The shares of MyState Limited (ASX: MYS)  touched a five year high of $5.48 on February driven by more than expected first half of 2015 results, but could not sustain this level and have corrected over 18.1% since then. MyState reported a slight decline of its revenues by 0.3% to $60.4 million in the first half of 2015, against $60.6 million in first half of 2016. The group improved its net profit after tax to $14.9 million from $14.8 million in 1H14, while maintained earnings per share at 17 cents. MyState also maintained the fully franked interim dividend of 14 cents per share, resulting in the dividend payout ratio of 82%. 


Net profit after tax performance highlights (Source: Company Reports)

Total assets improved by 5.2% on a year over year basis to $3,742.1 million for the period ending on December 2014, from $3,555.9 million for the period ending on June 2014. The total loan book increased more than 1.6 times system or by $155 million, against the contraction of $37.7 million in the prior corresponding period. The company had sold its investments in Cuscal, a payments and switching outsource provider as they no longer believe Cuscal to be a strategic asset to its business. MyState will report a one off profit after tax of $3.9 million, due to this transaction. 


Total loan book growth (Source: Company Reports)

The transition of Tasmanian banking brand to MyState bank had enabled the group to endorse its customer proposition better. Moreover, MyState’s solid sales and distribution efforts while help it grow to a strong portfolio in Australia, with  greater mix of low LVR loans as well as improving diversification enabling them to improve the quality of their home loan portfolio. The group raised over $300 million RMBS transaction to facilitate its further asset growth. 


Over 60% of home loans funded were under 80% LVR (Source: Company Reports)

On the other hand, net interest margins decreased by 0.09 percentage points to 2.36% as compared to 2.45% on pcp and 2.42% in 2H14. The decrease was mainly due to the stiff competition for home loans affecting the front book as well as the back book. The reducing mix of high yielding portfolio coupled with broker commissioning costs also led to the fall.   
             
The group achieved to decrease its overheads by 1.25%, resulting in the cost to income ratio of 64.5%, through technology savings, strict cost controls and other efficiencies. Meanwhile, Mystate maintained a conservative balance sheet, wherein the total capital ratio reduced 110 basis points to 13.3% post loan growth. The company also has a better average engagement scores of 82 out of 100, as compared to its industry peers, and intends to improve it further. However, return on equity decreased to 10.2% in the first half of 2015, from 10.6% in the prior corresponding period.

With regards to the divisional highlights, MyState overall banking business rose by 0.8% to $12.8 million during the period as compared to $12.7 million for the six months ended on December 13^th, driven by better services to mortgage broker industry. The company operates its banking business via the Rock in central Queensland and Mystate bank in Tasmania. The division witnessed 77% growth in approvals and settlements, and the growth momentum is expected to continue further. Moreover, the group’s product and pricing strategy enticed 60% of home loans funding at lower than 80% LVR. The 30 day arrears in the banking portfolio as maintained at 0.8%, which is relatively below as compared to its peers. The group had invested in fresh loan origination systems to further enhance its services while the efforts to improve processing efficiency for mortgage brokers will be launched in the second half of the fiscal year. 


Monthly loan settlements continue to build since 2H14 (Source: Company Reports)

As per the group’s wealth management business, Tasmanian perpetual Trustees (TPT) was maintained at $2.1 million, with steady funds under management fee, trustee services income and financial planning revenue. Meanwhile the funds under management slightly increased by 1% to $1.02 billion.

Outlook

The company’s residential mortgage lending book rose around 12% on an annualized basis, which is more than loan growth of regional as well as major banks.  The residential mortgage lending book growth is expected to continue to grow even during the second half of the year. Improving originations of its mortgage broker channel would further drive the division’s growth and diversification. 


Residential mortgage book growth (Source: Company Reports)

MyState Limited stock plunged over 10.8% in the last three months alone. The lower interest rates, mounting competition at all levels is expected to continue to pose pressure on its margins. On the other hand, the group’s efforts to improve its banking business coupled with further improving efficiency might drive its second half of fiscal year 2015 performance. We believe that the group will be able to continue to expand its loan portfolio as well as drive its growth.

Based on the foregoing, we give a “BUY” recommendation to the stock at the current levels of  $4.65.

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