ME half year results

• Underlying net profit after tax: $55.0 million, up 8%
• Statutory net profit after tax: $41.2 million, down 11%
• Net interest Margin: 1.59%, down 3 basis points
• Operating expenses: $125.0 million, up 2%
• Loan impairment losses: $4.1m, down 25% 
• Cost to income ratio: 61.3%, down 40 basis points
• Underlying return on equity: 8.1%, down 80 basis points 
• Common equity Tier 1 (CET1) capital ratio of 9.54%, Tier 1 ratio of 12.41%

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Continued strong growth across the business

ME has maintained a strong growth trajectory in the six months to 31 December 2018, increasing its home loan portfolio by 3.6% to $25.3 billion (gross of offset accounts) compared to market growth of 1.64% resulting in a growth rate of 2.2 times system for the six month period.

In December 2018 ME had 1.49% of the home loan market, up from 1.46% 12 months ago.

Growth in household deposits also remained strong in the first half of the year reaching $10.7 billion, an increase of 23% compared to the prior corresponding period (pcp).

Market share of household deposits over the last year increased from 0.77% to 0.89%. Growth in household deposits was 21% versus system growth of 5.1% resulting in a growth rate of 4 times system for the 2018 calendar year.

Household deposits now fund more than 51% of ME’s loan assets (excluding securitisation), up from 45% in December 2017. Household deposit growth is forecast to fund the majority of the Bank’s asset growth for the foreseeable future.

Customer numbers at 31 December 2018 were 495,053 (up 11% year-on-year) and reached the half-million during January 2019, meaning one in 50 Australians now bank with ME.

ME CEO, Jamie McPhee, said “increased brand awareness, competitive pricing, increased refinancing during and after the Royal Commission, and improved customer retention, have all contributed to growth”.

Financials

ME’s underlying half-year net profit after tax (NPAT) was $55.0 million, up 8% on the pcp.

Statutory net profit after tax, which includes IT system remediation and decommissioning costs ($7.0 million), an impairment charge relating to a new credit card platform ($5.0 million), and a realised / unrealised loss on hedging instruments ($1.8 million), was $41.2 million, down 11% on the pcp.

Net interest margin (NIM) fell 3 basis points to 1.59% due to an increase in funding costs and strong competition for home loans.

Combined with falling credit growth, ongoing competition, and increased regulatory compliance, NIM will continue to remain under pressure in the second half of the year.

An 80 basis point fall in return on equity was primarily due to a strengthening of the bank’s capital position (Tier 1 ratio of 12.41% up from 11.90% at 31 December 2017) following the issue of Additional Tier 1 capital in November 2017 ($200 million) and December 2018 ($100 million).

The cost to income ratio was down 40 basis points to 61.3% despite higher than expected regulatory compliance costs.

Asset quality

Overall credit quality remains strong with impaired assets remaining low. The portfolio delinquency rate for 90+ days continues at a historical low of 0.63% and loss rate of 0.0002%.

Strong performance despite NIM pressure and slowing home loan market

Jamie McPhee said “ME had performed strongly in the face of slowing credit growth and elevated funding costs.”

“Margin pressure is expected to remain an industry-wide issue throughout the rest of FY19.

“We expect to continue to increase our market share in FY19 by investing in our brand, digital experiences for customers, and our suite of simple and transparent retail banking products.”

“Our shareholders expect ME to act in our customers’ best interests while achieving a reasonable rate of return. We will continue to stay true to our core purpose of helping all Australians get ahead.

“ME has a strong Net Promoter Score of 31, which tracks customers’ willingness to recommend us.”