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.