MyState

Issuer Rating: Baa3/BBB+ (Moody’s/Fitch) [no Issue Rating]
Price Guidance: 3mBBSW + 550bps (includes franking)

• First call after 5 years (August 2027), then 5.25 years (November 2027) and 5.5 years (February 2028)
• Perpetual with mandatory conversion to equity after 7.5 years (February 2030)
• Distributions are discretionary, non-cumulative and paid quarterly
• Distributions are franked at the same rate as the dividends paid by the Issuer
• Features both a Common Equity Trigger @ 5.125% CET1 and Non-Viability Trigger
• Size: [AUD50mm deal]

We are comfortable with MyState’s ability to pay distributions on the capital notes. Firstly, it has sufficient current year earnings franking balances which reduce the cash cost of the notes for the issuer. Secondly, MyState has a proven, solid, earnings stream which will support payment of distributions.

MyState is ASX listed so has good access to equity capital. It is also an investment-grade issuer, albeit we note the security would likely be rated non-investment grade.

From a relative value perspective, we believe a margin of 550bps is fair. When compared to the ASX major bank listed alternatives, there is concession of around 250bps, which accounts for the differential in credit quality. While Police & Nurses has a similar issuer credit rating (BBB by S&P), we note it is a mutual and at a disadvantage to MyState in their ability to access equity capital. Furthermore, in terms of market share and strength, Police & Nurses is slightly smaller than MyState, so should price at a small discount to MyState.

MyState Limited is an ASX listed provider of banking and wealth management services through its retail brands – MyState Bank and TPT Wealth. MyState Bank is rated Baa2/BBB+ (Moody’s/Fitch). The bank generates around 89% of operating income, whilst the wealth management platform is small at 11% of operating income.

MyState Limited will be the issuer of the notes as the non-operating holding company (NOHC). MyState Limited holds 100% of the equity in MyState Bank and TPT Wealth which are cash generating businesses which upstream dividends. MyState Bank is a Level 1 APRA regulated ADI and MyState Limited is part of a Level 2 APRA regulated group. The TPT Wealth business has no debt.

Source: MyState Investor Presentation

MyState has a simple business model. As a challenger bank with a strong digital capability, its aim is to grow assets and customer deposits (to fund their book). FY22 NPAT of AUD32m was the second highest on record and allowed the company to pay a final dividend of 11.50cps (or a 79.2% payout ratio). The FY22 cost to income ratio was higher due to front-end investment to support lending growth. As expected, NIM decline reflected market competition due to refinance incentives driving customer switching and retention discounting.

The balance sheet is conservative and consists of 98% in lending assets. Growth was driven by lower risk owner occupied P&I lending with LVR<80%. The home loan book grew well above system in FY22 (+25.5% on 30 June 2021, over 3.0x system). MyState undertakes all credit decisions, no broker is given credit authority. Furthermore, all loan service assessments are done within responsible lending principles and valuations occur at the time of origination.

This has meant that the credit quality is solid and 30+ days arrears (%) is very low at 41bps. There are no longer any loans receiving COVID related assistance. The dynamic LVR sits at 55.2% at 30 June 2022 and provision coverage ratios are consistent with pre COVID-19 levels.

Capital is managed by the Board approved ICAAP framework pursuant to APS 110. Stress testing and scenario analysis is undertaken regularly as part of the enterprise-wide stress testing framework, ICAAP and Recovery Plan processes to assess whether the Group’s capital is adequate to sustain losses for severe but plausible potential outcomes for a range of financial and non-financial risks.

Customer deposits grew above system (+25% on pcp) and represent 73% of the funding mix. The residual funding consists of wholesale funding and securitisation.

Source: BondAdviser