Westpac Banking Cp Ord

Good morning everyone and welcome to Westpac's 2023 interim results. My name is Justin McCarthy, GM of Investor Relations. Before we begin today, I would like to acknowledge the traditional owners of the land in which we meet, the Gadigal people of the Eora Nation, and pay my respects to their elders, both past and present. The results will be presented by our CEO, Peter King, and CFO, Michael Rowland. At the end of the presentation, you'll have the opportunity to ask questions. And for those questions, we'll come back to them. Please press star 1. With that, over to you, Peter. Thank you.

Well, thanks, Justin, and welcome, I must say, and good morning to everyone. I'm really pleased with this result. It's the culmination of a lot of hard work over several years to simplify our business and rebuild momentum. We've strengthened the balance sheet, have been disciplined on margin growth and costs, and we've set up well to navigate a more difficult operating environment together with our customers. And before we get into the result, I'll share a couple of observations on the operating environment and how customers are faring. To date, the Australian and New Zealand economies have displayed resilience, particularly the strength of the labour market. However, the increased cost of living, along with widespread inflation, have led to the fastest increase in interest rates in decades. And we know this is tough for many households and businesses. For the bank, while hardship cases are currently below pre-COVID levels, we are preparing for an increase. Supporting customers is a top priority for the company. It is going to get harder for some, and we encourage customers to get in touch early, and our hardship teams are ready to help. Our loan portfolios are in good shape. With stress, little changed this half. However, we know the impact of rapid monetary policy tightening is yet to be fully felt. As an example, for variable mortgages, eight of 11 price changes have been translated into higher repayments. And for customers transitioning from fixed to variable rates, there is a longer lag with $95 billion of mortgages repricing over the next 12 months. We are navigating this environment from a position of strength. If I turn to the result, the uplift in performance, particularly our return on equity, is reflected in a significant increase in shareholder returns through dividend growth. Our balance sheet is the strongest I can remember, and strengthening the balance sheet was a deliberate decision given the economic outlook. Loan growth was disciplined and our funding composition improved with increased customer deposits. CT1 Capital is well above the top end of our target range, while credit provision coverage was also boosted. Our simplification agenda continued and we completed a further two divestments during the half. And we've worked hard to strengthen risk management. Most of our effort in the core program is now to embed the changes in our operating business to make them endure. While we're managing a range of short-term priorities, we're increasingly focused on the future. We're entering the next strategic phase with a refreshed purpose and priorities. And these are centred on the customer and improving our competitive position across key segments. On slide four, net profit was up 22%. And this reflects solid growth in operating income and a decline in expenses. The 24% growth in pre-provision profit was tempered by higher provisions for loan losses. And net profit after tax is now our main performance measure with cash earnings no longer reported. And Michael will cover this in a little bit more detail in his presentation. Revenue was up 8%. Lending was up across all segments with growth in owner-occupied mortgages, business bank and institutional banking. In addition, client activity drove higher markets income. Expenses were down 7% and excluding notables, expenses were down 3%. Credit quality is sound with our portfolios displaying resilience exemplified by a decline in new impaired assets in the period. Impairment charges were 10 basis points of loans, up from four, and an improved performance drove the significant increase in return on equity, which rose two percentage points to 11.3%. Moving to the shareholder returns on slide five, we've delivered a consistent improvement in returns since 2020, and that year marked a low point for Westpac and a testing time for shareholders. The recovery in profitability has driven the return on tangible equity to 12.8%, more than 3.5 percentage points higher than 2022, and well above the low point of 3.9%. Earnings per share growth of 26% was faster than the profit growth, as last year's buyback reduced the average share count by 3%. Dividends are significantly higher over recent years, reflecting the recovery in earnings. And the sustainable payout ratio has been updated to 65% to 75% of net profit after tax, adjusting for notables. We're navigating the operating environment from a position of strength. As I noted earlier, in all my years at Westpac, I can't recall a stronger balance sheet. Starting with capital, we have $3.6 billion above the top of the target range and our capital levels have materially increased since 2008, reflecting ours and APRA's conservative approach. The excess capital gives us options to support growth in targeted segments, cope with a potential harder landing or flexibility for future capital management. Liquidity also increased significantly over this period. Liquids, as a proportion of total assets, have risen from 8% in 2008 to the current level of 21%. Our total impairment provision was $4.9 billion, and that's $1.5 billion above the base case scenario for expected credit losses. On funding, our position is vastly superior to both that of 10 years ago and pre-GFC. Customer deposits have risen from 44% to 65% of total funding, while short-term wholesale funding reduced from 37% to 13%. And over the past three years, we've focused on banking in Australia and New Zealand, and that has simplified our portfolio. During this period, we've made further progress on simplification, including completing the exit of another two businesses, Advanced Asset Management and BT Super. In total, we've exited nine businesses. We continue to assess options for both the BT Platforms business and Pacific Banking And we're also accelerating the simplification of our banking services. Last year, I outlined our branch co-location strategy, and that's bringing multiple branches under one roof. With 96% of transactions occurring either over the phone or digitally, that is our primary channel, but face-to-face banking is important for some customers. Co-location is part of the striking, the right balance between physical and digital banking. And we're making great progress having recently opened our 50th co-located branch. We're also extending our virtual branch offer. And this is great for our regional or remote customers in particular. And we're piloting video anywhere, allowing customers to connect with bankers from the comfort of their home. Strengthening risk management and risk culture also remains a top priority and our core program, which you can see the progress at the bottom of this slide, is driving much of this change and since 2021 we've completed 87% of activities. The program is on track and we expect to complete activities by December, but our efforts to embed risk management will continue. We're entering our next strategic phase, one that is focused on both growth and increasing returns. We're turning the focus outwards, strengthening our market position for a more attractive customer proposition. We've refreshed our strategy and set a new purpose, which is creating better futures together. And our strategy is framed by four pillars. First is customer. Everything starts and ends here. And this pillar is about service, service that is consistently great. It's about support in the good and bad times and recognising customers who choose us as their bank. The next is easy, which is about making banking simple and digital for both customers and our bankers. And our expert pillar is how we differentiate. It's about sharing our expertise to help customers, whether that's through bankers, through thought, leadership and finance, or supporting customers to transition to net zero. Our fourth pillar is advocate for positive change. And as Australia's first bank and company, we've done this for centuries. We're focusing on three key areas, safety and security, financial inclusion and climate. And we'll measure our progress through improved returns and market position. Moving to costs, our focus on productivity and simplification in recent years does see Westpac a simpler and stronger bank. And we're targeting three areas to reduce cost. First is the portfolio simplification, where we've delivered nine of 11 business sales. The second is lifting risk management to reduce operational errors, and this half we had no notables. The third area is banking simplification through cost reset. The cost reset program has delivered over $1 billion of savings and reduced the cost-to-income gap to peers. Looking forward, the likelihood of persistent inflation and ongoing risk and regulatory demands are putting upward pressure on costs. Given this, we are focused on improving the cost to income ratio relative to our peers. We believe this strikes the right balance between cost discipline and investing in our franchise. And importantly, our cost reset program continues. Strong customer relationships are key to our franchise, and we're working hard to improve our service and offers by making banking easier, expanding digital access, and giving customers greater visibility and control of their finances. And digital is playing a major part in this story. It's the primary channel for connecting customers and bankers with our services. Today, more than 5.6 million customers are digitally active. Over the last year, digital transactions increased by 11% and mobile wallet payments by 50%. And our app is the main banking gateway for customers. With over 5 million daily sessions, it is the bank in your pocket. Since the launch in 2021, we've expanded features and capabilities, making banking both easier and safer. A few features we are proud of include the budgeting tools, which give customers greater visibility and control of their finances. Tracking income and expenses and carbon footprint are further examples. Westpac Verify is a new tool that alerts customers if there's a potential account name mismatch for payments to a new BSB and account number. And that builds on the safety features such as the dynamic CVC, which protects customers using credit cards and debit cards when they're shopping online. Now, most important customer offer is home lending, and we're working hard to restore our franchise. Our competitive position will strengthen with mortgage brokers now on the origination platform. mortgage lending has never been more competitive and while we have seeded market share, recent declines reflect a conscious decision to be disciplined and this is not the right time to take back share. We're focused on improving our service and investing in our systems and processes and this is freeing up bankers to spend more time with customers. Speed, simplicity and safety are driving our agenda and our single mortgage platform was fully operational in March with 92% of loans settled on the platform. While the rollout has taken longer than we hoped, we're pleased with its performance, particularly for the proprietary channel. Time to write is down to five days and we can complete a simple loan even faster. For third parties, as we bed down the platform and sharpen service, we expect time to write to improve. Now, digital mortgage is gaining traction with an unconditional offer in as little as 10 minutes for eligible customers. While it accounts for a small proportion of our origination, it is growing rapidly with approximately 80 million in settlements in April. We see significant potential to grow in business banking, leveraging our solid platform and deposit franchise. The segment performs strongly with pre-provision profits growth more than doubling on the back of rising deposit spreads. This was in turn reflected in higher margins and returns. Business banking is typically the segment that underperforms during economic downturns. and our seasoned portfolio, underpinned by long-term relationships, is performing, and there's currently little sign of stress. We have a strong deposit franchise, with a deposit-to-loan ratio above 150%. After a period of deposit growth, we saw a modest decline over the last year, an indication that business is starting to feel the impact of a slowing economy. Our loan book grew by 6% over the year and the book is well diversified across a range of sectors with capacity for further growth. Aligned to our financial inclusion advocacy, we've made a $500 million commitment for lending to women in business. Our drive to make banking easier and digital includes the launch of FPOS Air for small business customers and auto decision lending capability. And while loan growth is expected to be a little slower in the near term, we're optimistic about the medium-term prospects here. On institutional, we've made significant progress. Performance was strong with profit up 88% over the year as this drove return on equity at 14% up from 8%. Institutional banking presents a growth opportunity and we want to reclaim our position as a leading Australian institutional bank. We're focusing on deepening relationships with existing customers, building expertise and expanding digital capabilities. Our growth will be driven by supporting customers across relationship banking markets and transactional banking. And markets income increased over the half. We led the market on fixed income relationship strength. We also play a significant role in mobilising capital. In this half, we supported 23 sustainable finance deals with nearly a total value of $20 billion. In summary, we're very pleased with the performance of our institutional bank. And let me hand over to Michael to take you through the results in more detail.

Thanks, Peter, and good morning, everyone. I'm pleased with our performance this half, and as I look at the results, I'd highlight three points. First, the growth in net profit. we have taken a considered and disciplined approach to both revenue and costs in a highly competitive and inflationary environment. All segments grew pre-provisioned profit in the half. Second, the strength of our balance sheet. It provides capacity to support customers and growth and flexibility for future capital management. Finally, credit quality is sound. We believe we are well provisioned for this stage of the cycle. I'll start with the reporting changes on slide 16 before covering the result in more detail. Net profit is the primary measure of financial performance following the decision to no longer report cash earnings. The change forms part of our simplification agenda as we align our ASX and US results announcements and at year end we will consolidate the results announcements with the annual report. We will continue to report notable items which are not considered to reflect the group's ordinary operations. This disclosure will assist in the analysis of our results and comparison to peers. Notable items fall into three categories. First, movements in economic hedges. These were previously removed in the calculation of cash earnings. Second, net ineffectiveness on qualifying hedges, which were also removed. And third, material items that are not part of the group's ordinary operations. They will vary and may include items such as gains and losses on the sale of businesses, remediation charges and restructuring costs. In the first half of 2023, notable items provided a benefit of $178 million, comprising the gain on sale of advanced asset management of $256 million, a benefit of $43 million from hedge ineffectiveness, and a loss of $121 million from economic hedges. This compares to a loss of more than $1 billion in the second half of 2022 and a $179 million benefit in first half 2022. We've also shown the net interest margin on a core margin basis to remove the impact of notable items and treasury in markets and to make peer comparison simpler. Turning to the detail on slide 17. Net profit was $4 billion, reflecting strong revenue growth, contained expenses and a modest increase in credit impairments. Pre-provision profit growth was underpinned by the 7% rise in net interest income. The group's average interest earning assets increased by 4% to $934 billion. Growth in average loans of 2% was driven by a combination of mortgages and business lending. Average liquid assets were up 3% as we took the decision to be highly liquid in response to global market events and for the reduction of the committed liquidity facility. Non-interest income was up 5% to $1.7 billion. Stronger markets income more than offset a contraction in wealth management and insurance while fee income was flat. Despite the significant impact of inflation on employee and supplier costs, expenses were down 1%, delivering on our commitment for the half. Benefits from our simpler organisation and lower third-party spend were the main contributors. Impairment charges rose modestly to $390 million, driven by the modelled impacts of weakening economic forecasts, some early signs of deterioration in credit quality and a weather overlay in New Zealand. The effective tax rate in the half was 28.8%, with the tax benefit on the sale of advanced asset management reducing the tax rate below the statutory rate of 30%. The core net interest margin excluding the impact of increased liquid assets rose 12 basis points. Loan spreads, mainly in mortgages, subtracted 11 basis points from margin. we again saw intense mortgage competition for new customers and for the retention of existing customers. Business lending spreads were only marginally tighter with less intense competition. Customer deposits provided 20 basis points of benefit with wider spreads across all customer segments in Australia and New Zealand, along with higher earnings on hedge deposits. There was a mixed shift away from transaction accounts to lower spread online savings accounts and term deposits as customers responded to the higher rates on offer. Reflecting the step up in the tractor rate, higher earnings on capital contributed four basis points. Wholesale funding costs were slightly higher with a one basis point drag on margin. We timed our funding well, avoiding some of the more volatile periods when spreads were particularly high, raising $20 billion of new long-term wholesale funding in the period. The cost of holding liquid assets reduced margin by two basis points. Treasury and markets also reduced margin by two basis points, largely due to the contraction in short-term Australian dollar basis spreads. Notable items reduced margin by eight basis points, with the hedge impact moving from a positive in the second half of 2022 to a small negative in the period. While I'll come back to the margin outlook, it's worth highlighting that the exit core margin for March was 1.88%, two basis points lower than the average of the first half and flat on the second quarter. Total lending increased 1%, with growth in Australian mortgages and business and in New Zealand. Australian mortgages grew at 0.5 times system as we responded in a measured way to the intense level of competition. All growth was from owner-occupied variable rate mortgages, with a modest contraction in investor mortgages, which included the runoff of closed products. Australian business lending grew 1%, reflecting growth in targeted sectors more than offsetting declines in other parts of the portfolio. Institutional lending contracted slightly following strong balance sheet growth in the second half of 2022. Lending was 1% higher in New Zealand, although the appreciation of the New Zealand dollar saw a larger rise in Australian dollar terms. All the growth came from mortgages with above system growth. Personal lending was flat, with both cards and other unsecured lending portfolios steady. The closed auto loan book within specialist businesses continued to run off as expected. Notable items had a sizeable effect on non-interest income this half. Stripping these out, non-interest income was up 5%. Fee income was flat, with the impacts of lower interchange fees in New Zealand and lower facility fees in WIB offset by lower remediation payments in consumer. Wealth income was down, money from businesses sold. markets and other income was up substantially, primarily from fixed income, which benefited from higher customer flows and the tightening of credit spreads. There's also a significant contribution from the derivative valuation adjustment that moved from a charge of $17 million in the prior period to a $57 million contribution reflecting tighter counterparty credit spreads. Turning to expenses. The group demonstrated cost discipline over the period with expenses down 1%. Costs were up from higher inflation, salary and wage growth and higher third party costs. FTE was up in the half to manage customer service levels and regulatory demand, particularly in New Zealand. Pleasingly, most of these increases were offset by a 4% reduction in costs from our simpler organisation and reduced reliance on third parties. Investment spend was lower for projects that completed in the half. Investment decreased 8% over the prior period, with lower regulatory compliance spend more than offsetting the 13% higher investment in growth and productivity. The continued investment in our mortgage origination platform allowed the rollout to all third-party brokers so that now all channels originate mortgages in the same way. This provides a solid foundation to drive sales productivity and efficiency. Our investment in digital is enabling our strategy to become a digital-first bank and expand the ways customers can access our banking services. Continued development of the corporate cash management platform supports WIB's leadership aspiration in Australia. The business process simplification is making it easier for our customers to do business with us and for work to be more rewarding for our employees. While delivery of our regulatory compliance agenda remains a priority, and with 62% of investment spend, our progress has meant this spend has decreased. High capitalised balances and the extension in the overall use for life reflect higher spend on platforms and infrastructure, which will provide benefits over a longer period, and the fact that some of the larger investments are yet to complete. Impairment charges of $390 million were 10 basis points of average loans, up from a low of 5 basis points in the prior period. the $138 million IAP benefit comprised new IAPs of just $76 million, another low charge with no new IAP greater than $10 million. And write-backs and recoveries of $214 million included the recovery of a large exposure that had previously been written off along with write-backs from a combination of upgrades and external refinancings. The IOP benefit was more than offset by the cap charge of $528 million, which included write-offs direct totaling $218 million, a similar level to the prior period, and other cap movement of $310 million with weakening economic forecasts and only a slight deterioration in credit quality. Total provisions increased 6% to $4.9 billion, which is $1.5 billion above our base case scenario. We are well provisioned for a more challenging economic environment. Coverage also increased. Collectively assessed provisions to credit risk-weighted assets increased 17 basis points to 1.33%. This reflects both higher provisions and lower credit risk-weighted assets following the implementation of APRA's revised capital framework. Most of the increase in provisioning was due to higher modelled collectively assessed provisions. Our individually assessed provisions were lower, mostly due to lower new impaired assets. We do not make any changes to our scenario weightings and continue to believe the environment warrants a 45% weight to the downside. Credit quality remains sound. Stressed exposures as a percentage of total committed exposures increased three basis points, driven entirely by regulatory changes related to APS 220. Excluding this change, the ratio was one basis point lower, reflecting the lower level of impaired assets. Mortgages 90 days past due were two basis points lower, while there was an 18 basis point increase in the 30-day bucket. To date, the roll rate to 90 days is below historical levels. Unsecured 90 days past due were also two basis points lower, despite the continued runoff of the auto finance portfolio. The slight rise in early cycle delinquencies in both mortgages and unsecured reflects the impact of higher interest rates and inflationary pressures on household budgets. The CET1 capital ratio ended the half at 12.3% above the top end of our operating range. Net profit, excluding notable items, added 82 basis points with the payment of the final 2022 dividend, net of the DRP, reducing capital by 45 basis points. The adoption of APRA's revised capital framework added 62 basis points. The revisions reduced credit risk-weighted assets by $23.7 billion, with the main contributors being the reduction in non-standard mortgages, the shift to APRA-approved modelling for property finance, and reduced off-balance sheet exposures. Other risk-weighted asset changes added seven basis points to capital. a reduction in interest rate risk in the banking book risk-weighted assets from lower regulatory embedded losses, along with lower counterparty credit risk and improved credit quality across corporate exposures, more than offset lending growth and higher market risk-weighted assets. Capital deductions and other items reduce capital by 15 basis points, driven by an increase in capitalized software, a higher deduction for deferred tax assets, and FX translation impacts. Divestments reflects the completion of the advanced asset management sale. The Board declared an interim dividend of 70 cents per share, growth of 15% on the prior corresponding period. This reflects our improved financial performance and strong balance sheet position. The payout ratio excluding notable items was 64%. That compares to the sustainable payout ratio assessed on a full year basis of 65% to 75%. turning to industry margin considerations. Competition in mortgages is likely to have the largest impact on bank margins in the second half. For Westpac, higher interest and swap rates will continue to benefit non-rate-sensitive deposits and earnings on capital. We have been disciplined on lending growth to manage the margin. However, as demonstrated by the lower exit rate, lower mortgage spreads will be a headwind to our margin in the second half. Wholesale funding costs are expected to be marginally higher, driven by wider average spreads and repayment of the term funding facility from June 2023. Liquid asset balances are expected to stabilise as the final reduction of the CLF occurred on 1 January 2023. As I said earlier, I'm pleased with the first half performance. We have delivered good profit growth while significantly strengthening our balance sheet. Looking at the second half, we expect lending growth across all segments with revenue headwinds coming from lower margins and business sold. We start the second half with sound credit quality and are well provisioned. We will continue to be disciplined on costs as we further advance our cost reset program while at the same time investing to meet persistent regulatory requirements as well as for growth and productivity. Our balance sheet is strong, which positions us to manage the more challenging environment to grow and support customers. We will continue to position the balance sheet conservatively and plan to maintain capital above the operating range. The board will consider capital management as usual at year end. With that, let me hand back to Peter.

Well, thanks, Michael, and we'll touch on priorities in the outlook now. Economic growth is slowing and we expect this to continue through the remainder of 2023 and this will see credit growth slowing and unemployment likely to rise. On a more positive note, we expect the downturn to be shallow. In terms of our credit portfolio, it remains resilient. There are slight signs of stress emerging for households and businesses and we expect to see further stress as the full effect of monetary policy tightening flows through. Westpac's well positioned to manage through this environment. Our balance sheet is strong, which sees us well capitalised and able to support customers who need help. Just to recap, we've delivered an improved financial result with increased returns and dividends. We are a simple, stronger bank with the strongest balance sheet I can remember. And as we move to the next strategic phase, we'll set ourselves up to focus on growth in core markets and increasing returns. Thanks. And Jason's going to organise questions. Maybe Justin's going to organise questions.

Thanks, Peter. And good to know you know who I am now. So we'll go to questions now. And a reminder, star one, if you would like to ask a question. Our first question comes from Victor Gurman from Macquarie Bank.

Thank you, Justin. I was hoping two questions, if possible, one on margins, one on cost. On margins, one of the trends that we've seen with your peers is deterioration in margins quarter on quarter. And if I look at your statements on where you've landed with margins peaking in October and being only two basis points down in the exit rate, it suggests that you've seen much more stable margin performance quarter on quarter. I'd be interested to see if that is accessible, correct, and any observations you can offer us how you were able to achieve that and whether there's potential risk as we're going into next year with respect to mortgage competition and deposit competition. And then I have a second question on cost, if possible.

Well, I think I'll let Michael – well, why don't you give us the cost question, Victor?

Okay. Thank you. So the cost question is you've given us something on slide 10, cost to income ratios, and it looks like you're not particularly different to peers with respect to that measure. You're walking away from fairly ambitious cost guidance that you've had before. I'd be interested in kind of how do you – want us to think about costs from here. Do you think that you will be sort of tracking a bit closer to tiers, or is there, in your view, still material differentiation in terms of what you can achieve on costs in the next couple of years? Thank you.

All right, we'll start on NIM. So Michael highlighted in his remarks that our last quarter margin or last quarter NIM was pretty much aligned to the exit margin. So we feel like we did a good job in managing margins, all the moving bits in margins in the quarter. But Michael, why don't you add a few points on that?

And the way we think about that, as Pete said, the last quarter was broadly flat on the exit rate. And I think when we stand back, we have consciously managed the margin, being very much aware of that volume margin trade-off. And we talked to you about this at the full year results last year. So this is a conscious outcome. of trying to get that balance right, acknowledging that we've had a good run-up in deposit spreads, but that the mortgage margin in particular, but also from New Zealand and from business lending, has had a slight impact. But we see that as being core to the outcome today and an important part of how we've managed it. You asked how we look forward. As I said in my words, we see that there will be some continuing deterioration in mortgage margins in the second half, and that will be the main driver of the margin outcome. We're not giving an outlook or guidance on that, but all I'll say is as we've managed it in this half, we'll continue to manage the margin outcome as well as we can given the competing demands.

So when we thought about productivity, we had the three buckets. We had the simplification of the business portfolio, so we've done 9 and 11, and we continue to work on the platforms and Pacific banking business. The payoff from better risk management, in my mind, is less operational issues. And we had no notables in the half, so I think we're making real progress there. Then on the banking simplification, what we've really done over the last six months is reflected on inflation. My personal view on inflation is I think we're going to see services inflation pretty sticky. That's important for this business, given we're a people business and supply business. rely on a lot of supply. So we reflected on that. We've also reflected on the different regulatory requirements that we've got. If we think about APRA reporting, resilience of operations, what we're going to have to do on records management, we think there's quite a bit of work that we need to do there as the law gets hopefully simplified. So there's just a lot of regulatory things that will be persistent more than what we targeted in the previous target. And that's led us to view the cost of income relative to peers as more important, and we've got to simplify our business to get near the other two peers below us.

Well, to that... That makes a lot of... Sorry. I'll just add, Victor, that, you know, we are maintaining our focus on cost. Our cost reset program remains on foot, and you'll see in the materials that we've provided today, the outcomes on the key simplification measures continue to be reported, and we will continue to manage our bank more efficiently because... The premise that we started this was we needed to get our costs down. We still believe there are more efficiency opportunities and we'll continue that discipline into the next half.

So it would be fair, at least in the short term, the next half, next year, is it fair to assume the cost will start to increase from here as it is with consensus and inflationary pressures?

So I think to answer that, one thing that surprised us a bit is just the height and the persistence of inflation. When we set the original cost target, inflation was running at 0.5%. We expected it to go to 2.5%, and it's been running at well over 7%, and we expect that to continue in the half. we offset that inflation increase and wage growth increase from the cost reset savings. What we're saying is that's going to be harder going forward, but also, as Peter indicated, we need to continue to invest in our regulatory compliance agenda when we previously expected that to run off. So we're not giving guidance today, but we do think those pressures are very much there in the second half. Thank you.

Next question comes from Brendan Sproles from Citi.

Thank you. Good morning. Look, I've got a follow-up question on the cost. I mean, you said you're moving to a cost-to-income ratio relative to peers. When we look forward, you've kind of called out on the income side that you're going to have headwinds to mean and slowing revenue. So we're going to get a situation where you may have declining income income, but also rising costs?

Well, I think these are industry issues, Brendan. So in terms of the margin, obviously it's mortgages. This bank is skewed to mortgages in the portfolio. So in a relative sense, we're probably a little bit more impacted, but like any half margins, got many moving levers and we'll see what we can do to manage it well and I do think we did that, particularly in the last quarter. Just on costs, what we're saying today is they're not going to reduce. Us being able to get to an 8.6 number from where we are today, but as Michael said, we still have the cost program, we still have opportunities across the range of programs and We'll seek to do everything we can to offset cost pressure, inflation and regulatory whatnot, but it's just a bit hard for us to predict, or we don't want to set another number for FY24.

Okay, I've just got a second question on the dividend on slide 28. Obviously, Peter, you made some comments. You thought the balance sheet was as strong as you've seen for quite some time at Westpac. Obviously, you've got excess capital, you're neutralising the DRP. But what we have been noticing is this fall in the payout ratio of the last successive half, ex-notables. So would I take away from today with this new sustainable payout ratio that we will start to see that trend back up? from what we've been is a downtrend in that payout ratio.

Yeah, we think about the payout over time. So, you know, I wouldn't get too focused on any six-month period. And certainly, you know, we're comfortable in the range. So 65 to 75 is where we're comfortable. I mean, you can see we've created a bit of capital this half. So definitely opportunities for us to think about a high payout ratio.

Thank you. Next question comes from John Story from UBS.

Great. Thanks so much. Morning, Peter. Morning, Michael. Thanks for giving us a chance to ask a question. Just first one on my side is the 11 basis points of margin impact that you show in your NIM bridge. Just want to get a better understanding. Obviously, you've mentioned that you are growing well below systems. you've got quite substantial fixed rate maturities coming due in the second half of the year. I wanted to just get a better sense of how much you're having to discount to keep clients effectively on your books, and what does your retention rate look like?

The way we think about the margin, and just to break that 11 basis points down, seven basis points is from Australian mortgages, two basis points is from New Zealand mortgages, and remembering New Zealand has very much a fixed rate environment so that the impact of rising rates in New Zealand has a less transmission mechanism in the half. And two basis points broadly from business lending. So that's the way we think about it. On fixed rate, in fact, and I think we've said this before, the fixed rate roll from... So the roll from fixed rate... variable rate doesn't have much of a margin impact or certainly hasn't had much of a margin impact in the half for Westpac. And retention, I think we said at the full year that our retention rate at that point was 86%. For this half, it was 84%. So we're really pleased with our ability to retain customers through the fixed-rate rollover, and that's very much about communicating with them early, speaking with them through the process and getting them comfortable. We don't talk about the... the discount, but what we've always said and we continue to emphasise is that our service to customers, our responsiveness, our consistency on credit policy, as well as price, play a role in the retention of customers through this period.

Okay, and just my second question is... To get a better understanding of how much margin protection Westpac has as interest rates move, you've obviously got your forecast to put up your cash rate going down at $2.85, December 24. How much margin protection does the bank have as rates start to fall? And then also, what's the ability of Westpac to reprice its back book as rates go down?

So as you'd appreciate, talking about pricing is something we're just not prepared to do.

Yeah, so the economics forecasts are... Westpac economics forecasts are a peak in the cash rate of 385. So they're basically saying we're there and they've got about 100 basis points of reductions through 24. That'll give you a cash rate about 285. I think that's manageable because the issue we had with flaws and whatnot was the cash rate going to 10 basis points, not 285. So we feel that's good. And then obviously the tractor for capital hedging and deposits is a three-year rolling, so that smooths the impact of both rates going up and down into the margin.

The next question comes from Carlos Cacho from Jardin.

Thanks, Justin. Thanks for the opportunity to ask a question. Just to follow up on that lending margin impact, of that seven bips of margin compression from Australian mortgages, can you give us any colour around how that split between front book compression versus back book discounting?

Yeah, so the split for Westpac is about 55% front book, 45% back book impact.

Great. Thank you very much. And then just a second question around mortgage growth. Noting, as you said, you know, you've been quite disciplined in growth recently and well below system. At the same time, though, it does seem that you've, you know, you've kept your offers generally pretty competitive with rates kind of, you know, pretty in line with competitors and a cashback that's on average probably a little bit higher than peers. So can you give us a bit more detail as to how you're thinking about competition in that market and how how you try to strike the right balance between staying in there enough but not stepping too far away at the same time?

I would actually say for us to grow up market, we would have to be sharper on price than what we are today. That's how we think about it. There's always what's happening in the market that you can see, the above the line market, and then what happens below. They're still very competitive, is all the data we're seeing. But you're right, we have been competitive, particularly in the regional brands on some of the settings, but you're always balancing the Westpac brand and the regional brands. But I don't feel like, I feel like we've stepped back a little bit actually rather than match some of the pricing that's going on.

Thank you. Next question comes from Ed Heading of CLSA.

Thank you for taking my questions. A couple from me. Just continuing on the margin, how much of your mortgage back book is now repriced? Some of your peers have called out a third to a half and also called out large deposit moves coming through in February and March. Have you seen significant repricing in your exit margin from the deposits or is that still to come for you guys?

Now, I think on the... Well, why don't you pick up the other question? But on the exit margin, that's the month. So that's a pretty good read of what it is, Ed. And that's why we say the exit and the last quarter were pretty aligned. In terms of deposits, I think we've moved... a little bit earlier than that. So we've been competitive in deposits. I don't think there was any catch-up pricing that I can think of in the last couple of months. So the exit margin is not a bad representation of where we are at the moment.

We would see the exit margin for deposits rolling into the second half, so that's fine. On your question, remembering that, and we disclosed this in the IDP, we've got a significant fixed variable rate rollover in this half that we're sitting in, but our book's probably repriced about a third at this point.

Okay, that's great. And then just one second question, just going back to cost for a second, and I understand you've stepped away from the absolute cost number, but if you look at consensus and what you were saying before, you had significant cost reductions coming through in 24, and you did talk about some sticky inflation. and higher regulatory costs coming through. But given your cost reset program, do you still believe you'll be able to get any absolute cost reductions in 24 or is it just a little bit too hard in this environment?

On the timing of when things happen, as I said on inflation, I think it's going to be higher and stickier in services, so that's a bit of a challenge for people and supply-based business. On the regulatory piece, it'll depend on the timing of when we get the requirements and then when we start. you could see a period where they go down, but it'll just depend on quantum and size. But as Michael said, just stepping back, we still have the productivity program and we're driving very hard on productivity.

Okay, thank you.

Next question is from Andrew Lyons from Goldman Sachs.

Thanks and good morning. Thanks for taking my questions. Just two from me. Just firstly, you've noted explicitly that you've got $3.6 billion of surplus capital above the top end of the range. I'm just wondering, can you perhaps provide a bit of an outline as to what yardsticks the board is looking to before they actually start returning that to shareholders? And I think it was noted by Michael that it would be reconsidered at the four year results. I'm just wondering, would you potentially look at doing that intra half or will we have to wait until the full year?

Yeah, I think the biggest question we need to answer is what's the outlook for the credit cycle? So that's the one that will need a bit more time. So I doubt we'll, I don't think we'll look at it intra-period. We'll look at it at the end of the period when we've got quite a bit of new information under our belt. We'll understand the state of the economy and the credit book and As I said, we're thinking it's a soft landing, but we also got to prepare for something that's a little bit harder than that. So I think it'll be a November decision.

Great. And then just, you've noted with the stepping away from your absolute cost target, part of it is just stickiness within your regulatory and compliance costs. But then I just look at your investment envelope on slide 23 and over the year you've seen a an 18% reduction in your risk and regulatory spend within your broader investment spend. I'm just wondering how you can sort of reconcile those two comments around the stickiness of the regulatory spend versus what we've seen over the last 12 months.

It's still high though. So I agree the proportion has come down and the trajectory's down but when we look at what's coming at us, we had hoped that that will come down even further. I don't think that will eventuate. So that's really what we're flagging today is, yes, it's come down over the 12 months, but when we look at the pipeline, there's more stuff coming into it as opposed to the level coming down. The level's still pretty high in terms of the absolute spend as well.

And will you still expect the mix to move, despite that, to move more towards growth and productivity, or will that stickiness of reg spend mean that it it's going to remain broadly consistently where it is in the first half of 23.

Over time, I wanted to get more into growth.

Thank you.

Just a reminder for questions, it's star one, and we encourage the media who are also on the call to join the queue. So star one, please. Next question comes from Andrew Triggs from JP Morgan.

Thanks very much, Justin, and morning all. First question, just following on from Andy's question, just around sustainability of cost reduction and a half. So if you look at the waterfall chart on slide 22, really all the cost out was delivered through lower investment X risk and regulatory. You also saw a lengthening or an increase in the size of the capitalised software balance and a lengthening in the average useful life assumption. So just interested in that reduction, that investment spend. especially in the context of the customer franchise metrics, which are on slide 89, and including the net promoter scores, which all three divisions called out, which are sort of at all second bottom of the peer group.

Why don't you do it? Yeah, so look, I suppose I'll start off by saying, look, you know, we've got to stand back. This is three halves in a row where Westpac has reduced our costs. And I think we're pretty proud of that. And when we look at the half, what we've been able to achieve is covering the increase in inflation on supply costs. One of the things that's really come through in this last half is suppliers, and think of your tech suppliers, your outsource providers, are significantly increasing their costs. We've had wage growth in the half. You might recall we agreed an enterprise agreement, and that increased wages by 4%. And then you've got inflation running at 7% to 8%. So with the cost reductions that we've been able to achieve, we've covered all that increase, and I think that's a really good outcome for us. So, yes, our investment was slightly down in the half, and these things will vary from half to half. You know, we've completed some projects, but as Pete said, we have a big back book of investment we need to do, and as we project that, that will go up. And, you know, we don't set out to either increase the capitalised balance or increase the... the amortisation period to manage our expenses, that's an outcome of the investments and the activity that we're undertaking. But as I stand back as the CFO, I'm really pleased with what we've been able to achieve on costs and we will continue to keep that pressure on.

Sorry, do you want me to just say, Peter, when do you expect to see an improvement in those NPS metrics, please?

Yeah, I'll come back to that. So we have seen some increase in consumer in terms of NPS. But when we unpack it, we're doing okay with existing customers. Where we've got a lot more work to do is perception of customers that don't bank with us. And that'll be a share of voice in terms of our voice in the market. So I feel good about the delivery into consumer, particularly digital, the OBB platform for all channels. And we have seen that in the first party, but more work to do with perception, with people that don't bank with us. I think business is a little bit further behind consumers, so we've got work to do on our processes, and you can see that in the NPS as well as perception. But it's a good business. It's got plenty of deposits and relationships, and we'll be after that now. That's one of my priorities.

Thanks, Peter. Can I ask a second question on margins? So that customer deposit piece, which was a 20 basis point tailwind, 18 of which was on non-hedge deposits, looking into the second half, would you expect that to be a tailwind, a headwind, or just an immaterial nim driver into the second half?

I think it's dangerous to predict margins and movements, but if it's the same condition that we've seen in the first half, it'll be a smaller number, much smaller number. But you've also got to factor in what happens with rates as well as competition.

Yeah, if assumed no more rate hikes, it's still likely to be slightly positive.

Well, it depends what you do with your price. That's why it's... And we're not going to comment on that. Thank you.

Our next question comes from Jonathan Mott from Baron Joey.

Thank you. Just a couple of questions, if I could. The first one, Peter, goes back to the comment you just made about having work to do with the NPS for people who don't bank with you. Just looking through some of the detail, you only had 5.8% of the flow coming from first-time buyers, which is remarkably low. And I know first-time buyers are low at the moment with a lot going on and firing capacity down 30%, but it would seem that a lot of these customers just aren't being attracted to Westpac and the pricing's not great. So how do you start getting the new customers coming towards towards Westpac and the regional bank brands if it's not appealing to them.

Yeah, I think, well, on first homebuyer, the macro piece is flowing the markets down, as it is for us. And I think you're right, the big issue is about borrowing capacity. And for those who are entering the market, when you're adding 3% onto their assessment to borrow, their borrowing capacity is just out of whack at the moment. And so that's why the government has got the assistance, particularly for those sectors, nurses and whatnot to help them get into the market. So I think that's a dynamic. We've got some good deposit offers to bring people to us to save for a deposit targeted at younger people under 30. So that's one way we're bringing more people in. But it's a competitive market in mortgages and we've got to be competitive as well.

So I would say if you want to get that business going for the younger people, you need to get a bit more attractive with price as well, and you've got more back book, given you've only seen three basis points of back book repricing. So would it appear that your margin is holding up better for a number of reasons? You hadn't repriced the back book as aggressively as your peers have, so you've probably got a bit more to go. And if you want to get new customers in, you're probably going to have to get a bit sharper on price. Is that fair?

No, I don't think it is. I think just to give you a sense, the level of retention repricing has gone up probably three and a bit times from 12 months ago. The volume that we do in a month is three and a bit times. So we've been very active in retention repricing. to keep customers because it's cheaper to keep than to originate. And then on the front book, I said to take share at the moment, you have to get sharper on price. That's not our settings at the moment.

A second question, if I could, just looking at slide 20. You talked before about how well you're doing and the target you need to get into business banking. But if you look at business ex-auto and institutional, the two businesses were flat from a lending perspective. Is there any reason, and I know you also mentioned the NPS isn't great in that sector, but is that a concern that every single business is now talking about improving their focus on business and ANZ talking a lot about institutional, but your business there is quite stagnant?

Well, I see it the other way around actually. I think with mortgages being so uber competitive, capital and funding will redeploy into the business segment and I see that as institutional as business banks. So I see that's a bigger opportunity for us. So I think that market will get more competitive as more capital goes into it.

And how are you going to grow? As you said, everyone's going to compete, so it's going to be the next area potentially. We've just got no growth in this area yet, and the other banks are already competing aggressively and growing.

Yeah, so we will have more bankers and more digital capability to make it faster, but that particular organisation has been the most impacted by some of the historical issues and they're getting through those historical issues, so we've got more bandwidth to really focus on the customer offer and process and competing.

Thank you.

Our next question comes from Matt Dunger from Bank of America, Merrill Lynch.

Yes, thank you very much, gentlemen. If I could just follow up on the institutional bank on WIB. Just noting the disconnect between the average interest earning asset growth up 5% and net loans down 1%, half on half. Are you able to talk through what's going on with the reduced lending volumes and in that context, how that pertains to the increasing business lending outlook in the second half?

Yeah, I think if you look over the 12 months, there's been really strong growth. In WIB, it can be influenced by customer behaviour. So as an example, we had more customers go to capital markets rather than borrow on the bank's balance sheet, and that was probably the major thematic in the half. So that happens. But when we think about the medium term, sort of the short to medium term outlook for business, we see there's good opportunities to support people going to capital markets and get more loans on our balance sheet as well.

Thank you very much. And if I could just follow up with one on funding on slide 86, you talked to second half 23 term issuance below the first half. You issued 20 bill in the first half and 23 bill of maturities in the second half. So my question is why are you expecting issuance to be lower? Is something moving around your funding task?

So on funding, we took the decision, as I indicated, to get ahead of our annual funding task in the first half. So we were really pleased with that and we took advantage of stabler funding periods to do that. And at the same time, we significantly grew customer deposits and Pete pointed that in his presentation. So a combination of higher... funding in the first half and more customer deposits means we're probably not as pressured in the second half. But we'll just have to see how that plays out.

Great, thank you. Our next question comes from Richard Wiles from Morgan Stanley.

Good morning, Peter. So on slide nine, you include your measures of success. Can I ask you, what's market position mean? Does it refer to market share? How else would you assess your market position and would your approach differ in mortgages and deposits?

Yes, market share will be a key measure there, but it'll also be how we're going in other sectors. So if you think about the institutional bank, where we sit on the leaderboards on activity will be another measure. So the primary measure will be market share, but market positioning is there to say market share is not appropriate for every business. But over time, I see that we need to... get back to market growth in all our key segments.

Okay. And can I ask you about the mortgage market specifically? All the majors are talking about intense competition at the moment. They're all talking about returns being below the cost of capital for new mortgages. But the fact is that all four have reduced their exposure to other segments. all four are focused on performing well in retail and business banking over time discounts on new loans have gone from 50 to 100 to 150 to 200 basis points so why should investors have any confidence that the outlook for front book discounting and the outlook for mortgage returns is going to improve from here given the behaviour of the sector over the past few years and over the long term?

I'll look backwards. It's difficult for me to comment forwards given the law. But if I look backwards, really what has happened is we've had some new players in the market that have really driven market share gain at the cost of both a simple targeted offer but really good pricing. and the conditions have allowed that because money was free. If I think about it, I think the look forward is very different in terms of the macro. The cost of money has gone up a lot in the sense of deposits. Wholesale funding has got a little bit harder in the macro sense, but that can be cyclical, and we have not yet seen a response for the change in the conditions. Richard?

Thanks, Peter.

Our next question comes from Azib Khan from Evans and Partners.

Thank you very much. A couple of questions, firstly on capital, secondly on costs or risk management. On capital, obviously your target operating range, step one operating range is 11 to 11.5%. ANZ last week said that they think the revised unquestionably strong benchmark is now effectively 11.25%. So the lower end of your range is below 11.25%. Does that mean you have a different view on what the new unquestionably strong benchmark is?

No, no, no. So 10.25 is the top of the capital conservation buffer under the APRA's rules and we set a buffer above that at 75 and then the 11 to 11.5 takes account of the cyclicality of the capital ratio in a year. The quarter after we pay a dividend, you'll be down around 11. Before you pay the dividend, you want to be at 11.5. So I can't comment on how ANZ's thinking about it, but that's how we think about it.

Just to be clear on that, Peter, so you're setting your management buffers to be above 10.25?

Yes.

Thanks. Second question on risk management. If I take a look at slide eight, I can see that the program status for the core program went from green in September to red in February. What issues were identified in February for that to go to red?

Yeah, so this is the Westpac program waiting and we had two particular... So there's about 13, 14 streams in it and we had two streams that went red. They were slipping on their milestones and so we had to get them back on track. And you can see the... The monthly rating, it does move around a bit. It was red in Feb. It's back to amber in March. So it's about the streams and the milestones. But as we said, we're 87% through the activities and we're on target to be 100% through the activities by the end of December this year. And then we'll have a period where APRA will assess and review to get happy that the changes have embedded in the company, permanently embedded in the company. Okay.

But can I just ask, those two streams that went red, what did they relate to?

One was on projects and how we govern projects. One was on risk culture. But I wouldn't read anything into the streams. It's just the plans were a bit off and we've taken action within a month to get them back to Amber. This is a big program with lots of moving bits and we're in the really critical phase at the moment of changing how the business is managing risks. So the heavy lifting is this period through to December.

Thank you.

Thanks, Azib. And it's good to see the media have responded to our call. And we've got quite a few on the line now, which is great. So we'll start with Peter Ryan from the ABC.

Hi, Peter. Thanks for taking the question. I've got two questions. One is about the mortgage book. And what are you seeing in terms of mortgage stress and delinquencies? And what about negative equity cases? Are you expecting to see more of those?

So in terms of the book, 70% of people are ahead on repayments and that's pretty unchanged over the six months. We actually saw a reduction in 90-day delinquencies over the six months. There was an increase in 30-day delinquencies more recently. the number of people that have requested a hardship arrangement is down over the six months. So certainly from our perspective, at this point in what is a pretty aggressive tightening cycle, we're not seeing the stress. But I would step back and just say, this is an uneven, this will be uneven. So not every customer will feel it the way they are. So we know there will be customers households and businesses that need help and my plea to them would be call us early because there's lots of options for that. That's the key message that we say to customers that need help because this is going to be uneven, the timing's going to be different and they should call us early.

And what about cases of negative equity? Are you seeing more of those?

Not materially, Peter. I think it's less than 1% was in negative equity, which is the average LVRs and the 70% for the portfolio when we originate and the dynamic LVRs in the 50s. And there's a small amount of the portfolio, which is negative equity.

And just finally, before I go, with the budget tomorrow, Jim Chalmers has said they'll be pumping about $14.6 billion into the economy to assist struggling households with a higher cost of living. Do you have any concerns that this might fuel inflation?

I think it's appropriate. So, as I said, the fast increase in interest rates will have an uneven impact. Those people who need assistance, I'm pleased the government is providing assistance. We're also pleased to see some investment in scams in the budget is the other thing that we're very pleased about. The announcement on fixing texts is very important, I think, to get after scams.

Our next question comes from Joyce Malakis from News Corp.

Hi, Peter. Thanks for taking the question. Just following up from a couple of the comments you made to analysts earlier, it sounds as though you're not really expecting competition to intensify too much in the deposit market from some of the comments you made around margins. And I just had a second question as well.

Well, if we look at the... Maybe have a look at the economic forecasts, Joyce, and we've got credit growth in the 3% for December this year. It's the 12 months to December this year and next year. That's pretty low. And so it feels to us like... with low credit growth, there'll be appropriate competition, but probably not the need to really compete that market up. But obviously that's a choice for the market.

Okay, thanks. And just on the, I think there was a pie chart there that showed 7% of the business loan book was held in construction. In terms of that sort of mid-tier process, construction market, developers, et cetera. We've had a fair few collapses in recent months. Can you sort of talk through how Westpac's approaching that market and whether it has had exposure to some of those collapses?

Yeah, I won't talk about individual, but we haven't had any exposure to some of those sectors. And there's a slide on commercial property more broadly, but we've got the lowest exposure to commercial property. There is a bit of stress in developers, but we've probably seen a bigger impact from individuals who are building their house. So we've been focused on working with them and how they get to a new builder. So that's been the bigger issue for this bank is mortgage holders who are looking to build and how we help them.

More cost overruns then than developers going bust.

No, it's the people bringing up saying, I haven't got a builder anymore, what do I do?

Oh, okay, right, okay. Okay, thanks.

Our next question comes from Aisha DeCresta from the AFR.

Hi, thanks for taking the call. Just in terms of business banking, and you mentioned you want to push into that area, it's already super competitive and you've got these pressures around your risk culture. How are you actually going to do that?

Oh, well, if I look at the relative market opportunities at the moment, it's institutional and business where we see the better opportunities. And if I think about institutional, it's about having the right segment offers and the right bankers. And similar in business bank, it's about bankers and appetite. So we see these opportunities to grow. And as I said, in business bank, they've been a bit distracted by some of the historical issues and now they can look forward a lot more.

And just on the housing market, what's going to help for competition to invade? Like, what do you see as the big change that's going to come? And where will we see competition start to lift?

Yeah, well, it's a very competitive market at the moment. We will see is the answer. I'm not going to predict what I'll... what may or may not happen in terms of what competitors do, but our settings are to be disciplined in terms of growth and return in that market, and we see business and institutional bank as more attractive at the moment.

Thanks. Our next question comes from Eric Johnston from The Australian.

Peter, thanks for taking my call. Just wondering, you've increased your outlook for unemployment, and I'm just wondering what, and maybe you're a bit more conservative than some of the other banks in terms of the economic outlook. I'm just wondering, what are you seeing that potentially the rest of us aren't seeing? Why are you taking this footing?

That's our Westpac economics. I'm not sure we published the December number before, but that's certainly in the deck this time. I think it's about 5%. The big question I think for us is how long? We talk about peak in interest rates a lot, but actually the question should also be how long do they need to stay there to slow demand? So we're probably of a view that they need to stay there a little bit longer, given the peak's going to be lower than some countries around the world. So I think there's both peak and then duration. And I do believe we do have higher unemployment rates than some of the other estimates around, including in the Reserve Bank. But, you know, there's always a good debate on which economist is right and wrong. That's why, you know, in running the bank, we're just being a little bit conservative, holding plenty of capital, making sure we're well funded and topped up the provisioning this half.

OK. OK.

Our next question comes from Clancy Yates from the Sydney Morning Herald.

Hi, Peter. You said there's likely to be more loan stress in the future. Can you provide some details on what cohorts of mortgage customers the bank sees as most vulnerable to electricity, you know, such as the vintage of the loans, whether they're owner-occupiers, first-home buyers, et cetera?

Well, it's... It continues to be where circumstances have changed. So if you think about sickness, you think about unemployment, you think about divorce, historically have been the big ones. And then the fourth one that will come in will be overcommitment. So if someone has assumed that interest rates are going to stay very low and change their lifestyle. So I wouldn't put it down to... Now, those three historical things will be there, particularly unemployment will pick up. And then if there's over-commitment or people have changed their lifestyle, assuming rates will stay low, they're the people that we really want to come and talk to us about the options they've got and how we help them adjust their circumstances. Higher debt to income ratio loans are probably the ones that we watch the closest on top of those and they are having a slightly higher than the portfolio impact in terms of stress. It's how all that plays together over time and so we are increasing the number of people that we've got in our teams that take the calls from customers that need help.

Our next call comes from Nabila Ahmed from Bloomberg News.

Thanks for taking my question, Peter. I wanted to ask you a little bit more on the institutional growth. Are you looking at hiring bankers in terms of the growth? Can you talk a little bit about the competitive environment in that labour market? And also I had a question about what areas of stress you're seeing in the broader economy like Obviously, Joyce mentioned construction earlier, but it would be nice to get a bit of a sense of where else you're seeing it.

Yeah, so the first part of the institutional bank is to do more with existing customers that we know well. And that could be they use their limits more. It could be we get more of their activity in risk management. And we're also investing in the GTS platform, which is the payments capability for customers. So that's why we see that business as attractive to grow. We are building capability in climate. So if you think about transition, there's plenty of opportunities to fund the transition and the teams building the capability there to do that. Likewise, some of the risk management opportunities related to climate, we can also invest in. You think about carbon trading as an example. So it'll be a combination of doing more with existing customers, creating capability, particularly in climate, and then growing in smart ways in other areas.

And are you... So you are going to be hiring, or, like, can you talk about hiring plans? Oh, you...

Where there's demand, we are, and probably the biggest area that we are investing in is those related in the climate area and the climate transition. We're also building the capability by educating existing bankers, not just hiring bankers as well.

Our next question comes from David Ross from The Australian.

Good day, Peter. Thanks for taking my question. I just had a question for you on serviceability. So how many of your borrowers from the last three years would be unable to refinance the loans they've taken out from the bank? We heard a bit about this from NAB last week.

It's a hard number to put your finger on because I think the biggest... Probably the cohort that are most impacted have got high LVR, so they're a bit harder to refinance. In terms of serviceability, I think the banks are working through options to refinance where it's like for like. So I think there's opportunities there. But I would encourage customers, if they need... If they've got a problem, come and talk to us. Whether they're refinancing or they just want to talk to us, come and talk to us. So I think there's more opportunities to move between the banks than what people realise.

Thanks, David. So we still do have a few minutes left. We've got better late than never. We've got another analyst question come through. Just a reminder, if you would like to ask another question, it is star one. A question from Nathan Leed from Morgans.

Yeah, thanks for your presentation, guys. Just one question for me just on your credit risk weighted assets. I suppose before January this year, if we have a look at the ratio of those credit risk weighted assets to gross loans and particularly on the non-residential mortgage book, there was a gap in that ratio of Westpac versus your peers. With APRA's changes that came in in January, has that gap closed entirely or is there still upside in further improvement in that?

The way we think about it, so obviously the APRA capital framework changes has reduced risk-weighted assets by a lot. As I said, $23.7 billion benefit. We can't really comment on peers, but we have refined our models. We've improved the data that we get to make those assessments, and we think at the The 62 basis points fairly reflects where risk-weighted assets are. We continue to look to optimise capital. We have an ongoing program to look to how we can operate our businesses better, more efficiently from a capital perspective, and we'd like to think that that will continue to improve capital and optimisation over time.

Thank you, Nathan. That's it for our questions. Thank you very much for joining us today. And if we can help, please reach out over the course of the day. Thank you.