Westpac Banking Corporation

Good morning and welcome to Westpac's third quarter FY26 update. I'm Justin McCarthy, General Manager of Investor Relations. Joining me today is Nathan Goonan, our CFO. Before we commence, I acknowledge the traditional custodians of the land in which we meet. For us in Barangaroo, that's the Gadigal people of the Eora Nation. I pay my respects to Elders past and present and extend that respect to all Aboriginal and Torres Strait Islander people. Nathan will provide a brief overview of our quarterly performance and then take questions. In the interest of time, we'll take one question per person. Nathan.

Thanks Justin and good morning everyone. The third quarter reflected continued operational and balance sheet momentum underpinned by disciplined execution of our strategy. While the external environment remains uncertain, we are well positioned, with a strong balance sheet, disciplined risk settings and a clear strategic agenda. That agenda is centred on improving service and deepening customer relationships, with an emphasis on the proprietary channel in both consumer and business. We are focused on simplifying our business and increasing productivity. Unite is progressing well and we are implementing a revised operating model catalyst to further improve our execution. Net profit excluding notable items increased 2% compared to the first half 26 average. Revenue was up 1% with growth of between 2 and 4% in our Australian divisions. This was partially offset by a 7% decline in New Zealand or 3% in constant currency terms. Net interest income increased 2%, which more than offset a 3% decline in non-interest income due to timing and one-off items. Volatile items related to geopolitical uncertainty and the associated increase in market volatility were only a slight drag, following a $271 million reduction in the first half. Operating expenses were up 1%. These revenue and expense outcomes resulted in pre-provision profit growth of 1%. Sustainably growing customer deposits underpins our ambition to improve returns. The growth of 2% in the quarter highlights this priority. Consistent with seasonal patterns, transaction balances grew strongly. Business and wealth and institutional increased by 4% and 10% respectively, while household transaction balances were stable. The notable mixed shift in the deposit portfolio was a slowing in consumer saving balances and an increase in term deposits, with advertised term deposit rates above the saving rates for the first time since December 2023. We expect system deposit growth to remain solid during the fourth quarter, supported by seasonal increase in household balances and a likely reduction in institutional deposits. Loans increased 2%, with growth across all customer segments. Australian mortgages, excluding rams, grew by 2%, slightly above system. The proportion of proprietary flow rose to 36%, reflecting progress in executing our mortgage strategy. We expect mortgage system growth to moderate in the fourth quarter, in response to a higher rate environment and the recent Federal Government policy changes. In the near term, our growth is likely to be below system, given our initial cautious response to heightened competition. Compared with the second quarter, mortgage applications declined 11% in the third quarter and have declined 20% since the budget. Based on our analysis of credit checks, system-wide applications have fallen by slightly less than these amounts. These trends remain broadly consistent with our economics team housing credit growth forecasts of 6.8% in FY26 and 4.7% in FY27. Institutional lending and Australian business lending grew by 3% and 4% respectively, as we continued to increase market share. The RAMS transaction settled on 1 August, resulting in a $15.4 billion reduction in mortgages. Net interest margin was stable at $1.89. Core NIM of 178 was flat compared with the first half 26, although was up one basis point in the quarter. As foreshadowed, the non-repeated timing differences following the RBA rate changes in the first half added one basis point. Lending margins were lower, the rate of compression moderated in institutional and business lending, while mortgage margin compression in Australia and New Zealand was more pronounced. The contraction in Australia reflected a modest increase in both new fixed rate lending and switching and the runoff in higher margin accounts, while competition intensified in New Zealand as fixed rate lending increased. Deposit margins improved, reflecting benefits from the replicating portfolio and the higher interest rates on unhedged deposits. More customers qualifying for the bonus rate and a mixed shift to higher yielding products partially offset these benefits. Liquid assets provided a modest benefit reflecting favourable mix as liquid assets rose by less than average lending assets. The impact was slightly lower than previously expected reflecting stronger than anticipated institutional deposit growth. The Treasury and markets contribution of 11 basis points was stable. For the second half we continue to expect a replicating portfolio tailwind of two basis points. While immaterial to revenue, the impact of liquids is now expected to be neutral or a slight drag, reflecting ongoing deposit growth. Lending margins are likely to contract given heightened mortgage competition in both Australia and New Zealand, and the benefit of higher rates on deposit margins is expected to be offset by a combination of both rate and mixed impacts, including higher qualifying on savings balances. Expenses were well managed, with the 1% increase reflecting the averaging impact from higher salary and wages and our continued investment in our business. We remain on track for structural productivity savings of more than $550 million in FY26. Total investment spend is expected to be approximately $2 billion. Within that there has been a slight acceleration in Unite which is now expected to be modestly above the top end of the previously guided range of $850 to $900 million. We now expect amortisation to decline in the second half reflecting timing of the completion of non-Unite projects. Consistent with trends we outlined at the first half, businesses continue to show resilience and while consumer spend has slowed marginally, it remains at reasonable rate of growth by historical standards. Credit quality metrics remain sound. Stressed exposures to total committed exposures increase three basis points. This reflects a modest increase in watch list and substandard exposures in property, utility and manufacturing sectors. Our non-retail portfolio continues to be well diversified across sectors and geographies. Households have been resilient in the face of higher interest rates and cost of living pressures. Mortgage delinquencies edged up 1 basis point to 58 basis points and hardship balances rose 5 basis points. Credit impairment charges were stable at 10 basis points of average gross loans. Total credit provisions rose marginally and at $5.3 billion and now $2 billion above our base case. Collectively assessed provisions to credit risk-weighted assets decreased two basis points to 127, while total provisions to gross loans were stable at 58 points. Modeled collective assessed provisions were slightly higher. Revised economic forecasts provided a modest release, This was more than offset by management judgements, including updates to the downside severity methodology and increases in overlays. The SET1 capital ratio remains strong at 12.1%. The reduction in SET1 reflects a payment of the half-year 26 dividend and an increase in risk-weighted assets, more than offsetting earnings for the quarter. Various movements in risk-weighted assets are outlined in the materials. We received a 23 basis point benefit from the completion of the RAMS portfolio sale on 1 August. To conclude, the performance for this quarter demonstrates solid progress against our plans in a competitive environment. Disciplined execution is driving our momentum. We're striving to be more efficient while investing in our business. And with that, I'll hand back to Justin for questions.

Thanks Nathan and just to restate we've got a dozen of you in the queue so if you could limit your questions to one that would be helpful for us to get through. Our first question comes from Richard Wiles from Morgan Stanley.

Richard? Good morning Justin, good morning Nathan. You mentioned that your mortgage application run rate post-budget was $26,000. that's down about 20% on the March quarter and maybe 25% on the December quarter. Nathan, can you tell us how far investor applications have fallen since the budget?

Yeah, thanks Richard. It's a good question actually because I think it's worth just reflecting on the number of factors that are creating some uncertainty in that market and in particular around rates and budget changes. So owner occupies down 18% and investor down 26% which is I guess we probably draw some conclusion from that, that the rate impact is probably equal or potentially a bigger impact than anything that happened in the budget.

And that 18 and 26, what number are you comparing it with, Nathan? I'm comparing it to the 26 since the budget, Richard, yeah, on a light-for-light basis.

One other way to look at it, Richard, is just to say if you... If you did look at the period from the budget to now and you picked up the five-year average of our applications, we're down about 11% from that five-year average.

That's total mortgages?

Yes.

Thank you.

Our next question comes from Matthew Wilson from Jarden. Matthew?

Yeah, good morning, Matt Wilson, Jardin High Team. Just following on Richard's question on slide two, you say average monthly mortgage volumes. What are actual monthly mortgage volumes doing? Because that would imply that the end point is much worse than the start point. It's a nuance, but could you articulate that?

Yeah, thanks, Matt, and good morning. We probably have had a little bit more in June where it's been a bit more compressed, but I would say... I think sometimes the seasonality month to month is quite predictable and you can have in June a fair bit of tax structuring and different things that happen around that so I would be cautious about the reason we've done the quarterlies is we think that's a more reflective trend and I would say overall Matt on this housing point our fundamental point today will be to say I think we do need to let this play out a little bit. The trends that we're seeing, we still believe, are very consistent with the economics forecast of 4.7% growth in 27, 6.8% in FY26. So we'd be cautious about drawing too many conclusions on one month of data, but you'd be right to say June was lower than the prior two months.

And July would follow, I imagine.

Yeah there's a little bit of you know you're getting into the real micro now Matt but you know I did see in our weeklies that you know applications were up last week relative to where they've been so you know let's see how it plays out we're looking forward to being on our feet in November and have a bigger sample set to be able to really talk through it and You know, one thing, as I said to Richard's comments, I think we do know that rate volatility is the biggest determining factor of uncertainty in the mortgage market and we've gone from a period, even if you just took our economic forecast, where we're expecting two rate rises and now we're potentially suggesting the next rate move is down and that type of uncertainty, you know, does particularly put the mortgage market into a bit of a suspended animation.

I understand. Thanks, Tim. Thanks Matt.

Thanks Matt. Our next question comes from Andrew Lyons from Jefferies. Andrew.

Thanks and good morning. Nathan, you've highlighted good momentum in the franchise with both loans and deposits growing by 7% on the PCP. However, when we look at quarterly revenues on a PCP basis, they're actually down slightly. Now, I recognise there can be a lot of noise in these quarterly results, but can you Can you perhaps just talk to this trend and obviously with the replicating portfolio easing from a tailwind perspective, just the extent to which we could see this sort of revenue, year-over-year revenue trend improve going forward?

Yeah, thanks, Andrew. And I think, you know, in the pre-prepare, I did call out and I think You know, I'm very conscious about sort of explaining things away where we say, like, this is good and this is good, and then it gets offset by that. But I do think if you look at some of the underlying revenue in the quarter, you know, revenue is up 4% in our institutional business, NII in our institutional business up 6%. in business and wealth we had revenue in the quarter up 3% and in our consumer bank NII up 3% and revenue up 2%. So we do feel like we've got that underlying revenue growth in the franchise. Andrew, unfortunately, we had 3% decline in non-interest income that I can talk to. Treasury has stabilised in the quarter but is still down on the first half average and then obviously New Zealand's had a little bit of a challenging period so I guess I don't want to get into the games of if you look over here it's all good and if you exclude these things it's all good but I do think underlying we've got that momentum in the franchise and I think that is giving us the opportunity to get that earnings growth over time. And I think underlying, we're seeing it, which gives us some confidence in that.

Thanks, Andrew. Our next question comes from Jonathan Mott from Barron Drury. Jonathan?

Yeah, thanks. Just a question on the margin, and specifically you called out competition and the change in the savings percentage, everybody. in the last couple of weeks it appears that competition is intensifying CBA started cutting their mortgage rates everyone else has had to follow and then we're seeing some savings rates so IMG I think is now offering up to 6% so would you be expecting into this next sort of 3 to 6 months the impact of competition to be intensifying and also that bonus rate comment what percentage of customers are now qualifying for the bonus rate yeah thanks

John, maybe I'll just answer the point question at the end first. I'd say we've had about a percentage point uptick in the quarter on the qualifying on the bonus rate. So we'd be sort of now at the 86. And I think there is some sort of upward pressure on that, John. It's one of the things that we're deliberately doing is just trying to stimulate a little bit more in that regard. We did have, as I said in my pre-prepared, an interesting quarter in consumer deposits where probably for the first time in a number of periods, we had our savings product sort of stable marginally down, a little bit of that seasonality, but we did have some growth in TDs, which is probably the first time we've had term deposits in our consumer book growing by more than our savings products, you know, certainly since about 2023. So margins are still better on those savings products and we're making some changes there just to stimulate a little bit more qualification, which we think overall will give a better margin outcome than the TDs. Your broader point on and sorry I should just say that will probably lead to you know even a little bit more increase in that qualification rate. Your broader point on competition I think is well noted. The impact of that increased mortgage competition not necessarily evident in our third quarter margin outcomes but I do think the We're probably expecting now that we're growing at a subsystem level as we were a little bit cautious when that competition came in. We're probably back participating a little bit more in that but I'd still expect us to be subsystem and I'd still expect us to be talking about mortgage competition as being a more pronounced part of our margin outcomes when we get to the full year results. Thank you.

Our next question comes from Ed Henning from CLSA. Ed.

Hi, thanks for taking my question. Can I just have one on expenses? Can you just talk about any seasonality running into the fourth quarter? You talked about the amortization decline coming through. So does that see the expense growth soften in the fourth quarter just given the amort declines or how should we think about that?

Yeah thanks Ed and good morning. Now you should expect that we'll still have some seasonal uptick of expenses in the fourth quarter. I think you know as you know Ed you know I do prefer to look at expenses on an annual basis and then even within when we're talking about in the harbs I think we have a lot of seasonality so when you're talking about at the quarters it's particularly pointed that you can get some seasonality. I would say there's probably nothing different, materially different in the quarter relative to our positioning that we would have given you at the half, except for the mixed shift in investment spend. So a bit more of a tilt towards Unite that will now be slightly above that top end of the range we'd previously given. And then given Unite has squeezed out a bit of other spend you know some of the programs that would have started amortizing or we expected to start amortizing won't kick in yet so amortization likely to be a bit of a tailwind if I step back from the quarter I think we've had another good good quarter on expenses and I think you know, if we think about the annual plans that we set ourselves, I think we continue to track a little bit better than where we expected. We're very focused on productivity and so, you know, we think that we're doing a good job on the 550 and, you know, it's clearly just such a critical focus for us alongside Unite to make this organisation more efficient. All that said, I think we are executing well but we would expect fourth quarter will be seasonally higher than where we've been.

Thanks Ed. Our next question comes from Brian Johnson from MST. Brian?

Morning and thank you very much. Nathan, I'm just intrigued. Could you run us through a little bit more detail on what happened to the non-interest revenues in this quarter? Not just the quantum of it, which I think we can all work out, but you spoke about timing and one-off items. Can you just give us a little bit more clarity on that and what's the outlook for that in the fourth quarter?

Yeah thanks Brian and unfortunately the thing with the quarterlies around these the fees and OOI if I just maybe I'll just make some comments ex-Markets and Treasurer and then I'll make some Markets and Treasury comments Brian if that's helpful. I would expect we had won off in the second quarter that went in our favour and then we've had some remediation and some other things come through in the third quarter that went against us. So it's particularly lumpy where you're getting sort of both sides of that trade moving against you when you look at a quarter-on-quarter trend. I would say we still expect modest growth for the second half on our non-interest income line. If I just talked about Treasury markets for a minute, I think Treasury, while the majority of that is going through NII, the third quarter was much more back to normal levels. I think at the half we spoke about our performance relative to Banking Corporation Banking Corporation Banking Corporation Banking Corporation we were flat on the quarter but up 3% on the first half average. So some DVA favourability in that, but we were up 3% on the first half average in markets. So I would say overall a lot of that will normalise out and I would expect, as I said, non-interest income to be sort of modestly up for the half.

Thanks, Brian. Our next question...

Thanks. Good morning, Nathan. Maybe just a follow-up on Andrew's question around the revenue side of things. Obviously, just the percent growth in the quarter, which looks mostly to me to stay counter-related. If we look forward into Q4, there seems to be a lot of sort of emerging headwinds on the margin around the basis risk, which we haven't talked about this morning, TD mix deterioration, the last rate hike within May, so it's mostly in the base, mortgage competitions picking up, deposit competitions picking up, replicating portfolios slowing. Doesn't sound like any of that's particularly positive. I mean, what confidence, I guess, do you have that you'll be able to deploy what is a very healthy capital surplus and actually drive, you know, profitable growth with that?

Yeah, thanks, Andrew, and good morning. Maybe I'll... If this is helpful, I'll just maybe give it as a... take it as a margin question and just a little bit on outlook there, and then if that doesn't help, circle back and let me know. I think... You've touched on probably all of the moving parts. I'd say no change to our guidance around replicating portfolio or timing benefit of the rate lag. So I think they still remain as they were at the half. Liquids is neutral to revenue, but we're obviously flagging today that that could flip from being a benefit to a slight drag given where our liquid levels are as we come into the fourth quarter. On lending, I think we've got a couple of things offsetting here, but we were clearly always flagging that we would get continued lending margin compression. As we said, it's a bit more spiked in Australian mortgages and New Zealand and a little bit bit less in institutional and business and I think that the reasons for that probably change in the fourth quarter but as I said in the previous questions I expect that mortgage margin will be a you know a feature of our conversations when we get to the full year results and you called out that we've you know most recently had a little bit of a spike in Bill's voice which is not going to help and then I think it all swings on deposits Andrew and so you flagged it well the benefits from the rate rise will still have some benefit that you know the majority of that has flown through TD margins were much better at the start of the quarter than they were at the end and so you know that that is going to be a drag as we go in and then as I said to John's question we're likely to see higher qualifying on savings rates that we expect to bounce back so I think you know there's a it's it's It's hard to paint a picture that it's going up in margins, Andrew. I think a lot will depend on how the deposits play out and all the different moving parts there. Maybe just make one comment on your macro thing. I think, you know, what have we got to do to continue to be able to drive earnings growth? And it's, you know, it's the things that we're intensely focused on, which is we need to keep the momentum in the balance sheet. You know, we need to do a good job on delivering the whole of bank, the whole of customer so that we get our diversified revenues. And I think we have got some green shoots of underlying revenue growth in our customer franchise. and then we've got to be very good on expenses, which we're very focused on.

Thanks, Andrew. Our next question comes from Tom Strong from Citi. Tom?

Great. Thanks, Justin, and thanks, Nathan. I just had a question on provisioning. I mean, you've topped up the provisions in this quarter and conditions still remain relatively benign.

Just have a query around the property price assumptions. I mean, you now expect resi property down 1% in 26. Some of your peers are a bit more bearish than that.

Can you just talk about how sensitive the ECL is to that resi property price, or is it more sensitive? is still well collateralized?

Yeah, it's a good question, Simon. Good morning. Why don't we pick it up and we'll give a more fulsome explanation at the full year. We do expect that Lucy will revise her forecast after the RBA meeting this week so I would expect we'll have some movement there and then as we do we will flow that through our base case so that will be a direct impact into the models and then we can talk about the sensitivities then. What we've been doing though Tom is given we actually had favorability from putting Lucy's revised forecast through this quarter and so then we've made a number of sort of management judgments around the methodology for the downside severity and then the overlays in particular on that downside severity methodology. There's some flex there as some of that economic data flows through that we can continue to look at that and make sure we get the right balance.

Thanks Tom. Our next question comes from Carlos Cacho from Macquarie. Carlos?

Thanks Justin. Nathan, thanks for the detail around application volumes. I was wondering, I asked some of those earlier questions a slightly different way. Can you give us any colour around what the mix of that 20% is between refis and purchases? Presumably, purchases are down a bit more than refinancing activity.

Yeah, thanks, Carlos. I don't actually have that split on me, Carlos. I'd be happy to follow up on it, but your assumption is right. We've had a little bit more refi, and that was what we're expecting coming in, so more refi, less new home purchase. It would be, that would be true of the applications. It wouldn't necessarily be true of, obviously, the third quarter settlements.

Yeah. Thanks, Carlos. Our next question comes from Matt Dunger from Australia. Bank of America Merrill Lynch, Matt.

Yeah, thanks Justin and Nathan. I just wondered if I could follow up on the increase in overlays. You talked about the management judgment there, Nathan. Is that on specific sectors? It appears in terms of the corporate and business stress the only areas that are really increasing are transport and storage and maybe a slight uptick in manufacturing. I'm just wondering if you can talk more specifically about what you're seeing to put some of these overlays on at the quarter.

Yeah thanks Matt and maybe I'll just cover it quickly we did see as you called out slight upticking stress in manufacturing transport utilities I'd say utilities was effectively one single name transport and manufacturing was probably a little bit broader so what we did in the in the overlay is to answer the point question we included manufacturing in our energy intensive sectors so we had an overlay there we just expanded that to pick up manufacturing and we did raise a new overlay for discretionary spend and I think we included in the materials some detail around what we were seeing both for our in our business accounts and then in our consumer spending and you know the knock-on impact of a consumer that's making adjustments to the way they're living is we've just thought it was prudent to put in something around discretionary spend.

Thanks, Matt. Our next question comes from Brendan Spruill from Goldman Sachs. Brendan?

Good morning, Brendan from Goldman Sachs. Just a quick question on your business lending momentum across both institutional business and wealth. Obviously, you've got some pressures coming on the NIMS, but in terms of the pipelines and the ability to continue to grow the balance sheet, what were you seeing towards the end of the quarter?

Yeah thanks Brendan I think very similar to what we would have been speaking about at the at the half year I think business credit is still looking quite good at the top end so you know we've got business lending credit forecasts of something like eight and a little bit for 26 and I think we have it above six for FY27 we would say within that is very mixed so Small is much tougher. SME is a little bit better than small, but the top end of town, you know, in our corporate sector in particular, you know, there's quite strong growth. And then when you get into institutional, you do get into more of those macro themes. In terms of pipelines and growth, I think that we would be very confident that we can continue at trends that are pretty similar to what you've seen this quarter, certainly for the fourth quarter, and I would say that would be a trend that we would expect would continue into the first bit of 27.

Thanks, Brendan. Our final question comes from John Story from UBS. John?

Thanks very much, Justin. Good morning, Nathan. I just wanted to ask you about the retention of the book. It comes back to slide nine. Just kind of any behavioral changes that you see in your client base. It definitely looks like there's a little bit of a trend in terms of the percentage of IPL, PNI that's moving into INR. Maybe if you just speak to retention and duration of the book.

I think that it's probably apropos the earlier conversations and Richard's questions. I think the things that we know is you've got a mortgage market that has got a period of real dislocation, whether it be through the budget changes and then through rates. The reason we're quite cautious about drawing too many definitive conclusions is the budget happens in May. You've got rates that are looking like they're moving up and then they're moving down. And then we think that a lot of people need to get themselves through their tax year. So they want to get through June. They want to spend time with their accountant, spend time with their financial advisor and then work out their next move. So we are seeing... you know signs of different behaviour and we've pulled out you know some of those trends that we're seeing we are seeing investor down more than owner occupied we haven't necessarily seen first home buyers pick up the slack yet but I think you know we would be cautious about drawing too many conclusions at this point in the cycle and we're really looking forward to being on our feet in November where we'll have a bigger data set, hopefully a little bit more certainty on rates and then we'll have more constructive conversation about what do we think is actually driving what. All we can say is I think we would be more cautiously optimistic than maybe some of the narrative. John, in particular, everything that we're seeing here would be you know quite consistent with our economic forecasts of about 4.7% mortgage growth in 27 which you know and we knew that we were going to have periods of dislocation as you try and work through that but you know median term structural challenges in the housing market still persist and you know we think that that will ultimately prevail when you get you know a little bit further down the track.

Thanks John and that brings us to time. So we're available today if you'd like to come through with any further questions. Thank you very much.

Thank you.