MyState Delivering Profit Growth but Funding Cost Disadvantages Are Evident

MyState’s MYS result was solid, with the bank on track to meet our fiscal 2023 net profit forecast of AUD 42 million. Net interest margin, or NIM, was admittedly much weaker than we’d forecast, but larger average loan balances provided a welcome offset.

First-half net profit of AUD 20 million increased 20% from last year, and 30% on second-half fiscal 2022. The result was driven by home loan growth of 10.5% in the past six months, and NIM up 14 basis points to 1.71%. We expected NIM to improve modestly on the 1.78% achieved in the first quarter, but competition for customer deposits and home loans, plus higher wholesale funding costs had a larger impact on MyState relative to larger peers. In addition to having lesser transaction account balances, the bank is growing customer deposits faster to support loan growth. Ongoing RBA cash rate increases and the benefit of fixed rate loans maturing at higher rates should be margin tailwinds, but new loans on average will likely be written at a lower margin than the existing book and offset the benefit.

Our fair value estimate declines by 5.5% to AUD 5.20 after lowering NIM forecasts to 1.65% in fiscal 2023 and 1.7% over the medium-term, down from 1.8% previously. We assume loan growth slows to a low single digit by fiscal 2025, which should mean less of a need to price aggressively on customer deposits and small margin reprieve.

Despite the margin pressure, the benefits from having raised equity to support loan growth, plus the step up in distribution and marketing spending, is starting to bear fruit. With strong net interest income, the cost/income ratio fell 480 basis points to 63.2%, and return on equity improved 113 basis points to 9.2%. On our forecasts, EPS in fiscal 2024 will exceed fiscal 2021 levels by 5.5%. This might not sound like much, but if the bank does not pursue this growth, a shrinking loan book and margin squeeze given intense competition, plus inflationary cost pressures, may leave shareholders worse off.