Westpac Banking Corporation

Well good morning everyone and welcome to Westpac's first half 2021 results. My name is Andrew Bowden and I'm Head of Investor Relations. I'd like to acknowledge the traditional owners and custodians of the land on which we meet, the Gadigal people of the Eora Nation and pay my respects to Elders past, present and future. Joining me today are our CEO Peter King and our CFO Michael Rowland. I'll start proceedings off and then we'll open up to Q&A. Without further ado, let me pass off to Peter.

Well, thanks, Andrew, and good morning and thanks for joining us. With 2020 being such a challenging year, it's great to present a stronger first half result and an improved economic outlook. The rebound in the economy has been good for the community, for customers and for Westpac. Governments, health services, central banks and businesses have to date successfully managed through COVID. In short, it has been a real team effort. I'm pleased with the role Westpac and particularly our people have played in helping customers and each other. The strength of our balance sheet allowed us to support over 200,000 customers and while challenges will continue for some, the vast majority are now back on full repayment. So today I'll present our results and progress on strategic priorities before handing over to Michael for the financials. And turning to our first half performance, it's been a period of clear progress on a number of fronts. Cash earnings improved significantly to $3.5 billion. And this reflected the first impairment benefit that I can recall and much more lower notable items. As I look at the first half, I was particularly pleased with getting mortgages back on track. We also manage margins well and strengthen the balance sheet across capital and credit quality. Our plan to simplify our business is underway, announcing three investments and progressing our Asian consolidation. While I'm happy with our progress, we still have areas requiring significant work. In the core franchise, we will restore growth in business lending and improve response times, particularly in mortgages. We're investing in risk management through our core program with a specific focus on culture change. Finally, our costs are too high and today we're outlining our cost reset, including clear targets and accountability. On the result, both cash earnings and reported net profit were up significantly on the last two halves. There's two main drivers, the 1.3 billion turnaround in impairments and a $938 million reduction in notable items. Earnings per share and return on equity rebounded with return on equity just above 10%. The bottom table excludes notable items. On this basis, core earnings was flat on the prior half as the impact of low rates was offset by a rise in non-interest income. Expenses remain elevated as we continue to invest in our fixed priority. but were lower over the half. Excluding notable items, cash earnings rose 35% reflecting the impairment outcome. Over the past 12 months we have undergone some major changes in board and management. We have refreshed the ET with Chris, Anthony and Scott joining us over the past six months. On the right is our operating model which is a big change from how the bank has been run in the past. We are now making decisions through our lines of business. This has started with clear accountability and better end-to-end process management. Continuing to simplify the process is important as we digitise and automate. Our mortgage line of business is leading this change and the turnaround shows what can be achieved when authority and accountability are aligned. While we still have a lot to do, the way forward is clear and we are executing well on our plans. Last year we refreshed our purpose and values along with our strategic priorities of Fix, Simplify and Perform. I've been using these to drive the company forward and we've made good progress on each. Quickly touching on New Zealand, we are assessing whether a demerger can create value for shareholders. This is not about New Zealand's performance. It's been a solid contributor again this half. The catalyst of the review is the changing nature of banking, both in New Zealand and globally. Increasingly, banking is a local game, and with the BS11 requirements in New Zealand, there is limited opportunity for Australia and New Zealand to share capability and scale. There is more to do, and we will provide updates as necessary. If I start with six, we're fundamentally changing and strengthening our risk frameworks, controls and monitoring to deliver better outcomes for all stakeholders. Much of the change is being led by our expanded core program with 19 work streams comprising over 300 programs of work. Importantly, a group executive is accountable for each work stream. The program is also subject to quarterly assurance from Promitree. which we will release every six months with results. In financial crime we've made significant progress in fixing our issues and we're now focusing more on prevention and detection. Across both risk and financial crime we've increased resources significantly and we now have the capability and capacity required to deliver on our plans. Our simplified priority is about streamlining our portfolio of businesses, reducing offshore locations and making it easier for customers to do business with us. Jason and his team have worked hard and we've announced the sale of three of our specialist businesses. We're expecting these to settle in the second half of the year. We have good interest in the remaining assets and expect more announcements in the second half. Geographically, we're consolidating our Asian operations into Singapore. Jakarta and Mumbai are now closed and we expect to exit Beijing, Shanghai and Hong Kong next year. The impact of these changes is evident in our balance sheet with the fall in offshore lending and deposits. And we're also simplifying our banking business. Over the past six months, we've reduced a number of fees and charges, simplified processes and improved our digital capability, including the new Westpac app that is helping customers do more online. The decision to combine the leadership of consumer and business banking in Australia was consistent with this priority, reducing the duplication of overhead support and allowing us to push more responsibility into the lines of business. Turning to perform, mortgages has been a major priority and we've grown in the half. With the mortgage line of business now having accountability for their end-to-end process, we've identified where we need to improve, reduce unnecessary work and streamline activities across the brands and channels. This work can be summarised across three areas. Processes have been simplified including reducing hand-offs and removing duplication. We've made over 60 policy and process changes and reduced the number of customer documents and forms. The end result sees 68% of applications auto-decisioned. Finally, we're also rolling out our digital mortgage application process across all brands and this is helping customers through the process and to accept documents digitally. With a steady improvement in applications, mortgages have returned to growth and we're on the track to match major bank system in the second half. As I said earlier, we need a competitive cost base and today we have outlined our three-year plan. We are targeting an $8 billion cost base by 2024, which will require investment of around $3.5 billion to $4 billion over the three years. Michael will take you through the outline of the program in detail, but obviously this is a big change for Westpac as we have not historically set absolute targets. At a high level, there are four main drivers. First, we will improve our processes and risk management to reduce the notable items of recent years. The significant remediation costs have been disappointing and they must reduce as we improve our controlled environment. Second is the exit of specialist businesses, while our simplification initiatives are the third source of saving. Finally, we will have a smaller head office consistent with the smaller business we will become. While becoming leaner, we are retaining our investment spend of around 1.3 billion per year to accelerate the change. This will see us spend around 3.5 to 4 billion over the three years. Under our lines of business approach, we are renovating our end-to-end processes and policies and using technology to digitise them. We've prioritised mortgages, business lending, payments, digital channels, and GTS, and work is underway on each. While most of this investment is directed to our front-end capability, we're also focused on the quality of our data and our data infrastructure. This is particularly important to improve reporting and customer outcomes. We're also changing the way we operate, shifting from large multi-year programs to smaller, more discreet projects. This new cadence will accelerate change and delivery of more regular outcomes. Scott's been working on the roadmaps since he joined in November and we will outline more detail later this year. While there is a lot to do, the team and I are absolutely committed to deliver the plan. With improved earnings and stronger capital, we've had a good look at both the dividend and our dividend policy. The principles of our approach remain the same and we will look to target a long-term sustainable payout ratio around 60% to 65%. This is down from a few years ago as low interest rates have reduced returns and we see slightly higher asset growth. This half, we've determined a 58 cent dividend representing a payout ratio of 60%. with the improved conditions and capital when neutralising the DRP with no discount on the market price. We now have excess capital however we need clarity on the final capital rules before we consider returning capital. Thank you and I'll now hand over to Michael to take you through the numbers.

Thanks Peter and good morning everyone. As I reflect on the result I feel we've navigated a challenging environment well and while it's had an impact I'm pleased with the result, particularly with the higher return and better dividend. When I look at the half, I'd make three points. First, performance was better than we expected, particularly from stronger margins and a turnaround in impairments. Second, while our spend on the fixed agenda remains elevated, we have seen good outcomes on credit quality and provisions. And finally, our line of business model is driving a better performance culture. Today I will provide more colour on the numbers before discussing our cost reset and considerations for the rest of the year. So let's turn to the detail. This chart sums up the result with the increase in cash earnings driven by the impairment benefit and lower notable items. Looking at cash earnings before notable items, net interest income was down slightly with higher margins offset by lower lending. Non-interest income increased as activity recovered and some of the COVID impacts receded. Expenses were down a little from the timing of project spend, lower restructuring costs and reduction in our branch network. These declines more than offset the additional staff for our fixed agenda. Tax was higher, as expected, with an effective tax rate slightly above the Australian corporate tax rate, reflecting hybrid distributions not being tax deductible. Given the impact of notable items, I would like to explain these in more detail. Notables had a $282 million impact on cash earnings this half and we disclosed these last week. Remediation and litigation costs were $276 million as we increased provisions for known matters and for program costs as we completed further reviews. This category also included the cost of ending our agreement with IOOF and litigation costs mostly from previously disclosed settlements. We wrote off the goodwill associated with lenders' mortgage insurance as we agreed to sell the business to Arch Capital in the half. We also wrote off some capitalised software for systems being replaced or no longer in use. Asset sales and revaluations were a $193 million benefit. As we announced last week, we booked a gain from the revaluation of Coinbase and the sale of our holding in Zip. The earn-out payments from the sale of our vendor finance business were also high. Partly offsetting these gains were losses on the sale of Westpac Pacific and from divestment costs. The sale of our specialist businesses underpin our simplification plans but do impact future earnings. In the investor pack in our results document, We have more detail on their contribution to help understand the impact when we exit. As Peter mentioned, in addition to specialist businesses, simplification also includes other activities we are exiting or streamlining. Each of these impact earnings and at the same time reduce risk and complexity. We have disclosed the impact of these on the bottom of this slide. This includes reducing our correspondent banking relationships consolidating our Asian operations and our product and fee simplification program. We exited energy trading last year, and while it has not had much of an impact in the last two halves, it contributed around $40 million to earnings in the first half of last year. Turning to lending. Starting at the top, there were different drivers across the book this half. In mortgages, we saw strong owner-occupied growth, partly offset by lower investor lending. Business and institutional lending both fell. The former was due to modest demand across most sectors, with larger declines in property, agri and professional services. Institutional lending was lower, mostly from the exit of our Asian offices and as we prioritised return over growth. New Zealand continued to grow with all the growth in housing. Other lending declined as customers paid down their unsecured credit and business lending contracted, mostly from larger New Zealand corporates. Mortgage growth has been an issue. We've not kept up with the market and have lost share. We restored growth through the half but acknowledge we have more to do on service and response times. Looking at the detail, growth was concentrated in new owner-occupied P&I lending. First-home buyers represented around 13% of flows up on the recent levels of recent years. Our better performance was due to improved processes, better customer responsiveness and sharper and more targeted pricing. This helped offset increased property sales as the housing market rebounded. While applications have risen about 40% this half, We must maintain these levels and see a sustained improvement before we declare victory. I would add that while we have made good progress with over 60 policy and process improvements, there is more opportunity, particularly as we move to origination on a common platform for the Westpac and St George brands by the end of this year. The mortgage book has reshaped over the last 12 months. Interest-only lending has fallen, with balances down a further $10 billion in the half. The portion of our Australian book on interest-only is now down to 18%. Low rates have driven demand for fixed-rate loans, which have risen to 32% of the book, up from 23% from this time last year. Investor demand has been relatively muted. This change in composition has impacted margins, so let's turn to that. Excluding notables, margins were up three basis points over the prior half. There are a number of factors driving this good outcome and I'll walk through the key items. The four basis point decrease from loans was mainly due to housing, from both front book, back book pressure and the growth in lower spread fixed rate lending. Mixed has also had an impact with a decline in personal lending as customers continued to move away from this form of finance. These impacts were partly offset by lower funding costs. We have continued to manage deposits well, supporting a six basis point benefit to margin in the half. There are a few points to this. The bottom left chart shows how TD spreads have improved as rates declined and the book has repriced. There was also a mixed effect as customers shifted from TDs to at-core products, particularly transaction accounts. As rates have reduced, more deposits are priced close to zero. Around 60% of our Australian deposits are now priced at or below 25 basis points. Funding and liquidity added to margins as we improved our liquids management and from the drawdown of the TFF. Treasury's contribution was unchanged, continuing to perform well over recent halves. The tractor continued to drag on margins with a three basis point impact spread across deposits and capital. There has been no benefit from the increase in rates at the longer end of the curve given our three and one year horizon for hedging deposits and capital respectively. The impact of the tractor will bottom out over the next 18 months. Excluding notable items, non-interest income was up 3%, as some of the economic recovery has begun to flow through. Fee income was up 3%, with a rebound in cars-related income from both increased flows and because some of the COVID waivers have now ceased, particularly with merchant fees. Other fee income was lower, mostly from the elimination of fees from our simplification initiatives. Wealth and insurance income was little changed over the half, but was up over the year. Insurance was lower, consistent with the normal seasonality of severe weather claims, partly offset by a higher contribution from LMI. The LMI contribution reflects the stronger mortgage market and less claims. Funds income was up modestly with higher fund balances offsetting continued margin pressure. The increase in the other wealth category reflects a revaluation benefit on life insurance liabilities. In trading, revenue was lower across both customer and non-customer segments and across most products. Turning to expenses, notable items continue to have an impact. This half, notable items related to our costs of remediation programs, write-downs of goodwill, performance fees and losses on sale. Excluding these, costs were broadly flat. Moving across the buckets left to right, ongoing expenses were down as restructuring charges were lower and leave provisions were used as we emerged from COVID. This was partly offset by additional staff to handle higher mortgage volumes. Investment spending was flat on the previous half as some projects began to wind down and we reviewed prioritisations. We have continued to strengthen our risk management and compliance with costs up a further $119 million. This included expanding the core program and the lift in our financial crime and risk capability. We have largely completed the increase in resources, although the full period effects will flow through in the second half. COVID-related costs were lower as some one-off costs fell away as restrictions unwound. Moving to credit quality. Credit quality has been positive this half with almost every metric improving. On the left you can see that stress has improved with lower new impaired assets, lower delinquencies and more companies being upgraded. As Peter indicated, stimulus and support measures have been very effective in producing better than expected economic outcomes and we are now seeing the benefits. Spending is increasing. Unemployment is down and property prices are rising. All good for credit quality. Mortgage delinquencies have fallen as customers who exited hardship last year completed their six-month serviceability period. The chart on the top right highlights this relationship. This chart also shows a small increase in hardship as some customers were not able to return to repayment when their deferral period ended. This rise in hardship will flow through to delinquencies in the second half of the year. Moving to corporate and business stress. The book has performed well with declines across most sectors. This continues the trend we highlighted at the first quarter with the unwind of COVID restrictions supporting a stronger economy. Only three sectors saw a rise in stress over the past half with the increases due to a small number of names rather than any widespread deterioration. Commercial property saw an increase, and most of that can be traced back to the office and retail sectors. The improvement in credit quality metrics has been reflected in provisioning, so let's turn to that. This chart shows the composition of the provision charge. What is clear is that all elements have improved. On the far left, new IAPs were lower than last half, with new impaireds much lower, and no large exposures emerging. Write-backs and recoveries were also better as a small number of impaired exposures were refinanced. Write-offs direct were down, consistent with the decline in lending and lower delinquencies in unsecured consumer and auto. Model collective provisions reduced this half in line with improved credit quality and the better economic outlook. This was partly offset by higher overlays. Let's look at the provisioning in a bit more detail. We previously discussed how provisioning comprises both modelled outcomes and judgment. And this chart explains some of those movements. In aggregate, provisions were down 11% over the half, although the level is still around 40% higher than pre-COVID. Our models included changes in the economic outlook with better growth, lower unemployment and a stronger house price outlook. Those changes are in the table on the bottom right. These model changes flowed through to a stage one, two and three cap provisions that were all lower. The individually assessed provisions were also lower as the impaired book declined. Despite the improved outlook, some uncertainty remains, particularly as government stimulus ceases and deferrals are no longer available. And so we apply judgment, retaining our economic scenario weights including the 40% probability of downside. We also increased our overlays by $250 million to reflect the potential for stress as stimulus measures are removed. At the same time, we retained overlays for customers that have yet to return to payments after exiting deferral arrangements. So in aggregate, despite the better outlook, we have remained prudent through our scenario weights and use of overlays. As a result, Our total provisions to credit risk-weighted assets was 159 basis points. Capital has remained a strength with the CET1 ratio increasing more than 1.2 percentage points over the half. Cash earnings was the biggest contributor and the underwrite of the 2020 dividend meant that there was no impact from the dividend payment. Deductions were lower from our write-down of goodwill and from lower deferred tax assets consistent with the reduction in provisions. Risk-weighted assets fell over the half, contributing 20 basis points to capital. The chart on the bottom highlights the moving parts. The reduction was mostly due to credit risk-weighted assets from lower corporate and business stress, along with lower lending. On the right is the pipeline of capital benefit to come as asset sales progress to completion. Sales yet to complete take our pro forma CET1 ratio above 12.5%. This includes Coinbase, which we've now sold down. We expect the proceeds from the sale to be upstream to the group in the second half. At our last results, we committed to providing a three-year cost plan. This is now in place and work is underway. We've typically focused on a cost-to-income ratio target but we've taken a harder line to materially shift our cost base and drive accountability. The $8 billion target is reflected across the company, with all our leaders accountable for delivery. The decreasing costs will come from three areas. The first is from the divestment of specialist businesses, which currently account for around $750 million of our cost base. The businesses where we've announced exits account for around 12% of that total, on an X-notable basis. The digitise and streamline bucket recognises the growing customer preference for digital. In response, we will have fewer better branches that provide a differentiated service through our people and the quality of our branch environment. This will be accompanied by a further upgrade in our online capability to meet our digital-first approach. This trend is evident in our new app, but there is more to do to digitise the customer experience. At the same time, we are removing legacy products and streamlining some of our fees, making us a simpler bank to manage. Finally, a more focused organisation needs a smaller head office. We are taking a zero-based design approach to align our resources to the simpler bank we are creating and have identified what that looks like. In the short term though, our priority is about fixing our issues and that will see costs a little higher this year. It's also why you have not seen an increased restructuring charge as we begin this change. I know that large cost plans are easy to announce but hard to judge. So we are putting down markers so you can assess our progress over the next three years. To hold us to account, we've outlined metrics to track our progress. We will update these over the next three years and we've provided definitions in the pack. There are further metrics underpinning these indicators which every executive and general manager in the organisation has accountability for. But I personally have responsibility for the whole program. We will get it done. Finally, I want to outline some of the things to watch in the next half. The outlook for lending has improved both across mortgages and business, and we can see that in our pipelines. In mortgages, we have momentum, and we will build on that in the second half, to grow in line with major bank systems. In business lending, we have lagged in the past, but we are starting to apply the same rigour we've brought to mortgages. This will help us convert our current pipeline to growth. We had a good start to the year with margins, but some of the tar winds have now faded. In particular, with more deposits on rates less than 25 basis points, there is less flexibility to repeat those benefits. Mortgage competition remains intense, and as we grow, there will be a greater impact on spreads. The impact of low rates on the tractor will continue to flow through on our capital and hedge deposit balances. Non-interest income should continue to benefit from improved economic activity, although there will be a full period effect from fee simplification. On costs, our fixed spend will increase over the remainder of the year and we will experience the full period impact of additional FTE. Investment spend is expected to be higher in the second half as major projects gain traction. We will partly offset these increases as our simplification plans progress. Finally, while I'm comfortable with the strength of our portfolio and balance sheet, there is still some uncertainty which will be reflected in provisioning. We expect some pockets of stress to emerge particularly in the retail and hospitality sectors, as the stimulus unwinds, but we will continue to support our customers through this time. With that, let me hand back to Peter.