Bank of Queensland Limited

Well, good morning, everyone, and welcome to BOQ's full year results presentation for 2022. My name is Cherie Bell, and I am the General Manager of Investor Relations. Before we begin, I would like to acknowledge the traditional custodians of the lands upon which we are meeting today, the Gadigal people, and recognise Elders past, present and emerging. Thank you for taking the time to join us this morning. With me is George Fraser, our Managing Director and CEO, and Rachel Calloway, our Chief Financial Officer. We are also joined in the room by BOQ's Executive Team and Senior Management. This morning, we will be providing you with an overview of our full year results. We're also taking the opportunity today to update the market on our refreshed strategic priorities and long-term targets. I will now hand over to George.

Thank you, Sheree, and good morning, everyone, and thank you for joining us. In today's briefing, in addition to our results, we'll be presenting our refresh strategy and targets. I'd like to start this morning by acknowledging those communities who are experiencing the impacts of flooding, some for the third time this year. Our thoughts are with them. As Shireen mentioned, I'm joined this morning by Rachel and other members of my executive team and senior leaders. Today we're reporting another solid performance for the full year, continuing the strong momentum achieved by the group in FY21. Our underlying earnings increased 1% over the year, with cash earnings down 5% due to the absence of material provision write-backs in FY21. These results reflect a sharp focus on our strategic priorities, the execution and realisation of synergies from the Mi integration, and delivering to plan on our new digital bank transformation. After returning Mi Bank to growth in the first half, we have seen growth in housing cross all our brands. Our focus on medium-sized family businesses has resulted in SME lending growth ahead of market for the year. The integration program is delivering ahead of plan with increased synergies. We are delivering against our transformation roadmap with BOQ and VMA digital transaction deposits enabled on our new cloud digital bank. The quality of our portfolio has remained high with good underlying security and serviceability buffers. Our CT1 ratio of 9.57% is above our target range. As a result of this solid financial performance, the board has determined to pay a final dividend of 24 cents per share. This represents a 65% cash earning payout ratio for the half, which we believe is appropriate while we are transforming our business. Turning now to the results in more detail on slide 9, total income increased 1% while operating expenses remained flat. This resulted in underlying profit growth of 1% to $745 million. We delivered cash earnings of $508 million for the year, down 5% as the result of provisioned write-backs in FY21. Cash earnings per share was $0.784. Statutory NPAT was up 15% to $426 million. Both ROTI and ROE improved in the year. The drivers of the results are outlined on slide 10. Total income increased $9 million in the year, totaling $1.68 billion. While this was an increase of 1% for the year, the result was materially impacted in the first half by the decrease from lower ME balances which occurred prior to BOQ's ownership. We also saw NIM increase in the second half and finish the year strongly with a last quarter NIM of 1.81% and an exit NIM well in excess of this. Net interest income increased in the second half by 6% to $788 million. Turning now to lending and deposit growth on slide 11, lending growth momentum has remained strong, with all brands contributing to $5.5 billion in GLA growth for the year. Pleasingly, this growth has come through both housing and business lending. This demonstrates the benefits of our diversified portfolio, our multi-brand strategy, and balance between retail and business banking. Housing loans increased by $4.4 billion in the year, more than twice the level achieved in FY21. Central to this has been the turnaround in May, earlier than our initial acquisition projections, helping reverse the headwinds to net interest income we experienced in the first half. In the business bank, our strategy is delivering results both in terms of market share and returns. Customer deposits increased by $4 billion for the year across the retail and business bank, supporting asset growth with a deposit-to-loan ratio of 74%. A highlight was transaction accounts growing at 19% over the course of FY22. Looking more closely now at the business bank on slide 12... We have a differentiated approach, focused on medium-sized family businesses. Bankers, owner-managers and risk officers are specialised in our niche segments, providing relationship banking. Our lending is primarily underpinned by security, and the investment in the business bank is starting to deliver with revenue growth of 7%. We have simplified our policies, streamlined processes and built capability in our bankers, which is delivering returns. Our SME portfolio increased by $0.6 billion for the year, equivalent to 1.5 times system for the SME market. The focus of medium-sized family businesses delivers better margins, returns and a risk profile. Corporate banking growth has been achieved with a focus on returns, and our finance business also continued to grow despite the global supply challenges. Importantly, this business lending growth is well diversified and secured, with 92% of business lending underpinned by security. Next on slide 13, you can see that during FY22, we have focused on quality growth. This is essentially important given the current uncertain economic environment. We also recognise the importance of optimising our margin through this period. You can see that in our higher quarter full margin of 1.81% and an exit margin well in excess of this. Our fixed-rate lending applications, which were high during the first half, have normalised, removing the NIM drag going forward. And the revenue decline from the ME balance sheet decrease prior to our ownership has reversed and now represents a tailwind. Our portfolio is high quality, with business and housing loans backed by strong collateral. 53% of our home loan customers are ahead on their repayments by one year or more. We have seen our high LVR lending decrease again during the period, with this being an explicit strategy over the last four halves. We have strong provisioning levels and are well positioned for the economic environment. Now to slide 14. Operating expenses were flat in the year. We delivered $38 million in synergy benefits ahead of our estimates and a further $30 million in productivity benefits. These savings have enabled us to invest in growth such as SME and invest more in our digital transformation while delivering a solid cost outcome. We are at a midpoint in this transformation, which means we continue to incur the costs associated with our legacy platforms while building our new digital platform. This leads to increased costs in the near term due to the lag between developing the new and decommissioning the old. As has been the case across the banking industry, we are experiencing impacts of regulation, rising inflation and skill shortages. We expect this to drive up costs in the near term. However, in the longer term, unit costs will benefit from the ability to scale efficiently as well as from the retirement of legacy systems. Our impairments remain very low in FY22, in line with a high-quality asset portfolio that is well secured. We maintain a watching brief on key economic factors and, as always, are working side-by-side with our customers to support their ambitions. Returning to slide 15, BAQ is committed to building a sustainable business. I'm proud of our environmental commitments and our progress to date. We have continued with our carbon neutral accreditation and 54% of our energy needs are from renewable sources. We are committed to achieving 100% renewable energy by 2025 and have committed reducing our emissions by 90% for Scope 1 and 2 by 2030. Our owner-managers are embedded in our communities through more than 100 branches with long tenure and deep relationships. Through our community partners, we are supporting some of the most vulnerable Australians. Our people are core to our business and customer proposition. and we are building a future-fit organisation that is agile with curious bankers. We are strengthening our risk culture, improving our risk controls, and building an engaged, diverse workforce with inclusive leaders. I'd like to turn now to an update on our strategy. Just after I joined BRQ in 2020, we set out a strategy which we have been delivering against. Now with the ME integration almost complete, we have refreshed our strategic priorities and have a clear plan for the ongoing transformation of BAQ. FY22 has been a challenging year as we learn to live with COVID, severe weather events, deal with inflation, labour shortages and for many of our customers, rising interest rates for the first time. Against this backdrop, we have refreshed our purpose and strategy as shown on slide 17. Building social capital through banking is about how we support each other using the strength of relationships and working together for better outcomes for our customers, shareholders and our people. The purpose is underpinned by four strategic pillars aligned to delivering positive, long-term, sustainable outcomes for all our stakeholders. Our efforts and investments across the bank are aligned to these pillars. Exceptional customer experience, cloud digital bank, sustainable profitable growth with improving strength, risk and return, and fourthly, enriching people. Transformations are never easy, but I'm proud of what we have achieved as summarised on slide 18. We are modernising our core and digitising processes end-to-end. This will give us the flexibility of a neobank, but with the scale, strong capital position, proven brands of an established institution with 148 years in banking. providing us with a compelling advantage over both new and existing competitors. We have delivered solid growth across our retail and business brands. We have delivered digital transaction deposits for VMA and BOQ brands on the new digital bank, providing us a vastly improved banking experience for our customers. We have an experienced executive team in place who are leading the transformation, executing on our strategy, lifting the capability of our teams and driving improved engagement. Importantly, we have returned MeBank to growth and we are completing the integration ahead of schedule and with increased synergies. I want to stay with MeBank for a moment on slide 19. Given the record of failed banking integrations in Australia, executing on the MeBank integration is something we are incredibly proud of. We purchased MeBank because it provided scale in mortgages with a distinctive brand, delivered geographic diversification and used the same core banking system as we are using to transform VMA and BOQ. On the growth front, we have returned Mi's books to growth, arresting a significant decline in the mortgage balance sheet that occurred before our ownership. Geographically, we have been able to participate in the mortgage system growth in Victoria, spreading our portfolio more evenly across Australia. As well as upgrading the Mi core banking system, we have integrated the balance sheet and treasury functions and are preparing to migrate Mi customers onto the group's digital bank. Our focus now is providing me deposit customers with the benefits of the new digital bank experience. Turning to slide 20, another key element of our strategy is our multi-brands, which are focused on niche segments with minimal overlap and distinctive value propositions. We are about relationship banking. Our owner-managers are embedded in the communities we serve. Our specialist bankers are experts in their segments, and we offer distinctive brands rolling out state-of-the-art digital products and services. Turning to slide 21, BOQ set out a multi-year transformation strategy in 2020 to digitise the bank and move it into the cloud. the staged approach to our transformation reduces risk. Firstly, the transformation is digitally end-to-end and will span the full range of products and processes across the retail bank, business bank and support infrastructure. All customers will be migrated onto the new digital bank, which will allow for complete decommissioning and simplification of our future state. Finally, BOQ is working with our partners, including Terminos and Microsoft, building on their global research and development, bringing leading-edge innovation into our future state, improving our customer outcomes and driving revenue growth. On slide 22, you can see how our technology has been designed and it's been built with our target customer segments at the centre. It will deliver the simplest banking infrastructure for a bank our size. Using the cloud will enable us to respond quickly to changing customer needs and deliver efficient banking services at low unit costs on an ongoing basis. We have been disciplined to ensure no customisation is needed. Reducing complexity has been the focus of the design through simpler product offerings and streamlined digital processes. Underpinning the core banking platforms will be an intelligent customer data capability built on Microsoft's Azure public cloud. Our partnership with Microsoft also means we'll be the first bank in Australia to access Microsoft's cloud for financial services. delivering a superior customer experience. Turning to slide 23, the transformation has been delivered over three phases. The first phase will complete digital deposits and payments. We've prioritised this because it benefits the majority of our customers who are mostly transaction deposit holders, and it strategically improves our funding. We have established the core functionality that supports the launch of digital deposit products for all three retail brands. We have delivered to market VMA and BOQ digital transaction deposits. As I mentioned earlier, we will deliver me digital deposits onto the new platform in 2023. And towards the end of next year, we will have migrated 300,000 existing me bank deposit customers into the new digital bank. Building a payments capability for retail and business banking customers is another key deliverable for this phase. During this phase, there has also been progress with supporting our transformation plan, which include migration of data centre infrastructure into the public cloud, upgraded the business bank core to the latest version, technical foundations required to build the home origination functionality and further build out of our intelligent data platform. The development of lending origination that will sit across retail and business banking will be a key outcome for the second phase, commencing with digital home loans, followed by personal loans and business loans. In terms of personal loans, this is a real revenue opportunity for BAQ, and we are progressing plans to build this capability in our digital bank. Referring to slide 24, I want to share some of the metrics we are seeing from our digital deposits, which proves execution capability and immediate benefits for our customers and for the group. It was 18 months ago that we launched VMA digital deposits, and only six and a half months ago we did the same for MyBOQ customers. Yet we have seen $1.5 billion worth of deposits flow into the new digital bank, with an average deposit balance per customer of $24,000. Customers can open an account through our digital app in less than five minutes, making everyday banking easy. This has resulted in improved customer acquisition, and we are now attracting nine times more deposit accounts on average per month. The digital transformation is delivering results. Turning to our approach on customer migration on slide 25, migrations often limit the completion of transformation. Given this, we have phased the design to mitigate this risk. The payments functionality will allow migration without requiring change to BSP and account numbers, which addresses a major pain point for customers. I've already mentioned the pathway to migrate me customers and move to decommissioning and complete the closure of the me legacy systems, providing additional simplification and cost benefits. We deliberately designed the platform so that simple lending customers across me, BOQ and VMA would be served from the retail platform, while complex retail lending customers would be migrated to be served from the business platform. Within the business bank, only 10,000 relationship-managed customers need to be migrated to the BOQS private digital core. Looking at our investment profile on slide 26, we remain committed to the digital transformation and investing for the future, while in the near term we recognise we are incurring the cost of running and maintaining our legacy and building and running the new digital bank. We expect to see material decreases in our investment spend in FY23 as the costs related to integration reduce. Going forward, we expect to see unit cost benefits from customers on the new digital bank and in the longer term, benefits from decommissioning legacy systems. We have real conviction in our strategy and the outcomes to date give us confidence in the ability to achieve our targets. A cost-income ratio below 50% by FY26, with an ROE above 9.25%. Now on slide 27, you can see we have a comprehensive approach to improving returns with our immediate focus on delivering integration and productivity benefits and growing at an attractive roadie. We are improving margins through well-managed centralised pricing with benefits from rising rates and we are seeing growth in digital deposits. Lending growth is focused on SME and we are optimising our mortgages for Basel III. We are executing on the digital roadmap and have a phased approach to transformation to ensure we deliver ongoing benefits. Over the medium term, we expect this will deliver an improved customer experience through self-service capabilities and a faster time to yes. Our strategy and execution of the digital transformation is key to delivery of long-term outcomes of a simpler organisation, further improving productivity, ongoing scalable revenue growth and new revenue streams such as personal lending. Our refresh strategy builds on the momentum to date and provides us with the opportunity to create a differentiated bank with a compelling competitive advantage. With that, I'm really pleased to be passing over to Rachel, who will take you through our financial results in more detail. Over to you, Rachel.

Thank you, George, and good morning, everyone. Looking at the group financial performance, BOQ delivered 1% income growth on the prior year. This, combined with flat operating expenses, resulted in positive draws and a 1% improvement in underlying operating profit for the year. Whilst cash earnings of $508 million is a 5% decline, this was due to the prior year loan impairment credit. Current year loan impairment expense is $13 million. There were two key statutory cash adjustments for the year, both of which were noted at the first half results. These were $57 million of post-tax integration costs and the $24 million loss on the sale of St Andrews. Within the second half, 2% income growth and 3% operating expense growth resulted in underlying profit growth of 1%. Turning to net interest income in more detail on slide 30. In the first half, NII was impacted by lower housing balances in MeBank, which had declined by $1.4 billion in the year prior to our ownership. NIM declined in the first half, driven by higher swap rates impacting fixed rate margins. As we moved into the second half, we saw tailwinds from growth in customer loans, including a turnaround of the MeBalance sheet. Pleasingly, NIM also increased one basis point in the second half as a result of the rising rate environment and a disciplined focus on lowering our funding costs. The result was a 6% increase in NII for the half. NIM increased one basis point to 1.75% in the half. Starting with the full year, NIM of 1.74% was down 12 basis points. This was largely due to the impact of higher fixed rate lending against a backdrop of rising swap rates, ongoing competitive pressures and increased liquidity requirements. Benefits from lower funding costs and mix partially offset the decline. Looking at the half in more detail, asset pricing and mix resulted in an adverse impact of 15 basis points. Within this, a six basis point reduction was driven by fixed rate lending. This includes settlements from loans written in January and February when swap curves were rising, and we also had the full half impact of loans written in the first half. Ongoing competition resulted in a front-to-back book impact of six basis points on housing and two basis points in business lending. and we saw a further one basis point impact from the relative shift in the asset portfolio mix towards home lending. This decline was largely offset by lower funding costs, which had a favourable impact of 13 basis points. We continued to actively manage retail deposit pricing, improving NIM by 11 basis points, and saw a further two basis point benefit from improved wholesale funding costs. Capital and low-cost deposits contributed an eight basis point increase to NIM, with the changes to the replicating portfolio slightly better than what we flagged at the first half, and benefits from uninvested capital and low-cost deposits as interest rates started to rise. We saw a two basis point impact to NIM from third-party costs, including revenue sharing with owner-managers and third-party broker commissions. Heightened liquidity levels as a result of the handback of the CLF reduced NIM by a further two basis points in the half. Overall, this resulted in a one basis point improvement in NIM in the half to 1.75%, and we exited the year with a strong momentum and a Q4 NIM of 1.81%. Given recent volatility, we have provided more detail on future NIM considerations on slide 32. Looking ahead, we expect to see ongoing benefits from rising interest rates. In the first half, we expect to see further funding cost benefits and continuing tailwinds from our replicating portfolio and unhedged capital and low-cost deposits. Additionally, fixed-rate impacts have slowed and are settling to historic levels, with current fixed-rate lending applications below 10%. competition in variable housing and business lending remains. And finally, with the CLF handback continuing through to January, the liquids portfolio will continue to grow. Over the medium term, we expect margin conditions to follow similar trends. Within asset pricing, competition will continue to impact NIMS. We are focused on optimising our portfolio mix to ensure sustainable, profitable growth. We expect to see headwinds from rising retail and wholesale funding costs, the refinancing of the TFF and basis hedging costs. And finally, we expect to see further benefits from replicating portfolio and unhedged capital and deposits with our new digital apps providing further transaction deposit balance growth. Turning now to non-interest income on slide 33. Non-interest income of $153 million was an increase of $19 million for the year and included a number of material one-offs as called out in the first half. During the second half, non-interest income was $63 million. This included lower banking fee income due to a reclassification of interchange fees to align accounting policies across ME and BOQ. This change has no impact on earnings. Moving on to operating expenses on slide 34. Expenses have remained broadly flat at $937 million for the year. As laid out in the 2020 strategy, we have now delivered the third year of productivity, with an additional $30 million of benefits, bringing the total to $90 million over the three years. In addition, we have achieved $38 million of synergy benefits, which was above the top end of our forecast. This has enabled us to offset volume growth, regulatory costs, inflation and also accelerate our investment while maintaining a flat cost profile. Looking ahead, we have good momentum on our synergy and productivity programs. Spot FTEs reduced by 8% in the year. However, in line with the market, we are experiencing the impacts of rising inflation on our cost base. And we also have the near-term impacts of building the new digital bank and running the old. Through this period, we are focused on managing our costs to ensure we deliver on our transformation. Looking now at slide 35, we have increased our investment materially in the year to $331 million. This has enabled us to progress our digital bank transformation, open banking and integration. These are all key foundational components as we deliver on our cloud-based digital bank strategy. The velocity and cost of delivery is improving with each additional phase, and this provides us with increased confidence in the benefits for our customers, our people and our shareholders. Looking ahead, as George has outlined, we expect investment suspects to step down next year as integration costs reduce materially. Turning now to provisions and loan impairment expense on slide 36. Our 90-day arrears have trended down during the period as the economy recovers from COVID and unemployment remains low. As a result, our impaired assets have decreased again during the half to finish the year at $153 million. This was primarily due to the low levels of specific provisioning across both the housing and commercial portfolios. Specific provisions have reduced due to lower arrears and higher underlying asset values. LIE was $13 million for the year. In the first half, we saw reductions in both collective and specific provisions as economic conditions improved. In the second half, we increased the collective provision as improvements in quality were offset by growth in the portfolio and changing economic conditions. We continued to rebuild the MeBank provision. At the end of the year, our total provision balance is $295 million. BOQ remains well provisioned with coverage above regional peers, excluding the impact of ME. We see an improvement in our balance sheet mix when the ME portfolio is included toward lower risk housing exposure, resulting in a group provision ratio of 47 basis points. In addition to low arrears, our home loan customers are well positioned for the rising rate environment. 53% of home loans have a repayment buffer of one year or more. Of the remaining portfolio, these customers are predominantly new loans, investors or on fixed rate products. On our fixed rate portfolio, the main maturity tower is in the first half of FY24, in line with the high levels of fixed rate lending we saw across the industry through the first half of this year. Importantly, we are supporting our customers as they roll from fixed rates into variable products, and we are seeing these customers continue to perform well. our serviceability buffers ensure customers have the capacity to meet their repayments in a rising rate environment. Moving on to funding and liquidity on slide 39. As our balance sheet has grown, we have continued to optimise our funding across wholesale and customer deposits. During the year, we have grown customer deposits by $4 billion, with the deposit-to-loan ratio remaining broadly stable at 74%. Our transaction accounts grew by 19% over the year as we saw early success from the launch of our digital apps. TD funding costs remain low and customers are now seeking yield following the low cash rate cycle. We have taken advantage of TD rates falling below swap rates and grew our term deposit balances by $3.1 billion. Of this, $1.7 billion was new money. We have increased our long-term funding as we replace the CLF facility. The consolidation of the two long-term wholesale funding programs has enabled us to enhance the funding profile for the group with greater diversity, a lengthened tenor and increased access to securitisation and covered bond programs. Turning to slide 40, we are in a strong capital position with a CET1 ratio of 9.57%. During the half, we generated 53 basis points of capital through cash earnings. 27 basis points was utilised to support our ongoing loan growth, and 10 basis points of capital was invested in the transformation program. Within the half, we experienced a headwind of six basis points from the mark-to-market on our liquid asset portfolio. we continue to maintain a CET1 ratio above the top end of the target range of 9 to 9.5, as we work towards the final impacts of Basel III. In summary, BOQ has delivered a solid financial result for the year, with positive jaws as we focused on balancing growth and margin. We have revenue tailwinds from balance sheet momentum across all our brands, and we have exited the year with a rising NIMH. We have continued to invest in our business and are delivering against the transformation roadmap, and the integration program is delivering above forecast. We are confident in the quality of our portfolio, and BOQ is well placed to optimise performance through the cycle. I will now pass back to George for some closing remarks and the outlook for the full year.