ANZ Group Holdings Limited (ANZ) Earnings Call Transcript & Summary

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

Thanks, Jill, and thank you all for joining us today. I'd also like to acknowledge the Gadigal people as the traditional owners of the land on which we're meeting today. And I have to say it's good to be back here in Sydney. It's the first in-person results we've hosted in some time, and it's an understatement to say that a lot has happened since the last time we met. And I am really proud of how ANZ has supported our people customers through challenging times and how we've used that time to also strengthen the bank for the opportunities ahead. Now I'd like to acknowledge, however, that COVID has had a much bigger impact on some people than others, including some of our colleagues at the bank, and our thoughts remain with all of those who lost loved ones. Now on behalf of everybody at ANZ, I'd also like to express our concern for all those affected by the floods here in New South Wales and Queensland as well as the truly terrible events in Ukraine. For Ukraine, we've been waiving fees on customer payments to various charities supporting humanitarian efforts. While closer to home, we continue to offer financial assistance to customers impacted by those floods. Now not for a minute dismissing these very real tragedies, it's actually pleasing to see a sense of optimism returning in our home markets. Airports are busy. Hotels and restaurants, fully booked. And after 2 years of working from home, our offices and cities are coming back to life. Now regarding the first half performance, I'll cover the highlights and Farhan will go through the detail. Strategically, we made good progress, and we're better positioned for the future. Financially, we had a few headwinds, but then they impacted an otherwise decent half. Cash profit was up 4% versus the first half last year, but down 3% half-on-half. Margins are closely managed, and return on equity at 10% was a reasonable return for shareholders, while the board also proposed a dividend of $0.72 per share fully franked. We remain strongly capitalized with a common equity Tier 1 ratio of 11.5%. Over the past 5 years, we've led the sector in simplification and capital return. And we just completed our latest buyback of $1.5 billion. And that brings total capital return to shareholders over that time to $5.5 billion from buying back 160 million shares and neutralizing the dividend reinvestment plan. We were first to embark on simplification and prudently return capital to shareholders. We remain prudent through COVID and we didn't panic to raise unnecessary capital. So managing shareholder capital has been a strength of ANZ, and the Board remains intensely focused on capital efficiency and allocation. And as per our usual practice, we're taking the time to consider first and best use of any surplus capital, and we'll keep our owners updated as we progress. Productivity also remains critical. Now you will all remember that 4 years ago, in response to a question on costs, I suggested that as we simplify the bank, it could be possible to reduce our costs by about 10%, closer to $8 billion. Now I made it clear we didn't have a detailed plan to get there. But we understood the importance of productivity to meet both the competitive and the regulatory challenges we faced at the time. And at that time, it was actually a bold aspiration. Our run-the-bank costs were $8.2 billion and investments cost a further $600 million, and costs are increasing every year across the industry. Now a lot has happened since then, including the significant costs of remediation post the Royal Commission, and the impact of the ongoing reshaping of ANZ. But however you look at it, we've done an excellent job simplifying the bank, and cost management has become a core capability. In the 6 months to March, as we report them now, the run-the-bank costs remain tightly managed, coming in flat again at $7.4 billion on an annualized basis. And that's a material reduction since we set our aspiration. However, as inflationary pressures increase, absolute cost reductions will be more difficult. And with the shape of our business changing, a set cost target is less appropriate. However, we will not give up nor shy away from the ongoing need to be simpler and more productive. We still opportunity to simplify processes, automate where we can and drive benefits from adopting new technology. We've got a strong track record and a culture of cost management and that will remain. Now on the investment side, we've needed to and frankly wanted to invest more than we've originally considered 4 years ago to respond to the ongoing regulatory change, prepare for the fast-changing environment and most importantly, position for new growth opportunities. Now it's really important that we're held to account to deliver value from that investment. And the good news is that more is now directed at growth opportunities and less fixing issues of the past. Now I'm pretty really excited about the investments we're making to build out a new retail platform, ANZ Plus, our new sustainable finance capabilities, a new retail FX proposition due later this year and our expanding online SME platform, GoBiz. Now investing to further build resilience and enable lower cost processes is also pretty critical. For example, we're investing to migrate applications to the cloud and roll out Salesforce as a single customer service tool right across the group. We'll soon have 1/3 of our applications based in the cloud, and we're well on track to getting to about 50% in the next 18 months. Salesforce is actually a really critical tool, simplifying our employee experience and making us easier to deal with as a customer. And today, we've deployed it to 15,000 colleagues. Now in addition to that, we continue to invest in partnerships to drive better customer acquisition and engagement. In the half, we increased investment in Airwallex, Valiant and Slyp, and we completed the acquisition of Cashrewards. With Lendi, we launched our JV digital home loan proposition, OneTwo Finance, and we'll soon launch new customer propositions with Aider and Cashrewards. Now to support our sustainable finance business, we announced Project Wheatbelt. We're partnering with Qantas and one of Japan's leading businesses INPEX to develop a biofuels and regeneration project covering millions of hectares in Western Australia. We also invested in Pollination, a leading climate change and advisory firm. And we've already developed a really strong pipeline of opportunity as a result. Now looking at our risk performance. Our customers continue to strengthen their own balance sheets, increasing cash balances and improving their resilience, and that drove a provision release of almost $300 million. And it's also a really good sign that the economy is recovering. But more importantly, it's a direct outcome of the decisions we have made to strengthen ANZ and remove unattractive, low-return risk from our book. Divestments over the past 6 years and our disciplined approach to customer selection, particularly in Institutional, has reduced risk and improved risk-adjusted returns. And this is reflected in our internal expected loss rate, which is now 20 basis points versus 35 just 6 years ago, and it's a deliberate part of our strategy to improve quality of earnings. Now in a time of such uncertainty, I'm actually pleased with our prudent approach to risk, even when it has come at a cost to short-term revenue growth. It will benefit shareholders over the long term, and it sets us up well for the times ahead. Now turning to our customer franchises. New Zealand grew across all business lines while keeping a keen eye on risk. Institutional customer revenues grew very strongly with a focus on sustainability, high-quality, well-diversified balance sheet growth and solid growth in processing volumes for other financial institutions. Risk-adjusted lending margins for Institutional actually increased. Now it's often overlooked that our largest Institutional customer segment is financial institutions, and they generate an annualized revenue of $1.65 billion. It's growing at double-digit rates and generates a return on equity above 20%. And a small but an important subset of that is our business processing payments for other banks. It's growing rapidly, positioned to benefit from rising rates and already generates more than $150 million of revenue per annum at an ROE exceeding 40%. Now in Australia, home loan processing improved and volume grew modestly in the half. And while early days, processing times are back in market, and we lifted our capacity by 30%. In our Commercial business, where we serve 600,000 small and emerging businesses, our focus on risk-adjusted returns drove a decision to stop acquiring asset finance loans through third-party channels. Therefore, the back book is in runoff and reduced $300 million in the half with a further $1.2 billion to go. So that means a modest reduction in revenue but an increase in returns. But if you look through that book, our core Commercial loan book is growing well and momentum increasing with risk adjusted margins improving. Now with the impact of the pandemic now moderating and our balance sheet prepared to withstand any delayed economic impact, it's just time to reflect again on our long-term strategy. Since 2016, we've been simplifying and strengthening the bank, building more contemporary infrastructure to enable sustainable, long-term growth, particularly around the propositions of financial well-being and sustainability. Now our objective is to build a group with 4 strong growing franchises: a disciplined institutional bank, focused on intermediating trading capital flow in the region; a leading New Zealand bank with the #1 position in everything that it does; a repositioned and growing Australian Retail bank driven to improve customers' financial well-being; and a differentiated Australian commercial bank helping customers start, run and grow a small business. Now by running them well together, we'll deliver the benefits of diversification and generate decent sustainable returns. And to get there, we identified 5 high-level streams of work. We've been executing them pretty well. But along the way, we had to deal with the Royal Commission, significant New Zealand regulatory changes and, of course, COVID. So while progress has been significant, we had hoped to achieve more by now, particularly in Australian Retail and Commercial. But we are catching up fast. As you know, we've sold or exited 29 businesses, releasing billions in capital that has been returned to shareholders or deployed to other parts of the bank to fund growth. The only material noncore businesses left are our 3 remaining Asian bank investments. Institutional is now well run, highly disciplined and delivering returns comfortably above cost of capital. It will benefit from the sustainable finance super-cycle, and there are material opportunities to further grow transaction processing for other financial institutions globally. New Zealand is continuing to outperform across all business lines. It's prepared for the RBNZ capital changes. And it will largely finish its major compliance program, BS11, later this year, well ahead of schedule. In Australia, customer remediation, which has been such a feature for all banks since the Royal Commission, has now moved to the final stages of execution. The exit of noncore activities in Australia is also coming to an end. With ANZ Plus in market, it was time to bring together our digital and Australian Retail division under Maile while separating Commercial out as a stand-alone division. ANZ Plus is a new retail bank, built without the constraints of legacy technology. It's a new platform, set of processes and portfolio of partnerships that will improve the financial well-being of our customers and drive market share growth and higher lifetime value per customer. Now using the playbook for the big tech, we focused on building a strong foundation and launching a minimum viable product. And since the soft launch, many of you were there in late March, we've already built new features, including the ability to make payments through BPAY and PayID, immediate access to a digital card in your Apple Pay wallet and an Android offering. And those are going to be available in the coming weeks with more features following quickly. So we'll roll out ANZ Plus more broadly with the marketing campaign starting in a few months. Now as I mentioned, we've separated Commercial in Australia to give to focus and investment it deserves. And while it's clearly early days, I've spent considerable time working with the team to refine that strategy and identify opportunities. And I hope to share more of that strategy at the full year result. But partnering with the world's best service providers to help small businesses grow is going to be a key part of that future, and we recently achieved what we consider a major milestone. The ANZ Worldline joint venture went live last month with world-class payments products for merchants in market by the end of this year. And I've had the opportunity to preview and test those capabilities directly, and they're really industry-leading. So just in summary about our portfolio. New Zealand and Institutional had a clear strategies, solid momentum and built-on contemporary systems. In Australia, our core business is back to growth. And with ANZ Plus, we have a cutting-edge new platform to build on. And finally, in Commercial, it's in the final stages of developing its own differentiated strategy. So as a result of the progress we've made, we're now able as a group to move to the next evolution in building agility. So today, we announced our intention to implement a nonoperating holding company. Now this is, in our view, a low-cost option for our future and will unlock value for shareholders over time. We've been actively engaged with regulators. And yesterday, we received Board approval to submit a formal application to APRA, the Federal Treasurer, and international regulators such as the Reserve Bank of New Zealand. Now when that's approved, this will enable a new holding company to be created with wholly-owned entities sitting directly beneath. The banking group would comprise of current ANZ Banking Group. But it would also be a nonbanking group, which would allow us to bring the world's best nonbanking tech and services to our customers. So take our investment in partnership arm 1835i, for example. Under the new structure, most of these partnerships would sit in the nonbanking group. It also allows us to acquire, develop and grow new products and technologies that improve the financial well-being of our customers without operating within the constraints of a traditional bank. That's entirely consistent with our strategy to create a nimble, responsive organization. And it's a very common structure with leading banks such as JPMorgan in the U.S., DBS in Singapore, and of course, Macquarie here in Australia operating under such a structure for many years. Now there's going to be no change to how ANZ's existing banking operations are regulated. What APRA, the RBNZ and others want to regulate today, they will regulate tomorrow. But once approved by regulators, shareholders will vote on the proposal towards the end of this year. And I can assure you that we will be consulting widely on this change with our owners, our employees and other stakeholders. So with that, I'll now hand it to Farhan to talk through the financial results.

Thank you, Shayne, and good morning, everyone. It is indeed a pleasure to be here in person in Sydney. Last time, I spoke to you from Hong Kong over a phone, which was not particularly pleasant. Our results today will reflect the disciplined execution of our strategy and the benefit of our diverse portfolio of businesses, producing solid cash profit, EPS and ROE outcomes. I will take you through our financial and the factors that underpinned our solid result. In Australia, home loans, after a challenging 12 months, we returned to balance sheet growth this half. In Institutional, we saw targeted and profitable volume growth with risk-adjusted lending margins increasing and banking revenues growing strongly half-on-half. Our Markets customer franchise performed strongly this half, but lower balance sheet trading income saw total market revenue fall. In our market-leading New Zealand business, we again delivered strong home loan growth and displayed disciplined portfolio management. We have continued to invest at record levels in modernizing our technology and data architecture and reengineering our business processes to unlock productivity and increase our speed to market. A greater proportion of our investment spend this half was directed towards growth and productivity initiatives. We have proven our ability to manage and run the bank costs well, which are flat again despite heightened inflationary pressures. And we also saw a net credit provision release this half, reflecting an improved portfolio risk profile while balancing environmental uncertainties. Now we pre-released information on our large notable items, and further detail is, of course, included within the investor discussion pack. As you know, L&I forms part of cash profit. We separated them out to provide transparency and aid comparison. But to be clear, we hold ourselves accountable for cash profit, including L&I. Given that we pre-released the information on large notable items, which in aggregate amount to $43 million for the half, from this point onward, my reference will be to cash profit, excluding large notable items. And I'm happy to talk to them more detail in Q&A should you desire. Let me start with NIM, where underlying margins for the half were down 6 basis points. However, and consistent with our update at the quarter, this was driven by a lower exit rate at the full year with the entry to exit reduction in headline margin only 1 basis point for this half. This was a result of strong margin management through disciplined lending origination and actively managing the pricing of our deposits. So for NIM in the half, price competition in home loans in Australia and New Zealand remained intense, contributing to asset margins falling. Customer preference for fixed rate home loans drove a mix decline. But this abated with fixed rate flows falling to 26% in the month of March versus an average of 41% for the period. Customer deposit growth outpaced customer lending again, which saw liquid assets grow and have a modest impact on margins. And we also saw a benefit from our capital and replicated deposit portfolio with both volume growth and an increasing portfolio yield, which represents a turning point given reductions over recent years. Looking ahead, there are a range of potential tailwinds and headwinds to margins. We expect asset price competition, particularly in the home loan market, to remain intense and may intensify further in a rapidly rising rate environment. Rising rates will provide a material benefit to our capital and replicating deposit portfolio, which I'll spend on shortly. We also expect customer preference to change as rates rise. We're already seeing Australian customers shifting back towards higher-margin, variable-rate home loans. Our leading franchise in New Zealand, who are ahead in the tightening cycle, will provide us with important behavioral insights into the shift in customer preferences, where we're already seeing customers moving from at-call to term deposits, which are, of course, leading to deposit mix headwinds. But on balance, across the headwinds and tailwinds, we see second half '22 margins as being slightly positive. Now turning to our capital and replicated deposit portfolio. Yield curves steepened sharply this half. And we have started to see official cash rates rise across many countries in response to inflation, including as we here saw yesterday. Now while the timing and magnitude of any further official rate rise is unpredictable, we have provided on this slide an illustrative impact assessment on our capital and rate-insensitive deposits portfolio if rate rises unfold as predicted by ANZ Economics. The current portfolio stands at $142 billion, of which roughly 25% is sensitive to short-term rates where we will see the full benefit of any rate rises almost immediately. The remaining 75% is invested out mainly across 3- to 5-year terms. And we will see this benefit progressively over time as maturing tranches are reinvested at higher prevailing rates. As you can see, the impact is material and will manifest itself earlier in our New Zealand and international businesses who are ahead in the tightening cycle. All things being equal, rate rises could result in approximately $800 million of revenue upside over the next 12 months. However, please note that this impact is related strictly to our capital and replicated deposits portfolio. There are many other variables, as you know, outside of this portfolio, some of which I mentioned in the previous slide, which can affect overall revenues. I would now like to share with you our divisional performances. And as we go along, I'll try to highlight how our key priorities are supporting ROE and growth. Firstly and very briefly, our Commercial bank, because Shayne has referred to it already. Lending volumes grew modestly, and importantly, risk-adjusted margins increased 10 basis points. Moving to our Australian Retail business. While this was a challenging half in terms of revenue including the impact of the discontinuation of the Breakfree package, risk-adjusted margins were down in the half, but will benefit from rate rises as we look ahead. In particular, in our Australian home loans business, we did return the balance sheet to growth. We proactively managed volume while focusing on improving processes and capacity. We did this by increasing automation, improving processes and adding resources, which -- resulting in increasing available operational capacity by 30%. This, in turn, significantly improved turnaround times across all channels. We've exited first half with momentum in housing loan applications, and our near-term focus is to build on this in the second half. We did not and will not chase growth for growth's sake. We want profitable growth and will remain disciplined on margins. We are on target to grow in line with the Australian major banks by the end of our financial year, but we'll do so with an eye to our margin performance. So in summary, we are turning the corner in our Australian home loans business. With ANZ Plus, as Shayne said, we are fundamentally transforming the retail bank for the long term. And as ANZ Plus gains momentum, we will start reporting more granular performance metrics and make a clear linkage between these metrics and the Retail Banking P&L. Moving to Institutional. The first half result demonstrates the benefits of being a simpler, more resilient and disciplined business. Revenue, excluding Markets, was up 5% in the half. And I will talk to the market's performance shortly. But I would like to note that the Institutional business ex balance sheet trading, basically, our Institutional customer franchise, their revenue grew strongly by 9% half-on-half. This is comparable to how many of our domestic peers report their institutional business results. We demonstrated lending momentum with volumes up 8% directed towards our more profitable customers. The volume growth was relatively broad-based across various regions and segments, including strategic focus areas like financial institutions, sustainability and food and agri supply chains. Pleasingly, as Shayne mentioned earlier, risk-adjusted lending margin in Institutional grew 5 basis points in the half, demonstrating continued discipline in customer selection and pricing. The momentum in our franchise actually positions us really well for the structural tailwinds, which are emerging, with higher interest rates and upcoming capital reforms both expected to benefit our Institutional business. Markets revenue, however, was down for the half at $812 million. But pleasingly, their customer franchise and markets performed well with revenue up 23% and customer flow in our core FX, weights and commodities business stronger than the prior 2 halves. Balance sheet trading income was lower, partly due to adverse mark-to-market movements caused by wider credit spreads and also because of interest rate volatility. Looking forward, while financial markets are difficult to predict, we expect that higher interest rates and FX volatility arising from the return of meaningful interest rate differentials will continue to be constructive for customer flow in our core FX and rates businesses. Much like the business that Shayne referred to within Institutional that's often neglected, our payments in cash management business, which includes domestic and international payments and cash management is core to our DNA. And there's a lot to be excited about that business. This is a capital-light business that has delivered growth at scale with 1.5 billion transactions processed at close to 100% STP rates during FY '21 at a 17% CAGR over the last 2 years. We have a market leading position with a growing gap to peers. Our business has the highest market penetration and share of lead bank mandates and almost 60% market share of Australian dollar and New Zealand dollar volume in clearing. Our continued investments in payment platforms like Banking as a Service and NPP and deliberate growth in more profitable segments like financial institutions positions us well to drive future growth. This is a business that today earns over $800 million per annum at an ROE greater than 40%, processing and facilitating the payments and cash management needs of our largest corporate and financial institution clients. And it's also a business that is favorably leveraged to both higher interest rate and higher transaction volumes. Another area I'd like to talk about is sustainability, which I'm, of course, deeply passionate about as many of us are at ANZ. And we see this here as our -- both our responsibility and an opportunity. We were the first Australian bank to join the Net Zero Banking Alliance and have committed to $50 billion of sustainability funding by 2025, a target that we have continually beaten and revised upwards. As Australia's leading institutional bank, we are well placed to defend and grow market share and are already winning a disproportionate share of the sustainability opportunity. For example, our sustainable financing volumes in terms of our participation have grown at 156% per annum since 2015, which is 2x global average. Now practically, we are growing wallet in 3 ways. One, we are supporting existing corporate clients in the process of transitioning; two, we are supporting emerging green companies; and three, we're supporting our financial Institutional clients who are wishing to invest in sustainable assets. Now it's important to clarify that the wallet growth in sustainability is only partly from lending. We're also supporting customers with a wide range of nonlending solutions such as advisory, debt capital markets and sustainability linked derivatives. We are confident of our ability to continue winning a disproportionate share given the depth and breadth of our franchise, deep international experience, strong ESG capabilities and differentiated solutions. And as Shayne mentioned, through our partnership with Pollination, which has added to our capabilities and is already creating new opportunities with customers. In New Zealand, we saw another strong result from our market-leading business with revenue up 2% and lending volume up 4% for the half. We grew market share in home loans by 28 basis points, with volumes up 7% despite intense competition in the market. And risk-adjusted margins improved by 4 basis points as we continue to closely manage returns business segment to reflect the changing capital environment. And now I'll turn to expenses. You have seen ANZ deliver disciplined cost management since 2016, and that discipline was evident again in the first half. On a constant currency basis and excluding the acquisition of Cashrewards, BAU costs were flat, as I mentioned earlier, despite heightened inflationary pressures and despite additional resources being deployed to process higher home loan volumes in Australia and in New Zealand. This strong outcome was underpinned by close to $100 million of productivity off the back of increased adoption of digital channels and customer self-service, process automation and simplification in our back office functions and continued rationalization of our property footprint. As Shayne said, our continued focus on productivity is non-negotiable, especially as we face into a period of higher inflation in the short to medium term. Our run-the-bank cost management and productivity focus has allowed us to invest at near record levels this half in order to build a simpler and more resilient business and to position the business for future growth. The cash investment spend was flat half-on-half, while investment expense increased 13%, driven by a higher expense rate. Our capitalized software balance fell to $924 million, the lowest amongst our peers. Proportionately, more spend was on simplification and growth initiatives this half as we passed what we hope was the peak in regulatory and compliance spend. As we look to the second half, on a constant currency basis and excluding Cashrewards, we would expect cash investment spend and our run-the-bank costs to remain broadly flat. Throughout the presentation today, Shayne and I have provided an overview of various investment initiatives that we are really excited about. The value to shareholders is essentially anchored on 5 key themes that underpin the bank we're building that has a simpler, more modular and cloud-based technology architecture that enables greater speed to market and greater operational resilience and efficiency; a more modern digital experience for and employees that drives better engagement and retention; more timely, accurate and easy-to-use data that provides better insights to customers and enables better decision-making by management; streamlined business processes that leverage automation and machine learning; and a more operationally resilient bank with embedded controls that builds customer confidence and trust. We are building a simpler, better bank that's positioned for growth and has the agility to adapt and take advantage of the opportunities in a rapidly changing banking landscape. We will continue to have a focus on delivery and value realization and pursue this relentlessly. Turning to provisions, where individual provisions remained at historic lows this half as customers emerge from COVID with healthy balance sheet, supported by low interest rates and low unemployment. The $371 million release from the collective provision this half was a function of further improvements in the credit risk portfolio -- sorry, credit risk profile of the portfolio while balancing uncertainty in the broader environment. Our collective provision balance of $3.8 billion is $381 million higher than pre-COVID and includes $618 million of management overlays for environmental uncertainties. And we believe this remains prudent and appropriate at this time. Our capital position is strong with a Level 2 CET1 ratio of 11.5%. And it is this strong capital position that enabled us to profitably grow the balance sheet this half, mainly in Institutional and in New Zealand. The underlying business earnings funded balance sheet growth and the noncredit risk-weighted assets, which is interest rate risk in the banking book. This is the investment of our capital and replicating deposits. And given rates have moved significantly higher, we hold risk-weighted assets for the change in the value of these investments. Much of this is expected to unwind over the next 1 to 2 years. We completed the buyback this half and maintained the dividend at $0.72 per share fully franked, which equates to a 64% dividend payout ratio, well within our targeted range. Among the big 4 banks, as you know, we have led the way on capital management for some time, and capital efficiency and prudent use of shareholders' capital remains a strong focus for the Board. So to conclude a few words on my key areas of focus. We have improved our home loan processing capacity rebuilt application momentum, and we aim to extend that momentum into the second half. We have launched ANZ Plus, and you will continue to see further feature releases this year as we move towards our beta release of Plus home loan offering later this calendar year. We will report on the key value metrics of ANZ Plus starting from second half '22. We will continue to further build on the successes of the Institutional business and our New Zealand franchise. While we continue to grow these franchises, we will remain vigilant around the discipline required on risk and returns. We will intensify focus on the execution of the growth strategy of our commercial business. We will continue to invest to grow our commercial business with a sharp focus on value realization. Simplification and productivity remains central to our strategy. And my team and I will relentlessly pursue this objective in order to make us a better, more efficient and resilient bank for our customers and for our employees. We will also maintain our capital management and allocation discipline and will continue to remain disciplined on customer pricing and on risk management in what will be a volatile environment ahead. Thank you, and I hand back to Shayne.

Thanks. Okay. Now looking ahead, the operating environment will be very different. And as a company that is clearly tied to macro outcomes, we will need to change our business settings and investment priorities. With higher inflation, we're already feeling an impact on wages and staff turnover, which makes cost management more difficult. All else being equal, a higher interest rate environment globally will likely see industry margins expand. And to the extent higher inflation signals excess demand, it's likely to bring an end to the investment drought in Australia that began a decade ago. And as a result, we're already seeing stronger corporate demand or lending demand from our business customers, particularly at the bigger end. At some degree, there are global supply chain forces behind that inflation, which mean our trade expertise and funding are even higher demand, and you can see that emerging in this half's result. And the impact on provisions is more difficult to predict. However, we're clearly at cyclical lows. And some customers will find the inflation and interest rate shifts challenging after decades of down trends in both. And this is when the tough decisions we've made on customer selection and long-term risk management will pay dividends. And the adjustments may be bumpy over '23 and '24 and navigating it will require the institutional agility we've been focused on building. Now I'm very confident that -- in the what future holds for ANZ, and we'll continue to focus on the long term, investing for tomorrow and not just running for today. Our balanced portfolio of businesses, leadership and intermediating trading capital flows, particularly aligned to sustainability, and the strength of our balance sheet means ANZ is better positioned than most for the opportunities ahead. Now I want to thank the entire team at ANZ for their ongoing commitment to their customers and the broader community. Our culture is strong, and we have industry-leading employee engagement. And finally, we have an embedded sense of purpose to shape a world where people and communities thrive. So with that, we'll finish and go to questions. Jill?

Okay. Thank you. You've all been through this a million times, I know that. So I'll start with questions from the floor. I'll then go to the phone. [Operator Instructions] And we'll start with Jarrod because you sat on the front on your own.

Social distancing. Two questions, expenses and margins. Expenses, I know, Shayne, that you said that it was -- the $8 billion was in response to an analyst's question. But it's effectively moved into the, shall I say, DNA of ANZ. It's in your -- was in your slide deck as aspirational. That $8 billion was $7 billion run-the-bank, $1 billion of investment. What I heard today was $7.4 billion run-the-bank, hard to decrease that and increased investment. Are we looking $7.4 billion, $1.2 billion? I'm just looking for a bit more guidance on that. And I have a second question on margin.

Let me do that one directly, and then we'll get to the margin. No, that's absolutely fair. And you're right, precisely what you said is correct. I think the -- what we're saying is when we set the aspiration, the world looked very different. We were talking about potential for negative interest rates and deflation and all those other things. And now we're sitting in a world where inflation, printing is significantly higher than we've experienced. Wages increasing as well. And so it becomes a lot more difficult to drive absolute cost reduction. So we haven't given up. So we're not signaling that we've changed our intent around productivity. But having a target that just becomes almost impossible, I think, or it would force us down a track and potentially doing silly things. So on the run-the-bank, we're at 7 4 in the half, as Farhan mentioned. That's likely -- we're going to do our best to keep that flat over the second half. I think that's achievable, difficult. I don't know what the path of that will be over the coming year. There's just too many moving parts there. But we're going to continue to focus on managing those costs as well as we can. In terms of the -- and the other thing -- sorry, the other thing on that. Look, the shape of the bank is changing as well. We said today we're excluding Cashrewards. Well, when we're successful and have a knock, we're going to have another structure that we think are real benefits. It's going to be increasingly difficult to reconcile back what we were talking to as the base changes. In terms of the investment, again, I don't know what the investment number will be. I think the point we're saying is we should invest appropriately as much as we can as long as it's driving value. For now, we've got a good -- we've got a pipeline. We've got sort of roughly half of the stuff we're doing, frankly, is fixing reg compliance, that sort of stuff. And good to see about half is finally focused on productivity and growth. And that's the bit we want. We're hoping the reg and compliance stuff will start to diminish over time. I won't go to 0. But I think the point here is about holding us to account about the value we get for the investment rather than having a fixed target for what the number because, frankly, I don't know. Do you want to do a follow-up, I'm sure. Do you want to ask the margin question?

On margin, Slide 27, on a 3-year view, 25 basis points of tailwind. And I know that's linked to your forecast on Slide 51, which still actually look below where the market is based on yesterday's comments from the RBA, so there could be more upside there. You've got tailwinds have switched back to variable from fixed, obviously, competition and funding costs. The question is on more of a -- not of guidance, but given where the margins are in first half '22, on FY '24 basis, have margins troughed on an FY '24 basis? So I'm not talking about FY '27. So are they at the lowest point, given where the interest rate cycle and margins will be higher in FY '24?

So I'll answer a little bit, and then I'll get to Farhan to talk. It's a good question. And I might be able to step with a lot of people's view on this. Margin trends in Australia have been a one-way bet for 30 years. There were 2 temporary blips where they rose. And why? Well, it sort of relates to the Jeff Bezos' comment, right? "Your margin is my opportunity." I mean the reality is they're still healthy. I mean we might look at them relative to yesterday, they're down, but they're still healthy. And those margins, banks are driving decent returns above cost of capital. So there's -- the point in your question is -- the bit that's the unknown is the extent that competition will drive away any benefit that comes naturally through the rate cycle. That is the big unknown. And there's more capital available to go and attack those margins than ever before whether -- it's not just the big 4. We've got all sorts of capital that can come into that business. And so to me, that's a big unknown, Jarrod. Again, I can give you the wimp's answer and say, look, all else being equal, you're right, there should be margin expansion, right? And we probably are somewhere near at the trough. But there's the big unknown, is the level of competition. And we're seeing that. I mean, look, we're seeing that for different reasons right now in home loans in this market. For different reasons, we are seeing intense competition with cash backs and all sorts of other things going on at the moment. So I think it's a hard one to predict. But you might have, Farhan...

No, I think that you've -- please meet the ex-CFO, [indiscernible] Look, I think you've answered it well, Shayne. I think just to add to the point though, Jarrod, the fact is that even when we look out next half or next 12 -- 12 months, we're still not clear about how customer behavior will change. We started to see signs of that, but we don't know yet how that will fully materialize. So looking out 2,3 years, I think it's a very bold move to make. But you're right, traditionally and normally banks should be leveraged for higher interest rates. But there are many other factors moving around today, particularly the fact, as Shayne said, that this We haven't seen this in a while and how customers behave is going to significantly drive that, including, by the way, how our competition behaves in that environment as well from a pricing standpoint.

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

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

Look, and I think there is every reason to expect. As I said in my point, there should be margin. There will be margin expansion. I'm just saying the degree of it will be -- it's difficult to predict, yes.

Would you mind handing to [ Maudi ]. Thank you. And then we'll go to James.

Just got a question, firstly, on the mortgage book, just to see how it's going. I know you commented that it did grow. But if you back out offset accounts, which you have to net off, of course, it still fell almost 1% in the half and it's flat on 2017. So been a pretty chunky housing boom for the last 5 years and the book is flat. So ANZx mortgages, when is that going to be ready? We've heard a rolling 12 months for the last period of time. So when is that going to be up and ready? And I know you said you want to get back to system by the end of the year, financial year, give or take what happens with pricing, which gives you an out, and you can say no, too competitive. So let's go with that. You want to improve, but when we do you think you're going to have this new platform out? And then I've got a second follow-up question.

Okay. So I'm going to get Maile to answer in a second. So while she's getting ready -- it's a fair question. And you're right, you should take out the offsets. I mean it's true, and we have a higher offset balance in our peer group on a proportionate basis, which is a good thing. It means we have good customers who have the ability to have those higher offsets, but it obviously comes as a drag, and you're quite right on the numbers. I think that it's important to say, Jonathan, we -- actually, we need -- we were out of the game here in that period of time because we didn't have capacity. So it wasn't an issue of demand, it wasn't issue that people didn't want -- we didn't have a good product where we just couldn't process things. So the focus we had was rebuilding capacity. Now the reality was -- and I'll take accountability for this, we made a decision a couple of years ago that our Australia business needed a massive rebuild, yes? And they're trying to just throw tactical solutions at the business was insufficient. And that's why we embarked on the whole ANZx and ANZ Plus route. Now in hindsight, sure, we should have spent a bit more on the tactical stuff in the here and now and balanced it a bit more with the build of the new. So we paid a price for that, but that was a decision we made. What we're doing now is we're rebalancing that, so we put resources back into the here and now. We've hired a few hundred people, made more investments to try to get that capacity back. The good news is the capacity, the amount of volume we can process safely and well is up 30%, yes? And it hasn't finished. There's still more to come. So that will get us back in the game. And the question is, once you have the capacity, there's still a question of should you use it? And what we're saying is, no, no, you're right to be cynical and say we'll use it as an out. But we're not just going to use it because we got it and book loans, which we're seeing today in single-digit ROEs. We're not going to do that. We think we can get back to system, depending on what it is if it's moderate, and run and do decent accretive business in the second half, yes? That's the plan. ANZ Plus is not the solution for home loans this year or next year, right? We will get it into market, but it's going to take -- we've got -- our back book currently $280 billion. It's going to take a long time for Plus to really have an impact. Do you want to talk through where we are with that, Maile?

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

Second?

Yes. Second question, if I can. Follow up on this one. On New Zealand, Reserve Bank of New Zealand data came out on debt to income. And they're saying 20% of the loans in the city of Auckland are written at more than 8x pretax income, 8x DTI. You've got a 30% share in New Zealand, and you're winning share in the home loan market. Can you confirm that you're writing a similar more than 20% of your Auckland home loans are more than 8x pretax income? And how do you think this will play out when a new 2-year fixed rate mortgage, which [indiscernible] generally rolled to is now about 5.5%. So you'll be paying on -- these customers who are paying more than 40% of their pretax income on interest, let alone principle in a high inflation environment.

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

And there's serviceability requirements in New Zealand as well. Yes.

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

Thanks, Kevin.

James, thanks.

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

There's a basket of questions here. You talk about the noninterest, we'll just see housing sort of follows on from my question. I'll get Maile again to answer some of the pieces and what is getting really -- good questions. So in terms of -- yes, look, we said that we let down our broker partners in terms of our processing capabilities, right, and they weren't really too happy with us. But we've got a new team in there looking after those relationships. We headed to -- with the major aggregators. We used to be -- normally we'd do this every year. I haven't done it obviously for COVID, I don't know, 4 weeks ago, something like that. Actually, the support we got was really positive. And the feedback was -- hey, ANZ was the first to support the broker industry and has always been with them and has never treated them as a competitive threat. And they've not forgotten that. They're disappointed with us, but we have not burned those relationships. And they basically said, "We are there for you. When you get your act together, we will be back." And we are starting to see early signs of that. So I think from a relationship point of view, I'm sure there'll be some in the fringes who are not happy, but the core is pretty good, and we're already starting to see some of that come back into the business. Do you want to talk more broadly about?

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

Do you want to just talk more broadly, though, in terms of the -- so the momentum, I think, is -- you asked a question about is the current environment going to make getting back to system more less easy with rates and et cetera. Sorry, the conversation we're having before about how we're going to treat repayments and things, I think is useful to share.

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

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

I mean, yes, about 30% of our book is basically paying at the minimum, 70% is paying above, and 1/3 of the total is actually about 2 years above. So it's a very healthy book.

Just on noninterest income. So James, on a half-on-half basis, we had about a $220 million reduction in noninterest income. Now about $95 million of that was markets, and I'll come back to that in a second. About just over $70 million was for Breakfree, which we had mentioned, and that's not a repeating item, as you know, beyond '22. And then there were 2 or 3 other smaller issues, not underlying business related, but we had -- fair value gains were lower, for example, in our investment portfolio relative to last half. There were still gains, but they were just lower. And I think there were some lower realized revenue -- hedge revenue gains that came through P&L this half relative to last half. So those are not necessarily again repeating items. The only minor impact from an underlying business perspective was the fact that we had some lower fees on our New Zealand funds managed business, but that's a broader industry phenomenon in New Zealand. But aside from that, I would say that if you put markets aside, I think it would be fair to say that we are at a floor at this point, and we'll start to see that turn around. Markets, of course, is less easy to predict and we could have potentially upside on that depending on how the next few months travel. Sorry, Maile, you want to add something?

If you look at that amount, there's about -- half of it is coming out of the retail book. We've already flagged that about $70 million of it comes from -- just over $70 million of it comes from Breakfree, which is consistent with the $140 million guidance that we gave to the market. But the way to think about that Breakfree is those fees were prepaid. So we basically got a year where you get no other interest income. But effective September this year, we start actually being able to have fees again. So actually, not only is that $140 million annualized, or $70 million in this half, nonreoccurring after next half, but actually, we should start seeing fees come back. So that's like 70% or about 73 of the 100 and change out of Retail. The balance of it is actually just our standard first half, second half skew in our cards business, where we typically give higher fees due to higher interchange and other credit card fees. And so that's the other kind of 30 and change kind of associated.

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

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

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

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

Yes. I'll start with the assets first, Victor. It was about 50-50. So 50% growth in International, 50% growth in Australia. And the good thing about it, it was across a number of the priority segments that we've been focusing on, so FIG, REI, FBA into also Corporate and Property and Health. So it was pretty much evenly spread. So we're really happy with the diversification of it. And we're very careful about how we're pricing as you saw through the risk-adjusted margin outcome that we had. So I wouldn't expect the same level of growth in the second half. I think what we saw is underlying, pretty much in each of those segments, there was a bit of, as Shayne said, investment coming through from the bigger end of town finally in their business. Hadn't seen that for some time, which was a good thing. And we also saw a bit of M&A activity. The other thing that we did see, which I think will moderate a little bit too, was when the geopolitical issues really took hold, particularly in the January to March quarter, or I should say, December to March quarter. What we saw there was a number of customers actually drew down on facilities that they already had. So there was some asset growth there. I think that was a bit of a liquidity buffer for them. I don't think that will continue. We haven't seen that come back, which is a good thing, but I don't think that will continue. So I'd say moderating, but the growth at 50-50 between Australia and New Zealand, but really well diversified across the different segments. So very happy with the growth that we saw. And I would also say too that I think our weighted average credit now is up around 3% in the book. So we continue to see improvement there. So we're lending to the right people at good returns. On the growth opportunities for revenue when it comes to rates, there's no question we're leveraged pretty well for both U.S., New Zealand and Australian rate increases. And that's coming from not just, as Shayne said, the deposits that we get, the hot pot of money. We've been building our payments and cash management business out and investing in it strongly for the last 6 years. We picked up a lot of business in clearing NPP, a lot of cross-border payments, cash management and transactional business. And I think that investment will pay off over the next few years.

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

Sorry, sorry, just -- I don't know, I'm sort of potentially pushing my luck a little bit. But any chance we can get sort of sensitivity to a 25 basis point move on that unhedged portion of deposits?

Well, Victor, it's your lucky day. You want to...

Again, on replicated deposits, I could tell you.

No, non-replicated. So this stuff that sits in Mark's book, which is not replicated.

I think, Victor, it's not your lucky day.

It's not such a lucky day. No, I think it's a great question. But I think to some extent, we have to see how the customer behavioral situation is in the next 6 to 12 months before we have a sense of how much of that benefit will flow through that book. What we've given you is a book that we have a better understanding of in terms of rate and sensitivity. But on rate sensitive, it's very hard to...

I think it's...

And it sort of borders on price signaling as well. So I just want to be careful.

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

Victor, can you hand to Andrew, please?

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

So can I ask, is that the first question? You get your second one, so don't forget. It's a good question. It is about -- was about. I mean, mathematically, that's true. As you know, 2/3, but a bit more, of our costs are basically salary and wages. We're at the early stages of a cycle here. We were talking about it in New Zealand last week with the Board. Obviously, we've got our EBA under negotiation at the moment here. We're at this turning point where, let's put it this way, employee expectations are vastly different today than what they were not that long ago. So it's a bit early to say what the impact of those things is going to be. But 3% is not an unreasonable sort of baseline to think of broader inflation. I don't think that's an unreasonable number. And that's part of the reason we've talked about our approach to expenses and why it's going to be a lot harder. I would not be surprised if it was even higher than that. I think 4%, 5% is certainly not out of the question in terms of underlying inflation for the general cost when you think about what we're seeing in some of the EBAs that are being signed around the market, when you think about what's happening about the broader cost base for the organization. And let's not forget, a reasonable chunk of our people, more than half of our staff, don't live in Australia, they live somewhere else. And that inflationary issue is impacting right across the region.

Do you have a follow-up?

Yes. And then second question just on retention. So correct me if I'm wrong on this, but ANZ ran a pretty successful 2-year fixed rate campaign at the onset of COVID. And obviously, that contributed to very strong flows versus the market in the months that followed. Just interested in retention strategies to deal to that and whether that's a net positive or negative for margins, if you can hover...

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

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

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

And Shayne, just to follow up. So the spread of those loans were written out 2 years ago. Were they good, better, and different relative to the book?

Good question. So do you want to answer to why you went around 2 years ago running the book, but I will -- look, obviously, fixed rate loans in general are clearly much lower margin. And so what we're seeing is really... So we suffered -- margins suffered right through that 2-year period, not just because that's special, just because of that huge shift towards fixed rate. It had a massive mix effect on the book, like you've seen across the industry. Now what we're seeing is actually the reverse is happening. Before the rate changes, we're already seeing that. We've seen this big shift back towards variable rate, because on the rate card, variable rate is a lower print number than fixed and that attracts a lot of people. So that will be margin accretive that, all else being equal, with a mix shift alone is certainly a positive.

I mean roughly, when we exited September, that fixed rate flow was about 53% of our total flows. Exiting March is 26%. So it has halved. So it basically is much more shift towards variable.

And the margin difference between the variable and fixed is significant.

Brendan, can you.. Thanks, Ken.

Brendan Sproules from Citi. I've got a couple of questions. Firstly, on expenses. I just wanted to follow up on Jared's question around the $8 billion target that you originally had. Most of the run down to $8 billion actually came on the investment side. So the last 12 months, you've spent about $2 billion, and you were talking about a sort of a medium-term level of $1 billion. How do we sort of think about that now? That's a big gap, I guess, between, is this now we're going to invest at this $2 billion rate, or will it come down naturally?

Yes, okay. So if we step back, and again, I tried to talk about this in my section just to sort of reiterate it, and I'm not trying to be cute here. But part of the difficulty here is the way -- and I had a line in the way we report numbers now. We've changed the way we report numbers. When we said that we didn't have things like large and notable items, right? We didn't have the remediation challenges that we've had, et cetera. So what we've tried to do -- if we sort of back solve though, at the time when we said the number, the number was roughly -- our costs were close to 9, not quite, 8 to run, the expense crossing for 600 and change whatever, on invest. And that's why, in total, we, again, not making excuses at the time, and I went back and read the transcripts. I said, "Hey, look, we think the total can be about 10% lower, call it, $8 billion." And then after time, Jared quite rightly pointed out, over time, we refined that and said actually, we don't want to under-invest to get there. That would be stupid. We're really talking about the run. Well, what is it? So we sort of said, "Hey, at that time the run was in the high 7s." And then we had a target to get that down to 7. Your point about the -- I'm not sure I agree with you that the way we've reduced expenses is through investment. In fact, it's the opposite. Our investment rate has gone up quite significantly. Our day-to-day cost of running the bank, as we knew it then, and as we largely know it now, are materially lower, yes. Now that doesn't include things like ANZx and ANZ Plus. And over time, clearly, ANZ Plus, we're in market. And while we're still investing in it, it is going to increasingly look like run costs. We have people, we have teams, we have coaches, we have operations, et cetera. So that's why the blurring is getting a little bit harder for us to talk to. Your question about -- I don't know, and I mentioned it before, I don't know what the right level of investment is for the bank. I'd like to think it's not $2 billion. And of course, if I look at the $2 billion now, roughly half of it is fixed and comply, and the other half of the stuff that we're excited about and we think drives value for shareholders. I hope that fixed and comply stuff reduces. As I said, it won't go to 0 because there's always new regulation. I mean, LIBOR benchmark changes. These things are, I don't know, $50 million projects, et cetera. There's always going to be there, but I'd hope to think that it wasn't $1 billion, and it should be much, much lower than that. Let's not forget one of the biggest ones in there, BS11. BS11 is a significant piece of work. In its entirety, it will cost NZD 0.5 billion, right? Now we're at the end of that sometime this year. But that alone, those are the sorts of things that start coming out of that fixed and comply.

But I think it's, to your point earlier, Brendan, just to add color, I mean, 3, 4 years ago, our expense rate was closer to 70%, maybe even lower. And we are expensing now at about 90% because of the mix of the projects that Shayne talked about. That on a stand-alone basis itself is about a $300 million to $400 million expense differential. Now it's a timing issue. We could capitalize more if we were spending on things where we could capitalize more and basically save $300 million to $400 million, or we expense it, which means that we are putting less on the credit card, if you like, for the future. So it's a question of timing. And I think that $300 million to $400 million impact is significant in terms of total expenses.

I mean, we chatted about this. I mean look, in reality, we can -- and I'm not being flippant here, we can get to 8 or thereabouts if we really want -- if that was the goal, we can do it. But it means we just stop doing ANZ Plus, we stop doing the cloud migration, we stop doing the build-out of sustainability and all the things that we want to do. Now that's why I said, really, over time, quite rightly, you need to hold me and Farhan in the office accountable, why are we getting value from that. It's all very well to talk about spend. Where is the value. And that's where we've got to do a bit of job explaining to you. I accept that.

Did you have a follow-up, Brendan?

Yes, I have a follow-up question on capital. I noticed that your capital ratio fell a bit because of the interest rate risk in the banking book. How should we think about the $33 billion of risk-weighted assets there? Are they going to go back to the normal level that we've seen over time, which is sort of $10 billion to $20 billion? And then the sort of follow-up is, how does that affect, I guess, the possibility of future capital returns? I saw your level 1 is just only a little bit above 11 at the moment.

Yes. Sure. So just on the interest rate risk in the banking book, as we said earlier, as I said in the speech, I would expect that to start to unwind, if not unwind to a large extent, in the next 1 to 2 years. Now I say that with the caveat that it depends a great deal on where yield curves are over the next 2 years. But all things being held equal, since you're using that phrase quite liberally, it should unwind. It should unwind over the next 1 or 2 years to a large extent. As far as the risk-weighted assets on lending book are concerned, this half, it was largely driven by institutional and New Zealand growth in balance sheet and risk-weighted assets. But the good news is, it was good, profitable, accretive growth. So if we find that growth, and that's where the discipline and selection is coming in our institutional business, as well as in New Zealand, where we're expanding risk-adjusted margins at the same time, that's a good outcome, and we would probably continue to do that, but we will remain selective and remain disciplined around that to make sure that there is value for the shareholder in that. So it won't unwind. It was somewhat unusual. And I think part of the reason why, Brendan, it was somewhat unusual is, a, the fact that there is a reversion of investment cycle in the large corporates. But also towards the end of the half, there was heightened demand on drawdowns on facilities from our large corporate customers, given the uncertain environment with Ukraine, et cetera. So it's a bit of a mix and some of it might unwind, some of it might grow depending on what opportunities we find. But I don't think that there is a desire to unwind anything which is profitable.

Do you want to talk about the difference between level 1, level 2?

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

Can you hand to Brett, please, Cameron.

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

Yes. That's a good question. I mean -- and Farhan will go through in a bit more detail. I mean, without being overly simplistic, when you look at it, really, it was down to a couple of things. It was the balance sheet trading underperformance -- and it wasn't underperformance. It wasn't what we had hoped for, right? It was just sort of at a low point that we've seen. And we're pretty confident that, that will come back to something more normal. Taking that and Breakfree, which is, again, a onetime, it's not a continuous problem. Those 2 explain pretty much most of the fall in revenue, if you will. But do you want to talk a little bit more about our revenue outlook for the second half?

Yes. I mean, look, I think just on the first half as well, while certainly those 2 things that Shayne referred to. But also, if you think about it from a half-on-half perspective, for the first half, there was no question about the fact that we did have an impact on Australia home loans because of the fact that we had higher volumes coming into second half than we had going into the first half of this year. So there is an element of impact that comes from the Australia home loans business as well. If I was to look forward in the second half, I would argue that we've seen New Zealand and institutional come out at a positive momentum into the second half with supportive rate environment as well. And Australia home loans, assuming we do achieve, and we certainly aim to achieve, is back to system growth by the end of the half, we expect to see more balance sheet uplift on the FUM and home loans into second half. And again, if you're managing margin well, which is also our intention, there should be a positive story in terms of half-on-half revenue outlook between and Australia home loans as well. Now markets is the unknown because we'll have to see how that behaves. But again, from a customer revenue standpoint, it's a supportive environment with volatility and interest rates where they are. So I think that overall, our view would be that the outlook for second half should be positive relative to first half. But again, a lot depends on how we see these businesses perform in the second half, but there should be a lot of supportive tailwinds to that.

Do you have a follow-up, Brett?

Separate question. You talked about the market-leading position you have in the payments and cash management business. It does raise the question, do you have a sense of the proportion of your revenue that comes from market-leading positions?

You mean overall? That's a good question. I don't. I'd have to figure that out. I mean, I know that's not your question, but it's a good question. That payments business is a real little gem, right? And it's interesting, and Mark referred to some of the data in there. To have 60% market share of Aussie and Kiwi clearing at a time of rising rates is a great position to be in. To have the sort of volumes that we have processing NPP and those 1.5 billion payment transactions we process growing at 17% per annum. And remember, the way that business works, it's sort of an unusual business model, which it's actually not that fee driven. I mean, you don't get paid a fee. The way you make money is through the operating balances that it creates. So it is incredibly leveraged to higher rates. And the good thing is, it's like a lot of businesses, success breeds success, being the biggest in these things and the best actually attracts more customers to you. So there's a lot of really positive things here. But I couldn't sit here, honestly, and say, what's the benefit of that market-leading position. But it's worthy of some more thought.

I'll come back to you. I might go to the phones, please. I'm conscious that I've been holding all of those people hostage for the last 40 minutes.

[Operator Instructions] Your first question comes from Andrew Lyons from Goldman Sachs.

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

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

Look, I think that's probably correct. And one of the things I would just add to that also is that because of the fact that we've constructed this new agile way of running projects, we generally tend to do smaller and shorter sprints, if you like, which means that a lot of our projects are actually below the $20 million cutoff point. Therefore, they don't get capitalized, they're booked as OpEx. So that's also adding to the higher OpEx rate, and that's likely to continue as well, as we go forward. So I don't disagree, Shayne, and I think it's likely to remain elevated. Now that might shift a little bit depending on how much regulatory versus technology versus cloud, et cetera. But it's largely likely to remain closer to the high than the low.

Do you have a follow-up, Andrew?

Well, that's really helpful. Just a second question. There's been a number of questions just around housing momentum. I'd just be keen, you also noted better momentum in your commercial banking franchise subject to some changes in asset finance and broking there. But just keen to understand where that's particularly coming from? Is there any particular area that you're seeing momentum in that space? And perhaps whether higher rates, whether you expect higher rates might dull the recovery in commercial volumes?

That's right. I'm Happy to answer that one. So commercial, yes, that asset financial, I just wanted to mention that because there's a little bit of a drag, obviously, as a result. You do need to look through that. So Wesley, just to remind you what's in our commercial bank, because ours is slightly different -- all the banks have slightly different definitions, right? So ours is tending to be at the smaller end. So it's everything from sole traders. So we have a small business bank, which is largely managed through the branch network, et cetera. So relatively -- and really good digital uptake in there. We have business banking, which is slightly bigger. And then we have what we call specialist distribution. And specialist distribution can be loans of up to sort of $50 million at the extreme, and that's our cutoff. And then from there up, it sits in Mark Whelan's institutional bank. So just to be clear what we're talking about in commercial. In that specialist, just to be -- so the first, small business and business banking have no -- on a relative, they don't really specialize, they're really just regional businesses based on location. But in our specialist distribution, we have industry specialization. The growth to date is pretty strong, and it's actually come -- I mentioned momentum, so it's increasing, we're saying , but it is heavily skewed to the top end. So it's in that specialist distribution piece. What is it coming from, Andrew? Unsurprisingly, I think, agri. So one of the verticals we have in there is agri, that's doing really well, and the other one is health care. Now health care can be everything from a retirement home to pharmacies to medical practices, et cetera. But it's in those areas what you're really driving the growth. And mostly, it's coming from existing customers. There's a little bit of customer acquisition in there, but it's existing customers who we know and like, but it's in those areas. And I think the outlook -- we were just starting the planning. As I mentioned, we're doing the strategy work. The outlook and the sense from the team is that, that growth is starting to come down into the mid and smaller part of the book, yes? Because what you've seen over time, particularly at the small end, is a massive shift towards cash. So we talked about retail deposits of our fastest growing deposit book has been small businesses, who have been nervous about the future, uncertain about the outlook, and they've been the beneficiary of a range of government programs. And so they took a lot of money into their savings accounts. That's starting to level out. And it will be interesting to see what happens given the rate outlook, but that's starting to level out. So we're not seeing growth there. One other small insight I will give you, which I found interesting, looking at this, one of the fastest growing, in the smaller end, yes, one of the fastest-growing or the biggest demand for borrowing is actually for small businesses to buy their premises. So it's quite a significant shift. So these are, I don't know, your retailer or something, instead of leasing from the landlord, they've been taking the opportunity to leverage up and actually buy their premise. It's actually a reasonable trend sitting in the book. So those are the areas. That one, health and agri.

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

Your next question comes from Brian Johnson from Jefferies.

The first one is, if we have a look at the level 1 and level 2 capital, the level 1 capital, I've got a sneaking suspicion, becomes the binding constraint. But if we have a look at 3-year bonds, they've actually moved from about 2.6% on 31 March, up to being 3.1%. That feels like there is another adverse movement in the interest rate risk in the banking book if everything stayed where it is right now. And I think the balance of probability is it gets worse. Can I just confirm that basically what creates the interest rate risk in the banking book, I suspect, is the difference between the trailing yield versus basically the spot. Am I right in thinking there is another headwind prima facie to come through on the interest rate risk in the banking book in the second half?

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

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

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

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

Yes, I understand. So the way that gets done, the cost of capital gets calculated by our treasury team. They make a recommendation to the Board, absolutely gets decided by the Board. The Board made the decision based on their own views, and I can tell you it's an active discussion, and they have made historic -- and I've been around a long time in those discussions, they will make changes to it based on their views. You're right, that is that document, Page 38, obviously, it's already ancient history, and we increased the cost of capital already on the 1st of April. Now 1st of April also feels like a long time ago as we sit here today. We already increased it to 8.5%, and there is no doubt that we will be discussing it at the next Board meeting and it's highly likely that we will increase it again, yes? And the other thing, Brian...

And that reduces the bonus bill, helps the cash earnings in the second half?

Yes, very...

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

Just a final one, if I can push my luck. On Page 40 of the result, for the LCR calculation, we can see the cash outflows have crept up from about $208 billion to $230 billion half-on-half. I can see the various bits and pieces moving through, but I'd just be intrigued, my understanding was that a lot of the growth that we've seen has been in more stable deposit accounts. But what's going on with that cash outflows figure? So it's on Page 40 of the result.

You mean the RA or the slides, Brian?

The RA, Jill, as opposed to the slides. So you can see it's gone from $208.1 billion up to $230.3 billion.

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

Correct. And actually produces...

So it increases the HQLA and it increases the outflow figure, so the net impact is 0. Is that the way to think of it?

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

Your next question comes from Ed Henning from CLSA.

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

Well, that's a good question. Philosophically, no, like we don't sit here and say, for example, "Hey, let's find a way to spend $2 billion in the slate." And if reg and compliance goes down, we'll spend more in the things that we want. So we don't think about it like that. In reality, as reg and compliance comes down, I wouldn't expect us to ordinarily reinvest that into growth initiatives. And the reason is, as I said, the growth -- if they make sense, we'll do them. I mean, the reason that our investment slate has increased quite dramatically, putting aside reg and compliance, is because we've actually seen more opportunity than we've had before. And not just that there's opportunity, we actually feel more capable of actually achieving the outcomes there. We're in a better position, stronger to do it. So no, it wouldn't normally be a trade-off decision that we would make. I mean it might happen, it might look like that, but it doesn't. That won't be the necessary. That's not the way we approach it. I hope I made that clear, yes?

Yes. And then you've highlighted today you're pursuing a NOC, but you've got currently limited businesses outside banking. Firstly, can you just touch on what's the cost of this? And secondly, how big can the nonbank be, whether you talk about an investment you're going to make or things we should think about you're going to invest in?

Yes, it's a good question. So in terms of the cost, we think the -- so the cost of actually setting it up, the legal vehicle structure, going through all that will be tens of millions of dollars, but certainly materially less than $100 million, yes? Now we've got to work through some stuff. So I can't give you a precise number, but it's in that ballpark number. And that's why we said we think it's a lot of money, but we think it's a low-cost option for the future. And what's great about that is we don't need to drive -- the benefit case is relatively modest. So we don't need to drive massive benefits to be able to get to there. You're right from day 1. And again, I think it's important. This is not musical chairs. This is not us redistributing the bank as we know it today. It's not a capital arbitrage play. It's really about giving us the potential to run the bank well and grow outside of what we consider traditional banking today. So that's why we gave you the example of cash rewards and our 1835i portfolio. So we're not doing it with a transaction in mind. It's just the flexibility we want to build. And we think now -- it's interesting, I was reflecting to the Board the other day, first time this came up, I was the CFO. So that dates a long time. It wasn't my idea, but I'm just saying, I remember the Board discussing it. We've discussed it for a long time and can see real benefits from it. But the reason we're doing it now is we feel like we're in a position to be able to do it well if that makes sense, and to actually drive the benefits from it. Now in terms of the scale, look, we still have got some work to do with APRA around the sort of rules of engagement and how we will do this. And now you remember, at the end of the day, anything that we move from the bank today and we move into the NOC will require their approval. I mean there are still some hurdles to go through there. Over time, and I mean over time, there is no theoretical limit, it'll really -- but APRA will have a view quite rightly, about, Hey, as the nonbanking group grows, does that have an impact on the viability and the prudential soundness of the bank, right? That's their ultimate interest in that. And I'm sure they will have views about the nature of things that go into the nonbank and whether they put the bank at risk. Now clearly, that's not our intention to do that, but they will think those things through. And you look at somebody like Macquarie or Suncorp, who have NOCs, and obviously, for different reasons. But in Macquarie's case, obviously, the nonbank is even much bigger than the bank. So in theory, there's no limit to it.

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

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

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

Correct. But for example, another example might be, and we haven't got it yet. But for example, we own our head office in Melbourne. It's worth a lot of money, sits in the bank. Could we make that -- and we run a whole bunch of services that we've got that are not directly related to the provision of banking. Can we take those people and assets and put them in the nonbanking group to enable them to be more efficient and then sort of lease back, provide those services back to the banking group. Those are the sorts of things. And clearly, there would be some cost advantages and capital advantages potentially in doing that. And that's the sort of optionality we want to investigate. So I'm pretty confident this investment, yes, and we'll just -- I'm picking a number, we'll go in the middle, call it $50 million, yes, I am very confident that, that investment washes its face pretty quickly on really basic things that we can do without -- we don't need to justify some big extraordinary strategic shift in the bank, just getting some basic stuff done, we will get a payback on that.

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

Well, we already have a ventures arm, if you're talking about things like that. We have 9 partnerships sitting in there, some big like Linde and Cashrewards, some really, really tiny. We already have an investment approach there. I mean the total portfolio there is $400-something million, $450 million, something like that. So despite what I said about the banking structure not being appropriate, it hasn't slowed us down in our ability to do that. So I don't think the NOC necessarily changes our intention around those things. If we see investments, partnerships, things we want to acquire to make us a better bank, we'll do them with or without the NOC. We're just saying that NOC can actually make us more efficient in a way that we take those things to market.

Thanks, operator. I think how many questions have we got?

Two.

Okay. Second last question.

Your next question comes from Richard Wiles from Morgan Stanley.

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

So I'll start and Maile might want to make some comments. So there is no immediate example that comes to my mind to say, "Hey, what they're doing, that's what we want to do, right?" We've looked -- but there are examples of banks who are doing things that are very similar, right, or parts of what we're doing. So for example, in DBS' case, in terms of building new things. In terms of the time, if you really boil this down, and this is overly simple, essentially for retail, we only have 3 products in retail. We have savings and transaction -- savings accounts, transaction accounts, credit cards and personal loans, and home loans. And so what we need to do -- and at the moment, we only have one of those in production for ANZ Plus, and we need to build -- and next will be home loans. And we said, beta testing later this year, and we'll have a platform. And that beta testing, again, it will be minimum viable. It won't do your old singing or dancing home loans on day 1. It will start really simple. PAYG, single borrower, that sort of stuff, and then it will progress over time. And then cards will come later. So we've got to build out the capability. As we build, we continue migrations. What I mean by that? Of the 6-ish million customers that we have today, 2 million of them, in fact, more than that only have a savings and transaction relationship with ANZ. They don't have a home loan and they don't have a credit card. So we start and we've broken the customers down into these cohorts. So for example, there's -- well, I can't remember, less than 100,000 are just like really basic accounts, 100% digital, never go to a branch, et cetera. That's our first target. So soon, let me start that mass marketing campaign. We will invite those people to move across to the new Plus. And then we progress through the migration by cohort as we can fulfill their needs well. And so the migration, it's not a big bang migration at the end. The migration literally will start in June. We will start migrating our first customers across. It's going to take some years. Certainly beyond 3 years, but we should get the bulk of the migration done in that 3-year period. And that's when you start to be able to start turning off systems. But what's interesting, Richard, if your question is heading there about the cost, hey, you need to decommission these systems to get the cost benefit, that's partially true. Actually, when you do the analysis, the real cost is not in the systems, it's in the distribution cost of -- it's actually maintaining and selling the old products. That's where the cost comes. And so the real benefit is once you take today's products off the shelf, and don't offer them anymore, even if you've got to run the back book down, that's when you get the cost out benefit. And that will come earlier than systems decommissioning. Is there anything I missed or you want to...

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

Do you have a follow-up, Richard?

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

Richard, I agree with you.

Is this an acknowledgment that the majors are going to lose share and you're going to lose share. I mean why this ambition?

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

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

Last one.

Okay. So it's not winning against Westpac, it's actually maintaining your share of the total mortgage market?

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

A step at a time.

Yes.

Okay. Next call, please? Last call.

Your next question is a follow-up question from Brian Johnson from Jefferies.

I know I've had more than my fair here. But just very quickly, you said about level 2, level 1 converging. If level 2, 1 converge, that can either mean that level 2 comes down to level 1. And intuitively, I think that it's correct. But can we just get clarification on that?

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

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

Thank you very much for attending today and good to see you all. Thank you.

Thank you.

Thanks, everyone.