MyState Earnings: Guidance Disappoints as Competing With Wide-Moat Banks Takes Toll

MyState’s MYS fiscal 2023 cash net profit after tax increased 20% to AUD 38.5 million, with 14% loan growth helping offset weaker net interest margin and rising operating costs. The result missed our expectations by 3.5%, though. The funding cost disadvantage to major banks, as MyState is more reliant on savings and term deposits, was more pronounced than we expected. When customer saving rates peaked and banks got away with paying very little for customer deposits, small banks more reliant on term deposits benefited most. The difference in the cost of funds between major and nonmajor banks narrowed, but this appears to be widening again in a higher-rate environment. MyState’s NIM fell 4 basis points to 1.63%, with the second half down to 1.55%. In contrast, Commonwealth Bank’s NIM increased 17 basis points to 2.07% in fiscal 2023.

Competition for customer deposits will likely remain high as banks replace the term funding facility, but we expect reprieve on home lending rates as the industry looks to improve returns. Removal of cash-back offers, repricing new loan rates, and fixed-rate loans maturing at higher rates should provide a counterbalance.

Our fair value estimate declines by 4% to AUD 5 after we lowered our earnings forecasts for fiscal 2024 and fiscal 2025. We have moved fiscal 2024 forecasts in line with management guidance for flat EPS, around 12% below our prior forecast. The key driver is NIM weakness. We have lowered our NIM forecast 5 basis points to 1.55% but still expect a gradual improvement to 1.65% by fiscal 2026. We think major banks will reprice loans and deposits at a level that allows for low-double-digit returns on equity, and for smaller competitors like MyState to follow.

MyState declared a fully franked final dividend of AUD 11.5 cents per share, bringing the full year in line with our forecast at AUD 23 cents. The capital position remains sound, with the common equity Tier 1 ratio of 11.2%, above management’s comfort range of 10.5%-11%.