Westpac Banking Corporation

Good morning everyone and welcome to Westpac's 2023 interim results. My name is Justin McCarthy, GM of Investor Relations. Before we begin today, I would like to acknowledge the traditional owners of the land in which we meet, the Gadigal people of the Eora Nation, and pay my respects to their elders, both past and present. The results will be presented by our CEO, Peter King, and CFO, Michael Rowland. At the end of the presentation, you'll have the opportunity to ask questions. And for those questions, we'll come back to them. Please press star 1. With that, over to you, Peter. Thank you.

Well, thanks, Justin, and welcome, I must say, and good morning to everyone. I'm really pleased with this result. It's the culmination of a lot of hard work over several years to simplify our business and rebuild momentum. We've strengthened the balance sheet, have been disciplined on margin growth and costs, and we've set up well to navigate a more difficult operating environment together with our customers. And before we get into the result, I'll share a couple of observations on the operating environment and how customers are faring. To date, the Australian and New Zealand economies have displayed resilience, particularly the strength of the labour market. However, the increased cost of living, along with widespread inflation, have led to the fastest increase in interest rates in decades. And we know this is tough for many households and businesses. For the bank, while hardship cases are currently below pre-COVID levels, we are preparing for an increase. Supporting customers is a top priority for the company. It is going to get harder for some, and we encourage customers to get in touch early, and our hardship teams are ready to help. Our loan portfolios are in good shape. With stress, little changed this half. However, we know the impact of rapid monetary policy tightening is yet to be fully felt. As an example, for variable mortgages, eight of 11 price changes have been translated into higher repayments. And for customers transitioning from fixed to variable rates, there is a longer lag with $95 billion of mortgages repricing over the next 12 months. We are navigating this environment from a position of strength. If I turn to the result, the uplift in performance, particularly our return on equity, is reflected in a significant increase in shareholder returns through dividend growth. Our balance sheet is the strongest I can remember, and strengthening the balance sheet was a deliberate decision given the economic outlook. Loan growth was disciplined and our funding composition improved with increased customer deposits. CT1 Capital is well above the top end of our target range, while credit provision coverage was also boosted. Our simplification agenda continued and we completed a further two divestments during the half. And we've worked hard to strengthen risk management. Most of our effort in the core program is now to embed the changes in our operating business to make them endure. While we're managing a range of short-term priorities, we're increasingly focused on the future. We're entering the next strategic phase with a refreshed purpose and priorities. And these are centred on the customer and improving our competitive position across key segments. On slide four, net profit was up 22%. And this reflects solid growth in operating income and a decline in expenses. The 24% growth in pre-provision profit was tempered by higher provisions for loan losses. And net profit after tax is now our main performance measure with cash earnings no longer reported. And Michael will cover this in a little bit more detail in his presentation. Revenue was up 8%. Lending was up across all segments with growth in owner-occupied mortgages, business bank and institutional banking. In addition, client activity drove higher markets income. Expenses were down 7% and excluding notables, expenses were down 3%. Credit quality is sound with our portfolios displaying resilience exemplified by a decline in new impaired assets in the period. Impairment charges were 10 basis points of loans, up from four, and an improved performance drove the significant increase in return on equity, which rose two percentage points to 11.3%. Moving to the shareholder returns on slide five, we've delivered a consistent improvement in returns since 2020, and that year marked a low point for Westpac and a testing time for shareholders. The recovery in profitability has driven the return on tangible equity to 12.8%, more than 3.5 percentage points higher than 2022, and well above the low point of 3.9%. Earnings per share growth of 26% was faster than the profit growth, as last year's buyback reduced the average share count by 3%. Dividends are significantly higher over recent years, reflecting the recovery in earnings. And the sustainable payout ratio has been updated to 65% to 75% of net profit after tax, adjusting for notables. We're navigating the operating environment from a position of strength. As I noted earlier, in all my years at Westpac, I can't recall a stronger balance sheet. Starting with capital, we have $3.6 billion above the top of the target range and our capital levels have materially increased since 2008, reflecting ours and APRA's conservative approach. The excess capital gives us options to support growth in targeted segments, cope with a potential harder landing or flexibility for future capital management. Liquidity also increased significantly over this period. Liquids, as a proportion of total assets, have risen from 8% in 2008 to the current level of 21%. Our total impairment provision was $4.9 billion, and that's $1.5 billion above the base case scenario for expected credit losses. On funding, our position is vastly superior to both that of 10 years ago and pre-GFC. Customer deposits have risen from 44% to 65% of total funding, while short-term wholesale funding reduced from 37% to 13%. And over the past three years, we've focused on banking in Australia and New Zealand, and that has simplified our portfolio. During this period, we've made further progress on simplification, including completing the exit of another two businesses, Advanced Asset Management and BT Super. In total, we've exited nine businesses. We continue to assess options for both the BT Platforms business and Pacific Banking And we're also accelerating the simplification of our banking services. Last year, I outlined our branch co-location strategy, and that's bringing multiple branches under one roof. With 96% of transactions occurring either over the phone or digitally, that is our primary channel, but face-to-face banking is important for some customers. Co-location is part of the striking, the right balance between physical and digital banking. And we're making great progress having recently opened our 50th co-located branch. We're also extending our virtual branch offer. And this is great for our regional or remote customers in particular. And we're piloting video anywhere, allowing customers to connect with bankers from the comfort of their home. Strengthening risk management and risk culture also remains a top priority and our core program, which you can see the progress at the bottom of this slide, is driving much of this change and since 2021 we've completed 87% of activities. The program is on track and we expect to complete activities by December, but our efforts to embed risk management will continue. We're entering our next strategic phase, one that is focused on both growth and increasing returns. We're turning the focus outwards, strengthening our market position for a more attractive customer proposition. We've refreshed our strategy and set a new purpose, which is creating better futures together. And our strategy is framed by four pillars. First is customer. Everything starts and ends here. And this pillar is about service, service that is consistently great. It's about support in the good and bad times and recognising customers who choose us as their bank. The next is easy, which is about making banking simple and digital for both customers and our bankers. And our expert pillar is how we differentiate. It's about sharing our expertise to help customers, whether that's through bankers, through thought, leadership and finance, or supporting customers to transition to net zero. Our fourth pillar is advocate for positive change. And as Australia's first bank and company, we've done this for centuries. We're focusing on three key areas, safety and security, financial inclusion and climate. And we'll measure our progress through improved returns and market position. Moving to costs, our focus on productivity and simplification in recent years does see Westpac a simpler and stronger bank. And we're targeting three areas to reduce cost. First is the portfolio simplification, where we've delivered nine of 11 business sales. The second is lifting risk management to reduce operational errors, and this half we had no notables. The third area is banking simplification through cost reset. The cost reset program has delivered over $1 billion of savings and reduced the cost-to-income gap to peers. Looking forward, the likelihood of persistent inflation and ongoing risk and regulatory demands are putting upward pressure on costs. Given this, we are focused on improving the cost to income ratio relative to our peers. We believe this strikes the right balance between cost discipline and investing in our franchise. And importantly, our cost reset program continues. Strong customer relationships are key to our franchise, and we're working hard to improve our service and offers by making banking easier, expanding digital access, and giving customers greater visibility and control of their finances. And digital is playing a major part in this story. It's the primary channel for connecting customers and bankers with our services. Today, more than 5.6 million customers are digitally active. Over the last year, digital transactions increased by 11% and mobile wallet payments by 50%. And our app is the main banking gateway for customers. With over 5 million daily sessions, it is the bank in your pocket. Since the launch in 2021, we've expanded features and capabilities, making banking both easier and safer. A few features we are proud of include the budgeting tools, which give customers greater visibility and control of their finances. Tracking income and expenses and carbon footprint are further examples. Westpac Verify is a new tool that alerts customers if there's a potential account name mismatch for payments to a new BSB and account number. And that builds on the safety features such as the dynamic CVC, which protects customers using credit cards and debit cards when they're shopping online. Now, most important customer offer is home lending, and we're working hard to restore our franchise. Our competitive position will strengthen with mortgage brokers now on the origination platform. mortgage lending has never been more competitive and while we have seeded market share, recent declines reflect a conscious decision to be disciplined and this is not the right time to take back share. We're focused on improving our service and investing in our systems and processes and this is freeing up bankers to spend more time with customers. Speed, simplicity and safety are driving our agenda and our single mortgage platform was fully operational in March with 92% of loans settled on the platform. While the rollout has taken longer than we hoped, we're pleased with its performance, particularly for the proprietary channel. Time to write is down to five days and we can complete a simple loan even faster. For third parties, as we bed down the platform and sharpen service, we expect time to write to improve. Now, digital mortgage is gaining traction with an unconditional offer in as little as 10 minutes for eligible customers. While it accounts for a small proportion of our origination, it is growing rapidly with approximately 80 million in settlements in April. We see significant potential to grow in business banking, leveraging our solid platform and deposit franchise. The segment performs strongly with pre-provision profits growth more than doubling on the back of rising deposit spreads. This was in turn reflected in higher margins and returns. Business banking is typically the segment that underperforms during economic downturns. and our seasoned portfolio, underpinned by long-term relationships, is performing, and there's currently little sign of stress. We have a strong deposit franchise, with a deposit-to-loan ratio above 150%. After a period of deposit growth, we saw a modest decline over the last year, an indication that business is starting to feel the impact of a slowing economy. Our loan book grew by 6% over the year and the book is well diversified across a range of sectors with capacity for further growth. Aligned to our financial inclusion advocacy, we've made a $500 million commitment for lending to women in business. Our drive to make banking easier and digital includes the launch of FPOS Air for small business customers and auto decision lending capability. And while loan growth is expected to be a little slower in the near term, we're optimistic about the medium-term prospects here. On institutional, we've made significant progress. Performance was strong with profit up 88% over the year as this drove return on equity at 14% up from 8%. Institutional banking presents a growth opportunity and we want to reclaim our position as a leading Australian institutional bank. We're focusing on deepening relationships with existing customers, building expertise and expanding digital capabilities. Our growth will be driven by supporting customers across relationship banking markets and transactional banking. And markets income increased over the half. We led the market on fixed income relationship strength. We also play a significant role in mobilising capital. In this half, we supported 23 sustainable finance deals with nearly a total value of $20 billion. In summary, we're very pleased with the performance of our institutional bank. And let me hand over to Michael to take you through the results in more detail.

Thanks, Peter, and good morning, everyone. I'm pleased with our performance this half, and as I look at the results, I'd highlight three points. First, the growth in net profit. we have taken a considered and disciplined approach to both revenue and costs in a highly competitive and inflationary environment. All segments grew pre-provisioned profit in the half. Second, the strength of our balance sheet. It provides capacity to support customers and growth and flexibility for future capital management. Finally, credit quality is sound. We believe we are well provisioned for this stage of the cycle. I'll start with the reporting changes on slide 16 before covering the result in more detail. Net profit is the primary measure of financial performance following the decision to no longer report cash earnings. The change forms part of our simplification agenda as we align our ASX and US results announcements and at year end we will consolidate the results announcements with the annual report. We will continue to report notable items which are not considered to reflect the group's ordinary operations. This disclosure will assist in the analysis of our results and comparison to peers. Notable items fall into three categories. First, movements in economic hedges. These were previously removed in the calculation of cash earnings. Second, net ineffectiveness on qualifying hedges, which were also removed. And third, material items that are not part of the group's ordinary operations. They will vary and may include items such as gains and losses on the sale of businesses, remediation charges and restructuring costs. In the first half of 2023, notable items provided a benefit of $178 million, comprising the gain on sale of advanced asset management of $256 million, a benefit of $43 million from hedge ineffectiveness, and a loss of $121 million from economic hedges. This compares to a loss of more than $1 billion in the second half of 2022 and a $179 million benefit in first half 2022. We've also shown the net interest margin on a core margin basis to remove the impact of notable items and treasury in markets and to make peer comparison simpler. Turning to the detail on slide 17. Net profit was $4 billion, reflecting strong revenue growth, contained expenses and a modest increase in credit impairments. Pre-provision profit growth was underpinned by the 7% rise in net interest income. The group's average interest earning assets increased by 4% to $934 billion. Growth in average loans of 2% was driven by a combination of mortgages and business lending. Average liquid assets were up 3% as we took the decision to be highly liquid in response to global market events and for the reduction of the committed liquidity facility. Non-interest income was up 5% to $1.7 billion. Stronger markets income more than offset a contraction in wealth management and insurance while fee income was flat. Despite the significant impact of inflation on employee and supplier costs, expenses were down 1%, delivering on our commitment for the half. Benefits from our simpler organisation and lower third-party spend were the main contributors. Impairment charges rose modestly to $390 million, driven by the modelled impacts of weakening economic forecasts, some early signs of deterioration in credit quality and a weather overlay in New Zealand. The effective tax rate in the half was 28.8%, with the tax benefit on the sale of advanced asset management reducing the tax rate below the statutory rate of 30%. The core net interest margin excluding the impact of increased liquid assets rose 12 basis points. Loan spreads, mainly in mortgages, subtracted 11 basis points from margin. we again saw intense mortgage competition for new customers and for the retention of existing customers. Business lending spreads were only marginally tighter with less intense competition. Customer deposits provided 20 basis points of benefit with wider spreads across all customer segments in Australia and New Zealand, along with higher earnings on hedge deposits. There was a mixed shift away from transaction accounts to lower spread online savings accounts and term deposits as customers responded to the higher rates on offer. Reflecting the step up in the tractor rate, higher earnings on capital contributed four basis points. Wholesale funding costs were slightly higher with a one basis point drag on margin. We timed our funding well, avoiding some of the more volatile periods when spreads were particularly high, raising $20 billion of new long-term wholesale funding in the period. The cost of holding liquid assets reduced margin by two basis points. Treasury and markets also reduced margin by two basis points, largely due to the contraction in short-term Australian dollar basis spreads. Notable items reduced margin by eight basis points, with the hedge impact moving from a positive in the second half of 2022 to a small negative in the period. While I'll come back to the margin outlook, it's worth highlighting that the exit core margin for March was 1.88%, two basis points lower than the average of the first half and flat on the second quarter. Total lending increased 1%, with growth in Australian mortgages and business and in New Zealand. Australian mortgages grew at 0.5 times system as we responded in a measured way to the intense level of competition. All growth was from owner-occupied variable rate mortgages, with a modest contraction in investor mortgages, which included the runoff of closed products. Australian business lending grew 1%, reflecting growth in targeted sectors more than offsetting declines in other parts of the portfolio. Institutional lending contracted slightly following strong balance sheet growth in the second half of 2022. Lending was 1% higher in New Zealand, although the appreciation of the New Zealand dollar saw a larger rise in Australian dollar terms. All the growth came from mortgages with above system growth. Personal lending was flat, with both cards and other unsecured lending portfolios steady. The closed auto loan book within specialist businesses continued to run off as expected. Notable items had a sizeable effect on non-interest income this half. Stripping these out, non-interest income was up 5%. Fee income was flat, with the impacts of lower interchange fees in New Zealand and lower facility fees in WIB offset by lower remediation payments in consumer. Wealth income was down, money from businesses sold. markets and other income was up substantially, primarily from fixed income, which benefited from higher customer flows and the tightening of credit spreads. There's also a significant contribution from the derivative valuation adjustment that moved from a charge of $17 million in the prior period to a $57 million contribution reflecting tighter counterparty credit spreads. Turning to expenses. The group demonstrated cost discipline over the period with expenses down 1%. Costs were up from higher inflation, salary and wage growth and higher third party costs. FTE was up in the half to manage customer service levels and regulatory demand, particularly in New Zealand. Pleasingly, most of these increases were offset by a 4% reduction in costs from our simpler organisation and reduced reliance on third parties. Investment spend was lower for projects that completed in the half. Investment decreased 8% over the prior period, with lower regulatory compliance spend more than offsetting the 13% higher investment in growth and productivity. The continued investment in our mortgage origination platform allowed the rollout to all third-party brokers so that now all channels originate mortgages in the same way. This provides a solid foundation to drive sales productivity and efficiency. Our investment in digital is enabling our strategy to become a digital-first bank and expand the ways customers can access our banking services. Continued development of the corporate cash management platform supports WIB's leadership aspiration in Australia. The business process simplification is making it easier for our customers to do business with us and for work to be more rewarding for our employees. While delivery of our regulatory compliance agenda remains a priority, and with 62% of investment spend, our progress has meant this spend has decreased. High capitalised balances and the extension in the overall use for life reflect higher spend on platforms and infrastructure, which will provide benefits over a longer period, and the fact that some of the larger investments are yet to complete. Impairment charges of $390 million were 10 basis points of average loans, up from a low of 5 basis points in the prior period. the $138 million IAP benefit comprised new IAPs of just $76 million, another low charge with no new IAP greater than $10 million. And write-backs and recoveries of $214 million included the recovery of a large exposure that had previously been written off along with write-backs from a combination of upgrades and external refinancings. The IOP benefit was more than offset by the cap charge of $528 million, which included write-offs direct totaling $218 million, a similar level to the prior period, and other cap movement of $310 million with weakening economic forecasts and only a slight deterioration in credit quality. Total provisions increased 6% to $4.9 billion, which is $1.5 billion above our base case scenario. We are well provisioned for a more challenging economic environment. Coverage also increased. Collectively assessed provisions to credit risk-weighted assets increased 17 basis points to 1.33%. This reflects both higher provisions and lower credit risk-weighted assets following the implementation of APRA's revised capital framework. Most of the increase in provisioning was due to higher modelled collectively assessed provisions. Our individually assessed provisions were lower, mostly due to lower new impaired assets. We do not make any changes to our scenario weightings and continue to believe the environment warrants a 45% weight to the downside. Credit quality remains sound. Stressed exposures as a percentage of total committed exposures increased three basis points, driven entirely by regulatory changes related to APS 220. Excluding this change, the ratio was one basis point lower, reflecting the lower level of impaired assets. Mortgages 90 days past due were two basis points lower, while there was an 18 basis point increase in the 30-day bucket. To date, the roll rate to 90 days is below historical levels. Unsecured 90 days past due were also two basis points lower, despite the continued runoff of the auto finance portfolio. The slight rise in early cycle delinquencies in both mortgages and unsecured reflects the impact of higher interest rates and inflationary pressures on household budgets. The CET1 capital ratio ended the half at 12.3% above the top end of our operating range. Net profit, excluding notable items, added 82 basis points with the payment of the final 2022 dividend, net of the DRP, reducing capital by 45 basis points. The adoption of APRA's revised capital framework added 62 basis points. The revisions reduced credit risk-weighted assets by $23.7 billion, with the main contributors being the reduction in non-standard mortgages, the shift to APRA-approved modelling for property finance, and reduced off-balance sheet exposures. Other risk-weighted asset changes added seven basis points to capital. a reduction in interest rate risk in the banking book risk-weighted assets from lower regulatory embedded losses, along with lower counterparty credit risk and improved credit quality across corporate exposures, more than offset lending growth and higher market risk-weighted assets. Capital deductions and other items reduce capital by 15 basis points, driven by an increase in capitalized software, a higher deduction for deferred tax assets, and FX translation impacts. Divestments reflects the completion of the advanced asset management sale. The Board declared an interim dividend of 70 cents per share, growth of 15% on the prior corresponding period. This reflects our improved financial performance and strong balance sheet position. The payout ratio excluding notable items was 64%. That compares to the sustainable payout ratio assessed on a full year basis of 65% to 75%. turning to industry margin considerations. Competition in mortgages is likely to have the largest impact on bank margins in the second half. For Westpac, higher interest and swap rates will continue to benefit non-rate-sensitive deposits and earnings on capital. We have been disciplined on lending growth to manage the margin. However, as demonstrated by the lower exit rate, lower mortgage spreads will be a headwind to our margin in the second half. Wholesale funding costs are expected to be marginally higher, driven by wider average spreads and repayment of the term funding facility from June 2023. Liquid asset balances are expected to stabilise as the final reduction of the CLF occurred on 1 January 2023. As I said earlier, I'm pleased with the first half performance. We have delivered good profit growth while significantly strengthening our balance sheet. Looking at the second half, we expect lending growth across all segments with revenue headwinds coming from lower margins and business sold. We start the second half with sound credit quality and are well provisioned. We will continue to be disciplined on costs as we further advance our cost reset program while at the same time investing to meet persistent regulatory requirements as well as for growth and productivity. Our balance sheet is strong, which positions us to manage the more challenging environment to grow and support customers. We will continue to position the balance sheet conservatively and plan to maintain capital above the operating range. The board will consider capital management as usual at year end. With that, let me hand back to Peter.