Westpac Banking Corporation

Good morning and welcome to Westpac's first half 2025 results briefing. I'm Justin McCarthy, the General Manager of Investor Relations. Before we commence, I acknowledge the traditional custodians of the land on which we meet today. For us in Barangaroo, that's the Gadigal people of the Eora Nation. I'd like to pay my respects to Elders past and present and extend that respect to all Aboriginal and Torres Strait Islander people. I'm pleased today to be joined by our CEO, Anthony Miller, and CEO, Michael Ryland. After the presentation, we'll move to Q&A, taking questions on the phone. With that, over to you, Anthony.

Thanks, Justin, and good morning, everyone. It's a pleasure to present my first results announcement as CEO. We have a very strong financial foundation which provides us with stability and security to support our people, customers, shareholders and the broader economy. This is particularly important given the global uncertainty that has shaped 2025. It provides us with flexibility to navigate challenges as well as deliver both growth and return. Customer service excellence is critical for future success and we aim to be number one. To achieve this, we are investing in our people, innovation and simplification. Service quality is improving and we will see this continue as platforms such as Bizedge, Westpac One and Digital Banker come online alongside the boost to customer facing teams. We're also transforming the company via One Best Way, a philosophy that is driving simplification, consistency and efficiency. By implementing One Best Way across products, processes and technologies, we are streamlining operations to make banking easier and more cost effective. This will reduce risk and improve our operating and financial performance. We focus on ensuring we have a strong balance sheet. The foundations of the bank have strengthened materially over the last two decades. The common equity tier one ratio of 12.2% is more than six percentage points higher than pre-GFC levels. Additionally, the deposit to loan ratio is at a record high of 84.5%, which is up 31 percentage points in that time. This has significantly enhanced our financial resilience and reduced dependence on wholesale funding, especially from offshore. Over the same period, liquid assets had more than doubled and now make up 19% of total assets. Our credit impairment provisions exceed the base case scenario by $1.7 billion. These foundations will support us to navigate increasingly volatile and uncertain conditions stemming from trade and geopolitical tensions. Australia, and to a lesser extent New Zealand, entered this period of uncertainty in good shape. Inflation is moderating and interest rates are trending downward. Our stable political and regulatory environment presents Australia with the opportunity to differentiate and be a leading global destination for both talent and investment capital. Recent data highlights the resilience of the Australian economy, with household spending modestly improving and business conditions just below average levels. This aligns with insights from our analytics team, Westpac DataX. The credit card tracker indicates consumer spending is gradually improving, with annual credit card activity growing at 3 to 3.5%. Cash flow positions for business customers are now stable, and for many, they are now improving as they manage costs, including SME customers whose cash flows had been deteriorating for the last 18 months. While we're marginally low at our economic growth forecast for 2025, growth is still expected to accelerate to 1.9%. Housing and business credit are projected to grow by 5% and 6%, respectively. However, there are risks to this outlook. The most recent Westpac Melbourne Institute Consumer Sentiment Survey declined 10% among those interviewed after the US imposed reciprocal tariffs. Business confidence has also weakened. This could lead to softer consumer spending and business activity. Critically, wholesale funding spreads have widened since the end of the first half. Volatility may push funding costs higher. We recognise the important role we play across the economy. Supporting customers through hard times is a responsibility we take with pride. On scams, every layer of defence counts. Our latest innovations, Safe Block and Safe Call, are designed to further strengthen customer security. I am pleased that reported customer scam losses were down 19% this half, saving our customers $115 million in potential losses. More recently, we stopped a $320 million transfer by a business customer who was deceived into paying a hacked invoice with altered account details. While our customers remain resilient and stress has improved, we provided 23,000 hardship packages to customers and businesses this half, including 280 tailored disaster relief packages. Through the Westpac Rewards Hub, customers received $70 million in value through shop back, promotions and discounts. We have a proud legacy of supporting communities and we're strengthening this by expanding regional banking access. We are growing our regional presence with new service centres, giving homeowners, farmers, small businesses and local councils more access to financial services. It was a privilege to travel to Moree last month to make this announcement. To support women when starting or growing their business, we recently doubled the Female Entrepreneurs Fund to $1 billion. This initiative has empowered more than 1,000 women since 2023. We are supporting Australia's economic growth and shaping a stronger, more prosperous future. Cash is here to stay, and we're working with peers and the government to address the country's ongoing challenges in the storage, transportation and utilisation of cash. We've paid $1.7 billion in tax for the first half of 2025, ensuring we play our part in supporting the economy. Additionally, our 36,000 employees received more than $3 billion in salaries during this period. Turning to financial performance, the result reflects our focus of generating growth but making sure this is not at the expense of return. Net profit, excluding notables, decreased 1% to $3.5 billion compared to the prior corresponding period. There was a slight improvement in our key return metric, return on tangible equity, but this was mainly due to the reduction in share count through the buyback. The cost to income ratio increased by two percentage points. As I said at the market update, we have to structurally lower costs within the company. Unite is one, but not the only way we will achieve this. The ordinary dividend was maintained at 76 cents per share. This represents a payout ratio of 75% of net profit excluding notables. Our market position strengthened across areas aligned with our strategic tilt to business and institutional banking. We focused on improving returns in consumer. The 9% growth in consumer deposits is testament to the quality of and the ongoing improvement in the franchise. This reflects the health of our customer base and was supported by the success of our award-winning Westpac app and simplified product suite, which provides customers with consistent everyday banking solutions. Business lending increased 14%, with strong growth across target sectors of health, professional services and agriculture. In institutional, a focus on deepening client relationships and improving service underpinned loan growth of 15%. The progress made is evident in our improved rankings across key financial market industry surveys. The strategic tilt has been accretive to ROTI, while the average risk grades across the business and institutional lending book remain stable, which is particularly pleasing. Looking more closely at mortgages, we've managed through a very competitive banking environment and achieved a solid performance in the half. We have made headway in improving returns, added by further operating efficiency with front book returns now higher than back book. We've been focused on delivering consistent service through our home finance managers and mortgage brokers. This is reflected in time to decision, which further improved this half and is now under five days. Additionally, we have intensified efforts to retain customers during critical moments, such as the expiry of fixed rate loans. This has improved mortgage NPS, where we are now second. We are targeting growth in line with system, excluding RAMS. Decisions taken in recent months to focus on a better balance between growth and returns are expected to lead to a slightly softer Q3. Looking ahead, we are targeting higher returning segments, improving the performance of our proprietary channel and unlocking the benefits of scale through Unite. We have a great team in our first party channel and we have changed our reward and recognition structure to reflect that. We're adding another 180 home finance managers and have simplified our pricing structure to improve transparency for customers. Mortgage brokers are important partners. To support them, we've halved time to decisions since 2023 and continue to remove pain points for faster loan decisions. Customers remain at the heart of everything we do. We aim to be number one in service and we're going after this by embracing a whole of bank to whole of customer approach. Our priority is to win the entire customer relationship by providing consistent service excellence on the app, the phone and in the branch. To support this, we are mapping processes from the customer's perspective to remove pain points and making banking simpler, faster and more personalised. We're also investing in our people. In business, we are streamlining processes and increasing customer-facing roles. Over the next three years, we expect to add 350 bankers in business and wealth, with approximately 90 onboarded so far. Likewise for institutional, we are halfway towards our target of adding 80 frontline employees to support growth. We are focused on providing our people with training, including generative AI, data protection, cyber awareness, and in more specialised areas such as working capital. The Business Performance Academy has been launched to enhance banker development and expertise. To make banking simpler and more accessible, we're improving digital experiences. Our number one banking app is consistently upgraded and has new digital tools to help businesses with cash flow and expenses. We're also embracing AI through our AI Accelerator platform. In mortgages, we're using it to improve processes and communication. The Virtual AI Assistant answers process and policy questions for our people, saving significant time and allowing them to respond faster to our customers. Meanwhile, GenAI is being used to complement the expertise of our 800 assessors. By processing documents, summarising key information in broker applications, it ultimately speeds up approvals for customers. While AI is surrounded by hype, its true value lies in delivering sustainable productivity gains and cost savings, which can take time to materialise. It's early days, so we will measure the benefits of each test case to make sure we make informed decisions on further investment. To support service excellence, we're also investing in innovation. We have launched BizEdge, our new lending origination platform for commercial, SME and small business bankers. This is dramatically improving how we lend to businesses by guiding applicants and bankers through the best application pathway. With this platform, we expect to see a 60% improvement in time to decision. We are investing approximately $300 million in this initiative through to financial year 29. Upon completion, we will have merged 27 banker systems and tools into a single digital platform. Additional benefits will follow as we phase out legacy systems, reduce complexity and lower costs. For institutional clients, Westpac One will be our new platform bringing together real-time treasury management, FX, trade and lending with powerful data insights. It's progressing well. These investments support our goal to be number one in customer service. We have an ambitious transformation agenda, and this is focused on simplifying our operating environment across products, processes and systems to deliver the one best way through Unite. We expect this to improve customer experiences, make work easier for our people and reduce the cost of run and change. We covered Unite in detail at our update at the end of March. To recap, Four initiatives have been completed and 41 are underway. We are focused on getting the initiatives that are red back on track. We'll use the status by initiative and project stage to keep you updated on our progress. In the first half of 2025, we spent $251 million on Unite and we expect to spend between $350 and $400 million in the second half. spend towards the higher end of the range would reflect more initiatives progressing than we previously anticipated. Looking ahead, we anticipate Unite will represent approximately 40% of total investment spend from financial year 26 to FY28. We have set five strategic priorities. Today, I've devoted more time to performance, customer and transformation, which sit alongside the priorities of people and risk. A market-leading employee proposition underpins a market-leading customer proposition. We are fostering an accountable and empowered culture to create an environment where employees feel valued, supported and equipped to perform at their best. We are building on our solid employee engagement baseline with a clear ambition to reach the top decile. Risk management practices are being embedded into all roles and operations, not just as protection, but as a differentiator. We have set key metrics with FY29 targets to measure our progress in the years ahead. These will continue to be a regular feature so you can track our progress each half. Over the last two years, we have improved consumer NPS and are now second. We have made progress in business, but there is more to do. With several executive changes, we have a strong leadership team supported by an engaged workforce who are steadfast in their commitment to helping customers overcome challenges and achieve their financial goals. We will be open and transparent as we drive to complete Unite on time and on budget. Performance remains a key focus. Our decisions and approach are guided by delivering improvements in ROTI and cost to income ratio. In closing, we are pleased with the strength of our balance sheet. It positions us well to navigate uncertainty while supporting our customers and driving both growth and return for our shareholders. Michael will now take you through the performance in more detail.

Thanks, Anthony, and good morning, everyone. This result shows we're on track with the strategic repositioning of Westpac while strengthening the balance sheet for uncertain times. I have four observations on the result. One, our strong balance sheet settings enable growth in our target segments and increased investment in Unite while supporting our customers and the community in increasingly uncertain times. Two, the core margin was only three basis points lower in the half and one basis point in the second quarter in a competitive and volatile environment. Three, expenses were well managed with the ongoing cost reset program constraining expense growth to 3% despite elevated wage and salary growth and the step up of Unite. And four, credit quality is sound with impairment charges low at six basis points of average loans. To be in a strong position to support customers, it's worth reflecting on the extent to which the balance sheet has strengthened since the GFC. The CT1 capital ratio of 12.2% is up from 6% in March 2008. Not only does this place us in the top 10 banks globally, it's the way we absorb losses in times of extreme difficulty and continue to support customers. Our funding composition has improved significantly. Customer deposits have risen from 44% to 67% of total funding. This continued in the first half with deposit growth of $20 billion compared to the loan growth of $18 billion. Our liquidity and funding metrics are above normal operating ranges, which we believe is appropriate given the market backdrop. Our term funding issuance plan is the lowest it's been in the last 10 years, reducing our need to access wholesale funding markets. Moving to capital in further detail. The CT1 capital ratio ended the half at 12.2% and 12% on a pro forma basis. Net profit added 74 basis points, while the payment of the full year dividend reduced capital by 58 basis points. Risk-weighted assets, excluding IRRBB, was neutral as the increase from lending was offset by data refinements and improvements in delinquencies. IRRBB added 31 basis points, of which 23 basis points related to the extension of the deposit hedge from four to five years. Removing this impact is subject to APRA's approval of new models under APS 117. The ongoing share buyback reduced capital by 13 basis points this half. moving to capital management. We've actively balanced investment and growth while returning some of the surplus to shareholders through the on-market share buyback. Given that $1.1 billion of the previously announced buyback is left to complete and the focus on supporting growth and Unite, we've decided not to increase the buyback further. We expect the remaining buyback to take us the rest of the year to complete. it will continue to reduce the share count and support dividend sustainability over the medium term. Buybacks completed over the last three years have added approximately 27 cents per share in dividends. The interim dividend was held flat at 76 cents per share, equating to a payout ratio of 75%, which is at the top of our sustainable payout range of 65% to 75%. Turning to financial performance. Net profit was down 9% to $3.3 billion, largely due to notable items which relate solely to hedging. Hedging of our wholesale funding manages interest rate risk and unwinds over time. These hedging items reduced net profit by $140 million compared to a $41 million benefit in the second half. While we continue to improve hedge effectiveness, we plan to adjust our disclosures at the full year to make peer comparison easier. Excluding notable items, profit was down 4%. Higher expenses and impairment charges more than offset balance sheet growth and a recovery in markets income. EPS decreased 3%, less than the decline in net profit due to the buyback. Moving to the components of net profit, excluding notable items. Net interest income was up $4 million. Core net interest income was stable, with average interest earning asset growth of 2%, offset by a three basis point contraction in core net interest margin. Treasury and markets income was down slightly on the second half, but remains above the medium term average. Non-interest income was up $42 million, mainly reflecting an increase in FX revenue. Expenses were up $149 million. I'll cover this in detail in the expense commentary shortly. Overall, pre-provision profit excluding notable items was down 2%. Credit impairments detracted $75 million, reflecting an increase in the downside scenario weight to capture heightened external risks. The effective tax rate of 31.4% was slightly above the statutory rate of 30% with prior period adjustments and non-deductible expenses impacting tax expense. Total lending increased 2% with growth in all our segments, consumer, business, institutional and New Zealand. Australian mortgages, excluding RAMS, grew by 2%, slightly below system as we balanced growth and return in a competitive market. Australian business lending is showing good momentum. Lending grew 7% in the first half with solid growth in our target sectors of health, professional services and agriculture. Institutional lending grew by 6% as we continue to deepen relationships with customers. Lending edged up 1% in New Zealand with mortgages growing at 0.9 times system. Economic activity remains subdued, only recently emerging from recession. The portfolios in runoff included RAMS and the sale of the auto finance portfolio, which completed in March. Our strategy to grow household deposits continues to deliver, with deposits growing 3% in the half. Consumer deposits were up $17 billion as we attracted new customers. Growth in customer savings accounts more than offset a decline in transaction account balances. Mortgage offsets increased by $5 billion as new lending was almost exclusively in variable rate mortgages and customers brought other savings with them as they shifted from fixed to variable rate loans. Business deposits increased by $4 billion with customers preferring term deposits, albeit at a slightly slower rate than previously. The growth in WIB deposits was mostly in transaction accounts, reflecting a targeted strategy to maintain the number one position in the public sector. New Zealand deposits grew by $1 billion, with growth in savings accounts as customers preferred to maintain some flexibility given the uncertain economic and interest rate environment. Core net interest margin declined three basis points over the half to 1.8%. This compared to an increase of three basis points in the prior half. March exit NIM was 1.79%. We benefited from higher earnings on the replicating portfolios, although pressure across lending and deposit portfolios persist. Looking at the drivers for the half. Loan spreads subtracted one basis point. In mortgages, the market remains competitive and we saw several factors play out. We prioritised retention of existing customers. The impact on margin was offset by the spread improvement of switching from lower margin fixed rate mortgages to higher margin variable rate mortgages. We are now well past the peak of fixed to variable rate mortgage switching, with the portfolio now 95% variable rate. We've also seen business lending spreads tighten, reflecting the competitive market and growth in lower risk products. Deposits subtracted two basis points in the half as a four basis point benefit from the replicating portfolio was more than offset by the impact of customers moving away from transaction accounts and some compression in savings and TD spreads. We lengthened our deposit hedge from four to five years. This gives us additional downside protection in the event of more substantial declines in interest rates. Wholesale funding costs were slightly higher, as the prior half still had some benefit from the final tranche of the term funding facility. Higher earnings on capital contributed one basis point. The benefit from higher replicating portfolio rates was largely offset by the reduction in surplus capital as we continued to buy back shares. Treasury and markets lowered NIM one basis point with the contribution falling from 13 to 12 basis points, still well above the expected medium term average contribution. Notable items reduced the margin five basis points with a one basis point benefit in the second half, moving to a four basis point reduction. Moving now to non-interest income. Excluding the impact of notable items, non-interest income increased 3%. Fee income was up 1% with higher underwriting fees in WIB. Wealth income was up 7% with higher funds under administration driven by the strong equity market performance in the half. Trading and other income increased 5% from higher FX markets revenue. We continue to focus on sound expense management across all our businesses and this half expense growth was kept to 3%. Staff expenses increased 5% as the new EBA began and superannuation rates increased to 11.5%. FTE increased 2% as we added more staff to support Unite and more bankers in business, WIB and for first party mortgages. The technology vendor inflation we saw in prior periods eased this half to 3%, with higher technology operating expenses coming from higher software amortisation and the additional licences, data and storage costs to support growth. We worked hard to offset these cost headwinds, delivering $261 million of savings through cost reset. This included benefits of a simpler operating model, more automation and reductions in corporate and branch space. As Anthony discussed, Unite is ramping up with expenses higher in the half. Investments excluding Unite decreased largely due to the usual seasonality of investment spend and the completion of some risk and regulatory projects. We remain committed to cost reset and our objective remains to close the cost to income ratio gap to peers over the medium term. Moving to investment spend. Risk and regulatory spend was 38% lower following the completion of projects, however remains the largest component, accounting for just over 40% of total investment. Growth and productivity initiatives included continued digital investment to improve the customer experience, including Westpac One and BizEdge. Unite investment was $251 million as the project continued to step up through the period. The proportion of investment spend that was expensed increased to 61%, with Unite expensed at 77%. Turning to credit quality. Overall, credit quality metrics remain sound, with consumer and business portfolios performing well. Stressed exposures to total committed exposures decreased nine basis points to 1.36%. This reflects a decrease in mortgage arrears and stress across most of our business segments. This half, we have seen continued improvement in 90 days plus Australian mortgage arrears. These have reduced from a peak of 1.12% in September last year to 0.86%, reflecting a change in how we report these loans when customers complete their hardship period, along with customer resilience. In New Zealand, mortgage arrears lifted by five basis points to 54 basis points. The fixed rate nature of the mortgage market means rate relief is taking a bit longer to benefit customers and economic conditions are somewhat weaker. Our Australian unsecured lending portfolios saw a slight deterioration in credit card arrears due in part to seasonal factors. Business customers are managing conditions well, with stress rates improving across most sectors. We have not seen material issues from the floods in Queensland, and despite more recent market volatility, have not seen additional drawdowns on facilities. Turning to credit provisions. We have maintained total impairment provisions above $5 billion. This is just $24 million lower on the prior half, despite the reduction in stress. A small reduction in collectively assessed provisions was offset by a $75 million increase in individually assessed provisions, mainly from a single name in the services sector. While there was little change in the overall balance of our provisions, the composition shifted. Stage 1 cap increased, mainly reflecting growth in our business portfolio. Stage 2 cap decreased, largely due to the runoff of the auto finance portfolio and RAMS. Stage 3 cap was little changed. The weighting to the downside scenario was increased by 2.5 percentage points to 45%. The base case reduced by the same amount to 50%. In our view, this better captures the increase in risks that may come from heightened geopolitical and economic uncertainty that we can't yet see in the portfolio. In addition, we have removed overlays that have served their purpose. In total, collectively assessed provisions to credit risk-weighted assets decreased four basis points to 1.26%, which remains appropriate for our portfolio. The impairment charge of $250 million was the equivalent to six basis points of average loans, up from four basis points in the prior half. This remains well below the long-run average. I usually conclude with the main financial considerations for the half ahead. However, heightened volatility makes it difficult to provide a detailed outlook. For example, the BBSW OIS spread has oscillated within a 20 basis point range in recent weeks. What I can say is that our economics team is forecasting loan growth of 5% to 6% this calendar year in Australia and for official interest rates to decline to 3.3%, 3.5% by the end of 2025. Australian economic growth is expected to recover from 1.2% in 2024 to 1.9% in 2025, with private demand likely to overtake the public sector as the primary driver of activity. Recent data also shows household spending modestly improving, while business conditions are just below average levels. Second half expense growth is expected to be slightly higher, impacted by higher investment spend, including Unite. Expense management will continue to be a focus. Credit quality is expected to remain resilient on the back of low unemployment and GDP growth. We will maintain the strength of the balance sheet across capital, liquidity, funding and provisioning. In a volatile environment, we are well positioned to support our customers and the economy. With that, I hand back to Justin.