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Thank you for standing by, and welcome to the MyState Limited H1 FY '23 Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Brett Morgan, CEO. Please go ahead.

Thanks, Rachel, and good afternoon, everyone. Thanks for joining us to discuss MyState's results for the first half of FY '23. I'm Brett Morgan, MyState's Managing Director and CEO; and with me is Gary Dickson, our CFO. Today's investor presentation was lodged with the ASX earlier this morning and is also available on our website. I'll provide an overview for the half before Gary takes you through the financial results in detail, including our performance across lending, deposits and wealth management divisions. I'll then cover our outlook and provide a further update on our medium-term targets, which I first shared at our AGM last year. We welcome questions at the end of the presentation.

Before we turn to the slide pack, I'm pleased to say that 18 months into our 2025 growth strategy, we are on target. Our investment in marketing and distribution is delivering record levels of customer growth. Our customer base has grown in Tasmania and across the eastern seaboard states of Victoria, New South Wales and Queensland, and we are taking market share across our key portfolios of home lending and savings.

Over the past 18 months, our home loan book has grown 39% to $7.6 billion, with nearly 2/3 of our home loan customers now from outside of our home state. But before I go further into the numbers, it's important to understand the reason for our performance. And that's our people and our purpose.

Turning to Slide 4. Last year, our team told us that our purpose wasn't resonating. We knew something had to change. So we asked our team to work together to develop a new purpose. Our purpose, developed by our team, was launched internally in December, and it is, we're a Tasmanian based financial services company with big ambitions. We make managing your money easy to help you achieve what matters most. We invest in our people and communities, so together we can thrive. We are together for the better. And whilst our new purpose was only launched a couple of months ago, it's already helped guide a number of our decisions. We believe embedding our purpose into our business every day will deliver real benefits to our staff, customers and investors.

Turning to Slide 5. MyState provides retail banking, trustee and funds management products and services to more than 170,000 Australians through its 2 brands, MyState Bank and TPT Wealth. Our award-winning products and services are used by customers across all life stages from the first transaction account to savings or investing, buying a home, borrowing for commercial purposes, right through to estate planning and administering trusts.

Turning to Slide 6. Now to the numbers. As you can see, MyState performed strongly across key metrics. We've delivered a record net profit after tax of $20.1 million, up 20.7%. We've delivered strong above-system growth in deposits and the second fastest-growing home loan book in Australian banking. Home Lending was up 10.5% or 4.3x system growth. Deposits were up 13.5% to $6.3 billion. We grew household deposits at 2.6x system. Our return on equity has increased to 9.2%, up 113 basis points. We achieved this more efficiently with a sharply lower cost-to-income ratio, which is reduced by 558 basis points to 63.2%, and we saw a strong uplift in new customers with 14,500 new-to-bank customers, a 54% increase on the previous corresponding period. All of this with one of the best Net Promoter Scores in the industry at plus 46. These results demonstrate that our 2025 growth strategy is working.

Turning to Slide 7. An important aspect of our strategy is growing our market share, both here in Tasmania and also across the eastern seaboard. And as you can see, we've had significant gains in every state along the eastern seaboard, with Victoria leading the pack on every measure, home loans, deposits and new customer growth. Melbourne has been a key market for us and is a key market for us. and we have made a considerate investment into that market. When coupled with our competitive products and award-winning service, it's really boosted our market share.

Gary will now take you through the financials in detail.

Thanks, Brett, and good afternoon, everyone.

Slide 9 contains a snapshot of the key financial metrics of the business. And as you can see, the results for the first half are very positive. Core earnings of $30.3 million were up 36.7%, while net profit after tax jumped 20.7%, as Brett mentioned, the highest half year profit on record for the group. With strong top line revenue growth of 16%, outstripping cost growth of 6.6%, the cost-to-income ratio fell sharply by 558 basis points. Our investment in marketing and distribution is now clearly driving MyState's growth momentum and improving our operating leverage.

In terms of MyState's balance sheet, total capital and return on equity or ROAE moved positively during the half. At 9.2%, ROAE compares favorably to our regional bank peers and is on track to meet our target of cumulative growth of 30% over the 3 financial years to 2025. The Board has declared an interim dividend of $0.115 per share, which is in line with the 2022 final dividend and equivalent to a payout ratio of 62.5% of after-tax earnings. This decision is in line with our current dividend guidance range and strikes the right balance between pursuing growth, while continuing to deliver shareholder returns via dividends.

Slide 10 shows the key drivers of our highest half year net profit after tax result on record. Net interest income increased 21.3%, primarily due to a larger average balance sheet. Other banking income declined 7.1%, reflecting lower loan fee income with higher switching fees seen in the prior period as customers took advantage of lower fixed rate loans. The small decline in wealth management income was driven by lower management fees, partly offset by higher trustee services income. Operating costs increased 6.6%, which I'll cover in more detail in a moment. The prior period benefited from a revaluation gain on a property held in Rockhampton, which was subsequently sold in early 2022, and a write back of the collective loan loss provision from COVID high levels.

Slide 11 shows that total operating expenses increased 6.6%, driven by higher personnel costs and other expenses that were primarily volume related. Personnel costs were higher due to salary increases and a small increase in FTE, the latter reflecting the full period impact of the investment in growth-related roles, which commenced in FY '22. The small uplift in marketing spend has been directed to customer acquisition-focused activity, which has seen a 54% increase in new-to-bank customers, approximately 3/4 of which have come from the eastern seaboard. The uplift in other expenses was primarily volume driven and includes lending-related costs such as interest rate change notifications and payment system costs following the growth in customer deposits.

Turning to MyState Bank specifically on Slide 13. Relative to the second half of FY '22, NIM improved 14 basis points, reflecting the positive leverage to a rising rate environment, partly offset by competitive pricing pressure. Exit NIM in December '22 was below average NIM for the half. While we expect NIM will remain under pressure, the dynamic of funding costs running significantly ahead of the ability to reprice assets is expected to moderate moving forward, and we will continue to carefully manage activity to optimize growth and returns.

Turning to Slide 14. MyState recorded strong home loan book growth of 10.5% or over 4.3x system growth. The home loan portfolio has now grown 39% since June 2021 to $7.6 billion. There was a record $1.6 billion of settlements in the half, testament to the strength of our relationships with key brokers and our strong customer service, with competitive home loan approval times reflecting the investment we have made in underwriting capacity. While runoff remains a sector-wide challenge, both discharge activity and paydown levels were lower with the overall runoff rate decreasing from 35% to 28% in the current half.

Cash back incentives for refinances remain a feature of the market. RBA system housing growth began to moderate in the later months of 2022 and MyState experienced a resulting slowdown in home loan application flow towards the end of the calendar year. Looking forward, we are targeting to grow the home loan book at a multiple of at least 2x system.

Turning to Slide 15. Maintaining high credit quality remains a key focus and underpins our balance sheet strength. Our focus is on low-risk owner-occupied lending. Loans with an LVR of less than 80% make up 76% of the total book, and the growth in 90% plus LVR loans over the past 3 years is primarily attributable to our ongoing support of the federal government backed first time loan deposit scheme. Scheme loans now comprise approximately 16% of the book and account for 82% of loans with an LVR greater than 90%. The charts on the right show a small uptick in 30-plus and 90-plus day arrears, but these continue to be below industry benchmarks.

On Slide 16, the chart on the top right highlights that the total collective provision has increased consistent with the modest increase in the level of arrears and the rising interest rate environment. At 31 December, the key assumptions used to determine the forward-looking economic overlay were revised to incorporate the latest observed economic data, including a higher official cash rate, stable levels of employment, and house price falls across both FY '23 and FY '24. The probability of a moderate recession scenario was increased from 30% at June to 40% at December.

Key assumptions in the relevant scenario weightings are set out in the appendix on Slide 33. While arrears levels remain low, the flow-on effect of increases in the cash rate and any future increases are expected to become more visible over the coming months. On that basis and in line with our stated assumptions, the forward-looking economic overlay was increased. Provision coverage ratios are shown in the chart bottom left, and ratios are consistent with pre-COVID levels in June 2019.

Slide 17 shows that customer deposits continue to represent 73% of our funding mix with the flagship Bonus Saver account growing strongly during the half and customers continuing to move to term deposits in response to the rising rate environment. In line with our retail deposit-led growth strategy, MyState is growing at a multiple of system, and our aim is to be fair to both borrowers and savers. And as an example, we've increased the rates on our Bonus Saver account by the same amount as the change in the official cash rate. The issue of senior unsecured medium-term notes in October brought further tenor to the pool of wholesale funding. And finally, in December, MyState issued its first public RMBS transaction since 2019.

Turning to the next slide, Slide 18. MyState's total capital ratio increased by 173 basis points, reflecting organic capital generation via retained earnings, the inaugural issue of additional Tier 1 capital in August 2022, and the capital relief term RMBS transaction completed in December, partly offset by growth in risk-weighted assets and capitalized origination costs.

Slide 19 presents a capital walk based on the December 2022 capital position to show on a pro forma basis MyState's capital position under APRA's revised capital management framework, which was effective from the 1st of January. The bank expects the total capital ratio to increase by approximately 130 basis points following the application of the new credit risk weights under the revised framework and the new methodology to calculate the allowance for operational risk. The countercyclical capital buffer increased by 1% on the same date.

Moving to Wealth Management on Slide 21. TPT Wealth continues to deliver a stable source of operating income to the group. Operating income was steady on the prior period, driven by an increase in trustee services-related revenue, offset by lower fund management fee income.

Finally, on Slide 22, the pie charts show the current and target allocation to direct mortgages across our 3 income funds. The current allocation of 44% provides significant opportunity for the locally based commercial lending team to drive a strong loan origination pipeline in the short to medium term. The uplift in direct lending and rising interest rates have been the key drivers of increased returns for investors. Higher investor returns lead to an improved competitive position in the market and will help drive FUM acquisition moving forward.

I'll now hand you back to Brett to talk about our outlook.

Thanks, Gary. I'll now take you through our strategy and outlook. MyState is well placed to continue to benefit from the willingness of Australians to switch banks. As you've heard, execution of our 2025 growth strategy has delivered increased market share with significant gains in Tasmania and every state along the Australian seaboard, including Victoria, New South Wales and Queensland. Executing our focused strategy sets us in good stead to deliver on our targets.

On Slide 24, at MyState, our ESG focus is on the 6 key areas outlined on the slide. I'm pleased to say that during the last 6 months, we've made some good progress, including the release of our first TCFD reporting. We've also commenced the process of measuring our Scope 3 financed emissions to understand our total greenhouse gas emissions footprint. We have supported flood impacted customers in New South Wales and Queensland, and have been investing further into scan detection and sharing steps with customers on protecting themselves from scams. We know that progress on ESG is a journey, and we are proud to be taking steps to positively impact our customers and the wider stakeholder groups with whom we work.

Turning to Slide 25. At our AGM last year, I outlined 5 targets. And as you can see from the slide, we're tracking well against them. On bank lending, our growth is 4.3x system, well above our target of more than 2x system growth. On funding composition, our customer deposits were 73%, again, well above our target of more than 65%. On earnings per share, we're up 8.3% over the 5-year average and on track for our target of 30% cumulative growth over 3 years.

Looking at operating efficiency, we're meeting the short-term target cost-to-income ratio of 63%. We delivered a return on equity of 9.2% annualized, and we are on track to deliver a cumulative return of 30% over 3 years.

Turning to the next slide. And to wrap it up, MyState has had a strong first half. We posted a record profit. Revenue was up 16% and costs to 6.6%, and we've delivered above system growth in deposits and home lending. Our market share has grown significantly with increases across Victoria, New South Wales, Queensland and Tasmania.

Looking back, you can see that our 2025 growth strategy is working. When we look ahead, our growth strategy gives us a very clear pathway to deliver the benefits that come with continuing to scale our business.

Gary and I will now answer any questions you may have. Over to you, Rachel.

[Operator Instructions] Your first question comes from Nathan Zaia with Morningstar.

I just had a couple of questions. The first one was on NIM. Down in the second quarter and you're saying it's down again. We'll be exiting NIM down again on the first half average. Can you just walk through some of the key drivers behind that trajectory over the half?

Yes, sure. Thanks, Nathan. So I mean, I think what's happening with our NIM sort of reflects the fact that we are a small player, and we need to be competitive on both sides of the balance sheet, both from a home lending perspective and obviously, growing the home loan book at a multiple of system. We're looking to fund the majority of that book growth through retail deposits. So as I mentioned, one of the things we have done is we have passed on the increases in the cash rate to our savings based customers in a more timely fashion than what others may have.

Obviously, in the sort of second half of last calendar year, we did see a widening in wholesale credit margins, largely in response to the macroeconomic uncertainty and the narrative around rising inflation, of course, the geopolitical risk as well. We did also see, as you can see in one of the slides, customers move into TDs, which have been offering higher rates. So in some respects, we've seen our funding costs on that side run ahead of our ability to reprice assets. But I think from our perspective, the key is that we're continuing to grow net interest income. And obviously, that has a flow-on effect to the increases that you've seen in ROAE and EPS.

Okay. The targeting 2x system still, as long as you're comfortable with the total net interest income growth, then not as worried about what it does to margins?

Look, we're constantly...

Is that sort of the way to think about it?

Yes. I mean we're constantly sort of managing that volume margin trade-off. And as we look forward, there's clearly lots of moving parts in the way that will impact NIMs. Hard to estimate with a high degree of sort of precision. But certainly, there's obviously the future potential increases in the cash rate. We will see some tailwind from fixed rate borrowers moving to variable rate loans. Wholesale funding markets this calendar year have certainly improved relative to the second half of last year. And what I can say is NIM was pretty much flat in the month of January.

Okay. And just the only other question I had, I think you have more of your fixed loan customers rolling off later just given the timing of your loan growth. But of the fixed loans that haven't matured so far, can you comment on what sort of percentage have you stuck with still MyState customers?

Yes, sure. So we've got the fixed-rate maturity schedule on Slide 34. So what we've seen to date is effectively 80% of our customers are staying with us. Of those that stay with us, around 5% are refixing and 95% are moving to variable rate.

Yes. Just to add to that, Nathan, -- it's Brett here. We're incredibly conscious of customers that went in at 2%, got a great deal and are coming out at 5%. So we've got a program in place where we're calling every customer well before the rate expires, talking through the options and holding their hand through the process. So we've actually invested a little bit of the best capability and resources into the maturing fixed rate book and the customers and really making sure they have a good experience through that. And we think that's a key component of both retaining and making sure they get a good experience on the way through.

Okay. And can I just follow up on that as well. I'm assuming it's a small number, but do you have any sense of how many customers, that are rolling out of their fixed, would fail current serviceability test?

So when these loans were written, they were written -- they were assessed at the base of the current rate. So we assess them with the prevailing rate with a 3% buffer back in the day. And a lot has moved in their life. So cost of living is up, but also incomes are broadly up and there's all sorts of things moving. So they wouldn't fail based on their -- when we assess them originally. Now we'd be reassessing with another 3% buffer. So we haven't -- given the somewhat complexity, the full reassessment you need to do to assess it. But when we talk with customers, any customer who's having challenges, we just talk through with them how we can support them on the way through like any customer.

But in the most part, I mean, the other thing I can share is that all those customers that have gone from fixed so far and matured, the arrears rates are definitely no higher than the portfolio. So they're performing. So a lot of customers that went on to those fixed rates roll, so they just got a great deal like...

[Operator Instructions] The next question comes from Alastair Hunter with Ord Minnett.

Can I just ask in regards to your 2025 sort of growth strategy. Obviously, when that was set, the macro environment and interest rate credit growth outlooks were quite different. In terms of how you're sort of looking forward from today and what sort of setting adjustments in terms of how you're positioning the business have changed from what you were looking at a year ago to now?

Yes. So when we set the strategy right, I mean, the market was going a bit faster and the world was a touch rosy. What you'll see on Slide 14 -- there's a couple of things I'll point. On Slide 14, you'll see that the market slowed and we've slowed down a little bit too. So we're definitely not chasing high levels of growth for growth's sake, and we've shared some targeting at the AGM around that. So our aspiration is definitely grow at double market for ourselves. So we continue to get the leverage and the benefit of operating scale. The key for us is to scale up and get that real benefit, which you've seen through the positive jaws for the last 6 months to continue to scale our business given our fixed cost base.

So firstly, you'll see that our growth rate has come off a bit as the market has slowed. We've made some adjustments to credit policy and tightened a little bit. We never loosened credit policy at all to support the growth. We invested in marketing and distribution. But we have looked at our credit policies and made a couple of adjustments on the tightening side given the macro environment. So our target is more than 2x system. We have been running at more than 4x system. But as I said, we're comfortable in the business that we can run at 2x and deliver the value.

And if I use your sort of 30% ROAE cumulative 3 years and sort of like 10% ROAE as sort of the ambition per annum, in terms of where the sort of front book margins are contracting to within the housing book, and noting you're obviously targeting that lower LVR area that from the 1st of January has had some reduced capital needs for this competitor base. Are you comfortable that 10% ROAE on a new sub 80% LVR mortgage is achievable or the sort of volumes that you've been generating over the last few halves?

Yes. I mean, margins go up and down over time. It's the first point. It's about funding mix and all those sorts of things. I think the other part of our business is we've got the retail banking piece with MyState Bank. We've also got TPT Wealth, which we've got a funds business and the trustee business. So as we scale that side of the business that delivers strong ROAE as well. So it's balancing between the 2. We're conscious of the current returns, I guess, on mortgages. And we don't stand ourselves out to be #1, 2 or 3 on pricing either. So we're not chasing volume for volume. So we're conscious right at the moment. At this moment, the returns are a bit below. But of course, that changes over time as the market moves. We've seen that over the long term.

And I think the only other thing I'd add, Alastair, is there's the margin component, obviously, to what's driving ROAE, but then there's also the operating leverage component, and that's where we see the real sort of opportunities such as that ability to effectively drive the volume using the same sort of level of core infrastructure and core cost base.

Yes. It makes sense. And then one final question just on capital levels with the pro forma numbers for January, the 11.15 CET1. Is that a level that you can talk to in terms of what the Board has sort of approved as your sort of target range on the new adjusted basis?

Yes. I mean, I think the sort of target range would be sort of around the 11 to 11.50. I mean, I'd probably make a couple of observations. From a capital perspective, we are generating more of our capital needs organically. Obviously, the dividend has been set at the sort of lower end of the payout range. So we're trying to strike that balance between providing returns to shareholders via dividends and then also reinvesting in the business and getting share price appreciation. And we've got quite a bit of flexibility from a capital perspective through the sort of capital release securitization program that we run.

[Operator Instructions] There are no further questions at this time. I'll now hand back to Brett for closing remarks.

Thanks, Rachel, and thanks to everyone for joining the call today, and we look forward to catching up with some of you over the next month. Thanks a lot. Cheers.