Westpac Banking Cp Ord

Good morning, everyone, and welcome to the presentation of Westpac's full year 2020 results. My name is Andrew Bowden, and I'm Head of Investor Relations. I'd like to acknowledge the traditional owners of the land on which we speak, the Gadigal people of the Eora Nation, and pay my respects to elders past, present, and emerging. Presenting today are our results is Peter King, our CEO, and our new CFO, Michael Rowland. So without further ado, I'm going to hand over to Peter. Thanks, Peter.

Well, good morning, and thanks for joining us. 2020 has certainly been one of the more challenging years for the country and the bank. And I'm really mindful of the impact it's had on our people and customers. We've had to deal with our own issues as well as the impacts of COVID. And our results were disappointing. However, there's some positive signs in the economy and with customers rolling off deferrals. I'm pleased with our balance sheet, which is in great shape across funding and capital. This provides us flexibility to support customers doing it tough. Customers will experience ongoing impacts from COVID into next year, so we've added significant resources to help us get the best outcomes. While there's much to do to fix our issues and restore performance, we've sharpened the strategy, refreshed the executive team and we're committed to delivery. Today I'll cover the result. on strategy and priorities before handing over to Michael to take you through the detail. So let's turn to the overview. Our earnings were disappointing with impairment charges and notables impacting this result. Impairment charges increased fourfold to $3.2 billion. The impairment charge was skewed to the first half as there was no significant changes in scenario weightings. or economic forecasts in the second half. The other negative was the 2.6 being charged for notable items. This includes the AUSTRAC matter and programs to address issues and simplify the business. I'm very pleased with our capital position, with the set one ratio ending at 11.1%, and this increases to 11.2% on a pro forma basis, allowing for announced asset sales. Another feature of the year is a large increase in credit provision coverage with the ratio now at 171 basis points. On mortgage and small business deferrals, there's been significant reductions in customers on packages. On strategy, I've now completed the reset of the strategy with the board and this includes a clearer purpose, sharpening the focus on markets and businesses we're in, and setting out the three priorities for the company. One of my goals in this reset was to keep it simple and also provide clear actions and that's seen as frame the priorities as fix, simplify and perform. This has been translated into a program with individual executives accountable for delivery. And turning to the result, it was a tough year. with a reported net profit of $2.3 billion down by two thirds. Cash earnings trends were similar with the main difference to the statutory result being revaluation losses on hedges that don't qualify for hedge accounting. Impairment charges equated to 45 basis points of loans up from the 10 to 15 basis points we've seen in recent years. This saw us add $2.2 billion to impairment provisions, with the total provision now at $6.2 billion. On dividends, we declared a final dividend of 31 cents, which is a 49% payout of our full year statutory result. This is the maximum dividend we could pay under current APRA guidance. The bottom table is the result excluding notable items. On this basis, Core earnings was down 11% over the year, mostly from a fall in wealth and insurance earnings and higher expenses as we increased resources in risk management and to handle COVID demands. Also excluding notables, the cash earnings reduction was a third with the ROE at 7.7%. If I move to divisions, we're reporting under the new structure we announced at the half. In consumer, the decline in earnings was mostly due to higher impairments, but expenses also rose as we responded to COVID and risk management demands. Margins were well managed, driving net interest income growth, while fee income fell from lower customer activity, particularly in credit cards. This year we have wrestled with challenges in mortgage processing. This reflects losing our offshore operations as a result of COVID, and making our assessment processes too complex. The top priority for the mortgage line of business is to fix this and we expect to see improved performance early next year. In business, the decline in cash earnings was mostly due to higher impairment charges and lower margins as deposit spreads impacted lower interest rates. Fees were down off the back of COVID packages and lower activity. WIB's lower earnings also reflected a large increase in impairments, while loans reduced as we focused on return. Margins were impacted by deposit spreads. Costs were higher from increased spend on risk matters, whilst markets income held up particularly well. New Zealand's results were lower due to higher impairment charges. I was pleased with their operational performance with growth in both mortgages and businesses. helping to offset the decline in margins. Our specialist division houses the wealth, insurance, auto finance and Westpac Pacific businesses. And the loss here reflects a large charge of $922 million for notables, including write-downs in insurance and auto, and the accounting loss on vendor finance business. Excluding notables, earnings were also lower from higher general insurance claims and a decline in wealth earnings from lower funds and tighter platform margins. Impairment charges were also higher in both Auto and Westpac Pacific. Group businesses include Treasury and the AUSTRAC related costs and the loss here reflects the AUSTRAC provisions. Excluding notables, group businesses made $151 million with Treasury the highlight, delivering a great year with the team positioning well for lower interest rates and credit card spread movements. So overall impairments impacted all divisions with notable items particularly impacting specialists and group businesses. On asset quality, this is the trend of stressed exposures to total exposure. As you would expect and in line with the weaker economy, asset quality deteriorated, although the pace of deterioration was better than our earlier expectations. The other key point is stress remains well below the GFC peak. We spent considerable effort reviewing high-risk accounts in the business portfolio. This includes the majority of high-risk exposures in WIB and Business Bank. The downgrades from these reviews drove the 23 basis point increase in watch list and substandard and that's the red part of this bar. On delinquencies, recent trends saw a stabilisation as less people moved into hardship arrangements. I do expect this trend to continue for a few more months before we see customers rolling off packages and into individual hardship arrangements. We've seen very good progress on the number of customers now making repayments. In Australian mortgages deferrals have reduced to 4% of the portfolio while in small business it's 2% of the portfolio. We're closely tracking whether customers make their first repayment and we saw around 97% of the Australian Mortgage Book do so. We'll have a better idea on small business deferrals in a month's time given we're now at the end of the original six-month packages. The right-hand chart shows the quarterly trend in impairment charges and the coverage ratio. It highlights the coverage ratio lifted materially to 171 basis points. While the fourth quarter impairment charge was modest, provisioning coverage was maintained. COVID has had a significant impact on credit quality and customers. However, it's clear the measures provided by the government have been very effective and our own efforts in supporting customers have been important and will continue. Moving to capital, the CHC1 ratio ended at 11.13%. Boosting the ratio was a company priority so this is a good outcome and the result reflects lower capital usage in our core businesses and releasing capital from low return areas. On dividend, we declared a 31 cent dividend which reflects APRA's guidance of only paying half of statutory profit. While conditions have improved, we've also decided to be conservative and underwrite the DRP so the dividend payment won't have an impact on the capital ratio. We also have options to further improve our capital position The zip sale increases the ratio by eight basis points. Well, our line of businesses also have a focus on capital efficiency. So overall, I feel well positioned on capital. And since becoming CEO, my first priority has been to reset our strategy. Our purpose is to help Australians and New Zealanders succeed and helping is what our people are passionate about. As a result, we're focusing on our core businesses in Australia and New Zealand. In recent weeks we've announced the consolidation of our international operations and we use our hubs in Singapore, London and New York to support domestic customers doing business offshore. In terms of markets, we're concentrating on banking and more specifically where we can build a sustainable advantage. This thinking drove the creation of our specialist division and we're making good progress. We've also reset our priorities to be simple and clear and this will help with execution as everyone in the company lines up behind them. The first is fix. We need to fix our issues so we can move forward and it's my number one priority. We're addressing our risk management capability, improving culture, accelerating customer remediation and reducing IT complexity. Second is the need to simplify and this includes exiting non-core businesses and simplifying the products and services we offer. Over many years we've added new products and features which has added unnecessary complexity. We've also adopted a new line of business operating model and this sees one person responsible for the end-to-end product or service. This approach improves decision-making and accountability. It will also deliver better customer outcomes when one person has a clear line of sight and authority across every step in our service chain. At the same time, we need to transform our processes using digital, removing manual steps and using data to improve how we operate. The third priority is to perform. This season is focused on delivering for customers, growing our business and improving returns for shareholders. Finally, it's our customers and people that are at the heart of our business and having a highly engaged workforce will deliver value and I will not lose sight of that. As part of our change, I'm very focused on driving outcomes and while there's a lot to do, we are making progress. This slide is a snapshot of what we've delivered this year. As you may expect, I've moved quickly to get the team in place. We now have our CFO, Head of WIB and Chief Operating Officer on board and the Head of Consumer starts in January. In my first six months, I've spent considerable time on resolving key issues. Settling the Austrac case was important as it means we are solely focused on lifting our financial crime and risk capabilities. Part of the change required is cultural and that saw us reset our values and behaviours. In addition, our new core program is focused on improving our risk culture and risk management capabilities. This year we also completed our five-year IT infrastructure refresh and that's driven a 56% reduction in system outages this year and nearly 90% reduction over the five years. As part of this, the move to Microsoft 365 also allowed us to have 22,000 people working from home. In terms of Simplify, our specialist business is up and running and we're progressing the exit path for all the businesses. On Perform, our focus was managing the COVID impacts on both customers and the balance sheet, boosting the C to 1 ratio and ensuring the mortgage line of business was well set up to turn around our performance there. If I turn to 2021, we're focusing on driving outcomes and this slide has our priorities. On six, we'll focus on risk management, particularly the financial crime and call programs. These are well underway with reducing correspondent banks and major deliverable early next year. On fixing technology, we're nowhere too complex. We've made progress on infrastructure over recent years and we're now finalising our multi-year domain roadmaps. Under Simplify, the focus is exiting the specialist businesses, rolling out the customer service hub to all first and third party channels and embedding the lines of business operating model. On Perform, we're targeting significant improvement in mortgage growth. And as we move through COVID, balance sheet strength remains a focus so we can continue to help customers. Finally, we'll come back to you with a three-year cost plan at the half. Thanks, and let me introduce Michael Rowland, who joined us recently and brings fresh perspectives to the company.

Thank you, Peter. Good morning, and let me add my thanks to those listening. I'm really pleased to be with you today. I come to Westpac with an understanding of the industry the bank, its performance and what's ahead. It's been a challenging year, but I'm encouraged by our progress on resetting the business and with the strength of our balance sheet, particularly capital. Nevertheless, there is much to do to improve performance and returns and that will be my focus in the year ahead. When I look at the result, I'd make three points. First, as Peter said, this is a disappointing result and while COVID has played a big part, our own issues have significantly impacted profit and return. Second, we've maintained a prudent approach to credit provisioning and our coverage ratios reflect this. Finally, we strengthen capital and are well-funded and liquid. Together, these put us in good shape to deal with the current environment and continue supporting customers. So let's turn to the details. Cash earnings increased 63% in the half and excluding notable items was up 19% from lower impairment charges. This half, COVID has impacted most line items. Removing the impact of notable items, net interest income was down with both lending and margins lower. Non-interest income was flat with lower fees and wealth income largely offset by higher general insurance income. Costs were higher. as we prioritised supporting customers and increased our investment in risk capability and systems. We again topped up the credit provisions in the second half, but given the big provisions in the first half and our decision to leave risk scenario weightings unchanged, the second half charge was significantly lower. Our effective tax rate remained high at 42% as the AUSTRAC penalty provision and goodwill write-downs are not tax deductible. The effective tax rate for the year was 45%. Given the impact of notable items, I would like to explain these in more detail. Notables had a $1.2 billion impact on cash earnings this half. Previously, we've also disclosed other volatile items, but these have not had a major impact in recent halves. At the top of the list is the AUSTRAC penalty, which we settled recently. Remediation and litigation costs remained high at $182 million as we moved to resolve known issues. Remediation provisions were mostly top-ups to existing matters while we also increased program costs as we seek to make payments faster. Litigation costs were largely settlement costs of matters that we have closed out. We've had a good look at the value of each of our businesses and the combination of business and market impacts has meant that we've written off all of the goodwill of our life insurance and auto businesses. We also wrote off some capitalised software for systems that were no longer in use. Asset sales and revaluations were $55 million with two larger losses. As we announced last week, we recognised losses in the life company and the loss on sale of the asset finance business. These offset again on Zip. The sale of Zip has released eight basis points of capital, which adds to balance sheet strength, so let's look at that. The changes in the balance sheet have been substantial in the half. CET1 ended the year above 11%, while our LCR and NSFR jumped from significant deposit flows, the term funding facility and more liquid assets. With customer deposits up 2% and lending 4% lower, the deposit to loan ratio has increased to over 80%. On lending, declines have been seen in Australia with some growth in New Zealand. Following our strategic decision to rebalance our portfolio, lending also declined in international. A lift in deposits and $18 billion from the TFF have meant we have not needed to access term wholesale markets and we've reduced our short-term balances. As a result, wholesale funding is $42 billion lower with much of the reduction in offshore funding. Now let me turn to mortgages. Mortgage growth has been a problem for us this year. We've not kept up with the market. You can see that in the top left where mortgages have contracted in the last two halves. When you look into the detail on the bottom left, this decline has been due to property sales and pay downs. Part of this can be explained by the composition of our book and our overweight position in investor lending. This sector has contracted over the last 18 months with investors tending to pay down faster. You can see that in the table on the top right. While this is part of the story, our decline in mortgages has also been due to our process issues and our share of new lending. We know our time to write is too slow. Our new mortgage line of business management are working through the improvements across systems, policies and processes to get us back in the market. While we have recently seen a rise in daily applications, we need sustained improvement before we can call a turnaround. Interest only lending is falling with balances down almost $14 billion in the half and are now around 21% of the book. Low interest rates are also seeing customers looking around more, translating to increased refinancing with a preference towards fixed rate loans. Low rates are impacting margins, so let's turn to that. Margins were down 12 basis points. Loans had little net impact with competition, mix and COVID pricing, largely offsetting the benefit of lower rates. Much of the competition has been in mortgages where we've seen four basis points of contraction from front book, back book pressure. The seven basis points deposit impact was mostly about low rate deposits, partially offset by a mid-shift away from more expensive term deposits as you can see in the chart in the bottom row. On the right, deposits earning less than 25 basis points have increased $36 billion over the half. On the positive, short-term wholesale funding and treasury and markets contributed five basis points and one basis point respectively. Liquidity was also a seven basis points drag through a combination of mix and low rates, while capital was a three basis points drag and mostly about the returns from the tractor on the bottom left. The bulk of this impact should come through in the next 24 months. This half, non-interest income was flat, excluding notable items. Fee income was 9% lower, primarily due to the impacts of COVID. This included lower earnings on cards as activity fell significantly and customers were unable to travel overseas. Other fees were also lower due to lower volumes and fee waivers. Funds income has continued to decline due to lower margins and a decline in average FUA. Insurance revenue increased due to a reduction in insurance claims. The trading in other category was up 2%. Underlying performance was broadly flat as higher fixed income trading was offset by lower income from commodity trading. However, the second half result benefited from a positive CVA movement as credit spreads narrowed. Notable items have remained elevated and have had a large impact on expenses this half. Excluding these, costs were up 7% as we supported customers through COVID and invested in enhancing our risk and compliance capability. Moving across the buckets from left to right, our productivity savings of $232 million more than offset business as usual cost increases and higher investment, including amortisation. We've continued to strengthen our management of risk and increased our spend by $226 million. This included adding over 400 resources in risk and financial crime, updating a range of systems and continuing to review our policies and processes. Expenses will continue to be high in this area, but we are now over 90% complete on the planned increase in resources. Ensuring we supported customers throughout COVID, we increased expenses 137 million as we added resources to our customer assist teams brought some critical functions back online and invested more in work from home and safety measures. We know our cost base must reduce to reflect the revenue environment and our simplified operating structure. This work is at an early stage and I'll talk more about our three-year plan at the half-year. A driver of expenses has been increased investment. This chart shows how we have prioritised this year. With our risk and compliance shortcomings, This area has absorbed all the investment increases. Given the high cost of not getting things right, we are not compromising on the necessary investment. Some of the major investments in this bucket include our risk systems along with enhancements in the prevention of financial crime. We've also completed the installation of a new complaints management system that is driving change in how we monitor, manage and resolve complaints and better identify the source of issues. In the growth bucket, we've continued to invest in some of our key platforms, including a customer service hub, Panorama, and in extending the reach of the new payments platform, each of these providing customer benefits. Other includes spend on cybersecurity and system upgrades. The rise in amortisation of $105 million reflects the full period impact of key systems coming online, including a customer service hub and the NPP. This chart clearly shows where the provisioning action has been through the year with all the change in our collectively assessed provision bucket. On the far left, new IAPs were lower than the last half with just one larger exposure emerging. Right backs and recoveries fell slightly while write-offs direct were flat. While we continue to build collective provisions and having booked a large increase in the first half, there was less need to top up. Let's look at the provisioning in a little bit more detail. We've spoken a lot about how our provisioning has been determined and we've used the same structure this half. In aggregate, we topped up provisions by over $2.2 billion through the year with just over 80% in the first half. That increase lifted our total ECL provisions to $6.2 billion, more than 50% higher than a year earlier. On a coverage basis, total provisions to credit risk-weighted assets was at 171 basis points. The largest contributor to the provision in the half was the impact of stress on our portfolio up $439 million. You can see that in both the mortgage delinquencies and the downgrades across the business and institutional portfolio, including high-risk sectors of commercial property and accommodation. Economic impacts were a small positive, reflecting the improved economic outlook. We've made no changes to the weights of economic scenarios. Overlays were largely unchanged, up just $15 million. we have seen business overlays either utilised or reduced as we completed our reviews, offset by further top-ups for customers on deferral packages. As Peter mentioned, there are a few moving parts impacting our CET1 ratio. As you can see on the left, the earnings in the half added 37 basis points, capital deductions were 11 basis points and risk-weighted assets added one basis point. Capital deductions mostly reflected deferred tax assets related to higher provisions, economic hedges recognised in net profit, partially offset by a lower deduction for intangible assets. Credit risk weighted assets this half reflected the book shrinking and model changes, as well as market and exchange rate volatility. This was partially offset by credit deterioration. On the right, we've again provided our credit risk weighted asset sensitivity. The base case for FY21 is 64 basis points and 36 basis points for FY22. So far, we have seen 16 basis points come through. This reflects downgrades not being as widespread at this point in the cycle as we had originally modelled. In retail credit, we've seen the quality of the non-defaulted book improve and this has largely offset the rise in defaults. It's important to note that loans in deferral don't contribute to credit risk-weighted assets under the current APRA concessional treatment. Looking ahead, it is fair to say that fiscal and monetary policy support has been good for the economy. This has meant our corporate customers have improved cash flow and more consumers are exiting deferral packages. But there is still a deal of uncertainty. Low rates are a particular challenge for banks. While excess liquidity in the system has ensured that the market is well supplied with funds, this invariably heightens competition particularly when demand is weak. We will continue to prioritise support for customers and while the lower deferrals are pleasing, many customers are still doing it tough. These will continue to be headwinds in the year ahead. Turning to the components of earnings. On the outlook for lending, economic forecasts point to system business lending being down 3.5% and mortgage growth at 3.2% over FY21. We are seeking to get back to growth in the second half. Low interest rates will continue to impact margins, while competition will drive retention pricing and elevated refinancing in mortgages. On cost, the decision to support customers through COVID in enhanced as will the amortisation impact of higher investment spend in FY20. The cost reset program that I am taking personal leadership of will address our longer-term sustainable cost base, and I'll have more to say about that after half a year. Quality have been more positive, there is still uncertainty, and we will look to retain our... I'll now hand back to Andrew for Q&A.

Thanks, Michael. Today it's a combined media and analyst conference, so we'll take some questions from analysts first, then we'll flip across to the media as well. I'll do the normal introduce each speaker, and of course if you just keep it to a couple of questions to start, that would be great. So I might take my first question from Jared Martin, please, from Credit Suisse. Okay, I'm not sure that's... I'll try someone else on that list. Maybe they're on mute. It's a common standard at the moment. I'll take one from Andrew Triggs, please. I can hear some noise, but not quite yet. Andrew, can you hear me? Yeah, I can now. Thanks, Andrew. Okay, perfect. Thank you. Sorry, there's quite a bit of feedback so I'll push through. We saw that the NIM pressures continued to fall with the group NIM down another three basis points which suggests that revenue momentum continues to be under pressure. Could you maybe just talk about some of the liquidity impacts? on that Q4 trend and some of the moving parts looking ahead into the first half of 2021 around the funding cost piece, please?

Because I would have thought that the Q4 might have seen greater funding cost benefits than you saw.

So I think, Andrew, I'll start off. I think macro, what we're seeing is competition on the lending side. Some are repricing on deposits. BVSW has obviously been a benefit and we've built liquidity. So I think that's all in Michael's slide and then probably the other piece there is that Q3, Q4 cut that we've given in the slide as well. There's always timing differences on these but really at a macro level with interest rates moving down and the tractors coming down, the margin will come down I think. Michael, anything to add?

I'll just add that we've got to remember there's still a lot of competition in the mortgage market, so that's putting pressure on asset rates. But also, as Peter indicated, we have built up a lot of liquid assets as there's so much more deposits coming into the system.

And probably just one other thing on the liquid assets is we do expect the CLF will be reduced, so having that liquidity will be required as the CLF comes down.

Thank you. And just a follow-up question. on capital and developments of the specialist businesses. So what message is it being sent around the full underwriting of the DRC and potential timing on those asset sales? Maybe talk to our well-progressed financial leaders that are in those businesses, please.

Well, the first thing is, so Jason's team are up and running and we're working pretty hard, but as you know, with asset sales, you can't control the timing. It depends on on partners and getting an appropriate transaction that meets criteria, so we've got to meet those pieces. We're not in a position to say exact timing at the moment, but they are still there and we're working very hard. Just on the DRP underwrite, we just felt it conservative and that just reflects the fact that while we've seen very good and better performance in deferred loans and in the credit portfolio, I think next year will be when we find out which customers had lasting impacts from COVID. And this interplay between domestic economic growth coming back, government stimulus being wound back, is still unclear. So we decided to be conservative and underwrite the DRP.

And just one follow-up there.

I mean, is reduction in complexity still the overwhelming driver of the exit of those businesses, i.e.,

If asset quality and capital is looking better, does it make you a little bit more price sensitive on exit?

The driving thinking behind that is to simplify our portfolio of businesses. So we want to be in businesses that have scale and competitive advantage. And so that thinking still holds on the specialist businesses. And we've got to get the right transaction economics from our perspective.

Thanks, Brendan. I might try Jared Martin again to see whether... We can log in. We'll credit Swiss. I think you're on. Yep.

Okay, can you hear me? Yes.

Hi, Jeremy.

Okay. Hi, Peter. Welcome, Michael. So a couple of questions. First of all, can we come back to the DRP underwrite? Because there's a bit of a sort of a change here. So you're at 11.2%. You announced international consolidation is going to release $5 billion of RWA. You're flagging 65 basis points of RWA inflation and obviously you've got the sales of specialized businesses, which are unknown. But putting the first couple of things together, you're still above 10.5%. in the last half have been saying that APRA have given you permission to use buffers and you will use buffers. So I'm just, you know, what sort of change such that you are doing a dilutive DRP underwrite?

Well, Gerard, I think it's, as I said before, you know, when we sat down with the board and we looked at dividend, we looked at where we're at, I agree we've got a very healthy capital position and while Credit has performed better than what I thought and certainly packages are coming down. We still have this unknown about economic activity, the interplay between economic activity domestically. We also have the unwind of stimulus and of course what happens internationally is the other piece that we thought about. So yes it was conservative but it's also small in the sense of it's a 31 cent dividend.

Sure, okay. On the second question, maybe for you, Michael, I'll refer to slide 20 at least of the pack that I have in front of me. This is the second half, 20 expenses, and acknowledging that you're going to come up with a cost plan at the first half. I just wanted to understand the permanency of the investment risk and compliance and COVID-19 expense billed. And clearly the productivity plan is going to be ultimately to address the cost base. But those three items, to what extent has that build occurred and how permanent are those builds?

I think that's a good question. I think from our perspective, we would expect a fair portion of that build in FY20 to roll into FY21. And so that's why our cost reset plans will address the broader productivity, but there will be a roll into FY21 for those costs.

And Jarrod, I'd just add maybe where we have added resources is in the COVID assist packages. So we want to get in front of the number of people that are going to call us and ask for assistance. And when you bring people in, they need lead times to be effective. we've effectively been bringing people on ahead of time. Now, if the impact of COVID is not as big as what we think, then that resourcing will roll off relatively quickly, but we'll wait and see on that one. On risk management, we've certainly taken the view that we want to accelerate the resolution of our risk management issues. Again, a lot of that in the half was actually what I would say project resourced. getting on to fix it so that will roll off. It's not going to roll off for a couple of years because we've got a few years ahead of us and then there will be some lasting increase in risk management but not what we've got in this half.

Okay, thank you. We'll take a question from John Lott please. I've got to follow directly on from that question from Jared. And if you flip over one more slide, it's slide 22. And this, I think, summarizes it pretty well over the last five years. The whole risk and compliance spend has gone up threefold. But your investment in growth and productivity and other technologies actually fallen during that five-year period. So the question with that is, yes, you've got more spend on risk and compliance to come. But aren't you falling further and further behind your peers because you haven't been able to keep the growth and productivity up where you'd like? And when do you actually intend to be able to accelerate this and move from the fix to the simplicity and perform? Because from our perspective, you know, getting the first step risk and compliance right, you're still going backwards where the peers are going forward. I've got a follow-up question.

Suggest. Jonathan, so the first thing is in terms of simplifying the portfolio, that's about what businesses we're in and we've taken some pretty big steps this half in terms of the specialist businesses and we're working through how we exit those, the international consolidation. But you're right, if you look back historically, risk management and responding to new regulatory requirements has dominated the investment spend portfolio. increasing over time and we're very conscious of that and so one of the things though is I want to get through that fixed bucket as quickly as I can so I can move forward to simplicity and growth but I would just say on growth so we will continue to make investments in digital and in data and that's in particular in the consumer bank where we think we can get growth so we've got the new app our new Westpac app is out and we've got significant investment actually coming in behind it in terms of how we use the data.

Thank you. And a second question if I could. There is a lot of talk about risk-weighted asset inflation. I think on slide 24 over FY21 and 22, you're still talking up to 100 basis points of pro-cyclicality or inflation coming through there. But if you look at the numbers, risk-weighted assets actually fell 1% in the half And if you look at the number, you're starting around $40 billion of risk-weighted assets. If you have this 100 basis come through, you'll be somewhere around $480. But when we think of that, if you look at Westpac and all the banks over the last couple of years, the one number that you've consistently beaten us on is much lower risk-weighted assets than people thought. Now, you talked about lower business credit growth and you talked about capital efficiency. Where do you actually think that risk-weighted assets number will be able to land? Will it still be around the current sort of 430, 440 number or do you expect that 400 basis points to flow through and be up near that 480 in the next two years' time?

I'd just say on that slide, what we've set out is what I would call modelled outcomes. So they use our stress testing models and we run economic forecasts through them. Right now, the performance of the portfolio is better than the model. So everyone was pretty keen to understand what they would look like. We've given two scenarios over a couple of years. But right now, we're well better than those portfolios. So that's how I sort of see it. But as I said, there's still this question mark about what happens next year.

So can you still, with the numbers coming through, you've said 16 basis points so far and still had risk-laden assets going down, do you think you can keep risk-laden assets flat in a business scenario if you not give us a modelled outcome but your actual gut feel on where that'll last?

I think there's two pieces there. If you look at mortgages we expect to grow, business, the economic forecasts are for contraction next year and then we've got some portfolios that we're actively looking to shrink. So you can do the numbers and then the credit quality pieces is deteriorating but not at the rate that we thought.

Very good. Thank you. Okay, I'll take a question from Andrew Lyons please.

Thanks guys, can you hear me? Yes.

Hi Andrew.

Hi. Thanks for the opportunity to ask a question. Just a question just on your payout ratio. Your return on risk-weighted assets and sort of around, say, low single-digit risk-weighted asset growth would appear to support a sustainable payout ratio in the high 60s or low 70s. Can you maybe just talk about how the board might be thinking about the payout ratio as APRA potentially removes its payout cap at the end of the year? I guess I'm just wanting to understand whether we'll be going back to a situation where you'll be looking to maximise your payout to get franking credits back to shareholders or going forward, having reset the payout ratio, do you think you'll want to maintain a little bit more flexibility in relation to capital generation going forward?

Yeah, I think, well, this year, obviously the decision was really influenced by the current APRA guidance. We understand that will be... So we'll have to wait and see what that looks like. But we would certainly think about it exactly as how you've outlined it, Ashley. Look at growth, demand for capital through growth in the business. Look at return and have a payout ratio so we can return the franking credits as quickly as we can.

Okay.

Okay, question from Brian Johnson, please.

Good morning everyone and thank you for the opportunity to ask some questions but also for the great disclosures. I just had two, if I may. The first one that I'd be intrigued about, just if APRA restarts the amended BAL 3, your housing portfolio still looks to be skewed towards interest only, more investor. But I'm just wondering, could you give us a feeling on what happens to that housing risk weighting on your current modelling if we were to adopt the amended BAL 3 as it is proposed?

Well, Brian, I think, like you, I'm really waiting for the new model. So it's hard for me to give you a number. But I would highlight that since they were announced, our portfolio has significantly reduced in IOs. So that's been something that we've managed down. And so I don't expect IO to be near as big an impact as it was in the past. Likewise, investor. But we need these final calibrations to understand it. When I look at it, some of our business risk weights are probably a little bit higher than peers as well. So there's always puts and takes when you get these models. So we're just going to have to see what the net wash is.

Peter, the second one, I'd just be intrigued. A dividend with 100% DRP discount, with 100% underwritten DRP at a 1.5% discount, you can call that a dividend, but it actually sounds like a capital raising or we can call it basically passing the dividend. I was just wondering, could you give us a feeling for philosophically what the board thought that actually was? Is it a way just of distributing franking credits? Or is it a dividend plus the capital raising? Can you just run us through your thinking on it, please?

Well, it's a dividend, Brian. And if I talk to retail shareholders, they're pretty focused on the dividend that we pay. And so the pleasing thing about the second half is we've returned to paying dividends. In relation to the capital management aspect to it, I think I've covered that in the previous question about how we thought about that.

So it's a dividend plus the capital raising?

Brian, it's a dividend and then we're looking to encourage people to participate in the dividend reinvestment plan so that's not a cash outflow as such and then we will offset the remainder through an underwrite.

Thank you. We've got a question for Richard Wiles please.

Good morning everyone. Just wanted to clarify a couple of things from the outlook commentary. On expenses, there's a lot of moving parts. Is your expectation that expenses will go up in 2021? And on loan growth, I think you've suggested that loans will be down in the first half, but up in the second half. What's your expectation for loan growth for the full year?

So on the first question, Richard, as Peter explained, we will see some growth into FY21 from the project work we're doing in risk management. Depending how long the COVID support needs to be in place, we will probably see some early uptick there and also on some other investments that we've made. More broadly on offsets, it's a bit hard to say at this stage, but we'd say that costs will be slightly up next year, but it's just a bit early to say exactly how much. And then on asset growth, again, as Peter indicated, economic forecasts are that business lending will be down, so we expect that to flow through our book. And as we did say, we will look to get back to growth in mortgages in the second half, so that should give you a bit of a sense with the trend that you've seen certainly in the second half of this year.

And if I could just ask a second question please Peter. Could you outline the strategic rationale for providing the transaction and saving account capability to Afterpay? I mean they've taken a lot of share in the payment space. Clearly credit cards are under pressure for for various reasons but Afterpay has been a big influence there. So why provide a competitor with 3.6 million customers access to your transaction and savings account capability and do you think you'll lose customers from Westpac St George and Bank of Melbourne as a result?

I'll broaden that out to talk about the banking as a service strategy. When we look at banking and how it's provided we think it's fundamentally changing. Customers are choosing to bank in different ways. Certainly we're aware of a number of banks that are either at or looking at launching these type of platforms both offshore and in Australia and so it's an important market that we want to be part of. The flip side of this strategy is if the 10X strategy, which looks like good technology, develops in the way that we think it will, it's a fourth generation product system type capability, which gives us options for our systems within the bank as well. So it's not only giving us options within technology within the bank, but also it's a market that we think will be here. And then I think the other point is that Open Data in Australia is Customers own the data and they will choose where it is. It might not be in the next couple of years but it will happen. So we've looked at those trends and we thought this is a market that we need to have a foothold in. It may develop. We hope it will and Afterpay was the first partner for that particular business.

Okay. I think I'll take a question from Brendan Sprouse please.

Good morning. Thanks for letting me ask some questions. Just on page 79, you show the movement in credit risk-weighted assets for the period and you show that credit quality increases weight assets by $5.4 billion over the half. You did show us at the third quarter that that figure was up like $13 billion. I was wondering what was the change in the fourth quarter?

Brendan, I think the big thing there was we put the overlays, we estimated the credit deterioration in the third quarter. You might recall a $7 billion overlay for risk weights. That's reduced down to two and that reflects the work that we spoke about with looking at high risk accounts and regrading them. So you've got the movement between overlays and what's actually flowing through the portfolio and coming through the fourth quarter and that was an example of where things have come through a little bit better than what we originally thought back in March and April.

Okay and I've got another question on mortgages if I could. Twelve months ago we were talking about some issues that you were having in the mortgage market and obviously you've had a weak year. The mortgage flow chart on slide 17 shows that net refinance in particular was quite low relative to peers. I mean, what steps do you have to put in place or have you put in place to kind of rectify your position in the market when we look into 2021?

Yeah, it's a combination of processes. So we've made our processes too hard, which means time to yes is too long. It's a combination of looking at credit settings compared to peers. So nothing major there but just lining up to peers and then it's the operational processing and with the impact on our offshore operations of COVID, it really blew out the times and so we weren't hitting the mark. So unfortunately all those have come together but the new line of business that we've created for mortgages has that as their top priority.

Thanks. Take question from Victor Gurman, please.

Hi, thank you. Can you hear me?

Yes.

Great, thank you. So two questions for me as well, if possible. The first one on expenses. Michael, you talked a little bit about expenses already, but I just want to understand how when we think about expenses in 2021, do you think we should be looking at your second half 20 as a starting point, the two half 20s reading notable items and sort of annualise that number as kind of the starting point for expense in 2021 or a full year and some growth, as you suggested, on a full year basis as a more reasonable starting point? And I have a question on credit quality as well.

The way we think about expenses is that, as I indicated, we did increase our resources to support customers through COVID. We did bring some more resources onshore and we increased our investment in risk management and compliance activity. Now, not all of that will flow into next year and it depends, as Peter indicated, about how long customers are going to stay on packages and how long we need to continue to support them. So I don't think it's as simple as just rolling forward the second half or the full year. I think we will see some of that roll into the first half, but I don't think we'll see all of it, is the quick answer.

Right, so if we look at second half... Sorry?

Victor? I was going to say, if we look at second half 20 expenses, you're saying that at least some of it shouldn't roll through into the first half 21.

It's hard to say at this stage, but I can't say that it's definitely going to roll through. It'll depend upon how customers and the broader economy reacts. But no, you can't just necessarily roll it forward.

Right. And the second question on credit quality. So if I look at your economic assumptions that you've made in March relative to September, obviously the September forecast is significantly better. Yes, we've seen collective provision increase from first half to second half. I'd be just interested to understand sort of the key drivers around that. And as we go into 2021, what do you think is going to drive CP changes going into next year? And kind of more broadly as well, maybe, Peter, you can touch on as well. I mean, everyone is focusing on those deferrals as a guide for where credit quality is going to go and where impairment charges are. But do you think we need to be looking kind of more broadly than just deferral programs and whether you have any observation in terms of the rest of your portfolio, how it's performing outside of the deferral programs, what proportion of customers are on job keepers and things like that would be highly useful? Thank you.

I think, so the first thing is, One of the things I'm very conscious of is if customers are on deferrals you can't use your historical risk sensitive metrics to work out what's going on. So that's why we have increased resources to get contact up. It's also why we chose in the mortgage book to have effectively an opt-in at three months and at six months and I think we're starting to see the benefit of that through the reduction. To answer your specific question, I think the historical trends of stressed business exposure and delinquencies and people in hardship will be more important metrics as we go into 2021 and that's why we put those in the slides. So certainly what we're looking at is the regrading of business exposures, what are the portfolios and regions where we're seeing high levels of downgrades and stress and that's where we have to focus. So I think yesterday has been a large focus on deferrals. Come January next year I think we'll be past that and you've got a good read on what we're seeing today and it'll be in the logistics of managing customers and I think this event is slightly different to the GFC. The GFC was about large exposures, big companies This is about individuals and small business, so the logistical part of this particular event is very different to what we saw in the GFC.

Do you see a scenario where your collective provisions are lower next year, relative to where they are now?

Well, it would come back to the weightings. The big decisions are the weighting between the downside and the base case. That's a big decision that we've got to look at regularly. and then it'll be the performance of the portfolio through gradings and stress will be the other piece. So they're probably the two biggies. Obviously the economic outlook's important in it but they're the two things I'd highlight.

Thank you. Okay, I'll take a question from Ed Heading please.

Thank you. A couple of questions from me. Firstly, just in this period you've written down some capitalised software but yet you've only expensed 40% of your investment spend where last week a peer is expensing about 76%. Why so low and what's your expectations going forward on capitalised software?

So Ed, I think peers have different approaches but if you look at we're amortising $800 million a year on the balance. So we have a higher software capitalisation but a higher amortisation of that balance. That will go up again next year as Michael called out that the investment that we spent this year will be amortised next year. So I think it's just slightly different settings. We're capitalising more but we're amortising more and it will go up next year.

And I'd just add that on the software we wrote off, that was for software that was no longer in use. So it was appropriate for us to write that off.

And just on that, do you expect the ratio to stay similar? Are you still expecting the capitalised majority of your investment spend going forward?

I think, you know, we've averaged three-year type amortisation rates, amortisation to balance. That feels about right.

Yep. Okay. Thank you. And just the second question on non-interest income, can you just give us a little bit more colour there on that? Do you expect any fees to start coming back next year or waivers still staying in place?

Michael, do you want to? Yeah, so as we indicated, because of the COVID settings and the reduced activity in the economy, particularly in the second half, we saw a reduction in fees. But we would like to think as activity comes back, that those fees do increase. But as Peter indicates, it's a bit hard to tell at this point, but that would be our hope.

Thank you. We'll take a question from Matthew Wilson, please.

Yeah, good morning, team. Hopefully you can hear me. Yep. Two questions, if I may. Firstly, now that provision coverage is a much more relevant measure, can you explain the inconsistency between P&L bad debts, which you quite correctly assess against gross loans, and balance sheet provisions, which industry is now using credit risk weighted assets. The more appropriate provision cover is against gross loans to be consistent across all your asset quality metrics. And that sits at 88 basis points. So in the context of where your impairs are, where 90 days past due are, where deferrals are, it does look light. And then secondly, just on deferrals, and this is an industry trend, SME loans have cured much faster than housing loans. Can you sort of articulate some of the reasons behind that significant better level of improvement?

So on the first one, Matt, we looked at a number of metrics that you can choose. We've chosen to have a look at title provisions to risk-weighted assets because of the One of the challenges is when you've got a big mortgage book, the theory is it's better quality, which I think it is. So it makes some adjustment for that. But I think most of our disclosures allow you to cut in whatever way you look at. So understand if you want to take a different view on it. On deferrals, I think one of the points I made was on mortgages, we had effectively a three-month opt-in and then a further three-month opt-in. and we've seen 97% of people actually make the repayments when they're going to pay. So mortgages, I think we've got good line of sight. On small businesses, we're at the end of the six-month period. A lot of people are indicating they're going to commence repayments, but I do want to see it. So we're in that period in the next month where we've got indications of repayment. We want to see those come in, and then I think we'll have a good view on whether the small businesses portfolio is as good as what it looks at the moment. So I'm just naturally cautious on that one but the indications are pretty good but I'd like to see the repayments made at the first repayment.

Okay. Maybe just squeeze one more in. What is the level of capitalised interest? Is it about $700 million?

I think it's on the remaining mortgages in deferral, I think it's around $400 actually, Matt.

But obviously the people that have been deferred wouldn't have repaid all that capitalised interest.

I'm sorry, I've got the 400 number on me. We'll have to have a look at the other number. Okay.

I'll take a question from Azib Khan, please.

Oh, thanks very much. So firstly, just on expenses again. So Michael, if I heard you correctly earlier, you said that expenses in the area of risk and compliance will remain elevated. There was obviously a large jump in risk and compliance spend to $850 million in FY20. What risk and compliance and investment spend run rate do you expect going forward to pick for next year?

Look, I think we don't provide that sort of level of detail. As I indicated, we will see some of that run rate into FY21, but that's not a number we're disclosing at this point.

Okay. Thank you. Secondly, on the WIB loan book, that contracted by 16% over the half. Secondly, you flagged as part of your announcement about international consolidation that you will be looking to run off over $5 billion of risk-weighted assets in WIB. Is any of that $5 billion part of some of this contraction we've seen in the second half?

So we were active in the WID portfolio and in particular it was in Asia with trade where we saw the large reduction in balances but more generally I think we also saw corporates who had drawn down facilities early in the half to get liquidity actually start to give that back to us. So there was a bit of liquidity management in the customer base as well as actions we took, there would have, part of what we did this half would have been in the $5 billion as in?

Right, and you said, as part of that announcement, you said over $5 billion, there will be over $5 billion. Are you still expecting $5 billion or could it be significantly more than $5 billion, that runoff?

Have a look at the Pillar 3. I just can't remember how much we've run off this half, but it'll be in the Pillar 3.

Okay, just one last quick question for me, if that's okay. So it's been reported in the media that Westpac had a correspondent banking relationship with Peter Schiff's Europe Pacific Bank until 2018. What was the reason for seizing that relationship in 2018?

It's been reported in the media, but as you know, when it comes to customer matters and particularly financial crime, I can't comment on individual customers, Zib.

Okay, thank you. Take a final question from the analyst from Brett Lemesura, please.

Thanks, Andrew. What's the expected ROE on your afterpay alliance?

Well, Brett, it's a development that we will report on later on, but I'm not going to forecast what we're going to get out of afterpay. It's a business that's broader than afterpay.

Oh, it wasn't really... I wasn't really looking for a profit number, but when you enter a life, you've got to think, you've got to have some expectation as to what ROE you're going to get. Are you saying you didn't work it out or you just don't want to say what it is?

I'm not going to disclose it publicly, Brett.

Okay. Just moving on to the other question then, the credit loss provisions that you've got, how do they relate to the capital? Is it the... Central economic estimate on your capital or the downside or a mixture of both? How does it relate?

The way to look at it, Brett, is that the REG expected loss, REGEL, is what is used for capital and to the extent that the accounting provision is higher or lower, you get no deduction or a small capital deduction. I think we've got a small capital deduction for REG expected loss at the moment.

Yes.

Okay, thank you. Questions ahead?

Okay, I'll take a question from James Ayres, please.

Oh, thank you.

Peter, my question was with respect to the RBA and the expectations in the market that tomorrow we might see a drop in both the cash rate target and the cost of the TFS and potentially some QE in terms of buying at the 5-10-year part of the bond curve. On the QE, is that a good idea? And with the results showing today from ongoing mean pressure, you know, part of which is due to the deposits around the zero lower bound, could you just describe any impact from the combination of potential RBA action on your margins, please?

I think generally lower interest rates, no matter what they're from, is not great for bank margins, and we've seen that in this result. So, you know, that's the general trend. But if I step back, and look at what the country is attempting to manage and doing a good job at the moment is we've got domestic economic activity which is held back at the moment because of the appropriate restrictions for health reasons. We've got international activities held back. We've got government stimulus and then we've got liquidity being provided by the Reserve Bank and lower interest rates. We also have to think about the currency in this picture. and so having a competitive currency is also very important in this picture. So I just think when we think about this, the potential moves and what the Reserve Bank does, they have very good information. They're looking at balancing out pretty complex information and so we'll respond appropriately to what they do. I would just highlight though that we know that depositors... are very much hurting in this environment because it is savers who are the people that are getting lower returns on their investments. So, you know, I think we can debate the merits of a potential move tomorrow, but if we step back, the authorities are doing what they can to navigate the country through a pretty tricky time.

Just sort of supplementary there and just sort of saying steps back, you know, do you think there's much that's in the tank first monetary policy to get what we think we'll get tomorrow, what's the likely effectiveness of that? Is there any risk of rising asset prices?

We'll see. The asset price piece fundamentally depends on supply and demand at the moment. The turnover in the market's not great in terms of its lows, so that's actually held prices up pretty well. From my perspective, all the banks have got good capital and funding positions, so that gives us time to manage and help customers in need. So that should be good for asset prices, particularly house prices. So I think it's always, this is a fine balance that we're managing through here and to date I think it's been managed pretty well.

Thanks Peter. Question from Peter Ryan from the ABC.

Yeah, good day, Peter. Thanks for taking the question. Look, I just wanted to see if you might be able to look ahead to early next year or March or so with JobKeeper being tapered back and your deferrals also being managed back. How confident are you feeling about the economy and do you think there might be a requirement for the government to step in with an extension of JobKeeper or other stimulus to deal so people aren't hit with an additional, I suppose, shock when that's all wound back?

Yeah well I think the first thing I'd say is we will move from what I would call generally available deferrals so everyone gets the same arrangement to individual arrangements next year if customers need them and one of the things I've said is if customers foresee that they need help please come and talk to us early don't leave it till next year. So Peter I think that That's important that it's not like it goes away, just the nature of it changes. In relation to, and as I said before, on the economy, the interplay between domestic activity and the wind down in support from job seeker, job keeper is important. We don't know how that's perfectly how it's going to work, but the federal government and the state government's are aware of that and you've got to believe that they'll make the right choices at that point.

Okay, we'll take a question from Jenny Hewitt, please, from the AFR.

Good morning. Two questions. One is, just after James' question, the changes on responsible lending laws, are they going to make any difference or is it really... Are banks being much more cautious about their lending anyway? Real estate agents tell me, for example, that Westpac is definitely one of the slowest in the market to approve loans.

Well, in terms of responsible lending, the first point I'd make is we don't want to make any loans that people can't afford. So there's alignment between the bank's interest and the customer's interest. The opportunity that we see in the changes is actually to speed up the process. At the moment, we do tend to have a one-size-fits-all approach, and so we see it as speeding up the process. That will be good for activity, Jennifer, so that's good, but it's not about how we... We don't see this as an opportunity to fundamentally change our credit settings.

Okay, and the other question was to do with the Austrac settlement. To what extent was the delay in reaching a settlement with Austrac about the quantum of money involved and to what extent was it the determination by Westpac to avoid any risk of criminal penalties for its executive?

Well, on the Ostrak matter, that was a civil matter, not a criminal matter, so it was a civil matter. This is a complex matter, so it just took time for us to work through, Jennifer, and any settlement, you had to agree the facts and you had to agree the penalty, but in the end it was up to the court to decide determine the penalty, and that's what the court did a couple of weeks ago.

Okay, can I just ask one last question? That was, ANZ got quite a lot of flack from national ministers for its climate change policies. Can you explain what you think Westpac's responsibility in this area is in terms of moving away from or supporting customers with high exposure to fossil fuels?

So we've been consistent with our policy for a number of years, Jennifer. We talk about transition. So we know that customers, particularly those who are in higher emitting sectors, will need to transition into the new world and we want to work with them. That's what we think. These are complex areas. They take time, but we've got to work on transitions.

Can I take a question from Joyce Malakis from The Australian, please?

Hi, Peter. Thanks for taking the question. I just wanted to follow up on the deferral issue. I wondered what proportion of customers across mortgage customers and small business customers are actually not responding to communication from the bank in terms of the updated to, you know, how they're going and whether they aim to read start repaying again.

In the mortgage book from memory it was 20-30% but that's why we tracked the did they make their payments metric pretty tightly because some weren't responding because they just said we'll start and off we go. In the small business book it's about double that so it's been a higher non-response rate and that's why I made the point of saying that the next month's really important about working out who will actually make the repayment versus who needs more help.

Is that quite worrying in this book or were you anticipating that given that the period is just coming up now?

I don't know. I wouldn't describe it as worrying at the moment. It's just what it is. You know, people will see in the next month how many people make their repayments. That's the important metric from my perspective.

Okay, thank you. I'll take a question from Charlotte Greve from The Age, please.

Hi, thanks for taking the question. Just on AML compliance, I'm wondering, Peter, if you think that relaxation of the tipping-off laws to enable a greater information sharing between institutions might help banks like Westpac keep on top of financial crime?

Well, I think, Charlotte, I think the... The challenge in financial crime is we have actors who are continually creating ways to move money for activity that shouldn't be moved. So rather than talking about tipping off, I think if we can find ways to share information in the industry more broadly, that will be useful because we're sharing knowledge and information. So that's not possible under the customer privacy approach at the moment. and that's something that we could look at.

And, I mean, on this, how confident are you that Westpac, you know, anti-money laundering procedures are rock solid and we won't see a repeat of what we saw in November last year?

Well, we're investing heavily to get them to the standard that we need. So the reason the Ostrac case came around is they weren't where they needed to be. We've recognised that and we've committed to a multi-year program to uplift them. So... we will make improvements incrementally over time to get it where they need to be.

Okay, thank you. And just one more question. Westpac's applauded the federal government policies today when it comes to the budget and other stimulus. But what do you think about the leadership in the state? Do you think that borders now need to be reopened so we can see the economy sort of get back to where it was?

Well, I think we need domestic activity to increase. That's the best thing for the economic of the country. We can't keep borrowing money to pay income forever. So we've got to get activity back. We'll have to learn. It looks like we'll have to learn how to live with COVID. The vaccines are promising, but they still take time to roll out. So we do need more domestic activity.

And just on the state leadership specifically, how would you characterise this closure of borders?

You know, each state is making a call from their perspective. My perspective is we need more domestic activity because we can't borrow, we can't continue to borrow to pay income into the economy.

Okay, thank you.

Okay, I'll hold that and come back and then I'll take a question from James Frost, please, from the Australian Financial. Hi Peter, thanks for taking the question.

The shrinking loan book, it seems to be an approval processing issue and a demand side problem from investors as far as I can tell. What can you tell us around the turnaround time as they stand and where you hope to get them to?

And just on the investment, over the last few weeks or months, on an anecdotal level at least, is there any sense of a mini bounce or recovery across any of your key geographic markets?

Well, just more recently, as Michael said in his presentation, we have seen apps go up in the mortgage market as a whole, and I think it's fairly broad-based. including early signs of extra activity down in Victoria. So I do think there is more activity. Investors always, I think, invest for price appreciation and certainly our economist is indicating a much better outlook for next year in terms of prices. So there is the possibility that we do see a better outcome. In terms of our turnaround times, Really, for a basic loan, you need to be in a couple of days and we're not there yet. More complex loans, people will require longer, but we've got a fair bit of work to do to get back to a couple of days.

And do you reckon you'll see any improvement by January, for instance?

We're starting to see improvement in apps now and certainly I've asked the business to be improving in the first calendar quarter of next year.

Yeah, thanks. Okay, I'll try Paulina again. Paulina Duran from Thomson Reuters.

Oh, hi. Hi, sorry, I didn't hear you. Thank you for taking the call. Good morning. My call is around the alliance with Afterpay. AM Setup on Thursday mentioned that the customers that they have that use Buy Now, Pay Later are definitely showing riskier credit metrics with about 2.5%. double the time or double propensity to pay late, for example. Can you give us a little bit of a gist of what your clients that use Buy Now, Pay Later systems kind of look like, please?

Yeah, well, in terms of the arrangement, how we've thought about this is we're offering deposit products is what we're offering. How people pay off is not relevant to a deposit product, but I would just highlight that we all start out in our lifetime as riskier customers because if you're a student, you're building into it. If you're starting the work, you haven't got your credit history. So you would naturally see customers who are higher risk when they start off at the early stage of their life.

Right, so is it for them to think about it as an intra-user-side arrangement that you expect to get a sticky relationship in the future again?

Arrangement's about deposits. Afterpay, the buy-now-pay product is Afterpay.

Yeah. I'm just struggling to get what you get out of it.

Well, we get, as I said, it's about the development of the technology, which... can have application into our core business. And we see that customers are going to move the way they bank. So they're not just going to come to banks. Some will. Some will have arrangements through different partners. So this is a trend in the market that we see, and we want to be in that marketplace.

Thank you for that. If I may, just on the second topic, and that's the guarantee scheme for business lending. I think you said your lend, you used about $300 million of that. It's just relative to the $40 billion total that the government is guaranteeing half of it. It looks small from my point of view, but can you just tell us a little bit of how you're thinking about that and what has been the update since the changes and the tweaks were announced about two months ago?

Yeah, I think it's an important initiative from the government in terms of our customer uptake. They've chosen what's best for them. So some of them have used that particular product. Others have drawn down on existing limits. Others have taken out different lines. So it just depends on the customer uptake.

And what do you expect then? Do you expect that to still be the same in the next six months or two months?

Okay. I think we've got a few more calls online, but I think I'll call events to a close. So thank you very much for dialling in and good morning.

Thank you. Good morning.