Loan diversification drives portfolio growth
Ongoing interest rate rises have affected Liberty Financial Group, one of Australia’s largest non-bank lenders, which announced its financial results for the half-year ended Dec. 31 on Monday.
Liberty reported underlying net profit after tax and amortisation (NPATA) of $69.6 million for the first half of FY24, down 34% on 1H23.
However, Liberty reported positive overall results, including continuing portfolio growth through diversification, and a net interest margin and return on equity that “outperformed its peers”.
“Today, we are reporting a sound result for the first half of financial year 2024, underwritten by strong fundamental performance with profit decline as anticipated given the changing interest rate environment,” Liberty CEO James Boyle (pictured above left) said during the half-year results presentation. “Importantly, our net interest margin for the half has remained stable.:”
“We've also continued to grow our portfolio through continued diversification – as a result we again finished the half with a strong balance sheet and underlying cash return on equity of 12%.
“We appreciate that the changing environment has created stress on household budgets and we have worked proactively with our customers to manage this challenge and retain low bad and doubtful debts.
“We've also maintained our strong net promoter scores with both customers and brokers, and continued our ongoing investment in digital customer experiences.”
1H24 financial results
Boyle said Liberty’s net revenue was $292.8m, just 3% down on the $301.4m of the prior corresponding period. “This of course, is a function of financial asset growth as shown by our net interest margin of 2.54% being 34 basis points lower than the prior corresponding periods,” Boyle said.
“Also, reflecting the changing environment, our bad and doubtful debts were 12 basis points, which is up from all-time lows of 2 basis points in the prior corresponding period.
“Our cost to income ratio has increased marginally by 270 basis points to 28.7% and as a result of these outcomes, we confirmed a distribution in November of 12c per statement security.”
Financial highlights
- Underlying NPATA (net profit after tax and amortisation) – $69.6m ($104.9m), down 34%
- Net revenue – $292.8m ($301.4m), down 3%
- Net interest margin (NIM) – 2.54% (2.88%), down 34bps
- Bad and doubtful debts (BDD) – 12bps (2bps), +10bps
- Cost to income – 28.7% (26.0%), +270bps
- Distribution – 12C (21c), up 43%
Operating highlights
Liberty grew its average financial assets to $13.8 billion, a 6% increase on the prior corresponding period, while its loan originations grew 1% to $2.9bn.
Impaired loans also grew to $204m, up 51%, which Boyle said reflected tougher trading conditions and the reality of higher interest rates impacting households.
“Our average [staff] headcount also grew by 4% [to 556], reflecting continued portfolio growth and our continued investment in new businesses,” he said.
“We also finished the half with industry-high net promoter scores for both brokers and customers at 77 and 58 respectively, which we think reflects our ability to navigate the changing environment positively.”
Results analysis
Commenting on the 1H24 results, Liberty chief financial officer Peter Riedel (pictured above right) said total revenue was $708 million in the first half, an increase of 28% compared to the prior corresponding period and 11% compared to 2H23.
“The increase in total revenue was driven by both an increase in asset yield as a result of RBA rate increases being passed on to customers, and an increase in average financial assets,” said Riedel.
He said Liberty’s net interest margin of 2.54% was stable throughout the period and continued to be the highest in its competitive peer group.
New loan originations of $2.9 billion in the half were at record levels for Liberty, higher than the prior corresponding period and second half 2023.
“Growth in average assets was achieved from the growth achieved in each of our motor, SME, SMSF and personal loan portfolios,” Riedel said.
“Positively, the speed of loan repayments and amortisation slowed in 1H24 compared to more recent periods across all segments, and in particular the residential loan segment.
Income yield also lifted by 63 basis points to 8.53% in the first half, mostly from passing on RBA rate increases.
Riedel said it had been Liberty’s practice since May 2022 and throughout the changing interest rate cycle to pass on only RBA cash rate changes to its customers.
“Not passing on more than RBA rate changes in contrast to other non-banks was a deliberate decision to support our customers and business partners.”
Riedel said group yield had expanded with the continuing shift in the portfolio mix towards high yielding assets in the secured and financial services segments.
“The secured and financial services segments represent 43% of total Portfolio loans at 31 December 2023, up from 40% at 30 June 2023.”
Liberty funding
Riedel said Liberty’s total cost of funding came from the benchmark funding rate (mainly the one month bank bill swap rate), and also investment return provided to its funding and debt capital market partners (known as funding margin).
“The average benchmark funding rate increased by 64 basis points in the first half to 4.03% as the RBA increase the official cash rate,” he said. “The average funding margin was stable in the half increasing by one basis point to 1.79%.”
Liberty raised $2.3bn in new term funding in the half, and increased wholesale limits by $700m, including establishing a new auto loan facility to support loan growth.
“Funding markets have been very buoyant so far this calendar year, with record demand for fixed income products,” said Riedel. “Consequently, the debt capital markets has seen a consistent flow of new issuance.”
Riedel reported that Liberty had a $250m market to market (MTM) issue which matured on Monday. “We will look to issue a new MTN in the near term subject to market conditions and of course, we anticipate continuing to be an active issuer of asset-backed securities in 2024.”
Liberty’s strong financial position
Riedel said Liberty’s funding activity and liquidity position placed it in a strong position to continue to help more customers and to grow the business.
Liberty had its investment-grade rating affirmed at BBB- (positive outlook) following the release of the FY23 results. It remained the only non-bank in Australia with an investment-grade rating.
“Connecting financial performance and position together, LFG generated underlying cash ROE (return on equity) of 12%. This ROE outcome outperforms our competitive peer group after adjusting for leverage,” Riedel said.
“Our leverage ratio as measured by total assets divided by net assets was 13.5 times. This ratio – the lowest in our competitive peer group – along with our investment-grade rating demonstrates Liberty has the strongest balance sheet in the non-bank sector.”
Riedel said Liberty had delivered the following:
- portfolio growth in a period of lower credit demand and heightened competition
- a continuing shift in the portfolio towards higher margin assets
- a market-leading net interest margin
- operating efficiency and stability
- a leading risk adjusted earnings profile
- the highest ROE to leverage ratio in its competitive peer group
2024 outlook
Looking ahead, Boyle said it was Liberty’s view that economic indicators supported improving credit demand.
“We feel that the refinancing activity that's been a big part of portfolio decline over the previous 12 months has started to stabilise,” Boyle said.
”We've seen increasing provisions from our change in asset mix as we've explained, but we believe that our net interest margin can be stabilised as funding costs return to longer term averages.
“We will continue to feel the impact of inflationary pressure on our costs as many businesses and households do and we continue to see engagement and interest from our customers for improved digital experiences.”
Boyle said Liberty’s strategy to deliver diverse customer solutions had driven our portfolio growth.
“We've delivered leading peer net interest margins, delivering peer-leading returns on assets. We have delivered what we think are very sound underlying performance metrics for the business and the group,” he said.
“We finished the period with strong liquidity and capital position to support our ongoing growth. We've continued our investment in diversifying customer solutions and our ongoing investment in digital customer solutions.”
