MyState Limited (MYS) Earnings Call Transcript

Thank you for standing by, and welcome to the MyState Limited FY '25 Results Conference Call. [Operator Instructions] I would now like to hand the conference over to Mr. Brett Morgan, Managing Director and Chief Executive Officer. Please go ahead.

Thanks, Darcy, and good afternoon, and thanks for joining us today for our FY '25 results briefing. I'm Brett Morgan, MyState's Managing Director and CEO; and with me is Gary Dickson, our CFO. Turning to Slide 2. Earlier today, we launched our FY '25 financial results with the ASX and then these are also available on our website. With respect to today's agenda, I will begin with an overview of the full year result before Gary takes you through the financials in more detail. I will then end the presentation with a summary of our key business priorities before Gary and I welcome questions. Moving to Slide 4. FY '25 was a landmark year for MyState. Our transformational merger with Auswide completed in February 2025, and we are pleased to report that the integration is going well. In the 4 months since merger, we have already achieved annualized synergies of $8.4 million. Importantly, we've continued to grow the business post merger with loan book growth of 7.5% on an annualized basis. In addition to growing the loan book, we have maintained our high levels of customer advocacy, attracted new-to-bank customers, grown customer deposits and accelerated growth of Selfco, our equipment finance business. Supported by the combination of Auswide for 4 months, in FY '25, our underlying NPAT increased 17% to $41.3 million. We are well capitalized, which gives us flexibility to invest and grow into the future. The Board declared a final dividend of $0.11 per share fully franked, taking the full year dividend to $0.215 per share. Gary will talk more about the dividend later. Turning to Slide 5. The FY '25 result reflects the transformational year we've had, driven by the merger and underlying business performance. Turning to our key metrics. The merger and organic growth saw our home loan and deposit books increase by 62% and 71%, respectively. Underlying NPAT was up 17% to $41.3 million. Total capital increased 109 basis points to 17.5%, providing us with the flexibility to continue to invest in and grow our businesses. Underlying earnings per share was $0.307, which reflects the combination of Auswide and MyState and includes $0.01 per share in realized synergies in the first 4 months post merger. Importantly, the results were underpinned by continued strength in our service proposition. Moving to Slide 6. I Critically, our transformational merger with Auswide is on track and is already delivering value. In the first 4 months since the merger completed, we have delivered $1.7 million in actual synergies. On a full run rate basis, annualized synergies equate to $8.4 million. In the early stages of integration, we have successfully established a single Board and executive team, consolidated our group financial -- our group services functions, including risk, HR, technology, finance and marketing, focused on our people and investing into new capability, rationalized our internal and external audit relationships and negotiated a single corporate insurance arrangement. Turning to Slide 7. During the year, we continued to invest in a range of strategic priorities across our four brands. MyState Bank successfully launched its new digital banking platform, delivering an improved digital experience to our customers. Pleasingly, MyState Bank's entire digitally active retail customer base is now using the new platform. We also enhanced our lending processes, which shortened time to decision, supported higher volumes and delivered operating efficiency. Auswide Bank launched a major new partnership with rural services group Elders to distribute a range of our banking products to a new market through their network. Our TPT business is building significant momentum in the referral and conversion of trustee opportunities across new and existing segments. We also reduced operating costs through a range of process enhancements. Selfco, our higher-margin equipment finance business, has grown significantly since the merger with loan book growth of 43% in just 4 months. I will now hand over to Gary, who will take us through the financials in more detail.

Thanks, Brett, and good afternoon, everyone. Slide 9 contains a summary of this year's financial performance, which includes a full 12 months for MyState Bank and TPT Wealth and a 4-month contribution from Auswide, including Selfco. Our key financial metrics, including operating income, core earnings and underlying NPAT, were all well above last year's stand-alone MyState result. Total operating expenses were also up, primarily reflecting the inclusion of Auswide. We continue to closely manage our underlying operating expenses with cost growth across MyState Bank and TPT Wealth of only 3.7% for the year. Net interest margin increased 2 basis points year-on-year, with MyState Bank NIM stable and the inclusion of Auswide a positive to margin. We remain strongly capitalized with our total capital ratio increasing by 109 basis points to 17.5%, providing MyState with the capacity to drive future growth. Slide 10 contains a high-level summary of the financial contribution from our banking and wealth businesses. The banking result is shown on a combined ADI basis with further detail on the individual operating performance of both MyState Bank and Auswide Bank detailed in the appendix. Moving to Slide 11. Underlying NPAT of $41.3 million was up 17% on the prior year, driven by higher net interest and other banking income, partly offset by increased operating expenditure due to the inclusion of Auswide. Underlying NPAT excludes merger-related transaction and integration costs and purchase price allocation adjustments totaling $5.7 million, which are all included in the statutory NPAT result of $35.6 million. Net interest income increased 26% due to a larger average balance sheet and a small uplift in average net interest margin. Other banking income rose 24%, driven by higher lending and transaction fees and commission revenue. Wealth management income fell, impacted by nonrecurring commissions earned on some larger state values in the second half of FY '24. Total operating costs were up 25.7% driven by the higher merged group cost base. Slide 12 shows the combined net interest margin for MyState Bank and Auswide. Average NIM of 1.47% was up 2 basis points on FY '24. Exit NIM was slightly lower than average NIM for the second half of 1.49% due to the impact of the reduction in the RBA's official cash rate in May, which flowed through to variable rate lending and deposit products in the month of June. NIM also continues to be impacted by home loan and deposit price competition, some customers switching to higher rate deposit products and home loan retention discounting partly offset by Selfco's higher NIM. Slide 13 provides a breakdown of operating costs for the year, which increased 25.7% to $127 million. The inclusion of Auswide in the group added approximately $22 million to the cost base with MyState Bank and TPT Wealth limiting cost growth to 3.7% over the year noting a portion of corporate overhead is now also allocated to Auswide. Underlying expense growth remains a focus and continues to be well managed. Key drivers of the uplift in expenses were personnel cost growth of $12.2 million, reflecting increased FTE with the inclusion of Auswide staff. Technology costs increased $8.5 million due to the addition of Auswide and higher software maintenance fees. Other expense growth of $5.6 million reflected Auswide spend and volume-related lending and payment system costs. Slide 14 includes financial information on a pro forma basis for FY '25, comprising 12 months of earnings for Auswide Bank and 10 months of earnings for Selfco. The pro forma operating income and expenses in FY '25 form a baseline for the merged group. The slide highlights the recovery in Auswide's earnings with underlying NPAT of $6.1 million in the 4 months since merger being only 6% lower than the 8-month premerger period. Slide 15 provides a summary of the anticipated ranges and timing of synergies and the cost of integration on an annual basis through to FY '28. For the outer years, these represent our current best estimates and the actual timing may differ. At this point in time, integration and the realization of synergies is proceeding as expected. As we've previously disclosed, the merger is expected to yield annual pretax cost synergies of $20 million to $25 million over a 3-year period. We've provided a range with respect to integration costs, noting that our best estimate remains $29 million with the majority of this anticipated to be spent in the next 2 years. Turning to Slide 16. Our home loan portfolio increased by 62% to $12.9 billion at 30 June, following the merger with Auswide and underlying organic growth in the book. The group continued to actively manage the volume margin trade-off and focus on growth in low-risk owner-occupied lending. Loans with an LVR of less than 80% made up approximately 79% of the total book. Both applications and settlements increased on the prior year, and as Brett highlighted earlier, we also made digital enhancements to our lending processes, which shortened the time to decision, supported higher volumes and delivered operating efficiency. Home loan customers have continued to demonstrate resilience with employment markets remaining stable across Australia, inflation now back within the RBA's target range and house prices supported by recent cuts in the official cash rate with the potential for further rate reductions. The chart at the top right of this slide highlights a blended 90-day arrears rate of 44 basis points which comprises 54 basis points for MyState and 25 basis points for Auswide, both remaining below industry average. Moving to Slide 17. Primarily as a result of the merger with Auswide, customer deposits increased to $10.1 billion and now represent nearly 71% of our total funding mix. During the year, we saw growth in term deposits and both transaction and offset account balances. Post-merger, the group has a broader deposit gathering capability through MyState Bank's improved digital channel, Auswide's partnership model, including the new Elders relationship, and a larger, more geographically diversified branch footprint along the Eastern Seaboard. Securitization remains an important source of funding. And in October 2024, MyState Bank issued its largest securitization term deal which provided additional flexibility to run off more price-sensitive deposits. Slide 18 shows that the group remains strongly capitalized, with a total capital ratio increasing 109 basis points to 17.5%. This increase was supported by profit generated during the period and the issue of Tier 2 eligible subordinated notes in May 2025, partly offset by the FY '24 final and FY '25 interim dividends. The chart also includes the pro forma capital position at 30 June, inclusive of the redemption of $25 million of subordinated notes that occurred on the 10th of July, the first call date for these notes. MyState's strong capital position provides us with the flexibility to continue to invest in key initiatives, including growing our home loan and asset finance books. Turning to Slide 19. TPT provides MyState with income diversification, contributing $14.6 million in fee revenue and other income to the group, while expenses were 3% lower than the prior year. The decline in FUM reflects the finalization of some large states during the year. Looking forward, the business is expected to benefit from increasing momentum in the referral and conversion of opportunities in existing and new segments of the trustee services market. Slide 20 provides a snapshot of our equipment finance business, Selfco, which was acquired by Auswide in August 2024. The asset finance market is estimated to be worth $40 billion per annum. Selfco's target market is Australian small businesses seeking to purchase business-critical assets used to generate income. The majority of the book by asset type comprises trucks and trailers. Selfco originates loans nationally via the broker channel supported by BDMs on the ground in key states. The loan book has grown 43% since the merger and 98% since it was acquired by Auswide nearly 12 months ago. The business is higher margin. And going forward, we will look to continue to scale a relatively fixed cost base to generate appropriate risk-adjusted returns. Finally, on Slide 21, the Board has declared a final dividend of $0.11 per share. This takes dividends for the full year to $0.215 per share, representing a full year payout ratio of approximately 88% of underlying NPAT. The Board considered a range of factors when declaring the final dividend, including one-off merger-related transaction costs, integration costs, while also recognizing that Auswide only contributed to group earnings for a 4-month period. The second half payout ratio of 78.1% is within the Board's target range on an underlying NPAT basis. The dividend reinvestment plan will be offered to shareholders at a discount of 1.5%. I'll now hand you back to Brett to summarize our key priorities as we look ahead.

Thanks, Gary. And turning to Slide 23. In terms of integration priorities, we'll move to a single banking license, which will simplify many aspects of our banking business across treasury, finance, risk, compliance, product and operations. We'll implement a new loan origination system to modernize our loan decisioning process and experience, select and consolidate the core banking system and continue to consolidate the broader technology stack. We'll continue to consolidate our supply chain. We'll align our operating model, and we'll consider our future bank branding. In terms of business priorities, it is to profitably grow our home loan book, grow customer deposits directly and via partnerships, including the Elders partnership, continue to scale Selfco, our equipment finance lending business, accelerate the growth in our private trustee services business, continue to consider organic and inorganic opportunities where it makes sense. Moving to Slide 24. We believe MyState Group's investment case is compelling. We now have a larger and more diverse home loan book, improved financial resilience, greater access to funding, increased operating leverage and flexibility to pursue growth opportunities. As this result demonstrates, the merger is progressing well. We've made good early progress to extract cost synergies. We've continued to grow the business, and we've launched new initiatives to drive future value. We are well capitalized, have a track record of probability, an attractive, fully franked dividend yield and are targeting double-digit EPS growth based on full run rate merger synergies. We have an experienced management team that have the proven ability to execute and we look forward to profitably growing our retail banking, wealth and equipment finance businesses into the future. Gary and I will now answer any questions you may have. Over to you, Darcy, to moderate.

[Operator Instructions] Your first question comes from Alastair Hunter from Ord Minnett.

Brett and Gary, well done on first result incorporating Auswide. Just on the cost synergy slide, Slide 15. Note that you've sort of identified annualized synergies as of the end of June at $8.4 million but then we're forecasting on the '26 number only $9 million to $10 million run rate. So it seems like a very small uplift given you'll be spending sort of $12 million to $14 million, and obviously, undertaking a fair bit of activity as you've outlined. So I'm just trying to reconcile why that $9 million to $10 million looks low relative to an $8.4 million run rate at the start of the period.

Alastair, it's Brett. So thanks for the question. You're right in terms of what we did in the first year was identify and execute on those quick win synergies, which included the one Board, management team, the rationalization of some auditors, insurance and some other things. The next period is the lower, easier, I call it easier, the more straightforward synergies have been delivered. So we will be investing into sort of one loan origination system, one ADI and some other areas where we expect to extract the synergies sort of towards the second half of FY '26, early FY '27. So that's the reason for the timing and the jump in '27 and not significant uplift in '26. Of course, we're going to try and bring these forward and execute well and bring them forward as far as possible. But the next set of synergies, we really see to take a little bit of investment to deliver.

Yes. So it's not just a timing, pushing it a little bit...

Timing, and yes, it's just -- it's almost on the edge of this financial year, to be honest.

Understand. And then cost growth ex the sort of merger synergy activity looks like, again, based on what you sort of disclosed around about 6% underlying business as usual cost growth for the new combined group. Is that about what you're flagging?

Yes. So on Slide 14, with that pro forma information, which is hopefully helpful, we've got a baseline, if you like, of just over $180 million. So I think as you correctly highlight, Alastair, that the underlying cost growth is, call it, sort of 5% per annum. So that's an uplift in the order of $9 million. And from Slide 15, as you've highlighted, you can see that range of synergies. So net-net, we're expecting that rate of underlying cost growth in FY '26 to be broadly offset by the synergies that we realized, so a relatively flat cost base year-on-year.

And a question on the sort of, I suppose, your loan asset growth, building in a significant increase in sort of Selfco. What do you see as your -- versus a system housing credit growth of many of the other banks that come out of the sort of 5% to 7% range, where do you see your appetite for home loan growth versus that, I suppose, desire to make it profitable growth? What rates of growth would be realistic for '26?

And you're right on the trade-off between growth and margin, Alastair. So we think based on our business and noting that the larger base, we want to grow marginally ahead of system. And we're sort of thinking system is going to be 5% to 6%. So our expectation is slightly ahead of that. And we see that as the optimal rate between growth, returns and operating leverage.

Understand. And in terms of funding that growth, just interested in the sort of outlook for the Auswide Elders product, which really only got sort of launched and is being educated currently with the Elders sales team. But what sort of scale would you see you could raise of deposits through the Elders channel? And then secondary question really on capital in terms of where you sit at the moment, the 13.2% Tier 1 ratio, noting you've got lots of headroom at the total capital ratio, including the debt, but at the Tier 1 level, how do you see that funding this asset growth versus continued use of, I suppose, more securitization in the year ahead?

Yes. So Alastair, I'll answer the funding question and hand to Gary on the capital. So at a high level, we are always targeting more than 70% of deposits through customer deposits, and we consider Elders part of the customer deposits. So that's the first point. Secondly, you are right, the Elders partnership was only really rolled out post merger, so in the last 3 or so months, and it's about educating and helping each of the Elders' outlets to be able to take onboard customers. So we have seen some nice momentum there, and we expect that to accelerate. It will form a decent part of our funding position going forward. It must be strategically important to us, and also Elders to continue the partnership. So we do expect that to grow considerably.

And then I think on the capital side, Alastair, I mean, clearly, we are endeavoring to fund the majority of loan book growth through customer deposit funding. So sort of in line with the funding mix that's set out on Slide 17, we'd expect that to be at a minimum of sort of 70% as we look forward. And then in terms of more specifically on capital, as you can see on Slide 18, as you've highlighted, the CET1 capital ratio 11.88%, from a rating agency perspective, we have -- we've sort of previously communicated, we have a target of maintaining that at, at least 11% in terms of those rating agency requirements with effectively an internal appetite limit greater than 11.25%. So there is a little bit of headroom there or quite a bit of headroom there to grow. And then you mentioned Tier 1. Obviously, we have $65 million of additional Tier 1 capital on issue. So that will ultimately sort of roll through on the 1st of January 2027 to be treated as Tier 2 capital as part of the changes in the APRA capital framework. So we do -- we have capacity to grow. Securitization, capital release securitization will still remain an important funding source for us.

And on dividends, thank you very much for the extra dividends that came through. I suppose looking through some of the costs that you've outlined that are related to the merger and timing from the first half. As we look into the '26 dividend, can I just clarify whether the 60% to 80% is going to be based on the underlying net profit after tax or the statutory numbers? Noting you've probably got $0.02 or $0.03 on an after-tax basis in that adjustment between the statutory and underlying as a negative drag into the next '26 year before it normalizes out in '27 and '28. So which way can you guide the market as to the denominator for your 60% to 80%?

Yes. I think Alastair, as you saw this year, the Board look through to underlying effectively to consider the dividend to pay. And we're in a transformational period. So obviously, where there's some investment and spend to deliver synergies and outcomes, all in the order to create shareholder value. So I would say the Board will take decisions relevant at the time with the future view in mind. So I can't give you a definitive it's NPAT or underlying, but just know that the Board will consider the relevant factors at the time when taking the decisions about the dividend.

All right. So it's sort of a half-by-half.

Yes. I think over time, it will come back to steady -- over time, it will come back to steady NPAT. In the -- through the period, we'll consider all factors.

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