Latitude Group Holdings Limited (LFS) Earnings Call Transcript

Thank you for standing by, and welcome to the Latitude Group Holdings Limited Half Year '26 Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mitchell Hawley, Head of Investor Relations. Please go ahead.

Thanks Kate. Good morning, everyone, and welcome to Latitude's results briefing for the half year ending 30 June 2026. I'm Mitchell Hawley, Head of Investor Relations, and I'm joined today by our Managing Director and CEO, Bob Belan; and CFO, Guillaume Leger. In the spirit of reconciliation, Latitude acknowledges the traditional custodians of country throughout Australia and their connections to the land, sea and community. We pay our respects to elders past and present and extend that respect to all Aboriginal and Torres Strait Islander people today. I'll now hand over to Bob.

Thanks, Mitch. Good morning, everyone, and thank you for joining us. I'm pleased to share that Latitude has made a solid start to the 2026 financial year. It's been another period of focused execution, which has again translated into a strong set of operational and financial outcomes. Turning to Slide 5. You'll see that we've added 148,000 new customers to the Latitude franchise during the half. Card transactions, which is the key measure of customer engagement, increased 7% and purchase volumes grew 5% to $3.6 billion. New personal and auto loan originations reached $785 million, lifting our total receivables to $7.3 billion, the highest levels in 6 years. Moving on to Slide 6. Cash profit for the half came in at $64.3 million, up 39% year-on-year. Net interest margin increased 27 basis points to 12%, while risk-adjusted income grew 3% to $286 million at a solid 8% yield. At the same time, our cost-to-income ratio improved by almost 400 basis points to just over 41%. These are strong outcomes, particularly given 3 RBA cash rate increases during the half and inflationary pressures that continue to affect household budgets. They also reflect the discipline that's been maintained here at the company around pricing, credit and portfolio management. This combination of earnings growth, improved operating leverage and a robust balance sheet has enabled the Board to declare a fully franked interim dividend of $0.055 per share. It reflects our confidence in the business and our capacity to return capital to shareholders while continuing to invest for the future. Beyond the headline numbers, I'm pleased with the consistency of the performance that the company is now delivering. We've been deliberate about building a business capable of producing strong and sustainable results through different points in the economic cycle. We're not managing Latitude for any one quarter or one half. Our longer-term focus underpins the decisions we make each and every day, how we price, how we grow, the credit risk we take, how we manage our costs, and of course, where we choose to invest. I won't spend a lot of time speaking about the specifics on the next 2 slides that go into the Pay and Money division performance details. I'll leave that for Guillaume to cover very shortly. The key takeaway, however, is that both of our core businesses continue to perform well and continue to gain market share profitably. I'm also encouraged by the momentum that's building within our new enterprise growth division, established earlier this year to extend our product offerings into new and underserved segments, specifically health and wellness and home services. We expect this business to become an increasingly important contributor to Latitude's asset growth and earnings over time. Turning to Slide 9. I'm pleased with our progress to date, but I also see considerable opportunity ahead. Our Bridge to the Future strategy, which we launched in January is about building on the strong fundamentals now established across the company. There's still plenty of work ahead, but we have a clear strategic direction to guide our decisions. We have the execution discipline to deliver and the financial capacity to continue investing behind the opportunities that will underpin our future profitability growth. Finally, I want to thank all of my Latitude's colleagues. The progress that's been made over the last 3 years is a direct result of their focus, their hard work and their commitment. With that, I'll hand it over to our Chief Financial Officer, Guillaume Leger to take you through the results in more detail. Guillaume, over to you.

Thank you, Bob, and good morning, everyone. Turning to Slide 11. The first half reflects continued momentum across the group. We are growing receivables, generating higher earnings from that growth and doing so while maintaining strong returns and disciplined risk settings. Starting on the left-hand side of the page, we continue to see healthy origination activity across our business, resulting in average receivables growth of 6% year-on-year. That growth translated into earnings with total operating income increasing 7% to $438 million. We achieved this while maintaining pricing discipline and continuing to optimize our portfolio mix, contributing to a 20 basis point increase in operating margin to 12.2%. On the right-hand side of the page, risk-adjusted margins remain resilient. Across the portfolio, disciplined risk management, portfolio optimization and funding initiatives continue to support strong risk-adjusted returns of 8%. Turning to Slide 12. Cash profit before tax increased 12% to $105 million. Cash NPAT increased 39% to $64 million and statutory profit increased 37% to $54 million. The Board has declared a fully franked dividend interim of $0.055 per share. This represents the fourth consecutive increase in the dividend since the second half of 2024 and reflects confidence in the strength of the balance sheet and the underlying earnings profile of the business. Importantly, these results demonstrate both sides of our capital discipline, generating attractive returns on capital, while returns of capital to shareholders is delivered by a compelling dividend yield of approximately 12% or 17% on a fully franked grossed-up basis. Our tangible equity ratio remained strong at 8.1% or 7% on a pro forma basis, assuming the redemption of Capital Notes 1, which has its first call date on the 27th of October 2026. This remains within our target operating range of 6% to 7% and provides capacity to support future growth while continuing to return capital to shareholders. Turning to Slide 13. New credit card and loan volumes increased 4% to $4.4 billion despite headwinds from the New Zealand dollar. Growth was achieved across both Money and Pay divisions. The half-on-half movement reflects the historical seasonality of the business. Receivables increased 4% year-on-year to $7.3 billion, supported by continued origination growth and a disciplined approach to portfolio management. Importantly, growth continues to be generated from new business and remains aligned with our return hurdles and risk appetite settings. This portfolio growth continues to translate into higher earnings and returns. Turning to Slide 14. Margin performance remained strong. Risk-adjusted income increased $286 million. RAI returns remained strong at 8% despite evolving macro conditions. Funding cost improvements from new term funding initiatives, warehouse refinancings and lower average benchmark rates in New Zealand more than offset the effect of higher RBA cash rates during the half. As a result, operating income margin expanded 20 basis points year-on-year to 12.2%. Credit performance remained within expectations. Together with pricing discipline, funding optimization and portfolio management, this continued to support attractive risk-adjusted returns. Ultimately, the underlying economics of the business remained resilient. Turning to Slide 15. Funding remains a key strategic strength of the group. During the half, we completed 5 funding transactions totaling approximately $2.3 billion and further diversified our funding platform. We now have 65 investors across our program, $5.3 billion of warehouse capacity and $8.8 billion of public ABS issuances since the inception of Latitude. We also completed a Capital Notes 2 issuance successfully raising $135 million, including approximately $64 million we invested from Capital Notes 1 investors. Importantly, improved pricing and funding flexibility supported lower funding spreads during the half. Broadly speaking, our diversified funding platform continues to support growth, margin expansion and balance sheet flexibility. Turning to Slide 16. Credit performance remains consistent with our expectations and in line with our portfolio settings. The macro environment continues to place pressure on household budgets. However, portfolio performance remains within risk appetite. On the left-hand side, originations quality remains strong with 63% of our new customer originations within our CR1 and CR2 segments. In the middle of the page, delinquency rates have continued to normalize, reflecting both macroeconomic conditions and the portfolio risk settings that support attractive risk-adjusted returns. This has translated into net charge-offs increasing to 4.2%. On the right-hand side, risk-adjusted income remained strong at 8%, demonstrating the resilience of the underlying portfolio economics. We continue to maintain a prudent provisioning position with a coverage ratio of 4.59%, up 14 basis points during the first half. All things considered, we remain comfortable with the risk profile of the business and continue to generate attractive risk-adjusted returns. Finally, turning to Slide 17. Operating leverage continued to improve during the half. Cash operating expenses reduced 2% year-on-year, while we continue to invest in technology, AI and future growth initiatives. Productivity and simplification initiatives more than offset inflationary pressures. As a result, our cost-to-income ratio improved to 41.3%. We also continue to deliver positive jaws of 9% with operating income increasing 7% year-on-year and cash operating expenses reducing 2% year-on-year. Importantly, we're not simply reducing costs. We are reallocating investments towards initiatives that improve productivity, enhance customer experience and support future growth. Ultimately, disciplined cost management continues to create operating leverage and supports margin expansion, growth investments and stronger earnings outcome. With that, I'll hand it over back to Bob.

Thank you, Guillaume. The last page of the document really speaks to the outlook and our views for what's ahead. And let me just walk everyone who's on the call through that very quickly. Our view is that we're well positioned to navigate through what is clearly a more challenging environment here in Australia and to some degree also in New Zealand. While we may expect originations to moderate, we do continue to expect to grow assets or receivables throughout the year. As I've mentioned in prior calls, we continue to stay maniacally focused on net interest margin and risk-adjusted returns. That requires a different set of tactics and techniques in the current environment, and we're more than prepared and well-positioned to ensure that, that discipline is maintained. We continue to see the ongoing benefit of historical and current investments in AI and automation and fully expect there to be ongoing improvement to operating leverage as the year goes on. And again, as I've shared before, we are an organization focused on the fundamentals, executing for the long term and really continue to make investments to ensure that's the case here at Latitude, not for the next half, but for the long-term future. Mitch, over to you.

Yes. So with that, we'll hand it back to Kate for the Q&A.

[Operator Instructions] Your first question comes from the line of Sally Hong with Morgan Stanley.

I just had a few questions this morning. So Bob, you mentioned that you continue to expect good receivables growth, but also flag softer discretionary spending and lending demand. How should we think about the receivables growth over the next 6 to 12 months versus the 4% year-on-year growth you guys have delivered in first half '26?

Yes. There's a few things going on, Sally. So there's, without any question been some level of pullback in consumer discretionary spending. And I think that that's an obvious and expected outcome in the current environment. On the other hand, there's also a stronger demand for credit when these moments in the macroeconomic picture emerge. And so those are 2 sort of offsetting components. We see strong demand for things like debt consolidation loans and refinancing, which is great. It shows that customers are being proactive about managing their household balance sheet. And so that said, I've always been clear that we will prioritize net interest margin risk-adjusted return over volume growth, and that will continue to be the case. I guess, the last point I'd raise is that repayment rates are another key feature that we watch. Those have remained quite resilient in the first half of the year. But to the extent that those slow down, that could contribute to sort of greater asset or receivables growth in the back half.

I would also add that we are growing beyond our traditional space with our new division Enterprise Growth in the space of health and wellness and home services. Those are areas that are just pure growth for us because we haven't been very much in this space before and continue to diversify our outlets to more than just the traditional retail.

Great. So this is probably a question for you, Guillaume. So the margin reached 11.95% in the higher rate environment. What are the key tailwinds and headwinds to margin over the next 6 to 12 months? And should we expect the margin to broadly hold around these levels?

Thanks, Sally. [indiscernible] So look, a lot still needs to play out in the macro and the rates. As you also could see in the past few weeks and months we have been in a bit of a rollercoaster, is the RBA going to increase or not? I think it is a little bit clearer the path that it's going to. So that will definitely impact our margin. We've been able in the past year -- past few years to reduce our spreads. But at any point in time, this could also change. But we've been quite successful, and I think our investors are recognizing the strength of our platform and our returns. Pricing has been -- our discipline has been consistent. And as you could see on Page 7 for the Money business, our new business continues to be originated at higher yields in the portfolio. So that as we drop off the vintages that are at lower rates and originate at higher rates, this also improves our portfolio. We have a series of hedges on the books already to -- that we've locked in for the most part last year at lower rates. So that also gives us a tailwind in our margin in the future.

Great. So just on the net charge-offs, it's risen to 4.24% over the half. And when you say losses remain within expectations, what sort of trajectory for net charge-offs are you assuming for the second half of '26? And what would need to happen for these losses to move materially higher?

So look, just like everyone else, every lender in Australia and New Zealand, we were affected by macroeconomics and employment and so forth. So most people have disclosed slightly higher net charge-off provisioning. So you also see this in our numbers. In our case, we have great ability to price at levels that we believe is the right price for the risk. On our Money portfolio, we have 23 pricing segments, which is why we say that the losses are according to our expectation because when someone comes in at a certain risk profile, we price and we end up getting better returns as I was just talking about a few minutes ago. But of course, that cohort, if it's slightly higher risk, then it would generate the credit losses that you see. And this is why we keep saying that it's in our expectation that in order to continue to generate the 8% excess spread that we do generate, this also sometimes in a certain period would be aligned with slightly higher credit losses.