Westpac Banking Corporation
Q3 2019 Earnings Call Transcript

Published: 4 Nov 2019

[Andrew Bowden:]

Good morning everybody and welcome to Westpac’s full-year 2019 Results Announcement. My name is Andrew Bowden, and I'm Head of Westpac's Investor Relations. Welcome to all attaining as well as on the video on the webcast and on the phone. Before I commence, I would like to acknowledge the traditional land on which we speak today, the Gadigal people of the Eora nation, and pay my respects to elders, both past, present and emerging.Today, as usual, we are having Brian Hartzer, our CEO present, and then followed up by Peter. And then of, course, we will open up for questions. But without further ado, let me get Brian up to the lectern.

[Brian Hartzer:]

Thanks, Andrew. Good morning, everyone. It is obviously been a difficult year for the industry with lower interest rates, lower economic growth, falling house prices, increased competition and arise in regulatory scrutiny all putting pressure on earnings and this is reflected in our result.Having said that, we have actively managed returns, we have made a prudent decision to further strengthen our capital. We have acted decisively to reshape our business and we have effectively executed on our strategic priorities. So while the financial results are below the standards we expect, we are actively dealing with the environment and are setting ourselves up well to be a stronger performer over the next couple of years.Now, let's start with earnings. Reported profit was down 16% while cash earnings were down 15%. The majority of the reported earnings decline related to provisions for customer remediation, along with the cost of our wealth reset. For clarity, we are calling these notable items and they are disclosed throughout our reporting.The fall in earnings flowed through to a lower EPS and the ROE was 10.8%. Notable items also impacted margins and our cost income ratio. The table at the bottom of this chart shows the underlying picture excluding notable items. Now on this basis, cash earnings were down 4%, due to lower margins, lower wealth and insurance income and increased regulatory and compliance costs.The cash ROE X notables was 12.5%, which was down over the year as a function of both lower earnings and a 3% increase in average equity. The margin was lower over both the year and a half, mostly reflecting a fall in deposit spreads and the effects of low rates on both capital and liquidity.The cost income ratio of 43.9% is higher than we would like, but we are still targeting a sub 40% cost income ratio overtime, as investment costs fall away and productivity benefits come through.Now turning to divisional performance. We are reporting with our new operating structure which now has the BT businesses folded into our consumer and business divisions. The group business line includes what was left of the advice business and hence the large loss there.I will exclude notables in my comments, because most of these are in the business division and in the group line. Consumer cash earnings were 6%, lower over the year. The biggest decline was in insurance due to the significant weather events early this year and banking fees were also lower.Higher delinquencies meant that impairment charges were also higher. Growth for the year was concentrated in owner occupied mortgages and deposits. Although much of this was offset by a fall in margins as low rates limited the extent to which we can reprice deposits.Mortgage growth slowed during the year, this was partly because with slower system growth, we chose to prioritize margin. But in the second half, we also saw an impact from how and when we implemented changes to the hem tables as well as service ability assessment. Essentially the way we rolled it out made it harder for customers and brokers to do business with us. So in the fourth quarter, we saw applications diverted elsewhere and balances declined.We have largely fixed the process issues, and applications are picking up again. But with the lag between applications and settlement, this will still be a drag in the first half. I expect we will be back at going around system by the end of the financial year.Business division results were down 2% over the year, which was mostly due to lower wealth earnings and higher regulatory and compliance costs. The softer wealth earnings are from a combination of platform repricing moving early to remove grandfathered commissions and some of the my super migrations. Individually these items were small, but collectively they added up.On the lending side, business credit demand remain soft. Asset quality declined a little, the most of the deterioration was in watch list and substandard facilities few new companies migrated to impaired and as a result the impairment charge was lower.Overall though, I'm pleased with this business, we are number two in market share, and number one on NPS and commercial, SME and micro business segments. And we have a strong platform for one growth returns.WIB’s result was impacted by the loss of Hastings income, and from an accounting change to derivative valuation adjustments. If you take out these adjustments, the result was largely flat. WIB has continued to be very disciplined on pricing and return this year and that has seen us walk away from some business that didn't meet our risk or return hurdles.With slower new growth and companies continue to pay down debt, lending was lower over the year. However, we continue to have a very strong position in infrastructure, government and Green energy lending.New Zealand healing had a solid result with good growth across lending and deposit, a gain on the sale of Paymark and lower impairment charges. We have been using New Zealand as an innovation incubator and are beginning to import some of their success particularly new ways of working in our core product and technology areas.Now, turning to the balance sheet. Strength is always the first priority at Westpac in all our key ratios are in good shape. Before we funded loan growth with deposits and this helped our funding and liquidity ratios remain comfortably above regulatory minimums.Are CET1 ratio was little change to 10.7% despite a few capital headwinds that emerged during the year. Asset quality is good, but we have seen small 12 basis point rise in stressed assets to 1.2% over the year. Impaired assets remain at sector leading lows.So given the strong position, the obvious question is why are we raising capital? So let me explain that decision. While I seen Q1 capital ratio has continued to be above APRA’s unquestionably strong benchmark, there were a number of factors that weighed on our ratio this year.These included operational risk capital overlays and a new standardized model for derivatives, as well as the impact of customer remediation provisions on organic capital generation. In total, these added up to a 70 basis point drag on CET1.We are expecting some capital updates from APRA and the RBNZ and potentially further regulatory action, which may include litigation. With our first priority on strength, we decided therefore that it was prudent to conduct a $2.5 billion capital raise through an underwritten institutional placement and a share purchase plan.Over the next 24 hours, we will look to raise around $2 billion from institutions and we will then give existing retail investors the chance to participate at the same or lower price. This gets our pro forma ratio to around 11.25%, and gives us a good buffer above average APRA’s 10.5% benchmark. That gives us the flexibility to respond to developments in the year ahead and importantly means that we can continue to lend and support our customers, regardless of the economic cycle.Having acted on capital, we then had to consider the dividend. Our approach on the dividend has always been to maintain a payout ratio that maximizes the distribution of franking credits, while being sustainable in the medium-term. We also recognized the importance of consistency from many shareholders.In this environment, we believe that a sustainable payout ratio is in the 70% to 75% range. Over recent years, we have been willing to run above that level, largely because we have had good capital generation and lower asset growth. We have also held the dividend given our excess franking credits.But with the increase in shares on issue and a recent deterioration in the outlook, it would have been hard to get back into that payout ratio within reasonable time. So rather than make an incremental change, we decided it was prudent to reset.That gives us a more sustainable base and we will continue to look at ways we can distribute those franking credits. The payout ratio is 79% for the second half, but X notables is 71%. Our dividend yield in the second half was 5.4% and after franking It is 7.7%, which is a good outcome in a low rate environment.So those are the financial results, let me now turn to how we have been responding to this new environment. At the beginning of the year, we said we would deal with outstanding issues and we have. We exited financial planning, we have reshaped our distribution network, we consolidated 61 branches, removed 349 ATM, and entered into an agreement to sell most of our Australian offsite ATM. That helped reduce fixed assets and costs without impacting service for our customers.It also creates the potential for further savings if our partner is able to establish an industry utility to deliver ATM services in areas where no one bank can justify a presence. We have streamlined our management structure across both consumer and business divisions. This brings a consolidated approach to driving growth in each state across our brands, while eliminating duplication in local management layers.We centralized our remediation activities and raised significant provisions to address a number of historical issues. We are currently around 60% of the way through the known customer issues. We delivered 405 million in productivity savings this year, just above our $400 million target. As part of this, we reduced FTE by 5%, despite adding more than 400 people into our risk, compliance and remediation projects.While these initiatives required significant management focus this year, we have continued to deliver important milestones on a group service strategy. Our strategy focuses on delivering against three key themes, performance disciplines, service leadership, and digital transformation. This year, we have made number of important changes to the way that we organize and manage our businesses to improve execution discipline and strengthen accountability.On the service side, we have continued to make progress, with the number one NPS position across all main business segments. In consumer, we were number two for most of the year. We have embedded a strong service ethos across the company and improved our brand positions, which is critical to franchise growth in the future.I'm particularly pleased with our progress on digital, where we achieved a number of important milestones that will help us deliver better service and efficiency in the years ahead. The customer service hub has now been rolled out for Westpac first party mortgages, with the final lenders converting to the system over the next two weeks.Panorama is complete and is now the fastest growing platform in the market with over $23 billion in funds on the platform. We are the first bank to have fully rolled out a new payments platform and we currently process around 40% of all the value transacted on the MPP.Technology is increasingly important to our strategy to deliver a great service. So let me spend a couple of minutes on what we have delivered this year. The first aspect is how we are using technology to shift the digital experience. For our customers, we are delivering a simpler, easier and more personalized experience. Digital usage is up and digital channels are now 40% of all sales.Late last year We rolled out a fully digital mortgage for St. George and regional brands. This means a customer can get their mortgage through mobile phone with a fully digital experience. Bankers use the same technology and It is now represents more than 30% of apps in those channels.Our new online TD renewal process has significantly increased retention. Our new Westpac chatbot, called Red, has responded to over a million queries and sold 70% of them on the spot and I'm pleased to say that we are ready for open banking in February.We are also using digital technology to drive down costs through automation. The customer service hub gives us the rails to automate all of our consumer origination and servicing capability. Next year we will migrate other mortgage products and channels onto the platform and then begin to convert our other consumer products.80% of mortgages are now settled electronically and earlier this year we rolled out a new enterprise workflow system that allows us to automate our paper intensive processes. The other piece of the digital puzzle is our FinTech partnerships. This is important because success in the digital future is going to be about much more than having a cool app.We are actively building partnerships to bring new services to customers and benefit from the technology innovation that is exploding in the whole financial services ecosystem. Reinvention now has $150 million in investment capital across about 30 companies. On a market value basis were already significantly ahead, but the strategic value of these relationships is even more important.On a direct basis, we have significant investments in Zip Money, Assembly Payments, and Uno Home Loans. And today we have announced a partnership with 10X, a state of the art cloud based banking system that will allow us to expand our digital offer for customers both directly and in partnership with other institutions and FinTech companies.We have also been building the underlying technology to set us up for a digital future. For some time now, we have been systematically modernizing our architecture across four categories, channel or front-end systems, customer data and origination systems, product systems, and the underlying infrastructure. You can see on this chart where we are now up to.On channels, in addition to the digital mortgage and chatbot. We have upgraded desktop systems in our branches and call centers. The next phase of our mobile banking app is in pilot and we go live next year. This improves the user experience and gives a big step up on personalization and value add for customers.On origination, the customer service hub is the main story, but we have also rolled out a new big data platform that lets us analyze massive amounts of customer data and deliver real time insights across the bank and as I said earlier, we are ready for the next phase of open banking.On infrastructure, we now have a state of the art hybrid cloud environment, which dramatically improves our processing speed and reducing storage costs. We have upgraded our underlying network backbone, which improves the speed and reliability of our systems. So we have set ourselves up well to compete effectively in a new digital world.And with that, I will hand it over to Peter to take you through the details of the result.

[Peter King:]

Thanks Brian, and good morning everyone. I will start with a quick recap of the year before turning to trends in the second half. In reflecting on this result, I was pleased with credit quality and balance sheet metrics.But obviously disappointed with our results including the large increases in remediation provisions and the wealth reset costs. Excluding those items earning fell 4% with noninterest income the big challenge, and there is three primary drivers here.First, our decisions to exit Hastings, financial planning and Ascalon reduced revenue by 308 million. The second was high claims in general insurance following the large storms earlier in the year. And the third impact was lower platforms and super income as these businesses continue to reset.If I turn now to the second half, provisions for notable items were significantly lower and this saw earnings rise 8%. However, backing out notable items, earnings were down 3% and touching on the cane movements, loans were flat and we managed margin as well and combined with a better treasury result, interest income rose $95 million.Lower noninterest income included a $41 million charge from CVA methodology changes, a further drop in advice income and lower fees as activity fell. Expenses were slightly up as restructuring costs were higher than originally expected. And on the payments while credit metrics was sound an increase in right-off so the charge rise to the investors points of loans.And moving to notable items, this reduced earnings by $377 million as we allowed for further remediation and wealth reset costs, the larger items included updated estimates for the time value, money and financial planning, further provisions to interest only refunds and additional program costs.The bottom-left table covers our wealth reset, and the program is going well hitting its major milestone in exiting face-to-face Advice in September. On project costs having a lab for 241 million this year, we expect total costs at the bottom end of the 250 million to 300 million range.The top-right table is the normal disclosure of volatile and infrequent items. And these had no impact as gains from asset sales offset the group's CVA movements. And consistent with our first half, loan growth was modest with our New Zealand division and Australian mortgages driving growth and focusing on Australian mortgages, the charts on the left showed $2 billion of growth in the second half. However, this was skewed to quarter three with the book contracting in quarter four.Brian set out the reasons and they are evident in the lower new flows. There has also been slightly higher run-off when we compare it to the fourth quarter last year, and this reflects higher refinancing and repayments. There is a little bit of seasonality here.On the top right growth is in owner occupied, while investor fell 1% and we also write more fixed rate loans with flows of 35%. The bottom right title as our mortgage book continuing to reshape with interest only now 27% of the book. This is expected to continue with new flows at around 21%. Looking forward, we have the implemented mortgage process improvements in the last four weeks. However these will take some time to improve new flows.Now margins, given the volatile markets I was pleased with the outcome. Adjusting to notable items, margins were one basis point lower. And looking at the components, loan spreads are up one basis point in our business books. Mortgage spreads a little changed his re-pricing offset switching and competitive impacts.Deposits were a major driver with both at core and TD spreads three basis points lower. And the chart at the bottom left shows term deposits becoming more expensive during the half. The impact from short-term wholesale reflective the sharp falls in market interest rates. While lower interest rates also reduced the earnings on capital.The two basis points from liquidity reflects high liquid assets, which gives us some flexibility running into 2020 and treasury also had a better performance and that add one basis point here. The bottom right table has the bounces hedged by the tractor and new information related to low rate deposits in Australia.And on the markets and treasury where income was up 6%. On the left while treasury revenue was down year-on-year, it lifted by 47.5 million and that was a good outcome. WIB market also had a solid half with market customer income up 4% from both FX and fixed income sales. So in summary here I would say market and treasury had a solid half.And turning to non-interest income, there is a few moving bits, so we have excluded notables and it was down 5%. Starting in the left, net sales were lower with no large items here, income filling cards,, advice, WIB and merchants, mostly related to our activity.Insurance income raised 6%, as general insurance had no claims related to major storms this half. And partially offsetting this was lower life insurance income as TPD claims increased and we rode off deferred costs following the particular super changes. These legislative changes impacted the number of accounts and insurance levels.Trading and other income fell 106 million. Trading income included the 41 million CVA impact, I referred to before, while other income reflected a swing in fair value of financial instruments and lower GST refunds in New Zealand. Overall, given all the moving bits here I have this helps you understand some of the underlying trends.On cost issues they rose 3% but were down 1% excluding FX impacts and notable items. Hastings was the biggest contributor given us the exit in 2018. Business as usual costs was slightly higher than expected as we incurred restructuring provisions late in the half to support our 2020 productivity programs. And our work on productivity delivered 405 million, which was more than offset by BAU cost growth.Reg and compliance spend increased as we prepared for the cloud of banking practice, invested in financial crime programs, responded to regulatory requests and implemented programs such as the EFS and EFS9 these were partially offset by lower royal commission costs.Investment costs were flat while amortization rose 91 million and this reflected the customer service hub in [Pepe] (Ph) and panorama. And touching on second half costs, excluding notable items they rose 1%. And we saw similar trends here with Reg and compliance increasing 95 million, while amortization also rose 59 million. We are working hard on productivity taking up 259, million in the half which included SGA being down 3%. Overall this business is well position throughout our productivity targets next year.And moving to credit and the book remains in good shape. The left hand shows a small rise in the stressed ratio. The 10 basis point increase reflects high mortgage delinquencies, as well as business facilities migrating into our watch risk and substandard category. Impaired assets remain low and were unchanged this half.The right hand shows stressed exposures, with the largest increase in wholesale and retail trade. And this mostly reflects challenges for motor vehicle retailers as cost sales sale. Increases in other sectors including property and business services and manufacturing related to individual customer circumstances as opposed to any sector issues.Our Australian mortgages they continued to perform well with realized losses of 57 million in the half, impart this reflects 70% of customers being ahead of repayments, including continued growth in offset balances. While we have seen a rise in the 30 and 90 day delinquencies, the pace of change has recently slowed and 90 day mortgage increased 10 basis points in the first half and six basis points in the second half.The rise in properties in position reflects a small increase in new items and slower resolution rights as the property market slowed. So overall, the book remains in good shape with some encouraging recent trends. On the impairment charge it was 13 basis points and reflects good asset quality, but was up this half.Starting on the left, new IPs of a 170 million were flat and in fact slightly down on year ago. Brought backs and recoveries were little changed, however, there is a 26 million gross up between right offs and recoveries which was shown on the chart.And moving to write offs direct, these were the key drivers this half. They reflect seasonality, higher order write offs and lower unsecured debt sales. Other movements in the collective provisions included an overlay reduction of 58 million and these comprised an increase in agricultural overlays related to the drought, which is more than offset by a reduction in mining overlays as provisions are no longer required or utilized. So in summary here, the trends reflect the good asset quality position.On capital to CET1 ratio ended at 10.7% a little changed over the half as organic capital generation offset other items. Capital generation was 51 basis points and included lower IRVB as the embedded gain increased, as interest rates dropped.Credit risk weighted assets reduced with volume growth offset by improved credit quality and impacts of FX translation, and in other items, we had a smaller than expected impact from the derivative changes at 14 basis points.On the bottom left, we outlined capital considerations including the eight basis point impact from the new listing standard. There has also been a lot of discussion on New Zealand and the bottom right chart has a level one CET-1 ratio after adjusting for recent rules and the expected capital raise.At 11.2% we feel well positioned for any further RBNZ changes, particularly given the five year transition period. And turning to the outlook, as we said before, mortgage balances are expected to be relatively flat with the first half 2020 likely negative and return to growth in the second half.Our exit margin ex-treasury markets was 204 and it was a little lower in part due to liquidity. Non-interest income is likely to be down with reductions including advance and further impacts from resetting the super in platform business group.We are also not expecting any significant gains from assets sales in 2020. I will cover expenses on the next slide, but on asset quality, it is in good shape. But as I said for a couple of halves, It is unlikely to get better from here.Excluding notable items FY 2020 expenses are expected to rise 1% reflecting higher amortization and as we boost REG and compliance spending. On REG and compliance increases reflect a number of programs with the larger ones including financial crime, data and analytics, reporting to regulators, [LIBOR] (Ph) transitions and in New Zealand, the BS 11 requirements. This uplift is expected to remain through FY 2021 and then default. Finally on productivity, we targeted $500 million and a further cost reductions in Advice.So thank you. And with that, I will hand back to Brian to sum up.

[Brian Hartzer:]

Thanks, Peter. What I would like to do now is just talk a little bit about the outlook, economically and then some of the considerations I would like you to think about how we are positioning ourselves for the long-term. So, in terms of the economic outlook, we are expecting operating conditions next year will continue to be difficult with the background of low interest rates, slower growth and continued regulatory intensity.We anticipate that GDP will improve mostly driven by government spending. The construction sector continues to contract and consumer spending will be held back by low wages growth. We are however expecting some stimulus from tax cuts and low rate, although the impact will be limited by continued softness in the labor market.The sentiment already a bit fragile the outlook will depend to an extent on the global backdrop, and in particular weather trade tensions are resolved. On the housing market, we expect reported sale prices to continue to recover as new supply slows and investors return to the market.This fact will be strongest from Sydney and Melbourne. Although in absolute volume terms the improvement is likely be modest. We expect system credit to increase by around 3% for both business and housing, other personal lending is expected to contract further. Our economists are forecasting another interest rate cut in February, but believe that any monetary stimulus after that will probably take another form.In the banking sector, we expect a bit more clarity on capitals from the regulators, but we also expect more action from regulators in potential litigation, some of which will affect us. While this backdrop will continue to drag on performance next year, we should still see some balance sheet growth without a significant detritions in credit quality as we work through the remaining regulatory issues.And before I open up for questions, I wanted to touch on the factors that we think will drive success over the next period. Banking is clearly going through a once in a generation transition and not all banks are going to be successful. I have already talked about the role of technology, but there are several other really important areas to consider.Scale and strength will be increasingly important. Our scale will allow us to sustain investment in technology risk and compliance. And the capital and funding strength will allow us to withstand the economic cycles. We are number one or two in every major segment and our balance sheet is in the top tier globally.To continue to grow our customer base and revenue, we have strong service oriented brands that aren't reliant on price, and the ability to continue to invest in marketing and innovation. And in a war for talent, our strong employment brand helps us build world-class economies of skill in marketing and innovation, data analysis, risk management and technology. It is our combination of strength scale, ability to invest, and focus on brands and talent that will put us in a leading competitive position.Finally, how we define and measure success in this operating environment is important. So we have set specific goals against which you can hold us to account. I have laid out a few of the short and longer term goals on this slide. But let me focus on a few.First, we are sticking with our medium to longer term target of a sub 40% cost income ratio, we still have a hump of regulatory and compliance investment next year. So we have increased our productivity target for 2020. We expect to deliver $500 million in productivity savings and this is on top of the $200 million we stay from the wealth reset.Second, we expect to be back growing around system and mortgages by the end of the financial year. And finally, I have put a stake in the ground on NPS. We want to be number one of the major banks across all of our segments.And with that, Peter and I will be happy to answer your questions.

[James Ellis:]

Thank you, it is James Ellis from Bank of America. Just a couple questions. Firstly, in relation to the customer remediation provisions, which have been an ongoing contributor to the press on capital. To the extent that of what you know, how confident do you feel around the adequacy of those provisions?

[Brian Hartzer:]

Well James, we have provided for everything that we know and we can reasonably estimate, is the short answer. In a sense It is by definition, the unknown unknowns could be out there. This is something we have been working on now for a number of years, you might recall a couple that get it right, put it right. It is been an initiative we have been running for a number of years.When I look at what we have dealt with this year, we have dealt with financial planning, we have dealt with issues and mortgages, we have dealt with issues in business bank, we have dealt with other issues and smaller licks last couple of years. So I feel like we are getting through it.Our focus now is on paying customers back as quick as we can, because the time value money effect is significant and that will affect what it also ends up being. I guess the wild card is probably around regulatory actions and whether there are other things that come at us that we need to deal with, but of course we can never rule out that we might find something else.

[James Ellis:]

Just the second question around the productivity aspiration, acknowledging that you have started - you have stopped with that target. Your peers have got various iteration around absolute cost reduction, not all of them are clear around the time frame but deliberately. But can you just talk about - there are pressures around revenues which seems to be getting brighter overtime not lesser. What is the efficacy of having a cost income ratio close to an absolute one?

[Brian Hartzer:]

Well James, the way I think about that is, we are trying to run the bank for the long-term and we are trying to acknowledge with that target, which clearly has a revenue dimension to it. And so that is the wild card. We are trying to give an indication that we know we have to run the bank more efficiently to stay competitive and that is about the relationship between costs and income.We don't feel that an absolute cost target necessary leads you to making the right decisions along the way. Because we are really trying to say how do we drive more efficiency in these businesses and as we grow, we may need to invest more in some areas.So I know It is a bit tricky, particularly because in the last couple of years, we have had all the variation on the revenue line. But It is really a way of signaling that efficiency is incredibly important, It is a really important part of our priority and we are driving that through simplification, automation, digitization and we will continue to do that.I actually feel I know that there is a lot of noise in result, I actually feel the productivity result this year is a really good one. We have worked really hard on this and I think the absolute reduction of FC by 5% a year is indicative of the fact that we are making real progress on it.

[Jarrod Martin:]

Martin from Credit Suisse. Could you give a bit more color on the issues you have had in mortgage business and what has caused the slowdown in growth, I understand there was implementation of new Hem titles that didn't go well. And I have heard you correctly, most of this happened in fact in 4Q and they have been fixed now. Why is it going to take an entire year to get back to system, why wouldn’t system growth come in at second quarter, as applications takes for the three banks, why is banks going to take a full-year to get back to system.

[Brian Hartzer:]

Well Jarrod I guess we are trying to give an indication of where we are headed. I mean, there is a lot of - we still have to make tradeoffs in terms of volume and margin and the like, obviously it is a really competitive market at the moment. The short answer to the delay is the lag effect of applications build up, it takes a while for them to flow in. And we have got work to do in a number of areas.So we feel like that is - if we could get there faster, we will, but I don't want to be completely focused on volume growth because we still are making margin trade-offs along the way, but as an indication I think that is where we are getting. The way to characterize It is a pretty accurate summary of what happened, we had new hem tables plus the new hem tables that we collect data, the expense categories in a more detailed level.And so there was a tool put out to the brokers in particular around how we needed to collect that data. The tool was frankly pretty clunky, so we have gone back and reworked that, It is a better experience now. And as I said, we are seeing applications rise.

[Andrew Lyons:]

Thanks Andrew Lyons from Goldman. Just two questions, first just on your margin. You provided some commentary around the exit NIM versus the half NIM. Can you provide anymore commentary around how the trajectory trended in total with the rate cut. And then just second, your economic pocket disclosures, how about you held on to your 11% cost of capital assumption. Just two question, have you had any consideration over choosing these given the rate environment. And then secondly, just given one of your domestic peers has been progressively reducing these over the last 12 months. Have you seen any noticeable trends in the competitive environment, particularly within institutional banking?

[Brian Hartzer:]

Why don't you talk about margin, I will do the second one.

[Peter King:]

We have given what we can in terms of margins. So in particular, I would highlight the new disclosure on law rate deposit in Australia on the margin side. One of the challenge, I think that you could state in a harsh result, how volatile the different parts of the margin were and we are just going to have to see what the first half looks like.We are dealing with movements in market rates, competitive impacts, both in lending and deposit. So I wouldn't want to indicate something tie away because I just think the whole half will be very different depending on how the industry navigates this future period. But I think we have given a lot of information, so that you can hopefully understand the balance sheet piece. So now I didn't want to add anything on October.

[Brian Hartzer:]

And on the cost of capital, this is a bit of an academic debate around what the cost of capital is. To be honest, It is not something we obsessed about. It is clearly, you would think that lower interest rates would be a contributor to that, but there are other debates.I think the important thing is how we manage the businesses around the allocation of capital to different businesses. And we then expect them to make trade-offs between margin and volume to optimize the value that they can create.There is not a direct link in terms of us obsessing about a cost of capital and then how we feel we want to price in the market. It is an input that there is lots of other things that we think about it. And so I don't see it as a fundamental issue in terms of constraining our opportunity. You referred to WIB, we have prioritized return and managing margins in that business that has meant some deals haven't met that hurdle, but It is typically not being align able issue.Really, we are continuing to back the customers that we believe in and that we think will generate long-term value. So it is kind of interesting this discussion, but I don't see it as a major driver for us and how we actually manage the business.

[Jonathan Mott:]

John Mott from UBS. Question on Slide 19, I think that you gave us quite a bit of detail on the track there. And I just want to make sure that match this right as the headwind. If you look at and you get the rollout, the tractor is currently yielding about 195 or 295 basis points, the three year swaps, about 25 bps, if that is right. And I think the RBA is saying we are going to be into lower rate environment. Do we then use the capital hedge and the deposit hedge to that 90 billion and you potentially got 120 basis point headwind over the next three years on that, the rates that will -.

[Brian Hartzer:]

So giving you the balances on the right hand side and the tutorial of the rights. And we will have to wait and see what interest rates do and what not overtime.

[Jonathan Mott:]

It is about a $2 billion headwind over three years if rates stay at current levels.

[Brian Hartzer:]

Well, I will let you do the modeling. That assumes an interest rate in the future and we will have wait and see what happens.

[Jonathan Mott:]

Then you said offsetting that, you had some flexibility on liquidity. Are you alluding to in relation to liquidity to help you in the -.

[Brian Hartzer:]

I will just point out that we ended up a little bit more liquid at the end of the year. So we can time out wholesale funding into next year.

[Jonathan Mott:]

Quick follow-up question. You just sad risk on the banking book has fallen some 13 billion as a risk weighted asset to 500, and I think you said that embedded gains as rates have fallen. Do you think they are negative.

[Brian Hartzer:]

No, I don't think so.

[Peter King:]

The standard is much going maybe - to zero to $1 million.

[Brian Hartzer:]

So I think It is zero three times. This is a third time it sits zero in the last decade.

[Brian Johnson:]

I'm Johnson from Jefferies. Two questions if I may. And Brain, I suspect the current - is first one. So I would like to put a little bit of context in it. In 2009, it did came out and did a capital raise that was underwritten also more or less pronounced the deep profit mix. Share price fell, there was a shortfall when we spoke to them on the evening there was no discussion as where there it is shortfall in fact we were - I tell the other way around. Could you tell us what is the protocol if the underwriters elected with the shortfall? Because I think it is something the market deserves. And then the second one is that when we have a look at the replicating portfolio, it seems to me that you progressively becoming more unhedged as basically interest rates fall, because that balance of interest rate sensitive deposit goes up as rates actually fall do need to top up the size of the tractor.

[Brian Hartzer:]

I will try to take that. Brian on the capital, we will make appropriate announcements. So I will just leave at that. I'm not going to comment on NZ. On how we manage margins in a low rate environment, the concept behind the deposit hedge is you hedge in determinant zero rate deposits. And for the rest of the deposit book you are managing that against your assets. So that is how we think about it whether it makes sense or not to length and the duration of the deposits we will increase the hedging I'm not sure. And we will more manage that through the asset liability mix than specifically hedging it.

[Brian Johnson:]

Thank you.

[Victor German:]

Victor German from Macquarie. If I just can follow-up in terms of cost you think you will be telling us that you have got around $700 million of cost saves in the period. Yet if I could even twice that is underlying cost growth is in the order of 8000 million, this 450 or so is explained by some of the drivers that you have highlighted, is the rest simply inflation and as we move into the following year, I do see a scenario where you can actually keep cost flat or reduce them. Because it sort of feel like every half there is something extra that we find out that you need to stand on.

[Peter King:]

I haven't really done any calculations, but in terms of sort of the BIU cost growth if you like. The one thing that I would highlighted is the new accounting standard change on credit cards. So remember, AA SB [Indiscernible] thing. That sees the cost growth have been impacted by what is happening in the cars portfolio spend that is some of that impact and then the rest is really sort of activity and inflation. In relation to 2020, I'm not going to go out that far, because we have been pretty clear on what we are targeting for 2020.

[Victor German:]

Maybe, just to follow-up on ROE question. Brian obviously in the past you talked about ROE targets that you are trying to achieve, I have noted today you have announced 10x or 10 times I don’t know whatever.The partnership is, which is interesting step for a very large incumbents that you are looking to offer banking services. Just interested in your observation, how do you sort of look at the landscape of next three years? Do you see yourself as someone in sort of a defensive position needs to offer this sort of things for the FinTech players to sort of thrive and what does it do to longer-term ROEs for the industry?

[Brian Hartzer:]

I guess you could see it either as defensive or offensive. I mean, the way I think about it is, if big banks like us did nothing, then there would be a vulnerability. But our strategy has been to get on the front foot about this stuff and see it as an opportunity that customers needs. The way they want to bank is changing the technologies creating new ways to deliver services and we for quite a number of years now have viewed that as an opportunity and been investing for thatThe 10x opportunity is taking advantage of some new technology that has come along that is really globally leading and we have built a good relationship with them. It is opened up some new opportunities for us to grow through partnerships and potentially through the creation of some new services. I don't want to go into too much detail about that at this point, but we are pretty excited about a new avenue that it opens up for us.

[Andrew Bowden:]

Richard.

[Richard Wiles:]

Richard Wiles with Morgan Stanley. Brian, I would like to ask you some further comments on what you are thinking about with the dividends. Your outlook currently implies to you average volumes that we flat next year. Your margins will probably be down, your noninterest income will be down and your costs will be up. So there is a challenge in those environment, pricing in 2020, and that could mainly dividend - if you held the dividends without this needs to per half next year, the payout ratio might well go above that 70% and 75% target range. So, couple of questions, did the Board to see that what the FY 2020 payout ratio could be when it cut the dividends by the extent to this year? And what have you taken into account in terms of credit quality and sustainable levels of loan losses in setting that dividend?

[Brian Hartzer:]

Richard, I can't provide any guidance on what we are going to do over the next little while. I mean, you will obviously come to your own conclusions. I can say we certainly have considered carefully the level that we have changed the dividend to and feel comfortable with the decision that we made at this point in time.And on credit, as I have said, and I think Peter said as well, we feel that the book is in pretty good shape. With low interest rates, we continue to feel pretty good about the quality of the credit book, although it is probably about as low as It is going to be. Although we have been saying that for a while. But given where we are at with the capital is - like there is not much more I can say I'm afraid.

[Andrew Bowden:]

Let's take a call from the phone. Matthew Wilson with Deutsche?

[Matthew Wilson:]

Just further to just good comments from dividends. What is the industry getting front of this issue and bringing it properly? I was pretty creative given the outlook comments you have made today, that the dividend will again be under pressure in 2020? And then secondly a detail question on Slide 25, properties in possession excluding WA and Queensland has jumped 80% in the half. Could you add some color to that movement please?

[Brian Hartzer:]

I might do the second one then you want to go with the first one? On the second one, Matthew, the properties in possession number is up, but it is still a very, very small number. We are talking about fewer than 600 properties in position on a mortgage book of well over I think it is about 1.2 million home loans. So, these are very small moves in the scheme of things. And it really represents that It is taking a bit longer for people to clear properties in a slower moving housing market. So It is not anything that we are unduly concerned about.

[Matthew Wilson:]

Is there a stake that is turns out or?

[Brian Hartzer:]

We saw a bit more of an increase in Queensland, WA continue to be a bit of an issue. But honestly, the numbers are pretty small in the scheme of things.

[Peter King:]

And then on your observation about next year, I will just reiterate what Brian said. We have said, what we can or we want to on the outlook, we are not providing data guidance on 2020. And, you know, the dividend decision is always one that you make, based on what you can see at this time, and I think Brian set up pretty well how we thought about that at this time.

[Matthew Wilson:]

Okay, we will have a new Chairman, next year. Is that correct?

[Peter King:]

I don't think that is something we have said at this stage.

[Andrew Bowden:]

There has been no announcement on the any change. Andrew Triggs.

[Andrew Triggs:]

Andrew Triggs from JP Morgan. I have two questions please, firstly on the term deposit portfolio, just instead I think on the chart, the average cost of above the benchmarks still rises, just interested in your observations on the processing environment and term deposit book. And then the second question, just a follow-up again on the dividend just considering to what extent the Franking balance has saying that this was at staying at the dividend policy generally.

[Peter King:]

Short answer is, it is still a very competitive market on turn deposits, as we have seen, and that is what that outcome reflects. And then, yes, Franking and those large franking balance is, as I said in my talk, something that we consider very carefully more conscious that Franking credits have value shareholders that not value to us and so we would like to distribute them.

[Andrew Bowden:]

We will take a call from Brendan Sproules from Citigroup.

[Brendan Sproules:]

Thank you, look I just got a question on your cost guidance on Slide 29. When you announced the wealth restructure, you said there was one-off is X which you talked about between 250 million, 300 million you said that comes in the low end. So just talking about the ongoing impact back in March you said that business in 2018 had operating cost of 260 million and you said that most of those cost you expect it to be eliminated in FY 2020. And second the divisional restructure at the time which another 20 million which you talked - stock benefiting for FY 2020. I was just wondering where those second component stick within your guidance.

[Peter King:]

Yes, Brendon the 200 million that we are calling out for wealth reset is the majority of that 280 that you referred to, we have a little bit this year and It is probably a time to get lesser for the 30.

[Brendan Sproules:]

So wealth impact on top of that because they are not going to repeat?

[Peter King:]

The one-off impact is in notables which we haven't included in the FY 2020 point is excluding notables.

[Brendan Sproules:]

Okay. Thank you.

[Andrew Bowden:]

Well take a question from Azib Khan on from Morgans on the phone.

[Azib Khan:]

Brian you have said that you are expecting system housing direct service from 20.1 to 20.5, so you think business credit growth would slow from 3.3 to three. What do you see is driving this slowdown in business credit growth, will it be more SME or the larger end of business lending. Second question is are you now pretty is done with the RWA optimization in your institutional business or is there more to come on that front? And the third question is can you please tell us what the magnitude of the investment is in 10x, and what percentage shareholding is doing 10x?

[Brian Hartzer:]

I will do those in reverse order. So no, I can't tell you. We are not disclosing at this point in time. The RWAs on WIB, I think is largely done.

[Peter King:]

Yes. The largest side from here, RWA is really about restructuring of customer facilities, which is doing every time you roll a deal. It is not modeling, all that top of thing.

[Brian Hartzer:]

And then on the system growth, there is not a huge amount of insight there, I would say It is reasonably spread. The commercial credit demand has just been relatively weak. And that is probably been people paying down debt and probably been just a lack of business confidence to make further investments.

[Andrew Bowden:]

Okay. I will take call from Brett Le Mesurier [Shaw and Partners] (Ph)on the phone.

[Brett Le Mesurier:]

Firstly, we estimate this is everything about reducing the return and at all the institutional bank. I notice you are using 11%. Do you have any plans to review any of your return hurdle?

[Brian Hartzer:]

Brett, we don't think of it in quite such a black and white way. We think about how we allocate capital across our different businesses and ask the businesses to then target generating as much value as we can. And then involves making trade-offs between margin and volume. So no, we don't have a plan to make a fundamental change there, but equally that is only one input into how we think about pricing deals.

[Brett Le Mesurier:]

The second question I had with, you referred to in FY 2020 years expect $100 million less income from both management that is excluding the financial planning business. The $50 million decline. To what extending your confident because that is the end of the declining revenue from that business?

[Brian Hartzer:]

Well, Brett, I think just giving you a bit of insight into that particular drivers and things like the legislative change for Protect Your Super lower interest rates that impact the returns out of the platforms, migrating some of our super activity in the lowest grid products and then the re-pricing of BT Open flowing through. So they are the drivers, we can never legislative change is not in our control as in cash, right. So, go wherever they go. So we will just have to see.

[Brett Le Mesurier:]

The insurance income is declining. Not notice, but you have increases in clients rate. You have also referred obviously to lapse rate having a significant incline. To what extent are you confident that the claims experience has stabilized?

[Brian Hartzer:]

Well I think that starting for you, just thought I can't predict storms into the future unfortunately.

[Brett Le Mesurier:]

Not, It is actually referring life insurance.

[Brian Hartzer:]

Again, we haven't given any data or guidance on clients in life insurance. So we set out these historical trends in report and - receive advice.

[Brett Le Mesurier:]

Okay. Thanks Brian.

[Ed Henning:]

Ed Henning from CLSA. Just a follow-up on growth and cost. Firstly on growth and business and you just talked about the competitive environment, you saw our peer obviously we talked about before around cost of capital. Do you anticipate and with your margin management, do you anticipate to be a below system in business and in scope at least in the next year. And then just to get on the cost, I mean you told that higher spending in 2021 and fall thereafter development. Does that mean absolute cost up in 2021 and down in 2022?

[Brian Hartzer:]

I will do the first bit, and you can do the cost bit. I think I would separate our business division and WIB. WIB growth tends to really be a function of the transactions in the market. And the mix of customers that are doing things. And we have got a great customer franchise and we are happy to support transactions from good customers and the returns are still pretty good on our portfolio on a relationship basis. So I think what happens there will be a function of what our customers choose to do.On the business side, I think we are very well positioned. We are number two in market share and have a great distribution capability across all of our brands and statements. We have got leading customer advocacy in each segment of business. So I think we will continue to do very well there and if growth comes back I expect we will benefit from that.

[Peter King:]

Maybe on the cost question, I will just get back to what I said. So we indicated 1% for 2020 and then we expect REG and compliance cost to stay elevated into 2021 before reducing.

[Andrew Bowden:]

Okay. With that, no other questions. I would call it a close. Thank you very much and good morning.