Westpac Banking Corporation
Q4 2013 Earnings Call Transcript

Published: 4 Nov 2013

[Andrew Bowden:]

My name is Andrew Bowden, and I'm Head of Westpac's Investor Relations. Presenting today of course will be Gail Kelly, our CEO; and Phil Coffey, our CFO. And then of course, we'll have plenty of time to open up for questions. So with that, I'll ask Gail to take the stage.

[Gail Patricia Kelly:]

Thank you. Thanks very much. Thanks, Andrew, and good morning, everyone. Thanks very much for joining us for our 2013 full year Westpac results presentation. Let me start by saying that we're really pleased with this result. We do see it as a high-quality result. We've strengthened financially. We've deepened our relationships with even more customers. All of our business divisions, and indeed, all of our brands, contributed positively to this result. We're executing well in our strategy, and we're going to 2014 with good momentum. First, let's have a look at the numbers themselves. Cash earnings, up to $7.1 billion, so up 8% over the year. Our cash EPS, up 6%. Our return on equity came in at 16%, up 51 basis points. Our common equity Tier 1 ratio, up 9.1, so very strong 94 basis points improvement over the course of the year. In terms of ordinary dividends, as you would've seen, the directors declared a further $0.02, so $0.88 this half, up $0.02 on the $0.86 in the first half. And again, on the basis of the strength of our capital position, declared a further $0.10 special dividend. You would have seen our 5 strategic priorities over the last several results presentation. This is the shorthand version of them and showing that we remain strong, targeting our growth, driving deep customer relationships and showing that across our business, we work to simplify that business, and of course, pulling together as 1 team. You'll also have seen the construct that we have of strengths, return, productivity and growth. Now that's been really helpful for us within the business in terms of framing how we go about driving the business. It would be fair to say over the last 18 months or so, we've prioritized strength and return, and you can probably see that in our result. We're tilting a little more to growth as we go into the 2014 year, but you can be sure we'll do that with all the disciplines that you'd expect from the Westpac group. We're very aware that it's easy to achieve growth at the expense of strength, if you go up the risk appetite, or indeed, you can achieve growth at the expense of return if you price inappropriately for risk. So you can expect us to retain our disciplines. Let me then talk to those 4 dimensions and start with strength. And one critical element of strength, of course, is to look at the credit quality of an organization. And so if you look at our stressed assets to TCE, you see it comes in at a low 1.6% of TCE, which is actually half of what it was at the peak in September 2010, it came in at 3.2%. Our overall impairment charge for the full year, 16 basis points for the second half, 15 basis so very low level. I'll speak to capital more in a moment. On the bottom line there, we've actively worked over the last period of time to improve our funding profile and improving our customer deposit-to-loan has been an element, a specific focus across our business. Actually, if you go back to 2008, that deposit-to-loan ratio was at 52.6, so you can see what a substantive uplift that's been over the course of 5 years from 52.6 to now coming at 71.4. And of course, we're preparing ourselves now for implementation of the LCR, so focusing on the quality elements of our deposit raising. Liquid assets, up $16 billion to $126 billion, so really well placed to internally fund the Lloyds acquisition that we announced a short while ago. Employee engagement, one that I'm particularly pleased about, that's gone up 3 percentage points from last year to now come in at 87%, which is 2 percentage points above the global high-performing norm. And then 97% of our people had indicate that they understand how their work aligns to the vision and the strategy of the firm. So that you can just see is how powerful that could be for performance across our business. Right upfront, I mentioned that all of our business divisions have contributed positively to this outcome. Now Australian Financial Services, which includes Westpac Retail & Business Bank, St. George and RBC Financial Group, up 10% core earnings over the year and up 12% cash earnings over the year. What pleases me about Australian Financial Services is the portfolio approach that's being applied. We can see that translating into bottom line value. There's more coordination between the businesses, there's more sharing between the businesses. And there's really thoughtful allocation of capital across the different opportunities in those businesses. In Westpac Retail & Business Bank, the consistency has been remarkable here over the course of the past 3, 4 years since we first implemented Westpac Local. And you see that translated through to this year's results as well, 11% up on core earnings and 9% up on cash earnings. And indeed, the second half had core earnings growth of 6%. The hallmarks of the Westpac Retail & Business Bank this year has been very strong deposit growth, excellent expense management, very good margin management. And I have to also call out that this, our largest division, had an employee engagement of 93%. St. George has had a strong full year 2013 on the back of a strong second half of last year. So core earnings up 7%; cash earnings, up 17% with core earnings 5% up in the second half of the year. Highlights for St. George would be above system growth for mortgages, above system growth for retail deposits, again, good margin management and much improved asset quality. All of the brands within the St. George group have been performing. Bank of Melbourne's now into its third year, and it's exceeding its goals. BT Financial Group, well, if you look at 13 and 13, you can see it's been a really strong all-around performance from our wealth business, which is one of the areas within our group that we've been investing in and prioritizing from a strategic point of view. And I'm particularly pleased with that outcome when you bear in mind the extraordinary load and effort that's had to go into the regulatory agenda over the course of the past year. Westpac Institutional Bank, we are the lead Institutional Bank within Australia. We come out #1 in the Peter Lee surveys in terms of our relationship strengths, #1 in overall customer satisfaction. And for 10 years in a row, we've been the #1 transactional bank within Australia. So very strong levels of customer activity and strong outcomes in our debt markets business. Of course the headwind in the Institutional Bank has been margins. The compression of margins year-on-year has been 23 basis points down and 9 basis points down in the second half. The highlight, or the hallmark perhaps, of the Institutional Bank is the strength of its asset quality. And so again, both of the halves, first and second half, we've had a positive return out of the impairment line, overall $89 million positive contribution to earnings in that I mentioned, I think, you can see all the way through the GFC, the strength of the asset quality in our Institutional Bank. Westpac New Zealand, and this is in Australian dollars, up 8% core earnings and 16% cash earnings. If you want to see that in New Zealand dollars, it's 1% and 9%, respectively, with exchange rate movements having quite an impact there. And New Zealand is a fiercely competitive market, as you know. And there's also been margin compression in that market year-on-year, 10 basis points reduction in New Zealand. We've had a stronger second half than first half in New Zealand. And the call-outs I'd make there is strengthening the balance sheet, strong deposit growth, improvements in asset quality. And from a mortgage point of view, we focused on the sub 80% loan-to-valuation ratio in that environment. Westpac Pacific is our smallest business unit as you can see, but a really good cash earnings outcome of 34% up. And that's largely on the back of much lower levels of impairments over the 2013 year. Group businesses have had a large negative outcome over this year compared to last year. That's largely driven by our treasury business, which is 20% down in revenue turns this year on last year and with the biggest impact in the second half of this year. So much lower second half this year against what was a strong first half and a strong second half of last year. And Phil will give us more detail on that. So on capital, you would have noticed that 94 very strong increase in our common equity Tier 1 ratio that takes it up to 9.10 common equity Tier 1 ratio, which is, as you know, sector leading and well above our own target range of 8 to 8.5. And that's facilitated the declaration of that further $0.10 special dividend. Our $0.10 special dividend would amount to about 10 basis points of capital. So you can see, after that, we have plenty of headroom to absorb the Lloyds acquisition and still remain comfortably above our target range and comfortably ahead of our peers. Now, there's been a lot of commentary over the last week or so about capital, in particular, with regard to the D-SIB world, so let me just talk to what we know and what we don't yet know. What we know is that the D-SIB world is going to be imply -- applied within the Australian context. We know that's going to come into place from the 1st of January 2016, so 3 years from here. What we don't know yet is how much it will be. We don't know anything about the implementation timetable yet. In Canada, for example, a market that's similar to ours, the implementation timetable will be over 3 years, starting from 1st of January 2016 and there's some elements of capital measurement that haven't yet been defined. Of course, outside of that, we're also still awaiting finalization on the conglomerate rules. So once we have all of that, we will, of course, assess what the implications are for us, but as you can see, as we stand right now, both from an asterisk level point of view and in a relative sense, we're very well placed. Moving onto returns. And as you know, net interest margin is something we've been very actively managing in a very disciplined way over the course of the past few years and notwithstanding the headwinds that we've experienced this year in WIB and in New Zealand that I referenced earlier. We've really managed to hold our net interest margin more or less flat over the period of the full year, so down 2 basis points if you include Treasury and Markets impact and up 1 basis points if you exclude them. Key to managing margins is driving deep relationships with customers. We've -- there's a range of metrics that we look at to assess our performance there across both Westpac New Zealand as well as within Australia. Two of the major ones are the MyBank metric and the wealth penetration metric. The improvements there, of course, flow directly to supporting the increase in the customer return over credit risk-weighted asset that you can see in the bottom left hand part of that chart. That's something that all of our business units focus on as a metric of quality, of the customer business that they're writing. Return on assets, pleased to see the increase there to 1.18%, that's again, in the light of the very significant uplift that we've had of our funded liquid assets. We're also pleased with our return on equity, coming in at 16%, well above that line in the sand of 15% that we put in place 18 months ago. Moving to growth. Well, we've targeted our growth in a number of areas. Deposits, all elements of wealth, Bank of Melbourne, Asia and, indeed, also driving additional adoption and facilitating further take-up of mobile and digital with our customers. Customer deposits I've referenced that already, up 10% over the year, 1.3x system growth in household deposits and really a strong story for us. In the wealth area, you can see that FUM and FUA are both up quite strongly over the course of the year. Obviously, aided by strong, stronger markets, particularly as the year progressed. But also, we're very happy with the net flows that we've had in those parts of our business. Insurance premiums, well up both for general and for life. And that's largely on the back of the cross-sell activities across our own customers through our banking distribution networks. Bank of Melbourne, where we've been steadily growing our overall Victorian market share across the group, and the activities have been Bank of Melbourne has assisted us with that. So in Bank of Melbourne, we achieved 3x Victorian market share in mortgages and 5x Victorian market share in deposits. And we've grown our overall customer numbers by 10%. In Asia, we've set about, in a very disciplined and steady way over the course of this past year, putting in place new infrastructure, bringing on board some really quality new people, building out new platforms; for example, our trade platform, our new capabilities; for example, the Market Makers' License that we were awarded with in the middle of this year to facilitating the Aussie-Renminbi trade. You can see the trade volumes in that slide have picked up very substantially. Of course, they're offset by margin compression in that region. But overall, our revenues from our Asian business is up 33%, that's in USD. On digital, we're following our customers here in lots of ways. Our customers are preferring to deal with us digitally. And mobile, that's pretty exciting for us. We are enjoying providing these facilities and services for our customers, it does drive deeper customer relationships, the deeper the penetration you have of digital and mobile. And we're doing some very innovative things in this space that I'll touch on briefly at the end. In terms of lending growth, our overall lending growth in a subdued environment, both New Zealand and Australia, is up 4%. And our Australian mortgage growth has been the major part of that growth and that's up 4% as well. On Australian mortgages, we achieved 0.8 of system for the full year 2013 with some pickup of momentum in the second half. You can see on the chart at the top there that there's been a high level of new lending in the second half relative to the first, but also a high level of repayments in the second half relative to the first in this declining interest rate environment. We look into grow our mortgages at about system growth over the course of the 2014 year. We determined to do this in a sustainable way, and there are a number of areas that we're focusing on to achieve that, starting with consideration, increasing the customers' consideration of the various brands that we have for their homes. And that goes to marketing and goes to promotion. We're also increasing our sales intensity and sales practices and focus across our distribution networks. Within Westpac Retail & Business Bank, we're increasing the number of people we have available for sale. So our home finance managers are being increased in that brand. And then the range of things in the servicing front that we're working on to improve, be it time-to-approval, time-to-settlement, the top-up processes that we have, the valuation processes that we have. So a range of activities underway to assist us to get that 0.8 up to around system growth for the full year 2014, but do that sustainably. With regard to business lending, well, that's been modest as you can see over the course of the year. We've had some increase in Westpac Retail & Business Bank. In fact, we grew above system in that part of our business. And some increase in WIB as well, but that's been offset by the runoff of stressed assets. Looking forward, there is some increased confidence across the business community, but that's yet to translate into any drawdowns or actual investments activities. So time will tell as we get into the early part of next year. Productivity, the fourth element of those 4 dimensions that I spoke of earlier and a really important one. I remember standing here in 2009 and sort of reflecting on the new world that we'd be in, post the GFC, and that deleveraging was going to be a very substantial trend. And we could expect much lower levels of credit growth, and therefore, building out productivity as a core competence, as a core capability was going to be crucial for the future, and particularly in the light of the investment that we knew we wanted to put into our business. And so we started out on a rolling series of programs. And you can see those listed on the slide that have led to both cost benefit as well as revenue uplift over the period. In fact, from a cost benefit point of view, over the 5 years, from 2009 through to today, we've delivered over $1 billion in savings from these programs. But the critical thing here is not just sort of cost programs. It's actually pretty much of our driving a productivity culture throughout the organization. So we simultaneously started that some years ago driving lean capabilities and thinking and really a revolution across our business of everyone thinking about how do we simplify and streamline our business to give a better experience for customers and make it a whole lot easier for us to deal with ourselves. And really, this year 2013, we've got some real traction on this, I'm delighted to say. And you can see on that slide, a range of the simplification benefits that we've delivered over this year. There is a long list that that's a much shorter subset of them. But they're going to simplify processes, taking out paper, reducing over customer complaints, illuminating rework, using self-service for our customers, so that you don't need to actually do manual sorts of transactions and the like. So quite a significant list really driving savings for us. The last thing I'd say about productivity is that we're also changing the way we work across the Westpac group. Driving flexibility is much more of a way of doing things in our organization, and that's very well received by our 35,000 employees. And to build a trust, and actually, it translates into a very high level of discretionary effort that our employees bring to work. And so with that, I'd really like to thank all of our employees for their hard work and their performance this year. Before I hand over, to sum up and then hand over to Phil, let me just say a few words about some of the very significant initiatives that cumulatively are going to change the experience for customers over the medium term. Firstly, on online and mobile, as you know, is part of our SIPs agenda. We've been running with a new online application, and this is now in pilot with 4,500 customers and will shortly be rolled out. And we're pretty excited about the features that it brings to the market and think it will be leading in our market. Of course, it offers real-time look at your real-time running balances, 3 years history, transaction history, a range of self-service situations for customers that they can actually tell us if they're going overseas, if they'd like a top-up, if they want you to change anything in their situation with us. From a business customer's point of view, they can access both their business and their personal customers' relationships or accounts with a single log on, which is something our business customers have told us they'd like to do. We're coupling the work in mobile and in online with very substantial changes to our distribution network as well. So smaller physical footprint, more highly skilled people in our branches and a lot more use of smart technology and capabilities on 24x7 basis in our distribution network. Bank Now is the program name for the initiative being rolled out across our Westpac Retail & Business Bank distribution chain. And we've got 17 Bank Now branches up and running already. And Jason tells me that they'll be, on average, 1 per week over the next 2014 year. This is early days, but the benefits of coming through in the sense of about 10% uplift in revenue from those branches that have been converted to our Bank Now sites with lower levels of queues, obviously, and much high levels of customer satisfaction. SME is one of those areas of targeted growth for us. It's an area, we believe, that we have room to grow. We're lower than the natural market share that we should have when you bear in mind the strength of our brand. And we've got different models operating in the different parts of our distribution business. Within St. George, we've been piloting something called, Business Connect. We've piloted in 30 branches so far. Effectively, it's a videoconferencing facility from branches into a central area. And that central area, which right now is in Kogarah, it provides access to all of the expertise that a business customer might want from credit expertise to relationship management to equipment finance leasing, transactional banking capabilities, financial market capabilities. This is being really well received by our branch staff as well as by customers. And again, early days, but the signs of improvement are customers leveraging this service have gone from an average of 1.6 products per customer to 4.5 products per customer. St. George will be rolling this out to a further 150 branches over the course of the next financial year. In Westpac Retail & Business Bank, we've got a very extensive physical footprint through our branches, through our local business bankers. Our bank managers and personal bankers, in fact, the strongest footprint of salespeople across any of our peers to support in the SME segment. So more focus there, too. Wealth is an area, as you know, that strategically we're driving and continuing to build our competitive advantage. We're in the midst of -- or early days still, but underway with our new wealth platform, which will truly transform our wealth business for us. It's a straight-through processing arena. It will serve to consolidate all of the different platforms that we have on to one. It will add on new features and capabilities for our bankers as well as for customers and very much integrate banking and wealth for our customers in one platform. And as you know, we're doing that through our distribution channels as well. And the AFS model really helps us with that, having our people at the frontline really think wealth and banking in one. So supporting our customers total needs. And as you know, our Super for Life initiative has been really so well received by our people in the frontline. It's probably the best example we've got of that. We still routinely sell 1,600 Super for Life products through our retail distribution. We've got close to 400,000 customers in Super for Life right now and $3.7 billion in funds under management. The last thing I'll mention is customer information, which under Brian's leadership has been a huge area of focus for us and improving our data management capabilities. And of course, the new world here is not generalized information, it's got to be specific and tailored and useful for a specific individual. And so you'll see as is reflected on the slide, that over last year, we've sent out 59 million specific-tailored pieces of service information to customers to really help them and live their everyday lives and a lot more focus in here. And this is certainly the way of the future. Let me sum up then to say that we see this as a high-quality performance and a strong performance. We really aim across our business to drive balance and to drive consistency. We're disciplined in the execution of our strategy. We have a best-in-class balance sheet with strong capital generation and all of our business units are -- have performed very well in 2013 and have good momentum going into 2014. So with that, let me thank you and hand over to Phil.

[Philip Matthew Coffey:]

Well, thanks, Gail, and good morning, everyone. As we've done in recent periods, I'll focus on areas of special interest or areas where I think some additional data will assist analysis. And I'll also look in more detail around our second half performance in 2013. If we start with a breakdown of our earnings and looking at the quality and sustainability of the results, I think there are 3 major points to call out. The first, it has been the operating divisions that have driven the full year result with their core earnings rise being the primary driver of the growth we've seen in our cash earnings. And this is particularly evident in the second half where AFS division produced an excellent result with each business performing well, and that was on top of a good first half result. So AFS, which makes up 63% of the group's total earnings, recorded core earnings growth in the half of 6%. The second thing to call out is that the second half also experienced a substantial decline in the core earnings in the group business unit, mostly from a lower treasury revenue outcome. A $32 million reduction in research and development tax credits and $25 million in realized FX hedge losses also contributed to the decline. And I'll comment more on treasury in a minute. Thirdly, the group has continued to benefit from its very strong asset quality position with a slightly lower impairment charge in the second half, following a significant drop in the first half. Our improving credit position is a direct result of consistent choices that we've made over a prolonged period, and they are a hallmark of Westpac. On assessing the quality of the performance, there are a number of lenses that can be applied to see benefits from irregular items, from accounting outcomes and the more volatile aspects of the business. Looking at our cash earnings adjustments this period, you can see that this was a clean result. There's little to call out for the half, and we've treated all items consistently. There were no new infrequent items. Amortization of intangibles is almost identical period on period, and timing differences are the only element requiring adjustment. The better growth rate that you can see in our strategy-reported profit was mostly due to the unusual tax outcomes of 2012, where, if you recall, we incurred a tax cost associated with the new tax consolidation rules that were introduced that year. The impairment charge is another item that sometimes moves around period-to-period and you can see ours was straightforward. There was little change in the economic overlay in the half and only a small increase over the full year. And the lower impairment charge outcome was also consistent with other asset quality assessments, with a smaller deduction for regulatory expected loss and the GRCL unchanged in the half. Our most volatile items tend to be earnings from the management of market risk, and we do that in WIB and within Group Treasury. These are attractive ROE activities, even with the higher regulatory capital, but results are less predictable half-to-half. You can see in the bottom right hand of the slide that the markets-related contribution dropped in the half because of lower Treasury revenue. In particular, the relative stability of credit spreads and the flattening of yield curves saw returns in managing the liquidity book drop in the half. We also had lower revenue from the management of high-dollar interest rate risks in the overall balance sheet, and this activity was a good result for us over the full year, but it was lower in the second half. Market risk revenue in Institutional Bank was up in the half and in the year, in part because of the CVA adjustments and the benefits that we saw. But the overall markets-related income was a drag over the year and especially in the second half. When thinking about quality and sustainability, perhaps what's most pleasing with this result has been the consistent performance from our operating divisions. And you can see this in the chart at the top right of this slide. These divisions are our engine room and their contribution to cash earnings was up, and we saw 12.5% growth year-on-year and a 5.6% growth over the half. Gail has touched on returns in our performance and, as always, the net interest margin is a critical area of focus. This year saw similar trends to recent periods with high deposit costs offset by higher loan spreads, although the second half saw smaller impacts from both these factors. For the first time since the GFC, wholesale funding costs dropped sufficiently to provide a benefit to margins, and that gave us a 3-basis-point uplift in the second half. This benefit, though, was more than offset by the drag from holding more liquid assets and from lower returns on interest rates, which we earn on both our capital and on our low-interest balances. And I think that these 2 offsetting factors are likely to continue at least into the first half of 2014. Lastly, the drop in Treasury and Markets that I mentioned had a material impact on the most recent half, pulling overall margins down by 7 basis points. If you exclude these more volatile market influences, our underlying margins were flat in the half and up 1 basis point year-on-year. And so, you can see that in this year, as in previous, we've managed margins well, and we continue to focus on that and expect it to be an ongoing feature of our performance. The margin picture also incorporates a significant strengthening of our funding and liquidity position, and this had a number of elements. First, we've adjusted our focus over the year orientating towards deposits which are more sustainable and more highly regarded under the new regulatory rules, especially the LCR, which officially commences in a little over a year's time. Gail has mentioned the 1.3x system growth that we achieved in household deposits, and we've also had good growth in new business accounts that are specifically designed for the LCR regime. In our funding composition, deposits continue to grow in quantum as well as quality, while short-term wholesale continued to decline. Second, with the excess in deposits raised, we've prepaid $8 billion of government guaranteed debt maturing in the calendar 2014 year, and we reduced our long-term wholesale maturities by doing so. On the right-hand side of that slide -- this slide, shows the maturity profile of term debt over coming years and compares that to the borrowing programs of recent years. And you can see that maturities are relatively modest in that context. So the result of all of those strategies that I've talked to has led to a stronger balance sheet, but it did have a drag on margins. The upside, of course, is a better transition to LCR compliance over 2014 and gives us -- giving us the flexibility to respond to high credit growth as opportunities emerge. Lastly, on returns and quality, I draw your attention to the simple Dupont Analysis we've discussed over recent periods. You can see the drivers of our improvement in ROE, and one item we haven't yet mentioned that I'd like to call out is the increase in noninterest income, especially from wealth. This was an important but positive contributor over the year and, particularly, in the most recent half. The ROE improvement we've had over the year came with little change in leverage. All up, I've been pleased with the improvement of our returns over the year. It's been a key area of emphasis across divisions as we increasingly focus on and manage the business to its capital intensity, returns and the risk that each of our businesses have. Gail has highlighted the importance of productivity for the Westpac Group and ongoing expense disciplines continued. Over the year, productivity savings from previous and new initiatives offset the bulk of the operating expenses uplift, and the net of those 2 items saw cost 0.6% higher. Two other factors drove the overall reported increase in expenses. The major item was the impact of investment and regulatory change, and this included $145 million in the introductory cost in growth and productivity initiatives, including our expansion in Asia across Bank of Melbourne and investments in wealth. There was a $60 million uplift in amortization and depreciation expenses and a $35 million increase in onetime regulatory cost to do with wealth regulation around the Stronger Super and introduction of FOFA. The second item to call out is the impact of FX translation on our results, especially from the stronger kiwi dollar. Translating our global expenses into Australian dollars added $45 million or 0.6 percentage points to our overall annual expenses growth. So underlying expense growth was a shade under 4% for the year, and we believe we've continued to get the balance right of investment and savings to generate core earnings growth, both today and over the medium to long term. We lifted our investment spend in 2013 to $1.15 billion. Our investment has tended to average around $1 billion annually, but the timing of various projects does have an impact year-to-year and you can see how that has played out over the past 3 years. The direction of that spend has changed, with the SIPs program winding down and a much greater weighting toward growth and productivity initiatives. The regulatory change requirement has also grown and, in wealth, there were really some specific requirements that we had to achieve and specific milestones that we had to achieve in the 2013 financial year. Within our overall investment spend, the proportions of expense and capitalization has been very stable over the 3 years. Our impairment result was clearly a highlight, underpinned by a material improvement in the quality of our portfolio. Our stressed exposure ratio improved by around 18% over the half. And the composition of this improvement was also really encouraging, with a $680 million fall in impaired assets, a $190 million fall in wealth secured but 90 days past due and a $1.1 billion fall in our watch list and substandard categories. The significant drop in impaired assets mirrored the continuing downward trend that we've had in new and increased impaired loans. Looking across the various industry segments, you can see that property exposures have continued to be the biggest part of our stressed portfolio, but also the biggest improvers. The reduction in stressed in that part of the portfolio reflects improving industry characteristics with better asset market supporting sales and restructuring of clients. We've used the improved conditions to sell down impaired assets and to facilitate selective refinancing. There has been some modest deterioration in utility and mining sectors in line with specific industry and customer issues, but they're not a major issue for our total portfolio. This is a very strong picture overall for us and reflects the benefits of remaining disciplined on asset quality through the cycle. The lower impairment charge that we recorded during the year was mostly in those businesses with heavier commercial exposure

[Andrew Bowden:]

Thanks, Phil. Okay, look, I'm going to make sure I get to one question for everyone this time. That saying, Jon, would you start off with a...

[Jonathan Mott:]

Jon Mott from UBS. Just a question on mortgage loans, and I know with the book movement, there's a lot of talk, the paybacks as well, but more on the flow of new lending. If you look at your book, naturally, overweight New South Wales with St. George and with Westpac history, also overweight investment property. So they're the hottest areas to the housing market in the moment, especially Sydney investment property. So firstly, there's a couple of parts to my question, Andrew, but the first part is, should you be doing better, given your natural strength is New South Wales and investment property? And secondly, if you go on from that, is there any concentration risk you'll overhit given this Sydney housing boom does continue? Do ever get to a stage where this becomes a concentration risk which could hit that? And another point within that investment property, which we're saying, is Self Managed Super Funds and the growth of these, a lot of concerns around the industry, especially given potentially nonrecourse nature of Self Managed Super Fund investment property lending. Is that something that you are concerned with? And is this something, as an industry, we should be concerned with? So 1 question but with 3 parts.

[Gail Patricia Kelly:]

Thanks, John. Well, let me kick off. It might be useful, Brian, to ask you as well to give your thoughts on volumes and your trajectory particularly as it relates to New South Wales. So as you heard me say, we have picked up our lending momentum into the second half. And clearly, that's benefited by the activity -- the heightened activity within New South Wales and, yes, we are well positioned for that. So I think our applications half-on-half are up 16%. It's only now beginning to translate into sort of bottom line growth, I think, in September was the first month that we had a real pickup in bottom line growth, and we achieved 0.9 of system across the group in September. So good to see some of that translating. I mean, on New South Wales, in terms of a concentration issue, look, I don't think that we're overly concerned about that. I mean, it's markets we know well, our brands are really well established here. Our overall credit quality, as you know, is excellent. All of the metrics and underwriting standards that we have are excellent, so we're not concerned about that. On the Self Managed Super side of things, look, it's off a small base. I mean, we've got, what's the number, it's about $3 billion, I think, in

[Philip Matthew Coffey:]

Less than that, yes.

[Gail Patricia Kelly:]

Less than that of lending in Self Managed Super. And there's a range of additional requirements that are in place for lending through that kind of vehicle, additional underwriting standards, as well as, obviously, guarantees. But why don't you amplify that answer, Brian?

[Brian C. Hartzer:]

Thanks, Gail. I think Gail has given a good summary, Jon. And the starting point is to say, we're really pleased with our position. I mean, in another life, I would've killed to have market share of 23%, 24% in mortgages across the country, and it's a really strong position that's well diversified by state and across our brands as well. So we feel really good with our starting position. Now we're really trying to run this business sustainably and, as we talked about at the half, our position in mortgages reflected the fact that we wanted to concentrate on deposit growth and quality deposit growth, in particular. And I think growing household deposits at 1.3x system and showing the revenue growth that we were able to get suggest that we played our cards pretty well for this year. But then, as we also said at the half year, we want to increase our exposure to mortgages, as growth is picking up. But we want to do that sustainably as well in the same way that we tackled the deposit piece. And so, as Gail said, we're working across a number of different areas. So starting with the marketing, thinking about our sales capacity, thinking about our sales effectiveness and thinking about the processes that customers go through when they apply for loans. So we've been working on all of those things and the 0.9 of system that we achieved in September suggests that we're getting some really good momentum across that. I can also say that in the last number of weeks, we've had a significant pickup in application volumes beyond that as well. So we feel like we've got some good momentum and heading in the right direction. From a diversification point of view, again, I'm very pleased to have the position that we've got in New South Wales, biggest state, lots of opportunity and we feel good about that. But you can also expect that we're running the business from very much from a risk point of view. We think that having high-quality credit is got to be one of the hallmarks of Westpac. And so, we are constantly looking at concentration risk and looking at opportunities to make sure that we're well diversified. I think the final point on the credit side, though, is that the loans that we're writing today are the same quality as the portfolio overall. So there's been no degradation. And so, we feel pretty good with that. On the Super side, Self Managed Super Fund, as Gail said, are less than $3 billion. It has been growing pretty rapidly but we put that through a whole bunch of extra tests

[Andrew Bowden:]

Thanks, Brian. Victor up the back there.

[Victor German:]

It's Victor German from Nomura. I was hoping to ask you a question with respect to Treasury income. I understand it's very difficult to forecast, but it seemed quite significant a decline and I also note that value at risk looks lower in this half. I was just wondering if you can offer some observations in terms of whether there was anything specific that you can call out within for in this half and whether you've changed any of the risk settings? And also, perhaps, if you thought that 2012 or first half '13, second half '12, which is abnormally high levels and we are now entering a more normal environment, just some observations on that?

[Philip Matthew Coffey:]

It's always pretty dangerous talking about normal environments, but I, look, I do think that the single biggest factor that will drive the outcome in our market-risk activities is the nature of the environment in which they're operating. And the more volatile the financial markets, the more value that they can actually derive for the company in managing the risk that they do. And in Treasury, it's managing the full gamut of risk that we have in the balance sheet. And so if you go back in time, you'll see that the times of most volatility around the GFC was the time when they generated the most amount of value. In the last half, 2 factors I called out that actually underpinned the reduction in revenue -- there's no losses here, we're talking about less revenue. And they are that if you look at credit spreads, they were really flat over the half and the credit curve was very flat. And that's a difficult environment in which to add a lot of value in managing liquid assets. And so, the good income that we generated in the first half was not repeated in the second half. The observation on VAR actually goes more to the management of A-dollar interest rate risk in the balance sheet and, although that there were cash rate declines in the second half, a lot of that had already been built into the market curves, as we came into that second half. And so the lower risk was actually reflective of both lower volatility in the market and lower risk opportunities that were being managed by the Treasury, and that also led to lower revenues. So the risk in measured by the VAR and the returns were very much related. Looking forward, I think the best thing I can do is point you to use your own expectation in terms of how volatile markets will be. Stable markets are actually great for the lots parts of the company, but they're not great for managing market risk and adding value through that.

[Victor German:]

So there were no one-offs?

[Philip Matthew Coffey:]

No.

[Gail Patricia Kelly:]

An extra comment I would make, because I really think we have a great team that's very stable and has been all the way through the GFC with us and Curt and Carl Rowe [ph] and Jo Dawson, and so I'd back them if there's opportunities to add value to do that.

[Andrew Bowden:]

Brett?

[Brett Le Mesurier:]

Brett Le Mesurier, BBY. Well, I, Phil, a question on your net interest margin. The wholesale funding benefit was 3 basis points in the half, notwithstanding the fact you continued to increase the average duration of your wholesale funding. So I've got 2 questions. Sorry, Andrew. First one is if you finished increasing the average term of your wholesale funding? And what's the likely ongoing benefit to net interest margin from the more favorable wholesale funding conditions?

[Philip Matthew Coffey:]

Thanks, Brett. Look, thank you, for actually noticing that we've increased the average return of our wholesale borrowing. It is a real strategy for the company to do that, but also to take advantage of when markets give us those opportunities. And so when there's investor appetite for longer-term in a good kind of risk-return point of view, then we will try to push out our term wholesale borrowing. And so, I don't think we've necessarily finished it. It will, once again, it will be a function of what the opportunities are that we get. We look really hard at what that picture of our maturing profile of term borrowings looks like, because that's -- a point I raised about that was because that is now quite modest, looking forward, if we see a situation where lending growth picks up faster than our deposit growth is able to fund, then we have the opportunity to go back into the term markets and raise some more. And so we would do that in the circumstances where lending growth was giving us those opportunities. And part of the idea of pushing out your term wholesale is to give you sort of those sort of opportunities going forward. In terms of ongoing benefit, we had still, as you look at our maturities in '14 and '15, quite a lot of pretty expensive term wholesale borrowing that is going to run off. And so those benefits will flow through in terms of lower wholesale costs, and they'll flow through as benefits to the margin. But as I also called out, the flip side is we've got a very low-interest-rate environment, and so the hedging on our low-interest balances and on our capital will continue to really offset that benefit on term wholesale. And I see those 2 things pretty much running as offsets, at least for the first half of '14 and probably for the most of 2014.

[Jarrod Martin:]

Jarrod Martin from Crédit Suisse. Gail, Phil, we've heard a lot of the banks talk about derisking their portfolios, better credit quality, and particularly, Westpac, prioritizing strength right up there. And in doing so, we're also in an environment where it's a very low credit growth environment. So at the risk of speaking out of school, are banks not taking enough risk? Are banks not providing credit to the economy enough because they're prioritizing shareholder returns over being out to give credit to businesses to grow and ultimately that's to the detriment of the economic growth over the medium term?

[Gail Patricia Kelly:]

Look I think the issue is being more just the low subdued environment, there's been less demand, and that's driven obviously very competitive environment for all of us. But there's been less demand, and it's because of the lack of business confidence that we've had all the way through the last 18 months or so, even longer. And that's driven the subdued environment. Now we're beginning to see that pick up and I think all of us are ready and willing to be part of that and support our customers as a turn -- increased confidence to additional investment. So it's been more a function of less demand. I don't think that we are out there not lending and therefore, damaging the economy.

[Andrew Bowden:]

James?

[James Freeman:]

James Freeman from Deutsche Bank. Actually very similar to Jarrod's question. Just wanting to sort of understand the balance sheet strength and the conservative settings that you talked about. What we've sort of estimated is that it's costing you somewhere in about 1% to 1.5% off your ROE? What kind of environment changes that where you actually are happy to let go of the credit quality you're holding, let go of the capital, let go of the liquidity a little bit more to help sort of realize that return opportunity for shareholders? What kind of conditions do you need to see or are you basically just setting Westpac up for a solid sound lower ROE bank?

[Gail Patricia Kelly:]

Well, let me start, and Phil you can add in. Look, I think we've done a good job this year, if I may, if you think about ROE up to 15%, so a good -- up to 16%, so a good increase in ROE. If you look at our Tier 1, a very strong, up to 9.10%. So we've really strengthened that through as Phil indicated in his remarks, through the performance of the group and the organic growth and cash earnings within the group. So I think we've done a really good job. If you look at our revenue over this past year, we're 4% up in revenue. And although, and there's some other banks may have had higher lending growth, we have had higher revenue growth overall. So I think discipline and consistency and balance are the kinds of things that we want investors to have in their mind when they think about the Westpac group. But with that, Phil, you may want to give a bit more.

[Philip Matthew Coffey:]

Look, I think the construct of that risk, return, growth and productivity is the way we think about it. And as Gail mentioned, we certainly have had a heavier prioritization of strength and return in the last 2 or 3 years. And that, we think was the right thing to do. And it's allowed us to position ourselves to meet kind of regulatory hurdles. It's allowed us to improve our overall returns. And you can see the benefits of it flowing through in terms of the capital ratio, because your lower risk-weighted asset growth because of high credit quality leads straight through into your better capital ratio. But we're not a believer that you want to keep strengthening the company forever. And as Gail mentioned, we are looking to see -- to use that stronger base now to move towards both financing with the capital sense and with the funding sense additional growth. And we think that, that's the way to play it. It has been a low period of credit growth, so it's been a great opportunity for us to improve the funding position of the balance sheet, as well as the capital. But you don't do that forever, and you do it for the purposes I mentioned, which is to position yourself to better growth coming forward. I don't think we sit and feel that we've got a lower ROE as a consequence of that. We think, over time, the recalibration of capital and the equalization of that capital across the group will allow us to have the relative capital position and relative ROE position that's appropriate for the company and it will be better.

[Andrew Bowden:]

Richard?

[Richard E. Wiles:]

It's Richard Wiles from Morgan Stanley. Phil, in the 23rd, I knew your revenues grew at a slightly lower rate than your expenses, and that's actually consistent with what you said last year in your outlook commentary, you're looking to manage revenue and expense growth to achieve core earnings growth. I have 2 questions. Firstly, why are you targeting core earnings growth rather than positive jaws? And on Slide 12, you show the annual expense savings. Can we expect them to go up or go down in 2014?

[Philip Matthew Coffey:]

I guess the answer to the first part of the question, Richard, is that, with -- the whole point of positive jaws is to grow core earnings growth. But you can achieve a positive jaws and subachieve on core earnings growth. If we don't invest for future revenue, then in this particular period, we can have lower expenses and positive jaws. But that won't give us the better core earnings position in the future. And so we've tried to continue to focus on giving ourselves the capacity to invest for future revenue and recognize that we have to gather, live within those means from period to period. But we will constantly look to see if we can get higher revenue growth because, frankly, when your cost income is at 40%, then every dollar of revenue growth generates a decent core earnings feature, and so that's our challenge. The challenge we give our operating divisions is to find productivity savings year after year after year to offset the natural increase in their operating cost and to give us the wherewithal to continue to invest. And that's what we've been doing in the last few years, and that's what we'll continue to do. The challenge is if we don't find those savings, then you start to think what we can invest less and what does that mean for the future. And so all of our operating divisions understand that is the requirement on them, and they start every year thinking about how am I going to position the company and their part of the company to be in a better position starting the following year in terms of productivity savings they've been able to identify.

[Richard E. Wiles:]

And the expanding expenses for the expense savings next year, Slide 12?

[Philip Matthew Coffey:]

If it's to do with productivity savings, then I will think I was trying to answer it by saying, we will continue to have the focus on driving our productivity savings to offset those operating cost increases that will come again with this in 2014.

[Richard E. Wiles:]

But why -- I can understand why the investment spend is not set at the start of the year, I would've thought you'd have a pretty good idea on what level of productivity benefits you've got locked to.

[Philip Matthew Coffey:]

Yes, and they are...

[Gail Patricia Kelly:]

To offset the operating cost.

[Philip Matthew Coffey:]

To offset the operating cost increases that we will be having as a consequence of wage increases, inflation, et cetera, et cetera.

[Andrew Bowden:]

Mike?

[Michael Wiblin:]

This is Mike Wiblin from Macquarie. And just another question around the offsets. Phil, you talked sort of about the wholesale side of things, which will help on the lower rates and liquidity drag. Your deposit performance has been excellent, again, but it has been a bit of a drag on the margin. I mean, are you finished there or do you think there's a bit more to go? And how does that play into the margin, is that still a drag or not a drag or actually even a tailwind hitting into next year?

[Gail Patricia Kelly:]

We focused -- we haven't got to that huge journey of moving from 52.6% deposit-to-loan to now being over 71%. It's now more of a focus on the quality and mix of the deposits, particularly as we move towards an LCR regime. I mean the deposit-to-loan instruments are pretty blunt instrument really, but the LCR is going to be the new marching orders for us. So quality of deposit seems to grow through transaction accounts and growth of household. On the margin side, it's been a drag, as you said. However, I think there's been some signs of improvement over the last while. I hesitate to say, it's going to be a tailwind from, but it's certainly been less a negative.

[Andrew Bowden:]

Brian.

[Brian D. Johnson:]

Brian Johnson, CLSA. I have a question for Mr. Whitfield, if I may. Rob, if you ever look last year, we had 2 halves, we had about $65 million of charge and this result, and you begged me relentlessly about how good the asset qualities would sent 2 halves where you've had $45 million gain each half year. We also saw quite a chunky release in the expected loss of something like $200 million, back which is on Page 46. Can you just talk to us about -- can we expect another half of a gain going forward and what that might mean for the expected loss?

[Robert Whitfield:]

Thanks, Brian. And thanks for finishing with a congratulations, because the impairment story is one that I have been sort of emphasizing to you and to others for a very long time. And it is the result of many, many years of very disciplined risk management practices. We have a fantastic credit team and we really focus enormously on the asset quality of our book, and that goes from the front-line relationship managers all the way through to the support teams. In terms of 2013, you're quite right. We saw a positive benefit in both years and if you look at the composition of that positive benefit, as Phil pointed out, a large part of that was a lower individually assessed provisions going into 2013. As I look at the book going forward in 2014, there is nothing that concerns us that things that's likely to change with what we can see today, but it's very dangerous of course to predict what the environment is going to bring and what sort of credit conditions we'll see. But with the environment, we do expect to see and the conditions we expect to see, there are no large surprises that we can see on the horizon. So the quality of the book should continue to play as a strength for this year's banking 2014. In terms of whether that's going to be positive or negative, as Phil said, we don't give guidance on that.

[Philip Matthew Coffey:]

And just to add on the rate expected downturn loss, I think, point I'd make, Brian, is that the fact that, that dropped as much as it did in the half. I think is totally consistent with what we're saying around the improvement and the quality of the overall book.

[Brian D. Johnson:]

[indiscernible]

[Philip Matthew Coffey:]

Yes. We've made and -- obviously, across most commercial exposures, but WIB is a big part of that.

[Andrew Bowden:]

Okay, good. Couple of questions on the phone. We'll take one from Craig Williams, please.

[Craig Williams:]

Harmonized core of your Tier 1 was 11.6% and global minimum requirement is 7%, so that seems to suggest that you currently already have a very large buffer to accommodate the SIPs or counter cyclical buffers or the like, doesn't it? And the special dividend again this half sort of reflects that, and given core of your Tier 1 has increased from about 4% in a group level equivalent to something like 9% now on core of your T1 since 2007 to today and ROE remains strong 16% to -- or 20% plus on a tangible basis, investors shouldn't have too much cause for concern about returns you're going to achieve in the event that capital buffers are required to increase, is there?

[Philip Matthew Coffey:]

What can I say, something smart, like I get you to give Epper [ph] a call, Craig. But I won't say that. What I will say is I think, you're right in terms of highlighting just how strong we are in particular when you look at us from a global perspective in terms of the capital that we're holding. And we feel great about that and increasingly, I think it's recognized by global institution investors as well, just how strongly capitalized Australia -- Australian major banks are and Westpac in particular. How we move into accommodating the D-SIB is something that we'll all have a greater idea of, in the next few months, and what impact that might have on ROE, likewise. We'd be hopeful that we'd be able to do that in a sensible way, and reflecting the way that we've already set the company up in terms of having a strong capital position.

[Andrew Bowden:]

A question from Andrew Lyons on the phone too, please.

[Andrew Lyons:]

Just a question on capital, in the second half of 2013, you've seen your IRRBB risk-weighted assets charge nearly half. The commentary suggested that is largely due to a new regulatory model getting approval from APRA. Just 2 questions, is there anything else in that reduction in the IRRBB charge? And secondly more broadly on capital, I'll just be interested in any comments you can make just on the opportunity you think you still have to further manage or optimize your risk-weighted asset?

[Philip Matthew Coffey:]

Andrew, on the IRRBB, that was actually during quarter change and was processed through the Pillar 3 documents then and there's nothing else other than the model changes that we called out then, just that, I guess, gets more attention when you put it into the full year results as well. But no, there's nothing else to call out there. In terms of other opportunities, look, I think the biggest opportunity for the company is to continue to run our divisions with a really keen focus on the amount of capital that they consume and the returns they get in for that capital. And as that's being cascaded down through into the front-line, whether it be on an individual relationship manager basis, in an Institutional Bank or into various sort of segment analysis that Brian is doing, we're seeing the front-line think of ways to actually improve the way they can get a return on that capital. And that is, I think, the most encouraging thing in terms of feeling confident about how we're going to be able to continue to both achieve the right amount from a regulatory point of view, but also keep our ROE in good health. We don't have anything other than what I've already called out in terms of the major moving parts, which are obviously D-SIB, but also how the conglomerates rules finally get landed, and they will be, I think, significant issues over the course of 2014.

[Andrew Bowden:]

Andrew?

[Andrew Hill:]

Andrew Hill from Bank of America Merrill Lynch. Just question again on credit quality, If I look at Slide 54, at the impairment charge off, right, that's 16 basis points this year, it's lower than it's been in more than a decade. If I look at your forecast for unemployment for next year, you've got it going up to 6.5%. I'm just wondering, where is the stress point in terms of unemployment given you -- they seem fairly comfortable on the credit quality outlook? And secondly, given the changes that we've seen -- been seeing in the property market in terms of confidence indicators, are you starting to think that, that unemployment rate might not go as high as you're actually forecasting?

[Gail Patricia Kelly:]

Well, I'm hopeful it won't go as high as what we're forecasting. Bill Evans is in the room here, and those are -- Bill's been consistent in that forecast for some period of time. It also drives Bill's forecasted view that interest rates, cash rates, again, to come down to 2% during the course of the 2014 year. I'm hopeful it won't go as high as that. We have of course seen unemployment higher than that -- and continued with excellent credit quality. So I'm not concerned that from a stress testing point of view, we've got a range of things that we do in the mortgage side, for example, we put buffers in, as you'd be aware, so that we can assist individuals relative to a much higher cash rate environment in terms of their ability to repay. So I -- we've been there before, in 2008, was in fact probably the most stressed year from a point of view of higher interest rates and higher unemployments and our mortgage book held up particularly well. So that was a very good active live stress test for us. So that's your first question, what was the second one, again?

[Philip Matthew Coffey:]

I think there's a question around 16 basis points versus the history, is that the question, Andrew?

[Andrew Hill:]

That was the first question. The second question is really around just in terms of -- it seems as though you think things are getting a lot better. Does that mean that your forecast around the macro is starting to shift?

[Gail Patricia Kelly:]

Yes. Look, I think, cautious about that still. There's more optimism, no doubt and clearly, some of that is being driven out of the election results and the open for business direction that the government has now sit. So there's definitely more optimism. It takes a while for that consumer confidence and business confidence to actually translate into activity. On the consumer side, we're seeing some of that increased confidence translate into housing activity, particularly in New South Wales and Western Australia, but it is still patchy, and I'd still say, relatively cautious. In the commercial side, again, more activity, high levels of confidence coming out of confidence surveys, so business is saying they feel more confident about the future. But you ask them, does that mean that they're going to do something today? The answer is no, not yet. So I'm still relatively cautious about the timeframe through which this heightened confidence is going to translate into actual credit pickup. But I'd much rather be where we are today than where we were a year ago, because having confidence is the first start down that path. So our actual forecast for credit growth, credit growth would have been around 3, 3.5 this year. We would expect that to go up to about 4.5 next year. Mortgage, credit growth is being about 4.5 this year. We expect that to be 5.5 next year. And business credits has been lower this year. We'd expect that to get to 2% to 3% next year. So that's as we see it right now.

[Philip Matthew Coffey:]

Yes. I'll just add on that chart, Andrew, 2 things to obviously call out

[Andrew Bowden:]

Chris?

[Chris Williams:]

Chris Williams from UBS. I've got a question about leverage, and if we look at Slide 25, where you highlight the dramatic 94 basis point increase in your regulatory capital ratios across the course of the year. That's suggesting that through a regulatory lense, your leverage actually declined by 11% during the course of the year. If we then flip back to Slide 20, and you're measuring leverage against your average interest earning assets, it suggests that leverage actually made no contribution to your improvement in ROE. So my question is, how long can we continue to see a divergent view between your interest earning asset view of leverage and your regulatory view of leverage? And the second part of the question is that we heard a lot about pro-cyclicality back when risk-weighted asset growth would outpace assets and lending growth. We hear very little about pro-cyclicality when risk-weight asset seem to never grow in this new benign environment.

[Philip Matthew Coffey:]

Okay. Look, on leverage, I've actually think the way to think about is, against your average interest earning assets and because the regulatory capital can benefit from changes in the risk components of your assets, as opposed to the overall level of assets that you're carrying, and so we would mostly point to that slide on Slide 20, as the picture of what's happening with our leverage. And I guess the point is, I don't think we should get overly fast, leverage may increase, just important to know what is the driver of your improvement in ROE. At the moment, because of the low credit growth environment that we've had, our ROE improvement has not been as a consequence of leverage. But that could happen in the future, and that would be actually a pretty good thing. But it's because we'd be able to be growing our business into a higher ROE. What was that, the pro-cyclicality question?

[Chris Williams:]

It really about the extent of pro-cyclical benefits in your risk-weighted asset base?

[Philip Matthew Coffey:]

I think there's no doubt that you get through, if first, you do get pro-cyclicality impacts and we are obviously seeing some of those benefits now. I don't think we would ever shy away from that, but you're almost always through cycles have very long periods of actually pretty benign credit, and then some pretty big sparky years of bad credit. And that they are quite small, they give you an average that's higher, but the distribution is not a normal curve, as you know, in terms of the outlook for impairment costs. And we are in that period at the moment of lower impairment costs than the average, but that can continue for quite some time.

[Andrew Bowden:]

One last question at the back.

[Scott Robert Manning:]

It's Scott Manning from JPMorgan. On the resumption of business -- sorry, mortgage credit growth that you're looking for next year, one of the things the market has pointed to time and time again over the last couple of years has been the pricing relative to peers. And you've been happy to run a higher discount strategy to give like-for-like pricing and you've been happy to grow it below system while credit growth has been low. How are you thinking about the application of that discount as you look to resume momentum in that business, and therefore, whether it becomes sticky to unwind that discount going forward, as you do increase the rates of growth? And secondly, you're looking to target more growth through the broker network, or change that proportion, or is it purely through the proprietary channel?

[Gail Patricia Kelly:]

I can see Brian wants to answer his question. But let me take of -- I don't think that we -- as you know, large proportion of our customer, especially in the Westpac brand, have a 70 basis point discount. And obviously, from time to time, depending on the size of the loan, depending on the customer, we give a higher discount, I don't think we're discounting any more release than our peers an average. And we pay a very close attention to the margin of the back book, as well as the front book. But as you heard me say, and Brian mentioned in his earlier remarks, there are a range of things that we're looking at to make sure that we can sustainably lift from 0.8 to a 1 time system that go to consideration, marketing promotions, sales effectiveness, service improvements and the likes. So this is going to be really disciplined, it's not just a simple equation of volume prices, there's a lot more to this. And the fact that we have a range of brands that we can work with as well

[Brian C. Hartzer:]

Sure. Thank you. Well I think that's a good opening for this. And the main point that I would say, is we're trying to run this business in a sustainable way and we think very much about our overall net interest margin, not just the margin on a particular mortgage product. So as we've managed our business this year, we're thinking as much in a way about deposit margins as we are about mortgage margins. And then within that, we have a whole bunch of different levers that we can use. So there is the headline rate of course, but then we also have funding cost to consider. We have product mix. We have business mix. And I think with respect to the overall question of discounting, we don't believe we're discounting more than our peers and we see that in our overall data. We do come in and out of the market from time to time, depending on what we're trying to do. But we're very conscious about what's, what do our pricing actions doing to our overall margin? And what's happening to our exit margins versus the portfolio margins? So given the things that we've done this year, when we look at the exit margin on mortgages, it's actually above our overall portfolio of margins. So that says to us that we're managing that pretty well. But again, I would come back to really the key thing here is, there seems to be this incredible focus on headline rates versus growth. What we actually see is these other factors like the marketing, like the sales capacity, the sales effectiveness and process has as much to play in as anything we might do on price.

[Scott Robert Manning:]

And broker utilization?

[Brian C. Hartzer:]

On broker as well, we think brokers are an important part of the mix, but we certainly feel that our biggest focus is on first party and we've seen a lot of the focus that we've had on sales effectiveness has helped lift the first party growth. So our use of brokers has been recently stable and we expect it to stay there.

[Philip Matthew Coffey:]

All right, with that, thank you very much, and good morning.