Bank of Queensland Limited (BOQ) Earnings Call Transcript & Summary

Well, good morning, everyone, and welcome to BOQ's 2020 Investor Day. My name is Cherie Bell, and I'm the General Manager of Investor Relations here at BOQ. I would like to begin by acknowledging the traditional custodians of the land on which we are meeting today, the Gadigal people of the Eora Nation, and pay my respects to elders past, present and emerging. Firstly, some housekeeping. In the unlikely event of an emergency, please follow the directions of our BOQ employees. Well, thank you all for taking the time to join us this morning as we take you through the bank's refreshed strategy. Over the course of the morning, we will highlight the bank's key points of difference and areas of competitive advantage and clearly set out how we would transition the business back to a position of profitable and sustainable growth. We will also outline a set of medium term, strategic and financial targets that will enable us to report on our progress delivered throughout the execution of our strategy. In terms of our agenda this morning, shortly, I will hand over to our Managing Director and CEO, George Frazis, who will lead the group's strategy session. The session will be complemented by insights from some of our senior executives who will provide more detail and context on the key elements of our strategy and its execution. We are also joined this morning by our Chairman, Patrick Allaway, as well as a number of senior executives from BOQ. We have Ewen Stafford, Chief Financial Officer and Chief Operating Officer; Lyn McGrath, Group Executive, Retail Banking; Adam McAnalen, Chief Risk Officer; Deb Eckersley, Group Executive, People and Culture; Greg Boyle, CEO, Virgin Money Australia; Doug Snell, General Manager, BOQ Business; Hugh Lander, CEO, BOQ Specialist; Verity Gilpin, CEO, BOQ Finance; Chris Screen, Chief of Staff; and Kathy Cummings, General Manager of our broker business. Following the strategy presentation, George will provide some closing remarks, at which stage, there will be an opportunity for our analysts and investors to ask questions. And the day will conclude by noon. I will now hand over to George to outline our strategy.

Thanks, Cherie, and good morning, everyone. Thank you for joining us during a time, I know, is really busy for many of you, so we really appreciate it. Today, we will outline BOQ's sustainable and profitable growth strategy for the next 5 years, which is about reimagining BOQ through our distinctive brands and people, underpinned by what is going to be a comprehensive digital transformation. As Cherie mentioned, I'm going to be joined today by our CFO and COO, Ewen Stafford, and key members of the BOQ senior executive team, and I also want to acknowledge our Chairman, Patrick Allaway. Let me start by providing you with an overview of what we will cover off today. We'll briefly touch on our proud history and who we are. The strategy that we have developed addresses our business challenges and also takes advantage of our opportunities created by what is quite a changing environment. As I said, we are reimagining BOQ, building on what differentiates us through our refreshed purpose and 5 strategic pillars to deliver sustainable, profitable growth. We will elaborate on each of these 5 pillars as we go through the presentation. We have set targets to monitor our progress, and we'll report back on these on each half. You'll see that we are moving at pace and achieving momentum. I'll also update you on the outlook for FY '20. Now BOQ has been in banking, serving customers for 145 years, and we're proud of that rich history, which started in Queensland. Our customer focus comes from our highly specialized bankers and our owner managers who are small business owners who run our branches and who are deeply anchored in their communities. We have expanded organically and through acquisitions and successfully added distinctive brands, enabling us to further our focus on niche customer segments. Now with around 900,000 customers, served by almost 3,000 of people across the country and $78 billion in footings, the bank has a solid foundation upon which to grow. We have built our strategy, taking into account 3 elements, and I want to start off by talking about the first one, which is the challenges we face, which resulted in the disappointing shareholder outcomes. Our business was overly complicated with multiple systems, onerous processes and a lack of investment during what was a very challenging market environment of low growth, increased competition and a lack of community trust. Our strategy is also taking advantage of a number of shifts in the industry and broader environment: the move of customers away from the majors; our focus on attractive growth niche segments with a differentiated business model, enabling us to grow more strongly with good returns; developments in technology, which gives us the opportunity to successfully compete against larger players, enabled in part by standardized cloud technologies and the customers' shift to mobile. And thirdly and importantly, our strategy builds on our key differentiators and strengths. Our brands and proud history mean we are well placed to target key growth niches. The connections that our owner managers have are -- as long-standing small business owners in their communities is a real strength as are our highly specialized relationship bankers. Our digital transformation will be methodically staged initially for the retail bank. And we're starting off with our Virgin Money brand, and then we'll progressively migrate the rest of the bank as each stage is successfully completed. Our business niche strategy is a proven and successful model for delivering sustainable and profitable growth. As I said, our strategy is all about reimagining BOQ. We will have a distinctive and customer-led approach, overlaid by a comprehensive digital transformation, to deliver long-term shareholder value. Importantly, this is an integrated approach, which will transform the way we do business across our business. Our distinctive approach for our customers and people will be built on empathy, delivered through trusted brands, focused on customers where we can make a difference. We have begun a comprehensive digital transformation that will deliver us the combination of the strength of an established bank and the agility of a neobank. Our successful capital raising has given us the flexibility to support the investment necessary to execute this transformation. Progress is already well underway in Virgin Money Australia, and shifting the bank to a common cloud-based platform will provide us with a cost-effective solution that we can enhance with innovative investments in key areas. This will enable the business to return to sustainable, profitable growth. Today, we are outlining our financial targets, which include: to grow above system from FY '20, optimizing revenue and return at the same time; productivity benefits of circa $90 million containing expense growth to under 1% per annum for both FY '21 and FY '22, and this is also helping fund our transformation; positive jaws in FY '21 expanding in FY '22; maintaining organic capital generation of circa 100 basis points per annum from FY '21 with a CET1 target of 9% to 9.5%; achieving a target ROE of 8% through to FY '22 and 9% to 10% by FY '24; and sustainable growth in earnings per share and dividends from FY '21 onwards. At the full year results and at the capital raising, we laid out 5 strategic priorities. These have now been refined, and our strategy is based on 5 pillars. Our first pillar is our empathetic culture sets us apart. Our second pillar, distinctive brands, serving attractive niche customer segments. Our third pillar is a digital bank of the future with a personal touch. Our fourth pillar, a simple and intuitive business with strong execution capability. And finally, our fifth pillar, strong financial and risk position with attractive returns. Now we will deliver results while we are transforming the bank. This is not about promising something that's going to be delivered in 5 years' time. We are moving at pace and creating momentum. We have made material improvements in our mortgage lending processes, and we are already seeing these changes deliver for both our customers and the business. Our time to conditional yes has been reduced to around 1 day from 5 days. And this has meant a corresponding shift in our NPS as customers have noticed an improvement. While it is early days, we are seeing growth with both our business lending and mortgage lending portfolios, running ahead of market and also ahead of where we were last year. Importantly, this growth has not come at the expense of margin or diminished credit quality. We've also rolled out a new mobile app for our BOQ Specialist customers, which incorporates Apple Pay. The first phase of our cloud-based Virgin Money digital bank investment is well underway. And as mentioned earlier, the capital raising has strengthened our balance sheet and enabled us to get on with the transformation. Once again, it is early days, but it is encouraging to see that we're starting to see some real momentum in our business. We've seen a turnaround in household lending, with growth over the past quarter running faster than system at 1.4x. This is a notable shift from the same quarter in FY '19. BOQ's business bank niche strategy is continuing to see our business book grow faster than system at 1.3x. I want to stress that this growth has been delivered without compromising NIM or credit quality. As you can see on the retail side, the decline in NIM has been reversed. And on the business side, the decline has been stabilized. Whilst we will feel the downside impacts of the exit margin through the first half of '20, we are expecting to see this reverse into the second half with above-market lending growth. I'd like to now take you through a bit more detail on our 5 strategic pillars, and I'll also be calling on various members of my team to provide some more color on each of those. So we might start off -- obviously, we'll start off with the first pillar, which is our empathetic culture sets us apart. The first thing I want to say on this is that how we develop our culture for me is extremely important. It's an important part of how I and our leadership team want to lead this bank. The other thing to note is that when I first joined BOQ, the one thing that really stood out is our people and the fact that our people truly, truly care for our customers, and they also truly care for the bank. So what we've done is we've refreshed our purpose, which is aligned with our strategy to make sure it's distinctive, it's clear, it's motivating for our customers and our people and also provides clarity around how we make decisions, where our focus should be and the whole point of bringing this to life. So our purpose is creating prosperity for our customers, shareholders and people importantly through empathy, integrity and making a difference. Now what this means for our customers is we want to be delighting our customers at every interaction; helping our customers into their homes, helping them save and making their banking intuitive; helping family businesses grow and prosper and helping them run their businesses well. For our people and the organization, we want our people inspired to be delighting our customers, bringing their whole selves to work, making sure we've got a diverse workforce and able to contribute to our purpose and also make sure that we've got an environment where they can develop as bankers and people. We want to make sure we're enhancing our capability to be leaders in mobility with a personal touch, with smart data insights and making sure that we're relevant when it matters for our customers in the moment. Also, we want to ensure our capability is strengthened for us to continue delivering profitable, sustainable growth and ensuring that our bank continues to strengthen. Importantly for our shareholders, this is all about growing sustainable, long-term shareholder value. We're really proud of this purpose, and we're really looking forward to spending a lot of efforts in terms of bringing this to life. So what I'd like to do is ask Deb to come up and elaborate in terms of how our plans are evolving on that. But I'll also ask Lyn to talk about our owner managers, which really are at the heart of bringing this purpose to life. So thanks, Deb.

Thank you, George. For us here at BOQ, it's not just a cliché, people really are our greatest asset, and we know that because our customers tell us. So it's a critical focus for us as part of the strategy to ensure that we build the best culture and the capabilities to deliver on our purpose and on our strategy. And as you can see, we have 3 key focus areas to deliver on that: firstly, purpose-led empathetic culture; secondly, exceptional employee experiences; and then thirdly, growing the capability and talent required to deliver. And it's not accident that we start with purpose and culture. There are 3 values that we've articulated that really do sum up who we are at BOQ today when we're at our best: that's empathy, integrity and making a difference. And that's the hallmark of what we expect of all of our people every day. As George has already said, empathy is already a quality that we see at BOQ, and we have an opportunity to really dial that up to be at the real heart of our culture and to distinguish ourselves from our competitors. So what is empathy? It's certainly way more than just knowing the customer. It's actually about really understanding and experiencing what that person is experiencing and experiencing that with them and then, importantly, acting to help them. So it is an absolute step-up from purely understanding. Through our purpose-led empathetic culture, our people are and will be even more excited about the difference they can make for our customers. They feel inspired and safe to innovate and do the right thing. And they're encouraged to build deep connections with their customers and with their communities. Ensuring that we deliver on our purpose-led empathetic culture is at the foundation of our employee and customer experiences. And as we know, there's increasing evidence that organizations that strongly demonstrate empathy not only deliver for their customers but deliver for all their stakeholders. We firmly believe that our purpose-led empathetic culture will set us apart. Our purpose and values, as George has already outlined, is still relatively new, and we're currently embedding them and excited about embedding them through this year and beyond. One example of that is that our purpose and values will come to life through exceptional employee experiences where we're focused on enabling and empowering our people; recognizing our people, particularly those ones making a difference to the lives of our customers; and importantly, clarifying the accountabilities, which shall support quick decision-making and faster change through the organization. Our third area of focus is growing capability and talent. This will include investing in the development of our people, targeted recruitment and growing our leadership and the critical capabilities required, including our execution capability. Getting these 3 focus areas right will allow the bank to develop, attract and retain the talent required, which are critical to embedding the culture that we need and delivering results for our stakeholders. We will become a magnet for talent. We're already seeing this in the quality of people who want to talk to us about opportunities at BOQ. And we've set ourselves an ambitious target to move our employee engagement for which is currently around 56% to the top quartile, so definitely over 70%. Our empathetic culture is delivered by all of our people through their deep connections with customers and in their communities. This is both by our employees and their owner managers. Our owner managers are a distinctive part of our culture, which gives us a competitive advantage. And I'll now pass on to Lyn to elaborate further on that.

Thank you, Deb. When I joined BOQ, it became apparent to me very early on that the owner managers are a key differentiator for BOQ. So recently, we have built on that differentiation and enhanced our owner manager branch proposition in 3 important ways. We have reset our network and are now well placed for growth. We have developed clear recruitment criteria to ensure we have experienced, high-performing bankers owning these branches. We have introduced a revised franchise agreement, which tightly aligns owner managers, BOQ and our customer experiences. I now want to share with you a brief video that brings this proposition to life. [Presentation]

So as you just saw, our owner managers are long-standing small business owners, deeply anchored in their communities. Our owner managers have an average tenure of 11 years, greater than 11 years actually, and have built long-term customer relationships. Relationship-based pricing has led to strong NIM, leading to returns well above the cost of capital and above BOQ's average ROE. Our owner managers are experienced retail and commercial bankers with high-quality credit skills who truly understand SME banking. Consequently, we have a larger proportion of non-PAYG customers, particularly outside of Queensland, and the opportunity now lies in leveraging those SME customers. This provides BOQ with a competitive advantage, which our revised retail strategy aims to leverage. We have a number of new initiatives, including aligning our distribution footprint to our target segments. Our customer research and quantitative analysis identified where we want our branches positioned going forward, and we have an execution plan in place to get us there. We are committed to the owner manager model and are intending to tilt our mix of branches more heavily to the refreshed owner manager model. We will see a number of conversions of existing corporate sites into owner-managed locations. I'll now hand over to George to take us through our next strategic pillar.

Thanks, Lyn, and thanks, Deb. So Pillar 2 is about distinctive brands serving attractive niche customer segments. And just to make some comments about this. Firstly, we've got -- we're really proud of the collection of brands we've got. They're very trusted, and they do play a different role to different customer segments. The important point here is that we have made choices on which customer niches we target and where we actually don't target. So this is a very focused strategy, and it's all about where we can make a real difference to those customers' lives. If you look at our BOQ brand, which has been refreshed in terms of our retail brand, this is all about where customers truly value a personal touch. So our owner managers, as Lyn mentioned, is a really important component on how this differentiates us. There's not many banks that can say that their branch managers, their owner managers at branches, have got over 10 -- over 11 years on average in terms of tenure connected into their communities. Now what we are doing is supplementing that with digital capability so we can actually serve our customers a lot better. Now in addition to our owner manager branches, we'll have mobile banking branches, we'll be adding video banking to ensure we're better able to support our SME customers. And obviously, the third party channel is going to be a really important part of our delivery in terms of our BOQ Retail brand. I should say that's a channel that we have yet to tap into. So the growth that we've achieved to date in the first quarter doesn't incorporate some of the initiatives that we've got in place in terms of our third-party channel. If you look at our Virgin Money brand, this is a nationally recognized brand, a very strong brand. It appeals to a totally different segment group. It tends to be a little younger, little tech savvy, a little bit more aspirational. It's digital-only, so we're keeping that delivery model very pure. Obviously, it uses third-party extremely well and has call center support. If you look at our business banking brands, they're all quite distinctive, but they also provide an integrated approach in terms of how we're going to go forward and how we're going to leverage those brands further. In our BOQ Business brand, this is all about banking family businesses. And we've started our heritage in Queensland, and we've expanded across Australia on this, and we'll continue that development. Again, with all of our brands in business banking, the distinctive thing is that we're 100% specialized. All of our bankers are focused on specific target segments. If you look at our BOQ Specialist, which I'll get Hugh just to provide a bit more color, we've got an unrivaled position in the medical position -- in the medical sector, and that's just one example of how we do extremely well there. That business has been growing sustainably and continues to grow and provide attractive returns. So if we can go back. If you look at our BOQ Finance business, this is actually quite a jewel for us because it's a product that actually SME customers really value. We've got real scale in terms of customer numbers, as you can see, 90,000 customers, and we're going to -- going forward, we're going to see how we leverage that capability across our whole customer base. If we now go to the next slide, you can see that our specialized niche approach on the business banking side has delivered results, so in the order of 5% asset growth over the last 3 years per annum. Now the thing -- and I'm going to ask Hugh to come and give a bit more color on BOQ Specialist. But the distinctive thing about the way we do banking in business bank is that it's kind of old school, traditional banking. What we've got is business bankers that are all specialized, highly trained in that niche segment. Side-by-side with those bankers, we've got credit bank -- credit officers that focus on that segment, colocated. And then the third element is that we've got really strong local area marketing that's focused on that segment. It's those 3 things together that make this a very successful model. Now it's not just traditional banking. We then have got, obviously, digital supporting that to make sure that we're providing a better service to our customers. So I'll ask Hugh to come up and just give a bit more flavor on BOQ Specialist.

Thank you, George. As we look to more effectively leverage our capability and engagement model to a wider audience of SMEs, I thought it's useful to reflect on the BOQS business as an example about -- of how our niche strategy has and is well placed to continue to successfully grow by meeting the needs of SME customers through their various personal and business life stages. BOQ Specialist is a niche-focused business, but it is also a business of scale. Its strengths include strong and distinctive branding, dedicated and experienced industry bankers and risk professionals, products and services that are tailored to the unique needs of its discrete customer set and long-term relationships with industry associations and suppliers. The combination of these strengths has resulted in material growth in both customer numbers and asset balances. When the business was acquired by BOQ in 2014, asset balances were approximately $2.2 billion. And 5 years later, in August 2019, they had reached $8.8 billion. Now this growth has been achieved at acceptable margins, low losses and delivered strong overall returns. Going a little deeper into the model, our customer engagement approach is based on supporting professionals through their various life events. Prospective customers are exposed to BOQ Specialist at university via our targeted transaction banking offerings, and around 1,000 medical, dental and veterinary students and graduates each year join BOQ Specialist. Our engagement model then evolves as the professional moves into the workforce. It's in this early career stage that BOQS supports their personal borrowing needs, typically for a car or a home purchase. The relationship further develops as that practitioner looks to build out their own business and seek specialized finance, for example, to set up a new medical practice or for buying into or buying out an existing dental practice. Then once established, BOQS is there in support of practice expansion and investment lending facilities. As you can see, this industry-based model and life event engagement model supports both new customer growth and long-term deep customer relationships. While we do see continuing growth potential in the medical, dental and veterinary practitioner space, we also see increasing lending opportunities in corporate health care, with aggregation and consolidation accelerating in a number of sectors. Given BOQ's industry knowledge, reputation and relationships, we believe we're very well placed to capitalize on this opportunity. In addition, adjacent niche segments are being explored. For example, accountants working in professional practice share similar collegiate characteristics and life stage borrowing needs as health care professionals. And we believe that we will benefit -- that, that will benefit from the BOQS-enabled retail and commercial banking capabilities. I'd now like to hand over to Verity who will provide additional detail on why and how BOQ will capture more of the SME opportunity.

Thank you, Hugh. SME is a critical segment for BOQ and forms part of our transformation story. Our retail and business banking channels report strong metrics in this segment with returns around 12.8% and deposit-to-loan ratio of 111%. With approximately 140,000 SME customers across the group, we have proven capability of attracting and retaining customers in this segment. There is also an opportunity to deepen relationships with many customers holding 1 or 2 products with us. Combine these metrics with a nonfunding gap in the Australian market of $80 billion, and SME is an opportunity we plan to capitalize on. BOQ Finance plays a pivotal role in this strategy. We've delivered strong growth in the SME segment across key industries, such as transport, construction and agriculture, supported by a large customer base and an established introducer network. Our strong relationship skills, leading asset finance capability and industry knowledge generate superior outcomes and allows us to understand broader financing needs of our SME customers. This, combined with our niche focus, will differentiate us in the market. Aligning our capability and embedding the learnings across BOQ will lead to a stronger proposition that connects customers through an ecosystem delivering simpler and faster solutions. Over the next 3 years, we will embark on a number of initiatives, including rolling out videoconferencing across our branch network. We know that understanding customer needs and tailoring a quick time to yes is critical for this segment of customers. The ability to connect SME customers from a branch directly to a business banker who is supported by our specialist, credit and product teams will help deliver on the SME value proposition. We will also be leveraging our large number of introducers to drive further ownership of the SME segment. And consolidation of our systems will enable simplification of our products, improved origination processes and the ability to deliver data-driven insights to customers linked to loyalty and retention. Attracting SME customers is something we already do well in our niche segments. Capturing the market opportunity by having an industry-specific approach and aligning our capability will help us grow faster in SME banking. I would now like to hand back to George, who will take you through our 3 -- third strategic priority, BOQ's digital transformation.

Thanks, Verity, and thanks, Hugh. I'm really excited about the SME opportunity. And for us, it is all about deepening the relationships in the SMEs that we serve already and then also growing that. Our next -- our third pillar is a digital bank of the future with a personal touch. I do want to stress that our transformation is bank-wide, so it's not just about digital, but digital is a really important part of that. Now the way I'd like to go through how we're approaching this is, firstly, I'd give you a picture of what our current environment is, what our philosophy on how we will go through our digital transformation and then where our end state is and where we want to get to. The first thing to note is that we have got a very, very complex environment. One of the things that has occurred is that we've acquired businesses that have really provided us the ability to differentiate in terms of our brands and the niches that we're targeting and has been the key part of our success going forward. But what we haven't done is integrated those businesses when it comes to the middle office, back office and the systems. So the complexity and the costs are there as a result of that. And just to give you a sense of that complexity, on the retail side, we have 2 core systems, and we have about 7 systems that we interact with our customers. On the business banking side, that picture becomes even more complex in the sense that we've got 10 core systems and 11 systems in terms of how we interact with our customers. So you can see that there's a big opportunity for us to make improvements there. Now what we're not doing, so -- and actually, that's been described, and I think the person that described that is here in this room, as a bowl of spaghetti. What we're not doing is fixing that bowl of spaghetti. What we're going to do is -- obviously, there's a number of things we need to do around that, but our primary focus is all about building the new and then migrating to that new. So if I talk about the retail bank, we've now really made the investment in terms of Virgin -- the first phase of the investment in Virgin Money. And the system we're using, which is off-the-shelf, proven technology, cloud-based is our Temenos batch system. So this is what we're using as a core system for Virgin Money. And our objective is that the retail bank will -- once that system is fully proven, Virgin Money will migrate to that system, cloud-based system. On the business banking side, I just described the complexity of that environment. Fortunately, when you look at our BOQ Specialist business, that's using Temenos T24, which is effectively the noncloud version of Temenos. And this is why we were able actually to relaunch quite easily a very innovative mobile banking app for our BOQ Specialist because that's based on a core system that is real time. So the objective is, over time, is that we will be migrating our business banking operations and customers to that Temenos T24 system. And then at some point, we will make a decision if it makes sense to then convert that to the cloud and have one core banking system for the whole group. But that's a decision that we'll take at a later date. The other thing to note on business banking is that we will be combining our leasing operations onto one system. That will be a separate system. So leasing will be treated like a product and a plug-in into our core banking system. Now just to talk about our philosophy on this. As I said, we are not touching the old apart from what we need to do right now, which I will touch on in terms of what we've done to modernize our infrastructure. We're well underway in terms of our data centers going into the cloud. And that, again, is going to provide us much more flexibility, and that should be delivered by the end of this calendar year. We will be putting a micro server on our existing nonreal-time core system in the retail bank, so we can actually launch a new mobile banking app whilst we're working on the Virgin Money app -- Virgin Money system delivery. But that's all we're doing in terms of touching the old parts of the bank. Now our approach, as I said, is off-the-shelf, proven technology, cloud-based with an evergreen upgrade pathway. So basically, we're relying on global players to be continually upgrading that system for us. And where we will differentiate is at the front end in terms of our mobile app and how we interact as bankers. So -- and when we look at our core systems, there will be no customization. So as a small bank, what we can do is we can really simplify our environment, and we can be a lot stricter in terms of no customization. So that's our plan. We've got indicative timings on our delivery on that. Obviously, every stage here is staged. So we will not be going to the next stage until the previous stage is proven to deliver. There'll be robust business cases. And we're not having any large programs that go on for multiple years, which is where -- I've said in my past experience, where you get a little unstuck. So what I'd like to do now is ask Greg to give you a bit more flavor on how we're going in terms of our Virgin Money digital bank and also talk about our new approach of delivery when it comes to these systems. Thanks, Greg.

Thanks, George. As a key strategic growth pillar of BOQ Group, Virgin Money is a business with strong momentum and an exciting ambition to be one of Australia's leading digital challenger banks. Developed through an extensive customer research and customer cocreation process, Virgin Money's bank of bigger possibilities proposition will reimagine banking to be beautifully simple and rewarding, drive clear customer benefits and deliver a truly differentiated and exciting Virgin experience. Critically, Virgin Money already has a proven track record in executing on strong customer value-led propositions evidenced by more than 200,000 existing customers; a home loan portfolio, which has grown to more than $3 billion since launch in mid-2016; and success across other business lines, including credit cards. We are uniquely positioned to play in the intersection of the more traditional incumbents and the newer digital entrants by leveraging this proven track record and existing scale and combining it with key strategic assets which cannot be easily replicated by our competitors. This includes a globally recognized brand, known for innovation; strong future-ready capabilities across digital and partnership models, which are necessary to succeed in the current market; an ability to attract compelling and digitally savvy customers; and implementation of a market-leading cloud-based technology solution, all of which is backed by the strength of a recognized bank and our ability to leverage BOQ's ADI and access to other capabilities, including capital and treasury. To help bring the Virgin digital bank proposition to life, we'll now play a short video. [Presentation]

Over the next 5 years, Virgin Money will adopt the continuous transformation model, including ongoing product rollout across deposits and lending. This will start with the rollout of transaction and savings accounts and the integrated credit card proposition from later this calendar year. This will be followed by home loans and term deposits for mid-2021. In parallel, we will continue the build-out of key enablers across technology, loyalty and investment in our brand and broker. Importantly, Virgin Money has a strong track record in delivering new business lines and significant transformation projects, and we have set this project up for success. This includes a clear architectural and design principle to avoid legacy systems and processes wherever possible. Secondly, we have strong business ownership from a team of proven executives, which allows rapid speed and decision-making and clear accountability. And thirdly, we will leverage the global expertise of key delivery partners, including Temenos and Deloitte, and we'll run this project in a hybrid waterfall, agile manner. This ensures a strong uplift in capability and adoption of best-in-breed project implementation methodology. The digital bank project is already well progressed. Our proof-of-concept has successfully been established. More than 17 technology and business partners have already been selected. Our cloud environment has been successfully deployed. And our solution build is now underway across core platforms with the new API gateway and APIs establishing secured data flows, all of which lay the foundations for the group's future banking requirements. I'll now hand back to George.

Thanks, Greg. So our fourth pillar is simple and intuitive business with strong execution capability. The important point to make here is that our transformation is broader than our digital transformation. So it is a bank-wide transformation. Obviously, digital is an important part of that. The other important point is that what we're not doing is automating our old products and services and processes. So our starting point was defining the customer segments that we want to -- we know we can win in, so being really clear on which segments we're serving and which we're not, and detailed work has been completed on that. The second point then was saying -- what we're doing now is determining what products are required that are core banking on both the personal side and the business side that are required by those customer segments. The net result of that is we're likely to reduce our product set in the order of about 50%. The other thing we've done is we're now reengineering end-to-end our core processes. Now we've started off with the home loan process, but we'll then go through all of our other key processes to make sure that they're streamlined, and then we go into automation. But as I said, we've already started with our Virgin Money, and that's a totally new proposition. So basically, this is all about less products but focus products on the segments that [ it means ] streamlined processes and making sure that we're embedding compliance and digitizing where we can. Now what I'd like to do is call upon Lyn to provide a bit more color on the work that we've done on the home lending process. And then I'll ask Hugh to talk about investment, the cost, the productivity and how we're approaching differently our execution. Thanks, Lyn.

Thank you, George. We've already made a number of material changes through our home buying transformation program. The program focuses on 3 key areas underpinned by a number of initiatives. The first one is culture and capability. The second one is optimizing channels. And the third one is simplifying products, processes and systems. We have a new retail leadership team with significant retail banking and lending experience who are delivering results. We've brought in lender capability through our mobile mortgage bankers and we will continue to expand this group. As I mentioned before, owner managers have deep home-lending experience, so we will leverage their expertise. We have commenced streamlining and simplifying our processes with a view to making them customer-friendly, digitized and intuitive. This has reduced the time to conditional yes from 4 days -- sorry, from 5 days to 1 day, giving customers certainty sooner. Our focus on rework has seen a 17% reduction to date. And as George mentioned, this improvement is reflected in our mortgage NPS with a 25-point uplift since August 2019. But there is more to do. We need to simplify our product set. We need to roll out the customer engagement tool in March after successfully completing the pilot late last year. We need to turn our focus to automation, AI in process and consolidation of our lending platforms through the VMA neobank solution. We want to remove friction from our processes and significantly improve our people and customer experiences through the smart use of technology and data. Finally, but very importantly, we have turned our focus to brokers. In January, we hired a new general manager deep in broker experience. We are improving our strategic relationships with aggregators, implementing broker systems that matter to brokers, enhancing our capability with people who truly understand brokers and processes that make it easy -- easier and easy for brokers to do business with BOQ. I would now like to hand over to Ewen to talk about our investment.

Thanks, Lyn, and good morning, everyone. So I will firstly talk about our capital investment program and then move on to the operating expense outlook and talk in some detail about our productivity program and initiatives. So as the team has just laid out, we now have a refreshed multiyear strategy, a clear technology road map and sufficient capital to meet the investment requirements to transform the business. I think it's really important to note, and with the exception of the multiyear Virgin Money digital bank program, that the majority of the large programs that are currently in-flight in FY '20 will actually complete. So this leaves us with significant capacity and flexibility to really shape and stage the investment program in a way that best aligns to both the strategy but also business performance. We previously guided that capital investment will step up to $100 million in FY '20, which includes the $30 million for the VMA project. CapEx is expected to stay at this level for FY '21 and '22 before reducing to approximately $80 million in '23 and then down to $60 million in '24 as the technology road map is delivered. So I just want to make a few additional comments around execution capability uplift. And clearly, we recognize this as absolutely critical to build strong execution capability. And there's 5 key areas that we're thinking about how to go about that: firstly, ensuring strong executive sponsorship and with integrated strategic planning that optimizes our priority initiatives and their return on investment; secondly, driving transparency of delivery outcomes and accountability for realizing benefits; thirdly, structuring programs to make sure, and this is the point George was making, that we get incremental outcomes and with a real focus on time to market and time to value; fourthly, supporting our delivery teams with streamlined processes, tools and systems to make -- to ensure greater agility in delivery within clear risk and value guardrails; and then fifthly, focusing on new ways of partnering to transform the bank, beginning with the VMA partnership that Greg has just outlined. So we believe that these capabilities, once matured, will support the development of strategic execution within BOQ as a point of competitive advantage. So moving on to operating expenses. As we've previously guided at the full year '19 results, we expect an uplift of approximately 8% in FY '20 driven by 3 key areas: further risk and regulatory spend; increased OpEx to support capital investment and, in particular, marketing and contact center establishment costs associated with the launch of VMA later in this fiscal year; and increased amortization as a result of that capital investment uplift profile from FY '17 to '19 that we saw on the previous slide. So given this material step-up in FY '20, we believe that then the cost base is right-sized to carry us forward. And as such, we're looking to hold cost growth to less than 1% until FY '22. So I just want to step you through the walk that is on the slide and talk to the key moving parts. So in gray, we're making an assumption of CPI growth of 2% per annum. In the light blue, and given the increased investment over FY '17 to '20, amortization will further increase in '21 and '22. And in aggregate, we believe this is likely to add about $45 million to the cost base over that period. Importantly, though, amortization will then peak in FY '22 and plateau as we move forward into FY '23. And then finally, in the yellow box, we plan to largely offset this cost growth from a targeted productivity initiative through FY '20, '21 and 22 of approximately 5% per annum of our cost base which, in aggregate, will deliver $90 million of annualized run rate benefit in FY '23. So just to summarize that, while operating costs will grow approximately 8% in FY '20, we anticipate keeping costs broadly flat in '21 and '22 through a targeted multiyear productivity program that is already well underway and which I'll now provide a little more detail on. So the recently completed operating model and productivity review identified that there are significant and multiyear efficiency opportunities throughout the period of the transformation. Before sort of going through those stages, there's a couple of important contextual points. I think, firstly, and George has spoken to this but I think it's worth reiterating, many of these opportunities come from the fact that our businesses have come from acquisition and never actually been integrated. So as a result, we have a fragmented operating model and multiple platforms and systems. I just want to illustrate the impact that this has on the middle office of our business. So we have 21 teams working across 28 systems in service and operations, over 12 operation teams working across more than 20 technology platforms within product origination and fulfillment and 5 ways to originate a contract in BOQ Finance is just 3 points to note. And the second contextual point to note is that these benefits will change in both nature and where they will come from within the business as we move through the different stages of the transformation. And I'd just like to talk through those 3 key stages and elaborate on that point. So within FY '20, there's been 2 key areas we focused on, firstly, simplifying our organization structure. So this work is largely complete and, in 5 weeks, when we report the half year, you'll see clear evidence of that where we expect FTEs will be 4% to 6% lower than the number we reported at the full year in '19. We've also been focused this year around improved cost disciplines across all expense categories, including discretionary expenditure, contractors and consultants and starting to introduce tighter sourcing arrangements. We have begun shaping the '21 productivity program where a further $30 million of benefits is expected, and they will come through an uplift in productivity in that middle office through greater use of automation and artificial intelligence. There will also be benefits starting to emerge in this year through the product simplification program, and we will continue streamlining policies and processes right across the business. And then as we get out into that third year or the scale year, as it's noted on the slide, we're anticipating that the majority of the productivity savings will be achieved through this investment in technology that we've outlined this morning, including the consolidation of the technology platforms, the teams that work on those platforms and further streamlining process through digitization and straight-through processing. So in aggregate, these initiatives implemented through FY '20 to '22 will deliver annualized run rate benefits of $90 million in '23. I should also note that, at a broader portfolio level, that we'll be continually looking for opportunities to simplify the portfolio of businesses and business segments where they are no longer core to the strategy that we've outlined this morning or are subscale. So in conclusion, and noting the anticipated strong growth that the team has taken you through, we see significant opportunity for sustainable productivity, efficiency and unit cost improvements over the period of the transformation, and that this agenda will enable or help to enable the less than 1% cost growth, and the positive jaws outcome will enable further investment and help deliver the ROE improvement that George has outlined. So I'll hand back to George.

Thanks, Ewen. Before I get on to Pillar 5, I'll have to say I'm really pleased with the work that Lyn has done on the mortgage process. So Lyn's been running -- chairing a weekly meeting, a cross-functional weekly meeting to make sure we achieve those improvements, and that's only just the start. I'll have to say I'm really also pleased to have Ewen as part of the team. Ewen has got an extremely strong track record in terms of fundamental transformation but, more importantly, actually delivering results. He will be leading our transformation overall. So our fifth pillar is strong financial and risk position with attractive returns. As I mentioned at the full year results and at the capital raise, balance sheet strength is a focus for me. The successful capital raising that we completed late last year has already seen us increase strength of the balance sheet while simultaneously providing the flexibility to support the investments necessary to transition the bank back to sustainable, profitable growth with the CET1 target of 9% to 9.5%, which provides a comfortable buffer above APRA's unquestionably strong. We are anticipating an improved organic capital generation of circa 100 basis points from FY '21 onwards. We recognize the importance of dividends and franking credits for our shareholders. We will focus on quality lending funded through a mix of sources that include a high level of retail deposits. And just to note, if you look at what we're doing in terms of Virgin Money, the first stage of that is delivering a mobile banking app and transaction banking capability. So this is all about attracting transaction banking and deposits as a priority. How we continue to manage our risk both from a financial and nonfinancial sense is really important to us and in terms of how we strengthen our risk culture is also important. So what I'd like to do now is ask Adam, our Chief Risk Officer, to give us a bit more information on how we think about our risk framework and also our risk culture.

Thank you, George. Before getting to the strategy, I wanted to highlight that asset quality across the portfolio continues to be stable and strong. This is evidenced by the following 3 elements: firstly, most of risk metrics over the last 12 months are at slightly lower levels than the same period last year; secondly, the seasonal increase in arrears following on from the new year holiday period is lower than in previous years also; and finally, specific provision charges continue to track at historical lows, assisted by the strength of the property markets in the eastern capital cities. The portfolio has continued to perform well, supported by the continued diversification of the customer base, geography and asset class. And this diversification has helped insulate the portfolio against material impacts from extraordinary events, such as the ongoing drought and the summer bushfires. While the agribusiness portfolio has endured some challenging conditions over the past few years, recent rainfall in the eastern states has significantly improved the immediate outlook for most borrowers. Also encouragingly is that agricultural land values have remained stable throughout the drought, with price increases seen for quality farming properties. However, continued favorable weather conditions will be needed to end the drought. While on the topic of extraordinary events, the coronavirus is now also front of mind. While impacts to date have been minimal, the full economic effect of the outbreak is not known at this stage. At BOQ, we have effective structures in place to manage financial difficulty and hardship requests, including for one-off emergency events, such as the floods and bushfires of recent times. Despite everything we have seen, recent hardship applications are actually lower in both number and associated loan balances than the corresponding periods in previous years. On the regulatory front, we are continuing to progress the recommendations from the Hayne Royal Commission as a matter of priority. We support the recommendations of the Royal Commission and recognize their importance to supporting better outcomes for all customers. To date, we have underway or have implemented 9 recommendations whilst a further 16 recommendations relevant to our bank are currently being progressed by the government through either development of legislation or reviews. The remaining 51 recommendations do not apply to BOQ. In tying risk back to our strategy, our robust risk management framework will support sustainable growth. The importance of maintaining portfolio quality to underpin our growth is well recognized. We will ensure this is achieved by further leveraging our specialized credit risk capability to support our continued niche strategy, striking the right balance between credit risk and regulatory expectations with particular emphasis on leveraging CCR and open banking to satisfy both customer acquisition and responsible lending and, finally, simplifying credit policies and procedures to drive continued improvement in time to yes on home lending without compromising risk appetite. As Lyn highlighted earlier, work to date has already reduced our conditional time to yes from 5 days to 1. In summary, our portfolio is strong and stable, and we have the process and procedures in place to help keep it that way. On that note, I will now hand back to George. Thank you.

Thanks, Adam. Implementation of our 5 strategic pillars will drive performance against our financial targets and aim to deliver strong, sustainable outcomes for investors in 3 key areas, as I said, target ROE of 8% through to FY '22 and 9% to 10% by FY '24; maintaining organic capital generation of circa 100 basis points from FY '21 with a target CET1 ratio of 9% to 9.5%, comfortably above APRA's unquestionably strong; sustainable growth in earnings per share and dividends from FY '21 onwards. For each pillar, we have defined target deliverables, which we will report back each half to monitor our progress. Now importantly, underlying these targets are detailed operational targets, which we'll be monitoring and working towards. So in conclusion, we are a niche player. We know our customers. We know where we can succeed, and we know the digital space better than ever. We can and will deliver better products and services for our customers. We know customers have a range of options. Through our skilled bankers and our owner managers, we believe with the right product mix and services, we will drive sustainable, profitable growth. We are working on delivering a truly differentiated offering to the majors. We are focusing on the niche segments that we know provide the greatest opportunity to grow sustainable returns and where we can make a difference in our customers' lives. The changing environment results in less reliance on large proprietary IT systems and extensive branch networks and allows us to transform our business through implementation of digital and cloud-based technologies. BOQ is not burdened by large infrastructure and overheads, allowing us to be responsive and flexible. We'll be a simple and intuitive business for our customers and people. Our simplified business and staged approach to digital and technology investment will allow us to rapidly adapt to the new normal. We will deploy capital where we can deliver long-term shareholder value with strong execution skills and oversight. And now to our guidance -- FY '20 guidance. We had previously guided that FY '20 will be a difficult year as we transition with lower year-on-year cash earnings. We are now anticipating income growth with an improved impairment outcome and thus anticipate FY '20 cash earnings to be approximately 4% to 6% lower in FY '19. I do want to stress that this has been primarily driven by quality lending growth. Our statutory earnings guidance remains unchanged from previous updates. Further detail will be provided at our half year results once they have gone through the normal internal governance and external audit. We recognize the importance of dividends for our shareholders, and we are focused on sustainability of performance and outcomes. We are reaffirming our target dividend payout ratio of 70% to 80% of cash earnings. This will be subject to APRA approval due to the 12-month profit test. And I thank you for being with us today. I appreciate this is an extremely busy period. I did want to acknowledge our former Chairman, David -- Roger Davis, who's an important shareholder as well, who's at the back of the room as well. On that note, I'd like to hand back to Cherie, and we're really -- Ewen and I are really happy to take your questions. Thank you.

Thanks, George. So we'll now take questions from analysts and investors. There's a number of people here today. So if I could ask you to limit it to 2 questions per person. For those in the room, if you can wait for the microphone and state your name and organization before we begin. So with that, we'll start with Jarrod.

Jarrod Martin from Crédit Suisse. Two questions. First one for Ewen. Could you just provide a bit more detail on the $80 million to $100 million below-the-line item, in particular, trying to understand how much of that is for the restructuring versus, say, write-off of previous assets, so we can understand how that flows into potentially a benefit to amortization in later periods? So more detail on that. Then secondly, if I turn your eyes to Slide 32 in terms of your targeted capital investment, look at FY '23 and 2024, the drop-off there is equivalent to circa 5% to 10% of current cash earnings. I don't think I've spoken to a bank anywhere recently that expects ultimately their investment to decrease over time, just with everything that's going on. And considering that is such a large component of potential contribution to cash earnings, what makes you so confident that you can actually reduce that? And how -- now it seems that you're very dependent on that in terms of getting some of your targets.

Why don't you touch the first one, then I'll do the second one.

Sure. So just a few points to note, obviously, we're in the process of finalizing that below-the-line adjustment as we close for the half year and then go through our internal governance and external audit processes. But just to add a bit more color to it, there's really 2 key elements to it. And as you pointed out, the first one is around the restructuring charge and the costs associated with the strategy refresh and associated with that FTE reduction that we spoke about but also some acceleration -- early acceleration of investments. So that's the first bucket, and then the second will be a review of our capitalized software. So we had $232 million on the balance sheet at full year. So we're looking at it in 2 ways, both in terms of how that sits with the strategy going forward, and then, secondly, we're also just taking a look at our minimum capitalization threshold as well. So to dimension it for you, I think, to be finalized, but it will be broadly about 50%-50%. And then from a phasing perspective, it will be broadly 70%-30%, first half, second half.

Yes. So Jarrod -- can I just see that Slide 32 then? If you look at the investment from 2 years ago, this is quite a substantial step-up in investment. So we're spending $100 million this year. And that $100 million already includes that first stage substantial amount that we're doing for Virgin Money, and it also includes really the large infrastructure spend that we needed to do in terms of our data centers. So that's all being dealt with this year. The flow-on into next year is very small. So the difference between, say, us and what other players are experiences -- experiencing is that we've got a lot of flexibility in terms of how we spend that investment. And our view is that that's what's going to be required in terms of going forward. The other important point on this is that what we're not doing is dealing with fixing the old. So this is literally establishing a new digital bank that's cloud-based and then migrating through that. So we don't have the complexity of trying to fix multiple core systems and multiple application systems.

Richard Wiles, Morgan Stanley. George, you talked about empathy for customers. One thing mortgage customers like is a competitive rate. You haven't mentioned pricing today. So with that in mind, could you tell me what is your current -- what is the current gap between your pricing and the major banks' pricing on owner-occupier mortgages? Do you plan to do anything with your pricing to bring it all back into market? And what is your current front book versus price book -- front book versus back book cap? And finally, how do you think you can grow above system without having significant margin decline given how far out of market your pricing currently is?

Yes. So thanks, Richard. I'll touch on those questions and then hand over to Ewen. The starting point for us is that we've been really disciplined in terms of how we manage our price and the segments that we focus on. So this is not just about a price-led strategy. And what you've seen in the first quarter is we've been able to actually carefully manage that whilst continually growing above system. So there is an element of saying, well, if you look at our segments, it doesn't take a lot for us to make a difference in terms of our growth, and it is all about being really focused on those segments where we can make a difference. So that's why it's not price-driven. In terms of our differential front book, back book. You talked about owner-occupier, overall, it's in the order of 40 basis points. And you have seen in our results -- now that's less for owner-occupied, by the way, so it's skewed towards -- the larger amount is skewed towards the investor side of our business. And you've also seen half-to-half that we've had a 4 basis point impact on margin. So we expect that to continue, and that's what we've assumed. I'll hand over to Ewen to...

Well, you've pretty much answered that question. So it's in the low 40s, and it's 3 to 4 bps per half. Yes. So that's the answer there.

And again, the other thing to note, Richard, is the differential that we've got is that we've got to focus on our multi-brand. So what we're not doing is going across the market with one brand, one pricing approach, one segment approach. So the fact that we can actually deal with different segments, multi-brand provides us with a lot of flexibility in terms of how we manage our margin and volume.

I might just add to that, if I could, because when you actually break it down and look at the growth we're looking for, we're essentially looking for the business lending and then those niche businesses to keep doing what they're doing. So that's the first point. When you take Virgin Money out of the home lending, our aspiration there is to get the Blue brand, I guess, first back to positive growth and then to get it to system, and then the rest of the growth will come through the Virgin platform. So that's sort of broadly how we're thinking about that.

So you're confident you can get enough volume growth to offset 8 basis points per annum of front book, back book margin decline and the impact of lower rates.

Yes. So what we're doing is we're managing to optimize revenue and return.

Let's go to James.

It's James Ellis from Bank of America. Just a question on capital and franking credits. So just to really comment on the surplus capital generation, how you intend to deploy that, acknowledging you've talked about growing above system, and you've previously left the door open to neutralizing the DRP. And then related to that, in terms of franking credits, you've said that you no longer discount the DRP. I applaud the discipline of that, but the previous management team vigorously defended having discounts of up to 2.5% on a DRP on the basis that it assisted in maximum franking credit distribution. So just your thoughts there because if you can hit the targets which you've laid out, you can see a scenario where you've got both surplus capital and surplus franking credits.

Why don't you take that one?

So just on the 100 basis points of capital generation being used in 3 key ways, obviously, the first one is to fund the growth that you spoke to and the team has spoken to this morning; the second one is the CapEx, so the heightened capital investment as we step through that investment period; and then thirdly, it is, obviously, for the dividend payment.

And just to add to that, I mean, obviously, the capital raise has strengthened our balance sheet. So that was the objective of that. And I should note, we understand the importance of dividends and franking for our shareholders. So that's why the payout ratio is from 70% to 80%.

Jon Mott from UBS. Just a couple of questions, if I could. You called out the owner-managed branches and said that they're above average ROE. And I think you said SME is 13%. So what are the segments which are really diluting the ROE? What are you looking at? Which are getting very low single-digit ROE which you need to turn around? And secondly, just a question on capitalization. One of my pet hates, and I think from the people along this row, is banks which go along and say we'll have certain cost targets and then, 3 years later, who would have thought that the useful life of IT is less than we thought it was going to be, write it off below the line and say we hit our targets anyway. So what if you actually are going to amortize your IT investment over, and can we have some commitment that we're just not going to be 2 years down the line, write it all off below the line and say you hit your financial targets anyway?

Right. So I might touch on the amortization and the owner manager branches. I mean first thing to note with amortization is we are upping the level where we would amortize going forward. So we're making it a lot stricter in terms of what gets amortized and what gets expensed in the year. So we're going to be much more disciplined about that. We now have a very clear strategy, Jon. So what that then enables us is that the investment we make is aligned to that strategy, clearly aligned. So this is not about writing off IT systems going forward, and we're going to make sure that that's staged, and they're delivering. And the other thing we're going to make sure is that we're delivering results as we go along. If I look at the owner managers, the owner managers were really hampered by our complex processes, the way we would reward them, and effectively, the uncertainty around the Royal Commission was the real issue. But fundamentally, our owner managers are doing 2 things: they're focusing on mortgages, which are an attractive return; and the other thing they focus on and do really well is SME. And again, SME, with the strong deposit base, is an attractive segment. Now we haven't fully leveraged that because, as I said, we constrain them. So the starting point is the process improvement that Lyn has talked about on mortgages. By the way, the uptick in our differential in terms of mortgage performance, Virgin Money continues to do really well, BOQ Specialist continues to do really well. The real difference is in our branches, is where that change in performance is, and as I said, we have yet to tap into the broker market in terms of growth in mortgages. So mortgages are an attractive returning business, so is SME, and that's why our owner manager branch network is -- and what we're going to do with that, by the way, is supplement it with video banking, SME model where the expertise is central but leveraging the deep relationships that the owner managers have with the SMEs in their communities. Ewen, did you want to...

Yes. Just to finish on that one, so on the ROE question. I mean the very specific response to your question is within the corporate branches, within the broker and direct channel. I mean, obviously, Virgin is almost -- is essentially still a start-up, so it's -- in a lot of respects, albeit with the scale that Greg spoke to. So that would be dilutive at the moment from an ROE perspective, we didn't absolutely expect that, and it's not being managed for that at this point in time as well.

And the life that you're amortizing all of these IT investments because that's really important.

Yes. So the 2 things that will come through the below the line, as I mentioned, just to reiterate that, one is the minimum threshold, and then the other one is just a review of any software that's been capitalized that no longer forms part of the go-forward strategy. In terms of the life, I mean, it varies. So one of the key projects that is being delivered this year and has been spoken to is a significant uplift and modernization of the core infrastructure. So obviously, that will be over a longer term, as you would expect; core banking over a medium sort of term.

Yes. How many years? Because like we're seeing CommBank do different years -- all of them have done it and then just written it off and said, actually, sorry, it's not a 10-year useful life, it's 5. And then all of a sudden, it comes along as a below-the-line adjustment 3 years later and you hit your financial targets because you've just effectively under -- overbooked your profit for a number of years and then write it off below the line 3 years later.

So look, we'll provide full detail on that when we provide the final detail of -- and we've had external audit sign off of it. But as you would expect -- I mean, the digital side of it is shorter, 3 years. We then go into core banking. And then, obviously, that infrastructure is 10 years plus, but we'll give you the specifics in 5 weeks.

The other thing, Jon, we're going to be very disciplined in terms of where we spend our investment.

Andrew Lyons from Goldman. Just your 8% ROE guidance by FY '22 sits sort of between 10% to 15% above where consensus are currently sitting, and your cost guidance, which imputes about $600 million, is about in line. That suggests that you're expecting the improvement in ROE to come from some combination of better revenue margins and/or lower bad debt. Can you maybe just talk a bit about the split between those 2 improvements? And then just secondly, a question just on Slide 23, you talked about the potential for bolt-on acquisitions. Can you maybe just talk about where you see some holes in the portfolio that you might look?

Right. So I might touch on the second one first. So there's no set plans at this stage in terms of bolt-on acquisitions, but I'm really flagging that we're open to that. So we don't see any gaps at this stage. But as you've seen in terms of our previous strategy, we've done that extremely successfully. So it will be part of potentially the mix. The other thing to stress is it's not just about acquisitions but also partnerships. So as a smaller player, we're very open to partnerships and not doing everything for our customers. If you look at the 8% ROE, the starting point is that already, we've gone through a structural review of our cost base. So there's circa 100 FTE that -- we'll be 100 FTE lower when we report at the half, circa 100 FTE. So that productivity program will continue. So really, the uplift is coming, number one, from quality growth in terms of our lending; and secondly, from the productivity program that Ewen talked about.

And I think the other point to add is the leverage position of the capital will be coming down over that period.

Victor German from Macquarie. A couple of follow-up questions actually. So from Richard's question on front-to-back book issue, the RBA has been fairly vocal that the gap is [ really ] high, and the previous management team accepted the fact that they've done quite a lot of repricing. So just interested, how does it get us sort of back to 40 basis points given that now you are actually getting growth and, therefore, presumably, you're in the market competing? Just interested perhaps if you can provide a little bit more color in terms of exactly how that 40 basis points is calculated and whether it's the average of the overall book versus where the front book margins are. And maybe -- yes, just secondly, a follow-up from Andy's question on growth. Clearly, we are missing something that you guys are seeing. I'd just be interested to see -- because we're not really expecting kind of across all the banks to see something in the order of 12%, 13% revenue growth given all the margin pressures, which kind of your guidance sort of imply over the next 3 years. So yes, where are you expecting that growth to come from? And if it is balance sheet-led, how do you reconcile that 70% to 80% payout ratio? Because presumably even with 10% ROE, to do that 70% to 80%, if you're growing your balance sheet, something in the order of 5% would be very difficult.

All right. So if I touch on the front book, back book situation. As I said, what we've been experiencing is 4 basis points a half. My sense is that, that will continue. I mean as a smaller player, we do need to compete strongly to attract customers. But the issue was that what was hampering us in the past is really our bankers only had one tool to compete with, and that was price because we had the worst process. So 5 months ago, we were the slowest in market in mortgages, and we were the last in NPS. We are now in the top 3, I would say, in terms of time to yes on mortgages at 1 day, and there's further improvement. And our NPS has gone from negative 20% to a positive number, so customers really experience it. So what that enables us to do is that, effectively, we're taking customers out of the market and relieving their anxiety on are they going to get a home loan or not. So it is really focusing on the service. And that's the other thing that the digital investment will do, particularly in our business banking side, is just make it a lot easier for our customers. But that's not to say that we're not going to continue seeing that decline. And we're not proposing that we're not going to see that decline. So I think it's going to be an ongoing staged approach in terms of that back book, front book.

I might just finish that one off and provide -- if I could provide a little more color. So it is an average across the book. Just to add some further color to that. So the BOQ Blue brand is higher than -- slightly higher than that average, albeit it has come down significantly over the last 12 months. But you do also have -- it's a mix in here as well. So you have VMA with no back book, which brings that average down and BOQ Specialist as well with -- which sit well. So both of those sit well below. And BOQ itself, just marginally higher but, as I said, it has come down significantly over the last 12, 13 months.

And then just on the growth, the key thing to note on the growth is we've got a really strong, nationally recognized brand, which is Virgin Money Australia. And our investment -- our first phase of the investment is going into that already. So that's going to actually really accelerate what we can actually achieve without competing on price in terms of the different brands we've got. So it's a different value proposition.

I would just comment around the 12% to 13% you referenced, that's certainly not what I have in our models. So I don't know whether we take -- well, certainly not 13%. So I'm not -- I think the economics works without that. Oh, you're talking 3 years. Oh, fine. Fine, fine, fine. That makes sense then.

That is consistent with your total revenue growth.

Broadly -- well, not quite that high, but yes, over 3 years, that's about broadly accurate actually. Sorry, I thought you were talking per annum. I was about to come around and keen to go through your model.

Matt Wilson, Evans & Partners. I'm also following on from Richard. One way to keep your mortgage book margin high is to do lots of interest-only and investor loans. Can you give us color as to where that is today and where you'd like it to go to? And then secondly, there's one thing missing today. We've talked about growth on the asset side of the balance sheet. We haven't talked about deposits. If you look at Virgin, it's been around 3 years as an active brand. It's only got $300 million of deposits in there. So where is the strategy to grow your deposits to fund the growth? Or is there some other sort of magic plan out there to fund asset growth? Because we can all grow assets, BOQ's problems over the last 20 years has been growing its funding in economic sense.

I'm not sure everyone can grow assets. But anyway, just on that, if you look at our interest-only and our investor, we're below in terms of proportion when you look at the market as a whole. So it's not -- I think the interest-only is in the order of 20%. I'd have to validate.

We'll just get it confirmed.

We'll get that confirmed. And investor is 40%, I think, and Racheal will -- but they're both below the average of the market. We're not focusing on those segments, particularly, but they are in the mix. I should say that I do have concerns about interest-only, particularly with the new -- not concerns for us, but we would be steering away from interest-only because of the new capital rules. I'm not sure I have any concerns really with the investor side of things, if it's a good quality customer. In terms of deposits, that absolutely is our strategy on the investment. So if you look at what we have been lacking in the past, number one, we just don't have the mobile banking apps that enable a customer to do their transaction banking. So on BOQ Blue, we actually do attract younger customers, but we've got to pay quite a bit for those deposits. And then they leave their transaction banking with another bank because it's got a better mobile app. So that's why when you look at the investment that we focused on in terms of Virgin Money Australia, the first phase of that is all about providing transaction banking, so adding the transaction banking capability and bringing in lower-cost deposits.

What's the -- how are you going to offset your interest-only?

Well, actually, what we're doing with Virgin Money Australia is developing a native app, and that's the number one, the brand is distinctive. The second element of that, that I think will be really distinctive is all about loyalty. So Virgin Money Australia has been really good on that. And so we're extending that in a very innovative way, which I'm excited about. Once that model is proved out in Virgin Money Australia, we will be thinking about how we reward our customers more broadly on loyalty.

I think the other thing to note on Virgin is that the first drop of that technology that Greg spoke to will deliver savings and transaction accounts, so lower-cost deposits. So that's been quite consciously targeting in that way whereas the second one is where the term deposits will come through.

While on Virgin, and if it is tremendously successful, is there any change in the royalty stream that you pay back to the head brand in the U.K.? And what is that arrangement?

No, we haven't actually specified those arrangements. But no, there's no step-up because of the success of it. But obviously, as Ewen mentioned, growth for us in that brand is going to be a positive in terms of the financials of that business.

Andrew Triggs from JPMorgan. Just a question again on the network just as exactly how that fits into the niche strategy. Presumably, that's around the service offering. And as such, do you actually need to grow or return to growth in that channel to actually deliver what you're expecting for the broader strategy and the ROE target? And second point just on the NIM, how many further rate cuts do you assume as part of the ROE guidance?

I'll leave you with the NIM. So if you look at the owner manager network, really, it's focused on 2 things, one is -- well, 3 things: capturing deposits, and enabling that kind of over-the-counter transaction capability. But more importantly, for them, it's really mortgages, and that's where we've realigned the way we reward our owner managers and also SME -- dealing with SME customers. And as I said, we're going to be adding a video banking capability that really will release that network. Our plans are to grow the owner manager network. It's a very efficient way for us to actually extend our network. At the moment, we're still working those plans up. Our focus is probably going to be, obviously, Queensland, which is our heartland and then in Sydney and in Melbourne where it makes sense.

Andrew, the short answer to your question is, one, in July, obviously, perhaps, since we -- events of this week may have increased the potential of a second, but that's the answer in terms of how we modeled it to date.

Sounds good. Another question as well on the BOQ Specialist. We're seeing some talk about sort of surplus of doctors, particularly graduates, coming out of university. Has that changed a thing at all on the risk side of the equation? I mean, historically, this has been a very strong low-risk segment to lend to, have you changed any settings? And are you concerned about that issue?

At this stage, we're still seeing really strong credit outcomes in that specialization. And again, it gets back to the fact that this is not just about blanket-ly going after a target segment. We've got specialized credit people and specialized bankers that are targeting that segment, right? And that's really where the magic comes.

We'll go to the phones for a few questions.

Our next question from Azib Khan.

Look, from your presentation today, it sounds like a key driver of your above-system home loan growth in recent months has been the improvement in the time to conditional yes. Can you please tell us if you've changed your expense verification process at all in order to improve that time to yes? And secondly, a question about potential write-downs -- another question about potential write-downs. Of the $232 million of capitalized software in your balance sheet at the moment, how much of that, if any, pertains to the bowl of spaghetti?

I'll let you do the second one. So in terms of our time to conditional yes, you're absolutely right in the sense that that's been a key driver of our improvement in our performance. And obviously, the other thing is how we've rewarded our owner managers has also changed. So that's another big component of it. The thing I want to stress is that we have not changed our risk profile. So our risk appetite is the same. What we had is the most onerous process. And what we also had is a situation where every mortgage was checked 3 times, right? So no other bank checks every single mortgage 3 times. So this was all about, number one, improving the quality because of our streamlined process, and then becoming more efficient.

So to the bowl of spaghetti question, some of it or part of it will relate to it, and other parts will not. And as I mentioned, the other key component to it is the changing in the minimum threshold, capitalization threshold.

As it relates to the bowl of spaghetti, can we expect all of that to be written off -- written down in FY '20? Or is the plan to have a staged write-down there over the next 2 to 3 years?

Certainly not in FY '20. I mean if you reflect on the road map that was outlined for Pillar 3, the migration for BOQ Blue comes quite late in this transformation phase, so that would not be the case. And it's -- I think it's already -- we'll confirm this at the full year, but it's already a heavily depreciated, amortized asset.

In that case, with the expense guidance that you've given for beyond FY '20, is that inclusive of any further potential write-downs? Or do you plan on taking any write-downs of that bowl of spaghetti in future years below the line?

Well, given everything we know today, we are not anticipating that.

You're not anticipating any further write-downs in FY '20.

Correct.

So then you're saying that any write-downs relating to this bowl of spaghetti get taken in FY '20.

Given what we know today.

So it won't be a staged write-down then because you will be migrating from the bowl of spaghetti to the new systems in a staged manner, maybe perhaps it does make sense to have a staged write-down. And if there is a staged write-down, will the write-down in future years be taken below the line? Or will it be part of the less than 1% expense guidance?

Yes. I think a key point is the bowl of spaghetti is a very old and stale bowl of spaghetti...

That's been depreciated.

And has been heavily amortized.

Our next telephone question is from Brett from Shaw and Partners.

Are you seeing a change in the deposit mix between -- towards savings and transaction accounts, such as we've seen at some of the other banks? You didn't mention that as a positive on the funding side.

I think that is a change in the mix in terms of the market. But as I said, because of our lack of mobile banking capability at this stage, we still have quite a heavy mix of savings.

But it's a key part of the strategy going forward.

It's a key part of the strategy to change that mix.

And we'll come back into the room.

Anthony Hoo at CLSA. Can I just ask about the OMB channel? Firstly, you talked about modifying the franchise agreements. Are there any changes to the remuneration model? And then secondly, what do you think will be different about the OMB channel going forward versus 3 years ago when we started to see a decline in that network?

So probably 3 things, so there has been a change in the remuneration model. And we launched that in January, and we're in the process right now in terms of converting those owner managers to the new remuneration model. The model is kind of centered around great customer outcomes. But then importantly, it's aligned to the growth of the business. So there's a better alignment in terms of what creates shareholder value for us as well as what creates value for the owner managers. And that's been really positively received, and we're already seeing results as an outcome of that change. The other thing is what we've done is we've really been able to work out what type of owner manager works for us. So it is a combination of someone that does have a bit of a passion in helping customers into their homes, but it's also someone that understands SME lending. So that's the other key component of this, is us having a clear understanding of the type of owner manager that's successful.

Sorry, Cherie. Just before you do that, just to circle back to that question earlier around the construct of the book. So 60% is owner-occupied, 40% investor, 80% principal and interest, 20% interest only.

Sounds right.

Richard Wiles, Morgan Stanley. George, you mentioned the Temenos platform. You're going to build it for -- or use it for VMA and then you're going to transfer the BOQ business onto that. Are there any examples of banks around the world that have transferred an $80 billion of footings onto that new Temenos platform that you're using?

So Richard, I do want to clarify, what we've decided at this stage is that the retail bank will be transitioned to the Temenos batch system, which is a cloud-based system. The business banking side, we already have the Specialist business on the T24 system, which is the noncloud-based version of that. Both of those are real-time systems. That's what makes them great platforms. Whereas our current core business bank and core retail bank is on the signature system, which is a batch system, pretty well depreciated. So it is going to be a staged approach. Number one, let's make sure it's successful in terms of Virgin Money. Then we'll be transitioning our retail bank. On the business banking side, we've already got a platform that's been proven up, so we'll be migrating that over time. But that is a second phase, I'll have to say. Our focus initially is on Virgin Money. So we're going to see how that progresses, then the retail bank. On the business banking side, our priority really is to simplify our leasing systems. So that's where a lot of the complexity is. So that will be the best-in-class leasing product that we use -- system and migrating that and then thinking through how we migrate to T24. Now in terms of the specific question, Greg, I don't know if you could add to that in terms of the experience of the Temenos batch system.

There's a number of them globally, and we can certainly provide more detail at the half year. But we -- as part of our due diligence, we looked at ones across Europe, Israel and others, both of whom started up and then migrated across. In Israel, that includes the likes of Leumi, Pepper, but a number of the significant banks in Europe as well are doing the same.

The other thing I should add is in our BOQ Specialist, part of the -- when we acquired that business, it came along with a really heavily experienced team on Temenos. So that is another key capability that we're leveraging to make sure this transition is smooth.

Victor German again. I just wanted to -- hoping that, Ewen, perhaps you could just perhaps respond to the question that was asked around the dividend payout ratio in terms of just where -- am I missing kind of the math’s component of growth, balance sheet growth versus that 70% to 80% payout? Is it just sort of running down capital more to sort of the level that you're expecting? Or is there something missing? And also, just, George, you talked in your presentation about the increased focus on brokers as part of the strategy. Maybe if you can just provide us a little bit more color in terms of how prominent that channel you're expecting to become, where are you now in terms of broker flows and where do you think you can go with that.

Do you want me to answer first?

No. I'm happy -- just on the dividend policy. So we believe that payout ratio is appropriate in the medium term. We now have a 60% retail shareholding base, and so we understand the importance, the significance of the dividend and the franking credit, to the earlier question to them. We -- at the capital raise, we had indicated we would be at the top end of that 9% to 9.5%. With the extra capital that was taken through the SPP, we will be above the top end of that. And obviously, we felt it was appropriate not to scale back at that point in time. And so through that medium term, so out to '22, we -- certainly, we have the capital to maintain that payout ratio, to invest in the business and to grow the business.

So if you look at our increased focus on brokers, so again, you've got to look at the different parts of the business and how they distribute. So Virgin Money, obviously, is distributed through the broker network, and that's been successful. But those arrangements have effectively been with the Virgin Money Australia brand. Now interestingly, because of the strength of that brand, even though we had these onerous processes, it still did pretty well. But as we actually improve those processes, then the Virgin Money Australia brand is able to leverage that and do better. On the other key element that grows our home loans is obviously our BOQ Specialist. That is not dependent on your traditional mortgage brokers, that is a relationship-based model that's proprietary, and that continues to do really well. If you look at our increase to 1.4x system, the thing that's really pleasing from my perspective is the delta in that is really our corporate branches and our owner manager branches, in fact, particularly our owner manager branches, which is pretty unusual. Normally, when people turn around a mortgage situation, it's -- they've really turned on the broker channel. So the pleasing thing is we've got our proprietary system working better. There's still more to go, by the way. It's not to say that there isn't a drag on our retail business, but I'm just pleased with how that's responded. Now our proportion then on our BOQ Blue brand in terms of broker is quite low. I think it's in the order of 20%, 30%. So that's well below market. So we are going to be -- for us, with a small footprint, we are going to grow that footprint. But we don't have 1,000 branches, and we don't have any intentions of growing that footprint significantly. So the broker network will be important. And what we're doing now is we've got a focus group working through how do we actually better integrate with brokers to provide a better system. We got Kathy who's joined the team, who's behind there, who's leading that initiative. So we're really pleased to have Kathy on the team. I think, actually she was the person that started this whole thing with the CBA. So we're thrilled to have that expertise. So that's our plan.

If I can have 2, please. Firstly, as you think about moving into the cloud, how many cloud engineers do you have today? How many do you need? Will they be yours? Or will you outsource them? And secondly, just after your appointment, George, you appointed someone from Westpac, Peter, who was running the Business Bank. I understand he's left the organization. Where are we in replacing him?

Right. So the specific question on how many cloud engineers, I don't have the answer to that. But the one thing I'll do is -- and someone put up their hand if they want to answer that. But the one thing I'll -- and so [ Rob ] might answer that in a sec. The one thing I'd say is that the important thing about how we're going forward is that we're changing the way we're delivering. So number one, we're not touching the old as much as possible because that's where you get really unstuck, and then we're using global partners to help us deliver that, both in the integration and actually the experts in terms of the platform. In terms of Peter's replacement, the salient point for me, just generally, on the structure, we now have a clear strategy. We clearly understand the capabilities we want. We're well progressed in terms of finding a head of Business Bank. But I'll have to say, our 3 CEOs that run the individual businesses within the business bank are extremely strong, experienced and continue to do really well. But [ Rob ], I don't know if...

So just on the approach rather than the exact number of cloud engineers we're looking at, it's really extending the partnership model that we have with our system integrators like Microsoft, like DXC. So the idea will be consuming that engineering capability through our partners. We'll have a core strong team of people who will be focusing on especially cyber risk management compliance and ensuring that we have enough ability to govern those relationships. So the idea is not to go on a spending spree into a market which is already fairly overstretched. And there's plenty of capability out there with our partners.

Thank you very much, ladies and gentlemen, that concludes our strategy update.