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

Thank you for standing by, and welcome to the ANZ Institutional Business Roundtable. [Operator Instructions] There will be a presentation, followed by a question and answer session. [Operator Instructions] I would now like to hand the conference over to Ms. Jill Campbell. Please go ahead.

Thanks, Kylie. Good morning, everyone and welcome to ANZ's Institutional Markets Business Presentation. I'm Jill Campbell, ANZ's Head of IR. We're presenting today in the lands of the Wurundjeri people, and on behalf of the team, I pay my respects to elders past and present. The session is being recorded. It will be available for replay via the ANZ website later today. The presentation pack being used was sent around to you all earlier today. It's also available on the ANZ website in both the shareholder center and the analyst toolkit and in the presentations section. We've got 3 speakers this morning, Group Exec Institutional, Mark Whelan; our MD, Markets, Anshul Sidher; and the Institutional Division CFO, Romesh Curtis. They will speak for around 25 minutes, after which we'll go to Q&A. We're going to aim to finish around noon but we're conscious that we don't want to cut questions off. So in the, hopefully unlikely, event that you didn't get your question in, please contact the IR team this afternoon and we'll sort that out. With that, I'll hand it across to you, Mark.

Terrific. Thanks, Jill. Welcome, everyone, and thanks for joining us today. The main purpose of today is to talk to you about our markets business, building on the session we had in September last year on our Payments and Platforms business. We'll explain what it is we do, what we've been investing in and what makes our markets business different to its peers. Now we're going to keep it relatively high level today, but there will be opportunities to go into more detail in the Q&A and also in future sessions. Markets is a critical element of our customer proposition for institutional customers, and it's very high returning. Our markets team is a whole of bank resource with global distribution capability, supporting retail, commercial and institutional customers. As mentioned in the payments and platform session last year, our institutional business is well placed to grow profitably and support our customers globally. The institutional business has transformed since 2016 and today is a very different business. As an example, today's revenues are evenly spread across our 3 core products with transaction banking, corporate finance and markets each contributing 1/3 of revenues each. Last year, each product line achieved more than $2 billion in revenue and in comparison, in 2016, 45% of our revenue came from capital-heavy loans in Corporate Finance. So you can see that we've really transformed the spread of business. As well as diversifying revenue streams, we are focused on quality of our people and risk management. Today, our employee engagement scores are at world best benchmarks and our risk management processes and being accountable for all elements of risk is part of our culture. As a result, credit losses have reduced in line with our focus on risk management and most importantly, the quality of our customer base. We are focused on 6,300 high-quality customers who value our products, services and network. We have focused on priority sectors with the highest return and growth prospects. Financial service and funds is an example. We've developed long-term and deep relationships with the best customers globally. Return on risk-weighted assets is now more than double than that of what it was in 2016 at 1.59%. We've invested in global technology platforms carefully and consistently over the past 7 years, simplifying our tech stack and ensuring we're well positioned for what comes next. The institutional business today is very different and is well positioned to maintain strong returns going forward. The business mix, quality customer base and culture are all drivers of this business. We're using our high-returning geographic network and particularly our access to Asian markets to give us a unique competitive advantage and customer proposition and this is particularly true for our Markets business. Now as I've mentioned, we've invested in technology and systems over the long term. As we discussed at the September Payments and Platforms briefing, we have simplified the network and technology supporting our business. We've invested in connecting single product platforms that are globally integrated right across our network. We call this the digital backbone of our business. And it allows our teams to work easily together regardless of where they are located. Our FX team in Jakarta uses the same tools and customer information as our Markets teams in Singapore or in New York. We have one credit management system for our large customers, one global trade system, one global loan system and one customer onboarding system. In Markets, we use a system we developed called Sky for markets pricing, valuation, profit and loss and risk management. It's used by our Markets team, Group Treasury, Finance and Risk teams globally. And much like our payment's infrastructure, it was developed in-house. As a result, we've retired 134 technology assets and systems supporting the markets business over the past 8 years. We've invested consistently in our technology systems and we'll continue to invest in our strategic platforms. Consequently, we've got a strong base that we use to create value for customers and shareholders and also importantly, to manage our risk. As a result, we believe our network is unparalleled. Our network of 29 markets, particularly focused on the Asia Pacific region and connected through the digital backbone provides us with a unique and powerful differentiation for our domestic and international competitors. When you add together the components of this business, the leading payments and cash management business, which we took you through last year, a geographically diverse and specialized Markets team, deep relationships with customers resulting in them naming ANZ as the most reliable source of funding and long-term and careful investment in technology, it's clear that our strategy is adding value for customers and shareholders. We're a more diverse business than ever before, but more importantly, a high returning business with sustainable opportunities. Now, the Markets business delivered $2.1 billion in revenue last year. So I'd like to introduce Anshul Sidher to you. Anshul was appointed Managing Director of Markets in August of last year. In just a few moments, Anshul will take you through the drivers of that revenue and the strategic relevance of our markets offering. He will be followed by Romesh Curtis, Chief Financial Officer for ANZ Institutional. Romesh will then explain how Markets operations impact the group net interest margin, which is a technical issue that some of you have asked for more detail on. With that, I'll hand over to you, Anshul.

Thanks, Mark, and good morning, everyone. My name is Anshul Sidher, and I have taken on the MD Markets role in August of last year. Just a brief background. I have been with ANZ since 2012, starting off as the Global Head of Rates and setting up the local market business in Asia. Over the last decade, my responsibilities at ANZ has spanned across leading our trading functions, which included the balance sheet, our capital market business and our sales franchise in Asia. Prior to joining ANZ, I was in similar roles at Barclays Capital, Dresdner Kleinwort and Citibank in Singapore, London and Frankfurt. So today, I will briefly talk to you about our Markets business, the revenue drivers and our strategic direction. ANZ has the largest Markets business amongst the domestic major banks. What's unique is that 60% of Markets income comes from outside of Australia and New Zealand. We delivered around 10% of ANZ Group revenues, but the nuance is the business has the ability to produce strong results in both low interest rate environments like 2020 as well as higher interest rate environment like 2023. Now growing our returns and doing that consistently is a real priority for Markets as well as Institutional bank. Now, there are really 2 components to the ANZ Markets business. First is our customer-driven activity across sales, trading and capital market functions providing financing, hedging and investment solutions, what we call franchise in our results. The other component is really the work we do to manage ANZ's balance sheet under delegation from ANZ to treasury. In a sense, Markets is really the portfolio manager for the bank, where we optimize our liquidity portfolio and also manage the asset liability mismatch on our balance sheet across all our divisions. For today's briefing, I'll give a bit more detail around our franchise activity, which accounts for somewhere between 65% to 70% of Markets revenue through the cycle. I'll talk you through 4 key business lines and the propositions they offer to our customers. So starting off first with our foreign exchange business, which had close to around $700 million of revenue through the cycle, is our largest and highest returning business. Now, in a highly decentralized market like foreign exchange, competitive advantages come from really having access to deep pools of liquidity. Our unique geographic footprint and connectivity across our retail, commercial and international client base forms the foundation of our price competitiveness in Aussie and Kiwi foreign exchange. We have built much of our foreign exchange infrastructure in-house and unlike competitors, we don't rely on white label tools to derive pricing. We have invested over $75 million in our foreign exchange infrastructure in just the last 5 years to build out the proprietary technology. Now that gives us a degree of protection from margin compression in what are really competitive G10 foreign exchange markets. We are the #1 bank in foreign exchange by market penetration and market share as has been reported in the Peter Lee Corporate Survey in Australia. Now another unique part of our foreign exchange business at ANZ is really the local market for exchange business in Asia, serving primarily our multinational clients in the network. Much of the local market foreign exchange suite services trade, expense and dividend hedging for large-cap corporate customers, while also offering offshore risk management solutions for investor client base, which ranges from banks to insurance companies. Now today, trading in local markets span from CNH in North Asia to INR or Indian rupee or Indonesian rupee in India and Indonesia and has grown to be almost 80% the size of our G10 foreign exchange trading business. Moving on to Rates which delivers around $400 million annually in revenue and is centered on serving our corporate clients in Australia and New Zealand. Our key proposition in rates comes through our network, where we connect Australian and Kiwi corporates, governments and our own Treasury to differentiated pools of global liquidity. To give you an example, we link Aussie and Kiwi borrowers with central banks who manage these currencies as Aussie and Kiwi as part of their reserve management mandate and also insurance customers in Asia. These activities in the primary loan and bond market create flows in currency swaps. And ANZ is recognized as the market leader in currency swaps by the Peter Lee Survey. Much like foreign exchange, we also have a unique local market rates business in Asia, supporting our clients in the network while also offering a diverse set of markets for risk expression in interest rate trading. What that helps us is really produce better quality trading returns at a much more diversified and lower bar. Now closely tied to Rates is our fixed income business in credit. ANZ is the go-to house for investment-grade credit in the Eastern Hemisphere. We are ranked #1 in primary market league tables in Australia and New Zealand and #1 in the investment-grade secondary trading across Australia, New Zealand and Asia. Our unique positioning in covering bonds across Australia, New Zealand and Asia makes us the bank of choice for asset managers who deal in investment grade credit in the Asian time zone. Now right from super funds in Australia to large fixed income fund managers and bank balance sheets in Asia, ANZ is the port of call for offering and recycling high-grade bonds to a deep secondary market connectivity. Our strategy of linking primary origination backed by strong secondary trading support also makes us a valuable partner for primary market issuers who value the liquidity service we bring to their debt as a market maker. Another pillar offered to the franchise beyond capital markets and secondary trading is a securitization business in Australia, servicing primary market placement or residential mortgage-backed securities and asset-backed securities. Across our debt capital markets, secondary and securitization businesses, the credit business generates circa $200 million in revenue through the cycle. And finally, commodities. Our commodity business is centered around 2 key propositions, precious metals and energy trading, which includes carbon trading. We'll talk a bit more about precious a bit later when we cover net interest margin. So I'll focus on our energy and carbon trading capabilities here. Now unlike some of the Australian commodity majors, ANZ business focuses on commodity supply chains between Australia and Asia, providing risk hedging solutions to commodity producers and consumers while recycling risk in the region. A typical transaction involves connecting producer and end consumer hedging flows across upstream producers in Australia, midstream distributors in Singapore and Southeast Asia and the downstream consumers in North Asia, which makes the proposition unique. We're also growing our offering in carbon capabilities to support carbon abatement and sequestering projects with a focus on ACCU trading in Australia. This remains an important part of our environmental markets offering where we closely partner with our loan originating teams in corporate finance. So in summary, the way I think about the Markets business is that it's the most flexible way for the group to deploy balance sheet, whether it be between cash and derivatives, or between asset inventory or bond liabilities packaged as investment products. With that background, I will briefly cover the strategic imperatives, which we have outlined in the materials we had presented on Page 12 in the pack. Across our asset classes, foreign exchange and rates contributes more than 75% of our customer-led revenue through the cycle. We have a unique opportunity because of our network and customer flows to distribute Australian and New Zealand flow globally and to do that digitally. So we are focused on continuing to build out our foreign exchange and rates capabilities as they create what I call scale in the core of the Markets business. Then we have a credit and liquids business, which tends to do well in risk-off environments, especially given ANZ's high-grade credit focus. Now we intend to maintain what I would call capabilities do well in risk-off environments with a focus on more fee-based revenue lines in both credit and capital markets. And finally, what we call procyclical businesses or businesses which do well in inflationary environments like commodities, or even capabilities like repo, securities financing and part of our options business offer the diversification we need to deliver results consistently. And we'll be looking to add selective pockets of diversified capabilities to enable us to write economic cycles better. Now before I wrap up, that leaves me to NIM. I have with me Romesh Curtis, our Group -- our Divisional CFO, who will give you a more in-depth view of market's net interest margin. Now just a brief word on that before I hand over. Our gold bullion lending business has some very specific implications for our NIM. I would like to make a few simple points. Our bullion lending business is really focused on servicing our financial institution clients and is a very important part of our service offering. The NIM aspects of the bullion lending is very nuanced because gold unlike currencies is a zero-interest asset. What that means is that the forward curve for gold is upward sloping, or to keep it simple, the higher the level of interest rates, the steeper the forward price of gold. So when we make these loans in bullion or gold, we incur a funding cost that sits in the NII as an interest expense. However, the way we recoup this cost is through the forward contracts in our derivative books, which feeds into other operating income. So what really happens is that between the funding cost and the derivative return, we are able to produce significantly higher returns well above our cost of capital. So with that, I will pass on to Romesh to take you through Markets NIM in more detail.

Thanks, Anshul, and good morning, everyone. So now I'll turn to the technical issue of how Markets activities flow through to group revenue and how this impacts the group's net interest margin. This impact and the classification of revenue between net interest income or NII and other operating income, OOI, is technical. So I'll first start with 3 high-level points. First, as Anshul said, the markets business is run to optimize ROE and revenue. The business takes on activity that is accretive to risk-adjusted returns and revenue. Second, the business doesn't try to optimize the NIM or NII. That's because the NII and OOI breakdown in Markets is often in the outcome of accounting classification with NIM and NII representing an incomplete view of this performance. And third, because of this, we tend to separate Markets activity, when we present the group NIM. Nevertheless, we do get a lot of questions on how this NII OOI classification works, and I'll take you through this detail with reference to the slide pack published. Before we get into the classification of NII and ROI, I'd like to start with the impact of liquidity and Markets activities on the headline Group NIM and what this really tells us. It's important again to highlight that this impact to whether it's positive or negative, is an outcome of certain factors and very rarely a driver or indicator of returns or revenue performance. The impact of markets on headline Group NIM is a function of 2 things: a mix impact and a rate impact. So for example, referencing the chart on Slide 22, liquidity and Markets activities had an adverse impact of 3 basis points on the group NIM delta in the second half of '23 and all of this was the rate impact. In the first half of '23, the impact was an adverse 8 basis points, of which 4 basis points was a mix impact and 4 basis points a rate impact. Taking the mix impact first. This is fundamentally driven by whether Markets interest-earning assets grow at a faster or slower rate than the rest of the bank's interest-earning assets. Because Markets interest-earning assets are lower yielding, if they increase as a proportion of the Group's interest-earning assets, this will mathematically have an adverse mix impact on the Group NIM and vice versa. You'll be able to see this impact from the charts on the right-hand side of Slide 22. The first half of FY '22 and the first half of FY '23 were periods when Markets interest-earning assets increased substantially as a proportion of Group net interest income [indiscernible] sustaining assets and hence, there was an adverse mix impact on the group NIM. Of course, it's important to underscore that higher interest-earning assets, which is driven by either higher Markets activity or a larger liquidity portfolio brings higher revenue, which can be either NII or OOI. And because these assets are capital light, a generally higher ROE. As we've previously said on this topic, our assessment of these activities is not based on the mathematical mix impact they have on the Group NIM, it's based on the impact they have on ROE and revenue overall. So that's the mix impact. Then you have the rate impact. The rate impact is driven by the increase or decrease in the ratio of Markets NII to Markets interest-earning assets. There can be a few drivers of this, but one common driver of this rate impact is our Markets franchise activity when interest rates are higher. Referencing Slide 23, this is really due to the accounting asymmetry between NII and ROI, where the funding cost of positions is recognized as an interest expense in NII, but most of the revenue arising from this activity in the franchise is recognized in OOI, as Anshul outlined. And this asymmetry is most pronounced in the commodities portfolio, and when short-term interest rates are higher. This accounting asymmetry is not unique to ANZ and some international banks with larger Markets franchise or fixed businesses have also referenced this reporting outcome in the last 18 months. Looking at the chart on Slide 23, you'll be able to see a few things about NII and OOI. Firstly, you can see the correlation between NII and interest rates in the chart on the bottom left. NII and specifically NII relating to commodities in the teal blue is more negative when short-term interest rates are higher, representing the higher funding costs through NII. Secondly, you can see that when commodities NII is more negative commodities OOI is more positive in the chart above, showing the revenue offset from the accounting asymmetry through OOI. This asymmetry has a rate impact on the Group headline NIM. But as you can see, this rate impact isn't indicative of the overall returns or revenue performance. For example, in the bottom right chart, you can see that this ratio of market NII to interest-earning assets was 33 basis points in 1 Half '22 when total Markets income was $812 million and revenue on RWA was 3.2%. This declined to just 1 basis point in 2 Half '23, when Markets income was higher at $958 million and revenue on RWA was higher at 3.4%. So this ratio of Markets NII to interest earning assets drives the rate impact on Group NIM, but you can clearly see it's an incomplete measure of revenue and returns. At ANZ, this asymmetry is most pronounced in our franchise business via our commodities activity. A large component of this is precious metals, specifically gold. As Anshul mentioned, the gold inventories and gold lending in this book have a funding cost that is booked as interest expense in NII, but earning income through OOI driven by accounting requirements. And when short-term interest rates increase as they have done over the last 18 to 24 months, this impact in our reporting becomes more pronounced. It's also important to note there is no outright commodity price risks taken by this activity. So to summarize, there are good reasons why we separate the impact of Markets when we show Group NIM. These are outcomes rather than performance indicators. The impact of Markets activities can mathematically be shown as the mix impact and rate impact. But these impacts represent an incomplete view of risk-adjusted returns and revenue because an adverse mix impact on Group NIM from higher Markets interest-earning assets is generally offset by higher ROE and an adverse rate impact on group NIM that arises from the asymmetry between NII and ROI is generally offset by higher OOI. And so it follows that our markets business is set up to optimize ROE and revenue, not NIM or NII outcomes. I hope that helps, and I'll pass back to you, Jill.

Thanks, Romesh. And Kaylee, I'll hand over to you to start the Q&A, please.

[Operator Instructions] Your first question comes from Jonathan Mott with Barrenjoey.

If I take a step back and think about the Markets business as a whole, we've been thinking about this business as a $2 billion roughly revenue stream now for probably 4 years or maybe even longer than that, I think this is our first guidance that's provided. Could you talk about the growth in the franchise, how much you're focused on it and this is a growth engine, should we be thinking that, that $2 billion is going to grow? Or is this just an ongoing lower capital intensive, higher ROE that builds a $2 billion revenue stream over the next couple of years?

Thanks, Jonathan. And the answer to the question is yes, subject to. I do want to see it grow. We want to continue to grow it. I won't use the word conservatively, but in a way where I think I've said to you before, I want to go up by the stairwell, not by the elevator because you can go up by the elevator and come down by the elevator if you don't grow in Markets carefully. And therefore, when Anshul and I talk about the future of the business, the idea would be we would consistently grow revenue subject to us still meeting those return requirements. And therefore, we want to stay well above cost of capital. We want to be growing the business in a way that supports the customer franchise, and we are actually growing our customer franchise again now that we have it in, I think, good shape compared to what it was in 2016 and we continue to look for diversification benefits, which Anshul touched on in Markets to ensure that through the cycles that you see in the economy, we have enough levers within the Markets business to grow the revenue but also, more importantly, continue to maintain the ROE. So the benefit of the business to the customers is very well established, particularly in the financial institution space. But for us to continue to grow the revenue, it has to meet those hurdles of high ROE above cost of capital and be driven around the customer franchise, if you like, rather than the trading books. A lot of people associate Markets as a trading -- a proprietary trading business. We're not building ours that way. So long answer, but ultimately, yes I do want to grow it, but subject to the return requirements being met.

And can I just have a follow-up on that second part because sometimes there are great trading opportunities. For example, you had a very strong first quarter in that December quarter that's just been completed. And you saw the U.S. 10-year rally over 100 basis points during that period. When do you see a good opportunity like that, are you ever prepared to increase the trade VaR to some extent to make a bit of revenue? Or are you going to sit back and just let the client activity drive this?

We tend to focus on the client activity first and foremost, but Anshul you might want to talk about how we handle that. It's a good question.

Thanks, Jonathan. Exactly as Mark said, I think there's a high degree of correlation to the right kind of volatility in the market and the directionality there and to customer activity we see. So what we try and do is take and manage risk, helping clients or customers take advantage of those opportunities, could be on the asset or the liability side and VaR out and manage risk direction accordingly. So in terms of risk appetite, there's absolutely risk appetite to take advantage of opportunities. We just put a customer lens and that underlying of customer at the center of activity while we drive the risk.

Do you want the traded number increase when you see a -- or the balance sheet side tick up when there's trading opportunity like this?

Yes, absolutely. So just to underline, we have the opportunity and the flexibility to weigh in on these opportunities and resize the amount of risk we've got on, both to the balance sheet side, and I would say even in the franchise. Because as I said there is a high degree of correlation between external opportunities and client activity as well. So we tend to get a good degree of positive correlation in that outcome within the business as well.

Your next question comes from Matt Dunger with BofA.

Anshul, you talked about building out the Markets capabilities and just looking at the relative ROEs that you reported in FY '23 on transaction banking at around 36% versus the Markets division at 11%. What does it take to improve the ROE within the Markets division? Is this -- and how are you going to earn a better return on this investment that you're making into this business?

Thank, Matt. Look, that's a very good question. And I'll start off by saying, as Mark has pointed out, in the division, there is a diversification of capabilities. Market by definition is both an asset and liability side business. The role this market plays and as I said in my earlier briefing as well, is the ability for the divisions and the group to be able to flex through both the asset and the liability side of the balance sheet, obviously built around the customer proposition. Now that being said, I think that the heart of the strategy is really to deliver growth and revenue, but by growing on the margin, the higher-returning businesses. So for a very deliberate reason, foreign exchange is our largest business because that is the highest-returning business we have, and we will look to continue to scale that in the go forward. In the other business lines, and I'll put a customer lens on why we have those capabilities. Customers deal with ANZ because we bring a suite of capabilities to them. To give you an example, our corporate customer to [indiscernible] would want both foreign exchange and rate hedging solutions. Our financial institutions client [indiscernible] client really are looking for both rate and credit capabilities. Another example would be almost all of our commodity customers are multiproduct customers. So what customers really look for from the Markets business within the institutional business is a suite of capabilities, which are relevant to them, and which is the lens we put on when we are looking at the returns on the portfolio. Now in the go forward, the emphasis is to while we continue scaling our core high-returning business like foreign exchange, if you grow the fee-based line within the RWA heavy businesses like fixed income, and continue to add in to what are very different, let's say, what are the very differentiated commodity proposition, which is not really capital consumptive on the margin to grow ROE.

That's good. I might add there, Matt, the strategy that we've taken for the division, which is why I went the -- I did that sort of spiel at the beginning, has been to get the right mix of our business and slant that obviously to the higher returning parts of the business. As you call out, PCM is a really, really strong ROE business. But we -- for us to have sustainability, we have to be building that mix of the -- also of the customer base that we've got. And therefore, if you take that same principle into the Markets business -- so we're trying to do that in a divisional sense, if you take that into the Markets business, we certainly would want to grow the foreign exchange side of it, which is the highest returning side of it. Spot FX is a great -- if I could choose one product that we do in Markets and only one product, it will be spot FX. Unfortunately, you can't -- we can't just position the business that way. It has to be a mix of FX, rates, fixed income, credit commodities. And getting that blend right does sometimes takes some time, and it also will shift based on the customer sort of preferences. So we're doing a lot of work around trying to grow the more -- the higher credit businesses while at the same time get better returns than the ones that are a little bit more capital heavy. And that is a bit of a journey, but I think we've done a good job in the last few years. I'd hope that gets better going forward as well.

Your next question comes from Andrew Lyons from Goldman Sachs.

Just a further question on the back of Jon's initial question earlier. Mark, you mentioned the opportunity for greater levels of diversification of revenue in the Markets business, which Anshul also mentioned would be franchise focused. Can you perhaps just talk in a bit more detail about where they'll come from. And just, I guess, how do you manage the risk of introducing the business to new revenue lines?

Yes, I might start and then Anshul, you can take that. If I look at it from the good choice of customer is really important in that, Andrew. So while we've been focusing on the higher accretive businesses in the division, in particular as you know around PCM. That's the first step. The second step is actually to focus on the customers that can deliver that sort of product mix too. And so you'll note in the last 5 or 6 years, particularly, we've gone really hard at areas like the financial institution space, particularly with funds and global funds, domestic funds but also banks because they tend to be using those higher ROE products. It is the same across the division in PCM, but it's also actually relevant to the Markets business specifically. On top of that, we've also looked for customers that operate in multiple geographies, and will deal with us in multiple geographies. Our most profitable customers tend to be those that deal with us in either Australia or New Zealand sort of -- that's our door opener if you like. But then in 1, 2, 3, 4 in some instances, we've got customers dealing with us in 13, 14 countries in the international network. They become very profitable because there is a multiplier effect for us, both in the type of business that we see with that mix, but also in the local markets. Anshul touched on our local markets capability, which is actually accretive for us and is a differentiator for us. So it's getting -- it's the choice of customers that matches the network, but also then the mix of business that we're after. So did you want to add to that specifically around market, Anshul?

Sure, Mark. So, thanks, Andrew. Maybe just to add to what Mark said and making very specific. I think what we try to do is really acquire scale in what is a differentiated proposition. And it's hard to unline that as I briefly mentioned in the initial update. We have what I call really strong differentiated access to liquidity propositions in foreign exchange, particularly both in Australia and New Zealand as well as in Asia to our local Markets business. A really strong cross-border proposition in our fixed income business and what I would call a very differentiated proposition, again, in the commodities business. Now you marry that to a core set of customers who deal with ANZ consistently. And as Mark said, tend to deal with us at multiple touch points in multiple countries, would be the focus of the business. And to make it specific in terms of priorities, we already have our local market business, which is almost an annuity business for us now. Very stable through the cycle, a completely differentiated proposition. We will intend to do more of that. But one focus is going to be a lot more digital delivery in foreign exchange, for example, and our internal reach into commercial and retail in Australia and New Zealand. The second piece would be adding on the more fee-based income lines in fixed income, where the cross border proposition is unique and that includes, beside people also the securitization business in Australia. The third piece is really the commodities proposition. I think we have a big role to play in the carbon space and the energy space with a focus on Australia and Asia. To supplement all of that, Australia does more solutions within the capability or adding on to our mix in Australia -- in foreign exchange particularly and in the rate space in Asia. So I hope that gives you a bit of a flavor of what...

The only other point that I suppose to add there is part of the growth proposition is also to ensure that we do want to selectively grow our customer base, but I would underlying selective. It has to meet the criteria that we've sort of outlined before that has a link to Australia and New Zealand, but also the multiple geographic piece and in the higher returning sectors. That tends to be where we're focusing and we have started to pivot to that new customer selection, which will help the sustainability and the growth in revenue and return and more importantly Markets. So we're trying to build that business to remove that sort of annual variability that you've been seeing, which upsets everybody. You can't take all of that out because sometimes some years are more volatile than others and then point to 2020. But ultimately, that's the idea that we're -- outside major events, that's what we're trying to get to.

Mark, just while I've got a microphone, I might as well try for one more. Your AGM commentary highlighted conditions in markets that started pretty well in 1Q. Any comments on the extent to which that's continued into the second quarter?

Yes. Look, I think generally, the business has been in pretty good shape. I mean, as -- we started, as I would have expected, it's continued relatively well across all the business lines. I'm pretty happy. I mean, I'm never completely happy bottom line. But it's gone as we would have expected. And this business tends to have a -- and we actually focused on having a strong first half because this markets business tends to be, if you get away well, you continue to have a reasonable year. I hope that continues. You saw that last year and I would imagine that we'll finish the half okay. And then in the second half, we're going to try and pay out some of the volatility you saw last year. Again, that will depend a little bit on market condition.

Your next question come from Brian Johnson with MST.

Just a few questions, if I may. And can I just come back to a subtle thing, the difference between the AGM commentary and what we saw in the first quarter. So at the AGM on the 21st of December, the narrative was that -- can you hear me Mark?

Yes, loud and clear.

So the narrative was at the AGM on the 21st of December, that the revenues were in line with the second half '23, which was $5.1 billion and that the Markets revenues were in line with the first half '23, which was $5.75 billion. Nine days later, for the quarter, we basically saw the revenue guidance is now basically in line with where it was at the first half '23. The uplift -- that implies an uplift of revenue of something like $80 million. I'd just like to understand, did that -- was the commentary at the AGM incorrect? Or where did the $80 million of revenue did come through in your business, Mark? Or did it come through in the nonmarkets business, the 9 days.

So it wasn't that the AGM or the 1Q were -- either of them were incorrect, BJ. It was the AGM, as you've said, with half-on-half comment. We haven't closed off the half obviously, and you would still remember -- even though we were into December, you're still seeing numbers coming through. In the first quarter, we've given you a PCP comparison because we thought that was more relevant given the trends that we've seen in the Markets business. So effectively, the Markets trends, as Mark just explained, has continued to be pretty good, and that's why we thought a comparison to the first half, or PCP, given the nature of that business does tend to be to have a stronger first half than second half. We thought a PCP comparison was going to be more useful to you.

Yes...

Jill, it is useful. But as I say, it's materially different over a period of 9 days. I'm just trying to get my head around, was it in the Markets business or in the nonmarket business that revenue -- that we saw the revenue uplift between the AGM commentary and what we saw in the first quarter.

Well, we've given you -- in the first quarter, disclosures, we've given you a split effectively of a comment about revenue more broadly and Markets specifically. So that would give you that answer, BJ.

That would imply that it wasn't in the Markets business then?

That would be the math.

Right and is that correct? Mark, is that correct? because it's kind of different to what you said today?

Well, no, what I said today was that we started well and [indiscernible] that came through in the quarter announcements that we made, the first quarter announcements that we made. I think there's an issue between the Group numbers and the Markets numbers...

Yes. And we split the Markets numbers...

If I look at where we were -- the start that we had last year, this is why we went PCP, to start we had this year. I'm not going to give you the exact numbers, obviously, but the trends were pretty solid, to be frank.

And so that's why we -- if you read the first bullet point on Slide 2 of the quarterly, that's why we say Group revenue was in line with the first half quarterly average with nonmarkets revenue broadly in line. And then we give you a comment after that, that says the Markets business has had a good start to this year with revenues a little better than the first half. So the math of that is pretty obvious, I would have thought.

Okay. That is up in the Markets business then. Okay, Mark, the second one is that listening to you today, you've built your proprietary pricing system and I think you really to take a big pat on the back. It's fantastic that you've actually got single systems. I was just wondering how we reconcile this kind of increased counterparty risk that you sometimes see unintendedly in the Markets business. So for example, it wasn't that long ago that we had a one-off credit loss basically flow through a Singapore trading counterparty in the oil business, we'd seen one in copper years ago. Does this show up in the Markets business or basically in the corporate finance business? How do you run it?

Yes, it's actually -- that was actually in the transaction banking business. So transaction banking is payments cash management, which you know we're growing and the other element of that is the trade finance book. That was a fraud that occurred in the trade finance book, so it wasn't associated with Markets.

And how do you -- but Mike when you take a position and you've got -- in the Markets business, you've got this counterparty risk, do you somehow hedge that away? Or how should we be thinking about that?

Yes, yes, Anshul can give you some insights to that. Anshul, do you want to?

Brian. Look, just to give you quick flavor, we don't have any lending losses in markets. And any customer losses in the context of markets would really be on default on derivatives, okay? And to, as such, so that you have the exact background, they have been very tiny, very few cases, probably less than a handful where we have to close out. And how we managed this, I think there's a regulatory framework in place where we have, by definition of the regulator, the need to have an XP or what we call a CVA risk. We manage all the counterparties as coming through derivatives through CVA provisions and then associated CVA hedging along with that. Now that gets supported under the CVA disclosure in the results technically. So, if you look at that trend, I think it's been a pretty consistent sort of story to what I just said that market does not really have any lending or really counterparty credit disclosures of any scale or height.

Part of that book is also covered through -- not all of it, but part of it is covered through CSAs. So it's that -- if you wanted to go in deeper on that BJ, we can actually do that. And it gets quite complicated when you get down to the credit counterparty risk, if you like, that we have in the book and how that is managed and hedged and we do some of that, depending on whether we can get matches to parts of that portfolio in the external market to hedge it. but it is quite a detailed area, but they do watch that quite closely. But as Anshul said, there's very little derivative losses that you see or defaults that appear in the book. And sometimes, we associate if there is a major corporate that's gone down, and we've had FX deals or [indiscernible] deals with them that we have to net out and we're in a loss position on those. In a lot of instances, we're actually in a gain position on them. So it depends on the circumstances.

Mike, just a final one, if I may. I understand how you're managing it for like a total return between the noninterest revenue and the net interest income. I suppose to say I think some [indiscernible] focus just on the [indiscernible] aspect in the net interest income [Technical Difficulty] but can I just have a go at to work out whether I've got this correct. Rates rise, we basically see a funding drag through the net interest income, which is offset by a gain in the noninterest revenues. But the other hunk of the Markets business is that when we have a look at the way you manage, for example, the replicating portfolio tracker, we can see bond rates fall, the gain goes basically the mark-to-market gain, whatever you want to call it, that goes through the net interest income line or the noninterest revenue line.

We're just working out who's best to answer this one for you [indiscernible].

So that goes through NII. So just to clarify this because it's the issue, rates go up, at the short end, bad for NIM, bonds go up, bad for NIM. Is that right? [indiscernible] replicating portfolio or?

Well, one short-term rate [indiscernible] once term structure rates, right, right?

Yes.

I will just take a shot at it. So specifically to the bullion business is where you've got 2 lines, where you've got the cost of financing that's sitting in your NIM, while the income from it, which more than covers our NIM and some come through our NII. Okay? OOI sorry. The bond business is -- the cost of carrying that in NIM is completely a different issue. There is no kind of volatility you are seeing where you've got 2 offsetting lines increasing or decreasing the way you are seeing that in the bullion business. That's it.

Well, I'm still -- look just a little bit slow as we both know. But if I have a look at Slide 12, we can see maintained capability and lower interest rate environment, which I think is telling me, as long bond rates go down, we get positive gains come through and probably comes through the NIM, but then if I have a look at the other slide on where the replicating portfolio is managed, it's managed in this business where we know a higher bond rates are good for it. And I'm just really struggling to work out the dynamics.

Yes. I think the other piece that's missing here is that when we manage the liquidity portfolio, we're effectively hedging interest rate risk the delta hedging the interest rate risk. So there is no P&L impact from a parallel change in interest rates that will come through the liquidity portfolio.

But the capital requirement moves around quite a bit because of the embedded gain or loss, is that correct ?

Yes. And we manage interest rate risk in the banking book for that as well.

Okay. So the ROE moves around?

Your next question comes from Richard Wiles with Morgan Stanley.

Just wanted to ask a question about the impact of rate movements on the entire institutional revenue book. I'm not interested in whether it goes through other income or whether it goes through net interest income. But how does the lower rate environment impact institutional revenue? What's the sensitivity? And is the revenue headwind from rates larger than the institutional bank than it is in the retail and business banking division of [indiscernible].

Yes. So there's a number of parts to that. Look, clearly, you've seen in the institutional business a benefit that has come through from rising rates, particularly in the PCM business. I want to give you a sensitivity on that. Obviously, we haven't given that [indiscernible] I want to give that today. But you've got to kind of break that PCM portfolio into a number of components. You've got a large portion of that book is a term deposit book, the changes in interest rates, [indiscernible] don't impact margins there. You've got -- then got a proportion of that book that is linked to short-term interest rates, so essentially customers that are contractually linked to short-term interest rates. So the delta or the [indiscernible] impact is not big and then you've got a portfolio where the rates are not linked to cash rates and therefore, you do have some impact there. So there is a proportion of that of that book that is impacted by interest rates. But the other thing to note is that there are also management actions undertaken all the time in that portfolio, including growing the size of the book to mitigate against interest rate impact, customer pricing to mitigate against interest rate impact and obviously, a lot of customers in the PCM book, what they really value is not necessarily, just the interest rate they're getting on those deposits, but also the payment functionality that platforms are delivering. There's a rate sensitivity absolutely. But in addition to that, there's also a number of management actions that are taken to manage interest rate sensitivity in that book.

Yes. And the component just to add to that, Richard, the component part of that deposit base mean that you can't just look at this as a linear item one way or the other because we will take management actions, some are more sensitive than others. And we'll look to -- I think and I'm just talking the Jill about this, I think we should look to provide a little bit more detail for everybody on that and the breakdown of those deposits at the first half '24.

No, we appreciate the curiosity, Wiles, and we'll look to give you a bit more help on that at the half.

And I think that we should do that in any case because as we continue to -- I want to continue to grow that business, so it's best that everyone understands those component parts of the deposit book. It's not just going to be a linear one way or the other.

Exactly.

But we can actually manage it, which is what we're sort of building muscle on as well.

Could I just try to phrase the question a little bit differently. The institutional margins went up more or the institutional revenue benefited more from rising rates earlier in this rate cycle. Was that because New Zealand rates and U.S. rates, in particular, went up earlier than Aussie rates? Or is it because institutional was more leveraged to rates than the rest of the [indiscernible].

Little bit of both [indiscernible].

Yes. Richard, you're right. It is more -- it's a bit of both, but more the former. So in particular, within our deposit portfolio, there is a little bit more rate sensitivity to dollars, U.S. dollars, than to Aussie or Kiwi.

When rates go down, do you think the performance of the institutional revenue versus the rest of the division will be influenced more by the timing and magnitude of rate moves in Australia versus the U.S.? Or is the institutional just more leveraged to the movements in rates generally.

No, I wouldn't describe it as leverage. I think as you said, there's a little bit more -- there's a little bit more sensitivity to U.S. dollars or U.S. dollar rates. And obviously, again, it all depends on volumes as well and mix of the deposits as to how that margin moves overall.

Your next question comes from Victor German with Macquarie.

My question was sort of along similar lines to Richard and it's slightly different though. So Mark, I think in your opening comments, you talked about the changes in institutional bank that we've obviously served over the last couple of years, 5 years or so that you've made and ultimately, it's a stronger business, which we can see and one of those benefits obviously came from improved risk profile and lower impairment charges, but looking at your pre-provision line and looking at return on risk-weighted assets at a pre-provision level, the real step-up in returns as Richard was alluding to earlier, came through in 2023 when rates went up. So if I look at sort of 5 years prior to that, the average return on risk-weighted assets is 1.5% and it was sort of moving up and down depending how strong market income work, but it hasn't moved up meaningfully and then we see a step up in 2023. As we're looking sort of [indiscernible] to the medium term, are you -- what are your observations in terms of the return profile for the business going forward? Do you think that -- it's more around opportunities managing sort of risk-weighted assets while maintaining or growing pre-provision earnings at a slower rate? Or do you [indiscernible] to continue to grow? Or is it ongoing benefits through the impairment line that you think will deliver better long-term returns.

Yes. Victor, it was a bit there too. Look, most people feel and we get this question a little bit, but just because rates went up, that's why we haven't had such an improved performance. Well, there's no doubt that helped. But we've been positioning for this for quite some time and while the rates went up, there was a few other things that occurred. We obviously had some risk -- risk-weighted asset benefit through the Basel IV changes, which affected and helped our return on equity. That's not going back regardless of what goes on. That is now [indiscernible] going to change one more time. But just that we don't see that benefit going away. We're significantly more capital efficient not only by the mix of business that we have in place, the quality of the customer base, which is much higher rated than 2016, but also by the Basel IV benefits that we're guiding in a capital sense. So that will stay with us going forward. The second thing I'd say is that we've improved the mix of the business, as we've discussed, is more into PCM, more into Markets and at a higher return business, which also had some capital impacts previously, which we got a little bit back on. And then less into that heavy loan book. On top of that though, I have to say that even with -- if we just looked at the loans that we're writing today and the discipline that we have on the pricing of those vis-a-vis where we were in 2016, we require unless there's a very good argument around actual real cross-sell that those loans get written at or above cost of capital. That wasn't the case in the past. Now a lot of that has occurred during that last 5-year period. So it's combination of [indiscernible] that is the case, the combination of factors Victor that got us the performance that we've had, which is why we have a higher degree of confidence that we can maintain sustainable returns above cost of capital compared to where we were back in 2016 and to your point around the provisions, the issue there for us is that we -- I've said this before, which obviously affects the returns as well. I've said this before, when there was a bad loan, we usually used to have the biggest cheque [indiscernible] at the front of the line, right? And we're very conscious of that in what we're trying to do. When i say we won't take losses going forward, but by dealing with the right level of customers, with the right mix of business, you mitigate a lot of that. And then you apply the fact that we're pricing for risk better than we've ever done. And we're getting that mix of business and you combine all that. Certainly, rates going up help, but it was only one factor of a number of them.

I think the other thing is that the sheer level of technology investment you've made in that business over the past few years and what that allows you to including the harmonization of the credit decisioning, it's a quantum lease picture on where that business was a decade ago.

Yes. And in addition to that, too, I think what we're trying to do is the simplification of the tech stack is really important because it allows us now to have further opportunities to automate and have much better data and everyone talks about data and you think of a way to actually going to make any money out of it. The first thing is to actually get it as clean data and actually make it in a position where your customers are getting a better experience with the systems, and we have visibility of their activity. That's what we're concentrating on next. And so I get your point, I do tend to get a little bit grumpy but i don't get grumpy a little bit about the fact that people just think of the linear association with rates up and down. We're trying to get away on that. Certainly part of it, and we have to manage that, but it's not all due to the fact that interest rates went up.

I mean I think the point around [indiscernible] is also one of them coming back to my numbers, you've got about a 30 basis point benefit from that, but there was investor benefits [indiscernible] based to your thoughts whether you see a risk of that being competed away given that everyone effectively had that step up, and therefore, they could potentially compete more aggressively for lending. It doesn't sound like that's the case that you're seeing currently that people have kind of [indiscernible] assets.

Yes. You break up a little bit there, but I think the Basel IV benefits were [indiscernible] And so yes, you're right, everybody got the benefit of that. But ultimately, I think the additional benefit is that if you look at the risk-weighted assets, that's improved significantly in our book, more than others in my view because of the reweighting of the business to that higher-rated customers, particularly in the FI space. And why are we being successful with, well actually business is geared very much into servicing those customers not only in FX, but in credit, in local markets in local market rates business, which is very appealing to a lot of the global funds and wanting to get exposure into Asia. And in addition to that, the payment and cash management services like clearing and others that we add. So it's a combination of all of those things that puts us in a better position, but certainly, on the risk-weighted asset side. We're targeting customers that sort of fit that profile I just described to you, which means we get the risk-weighted asset benefit, but we think we get the highest returning product benefit as well.

Your next question comes from Andrew Triggs with JPMorgan.

Just a couple of quick follow-ups. First one, just zoning in on rate leverage again. I think you said at the platforms briefing last year that there was about $103 billion of operational deposits. Is that ultimately the number that really is the rate in sensitive component of deposits within the institutional bank market?

No, it's Romesh here. So no, not all of that is rate insensitive. So that's essentially the total book of the [indiscernible] deposits, you might call them, but a large proportion of that, the customer rates are contractually linked to cash rates, so not all of that. Certainly a large part of that is not rate insensitive.

Yes. So we are able to part of that [indiscernible] negotiate some of the rates, if you like, which means on the way up and also on the way down.

Mark, could you give us a sense of the split. You've that number before.

Yes. I don't think we've given explicitly before like that. So let's consider what we can provide. Look, I think we understand we're getting the message that we get a bit more detail on that. So obviously, analysis does. We'll talk to Jill and see what we can do to come up with something that gives you pretty sensitive for us to do that now. I think we do that once we [indiscernible] half results [indiscernible].

Yes, we [indiscernible] look to give you a bit more analysis on that at the half when we can give you more context, but we can't give you that today.

Yes, sure. And then just quickly a follow-up again on ROE for the Markets business, which was in the FY '23 presentation, that 11% was broadly similar Corporate Finance, whereas generally the picture has been that corporate finance lending is pretty low and tight margins, low ROE and then cross-sell [indiscernible] up that return. Can I understand then why is that the market -- would have presumed the markets franchise earning a better ROE than the lending business? I know cross-sell involves transaction banking as well and payments as well as markets. Why isn't there a bigger difference between the 2 ROEs of those divisions?

Yes. I think we're in a bit of a journey here with markets. While we've been reshaping the division, we've also been reshaping markets around that customer mix that I talked about, but also that specifically to land with the product mix. And getting that right takes a little bit of time. So we do want -- if you break down what we've done within the division, what do I want to want, I actually like 45% of my business coming from PCM, right, not transaction banking, PCM because it is and will always be the highest returning on equity business. And then I would go in order of markets, corporate financial loans let's call it, and trade. Trade actually is a lower returning sort of ROE business and it moves around quite a bit. It's important because it actually does feed other things in some markets. For example, FX deals that come off back of it. And we -- it's sort of a product, obviously, that matches the geographic footprint that we have. By the way, we're working on that because we're looking at trade in a different light, so we want to do more of the supply chain trade and do that through shares risk portal because we get great risk share and here it's actually more available for us. On the loan book, I've talked to that where we've got -- we're pricing the loans pretty much at cost of capital or above. And using that as a ticket to the dance to a degree, but I want that ticket to the dance to be as small as possible. So again, we'll continue to provide it, but we'll do it in a selective perspective. With regard to the Markets, I still think we're on a journey here. I mean, Anshul's seen across the desk looking uncomfortable with. But what I want here is I want that ROE higher and because I'm not going to get all of the transaction business without actually a transactional banking business, without providing other product services. And so you have to look at getting the mix right and then within the mix of those products, the right mix within the products, which is why Anshul's focussed very heavily on the FX side and the high returning business as local markets can actually very, very profitable for us. But that again, just takes at a time. So that's why I talked about markets being up by the stairwell. We want to build it slowly, conservatively and on the basis of revenue growth, but more importantly, ROE growth. It has to have both. And I think it's improved that over the last few years, but it's still got a way to go from my perspective. Is that helpful Andrew?

Your last question is from Ed Henning with CLSA.

looking quickly on Slide 14 and just kind of following up on the previous couple of questions. You talked about the markets business growing, going up the stairwell and growing at $2 billion. But are you grabbing market share here? Or is it just the market growing? And can you just touch around competition, do you think you can still get that stairwell as competition continues to increase in this space.

Pretty good question. And I think at the heart of what this presentation was about. I think we are looking to focus not just on growing revenue, but growing the returns and revenue and doing it methodically, which is why we're focused on where we have a differentiated proposition and looking to scale that specifically in areas where we have higher margins and higher returns and also customers who are going to be with us sustainably through the cycle. I think so if you look at the capability mix, which we have in there, there are parts in which we are leveraging our strengths, which are not necessarily leading to just the growth in the market, but our capability is allowing us to take a larger share in the market. And that ranges from, as I mentioned, the differentiated pools of liquidity assets we have in foreign exchange, both in Australia, in New Zealand as well as Indonesia and scaling that, which is higher [indiscernible] business. Looking at our commodity proposition in a very differentiated way, leveraging our network, which is not necessarily something other banks can do. And then thirdly, growing the higher-margin businesses within the fixed income business. So if you put that together, it's not necessarily dependent on just market growth, but I think just getting to the scale we think we can in the markets business.

Yes. And I think Anshul touched it earlier, too, on the fact that we've invested and built our own capability in pricing, which means we're not reliant on other suppliers with this who tend to be taking a bit of a share of that profit pool if you like through the way that they have to execute and the -- our competitors may have executed. So there's an element of that. I would -- and it's pretty competitive as you would expect in Australia, right? So we do have to see some growth options I think in Australia, and we'll continue to try and compete to get a growing pool. So there's a number of factors, technology, quality people, price capabilities, et cetera, et cetera. But we've got an opportunity there. But internationally, I think with the Asian presence that we have in the local markets business, domestic competitors don't have that, but also the internationals have some of it, and they are very good competitors, but we think we can -- because we're focused on a key set of customers, we think we can probably outgrow a little bit there. We'll see how -- and that has been the case but we will see if we can do more. Final thing, too, is that we've not been good domestically at selling into our commercial banking, right, in markets. In fact, I get frustrated by this because when I ran commercial, they tried to change it and they failed miserably. But the -- and this is on our schedule now, particularly around some of the tech spend that we've had. We want to take that deeper into our commercial customer base. So we're working with Clare Morgan and team about how we do that and create a better proposition. So I think we can go deeper into our own market. And then we get the right proposition, perhaps we can also help grow our market share there, which we have a benefit on, but we've been pretty lousy in that space and that's one of the things I want to fix.

That does conclude our question-and-answer session. I'll now hand back to Jill Campbell for closing remarks.

Thanks, Kylie. Thanks, everyone. And we were conscious that there would be a lot of questions, and there were. Thanks for those. And so we've run a little bit over. I am conscious though that some of you might have had additional questions. So if you ring either Cameron, myself or [indiscernible] this afternoon, and we can -- if you need help and we can connect you with Romesh and Stuart and their team. And thank you so much for joining us.

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