Commonwealth Bank of Australia

Hello and welcome to the Commonwealth Bank of Australia's results briefing for the year ended 30 June 2023. I'm Melanie Kirk and I'm Head of Investor Relations. Thank you for joining us. For this briefing, we will have presentations from our CEO, Matt Common, with a business update and an overview of the results. Our CFO, Alan Docherty, will provide the details of the results, and Matt will provide an outlook and summary. The presentations will be followed by the opportunity for some questions. I'll now hand over to Matt. Thank you, Matt.

Thank you, Mel. And good morning, everyone. It's good to be with you today. Throughout the year, we've been very focused on supporting our customers, investing in our communities and providing strength and stability for the broader economy. We are very conscious that many Australians are feeling under pressure in the current environment. The rising cost of living is impacting all of our customers. While most of our customers remain well positioned, we are seeing more people access their savings buffers. We also recognise that some customers are finding the current environment very tough. We are proactively supporting customers in need. This includes contacting every customer coming off a fixed rate mortgage to discuss options, as well as providing flexibility and financial assistance for those who need it. To help save on everyday expenses, navigate the changing economic environment and plan for the future, 3 million of our customers have engaged with our money management tools. This year we have helped more than 150,000 Australians buy a new home and have lent $35 billion to help small businesses create jobs and grow. Safety and security remains a priority across the community This year we have prevented and recovered more than $200 million in potential scams. We have invested $750 million to protect our customers and the community from the threat of financial crime, cyber attacks, scams and fraud. Strong and stable banks benefit all Australians. This year, we have further strengthened our balance sheet to ensure we remain well positioned to support our customers and the broader economy. We've also made a commitment to maintain our regional branch footprint for the next three years to support local communities and businesses. We continue to have the largest ATM and branch network in the country, and our call centres are based in Australia. We also recognise that many Australians rely on dividends to support their income. This year, we have returned $10 billion through dividends and buybacks, benefiting over 12 million Australians. Before I get into the detail of the result, I wanted to spend a few moments on the impact of higher rates. To combat inflation, central banks around the world have raised interest rates in order to lower the demand for credit and lower aggregate demand. As a result of higher rates, banks receive more interest from borrowers, but pay more interest income to depositors. By way of example, our depositors received an additional $10.7 billion in interest payments last year, five times more than the prior financial year. The average interest rate earned by depositors has increased by more than the average rate paid by home loan customers, mainly due to the impact of fixed rate loans and greater home loan discounting across the market. Payments to suppliers and employees increased 5% to $11.6 billion during the period. Our shareholder profit increased by $600 million or 6% in the year. We often receive questions on the bank's profitability. We thought it might be helpful to look at our profit in the context of the past decade. The Commonwealth Bank has grown significantly larger during that time, with customer deposits increasing by $380 billion. We're also significantly stronger, holding nearly twice as much tier one capital and substantially more liquid assets than we did a decade ago. This helps to protect the economy withstand unexpected shocks like we have seen recently in international markets. But this additional strength also comes at a cost, which we estimate to be between $7 billion to $11 billion per annum across the Australian banking industry. That cost has not simply been passed on to customers. Our profitability has fallen substantially in the last decade and is currently lower than a number of international markets. Our strength allows us to invest to continue to improve the experience we provide to customers and to remain prepared to support our customers and their broader economy through challenging times. Turning now to our performance. We finished the year with peer leading net promoter scores across all key customer segments. This customer focus, coupled with consistent disciplined execution, has delivered volume growth in all core lines of business. As a result, our statutory net profit after tax increased 5% and our cash net profit after tax increased 6%. we have maintained strong liquidity, funding and capital positions throughout the financial year. And we have continued to manage our share count through buybacks, which has helped earnings per share increase by 45 cents. Our operating performance and capital position has allowed the board to declare a full year dividend of $4.50, an increase of 65 cents on the prior year. Operating income for the year was up 13%, driven by volume growth and higher net interest margins. Operating expenses were up 5%, driven by inflation and increased technology spend to support the delivery of our strategic priorities. Pre-provision profit was up 19%, reflecting our strong operational performance. Despite loan impairment expense increasing by $1.5 billion, cash net profit was up 6% on the prior year to $10.2 billion. We've continued to strengthen our balance sheet and we remain well placed heading into a lower growth environment. Our balance sheet is 75% deposit funded. Weighted average maturity of our long-term funding is five and a half years and liquid assets are $189 billion. We've implemented APRA's changes to the Prudential Capital Framework, which were effective from 1 January 2023, and have a common equity Tier 1 capital ratio of 12.2%, well in excess of regulatory minimums. Our portfolio has remained sound, with arrears and impairments below long-term averages, supported by a strong labour market and savings buffers. Troublesome and impaired assets increased to $7.1 billion or 51 basis points, which remains well below historic averages. Home loan arrears remain near record lows at 47 basis points. Given the uncertain outlook, we remain well provisioned and capitalised for a range of economic scenarios. We hold total provisions of $6 billion, which is $2.2 billion above our central economic scenario. The impacts of the current environment are being felt unevenly across our customers and the economy. In aggregate, we are seeing prices rise at about 6% across the economy, and yet household spending on a per capita basis is increasing at around 3%. This reflects a pullback in the volume of goods and services consumed by households. The increase in mortgage repayments is predominantly impacting households aged 25 to 55, Younger Australians also tend to have lower incomes and the smallest savings buffers. They are most sensitive to changes in the cost of living. We see customers in the 25 to 34 year old age group pulling back on spend most acutely and reducing their savings given the impact of higher mortgage and rental payments. After years of very low interest rates on their savings, millions of Australians are now also benefiting from higher rates on their savings accounts. By way of example, our customers over the age of 65 received approximately $2 billion in additional interest income last financial year. Our home loan portfolio remains resilient, but we continue to watch it closely. Over the past four years, redraw and offset balances have grown substantially faster than home loan volumes. This trend has continued in the past 12 months where many of our customers have paid down or offset their loan balances where they can. One trend we're observing is customers bringing savings balances back to the Commonwealth Bank from other institutions as their fixed rate mortgages mature in order to offset their loan balance. While we know that there are some customers that are finding the current environment very challenging, we are still seeing only a small number of customers currently falling behind on their repayments. Both our 30 and 90 day arrears remain near historic lows because customers are taking practical steps to adapt to the higher rate environment. We have seen some uptick in 30-day arrears in the past 12 months and expect that 30-day and 90-day arrears will trend higher over the course of the financial year. Requests for hardship are still down about 27% versus pre-COVID levels, but these figures will rise. Across the economy, borrowers have only felt about two-thirds of the current cash rate increases, And this is because repayments don't increase immediately and also due to the expiry of fixed rate loans. We continue our disciplined execution of our strategy. Our core business continues to perform well through our customer focus and operational execution. The strength of our franchise continues to be underpinned by deep, trusted customer relationships. We're very fortunate to serve approximately 11 million retail and over 1 million business customers. Our leading proprietary physical and digital distribution channels enable us to deliver a superior customer experience and better understand and serve our customers' needs. we will continue to deliver highly differentiated customer propositions so that customers have very personalised and relevant experiences driving loyalty and advocacy. We've also been very focused on making disciplined volume margin trade-offs and are regularly reviewing how we compete given the atypical market conditions. In our core retail business, there continues to be intense competition and a challenging margin outlook. The operational performance of our home buying business remains very good, and we've taken a number of steps to ensure our lending posture delivers sustainable financial returns. This has had an impact on our volume performance, particularly in the last quarter. The mortgage market in New Zealand is even more challenged, where pricing conduct is difficult to reconcile. We've pulled back on volume growth in New Zealand given the unsustainable returns, with growth in the second half well below system. Our institutional bank has contributed to our result in a variety of ways. We've seen approximately $40 billion in credit risk weighted assets over the past six years and a net funding of $73 billion over the past five years, including $11 billion in the past year. This has further supported our balance sheet and capital allocation to enable us to grow our business banking franchise and to continue to invest in our overall customer proposition. As you know, we made a strategic choice a number of years ago to increase our investment in business banking. More than 25% of businesses now consider the Commonwealth Bank their main financial institution. We hold $68 billion more in business banking deposit balances than we did in June 2020, a 43% increase. This growth in primary customer relationships has meant transaction banking now contributes 48% of the business bank's revenue, up from 34% in financial year 20. We have continued to grow volumes above system in the past 12 months, with lending balances growing $14.5 billion, or 1.4 times system. This deepening of primary customer relationships and prudent lending growth has resulted in strong earnings performance from our business bank. The cash net profit after tax has grown over 30% year on year, and the business bank now contributes approximately 40% of group profit after tax. This year, we launched CommBank App version 5.0 with a simplified and enriched customer experience for our customers. We've made it easier for customers to manage their personal and business accounts, find and access money management tools, and discover different features and money-saving offers exclusively available to CommBank customers. We've also now integrated CommSec investing into the CommBank app, giving customers the ability to view their holdings and trade Australian shares and ETFs. Early results from the launch of the new app are promising, We've seen more customers using the app and more engagement in the app. Our daily logins increased by 11% in the month of July, and we've seen a 40% increase in feature and product discovery. App 5.0 builds on a strong multi-year history of leadership in digital banking. Every year, we have more digitally active customers who log in more frequently each month and who are more engaged when they are logged in. Our app is used by more customers than any other financial services app in Australia with 7.8 million active users and with a peer-leading Net Promoter Score of 26.2. On average, our customers are now logging in 39 times per month. The volume and value of payments also continues to grow, and we are seeing nearly $80 billion of transactions processed each month through our app. In the current environment, a key focus is providing customers with timely and useful information to help them manage their budgets. We are proactively contacting every customer coming off a fixed rate mortgage to discuss options and provide practical support and are extending support to our business customers. In addition, our digital capabilities play a critical role in giving customers greater visibility and insight into their finances and providing support through our money management tools. More than 3.2 million customers have engaged with our digital tools like Bill Sense, Money Plan and Spend Tracker. Through our Benefits Finder feature, customers have now received over $1 billion in discounts, entitlements and benefits. Digital and technology are also critical to keeping our customers safe. We've launched a range of new digital protection features this year and have been able to prevent or recover over $200 million from scams targeted at our customers. One of these is Call A Check, which we use about 50,000 times per month. When we call our customers, we now send an alert into their CommBank app so that our customers have confidence that the person they are talking to is really from the Commonwealth Bank. Name Check identifies if a customer is trying to send money to a place where the account number and name don't match. And this feature has helped one of our customers avoid a $1.2 million mistake in payment and on 16 million occasions has provided customers with the reassurance that their money is going to the right place. And our newest feature, Customer Check, uses the CommBank app to further verify a customer's identity and branch. Maybe let me just bring that to life with one of my favourite examples from the last week. We had a customer who was interstate. We had someone who'd come into the branch misrepresenting themselves to be the customer, trying to withdraw about $8,000 to supposedly purchase a car. Our branch teller suspected something might not be quite right, pressed the real-time customer check in CommC, which is the system that we use to serve all of our customers. It popped an alert in our CommBank app to the real customer saying, are you currently with a CommBank specialist? It could be in branch or it could be in your home. They immediately came back and said no, popped that message to our team. Of course, when our member of staff went back of house to check and talk to the fraud management and scam team, the customer or the purported customer ran out of the branch. To me, it's just a great example of the technology that we can bring to bear to give our customers that real time confidence and reassurance. And so protecting customers from cybersecurity threats, financial crime, scams and fraud is a huge priority for us. And we've invested $750 million this year to keep our customers safe. Using these digital tools and alerts, we provide customers with confidence to more safely navigate the ever-changing threat landscape and also provide a gentle reminder to stay vigilant. We are here to help and encourage anyone who has any questions or concerns about their financial situation to get in touch. And with that, I'll hand over to Alan, who will talk through the result in more detail.

Thank you, Matt, and good morning to everyone who has dialled in. I'll cover the financial results for the year in a little more detail and also provide some more color around how we have further strengthened key settings in order to both support our customers and also deliver sustainable returns to shareholders. As always, these results were driven by a combination of macroeconomic factors, management actions, and franchise strengths. Looking firstly at the macro context, interest rates are now at highly restrictive levels. And due to intense price competition for home loans, margins peaked across the banking sector in late 2022. As competition for deposits increased, we've then seen continued margin pressure over the most recent six-month period. Our economic fundamentals remain strong. with full employment, healthy aggregate savings buffers and rapid population growth. This shows up in our results in the form of continued low arrears rates, further growth in offset account balances and record levels of new transaction account openings. That said, the rate rises are having their intended dampening effect on real household disposable incomes, and we've begun to see a moderation in per capita discretionary spending. We expect this to continue as the full extent of tightening is felt, and we again topped up our loan loss provisions as we take a forward-looking view of the economic slowdown. Turning secondly to the results of management actions, a continued focus on our customers is showing up in our leading customer advocacy scores. Our focus on consistent, high-quality operational execution has driven significant growth in pre-provision profits. and we are responding to tighter financial conditions by further strengthening our key balance sheet settings, which enables us to both support our customers and deliver strong and sustainable shareholder returns. Thirdly, our franchise continues to evolve. Both retail and business main financial institution share remains strong, and our return on equity remains sector leading. These factors have driven continued growth in customer deposit balances and a very strong level of organic capital generation. We have deployed a small portion of our significant capital surplus to further reduce our share count, and this has helped drive another increase in the dividends paid to our shareholders. Now on to the detail. Statutory profits from continuing operations were $10.2 billion. Non-cash items this year were relatively small, with continuing cash profits also rounding to $10.2 billion. Cash profit is 6% higher than last year, with strong growth in pre-provision profits, partly offset by higher loan losses. There were a couple of one-off items that have previously been disclosed that reduced the headline growth rates in both income and expenses this year. And so I'll focus on the underlying performance in this presentation, which was full year operating income growth of 12.7% and expense growth of 5.5%. You can see here the difference between the full year and sequential half growth rates. In the second half, income growth was 0.4%, with lower net interest income due to falling net interest margins, offset by higher global markets income and higher equity accounted profits from our associate investments. That fed into slightly weaker operating performance for the sequential half, and cash profits were down 2.8% as we increased provisions for loan losses. Looking firstly at the growth in underlying operating income over the year, net interest income increased significantly from strong volume growth of between 5% and 10% across each of our main lending and deposit products, as well as a recovery in margins from the lows observed in the prior financial year. Other operating income was lower over the year, largely a function of divested earnings and lower earnings from associates. In the second half, income growth slowed to 0.4% as net interest margins began to compress. And this slide decomposes that five basis point reduction in margin over the most recent six month period. Continued competitive pressure on domestic home lending drove six points of that seven basis point contraction in lending margins. The competitive situation in New Zealand was even more intense, where the margin on new home loans is currently less than half of the level we see in Australia and significantly below the cost of capital. As a result, we have chosen to grow well below system in New Zealand and have limited the impact to one basis point of group margin decline over the most recent six month period. As flagged our February results update, we have seen increased deposit and wholesale funding costs, which reduced margin by four basis points. and also the benefit of higher rates on our replicated products and equity hedges, which increase margin by six basis points. As we look ahead to the next financial year, the same factors that I have previously called out 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. The trajectory of short and long term interest rates will also be important for both deposit portfolio margins as well as the reinvestment rates applied to a replicating portfolio and equity hedges. Turning now to operating expenses, they increased by 5.5% over the year. This was largely a result of inflationary increases in wages and supplier input costs and higher volume costs. Our ongoing business simplification initiatives delivered incremental cost savings of a little above $200 million this year, and our cost to income ratio improved by around three percentage points to 42.8%. Turning to our balance sheet settings and looking firstly at credit risk. Loan impairment expenses were $1.1 billion as loan loss rates normalised closer to long-run averages. Leading indicators of credit risk have started to increase from a low base, with 90-day arrears increasing over the most recent six-month period. Further increases in arrears are expected as pressure continues to build on household disposable incomes. Corporate troublesome and impaired exposures increased, primarily driven to downgrades to a small number of exposures in the property and construction sectors. As you can see in the call-out box on the far right, TIAs do however remain well below long-run averages. As rates continued to rise over recent months, we decided to further top up both consumer and corporate credit provisions. total provisions increased to $6 billion. This represents a buffer of more than $2 billion to our central scenario of a relatively soft landing for the Australian economy and gives us approximately 75% coverage of our stagflationary downside scenario. I thought it helpful to provide some insight around how the components of our loan loss provisioning behave under the accounting standards as we work our way through the course of an economic cycle. Under AASB 9, we must at all times take a forward-looking view of the expected credit losses on our existing loan portfolio. These rules were deliberately framed to allow banks to increase provisions ahead of an economic downturn and therefore strengthen financial system stability. The different components of provisions are set out in the table on the right hand side of this slide. Our base collective provisioning models look at current indicators like consumer arrears rates and troublesome exposures. We then add two forward-looking components, FLA's, or forward-looking adjustments, and the MES, or multiple economic scenarios. FLA's are judgmental overlays applied to very specific cohorts of retail customers and business segments. For example, right now we have specific consumer FLA's for home loans originated at the bottom of the rate cycle. and specific corporate FLAs for sectors of concern, such as the construction sector and B-grade office properties. The MES operates at a more macro level. When we forecast an economic slowdown, we model the expected credit loss of different scenarios, and MES overlays tend to increase provisions. As you enter the bottom of the economic cycle, consumer arrears and troublesome exposures increase. This leads to an increase in base and individual provisions. At that point, the FLA's applied to those same customer segments are de-recognised. There is therefore a degree of natural offset between these components as we move through an economic cycle. The MES overlay also generally reduces after you pass the bottom of the cycle as forecast economic variables start to improve. Standing back from all of it, you will likely see higher provisions late in the economic cycle and lower provisions following the bottom of the cycle. Whether loan and permit expenses are higher or lower during that period of contraction will be a function of the actual losses incurred compared with the predicted losses inherent in the MES and FLA overlays. For many years, we have sought to hold industry-leading provisioning coverage levels through the cycle. That eats into our capital surpluses in the short term. However, it also means that when a credit deterioration eventuates, we incur relatively lower annual loan losses and can deliver more stable earnings and dividends over the long term. The rest of our balance sheet settings also remain industry leading, with our deposit funding ratio increasing to 75% and long-term funding settings remaining conservative. Short-term wholesale funding remains at a historical low proportion of total funding of 7%. I expect this metric to increase over the year ahead as we use some of this spare capacity to fund maturities in the RBA term funding facility. On capital, we've delivered a common equity tier 1 ratio at 30 June of 12.2%. This is 10 basis points higher over the half, as another period of strong organic generation was partly offset by the completion of our previously announced on-market share buyback. Today, we also announced a new $1 billion buyback, which would take our CET1 to 12% on a pro forma basis, an $8 billion surplus to the APRA prudential minimum of 10.25%, and nearly $5 billion above the board target of 11%. The final dividend of $2.40 represents a 14% increase on the prior year and takes our full year payout ratio to 74%, close to the middle of our policy range. Given our very strong capital position, the Board have decided to again neutralise the DRP in respect of the final dividend. In closing, I wanted to share how we have positioned our key financial settings for the coming economic slowdown and how this helps support our customers, the economy and our shareholders through uncertain times. As you can see on the left-hand side of this chart, we have strengthened provisioning, created spare funding capacity and retained significant surplus capital as the economy begins to slow. We have also positioned our structural hedges of interest rate risk to provide significant support to net interest earnings over future years. Our return on equity has increased this year to 14%, supported by earnings growth and buybacks. That has allowed us to generate strong levels of organic capital, which funds the extension of credit to our retail and business customers. For our shareholders, we seek to provide healthy and sustainable dividends and efficiently return surplus franking credits. This provides them with the incentive to continue to invest their capital into the Commonwealth Bank and support our customers and the economy over the long term. I now hand back to Matt, who will take you through the economic outlook and a closing summary. Thank you.

Thanks very much, Alan. The fundamentals of the Australian economy remain strong. The jobs market remains tight, with unemployment still near historic lows, high business investment and strong terms of trade. We recognise, though, that all households are feeling the impact of higher inflation and higher rates. We can see households taking practical steps to adjust to this new environment. Consumer demand has slowed on a per capita basis, but immigration is providing a structural tailwind for the economy. Even though wages are rising, the combination of higher inflation and higher interest repayments has meant that real household disposable incomes have fallen around 5% year on year. Higher rates are having the intended effect of slowing growth and lowering inflation. Inflation appears to have peaked, and we expect economic growth to fall below 1.5% this year. Borrowers have only felt about two thirds of the current cash rate increases, given that repayments don't increase immediately and due to fixed rate loans, many of which expire in the next six months. Given this, we believe we are near the end of the rate hike cycle, but that rates may stay high for some months to come. We're also mindful of the potential for entrenched services inflation, which is possible if productivity does not improve alongside wages growth. Our base case remains a soft landing, and we're expecting these pressures to ease as inflation and interest rates start coming down next year. The economy remains fundamentally sound and stronger than many international markets. And we remain optimistic about the outlook. So in summary, the Commonwealth Bank remains strong and stable. This allows us to support our customers today, to invest for the future and to support Australia through the economic cycle. We have a distinct proposition and more customers are choosing to bank with us. This has allowed us to deliver strong operational performance and return over $10 billion to shareholders through buybacks and dividends. This has been underpinned by consistent, disciplined, operational and strategic execution. Our strengthened and conservative balance sheet is a highlight of our result and provides flexibility to navigate uncertainty and support our customers in the broader Australian economy while delivering sustainable returns to our shareholders. I'll now hand over to Mel and look forward to your questions.

Great. Thank you, Matt. For this briefing, we will be taking some questions from analysts. When your phone line opens, please state your name and the organisation that you represent. And to allow as many as possible to ask questions, please limit your questions to no more than two questions. The first question comes from John Story.

Hey, Matt and Ellen. Thanks so much. It's John Story from UBS. Ellen, thanks for the detail just around the provisioning. I mean, the market obviously remains reasonably cautious just on the normalized credit experience for CBA. I mean, I think the timing has certainly been pushed out over the last few reporting periods. And I also appreciate you've got a $2.2 billion additional overlay over your central scenario. But just looking at some of your probability weightings around your scenarios, I do note that those have changed, particularly over the last six months. Is this an indication – so kind of first question here – is this an indication that that CBA's views around the software landing relative to what you previously had, you've got more confidence in that now? That's just the first question.

Yeah, thanks, John. And that is the case. I mean, six months ago, there was a greater degree of uncertainty around, in particular, the terminal cash rate in Australia, both in Australia and many other jurisdictions around the world. There's been increasing terminal cash rate expectations through that period. We feel, as Matt mentioned in his economic outlook, that we are closer to the end of the rate cycle at this point. And so I think we've got more confidence around that terminal cash rate. We increased that in both the central scenario and also the downside scenario. that led to increased level of expected credit losses on both of those scenarios. And then we increased the probability weighting towards that central scenario. So central and upsides now, you know, 57.5% probability, which, you know, a higher probability than we had previously. So, yeah, it's really a reflection of more certainty around where some of those key economic fundamentals are headed, John.

Got you, got you. Matt, maybe just the second one is just really around your views on competition in the market, both on the asset and liability side of the balance sheet. It does feel to us that there's some rationalization that's come back into the market. Also, we'd just be interested to kind of get a view on some of the margin drivers, particularly in the fourth quarter. We've calculated roughly about a three basis point kind of decline in Q4. Maybe you could just kind of answer the question around competition and then Just around that, your fixed rate, you've got a big fixed rate roll off heading into December 2023. Related to that margin question, What are you having to invest in price now to retain customers relative to what you're having to invest three or six months ago?

Thanks. Yeah, sure. Thanks, John. Look, maybe I'll make some comments. I suspect we might return to this via some other questions. Look, I think clearly the last 12 months has been, I think, pretty atypical in terms of a very rapid change, particularly in the basis of competition. If I just deal particularly with home lending, I think over a period of time, certainly throughout COVID, from our perspective, there was a good basis of competition around particularly operational processes, differentiated execution. As we got into the first half, very, very aggressive. price-based incentives to levels that have been colourfully described by many over the last six months. I won't add to that, but certainly we would consider not to be sustainable. As you know, we led the removal of cashbacks. I think clearly they, and we talked about that at the half, they're causing a headwind to margins. We had, I'd say, the least to benefit, clearly, by removing those cashbacks. I think also, importantly, it would seem that some of the evidence would support that it distorts customer behaviour. So, I mean, we led that change. That's been adopted by most players, but all of them have lagged our implementation. So hence, we had a softer month in June. July will be a softer month on volumes there. So as we look out today in terms of current pricing, still extremely competitive and aggressive. I'd say it's modestly changed. I think our overall sense is it's probably exaggerated the level of change that's seen by market observers. It's going to be a key indicator, obviously, in terms of NIM into financial year 24. Alan and I both touched on New Zealand. I'm happy to sort of come back to that. And then, so I think on the rest of the asset side, I mean, all aspects of the business are continuing to be competitive, and we see that going forward. Obviously, home lending was the most concentrated. Liabilities, I think one of the things that's on our mind going into FY24 is clearly, and Alan will no doubt expand on it later, just the funding issuance. We've got all the term funding facilities maturing. Our balance sheet's an extremely strong position. But clearly a number of our competitors we feel are going to have to compete pretty aggressively for deposits to offset some of the wholesale funding issues they'll need to do and probably less room on the short-term wholesale funding. So I think that's definitely one to watch. Maybe it normalises or across both assets and liabilities. And so that's one of the areas that we are meeting extremely regularly as a management team to sort of look at all of the settings that we've got in market. How do we compete most effectively? Obviously, we're going to continue to compete in those markets. We're not prepared just to seed share for the sake of it, but we're very focused on sustainability over the medium term too. Thanks very much, Matt.

Great, thank you. The next question comes from Jonathan Mott.

Thanks, Matt. Can I just follow up on John's question then? With the margin that you're seeing, if you look from the third to the fourth quarter, two to three basis points, ongoing pressure through that period, and I know it moves around month to month, is that kind of the trend that you'd expect over the next 12 months? So, obviously, moderating from the very aggressive compression that you saw in the March quarter from December when it peaked back in October, it's sort of given these headwinds So around two to three bits per quarter looks like the correct trend. And then I just wanted to follow on with a question on slide 15 you called out. Home loan market share, good, about one-time system through the year. But above that, you say that excluding unloan and Bankwest, it was 0.8. I want to get a feeling, did that change when you put through the repricing around sort of that March, April period? Did you see a change in the split between the CommBank brand versus Bankwest and Unloan?

Yeah, sure. Why don't I start now and you add to it. Obviously, there's a bit in that, John. Look, I think we recognise that this is going to be a topic of a lot of inquiry. I mean, you'll be able to sort of reasonably accurately calculate the sort of exit margin. We're not going to give it precisely. There's also probably the exit margin or even monthly margins. There's a bit of noise in there. There's a bit of liquids benefit, for example, in the June month. I mean, as we look forward into the year ahead, there's obviously a number of factors that, you know, the big contributors, you know, may just deal very quickly on the positive side. We're going to get higher benefits from replicating portfolio hedges and the duration of equity. And then just on the pure competition side, we've sort of touched on deposits. We certainly have a view on what's the proportion of price-based discounting that's going to weigh on margins that's going to come from home loans. They're probably, I mean, they're the main factors. I guess, John, one of the things that we're sort of trying to grapple with is, I mean, even within our own forecasts, how to best... you know, help the market determine what that should be. I do think there's a couple of items in there that are, you know, that are pretty lumpy. Clearly the home loan competition, you know, really stepped up as we called out and sort of Q2 of our financial year, and that's really weighed on margins across the whole market. I mean, in particular, in terms of to your second question on volume, yes, I mean, as we've talked about before, we've been prepared to, we're trying to grow the category of digital direct via online. I think in particular what's weighed on our market share performance, certainly our volume, will be the removal of cashbacks. Leading that out, leading that out first, and everyone else delaying after that, that was the biggest driver of it. A soft June, July will be softer from what we can see. And as you would appreciate, we want to make sure that we're competitive. We're certainly not going to reward customers competitors who are just trying to shift share, but ultimately we're sort of comfortable losing some share of low return, which it would be in that month. And so I think we've got to get that balance right. We'll look at those price settings across all of those, make sure we're competitive for our customers, but clearly we want to make sure that there's a sustainable margin profile to be able to support customers going into the future.

Yeah, the only piece I'd add, John, is that, I mean, of the forward-looking considerations, the one that didn't really impact as much in the last couple of quarters as we might have expected six to 12 months ago was wholesale funding and including the basis risk premium. Basis risk premiums remained very low over the most recent couple of quarters. You know, we'd expect based on the sort of implied futures on BRP that that will start to increase from here. We're also likely to see a lot of term issuance, not just from domestic banks, but from banks all around the world as they deal into their version of the RBA term funding facility. So I think that's going to feed in a more competitive pressure on deposits in each of the domestic deposit markets. And so the trajectory for both the quarter and the half was down, as you can see in the numbers we published today. And then the forward-looking considerations, I think the one The ones to watch are going to be intensification of deposit competition and higher wholesale funding costs.

Thank you. Great. Thank you. The next question comes from Richard.

Good morning. Richard Wiles here from Morgan Stanley. Matt, I've got a couple of questions on costs. There's been some talk in the industry and some recent media reports about a major cost reduction exercise at ComBank. Can you comment on whether that's the case and whether you're aiming for a significant step up in your annual cost-saving targets? And separately, the NAB and ANZ's recent decisions towards some of their staff pay rises of 17.5% and 16.5% respectively over four years have any implications for CommBank? And can you comment on the potential implications of multi-employer bargaining or the same job, same pay laws that the government has proposed?

Yeah, sure, Richard. Why don't I start with the second question first, and then I'll kind of come back to Outlook. Look, we currently have an offer that's tabled with the Financial Services Union. We've communicated to our team. We hope that we'll be supported. And it's 12.75% over three years. But I mean, basically, the four-year number from the peers, they're adding back what they paid last year. So if you add it back, it's comparable. I think it's actually... So it's a very small difference between, I'd say, what we can see across the three peers. I think it's a reasonable position. Now, clearly we've been comfortable to put that offer forward. Obviously, we think it's compelling. We hope it will be supported. But that remains to be seen. I guess the second part of that, naturally, that is putting, and when we talk about even our FY23 expense performance, the higher wage growth clearly puts pressure on our cost line. We can then therefore see what that expenditure increase will look like over the next few years. To answer your first question, I wouldn't characterise it in that way at any time. I mean, as we've talked about publicly many times, and we don't, as you know, give forward cost guidance. But what we do want to do is make sure that we're both prepared to invest in our business for the near and medium term. And for us, we've been prepared to take on additional resources, either to support higher volumes. Certainly, we've had a very large investment envelope over the last few years. from a regulatory and risk perspective. We've clearly made a lot of progress there. We're keeping our investment spend high, but we're also very cognisant, clearly, of the environment that we operate in, the outlook for revenue, clearly the outlook for expenses and so I mean it's just a function of who we are when if we make changes to the way we work or to our operating model and there are and you know every change in FTE or reduction FTE is difficult but if there is a small change given our overall size of our business that tends to be picked up in the media. So we'll be balancing that very closely. We've done a lot of work as a management team preparing for that. We think that's the most responsible approach to both deliver and support our customers, but also support our owners over the near and long term.

Alan mentioned $200 million of cost savings in the FY23 year. You don't have ambitions or targets to ramp that up significantly in 24 and 25?

Well, I think consistent with what we've said previously, we tend to talk about our... We have an ambition and we have plans that we work through from a management perspective. We don't necessarily communicate those in advance. We more talk to, as you know, about what we've done in the period. And... Some of the headwinds that we've had from an expense perspective are because we've been prepared to, as an example, expand the investment envelope. We've brought more technology in-house. We've obviously added resources. But as we look forward, certainly where we've been able to finish some major regulatory and risk investments, we think there will be some opportunities to reduce our costs in that area. as we brought more tech in house, we've reduced our cost to ASPs or external technology companies. And as you'll see, there's a breakdown of the investment mix as we're putting more into areas like productivity and growth. We want to improve the the processes to deliver a better outcome for our customers, but that also improves the automation. I think the other thing that Alan had called out is we've increased investment in particular in cyber and scams alongside financial crime, and that's unlikely to reduce in the coming periods.

Thanks, Matt. Great. Thank you. The next question comes from Andrew Triggs.

Thank you, Mel. Hi, Matt and Alan. Slide 64 shows the rate of switching to high-rate deposits reduced in the fourth quarter across both the domestic retail and domestic business deposit bases. Richard, to know whether we can read too much into this, given I presume there are some seasonality impacts, especially in the business space where the month of June is always a strong month for loan growth and new lending often drives the creation of new deposits. So could you Any comments you could provide on that, Alan, in terms of whether we can read much into that fourth quarter move?

Yeah, I mean, look, Alan, I think there's a couple of things worth highlighting. I mean, one of the ways I think we look at it is a little bit, what's the compositional mix on deposits sort of pre-COVID and comparing that to where we are? And then what are we actually observing? And then I think we called it out, one of the things that... we could see showing up, let's say, in household deposits has been some of the fixed rate maturities as actually bringing deposits back into CBA. That's probably giving us a tailwind we didn't necessarily fully anticipate, but we do, I expect, expect to see some switching. The exact rate of that switching into both savings and into TDs remains to be seen. I think your point about it stabilising is important. And then I think from a business just observed perspective, you're seeing more businesses consuming some of those cash balances as well. I think one other factor that we've seen is the government and the ATO have had very accommodating settings in terms of ATO debt. That's a reasonable proportion of outstanding balances. I expect that that will tighten over the next year or two. I think that's reasonable. So you sort of add all of those aspects up. They're a couple of things we're watching very closely from a funding and balance sheet perspective.

Yeah. And Andrew, I think your observation is correct. The seasonality around deposit switching between different types of accounts as you get into financial year end. And so what we were careful to point out was that there was a reduction in the rate of switching. I don't think switching is a phenomenon as an end either in the retail deposit base or the business deposit base. I think in particular we added some historical context around the composition of our retail and business deposit base over the last number of years. And you can see in the following slide on sixty five. There used to be a much larger proportion, for example, of term deposits within the retail customer base. And so as we continue to see very attractive term deposit offers in the market and intensified deposit competition, I think it's likely we see further increases in switching towards term deposits as well as at-call savings accounts. So, yeah, the rate of switching certainly reduced noticeably in the quarter, but they will continue to be switching in the next financial year. We'll continue to be transparent with the market on the levels that we see across both portfolios.

Thanks, Alan. Actually, just to follow on with that slide 65, it expresses it well. On the deposit, on the retail deposit side, that's the area where it looks like still well below sort of pre-COVID levels, whereas on the business side, term deposits are back at the same ratio of total deposits they were pre-COVID. Does that sort of explain, I guess, in the sense that there's more inertia in retail banking, it could be a bit more lagged effect rather than a business which has been quite upfront?

There's also aspects of our franchise growth in business banking over the last few years. We've added a lot of MFI share. We've added a lot of new transaction accounts in the period between 23 and Dec 19. So the franchise shape's a little different. And so I think that's part of the reason why the term deposit mix is changing. is a little lower at June 23. But yeah, I think that suggests that there is certainly further changes on deposit competition ahead, particularly in the retail space.

The only other thing I'd add that we've observed, and obviously this only applies to those of the, let's say, home loan or outstanding debt, is we're seeing more of that show up in offsets. And that sort of makes sense. As the rate environment has risen, the interest component on people's P&I, particularly for owner-occupied, they should be paying down sort of non-deductible debt. So you're seeing maybe more of the deposit balances sort of consolidate to reduce the interest bearing balances. Now, I accept that more of the proportion of customers that are in TDs tend to be at a later stage in life and not necessarily, certainly not all holding housing debt. But yes, we look and have various assumptions about how we think that will move over the over the course of the year and I think as Alan said there'll be some behavioural elements as well as price pressure depending on funding profiles across the rest of the market. Thank you.

Thank you. The next question comes from Andrew Lyons.

Thanks, it's Andrew Lyons from Goldman Sachs. Just two questions if I may. Alan, you've provided some additional disclosure just around your high sustainable returns, which includes disclosure on the franking neutral payout ratio being 80%. Now, just given you also note that dividends are now the only way to return surplus franking credits back to shareholders, is it likely that you may over time push your payout ratio towards the top end of your 70% to 80% payout ratio target range? having historically favoured the middle of the range?

I mean, there's a number of factors that go into the board's consideration of a dividend at each reporting period, Andrew. I think it's important, franking surplus balances and how they're trending is one aspect of the considerations. There are many others, but it's an important aspect, and one of the things we wanted to call out on that slide, across a range of balance sheet items, there's a number of factors structural hedges, buffers that we've built into provisioning, buffers on capital, and obviously the franking balance we look at very closely to make sure that we retain a healthy surplus there. We're very pleased with where the franking balance sits. That franking neutral payout ratio of 80%, that hasn't moved around very much in recent years. Although it's another consideration, obviously, when we come around to recommending the board approving any sort of capital or dividend distribution. And the statement around the dividend being the only mechanism to distribute, that's just a reminder to the market following the last federal budget where dividends are the only way we can distribute that surplus franking credit.

It's helpful. Thanks. Thanks, Alan. Matt, just a second question maybe for you. Slide seven is really interesting, particularly the chart that shows how Australian banks collectively have gone from among the most profitable developed market banks to being now among the least profitable. Despite this, there still appears a perception that the Australian banks over-earn to the detriment of their customers, and that's certainly what my conversation suggests. In light of this, to what extent do you see not just the reality is problematic, i.e. does falling Australian bank profitability potentially put at risk where global capital gets allocated, but also the perception of Australian banks as over-earning is problematic, which might see further regulatory pressure placed on that profitability?

Yeah, no, Andrew, thanks very much for the question. It's obviously a very important topic. I guess my first point, clearly, it's not an Australia-only issue, given recent events, let's say, in Italy. I mean, as you know, we've received a lot of questions about this, and so, you know, in terms of profitability and also how banks contribute more broadly, and so we tried to, you know, set out some of the... the best sort of facts to illustrate how that's changed over time. I mean, within your question is one of, I think, the key points. It is not a choice between profitability or doing a good job for customers. You can do both. I think every business, certainly over the medium or long term, has to do both. If you're not doing a good job by your customers, you're not winning new customers, you're not able to grow, you can't possibly generate sustainable returns. And so that's part of it. And I mean, you're quite right. The sort of the second leg of that is also how important it is for banks to be profitable, particularly at this point in the cycle, because it is a competitive context for capital. And if a financial institution or banking system of a particular country is below cost of capital, well, why would shareholders then invest money into that? And that, of course, leads to very bad lending outcomes, the inability to be able to support the broader economy. We've seen that. There's many case studies of that, particularly in Europe. And so we do think it's an important topic and debate. We always feel comfortable explaining our decisions. We think as such a large company in the context of Australia, we should be subject to a lot of scrutiny and we try to prepare at least some facts to be able to support that discussion. Thank you. Appreciate it.

Thank you. The next question comes from Victor.

Thank you, Mel. Victor from Macquarie. I also wanted to ask a question on slide 64, the deposit mix chart. And the question I have is if I look at your non-interest-bearing deposit, obviously, and I think Matthew alluded to it as well, massive increase relative to pre-COVID level. Are there any structural things that we should think about to justify that increase? In the context of higher rate environment, obviously, customers presumably will try to gravitate towards better rate deposits. Is there anything that potentially should stop it going back to where it was in 2019?

I mean, let's sort of unpack, and Alan, you add, in terms of, I mean, we've got a a very significant growth rate during COVID, and I think there's a few factors contributing to that. One, clearly, and we've seen this in the past, we're the signs of stress and volatility. We're a big net deposit beneficiary. We feel like we've got a very good deposit-gathering franchise on both retail and business. That helps a lot because we've got the you know, the main bank relationship, you know, in a business context, obviously that's where a lot of the, you know, day-to-day working capital transactional flows obviously helps us with the lending and risk identification. Then, of course, you know, during COVID, particularly when there was a lot of fiscal stimulus, because of the breadth of our customer base, we benefited from that. We see a little bit of a natural unwind as the cycle turned. That was some part of the headwind in terms of volume performance in household deposits. And then I think it's probably a factor of, as I said earlier, we would see directionally switching back into similar areas, but depends a little bit on individual circumstances, like I said, whether there's the presence of a loan or not. And then I think in business, it's probably similar sort of factors that we've talked about, a function of operating performance of businesses, funding of working capital, but business lending still remains strong. So we see that sort of expansion of the money supply showing up in other parts of the household sector. So I think directionally it will move. It's a question about what's the rate of change. And as Alan said, at least that relative rate has stabilised.

I mean, the other franchise aspects is obviously going to be cyclical aspects related to the level of rates and the level of deposit competition in the market. But also from a franchise perspective, we invested a lot in our everyday banking experience, both in the retail bank and the business bank. There's a lot of features attached to everyday transaction accounts, which customers are really benefiting from. We covered some of them today in terms of supporting customers through sort of cost of living pressures. So the other aspect that's changed in the last couple of years is obviously with the borders reopening, a very big increase in the level of net migration into Australia. We're achieving record level of new transaction account openings driven by both non-migrants, but also the return of migrants and that strong level of net population growth in Australia, which is going to that weighting towards non-interest bearing deposit accounts. So there's both cyclical factors. There's also franchise factors. So yeah, I think both of those will need to bear in mind as we look at how that proportion of deposit composition moves over the next year or two.

Thank you. That makes a lot of sense. And second question for me on New Zealand, I think, Matt, you volunteered to potentially provide a bit more colour on that. If we look at your group margins relative to 2020, they're pretty much back to the same level, whereas New Zealand, even after decline in this half, they're still materially up. Is that just a fact of liquids having an impact, or is there a fact that New Zealand margins, which is a slightly different market and some of those normalisation and margins potentially take a bit longer. Just be interested in your thoughts on how that market is likely to evolve and whether it's likely to lag performance in Australia or not.

Yeah, I mean, maybe if Alan wants to talk more broadly on some of the margin swings, I think, you know, one of the things that we noticed very sharply, we certainly did in the first half, and, you know, unlike the second half in Australia, there's been... there hasn't been any improvement or, said another way, that sort of level of competitive intensity. And I think lack of sustainability on some of the lending margins, particularly in home lending, I do think are difficult to reconcile. And without telling you exactly what the margin is, maybe I'll give you a few of the composition parts, which will help you calculate it, I think, pretty accurately. At least the last time I looked, I think a two-year fixed, and I think maybe the average term in New Zealand is probably 18 months, but let's say the two-year fixed looks at about $6.79 customer rate. I think two-year swaps is about $5.50. to do the extra part you need is you need to calculate what the weighted market curve would be for five years, which might be hard for you to calculate. But if you guess that was a bit more than 100 basis points, you're pretty close. You can do the maths when you unpack that on what that margin might be, and that doesn't seem sustainable.

And on our New Zealand margin trajectory, I mean, we took very deliberate targeted action around volume rate trade-offs in that market. That's helped slow the level of margin contraction that you would otherwise have seen if we were continuing to grow at or above system on housing in New Zealand. That's been the main factor around how we're managing volume and rate within that context of a very intense level of competition for home lending.

I think the ASB team, they've sunk well below system and are maintaining discipline. So there's also a point where you need to defend. Now it's a low growth environment. But yeah, look, I think that's clearly been an area of focus for the team. And we're seeing similar trends with further deterioration in New Zealand. So it'll be interesting to see how that will change in FY24. And on the deposit side? Uh, certainly not to that level. I mean, it's competitive and for all the same reasons that we've talked about in the Australian context. It feels like on the lending side, you know, both in Australia but continuing at a greater rate in New Zealand, there's more of a disconnect in terms of... lending margins and because they're a much higher fixed rate market, those margins seem to be well below what we would have otherwise seen or expected. Thank you.

Thank you. The next question comes from Brendan.

Good morning, Brendan Sprouse from Citi. I've got a question on your funding mix on slide 32. This year, you've kept those percentages, you know, very stable in line with your loan growth. But just looking at some of the system aggregates, it does appear as though in Australia, as it has in other developed nations, abroad money may have contracted in June. Household deposit growth has kind of collapsed as well. What's the outlook for that mix in terms of funding lending growth in FY24? And if deposit growth is very weak, as it appears to have become, We expect that we'll see sharp rises in long-term funding and short-term funding to fund that growth. And then I have a second question.

Yeah, no, I think we will see increases in short and long-term wholesale funding in the next financial year. But on that June change in household deposit and the broad money aggregates, we've seen a lot of that come back in July. So a lot of that, Brendan, was actually some switching, we think, from... personal accounts into business accounts for particularly small business owners through that June fiscal year end. We've seen seasonality of that type in past periods and we've seen, it was I think more pronounced in June than we'd seen for a number of years, but we've seen a lot of that come back, certainly our share of that come back into our deposit accounts, retail deposit accounts during the first three, four weeks of July. I think we've seen about 80% of that June decline come back in that period. So I wouldn't read too much into the June trends on household broad money. I think more broadly, money supply certainly lower growth than maybe we've seen over the past two or three years, which has been a very unusual period of expansion in money supply. Still moderate, but positive growth in broad money supply more broadly. And then the dynamics between households and business will be a function of you know, how businesses are performing, where wages end up and the sort of spending propensity of the consumer. But I wouldn't read too much under the June month on household deposits.

Sure. Thank you. And my second question just relates to the short-term, long-term funding mix. I mean, you've obviously made the point at this result, and I think you made it in February, Alan, that the short-term funding is below average and you feel you have capacity there. I did note that your long-term funding task has ticked up a little bit in the half. I think it's $68 billion now for the full year 24. To what extent is that at its maximum capacity or do you have an ability to grow that further if we do see broad money continue to slow faster than loan growth?

Yeah, certainly when we come up with our funding plans, we make sure we've got plenty of capacity across term issuance, and we've also, as we've mentioned in the last number of results, when we drew down on the term funding facility, we repaid a large proportion of short-term as well as long-term wholesale funding, because we knew that when we came to this financial year 24, when you see the spike of maturities on the TFF, We wanted to keep spare capacity in the short term stack to allow us to help partially meet the maturities on the term funding facility. So we've kept that capacity there. We'll deploy some of that capacity as we roll through the maturities this period. One of the other things we did, obviously, when we... We've known for a long time the maturity date of the TFF. We avoided issuing other forms of term debt into those same maturity windows. So again, that gives us further flexibility. But yeah, we're feeling comfortable about the term funding issuance we've got planned. There's further capacity there. for example, if lending grows above our expectations or we decide to step away from some aspects of deposit gathering if the pricing doesn't meet our volume rate trade-offs. But, yeah, we're feeling comfortable about the funding task in the year ahead as we deal into the TFF maturities.

Thank you.

Thank you. The next question comes from Carlos.

Carlos Catcher, Jarden. Thanks for the chance to ask the question. I was just wondering if you could give us any more detail on the six-page report of home loan margin compression, we call it on the NIMS slide, in terms of the split of that between back book and front book pricing.

So, let me just double-check, Carlos. There's a little bit of background noise. You know, additional colour on... How much is NIMS?

So, yeah, there's the six basis points of home loan lending compression that you called out. Just how much of that is back book versus front book pricing?

I mean, obviously, there's both elements in there. We've seen, I think, over the past 12 months, we've seen more than three quarters of our standard variable rate portfolio either be refinanced or a new origination over that period. So there's a component of both. We haven't disclosed the exact split within the six basis points, Carlos. But yeah, there's elements of both in the six basis points.

Yeah, I mean, in some ways, Carlos, it's hard to sort of be really precise insofar as, you know, 45% of the volumes are refinance. Obviously, we're focusing on retention and a lot of the fixed rate maturity is obviously about customer base. We are proactively contacting some parts of our customer base given the pricing differential. I mean, at the half, there was a lot of interest in the sort of front book, back book. expansion that's contracted quite substantially over that six month period, which is sort of the natural consequence of that activity. And then obviously, as we play forward, depending on what's happening with pricing, we would expect that to continue to converge. And from our perspective, you know, there's some aspects of the... some segments of the market where we're not competing as aggressively for, and there's others where we are. And as I said, there's a lot of that focus on the retention of our existing customer base and supporting them well.

Thanks. Maybe following up on that, on the retention question, you called out a 90% retention rate for fixed-rate customers rolling off, which is modestly lower than, I think, what you called out last half, or maybe that was... I'm not sure if it was on the call or in other conversations, but is that a rate that you're kind of quite happy with? Would you like it to be a little bit lower? It is a decent bit above peers. And kind of what are you doing to impact that retention rate?

Yeah, we're pretty comfortable with where it is overall. Obviously, it's one of the metrics that we're watching and I guess we're looking at both the volume margin and sort of risk characteristics of both new and existing. And we feel like it's been sort of within that just by sort of like a couple of percent. We feel like that balance is right. Look, we've got a lot of capabilities in terms of engagement with customers, both in terms of preparation for so they're really well prepared, but also to make sure that we're putting through targeted and personalized offers to customers. So we've got both their capability from a pricing perspective as well as some of the. the tech that we've built within the app to make very sort of personalised offers. And we're not tending to participate to the same extent in just the straight out, you know, refinance across the market, which is still, you know, extremely aggressively priced. And, you know, the majority of that would be going to the very small number of banks that still have a cashback offer, which I think would make it pretty unprofitable business over that period of time. Great. Thank you very much.

Thank you. The next question comes from Ed.

Hi, it's Ed Henning from CLSA. Thanks for taking my questions. Just following on the question on mortgages, can you just touch on, with all the fixed rates rolling off now and you talked about book margins getting a little bit better, are they now accretive to margin as those fixed rates roll off?

No, the switching, we haven't called out switching in the half because it had no net impact on the net interest margin in this period. We've modelled out how the switching is going to look over the next year or two. And again, it's going to be the new business margins on variable have improved a little, but I'd say broadly neutral. I mean, to the extent that there's maybe a point or two, we'll call it out in future periods if we see anything. But it's going to be broadly neutral. So when we've seen the negative switching, when the move to fix eventuated in the last two or three years, we called out a cumulative impact of that, that negative impact of switching. We're not going to see a commensurate positive impact of the switching back. Currently broadly neutral. Maybe there's a point or two of margin over the next couple of years. That remains to be seen. It's going to depend on where standard variable rate new business margins land up. in the years ahead.

Okay, thanks. And then just secondly on impairments, just if they head up as the economy heads down, can you just talk about the pro-cyclicality impact on capital and your ability to continue buybacks in a period despite elevated provisions?

Yeah, I mean, the procyclicality, we've already seen that to a large extent because of that forward looking approach. And that's why we've built the level of provisioning relative to the central scenario that you see. You've seen it over the last number of halves and you see another increase in the provisioning. Today, while we're not seeing much in terms of increased arrears rates or troublesome exposures, we are able to apply some of those conservative forward-looking adjustments and we've obviously increased the impact of the MES overlays over the past six months. The point of the construct of the standard and why I wanted to spend a little bit, I mean, I think starting the conversation on it today, I think it's a longer conversation that we'll see play out over the next few halves. But we're able to bring forward some of those aspects into this result in order that it's not a pro-cyclical impact on provisioning and on capital when you're in the depths of an economic downturn. We're looking ahead. We've taken a view on what that might look like. We've got a considerable buffer on our base case of our central scenario. And so I think that, as I said, it eats into capital surpluses now because we're holding that $2.2 billion extra provisioning over and above the central scenario. So that should limit the extent of any sort of procyclicality or further capital imposition as we head into the contraction. But it all depends, as I mentioned, on what the actual level of losses are. If we are over-predicting the losses, as was the case during COVID, then you'd see a release of provisions. If we are under-predicting losses, then you'd see further increases in provisions. So we'll need to see how the actual economy pans out relative to the predictions that we've made within FLAs and MEDs. OK, that's great. Thank you.

Thank you. And our next question, and it will have to be our last, is from Matt Dunger.

Yes, thank you very much, Mel. Matt Dunger from Bank of America. If I could ask on slide 27, the funding costs, you've called out four basis point impact. Are you able to unpack the deposit switching versus price competition and funding costs impact for us?

So the switching is three basis points of that four basis point impact. And then we've seen further deposit pricing in term deposits that's offset by the benefit of higher rates on some of the non-replicated savings deposit balances. So that's a net wash. And then we've seen one basis point of higher wholesale funding. So, yes, switching is three of the four points, Matt.

Thank you, Alan. And if I could just ask a final one on the FTE increasing 2% in the half, talking about the shift to in-house technology earlier, how far through this are you and is this delivering a lower cost outcome over time?

Yeah, I mean, we're going to continue with the insourcing work that we're doing. We've seen commensurate reduction in the external providers that the technology team used historically, commensurate with the increase in technology FTE that we've brought in-house. There's further work to do there, so I think that will continue. And really, that's playing out within our cost base with you're seeing it turn up as higher staff costs with a commensurate reduction in the cost of the external service providers, which used to turn up in the technology cost line within the OPEX disclosures. But, yeah, that's going to be a continuing feature, at least for the next year or two.

Thank you very much.

Great. Thank you very much. That brings us to the end of time. So thank you very much for joining us and we look forward to engaging with you over the course of the next week. Thank you.