Thank you for standing by. Welcome to the Heartland Group FY 2024 full year results. All participants are in a listen-only mode. There will be a presentation, followed by a question and answer session. If you wish to ask a question, you will need to press the star key, followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Jeff Greenslade, CEO of Heartland Group. Please go ahead.
[Foreign Language ] Thank you. Kia ora koutou, e ngā mana, e ngā reo, e rangatira mā , nau mai, nau mai, haere mai. He ngā hua pūtea o te tau. Ko Jeff Greenslade ahau, te Kaiwhakahaere o Heartland. Welcome, everybody, to the financial year twenty twenty-four full year results. I'm joined by the group CFO, Andrew Dixson, who's unfortunately has COVID, and is calling in from home. So, thank you, Andrew, for attending. Leanne Lazarus, who is the Chief Executive of the New Zealand bank. Michelle Winzer, who's our new Chief Executive of the Australian bank. Michelle has joined us recently and brings a wealth of experience in Australian banking, particularly in the realities of running small banks, which we are very pleased to have her on board.
We also have here the Bank CFO, Kerry Conway, the General Counsel, Phoebe Gibbons, and the Head of Communications, Nicola Foley . Before I hand over to Andrew and Kerry to take you through the results, just some observations of the year. Clearly, the underlying performance at 102.7 came in shy of guidance, about 4.9% below the lower end of guidance. Reflecting a year that has been heavily dogged by provisions. During the first half, we took a NZD 16 million provision, and then we saw a rather sudden and deep deterioration emerging in May and June.
In the second half, I think something that has now been well highlighted in other industries, but also by the Reserve Bank, impacted our customer base as well, and that resulted in the need to take some additional provisions of around NZD 10 million, which, as you will appreciate, largely drove the difference between us meeting guidance, and falling short. That said, there are a number of positives that we can take out of this year. Firstly, in the financial sense, we saw 6.4% growth overall. I think that's very credible in a market which has probably been one of the more difficult markets we've seen in terms of economic conditions since the GFC.
And within that, we saw the ongoing juggernaut growth of the reverse mortgage businesses in both countries, performing at above 20%, and that just shows the resilience of that product, its ability to perform in good times and bad. So that was a very, very significant positive contribution. In asset finance, we saw in New Zealand 8% growth in motor . We saw growth down to 3.8%, which is below where we have normally been, but that must be remembered that was in the midst of a market that actually went back by 12.7%. So a credible performance, given those headwinds. Livestock in Australia is the area where we had concerns in terms of growth due to market conditions and prices to climatic conditions.
We saw that book run down as farmers, for various reasons, destocked. However, those conditions, those factors are now behind us, and as Michelle will discuss, we are very confident that we will see growth returning to that business in this financial year. The second area of positive performance was in some of the many strategic achievements that we managed to complete during the course of the year. First and foremost, being the acquisition of the ADI in Australia, being the only New Zealand bank to own a bank in Australia. Integration is proceeding very well. I think we're well ahead of where we expected to be, as Michelle will pick up on as well, and indeed, Kerry and Andrew.
The conversion of our high-cost wholesale funding into lower cost retail deposits is moving ahead, on target in terms of volumes, and ahead of target in terms of the rates that we're getting. So we're very pleased with that. Obviously, we completed a capital raise successfully to fund that acquisition, and in New Zealand, we saw the completion of the core system upgrade, a rather monumental task that was completed, and positioned us very well for efficiencies going forward, and Leanne will touch on those in terms of our ambitions around the cost to income ratio. So I will pause there and hand over to Andrew and Kerry to take you through the results for ...
Thanks, Jeff. Good morning, everyone. I'm on slide seven. Heartland achieved a solid FY24 NPAT of NZD 102.7 million on an underlying basis, within a challenging economic environment, while executing several significant strategic objectives. One-off or non-cash technical items had a NZD 28.2 million impact on reported NPAT of NZD 74.5 million, which I will cover on the next slide. On an underlying basis, net interest income decreased NZD 6.1 million year- on- year, due to a 36 basis points reduction in net interest margin to 3.64%, partially offset by receivables growth of 6.4% to NZD 7.2 billion.
Reverse mortgages grew approximately 20% in both countries, supported by asset finance growth of 8% in difficult trading conditions, and motor growth of nearly 4% in a market where car sales by dealers were down nearly 13%.... Operating expenses decreased 1.3 million, with the cost to income ratio flat at just under 42%, despite the reduction in net operating income. Impairment expense increased 7.2 million and was the primary cause of the shortfall to guidance, where there was a late increase of 10.1 million of provisions in asset finance, motor finance, and rural relationship, without which Heartland would have seen a result within guidance. Financial position remains robust across the group, with material increases in liquid assets, borrowings, and equity, primarily as a result of the acquisition of the Australian bank. Moving to Slide 8.
In what was a year of significant activity, there was a NZD 28.2 million variance between reported and underlying NPAT, with the key items being, firstly, a NZD 11.5 million dollars of provisions taken against a subset of legacy lending, as disclosed in December 2023. Secondly, NZD 7.7 million of acquisition-related expenditure. And thirdly, a NZD 3.3 million dollar impact of Australian bank NPAT across May and June. The remaining items are consistent with prior periods, and in particular, the de-designation of derivatives has a remaining approximate NZD 1 million dollars to wash through in FY 2025. Moving to slide 9 on profitability. The individual components will be discussed on subsequent slides. However, the waterfall charts demonstrate the reduction in year-on-year profitability was caused predominantly by NIM contraction, combined with a higher impairment charge.
That said, the five-year compound annual growth rate and underlying NPAT of 7.5% exceeds that of Australian banks of around 4.4% and major banks of around 0.9% across the same period. Moving to Slide 10, net interest margin. Heartland's underlying NIM was 3.64%, a reduction of 36 basis points from the prior year. We provided more visibility on trends within NIM and have split this between NZ banking and AU banking, which will be the format going forward for this and other metrics. At a group level, NIM stabilized across the second half of the financial year, and exit NIM has shown expansion, which is expected to continue throughout FY25.
In New Zealand, underlying NIM was 3.79%, which is down 32 basis points from the prior year due to a higher cost of funds, the slower repayment of lower margin asset finance and motor finance loans as customers deferred asset upgrades, as well as a slower pass on of rate increases to reverse mortgage customers. Underlying NIM has stabilized during the second half as cost of funds increases slowed and repayment accelerated in asset finance and motor finance, assisted by a pass through of rate increases to New Zealand reverse mortgage customers late in the financial year. FY24 exit underlying NIM was 3.92% and has improved early into FY25.
Looking forward, underlying NIM expansion is expected to continue and is forecast to rise above 4% by the third quarter of FY 2025, and this will be driven by the continued NIM improvement in fixed rate portfolios, primarily motor finance and asset finance, a focus on core lending growth, combined with active management of non-strategic assets, and cost of funds benefits from a reducing rate environment. In terms of Australian underlying NIM, which was 3.17, this was down 45 basis points from the prior year, primarily due to asset mix, with an AUD 103 million reduction in Australian livestock finance receivables, of which AUD 76.4 million occurred in the first half of the financial year. This was compounded by the continued increase in wholesale cost of funding, which was not passed on to our Australian livestock finance customers.
In contrast, Australian reverse mortgage NIM was well managed, consistently to around the 3% mark across FY 2024. Base rate stability and a smaller retraction of Australian livestock finance saw underlying NIM stabilize across the second half of the financial year, and FY 2024 exit underlying NIM was 3.19%. Looking forward, underlying NIM expansion is expected and is projected to rise above 3.4% for FY 2025, with an FY 2025 exit underlying NIM above 4%. This will be due to the current excess liquidity in Heartland Bank Australia being consumed, the transition from wholesale to deposit funding largely concluding at the back end of FY 2025, and growth in the Australian livestock finance market expected to return due to more favorable market conditions and the execution of product and distribution initiatives. Moving to Slide 11 on costs.
The underlying cost-to-income ratio was flat year-on-year, despite the reduction in net operating income, and operating expenses reduced NZD 1.3 million. Within this reduction, staff expenses decreased by NZD 6.1 million due to lower discretionary payments following the shortfall to underlying NPAT guidance. IT costs increased by NZD 1.9 million due to general cost inflation, alongside increased investment in IT security, and other operating expenses increased NZD 2.1 million due to a combination of higher legal and professional fees and occupancy expenses. The Australian banking CTI of 48.4% largely reflects the lower livestock receivables balance and consequential lower income.
Looking forward, we do expect the underlying cost to income ratio to increase in FY 2025, as the full cost base of the ADI is absorbed and Heartland Bank's core banking system upgrade commences amortization, which is expected to add approximately NZD 5.4 million of non-cash operating expenditure per annum over a seven-year period. Despite this, Heartland remains committed to its ambition of an underlying CTI ratio of less than 35% by the end of FY 2028, with several initiatives underway. Leanne and Michelle will touch on this later in the pack. Moving to Slide 12, Impairments.
Reflecting the challenging economic conditions, Heartland's overall credit quality deteriorated year- on- year, reflected in the underlying impairment expense ratio increasing to 0.44%, which is up eight basis points on FY 2023, alongside total provisioning increasing NZD 22 million, and this includes the NZD 16 million related to the subset of legacy lending taken in December 2023. While impairment is elevated and is expected to remain so in the short term, it is within an acceptable band given the economic environment. Balancing this, the reverse mortgage portfolios continue to exhibit sound credit quality and resilience in both countries. New Zealand NPLs deteriorated from 2.56% to 3.66% in FY 2024, primarily in the first half, with the second half seeing relative stabilization and only a six basis points increase on the first half.
The trend in total arrears showed a similar pattern, with the first half experiencing a 230 basis point deterioration to a peak of 7.6%, but an improvement of 70 basis points in the second half to 6.9%. This deterioration primarily originated in the motor finance and asset finance portfolios, and we've provided some further arrears graphs overpage. In Australia, as farmers responded to the extreme weather conditions, many held on to livestock for longer periods of time through FY 2024 to gain weight and return value. Heartland expects these remaining livestock to be sold and replaced through the first half of FY 2025. Despite this, the relatively low level of provisioning is an indication of the credit strength and resilience of the portfolio and more broadly, the sector. Moving to Slide 13, Provisions.
Provisions increased by NZD 22 million in FY 2024, which includes the NZD 16 million provision raised by Heartland Bank in December 2023, which was utilized to cover enhanced provision modeling outcomes and to write off longer-standing loans in motor finance and business lending. Consistent with the industry, Heartland saw a significant deterioration in domestic economic conditions during May and June 2024, during which additional specific and collective provisions totaling NZD 10.1 million were required. Specific provisions increased by NZD 7.3 million across asset finance and rural portfolios, as the incidence of businesses that entered voluntary liquidation, receivership, or ceased to trade increased. Collective provisions increased by NZD 2.8 million dollars, primarily across the motor finance and Open for Business portfolios, as customer arrears spiked and enhancements to the motor finance provisioning model, which was implemented in June 2024, took effect.
Motor and asset finance, we've included to the charts we've included, demonstrate that while elevated, early-stage arrears are controlled and the increase in the 30 to 89 days' arrears is slowing. In terms of outlook, while the recent reduction in inflation and OCR is encouraging, unemployment and the lag effect of interest rates means some volatility can be expected to continue through FY25, and this remains evident in the NPL trend. Despite this, investment continues in collections and recovery process efficiency and systems automation. Business and rural loans are being closely managed, and the bank continues to refine its risk appetite as it manages its non-strategic asset pool and reduces large exposures. Moving to Slide 14: New Zealand Funding and Liquidity. Heartland Bank and New Zealand group deposits in line with market, despite competition remaining high.
Cost of funding was impacted by depositors favoring higher rates and longer-term deposits, and we saw the call-to-term ratio decrease to 32% from 36% in the prior year. The outlook for the New Zealand bank is a lower cost of funds, as interest rates are expected to fall, combined with a focus on reducing exposure to wholesale funding and growing its market-leading call on savings products. Moving to Slide 15: Australian Funding and Liquidity. This is a clearly different funding liquidity stack following the acquisition of the Australian bank, with the transition to deposit funding assisted by the pre-completion deposit raising program and corresponding repayment of the CBA facility, which has left more than 50% of the business deposit funded at 30 June 2024.
This transition will be accelerated in FY25, with the origination of all new lending being funded by deposits, combined with securitization repayments, both from natural runoffs as well as exercising quarterly date-based calls. Heartland Bank Australia's final Australian AUD 220 million three-year floating rate note also matures in May 2025 and will be refinanced by deposits. As such, we expect the Australian bank to be approximately 90% deposit funding, funded by the end of the financial year, with small committed wholesale facilities maintained for diversity and as a source of contingent liquidity. The margin benefits of this transition are clear, with deposits having been raised at around 2% lower cost than wholesale funding over the period. The full impact will be seen from FY26 once the transition has completed and the bank's significant liquidity position is optimized. Moving to Slide 16: Capital.
2024 proved a successful year of capital raising, with over NZD 200 million of common equity raised to enable the acquisition of the Australian bank and provide capital for growth in both New Zealand and Australia. Group equity is now over NZD 1.2 billion, representing 13.3% of total assets. Shortly post-completion, Heartland Bank Australia successfully completed an Australian AUD 50 million Tier 2 regulatory capital issuance, which was nearly three times oversubscribed. Given the corporate structure, we now manage capital across four regulatory lenses, and we've provided a breakdown and reconciliation of actual equity through to regulatory capital, as well as the respective risk-weighted assets across each view. Moving from left to right, the banking group is the consolidated NZ Bank, including the Australian banking group. NZBG is just the New Zealand bank.
HBA Level 1 is just the Australian bank, and HBA Level 2 is the Australian banking group, i.e., the bank and its subsidiaries. As evidenced by all the capital ratios, both banks are very well capitalized. Looking forward, the group anticipates future capital requirements will be funded through a combination of profitability, further issuance of hybrid capital instruments, and the release of capital from non-strategic assets. Moving to slide seventeen, shareholder return. Heartland is pleased to declare a three cent per share dividend, which is a 55% payout of underlying NPAT and is in line with that signal during the recent capital raise. The dividend yield is 8.7%. This level of dividend, while moderated from previous years, reflects a higher number of shares on issue and balances shareholder return on capital demands of two growing banks, particularly Australia.
Finally, moving to slide 18 on FY28 ambition, a recap of our longer term targets. While the metrics for FY24 are below these FY28 ambitions, NIM is expected to uplift quickly, particularly in Australia, as the transition to deposit funding occurs. Growth has been subdued in FY24 in a challenging economic environment. Some volatility is expected into FY25. However, the execution of the ADI acquisition in Australia, combined with an ongoing strong demand for reverse mortgages in both countries and a turnaround in conditions for Australian livestock finance, positions us well to achieve the FY28 ambition. FY25 costs and CTI is expected to increase in FY25, as the full cost of the ADI is absorbed and the cost of Heartland Bank core banking system begins to amortize.
However, we are committed to the FY28 ambition of a sub-35% CTI, which will be achieved through investment in digitalization, simplification of the New Zealand business, and disciplined cost management across the group, coupled with revenue growth. Although impairments are currently at elevated levels, they are not outside an expected band based on the current economic environment. We expect the impairment ratio will improve as the economy improves, combined with focused growth in high quality, more resilient asset classes and continued investment in technology to improve workflow for arrears management. I will now pass to Michelle to discuss our Australian bank.
Hey, everyone. So it's great to be here. This is my sixth week in the business, but we did acquire the bank and merge the businesses four months ago, so I will be taking over. It might be helpful for everybody on the call, so I have had over thirty years in banking experience with extensive experience in the majors, but most recently, more experience in the smaller banks. And I bring with me a strength in leadership, business growth, and a strong understanding of the full end-to-end process of our business. As Jeff mentioned, I bring the best of the big bank disciplines, but couple that with the dynamic, customer-focused approach of a small bank. But I am very excited by the potential to deliver our best or only strategy in the Australian market.
I know that we have the capability and product offering to make a real difference. My initial focus since coming on board has been about getting our structure right to enable us to deliver, and you might have noticed some new appointments of key roles in the business, a Chief Commercial Officer and a Chief Technology and Operations Officer. These roles have been added to the already existing strong executive team, and we're now set up well for success. My focus is on getting our operating rhythm right and making sure that we're reviewing all of our processes, so that we can deliver an enhanced customer experience across all of our businesses. I'm particularly focused on bringing together the culture of the three businesses and working through the operational efficiencies that exist, and duplication, particularly removing the duplication in our work to improve our time to service.
Andrew and Jeff touched on the livestock business, and moving forward from the challenges of the last few years in the livestock business, we have seen an improvement in the weather across several states. We are still, however, seeing some difficult drought conditions in parts of Australia, in South Australia and regional Victoria, but the improvement in the weather and the lifting of suspensions in exports to China and the herd rebuild in the USA has seen a strong increase in demand for our stock, and that's driven a level of optimism with our farmers, who are starting to sell stock at improved prices. We saw significant variations over the last few years in stock prices in Australia, from the highs of January 2022 to lows in October 2023, delivering drops of 67% for cattle and 40% for sheep.
But that started to improve again in August 2024, with cattle prices up 55% and sheep up 82% from that low point. We are ambitious but realistic about the environment we are operating in, and we'll continue to partner with our customers to help them to recover from a difficult period. For our reverse mortgage business, there is strong potential that we have a unique product offering in the market, but most importantly, we have an aging population demographic in Australia. The reverse mortgage product gives our customers a choice to age the way that they wish to. We are focusing very hard on our end-to-end processes to identify opportunities to improve the service that we provide to our customers, which, as I said, includes removing the duplication in processes, but most importantly, streamlines how we deliver our service.
We remain very focused on being the lowest cost provider in the industry, and the work we're doing will reduce our time to service from months to days. Being a digital bank and identifying opportunities to digitalize parts or all of our process, to make it easier for our customers to do business with us, is paramount. Obtaining our ADI has given us the ability to raise retail funds, and as Andrew talked about, we've exceeded our original expectations. That will certainly support our growth ambitions and deliver the required reductions in the cost to income ratio. Our cost to income ratio is very important to us and is projected to be mid-forties for FY25, but we know that with further improvements, there is a lot of opportunity for us to improve that further.
But obviously, being an ADI comes with obligations under our APRA regulations, which is an uplift to our businesses, and we're making good progress with this. We have a strong forward-looking liquidity plan, helping us transition from the historic 100% wholesale funding to, as Andrew mentioned, predominantly around the 85%-90% retail funding this financial year. That will certainly be a major contributor to improving our NIM and cost to income ratio. We have some targeted product solutions that we're bringing to market to support both our livestock and reverse mortgage customers, and that should open up some new markets, and they're likely to be launched in quarter two or quarter three this financial year. We have expanded our risk and compliance capability within the business, including credit risk, operational risk, and asset management, to ensure we build a strong risk culture.
This is enabling us to identify areas that require focus early, so we can work with our customers to achieve positive outcomes, because those early interventions can be key to success in certain scenarios. This has been a really important investment and will continue to set us up for success. In summary, FY25 for us is about operational efficiency, execution of our strategy, service excellence, and quality focused risk management. We'll do this with quality people and disciplined management and execution. We have a diverse and highly qualified board who are working very well with management, and the combination of our skills will support us in being successful, and we are keeping it simple and focusing on our core products. Into the future, we'll consider new business lines to expand into; however, this will be supported by strong business cases demonstrating the required ROE in our business.
I'll now hand to Leanne Lazarus to talk about the New Zealand business.
Thank you, Michelle, and good morning to all. Within the New Zealand business, we are focused on margin expansion, cost reduction, and simplification. These will flow on to better returns, increasing underlying return on equity and our underlying profitability. As mentioned earlier, our margin within the New Zealand business in financial year twenty-four was 3.79%. In this financial year, we forecast our margin to expand to above 4%, and we're going to achieve this by actively managing our cost of funds. We will naturally benefit from a reducing rate environment. However, we are actively managing the mix of our retail funding, focusing on growth in core, particularly our newly launched Digital Saver product that came into the market last October.
We will continue to manage our margin through improving our fixed rate portfolios, primarily in our motor finance and asset finance books, and we're proactively working with customers on that. We will also naturally see a roll-off of those loans in this financial year. And then the third area is around a strong focus on the core lending growth, as well as actively managing a pool of assets that we have accumulated over time that are no longer a strategic fit for Heartland. I'm referring to, or we're referring to these assets as non-strategic assets, and I will talk about it a little later, but it is on slide 23. The second area of focus is on our CTI.
Our cost to income ratio will increase in financial year 2025, primarily as the core banking system upgrade commences amortization, and that's around approximately NZD 5.4 million. CTI is a critical measure for Heartland, and we want to be the lowest cost provider amongst banks. This, once again, aligns with our best ROE strategy. We've previously updated you on a range of digital and automation initiatives that will deliver cost savings. We are now in execution mode of digitalizing our banking functions, providing self-service to our customers, increasing the use of our mobile app uptake through feature enhancement and automating internal processes. Slide 22 highlights these initiatives and the savings that they will bring. Coupled with that will be structural efficiencies that we will gain.
The intent is to keep our headcount as they are at present, but this really creates capacity for growth areas. Initiatives, as I said, will amount to around NZD 5 million, and my final point is around simplification. Our non-strategic assets outlined in slide 23, at present, earns little or no income for us, and they return less than the cost of our capital. We will, in future, be looking to manage and report these assets separately, so that we can provide greater transparency, and also have a more focused resolution around the strategy that we're going to adopt. We will take our time to work through what this means, in terms of releasing underlying capital that we want to redeploy, either back to the group or through our growth ambitions.
As we work through this detailed approach around timing, we will do so prudently as we rationalize these assets over a responsible period. I now hand back to Jeff, closing remarks.
Thank you very much, so a couple of points before we move to questions. The outlook for us is positive. Over the years that we have set our aspirations, you'd expect to have good years and bad years, and we have indeed had a bad year in terms of economic conditions. But those conditions will improve, and we'll start to see that flowing through positively to growth, and see the provisions that we have suffered in the last financial year, abate. For New Zealand, as Leanne mentioned, the challenge is to simplify the business, to restore margins, and to reduce the cost to income ratio, and the cost to income ratio, really, for us, is increasingly a key point of differentiation for us.
When we talk about our best and only product strategy, we are now extending that into other categories, and cost to income ratio is where we want to be, best or only. We must be the lowest cost provider of everything we do. And Leanne mentioned, that's gonna be achieved in a number of stages. The first stage is targeting NZD 5 million, and while the dollars are important, it's more what that reflects in terms of change. We are fundamentally changing the way we do stuff, and that's gonna be really important, and that's gonna have an enduring benefit, for the future. This is about change, how we process the completion of digitalization. This isn't trimming, you know, this is change.
Australia, very similar, but possibly even more simplified challenge, in that it's lucky that it has a very simplified base at the moment with just two products. Both of those products, in a risk-weighted, adjusted sense, achieve the margins that we need. However, we need to maintain the discipline. Too often, startup banks fall into the distraction of form and increasing headcount. It's something that we must be alive to, and be very disciplined around understanding what we can be good enough at, and what we need to be excellent at. And as Michelle mentioned, you know, her focus also is going to be on the cost to income ratio, being the lowest cost provider of reverse mortgage mortgages in Australia and livestock products.
On livestock, we really do believe there is a fantastic opportunity for us there. The conditions are ameliorating and improving, and we're very confident, and we now need to execute over the next 12 months. Through those, particularly those quantitative, sorry, qualitative measures around CTI and margin, and then as growth comes back in, as the economies in both countries start to improve, we will start to see the return on equity moving where it needs to go. In the short term, however, given the volatility and the uncertainty we're seeing in economic conditions, we don't think it's appropriate at this stage to give guidance. That is something that we will review constantly and update the market on.
But like a number of participants in the industry and in other sectors at the moment, we are waiting to see what happens, particularly over the next six months, as when the rate cuts continue, and as that flows through to the economy in terms of boosting confidence. Finally, I'd like to say farewell. This is my last results announcement, and I will be finishing at the end of this year. It's been a journey. We've joined in two thousand and nine with a finance company that became a building society, and then we became a bank.
Along the way, I'm very proud of the digitalization that we've done, the Manawa Ako Internship Program we run for Māori rangatahi, and also obviously, culminating in the acquisition of a bank in Australia. So it's a good time, for me to be bowing out, and I, sorry that it's not been the best of years to leave on, but that is leveled by the fact that I think the business is very well positioned, and there's lots to be optimistic about, and a lot of opportunities for us to capitalize on in the future. So thank you, everybody. Thank you, shareholders, for your support. Thank you, board and management that I've worked with. It's been a very enjoyable time. I look forward to, Michelle and Leanne delivering in the future. Thank you very much. Now, we'll move to questions.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you're on a speakerphone, please pick up the handset to ask your question. Your first question comes from Wade Gardiner with Craigs Investment Partners. Please go ahead.
Hi there. I've got a few questions here. First of all, you commented about staff costs down 6.1, which I couldn't quite reconcile because it was sort of looked like it was up about 1. But anyway, I take it that decline is the discretionary bonus, in which case, is that all of the discretionary bonus? How is that set, and will we see, you know, sort of a bounce back next year, you know, if you hit certain milestones? Can you sort of give us a bit of color on that?
Andrew, you cover that one?
Yeah. Hi, Wade. So yes, it's a full suite of discretionary payments, both short-term incentive and long-term incentives. One could assume with better performance going forward, that those will come back to ordinary levels.
I mean, assuming that we have a better year next year, that creates a bit of a headwind in terms of lowering your CTI for next year. Is that fair comment?
It is, but it would only obviously, discretionary payments will only be paid for a good performance, so I'd say they'd moderate each other.
Okay. I think on page eight of the presentation, it talked about Challenger costs, I think it was, is or ADI transaction costs, seven point seven. Sorry, is that the Challenger acquisition cost? For some reason, I thought that there was gonna be about three mil of acquisition costs.
Yeah, that's right. So that's costs related to the acquisition and integration of the ADI. I think we signaled earlier in the year that it was probably around the NZD 3-3.5 million mark. Obviously, with the delayed completion and complexity, those costs were somewhat higher.
Right. So if I'm looking at the reported CTI versus underlying, is that the only difference or are there other...? I'm just trying to reconcile the two of those.
That will be the primary difference. You'll also have things impacting the income line, which is your de-designation of derivatives and the fair value change, although the fair value change was not significant this year. So primarily, it's that de-designation of derivatives which would flow through the top line, your net operating income line.
Yeah. And while we're on sort of underlying versus reported, what haven't you included in impairments as sort of underlying? What's the difference there?
That was purely the provisions taken in December, so the subset of legacy lending.
Right. Okay. The final question for me, you talked about a deterioration in May and June. Can you sort of comment about, you know, what you've seen in the market since then? Has it improved or are we sort of bobbing along in the bottom, if you like?
It's Jeff. I think it's fair to say we're still seeing the same sort of pressures coming through in terms of the anecdotal feedback from our customers, but also in terms of growth. However, there has been, you know, the rate cut, which is a positive, but that will take time to feed through, and then I guess, like everybody, we're waiting to see what the Reserve Bank does next. Leanne, do you want-
So Wade, it's Leanne here. What we have seen is that businesses are entering into voluntary liquidation. There's receivership, as well as some businesses are ceasing to trade. There is this lag between interest rate decreases and business outcomes, so there is a level of uncertainty, particularly in this calendar year, that may flow on to early two thousand and twenty-five calendar year.
Okay. That's all for me. Thank you.
The next question comes from Grant Lowe with Jarden. Please go ahead.
Oh, hi, team. Thanks for taking my questions. Just regarding the impairments side of things. So you talk about expected to remain elevated, you know, for the at least the short term foreseeable. In terms of... Can you just outline your sort of unemployment assumptions you've given previously for the motors book and potentially others, and where you see that impairment level through the coming year? Obviously, we've got, you know, the motors and the asset finance side of things. And can you also talk about when you see some of those legacy loans that you've talked about running off?
Andrew? Are you there?
Okay, I'll start.
Oh, sorry.
Okay. I'll start off with the subset of the legacy loans, because I picked it up. There was quite a bit in your questioning, so let me start off with-
Yeah.
The last part of it, and then I'll go back to the impairments. So with the subset of those legacy loans, so primarily, well, it's primarily in the motor and the asset finance. We're seeing that start to roll off in the, so those low-yielding loans run off in twenty-five. But equally, when we took the provision in December, primarily around motor, and those subset of dated loans, we have reduced those arrears by about 58%. So we've addressed that from the provisioning that we have taken, and we'll be dealing with the residual in this period. So that was the last question. What was the first part, if you could repeat it?
Sorry, just on that one, if I may. The arrears, have they been sort of written off? Are we talking 58% through write-off, or are we talking about remediation of those items?
Yes. We have. There's a combination. There is primarily write-offs, so there was about NZD 5.5 million of write-offs, and then some did cure, but primarily NZD 5.5 million of that was write-offs. What we are seeing, because remember in December when we took that NZD 16 million, we said primarily as a result of economy and internal operational inefficiencies. The internal inefficiencies are starting to pay dividends. What we are seeing is that early days, 5 to 29 days past due, arrears are stabilizing, and it is on slide 13, so you'll see 5 to 29 stabilizing. 30 to 89, for the first half of the financial year, there was rapid deterioration, but the second half then, while there was still deterioration, it wasn't to the extent of the first half.
And then the ninety days past due, that's where the continuing deterioration is. And so you can see-
Okay.
Internally, everything we can to manage this. It's the external environment now and working.
Yeah. Okay, and then just around the assumptions on the... Look, I appreciate it was a long-winded question. Awesome.
So on the go forward, really, it is really uncertain because there is volatility, the market is challenging. And unemployment forecast to continue to rise. Having said that, we also know that there is this lag between interest rates and business outcomes. But having said that, when we are contacting customers and working with them, they want to work with us to find solutions. So that's where, that early-day customer contact is really important, because that will then prevent the roll-through. So unfortunately, there's not a straightforward answer there.
Yeah. Okay. All right, thank you. And then just around another couple for me. Just around the dividend side of things, you've said that I think in the release around the payout ratio being it's sort of at least 50% for FY25. Can you give us some thoughts on how you're seeing the payout ratio you know beyond FY25, and what sort of factors you're considering in that? Obviously, there's you know growth in the receivables book. I appreciate the you know the capital requirements to support that. But you know you've got a target out there of receivables growth of at sort of at least plus 10%, which you know seems manageable at a higher payout ratio, at least on my numbers.
Can you just sort of outline how you're thinking about that payout?
At the moment, it's a bit like guidance. It's something that we're still, and I guess indeed the board is still considering, taking into consideration all those issues that you've outlined, with the economic conditions, you know, the needs of the banks in terms of growth, how we are going in terms of the non-strategic asset rationalization. So really, no, I can't give you any further direction than that at this stage.
Okay, that's cool. And then just the last one for me around so in the equity raise presentation, you set out expectations. There was a slide in there for Heartland Bank FY25 projection, including a P&L and balance sheet. And from what you've said today, it sounds like you know on target on the balance sheet side of things to get to 90% deposit funding. Just where we are now, winding forward a few months, how are you thinking about the P&L, which had an impact of AUD 36 million on there? How do you think you're tracking towards that at this stage with given the NIMs that you're sort of or the cost of funds you're seeing now in receivables growth?
Andrew, do you want to cover that?
Yeah, I think the short answer to that is everything is on track, so there's no cause to change the view on that number or the components of that number, Grant. So, as you, you've noted, we've got some good runs on the board with the deposit raising. Nearly 50% of the business funded by deposits and a proven ability to raise those deposits, so that transition will happen. Really, it's execution around livestock and the market coming back will be the key bearing on that number. But at this stage, everything is on track.
Okay, excellent. That's all for me. Thank you.
Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Andrew Harvey-Green with Forsyth Barr. Please go ahead.
Morning, team. Just a couple of questions from me. First of all, just looking at the NIM growth that you're expecting in FY25 , are you able to just give us a sense of what you are assuming in there around interest rate declines? And how much of a tailwind that is going to be providing for that NIM expansion?
We, like many, are assuming that the RBNZ will continue to cut the OCR into FY 2025, and we've built that into our modeling. We're expecting multiple in the year.
And we're also expecting to see more of the low-yielding loans
Loans start to roll off, and repay. And we are working with those customers on retention, new acquisitions.
Right. Okay, thank you. Second question is just around, I guess, some of the one-off items that we might, if there's any in advance you can call out. I think you've already called out NZD 1 million of the de-designation of derivatives. Are we expecting anything else? I'm wondering if there's anything else, particularly on the Australian banking side, that might be coming through there?
Andrew?
Yeah. So the de-designation of derivatives, as you just said, will wash through for the final time for that in the column there, so that will be about a tick over a million. We're obviously still exposed to the fair value changes on our equity investments, so that will remain there. The only real other area will be around integration costs, and regulatory costs of the acquisition, where certain external reporting needs to be undertaken. And I think that's probably about it.
Okay, great. Thanks. Just last question, I was just wondering if you'd be able to provide a comment and your views and how you kind of see it impacting Heartland on the Commerce Commission banking report, particularly, I guess, suggestions around open banking and what that might mean.
Leanne Lazarus?
Well, we welcome the Commerce Commission's report. Well, we believe competition is really healthy, and we see that as a huge opportunity for New Zealand and for Heartland. With regards to open banking, we are looking at that body of work, and once again, that will also create further imperatives for customers to switch.
Yeah. Well, that's, that's great. Thanks. That's all for me, and all the best, Jeff, for the future.
There are no further questions at this time, and I'll hand back to Jeff for closing remarks.
Thank you very much for your time, very much appreciated. Obviously, you have our contacts should you wish to take up any of these questions further, but thank you very much.