Good morning, everyone, and welcome to The Heartland Group Fiscal Year 2021 Interim Results Conference Call. Please note that all participants are currently in a listen only mode. Once the presentation is over, analysts will be invited to ask questions. I would now like to turn the conference over to Jeff Greenfield. Please go ahead.
I'm Jeff Greenslade, the Chief Executive of the Heartland Group. I'm joined with the Group Chief Financial Officer, Andrew Dickson and Chris Flood, the Bank Chief Executive. In a moment, I'll run through the an overview of the financial highlights of the half year performance. I'll also make some comments on the impairments and the related sense the impact of COVID. Then Andrew will pick up the financial performance in more detail and then it will be followed by Chris Fleitz who will go through a divisional summary and then I will close with some strategic and community and cultural highlights.
Before I start, however, I would like just to note that this is the 10th year of the Christchurch earthquake and also recognize the employees of Marek, one of the antecedent units of Heartland that either perished or injured during that earthquake. All right. Turning to the results now. The net profit after tax was $44,100,000 up 10.6% on the previous period. Underlying impact was a little lower at $43,200,000 up 13.4%.
And that reflects the underlying reflects Andrew will go into more detail, but we had a write up in the holding value of our Harmony shares, which was to a large extent offset by other factors, some other areas where we chose to take some write downs, which produced a small net gain. During the year, we saw or during the period, we saw our gross financial receivables grow by 2.7 percent, which is a little bit lower than where we would be normally. We saw good growth in areas like motor business and remediated and reverse mortgages, the core areas and the continuation of reduction in some of the non core areas, but also some of the areas like open the business where we're facing competition effectively from the facilities that the government has put in place following COVID. Net interest margin at 4.28 percent was up 5 basis points on the back of NOI of $125,300,000 itself up 5.6 percent. So performing very well in those top line earnings area.
The costincome ratio was up 48.8 percent sorry, to 48 point 8% up to 2.8 percentage points. And again, driven by the increased costs that I referred to earlier in a one off sense. In an underlying perspective, the cost to income ratio was just under 46 percent, which was in line with expectations. I'll talk a bit more about impairment expenses. But as a percentage of average receivables, it decreased from 0.4% to 0.19%.
In terms of the experience, we're seeing a very positive response in terms of the impairment experience. All this produced a return on equity, which was up 54 basis points to 12.2%. And we are pleased or the Board is very pleased on the basis of this performance to announce a dividend of $0.04 per share. I'll turn now to deal to discuss a little bit more detail the impairment expense and some of the issues relating to COVID. We are operating in an unusual environment.
In the release on page 2 of our release, there is a graph which demonstrates the delta between where forecasters have had GDP over the last period and where it has actually been. And as you can see, there's been quite a considerable gap between sentiment and actual performance. And that really reflects the environment we're in. And I think that is that flows through to our impairment expenses. So whilst there was expectation that things were going to be harder, more severe as a result of the lockdowns that simply has not happened.
And there's probably 3 key drivers behind this. One is the behaviors of our customer base, reflecting the high levels of cash in the environment whether it's through government intervention or things like the bank mortgage holidays. We have seen customer behaviors change in terms of acceleration of repayments. And as Chris will talk a bit about this in a moment, we are seeing strong origination, but at the same time we're seeing higher than normal repayment levels. We are hoping that with the cessation of the mortgage holidays in particular that will start to abate.
The second factor around that stronger impairment experience is the improvement ongoing improvements in terms of our own processes in terms of collections and working with customers. And also thirdly, the mix that we have. So where we are growing more proportionately is in the lower impairment or areas of high degree of predictability around impairments such as motor and business intermediated and reverse mortgages. So that has also helped us. We have grown and also conversely less in the areas of high end payment.
We also have put in place what's called hardened extend. And I know when we discussed that last time, there was some sense that this was a kind of a bad book as a result of COVID. It was always intended to be a product we wanted to offer to customers and indeed to non customers. We see it very much as a business as usual product. And interestingly, the NPLs in fact in these areas are actually lower than the comparable non Heartland Extend products.
So Heartland Extend certainly has provided some help to COVID impacted customers that's undoubted. But generally speaking, the book is performing very well. And as said in terms of NPL is actually better than comparable products. Moving now on to COVID. In FY 2020, we took a COVID-nineteen economic overlay of $9,600,000 pretax.
And that was against a backdrop, this rather unusual environment where we weren't certain that we would that we could see actual losses arising from COVID. However, we did accept the view that traditional means of monitoring and forecasting impairments may not apply in the environment that we were facing given the obvious layers of unpredictability and unprecedented circumstances that we faced. So that we have we decided to take that on top of the traditional layers and buffers that we currently have. To date, we have not utilized that facility at all. It is still there.
And as I said earlier, the behavior of our books has improved for a number of reasons. Some of them in a positive way related to COVID in terms of the cash being a lot of cash in the environment fueling repayments, but also to those other factors. At the moment, given ongoing uncertainty and a short lockdown as recently as last week in Auckland, we still do not feel yet to be in a position to release that provision that is something that we will continue to monitor. All right. At this point, I'll hand over to Andrew Dickson, the Chief Financial Officer, who will take you through the financial results in more detail.
Thanks, Jeff. So I'm on the growth and profitability Slide 10. So as Jeff summarized, net profit after tax for the 6 months, the 31 December 2020, was 44,100,000 dollars to $4,200,000 higher than the prior comparative period, representing growth of 10.6%. Included in that result though are 3 one off items that have a net impact of $900,000 post tax, reducing net profit after tax to $43,200,000 on an underlying basis. And while the net impact is low, the gross impact of these items were as follows: and other operating income, a $5,200,000 non taxable fair value gain was taken on Harbin's equity investment in Harmony, and that follows Harmony raising capital and contemporaneously listing on the ASX and NZX in November 2020.
This was offset by 2 operating expense items. Firstly, voluntary acceleration of amortization of certain software assets totaling $4,300,000 and secondly, the write off and provisioning of historic aged expense account items, which totaled 1,700,000 dollars Just to remind you, we have some one off items in the prior comparative period, primarily related to the release of unamortized reverse mortgages, income and expenses, following the adoption of IFRS 9, which reduced comparative underlying impact to $38,100,000 meaning the increase in underlying net profit after tax for the period was $5,100,000 representing growth of 13.4%. In terms of the components of that bridge between profitability, net interest income increased $8,000,000 with net interest margin increasing 5 basis points due to having $300,000,000 higher average interest earning asset. The components of NIM saw interest income decrease $6,100,000 on account of the low interest rate environment, reducing asset yields, together with the continuation of a liquid asset portfolio in excess of historic norms and the aforementioned portfolio shift away from high yielding unsecured portfolios towards reverse mortgages, motor and business intermediated lending. Interest expense decreased $14,100,000 on account of both deposits in the bank and wholesale benchmark rates, over which our Australian funding is priced, presenting at historic lows.
Overall, net interest margin has been maintained at around that 4.3 percent mark. In terms of operating expenses, they increased $3,800,000 on an underlying basis, and that was due to three factors. Firstly, dollars 4,500,000 higher staff expenses, which is due to an increased headcount to assist COVID related customer activity and our continued investment in our digital and financial technology strategy. We also had $1,600,000 lower marketing costs, primarily due to the COVID impacts of the subdued lending market. And we had $1,000,000 higher IT costs to accommodate the increased headcount.
As noted earlier, the cost base is ready to scale once historic levels of growth resume. And while the cost to income ratio ticked up slightly, it remained stable and within expected levels. Finally, impaired asset expense decreased $4,500,000 with the impaired asset expense ratio decreasing to 0.19%. That was detailed by Jeff previously. Turning to the growth in receivables, Slide 11, and Chris will pick up the divisional specifics later in the pack.
However, the graph here highlights growth across the various portfolios, which has been tempered by elevated repayments. That said, we have seen strong growth in our core portfolios, particularly reverse mortgages in both countries, business intermediated and motor. We've also seen reductions in our unsecured portfolios open for business, as Jeff mentioned, with competing products, which some degree being the government loan scheme, sorry, as well as Harmony, which is reduced and itself has been the process of transitioning to being an on balance sheet lender. We've also seen the continued reductions in our non core portfolios, though to a lesser degree than in other periods. Turning to the key performance measures on Slide 12.
These have been largely covered. Net interest margin continues to be strong. Notably, the top line there shows the impact of the excess liquid asset position. Again, cost to income ratio on an underlying basis is sitting around the mid-40s as we expect at this point. Continued improvement in non performing loans, which has been highlighted previously, and the expense the impairment expense ratio, which is reduced to about half of what it was in the prior comparative period.
Now turning to shareholder return, slide 13. Pleasingly, both return on equity and EPS have continued to improve and increase with EPS growth of 10%. And as Jeff mentioned, very pleased to announce an interim dividend of $0.04 per ordinary share despite the continued ban on distributions by Heartland Bank, a position we hope to have clarity on from the Reserve Bank from the end of March. So with that, I will hand over to Chris to start the divisional summary or maybe Jeff to start with Australia. Sorry.
So I will cover Australia. So I'm we're up to Slide 15. So another period of good growth in the Australian reverse mortgage markets with operating income up 15% and receivables increased by 10.6%. We've also seen elevated repayments coming out of Australia and that's not unexpected. Similar phenomenon in New Zealand or in property markets.
A lot of our customers have seen the opportunity to cash up and move on to the next stage of life probably a little bit sooner than anticipated given the horizon in those key residential property markets. We've done a lot of work in terms of broadening our distribution within Australia adding more aggregators and we'll see the benefits of that flowing through alongside the investment we continue to make in the digitalization of that platform with rising numbers of customers on boarding our digital platform. And during that, for the last 12 month period, we increased market share from 26% to 28%. So Chris will cover the other New Zealand based divisions within the bank.
Thanks, Jeff. So just turning now to Page 16 and New Zealand reverse mortgages. And just before I start, both Andrew and Jeff noted the increase in repayments that we have experienced in the first half of this year. Certainly, in a bank context, it was significantly more than anticipated. It also clearly impacted on growth.
And as Jeff mentioned, that wasn't a product of our ability to write new loans. In fact, in terms of the our new lending budget, the bank is performing very close to the budget set, and the lack of growth is simply a product of many more repayments than we'd anticipated. The repayment is secured for different reasons. In terms of reverse mortgages in New Zealand, there are a couple of factors driving that. Firstly, the last quarter of the last financial year, there was very little repayment as the as our customers didn't sell homes in that period, didn't want people coming into the house.
And there was very much a catch up in the first half of this year. But the underlying performance of the division was very strong. New lending up 11% on the year prior, and it was a record. And that was achieved with smaller average loan size, so more loans and in an environment where house prices increased, reducing the LVR on drawdown down to 9%. Prospects for the division are very solid.
Approvals in the 1st 6 months of this year were up 20% on the same period last year. And the pipeline is at the end of December was up 38% on the same measure. On Page 17, we actually provide some little more in-depth analysis of the both reverse mortgage portfolios. I'll just note that origination also includes, in this slide, advances made to existing customers, and that will be an ongoing story as people are heading towards regular tools more so than they did in the past and away from that lump sum upfront. Turning now to Page 18 and open to business.
Repayments are clearly a feature in this ledger very much supporting customers, making sure they're in a position to work through the COVID lockdowns in the period that followed. And the first sort of half of this year, just assuming the Q1 of this year was spent in a lot of cases unwinding some of those arrangements as customers went back to normal payment schedules for the reasons that Keith discussed earlier in terms of the underlying performance of the economy. So very much was a repayment story. The government packages, the wage subsidies and in particular, the IRD loans impacted this book as borrowers could retire higher costing debt for, in some cases, interest free debt. And then more likely, the mortgage holidays and the low mortgage rate environment has seen a continuation of that through the first half.
It was also the first half, there was also flat borrower demand through that period, which started to abate in December. And since then, we have seen that trend reversing and will be supported in the second half by more advertising. And we expect to be back heading towards our pre COVID gross levels before the end of this financial year. Turning to business intermediated. Again, repayment story here, the activity was similar to that experience and opened the business.
However, we did experience very pleasing and solid receivables growth of 13.2% in the half. Remember that the intermediated business model was a point of sale model. We form relationships with distributors predominantly in the transport sector, but other sectors as well such as tractors and plant equipment like forklifts and form relationships with the dealers that sell those products. This puts us right at the point of sale and has been very successful for us. We have established new distributor relationships and obviously picked up relationships with the dealer networks during the half.
They've been attracted to some of the digital tools that we have and they are so focused on helping them sell product. And new business volumes are starting to return to pre COVID levels. We expect a stronger second half as a consequence. The only sort of note of concern is some of the supply chain disruptions that are occurring overseas, just noting sort of the complexity of the equipment we fund. However, at this point, the distributors' expectations support our growth assumptions for the second half.
Turning to business relationship. There's 2 factors in play here, clearly the continued runoff of the non core high cost to serve and low margin business, and we expect that to continue. The bank finance guarantee scheme and low mortgage rates and potentially higher property prices may see that non core book run off at a slightly faster rate. About 20% of the book now though is focused on funding inventory that supports our motor and intermediated businesses and helps us attract the retail business that that produces. And we see growth in the sector over the second half.
So while there will be continued runoff in the core relationship book, we are likely to see some swapping out with inventory financing and other core parts of that book. Turning now to Motor Finance on Page 20, and that was a very pleasing result. It was impacted by higher levels of repayments, predominantly due to mortgage holidays, as Jeff discussed, but also some debt consolidation as a consequence of historically low mortgage prices. So very pleased with the growth. They came out as a consequence of market share gains.
And in fact, new lending was up something like 22 percent half on half in an environment where new vehicle sales were down 17% and the importation of used imports into the country were down by a similar margin. The other effect that I need to draw out here is that Holden contributed 23% of the first half of the twenty twenty financial year as they contributed 23% of business. And in this half, they only contributed 5% of business. So a very pleasing result. So we're leaning to more customers, greater number of customers, but also higher loan value as we have getting a greater share of that new car market.
We have established additional distributor relationships. So we'll enjoy the relationships with the dealers that sell their product. And again, attracted to digital onboarding processes and the flexibility that we have in that regard, but also the innovative products like our guaranteed future value product. We have a very experienced team in the motor area. They've been in this industry a long time.
They are well respected not only within the bank, but also across the motor industry. And that has sort of in good state and helped us achieve those market gains. Pipelines are strong. There is some concern with intermediated around supply chains. But again, distributors' expectations support the growth aspirations we have for the second half and on strong pipelines, I expect growth to occur at a similar sort of level.
Turning now to Harmony and other personal lendings. Clearly,
quite a bit
of reduction on this book and there's a couple of reasons for that. Firstly, in the COVID period, both Harmony and Heartland appropriately reset risk settings. There was reduced demand post COVID. And then obviously, the wage subsidies and mortgage holidays, the low mortgage rates that are available also saw repayments coming at a faster rate. Harmony itself is pivoting to a wholesale model, as Andrew alluded to, and Heartland will participate in that move.
And we are expect pre COVID sort of growth levels to resume well ahead of the end of the financial year. Jeff will pick up some comments on home loans a little bit later in the presentation than his closing. So turning now to Page 24 and rural. So three things I want to call out here, continuation of the non core relationship model being repaid. It's low margins, high cost to serve.
And I think that we expect that to continue certainly with strong dairy prices and some potential consolidation occurring in that market, that will be a factor in the second half. The other factor I want to call out is banks other banks' activity in the smaller farm area has changed. They are looking to take cost out of the model by moving from a farm gate relationship model to a phone relationship model. We see that as an opportunity, and we're able to develop rather quickly a digital platform called Cheap and Beef that was launched late in the year. And I just call you can see some very encouraging application numbers and did some early payouts.
We think that it will be continuing to store in the second half. It's attractive to farmers but also attractive to the professionals who support them. And the 3rd part of the rural book, of course, is livestock. And it's been a tough season for farmers but also a tough season for health in the context of a drought, some uncertain meat schedules and less trading as a consequence. So we didn't and that's where Harlan actually plays in the supply chain.
When growers sell to finishes, the Highland facilities are placed to be used in that space. And that just didn't happen to the same degree as it typically does. Those facilities remain in place. They will be drawn again when the market returns. And we so we expect a better result in the year ahead.
So lastly, I wanted to cover funding and liquidity. And given the modest balance sheet growth achieved, there wasn't a lot of headline action there. Underneath that though, there was quite a bit of activity as we continue to reduce the size of our average deposit relationship, and that's about bringing new depositors to the bank, and that remains a focus. We maintain strong liquidity, and we're well placed to fund the growth expectations in the second half of the financial year. Just handing now back to Jeff or to Andrew, sorry.
So, it's still on funding and liquidity. So, in Australia, we continue to diversify and expand our Australian funding with the terms curitization transaction completed in September. We're now very well positioned with 2 bank funded warehouses to fund origination and season loans and then a term structure to programmatically issue into to free up warehouse capacity as required. So this all sets us up well to accommodate BAU growth with the next stage focused on developing funding for new products that are planned, and Jeff will cover that in his strategic section, and a focus to further optimize the existing funding programs that we have, which includes increasing facility limits and introducing mezzanine funding to further optimize our capital position in those facilities. I'll pass back to Heath now.
Thank you, Andrew. Thank you, Chris. So strategically, nothing particularly new to report, but just some points I just want to tease out. We're operating in an unusual environment of COVID. I guess that's sort of a general strategic thing that we're living with.
And similarly, we are seeing the continuation of pre COVID of a shift towards traditionally non bank type of areas. And I guess the third theme, which is us, is around Australia. So all those three things take into consideration, we see ourselves very much positioned in terms of opportunity as opposed to challenge. That graph that I referred to earlier in terms of where forecasters saw GDP versus actual is I think a reflection of a lot of mainstream thinking in the banking sector one of continued caution. So we are less on focused on the caution side and see ourselves positioned around the opportunity.
And out of that opportunity, we do wish to to continue to grow whether it's organically, inorganically in order to acquire scale and also to acquire scale through a different means than simply growing. We'd like that as well, but through technology of digitalizing everything we do effectively gives us scale. We can get to every New Zealander and conceivably every Australia if we so choose through digital platforms. To give you an idea, our residential mortgage platform, which is a very new one, we had a few stops and starts with COVID and then the Christmas holidays. We are seeing around about 11,000 visits per month to our website.
So that's sort of 11,000 New Zealanders that we've taken an awful lot of branches to get to otherwise in terms of the traditional way of selling mortgages. So we have continued that process. As Chris mentioned, we've launched the sheep and beef platform, a motor direct platform and also an SME open for business platform in Australia. The home loan platform in New Zealand, as I said, went through a bit of a stop start, stop start again, but we have managed to approve $300,000,000 of loans so far. That's translated into currently around about $15,000,000 of drawdowns.
That conversion rate will improve with time as we sort of gain momentum, but also we work through the initial periods where our customers need to buy a house or get their mortgage refinanced. So something that we'll be still working through is typical of these platforms. The drawdowns start off being a lot less than visits and approvals, but eventually catch up. And so we are very positive about what we see. Turning now to some other highlights in terms of customers, culture and community.
We're very pleased in terms of progress we've made around youth and Maori youth in particular, Rangatahi Board where we have a Board of staff comprising employees under the age of 30, reflecting the fact that now over the third of our staff aged under 30. This combined with Mana Mahaou, which is an internship program, which we're now targeting mainly Maori school leaders. We have had 70 4 alumni through the organization, including 45 participants this summer. And also, we have now 12 permanent employees. So this is giving us very good ability to help in the career development of Rangitahi, but also to identify a very rich source of talent going forward.
Part of one of the things that they've been achieving is the launch of a mobile financial literacy tool called Rocket, an app, which is now being rolled out through a number of schools in New Zealand. During the course of the year, we continue to receive best of category awards in terms of our savings products and our core account and also reverse mortgages. In terms of sustainability, we have moving towards measuring our baseline greenhouse gas emission that will be audited and our reduction target will be published in the website by the 31st our website for the 30 1st March 2020. And finally, in terms of economic prosperity, we're very pleased to see that we have delivered total shareholder returns of 124% over the last 5 years compared with the NZX index 50 of around 108% for the same period. So it's something that we're very proud of.
It's continuing to invest in our communities, particularly developing Rangatahi, but also bringing prosperity to our shareholders. On that note, we'd like to thank our shareholders for your support and also would like to thank the staff and the people of Heartland for their efforts during what remains a very interesting environment. Thank you. So I will close there and we will open up for questions. After which I will give some comments around where we see the forecast.
Thank you. We would now like to open up the lines to analysts for any questions. And we will go to Grant Lowe. Please go ahead.
Hi, guys. Thanks for the presentation. It was very comprehensive. I've got just a few questions. Firstly, around the OpEx side of things.
So obviously, CTI was sort of around the low 40s a couple of years back. Just wanted to get a sense around the 78 additional staff, what the sort of split of those between sort of COVID-nineteen and tech related that you've called out there? And just a sense of what that's sort of doing, whether that's front end origination or apps or otherwise and or back end sort of processing systems type stuff and how that relates to the software impairment that you've taken in the half? And then, of course, just where we sort of expect that to go to, whether that's peaked or whether that's expected to come back?
Thanks. I'll answer the first but the last one first. So yes, that investment has peaked. It's roughly, I'd say, 40 odd would be in the digital space and 30 odd would be COVID related. The COVID staff were are on the way out barring any further lockdowns.
They are really needed and have been needed to provide hands on assistance to customers impacted by the lockdown. So they typically were like seasoned retired bankers that we brought back brought in to get on telephones and provide that sort of hands on assistance where required. So that is beginning to sort of wind down and out. When it comes to digital, the staff that we have hired have been the execution staff, project managers and developers. The 2nd category is something we decided a while ago.
It made sense for us to bring in to our in house development, our coding stills. That we decided was more efficient in terms of speed and remembering that this market is one where speed is highly valued, but also for efficiency. So rather than standing in the queue in someone else's shop, we could be the masters of our own destiny in terms of that area. So I see that area remaining relatively stable. So we will feel like earnings will grow up around that investment.
Just the write downs, Andrew, that is unrelated to digital that was just some software we had, which was still good software, so with good life, but we decided given the situation we're in that we might as well sort of accelerate some of the depreciation and just put it behind us.
Okay. And just in terms of so I mean, you've articulated the reverse mortgage side of things, the growth was slower, but I think that's largely a result of sort of repayments which you've articulated. In terms of the marketing spend last year was up significantly on the prior year. Were you sort of spending at similar levels to support reverse mortgages in Australia and New Zealand?
Yes. So we have been in historical terms, we are up from where we have been in the past. However, in terms of where we expected to spend, it's probably a little bit down given the fact that we suffered from the lockdowns and some of the distribution meant that we shifted more towards the lower cost AdWords type of advertising as opposed to more expensive TV. But we are looking to refresh those campaigns. So we will continue to see marketing spend at the sort of last year, this year sort of levels compared with previous years, particularly in reverse mortgages.
Got it. Okay. And last one for me. Just around the strategy, so obviously at the last update, whilst there was nothing committed, you were looking at potentially spending out a couple of business units or most of them particularly called out to sort of optimize the value, I believe the terminology was or some such. Is that now sort of abated now that the share price has sort of recovered quite a lot from where it was sort of at the low points?
Or how are you thinking about that going forward?
What we want to do was to allow it was a number of objectives. But firstly, it was to create a more transparent perspective in terms of some of our businesses, particularly motor that certain areas are probably less well understood. So a degree of separation in terms of simply providing more granularity in terms of the financial components of motor and reverse mortgages for that matter was something that we wanted to do. And then secondly, I guess there's more strategic element is we do wish to sort of always preserve the possibility to be able to play in either a bank sector or a non bank sector, whatever is the most favorable. So yes, structurally, we want to preserve those options because it comes and goes.
It wasn't so long ago banking was the best place to be. Now for a whole lot of reasons that I'm sure are obvious, the pensions now swung towards the non bank areas. Our purpose is to make sure that we have the option to play in whatever space is going to maximize shareholder return. There, sort of ongoing
process? Yes. So that's something that we're getting to. Yes. So here in terms of ongoing process?
Yes. So yes, it is. That's all internal just in terms of getting that sort of transparency and providing some degree of structural definition around certain areas. So nothing beyond the confines of the organization.
Okay. That's everything for me. Thank you very much.
And we'll next go to Stephen Hudson.
Good morning, gentlemen. It's Stephen Hudson here. Just a couple from me. Just in terms of the guidance, I think you've conditioned that on, I suppose, repayments activity normalizing the second half. We can see from the RBN debt data that at least to November that gross lending outside of residential mortgages looked
or growth looked relatively low,
in fact, it's going backwards suggesting that repayment activity remained pretty high at that point. I just wondered if you could give us a little bit of a feel for your confidence in that repayment activity normalizing in the second half and what impact that could have on the range that you provided? And then secondly, just on reverse mortgages, I just wondered if you could give us some idea about your aspirations outside of Australia and New Zealand, whether or not you've considered that in the most recent strategic review?
Thank you. And Stephen, thank you very much for providing the segue back to the forecast because in my haste to get on to questions, I missed that last page. So yes, we are continuing to confirm guidance, but with the qualification that we expect it to be at the upper end of the $83,000,000 to $85,000,000 So and to come back to your questions, we are seeing good, in terms of our expectations, cost, margin activity and we're seeing also obviously a very favorable impairment experience continue. So that gives us the sort of confidence around the upper end. The swing factor in terms of repayments is a factor given where we are at this time of
the year.
It has as every literally day goes by repayments have net repayments have less ability to swing the outcome. But it is something probably more relevant for the next financial year than this financial year is how we see repayments behaviors, our senses and it's very hard to measure in a scientific sense, but in terms of what we see in here, it is that there's a lot of cash in the environment, a lot of diversion from mainstream mortgage repayments to other higher earning, higher yielding loans. So it has been swung with the cessation of mortgage holidays. We're now in that period, but too early to say whether that is going to cause abatement. It could be that customers again with higher interest with lower interest rates are just looking at accelerating their payments generally so rather than press average repayments for 24 months?
Yes. The loan to 20 months. The loan to 20.40 is
the one which we watch most closely for obvious reasons. Yet maybe that might inch forward, but just in terms of people having more cash to allocate towards principal debt than interest and so forth. So a lot of water to go under the bridge there, but I'd emphasize the fact that we're getting a long way down the track in terms of the full year result. The other question was reverse mortgages. Have we looked beyond Australia and New Zealand?
Interestingly, when we were first offered the Australian business, it came with Spain and Ireland as well. At that stage, we decided that it was Australia was enough for us to be going on with in terms of extending our reach offshore. So the answer at this stage is no. We aren't not looking at anything in particular, but it is something that we see of interest in terms of countries with similar demographics, similar pressures in terms of both housing and asset rich and income poor dynamics coming through.
That's useful. Thanks, Jeff. Actually, I might just sneak one more in if I could. Just going back to the potential for a non bank holding structure for the motor vehicle book. Would you envision the entire book being placed into that kind of structure or part of it?
And if so, what would drive that decision?
No decision has been made and haven't really sort of yet had to contemplate that sort of decision making. But yes, what I can tell is the obvious ones would be the drivers is rerun the mass, what is the most efficient outcome.
Great. Thanks very much.
And we'll next go to Jeremy Kinkade.
Good morning all. I also have another couple of questions on the reverse mortgage business. The Australian reverse mortgage business has been growing faster than the New Zealand business for a few halves now. And the origination data is very helpful. Obviously, you're sort of the originations are twice as large in Australia as they are in New Zealand.
Can you just talk to why that's the case? Is it a strategic decision? Or is it more a function of market dynamics?
It's a bit of the above, all of the above. In Australia, we largely not entirely, but largely focused on those eastern seaboard type of states, the Southeast Queensland, New South Wales and Victoria. And by definition, we are facing into higher average home loan kind of values. So therefore, we are usually getting higher loans sizes in Australia than we do in New Zealand. So that's the first thing, just the dollars per loan tend to be bigger for those reasons.
Secondly, the market is much more mature. You have a federal government support for the product. They have an equivalent product targeting lower socioeconomic groups that we don't really touch, but that has a sort of a halo effect in terms of our product, in terms of its acceptability. And some of the state governments like South Australia for reasons to do with South Australia offer products as well. So it's a much more mature market.
And that thirdly then flows through to a much more developed broker distribution network than we have in New Zealand. I mean essentially, we do all the heavy lifting ourselves in New Zealand for every loan that we generate is more or less hours from start to finish, whereas in Australia, it's roughly fifty-fifty depending sometimes it's a bit to move around, but roughly fifty-fifty. So those are the reasons why I think we get more growth in Australia and higher average loan sizes. And I see that New Zealand's got a bit to catch up, but I think that higher average loan size is probably permanently backed in.
That's very helpful actually. And could you also what is your capital ratio, your CET1 capital ratio within the registered bank at the moment?
That's just a tick under 14% as at 31 December, and the bank is accumulating around about 20 basis points per month of capital ratio. So you can probably predict that forward on that sort of run rate.
Great.
And to the organic growth comments, in the presentation, you talked to potential inorganic reverse mortgage opportunities. But are you also looking at inorganic growth opportunities outside of this? And if so, what are you considering?
Yes. So we are looking at any opportunities that are adjacent to our current product focus. So and there are reverse mortgage books in Australia. So that's something that we would like to have a look at it if it was possible. Areas that we have been interested in the past include sort of things like motor or some business assets.
So we are sort of open to all sorts of those opportunities. At the moment, I would say it's a kind of a subdued environment in New Zealand
in that
regard. Australia is probably a little bit more active, but the difficulty we face is with COVID and the lockdown, it's very hard to be too engaged when you're having to be seen remotely.
Okay. That's very clear. And then just finally on your guidance, that doesn't include any unwinding of the COVID overlays or anything like this in there, does it?
No. So that's yet to be factored in, if at all.
Okay. Thank you very much. That's all for me.
And we'll next go to Guy Hooper.
Good morning, everyone. It's Jamie here from Forsyth Barr. A couple of questions from me, please. Firstly, just on your amortization of intangible assets. You also increased your amortization expense for the period.
What are you now assuming as your useful asset life going forward? I think you've previously stated in the annual reports, you've determined to be about 10 years. Can we assume it's now nearer 60 months?
Look, it depends on the underlying assets. So we have our core systems, which continue over 10 years. Some of the newer digital assets that we are deploying have a shorter useful life.
Okay. And secondly on yields. Last time I checked your website, New Zealand reverse mortgages had a yield of around 6.9% as today it's showing about 5.9%. So that compression of 100 bps, is that a function of slowing demand, increased competition or regulatory pressure at all?
No, not at all. What it is reflective of is the what happened in the mortgage markets in New Zealand. And we consider what go forward mortgages are priced at when we price a reverse mortgage. And obviously, our funding costs
as well factor into that as well.
What should our expectation be on future yield compression in the second half of the year then, please?
The things to look to in terms of how we price for New Zealand, the indicators a good indicators would be where the deposit rates are. Obviously, that is a good proxy for our cost of funds. And we maintain a margin over floating rates. Chris, it's typically 1.5%, 2% over mainstream bank floating rates. It's a sort of a not a it's not a regulatory thing.
It's not a hardwired thing, but we think it's fair and reasonable thing for us to keep an eye on to ensure that we're doing the right thing.
Okay. And final question from me, please. I read a fair bit about employee strikes through First Union over the course of the year. What is the latest on this please? And should we assume any cost pressure going forward?
Thanks.
Jamie, it's Chris here. We're not we have settled with the negotiations with the union was settled during the course of I think it was late last year. So you shouldn't factor in anything along those lines.
That's all for me. Thank you.
And at this time, there are no further questions. I will now pass the line back to Jeff for a closing statement.
Well, thank you very much for your attendance. And I did pick up on the guidance comment, which I during the question time. But just to confirm, it is at the just in guidance, but with the qualification expectations are sitting at the higher end of $83,000,000 to $85,000,000 Appreciate your attendance, as I said. And look, we are available for any questions at all if you'd like to call us during the course of the afternoon. Thank you very much.
And this concludes today's call. Thank you for your participation. You may now disconnect.