Westpac Banking Cp Ord

Good morning everyone. Welcome to Westpac's 2023 full year results. My name is Justin McCarthy, GM of Investor Relations. Before we begin today, I'd like to acknowledge the Gadigal people of the Eora Nation as the traditional custodians of the country we are meeting on today. I'd recognise their continuing connection to the land and waters and thank them for caring for this land and its ecosystem since time immemorial. I pay my respects to Elders past and present and extend that respect to all First Nations people present today. 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. As a reminder, to ask a question, please press star 1 on your phone. With that, over to you, Peter.

Well, thanks, Justin, and good morning, everyone. Overall, I'm pleased with our progress and financial result this year. We've strengthened the franchise in consumer, business and institutional banking. We also completed portfolio simplification, exiting another three businesses this year. And the uplift in financial performance, in particular our return on equity, is reflected in higher returns to shareholders through dividend growth and the upcoming share buyback. This was also achieved while strengthening the balance sheet. And while we've made progress, there's more work to improve performance and the efficiency of this bank. With the foundations in place, we have even more capacity to focus on the future and this started with the separation of the consumer and business segments. We've also established a standalone function to focus on technology. Technology simplification is a significant undertaking It's part of our plan to improve service to customers, grow our business and deliver a cost to income ratio close to the peers. Before turning to the results, I'll say a few words about how customers are faring through a challenging period. The Australian economy has slowed with headwinds from high inflation and higher interest rates. Consumers are being squeezed by cost of living pressures, meaning many have no choice but to adjust their spending. While there has been an increase in hardship, the vast majority of consumers have displayed resilience. For business, the slowdown in growth and higher costs is affecting demand and profitability and we have seen a small rise in stress across business customers, although at this stage it's been isolated. Our results were up strongly with net profit 26% higher and EPS 28% higher. Return on equity rose two percentage points to 10.1% and this reflects solid growth in income which exceeded expense growth. Higher provisions for loan losses were a drag on impact growth this year. Notable items had a far smaller impact on this result and they were 80% lower at 173 million. Net profit excluding notables was up 12% and we see this as a better measure of the business performance. Revenue drove this result and was up 10% with 5% growth in loans and two basis point increase in managers' margins. Lending was up across all segments with growth in mortgages, business and institutional banking. and margins were supported by widening of deposit spreads and earnings on capital which more than offset the impact of mortgage competition. Expenses excluding notables were up 1% with inflationary pressures from wages, third party vendor costs and software amortisation largely mitigated by the benefits of our cost reset actions. Cost growth was higher in the second half and we've taken action to limit expense growth reducing FTE by 6% and we remain committed to addressing the cost base relative to our peers. The credit quality of our portfolio is closely monitored and we've seen some increase in stress. This was reflected in the impairment charge of nine basis points alone which was up from five. But stepping back from the detail, the portfolio is demonstrating resilience, with most customers being able to respond to economic pressures. We're pleased with our capital position at the end of the year. The adoption of Basel and higher profit saw the C21 ratio the strongest I've seen in my career. At 12.4%, we are one of the top banks globally. With $4 billion of capital above the target range and a resilient economy, we are returning capital through a $1.5 billion on-market buyback. On a pro forma basis, that's post the buyback, the common equity Tier 1 ratio remains 12% with this excess capital available to support growth and returns to shareholders. On dividends the board determined a final dividend of 72 cents per share and that sees the total dividends for the year at 142 cents per share which is up 14% year on year. When determining the dividend we considered this year's performance and the outlook and we felt this is the right balance for FY23. Turning to our business, it's been a big year as we've completed portfolio simplification exiting another three businesses. This takes the number of businesses exited to 10 which has released 58 basis points of capital. We are retaining BT Platforms and Pacific Banking and these businesses are now part of Business and Wealth under Anthony Miller's leadership. Completing portfolio simplification provides more capacity to grow and simplify our banking businesses. The recent employee reductions see us close to delivering the goal we set in 2020 of reducing head office staff by more than 20%. Branch network consolidation continued and the highlight being the ability for customers to now make cash transactions at any of our branches regardless of which brand they use. We also progressed branch co-locations, bringing multiple brands together under one roof. We're now up to 82 branches that are co-located. We're also investing in our digital capability for both consumer and business customers. This includes the Westpac app, which is now the number one banking app in Australia, FPOS Air, our digital mortgage and a range of digital deposit offers. Technology underpins the customer offer and the consolidation of infrastructure has resulted in significant improvement in system stability and resilience. More than 70% of our infrastructure is now evergreen and that means it's continuously current and available to build on. Importantly, it has created the foundation to accelerate our technology simplification which I'll come back to later. We've reduced the number of products we offer by 37% over the last three years, including a further reduction of 8% this year. And our strong balance sheet provides the capacity to grow and invest. We're also well provisioned, having increased impairment provisions by $300 million to $4.9 billion at the end of the year, and that's $1.5 billion above the base case scenario for expected credit losses. The group's liquidity and funding positions are very healthy as reflected in both the LCR and NSFR being well above regulatory minimums and we have managed the TFF roll-off well with a modest 12 billion TFF outstanding. I'm pleased with the improvement in the health of our franchise across consumer, business and institutional banking. If we start with consumer on slide seven, customers are increasingly adopting digital banking and we're working hard to improve our service and offers by making banking easier, expanding digital access and giving customers greater visibility of their finances. The Westpac app is used over five million times a day and Forrester rated the app number one and our NPS improved to number two. The app gives customers control of their everyday banking and new features include budgeting tools, carbon tracking and voice search functionality. Everyday banking is at the heart of our customer relationship and this year we've grown household deposits ahead of system and the number of my everyday banking customers is up 4%. We attribute this success to focusing on deposits which has driven sustainable growth and deeper customer relationships. Competition in home lending was fierce during the first half of the year with intensity easing in the second half. We worked hard to give customers every reason to stay with us while attracting new customers. In mortgages we improved our service by investing in systems and process and this year we rolled out the single mortgage origination platform with 95% of mortgages processed on the platform in the second half. Our time to write for first party loans was consistently five to six days and as we bedded down the new process for brokers, time to write improved from 10 days in March to seven days in September. Given competition in the first half, we were disciplined and seeded some market share. We did have a stronger second half growing at 1.2 times system. While we were more competitive on price, actions were taken to restore the front book profitability by reducing discounts. We're also later than some peers to remove or reduce cashbacks. And finally, we've done well on retention. Following the introduction of process improvements, retention on expiring fixed rate loans improved from 82% to 90%. In business, we're investing to support customers, Improving payment and deposit offerings are critical in this segment. Earlier in the year we launched FPOS Air which turns your mobile phone into a merchant terminal, helping businesses get paid easily while on the go. The simple online setup process for both iPhone and Android allows customers to be up and running in as little as 15 minutes. The new digital process now sees customers opening a business transaction account in less than 10 minutes, and this will continue to support our deposit franchise. We've also added capability in the payment space, and this includes the acquisition of HealthPoint, which provides real-time private healthcare claiming services. And through our partnership with MX51, we're also delivering innovative merchant payment solutions to compete in the market. Business lending has consistently grown for the past two years with the book Diversified Across Sectors. and the streamlining of the application process has resulted in customer saving two hours per deal. And this and other improvements have reduced our average time to decision by over 30% to less than 10 days. We believe this has contributed to improved momentum with the number of applications across small and medium-sized businesses up 37% in the second half. Turning to the institutional bank, our goal is to reclaim our position as the leading domestic bank. During a three-year period we've consistently simplified our product and service offerings, consolidated our geographic footprint and focused on building deeper relationships with existing customers. The financial results have steadily improved over that time with return on equity trending up and the cost of income gradually declining. Importantly, employees are engaged with WID's employee score rising to 79%, one of the highest in the group. We had solid lending growth of 9% across sectors including health, property and energy. Greater industry specialisation and freeing up banker time to spend with customers is driving improved results. Financial markets had a strong year with revenue up 27%, with the growth in sales and risk management income. Financial markets customers have benefited from greater external focus. This has been reflected in much improved results. We ranked first for government and semi-government bonds, with our market share rising from 9% to 15%, the highest in nine years. Investing in our cash management and transactional banking capability is also a priority. We're developing a new corporate cash management banking platform and this is a multi-year investment with the first major release now complete. Pleasingly, we've grown revenue across all three businesses, CIB, Financial Markets and GTS. Strengthening risk management and risk culture through our core program remains a top priority. We've completed 94% of activities under our core integrated plan and we expect to complete all activities by the end of the calendar year. Our efforts then turn to embedding the outcomes of the program, which will continue as we transition in calendar year 2024. The ultimate aim is to ensure our risk culture is proactive and sustainable. In New Zealand, the BS11 and Section 95 programs completed and we've continued to build our defences to combat the escalating threat of scams. During the year we launched a range of initiatives to detect, disrupt and halt scams. This includes alerting customers through payment prompts, blocks for some cryptocurrency payments and the use of biometrics. We're now stopping almost 70% of scams and we're working hard with peers, regulators and law enforcement to make it even harder for scammers. We recognise higher interest rates and inflation are impacting some households and businesses and our mortgage portfolio is demonstrating resilience with most customers being able to respond to economic pressures. For variable rate mortgages, rate rises have translated into higher repayments. However, average pay to head rates were stable and offset balances actually grew this half. We are supporting customers who are doing it tough and ended the year with just over 13,000 customers in hardship arrangements. This is still lower than the peak we supported during COVID, which is a positive indicator that customers are mostly adapting to the environment. Looking to the medium term, responding to climate change has been a major focus this year. Consistent with our targets, we've reduced our operational emissions by 52%. We'll also support customers' transition to net zero by 2050. We're progressing our NZBA commitments, setting seven new targets this year, and that sees 12 targets now in place. I'll hand to Michael now to run you through the details of the financial result. Thanks, Peter, and good morning.

The impact of inflation and interest rates on the economy, as well as market volatility and competition, continue to shape our operating environment. and it's come through clearly in our second half results. Reflecting on this, I'd make five observations. On revenue, we managed margins well and our portfolio grew. We limited the reduction in core margin to six basis points. Economic and geopolitical pressures are heightened and volatile. For us, this has resulted in lower non-interest income, particularly the derivative valuation adjustment in markets. Inflation continues to drive costs higher. We acted in the half to limit cost increases to 5%. Our cost reset program remains critical to delivering our cost to income ratio ambition. Our balance sheet remains strong with all metrics above minimums. It provides capacity to support customers through difficulties and for growth. It also gives us flexibility for capital management as shown by the $1.5 billion buyback we announced today. And finally, credit quality is holding up better than we expected. While we've seen some deterioration, we are well provisioned for this stage of the cycle. With this context, net profit in the second half was down 20% to $3.2 billion, and excluding notable items was down 7%. The cost-to-income ratio rose three percentage points to 49%, and our key return metric, return on tangible equity, was 11.2% above the cost of capital. Turning to slide 14. As notable items and businesses sold continued to impact the results, in particular the comparative period analysis, we've highlighted these impacts on the slide. Notable items in the second half reduced net profit by $351 million. These included customer remediation and litigation costs for prior year matters of $176 million. restructuring costs of $140 million as we continue to simplify the organisation and divest specialist businesses, and the P&L impact of a smaller corporate property and branch footprint. Notable items also included a $52 million benefit from hedging items, broadly offsetting the loss in the prior half. The combined impact compares to a $178 million benefit in the first half. As Peter outlined, notable items were far lower this year. Non-core businesses that we have exited were not significant to second half 2023 earnings but do impact prior period comparisons. Moving to the components of net profit. The 7% lower net profit reflects stable net interest income, lower non-interest income, higher expenses and the drag from business assault. Lower impairment charges provided some offset. Net interest income was up $10 million. Average interest earning assets increased 2% to $949 billion, comprising average loan growth of 1% and average liquid asset growth of 2%. This was broadly offset by the lower core net interest margin. Non-interest income declined $70 million, with the derivative valuation adjustment the largest driver as credit spreads expanded. Expenses were up $266 million. I'll cover this in detail in the expense commentary shortly. Combined, these components led to a 6% decline in pre-provision profit, excluding both notable items and business assault. Credit impairments added $132 million, reflecting the lower overlays in cap in the half. The effective tax rate was 30.1%, slightly above the statutory rate of 30%. Finally, the profit impact from business of sold was $91 million. Turning to lending. Total lending increased 3% with growth in all four segments of consumer, business, institutional and New Zealand. Australian mortgages grew at $13 billion and at 1.2 times system. Improved service levels and focused customer retention strategies were all contributors to above system growth. At $51 billion, we saw the largest proportion of fixed rate expiries in our book. We are particularly pleased that the proactive strategies saw retention rise to 90% for much of the half. Australian business lending grew 4%, reflecting pleasing growth in targeted sectors. Institutional lending grew by 9% as we continued to deepen relationships with our existing customers. Lending was 1% higher in New Zealand. New Zealand mortgages grew below system as we chose to balance margin and volume growth in a highly competitive environment. Personal lending declined 6% driven by the planned roll-off of the auto finance portfolio. Our deposits have grown 2% as momentum continued. Customer deposits now provide 71% of our funding and give us a strong base for growth. Consumer deposits increased by $14.8 billion as we grew our share of household deposits 1.2 times system and attracted new customers. The largest uplift was in behavioural savings accounts, which more than offset a decline in transaction account balances. We saw no additional switching into term deposits. There was a $3 billion increase in mortgage offset balances. Customers that had shifted from fixed rate loans brought with them other savings as they moved into the variable rate product. WIB deposits grew $2.5 billion, mostly in term deposits. Transaction and savings balances were stable. Business deposits were $2.9 billion lower in line with system. Some business customers drew down on cash buffers to meet higher interest and input costs while the market continues to remain competitive. New Zealand deposits were stable in New Zealand dollar terms, with reductions in transaction and savings accounts offset by growth in term deposits. Core net interest margin declined six basis points to 1.84%. Loan spreads, mainly in mortgages, subtracted 10 basis points from margin. Mortgage customer retention along with the averaging impact of competition in prior periods had the largest impact during the half. Business lending spreads were only marginally tighter. There were a number of moving parts in customer deposits which were a drag of only one basis point in the half. A decline in spreads was largely mitigated by higher returns on hedge deposits. Wholesale funding costs were slightly higher lowering margin by one basis point. We timed our funding well, avoiding some of the more volatile periods when spreads were particularly high, raising $15 billion of new long-term wholesale funding in the period. Reflecting the step up in the tractor rate, higher earnings on capital contributed six basis points. Treasury and markets added two basis points to the margin, with the contribution rising from eight basis points to 10 basis points. Notable items increased margin by two basis points with the hedge impact moving from a negative in the first half to no impact in the period. Moving to non-interest income. Notable items and businesses sold had the biggest impact on non-interest income in the half. Excluding these impacts, non-interest income was down 5%. Fee income was down slightly with lower cards income in consumer partly offset by higher lending fees in the institutional bank. Wealth was broadly flat, excluding the impact from businesses sold. Markets income was down slightly following good growth in the first half and was particularly impacted by the lower derivative valuation adjustment. Turning to expenses. The 5% increase in expenses in the half was mostly from inflationary pressures combined with increases in both software amortisation and investment. Ongoing costs were almost $500 million higher from salary and wage growth along with higher third party costs. The latter was widespread but particularly high across software maintenance and licence costs. Investment expenses were up $182 million including higher software amortisation which added $120 million in the period as a number of regulatory and business growth projects completed. These investments have contributed to better risk, customer and capital outcomes. We delivered just over $400 million in savings through cost reset. This included a 6% reduction in FT in the half as we continued to simplify the organisation. Moving to investments. We saw a shift in investment spend towards growth and productivity. Although our regulatory compliance agenda remained a priority and the majority of our spend, we expect that spend has peaked in both absolute and percentage terms. Total investment spend decreased by 3%. Our risk and regulatory spend was 9% lower while we increased growth and productivity investment by 8%. Major growth investments included the mortgage origination platform, digital capabilities and the corporate cash management platform. High capitalised balances and the slight extension in the use for life reflect higher spend on platforms and infrastructure which provide benefits over a longer period. As these larger projects complete, we expect our capitalised software balance to decrease over time. Turning to credit quality. Stressed exposures as a percentage of total committed exposures increased 16 basis points. This reflects the lift in mortgage arrears and some downgrades to watch list in business lending. Mortgage's 90 days arrears have increased 13 basis points while a 30 day bucket increased 15 basis points. As customers face higher rates and inflationary pressures we know that these are not being felt evenly. Most of our customers have been able to adjust to higher repayments and many have also maintained buffers above their scheduled payments. Some have found this more difficult, which is reflected in rising arrears. Unsecured lending has performed well as we improved our collections processes. The increase in stress across business customers reflected in higher watch list and substandard exposures was most pronounced in construction with a modest rise in property. Others related to a small number of exposures across a range of sectors. Turning to provisions. We're well provisioned for a more challenging economic environment. Our coverage remains appropriate for the risks we see in our portfolio and we continue to hold overlays for risks not captured in our models. This half collectively assessed provisions to credit risk weighted assets increased two basis points to 1.35% with slightly higher provisions and lower credit risk weighted assets. As you see from our result, the composition of provisions has shifted in the half. Overlays were lower. We removed the New Zealand weather overlay and partly released overlays across Australian and New Zealand mortgages and some business portfolios as these risks are now captured in modelled outcomes. Stage 2 cap increased due to higher model provisions including movements from both overlays and Stage 1. Higher stressed exposures and early cycle mortgage delinquencies also lifted Stage 2 provisions. We did not make any changes to our scenario weightings and continue to believe a 45% weight to the downside is the appropriate setting for what we know now. We will continue to assess this as economic conditions evolve. Moving to slide 24. As I said earlier, credit quality is holding up better than expected. Impairment charges of $258 million were seven basis points of average loans, down from 10 basis points in the prior period. This remains below the long-term average. The IOP charge comprised new IOPs of $121 million, another low charge, relating to a small number of exposures and a lower level of write-backs and recoveries compared to the first half, which included a recovery of a large exposure that had previously been written off. The other movement in cap was well down on the prior period at $19 million, as we assess that the overall level of provisions remain appropriate. Moving to capital. The CT1 capital ratio ended the half at 12.4%, well above the top end of our target operating range. Net profit added 71 basis points, while the payment of the first half 2023 dividend reduced capital by 54 basis points. RWAs added 5 basis points, with a reduction in credit risk-weighted assets adding 15 basis points from data refinements, offsetting 12 basis points from lending growth and the modest deterioration in credit quality. Other changes reduce capital by 12 basis points from an increase in capitalised software and a higher deduction for deferred tax assets. With this result, we also announced a $1.5 billion buyback to return excess capital to shareholders. This will reduce capital by 33 basis points, taking our pro forma CET1 capital ratio to 12.05%, still above the top end of our target operating range. We enter 2024 in a strong financial position to navigate what we expect will be ongoing economic and geopolitical challenges. On revenue, we expect system credit growth to be positive as we target growth in line with market. Margin headwinds are likely to continue, although the composition may vary. The drag from previous divestments will be less of a factor than in the current half. We will continue to be disciplined on costs and will rigorously pursue savings under our cost reset program, including from the lower headcount we delivered in the second half. However, investments that completed this year will drive higher amortisation costs. Inflationary pressures will persist and risk and regulatory spend, while lower, will remain elevated. Our balance sheet is strong and positions us well to support customers, growth and our technology simplification investment. And finally, maintaining capital at or above the top of the operating range provides flexibility for the board to consider further capital management options. With that, let me hand back to Peter.

Well thanks Michael. At the half year I outlined our strategy for growth and return. Just to recap, our strategy was refreshed and it's guided by our purpose of creating better futures together. There are four strategic pillars of customer, easy, expert and advocate, with the outcome being growth in key markets and improving returns. The organisation restructure mentioned earlier is critical to support our strategic refresh and to sharpen the focus on target markets. The strategy is all about the customer. They're at the heart of what we do and we value the whole of customer relationship and work hard to anticipate their needs, including through delivering personalised experiences, offers and insights. Transaction accounts and payments are at the centre of the customer relationship, enabling us to build earlier and deeper relations. We continue to make banking easier, more intuitive and digital. This next phase is about radically simplifying the bank. For this to be successful it's fundamental that we accelerate the simplification of processes and technology. That brings me to slide 29 which shows the work underway to reduce the size of our technology stack by two thirds. Over the past three years we've progressed the foundational elements seen here in the technology foundation layer at the bottom. More than 70% of our infrastructure is now evergreen, meaning it's current and available to be built on. The focus from here is accelerating the simplification of product, platforms and enterprise. And we'll start by reducing customer masses and modernising payments. The task at hand is laid out here. Our technology isn't older or less capable than peers. We just have too much of it. Cutting our technology components from around 180 down to around 60 will improve our speed to market, make us more efficient on costs and reduce operational risk. And this is a big agenda for the company over the next four years. A period of sustained investment is required to support this strategy and we believe that this can be achieved with a relatively modest increase in the investment envelope to approximately 2 billion per annum. To put this into context, in the five years to FY19 we invested approximately $1.3 billion per annum. The increase to around $1.9 billion in the last four years with almost two-thirds allocated to risk and regulation. Our intent is to redirect from risk and regulation spend to growth and productivity. Execution will be the key with a whole of organisation approach that is principles based. Customer experience is obviously the key driver and the simplification will be jointly led by both the business and technology. Our approach will be modular where we address components within layers and this will add flexibility allowing the individual work streams to be scaled up or down as required. And we're outcomes focused with key measures of success being improving return on tangible equity and growing the business in line with market. So in summary, we've finished the year with a stronger franchise and balance sheet. We are focused on technology simplification and are well positioned to grow and to help customers navigate the environment. Thank you and back to Justin for Q&A.

Thanks, Peter. So we'll move to Q&A now. Just a reminder, star one to ask a question and we also encourage the media to register as well. So our first call comes from John Story from UBS.

Hi. Thanks so much. Thanks, Peter. The question I have just first off is just really around the cost reset program. You told us a few years ago that the bank had gone back to a decentralized cost program, and just looking at your underlying BUs this morning, particularly around the consumer business, you actually saw quite a big increase just in the cost-to-income ratio. So obviously I appreciate there are a lot of different ways that you can look at costs, but maybe if you could just give us some sense around some of the levers that you can pull outside of what's happening at the center of the group and the impact that that has on the underlying BUs.

In terms of the program, there were three broad levers. Firstly was the portfolio simplification which we've basically completed this year. The second was reducing notable items and while they're down, they're not down as far as what we need so that continues to be work in progress and certainly the risk management uplift plays a critical part there. But also the technology simplification is a big part because one of the challenges with running too much technology is it's hard to manage sometimes. And then the third bit was obviously simplifying and digitising the bank. So that's the bit we're after. We are seeing, we have seen the reduction in FTE in the second half that both Michael and I spoke to but Michael why don't you also add to what we're seeing in the cost reset. I would just say on consumer it's obviously revenue and expenses and the challenge with revenue and consumerist mortgages is having a big impact but Michael?

Yeah thanks Peter. As we indicated previously The cost reset is based, as Peter said, on portfolio simplification, business simplification and organisational simplification. Portfolio is completed, as Peter said. Business simplification continues underway and the technology plan that Peter outlined today is a big lever for that going forward and the organisational simplification has delivered us around a billion dollars over the last three years and continues to be a core lever for us. We said that we would reduce head office roles by 20% by the end of 24. We're on track for that. We said we would reduce corporate property by 20%. We've already delivered that in FY23 and there's a little bit more to do in 24. And the 6% headcount reduction in the second half will provide us some savings into 2024. Having said that, as I indicated, inflation and wage growth and particularly inflation on third party suppliers continues to be intense. And so we'll still see that as a headwind going into 24, but those levers that I talked about remain in place to offset most of that going forward.

Our next question comes from Brendan Sproles from Citi.

Good morning. I've just got a couple of questions on costs as well. In the second half on slide 21, you show that your ongoing expenses are up 489, almost 10% increase in a six-month period due to persistent inflation. Obviously, in your outlook, you've said that this inflation will persist. Can you maybe give us an impact of how different 24 will look compared to second half 23 on this measure?

Look, I think the best way to respond to that is to say that we called out persistent wage growth, consistent third-party expense growth, and we see that that will flow into 24. Cost reset through lower headcount will offset some of that, but we still think that the sorts of cost increase we saw in the second half will play into the first half of 24.

Brendan, was there a follow-up there or...?

Yeah, I've just got a second question, if that's okay. Just on your investment spend, you kind of indicated that $2 billion is kind of the number that you want to kind of work for to add over the medium term. But just on slide 22, the level that you expense of that is actually quite low relative to your history, also relative to some of your peers. Now that the mix is shifting away from regulatory and risk and more into this growth and productivity bucket, how will the mix between expenses investment spend and capitalise investment spend change?

Yeah, look, the outcome of capitalisation expenses is a factor of the sorts of areas that we're investing in. And as we said, we invested in platforms. We'll continue to invest in platforms and infrastructure, and that'll be capitalisable. But as you say, we will spend less on risk and reg, so that won't be. We saw in the second half that the capitalisation percentage dropped, and we expect that to be similar into 2024.

Our next question comes from Andrew Lyons from Goldman Sachs.

Thanks and good morning. Just two questions from me. Peter, just firstly, you've noted that the balance sheet has capacity to grow and that you now want to maintain market share in key lending and deposit segments. Just in light of this, can you just talk to how you're thinking about the volume margin trade-off, particularly as it relates to mortgages? You noted some improvement in mortgage profitability through the back end of the second half, but we have heard that one of your large competitors... has re-engaged in recent weeks. So just to what extent this was to accelerate, how will you manage balance sheet growth in the business?

Yeah, I think we want to be consistent in all our markets, including mortgages. So one of the challenges for this organisation has been to be a little bit in and out of the market. So I think the word we use is consistent. So we want to consistently serve, get consistent service and look to grow. In terms of mortgages, where we ended up over the year was actually 0.8 a system. We were a bit softer in the first half and stronger in the second half so we'll always look at it but my assessment of the market is that there were reductions or in discounts in the second half and if you look at the RBA stats the difference between portfolio and new lendings the closest has been in a little while so it's always a dynamic question but hopefully that gives you a sense of how we want to We want to serve by reducing the time to yes, so make sure that our service is really good where it needs to be and then we'll look at tactics over time. But it's more about being consistent and growing at market and showing the franchise can grow at market.

Thanks, Peter. Just a second one, maybe for Michael, just around. A bit of a clarification around the response to Brendan's question, your second half costs Ex-notables was annualised $10.5 billion and if we're sort of assuming mid-single-digit inflation, that brings FY24 costs to about $11 billion. Is that sort of broadly speaking how we should be thinking about the trajectory for costs or is there some upside risk to that number? that sort of 5% from the second half growth continues into the first half.

Yeah, I think the best way to think about it is that wage growth is still going home. We saw it at 7% in 2023, and inflation is impacting on third-party vendor costs, particularly in technology, and that's running well ahead of that. So we'd say that that run rate is higher than we saw it in total terms but that the work that we're doing will reduce that overall impact. Now I'm not going to put a number on it but hopefully that gives you a sense. I've indicated that the sort of net increase we saw in the second half is likely to persist into the first. Thank you.

Our next question comes from Victor Goerman from Macquarie.

Thank you Justin. I was just hoping to – two questions as well. First one, on slide 19, you provided that bridge in terms of margin performance. Customer deposit margin down one basis point. I was just hoping if maybe you can give us a little bit more colour and how that number actually comes together. I think there's quite a lot of moving parts, obviously, with higher rates still benefiting and some of the offsets, if you can maybe talk about them, what you've seen over the course of the half –

Yeah, the best way to think about it is that we did see more competition for deposits in the second half and the spread expansion we've seen over the last few years just isn't there anymore. So the greater competition, mainly in consumer but also in business, meant that the spread compression was higher in customer deposits but offset by the increased rate, the tractor rate on non-rate sensitive deposits. So they broadly matched off. is the best way to talk about it.

And would you say that there's been acceleration in of impact of mix into the fourth quarter?

Yeah I think as I indicated, yes is the quick answer but we didn't see as we expected a big mix shift into term deposits. What we saw was a shift out of transaction accounts into savings accounts which are a higher rate but not as big a shift into term deposits. So you've got, that's why we said there are lots of moving parts in deposits and I think that will continue to evolve But I think we're well positioned as a bank with a high level of non-rate sensitive deposits to take advantage of that impact.

And then just very quickly on the buyback, given that you've got about $3.5 billion of franking balances and they're still rising, just thinking around doing the buyback versus the special dividend?

We always think about growing the dividend and obviously that returns frame credits. In relation to the buyback, given where the share price is, we felt that was the right balance for all shareholders.

Our next question comes from Matt Dunger from Bank of America.

Yes, thank you for taking my questions. Just wondering if we could unpack the lending margin decline at ten basis points. You talked about mortgage competition being the key driver. We hear you're offering some steeper discounts versus peers. How long can you price ahead of peers and how much of this decline in mortgage margins is coming from front versus back book?

I think broadly there's two big buckets going on. One is retention repricing including the fixed variable role. So that was a sizeable part of that 10. So most of it was mortgages in terms of the 10 and broadly most in Australia, a little bit in business, a little bit in New Zealand. But you've got two buckets. You've got retention repricing and then you've got new flow and I think they're broadly the same. In relation to your comment about where we're sitting in the market, we're being competitive in the market. So from the data I'm seeing through the RBA and APRA data each month, I don't think it's that far different to competitors. But Michael, would you have anything else?

Yeah, I'll just add that what we've seen over the last 12 months or so is quite a contraction at an industry level on the front book, back book margin. And you can see that through that RBI data that Peter mentioned. And that's really come about by an increase in the customer rate. So the customer rate on new lending is picking up. The other thing I would say is that, as Peter indicated, we had the largest portfolio of repricing effectively from fixed to variable in the half. and that comes down a bit in the first half, 24, and then comes off to more normal levels. So that elevated level of repricing through retention will come down a little bit in the first half.

And next question from Jonathan Mott from Baron Joey.

Yeah, if I could just ask two questions. The first one, you did talk a bit about the institutional business returning to number one, but you haven't given us any targets on what you're trying to do in business banking. Obviously, this is a focus for a lot of the banks. Could you tell us what your goals and KPIs are for business banking and what you're trying to do over the next couple of years?

Yeah, so the first thing is if you look at the MPS or the service metrics in business, they're pretty low. And they're negative in absolute sense and probably close to third, but they're not where we want them to be. So the first thing is to improve service metrics. We've just rolled out a new provider of NPS which is providing much more information at a product and experience level and geographic level which is allowing us to link data between what we see internally and what the customer is saying. So that's the first thing. The second thing is payments as I said so we're investing in payments so both the capability and merchants through MX51, the focus on healthcare, the focus on origination of deposits, the app has been improved so payments and the digital ecosystem there. Then lending is really a rebuild of the lending process. So we improved the lending process a lot but compared to market it's not where it needs to be. So you put that together and we've got a business that's pretty skewed to the top end of the business bank, the commercial end if you like, we've got to get after SMEs as well. So we need to have a business more balanced, providing service, providing all features and we certainly see good returns particularly in that SME business. And we have a lot of existing customer relationships through deposits, which will be the first focus in terms of where we grow.

Can I ask a follow-up question to the slide? I think it's either 29 or 30, depending on what you're looking at, which is acceleration and technology simplification. So this is a huge project, reducing the number of systems from 180 to less than 60, You called out some numbers, roughly $1 billion per annum for four years. So it looks like it's a $4 billion, roughly, project, plus or minus a bit of inflation. But if you look at what ASIC called out when they talked about the hardship proceedings and they quoted your audit report of saying that there's been a very complex system due to years of underinvestment, can you provide some more information on this? And it might be a different strategy day because this is a massive turnaround strategy today. and a huge investment, how long it's going to take, four years, what commitments we're going to get, what are the benchmarks we should be looking at through this timeframe as you effectively rebuild the back end of the bank.

So we will do an update next year, John, and agree this is a massive commitment for this organisation. There's a big goal here. but we have to do it so we're a simpler organisation for so many reasons, customer service, risk management, costs. And as the world gets more complex in terms of its requirements, we need to simplify. Broadly, we'll break the back of this in four years and collections or hardship as an example is one of the... capabilities in the enterprise layer that we're after. So I think the board and management are committed to it. We see this as a must do that we need to get on and do it. We've got more bandwidth now. The portfolio simplification is completed and we've done a lot of the uplift in risk management and so that's the logical next phase. But I understand you want more detail and I don't think you'll be alone in the markets. but it's probably an hour by itself and not the right time to jump into it today, but we're happy to do something next year.

Thank you. Our next question comes from Andrew Triggs from JP Morgan.

Thank you, Justin. First question, please, just a really follow-up to Victor's question. Looking at transaction account balances, they were only down $5 billion in the half and that looked to be about a third of the decline in the previous half. Interested in your sort of response to the other question. around, well not seasonality, but a change in the dynamic in the fourth quarter. Could you just sort of maybe talk a little bit more about that? Do you expect this slowdown that we've seen to continue? Or was there sort of a fresh increase in the fourth quarter?

As I think I indicated, customers did move funds out of transaction accounts to savings accounts, which is the rational response to higher interest rates. We're not alarmed by that. We expected it. And, you know, that trend that we saw in the second half is persisting into first half 24. I think until rates stabilise, we'll still see a bit of that in the first half.

Thanks, Michael. So a similar pace of decline is something that we could expect?

Yes.

Great. Thank you. And then just a question on the business bank. The NIM, I think, was up to about 5% for the second half. Obviously, very strong performance. You did allude to some asset competition pressures, asset spread pressures on the NIM. but obviously deposit returns outweighed that. Could you talk to competition in this market? Are you seeing... I mean, why shouldn't we expect to see some of these outsized gains in the NIM competed away over time?

It's possible but we're one of the smaller banks in the market and for us the opportunity is particularly in SME which is a higher spread business. So competition that's in mortgages, we'll have to wait and see what happens in terms of the future. In this result, in that 10 in the margin waterfall, it was a pretty small portion of the 10 in terms of business lending across both the business bank, WIB and New Zealand. So not the feature for us. Mortgages was the real dominant factor for us.

Thanks, Ben. You haven't seen in the recent weeks and months any change in that dynamic, i.e. an intensification of competition there. As for 10%, no.

Yeah, at the margin. So I don't, you know, it's at the margin.

That's helpful. Thank you.

Our next question, Matthew Wilson from Jefferies.

Yeah, good morning, Tim. Can you hear me okay? Yes. Yep. Two questions. Firstly, just New Zealand. Can you sort of give us more colour as to what's going on there? There's not much growth. It hasn't grown for a while. Your core equity tier one sits at 11.1%. which is below peers and well below the 13.5 that you need to get to eventually, which is a $1.2 billion impost on capital. What's the path there and the strategy for New Zealand? And then I've got a second question.

I'll let Michael who sits on our New Zealand board speak to New Zealand. Thanks Matt. So a couple of things going on in New Zealand. Obviously for Westpac we've been focused on BS11 compliance which is their outsourcing requirements of the Reserve Bank of New Zealand plus we've had Section 95 which is another regulatory program. So a reasonably similar sort of backdrop to what we've seen here in Australia and so that's taken up a lot of attention from management to get through that. In addition, the New Zealand economy has slowed. We've seen some slowing in the Australian economy as Peter indicated but we've seen a lot more slowing in the New Zealand economy with a higher interest rate and higher inflation. So we've had the Westpac focus on risk and reg and a slowing economy. On the CET1 ratio, the board in New Zealand is very focused on meeting the requirements of the RBNZ capital ratios, we have a path through earnings and risk-weighted asset optimisation. So I think we're comfortable that that will be managed within the existing parameters.

Okay. And then the second question is obviously on technology. We've talked about these tech issues now at Westpac for at least eight years, and there was always a reluctance to go down the path that you've announced today. You sort of defended on the basis that they're They're just ledgers. What's actually changed to make this right decision today? And then as we look to the core, is it going to be Westpac Hogan or St George Salaretti? Which one are we merging to? And just to confirm, Maudie's point, is it $4 billion that will cost you?

So there's a bit in that. In terms of the cost, all we've said today is the envelope for the group needs to increase to $2 billion. So I haven't put a number on the whole program. We can do that down the track. So we believe we can fit it within the envelope for the group of $2 billion per year. In terms of our technology focus for the last few years, as I said, it's been on the foundation layer. So think about that as networks going from six to one, data centres, the data platforms work, how we code technology. We're going to be pretty much where we need to be on that bottom layer in early 24. So that allows us to build everything else on top of it. And then on the top layer we've been working on the digital experience. That's been three years of hard work to get particularly the Westpac consumer app up to where it needs to be. So that's really been our focus in the last few years and now with the bandwidth from portfolio simplification being behind us and as I said risk management we've broken the back of, we can look to the next phase. Matt, I'd encourage you to think about it as modular. In terms of the deposit ledger, that's not really the critical piece. It's things like we have multiple ways to ID people. And when I say multiple, it's not one or two, it's in the tens and twenties. So it's collapsing all those systems that are just as critical as what ledger it needs to be. But again, You know, the collections example, it's quite manual in some cases, so we need to replace that particular area. The ledgers work and they still work and they're still not going to be the priority in the time horizons. It'll be the modules around the ledgers that we'll particularly get after.

Okay. So we'll still have two core banking systems essentially. We'll just sort of around that, is that correct?

Yeah, we'll pick it up in detail but you've got to think about it as modular. Each of those rectangle squares in the picture on slide 29 I think it is, is what we've got to simplify.

Okay, cheers guys.

Our next question is from Richard Wiles from Morgan Stanley.

Good morning. Good morning. I think Michael's comments on the cost outlook probably suggest costs will be up again 5% in the first half 24, so something like $5.5 billion, so run rate tracking at $11 billion. I know you haven't given guidance, but that seems to be where you're pointing us to. If you're going to reduce the cost-to-income ratio relative to the peer group in the medium term, Does this imply that beyond 2024 costs are going to come down? How do you get to that sort of outcome of a narrower cost to income gap?

Thanks Richard. So look obviously as you'll appreciate the cost of income ratio has two components. Firstly the revenue component and we see that revenue growing over time. We'll see 24 as we've indicated there are margin headwinds but after 24 we see that growing in line with system in a more stable margin environment will grow revenue. And on cost, I think we're the only major bank that's calling out a formalised cost program, and we will remain disciplined on costs. And we think that that will be, in a relative sense, a positive compared to peers. So when you look at those two aspects over the medium term, which is what we've guided to, we believe that our cost-to-income ratio will reduce and we'll get closer to peer group.

Okay. And for this year, sounds like the gap's not going to narrow for cost bases heading towards $11 billion.

Well, I don't think at this stage, I think 2024, as I indicated, margins will, there was headwinds on margins and persistent inflation and wage growth remains. So it's a difficult year from that perspective.

But Michael, relative to the peer group, they're all operating in the same environment. They've all got headwinds for volume growth. They've got ongoing pressure on margins. What's going to drive cost to income ratio improvement relative to the peer group this year.

So I can't really comment on what peers are doing, Richard, and obviously we'll see what that outcome is over the next little while. But as I said, we continue to remain focused on growing our balance sheet at market and keeping out the cost growth from wage growth and inflation as low as we possibly can. Now we think that that's the right setting for Westpac at this stage and we'll just have to see how that plays out against peers.

Thanks Mark.

Our next question comes from Ed Henning from CLSA.

Thanks for taking my questions. I've got two. The first one's on capital. In the outlook today you've felt that ongoing opportunity to capital management. You've announced a $1.5 billion buyback. Can you just clarify is that therefore are you trying to buy that $1.5 billion back in the first half as you've got considerations your consideration of the outlook after the first half for ongoing opportunity in capital management. And so just within the capital, you also talked about you got a 15 basis point benefit from data refinement. Can you just talk about any more optimisation or differences relative to peers you've got on your capital that could benefit you in the near term?

So on the size of the buyback, Ed, the best way to think about it is we think we can execute that over the next six months and then we can look at our capital position again and the board can make a further decision. So that's how we've sized the one half about what we can execute on market. the Basel piece so we're really happy with the implementation of Basel and you've seen that in the uplift. Michael, do you want to just comment on any further opportunities?

Yeah, we have an ongoing risk-weighted asset optimisation program. We still think that there are some optimisation opportunities for us in the broader sense but the benefit you've seen in the half and the year through Basel III, we don't think that that will repeat at that level, but that's not to say that we won't continue to look for optimisation opportunities.

And just one quick second one, you know, there's been a lot on margins today as well. You look at the third quarter, the core margin was 186. Fourth quarter was around 182. You talked about September at 181. While you talk about margin headwinds continuing in 24, if you look at the fourth quarter and then in September exit margin, are you seeing those headwinds starting to ease or is the competition picking up and we should think about the trends continuing what you saw in the last couple of quarters?

I think that the analysis is right in terms of the fourth quarter and 181, but as usual, there's lots of moving parts in margin.

There are. Peter's right. There are lots of moving parts, but the way to think about it is the mortgage margin compression was the biggest impact on margin in the half and the quarter, and we expect that to play through into the first half.

Thank you.

Our next question is from Carlos Catro from Jardin.

Thanks for the opportunity to ask the question. I've got two as well. Firstly, on the business bank, there's been a few questions around that. Can you give us a bit of an idea now, kind of post the restructure, any thoughts on what investment is needed, what needs to be done to improve the outcomes in the commercial bank and any guidance on the timeline and cost of that?

Yes, so I think I covered that in the answer to the previous question, I think, John Motz, but we're very focused on payments and deposit capability and cash flow management effectively and the opportunity in web to re-platform I think will benefit some of the business bank as well. So that's the first thing. The business landing piece is probably – and so I'd say on payments we're well progressed in WIB and we've made some good strides with the F plus F for small business, also some of the other capabilities that we're integrating in merchants. business lending has got a lot more work to do. So we know that. In terms of timeframes and costs and whatnot, I don't want to pick out particular businesses but I would say it's a priority in the way that we're thinking about it. So both of those, sorry, and then the other point was the SME segment where we're a bit light in SME so that is definitely an opportunity for us in terms of the SME segment.

Thank you very much. And then just secondly on, I guess with the RBA widely expected to hike tomorrow, you were kind of some of the comments suggesting that maybe the benefits of higher rates are fairly neutral in the deposit book. For overall earnings, do you think it's still a tailwind if we get further rate hikes or it's more of a neutral impact now?

I think on Michael's side he pointed to interest rates as being one of the determinants of future margin, but of course I can't comment on what we may or may not do on pricing on a go-forward basis. You'll see it when it happens.

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

Thank you, Dustin. A couple of questions from Manny on costs. Firstly, Peter and Michael, you've said you're on track to reduce head office roles by 25% by FY24, but at the same time you're accelerating your qualification. What do you expect the delta to be for your overall headcount, including contractors, over the next two years? And is it fair to presume that as perhaps overall permanent roles go down, there will be an increase in contractors over the next couple of years?

It'll be a little bit more complicated than that I think because there will also be partners that we use so some of the work could come through in partner line rather than through the salary or the contractor line as the IBSO. I think the best, go back to the investment spend and we'll accommodate it within the investment spend is how we're thinking about it at $2 billion a year.

Also on that, I think I heard Michael say that wage inflation experienced in FY23 was 7%. Can you please tell us what was contractor wage inflation?

So what I indicated, that was for FTEs, so permanent employees of Westpac was at 7%. Third parties varied, you know, and that depended on the third party. It was anywhere between 10% and 15% per annum during the year.

Thanks, James. Just one more question on cost. In terms of your spend on cyber security, the annual spend there, do you think that's now peaked or is there more of a ramp up to come? And also on that obviously Canberra is thinking about making the banks liable for scams. What sort of discussions if any have you had with Canberra on that front?

On scams, the discussion's about an industry code. So we're working on the industry code. But the thing about scams though is it's an ecosystem. So if you look at investment scams which are half the money that are lost, often the opportunity appears on a social media platform. You then have interactions and the bank's sort of at the back end of it trying to do our best to stop people investing in these type of things. So it's got to be a whole of ecosystem approach. It just can't be a code on the banks. It's got to be for the whole system. But we're doing as an industry and Westpac's playing a leading part, we're doing everything we can to educate people. At the moment we tell people when we think it is a scam and we're actually going to integrate the sophisticated decisioning that we have at the back end right into the app so the customers can make better decisions. We've blocked cryptocurrency for certain exchanges where we could see a high flow of scam dollar values through it. So I think it's not so much the discussion with Canberra, it's we're doing everything we can and we need an industry code that looks at the whole ecosystem, not just the banks, because we sit at the back end effectively. Sorry, you had a first leg to that question that I didn't write down.

Yes, it's the private security annual spend. Do you think that's picked or that there's more ramp up in that to come?

Yeah, I think every investment we do now has to have a cyber layer. So if I think about what we're talking about in terms of the reduction in that middle three layers in the technology stack, a lot of that will go to modern technology which is better for cyber. So we've got to do sort of cyber stuff like monitoring and testing and perimeter testing and whatnot but then there's just the basics of access control, employees and whatnot and we've worked on that hard over time. Is it going to go down? No, it'll increase and we've just got to keep alert and keep investing in that area.

Thank you very much.

We'll move now to questions from the media. So we'll start with James Ayres from the AFR. James.

Thank you. Hi, Peter. As Carlos said, I think there's inevitably going to be a lot of focus on the RBA rate decision tomorrow. I might just ask about that and the impact of the customers rather than future pricing. I see your economists sort of pointing to cash rate peak at 4.35% and then falling to 3.85%. in 2024, so two cuts. You said today, though, that inflationary pressures will persist, sort of see potential for higher oil and energy costs, given all these geopolitical risks and whatnot. So I just wondered if you could talk to any risk to that 3.85% 2024 forecast. Like, do you think there's any chance that perhaps they'll be up above 4% throughout all of next year, and if that's the case? I know you've talked about customers being resilient but if rates have to stay high for longer, which will obviously prolong reduced borrowing capacity, could you just talk through how that might flow through to credit growth and housing prices and even sort of delinquencies in 2024?

Yeah, so just putting aside the big uncertainties in the global world and geopolitics, I'll just put them for a side. I think if you look at the domestic economy at the moment, there's big demand for infrastructure. There's big demand for energy transition. There's demand for more housing. We've obviously got immigration. And if I think about how well the economy has performed, it has performed stronger than we thought, and I think there is some pretty big demand drivers there. around at the moment and if that does eventuate, interest rates will probably need to be higher than what we're thinking. So I'm not going to talk about the Westpac economics forecast. They're independent and obviously we respect that but I think the risk is that interest rates stay higher for longer is the risk because we've still got a lot of domestic demand to do things that are really important in the economy. As we said what we're seeing right now is actually the vast majority of customers are adapting to the environment so pay to head rates in mortgages are pretty similar. Offset balances grew faster this half, that was probably the biggest surprise I think in the half. We've seen the number of customers only making the minimum repayment on cards at similar rates for a long period so that's why we say the step back comment is that it's sort of, they're working it through but we also know that some are not and That was the reference to the 13,000 customers in hardship and we do say to customers if they need help, call us. 75% of those people are either getting temporary reductions in repayments or a repayment pause. So what helps often is time. They might have lost their job or whatnot. So I think the key question to me as I look forward is what does unemployment or what does employment look like? And if you've got a job... and you can get hours. And that's, I think, what's solving a lot of the issues at the moment. But we'll have to wait and see about where these interest rates settle. And we've probably got too much demand in the economy at the moment.

Just on unemployment, Peter, like your economist is sort of seeing that up from 3.8% now to 4.7%. I mean, if these sort of rates do have to stay higher for longer being the risk which you just said, do you sort of see potential for that unemployment to sort of adjust into the fives perhaps?

Oh, no, but I'd say from our perspective, and Michael covered this well in the presentation, we're provisioned appropriately but well above the expected base case in terms of the outcome. We've got strong capital. You want to stay well funded. So we've set the bank up. I think for a more challenging environment. And then we've also got to be aware that there's some pretty big geopolitical issues at play at the moment and they could see global demand come down quickly and you could actually have a fast reduction in interest rates. So it is a challenging time to pick the future. You can't actually pick what's going to happen so you've got to set your balance sheet up for the best that you can in terms of dealing with different scenarios.

Okay, thank you Peter.

Our next question comes from Michael Janda from the ABC.

Hi Peter. Just a question around mortgages again. You've got in your presentation that 40% of mortgage customers are less than a month ahead in repayments, including offset accounts. So has Westpac done any modelling on how hardship and arrears might look if interest rates remain at or around current levels up to the end of next year? How many people start running out of the buffers they've built up?

Well what we've seen in the disclosures is the buffers are actually pretty consistent. So the figure that you refer to there actually includes say interest only loans where a lot of people don't want to pay ahead because of tax benefits, fixed rates as well as those that are new loans which typically aren't ahead because they haven't had the opportunity to to get ahead yet. But I think the bigger point is the trend hasn't changed that much. So that's why we say most customers are adapting to the environment and of course we've kept a 3% interest buffer for new loans. So those who have been originated in the last period since interest rates moved up, actually they've got buffers in their affordability. So it's more the ones that were originated in the low interest rate period that we're watching and they're broadly going okay. But I would end it with if customers are feeling tight, give us a call. There's options and certainly we can look at their individual circumstances.

And just a quick follow-up on your fixed loans. It looks like Westpac is more like halfway through your fixed mortgage rollover, whereas maybe the system is more like two-thirds through. Is that right? You had some quite long-dated fixed loans or cheap rates during COVID.

I think we got through the big cohort this six months and then really we're through it in the next six months and then it's back to normal is the shape. So I don't think we're that out of whack yet. with the market and certainly what we're seeing is people are getting prepared and one of the reasons they were getting prepared was often they had split their mortgage between fixed and variable so they could see the change. So no, I feel like we're well progressed through that fixed rate rollover.

Our next question comes from Karen Mailey from the AFR.

Hi Peter. Like, looking at – thanks for taking the question – looking at your mortgage book, it looks as though your – has Westpac's strategy been to skew its mortgage back a book in favour of – of people on higher incomes, over $200,000. It looks like that cohort seems to be stronger than I would have expected.

Well I think there's been a couple of trends over time. We've moved the mix of the book away from interest only to principal and interest so that's been a multi-year journey to do that. We've also seen more owner occupied versus investor. And I think consistently the quality of the borrower has been higher income and we've shown those charts that you're referring to consistently over time. So that's one of the reasons I think that the shape of the book and the way it's moved through the last period has seen most customers being able to adapt to higher interest rates and the inflation being higher.

And I thought that also... In your new business, in the new mortgages that you're writing, are you also targeting that segment and is that one of the reasons why your offset account balances have increased?

Oh, I think new loans at the moment, they've got a 3% buffer on them. So they're pretty good from a banking risk perspective. They're pretty good quality borrowers because they've got excess income, if you like. And so that's why we're very happy to be in the market and right in the business. We think they're good, high-quality businesses. On the offset, probably... The one thing that might be a little bit different is as people roll off fixed to variable, under the fixed product you can't have an offset, under the variable product you do. So I think we've seen a little bit of consolidation of deposits and savings into the mortgage bank and into the offset account and that's pretty smart because it's a high return if you're offsetting your mortgage rate.

And can I also ask about write-downs of cash back? What's Westpac's policy of cash back?

Michael? Yeah, so Westpac's policy is consistent with accounting standards and we capitalise it on the balance sheet and amortise it over sort of an agreed period. And that period is sort of between four and five years related to the effective life of the mortgage.

Right, so you do it... Mortgage by mortgage or on a portfolio?

We do a portfolio calculation of the effective life of the portfolio and we amortise it over that period.

Great, great. Excellent, thanks.

Our next question comes from Paulina Duran from The Australian.

Hi, good morning and thank you for taking the question. So my first question is around You mentioned starting to see a little bit of stress on business. Can you go a little bit deeper on that? Which spectrum, which areas? And is that, you know, particularly on SMEs?

Yeah. So there's a good slide in the deck, but broadly what it says is the most stressed sector is property construction, so that's not a surprise. That's to do with the fixed prices, the material and labour increases, and that's sort of flowing through into the portfolio. But we can see that, but we've been working on that. Then outside that, it's really been single customers that have... unique issues. So there's not any particular sector where we think there's a sector theme and small business it's not really. If we take cafes and restaurants as an example, stress is actually reduced in the six months. So that's why I say there's no macro thematics that we're seeing. It tends to be more individual customers and at this point it's a modest increase in stress and something that we can work through.

For that undermining exposure though, do you feel that that spike reflects the wider sector, or is that more of a Westpac exposure in some way?

No, no, it's one exposure, not just Westpac is involved there, but it's just one exposure.

Thank you. If I may push my luck, the final question for me, around competition. I mean, the dynamics there have been quite interesting with a lot of pressure on some peers of yours. Can you just go a little bit on what your expectation for the future of cashbacks is? You, of course, make a decision on the Westpac brand, but not on others. So just interested in your comments around that.

Yeah, well I can't talk about what we may do in the future on pricing but in terms of what we've done, we have removed cashbacks on the Westpac brand. A couple of weeks ago we've removed cashbacks on the Bank of Melbourne brand and for St George and Bank SA we've halved the cashbacks. So that's where we're sitting at the moment in terms of the cashback in our brands.

And our last question today comes from Lucas Baird from the AFR.

Hey guys, how are you going? I was just wondering if you could elaborate a little bit more on the geopolitical risks that you mentioned in the shareholder letter. I mean what specifically are you expecting to hurt Australia coming from tensions in the Middle East and stuff like that?

The risk to Australia is twofold, global growth and what happens and energy prices and any time you've got conflict in the world, particularly in the Middle East, it could go wider. I'm not saying it will, I'm just saying it could and so what we need to be worried about as a country is the flow through on economic activity in the world and if the world slows down That's not great for us is sort of the short answer and obviously if energy prices go up because of uncertainty on supply in energy again that's an import shock for the country. So those two things are the primary mechanisms that something overseas could come back. to us and very hard to tell but the risk has obviously gone up a lot with two major conflicts in Europe and the Middle East popping up in the last little while. So we've got to be alert to the risks. As I said the domestic economy is going pretty well. There's a lot of demand but we could be influenced by what goes on in the globe.

Okay, cool. And then just the second one, commercial real estate. I think there was a slide in the presentation that said commercial property values are down about 15% over the last 12 months and expected to fall another 0.5% next year. I mean, what's it going to take for commercial property values to start trending up again?

Yeah, so the figures you refer to there are what we've used in our credit provisioning models. So they're sort of estimates, forecasts if you like. From our perspective, the average LVR at the moment in the portfolio is around 50%. So we can accommodate quite large falls in property prices from here and that represents the lending decisions and settings that we've had over the last few years. So what will spark a change in property prices, it will depend on people who have to sell I think and if they can handle the higher interest costs and pass it on then they won't have to sell but if there is more turnover then maybe the prices will reset in commercial property.

Cool, thanks guys.

Thank you. Thanks for your time everyone. We look forward to catching up with you over the next week or two. Thank you. Thank you. And if you're in the room feel free to turn your phone on.