Humm Group Limited

Good day and thank you for standing by. Welcome to HUM Group H123 results conference call. At this time, all participants are on the listen-only mode. After the speaker presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. To ask your question or comment on the web, please type your question in the box located on the left-hand side of the screen. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker, Rebecca James, Chief Executive Officer. Please go ahead.

Good morning. Thank you for joining us for our half-year 23 results presentation. My name is Rebecca James, CEO of Hum Group, and I'm joined today by our CFO, Adrian Fiske. Today's results are an outcome of initiatives taken over the course of the past 12 months to align with our core offering in bigger ticket items and ensure that we're in the strongest position to continue to grow our business in a profitable and competitive manner. During the period, we've grown our receivables book by over 27% to $3.8 billion in the half, with the overwhelming majority of it in what we would call financing bigger ticket items for small to medium businesses and consumers. Less than 2% of our business finances small items in the buy now, pay later sector. We provide an average loan of 4,500 in our consumer finance business and an average loan value of 100,000 in our commercial business. We've continued to invest and enhance our superior credit decision engine, which has delivered net loss to ANR of 1.95% in the first half 23. a 90 basis point improvement on PCP. In the current environment, we're acutely aware of the need to manage our costs, and we've already removed more than $14.9 million, including a reduction in marketing, payroll, and other operating costs. Our balance sheet position is strong and remains one of our key differentiators in the market, with $103 million of unrestricted cash, $1.1 billion in warehouse headrooms, $100 million in undrawn debt, and a well-diversified and sophisticated funding platform. This half, we've introduced our new measure of normalised cash profit after tax. We believe this metric more closely represents cash performance and eliminates volatility for non-cash items, particularly depreciation and AASB9 provisions, given the material receivables growth that is occurring in the business. For consistency and transparency, we'll be including both normalised cash profit after tax and our previous metric cash net profit after tax in this result and also at the full year. Normalised cash profit after tax was $38.5 million with cash end part of $16.7 million. I'll provide a detailed walkthrough of this performance shortly. And finally, we've proposed a fully franked interim dividend of $0.01 for the half. On slide four, you'll see the profile of our two businesses. Our vision is to be the favoured way to pay for bigger purchases. It's a vision that speaks to both our future and our heritage, spans our entire suite of products and capitalises on our strengths in funding and securitisation. We often get asked how our two businesses fit together and on this slide, you can see the characteristics of each business. While the end customer distribution and purchase average transaction value differ, the core expertise of the business, what sits within its DNA in credit decisioning and management, along with funding and securitisation, are leveraged to serve both businesses. It is that capability which enables us to deliver an exceptional customer experience in the areas of speed to yes, a priority for our merchant and broker partners, and speed to sale and settlements. On slide five, you'll see that in FY23, the company made significant progress in executing its strategy to streamline operations and reduce costs while improving profitability and growth in key areas. As we committed to at our FY22 results, non-core small ticket products, Hum New Zealand and Hum Pro Australia in New Zealand have closed. All receivables will have run off enabling for systems to be switched off and costs removed by 30 June 2023. We have also delivered substantially on our cost-out initiatives and removed $14.9 million of costs half-on-half and are on track to deliver $20 million to $25 million of annualised cost savings going forward. Unprecedented material central bank tightening drove a rapid increase in funding costs of between 300 and 400 basis points, depending on geography. To mitigate against this, the company has executed several pricing initiatives. In our commercial business, while there was slight margin compression in the first quarter, the front book net interest margin is now at a higher level than the prior 12-month period, an even stronger result when combined with volume of $744.8 million, up 72% on PCP. Consumer repricing initiatives also commenced with a series of increases to merchant services fees, annual and monthly account keeping fees and interest rates. Front book MSF yield in Hum Big Things now sits 80 basis points higher than the back book and the company expects further yield improvement in the second half. Turning to slide six and you can see our normalised cash profit after tax to cash NPAT walk. Given the impacts of credit provisions, depreciation and costs associated with suspended products, we believe this removes volatility and is a more accurate reflection of the cash profitability of the business. Normalised cash profit represents statutory net profit after tax adjusted for material infrequent items such as legal provisions, one-off transaction costs, restructure and redundancy costs, items which were previously included in cash impact. Non-cash items such as depreciation and AASB 9 provisions and operating losses as suspended products notified to the market, Humpro, Bundle New Zealand, Hum New Zealand and Hum UK, including related retreat costs with these products ceasing to impact the business from 30 June. Normalised cash profit after tax of $38.5 million was 2% up on PCP, which reflects growth in HUM Group's core businesses within commercial, HUM AU Big Things and the Australian and New Zealand cards business. I'd now like to discuss the strong performance of our commercial business in the first half. The landscape of small and medium enterprise lending is rapidly changing. For the first time, non-bank lenders have overtaken banks in providing SME loans. With a total addressable market of $45 billion in Australia and $8 billion in New Zealand and an increasing preference to access finance via brokers, we are well-placed to continue our strong growth trajectory. Our focus is on delivering exceptional service to brokers who are our sole channel. As a specialist SME lender, We specialise in asset finance for capital-intensive businesses and we see opportunities to broaden our industry and product offerings. Finally, we offer an exceptional SME experience with 24-hour approval and same-day settlement. Our full spectrum of lending, from low documentation to full credit assessment, allows us to meet the varied needs of our clients, focusing on underserviced areas of the market. Flexi Commercial is the leading provider of specialist asset finance in the market with over 1.94 billion in receivables. Our business primarily offers equipment finance to growing small and medium sized enterprises which help them to fund the purchase of revenue generating assets. Our top three assets being transport, construction and light commercial vehicles. Our market leading service is how we've stood out in the broker channel and has been underpinned by an investment in technology which allows us to drive efficient decisions and differentiates us from traditional lenders. 80% of deals are decision on the same day, up from 45% just six months ago, and 39% of approved deals are automated, making us quicker, nimbler, and easier to work with than those traditional lenders. The commercial business has continued to see excellent momentum. As you can see on slide 10, quarterly volumes have grown rapidly since the third quarter 20, with first half 23 volume at $744.8 million, up 72% on PCP. Normalised cash profit after tax is up 12% on the previous corresponding period to $19.3 million. We have seen net interest margin improvement in the second quarter of 2023. While we experienced slight margin compression in the first quarter due to the unprecedented increase in funding costs, the benefits of our repricing initiatives executed in the second quarter are now flowing through. Our front book NIM is now higher than the prior 12-month period, which is an excellent result, and we will remain disciplined on a go-forward basis to protect this position. Our commercial business benefits from board-based sector exposure with industries, priorities and logistics, civil engineering and agriculture. We prioritise assets that have strong retained value and strong demand on the resale market, ensuring low concentration risks. Our average ticket size is 100,000, providing a diverse portfolio that can withstand fluctuations in individual sectors. I'd like to just touch on our strong credit performance and the strategies that we've implemented to achieve it. Our credit performances remain consistently strong. The 30 plus days past due has consistently declined thanks to our improved underwriting, better collections capabilities and improved systems. The benefits of this investment can be seen in the delinquency chart on the bottom of the page with only 0.5% of accounts becoming 30 plus days past due. We've also achieved volume growth while maintaining credit quality. Our net loss to A&R of 0.5% has improved 10 basis points on PCP. This is a testament to our discipline's underwriting standards and our commitment to maintaining a high-quality portfolio. On slide 12, you'll see our broker-led strategy is gaining significant momentum in New Zealand, with volumes up 173% on PCP. We have accelerated the adoption of the broker-led equipment finance model while also maintaining our existing profitable channels. This has allowed us to expand our market reach while continuing to generate strong returns from our existing business lines. We've taken a page out of the Australian playbook and we've made refinements to suit the local market. We are confident that this approach will allow us to replicate the success of the Australian model in New Zealand. We're currently transitioning from a lower yielding government leasing business to equipment finance. While there's been a slight uptick in losses, we are still maintaining historical lows. We anticipate that our long-run credit performance in equipment finance will be similar to that of our successful Australian business. I'd now like to talk about the performance of our consumer finance business for the half. I'd like to start by discussing some of the key dynamics at play currently in the consumer finance sector. Firstly, as the market definition of buy now, pay later is attributed almost solely to small ticket pay and for financing, which is less than 1.2% of total receivables, we've rebranded this segment to point of sale payment plans to more accurately reflect our products and services. The turbulence experienced by unprofitable players should not distract from the fact that this form of finance is preferred by both merchants and customers. After a period of intense competition, which has impacted back book yield, the playing field is starting to level, with competitors who relied on unsustainable merchant pricing, often below the cost of capital, struggling in this new environment. Hum will be the beneficiary. Selecting merchants from the fallout will align with our bigger ticket strategy. This is evidenced by the growth in distribution over the last two months, adding over 600 new points of presence and front book yield that is now 80 basis points higher than the back book. The sector is also awaiting the Treasury's review into Buy Now, Pay Later. HUM Group overall supports the intent of the options paper in increasing consumer protection. HUM Group supports bringing BNPL within the application of the National Credit Code to require BNPL providers to comply with responsible lending requirements, which are calibrated to the level of risk of Buy Now, Pay Later products and services. often referred to as option two. Regardless of the outcome of the review, Hum Group provides finance in both regulated and unregulated segments, and we are well-placed to adapt and have appropriate systems already in place. On slide 15, you can see the makeup of our consumer finance business. New Zealand Cards, Hum90, which is our Australian Cards product, and Hum Big Things are all point-of-sale installment products enabling purchases of goods or services with a current average ticket size of 4,500. Each of these products are profitable with room for growth. New Zealand cards volume of 381.1 million grew on PCP by 6%, with customer spending habits normalising after the pandemic. In the first quarter 23, we saw a reduction in our receivables, driven by accelerated paydowns, which is consistent with the market and has been driven by surplus savings, as demonstrated by the graph on the right of this slide. However, we are encouraged to see that growth in receivables has recommenced in the second quarter. Normalised cash profit after tax was down by 26% to $12.5 million. and this was a result of lower gross income due to the accelerated paydowns and interest-bearing balances across the market that I just mentioned. Looking to the second half, our back-book repricing initiatives executed in the first half will flow through and help improve our profitability in the second half of the year. On slide 17, you'll see volume growth in our Australian cards portfolio of 19% on PCPs, And that indicates that our customers' spending behaviours are beginning to normalise following the pandemic, but are still below pre-COVID-19 levels. AU Cards receivables are growing in line with our increased volume growth. However, due to the long-term interest-free period associated with these products, income from interest-bearing balances from our long-term interest-free volume will be realised in future periods. AU card's normalised cash profit of $2.7 million was a result of lower operating income from lower interest-bearing balances and marginally higher funding costs, offset by reduced operating costs in response to the prevailing market conditions. Looking to the second half, strong volume growth in long-term interest rate travel in the first half of 2023 will translate into income in future periods, typically 12 months from our origination. Point of sale payment plan segment volumes of $604.6 million was down 7% on PCP. This was driven by a return to growth in big ticket core volumes, which were up $22 million, and reflects the runoff of decommissioned predominantly small ticket products, accounting for $67 million in reduced volume. HUM AU Big Things normalised cash profit after tax of $8.2 million was offset by AU Little Things and Net of Offshore. In the second half, we expect increased diversification and improved pricing with a renewed focus on growth as the competitive dynamic maturely changes. In relation to offshore operations, and as announced at the AGM, Hum Group has ceased promotion and business development activity in England, instead focusing on growing the successful Irish business and has maintained the credit licence to service merchants in Northern Ireland. This focus has seen volumes in the Irish business grow by 15% on PCP. In Canada, the business has come to commercial terms with more than 1,250 locations across veterinary, dental, auto, hardware and home, plus an additional 2,600 contractors within the home improvement industry. Speed to scale has been a focus and software integration providing with access to an additional 6,500 dental practices and 2,000 veterinary clinics. The current market environment will see increased market share with higher yields as a result of targeted merchant onboarding. I'd now like to hand over to Adrian who will walk us through the financials.

Thanks Bec and good morning. I'm here today to discuss the financial performance of Hum Group for the half year ended 31 December 22. As Bec has mentioned, we have updated how we communicate our results to better We have adopted a new measure, normalised cash profit after tax. Normalised cash profit removes material infrequent items that have been previously captured as part of our cash end pad measure. It also excludes non-cash items such as AASB 9 provisions which are required by accounting standards to be booked as we grow receivables. We note that actual losses and recoveries are still included in the normalised cash profit measure. Other non-cash items such as depreciation are also removed. This line moves significantly between the period as we impaired assets this time last year, lowering depreciation in the current period. Further, we've excluded cash and PAP losses in our suspended products, which we expect to be wound down by 30 June this year. We consider that normalised cash profit represents the best measure of our ongoing earnings for the home group as we navigate this transition phase. For example, SSB9 provisions were a tailwind in the prior period as COVID macro provisions were released, and they are a headwind in this period as we grow our commercial and consume book. For consistency and transparency, we'll be including the normalised cash profit measures, cash NPAT, and the component parts for this half and the full year results. On slide 21, we've shown a normalised cash profit after tax of $38.5 million for the period ended 31 December 22, which is up from $37.9 million in the prior comparative period. Gross income was up 10% to $243.7 million, reflecting growth in receivables across the commercial and consumer businesses. Net income is down over the period by $15.1 million, reflecting a squeeze in margin attached to rising cost of funds, and I will cover this in detail on an upcoming slide. A credit impairment comprises net loss and provision movements. There has been a $6.3 million improvement in net losses on the prior period, which has been offset by a $21.9 million provision swing between the periods. The prior period has $16.8 million in provisional releases, and this year we increased provisions by $5.1 million, largely resulting from growth in the receivables book. From a cost perspective, we are pleased with the reductions across marketing, people, and other operating costs, offset by certain costs during the period, which I'll also discuss. This leads to a cash NPAT using the prior measure of which is a reduction in the prior period as a result of the reversal of the AAS9 provisions of $14.6 million, offset by the benefit that we received from lower depreciation. Our tax expense was $5.2 million with an effective tax rate of 22%, and this is lower mainly due to the recognition of offshore losses and our perpetual loan interest. Finally, on dividends, consistent with our strategy day last year, the directors have determined that HUM will continue to pay dividends and set out a fully franked dividend of $0.01, which equates to $5 million. We consider that it's important to strike a balance between dividends for investors and investing in growth. The amount is consistent with our previous guidance of 30% to 40% of cash impact. We will transition this measure to normalised cash profit following our discussions with our board in April, and we will update the market at our full year results. Consistent with the prior period, investors will be able to utilise HUM Group's dividend reinvestment plan. On slide 22, the HUM Group executive team have made good progress on our cash out initiatives and remain committed to our target of $15 to $20 million as we transform the cost base of this business through modernising our legacy products and technology platforms. Putting aside the reductions in depreciation attached to impairments taken this time last year, we have delivered a $14.9 million in savings. From reductions in marketing that were focused on our small ticket suspended products, little things along with our UK business. We have lowered our people cost and reduced our headcount by 126 in Australia and New Zealand over the last 12 months. In addition, we have moved our call centres from Adelaide and Auckland to Manila. We have also managed cost increases during the period, which have included our investment in offshore, which will reduce in the second half due to our decision in November 22 to retreat from UK into Ireland. There are a couple of additional costs associated with the failed transaction with LFS. And we have also calculated the notional cost associated with inflation and payroll on payroll and non-payroll. This slide sets out our cost to income ratio for the commercial business, the consumer business, and the consumer business, excluding costs associated with suspended products. As I said, we are proud of what the commercial team have achieved with our sub 40% cost to income ratio. And we consider that this business has achieved operational leverage, which will enable us to grow without commensurate increases in costs. We are also implementing further technology enhancements across Australia and New Zealand to enhance our speed of decision and speed DS, along with operational back office improvements. In the consumer business, we are targeting a 50% cost-to-income ratio and note that despite good progress in cost removal, this ratio has been affected by reductions in net operating income, resulting from higher costs of funds and a squeeze in margin. If we eliminate the cost of fund increases, our pro forma CTI measure would be 53.5%. We continue to focus on a number of initiatives, including simplification of products, technology-enabled transformation, particularly in our call centres and back office functions, platform cost reduction by migrating to the cloud, noting that we're experiencing higher uptakes as we migrate our point-of-sale payment platform to the global Salesforce Q2 platform. We recommit to our in-year cost savings of $15 to $20 million and annual cost savings of $20 to $25 million. Further, we are on track to meet our CapEx budget, disclosed as a full year of $18 million. On credit risk management on slide 24, our credit performance demonstrates the strength of our credit team and their long history of credit decisioning. We make this statement with our hubris as we are conscious that we are living in uncertain times. and we are keenly focused on early credit indicators. PUM Group has made investments in systems and in processes that have delivered over recent years and include a forward platform with digital identity, fingerprints, biometrics, automatic verification and authentication tools. We have comprehensive credit reporting, bank statements online for income verification, enhanced decisioning tools and credit scoring. We have machine learning models and improved our collections capability. These have directly contributed to lower losses, and further, we have been successful with our collection strategy and debt sale programs over the last 12 months, which have seen a material improvement in recoveries. The net loss to ANR for the group is 1.95%, which is a 90 basis point improvement on the prior comparative period. BigThings net loss to A&R is flat at 2.5%, and this has been stable for many periods, representing our long history in this market and focus on verticals such as solar, home improvement, auto, and medical. LittleThings net loss to A&R has fallen to 2.7% as a result of closure of suspended products and reduction in volumes from LittleThings merchants. AU and NZ cards have improved over the period, and we are particularly focused on the NZ economy and impacts on more targeted interest rate measures. Commercial continues to demonstrate low losses, showing resilience in the SME sector and recoveries from a strong second-hand market. I note that this ratio is also benefiting from higher growth and a larger denominator, and we anticipate it will normalise over time. On slide 25, we've included this table, we included this table at the first time at our four-year results to provide investors with transparency of the movement in net loss, 00B9 macro provision releases, and 00B9 provision movements per product. It highlights the point I made at the start of my presentation that net losses have improved significantly period on period, which benefited from reversals in macro provisions, taken during COVID and reductions in provisions from improvement in those items that I outlined on the previous slide. While we have not seen any deterioration in losses or arrears, we have increased the macro provision in New Zealand slightly as we watch the unemployment metrics. We continue to maintain conservative credit provision settings with credit provision coverage being 3.9% in consumer, 2.2% in commercial. While we are confident in our credit processes, we recognise that we are experiencing historical low credit losses and the market is uncertain as we navigate through stimulus being removed from the economy, rising household costs and fixed rate mortgages rolling into variable. We also historically see seasonal increases in losses from Christmas period and we are focused on the wind down of our suspended products. On slide 26, The Treasury team have worked very well alongside our banking partners to execute a funding plan that positions Hum Group to continue to grow the business prudently. In recent years, we've been focusing on improving the capital efficiency of our balance sheet. We've introduced mezzanine in our facilities, which has had the effect of reducing capital employed in a warehouse from, say, 20% to 8%. And this has freed up capital that has allowed us to continue to fund our growth. In challenging markets, we've executed well in the last half. Two commercial facilities, two commercial MES facilities to ensure that we continue to invest in that business and drive growth. We've executed a $250 million commercial, a 210 point of sale payment plan term deal when some businesses were struggling to get deals away. We also have a $150 million gross facility that has replaced our syndicated debt facility which has enabled us to invest in the growth of our business, particularly the commercial business. This facility is more fit for purpose for the business providing growth capital. We finished the year with 102.8 million in unrestricted cash and 50 million drawn on the growth facility. The cash usage during this period predominantly relates to investment in the capital to support the growth of the commercial and consumer businesses. On slide 27, The last 12 months have seen unprecedented increases in the cost of funds. The swap rates have moved ahead of the RBA and RBNZ benchmark rate increases. Plum Group is disciplined on margin and focused on protecting and improving NIM with a strong hedging program in place that has sheltered us against rate increases, which see our term books hedged to around 80% and our cards business hedged to approximately 60%. We perform detailed merchant-by-merchant, broker-by-broker analysis on pricing, along with a focus on the marginal cost of funds for each receivable originated by term. Where relationships do not meet our return hurdles, we have increased pricing or exited relationships. We have moved pricing in the market across all products, and importantly, have recaptured our NIM in the commercial business that exists at the start of the calendar year 22. Repricing the consumer book is more complex as we are limited in our ability to pass on pricing movements in areas like credit cards. In BNPL, we have moved rates across all verticals, but the transmission mechanisms take more time given contractual notification periods and the time it takes for new volume to flow into receivables. For example, to install a solar panel. I note that we moved another 50 basis points in the last week. We expect the consequential NIMS squeeze to take time to flow through the books as the back book repricing is replaced by front book pricing. Further, it's worth noting the cost of fund has increased as we have secured mezzanine financing in our warehouses, which has improved the capital position and the return on equity, but results in a higher interest expense. On slide 28 with commercial, we delivered another strong half performance from the commercial team with volume at $744.8 million, which represents a 72% increase on the prior period, with receivables growing to $1.94 billion. The margin squeeze that we discussed in the previous slide impact commercial for about four months. and we are now seeing receivables originated at prices that reflect the current cost of funds observed in the early part of the year. This four-month squeeze occurs as we were unable to pass on the swap increases to brokers at the same pace of swap rates. The originations over this period will flow through the book and the P&L as back book yield and will be replaced by originations at higher rates. The normalised cash profit for this business increased by 12%, and we consider that we are well-placed to continue to responsibly grow this book with two new warehouses and a corporate growth facility. On slide 29, we committed in prior periods that we'll continue to provide the detail of our value drivers for both the commercial and the consumer business to assist our investors understand the performance of the individual businesses. In commercial AU, volume growth continues to be strong with $638.7 million originated in the past six months, taking our total receivables in AU to $1.72 billion. Product yield has improved to 9.8% and our average front book pricing for the December month was over 10.5%. Cost of funds has increased with base rate increases. as well as MEDS that was introduced in this book in the last 12 months. Net loss to A&R is at a historic loss of 0.6% for the period and benefits from a large denominator that will normalise over time. In commercial New Zealand, volume increased to 106.1 million from the strong growth that commenced in Q4 of FY22 as we established this broker business in New Zealand. Product yield is down to 10.4% due to mix in this product as we move to a similar business model as we have in Australia. With cost of funds at 5.8%, you can see the impact of RBMZ tightening in the New Zealand market, along with a higher mix of originations in the last 12 months. Net loss to A&R again continues to be strong at 0.2%, and this is enhanced by an older book of government assets. On the following slide, in consumer finance, we've seen a reduction in normalised cash profit of 7% to 19.2 million, which is largely attributed to margin compression and reductions in receivables attached to paydowns in the cards NZ business. On the following slide, in slide 31 in Home Australia, we've seen good growth in the big things business with volume of 297.4 million across solar and health. Front book product yield has benefited from yield enhancement initiatives discussed, and this has been offset by back book yield that was written in a very competitive environment, leading to a total yield of 14.2% down from 14.9%. The cost of funds increased to 3.5% is largely base rate and market changes. The normalised cash profit for Big Things was $8.2 million, which is slightly down in the prior period, but this demonstrates that this is a profitable product. Little Things has reduced in volume by $15.5 million over the period as we focus on this being a companion product for Big Things. The product yield to 9% has improved as we have increased MSF and maxed CE changes over the year. You can see that the yield benefit in big things versus little things and the relative unit economics of these products. We're pleased to say that we have lowered the cash losses for this product to $3.2 million versus $6.1 million in prior periods. On slide 32, consumer finance cards, volume and receivables have returned in Cards New Zealand with product yield improving over the periods. We note that in the first quarter, we witnessed higher paydowns, and we have now returned to growth in the second quarter. This period was also impacted by volatility in currency markets, particularly the Aussie New Zealand FX market. The normalised cash profit for the business is $12.5 million, which is down on the prior period of $14.8 million, and we are very pleased with the net loss to ANR of 3%. AU cards has grown to $266 million, with our travel partners beginning to return to growth. Yield has improved slightly, and we note that travel growth will have a delayed transition to revenue, as the products have a 9- to 12-month interest-free period. Normalised cash profit is $2.7 million, and we see opportunities to improve the scale of this business and lower costs. With that, I'd like to thank you and hand back to Bec to finalise.

Thank you. Now to Outlook, which you'll find on slide 34. Hum Group is well positioned to navigate the current economic environment with a strong balance sheet, profitable products and leading credit capabilities. We'll continue to take steps to focus on our core and align to Hum's unique market position in financing bigger ticket purchases. Hum Group anticipates that it will deliver profitable growth across all products, in FY23, with gross income increasing as volume and yield initiatives gain traction in the second half, with second half normalized cash profit after tax anticipated to be higher than the first half. With that, I'd like to conclude today's presentation and hand back to our moderator for today's Q&A session.

Thank you, ma'am. As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. To ask your question or comment on the web, please type your question in the box located on the left-hand side of the screen. Please stand by while we compile the Q&A roster. And I show we have a question from John Marin from CLSA. Please go ahead.

Hi, thank you. Can you guys hear me?

Yes, we can.

Thanks, John. Okay, good. So good morning, guys. Just forgive me if I ask any questions here that you've already detailed. I'm just jumping through quite a few different results this morning. But, you know, I'm a little bit confused by the market's reaction, to be quite honest. You know, I think as I go through your numbers, they look pretty good. and pretty close to my model. In fact, I think you came, you know, on a net profit basis, you actually came in ahead of my model. So I guess maybe I just want to understand, you know, I actually thought that name could actually be under a little more pressure given the interest rate rises. But maybe you could just help me understand what that walk looks like over the next, you know, couple half years, you know, as you reprice the portfolio and on both sides.

Yeah, thanks, John. If I start with the commercial business, so what we saw was a period of about four months where we saw a squeeze in margin as a result of swap rates increasing quicker than we passed on rates through to our brokers. And we're pleased to say that we've actually recovered the NIM from which is the result. You know, there is some of that book that will sort of flow through the book, but all new originations will be originated at that sort of NIM pricing. So, you know, we think that's a good outcome. We're also well hedged in those books. So we're hedged about the 80% level, and we have been for some time. So we'll benefit from those hedges. You can see that we've got quite a large $66 million market gain on our derivatives, which represents the value that we've left in on those slots. In relation to the consumer business, we have raised rates. We have raised rates in the card business. We've obviously limited a little bit in terms of just the size at which those rates can be in the market, and we're sort of being very cautious around that. But we have moved rates across, and we'll start to see those flowing through into the next year. Again, those books have been well hedged, and we've outlined the cost of funds in the back end of those slides, which actually has the cost of funds in them. In relation to BNPL, again, we've been moving through pricing since about June of this year. and so we've been moving both price increases and MSF increases. The transition mechanisms are a little bit more complex here because we've got contractual repricing in terms of just the timing, and also it takes time to install solar panels, for example. So they come through a bit slower, but again, we're going to see that pricing increase. The critical thing is we're actually seeing competitive dynamics, the real pressure that was on the competition abate, And so we've seen opportunities, as Bec mentioned most recently, to actually improve pricing as well. So it will still have part of this back book flowing through, I suspect, over the next 12 months, but we're originating strongly across the month.

Do you think we can get some NIM stabilization going into next year, or is there some more compression? I know the front book repricing will have an impact there, but how do we look at NIM next year?

Yeah, I think we will get some stabilisation, certainly. You know, I think we're anticipating that rates will sort of start to top out. I think the three-year rate is pretty flat at the moment and we're not seeing the three-year rate move materially and hope that it doesn't. So I think if that three-year rate stabilises, then we will have more stabilisation. The biggest impact was that sort of four-month period where we saw just such a significant increase, 200 to 300 basis points in rates.

Right. Okay. So on the commercial side, you know, pretty strong momentum there. I think I had that volume of 74% and you came in at 72. So pretty admirable. I mean, as we look at that business going forward, like, I mean, can you just give us some color around, you know, how the year-over-year growth rates look against these tough compares and maybe help me understand, like, just how much the shift towards brokers is going to drive new volumes?

Yeah, thanks, John. We're seeing very strong demand in both areas of our business, but particularly in commercial. Sentiment among small and medium businesses, it's showing to be really resilient, and the feedback that we're getting from brokers is very similar to that. And so from a second half trajectory, we're seeing very continued strong volume growth. And also as we transition our New Zealand business into this equipment finance business as well, that is driving a lot of growth for us. So, you know, from a commercial perspective, we see consistent growth going into the second half. And also in our consumer business, I think we have been pleased that despite the flow on increases from a pricing perspective, our volume has continued to grow. And that is also, I think, a testament, even though the consumer is a little bit more depressed, I would say, from a sentiment perspective, the verticals that we're in and our focus on necessities over want. So still very strong growth for us in dental, veterinary, automotive, home and home improvements. So the growth outlook for us into the second half and just what we're seeing in January and February is very strong.

Okay, great. Just a couple more before I jump. I think you mentioned there was an uptick in charge-offs in the commercial side somewhere. Can you just elaborate on that a little bit?

Yeah, I think there was like a minuscule uptick, I think, of about 10 basis points in the New Zealand commercial business. But it's still half a percent. It's less than 1%. And really that's us transitioning the business. Previously, it was a small ticket leasing business for small businesses. We had a big concentration in government. But, you know, again, historical low in that area of the business. And we're seeing it track very much in line with our Australian business.

Right. I mean, I think, I mean, obviously we're way below normal in terms of bad debts. And so, like, as we move forward through the next few periods, I mean, do we see that normalize? And does that help? help continue to drive growth, or could that be a limiting factor?

We think that, and it will normalize in terms of the denominator effect that we have in the business. We're not, in terms of our early indicators and our view of the credits that we're currently writing, which is a lot of bank rate credit in that market. We're not anticipating losses to drop up at all, but we're quite positive of that market that as the banks sort of, you know, as we compete harder and then we're actually getting more of their bank rate credits and we think that will be good from a loss perspective. We have a couple of questions on the line that we might just switch to if you're okay with that.

So moving to questions that have come over the webcast. The first question that's been posed is, can we expect any further one-off costs related to the change in product mix coming through in the second half?

At the moment, no. We are basically working through all of the sort of different products and sort of reducing costs. All the direct costs attached to those individual products are being reduced. We've taken the one-off items that related to the UK in terms of redundancies in that market. We have no further plans on that front. And what we're continuing to work through is the shared costs and getting those costs down.

Great. I'll cover two more questions coming in from the webcast before we wrap up. The next question is, how confident are you that margins will improve into the second half? I think you've covered all from that one already, but any further comments on that, Adrian?

No, I don't think anything more than what I said previously. So as we sort of mentioned, the front book pricing is continuing to increase and we're hoping that rates in the three-year market start to stabilise. There might be some increase in that. You know, it's sort of hard to make these predictions in this market just given the complexity that we're all looking into. But we're very acutely focused on NIM as a business and, you know, we're laser focused on the current cost of funds and originating assets at good prices.

Great. Final question from the webcast, and apologies for those who I haven't been able to get to. We will look to respond to those outside of the call today. Final question coming through is, if normalized NPAT is the best metric for the business, then why is the dividend based on the cash NPAT number?

Yeah, thank you. That is the right question to ask. So we're currently in the process of discussing the dividend policy with our board and we'll finalise that as part of our strategy in April. The challenge we had today is that we think that normalised cash profit is the best representation of our cash and our profits moving forward. Given some of the adjustments, cash impact is probably the best measure. If you look back at our cash outcomes for the half, on which we paid dividends on the history, that it was the right measure for now, but we will be updating that with the board. These things will start to normalise other than depreciation and provisioning. And so, therefore, we'll be putting a new measure to the board and then to the market for 30G.

Thank you very much. Back to Operator, I think, before we have our closing statement from Bec this morning.

Thank you. I'm sure no further questions in the queue. That concludes our Q&A session. At this time, I'd like to turn the call back over to Rebecca James, CEO, for closing remarks.

Thank you for your time. Adrian and I look forward to meeting with many of you one-on-one over the coming days. Thank you very much.

This concludes today's conference call. Thank you for participating. You may now disconnect.