ASX:HMY - FY24 Annual Report

FY24 Annual Report

Released 23 Aug 2024 - 8:18 AM

Announcement PDF Annual Report 2024 Contents HMY 2024 Highlights��3 Board of Directors��5 From the Chair�� 7 From the CEO��8 Review of Operations��11 Sustainability Report��19 Directors’ Report�� 28 Financial Report�� 29 Shareholder Information�� 69 Corporate Information�� 71 Directory��75 HARMONEY ANNUAL REPORT FY24 2 HMY 2024 Highlights Performance $758m Loan book up 2% and average loan book up 10% Group loan book $123m Revenue up 14% to $123m Group revenue $13.2m Statutory loss $0.7m Includes one-off $9.5m intangible impairment on retirement of Stellare® 1.0, following launch of Stellare® 2.0. Normalised statutory loss $3.7m Fifth consecutive half of Cash NPAT profitability Cash NPAT 24% Highly automated Stellare® platform driving further cost to income ratio gains Cost to income ratio 0.43% Group arrears of 0.43%, significantly lower than personal loan market average 1.58%1 Group 90+ day arrears $21m Funding capacity for growth with undrawn facilities of $181m and unrestricted cash of $21m Unrestricted cash 1. Equifax Australian Consumer Credit Demand Index 2024 Q2, Personal Loan series. HARMONEY ANNUAL REPORT FY24 3 Achievements Stellare® 2.0 +50% Award winning Increase in Australian new customer originations July 2024 on prior comparative period (pcp) AFR Boss most innovative award September 2023 4.8/5 83 Customers rate us! Google and Shopper Approved scores of 4.8/5 from more than 57,000 reviews Customer Net Promoter Score 83 Applicant Net Promoter Score 50 83% Funding leader Employee Engagement Score Funded by 3 of the "Big-4" banks and New Zealand’s first non-credit card consumer Asset Backed Securitisation, NZ$200m rated by Moody's HARMONEY ANNUAL REPORT FY24 4 Board of Directors Paul Lahiff Independent Chairman Paul Lahiff (Bachelor of Agricultural Science) is a highly seasoned executive with 40 years of experience in financial services. Paul is currently the Chair of Australian neo-bank UBank, and NESS Super. Paul was previously the CEO and Managing Director of Mortgage Choice, during which time he led its successful listing on the Australian Stock Exchange. He was also a former Managing Director at Permanent Trustee, and before that at Heritage Building Society. Paul brings extensive capital markets, regulatory and governance experience from his Chairmanships at Cuscal Limited, New Payments Platform Australia, Australian Retail Credit Association, and RFi Group. Paul is a member of Harmoney’s Audit and Risk Committee and Nomination and Remuneration Committee. John Quirk Independent Director John Quirk (Bachelor of Science) has over 40 years of experience in the technology sector with international and multinational companies, as well as his own strategic investment and corporate advisory business. John is currently the Chair of Portainer.io and Aeroqual, and a director of Television New Zealand. John was previously the Chair of Kordia Group (a SOE), ClearPoint Group, Farm IQ Systems Limited, FrameCAD Group, WhereScape Software, and SMX, and was a member of the Ministerial Advisory Board for the TVNZ / RNZ merger. He has held key leadership roles, including the position of Chief Executive Officer (Asia Pacific) of MI Services Group, an international management consulting and information systems company. John is a Chartered Member of the Institute of Directors. John chairs Harmoney’s Audit and Risk Committee and is a member of the Nomination and Remuneration Committee. HARMONEY ANNUAL REPORT FY24 5 Monique Cairns Independent Director Monique Cairns (Bachelor of Business) has over 20 years of experience in strategy, communications, marketing and sales, across financial services and other sectors. She is a professional director with her own consultancy business, Caribou, where she provides strategy development and CEO performance and remuneration reviews. Monique is currently the Chair of 30 Seconds Group, the Deputy Chair of New Zealand Home Loans, a director of Ingenium, a Board trustee of The New Zealand Portrait Gallery Te Pūkenga Whakaata, and a member of the General Committee at the Northern Club. Monique’s executive background includes serving as the Head of Retail Sales Development and Customer Experience at the Bank of New Zealand, and the Chief Marketing Officer at GE Capital NZ. Monique was also a former director of DEC International, Manukau Institute of Technology, Unitec Institute of Technology, Lotto NZ, and the SPCA. Monique is a member of the Australian Institute of Company Directors and the New Zealand Institute of Directors. Monique chairs Harmoney’s Nomination and Remuneration Committee and is a member of Harmoney’s Audit and Risk Committee. Neil Roberts Founder, Chief Strategy Officer & Executive Director Neil Roberts founded Harmoney, and was CEO over 6 years, driving the capital path, and building culture, systems and processes that are intrinsic to Harmoney’s success. Prior to that Neil was Head of Sales and Business Development at FlexiGroup, leading a team of 80 with annual sales of $200 million, driving a $30 million profit. Neil founded the Direct Division of a New Zealand retail company, PRG Group, that sold personal loans to consumers and raised retail debentures to fund loans. Launched in 2001, PRF Direct achieved $3.2b in personal loan applications and $1.2b in written personal loan volume over five years. Ultimately heading the business, Neil was responsible for over 400 staff and a balance sheet of $750m in assets, with forecasted PBT of $50m six years later, prior to being sold to GE Money in 2006. David Stevens Chief Executive Officer & Managing Director David Stevens is a highly experienced public company CEO specialising in consumer and commercial finance in Australia and New Zealand. Before commencing with Harmoney as CEO in 2019, David had most recently led a start-up consumer finance company, to ultimately securing a major equity stake in the business by a large Australian Bank in 2018. Prior to this, David served as CEO and CFO of Humm (formerly “FlexiGroup”) (ASX: “FXL” now “HUM”). In David’s nine years with FlexiGroup, he led a team of over 1,000 employees in the strategic growth of the business, through organic growth and M&A, from what was a small company when he started, to becoming CEO of an ASX200-listed business. David also led the $300m+ acquisition of Fisher & Paykel Finance and spent considerable time in New Zealand in the course of his work in the local side of the business. HARMONEY ANNUAL REPORT FY24 6 From the Chair Paul Lahiff Dear Shareholders, In a year of significant achievements, it is with great pride this year that Harmoney has launched its new, internally developed, Stellare® 2.0 lending platform in Australia. It has been a huge focus for our team, drawing on their exceptional skills and deep consumer lending experience, incorporating leading technologies and some of the latest thinking in machine learning and artificial intelligence large language models. Stellare® 2.0 provides an easier customer experience, an improved ability for us to safely help more applicants, even higher levels of automation, and importantly, a much faster platform for our team to iterate on and to release new features and products. Prioritising the development of Stellare® 2.0 this year has impacted origination volumes as we've elected to forego certain enhancements to our Stellare® 1.0 platform. While those enhancements would have supported current year originations, particularly in a year where consumers have been facing significant economic headwinds, strategically they wouldn't have delivered the sustained benefits that Stellare® 2.0 brings for the years ahead. Pleasingly, even spending this year investing for the future, and despite the challenging economic climate for consumer lending with higher market interest rates and increased economic uncertainty, we have delivered another year of both Cash NPAT profitability and loan book growth, this marking our fifth consecutive half of doing so. Alongside a strong financial performance, Harmoney has achieved some significant sustainability goals this year, including introduction of a Sustainability Policy and a Modern Slavery Statement, as well as an impressive 57% reduction in our Scope 1, 2 and 3 emissions. Harmoney has offset all residual emissions to maintain net zero emissions for the year. These achievements support our ongoing commitment to creating long-term value for all our stakeholders while minimising our environmental impact and making a positive impact on the communities we serve. Finally, I would like to thank my fellow Board members for their contributions this year and to thank and acknowledge both Tracey Jones, who retired at our Annual General Meeting after nine years as an Independent Director and as Chair of the Audit and Risk Committee, and John Quirk who has assumed the role of Chair of the Audit and Risk Committee. On behalf of the Board, I would like to congratulate David Stevens, our CEO, and the entire Harmoney team for a year of great progress and to thank them for all their hard work and commitment to our customers, our values and to each other. I would also like to thank our shareholders for their ongoing support. Paul Lahiff, Chair HARMONEY ANNUAL REPORT FY24 7 From the CEO David Stevens Stellare 2.0 - A transformative leap forward The launch of our Stellare® 2.0 platform in Australia marks a pivotal moment for Harmoney. This groundbreaking platform promises to revolutionise our customer experience, accelerating the delivery of personalised solutions and innovative products that cater to their evolving needs. After a year of dedicated development by our talented team of engineers and consumer lending experts, we have achieved a long-held ambition of transforming our development agility. Stellare® 2.0 replaces our Stellare® 1.0 platform, which served us well for a decade, but being founded in our now completed peer-to-peer business, was ultimately hindering our pace of innovation. While the retirement of Stellare® 1.0 has resulted in a one-off $9.5 million impairment expense this year, Stellare® 2.0 is an investment we believe will yield substantial long-term returns for many years ahead. Stellare® 2.0 harnesses the power of automation, machine learning, and artificial intelligence large language models to enhance every step of the customer journey. From working in partnership with Google’s algorithms to efficiently identify those applicants most likely to take out a Harmoney loan, to simplifying the application process and managing repayments, to identifying and marketing to qualifying existing customers next time they are looking for a loan, Stellare® 2.0 empowers us to deliver a seamless and personalised experience. The results are already evident: In July 2024, new customer originations in Australia surged by 50% yearon-year. Our focus now shifts to innovating on Stellare® 2.0 and extending its benefits to our valued New Zealand customers. Sustained growth amidst market challenges Harmoney's fifth consecutive half of both Cash NPAT profitability and loan book growth is a testament to the strength and flexibility of our consumer-direct model. Despite investing heavily in Stellare® 2.0 and navigating a year of higher interest rates and economic uncertainty, we achieved Cash NPAT of $0.7 million and grew our loan book to $758 million. While rising market interest rates have temporarily compressed our net interest margin (NIM) to 8.8%, we anticipate a rebound in the coming year, with our 4Q24 new lending margin already at 10.2%. Our highly automated platform and the agility of our consumer-direct model responding to market conditions allowed us to reduce acquisition costs by 14% and cash operating expenses by 4%, even in the face of very high annual inflation levels. HARMONEY ANNUAL REPORT FY24 8 Financial strength and improving credit performance Despite economic headwinds, Harmoney's credit performance is showing positive trends. Our incurred credit loss to average gross loans has decreased from 4.2% in the first half of the year to 4.0% in the second half, driven by the replacement of an earlier, less accurate Australian scorecard. We are also seeing improvements in arrears performance, with 90+ day arrears down to 43bps from 65bps at 31 December 2023. Harmoney's financial position remains strong and well positioned for growth. We successfully refinanced and upsized our corporate debt facility to $30 million, of which $7.5 million remains undrawn. Additionally, we issued a NZ$200 million asset-backed securitisation, New Zealand’s first ever unsecured personal loan backed securitisation, and further enhancing our funding capacity. With strong support from three of the “Big-4” major Australian banks and ample cash reserves, we are well-capitalised for future growth. On track for 20% cash return on equity in FY25 We remain confident in achieving our stated goal of a 20% cash return on equity run rate in FY25. Stellare® 2.0 is set to accelerate originations growth, particularly in the second half of the year as its rollout is completed across our New Zealand as well as our Australian customers. This growth, combined with our widening NIM, operational leverage from increased automation, and strong funding capacity, positions us well for the coming year. On behalf of the Management Team, I extend our gratitude to the entire Harmoney team for their exceptional dedication and the successful launch of Stellare® 2.0. We also thank our shareholders for their continued support. We look forward to a year of further growth and are excited to demonstrate the full potential of Stellare® 2.0. David Stevens, CEO and Managing Director HARMONEY ANNUAL REPORT FY24 9 This page has intentionally been left blank HARMONEY ANNUAL REPORT FY24 10 Review of Operations HARMONEY ANNUAL REPORT FY24 11 Financial performance The table below presents the financial results for the current year compared to the previous year. Year ended Year ended 30 June 2024 30 June 2023 $'000 $'000 $'000 121,663 105,539 16,124 15% Other income 878 1,534 (656) (43%) Total income 122,541 107,073 15,468 14% Interest expense 55,848 39,824 16,024 40% Incurred credit losses 30,699 24,552 6,147 25% Risk adjusted income 35,994 42,697 (6,703) (16%) Customer acquisition expenses 10,592 12,316 (1,724) (14%) Net operating income 25,402 30,381 (4,979) (16%) Personnel expenses 11,025 10,993 32 0% Customer servicing expenses 5,918 6,174 (256) (4%) Technology expenses 4,954 4,816 138 3% General and administrative expenses 2,831 3,670 (839) (23%) Cash operating expenses 24,728 25,653 (925) (4%) - - - - 674 4,728 (4,054) (86%) 202 (7,827) 8,029 N/A Share-based payments expenses (1,488) (1,937) 449 23% Depreciation and amortisation expenses (12,582) (2,545) (10,037) (394%) Statutory loss after income tax (13,194) (7,581) (5,613) (74%) Interest income Income tax expense Cash NPAT Change Change % Non-cash adjustments Movement in expected credit loss provision For the year ended 30 June 2024 the Group reported Cash Net Profit After Tax (NPAT) of $0.7m (FY23: $4.7m), delivering its fifth consecutive half of Cash NPAT profitability. Total income increased by 14% to $122.5m (FY23: $107.1m) from a combination of higher average loan book and interest rates. Risk adjusted income decreased by 16% to $36.0m (FY23: $42.7m) predominantly due to increased interest expense, with higher market rates through the period, and to higher incurred credit losses. Customer acquisition and cash operating expenses fell $2.6m, demonstrating Harmoney’s ability to generate incremental income while maintaining a low cost base, facilitating continued Cash NPAT profitability. Notably this year, non-cash adjustments included a one-off $9.5m impairment loss recognised on the retirement of Harmoney’s Stellare® 1.0 platform, following the successful launch of Harmoney's new Stellare® 2.0 platform. The Group determined there was no reduction in useful life or impairment of Stellare® 1.0 at 30 June 2023 as at the time there were no plans to transition the existing Stellare® 1.0 loan book onto the new Stellare® 2.0 platform. Given Stellare® 2.0 platform's superior loan management capabilities, and associated cost efficiencies, the Group now plans to migrate the Stellare® 1.0 loan book in FY25, after which Stellare® 1.0 will no longer be in use. Other regular non-cash adjustments included $3.1m of other depreciation and amortisation expenses, $1.5m employee share-based payment expenses and a $0.2m reduction in the expected credit loss provision driven by improved arrears performance and loss outlook. Together, these non-cash adjustments to Cash NPAT generate a $13.2m statutory loss after tax. Excluding the one-off $9.5m impairment loss, normalised statutory loss after tax was $3.7m (FY23: $7.6m) representing a 51% improvement on the prior year. HARMONEY ANNUAL REPORT FY24 12 Loan originations Year ended Year ended 30 June 2024 30 June 2023 Change Change % Total originations ($'000) 327,209 426,234 (99,025) (23%) New customer originations ($'000) 195,509 253,595 (58,086) (23%) Existing customer originations ($'000) 131,700 172,639 (40,939) (24%) Number of originations 20,166 26,202 (6,036) (23%) Average value of new customer originations ($) 20,268 21,158 (890) (4%) 12,519 12,144 375 3% Average value of existing customer incremental originations ($) This year, Harmoney has chosen to focus resources towards the development and launch of its new Stellare® 2.0 platform, replacing its existing Stellare® 1.0 platform. While this decision, and the launch of the superior Stellare® 2.0 platform, is expected to deliver faster growth in future years, the lower investment in the retiring platform this year, in combination with consumer lending headwinds as consumers have adjusted to higher market interest rates, has moderated originations, which were down 23% to $327m (FY23: $426m). However, Harmoney's flexible consumer-direct marketing model was also able to respond to these circumstances and reduce customer acquisition expenses by 14% to maintain positive Cash NPAT through this transitional year. Despite facing the same market conditions, originations from existing customers fell by less than those from new customers, demonstrating the strength of the annuity income Harmoney is able to generate from its direct relationship with its existing customers, with these originations also carrying near zero acquisition costs due to that existing direct relationship. Larger market Australian originations continued to predominate, accounting for 58% of total originations (FY23: 58%). HARMONEY ANNUAL REPORT FY24 13 Portfolio Year ended Year ended Change Change % 30 June 2024 30 June 2023 Loan book (period end) ($'000) 758,129 744,000 14,129 2% Loan book (average) ($'000) - Group 754,171 683,097 71,074 10% Loan book (average) ($'000) - Australia 392,051 342,361 49,690 15% Loan book (average) ($'000) - New Zealand 362,120 340,736 21,384 6% Despite lower than prior year originations, the loan portfolio grew $14m, closing the year at $758m (FY23: $744m). Harmoney has maintained growth through the year evidenced by the average loan book being $50m larger in Australia and $21m larger in New Zealand compared to FY23. The higher growth in Australia sees it now making up 54% of the loan portfolio (FY23: 51%). With lower originations this year, the average age of the loans in the portfolio (measured as the time since they were issued) has increased from 11 months last year to 14 months this year. This has placed upward pressure on the incurred credit loss to average gross loans (%), as described in more detail in the risk adjusted income section. HARMONEY ANNUAL REPORT FY24 14 Risk adjusted income Year ended Year ended Change Change % 30 June 2024 30 June 2023 16.2% 15.5% 70bps N/A Funding debt (period end) ($'000) 739,546 720,503 19,043 3% Funding debt (average) ($'000) 725,802 660,269 65,533 10% Average funding rate (%) 7.7% 6.0% 170bps N/A Net interest income (%) 8.8% 9.6% (80bps) N/A 30,699 24,552 6,147 25% Incurred credit loss to average gross loans (%) 4.1% 3.6% 50bps N/A Risk adjusted income (%) 4.8% 6.0% (120bps) N/A Average interest rate (%) Incurred credit loss ($'000) Risk Adjusted Income (RAI) is calculated by deducting funding costs and incurred credit losses from income. It is expressed in the table above as a percentage of the average loan book. RAI has decreased by $6.7m to $36.0m in the current year with a $16.1m increase in interest income being offset by $16.0m increase in interest expense, followed by a $6.1m increase to incurred credit losses. Other income decreased by $0.7m with the wind down of Harmoney’s legacy peer-to-peer platform, which was completed in October 2023. Harmoney’s risk adjusted income percentage, while down to 4.8% (FY23: 6.0%), remains attractive within the consumer lending market, demonstrating the strength of Harmoney’s underlying business model and its resilience through the economic cycle. Interest income grew by 15% to $121.7m (FY23: $105.5m) driven by growth in the average loan portfolio size and an increase in the average loan portfolio interest rate to 16.2% (FY23: 15.5%), as higher market interest rates have been passed through on new originations and now make up a larger proportion of the portfolio. This trend is expected to continue. Interest expense increased by 40% to $55.8m (FY23: $39.8m), driven by average portfolio growth and an increase in the average funding rate to 7.7% (FY23: 6.0%). This increase in the average funding rate, while predominantly due to increased market rates, is in part also due to Harmoney achieving higher leverage across its facilities due to the quality of its loan portfolio. Net Interest Income (NII) has remained stable at $66.7m (FY23: $67.2m). NII as a percentage of average loan book decreased 80bps to 8.8% (FY23: 9.6%) due to the average funding rate increasing at a faster pace than the impact of new lending rates on the average loan portfolio interest rate. The new lending (front book) NII has maintained at approximately 10% through the current year, which is expected to lift the portfolio NII back within target range of 9-10%. Incurred credit losses, representing loans written off during the period, increased $6.1m to $30.7m (FY23: $24.6m). Incurred credit loss to average gross loans % increased to 4.1% (FY23: 3.6%), 10bps higher than Harmoney’s target range of 3-4%, in large part driven by lower originations this year increasing the average age of the loans in the portfolio (measured as the time since they were issued), from 11 months last year to 14 months this year. Personal loans tend to reach ‘peak hazard’ for loss during the period 12 to 18 months after origination, so this year a higher proportion of the loan book transitioned through this “peak hazard” period, including the final cohorts of a less accurate earlier Australian scorecard which was replaced two years ago. The better performing current Australian scorecard is beginning to dominate, with the 2H24 credit loss % 20bps lower than 1H24, and back within the target range at 4.0%. As discussed further below, in anticipation of a cyclically driven lower risk adjusted income, Harmoney reduced both customer acquisition expenses and operating expenses, to maintain a balance of both cash profitability and growth. HARMONEY ANNUAL REPORT FY24 15 Credit provisioning Year ended Year ended Change Change % 30 June 2024 30 June 2023 Movement in expected credit loss (ECL) provision ($'000) (202) 7,827 (8,029) N/A Provision rate (%) 4.8% 4.9% (10bps) N/A The expected credit loss (ECL) provision represents Harmoney’s modelled expectation of future period credit losses to occur from the current portfolio. The provision does not, and is not designed to account for future period interest income that Harmoney also expects to derive from the current portfolio. Movements in the provision are driven by changes in the size of the loan portfolio and changes in Harmoney’s expectation of the level of future period loss to occur from within that portfolio. As movements in the provision do not impact cash, they are excluded from the calculation of Cash NPAT, which recognises only credit losses actually incurred during the period. Harmoney’s ECL provision reduced to $36.6m (FY23: $36.9m), with a 10bps reduction in the overall provision rate from 4.9% at 30 June 2023 to 4.8% offsetting additional provisioning driven by loan portfolio growth. The reduction in the provision rate to 4.8% is driven by improvements in the base model drivers e.g. improved arrears rate, moderated by increased conservatism in the economic overlay adjustment applied to that base. Customer acquisition metrics Year ended Year ended Change Change % 30 June 2024 30 June 2023 Customer acquisition expenses to origination ratio 3.2% 2.9% 30bps N/A Customer acquisition expenses to income ratio 8.6% 11.5% (290bps) N/A Anticipating the headwinds to consumer lending proclivity and affordability brought about by higher market interest rates and cost-of-living inflation pressures, Harmoney leveraged the flexibility inherent in its consumer-direct marketing model to reduce customer acquisition expenses by $1.7m (14%) to maintain a balance of both cash profitability and growth. The success of this strategy is demonstrated by the improved customer acquisition expenses to income ratio of 8.6% (FY23: 11.5%), reflecting Harmoney’s continued portfolio and revenue growth, despite moderating customer acquisition expenses. A key metric for Harmoney’s consumer-direct model is the cost to acquisition ratio, shown in the chart below. This ratio has typically trended down, driven in part by a key feature of Harmoney’s consumer-direct model, being that existing customers return for subsequent loans, and those originations have near zero cost due to that existing direct relationship. This year this ratio has seen a slight increase to 3.2% from 2.9% in FY23, while still well below FY22’s 4.7%. This year’s increase was predominantly driven by economic headwinds impacting originations to existing customers, who have near zero acquisition costs and therefore, when originations to existing customers reduce there is no commensurate cost reduction. Likewise, there is not expected to be any commensurate cost increase when existing customer origination growth resumes. Accordingly, the downward trend in this ratio is expected to resume once macro economic conditions allow for origination growth to return, and in particular as existing customer origination growth returns. HARMONEY ANNUAL REPORT FY24 16 Customer acquisition expenses to originations ratio Cost to income metrics Cost to income ratio 1 Year ended Year ended 30 June 2024 30 June 2023 23.9% 28.1% Change Change % (420bps) N/A 1. Excludes FY24 one-off impairment loss on internally developed software Harmoney achieved a further 420bps improvement in its cost to income ratio this year, now down to 23.9% (FY23: 28.1%). The ratio includes all operating costs below net operating income (personnel, share-based payments, customer servicing, technology, administrative and depreciation and amortisation expenses), with the exception of the one-off impairment loss expense on internally developed software, recognised this year with the launch of Harmoney’s new Stellare® 2.0 platform and the retirement of the Stellare® 1.0 platform. The continuing improvement is a reflection of the high levels of automation in Harmoney’s Stellare® platform, enabling Harmoney to continue to grow its loan book and revenue significantly faster than operating costs, and this year reducing operating expenses. Cash operating expenses reduced by $1.0m to $24.7m (FY23: $25.7m). This reduction was largely due to lower administrative expenses, down $0.8m while other cash operating expenses remained relatively stable with cost management initiatives offsetting inflationary pressures. HARMONEY ANNUAL REPORT FY24 17 Financial position 30 June 2024 30 June 2023 Change Change % $'000 $'000 $'000 Cash and cash equivalents 37,744 43,454 (5,710) (13%) Finance receivables 761,471 745,790 15,681 2% Expecte

Share your feedback

Discover