Earnings Transcript for NAUBF - Q3 Fiscal Year 2021

Operator: Thank you for standing by, and welcome to the National Australia Bank 2021 Full Year Results Presentation. Please go ahead.

Sally Mihell: Thank you, operator. Good morning, everyone, and thank you for joining us today for NAB’s full year 2021 results. I’m Sally Mihell, the Head of Investor Relations at NAB. Before beginning today, I would like to acknowledge the traditional owners of the land I’m calling in from, the Wurundjeri peoples of the Kulin Nation. I’d like to pay respect to the elders past, present and emerging and to the elders of the traditional land in which you are also calling in from. Presenting today will be Ross McEwan, our Group CEO; and Gary Lennon, our Group CFO. We are also joined by members of NAB’s executive team. At the end of the presentation, which we’ll take about 35 minutes, we’ll open up to the Q&A. Just a reminder, you need to be on the phone line to ask a question. I’ll now hand to Ross.

Ross McEwan: Thanks very much, Sally, and welcome to NAB’s full year 2021 results announcement. We have delivered a solid financial performance driven by improved momentum across our bank and strong asset quality. This has been achieved during what has again been a challenging year economically and socially in Australia and New Zealand. The increase in returns to shareholders while retaining a strong balance sheet is a highlight of our results. There’s only been 18 months since we launched our refreshed strategy, while there is still much to do. We’re ahead of where I expected us to be. Our investments in customers and colleagues are delivering better service outcomes and growth across our businesses. Discipline, focus and execution have been key to this. We’re optimistic about the future opportunities to grow our businesses while we remain committed to maintaining our cost discipline, we will continue to invest to support this growth. Overall, the decisions we are making and the progress we have made position us well for the future. Our financial results this year reflected a 39% improvement in cash earnings, driven by momentum across our business and strong asset quality. You will see there are no large notable items reported again this half as we focus on just getting the basics right. Underlying profit, which declined 6.8% over the year, was impacted by the challenging trading environment for Markets and Treasury. Our operating costs increased by 1.8%, which is in line with our guidance of 0% to 2% for the year. Excluding Markets and Treasury, our total income was stable over the year, and pleasingly, 2% higher in the second half of 2021 due to asset growth. Gary will spend more time discussing the key drivers of group performance. We have delivered improved returns to shareholders. And while retaining a very strong balance sheet, our strong balance sheet enables us to keep the bank safe and support customers who want to grow and those who need our help. At our first half results, we provided revised capital and dividend target settings reflective of a more normalized operating environment. Our $2.5 billion buyback, which commenced in August is a step towards achieving our target CET1 range of 10.75% to 11.25% over time. We have completed about 20% of this buyback. Our bias is to continue to reduce our share count to deliver long-term ROE benefits to shareholders. Our improved financial returns to deliver the cash ROE for the full year 2021 of 10.7%. That’s 2.4% higher than the FY 2020 ROE of 8.3% allow still behind our 2019 level when we held less capital. The final dividend of $0.67 per share represents 69% of second half cash earnings, which is within the target dividend range of 65% to 75%. Together with the interim dividend of $0.60, this brings the total dividend for the full year to $1.27 per share. As at September 2021, capital and provisioning levels remained very strong. While we are anticipating a strong economic rebound in 2022, some customers may continue to encounter difficulties as support programs put in place during lockdown are withdrawn. Given this ongoing uncertainty for some customers, we have retained strong provisioning levels with a collective provisioning to credit risk-weighted assets of 1.35%. The CET1 ratio of 13% reflects 43 basis points of organic capital generation this half and our pro forma CET1 ratio of 12.25%, which is adjusted for the Citi acquisition, and the remainder of our buyback remains well above APRA’s unquestionable strong benchmark. 18 months ago, we announced our refreshed group strategy which remains unchanged. Customers and colleagues are the twin picks of our strategy. There are four key areas we will be known for, relationship led, easy to do business with, safe and finally, thinking long-term. We’re also clear about where we will grow that is through building on our clear market leadership and business in private banking, disciplined growth in our Corporate and Institutional business, becoming a simpler and more digital business in our Personal Bank, continuing the strong momentum in BNZ and acquiring more customers through our digital bank, UBank. We are making good progress on our key measures of success, but continued execution is critical. Our colleague engagement score is now in the top quartile of global organizations. Customer strategic Net Promoter Scores is equal first of the major banks. However, our ambition is to achieve a positive score. In terms of returns on shareholders to recognize these targets needs to be delivered on a sustainable basis, this year we have delivered double-digit return on equity, and our costs were kept in line with the guidance this year of 0% to 2%. We are getting results by delivering better outcomes for customers and colleagues. We have the number one Net Promoter Score for consumer in Australia and New Zealand. And business NAB scores were consistently higher through the year, finishing in September ranked second overall and number one for medium business segment. Corporate and Institutional Banking has achieved record high customer scores across a number of products in the annual Peter Lee survey of large corporate customers. This includes transaction banking, which has been an area of focus for our institutional business. We’re continuing to invest in our colleagues to make it easier for them to do their jobs well and to drive the cultural change required for the successful execution of our long-term strategy. We have embedded a customer-centric operating model with clear accountabilities and leadership and training programs are being rolled out. Over 7,000 of our colleagues have enrolled in our career qualified and banking program in the last year. And we continue to invest in qualified cloud engineers to support our technology transformation and our distinctive leadership program is building our leadership capability across the organization. This time last year, I said we wanted to grow safely. In full year 2021, we have seen consistent growth across every one of our businesses. Importantly, this growth is not sacrificing returns. Six months ago, I was confident we could return to system growth in housing. And over the second half of 2021, we achieved 1.1 times system growth. Given the significant volumes, which have been processed, I’m proud of the teams, which have worked together to deliver this. And I’ll talk a little bit more about our progress in home lending shortly. In NAB’s largest division, Business and Private Banking, we have further extended our SME market leadership. Over the second half of 2021, business lending in this division increased $6.7 billion, representing about 12% annualized growth, and we increased our market share by 20 basis points. Our focus on growth in the important transaction banking segment has also delivered an 18% increase in business transaction account sales over the year. Corporate & Institutional Banking had a strong momentum aligned with its disciplined growth strategy. Over the year, total GLAs increased 11% with strong growth of 22% and our higher return in target segments of infrastructure and investor. In transactional banking, we added 63 basis points market share in the full year. BNZ has again achieved a very strong result in a competitive market. BNZ’s strategic focus on home lending and SME has delivered above system growth in both of these sectors in the second half. A continued emphasis on simplification and improving digital banking has also helped BNZ grow share in retail deposits. In business and private banking, we’ve been investing to grow and have extended our market leadership. This is evident in the results across the portfolio. Over the last six months, small business market share increased by 40 basis points. Our agri market share increased by 160 basis points and private banking achieved 2.3 times system growth in home lending. It has been a good year. Key to this has been simplifying the business and getting the basics right, including adding another 550 new customer-facing roles and simplifying our policies and processes to deliver efficiencies equivalent to approximately 200 FTE. We are delivering differentiated and better banking experience for customers and colleagues. An example of this is the relaunch of our quick digital small business lending platform, offering applications through to cash disbursement for existing customers within 20 minutes. Opening a business transaction account is also becoming much quicker and an easier via our new digital platform with real-time customer onboarding, automated KYC checks and multi-product origination. The rollout of new facility renewal and annual review processes are allowing bankers to make much faster assessments using data and analytics. We are better leveraging our high net worth proposition as well. Our new integrated offering of NAB Private Wealth brings together Private Wealth, JBWere and nabtrade. And over the last 12 months, this has delivered a 12-point increase in Net Promoter Score, above system growth in home lending and a 28% increase in funds under management. In Home Lending, we’re putting our energies into delivering a simpler, faster service. Our simple home loans origination platform can now originate 80% of home loans through our retail proprietary channels, and we’ll be rolling out through our broker and business and private bank networks in 2022. The ongoing simplification of our policies and processes, more automated approvals and the rollout of new credit decisioning model and our broker channel have helped deliver better outcomes for customers and colleagues. We’ve seen a 50% reduction in banker time to submit a home loan application. Our time to yes improved by 30% this year despite a 60% increase in application volumes. We are now recognized by PEXA as equal first of the major banks for settlement performance, a significant improvement from fourth just six months ago. Over the past six months, we’ve taken action to reshape our portfolio. This includes the completion of the sale of the MLC Wealth in May, which has allowed management to dedicate all of our time to growing our core business. The combined business of 86 400 UBank provides an opportunity to deliver a market-leading digital bank experience with access to NAB’s balance sheet to support growth. And in August, we announced the proposed acquisition of Citigroup’s Australian Consumer business to accelerate our personal banking strategy. Subject to regulatory approvals, we expect to complete this transaction by the middle of next calendar year. Our investment spend in 2022 will be approximately $1.3 billion, which is broadly in line with the same spend this last year. In prior years, the focus of our investment has been on building our technology foundations and responding to regulatory and compliance requirements. This mix is changing, and we expect to increase the allocation to discretionary investment from 39% in 2021 to approximately 50% in 2022. This means that more of our investment dollars can be focused on accelerating simplification and automation in our core products. We will also continue to invest in improvement in automating our control environment. This includes the investment we’re making to help keep the bank and customers safe from growing threats of fraud, cybercrime and other criminal activity. The investments in our technology platforms and capability over the past four years enables us to increasingly leverage digital data and analytics to achieve our ambitions. The past 12 months have been a busy time as we substantially progressed a number of our digital initiatives. This includes payment innovation, improvements in digital engagement for everyday banking, becoming the accredited data recipient, leveraging data and analytics and simplifying our lending processes. The appointment of Angie Mentis to our new group executive role for data, digital and analytics will help to accelerate our progress further. Climate action is everybody’s job. We are very aware of the role we play and the opportunity for our bank and our customers. We have has a long history of taking action on climate through our own lending and operations as well as through the partnership and initiatives we’ve led or been involved in. Our Corporate and Institutional Bank has been at the forefront of development of sustainable and social bonds, ESG-linked derivatives, sustainability-linked loans and asset-backed securities. We are already the leading Australian bank for lending to renewables having lent over $6.5 billion in the past five years. We’re improving our banker capabilities so we can have the right conversations with our customers. With Melbourne Business School, we have designed a climate training course for our corporate institutional bankers. This will be extended more broadly across the bank, including with our agri bankers. Our relationships with customers, product expertise and investment in building our bankers capability position us well for this long-term opportunity. Our goal is to achieve a net zero emission lending portfolio by 2050. That’s why we’re working with 100 of our largest-emitting customers to support them as they transition to a net zero economy. We were the first Australian bank to have made the commitment to Net Zero under the collective commitment to climate action. And today, we have released our plans for the oil and gas sector. This review set out how we will cap exposures to oil and gas lending until 2026. And after 2026, we will reduce exposures over time in accordance with the IEA Net Zero Emissions 2050 Pathway. We are the first of the major banks to release our plans under this pathway. We know there is much more to do and that we can do. And at NAB, we will play our part. I’ll now pass to Gary, who will take you through the results in more detail.

Gary Lennon: Great. Thank you, Ross. Let’s start with our usual high-level overview of the financials. As Ross mentioned previously, there’s been no notable items again this year and all comparisons with FY 2020 are on an ex notables basis. Underlying profit is lower over both for year and half-on-half with revenue impacted by a weaker period for Markets and Treasury combined with cost growth. Cash earnings over the year rose 39%, reflecting significantly improved credit impairment charges. Half-on-half, the decline was consistent with underlying profit at 4%, with CRCs relatively stable. Cash ROE increased 240 basis points over the year to 10.7%, reflecting the improvement in cash earnings, but was lower half-on-half consistent with the cash earnings decline. At a divisional level, underlying profit performances for second half 2021 have been solid and reflect the execution of our strategy, which is driving growth while managing returns. Business and private banking grew underlying profit 2% with stronger volume and revenue more than offsetting higher costs and investment spend. Personal Banking underlying profit declined 2%. Good volume growth in housing, along with disciplined cost management partly offset lower margins, reflecting housing competition and mix impacts. Corporate and Institutional Banking underlying profit declined 14%, reflecting a difficult period for Markets income, but excluding Markets, was up 5%. And New Zealand Banking posted a strong performance with underlying profit up 3%, with strong volume growth and stable margins. Before getting into the detail of the results, I want to update you on our remediation programs, customer-related remediation charges for second half 2021 were $137 million pretax, of which $117 million is in discontinued operations and wealth related. In second half 2021, there’s been no significant new remediation issues identified. Our focus has been on remediating customers who are part of our existing major programs as quickly as possible. I’m pleased to say we are progressing well. Customer payments have increased 80% over the year. In terms of adviser service fees, we have completed the process for salaried advisers and for advice partnerships, expect to be around 80% complete by the end of calendar year 2021. Based on this progress, we now expect to have all of our major customer remediation programs essentially completed in calendar year 2022. We have also included here an update on our AUSTRAC investigation. AUSTRAC commenced investigation in June. At that time, AUSTRAC commented, it was not considering civil penalty proceedings and NAB has not been notified of any change to this view to date. However, the investigation is ongoing and outcomes, including the potential impact on costs remain uncertain at this stage, whether that be ongoing cost uplift or any one-off remediation. Turning now to revenue, which declined 1% over the half. The impact of weaker Markets and Treasury performance this period is clear from the chart, representing a drag on revenue of $228 million, which I’ll discuss in more detail shortly. Excluding Markets and Treasury, revenue grew 2% half-on-half. Ross talked about the volume momentum in our business. This has translated into an increase in revenue of $180 million over the half. Fees and commissions declined $64 million. Approximately half of the decline relates to customer remediation and lower card income due to COVID related restrictions. The rest of the decline relates to the sale of our broker aggregation business and higher scheme charges impacting merchant acquiring fees, partially offset by higher home lending fees relating to volume growth. The next slide provides more details on Markets and Treasury. Second half 2021 was a weak period for Markets and Treasury with revenue of $580 million, down 28% half-on-half and well below a typical half yearly run rate. The key driver of the decline is NAB risk management income, reflecting the limited trading opportunities in an environment of low volatility and increased liquidity impacting repay margins. Customer income was relatively stable in the half. While the outlook for Markets and Treasury income is difficult to predict in more recent times, volatility has increased, which does provide greater opportunities going forward. Turning now to margins. Net interest margin declined 5 basis points over the half. Markets and Treasury was a drag of 5 basis points, of which 3 basis points come from holding higher liquids. Excluding these items, NIM was flat. The impact of the lower rate environment on deposits and capital in the second half of 2021 have been more than offset by lower funding and deposit costs, which have added 6 basis points to NIM. Lending margin declined 5 basis points this period, reflecting competitive pressures and mix impacts in home lending. Looking forward to FY 2022, we do expect that the low rate environment to have a minimal impact on NIM as returns from our replicating portfolio start to stabilize and increase thereafter. Home lending competition and mix are expected to remain headwinds, including the full period impact of increased fixed rate lending in FY 2021. We expect higher liquids to also be a NIM headwind in FY 2022. This mainly relates to the significant liquids build in the fourth quarter of FY 2021 and to a lesser extent, a further gradual build in liquids in FY 2022 as the CLF is phased out. However, at a revenue level, we expect the impact of higher liquids to be broadly neutral. Against these headwinds, we again expect some offset from lower funding costs and deposit mix, but these benefits are moderating, and we see this as a reducing tailwind for FY 2022. Costs rose 1.8% over the year and 2.4% half-on-half. At 1.8%, annual growth is within our targeted range of 0% to 2% for FY 2021 and reflects a balanced approach to investing in growth and digitizing our business while maintaining cost discipline. This investment is reflected in the $141 million uplift in technology and investment and D&A as well as the $113 million of additional hires to support growth. This investment has helped drive a strong productivity outcome for FY 2021 with savings of $411 million. Main drivers relate to the uplift in digitization, automation, policy and process simplification and lower third-party spend. Remuneration and inflation was an increase of $138 million, reflecting salary increases, including some emerging inflationary impacts, especially in respect of technology and data resources. Our costs this year have also absorbed a meaningful uplift in performance-based compensation of $364 million from a low base in FY 2020. Partly offsetting these increases is a decline of $207 million in other. This mainly reflects the non-repeat of restructuring costs in FY 2020 of $142 million and lower consulting spend. Looking forward to FY 2022, we expect costs to be broadly flat, broadly stable with FY 2021 levels with a focus on productivity to offset our investment in growth initiatives, inflationary pressures and further technology-related costs. We continue to target lower absolute costs over the FY 2023 to 2025 period relative to our FY 2020 base of $7.7 billion. At this stage, both these targets exclude the impact of the Citibank transaction as well as any costs associated with the AUSTRAC investigation, including fines or any nonrecurring remediation. Shifting now to credit impairment charges and provisions. In second half 2021, we booked a credit impairment write-back of $89 million. This comprises of an underlying CIC write-back of $113 million and a small increase in forward-looking related charges. The underlying write-back of $113 million is broadly in line with first half 2021 and reflects continued low specific charges and improved asset quality. Net forward-looking charges of $24 million are also fairly consistent with half one 2021. The EA has been topped up by $180 million – $181 million to reflect uncertainty over the impact of recent lockdowns in the reopening phase, largely offset by a write-back in target sector FLAs mainly reflecting an improved outlook for agri. CP coverage as a ratio of credit risk-weighted assets remained strong at 1.35%, down 15 basis points from March, but with 8 basis points of the decline relating to the partial sale of the aviation portfolio. Asset quality outcomes in second half have improved across every measure. The ratio of 90 days past due and impaired assets to GLAs has declined 29 basis points. Arrears are lower, reflecting a broad-based improvement across the Australian mortgage portfolio, including for those customers previously part of our COVID-19 deferral program. Impaired assets also reduced mainly driven by workouts in the business lending portfolio. Watch loans stepped down, mainly reflecting the aviation sale and new impaired assets remain at very low levels. These outcomes are encouraging and highlight the resilience of our customers during lockdown, lockdowns and the benefits of our broad package of support measures in place. However, at this early stage of the reopening, it was uncertain how asset quality will perform as businesses emerge from a period of hibernation and support is tapered. It’s worth noting that over 70% of our categorized nonretail assets related to those sectors most heavily impacted by COVID-19 including retail trade, tourism, hospitality, aviation and parts of the CRE book. This slide gives a bit more insight into the performance of those sectors which are most exposed to COVID-19, while asset quality for these sectors improved over second half 2021, it remains materially worse than our overall book, with the ratio of 90 days past due and GIAs more than double that of the total nonretail book. Post the release of our agri FLA, a 100% of our non-retail targeted sector FLAs now relate to these COVID-19 sectors. Turning now to capital, which has again been very strong over the half. Our CET1 ratio at September stands at 13%, up 63 basis points from March. Continued strong organic capital generation has been a key driver, reflecting improved asset quality and CIC write-backs over the second half 2021. M&A was also an important driver, contributing 29 basis points, mostly relating to the finalization of the MLC Wealth sale. Partially offsetting these impacts is completion of approximately 20% of our on-market share buyback this period. Risk-weighted assets have been stable. This includes flat credit risk-weighted assets, reflecting volume growth, largely offset by asset quality improvements, higher IRRBB risk weights mostly related to higher interest rates, offset by model-driven reductions in market risk. On a pro forma basis, CET1 is 12.25%, taking into account announced acquisitions and divestments and the $2 billion balance of our share buyback yet to be completed. This compares with our target range of 10.75% to 11.25% and sees us well placed to continue to grow and support customers while considering options to further improve shareholder returns with an ongoing bias to reducing share count. Finalization of APRA’s unquestionably strong standard is due shortly. While this is expected to result in a resetting of capital ratios, it is not expected to have a significant impact on our required capital. Liquidity and funding have remained strong, supported by continued deposit inflows and ongoing central bank and government stimulus. The decline in LCR to 128% from 136% at March, mainly reflects the reduction in the CLF. NSFR has remained broadly stable at 123% over the half. TFS allowances totaling $17.6 billion were fully drawn down in the June quarter with proceeds used to support lending growth, wholesale debt refinancing and an increase in liquid assets in the fourth quarter of 2021. We expect to increase our term wholesale funding issuance to more normal levels in FY 2022 to support growth and refinancing requirements and to position the balance sheet for the phasing out of the CLF and for TFS maturities in the coming year. So, with that, Ross, I will hand back to you for some closing comments.

Ross McEwan: Thanks, Gary. In closing, I’d like to outline my key priorities for 2022. We remain focused on executing our long-term strategy. By doing what we said we would with discipline and focus, we have built momentum across every one of our businesses. There is more to do, but we have the foundations in place, and I’m confident we will continue to grow. Our latest business survey released today shows business confidence and conditions are improving. NAB is the largest business bank in Australia and New Zealand, and we will play a key role in the expected economic rebound. However, as we transition to COVID normal, we know some customers may face difficulties and require ongoing support. Many of our colleagues will also be transitioning to a hybrid way of working, which will include two to three days a week at the office while offering the benefits of flexible workplace. As Gary has outlined, we will continue to balance investment and growth with capital and cost discipline. We remain committed to our 23 to 25 cost targets while continuing to support the momentum across our businesses. Gary has also provided a brief update on the AUSTRAC investigation resolution of this investigation is a key priority. Finally, we will focus on progressing the integration of 86 400 and UBank and the proposed acquisition of Citigroup’s Australian Consumer business to ensure we deliver the expected benefits of these transactions. Thanks for being with us today. I will now hand back to Sally for Q&A.

Sally Mihell: Thank you, Ross. I’ll just hand to the operator. If I could just remind you to please limit your questions to two.

Operator: Thank you. Your first question comes from Andrew Triggs with JPMorgan. Please go ahead.

Andrew Triggs: Thanks. Good morning. Ross, just interested in, given the commentary of the third quarter trading update, it suggests that NIM did deteriorate meaningfully in Q4. Perhaps Ross or Gary, to what extent was liquidity a driver of this falling NIM? And what were the other underlying factors that you saw during the Q4 that drove the margin pressure, please?

Ross McEwan: Well, the margin pressure, as you see, wasn’t from the core businesses of Personal and Business Banking, it came out of our markets and treasury operation. Otherwise, it was flat, but there is pressure coming across from the competition, particularly in the home lending market. And there’s only so much we’ll be able to offset that over the next year, I think, from pricing changes to saving deposit products. So we do believe there will be some pressure going forward, but it probably hasn’t been as much as some others have experienced Gary, do you want to make any other comments...

Gary Lennon: Yes, that’s. So it’s essentially Markets and Treasury, Andrew. And as I called out that we did have a quite a significant uptick in our liquids book right at the start of the fourth quarter, so that $24 billion. So that did again impact NIM optically for that last period. And as Ross mentioned, home loan competition was ongoing and continued but there are the main drivers.

Andrew Triggs: Just to follow up on that. Is your observation of competition in mortgage actually getting worse since the TFS ended rather than better? And in that context, fixed-rate mortgages were 57% of drawdowns for the second half, which is around the top of the tier range. How much of this growth that you’ve seen in your book, therefore, is just lower margin as you bank or white label mortgage product that you’re seeing? And do you expect that 6 to 8 percentage to change next year?

Ross McEwan: Yes. Look, we do expect to see the change in the construct of new business. It’s been a very strong push towards fixed because of the pricing. But now you’re seeing a bigger swing across into the variable product set. We can expect that to continue over the next year. I mean you look at the players in this marketplace, everybody is in mortgages. And it’s still profitable, but the competition is there, and we do expect to have more pressure coming through on that book, and we’re very cognizant of that. We’re going to be very careful. We just don’t end up in that price where our delivery is going to be around service delivery as much as it is around pricing value. And you’ve seen that coming through very strongly in our mortgage business this year. I think we’ve moved from being one of the probably slowest to deliver to one of the fastest in the marketplace, and that’s important for customers and also for the broker community certainty of getting the deal through. So we’re certainly playing it on the service delivery as much as anything else, and we’ll continue to do so. Yes, I think we’ve got a good proposition in this marketplace, and we’ll stay in it very strongly.

Andrew Triggs: Thanks, Ross. Could you think in White Label have an outsized share of new business this are?

Ross McEwan: White label is across a number of the broker operations through Advantage? I haven’t got the exact number of the percentage. So it’s not large. What you’re seeing with 86 400 and UBank, very strong growth in that business. And we expect that to continue on into 2022. It’s a very good operation. And as we bring those businesses together, again, the platform will be helpful to us, but it’s around as much around the service and price proposition there, but it will be a digital activity.

Gary Lennon: Andrew, the pleasing area was particularly business and private. So that had a very good second half.

Ross McEwan: We also saw the NIM in our business bank slightly up over the year. So I think given the intense competition in that marketplace, I think Andrew and his team did an incredibly good job, that’s worth noting the performance there on the great growth, good management. But we’ve won more cost as we put 550 more people into that business, and it’s going very, very well.

Andrew Triggs: Okay. Thank you.

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

Andrew Lyons: Thanks, and good morning. Hi, Ross. Just a question on your ROE. You’ve delivered 10.7% in FY 2021, which is consistent with your double-digit ROE ambition. But obviously, FY 2021 had some tailwinds and headwinds, including, firstly, a much lower than 25 basis point normal bad debt charge that you disclosed on Slide 70. Secondly, slightly higher expense base than your sub-$7.7 billion ambition. And thirdly, a capital position that’s at least 1% higher on a pro forma basis than the top end of your range. But if you adjust for all of that, you get an ROE of about 9.5%. So I’m just keen to sort of understand some of the other levers you think you can pull to get your ROE over 10% over the next 2 to 3 years and maybe particularly focusing on revenues.

Ross McEwan: Certainly focus on growth and ensuring revenue you don’t want to take on business that’s not profitable for the bank. But we are carrying a significant increase in capital that will bring down over the next 3 to 4 years. That will certainly help our ROE. And I stay firm on the view that this is a double-digit ROE bank. And to those factors that you raised, we’ve got to get more productive, carry less capital and do more good solar business, which we’re proving we can do. So I think it’s on a good path. But if you normalize out today even the capital, it’s still significantly higher than 10.7%, which would take up slack from most.

Andrew Lyons: Okay, Ross. And just a second question just on markets and treasury. Slide 22, you highlight your FY 2021 markets and treasury revenues were somewhat below the average of recent years, but you do note some recent reemergence of volatility, which might help in 2022. Do you still think recent year average is the best guide as to sort of, I guess, sustainable or normal revenues in that business, which is sort of around $1.7 billion to $1.8 billion? Or are there some structural issues which may impede that line item reverting to that average?

Ross McEwan: First off, our markets treasury business was pretty much on line with everybody else in the marketplace. So it wasn’t the result wasn’t better or worse. I think it was there or thereabouts, and it certainly has been impacted by massive amounts of liquidity in the market and just very little volatility. We’ve already started to see more volatility coming through and whether it gets back up to the average or certainly I’m not going to predict that. But I think we are seeing already a bit more volatility in this business getting back to an average performance across the time frame. The time will tell. There’s a lot of liquidity out in this marketplace at the moment. But we’re comfortable with the way it’s performing, where we believe it’s the business to be in and supplement a lot of other activities going on across our corporate institutional and business and personal bank. So let’s see how it goes this year next year, but I wouldn’t – you tell me what’s going to happen with liquidity and volatility, I could probably give you an indication.

Gary Lennon: I think it’s a trend Andrew. So you’ve got to look at the direction of travel now is it’s likely there’s going to be more volatility going forward. There’s going to be a trend, at least at the longer end anyway of more normalization of interest rates. All that adds as a positive. And as progressively, which we do expect will continue from here on in that liquidity is withdrawn from the system, the operation of the market tends to – will be tending to normalize over that period. So it’s more a time frame for all those activities to occur. What happens in FY 2022 because they’ve still got excess liquidity. Hopefully, there will be still more volatility and interest rate movements there to work on which drives hedging activity as well as trading opportunities that we do hope with that volatility that we either get back to normalized levels or start to trend towards more normalized levels. And then each and every year after that, I think that would start to trend back to some of the levels we’ve previously seen.

Andrew Lyons: That’s helpful. Thanks very much, Its helpful. Thanks very much. Got it.

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

Ross McEwan: Hi, Brian.

Brian Johnson: Good morning. I’d just like to congratulate you on the fantastic slide deck and what looks like a pretty good result despite the market’s reaction. Just when we have a look at it, I suppose the first thing is that when we have a look at NAB, historically, you’ve had much bigger volatility through your P&L from your financial markets business. And when we have a look at it, you seem to hold more assets in available for sale. Gary, could you talk us through, basically, is there an opportunity to change around that structure? And what impact that might have on both the earnings and interest rate risk in the banking book if, in fact, there was a change that could be done to reduce this earnings volatility that we get?

Ross McEwan: Yes. So, and there’s lots of things to consider there. And you’re right, Brian, that all markets and treasury businesses or particularly treasury whilst that time it’s difficult to work it out because there’s varying levels of disclosures, as you know, across the different banks where we think we’d like to be fully disclosed, but maybe others is disclosing as much ourselves. But you do know, particularly for treasury, there are different accounting practices and setups around the treasury book. And to your point about a balance between how many of the books are mark-to-market in the P&L and how many of the books are essentially fair value through other comprehensive income where what goes through the P&L is accrual income or any realized gains that come out of those reserves. And so the point there is to really look at a comparison that we have done this now and gathered all those different components across the bank where you can step back and look at on a like-for-like basis, what actually appears in cash earnings and what revenue gains appear as unrealized gains in other comprehensive income. Once you put it all together, as you’d expect and as Ross said, the returns and the trends are pretty similar. And you’d expect that given that the liquids books that we’ve all got tend to have the same sort of liquid assets, there might be slightly different – slight differences in provisioning. But the fundamental part of your question is it does – there are timing differences in different volatility. We’ve always – as you’ve said, Brian, we’ve always had more of a philosophical bias towards mark-to-market really off the back of execution discipline that, that drives. The more the more that you can go to accrual, you do run the risk that you’re not taking those signals. The market is demonstrating straightaway and it does impose I think, a greater trading discipline and a better trading discipline. But the downside is what you say it can introduce greater volatility. But it is something we’ll look at, and I’ll discuss with our treasury team, and we’ll compare with how that lays out versus peers, and we’ll see whether there’s an opportunity to maybe change up in future if volatility is the most important thing to look at.

Brian Johnson: So, earnings – Gary, I am correct in thinking that you are reviewing it and it does create more earnings volatility than your peers. That’s correct?

Gary Lennon: Yes. You’d have to go peer by peer, but we tend to mark-to-market more of our portfolio through cash earnings than others. And so that’s right.

Brian Johnson: Gary. The next one is – or probably more for Ross. AUSTRAC, slide 20. It’s good to see a little bit more disclosure, but it’s pretty – two questions. First one, what specifically is the AUSTRAC issue? Can you just give us a quick summary of what is a – what is AUSTRAC actually investigating? Just a very layman’s explanation. And the second thing is, I was wondering if you could provide us some kind of feeling for the uplift in the operational cost you’re running basically through the cash earnings with regards to basically this issue?

Ross McEwan: Yes. Both good questions, Brian. The first one is, look, we have got an investigation as to whether we’re just meeting our obligations under AML CTS. I mean that’s the basis of it. And that’s been the question and reason for the enforcement team asking for information from us. So we’ve submitted all that information. We’re working well with them. As we’ve said, we’ve got a program of work that probably goes from less than other 18 months anyway. And they’re seeing whether we’re honoring that program of work and doing what we should be doing. It’s as basic as that it’s no different to any other bank around the world has the same issues of complexity of the legislation that we are having been involved in another one with similar difficulties. It’s across the world. So look, we’re in the middle of the investigation at the moment, cooperating well. We’ll just see whether – what Astra come back with

Brian Johnson: The uplift in the operating expenses that we see as a result of it that you’re expensing through cash earnings.

Ross McEwan: There’s costs. I’ll get Gary to take you through, but it comes at multiple levels. manual work at the sort of the front end as it flows through into making sure you’re looking at the money laundering plus KYC from a more manual perspective rather than from a very technology-driven perspective. And secondly, there’s a fair bit of remediation work going on. So Gary just take you through both of those, Brian.

Gary Lennon: Yes. So Brian, the guidance that we gave is flat costs, excluding Citi, but excluding this point as well. And this is really just because we’re still partway through the process and we’re uncertain as to exactly the scope of the activity we’re going to be required to do as well as just the cost associated with the interactions with AUSTRAC. So we have to prepare lots of documents, lots of legal reviews, et cetera. So what we’ve said there is for those upfront costs and for what we describe as nonrecurring costs where we just have to go and remediate x amount of customers for these items. We have to find certain documents or whatever it turns out to be. And whatever that scope of that turns out to be post our AUSTRAC review, that is the portion that we’re uncertain as to what that’s going to evolve to date, so we’ve carved that out. But our expectation is if the costs relate to ongoing BAU expenses, you’ve got to upgrade this control or you need additional things to do ongoing work that will be more structural than that is included in our cost guidance. So we’re just trying to carve out more of those costs of a one-off nature and ongoing costs is included within our guidance.

Brian Johnson: Ross, look, I’d really just like to push the point because there’s a big issue out there – It sounds today as though this is a procedural problem as opposed to any specific breach. So we’re not going to pick up the newspaper and read about charter exploitation or a problem at the back of the ATMs, which is facilitated terrorism financing. This seems as though it’s more mechanism about the procedures as opposed to any specific breaches. Is that correct?

Ross McEwan: It’s reasonably broad ranging. They’re looking at our program of work more than anything else, Brian. And it is around the obligations we have under AML and the program of work that we’ve articulated to them we’re working still through that program and getting the results. So it’s as broad as that. And I would like to say what do they find or we find because these are pretty complex measures. But at this stage, it’s really around how are we living with our obligations and a review of the program that we’ve committed to. And just on your cost piece, if we got this reasonably well automated, we’re talking tens of millions. We’re not talking hundreds of millions of dollars of reduction in cost base here because we are – we do have front-end and back-end processes associated with anti-money laundering and KYC. We’ve been getting a lot better at it and more streamlined at it. There’s still a long way to go. But it’s – we’re not talking hundreds of millions of dollars of reduction in costs once we automate...

Brian Johnson: Fantastic.

Ross McEwan: I’ll point you to where we have laid out in our contingency note answers to some of the questions you’ve made about a bit more detail of what’s involved. So that’s just to assist you. That’s on page 17 of our annual financial accounts.

Brian Johnson: Thank you very much and thank you. Great result pack. Thank you.

Ross McEwan: Thanks, Brian.

Operator: Thank you. Your next question comes from Victor German with Macquarie. Please go ahead.

Gary Lennon: Hello, Victor.

Victor German: Hi. Thank you. Two questions for me. I’ll ask a question on marketing comparison and the phenomenal investment spend as well. With respect to market income, I mean, we’ve talked about it already earlier, but are there any sort of things that you could perhaps point us to as to why you might be more impacted than your peers with a slow interest rate environment. I know that you’ve talked about repo business being more impacted, which makes sense and presumably you are more exposed than peers. Maybe if you could give us a sense for how much that business contributes and why you’re more impacted than peers to this environment...

Ross McEwan: Well, first of all, so on our analysis, we are not more impacted our businesses versus some of the other equivalent businesses here. But we’ve pulled apart everybody else’s businesses and related to the types of business we’re involved, and we’ve got a similar result here. But there are some different ways of accounting for it. And as Gary said, we’ve probably got more mark-to-market and hold the assets for longer. And I think it’s performed in line for the rest of the market is what we – our analysis has shown...

Gary Lennon: And Victor, you had to add to that. And if you break it out between how we disclose it between markets and treasury, and there can be a timing period half-on-half. But if we look at our markets business in isolation over the course of the year, it’s down around about 24, I think percent is the revenue down. When we look across our peers, it’s pretty similar to what we see across PE group. So again, a loss your point that it’s – I think it is the experience, which is what do you expect the experience is pretty similar, and we have found challenges with – we do have a larger repo business. So that does tend to get a bit more impacted spreads come in. But probably the big difference is on treasury and my earlier point around you really need to look at movements in OCI in addition to cash earnings because the unrealized gains go into – And this is a normal thing that everyone does. But for this period, it is creating quite a few distortions in what revenue turns up in cash earnings versus elsewhere? And if you’re rebalancing your liquids portfolio, which all treasury functions do as you sell bonds, that moves from OCI into cash earnings. So you can get some differences and we sort of look through those and some of our peers have a very different experience where they’ve – looks like they’ve been rebalancing their portfolio a lot more than we have, which has the effect that more income flows through in the cash earnings than sits in reserves. So that’s my point. You have to sit back and have a look. And once you adjust for all that, we step back and go, well, as we would have expected, the overall economic performance is pretty similar.

Victor German: Okay. No, that’s very helpful. That makes sense. Presumably it means that as we go into next period, those that those normal – those balance sheet activities normalize, you shouldn’t be significantly different to peers as, I guess, Ross is suggesting?

Gary Lennon: Yeah. And that’s an important point, Victor, that whilst the transfers in and out of OCI can vary, that does tend to have an impact on returns going forward that you see in cash earnings. So one accruing will accrue through over time. The other is realized straightaway. So that sort of goes to this point of different practices around rebalancing portfolios and the different timing and recognition aspects that creates...

Victor German: That’s very helpful. And secondly, I was just hoping to – I know I asked you this pretty much every half, but I’ll do it again. If we look at investment spend, you’re looking to hold it broadly flat. If we look across the peer group, everyone has lifted that number quite substantially. I appreciate that the number is not perfectly comparable across the banks. But just maybe if you can give us or remind us why you’re comfortable with what you’re spending now? Why that $1.3 billion is an appropriate number, particularly in the context of what kind of you described earlier or discussed earlier with respect to AUSTRAC potentially needing a little bit of additional investment. Why hasn’t that investment, I guess, been done before? Yes. And why do you think 1.3 is the right number?

Ross McEwan: Thanks. So I’ll pick that one up. the 1.3% this year we’re now in will be, as I said, consistent with what we spent last year, which actually was less than the money we were spending the 2-year prior, where we had major programs to change a lot of our technology systems, processes and I think fix-up a number of regulatory type issues. $1.3 billion is one hell of a lot of money. And you put it across a very focused set of priorities that we have as a bank, you can get a good return out of it. And what we’re seeing is a better return for dollars spent out of our portfolio now than probably we’ve ever had, and we’re comfortable with that. We sit every Fortnite with the executive team and go through the programs of work. you can do that when you’re spending it on sort of 20 major programs, not 400 other things, and that’s what we’re doing. So we’re getting a better return out of the spend, we think, 1.3 billion, plenty for a bank of the size to stay and lead the market. You’ve got to be very careful. You spend a lot more money. You don’t actually know where it’s going to. And I think that’s the danger that we were in. We were spending a lot and a lot of it was – some of it I suspect we didn’t know whether we’re getting a return to how we do. And so, we’re very focused and disciplined on that $1.3 billion spend. And as you’re saying, it’s flowing through into our results. We’re getting much better processes in our business bank and our personal business. We’re spending it on in areas such as merchant. We’re spending it across our payments business, all the core parts of the bank, and it’s – remember, it’s only spend on a bank. I don’t have a wealth business or any other subsidiary operations that I have to worry about today, it’s a bank, and that’s where we’re spending the money. So pretty comfortable with 1.3%. Everybody would love to spend more. But where you get the return. I think that’s we’ve optimized it. And this year, we’re spending less on the issues that we’ve had to fix and more on the go forward. So you’re starting to see much more positive impact on the areas of customer and colleague, which is what you want and over time we’ll see even more of it being spent on discretionary.

Gary Lennon: Ross, just a couple of other ones to add. And Victor, well, Victor, you called this out, you do need to be cautious in the comparisons about what’s included versus peers. So that we all know they’re not like-for-like. But probably two points. More importantly, we did – if you go back a number of years, and I think we were at the time in some circles anyway, criticized for this. We had quite a significant uplift in spend in investment, and that was really focused on some of our technology, underlying foundations, et cetera, that we wanted to get in place where we did spend that potentially earlier than peers, and we’re feeling pretty happy about that. But that spend is being done. And a lot of work has been done in more recent times around the effectiveness of that $1.3 billion spend, where we have less overhead, less governance, more agile processes. So the equivalent of that $1.3 billion now, difficult to put a number on it, but we think 10%, 20% more productive spend than it previously was. We had a big component of outsource in that, which was more expensive and probably less effective. So we’re getting a lot more bang for our buck for the $1.3 billion spend, and we’re pretty confident this is the right level for us for now.

Victor German: Okay. Thank you. It sounds like it’s highly unlikely for us to wake up one day in the next 3 years that – and we see that number at $1.6 billion, $1.7 billion, at least the way you’re seeing it currently.

Ross McEwan: I’m very much hoping you or I won’t wake up and have to spend that sort of money on the bank. Remember, we are a very focused operation. And we’re just spending it on a bank. It’s a lot of money, $1.3 billion.

Victor German: Thank you, Ross. Thank you, Gary.

Operator: Thank you. Your next question comes from Matthew Wilson with BNP. Please go ahead.

Gary Lennon: Hi, Matthew.

Matthew Wilson: Good morning, Ross. Good morning team. Echo Brian’s comments two clean results out of NAB consecutively is a great outcome given the last 25 years. Just let me look at the Citi acquisition. Can you give us some feel for how much uplift that should provide to the margin? And then secondly, you’re clearly the best business bank in Australia, but your MPS is number two. Can you walk us through the road to being number one from an MPS perspective in the business bank?

Ross McEwan: Yes, we’ll start with the latter one first, and we do bounce between one and two backwards and four is pretty much every month. Mike and Sam with all of it is we’re still very negative, and we need to be very positive. So I think the task is to get ourselves into absolutely positive business banking territory on a consistent basis, Matthew, as opposed to joking around for first and second against negative. So that’s our target. And the team are very focused on a lot of it, remembering comes back from the small business market that make up the bulk of the numbers on the surveying. So they’re the ones usually with probably the less relationship-led service, they are more digital, and we’ll get a lot better in that digital space. So we’ve got a very clear focus on getting better in that customer space. A lot of it will come through automation. It will come through digitization, which is where we’re focusing small- and medium-sized businesses. And all parts of our business have been using a lot more digital activity to look after customers here. On the Citi acquisition, can we just go back to why we were very interested in this, and it’s two major parts of the four parts to that business, the two major parts of obviously, the credit card business that our people are focused on. If the acquisition goes through, which we’re hoping it will, it does put us in a position of being clearly number two in the marketplace with scale. And in this business, you do need scale. We will replace our systems. We’re in the market now with vendors talking to them about replacing current systems to look at new go-forward systems, not just for the credit card business, but the personal unsecured business, which I think will be important going forward for NIM. I haven’t got a NIM number for you in mind, but you know with the bigger book of unsecured, you do get an uplift, but it will still be devoted by the mortgage business. And again, a different set of customers to talk to and do things work, but you need capability, good systems. And we are also looking forward to the white label business here, some very good partners in this business that we’ve had the opportunity to have conversations with. We think we can help them with their business as well and expand their businesses and create a really good white label business. So there’s many parts of it. And don’t forget, the $7 billion of mortgages that throw for good reasonably good return that well integrated to our business as well. But yes, there will be an uplift in NIM, I wouldn’t say it’s significant at all its capability, its systems and at scale that’s very important in that market and the white label business is vital, I think, for us. So lots of things to like, but it’s a big integration. We’ll be focused on it for 2 or 3 years, and we’ll try to make the most of it and get the returns out of it that we believe we should.

Matthew Wilson: Yeah. Now, thanks for your time.

Ross McEwan: Thanks.

Operator: Thank you. Your next question comes from Brendan Sproules with Citi. Please go ahead.

Brendan Sproules: Good morning, team. I have a couple of questions. Firstly, just on your net interest margin. A couple of your peers have called out that net interest margins in the month of September was sort of materially below the average for the second half and driven by the high liquids, which you’ve mentioned here, the competitive pressures, particularly in fixed rate lending, which I know you had around 56% of your flow in the second half into fixed rate products. And then also the declining benefit from deposits. So I was wondering if you can give us an indication as to how that shape looks for your business? And then I have a second question on Business Bank.

Ross McEwan: Well, a, it sounds like a NIM is a great one for you. I don’t think you’re going to be giving this exit NIM, but you can give an indication of what’s starting to happen in that marketplace.

Brendan Sproules: Right.

Gary Lennon: So it’s probably – I don’t talk about the discipline of our business bank on them as well, plus a couple of points in the half as we like that. So the outlook for NIM and yes, we don’t disclose an exit NIM per se, but we’re happy to run through the components that you’ve talked about. And probably the first one, the liquids one, which clearly with our increase in liquids in the fourth quarter, and then we will have a gradual further increase in liquids throughout the year as CLF is phased out. So that is something that will impact our NIM, but that’s essentially an optical impact. We’re expecting the revenue portion of that to be pretty neutral, and it’s not capital consuming, but it is a factor when you go to forecasting where NIM is going to go. So that’s the first point. The second point where we get into the more substantive drivers of NIM, we do see chasing pressure and competition in housing. Some of the things that I’ve called out, you’ve called out the shift of fixed that will flow through for the full year. So it’s definite that there will be ongoing housing NIM pressures as we go into 2022, albeit a read and listened to some of the commentary coming out of some of our peers, which I thought was pretty pessimistic on what that might look like. So we’re not we’re not seeing those degrees of exiting into what some of our peers have been disclosing, but the issue is real, just to a lesser extent. And then we do – whilst we’re seeing funding and deposit costs will decrease as a tailwind. It will still exist. So we are still seeing good deposit inflows. We’re still seeing the mix of those inflows is still of good quality. As Ross talked about a lot, we’ve been doing a lot of work on transactional, looking for more deposits. So that funding and deposit offset should continue through. We also, despite increases in long-term rates, what we’re able to issue at now versus what we’re refinancing. There’s still a carry benefit there as well. So a number of benefits on the funding and deposit side. And then you sort of on the business – underlying business side to date, there’s slight emergence of pressures, but the nature of our SME businesses. It has been for a long time, you don’t really see that acute margin pressure appearing unless there’s other issues with the relationship because price is just one component and a lesser component of that relationship. So you lay that out net-net. So I would say, look, there’s net headwinds for next year. There’s still a lot to play out to the actual scope of those headwinds. This year, we managed to essentially net them off to get to flat NIM. I think that will be difficult for 2022, but I also don’t think it will be a disaster scenario either. So hopefully, that gives you a little bit of sense how we’re thinking anyway about the direction of NIM for 2022.

Brendan Sproules: Yes. That’s very helpful. Thanks, Gary. And my second question…

Gary Lennon: Actually, there was a final point I was remiss in not mentioning in 2021, it was hopefully now the final year where NIM is being impacted by the low rate environment. So with the movement in rates and 3- to 5-year swap curve, how we’re now investing our capital and MBIs, that should really neutralize for 2022. So that’s a big headwind we’ve had in 2021 that will disappear in 2022. And then hopefully, by 2023, that actually and beyond starts to turn into a tailwind.

Brendan Sproules: Thank you. And just my question on the Business Bank. I mean there’s been a terrific turnaround in the revenue growth profile in the last 6 months. To what extent is your use of brokers helped you gain market share? And secondly, how do we think about the lending spreads that you’re making in this business, say, relative to pre cover? Are they higher and more profitable...?

Ross McEwan: I don’t think the spreads have moved much at all, Gary. – let you give us some contemplation that...

Gary Lennon: We’re pretty consistent actually that we’ve – some of the components have moved around, but the spreads overall are reasonably consistent. Broker is playing an increasing role as we know, we’ve been underweight in that space, starting to build more. But in terms of materiality to the growth this half, still only about 30%. So it’s an increasing proportion, but it’s nowhere near the proportion on the mortgages side. But that will be a feature that’s a trend, I suppose, that will continue in future periods. But the BMPB business has been very good to reinforce the key to this is strong relationships, strong interactions with customers, strong advice and that puts you in a position where price is one of the lower discussions that get had. And so that helps you in this sort of scenario where we’re not finding ourselves in a constant pricing battle all the time, as long as you do have a happy customer. And they tend to really come up when there’s been issues or whatever. And thankfully, I think the team has been doing a pretty good job on that and minimizing the issues and maximizing the discipline around pricing.

Ross McEwan: I think the competition here has been our friend. It’s awake, I think, a very good business bank. All parts of it are working well and growing. Small business, which was flat or losing for a few years has been – is now growing well. It’s exiting 2022 very strongly. Our metro business is stable and starting to grow. Our rural agricultural book is growing, as we said, flat at 14% growth in the year. Our private banking operation had well over 2x system growth in mortgages. So every part is growing. We just make it easier for our colleagues and our customers to do some business with us. It’s a relationship business. And a lot of people forget that, that price is important, but it’s not just the only thing. In some of – I think others have forgotten how to do business banking well, where I think we’re on March. And I think you’ll see continue to see this business grow. There aren’t too many businesses in Australia that grew $30 billion in the last 6 months. It shows how powerful this franchise is turning out to be $60 million of that in business banking...

Brendan Sproules: Fantastic.

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

Gary Lennon: Hi, Richard.

Richard Wiles: Ross. I’ve got a couple of questions, one is on margins and one is on New Zealand. Firstly, on the margin, can you provide, Gary, a bit more detail on the 5 basis point headwind from lending on slide 23. For example, can you give us an indication of what was mortgage competition? What was mortgage mix? And was there anything from business lending or New Zealand in that 5 basis points?

Gary Lennon: I think the bulk of that was housing, and I haven’t got the exact split between – But definitely, there was a reasonable contribution from both those factors in terms of just general competition versus change in mix. So it’s a bit of a guess, let’s say it’s three to two, but something like that.

Richard Wiles: Okay. And then in New Zealand, Ross, you’ve obviously got two big issues occurring there at the moment. One is the tighter macro prudential measures and the other is the moves from the BNZ. Do you think the strong performance in New Zealand can continue? And do you think the positive impact on revenue from rate rises will be enough to more than offset a sort of slowdown in mortgage growth from very high levels.

Ross McEwan: Yes. Look, it’s hard to know where the market in New Zealand go, so best that interest rates are on the March, which do help a bank. I think it’s important to understand the strategy for our business in New Zealand, and there is a clear tilting part of our plan is a tilting more towards the consumer and the SME than where we’ve been stronger traditionally, which is a more corporate end of this marketplace. And that’s as much because capital levels are increasing in the New Zealand marketplace quite dramatically over the next five years. And we believe we can serve the customers best and get a good return out of those parts of the market. But New Zealand is, you’ve seen the house prices go up by 25%, 27% in the last 12 months. That just can’t continue. And they’ve got to take some action to slow it down. And I think interest rates are on the march that would itself will slow that market down for a period. But it’s a complete lack of supply in that marketplace just as the problem in the Australian marketplace. BNZ’s well positioned. It’s not the biggest bank, but it’s certainly, I think, well positioned in that marketplace. And we’ve had very good leadership of it and consistent leadership of it as well and put a new leader in water Dan Huggins, New Zealand so back home, and I think he’ll do a very good job with that business. It’s hard to know where it will go, but it straight on the March.

Richard Wiles: So you don’t think that dynamic is negative for banking revenue growth in New Zealand – is it the right?

Ross McEwan: But it’s in pretty good shape. And I think we’re in the right parts of the market there.

Richard Wiles: Thank you.

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

Gary Lennon: Hi, Ed.

Ed Henning: Hi. Thanks for taking my questions. Just circling back to the Business and Private Bank. You touched on before, the margin was improved during the period or the half. Was that mix driving the margin? And how should we think about the outlook for that? And you touched on before, 30% of flows coming through broker as a first one, please?

Ross McEwan: First off, the broker flows in themselves don’t reduce the margin. It’s actually quite interesting that it’s equal to our own distribution, the margin through the broker flow. So it’s fine. It’s just starting to be a slightly bigger part of the market. We’ve been a bit weaker than that. We’re getting stronger and better at serving the broker community. I’ll leave Gary on the margin make up itself. But as you see, we have increased, but just shared discipline in that marketplace has served us pretty well. So Gary, any other comments on the margin? You’ve done very well on margin today. Most of the questions have been on that.

Gary Lennon: So it’s really an extension of what you’ve said. So the business continues to be disciplined around margin and that’s been fundamental to our component to safe growth is we just – we don’t want to be growing and then sacrificing significant margin or having to pay significant amounts in terms of additional operation costs. So Andrew has been really focused on how do we get that growth without sacrificing the margin, making sure the returns continue to be solid, and we continue to relook at any particular pockets, and this has helped where the returns are suburb rates. So we do look at those, we do look at opportunities for additional businesses, opportunities for repricing. So that is all assisted with the margin during this period. Discipline around the lending margin. And then we’ve had some nice tailwinds for the period around funding and deposit costs. So all of that together has given a pretty good – it’s a great outcome when you’re growing $10 billion, 5% GLA growth and plus 2% in margin is a great momentum. And so going forward, we like that sort of growth, Andrew. And as ones we can maintain the discipline on the margin, that would be great.

Ed Henning: So, Gary, looking at Andrew, in the audience. Just on the margin and the outlook. Obviously, a great result as you said this period, but do you see the benefits from the deposits easing off and more competition come in? Like should we be thinking this business can hold margin or margin continue going up? Or should we see a little bit of pressure anticipated to come through?

Ross McEwan: Well, there’s definitely pressure because your – the balance of deposit pricing, there’s only so much left in that end of it. So there will be pressure. But there’s been intense pressure in this part of the market for the last 2 years. And we’ve got a very strong franchise that has weathered that pressure and growing very well standing still, but it’s actually shown a propensity to grow. We’re doing a very good job with customers. We focus on the customers all the time, and it’s showing through. It’s all very well, easy in this business to come in with really cheap pricing and crush your market margin on the floor and grow your costs. At the end of the day, it’s a balancing act, and I think we’re providing that very strongly.

Ed Henning: Okay. All right. And then just a second one on credit growth. We just touched on business, which was really strong, but it was strong across the board. Can you just go through each segment on where you expect growth? Do you expect to continue to grow above system across all your divisions?

Ross McEwan: I would like to grow across the board in each of the areas in a disciplined way as we have in the second half. I’m not saying it’s going to be as strong as, but we would expect our businesses to grow in the areas that they’re in. That’s all we’re focusing on. It’s not a slave got wealth businesses and all other things. I have to worry about. We’re a bank with 4 very strong franchises and a growing part of 86-year UBank, which has also showed propensity growth. But we’d expect to see part of the business continue to grow going forward. So that sounds like growth of at least at system, you’d be disappointed if it went below system in your car I would be disappointed with less than system growth from the bank. But let’s see how it plays out if margins get trashed because of it. I’ll be more cautionary but at this stage, we’re holding on well with margin and growing. It’s the discipline of both.

Gary Lennon: And of course, the strategy is so for Australian consumer, it would be great to be growing mortgages above system. Obviously, in SME, absolutely, some of our system. New Zealand continuing to grow the system. And then in CIB, it’s a bit more optimized. So where we see the opportunities, where we see the returns. So that’s the area where there’s a bit more nuance in CIB. It’s just not only growing at system, it’s optimizing return.

Ross McEwan: These ability to grow very well in that area doing that as well.

Ed Henning: Okay. Thanks for that, I appreciate the insights.

Operator: Thank you. Your next question comes from Jonathan Mott with Barrenjoey. Please go ahead.

Jonathan Mott: Hi. Thank you. Just a couple of more questions again on business banking. And again, that look, I think Ross in the first half, you’re really optimistic about the pipeline that came through, and we’ve seen that come through now. Agriculture has been very strong. So other areas across the economy that you think you are starting to see growth come through. But also a question I also asked last year, if I can follow on with that one. Slide 77, you continue to show the business’ exposure with probability of to a greater than 2%, which has hit another record low despite the COVID exposed segments. Do you actually think that now is an opportunity that you need to take on more risk did you need to help the Australian economy, there’s some good ROA opportunities out there in business banking, and there’s a lot of pressure in margins in other parts of the economy? Should you be taking on more risk, those two questions on the business bank if I could.

Ross McEwan: Well, Jonathan, I’m not too sure whether I can grow much more than $30 billion in six months across the entire business, of which $6.7 million was out of our business bank, which is playing its part in helping this economy recover and get going again. I did say to you last time that I saw momentum continuing. And I’ll say to you again this time around momentum looks like it’s continuing. It’s doing pretty well. So – and that’s across the board. So in business banking, it’s not just a one-trick pony there in one part of it. It’s growing across all segments and across many sectors as well. But we’re a very, very good business bank. And we just make it easier for our colleagues to deal with customers and our customers to deal with us. It’s not that complex, and we’re being good for it. But we’re using data and analytics, a lot better than we were two years ago. We’re enabling our leaders to get out there. So we’ve got very good bankers. Everybody wants them I see. But we’re doing a very good job, and they’re doing a great job for us. So I’m optimistic about it. We’re seeing the growth. I’ll predict again that you’ll see another 6 months of growth out of the bank, just as I told you that last time.

Gary Lennon: But it’s across the board.

Ross McEwan: Yes, it’s in just one area of the business bank. And Australia, as you’ve seen from the latest survey we’ve put out today, it’s optimistic. And we’ve predicted that as we come out of lockdown as long as we stay out of the lockdowns that we’ve been in and let Australia get going, again, open it up to the world again, just as many other countries have, we’ll be in pretty good shape. And we will do our part plus to help it get going as we have shown in this six months.

Gary Lennon: And Jon, we like to refer to that chart. I like this chart. I think it tells a good history. And a few things it points out is clearly, we haven’t got this I’m not you’re adding mortgages, Ross, $10 billion growth in business and private by going up the risk curve. So we’ve kept the discipline around risk and that’s demonstrated in this portfolio. And you see the amount of work that’s been done over the past decade to really reshape the risk across all of our business lending exposures. And you’re right, that does give us now opportunities to look at areas where we think the risk returns are strong, that we’ve got some ability if we think that qualifies with disciplined safe growth.

Jonathan Mott: Just a quick one following on from that. The growth that’s coming to you, how much of that is coming from existing customers borrowing more versus new customers to the bank?

Ross McEwan: Well, the vast majority would be coming out of existing customers wanting to improve their businesses and grow. So it is coming out of the vast majority. I don’t have the exact percentage we can get that for you, but the fair percentage coming out of existing customers. And that’s just being better.

Gary Lennon: And John, you’d expect that we would we track it every – certainly, every week, I see the numbers maybe every day, that the win-loss ratio is – has been very positive. So we are certainly winning more from our competitors than we’re losing. And the ratio has been very solid, like it’s not just a just above 1. It’s 1.5, 1.8 on occasion. So we are having really good success with our proposition with customers at NAV, but also with customers that are not yet our customers but have become...

Jonathan Mott: Thank you.

Operator: Thank you. Your next question comes from Azib Khan with Morgans Financial. Please go ahead.

Gary Lennon: Hi, Azib.

Azib Khan: Hi, there. Thank you, Ross and Gary. A couple of questions from me, one on business lending and one on housing lending. On business lending. So obviously, the growth there was strong at 6% over the half. To what extent is that being assessed by the government SME recovery loan scheme?

Ross McEwan: Probably limited. There’s been some input earlier on and some impact of just getting some confidence back into it. And I think it was really helpful to have those schemes, particularly around the asset finance pieces was pretty important as we came to the end of the financial year last year. So limited this year, it is just businesses wanting to get going again and seeing the opportunity and optimism with an economy opening up. That’s what’s driven it.

Azib Khan: So the impact of those government guaranteed scheme is negligible in this result, Ross?

Ross McEwan: In the latter part of the year, absolutely. They did the job very early on, just as many of the government schemes, we are very positive for those because they just booked confidence and momentum back into the market. But over the last three to six months, very limited. And it’s been customers just wanted to get on the business. But those schemes were very important at the time just to give facilities and to give confidence into a marketplace. And I think we often forget that.

Azib Khan: Just in the last couple of months, Ross, the government has yet again revised and expanded that scheme. Do you think the take-up of that scheme will increase? And for you as a lender, do those government-guaranteed lines come with lower margin?

Ross McEwan: A similar margin because we’re holding less capital on them. So they’re probably equal to what we have in the market on a normal product. But again, can I just don’t underestimate what the government has done here over the last 18 months right throughout that these schemes are becoming a smaller and smaller part of what customers are looking for at the moment.

Azib Khan: Okay. Just a second question for me on housing. So I know, Ross, that your economist have got a pretty grim system home loan growth forecast in FY 2022 of 5.1%, groom relative to some of your peers.

Ross McEwan: Grim, 5%, I take it all day and every day, but less than what 20% house price rises, so to speak.

Azib Khan: Yeah. Relatively great money in absolute terms, we’re relatively great. But Ross, in terms of your own view on this front, are you aligned with your economists on this front? Or are you expecting better than $5.1 million...

Ross McEwan: No, look, I’m aligned with our economists on this. I think these are sort of numbers over time about the right numbers. Look, a lot of factors at play here, though. Let’s see what happens with integration, which must start opening up soon to get labor into this marketplace. Every business we talk to is looking for labor. We need to get the borders open again for businesses to really hum along, and that could have an impact. But I’m comfortable with 5%.

Gary Lennon: And conservative assumption is predicated on that house prices do continue to increase, that APRA will continue to intervene. So there is some expectations of further interventions built into that number. So if that didn’t happen, then maybe there is some upside to that 5% number.

Azib Khan: Okay, great. Thank you.

Operator: Thank you. Your next question comes from Carlos Cacho with . Please go ahead.

Gary Lennon: Hi, Carlos.

Analyst: Hi, good morning. I just had another question on the business credit side of things. We’ve seen some headlines recently that supply chain issues, among other things, have seen a pretty significant increase in working capital. How much are you seeing that through the business credit or the business bank versus how much of the growth is driven more by investment and buying property in the ABS stats we’ve seen a pretty significant step-up in business lending for property as well.

Gary Lennon: Very much the latter, very much the laser. We haven’t seen – we’ve seen some increase but not major increase in the former, but most of the letter.

Analyst: And then the second question, just on the bad debt front. There’s still – it’s a fair bit of wiggle room within the economic overlay there. What do you need to see for that to come down? Is it just the continued recovery coming out of lockdown, seeing that we see this increase in spending continuing that we don’t see businesses struggle as we come out?

Gary Lennon: Yes. Look, I’d certainly like to see a few quarters come through here before we start releasing out. We are being cautionary, and I’ll tell you we’re going to continue to be cautionary. There’s still some way to play out here. we’re seeing great optimism in the marketplace, but let’s see it play out. And let’s see a lot of these businesses that have basically been in hibernation start to emerge again. We’ll see what the outcome is. We all know you just need to walk down the main streets of most of our big cities. And you’re seeing places, places you’re seeing businesses just not open yet. Let’s see if they open up and get going again. And a lot of that will be to do with getting people back into cities like Melbourne and Sydney and getting people back into the office buildings to get the businesses underneath them going. So I am still a little bit cautious, very optimistic about cautionary, and we won’t be doing any major releases, I think, for a little period of time.

Analyst: Excellent. Thank you very much.

Operator: Thank you. There are no further questions at this time. I'll now hand back to Mr. McEwan for closing remarks.

Ross McEwan: Look, thanks very much for joining us this morning. As we’ve said, it’s been a good year, and I am pleased with the momentum we have across all of our business. It’s also, as some of you pointed out, nice to deliver a clean set of results again. We launched our refreshed strategy 18 months ago, and we’re ahead of where I expected us to be at this point in time. It is good to have focus on the bank and fewer distractions that we’ve certainly had over the last 12 months. And this comes back to just focusing on the right things for customers and colleagues, lifting our service levels and just getting the basics right. I let there’s lots more to do, and we’ll keep executing with focus and discipline. Again, many thanks for joining us on this morning’s call. We do really appreciate your questions. Thank you.