Good morning everyone and welcome to the Heartland Group FY 2023 half year results. Please note that all participants are currently in a listen only mode. Once the presentation is over, you will be invited to ask questions. To do so, dial star one and an operator will assist you. If you would like to ask a question via the web interface, simply type your question in the ask a question box and click send. If any participant has difficulty hearing the presentation, please submit your question via the same tool. I would like to turn the conference over now to Mr. Jeff Greenslade. Please go ahead.
[Foreign language] . Good morning and welcome to the June results for-- Sorry, December results for half year results for Heartland. I'm Jeff Greenslade, the Chief Executive of the Heartland Group. I'm joined by the Deputy Chief Executive, Chris Flood, the Heartland Bank CEO, Leanne Lazarus, the Chief Financial Officer for the group, Andrew Dixson, and the General Counsel, Phoebe Gibbons. I'm gonna touch on some highlights and some commentary on the operating environment before Andrew will take you through the results in detail. Before I do so, just a little bit of technical housekeeping. You will note that we are reporting both in a reported sense and an underlying sense.
Reported obviously complies with NZ GAAP. The underlying results endeavor to give you an insight to the performance of the business after taking out non-operating or extraneous impacts such as equity investments or the designation of derivatives. As you'd expect, it flows through to other operating income substantially, but it also has impact to a lesser extent on NII and expenses. With that noted, I will just give you the highlights. As you can see, and I'm on page 6, we had good growth and in a relative sense, a very credible growth of balance sheet of 10%. That drove in NII terms an increase of 12% of the revenue in a reported sense and 13.6% in an underlying sense.
That resulted in an NPAT of NZD 48.7 million, which is +2.4% up in a reported basis, and NZD 54.7 million, which is a 16.2% in an underlying sense, once the extraneous or one-off items are excluded. During the course of the half, impairments remained stable at 29 basis points. We saw an improvement in the underlying cost to income ratio. It came down 40 basis points to 42.7%, that's very important given our focus on efficiency. If you add back those non-operating items, the cost to income ratio was 44.8%.
NIM contracted during the course of the half and in an underlying sense it is at 4.02%, and 3.97% in a reported sense, which is down just under 30 basis points. That's been caused by a range of factors. The mix of the book, particularly the growth we've seen in reverse mortgages, has contributed to that, which is a positive. We've also seen the shift in the risk of the motor book, which has also resulted in a decline in lending yields, which has contributed. Also, in an environment of rising interest rates, we did not take the opportunity to increase our margin. We were very prompt to pass on the benefits of increased rates to our depositors, less so to our borrowers.
In the case of reverse mortgages in both countries, in some cases, we didn't pass on those increases at all. Tuning out the operating environment, what was the environment like and what can you expect for the remainder of the year? Three things stand out. One we won't be surprised to hear is the risk environment where the macroeconomic conditions continue to be fraught. Obviously there's a focus on credit risk. For us it remains stable, and that really reflects the weight of reverse mortgages in the book and the growth we're getting from those books, which are very resilient from a risk point of view. Motor, we saw the impairments increase to what we'd call normalized rates. Leanne will pick that up in more detail.
Just reflecting the environment post-COVID, has resulted in those NPLs returning to more normalized levels. We still maintain a level of caution in terms of some areas of our business, and accordingly, we have decided to retain the economic overlay of NZD 8 million. The second environmental factor for us is clearly technology. We see this as the pathway to a differentiated proposition around efficiency and scale. When it comes to technology, the view that we take is the banking industry has not yet fully embraced the benefits of technology. There are a number of reasons for this. The industry is beset with legacy systems, a multitude of distribution platforms, and a general lack of interconnectivity within systems and processes.
This translates into the time it takes to process customer requirements, and that comes at a cost. Because that model afflicts the banking industry, in more or less the same way, banks tend to sort of congregate around a cost to income ratio of the mid-40%. We believe that there's an opportunity to break free of this paradigm and to focus unremittingly on automation and self-service, and fully digitalize our platforms, and move into a different area in terms of cost-to-income ratio. And we demonstrated what was possible with our Online Home Loan proposition by offering a platform where it's only accessible online. There is no branches, you know, or branches or telephony. It's only accessible online.
The cost of providing that was extraordinarily low, and that enabled us at times to be able to offer market-best rates. This is the future. That's what you can expect from us in terms of the operating environment. It requires change, not trimming, but taking a fresh approach to how we allocate our resources to make sure that they are focused on value contribution rather than just activity or the structures of an organization plan. Our mantra very much is that if we look like the other banks, we will perform like the other banks, and that's not our intention. That moves nicely to the third environment, part of the operating environment that is prevalent and will continue, is growth. We are seeing growth in the market. We'll continue to see it.
If you see on page 47. Sorry p age 7, there's a table there which Andrew will go in more detail. As you can see in those businesses like reverse mortgages, we're getting 20% growth in Australia, 24% in New Zealand. In asset financing, where we are servicing the infrastructure development needs in New Zealand, we're getting 13% growth. Motor, post CCCFA, returning to its levels of growth at around about just under 11%. We're seeing some green shoots returning to our home loan offering post the triple CCCFA issues. Finally, we are looking forward to developing more growth in Australia with our livestock offering, particularly as we move towards a bank license.
I will now hand over to Andrew Dixson, the chief financial officer, who will go into more detail around the financial results.
Thank you, Jeff. Good morning, everyone. I'm on slide 9, which bridges NPAT for the first half of FY 2023 with NPAT for the first half of 2022. This was presented on an underlying basis, which excludes the impacts of one-off items in each financial period, as noted on the slide. I will talk to those items as I run through the individual components of profit and loss, I would note these one-off items are consistent with those flagged during our issuance of profit guidance. Also, please note that Heartland Group's results for the first half of FY 2023 include StockCo Australia, the entire period, as a result of the acquisition in May 2022. This means that the prior period comparatives did not include this.
I will call out the impact of StockCo Australia in terms of its contribution to the individual components as we go through the results where applicable. Firstly, NPAT. On a reported basis, NPAT was NZD 48.7 million for the half, an increase of NZD 1.1 million or an increase of 2.4%. On an underlying basis, this was NZD 54.7 million, an increase of NZD 7.6 million, which is 16.2% higher than the prior comparative period. In terms of the individual items, net interest income on an underlying basis was NZD 140.8 million, which was an increase of NZD 16.9 million, of which StockCo Australia contributed NZD 11.5 million.
Reported net interest income was NZD 138.9, which includes a one-off NZD 1.9 million interest expense on the bridging facility, which was utilized to acquire StockCo Australia. This bridge was repaid on the 13th of September using proceeds from the recent equity raise. In terms of the impact to NII, the result was driven by a decrease in net interest margin of 29 basis points. The reduction was from 4.3% in the first half of 2022 to 4.02% in the first half of 2023. I would note that NIM only reduced 8 basis points from the second half of 2022.
This reduction was combined with NZD 1.2 billion higher average interest earning assets compared to the prior period, which is made up of NZD 1.1 billion higher average receivables and around NZD 100 million higher average liquid assets. StockCo Australia contributed just under NZD 400 million to this figure. I will cover the movement in net interest margin in more detail on the following slide. Receivables grew NZD 316 million from June 30, 2022, which was a 10.1% annualized growth rate, noting this excludes the impacts of changes in FX rates. I'll cover the key components of this growth on slide 12. Other operating income, underlying, in an underlying sense, was NZD 8.9 million, which is an increase of NZD 2 million or 28.3% higher than the prior period.
This is primarily driven by an increase in upfront reverse mortgage income with continued growth in originations across both portfolios. Reported other operating income was NZD 2.8 million, a decrease of NZD 4 million, and this is where some of the significant one-off impacts we're seeing. Firstly, there was a NZD 3.6 million loss contributed by the derivatives that were de-designated from prior hedge accounting relationships in FY 2022, with there being no impact on the first half of 2022. The dedesignation resulted in a large mark-to-market accounting gain on these derivatives, which was recognized in the second half of FY 2022. While these hedges were removed from their accounting relationships, the majority were retained to manage interest rate risk and to continue providing their intended economic benefit.
This, however, results in the mark-to-market gain taken previously being unwound as a loss as the cash flows from these derivatives are realized. The impact of this will primarily be seen in the current financial year. The second one-off item in this part of the P&L related to a NZD 2.4 million fair value loss on Heartland's equity investment in Harmoney Shares, and this compares to only a NZD 0.1 million fair value loss in the first half of 2022. The fair value, as at the 31st of December 2022, takes into consideration the final bid-ask price on the final trading day of Harmoney Shares for the period on the ASX, which was AUD 0.4875. There were no trades occurring on the final day. Turning to operating expenses.
On an underlying basis, operating expenses were NZD 63.9 million, an increase of NZD 7.5 million, which is 13.3% higher than the prior comparative period. StockCo Australia contributed NZD four and a half million to this increase, with the remaining NZD 3 million increase primarily driven by a 4.8% increase in staff expenses due to an increase in average full-time equivalent employees, many of whom are focused on our technology projects and our Australian ADI endeavors. This was combined with general labor cost inflation amidst a tight labor market. There was also a commensurate increase in upfront reverse mortgage expenses, which are largely offset by the increased upfront reverse mortgage income previously mentioned. The balance of the increase related to increased general administrative costs. These were in part offset by reduced marketing expenditure.
The underlying cost of income ratio improved to 42.7%, which is down 40 basis points on the prior comparative period. Finally, on operating expenses, we do expect to bear some one-off transaction costs in the second half, which will not impact the underlying metrics, and these principally relate to our exploratory work on the ADI license, including the potential acquisition of Challenger Bank. Impaired asset expense was NZD 9.2 million, which is up NZD 0.7 million on the prior period, and the impairment expense ratio was 0.29%, 4 basis points lower compared to the prior comparative period. While the receivables portfolio recorded strong growth during the year, impairment expense benefited from the continued run-off of high-risk portfolios, being replaced with strong growth in high-quality portfolios, such as reverse mortgages in both countries and the addition of StockCo Australia.
Book quality improved within core portfolios such as motor, with a higher proportion of growth from franchise dealers and high quality of end borrower following tightening to lending standards in the wake of CCCFA changes. While we experienced initial uptick in motor arrears during the period, this has moderated to align to pre-COVID, COVID levels and the ordinary seasonal increases experienced. In particular, our key indicator of being unemployment remains low. In all, credit quality remains sound, and our portfolios continue to prove resilient. The economic overlay of NZD 8 million taken in the prior financial year remains unchanged at the end of the period and is considered sufficient protection against the potential impacts of any future deterioration in the economic environment. Turning to slide 10, the key performance measures.
Focusing on NIM and the decrease from 4.3% in the first half of 2022 to 4.02% in the first half of the current financial year with high-quality assets, this contributed around an 11 basis point decrease. The change in portfolio composition was a result of the continued runoff in the high-risk portfolios, with personal lending and unsecured SME lending both reducing. Business and rural relationship lending experienced larger repayments of high-risk exposures. At the same time, there has been strong growth in high-quality portfolios such as reverse mortgages and Online Home Loans. This impact was offset by the acquisition of StockCo Australia, which contributed an equivalent 11 basis point improvement in NIM.
There was also margin compression in individual portfolios NIMs, which contributed a further 29 basis points decrease in overall NIM. This was driven by a few factors. Firstly, cost of funds increased during the period after being with the cash rate being at record lows in both countries for a long period of time. We saw a rapid and sharp increase. Heartland intentionally delayed passing the full impact of these increases onto some customers. In the case of reverse mortgages in New Zealand and Australia, did not pass on the full increases. With depositors, Heartland was quick to pass on the benefits of the rise in cash rate. It is believed while this did not maximize our potential NIM, it was a socially responsible and more sustainable approach. This has positioned Heartland to fund future receivables growth.
Competitor activity in Heartland's key portfolios, primarily asset finance and motor, also intensified during the period, with aggressive pricing from smaller competitors attempting to grow their market share. Heartland proactively managed pricing to remain competitive while protecting its market position. Through proactive portfolio pricing and margin management, the compression in NIM has stabilized over the back end of the period, and Heartland's underlying NIM did record only an 8 basis point decrease on the 6 months to June 30, 2022, and it is expected to remain stable going forward. Just as a final note, while we're seeing other banks reporting NIM expansion, it is worth noting those banks did have access to the Reserve Bank's Funding for Lending Programme, whereas Heartland did not have suitable eligible collateral to participate.
This has enabled other banks to share in about NZD 19 billion of funding at low OCR rates during this period. In terms of cost-to-income ratio, we have seen this continued its downward trajectory, decreasing to 42.7% on a underlying basis, and that's down 40 basis points compared with the first half of 2022. Costs have been tightly managed despite inflationary pressures. Non-performing loans did increase primarily in the business and motor portfolios. In business, the increase was driven by several large exposures that have strong security and have longer-term remediation plans in place.
In motor, we saw an increase in arrears in the first four months of the half due to rising costs impacting household budgets, and this was reflected in the percentage of motor book arrears increasing from 3.17% at 30 June to 3.99% at 31 October. However, this has since moderated, with the percentage of the motor book arrears falling to 3.73% by the end of the half, and this reflects a return to pre-COVID-19 levels of arrears at this point in the financial year. Furthermore, the subsequent seasonal increase, which we tend to experience in January 2023, has been at a similar level to January 2022. Moving to slide 11 on shareholder return. Our underlying return on equity remains solid at 12.1%, and this is in line with the prior comparative period.
Our underlying EPS of NZD 0.082 per share was up NZD 0.002 per share on the prior period. We have declared a fully imputed NZD 0.055 per share dividend, which provides a very strong dividend yield at 8.7%, which is an increase from 7.4% in the prior period. We have set the discount on the DRP at 2% for this dividend. Finally, moving to slide 12, growth in receivables, which charts the growth in the first half of the financial year by division. Leanne and Chris will cover this in detail later in the divisional summary.
However, it's another first half of fantastic growth, double-digit growth, seeing NZD 316 million from 30 June 2022, which is a 10.1% aggregate annualized growth rate, excluding the impact of changes in FX rates. Excellent growth was experienced in our core portfolios, with standout performances across both reverse mortgage portfolios. Australia recording NZD 128 million of growth, which is nearly 20% annualized growth, and New Zealand recording NZD 87 million of growth, which is an annualized growth rate of 24%. New origination increased significantly, offsetting the continued strong liquidity profile of the books. Asset finance and motor finance also continued their strong growth profiles, with annualized growth rates of 13.4% and 10.1%, respectively.
Business lending contracted by NZD 35 million, which was driven by lower floor plan utilization as stock inventory levels remained impacted by global supply chain and erratic shipping conditions. The Harmoney portfolio continued to run off in personal lending, and there's very little of that left to run off, and this contributed to an improved risk profile and quality of lending book. Online Home Loans grew NZD 28 million in the first half, which was an annualized growth rate of 19.3%. This growth was lower than in previous periods, which was driven by a sharp decline in property sales and new mortgage volumes in New Zealand. I'll hand over to Jeff Greenslade for a strategic update.
Thank you, Andrew. I'll give a strategic update and talk about sustainability before handing over to Leanne and Chris. Our strategic activity has really focused on 3 areas, each representing points of differentiation. Firstly, our best or only products, and Leanne and Chris will pick up on progress there, in New Zealand and Australia respectively. Secondly, as I mentioned earlier, technology, the work we're doing there, is our pathway towards efficiency and ultimately, a superior cost to income ratio, which will take time. It may wobble over time, that is our commitment. The things that we've achieved in the last period, we have seen our Heartland Mobile App users grow by 46%, and we see that as the major medium for self-service.
Very importantly, we've seen our calls have gone down by 7%, and that is a major indicator of utilizing costs. The amount of calls that the organization takes, and we ultimately have a target of 0 inbound calls. Those things have flowed through to the underlying reduction in the cost to income ratio that Andrew has covered. We've also are close to finishing the upgrade of our core system, which has been a long process, but it's a very important milestone for us in terms of future-proofing and giving us a basis for future efficiency. The third element is Australia, and this is where we have a unique opportunity to access accelerated growth in Australia, unlike any of our peers in New Zealand.
During the course of the year, we raised just under NZD 200 million of equity. We're very pleased to have attracted a number of Australian institutions as part of that capital raise. That's very important for us for the future to give us a stronger base in Australia of investors for raising capital. I'd also like to point out and thank the strong support we got from our New Zealand shareholders in that issuance. During the course of the period, we increased our market share in Australia in reverse mortgages to just under 36%, and we're also substantially through the process of embedding the acquisition StockCo into our business.
During the course of that period, we used some of the proceeds of that capital raise to repay the bridging facility which funded the StockCo acquisition. Of course, we announced a sale and purchase agreement in respect of Challenger Bank. Challenger Bank is the contract there is obviously conditional on us obtaining the necessary consents to become licensed as a bank in Australia. Challenger itself is a relatively small bank, has just shy of NZD 400 million of receivables, which is spread across residential mortgages, auto and asset finance. The book is small and very consistent with our risk appetite, so it doesn't come with any legacy issues in terms of its back book. Whilst its antecedents go back quite a considerable period, it is effectively a new organization.
Challenger put it through a major overhaul, so they've got a new platform, a cloud-based, core system, and their pathway in terms of digitalization, has commenced. As you can imagine, this is an excellent base for us in terms of our plans for Australia. Our plans for Australia are once we obtain a license, is to refinance the wholesale funding, which supports our reverse mortgages and livestock with deposits. That gives us the potential for an uplift in margin, but more importantly and more enduringly, access to a much deeper pool of funding to fuel the growth that we are experiencing and intend to continue to experience in Australia.
Once that's underway, we will then also look at introducing new products, motor loans and asset finance into Australia, utilizing the distribution networks that we have in Australia via our partners in New Zealand that have distribution and manufacturing in Australia. Thirdly, building on a superior cost-income ratio, the objective is to introduce Online Home Loans in the same way that we have in New Zealand and offer a competitive product. Moving then to sustainability. Sustainability has three streams: environmental, social, and economic. In terms of environmental, much of our activity has been on our own footprint, our direct contribution, and we've seen quite a significant reduction in our contribution to greenhouse gas emissions at 56%.
Admittedly, that has been assisted by the COVID lockdowns, but nonetheless, we have learnt a lot and have locked in some great opportunities to further improve our contribution in terms of emissions. We're also working with our customers to help them in their transitions, and we are funding the new generation of vehicles. We have a discounted rate for our customers who wish to take up either EV or hybrid vehicles. We're also working with various industry groups to learn and discover better ways in which we can control not just our own direct footprint, but also how we help with our own communities in terms of their impact on the environment as well. Turning to social equity, two things to call out in particular.
We achieved a Rainbow Tick accreditation, which we're very proud of. A lot of work went into that, and so we're very pleased to have reached that milestone. Secondly, we completed the sixth Manawa Ako internship. It started early in the beginnings as targeting Māori rangatahi, but we've included Pacific as well, and this was the sixth group of rangatahi that we had through the organization. Every time we have one of these internships, we learn more ourselves about how we can become more accessible and more accommodating to try and bridge the gap between te ao Pākehā and te reo Māori. Economic prosperity, we as discussed. We enjoyed the highest percentage growth of main banks in terms of deposits.
I think that loyalty was a reflection of some of the service propositions, but particularly the way that we were very prompt to pass on rising interest rates to our depositor base, and that has given us a very strong normal funding base to assist in fueling our growth. Similarly, with our reverse mortgage customers, we have grown quite consistently in both countries at high levels, helping out the senior demographics in both countries in terms of how they meet their retirements. As we discussed, we did not increase our NIM during this period. We made the conscious decision to behave in a social responsible way in terms of our depositors and our borrowers, and particularly for our reverse mortgage customers, in both countries, not passing on all of the increases at all.
We occupy leading market positions in the reverse mortgage businesses in Australia and New Zealand, and with that leadership comes responsibility. What we believe we are doing is not just socially responsible, it is the sustainable things to do. It's in the shareholders' best interest. Just look at the growth we're getting. You know, almost 20% in one country and 24% in the other. I think that speaks for itself in terms of underpinning our social responsibility. Now I'll hand over to Leanne Lazarus, the Chief Executive of Heartland Bank, who'll go through the New Zealand divisional summary.
Thank you, Jeff. Good morning to all. The Heartland Bank strategic focus has been on business as usual growth, driving higher quality and lower risk assets and frictionless service at a lower cost. Our actions have been underpinned by our sustainability agenda and creating a positive work culture and environment. Our Mahi Pono, our values, underpins our decision-making. Within the diverse portfolios of the bank, we continue to develop automated solutions to digital platforms to enable our enhanced customer experience and drive efficiency and disciplined execution throughout the bank. As Jeff mentioned, our core banking system upgrade is nearing completion. I'm going to turn to page 18 to go through each of the portfolio performances and starting with reverse mortgages. In New Zealand, reverse mortgages has remained resilient to economic conditions. The increase in the cost of living is driving demand.
There is an increased awareness and acceptance of reverse mortgages. We experienced strong growth of 24% or annualized growth for the six-month period, so that's 24%. New business loan-to-value ratios at 10% and portfolio loan-to-value ratios at 19%. Heartland is recognized as New Zealand's leading reverse mortgage provider, as demonstrated by our market share. Turning to asset finance, page 20. We achieved annualized growth of 13.4%. We did see our non-operating income in this portfolio decrease by 4.8%. This is primarily due to a NIM deterioration due to the impacts of interest rate changes required to maintain competitive pricing, as well as a lag of the time it took us to fully reprice our fixed rate loans. Significant digital development is underway in this part of our business to support future scalability and efficiency.
We did see a demand in our core asset segments for trucks, trailers, and yellow goods. We had lesser for focus on the logging sector, and we've had strong activity in logistics. Following on to our business portfolio as outlined on page 21 of the presentation. Our business portfolio includes the historical relationship books that continues to run down, contributing to a book that is lower risk. It also includes floor plan lending, which is loans to motor and truck dealerships secured against stock. Negative movement was driven by the lower floor plan utilization and stock inventory levels remain impacted by global supply. We expect to see an improvement in this position in the second half of this financial year as stock arrivals continue throughout 2023.
In our Open for Business portfolio, which is unsecured lending to our small and medium enterprise sector, Heartland has followed a cautious approach since COVID 2020. A strategy reset occurred in the second quarter of our first half of the financial year due to sensitivities that this sector is experiencing a challenging macroeconomic environment. We are comfortable with the book contraction that has occurred for the six-month period as we move towards higher quality and lower risk assets. I now turn to motor finance, as outlined on page 23 of the presentation. Our book is at NZD 1.46 billion of receivables as at the 31st of December 2022. For the six-month period, we achieved growth of 10.9%.
Growth has been a product of market share gains at the higher quality end of the market. We saw a shift in the mix, 75% of business originating from key partnerships and branded partners. There has been a change to our portfolio mix. However, we have seen a non-operating income decrease, and that's primarily driven by competitor activity and the change in our portfolio mix. Competitor activity in the motor industry has been really aggressive as smaller motor vehicle financiers attempt to grow their market share in the higher quality end of the market. Heartland's response to this has been to manage interest rates in order to remain competitive and ensure growth was achieved. This also once again impacted on our number. We had increased lending to new generation vehicles.
That was 14% of all new vehicle lending in the first half of the financial year. We launched a green vehicle lending rate in December of 2022. Our motor arrears, as Andrew and Jeff have highlighted, did see an increase in the first four months of the finance half year. We saw this declining in the November and December periods. We have strong partnerships with our key branded partners, which we're confident of continued strong growth in the second half of the financial year. Turning to personal lending, which has now become a small part of Heartland's portfolio. It's expected to remain so in the prevailing market conditions. The principal drivers of contraction is in our Harmoney book, which is closed to new business and is running off.
Like with our Open for Business, we are comfortable with contraction in this book, and unsecured portfolio. Our Online Home Loans have seen growth of 19.9% in the first half of the financial year. We expanded our online loan criteria and had a significant focus on digital enhancements, particularly with an enhanced approval process for quicker decisioning to customers. Within this portfolio, we see significant opportunities as we have a lower acquisition cost and extremely competitive interest rates. Finally, turning to Rural, which could be outlined on page 26. Receivables decreased from the six-month period by 3.8%, driven by the normal seasonal fluctuations in livestock. Our focus remains on our core sheep, beef, and dairy direct, which continues to be our primary focus together with our livestock business.
We well-positioned into the second half following normal seasonal fluctuations, we expect to see this portfolio recover in the second half. The rural portfolio will also benefit from legacy loan rundowns, contributing to a book that is lower risk. Finally, before I hand over to Chris Flood, I just want to quickly mention the impact of the flooding and cyclones on our customers. The flooding in Auckland had limited impact to our portfolios, particularly in our home loans. The impacts of the cyclone will have more of an impact on our commercial rural livestock portfolios. We see this as more business disruption rather than loss of assets, we are working with our customers to understand the impact and the support required. I'll now hand over to Chris Flood.
Thank you, Leanne, and good morning, everyone. I'm on page 28 Australian reverse mortgages, and as discussed by previous speakers, it has been a very strong growth period for Heartland. A couple of things driving that. Demographics, obviously with more baby boomers now entering into, well into retirement. The cost of living increases in both countries are real and are outpacing the income that retirees are receiving. So that has created pressure. I think there's a growing awareness in both countries of the product. For a long period of time, we were the only business advertising in both countries. With increased competition comes more advertising.
Growing awareness and greater acceptance has led to a bigger market for us in Australia. We remain the leading provider in that market. We expect continued strong growth in the year ahead. We're focused now on ensuring we have the best processes we can employ to be efficient and effective in terms of our operations. This business will very much benefit from being part of a wider Australian business in the fullness of time. Just turning quickly to page 29 and the some of the metrics there. I'll just call out a couple. The first point to note is these metrics in terms of average LVR and weighted LVR have barely changed.
The reasons for people taking or drawing down a loan have changed, though, however, and we are seeing increases in the amount that is channeled towards retiring existing debt. We think that'll be a continued trend to see. As you'll see from the weighted LVR, which is still running at circa 20%, there has been no real change in the overall position. Turning now to page 30. While the growth at 6.7% is relatively modest in the first half of this financial year, it was achieved in what were very difficult markets. As a consequence, you know, it is an excellent performance.
Weather events in New South Wales and Queensland were severe and had a significant impact, and as did the COVID lockdown in China. It came at the same time as we had a drought in the U.S., and so they destocked. Commodity prices came under some pressure, noting the weight gain, value add, trumps the commodity price fall. It doesn't have a risk implication for Heartland, but it meant that we had to lend against a lot more stock to grow at similar sort of rates. Performance measures, I look to the number of new bank new to bank customers and the number of referring partners we have. Both have steadily climbed.
Commodity prices will strengthen again and StockCo as well, positioned to benefit from that. Like, reverse mortgages, this business will also benefit from being a part of a larger business in Australia. I will hand now back to Andrew.
Thanks, Chris. Moving to slide 32 and New Zealand funding and liquidity. At a consolidated level, Heartland Group increased borrowings by NZD 158 million to NZD 6.3 billion.
This was a combination of growth in both Heartland Bank in New Zealand and Heartland Australia, partially offset by the full repayment of the StockCo acquisition bridge facility. Heartland Bank increased borrowings by NZD 250 million to NZD 4.6 billion, with deposits growing NZD 480 million to just over NZD 4 billion, which is a 13.4% increase. This was driven by competitive pricing on targeted products with a particular focus on building out Heartland's Notice Saver offerings. As previously mentioned, Heartland Bank was quick to pass on the benefits of the rising interest rate environment to its depositors, and this resulted in it experiencing the highest growth rate in deposits of any other bank in New Zealand during the first quarter.
This growth enabled a reduction in other borrowings, which reduced by NZD 231 million to NZD 519 million following repayment of Heartland Bank's inaugural NZD 150 million retail bond and a NZD 77 million reduction in the amount drawn under its committed auto warehouse, reducing reliance on and creating capacity in its wholesale funding programs. Total liquidity strengthened, increasing by NZD 147 million to NZD 775 million, particularly off the back of deposit promotions, ran across November and December. The resulting liquidity ratios speak for themselves and are well in excess of regulatory minimums. Turning to slide 33, in Australia.
Heartland Australia increased borrowings by AUD 168 million to just under AUD 1.4 billion, which is a 14% increase, and to cater for the growth being experienced in the reverse mortgage book. Reverse mortgage securitization warehouse maturities were extended by two and three years respectively, and aggregate senior limits were expanded by AUD 50 million, providing additional headroom to fund future growth in the portfolio. Heartland Australia now has access to committed reverse mortgage loan funding of just under AUD 1.5 billion in aggregate and continues to actively progress further extensions to its warehouse funding programs. A further AUD 80 million in aggregate of medium-term notes were issued in the half, taking the total outstanding issuance under this program to AUD 360 million as at December 31, 2022.
Stockco Australia increased its borrowings by NZD 15 million to NZD 344 million, with the new facility that was executed on acquisition operating as expecting, as expected. Further funding facilities are planned to cater for projected growth ahead of the proposed acquisition of Challenger Bank and commencement of deposit-raising activity. Moving to slide 34 on capital. Following the equity raise completed in September 2022, the group's capital position strengthened and now sits at just over NZD 1 billion, which is 13.7% of total assets. Heartland Bank's regulatory capital ratio reduced to 13.15% at the end of the period following the removal of any bank dividend restrictions by the Reserve Bank.
Heartland Bank continues to operate significantly in excess of current regulatory minimums and is well-positioned to meet the Reserve Bank's future capital requirements, which are for a core capital ratio of 11.5% and a total capital ratio of 16% by the 1st of July 2028. In order to accelerate this journey, diversify its capital base, and accommodate future projected growth in the medium term, Heartland Bank is considering an offer of Tier 2 capital notes. More details are provided in our market release, and full details are expected to be issued mid-March. Just to state that no money is currently being sought and applications cannot be currently made for this. Finally, on slide 35, regulatory update.
Heartland continues to monitor and process the significant volume of regulatory change, with a key area being the changes to the CCCFA, whereby Heartland Bank implemented new processes and technologies to deal with this. We also have an ongoing focus on the impending implementation of mandatory climate-related disclosures. Additional changes include the Financial Markets Amendment Act, which comes into force in early 2025, the Deposit Takers Bill, which includes the introduction of a Depositor Compensation Scheme, and Consumer Data Right. I'll now hand back to Jeff Greenslade.
Thank you, Andrew. To summarize, this is a good result. We've seen good growth coming through in an environment of economic uncertainty. There's also been against a backdrop of substantial strategic activity, as I mentioned, upgrading our core system, integrating StockCo, and the process approvals that we're going through with regulators on both sides of the Tasman in order to become a bank in Australia. We expect this to continue both the growth that we're seeing, plus this very strong focus on strategic activity because this is the organization that we are.
We are building a differentiated bank in New Zealand and Australia, one which has a solid base in New Zealand on its best or only products, access to accelerated growth in Australia, and is efficient and create a virtuous circle of doing more at lower cost. A lot of hard work has gone into the half's result, and there is more hard work to come. I'd like to thank Chris Flood's team in Australia, Leanne, your team in New Zealand, and also our ever active Chief Financial Officer, Andrew, for his work in terms of putting those all together. Also extend my thanks to the wider Heartland whānau, ngā mihi nui. Thank you for your commitment and your diligence.
Finally, I'd like to thank our shareholders for your continued support. Now we'll hand over to the moderator for questions.
Thank you. If you would like to ask a question over the phone, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. A voice prompt on the phone line will indicate when your line is open. Again, please press star one to ask a question. Our first question comes from Grant Lowe with Jarden. Your line is open.
Oh, hi, team. Can you hear me okay?
Yes. Hi.
Hello. Oh, great. Just around the Challenger Bank timelines. I dropped off a call for a period there, so apologies if I've missed anything. In terms of the timelines associated with those around, also around the additional costs you expect in the second half for those initial fees?
I think the It's a bit hard to hear you, but I think the question was around the timelines for Challenger Bank and then secondly, the cost in the second half. I'll deal with the first part of that question, if I've got it correctly. I wish I knew the answer to that question about how long it's going to take. It is a process with two regulators. They don't give us timetables. We endeavor to give them timetables, but it's really in their hands. We're unaware of any major issues, but it's just an iterative process that we need to work through with both sets of regulators. Andrew, I think the question of cost associated with the... Was it a question of quantification?
Yes, that's right. Quantification.
Yeah. The costs principally relate to due diligence and documentation and exploring the acquisition, rather than getting the license itself. That will be in the region of about AUD 2 million.
Okay, great. In terms of, have you're obviously doing a lot of work on this behind the scenes. Have you got an indication of the potential size of any equity raise down the track to support regulatory requirements once the bank is established?
Not yet. Obviously, we've announced, the bank is considering a Tier 2 offer. That's the only capital related activity at this point in time.
Right. Okay. Yeah. In terms of the home loans book, obviously there was a target out there of NZD 495 million for year-end. Can't do much about the state of the mortgage market. In terms of the strategy for that for the second half, is that maintain the same sort of strategy, and, you know, effectively wait till the mortgage market starts to pick up again? Or is there any particular change in strategy with that product?
Very much along the lines. The product has suffered, if you like, not just from the downturn in the property market, but the CCCFA. It took a while to work those issues through because when we've got a purely online approach, it's much more complex and requirements for us to meet the responsible lending requirements. Now we're getting sort of a, if you like, an understanding and equity around that area that has resolved itself. We see perhaps the big change is more of a pivot towards refinancing, and that has a number of advantages.
You're financing people who've already been approved by another bank, and they are in this environment, you know, we expect with the refinancing into a higher market, like I want to save every possible cent they can. That's where we aim to be positioned, is more towards the refinance market.
Okay, that's great. In terms of just trying to understand the cost side of things into the second half. You've called out, you know, obviously receivables, opening receivables will be, are higher. You've called out that NIM is expected to be flat and that the NPAT result in the second half is likely to be similar to first half. There's only a few line items between those various numbers. That sort of implies to me that you're expecting a an uptick in OpEx. Obviously, everyone's expecting, you know, or experiencing cost pressures. Is that sort of a correct interpretation of those variables?
No, I don't think so. We'll continue to focus on control of costs. We're, you know, there will be inflationary pressures continuing. We are, we do have a higher headcount focused on, in the main technology products which are drawing to a close. I would say that we would see OpEx at similar levels to the first half.
Okay. That's great. In terms of just the macroeconomic assumptions underpinning that NZD 8 million economic overlay, obviously, you know, the impairments remain fairly benign at the moment. You've got that economic overlay. Can you give us an indication of the sort of, I don't know, levels of unemployment or otherwise that sort of factor into the quantification of that? Then, like, give us a sense of, you know, what that how much of a downturn that effectively could support?
I think for us, unemployment is the most closely correlated factor driving any of our risk models. In terms of the overlay, though, it's also linked to some of our larger legacy loans, where there are some lumpy exposures. We're still just remaining a degree of caution around those. They're more of a, like a portfolio by portfolio judgment call in terms of the round, which suggests to us the right thing currently is to maintain the level where it's at.
Okay, that's great. Thank you very much. That's all for me.
Sorry, can I just clarify, your comment, I think, was around the fact that we expect our profit to be similar to the first half and the second half.
That is correct. Obviously, receivables are up and NIM is flat, which implies that, you know, net interest income will be up, but the bottom line obviously remains flat. Just trying to understand whether that's a cost thing or an impairment thing. There's only a few line items between those various numbers, obviously.
We expect to see growth in profitability in the second half. Yes, NIM is expected to be stable. We expect continued receivables growth, costs will be controlled and our loss experience to continue at current levels. That will produce a profit which is in excess of the first half.
Okay.
I think similarity was used in the sense the ingredients are similar.
Yeah. Okay. Okay. Great. That, that's fine. Thank you very much.
Our next question comes from Wade Gardiner with Craigs Investment Partners. Please go ahead.
Hi. Sorry. Just looking at your reverse mortgage books, both New Zealand and Australia. It looked to me like origination was strong, which you sort of explained, but I was expecting to see, maybe a fall in repayments, just given where the property market's gone. Can you sort of talk to sort of a bit of color around that and, you know, would we see some sort of normalization of that into the second half?
Yeah, you're absolutely right, Wade. Repayments have come down, not significantly, but they are lower than we had anticipated. It's, you know, hard to judge when that might return to what we would call normal levels. For the first half of this year, it has been lower than we budgeted for.
Right. I guess I'm just trying to understand the what's a normal rate because, of course, lower repayments will, you know, essentially boost the value of your book. In terms of the receivables growth, what was sort of the, you know, the normalized level versus what was boosted by the lower repayments? Is that possible to quantify?
I could do some work on that and quantify it for the half, but it's most of the growth has come from increased new UDC customers as opposed to retraction repayments. We can go into more detail, but typically repayments have set between 12% and 15%-16% over a long period of time. It's kind of hard to understand what is normal. We do track reasons why people are repaying. What we did notice, though, is that the highest level of repayments we saw was during that period of a couple of years where particularly, say, Sydney and Melbourne property prices were at record highs. Now that was if you like correlation. It's not necessarily proof, but that was correlated.
Secondly, we've seen the repayments rates coming down since the property markets have cooled. Again, correlation, not necessarily proof, but that's the sort of, you know, the assumption that we think is valid, is that movements in property prices do influence the repayment rates.
Okay. You talk about the core system upgrade and sort of greater levels of automation. Can you sort of give some examples of where we're going to see this?
Across our portfolios, particularly within our middle and our back office, creating efficiencies within that, automation of our processing across those parts of our business. Our core system upgrade is going to be an enabler for us to accelerate that automation. The primary focus in our middle and back office, as well as as we continue to develop our mobile app, functions for our customers to self-serve.
The things that we will be measuring.
Sorry.
The things that we measure to see how that's going is, for example, obviously uptake in the mobile app is very important. That's the pathway to self-service. If people don't have it, they can't access self-service. Uptake is very important to us. That's one factor we look to. Secondly, the decrease in inbound calls. That's a major cause of cost and extra processing. Behind those two things is just what's happening in the middle in terms of how we make things happen, whether we, you know, to what extent we can automate those processes. We have specialists in customer journeys that are constantly mapping out the customer journeys, finding bits we can take out, bits that are replicated, and things that we can automate.
Indeed, again, one of the things that Leanne's team is looking at is the role of robots in terms of some of those functions.
Following the sort of the system upgrade, Is there an opportunity to reduce some of the, you know, those staff numbers associated with it? Or is this sort of just an ongoing, you know, staff numbers will continue to increase with the size of the books?
A lot of the staff we're carrying who are contractors effectively, yeah, are related to the project. The project itself, you know, will close, and then there will be reductions. Yeah, you never know what comes down the pipe, which is the next thing that we need to do. Certainly, yeah, the project has absorbed a lot of resourcing, which will come to an end once the project or once it's completed.
I will say there's a significant to be undertaken.
What's that? Sorry.
I will say there is a significant body of work to be undertaken in this area.
Right. Okay.
The-
We won't see sort of a reduction in the, you know, cost and the cost to income ratio as a result of that sort of project coming to an end and staff numbers reducing.
What we will look to do is we are driving efficiency programs throughout the bank, is look at all of our cost lines and our practices, and how we run more efficiently.
Okay. That's all for me. Thank you.
Our next question comes from Stephen Hudson with Macquarie Securities.
Good morning, and thanks for the presentation. Just a couple from me. I'm not sure if I missed it, but can you potentially quantify the funding pass-through issue around reverse mortgages and what that costs you in terms of NIM? Secondly, Chris, I think you mentioned that your weighted average LVR across your reverse mortgage books had remained pretty steady at sort of 20%. I just wondered if you can give us a historic range. I haven't got that in front of me, but that would be useful. Maybe one for Andrew, just on the Challenger strategy around becoming an approved deposit taker.
Do we read anything into the funding availability and costs in terms of the MTN program, as you push into, being an ADI or, is the MTN program still pretty much, unchanged as you see it?
I'll start with that one first. What I foresee happening, once we acquire, hopefully acquire Challenger Bank, is that program will be reset. Currently it's issued by Heartland Australia Group, which is rated. Challenger Bank is not rated at the moment, so we will seek to get a credit rating and probably 2 credit ratings for the bank as that will enable us to reestablish or reset the program out of Challenger Bank. That issuance will be by a bank, obviously, and the paper will be repo-eligible, so we will reap the margin benefit of doing so. That's the MTN program.
Your question around impact of pass or not passing on the full benefit, I don't have a hard figure in terms of the NIM impact. What I will say is in Australia, it was around about 40 basis points that we haven't passed on. In New Zealand, it's much bigger than that. It's around about 150 basis points, reasonably significant.
Stephen, in terms of the weighted LVR, I'll get you the range, let's say, over the last five years. I don't have that to hand, but it's been relatively consistent through that period. It's been higher. You know, if you look at 2019, it was up around 25%. It's come back, obviously, on the back of the previous sort of increases in the quarterly index movements.
That's useful. Thanks, Chris and Andrew. Actually, at the risk of jamming the call, Jeff, I might just lob one into you. You talked about the sort of the cost to income ratio and your aspirations, obviously to beat the bigger banks on that score. You know, obviously you've got a high NIM, and so I think if, you know, if my maths is right, your sort of 43% probably translates through to something closer to where the banks are now. Where do you think it could get to in the next 5 years if you get your technology stack right and, you know, perhaps your aspirations in Australia come through?
Yeah. As we observed in the previous question, you need to spend in order to get there. You've got work going on at the moment with the systems upgrade. We've got work going on in other areas. And that will continue. That's not gonna be a short-term thing, and it will wobble the cost to income ratio as we go through this period. You know, and we invest to get to where we go. Because what we're doing is changing, not trimming. And that's the important thing to keep in mind because the paradigm that exists is what we've got to break out of, that will take time. I'm not gonna give at this stage a timeframe or a target for that.
What I can say is that, you know, where banks currently sit around the sort of mid-40s% or something, you know, you need to be significantly below them. You know, obviously something in the 30s% is where we need to be aspiring towards, but that's not a hardwired target or, and certainly not a timeframe around it. just to give you an indication that it can't just be 1% or 2% better, it's got to be a quantum difference.
That's useful. Thanks, Jeff.
As there are no questions online, I will now pass to Jeff Greenslade to close the call.
Thank you very much for your attendance. It's very much appreciated. Obviously, if you have anything else you wish to ask us, Nicola Foley is available to take that. Once again, thank you for your support. [Foreign language] .
This concludes today's call. Thank you for your participation, and you may now disconnect.