AMP Limited (AMP) Earnings Call Transcript & Summary

Good morning, everyone, and thank you very much for giving up your valuable time on this Thursday. Before we start proceedings today, I would like to acknowledge the traditional custodians of the land on which we're holding this meeting today, which for us is the Gadigal people of the Eora Nation, and I'd like to pay my respects to the elders, both past and present. We're here today to announce some, I think, exciting new developments in relation to our bank. And joining me here today is some familiar faces but probably some not so familiar faces as well. Firstly, we have Blair Vernon, who's the CFO for AMP Bank; we have Sean O'Malley, who is our Executive responsible for AMP Bank; and also Sam Everington, who's the CEO of Engine by Starling, and it will be important to understand why he's here with us today in just a moment. So if I walk through what we want to do today, firstly, I'll just give a quick overview of what this new initiative is and where we're taking AMP Bank. Then I'll hand over to Sean, who can give you a few more details on the proposition and direction and why we think this is a genuine opportunity for AMP. We'll then ask Sam to come to the mic and really talk about why we're partnering with Starling? What has Starling done in the U.K.? And why we think that can translate to the Australian environment? Of course, you're going to be interested in the financial implications, and so I will ask Blair to come forward and talk about what this will do to our forecasts, and then we'll talk about next steps and of course, take Q&A. If I quickly go to the overview of this new initiative. Firstly, I think it's important for me to acknowledge that it is certainly a difficult time for banking, and you've heard most of the CEO of banks reiterate that over the results period. It's challenging both on the mortgage side, which always been competitive, but it's clearly on a funding side as the TFF rolls off towards June next year. And this is particularly so for smaller banks and particularly so for us, where we have pretty much most of our funding coming from retail deposits. We've known for some time that we needed to make a meaningful change in order to address these dynamics and reposition the bank for the longer term. Now I want to say we haven't taken this decision lightly, and we've done lots of analysis because we understand their impacts on return on capital. And as a management team, we are very focused on return on capital for our shareholders. So what is the proposition? Today, we're announcing that we're going to launch a digital bank built specifically for small businesses and sole traders, and it's focused on transactions, payments and deposits. Lending will come but that is not our focus. We decided that we wanted to embark on a program where we did and could manage risk. And as a result of that, we have partnered with Starling, which is the leading U.K. digital bank. And we want to leverage its expertise not only in terms of the platform engine but in the way it takes its proposition to market, the way it makes decisions, the way it operates. This build will occur over the next 12 or so months, and we'd want to have an offer in market by the first quarter of '25. This new division will operate within the existing bank but will be separate in the way it makes decisions and the way it operates, but under Sean's leadership because it's very important that he takes accountability for the whole proposition. It is the next step in our bank strategy. It does provide us with revenue diversification, funding diversification and really will help to drive profit enhancement over the future years. The investment we're expecting is about $60 million across '24 and '25 and about $40 million of that will be capitalized. I do want to stress, though, this has no impact on the commitments we made about controllable costs for '24 and '25, and Blair will talk about how we're going to deal with that. We are cognizant, though, that the pressure on NIM continues and is likely to continue through the first half of '24, and as a team, we made absolutely remain focused on that. So just quickly, what does this new proposition and what does it do to the strategy? Firstly, there is no change in the strategy that we've been talking about for the last couple of years. We do need to grow our bank responsibly as well as platforms and the other businesses are in continue or improve mode. But I would stress, we have simplified our portfolio over the last couple of years. And with the final condition being settled with the Dexus deal, we're now able to completely remove AMP Capital from our boundaries. This really gives us the opportunity to focus on the portfolio that will be the go-forward portfolio and to continue to improve and deliver that for long-term value. So on that note, let me ask Sean to give you a few more details.

Thanks, Lex, and good morning to everyone. I'm Sean O'Malley, the Group Executive for AMP Bank. I'm delighted this morning to be announcing this new division, and I believe this is a step change for AMP Bank, as well as a step change towards our ambition of being the best digital bank, helping everyday Australians create whatever wealthy they want. As Lex mentioned, we are setting up this new division to run independently from our current bank, but we will be sharing some of the leadership, some of our capabilities and some of the experiences we have today. Whilst the platform and the technology is very important, and we'll spend some time talking about that in more detail, we'll also, though, be developing a new operating model. That operating model will leverage the expertise we've seen with Starling and that will leverage new ways of working to become more agile, more adaptive, make decisions faster and be more successful. This new division does sit under our existing AMP current banking license, and we will leverage some of our shared services so as to maximize efficiencies. As I said, we're going to spend a bit of time talking about the technology today and the Engine platform. The Engine platform I'd describe as a deep core platform. It will be -- we'll be leveraging that Engine platform. And we do have Sam, the CEO here today, who's going to share more about both the technology but also the success that Starling has seen in the U.K. This will help transform AMP Bank from, today, a mortgages and savings bank to one that has full transactional banking experience for both small businesses and everyday consumers. We'll be taking a very considered and efficient approach to any integration with the current bank. There won't be any changes to underlying -- today's underlying banking platform or systems, although we will look for opportunities to help our existing banking customers sign up and take advantage of the new platform and the wonderful new offerings. We do believe that the Australian market is ripe for a new entrant, with no digital-first offering tailored specifically for the needs of small business. We think AMP Bank is well placed to disrupt the small business market and offer a compelling proposition that helps small business start, run and grow their businesses. We'll do this by the delivery of a feature-rich, convenient digital banking service, leveraging simple everyday banking products such as transaction savings, payments and cards, but also adding smart digital tools, including integration to various services, firstly, and starting with accounting software integrations. Progressively we'll be delivering a connected digital ecosystem that offers digital access to all of the services, many of the services that small businesses need. Although in addition to the digital experience that customers receive, there is a major differentiator of Engine that is the integrated platform. That integrated platform allows us to deliver seamless human support for those customers, which will include a 24/7 contact center, including chat as well as phone. That 24/7 allows us to be there when small businesses need us, not the hours that we choose to operate. And all of this is delivered through the power of your mobile phone. So we turn our attention to how are we going to deliver this compelling offering. One of the great advantages for us in choosing to partner with Engine is that we get to leverage the experience that Starling had in bringing their proposition to market in the U.K. And what we saw very well -- that worked very well there was the incremental and phased approach, so we'll be adopting that incremental low-risk phased approach. The build phase will take us through 2024 and we'll launch in market in Q1 in '25. When we launch, we'll offer core transaction and payment features for both small business as well as for consumers. The build phase is really about integrating and connecting the highly successful Engine platform into the Australian ecosystem. So imagine connecting things like payment rails, identity providers and some but a very small number of AMP shared systems, such as our general ledger and our HR systems. As I mentioned, unlike other banking platforms, and we've done research around the world before choosing to partner with Engine, unlike other banking platforms, Engine is a deep core, and Sam will explain a little bit more about the modular design and the way that, that works. But what a deep core means for us is we don't need to connect it into a multitude of other peripheral systems, things like CRMs and workflows and telephony platforms. This is a really differentiated major advantage, and it allows us to move quickly and efficiently relative to those other options. We will add other features and products post launch, including, as you can see on the slide, term deposits, savings accounts and small overdrafts. It's very important to stress the point that our offering here is focused very much on meeting the needs of transaction and savings -- meeting the needs of our customers' transaction and savings needs, not on lending, although lending will come but some way down the track. We'll also, though, be able to leverage and will leverage Starling's very successful go-to-market strategy and their strategy, which will adopt [ Blair's ] broad awareness, including very innovative social media and targeted industry-specific marketing. Some of the research that we conducted earlier this year shows that the AMP brand is a powerful accelerator of this proposition. That is different to other fintech and other startups that we see launching in our market. Customers reported through that research that they were 2.5x more likely to sign up for this digital experience when it was branded AMP. That's a really powerful head start for us. I'd like just to spend a little bit of time building on what Lex said about our current context. And as I explain the current context or more, this will highlight why we believe this is the right strategy for AMP Bank. AMP Bank turns 25 this year and we are a well-credentialed retail digital bank. We currently run that efficiently at or around 43% cost to income. However, in the highly competitive market in which we operate, our growth is currently constrained by our funding composition, sources and ultimately, its cost. The dynamics around funding costs are not new to you. And for a small retail focus, banks are clearly challenged. We know that these are being faced by banks across the industry. As you can see on this slide, the increase in term deposits and at call rates, combined with the roll-off of TFF, are impacting our cost of funding in this part of the cycle. This is particularly so for AMP Bank as we have very low transaction balances in our mix. This is a further headwind for our bank, but we believe the new division opens us up to a growing market segment, and the focus on deposits helps us diversify this funding mix, lower the total cost of funding and ultimately will improve ROC in the medium term. If we explore a bit about why small business and why do we believe small business is the right adjacency for us to enter. Small business is a further headwind for our bank, but we believe the new division opens us up to a growing market segment and the focus on deposits helps us diversify this funding mix, lower the total cost of funding and ultimately will improve rock in the medium term. If we explore a bit about why small business and why do we believe small business is the right adjacency for us to enter. Small business market in Australia is the backbone of our economy. It's significant and it's growing rapidly. 99% of the 2.6 million businesses in Australia are small businesses. And research shows us this is expected to continue to grow over the next 10 years and there's expected to be around 3.5 million new businesses entering in that 10-year period. Most of these businesses are in the sole trader and micro and small sub-20 employee part of the market. We think AMP Bank is well poised to capitalize on this continuous flow of new businesses who need a bank that can grow with them. Additionally, we know this is an underserved market. Industry research shows that small businesses are dissatisfied with their current market offerings. Quite simply, what's on offer doesn't meet the needs of these small businesses. Research shows us that they're looking for a connected, simple digital-first experience. And that's exactly what we'll be offering partnering with Engine. It brings together features, functionality that this market is crying out for. If we have a look at the -- on Slide 13, if we just dive, double-click on the size of the opportunity here, we're focused very much, as Lex mentioned, on sole traders, micro and small businesses. It's a large part of the market. You'll also see that actually not only is it large, it holds significant deposit balances, and those significant deposit balances, we believe our offering will be able to secure. Also, this part of the market is growing and it's growing meaningfully. In addition, this part of the market, the needs of this part of the market are a good match for the needs of everyday strains for consumers. And that really supports our approach, which will be to launch to both small business and consumers concurrently. I've mentioned Engine several times, and I'm really excited about our choice to partner with Engine. And I'm delighted that we have Sam, the CEO of Engine, here with us in Australia today. And Sam is going to talk about their experience in the U.K., but also explain a little around why they see that, that experience is transferable to our market.

Thank you. Thank you, Lex and Sean. It's really fantastic to be here today. I'm going to start with a bit of background on Starling. So Starling is a leading U.K. digital bank. It launched 6.5 years ago now and has amassed 3.6 million customer accounts in that time. And Starling has seen particular success in the business banking market, growing rapidly to achieve more than 9% market share of the small business banking in just over 5 years. And this growth has been enabled by our technology platform, which is designed to deliver rich, highly personalizable and digitally-native banking experiences for customers. It's all designed with the aim of solving real problems for customers rather than simply selling products for a bank. Starling's proposition itself is actually transaction account and deposit-led as a business because it's a product where you can really make a difference and engage with customers and drive growth, and then it delivers an effective cost of funding source for the bank. This customer -- bank's customer-centric approach has helped Starling to sit around the top of the independent banking satisfaction surveys in the U.K. for the past few years, which is a combination of delightful app experiences supported by excellent customer service that we make available 24/7. But that focus on customer satisfaction does not have to come at the expense of profits for the bank. In its 2023 annual report, Starling reported annualized revenue of GBP 684 million and profits before tax of GBP 195 million. Starling Bank's success is really underpinned by its use of this single cloud-native core banking technology right across the business. The technology is designed to deliver the twin outcomes of a low cost to serve for the bank combined with high levels of both customer and critically, employee satisfaction. So these customers get a delightful and highly self-service mobile native banking experience with all the things you'd expect from fully digital personal and business account opening to enhanced card controls and even small touches like self-service, high-value payments that really make life easier. But if a customer does need to get in touch with the bank, everyone from the first-line contact center teams handling the chats and calls that Sean mentioned, through to the back office functions in card disputes, in payments and in financial crime, are all serving customers through the same single view of the customer, the relationship, their businesses and their financial products. And this single servicing interface gives teams the information and the capabilities and tools they need to solve most customer problems quickly, which boosts both customer satisfaction and employees as well. And operationally, it's far more efficient for the bank. Further, the app enables customers to personalize and automate aspects of their banking. They're feature-rich transaction accounts. They come with things like spending insights and very granular card controls and real-time payment notifications. And then we've built extra features specifically for small businesses, areas like delegated expense cards and receipt management and real-time integration to the accounting packages. And my personal favorite of this, which is spaces, kind of personalized savings targets and goals that Starling helped pioneer a bit coming the norm but now right through to kind of automated budgeting, allowing bills to be paid directly from [ ring for instance ] -- spaces within your account, specific to the business sort of the household. Moving on to Engine now. Engine is the software-as-a-service core banking proposition built from the technology that underpins Starling. It's cloud native and it's delivered as a fully managed service, so it's constantly improving for its customers. Internally, Engine is built as a collection of pre-integrated modules, communicating through APIs and events to deliver effectively real-time banking capabilities to customers and, very importantly, in a resilient and scalable way. It now operates millions of accounts in the U.K. and almost uniquely has had no reportable major operational or security incident in the past 5 years. But most importantly here for our work here with AMP, our implementation approach is designed to derisk delivery with a focus on getting new products out to market as quickly as possible to enable growth. And we can do this because the project is starting from an integrated and running system. And so rather than building and composing from a list of requirements and a number of vendors, we start by reviewing existing journeys and operational process instead. And then we work together to configure and to localize these both for AMP's products and for the market in Australia. And we've already been doing this for 6 months with Engine's first client in Eastern Europe and Romania, which gives us further confidence in the project plan we have here with AMP. So why do we think the proposition and Starling's success is going to translate well here in Australia? Firstly, similar to when Starling launched in the U.K., the small business market is poised for disruption. They're a really major part of the Australian economy but they're actually quite underserved by the existing offerings. They fall in a gap between efforts for corporates and retail customers. And so there's a significant potential opportunity for a proposition focused on helping solve problems faced by small businesses. And one of the privileges that I've had in meeting banks in a number of markets is realizing just how remarkably similar these are all over the world. Business owners spend far too much of their time on financial admin rather than growing their business. And so by offering personalized banking, where you can do everything natively from your phone, we can really make life easier for them and make their bank available wherever they need it. These small businesses and sole traders aren't typically paying their bills or filing receipts in an office, but they're in their van in the downtime between jobs or they're on their sofa at home in the evening once their kids are in bed. And finally, from the joint reviews we've undertaken together, the regulations here in Australia are also broadly aligned with the U.K. So the localization efforts needed there should be limited to. And so this market opportunity is why we're really excited to be here today and announcing the partnership with AMP. There's a significant opportunity ahead for both organizations, and we believe AMP are well placed to take advantage of this. The AMP leadership team is ambitious and growth minded. It's hungry. It wants to take significant market share in small business banking. And that potential is really exciting for us with Engine, too. And AMP is fully committed to the program's "adopt not adapt" approach, which will be underpinned by a culture of designing products that solve problems for customers and really focusing on acting as a digital-first business. But as Sean said in the research, really not to be overlooked, AMP has a long history and established brand here in Australia, too. And that's really important if you want to become a customer's primary bank and get into deposits, their working cash and their savings with you. And so together, we think the AMP has the right team, the brand and the local market experience to help accelerate this growth. And in partnership, we're all well placed to fill a key gap in the market and help better serve small businesses here in Australia. Now I'm going to hand over to Blair, who will take you through some of the financial implications. Thank you.

Thanks, Sam. It's great to have you here with us today. I'm just going to briefly cover, in 1 page, our current view on the financial implications of the initiative we're announcing today. I think importantly, as Lex said at the outset, this does not change our guidance on costs, both above the line and below the line through the period we've guided to. In FY '24, we're still targeting a controllable cost base of $690 million, and our aspiration for '25 is landing in the region of $620 million to $640 million. As we've already announced at the half year, we have an investment envelope that we've announced of $120 million to $150 million to achieve that cost out. And that cost out was broadly titled a Business Simplification program, as you'll recall, and this is a business simplification as well as a growth program. Where we see this capacity emerging is in the repurposing of the investment we already had planned for the bank. We already had that in our growth agenda. And we're also seeing the positive impact already of our business simplification program as we've launched it in the second half of this year. So overall, our go-to-market investment of $60 million across '24 and '25 with about 2/3 of that capitalized is comfortably be able to be accommodated within that guidance that we've already provided. As Lex mentioned, we do see continued pressure in NIM, and that's, in fact, one of the reasons why this is such an important strategy for us. Given the current market conditions, we do see NIM being in the region of 125 basis points for this year. And we continue to see pressure as we look forward into '24. But with this initiative, we do expect there to be positive impacts on NIM, given that obvious change in funding mix and flexibility that this initiative will deliver in the later years. And that's important in terms of the go-forward position for the AMP Bank overall and the group. In terms of growth, again, as Lex mentioned, we're absolutely committed to improving return on capital. But that has to be done in the context of repositioning the bank, given the issues we face particularly around funding. And so we expect this position to allow us to do that. For '24, we do expect growth to be nominal, a big focus on NIM and return on capital as we're committed to. But importantly, as we look out into the outer years of this initiative, we see upside for AMP Bank NPAT and ROC from '27 onwards. That naturally follows the ramp-up in the business case we designed and our expectation of that improvement in terms of bank performance and the wider group performance. I'm going to hand back to Lex for a quick wrap-up.

Thank you, Blair, and thank you to the team. I mean, clearly, this is a significant change for the direction of the Bank and something I think we're all excited about. We believe it is targeting an underserved and growing market, and it's going to help us to broaden and diversify our revenue streams but also our funding sources. This is not a program we embark on lightly and being able to leverage the experience of Starling, being able to leverage the experience of Engine, and the capability of Engine has been really important for us in making this decision. The division will be built on the strengths, but I also anticipate that there'll be significant benefits back into the AMP Group as we learn to manage differently, operate differently and in a more agile and adaptive manner. And certainly, improving return on capital remains a focus for all of the management team in AMP. I think this is an exciting new development for us. There is clearly a lot of work ahead, but I think we're all committed to making it work. So I'll now pass to the operator for questions.

[Operator Instructions] Your first question comes from Matt Dunger with Bank of America.

Thanks for the additional detail on your deposit mix, and I can see the rationale to lessen the funding risk over the medium term. But at present, the deposit mix in high-cost deposits. So my question is, in the near term, you're flagging minimal volume growth in FY '24. Is this going to be a medium-term feature? And what can you do around that net interest margin in the near term to medium term?

Yes. I mean, I'll just make a few comments because we're not intending to give a whole broad conversation about the market as it sits today. I think the market is in a cycle and any CEO of bank would admit that and has been admitting that through the results period. So clearly, where -- I'm sorry, I think we've got a few echoes there. They're gone now. Clearly, it's in a difficult time for banking. And as you can see from the mix there, we are predominantly based on retail deposits because we don't have large transaction capability. And that's why we're sitting here talking about something with Engine and with Starling because we need to broaden that diversity. So if I look to the near term, mortgages have always been competitive. That's not something new. But as the TFF rolls off towards June next year, I expect that competition for funding to remain competitive. After that point in time, we'll have to wait and see what the market does.

Just follow up, with the $60 million of repurposed investment spend, Blair talked to that already being in your growth agenda. But that's almost half of AMP Bank's existing controllable cost base. So are you able to talk to where those costs are coming out of? More specifically, is this running existing systems for longer?

Look, as Sean mentioned, we've got an existing bank that actually runs at a very good cost to income, 43%, 44%. So we think that's a pretty efficient operation to start with. We've obviously been investing that over a number of years and we're very comfortable with where that position is. So we already had in our plans an investment envelope for this year and next year. And what we've done is direct that towards its initiative. Clearly, front of mind in that was minimizing that cost to execute, which is why the partnership with Engine is so critical. I think the other point that's important to note is the business simplification spend that we announced, the $120 million to $150 million always envisaged that there was a simplification element. And part of that is actually unlocking these business units to operate more efficiently together. And so this particular initiative is a key not just to the bank but it actually enables us to start to simplify some of the other parts of the business where we've got complexity. And so that's why we've been designing that program as we've worked through our planning cycle. We've obviously been working on this for a number of months, 9 to 12 months actually. So we had this intended strategy as part of our thinking as we designed that simplification cost out program.

Next question from Simon Fitzgerald with Jefferies.

Just firstly, I wanted to unpack the NIM guidance a bit more. I'm looking at my numbers, it looks about maybe 1.12% for the second half '23. And if I'm correct, that might be one of the lower ones out there. So I just wanted to know what does that mean for your market positioning? And also looking out to FY '24, could you just sort of give us a bit of a sense of is that the base?

Thanks for the question, Simon. Yes, we've got our results in a couple of months so we'll be able to give you a bit more guidance on '24. But we felt, given we were giving an update on the bank today, it was important to think about where we'd be for the FY '23 year, and you can see that at 1.25%. As we sit here today, we are experiencing certainly reduced growth in our bank as we want to manage towards value and return on capital. I expect the conditions, as the TFF rolls off through the first half of next year, will remain subdued for those same reasons. But in terms of guidance, we'll come back to you when we deliver the full year results in February.

Okay. And a few other questions here. Maybe you can touch on the economics of Starling. I imagine there'd be like a fee per customer or a fee per month. What would that be and can you share that with us?

I'm sure you can appreciate. We're not going to share the details of our commercial arrangements and I can ask Sean to comment. But Starling's success is basically directly attributable to the success that AMP gets in this market, so there is definitely an aligned purpose here in terms of making sure we have a successful small business market. Sean, anything else?

Thanks, Lex. Yes, I'll just reinforce that. I think it's a commercial relationship that's based on the more successful we are, the more successful that Starling is nor that Engine is. And so it's a very well aligned. It also is highly variable, and so our success is very important to Engine, and we think that's the right way to structure that commercial relationship.

Yes. I agree. Well, it's a partnership in the true sense.

Yes, okay. And then maybe a final question. Just sort of thinking about how bespoke this will need to be for Australia and for AMP. Wondering, is that all sort of covered in the $60 million that you're talking about in terms of development or would there be additional costs if you need to sort of tweak it further?

I mean, we put the costs in there through '24 and '25, and we want to act in an agile manner as we bring this to the market so we'll bring it to the market and continue to reiterate through '24 and '25 as we understand what the customers actually want, what they don't want. I think Sam has had some great experience in the U.K. where you've turned off many features. So I mean, there'll be ongoing development clearly. But within this, we've given you the amounts we're spending through '24 and '25. And there is no more in the envelope in those years. But maybe you can talk a bit more about what that, either of you?

Yes, absolutely. I think Sam mentioned what we've seen so far, we've been working together now for 9, 12 months, the level of localization we're expecting actually is quite minimal. There will be some, and I think the proposition will evolve and adapt over time. That's one of the really important features. But as Lex said, that amount that we have allocated to deliver this includes everything it will take to get this to market, both technology, people as well as marketing effort to get this to market over the next 2 years.

Okay. Sorry, one other final question. What other products is this sort of nature did you consider? And have you got any other examples where -- or how many other banks have thus been outsourced to in, say, Europe or something like that?

Maybe, Lex, if you're okay, I can cover that, Simon. We looked around the world as well as locally at other alternatives on banking platforms. And we examined there's a number of calls out there that you'd be familiar with, with Mambu and Thought Machine and the like. And what we saw with Engine was actually a differentiator on a couple of bases. One was the very deep core that I described, that means the app experience, the customer experience and the staff experience are very well integrated in 1 platform. That is actually unique and it also derisks the delivery, which is fantastic. But the second is our ability to leverage Engine's relationship with Starling, owned by Starling, and the very great success they've had in launching into the U.K. market. That we think is a differentiator. But we did -- we looked at about 20 different platforms over the last 18 months actually before we decided to partner with Engine.

And Sam, I think you're working on something else in Europe at the moment, right?

Yes, we're in a fortunate position. We have a very strong reference user effectively in Starling Bank today, and we've been working with the bank in Eastern Europe for kind of -- a year or so now but it's 6 months into implementation there. So this will be the kind of third installation of it. But we're focused on growing sustainably because if we replicate Starling's success with one in Eastern Europe and here in Australia, that's an excellent foundation for the business in the future. I'm not under kind of short-term revenue pressure as the tech company normally would be because we're part of a highly profitable banking group.

Your next question comes from Lafitani Sotiriou with MST Financial.

I wanted to kick off with the conference around return on capital. There's a lot of -- a lot of comments that in the presentation to be going to improve and considering return on capital. But I just want to get some specifics. So when you do -- when you're factoring in and calling out it being accretive to capital in 2027, is that actually meeting your cost of capital? Or are you just saying that you expect to start improving your overall return on capital in 2027?

Yes. Thank you, Laf. A good question. I mean, clearly, we're doing this because we believe that over the longer term, this is going to deliver returns on capital above our cost of capital. And that's our focus today. But in the current market, we understand that's challenging. I'm not going to kind of give exact guidance in 2017 about what that looks like because I think the market is changing almost on a daily basis. But certainly, our ambition is to deliver returns above the cost of capital.

Ambitions is 1 thing, but this is a serious amount of capital you're putting on the table and there's a long lead time for this. And this is in the context, I mean, in the last 5 years we spent over $100 million upgrading the bank platform already. So there was a lot of commentary around clearing the pipes so there's quicker applications and getting new business coming in quickly. But in the last 5 years, your cost to income has gone down from 35-odd to 43%. And so -- and your profitability has gone backwards. And yet you've got another bank platform project that you're going to invest that's long dated with a lot of risk around execution. So why should we have confidence in you this time properly allocating capital within their [indiscernible]?

Yes, there's a lot of questions there, Laf, and maybe I'll start with the last 1 first. Firstly, I think we have derisked this program by working with and they're not a fintech anymore because they're now a very profitable bank but by working with someone who has delivered the same proposition in the U.K. market. Now except it's not exactly the same and we're going to have to adapt some things to the Australian market. But I think we have really been thoughtful about derisking the program. In terms of your confidence about why we can do it this time, firstly, I'd ask you to consider that many of the people sitting around the table are very different these days. And we have been, over the last couple of years, very focused on driving simplification, on driving cost out, and on preserving and giving back capital to the shareholders where we didn't think there was value in us utilizing it. In this particular situation, we've done a lot of analysis over the last 9 to 12 months, financial analysis as well as considering different options to drive value for the bank. And we believe this is the best way forward to spend $60 million to provide an adjacency to the existing bank and to provide diversity and funding. Some of the spending in the past, you're right, has been about delivering speed in the mortgage space, and I don't think that's gone unwasted.

Okay. So I just want to circle back to some of Sean's colors that this is one of the -- this will be the first digital-only banking platform for sole traders and small business. I'm not sure how much research you've done. There's already something alive that are already doing integrated bank accounts with batch statements and the ATO and all the accounting platforms that are in the market today. And so I just want to understand why you guys think you are first to market, and have you done proper research on the Australian market first?

Thanks, Laf. We've absolutely conducted extensive research on the Australian market. And you're right, there are other banks naturally that have digital offerings in the market. That's -- we wouldn't say we're the only bank offering digital services. We do believe, though, we're the only bank that's going to be offering this depth and feature-rich level of digital service that's going to serve the small end of small business. What you called out correctly, are there are other banks that have some of these features already. That's absolutely right. But in all of our research, both locally as well as looking, as I said, internationally, we didn't see any other platforms that actually any other truly integrated platforms that have the same level of features and functionality and capabilities. But also, as I said, we didn't see anyone else who had captured this level of market share in any other market. Starling had done an extraordinary job of connecting, of grabbing a huge slice of the U.K. banking market. We think it's a great opportunity for us to leverage that. So it isn't just the technology, I guess, is where I'm going. The technology is very important and the features and functionality we think are differentiated. And I've looked at every one of those offerings in the Australian market, but we think the Engine one is better.

Yes, sure. I mean, but there are some already live in the market and that fintech businesses and that got backing on some of the banks, but there are some that are already live with feature-rich and that have already designed for the Australian accounting standards and are already live and that did spend $60 million to get it going. But can I just ask another question? Can you guys back out of this contract? What's involved? Is there a break fee? Or if you -- what's involved if you [ blindly ] decided to walk away from this investment?

Laf, I mean, obviously, I'm not going to talk about the details of the commercial arrangement. I mean, we don't -- we haven't made this decision lightly. We've been talking and analyzing this for the last 12 months, and we're sitting here committed to making this work in the Australian market. So I mean, the commercials, I'm not going to disclose but we're obviously committed to making this work. I mean, there's always opportunities to get out of contracts but that's not where our heads are at.

Okay. And just 1 last question. Can we get an update on BOLR, given the materiality of [ its update ] you can provide?

I'm not going to give an update on BOLR today. We're still in the middle of mediation. As I said at the half year results, we're all committed to approaching that with good faith and that's what we're doing.

The next question comes from Siddharth with JPMorgan.

Just a couple of questions, if I can. Firstly, Alexis, I just wanted to clarify, the comments about NIM pressure to continue into FY '24, I just wanted to clarify, is that a comment on -- versus the second half number that you implicitly guided? Or is that basically a comment versus FY '23? So, bet you, what I'm saying is will it be below that 1.11% for the FY -- for the second half of '23?

Yes, I make that -- thank you for the question. I'm not giving guidance on FY '24 at this point. We'll come to that when we get to the full year because I think the market is pretty dynamic at the moment. What I would say is that we are all aware that the TFF will continue to roll off through to June '24. And so that's why I made those comments more about the roll-off of the TFF.

So it should be incremental to the second half '23 for those extra pressures you're commenting on the -- that you referred to?

I'm not going to give guidance on the NIM. We'll come to that in a couple of months. I can understand why you're asking. Look, I don't know what interest rates are going to do over the next couple of months. So I'm not going to start making predictions about what it looks like for '24 at this point in time. But clearly, there's still a pressured environment.

Sure. Okay. No problems. Can I ask a question just about the decision to target SME and not retail. I'm just interested in why the bank is targeting this market when -- I suppose your existing relationships are probably more in the retail side. And also could you just comment on distribution efforts [ and needed ] the bank to tap this new market.

A pressured environment.

No problem. Can I ask a question just about the decision to target SME and not retail. I'm just interested in why the bank is targeting this market when I suppose your existing relationships are probably more in the retail side. And also, could you just comment on distribution efforts and needed the bank to tap this new market?

So I think you broke up a bit on that last bit but I'll pass to Sean to talk about why small business.

Yes, absolutely. Thank you. I think I caught the last bit about distribution method. So why small business and the small end of small business but also consumer? And so whilst we're focused very much on small business, we will be launching this to consumer and to everyday consumer, focusing on their transaction needs. Our current customer base, though, doesn't match their customer base. Our current customer base are really mortgage holders and savers. And whilst they're very important and we'll continue to focus on our mortgage business. And indeed, the new division will be a funding source for our existing business. Our existing customer base on the deposit side are more savers than transactors. And so it will require us to be targeting a different market for capturing transactions, although I said we'll be working to assist some of our existing customers to transition. Why small business? We believe it's an underserved part of the market. So when we -- and the research we've done shows that small business is typically not very happy with their existing banks. They don't think that many of the banks in Australia serve them very well. And we think it's a part of the market that we can disrupt. But equally, we believe that we can capture share of consumers. And so we will be launching both for consumers as well as small business. And we think we can effectively, very similar to what Starling did in the U.K., where they've got both a very successful consumer bank as well as small business bank, we think we'll be able to capture both.

Okay. And just my final question is just around FY '27. I was hoping you might be able to give us some details on the business case that you have. So just -- how big do you -- if everything goes to plan, how big do you think the deposit base that you get from this could be in FY '27?

I'm not going to talk about actual numbers, but I think we can talk about some ambitions we have in terms of market share. Sean?

Yes, absolutely. So we believe we can capture somewhere between 3% and 6% maybe of the Australian market progressively over time. That naturally won't all come in our first year or 2. And so -- but we do believe it's a big and growing market, and we believe we can capture that somewhere in that sort of range.

Yes. And the way that will impact the bank is basically that your cost of funding will be lower in the existing bank and -- I mean, would that impact on cost-to-income ratio at all? Or just trying to make sure I understand how we factored into FY '27 in our thinking.

Definitely, you're right around the cost of funding. That's what -- that's the primary play for this. We would hope, over time, the cost to income would continue to come down as revenue improves.

The next question comes from Kieren Chidgey with Jarden.

Most of my questions have been asked, but I'll just circle back on 1 or 2 points, Alexis. So I just want to be clear on how you're thinking about the growth near term into '24 for the current bank. I mean, the RO is currently below 8% based on that second half NIM. So are you still aiming to grow at system or are you just planning on keeping the book fairly flat for the foreseeable future?

Yes. I think as I said at the outset and Blair emphasized at the moment, we're looking at nominal growth in the Bank because of the reasons you just articulated. And I expect that will continue for the rest of the year. We obviously have to continue to assess what's happening in the market but certainly through this year.

Okay. And secondly, if sort of one of the key benefits to the group is obviously over time, lower funding costs and assistance to your bank NIM as a result of that. Why is this being set up as a stand-alone division? Why is it not part of the existing bank?

Yes. Look, it is part of the existing bank in terms of leadership and it's part of the existing bank in terms of licensing. Why we wanted to set it up as a separate division is because the operating model, the manner in which we make decisions, the way we service customers is very different. And we don't want to -- in fact, we want to learn from that and bring it back into our existing bank. So that's the primary reason. At the end of the day, Sean will be responsible for the bank we run today and the bank we run tomorrow.

Okay. And then thirdly, just given the near-term outlook is more challenging from a profitability point of view for the bank, how does that impact sort of this potential Stage III capital return -- that obviously hinges on BOLR, so you had a question on that. But more broadly, does BOLR bank profitability also [indiscernible] on the outlook there?

Yes. As we said at the half year, the third tranche of the capital is dependent on clarification of some of that litigation that's still uncertain for us plus the current market environment. So as I mentioned before, we've been working on this 9 to 12 months. So alone, it's not an important factor in that [ industry ] decision.

Okay. So it's still more around the transaction outcomes?

Yes, it's the uncertainty around some of those litigations and the market environment.

[Operator Instructions] Your next question comes from Scott Russell with UBS.

A few questions, please. Firstly, just on the revenue model that's planned here -- your focus -- first on transaction and savings offerings in Australia, that's not traditionally a very large fee pool. I'm looking at Slide 15, however, and clearly, Starling's had success with not only growing accounts. But more to the point, the rate of revenue has outpaced the growth in accounts, particularly over the last 2 or 3 years. So perhaps you could comment on whether the revenue model you're planning for engine in AMP is likely to be similar to that and whether that relies heavily on charging or -- how the fees are charged to customers in the U.K.

I'm happy to. Firstly, thank you for the question, Scott. It doesn't rely on fees. So our revenue model doesn't rely on fees. So I think the best way to think about our revenue model here is we've got a lending business that will happily accept lower funding -- lower cost of funding that we can feed these funds to. And so think about it more as a transfer pricing mechanism where this business will earn money, will earn revenue from being able to pass those funds on to our mortgage business at a lower cost than what our mortgage business gets charged today. That's really how the revenue model works for -- works in our model. I believe that's very similar to how the revenue model works -- works for Starling.

Yes. It is -- Starling is fundamentally a low fee bank so it's the margins you make on moving payments and the net interest margin on the lending. So the reason the revenue has grown quicker than customer numbers in recent years is because Starling with a new bank and it has taken a while to build up the lending side of the business. And so that is catching up, but AMP have the advantages that the lending business is already in place today and so they can effectively deploy deposits in a way that's taking Starling time to reach.

Okay. I follow. That's clear. And in terms of the launch 1Q '25, it's over 12 months away. Given this is an off-the-shelf purchase effectively of Engine, is that time frame to launch unusual when you think about perhaps, Sam, the other -- you mentioned you've worked with a couple of other banks in Europe thus far. Is this an unusually long time frame to launch and perhaps some reasons why that might be the case for Australia?

No, not at all, actually. You look at people trying to do similar things in the market, they may start at 12, 18 months, they often take 2 or 3 years to come to fruition. We have real confidence in the time line, and we're being appropriately cautious through it, but we're all incentivized where there's opportunities to accelerate this, we would look to accelerate it too.

I think, Scott, I mean, that's a question we've been asked many times, but it's more not so much the platform itself but it's the integration into some of the payment rails, et cetera, that we need to do in Australia. So that's where the time we'll spend, and as Sean said, into some of the corporate systems within AMP.

Okay. And then maybe just 1 last final question about perhaps the ability to leverage your existing bank customers here, noting that there are a lot of mortgage holders that you have. Do you have much visibility into -- I'm sure you do on their ownership of small businesses and any interest expressed so far or potentially you see amongst the existing mortgage holders to have an early jump start into the existing bank customers? Or is it really going out fresh to SME?

Yes, absolutely, Scott. So I think really good question. I'd say that we've got -- and we know we've got SME customers in our book today really by accident. So if you have a look across our lending portfolio, some of those customers are very clearly small business owners. Equally, we have some small business owners who are savings customers whole term deposits with us today. So naturally, we'll be targeting those existing customers and helping them to sign up for this fantastic new offering. But it's -- I wouldn't -- there is an opportunity there as a bank today that's got around about a 1% market share, though. I'm very interested in the 99% of Australia that we don't bank. And so I think there is an existing opportunity, but I think there's a much larger opportunity beyond our existing customer base.

Thank you. So on that note, I don't think there's any more questions. So I might thank you all for your time today and look forward to speaking to you soon. Thank you, everybody.