Westpac Banking Cp Ord

Good morning and welcome to Westpac's Q1 FY26 update. I'm Justin McCarthy, GM Investor Relations. Joining me today is Nathan Goonan, our CFO. Before we commence, I acknowledge the traditional custodians of the land on which we meet. For us in Barangaroo, that's the Gadigal people of the Eora Nation. I pay my respects to Elders past and present and extend that respect to all Aboriginal and Torres Strait Islander people. This is an inaugural quarterly call designed to enhance transparency and disclosure. We hope this refinement is helpful and welcome your feedback. Nathan will provide a brief overview of our quarterly performance and then take questions. In the interest of time, we'll take one question per person. With that, Nathan.

Thanks, Justin, and good morning, everyone. Thank you for joining. As we start the financial year, we're continuing to drive operational momentum across the group and our quarterly performance reflects a disciplined execution of our five strategic priorities. Net profit excluding notable items increased 5% compared to the second half 25 average. Revenue was up 1% comprising a 2% increase in net interest income driven by an increase in average interest earning assets and a stronger treasury performance and a 4% decrease in non-interest income driven by lower markets revenue due to unfavourable DVA. Operating expenses x the second half 25 restructuring charge were stable. Including the restructuring charge, expenses were 5% lower. These revenue and expense outcomes resulted in an increase in pre-provision profit of 6% or 2% x restructuring. Sustainably growing customer deposits underpins our ambition to be our customer's main financial institution. The growth of $12 billion in the quarter highlights the inherent strength of our franchise, with household deposit growth of 3% and business transactional deposits up 4%. We expect deposit growth to remain strong through FY26. Loans increased $22 billion with growth across all customer segments. Institutional lending grew by 7% and was well diversified. We continue to see good opportunities in this part of the market, although we expect the rate of growth to moderate over the remainder of FY26. Australian mortgages, excluding rams, grew by 3%. This reflected progress in executing our mortgage strategy with the proportion of proprietary flow rising to 35% in the quarter. This positioned us above system for the quarter. We're targeting consistent performance broadly in line with the system from here. Australian business lending maintained momentum, growing at 3%. More bankers on the ground is improving proprietary flow. The stronger lending than deposit growth resulted in a modest widening of our funding gap, with the deposit to loan ratio down one percentage point to 84%. We remain on track to settle the RAMS transaction by mid-year and have intentionally positioned the balance sheet to accommodate the expected $16 billion reduction in mortgages. Funding markets have been supported and we have issued $18 billion in long-term wholesale funding since October 25. Net interest margin decreased one basis point to 1.94%. Consistent with expectations set out of the FY25 results, core NIM of 1.79% declined by three basis points compared to second half 25, with the decline moderating to one basis point on a quarterly basis. Lending margins edged lower as competitive pressures persisted. The rate of compression was stable in mortgages, has moderated in business and was more pronounced in institutional this quarter. The non-repeat benefit related to interest rate reductions in prior period was a net drag in the quarter, with the lending reduction more than offsetting a deposit benefit. Prior period rate lag impacts have now flowed through our numbers. Overall, deposits were stable. Compositionally, growth in higher rate savings balance continues to be a drag, while liquid assets provided a slight benefit. The Treasury and markets contribution of 15 basis points was up from 13 basis points, reflecting favourable interest rate positioning by Treasury in a more volatile market environment. To provide further earning stability through the cycle, the deposit hedge was increased by $15 billion to $92 billion, $7 billion of which was flagged at the full year results. This had no material impact on NIM in the quarter. In terms of considerations for the first half, we continue to expect the net replicating portfolio benefit to be approximately one basis point. And our sensitivity to a 25 basis point rate rise is a benefit of approximately one basis point over a 12 month period. However, the recent RBA rate rise will be a slight headwind in the second quarter due to the timing of passing through the rate rise to customers. Operating expenses, excluding the second half restructuring charge, were stable at $3 billion. We report to the nearest $100 million with expenses rounded up in the quarter. We remain confident our FY26 expense growth will be largely offset by productivity savings, which include ongoing benefits from the restructuring charge taken in the second half of 25. Considerations provided at the full year results in relation to investment spend and operating expenses more broadly remain current. Credit quality metrics improved over the quarter. Stressed exposures to total committed exposures decreased 11 basis points. This reflects a decline in Australian mortgage arrears and reduced stress rates across most industry sectors. Our portfolio remains well diversified across sectors and geographies. Total credit provisions rose marginally and at $5 billion were $2.1 billion above our base case. Coverage was stable at 125 basis points. While modelled collective assessed provisions were stable, reductions from improvements in underlying credit metrics were offset by model adjustments related to the severity of the downside scenario. Credit impairment charges remained low at six basis points of average gross loans. The SET1 capital ratio remained strong at 12.3%. The reduction in SET1 reflects a payment of the full year 2025 dividend, which more than offset earnings for the quarter. There were also several items that moved in both directions and summed to a reduction of five basis points. These movements, many of which are one-off in nature, include a benefit from the removal of the operational risk overlay, higher lending balances, which were partly offset by credit quality improvements and data refinements. IRRRB was a modest drag with embedded losses and an increase in hedge deposits, more than offsetting the benefit of standard changes, and the capital floor drove a marginal reduction. In second half 26, we expect a 22 basis point benefit from the completion of the sale of our Rams portfolio. To conclude, the performance for this quarter demonstrates solid progress against our plans. Discipline execution is driving our momentum. We're deepening customer relationships and investing in our business. We're optimistic on the outlook for the economy and expect demand for both business and household credit to remain resilient. With that, I'll hand back to Justin for questions.

Thanks, Nathan. And as a reminder, in the interest of time, if you can just limit it to one question. Now, first question comes from Matthew Wilson from Jardin. Matthew.

Good morning, guys. Hopefully you can hear me.

Yeah, we've got you, Matt.

Oh, good. Thanks for the opportunity to ask questions. Pretty clear result. Therefore, perhaps can we ask a question? Obviously, you've had two senior leaders in the IT area depart in recent weeks. which coincides with an important part of the Unite project. I understand Peter Herbert is running it, but obviously IT is important. Could you add some colour to the outlook for that?

Yeah, thanks, Matt. And we've obviously got an update on Unite in the diary for, I think, the 26th of March, where we'll do a fulsome update on that. I think, you know, obviously Anthony and Scott has announced his retirement and sort of he and Anthony have been working through that over a period of time to work out when's the best time for that to happen. Scott's remaining with us until the end of the year as we find a replacement for him. But You know, as you said, Peter Herbert runs the Unite program. We have a dedicated CIO who works for Scott who's been embedded in that program with alongside Peter Herbert running it. And so, you know, don't read anything into that. It's sort of no material impact on Unite and you'll get a fulsome update on the 26th of March. And, you know, you could almost read it the other way, Matt. This is a retirement for Scott that Anthony and Scott have been working through. When's the best time to do that?

What about David Walker? He seems more hands-on and has fantastic experience with his time at DBS.

Yeah, David Walker. I think David Walker, again, we've got, you know, these are great executives who've done good things for Westpac over a period of time and, you know, come to the end of their time here. I think we've also been bringing in talent into the tech team. And, you know, again, you know, there's a dedicated CIO who isn't David Walker or Scott Collari who's been working on the Unite program.

Thank you. Thanks, Matt. The next question comes from John Story from UBS. John?

Hey, good morning, guys. Happy Friday. Yeah, I guess the question that I would have, Nathan, is just around your hedge, right? And obviously the decision to increase the size of the hedge into a rate hiking cycle. I mean, obviously in the short term, it's maybe not ideal. But maybe you could just give a little bit of context around how tactical you can actually be on the hedge itself. And then maybe the 50 basis points, let's say, of potential interest rate increases during the course of this year. What would be the impact actually on them from increasing the size of the hedge?

Yeah, thanks, John. Happy Friday to you as well. On the hedge, I think, I probably came into the role, John, thinking that one of the things we needed to do was just increase the proportion of our non-rate sensitive deposits that were hedged. And I think really what we're trying to do here is provide medium terms earning stability through the cycle. And so while yes, you can be tactical and when you put it on, I think the main point here is to try and give that earning stability so that it's better for us when we're planning to run the bank and we think it's a more predictable earnings profile for the market. The timing of these two was, and I think now, just to say, John, I think we're now proportionally up there with some of our peers in terms of eligible deposits that we could hedge. The timing of the two that we've put on, so we did two $7 billion broadly in The first was in October. That went on probably slightly below cash. So what you're doing here, as you know, is you're effectively taking earnings out that might be earning the overnight cash rate and investing across the five year curve. So the October one was slightly below. So we took a little bit of near term earnings hit on that one to give us the earning stability over time. And then actually the December one was just slightly before Christmas. And we actually were able to invest that pretty much at the cash rate. So there's no near-term earnings impact from that one. And as I said, take that all in aggregate. We expect a one basis point benefit from the hedge when we get to the first half.

Thanks, John. Thanks, Adam. Our next question comes from Andrew Triggs from JP Morgan. Andrew.

Thanks, Justin. Nathan, can I just ask on the momentum in the cornium in the quarter, please, just the one basis point decline, just a bit more in terms of the drive of that, what were you seeing with respect to mixed shifts, especially on deposits? You mentioned perhaps there was a little bit of a headwind from your change to hedge there. What are the other sort of drivers you can sort of call out for us, please?

Yeah, thanks, Andrew. And I think maybe I'll answer this one a bit fulsome and then hopefully it helps others on the call as well. I guess the trends that we're seeing in the quarter, Andrew, are very consistent with what we were talking to you about at the full year. And I think they're obviously going to be the things that we'll be talking about when we get to the half as well. You know, it is a more stable environment for margins and you're right to call that out. And as you said, we've sort of seen moderating trends. While they're consistent trends, they're moderated. We had sort of three basis point declining margins when you compare to the second half and then one basis point when you isolate it to the quarter. And I think if you back out the net negative from the rate lag, the prior period rate lag, when rates were declining, it is relatively stable. That said, the underlying trends are sort of, as I outlined at the full year on lending, you know, we're seeing that sort of gradual decline in lending margins across the book. So mortgages was relatively stable for the quarter, but remains competitive overall. business lending, the compression was sort of much more moderate in this quarter than it's been in prior periods for us. And then maybe institutional was a little bit more this quarter than it's been, although we've seen a little bit of margin compression coming in there sort of last quarter of 25 and into this quarter. And on the deposit side, while relatively stable overall, you know, the thing that's hurting margins there a little bit, and again, it's sort of a gradual decline, has just been the real success of that savings product So at a macro level deposits, your mix has been improving, proportion of TDs is continuing decline. The bonus saver product, the live product continues to be a great product for our customers. And so that might've been 5 billion of growth in the fourth quarter last year was another 4 billion of growth this year. And one of the factors there is, I think, consistent with our peers. We're just seeing a slight tick up in the people who are qualifying for the bonus rate. So I mentioned that at the full year, the fourth quarter was about a percentage higher than what it had been for the average of that year. And that's continued into this quarter. So they're the sort of If I thought about the considerations going forward, just to be fulsome in the answer, Andrew, I think you continue to see those underlying trends flow through into the second quarter. The replicating portfolio wasn't much of a benefit in the quarter. We expect it to be one basis point in the half. Liquids, I think, remain a benefit for us in the second quarter. And then just to call out the rate, The benefit from the 25 basis point hike that we've had, albeit a one basis point benefit over a 12 month period, it's likely to be a slight drag in the second quarter, just given the timing difference between when we pass on to deposit holders relative to lenders.

Thank you.

Thanks. The next question comes from Jonathan Mott from Baron Joey. Jonathan.

Just a quick question, if I could, on the deposits. You said they're really good growth and success that you've had in the savings product. And I think you just mentioned $4 billion. Have you seen any growth in non-interest-bearing deposits, which was a real tailwind for CBA when they just reported?

Yeah, we have seen growth in those, John. Sorry, I should have said hi. How are you going? Yeah, we have seen growth in those transaction deposits. In particular, I called out in the speaking notes, I think Paul and the team are doing a really neat job in business there, John. We had sort of 4% growth in the quarter of Transaction accounts in business bank, that's sort of $2.8 billion growth there. And then overall, we're seeing growth in transaction accounts in consumer as well. So it has been outpaced by growth in offsets and growth in savings. So that's hence calling out that mix shift with the higher proportion of growth coming in those higher rate products. But we are seeing that underlying quality growth as well.

Thanks, John. Next question comes from Carlos Catro from Macquarie. Carlos.

Thanks, Justin. I'm just wondering if you give us any detail about the proprietary broker split and mortgages. It looks like from your portfolio side, you've continued to lose a bit of proprietary share, but on the flow side, have you seen any stabilisation or improvement there given the huge focus on the proprietary channel?

Yeah, thanks, Carlos. Yeah, we have, from a flow sense, and you're right to say it's a big ship. And I think Anthony's mentioned it the full year, you know, we're going to measure this in sort of halves and years, not in quarters. But for the quarter, you know, we have had that improve for two quarters in a row now. And on a flow basis, it was 35%, which is up from where it had been. Actually, interestingly, if you're sort of looking for a stat or you want to be a believer in this space, which we certainly are, we've had first party growth of $3 billion in the first quarter. If you compare that to the sort of fourth quarter, that was a reduction in that first party or proprietary book. And you know, it grew by about 100 million in the prior period. So it's sort of grown by three prior period, it grew by about 100 million. So we are seeing green shoots there. It's going to be a journey for us as we continue to push on that. And the team are doing a good job executing against a multi-year plan that we expect to just continue to improve and improve as we go through that.

Thanks, Carlos. Our next question comes from Brendan Sproles from Goldman Sachs. Brendan.

Good morning, team. Just a quick question on the contribution to NIMS from Treasury this quarter. Is that a little bit circumstantial to the conditions that you faced during December? And how do you sort of see the contribution to NIMS on a more sustainable basis from this part of the business? Yeah, thanks, Brendan.

Good morning. And it's a good question. I think it's clearly been a bit of an outlier in this quarter. So I would expect it to moderate and I'd expect it to moderate even into the half, Brendan. So I think long run of that has been more like in the, you know, in the 12. Some people tell me it's sort of almost been in the, you know, down around 10. I think, you know, we've clearly had a good quarter there where the contribution's been significant. I'd expect it moderates. And so don't expect that to be 15 when we get to the half.

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

Thanks, Justin. Good morning. Nathan, you mentioned the funding gap in the quarter, which meant that you haven't got the same portfolio mix that your peers have seen. I mean, how should we think about the funding of growth into the next couple of quarters, given your loan growth is quite strong? How should we think about how you're going to fund this? Do you have to get potentially a bit more competitive in deposit pricing to pick up that deposit growth?

Yeah, thanks. So I think we're doing a neat job on deposits. I think the major thing just to call out as you think about the outlook is just the RAM sales. So we've got $16 billion of mortgages that we expect to drop off the sheet when we get to completion of that, which we're expecting by mid-year. And so what we've been able to do a little bit, if you think about that, is just pre-position the balance sheet for that eventuation. We've sort of been doing that a little bit on both sides, I guess. So that has given us the confidence to be able lending a little bit more on the asset side, and we've also structured up some of our liability side a little bit for that eventuation. So for the real studies out there, you'll see we've been increasing short-term funding a little bit for that eventuation, and we've been able to sort of structure up for that. So that's the big thing that we've got going on as we think about the outlook for funding the balance sheet. for the rest of the year. I think on deposits, look, it's a competitive market. We're doing well. We feel good about that. And, you know, we've been sort of taking a slight amount of share in household deposits or being just slightly above our system. We want to continue to do well there. Business transaction growth's been good and the team are executing really well there. So we want to continue to be focused on deposits and make sure we're getting our share or slightly above, but we don't think we have to do anything crazy on price to be able to do that.

Thanks, Tom. Our next question comes from Brian Johnson from MST. Brian?

Thank you. Nathan, I'd just be intrigued. I know Carlos kind of answered this, but I'd love it if I could get some more detail. We've seen the flow go from like 33% through the prop channel up to 35%. But the flip side is that we've actually seen the percentage of the book decline from 45% to 44.4% on slide 18.

could you just explain to us the increased flow versus the declining book is there something weird that's happened in the life of the book between the two yeah thanks brian and good morning um i think it is just going to be a sort of a run what what proportion is running off relative to the flow that we're putting on and so um you know i i can take it away and come back to you and just sort of outline how the mass would work on that brian but i think My comments really go to the bit that we're most focused on had been that flow number in terms of improving how we're going to market and making sure that our application front of funnel was most focused on improving that first party mix relative to third party. Clearly, there's just maths in the back about how the back book is behaving relative to that flow that causes the dynamic that you're seeing on the page there.

Nathan, would it be incorrect? So it's hard not to conclude that the prop book is running off faster than the broker book. Is that a fair conclusion?

Yeah, I think it has to be the maths of it. So the absolute prop flow was sort of up in the year, but up in the quarter, as I said, we sort of had $3 billion of prop flow. But then to get the dynamic that you've got there in the stock, you have your prop book is running off faster than your broker book.

Thank you very much. Thanks, Jason.

Thanks, Brian. Thanks, Brian. And also consider that the flow, if flow's still below 50 from proprietary, so we're still getting more flow from broker. Thanks, Brian. Our next question comes from Ed Henning from CLSA. Ed?

Hey, thanks, Justin. Sorry, there might be a bit of background noise. Can I just ask a question on capital? Obviously, capital vision looks pretty strong. You've got the RAM sale coming through. Can you just talk about more optimisation opportunities coming through in the next half, in the next year, and also potential impacts of the Airbnb changes as well coming through? Yeah, thanks, Ed.

We can hear you fine, so... I'll just sort of take those in turn. I think inside the quarter on refinement, basically we've had a track record here of about $10 billion of sort of optimisation in the risk weights every year. And I think the team have been executing really well against that for a number of years. It's been a pretty consistent number. You'll see in the pack when you get the opportunity, that was $2.3 billion of risk weight optimisation in the quarter. I do expect, and I think I said at the full year, that that run rate is unlikely to repeat for the full year. So I don't expect we're going to be at 10 this year. I expect that will be a much more moderate number. you know if we got that somewhere near the sort of seven or eight i think it would be good a good effort based on the pipeline of opportunities we've got ahead of us so we continue to see opportunities maybe they're moderating a little bit from where they've been the other thing that's sort of offsetting some of the strong credit risk weighted asset growth has been credit quality so When you get the opportunity to go through the pack, you'll see that was a $3 billion RWA benefit from improvements in underlying credit quality. That was about $3 billion in the fourth quarter last year. So that's a pretty consistent trend now. And if we continue to see those asset quality improvements flow through the book, you could expect that that continues to be a benefit for us. And then I think on lastly on and offsetting that, you know, we've obviously got strong credit growth. So, you know, that's that's the most important thing that's that's offsetting that there. As it relates to New Zealand, you know, that's still early days in terms of, you know, those things haven't been finalised, but they do look positive. So, you know, we have, that would mean that we're pretty much at the capitalisation rate of 12.5 set one in New Zealand that we need to be at. So there will be some opportunities there. I don't think it's particularly material for us, but, you know, net net, that'll be a positive for us as well.

Thanks, Ed. Our next question comes from Richard Wiles from Morgan Stanley. Richard?

Good morning. So I just wanted to follow up on the questions around Treasury. I think you said that Treasury had a good quarter, boosted the margin, but markets was negatively impacted by DVA. If we put it all together, Treasury and markets, it looks like... the margin benefit might have been greater than the drag on other income, although you haven't split it out. Last year, or last half for Treasury markets was about $1.1 billion. So the quarterly average is around $5.50. Could you tell us what it was in the quarter and how much it, so whether that margin boost has been fully offset by a reduction in other income?

Yeah, thanks, Richard. And obviously we'll sort of do that fulsome disclosure when we get to the half. In terms of just sort of to give a high level sense, I think you're reading it right. They've probably offset each other, but I think we can give more fulsome disclosure on that when we get to the half. But proportionally, I think you're getting that pretty right.

Thanks, Richard. Next question comes from Matt Dunger from Bank of America Merrill Lynch. Matt.

Yes, thanks, Justin and Nathan. Could I just revert to the capital position? I know you said the five basis point net impact of the one-offs, but just wondering how the embedded losses unwind. You've got the RAM sales, so just wondering how you're thinking about potential for capital returns coming into the half, given strong capital generation trends.

Yeah, thanks, Matt. Just specifically on the embedded losses there, I think, you know, IRRBB was, you know, a net drag of four basis points. There's sort of three component parts here. So we had the benefit of the standard changes. I think we flagged that at the full year. It's about 40 basis points or 39 to be precise. And then they're sort of offsetting that. There's two points, the deposit hedge. So we obviously have increased that by 15 billion. There's 27 basis points consumed there for that. And then as you rightly call out, we had embedded gain swing to embedded losses. And so there's sort of 16 basis point drag from that in the quarter. In terms of the look forward on that, obviously the embedded loss or gain is really all rate dependent. So that is quite hard to predict. And so it's like the unwind of that, you know, is obviously a possibility. There's obviously a possibility that that goes the other way as well. So that's a little bit of a one to watch in terms of, you know, where things go from here. I think our movement there, just looking at the other results this week, looks very consistent with what other people have seen. On the go forward, you know, as you rightly call out, I think a number of the movements in this week quarter are a little bit one-off in nature. So, you know, operational risk overlay removal is sort of one-off in nature. The impact of a standard change is one-off in nature. The additional deposit hedge, while we'll continue to have rebalancing while we've got strong growth there, you know, I think we're now proportionally, you know, in and amongst our peer and I wouldn't expect material movements in that in the second quarter. And then it just all comes down to sort of earnings, credit, risk-weighted asset growth through credit, what happens in asset quality, what happens in the embedded loss. So there's a few moving parts on that and look forward to discussing it more with you at the half.

Thanks, Matt. That was our last question. We certainly thought that this morning was valuable. Hopefully you did as well. We welcome your feedback. And thank you for being succinct with your questions because we're just on 8.30 now. Come through with anything else we can help with throughout the course of the day. Thanks very much. Thank you, Nathan.