Commonwealth Bank of Australia

Hello and welcome to the Commonwealth Bank of Australia's results briefing for the year ended 30 June 2020. I'm Melanie Kirk and I'm Head of Investor Relations. Thank you for joining us. For this briefing, we'll have a presentation from our CEO, Matt Common, with an update on the business and an overview of the results. Our CFO, Alan Docherty, will provide details of the financials and Matt will provide an outlook and summary. The presentations will be followed by the opportunity for analysts and investors to ask questions. I'll now hand over to Matt. Thank you, Matt.

Thanks very much, Mel. And good morning, everybody. Before I start, I just wanted to acknowledge what a challenging six months it's been for Australians right around the country, starting the year with bushfires, but of course, more recently, the coronavirus pandemic. And particularly, I want to pass on our best wishes to our customers, to our people, and of course, the broader community in Victoria. During that period, we've been doing our best to make sure that we're working hard to support our customers and making sure that we're continuing to consistently execute our strategy and deliver balanced outcomes across a range of different settings. We feel that we've made very good progress during that period. I'm just going to step through some of those highlights now. We've responded very quickly as we've needed to and put substantial support in place for our customers. We've responded to almost a million different requests for assistance over the last few months. That's enabled us to put in place substantial support, particularly around repayment deferrals, where we've deferred almost 250,000 repayments. We've also made 250 million personalised support messages through our We've also made sure that during that period of time, we've continued to support our customers with $100 billion of home lending and $27 billion of new business lending over that time. Pleasingly, we've seen big increases in our employee engagement, up 13 percentage points to 81%. And I also want to just thank all of the Commonwealth Bank staff for their amazing support and hard work during that period. to support our customers. That has enabled us to perform well across a range of different settings and for our shareholders. Our final full-year dividend of 98 cents in the second half represents 49.95 per cent of statutory profit, which is reflective of APRA's expectations. As part of supporting our customers, we've been able to leverage the technology and digital investments we've been making for many years. In particular, we've seen more than 5.5 million visits to our CommBank app and NetBank, particularly to our information pages where we've made sure we've had up-to-date federal and state guidance and some practical information for our customers. In responding to supporting our business or SME customers, we've leveraged existing investments in our BizExpress technology and decisioning to process just over 50% of the SME loan guarantee schemes, helping our customers ensure that they could make their payments to their employees and participate in the JobKeeper scheme. Pleasingly, we've seen those investments in technology like BizExpress, where now for eligible customers, we can move from application, decisioning, online acceptance and funding directly into the customer's transaction account in under 20 minutes. And as part of looking to provide real value to our retail customers via our CommBank app, we've continued to extend our benefits finder capability, where we've seen a 78% increase in the last six months in terms of benefits. That's meant that more than $150 million has been delivered to our customers since we launched the benefits finder functionality. Now, just touching very briefly on the result, Our statutory profit was up 12%. It's the basis on which the dividend calculation was made. And the majority of that improvement or increase year on year is as a result of the divestments, predominantly the asset management divestment. Our cash net profit after tax was down 11%. And our common equity tier one finished at 11.6%, which is approximately a $5 billion surplus above APRA's unquestionably strong 10.5%. Our full-year dividend for the year of $2.98 is fully franked and, again, consistent with APRA's expectations. Over the full year, our cash end part, we saw income up 0.8 per cent from strong volume growth, which I'll unpack a little on subsequent slides. Our operating expenses are 0.7 per cent for the full year, or 0.4 per cent sequentially. We saw our loan impairment expense up 33 basis points, which is predominantly driven by that $1.5 billion forward-looking adjustment that we took in our third quarter. And as I said, our cash profit down 11% for the year. We've seen that core franchise strength really come through clearly over the course of this financial year. In particular, we continue to focus very closely on our customers and watch our The results of that through our net promoter scores, which pleasingly we've seen some improvements throughout the course of the year, right across all of our businesses. And again, in our digital banking solution, we finished with the highest ever net promoter score, which is, of course, critical to our long-term strategy. Our operational execution, I think, can be highlighted in a couple of particular areas, obviously areas like Business Express, which I've touched on. but also just the commitment and dedication to making sure we've kept very consistent home loan decisioning times during the course of the year has enabled us to again deliver a very strong home lending result of 1.3 times system. That business lending result of $7 billion, up 5.1 per cent for the year, and we actually saw the strongest growth in that fourth quarter that we've seen for the last couple of years. And in particular, one of the standout performances right across the business has been our deposit growth and, in particular, our transaction deposit growth, where we've seen a 25 billion and 25 per cent increase in household deposits. Just spending a moment on deposit growth more broadly, we have seen total deposit growth over the course of the year of $64 billion. That's the most growth that we've ever seen by dollar value. And when we break that down again into particularly valuable deposits of transaction balances. We've seen $45 billion of growth over the year and $30 billion of that coming in the second half, which has really been a phenomenal result right across all of our business units. As we look at our balance sheet, we've continued to strengthen what we're already very well positioned, and we feel like we've got overall now the strongest balance sheet we've ever had. A couple of ways that's reflected in particular is through that deposit funding, which I mentioned. We saw a five percentage point increase during the course of the year, up to 74% deposit funded. And as you can see, set aside the GFC, there's an increase of almost 20 percentage points during that period. The forward-looking adjustment that we took in the third quarter sees us with total provision coverage of $6.4 billion or 1.7%. as a function of credit risk weighted assets, which is still peer leading. And again, that common equity tier one of 11.6 per cent is a very strong outcome. And we also see another between 58 and 68 basis points of capital to be generated inorganically from previously announced divestments, which have not yet completed. With the next few slides, we've really tried to break down and provide some additional disclosure around repayment deferrals, given the understandable interest in this area. We've developed some technology to make it easier both to analyse and understand what's going on, but of course to ensure that it's an efficient process for customers opting into the repayment deferral process, as well as opting out. And you'll see the disclosure here that we've provided. We've seen quite a reduction in customers coming out of their repayment deferrals, even though in the context of home lending and business lending, they are entitled to the full six-month repayment deferral. Pleasingly, from a personal loan perspective, almost 95 per cent of customers have recommenced their repayments. We've also made that opt-out process an easy one from a customer perspective on NetBank and the CommBank app, and we've also made it easier for customers to look at interest only as an option. And I think unlike other cycles where the cash rate is now, it means that interest only is a very viable option for many customers. A typical loan size is approximately $350,000. So a repayment amount of interest only is approximately $200 per week. Now trying to split out some of the analysis in more granular detail on the next couple of slides, first starting with home lending. And this is predominantly an analytical exercise that we're augmenting, obviously, as we're in regular contact with our customers. And what we've provided here is a breakdown using one of our home loan risk scoring models. And it typically includes a number of the factors that you would ordinarily expect. So things like dynamic LVR, how far a customer is in advance on their repayment history, the industry sector that they work within, things like interest only versus principal and interest, owner-occupier versus investor. We've also added in variables such as JobSeeker. You'll see that disclosure there on the slide of 13.6% of our accounts tagged to a JobSeeker payment, although 58% or 7.6% where the joint accounts with one party are receiving JobSeeker accounts, JobSeeker payments. Now, this has, of course, been possible because in about 90% of cases, we have an active transaction account associated with our home loan, so we feel like we've got an accurate read on what's happening in the customer's account and, of course, changes to income, an important variable within that overall model. You'll see on the left-hand side some disclosure there in terms of active transactions accounts that are in deferral as at July. We've seen a continuing reduction throughout August, but a slight increase, obviously, as you would expect through Victoria. But at least month to date in August, we expect that that number is going to be flat or slightly down. We've provided the dynamic LVR of less than 80 per cent, 67 per cent of the book, and that's an important variable. And of course, as I said, 14 per cent 12 months or more in advance. Similarly, from a business lending perspective, we've looked at a number of different variables, including the occupation sector, changes in and around cash flow, their behavioural repayment history. And you see an active breakdown on this slide, both between our states, where the geographical distribution is by sectors. And I think importantly, if you look at the home loan slide, there was 25% of our customers were making some form of repayment. In business lending, that skews even more to actually be 30% of customers that are on a repayment deferral at the moment are making their repayments in full. 89% of our customers are secured. So one way to think of that is 67% fully secured. We'd say 22% are partially secured, leaving 11% of unsecured. And just over 50% are relationship managed. And obviously relationship managers play a very important role in terms of maintaining regular contact with customers but also bring a depth of understanding about business plans, inventory, supply chains in our broader overall assessment as we go through the reviews with our customers. As I said at the start, we've made good progress in consistently executing our strategy during the course of the year. We completed the divestment of — we announced the divestment of 55 per cent of our CFS business to KKR. earlier this year, which we expect to complete in the second half of this financial year. We also announced as part of our results the latest report from the independent expert Promontory. We're making good progress, having completed almost 80 per cent of our milestones. You'll see overall very strong share performance above system growth clearly in deposits in home lending, stronger performance in business lending and again, that improvement that we're seeing, not just in our net promoter scores, but also more broadly in the context of the reputation and standing of the business going forward. And of course, those investments in digital banking and our technology more broadly, absolutely critical to our future strategy. We really want to position ourselves as the trusted and relevant partner at the centre of our customers' financial lives. An essential part of that has been the number one digital bank, We've been recognised in that way for the last four years by Forrester and 11 years by Canstar. And we've continued to invest in some leading features and functionality to improve the quality of the experience for our customers. Just a couple of recent examples. First of all, we rolled out in the last month or so a coronavirus money plan, which just provides some simple but actionable insights and steps for our customers to be thinking about. We've seen more than 300,000 customers use that already. Our bill prediction tool, which actually helps, of course, customers manage and expect what bills are coming through. We've seen almost a million customers use that, start using that in just the last three weeks. And perhaps just to give an insight about how some of the unique elements of our technology come together. In building something like the bill prediction tool, we're using 14 billion transactions per We then calculate 150 million different bill presentment options. We're using 20 machine learning models and we deliver that into a personalised experience, which of course continues to improve the experience and is personalised to our individual customers. We've made some very good progress in and around our payments innovation. That's a huge priority for us going forward, continuing to work very closely with Klarna. We had a technology and innovation update a couple of weeks ago. We will continue and we look forward to bringing some more exciting innovations to market in the months ahead. At this point, I'm going to hand over to Alan, who's going to talk more about the result in more detail.

Thank you, Matt, and good morning. Financial year 2020 has certainly been one of our more interesting periods and I will step through it in more detail shortly. In summary terms, what really stands out for me is that despite a difficult environment in both social health terms and economic terms, the structural advantages of our franchise coupled with the disciplined execution of our strategic and operational priorities has delivered a pretty good set of outcomes for our customers and our shareholders. Before the coronavirus pandemic, we were already experiencing the earnings pressure of a lower for longer interest rate environment. While that represents a headwind in absolute terms, in relative terms, the Commonwealth Bank performs better in a falling rate environment. Our structurally advantaged franchise product mix and our balance sheet sales settings help us deliver less volatile earnings through the cycle and generate structurally higher levels of organic capital. After the onset of coronavirus and the associated economic downturn, customer behaviours changed in two ways which also play to our franchise strengths. A scale advantage that attracts more customers to the Commonwealth Bank during uncertain times and an acceleration in the level of our customers' digital engagement. We have built upon those strengths with strong operational execution in the retail bank and better capital disciplines across the group. We have strengthened all of our balance sheet settings and then extended that balance sheet in support of our retail, business and institutional customers across both Australia and New Zealand. That has resulted in strong growth in home loan market share, a large capital surplus both before and after the dividend strengthened levels of loan loss provisioning at 30 June, and an exceptional period of customer deposit growth. Now on to the detail, and let me start off as usual with the reconciliation of total statutory profits to cash profits from continuing operations. Statutory profits for the year were $9.6 billion, largely due to one-off gains on the sale of our various wealth management businesses. All the usual adjustments apply, with Colonial First State now the main contributor to profits from discontinued operations. Those adjustments result in cash profits from continuing operations of $7.3 billion. And as Matt has described, that cash profit is 11% lower than last year. Operating income, operating expenses and operating performance are all up by around 1%. And so it was the loan impairment expense more than doubling to $2.5 billion, which drove that reduction in cash profits. Looking firstly at operating income, the growth was driven by higher net interest income, more than offsetting the impact of COVID-19 on other banking income and lower fees in our funds management and insurance businesses. That growth in net interest income of $386 million was a function of strong volume growth across our core products, with average home loan balances up 4%, another strong period of double-digit transaction deposit growth, and positive momentum in business lending. Institutional lending balances were 5% lower on average year on year. However, spot lending exposures increased slightly as the business continued to support key clients' liquidity needs during a difficult period. As you would expect, net interest margins were lower over the year. And if we look at the sequential change over this half, margins fell by seven basis points. Asset pricing provided a small benefit of two basis points. The margin pressure from a low rate environment can be seen in the five basis point reduction in deposit funding and pricing and the three basis point impact of lower earnings on invested capital. The other phenomenon that we're seeing right now is a very high level of excess liquidity, principally due to that strong growth in transaction and savings deposits. Those excess liquids are deployed in very low rate, high quality liquid assets diluting our headline margins by four basis points. As we look ahead, we expect the cash rate reductions will result in a seven basis point margin headwind over the next financial year. It is also likely that we'll continue to carry excess liquids during a period of economic uncertainty, and so it's likely that that will dilute headline margins, though that's a little harder to estimate at this point. Operating expenses grew by 0.7% over the year. That was helped by a reduction in customer remediation costs of $381 million, despite the increase in aligned advice provisioning that we took in the second half of the year. If we exclude notable items, underlying costs grew 2.7%. Within that, we absorbed higher staff, property, and IT costs, partly due to the impacts of coronavirus. We scaled up the operational resourcing of our customer financial assistance and collections teams. We understandably seen lower levels of annual leave taken. We made all our branches and commercial offices COVID safe for our people and our customers. And we invested in IT infrastructure to enable 39,000 of our people to work from home. While this is the second successive year of cost growth since we announced our strategic priority of business simplification and cost reduction, it is pleasing to see growing momentum and productivity benefits. We've delivered $548 million of cumulative cost savings this year, an increase of $358 million on the prior year, and this will continue to be an important area of management focus given the weaker earnings outlook. Turning to our balance sheet settings and looking firstly at credit risk, loan loss rates increased significantly across both consumer and corporate portfolios due to forward-looking adjustments to provisions for the impact of COVID-19. We can already see some signs of emerging stress across the portfolio, although it is early days. Within the consumer portfolio, both home loan and personal loan 90-day arrears remain below the levels that we've seen last year. However, both of these products are being insulated by the loan deferral arrangements that have been in place since March. Credit card 90-day arrears increased 43 basis points to 1.23%, although around half of that increase relates to the denominator effect of lower credit card balances. Troublesome and impaired assets increased $900 million to $8.7 billion, with most of that increase related to higher corporate troublesome exposures from a relatively small number of institutional clients in those sectors most exposed to the coronavirus lockdowns, including retail trade, manufacturing, transport and culture and recreation. we have been focused on supporting our retail and business customers during a difficult period. The loan deferrals, along with the very strong fiscal, prudential and monetary policy response, are providing individuals and businesses with much needed time to mount a recovery. However, we know that unfortunately not all of our customers will be able to fully recover and we've therefore been conducting very granular modelling of the expected impacts across both our retail and non-retail portfolios. For our retail lending portfolios, we've conducted analysis of our customer base across a number of dimensions, including their occupation, where they live, their payment activity, and for home lending, their level of equity. For our non-retail lending portfolios, we've looked at the expected change in cash flows for those businesses operating within impacted industries and geographies, And that's informed the degree of notching that we've applied to the probability of default and loss given default for those exposures as part of our forward-looking adjustments. And that approach has enabled us to continue to take a careful approach to our provisioning. And as a result, we have increased our collective provisions in the consumer portfolio by 32% and in the corporate portfolio by 48%. That takes our total provisions as a proportion of credit risk-weighted assets to 1.7%, the highest in the industry, along with the most highly collateralised lending portfolio. As we look ahead at the alternate economic scenarios, we're well positioned for whatever the future may hold. Our current level of provisioning is $1.1 billion higher than the level of provisions that we calculate would be required under our base case economic forecasts. That extra level of provisioning provides our earnings and capital levels with a degree of insulation should we experience a more severe, prolonged downturn scenario. We continue to strengthen our funding settings. Our customer deposit ratio is now 74%, and the weighted average maturity of our long-term debt is now 5.3 years. We continue to reduce funding risk in other ways, For example, our reliance on short-term funding sources is now at historical lows. We also have access to $31 billion of three-year funding from the RBA's term funding facility, and that provides us with another stable source of funding as we seek to support our customers and the economy during the difficult period ahead. On capital, we've delivered a level 2 common equity tier 1 capital ratio of 11.6%, down 10 basis points since December 2019. That represents a significant surplus to APRA's unquestionably strong capital requirement and will be further strengthened by the expected capital uplifts as we finalise our announced divestments. During the six-month period, we absorbed the $1.5 billion increase in COVID-19 loan loss provisioning and $3.5 billion in cash paid in neutralised interim dividends. That was offset by another strong period of underlying organic capital generation and 26 basis points of inorganic capital from completed divestments. Importantly, our Level 1 parent entity capital remains significantly higher than our Level 2 group capital, which means we're uniquely well-placed to absorb RBNZ's freeze on dividend payments from New Zealand banking subsidiaries. Looking at the trajectory in our capital levels over the course of the past year, you can see that we remained above unquestionably strong capital levels for all 12 months, including the months following the declaration and payment of our last two dividends. As you would expect, there's been a degree of volatility in our capital levels over the course of the past year, in particular over the last two quarters. In Q3, we seen weaker profits from the COVID-19 provisions and the timing of the interim dividend. We also seen higher credit spreads and market volatility in the month of March, and that resulted in a 95 basis point fall in Q3 CET1. In Q4, we seen stronger profits and a tightening of credit spreads. We also adopted a more granular calculation of credit risk weighted assets on defaulted exposures, providing a nine basis point improvement to CET1. These benefits offset the deterioration in credit quality and delivered an 85 basis point increase in Q4 CET1. The final dividend of 98 cents reflects APRA's recently updated guidance and sees us retain more than half of our second half statutory earnings. That represents a cautious approach to capital management and dividends, as we head into a period of economic uncertainty. I'll now hand back to Matt for the outlook and the closing summary. Thank you.