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Date : 08/10/2021

MyState

ASX :

MYS

Market Cap : $509.57 Million

Dividend Per Share : $0.13

Dividend Yield : 5.25 %

Buy

52 Week Range : $3.62 - $5.44

Share Price : $4.85

A digital bank in the making and the fastest growing among the big 4 and regional banks Down Under. We recommend a "Buy".

Company Analysis

MyState Limited (ASX: MYS) is a Tasmania based bank that provides banking, trustee and managed fund products and services through its wholly-owned subsidiaries MyState Bank Limited and TPT Wealth Limited. MyState is essentially a regional bank that provides all the usual banking services such as lending, mortgage, deposit, etc. While the Wealth segment provides financial planning and fund management services.

MyState’s share price has enjoyed a good run since November 2020, much like the big 4 and the regional banks here in Australia. While there was some weakness in the share price during February when bond yields were rising, the stock price rebounded with increased lending volumes and an overall easier operating environment.

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Source: Tradingview.com

Digital Bank in the making

What sets MyState apart from the big 4 and the other relatively bigger regional banks? MyState has invested heavily in digital banking capabilities that automate and digitise back-end processes to accelerate applications and provide a more seamless customer banking experience.

Given their relatively smaller size and assets, MyState is nimble enough to transform themselves and align the firm towards the digital economy. While all the other banks are also on a similar path, the relatively large operations and legacy assets significantly increase transformation costs and also the time it takes for the transformation.

The firm has introduced artificial intelligence (AI) in their back office to predict customer behaviour in the home loan book that is particular to a customer’s circumstances. Now, they have over 30 robotics processes at work in the back office which together have improved customer wait times and accuracy and it provides a platform for MyState to scale operations. The use of technology enables the company in delivering a consistently speedy time from application to approval for customers and mortgage broker partners and the optimised back-end processes enables MyState to deal with an increasing number of home loan applications. It is faster and cost effective in the long-run and it is why we see banks scrambling to transform digitally.

During the year, MyState added 17,000 new customers – a 30% increase in one year. Tellingly, 93% of these new customers came through digital channels – a testament to their investments so far. Their e-statement levels have risen 24% in the last two years to 53% of all customers opting to receive their statements electronically – saving MyState time and money.

All upgrades in infrastructure that have been made by MyState are now starting to pay off. The restructure of the retail banking business has led to significant savings. The closure of six branches and a re-organisation of the TPT Wealth business in the last financial year led to a $2.6 million restructure charge. The remaining seven branches located in Tasmania will support the longstanding loyal customer base. Savings from these initiatives are being reinvested into increased marketing and distribution capability to grow the business.

MyState’s mobile app is an example of their market-leading AI which now allows customers to gain insight into spending and saving habits, helping optimise costs and payments to help achieve their financial goals. They are now investing in a new internet and mobile banking platform which is due for delivery in FY22.

Loan Book Transformation

MyState’s loan book used to be concentrated with Tasmanian clients. However, since they started to grow nationwide, it has reduced the concentration risk. In a bid to do just that, MyState undertook a transformation strategy that involved enhancing their distribution capacity and bolstered their business development function.

This transformation will become more digitally available through alternative channels, such as mobile apps. Online channels will allow the bank to fuel growth outside their traditional core branch network. The reduction of physical branches has freed up resources, allowing MyState to focus on the branches that they retained as well as building out the loan book nationally with new customer acquisitions.

TPT Wealth replicates Bank’s success

In FY21, MyState outsourced some investment functions, launched a new trustee services platform, and changed their legacy commercial lending system. These initiatives have enabled more synergies, allowing the company to scale and support growth in funds under management as part of the 2025 strategy.

This year, MyState has undertaken a shift to combine face-to-face transactional operations with a modern digital offering to the funds management business, with almost a third of our investors using our new digital portal.

With funds under management increasing during the year to $1.105 billion, driven by growth in the range of income funds, MyState began the task of updating their products to ensure that they remain relevant for customers who seek regular income. The firm received the first independently rated, high investment grade four star ‘superior’ rating from SQM Research for the TPT Fixed Term Fund. TPT Wealth is now pursuing new ratings for the Long Term Fund and Select Mortgage Fund to allow further access to third-party distributors and wholesale markets and grow FUM.

Like the Bank, TPT Wealth is also increasing its reach outside of Tasmania. The new technology platforms greatly enhance their distribution capability and capacity. This year, MyState has begun to harness this by increasing their business development resourcing with new managers on the eastern seaboard, complementing their established operations now led by two corporate offices in Hobart and Launceston.

While MyState is a regional bank based in Tasmania, they are restructuring their relatively small organisation into a digital bank with extreme technological capabilities that can significantly reduce costs and increase profitability in the long-run. The adoption of these technologies also sets up the firm for growth, which is already evident in the FY21 growth numbers.

Now, MyState has embarked on a capital raising, ended FY21 with a bang, and is working on an accelerated growth strategy that should be complete by 2025.

Solid FY21 Performance

During late August, MyState announced their FY21 results and stealing the headlines was that Net Profit After Tax (NPAT) had grown 20.9% to $36.3 million. Lending growth, significant deposit growth, active cost management, and an improved cost of funding. The cost to income ratio (excluding restructure costs) fell by 153bps to 61.3% for the full year, further supported by gains from technology investments. For the year to 30 June MyState’s ROE was 10.3%, up an impressive 116bps on the prior period. As a result, the Board has declared a Final Dividend of $0.13 per share.

Net interest income for the period grew 12.5% to $112 million, due to growth in lending and lower funding costs. Funding costs fell across all products, with wholesale costs falling in line with moves in the BBSW benchmark. MyState reported a +10bps improvement in its Net Interest Margin (NIM) to 1.96% over the period, underpinned by increasing customer deposits, lower funding costs, reflective of current liquidity conditions, and favourable deposit interest rates.

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Source: MyState

The technological investment is paying dividends to MyState already. With a significant number of customers transacting digitally, MyState is able to meet customer needs in a more efficient way. As mentioned earlier, the restructure of the TPT Wealth business and closure of MyState Bank branches led to a $2.6 million restructure charge. Six branches were closed in the financial year, with the remaining seven branches located in Tasmania supporting the long-standing local customer base. The savings from these initiatives are being re-invested in the business, primarily in marketing and distribution to accelerate loan book and retail deposit growth.

With the market for personal loans having changed dramatically in recent years with the growth in the number of online personal loan providers combined with a consumer preference shift to buy-now-pay-later products, MyState ceased originating personal loans at the end of May. Customer needs for personal loans are now satisfied by a referral arrangement in a similar manner to that of general and health insurance. Efficiency savings generated here are being re-invested in accelerating home loan and retail deposit growth. This is the advantage of being nimble.

MyState has been able to cut-off an entire segment as they did not have too many assets devoted to personal loans. This is where the bigger banks are being disrupted by BNPL – with the personal loans segment unable to compete with the likes of buy-now-pay-later, but these banks are unable to cut off the segment given the billions of dollars’ worth of assets that are already in place for the personal loans segment.

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Source: MyState

Home loan growth was 6.8% for the 12 months to 30 June 2021, equivalent to 1.3 times system growth. Home loan applications (up 13.3%) and settlements (up 20.9%) ensured continued solid lending growth, despite an increasing competitive lending environment. MyState Bank is further investing in distribution capacity and is expecting further growth in FY22. MyState has also seen customer deposit growth of 13.2% in the 12 months to June 2021, with the award-winning MyState Bank Bonus Saver Account attracting significant growth – up 319% in the year – driven by an active digital acquisition program. As a result of excellent growth in customer deposits, the customer deposit funding ratio increased to 73.4% on 30 June 2021, up from 69.1%.

Just 1 hiccup in a challenging year

So far, it’s been a very positive result for MyState. The only hiccup during the year came from its wealth management business. While funds under management grew 3.4% for the year to $1.105 billion as of 30 June 2021, driven largely by a suite of well performing income funds. Operating income was down 12.9% on FY20, a result of lower management fee income, due to both lower average FUM levels and fee rebates. Mortgage lending fees were down $0.20 million on lighter TPT lending volumes, and Trustee services income was down $0.92 million due to lower capital and income commissions.

On 30 August, MyState added Alan Logan as General Manager for their Wealth segment. Alan is an experienced wealth management executive with deep experience in distribution and he will be responsible for driving TPT Wealth’s growth and continuing to scale the business with the support of our dedicated team.

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Source: MyState

Despite the TPT Wealth faltering slightly, it does not have a material impact on MyState’s overall finances. This is because the Wealth segment makes up about 10% of MyState’s overall revenues. The majority of their revenue is generated from Banking activities, and it is also where the growth story of MyState lies.

Equity Raise bolsters Capital position

MyState maintained a strong capital position. With an equity raise in May, the position strengthened. MyState raised $55.5m through a $24.2 million partially underwritten Entitlement Offer to eligible retail investors and a $31.3 million Placement and Entitlement Offer to existing and new institutional investors. The Offer price for the capital raise was at $4.30 a share and the company received high levels of demand from both, existing and new institutional investors. The funds raised will be used to accelerate the company’s growth strategies.

2025 Growth Strategy & Outlook

In what was a year made up of volatile operating conditions, MyState performed well. They grew their customer base, increased their loan book, deposits and funds under management, and finalised the 2025 strategy that will see MyState targeting rapidly increasing customer numbers, deposits and lending at MyState Bank and funds under management at TPT Wealth.

The banking industry in Australia is highly competitive and is a low growth environment. The key to succeeding here is to build a brand, being agile or nimble enough to quickly adapt to changing consumer behaviour, being digitally enabled to scale appropriately, and having a strong balance sheet. MyState ticks all of these boxes.

We expect this trend to continue. In FY22, our analysis points towards a close to 6% growth in revenues. While the loan book is expected to grow, we do see a slowdown due to the lending market slowing down in Australia. MyState is expected to continue to digitise operations, adding to their AI-enabled capability, and generating momentum to drive further investment in attracting new customers. The company will replace the existing internet and mobile banking platform in 2022, which will provide a new state of the art platform for our customers. This opens up a significant opportunity for MyState to grow the Bank and funds management businesses in a low-risk manner, but at a much faster pace.

Following the launch of the new AI platform, we expect revenue growth in FY23 to be higher at around 9%. Another obvious benefit from the increased digitisation is the lower operations cost and cost savings from letting go of legacy technologies. By our analysis, this should continuously increase NPAT margins. Currently, sitting at 25.7%, we expect Net Income margins to increase year-on-year to 27% by FY23.

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MyState resumed dividend payments in 2021 – with an interim dividend of $0.125 and a final dividend of $0.13 a share. The dividend payout ratio at 69.3% remains comfortably inside the targeted range of 60-80%. This brings the total dividend for FY21 to $0.255 – representing a 5.3% fully franked dividend yield. Given the significant capital raise, EPS is expected to be diluted initially, however, in the medium to long-term, the EPS and Return on Equity is expected to see robust growth.

Valuation multiples of MyState are fairly modest given the growth that is forecasted. It is one of the best performing banks here in Australia and their growth trajectory is the highest when compared against its peers. Therefore, a FY22 P/E of 13x and FY23 P/E of 11.5x is modest in our opinion. On examining the Price to Book Value multiple, we see that MyState is now trading just 1.1x – which is again modest given that most of their assets are digital and therefore off the balance sheet.

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Recommendation

MyState has the most robust growth profile among the big 4 banks and the regional banks. This is largely due because the company is transforming itself into a digital bank with the adoption of AI. The digitised operations have already boosted revenues, decreased costs, and increased the market share across all their banking products. The relatively small size of MyState enables it to be agile and respond better than its peers to changing consumer preferences and it is already evident in the customer acquisition numbers MyState posted in FY21. With a capital raise, their balance sheet has become stronger and has given the firm leverage to pursue their 2025 Growth Strategy of rapidly accelerating growth across its bank and wealth segments. We recommend long-term investors to “Buy”.

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