the precursor to that. We still sit at levels below where we were sort of three years ago, so-
Okay.
Yeah.
I mean, who knows what's gonna happen? But there's, you know, there's a fair bit of commentary that obviously, as a result of sort of the lag effects of all the rate increases, that there'll be an increase in unemployment, perhaps even, you know, a couple of percent. I mean, that would, maybe I'm being too simplistic here, but that would surely result in some of our customers losing their jobs and no longer being able to pay a loan.
Well, that's it.
You know, that's-
It's very-
You're comfortable with that, obviously.
Yeah. I mean, I'd say that's an assumption we make, too.
Yeah.
The thing is, one of the core strategies of our business is to have a very solid collections team. And that's, it's not about collections, that's about communicating with the customer. It's about talking to the customer through that cycle to understand when can we take the payment, and when can we manage it in line with their other expenses that they have as well. And it's that cash flow. So our experience, it certainly in the Money3 business, quite different to AFS. When people get in arrears, they then go bad. In the Money3 business, they start to miss payments, but their intention is to pay. Their issue is, you know, one-off expenses or just general cash flow.
But we have a lot that go into arrears and then go on to pay out their loan. We've seen that over the last 20 years, that while it carries a higher level of arrears at Money3 than, say, AFS, most of those customers go through and pay. I think I don't know whether we're going to have a soft landing or a hard landing, but I know that we're preparing for it, that we're, you know, making sure that we're having constant and regular communication with our customers.
Yeah.
Yeah.
We do have a very strong balance sheet. We can't predict what's gonna happen-
Mm-hmm.
In the next six months. We, like you, might, may or may not. I thought we might have seen more by now, but we're very cognizant we have a very strong balance sheet, and that's certainly discussed, you know, with the management team a lot around keeping a strong balance sheet just in case. So we'll see what happens next year. But the team, Scott's right, the collections team we have at Money3 is probably as good as anywhere in market, if not better.
And if we may add to that, Chris, while the primary measures are to do with having the customers, so secondary measure, you know, if you look into our provisioning policy, we do take into account a number of factors that are forecasted, including employment rate changes or unemployment rates, and these are factored into the provision policy as well as the provision. And you may note that compared to the historical loss rates or including the loss rates that we experienced in FY 2023, our provision rates as a percentage of the book will be higher, and that buffer is to consider these future potential events and, and also, you know, to protect the company for any unforeseen things.
I was curious that, so Money3 is now sort of 25%, whereas, I mean, I think previously it was sort of upwards of 30% in terms of the cost of the loan.
Oh, yes.
Yes.
Yeah, sorry.
Sorry. Yeah, yeah.
It's a much bigger part of the business. Sorry, I know where you're going.
Yeah, yeah. And probably, you know, at this stage, maybe 5% of the business's margin has been eaten up by the base rate increases. How is the company gonna restore previous net interest margins, or are we just sort of giving up on that?
It's a great question. If I can ask you whether you mean NIM or NPAT?
Well, I mean, one drives the other, doesn't it, or?
Well, well, so what, what you'll see in Money3 is that they've had very, I mean, of our business units, we've been able to invest in that business in technology. They've done quite a good job in terms of maintaining productivity. I would like to be sitting here saying that the productivity's improved, but we've had quite a bit of wage inflation in that business. But we continue to invest in technology. We continue to do tomorrow better than what we're doing today, and as long as we can keep doing that, we can pass some of that on to the customers and also grow our business to produce the... 'Cause the question often comes up: How do we get back to sort of AUD 50 million NPAT?
And there's three arms to that, really, that we've got to continue to focus on. Charging the right yield to the customers. You know, part of the reason why that top end is not there, that the higher risky, the higher-risk cohort of casual borrowers that we would've been lending sort of that 28% interest rate of the past is an area that in, you know, we feel in the current environment is quite challenging to lend to them. Hence, why we focus just slightly below that, employed people to buying a near new- a newer asset.
But to come back to your question, appropriate yield, focusing on our productivity across our business, and, you know, I'm not sure that we're going to see wages go up in the next 2-3 years like we did in the last 2-3. Like, it has been quite a bit of inflation, but we'll continue to invest in technology to drive productivity. Buying the right clients will keep our bad debt experience in that 3.5%-4.5% range. Like, writing credit in, you know, the credit risk people in our business are thinking about: How do we keep our-- How do we continue to write to clients that have some resilience if we do have a recession and we do have more challenges?
How do we keep that bad debt within that, that range in terms of what we're writing? The last part is the obvious funding cost one.
Right. So you're saying that it's not just increasing the average interest rate of the loans, you think you're going to attack it in several ways, right?
I don't think there's a silver bullet here.
I think it's a combination.
Mm.
It's productivity, slightly different markets-
Mm.
- tighter credit is the predominant ones.
Yeah.
Yeah. Another question's come online, that I'll just ask: Can you tell us more about the investment in Vyro? How does this align with our strategy? Is this about protecting lending channels, or do we expect a return from the business? I might just start with that. From a board perspective, we're always looking at what... And with Scott and the management team, obviously, strategically ahead, where, what markets should we be playing in? How do we diversify the channels that we are playing in? There's no doubt, obviously, electric vehicles are coming down the pipeline, but at the moment, that's not our traditional customer. They're not easily buying.
That's maybe a 30 second-
Vyro?
What is Vyro?
Sorry.
Before we go on.
It's good stuff. Vyro, we invest in an electric vehicle platform, effectively, that sources vehicles, electric vehicles and does the life cycle of the vehicle for the customer. It partners. It's an online platform. It partners with groups such as AGL out of Canberra, AstraZeneca. I might have some other partnerships now, Scott, but advertise with them.
So if you're in, the ACT, for example, and you get your AGL bill, you'll say, "Go onto the ACT Vyro platform to access your electric vehicle." So we looked at it and said, "Well, at the moment, electric vehicles is a space where they're not our customers, but we want to have a foothold in that space, and we want to be abreast of developments going on in that space." So for us, making a strategic investment in a company and a small investment into a, quite early stage company, which is Vyro, has been important to obviously have a foot in the door on the electric vehicle space. It protects channels, but it also opens up some channels, and not only that, it also gives us a little bit of a view about what's coming down the pipe, in other areas as well.
So it's almost for us... Because we're a bigger company now with, you know, with a big loan book, it's almost a forward indicator for us about what the next few years look like and how we can build product to support that. So that was really the rationale from the strategic perspective. Scott, did you want to add more to that?
Yeah, it is a small investment. We don't have a controlling interest in that company, but part of the agreement is that. So I encourage you, Vyro.com.au, V-Y-R-O.com.au is the website. You know, it's principally there to facilitate people wanting to buy an electric vehicle. 2 thoughts of thinking as to why we made that investment into that business. The asset class of electric vehicles is only going to grow, and a way for us to get an exposure to an asset class that we don't traditionally hold. You know, this group is one of the largest retailers of Polestar vehicles in Australia. I think they're number two. You know, it's giving us exposure to an asset class that we don't traditionally have a lot of exposure to.
The key one, it's opened up a new avenue of distribution for us. It is highly likely we won't fund many vehicles directly from that website, 'cause it's low volume, but it's the secondary site on there that has given us a small trickle. Like, this is not going to be a massive contributor to volume in the next 12 months. It's helping us look at new ways of distributing our product through partnership and giving us exposure to a new asset class.
So if you do happen to have a look at the website and you choose to apply for finance, you will find that you end up coming to us, and the great thing about that is you may or may not choose to go ahead and buy an electric vehicle, but we would love to have the opportunity to give you a quote for a car loan.
Okay. With that, and I'll assume there's no further questions, again, I'll thank everyone and, invite you to join us outside for a cup of tea. Thank you, everyone. Thank you for your attendance.