Westpac Banking Corporation
Q2 2015 Earnings Call Transcript

Published: 4 May 2015

[Andrew Bowden:]

Well good morning everyone and welcome to the First Half Presentation of Westpac's Financial Results. My name is Andrew Bowden and I'm head of Westpac's Investor Relations. Welcome everyone here, thanks for coming down today and to those online and on the phone. I'd also like to acknowledge the traditional owners of the land on which we meet today, the Gadigal people of the Eora nation and pay my respects to elders both past and present. Presenting this morning of course is Brian Hartzer, our new Chief Executive Officer, welcome Brian; and Peter King, our CFO. So without further ado let me invite Brian to the lectern.

[Brian Hartzer:]

Good morning everyone. It's a pleasure to be here today delivering my first result as Westpac's CEO. Today I'd like to you to you through the first half results and also share with how our strategic priorities are evolving. Peter King will then dive into the results in detail and will finish the usual with the Q&A session. So let's begin. You've all seen the results; the bottom line is that our operating divisions the real engine rooms of the bank continue to perform strongly. However the derivative valuation adjustments and a lower treasury result gave us a headline result that was in line with last year. As you would expect we've been disciplined in the way that we manage our margins and costs and credit quality and balance sheet strength remain a hallmark of the Westpac Group. On the environment on positive I am positive on the outlook Australia has great potential, however the economy is currently going through a transition and the signs are that this will take a little while to work through. For banks this means we also face some headwinds, including modest demand continuing impacts of global quantitative easing and ongoing regulatory scrutiny. Having said that we can't use the environment as an excuse, we will run our business in a way that provides the headroom to manage the volatility while investing to build the long-term value of the franchise. As part of this we've refreshed our strategic priorities with a renewed focus on performance disciplines and the service revolution that we launched last year. But first let's turn to the numbers. At a headline level this result is below par and a little below our market expectations. You can see that the key number are mostly flat to slightly down over both the previous period and the prior year. This was due to one-time changes to derivative adjustments and lower treasury numbers which mask good divisional performance. Cash earnings and EPS were both down 2% for the half and un-changed over the prior corresponding period. Margins are a good story, we've balanced the leverage well and our margin excluding treasury and markets has remained at 2.01% for the past three halves. Asset quality has continued to be positive with the impairment charge remaining at the very low level of 11 basis points to average gross loans. In line with the lower earnings the ROE was 15.8% which is down 54 basis points on the second half with a similar picture on the prior corresponding period. Capital also remains healthy with the common equity tier 1 ratio at 8.8% comfortably above regulatory minimums. Now while these headline numbers are below what I'd like, the fundamentals of the business are strong and as a consequence we've lifted dividends per share with the Board approving $0.01 or 1% rise to $0.93 per share. What I'd like to do now is go to some of the details of the result starting with the performance of our operating divisions. The performance across our operating divisions were solid, with earnings up on both the prior half and the prior year. Looking at core earnings the contribution was up 2.2% for the half, which builds on our strong second half performance last year. Within this the growth engine was retail and business banking, the main drags on performance were the derivative adjustments of $85 million and the group business unit result of 44 million which was lower due to lower treasury earnings. Now treasuries had some very strong outcomes during the GFC and in the years after that. Although there are now structural and cyclical challenges that have contributed to the lower outcome this half and Peter King will talk to that in more detail. It's also important to note that we achieved this result while maintaining our disciplines on strength. Strength has been a hallmark to the Westpac Group and will remain so. By strength I'm talking about all measures including funding and liquidity, asset quality and capital, the strength of our management team and our number one or number two positions in key markets. If we start with funding on the top of left of this slide. You can see that we've maintained our stable funding ratio at 83% which is a function of good customer deposit growth and raising $16 billion in term funding during the half. On liquidity we transitioned to the new LCR regime and as part of that we lifted our liquid assets to a 137 billion which gave us an LCR ratio of the 114% which is comfortably above the regulatory minimum. On asset quality stressed assets have continued to fall down 12 b basis points to 1.1% of total committed exposures and despite that improvement our total provision balances are actually higher and we've maintained our economic overlays. Our common equity Tier 1 capital ratio remains strong, although it is at the lower end of our preferred range, so I’d like to spend a bit more time on that given the changes that we announced today. Now on capital, our businesses have been good at generating capital with the capital ratio going from 7.4% to 8.8% today. Over the last 18 months you can see that the ratio has been relatively flat. This reflects the completion of the Lloyds acquisition last year, as well as modeling changes that have added $700 million of capital against our mortgage book. Looking ahead the regulatory picture is uncertain, although it's likely that banks will need to raise additional capital. Accordingly we believe it's prudent for us to be at the top end of our preferred range at this time. With dividends we decided that $0.01 increase to $0.93 was appropriate and on Friday’s share price that’s equivalent to a yield of over 5% or over 7% fully franked. To help to lift our capital ratios we’ll reintroduce a 1.5% discount to the DRP and we’ll partially underwrite the DRP. This will add around 50 basis points to our ratios and all else being equal to capital ratio will rise to slightly above our preferred range at 9.3%. Now what you should take from this is that we will continue to be prudent and disciplined in the way we manage our capital. So that’s balance sheet strength. But as you know we are constantly striving to get the balance right between strength but also growth productivity and return. This half we continued to grow our portfolio around system while managing margins and underlying expenses closely. You can see on the top half of the slide that we’ve grown home lending and deposits at 0.9 in one-time system respectively while margins have been flat. We also tightened up on expenses which increased 1.7% for the half with productivity benefits largely offsetting our businesses as usual cost wise. While we didn’t deliver positive jaws this half due to the derivative adjustments and lower treasury earnings that will be a priority for the future. I’m also pleased that our ROE remains above 15% which is the line in the sand that you are familiar with and it’s a target that we remain committed too. So that’s the group picture. Let’s take a closer look at the divisions. Retail and business banking was our growth engine for the half. Cash earnings were up 2% in WRBB in New Zealand and up 4% in St. George. Over the prior corresponding period growth was higher with WRBB in St. George up 8% and 9% respectively while New Zealand grew 2% due to the impairment charges coming off a very low base in the first half of last year. While you can see across all these divisions is consistency. Disciplined growth, well managed margins, expense control and strong asset quality combined with improved service quality. For Westpac RBB one of the highlights this half was the rollout of our new state of the art Westpac Live platform which now covers all retail and most business customers. Feedback has been strong and we're seeing that in consistent improvements and customer satisfaction. For the St. George Group Bank of Melbourne is about to open its 100th branch and Bank of Melbourne has consistently grown at more than double the market rate in both deposits and home lending. The Lloyds acquisition was also a solid contributor to the St. George result with the earnings above our business case. In New Zealand the business has kept up its momentum following the appointment of David McLane as CEO. We’ve grown well in both deposits and lending and we recently won the Air New Zealand credit card business which is a great milestone. New Zealand also launched a new online platform called Westpac One which has just been selected as the very best online banking platform in New Zealand. Our retail and commercial businesses continued to delivery consistently good financial results. But our ability to sustain those results really comes down to the size and advocacy of our customer base. So I'd like to spend a bit time on that. Now you may recall from prior presentations that the AFS leadership team has been very focused on service quality and the coordination between our brands. This is status up well and we’ve made further progress this half. On consumer and business customer satisfaction Westpac RRB is now equal to or leading the major banks. In particular consumer satisfaction has steadily improved over the last 12 months to be near record levels. St. George also continues to be well ahead on consumer stratification of the major banks. And one of the things that particularly pleases me in this result is that as a result of our service initiatives complaints in the Westpac brand are down 49% year-on-year and in the St. George brand it's down 16%. This is on top of already large reduction and complaints in previous years. The customer base continues to grow with both WRBB and St. George contributing. This half we added another 215,000 customers which means across our retail banking brands in Australia we now have more than 10 million customers. While we maintained our lead on wealth products, we were little behind where we like to be on this. The wealth industries had a lot of change in the last 12 months, the sector is transitioning through a more sustainable position that helps raise advisors standards and helps protect against conflicts of interest and this is a good thing. We remain very positive on the outlook for wealth, so I’ll spend a bit of time now on the BT result. The BT story is about solid franchise growth in funds management and insurance offset by higher claims. Cash earnings were down 2% for the half and up 2% over the prior year. On the left hand side of this chart, you can see that the funds business has continued to perform well, while the insurance result was a bit lower. On the right hand side, you can see that the foundations of both businesses remain sound with strong growth across both funds management and insurance. Funds under management grew 26% over the last 12 months and funds under administration were 17%. BTIM and advance both performed well and we’ve also had a stronger contribution from private wealth. The performance in our advice business was lower over the past six months but unchanged over the prior corresponding period. On insurance, we’re continuing to gain share. Life insurance and general insurance in-force premiums were both higher for the year, up 8% and 13% respectively. The drag to the result was due to higher insurance claims because of severe weather events, including cyclone in Marcia and the Brisbane hail storms. And while claims are always going to be somewhat unpredictable, the outlook for BT remains bright. We signed a white labeling agreement with Allianz to expand our general insurance product range and to improve our digital sales capability. We’ve renegotiated our LMI contracts to provide customers with better service, to generate improved returns and to do so within the same risk profile. And we’ve hit another important milestone on Panorama with the launch of managed portfolio functionality during the half. So this continued momentum across the wealth businesses, let's take a look now at institutional. At a headline level, WIB cash earnings are down 13% in the half. However, before the derivative adjustments earnings were only down 1% and core earnings were up 4%. Given the tough competition in that segment, I consider this to be a pretty good result. Looking at the detail, net interest income was flat with higher volumes particularly in natural resources and property offset by margin pressure from the weight of cheap money flowing from global quantitative easing. Non-interest income was up 9%, with financial markets customer revenue up 8% from improved flows and this included particularly good FX sales. Expenses were well managed with the uplift in expenses mostly due to continued investment in Asia. Finally asset quality remains a real strength of WIB. This half WIB had another it impairment benefit. However it was lower due to fewer write-backs. From a franchise view WIB was the lead domestic transaction banker for the 11th year in a row, it was the number one platform for corporate online and the number one Australian bank globally for FX. So what you can see across all of our operating divisions, whether in retail and business banking, wealth or institutional is that the teams are staying focused on delivering better service for customers while managing all the levers of the business in a discipline way. Now before I hand it over to Peter, I’d like to address the number one question I’ve been asked since I became CEO, which is; is the strategy of the Westpac Group going to change? Now the backdrop to this is how I think about creating value at a bank like Westpac. And it's hard I see my role as CEO as building the long-term sustainable franchise value of the company within the constraint of acceptable short-term returns. If you think about the last three CEOs of the Group, Bob Joss, refocused the company on its core strengths. David Morgan created a strong financial services franchise while building an uncompromising risk ethic. Gail Kelly expanded our family of brands, strengthened technology and put us on the path to becoming a genuinely customer focused organization. So each of these CEOs created franchise value and my goal is to sustain that trend by growing the size of the franchise, deepening relationships and building relationships that can last for long periods of time. And doing all of that, while staying focused on our core performance disciplines. And of course as Australia’s oldest company and first bank, we have a particular responsibility to help support the economic development of the nation. You can see this in Westpac’s vision statement which hasn’t changed for many years. Our goal is to be one of the world’s great service companies helping our customers, communities and people to prosper and growth. Now we’ve added the word service to this statement, it's a small but important change because it reflects the way the Westpac Group can continue to thrive in a challenging environment. Customers want to deal with products and brands that they trust, and they want the convenience and value that modern technology is bringing to other aspects of their lives. So by aspiring to be one of the world's great service companies we'll give more customers reasons to join us, we'll make it easier for them to do more with us and will build relationships that last. And even in the last six months you can see how this is working for us. And as this a room of analyst you'll also be pleased to know that what we're finding is when we build great customer experiences, our cost actually go down and our risk control improves. So while the strategy hasn't changed we have adjusted our strategic priorities to help us achieve this vision of service leadership and I'd like to talk you through those priorities now. The first priority is to maintain our performance disciplines; we want to be the region's best performing bank by balancing strength, return, productivity and growth. And our commitments of balance sheet strength and sustainable business practices won't change. Our second priority is the service revolution that I introduced you to last year. The service revolution is about making life easier for customers helping them solve their financial problems and reach their financial aspirations and with the combination of great people and great technology we're creating new customer banking experiences that help put Westpac and St. George and rest of our brands at the top of the shopping list for new customers. Our third priority is about digital transformation of the company, particularly around our processes and operations reshaping the way customers do business with us and driving better efficiency. We've made great progress on building world class digital platforms for our customers, we've been reconfiguring our branch network and simplifying products and processes, but there is lot more we can do to improve our operating leverage. The next priority is about building a few new growth highways, whether it's wealth and our investment in Panorama, Asia and support of customer and trade flows or SME where we're improving the service for customers by rolling video conferencing facility to our branches and more recently we've made 30 billion of pre approved lending available to our SME customers across the Westpac brand using technology. The final priority is what I call the workforce revolution. This is about making Westpac a talent factory, with the best people in the industry get the development and the support they need to thrive. Now rather than isolated initiatives these priorities are inter-related and together they will transform our business over the next couple of years. Putting on another way the work that we're doing on digital transformation improves financial performance but also with service quality and at the same time our growth initiatives rely heavily on digital to help grow the customer base and make it easier for customers to join us. All this technology also provides more connected and engaging place for our employees to work. So while it's still early days I personally introduce these priorities to over 5,000 of our people leaders in the past few weeks and they are well under way with execution on these initiatives. So there is a tremendous energy for this agenda across the company and that gives me confidence that we'll enter our third century of business generally as one of the world's great service companies. Before I wrap up I'd like to make a few observations about the environment. It is clear that global conditions are mixed, although the U.S. economy has been improving European conditions are very challenging and we're seeing the ongoing impact of extraordinary central bank actions to try this stimulate growth. The Chinese economy continues to grow albeit with different dynamics as the authorities look to shift the growth profile to more of a consumer driven economy. For Australia the long-term outlook remains positive, interest rates are low the Australian dollar has come down and the economic fundamentals are sound. Having said that the economy is currently in transition and this means we expect growth to be uneven across different industries and different regions. Some areas like housing, infrastructure and agriculture will do relatively well. While other areas such as mining and resource driven regions of the country will find it tough. Through Australian banks this means the credit growth will be modest but positive with housing growing faster than business. Asset quality should remain strong overall supported by low interest rates and strong consumer and business balance sheets. This also means that within banking competition is going to remain intense, and there are regulatory end market uncertainties that we're adapting to. At the same time we do expect wealth and insurances businesses to continue to grow strongly. So that's the external environment let me wrap up. While the environment is changing we are well placed to respond. The drivers of value are in very good shape, each of our divisions is performing well, has a clear strategy and execution of that strategy is underway. We have a high quality management team that's managing the business in a balanced and disciplined way and we have more than 40,000 highly engaged staff. At the same time we’re lifting our intensity that’s being supported by these new priorities which give you even greater emphasis the performance disciplines and to digitally transforming our business. The service revolution program is already delivering results across our retail businesses and that’s now being embedded across the group. So Westpac is in a strong position and I’m confident about our outlook. My team and I are energized, determined and optimistic about the period ahead. I’ll hand it over to Peter now to take you through the results. Thanks.

[Peter King:]

Thanks Brian and good morning everyone. As usual I’ll focus my comments on areas I think assist in and understanding this result. In the top chart you can see the cash earnings well are over the half. As Brian indicated revenue was impacted by the derivative adjustments and a lower treasury result. Expenses and impairments were both good outcomes this period while we also observed a high tax rate. You may recall that we had the $56 million tax benefit last half. In the bottom table I said out how I think about the revenue performance. On treasury you can see its revenue is more than half since the first half of 2014, I’ll come back to the drivers of that later. On the derivative adjustments we finalize our methodology and updated our product systems which saw us make adjustment this half. The major change was the first time adoption of FVA which we previously announced in February. Before these two items we had revenue growth of 2.3% on the prior period and 4.8% over the year. This is a better reflection of the revenue performance of our operating divisions. Turning to the cash and reported earnings picture. There has been no change to our cash earnings policy and no new adjustments this period. In the chart you can see some volatility in reported profit over the recent halves; this mostly reflects the fair value movement of treasury shares and economic hedges. On the right hand side I've detailed in frequent and volatile items. The only new item this period is the derivative adjustments; one of the table highlights is the large turnaround in the contribution of in frequent and volatile items. The 150 million delta is equivalent to just over 4% of cash earnings. Each half we state to provide some insight around areas of interest in the results while most of these are familiar I’ve included two new items this period. How we're responding to increased supervision of investor property loans and a deep dive into the topical credit areas of commercial property and lining. Let’s turn to the markets income first. This slide takes you through the components of market income. Starting at the left we’ve consistently improved customer income. Growth was particularly strong this half up 8% to 455 million. Increased FX sales were the primary driver here. This reflected the improved performance across our institutional and retail partnership and of course more customer activity with the high volatility in the Australian dollar. Another factor was the rise in interest rate hedging income which was supported by our recent success in infrastructure transactions. Moving along the chart market risk income also rose with both our FX and fixed income businesses contributing. The 153 million derivative adjustment includes both the 122 million from the methodology change and a negative 31 million from CVA adjustments. As you can see while total markets income of 449 million was slightly down the core business drivers were positive. Moving now to treasury, treasury manages the risk in the gross balance sheet and I wanted to provide some context around their contribution. The chart on the left side treasury added significant value through the GFC period, effectively managing the extreme market movements we saw through that period. Treasury revenue picked at 6% of group revenue in 2009 and was just over 1% this half. This change is mostly a function of structural and cyclical impacts as Brian mentioned before. In the structural bucket, the largest change relates to liquidity management. The new LCR regime has reduced our flexibility in particular more liquids must now be held as government securities they've lower yields within the bank paper that we used to hold. Also the majority of liquids must now be held in Australian dollar, which reduces opportunity in our U.S. portfolio where we’ve made good returns in the past. And finally over the last few years we’ve shifted more of our liquids into the banking book out of the freighting portfolios. This move is seen now actively managed portfolio reduced by around 40% and was part of the lower income. In the cyclical elements the largest change relates to the fall in the U curve and likelihood the rates will stay lower for longer. In aggregate these two dynamics of reduced opportunities and same revenue from treasury low this half. Treasury continues to be a valuable contributor hovering the short-term its difficult say conditions changing that will increase the opportunities here. Having spoken about some of the volatile items, let's turn to the balance sheet. On the left you can see the new lending and run-off dynamics of the Australian mortgage and business portfolios. In both portfolios, origination has being good with new lending similar to the prior half. In contrast, graph has increased as consumers continue to remain cautious and use low interest rates to pay down debt. The bottom right hand chart shows WIB growing in corporate lending, the trade finance portfolio was flat as increased physical volumes and FX translation benefits were offset by the large reduction in commodity prices. Finally our segment opportunities in the WIB pipeline, particularly related to M&A and infrastructure. Now I’d just like to make a few comments on regulation of investor property lending. Having seen regulation in New Zealand, we’re now seeing changes in Australia. As you know APRA has set a 10% benchmark for IPO growth, with potential capital consequences if growth is above the benchmark. In sense of our settings, we are trading the 10% benchmark as a hard limit and have taken steps to temper growth. Our sponsors included increasing in the interest rate for used processing loans about 30 basis points to 7.1% are also adjusting the criteria for non-resident lending. While I don’t see this is a material issue, there will be a small impact. Given the lag between application and drawdowns you should expect to see a gradual impact in market flows in the September quarter. Now to margins, the margin outcome has played out as we indicated last year. Margins excluding treasury and markets at 2.01 are unchanged over the last three halves and highlight our discipline management of volume and margin. Again this half you can see competition for lending remained intense with asset spreads easing by 6 basis points, competition was broad based across all lending categories. The 1 basis point decrease from liquidity includes the new CLF costs, while the capital and other impact mostly related to lower interest rates speeding into capital hedges. These headwinds have been offset by reduction in cost of funds across both deposits and wholesale. From a divisional perspective on the bottom right, you can see that retail margins held up well, but were lowering with. We’ve continued to operate in a very competitive environment with spread pressure on both sides of the balance sheet, as well as low returns on capital. These dynamics will see the WIB margin continue to reduce. Given all the moving paces I am pleased with our margin outcome and we’ll continue to take a consistent approach to the volume margin trade-off. Moving now to expenses, as Brian mentioned, we’ve also managed the legacy well. Operating expense growth was 1.7% in the half with ordinary expense growth of 1.1% and FX translation adding another 0.6%. On the productivity front we’ve delivered another 113 million in sales, similar to the 117 million we delivered last half. Investment spending was skewed to growth reflecting investment in Asia, launching the new phase of Panorama and our various online initiatives including Westpac Live of course. Looking ahead while suffering half way amortization was little change this half. We will see a lift in the second half and overall this will add around 1% to expense growth over 2015. Improving asset quality continues to be a feature of the performance, the proportion of stressed assets produced with the ratio down 12 basis points to 1.12%. The improvement included a reduction in stressed assets of 700 million and an 8% reduction in impaired assets. There was also a further reduction in commercial property stress which is shown in the first bar in the chart on the right. Looking across other industries stress is generally heading in the right direction, I've highlighted in gray those sectors where stress has increased. These include retail, agriculture transport and mining. Retail is mostly due to seasonality in some book growth, while the agriculture increase is being due to movements in existing facilities. In transport the mutual rates were couple of names that migrated in stressed last year, while the mining portfolio has seen a small uplift and I’ll come back to that on the next slide. In aggregate we continue to be very pleased with the quality of the portfolio. However, we remain conservative and kept our economic outlays in place. While the asset quality trends are positive, I do want to touch on two focus areas; firstly commercial property, which was called out in the financial stability review and secondly mining and related sectors which has been a topic of interest with both domestic and international investors, on property we are very comfortable stressing the portfolio has materially reduced having picked at over 15% in the GFC it's now declined to less than 2%. That's low as we haven't for a decade at the same time as the quality is improved we've also reduced our exposure to high risk segments including site financed and land banks these segments typically have the high lost rates in the GFC. So while some stress could emerge down the track as a whole we remain comfortable with our exposures here. On mining we are relatively underweighted sector as we took a third cycle view, recently there have been a few names that have moved into stressed however they are performing and we are working closely with them. You can see the stress in the portfolio is around 3.7% while impaired assets are below 1% but measures are relatively low we've also reviewed other sectors that rely on mining for signs of stress over the last 12 months we have seen a small number of companies downgraded in aggregate we have around 200 million of exposed division names however as that already classified as stressed we have increased provisioning for them. I do feel like we are on top of the issues in this sector. Reflecting the improved asset quality the impairment charge picture continues to be benign with the charge of 341 million this half. This graph looks at the components and it's a useful way to think about the drivers. Staring at top left you can see that Eora piece continue to be low and fell a little further this half. As we indicated at the full year write backs and recoveries were a little less as the pool of stressed assets has continued to reduce. Write threats tend to be seasonal related to the unsecured personal lending write off cycle so when compared to the first half of 2014 performance has also been good. The last element the other movement in caps has also improved consistent with the reduction in stress. As we have previously spoken about our treatment of provisioning includes the interest caring adjustment that is charged against interest income because of this approach our impairment charge to gross lines is not directly comparable to fees this half our ratio of impaired charge to gross lines was 11 basis points where as the comparable ratio is 15 basis points. At the bottom right you can see our provisioning coverage remains strong against both the impaired and performing portfolios. The provisioning coverage is also been supported by our decision to maintain the economic overlay despite the improvement in asset quality we continue to believe that asset quality is one of our strengths. Turning now to capital, on the left hand side you can see the movements in our common equity tier 1 ratio from an organic perspective with the high ROE we generated sufficient capital support in dividend, capital required for growth and still generated 18 basis points of capital. There are also other items impacting capital this half, the most significant thing that changes to mortgage probability to folks which lifted our average mortgage risk weights from 14% to 16%. FX translation also impacted as we hedge our capital deployed here mostly in New Zealand with a change in our defined benefit obligation reflected the impact of lower interest rates. Together they expect us to -- took 39 basis points off the ratio so we ended at 8.8% or 12.7% on an internationally comparable rate basis these remain at the upper-end to the sector globally. As Brain mentioned today we have announced initiatives to boost the capital position. This decision was based on our belief that we should be operating at the top-end of the range even regulatory uncertainty. As part of this decision we took into account model changes we are discussing with regulators these are listed on the slide. Off course we also have the APRA signed Basel considerations while sizing and timing of changes here are yet to be determined we feel better prepared being at the top-end of the range. On the positive side we don't have to deal with the phase out of the wealth leverage we will continue to assist our capital position at each half considering what we know on regulatory requirements the growth outlook and performance. So as I looking into the second half they are a few factors to consider you can continue to expect Westpac to balance growth and margin in a disciplined way as a general rule we’ll aim to be around system but we will grow faster in tighter segments or pull back if the appropriate risk reward is not a valuable. We will continue to work with flat margins excluding treasury markets although given the intense competition and the likelihood of lower rates holding margins flat will be a good outcome. We will have a few tailwinds in the second half with no derivative adjustment and completing the sale of the CBD buildings as part of Barangaroo while productivity benefits in the pipeline will likely offset business as usual costs with investments the major driver of the uplift in the cost base. The outlook for asset quality remains positive over the low impairment charge will likely rise as recoveries and write backs continue ways. In summary given all our overall businesses are performing well, we are set up well for the second half. With that let me pass to Brian.

[Brian Hartzer:]

I think we’ll now turn to Q&A Andrew do you want to open that?

[Jon Mott:]

Jon Mott from UBS, just a question on the dividend policy, in the past there has been a progressive $0.02 per share for some period of time and now obviously it’s moved back to $0.01. There has been some comments about a payout ratio I think Phil Coffey made those comments last week. Should we now be thinking about the dividend is more of a payout ratio strategy around that 75% mark or would you like to maintain a consistent growth in the dividend?

[Brian Hartzer:]

Well Jon we know that the dividend is really important to our shareholders particularly about half of our shareholders are retail and so dividend is really important. We look at this every six months and we balance up trying to have a sustainable payout ratio with understanding where earnings are with understanding where we are in the cycle through the year with what we know about regulatory capital and with the franking balance as well. And so taking all that into account we thought that $0.01 as a Board was the right answer at this time, in six months time we’ll look at that again. And certainly the payout ratio is one of the things that we think about.

[Jon Mott:]

So no real change in strategy yet, or was it just a decision for this half?

[Brian Hartzer:]

That was a decision for this half.

[Mike Wiblin:]

Mike Wiblin from Macquarie, just a question on investor lending, in terms of the growth number it does appear to be a bit different from the outflow statistics, can you talk a little bit about what else is in there and also I think you mentioned the non-resident part I mean how big is that and how fast is it growing and if you’ve mentioned it clearly it must be material in terms of you’re getting underneath that 10%. And thirdly, was there any spreading ticket involved in the sort of the shift in the I had to ask that question in terms of shift to the capital ratio because I thought the range is coming at a more 8.5 to 9 across the sector outside of that but it’s shifted up a bit?

[Brian Hartzer:]

So, Mike why don’t I start with just the overall view on investment property management, we’re very comfortable with where we sit as Peter said, it’s been a strength for us as a group it is something where we’ve performed well in. Having said that we’ve recognized that Afro has been concerned about the rate of growth and so as Peter said we’re treating the 10% growth limit as a hard target. We’ve already made some changes in our underwriting criteria and a few other adjustments that we feel comfortable will get us down to that level. But there is a flow effective that as well because we are obviously writing new business and takes a while for that to book. But we feel comfortable with where we’re going on that, and Peter you might want to address this.

[Peter King:]

Just on IPO growth the upper measure is slightly different to what you see so it captures self managed to the fund and non-resident lending in relation to your comments on non-resident lending on really reflecting both the government changes and also some tightening of that risk appetite. So I’m not flagging anything particular in that book. On the spreading ticket we’re waiting, so we haven’t got clarity on what that might look like but given we are taking action we think we’ll gain below that 10%.

[Brian Hartzer:]

But the capital range as it is today, it doesn’t include the spreading ticket.

[Peter King:]

The capital range hasn’t changed from what we said last half.

[Andrew Lyons:]

Andrew Lyons from Goldman Sachs, and just a question Brian on your ROE which was at 15.8% for the half, if you adjusted the EBITDA in the DRP capital raise that’s a bit of a headwind so that gets you into to low 15s on the ROE and against this bad debt so at or close to cyclical lows and you can see banks a lot than they more capital versus where they are at the moment just in light of reiterating the 15% line in the standard ROE can you maybe just talk about some of the levers that you think you have on revenue and expenses that can offset these pressures that exist?

[Brian Hartzer:]

Well I think our ROE is really important. It’s a clear driver of value and it is something that we’re extremely focused on. I think if you look at the 15.8 as Peter pointed you out and you add back those adjustments that we made were well above 16%. So there is a fair cushion there I think what I’d say is that what we will have to be in this environment is more nuance in a way that we allocate capital and manage our ROE. We look at on a portfolio basis and we look at it within each of our businesses. What we’re doing with the changes we’re making is getting ahead of where we think capital is going and giving our businesses as part of their strategy planning a sense of what they’re going to have to achieve and giving them time to think about the changes they can make to drive ROE. And from that standpoint our businesses have got quite a lot of levers available to them and we feel comfortable that 15% is the target we can stick with.

[Brian Johnson:]

Brian Johnson, CLSA. I have two questions if I may to you, Peter. Peter, the first one is in the RBA financial stability review report. They actually said that they expected the buffer on the SBR to be substantially above 2%. Today, you have actually said that you’ve increased it effectively to 2.1% or something like that, I’d just be interested in how comfortable can you be that that’s actually enough in your discussions that you’ve had with APRA? And then the second one is, it's great that we’ve had these wild references to the move into Barangaroo and that favorably hits the earnings, could we please get some degree of clarification about the timing and the quantum. So what I am interested in is the potential gain you get on selling and building costs of moving in and how much of it flows into the P&L and when it flows?

[Peter King:]

On the Barangaroo the major piece is 59 million profit-on-sales there will be some costs to move that will come in at those in the cost like we normally do. On the buffer moving it by 2.1%, we think that is more of an accurate for what we’re seeing in terms of the environment.

[Brian Hartzer:]

And there is also the 7% [Multiple Speakers] number of things in that, so that’s just one slice of the things that are there.

[Peter King:]

We are effectively assessing we will reduce that 7.1% and it's both on debt, new debt but also existing debt. So it's a pretty big gap to that counterfeits your rights when you take…

[Brian Hartzer:]

Can I just clarify that one of the things that we’ve done traditionally differently is we take into consideration the whole consumers borrowings, not just the individual loan. So we think that’s a conservative approach.

[Brian Johnson:]

[Indiscernible].

[Jarrod Martin:]

Jarrod Martin from Credit Suisse, just in reference to your capital slide Peter, you look at some of the uncertain impacts and where capital is moving, the risk weighted asset capital for mortgages seems to be now very much on the table, the FSI recommended average risk weights of between 25% and 30%, 20% risk weight for the Westpac would get them into the bottom-end of that range and if you apply that your mortgage portfolio as it is now that would require an extra $5 billion of capital, yet you’ve only done a $2 billion capital initiative this time around; one, why didn’t you do something larger? Two, can we expect a rolling period of DRP underwrites?

[Peter King:]

I might just quickly touch on it and go into a bit more, and Jarrod, the starting point here is we look at this every six months and we say, what do we know today based on the size of what the regulators are saying, what the timing is. There is a lot of things moving around, we felt on balance given what we knew today going to the top of the range was the right place to land, if situation changes, we get more clarity either on timing or closing. Then obviously we’ll consider that in the next six months when we come back to look at these holdings.

[Brian Hartzer:]

Just on mortgage risk weighted assets, I’ve just said is a very complicated area, we don’t yet know and there is lots of modeling out there. So there is different views on it, we don’t know how LMI is going to trade it we don’t know how exposure is going to be trading it is traded differently between advance standardized banks. We have interest rate risk in the bank both the standardized banks done. So there is a lot of detail in the model and I think that was also made observations that the gap might not be bigger, as big as what we think. We’re just going to have to wait now to see what APRA are thinking of that they have made some comments in the last couple of weeks, so it feels like we will know something later this year.

[Victor German:]

Victor German from Nomura Securities, two questions if I may; one to follow-up on investor mortgages looking at -- if that part of the segment is going to 11.5% and given that it's about 46% of your overall book it sounds like non-investor segment is growing at 1% or 2%, Brian are you comfortable with that level of growth, what do you think the issues are and how do you think you can address them? And the second question looking at Slide 16, where you outlined your strategic priorities and digital transformation service revolution things like that, sound like there is money that you need to spend to get to that, if you're able to perhaps outline to us what your plans on expenditure the next three to five years and how are you planning to balance of those near-term and short-term performances targets versus this long-term objectives?

[Brian Hartzer:]

I might ask Jason to comment a bit on mortgages in a minute, but the first thing I would say is that it's true that investor segment has been growing faster and that’s really good thing, we’ve been well positioned in that and from a risk point of view, from a return point of view that’s been very attractive. What we are seeing in the market generally is slower owner occupied growth and we’ve been taking a number of steps to be better positioned in that and support that growth and Jason, do you want to make a comment on that?

[Jason Yetton:]

Look I think Brian and Peter covered up pretty well and we’ve outlined a good plan to manage growth in a very balanced way and I think you can see that in overall core growth while as managing margins in a pretty effective way, the growth in the market has been primarily in the investor property line segment as you know and of course direction made pretty clear how we need to manage that in the balanced way going forward. I think one of the -- probably two observations that will come of that had some of the heart in mortgage discounting in the IPO market should start to reside, I think overtime, segmenting up pick up might increase in some of the unoccupied and first time buyer segments. That said, growth in those areas have been pretty low. So it is the which will shift the focus we've been doing well in parts of the market that have been going well in Western, New South Wales and Victorian on the other hand when you go to family or friends you start to looking at opportunities with different segments and think of different geographies in saying that we are going to still made at a very balance life so that's what we are thinking looking forward to over the next six months.

[Brian Hartzer:]

Thanks Jason and Victor on the second part of your question around IT investment so there is a significant transformation to be done what we're seeing is that we're already very well positioned that the front end now with our new digital assets with Westpac live and our mobile capabilities and as customers adopt them some of the savings is beginning to flow were seeing good benefit to the online platform already in that you can take up those small ATMs for deposits and the life we spend somewhere around a billion market investments across the company each year or bit above that we feel comfortable that we can continue to make the investments we need to make the transformer company for doing that broad range with that said we are also conscious of delivering a reasonable steady of return through that period and so as the bid of the balancing act about what we can afford in any given period to make sure that the delivering at this return but we are fundamentally transforming the company.

[Victor German:]

So you don't feel the need of increasing that investment spending you currently have?

[Brian Hartzer:]

At this point in time we feel like the ranges of our investment spend is pretty reasonable.

[Craig Williams:]

And a couple of questions to play, so Brain you are very familiar with the business you've taken over taking a medium-term win to your tenure may I have the management bench in place and organizational structure in position as you believe you require. And second question being the revenue environment progressively tougher today sort of considering sharing with and growing slowing investor lending and your customer income ratio is full only power so have you identified the need for higher region cost given expense growth as well above safety we're be the focus to this give the focused on service and technology that you've liked to today?

[Brian Hartzer:]

Thanks Craig. In listening to you first question I feel that one of the great assets displaces the quality of our management team as this is the team that's created the strategy and the performance that you see here in I feel really good about that group. In terms of your second question clearly we are going to have to continue to drive productivity improvements we have strong disciplines on a day to day basis of managing variable cost and I think you see that in the chart that we put up where you look at our cost growth adjusted for FX you can see we've show really good discipline around offsetting our businesses usual cost growth at the same time I think as digital transformation more structural changes to our business go through we should see that reflected in a much better productivity outcome overtime.

[Richard Wiles:]

Richard Wiles Morgan Stanley, Peter I want to ask some questions on investment property lending but also interest only lending I think in Westpac’s new disclosure in the pack today you are the one major bank that doesn’t disclose what proportion of the mortgage portfolio is interest only can you tell us how much of these can you also tell us what the growth rate in interest only lending is at the moment because it appears to be a high growth rate than investment property lending across the major banks in addition to that do you think there is any risk that APRA changes the state limit reduced it from 10% growth on invested property lending to something lower given that we can continue to get high if there is rights of auctions in Sydney given the outlook for interest rates is still lower do you think that might actually lower that's breaking that and my final question relates to investor property lending and capital requirements do you think that APRA will follow the [indiscernible] approach will classify investment property lending for capital adequacy purposes?

[Peter King:]

So I think it's really important to remember when we underwrite interest only we underwrite it as if it's P&I so we don't rely on just the interest payment in assessing whether or not people can support the credit they are treated as if it was for principle paying and so that's a very conservative approach it is different than the way things overseas sometimes deal with interest only so we are comfortable with that basic policy a lot of its driven by investor lending and people looking to have more lumpy repayments and when you look at the LDRs and dynamic LDR across the portfolio it's still very low so we don't see that as a fundamental exposure.

[Brian Hartzer:]

And just as I don't have the exact numbers here but I will also add that run off in interest only lines is actually matched pretty closely on owner occupied so interest only non-interest only you actually see the same behavior so I think there is a view that interest only is high risk but actually behavior on it is pretty good and in fact in the half we had higher run off in the interest only portfolios on new questions on APRA I can't really comment on what they willing on doing if I look at our view on the resetting that's we had are 7% assessment rate with things right if interest rates go lower we don't drop that rate that's the reason you have this floor rates we will have to wait and see if on IPO because I am sure that's part of the discussions on mortgage risk weighted more broadly and as I said they will have something to say later in the year.

[Richard Wiles:]

Can I just follow-up on interest only APRA specifically mentioned that as an area of prudential concern, can you confirm whether the growth rate interest only is above or below the growth rating in investment property lending if you can give us some specific numbers?

[Brian Hartzer:]

I don’t think they are majorly different but okay.

[Andrew Hill:]

Andrew Hill from Merrill Lynch, just a question maybe a question for Rob and just on institutional banking the margin compression accelerated again this half I’m just wondering if we can get some color around the drivers of that and also how you see that playing out through the course of this year and maybe with some reference to drive finance as well?

[Brian Hartzer:]

I’ll hand it over to Rob in a second. But first can I just say I think that institutional banks manage this really well and this is a business that we have a real strong franchise and it’s still returning well above our hurdle. So notwithstanding pressure on the lending side and this is still a good business and I think the guys managed it well as you see in the core earnings growth.

[Rob Whitfield:]

Thanks Brian, thanks Andrew. Look as we said for full year we have had pressure on both sides, for the margin it’s been both on the assets side of the liabilities and for this half pretty even on both in terms of what we expect to go forward a more pressure to sustain on the lending side but perhaps subdued pressure on the deposit side. So still pressure overall mostly on the margin side, mostly from the same issues we have been seeing all the money high competition both strongly competed the high quality assets and no result while there is so much we do around from that.

[Andrew Hill:]

And trade finance?

[Rob Whitfield:]

Trade finance, I’ll just remind you it’s a very small book, at Westpac it is a growing book it’s been growing at a much low rate in fact it went backwards in total terms in this half. It’s a story you’re familiar with commodity prices significantly up, volumes up but not enough to compensate, same driver underlying though in terms of pricing. We’ve lots of liquidity around the globe. People highly compatible because they’re risk weighted capital effective product, but it is highly competitive in the short duration. So that pressure continuing particularly in Asia.

[Andrew Triggs:]

Andrew Triggs from Deutsche Bank, I just have a question on the treasury side of things, just in terms of the slide you gave. So just on seasonality between the first half and second half just confirm where that’s the case in the market side of things and also whether there you’ve given some structural factors that you called on whether there is any sort of has been change to resolve to apply that divisional or whether that do in future.

[Brian Hartzer:]

So in terms of seasonality, it’s not a seasonal business it’s just depends on the opportunities. In terms of the resourcing it’s actually a very small team now so there is not a lot to reduce that a lot of value with the small time.

[Brett Le Mesurier:]

Brett Le Mesurier from BBY, a question on the financial planning business, the only major that hasn’t had a problem, can you comment on how confident you are that is going to remind that way and what you’re doing to ensure that you might have a problem going forward?

[Brian Hartzer:]

Thanks Brett, thanks for the question. This is obviously a big issue from a community point of view. So I was half hoping question on this. I think the important thing to bear in remind is that the broad issue here is about Australians getting good quality advice with Australian population ageing it’s really important that the community has good economically viable sources of advice that they can trust that’s free of confidence of interest. And since I came here back from the UK having seen what happens with banks getting out of financial finding all together, this has been a real focus for me and for Brad in how we run the BT business in a sustainable way. And Brad and his team have been real leaders in this. We made a number of changes well in advance the profile we move to, fee for advice since 2011. We’ve raised the standards for our advisors. We’ve put all of our digital, all of our financial planning files online in a digital format so that we can independently review them and we’ve been real leaders in transparency with the launch of advisor view which is like trip advisor for financial planners or as you can go on and you can actually rate your financial planner and see what other customers have has said it out then. So I think we’ve made a lot of progress in moving the industry to a more sustainable model. Now, having said that there are examples as we’ve seen from other banks and a business our size we’ve had examples that flow of where customers haven’t been treated the way they should and that needs to be fixed and our policy has been that if we find an example where someone has been given the wrong advice then we deal with that we set them right. We look for other customers they might have had that issue and we resolve them as well. So that’s just been our standard practice. Having said that giving all the attention this has had in recent months we are going back and having another look and if we find anything we’ll fix it, having said that, we haven’t found anything systemic.

[Andrew Bowden:]

We take a follow-up question from Scott.

[Scott Manning:]

Scott Manning from JPMorgan, two questions, firstly, after today’s capital initiatives on a [indiscernible] point of view of you have won a fair bit higher than up to 100 points, do you feel like you had a relative advantage and you got less heavy lifting to do and that gets reflected in your business practices going forward or do you see that everyone has got leverage price, so you want to get an early start? And the second one is on the multi-brand strategy we haven’t heard that word out of the in terms of the five calls that the strategy going forward. So the thoughts around efficiency that can be achieved in the backend and showing customer behavior this is efficiency at the front-end and distribution with the duplication of the branches across the brands?

[Brian Hartzer:]

So on capital you’ll have-to-have see other banks how they feel out there preferred range, we’ve said what our range is and we feel that’s prudent to be where we are at this point in cycle. If your suggestion is that we’ve been conservative then that’s a reasonable assumption. In terms of multi-brand, our family of brands has a great strength of the group and it’s led a strong growth in customer numbers. I think it's important to recognize that our strategy is not about having different brands going head-to-head in a core market they are about different brands complementing each other in a market. And as a result of that as you suggest we’re looking for efficiencies as we bring consistency to our systems, to our operations, to product development and so forth. We’ve made great progress on that over the last couple of years in AFS that’s part of what’s contributed to the productivity benefits that Peter talked about and we expect that to continue to be an opportunity for us, but as for multi-branding part of strategy, it is part of the strategy, it's a really important of what gives us an advantage in these markets.

[Andrew Bowden:]

Thank you very much. Brian, you want to make a couple of closing remarks.

[Brian Hartzer:]

Thanks, Andrew. Thank you very much. Well thanks everyone for attending today and for your questions. I’ll just finish by coming back to where I started, Westpac is in great shape. We’re financially strong, our businesses are well positioned, they have got clear strategies, they are executing against those strategies and you see it in the financial results that we’ve delivered this half. On customer measures, on value measures things drive our long-term franchise value these are all moving in the right direction. So we’re setup well for the second half and I am really optimistic about our long-term future. Thanks very much for coming.