Westpac Banking Corporation

Well, good morning and welcome to Westpac's first half 2022 results presentation. Thanks for joining us. My name is Andrew Bowden and I'm head of Westpac's Investor Relations. I would like to begin by acknowledging the traditional owners and custodians of the land which we stand today, the Gadigal people of the Eora Nation and pay my respects to elders past and present. I extend that respect to all Aboriginal and Torres Strait Islander peoples with us today or online. Presenting this morning is Peter King, our CEO, and Michael Rowland, our CFO. And after their words, I'll invite some questions. With that, let me pass to Peter.

Well, thanks, Andrew, and good morning, everyone. Just over 18 months ago, we reset the strategy to turn the company around to make Westpac a simpler, stronger bank. In addition to changing our purpose, we made specific commitments under the three priorities of fix, simplify and perform. And we're working through these plans and we're realising the benefits. Under the fixed priority, we're one year into our three years of the core program and we're on track. We also closed seven significant regulatory matters and completed the further three major customer remediations. Under Simplify, we're getting back to banking in Australia and New Zealand. We've now sold six businesses, with two sales completed this half, and the process to sell super and platforms is well advanced. Adopting digital is the other critical part of Simplify. In this half, we completed the rollout of our new app, which is faster, more intuitive and has more features. On Perform, we had better growth in business and institutional lending, and we grew in owner-occupied mortgages. But unfortunately, investor lending declined, dragging on overall mortgage growth. We are working hard on costs, and the 10% reduction underpinned the stable ROE this half. Finally, our balance sheet's in great shape, allowing us to return $5.5 billion to shareholders through both the dividend and the buyback. And so in summary, we're delivering on fix and simplify, and this creates the capacity to increase our focus on perform. If we turn to the numbers, this half reported profit and cash earnings were up significantly. And the big driver was the large fall in notables from $1.3 billion to $6 million. If we strip out notables, core earnings rose 6%, and I was particularly pleased as the 10% lower costs more than covered the decline in revenue. And revenue was lower as we navigated low interest rates and the competitive market, but NIM pressure eased through the half. So in contrast, cash earnings was little changed as we absorbed a turnaround in impairments, and that included adding just under $500 million to economic overlays. Our return on equity was maintained, with average equity 1% lower following the buyback, and that reduced shares on issue by 4.6%. Turning to our businesses, and this slide has core earnings excluding notables, and this gives you a better picture of underlying performance. In consumer, core earnings were down 7%, mostly from lower net interest margins. We did increase lending, we grew fees and we reduced costs, although this was not enough to offset lower mortgage spreads. In business, core earnings were up 36%, driven by the 15% reduction in costs, and revenue was a little lower as competition reduced. We've had a solid half with changes made to the business now taking effect. We had good growth in loans while markets income also improved as more customers were active in the hedging markets. In New Zealand, revenue was unchanged and with costs down 2%, core earnings rose modestly. Following business sales and lower life insurance income, the contribution from specialist businesses was down, but not unexpected. And finally, the group businesses were up following a standout Treasury contribution. I already mentioned our progress in transforming our management of risk and culture through our core program. In this half, we largely completed the design phase, which is our first major milestone. We're also a long way through the implement activities and expect to complete most of this phase by the end of this calendar year. And this is the second major milestone. We'll then shift to the embed phase where we have to demonstrate the sustainability of the changes we're making. We'll also soon release Promontory's latest reports which point out the substantial work already completed and they reinforce the activity and commitment that's ahead of us. Importantly, they also confirm the program is on track. So let's turn to our segments and starting with consumer. This is our biggest business, reflecting its significant market share in mortgages. While we've been particularly challenged by low rates and competition, we are more positive on the future. We're making progress on improving service, and that's starting to be reflected in our franchise metrics. In this mass market business, digital is vital and we're building capability into our existing apps. As an example, our new deposit onboarding process where customers can join Westpac and open a functioning deposit account in a matter of minutes. And the number of accounts originated increased by one third over the half using this new capability. We have made progress in mortgage processing, including the expansion of digital applications. However, there is more to do as we complete the rollout of our new system to third-party brokers. And these changes and the new app are being reflected in higher MPS and MFI scores. We are heading in the right direction, and as new bankers come up to speed and we add digital functionality, we expect this trend to continue. We've made good early progress in turning around the business bank. And freeing up banker time has been the focus. And we achieved this through simplifying credit assessments and your reviews and from digitising the application process. On average, this has given bankers one extra day per week to spend with customers. And these changes are feeding into higher settlements and the portfolio growth you can see on this slide. As I look forward, we have a significant opportunity in business. Given our large customer base, it's a business we plan to grow. We've undergone significant change over the past 18 months. Having refocused the business and refreshed the leadership team, we're now well placed. Markets' income improved as volatility in rates and FX saw more hedging of risks. and this combined with the growth in lending contributed to a much improved result. We've also strengthened our sustainability position with a new carbon trading desk, and we're currently engaging with customers on transition pathways. The team was particularly active with 39 sustainability transactions, which was a rise of 50% over the half. We are bringing sustainability linked loans and deposits to a range of customers which is providing further options for growth. The improved performance has delivered better returns and overall I'm happy with the progress of the new WIB leadership team. Westpac New Zealand made sound progress with growth in lending and deposits, a flatter margin and lower costs. While the results were better, there is much more we need to do to improve customer metrics and retrieve more balanced growth across consumer and business. We have captured nearly one-third of sustainable transactions in New Zealand and continue to pick up share in Agri. But part of the challenge in New Zealand has been our significant fixed agenda, which has absorbed a lot of resource. We are working closely with the Reserve Bank of New Zealand on several issues and making progress. On dividends, the growth in earnings and the strength of the balance sheet enabled us to lift the dividend per share to 61 cents. Our approach remains the same with us targeting a medium term payout ratio between 60 and 75%. And this half we landed at 69% for the payout ratio. And we'll also be neutralising the DRP by buying shares on market. Let me now hand to Michael who will take you through the numbers in detail.

Thanks Peter and good morning everyone. Looking at the results, I'd make three points. First, core earnings, excluding notable items, were up 6%. Margins stabilised through the half and loans and deposits are growing. Treasury's performance was particularly pleasing. Second, progress on cost reset was a standout, with costs reducing 10%. Our work to simplify and be more efficient is well underway and this was the driver of the result. Third, our balance sheet and capital are well positioned for a changing outlook. Most of our credit metrics are back to pre-COVID levels and we've actively managed funding with much higher deposits and early access to markets. Our capital ratios remain strong after returning $5.5 billion to shareholders this half. Now turning to the detail. Let's begin with notable items. In aggregate, the impact of notables was small at $6 million with $1.3 billion lower than last half. Gains on the sale of businesses largely offset the intangible write-downs in our super business and a top-up of remediation provisions. The exit of non-core businesses added to capital, but reduces earnings. More details are included in our results documents. Cash earnings were up over the half, although stripping out notables, they were 1% lower. Core earnings were up 6%, with the reduction in expenses more than covering lower net and non-interest income. Excluding notable items, net interest income was down 2%, with competition for new lending compressing margins while loan growth was impacted by lower Australian investor lending. The fall in non-interest income was mostly from the exit of insurance and the revaluation of live policyholder liabilities. Expenses were down 10% from reduced headcount, less third-party spend and lower property costs. More of our staff also took a well-deserved break, reducing leave provisions. Impairment charges were four basis points of gross loans. Given uncertainty in the outlook, we added to economic overlays and that was the main reason for the turnaround in the credit impairment charge. Tax was lower, with an effective tax rate slightly above the statutory rate at 30.4%. Total lending was up just over 1%. The main feature this half was the growth in business and institutional. In mortgages, we had good growth in owner-occupier, partly offset by a contraction in investor lending. Business lending grew in the property and agri sectors, while WIB supported a lift in M&A activity and existing customer growth. Lending was higher in New Zealand, although FX movements saw a contraction in Australian dollar terms. The 2% rise in New Zealand lending was all in mortgages, and while growth was sound, it slowed through the half following implementation of new consumer law and as interest rates rose. Personal lending was stable as the economy opened up and credit card spend increased. Finally, specialist business did a good job of running down the consumer order book and sold the wholesale dealer book during the half. Looking at Australian mortgages in more detail, we had solid growth in owner-occupied, but investor continued to contract. There are a few factors driving the investor lending outcome. First, outflows have been elevated from our decision to run down lending to self-managed super funds and to foreign buyers. We also experienced higher runoff for certain interest-only lending. Second, we have been out of the market on investor lending policies. This is being addressed and is yet to be reflected in new flows. And finally, our processes need to improve. While we prioritised owner-occupied mortgages when rolling out our new platform, we must improve our service to businesses. We've expanded the number and focus of lenders and are simplifying these processes. We expect to have most of these issues resolved by the end of the year. That should translate to growth in 2023. On portfolio mix, fixed rate lending continued to be popular, but has now eased. Fixed was around 39% of the flow for the half, reducing to 24% in March. This mixed change has impacted margins, so let's turn to that. Over the half, margins fell 14 basis points. Most of the margin fall was in the first quarter, with liquidity half of the fall, while there was a small increase in the second quarter. Turning to the components, lending spreads were the big driver, down 15 basis points. Most of this was from the intense mortgage competition we flagged last year and from mixed changes. We grew fixed rate mortgage lending while higher margin investor lending contracted. Competition has been intense in business, which has also seen reduced spreads. There was a mixed impact as most growth was in lower spread products. Deposit pricing was a benefit as we repriced deposits in the second quarter. Funding provided a slight benefit to margins as average wholesale funding costs were lower. Earnings on hedge balances had a broadly neutral impact in this half. You can see in the tractor chart we expect this to shift to a benefit in the second half. Treasury's contribution rose four basis points. This was mostly due to a strong outcome in the first quarter as the team managed volatility and liquidity well. We have largely completed our liquidity build for the phase-out of the CLF and this drove the seven basis point drag from liquidity in the half. The March exit margin excluding Treasury and markets was 1.68%. As we think about drivers of our margin, we've provided our insights on this slide, given there are so many factors at play. First, we are in a rising rate environment with significant market rate increases already this year. We expect the cash rate to rise to 1.75% by year end and to 2.25% in 2023. The rising rates will benefit earnings on capital and non and low rate sensitive deposits. We've provided the tractor profile to show you the impact on capital and hedge deposits and the profile of our Australian deposit book. Looking at lending, the pressure from fixed rate home lending has slowed as we have repriced and seen a move of flow back to variable rate mortgages. There will be some impact of lower fixed rate margins in the second half. And we expect competition to shift to variable rate mortgages and remain competitive in New Zealand and business. We are largely finished with our liquidity build. All in all, while there are a number of factors that will impact margins going forward, on balance, we are positive on the trajectory in the second half. Turning to non-interest income. Excluding notable items, non-interest income was down 8%, mainly from the exit of our general and lenders mortgage insurance businesses. Excluding divestments, the fall was 1%. Fee income rose 4% as customer spending increased as we emerged from COVID lockdowns and as local and international borders opened. These gains were partly offset by simplification that reduced fees. wealth and insurance income was down 29% or $185 million, with 70% of that fall from exited businesses. Adjusting for this, wealth and insurance income fell 13% from revaluation losses on life insurance liabilities, margin compression as customers migrated to the Panorama platform, and from lower KiwiSaver fees. Turning to trading and other income, excluding the impact of revaluation gains, the total was up 2%. This increase was mostly due to markets' income growth, and this next slide looks at that in a bit more detail. We had a pleasing result in Treasury from outright interest rate risk and basis risk positioning in the first quarter. Customer flow increased across FX and fixed income. The team has also stepped up their customer focus and delivered better solutions on derivatives, which is building on the momentum we have seen in the half. However, recent volatility created headwinds, and while the result was up, we see further opportunity. Non-customer income remains below historical levels, and the team is working to drive growth in the second half. Overall, we are in a much stronger position in our markets business. Turning now to expenses. We are delivering on our cost reset with a 10% expense reduction, X notables this half. Looking across the chart, BAU fell $170 million, mostly reflecting the success of our simplification to date. We were able to deliver these cost savings while absorbing salary and CPI increases and the full period impact of superchanges. Headcount was down by more than 4,000 and we materially reduced our reliance on third parties. The improvement also included the benefit of higher utilisation of leave balances that built up over COVID. Investment spend was lower as we completed phases of major projects and the normal seasonality in our investment cycle. Fixed one-off costs reduced as we progressed through the design phase of core and completed some cornerstone projects that will improve our management of risk. Overall, investment spend remains weighted to fix and is expected to rise slightly in the second half as we continue to invest. We remain committed to our $8 billion cost target and expenses in 2022 are on track to be materially lower than 2021. it's important to recognise that our costs remain higher than peers and higher than where we need to be in order to be competitive. The structural changes necessary to achieve our target are underway and we got ahead of the 2022 outcomes in the half with more than two thirds of people exits completed. Each leader has committed plans and targets for what needs to be achieved. Therefore, over the second half, we expect to hold the gains made but are not expecting another step down. In total, costs excluding notables will be around 2% lower and 7% lower for the year. The drivers of that trajectory are on the right. We will benefit from productivity measures already taken, although we will invest more, particularly in completing fixed initiatives in New Zealand. While we recognise the impacts of higher inflation, along with the timing and nature of our final divestments, we remain committed to the $8 billion target for our core businesses. We've updated the metrics we're using to track our progress towards the 2024 target. On this slide, you can see we are implementing our digital first approach with a larger proportion of our mortgages shifting to digital processes. This momentum will accelerate in future halves. I'm also pleased with the work we are doing to shift decision-making closer to customers. This will allow us to further simplify decision-making, streamline our head office and reduce bureaucracy. Moving to credit quality. In the half, unemployment was at generational lows, savings continued to rise and economic growth remained robust. It's not a surprise that almost every credit metric improved. On the left, you can see that stress has reduced with lower watch list and substandard exposures as corporates were upgraded. Impaired assets were also lower with very low levels of new impaired assets and most of the forum finance exposure being written off. On the top right, 30-day mortgage delinquencies have continued to trend down as we've ceased COVID deferral packages and many customers return to health. 90-day delinquencies also continued their downward trend and are approaching pre-COVID levels. Unsecured lending delinquencies have also trended lower despite the contraction in the portfolio and so the underlying performance has continued to improve. In aggregate, provisions were down 6% over the half and while credit quality is back near pre-COVID levels, our provisioning is 20% higher than September 2019. The $325 million reduction in total provisions was mostly due to lower impaired Stage 3 provisions, mainly from the partial write-off of Forum Finance. Collective provisions in aggregate were little changed, although the mix shifted to a higher proportion of overlays. Applying our models, the improvement in credit quality metrics and better unemployment led to lower collective provisions. Given current uncertainties, we increased the weight applied to our downside economic scenario from 40% to 45%, with a corresponding reduction in the weight applied to the base case. Overlays were increased to reflect the impact of higher inflation, rising interest rates and supply chain disruptions. We also added an overlay for the floods in northern New South Wales and Queensland, based on the most recent customer data. In aggregate, we increased overlays by $489 million. This chart shows how our provision decisions played out on the impairment charge. New IAPs were lower, reflecting the better environment, few new impaired assets and no large new names. Write-backs and recoveries fell slightly from a reduction in New Zealand. Write-offs direct were down, consistent with the decline in unsecured lending and lower delinquencies in the consumer and auto portfolios. Model collective provisions decreased, offset by higher overlays. CT1 capital was at 11.33%. Allowing for announced divestments, that arises to 11.5%. There were large movements in the half, so let's look at that. we returned $5.5 billion to shareholders with our final dividend and our off-market buyback. There was a $23 billion or 70 basis point impact for increased risk-weighted assets. Non-credit risk-weighted assets accounted for $21 billion of the increase, with market risk rising almost $3 billion. The early adoption of the new operating risk standard added a further $2 billion. The remainder of the increase was from a $16 billion rise in interest rate risk in the banking book, risk-weighted assets. That increase was mostly due to the regulatory embedded loss on our hedged capital due to the sell-off in the yield curve. This increase should reduce as interest rates reach neutral levels over the next 12 to 24 months. It has been pleasing to see we've got clarity on APRA's revised Basel III standards, and while we await final approval of our models and delivery of our data requirements, we are expecting total risk-weighted assets to be largely unaffected. With the rules finalised, we've now updated our CT1 capital operating range. The top of the CT1 capital stack for regulatory purposes will be 10.25% from 1 January 2023. applying a management buffer and with guidance from APRA, we will operate in the range of 11% to 11.5% from the start of 2023. Looking forward, there are several dynamics that will impact the result in the second half. While the mortgage market remains competitive, we expect growth in mortgages based on the activity we are seeing. As mentioned, we have work to do on investor mortgages and we are focused on this. Business and institutional lending have performed well and we are looking forward to maintaining this momentum throughout the year. Competition in all our lending sectors means margins continue to remain under pressure, although the flow through of higher rates to the tractor and other tailwinds are positive for margins. Non-interest income will continue to benefit from higher economic activity. While markets income is difficult to predict, our business is much better placed than 12 months ago. The loss of income from divestments will continue to drag. We have flagged a $1 billion notable loss in the second half on the sale of our life insurance business. Cost excluding notables are expected to be around 2% lower on the first half. Credit metrics are in good shape and the economic outlook is positive. And finally, we are well placed to implement APRA's updated capital rules. With that, let me hand back to Peter.