Westpac Banking Corporation
Q2 2013 Earnings Call Transcript

Published: 3 May 2013

[Andrew Bowden:]

Good morning, everyone, and thanks very much for making the time down here. I know it's a busy day. There's a few people -- a few less people here today because they're sitting on the webcast. So welcome to those who are online as well, and it's great to have you here. This is Westpac's First Half '13 Results. My name is Andrew Bowden. I'm Head of Investor Relations. Running the show today, we have CEO Gail Kelly, who I'll introduce in just a second; and Phil Coffey, our CFO. We'll do the standard presentation today with Gail and Phil speaking first, and then we'll open up for Q&A. But Gail, if you'd like to come up and start the proceedings.

[Gail Patricia Kelly:]

Thanks very much, Andrew. And if I can add my words to Andrew's terrific welcome to all of you. Thank you so much for joining us today. I do appreciate it's Friday, and I do appreciate that you have Macquarie to cover as well. So I appreciate you either being here in person or coming in via the telephone or the webcast. So when we reflect on our first half results for 2013, there are number of points that -- I'd really like to make 5 key points. The first point is we see this is a strong and balanced performance. And I think what we aimed for is consistency to deliver clean performance that actually is consistent half-on-half. And as you know, there's 4 key elements that we focus on being strength and return and growth and productivity, and what we work to try and do is achieve appropriate balance between those 4. The second point is that we have all divisions performing well. Now as you know, our second half last year was a particularly strong performance. And against such strong performance, all of our business units have been able to increase their core earnings for this first half of 2013. And third point is that we're executing well against our strategic priorities. We have the benefit of having an experienced management team and a circle of management team that are very clear in what the priorities are, and they're putting together very well to execute against them. Linked to that, of course, is managing for the current environment, which remains a challenging environment, and certainly, from a growth point of view, a subdued environment. And this is where in line with our strategy, we're actively targeting those areas where we believe there's lots of opportunity for growth and to enhance return, and we remain disciplined where conditions are tougher. And so discipline with regard to pricing, and obviously, with regard to risk appetite as well. Clearly, on the loan growth arena, productivity is key. And as you know, it is a journey we kicked off in 2009, and we continue to raise the bar there. And then, of course, the strengthening of the balance sheet across all of its dimensions, and I think that's probably the overall feature of this result, is the further chapter in that strengthening of the balance sheet process that we started 5 years ago with the onset of the global financial crisis, and so to finish up this half with a strong capital position, and Phil and I will both say more about that later. In terms of a strong company, this slide gives a little bit more insight into the elements of that strength. Cash earnings growth on a prior corresponding period up 10%; on the prior period, up 4%. Net interest margin, the word there, I think, is stable, disciplined, well managed. If you look at the last 3 halves, pretty much stable, 2.17, 2.18, 2.19. On the customer deposit-to-loan ratio, you'll remember last year, we put a very big focus in the organization on driving a deposit culture in our organization and working to increase the focus on deposits. And so we set ourselves the task of growing deposits above system, and we've continued that pattern into this half, paying a lot of attention to quality of deposits as well. The stressed assets to total commercial exposures, a significant further reduction there, and I have to say, the rate of reduction has exceeded our expectation for this half. But I think it does speak to the overall quality of -- the credit quality, the asset quality of the Westpac Group. Capital, as I indicated, I'll say more about that, but at 8.74, we sit comfortably above our target range or our preferred range of 8 to 8.5 for common equity, and if you compare that in the fully harmonized Basel III basis, it's equivalent to an 11.4. And then there's a slide in the Investor Discussion Pack that I'd draw your attention to. I think it's on Page 57, and you'll see just how well placed we are there relative to local peers and global peers on that metric. So I already mentioned this construct and you've seen it before, this time last year, and again, at the end of last year, the strength, return, productivity and growth constructs. And as you know, the trade-offs that exist between these different elements and dimensions and our job as management is to seek to achieve the right balance of outcome for -- across the whole. I've spoken to strength already, and on return, clearly the name of the game is maintaining discipline. I think we've done that well with margins. ROE, I'll talk to later. But obviously, I'm really pleased to see that pick up above 16%, and on the customer return on credit risk-weighted assets, and that's a function not just of good margin management but also driving that depths of customer relationship. On growth, we're seeking to grow where we believe growth opportunities exist, and customer deposits, and here, we targeted above 1.2x system and household savings growth in that sector, so paying attention to quality as we head towards the new liquidity regime and funding profile regime. Wealth penetration, this has been an area we focused on for a long period now. And it is, I think, a signature feature of the Westpac Group, the way in which our wealth businesses work so closely with our retail distribution businesses. So we stick to leading in this and have continued to improve that ratio, which as you know, is measuring our own customers who have our own wealth products. So the wealth penetration of our own customers. Bank of Melbourne is another example of where we targeted our growth and have made investments. That's coming up for 2 years young, as it were. We launched it in July of 2011. Really pleased with how our Bank of Melbourne strategy is playing its way through. Really good growth in household deposits over the course of the past 12 months, 5x system, Victorian system, and 3x Victorian system in home lending. Of course, you need to look at that against the context of Westpac as a whole and Victoria, and I'm pleased to say that we're growing from the system as a whole point of view. So Westpac and Victoria is growing, too. In fact, we grow about 80,000 new customers across the brands in Victoria every year. And on productivity, that's been a journey for us that goes back to 2009 when we kicked off the SIPs. We kicked off a disciplined planned program of workaround productivity. And so the benefits you see this year really flow from initiatives and work that we put into the system a year ago, and the work that we're doing now will flow through the benefits into the next half and into 2014. So $228 million in productivity savings over the past 12 months, $121 million over the past 6 months. Expense income ratio, as you know, we seek to leading in that regard and something we certainly intend to maintain. And the SIPs are on track and are performing well. I'm pleased to say also nearing completion. A number of key milestones this year with regard to our online program, which finishes up towards the end of this calendar year with the online system being implemented for our Westpac retail consumer or Westpac consumer customers. And we intend to actually, at the end of this year, really draw a line under our SIPs agenda and give you a full report card and then move on from there. So looking at each one of our divisions and starting with Westpac Retail & Business Bank. And probably, the best words to describe our Westpac Retail & Business Bank, which is, as you see, our biggest business unit, is the words consistency and discipline. Many of you all remember, going back to 2009 when we invested quite significantly into Westpac Retail & Business Bank through our Westpac Local series of initiatives. And it's really pleasing to see that since second half of 2010, we've grown our core earnings in this business every year or every half. And this half, our core earnings is up 4%. So a strong business unit, a strong franchise, a strong balance sheet. And if you have a look in the IDP, you would see the improvement against your range of customer metrics, the depth of the customer relationship, really strong customer retention, reduction in customer complaints, and of course, that wealth penetration metric. In St.George, it's been a strong 12 months, and so 2 really strong halves. And if you look at -- in fact, it's up 25% on cash earnings over that 12-month period and 8% on core earnings. And if you look at the big portfolios of retail deposits and mortgages, you'll see that we're well above system growth in both of those for the St.George Group. On business lending, that's a bit softer. In fact, we've lost balances from our business portfolio, and some of that is due to the runoff of stressed assets. So thinking about an impairment position that's been a strength for us over the past period and the asset quality is really looking very favorable. St.George also has done well in its customer metrics, and then off a lower base, growing very strongly in the wealth penetration, growing its overall customer numbers and retains its leadership in customer and business -- consumer and business New Promoter Score. BT, the best way to look at BT's performance this half is to compare it against the prior corresponding period because of the impact of natural disasters that usually occur in the first half of the year. And so compared to prior corresponding period, core earnings is up 15%, and cash earnings is up 15% as well. It's obviously been a strong recent period for markets, and so the earnings out of our funds management business has increased 10%. And the earnings from our insurance activities has increased 39%. Of course, as I mentioned earlier, we're really focused on the linkage between our wealth business and our retail division businesses, and we continue to focus on the cross-sell activities of wealth products into Westpac RBB and St.George, and BT Super for Life is a really good example of that. We've got 350,000 BT Super for Life customers now, and we still routinely fill around 1,500 products per week through our distribution systems. On the Institutional Bank, those 3 bars -- 3 charts on the bar graph there show that we had 3 really strong halves. And over the past period, cash earnings up 10%, and core earnings up 2%. I think I'm really pleased with the Institutional Bank. Remember, it's a high-quality business with great customer depths of relationships, great customer connections. And the customer really over this past period, this past half, is up 5%. So very strong performance out of our debt markets in the area. The issue for us in our Institutional Bank relates to margins, and there's been a 9-basis-point compression of margins in our Institutional Bank. And of course, that's a direct function of the amount of liquidity that's in the global financial markets, which is working its way through to compress margins as it seeks to find a quality home. Now as we look here into the next half, we don't see that trend abating. On impairment as a feature on strength, signature strength, really, of the Westpac Institutional Bank and certainly a signature strength of this half because it's had a positive benefit from impairments in the half and it's not necessarily something that we think will repeat into next half and next year. Westpac New Zealand had a good 2012, and so this first half of 2013, in some respect, has been a period of consolidation. Peter Clare has been working on the strengthening of the balance sheet. New deposit-to-loan ratio is now up to 75%. So it's grown above system in terms of deposits. On the lending side, he's focused at the more quality end of lending. So mortgages, he's been focused on sub-80% loan to valuation side of things. Good performance on the customer metrics, if you have a look at that, in the IDP, solid growth in mobile and online customers. And these customers with 4 or more products is now very close to 50%. So that's perhaps a good lead into talking about the underlying customer momentum, which I've already referenced in talking about the financial results of the business. They're obviously really important underlying features that lead to financial outcomes. For now, I'll just talk to 2 of those charts, the WIB trade volumes, just to draw your attention to the strength of trade volumes in this half, and particularly, the strength of the trade volumes in Asia. Well, of course, that's strong volumes, but again, impacted by the margin pressures that are prevalent in Asia in trade as a consequence of the liquidity that I've already referenced. Our strategy in Asia is really clear, and you've heard me talk to that before. It's very much about connections, about our customers, supporting our institutional, corporate, commercial, agri customers as they increasingly trade and invest in Asia. And so steadily over the course of the past 2 years, we've built up our people, our infrastructure, our capability across Asian markets. This last half, opened our branch in Mumbai, as you'd be aware. And also, 1 of the 2 Australian banks to be granted the Market Makers' License, which means that we can facilitate trading between the Aussie dollar and the renminbi. But it is an organic strategy, and it's very much predicated and focused on our customers. On the other side of the chart, just to brief you, references the wealth penetration 1, just to really highlight the strength of our Westpac RBB business in this regard. So sitting well above peers from a wealth penetration into our own customer base. And St.George, the fastest-growing business on that slide, now third out of the slate of 5 and the head of 2 of the major banks. So let me start on the right-hand side of this slide and really go to return on equity. And I'm sure all of you will recall that at this time last year, when our return on equity stood at 15.1, I commented that we're going to put a line under the sand with regard to return on equity and work really hard to manage our return on equities that did not fall below the 15% mark. And so it is particularly pleasing to see that increase over the course of the past 12 months to now stand at 16.13%. That's partly a function of the discipline on the net interest margin, which I will really touch to. And of course, the discipline on the net interest margin also supported our customer return on credit risk-weighted assets, as indeed has our focus on continuing to deepen our relationships with customers do more with our customers. On productivity, as I mentioned, this is not a new story for us. It goes all the way back to 2009 where we formally initiated a strategy and a management structure around productivity. So since then to now, we've had a range of programs underway every single half. And when you think about those programs in 3 buckets, there's the structural change style initiatives. We do more work on that now as we're going into the future. Some of the low-hanging fruit, of course, is taken up. But structural change includes our supplier program. Continuous improvement, we have an increasing number of lean experts working across our businesses, helping us to redesign processes and improve them from an efficiency point of view and an ease for customer point of view. And then there's a bucket of everyday cost management, which we're very zealous on. Now this not only helps fund and provide capacity for investment, but also very clearly, it improves the experience for customers. And so I put at the bottom of that slide just some of the metrics that go to improving the life and the experience for customers. I'm particularly delighted with the 20% reduction in customer complaints that we've had over the course of the past period, and that's something that Brian Hartzer is particularly focused on since he arrived in the organization. He's really making sure we pay attention to the basics and credit quality -- of the service quality dimension of our business. Just having a look at where we've been in investing, and it's really good to see the -- in terms of percentages, the percentage of our investment associated with SIPs is continuing to decline. It was strong in our full year '11, 46%, was devoted towards to SIPs, now down to 19%. And correspondingly, the increase -- I mean, there's an increase in regulatory. I'm sure you note that, too. But aside from that, there's a corresponding increase in growth and productivity. And so we're investing there in wealth. We're investing in Asia, as I've indicated, investing in planners, investing in Bank of Melbourne and investing in structural productivity, increasingly more towards structurally redesigning our business for the long run. So onto capital. Now just to recap here, you'll recall, towards the end of last year, once the requirements settle down with regards to implementing the new Basel III regime, for us, 1st of January of 2013, we were in a position to sit down with the board and really determine what is the preferred range for the Westpac Group with regard to where we'd like our core equity ratio to sit. And of course, you build that from the bottom up with all of the prudential buffers that are acquired and our own management buffers that we put on top of that. And as we communicated to you last year in November, we agreed with the board a preferred range of 8% to 8.5% in terms of where we'd like our core equity ratio to sit. And as we sit today at the end of March, we're comfortably above that at 8.74%. And so it's on that basis that the board came to 2 -- 3 decisions. So decision #1 was with regard to our ordinary dividend and to continue the normal pattern there. So 2 things, to increase -- continuing the normal pattern with regard to our ordinary dividend and so essentially maintaining our payout ratio debt to the 75, 76 level. The second decision with regard to the DRP and rather issuing shares into the DRP as we've done in the past, actually to neutralize the DRP for this period because of the strength of the position. And then the third one, again, driven by the strength of the position, was to announce a special fully-franked dividend of $0.10. So once we've executed all of that and completed all of that, we will remain very strong from a capital point of view and with a healthy surplus of franking credits. So this slide really is just a sum-up of our key result metrics. And I've spoken to most of the elements on that page other than cash earnings per share, up 8% over the prior corresponding period and 3% over the past period. And the other one to note there is impairment charges to average loans, which is 17 basis points, so clearly on a cyclical low. In fact, I look back to see when was the last time we had a 17-basis-point impairment charge, and it was 2006. So I think that's pretty much at a cyclical low. Just before I hand over to Phil, let me just say a few words about the outlook and a few summary comments about our strategy for the next period. So in terms of outlook, if we think about the second half and we think about it from how the economy tracked over the second half, we expect it to remain a subdued economic environment. So business credit is really low, as you know, at the moment. In fact, businesses are sitting on their hands at the moment. Consumer sentiment, while it picked up just a little in the first part of this year, it is certainly tentative and customers are preferring still to pay it on date and preferring certainly to save. So there are some brakes on growth. I've mentioned those 2 and a feature in those 2 is the high Australian dollar certainly impacting how businesses are thinking about their business. The global environment remains uncertain, as we all know, and we can expect that to continue over the next period. I mean, I think we've all seen that as you emerge out of a financial crisis, it takes a long time for the effects of that and for recovery to actually play through. From a Europe point of view, we're probably talking about a 2-decade scenario of recovery that's going to be required there. Now having said that, I think from an Australian economy point of view, we are still well placed. The underlying fundamentals remain solid. You just have to travel offshore and then reflect back when you look on Australia to realize that we do remain, in an underlying sense, solid. Unemployment is still very low at 5.6%. Inflation sits comfortably in its band. It's probably at the lower end of its band. Although interest rates are low, the Reserve Bank has capacity should they so wish to further reduce interest rates. So overall, we remain in a fundamentally solid position in Australia. Back to subdued growth. And we certainly expect that to persist. So against that backdrop, we think our strategy remains absolutely relevant and appropriate and right for the time. It's a very clear strategy, and we're executing very solidly against it. Strong, so having a strong company. If we have a strong company with strong capital and strong funding and credit quality, we can best support our customers and best support the economy. Then we are attending to those SIPs where we believe there's most growth. So I'll touch on some. Obviously, wealth, deposits. In terms of industry sectors, we're looking at natural resources. We're looking at health. Government is a strong sector in terms of growth for us, particularly with the transactional banking elements that actually flow from that. Asia is a geography where there's more opportunity for growth. SME is a sector that we prioritize, and you would have heard in Brian and his team's presentation in March, that focus on SME playing out differently in St.George and in Westpac RBB. So those are the some of the sectors for us. At the heart of our relationship is depth of customer relationships. And so we continue to focus on that, making sure that we seek to earn our customers' business, we do more with our customers, particularly facilitating that wealth cross-sell, the superannuation cross-sell, insurance cross-sell, creating more upside for us there. The fourth one is about this literally radical simplification. So it goes to productivity, and it's about seeking to radically simplify the way we do business. So we've got significant streams of work at play here. In fact, there are about 100 people in our business working on structural simplification across 6 streams of work and 28 initiatives. So focusing on reducing the number of products we have, simplifying major processes from an end-to-end point of view such as home lending and business processes, the digitalization and self-service elements of our business, so driving a different type of branch footprint. You would have seen that in Jason's presentation on March. And it's simplifying our IT environment. So this is a very serious program of work that we've got that will carry us through for a few years to come. And then lastly, of course, the one team approach. I think our competitive advantage is to have a strongly aligned team, a highly engaged workforce. It's never something you take for granted. And so on that note, let me just firstly thank the 36,000 Westpac employees for their dedication and commitment and supporting us in producing this result, which is, of course, just a chapter in a story of several halves that's produced these solid results, and then also, to thank all of you for coming here today and for listening in. So Phil, over to you.

[Philip Matthew Coffey:]

Thanks, Gail, and good morning, everyone. At the full year, I spoke to our results and I focused on 4 themes that I would like to continue that approach today in looking at our first half of 2013. And those themes were, firstly, the quality and sustainability of our results, then our returns, investment and productivity, and finally, the franchise strength. So turning first to quality and sustainability. And a key feature of the result, as Gail mentioned, is it builds on a very strong second half that we had in 2012. And the picture at the top of the chart, right, that shows that 7% step-up that we had in cash earnings in the second half, and that's been followed by the 4% rise in this half. Looking at the composition of the earnings, the chart at the bottom takes a slightly different cut of the results and draws out what was behind the performance when we're comparing it to the immediate prior period. Starting at the left and starting with the core earnings, and Gail has talked about that, this in core, of course, is revenue less expenses. And across the key divisions, that was up a solid $118 million. Westpac RBB is our biggest division, and they have the strongest contribution to that. It was up 4% in the half, and Gail highlighted that actually all of their operating divisions contributed. The treasury revenues were a little lower in the half, and that translated into lower core earnings in the group business unit. Treasury delivered a good result, but the strong gains achieved from managing the liquids portfolio in the second half of '12 will not match this half. Asset quality has continued to improve across the portfolio, and this led to a significant reduction in impairment charges. I'll talk about this a bit more later on, but in summary, the improvement was predominantly in the business portfolios, and not surprisingly, with St.George and the Institutional Bank, that benefited most from those trends. And finally, tax had an unusually large impact and that reduced cash earnings by an extra $131 million. Around 60% of the tax increase relates to the 5% rise that we had in the profits before tax, and the remainder of that tax uplift was due to the nonrecurrence of some benefits that we had in the prior half. The silver lining in this outcome is that the higher A dollar tax rate also generates franking credits, which were value to most of our shareholders. And if you look at our economic profit, which incorporates that benefit, that was up 11% in the half. It is worth mentioning that you should expect our tax rate to settle a little higher than 30% from now on, and that's because the distributions on new hybrid equity instruments are in interest expense but they're not tax-deductible. And this will continue to be a feature of the sector's results, as all of the hybrids mature and are replaced by the new Basel III compliant hybrids. Recognizing the heightened focus on the quality of the sector's performance, I thought I touched on some of the most commonly discussed elements. Overall, this was a relatively clean and straight-forward performance with no major one-offs or restatements during the period. At the same time, pleasingly, there were fewer cash earnings adjustments than recent times with timing adjustments and the amortization of intangibles being the main items. Looking at the bottom line, this was also good example of how the swings in reported profit can play out, and the growth in reported profit was higher than the rise in cash earnings over both the half and the year, whereas this time last year, the reverse was true. In Treasury and Markets, we've had another good result. Markets income was up $50 million over the prior half, while our treasury was $39 million lower. So net-net income from market sources or sources that are affected by the markets was good, but it really had little impact on earnings. I know a number of you have picked up that the trading income item was up stronger than that, but that's the accounting measure that only picks up non-interest income. When you look at the combined non and net interest income that we reflect in markets, and obviously, the treasury result, which is largely reflected in net interest income, you get that combined picture that I just talked to. These elements also contributed to a little less than 9% of our total revenue, which is a similar proportion to recent periods. In that whole markets area, another item that tends to get a bit of comment and which can be quite difficult to forecast is the CBA. And in this half, we recorded a $21 million CBA benefit compared to a small charge of $3 million in the prior half. So for us, the CBA of late has not really been overly volatile and not a major impact on earnings. Performance fees were achieved again this half in both Hastings and J O Hambro, but they are much lower than we had in the second half of '12, and their impact on the bottom line was also reduced by the performance bonuses that we've paid out in the half. Lastly, notwithstanding the lower impairment charges that you see in the P&L, the total impairment provisions were only down $42 million. And they did include a top-up to the economic overlay. I guess the other point I'd raise and point you to is that the capital adjustment from the GRCL saw a $48 million benefit to the capital compared to the prior half. And of course, that benefit doesn't flow through the P&L. So I think if you look at the combined balance sheet and capital elements, we haven't inflated the P&L in that line. Moving to the drivers of our returns, and I've reproduced a simple DuPont model for looking at the sources of return. This table details the returns on our average interest earning assets from the various aspects of the P&L, and it shows how that's impacted our cash earnings return on assets. So overall, ROA was up 3 basis points with positive contributions from the revenue lines more than offsetting expenses and the impairment charge benefits larger than the tax drag. The rise in return on assets didn't fully flow through to return on equity, however, as we've continued to grow equity faster than assets. And so our leverage was a little lower. So notwithstanding the modest reduction in leverage though, our ROE rose to just over 16%. And it's the dynamics of higher ROE and lower leverage that you can see in our improved capital ratios. With net interest income accounting for almost 70% of revenue, clearly, margins play a big role in returns. It's been a key focus for us, and as Gail indicated in the lower growth market, discipline on margins is even more important. And the full year last year, we indicated that the margin trajectory was largely broadly flat in 2013, and you can see in this slide that, that's pretty much how things have played out to date. Margins were a little higher in the half versus the prior period as the loan repricing we did early in the half allowed us to catch up on the rise in funding costs that occurred through most of 2012. On the mix of movements, customer deposits have continued to be a drag as competition remains intense, and it seems that most of our new deposit flows come on to the balance sheet at a lower spread than the portfolio average. You will recall, we also materially reduced our short-term wholesale funding over the last year, and the full period impact of this was reflected in the lower deposit spreads. An interesting trend for us in the half has been the switch in customer preferences out of term deposits and into our core savings account. This perhaps reflects the customers are now beginning to think about doing something more with their cash, and this could eventually be a good sign for confidence and the economy. Term wholesale funding costs were broadly unchanged for us in the half. The drop in wholesale funding spreads meant that new borrowings were similar spreads to those with the maturing borrowings that they replaced. Now there's no doubt the wholesale capital markets have certainly improved, and the shorter terms are now even cheaper than most forms of deposits. However, for us, the lessons of the GFC that the risk should be too heavily dependent on shorter-term wholesale international markets and how unreliable they may be in the future have not been lost. And the benefit of the cheaper markets will only progressively work their way through our cost of funds. Treasury and Markets income, you can see on this slide, had a small negative impact on margins in the half, reflecting the lower return on liquids book I mentioned and because the level of markets income reported a net interest income was lower. If you exclude the impact of Treasury and Markets, you can see our underlying margin, and it's almost unchanged from a year ago. Moving now to investment and productivity. And expense management continues to be a real priority for us, particularly given the material investments we're currently undertaking. Over the last 6 months, operating expense growth from wage increases, performance bonuses, annual rent reviews and more marketing spend have been largely offset by the prior period benefits from productivity. Our productivity programs have improved our cost base by just under $121 million over the last 6 months. And that builds on the significant gains we've made over recent years, and Gail outlined some of those programs. Most of the increase recorded in our expenses are due to investment, and on this slide, on the right-hand side of the slide, you can see we break up the components into 3 major groups. Firstly, there's the SIPs program, that you are familiar with, it added only $10 million to expenses over the half. The increase in SIPs is really related to the higher amortization of capitalized costs from the completion of past projects. Other projects that are focused on growth and productivity are getting increased funding, and their investments and the related OpEx that goes with that are having an increasingly large impact on expense growth. And they include scaling up of our Asian operations, and obviously, our Bank of Melbourne operations. And you can see that in the bottom left chart on the slide. Lastly as Gail reported, our regulatory compliance costs have also continued to increase and flow through our expense growth, and that's not surprising given the raft of changes that we've had to issue following the GFC. For those of you that obviously dig closely to the numbers, you will see that depreciation and amortization expenses were up only modestly, and this mostly reflects the absence of write-offs that took place in the prior period and to some timing issues. We expect depreciation and amortization to pick up a little in the second half, and we still expect that this added around 1 percentage point to our overall cost growth in 2013. You'll see in our more detailed packs that we'll remain at the conservative end of amortization periods. It is about 4 years, and we really try not to over delay these costs into the future. Importantly, we see the benefit of productivity programs in play that will help to offset these increases. So the picture on expenses remains one of discipline, ensure that our productivity programs are delivering the headroom for investment while keeping a close eye on our core earnings growth. And this will continue to be a feature of our results. The last thing is around the strength of our book and risk profile. Looking at credit risk, and the story continued to improve for the fifth half in a row. In every -- we're seeing a 23-basis point decline in stressed assets over the last 6 months. But the decline can be traced back to an improvement in the business book, which has led to a 21-basis-point fall in the watch list and substandard category. The reduction in total stress is actually even more significant when you take into consideration the normal seasonal rise that we get in consumer delinquencies, and that they appear in the 90-days past due category on this slide. Commercial property has had another step down in stressed over the half. We've seen liquidity return to this market, and that has assisted companies to strengthen their balance sheet and supported for us the workout of impaired facilities. At the same time, more stable property markets have meant that we've not needed to top-up provisions for existing stressed property assets, and that has been a feature of impairment charges for the last few years. There was a small rise in consumer delinquencies, and you can see that in both the stressed exposures and the delinquencies chart on this slide. The positive element over the half has been the consistent improvement across most sectors from that recorded in September, and that's perhaps a bit better outcome than we expected when we presented to you last year. Of course, it's a welcome trend and it goes, I think, to the quality of our portfolio. This slide looks at how the improvement in asset quality has impacted impairment charges and provisioning. Overall, the provision charge was a very pleasing $166 million lower over the prior half. The improvements in asset quality from both our reduction in stressed exposures and the decline in new and increased impaired assets has been a key factor behind the fall in impairment charges. Another feature of the results is being that actual losses across business portfolios have continued to be below what we initially modeled. And as we've realigned our models to account for these differences, there's been some reductions in provisions required. This benefited the provisioning charges in our business and commercial portfolios. Looking at the economic overlay with details on the right-hand side of the slide, we've continued to adjust the components for current conditions. So the further improvement in the property sector that I mentioned has led to a reduction in the overlay by $32 million, and this was offset by a decision to top up the overlay by $63 million to accommodate our increased caution towards certain sectors but in particular, manufacturing. In total then, the overlay was $28 million higher. Our provisioning cover, which you can see on the bottom right of the slide, remains very healthy, with the individually assessed kind of sitting just on 40%, and the collectively assessed provision also remaining strong. We introduced this slide last year. I know you all liked it so much, we brought it back for a repeat, as it helps to explain how movements in asset quality play out in our provisioning. And I think the picture is best looked at in 2 halves. If you look at the left-hand side of the slide, the reduced stress in the book translates into more of our portfolio being fully performing, and less in the 3 categories of stress. If you look at the right-hand side of the slide, the provisions required for each category adjust for the loss experiences we recorded, and the average credit rating within each category. Now the performing book is 98.06% of our total, it's also by far our biggest category, and it saw a very small improvement in probability of default based on historical experience. The other categories were broadly unchanged with a small drop that you see in 90-days and well secured in that category. That's the result of a change in mix. We've got more housing exposures in that category and less commercial property. So these changes, when you look at the provisioning and the size of the exposures, has meant that we've had a small increase in the impaired asset provision and a small reduction in collective provisions. Moving from credit risk to funding and liquidity, and we've continued the trends that you saw last year. You can see on this slide that in the first half of 2013, all of our funding sources were high-quality stable elements, being in customer deposits, term funding and increased equity. On the uses, we've well covered our loan growth and our wholesale term maturities, as well as facilitating some further reduction in short-term wholesale funding. We've also used the positive market conditions to get ahead of our 2014 maturities with the buyback of a little more than $3 billion in government-guaranteed term debt. The net impact of this change has seen our stable funding ratio edge a little higher with a stronger deposit mix. The last aspect of strength and obviously, the highlight, for me and I think for us, has been our very strong capital position, with our common equity Tier 1 ratio now comfortably ahead of our preferred range that we outlined last year. At 8.74%, our common equity ratio translates to 11.4% on a fully-harmonized basis, and as Gail mentioned, that compares very favorably, both domestically and against international peers. The improvement in capital ratios stems from 3 factors. Firstly, our organic capital generation has been a key factor. This is both from increased earnings and remaining discipline on growth, which has contributed to modest risk-weighted asset growth. Secondly, as I called out last year, we've been working hard to improve the allocation of capital across the business, and this process has realized a number of opportunities, some of which appear in these numbers and some will emerge in future peers. And thirdly, an asset quality has also played a part with the reduction in business risk flowing through to lower credit risk-weighted assets. We sought to be clear on our capital ratios last year with our preferred range for common equity Tier 1 of a range of 8% to 8.5%, and this level of capital when we modeled, gave us a very comfortable buffer, over regulatory thresholds and allows us to operate as a strong and an efficient bank. Given this clarity, I hope it's not surprising when you sit down and look at the story that we have announced today, and it's not surprising that we have a number of capital management initiatives, which Gail outlined. As many of you know, there remain some uncertainties around the Basel rules that will be finally applied, but one we -- on best of what we know, our capital levels today are very strong. And our capital decisions provided good balance between ensuring we are strong and prepared for growth, whilst at the same time, returning value to shareholders. And that's something that we will continue to assess each half. So as we look at the remainder of FY '13, the trends that we outlined last year are likely to continue to play out. Balance sheet growth is expected to remain modest, with as Gail mentioned, both consumers and businesses remaining cautious. Deposit growth is expected to continue growing faster than lending, and so our funding composition should continue to improve. That said, we're not looking to repeat the rapid shift in the funding metrics that we achieved last year. While our system loan growth has been lower and we've seen little change in market share, we would like to see some improvement in our loan growth relative to what we experienced in this half. You can, however, expect us to remain disciplined on margins. It's an approach that has served us well. Our investment will continue to target areas where the growth outlook is much higher, and in the next 6 months, we will invest further in our online and digital capability, in our wealth platforms and in Asia distribution. As I mentioned, amortization and depreciation is also expected to have a bit bigger impact on expenses in the second half. However, these investment costs will continue to be balanced against our revenue performance and our productivity programs. Asset quality trends this half, we probably did better than even we expected, and it would be hard to see our impairment charge going lower in the second half of the year. In particular, it would be unusual for the Institutional Bank to record another positive impairment benefit. But Rob, very nice. That said though, you can expect our portfolio to continue to perform relatively well. So overall, we are focused on the execution of a clear strategy and one that delivers a sustainable and balanced outcome. With that, Gail and I will be happy to take your questions.

[Andrew Bowden:]

Thanks, Phil. I want you to stand from there, Richard?

[Richard E. Wiles:]

It's Richard Wiles from Morgan Stanley. Could I ask the question on capital. The ratio is above the 8.5%, top end of your target range, you've announced a special dividend of $0.10. You've got surplus franking credits, would it be reasonable to think that if loan growth remains relatively low, if the ratio remains above the 8.5%, you will utilize those franking credits and maybe think about paying a small special at any time that you're above 8.7% -- above 8.5%?

[Gail Patricia Kelly:]

Richard, look, I think obviously, the board will make that deliberation every half. That's the way in which dividend decisions are worked. I think Phil has outlined it pretty well. That we think we've struck a really good balance this half. It remains conservative because there are still unknowns out there. And as a bank and as a stance, we prefer to remain conservative, but at the same time, demonstrate that we're getting value back to the shareholders. So -- but that's a consideration that we'll look out every half. I think what we've done quite clearly is, put out the framework for investors to actually see how we think about it.

[Richard E. Wiles:]

Does your 8% to 8.5% range take into account the possibility that APRA could move on to domestic leases systemically important banks?

[Gail Patricia Kelly:]

Certainly, certainly. That's a way out there still. APRA is on record themselves saying that, that will be implemented from 2016, so that's quite away from now, but based on what we know, it certainly does. It takes into consideration all elements of uncertainty that might be out there. And based on what we know, it remains very conservative.

[Andrew Bowden:]

Richard, just pass it.

[Jonathan Mott:]

Jon Mott from UBS. A question on the operational side, and if you look at the performance of AFS in the last half, and further while, you've done very well on the deposit side, which is something that you've really been focused on, so well done there, but on the lending side, it hasn't been as strong, I think. If you look at the 2 parts there, it was about 1% credit growth, 3% deposits. Now remembering that you had very good growth in 2009 and '10, and along those lines, and now you're going to be reaching a stage where they're going to accelerate their amortization just to -- given those vintages, it's going to be another headwind to growing credit over the next little while. So my question really comes down to, can you grow lending at the same time, as growing deposits or -- without having to go to broker channel or is this really a case of pick your poison?

[Gail Patricia Kelly:]

Thanks, thanks, Jon. A really good question. Look, what I'd say as regard to AFS, is firstly there's a portfolio, and it's one of the benefits that we have within our AFS, AFS model, is we have a portfolio. And so even within that portfolio, you've seen St.George, Bank of Melbourne, actually grow well above system on mortgages. While Westpac RBB has actually been under-system on mortgages. So that's -- and what I've really seen is I'd like to grow at or around system, but happy to grow a little less, with system being so modest. So system growth is only 4%, 4.5%. If you're growing at 0.8% or 0.9% of system, I'm comfortable with that but as long as you're managing the margin. Having said that, we would like to and we think we can, without compromising anything around discipline, without compromising anything around risk, quality or pricing and margin management discipline, we think we can pick up our growth a little on the lending side. And so Brian has too many sites to grow his overall mortgages for AFS as a whole at around system growth for the second half. Now remember, that's against the portfolio, so it may not be identical across every brand, but around system growth, so there's a little bit of a pickup in mortgages. And then on the business side, Westpac RBB has been adjacent but sort of more or less wholesale, some more or less flat, haven't you on the business side? But we've lost a bit of growth in the St.George side, and that's largely because of the run-off factors within St.George, the run-off of stress exposures contributed to that. Now there's a bit more of that to come, but we think actually that will stabilize in the second half. So we won't grow particularly in business lending in the second half, but we're not going to run-off either, so it's going to be more or less stable. That's the scenario that George is actually working to. Business in web has actually been growing, but with some margin issues that I've touched on earlier, so a bit more growth to come but in a very balanced and managed way.

[Andrew Bowden:]

Jarrod?

[Jarrod Martin:]

Jarrod Martin from Crédit Suisse. Two questions, one short-term and one a more -- a bit more long-term deal. Gail, you mentioned about institutional margins under pressure and not abating going forward. I wondered if we could get, one, a bit more color on that and how that -- how you manage that under your sort of disciplined margin management statement. And more sort of longer-term question, previous CFO of Westpac used to talk about bad debts between 20 and 40 basis points as a general sort of range. I wondered, Phil, given the mix of the Westpac book now, as well as I suppose, the outlook for less asset price inflation, what are more appropriate range would be for Westpac?

[Gail Patricia Kelly:]

Thanks, Jarrod. Look, on the first one, fully expecting that question because clearly, as a point of difference was with one of our peer's comments, so I'll then ask Rob to comment a little bit more on what he's seeing. He'll give you a little bit more color on exactly what he's seeing on the institutional side with regard to margin depression, and Phil, you might want to pick up on the second question.

[Robert Whitfield:]

Thanks, Gail. Thanks, Jarrod. Look, we are seeing pressure on the margin side and I think you need to break it down to both sides of the balance sheet. So let's start with the asset side first. We're seeing pressure, of course, most of the financing products, and it's coming from 2 sources. The first is demand has been subdued, so clearly, low credit growth in Australia and softer credit growth than we expected in Asia. And you add that or couple that with the wall of liquidity that we've been speaking to, and with the Bank of Japan adding to that liquidity, there is so much cash, and the banks internationally and domestically, are competing for those assets very aggressively, so there is a competition type playing through. On the liability side, it's more of a domestic story, and we're seeing strong competition from all the domestic banks, still chasing Basel III compliant deposits very sensibly. And so we have seen that affect our performance in the first 6 months, and we'd certainly expect it to see part of the second, trend not abating, part of the performance in the second half. In terms of how we position for that, it goes really to the strength of our strategy. I mean that really the deepening customer relationships and our strong risk management disciplines that really plays into this part of the cycle for us. Thanks, Jarrod.

[Philip Matthew Coffey:]

On the, what impairment charge should we expect, I guess, since that 20 to 40 range was promulgated, 2 pretty important things have changed, one is the accounting methodology has changed, so we're no longer under-expected, we're now on incurred, and that makes it harder to be more predictive. The second thing is, our book is quite a bit higher quality than it was. There's a lot more mortgages in total in the book so there's a lot more secured exposures than we had at the time of the 20 to 40. So I think on that basis, you could easily see how the low point could be quite a lot lower than 20 and maybe, the high point at some point in a nasty recession will be quite a lot higher. We haven't tried to give a serious guidance on this. If you had to twist my arm and say, where should it be? I don't know, 20 to 30 is probably, where you'd see the average. But we know averages actually disguise a lot of variability in the actual distribution. And so what we tried to be clear on today is that we're at 17. We think that's a good point to be. It's hard for us to be even more bullish than 17, but I'm not going to put a line at there.

[Andrew Bowden:]

I might take a call from the phone. I'll take a call from Brian Johnson, please. James, would like to?

[James Freeman:]

James Freeman from Deutsche Bank. Two questions, one just on the margin. You've mentioned roughly flat for '13, if I actually have a look at what you're telling us here, institutional margins falling, New Zealand still coming under a little bit of pressure, Australia did very well from the mortgage rate pricing, which is obviously now in the base, unlikely -- well, I'd say unlikely, to be something in the second half of the year, and some still deposit competition on the mix side. How do you actually get to that flat margin for the second half and actually for the full year? And the second question just on bad debts, everything seems to be improving, 17 basis points, impaired is down, mining is down, watch list down, overlay up. I'm a little confused, just at what point do you actually going to start to get this overlay to reflect what's actually happening in the underlying book?

[Gail Patricia Kelly:]

Well, let me start with the first question on margin. I think what Phil has said and what I've said is with regard to the margin for the full year of '13, is that we'll remain very disciplined, and we're going to be very disciplined. I don't think we said, we'd necessarily be flat. We'll aim at flat, you were to really twist my arm and if someone really twisted Phil's arm, I would say it probably would be down 1 basis point or 2 in the second half, for the reasons of the factors that you've outlined. I mean clearly, like any period, there's tailwinds and there's headwinds. But we're going to work really hard in a disciplined way to seek to maintain it flat. However, if you were to twist my arm, I'd say it would be slightly down in the second half due to the factors that you've outlined. On the bad debt side, Phil, you've...

[Philip Matthew Coffey:]

Okay. Can I also just -- because I think we will definitely be where you just said, Gail. But there is no wholesale funding cost that we will be rolling over. It's only $12-odd billion in the half so it's not going to be massive, but it's still better. And the interesting I think to see through the half what impact these much lower wholesale rates have on deposits spreads. To date, they really haven't dragged deposits spreads lower, but that's something that would be a big factor for us in terms of where the margins land over the half and the next year. Look, in terms of the overlay and underlying book, we got criticized when we released overlays and now we're getting criticized when we put them on. So it's a tricky balance to get here with you guys. But I -- look, I think what the overlay does is it looks to say, what's going on that we can see in the portfolio that's yes to turned down in specific provisions? And I don't think we're surprising anybody in saying that there's no doubt manufacturing is exhibiting signs of stress, particularly because of the higher A dollar. And so it does make sense for us to actually see that level of provisioning allocated to that industry increase. And so we're comfortable that that's what's happened. We think it's totally consistent with what we're seeing in the portfolio. The fact that the overall portfolio entitle is improving, you see in the fact that overall provisions are slightly lower, and we think that all that is, consistent.

[Andrew Bowden:]

I might take a question from the phone. Another question from the phone, Craig Williams.

[Craig Williams:]

If I look at what Slide 20, at least on my computer, I'm not sure how that aligns with the books you're working for day today, but looking at asset quality, continues to improve, a slide that Phil talked to, if we look at the impaired level for the group, as it sits today and compare that with the precrisis 2007, 2008 level, I think your impaired is still tracking around 2 to 3x the level of precrisis level, as measured as a percentage of your PCA. Your bad debt charge through the P&L today, as Gail noted, in fact sort of 2006 levels, however, is there a school of thought internally, that says you tackle your impairments impaired assets more aggressively in preparation for the next credit cycle?

[Philip Matthew Coffey:]

Look, I think, Craig, the fact that we have been strongly capitalized, and I think the whole industry has been strongly capitalized just mean it's been quite an orderly market in terms of dealing with stress and impaired assets. And I think that's why as an industry, you've seen us be slower in actually both writing off and clearing out problem assets. And I think that's an appropriate thing to do. Now obviously, as additional cash has come back into the marketplace, and I talked about that in the commercial property space, it does give you the opportunity to find buyers who are prepared to pay what we think is the appropriate price for the asset. And as that happens, there is a possibility that we will see that accelerate in the next periods. You will see in the next slide that our new and increased impaired assets continue to decline. So if that happens, then we are going through a bit faster cleanup process and -- that overall, impaired balance will actually shrink quite a bit faster.

[Gail Patricia Kelly:]

It's quite interesting, Craig, if you look at the property side, over the last 2 or 3 or 4 years when we're talking about property impairments, is this sort of a big factor -- the big picture. And actually, this half, we've had a positive benefit out of property, which is quite extraordinary. So net benefit because for the first time, as we've grown, keep turning the handle and doing the revaluations, we've been able to in fact, give some properties away, where they're valued, which means you get a write-back, so properties contribute a net benefit to this half's P&L, which is complete turnaround from the scenario we had a few years ago.

[Andrew Bowden:]

Michael, take it.

[Michael Wiblin:]

Michael Wiblin from Macquarie. Obviously, you had very strong customer trading results. I just wondered if maybe you could talk a little bit about the drivers, you more staff, you had less volatility or more volatility? And then I guess, the sustainability of that result going forward. Is it a good base to grow off? Is there more to come there? And then just the second question on the Queensland cat claims, is that over and done with now or do you just don't know?

[Gail Patricia Kelly:]

Okay. Well, I mean on the trading results, the major drivers are customers. As you heard me say in my remarks, the customer revenues up 5%, and so that's the major driver on the trading side. And in an environment like this, volatility, customers look for us to help support them and hedging their activities and so on, and that's been the major driver here since our debt markets has done particularly well. Always very difficult to forecast that particular number. I don't know if you -- you're shaking your head, you don't want a forecast, do you? No? But that's the major factor there, so it's really quality business in a volatile environmental with customers wanting us to support them. On the Queensland side, you want to add to that?

[Philip Matthew Coffey:]

I was just going to say, Slide 45, Mike, kind of gives you a sense of what demand is customer, what demand is risk. And you see that the vast bulk of our market's income is customer, and that's continued to be really good in the half. And as Gail said, the pickup in this half was debt markets now. The nice thing about Rob's business is he's got a number of different elements to it, debt markets in different parts of foreign exchange and commodities and the like. And so we do get a portfolio effect and not everyone shoots the lights out every half, that was the case again this half, the debt markets did really well, obviously, for the reasons that Gail has said. On the Queensland cat claims, we basically processed them through the General Insurance pretty rapidly, and you'll see that when you dig into the insurance numbers, that -- actually that's a big part of why the insurance business was a negative this half, it's what Gail said. Because they are so seasonally related, so the weather patterns that we see in the country, that's why we encourage people to look at the comparison with the prior corresponding period.

[Andrew Bowden:]

Okay. Take another question from the phones, Victor, please?

[Victor German:]

My question relates to Jonathan's question before on the growth outlook in the lending portfolio. I think for some time, the view has been that the pricing on the standard variable mortgages is not really impacting all your higher pricing than peers, it's not really impacting market share. If we look at more recent trends from APRA statistics, it looks like Westpac's market share has been significantly lower than peer group. I'm just wondering as we go forward, what your views are in relation to is there a need to align your pricing relative to peers, or do you think you'll be able to achieve more like system growth without necessarily, aligning those SVR rates?

[Gail Patricia Kelly:]

Look, thank you very much. As you've heard me say, firstly, we think about it in the portfolio -- but I'll ask Brian to comment in a moment, too. But we think about in the portfolio since, so across Brian's business, what's happening in Bank of Melbourne, RAMS is another one, St.George and Westpac. So in the portfolio it seems I would like us to achieve a round system growth in mortgages. We had that big pickup, as Jonathan mentioned, in 2009 and our mortgages took us up 2 percentage points, that's really stood us an excellent stead, so I'd like to grow it around system growth. In Jason's specific business, yes, it's been lower than system and indeed, probably about 0.5 of system. Now one factor there is the very significantly repayments ahead of schedule, repayments, that our customers do. We tend to have a high-quality customer base and indeed, a more affluent customer base in Jason's Westpac business, and they've tended to put away as much as they possibly can. So we've had quite a pickup over this past period over accelerated payments. That's been the major driver there. But, Brian, would you like to add anything?

[Brian C. Hartzer:]

Thanks, Gail. I think that's a pretty good summary. What I would add is that SVR is really just a headline rate and most customers don't pay the SVR rate. We use packages in various tactics in actually what we originate. I think the key point that you've made is that, we do think about this as a portfolio of brands, of channels, of products. We use offers very carefully in different places, and we have been affected, particularly in RBB, by the accelerated repayments. What we have started to do is compete a bit more aggressively and in the last few months, we've seen really strong application volume, and we feel pretty confident that we can ramp that up.

[Andrew Bowden:]

Brett?

[Brett Le Mesurier:]

Brett Le Mesurier from BBY. Phil, you -- talking about deposit growth slowing in this half that we're currently in, so it looks like we're heading towards deposit funding being about 60% of total funding. Is that the target level that you're heading for, the ultimate right sort of number? And if so, why would -- why do -- would you think that 60% is the right sort of number?

[Philip Matthew Coffey:]

If I think 60% is the right number, why do I think 60% is the right number? Well, I'm not sure the 60% is the right number, Brett. I do think that the outcome of that, whatever the outcome will be, actually functions just how much appetite you've got for wholesale borrowings. And I think we have actually recalibrated our wholesale to a point where we're very comfortable, both in terms of how much short-term we've got, where it's, particularly how much short-term offshore we've got, and what the maturity profile of our term wholesale looks like. So that means we can actually have a quite a degree of flexibility around where we source the next dollar of funding. I guess, my point is, if the system is giving you faster deposit growth than loan growth, and we're setting ourselves up to do well in that, then we'll probably see that deposit-to-loan ratio continue to improve. Where it settles, I'm not sure. As I said, I think it will be a function more of what you're wholesale appetite is than having a target number. We don't have a target deposit-to-loan or deposit-to-total-funding ratio. we have limits around how much wholesale we're prepared to have, and then we're basically looking to make sure that we get several funding for our loans.

[Andrew Bowden:]

I know it's a busy day for everybody, so I'm going to call a halt at that point. And thank you very much for attending both here and on the phone, and good afternoon.