Westpac Banking Corporation

Good morning, everyone, and welcome to Westpac's full year 2022 results. My name is Andrew Bowden. I'm the GM of Investor Relations. I'd like to acknowledge the traditional owners and custodians of this land, the Gadigal people, and pay my respects to elders past and present. First, I want to particularly thank those people in the room today. Thanks for making the effort. You will be given first go at the questions. And then I'll consider the people on the phone. Presenting today are our normal presenters, Peter King and Michael Rowland. And without any further ado, I'm going to pass straight to Peter.

Well, thanks, Andrew, and good morning, everyone, and a special welcome to those in the room. As you're aware, our strategic priorities involve fixing outstanding issues, simplifying our business, and improving financial performance. And since 2020, we've made significant progress while navigating a global pandemic and record low interest rates. In terms of fixing issues, the Customer Outcomes and Risk Excellence Program, or CORE, is on track. With design now complete, 2023 is a critical year to embed that change. We've now resolved 14 regulatory proceedings and class actions over the past two years. and we're well through customer remediation. Our business is much simpler, with nine of 11 transactions announced and the sale of BT progressing. Our geographic simplification sees us operating from three offshore locations down from eight two years ago. Now, financial performance was solid, although it was still held back by notables. And given the progress on fixed, we expect materially lower notables next year. Key value drivers have turned with improved loan growth, margins increasing, and the cost base reducing. And these trends were particularly evident in our second half. This is reflected in the better core earnings across all our banking divisions. We've also positioned the balance sheet for the environment with sound capital, an appropriate funding mix and good credit quality. And this sees us more focused on the future, particularly improving service for customers and focusing on responding to climate change. Turning to the numbers, for the year, reported profit was up 4% and cash earnings were 1% lower. And both of these results were impacted by notables. This year, notables were $1.3 billion, mostly reflecting the exit of Australian life insurance. Removing notables gives our preferred view of continuing financial performance. And on that basis, revenue was down 2%, costs were down 7%, and this saw core earnings up 3%. I was pleased with this as the higher contribution from our ongoing businesses more than offset the earnings loss from asset sales. Cash earnings excluding notables fell 6%, reflecting the $950 million turnaround in impairment charges. While margins were down over the year following strong competition and low interest rates, they improved in the second half and Michael will take you through that detail. Our return on equity was 9.3%, and while this is in line with our cost of capital, it's not where we want it to be. There are a few moving parts in the result, and so looking into the detail, it was a solid performance, and this was reflected in the 6% increase in dividends per share over the year. This slide sets out the impact of sole businesses. Having exited Seven, we are a much simpler organisation today. These sales released 48 basis points of capital, supporting the $3.5 billion buyback earlier in the year. This half we completed our exit from insurance, following the sale of life insurance in both Australia and New Zealand. You can see on the chart that the impact of businesses sold was a drag of over $400 million. but pleasingly earnings growth on our ongoing businesses of over $650 million more than offset that drag. Turning to FIX, we have made significant progress on resolving outstanding issues. The core program is critical to lift risk management capability, and we're well into the embed base of the program, which is changing how we manage risk. We expect most implementation activities to be completed by the end of this calendar year. And in 2023, this is focused on making the changes part of everyday business. Today, we released the latest two promontory reports and they confirm our progress whilst also acknowledging the work and commitment that is still ahead of us. Resolving historical, legal and regulatory matters has also been a focus. In the last year, we completed 14 major customer remediations and settled seven regulatory matters. In October, we also settled a further two class actions and we provided for those in this result. So overall, it's been another big year on the fixed agenda. Our second priority is simplification. We've completed seven business exits and reached agreement with Mercer for the super and asset management businesses. The BT Panorama platforms process is underway, but there's nothing to update on today. Geographic simplification sees Singapore now an Asian hub, and we're awaiting final regulatory approvals in China and Hong Kong before we can exit and repatriate the capital. And banking simplification has also been moving forward. The new Westpac app is a step up in both capability and speed, and this is helping customers to migrate to digital. This included digitising over 400 paper forms as well as contacting more customers through secure online messaging rather than via email. At the July strategy update, we outlined our plans for the physical network, including our co-location branches. We've recently extended the Australia Post partnership by a further 10 years. So in summary, with business and geographic exits well advanced, we're now much more focused on banking simplification. Turning to our businesses, all improved their position over the year, and this is reflected in earnings. The chart at the top is year-on-year performance, while the one at the bottom is half-on-half performance. What's evident is the stronger second half with all our customer divisions delivering. Momentum was off the back of loan growth, good NIM management and lower costs. GBU did have a softer half and that was from a lower treasury contribution following a very good first half. So let's turn to the businesses in detail. In consumer, the key themes are mortgages, digital and margins. In mortgages, we grew below major peers for the year, but as we improved the consistency of our process, we grew in line with majors in the second half. We've more to do with rolling out the app to third party brokers or the new system to third parties and scaling up the digital mortgage. And this will also help customers refinancing as well as those shifting off fixed rates. I'm really pleased with our progress in digital. We've completed the rollout of the Westpac app. We've also recently launched the new personal financial management tools in the app. And this solves the major functionality gap. This is delivering better outcomes for customers and also improving our efficiency. While core earnings were down over the year in consumer, momentum was stronger in the second half as line growth and higher deposit spreads lifted returns. Lending spreads do remain under pressure and there's been no let up in mortgage competition. But overall, consumer ended the year with a stronger franchise and momentum. Our business segment had a better year as we improved efficiency and removed bottlenecks. Core earnings dropped significantly in the last two halves from lower costs and high interest income. And this division has a deposit-to-loan ratio over 150%, and so its NIM is more leveraged to rising rates. And you can see that in the latest half. We have excellent business bankers. However, they've been distracted by resolving historical issues and complexity. But this is improving as we move through the fixed agenda, and we saw that with more settlements per banker this year. It's also been helped by simplifying credit assessments and digitising processes. And these changes translated to the better growth across existing customers, mostly in agri, property and professional services. So with a large customer base, we have a significant opportunity in business and it's a segment that we plan to grow. WIB has undergone significant changes over the past two years, focusing on deepening customer relationships to improve returns. And core earnings dropped strongly over both halves as we grew lending by 26% and reduced costs. And this is a relationship-driven performance with a lot of the growth from existing customers, in part because they drew down on existing limits rather than accessing corporate debt markets. Growth was in infrastructure, M&A, structured finance and property. And we've maintained our leadership in sustainable finance, participating in 69 transactions during the year. As we embed the changes, we expect growth in WIB to continue. In New Zealand, we've refreshed the management team, are dealing with significant regulatory commitments and are making steady progress. We simplified the business following the exit of life insurance. Lending grew through the year across both mortgages and business. And within business, there was also good mix across industry sectors. And while New Zealand is further through the interest rate cycle than Australia, the effects on margins are more lagged given more of the loans over there are fixed rates. Costs were higher as we increased... resources for regulatory programs, including the BS11 project, and to strengthen technology infrastructure. But the better growth improved margins and higher costs, and this led to core earnings growth in the last two halves. Like Australia, credit quality in New Zealand is excellent and impairment charges remain low. We have made good progress in reducing costs and it remains a top priority for the company. But given the challenges in the environment, we have adjusted our FY24 target from $8 billion to $8.6 billion. At the time we set the target, we assumed inflation around 2.5%, fully exiting our specialist businesses and completing our major risk and regulatory programs. Higher inflation is having a significant impact, along with the war for talent, which is also pushing up salaries. Last week, our employees endorsed our latest enterprise agreement with higher pay and a $1,000 one-off payment for cost of living. This is just one of the examples of pressure in the system. We are committed to simplifying our business portfolio, but business exits won't be completed by FY24, and so we have removed SBD costs from the target. At the same time, while our fixed programs are on track, we expect some costs to be required for longer, and this has been most evident in New Zealand, including for the BS11 project. We think 8.6 billion gets the balance right between productivity and the investments we need to make, And while we have updated the target for the environment, we still are seeking to deliver a step down in costs over the next two years. In July, we outlined our new climate plans to become a net zero bank. We reconfirmed our commitment to net zero in our operations and financing activities and set the first four sector targets. Today, we've announced our fifth 2030 target for large commercial property sector. We're also progressing additional targets for high emitting sectors. And by the end of 2023, that should capture around half of our financed emissions. Since the July update, we've continued to talk to our larger customers and we'll capture their feedback as we finalise our pathways. With our direct emissions, we reached a milestone with the equivalent of 50% of our electricity consumption now from renewables. And looking forward, we have agreements to take that to over 80% by 2024 and are working to get it to 100% by 2025. On dividends, the board determined a final dividend of 64 cents per share. And that sees the total dividend for 2022 at 125 cents per share, which is up 6% over the year. When determining the dividend, we consider the outlook, capital position, and look through the notables, and we feel the increase this half reflects performance and our confidence in the future. On an ex-notables basis, the full-year payout was 67%, and that's within our target range of 60% to 75%. Let me now hand over to Michael, who's going to take us through the second half result in more detail. Michael.

Thanks, Peter, and good morning, everyone. I'm pleased with our performance this half, and as I look at the results, I'd make three points. First, we've improved momentum across all our banking businesses. Combined with better margins and lower costs, core earnings rose 12%. Second, our balance sheet and capital are well positioned. Capital levels are near the top of our operating range and we've actively managed deposits and timed our wholesale funding well. Finally, credit quality has continued to positively surprise. And although we're expecting a rise in stress in the coming year, there are still no signs of deterioration. Turning to the detail. Our results reflect many different elements this year as we work through our fixed agenda, progress transformation and complete business exits. We've provided extra detail so you can see the impact of notable items and the sale of businesses. Notable items this half were dominated by the sale of the Australian life insurance business with a loss of $1.1 billion, which we disclosed when the deal was first announced. Other notable items in the half were a net cost of $166 million after tax, including additional remediation and litigation provisions, and the costs of restructuring our corporate and branch footprint. These were partly offset by tax refunds from prior asset sales. Exited non-core businesses were not significant to 2022 earnings, but did impact prior period movements and some line items, so we've highlighted this in the analysis. Cash earnings this half were down significantly, mainly from the impact of notable items. Core earnings were up 12% when these and the turnaround in credit impairments are removed. Most of the core earnings increase was from the 7% rise in net interest income with growth split between volume and margins. Excluding notable items, non-interest income was down 7%, with around 40% of that due to business exits. The rest of the decline was mostly from the valuation adjustment in trading income. Expenses were down 2%, delivering on our commitment for the half. Simplification and the completion of some fixed projects were the main contributors. Impairment charges were a low of five basis points of gross loans, up one basis point or $57 million. Tax was higher with the rise in earnings. Total lending increased 3% with growth in mortgages, business and institutional lending. Movements in the exchange rate took around $3 billion off growth. In Australian mortgages, the growth was in owner-occupied lending, and while our performance in investor improved to 29% of flows, the balance was a little lower over the half, mainly from a fall in mortgages for business purposes and for closed products. Australian business lending had a solid half, with good growth in property, agri and professional services, while our institutional growth was principally from existing customers. Lending was 3% higher in New Zealand, although FX movements saw a contraction in Australian dollar terms. New Zealand grew in both mortgages and business lending. Personal lending was down 9% as we continued to run down the consumer order book. Cards and other personal lending were relatively flat. With lending and credit outlook more challenging, I wanted to highlight that over the last five years, we've improved the quality of our portfolio. Mortgages have grown to be 71% of our book and the quality of the institutional book has improved. Higher risk-weighted portfolios have declined, including interest-only and closed mortgage products and other consumer lending. We've also exited two portfolios where we relied on third-party originators, including vendor and dealer finance. Lending outside Australia and New Zealand has more than halved over the period, in line with our strategy. And so we enter this next period with sound credit metrics and confidence in the quality of our book. We grew Australian mortgages 2% over the half, mostly due to a better net refinance outcome, while paydowns and property sales were also a little less. Part of the improvement has been because we reduced processing times to 6.3 days for first party and 8.1 days for third party originations. This helped us better manage volumes and higher inquiry levels as rates increased. These turnaround times are in market, but not yet where we need them to be. Over the coming half, we expect them to bring down the time a little further as we complete the rollout of our new mortgage platform to brokers and as we extend the functionality of our digital mortgage. Fixed lending declined to around 11% of flows, well down from its peak of around 50%. Margins were a good story this half, up five basis points and excluding Treasury and markets, up 10%. The increase was in deposits and hedged earnings, partly restoring spreads after years of record low interest rates. Lending spreads were down 14 basis points from intense mortgage competition and rate lags. We've only just begun to see the impact of the roll-off of fixed rates. This will pick up in the half ahead and peak in the second half of 2023. Funding impacts on margins were broadly neutral this half. We've timed our funding well, avoiding some of the more volatile periods when spreads were particularly high. We've also managed to lock in around $4 billion of pre-funding. The impact of liquid assets was more than expected as holdings were higher and funding costs were larger. We expect a smaller impact from liquids going forward. The September exit margin, excluding Treasury and markets, was 1.85%, up five basis points on the average of the second half. And this is a tailwind going into 2023. This next slide outlines the margin drivers in more detail and the industry considerations for the first half of 2023. The tailwinds brought on by rising rates will continue. With the 25 basis point rate rise last week and further increases expected, deposit spreads and hedged earnings should continue to improve. Over 2023, we have around 50% of our fixed rate mortgages rolling off, and given the intensity of competition, the benefit will likely be a little lower than we initially expected. While rising rates are a positive, there are still headwinds, particularly in the second half of next year. From last half, you can see that loan spreads contracted, and this is expected to continue into 2023. We've begun to see funds flow into term deposits as interest rates rise, and this will drag on margins in the period ahead. While wholesale funding costs are also expected to be higher, the impact from the roll-off of the TFF will be a second half issue. We have largely finished our liquids build, but expect some additional pressure, mainly from the higher cost of carry. All in all, while there are competing factors on margins going forward, we are positive on the trajectory into the first half, but expect that to moderate in the second. This half, notable items in sole businesses have had a big effect, so I've stripped these out to show the underlying picture, with non-interest income down by 4%. Fee income was 2% lower from a reduction in institutional fees and some non-notable remediation, offset by higher card spending. Wealth income was up, mostly from higher interest rates on cash management. Trading and other income was lower, including from a derivative valuation adjustment. The increased volatility over the half saw fewer customers inclined to hedge exposures, and so markets' customer income was down. On the other hand, higher volatility increased trading opportunities and this saw the non-customer income a little higher. Other income was lower, mostly from some one-offs in the prior half. We delivered on our cost reduction commitment by reducing expenses by 2% this half and by 7% for the year. The reduction was all in employee costs with a 5% reduction in average FTE. Ongoing expenses were higher with inflation, increased mortgage volumes and more persistent regulatory spend, particularly in New Zealand. Our cost reset plans took 7% off expenses as we cut third party spending, reduced our footprint and implemented the next round of changes under our line of business operating model. Under this change, we moved more of our functions to customer divisions and expanded our shared services units to get the benefits of scale. Investment spend was down a little over the half. We capitalised some major investments and we've had the full year benefit of the write-down of assets in 2021. Fixed spending was down as we moved into the implement phase of the core program and completed some major risk projects. Credit quality has continued to improve across almost every metric. Starting from the bottom of the bar chart, impaired assets declined as new impaired assets remained very low and we partially wrote off a couple of larger provision debts. The fall in 90 days past due aligns to the improvement in mortgage delinquencies, which continued to trend lower, even in the 30-day bucket. The small rise in the watch list was mostly due to the downgrade of one larger facility, but otherwise the trends in this bucket are also good. Unsecured delinquencies also trended lower despite the contraction in the portfolio, and so underlying quality is sound. Provisions remain 18% above pre-COVID levels and were little changed over the half, down just 50 million. All of the decline in total provisions was in individually assessed provisions. The mix of collective provisions shifted in the half with a lower proportion of overlays as we captured more risks in our models. After applying a greater weight to our downside economic scenario at the half, we continue to believe the current uncertainty warrants a 45% weight. Looking at the relationship between our provisions and the impairment charge, new IOPs continued to be remarkably low. No large new exposures greater than $50 million were downgraded to impaired. The largest impaired exposure was $30 million. Write-backs and recoveries were lower, in part because the stock of impaired assets is lower. Write-offs direct were slightly higher over the half but remained low, given the decline in the auto portfolios. The other movement in cap was $17 million as increased model provisions offset reductions in overlays. While we expect a slowdown in economic growth and an increase in stress, we are confident in the quality of our portfolio. At the same time, maintaining tight credit standards in mortgages and commercial property lending sets us up well for 2023. LVRs remain at comfortable levels and mortgage insurance coverage is stable. Notwithstanding more recent reductions, property prices remain high and provide a buffer. Reflecting the quality of the mortgage book, we had just 224 properties in possession at the end of September and actual losses for the half were just $2 million. On the business side, while business growth has been higher over the last 12 months, it had been relatively low for an extended period and we are well provisioned. There is not excessive gearing in the system that's concerning us. As with most downturns, while the aggregate picture looks fine, the effects of higher interest rates and lower growth will be uneven and we expect stress to rise. But regardless of how that emerges, we are well positioned to respond. CET1 capital ended the year at 11.3% and allowing for announced divestments, that rises to 11.4%, near the top of our operating range from January 1 this year. Other than the usual impacts of earnings and dividends, IRRBB risk-weighted assets were a 36 basis point drag that flowed through in the June quarter and is largely unchanged since then. Growth in credit risk-weighted assets from lending was largely offset by improved credit quality. The other category was higher from rises in capitalised software and expenses. Divestments reflects the completion of the Australian life insurance sale. Other capital considerations are outlined on this slide. It has been pleasing to have clarity on APRA's revised Basel III standards. We expect some reduction in RWAs, mostly in institutional and business, that will add to our CET1 capital ratio from 1 January next year. Looking forward, we expect heightened market volatility with higher inflation and interest rates. While mortgage market remains competitive, we expect growth to be broadly in line with major banks, with more work to do in the investor segment. Business and institutional lending will continue to perform well, with growth in line with system, albeit lower than 2022. I've already spoken on margins. We expect a rise in the first half, given our exit margin and the likely rise in interest rates. Non-interest income will be impacted by business exits and the anticipated slowdown in consumer spending and broader economic activity. Costs excluding notables are expected to be lower, at 0% to 2% down for the half, with continued delivery on our cost-out plans. We expect some rise in impairment charges, but given the lagged effects of interest rate rises, this will be more of a second-half 2023 story. Before handing back to Pete, I wanted to highlight that from next year, as part of our simplification, we are moving to focus our financial reporting on statutory profit after tax. We will continue to provide information on large and infrequent items and we'll come back next year on the details. With that, let me hand back to Peter.