Good morning, everyone, and welcome to the Heartland Group FY 2025 Four- Year Results Call. I'm Andrew Dixson, Chief Executive of the Heartland Group, and I'm joined today by Leanne Lazarus, Chief Executive Officer of Heartland Bank in New Zealand , Michelle Winzer, Chief Executive Officer of Heartland Bank Australia, and Kerry Conway, Chief Financial Officer of the Heartland Banking Group. Starting with slide five, The FY 2025 Summary. FY 2025 has been a year of significant reset, change, and integration, during which we have prioritized capital efficiency, restoring a superior margin and the act of de-risking of our lending portfolios. While this has impacted underlying financial performance, particularly in the first half, it has set a strong foundation for the future, with good momentum built across the second half of the financial year.
Two notable impacts to financial performance were, i mpairment expense increased $25 million due to a significant increase for the New Zealand Bank in the first half of 2025, in response to the impact of the ongoing deterioration in economic conditions and the de-risking and repositioning of some of our lending portfolios, as previously announced on 18th of February 2025. Following policy and process change, asset quality is improving and recovery outcomes are above expectation. Secondly, operating expenses were up $53 million, primarily due to non-repeating benefits in FY 2024, the cost base of the ADI, and subsequent costs related to regulatory requirements following its acquisition, hiring for growth and software-related costs. Cost growth is stabilizing, with underlying operating expenses increasing just $0.8 million half- on- half.
Underlying net profit after tax was $46.9 million, meeting guidance of at least $45 million and substantially meeting the outlook metrics set at our interim results in February. In terms of reset, we refined our strategic focus to core products capable of delivering a threshold return on equity. A superior margin was restored, with both banks delivering strong exit margins driven by lower cost of funds. Strong growth continued in reverse mortgages in both countries, with receivables up 15.5% in New Zealand and 18.5% in Australia, demonstrating growing market demand for this product. Good momentum was achieved in livestock finance in New Zealand, with receivables up 18.4% and we saw a return to growth in Australia, with receivables up 1.5%, arresting the FY 2024 decline. Growth remained challenged in motor finance and asset finance due to subdued economic conditions and a focus on higher quality lending.
Finally, there was an increased focus on capital optimization through several peer initiatives by the New Zealand Bank and the unwind of unsecured lending, together with the accelerated realization of non-strategic assets, including the home loan portfolio. This is enabling capital to be redeployed to high-return core lending portfolios. In terms of change, we have made positive changes to collections and recoveries policies and processes. The introduction of more prescriptive collections and recovery policies has improved overall asset quality, and recovery outcomes are exceeding our initial expectations. Motor finance arrears are now performing better than industry average. In terms of integration, Heartland's existing Australian businesses have now been integrated into the acquired ADI to form a new and unique Australian bank.
The Australian funding transition has been successful, with deposits forming 81% of the bank's funding, providing our Australian bank with a deep, stable, and diverse platform to efficiently fund future lending growth. Moving to slide six, Group Financial Results. I will discuss the differences in the report and the underlying impact on the next slide, and Kerry will discuss individual bank performance in more detail later. Heartland recorded underlying impact of $46.9 million for FY 2025, meeting market guidance provided at our interim results. This reflects a combination of three things, a strong improvement in net operating income following lending expansion in both countries, despite overall receivables retracting, an increase in operating expenses following the acquisition of the Australian bank, associated investment required across the business, and investment in growth.
I will discuss this in detail shortly. [crosstalk] and an increase in impairment expense, primarily in the New Zealand Bank, impacted by the ongoing deterioration in economic conditions on some of its lending portfolios. Receivables retracted $85 million, reflecting a positive shift towards higher return, lower capital- intensive assets as unsecured and non-strategic assets wound down. Moving to slide seven, there was an $11.1 million pre-tax difference between reported and underlying impact. The key items being, firstly, a $1.1 million loss from derivatives that were de-designated from their prior hedge accounting relationships in FY 2022. I can now confirm this is fully unwound. There was $1.6 million of fair value gains in aggregate across investment properties and equity investments. This was primarily driven by an uplift in the value of our shareholding [crosstalk] .
There were $1.5 million of regulatory assurance costs that were required as post-licensing conditions, following the acquisition of the Australian Bank. Finally, there were $7.3 million of exit costs associated with key management personnel exits across the year. Moving forward, we expect any difference between underlying and reported to be minimal, save for any fair value impacts on equity investments or other non-recurring expenditure. This was what we witnessed across the second half of FY 2025. Moving to slide eight, Underlying Operating Expenses. Kerry will talk to the composition of operating expenses at a bank level further on in the pack. This slide walks through the increase in costs and overall group level, to remove the noise of any inter-entity staff transfers and cost recharges.
While operating expenses of $181 million increased $56 million year- on- year, a number of factors need to be taken into consideration to rebase FY 2024 operating expenses and to enable a like-for-like comparison. These are, firstly, FY 2024 included $14.1 million of OpEx benefits that have not been repeated in FY 2025. This is a combination of $4.7 million of staff costs that were capitalized to projects, primarily being the New Zealand core banking system upgrade and the ADI acquisition, and $9.5 million relating to both the non-payment of short-term incentives in FY 2024 and the full release of accrued cost of all active long-term incentive schemes in FY 2024. $17.3 million came from the existing cost base of the ADI, and $6.3 million came from the New Zealand core banking system upgrade commencing its amortization in FY 2025.
This results in the comparable increase in operating expenses being $18.6 million, which has come from three key areas. Firstly, a $7.7 million increase in additional staff expenses, which came about across the business in terms of investing in people to enable growth, and to meet the regulatory requirements for each bank. For example, in Australia, to maintain its own core functions such as finance and risk, and in New Zealand, to invest in core functions to enable higher quality growth, collections activity, and to address additional regulatory oversight responsibility arising from owning the ADI. There was a $3.3 million increase in IT spend. There was increased investment at IT security and the implementation of a group-wide single platform for our finance and human resource functions.
Secondly, there was a long-term renewal of the current version of the Australian core banking system, as well as to accommodate the increased volume from deposits. Finally, there was a $7.6 million increase in other operating expenses from a combination of three things. Firstly, increased lending on professional fees that are not expected to recur going forward. We have not struck these from the underlying result. Secondly, an increased upfront reverse mortgage origination cost related to receivables volume achieved, and a high mix of broker business in Australia. Finally, higher audit and board costs associated with the ADI in Australia. Importantly, cost growth is now stabilizing, with the second half costs largely flat on the first half, with CPI expected to improve into FY 2026.
In terms of the outlook for FY 2026, the increase in costs during FY 2025 was mainly driven by the full-year impact costs related to the acquisition of the ADI, with much of the increase fixed in nature. Looking ahead, Heartland Group does not anticipate any further material cost increases, and is firmly committed to disciplined cost control and improving the underlying CTI ratio. In New Zealand, underlying OPEX is expected to remain largely flat on FY 2025. In Australia, underlying OpEx is expected to increase in 2026, with these costs variable in nature and tied to growth, primarily higher broker commissions and onboarding expenses related to the expansion of the reverse mortgage portfolio, as well as the full-year impact of additional roles filled in 2025 to strengthen capability and the capacity for growth.
Despite these increases, the underlying CTI ratio for Australia is expected to reduce towards 45%. due to an uplift in net operating income from receivables growth and the full-year benefit of the funding transition that occurred in FY 2025. Moving to slide nine, Non-strategic Asset Realisation. Heartland Group's dedicated team has made excellent progress on NSA realisation during the period, with total NSAs reducing $179 million across the year, releasing $16 million of capital. The home loan portfolio continues to wind down as expected and sits at $172 million at 30th June, with a further $90 million reduction projected by 31 December, 2025. In the more complex rural and business portfolios, the team remains focused on exiting exposures on a commercial basis, with well-developed strategies in place. Exit options that require debt mediation, refinancing with external counterparties, and in some cases, sale of the underlying business naturally impact timing.
However, we are at the late stage in these processes for some of the more material exposures in the portfolio, with positive outcomes expected. Realization projections have been reviewed with no material changes to outcomes or timelines. Moving to slide 10, Capital. The group remains well-stabilized and positioned to support expected growth in the banks, and taking into account potential future capital requirements. Both banks continue to operate with strong regulatory capital ratios and have capacity for hybrid capital issuance. The focus on capital optimization and NSA realization has generated more than $30 million of capital in FY 2025, with a similar amount still remaining in the NSA pool and from further future optimization initiatives. Slide 11, Shareholder Return.
While the return on equity and EPS are below historic levels, we have seen a strong rebound in the second half of the financial year, with the return on equity at 6% and EPS of $4.60 per share. We are pleased to declare a final dividend of $0.02 per share, which is in line with the interim dividend and represents a payout ratio of 52% for the second half of FY 2025, aligned to our current payout ratio target of at least 50% of underlying net profit after tax. I'm pleased to hand to Leanne and Kerry to discuss our New Zealand Bank.
Thank you, Andrew, and good morning all. This is Leanne Lazarus. Financial year 2025 for the New Zealand Bank has been a year of significant reset and uplift. We've refined our core lending portfolios, improved asset quality, a greater commitment to cost discipline and we are accelerating non-strategic assets, as Andrew has said, to enable capital to be redeployed to higher return core lending portfolios. However, we are now realizing the benefits of the strategic reset. We've delivered strong growth in our reverse mortgage portfolio, 15.5% year- on- year, livestock 17.6%, and direct-to-consumer motor portfolio, 16.7% year- on- year. We've achieved a superior margin, an exit margin of 4.3% versus 3.84% in 2024, and an average of 3.87%, up eight basis points from June of 2024. We've implemented more digital solutions to better support our customers and employees, and have begun to stabilize costs.
Kerry Conway, the Bank's C F O, will talk to that shortly. As we've navigated through a challenging economic environment, credit demand, coupled with a firm stance on credit quality, particularly within our motor and asset finance portfolios, remained subdued, overall impacting lending growth. We will elaborate on that shortly, as we walk through our financial performance. However, what I can say is that asset quality within the bank has significantly improved, with more prescriptive collections and recoveries processes having a positive effect. Innovation continues to be a key area of focus for the New Zealand Bank. In reverse mortgages, as an example, we successfully launched the Village Access Loan, which enables older New Zealanders to access funds to transition into retirement villages. In motor, we've launched Merit Marketplace, a new online marketplace for vehicle purchasing and financing.
We continue to focus and deliver on digital solutions for our customers, to improve on speed and ease and reduce manual processing internally. We've improved mobile app self-service, which supported a reduction in inbound call volumes. In our reverse mortgage portfolio, we implemented new online application forms, and in our motor portfolio once again, we implemented a new origination platform for our motor dealers. As I said earlier, non-strategic assets are a key focus for us in simplifying our bank and running down these assets to free up capital and invest in higher return portfolios is a significant focus. Looking ahead, our strategic focus on efficiency, quality, and growth is extremely clear.
I am confident that the New Zealand Bank is well- positioned for financial year 2026, in achieving its vision to be New Zealand's leading specialist bank, meaning a leading customer and originator experience, lower cost-to-income ratio and a stronger return on equity. I will now hand over to Kerry Conway to go through the financial performance of the New Zealand Bank.
Thanks, Leanne, and good morning, everyone. I'm on slide 14. The financial position for the New Zealand Bank remains robust for the New Zealand Bank and the wider b anking group, with capital and liquidity ratios, one, above board and regulatory minimums. Net profit after tax for the bank on a reported basis was $21.9 million for the year, and that's a reduction of $33.9 million or 60% on the prior year. Underlying results exclude the impact of $3.7 million pre-tax one-off items, touched on by Andrew earlier on, being related largely to loss on derivatives, fair value changes, and costs related to required assurance following the ADI acquisition. As Andrew discussed, we expect the difference between underlying and reporting to be minimal from FY 2026 and thereafter. For the rest of this section, I will talk to results on an underlying basis.
In a challenging economic environment, the New Zealand Bank underlying impact was $24.6 million, a reduction of $50 million, 67% on the prior year, with performance materially impacted by impairments in the first half. I'll walk through more detail in the coming pages. Moving on to slide 15. Receivables retracted $368 million, 7% in the year to $4.7 billion. $179 million of the retraction was driven by non-strategic asset rundown. $47 million was in portfolios we are no longer actively marketing, and the remainder of $141 million in core portfolios. As Leanne talked about, reverse mortgages maintained momentum, with livestock finance propelling rural growth. However, this growth has been more than offset by retraction in the motor, asset finance and business relationship portfolios. These have been significantly impacted by economic headwinds and heightened competition. Leanne will talk more detail on individual personal portfolios a little bit later.
Moving on to net interest margin, slide 16. Our exit NIM expanded 29 basis points in the year to 4.13%, significantly outperforming the 4% guidance we gave at half- year. Our average NIM at 3.87% was up eight basis points in the year, supporting net interest income to be largely flat despite receivables retraction. The OCR declined rapidly through FY 2025, from 5.5% to 3.25%. Coupled with market-wide soft credit demand, this has resulted in intensified pricing competition in some of our key portfolios. However, we have maintained a balanced pricing strategy, and proactively managed our cost of funds to drive NIM expansion through reducing the mix of more expensive wholesale funding, more aggressively pricing term deposits in line with funding needs, and driving volume into cheaper core savings products.
As a result, FY 2025 average cost of funds of 4.96% was down 31 basis points on the prior year, and the second half cost of funds of 4.67% was down 67 basis points on the first half. NIM is expected to expand further into FY 2026 as cost of fund benefits continue, and growth is focused on higher NIM portfolios. The outlook is for our average NIM to expand to be greater than 4.20%, and our exit NIM greater than 4.25%. Moving to operating expenses on slide 17. OpEx of $128.1 million is up $25 million, 25% on the prior year. However, as detailed by Andrew , backing out non-repeating one-offs, structural changes which are neutral to the group level, and the amortization of the core system upgrade, like-for-like increases $9 million or 8%.
In looking at the composition of the cost base, 50% of the New Zealand Bank is people-related, with 482 ending full-time equivalents. The next biggest cost category is IT, making up 11% of the total. Th is includes software licenses, software and IT support, IT security, maintenance, and communication costs. $11 million of amortization includes $6 million new amortization for the core system upgrade, which started this year, and the remainder is from other BAE software, largely from projects completed prior to the upgrade. In FY 2026, we expect our operating expenses to stabilize, as the required capability for running a trans [crosstalk] bank is now in place. A s we return to growth, CTI improvements will accelerate. Next, I'll talk to asset quality on slide 18. The total non-performing loan ratio continues to improve, down 44 basis points to 3.2% for FY 2025.
The NPL ratio, excluding NSAs and non-core lending, was down 30 basis points to 2.4%, helped by material reductions in motor and rural lending arrears. For motor, changes in collections, write-off and recovery strategies have had a positive impact, resulting in arrears decreasing by $27 million to $38 million, with $20 million of that reduction coming from the greater than 365 days bucket. Loans in this bucket are now fully written off. In rural lending, the sector is currently extremely strong, supported by around a $10 milk price. As a result of this improvement in trading conditions across the last year, we've seen an improvement in this portfolio. Arrears greater than 90 days are down $9 million to $5.5 million, especially in the 90 day- 180 day bucket. Early day arrears, five to 90 days, have reduced from $10 million to $5 million.
However, in business finance, operating conditions have deteriorated, with a 26% year-on-year increase in company liquidations and a 14% year-on-year increase in business defaults. The most affected industries remain construction, property, hospitality, and transport, which represent a significant portion of our business lending portfolios. These challenges have contributed to a rise in arrears, with 90+ days past due non-performing loans, increasing from $42 million in FY 2024 to $58 million in FY 2025. On a positive note, early- stage arrears, so five to 90 days past due, decreased from $50 million in FY 2024 to $43 million in FY 2025, with earlier intervention occurring between the front line and specialist support to engage with customers that are demonstrating warning signs. Moving on to impairment expense on slide 19. The FY 2025 impairment expense of $68.8 million is at $39 million or 131% increase on the prior year.
As we discussed at the half- year, the year-over-year increase relates predominantly to the motor and business lending portfolios, where the collectability of customer arrears have been impacted by deteriorating economic conditions. The second half impairment expense was $19.7 million versus $50.7 million in the first half. There are three components of the $68.8 million, $47 million in write-offs, less $10 million in recoveries, $25 million in specific provisions, predominantly in the asset finance and older business relationship portfolios, and a $7 million increase in collective provisions, again predominantly in asset finance and business relationships, partially offset by reductions for motor and rural. The impaired asset expense ratio was up 80 basis points to 1.4% for the full year, but down 119 basis points versus the first half. Moving to funding and liquidity, slide 20.
The bank retains a strong liquidity position, with key metrics well above board and regulatory requirements. Retail deposits declined modestly by 1.9% compared to the first half, aligning with funding needs. Call and saving products remain stable, consistent with our strategy to prioritize low-cost funding sources. With lending contracting in FY 2025, excess funds have been used to repay $362 million of more expensive wholesale funding sources, which is a 55% reduction. In addition, we took the opportunity to reduce the bank's securitization facility limit from December 2024 by $280 million to $320 million. We were mindful of the 1st of July go- live date for the depositor compensation scheme, so adjusted pricing to ensure stable customer balances ahead of this. So far, we've seen minimal impact. Finally, moving on to capital, slide 21.
With a regulatory capital ratio of 15.9%, the New Zealand Bank continues to operate well above the current regulatory minimum of 13.5%, demonstrating a strong capital position and readiness to support future growth while meeting the RBNZ's anticipated higher capital requirements. Several key initiatives have helped us get here. We've unlocked capital through the realization of non-strategic assets, and we've streamlined our structure by canceling the Merrick insurance license. We've also shifted our lending focus towards lower capital-intensive areas. This capital optimization strategy has allowed the New Zealand Bank to support the Australian Bank in reinvesting 100% of its profits into growth, and at the same time, returning excess capital to our parent.
The New Zealand Bank's underlying ROE of 0.5% in the first half negatively impacted the group's overall results due to the increased impairments. However, the second half results showed clear improvement, with ROE reaching 6.1%, and this is forecast to continue to improve through sustained net interest margin levels above 4%, lower impairments, and stabilizing costs. I'll now hand over to Leanne, to discuss the New Zealand Bank strategy and portfolio performance.
Thank you, Kerry, and I am now on slide 22. Talking to reverse mortgages, we've seen another pleasing results as we've spoken about a little earlier on, particularly within the second half, with strong annual growth of 15.5%. This was driven by higher levels of cash reserve drawdowns, where customers tap into money that is set aside from their loan for future use. Growth was moderated however, by high repayments. The reverse mortgage portfolio has grown to $1.23 billion, with an average loan size of $154,000. Our reverse mortgage portfolio is exceptionally high quality and well secured. As I've spoken about earlier, digital enhancements have been strong in this area and we've enabled 50% of cash reserve drawdowns to be processed online. We've reduced the reliance on phone calls and emails, and electronic property valuations for most properties have reduced average settlement times by five days.
In financial year 2026, we will continue to simplify and automate manual processes. We will add digital capabilities to provide a leading customer experience to unlock future growth. We will prioritize growth, and digital innovation in reverse mortgages to retain our leading position. We expect to exceed the level of growth seen in financial year 2025, with over 18% growth forecast for financial year 2026. Moving on to slide 23, The Rural and Livestock Portfolios, we achieved 4.9% growth in the rural portfolio, driven by 17.6% growth in livestock. In June, the seasonal slowdown came earlier, resulting in suppressed volumes of approximately $10 million. That said, the outlook for livestock sectors in financial year 2026 remains positive, with improved sector confidence and strong commodity prices. Rural asset quality has improved, as Kerry Conway outlined earlier.
Moving to slide 24, The motor and Auto Motor. T he motor portfolio required significant reset and uplift in financial year 2025. Our focus has been on strong risk management and the quality of business coming through the door. We implemented new credit decisioning scorecards in the second half of the financial year, and are targeting higher quality franchise and branded partners and direct-to-consumer origination. This shift has had an impact on new business volumes in the short term, but will have a positive impact on return on equity as low-q uality lending rolls off. To improve the experience for our customers and partners, as I said earlier, we introduced a new motor origination platform in the second half of the financial year, which is driving faster response times and better conversion rates.
The overall motor portfolio retracted 4.3% in financial year 2025, with the addressable market for motor finance down 0.3% year- on- year. Pleasingly, the direct motor portfolio is showing good momentum at 17% growth year- on- year. With our focus on quality and speed and ease for our customers, we expect the portfolio to return to growth at a higher level of credit quality in financial year 2026. As mentioned earlier, motor finance arrears are improving and now performing better than industry average. Moving on to slide 25, Business Finance. This slide includes asset finance, which is $613 million of the portfolio. Heartland Bank firmly held its stance on credit quality and price in financial year 2025. As a result, the asset finance book retracted $124 million. Retraction was due to challenging trading conditions, elevated repayments, as SMEs sold surplus assets and aggressive competitor positions on price and credit standards.
Trading conditions continue to be challenging, and liquidation levels remain high. We expect these conditions to remain in most of the first half of financial year 2026, with activity to pick up in the second half as the New Zealand economy recovers. As Kerry has spoken to the challenges around asset quality in this portfolio, given the economic environment, I will reiterate that this portfolio is appropriately provisioned and improvements in our proactive intervention measures have had a positive impact on non-performing loan management. Thank you, and I will now hand over to Michelle Winzer to talk through the performance of the Australian Bank.
Thank you, Leanne, and good morning, everyone. I'm Michelle Winzer, the Chief Executive for Heartland Bank Australia. I am on slide 27. I'm extremely proud of the way we finished our first year of operation in the Australian business and the enterprise value that we created in FY 2025. Our vision is to be Australia's leading specialist bank, with a focus on enriching customers' lives through financial freedom. The year started with a slow first quarter after consolidating the three businesses into Heartland Bank Australia and reviewing our structure for success. From the second quarter through to the year- end, we achieved month-on-month improvements across the business. I established a new executive team of high caliber, who are working incredibly well together. We have focused on uplifting our capability across the business, and implementing the right frameworks and controls to protect our customers and meet all our obligations.
We have invested in our risk capability and formed partnerships, to ensure the business can achieve sustainable growth into the future. The second half delivered stronger results than the first half, and had our exit momentum at the highest level in the history of the business. Our impact was $16 million for the second half, from the first half at $12 million, which was overall up 20.4% on FY 2024. Our exit NIM was 3.59%, which was in line with our commitment to market, which was up 32 bps on the third quarter. Our CTI was 48.4% for the second half, down from 56.4% in the first half. Our ROE continued to improve, being 7.8% in the second half, with momentum to improve further. Our growth for the reverse mortgages business was 20.6% for the second half, and livestock was 4.3% for the second half.
Our impairments ratio was impacted by two single-name customer provisions late in the half, and finished the year at 0.13%. We stayed true to our revised strategy, which was to remain with our reverse mortgages, livestock, and deposits as our three core product sets and continue to be focused on delivering best or only products. We are clear on the potential opportunity in Australia, and have focused our energy on being the best at what we do. Our key areas of focus in the business remain business growth, service excellence, and diversified distribution. In relation to business growth, by the close of FY 2025, we exceeded 30,000 customers, with a remarkable 18% or more than 4,500 growth in customers, propelling our receivables up $290 million and deposits up $560 million.
Reverse mortgage performance included six best-ever monthly results, with a strong new business fourth quarter 2025, which was up 69% on fourth quarter 2024. This momentum has continued with July having our highest number of applications in a single month. This exceptional performance reflects our focus on precise forecasting, disciplined execution, and robust internal controls. Continuous pipeline growth and positive new business demonstrate strong market demand and effective lead conversion, particularly during our high-impact quarter three and quarter four periods. Reverse mortgage new business volumes consistently exceeded $30 million monthly from quarter three onwards, fueled by strong relationships and improved service levels. Being able to support our customers over the long term is something we are proud of, with 66% of customers topping up through additional draws or top-up requests.
We are also appealing to high-valued customers with loans greater than $1 million, now representing about 10% of our flows, which compares to 5% of the overall book in this high-valued client segment. In relation to service excellence, our key focus areas have been, we strengthened our organizational agility through strategic role realignment, which has significantly accelerated our deal turnaround and supported us with scalable growth. We' ve now launched a targeted customer satisfaction survey following onboarding, to ensure standards are maintained and improved whilst we look to grow drawdown levels at settlements. We have enhanced customer engagement and retention activity through impactful communications. This ensured that repayment volumes held steady at approximately $23 million per month, enabling new business to consistently surpass runoff and drive net portfolio growth.
Of the total FY 2025 repayments of $273 million, only $29 million were due to outward refinances, with the remaining repayments representing property sales, deceased estates, and voluntary repayments. We have empowered our customer service teams to make decisions to deliver exceptional customer service for our direct channel. In relation to diversifying our distribution, our key areas of focus have been supporting our broker channel, which with strong relationship management and communication has flourished, underpinning approximately 56% of new reverse mortgage business and underscoring its pivotal role in our distribution strategy. We've managed to streamline the network from the previous 4,011 brokers to a more focused group of 3,221. This strategic change enables us to concentrate our efforts on building deeper, more collaborative relationships with our brokers. We have continued to expand our broker network, which includes the addition of the award-winning broker firm Mortgage Choice.
Our focus on partnerships and sponsorships has continued in the livestock finance business, sponsoring several events within the industry Australia-wide. Pleasingly, our corporate simplification strategy has been executed as planned, with our focus on converting wholesale funding to deposits and finishing the year at 81% deposit funded from 54% in June 2024. FY 2026 outlook is for this to continue to improve. Additionally, in third quarter 2025, we launched a new high-interest savings account, Life Savings, and continued our funding optimization through our database calls and amortization of our securitization facilities.
Our deposit franchise has been enhanced in the period, with the connection with two additional intermediaries to attract wholesale deposits across broader customer segments. We have managed our liquidity well, reducing our excess liquidity held from June 2024 and growing when required for wholesale maturities and our business growth. T he improvement in our cost of funds has been 1.39% from June 2024, and resulted in a 75 basis point increase in our net interest margin from FY 2024 to the end of FY 2025. I'll now hand over to Kerry Conway to speak through the financials.
Thanks, Michelle. Just to note that all of the following slides are presented in Australian dollars. Like New Zealand, the financial position for the Australian Bank is robust, with capital and liquidity ratios well above board and regulatory minimums. Net profit after tax for the bank on a reported basis was A$27.2 million, an increase of A$9.4 million, 53%. As with the group and the New Zealand Bank, the results are presented on both reported and underlying basis. Underlying results exclude the impact of A$1.4 million pre-tax one-off items relating to staff costs and regulatory assurance costs. Underlying impact of $28.1 million is a strong increase of $4.8 million, 20% on the prior year. It is important to note that due to the acquisition of the ADI in April last year, the FY 2025 results are not directly comparable on a like-for-like basis to prior year.
I'll walk through more detail in the next few pages, where we have rebased the prior year to make sure we can compare metrics on a like-for-like basis. Moving on to slide 29, receivables grew A$290 million, 15% in FY 2025 to A$2.3 billion, with strong growth of 18.5% in reverse mortgages. Michelle's already touched on this, and we'll talk in more detail later, so I'll move straight to slide 30, N et Interest Margin. The prior year exit NIM of 3.19% essentially excluded the impact of the ADI, so has been adjusted to 2.84% to account for the impact of additional liquidity now required as a result of being a bank. This allows for a like-for-like comparison.
From this adjusted base, exit NIM expanded 75 basis points to 3.59%, primarily as Michelle talked to funding optimization, driving + 80 basis points as a result of transitioning from wholesale to retail funding. NIM is expected to expand further in FY 2026 as cost of fund benefits continue. The outlook for average NIM is to be greater than 3.4%, and for exit NIM projected to be greater than 3.65%. Next, OpEx, on page 31. OpEx was up A$46.4 million, was up A$15 million, 49% on prior year. However, as we've detailed previously, adjusting for non-repeating one-offs, structural changes which are neutral at a group level and the full-year impact of the ADI acquisition, there is a like-for-like increase of $8 million, 22%. It's important to note that on a like-for-like basis, CTI improved from 55% to 52%.
Similar to New Zealand, a large portion of the cost base is people-related, so at 44%, which is 117 full-time equivalents. In Australia, the next biggest cost category are costs related to volume growth at 17%, which is largely intermediary commission aligned with reverse mortgage growth. Again, similar to New Zealand, a sizable portion, 12% of the cost base relates to IT, including costs relating to the current core system Temenos. In FY 2026, we will continue to see some growth in operating expenses as we see the full-year impact of FY 2025 recruitment, as well as costs related to growth. However, income growth will outrun cost growth, resulting in further improvement of CTI to below 50%. Moving on to funding and liquidity, slide 32. As discussed in reference to NIM, the bank has made a successful transition from wholesale to deposit funding.
The liquidity surplus we held at the beginning of the year has been utilized strategically to repay the expensive wholesale funding of around A$800 million. Prior to acquisition, funding was 100% wholesale. A s Michelle talked to, this is now 81% and will improve further to around 85% next year. Current liquidity is optimal and well above board and regulatory minimums. Finally, moving on to capital, slide 33. Like New Zealand, the Australian Bank capital ratio of 20.41% is well in excess of management minimums, which include a buffer above APRA minimums. As a result, the bank is well placed to support its growth ambitions organically through existing capital reserves and future sustainable profitability.
The return on equity for the bank shows a strong improvement from 5.9% in the first half to 7.8% in the second half, and we expect additional NIM benefits from deposit funding to be realized, along with benefits of increased scale from the bank growth, driving further improvements in ROE. I'll now hand back to Michelle to go through the individual portfolios.
Thank you, Kerry. I'm on slide 34. In relation to reverse mortgages, we achieved our highest new line originations on record, resulting in a net book growth of $309 million from FY 2024, at $276 million. We've also seen a positive start to FY 2026, with our pipeline remaining strong to support FY 2026 growth aspirations. Pleasingly, we delivered significant reductions in our originations and settlements process, with improvements from greater than 60 days to less than 20 days for reverse mortgage originations. The book has grown by 18.5% since June 2024, and as I mentioned, 20.5% in the second half, with record new business results in second half 2025, resulting in a record milestone of a $2 billion book achieved in July 2025. Competition has remained very strong, with non-banks and fintech innovators expanding into this market. Despite this, we continue to increase our market share.
A weighted average LVR is 24.6%, with a non-performing loan rate of less than 1%, with our average loan size of $208,000. Our outlook for FY 2026 is for growth greater than 19%. Moving on to slide 35 for livestock. We achieved the highest volume of cattle and sheep head financed in FY 2025 at greater than $1 million, which is the highest number financed in this business since 2022. Our receivables grew by 1.5%, reversing the FY 2024 book decline of 28%. There are still drought-affected areas of Australia impacting feed levels, and resulting in selldown of livestock. However, there has been some rainfall over recent months. The northern states have improved, and we have a positive outlook to the Australian livestock market. The team has worked closely with our customers and have reduced the [stockpile] non-performing loans from $64.4 million in June 2024 to $36.4 million in June 2025.
Whilst impairments remain low, they were higher than expected, with three single-name customer provisions late in the year increasing impairment expense ratio to 0.13%, which is up from 0.03% in FY 2024. Our outlook for FY 2026 is for growth of greater than 20%. Prioritizing a framework of strong risk management capability in the business, our focus also remained on right-sizing our expenses. We delivered strong improvements in our CTI ratio, finishing the full year at 52%. However, the second half was 48.4%. We did this [crosstalk] by optimizing our wholesale to deposit funding mix, with disciplined management of FTE in business operations, delivering cost savings through corporate simplification, process reviews, and automation, and executing on structural synergies and enhancing the capacity for growth, whilst offering customers cost-effective solutions.
I am actively focused on bringing together the culture of the three businesses, and ensuring we have highly engaged teams focused on our customers and motivated to achieve the business growth objectives we have. Our risk and compliance teams are now in place, with increased capability for AML, CTF, and ESG. This, coupled with a quality leadership team, will ensure we continue to mature our risk culture. We are happy with the asset quality, and our NPLs are a low % of our receivables. W e feel we are appropriately provided for following our review of the portfolio. In summary, whilst our first quarter growth was slow, our remaining nine months delivered strong results across all portfolios. Our month-on-month improvements continue to enable strong results for June 2025. This has set us up well, leading us to the achievement of the $2 billion RM book in July 2025.
We have the right people in place and clarity on the strategic direction. Our focus remains on keeping the business simple and disciplined in our consistent service experience, and building stronger partnerships with intermediaries, aggregators, brokers, and agents. I have a high-quality executive team in place who are working extremely well together to deliver the best outcomes for the business and our shareholders, and we are attracting a high level of talent in each of our teams. We continue to work very well with our board, and their support has been critical to our success. I'm confident and excited about the year ahead in FY 2026. I'll now hand over to Andrew.
Thanks, Michelle. Turning to slide 37, FY 2026 Outlook. We expect to deliver improved underlying return on equity and net profit after tax in FY 2026. We will be focusing on four key areas. Firstly, maintaining a refined strategic focus on our core product sets, with growth and innovation prioritized in reverse mortgages as the primary portfolio, given the market opportunity which I will discuss over page. Secondly, investing in technology uplift to simplify and automate manual processes, introducing new digital capability and providing better customer, intermediary, and employee experience whilst unlocking future growth. Thirdly, operational cost control. Heartland does not anticipate any further material cost increases, and is firmly committed to disciplined cost control while improving underlying CTI . Finally, continuing to prioritize the efficient use of capital.
With return on equity as Heartland 's key performance metric, ensuring efficient use of capital is critical, t he active realization of NSAs will continue and we will redeploy this capital to high-return core lending portfolios. Heartland also welcomes and will continue to participate in the Reserve Bank of New Zealand's review of key capital settings, with a particular focus on capital levels, asset risk weights, and the composition of regulatory capital. Heartland sees this as a critical pathway to support Heartland Bank 's ability to remain competitive, reduce the cost to the end customer, and deliver a significantly improved return on equity. Slide 38, FY 2026 Outlook and The Reverse Mortgage Opportunity. As mentioned, our business will prioritize growth and innovation in reverse mortgages to retain our position as leading active originators in both countries, increasing our competitive advantage in markets with significantly untapped potential.
The existing opportunity is large and it is growing, with population projections supporting more than a 40% increase in those eligible for reverse mortgages through to 2040. We estimate the total addressable market to be $170 billion in New Zealand and $660 billion in Australia. To meet this growth opportunity, Heartland will provide lending solutions. Firstly, to meet the unique financial needs of those aged over 60 years, with home equity continuing to build up with long-term house price inflation. Secondly, for older people in and entering retirement with existing residential mortgages, there is significant debt requiring servicing on low fixed incomes for this cohort.
Finally, for people in or seeking to access retirement villages or aged care, while we have started with the Village Access Loan, more can be done to assist with affordability and access issues at a critical stage of life, and to play our part in addressing the projected shortfall in accommodation for this cohort. Slide 39, FY 2026 Guidance. Our priority for FY 2026 is to deliver an underlying return on equity of at least 7%, and an improved underlying net profit after tax of at least $85 million. We expect the difference between reported and underlying impact to be limited in FY 2026, only to any fair value changes on equity investments held and other non-recurring expenses. Heartland intends to continue to provide greater granularity alongside quarterly market updates, and guidance is provided across each bank and across key metrics.
This shows a marked improvement across the board for FY 2026. Slide 40, Long-term Ambitions. Intentional and necessary resets in Heartland 's business throughout FY 2025 have rebased the starting position assumed when we first announced our ambitions for the financial year ending June 30th, 2028. These resets have included a focus on return on equity as Heartland 's key performance metric, requiring increased discipline in capital management and allocation. A refined product strategy, prioritizing growth and high-return core product sets, which are accretive to return on equity, t his has necessarily resulted in a near-term reduction in Heartland Bank's lending base, as it exits non-strategic assets and winds down unsecured lending portfolios. Enhancements to collections, recoveries, and write-off strategies to deliver sustainable asset quality over the long term.
These changes have amplified Heartland 's near-term impairment expense, recognizing that accelerated investment in process simplification and automation is required to maintain a competitive advantage and to achieve our growth ambitions in Heartland 's core product sets. Finally, an increase in the cost base, primarily due to absorbing the ADI and subsequent costs related to regulatory requirements following the ADI acquisition. At an Investor Day, ahead of our FY 2025 annual general meeting, Heartland intends to present updated long-term ambitions, resetting to a four to five-year time horizon for the financial year ending June 30th, 2030, to demonstrate our operating metrics of scale. Heartland will provide to investors detailed information on the underlying approach, growth drivers, and timeframes that support the delivery of its reset long-term ambitions.
We currently expect that during the period to FY 2030, investors will see a significant increase in underlying return on equity and underlying profit from a continued focus on capital efficiency, both in the composition of our regulatory capital and the allocation of that capital to core product sets. Profits generated in Australia are largely, if not wholly, retained within Heartland Bank Australia, to provide the capital to fund its projected growth.
Continued growth in our core product sets with a bias towards material growth in reverse mortgages, superior NIM being maintained, enhanced asset quality, and an underlying CTI reduction. More information about our Investor Day will be provided in due course. Finally, I'd like to thank our staff for their resilience and delivery in what has been a year with very unique challenges, and of course, to our shareholders for their continued support. Thank you very much. I'll hand back to the operator.
Thank you. If you would like to ask a question, you'll only need to press the star key followed by number one on your telephone keypad. If you would like to cancel your question, please press star two. If you are on a speakerphone, please pick up the handset to ask your question. Your first question today comes from Ben Crozier from Forsyth Barr. Please go ahead.
Morning all. Just the first one on reverse mortgages. It's good to see you come out and saying you're prioritizing growth there, and aiming for north of 18% growth. If we just look at growth rates over the last couple years, particularly in the 2H, they were for New Zealand and Australia, below that threshold. What gives you the confidence that you can step up the growth? I know you've pointed to some strong 2H in Australia, but particularly in New Zealand, to grow north of 18% for reverse mortgages.
Thank you. This is Leanne Lazarus . We have strong confidence in our ability to grow to 18%. A couple of things on that. Strong brand awareness., t he market has played quite a significant role with the economic conditions that we have. As you heard yesterday, the OCR has decreased. Reverse mortgages is based on customer need, and there's a significant addressable market. Our brand, our position in the market, as well as our continued pipeline generation and lead generation, is extremely strong and we're starting to see increased levels of applications come through.
Ben, [crosstalk]
Give me just a minute.
Sorry, go ahead.
Yeah, I was just going to say, in Australia, your rate that you offer is at the higher level of your competitors. Will you look to move that down and maybe give up a wee bit of NIM to accelerate growth, or can you hold these rates?
We're looking at everything across the reverse mortgage business in Australia, Ben. We have seen our application volumes pretty much double in the last 12 months. There are a lot of improvements that we are delivering in that business. I know I talked about some that we delivered in FY 2025. We're delivering even more in FY 2026. We continually look at the pricing of the product. There is significant demand, and some of the features that we have in our product are different to the rest of the market, which is what warrants the premium in the rate. It is something that we continually look at because we recognize the importance of and the opportunity in that market.
That's good color. Thank you. Maybe just on your due diligence and risk tolerance, and risk pricing processes in your motor and business lending. I know you've talked a bit about the change in collection policies you've done, but on origination, have you changed any of the way that you look at your originations?
I'll take that question. What we have looked at is our lending standards. We've adjusted that. We'll be introducing and we started to introduce risk-based pricing. For good quality deals, dealer-originated, direct, looking at, as I said, risk-based pricing and pricing for risk. We have updated our motor scorecard, so that's more in line with economic conditions and that was introduced in the second half. We are going to be doing the same for our asset finance book as well. Having said that, we've looked at lending standards as well, implemented prescriptive ways of collections, recoveries, also within the business asset finance portfolio, as with motor.
Perfect. Thank you. That's all from me.
Thank you. Once again, if you would like to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Stephen Hudson from Macquarie Securities NZ. Please go ahead.
Good morning, everybody. Just on your CTI, I know you'll have a lot more to talk about at the Investor Day, but I just wondered if you could give us some early indications of the key buckets that you're looking at to reduce your absolute cost levels. I guess assuming long-term receivables growth.
I'll talk about the New Zealand business, and Michelle could talk to the Australian business. In the investor presentation on the operating expenses, there is a breakdown or composition of the respective bank's cost base. As you can see, there are fixed and variable costs. Variable costs is where the focus is. Digitalization is going to play a huge part in being able to automate this business, because as you can see, half the cost base is people-related. Being able to move our people to more high-value frontline activity, as opposed to manual processing and administrative tasks . Equally, it will be the same with looking at supplier costs as well. Michelle, is there anything further you want to add that could be different?
We’ve looked at every single expense in the business over the last 12 months. We’ve delivered structural changes, we've delivered process improvements, we've automated some steps of the process. Those things will continue to be looked at, particularly having a look at some automation in some of the processes and having a look at our cost to serve and our cost to originate, to see how we can improve things in those areas.
This is Kerry Conway here. I'll just jump in. This year, we have seen some increases in the cost base across the banks, but we expect that growth to stabilize significantly. Coupled with that, retraction in receivables has really had an impact on cost-to-income. As we return to growth with a stabilizing cost base and growth in income, we will naturally see improvements in CTI.
That all makes good sense. Thank you. Just a couple of quick questions further. You mentioned the RBNZ capital review and the risk weighting review that's underway there. Can you give us any clues as to what you think may eventuate?
Unfortunately, I don't know the outcomes of those reviews, but what I can say is we are participating at an industry level in providing our information around, how do we make the New Zealand banking industry, or actually the New Zealand environment more competitive, that has a better outcome for customers and a level playing field for all banks, irrespective of size?
Right. Do you think that they'll be looking at the fairly gaping hole or gap between internal risk weightings and small bank- mandated risk weightings?
The Reserve Bank has been very collaborative and open in working and receiving feedback. We will be participating in industry initiatives around providing insight and feedback as to what we believe our position is. Once again, that's not unique to Heartland . It will be across the industry, but we will be participating in providing our respective feedback.
Okay. No, useful. Just a final one, thanks for the additional detail on the reverse mortgage TAMs. It's sort of big numbers. I was a little bit surprised that the Australian TAM is n ot b igger, or the New Zealand one is smaller , given the population relativities. Is there something going on there in terms of your eligible population estimate? I think Australia's got sort of five times the population compared to New Zealand, but I think your TAM wasn't [crosstalk].
Thank you, Stephen. That has just taken a couple of segments of the Australian population, and you could see the segments on the side. There are actually multiple segments who are potential customers in the reverse mortgage market. That's just taken those couple of comparable segments across the two countries, to include that in that data. [crosstalk] .
Got you. Thanks very much.
Thank you. There are no further questions at this time. I'll now hand back to Mr. Dixson for any closing remarks.
Thank you all for listening and your questions this morning, and thank you once again to our staff and our shareholders.
That does conclude our conference for today. Thank you for participating. You may now disconnect.