BNK Banking Corporation Limited (BBC) Earnings Call Transcript

[Technical Difficulty] On the agenda today, you'll be hearing from both Allan Savins, our CEO; and Steve Kinsella, our CFO. And for the agenda this morning, we'll first start off with Allan, who will give us the results overview, then followed by Steve, who will run through the specific financial results and then back to Allan for the strategy update and outlook. And then at the end of the session, we'll have a question-and-answer session. So feel free to submit questions through the webinar window that you are currently in. [Operator Instructions] Just before we start off, we encourage you to read this disclaimer in your own time. We won't go into detail with it now. And at the same time, the resources that we go through in this session are also available for download on our website, along with the annual report and the official ASX announcement that accompanies this presentation also. So with that, I'll throw to Allan to start us off with the FY '25 results overview. Over to you, Allan.

Thank you for the introduction, Matt. I'm pleased to now take you through the full-year FY '25 results overview for BNK Banking Corporation. This section highlights the progress we've made in executing our strategy and how we're positioning BNK for sustainable and successful future. In summary, BNK made meaningful progress in FY '25, delivering a clear turnaround and building momentum across the business. Our focus on higher-margin, capital-efficient assets, combined with disciplined cost and balance sheet management is driving sustainable performance. During the year, we also executed some key strategic initiatives, including the optimization of our warehouse assets, contributing to a more diversified earnings base. The financial results for FY '25 reflect continued positive momentum, underpinned by an improvement in underlying NPAT and a stronger, more resilient balance sheet. While the banking sector remains structurally sound throughout FY '25, it was a year shaped by significant headwinds, margin compression, heightened competition, rising operational costs, increasing cyber risks and the burden of ongoing technology investment. Despite these broader industry challenges, BNK demonstrated strong core resilience, with capital strength and asset quality holding firm, with early signs of some market-easing conditions emerging later in the year. Against this backdrop, BNK delivered an underlying NPAT of $3.8 million, an increase of $4.7 million or 509% on the prior year. This result reflects our disciplined approach to margin management, portfolio optimization and revenue diversification. Statutory NPAT also improved to a positive $1.3 million, up $8 million from FY '24, further reinforcing the financial resilience of the business. Some other call-outs. Net interest income rose 13% to $21.9 million compared to the prior period. Total net income increased 50% to $26.1 million compared to FY '24, reflecting strong top line growth, driven by revenue diversification and portfolio optimization. Underlying operating expenses grew by 12%, reflecting a balance between strategic investment, inflationary pressures and disciplined cost management. The result reflects a positive jaws effect with income growth outpacing expense growth, reinforcing the benefits of our strategic focus on sustainable growth and operational discipline. And net interest margin increased by 46 basis points to 1.52% over the year. This uplift was driven by the deliberate shift in portfolio composition, reducing exposure to lower-margin assets, the flow-through of the maturing fixed rate loans repricing, growing our higher-margin segments and actively managing our cost of funds. It reflects the effectiveness of our margin management strategy and our focus on disciplined asset selection. BNK's deliberate repositioning towards higher-margin lending is beginning to deliver sustainable profitability, validating the multi-year strategic plan. We've achieved strong underlying statutory performance, reflecting consistent execution across the business. Net interest income has grown, supported by improved asset mix and disciplined pricing strategies. We've seen margin expansion, reinforcing the effectiveness of our strategic repositioning and operational focus. The establishment of diversified revenue streams is delivering tangible results. This includes ongoing warehouse fee revenue from the Goldman Sachs facility, the Robusta securitization of the Goldman Sachs warehouse assets, which subject to market conditions is expected to become a recurring feature. The partial sale of the Bendigo warehouse assets, which unlocked value is now generating ongoing servicing income. Together, these transactions reflect a strategic shift towards sustainable recurring revenue generation, enhancing financial resilience and long-term value creation. High-margin assets now represent close to 28% of the total portfolio, approaching our initial goal of 30%. The capital adequacy ratio increased to 29%, providing flexibility to pursue strategic growth initiatives with no immediate capital requirements. FY '25 laid groundwork for future scalability, including early-stage investment in technology transformation and continued enhancement of regulatory and compliance frameworks. In FY '25, the balance sheet reduced to $903 million, down from $1.37 billion in FY '24, representing a 34% year-on-year decrease. This included the strategic $220 million sale of lower-margin prime residential loans to Bendigo Bank, consistent with our repositioning strategy. Excluding the loan sale, the underlying reduction was 18%, broadly in line with the contraction reported in the first half of FY '25. This reinforces that what we are seeing is a measured and deliberate reshaping of the portfolio to enhance profitability and long-term value. Importantly, despite the smaller portfolio size, this deliberate reshaping has improved the margin profile of the book and supported a continued rise in net interest income, which reached $21.9 million in FY '25, up 13% year-on-year. This result underscores our belief that profitable growth, not volume is the key to sustainable success. The portfolio's payment structure remains largely consistent, with over 80% of loans continuing as principal and interest. This stability underscores a lower portfolio risk profile as borrowers steadily build equity in their properties. Commercial lending momentum has driven the portfolio shift, partly offsetting the prime residential run-off, while specialist residential remains stable. High-margin assets now comprise approximately 28% of the portfolio, as mentioned earlier, secured by either residential or commercial property. While this shift has also been partly influenced by a reduction in the prime book, we have taken deliberate steps to expand our exposure to higher-return segments. We've seen a positive shift in the LVR mix of settlement over the past year. In FY '24, 34.9% of the portfolio had an LVR of up to 60%, increasing to 39.1% in FY '25. Meanwhile, loans with an LVR between 60% and 80% decreased from 58.6% to 55.4%, and those above 80% reduced from 6.5% to 5.5%. These changes reflect the current portfolio dynamics and our ongoing focus on maintaining a strong risk profile through a more balanced and lower risk LVR distribution. As at June '25, 44% of our loan book was ahead in repayments, consistent with the position at June '24. This stability highlights the strength of our portfolio and the financial discipline of our customers who continue to manage their repayment obligations effectively. There is a clear indication of credit quality and ongoing portfolio resistance -- resilience, excuse me. Our residential portfolio mix has remained largely stable year-on-year with only a slight increase in the proportion of investor loans, notwithstanding the aggregate book size has reduced. Owner-occupied lending continues to make up the majority of the book, which supports portfolio resilience and aligns with our broader risk management strategy. Fixed rate loans have largely all converted to variable rates for FY '25, with no new fixed rate business being originated. In terms of prime new business, we're focusing on originating loans in the $2.5 million to $5 million range when the opportunity arises exclusively in metro areas. These types of loans offer greater price elasticity, allowing us to optimize returns while maintaining strong credit quality. Our commercial portfolio has seen strong growth, up 79% year-on-year to $136 million. The average loan size is $540,000. And importantly, all new lending is secured by first ranking commercial property, ensuring a well-diversified portfolio and low risk profile. We continue to lend against standard commercial assets, factory units, retail shops, warehouses, properties with broad market appeal and alternative use potential. These loans are structured as long-term 30-year loans rather than short-term SME cash flow facilities to mainly investment-focused borrowers, not owner occupation. This structure, therefore, limits our direct exposure to operational risks typically associated with SME borrowers. Offset account balances have remained steady at $77 million as at June '25, consistent with December '24 and only slightly down from the prior year. This stability reflects the continued strength in customer cash flow management even in the face of broader economic pressures. In terms of arrears as at June '25, 90-plus day arrears in residential -- the residential book stood at 1.1%, an increase of 31 basis points from June 2024. This movement was anticipated, driven by a progressively smaller portfolio base. Importantly, while the percentage has risen, the actual number of accounts in arrears remains very small in real terms, and we are well provisioned to manage this risk. Commercial and 90-day arrears were 0.95% as at June '25, up 6 basis points from the prior year. These continue to track within acceptable levels. As with residential, the portfolio remains well diversified and conservatively managed, with provisions in place to support ongoing growth in this area. And at June year-end, we had no mortgage in possession cases. And on that note, I shall hand over to our CFO, Steve Kinsella, to present the financial results in more detail.

Thank you, Allan, and good morning. Starting in February '25, the RBA delivered 3 reductions to the overnight cash rate this calendar year and totaling 75 basis points with market expectations of further cuts. This is in the context of heightened uncertainty in the global macroeconomic landscape and the potential implications for the domestic economy. We were pleased to be able to pass on these cash rate reductions in full to all of our home loan and commercial loan customers. Notwithstanding these reductions, we continue to see a very competitive environment on both the asset and liability side of the balance sheet. During FY '25 and in that context, we repositioned the portfolio to improve our margins and recognized the easing cycle we were entering. Consistent with our strategy, we did not compete in the lower-margin prime residential space for new business and actively sold a portion of the portfolio to realize some value and help enhance returns across the wider portfolio. We have retained a good proportion of our fixed rate maturities coming off low rates and cautiously grew our higher-margin assets. We also focused on optimizing returns available on our liquid investment assets. These factors all assisted our improved NIM outcome for the year with positive momentum. Expenses grew with some targeted growth in our people, technology investment, transaction fees and some inflationary impacts. And arrears whilst higher than this time last year are within acceptable ranges, with the lower absolute rates likely to assist our customers. We have a very healthy capital ratio that will support the areas of growth targeted for FY '26. Looking at our results for the year, our statutory outcome and underlying outcome both showed a marked improvement from the losses in the prior comparative period. Statutory NPAT was $1.3 million, an improvement from the loss of $6.7 million recorded in FY '24, which also included a goodwill write-down, of course. Underlying NPAT was $3.8 million compared to a loss of $0.9 million in FY '24. Our net interest income of $21.9 million was up 13% from FY '24. Our other income was up in both statutory and underlying terms, with the income from the Robusta trade and sale of the warehouse loans to Bendigo. There was also continued good fee income from our origination and servicing activities generated from the Goldman Sachs warehouse program and the servicing of the loans associated with both the Robusta and Bendigo sale transactions. The NPV impact from the rundown of our legacy wholesale mortgage management book is the only difference between statutory and underlying income and is consistent with prior period treatment. Underlying expenses were up 8% year-on-year with selected investments, transaction fees associated with Robusta and inflationary pressures balanced with careful expense management. We saw vendor expenses associated with our technology upgrade in the period of just over $1 million that are included in our statutory results, but not our underlying results. Credit loss expense for the period was actually a net write-back of $84,000, with a reduced book offsetting a small increase in the arrears and an increase to some of the overlays. This chart shows the walk from FY '24 underlying loss of $0.9 million to the underlying profit of $3.8 million for first half '25 -- for FY '25, sorry. Higher net interest income of $2.6 million, higher fee income from the 2 trades we mentioned and origination and servicing fees and lower credit provision expenses, all contributed strongly, partly offset by increases in the cost base and a higher tax charge. Our balance sheet footing showed a decline year-on-year, consistent with our strategic aim of moving away from prime residential and as we allowed that book to reduce. The reduction also included the sale of $220 million of loans to Bendigo in the second half of FY '25. Whilst our aim is to ultimately grow the book, the reduction was a key step to reset the business and create the capacity for us in a capital sense. Total assets reduced 29%, whilst deposits reduced 21%. The NIM improved 46 basis points through this period, and I will discuss that later in the deck. Our underlying cost-to-income ratio was 93%, as we moved into profitability and our capital ratio improved on both the Tier 1 and total level, largely from a reduction in the book, but in so doing, creating the capacity to invest in selective higher-margin business. Our second half results show an overall uplift in underlying NPAT to just under $2 million from $1.8 million in the first half. Net interest income was down 2%, with 3 fewer days in the second half and also the steeper decline in the book following the Bendigo sale, partly offset with some growth in our higher-margin assets. Other income grew 25% from first half '25, with the net sale proceeds and ongoing origination and servicing fees from both Goldman Sachs and Bendigo, respectively. Underlying expenses grew 3% on the first half, with consistent themes of selected investment and inflationary uplift. This chart shows the walk from the first half underlying profit of $1.8 million to the underlying profit of $2 million for the second half. The slightly lower net interest income of $0.2 million was offset with a higher fee income of $0.9 million, and then there was a net increase in the cost base and a slightly higher tax charge as a result. Looking at our net interest margin more closely. Our NIM for FY '25 rose to 152 basis points, which is up 46 basis points from FY '24. We saw increased margins on the asset book through a combination of reductions in the lower-margin prime resi book, a flow-through of the maturing fixed rate loan repricing and some growth in our higher-margin products. We also focused on positioning the funding of our book for the easing cycle, which was underway in second half '25. Compared to the first half, we also saw further improvement in our NIM from 139 basis points to 170 basis points in the second half. Again, this is due to the positioning of the book and reducing the overall composition of more expensive term deposits as well as the benefit on reducing the notes on issue that were supporting the loans, which were sold out of the warehouse to Bendigo. Notwithstanding that, competition for deposits does remain very healthy. Looking at our funding mix, this chart shows how the composition of our deposit book has changed over the last 12 months. The market for term deposits over the 12 months continued to be competitive, with customers seeking additional yield through either high interest savings accounts and/or term deposits. With the anticipation of lower cash rates, absolute TD yields reduced, but we've been selective in replacing maturing higher-cost TDs. We've looked to actively balance the composition of term deposits with greater funding stability against the impact on margin over the 12 months as we entered a rate reduction phase of the cycle. Our margin remains an area of acute focus, and we continue to focus on our cost of funding as a key contributor to overall NIM outcomes. Our operating expense performance reflects a combination of investment in our people, foundational areas of the tech stack, securitization, transaction fees and navigating inflationary pressures across most expense lines, whilst maintaining a strong focus on cost control wherever possible. Total expenses increased from $21.6 million in FY '24 to $24.2 million in FY '25. Within this, just over $1 million relates to the investment in the technology upgrade and core banking system foundational work. We exclude the core banking system replacement costs from the underlying result. There was a further $350,000 of transaction fees associated with the Robusta trade included in our professional services, and these are included in our underlying result. A healthy percentage of customers remain ahead in their payments, as Allan mentioned, with a similar number on time. Just 2% are in arrears by 30 days or more, which I will expand on shortly. Alongside that, our portfolio LVR also shows that more than 90% of the book has an LVR less than 80% and a slightly improved aggregate composition to FY '24. The increase in customer borrowing rates, combined with ongoing household financial pressures led to more elevated arrears commencing in 2024. This trend has been broadly consistent with what we have seen across the industry. Over 90-days arrears sit at 1.1% on our residential loan book compared to 0.79% this time last year, and this represents a small number of accounts. The aggregate total for 31-days plus sits at 2.11%. Given it only takes a few accounts to move this percentage, we can see quarter-to-quarter volatility, but we remain of the view that our arrears position is in line with expectations. The recent reductions in the cash rate by the RBA should assist customers, and we've passed on the full reductions to all our home loan customers. Our commercial arrears remain within tolerance with our 90-day plus arrears sitting at 0.95%, very slightly up from 0.89% this time last year. This represents 4 accounts. We will continue to monitor this book closely as we cautiously grow it. The loan book remains sound from a credit perspective. Our overall charge for the year was a write-back of $84,000 compared to a charge of $300,000 in the prior corresponding period. Our overall provision coverage has increased from 22 basis points of the portfolio to 33 basis points and sits at $3.2 million, similar to the aggregate amount held last year. The breakdown is provided and shows a reduction in our Stage 1 provisioning, largely reflecting the book reduction. Our Stage 2 and 3 provisions increased with a slight uptick in arrears shown on the previous slide, whilst we have added to the overlays year-on-year as we continue to refine the provisioning methodology. With the focus on transitioning the balance sheet towards higher-margin and capital-efficient assets, we've seen an improvement in the overall capital adequacy ratio to 29%. This represents a strong capital position, well above regulatory requirements and above Board minimum targets. The increase has been achieved from a reduction in the asset book and increases to capital as outlined with a small initial organic capital contribution from the positive earnings in FY '25. I should point out the liquid assets mark-to-market is a small typo and should be a positive 0.27%, not a negative, as we had reduced mark-to-market losses on that portfolio from last year. With that, I will now hand back to Allan to discuss our strategy and outlook. Thank you.

Thank you, Steve. FY '25 marked a significant step forward in our transformation towards sustainable profitability, with clear progress across our 3 strategic pillars: growth, margin and profitability. To recap, we continue to diversify our portfolio with higher-margin assets now comprising approximately 28%, progressing toward our target of 30% concentration. Through risk-weighted asset optimization and disciplined capital recycling, we ensured every dollar deployed was working harder, supporting targeted loan growth in segments that deliver superior risk-adjusted returns and contribute to long-term shareholder value. Our net interest margin increased by 46 basis points to 1.52% for the year ended 30 June, '25. In second half '25, net interest margin rose to 1.7%, up 31 basis points from the first half of '25, reflecting our continued strategic focus on asset mix optimization and cost-effective funding. Our customer deposit to loan -- total loan ratio of 112% reinforces the stability of our funding base, an essential foundation for margin expansion and resilience in changing market conditions. These outcomes support our medium-term target of achieving net interest margin greater than 2%. For profitability, underlying NPAT increased by 509% year-on-year to approximately $3.8 million, driven by strong growth in net interest income, up 13% year-on-year, net income up 50% year-on-year. We maintained our strategic approach to cost management, with total operating costs rising 12% year-on-year, reflecting targeted people and technology investment and inflationary pressures. Importantly, revenue growth outpaced expense growth, resulting in positive operating jaws for the year. And our underlying cost-to-income ratio improved to 93%, down 12 percentage points year-on-year, demonstrating progress towards our medium-term target of less than 60%. These results reflect our commitment to steady, sustainable growth. While our ROE target of greater than 10% remains a medium-term ambition, we're making tangible progress towards improving returns through disciplined execution. As we look ahead, our growth strategy is focused on scaling high-value opportunities and deepening our presence in capital-efficient segments. And we acknowledge that performance may not always follow a linear trajectory, particularly given the continued competitive environment. While we are confident in our direction, we anticipate variability in outcomes as we navigate evolving market dynamics. While growth is essential, sustainable profitability through strategic discipline remains at the core of our approach. By deepening our penetration in high-margin segments, we're not just pursuing growth. We're scaling where returns are strongest, risk is well managed and capital is most efficiently deployed. This is a continuation of the momentum we established in FY '25 as we now advance with even greater precision and intent. Partnerships continue to be a cornerstone of our growth strategy. In FY '26, we will expand our senior secured warehouse funding capability, having successfully settled our first syndicated transaction in July, supporting an Australian non-bank lender. We'll continue to actively pursue third-party distribution relationships to unlock new origination channels and extend our reach into targeted markets where we see strategic value. These partnerships allow us to scale efficiently, diversify our product offering and access new customer segments, all without the overhead of direct acquisition. This is a model that enhances margin, broadens our footprint and supports long-term scalability. We see this as a key lever for sustainable growth in the years ahead. While our focus remains on high-margin segments, we also recognize the important role prime lending plays in portfolio diversification and capital deployment. Over recent years, we have made deliberate decisions to streamline our prime exposures, including a selective asset sale to improve capital efficiency. These actions were strategic and delivered the intended outcomes. Lifting BNK's net interest margin above 2% has remained a consistent medium-term objective, and we've made meaningful progress towards that goal. In FY '26, we're building on that momentum. Our focus on driving further margin expansion through continued optimization of capital deployment, further rebalancing towards higher-yielding segments and maintaining disciplined cost-effective funding following the recent investment-grade credit rating from S&P Global Ratings. As part of this strategy, we'll continue to offer prime residential loans in a selective and measured way and where returns make sense. This approach supports portfolio diversification and capital efficiency while allowing us to maintain our strategic focus on higher-margin segments that underpin earnings growth. Funding remains a key lever in margin management. Our strategy combines lower cost deposits with selective access to wholesale markets, reducing overall funding costs while maintaining flexibility. In FY '26, we'll continue to optimize this balance, ensuring our funding base supports growth without compromising margin or liquidity. Margin management extends well beyond funding, however. It's a daily discipline. In FY '26, we'll maintain a sharp focus on pricing integrity, portfolio rebalancing and cost control. Together, these levers ensure that as we grow, we do so profitably, sustainably and with a clear eye on long-term shareholder value. Capital efficiency is central to our growth strategy. It's about smarter deployment, not just more deployment. And finally, diversifying our revenue base remains a key priority in FY '26. A core part of this is scaling recurring fee-based income through our Goldman Sachs' off-balance sheet warehouse. This model allows us to originate and manage portfolios without tying up capital, driving higher returns on equity and reducing reliance on margin income. In FY '26, we'll look to expand our use of this facility to further strengthen our non-interest income profile and insulating earnings from the interest rate volatility. So in summary, FY '26 is about execution with discipline. We are focused on delivering sustainable underlying profitability through a margin-led strategy that balances quality earnings with long-term resilience. Our growth will come from where we create the most value, high margin and high-return segments, supported by the scaling of our senior secured warehouse funding. At the same time, we will maintain momentum with prime in a measured way, providing diversification without compromising our margin strategy. We'll continue to improve capital efficiency by reallocating into higher-return opportunities while maintaining tight cost discipline in a challenging environment. Alongside this, we'll expand our off-balance sheet warehouse with Goldman Sachs, deepening diversification and strengthening recurring income streams. Partnerships and product expansion remain a strategic priority, broadening our reach through white label and other distribution relationships where possible. And we'll continue to invest in technology in line with our capacity and priorities, modernizing our platform to drive future efficiency and strengthen regulatory compliance. FY '25 gave us momentum. FY '26 is about building on that momentum with precision and intent, growing profitably, managing risk with discipline and creating long-term shareholder value. Thank you. And that concludes BNK's FY '25 results presentation. And I'll now hand back to Matt, who will moderate the Q&A session.

Thank you, Allan. We currently just have a single question that's come through throughout the session. If you do have a question now, it is a great time to type it in and it will come through to us, and we'll do our best to answer as soon as we receive it. This person has asked, can you please explain why the one-off sale to Bendigo Bank is reflected in underlying profit? It appears to be non-underlying in nature.

I might first respond to that. The only exclusion we make between our statutory and underlying results is the legacy wholesale mortgage management book, and we've been very explicit about that to minimize the difference between statutory and underlying. We are always seeking to optimize the value of our portfolio, and that could include transactions from time to time, including the Bendigo sale. And we've been very transparent around these transactions so that investors and shareholders can certainly interpret and understand the results and the composition of our results. And so that's the reason we included in underlying is, again, just to minimize the differences between our statutory and underlying.

And further to that, too, I'd add that we still have the warehouse facility available. So, part of that optionality of the warehouse is that we can still sell loans into that facility. So it may come a time again where it makes sense to us where we will do that transaction again. So in some respects, it may not necessarily be a one-off transaction.

The next question. How many accounts, residential and commercial are held?

We have approximately 3,500 loan customers and over 10,000 deposit customers.

And commercial within that is around 250 at this stage of the book.

This question is, what is the projected IT spend for FY '26?

We don't disclose individual future line items, but we are expecting an increase in our tech spend in FY '26 from FY '25. Most of the increase is going to be based around the next phase of our core banking upgrade and tech stack upgrades. So, we'll obviously share that as we release future results.

The next question. Can you please expand on the breakdown of the roughly $6 million other income in underlying profit?