Earnings Transcript for ANZGY - Q2 Fiscal Year 2022

Jill Campbell: Good morning, everybody. Thanks for joining us for the presentation of ANZ's Financial Year 2022 Half Year Results. I'm Jill Campbell, I'm ANZ's Head of Investor Relations. We're here at ANZ's offices in Pitt Street, which is on the traditional lands of the Gadigal people. I pay my respects to elders past and present. And I also extend my respects to any Aboriginal and Torres Strait Islander peoples joining us for today's presentation. Our results materials were lodged earlier this morning with the ASX. They're also on the ANZ website in the shareholder center. A replay of this session, including the Q&A will be available via our website from about mid-afternoon. The presentation materials and the presentation itself being broadcast today may contain forward-looking statements or opinions. And in that regard, I draw your attention to the disclaimer on page 1 of the slide deck. I'll talk more about Q&A procedure when we get to that section of today's session. But ahead of that, a reminder that if you do want to participate in Q&A, you need to do that via the phone. Our CEO, Shayne Elliott; and CFO, Farhan Faruqui will present for around 35 minutes. After that, I'll go to the procedure for Q&A. Thanks Shayne.

Shayne Elliott: Thanks, Jill, and thank you all for joining us today. I'd also like to acknowledge the Gadigal people as the traditional owners of the land on which we're meeting today. And I have to say this is good to be back here in Sydney. It's the first in-person results we've hosted in some time, and it's an understatement to say that a lot has happened since the last time we met. I am really proud of how ANZ has supported our people and our customers through challenging times and how we've used that time to also strengthen the bank for the opportunities ahead. Now I'd like to acknowledge, however, that COVID has had a much bigger impact on some people than others, including some of our colleagues at the bank, and our thoughts remain with all of those who lost loved ones. Now on behalf of everybody at ANZ, I'd also like to express our concern for those affected by the floods here in New South Wales and Queensland as well as the truly terrible events in Ukraine. For Ukraine, we've been waiving fees on customer payments to various charities, supporting humanitarian efforts, while closer to home, we continue to offer financial assistance to customers impacted by those floods. Now not for a minute, dismissing these very real tragedies, it's actually pleasing to see a sense of optimism returning in our home markets, airports are busy, hotels and restaurants fully booked. And after two years of working from home, our offices and cities are coming back to life. Now regarding the first half performance, I'll cover the highlights and Farhan will go through the detail. Strategically, we made good progress, and we're better positioned for the future. Financially, we had a few headwinds, but -- and they impacted otherwise decent half. Cash profit was up 4% versus the first half last year, but down 3% half-on-half. Margins are closely managed, and return on equity at 10% was a reasonable return for shareholders, while the Board also proposed a dividend of AUD0.72 per share fully franked. We remain strongly capitalized with a common equity Tier 1 ratio of 11.5%. Over the past five years, we've led the sector in simplification and capital return, and we just completed our latest buyback of AUD1.5 billion. And that brings total capital return to shareholders over that time to AUD5.5 billion from buying back 160 million shares and neutralizing the dividend reinvestment plan. We were first to embark on simplification and prudently return capital to shareholders. We remain prudent through COVID, and we didn't panic to raise unnecessary capital. So managing shareholder capital has been a strength of ANZ and the Board remains intensely focused on capital efficiency and allocation. And as per our usual practice, we're taking the time to consider first and best use of any surplus capital, and we'll keep our owners updated as we progress. Productivity also remains critical. Now you will all remember, that four years ago, in response to a question on costs, I suggested that as we simplified the bank, it could be possible to reduce our cost by about 10%, closer to AUD8 billion. I made it clear we didn't have a detailed plan to get there. But we understood the importance of productivity to meet both the competitive and the regulatory challenges we faced at the time. At that time, it was actually a bold aspiration. Our run-the-bank costs were AUD8.2 billion and investments cost a further AUD600 million and costs are increasing every year across the industry. Now a lot has happened since then, including the significant cost of remediation post the Royal Commission and the impact of the ongoing reshaping of ANZ. But however you look at it, we've done an excellent job simplifying the bank and cost management has become a core capability. In the six months to March, as we report them now, the run the bank costs remain tightly managed coming in flat again at AUD7.4 billion on an annualized basis, and that's a material reduction since we set our aspiration. However, as inflationary pressures increase, absolute cost reductions will be more difficult. And with the shape of our business changing, a set cost target is less appropriate. However, we will not give up North Shire Away from the ongoing need to be simpler and more productive. We still have opportunity to simplify processes, automate where we can and drive benefits from adopting new technology. We've got a strong track record and a culture of cost management and that will remain. Now on the investment side, we've needed to, and frankly, wanted to invest more than we'd originally considered four years ago. To respond to the ongoing regulatory change, prepare for the fast-changing environment and most importantly, position for new growth opportunities. Now it's really important that we're held to account to deliver value from that investment. And the good news is that more is now directed at growth opportunities and less fixing issues of the past. Now I'm personally real excited about the investments we're making to build out a new retail platform, ANZ Plus, our new sustainable finance capabilities, a new retail FX proposition due later this year, and our expanding online SME platform, GO-BUS. Now investing to further build resilience and enable lower cost processes is also pretty critical. For example, we're investing to migrate applications to the cloud and roll out salesforce as a single customer service tool right across the group. We'll soon have one-third of our applications based in the cloud, and we're well on track to getting to about 50% in the next 18 months. Sales force is actually a really critical tool, simplifying our employee experience and making us easier to deal with as a customer. And to date, we've deployed it to 15,000 colleagues. Now in addition to that, we continue to invest in partnerships to drive better customer acquisition and engagement. In the half, we increased investment in Air Wallets, Valeant and Slip, and we completed the acquisition of Cashrewards. With Lindy, we launched our JV digital home loan proposition on to finance, and we'll soon launch new customer propositions with ADA and Cashrewards. Now to support our sustainable finance business, we announced Project Wheatbelt. We're partnering with Qantas and one of Japan's leading businesses in PEC to develop a biofuels and regeneration project covering millions of hectares in Western Australia. We also invested in pollination a leading climate change investment and advisory firm, and we've already developed a really strong pipeline of opportunity as a result. Now looking at our risk performance. Our customers continue to strengthen their own balance sheets, increasing cash balances and improving their resilience, and that drove a provision release of almost AUD300 million. And it's also a really good sign that the economy is recovering. But more importantly, it's a direct outcome of the decisions we have made to strengthen ANZ and remove unattractive, low return risk from our book Divestments over the past six years and our disciplined approach to customer selection, particularly in institutional, has reduced risk and improved risk-adjusted returns. And this is reflected in our internal expected loss rate, which is now 20 basis points versus 35 just six years ago, and it's a deliberate part of our strategy to improve quality of earnings. Now in a time of such uncanny, I'm actually pleased with our prudent approach to risk, even when it has come at a cost to short-term revenue growth. It will benefit shareholders over the long-term, and it sets us up well for the times ahead. Now, turning to our customer franchises, New Zealand grew across all business lines, while keeping a keen eye on risk. Institutional customer revenues grew very strongly with a focus on sustainability, high-quality, well-diversified balance sheet growth and solid growth in processing volumes for other financial institutions. Risk-adjusted lending margins for institutional actually increased. And soft and overlooked that our largest institutional customer segment is financial institutions, and they generate an annualized revenue of AUD1.65 billion, it's growing at double-digit rates and generates a return on equity above 20%. And a small but important subset of that is our business processing payments for other banks. It's growing rapidly, positioned to benefit from rising rates and already generates more than AUD150 million of revenue per annum, at an ROE exceeding 40%. Now in Australia, home loan processing improved and volume grew modestly in the half. And while early days, processing times are back in market and we lifted our capacity by 30%. In our commercial business, where we serve 600,000 small and emerging businesses, our focus on risk-adjusted returns drove a decision to stop acquiring asset finance loans through third-party channels. Therefore, the back book is in runoff and reduced AUD300 million in the half with a further AUD1.2 billion to go. So that means a modest reduction in revenue but, an increase in returns. But if you look through that book, our core commercial loan book is growing well and momentum increasing with risk-adjusted margins improving. Now with the impact of the pandemic now moderating and our balance sheet prepared to withstand any delayed economic impact, it's just time to reflect again on our long-term strategy. Since 2016, we've been simplifying and strengthening the bank, building more contemporary infrastructure to enable sustainable long-term growth particularly around the propositions of financial well-being and sustainability. Now our objective is to build a group with four strong growing franchises, a disciplined institutional bank focused on intermediating trading capital flow in the region. -- the leading New Zealand bank with the number one position in everything that it does, a repositioned and growing Australian retail bank driven to improve customers' financial well-being and a differentiated Australian Commercial Bank, helping customers start run and grow a small business. Now, by running them well together, we'll deliver the benefits of diversification and generate decent sustainable returns. And to get there, we identified five high-level streams of work. We've been executing them pretty well. But along the way, we had to deal with the Royal Commission, significant New Zealand regulatory changes and, of course, COVID. So while progress has been significant, we had hoped to achieve more by now, particularly in Australian retail and commercial, but we are catching up fast. As you know, we sold or exited 29 businesses, releasing billions in capital that has been returned to shareholders or deployed to other parts of the bank to fund growth. The only material non-core businesses left are our three remaining Asian bank investments. Institutional is now well run, highly disciplined and delivering returns comfortably above cost of capital. It will benefit from the sustainable finance super cycle, and there are material opportunities to further grow transaction processing for other financial institutions globally. New Zealand is continuing to outperform across all business lines. It's prepared for the RBNZ capital changes, and it will largely finish its major compliance program, BS11, later this year, well ahead of schedule. In Australia, customer remediation, which has been such a feature for all banks since the Royal Commission has now moved to the final stages of execution. The exit of non-core activities in Australia is also coming to an end. With ANZ Plus in market, it was time to bring together our digital and Australian Retail division under Miley while separating commercial out as a stand-alone division. ANZ Plus is a new retail bank built without the constraints of legacy technology. It's a new platform, a set of processes and portfolio of partnerships that will improve the financial well-being of our customers and drive market share growth and higher lifetime value per customer. Now using the playbook for BigTech, we focused on building a strong foundation and launching a minimum viable product. And since the soft launch -- many of you were there in late March. We've already built significant new features, including the ability to make payments through BPAY and PayID, immediate access to a digital card in your Apple Pay wallet an Android offering. And those are going to be available in the coming weeks with more features following quickly. So we'll roll out ANZ Plus more broadly with a marketing campaign starting in a few months. Now, as I mentioned, we separated commercial in Australia to give it the focus and investment it deserves. And while it's clearly early days, I've spent considerable time working with the team to refine that strategy and identify opportunities and I hope to share more of that strategy at the full year result. But partnering with the world's best service providers to help small businesses grow is going to be a key part of that future, and we recently achieved what we consider a major milestone. The ANZ and Worldline joint venture went live last month with world-class payments products for merchants in market by the end of this year. And I've had the opportunity to preview and test those capabilities directly and they're really industry-leading. So just in summary about our portfolio. New Zealand and Institutional have clear strategy, solid momentum and built on contemporary systems. In Australia, our core business is back to growth. And with ANZ Plus, we have a cutting-edge new platform to build on and finally in commercial, it's in the final stages of developing its own differentiated strategy. So as a result of the progress we've made, we're now able, as a group to move to the next evolution in building agility. So today, we announced our intention to implement a non-operating holding company. Now this is our view as a low-cost option for our future and will unlock value for shareholders over time. We've been actively engaged with regulators. And yesterday, we received board approval to submit a formal application to APRA, the Federal Treasurer and International Regulators such as the Reserve Bank of New Zealand. Now when that's approved, this will enable a new holding company to be created with wholly owned entities sitting directly beneath. The banking group would comprise the current ANZ Banking Group, but they'll also be a non-banking group which would allow us to bring the world's best non-banking tech and services to our customers. They take our investment in Partnership arm-1835i, for example. Under the new structure, most of these partnerships would sit in the non-banking group. It also allows us to acquire, develop and grow new products and technologies that improve the financial well-being of our customers without operating within the constraints of a traditional bank. Now it's entirely consistent with our strategy, to create a nimble responsive organization, and it's a very common structure with leading banks such as JPMorgan in the US, DBS in Singapore, and of course, Macquarie here in Australia, operating under such a structure for many years. There's going to be no change to how ANZ's existing banking operations are regulated. What APRA, the RBNZ and others want to regulate today, they will regulate tomorrow. But once approved by regulators, shareholders will vote on the proposal towards the end of this year. And I can assure you that we will be consulting widely on this change with our owners, our employees and other stakeholders. So with that, I'll now hand to Farhan to talk through the financial results.

Farhan Faruqui: Thank you. Thank you, Shayne, and good morning, everyone. It is indeed a pleasure to be here in person in Sydney. Last time I spoke to you from Hong Kong over a phone, which was not particularly pleasant. Our results today reflect the disciplined execution of our strategy and the benefit of our diverse portfolio of businesses, producing solid cash profit, EPS and ROE outcomes. I will take you through our financial performance and the factors that underpinned our solid result. In Australia home loans, after a challenging 12 months, we returned to balance sheet growth this half. In institutional, we saw targeted and profitable volume growth, with risk-adjusted lending margins increasing and banking revenues growing strongly half-on-half. Our markets customer franchise performed strongly this half, but lower balance sheet trading income saw total market revenue fall. In our market-leading New Zealand business, we again delivered strong home loan growth and displayed disciplined portfolio management. We have continued to invest at record levels in modernizing our technology and data architecture and reengineering our business processes to unlock productivity and increase our speed to market. A greater proportion of our investment spend this half was directed towards growth and productivity initiatives. We have proven our ability to manage run the bank costs well, which are flat again despite heightened inflationary pressures. And we also saw a net credit provision release this half reflecting an improved portfolio risk profile while balancing environmental uncertainties. Now, we pre-released information on our large notable items, and further detail is, of course, included within the investor discussion pack. As you know, L&I forms part of cash profit. We separate them out to provide transparency and aid comparison. But to be clear, we hold ourselves accountable for cash profit, including L&I, given that we pre-released the information on large notable items, which in aggregate amount to AUD43 million for the half, from this point onward, my reference will be to cash profit, excluding large notable items, and I'm happy to talk to them in more detail in Q&A should you desire. Let me start with NIM, where underlying margins for the half were down six basis points. However, and consistent with our update at the quarter, this was driven by a lower exit rate at the full year with the entry to exit reduction in headline margin only one basis point for this half. This was a result of strong margin management through disciplined lending origination and actively managing the pricing of our deposits. So for NIM in the half, price competition in home loans in Australia and New Zealand remained intense, contributing to asset margins falling. Customer preference for fixed rate home loans drove a mix decline, but this abated with fixed rate flows falling to 26% in the month of March versus an average of 41% for the period. Customer deposit growth outpaced customer lending again which saw liquid assets grow and have a modest impact on margins. And we also saw a benefit from our capital and replicated deposit portfolio with both volume growth and an increasing portfolio yield, which represents a turning point given reductions over recent years. Looking ahead, there are a range of potential tailwinds and headwinds to margins. We expect asset price competition, particularly in the home loan market to remain intense and may intensify further in a rapidly rising rate environment. Rising rates will provide a material benefit to our capital and replicating deposit portfolio, which I'll spend more time on shortly. We also expect customer preference to change as rates rise. We are already seeing Australian customers shifting back towards higher-margin variable rate home loans. Our leading franchise in New Zealand who are ahead in the tightening cycle, will provide us with important behavioral insights into the shift in customer preferences, where we are already seeing customers moving from ad call to term deposits, which are, of course, leading to deposit mix headwinds. But on balance, across the headwinds and tailwinds, we see second half 2022 margins as being slightly positive. Now, turning to our capital and replicated deposit portfolio. Yield curve steepened sharply this half. And we have started to see official cash rates rise across many countries in response to inflation, including as we saw here yesterday. Now while the timing and magnitude of any further official rate rises is unpredictable, we have provided on this slide an illustrative impact assessment on our capital and rate insensitive deposits portfolio, if rate rises unfold as predicted by ANZ economics. The current portfolio stands at AUD142 billion, of which roughly 25% and is sensitive to short-term rates, where we will see the full benefit of any rate rises almost immediately. The remaining 75% is invested out mainly across three years to five year terms. And we will see this benefit progressively over time as maturing tranches are reinvested at higher prevailing rates. As you can see, the impact is material and will manifest itself earlier in our New Zealand and international businesses who are ahead in the tightening cycle. All things being equal, rate rises could result in approximately AUD800 million of revenue upside over the next 12 months. However, please note that this impact is related strictly to our capital and replicated deposits portfolio. There are many other variables, as you know, outside of this portfolio, some of which I mentioned in the previous slide, which can affect overall revenues. I would now like to share with you our divisional performances. And as we go along, I'll try to highlight how our key priorities are supporting ROE and growth. Firstly, and very briefly our commercial bank, because Shayne has referred to it already. Lending volumes grew modestly, and importantly, risk-adjusted margins increased 10 basis points. Moving to our Australian retail business, while this was a challenging half in terms of revenue, including the impact of the discontinuation of the break-free package. Risk-adjusted margins were down in the half, but will benefit from rate rises as we look ahead. In particular, in our Australian home loans business, we did return the balance sheet to growth. We proactively managed volume, while focusing on improving processes and capacity. We did this by increasing automation, improving processes, and adding resources, which resulting in increasing available operational capacity by 30%. This, in turn, significantly improved turnaround times across all channels. We have exited first half with momentum in housing loan applications, and our near-term focus is to build on this in the second half. We did not and will not -- chase growth for growth's sake. We want profitable growth and will remain disciplined on margins. We are on target to grow in line with the Australian major banks by the end of our financial year, but we'll do so with an eye to our margin performance. So, in summary, we are turning the corner in our Australian home loans business. With ANZ Plus, as Shayne said, we are fundamentally transforming the retail bank for the long term. And as ANZ Plus gains momentum, we will start reporting more granular performance metrics and make a clear linkage between these metrics and the retail banking P&L. Moving to institutional. The first half result demonstrates the benefits of being a simpler, more resilient and disciplined business. Revenue, excluding markets, was up 5% in the half, and I will talk to the market's performance shortly. But I would like to note that the institutional business ex balance sheet trading, basically our institutional customer franchise, the revenue grew strongly by 9% half-on-half. This is comparable to how many of our domestic peers report their institutional business results. We demonstrated strong lending momentum with volumes up 8% directed towards our more profitable customers. The volume growth was relatively broad-based across various regions and segments, including strategic focus areas like financial institutions, sustainability and food and agri supply chains. Pleasingly, as Shayne mentioned earlier, risk-adjusted lending margin in Institutional grew 5 basis points in the half, demonstrating continued discipline in customer selection and pricing. The momentum in our franchise actually positions us really well for the structural tailwinds, which are emerging with higher interest rates and upcoming capital reforms, both expected to benefit our institutional business. Markets revenue, however, was down for the half at AUD812 million. But pleasingly, the customer franchise and markets performed well with revenue up 23% and customer flow in our core FX rates and commodities business stronger than the prior two house. Balance sheet trading income was lower partly due to adverse mark-to-market movements caused by wider credit spreads and also because of interest rate volatility. Looking forward, while financial markets are difficult to predict, we expect that higher interest rates and FX volatility arising from the return of meaningful interest rate differentials will continue to be constructive for customer flow in our core FX and rates businesses. Much like the business that Shayne referred to with an institutional, which is often neglected,, our payments in cash management business, which includes domestic and international payments and cash management is core to our DNA. And there's a lot to be excited about that business. This is a capital-light business that has delivered growth at scale with 1.5 billion transactions processed at close to 100% STP rates, during FY 2021, and at a 17% CAGR over the last two years. We have a market-leading position with a growing gap to peers. Our business has the highest market penetration and share of lead bank mandates and almost 60% market share of Australian dollar and New Zealand dollar volume in clearing. Our continued investments in payment platforms like Banking as a Service and NPP and deliberate growth in more profitable segments like financial institutions, positions us well to drive future growth. This is a business that today earns over AUD800 million per annum at an ROE greater than 40%, processing and facilitating the payments and cash management needs of our largest corporate and financial institution clients. And it's also a business that is favorably leveraged to both higher interest rates and higher transaction volumes. Another area I'd like to talk about is sustainability, which I'm, of course, deeply passionate about as many of us are at ANZ. And we see this here as our -- both our responsibility and an opportunity. We were the first Australian bank to join the Net Zero banking alliance and have committed to AUD50 billion of sustainability funding by 2025, a target that we have continually beaten and revised upwards. As Australia's leading institutional bank, we are well placed to defend and grow market share and are already winning a disproportionate share of the sustainability opportunity. For example, our sustainable financing volumes in terms of our participation have grown at 156% per annum since 2015, which is two times global average. Now practically, we are growing wallet in three ways. One, we are supporting existing corporate clients in the process of transitioning. Two, we are supporting emerging green companies and three, we're supporting our financial institutional clients who are wishing to invest in sustainable assets. Now it's important to clarify that the wallet growth in sustainability is only partly from lending. We are also supporting customers with a wide range of non-lending solutions such as advisory, debt capital markets and sustainability-linked derivatives. We are confident of our ability to continue winning a disproportionate share given the depth and breadth of our franchise, deep international experience, strong ESG capabilities and differentiated solutions and as Shayne mentioned, through our partnership with pollination, which has added to our capabilities and is already creating new opportunities with customers. In New Zealand, we saw another strong result from our market-leading business with revenue up 2% and lending volume up 4% for the half. We grew market share in home loans by 28 basis points, with volumes up 7%, despite intense competition in the market and risk-adjusted margins improved by four basis points, as we continue to closely manage returns in our business segment to reflect the changing capital environment. And now I'll turn to expenses. You have seen ANZ deliver disciplined cost management since 2016 and that discipline was evident again in the first half. On a constant currency basis and excluding the acquisition of Cashrewards. BAU costs were flat, as I mentioned earlier, despite heightened inflationary pressures and despite additional resources being deployed to process higher home loan volumes in Australia and in New Zealand. This strong outcome was underpinned by close to AUD100 million of productivity off the back of increased adoption of digital channels and customer self-service, process automation and simplification in our back office functions and continued rationalization of our property footprint. As Shayne said, our continued focus on productivity is non-negotiable, especially as we face into a period of higher inflation in the short to medium term. Our run-the-bank cost management and productivity focus has allowed us to invest at near record levels this half in order to build a simpler and more resilient business and to position the business for future growth. The cash investment spend was flat half-on-half, while investment expense increased 13%, driven by a higher expense rate. Our capitalized software balance fell to AUD924 million, the lowest amongst our peers. Proportionately, more spend was on simplification and growth initiatives this half as we passed what we hope was the peak in regulatory and compliance spend. As we look to the second half on a constant currency basis and excluding Cashrewards, we would expect cash investment spend and run-the-bank cost to remain broadly flat. Throughout the presentation today, Shayne and I have provided an overview of various investment initiatives that we are really excited about. The value to shareholders is essentially anchored on five key themes that underpin the bank we are building that has a simpler, more modular and cloud-based technology architecture that enables greater speed-to-market and greater operational resilience and efficiency, a more modern digital experience for customers and employees that drives better engagement and retention, more timely, accurate and easy-to-use data that provides better insights to customers and enables better decision-making by management, streamline business processes that leverage automation and machine learning, and a more operationally resilient bank with embedded controls that builds customer confidence and trust. We are building a simpler, better bank that's positioned for growth and has the agility to adapt and take advantage of the opportunities in a rapidly changing banking landscape. We will continue to have a focus on delivery and value realization and pursue this relentlessly. Turning to provisions, where individual provisions remain at historic lows this half as customers emerge from COVID with healthy balance sheet supported by low interest rates and lower unemployment. The AUD371 million release from the collective provision this half was a function of further improvements in the credit risk portfolio -- sorry, credit risk profile of the portfolio, while balancing uncertainty in the broader environment. Our collective provision balance of AUD3.8 billion is AUD381 million higher than pre-COVID and includes AUD618 million of management overlays for environmental uncertainties, and we believe this remains prudent and appropriate at this time. Our capital position is strong with a Level 2 CET1 ratio of 11.5% and it is this strong capital position that enabled us to profitably grow the balance sheet this half, mainly in institutional and in New Zealand. The underlying business earnings funded balance sheet growth and the non-credit risk-weighted assets, which is interest rate risk in the banking book. This is the investment of our capital and replicating deposits and given rates have moved significantly higher, we hold risk-weighted assets for the change in the value of these investments. Much of this is expected to unwind over the next one to two years. We completed the buyback this half and maintained the dividend at AUD0.72 per share fully franked, which equates to a 64% dividend payout ratio well within our targeted range. Among the big four banks, as you know, we have led the way on capital management for some time and capital efficiency and prudent use of shareholders' capital remains a strong focus for the Board. So to conclude a few words on my key areas of focus. We have improved our home loan processing capacity and rebuilt application momentum, and we aim to extend that momentum into the second half. We have launched ANZ Plus, and you will continue to see further feature releases this year as we move towards our beta release of a plus home loan offering later this calendar year. We will report on the key value metrics of ANZ Plus starting from second half 2022. We will continue to further build on the successes of the institutional business and our New Zealand franchise. While we continue to grow these franchises, we will remain vigilant around the discipline required on risk and returns. We will intensify focus on the execution of the growth strategy of our commercial business. We will continue to invest to grow our commercial business with a sharp focus on value realization. Simplification and productivity remains central to our strategy. And my team and I will relentlessly pursue this objective in order to make us a better, more efficient and resilient bank for our customers and for our employees. We will also maintain our capital management and allocation discipline and will continue to remain disciplined on customer pricing and on risk management in what will be a volatile environment ahead. Thank you, and I hand back to Shayne.

Shayne Elliott: Thanks. Okay. Now looking ahead, the operating environment will be very different. And as a company that is clearly tied to macro outcomes, we will need to change our business settings and investment priorities. With higher inflation, we're already feeling an impact on wages and staff turnover, which makes cost management more difficult. All else being equal, a higher interest rate environment globally will likely see industry margins expand. Now, to the extent higher inflation signals excess demand is likely to bring an end to the investment drought in Australia that began a decade ago. And as a result, we're already seeing stronger corporate demand lending demand from our business customers, particularly at the bigger end. And some degree, there are global supply chain forces behind that inflation, which means our trade expertise and funding are in even higher demand, and you can see that emerging in this half's result. And the impact on provisions is more difficult to predict. However, we're clearly at cyclical lows, and some customers will find the inflation and interest rate shifts challenging after decades of down trends in both. And this is when the tough decisions we've made on customer selection and long-term risk management will pay dividends. And the adjustments may be bumpy over 2023 and 2024 and navigating it will require the institutional agility we've been focused on building. Now, I'm very confident in what the future holds rains it, and we'll continue to focus on the long-term, investing for tomorrow and not just running for today. Our balanced portfolio of businesses, leadership and intermediating trading capital flows, particularly aligned to sustainability and the strength of our balance sheet means ANZ is better positioned than most for the opportunities ahead. I want to thank the entire team at ANZ for their ongoing commitment to their customers and the broader community. Our culture is strong, and we have industry-leading employee engagement. And finally, we have an embedded sense of purpose to shape a world where people and communities thrive. So with that, we'll finish and go to questions, Jill.

A - Jill Campbell: Okay. Thank you. And we'll start with Jared, because you sat in the front on your own.

Unidentified Analyst: Social distancing. Do I need to press star one to ask a question? Would you mind?

Jill Campbell: You're unmute.

Unidentified Analyst: Thanks, Shayne. Thanks Farhan. Two questions. Expenses and margins. Expenses, I know, Shayne, that you said that it was -- the AUD8 billion was in response to an analyst question, but it's effectively moved into the, shall I say, DNA of NZ it was in your slide pack is aspirational. That AUD8 billion was AUD7 billion run the bank, AUD1 billion investment. What I heard today was AUD7.4 billion run the bank, hard to decrease that and increased investment. Are we looking AUD7.4 million, AUD1.2 million -- I'm just looking for a bit more guidance on that. And I have a second question on March.

Shayne Elliott: Let me do that one directly, and then we'll get the margin. No, that's absolutely fair. And you're right, precisely what you said is accurate. I think the -- what we're saying is when we set the aspiration in the world were very different. We were talking about potential for negative interest rates and deflation and all those other things. And now we're seeing in a world where inflation, printing significantly higher than we've experienced wages increasing as well. And so it becomes a lot more difficult to drive absolute cost reduction, right? So we haven't given up -- so we're not signaling that we've changed our intent around productivity, but having a target just becomes almost impossible, I think, or it would force us down to track of potentially doing silly things. So on the run the bank, we're at 74% as -- in the half, as Farhan mentioned, that's likely we're going to do our best to keep that flat over the second half. I think that's achievable, difficult. I don't know what the path for that will be over the coming year. There's just too many moving parts there. But we're going to continue to focus on managing those costs as well as we can. In terms of the -- and the other thing -- sorry, the other thing on that, look, the shape of the bank is changing as well. We said today are excluding Cashrewards. Well, when we're successful and have a knock, we're going to have another structure that we think are real benefits. It's going to be increasingly difficult to reconcile back what we were talking to as the base changes. In terms of the investment, again, I don't know what the investment number will be. I think the point we're saying is we should invest appropriately as much as we can as long as it's driving value. For now, we've got a good -- we've got a pipeline, we've got sort of roughly half of the stuff we're doing, frankly, is fixing reg compliance, that sort of stuff. And good to see about half is finally focused on productivity and growth. And that's the bit we want. We're hoping the rig in compliance stuff will start to diminish over time. I won't go to see raw, but I think the point there is about holding us to account, about the value we get for the investment, rather than having a fixed target for what the number is, because, frankly, I don't know. Okay. Do you want to -- you do have a follow-up, I'm sure. But do you want to ask the margin question?

Unidentified Analyst: Sure. On margin, slide 27, on a three-year view, 25 basis points of tailwind. And I know that's linked to your forecast on slide 51, which still actually look below where the market is, based on yesterday's comments from the RBA. So there could be more upside there. You've got -- tailwinds have switched back to variable from fixed, obviously, competition and funding costs. The question is one, more of a -- not a guidance, but given where the margins are in first half 2022, on a FY 2024 basis, have margins troughed on an FY 2024 basis. So I'm not talking about FY 2027. So are they at the lowest point, given where the interest rate cycle and margins will be higher in FY 2024.

Shayne Elliott: So, I'll answer a little bit, and then I'll get Farhan to talk. It's a good question. And I might be out of step with a lot of people beyond this. Margin trends in Australia have been a one-way bet for 30 years. There were two temporary blips where they rose, and why? Well, it says, it sort of relates to the Jeff Bezos comment, right, your margin is my opportunity. I mean the reality is, they're still healthy. I mean, we might look at them, relative to yesterday, they're down, but they're still healthy. And those margins, banks are driving decent returns, above cost of capital. So there's -- the point in your question is, the bit that's the unknown is the extent that competition will drive away any benefit that comes naturally through the rate cycle. That is the big unknown. And there's more capital available to go and attack those margins than ever before, whether it's -- not just the big four, we've got all sorts of capital that can come into that business. And so, to me, that's the big unknown, Jared. Again, I can give you the wimp’s answer and say, "Look, all else being equal, you're right. There should be margin expansion, right?” And we probably are somewhere near at the trough. But there's the big unknown, it's the level of competition. And we're seeing that -- I mean, look, we're seeing that for different reasons right now in home loans in this market, for different reasons. We are seeing intense competition with cash backs and all sorts of other things going on at the moment. So I think, it's a hard one to predict, but you might have further --

Farhan Faruqui: No, I think that you’ve -- please meet the ex-CFO, ladies and gentlemen. Look, I think you've answered it well, Shayne. And I think, just to add to the point though, Jared, the fact is that, even when we look out next half or next 12 months, we're still not clear about how customer behavior will change. We started to see signs of that, but we don't know yet how that will fully materialize. So looking out two, three years, I think, is a very bold move to make. But you're right, traditionally and normally, banks should be leveraged for higher interest rates. But there are many other factors moving around today, particularly the fact, as Shayne said, that this -- we haven't seen this in a while and how customers behave is going to significantly drive that, including, by the way, how our competition behaves in that environment as well, from a pricing standpoint.

Shayne Elliott: I also think, from the way we run the bank, we don't want to dilute it. We don't want to culturally think, we're going to get a free kick, because I’ll imagine the bottom, this is -- there’s some upside and we should, therefore, take our foot off the accelerator and the things that we need to do. So culturally, we're not relying on it, in terms of our planning in terms of how we'll get some revenue benefit from it. So we're still going to manage it really tightly.

Unidentified Analyst: Sorry, I think your shareholders are relying on it though.

Shayne Elliott: Look, and I think there’s every reason to expect, as I said in my time, there should be margin, there will be margin expansion. I'm just saying the degree of it will be -- it's difficult to predict, yes.

Jill Campbell: Would you mind handing to ? Thank you. And then we'll go to James.

Unidentified Analyst: Thanks. Just got a question firstly on the mortgage book, just to see how it's going. I know you commented that it did grow, but if you back out offset accounts, which you have to net off.

Shayne Elliott: Of course.

Unidentified Analyst: It still fell almost 1% in the half and it's flat on 2017. So been a pretty chunky housing boom for the last five years, and the book is flat. So ANZx mortgages, when is that going to be ready? We've heard or rolling 12 months for the last period of time. So when is that going to be up and ready. And I know you said you want to get back to system by the end of the year, financial year, give or take what happens with pricing, which gives you an out, and you can say not too competitive. So let's go with that. You want to improve, but when we do think you're going to have this new platform out? And then I've got a second follow-up question.

Shayne Elliott: Okay. So I'm going to get Maile to answer in a second. So while she's getting ready. It's a fair question. And you're right, you should take out the offsets. I mean, it's true. And we have a higher offset balance in our peer group in a proportionate basis, which is a good thing. I mean it means we have good customers who have the ability to have those high offsets, but it obviously comes as a drag and you're quite right on the numbers. I think what's important to say, Jonathan, we -- the issue -- we need -- we were out of the game here in that period of time because we didn't have capacity, yes. So it was an issue of demand. It wasn't issue that people didn't want -- we didn't have a good product where we just couldn't process things. So the focus we had was rebuilding capacity. Now, the reality was and I'll take accountability for this. We made a decision a couple of years ago that our Australia business needed a massive rebuild and they're trying to just throw tactical solutions at the business was insufficient and that's why we embarked on the whole ANZx ANZ Plus route. Now in hindsight, sure. We should have spent a bit more on the tactical stuff the here and now and balance it a bit more with the build of the new. So, we paid a price for that, but that was a decision we made. What we're doing now is we're rebalancing that. So we put more resources back into the here and now. We've hired a few hundred people made more investments to try to get their capacity back. The good news is the capacity, the amount of volume we can process safely and well is up 30%, yes. And it hasn't finished. There's still more to come. So that will get us back in the game. Now the question is, once you have the capacity, there's still a question of should you use it? And what we're saying is, no, no, you're right to be cynical and say we'll use it as an out. But we're not just going to use it because we got that and book loans, which we're seeing today in single-digit ROEs. We're not going to do that. We think we can get back to system depending on what it is, if it's moderate, and run and do decent accretive business in the second half that's the plan. ANZ Plus is not the solution for home loans this year or next year, right? We will get it into market, but it's going to take -- we've got -- our back book is AUD280 billion. It's going to take a long time for Plus to really have an impact. Do you want to talk through where we are with that, Maile?

Maile Carnegie: Sure. And as Shayne said, I mean, the real focus we've had recently is just getting back in market with our existing products. And we very much are there. If you kind of look at time to decision, which was a really big sticking point for us. This month, we're already kind of down to 2.1, 2.4 days, and we're doing that really consistently. So we've really been working on getting the alignment between our capacity, our policy and our pricing to make sure that we're kind of -- they're all tracking together. And as Shayne said, we're very much on track. We can -- we are very confident that we're going to be able to deliver to capacity that will deliver on one system growth. And as Shayne said, it's very much making sure that do that in a financially sensible way and not just chase growth for growth sake. Now specifically on ANZ Plus, we have always been planning to have a beta out this calendar year, and we're on track to do that. Now the objective for ANZ Plus is not just to be an at-market solution is to be well ahead of market. And so that's the plan. And again, we've always had kind of this kind of calendar year as the objective and as I said, we're on track to do it.

Unidentified Analyst: Second?

Shayne Elliott: Yes.

Unidentified Analyst: Yes. Second question, if I can.

Shayne Elliott: Yes.

Unidentified Analyst: Follow-up on this one. On New Zealand, Reserve Bank in New Zealand data came out on debt to income. And they're saying that 20% of the loans in the city of Auckland are written at more than eight times pre-tax income, eight times DTI. You've got 30% share in New Zealand and you're winning share in the home loan market. Can you confirm that you're writing a similar number, more than 20% of your Auckland home loans more than eight times pre-tax income. And how do you think this will play out with a new two-year fixed rate mortgage, which Kiwis generally rolled to is now about 5.5%. So you'll be paying on these customers who are paying more than 40% of their pre-tax income on the interest let alone principle in a high inflation environment.

Shayne Elliott: I don't have -- and I don't think Antonio is on the phone.

Jill Campbell: No.

Shayne Elliott: No, I don't have the number off the top of my head, Jonathan. I'm happy to get back to you all on the number. We had the board meeting on Friday in New Zealand. And -- the New Zealand books are actually in really good shape. I don't have the DTI stuff. I just can't remember it off the top of my head. What's important there almost none of the book is being written above 80% LVR. I know that's not your question. I know that's a different point. But in general, it's in pretty good health when we look at that. And as you know, 90%-ish of the 80%-something of the book is fixed rate. And so that doesn't mean that doesn't mean that there's no impact of higher rates, but it certainly smooths out and gives people time to adjust. So I don't have the data on New Zealand. But as I said, when we looked at it on Friday, we didn't come away from the risk meeting how many -- Kevin will have a--

Maile Carnegie: And the service ability requirements in New Zealand as well.

Shayne Elliott: Yes. Yes.

Kevin Corbally: So what I was going to say, Jonathan, is we are roughly in line with market in answer to your question, right? Important things to remember in New Zealand DTI includes bridging finance. So if you're refinancing an existing loan, we have to add the two together. So it's kind of a -- which is not the case in Australia. So it's sort of overinflates what that number actually is, is the second thing I'd say. Third thing, as Jill alluded to, we have to apply a 3% serviceability buffer. Same is what we do in Australia same rules apply. New Zealand has the privilege of having to operate on the RBNZ as well as APRA rules. So it's got a 3% buffer that's applied to any loan. So whilst you might have seen an increase of 2% in loans in the last 12 months, any loans have been written in that period, they were originally assessed on the 3% buffer as well. And to Shayne point 96% of loans that we've got in New Zealand are at less than 80% LVR. So it provides some other benefits as well.

Shayne Elliott: Thanks, Kevin.

Jill Campbell: James. Thanks.

James Ellis: Thanks very much. It's James Ellis from Bank of America. Just a question on non-interest income and a second question on the second half mortgage balance growth guidance. So to what extent do you think that with the break-free impacts on fees on non-interest income, markets income was softer? To what extent do you think we've found a floor for non-interest income, which was a softer part of this result? And then secondly, on the mortgage balance growth for the second half, look acknowledging you have fulfilled the first half aspiration. So tick in the box for that. Moving to the second half, at least on the APRA data, it would seem that it's a very wide gap there. And a couple of things I'd be interested in that, obviously, with rates going up, and there's been full pass-through to mortgage rates. Does that make it easier, harder, no different? And also with the broker flow, which is 58% to 53%, I know there are different views around the profitability and risk profile of those mortgages, but on the single dimension of driving up volumes, to the extent that you're perhaps disaffected the broker community, how is that a headwind or not

Shayne Elliott: There's a basket of questions here. You talk about the non-interest -- I'll just -- we'll do housing because it sort of follows on from my question. I'll get Maile again to answer some of the pieces and what getting really good questions. So in terms of -- yes, look, we said that we let down our broker partners in terms of our processing capabilities, right? And they went to really happy with us. But we've got a new team in there looking after those relationships. We had it with the major aggregators, normally do this every year, I haven't done that, obviously, for COVID. I don't know, four weeks ago, something like that. Actually, the support we got was really positive. And the feedback was hey, ANZ was the first to support the broker industry and has always been with them and has never treated them as competitive as a competitive threat. And they've not forgotten that. They're disappointed with us, but we have not burned those relationships. And they basically said, we are there for you when you get your act together, we will be back. And we are seating to see early signs of that. So I think from a relationship point of view, I'm sure there will be some at the fringes who are not happy, but the core is pretty good, and we're already starting to see some of that come back into the business. Do you want to talk more broadly about?

Maile Carnegie: Sure. And absolutely. I mean, when you talk to the brokers, I mean, they are really looking to see consistency of performance. They're seeing it. They're saying to send more flow our way. I think the pack shows that we have about 53% of our flow in broker. Actually, it's come up to -- that's an average. So we're back up to about 58%. So we're seeing that volume come back in. We're seeing support come back in, so the lovely dinners and conversations I have are actually translating into seeing the flow come back.

Jill Campbell: Do you want to just talk more broadly, though, in terms of the -- so the momentum, I think, is -- you asked a question about is the current environment going to make getting back to system more less easy year with rates and et cetera.

Maile Carnegie: Okay.

Shayne Elliott: Sorry, to -- the conversation we're having before about how we're going to treat repayments and things, I think it's useful to share, yes.

Maile Carnegie: So in terms of rates, I mean, obviously, we're expecting the actual -- there's potentially going to be some bumpiness or some change in the actual system growth. We -- when we're talking about forecast and get back to system growth and having the capacity to do that, we actually haven't made any kind of changes in terms of that capacity is still an assumption of a pretty high system growth. So if I just kind of think through your question in terms of -- are we starting to adjust what capacity -- no, we're still assuming we've got a high level of capacity. So if you assume that potentially the market actually softens a bit, potentially, it could be easier for us to hit system growth. In terms of the interest rate itself, I mean the way we're looking to execute that, which was, if you think about how we manage the interest rates on the way down, we would keep our customers' repayments flat, so -- which is a bit differentiated to other people in the market. So we didn't automatically adjust them down, and we're looking to have a similar approach on the way up, meaning that if you are at minimum payments, they'll automatically be moved up. But if you're beyond minimum payments, we plan to keep it there unless you actually call to reduce them. So again, our assumption is that, that won't change. And so you shouldn't make it any harder.

Shayne Elliott: And the reason I mentioned that is that, that will obviously have an impact on the risk of refi out. I mean if you if people's payments are going up, that's clearly a trigger for people to think about or maybe I should shop around for a better deal. So I think -- and something like that's 70% of our borrowers are ahead on their repayments. So that will actually have -- so the latest rate rise actually is not going to have an impact anytime soon for the vast, vast talk about.

Maile Carnegie: I mean yes, about 30% of our book is basically paying at the, I guess, the minimum, 70% is paying above and one-third of the total is actually about two years above. So it's a very healthy book.

Farhan Faruqui: Just on non-interest income. So James, the -- on a half-on-half basis, we had about AUD220 million reduction in non-interest income. Now that about AUD95 million of that was markets, and I'll come back to that in a second. About just over 70% was for break fee, which we had mentioned, and that's not a repeating item, as you know, beyond 2022. And then there were two or three other smaller issues, not underlying business related, but we had fair value gains were lower, for example, in our investment portfolio relative to last half, there were still gains, but they were just lower, and I think there was some lower realized revenue -- hedge revenue gains that came through P&L this half relative to last half. So those are not necessarily again repeating items. The only minor impact from an underlying business perspective was the fact that we had some lower fees on our New Zealand funds managed business, but that's a broader industry phenomenon in New Zealand. But aside from that, I would say that if you put markets aside, I think it would be fair to say that we are at a floor at this point, and we'll start to see that turn around. Markets, of course, is less easy to predict, and we could have potentially upside on that depending on how the next few months travel. Sorry, Maile, you want to add something?

Maile Carnegie: If you look at that amount, there's about half of it is coming out of the retail book. We've already flagged that about AUD70 million of it comes from -- just over AUD70 million of it comes from break free, which is consistent with the AUD140 million guidance that we gave to the market. But the way to think about that break free is those fees were prepaid. So we basically got a year where you get no other interest income. But effective September this year, we start actually being able to have fees again. So actually, not only is that AUD140 million annualized or AUD70 million in this half non-reoccurring after next half. But actually, we should start seeing fees come back. The other -- so that's like 70% or about 73% of the 100% and change out of retail. The other -- the balance of it is actually just our standard first half, second half skew in our cards business, where we typically have higher fees due to higher interchange and other credit card fees. And so that's the other kind of 30 and change kind of associate.

Farhan Faruqui: Yes. But I think it's fair to say, James, that there is no fundamental weakness in the underlying business that is causing it. So, therefore, we expect that to return. And the changes such as break free, et cetera, are transitionary.

Jill Campbell: Could you pass back to Victor? This is very efficient getting people pass the microphone. Thanks Victor.

Victor German: Thank you, Jill. I was hoping to turn attention to institutional bank, if possible. If I look at the result, it was excluding markets income, very good result. It looks like Asia has driven a huge part of it, both in terms of volume growth, or particularly in terms of average asset growth. So I’d be hoping if Mark or Shayne you could provide some color in terms of what drove that? And to what extent -- I know there's some liquidity component that's benefiting you to what extent that potentially may unwind in future periods? And then the second question, also staying on institutional is with the chart that you provided for us in terms of leverage to lower rates -- leverage to higher rates. It excludes, obviously, a very large component of institutional deposits in Asia. I'd be interested to hear your thoughts around potential leverage to high particularly U.S. dollars in that business over the next couple of halves?

Shayne Elliott: Yes, that's a good -- so Mark will talk through the growth on the asset side and the question about Asia, Victor. And then also the PCM side is also interesting, because -- while Mark's getting ready, as you know, it's a different market. So generally, the institution, are sort of contractual rates that we have with customers. And so it takes a lot longer to sort of flow through into the business, but there's clearly upside, because a lot of those -- I mean, it's easy to think of institutional deposits sort of hot money. That's not what it is. It's increasingly -- these are operational operating balances we have. And as I said, they're sort of contractual. Now the volume will fluctuate, but you can talk through both the growth on both sides of the balance sheet.

Mark Hand: Yes. With you, I'll start with the assets first. Victor, it was about 50%. So, 50% growth in international 50% growth in Australia and the good thing about it, it was really -- it was across a number of the priority segments that we've been focusing on, so FIG, REI, FBA into also corporate and property and health. So it was pretty much evenly spread. So we're really happy with the diversification of it. And we're very careful about how we're pricing as you saw through the risk-adjusted margin outcome that we had. So, I wouldn't expect the same level of growth in the second half. I think what we saw as underlying pretty much in each of those segments, there was a bit of, as Shayne said, investment coming through from the bigger end of town. Finally, in their business, I haven't seen that for some time which was a good thing and we also saw a bit of M&A activity. The other thing that we did see, which I think will moderate a little bit too was the -- when the geopolitical issues really took hold in the -- particularly in the January, March quarter, I should say, just similar to the March quarter. What we saw there was a number of customers actually drew down on facilities that they already had. So it was some asset growth there. I think that was a bit of a liquidity buffer for them. I don't think that will continue. We haven't seen that come back, which is a good thing, but I don't think that will continue. So I'd see it moderating, but the growth that 50/50 between Australia and New Zealand, but really well diversified across the different segments. So very happy with the growth that we saw. And I would also say it's too that I think our weighted average credit now is up around 3% in the book. So we continue to see improvement there. So we're lending to the right people at good returns. On the growth opportunities for revenue when it comes to rates, there's no question, we're leveraged pretty well for both U.S., New Zealand and Australian rate increases. And that's coming from not just a change to the deposits that we get the harder money. We've been building our payments and cash management business out and investing in it strongly for the last six years. We picked up a lot of business in clearing NPP, a lot of cross-border payments, cash management and transactional business, and I think that investment will pay off over the next few years.

Farhan Faruqui: But just from a geographic point of view, because that's a divisional view. But from a geographic point of view, just as you look at the replicated deposit portfolio and capital. I would say about 60% to 65% of that comes from Australia geography, and about 35% to 40% from New Zealand and International. Just to give you a sense of proportion. Now, of course, there's institutional embedded in Australia results as well as New Zealand as well.

Victor German: Sorry, just I don't know sort of potentially pushing my like a little bit. But any chance we can get sort of sensitivity to a 25 basis point move that unhedged portion of deposits?

Shayne Elliott: Well, Victor, it is your lucky day. You want to focus on that?

Farhan Faruqui: Again, on replicated deposits I could tell you.

Victor German: Non-replicated.

Farhan Faruqui: Non--

Victor German: Non-replicated, well, so its stuff that sits in Mark's book, which is not replicated.

Farhan Faruqui: I think it's not your lucky day.

Shayne Elliott: It's not lucky day.

Farhan Faruqui: No, I think it's a great question. But I think to some extent, we have to see how behavioral -- how the customer behavioral situation is in the next six to 12 months. Before we have a sense of how much of that benefit will flow through that book. What we've given you is a book that we have a better understanding of in terms of rating sensitivity. But on rate sensitive, it's very hard to…

Shayne Elliott: I think it's--

Victor German: And it's sort of bodes and price signaling as well. So, I just want to be careful.

Shayne Elliott: It's -- sorry, I shouldn't have jumped in there. We thought about it because I know a lot of people are interested in that question. So you're not the first to ask it. The difficulty we have is we're worried actually about just being very misleading because you end up having to say all else being equal, knowing that actually -- particularly over the last few years, the shift in customer behavior has been extraordinary, and I don't use that word lightly. When you think about the massive shift between term to cash. And we're still seeing it every day. I mean, I get the balance sheet every single day across all those portfolios. The shifts are quite extraordinary. We talked about offsets, all these things. So it's kind of hard to figure out how people are going to behave in this new world, rates are rising. So, I don't know who's next.

Jill Campbell: So, Victor, can you hand to Andrew, please? Thank you.

Andrew Triggs: Thank you Jill. Andrew Triggs from JPMorgan. Two questions, please. First one on costs, Shayne. Just in terms of underlying inflation in the book, it looked to be about -- running about 3% in the half. Is that a reasonable assumption for the future in midterm future? And just interested in any comments you have around wage inflation, which is a sector-wide issue?

Shayne Elliott: Can I ask? Is that the first question? You get your second one, so don't forget -- it's a good question. It is about -- it was about -- I mean, mathematically, that's true. As you know two-thirds a bit more of our costs are basically salary and wages. We're at the early stages of a cycle here. We're talking about it in New Zealand last week with the Board. We've -- obviously, we've got our EBA under negotiation at the moment here. We're at this turning point where -- let's put it this way, employee expectations are vastly different today than what they were not that long ago. So it's a bit early to say what the impact of those things is going to be, but 3% is not an unreasonable sort of baseline to think of broader inflation. I don't think that's an unreasonable number. And that's part of the reason we've talked about our approach to expenses and why it's going to be a lot harder. I would not be surprised if it was even higher than that. I think is certainly not out of the question in terms of underlying inflation for the general cost. When you think about what we're seeing in some of the EBAs that are being signed around the market, when you think about what's happening about the broader cost base for the organization. And let's not forget, a reasonable chunk of our people. More than half of our staff don't live in Australia. They live somewhere else. And that inflationary issue is impacting right across the region.

Jill Campbell: Do you have a follow-up?

Andrew Triggs: Yes. And then second question, just around on retention. So correct me if I'm wrong on this, but ANZ ran a pretty successful two-year fixed rate campaign at the onset of COVID. And obviously, that contributed to very strong flows versus the market in the months that followed. Just interested in retention strategies to deal to that and whether that's a net positive or negative for margins if you can halt?

Shayne Elliott: It’s a really good question. So again, I get Maile, you're right. So we did that was very successful, and we saw like everybody, we've seen at the time of this, huge shift -- there was a huge shift to fixed rate, which looking back was a good thing for customers to do. That's obviously changing. But what we've now got is a lot of those as like right now, literally, we're in the middle of all of those coming to maturity and that is a trigger for people to reconsider not just the rate but also the bank, the word. So, you're right to ask the question about retention. We had some strategies around that. And do you want to talk to?

Maile Carnegie: Sure. If you actually look at the math, we actually -- our numbers or percent of the book that we're seeing around attrition is actually very consistent with the rest of the market. So I agree, we did have a really attractive fixed loan and those things are starting to roll off. But actually, at this point, we're not seeing any data to suggest that the percent of our book that is a trading is materially different. In fact, it kind of feels like it's right in the middle of the rest of the market. So, we're not seeing anything at the moment to suggest that we are disproportionately impacted by that. And you're right, we do have a lot of -- we do have a lot of strategies in market to manage attrition. So we have -- we we've approved some more discretion in kind of our front line. We've got some sharper deals out there. So yes, we are actively managing it, and the data suggests we're not seeing any significant difference versus peers.

Shayne Elliott: I mean, strategically, it's got a lot harder, right. I mean, you just look at the maths and the churn, if you will, in the bulk across the industry is much higher than it used to be because the friction of moving is lower, and it's easier. And again, that's a good thing for customers to have that that choice. Part of our strategy is to say, look, you can just play that game and just be sort of try to be the low-cost provider and build your capacity or you need to build a strategy that's built around sort of retention, which is about how do I create broader loyalty and customer service, and that is essentially at the heart of the whole Plus strategy. Now that's not going to change your question about what we're dealing with loyalty today or next year. But more broadly, that's our strategy for the longer term.

Andrew Triggs: And Shayne, just to follow-up.

Shayne Elliott: Yes.

Andrew Triggs: So the spread of those loans are written out two years ago, were they good, bad, and different relative to the book?

Shayne Elliott: Good question. So do you want to answer it or you went around two years ago, running the book, but I will -- look, obviously, fixed rate loans in general are clearly much lower margin. And so what we're seeing is really -- so we suffered margin suffered right through that two-year period, not just because that's special, just because of that huge shift towards fixed rate. You had a massive mix effect on the book like you've seen across the industry. Now what we're seeing is actually the reverse is happening before the rate changes. We're already seeing that. We've seen this big shift back towards variable rate because on the rate card, is a lower print number than fix and that attracts a lot of people. So that will be margin accretive that all else being at a mix shift alone is certainly a positive.

Farhan Faruqui: I mean roughly when we exited September, that fixed rate flow was about 53% of our total flows. -- exiting March is 26%. So it's hoped -- so basically is much more shift towards variable.

Shayne Elliott: And the margin difference between the variable and fixed is significant.

Jill Campbell: Brendan, can you -- thanks, Ken.

Brendan Sproules: Thanks, Jill, Brendan Sproules from Citi. I've got a couple of questions. Firstly, on expenses, I just wanted to follow up on Jared's question around the AUD8 billion target that you originally had. Most of the run down to AUD8 billion actually came on the investment side. So the last 12 months, you've spent about AUD2 billion, and you were talking about a sort of a medium-term level of AUD1 billion. How do we sort of think about that now? Are we -- that's a big gap, I guess, between -- is this now we're going to invest at this AUD2 billion rate? Or will it come down naturally?

Shayne Elliott: Yes, okay. So if you step back and again, I tried to talk about this in my section just to be -- just to sort of reiterate it. And I'm not trying to be cute here, but Part of the difficulty here is the way -- and I had a line in the way we report numbers now. We've changed the way we report numbers. It's like when we said that we didn't have things like larger notable items, right? We didn't have the remediation challenges that we've had, et cetera. So what we've tried to do -- if we sort of back solve though, at the time when we said the number, the number was roughly -- our costs are close to 9%, not quite -- 8.2% run 600 the expense AUD600 million and change or whatever on invest. And that's why in total, we, again, not making excuses at the time, and I went back and read the transcript I said, "Hey, look, we think the total can be about 10% lower, call it, AUD8 billion. And then after time, Jared quite rightly pointed out, over time, we refined that and said actually, we don't want to under-invest to get there. That would be striped, we're really talking about the run. Well, what is it? So we sort of said, hey, at the time the run was in the high 7s. And then we had a target to get that down to 7%. Your point about the -- I don't -- I'm not sure I agree with you that the way we've reduced expenses is through investment. In fact, it's the opposite. Our investment rate has gone up quite significantly. Our run -- our day-to-day cost of running the bank as we knew it then, -- and as we largely know it now, are materially lower. Now that doesn't include things like ANZx and part of the ANZ Plus. And over time, clearly, ANZ Plus we're in market -- and it is -- while we're still investing in it, it is going to increasingly look like run costs. We have people, we have teams, we have coaches, we have operations, et cetera. So that's why the blurring is getting a little bit harder for us to talk to. The point -- your question about, I don't know, and I mentioned it before, I don't know what the right level of investment is for the bank. I'd like to think it's not AUD2 billion. And because if I look at the AUD2 billion now, roughly half of it is fixed and comply and the other half of stuff that we're excited about, we think drives value for shareholders. I hope that fix and compliance stuff reduces. As I said, it won't go to zero because there's always new regulation. I mean, LIBOR benchmark changes. These things are, I don't know, AUD50 million projects, et cetera. There's always going to be there. But I'd hope to think that it wasn't AUD1 billion, and it should be much, much lower than that. Let's not forget one of the biggest ones in there, BS11. BS11 is a significant piece of work. In its entirety, it will cost AUD0.5 billion, now we're at the end of that sometime this year. But that alone, those are the sorts of things that start coming out of that fixed and comply.

Farhan Faruqui: But I think to your point earlier, I mean, just, Brendan, just to add color. I mean, three, four years ago, our expense rate was closer to 70%, maybe even lower. And we're expensing now at about 90% because of the mix of the projects that Shayne talked about. That -- on a standalone basis, itself is about a AUD300 million to AUD400 million expense differential. Now, it's a timing issue. We could capitalize more, if you were spending on things where we could capitalize more and basically save AUD300 million to AUD400 million or we expense it, which means that we are putting less on the credit card, if you like, for the future. So it's a question of timing. And I think we've -- that AUD300 million to AUD400 million impact is significant in terms of total expenses.

Shayne Elliott: I mean, we chatted about this. I mean, look, in reality, we can -- and I'm not being flippant here. We can get to age or thereabouts, if we really want -- if that was the goal, we can do it. But it means we just stop doing ANZ Plus, we stop doing the cloud migration. We stopped doing the build-out of sustainability and all the things that we want to do. Now that's why I said, really over time, quite rightly, you need to hold me and Farhan and else can’t why are we getting value from that. It's all very well to talk about spend, is the value, and that's what we've got to do a bit of job explaining to you. I accept that.

Jill Campbell: Did you have a follow-up Brendan?

Brendan Sproules: Yes, I did. I have a follow-up question on capital. I noticed that your capital ratio fell a bit because of the interest rate risk in the banking book, how should we think about the AUD33 billion of risk-weighted assets there? Are they going to go back to the normal level that we've seen over time, which is sort of AUD10 billion to AUD20 billion. And then the sort of follow-up is how does that affect, I guess, the possibility of future capital returns? I saw your level one is just only a little bit above 11% at the moment.

Farhan Faruqui: Yes. So, just on the interest rate risk in the banking book, as we said earlier, as I said in the speech, I would expect that to start to unwind, if not unwind to a large extent in the next one to two years. Now I say that with the caveat that it depends a great deal on where yield curves are over the next two years. But all things being held equal, since you're using that phrase liberally, it should unwind. It should unwind over the next one or two years to a large extent. As far as the risk-weighted assets on lending book are concerned, this half, it was largely driven by Institutional and New Zealand growth in balance sheet and risk-weighted assets. But the good news is it was good, profitable, accretive growth. So if we find that growth, and that's where the discipline and selection is coming in our institutional business and as well as in New Zealand, where we're expanding risk-adjusted margins at the same time that's a good outcome, and we would probably continue to do that, but we will remain selective and remain disciplined around that to make sure that there is value for the shareholder in that. So -- but it won't unwind -- it was somewhat unusual. And I think part of the reason why Brendan, it was somewhat unusual is, a, the fact that there is a reversion of investment cycle in the large corporates. But also towards the end of the half, there was heightened demand on drawdowns on facilities from our large corporate customers given the uncertain environment with Ukraine, et cetera. So it's a bit of a mix and some of it might unwind. Some of it might grow depending on what opportunities we find. But I don't think that there is a desire to unwind anything which is profitable.

Shayne Elliott: Do you want to talk about the different Shayne Level 1, Level 2?

Farhan Faruqui: Yes. So on Level 1, Level 2, primarily the gap is started with APS 111. We had said at the time that we are going to manage through actions, the reduction in the gap that was being created between level 1 and level 2. And we've done that to a large extent in the half, where we have taken management actions. And some of those you've seen in the large notable items with the PNG capital remix that we've done and some other actions that have effectively mitigated to a large extent, the APS 111 impact. So where we are now is that -- and we anticipate this specifically because we know where the New Zealand outcome is going to be on capital reforms. We're not quite there yet on understanding the Australian institutional impact from a capital reform perspective, but we certainly expect overall and directionally that the capital reforms will effectively help close that gap even further. So we'll see Level 1 and Level 2 converging hopefully, depending on how the modeling and some of the documentation, et cetera, works out on capital reforms that we expect those to effectively start to converge and the gap will start to reduce. But we still have other management actions, Brendan, that we can take to manage that difference.

Jill Campbell: Thanks. Can you hand to Brett, please, Cameron. Thank you.

Brett Le Mesurier: Thanks. Brett Le Mesurier from Perpetual. A couple of questions. Shayne, unfortunately, over the last little while, we've seen income going backwards as expenses have grown. You've talked about expenses being flat from the first half to the second half. And obviously, there's a lot of things to take into consideration with income, but I'd be interested in your level of confidence that you'll actually get some income growth from the first half to the second half.

Shayne Elliott: Yes. That's a good question. I mean -- and Farhan will go through in a bit more detail. I mean without being overly simplistic, when you look at it, really, it was down to a couple of things. It was the balance sheet trading underperformance, and it wasn't under performance. It wasn't what we had hoped for, right? It was just sort of at a low point that we've seen. And we're pretty confident that, that will come back to something more normal, taking that and break free which is, again, a onetime, it's not a continuous problem. Those two explain pretty much most of the fall in revenue, if you will. But do you want to talk a little bit more about our revenue outlook for the second half?

Farhan Faruqui: Yes. I mean, look, I think just on the first half as well, while certainly those two things that Shayne referred to. But also, if you think about it from a half-on-half perspective for the first half. There was no question about the fact that we did have an impact on Australia home loans because of the fact that we had higher volumes coming into second half than we had going into the first half of this year. So, there is an element of impact that comes from the Australia home loans business as well. If I was to look forward in the second half, I would argue that we've seen New Zealand and institutional come out at a positive momentum into the second half with supportive rate environment as well. And Australia home loans, assuming we do achieve -- and we certainly aim to achieve is back to system growth by the end of the half, we expect to see more balance sheet uplift on the FUM and home loans into second half. And again, if you're managing margin well, which is also our intention, there should be a positive story in terms of half-on-half revenue outlook between in Australia home loans as well. Now, markets is the unknown because that we'll have to see how that behaves, but again, from a customer revenue standpoint, it's a supportive environment with volatility and interest rates where they are. So, I think that overall, our view would be that the outlook for second half should be positive relative to first half. But again, a lot depends on how we see these businesses perform in the second half, but there should be a lot of supportive tailwinds to that.

Jill Campbell: Do you have a follow-up, Brett?

Brett Le Mesurier: Separate question. You talked about the market-leading position you've had in the payments and cash management business does raise the question. Do you have a sense of the proportion of your revenue that comes from market-leading positions?

Shayne Elliott: That's -- you mean overall? That's a good question. I don't. I'd have to figure that out. I mean, I just -- I know that's not your question, but it's a good question. Debt payments business as a real little gem, right? And it's interesting, and Mark referred to some of the data in there. We have 60% market share of Aussie and Kiwi clearing at a time of rising rates is a great position to ban. To have the sort of volumes that we have processing NPP another those AUD1.5 billion payment transactions we process growing at 17% per annum. And remember, the way that model -- that business works is sort of an unusual business model, which -- it's actually not that fee-driven. I mean, you do get paid a fee. The way you make money is through the operating balances that it creates. So, it is incredibly leveraged to higher rates. And the good thing is it's like a lot of businesses, success breeds success, being the biggest in these things and the best actually attracts more customers to you. So, there's a lot of really positive things there. But I couldn't sit here honestly, and say, what's the benefit of that market-leading position. So, -- but it's worthy of some more thought.

Jill Campbell: I'll come back to you. I might go to the phones, please. Can't just sit, I've been holding all of those people hostage for the last 40 minutes.

Operator: Thank you. Your first question comes from Andrew Lyons from Goldman Sachs. Please go ahead.

Andrew Lyons: Thanks and good morning. Shayne, just to bring it back to investment spend. I'm sorry to do that, I know you've had a number of questions on that front. But one of the changes that has occurred is actually the extent to which you are expensing your investment spend, it's gone from sort of 70% a few years back up to 88% in the recent half. While recognizing you're not sure ultimately where investment spend will settle. Do you have a view as to the extent to which you'll be expensing at the current levels, particularly as you hopefully moving away from the extent to which you're spending on reg expense? And then I've got another quick question.

Shayne Elliott: Yes. Yes. No. Actually, look, put simply, it should remain high and the reason is not that we are doing anything different, and it's not an accounting policy issue. This is the nature of that investment, and I'll give you a very obvious example. In the good old days, when what would that investment look like? It would have been building a data center or basically truly building an asset of something that you would own. And so you would quite appropriately, even if you were writing software in a system, you would capitalize that sticking on your balance sheet, right? And we changed our rules around that. But now when you think about ANZ Plus, ANZ Plus is entirely cloud-based. And so there is no asset. And from an accounting policy point of view, the investment you're making because it's sitting in AWS or GCP cloud or whatever, that has -- it just drives a different accounting outcome. And so that's what's driving that, Andrew, as opposed to anything we're doing. I look, instead and have you. I can't tell you who knows what future investments will be, but one would imagine they're going to continue to be largely like they are today, they're sort of cloud-based, not the old fashion sort of fixed asset sort of investment. There will be a little bit of that, but you know.

Farhan Faruqui: Look, I think that's probably correct. And one of the things I would just add to that also is that because of the fact that we've constructed this new agile way of running projects, we generally tend to do smaller and shorter sprints, if you like, which means that a lot of our projects are actually below the AUD20 million cutoff point. Therefore, they don't get booked as -- they're not get capitalized. They're booked as OpEx. So that's also adding to the higher OpEx rate, and that's likely to continue as well as we go forward. So I don't disagree Shayne, I think it's likely to remain elevated. Now that might shift a little bit depending on how much regulatory versus, technology versus, cloud, et cetera, but it's likely to remain closer to the high than the low.

Jill Campbell: Do you have a follow-up Andrew?

Andrew Lyons: Well, that's really helpful. And -- Sorry.

Jill Campbell: Do you have a follow-up? Yes.

Andrew Lyons: Just the second question. Yes, yes. Thanks, Jill. Just a second, there's been a number of questions just around housing momentum. I'd just be can. You also noted better momentum in your commercial banking franchise subject to some changes in asset finance and broking there. But just keen to understand where that's particularly coming from? Is there any particular area that you're seeing momentum in that space and perhaps whether higher rates, whether you expect higher rates might go the recovery in commercial volumes?

Shayne Elliott: Yes, great. I mean, I’m happy to answer that one. Hey, so commercial, yes, that asset financial, I just wanted to mention that because there's a little bit of a drag, obviously, as a result, you do need to look through that. So we’re seeing just to remind you what's in our commercial bank, because ours is slightly different, all the banks have slightly different definitions, right? So ours is tending to be at the smaller end. So it's everything from sole traders. So we have a small business bank, which is largely managed through the branch network, et cetera. So, relatively -- and really good digital uptake in there. We have business banking, which is slightly bigger and then we have what we call specialist distribution and specialist distribution can be loans of up to sort of AUD50 million at the extreme, and that's our cutoff. And then from there up, it sits in Mark Whelan's Institutional Bank. He has -- so just to be clear, what we're talking about in commercial. In that specialist, just to be -- so the first small business and business banking have no on a relative that don't really specialize, they're really just regional businesses and based on location. But in our specialist distribution, we have industry specialization. The growth to- date is pretty strong, and it's actually come -- I mentioned momentum. So it's increasing, we're seeing, but it is heavily skewed to the top end. So it's in that specialist distribution piece. And what is it coming from Andrew? Unsurprisingly, I think, agri. So one of the verticals we have in there is agri, that's doing really well and the other one is health care. Now health care can be everything from a retirement home, to pharmacies, to medical practices, et cetera. But it's in those areas what are really driving the growth. And it's with -- mostly it's coming from existing customers. There's a little bit of customer acquisition in there, but it's existing customers who we know and like, but it's in those areas. And I think the outlook we were just starting the planning, as I mentioned, we're doing the strategy work. The outlook and the sense from the team is that that growth is starting to come down into the mid and smaller part of the book. Because what you've seen over time, particularly at the small end, is a massive shift towards cash. So we talked about retail deposits of our fastest growing deposit book has been small businesses who have been nervous about the future, uncertain about the outlook and they've just -- and they've been the beneficiary of a range of government programs. And so they've took a lot of money into their savings accounts. That's starting to level out. And it will be interesting to see what happens given the rate outlook, but that's starting to level out. So we're not seeing growth here. One other thing, one other small insight I would give you, which I found interesting, looking at this, one of the fastest growing in the smaller end, yes, one of the fastest-growing or the biggest demand for borrowing is actually for small businesses to buy their premises. It's quite a significant shift. So these are, I don't know, your retailer or something instead of leasing from the landlord. They've been taking opportunity to leverage up and actually buy, but that’s actually reasonable trend sitting in the book. So those are the areas. That one, health and Agri.

Jill Campbell: Thanks Andrew. Operator, we'll take the next call.

Operator: Thank you. Your next question comes from Brian Johnson from Jefferies. Please go ahead.

Brian Johnson: Good morning, and thank you very much for the opportunity to ask a few questions. The first one is, if we have a look at the Level 1 and Level 2 capital, the Level 1 capital I've got a sneaking suspicion becomes the binding constraint. But if we have a look at three-year bonds, they've actually moved from about 2.6% on the day -- on 31 March, up to being 3.1%. That feels like there is another adverse movement in the interest rate risk in the banking book, if everything stayed where it is right now. And I think the balance of probabilities as it gets worse. Can I just confirm that basically what creates the interest rate risk in the banking book, I suspect is the difference between the trailing yield versus basically the spot Am I right in thinking there is another headwind promote to come through on the interest rate risk in the banking book in the second half.

Shayne Elliott: Yes, Brian, it's a very fair question, and I would agree with you. I think they could potentially be, call it, roughly another 10 basis points or so in the interest rate risk banking book that potentially compromises capital again in the second half. Again, depending on the pace and the velocity as well as the size of the rate increases, that could shift. But as I mentioned earlier, Brian, that's not a permanent phenomenon. It's just a question of how quickly it unwinds, and that's -- and yes, you're right, it could have a further negative impact in the second half.

Brian Johnson: So, when we talk about basically this tailwind on capital you get from a reducing interest rate risk in the banking book, is that premised on the idea that we actually see bond rates rally or is it premised on just the unwind of that averaging impact?

Shayne Elliott: No, it's just on the unwind impact. So as tranches unwind, basically you get reinvested at higher rates and therefore, the embedded loss effectively unwinds. But also remember that while that's happening on the interest rate risk and banking book, we are also starting to see the benefits of that come through in earnings from a rate increase perspective. So, there are some short-term gains, short-term deficits, but also medium-term unwinds. And a lot of that will eventually come back to revenue as well as those tranches mature. So it is indeed a timing challenge, Brian, to your point.

Brian Johnson: Okay, great. Just a second question and I even have a third, if I can squeeze it in. If I look at the economic profit on page 38, in the last half, the messaging was about basically we're positively leveraged to rising rates, yet you reduce the cost of capital. When I've look at it today, I can see that basically, you've held the cost of capital assumption flat at 7.75%. But once again, your messaging is that rates are rising. I don't know as an old guy, it seems to me, if I look at the way you paid, I can see basically the behaviors. Can I just get a feeling about who sets that number? Has it been reviewed by the Board. And in this rising interest rate environment, is it appropriate but it's been held at that lower rate, not increased, so from page 38 of the--

Shayne Elliott: Yes, I understand. So the way that gets done that -- the cost of capital gets calculated by our treasury team. They make a recommendation to the Board absolutely gets decided by the Board. The Board made the decision based on their own views, and I can tell you it's an active discussion, and they have made historic and I've been around a long time in those discussions, they will make changes to it based on their views. You're right, that is that document, page 30, obviously, is already ancient history. And we increased the cost of capital already on the 1st of April. Now 1st of April is also feels like a long time ago, as we sit here today. We already increased it to 8.5%, and I -- there is no doubt that we will be discussing at the next board meeting, and it's highly likely that we will increase it again. Yes, and the other thing Brian.

Brian Johnson: Understand that reduces the bonus bill helps the cash earnings in the second half?

Shayne Elliott: Yes, very.

Farhan Faruqui: Just to add to that point though, Shayne, I think it's important also to point out, Brian, that when institutional lending book prices there lending, they actually have an additional 50 basis point buffer on top of the cost of capital. So in effect, based on the cost of capital that we've now created, which is 8.5%, institutional is pricing of 9% cost of capital.

Brian Johnson: Just the final one, if I can push my luck.

Shayne Elliott: Sure.

Brian Johnson: On page 40 of the result, we can see for the LCR calculation, we can see the cash outflow have gapped up from about AUD208 billion to AUD230 billion half-on-half. I can see the various bits and pieces moving through, but I'd just be in treated, my understanding was that a lot of the growth that we've seen has been a more stable deposit accounts. But what's going on with that cash outflows figure? So it's on page 40 of the result.

Jill Campbell: You mean the RA or the slides, Brian?

Brian Johnson: The RA?

Jill Campbell: Thanks Brian.

Brian Johnson: As opposed to the slides. So you can see it's gone from AUD208.1 million up to AUD230.3 million.

Shayne Elliott: So, my understanding is the bigger driver of that is not those stable deposits. It's actually short-dated wholesale deposit growth through institutional and the vast bulk of that just ends up sitting in a central bank somewhere, so it's LCR neutral. That's what my understanding of the driver is.

Farhan Faruqui: Correct. And actually,

Brian Johnson: Okay. So it increases the HQLA and it increases the ARPU figure, so the net impact is 0. Is that the way to think of it?

Farhan Faruqui: Correct. That's exactly right, Brian. And as you know, that produces actually very strong returns.

Brian Johnson: Fantastic. Thank you very much.

Shayne Elliott: Thank you.

Jill Campbell: Thanks, Brian. Next question please, Operator.

Operator: Thank you. Your next question comes from Ed Henning from CLSA. Please go ahead.

Ed Henning: Hi. Thank you for taking my questions. I've got a couple. Firstly, just a clarification. Again, Shayne, you've talked about reducing spend in regulatory compliance going forward. I just wanted to clarify, do you see that spend largely or fully reinvested going forward at this point?

Shayne Elliott: Well, it's a good question. Philosophically, no, like I don't -- we don't sit here and say, for example, hey, let's find a way to spend AUD2 billion in the slate. And if Regan compliance goes down, we'll spend more in the things that we want. So, we don't think about it like that. In reality, I -- as rigging compliance comes down, I wouldn't expect us to ordinarily reinvest it into growth initiatives. And the reason is, as I said, the growth in -- if they make sense, we'll do them. I mean, the reason our investment slate has increased, quite dramatically, putting aside rigging compliances, because we've actually seen more opportunity than we've had before. And not just that there's opportunity, we actually feel more capable of actually achieving the outcomes there. We're in a better position and stronger to do it. So no, it wouldn't normally be a trade-off decision that we would make. I mean, it might happen, it might look like that, but it doesn't. That won't be an issue. That's not the way we approach it. I hope I made that clear.

Ed Henning: Yes. No. Thank you. And then you've highlighted today, you're pursuing a knock, but you've got currently limited businesses outside banking. Firstly, can you just touch on what's the cost of this? And, secondly, how big can the non-bank be, whether you talk about an investment you're going to make, or things we should think about you're going to invest in?

Shayne Elliott: Yes, it's a good question. So in terms of the cost, we think the -- so the cost of actually setting it up, the legal vehicle structure going through that, will be tens of millions of dollars, but certainly materially less than AUD100 million. Now, we've got to work through some stuff. So I can't give you a precise number, but it's in that ballpark number. And that's why we said, we think it's a lot of money, but we think it's a low-cost option for the future. And what's great about that is, we don't need to drive -- the benefit case is relatively modest. So we don't need to drive massive benefits to be able to get to there. You're right, on day one. And again, I think it's important. This is not musical chairs. This is not us redistributing the bank as we know it today. It's not a capital arbitrage play. It's really about giving us the potential to run the bank well and grow outside of what we consider traditional banking today. So that's why we gave you the example of Cashrewards and our 1835i portfolio. So we're not doing it with a transaction in mind or -- it's just the flexibility we want to build, and we think now -- it's interesting, just repeating, but the board the other day. The first time this came up, I was CFO. So it dates a long time. It wasn't my idea, but I'm just saying, I remember the Board discussing it. We've discussed it for a long time and can see real benefits from it. But now, we -- the reason we're doing it now, is we feel like we're in a position to be able to do it well, if that makes sense, and to actually drive the benefits from it. Now, in terms of the scale, look, this will still be -- we've still got some work to do with APRA around the sort of rules of engagement and how we will do this. And they remember, at the end of the day, anything that we move from the bank today and we move into the NOC will require their approval. I mean, there is some -- there are still some hurdles to go through there. Over time, and I mean over time, there is no theoretical limit, it will really -- but APRA will have a view quite rightly, about, hey, as the non-banking group grows, does that have an impact on the viability and the prudential soundness of the bank, right? That's their ultimate interest in that. And I'm sure they will have views about the nature of things that go into the non-bank and whether they put the bank at risk. Now, clearly, that's not our intention to do that, but they will think those things through. And you look at somebody like Macquarie, or Suncorp who have not -- because obviously, for different reasons. But in Macquarie's case, obviously, the non-bank is even much bigger than the bank. So then, in theory, there's no limit to it.

Ed Henning: Okay. And then just initially on that, you talked about the flexibility, is it just a cost and an option going forward for you, you're just putting in place now? Or do you see there's actual profitability in it immediately?

Shayne Elliott: No, no, it is an option. I would say that the benefits, the immediate benefits will be modest. Yes. So just -- it's a silly example, but just like Cashrewards. So Cashrewards is a shopping capability to give people are buying goods, cash back a better deal. It's a great thing for customers. We really like it. The saver mindset of those customers are very attractive to us over time. Clearly, that is not a bank. But if we own that and we do own it today, in a banking structure, they would be subject to all the same regulation that we are, beer, responsibilities, compliance, training, AML, all these sorts of bits and pieces that would just slow them down. And so that's the sort of thing we really need to unleash and to be able to say, it's just not appropriate. And EPRA will decide in each case, with us, where is the best place for those things to do. So it's really unlocking their agility. That's where the benefit comes as opposed to there's some automatic cost benefit or capital benefit. I mean, those things will be there. There will be.

Jill Campbell: Puts them on a level playing field with their peers as well.

Shayne Elliott: Correct. But for example, another example might be we haven't got it yet. But for example, we own our head office in Melbourne. It's worth a lot of money. It sets within bank. Could we make that -- and we run a whole bunch of services that have got -- well, are not directly related to the provision of banking. Can we take those people and assets and put them in the in the non-banking group to enable them to be more efficient and then sort of lease back, provide those services back to the banking group. Those are the sorts of things. And clearly, there would be some cost advantages and capital advantages potentially in doing that. And that's the sort of optionality we want to investigate.

Ed Henning: Okay. It's not that you--

Shayne Elliott: I'm pretty confident this investment, yes, and we'll just I just don't -- just I'm picking a number will go in the middle call it, AUD50 million, yes. I am very confident that, that investment washes its face pretty quickly on really basic things that we can do without -- we don't need to justify some big extraordinary strategic shift in the bank. Just getting some basic stuff done, we will get a payback on that.

Ed Henning: And this is not to say, you're going to go out and spend lots of money on small investments to put in this. There might be some, but there's no big investment agenda essentially?

Shayne Elliott: Well, we already have a venture arm, if you're talking about things like that. We have nine partnerships sitting in there, some big like Linde and Cash Awards, some really, really tiny. They -- we already have an investment approach there. I mean, the total portfolio there is AUD400 something million, AUD450 million, something like that. So despite what I said about the banking structure not being appropriate. It hasn't slowed us down in our ability to do that. So I don't think the not necessarily changes our intention around those things. If we see investments, partnerships, things we want to acquire to make us a better bank, we'll do them with or without the knock. We're just saying that knock can actually make us more efficient in the way that we take those things to market.

Ed Henning: Okay. Thank you.

Shayne Elliott: Thanks.

Jill Campbell: Thanks operator. I think how many questions have we got?

Shayne Elliott: Two.

Jill Campbell: Okay. Second last question.

Operator: Thank you. Your next question comes from Richard Wiles from Morgan Stanley. Please go ahead.

Richard Wiles: Good morning, everyone. I have couple of questions. Shayne, the first one relates to ANZ Plus, which you've told us a few times is effectively a new retail bank -- are there any incumbent banks around the world who've built a new retail bank platform and migrated their customers and who you think sort of good indicator of how you can migrate your customers? And then how long do you actually think it will take you to do that? So how you into migrated all the customers to ANZ and you turn off the old ANZ retail..

Shayne Elliott: Yes. So, I'll start and Maile might want to make some comments. So there is no immediate example that comes from and say, hey, what they're doing, that's what we want to do, right? We've looked -- but there are examples of banks who are doing things that are very similar, right or parts of what we're doing. So for example, in DBS is case in terms of building new things. In terms of the time, if you really boil it down, and this is overly simple, they're essentially for retail, we only have three products in retail, we have savings and transaction savings accounts, transaction accounts, credit cards and personal loans and home loans. And so what we need to do -- and at the moment, we only have one of those in production for ANZ and we need to build. And next will be homeowners. And we said, be the testing later this year, and we'll have a platform. And that beta testing, again, it will be minimum viable. It won't do you all singing or dancing home loans on day one. It will start really simple. PAYG, single borrow that sort of stuff, and then it will progress over time. And then cards will come later. So we've got to build out the capability. As we build, we continue migrations. What do I mean by that? Of the six-ish million customers that we have today, AUD2 million of them, in fact, more than that only have a savings and transaction relationship with ANZ. They don't have a home loan and they don't have a credit card. So we start and we've broken the customers down into these cohorts. So for example, there's -- well, I can't remember less than 100,000 just like really basic accounts, 100% digital, never go to a branch, et cetera. That's our first target. So soon. Let me start that mass marketing campaign. We will invite those people to move across to the new plus. And then we progress through the migration by cohort as we can fulfill their needs well. And so the migration, it's not a big bang migration at the end. The migration literally will start in June. We will start migrating our first customers across. It's going to take some years certainly beyond three years, but we should get the bulk of the migration done in that three year period. And that's when you start to be able to start turning off systems. But what's interesting, Richard, if your question is hidden there about the cost, hey, you need to decommission these systems and get the cost benefit -- that's partially true. Actually, when you do the analysis, the real cost is not in the systems, it's in the distribution cost of. It's actually maintaining and selling the old products. That's where the cost comes. And so -- the real benefit is once you take today's products off the shelf and don't offer them anymore, even if you've got to run the back book down, that's when you get the cost out benefit, and that will come earlier than systems decommissioning. Did -- is there anything I missed or you want to--?

Maile Carnegie: The only thing I'd add is actually linked to that last comment, the first place we're looking to drive kind of integration and really both for the benefit of growth into ANZ, but also managing costs and run costs pragmatically is in our distribution network. So we're already putting together an integrated distribution kind of plan that will go across managing both ANZ Plus but also our existing products.

Jill Campbell: Do you have a follow-up, Richard?

Richard Wiles: I do, please. The other one relates to your ambitions for the mortgage market. It seems strange that you would have a target to grow in line with a major bank system rather than the Australian system. At the moment, the whole market is growing at about 7%, that's the run rate. But the average of the major banks is more like 3.5 million. NAB is at system or maybe a touch above, but Westpac's below, CBA has now gone below, which I think is an interesting development. So why this ambition to grow in line with a group that is losing market share? Is this an acknowledgment because there's a big difference, Shayne. There's a huge difference, you're aligning. So is this an acknowledgment that the majors are going to lose share and you're going to lose share as what you're going to continue to look at there. I mean why this ambition?

Shayne Elliott: You're giving us way too much credit, all right? We did not think that -- look, at the end of the -- no, that is not what we're trying to say. What -- and again, it's easy in hindsight. What we would trying to signal and communicate, hey, yes, we've had a problem in capacity. Yes, we need to build that capacity. We need to get back into market. And obviously, in the questions, what -- how do you define market and system. We said, hey, we've got to be back with the people we compete with and sort of look like us. We were not trying to be cute because right now, to be honest, you're right. We are back at system growth of the major peers because they're all on average, they're not done anywhere, right? So, mission accomplished. But that's not -- we were not trying to be cute. But I take your point, and I can see -- do you want to give a bit more flavor to?

Maile Carnegie: I mean the very clear mandate is, we need to win in this very important market. Now I think that when I joined the business, it was really just how do you chunk up that ambition in a way that is aspirational, but still feels achievable, but also achievable in a way that you're doing it structurally and sustainably versus just throwing things into the market that are going to be fragile and blow up on you. So, no, it was absolutely not to be cute, but beyond this next interim objective is very much to kind of to grow ahead of peers.

Jill Campbell: Last one.

Richard Wiles: So, it's not winning against Westpac, it's actually maintaining--

Shayne Elliott: Mission accomplished.

Richard Wiles: It's actually maintaining your share?

Shayne Elliott: No, no, Richard, you're right.

Richard Wiles: Maintaining your share of the total mortgage market?

Shayne Elliott: Yes, yes, yes. Look, again, you learn a lot of -- whenever we make any sort of forward statements or any guidance like this, you kind of always mean, we end up always regretting them because people like you quite rightly hold us to account to them and you're sort of rethinking go, well, I wasn't quite what we meant. So look, I'll take that one again as well, but no. Our intention was to say, look, we were out of market, we were not competitive. We need to get back and we need to be holding and growing market share in the broader sense of the term. It was just that at the time, to Maile's point, it felt a more achievable ambition for the team. Remember, look, we were going backwards. I mean we went flat. We had shrunk -- middle of last year, we were going backwards at a fairly rapid rate of knots. Then say to them, by the way, we're going to turn around and be growing at 7%. I'm not sure that would have been an effective employee motivation, right? So that's partly what we did, as Maile mentioned. But that is our intention. And by the way, we're not going to stop there. It's not like there's a cap. Hey, when you a system you start. We want all the responsible growth that we can get, but the most important thing here is we have to build the capacity to do that well

Jill Campbell: Step at a time. Yes. Okay. Next call, please.

Richard Wiles: Thank you.

Jill Campbell: The last call. Thanks Richard.

Operator: Thank you. Your next question is a follow-up question from Brian Johnson from Jefferies. Please go ahead.

Jill Campbell: So, sneaky Brian.

Brian Johnson: I know I've had more than my fair share. But just very quickly, you said about Level 2, Level 1 converging, if Level 2, 1 converge, that can either mean that Level 2 comes down to Level 1. And intuitively, I think that is correct. But can we just get a clarification on that?

Shayne Elliott: No, Brian, I didn't mean to suggest that Level 2 will come down. I think the thinking was that Level 1 will meet -- go up to meet Level 2. And I think -- so for example, just on the New Zealand impact. So there's no New Zealand like there's no use an RWA increase from capital reforms. How -- but so as a result, what ends up happening is that Level 1 will benefit. So Level 2 will have the impact of any of the new -- of the capital reforms in New Zealand. But at Level 1, there will be no impact from New Zealand. So it will basically help Level 1 become equivalent to Level 2. So, to answer your question is quite simply, and I could walk you through the detail of that at any time. But -- to answer your question very simply, no, it's not about Level 2 reducing to Level 1. We anticipate Level 1 increasing to Level 2, hence becoming a smaller binding constraint.

Brian Johnson: Thank you very much.

Jill Campbell: So we are -- and I'll find out who -- if there's any lift on the phone, I'll find out who they are, and we will call them because we do need to start calling time. So, do you--

Shayne Elliott: Thank you now -- thank you very much for attending today, and good to see you all. Thank you.

Farhan Faruqui: Thank you.

Jill Campbell: Thanks everyone.