ME flags new products, loan growth and dividends

The rate at which superannuation cash has been pouring into not-for-profit super funds this year has only been eclipsed by heaving deposit growth at their proprietary banking arm, ME Bank.

ME appears to have entered an earnings sweet spot after posting a 46 per cent leap in full year profit to $89 million.

The record bottom line for the 12 months to the end of June, was built on solid mortgage growth, lower impairment experience and material margin expansion.

Chief executive Jamie McPhee said the bank had overcome tough operating conditions including the soft housing market and the regulatory crackdown on investment lending to grow the mortgage book.

While ME suffered a runoff in lending to investors, the bank still grew its overall mortgage portfolio at 1.3 times the system growth rate after settling A$6 billion of new owner occupier loans.

McPhee said the bank was aiming to accelerate lending activity in 2019 and was in talks with APRA to have the 10 per cent growth cap on investment lending removed.

"We've got a target to grow home lending by up to 1.5 times system," he said.

"We have not had the 10 per cent cap removed, although we are in active discussions - hopefully that's not too far away."

A key driver of the earnings surge at ME in recent years has been the bank's successful effort to reduce its reliance on wholesale sources of funding by expanding its retail deposits.

ME enjoyed market-leading growth in household deposits last year after increasing its retail deposit base by more than $1.6 billion or 27 per cent to $7.58 billion.

The 30 industry funds that own ME Bank grew their funds under management by an average of 16 per cent.

McPhee acknowledges the bank's stellar rate of increase probably won't be matched this year.

"As the deposits portfolio gets bigger our growth rate will probably slow," he conceded.

"However, we want to keep growing deposits faster than the sector average."

McPhee is also planning to diversify the asset side of the bank's balance sheet this year through the launch of a rewards-linked credit card and a reverse mortgage product.

While the performance numbers are lining up nicely for ME, the 2018 financial year was not always smooth sailing for the bank.

The migration to a new core banking platform in the last two years resulted in a raft of service outages, particularly in the second half of 2017.

According to information technology research provider, Aussie Outages, ME suffered nine major service outages during the 2017 calendar year.

Outage events have declined this calendar year, but McPhee acknowledged that as a branchless bank ME needed to reduce their frequency.

"There's no doubt that as we were putting in our new core banking platform there were some outages," he said.

"The number of outages has reduced this year and we're pleased with the reduction that has occurred."

The resetting of ME's digital strategy also induced a management overhaul at the bank, which resulted in the resignation of three senior executives.

McPhee said the management reorganisation was necessary to align organisational structure with the strategy.

ME's operating result equated to a return on equity of around 8.1 per cent.

Since the launch of ME Bank in 1994, shareholders have contributed paid up capital in excess of $1 billion.

A further $200 million was raised from shareholders in November last year through the issue of capital notes.

Holders of the capital notes received an inaugural distribution of 2.5 per cent.

McPhee said the bank was now self-sufficient in terms of meeting its capital requirements.