Heartland Group Holdings Limited (HGH) Earnings Call Transcript

Thank you for standing by, and welcome to the Heartland Group FY '25 Full Year Results. [Operator Instructions] I would now like to hand the conference over to Mr. Andrew Dixson, CEO of Heartland Group. Please go ahead.

Good morning, everyone, and welcome to the Heartland Group FY 2025 Full Year Results Call. I'm Andrew Dixson, Chief Executive of Heartland Group, and I'm joined today by Leanne Lazarus, Chief Executive of Heartland Bank in New Zealand; Michelle Winzer, Chief Executive of Heartland Bank in Australia; and Kerry Conway, Chief Financial Officer of the Heartland Banking Group. Starting with Slide 5, the FY 2025 summary. FY 2025 has been a year of significant reset, change and integration, during which we have prioritized capital efficiency, restoring a superior margin and the active derisking of our lending portfolios. While this has impacted underlying financial performance, particularly in the first half, it has set a strong foundation for the future with good momentum built across the second half of the financial year. Two notable impacts to financial performance were impairment expense increased $25 million due to a significant increase for the New Zealand Bank in the first half of 2025 in response to the impact of the ongoing deterioration in economic conditions and the derisking and repositioning of some of our lending portfolios as previously announced on 18th of February 2025. Following policy and process change, asset quality is improving and recovery outcomes are above expectation. Secondly, operating expenses were up $53 million, primarily due to nonrepeating benefits in FY 2024, the cost base of the ADI and subsequent costs related to regulatory requirements following its acquisition, hiring for growth and software-related costs. Cost growth is stabilizing with underlying operating expenses increasing just $0.8 million half-on-half. Underlying net profit after tax was $46.9 million, meeting guidance of at least $45 million and substantially meeting the outlook metrics set at our Interim results in February. In terms of reset, we refined our strategic focus to core products capable of delivering a threshold return on equity. A superior margin was restored with both banks delivering strong exit margins driven by lower cost of funds. Strong growth continued in Reverse Mortgages in both countries, with receivables up 15.5% in New Zealand and 18.5% in Australia, demonstrating growing market demand for this product. Good momentum was achieved in livestock finance in New Zealand with receivables up 18.4%, and we saw a return to growth in Australia with receivables up 1.5%, arresting the FY 2024 decline. Growth remained challenged in Motor Finance and Asset Finance due to subdued economic conditions and a focus on higher-quality lending. Finally, there was an increased focus on capital optimization through several key initiatives by the New Zealand Bank and the unwind of unsecured lending together with the accelerated realization of nonstrategic assets, including the home loan portfolio. This is enabling capital to be redeployed to high-return core lending portfolios. In terms of change, we have made positive changes to collections and recoveries, policies and processes. The introduction of more prescriptive collections and recovery policies has improved overall asset quality and recovery outcomes are exceeding our initial expectations. Motor Finance arrears are now performing better than industry average. In terms of integration, Heartland's existing Australian businesses have now been integrated into the acquired ADI to form a new and unique Australian Bank. The Australian funding transition has been successful with deposits forming 81% of the bank's funding, providing our Australian Bank with a deep, stable and diverse platform to efficiently fund future lending growth. Moving to Slide 6, group financial results. I will discuss the differences in reported and underlying NPAT on the next slide, and Kerry will discuss individual bank performance in more detail later. Heartland reported underlying NPAT of $46.9 million for FY '25, meeting market guidance provided at our interim results. This reflects a combination of three things: a strong improvement in net operating income following NIM expansion in both countries despite overall receivables retracting; an increase in operating expenses following the acquisition of the Australian Bank, associated investment required across the business and investment in growth. I will discuss this in detail shortly. And an increase in impairment expense, primarily in the NZ Bank, impacted by the ongoing deterioration in economic conditions on some of its lending portfolios. Receivables retracted $85 million, reflecting a positive shift towards higher return, lower capital-intensive assets as unsecured and nonstrategic assets wound down. Moving to Slide 7; there was an $11.1 million pretax difference between reported and underlying NPAT. The key items being: firstly, a $1.1 million loss from derivatives that were de-designated from their prior hedge accounting relationships in FY 2022. I can now confirm this is fully unwound. There was a $1.6 million of fair value gains in aggregate across investment properties and equity investments. This was primarily driven by an uplift in the value of our shareholding in Harmoney. There were $1.5 million of regulatory assurance costs that were acquired as post-licensing conditions following the acquisition of the Australian Bank. And finally, there were $7.3 million of exit costs associated with key management personnel exits across the year. Moving forward, we expect any difference between underlying and reported to be minimal, [ save ] for any fair value impacts on equity investments or other nonrecurring expenditure. And this was what we witnessed across the second half of FY '25. Moving to Slide 8, underlying operating expenses. Kerry will talk to the composition of operating expenses at a bank level further on in the pack. This slide walks the increase in costs at an overall Group level to remove the noise of any inter-entity staff transfers and cost recharges. While operating expenses of $181 million increased $56 million year-on-year, a number of factors need to be taken into consideration to rebase FY '24 operating expenses and to enable a like-for-like comparison. These are firstly, FY '24 included $14.1 million of OpEx benefits that have not been repeated in FY '25. This is a combination of $4.7 million of staff costs that were capitalized to projects, primarily being the New Zealand core banking system upgrade and the ADI acquisition and $9.5 million relating to both the nonpayment of short-term incentives in FY '24 and the full release of accrued cost of all active long-term incentive schemes in FY '24. $17.3 million came from the existing cost base of the ADI and $6.3 million came from the New Zealand core banking system upgrade commencing its amortization in FY '25. This results in the comparable increase in operating expenses being $18.6 million, which has come from three key areas: Firstly, a $7.7 million increase in additional staff expenses which came about across the business in terms of investing in people to enable growth and to meet the regulatory requirements for each bank, for example, in Australia to maintain its own core functions such as finance and risk and in New Zealand to invest in core functions to enable higher-quality growth, collections activity and to address additional regulatory oversight responsibility arising from owning the ADI. There was a $3.3 million increase in IT spend. There was increased investment in IT security and the implementation of a Group-wide single platform for our finance and human resource functions. And secondly, there was a long-term renewal of the current version of the Australian core banking system as well as to accommodate the increased volume from [indiscernible]. Finally, there was a $7.6 million increase in other operating expenses from a combination of three things: Firstly, increased legal and professional fees that are not expected to recur going forward. We have not stripped these from the underlying result. Secondly, an increased upfront Reverse Mortgage origination costs related to receivables volume achieved and a high mix of broker business in Australia. And finally, higher audit and board costs associated with the ADI in Australia. Importantly, cost growth is now stabilizing with the second half costs largely flat on the first half with CTI expected to improve into FY '26. In terms of the outlook for FY '26, the increase in costs during FY '25 was mainly driven by the full year impact of costs related to the acquisition of the ADI with much of the increase fixed in nature. Looking ahead, Heartland does not anticipate any further material cost increases and is firmly committed to disciplined cost control and improving the underlying CTI ratio. In New Zealand, underlying OpEx is expected to remain largely flat on FY '25. In Australia, underlying OpEx is expected to increase in '26 with these costs variable in nature and tied to growth, primarily higher broker commissions and onboarding expenses related to the expansion of the Reverse Mortgage portfolio as well as the full year impact of additional roles filled in '25 to strengthen capability and the capacity for growth. Despite these increases, the underlying CTI ratio for Australia is expected to reduce towards 45% due to an uplift in net operating income from receivables growth and the full year benefit of the funding transition that occurred in FY '25. Moving to Slide 9, nonstrategic asset realization. Heartland's dedicated team has made excellent progress on NSA realization during the period with total NSAs reducing $179 million across the year, releasing $16 million of capital. The home loan portfolio continues to wind down as expected and sits at $172 million at 30 June, with a further $90 million reduction projected by 31 December 2025. In the more complex rural and business portfolios, the team remains focused on exiting exposures on a commercial basis with well-developed strategies in place. Exit options that require farm debt mediation, refinancing with external counterparties and in some cases, sale of the underlying business naturally impact timing. However, we are at the late stage in these processes for some of the more material exposures in the portfolio with positive outcomes expected. Realization projections have been reviewed with no material changes to outcomes or timelines. Moving to Slide 10, Capital. The Group remains well capitalized and positioned to support expected growth in the banks and taking into account potential future capital requirements. Both banks continue to operate with strong regulatory capital ratios and have capacity for hybrid capital issuance. The focus on capital optimization and NSA realization has generated more than $30 million of capital in FY '25 with a similar amount still remaining in the NSA pool and from further future optimization initiatives. Slide 11, shareholder return. While return on equity and EPS are below historic levels, we have seen a strong rebound in the second half of the financial year with return on equity of 6% and EPS of $0.046 per share. We are pleased to declare a final dividend of $0.02 per share, which is in line with the interim dividend and represents a payout ratio of 52% for the second half of FY '25, aligned to our current payout ratio target of at least 50% of underlying net profit after tax. I'm pleased to hand to Leanne and Kerry to discuss our New Zealand Bank.

Thank you, Andrew, and good morning all. This is Leanne Lazarus. Financial year '25 for the New Zealand Bank has been a year of significant reset and uplift. We've refined our core lending portfolios, improved asset quality, a greater commitment to cost discipline, and we are accelerating nonstrategic assets, as Andrew has said, to enable capital to be redeployed to higher return core lending portfolios. However, we are now realizing the benefits of the strategic reset. We've delivered strong growth in our Reverse Mortgage portfolio, 15.5% year-on-year; Livestock, 17.6% and our direct-to-consumer Motor portfolio, 16.7% year-on-year. We've achieved a superior margin, an exit margin of 4.3% versus 3.84% in 2024 and an average 3.87%, up 8 basis points from June of 2024. We've implemented more digital solutions to better support our customers and employees and have begun to stabilize costs. Kerry Conway, the bank's CFO, will talk to that shortly. As we've navigated through a challenging economic environment, credit demand, coupled with a firm stance on credit quality, particularly within our Motor and Asset Finance portfolios remained subdued, overall impacting lending growth. We will elaborate on that shortly as we walk through our financial performance. However, what I can say is that asset quality within the bank has significantly improved with more prescriptive collections and recoveries processes having a positive effect. Innovation continues to be a key area of focus for the New Zealand Bank. In Reverse Mortgages, as an example, we successfully launched the Village Access Loan, which enables older New Zealanders to access funds to transition into retirement villages. And in Motor, we've launched MARAC Marketplace, a new online marketplace for vehicle purchasing and financing. We continue to focus and deliver on digital solutions for our customers to improve on speed and ease and reduce manual processing internally. We've improved mobile app self-service, which supported a reduction in inbound call volumes. In our Reverse Mortgage portfolio, we implemented new online application forms. And in our Motor portfolio, once again, we implemented a new origination platform for our motor dealers. As I said earlier, nonstrategic assets is a key focus for us in simplifying our bank and running down these assets to free up capital and invest in higher return portfolios is a significant focus. Looking ahead, our strategic focus on efficiency, quality and growth is extremely clear. I am confident that the New Zealand Bank is well-positioned for financial year '26 in achieving its vision to be New Zealand's leading specialist bank, meaning a leading customer and originator experience, lower cost-to-income ratio and a stronger return on equity. I will now hand over to Kerry Conway to go through the financial performance of the New Zealand Bank.

Thanks, Leanne, and good morning, everyone. So I'm on Slide 14. The financial position for the New Zealand Bank remains robust and for the New Zealand Bank and the wider Banking Group with capital and liquidity ratios well above Board and regulatory minimums. Net profit after tax for the bank on a reported basis was $21.9 million for the year, and that's a reduction of $33.9 million or 60% on the prior year. Underlying results exclude the impact of $3.7 million pretax one-off items touched on by Andrew earlier on, being related largely to loss on derivatives, fair value changes and costs related to required assurance following the ADI acquisition. As Andrew discussed, we expect the difference between underlying and reporting to be minimal from FY '26 and thereafter. For the rest of this section, I will talk to results on an underlying basis. In a challenging economic environment, the New Zealand Bank underlying NPAT was $24.6 million, a reduction of $50 million, 67% on the prior year, with performance materially impacted by impairments in the first half. I'll walk through more detail in the coming pages. Moving on to Slide 15. Receivables retracted $368 million, 7% in the year to $4.7 billion. $179 million of the retraction was driven by nonstrategic asset rundown. $47 million was in portfolios we are no longer actively marketing and the remainder of $141 million in core portfolios. As Leanne talked about, Reverse Mortgages maintained momentum with livestock finance propelling rural growth. However, this growth has been more than offset by retraction in the motor, asset finance and business relationship portfolios. These have been significantly impacted by economic headwinds and heightened competition. Leanne will talk more detail on individual portfolios a little bit later. Moving on to net interest margin, Slide 16. Our exit NIM expanded 29 basis points in the year to 4.13%, significantly outperforming the 4% guidance we gave at half year. Our average NIM at 3.87% was up 8 basis points in the year, supporting net interest income to be largely flat despite receivables retraction. The OCR declined rapidly through FY '25 from 5.5% to 3.25%. Coupled with market-wide soft credit demand, this has resulted in intensified pricing competition in some of our key portfolios. However, we have maintained a balanced pricing strategy and proactively managed our cost of funds to drive NIM expansion through reducing the mix of more expensive wholesale funding, more aggressively pricing term deposits in line with funding needs and driving volume into cheaper core savings products. As a result, FY '25 average cost of funds of 4.96% was down 31 basis points on the prior year and the second half cost of funds of 4.67% was down 67 basis points on the first half. NIM is expected to expand further into FY '26 as cost of fund benefits continue and growth is focused on higher NIM portfolios. The outlook is for our average NIM to expand to be greater than 4.20% and our exit NIM greater than 4.25%. Moving to operating expenses on Slide 17. OpEx of $128.1 million is up $25 million, 25% on the prior year. However, as detailed by Andrew, backing out non-repeating one-offs, structural changes, which are neutral to the Group level and the amortization of the core system upgrade, like-for-like increase is $9 million or 8%. In looking at the composition of the cost base, 50% of the New Zealand Bank is people-related with 482 ending full-time equivalents. The next biggest cost category is IT, making up 11% of the total, and this includes software licenses, software and IT support, IT security, maintenance and communication costs. And $11 million of amortization includes $6 million new amortization for the core system upgrade, which started this year and the remainder is from other BAU software, largely from projects completed prior to the upgrade. In FY '26, we expect our operating expenses to stabilize as the required capability for running a trans-Tasman bank is now in place. And as we return to growth, CTI improvements will accelerate. Next, I'll talk to asset quality on Slide 18. The total nonperforming loan ratio continues to improve, down 44 basis points to 3.2% for FY '25. The NPL ratio, excluding NSAs and noncore lending was down 30 basis points to 2.4%, helped by material reductions in motor and rural lending arrears. For Motor, changes in collections, write-off and recovery strategies have had a positive impact, resulting in arrears decreasing by $27 million to $38 million, with $20 million of that reduction coming from the greater than 365 days bucket. Loans in this bucket are now fully written off. In rural lending, the sector is currently extremely strong, supported by around a $10 milk price. As a result of this improvement in trading conditions across the last year, we've seen an improvement in this portfolio. Arrears greater than 90 days are down $9 million to $5.5 million, especially in the 90- to 180-day bucket. Early day arrears 5 to 90 days have reduced from $10 million to $5 million. However, in business finance, operating conditions [ haven't ] deteriorated with a 26% year-on-year increase in company liquidations and a 14% year-on-year increase in business defaults. The most effective industries remain construction, property, hospitality and transport, which represent a significant portion of our business lending portfolios. These challenges have contributed to a rise in arrears with 90-plus days past due nonperforming loans increasing from $42 million in FY '24 to $58 million in FY '25. On a positive note, early-stage arrears, so 5 to 90 days past due decreased from $50 million in FY '24 to $43 million in FY '25 with earlier intervention occurring between the frontline and specialist support to engage with customers that are demonstrating warning signs. Moving on to impairment expense on Slide 19. The FY '25 impairment expense of $68.8 million is a $39 million or 131% increase on the prior year. As we discussed at the half year, the year-over-year increase relates predominantly to the motor and business lending portfolios where the collectability of customer arrears have been impacted by deteriorating economic conditions. The second half impairment expense was $19.7 million versus $50.7 million in the first half. There are three components of the $68.8 million. $47 million in write-offs, less $10 million in recoveries, $25 million in specific provisions, predominantly in the asset finance and older business relationship portfolios and a $7 million increase in collective provisions, again, predominantly in asset finance and business relationship, partially offset by reductions for Motor and Rural. The impaired asset expense ratio was up 80 basis points to 1.4% for the full year, but down 118 basis points versus the first half. Moving to funding and liquidity, Slide 20. The bank retains a strong liquidity position with key metrics well above Board and regulatory requirements. Retail deposits declined modestly by 1.9% compared to the first half, aligning with funding needs. Call and saving products remained stable, consistent with our strategy to prioritize low-cost funding sources. With lending contracting in FY '25, excess funds have been used to repay $362 million of more expensive wholesale funding sources, which is a 55% reduction. In addition, we took the opportunity to reduce the bank's securitization facility limit in December '24 by $280 million to $320 million. We were mindful of the 1st of July go-live date for the Depositor Compensation Scheme, so adjusted pricing to ensure stable customer balances ahead of this. So far, we've seen minimal impact. Finally, moving on to capital, Slide 21. With a regulatory capital ratio of 15.9%, the New Zealand Bank continues to operate well above the current regulatory minimum of 13.5%, demonstrating a strong capital position and readiness to support future growth while meeting the RBNZ's anticipated higher capital requirements. Several key initiatives have helped us get here. We've unlocked capital through the realization of nonstrategic assets, and we've streamlined our structure by canceling the MARAC Insurance license. We've also shifted our lending focus towards lower capital-intensive areas. This capital optimization strategy has allowed the New Zealand Bank to support the Australian Bank in reinvesting 100% of its profits into growth and at the same time, returning excess capital to our parent. The New Zealand Bank's underlying ROE of 0.5% in the first half negatively impacted the Group's overall results due to the increased impairments. However, the second half results showed clear improvement with ROE reaching 6.1%, and this is forecast to continue to improve through sustained net interest margin levels above 4%, lower impairments and stabilizing costs. I'll now hand over to Leanne to discuss the New Zealand Bank strategy and portfolio performance.

Thank you, Kerry, and I am now on Slide 22. Talking to Reverse Mortgages. We've seen another pleasing result, as we've spoken about a little earlier on, particularly within the second half with strong annual growth of 15.5%. This was driven by higher levels of cash reserve drawdowns where customers tap into money that they set aside from their loan for future use. Growth was moderated, however, by high repayments. The Reverse Mortgage portfolio has grown to $1.23 billion with average loan size of $154,000. Our Reverse Mortgage portfolio is exceptionally high quality and well secured. As I've spoken about earlier, digital enhancements has been strong in this area, and we've enabled 50% of cash reserve drawdowns to be processed online. We've reduced the reliance on phone calls and e-mails and electronic property valuations for most properties have reduced average settlement times by 5 days. In financial year '26, we will continue to simplify and automate manual processes. We will add digital capabilities to provide a leading customer experience to unlock future growth. We will prioritize growth in digital innovation in Reverse Mortgages to retain our leading position. We expect to exceed the level of growth seen in financial year '25 with over 18% growth forecast for financial year '26. Moving on to Slide 23, the Rural and Livestock portfolios. We achieved 4.9% growth in the Rural portfolio, driven by 17.6% growth in Livestock. In June, the seasonal slowdown came earlier, resulting in suppressed volumes of approximately $10 million. That said, the outlook for livestock sectors in financial year '26 remains positive with improved sector confidence and strong commodity prices. Rural asset quality has improved, as Kerry Conway outlined earlier. Moving to Slide 24 and on to Motor. The Motor portfolio required significant reset and uplift in financial year '25. Our focus has been on strong risk management and the quality of business coming through the door. We implemented new credit decisioning scorecards in the second half of the financial year and are targeting higher quality franchise and branded partners and direct-to-consumer origination. This shift has had an impact on new business volumes in the short-term but will have a positive impact on return on equity as low-quality lending rolls off. To improve the experience for our customers and partners, as I said earlier, we introduced a new Motor Origination platform in the second half of the financial year, which is driving faster response times and better conversion rates. The overall motor portfolio retracted 4.3% in financial year '25, with the addressable market for motor finance down 0.3% year-on-year. But pleasingly, the direct motor portfolio is showing good momentum at 17% growth year-on-year. With our focus on quality and speed and ease for our customers, we expect the portfolio to return to growth at a higher level of credit quality in financial year '26. As mentioned earlier, motor finance arrears are improving and now performing better than industry average. Moving on to Slide 25, Business Finance. This slide includes asset finance, which is $613 million of the portfolio. Heartland Bank firmly held its stance on credit quality and price in financial year '25. As a result, the asset finance book retracted $124 million. Retraction was due to challenging trading conditions, elevated repayments as SMEs sold surplus assets and aggressive competitor positions on price and credit standards. Trading conditions continue to be challenging and liquidation levels remain high. We expect these conditions to remain in most of the first half of financial year '26 with activity to pick up in the second half as the New Zealand economy recovers. As Kerry has spoken to the challenges around asset quality in this portfolio, given the economic environment, I will reiterate that this portfolio is appropriately provisioned and improvement in our proactive intervention measures have had a positive impact on nonperforming loan management. Thank you. And I will now hand over to Michelle Winzer to talk through the performance of the Australian Bank.

Thank you, Leanne, and good morning, everyone. I'm Michelle Winze, the Chief Executive for Heartland Bank in Australia. I am on Slide 27. I'm extremely proud of the way we finished our first year of operation in the Australian business and the enterprise value that we created in FY '25. Our vision is to be Australia's leading specialist bank with a focus on enriching customers' lives through financial freedom. The year started with a slow first quarter after consolidating the three businesses into Heartland Bank Australia and reviewing our structure for success. But from the second quarter through to the year-end, we achieved month-on-month improvements across the business. I established a new executive team of high caliber who are working incredibly well together. We are focused on uplifting our capability across the business and implementing the right frameworks and controls to protect our customers and meet all our obligations. We have invested in our risk capability and formed partnerships to ensure the business can achieve sustainable growth into the future. The second half delivered stronger results than the first half and had our exit momentum at the highest level in the history of the business. Our NPAT was $16 million for the second half from the first half at $12 million, which was overall up 20.4% on FY '24. Our exit NIM was 3.59%, which is in line with our commitment to market, which was up 32 bps on the third quarter. Our CTI was 48.4% for the second half, down from 56.4% in the first half. Our ROE continued to improve being 7.8% in the second half with momentum to improve further. Our growth for the Reverse Mortgages business was 20.6% for the second half and Livestock was 4.3% for the second half. Our impairments ratio was impacted by two single name customer provisions late in the half and finished the year at 0.13%. We stayed true to our revised strategy, which was to remain with our Reverse Mortgages, livestock and deposits as our three core product sets and continue to be focused on delivering investor-only products. We are clear on the potential opportunity in Australia and have focused our energy on being the best at what we do. Our key areas of focus in the business remain business growth, service excellence and diversified distribution. In relation to business growth, by the close of FY '25, we exceeded 30,000 customers with a remarkable 18% or more than 4,500 growth in customers, propelling our receivables up $290 million and deposits up $560 million. Reverse Mortgage performance included 6 best-ever monthly results with a strong new business fourth quarter '25, which was up 69% on fourth quarter '24. This momentum has continued with July having our highest number of applications in a single month. This exceptional performance reflects our focus on precise forecasting, disciplined execution and robust internal controls. Continuous pipeline growth and positive new business demonstrates strong market demand and effective lead conversion, particularly during our high-impact quarter three and quarter four periods. Reverse Mortgage new business volumes consistently exceeded $30 million monthly from quarter three onwards, fueled by strong relationships and improved service levels. Being able to support our customers over the long-term is something we are proud of with 66% of customers topping up through additional draws or top-up requests. We are also appealing to high-valued customers with loans greater than $1 million, now representing about 10% of our flows, which compares to 5% of the overall book in this high-value client segment. In relation to service excellence, our key focus areas have been, we strengthened our organizational agility through strategic role realignment, which has significantly accelerated our deal turnaround and supported us with scalable growth. We have now launched a targeted customer satisfaction survey following onboarding to ensure standards are maintained and improved whilst we look to grow drawdown levels and settlements. We have enhanced customer engagement and retention activity through impactful communications. This ensured that repayment volumes held steady at approximately $23 million per month, enabling new business to consistently surpass runoff and drive net portfolio growth. Of the total FY '25 repayments of $273 million, only $29 million were due to outward refinances with the remaining repayments representing property sales, [ deceased estates ] and voluntary repayments. We have empowered our customer service teams to make decisions to deliver exceptional customer service for our direct channel. In relation to diversifying our distribution, our key areas of focus have been: supporting our broker channel, which with strong relationship management and communication has flourished, underpinning approximately 56% of new Reverse Mortgage business and underscoring its pivotal role in our distribution strategy. We've maintained -- we've managed to streamline the network from the previous 4,011 brokers to a more focused group of 3,221. This strategic change enables us to concentrate our efforts on building deeper, more collaborative relationships with our brokers. We have continued to expand our broker network, which includes the addition of the award-winning broker firm, Mortgage Choice. Our focus on partnerships and sponsorships has continued in the Livestock business, sponsoring several events within the industry Australia-wide. Pleasingly, our corporate simplification strategy has been executed as planned with our focus on converting wholesale funding to deposits and finishing the year at 81% deposit funded from 54% in June '24. FY '26 outlook is for this to continue to improve. Additionally, in third quarter '25, we launched a new high-interest savings account, Life Savings, and continued our funding optimization through our database calls and amortization of our securitization facilities. Our deposit franchise has been enhanced in the period with the connection with two additional intermediaries to attract wholesale deposits across broader customer segments. We have managed our liquidity well, reducing our excess liquidity held from June '24 and growing when required for wholesale maturities and our business growth. The improvement in our cost of funds has been 1.39% from June '24 and resulted in a 75 basis point increase in our NIM from FY '24 to the end of FY '25. I'll now hand over to Kerry Conway to speak through the financials.

Thanks, Michelle. Just to note that all of the following slides are presented in Australian dollars. Like New Zealand, the financial position for the Australian Bank is robust with capital and liquidity ratios well above Board and regulatory minimums. Net profit after tax for the bank on a reported basis was $27.2 million, an increase of $9.4 million, 53%. As with the Group and the New Zealand Bank, the results are presented on both reported and underlying basis. Underlying results exclude the impact of $1.4 million pretax one-off items relating to staff costs and regulatory assurance costs. Underlying NPAT of $28.1 million is a strong increase of 4.8%, 20% on the prior year. It is important to note that due to the acquisition of the ADI in April last year, the FY '25 results are not directly comparable on a like-for-like basis to prior year. I'll walk through more detail in the next few pages where we have rebased the prior year to make sure we can compare metrics on a like-for-like basis. Moving on to Slide 29. Receivables grew $290 million, 15% in FY '25 to $2.3 billion, with strong growth of 18.5% in Reverse Mortgages. Michelle has already touched on this, and we'll talk in more detail later. So I'll move straight to Slide 30, net interest margin. The prior year exit NIM of 3.19% essentially excluded the impact of the ADI, so has been adjusted to 2.84% to account for the impact of additional liquidity now required as a result of being a bank. This allows for a like-for-like comparison. From this adjusted base, exit NIM expanded 75 basis points to 3.59%, primarily, as Michelle talked to, funding optimization driving plus 80 basis points as a result of transitioning from wholesale to retail funding. NIM is expected to expand further in FY '26 as cost of fund benefits continue. The outlook for average NIM is to be greater than 3.4% and for average NIM -- sorry, for exit NIM projected to be greater than 3.65%. Next, OpEx on Page 31. OpEx was up -- of $46.4 million was up $15 million, 49% on prior year. However, as we've detailed previously, adjusting for non-repeating one-offs, structural changes, which are neutral at a Group level and the full year impact of the ADI acquisition, there is a like-for-like increase of $8 million, 22%. And it's important to note that on a like-for-like basis, CTI improved from 55% to 52%. Similar to New Zealand, a large portion of the cost base is people related, so 44%, which is 117 full-time equivalents. In Australia, the next biggest cost category are costs related to volume growth at 17%, which is largely intermediary commission aligned with Reverse Mortgage growth. And again, similar to New Zealand, a sizable portion, 12% of the cost base relates to IT, including costs relating to the current court system Temenos. In FY '26, we will continue to see some growth in operating expenses as we see the full year impact of FY '25 recruitment as well as costs related to growth. However, income growth will outrun cost growth, resulting in further improvement of CTI to below 50%. Moving on to funding and liquidity, Slide 32. As discussed in reference to NIM, the bank has made a successful transition from wholesale to deposit funding. The liquidity surplus we held at the beginning of the year has been utilized strategically to replay the expensive wholesale funding of around $800 million. Prior to acquisition, funding was 100% wholesale. And as Michelle talked to, this is now 81% and will improve further to around 85% next year. Current liquidity is optimal and well above Board and regulatory minimums. Finally, moving on to capital, Slide 33. Like New Zealand, the Australian Bank capital ratio of 20.41% is well in excess of management minimums, which include a buffer above APRA minimums. As a result, the bank is well-placed to support its growth ambitions organically through existing capital reserves and future sustainable profitability. The return on equity for the bank shows a strong improvement from 5.9% in the first half to 7.8% in the second half, and we expect to see -- we expect additional NIM benefits from deposit funding to be realized along with benefits of increased scale from the bank growth, driving further improvements in ROE. I'll now hand back to Michelle to go through the individual portfolios.

Thank you, Kerry. I'm on Slide 34. So in relation to Reverse Mortgages, we achieved our highest new loan originations on record, resulting in a net book growth of $309 million from FY '24 at $276 million. We've also seen a positive start to FY '26 with our pipeline remaining strong to support FY '26 growth aspirations. Pleasingly, we've delivered significant reductions in our originations and settlements process with improvements from greater than 60 days to less than 20 days for Reverse Mortgage originations. The book has grown by 18.5% since June '24, and as I mentioned, 20.5% in the second half with record new business results in second half '25, resulting in a record milestone of a $2 billion book achieved in July '25. Competition has remained very strong with nonbanks and FinTech innovators expanding into this market. But despite this, we continue to increase our market share. Our weighted average LVR is 24.6% with a nonperforming loan rate of less than 1% with our average loan size of $208,000. Our outlook for FY '26 is for growth greater than 19%. Moving on to Slide 35 for livestock. We achieved the highest volume of cattle and sheep [ head ] financed in FY '25 at greater than [ $1 million ], which is the highest number financed in this business since 2022. Our receivables grew by 1.5%, reversing the FY '24 book decline of 28%. There are still drought-affected areas of Australia impacting feed levels and resulting in sell-down of livestock. However, there has been some rainfall over recent months. The northern states have improved, and we have a positive outlook to the Australian livestock market. The team have worked closely with our customers and have reduced the StockCo nonperforming loans from $64.4 million in June '24 to $36.4 million in June '25. Whilst impairments remain low, they were higher than expected with three single name customer provisions late in the year, increasing impairment expense ratio to 0.13%, which is up from 0.03% in FY '24. Our outlook for FY '26 is for growth of greater than 20%. Prioritizing a framework of strong risk management capability in the business, our focus also remained on rightsizing our expenses. We delivered strong improvements in our CTI ratio, finishing the full year at 52%. However, the second half was 48.4%. We did this by optimizing our wholesale to deposit funding mix with disciplined management of FTE and business operations, delivering cost savings through corporate simplification, process reviews and automation and executing on structural synergies and enhancing the capacity for growth whilst offering customers cost-effective solutions. I am actively focused on bringing together the culture of the three businesses and ensuring we have highly engaged teams focused on our customers and motivated to achieve the business growth objectives we have. Our risk and compliance teams are now in place with increased capability for AML/CTF and ESG. This, coupled with quality leadership team will ensure we continue to mature our risk culture. We are happy with the asset quality as our NPLs are a low percentage of our receivables, and we feel we are appropriately provided for following our review of the portfolio. In summary, whilst our first quarter growth was slow, our remaining 9 months delivered strong results across all portfolios. Our month-on-month improvements continue to enable strong results for June '25. This has set us up well, leading us to achievement of the $2 billion RM book in July '25. We have the right people in place and clarity on the strategic direction. Our focus remains on keeping the business simple and disciplined in our consistent service experience and building stronger partnerships with intermediaries, aggregators, brokers and agents. I have a high-quality executive team in place who are working extremely well together to deliver the best outcomes for the business and our shareholders, and we are attracting a high level of talent in each of our teams. We continue to work very well with our Board and their support has been critical to our success. I'm confident and excited about the year ahead in FY '26. I'll now hand over to Andrew.

Thanks, Michelle. Turning to Slide 37, FY 2026 outlook. We expect to deliver improved underlying return on equity and net profit after tax in FY '26. We will be focusing on four key areas. Firstly, maintaining a refined strategic focus on our core product sets with growth and innovation prioritizing Reverse Mortgages as a primary portfolio given the market opportunity, which I will discuss over page. Secondly, investing in technology uplift to simplify and automate manual processes, introducing new digital capability and providing better customer intermediary and employee experience whilst unlocking future growth. Thirdly, operational cost control. Heartland does not anticipate any further material cost increases and is firmly committed to disciplined cost control while improving underlying CTI. And finally, continuing to prioritize the efficient use of capital. With return on equity as Heartland's key performance metric, ensuring efficient use of capital is critical. The active realization of NSAs will continue, and we will redeploy this capital to high-return core lending portfolios. Heartland also welcomes and will continue to participate in the Reserve Bank of New Zealand's review of key capital settings with a particular focus on capital levels, asset risk weights and the composition of regulatory capital. Heartland sees this as a critical pathway to support Heartland Bank's ability to remain competitive, reduce the cost to the end customer and deliver a significantly improved return on equity. Slide 38, FY 2026 outlook and the Reverse Mortgage opportunity. As mentioned, our business will prioritize growth and innovation in Reverse Mortgages to retain our position as leading active originators in both countries, increasing our competitive advantage in markets with significantly untapped potential. The existing opportunity is large and it is growing with population projections supporting more than 40% increase in those eligible for Reverse Mortgage through to 2040. We estimate the total addressable market to be $170 billion in New Zealand and $660 billion in Australia. To meet this growth opportunity, Heartland will provide lending solutions. Firstly, to meet the unique financial needs of those aged over 60 years with home equity continuing to build up from long-term house price inflation. Secondly, for older people in and entering retirement with existing residential mortgages, there is significant debt requiring servicing on low fixed incomes for this cohort. And finally, for people in or seeking to access retirement villages or aged care, whilst we have started with the Village Access Loan, more can be done to assist with affordability and access issues at a critical stage of life and to play our part in addressing the projected shortfall in accommodation for this cohort. Slide 39, FY '26 guidance. Our priority for FY '26 is to deliver an underlying return on equity of at least 7% and an improved underlying net profit after tax of at least $85 million. We expect the difference between reported and underlying NPAT to be limited in FY 2026 only to any fair value changes on equity investments held and other one-off nonrecurring expenses. Heartland intends on continuing to provide greater granularity alongside quarterly market updates and guidance is provided across each bank and across key metrics. This shows a [ marked ] improvement across the board for FY '26. Slide 40, long-term ambitions. Intentional necessary resets in Heartland's business throughout FY '25 have rebased the starting position assumed when we first announced our ambitions for the financial year ending 30 June, 2028. These resets have included a focus on return on equity as Heartland's key performance metric, requiring increased discipline in capital management and allocation. Our refined product strategy, prioritizing growth in high-return core product sets, which are accretive to return on equity. This has necessarily resulted in a near-term reduction in Heartland Bank's lending base as it exits nonstrategic assets and winds down unsecured lending portfolios. Enhancements to collections, recoveries and write-off strategies to deliver sustainable asset quality over the long-term. These changes have amplified Heartland's near-term impairment expense. Recognizing that accelerated investment and process simplification and automation is required to maintain the competitive advantage and to achieve our growth ambitions in Heartland's core product sets. And finally, an increase in the cost base, primarily due to absorbing the ADI and subsequent costs related to regulatory requirements following the ADI acquisition. At an Investor Day ahead of our FY '25 Annual General Meeting, Heartland intends to present updated long-term ambitions, resetting to a full 5-year time horizon for the financial year ending 30 June 2030 to demonstrate our operating metrics at scale. Heartland will provide to investors detailed information on the underlying approach, growth drivers and timeframes that support the delivery of its reset long-term ambitions. We currently expect that during the period to FY 2030, investors will see a significant increase in underlying return on equity and underlying profit from a continued focus on capital efficiency, both in the composition of our regulatory capital and the allocation of that capital to core product sets. Profits generated in Australia, largely, if not wholly retained within Heartland Bank Australia to provide the capital to fund its projected growth, continued growth in our core product sets with a bias towards material growth in Reverse Mortgages, superior NIM being maintained, enhanced asset quality and an underlying CTI reduction. More information about our Investor Day will be provided in due course. Finally, I'd like to thank our staff for their resilience and delivery in what has been a year with very unique challenges and of course, to our shareholders for their continued support. Thank you very much. I'll hand back to the operator.[Operator Instructions] Your first question today comes from Ben Crozier from Forsyth Barr.

Just the first one on Reverse Mortgages. It's good to see you come out and saying you're prioritizing growth there and aiming for north of 18% growth. But if we just look at growth rates over the last few couple of years, particularly in the 2H, they were for New Zealand and Australia below that threshold. So what sort of gives you the confidence that you can step up the growth? I know you've pointed to some strong 2H in Australia, but particularly in New Zealand to grow north of 18% for Reverse Mortgages.

Thank you. This is Leanne Lazarus. We have strong confidence in our ability to grow to 18%. A couple of things on that. Strong brand awareness. The market has played quite a significant role with the economic conditions that we have. As you heard yesterday, the OCR has decreased. Customer -- Reverse Mortgages is based on customer needs, and there's a significant addressable market. Our brand, our position in the market as well as our continued pipeline generation and lead generation is extremely strong, and we're starting to see increased levels of applications come through.

I was just going to say in Australia is -- your rate that you offer is sort of at the higher level of your competitors. Will you look to move that down and maybe keep up with the NIM to accelerate growth or can you hold these rates?

We're looking at everything across the Reverse Mortgage business in Australia, Ben. We have seen our application volumes pretty much double in the last 12 months. There is a lot of improvements that we are delivering in that business. I know I talked about some that we delivered in FY '25. We're delivering even more in FY '26. We continually look at the pricing of the product. There is significant demand and some of the features that we have in our product is different to the rest of the market, which is what warrants the premium in the rate, but it is something that we continually look at because we recognize the importance of and the opportunity in that market.

That's good color. And maybe just on sort of your due diligence and risk tolerance and risk pricing processes in the motor and business lending. I know you've talked a little bit about the change in collection policies you've done, but sort of on origination, have you changed any of the way that you look at your originations?

I'll take that question. What we have looked at is our lending standards. We've adjusted that. We'll be introducing and we started to introduce risk-based pricing. So for good quality deals, deal originated direct, looking at, as I said, risk-based pricing and pricing for risk. We have updated our motor scorecard, so that's more in line with economic conditions, and that was introduced in the second half. We are going to be doing the same for our asset finance book as well. Having said that, we've looked at lending standards as well, implemented prescriptive ways of collections recoveries also within the business asset finance portfolio as with motor.