Westpac Banking Corporation

Good morning, everyone, and welcome to Westpac's 2021 full year results. My name is Andrew Bowden and I'm head of Westpac's Investor Relations. I'd like to acknowledge the traditional owners of the custodians of the land on which we meet, the Gadigal people of the Eora Nation, and pay my respects to Elders past, present and emerging. Presenting today is our CEO, Peter King, and our CFO, Michael Rowland. Without further ado, I'll hand over to Peter. Thank you.

Well, good morning and thanks for joining us. 2021 was an important year for Westpac. We are delivering on our refresh strategy, changing the way we operate, and we've restored momentum in key businesses. It's been a complex year with COVID impacting the economy, our customers, and how we work. While operational performance has improved, our financials are not yet where we want them to be. Cash earnings rose strongly as impairments were better. However, core earnings were lower. Our balance sheet is in good shape and this allows us to return around $5.7 billion to shareholders through the final dividend and share buyback. This morning I'll reflect on the four-year result and the changes we're making in each division before Michael will cover the financials in more detail. Across our fixed, simplified and performed priorities, we're tracking in line with the plans outlined at the start of the year. In the fixed priority, the Customer Outcomes and Risk Excellence Program, or CORE as we know it, is largely through its design phase and will soon release a further two promontory reports. The other significant area of delivery was financial crime. We've responded to all areas raised in the AUSTRAC case. We've made significant progress simplifying our portfolio of businesses, which I'll touch on shortly. In Perform, the highlight was restoring mortgage growth and we also grew business lending in the second half. On costs, our $8 billion target is a key focus and with competition and lower interest rates impacting revenue, we must and will reset our costs. Cash earnings improved significantly to $5.4 billion with ROE just under 8%. And our strong CE2-1 ratio, 12.3%, allows us to return significant capital to shareholders. So turning to the result, both reported net profit and cash earnings were up significantly. The two main drivers were a 3.8 billion turnaround in impairments, as COVID's impact wasn't as big as we feared last year, and a $1 billion fall in notables. Our EPS and ROE were both higher but slightly lagged earnings growth given the capital we raised in 2020. Stripping out notable items gives us a better indicator of underlying performance and on that basis cash earnings was still higher, although core earnings were softer from lower margins and higher expenses. The decline in margins reflects both the market and our decision to grow mortgages. Expenses were higher as we added resources to improve risk management and reshape our business and do it quickly. Last year, we refreshed our purpose and strategy. I use this slide to give our people context behind our priorities. The main change has been adding climate as a perform priority, which we announced at our ESG update in September. To deliver this strategy, we are fundamentally changing how we operate, and that starts with a simpler business portfolio. The sale of non-core businesses has been active, and you can see the great progress at the top of this slide. These transactions have boosted capital by 26 basis points this year. And as we turn to 2022, our major focus is to progress the exit of super and platforms. The second leg is simplifying our banking operations. The lines of business operating model is creating clearer end-to-end accountability and faster decision making. And the outcomes can be seen in both mortgages and business lending. We're simplifying products and fees. And just as an example, we've reduced the number of mortgages on offer from 161 to 68 and halved the associated fees. This is reducing complexity, allowing us to better focus on core banking in Australia and New Zealand. To deliver our transformation, we need to change the way we work, embedding performance and risk cultures and simplifying everything we do. Of course, it starts at the top and I now have my team in place. And in late 2020, we implemented McKinsey's Organisational Health Index to monitor progress. Over the last 12 months, our score has increased four points to 74, placing us close to the global top quartile for this measure. We have seen encouraging improvements in the culture measures of leadership, accountability and direction. Now, risk culture is also improving. I can see this in how we manage complaints, the progress in restoring high rated issues or resolving high rated issues, and the confidence people have in speaking up. Process simplification through mapping of end-to-end processes and controls helps us better manage risk and simplify the business. 2022 will see us continue this focus, particularly using digital to automate customer processes. I've been pleased with progress in consumer this year. Cash earnings rose 14%, with credit quality in good shape, although core earnings were lower as margins reduced and resources increased for fixed projects. Operationally, we improved the franchise, restoring mortgage growth following several halves of contraction. We also lifted customer acquisition with our new app and focus on millennials. While our MPS is not where we need it to be, it started to improve as we enhanced digital capabilities. And digital has been a priority for the team with our new iOS app launch this year. It's a digital bank in your pocket, available 24-7, increasing both the speed and functionality of what customers can do online. One of the features introduced was a new deposit opening process, and this reduced the time to get a new customer up and running to just a few minutes. This helped lift customer acquisition, which is critical to building the strength of this franchise. The other significant change has been in the management of debit and credit cards. While many of us continue to use plastic, there's now a pathway to fully digital debit and credit cards. With the new app, you control the card. It allows you to download digital cards instantly. We've also made the CVC dynamic, which is a game changer in security, particularly online. And turning around mortgage performance was a highlight and we delivered 10 months of consecutive growth this year. To do well in mortgages, we must be competitive on price, application speed and borrowing capacity or volumes drop off quickly. Following our focus on speed and competitive pricing, we are now back in the market and we're seeing over 70% of applications auto-decisioned while customers are also using the app to track the progress of their applications which is taking pressure off the mortgage team. We've completed the rollout of the digital mortgage origination platform to our network. And with first party done, we're now rolling out the platform to brokers. There has been some discussion on processing times, and we have a clear roadmap for further improvements next year. So having restored momentum and with brokers beginning to use our digital processes, we're well placed for the year ahead. If we turn to business, while the division lifted cash earnings significantly, it was more challenged at the core earnings line. Lending declined through the year, a function of more modest demand and our frontline fixing issues rather than spending time with customers. We also tightened our credit standards at the onset of COVID, but these have now been reversed and sees us winning customers back. Following changes in the first half, bankers are spending more time with customers and and a new digital onboarding process has also helped. The outcome has been higher lending in the second half and a healthy new lending pipeline. Institutional has undergone significant change over the last 18 months. Having refocused the business and refreshed the leadership team, we're now well placed. We've reduced offshore exposures, slimmed down correspondent banking and simplified the product set. We also had a tough year in markets income, which was a revenue drag on WIB and the group. The bottom right chart shows the reduction in offshore lending increased domestic activity, and a rise in M&A activity was a feature of the second half. While WIB is now at lower risk, the changes have impacted revenue. However, they're mostly behind us, so we're now shifting our attention to growth, particularly for climate solutions. New Zealand delivered a strong financial result, achieving good growth and improved performance at both cash and core earnings. Similar to Australia, New Zealand is working through its program to lift risk management and digitise the bank. That change is being accompanied by the BS11 work to operationally separate from Australia, and these items particularly impacted second-half expenses. Growth in New Zealand mortgages was strong and while we were slightly under market, we grew that book 10% this year. New Zealand deposit growth was also solid with plenty of market liquidity. Margins were a little higher over the year but down half on half and while lower rates contributed to decline, the New Zealand Central Bank is now increasing interest rates. On capital, we ended the year at 12.3%, well above APRA's unquestionably strong 10.5% threshold. Since the benchmark was announced in 2017, we've restructured our mortgage portfolio, reducing the proportion of investor and interest only, as well as applying a mortgage RWA floor, so we feel well-placed to respond to APRA's final capital rules expected later this year. On a pro forma basis, taking into account the buyback and announced asset sales, our set one ratio is 11.8%. We'll finalise the management buffers post APRA's announcements, but given the strength in the balance sheet, we decided to return up to $3.5 billion for a buyback. And the off-market structure works well for us as we can buy back shares at a discount, monetise some of our large franking credit surplus, and generate a reduction in the share count. And this supports future earnings per share and dividends per share, and that benefits all shareholders. The strength of the balance sheet from a credit and capital perspective enabled us to lift the dividend to 60 cents per share. The principle behind our approach remains the same, and we're targeting a medium-term sustainable payout ratio of around 60 to 75%. This is a little higher than we indicated at the half. In this half, we looked through notables, as many had no impact on capital, and on that basis, the payout ratio was 70%. We will neutralise the DRP by buying shares on market. Well, thanks, and I now hand to Michael to take you through the numbers.

Thanks, Peter, and good morning. When I look at the second half result, I'd make three points. First, Low interest rates and competition hit margins across lending. Trading income was weaker and costs were up as we focused investment on the things we need to do now and for future performance. Second, the balance sheet is strong. Capital generated from operations and investments has enabled us to increase the dividend and return capital to shareholders. And finally, we have a clear path to our cost target in 2024. Today we'll provide more colour on the numbers, achieving our cost target and considerations for 2022. Let's turn now to the detail. Notables had a $1.3 billion impact on cash earnings, up $1 billion on the first half. Remediation and litigation costs were $172 million as we increased provisions, mainly in advice and in New Zealand, and for litigation matters, including resolving outstanding investigations. Asset write-downs, including goodwill and capitalised software, were $965 million. As previously disclosed, we wrote down mainly intangible assets in WIB following the annual impairment test. This concluded that we could no longer support the carrying value of these assets, with exited businesses and lower interest rates impacting revenue. Asset sales and revaluations were a $182 million drag, as we progressed the sale of businesses. The charge was for additional separation costs and write-offs related to the sale of life insurance. This was partly offset by the gain on general insurance and earn-out payments from vendor finance. The sales of our specialist businesses underpin our simplification plans, reducing risk and complexity. But there's also an earnings impact. The bottom of this slide summarise the contributions of the businesses sold. We've previously flagged a $1 billion after-tax charge in 2022 for the estimated loss on completion on the sale of life. This will be treated as a notable item and be recognised in non-interest income. Notables will be less of a feature of our results going forward. This chart summarises second-half cash earnings with net interest income, non-interest income and expenses all contributing to the decline. Excluding notable items, net interest income was down a couple of percentage points, with higher lending offset by lower margins, the opposite of the first half. Non-interest income decreased, primarily from lower trading income. Expenses were up 9%, mainly from workforce increases, the lower utilisation of leave balances and higher investment spend on fixed. Asset quality has continued to improve. and we recognised a credit impairment benefit in the second half, albeit lower than the first, as we fully provided for the forum finance exposure. Tax was lower, with an effective tax rate of 36% above the Australian corporate tax rate, reflecting the non-deductibility of some notable items. Turning to lending. This was a pleasing aspect of the result and reflects the focus and priority we have brought to the mortgage business. Total lending increased, driven by growth in Australian mortgages, where the buoyant property market and the process improvements we have made ensure that we grew in each half this month. Investor lending continued to contract. This reflects our lower borrowing capacity as we have adopted a more conservative approach to credit assessment than some in the market. Australian institutional lending improved from increased demand in the structured finance and retail segments. Business lending stabilised, as our bankers focused on supporting customers in our core markets, offsetting elevated repayments from ample system liquidity. New Zealand continued to grow, with higher housing lending supported by continued growth in its property market. Personal lending declined, as customers paid down their unsecured credit and shifted to alternatives. Turning to look at the Australian mortgages in more detail. We're pleased to deliver a turnaround. In the second half, we grew just ahead of major bank system with growth in the owner-occupied segment. Our better performance has been due to a strong property market, digital origination, additional lenders, improved productivity and targeted pricing. Looking at the composition of the book, we saw a decline in interest-only and investor loans. Interest-only is now just 16% of the book, while investor is down to 34%. 52% of flows have been in fixed rate lending as customer preferences for this type of loan continue in the low rate environment. But the change in composition has impacted margins, so let's turn to that. The 11 basis point impact from lending spreads was mainly from intense mortgage competition along with the mixed shift to fixed rate lending. Competition also put pressure on business lending spreads while the reduction in personal lending balances dragged on margins too. Deposits contributed four basis points from lower TD rates and the continued shift to at-call deposits. The total benefit was smaller this half as a significant portion of at-call deposit rates had already reached their floor. Funding liquidity generally added to margins as wholesale funding costs were lower as we drew down our full allocation of the TFF. Lower earnings on hedge capital balances also reduced margins. Going forward, we expect the tractor to have a reduced impact as we moved hedge capital back to the three-year swap rate. Treasury's contribution fell two basis points, reflecting lower volatility in the half. The September exit margin is around 180 basis points, excluding Treasury and markets. Excluding notable items, non-interest income was down 6%, mostly from the fall in trading income. Fee income was up 1%, with higher institutional fees offset by a reduction in fees from correspondent banking. Wealth and insurance income was down 8%, mainly from the lower evaluation benefit of life insurance liabilities, and as customers migrated onto the lower margin panorama platform. This was only partly offset by higher general insurance income from fewer extreme weather claims, and better LMI income prior to these businesses being sold. Trading income was down, particularly in fixed income, due to difficult trading conditions for us. Other income also included revaluation gains on investments held by re-inventure. Turning to expenses, as we've called out, notable items continue to have a major impact, adding $1.6 billion to costs in the half. Excluding notables, costs were up 9%. we accelerated work on key fixed projects with higher workforce costs. We expect this workforce to fall away progressively as we embed our risk management uplift. Another significant contributor was the lower utilisation of leave balances as staff took less leave during the latest round of COVID lockdowns. Investment spending, excluding the fixed component, was in line with our normal uplift over the second half. Spend remains heavily weighted to fix. Our core program is improving risk management and our culture. We've also improved our financial crime capability and systems, invested to meet changing regulatory requirements and delivered a single Australian complaints handling system. The increase in costs was necessary to meet our obligations and set us up to deliver on our cost target. So let's turn to that. At our last results, we committed to a three-year cost plan with an absolute target of $8 billion by 2024. We remain committed to that target and expenses in 2022 are expected to be lower. As we move to delivery, we are now providing more clarity on our plans. The decrease in cost is expected to come from a reduction in notable items and across three broad areas. I've called out the $1.1 billion in expenses on the fixed priority that are one-off in nature. These are mostly related to temporary expansion of our workforce, to improve our risk and compliance environment and to respond to historical issues. These costs will phase out over the next two years. On portfolio simplification, specialist businesses account for around $800 million of costs. We've made progress on divestments and we expect to see the benefits of lower costs this year. the remaining businesses do account for the majority of costs, and as Peter has said, we're committed to exiting them. Once these divestments are completed, we will be left with $9.1 billion of costs in our core banking business in 2021 terms. We are continuing to simplify the business through streamlining and digitisation in line with customer preference. We've already made good progress in 2021. Our digital mortgage platform, has made our processes faster and better. All major brands are on the platform and brokers are beginning to access it. And 75% of customers are accepting contracts online. And our upgraded iOS mobile app has been rolled out, allowing customers to deal with us digitally for their banking needs. There's still more to do, but we're progressing digital first at pace, and I'm confident of the strong customer and cost outcomes this will achieve. Finally, on organisational simplification, we are reducing our property footprint as we exit some CBD buildings. The next phase of simplification is further embedding our line of business operating model, including streamlining our head office. At the first half, we provided the key metrics we're using to track the progress towards the 2024 target. We have updated these and you can see we are implementing our digital first approach. We've also added our total fixed one-off spend to this tracker as we see this as an important metric. The path to $8 billion is clear. Every executive and general manager has a three-year plan and an annual target and delivery is in their scorecards. As I've said at the half, we are committed to this target. Moving now to credit quality. Almost every credit quality metric has improved. On the left, You can see that stress has reduced with lower watch list and substandard as more corporates were upgraded. Employment is robust, asset prices have increased and savings are high, positive trends for credit quality. On the top right, you can see 30-day mortgage delinquencies ticked up given our treatment of the second round of COVID packages. We will re-age these loans at the end of their three-month deferral period. This should see most of them stay out of the 90-day bucket. There is more information on this in the pack. Unsecured lending delinquencies declined despite the contraction in the portfolio as the underlying performance improved. Our provisioning comprises both modelled outcomes and judgment. Total provisions were 140 basis points of credit risk-weighted assets and remain above pre-COVID levels despite the releases in the half. In aggregate, provisions were down 9% over the half although the level is still 27% higher than pre-COVID. The group has maintained the economic scenario weights, given remaining uncertainties, and applied judgment in the calculation of overlays. Our forecasts show that recent lockdowns will negatively impact GDP for calendar year 2021, but we expect a sharp rebound in 2022, albeit off a lower base. Unemployment is expected to be lower. and we expect the property price increases to moderate to high single digits. The overlay reduced over the half as customers who had taken out deferrals following 2020 COVID outbreaks recommenced payments. However, we retained the bulk of the overlays as there is still uncertainty how customers will recover from recent lockdowns and when the Australian economy completely opens up. Shifting to the composition of the impairment charge. and the only increases in new IAPs in the half reflecting the group's exposure to forum finance. 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 portfolios. Model collective provisions reduced further this half in line with improved credit quality and better economic outlook. Capital remains a strength, with the CET1 ratio at a healthy 12.3%. Cash earnings were the biggest contributor, followed by capital released from completed divestments. The payment of the interim dividend consumed 49 basis points of capital. Risk-weighted assets increased on the half and were broadly flat on the prior corresponding period. The 16 basis points decreased from risk-weighted assets in the waterfall, mostly related to the application of the mortgage risk-weight flaw of 25%. On the right of the chart, we show the impact of the share buyback and the benefit from asset sales announced but not yet completed. Proforma CET1 is expected to be 11.8%. Peter has already touched on the rationale for the off-market share buyback. The features of the buyback are on this slide. I refer you to the details in the buyback booklet and encourage you to read it. I'd make three points. First, This approach allows us to buy back shares efficiently and at a discount to the market price. It benefits all shareholders as reduced share count supports earnings per share, dividends per share and overall return metrics. And the buyback allows us to distribute further franking credits to shareholders. The group's franking balance remains healthy even after allowing for the buyback and payment of the fully franked final dividend. 2022 has a number of dynamics that we see playing out and we've set them out here for you. We expect to maintain momentum in the mortgage market and grow in line with system. While our focus on business lending is bearing fruit, it will be a longer fix. And we are encouraged by pockets of early growth. Margins remain under pressure with competition and low interest rates likely to continue. Front book, back book pressure continues and fixed rate lending in mortgages will likely further weigh on margins. The tractor is expected to have less of an impact compared to the last half as we've moved to a three-year hedge on capital as interest rates rose. Non-interest income will benefit from higher economic activity. However, divestments will drag. Markets income is difficult to predict given the impacts of QE and volatility. Costs, excluding notables, will be lower in 2022 and I've provided colour on this already. Credit metrics are in good shape, and the economic outlook is positive. And finally, we expect APRA's final capital rules, while the removal of the CLF will also impact capital. With that, let me hand back to Peter.