Resimac Group Ltd

ASX:RMC

Earnings Call Analysis

Earnings Call Transcript 2022-Q4

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Resimac Group FY '22 Investor Call. [Operator Instructions]

I would now like to hand the conference over to our speakers today, Mr. Scott McWilliam, Chief Executive Officer; and Mr. Jason Azzopardi, Chief Financial Officer. Please go ahead, gentlemen. Thank you.

[Scott McWilliam, executive]

Thank you, and good morning, everyone. It's my pleasure to welcome you to Resimac's results investor conference call for the year ended 30 June 2022. I'm Scott McWilliam, CEO of Resimac; and with me is Jason Azzopardi, our CFO. We'll be talking to the investor presentation lodged with the ASX this morning and welcome questions at the end of the call. In today's presentation, we'll take you through our performance highlights and overview of the macroeconomic environment, the quality of our portfolio and our focus for FY '23.

Starting on Page 3, I'm pleased to report a strong FY '22 results. Normalized NPAT increased to $104.4 million. However, if we exclude the large noncash fair value gain on interest rate swaps, normalized NPAT decreased to $86.2 million. We believe it's important to call out this one-off large noncash fair value gain as we expected to unwind through the P&L in future years. Our home loan portfolio increased to over $15 billion for the first time, driven by a 30% increase in settlements compared to FY '21. In addition, our asset finance offering continues to gain traction with [indiscernible], settling over $400 million in FY '22, up 200% compared to FY '21. And finally, I'm pleased to report the Board has declared a fully franked final dividend of $0.04 per share, taking the full year dividend to $0.08 per share.

Moving to Page 4. The macroeconomic environment has evolved significantly compared to our half year results in February. The RBA narrative quickly moved from a period of stability to a rapidly increasing cash rate environment, driven by a ramp of inflation domestically and internationally. The current rate environment is creating consumer uncertainty, negatively impacting mortgage activity in the overall market. Whilst high interest rates and inflation is placing pressure on household budget, we remain confident our portfolio can absorb further interest rate increases. The unemployment rate remains at record lows. The portfolio has significant prepayment buffers, conservative credit assessment and a low loan-to-value ratio, as demonstrated on Page 6.

I'll now hand over to Jason to talk through financials.

[Jason Azzopardi, executive]

Thanks, Scott. Turning to Page 9. I'm pleased to report that statutory and normalized profit is broadly in line with last year, excluding one-offs. As Scott mentioned earlier, our FY '22 normalized profit of $104.4 million includes a large one-off pretax $25.7 million fair value gain on our fixed rate loans and interest rate costs. We have disclosed an additional NPAT line on this table to exclude the fair value gain on these swaps.

Referring to that NPAT line that does exclude swaps, I would like to call out the half-on-half performance, in particular, with $37 million in second half '22. This performance was adversely impacted by our decision to take a conservative approach to our provisioning, increasing our collective provision macroeconomic overlay by $9 million. This can be seen in the loan impairment expense line on the same table. We will reassess our provision coverage at half year. However, at this stage, we don't expect to increase our collective provisions further in FY '22.

Moving to net interest income. This decreased 2%, driven by lower margins, partly offset by higher AUM. We will touch on both of those in more detail shortly. And finally, OpEx increased 12%, driven by increasing FTE as we invest in growth segments, in particular, our asset finance business and technology [indiscernible]. This growth in FTE was compounded by inflationary wage pressures as experienced across the industry.

[Scott McWilliam, executive]

Thanks, Jason. Moving to Page 10. FY '22 settlements increased 30%, driven by our focus on high-yielding Specialist products in preference of Prime, where we made the strategic decision to enjoy lower-yielding -- to avoid lower-yielding Prime market, compounded by large cashbacks offered by the ADIs. Second half '22 settlements were softer, driven by seasonality, lower Prime settlement, as mentioned, and the short-term impact of a new origination system rollout. I'm pleased to report, as a result of our investment in origination technology, we are today offering market-leading application turnaround times to brokers.

Moving to Page 11. I'm pleased to report home loan AUM increased 11%, highlighted by our Specialist portfolio increase. Prime decreased 5%, driven by the continued highly competitive environment.

On Page 12, we can see the trend of lower NIM continued in the second half as lower yields, and the rapidly increasing BBSW in advance of cash rate rises offset the benefits we received from our lower funding attractive rates. Our NIM decreased 26 basis points for the year, driven by deals decreasing 30 basis points as a result of back book runoff and continued new business across both Prime and Specialist. The average BBSW blended with BKBM increased 9 basis points during the year, with BBSW spiking in Q4 in advance of cash rate rises. The BBSW movement in advance of our ability to reprice the back book had a 3 basis point impact on our full year NIM. Our blended cost of funds decreased 13 basis points, driven by our flexible warehouse portfolio and low-margin RMBS issuance in the last 18 months, driving our attractive rate down. We will continue to leverage the strength of our brand in the funding markets as capital markets pricing increases to record lows.

Moving to Slide 15. Resimac's funding program remains a key pillar for the sustained success of the group. The group issued close to $6 billion of Australian and New Zealand RMBS in FY '22 as well as increasing a number of warehouse facilities in both home loan and asset finance. Capital markets pricing has increased over the past 3 months, and we expect our net issuance to be priced at a higher margin than the recent record lows. We'll remain diligent in our return on capital hurdles on new originations, factoring in elevated cost of funds, and will remain strategic on timing of new issuance.

Moving on to Slide 16. The reduction of our specific provisions continues with a total of only $4.2 million at June '22. This is a testament to the credit quality within the portfolio, our collection processes and the benefit we have received from a period of rising property prices. As mentioned earlier, we have maintained a cautious approach to provisioning whilst we mitigate the next 12 months. We have increased our collective provision to 27 basis points of total AUM, 4 basis points higher than FY '21. We acknowledge this is conservative. However, shareholders can be reassured we have significantly provisioned for any potential macroeconomic shocks and future AUM growth. We will continue to reassess the coverage ratio at each balance date.

I'd now like to quickly touch on strategy before moving to questions. We hold true to our vision of being a customer set company that makes home ownership, financial freedom and business success more accessible to everyone. Our Resimac-branded home loans and asset finance businesses are designed to offer a broad suite of products with flexible lending solutions that cater for a wide audience facilitated predominantly by brokers. We've built this business on the promise of superior service to brokers and customers, and that promise remains unchanged. Our strategy is to continue to grow our assets under management in our core niche operating markets by leveraging the strength of our brands across home loans and asset finance. We will achieve this with a deep and unrelenting customer focus that enables us to deliver better and more accessible lending solutions to Australians and New Zealanders.

We will continue to invest in technology and customer experience design to support increased scalability, achieve a lower-cost operating model and provide brokers and customers in a superior experience. Lastly, we are supported by more than 10 warehousing banks represented by large domestic and offshore global banks. We will continue to leverage our global funding program to provide reliable access to funding throughout changing market conditions.

I'll now hand the call back to the moderator, and we're happy to take questions.

[Operator]

[Operator Instructions] Thank you. Your first question is from the line of Minh Pham from Barrenjoey.

[Minh Pham, analyst]

Two questions, if I may. The first one, just on loan losses. It looks like you've taken credit impairments of 12 basis points of loans. You've increased provisions, and that does appear higher than what your peers have done this period. Most banks and nonbanks are still releasing provisions. What are you seeing there that they might not be? Looking at arrears on a 90 days byproduct, Prime arrears have risen slightly over the past couple of years. Or do you think you're just applying more conservatism? And a second question, if I could, after.

[Scott McWilliam, executive]

Of course. Thanks for the question. Look, we acknowledge we are being quite conservative. We've had significant growth in our AUM in the last 2 years. We just want to be prepared for any potential shocks that may -- ensure that we've got coverage for any future shocks. We do acknowledge it's conservative. We think that we've got enough provision there to navigate whatever happens. And we also believe we've got enough full growth throughout FY '23. So we don't think we're going to need to increase that at all in '23. We thought it was the right time to take it down given the uncertainty, acknowledging it is conservative.

[Minh Pham, analyst]

Great. And just a second one on settlements. The asset finance settlements, the $1 billion target has been maintained for FY '24. You've removed the $8 billion home loan settlement target, I assume, given the slowing outlook there. Given loss rates are historically higher in asset finance, and this is a new book of business, do you think now is the right time in the cycle to be growing this business? How do you ensure that your credit appetite is being fairly priced?

[Scott McWilliam, executive]

Yes. Look, despite the fact current arrears and delinquency levels, probably dispute that where the reasonably [indiscernible] are just as strong, in some cases, even stronger than mortgage portfolio. The reality is, over the long term, you would expect higher losses through that asset class. And we've built the business of very strong credit discipline, which is why as opposed to buying an existing business to bolster up the signs of asset finance, we've done it organically. We run it through our models. We run it through our technology, run it through our people. And that credit discipline that I think was demonstrated over decades across the knowledge book is no different to how we're approaching it with asset finance.

[Jason Azzopardi, executive]

And can I just add, we've -- as part of the collective provision increase that we had in there, we started leasing up our collective for RAF, asset finance. That's a 53 basis points coverage for the asset finance business. It's -- we still have a pretty conservative book in that area where over 40% of our loans are secured by residential properties. So we -- the provision is such now that even if we're releasing through home loans, we think we've got enough collective provision there for both segments through FY '23.

[Scott McWilliam, executive]

Yes. And then I'll add just a last point to that. So our approach to mortgage asset origination, where we lean probably more than most nonbanks to the conservative side, is really no different to how we're approaching our AUM growth with asset finance. So we do like -- we like the clean side of Prime. We like the clean side of near Prime, which is how we built the resi mortgage business. We'll take the same strategy into asset finance.

[Operator]

Your next question is from the line of Tim Lawson from Macquarie.

[Tim Lawson, analyst]

Just on the NIM. It's helpful to give us that 3 basis point impact you called out earlier. But could you talk about the sort of second half and the exit rate NIM that you're looking at, given there's been obviously competition and repricing going on?

[Scott McWilliam, executive]

Yes, sure. So we see exit NIM for the year in around the mid-160s for home loans. So that's where that's at in a [indiscernible] environment. There was a bit of -- the thing we have in the last couple of months was BBSW increasing in advancement. But when we normalize for that, that's where we see the NIM. So as we get through this rate rise period in the next few months, we think about BBSW as a spread above cash of about 10 basis points. And we're seeing -- and what we're doing now, we're pricing our new originations in line with the capital hurdles and the return we require on new originations.

So targeting that new business in where we think builds will land and a bit of a movement in capital markets, which will slowly move our attractive rate out of cost of funds, we'd like to think that -- sorry, and of course, the repricing on the back book that we've done through a big cycle, we'd like to think that, that exit NIM, we think we can keep that broadly in line for FY '23 is what we're targeting.

[Tim Lawson, analyst]

Okay. And just with the sort of tightness in loan markets and wage inflation this year, you obviously implemented the core bank system in New Zealand, talking about applying it in Australia. Your plans beyond that in terms of the internal spending on systems, et cetera, what happens to that spend? Is that -- you moderate that a bit or you just keep down the spending if you think you still need to commercially justify it?

[Scott McWilliam, executive]

Yes, look, the reality is, I think spending on technology is down to just a BAU expense, but it's a different spend. We've spent the best part of 2 years spending on infrastructure technology, which obviously are long projects and expensive projects. The way we think about our spend, let's say, halfway through this financial year or the start of next calendar year is it will be more around application technology. So where we're investing in applications to support CX, to support scalability, to support broker experience, it's really more smaller ticket, smaller projects that are supporting really kind of our broker and our customer focus. Again, it's also kind of an add-on or complementary to the infrastructure spend we spend today.

[Operator]

[Operator Instructions] Your next question is from the line of Jeff Cai from Jarden.

[Jeff Cai, analyst]

A question on the margins. Can you talk through how much repricing you've done on the mortgage back book from May to August versus the cash rates? And how has the runoff rate been in July and August so far?

[Scott McWilliam, executive]

Yes, sure. So the first question, the reprice through the May to August period, we've repriced on the total portfolio. Obviously, it's different in different product types and segments, 24 basis points over and above the cash rate. And that's necessary because if you think about BBSW below cash and now seeing that -- where we expect it to be above cash, there's an immediate circa 20 basis points increase in your funding costs just on that BBSW normalizing, for want of a better term, over the period.

So for us, it was effectively a pass-through of that increase. And we're continuing to monitor that, and we'll approach that proactively. We need to do that again and that's in the next couple of rate rises. The second question was -- sorry, Jeff, of the runoff. So look, obviously, first half was high in runoff in that competitive environment. Second half, we certainly saw a runoff decrease materially. We haven't had any material spike in runoff in the last couple of months as a result of either the environment or us going over and above cash rate.

In saying that, the market is often -- in terms of activity, a lot of it is due to uncertainty across the market on where rates will land. There's a lot of noise every 4 weeks. Customers are getting the letter on rate increases. And that's putting a bit of a damper on activity and people moving. So it's a bit of watch this phase on runoff, I think, for everyone in the industry. But I think where most participants are seeing runoffs remain at fairly stable levels to where they've been in the second half.

[Jeff Cai, analyst]

Got it. And sorry, the exit NIM of $160 million, is that exactly for June or July post all your repricing?

[Scott McWilliam, executive]

Sorry, do you say what was exit NIM for June?

[Jeff Cai, analyst]

No. In terms of when you made the comment of exit NIM was in the mid-$160 million, is that for June? Or is that for July post some of your repricing?

[Scott McWilliam, executive]

So -- yes, so the June exit NIM was mid-$160 million as I said.

[Jeff Cai, analyst]

Okay. Okay. And then just another one on asset finance. Can you talk through how big is the book currently? And how will your new origination system sort of boost growth into '23?

[Scott McWilliam, executive]

Yes. So the book, obviously, coming off a very small base, is broadly in line with settlements around $400 million. We will be rolling our products and our new origination platform in stages. So our largest segment being consumer finance across auto and equipment, we will be rolling out in the next 2 or 3 months, followed by other products in the state rollout over the next 9 months. The purpose of investing in the origination technology upfront is for 2 reasons: is to create ease and speed for our broker network; and also to support scalability within the business.

So we are tracking towards the FY '24 target that we set 18 months ago. We still feel as though that is very much achievable. We're very much buoyed by what we're seeing with some more mature players in that space, have been in the market probably a decade. The market is probably deeper and wider than when we first stepped into it. So we believe that a target [indiscernible] FY '24 and leveraging of technology spend upfront and targeting those markets more on the conservative side of Prime and near Prime will more than support that number as we think about kind of higher AUM and higher settlement numbers beyond FY '24.

[Operator]

Your next question is from the line of Andrew Tan from Bell Potter.

[Andrew Tan, analyst]

Another NIM question here. So I guess you're saying an exit NIM of $165 million and I guess FY '22 was $181 million, like [indiscernible] like a waterfall from the $181 million to $165 million to see which buckets have changed?

[Scott McWilliam, executive]

Andrew, I think I'm looking at the second half average was $171 million for NIM. So probably won't look at the full year, that's the one. And the main driver in the second half is the BBSW spike. So if you think about the first half, it was relatively flat. So that's probably where you're seeing the difference in terms of the average of the exit because we were hit quite materially later in the year. So it's effectively the 2 levers of yield and BBSW are the 2 others [indiscernible] waterfall effectively.

[Andrew Tan, analyst]

Yes, yes. So the BBSW impact...

[Scott McWilliam, executive]

Sorry?

[Andrew Tan, analyst]

Yes. SO the BBSW impact, I guess, that's the spread between the cash rate and the BBSW. So how much more was there to, I guess, go in that exit run rate, I guess? Because it's -- yes, I guess the spreads widen with the rising cash rate environment.

[Scott McWilliam, executive]

Is that a question?

[Andrew Tan, analyst]

Yes, yes. So I guess there's 2 buckets, right? So you've done some repricing and then a BBSW spread going against you. So how do we look at those 2 buckets?

[Scott McWilliam, executive]

Yes. So I think, look, FY '22, I think you should think about it how we've been thinking at margins in the past. To simplify this, we've had yields compressing for most of the year. We've had that BBSW start to move out. So the main driver has been we've had -- we've always talked about can we match the decrease in yield on our asset side with the reduction on our pricing and our liability side? So that's always been the challenge. And we've been pretty transparent that we build on a yield, pricing on yields is going to be more aggressive. So that's what's happened.

Now what we're seeing is now we're saying, okay, well, we're seeing a bit of a stabilization because the new business pricing is not significantly below the back book runoff that we were seeing. So we're pricing new business higher, and we're seeing BBSW move out, but the repricing we've done in the back book should fully offset that BBSW repricing and hopefully be able to even offset any funding cost increase that we may incur on attractive rate as we start to issue new RMBS in the future and that coming off those record lows.

[Andrew Tan, analyst]

Okay. And forgive me if I didn't say it, but did you just put out the NIM for the buyers?

[Scott McWilliam, executive]

No, we didn't. We're targeting double the NIMs in asset finance. We like to target sort of low 3s in terms of asset financing. That's what we're targeting. We're looking for different types of products and the blends. That's where we're aiming to come at it.

[Andrew Tan, analyst]

Okay. And then just in terms of runoff, I guess, are you seeing it return to kind of historic levels, which is circa 25% kind of levels? Is that where you're seeing it right off to?

[Scott McWilliam, executive]

Yes. So Prime is -- the historic level for Prime is 25%. But probably what we're seeing market overall, we've definitely seen a slow-up of refinance activity. There's no doubt about that. But it was significantly elevated. The Prime specialists, do you expect those to be a bit higher than that? Probably around 30%. So look, we've seen all product types revert back to what we've seen in a couple of years before that large peak that we had in the first half.

Yes. So prime is that the historic level for price is 25%. But probably what we're seeing the market overall. We've definitely seen a slow up of refinance activity. There's no doubt about that, but it was significantly elevated. New priming specialists, you expect those to be a bit higher than that on probably around 30%. So look, we've seen all product types revert back to what we've seen in a couple of years before that large peak that we had in the first half.

[Operator]

Your next question is from the line of Richard Wiles from Morgan Stanley.

[Richard Wiles, analyst]

I've got 2 questions that relate to Slide 11 on the home loan AUM. The first really relates back to the Prime book and this concept of runoff. This is the -- Prime books sort of continued to shrink during the second half. How much of that is due to the [ sale of those ] runoffs? And how much of it is due to you just stepping out of the market for new lending because of the conservative pricings? And what are your expectations going forward? Do you think you'll get some growth back in the Prime portfolio?

[Scott McWilliam, executive]

Yes, good question. And that's where kind of the risk in runoff is probably the greatest in this environment where it is still extremely fiercely competitive. But really, the market where the major banks are playing at the moment, and they seem to be kind of jumping over each other just to hold AUM in that space, there is a challenge in terms of runoff and book growth in that Prime space.

That said, where we're playing, where we're targeting in that space is not necessarily chasing after your typical owner-occupier principal and interest in a moment that [ metro ] type line below 80%. We look for niche markets in the Prime markets where we see a reasonable return on capital and trying to stay away from some of those store-automated or different banks that's just kind of chasing that one customer. But in doing so in this market, that is challenging. So holding the AUM book for Prime will be a challenge, but we kind of know where we want to play and we know where we don't want to play.

Sorry, Richard, was there a second question?

[Richard Wiles, analyst]

Yes, there is. So there's a reference on this slide to the direct-to-consumer channel, particularly homeloans.com.au business. I'm just wondering if you can give us sort of your views on how that direct-to-consumer channel is evolving relative to your expectations. Do you think Australians are embracing that channel at the place that some of the industry participants may have expected?

[Scott McWilliam, executive]

Yes, it's a good question. And in this particular environment, there's kind of a lot of different and choppy data points. So I think the reality looking over the last 3 years is that online space, that digital online distribution market has definitely taken market share away from a brick-and-mortar distribution. It doesn't really impact both as they're 2 totally different proposition.

So there has been growth in that sector and the specification of that is that we're seeing new participants come into it, including CBA recently, and they've been in it for a while. [ Organic People ] also buying a few brands out there, whether it's [indiscernible], so on and so forth. So -- but it is very much a Prime borrower, your target. It is a rate-driven Prime borrower that's attractive to that model. And to be a dominant player in that space, you need to deeply understand what that customer journey or what that customer experience need to be. It needs to be an automated, streamlined, low touch, low friction, digitally enabled channel. And if you can't offer that, then you're probably just playing the edges.

So it'd be interesting to see how that market performs probably over the next 12 months, moving through what is a slightly different cycle we're all in at the moment. But yes, look, it very much is -- it carries a lot of the characteristics I mentioned earlier with Prime and the fact that the banks are stepping into it, they're just able to see it as an extension of their Prime offering.

[Richard Wiles, analyst]

And do you have a view on where it could get to a percentage out of the total market for originations on a multiyear number as high as 30%? I don't know how realistic that is. Do you have a view on how much can come through the direct channel?

[Scott McWilliam, executive]

I think in the near term or medium term, I think 30% is a stretch. And when you think about it, you almost need to take the entire market away from business banking, retail banking, brick-and-mortar banking, because broker represents 70% of the market. So you're effectively saying you've got a broker in an online market and every other traditional distribution channels [indiscernible]. So I can't see that happening over the short, medium and even on a new long term. That said, it is a growing market. Customers today are more comfortable and...

[Operator]

Ladies and gentlemen, please stand by while we reconnect the speakers. Okay. Do we have the speakers back on the line?

[Scott McWilliam, executive]

Yes, yes, we do. We're not sure where we got kicked off the call, but I was probably halfway through a question from Richard. I'm not sure [indiscernible]. Did I answer your question?

[Richard Wiles, analyst]

Well, the last bit I heard was that it's a growing market and customers are getting more comfortable with the direct channel. I'm not much sure how much you've said after that.

[Scott McWilliam, executive]

Yes. No, I think just saying after that, we realized we were just kicked out of the call. Yes, it is a growing market. I don't see it going back to [indiscernible] growing [indiscernible] taking market share from traditional with some more type distribution. I think customers will become more and more comfortable with it. I think it's really up to the lenders that play in that space to make sure they're offering the experience that someone that wants to transact online requires for that relationship. And it is about low touch, that's something that's automated, something that's easy because it requires a little bit of upfront effort from the customer, is effectively entering into a wholesale relationship.

[Operator]

Thank you very much. There are no further questions from the phones, gentlemen. Please continue. Thank you.

[Scott McWilliam, executive]

There are no further questions, you say?

[Operator]

Yes, sir. There are no further questions from the phones.

[Scott McWilliam, executive]

Okay. So thank you, everyone. Thank you for your time. And I'll tell you, we'll be catching on later with one-on-one. But as always, if there's any specific questions you have, please feel free to reach out to Jason or myself. Enjoy the rest of the day and enjoy your weekend.

[Operator]

Thank you very much. Ladies and gentlemen, that concludes our teleconference for today. You may all disconnect. Thank you.