Earnings Transcript for NAUBF - Q4 Fiscal Year 2023

Operator: Thank you for standing by, and welcome to the National Australia Bank 2023 Full Year Results Conference Call. Please go ahead.

Sally Mihell: Thank you, operator. Good morning, everyone, and thank you for joining us today for NAB's full year 2023 results. My name is Sally Mihell, and I'm the Head of Investor Relations. Before we start, I'd like to acknowledge the traditional owners of the land I'm calling in from the Gadigal peoples of the Eora Nation. I'd like to pay respect to their elders, past, present and emerging and to the elders of the traditional lands in which you are also calling in from. Presenting today will be Ross McEwan, our group CEO; and Nathan Goonan, our Group CFO. We're also joined in the room by members of NAB's executive team. Ross and Nathan will provide an overview of our performance this half. Ross will also provide some comments on the outlook and our priorities for 2024. Following the presentation, there will be an opportunity to ask questions. Please note, you need to be on the phone line to ask a question. I'll now hand to Ross.

Ross McEwan: Thank you, Sally, and welcome to our full year results. It's nice to have Nathan here for his first set of results as our CFO. We have delivered a strong financial performance this year with positive contributions across each of our businesses. These results reflect the consistent execution of our long-term strategy, together with the benefits of higher interest rates. I've been pleased to see the steady, solid progress of our businesses over a period of years now. We did experience more challenging conditions in the second half that saw our financial results soften. This came as the impact of higher rates and inflation increasingly weighed on households and the broader economy leading to a slowdown in credit growth and continued strong competition in home lending and in deposits. We expect our operating environment will remain challenging in 2024 reflecting continued slower economic growth and elevated inflation. We are well prepared. Our balance sheet settings remain prudent with capital above our target range and strong provisioning. We are seeing the benefits of deliberate choices we're making about where to invest. In particular, our leading business in Private Banking division has continued to record its record of strong growth. This is a great business built on long-term relationships with customers, and we're determined to make it even better. In Corporate and Institutional and home lending, our focus on returns has seen us adopt a disciplined approach to growth. Cost of living pressures are impacting some customers more than others, and the RBA's decision to again increase the official cash rate this week because of persistent inflation will increase the pressure on households. Our message is, please call us as soon as you're feeling you're getting into difficulty. Our focus is on managing NAB for the long term, consistent multiyear investment in strategic priorities is delivering better outcomes for our customers and colleagues. This will drive better returns to shareholders over time. We have delivered a strong financial performance over the 2023 financial year compared to 2022. Revenue grew 12.9%, benefiting primarily from higher margins, which peaked in the first half and volume growth, together with improved markets and treasury income. Total costs were up 9.1% over the year or 5.6% when you exclude the full 12-month impact of the Citi consumer business, and costs related to the federal government's Compensation Scheme of Last Resort. The 5.6% increase mainly reflects higher staff-related costs. It also reflects investment in technology and compliance, including ongoing investment in our financial crime environment, together with fraud prevention and cybersecurity. Cost headwinds were partially offset by productivity benefits which were in line with our target this year of $400 million. Underlying earnings increased 16.1% and cash earnings rose 8% over the year. The final dividend of $0.84 brings our total dividend for the year to $1.67. This is a $0.16 increase on 2022 and represents 68% of cash earnings for the year. Over the year, we will return $5.2 billion to our shareholders in dividends. All our businesses contributed to the growth in underlying earnings over the year. And I want to again highlight the strength of our Business Banking franchise as a key driver of this performance. Our leading business in Private Banking division continues to grow and delivered a 21.6% increase in underlying profit. Corporate and Institutional achieved a 19.5% increase in underlying profit. These 2 divisions accounted for almost 85% of the group's total growth and our underlying profit for the year. Personal banking with increased underlying profit of 3% and BNZ, up 10.9%, have delivered good results in challenging environments. Underlying profit in the first half benefited from the impact of higher interest rate environment. The decline in earnings in the second half largely reflects a more modest benefit from cash rate increases together with elevated competition and cost headwinds. This impact was particularly pronounced in personal banking, where sector returns remain challenged by the low margin on home lending. Nathan will spend some time shortly discussing the key drivers of the group's financial performance. We've delivered another improvement in annual cash ROE to 12.9%. This is the result of our strong financial performance, along with a focus on reducing share count while maintaining strong capital through the cycle. The long-term trend evident on this chart reflects our consistent focus on strategic execution over the past 3 years. Prudent balance sheet settings are an important part of our strategy which is focused on keeping customers in the bank safe through the cycle. Collective provisions to 30 September represent 1.4% of credit risk-weighted assets. This includes $1.4 billion of forward-looking provisions added since September 2019. Both the liquidity coverage ratio and the net stable funding ratio are well above the minimum requirements. Our capital remains strong with a pro forma CET1 ratio of 11.94%, above the target range of 11% to 11.5%. This includes 28 basis points impact of the remaining $1.2 billion buyback. Our focus on generating organic capital will be important to future -- support future growth while providing options for ongoing capital management. A stronger deposit franchise is a core part of our strategy and is an important driver of improving returns across our business. Over the past 4 years, we've grown our share of both business and household deposits. This growth has driven our increase in the share of lending funded by customer deposits from 70% to 82%. We have continued to invest to uplift our transactional banking capability across our businesses. In Corporate and Institutional Banking, we have increased our lead bank market penetration from transaction banking to 26%. Across both our personal and SME customers, we've seen strong growth in new transaction account openings. An increasing share of these accounts is being opened digitally. You will have seen this slide before and importantly, it remains unchanged. 3.5 years ago, we announced our refreshed group strategy. This is a long-term strategy that is core to the actions we take every day across our business as we consistently focus on delivering better outcomes for our customers and our colleagues regardless of the environment. Investing in our colleagues is key to delivering a better customer experience and overall performance. Colleague engagement has improved slightly and is now just above our target of top quartile. This is a particularly pleasing outcome recognizing the challenges faced by our colleagues as they transition to a new hybrid work -- ways of working, which also deals with more challenging external environment. We are investing to improve the capability of our workforce. The talent we have built in our organizations, we can fill more vacancies from internal appointments. And across our senior management roles, 83% of vacancies in 2023 were filled with internal candidates, that's up from 70% in 2022. Delivering improved customer outcomes is a core pillar of our strategy. Our Net Promoter Scores are #1 or 2 relative to our major bank peers and our key customer segments. Our consumer Net Promoter Score has stabilized and started to improve, our business Net Promoter Score has improved by 8 points this year to a positive 5. I am pleased with the actions we're taking to address customer feedback but we are not where we want to be. There is more to do to achieve the scores we aspire to in both consumer and business. For large corporate and institutional Net Promoter Score, we ranked #2 based on the recent Peter Lee survey. Pleasingly, corporate and institutional continues to rank first in relationship strength across a range of specialist focuses, including transactional banking and debt markets origination. We are the largest lender in Australian businesses with a market share of 21.7%. This reflects the strength of our 2 business banking franchises. Our strategy makes clear where and how we will grow in business lending. Business and Private Banking is the largest lender to the SME businesses in Australia and it's grown business lending by $33.9 billion or 31% over 3 years. Our focus on our investment is supporting growth at attractive returns and we see more opportunities ahead, which we'll talk about on the next slide. The strategy for Corporate and Institutional Banking is based on improving returns through the cycle with disciplined balance sheet usage. This is underpinned by deep and long-standing relationships with our clients and targeted growth segments. This strategy has delivered an increase in return on equity of 560 basis points to 15.6% over 3 years. Business and Private Banking is our largest division and is a key differentiator for us at NAB. Our ambition is to maintain clear market leadership by supporting our bankers who are the best in the country with enhanced digital data and analytics capability. This is a relationship-led business with over 6,000 customer-facing roles, over 150 business banking centers and 450 branches. Our scale means we can offer customers deep sector specialty including agriculture, where we have over 33% market share. Our high net worth offering helps SME customers build and maintain wealth outside their business by delivering banking, investment and advice through an integrated approach. Our SME specialization and leadership over many years means we have deep expertise in the way we originate credit and manage risk through the cycle. We continue to see good opportunities to grow at attractive returns. This includes transaction banking and small business lending, we are underweight, together with merchant acquiring and higher net worth segments. To support this, we've invested more than $1.3 billion and added over 600 net facing -- new facing -- customer-facing roles over the past 3 years. Our investment and focus is delivering better outcomes for shareholders with 30% growth in total lending and 36% growth in deposits over 3 years driving a 38% increase in underlying profit. We continue to navigate a very challenging home lending market. Over the past 15 months, the rapid increase in net interest rates, together with the expiry of a substantial volume of fixed rate loans has seen intense competition reflected in pricing. This competition has been a key driver of a 15 basis points decline in our group lending margin this year. Home lending is an important product for NAB and our customers. Our objective at home lending is to offer customers, bankers and brokers, a strong service proposition while seeking to maintain our long-term returns through a disciplined approach to growth. We grew above system when returns were stronger, and we've slowed our growth when returns were more challenged. Over a 2-year time frame, we've grown in line with the system, excluding the impact of the Citi acquisition. While it's been pleasing to see front book pricing stabilize and improve slightly over recent months, it remains well below historic levels, as you can see in the data published by the Reserve Bank. Further improvement is required for returns to become more attractive. We expect housing credit growth will slow and refi rates will remain elevated as a substantial portion of fixed rate loans expire. We will monitor the changing dynamics in this market and maintain our disciplined approach to balance returns and volumes. As part of our focus on enhancing the customer, banker and broker experience, we are investing in our simple and digital home loan proposition. In 2023, we've progressed the rollout of this platform to our business and private bankers and the broker channels. Approximately 50% of all loans submitted via this platform receive same-day unconditional approval. While households overall have been resilient in this more challenging environment, the impact has been uneven, and we are here to support customers who need our help. This includes additional resources in NAB Assist to support a 25% increase in accounts receiving hardship assistance and a 61% increase in calls over 2023. I also want to provide an update on the actions we've taken to help customers impacted by the huge increases in scams and fraud activity. Defending against criminals remains a key priority for us. This year, we've added a further 70 FTE to our investigations and fraud team, taking the total size of the team now to over 470. We have a significant pipeline of improvements to make our customers safer and along those already delivered, stopping the use of links in texts and partnering with telcos to limit spoofing scams. Scams and fraud are an epidemic. We're working with others across government, corporates and community to educate customers and implement tools that can help keep our customers safe. In the current environment, it's important that we manage our business for the long term. Our investment spend in 2024 is expected to be approximately $1.4 billion. This consistent level of spend on core strategic priorities is supporting safe long-term growth in our business together with sustainable cost efficiencies. Maintaining cost discipline as critical in this inflationary environment. In 2024, we are again targeting approximately $400 million of productivity benefits, which will help offset cost headwinds while providing capacity for further investment. I'll now pass over to Nathan who will take you through the results in more detail.

Nathan Goonan: Thanks, Ross, and good morning, everyone. It's a privilege to be here presenting my first NAB results as CFO. I'll take about 20 minutes and keep this pretty consistent with what you've become used to from NAB in the last few years. When you look at our high-level overview of the financials, as Ross has said, this is a strong set of results year-on-year, noting the second half is softer relative to a very strong first half performance. To summarize, underlying profit rose 16.1% over the year with strong revenue growth outpacing cost increases. Trends in the second half reversed, slowing growth, the impact of increasing competition and lower end markets and treasury income impacted revenue, which declined 3.8%. At the same time, cost increased 4.1%, driving a 9.6% decline in half-on-half underlying profit. The change in cash earnings of 8.8% over the year and down 10% over the half, is softer than underlying profit, reflecting a higher credit impairment charge as asset quality has deteriorated off a low base. Statutory profit rose 7.6% over the year and declined 13.1% over the half with a gap to cash earnings in both periods, reflecting volatility in some of our economic hedges and expected increases in acquisition and integration costs primarily related to the Citi consumer business. Over the year, the statutory profit has also been impacted by the non-repeat of gain on sale of BNZ Life, which was partially offset by lower customer remediation relating to the discontinued wealth business. Taking a closer look at revenues. In the second half, you can see the impact of lower margins. Over the half, revenue declined 3.8% or 2.7%, excluding markets and treasury income. Volumes contributed $94 million, which is less than prior periods. This reflects strong growth in average lending balances in Business and Private Banking, offset by lower average volumes in Corporate and Institutional. In personal bank, volumes were fairly stable, reflecting our disciplined approach to growth in home lending, and it was a similar story in New Zealand given weaker market conditions there. Margins, ex markets and treasury, have been the main drag on revenue this period, representing a $313 million decline compared with a very strong first half performance. Fees and commissions dropped $22 million, reflecting a range of factors, including seasonally lower transaction volumes for payments in cards and higher loyalty costs and card scheme fees. Markets and treasury income declined $149 million following a very strong first half performance. The key driver was trading income, reflecting a revision from highly favorable trading conditions in first half '23. We'll spend a bit of time on this next slide given the importance of margins. NIM declined 6 basis points, representing the biggest impact on revenue over the half. Markets and treasury was a benefit of 1 basis point, primarily related to economically hedged positions offset in other operating income. Excluding markets and treasury, NIM fell 7 basis points. A key driver has been lending margin, down 7 basis points, consistent with first half '23, with again, almost -- this again almost wholly reflects competitive pressures in Australian home lending with more than half of the impact this period related to discounting in prior periods. Back book repricing has remained a key driver. And while volumes have continued to moderate from their peaks, they remained elevated for the half. Front book pressure was also a contributor. As Ross has said previously, we made a conscious decision to moderate volume growth in this market. And this, together with some recent improvements in market pricing has limited the impact on front book margins. If I turn now to deposits, this was a 4 basis point drag on margins for the half. The key impacts relate to term deposits. Term deposit costs are increasing from their lows of September '22, which has translated into a 3 basis point decline in NIM this half. At the same time, we have seen faster relative growth in term deposits with mix contributing a further 2 basis point NIM decline. The benefit of cash rate increases on unhedged at core deposits has been fairly neutral this period as higher rates have been passed on to customers. The overall impact across deposits and capital from higher Australian replicating portfolio returns has been approximately 4 basis points this half with a further 1 basis point relating to New Zealand replicating portfolios. Funding costs were neutral in the half with higher volumes and spreads for term funding offset by lower short-term funding costs. I am conscious that in the recent past, we've provided quarterly NIMs during a period of rapidly changing cash rates to help give a sense of more recent trends and trajectory. Given the more stable cash rate environment now, we think a focus on half yearly NIMs is more appropriate to understand underlying trends, particularly given the inherent volatility of NIM movements over shorter periods. Looking forward, we have included a broad outline of the key trends we see impacting NIM in the first half '24. Headwinds from the impact of home lending competition are likely continue, albeit at a slower rate. It's also likely term deposit costs will continue to normalize from September '22 lows. Deposit mix trends are harder to predict, although we have observed a slowing in mix changes in recent months. However, the NIM impact of mix changes for FY '23 is still to flow through to the averages. Funding costs will include the impact of TFF refinancing, estimated at approximately 1 basis point in the first half. But the overall impact on funding costs on NIM will be very dependent on short-term rates. Against these headwinds, we see the main tailwind as further upside from higher interest rates on our deposit and capital replicating portfolios. This benefit is estimated at approximately 4 basis points for our Australian and New Zealand portfolios in the first half based on the 30 September swap rates and volumes. Another important area of focus for us is cost. These rose 9.1% over the year or 5.6%, excluding the impact of Citi and the provision for the federal government Compensation Scheme of Last Resort. There are a number of key contributors to call out here. Firstly, salary-related costs increased $359 million this year. A material portion of this relates to the Australian salary increases, including the increase of between 3% to 5% from 1 January 2023 and $30 million of one-off costs under the Australian enterprise agreement. Also included are pay increases in New Zealand, higher superannuation and higher payroll tax. Secondly, volume and new business-related costs increased $172 million. This includes the full period impact of FY '22 hires in Business and Private Bank to support growth. We also put on extra colleagues supporting customers in our call centers and NAB Assist and incurred additional costs associated with the establishment of new businesses, including our India and Vietnam centers and the Paris office. Thirdly, tech and investment spend increased $146 million. This reflects additional licensing and support costs along with higher cloud and mainframe usage plus technology resilience spend. Investment spend impacting the P&L was lower in FY '23, given the higher capitalization rate on projects undertaken in the second half. D&A charges rose $88 million less than we foreshadowed at the end of last year, given mix and timing of deployments. Other costs increased $169 million over the period, a material portion of this, which is financial crime related. Helping offset these headwinds are productivity savings of $398 million as we work to simplify and improve our processes. In addition, remediation costs are lower, reflecting the non-repeat of payroll remediation in FY '22 and lower customer-related remediation charges. Looking ahead to FY '24, we expect cost growth will be lower than FY '23 levels of 5.6%. Growth in salaries is expected to slow with the non-repeat of the one-off EA payment, our new enterprise agreement framework means we expect to see more stable salary-related cost impacts in FY '24. Costs associated with volumes and new business initiatives are also expected to moderate in FY '24 including a lower impact from the setup costs mentioned earlier, together with a more stable environment for our customers. As Ross noted earlier, we expect to maintain investment spend at approximately $1.4 billion and deliver productivity savings of approximately $400 million in FY '24. The next 3 slides all relate to credit impairment charges, asset quality and what we're seeing in our lending books. Credit impairment charges of $409 million increased again over the half. This includes underlying charges of $559 million, reflecting asset quality deterioration, volume growth in Business and Private Banking and higher specific charges, although they remain at low levels. CICs this half also include a net $150 million release from forward-looking provisions given asset quality deterioration is now being reflected in underlying charges and our economic outlook has modestly improved since the first half. The ratio of 90 days past due and gross impaired assets to GLAs increased 9 basis points to 75 basis points with a fairly broad-based deterioration across the group's mortgage portfolio and the business lending portfolios in B&PB and New Zealand from low levels. The bulk of this uplift relates to arrears, and we are seeing little conversion to impairment given strong security positions and current asset valuations. The flow of new and impaired assets this half includes a further $73 million of restructured loans relating to customers affected by severe weather events in New Zealand in the first half. These loans have essentially all returned to performing in recent times but remain in the restructured category. Excluding these loans, underlying new impaired assets increased only modestly and remain at low levels. Watch loans increased 2 basis points in the period. As the economic environment has become more challenging, there has been an expected deterioration in asset quality in our Australian housing portfolio. That comes as households face higher cost of living and interest costs. But the key message here is that customers are adapting, finding ways to manage their finances and remain resilient. Average offsets and redraw balances continue to rise and are now 17% higher than March '22 levels. While there has been some natural erosion in repayment buffers, given the increase in mortgage repayments on average, customers repayments remain well covered with offsets and redraws currently equivalent to almost 38 months of mortgage repayments. Not unexpectedly, arrears have started increasing from low levels. This is most evident in the 30-day past due ratio, which is up 19 basis points since March. Drivers of the increase are fairly broad-based on -- by loan and loan type and region. We have previously highlighted a portion of the book we thought could be higher risk relating to loans originated during August '19 to July '22, when interest rates were very low, and serviceability was tested at less than 6%. This represented $145 billion of our total housing GLAs. At this stage, the contribution from this book to the uplift of 30-day arrears appears broadly in line with normal seasoning. Despite higher arrears, we are not seeing this translate into higher impairments with the ratio of gross impaired assets to GLA remaining low and stable at 6 basis points. This reflects a strong security position of the book and house price improvements. Average dynamic LVR has reduced over the half to 41%. Negative equity now represents just 0.4% balances. We do expect arrears to rise further as the economy continues to slow. While the cohort of loans originated during the low interest rate period remain of interest, at this stage, our housing book is showing fairly balanced characteristics. Our expectation is that from here, outcomes will likely be tied to -- more generally to the economic environment, unemployment and house prices will be key factors to watch. Similar to the Australian housing story and not unexpected for where we are in the cycle, we have seen an increase in B&PB business lending arrears in the second half '23. Key drivers include inflationary pressures and higher interest rates. The arrears deterioration is broad-based, although we continue to see higher absolute levels of arrears in sectors with FLAs in place such as construction, retail trade, tourism, hospitality and entertainment and parts of the CRE book. Consistent with this, we have seen a small increase in probability of default greater than 2%. This is not unexpected and follows several periods of improvements despite strong volume growth. Unsurprisingly, this portfolio also includes some bias to sectors where we have FLAs in place. Similar to our housing book, the higher arrears are not necessarily translating to losses. This reflects the highly secured nature of our book, even after applying material discount to market valuations. Only 6% of loans are unsecured. Given the more challenging outlook, it's likely we'll see SME arrears increase further, but we are pleased with the position of this book. Most of our customers entered this period in a strong position. Gearing remains low with loan facility utilization rates below pre-COVID levels and B&PB deposits are up again in the half and 36% higher than September '20 levels. While we are pleased with the performance of the portfolio, strong provisions have been a feature of this bank for a while now and continue to be. Collective provisions increased by $158 million in the half to $5.2 billion. CP coverage to credit risk-weighted assets is well above pre-COVID levels at 1.47% and higher over the half. Provision for total expected credit loss increased $176 million from March to $5.8 billion. The increase reflects deterioration in asset quality this period, partially offset by modest improvements in the economic outlook. Scenario weightings remain unchanged from March levels. We have increased target sectors FLAs this period by a net $43 million, primarily due to the addition of a New Zealand agri provision given more challenges in the outlook for that sector. Total sector-specific FLAs stand at $543 million. Another more recent feature of NAB's performance has been our capital position, and we remain in a strong place. Our group CET1 ratio stands at 12.22%, broadly stable with March. Over this period, we have generated organic capital of 29 basis points. Credit risk-weighted asset growth and for 4 basis points of capital in the second half, excluding the impact of FX. Volume growth and deterioration in asset quality during the period have been mostly offset by model and methodology impacts. Other was a drag of 21 basis points, comprised a number of items, including FX impacts and noncash expenses relating to Citi integration, along with higher deductions for software and capitalized expenses. Some of these items can be volatile period to period. During the period, our on-market share buyback accounted for 7 basis points of CET1. Allowing for completion of the buyback, pro forma CET1 is 11.94% compared with our target range of 11% to 11.5%. Liquidity and funding have also remained strong during this period, which included the first tranche of TFF refinancing. LCR increased to 140% during the period, while NSFR declined 1% to 116%. Both ratios showed large buffers to the 100% minimum requirements ensuring we're able to navigate any market volatility. NSFR is expected to normalize to pre-COVID levels over time, including the impact of removing favorable treatment of TFF collateral. Excluding TFF collateral treatment, our NSFR would be approximately 114%. Despite some volatility in funding markets, we issued $17 billion of term wholesale funding during the period or $40 billion over the year. This was broadly consistent with maturities and includes refinancing the first tranche of TFF of $15 billion. Our balance sheet settings mean we are well placed to manage the remaining $18 billion of TFF maturing in FY '24, while continuing to support the growth in our franchise. I'll now hand back to Ross.

Ross McEwan: Thanks very much, Nathan. The ongoing impact of higher rates and inflation on households is reflecting a slower activity level in the Australian economy. We expect real GDP growth to slow from 2.7% over 2022 to a below trend rate of less than 2% over 2023 and 2024. Consistent with the slowdown, both housing and business credit growth are forecast to decline in 2024. And our most recent quarterly business survey to September indicates that while business conditions are robust and above long-term averages, business confidence is relatively soft, particularly in retail. Despite slower growth, these forecasts reflect a view that the Australian economy will remain resilient, supported by strong population growth and a likelihood that the cash rate is now at or near peak levels, given some moderation in inflation. Rest of this view include the impact of elevated geopolitical tensions at the extent to which household spending slows together with the pace of which inflation moderates. We are well placed to navigate a challenging environment while continuing to grow. For 3.5 years, we've been executing a clear and consistent strategy with disciplined focus. This includes making deliberate choices about where we want to invest and grow and where we may pull back a little to focus on returns. While all of our businesses are performing well, our consistent investment in Business and Private Banking has delivered strong asset growth while maintaining high returns. This is now our largest division by GLAs and is a key driver of our improved return on equity. Supporting our customers and colleagues remains a key priority again in 2024. For those who need our help, we are ready to help where needed. We have a strong balance sheet to support growth. Our prudent risk settings position us well for any future market volatility. Although our cost base is being challenged by short-term headwinds, we will maintain our disciplined approach to managing our costs with a focus on productivity to provide headroom for investment. We will get right the work that we have agreed with AUSTRAC to keep our bank and customers safe. And finally, we are progressing the integration of the Citibank consumer business to ensure we deliver the benefits of this transaction. I'm confident in the outlook for NAB and the Australian economy, we see good opportunities for growth ahead. Thank you for your time, and I'll hand back to you, Sally, for Q&A.

Sally Mihell: Thank you, Ross. We'll now pass to the Q&A. [Operator Instructions]. Please go ahead, operator.

Operator: [Operator Instructions]. Your first question comes from Andrew Triggs from JPMorgan.

Andrew Triggs: A question firstly on the Business Bank NIM, please. I wonder if, perhaps, Nathan, you could unpack the compression you saw in the half between the home loan -- the spread compression on the home loan book and what you were seeing on deposit costs?

Nathan Goonan: Andrew, I think the best way to think about the divisional NIMs is probably just to go back to the commentary that we've made on the group NIM and then your divisional NIM performance is really just proportionate to your exposure to those drivers. So what we've said and called out there is some compression in home lending on the 7 basis points. We said that was sort of predominantly everything we were seeing in the home lending side, and then we've called out the term deposits. I guess, sort of conspicuous in its absence there is we haven't called out anything on business lending. So to answer that question directly, we haven't really seen any compression at all in the half on business lending NIM.

Andrew Triggs: But yes. So -- but in terms of deposit costs you're saying within the Business Bank, that must be an area of pressure given the extent of the NIM decline in the half in the Business Bank?

Nathan Goonan: Yes. So -- and I think when you go back to the -- again back to that sort of top of house here at the group level, we have called out the impact of term deposits. So I think when you get into the disclosure there, you'll see that predominantly our increase in term deposits over the period has been in the Business Bank. So that would see a lion's share of that impact flowing through into that division.

Andrew Triggs: And just on that -- a follow-up on that. You've shown good growth over the last, I think, it was 3 years, the number you gave on Business deposit growth. Has that been quality of the Business deposit growth or it has been more driven at the term deposit end of the market?

Nathan Goonan: Yes. I think there's probably just 3 things on deposits, and maybe Ross would like to make a comment as well. I think -- the first of all has been the strategic question of wanting to do more with our customers, in particular, in the Business Bank where we've had traditionally a stronger market share on the asset side than we have on the liability side. And we've been delighted with the performance there to do more with our customers in that part of the franchise. And so we see that growth being core franchise growth. I think the stats on that are that about 90% of those customers are customers who have got another product with us. So I think about 85% of them are customers who have got another deposit product with us. So I think on the on the core strategy of wanting to do more with our customers, we're delighted with that performance. And then you just get to the customer preference piece, which is, I think, in that part of the market, we've seen a customer preference, which has been more weighted in the recent period towards TDs. And then you've got the NIM impact of that, which we've talked about.

Ross McEwan: The strategic issue here, Andrew, is this franchise for probably a decade or more has been weak on transaction accounts, savings accounts and term deposits. And across all of our franchises, that's been a big focus for us for the last 3 to 4 years. We're seeing growth across all of these in our personal bank, our Business Bank and a very strong focus on our Corporate and Institutional. So I'm very pleased with that. That will continue. And we're looking at both sides of the balance sheet now rather than just being an asset accumulator, and you've seen that in some of the stats we've given you today of 70% to 82% self-funding, which is huge for this bank. So we'll keep that going, and the focus is absolutely there.

Operator: Your next question comes from Jonathan Mott from Barrenjoey.

Jonathan Mott: Two questions if I could. Just following on from the last question. I just want to get a feel, again, in the Business and Private Bank, Ross, you talked a lot about improve the quality of your bankers and the franchise. But when we see the margin pressure coming through, a lot of it is on the home loan side. And I'm surprised to hear your comment that it's -- that you said it's proportional. Shouldn't we be seeing a better margin performance in the Private Bank home loans than you are in the retail bank. And now 64% of all home loans flow going through brokers even though the majority of that is coming through the Private Bank. So shouldn't you be doing better in Private Bank mortgages NIM than was shown today? And then I've got a follow-up question, too.

Ross McEwan: Yes. Look, that is right. And we are doing pretty well across there. The biggest proportion of our own proprietary work comes through our Business and Private Bank. That's where the vast majority of it is and a much bigger skewing in our personal bank towards the broker community. It's not surprising if you flick on to the deposit side of it, though, and the move to term deposits. I don't think it's a surprise that Business customers are moving more towards term deposit. We're still not back to where we were, Nathan, what -- probably 4 or 5 years ago on the portion of term deposits held, but there has been a bigger move by businesses. And I suspect they're getting the feel that they're getting closer to the top of the cycle on interest rates and thinking they'll move into term deposits at this point in time. I think that's where their thinking is. But look, we're -- as Nathan said, across the book, we're seeing the contraction most in home lending, secondly, in term deposits so next to nothing going through in our business lending, so been very happy with that.

Jonathan Mott: Can I ask a follow-up question on cost and the outlook. Ross, we've been watching across many banks for many years. And you've always -- I want to use the term frugal, but you've always been a very prudent cost manager. And in the last couple of years, we've seen costs -- in 2023 and in '24, the cost base is growing pretty substantially, and we understand the drivers of why. But if we're in an environment where rates are higher for longer, customers are going to be doing and the revenue environment is going to be very, very subdued. How much flexibility do you have to really get that cost down? Can you pull back on discretionary costs? Can you really work on that $400 million of productivity? And is cost focus has to become an even bigger focus of management, just given the revenue environment looks pretty subdued.

Ross McEwan: Look, you're absolutely right. In a high inflationary environment where income is getting harder to get -- to improve, costs do need to become a much bigger focus for any bank, not just us. A comment I would make though is we are looking to get -- costs won't come down. In absolute terms, they won't come down. It's the slowing of the growth in costs that we're looking for because we do want to keep investing in this franchise. Right across the board. We've got some really good opportunities. That's why we're holding our investment spend at $1.4 billion for the 2024 year. But I've got 100 leaders now who are absolutely focused on not spending money on things that aren't going to get them a return. And that's quite a difference for this bank that it's not a cost program we have, it's -- we've got 100 of our leaders that we run the bank with, who are focused on running their parts of the business or their enabling it to actually do a better job. And that's something I think that will be a competitive advantage for this bank. Because otherwise, you run through a cost program per se. All you do is get a downward pressure, and then it bounces back up again because nobody took accountability for it, really, and that's a significant change I'm seeing in our 100 leaders. But it's a major focus for us, but we've got to be a bit careful. We've got an amazingly good franchise here that we want to invest in. In our business bank. There are areas that we're seeing some really good opportunities in. We've invested heavily in the health sector, for example. We've done it -- purchase there, some really good opportunities to push into that market across professional services, across a lot of areas. We're seeing really good opportunities. So I'm -- we're going to balance out cost with long-term growth in the business. And the personal bank where the pressure is, Rachel and the team have probably done the best job on cost management in a very, very difficult time. But if you have a look at the cost -- the revenue decrease in that business, and it will be reflected, I suspect, across every bank in Australia. I don't think anyone's going to defy this logic that the margin is down on home mortgages and therefore, the revenue is down. And you take 20%, 25% of your revenue out, there's an absolute focus on the cost, but the right pieces of costs. So look, you're absolutely right. We've got a focus on cost, but I do want to see that the right parts of our business continue to grow for the long term. Thus, the investment we'll keep making.

Operator: Your next question...

Ross McEwan: just 1 other comment, if I may. I think we've got to think about this in a slightly longer term than what you may have done in the past because we've had an interesting year, and I'll call it an interesting year in 2023. I've never seen an environment where you've had effectively 11 interest rate rises in about 11 months, which has given you a lot of revenue for a very short period of time and then it sort of disappears through competition that it has in this marketplace. So I think we're looking at it from a look-through perspective of thinking about 2021, 2022 and 2024 and sort of this blip in the middle of it all was 2023. And if you take that sort of thinking that's the way we're thinking about the bank as we head into 2024. It's nice to have had it, but it disappeared pretty quickly.

Operator: Your next question comes from Andrew Lyons from Goldman Sachs.

Andrew Lyons: Ross, on Slide 15, when you're on that slide, you noted that there had been some improvement in front book pricing. But further improvement was certainly required to sort of continue to see returns improve. I'd just begin to sort of dig into those comments a little bit and just to hear your thoughts on the extent to which you think the deterioration in returns, which is close to 100 basis points from peak to trough on that chart, are cyclical versus structural change? And why you say the potential for that discount that's currently embedded to continue to improve from here?

Ross McEwan: Yes. Look, a great one, Andrew, and we think about this pretty much every day. Is this a structural change? Or is this sort of a cyclical piece going on. What we're seeing for the first time in Australia, I don't think Australian market has seen this pressure on a mortgage book. I don't think we've ever seen it to this extent. You see it in the New Zealand marketplace where you've got a very fixed rate market. And when the market slows down and fixed rates come up, everybody, every business chases around after the business and the NIM gets compressed. That's what we're seeing in this marketplace. And that's why I'm of the view that we've got another 6 to 12 months of quite heavy competition in the mortgage business because we still got a reasonable chunk of our fixed rates to roll and therefore, customers going from 2% to 6.5% are going, "I'm going to look where I can get the best offer," as they should do. Now, we're holding about 85% of that -- those customers. But that's putting a lot of pressure on the market. Plus, you've got a couple of players who just want to grow market share, which is fine. That's their strategy. And that's the market we're competing in. So I think those 2 factors alone or say this market remain competitive for another 6 to 12 months. But players like us are saying, we'll be in that market, but it's not going to be to the same extent we were 12 months ago when we were gaining market share and making money in that marketplace. We're a bit quieter in the market at the moment. We're running at about 0.8x system. Actually, in the last month or so, we've been at about 1x system, shows we can grow it. But we're just a little bit more cautious it about because the returns aren't what we expect, and we've got lots of other opportunities across the bank. But I don't see this pressure coming off for the next 6 to 12 months. And then I think -- well, I'm hoping, maybe it's more hope than anything that you end up getting a bit -- better sensible pricing because it's capital and liquidity are the scores -- scarce resources of a bank.

Andrew Lyons: And just on those other opportunities, just a question on your CIB strategy going forward. Slide 13 of your pack shows a significant improvement in the division's ROE over the last 3 years, I think, from like 10% up to 15.5%. But against this growth in the business has been fairly anemic. To the extent you've got returns to where they are, is there now an opportunity for the division to grow a little faster, just given that improvement in returns? Or is this still one where you see it's about harvesting returns as opposed to sort of aggressively growing the business?

Ross McEwan: Yes, look on our Corporate and Institutional Bank, I think David and his full team have done an amazing job here. To see returns of that. I'm not too sure you've got any other business in banking that's got a return of 15.6%. I love to hold it, I'm not sure we can. But that's a great uplift, and that's what we've asked of that business, and they've been very disciplined. We would expect to see some growth in the GLAs in this business over the next 12 to 24 months, particularly in the corporate end of this marketplace, which butts up against Andrew's business. I think those 2 work in unison, and we'd expect to see some growth in the GLAs in that business. Which we'd see over the next 12 to 24 months. And we're starting to experience that now. But again, very strong discipline in that business, and you're seeing the results coming out. I'm very, very pleased with that business. And therefore, you give them a bit more to play with, and they've done a great job.

Operator: Your next question comes from Victor German from Macquarie.

Victor German: I was hoping to actually follow up on Business deposits as well, and I appreciate you already answer -- you already answered a few questions, but just -- be interesting to get your thoughts around differences in performance for your franchise versus peers. And one of your peers highlighted that the mix impact in their deposit franchise in the Business Bank has slowed in the June quarter. We haven't heard from them since then. But are you seeing that -- the differences that you're observing in your deposit profitability are more driven by mix of business and you are more towards middle markets as opposed to smaller markets, or do you feel like there's still differences in the quality of deposit franchise that you have that you're still working on that Ross mentioned earlier?

Ross McEwan: Yes. I'll make on an intro comment on that one from a strategic perspective, then pass to Nathan to see if he's got more detail on it. Just think what we're trying to do with -- across the entire NAB franchise, including our Business Bank, personal bank and Corporate Institutional as we are taking a weakness and turning it into a strength because our weakness has been our deposit and transaction franchise. I mean we're brutally honest, that's been a weakness of this bank for a long period of time. And now you're starting to see this turn into quite a strength across all parts of our business. So that's strategically what we're endeavoring to do. And in this area, in Business Banking, we're up 200 basis points and self-funding ourselves in that business over the last 3 years. That's outstanding. And we should be. I mean we should be the biggest deposit franchise in the Business Bank because we're the biggest Business Bank. I won't say there's an inevitability about it. But at some point in time, we are looking at both sides of the balance sheet here, and that's what a great business bank does. We also have a very good private bank, which is starting to find its straps again. And also tucked away and then JBWere, which I think is a business that's been hidden for a long period of time. So I think there's a real opportunity here. And then I'll pass to Nathan, you can give whatever detail you've got on how that works as well through. But I think it's important to understand strategically what we're trying to do and being successful at.

Nathan Goonan: Yes, I can just add a couple of points, Victor. Probably just to say, I think, in this term deposit, it does narrow it down to the Business Bank and the focus there. I think you'll -- we've got some good disclosure in the back that just shows term deposit growth hasn't been a feature in Corporate and Institutional. And so that mix hasn't really been shifting. And then I think within the Business and Private Bank, as Ross said, it's been strategically, we're delighted with what the team are doing there. And then you've just hit a point in the cycle where customer preference has been such that there's been more demand in the term deposit piece. I think we are seeing a slow sort of, call it, internal churn. And so we've probably got a little bit where our incremental growth has meant that our mix has moved a little bit than the internal churn, if that makes sense. So there's a little bit of growth, which has been higher in TDs than in other deposit products, I guess, which is also impacting it. And then underlying that, we're probably seeing not as a bit of a softening of the actual mix churn.

Victor German: And are you seeing -- I'm not sure if you have that detail, are you seeing any meaningful differences between smaller customers and medium customers within the SME bank?

Nathan Goonan: Not really. I think that we've -- I think we you probably see that it's just the timing of when people might take up the opportunity and where they see the rate cycle. So we typically see that in Corporate and Institutional have the mix shift first and then it will flow through to some of your sophisticated customers. And bearing in mind in Business and Private Bank, we've got JBWere in our private bank. So they would be potentially more likely to be hitting those points on the curve and taking out TDs.

Victor German: Understood. And then my second question on capital, if I may. I think Ross mentioned earlier that you obviously have a buyback in place and you're looking at potential further capital management opportunities after that. I'm just interested in your thoughts around the trade-off between buybacks and dividends. I know that your level 1 capital is now on a pro forma basis 11.8%. And your earnings are likely as the industry and it's likely to decline in 2024. Are you sort of thinking that you would prefer to stick to the payout ratio or would you keep a little bit of extra surplus capital and make sure that your dividends are maintained? How do you think about the -- balancing those 2 items?

Ross McEwan: Maybe if I just give again -- just a headline and then I'll pass to Nathan. We set a very clear policy on a payout ratio of 65% to 75%, and we want to stay within that. Because the feeling was that the bank was always stretching itself to pay out a higher ratio, and then we'd be taking more -- taking on board more shares, and we got into a pretty -- a cycle of -- probably wasn't that helpful long term. So our payout ratio of 65% to 75%, where -- we want to stay within that. We've been cautious about making sure we're looking forward several years to see that we can stay within that wherever possible. And that is why we've sort of dictated what we've done with our dividends per share. I do like the idea of payback as long as -- sorry, buybacks as long as we've got a good strong position of the bank, and that's why we've -- we're in the middle of another one at the moment to get our share count down, which wee bit strange for NAB because it's quite a different position to be and where we were again for about a decade or so when we were constantly getting more shares, and I'm well aware in my first year, I added to that. But the path is now let's have less shares, get a good dividend stream for our shareholders and create real value over time, but a long period of time. Nathan, any comment from you?

Nathan Goonan: Nothing to add really. I think our bias is towards reducing our share count Victor and to have progression in earnings per share and dividend per share in line in those sort of payout ratios.

Ross McEwan: That's why I like Chart 7. It's my favorite.

Operator: Your next question comes from Matt Dunger from Bank of America.

Matthew Dunger: Yes. follow-up on Andrew's question on mortgage pricing. Noting the lending margins down 7 basis points in the half. Nathan, you talked to the pressure primarily on mortgages and back book repricing -- in back book repricing haven't happened in the first half. Presumably, this back book repricing is flowing through, and the front book trajectory seems to be improving. So Ross, why can't you be more glass half full on first half '24 margin trajectory?

Ross McEwan: I'm probably being pragmatic, we're facing into a very -- still a reasonably aggressive housing market and we're doing a pretty good job at it, but it's -- the pressure is still there. As I said, I think the pressure is still going to be there for probably another 6 to 12 months before it abates. But -- so it's just a reality of the market we're playing in. And we've got -- we're doing our best to balance that out for our customers and also our bankers and our brokers at the same time, making sure that the capital and liquidity goes into areas that we can get a better return out of. So it's a balancing act. I love to be more optimistic for you, but the reality is we've still got a fair bit of fixed rates to get through on behalf of customers. They're looking for the best rate they can possibly find. You've got players in the market charging around, wanting to do more business. That's just great. That's their strategy, and we're doing a big balancing act amongst it all. And I think doing a great job in that space as well complements to our mortgage team. And we're playing a long game. If you have a look at the investment we've made in our mortgage business, we are still investing this year again, as part of our $1.4 billion. We're getting better and better every month we go through. So we're trying to play this game on a service basis, which is really important for customers and our bankers and our brokers, and it's working for us, but it's a long game.

Matthew Dunger: If I could just ask a second question on credit quality. In New Zealand, you've taken that New Zealand $51 million FLA, just wondering if you could talk through how you expect the work through is going to occur on over $500 million of 90-day past due impaired and restructured loans?

Ross McEwan: Look, the New Zealand marketplace, incredibly resilient given what's going on, slower growth over there, but it's been incredibly resilient, particularly in the home loan market. If you have a look at the losses there, I think 0.00. And then you go to the next quarter and at 0.00. So it's a very resilient market. But maybe, Nathan, you can probably talk through what's happening in the market.

Nathan Goonan: Matt, there's probably just 2 points there. I think just to clarify, the -- just to separate the 2, the FLA is a more broader provision that we've raised in relation to the agri outlook and not related to the restructured loans that we've called out there. So I think, as I said in my comments, the -- those restructured loans really relate to that single weather event that happened at the -- right at the end of the first half. We had about 114 customers there that were impacted by that. We gave them interest rate holidays, which meant that they then needed to be classified as restructured. They're all through that window. So effectively, they're all performing, I think, all but one. So they're back in our book and performing, and we'd expect them to drop away from that category next half. That's separate to then the FLA that we raised just for the broader outlook for agri in New Zealand.

Operator: Your next question comes from John Storey from UBS.

John Storey: And I think you guys have done a really good job this morning in just setting expectations for FY '24 and in some really good questions already that you've answered. I think just the questions that I have on my side is just something that you said just around your funding mix, which has improved. If you go and have a look at your net lending margin at 118 basis points. It's pretty much the lowest that it's actually ever been in the history of the bank. Most of the margin actually coming obviously from your replicating portfolio and the unhedged component of net funds. I just wanted to get a sense, we've obviously had a 25 basis point interest rate increase this week, possibly another 1 or 2 coming through next year. So I just wanted to get a sense of how tactical NAB can actually get around the interest rate hedging and also what the impact is of the last few parts of the interest rate increase is just on your margin and the guidance that you provided?

Nathan Goonan: Yes. Thanks, John. I'm happy to start and then maybe Ross will add, if he wants to. I think we've called out there, John, that we've had 2 rate rises in this half, and that's effectively been no impact on NIM in the half or no material impact. We'd expect if we continue to get interest rate rises on our unhedged, we would continue to get a modest benefit, but it will be small and probably similar to the to what we experienced in this half, which is essentially not material at the group level. And as you've seen yesterday, we've passed on the interest rate rise, both to mortgage customers and on our core savings products. So that type of impact is modest at the group level. On the hedged and hedge portfolio and opportunities to be tactical, we probably don't see it like that. I think we've been very consistent in the way that we've approached that, and that's giving us good predictable earnings there. And I think to your benefit, you can see you'd be able to see that quite predictably come through our NIM, and we've stayed really constant on that. And I don't see that as something that's sort of good risk management to be doing.

John Storey: Okay. That's great. And maybe just then secondly, there's obviously been a lot of questions already just on the Business Bank. I think clearly, a very important part, component of the overall group. I think the 1 that I just had is you did see a 25% increase just in the credit impairment charge. Just to get a sense on NAB's Business Bank and the risk of NAB Business Bank relative to peers, would you kind of expect some of these trends, obviously, CBA actually saw a decrease in the charge half-on-half. How would you kind of characterize the riskiness, I would think, of the portfolio ex the home loan book relative to the peer group and the likelihood of these types of charges kind of rolling forward?

Nathan Goonan: Thanks, John. I'll start again and then maybe Ross might want to add. I think one of the really important features here to look at is just what we're seeing in impaired in that book. And so while we have seen arrears, we've really seen no pass-through into impaired. And I think if you actually go back over time and you look at it, it might be somewhat counterintuitive, but it's actually not something that happens. You don't see arrears necessarily progressing to impaired. And the reason for that is when you get to that arrears position. That is the point where you test your security and you test for impairment. And what I think you should take from the result in the half is while we're seeing some customers get to that arrears point the quality of the book and the quality of the security is really coming through there. So we're not seeing that uptick in arrears. And so without answering your relative question, I think we'd be really comfortable with both the quality of the book and that, in particular, is showing through in the quality of the security.

Operator: Your next question comes from Carlos Cacho from Jarden.

Carlos Cacho: I just wanted to ask again on the Business and Private Bank. You touched on kind of that focus on driving increased deposit growth, particularly in transaction accounts. Do you think there's any kind of other specific investments or changes you need to make there? Or it's really just a matter of time? Obviously, TDs have been driving the recent growth, but to drive up that MFI share and the transaction deposit growth in the Business Bank. Is there anything else you're looking to do?

Ross McEwan: Yes. Great question, Carlos. There are a number of initiatives that Andrew and the team have in that Business Banking space. We've had pretty consistent funding into the deposit space as we've talked about. We've been doing a lot of work on our back office and systems to do with just our core lending across a broad range of lending, not just lending into -- for the business, but some of the invoice financing and the likes. We've a lot of money and we got another year of big funding in our merchant space, which is starting to show some very good results coming through there. But the next 12 months I think we'll put that business in probably best-in-class in this marketplace, and we own it. We haven't outsourced it. We've said that that's a business we want to be part of. We've got some sectors that we've been weak at traditionally that we are now very focused on given we've got the core of the bank going. So I would see good growth continuing to happen in this bank for some time yet. We've invested in our bankers. We've invested in banker support. As you said, we've said we've put in another 600 to 700 of customer-facing people over the last few years. That's adding benefits to us. And we'll get some productivity movements out of the work that we've been doing. So every time we look at it, the more opportunities we are. We've also got growth in our corporate space and David Gall's area, which we're very pleased with. We're seeing good growth in the transaction accounts at the big end of town. We're about 26% market share in that area. I'd like to see a bit more. We're partners with some really good players in the technology space that are having some real wins for us with bigger customers. Yes. No, I'm pretty comfortable. We've got plenty of growth left in that franchise. It's hitting its straps. So -- yes, Nathan...

Nathan Goonan: I was just probably going to add 1 thing, Carlos. I don't think it will be right to take away from the call or our comments that we've been growing just in term deposits in the deposit franchise there. I think Ross has got the slide there on Page 9 here. We've had a 50% increase in transactional account openings in that franchise over 3 years. And so we wouldn't want you to take away that it's been growth in TDs. And as I said, that TD customers there. The vast, vast majority of those are good clients of the franchise, and we see it as core growth.

Ross McEwan: Yes, and much more opening from a digital perspective, both in Andrew's world in Business and in Rachel's world in personal. And that's probably got another 2 or 3 years of investment in it to really get it to where we need it to be.

Carlos Cacho: My second question is kind of also staying on the Business Bank. Just wondering how you're seeing the competitive landscape there? We've had, until recently, kind of 2 of your major peers were not particularly focused or they're kind of dealing with other internal issues and they weren't very focused on the business bank. Now it seems that with returns in mortgages, in some cases, below the cost of capital, everyone is focusing on business banking. You've obviously got the kind of pole position there. But how are you seeing that shape up kind of in competition on the ground? And is it perhaps going to get harder? Or is that -- I know lending is much less commoditized in that segment, but are you seeing pressure coming through on lending margins at all? How is the competition shaping up?

Ross McEwan: Look, we've always expected all the big banks to be good competitors in the space. Obviously, some have been wee bit distracted with other things. But we always thought they would come back into this marketplace, it's inevitable. But while others have been distracted, we've been investing very, very heavily in this franchise. And those results are starting to come through. So competition makes us all a lot stronger, and we're becoming a lot stronger in this area. But I want to leave you with the fact we're going to continue to invest in this franchise and we expect to see really good results to continue to come from it. Yes, margin to some point will come under pressure, but I don't see it as coming under the same pressure as you do with a home loan. It's a very strong relationship franchise, and we should never forget that. I'm reminded, very early in my tenure here by a customer, been with us 150 years, "Ross, it's a relationship business. I've been with you for 6 generations. That's why we're with you. It's called relationships and we expect it to continue." That's what it is. And you don't build that overnight. You don't build that with the changing price and business lending product, just doesn't happen. But we have to be competitive, we are. We got great bankers, that's a big advantage. We've got now systems and applications that are working for us, not against us. We're investing heavily in other things that will make our bankers even more powerful in the marketplace. We're investing in our digital capability for our bankers to make it easier for them to do business. It's pretty hard to chase that within 3 months, didn't change everything. So we've been investing in this core franchise now for 4 years and it's showing through...

Operator: Your next question comes from Matthew Wilson from Jefferies.

Matthew Wilson: Two questions, if I may. The proactive engagement with the home loan customer base is clearly happening. A link to that, can you disclose what percentage of home loans have been restructured and are performing?

Ross McEwan: The vast majority outperformed, there's a very few that aren't. That's the reverse way of looking at that. There's probably, I think, and I'll have a look at Rach, about 10,000 home loan customers that we've changed their structure or done something with, but it's a small percentage of our book, it's a minute percentage of our book. So they -- and they -- as you see they're performing very well. And I think if you look back at 2019, the book is still performing from an impairment perspective better than it was in 2019. So whilst the things are getting a bit tighter. Still our book is performing from that perspective. Rach, anything else that -- I don't think. It's in pretty good shape. Matthew?

Matthew Wilson: And then on the second question on risk weighted inflation. You're starting to see that come through the home loan book, you went from sort of 26% to 27%. Is that model changes? Is it higher chip? Have we seen the bottom in home loan risk weighted, and you're starting to get a bit of inflation come through with the cycle?

Nathan Goonan: Yes. Matt, it's Nathan. We've got the bridge there on the capital, and you can see that there's been about $3.3 billion, I think, of risk-weighted asset increase just on the basis of what we're seeing come through in the impaired. So that will largely be model driven. And we've actually, inside the new capital framework, been able to offset that with some investment in risk-weighted assets, some models and some enhancements that we've been doing there. So we've been able to find those offsets. But probably the best guide on that is just to take it back up to the top of the house and say, well, for the asset quality deterioration we've seen across the whole portfolio, inside the half, we've seen that $3.3 billion of risk weights that have been commensurate with that.

Operator: Your next question comes from Richard Wiles from Morgan Stanley.

Richard Wiles: I have a couple of questions, one on margins and one on the mortgage market. Firstly, on the margins, Ross, group margins have fallen in the second half 1.71%. It got to a low of 1.65% in FY '22 when rates were 0. Are you confident you can keep margins above that previous FY '22 low?

Ross McEwan: Well, I won't give you a prediction on where the margin goes, but it's -- if you look at it over the last probably 20 years, the trend is quarterly down, and I think we're back on to that trend today. And there is pressure in there, particularly in the home lending business. So you've got to be very efficient in that marketplace to make reasonably good money out of it. But other than that, no predictions on where that one's going, but it's a pretty competitive marketplace we're playing in, in Australia.

Richard Wiles: And then my second question relates to mortgages. Given we're in a low volume growth environment and there's a lack of real diversification outside of retail and business banking amongst the 4 majors. Is it optimistic to think the industry will price for satisfactory returns in mortgages once the refi and fixed-rate maturities come to an end? When the 3 banks who all want to grow share just start competing hard for the new lending rather than the refi lines?

Ross McEwan: Yes. Look, you're maybe right. The other scenario to that, of course, is we get through the refi, we get more into a new business market flow and you start to stabilize the returns on this business. We've got to get much, much more efficient as does everybody in this marketplace. So digital capacity in here is going to be really important. Yes, so we do see a path because otherwise, why would you allocate capital and liquidity to it? And over time, I think that becomes a sensible allocation. And I think the industry will do that.

Nathan Goonan: Yes. And Richard, it's Nathan. Maybe just to add 1 thing. We still think that there -- as we get into, as Ross said, out of the refi market and into a new business, a bit new home sale market in particular. You do get that opportunity where service matters more. And I think that we've invested in the franchise and it probably links back to maybe Jon Mott's question around the Business Banking franchise as well. We think there's opportunities in our customer base where there will be value provided for service. And so we've got to continue to invest in that and make sure when that market turns around, we're getting an over share of it again because we think the economics in that will always be better.

Operator: Your next question comes from Brian Johnson from MST.

Brian Johnson: Congratulations on great disclosures, really good. Two questions, if I may. NAB is now the second bank where we've seen probably a little bit of a surprise growth in the mortgage offset accounts. I'd just be interested to know just where you think those offset accounts -- so as you get the fixed rate reversion lines turn into variable rate, the way that you offset that is by basically having a mortgage offset account. So clearly, people have been parking them elsewhere. I'd just be intrigued on 2 things. Where do you think the mortgage offset account increase is coming from? Is it little banks, nonbanks, big banks? And then the second one -- the second subset of that question is, what is the impact of that on the NIM? Because I would have thought they're probably the most expensive deposits there actually are.

Nathan Goonan: Yes. Brian, why don't I start and then I can hand to Ross. So I think you're right to call out that the fixed rate expiry is a big driver of that. So as people have rolled off fixed rate, what we've seen is that they've been bringing their offset balances in, as you've rightly categorized that to then offset the impact. In terms of where that's coming from, I think that's probably being broad-based. It could be coming from anywhere. It could be a little bit of mix inside our deposit base, although at an overall total level, we haven't really seen that mix shifting too much and then it could be coming from other banks, it could be coming sort of more broadly in the market, but that has been a feature. In terms of just drag on NIM. I think you're right to call out that it is going to be a more expensive -- in a relative sense, a more expensive deposit. We've got as -- we've made rate rises yesterday on our core deposit product, the rewards over now at 5%. And then you've got mortgage rates that will be in excess of that. It's just then a question of materiality of it on the NIM.

Brian Johnson: That impact hasn't really been material on the NIM?

Nathan Goonan: It's not something that we've called out this half, Brian. So it could be something that becomes a feature as we go forward, but it's not something that we would see as being material at this point.

Brian Johnson: Fantastic. The second one is, there were some really great disclosures today on those loans that were originated when rates were at the very trough. But when we think when the fixed rate reversion quantum of the rate shock is actually highest it will be the fixed rate loans that were initiated after November '20, which is when we had the biggest cut in the fixed rates. So we're only really just entering that. If, in fact, they were 3-year loans. Could you just comment on that quantum of the rate shock? Because I know it's -- I know a lot of loans have already reverted, but they're ones where the fixed rate wasn't actually at the lowest point. Could we just get a feeling on how you're looking at that and thinking about that over this next 6-month period?

Ross McEwan: Yes, you're right, Brian, there were all 2- or 3-year fixed rates. So I'm just trying to direct my brain as to what percentage was the 2-year because they would have already converted over in the 3 years. I think there were more 2-year than 3-year, Rach, weren't they? So a fair bit would have gone through. I think we've got about 30% to 40% still to roll this year, Brian, which is why my comments around the pressure will stay on for the next 6 to 12 months. But I think at that point in time, they'll have all rolled through. And they're all rolling back on to -- or the vast majority of going back onto a standard variable. So I think -- I'm not too sure we'll expect anything different from this cohort to the last -- the other cohorts that have already come through. But Nathan, have you got anything else on that? We haven't seen anything experience that's different on the way they're rolling through.

Nathan Goonan: No. I think we do have some disclosure, Brian, maybe it's going to your point on Page 75, where we've just got a profile of the forecast mortgage repayments at the 4.35% cash rate. So in the bottom there, we've got 60% of that are going to experience a plus 50% sort of appreciate. We're not answering the question directly, but that might give you a sense of it.

Operator: Your next question comes from Ed Henning from CLSA.

Ed Henning: I just had 2 as well. Just 1 quick follow-up, 1 on the Business deposit franchise. Just to clarify, you've talked a lot today about the mix now, is that starting to slow? And also, just given the competitive environment, do you see any risk of deposit beta coming through on the Business deposit side, is the first question.

Nathan Goonan: Yes. Ed, we are seeing that start to moderate. So I think deposit mix in there has, in recent times, started to putt out. It's a little bit hard to predict. And obviously, we had a rate rise yesterday and maybe a little bit more in the outlook now. So we might see -- continue to see some fluctuation around that. But yes, it's right to say that we've seen -- in recent times, we've seen that moderate.

Ross McEwan: Going back to where originally deposit TD rates were -- TD percentages of our deposit book were. So there's still a little bit to go, but it has moderated the pace as it moves there.

Nathan Goonan: Yes. I think in Business Bank, I think TDs are about 31% of the deposit making Business and Private Bank and even in pre-COVID, we were at 36%. Ross? yes.

Ross McEwan: Yes. So I think there's a wee bit to go there, Ed, that probably about a move 5% to TD. So that move has started. But at what pace, it seems to have slowed down a wee bit.

Ed Henning: And do you see any risk of competition just on the -- on any deposit beta or a catch-up of more cash rates or savings rates other than TDs in the business accounts?

Nathan Goonan: No, that hasn't been a feature of the market, Ed. And I think that actually the deposit market has been -- more broadly has been really competitive for some time now, but it hasn't been sort of -- there hasn't been any shocks in that competitive environment. And so I think it's been competitive. The marginal deposit is obviously well bid. But I think by and large, that it hasn't -- we haven't seen any shocks in it. And we don't really -- the products are not sort of structured like that, that we see -- that's not something that we're expecting. But you don't know, it's a competitive environment and someone might look to do something different. Certainly, for us, I think we're happy with where we are, and we don't see any need to be doing things like that in the market.

Ed Henning: Okay. That's great. And then just a second one, just on your markets and treasury, it looks quite soft in the fourth quarter. Did something happen around a position or you did shrink some of your markets' business. Did that have an impact? Or is it just generally just weaker activity?

Nathan Goonan: It's probably the latter. There's nothing really to call out there, Ed. I think we -- if you just took it in the half, I think client-driven activity was actually pretty stable. And then it was all on the trading line. I think we are coming off. The first half was the best half we'd had in the trading business since in 2020, I think. So coming off a strong half, and we just saw really observable volatility was out of the market and less trading opportunities. So no big one-offs.

Operator: Your next question comes from Brendan Sproules from Citi.

Brendan Sproules: Also have a couple of questions. My first 1 is on the investment spend. Ross, you're very disciplined around the investment spend. And again, you've indicated next year is around that $1.4 billion. That's well below sort of peer levels. How should we think about this heading into the medium-term customer experiences, around about 1/3 of this investment spend. But is there more sort of spend in the medium term required here on digitization, particularly around your deposit franchise to sort of reduce your reliance on term deposits?

Ross McEwan: Yes. Look, my team would laugh at that question. They'll laugh at me, not at you on that question because everybody always wants to spend more money. And I'm sure it's in every bank as well, Brendan but I've observed is at about $1.4 billion, we know where every dollar goes. And we know what we're going to get out of it. You start -- for us, and I'll talk about for us. For us, you start spending a lot more than that. And just wonder did it actually add any value to the organization? And the discipline we've had for the last, pretty much 4 years of consistent spending so that our business heads know that they're going to get the money this year and next year as long as they deliver is probably the most crucial thing for us that has saved us a lot of money over the last 4 years. So it's the consistent spend. And we're seeing some pretty good benefits coming out of that. You raised the digital and data piece. We've got another 2 to 3 years of good spend in that area to get us into really good shape. We're -- so I'm pretty comfortable. I think as you go beyond $1.4 billion for us, it's like did it get wasted and I suspect a fair bit of it would. So it's the discipline of it, that I think we've really mastered it. And we have a very disciplined approach to making sure we're supporting the spend and getting the returns out of it. So look, others may have much, much better capability of spending a hell of a lot more money. But I think over time, we've proved that spending about this level, we get great returns out of it and it makes a difference to our customers and colleagues. It's -- I could easily spend a hell of a lot more I'm just not too sure we would have the capability of doing it wisely from a NAB perspective.

Brendan Sproules: Okay. Terrific. I just have a second question on your loan loss provisioning. And a number of your other peers have kind of signaling that provisioning is actually starting to get to kind of peak levels with really significant provisions above the base case. I noticed in this result, you also are continuing to grow. I mean as we look into '24, if the economy plays out as you articulate in your base case. Can we expect these provisionings to have largely peaked? Or do you expect them to continue to grow as the economy deteriorates?

Ross McEwan: Yes, look, a really good question. I think we'd rather just see out the next 6 to 12 months to see what does happen in the economy. We're comfortable with the levels we're at. We have been growing them slightly. I've been very reluctant to sort of reverse them out because we just don't know. And again, it's given us absolute confidence to keep growing the franchise, particularly in the Business Bank because we have got very good provisioning, good capital, good liquidity. It's just given us surety that we've got a great franchise. So from that end, I'd be a wee bit reluctant, but let's see how the next 6 to 12 months plays out...

Nathan Goonan: Yes. And Brendan, obviously, just the way it works here is that if we see -- continue to see experience -- arrears experience tick through, we'll just probably see the mix of that shift. So in absolute levels, it doesn't mean you need to go up. It just means we'll probably see a little bit come out of the forward looking into the collectives.

Ross McEwan: Yes. But it's given us real confidence in continuing to work with customers and colleagues on the provisioning we've got. And we feel pretty good about it. But it's a debate in discussion we have with our Board as well.

Operator: Your next question comes from Azib Khan from E&P.

Azib Khan: Ross, when you were talking about mortgage competition dynamics earlier, you did mention there were a couple of big players out there that are happy to grow market share, and you said that makes sense. You're obviously not looking to do that. Is one of the big differences here that you have the option or the luxury or you're well positioned to grow in SME lending, which is far less competitive and the lending margins there are holding up, whereas some of the other players don't. And the follow-up question to that would be if you do start to see notable deterioration in business lending asset quality, would your thinking changed such that you try to, again, grow mortgage market share?

Ross McEwan: Yes. I suppose it goes back to a fundamental of running the business. And the 2 scarce resources in the bank are capital and liquidity. And if you've got options, put them to best resource on -- work on behalf of both customers with your shareholders. And when I'm getting what I'd consider to be a suboptimal return out of a mortgage, I don't need to grow market share in that thing. If at a later time, I can quietly come back into the marketplace and get to 1 or 1 -- greater than 1x system. So put the resource, which is scarce into the best place, and that's the thing that drives myself and the team here. That doesn't mean we're out of the mortgage market. We're in the mortgage market. We're just not growing as we used to do, and we'll grow in the most suitable time is. That's what's driving us. And I think it's working pretty well. So there's nothing too much different to that in my mind. And Nathan, you may...

Nathan Goonan: No, I think that I probably just wouldn't link the 2 at all. I think that I think you make an economic decision about how we how we want to participate in the home lending market. But I would say, and Ross had on his Slide 15, I think one of the things that we've been in the home lending market is incredibly consistent in it. It is important that you're consistent in these markets and you don't drop in and out of them as your question might suggest. And I think being able to be consistent for our brokers, consistent for our staff, consistent for our customers is really important. And then when you flip to the SME side, yes, we may see more arrears. But actually, that's a point when your customers need you to be really active in the market and showing them that you've got the support. And I think one of the real strength of the Business Banking franchise is the consistency of the relationship with approach. And so you certainly wouldn't see -- if we saw arrears, you wouldn't see us backing away from that market.

Ross McEwan: I'll just say there's 1 other thing, I think that's quite important when you're running a business like this, that the team plays as a team in this area, and we don't penalize people when we ask them to do the right thing by the shareholder and the customer. And I think that's really important as well. So there's no internal competition. I have to be bigger than or greater than or whatever, it's what's the right thing to do. And I think that's pretty important in enabling us to make the right decisions as an executive team to get the money in the right places and to support the customers, and that's working for us. So we are supporting our mortgage customers. There's a big rollover of fixed rates going on, we'd rather look after that group and make sure we're holding on to them than chase after new stuff. But I think that's also something that's driving NAB at the moment as well. A good team of people who are working well together.

Operator: Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.