Commonwealth Bank of Australia

Hello and welcome to the Commonwealth Bank of Australia's results presentation for the half-year ended 31 December 2022. I'm Melanie Kirk and I'm Head of Investor Relations. Thank you for joining us for this virtual results briefing. For this briefing, we will have a presentation from our CEO, Matt Common, with an overview of the business and an update of the results. Our CFO, Alan Docherty, will provide details of the financial results and then 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, Mel, and good morning, everyone. It's great to be with you today to present the bank's half-year results. Before I get into the detail of the result, I want to spend a few moments on the disconnect that we've observed in the past six months between our headline measures today and some of the underlying conditions. The cost of living pain for many customers is very real, and yet the impact is not yet evident in our first half financial performance. We are very conscious that many of our customers are feeling significant strain from rising interest rates alongside the rising costs of electricity, groceries and other household items. This is becoming increasingly challenging for many households and an increasing source of worry, given that the cash rate is likely to rise further in the coming months. If we assume that there are two further cash rate increases, Australian homeowners have to date only experienced about half of the likely impact on monthly cash flows. We are proactively contacting every customer who is coming off a fixed rate mortgage this year so we can discuss what kind of support and options we can offer them. We can see some customers drawing down on savings and reducing spending to compensate, and yet we have not seen this translate into customers falling behind on repayments. While this has resulted in higher earnings in the period, it is driven by timing rather than the economic reality of higher rates. While there has been an improvement in margins as the cash rate increased from emergency levels, margins have not returned to pre-COVID levels. We saw margins peak in October on a month-on-month spot basis. Funding costs have increased significantly, which has also coincided with escalating price-based offers across the home loan market in Australia and New Zealand. We believe home loan pricing across the industry is below the cost of capital. On the other hand, this has served to dampen the impact of rising rates on home loan customers. Against this backdrop, we've been focused on serving our customers well and disciplined execution in this highly competitive environment. This half, we finished the period with peer leading net promoter scores and have delivered a strong financial result. Our continued balance sheet strength and capital position means we are well-placed to support our customers and the broader Australian economy. We're announcing today a dividend of $2.10 fully franked, a neutralised dividend reinvestment plan, and an expansion of our on-market share buyback program by up to $1 billion. Turning to our results, our statutory net profit was $5.2 billion. Cash net profit was also $5.2 billion, up 9%, driven by strong net interest income, partly offset by higher operating costs and increased loan impairment expense. Our operating performance was $7.8 billion, up 18%. Our operating performance and strong capital position has allowed the Board to declare a first half dividend of $2.10, an increase of $0.35 on the prior corresponding period. Our operating income was up 12% for the half, driven by volume growth and a recovery in margins. Operating expenses were up 5%, driven by wage and supplier inflation and higher IT costs. Pre-provision profit was up 18%, reflecting the strong underlying performance. Loan impairment expenses normalising post-large write-backs in the last financial year, while credit quality remains sound. The combination of 18% growth in operating performance and higher loan impairment expenses resulted in cash profit up 9% on the same period last year. Our balance sheet remains strong, heading into a lower growth environment, and we hold substantially higher capital levels. The balance sheet is 75% deposit funded. Weighted average maturity of our long-term funding is 5.8 years, and liquid assets are $193 billion. Our common equity tier one capital ratio is 11.4. We have implemented APRA's changes to the Prudential Capital Framework, which were effective from the 1st of January 2023, and have a pro forma capital ratio of 12.1%. The overall credit environment remained very benign in the period. However, we are watching closely for early signs of stress, particularly among higher risk cohorts. Troublesome and impaired assets decreased modestly to $6.3 billion from $6.4 billion in the half. Home loan arrears are at near record lows at 43 basis points, although leading indicators suggest that arrears will start to trend upwards from here. Given the uncertain outlook, we remain well provisioned and capitalised for a range of economic scenarios. We hold total provisions of $5.5 billion, which is approximately $2 billion above our central economic scenario. Our core business continues to perform well through disciplined execution. The strength of the franchise starts with our strong customer relationships. We are fortunate to serve 9 million customers and over 1 million businesses, and to have the leading proprietary physical and digital distribution channels. Through our CommBank app, we have nearly 9 million touchpoints with customers each day. And by delivering a superior customer experience through our digital channels, we're able to develop deeper relationships to better understand and serve our customers' needs. We continue to invest in our customer engagement engine, which is now making 53 million decisions in real time each day to deliver superior customer experiences. We've also built a number of proprietary assets over time to better manage and assess risk using transactional data representing approximately 40% of payment flows in Australia. These assets allow us to deliver superior customer experiences at scale, driving customer advocacy and MPS, which are increasingly important in a digital era. We finished the half with peer leading net promoter scores in all of our key segments, consumer, business banking and institutional. We led the market on net promoter scores for 11 of the last 12 months in our business bank. But despite being number one, we still have a lot of work to do to improve our absolute scores and this will continue to be a significant focus for us in the years ahead. Our NPS is critical to building customer relationships. 35% of Australians consider the Commonwealth Bank to be their main financial institution, which is more than double our nearest peer. In business, one in four businesses consider the Commonwealth Bank their main financial institution, an increase of 1.5 percentage points in the last 12 months and 21% more than our nearest peer. Transaction account relationships have again grown strongly in this period, We opened 716,000 new retail transaction accounts in the half and an increase of 50% and now have nearly 1.1 million business transaction accounts, which is up 9% year on year. Having a transaction banking relationship allows us to better understand customer needs and risk and underpins continued growth in both home and business lending. More than 95% of our home loan customers and approximately 90% of business lending customers hold a transaction account with us. As you know, we made a strategic choice to increase our investment in business banking. Cumulatively, over the past three years, we've directed an incremental $600 million of investment into our business bank, resulting in strong customer and earnings growth. Since December 2018, we've delivered market leading MFI share growth of 170 basis points. And over that same period, deposit market share has grown 270 basis points to 22.4%. We hold $68 billion more business banking deposit balances than we did in June 2020, which is a 43% increase. This growth in primary customer relationships has meant transaction banking now contributes 47 per cent of the business bank's revenue, up from 34 per cent two years ago. And the business bank has moved from a net asset position of $38 billion in June 2019 to being fully deposit funded today. We've continued to grow volumes above system in the past 12 months, with deposit balances growing $8 billion at 1.5 times system and lending balances growing $16 billion at 1.3 times system. This deepening of primary customer relationships and prudent lending has resulted in strong earnings performance. Return on target equity has increased by a third over the past three years, and the business bank now contributes 38% of group profit after tax. Our business bank now leads the market on MPS, MFI share and MFI growth, deposit share and deposits growth, and merchant market share. Despite higher growth, we will remain second in market on business lending. We've remained cautious given the economic uncertainty and continue to focus on opportunities to further grow our business by leveraging our transaction banking advantage. A big focus for our investment in business banking has been payments and merchant acquiring, which underpin the relationship we have with our business customers. We've launched a range of new smart terminals, and have more than 50,000 devices now in market, 30% of those to new merchant customers. These new devices allow us to build differentiated propositions by industry verticals and we've been particularly focused on healthcare and hospitality. In healthcare, we enable digital claiming of rebates via full integrations into Medicare, the NDIS and various health insurers and access to digital receipts. This has helped us to win new healthcare clients, including the NDIS, and has supported strong lending growth of 21% in the healthcare sector. For businesses accepting online payments, late last year we launched a new e-commerce proposition called PowerBoard, which helps businesses get online and with a few clicks offers a broad range of payment services to their customers without the need for costly technical integrations. The home lending market is undergoing a period of extreme change and intense competition. There are a number of contributing factors, including aggressive volume growth, the cyclical slowing in new lending growth, the pending surge in fixed rate maturities and high levels of refinancing. This has occurred at a time where wholesale funding costs have increased substantially. Cashbacks are growing in size and prevalence. And we estimate the banks have deferred costs relating to cashbacks of over $1 billion. This figure has increased almost 50% in the past two years, and combined with a substantial increase in commissions over the same period, creates a margin headwind that will flow unevenly across the market. The operational performance of our home buying business remains strong, and we are regularly reviewing how we compete given the atypical market conditions. We have a number of unique assets, including the largest home lending frontline team, a direct to consumer digital proposition, Unloan, and a distinct proposition through Bankwest. We also now account for approximately 37% of all proprietary originated loans in Australia. We decision more than four and five home loan applications within a day, and 64% of proprietary applications are auto-decisioned in less than 10 minutes. We are very focused on proactively engaging with our customers as the surge of fixed rate rollovers occurs across the industry over the coming 12 months. Unloan, the digital direct home loan we launched mid last year, is becoming an increasingly important channel and has already funded over $1.5 billion of loans. We're able to pass on the lowest servicing and distribution costs from a direct-to-consumer model through a competitive rate that rewards customer loyalty and doesn't rely on cashbacks, honeymoon rates or fees. And through HomeIn, our digital e-conveyancing service, we have now settled over $3 billion in home loans, with 98% of these customers taking up a CBA home loan. To navigate the current economic and competitive environment, we will continue our focus on strong, disciplined operational execution across all channels, proprietary digital and broker. Digital remains central to our strategy. We continue to grow digital engagement and now have over 8.3 million digitally active customers, nearly a million more than two years ago. The net promoter score for our mobile banking app sits at a peer-leading 28.5 and the digital net promoter score in our business segment also sits at a peer-leading 11.4. Through digital, we see increasing returns to scale in terms of building deeper, more trusted customer relationships, better understanding customer needs and risk, and delivering a superior customer experience. Strong digital assets and engagement allow us to help customers in a range of ways. One area we've been extremely focused on is fraud and scams, given the growing prevalence in the market. Customer losses to scams were estimated by the ACCC at over $2 billion in 2021, and our data suggests they have been more than doubling each year since. We have a range of services and security features in place to help protect our customers. We've been investing in technology to keep our customers safe, including real-time monitoring, fraud prevention technology and secure banking. We're also doing all we can to raise awareness and educate customers about the actions they can take to stay safe online. We've contacted more than 9 million customers about uplifting their banking security. The security checkup in the CommBank app also walks customers through key steps to keep accounts and cards secure from activating location-based security and setting up alerts. And we also recently introduced two unique features, Caller Check and Name Check. Caller Check is a new app feature that allows customers to verify whether a caller claiming to be from a Commonwealth bank is actually legitimate. NameCheck helps customers ensure that the account they are paying to belongs to the person they are trying to pay. We have dedicated teams working around the clock to look out for unusual activity across our customers' accounts and we are reaching out promptly if we detect anything suspicious. We also know that many of our customers are concerned about the cost of living pressures and rising interest rates. We have increased deposit rates nine times in the past nine months and are helping customers better manage their finances through budgeting and spending tools in our CommBank app. Customers have now accessed more than $1 billion in benefits and entitlements through our Benefits Finder feature, which will help with the rising cost of living. We are here to help our customers and encourage anyone who has questions or concerns about their financial situation to get in touch with us. And with that, I'll hand over to Alan to talk to the result in more detail.

Thank you, Matt, and good morning to everyone who is dialled in. I'll unpack the financial results to 31 December in a little more detail, and I'll also cover the changes to our regulatory capital, which arose from APRA's Prudential Framework revisions, which became effective on the 1st of January this year. In summary, these financial results were driven by a combination of macroeconomic variables, management actions, and franchise strengths, and we are well positioned to support our customers and the broader economy as financial conditions continue to tighten during the 2023 calendar year. Looking firstly at the macro context, interest rates have increased very quickly to their highest level in more than a decade, while unemployment is at a 50-year low. The full effects of the rapid tightening of interest rates are still to emerge, but we fully expect to see a moderation in discretionary consumer spending in the months ahead. Those macro factors have manifested in a rapid recovery in our net interest margins, continued historical lows in arrears rates due to full employment, but also increased loan loss provisioning as we take a forward-looking view of that coming slowdown in consumer spending. Turning now to the results of management actions. Our continued focus on customer outcomes is manifesting in our leading customer advocacy scores. Our focus on consistent high quality operational execution has contributed to the significant growth in pre-provision profits. And as a management team, we're responding to the tighter financial conditions with a deliberate conservatism in our funding risk settings together with careful calibration of credit risk settings. Finally, looking at how the structure of our franchise is evolving, we've seen another period of improvement in both retail and business main financial institution share, as well as continued growth in customer deposit balances. This has driven strong organic capital generation in the period, which enables us to continue to support our customers' lending needs. as well as continue to reduce our share count and sustainably increase the dividends paid to our shareholders. Now on to the detail. Statutory profits from continuing operations were $5.2 billion. Non-cash items within continuing operations were relatively small, with continuing cash profits also rounding to $5.2 billion. That cash profit represents 8.6% growth on the same period last year. That was the result of operating income growth of 12%, operating expense growth of 5%, pre-provision profits increasing 18%, and loan impairment expense returning somewhat closer to long-run averages during the half. Looking firstly at operating income. Net interest income increased by $1.9 billion on the prior comparative half, a combination of strong volume growth in all businesses and on both sides of the balance sheet, and also the recovery in net interest margins. Other operating income decreased by $400 million over the same period. This was largely due to the revenue foregone from divested businesses and lower associate earnings. Excluding those items, we continue to see strong underlying volume-driven growth in deposit, foreign exchange and business lending fee revenues. Turning now to net interest margins. Over the most recent six-month period, margins increased by 23 basis points, with the benefit of rising rates on deposits, the replicating portfolio and equity hedges partly offset by lower lending margins. Taking a slightly longer view of margins in the box at the bottom right, margins have recovered back to around the same level we had seen in 2020, before the full impact was felt of the historical lows in interest rates during the COVID response. Margins do, however, remain lower than they were four or five years ago, despite the overnight cash rate sitting at a decade high. And you can see that monthly spot margins peaked around October, before stabilising in the December quarter. This was due to the increased intensity of home loan and deposit price competition, offsetting the benefit of rising rates. As we look ahead to the second half, the same factors that I have called out previously will continue to be important considerations. Headwinds include the competitive pricing dynamics in home lending and deposits, the rate of customer deposit switching, and increasing wholesale funding costs. Against that, the trajectory of domestic interest rates will determine the strength of the remaining margin tailwind from deposits, the replicating portfolio, and our equity hedge. Turning now to operating expenses, they increased by 5.2% on the prior comparative period, excluding the slight increase in remediation costs, underlying costs were up 4.4% due to inflationary increases in wages and supplier input costs. Growth in other costs were offset by our ongoing business simplification initiatives, and our cost-to-income ratio improved by 3 percentage points to 42.5%. Turning to our balance sheet settings and looking firstly at credit risk, Loan impairment expenses were $511 million and a half, as we see loss rates begin to increase off an extremely low base. Leading indicators of credit risk remained benign, with the 90-day arrears rates within our consumer portfolios below where they were a year ago, and corporate troublesome balances remaining at historic lows. As you would appreciate, we're looking closely at very early stage arrears of even one day or more across both our consumer and corporate portfolios. These have increased in the last few months, though off a very low base, and they remain well below long run averages. We are watching those measures closely and do expect arrears to increase in the coming months. Given the expected tightening of conditions in the year ahead, we've decided to top up both our consumer and corporate credit provisions. Total provisions were increased by $200 million to $5.5 billion. This provides us with a $2 billion buffer to our central scenario of a relatively soft landing for the Australian economy. and gives us approximately 80% coverage of the potential $6.9 billion loss modelled under our stagflationary downside scenario. Our balance sheet settings remain peer leading, with our deposit funding ratio increasing again, now at 75%. Long-term funding settings also remain conservative. Given we are forecasting much tighter financial conditions over the next couple of years, we have again reduced short-term wholesale funding to a historical low proportion of total funding of 7%. This form of funding used to represent 26% of our liability stack. This conservatism costs money. We could increase our net interest margins by shortening our funding mix closer to industry peers, but we feel keeping extra capacity in this part of the funding stack remains the prudent course, given the current macro environment. On capital, we've delivered a common equity tier one ratio at 31 December of 11.4%. This is 10 basis points lower over the half, largely due to the progress we made on the on-market share buyback in the last six months. Our pro forma CET1 capital from 1 January 2023 under the new APRA capital framework was 12.1%, an increase of 70 basis points and well above the new prudential minimum of 10.25%. Today, we also announced a $1 billion upsize to our on-market share buyback and the completion of that buyback in the period to 30 June would see an expected change in capital of 25 basis points. I thought it would be helpful to provide some more detail on how the new prudential requirements manifested in our new capital ratio of 12.1%. As we had previously indicated, the aggregate effect of the prudential changes are to increase the reported capital ratio as a result of a lowering of risk-weighted assets. As you can see on the bottom right of this chart, when you take into account our higher capital target of 11%, the overall capital requirement remains broadly the same. Asset classes that seen a reduction in their risk weighting included owner occupied home loans and commercial property exposures. Importantly, we can now take account of greater risk discrimination in these portfolios and more fully recognise the benefit of high quality collateral held against these exposures. On the other hand, risk weightings increased for investor home loans as these exposures are generally more highly geared. New Zealand risk weightings increased in alignment with the new RBNZ requirements and operational risk capital increased under a simplified and standardised calculation which is now proportional to the level of banking income. All other risk-weighted assets remained largely unchanged. The first half dividend of $2.10 represents a 20% increase on the prior comparative dividend and a normalised interim dividend payout ratio of around 70% in line with our long-standing dividend policy. Given our very strong capital position, the Board have also decided to again neutralise the DRP in respect of the interim dividend. I'll now hand back to Matt who will take you through the economic outlook and a closing summary. Thank you.