One step toward achieving up to $25 million in pretax cost savings was MyState (ASX: MYS) handing back the Auswide banking license to the Australian Prudential Regulation Authority. The Auswide brand and product offering aren’t affected; its assets and liabilities were simply transferred to MyState.

Why it matters: Cost savings from the February 2025 acquisition of Auswide underpin our earnings growth forecasts for MyState, and moving to a single license was always the planned first step. The bank will save on license fees, and it takes pressure off the finance teams.

  • We forecast that its poor cost/income ratio of 68% in fiscal 2025 will improve to 60% by fiscal 2030, mostly driven by merger cost savings. We expect home loans to grow broadly in line with the market, with equipment financing showing stronger growth as capital is deployed in the segment.
  • Our fiscal 2027 forecast of $69 million includes cost savings and modest organic growth. It also benefits from MyState-owned Auswide for a full 12 months rather than just part of the fiscal year.

The bottom line: Our fair value estimate for no-moat MyState of $5.10 is unchanged.

  • We think shares are undervalued, trading on a fiscal 2026 P/E of 13.5 times and a fully franked dividend of around 5%. We expect strong earnings growth in fiscal 2026 and 2027 as cost savings are achieved, but the market is likely awaiting further progress on cost-out from merger integration.

Between the lines: With a loan book of $13 billion, MyState lacks the scale of its much larger competitors. Even leaving the major banks aside, no-moat Bendigo and Bank of Queensland have loan books in excess of $75 billion and $85 billion, respectively.

  • We don’t think MyState is too small to make the ongoing investment required to compete. In fact, MyState could be a potential acquirer of even smaller lenders struggling to meet regulatory and compliance requirements, and the technology spending required to meet customer expectations.

MyState’s loan growth boosted by Auswide merger, cost savings expected to follow

MyState is a small listed Australian bank, commanding a tiny 0.55% of the mortgage market. A key point of difference, though, is MyState’s large exposure to housing, and in particular, owner-occupied and low loan/value ratio loans. Housing loans make up most of MyState’s total loan book, in comparison to roughly 65% (on average) for the major banks. This contributes to the bank’s sound credit quality, with extremely low arrears and bad debts. Because of its size, MyState struggles to generate comparable margins to the majors, as it has a much smaller customer base and higher funding and operating costs.

The bank is focused on expanding its loan book to increase scale, with its recent track record demonstrating its ability to increase both loans and deposits at rates well above system. It is progressively expanding and diversifying its loan book outside Tasmania, utilizing mortgage brokers to grow in the Australian eastern states. The merger with Auswide further diversified geographic exposure, with the bank being Queensland-based. However, with MyState continuously repricing mortgage rates to win customers, solid loan growth has not been matched by income growth.

As a result, return on equity has averaged just under 9% over the past five years. Digitization, marketing, and operational efficiency remain the key areas of focus. Technological advancements will continue to be integrated into daily operations to keep cost growth down and enhance customer experience.

MyState’s cost/income ratio should improve over time as it leverages increasing scale, has more automated systems and processes, and rationalizes the branch network. The integration of Auswide Bank also expected to deliver material cost savings. MyState is banking on digitization and marketing for continued customer growth, but we view these initiatives as “must-dos” to keep up with competition, rather than differentiating factors to drive significant growth in loans or deposits.

We think there is scope for MyState to expand its loan book further, given its low penetration in Australia’s eastern seaboard.

Bulls say

  • Low credit costs associated with mortgages provides more consistent earnings in comparison to larger more diversified lenders.
  • Customer deposits provide 70% of funding, helping reduce demand for more expensive wholesale funding.
  • The bank is increasing its loan book via the broker channel, leading to improved geographic diversification and scale.

Bears say

  • MyState struggles to compete with the four major banks because of their size, dominant brands, pricing power, cost advantages, market presence, and distribution capability.
  • Growth via the mortgage broker market becomes challenging if competitors improve their loan approval processes and responsible lending rules are relaxed.
  • MyState suffers from a much higher cost/income ratio than its peers, with the high cost base weighing on return on equity.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.