Bendigo and Adelaide Bank Limited

Welcome to the Bendigo and Adelaide Bank 2026 half-year results briefing. All participants are in a listen-only mode. There will be a presentation followed by a question-and-answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Sam Miller, General Manager, Investor Relations. Please go ahead.

Thanks, Rocco. Good morning everyone and thanks for joining us for Bendigo and Adelaide Bank's 2026 half year results briefing. Let me begin today by acknowledging the traditional owners of the lands on which we meet today, the Gadigal people of the Eora Nation. I pay my respects to their elders past, present and emerging. And I also extend my respects to the Aboriginal and Torres Strait Islander people who are present on the call today. Moving towards the agenda, there's been a minor change to our presentation today and we will broadcast audio and slides only. Our CFO Andrew Morgan has tested positive to COVID and our CEO Richard Bunnell will present the first half of 2026 results with Richard and I handling the Q&A. I'll now hand over to Richard.

Thanks Sam and good morning everyone and appreciate you taking the time to join us today. Our half year result reflects a period of intensive strategic execution, disciplined margin management and a significant reduction in operating costs in the second quarter of the half. We've taken a patient approach to deliver against our strategic priorities which is strengthening our business. These actions are delivering momentum that is building and is expected to deliver stronger balance sheet growth in the second half. Our customer numbers continue to grow strongly and are expected to reach 3 million in Q4. This growth is supported by our Bendigo Bank and UP net promoter scores that are respectively 25 and 42 points above the industry average. During the half, we saw the benefits of our deliberate strategy to focus on growing our share of lower-cost deposits, which grew by 3.6% to now represent 53.8% of our total customer deposits. Our investment in digital capability is a key driver of this outcome with digital deposit sales accounting for 41.4% of total deposit sales, an increase of 7.4% for the half. On the lending side, we are regaining momentum in residential mortgages with strong application flow in December and positive growth for the month of January. The more balanced approach to residential loan growth follows the decision to exit our legacy mortgage partner business, allowing us to deploy our capital into higher returning channels. This decision has led to higher discharges in that channel, which has been offset by 6% growth in our digital channel. Meanwhile, application momentum in our higher returning channels is building, placing the bank in a stronger position over the long term. our second quarter expenses were 6.4% lower than the first quarter, reflecting higher seasonal cost drivers in the first quarter, such as the annual salary adjustment process. A highlight for the half was our digital bank up, achieving its first month of profitability in September, more than six months ahead of schedule. This is a significant milestone and tangible evidence that our investments in digital are creating value and continue to contribute positively to the group's competitive position. As we announced back in November, we are acquiring RACQ Bank's loan and deposit books. This is a valuable opportunity for us to grow our business in Queensland and welcome a new group of customers to the fold. Finally, towards the end of last year, we identified and self-reported the shortcomings in our management of AML CTF risk. We continue to engage proactively with regulators and are developing a comprehensive action plan to address the issues identified. We are committed to strengthening our processes and meeting our regulatory obligations and I'll have more to say on this matter later in the presentation. Returning to execution, the first half was a period of intense focus and significant process on the delivery of initiatives aligned with our strategic pillars and enablers, which we shared six months ago. I covered some of these strategic achievements at our investor update in December, so I'll only briefly recap them here. In just three months, our digital and technology engineering teams rebuilt and delivered our in-app digital onboarding capability, which is delivering significantly increased new customer flow through this channel. We finalised the full rollout of the Bendigo lending platform with it now being available across all of our retail branches and we migrated 180,000 Adelaide Bank customer accounts onto our core banking system, delivering on our long-held objective of one core banking system and two main customer facing brands. One aspect I didn't speak to at length at our investor update last December was our new five-year partnership with Google. This partnership will provide enhanced cloud capability, access to enterprise-wide AI tools, and industry-leading cybersecurity defenses. Over 2,200 of our people are already utilizing the Gemini AI tools with early adoption showing significant productivity benefits. Examples such as generative AI for hardship detection improving timeliness of engagement, accuracy and productivity are supporting improved customer outcomes. These initiatives I've highlighted are tangible examples of the early progress we are making to deliver on our 2030 strategy. I'm excited by the benefits we're starting to see flow, which I'll walk through shortly in our progress update, but first I'd like to turn to our financial performance. For the half, cash earnings of $256.4 million were up 2.8% on the prior half, driven by a 3.7% uplift in total income. Notably, this is the first half in the bank's history that we have delivered more than $1 billion in income. Income benefited from a four basis point improvement in margin as we focused on delivering a more favourable mix of lower cost deposits following a moderation in lending growth. Operating expenses increased by 4.2% reflecting expected increases in software costs and amortisation charges, additional work days during the half and higher remediation expenses. Our investment spend declined by 19% for the half as major technology projects such as the rollout of the lending platform came to an end. and finally in credit expenses we saw a $2.4 million right back for the half as collective provisions reduced reflecting lower overall loan balances together with the repayment of some larger impaired loans. The overall credit portfolio has remained resilient and we remain focused on helping customers that face difficult choices due to cost of living and other pressures. Turning now to our divisional performance. Our consumer division delivered strong earnings growth of 5.9% for the half, with net interest income increasing by 4.9%. This performance was largely driven by an eight basis point improvement in margin, supported by the previously mentioned strong growth in lower cost deposits. Residential lending declined by 2.6% for the half, As noted, this reflects our strategic decision to exit less profitable legacy partners in our third party originated channel, which contracted by 7.4% over the half. However, our digital lending channel grew 6%. This deliberate shift in focus towards more profitable channels is expected to continue to lift the returns for our consumer division over the longer term. Our business and agri-divisions cash earnings decreased by 1%, with higher net interest income largely offset by higher expenses. Higher NII benefited from higher average interest earning assets and additional work days, while expenses were impacted by the ongoing investment in our business lending platform. While overall loan growth was largely flat for the half, we have a strong pipeline of business coming into the second half, with momentum building across our broker channel, agribusiness and equipment finance. At the FY25 full year result, I shared three areas of focus for the next two years that will be critical to progressing towards our ROE target. As I said then, at each half and full year result, I will update you on the progress we're making across each area of focus and to recap, these areas are optimising our deposit franchise, enhancing productivity and delivering sustainable growth. Let me step you through the progress we've made this half. We've previously highlighted that we'll be taking a deposit first approach to growth, targeting lower cost deposits as the primary source of funding for our lending activity. to enable this deposit-led approach which strengthened our digital deposit franchise through the refresh of our in-app digital account opening capability for Bendigo's new-to-bank customers, and we've enhanced app functionality to deliver improved digital experiences for all our customers. We're now seeing weekly volumes of 400 to 500 new customers joining us through this digital onboarding functionality. Our frontline teams are proactively engaging with our existing Bendigo customers who don't currently have a Bendigo transaction account. And we've also continued to upskill the sales capabilities of both our frontline and virtual banking teams. These initiatives have already delivered benefits with lower cost deposit growth of 3.6%, particularly in the EasySaver, and increased digital deposit sales of 7.4% for the half. UPS grow and flow product drove an additional 190 million of lower cost deposits over the half and we expect this momentum to continue as highlighted at the investor update and we are targeting digital deposit sales of 45% by the end of the financial year. Following the announcement of our productivity program in August, the outcome of the first phase is evident in the half year results. Investment spend is reduced, supported by a 48% reduction in contractor numbers over the half. Our full-time equivalent employee numbers are reduced by 5% on the prior corresponding period and 4% over the half. This is a result of several support function and technology division restructures. But let me highlight a couple of the outcomes this half. Through our focus on operational excellence, within our operations teams, we've successfully realized a $9.6 million benefit this half. And we're elevating our AI and automation program in partnership with Google, which continues to empower our people to self-drive productivity and process improvements. Our entire workforce has access to the Google AI Suite, and we're seeing organic, people-led innovation outcomes. Our productivity program has now entered its second phase, which comprises two key initiatives. The first initiative is a new information technology partnership for which we are now in advanced negotiations and the second focuses on business processing where planning activity continues. Together these initiatives will enhance our technology and operational capabilities, thrive innovation and support our guidance of keeping business as usual costs no higher than inflation through the cycle. will provide further updates to the market through the course of this half year. Our third area of focus is maintaining a disciplined approach to capital allocations to drive long term sustainable growth that exceeds our cost of capital. These disciplines reflected in our NIM to credit risk weighted asset ratio, which despite slightly moderating this half, remains well above the level of two years ago. Our recent decision to exit less profitable legacy mortgage partners is another example of this discipline in action. By prioritising growth in our higher returning channels, we're actively managing our portfolio to improve returns. We expect decisions like this will continue to support our NIM to credit risk weighted asset metric over the longer term. In business and agri, we saw the usual agri seasonality with high loan repayments, driven by strong yields for our grain growers particularly in WA and New South Wales. This seasonality is expected to reverse as funding is redrawn down in the second half. In addition, growth in the business portfolio remains robust particularly across portfolio funding and business lending with a strong pipeline heading into the second half. Finally, I'd like to take a moment to provide an update on our approach to addressing the deficiencies in AML CTF risk management at the bank. We recently appointed a new highly experienced Chief Compliance Officer and Head of Financial Crime Risk, Steve Blackburn, to lead our response. We've now received detailed recommendations, actions and a roadmap from Deloitte which we're using to guide our remediation and uplift program. with a focus on enhancing our enterprise-wide AML CTF risk management including transaction monitoring. Our current expectation of the total cost over a period of up to three years will be 70 to 90 million of which we expect an initial cost of 15 million will be incurred in the second half of financial year 26. These expenses will be contained within our existing 2026 investment slate. In parallel, Deloitte are also completing an additional root cause analysis across our broader non-financial risk management. I'll now move to the financial results in more detail. This result reflects improved momentum across a number of metrics following our first quarter trading update. We slowed the decline in residential lending and expect a return to growth into the second half. We've also seen an improved funding mix with stability in transaction accounts and continued strong growth in savings accounts. This has enabled us to deliver a lift in net interest margin in the second quarter despite the lower cash rate. We've also carefully managed pricing decisions to stimulate growth in key target segments. And we've tightened our management of business as usual costs in the second quarter, with quarterly costs reducing over 6% on the first quarter. Our operating performance was 2.8% higher than the prior half, mostly due to strength in income. And cash earnings of $256.4 million are 2.8% higher than the prior half. Our balance sheet is in a strong position going to the second half, reflected in strong capital, funding and liquidity. On this slide we show you the usual reconciliation of cash to statutory earnings. You can see that the Adelaide core consolidation was in line with the higher end of the flagged range and most of the restructuring cost booked in the first half was in relation to the productivity initiatives which I mentioned earlier. growth in house prices in Sydney and Melbourne, boosted home safe unrealised income and going into the second half, we expect a very small amount of residual costs associated with the Adelaide Bank core consolidation. We also expect to incur further restructuring costs in relation to the next phase of our productivity program and also preparation work for the completion of the RACQ transaction. turning now to total income for the half. Income of $1.01 billion was up 3.7% on the prior half. Net interest income increased 3.2% reflecting a slight contraction in average interest earning assets and an improved margin. This was further bolstered by stronger other income which was up almost 7%. other income excluding HomeSafe was up 6% reflecting improved wealth and cards income. HomeSafe income was up 8% reflecting 5% growth in completed contracts on the prior half and a stronger average profit per completion. In respect of key considerations as previously flagged, income from the HomeSafe portfolio will reduce over time subject to the rate and profit on contract completions. This half saw the number of open contracts reduced by around 3%, which is a rate consistent with the last two halves, whilst the average life of contracts completed through the half was around eight years. Turning now to net interest margin. Compared to the prior half, our NIM was up four basis points to 192 basis points. asset pricing negatively impacted three basis points, which was due to a combination of front book pricing pressure in residential lending and ongoing retention pricing pressure in business and agri. Deposit and funding pricing improved three basis points, mostly reflecting the benefit of term deposit repricing, and mix provided a four basis point benefit, reflecting a combination of improved funding mix and improved asset mix. income from our replicating portfolios was flat as expected, as was revenue share. Our exit NIM was slightly higher than the second quarter average. Looking forward, key considerations for the second half of 26. We think it likely that a further cash rate increase will happen later this financial year and we expect a small amount of NIM pressure as lending volumes improve into the second half following some selective repricing during the second quarter. We also continue to see customers rolling off fixed rates and mostly favouring variable rate mortgages. First half maturities were around 2 billion and we expect around 1 billion of further maturities into the second half of 26. And higher swap rates could see replicating portfolio contribution turn from flat to slightly positive. The unknown factor as always is the degree of price competition on both sides of the balance sheet. Turning now to residential lending. Settlement volumes in aggregate were down 15% on the prior half, particularly in third party channels. Discharges were also elevated, mostly due to the closing down of one of our partner channels. We continue to prioritise the deployment of capital into channels where both the economics are compelling and growth opportunities exist, being self-serve digital mortgages and broker-intermediated mortgages through our new lending platform. This half, almost 50% of new settlements came through our physical network, a third through broker-intermediated channels and 17% through direct digital channels, including Up. We do see further growth opportunity in our physical network following the completion of the rollout of the new lending platform which was completed in November 2025. The positive trends in our mortgage book continue. First, around 40% of new loans are below 60% LVR and almost 90% of new loans are below 80% LVR. Second, the average credit risk weight on new mortgages has continued to improve. And third, critically, the ratio of NIM to credit risk weighted assets on new business as a proxy for risk-adjusted returns is up strongly on 12 months ago. Momentum in the book is improving. Applications per day steadily improved over the second quarter and we saw the strongest volume of applications per day in December and expect these loans to settle during the third quarter. Discharges have also slowed progressively over the second quarter. So with this momentum in mind, we are targeting growth around system towards the end of the second half of FY26. Our deposit gathering franchise remains an ongoing strength and is improving. Across both our proprietary network and community bank partners, we delivered growth of just under 2% on the prior half and we continue to see good momentum in digital deposits. In our up business, digital deposits increased 24% over the half whilst Bendigo Digital deposits grew 13% over the same period. Whilst deposit growth over the half looks modest at 1.1%, deposit mix has continued to improve. We continue to see strong growth in EasySaver accounts which were up 7% on the prior half and overall savings accounts up 5%. Following a dip in the first quarter, transaction account balances had a strong second quarter finishing marginally higher than the prior half. Partly as a result of tax receipts, we saw offset accounts rise 5% over the half. Through careful management of our funding requirements, we also managed to reduce term deposit balances which were down 4% on the prior half. The overall picture on deposits is that lower cost deposits increased to almost 54% of total up from 52.4% just six months ago. And critically, our household deposit to loan ratio remains strong at 77%, which is nine percentage points higher than the industry average. Turning now to operating expenses, total costs increased 4% for the half as previously flagged. Second quarter costs came in 6% lower than the first quarter. Business's usual costs, excluding the increase in remediation costs, grew 5% over the half. Inflation, software licence fees, amortisation and three additional work days impacted our BAU costs, contributing 6.1% to overall cost growth. Spot FTE were 4% lower than the prior half, reflecting a number of restructuring activities through the half. in respect of second half costs, we are targeting to manage total BAU costs to no higher than the first half. Longer term, we reiterate our cost guidance, which is to keep BAU cost growth contained to no higher than inflation through the cycle. I want to spend now a few minutes on our investment spend, including its composition, and how we think about investment spend for the second half of the year in the context of the recently disclosed A&L CDF issues. As a reminder, coming into this financial year, we had said we expected cash investment spend to be roughly the same as last year, or around $230 million, plus non-cash spend of $30 million at the upper end of the Adelaide core migration, so in total around $260 million. around half of the $230 million cash spend was expected to be expensed. For the first half, we spent just under $89 million on cash investment spend, with 65% of that expensed. In addition, we spent $35 million on non-cash investment spend, mostly on the completion of the Adelaide Bank call migration. Our early stage estimate for the AML CTF uplift program is that it will cost approximately 70 to 90 million and will run over the next three years. The remainder of this year will be about mobilisation and early stage activity, costing an estimated 15 million in the second half, and then the work will ramp up into the next financial year. We intend to cover the costs of the AML CTF program inside our previously flagged FY26 cash investment spend and expense investment spend in the second half to be slightly higher than the first half. Moving to credit quality and credit expenses. Our key credit metrics remain sound and we continue to carefully watch trends in the industry and within our book. Through the half, we booked a net write-back of $2 million, mostly reflecting reduced collective provision on the lower residential lending portfolio. Gross impaired loans have remained stable at 15 basis points of gross loans and arrears across the book remain low but are increasing. 90 day arrears in residential lending have increased in the low single digit basis points in the last six months to 85 basis points. In agribusiness, arrears have been stable over the half and the dollar value of arrears has reduced. The technical issue that we described at full year around expired facilities has not yet been fully resolved, though we do expect third quarter arrears to return to more normal levels. Whilst asset quality remains sound and arrears are at relatively low levels, we do expect bad debts to trend upwards over time. Our funding and liquidity metrics remain strong and well diversified. Our average liquidity coverage ratio for the second quarter was strong at 135%. The proportion of customer deposits to total funding improved in the prior half to just under 80% and our coverage of household deposits to loans at 77% is well above the industry average. Through the half, we retired some wholesale debt bring the proportion of our funding needs met by wholesale down to 21%. And our community bank partnerships importantly provide us with a net $15 billion of funding, which provides further diversification and a relatively cheaper funding source than wholesale funding. And finally, turning now to capital and dividends. our CET1 ratio increased 37 basis points to 11.37% over the half, and this reflected lower capital consumption through reduced lending. Our capital remains well above the board target of above 10%. On a pro forma basis, our 1 January capital position reduced by 18 basis points, reflecting the inclusion of the $50 million regulatory capital overlay. directors have determined to pay an interim dividend of 30 cents per share which will be fully franked. This represents a 67% payout ratio for the half and on a cents per share basis is flat on the prior comparative period. As a prudent measure, this half we will be underwriting around 70% of our dividend which will in effect mean we retain 31 basis points. or approximately 120 million of our CET1 following the payment of the interim dividend further strengthening our capital position. So in summary, we are in a strong capital position going into the second half. I'll now open it up for questions.