Westpac Banking Cp Ord

Good morning, everyone, and welcome to Westpac's full year 2022 results. My name is Andrew Bowden. I'm the GM of Investor Relations. I'd like to acknowledge the traditional owners and custodians of this land, the Gadigal people, and pay my respects to elders past and present. First, I want to particularly thank those people in the room today. Thanks for making the effort. You will be given first go at the questions. And then I'll consider the people on the phone. Presenting today are our normal presenters, Peter King and Michael Rowland. And without any further ado, I'm going to pass straight to Peter.

Well, thanks, Andrew, and good morning, everyone, and a special welcome to those in the room. As you're aware, our strategic priorities involve fixing outstanding issues, simplifying our business, and improving financial performance. And since 2020, we've made significant progress while navigating a global pandemic and record low interest rates. In terms of fixing issues, the Customer Outcomes and Risk Excellence Program, or CORE, is on track. With design now complete, 2023 is a critical year to embed that change. We've now resolved 14 regulatory proceedings and class actions over the past two years. and we're well through customer remediation. Our business is much simpler, with nine of 11 transactions announced and the sale of BT progressing. Our geographic simplification sees us operating from three offshore locations down from eight two years ago. Now, financial performance was solid, although it was still held back by notables. And given the progress on fixed, we expect materially lower notables next year. Key value drivers have turned with improved loan growth, margins increasing, and the cost base reducing. And these trends were particularly evident in our second half. This is reflected in the better core earnings across all our banking divisions. We've also positioned the balance sheet for the environment with sound capital, an appropriate funding mix and good credit quality. And this sees us more focused on the future, particularly improving service for customers and focusing on responding to climate change. Turning to the numbers, for the year, reported profit was up 4% and cash earnings were 1% lower. And both of these results were impacted by notables. This year, notables were $1.3 billion, mostly reflecting the exit of Australian life insurance. Removing notables gives our preferred view of continuing financial performance. And on that basis, revenue was down 2%, costs were down 7%, and this saw core earnings up 3%. I was pleased with this as the higher contribution from our ongoing businesses more than offset the earnings loss from asset sales. Cash earnings excluding notables fell 6%, reflecting the $950 million turnaround in impairment charges. While margins were down over the year following strong competition and low interest rates, they improved in the second half and Michael will take you through that detail. Our return on equity was 9.3%, and while this is in line with our cost of capital, it's not where we want it to be. There are a few moving parts in the result, and so looking into the detail, it was a solid performance, and this was reflected in the 6% increase in dividends per share over the year. This slide sets out the impact of sole businesses. Having exited Seven, we are a much simpler organisation today. These sales released 48 basis points of capital, supporting the $3.5 billion buyback earlier in the year. This half we completed our exit from insurance, following the sale of life insurance in both Australia and New Zealand. You can see on the chart that the impact of businesses sold was a drag of over $400 million. but pleasingly earnings growth on our ongoing businesses of over $650 million more than offset that drag. Turning to FIX, we have made significant progress on resolving outstanding issues. The core program is critical to lift risk management capability, and we're well into the embed base of the program, which is changing how we manage risk. We expect most implementation activities to be completed by the end of this calendar year. And in 2023, this is focused on making the changes part of everyday business. Today, we released the latest two promontory reports and they confirm our progress whilst also acknowledging the work and commitment that is still ahead of us. Resolving historical, legal and regulatory matters has also been a focus. In the last year, we completed 14 major customer remediations and settled seven regulatory matters. In October, we also settled a further two class actions and we provided for those in this result. So overall, it's been another big year on the fixed agenda. Our second priority is simplification. We've completed seven business exits and reached agreement with Mercer for the super and asset management businesses. The BT Panorama platforms process is underway, but there's nothing to update on today. Geographic simplification sees Singapore now an Asian hub, and we're awaiting final regulatory approvals in China and Hong Kong before we can exit and repatriate the capital. And banking simplification has also been moving forward. The new Westpac app is a step up in both capability and speed, and this is helping customers to migrate to digital. This included digitising over 400 paper forms as well as contacting more customers through secure online messaging rather than via email. At the July strategy update, we outlined our plans for the physical network, including our co-location branches. We've recently extended the Australia Post partnership by a further 10 years. So in summary, with business and geographic exits well advanced, we're now much more focused on banking simplification. Turning to our businesses, all improved their position over the year, and this is reflected in earnings. The chart at the top is year-on-year performance, while the one at the bottom is half-on-half performance. What's evident is the stronger second half with all our customer divisions delivering. Momentum was off the back of loan growth, good NIM management and lower costs. GBU did have a softer half and that was from a lower treasury contribution following a very good first half. So let's turn to the businesses in detail. In consumer, the key themes are mortgages, digital and margins. In mortgages, we grew below major peers for the year, but as we improved the consistency of our process, we grew in line with majors in the second half. We've more to do with rolling out the app to third party brokers or the new system to third parties and scaling up the digital mortgage. And this will also help customers refinancing as well as those shifting off fixed rates. I'm really pleased with our progress in digital. We've completed the rollout of the Westpac app. We've also recently launched the new personal financial management tools in the app. And this solves the major functionality gap. This is delivering better outcomes for customers and also improving our efficiency. While core earnings were down over the year in consumer, momentum was stronger in the second half as line growth and higher deposit spreads lifted returns. Lending spreads do remain under pressure and there's been no let up in mortgage competition. But overall, consumer ended the year with a stronger franchise and momentum. Our business segment had a better year as we improved efficiency and removed bottlenecks. Core earnings dropped significantly in the last two halves from lower costs and high interest income. And this division has a deposit-to-loan ratio over 150%, and so its NIM is more leveraged to rising rates. And you can see that in the latest half. We have excellent business bankers. However, they've been distracted by resolving historical issues and complexity. But this is improving as we move through the fixed agenda, and we saw that with more settlements per banker this year. It's also been helped by simplifying credit assessments and digitising processes. And these changes translated to the better growth across existing customers, mostly in agri, property and professional services. So with a large customer base, we have a significant opportunity in business and it's a segment that we plan to grow. WIB has undergone significant changes over the past two years, focusing on deepening customer relationships to improve returns. And core earnings dropped strongly over both halves as we grew lending by 26% and reduced costs. And this is a relationship-driven performance with a lot of the growth from existing customers, in part because they drew down on existing limits rather than accessing corporate debt markets. Growth was in infrastructure, M&A, structured finance and property. And we've maintained our leadership in sustainable finance, participating in 69 transactions during the year. As we embed the changes, we expect growth in WIB to continue. In New Zealand, we've refreshed the management team, are dealing with significant regulatory commitments and are making steady progress. We simplified the business following the exit of life insurance. Lending grew through the year across both mortgages and business. And within business, there was also good mix across industry sectors. And while New Zealand is further through the interest rate cycle than Australia, the effects on margins are more lagged given more of the loans over there are fixed rates. Costs were higher as we increased... resources for regulatory programs, including the BS11 project, and to strengthen technology infrastructure. But the better growth improved margins and higher costs, and this led to core earnings growth in the last two halves. Like Australia, credit quality in New Zealand is excellent and impairment charges remain low. We have made good progress in reducing costs and it remains a top priority for the company. But given the challenges in the environment, we have adjusted our FY24 target from $8 billion to $8.6 billion. At the time we set the target, we assumed inflation around 2.5%, fully exiting our specialist businesses and completing our major risk and regulatory programs. Higher inflation is having a significant impact, along with the war for talent, which is also pushing up salaries. Last week, our employees endorsed our latest enterprise agreement with higher pay and a $1,000 one-off payment for cost of living. This is just one of the examples of pressure in the system. We are committed to simplifying our business portfolio, but business exits won't be completed by FY24, and so we have removed SBD costs from the target. At the same time, while our fixed programs are on track, we expect some costs to be required for longer, and this has been most evident in New Zealand, including for the BS11 project. We think 8.6 billion gets the balance right between productivity and the investments we need to make, And while we have updated the target for the environment, we still are seeking to deliver a step down in costs over the next two years. In July, we outlined our new climate plans to become a net zero bank. We reconfirmed our commitment to net zero in our operations and financing activities and set the first four sector targets. Today, we've announced our fifth 2030 target for large commercial property sector. We're also progressing additional targets for high emitting sectors. And by the end of 2023, that should capture around half of our financed emissions. Since the July update, we've continued to talk to our larger customers and we'll capture their feedback as we finalise our pathways. With our direct emissions, we reached a milestone with the equivalent of 50% of our electricity consumption now from renewables. And looking forward, we have agreements to take that to over 80% by 2024 and are working to get it to 100% by 2025. On dividends, the board determined a final dividend of 64 cents per share. And that sees the total dividend for 2022 at 125 cents per share, which is up 6% over the year. When determining the dividend, we consider the outlook, capital position, and look through the notables, and we feel the increase this half reflects performance and our confidence in the future. On an ex-notables basis, the full-year payout was 67%, and that's within our target range of 60% to 75%. Let me now hand over to Michael, who's going to take us through the second half result in more detail. Michael.

Thanks, Peter, and good morning, everyone. I'm pleased with our performance this half, and as I look at the results, I'd make three points. First, we've improved momentum across all our banking businesses. Combined with better margins and lower costs, core earnings rose 12%. Second, our balance sheet and capital are well positioned. Capital levels are near the top of our operating range and we've actively managed deposits and timed our wholesale funding well. Finally, credit quality has continued to positively surprise. And although we're expecting a rise in stress in the coming year, there are still no signs of deterioration. Turning to the detail. Our results reflect many different elements this year as we work through our fixed agenda, progress transformation and complete business exits. We've provided extra detail so you can see the impact of notable items and the sale of businesses. Notable items this half were dominated by the sale of the Australian life insurance business with a loss of $1.1 billion, which we disclosed when the deal was first announced. Other notable items in the half were a net cost of $166 million after tax, including additional remediation and litigation provisions, and the costs of restructuring our corporate and branch footprint. These were partly offset by tax refunds from prior asset sales. Exited non-core businesses were not significant to 2022 earnings, but did impact prior period movements and some line items, so we've highlighted this in the analysis. Cash earnings this half were down significantly, mainly from the impact of notable items. Core earnings were up 12% when these and the turnaround in credit impairments are removed. Most of the core earnings increase was from the 7% rise in net interest income with growth split between volume and margins. Excluding notable items, non-interest income was down 7%, with around 40% of that due to business exits. The rest of the decline was mostly from the valuation adjustment in trading income. Expenses were down 2%, delivering on our commitment for the half. Simplification and the completion of some fixed projects were the main contributors. Impairment charges were a low of five basis points of gross loans, up one basis point or $57 million. Tax was higher with the rise in earnings. Total lending increased 3% with growth in mortgages, business and institutional lending. Movements in the exchange rate took around $3 billion off growth. In Australian mortgages, the growth was in owner-occupied lending, and while our performance in investor improved to 29% of flows, the balance was a little lower over the half, mainly from a fall in mortgages for business purposes and for closed products. Australian business lending had a solid half, with good growth in property, agri and professional services, while our institutional growth was principally from existing customers. Lending was 3% higher in New Zealand, although FX movements saw a contraction in Australian dollar terms. New Zealand grew in both mortgages and business lending. Personal lending was down 9% as we continued to run down the consumer order book. Cards and other personal lending were relatively flat. With lending and credit outlook more challenging, I wanted to highlight that over the last five years, we've improved the quality of our portfolio. Mortgages have grown to be 71% of our book and the quality of the institutional book has improved. Higher risk-weighted portfolios have declined, including interest-only and closed mortgage products and other consumer lending. We've also exited two portfolios where we relied on third-party originators, including vendor and dealer finance. Lending outside Australia and New Zealand has more than halved over the period, in line with our strategy. And so we enter this next period with sound credit metrics and confidence in the quality of our book. We grew Australian mortgages 2% over the half, mostly due to a better net refinance outcome, while paydowns and property sales were also a little less. Part of the improvement has been because we reduced processing times to 6.3 days for first party and 8.1 days for third party originations. This helped us better manage volumes and higher inquiry levels as rates increased. These turnaround times are in market, but not yet where we need them to be. Over the coming half, we expect them to bring down the time a little further as we complete the rollout of our new mortgage platform to brokers and as we extend the functionality of our digital mortgage. Fixed lending declined to around 11% of flows, well down from its peak of around 50%. Margins were a good story this half, up five basis points and excluding Treasury and markets, up 10%. The increase was in deposits and hedged earnings, partly restoring spreads after years of record low interest rates. Lending spreads were down 14 basis points from intense mortgage competition and rate lags. We've only just begun to see the impact of the roll-off of fixed rates. This will pick up in the half ahead and peak in the second half of 2023. Funding impacts on margins were broadly neutral this half. We've timed our funding well, avoiding some of the more volatile periods when spreads were particularly high. We've also managed to lock in around $4 billion of pre-funding. The impact of liquid assets was more than expected as holdings were higher and funding costs were larger. We expect a smaller impact from liquids going forward. The September exit margin, excluding Treasury and markets, was 1.85%, up five basis points on the average of the second half. And this is a tailwind going into 2023. This next slide outlines the margin drivers in more detail and the industry considerations for the first half of 2023. The tailwinds brought on by rising rates will continue. With the 25 basis point rate rise last week and further increases expected, deposit spreads and hedged earnings should continue to improve. Over 2023, we have around 50% of our fixed rate mortgages rolling off, and given the intensity of competition, the benefit will likely be a little lower than we initially expected. While rising rates are a positive, there are still headwinds, particularly in the second half of next year. From last half, you can see that loan spreads contracted, and this is expected to continue into 2023. We've begun to see funds flow into term deposits as interest rates rise, and this will drag on margins in the period ahead. While wholesale funding costs are also expected to be higher, the impact from the roll-off of the TFF will be a second half issue. We have largely finished our liquids build, but expect some additional pressure, mainly from the higher cost of carry. All in all, while there are competing factors on margins going forward, we are positive on the trajectory into the first half, but expect that to moderate in the second. This half, notable items in sole businesses have had a big effect, so I've stripped these out to show the underlying picture, with non-interest income down by 4%. Fee income was 2% lower from a reduction in institutional fees and some non-notable remediation, offset by higher card spending. Wealth income was up, mostly from higher interest rates on cash management. Trading and other income was lower, including from a derivative valuation adjustment. The increased volatility over the half saw fewer customers inclined to hedge exposures, and so markets' customer income was down. On the other hand, higher volatility increased trading opportunities and this saw the non-customer income a little higher. Other income was lower, mostly from some one-offs in the prior half. We delivered on our cost reduction commitment by reducing expenses by 2% this half and by 7% for the year. The reduction was all in employee costs with a 5% reduction in average FTE. Ongoing expenses were higher with inflation, increased mortgage volumes and more persistent regulatory spend, particularly in New Zealand. Our cost reset plans took 7% off expenses as we cut third party spending, reduced our footprint and implemented the next round of changes under our line of business operating model. Under this change, we moved more of our functions to customer divisions and expanded our shared services units to get the benefits of scale. Investment spend was down a little over the half. We capitalised some major investments and we've had the full year benefit of the write-down of assets in 2021. Fixed spending was down as we moved into the implement phase of the core program and completed some major risk projects. Credit quality has continued to improve across almost every metric. Starting from the bottom of the bar chart, impaired assets declined as new impaired assets remained very low and we partially wrote off a couple of larger provision debts. The fall in 90 days past due aligns to the improvement in mortgage delinquencies, which continued to trend lower, even in the 30-day bucket. The small rise in the watch list was mostly due to the downgrade of one larger facility, but otherwise the trends in this bucket are also good. Unsecured delinquencies also trended lower despite the contraction in the portfolio, and so underlying quality is sound. Provisions remain 18% above pre-COVID levels and were little changed over the half, down just 50 million. All of the decline in total provisions was in individually assessed provisions. The mix of collective provisions shifted in the half with a lower proportion of overlays as we captured more risks in our models. After applying a greater weight to our downside economic scenario at the half, we continue to believe the current uncertainty warrants a 45% weight. Looking at the relationship between our provisions and the impairment charge, new IOPs continued to be remarkably low. No large new exposures greater than $50 million were downgraded to impaired. The largest impaired exposure was $30 million. Write-backs and recoveries were lower, in part because the stock of impaired assets is lower. Write-offs direct were slightly higher over the half but remained low, given the decline in the auto portfolios. The other movement in cap was $17 million as increased model provisions offset reductions in overlays. While we expect a slowdown in economic growth and an increase in stress, we are confident in the quality of our portfolio. At the same time, maintaining tight credit standards in mortgages and commercial property lending sets us up well for 2023. LVRs remain at comfortable levels and mortgage insurance coverage is stable. Notwithstanding more recent reductions, property prices remain high and provide a buffer. Reflecting the quality of the mortgage book, we had just 224 properties in possession at the end of September and actual losses for the half were just $2 million. On the business side, while business growth has been higher over the last 12 months, it had been relatively low for an extended period and we are well provisioned. There is not excessive gearing in the system that's concerning us. As with most downturns, while the aggregate picture looks fine, the effects of higher interest rates and lower growth will be uneven and we expect stress to rise. But regardless of how that emerges, we are well positioned to respond. CET1 capital ended the year at 11.3% and allowing for announced divestments, that rises to 11.4%, near the top of our operating range from January 1 this year. Other than the usual impacts of earnings and dividends, IRRBB risk-weighted assets were a 36 basis point drag that flowed through in the June quarter and is largely unchanged since then. Growth in credit risk-weighted assets from lending was largely offset by improved credit quality. The other category was higher from rises in capitalised software and expenses. Divestments reflects the completion of the Australian life insurance sale. Other capital considerations are outlined on this slide. It has been pleasing to have clarity on APRA's revised Basel III standards. We expect some reduction in RWAs, mostly in institutional and business, that will add to our CET1 capital ratio from 1 January next year. Looking forward, we expect heightened market volatility with higher inflation and interest rates. While mortgage market remains competitive, we expect growth to be broadly in line with major banks, with more work to do in the investor segment. Business and institutional lending will continue to perform well, with growth in line with system, albeit lower than 2022. I've already spoken on margins. We expect a rise in the first half, given our exit margin and the likely rise in interest rates. Non-interest income will be impacted by business exits and the anticipated slowdown in consumer spending and broader economic activity. Costs excluding notables are expected to be lower, at 0% to 2% down for the half, with continued delivery on our cost-out plans. We expect some rise in impairment charges, but given the lagged effects of interest rate rises, this will be more of a second-half 2023 story. Before handing back to Pete, I wanted to highlight that from next year, as part of our simplification, we are moving to focus our financial reporting on statutory profit after tax. We will continue to provide information on large and infrequent items and we'll come back next year on the details. With that, let me hand back to Peter.

Well, I thought I'd just finish touching on the outlook. When we spoke at the half, we were planning for higher interest rates, a moderation in GDP growth, record low unemployment and a pullback in housing prices following a stellar run. The big change since then has been the impact of the war on energy and food prices, along with much more buoyant spending. The surge in inflation is now feeding into wages and businesses are increasing prices. And as a result, we expect interest rates will need to be in the range of 3.5% to 4% to slow inflation. We're also positioning for a slowdown in the economy, a modest rise in unemployment to 4.5% and further falls in housing prices. However, I am very positive on the fundamentals of the Australian and New Zealand economies. Although, as Michael said, if there is a slowdown, the effects will be uneven. Most customers are in decent shape heading into the future. And so with our healthy balance sheet, we are ready to assist those customers who do need help. So let me just sum up. We're well advanced on the fix and simplify agenda and we'll stay the course to get it done. This year's operating and financial performance was solid with our stronger second half giving us momentum into 2023. Our balance sheet is well positioned for the tougher environment and we are directing more effort to improving the bank for customers and lifting shareholder returns. Thanks. And we'll hand back to Andrew for Q&A. And I just would like to say, Andrew, thank you for your, I think it's 43 results now. Andrew's going to be moving to another role within the company, but he's done a great job for us over the years.

Thanks, Pete. Okay, I'll wait for Michael to get up. As I said, I'm going to stick with the room first. Can I just go?

Thank you, Andrew, and congratulations on a stellar career. Well, that's not finished yet. No. Peter, two questions, and Michael as well, one on expenses and one on margins. If we look at your margin benefits in the half, it's a fairly substantial uplift from deposits, 24 basis points. If you could maybe give us a little bit of colour as to why the exit rate is only five basis points above, given all the rate increases that we've seen so far, and are you seeing slowing in that deposit leverage beta as rates continue to increase? And the second question on costs. In the slide on costs, you provided inflationary pressures moderating from sort of around 7.5% to 3%. Just interested in your thoughts on whether that's sort of the 7.5%, 3% is adequate numbers in terms of where cost growth is likely to be in 2023, 2024, kind of as a basis before cost-saving assumptions. And given that cost growth this period has been, you know, when you adjust for capitalisation versus expensing, pretty much you haven't really seen cost reductions. Why are you still confident on significant cost reductions in 23, 24? Thank you.

I might deal with costs. Mike can do margin. In terms of the target, so the way we're thinking about this is we want costs to go down and we want to have an absolute cost target to focus the company. In relation to the components, there's always ons and offs in these things, but we've set out our expectation for inflation. Personally, I think they're right in terms of expectations, but you know what they are is the best way. Is my crystal ball better than yours? Time will tell, really. On your point on the performance in the half, we have reduced FTE. You're right, there is a change in amortisation. That's predominantly because we've got WIB investing in some of the payments platform businesses, so I wouldn't see that as related to the P&L, and we've continued to invest in digital. They will have benefits in the future. But when I look at it, that's a cost reduction of 7% this year, and we're planning for 8% over the next two years. Inflation, we've been clear on the estimates. We think it's fair, but we've been clear. OK. Hold on. Margins.

Yeah, so, look, I just add to Pete's... You know, we've outlined in the information materials that we've provided to you the targets that we still have in place for the underlying simplification of our business. So we've delivered on those this year, and they're critical for us to deliver that simplification to get underlying costs down to 24. So we're not... So that's an important point to make. On margins, there are a lot of moving parts on the margin in the year and the half. In the half in particular, we've seen, as you can see from the slides, we still see significant mortgage price pressure in the system, and that's going to play through in the second half, into the first half of 2023. But we think, by and large, that trajectory of exit margin will flow through into 2023 and so we see the margin higher because we've got good trajectory flowing on deposits and hedged earnings.

There was also a bit of pre-funding in the last quarter getting into next year so you can see that in the liquids column in the margin but we've been pretty focused on making sure we're well funded and markets have been a little bit choppy so when the markets are good we've been pretty active in funding. And Jared.

Jared Mark from Credit Suisse. No surprise, go back to expenses. So no surprise with the cost reset to $8.6 billion. But there seems to be a subtle difference in that target now in as much as its ex-specialised business group. So is that to say that you don't expect or you expect that you'll still have a specialised business group by the time we get to FY24? And then what are the potential stranded costs? once you do exit, and so that ultimately you will never print an $8.6 billion cost base because of those things. That's the first question on cost. The second question, and go back to what Victor alluded to, you've increased your capitalisation of expenses from 39% to 55%. You've got a peer that actually is expensing 87%. The extent to which that number moves down or moves up going forward

Just on the SBD, so as you know with any transaction, you announce it, then there's a process to regulatory approval, then you settle it, and then there's transition period. With the platforms business, we expect this transition period to be lengthy. So you'd normally get revenue and expenses at that point. That's really what we're dealing with in excluding SBD in terms of the arrangement because we expect there to be a long transition period. We'll be clear, so we put down the bottom of that slide the revenue and expenses from the SBD businesses. We're still committed to simplifying this portfolio. It's a transaction we're working on, but we just wanted to be clear that we do expect there to be transition costs for a period of time on that transaction.

And I'll just add, just on your point on stranded costs, we've been working on the stranded cost element of SBD for some time now. As we've indicated, we've exited nine businesses already and we've removed the stranded costs associated with that. So we will continue to work on that. So notwithstanding that the final exit of those businesses might take a little bit longer, we are continuing to work ahead of that so that by the time they are exited, the stranded costs are insignificant. On the capitalisation, as Pete indicated, we have spent more on our large platform investments this year. We've spent money on our mortgage platform, payments, data and digital. We have a capitalisation policy and we just followed that policy. So we'll continue to do that. We raised the threshold for that to $20 million. That's still in place. And so, you know, we can't predict exactly how that will play out, but we expect... that in this year there's probably been a bit of a spike in the capitalised element just because of the nature of it and the fact that we wrote off the WIB assets last year.

Okay, Andrew.

Andrew Triggs from JP Morgan. Maybe just to ask quite directly, the F524 cost target was assumed for the level of investment spent and what percentage is capitalised rather than expensed up front? Level of capitalisation.

So we've factored a similar level of investment capitalisation in the 24 target for the revised target as we did in the original target. So it's a bit low. It's more the long-term average of capitalisation, which is lower than this year.

And the total level of investment spend is annualising at $2 billion.

I think we said this last year, slightly lower as we complete more of the fixed projects. So you saw that the investment spend come down this year as we completed a number of the fixed programs and we rolled off some of the core activities. That will continue to roll down, but we'll see a switch from fixed into simplify and perform, but at a slightly lower level.

Thanks, Michael. And last half had quite granular disclosure on the fixed non-recurring element of cost base. That's not in the pack this time. What happened to those various components? Are we able to get a sense of that?

Oh, I think they came down.

Yeah, so the quick answer is, as Pete indicated, that the fix we see as being more part of the ongoing cost base of the bank. When we originally set the cost target, we assumed that we would complete core and the major risk projects at that time, and that would go to zero. What we found, and New Zealand's a good example, but we've got a lot of data requirements, and it's playing across the industry. This is not just a Westpac issue. That is more persistent, and it's likely to stay in the cost base longer. So rather than call it a fixed one-off cost, we see that as partly ongoing cost base of the company.

Thank you. And just a second question on tier two capital. So APRA released a paper talking about calling of uneconomic calls of particularly, I guess, sub-debt, non-call five, which are called at five despite the annuitions cost being above what's rolling or what you're buying back or calling. Yes. Your sense on, I guess, what that is likely to do to demand for tier two paper and potential widening of spreads on sub-debt?

So I suppose I'd say a couple of things. Firstly, APRA just confirmed its existing standard and policy, so nothing's changed from that. We still have a requirement to grow Tier 2 out to 2026, so that hasn't changed. You see that the market did react on a pricing basis. They're a little bit surprised, but we expect that to moderate as things settle down.

John? Two questions, if I could. The first one on New Zealand. You did mention it's a high fixed rate market, so it takes time to come through, but margins only up five pips and a half from flat year on year, despite the RBNZ going pretty aggressively. Some of your peers are already starting to see quite a bit of rate leverage coming through in New Zealand, so... First question, why aren't you seeing the rate leverage coming through? Do you expect to see that coming through this next half? Because it is a lot more muted than we expected. Second question after that.

Yeah, so a couple of things. Obviously, New Zealand's ahead of us in the rate-rising cycle. So while there is an 85-15 fixed variable market, we're starting to see that flow through. So we are seeing, and the industry, I think, is seeing a contraction in mortgage margins because of that. And also, we will see rate leverage on the deposit side. But like we're starting to see here in Australia, there's been a big shift from at-call to TDs. That's accelerated significantly. And because of that and the funding situation, the rate leverage on deposits is a little bit lower. So we do expect in New Zealand as well that margin to increase in the first half, but probably a little bit less than you'll see here in Australia.

And I think the other thing in New Zealand is we had a liquidity overlay from the regulator, which we've been dealing with. That meant we had to hold high-cost funds. So I think that could be one of the reasons that we're a bit different to peers as well. But we've got the overlay removed now.

Second question just on the DRP. Sorry, half removed, not all removed. Half removed, yeah. Thank you. Second question on the DRP, you're not neutralising, you're actually issuing shares. So through this period, you said your capital position's great, you think you're going to get another tailwind from the risk-laden asset reduction. Not neutralising the DRP and paying a higher dividend, I know franking's important to shareholders. Is this the result of the potential change to off-market buybacks in our need to return franking through dividends? Is that one thing? Or why would you be not neutralising your DRP and issuing shares to pay dividends again?

Yeah, so it's a small top-up to capital if we do issue shares, $200 million. It's not really because of the government's change in policy. It's just we've stared into everything. We're doing this half, and we think we need to issue shares for the DRP. Ed?

Thanks, Andrew. A couple of questions from me. Just firstly, going back to the NIM, you moved your deposit hedge from three years to four years during the half. Can you just touch on what the impact was that in the half and also going forward? And then just to clarify on your comments, you talked about a positive trajectory going into first half 23. Is that a positive trajectory from the exit, Nim? And then you talked about moderating in the second half. Are you saying moderating as in it falling or as in it's still going up but just at a slower rate?

Okay, so just on the first point, so we look at the hedged period for both our capital and deposits on a regular basis, and we made a decision earlier in the year to increase that to four years because that better reflects the behavioural maturity of the book, and also we... we took the view that it would improve earnings over that period of time. So that was that first issue. Second issue, we expect the margin to improve on the exit rate in the first half. And that increase in the first half, we'll still see an increase in the second half, but it'll be lower.

Thank you. And then just a second question, if I can. You talked about, and it was publicised, you were looking at Tyra. Why are you looking at a business that's loss-making? What's it going to add to you?

Yeah, so obviously the conversations are confidential, so I'm limited in what I can say. But when we look at the bank, so we're focusing on the banks, we think payments is important. In the institutional bank, we're investing in sort of the infrastructure that supports the bank, including using the 10X capability. And we're also looking at other options that can improve the offering to business customers around payments. So that's the strategic thinking. Because we're simplifying the portfolio, we've got more ability to look forward and I'll probably stop there. Andrew.

Thanks, Andrew Lyons from Goldman. Just two questions for me. Firstly, just slide 43 disclosed your MFI share, which had been steadily improving until the recent half after really decades of decline on that measure. It did stall a little bit in the second half of the year. I'm just wondering, is there anything that we should read into that, particularly as you're very focused on costs in the business at the moment? And then a second question just around your capital. You have mentioned an expectation that your risk-weighted assets will reduce and your core equity ratio will increase. Just can you give us some sort of a feel as to the extent of the increase that you might expect on OneGen?

So on consumer, when we look at the... So you've got the MFI, which can be survey-based. It has improved. Westpac's doing well, I think. A little bit of weakness in St George, so we've got a bit of work to do there. But if I look at fundamentals of, say, customers banking with us, a number of accounts opened, both of those are improving in terms of the operational performance of the business. So I think we've still got more work to do on MPS and MFI, but we're very focused on improving the operational performance of Consumer Bank as well.

on capital with the non-neutralisation of the dividend and the normal ups and downs we expect to be slightly above our top of our target range as we go into January.

Okay, I'm going to switch to the phones. Can I take a call from Brendan Sprouse, please?

Good morning, team. I just have a question around your composition of your customer deposits you have on slide 62. There did seem to be a big shift into TDs during the half. Just sort of looking at the charts below that, is it fair to assume a lot of those TDs came in the WIB or division or was it spread across? all the divisions, and then also what's the impact, I guess, of that drag that you're expecting in the first half, 23?

So just quickly, the composition of the drive-to TDs, so we saw a shift in consumer from ACOL to TDs and in WIB new money into TDs. So it's broad-based across all our businesses. On the margin, it didn't have a significant impact on margin in the second half. It'll have slightly more of an impact in the first half because we'll have a full half impact, and I indicated that when I went through that margin slide.

And if I could just have a second question on slide 66, just looking at your investment spend and the mix of that. I mean, this year, again, it's been obviously dominated by fixed. So I was wondering, how will these three buckets change over the next couple of years as you reach towards your overall cost target?

Yeah, I think as we've indicated in the past, we expect the proportion of what we call fixed to come down as we complete the major risk projects and complete core. And we'll see particularly the simplification bucket, but also the performed bucket increase as a percentage on a slightly lower total.

No problem. Thank you. We'll take a call from Brian Johnson, please.

Good morning, and thank you very much for the opportunity to ask a question, two questions, if I may. The first one is, if we go back to slide 20 from the first half result, you specifically called out at call on term deposit repricing in the second quarter 22 and said that that would flow through, the full period impact of it would flow through into the second half. When I actually have a look at slide 63 in today's announcement, I suppose I'd really like to understand... basis point deposits from $300 billion to $75 billion and the gap up from something net negligible earning below $75 basis points to $300 billion, Westpac has lost quite significant retail deposit market share. When do we expect to see some – is this a critical issue? Does it need to be addressed through pricing? That's the first question.

Well, Brian, I think in terms of the... I've got the slide in my head. I think it's the one that shows the deposits by interest rate in terms of what we're paying. There's been very increases, very large increases in... interest rates obviously so we have had to increase the amount of interest we pay on deposits so that's explained the majority of those movements. In relation to our performance in deposits I think we think about deposits as transactional which I said before we are growing the number of customers who are using Westpac for transactional purposes and then we look to fund the loan growth with deposits as well and we've done what we needed to do in terms of growing deposits to fund the balance sheet. So I think, you know, one's the interest rate cycle and so we have increased interest rates on deposits. The second one is about how we fund the bank and we have been able to fund the bank and the loan growth in the period.

Sorry, Peter, could I just push my luck? If we go back to what was said at the first half, you specifically called out that in the second quarter you would reprice down at call on term deposit. So that was slide 20 of this half. And you said that you expected it to flow through into the second half of the year. So that's slide 20 of the first half result. When we actually have a look at this result, you've lost quite a substantial amount of share. So just come back to what I was saying. Does Westpac need to change its deposit pricing or do we continue to see loss of deposits going forward?

Well, I don't think we have lost deposits, Brian. So if I look at... I can't imagine us talking about future pricing at the half year. We stay away from what prices will change in the future. But if you look at the second-half margin performance, we have seen expansion in deposit margins. That was pretty evident in the slide that Michael used. And we will always grow where we need to to fund loan growth. And I'll just make the point, Brian, that our deposit-to-loan ratio is broadly... We haven't got the first-half pack here to look at, Brian, so I'm having... Well, it's pretty clear.

You did say at call and turn deposit repricing in the second quarter is a positive, and then you called out the full period impact of repricing to flow through into the second half.

And it did in the margins.

I'm not making this up. You guys said it.

And it did in the margins, Brian. Yeah. The margin deposits have been expanded. Yeah.

So, Brian, I think the point to make here is, A, it did flow through to the margin. As you can see on page 63, the 28 basis points flowed through from customer deposits. So that's, in anybody's sense, flowed through to margin. And since we made that comment, interest rates have increased significantly. So I'm not sure what... And we've maintained a deposit-to-loan ratio that's appropriate for the bank at this point. So I'm not sure what point you're trying to make.

Okay. Just on to the second one, if I may. When we have a look in the Pillar 3 on page 19... we can see that basically the core equity T1 ratio is 11.3%. And I think, to your credit, you guys were calling out that number should not dip below 11% under APRA's rules.

Correct.

But when I look a little bit further on that page, we can actually see that the Westpac New Zealand core equity is now down to 11%. That number had been as high as 13.8% if you go back to September 2021. And we know that it's got to get to 13.5%. Admittedly, it's a long way away. Can we just reconcile where the core equity sits right now on an ex-dividend basis, because that's more relevant, but also what is going on with that rundown in the core equity in New Zealand?

So you're right, Brian, that we do need to build the New Zealand core equity in line with the Reserve Bank of New Zealand rules, and we're on track to do that. We paid a dividend in the half. That's had an impact on capital. And as we sit here today, we will be above 11% on an ex-dividend basis.

And what about the New Zealand capital bill?

The New Zealand capital will build to reach the RBNZ requirements between now and 2028.

And was there a dividend upstream from New Zealand to Australia in this half year?

Brian, we've got six years to build that capital ratio in New Zealand.

And Reserve Bank takes a very close view, so we have to get approval to pay a dividend, and that approval was received. So it's in line with our expectations.

Can I take a question from Richard Wiles, please?

Good morning, gentlemen. A couple of questions, please. In the fourth quarter, two of the other banks, BAQ and ANZ, revealed that their margins were up 13 basis points and 15 basis points, respectively. I wonder if you could comment on what happened to your margin in the fourth quarter and how it compared with the exit margin.

So, Richard, we obviously are not providing quarterly numbers, but our trajectory is up, so you can work out that in the fourth quarter it was positive and growing, and it'll grow into the first half of 2023.

Sorry, it was positive in which quarter, Michael?

In the fourth quarter.

It should be really positive. I mean, your peers are doing double digits.

So I'm sure you'll want more disclosure than, you know, we've agreed we're doing half on half disclosure. And that's where we sit.

Okay, was the exit margin above the fourth quarter?

Was the exit margin above the fourth quarter? The exit margin was in line with the fourth quarter.

Okay, thank you. And then on slide eight, which talks about your costs, you reveal some progress on the number of applications you've decommissioned and also the number of processes you've digitised. Can you talk to us about targets for the full cost reset plan? How much progress have you made on decommissioning applications and digitising processes relative to your end target?

Yeah, so on page 67 of the materials, Richard, we've had a consistent slide on how we're progressing. And as I indicated before, we're progressing to plan. So we're on target to achieve the simplification that we outlined back in 2021. And that's on track.

Okay, thank you.

I might just remind those on the phone, star one, if you want to ask a question. I'll take a question from Azib Khan, please.

Thank you very much. A couple of questions, if I may. First one on costs. On slide 14, you show the expenses for the specialist businesses segment to be $1 billion, roughly. If I recall correctly, back in FY20, the expenses for that same segment was about $0.9 billion. But since FY20, you've exited a lot of those businesses. So I'd like to understand why the cost for the segment has increased between FY20 and FY22.

See if it's got some notable items in it this year.

So the notable items are obviously the sale costs of the various businesses that were exiting, plus some additional remediation costs. So that, as Pete said, includes... That's why it's a bit bigger. It looks... Yep.

OK, thank you. Second question on margins. I'd just like to understand... I mean, you've obviously called out, you know, intense mortgage competition prevails. I'd like to understand, on slide 23, where you showed a new waterfall, The nine bids straight from loans, how much of that was the Australian mortgage fronted back book impact? And also within the business division, obviously you've improved your loan growth momentum there. The NIM is up 74 basis points, half and half. But I'd like to know if there's been any business lending spread contraction in that segment, and if so, how much? Thank you.

So the business lending spread compression is very small, a basis point or two, and the majority of the loan spread compression is from mortgage competition in Australia. You see that we've called out the rate lag impact, which is the five basis points, so the remainder is from mortgage competition.

And retention, repricing, and new flow as well as ZIB. Yep.

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

Hi there. Thanks, guys. Thanks, Peter. You said in your closing comments you expected the cash rate would peak between 3.5% and 4%. On that Westpac Wire interview this morning, you said you expected that it might fall in 2024. Off that peak, I was just wondering if you could talk a little bit about how your thinking on that might have changed last week, given the RBA's... Inflation forecast sort of rising up to that 8% inflation peak and perhaps inflation staying above 3% sort of into 2025. Do you still think after last week we might start to see a fall in 2024? And a related question just on the credit quality side. If we're starting to sort of peak at 4%, are you able to be any more specific on what you might see in impairments? Michael said in his comments it would be the second half of 2023. Story, you're saying unemployment could hit 4.5%. Mortgage delinquencies are obviously really low at 0.75%. Just wondering if you could talk a little bit about this peak cash rate and what it might do, what this sort of uneven economic effects idea means.

Yeah, I mean, we do get a little bit focused on where it's going. But I think if I step back, what we've got is a very strong economy, low unemployment, record low unemployment, and we've got interest rates rising quickly. At this point, we haven't seen spending really slow down. It's probably just a little bit. We have seen housing prices go down. So we're just highlighting that we think interest rates need to move up further from here to slow the economy and slow inflation. So that's the trend. Time will tell us exactly where they need to peak, but we've given you a bit of an estimate of where we think they need to go to slow it down. There are long leads here, so... We still have not started processing the last three interest rate increases into mortgage repayments, monthly repayments yet, so they've got to still come through. And so that's why I think the Reserve Bank's effectively moved back to 25 basis point steps, and they're going to look at the data. That feels like an appropriate move at this point. On credit quality, I think the credit quality in its aggregate sense, most of the metrics, all the big metrics, are now back at pre-COVID levels. We're maintaining 18% higher provision coverage, even though we're at the same levels. But we recognise with borrowing costs, with energy costs, with food costs all going up, that some people will need time and there might be some write-offs. So some extra stress and therefore some provisions. We haven't put out a forecast for that, James, and I won't do that. We'll give you another update at the half year.

Okay, I'll take a question from Asher DeCresta, please.

Oh, hi. Just picking up on what Jane said, are there any areas of the economy that concern you more than others or any businesses that you're more worried about? And then just on the fixed rates, how many of your customers are you keeping as they roll off those fixed loans?

Yeah, I think when we look at the economic impacts, we think discretionary spend is the part of the economy that reduces as people spend more of their income on interest costs and energy and food. So anything that's associated with discretionary spend in the economy, some small businesses that are concentrators watch what we're watching particularly closely. Sorry, the second question. Oh, fixed rates. I think it was in the high 80% that we saw rollover from fixed to variable and stay with the bank. This half, I think 86% was what we're experiencing.

Can I just ask you a follow-up? How many of them use your digital home loan product to refi?

I'm not sure, actually. I'll have to find out. A small number, a small number. Most of the processes are online. Thanks.

I'll take a question from Joyce Malakis, please.

Hi, Peter, and thanks for taking the question. Just following up from the last couple, could you just talk through and provide a little bit more colour around your expectations for business credit growth and housing credit growth, given what you've told us in terms of your expectations for interest rates and unemployment over the next little while, please?

Yeah, we've got both moderating. So the economic forecast for housing lending is 3.6% next year and businesses too. Whether or not it slows down that quickly straightaway will depend on how the economy reacts, but we are planning for slower growth than what we've seen this year.

And just to follow up one on the cost side, obviously FTE did make an impact, the reduction there on the costs for this result. Are you expecting that that rate sort of continues as you do work towards the $8.6 billion target?

Expecting FTE? So, yeah, we broadly expect a decrease that we saw this half to play through in the next year.

Sorry, you do expect?

Yes, yeah. So we saw a 5% reduction in FTE, and we expect that to play through into 2023 as well.

Okay, thank you. I'll take a question from Gerard Coburn, please.

Hi, Peter. Thank you for taking my question. Look, this is quite a broader kind of outlook question, but I just wanted to ask in relation to kind of enterprise bargaining. Obviously, there are possible legislative changes for industrial relations happening in Parliament. I just want to see if there's any kind of headwinds with that, the bank bringing down expenses.

Well, we've just... had our latest enterprise agreement approved. It's for two years in terms of that. So we're pleased literally last week that happened. So that covers for two years. In terms of the broader changes, we're watching them very closely. We're not sure we would like a broad-based industry enterprise agreement. So we're looking closely at whatever changes might come through Parliament. Beautiful. Thank you.

I'll take a question from Nathan Zia, please.

Good morning. I was just hoping you could comment on application volumes and how they've trended over the last 12 months. And then just following on from that, what percentage of those are getting approved and rejected and how that compares to, say, 12 months ago as well?

Yeah, well, I think you can see in the stats that the applications are coming down, and there was recent data last week that said they're down, so we're a big part of the market, so obviously we're coming down as well. In terms of the approval rates, I think they're pretty unchanged, actually. They're consistent, but we are expecting lower application levels, just what's happening in turnover and whatnot in the market.

Is those approval rates the same between a refinance from another bank and a new loan as well? That's unchanged as well?

We look at the approval rates in aggregate and they're unchanged.

Okay.

Okay. Thank you.

Can I take a question from Clancy Yates, please?

Oh, hi, Peter. A quick question on credit quality. You've said that inevitably there will be an impact of interest rates rising. Are you able to say just roughly what timeframe, when that might start to flow through and in which parts of the business would feel the stress first? Would it be mortgage arrears or do you see it show up in business loans? Yeah, could you just provide a bit of detail there?

I think the... Christmas, up the Christmas period, it feels pretty strong. After Christmas, it's feeling strong. Around that March to June quarter, I think we'll particularly get a good read on what's happening. In terms of what are we looking at, obviously things like job ads, retail spending, some of those more forward-looking activities before we get into delinquencies and whatnot. As I said before, we'll also be watching small business performance, particularly those areas that are involved in discretionary spend.

OK, thank you. I'll take a final question, actually, from Fabian Cotter, please.

Hello. Just looking at your mortgages, I know Occupy are up $10.5 billion between March and September, and you're saying that your forecast is less going into the next year. Just from a broker channel point of view and a strategy from Westpac, To what extent is Jonas going to be on brokers to help alleviate some of the stress and keep the flow coming in through Westpac and stuff? Is there a big importance placed on the broker system, broker channel for Westpac?

Well, I think we're focused on providing a good service to both the first party and the broker channel. And that's all about speed. And you can see in the result that we have increased speed. And so it'll play an important part. Both channels play an important part in Westpac mortgages, both first party and third party. Excellent. Okay, thank you.

Okay, with that, I'm going to call things to an end. And this is my final session up in front of the audience. So I just want to say I've been particularly lucky in my career, 27 years almost, dealing with a lot of the people on this call. So I want to thank you all for the incredible support that you've provided me. It's been a great pleasure. But I do want to thank... I've had great... support from the executive team over the years as well but perhaps most importantly my team who I'm most proud of and they're the ones who have been able to do for me to do what I've been able to do so I want to thank them personally. Thank you all much and good morning.