Australian Finance Group Ltd. · ASX:AFG
Australian Finance — Investor Presentation (February 2023)
46 slides from Australian Finance's investor presentation, Feb 24, 2023
Slide 1: Half Year Results Presentation 2023
Half Year Results Presentation 2023
Slide 2: Presentation Outline
Presentation Outline Item Presenter Pages Performance overview David Bailey 3–6 Operations update David Bailey 7 – 16 Financial performance Luca Pietropiccolo 17 – 22 Outlook David Bailey 23 – 28 Q&A Appendices 29 – 46 2
Slide 3: AFG Business model
AFG Business model Operating in AUSTRALIAN deep FINANCE MARKET Residential Commercial Equipment and Personal markets… Mortgages Mortgages Asset Finance Loans … with a range Aggregation Services Loan Distribution Loan Manufacturing of financial Broker originated loans generate annuity style earnings
Slide 4: AFG's proven growth blueprint
AFG’s proven growth blueprint Provides scale & Leverage scale – Leverage scale – platform to diversify partner with expand into into new markets lenders higher margin lending Aggregation Loan Loan Services Distribution Manufacturing Markets AFG Volume Broker Share AFG Share $189B Residential Mortgag
Slide 5: H1 Highlights
H1 Highlights Strong balance sheet & Earnings diversification Investing for growth cash flow generation Providing resilience & a strong Positioned to take advantage of Deliver efficiencies & scalable platform for growth growth opportunities growth through the cycle 66% earnings from higher Record $1
Slide 6: H1 Financial Summary
H1 Financial Summary Competitive advantage from Diversification & strategic Strong cash flow generation, Capital light business model, Delivering quality shareholder being a leading aggregator investments underpin earnings driven by annuity style cash flows with high quality loan book returns Record
Slide 7: Operations update
HALF YEAR RESULTS Operations update
Slide 8: Policy intervention has slowed the housing market
Policy intervention has slowed the housing market Record low cash rate has been rapidly unwound, with the impact of The rapid rise in cash rate led to a reduction in property consecutive increases still to flow through the economy prices at a rate not seen since the GFC Although credit growth has sl
Slide 9: TFF, record low deposit rates & cash back offers have led to ADI market share gains
TFF, record low deposit rates & cash back offers have led to ADI market share gains $188b TFF1 stimulus & record low deposit margins has created an The funding advantage led to market share gains for ADIs on new lending arbitrage for ADIs2 & reduced non-bank’s ability to compete This funding advanta
Slide 10: AFG has proven resilient through cycles
AFG Residential volumes in the last AFG has proven resilient tightening cycle (2001-2007) through cycles Aggregation • AFG has historically outperformed the collective Residential market for lodgement volumes during rising interest rate conditions • The importance of brokers is evident, with the cha
Slide 11: Our diversification strategy is proven & provides a growth platform
Our diversification strategy is proven & provides a growth platform AFG’s large broker network provides the foundation for Strong growth in trail book net asset on the Commercial mortgage trail book has more than diversification into higher margin products & new markets balance sheet doubled since l
Slide 12: Our diversification strategy is proven & provides a growth platform
Our diversification strategy is proven & provides a growth platform Higher margin AFG Securities loan book now almost $5b Over 60% gross profit is delivered through annuity Delivering strong RoE style income streams Net Interest Margin (NIM) growth to 145bps Net asset growth driven by strategic inve
Slide 13: Business segments are well placed to continue to deliver shareholder returns
Business segments are well placed to continue to deliver shareholder returns Aggregation services include upfront & trail Majority of the earnings in AFG Home Loans commission, & broker fees across a diverse product (AFGHL) is from the ongoing loan book. This range including Residential, Commercial,
Slide 14: Aggregation
Aggregation Record Brokers remain the dominant residential 72% share channel, with commercial a significant growth opportunity • Brokers recognised by lenders as the pre-eminent channel for Australian mortgages, with 72% market share • Brokers are critical to providing competition & choice, & are ev
Slide 15: AFG Home Loans
AFG Home Loans Strong book growth; ranked 6th for lodgements, the best performing non-bank1 • AFG Home Loans includes AFG funded Retro & Link brands (AFG Securities) as well as White Label products • The ADI’s funding advantage has temporarily reduced available margin, this structural disadvantage h
Slide 16: Funding
Funding History of issuances with sufficient capacity for AFG growth • Strong history of issuing RMBS transactions, with $3.4b issued in the past 24 months of the total $7.5b issued since 2013 • AFG Securities loan book has grown 22% to $4.9b since December 2021 • September 2022, AFG issued a record
Slide 17: Financial update
HALF YEAR RESULTS Financial update
Slide 18: Financial Results
Financial Results • AFG Securities Loan Book up 22%, underpinning revenue 1H23 1H22 1H23 v 1H22 growth of 12% Total Revenue $m 525.2 469.7 12% • Gross profit benefiting from first period of Fintelligence & BrokerEngine partially offset by Net Interest Margin Gross Profit $m 62.0 61.3 1% • NIM at 145
Slide 19: Underlying profit before tax – Earnings bridge
Underlying profit before tax – Earnings bridge Cash commissions include lower Residential volumes, Increased investment to higher payout ratio partly support growth - further offset by growth in other details on slide 21 products such as Commercial and Leasing 8.3 4.3 0.8 4.5 3.4 6.2 3.1 0.5 1.7 1.2
Slide 20: Strategic investment performance
Strategic investment performance Acquisition Date April 2018 December 2021 January 2022 1H23 earnings contribution $3.5m $2.8m $(0.4)m1 Carrying value $31.8m $54.6m $4.6m Current AFG Ownership 32% 75% 70% Loan Book Broker numbers Subscribers Key metrics $4.9b 540 2,000+ Up from $0.75b at acquisition
Slide 21: Higher operating costs associated with growth, efficiencies expected from FY24
Higher operating costs associated with growth, efficiencies expected from FY24 Strategic Investments Technology Investment Inclusion of operating expenses associated with $4m Fintelligence & Broker Engine for the first time. Primarily relates to Employee Costs. $4m Ongoing investment to improve brok
Slide 22: Annuity style earnings provides strong cash generation, balance sheet well positioned for growth
Annuity style earnings provides strong cash generation, balance sheet well positioned for growth Strong leverage at 31 December 2022 23% Strong cash generation with 105% cash Adequate capital to fund future investment Capital light business model with capacity to conversion for H1 FY23 fund growth $
Slide 23: Outlook
HALF YEAR RESULTS Outlook
Slide 24: January 2023 Trading
January 2023 Trading Comparison of January Lodgements • Residential lodgements are below January 2022, at $4.3 billion. • AFG Home Loans lodgements down 64% compared to January 2022. • AFG Securities lodgements 66% lower than January (14%) 2022. Settlements were 60% lower. • Residential lodgements v
Slide 25: Market headwinds expected to slow
Market headwinds expected to slow TFF funding will be repaid with $85b maturing in 2023 With the TFF repayment, bank deposit margins are likely to return to long term average This will negate the structural disadvantage for non-bank lenders funding costs 1. Assuming funding to be repaid over 3 years
Slide 26: Market headwinds expected to slow
Market headwinds expected to slow Approximately $30b of fixed rate loans from the AFG Net migration has returned & has been forecast to increase Residential book to reach maturity above historical averages AFG Securities does not have a fixed rate product, so providing Supported by strong levels of
Slide 27: Our strategy to build scale & expand into higher margin lending services is proven
Our strategy to build scale & expand into higher margin lending services is proven Strong balance sheet & Earnings diversification Invested for growth cash generation $200b $260k 1,300 + Residential + Commercial Industry leading credit quality, Growth in our broker network since listing Trail book i
Slide 28: Our strategy to build scale & expand into higher margin lending services provides a growth platform
Our strategy to build scale & expand into higher margin lending services provides a growth platform Strong balance sheet & Earnings diversification Investing for growth cash generation Innovation using our data to Technology investment to improve broker Leveraging our annuity identify underserved cu
Slide 29: Appendices
HALF YEAR RESULTS Appendices
Slide 30: Settlements & Loan Book
Settlements & Loan Book Settlements ($m) 1H23 2H22 1H22 1H23 v 2H22 1H23 v 1H22 Residential 28,598 28,619 30,774 (0%) (7%) AFGHL 2,332 2,787 2,799 (16%) (17%) White Label2 1,267 1,370 1,496 (8%) (15%) AFG Securities2 1,065 1,418 1,302 (25%) (18%) Commercial 2,017 2,116 1,771 (5%) 14% AFG Business 10
Slide 31: Key metrics
Key metrics 1H23 2H22 1H22 1H23 v 2H22 1H23 v 1H22 Operating Income1 Aggregation $m 383.1 373.3 391.2 3% (2%) Key movements AFGHL $m 141.2 85.1 77.7 66% 82% Other $m 0.9 0.9 0.8 7% 10% • Aggregation operating income (2)% year on year, driven primarily by lower Residential Total $m 525.2 459.2 469.7
Slide 32: Summary P&L
$m 1H23 2H22 1H22 1H23 v 2H22 1H23 v 1H22 Summary P&L Commissions Interest on trail commission income receivable 358.5 41.9 354.2 41.5 375.9 40.7 4.3 0.3 (17.4) 1.2 Mortgage management services 0.2 0.3 0.2 (0.1) (0.0) Securitisation transaction fees 2.3 2.4 2.2 (0.1) 0.1 Key movements Securitisation
Slide 33: Reported NPAT to Underlying NPATA reconciliation
Reported NPAT to Underlying NPATA reconciliation Key movements • The trail commission adjustment represents the non-cash change in the carrying value of the trailing commissions contract assets & liability. Additional information in relation to trail book $m 1H23 1H22 1H23 v 1H22 accounting & key as
Slide 34: AFG holds $200m in liquid assets & high performing investments
AFG holds $200m in liquid assets & high performing investments Dec 2022 v Key movements $m Dec 2022 Dec 2021 Dec 2021 • Net unrestricted cash of $18m Unrestricted cash 65 84 (19) • Trail book net asset was steady at $103m Debt facility (47) (53) 6 Net unrestricted cash 18 32 (13) • High performing,
Slide 35: Trail book asset
Trail book asset The table below outlines key assumptions used to value trail commissions Key Assumptions Dec 2022 Dec 2021 Average loan life Between 3.7 and 4.6 years Between 3.5 and 4.9 years Key movements Discount rate per annum1 Between 4% and 13.5% Between 4% and 13.5% • Trailing commissions ar
Slide 36: Summary Balance Sheet
Summary $m Dec 2022 Dec 2021 Dec 2022 v Dec 2021 Balance Sheet Assets Unrestricted Cash 65.3 84.1 (18.8) Restricted Cash 206.9 160.9 46.0 Trade and other receivables 12.4 7.5 4.9 Other Assets 8.9 23.2 (14.4) Contract Assets 1,167.7 1,121.0 46.7 Key movements Loans and advances 4,942.3 4,042.5 899.8
Slide 37: Summary Cashflow
Summary $m 1H23 1H22 1H23 v 1H22 Cashflow Cash receipts from customers 389.0 353.6 35.4 Cash paid to suppliers and employees (384.0) (350.5) (33.5) Interest received 121.9 50.7 71.3 Interest paid (94.0) (25.6) (68.4) Income taxes paid (6.1) (13.3) 7.2 Net cash generated by operating activities 26.9
Slide 38: Expected credit loss provisions
Expected credit loss provisions Proportion of Residential mortgages • AFG has a strong history of low credit losses, as a result of insights from LVR with no LMI & more than 12 months of over 25 years of data & extensive industry experience repayments in advance • Arrears have historically outperfor
Slide 39: AFG Securities – Loan quality
AFG Securities – Loan quality 39
Slide 40: Residential settlements
Billions ($) Residential settlements 30 10 25 8 & 20 rs £6 5 = 4 10 2 ; | SA WA LD vic Nsw 4H19 1H20 4H21 1H22 1H23 m4H21 5 1H22 = 123
Slide 41: Residential loan book
| Residential !oan book Q 8 & Billions ($) 8 8 ST cl IIL | | WA m 4H21 5 1H22 m 1H23
Slide 42: Commercial settlements
Commercial settlements 25 08 07 2.0 0.6 we 15 2° Q Pa = 5 B04 @ 10 * oa 02 05 | " i | on on OB =-_ OO 1H19 1H20 41H21 1H22 1H23 SA Wa aL vic Nsw = Commercial mortgages _™ Equipment finance @ 1H21 © 1H22 @ 1H23 42
Slide 43: Commercial loan book
| Commercial !oan book 4.0 5% ” 3.5 3.0 e 225 ) s d B20 15 1.0 “pl SA WA vic QLD m4H21 5 1H22 = 1H23 = NSW mvic QLD SA = WA
Slide 44: Lending activity
Thousands ($) Lending activity Q1 G2 Q3 Q4 QI Q2 Qs Qs QI Q2 Q3 QF QI Q2 QS a4 QI Q2 Q3 Q4 Qt a2 FY18 FY19 FY20 Fy21 FY22 FY23 mmNational —NSW —NT —QLD —SA —VIC —WA Qt Q2 Q3 a4 QI Q2 O3 A4 QI Q2 Qs Qs Qt QZ 3 a4 QI a2 Q3 A4 At QZ FYI8 FY19 FY20 Fy21 FY22 FY23 National —NSW —NT —QLD —sa —vic —wa
Slide 45: Sustainability
Sustainability Environment Social Governance Strategic objectives Strategic objectives Strategic objectives • Measure, report on & reduce carbon emissions. • Preferred place to work for people who share our passion • Highest standard of ethics, integrity, & transparency in all we • Support our carbo
Slide 46: Important Disclaimer
Important Disclaimer This presentation contains general information which is current as at 23 February 2023. The information is intended to be a summary of Australian Finance Group Ltd (AFG) and its activities as at 31 December 2022, and does not purport to be complete in any respect. The informatio
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