Good morning everyone, and welcome to the Heartland Group FY 2022 half year results. Please note that all participants are currently in a listen-only mode. Once the presentation is over, analysts will be invited to ask questions. To do so, dial star one and an operator will assist you. I would like to turn the conference over now to Mr. Jeff Greenslade. Please go ahead, sir.
Thank you. Good morning and welcome to everybody. Thank you for attending the Heartland Group first half 2022 results. I'm Jeff Greenslade, the Chief Executive of the group. I'm joined by the Group Chief Financial Officer, Andrew Dixson, and the Chief Executive of Heartland Bank, Chris Flood. I will start with a few highlights before handing over to Andrew to go through the financial results in more detail. We'll come back to pick up a summary of the Australian performance before handing over to Chris Flood, the Chief Executive of the bank, to go through the business results within the bank. I'll finish with some closing remarks at the end and be able to take questions.
Starting at page four of the presentation, the wheel of fortune, and indeed it's a good wheel of fortune. You see our result, NZD 47.5 million of NPAT, an increase of 7.8% on the previous half year, which equates in an underlying sense to a increase of 8.8%. Very pleasing result, driven by quite strong balance sheet growth. We saw, in annualized sense, 13.9% growth in financial receivables, up NZD 340 million to end just shy of NZD 5.4 billion. That was very pleasing in its own right, but also more particularly because all the key qualitative metrics performed well.
NIM was up, CTI was down, and despite appearances, impairments were up, but actually in a normalized sense, they were down, and I'll explain that more fully in a moment. These combine to see the continuation of our steady increase in ROE up to 12.2% and an increase in earnings per share. A very pleasing result. Chris will cover this in more detail. We did see, beginning of this year, some flagging in the momentum with the advent of the CCCFA, and he will explain that in more detail, how that impacts on both residential mortgages. Despite that, we're still seeing good growth coming through for the remainder of the year. Turning now to page five, just some strategic highlights.
As outlined, the financial and in the business sense, a very positive result. It also reflects some very strong improvements and progress in terms of strategic indicators, and in particular, digitalization as reflected in our cost to income ratio, even though underlying costs went up by a small amount due to our investment in IT in particular, our cost to income ratio declined quite significantly. That really reflects the benefits of digitalization, being able to get down the costs of onboarding and servicing customers, developing scale through technology, is showing results.
Secondly, NIM indicated once again that strategic strength we have in terms of our market position based around best-of-breed products, and that was further endorsed by a number of awards, which I'd like to highlight, in Australia for reverse mortgages, in New Zealand for reverse mortgages. Also in New Zealand, the Canstar Award for the fourth year in a row of being the best savings bank in New Zealand. Considering that in that market, in deposits, we square off against all the banks in New Zealand, that is particularly an impressive result, one we're very proud of. In terms of our social responsibilities, we are continuing to work on our sustainability strategy. Probably the highlight in the last year was the transition of our fleet from towards hybrid cars.
We also obtained the Rainbow Tick during the course of the year, and that was particularly pleasing. A lot of long, hard work went into that, so that was a great highlight for us during the year. We are about to complete our fifth Manawa Ako internship. We had 25 Māori and Pasifika youths in for a short period of time before we had to turn the internship program into a virtual internship program, which was a great challenge, which we rose to, and it was very successful. That was also very pleasing for us. As I said earlier, I'll just explain the impairments that all is not what it seems.
We had an increase in impairments versus the previous half, but at 33 basis points, that reflects a more normalized level of impairments, and indeed historically is very much below where we've been in the past. The very low rate reported in the corresponding period in 2021 of 19 basis points reflected our response to COVID, where either through the government's facilities or through our own Heartland Extend product, we allowed customers that were struggling to extend their facilities. Obviously, that clearly has worked, given that it has not, if you like, hit the can down the road and flowed through to this year's results. We're seeing our this year's this half's results reflecting a normalized business as usual result at the below end.
Just further on COVID, as you can see, we haven't seen a material impact in terms of the overall results coming from COVID. Obviously, it covered the Auckland lockdown period. What we're seeing, as we mentioned last time, the same sort of behavioral phenomena resulting from lockdowns that we see, activities decline, mainly due to the inability to access things like motor vehicles and assets to finance. We have that ongoing underlying momentum with reverse mortgages continuing. Once lockdowns are eased, we see that surge of activity. Net-net, we're seeing the same results that we would have seen in a year if the lockdowns hadn't happened, other than we have these sorts of surges of activity.
The provision that we took some time ago of NZD 9.6 million remains. We have still decided to keep it. Obviously, there always seems to be something on the horizon, and when it comes to COVID. At the moment, exercising caution, we've decided to retain that provision. I will pause there and hand over to Andrew Dixson, who will pick up the financial results from page eight.
Thank you, Jeff, and good morning, everyone. I'm on slide eight, which bridges net profit after tax from the first half of the financial year 2021 with the first half of financial year 2022. Apologies, slightly busy slide, but we've included this on both a reported and an underlying basis, with the underlying result removing the one-off items in each financial period. I'll talk to those as I run through the components. Firstly, net profit after tax on a reported basis was NZD 47.5 million for the half, which is an increase of NZD 3.4 million, up 7.8% on the prior period.
On an underlying basis, net profit after tax was NZD 47.1 million for the half, which is an increase of NZD 3.8 million, and that's 8.8% higher than the prior period. Stepping through the components, firstly, net interest income. This was up NZD 10.7 million, which is a 9.4% increase. And the reported number there was NZD 123.9 million. This was driven by a 3 basis points increase in net interest margin, which expanded slightly to 4.3%, as well as a NZD 460 million higher average interest earning asset balance. NZD 512 million higher average receivables, partly offset by NZD 51 million lower average liquid assets.
As we will cover on the subsequent slide, receivables grew NZD 351 million from 30 June 2021, which was a 13.9% annualized growth rate in the first half of the financial year, noting that excludes the impact of foreign currency exchange. The 3 basis point increase in net interest margin was impacted by the continued low interest rate environment, which was prevalent for much of the period, and that impacted on both sides of the balance sheet. We saw a 60 basis point decline in the yield on average interest earning assets, and that was offset by a 73 basis point decline in the cost of average interest-bearing liabilities. The decline in asset yield was driven by a few factors.
Firstly, yields continued to contract across all portfolios with lower new origination yields replacing higher yielding back book as it repaid. Also, the composition of the receivables portfolio continued to tilt towards higher quality assets, with receivables growth, as we'll see on the subsequent slide, occurring in the lower yielding portfolios such as reverse mortgages and home loans. Whereas the higher yielding portfolios such as personal loans, Harmoney, and Open for Business continued to contract. We're expecting this dynamic to continue through the second half of this financial year. The composition of the liquid asset portfolio was also weighted more towards lower yielding cash and primary liquid assets on average, with the preference to maintain a higher undrawn committed liquidity balance, given the relative absence of high yield investment opportunities through the period.
The decline in cost of funds was driven by several factors. Firstly, an 89 basis point reduction in the average cost of deposits, which was driven primarily by the continuation of lower rate deposits replacing higher rate maturities. In all, both call and term deposit rates in the market were at historic lows for much of the period, and the duration of our deposit book shortened as a consequence. There was also a 23 basis point reduction in the average cost of other borrowings, which was driven primarily by lower cost of wholesale funding in New Zealand.
In terms of other operating income, on a reported basis, it was NZD 6.8 million, which looks like it was down NZD 5.3 million for the half, but that was impacted by some one-off items, particularly in the prior period, where we had one-off gains of NZD 5.2 million, related to fair value gain on the Harmoney equity investment. In the current period, one-off net fair value losses totaled NZD 0.1 million, so much lower, and that consisted of a small uplift in the Harmoney equity investment again, from some shares that were acquired early in the half, offset by a NZD 0.3 million fair value loss on other equity investments.
When you take all of those into consideration, underlying other operating income was NZD 6.9 million, which was flat half on half, and represents two things. One, an increase in origination fee income that was offset largely by reduced insurance underwriting income as the Marac insurance policies continue to run off. In terms of operating expenses, reported operating expenses were NZD 57.3 million, which is a decrease of NZD 3.8 million on the first half of 2021, and this was impacted again by some one-off items. In the prior period, one-off expenses of NZD 6.1 million were incurred, which just rattling through those very quickly, we had NZD 4.3 million of voluntarily accelerated amortization on software assets.
We had NZD 1.7 million of legacy suspense account provisioning and write-offs and NZD 0.1 million of non-recurring staff expenses. In the current period, more straightforward, we had one-off expenses of NZD 0.9 million, and they related to non-recurring staff expenses. If we take all of those items into consideration, underlying operating expenses were NZD 56.4 million, which was up NZD 1.4 million or 2.5% on the prior comparative period. This was primarily due to a NZD 1.9 million increase in IT and communication expenses, which was driven by software amortization and licensing costs as a result of our continued investment in technology and digital capability. This was partly offset by NZD 0.7 million lower staff expenses due to lower FTE.
As previously flagged and indicated in our subsequent key performance measures, Heartland's cost to income ratio has continued its downward trajectory, decreasing to 43.8%, compared to the first half of 2021. On an underlying basis, that cost to income ratio decreased 2.7 percentage points to 43.1%. Finally, on impairment expense was NZD 8.5 million, which is an increase of NZD 4 million on the prior period. As Jeff has covered, this reflects on one hand the benefit of the COVID-related extension activity that occurred in the first half of 2021, including BFGS, ID loans, our own Extend product, and similar.
While on the other hand, a return to higher levels of asset growth and associated provisioning in the first half, I should say, of 2022. The impairment ratio of 33 basis points indicates that those extensions were successful in affording our borrowers time to remediate. This ratio is reflective of a return to a more business as usual state. As Jeff has noted, this continues to trend below where we were pre-COVID. Just to reiterate, the NZD 9.6 million COVID overlay taken in the prior financial year has not been utilized and remains in full at this stage, given the continuation of COVID in Australasia and the uncertainty in terms of economic impact that that brings. Turning to slide nine, growth and receivables.
Chris will cover this in more detail later in the divisional summary section. It's fair to say despite continued COVID disruption and some legislative headwinds, a very pleasing strong period of growth saw receivables increase by NZD 351 million, which is an annualized growth rate of 13.9%. Both reverse mortgage portfolios produced double-digit growth, with Australia recording NZD 65 million of growth, which is an annualized growth rate of 12.1%, and New Zealand recording record NZD 47 million of growth at an annualized growth rate of 15.6%. These results were fueled by increased new origination as well as a lower repayment experience than that of the prior period.
Asset finance continued its strong growth, increasing NZD 36 million in the period, which is an annualized growth rate of 12.4%. Wholesale lending also recorded annualized growth rate of 13.7%, which was driven by new lending to Go Car and the expansion of wholesale motor dealer groups. Motor also recorded a very respectable 8.8% growth, with that result softened late in the half by CCCFA impacts, which again, Chris will cover later in the presentation. The runoff of the Harmoney portfolios continued in personal lending, which saw that portfolio retract. Finally, home loans grew NZD 163 million for the half, which is up NZD 121 million on the second half of 2021's growth. Turning to slide 10, key performance measures.
Everything is trending well. NIM remained strong within a stable band, having expanded 3 basis points from the first half of 2021 to 4.3%. While excluding the impact of liquid assets, NIM was 4.63%. As also covered on both a reported and underlying basis, the cost to income ratio has continued its downward trajectory, with the underlying cost to income ratio continuously decreasing over the last 3 1/2 year periods from 45.9% to 43.1%. Non-performing loans and impaired asset expense ratio have returned, as we've said, to more normal levels after historic lows in the first half of 2021, with the previously noted remediation efforts. Moving to slide 11, shareholder return.
Everything is again trending in the right direction with the return on equity, 12.2%, an increase of 7 basis points. Earnings per share of NZD 0.081 per share, which is up half a cent per share on the prior half. It reflects EPS growth of 6.6%. Pleasingly, a fully imputed interim dividend of NZD 0.055 per share has been declared, which delivers an increased dividend yield of 7.4%. I'll now hand back to Jeff and then Chris, who will cover the divisionals. Thank you.
Thank you, Andrew. That takes us to slide 13, which just sets out initially the reverse mortgages portfolio. Just a few things I'd like to draw your attention to. Firstly, the low LVRs in both countries, reflecting very similar customer behaviors in each country, which it's just important to note, given the outlook in both countries is for a property correction or downturn that we're very well positioned, in a very robust position indeed, in terms of any downturn in those real estate markets. The second thing I just would like to draw your attention to is, as you can see, the strong growth we're getting in both markets, both in terms of annualized growth, half-on-half, but also the compound growth rates that are going back to 2017.
They are both, you know, in great positions in both markets in terms of underlying growth and growth which is also very countercyclical. Turning now to Australia, specifically on slide 14, as Andrew pointed out, very strong growth there. We took the opportunity also of segmenting our market in Australia. It's a market which is obviously bigger and our book is bigger. We have more data, we have more years of experience, and what we are seeing is the potential for the market to be segmented into the typical borrowers that we have that sort of take up the mortgage in their early 70s, and then a younger market, which is the, if you like, the toe-in-the-water customers in their 60-70 bracket.
We launched a new product called Express, targeting that market in particular, and the pipeline for that is, or the interest in that has been very strong. But also we're seeing no abatement of growth coming out of the regular product as we've launched that. We have been advertising quite vigorously in Australia, and I think that is also contributing to those good results as well. In Australia, we had very strong closing growth in the last months of the half, and that has continued on through, making up for some of the growth that was slowed down during the lockdowns, particularly in Melbourne. Very pleasing results in terms of our Australian reverse mortgages. All right, I'll now hand over to Chris Flood, who will pick up the rest of the divisional overviews.
Thanks, Jeff, and good morning, everyone. I'm on page 15, New Zealand Reverse Mortgages. I guess when we purchased this business in 2014, we did so with an expectation that baby boomers heading into retirement would contribute significantly to growth. We are seeing that now. We've supported that with a dedicated team who only do reverse mortgages, and the service proposition that we provide as a consequence is very good. Over recent times, we have increased advertising, and we note the product has been discussed more broadly in the community. That, coupled with the favorable conditions that we're experiencing, so house price inflation and comparatively low interest rates, has underpinned the growth that we've seen, and really that growth rate is exceptional for the business.
Pleasingly though, our pipeline, if I look at our pipeline as at the end of last month, it is three times greater than it was this time last year. Not only have we had a good result, with our expectation is for the year to finish strongly, and continue growth at these rates. Turning now to page 16, and Open for Business. Not a lot really, not a lot different from last year, really. Small business continues to take a cautious approach to increasing debt, and clearly we take a cautious approach to the sector. Ahead of Omicron, we were starting to see some green shoots of growth as people were inquiring more for business and we were able to approve more loans.
However, we do expect that to flatten during the Omicron outbreak, but we remain well positioned to lean back into the sector as SMEs businesses. Turning now to Asset Finance on page 17. Again, this was another strong performance for the bank, and benefited really from a couple of factors. The underlying performance of the economy remained robust during the half. Within that, the transport sector was particularly strong. Heartland positioned itself well ahead of the pandemic through relationships with distributors and dealerships, and that placed us at or near point of sale at a critical time. Clearly we've benefited from that with those distributor and dealership relationships. We expect a strong second half.
We have strong pipelines, and we're seeing that there is, while there is some supply constraint delays in business, as Jeff referenced earlier, the underlying approvals are there and the business is settling when the assets become available. Turning now to page 18 and Wholesale Lending. Previously, this area was discussed as business relationships. At the full year, I signaled, in fact for some time, I've been signaling that we're targeting a rundown of those larger relationships and to business borrowers, where we provide multiple loans to one customer. That was a decision taken a number of years ago to de-risk the business, and that has continued in the first half of this financial year.
I also signaled last year, we expected to grow receivables in the business unit and clearly that's been achieved in the first half, which has come on the back of wholesale lending. That is, in a Heartland context, loans to dealerships or distributors who sell assets that we like to finance, like motor vehicles or trucks or tractors. That clearly contributes strongly to our motor division and our asset financing division. In effect, inventory financing. More recently, we have also lent to other finance businesses in that sector who operate in slightly different markets to us, lending into finance companies that understand market into markets that we understand well and have deep knowledge in. We expect continued growth in this sector.
In fact, one of the drags on the half has been, again, supply constraints. What tends to happen is ships arrive full of stock, and they are pre-sold. Rather than sit around on dealership yards, they turn into loans on our asset finance or our motor book very quickly. Turning now to motor finance, notwithstanding the lockdowns that we had experienced in the North Island in the half, we achieved another strong result. Helped in part by strong motor vehicle sales, and we also benefited from market share gains in both the franchise and used car markets. The CCCFA has impacted our motor lending in December and in January.
While we're seeing some recovery in February, we note in both the two previous months, car sales volumes were down. We look forward to the ministerial review that's currently underway. We have participated in it, and we do expect some clarity which we think will mean we'll have a strong finish to the year, albeit the third quarter will be softer than that we are experiencing in the first half. We will also benefit from some additional relationships with distributors that we have developed and we'll be looking to roll out in the last quarter. Turning now to personal lending on page 20. Again, we've maintained a cautious approach to what's largely unsecured lending.
We remain well positioned to benefit from when that market returns. At this stage, our interim expectation is for it to run down during the second half of the financial year. On page 21, in our rural division, there is a bit to unpack here. We've got a couple of factors going on. A flat result, but what we have seen is a continuation of those larger relationship loans continue to run off. We've talked about that for a number of years now, and that's been replaced with the sheep and beef initiative we discussed last year. It's performed very strongly in the half.
It maintains a strong pipeline, and we have great expectations for future growth from that business in the second half and beyond. Also, December, of course, is the low point in the livestock season, so that runs off in the months from getting into December and picks up in the second half. On the back of that, we expect a strong finish to the year. Sheep and beef will continue on, livestock will return, and we've recently launched a dairy direct equivalent of sheep and beef. We have some high expectations for growth rates at similar levels to that achieved in sheep and beef. Lastly, on page 22, home loans. It's clearly been a big growth engine for the bank, and we have benefited from some acquisition advantages.
It is an online-only strategy. It's a huge market with a lot of refinancing happening every month, and we benefit from targeting low LVR and high income-to-debt ratio customers and use best in industry service proposition and some of the best rates going around. While the CCCFA has also had an impact on this corner, again, on this sector, again, the ministerial review that's underway, I think will provide some clarity. We have changed some processes to remediate some of the softness we've seen in December and January. We expect a softer third quarter, but a strong finish to the year. Back to you, Jeff.
Thank you. Andrew, if you could pick up the funding and liquidity and capital pages, then I will take it from there.
Yeah, absolutely. Moving to slide 23. In terms of New Zealand or the bank's funding, the bank increased borrowings by NZD 236.4 million with the receivables growth being funded relatively evenly between deposits and wholesale funding through the period. Deposit funding grew NZD 117 million, and that was driven largely by the successful launch of a new product, being Heartland 32-Day Notice Saver. Term deposit retention also remained strong during the period. Other borrowings increased NZD 119.5 million, and that was primarily due to a NZD 126.6 million increase in securitization funding.
This was a result of high utilization, following an increase in the bank's committed auto warehouse facility from NZD 300 million-NZD 400 million, which occurred in September of 2021. As we previously discussed, Heartland Bank decreased its total liquidity by NZD 36.3 million, reflecting a return toward pre-COVID levels, while regulatory liquidity ratios remain well in excess of the regulatory minimum. In Australia continues to hold solid headroom in its reverse mortgage facilities, and also issued an additional NZD 45 million of medium-term notes in July of 2021. Given the anticipated growth profile of the business alongside the recently launched new products, both of Heartland Finance's reverse mortgage funding warehouses are in the process of being expanded, and that includes the introduction of a new mezzanine funder.
We're also in the process of extending both facilities' maturity dates. Moving to slide 24 in terms of capital. Group capital remains strong, which at 13% of total assets. Heartland Bank's capital position progressively increased during the first half of the financial year, reflecting its strong profitability, providing excess capital over that which has been consumed by asset growth, and particularly with a significant amount of that asset growth coming from low consumption portfolios being home loans and reverse mortgages.
As a result, Heartland Bank's regulatory capital ratio was just below 14% as at 31 December, which is an increase from 13.88% as at June. This provides the bank a strong platform for continued growth, as well as meeting the Reserve Bank's future higher capital requirements, which require a common equity tier one ratio of 11.5% and a total capital ratio of 16% by 1 July 2028. I'll hand back to Jeff for a strategic update.
Thank you. Just before I do, I'll just touch on the regulatory update. We have covered the CCCFA, which has been, I guess, the regulatory event that's caused most activity. There's also the Deposit Takers Act coming in, which is a form of deposit insurance that is in the process of being introduced. Turning firstly to our strategic objectives, just to reinforce the message, our strategy based around best or only products delivered by our scalable digital platforms continues, and the results of that in terms of balance sheet growth, in terms of the qualitative measures around NIM and CTI, cost-to-income ratio, is continuing to be demonstrated. We are constantly working in terms of delivering that frictionless service.
There is no finish line when it comes to that service proposition, and the pathway is through digitalization and automation, so you will see continued investment in those areas. We're particularly focused on Australia. We see opportunities to expand in Australia, and there's a lot of activity going on at the moment in terms of where we can expand. Looking forward, obviously the NPAT that we've reported today was ahead of where we expected to be on the basis of that stronger than anticipated asset growth. For the reasons that Chris highlighted, we may see the run rate moderate slightly due to the CCCFA, which impacted mainly in December, January.
We remain cautiously optimistic that the ministerial review will bring about the appropriate changes, and we'll start to see a return to more normal levels of growth in motor and in residential mortgages. Underneath that, as I mentioned earlier, we're seeing strong growth in those areas of asset finance and in particular, reverse mortgages. As part of that underlying growth, we're seeing very strong growth in our online home loans, a continuation of growth in reverse mortgages. That is creating a shift in terms of the portfolio reflected in the net interest margin contracting because of the lower margin products, the growth outstripping those of higher margin businesses. That does not concern us. We see that as a positive.
Also remembering that those products like home loans and reverse mortgages attract less capital, so there is a quid pro quo, and also they generate lower levels of impairments. We're very comfortable with that shift happening. Most particularly, we're very focused on that cost to income ratio. We will continue to invest in IT, so we may see costs increasing.
The key measure of success in terms of our strategy and the financial performance is continued reduction in the cost to income ratio, as we see that as being a major point of differentiation as we're able to onboard and service our customers at a lower cost than the rest of the market. Finally, just confirming the guidance that was given of 93-96 remains in place. Just to repeat what Andrew said, we're very delighted to announce an interim dividend of NZD 0.055 per share. Thank you very much. That completes the formal part of the presentation, and we're happy now to take questions.
Thank you. We would now like to open up the lines to analysts for any questions. If you wish to ask a question, please press star one on your telephone and an operator will assist you. We'll now take a question from Wade Gardiner.
Hi there. I've got a few questions here. First up, just on slide 24, you talked about increasing capital, kicking it off in July this year. First of all, why would you necessarily kick it off this year given that you are already sitting sort of well above that 10.5% minimum? You know, if you are gonna do it sort of progressively over seven years, can you sort of put a dollar number on what you think that would be and how you'll raise that capital?
Andrew, would you like to comment on that?
Yeah, I'll take that. That the starting from first of July that just refers to the new rules commencing from there. That doesn't mean that we will start increasing from that point, 'cause as you say, we're already well above that level.
Okay. What about in terms of dollar value and how you'd raise it? I assume the DRP is in place, isn't it?
Yes, it is at the group level. There's a few things. It'll obviously depend on the portfolio mix. You know, different portfolios consume different amounts of capital. We don't have any Tier 1 or Additional Tier 1 or Tier 2 capital, so that's always an option. Then we have options at the top group level, either external capital raising or raising debt and passing that down. You know, the cupboard is full in terms of options.
Okay.
Wade, to summarize, it means then you've got a lot of options to get there. Obviously as Andrew highlighted, what we need to raise and when we need to raise is dictated by the nature of the portfolio, how much we grow and what areas we grow.
Yeah. Okay. In the commentary, you talked about potential acquisitions in Australia. Can you give a bit more color on that?
Nothing at this stage. It is something that we are constantly focused on in terms of areas where, you know, we have some familiarity already. I guess the key takeout is Australia's probably occupying more of our time in that sort of strategic aspect than, say, New Zealand is.
We're not talking reverse mortgages here, we're talking other lines?
No, it's not confined to reverse mortgages, but certainly, obviously, anything which comes with reverse mortgages would be of interest to us. There are two major portfolios that we're aware of which Westpac and CBA hold. As far as we're aware, they're not for sale. We are looking in a raft of areas which suit our current, you know, expertise and fit within that best or only strategy, where we can do what we've done in New Zealand, carve our positions based on the nature of the product or how we deliver that product to create a, you know, a point of differentiation.
Okay. In the commentary or in the presentations, you also talked about sort of the benefit that the reverse mortgages had got from, you know, a strong property market and low interest rates. Do you think that that's going to provide a headwind as it all starts to go the other way?
No, it appears, for example, this is just anecdotal, there's no scientific evidence to back this up, but there are strong anecdotal evidence to suggest that when property prices are going up, our repayments go up with that. I guess the inference we take from that is that people are deciding to exit their house earlier because they feel like they've got a price that they'd never expected they would get. Since we've seen a moderation of property price growth in, say, Auckland, Melbourne and Sydney, we have seen a tailing off of repayments, but it's very early days to draw any definitive conclusions. But the underlying question is no. You know, we expect to see growth continue through the property market cycle.
Okay. While I've got you, in terms of your business loans, do you have much exposure to hospitality given that it's a bit of a difficult sector at the moment and we're seeing a lot of closures?
Yeah. We have very little exposure to that part of the market, so if anything, it was in our Open for Business area, so it's relatively modest. Clearly, we've taken a cautious approach to that over the last few years.
Okay. Lastly from me, just thoughts on your funding mix as interest rates go up. Does that change things or not?
What we do is we tend to use the wholesale markets for backup liquidity, but with some exceptions. We securitize motor and we have a wholesale funding facility for some of our reverse mortgage in Australia, which has been securitized. Obviously, in Australia we are funded by bank lines in terms of the book there. Our exposure to wholesale lines is either Australia or, it's more backup liquidity here.
We are largely, in terms of the New Zealand bank, funding off the deposit yield curve. We target, like everybody, the shorter end. Everybody is sort of in that sort of funding short path. It's hard to attract depositors beyond, you know, 12- 18 months. Everybody investment appetite tends to be short-term, and obviously that's exacerbated in the current environment. That's where we see our funding base. Obviously what we manage is, if you like, the jaws between, the yield that we are borrowing at and then the yield at which we're lending. You know, if rates move up then, you know, the jaws moves up with it.
Okay. That's all from me. Thank you.
As a final reminder, that is star one if you would like to ask a question. We'll now take a question from Grant Lowe.
Oh, hi, guys. Can you hear me okay?
Yep.
Hello, can you hear me?
We can hear you.
Okay, great. Yeah. Thank you. So just looking at the CCCFA a little bit further, you've outlined some of the key points there. Just in terms of you call out the application rates, you know, for the home loan business have been, you know, very strong compared to sort of last year. In terms of how do we think about the approval rates at the moment? Are they. What can you say about how they compare and also around, obviously, you know, approvals take longer. Is it more of a pushing out or is it more of a sort of a rejection dynamic that's going on?
There are two factors in play. Yes, the decline rate has gone up, and it's gone up across the industry. As a consequence, that has impacted on volumes. But we're also, it's also taking longer to assess, and that's. There's been a lot of media comment around that. The interrogation that you have to apply to bank accounts takes longer than the previous processes we employed. We will, in a mortgage sense, modify our digital-only strategy to accommodate that. We're just putting that solution in place this week. We're hopeful that we'll actually get a reprieve from the amount of work that we're having to do, and minimize the decline rates that we're getting.
That sort of relates to my next question as well, which we'll come to in a second. In terms of, does that require sort of further investment in systems and processes? Like at the moment it's a digital-only product which, you know, you apply online and, you know, fairly light touch. What are you sort of getting at there? Are you talking about additional, you know, people to review from a process side, or are you talking about additional systems?
What we're doing is integrating our motor capability and to support our home loan capability. Previously they were separate, and integration of that means that we can process those applications through utilizing motor resources that have been previously dedicated to motor.
It's fair to say a couple things. With the automation that we've got and with CCCFA, we can say no very quickly. It's not the no's that are causing us the problems, it's trying to get yes. We're chasing warm customers in order to convert them into you know an onboarded customer. The other thing, Chris, in terms of time impacts. If you look at a traditional position, pre-CCCFA, we could approve a motor loan and anywhere between sort of two minutes for very good customers, but on average 20 minutes for a customer. It's now taking, because the interrogation required of the bank statements in a motor context, it's taking on average us two hours to approve those loans. We're talking, you know, minutes and hours, not days.
Yeah. Yeah, no, I understand that. Just in terms of the, you called out in the announcement via the home loans partnership with a broker firm I haven't got in front of me. How should we think about the economics of that? Previously, obviously this was, you know, digital only. Is this a separate product or related product or is this, you know, an adjunct to the existing product, and how should we think about those economics?
The economics really don't change from a Heartland perspective. What it is is we are trialing the originating through brokers. The rates that they charge will be slightly different to the rates that we charge, but still in a broker context, best of breed.
Got it. Okay. In terms of the net interest margins, I appreciate the dynamics going on with the various portfolios and the like, but sort of putting those mix changes to one side, do you see any sort of pressure on them at the moment? I guess specifically sort of getting at competition, particularly in the Australian reverse mortgages, but potentially elsewhere.
I talked about the Australian reverse mortgages. We are seeing a little bit of competition c oming in through some small players that are currently pricing below us. Not substantially below us, but to give you an idea of the impact, we're still growing market share as a result. So we're not seeing it eroding our position. It's something that we keep a watchful eye on. The new Express product is a lower margin product, but it is also a lot of the onboarding is done online, so it's a lower cost product as well. So that's how we tend to respond if we can, is through reducing our onboarding and servicing costs, not necessarily pulling the price lever straight away, in the face of competition. In terms of motor, Chris, here in New Zealand?
Yes. There will be a mix change within the motor area. What we are seeing is higher approval rates and draw down rates from loans originated off franchise dealers. Typically money lent to homeowners, and so they attract a lower interest rate. We're finding the decline rates in the used car end of the market are high. As a consequence, not quite as much business as we were in that. Given the legislation that was introduced was really to target predatory lending and not, you know, not bank lending into the consumer sector, you know, we're hopeful the ministerial review will remediate that. My view is that that will be a third quarter matter, but it should remediate itself in terms of the fourth quarter.
That's great. Thank you. To summarize here, we are seeing some signs of competition coming into Australia, which may result in that contraction of margins for the reasons I've mentioned and that there. We have reduced our rates a little bit ahead of reduction in funding rates as a consequence. But that has been, you know, so far offset by volume, and also over time, we tend to offset that through the reducing our cost of onboarding and servicing.
Thank you.
At this point, there are no more questions. I will now pass the line back to Jeff for a closing statement.
Thank you very much for your participation today. We are delighted to have presented this result. Also, thank you for your support. Obviously, we remain available for further commentary and questioning during the course of the week if you so choose. Thank you very much.
Once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.