Westpac Banking Corporation

Good morning everyone. Welcome to Westpac's 2023 full year results. My name is Justin McCarthy, GM of Investor Relations. Before we begin today, I'd like to acknowledge the Gadigal people of the Eora Nation as the traditional custodians of the country we are meeting on today. I'd recognise their continuing connection to the land and waters and thank them for caring for this land and its ecosystem since time immemorial. I pay my respects to Elders past and present and extend that respect to all First Nations people present today. 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. As a reminder, to ask a question, please press star 1 on your phone. With that, over to you, Peter.

Well, thanks, Justin, and good morning, everyone. Overall, I'm pleased with our progress and financial result this year. We've strengthened the franchise in consumer, business and institutional banking. We also completed portfolio simplification, exiting another three businesses this year. And the uplift in financial performance, in particular our return on equity, is reflected in higher returns to shareholders through dividend growth and the upcoming share buyback. This was also achieved while strengthening the balance sheet. And while we've made progress, there's more work to improve performance and the efficiency of this bank. With the foundations in place, we have even more capacity to focus on the future and this started with the separation of the consumer and business segments. We've also established a standalone function to focus on technology. Technology simplification is a significant undertaking It's part of our plan to improve service to customers, grow our business and deliver a cost to income ratio close to the peers. Before turning to the results, I'll say a few words about how customers are faring through a challenging period. The Australian economy has slowed with headwinds from high inflation and higher interest rates. Consumers are being squeezed by cost of living pressures, meaning many have no choice but to adjust their spending. While there has been an increase in hardship, the vast majority of consumers have displayed resilience. For business, the slowdown in growth and higher costs is affecting demand and profitability and we have seen a small rise in stress across business customers, although at this stage it's been isolated. Our results were up strongly with net profit 26% higher and EPS 28% higher. Return on equity rose two percentage points to 10.1% and this reflects solid growth in income which exceeded expense growth. Higher provisions for loan losses were a drag on impact growth this year. Notable items had a far smaller impact on this result and they were 80% lower at 173 million. Net profit excluding notables was up 12% and we see this as a better measure of the business performance. Revenue drove this result and was up 10% with 5% growth in loans and two basis point increase in managers' margins. Lending was up across all segments with growth in mortgages, business and institutional banking. and margins were supported by widening of deposit spreads and earnings on capital which more than offset the impact of mortgage competition. Expenses excluding notables were up 1% with inflationary pressures from wages, third party vendor costs and software amortisation largely mitigated by the benefits of our cost reset actions. Cost growth was higher in the second half and we've taken action to limit expense growth reducing FTE by 6% and we remain committed to addressing the cost base relative to our peers. The credit quality of our portfolio is closely monitored and we've seen some increase in stress. This was reflected in the impairment charge of nine basis points alone which was up from five. But stepping back from the detail, the portfolio is demonstrating resilience, with most customers being able to respond to economic pressures. We're pleased with our capital position at the end of the year. The adoption of Basel and higher profit saw the C21 ratio the strongest I've seen in my career. At 12.4%, we are one of the top banks globally. With $4 billion of capital above the target range and a resilient economy, we are returning capital through a $1.5 billion on-market buyback. On a pro forma basis, that's post the buyback, the common equity Tier 1 ratio remains 12% with this excess capital available to support growth and returns to shareholders. On dividends the board determined a final dividend of 72 cents per share and that sees the total dividends for the year at 142 cents per share which is up 14% year on year. When determining the dividend we considered this year's performance and the outlook and we felt this is the right balance for FY23. Turning to our business, it's been a big year as we've completed portfolio simplification exiting another three businesses. This takes the number of businesses exited to 10 which has released 58 basis points of capital. We are retaining BT Platforms and Pacific Banking and these businesses are now part of Business and Wealth under Anthony Miller's leadership. Completing portfolio simplification provides more capacity to grow and simplify our banking businesses. The recent employee reductions see us close to delivering the goal we set in 2020 of reducing head office staff by more than 20%. Branch network consolidation continued and the highlight being the ability for customers to now make cash transactions at any of our branches regardless of which brand they use. We also progressed branch co-locations, bringing multiple brands together under one roof. We're now up to 82 branches that are co-located. We're also investing in our digital capability for both consumer and business customers. This includes the Westpac app, which is now the number one banking app in Australia, FPOS Air, our digital mortgage and a range of digital deposit offers. Technology underpins the customer offer and the consolidation of infrastructure has resulted in significant improvement in system stability and resilience. More than 70% of our infrastructure is now evergreen and that means it's continuously current and available to build on. Importantly, it has created the foundation to accelerate our technology simplification which I'll come back to later. We've reduced the number of products we offer by 37% over the last three years, including a further reduction of 8% this year. And our strong balance sheet provides the capacity to grow and invest. We're also well provisioned, having increased impairment provisions by $300 million to $4.9 billion at the end of the year, and that's $1.5 billion above the base case scenario for expected credit losses. The group's liquidity and funding positions are very healthy as reflected in both the LCR and NSFR being well above regulatory minimums and we have managed the TFF roll-off well with a modest 12 billion TFF outstanding. I'm pleased with the improvement in the health of our franchise across consumer, business and institutional banking. If we start with consumer on slide seven, customers are increasingly adopting digital banking and we're working hard to improve our service and offers by making banking easier, expanding digital access and giving customers greater visibility of their finances. The Westpac app is used over five million times a day and Forrester rated the app number one and our NPS improved to number two. The app gives customers control of their everyday banking and new features include budgeting tools, carbon tracking and voice search functionality. Everyday banking is at the heart of our customer relationship and this year we've grown household deposits ahead of system and the number of my everyday banking customers is up 4%. We attribute this success to focusing on deposits which has driven sustainable growth and deeper customer relationships. Competition in home lending was fierce during the first half of the year with intensity easing in the second half. We worked hard to give customers every reason to stay with us while attracting new customers. In mortgages we improved our service by investing in systems and process and this year we rolled out the single mortgage origination platform with 95% of mortgages processed on the platform in the second half. Our time to write for first party loans was consistently five to six days and as we bedded down the new process for brokers, time to write improved from 10 days in March to seven days in September. Given competition in the first half, we were disciplined and seeded some market share. We did have a stronger second half growing at 1.2 times system. While we were more competitive on price, actions were taken to restore the front book profitability by reducing discounts. We're also later than some peers to remove or reduce cashbacks. And finally, we've done well on retention. Following the introduction of process improvements, retention on expiring fixed rate loans improved from 82% to 90%. In business, we're investing to support customers, Improving payment and deposit offerings are critical in this segment. Earlier in the year we launched FPOS Air which turns your mobile phone into a merchant terminal, helping businesses get paid easily while on the go. The simple online setup process for both iPhone and Android allows customers to be up and running in as little as 15 minutes. The new digital process now sees customers opening a business transaction account in less than 10 minutes, and this will continue to support our deposit franchise. We've also added capability in the payment space, and this includes the acquisition of HealthPoint, which provides real-time private healthcare claiming services. And through our partnership with MX51, we're also delivering innovative merchant payment solutions to compete in the market. Business lending has consistently grown for the past two years with the book Diversified Across Sectors. and the streamlining of the application process has resulted in customer saving two hours per deal. And this and other improvements have reduced our average time to decision by over 30% to less than 10 days. We believe this has contributed to improved momentum with the number of applications across small and medium-sized businesses up 37% in the second half. Turning to the institutional bank, our goal is to reclaim our position as the leading domestic bank. During a three-year period we've consistently simplified our product and service offerings, consolidated our geographic footprint and focused on building deeper relationships with existing customers. The financial results have steadily improved over that time with return on equity trending up and the cost of income gradually declining. Importantly, employees are engaged with WID's employee score rising to 79%, one of the highest in the group. We had solid lending growth of 9% across sectors including health, property and energy. Greater industry specialisation and freeing up banker time to spend with customers is driving improved results. Financial markets had a strong year with revenue up 27%, with the growth in sales and risk management income. Financial markets customers have benefited from greater external focus. This has been reflected in much improved results. We ranked first for government and semi-government bonds, with our market share rising from 9% to 15%, the highest in nine years. Investing in our cash management and transactional banking capability is also a priority. We're developing a new corporate cash management banking platform and this is a multi-year investment with the first major release now complete. Pleasingly, we've grown revenue across all three businesses, CIB, Financial Markets and GTS. Strengthening risk management and risk culture through our core program remains a top priority. We've completed 94% of activities under our core integrated plan and we expect to complete all activities by the end of the calendar year. Our efforts then turn to embedding the outcomes of the program, which will continue as we transition in calendar year 2024. The ultimate aim is to ensure our risk culture is proactive and sustainable. In New Zealand, the BS11 and Section 95 programs completed and we've continued to build our defences to combat the escalating threat of scams. During the year we launched a range of initiatives to detect, disrupt and halt scams. This includes alerting customers through payment prompts, blocks for some cryptocurrency payments and the use of biometrics. We're now stopping almost 70% of scams and we're working hard with peers, regulators and law enforcement to make it even harder for scammers. We recognise higher interest rates and inflation are impacting some households and businesses and our mortgage portfolio is demonstrating resilience with most customers being able to respond to economic pressures. For variable rate mortgages, rate rises have translated into higher repayments. However, average pay to head rates were stable and offset balances actually grew this half. We are supporting customers who are doing it tough and ended the year with just over 13,000 customers in hardship arrangements. This is still lower than the peak we supported during COVID, which is a positive indicator that customers are mostly adapting to the environment. Looking to the medium term, responding to climate change has been a major focus this year. Consistent with our targets, we've reduced our operational emissions by 52%. We'll also support customers' transition to net zero by 2050. We're progressing our NZBA commitments, setting seven new targets this year, and that sees 12 targets now in place. I'll hand to Michael now to run you through the details of the financial result. Thanks, Peter, and good morning.

The impact of inflation and interest rates on the economy, as well as market volatility and competition, continue to shape our operating environment. and it's come through clearly in our second half results. Reflecting on this, I'd make five observations. On revenue, we managed margins well and our portfolio grew. We limited the reduction in core margin to six basis points. Economic and geopolitical pressures are heightened and volatile. For us, this has resulted in lower non-interest income, particularly the derivative valuation adjustment in markets. Inflation continues to drive costs higher. We acted in the half to limit cost increases to 5%. Our cost reset program remains critical to delivering our cost to income ratio ambition. Our balance sheet remains strong with all metrics above minimums. It provides capacity to support customers through difficulties and for growth. It also gives us flexibility for capital management as shown by the $1.5 billion buyback we announced today. And finally, credit quality is holding up better than we expected. While we've seen some deterioration, we are well provisioned for this stage of the cycle. With this context, net profit in the second half was down 20% to $3.2 billion, and excluding notable items was down 7%. The cost-to-income ratio rose three percentage points to 49%, and our key return metric, return on tangible equity, was 11.2% above the cost of capital. Turning to slide 14. As notable items and businesses sold continued to impact the results, in particular the comparative period analysis, we've highlighted these impacts on the slide. Notable items in the second half reduced net profit by $351 million. These included customer remediation and litigation costs for prior year matters of $176 million. restructuring costs of $140 million as we continue to simplify the organisation and divest specialist businesses, and the P&L impact of a smaller corporate property and branch footprint. Notable items also included a $52 million benefit from hedging items, broadly offsetting the loss in the prior half. The combined impact compares to a $178 million benefit in the first half. As Peter outlined, notable items were far lower this year. Non-core businesses that we have exited were not significant to second half 2023 earnings but do impact prior period comparisons. Moving to the components of net profit. The 7% lower net profit reflects stable net interest income, lower non-interest income, higher expenses and the drag from business assault. Lower impairment charges provided some offset. Net interest income was up $10 million. Average interest earning assets increased 2% to $949 billion, comprising average loan growth of 1% and average liquid asset growth of 2%. This was broadly offset by the lower core net interest margin. Non-interest income declined $70 million, with the derivative valuation adjustment the largest driver as credit spreads expanded. Expenses were up $266 million. I'll cover this in detail in the expense commentary shortly. Combined, these components led to a 6% decline in pre-provision profit, excluding both notable items and business assault. Credit impairments added $132 million, reflecting the lower overlays in cap in the half. The effective tax rate was 30.1%, slightly above the statutory rate of 30%. Finally, the profit impact from business of sold was $91 million. Turning to lending. Total lending increased 3% with growth in all four segments of consumer, business, institutional and New Zealand. Australian mortgages grew at $13 billion and at 1.2 times system. Improved service levels and focused customer retention strategies were all contributors to above system growth. At $51 billion, we saw the largest proportion of fixed rate expiries in our book. We are particularly pleased that the proactive strategies saw retention rise to 90% for much of the half. Australian business lending grew 4%, reflecting pleasing growth in targeted sectors. Institutional lending grew by 9% as we continued to deepen relationships with our existing customers. Lending was 1% higher in New Zealand. New Zealand mortgages grew below system as we chose to balance margin and volume growth in a highly competitive environment. Personal lending declined 6% driven by the planned roll-off of the auto finance portfolio. Our deposits have grown 2% as momentum continued. Customer deposits now provide 71% of our funding and give us a strong base for growth. Consumer deposits increased by $14.8 billion as we grew our share of household deposits 1.2 times system and attracted new customers. The largest uplift was in behavioural savings accounts, which more than offset a decline in transaction account balances. We saw no additional switching into term deposits. There was a $3 billion increase in mortgage offset balances. Customers that had shifted from fixed rate loans brought with them other savings as they moved into the variable rate product. WIB deposits grew $2.5 billion, mostly in term deposits. Transaction and savings balances were stable. Business deposits were $2.9 billion lower in line with system. Some business customers drew down on cash buffers to meet higher interest and input costs while the market continues to remain competitive. New Zealand deposits were stable in New Zealand dollar terms, with reductions in transaction and savings accounts offset by growth in term deposits. Core net interest margin declined six basis points to 1.84%. Loan spreads, mainly in mortgages, subtracted 10 basis points from margin. Mortgage customer retention along with the averaging impact of competition in prior periods had the largest impact during the half. Business lending spreads were only marginally tighter. There were a number of moving parts in customer deposits which were a drag of only one basis point in the half. A decline in spreads was largely mitigated by higher returns on hedge deposits. Wholesale funding costs were slightly higher lowering margin by one basis point. We timed our funding well, avoiding some of the more volatile periods when spreads were particularly high, raising $15 billion of new long-term wholesale funding in the period. Reflecting the step up in the tractor rate, higher earnings on capital contributed six basis points. Treasury and markets added two basis points to the margin, with the contribution rising from eight basis points to 10 basis points. Notable items increased margin by two basis points with the hedge impact moving from a negative in the first half to no impact in the period. Moving to non-interest income. Notable items and businesses sold had the biggest impact on non-interest income in the half. Excluding these impacts, non-interest income was down 5%. Fee income was down slightly with lower cards income in consumer partly offset by higher lending fees in the institutional bank. Wealth was broadly flat, excluding the impact from businesses sold. Markets income was down slightly following good growth in the first half and was particularly impacted by the lower derivative valuation adjustment. Turning to expenses. The 5% increase in expenses in the half was mostly from inflationary pressures combined with increases in both software amortisation and investment. Ongoing costs were almost $500 million higher from salary and wage growth along with higher third party costs. The latter was widespread but particularly high across software maintenance and licence costs. Investment expenses were up $182 million including higher software amortisation which added $120 million in the period as a number of regulatory and business growth projects completed. These investments have contributed to better risk, customer and capital outcomes. We delivered just over $400 million in savings through cost reset. This included a 6% reduction in FT in the half as we continued to simplify the organisation. Moving to investments. We saw a shift in investment spend towards growth and productivity. Although our regulatory compliance agenda remained a priority and the majority of our spend, we expect that spend has peaked in both absolute and percentage terms. Total investment spend decreased by 3%. Our risk and regulatory spend was 9% lower while we increased growth and productivity investment by 8%. Major growth investments included the mortgage origination platform, digital capabilities and the corporate cash management platform. High capitalised balances and the slight extension in the use for life reflect higher spend on platforms and infrastructure which provide benefits over a longer period. As these larger projects complete, we expect our capitalised software balance to decrease over time. Turning to credit quality. Stressed exposures as a percentage of total committed exposures increased 16 basis points. This reflects the lift in mortgage arrears and some downgrades to watch list in business lending. Mortgage's 90 days arrears have increased 13 basis points while a 30 day bucket increased 15 basis points. As customers face higher rates and inflationary pressures we know that these are not being felt evenly. Most of our customers have been able to adjust to higher repayments and many have also maintained buffers above their scheduled payments. Some have found this more difficult, which is reflected in rising arrears. Unsecured lending has performed well as we improved our collections processes. The increase in stress across business customers reflected in higher watch list and substandard exposures was most pronounced in construction with a modest rise in property. Others related to a small number of exposures across a range of sectors. Turning to provisions. We're well provisioned for a more challenging economic environment. Our coverage remains appropriate for the risks we see in our portfolio and we continue to hold overlays for risks not captured in our models. This half collectively assessed provisions to credit risk weighted assets increased two basis points to 1.35% with slightly higher provisions and lower credit risk weighted assets. As you see from our result, the composition of provisions has shifted in the half. Overlays were lower. We removed the New Zealand weather overlay and partly released overlays across Australian and New Zealand mortgages and some business portfolios as these risks are now captured in modelled outcomes. Stage 2 cap increased due to higher model provisions including movements from both overlays and Stage 1. Higher stressed exposures and early cycle mortgage delinquencies also lifted Stage 2 provisions. We did not make any changes to our scenario weightings and continue to believe a 45% weight to the downside is the appropriate setting for what we know now. We will continue to assess this as economic conditions evolve. Moving to slide 24. As I said earlier, credit quality is holding up better than expected. Impairment charges of $258 million were seven basis points of average loans, down from 10 basis points in the prior period. This remains below the long-term average. The IOP charge comprised new IOPs of $121 million, another low charge, relating to a small number of exposures and a lower level of write-backs and recoveries compared to the first half, which included a recovery of a large exposure that had previously been written off. The other movement in cap was well down on the prior period at $19 million, as we assess that the overall level of provisions remain appropriate. Moving to capital. The CT1 capital ratio ended the half at 12.4%, well above the top end of our target operating range. Net profit added 71 basis points, while the payment of the first half 2023 dividend reduced capital by 54 basis points. RWAs added 5 basis points, with a reduction in credit risk-weighted assets adding 15 basis points from data refinements, offsetting 12 basis points from lending growth and the modest deterioration in credit quality. Other changes reduce capital by 12 basis points from an increase in capitalised software and a higher deduction for deferred tax assets. With this result, we also announced a $1.5 billion buyback to return excess capital to shareholders. This will reduce capital by 33 basis points, taking our pro forma CET1 capital ratio to 12.05%, still above the top end of our target operating range. We enter 2024 in a strong financial position to navigate what we expect will be ongoing economic and geopolitical challenges. On revenue, we expect system credit growth to be positive as we target growth in line with market. Margin headwinds are likely to continue, although the composition may vary. The drag from previous divestments will be less of a factor than in the current half. We will continue to be disciplined on costs and will rigorously pursue savings under our cost reset program, including from the lower headcount we delivered in the second half. However, investments that completed this year will drive higher amortisation costs. Inflationary pressures will persist and risk and regulatory spend, while lower, will remain elevated. Our balance sheet is strong and positions us well to support customers, growth and our technology simplification investment. And finally, maintaining capital at or above the top of the operating range provides flexibility for the board to consider further capital management options. With that, let me hand back to Peter.