Release Date: August 20, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Judo Capital Holdings Ltd (ASX:JDO, Financial) reported strong lending growth, with the loan book exceeding $10 billion.
- The company successfully repaid the term funding facility, which has been a significant tailwind for profitability and capital.
- Judo Capital Holdings Ltd (ASX:JDO) achieved a net interest margin (NIM) at the top end of their guidance, with an exit NIM of 3% expected by June 2025.
- The company continued its regional expansion, opening four new locations and adding 21 bankers during the year.
- Judo Capital Holdings Ltd (ASX:JDO) maintained a strong capital position with a CET1 ratio of 14.7% and plans to optimize its capital stack further.
Negative Points
- The cost of risk was at the top end of expectations, with an impairment expense of $70 million.
- The 90 days past due and impaired ratio increased to 2.31% of GLAs, reflecting some asset quality challenges.
- Operating expenses grew by 13% due to higher employee, IT, and amortization costs.
- The company faces increased competition from major banks and private credit firms in specific segments of the SME lending market.
- Judo Capital Holdings Ltd (ASX:JDO) has a high reliance on broker-introduced loans, which could impact profitability if broker commissions increase.
Q & A Highlights
Q: At the CBA result last week, they bemoaned the negative spread on TDs. You've seen subsequent pricing moves by the majors. If we move back to a world of a positive TD spread, which was in place pre the GFC, how would that improve your NIM given that you continue to include sort of an 80 basis points negative spread in your NIM assumptions going forward or does it get competed away?
A: No, I mean Matt, I mean, the maths is relatively simple as you said. I mean, we -- our margin is 80 basis points over swap and nearly $10 billion of deposits now. So that would be $80 million that would flow directly to the bottom line. I mean, we do think you'll also see that CBA last week, our premier TD rate is the one year rate. And you will have seen some downward movements on that last week, I think CBA dropped 40 basis points. That's not a direct comparison with where we compete. As you know, we compete in the branchless bank space. But we always said that we believe that once the term funding facility was repaid, we believe that the competition for TDs would moderate and that would manifest itself in lower margins. But yes, I mean, if we got to I think you like in the UK and I was there four weeks ago, and yes, I mean that they can understand that we pay over swap for our TDs. And as you said, the impact on NIM would be significant. I don't know, Andrew, what would it -- it would be a NIM of over 4% presumably.
Andrew Leslie: Very significant. But I think we've put our guidance out there, Matt, that's where we think and that's where we're managing to. And I think the only add to that comments from Chris is that we have started to see a little bit more rationality in the deposit pricing market and that needs to wash through. Swap -- the volatility in swap rates is probably the other component there. And that has been a little bit unhelpful of light but some stability there. And also just more rational pricing, I think is what will bring that front book deposit margin, which we have been at the top end of that 80 basis point to 90 basis point range, we have been at 90 basis points that we expect that will kind of come down through the year to the bottom end of that range.
Q: In your outlook comments, you talk to an economy that is transitioning from consumer led to business led, that's very positive from a structural perspective in this country for too long. We've lived on the back of a non-productive home loan. What gives you confidence that, that transition is actually taking place? And what parts of the economy do you think will be big participants and how you front-and-center those sectors?
A: Yeah, no, thank you, thank you, Matt. I mean, as you said, I mean, the household deleveraging story is definitely over and we're seeing systems credit growth of 7%, 8%, even higher in some areas. We think that's a reflection of the fact that the good businesses are just getting on with life. You know, I don't think interest rates are going anywhere as soon in terms of downward trajectory, and also the pressures around labor and increased costs. And so what we're seeing is businesses that are doubling down on investing in productivity and labor saving technology. They're investing in their CVP, the customer value proposition. They're investing in energy transition. They're investing in the globalization of supply chains, and we're seeing it as a quite a broad spread across our customer base. As you know, I'll keep reminding everyone, we're 2% of the system. Our business model is to back the best businesses, the best entrepreneurs, the best sponsors, and they are the ones that are actually pivoting and actually starting to invest now and you're seeing that through our lending growth.
Q: Just a question on slide 19, if I could, which is the capital side. If we look through the CET1s have come down a lot in the half, a bit more than we're probably anticipating. If we roll forward with the credit growth as the next year, two years, you're probably going to get a bit tight on capital is your approach to $20 billion scale economics. Now the majors are running the CET1 ratio at around 12% maybe a bit around that number, that's where the market is kind of comfortable with it. How low do you think you can take that CET1 ratio while maintaining investor confidence? And second part, just around you talk about I'll ignore AT1 because it's not common equity, but term securitization, another risk weighted asset management tools, what are you thinking you could do to try and generate some additional capital.
A: I mean, I'll take the first part, and I'll hand over to Andrew for the second part, John. I mean, John, obviously, we're been having these conversations for many, many years now, I mean, I remember pre the IPO talking about this topic and in terms of our original projections for the thesis of Judo and those AT metrics at scale and they haven't changed. I mean, I've consistently said that our thesis was to have a CET1 ratio that was somewhere between the regional banks and the major banks. So as you said, the major banks are about 12% and the regionals are sort of high 10s, 11%, that's reflecting the fact that the regional banks are largely home loan banks and of course, the major banks get the benefit of advanced accreditation. And but also we don't want to run our capital levels to skinny because we know we're still going to be a high growth business beyond the $20 billion book. And that still remains our thesis, that underpins those metrics at scale.
Andrew Leslie: I guess on the second part of the question, John, in terms of other kind of capital options, I mean, as we've said before, we do have a number of options available and so the AT1, the capital relief term securitization that they are trades that we did for the first time last year. As some of you will note, we pay a bit of a first issue of premium there, but we've proven our access to those capital options. And so they are options that we genuinely have available to us, and we'll continue to look at these to make the capital stack more efficient as we do get closer to that endpoint as Chris articulated. RWA management is I guess, a bit of a general term, but there are things that we can do there I guess with the scale now of the book and how actively we think about that how we manage the risk-weighted asset piece. That we just have some options that we probably didn't a couple of years ago. So the point here is we've got a plan. We're managing to that, and we do have options available to us that we will look at to make the stack a bit more efficient going forward.
Q: Can I ask
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
