Thank you for standing by and welcoome to the Pepper Money Limited 2022 half year results briefing. At this time, all participants are in a listen only mode. There will be a presentation followed by a question and answer session. At which time, if you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to your first speaker today, Gordon Livingston, Investor Relations. Please go ahead. Good morning, everyone, and welcome to Pepper Money Limited's results presentation for the first half of calendar year 2022. My name is Gordon Livingston, investor relations at Pepper Money. I would like to begin by acknowledging traditional custodians of the land on which we meet today, the Gadigal people of the Eora Nation. We pay our respects to each of their elders past, present, and emerging. Following a business update from Pepper Money's CEO, Mario Rehayem, Pepper's CFO, Therese McGrath, will run through the financials. After some closing marks from Mario, there will be an opportunity to ask questions at the end of the session, which can be either by phone or submitted via the portal. I will now pass over to Mario. Thanks, Gordon. On behalf of my entire team at Pepper Money, I would like to thank everyone who has joined us today. Therese and I are proud to present our first half calendar year 2022 results, which again demonstrates the ongoing ability of Pepper Money to deliver sustainable growth. The strength of Pepper Money's first half financial results is down to our ability to deliver on our strategy. As you have heard me say, at Pepper Money, our mission is simple, it's to help people succeed. We focus on creating financial inclusion by challenging the way loans are designed and distributed. Our values provide the guide to how we do business and how we interact with our customers, stakeholders, and each other. The core competencies of the business credit, funding, distribution, and technology are all supported by 22 years of data and through the cycle experience that continues to see Pepper Money deliver on strategy and drive profitable growth. Over the first half, we grew our customer base to 327,000, an increase of 13% from calendar year 2021 year end. We delivered AUD 5.6 billion in originations, 53% growth on prior comparable period. This was driven by mortgage originations growing 48% to AUD 4.1 billion and asset finance originations of AUD 1.5 billion, a growth of 67% on PCP. We continue to deliver above systems growth. Mortgages in Australia grew 4x systems in the first half of 2022 and asset finance outpaced the market with 21.5x systems growth in the same period. This above systems growth saw lending AUM close June 2022 at AUD 18.3 billion. Mortgages increased 24% versus PCP to AUD 14 billion, and asset finance increased 43% versus first half 2021 to a record AUD 4.3 billion. With total AUM closing at AUD 19.4 billion, a growth of 24% on PCP. Net interest margin of 2.29% was down 30 basis points on PCP. NIM compression experienced over the second half of 2021 carried forward into 2022, with mortgages NIM at 2.06%, 33 basis points lower than PCP, and asset finance NIM at 3.07%, 30 basis points lower than PCP. NIM has been impacted by rising swap rates and funding costs, compounded by continued competition across the market. Therese will cover off in the financials how we have been responding to front and back book pricing, responding to the rising rate environment experienced. Our delivery of strong origination volume saw the business grow total operating income by 12% to AUD 198 million. Our 22 years of experience is demonstrated through our credit quality. Our deep capabilities in credit, loan servicing and data analytics, together with our prudent approach to pricing for risk, is evident through our loan loss performance, which improved by 10 basis points on PCP to 0.18%. The business remains well provided and at June 30 2022, we held a total provision for credit losses of AUD 114 million. The recurring investment we make in our platforms and processes continues to support efficient scaled growth. Underlying productivity increased 65%. Our ability to leverage our in-house purpose-built platforms is paying real dividends in terms of scaled efficient growth. In the difficult and volatile markets, the depth and breadth of our investor base and the strength of these relationships truly come to play. We increased our warehouse capacity to AUD 11 billion, up 11% on December 2021. We successfully executed four securitizations over the first half of 2022, raising AUD 2.5 billion in total. We have also closed in July a further non-conforming deal of AUD 500 million, bringing total securitization year to date to AUD 3 billion. We have just mandated a AUD 650 million prime RMBS deal. Our funding supports our sustainability objectives, including our core pillar of financial inclusion. In the first half of 2022, we completed our second green bond at AUD 330 million and our first social bond at AUD 300 million. We were recognized by Canstar, winning their inaugural Canstar Green Excellence Award for our electric vehicle loan options, supporting our ongoing commitment to environment and sustainability. With our volume growth ahead of system, coupled with business mix, ongoing productivity gains, and disciplined cost management, we continue to deliver strong profit growth of pro forma NPAT growing 11% on PCP to AUD 73 million. With the board declaring an interim dividend of AUD 0.054 per share an annualized yield of 6.3%. We had a strong focus in the first half of 2022 to deliver volume and AUM growth as we prepared for interest rate increases and a softening market. In mortgages, we have outpaced the market originating AUD 4 billion. Our asset finance business continues to grow market share, originating AUD 1.5 billion, outstripping the market. With our increased focus on customer retention, our prepayments are trending back to long-term averages across all asset classes. Now on to mortgages. People come to Pepper for a purpose, not price. Over the first half, our digital loan solutions, coupled with the depth of our credit and underwriting capabilities and distribution footprint, saw Pepper Money help an additional 7,068 new mortgage customers. Mortgage originations are at AUD 4.1 billion, were 48% higher than PCP. Business mix has shifted slightly when compared to calendar year 2021, with 55% of originations coming from prime customers and 45% from non-conforming, which includes our new customer solution, Near Prime Clear. Our diverse mortgage product offering gives us options to shift the mix of our originations to better manage margin versus volume. Our weighted average LVR at 54% is 7 basis points lower than PCP as our customers' equity positions in their homes increase. Pepper Money remains committed to helping those customers underserved by traditional banks, with 30% of originations coming from self-employed small businesses. For five consecutive years, with year-on-year volume growth, we retained and improved our industry-leading turnaround times. We make the complex simple through our in-house purpose-built technology and the depth of our data analytics. We continue to deliver fully underwritten, non-conditional approvals in under 7 hours. Our technology suite of broker and customer solutions, including PPS and Pepper Resolve, which have been in the market since 2017 and 2019 respectively, are providing a seamless path to yes for customers of all walks of life. Now on to asset finance. Our asset finance business continues to grow share and expand its product, distribution, and customer footprint. The business continued over the first half of 2022 to surpass the existing monthly origination records it set over 2021. Total originations at AUD 1.5 billion in the half grew 67% on PCP, and the business now contributes 36% of total operating income. TA originations at AUD 900 million represents 61% of asset finance originations and grew 83% on PCP. With closing AUM at AUD 2.5 billion, this customer cohort represents 58% of the underlying asset pool. Moving to funding. We have a strong and long-established track record in debt capital markets. We have a broad and deep investor base of both domestic and global debt investors supporting us. Since 2003 to June 2022, we have raised in excess of AUD 31 billion across 51 transactions via our three programs, Pepper Prime, PRS, and SPARKZ. It is both the strength and longevity of these relationships which allows the business to continue to raise funds and grow, even in the challenging market conditions. We have raised in excess of AUD 3 billion to the end of July 2022, and in the first half, we completed four securitizations totaling AUD 2.5 billion. Pepper Prime 2022-1 of AUD 1 billion, including a AUD 330 million green bond. PRS 32 at AUD 500 million, SPARKZ 5, ABS for AUD 700 million, and our inaugural Pepper Social Bond of AUD 300 million. We increased our warehouse capacity to AUD 11 billion, up 11% on December 2021, giving us significant headroom to fund our aspirations for growth across both mortgages and asset finance. I've said in the past, we have always taken the prudent approach to funding and maintained a minimum of six months of headroom. This is part of our ongoing strategy that allows us to be prepared to manage any cycle, whether it's up or down. On to operations. The investment in our scalable purpose-built platform is both enabling us to operate more efficiently and achieve scale, which supported our record originations and delivered a 65% core productivity uplift. In asset finance, Solana is delivering 42% auto approval and well on track to reach 60% by Q3. With 91% of mortgage applications processed through Sage, we have delivered record application flow and uninterrupted market-leading approval turnaround times. Apollo, our servicing platform, has significantly reduced the effort to serve customers via automation of processes and increasing customer digital accessibility for self-help options. Turning to lending. We entered 2022 prepared for rising rate environment and expected volatile debt markets alongside macroeconomic and geopolitical uncertainty and funding constraints. Against this backdrop, we accelerated opportunities to grow our loan books and delivered record originations of AUD 5.6 billion in the half, up 53% on PCP. Over quarter one, total applications at AUD 4.3 billion grew 53.35% on PCP and 53% on quarter one 2020, with mortgages growing 24% and 41% and asset finance growing 72% and 94% for Q1 2021 and 2022 respectively. Over quarter two, as interest rate rises started to hit and inflationary pressures built, total applications have started to slow, with quarter two falling 3% on quarter one 2022. However, total applications in the second quarter still grew 22% on PCP. By asset class, mortgage applications grew quarter two versus PCP by 14%. However, when looking at Q2 versus Q1 2022, applications have declined 5%. Asset finance applications grew quarter two versus PCP by 47%. Looking at Q2 versus Q1 2022, applications are flat. Equifax has reported a 15% decline in mortgage inquiries in July 2022 when compared to June. While we do expect this trend to continue in the short term, we have started to see the rate of decline taper. Now to originations. Quarter 1 2022, total originations were AUD 2.6 billion. This grew by 18% to AUD 3 billion in the second quarter, delivering AUD 5.6 billion in originations for the half, a growth of 53% on PCP. In terms of assets under management, lending closed in June 2022 at AUD 18.3 billion, up 28% against June 2021, with mortgages up 24% to AUD 14 billion and asset finance at AUD 4.3 billion, a growth of 43% on PCP. This strong AUM position places us well for the balance of the year and into 2023. I will now turn to Therese to run through the financials. Thank you, Mario, and good morning, everyone. As Mario largely covered off most items on this page, I'll just touch on a few points before moving to a deeper dive on NIM, pricing, and credit performance. While today I will be focusing on our pro forma results, our statutory NPAT at AUD 72.2 million grew 29% on PCP. As noted by Mario, originations at AUD 5.6 billion delivered a growth of 53% on PCP, with lending AUM closing June 2022 at AUD 18.3 billion, an increase of 28% on prior comparable period. Total AUM closed the half at AUD 19.4 billion, a growth of 24% on PCP. As Mario noted, this places us in a strong position as AUM is a key driver of future period income. Volume growth was partially offset by lower net interest margin, NIM, which at 2.29% was down 30 basis points versus PCP. I will address the movement in NIM in detail in the next slide. Total operating income grew by 12% to AUD 198.4 million, and pre-provision operating income at AUD 212 million grew 11% on PCP. Total operating expenses at AUD 93.8 million include a one-off charge of AUD 2.1 million relating to the impairment of an acquired equity investment held in Volt Bank, which was written off following the return of their banking license at the end of June. Excluding this impairment, our expense base at AUD 91.7 million grew only 1% on the second half of 2021 and 11% on PCP. The increase in expenses on PCP relates to FTE growth of our broker administration business, which you can see in the chart below. These costs are fully recovered. After normalizing reported CTI of 44.2% for the impairment in Volt, underlying CTI at 43.2% is flat on prior periods. The 22 years of experience we have of managing through all cycles shows through our ongoing profit growth. We know our key drivers, and we know how to leverage. In an intensely competitive mortgage market with margins compressing, we have known when to grow volumes, delivering growth well ahead of system. Our business mix provides a balanced portfolio with the right blend of short and long-term lending assets, with asset finance now contributing 36% of total operating income. Taking volume growth and portfolio mixed together with our disciplined approach to costs and the benefits from scale and efficiency that we continue to drive through our tech stack, we delivered pro forma EBITDA of AUD 119.4 million, up 11% on PCP, and pro forma NPAT of AUD 73.1 million, a growth of 11% on PCP. Turning now to NIM. Focusing on the key drivers of the movement in net interest margin. The average NIM for the first half of 2022 of 2.29% declined 23 basis points on the average NIM for the prior half and 30 basis points on PCP. The largest contributors to NIM deterioration over the first half of this year have been the rising BBSW and swap rates. Focusing on mortgages, which is the graph on the bottom left. The NIM compression we reported over 2021 continued to flow through into this year and has been accelerated given BBSW increases. At 2.06% on average for the first half of 2022, the reduction of mortgage NIM has been impacted in part by market competition, driving lower portfolio rates, as mentioned, in part by the volatility in BBSW and in part by our business mix with the lower LVRs resulting in our prime portfolio growing 27% on PCP to AUD 7.2 billion. It needs to be remembered that with a lower NIM, prime also comes with lower credit risk and therefore lower credit provisioning. I'll cover off in the next slide what we've done in terms of pricing to help address this compression, but first to asset finance, which is the graph on the lower right-hand side. The volatility in swap rates is clearly seen in our asset finance NIM. Over the second half of 2021, NIM actually benefited 11 basis points from swap rates. This reversed over the first half of 2022, and rising swap rates contributed to asset finance NIM, reducing 27 basis points on the prior period. On top of this, our customer rates reduced by 28 basis points, driven by the competitive environment and by our business mix with our lower yield commercial and novated lease segments growing as a percent of total. It does need to be noted that novated lease, as its salary sacrifice, attracts virtually no credit losses. These factors contributed to asset finance NIM, reducing from 3.43% second half 2021 to 3.27% first half 2022. How have we responded in terms of price changes? As our funding costs increase, we have moved both back and front book pricing in mortgage and front book pricing and asset finance given it is a fixed rate product. In mortgages, since the RBA started to increase interest rates in May this year until the end of June, we have moved our back book pricing by 15 basis points over the OCR and front book by 31 basis points over the OCR. As a result, specifically over quarter two 2022, average portfolio rates increased 11 basis points on quarter one 2022. This increase, however, was partially offset by ongoing increase in BBSW as well as widening margins on new issuances, which drove up the cost of funds. Following the RBA increase in July, we have also increased the back book by 8 basis points and the front book by 35 basis points over the official cash rate. As discussed, our asset finance business has seen significant pressure on funding margins as swap rates have widened over the reporting period. This has necessitated a series of front book rate increases to maintain business performance. The December 2021 weighted average swap rate for the front book was 1.22%. As of June 2022, this had moved to 3.38%, so an increase of 216 basis points. On top of this, over the same period, funding note margins increased over 90 basis points on average. We've responded to these adverse market movements by increasing the pricing out of our asset finance front book by a weighted average of 2.97%. Moving to the second half, while we expect the weighted average front book rates to increase on both portfolios, we will continue to review our position and adjust accordingly given the volatility in margins. Now to focus on the credit quality of our portfolio. We have high quality residential and asset finance lending businesses and the segments that grew over the first half of 2022, such as our prime mortgages and novated lease, typically attract low losses. We have 22+ years of experience in credit and underwriting through all cycles. We know how to manage distressed assets and know how to analyze what causes the distress and to take these learnings into our credit policies. On top of this, we are prudent in our approach on provisioning. At the end of June 2022, we held total provisions of AUD 114 million, a coverage ratio of 0.62% of AUM. As I previously noted, prime and other low loss products have been the fastest growing part of the portfolio, which has driven the marginal reduction in the coverage ratio from 0.7% as at December 2021. We have no customers subject to COVID hardships, and we are not seeing any increase to arrears due to customer stress from rising rate environment. While we have adjusted down provisions for COVID, given the current macroeconomic environment, we are holding AUD 24.7 in model overlays. That is management overlays over and above our ECL models, reflecting the current uncertainty in economic drivers. However, a good indicator of potential future loss is 90+ day arrears, which continued to trend down during the half. Mortgages closed June 2022 at 0.86% of AUM and asset finance at 0.18%. The positive portfolio mix and the ongoing strength in credit performance is seen through our loan losses as a percent of AUM, which have improved 10 basis points over PCP to 0.18% as at June 30 2022. Mortgages have marginally increased by 4 basis points on PCP, which is just reflecting a higher weighting to the downside case in the expected credit loss model inputs, given the current macroeconomic trends. Turning to expense management. Our pro forma operating expenses of AUD 93.8 million increased 13% on PCP. As I mentioned, these include a one-time AUD 2.1 million impairment in relation to an equity investment in Volt Bank following the return of their banking license. Excluding impairments, pro forma operating expenses of AUD 91.7 million increased 11% on PCP. The key movement versus PCP are staff expenses, which increased 6% on the first half of 2021. This was driven by increased FTE in Manila in support of the broker administration business. As I said, these costs are fully recovered through loan and other income. If we strip out from staff expenses the impact of increasing our FTEs and the favorable mix we get through growing in Manila, underlying wage inflation is running around 2.5%. Technology costs increase in line with FTEs. It's a cost per seat. Marketing spend increase of AUD 1.2 million on PCP reflects the underlying reinvestment rate of about 2.5%-3% of total operating income. The scale and efficiency benefit we have been delivering through our technology stack shows when comparing the first half of this year's expenses to the second half of last year. Excluding impairments, pro forma operating expenses of AUD 91.7 million only increased by 1%. Now just to run through some key metrics. We think of our value tree as volume and margin, supported by portfolio mix, coupled with productivity will drive performance. Volume growth is shown through the record originations across both mortgages and asset finance, supporting an uplift in lending AUM of 24% on PCP and 14% on December 2021 close. Total operating income has grown 12% on PCP, and asset finance now contributes 36%. Taking income growth and adding the benefit from the scale and disciplined cost management, excluding the impairment, CTI remains flat at 43.2%. The depth of our data capabilities, credit underwriting, and our risk-based approach has seen continued improvement in the quality of our assets, with loan losses as a percent of AUM improving 10 basis points on PCP. This all goes to support a total operating income yield of 2.4%. As such, given the strong performance and capital management of the business, the board has declared an interim dividend of AUD 0.054 per share, an annualized dividend yield of 6.3%. As we have largely covered up all items in the income statement, I will now just turn to our balance sheet on page 17. Loans and advances as of the 30th of June 2022 of AUD 18.4 billion reflect the 14% net portfolio growth on December 2021. We originated AUD 5.6 billion in new financial assets over the period. The asset growth was financed by the issuance of public term securitizations totaling AUD 2.5 billion, an 11% uplift in warehouse capacity on 2021 year-end, and a further AUD 861 million in private term securitizations. Net assets as of the 30th of June grew 19% over December, in line with our business origination growth. Cash and cash equivalents at the end of June stood at AUD 1.3 billion. As usual, we will continue to manage capital, balancing between holding sufficient levels to manage in uncertain markets and knowing when and where to invest for growth. I will now hand back to Mario to close. Thanks, Therese. I'll provide a quick update on our most recent acquisition of Stratton. We've hit the ground running with our focus on synergies and business integration. Since our completion in July, we have implemented a mortgages referral arrangement, positioning us well for white label integration. We have also found synergies with real estate and supply costs. Our integration has progressed with cyber and security. We have integrated our finance general ledger, accounts payable, and management reporting, and we are well progressed with implementing our risk and compliance frameworks, including policies and procedures. Before I open for questions, I would like to give a quick recap. We have delivered record originations, continued our double-digit AUM growth. Our loan performance continues to improve with no signs of stress to date. We have continued to deliver market-leading turnaround times while increasing productivity by 65%. We have maintained our minimum six months of funding headroom, which will position us for uninterrupted funding through the cycle. While I acknowledge the challenging market conditions in which we operate, Pepper Money will continue to differentiate itself from the market through its portfolio diversity, quality of assets, operational scale and efficiency, underpinned by our core competencies of credit, funding, distribution, and digitally enabled data. This positions us well to manage through the cycle. Our unrelenting focus is on driving the right performance across the business, with our emphasis being centered on margin management through mix of business and front and back book rate management. Maintaining a strong capital position to allow for organic and inorganic growth. Delivering on our investment objectives with an unwavering focus on ROI. We continue to integrate and create synergies with Stratton, including a successful rollout of our white label product offering. Deliver innovative product solutions by creating financial inclusion and product diversification. Finally, continue to create a leading work environment for our staff. Thank you for joining us today. I will now hand over to Gordon to open up for questions. Thanks very much, Mario. Operator, if we could open the floor to questions now, please. Thank you. At this time, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. Your first question comes from Andrew Lyons with Goldman Sachs. Please go ahead. Thanks and good morning. Therese, just a question just on slide 11, the margin waterfall. Just focusing in on the mortgage changes in the half. You note the BBSW impact at 22 basis points. Now I assume that's just the average one-month BBSW change over the half. Over the half. Correct. Just, like, this business is ultimately the profitability of the business is ultimately less about the absolute change in the BBSW, but more about the change between the spread between the cash rate and the bill rate. While you're right in saying that the bill rate's up 22 basis points, the average cash rate over the half, albeit I can see it as a bit back-end loaded, the average cash rate was still up 15 basis points, over- Right over the half. I'm just keen to sort of understand why we haven't seen that come through a little bit more, I guess, in the customer rate. Is there an element of timing here? Usually- Just in light of all those uncertainties, you know, maybe if you can just give us a bit more detail how the NIM has sort of performed over July and August to date. Andrew, I'll probably touch on that before I pass on to Therese. It's Mario. With regards to the NIM, the volatility in the BBSW versus the cash rate is a moment in time, so we have to make sure that we factor that in. When you are factoring in an increase, when the market is actually factoring an increase in cash rate, we are positioned in a period of catch-up, and that usually is around that six-week window to reprice the back book and the front book, depending on when that BBSW is being factored in. If you take, for instance, the June BBSW, that was circa 100 basis points against cash at around 85. That arbitrage there impacts our NIM until we pass on that cost of that increase of the cost of funds. If you look at today, the BBSW and cash rate is somewhat in line. In fact, it's probably slightly under, and we will gain a benefit from that. Until BBSW continues to be elevated, a fact that we have to continue to make sure that we think about that it that there will be a OCR increase expectations. Until that normalizes, so that rate increase cycle normalizes, there will be that point in time volatility, and we will consistently play catch up on that. It's not set in stone, so we just need to make that very clear. Just to follow on from what Mario said as well. Subsequent to the half year, we actually have implemented further back and front book rate increases. Correct ... across the mortgage portfolio and front book increases across the asset finance portfolio. Andrew, you're absolutely right. You're right. Yeah. It's sort of a moment in time. There is a delay between when the rates change, et cetera, and when we implement it between four and six weeks, and it's just blowing its way through. Great. If I just think about maybe the second half of last year as being a relatively normal NIM, sort of with timing, I guess just purely thinking about the timing. I think the gap between the cash rate and the BBSW at that time was a negative nine basis points. Mm-hmm. If we think maybe a normal is 15 basis points, are we still saying that that is gonna drive 25 basis points of decline, you know, versus that second half margin, which looks like you've already seen quite a big bring forward of that? Yeah ... given the 22 basis point delta in the bill rate that you've highlighted this half. Yeah. Is that the right way to think about it? It is, but there's a couple of other elements that come into play. First and foremost, where the competition is and where the market is. Sure. Yeah. Yeah. That's gonna dictate, you know, what front book pricing is gonna be at. Sure. The other thing is that we have that many don't have is we have an ability to flex more volume into the less competitive world, which is the non-conforming section of the business, and our asset finance and also our CRE lending. We do have options and we have already started to exercise those options in flexing a little bit more volume in non-conforming for mortgages. Because where we see prime mortgages right now is an area that we're not really comfortable in originating in just as to where the margins are. There are lenders out there that are taking that kind of risk at that kind of rate. We have always said that we will manage the margin and not just focus on volume. We did come out of the gates very strongly this year on purpose because we knew the headwinds that we were facing. You can see that in the volumes that we were able to generate in that point in time. Once that NIM starts to deteriorate, we start to focus differently. We look at managing that margin and looking at more so what the impacts of that management is gonna have in 2023 and 2024. I certainly take the point on the mix and the competitive dynamics, but if I just wanna isolate, you know, the over the cycle impacts of the cash bill spread normalizing, is it fair to say that it would appear, given timing, that a lot of it has been brought forward into the first half of the calendar year 2022? Definitely, we saw it in the first half of calendar year 2022. If you look at the average BBSW half of 2021, it was 0.1. Same for the second half, 0.1. In the first half of this year, the average was about 0.239. Yeah. That actually started to escalate a little bit towards June as well. Yeah. We are seeing it starting to normalize now, though. Yeah. It's fair to say as well that, say, we made a change on a Monday, and then on the Tuesday and Wednesday, you know, the swaps widened. It actually wasn't really taking effect, but we're seeing that starting to slow down, and we're starting to see that volatility calm down. That will then play to our advantage, and we'll be able to catch up and be in front of it rather than being behind it. Correct. Okay, that's very helpful. Just a final one. Just some of your non-bank peers have started disclosing their stress tests, which I know you haven't in the results. Can you perhaps just give us an idea of what your internal stress test process is, and just whether your severe scenarios result in any breaches of your rapid amortization or stop origination triggers? Yeah. No, look, good question. At least twice per annum, we do a loan by loan stress test across both of the portfolios. For the mortgage portfolio, again, loan by loan, we look at an immediate stress of about a 30% decline, and then a decline of roughly the same amount over a period of time. We've run that exercise recently, in the last few months, and we're not seeing any stress occur. One of the things you would notice, when Mario was presenting the mortgage portfolio, the average LVR has actually improved to 54%, versus 61% in the first half of last year. So we are seeing customers hold more equity within their home. In terms of the asset finance, again, we go through exactly the same process. We go through at least a biannual by-loan stress across multiple scenarios. Yeah. Losses are very heavily predicated on the type of collateral that you take on. We are very conservative in the type of collateral that we take on. If you think about our mortgage business, it's predominantly red brick Australia. Your typical freestanding homes that are in significant demand in any type of market, as opposed to we don't lend to high rise, high density, we don't do rural, we don't do lifestyle properties. We take that volatility away from our collateral. Given that the majority of our lending and our originations, you know, in excess of 70% is red brick Australia, single dwelling, owner occupied, they are very low loss attracting assets. Appreciate that. Thanks, Mario. Thanks, Therese. Cheers. Thanks. Your next question comes from John Hynd with Wilsons. Please go ahead. Good morning, Mario and Therese. Thanks for taking my questions. Hey, John. Hi. Slide 25, I just wanted to start with how we should think about the second half. You're looking at applications that were obviously quite strong and ramped from January to April. When did you start seeing those roll through into the originations? What was the timing of this cycle? Is that the key driver of the strength that we're seeing now and saw in the results? I guess, how do we think about what's happened since March, where you started to see applications soften a bit, please? Yeah. Yeah. From an applications standpoint, this is not foreign territory for us. We've played a very similar playbook with regards to slowing down when we are not confident in the actual market, whether it be housing prices, whether it be funding, or market volatility. For us, it's more of a self-led whilst we're in control of that particular arena. Yes, we did see a 5% drop, but for us, what the importance is making sure that we are looking out on the forecasted, you know, back half of this year and 2023, is very, very important for us. If you think about where the mortgage applications are, that will have an impact in originations in the back half of this year. We are confident that we have started to see a positive rebound, and we are flexing more towards a different mix to what we have seen in the last 18 months. That's purely because we are managing first and foremost the ethos around pricing for risk and making sure that you know the margins are contained where we see them. You might see a slight drop in prime mix and more towards non-conforming because this is where it's our core DNA, and this is an area that we know when to play it, and this is the market to play it in. Yeah. Right. That's sort of why we've seen the step up in Near Prime this half. Correct. We shouldn't see a similar drop off in originations that we're seeing in applications at the moment in the second half. You'll see it starting to flatten out, and then we'll start to recoup it in the back half of the year. That's how we would naturally play it. If you look at 2020, you can see that, you know, from March to April, there is a seasonal drop that naturally happens. There's usually a recovery. For this particular half, we decided to slow down originations because of the market and where it is. It is, you know, important to note, we have in excess of AUD 4.5 billion of headroom in our warehouses currently, and that's growing month on month. We are preparing for a very strong finish and a very strong start for 2023. I think positively what we've seen, you've probably seen it reported over the weekend, you know, clearance rates are now trending back up. It's been a very good August within the market in terms of sort of house sales that have been coming through. We're starting to see a turnaround in that application trend. Mm-hmm. At a market level as well as the business. Yeah. Okay. No, that's very helpful. Just one or two more, if I can. On provision coverage, given your comments just before about stepping away a little bit from Prime, how do I think about, you know, the coverage, the overlays, about 0.49%, what sort of risk profile does this present? I guess, how does that change in this environment and what would the impact be? Yeah. Just to clarify, when we point out non-conforming, the majority of the volume that we write in non-conforming is the new product that we've just launched called Near Prime Clear and Near Prime. Near Prime Clear was practically our Prime product, you know, I would say 12 months ago. What we have done is we've shifted that across, and that's because banks are becoming tighter in their Prime policies. We become tighter on our Prime, and we've opened up a new product segment. The fact that we are saying it's more non-conforming, the attributes of the customer are virtually the same as Prime. And all we're doing is charging a higher margin on that particular segment. I will pass over to Therese to just clarify more around the provisioning. Yeah, you know, obviously in terms of the provisioning, there's been a little bit of a slight favorable variance because of the Prime book that we've been writing in the beginning of this year, but the business continues to be well covered. We tend to be a little bit more conservative when it comes to provision coverage versus a number of those within the market running around that 0.62%. What I would actually suggest you have a look at is the 90-day plus arrears. We always use this as a good indicator to where we're seeing any stress come in the book, because that's where customers actually do start to really think about some sort of, or you start to see the impact on a customer. Actually, we're seeing our 90-day plus arrears continuing to trend down across both of the asset classes, mortgages and asset finance. Again, I'll just sort of stress, we have no customers subject to any form of COVID hardship. Actually, we have no customers currently who are subject to any stress as a result of the rising rate environment. Okay, thanks. Directionally, as your customer becomes a little more Near Prime, I guess, what I'm questioning really is the 65 basis points in first half 2021 to 49 now. You're comfortable with that, or we wouldn't expect an increase given what you're seeing to your book now? No. No. No. I am gonna call out because particularly at a total level, do remember we're growing our novated lease as a part of the total business. There is zero losses virtually with novated lease because it's a salary sacrifice business. We've grown Prime over and above the rate of the market, and we've also grown just total Tier A product mix within asset finance. Really importantly, I'll go back to the point, and Mario made it as well when he was running through mortgages. The LVR of the portfolio is running at 54%. That is down from 61% from the same time last year. Yeah. That is a key factor because losses do come very much in line with where your LVR positioning is, because obviously, that's the equity that is built into that property. When we say non-conforming, we can decide to write non-conforming but at a much lower LVR- Mm-hmm. which then strips away that particular loss risk. No, thanks. That's really helpful. Last one from me. On asset finance, how should we think about the back book stepping up? When can we start to see that increase? You, you're seeing some really strong growth through that channel. I know that they're fixed in nature. Yeah. How much longer are we at these levels and could the step-up be significant or more muted? You don't reprice the back book because it is a fixed rate contract, and it'll actually amortize over time. The life of the contract, which is like four to Yeah. to six years on average, because the majority of it is actually cars. You can see on slide 12. Yeah. Yeah. I understand that. I'm just asking as- Yeah. As they roll off. What that is doing. It-- A-and- Yeah. As it rolls through and you get the time and the mix coming in, you get a very different blend coming through. Really, the big swing around about that we've seen, though, within asset finance has been in the BBSW, in the swap rates. You know, swap rates have been highly volatile. We're actually getting benefit from swap rates in 2021. That's just reversed over the first half of 2022. On that, because we are pricing off the swap curve, we do believe where we're currently situated now that that volatility has somewhat peaked. Yeah. We're starting to see a normalization. Once we receive that normalization, just like in mortgages. Yeah. you start to reset what the path is going forward. Right. Thanks, guys. Appreciate it. Your next question comes from Josh Freiman with Macquarie. Please go ahead. Hi, guys. Just checking you can hear me. Yeah. Yeah. Thanks, Josh. Thanks. Although I am gonna specify to the operator it's Freiman for future reference. So two questions from me. Look, you guys have achieved pretty good volume growth in the half, but that's been broadly offset by pretty aggressive margin compression. I'm conscious, you know, to Andy's question, there's that timing hit that you guys have had in this half. You know, I'm conscious that you guys do still have continued rate rises and significant competition. I just wanna check how you plan to manage that volume margin trade-off in the short term. Yeah, look, it's a good observation and question. The constant view that we have is as long as we feel that the pricing for risk is in line with what we've set internally, then that is what sets the tone on volume versus mix. We won't be looking at growing for growing's sake. It's just not worth it because what tends to happen is if you try to front load that growth knowing that you are riding that front book price underwater, then you're really gonna be cornered to raise the back book above OCR, and that's not a good experience because what you will have is accelerated attrition. We are balancing between the three main areas of getting it right, containing the attrition rates, and making sure that we have customers, you know, for the long haul. Everything that we do is done or predicated on a two to three-year minimum view as opposed to a knee-jerk reaction of what today's market is doing today. I can't give you any guidance on what the volume will look like, but I can tell you that, you know, we've been here before. Mm-hmm. You know, 2003-2008 was a market where rates went up. 2009-2011 was when the markets were going up in rate rises, and we managed them very well. For us, it's all about understanding what that mix should look like. I apologize, I'm not answering your question exactly to what the volume's gonna look like. It really does come down to depending on what that margin looks like for the risk we're taking on that particular asset in that moment. Understood. Thank you. Second question. You know, I'm conscious that you guys do still have significant headroom in your warehouses. But the RMBS market, you know, those spreads have started to rise, and we've seen a few deals recently. I know not you guys, but some deals have started to fall over. Are you able to provide some more color on funding markets and how you're seeing them? Sure. The funding markets have been kind to us, and maybe not kind to others. Again, we have termed out in excess of AUD 31 billion over 51 transactions, and we've been doing so since 2003. We have a long-standing relationship and history with both onshore and global investors who are repeat investors into our programs. That is a huge differentiator to many in the market. The other point I'll raise is that that AUD 4.5+ billion of headroom is increasing as we are putting on more and more warehouses as we speak. That means that irrespective of what happens to the market, we still have AUD 4.5 billion of originations we can write even if the markets are closed. This is headroom that we have factored into the business for environments that we are in today. That's what it's specifically built for. That way we are not pressured to go out to the market if we feel the deal cannot be done. Till today, we are confident. We got a deal in the market today, and that is a AUD 650 million prime deal. We are, you know, somewhat confident that we will execute this just like we have executed every other deal that we've put out to the market. Thank you. Your next question comes from Minh Pham with Barrenjoey. Please go ahead. Hi, everyone. Thanks for answering my questions. Just two from me. Firstly, on the weighted average LVR that you mentioned, 54% is the average of the book, but, you know, it's the tail that we worry about in banking. Do you know what the LVR of the last 10% of your book is? I don't have the last 10%, but I'm happy to come back if we're catching up later on. I will tell you, though, that the average LVR of the loans that was written approximately in the last 12 months is averaging between 62% and 67%. Yeah. Great. Thanks. To just give you some comfort that, you know, we will generate usually, less than around 6%-7% of our flow of anything greater than 80% LVR, just to give you a bit of an understanding. It is very small. The higher the LVR, so if you think about anything greater than 90%, that's just at around 2%. Yeah. We are very conservative on high LVR loans. That is also a factor of some of the NIM compression because we did focus in the back half of last year and the first half of this year on originating more lower LVR loans because we knew what market we were entering into and the headwinds that we were factoring. It is all about management of that LVR/collateral that we're taking on. Great, thanks. Maybe just one on the expenses. Obviously pressure from cost inflation, and you've got the full run rate of FTE added in the period, next period. Stratton is going to complicate that. You've provided wage inflation on an organic basis. How do you see OpEx trending over the next year, particularly as revenues may weaken in a slowing revenue environment? Yeah. Well, you can see that we're very disciplined in terms of our cost management and what the drivers are. The majority of the costs within the business come from FTE through full establishment running forward in terms of that area. Technology cost just literally increases with people coming on board. A new employee gets a computer and software associated with it, et cetera. That's really an FTE-driven cost. All of the other costs are actually a reinvestment ratio, whether it be marketing, or whether it be things like, sponsorships and, broker support. We run a really tight ship. Look at the cost per FTE, which have actually trended down 15%. If you look at the total cost base as a percentage of operating income as well, we're trending down. Great. Thank you. Cheers. Thank you. Your next question comes from Paul Buys with Credit Suisse. Please go ahead. Oh, good morning, Mario, Therese. First one for me, please. Just following on some of the other NIM questions. Just on the asset finance customer rate changes, you highlighted the very important point that there's been some mix shift there, for example, novated lease growth, which is kind of playing out on that. I just wondered if you've got any color on what that customer rate change would look, I guess, sort of ex the mix shift. I'm just trying to work out what the sort of underlying trends are from a competitive perspective if you know ex the mix shift that you guys have been entering into. Look, novated lease is still a relatively small part of the overall origination space. It's running around 3%. I think you can actually take the average what we're running at the moment as being pretty close. Yeah. Yeah. Okay. You can see on slide 12 that the front book rates have significantly increased. Correct In June. That's somewhat captured all of the volatility and the compression that we experienced in April and May. Correct. You are seeing a market recovery as well with asset finance. The mix. This is something that we will always factor in. Yeah. As we start to write more novated, we will then balance into taking on other type of higher yielding products to make sure that the mix stays correct. I think it's important to note we have been increasing the front book. Yes Price on novated lease as well. Correct. Because what we've been experiencing in terms of sort of our input cost is across the portfolio, so that's had to be passed through novated as well as, commercial and consumer. Got it. Overall, you'd still continue to see asset finance as a less competitive space than the home loans, right? Yes, because the main factor for that is asset finance really doesn't have any big bank players that are gonna have a somewhat funding advantage. With assets, predominantly all the peers and competitors are non-banks, and they will have similar funding challenges as we would with regards to cost of funds and where the swaps are, the volatility in the swaps. I think importantly as well, you know, the investment that we have made in the Solana system, the brokers talk about it, the introducers talk about. Sure how it's so easy to do business with us. The more that you can minimize friction for those who wanna do business with you, the more you'll increase your share. Okay. Thank you. Sticking on that space for a minute. Obviously on the home loan side, we've got, you know, what property prices are doing and the outlook. On the asset finance side, we've still got a pretty buoyant environment for car prices, particularly used car prices. I guess supplies are still expected in the short term. Just wanted to. You know, obviously, you guys have been getting effectively a ticket price benefit from that environment for a period of time. You know, I just wanna confirm, do you see that persisting in the short term? How do you see that into the medium term? Yeah, I think that'll stay relevant as long as stock coming into Australia is limited. You know, there is many views that, you know, stock is coming back in, but in very dribs and drabs format. We still think that there is at least another six-12 months. Mm-hmm of this not recovering to pre-COVID, you know, supply. There is still a period of time where we feel that the used car market will remain fairly buoyant. Okay. Thank you. Then the last one, there's a couple other questions we're talking about, I guess funding markets and the like. I just wanna kind of ask this simply back to that slide 11. So the last two periods, you got, I guess, funding margin benefits. I guess I'm just trying to ask the simple question, you know, to the extent that that's benefited this period and periods prior, you know, to what extent... What's the outlook for that going forward? Has that run its course now in terms of where you are? Again, you've already explained, I guess the availability and the differentiation versus peers, which I get. If we actually look at what's been, you know, that driver in the last periods, how does that look going forward? You have to remember what we're seeing in the funding markets now and how we're funding. It's only a small percent of what the total- Sure funding pool of the business is. NIM is actually an average over a period of time. It's the blend of, you know, previous period, positive funding with some of the impact of this coming through now. Yeah. I think we're all expecting to see a little bit more stabilization, normalization come within the next, you know, 12-month period. Yeah within funding markets. Yeah. We do have a diversified portfolio that we can flex on, and that diversification will broaden over time, which will give us more options to be able to pull more levers, and drive that mix. Mm-hmm. I think it's important to note that, you know, the volatility. Well, first and foremost, we're very transparent. Mm-hmm last year that there was a lot of tailwinds that we had received on the cost of funds and where we're at. We're being very transparent right now. This is not a Pepper issue. This is an industry issue. Mm-hmm that everyone is transitioning through, whether it's banks or non-banks. I mean, with banks it's probably delayed and their, you know, their time will come, so to speak. Yeah. With non-banks, it is what it is right now. It is, and again, I have to reiterate and harp on, it's a moment in time. Yeah. We are right through a transitional period, and once that stability comes through, then we will be able to return to BAU by way of setting our price without any surprises coming through from our arbitrage between the BBSW and the cash rate. Sure the swap curves for asset finance. Thank you. I'm gonna be cheeky and sneak in one other quick one. I think, Mario, you mentioned in the beginning, prepayments you saw heading back to kind of long-term trend, which is obviously good news to the extent that's coming through. If I look at slide four, I can see that, prepayments dropped for mortgages, but it looked like they actually ticked up in small numbers. Did they actually ticked up slightly for asset finance? I just wanted to sort of That. Dissect that comment into the two segments. Yeah. That's also a factor of timing and also size of book. Mm. You will see, you know, certain cohorts coming off at periods of time. If you had a large origination year two-three years ago, and those start to come to maturity, then you will start to see them coming off. But we are, what I would say, recapturing a lot of those customers. Yeah They are coming back on with new assets. Okay. Great. Thanks, guys. That's all from me. Thank you. Thanks. Your next question comes from Wei-Weng Chen with RBC Capital Markets. Please go ahead. Hi, team. Just a couple of questions from me. Just firstly, on asset finance, and the repricing there in the front book. So the chart on page 12 cuts off in June 2022. I'm assuming repricing has continued into the first two months of the year, sorry, of the second half. Are you able to maybe please speak to, I guess, where the front book pricing is now and also from a competitive perspective, are your competitors increasing by similar amounts? I think competitors are being a little bit volatile in terms of some of the pricing that they've been implementing. We continue to actually increase given what's been going on in relation to the BBSW. Sorry, in relation to the swap rates. We did actually take an opportunity though to sort of modify some of the pricing on commercial CRE in August just because we saw an opportunity there. We just continue to monitor. Yeah. Where we see our input prices increase, then we'll take the opportunity to increase the front book, but also to capitalize on volume when we can. Yeah see clear spots. I think the easiest way to think about it is, we do price off the swap curve. As you start to see that swap curve moving. Yeah You will see us repricing. Correct. Okay. That pricing has continued, repricing has continued into the second half, yeah? Correct. Yes, definitely. Correct. Just looking at expenses, you've increased headcount a fair bit in the last 12 months. Just wondering what sort of movements we should expect to see, I guess, for the remainder of the year. Also, I'm assuming the half year expense number doesn't really reveal the full run rate of your new cost base with the new people. How should we think about that going into the second half? I think go to slide 14, and then it'll give you a very clear on the top right-hand side. That increase that you're seeing is predominantly our broker administration services in Manila, and they are 100% costed. I'll pass it over to Therese to sort of Thanks. If you look at December 2021, we actually had total expenses of AUD 91 million. If you look at June 2022, our total expenses when you actually normalize for the one-off impairment was AUD 91.7 million. You know, we're running sort of fairly constant on a half to half basis. As I showed in the top right-hand slide 14, I broke down the FTE growth. As that is occurring in Manila, we get a favorable mix impact because it reduces the overall cost per FTE. The underlying wage inflation is running about 2.5%. Yeah. I think it's important also to note that in June and July, we had record originations coming through the door in excess of AUD 1 billion a month on each one of them. We did not need any extra resources, and the system that we have, all built in-house, took it in stride. We were positioning the business to obviously take more volume on to that area. We are very comfortable with the scalability of our platforms. Yeah. That is very evident in two months in a row originating in excess of AUD 1 billion for a non-bank. That's a meaningful number. Yeah. Okay, thanks. Sorry if I missed this earlier, but on page 11, just your commentary around recent price movements will flow through to second half, calendar year 2022 in relation to NIMs. But just wondering, are you saying that, I guess second half on first half, we're gonna see an expansion in NIM or are you guys just still seeing, I guess, a headwind from the swap rate? If you break it down to, like, the customer rates, BBSW and then funding margins, the customer rate itself will increase. It increased in quarter two on quarter one, and that's the impact of the price increases coming through. What Mario mentioned at the beginning is there is a timing issue in that OCR will change, but then it takes roughly, you know, six weeks for us to reprice both back and front book, just given how it flows its way through. If you just isolate the customer rate side of the NIM walk, yes, you know, we will see an increase over the second half of this year. What obviously you've got to factor in, though, is all the BBSW and swap rate movements and also what's happening in terms of funding margin. Unfortunately, we don't have a crystal ball with knowing what that BBSW versus cash rate is going to be. We can't really comment to see what, you know, how that's going to look like by the end of the year. One thing that is for sure is that we are very disciplined. Yeah. We have a handle on knowing how to price for risk, and we know how to manage that back book NIM. If I can just support what Mario said as well. When it comes to things like BBSW swap, cash rate, it's not just impacting us, it impacts everyone. Yeah. Yeah. Just to clarify, your expectation is that customer rates will not be a drag going into the second half? It depends on the mix of the business as well, but given the price increases that we've implemented and what we see coming through and isolating solely the customer rate, no, I'm not expecting it to be a drag. Okay, clear. Thanks so much. There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.