Westpac Banking Corporation

Good morning, everyone. Welcome to Westpac's 2024 interim results. My name is Justin McCarthy, General Manager of Investor Relations. Before we begin today, I acknowledge the Gadigal people of the Eora Nation as the traditional custodians of the country we are meeting on today. 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 an opportunity to ask questions. To ask questions, please press star one. With that, over to you, Peter.

Well, thank you, Justin, and good morning, everyone. I summarise this as a good result as we've navigated below-trend economic growth in a competitive banking sector. We've been disciplined, balancing growth and margins well, and over the year we've grown in all key segments with mortgages up 5%, while business loans and consumer deposits both grew 9%. Growth has been off the back of customer service improving. In consumer, the service focus sees the Westpac app rated number one, mortgage approval times being cut in half and MPS up. In business, time to decision for loans is down 19% and we improved our merchant offerings through the launch of new terminal and digital capabilities. While in WIB, we have improved our rankings in key financial market surveys. From a balance sheet perspective, we're in great shape. In particular, the strong capital position allows us to return $1.5 billion in surplus capital via a special dividend and a further share buyback. In risk management, it was a big half as we completed the critical milestone in the core program, being the completion of the integrated plan. While the work on risk management is ongoing, the simplification of the business portfolio and core uplift sees us in a significantly improved position compared to three years ago. It is exciting that we're now focused on growing in a disciplined way while simplifying our technology stack to making banking easier and lower cost. Turning to financial performance, our result was solid with profit up 5% this half, Return on tangible equity, one of our key financial metrics, rose by 44 basis points to 10.5%. Excluding notables, this half profit was down 1%. Pre-provision profit was flat. And the key to this result was disciplined management of growth and margins. In particular, core margin was 1.8%. which is unchanged from the September 2023 exit margin. Mortgage competition was less intense than it's been, and this was a key reason for how we held margins through the half. Revenue rose 1% as lending was up in all key segments with growth in housing, business and institutional. Expenses were up 3%. and technology costs had been a headwind, reflecting additional software amortisation from prior investments, along with higher vendor costs. We are working hard on productivity, delivering a 5% reduction in average FTE this half. On impairment charges, they rose off a low base to nine basis points of loans. The impact of higher interest rates and inflation is evident in the credit quality metrics. However, we are well provisioned and hold $1.4 billion above the base case. Last half, I noted our capital position is the strongest I've ever seen. This half, it's even stronger with a common equity tier one ratio of 12.5%. Combined with our solid financial performance and resilient economy, it has supported further capital management. As at today, we've completed 59% of the $1.5 billion buyback we announced in November, and today we've increased the buyback by a further $1 billion to a total of $2.5 billion. In addition, recognising the franking credits that we have, shareholders will also receive a special dividend of $0.15 per share which returns approximately $500 million to shareholders. Our interim dividend of $0.75 is up 4% on the last half and the payout ratio of 74% is at the upper end of our medium term range of 65% to 75%. On a pro forma basis, that's post the buyback and the special dividend, the common equity tier one ratio remains above 12%. And we believe this level is sufficient to support both growth and investment. And that brings me to strategy. The group ended this year with renewed focus on our strategy for growth and return. We measure this through market position and return on tangible equity. The improvements in everyday banking offers through the app and digitisation have supported a buff system household deposit growth. And this has delivered a one percentage point increase in deposit market share to 21% over the past 12 months. Improvement in mortgage service has stabilised mortgage market share, which is also at 21%. And our mortgage NPS is now equal first of the majors. In WIB, we're focused on deepening client relationships and improving service. As I mentioned earlier, the progress made is evident in our improved rankings across key financial markets industry surveys, particularly fixed income. We are making good progress with the next step, the Unite program, which is critical to simplifying the business for bankers and customers. And driving a sharper customer focus is a key priority for me. This has involved asking all our people to make sure that everything starts with the customer, every decision, every action, no matter the role. To drive the uplift, we've made two important changes. Every employee has an external MPS goal and we've relaunched a customer service promise with three simple steps, care, listen and act. While there's always more to do, our focus on better customer experience is delivering results. Time to decision for both mortgage and business loans has improved. Enhancing safety features to keep customers safe from scammers has been a big priority. In an Australian first, Westpac Safer Pay alerts customers to likely scams where we detect high scam risk. If customer response suggests the payment is highly likely to be a scam, we stop the payment. Safer Pay is powered by AI and integrated into our fraud detection systems. Over the last six months, we've prevented over $120 million from being lost to scammers. More broadly, we continue to support the Australian economy through a period of below-trend activity. While households have displayed resilience, we know some customers are doing it tough. We now have 18,000 assistance packages in place, and this is up from pre-COVID levels of 11,000. We're also supporting business customers as they transition to net zero. Our team completed 33 sustainable finance transactions this half. We're also progressing our NZBA commitments. Twelve targets are in place and we're working through our last sector target for aluminium. Moving to our consumer division, we've managed through a very competitive banking environment which has had a large impact on the margin in consumer activity. The trends in financial performance are stabilising, with revenue down 2% and expenses up 1% in the first half. Margin contraction slowed significantly when compared to the second half of 2023, and this has seen the return on tangible equity at 9% this half. From a service perspective, consumer MPS has increased for seven consecutive months. We've made significant improvements to our physical, digital and virtual banking offers so customers can bank with us 24-7. The key driver of the improvement is the digital channel. We continue to upgrade services, improve navigation and enhance budgeting tools. We're also consolidating our branch network and now have 100 co-located branches. We have plans to increase co-locations by about a third over the next three years. Everyday banking is at the heart of customer relationships and this half we grew household deposits above system. The value of our deposit products was recognised in the 2024 CanStar Awards, where we won awards for outstanding value transaction accounts and outstanding value junior and youth banking. In mortgages, the market is competitive. However, it has eased this half, helping us to temper the decline in mortgage profitability. Looking closer at mortgages, this chart shows our progress over the past three years. The chart plots the customer roommate for new owner-occupied loans and growth relative to system. Following further improvement in service, we've sustainably grown around system for the past 18 months, while pricing slightly above peers recently. We've also included what we consider our key service metrics, time to decision and the percentage of loans processed through the mortgage platform. and the combination of these pricing decisions and our service offering ultimately led to the system outcomes you can see on the chart. We are targeting growth around system, subject to competitive intensity, and we're also removing cashbacks by the 30th of June this year. In business, we're investing to improve service, payments capabilities and redirecting staff to customer-facing roles. The financials reflect a disciplined performance. For the half, revenue was up 1%. Costs were flat with return on tangible equity of 20%. Business lending rose 3% this half and 7% over the year. And by sector, growth was broad-based with segment growth skewed to commercial. The simplification and digitisation of the lending platform and processes over the next few years will improve our lending offer further. In line with rising rates, there has been a mixed shift in deposits away from that call to term deposits, with term deposits now comprising over a third of total business deposits. Softer economic and trading conditions have also contributed to lower working capital balances, which are evident in the transaction balances. Payment innovation remains a focus in business. FPOS Air, which turns your phone into a merchant terminal, has been rolled out to larger customers, and the acquisition of HealthPoint this half adds to our health sector offer through providing real-time private health care claiming. We also launched F Plus Flex, a cost-effective merchant terminal that integrates to over 500 point of sale systems, including self-service kiosks and checkouts. Turning to WIB, an unrelenting client focus is the key to reclaiming our position as the leading domestic bank. Revenue was up across all three businesses, CIB, FM and GTS. WIB's return on tangible equity was 14%. Growth in average interest earning assets of 12% reflects higher lending and higher trading assets that facilitate client activity. In CIB, lending was up 10% over the year, mostly to existing customers. We saw growth across the property, non-bank financials, energy and infrastructure sectors. We are a market leader in renewables, supporting customers across 33 sustainable finance transactions. And in transaction banking, Pay2 is the latest project to be delivered. It offers a smarter alternative to direct debit by allowing customers to set up a digital payment agreement which they can manage and view in the Westpac app. Pay2 is now available to corporate institutional customers with rollout to smaller businesses expected later this year. We're also applying a client-led approach to grow in financial markets. This half debt and capital markets volumes were strong for us. The improvement is being recognised with the team receiving nine Kanga News Awards, including the number one bond house in Australia for the first time in more than a decade. Today, Westpac is a simpler, stronger bank after three years of hard work to simplify our business portfolio and deliver the core program. Our independent review of Promontory has deemed the core integrated plan complete. This is reflected in their final report, which we also released today. The report describes our progress as a major achievement, noting the significant improvements made through the program. The changes have improved the way we think about and manage risk. They've strengthened risk capability, processes, frameworks and governance practices across the group. This is helping us to identify and respond to risks faster and more effectively. We're currently in the transition phase under which we're demonstrating the sustainability and effectiveness of the changes we have made. Risk management foundations are now in much better shape and remain an ongoing focus. The next phase of our simplification is technology. Our Unite program is a business-led, technology-enabled simplification and it's underway. It has three objectives. A better experience for customers, particularly the speed of service. Making systems easier for bankers. And faster service means less jumping between systems and more time with customers. And finally, increased shareholder return. Unite will reduce our complexity, meaning lower run and change costs. And we're not starting from scratch. It's about accelerating the level and pace of simplification for a program of coordinated initiatives. In 2024, we're focused on planning, ramping up resourcing and commencing the first phase of projects. To bring this to life, we're underway in consolidating the number of identity verification systems from 22 to one. We're also moving to a single customer file, migrating all customer records into one common API accessible platform. Ultimately, this will see us move from three customer masters to one. And finally, the consolidation of our collections platforms has begun. We expect the program to help narrow our cost to income ratio gap compared to peers. Let me now hand to Michael to take you through the performance in more detail. Michael.

Thanks Peter and good morning everyone. As is evidenced by our first half results, the economy remains resilient, unemployment is low and mortgage pressures are showing signs of easing. However, The impact of inflation, higher taxes and interest rates, as well as competition for lending and deposits, continue to influence our operating environment. Reflecting on this, I'd make four observations on our first half result. One, our capital position is strong. It supports today's announcement of a further return of capital through a $1 billion on-market share buyback and a $500 million special dividend. This is in addition to the buyback already underway. The interim dividend is also at the top of our payout range. Two, we manage margins well. While the core margin contracted by three basis points, it was the same as the September exit rate. Thirdly, inflation, technology costs and software amortisation drove expenses higher. Our cost reset program reduced the overall impact and constraining expense growth to 3%. And finally, credit quality is sound. While we've seen some deterioration, it's broadly as expected, and we are well provisioned for this stage of the cycle. With this context, net profit in the half was up 5% to $3.3 billion. Excluding notable items, net profit was down 1%. The cost-to-income ratio was 50%, and our key return metric was Return on tangible equity was 11%, above our cost of capital. I'm pleased to report that notable items relate solely to hedge accounting items, which peers disclose as cash earnings adjustments. Hedge items reduced net profit by $164 million compared to a $52 million benefit in the second half of 2023. These items unwind to zero over time. As we completed our portfolio simplification in 2023, businesses sold didn't have any impact in the half, but continue to impact prior period comparisons. They're highlighted on the slide. Moving to the components of net profit excluding notable items. The 1% decline in net profit reflects the growth in net interest income and a lower tax rate being slightly outweighed by both higher expenses and impairment charges and a modest drag from businesses sold. Net interest income was up $139 million from a strong Treasury and markets performance. Core net interest income was flat with average interest earning asset growth of 2% offset by a three basis point contraction in the core net interest margin. Non-interest income was flat, with growth in fee and trading income, offset by declines in wealth management and other income. Expenses were up $123 million. I'll cover this in more detail in the expense commentary shortly. Combined, these components led to a modest increase in pre-provision profit, excluding both notable items and businesses sold. Credit impairments detracted $104 million, reflecting a small number of single-name IAPs during the half. The effective tax rate was 30.9%. While slightly above the statutory rate of 30%, it was below the prior half. The impact from businesses sold reduced profit by $20 million. Turning to lending. Total lending increased 1% with growth in all four of our business segments, consumer, business, institutional and New Zealand. Australian mortgages grew by 2%. More consistent service, better time to decision and proactive customer retention contributed to the growth. While we passed the peak of fixed rate mortgage expiries in 2023, $37 billion of fixed rate loans expired this half. We are particularly pleased that proactive strategies saw retention of approximately 90%. Portfolio composition has shifted with 99% of new mortgage flow into variable rates in the half. The portfolio is now at 85% variable rate, up from the COVID low of 60%. Australian business lending grew 3% with solid growth in commercial. By sector, health, utilities and entertainment delivered the strongest growth. Institutional lending grew by 1% as we continued to deepen relationships with existing customers. Lending increased by 2% in New Zealand against a backdrop of subdued credit growth. Mortgages grew at 2% in the half, supported by an improvement in our product offering, while business and other lending was little changed. Personal lending was flat and the planned runoff of the auto finance portfolio continued. We are pleased with the momentum in deposits, which grew by 2% in the half. Our deposit to loan ratio remains at historically high levels of around 83%. Consumer deposits increased by $13 billion as we grew our share of household deposits at 1.1 times system and attracted new customers. An increase in the savings accounts more than offset a decline in transaction account balances. There was also a small amount of switching into term deposits, but less than expected. Mortgage offset balances increased by $3 billion. As we saw in the prior half, customers who shifted from fixed to variable rate loans brought other savings with them. Business deposits were stable, reflecting a weaker system and softer economic conditions. Customers continue to switch into term deposits from transaction accounts. WIB deposits contracted slightly, mostly in term deposits, reflecting our strategy of balancing growth with value. New Zealand deposits contracted by $1 billion in New Zealand dollar terms with reductions in term deposits and transaction accounts. The decline in these accounts reflected the broader challenging economic environment. Core net interest margin declined three basis points over the half to 1.8%. This compares to a decline of six basis points in the prior half. The trajectory of the core interest margin stabilised. It was 1.8% at both Q1 and Q2 2024, as well as at September 2023. We continue to be disciplined in how we balance the margin on loans and deposits at a time when competitive pressures have eased slightly. We also benefited from higher earnings on hedge capital and deposits. Moving to the drivers for the half. Loan spreads, notably in mortgages, subtracted four basis points. Customer retention, along with the average impact of prior period competition, had the largest impact during the half. This was notably less than in the prior period as the front to back book gap narrowed by the end of the half. Business lending spreads tightened further. Customer deposits detracted two basis points. A mixed shift from at-call deposits to lower spread term and savings accounts outweighed higher returns on hedge deposits. Wholesale funding costs were slightly higher and we continued to replace the term funding facility. We had $8 billion remaining, which will roll off in the second half. We timed our funding well and took advantage of favourable credit markets, raising $20 billion of new long-term wholesale funding in the period. Higher earnings on capital contributed four basis points, reflecting the step up in the tractor rate. Treasury and markets added three basis points to the margin, with the contribution rising from 11 basis points to an above-average contribution of 14 basis points. Notable items subtracted five basis points from the margin, with no impact in the second half 2023, moving to a negative five basis points in the period. Moving to non-interest income. Excluding the impact of notable items, Non-interest income was stable on the prior period. Fee income was up 3%, with higher underwriting activity for institutional customers, the largest contributor. Wealth income declined by 3%, with higher funds under administration, more than offset by the lower platform margin. Trading income was 7% higher, with stronger customer-driven foreign exchange activity, boosting income. However, it was largely offset by a decline in other incomes. Turning to expenses. Expenses were up by 3% in the half. We absorbed much of the higher technology operating expenses and software amortisation, which saw total technology expenses rise by 13%. We worked hard to offset these cost headwinds, delivering $233 million in savings through cost reset. Business simplification, including changes to the operating model, generated further savings with FTE down 2%. Businesses sold provide a $28 million benefit in the prior half due to the reimbursement of costs of businesses sold. Underlying expenses, excluding the impact of businesses sold, rose by 2%. We remain committed to the cost reset program and our objective to close the cost-to-income ratio gap to peers over the medium term. Moving to investment spend. As outlined in our March technology update, we expect our investment spend to be approximately $1.8 billion in 2024. Risk and regulatory programs will remain around 60% of spend, with 40% on growth and productivity, including our technology simplification program, Unite. Initial planning for Unite continues, with spend expected to accelerate during the half. Given the planning stage for Unite and the completion of several large programs in 2023, our total investment spend decreased 15% compared to the prior corresponding period. The comparison is with the prior corresponding period, given spend is historically weighted towards the second half. Growth and productivity initiatives included our ongoing investment in digital, particularly the Westpac app, and the continued development of the cash management platform in institutional. Risk and regulatory spend was 8% lower following the completion of the Basel III program and BS11 in New Zealand. The proportion of investment as expensed continued to rise. It rose from 33% in first half 2023 to 56% in first half 2024 as the investment profile changed. As a result... The average amortisation period declined from a peak of 4.5 years in first half 2023 to 3.2 years in first half 2024. We expect the higher expensing trend to continue given the Unite program will be largely expensed. Turning to credit quality. Stressed exposures as a percentage of total committed exposures increased 10 basis points to 1.36%. This reflects the lift in mortgage arrears and a small increase in stress among business customers. While customers face higher interest 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. However, some found this more difficult with 90 plus days arrears in Australian mortgages increasing to 1.06%. Customers with fixed rate expiries in the half rolled off an average interest rate of 3% onto variable rates that were approximately 6%. Looking to the second half, the amount of fixed rate expiries will fall by $6 billion to $31 billion. While arrears are likely to rise further, we expect the mortgage portfolio credit metrics to remain resilient. Unsecured lending deteriorated slightly, driven by the cards and personal loans portfolios. The increase in stress across business customers was most pronounced in wholesale and retail trade, driven by a single name exposure. Turning to credit provisions. We are well provisioned for the projected economic environment. Our coverage remains appropriate for the risks we see in our portfolio with total impairment provisions $1.4 billion above our base case scenario for expected credit losses. Collectively assessed provisions to credit risk-weighted assets increased three basis points to 1.38% with provisions up 4%. As you can see from our result, the composition has shifted in the half. Overlays were lower. We partly released overlays across Australian and New Zealand mortgages and some business portfolios as these risks are now captured in modelled outcomes. The increase in the Stage 3 cap reflects the higher mortgage and personal unsecured delinquencies I discussed on the previous slide. Stage 2 cap increased due to revised economic assumptions, largely reflecting downgrades to the commercial property price forecasts for both 2024 and 2025 and changes to the interest rate forecast. There was some offset in Stage 2 following changes to our scenario weights. The weighting to the downside was reduced by 2.5 percentage points to 42.5%, with the base case rising by the same amount to 52.5%. The changes reflect a modest reduction in economic uncertainty as we move through the cycle. For context, the downside weighting was 27.5% prior to COVID. To reiterate, credit quality remains sound. Impairment charges of $362 million were nine basis points of average loans, up from seven basis points in the prior period. This remains below the long-run average. The IAP charge comprised new IAPs of $213 million. The increase relates to a small number of exposures, including only one single name in excess of $50 million. And write-backs and recoveries were in line with the second half. The cap charge of $269 million comprised other changes in cap of $58 million and write-offs of $211 million. The other changes in cap charge were a function of the movements in the collective provisions outlined on the previous slide. Moving to capital. The level 2 CT1 capital ratio ended the half at 12.5%, well above the top end of our target operating range. Net profit added 75 basis points, while the payment of the final 2023 dividend reduced capital by 57 basis points. Risk-weighted assets added 17 basis points, entirely driven by non-credit risk-weighted assets. Interest rate risk in the banking book risk-weighted assets declined from a lower regulatory embedded loss. Credit risk-weighted assets were flat, with further benefits from data refinements offset by lending growth and a modest deterioration in credit quality. The $1.5 billion share buyback announced at the full year 2023 reduced capital by 19 basis points. With this result, we also announced an additional $1 billion on market share buyback and a $500 million fully franked special dividend to return surplus capital to shareholders. These, along with the $700 million remaining from the prior buyback, will reduce capital by 49 basis points, taking our pro forma CT1 capital ratio to 12.06%, still above the top end of our target operating range. Our strong financial position allows us to navigate ongoing economic and geopolitical uncertainty. On revenue, we expect credit growth to be positive with mortgages growth at similar levels to the first half. Our business and institutional lending pipelines are strong and we expect good growth in the second half. We continue to target growth in lending and deposits in line with system. We also anticipate margin trends to be similar to the first half. Lending remains competitive, although mortgage competition is easing somewhat. Deposit competition has picked up, while the mixed shift to lower spread accounts is slowing. Return on hedge deposits and capital will continue to rise in line with the tractor rate. We expect similar expense growth in the second half, with cost reset partially offsetting inflation and wage pressures, and higher investment spend. Investment in the second half will include the ramp up on Unite and will be mainly expensed. While software amortisation remains a headwind, it will slow. Credit quality remains sound with some further deterioration likely. In summary, our balance sheet is strong, we have operating momentum and with continuing discipline management, we are well positioned to support customers, growth and the Unite investment. With that, let me hand back to Peter.