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

Thank you for standing by and welcome to the Bank of Queensland half year results conference call. [Operator Instructions] I would now like to hand the conference over to Ms. Cherie Bell, General Manager, Investor Relations. Please go ahead.

Good morning, everyone, and welcome to BOQ's first half results presentation for 2020. Before we begin, I would like to acknowledge the traditional owners of the land upon which we meet today and recognize elders past, present and emerging. I would like to thank you for joining us via the audio webcast today in lieu of our usual results presentation, recognizing the current COVID-19 challenges we are all facing. Joining me today is George Frazis, our Managing Director and CEO; Ewen Stafford, our Chief Financial Officer and Chief Operating Officer; and Adam McAnalen, our Chief Risk Officer. We are also joined by members of BOQ's executive team and senior management. I will shortly hand over to George to provide an overview of the financial results and an update on our progress against our strategy before Ewen speaks to the results in more detail. George and Adam will then provide additional detail on our response to COVID-19 and our underlying asset quality, which we felt was important given the current environment. Following this, George will provide concluding remarks and observations, after which there will be an opportunity for analysts and investors to ask questions. I will now hand over to George to outline the results.

Thanks, Cherie, and good morning, everyone. I do want to thank you all for joining us in what are absolutely extraordinary times. Now while our primary focus today is the bank's first half results, given the significant impact of COVID-19, I will provide an update on how we see the economic environment and the impact on our business and industry and BOQ's response. As Cherie mentioned, I will be joined by Ewen, our CFO; and COO, Adam, to help present, and we've got other members of the senior executive team here also to help answer questions. Now turning to the headline first half results on Slide 4. Our cash NPAT is down 10% versus the prior corresponding period and down 1% compared to the second half in 2019. The decrease is a result of the previously flagged increasing expenses predominantly due to the regulatory compliance costs and strategic investments. Those investments form part of our focus on delivering a material improvement on past performance. To do that, we have a clear strategy in place. We are executing that strategy and are already seeing the benefit start to flow with improved balance sheet and income momentum across the housing and commercial portfolios. The review of our operating model and implementation of its recommendations is underway, including the restructuring of our workforce and a reprioritization of our investment portfolio. With a clear transformation program, we maintain the ability to flex this program of work as required in response to changing market dynamics. The economic landscape has shifted enormously in the 6 weeks since our strategy update due to the fast escalation of COVID-19. While the rapid and welcome response by the government and regulators will cushion the economic hit, the outlook for the economy, our customers and, as a result, our business remains deeply uncertain. But as I will outline this morning, we have entered this period as a simplified business with a strong capital and liquidity position, a robust risk management framework and a portfolio that provides us flexibility to adapt as required. I'm confident that BOQ is well positioned with a healthy capital buffer to respond to adverse impacts from the current environment, and we will continue to execute against our strategy to position BOQ for strong return to growth when the economic clouds pass. Turning now to the results themselves on Slide 5. Our first half result was solid and is in line with improved updated guidance provided at the strategy briefing in February. Statutory net profit after tax was $93 million, impacted by a number of below-the-line adjustments related to our restructuring activities. This result was down 40% from the prior corresponding period and 35% lower than the previous half. Cash earnings after tax decreased 10% to $151 million for the half and were 1% below second half 2019. Cash return on equity decreased to 7.5%. Common equity Tier 1 is materially higher during the half at 9.91%. Overall, our cash earnings per share decreased 16% to $0.353 per share. After the market closed yesterday, APRA provided a letter for all ADIs and insurers regarding capital management and the deferral of dividend decisions until the outlook is clearer and robust stress testing results have been discussed with APRA. Based on this guidance, BOQ is determined to defer the decision on payment of an interim dividend. The drivers of the first half results are outlined on Slide 6. Total lending grew by $781 million or an annualized rate of 3% during the half, representing an uplift of 56% on the prior corresponding period and 79% on the second half of FY '19. Improvements in lending growth was seen across both our retail and business bank. NIM reduced by 3 basis points during the half, slightly down on the 2 basis points decline seen in the second half of FY '19. The cost-to-income ratio increased marginally to 54.0% during the half due to investments in Phase 1 of the VMA project and modernization of our core infrastructure as well as increases related to the risk and regulatory compliance. Importantly, we have a number of initiatives entrained to ensure our cost growth is contained to less than 1% from FY '21 onwards as the benefits of our productivity initiatives begin to flow through. The loan impairment expense was flat at $30 million and equates to 13 basis points of gross loans. It was pleasing to see momentum building in both the housing and commercial portfolios in the half year, as seen on Slide 7. Both VMA and BOQ Specialist continue to grow their housing portfolios. BOQ Blue is still contracting but at a slower rate thanks to increased acquisition volumes. In the commercial portfolio, we had strong growth in both the BOQ Commercial and Specialist businesses through their focus on niche segments. The asset finance business continues to grow at a slower rate with an emphasis on improving margins and returns. Moving to retail banking performance on Slide 8. We continue to see growth across NPS metrics, reflecting our focus on improving the experience for our customers. This improved experience is driving the uplift in the lending portfolio and maintenance of the deposit portfolio. We continue to see good momentum across the VMA product lines with the lending portfolio now in excess of $3 billion. Now to Slide 9. The business bank experienced good growth across the niche segments during the half. Commercial and housing lending both grew materially compared to the prior corresponding period supported by solid growth in the deposit portfolio. We maintain our portfolio diversified across a range of industries, and the importance of which is amplified during this period of economic volatility. Turning to Slide 10. The first half result was slightly better than what we forecast at the Strategy Day. We have a clear strategy in place that takes advantage of a number of shifts in the industry and broader environment. This focus on attractive growth in niche segments with a differentiated business model will enable us to deliver sustainable, profitable growth. In the current environment, our purpose that puts empathy at the heart of our customer-led approach plays a key role in helping us to navigate this period of change for our customers, people and shareholders. Underpinning this approach is a staged digital transformation that will provide better outcomes for customers and value for our shareholders. And now to our strategy progress on Slide 11. As I highlighted at our strategy update, we are executing on our strategy across 5 pillars and have delivered a number of initiatives during the first half of FY '20. Under our first pillar, our purpose-led empathetic culture sets us apart. We have refreshed the purpose and values and have already seen improvements in both our MFI and lending NPS results. Under distinctive brands serving attractive niche customer segments, we have built momentum in house, home and business lending with new business volumes above system. Under digital bank of the future with a personal touch, we have delivered a new mobile app for BOQ Specialist, now on track to deliver the first stage of our VMA digital bank in 2020, the first step in the digital transformation of the wider group. We are pursuing several initiatives under simple and intuitive business with strong execution capability. We have delivered a material improvement in our time to yes for customers seeking a home loan from 5 days to an average now of conditional approval in less than 1 day. We have identified and largely delivered a number of productivity savings, including a 4% reduction in our spot head count from FY '19 to first half '20. And our investment portfolio has been reprioritized, providing timely flexibility around our program in FY '21. Finally, under our fifth pillar, strong financial and risk position with attractive returns, we have strengthened the balance sheet through the capital raising, giving us the flexibility to transform the business and respond to the changing market dynamics. We have a good liquidity position with net stable funding ratio of 133% (sic) [ 112% ] and a liquidity coverage ratio of 112% (sic) [ 133% ]. I'll now hand over to Ewen to talk through the financial results in more detail.

Thanks, George, and good morning, everyone. Turning firstly to the group financial performance on Slide 13. Total income of $541 million was flat with pcp. This was the result of a 1% increase in net interest income driven by growth in the balance sheet in both the full year '19 and in the first half of '20 and tight margin management. This NII growth was offset by a $7 million reduction in noninterest income. Operating expenses increased 9% as a result of the investment in strategic initiatives and increased spend on regulatory and compliance activities. In line with George's earlier comments, we have taken a $10 million collective provision overlay in relation to the potential impacts of COVID-19 as they were understood at the 29th of February. Inclusive of this overlay, loan impairment expenses remained flat with pcp at $30 million equating to 13 basis points of GLA. Cash earnings reduced by 10% compared to pcp to $151 million for the half, with a 1% reduction when compared to the second half 2019. Statutory net profit decreased to $93 million impacted by the below-the-line adjustment of $58 million. Breaking the financial results down to a segment level on Slide 14. The retail bank was down 17% in cash earnings to $55 million, with net interest income flat and noninterest income lower compared to pcp. The business had higher operating expenses with a positive contribution through loan impairment expenses as a result of improved arrears profile, partially offset by increases in specific provisions primarily through Western Australia and regional areas. Cash earnings for BOQ business decreased by 3%, down to $99 million for the half. There was strong net interest income growth of 4% driven by asset growth and supported by 11% growth in deposits, which resulted in a $10 million increase versus pcp. This was offset by lower noninterest income due to the sale of the debtor finance book in second half '19 and the loss of merchant terminal income as we migrated to an outsourcing arrangement for these services. Business banking was also impacted by higher operating expenses and impairment expenses as a result of the $10 million COVID-19 collective overlay, which sits almost exclusively in BOQ business. As can be seen on Slide 15, the lending portfolio grew to $47 billion. As outlined at Investor Day, our niche strategy is delivering strong growth in both the housing and commercial portfolios with 56% higher growth for the half compared to the first half '19. VMA and BOQ Specialist have both delivered an uplift in housing volumes, while BOQ Blue is starting to see the benefits from the home lending transformation program with increased new business volumes and a slower reduction in balance sheet. Asset finance grew at a measured lower rate of 1.3% in the first half '20 as the business focused on pricing, margins and improving returns. Overall, the focus will remain on asset growth while maintaining the quality of assets and managing margin across our niche businesses to support sustainable, profitable growth. Given the current environment, I will spend some time talking through our funding and liquidity position. BOQ is well positioned on funding, which is outlined on Slide 16. During the half, we have held customer deposits at $32 billion or a 69% deposit-to-loan ratio. Reliance on higher cost term deposits has reduced, and savings and investment balances have increased. Fast track deposit products continue to be well received, particularly in younger demographics, which is supportive of tilting the customer deposit mix and new customer acquisition. The launch of Virgin Money digital transaction and saving deposit products later in 2020 will further support growth in this area. Through the half, we have continued to focus on increasing longer-term wholesale funding sources. Since full year '17, we have increased long-term wholesale funding by $2.2 billion, allowing us to reduce reliance on short-term funding. BOQ has a reported liquidity coverage ratio of 133% at the end of first half '20 and a net stable funding ratio of 112%. BOQ's strong funding and liquidity ratios have us well positioned in this period of economic uncertainty. Turning to Slide 17. BOQ's wholesale funding objectives are based on capacity, resilience and diversity while minimizing the cost of funds and maintaining the flexibility to take advantage of opportunities in the most appropriate global markets. This ensures we are well placed from a liquidity and funding perspective with diversified funding sources and orderly maturity towers. In second half '20, we have senior unsecured maturities of $700 million, and our stable funding profile coupled with our strong capital position provides us with the ability to redeem $150 million additional Tier 1 notes at the call date in late May 2020. We also have diversified access and capacity available through a range of term funding instruments, including domestic and offshore unsecured funding programs, 3 AAA-rated securitization programs, and an additional $1.7 billion capacity in our AAA-rated $3.25 billion covered bond program. Turning to Slide 18. The impact of COVID-19 has been significant for financial markets. However, BOQ's good liquidity and capital levels prior to the market disruption, diversified funding base and continued focus on customer deposit gathering sees us well positioned during this period of volatility. Announcements from the RBA and APRA have promoted market liquidity and provided alternative funding options for us. In addition, BOQ has increased its internal securitization by approximately $1.7 billion to provide coverage of 150% of our $3.4 billion committed liquidity facility, further strengthening the availability of our contingent liquidity portfolio. This combination of good liquidity and funding, in addition to central bank and government stimulus, provides BOQ with access to a range of funding options. Turning to net interest margin on Slide 19. NIM has decreased 3 basis points from the second half '19 to 1.89%. Asset pricing and mix delivered a 6 basis point benefit, within this housing repricing activities increasing by 7 basis points with a further 2 basis point increase from commercial and asset finance repricing. There was also a 1 basis point benefit to NIM as a result of a shift in mix towards higher-margin commercial and asset finance lending. These benefits were partially offset by a 4 basis point reduction from the front-to-back book drag. Funding costs had an adverse impact of 4 basis points for customer deposits and 1 basis point for wholesale funding. The impact of hedging costs improved NIM by 4 basis points in the half driven by a reduction in basis portfolio spreads from 39 to 24 basis points. The cash rate cuts and associated lower interest rate environment has reduced BOQ's NIM by 4 basis points due to a 3 basis point reduction on the replicating portfolio and an additional 1 basis point reduction on the uninvested free funding and low-cost deposits. Partially offsetting this decline was a 1 basis point benefit as a result of a shift in funding mix towards more equity following the capital raise. Third-party costs increased during the half, resulting in a 2 basis point reduction in NIM with a further 1 basis point decrease due to the accounting treatment changes for leases under AASB 16, which are now fully embedded. The higher third-party costs are a reflection of higher commission payments due to increased volumes through the broker channel and owner-managed branches. Higher average liquidity balances during the first half contributed to a further 2 basis point decline in NIM. Looking forward to the NIM outlook in the second half '20 and overall, we expect NIM to be broadly flat. We anticipate the front-to-back book drag to continue at approximately 4 basis points per half. We expect to see significant benefits to NIM as a result of asset pricing changes announced in March. Given current basis cost, we do not expect a material impact to NIM in the second half relating to hedging costs. As a result of cash rate changes, we expect to see a 3 basis point decline in NIM in the second half for capital and low-cost deposit replicating portfolio. The impact is expected to continue into FY '21 and then flatten into FY '22 as the yield curve out to 3 years remains flat and rates remain low. The impact of funding cost is uncertain and can move quickly. However, we anticipate the funding available through the term funding facility to provide an uplift to NIM of 2 basis points in the second half. Based on current market conditions, we expect that this will be more than offset by higher funding costs elsewhere in the wholesale and retail funding portfolios. Furthermore, we expect the negative impact of higher average liquidity balances in NIM in the first half '20 to unwind in the second half. Noninterest income is outlined on Slide 20. We continue to see pressure across all subcategories with an overall reduction of $7 million or 11%. In line with industry trends, the decline was driven by lower bank guarantee volumes, a continued shift towards low and no fee products and the reduction in merchant fees. In addition, we experienced lower debtor finance fees as a result of the sale of the business in August '19. Income in the St Andrew's Insurance business continued to decline in the first half '20 as the business is now closed to new sales of consumer credit insurance. We expect further declines as a result of higher claims experience in the second half '20 due to the current economic environment. Trading income contributed $2 million in first half '20. However, it's expected to be lower in the second half '20 due to market volatility. Overall, we expect the decline in noninterest income to continue into the second half as we support our customers by waiving business banking fees and the continued transition to low and no fee products. Moving now to operating expenses on Slide 21. Expenses of $292 million for the half increased by 9% on pcp and by 4% from the second half '19. The key drivers of the $24 million increase were $8 million project-related technology spend on strategic initiatives, $17 million on risk and regulatory expenses and $4 million on general IT expenses. These were partially offset by a reduction in occupancy and general expenditure. Total amortization expense was $18 million and flat on pcp, benefiting from the below-the-line adjustments. Given what we know today, the outlook for expenses for FY '20 remains as outlined at Investor Day in late February. Turning now to portfolio provision and loan impairment expenses on Slide 22. Provision balances and impaired assets remain stable with second half '19 at $235 million and $196 million, respectively. Loan impairment expense was $30 million in the first half '20, in line with pcp and down $14 million compared to the second half '19. Specific impairment expense increased by $10 million compared to pcp as a result of declining property values in Western Australia and regional centers and 2 top-up provisions on pre-existing, large commercial impairments. The collective impairment expense of $2 million for the first half '20 included 2 key components: Firstly, a net underlying $5 million reduction comprising changes in credit growth mix largely in housing, improvements in the underlying data quality relating to collateral and regular movements through runoff and amortization. Secondly, a $7 million uplift in the collective provision overlay was recognized as a result of the $10 million COVID-19 estimate based on best available information at 29 February and utilizing scenario stress testing undertaken at that time. This increase was partially offset by the release of $3 million for the agri portfolio due to improvements in drought conditions from recent rains and anticipated winter crops. Loan impairment expenses to GLA remain at 13 basis points, consistent with the first half '19 and an improvement of 6 basis points from the second half '19. Moving on to the capital investment program on Slide 23. During the first half, we have spent $52 million on capital initiatives primarily relating to Phase 1 of the VMA digital bank to deliver transaction and savings products and the modernization of core infrastructure, including the migration of key data centers to a cloud environment. Both of these investments are foundational to our strategy to become a simpler and digitally enabled bank. A further number of other smaller capital investments have also been completed during the half, including a new app for BOQ Specialist customers, new CRM tool for our front line, the replacement of the contact center telephony platform, Phase 1 of the home lending transformation platform and new regulatory and compliance tools. As part of the intangible asset review, we have made a material adjustment to our software intangibles balance. This includes a $26 million reduction for a change to our capitalization threshold policy to $1 million, which decreased the number of intangible assets from $135 million to $55 million. Further, the accelerated amortization of 6 legacy assets as a result of the strategic reset of the technology road map decreased the intangible balance by $16 million. We have now completed the review, and outside normal impairment testing, we are comfortable with the balance sheet position. The remaining assets on the balance sheet have an average duration of 5.1 years. As mentioned, amortization charge for the period was $18 million. To reiterate comments made at Investor Day, the transformation strategy contains the flexibility to adjust our capital expenditure to suit shifting market and customer dynamics. Slide 24 includes a summary of the noncash items for the first half. We previously communicated that statutory earnings will be impacted by material one-off below-the-line adjustments of circa $80 million to $100 million pretax or circa $65 million to $70 million post tax. Further, we noted that the charge was likely to be recognized 70% in the first half and 30% in the second half '20. As part of the strategy refresh, we have recognized $47 million post tax in the first half '20, reflecting a $32 million impact from the intangible asset review and a $15 million restructuring charge. As explained in the prior slide and talking now in post-tax dollars, the intangible asset review resulted in an $18 million impact due to our capitalization threshold policy change, $11 million accelerated amortization relating to the strategic reset of the technology road map and $3 million in relation to essential upgrades required for the legacy BOQ Blue banking platform. Restructuring charges incurred in the first half included $10 million in redundancy charges and $5 million relating to the development of our pathway to simplify our business and improve cost-to-income over the medium to longer term. The spot FTE reduction during the first half was 77 or 4% compared to the full year '19. There was also $11 million of other noncash items in the first half '20, consistent with the last 2 halves. As touched on, the second half '20 will see further impacts in line with prior guidance with additional one-off investments relating to the balance to redundancy costs from the operating model review and accelerated strategic initiatives, including foundational automation work and people and culture programs. Moving to capital on Slide 25. George has already flagged that we're in a very strong capital position with a CET1 ratio of 9.91%. This represents a large buffer in excess of APRA's unquestionably strong capital requirements to standardize banks and is in excess of BOQ's current CET1 target range of 9% to 9.5%. The $340 million capital raise delivered an additional 110 basis points of capital. Importantly, underlying capital generation added 6 basis points to CET1 compared to the 7 basis point of consumption in the second half '19. This shift was due to lower consumption from risk-weighted asset growth given the focus in the half towards lower risk-weighted housing exposures away from more capital-intensive businesses such as BOQ Finance. An underlying increase in capital investment in the first half '20 was partially offset by the impact of the intangible asset review. There was a further 5 basis point impact from the restructuring charge. We have moved quickly to strengthen the balance sheet through the capital raise and focus on underlying capital generation, positioning us well to execute the refreshed strategy and providing resilience in the current operating environment. Finally, turning to Slide 26 and the potential impact of COVID-19 on our business subsequent to balance date of 29 February '20. Circumstances have evolved significantly since then. And as such, we have made a detailed subsequent event disclosure, and details of this can be seen in Note 5.5.4 in the statutory account. The materiality of the likely impact has given the rise to a nonadjusting subsequent event disclosure. The impact on the collective provision for FY '20 is estimated to be in the range of $49 million to $71 million, inclusive of the $10 million recognized in the first half '20. The overlay has been determined based on forward-looking scenarios and the impact on our portfolio, considering the facts, circumstances and forecast of future economic conditions and supportable information available as at yesterday, 7th of April. In assessing the forecasted economic conditions, consideration has been given to both the significant government support measures being undertaken and also to relief offered to borrowers by BOQ. The calculation of the estimated impact on the collective provision in this current environment is subject to significant uncertainty. And although BOQ has provided a range for the outcomes of COVID-19, this range may move materially as events unfold. As such, the range of $49 million to $71 million should not be seen as firm guidance nor as a forecast as to the final impacts expected. Adam will take you through the underlying modeling assumptions and potential impact on our portfolio shortly. On that note, I'll hand back to George.

Thank you, Ewen. Now moving to Slide 28. A lot has happened since our strategy update 6 weeks ago. Today, the severe impact of the pandemic on the Australian economy and financial systems are clearer but still very unpredictable. We have entered this period with a strong capital and liquidity position and a steadfast commitment to support our customers and our people through the stable and ongoing operation of our business. We're continuously assessing the impact of the pandemic on our portfolio, ready to respond as necessary. In the meantime, however, we are focusing on executing against our strategy and the knowledge that will position BOQ for a strong return to growth. Turning to Slide 29. Since the onset of COVID-19, BOQ has been actively working with the Australian Banking Association, federal government and regulators to structure a number of industry responses that complement action by the RBA and APRA. The response by regulators is assisting BOQ to support our customers during this period by providing certainty of cost-effective funding and ensuring capital is preserved as customers defer repayments. As I mentioned earlier, BOQ is fundamentally a good business. We have a strong balance sheet supported by good liquidity, funding and underlying credit position. We have taken steps to simplify our business, and our investment portfolio provides us flexibility to adapt as required. We are making it clear to our customers and people that we are here for them, and we will work with them through the challenges ahead. As a guide, current scenario analysis gives us a collective provision range of $49 million to $71 million, $10 million of which is recognized in the first half '20. As Ewen said, Adam will cover the scenario model in more detail. I would like to talk briefly about what we are seeing in the macroeconomic environment and how governments, regulators and the industry are responding, as can be seen on Slide 30. It goes without saying that the economy is facing a very difficult period, the length and depth of which is unknown. The government, the RBA have taken decisive and significant action and have stated that they will provide whatever further assistance is necessary. That action will cushion the economic hit, save countless jobs and businesses and provide the nation with the best chance of a V-shaped recovery. Australia's sound economic fundamentals will all help to underpin the economic recovery. We see a V-U shape recovery scenario as the most likely outcome at this stage, which our CRO, Adam, as I said, will talk to in more detail. However, there remain major challenges and uncertainties, and the impacts will be different by industry segment. Consumer confidence has dropped significantly, and we expect to see a notable rise in unemployment, and household savings rates decline although the rundown may be minimized somewhat by the government stimulus. We expect the housing market to be very soft and prices to decline at least until the economic situation stabilizes. However, combined balance sheet strength of the government, RBA and the banks provide a significant benefit through their alignment to cushion the impacts on the economy. So what does this all mean for BOQ and our customers? Slide 31 highlights some of the steps BOQ has taken to ensure our people are cared for and there is limited disruption to our business. BOQ remains committed to supporting our customers through these challenging times. I'm proud of how our people have responded, and our continuity plans have worked very well. Our relationship bankers and our people in our branches and call centers right across the business have managed to adapt to this unprecedented event so swiftly and smoothly and ensure our customers get the service they deserve. Our people are here to assist. So a huge thank you to them for their continued dedication during this period. I'll now pass over to Adam to provide more detail on our asset portfolio and scenario analysis as it relates to COVID-19.

Thank you, George, and good morning. I'll start this morning with our asset quality on Slide 32. As you can see, BOQ has continued to take a prudent approach to provisioning. Total provision coverage for impaired assets has remained broadly flat at 166%. Specific provisions to impaired assets also remained stable at 43%, reflecting a low interest rate environment coupled with low provision activity. Despite the fires, flooding and ongoing drought conditions in various parts of the country, BOQ did not have any new impaired assets in the first half greater than $5 million. We continue to manage 5 existing exposures with impaired balances greater than $5 million with a combined total exposure of $56 million. Our collective coverage of 78 basis points as a proportion of risk-weighted assets remain strong compared to both regional bank and major bank peers. Turning to the arrears trends on Slide 33. In spite of the external challenges presented by the first half of the financial year, our loan portfolio continued to perform strongly over the period. Arrears levels have remained low and are broadly similar to where they have been in recent years. As a demonstration of the portfolio's resilience to those external shocks, the bank received only 71 hardship applications following the bushfires and floods with a total exposure of circa $20 million. The ongoing solid arrears performance is largely due to the careful and conscious decision the business has taken over a number of years regarding the desired composition of our lending portfolio. As can be seen on Slide 34, BOQ has built up a carefully diversified lending portfolio, leaving us well placed to weather the current economic dislocation. We have carefully managed levels of risk within our housing portfolio, which now have an average LVR of 66%. While our business lending strategy has focused on leveraging our strength in specialized niches, this has been done with a focus on diversification across a range of industries. Through acquisition and organic growth, we have successfully diversified away from property and built up deeper portfolios in sectors, including agriculture and health care. This approach also provides countercyclical diversification with different sectors likely to experience downturns at different times. Within BOQ Finance, no singular industry represents more than 20% of the portfolio. Regarding the impact of COVID-19, I want to start with the scenario modeling we completed at the beginning of March that was based on economic forecast available at 29 February. The modeling assumptions we used at that time were based on a widely accepted belief that the biggest impact would be felt in global supply chains and industries highly dependent on international travel and immigration. There were external forecast of a marginal uplift in unemployment but no overall impact on GDP. Given these external economic assumptions, we considered that credit risk rating downgrades across affected industries of up to 1 notch was appropriate. This represented an increase in the probability of default of up to 2x. As a result, we took a prudent approach to calculate what was a reasonable collective provision of $10 million. Turning to Slide 35 and in a month since this earlier modeling was completed, the breadth and depth of the pandemic impact on the global economy has become increasingly apparent. This has meant that our assumptions for the second half '20 have necessarily changed. In updating our economic parameters, we considered a broad range of scenarios reflective of the uncertain economic conditions and outlook. We've updated our economic assumptions to reflect the greater impact to GDP which we now expect to fall by 3%, a more prominent rise in unemployment than initially anticipated now expected to peak at 9% and the likelihood of a reduction to property prices. Based on our scenario analysis based on the actions already taken by governments and regulators coupled with their openness to provide further support should this prove necessary, we have assessed the likely recovery outcome will initially be a bounce followed by a longer recovery when it comes. Under this scenario, the housing portfolio will be impacted by high unemployment and a reduction in property prices, but the unemployment impact on property prices and loss given default will be limited. However, for the business portfolio, we do expect a broader range of industries to be more heavily impacted, most notably the tourism, hospitality and food services and education sectors. Depending on the degree to which each industry sector is exposed, we have applied credit risk rating model downgrades of up to 4 notches. This results in a PD increase across all industries. However, we've assessed that government support provides a 1- to 2-notch improvement, which acts to partially offset the PD increase in the model scenario. The outcome of this scenario exercise suggests a potential full year 2020 impact on the collective provision in the range of $49 million to $71 million. However, the environment remains very uncertain, and as such, we have modeled a number of stress scenarios and we'll closely monitor development as the situation evolves. I will now hand back to George to take you through his concluding remarks.

Thanks, Adam. As you can see on Slide 36, we have implemented a range of measures to support both our personal and small business customers. These include a banking relief package for SME customers impacted by the pandemic, which provides them with a deferred payment period of up to 6 months on their small business loans less than $10 million. Importantly, risk weights do not change for these deferred loans, which conserves capital. We know that once SMEs get through this early stage in the COVID-19 crisis, they will need to start planning for the longer term. This will include assessments about how their existing business models will adapt when the current constraints and the economic activity are lifted. This will be a challenge because no one knows what longer-term adjustment this crisis may cause. BOQ will be developing a business plan strategy to assess SMEs with this critical process. In addition to the 6-month deferral repayment period available through our banking relief packs, our business bankers can also provide a request for business customers with a variable-rate business loan of less than $3 million to switch to a 1-year interest-only period or extend an expiring interest-only term for an additional year. We are also providing SMEs with access to unsecured overdraft at reduced interest rates to help them keep their businesses operational. This is in addition to business term loan and overdraft interest rate reductions, the waiver of a number of fees and pausing spending criteria on business performance savings accounts. We fully understand the importance of helping our SME customers conserve cash flow in these uncertain times. Slide 37 provides further detail on the customer requests for support. To date, we have received approximately 15,000 requests from customers for assistance, of which approximately 1/3 relate to our personal customers. As you can see, of the 75,000 personal customers with an LVR of less than 80%, we have currently received request for assistance from circa 5.5% of these customers. Likewise, of those customers with an LVR greater than 80%, circa 4.5% of the 20,000 customers have sought assistance at this stage. These obviously all have LMI insurance. Looking at our total retail portfolio and related assistance requests, the average LVR is 59% with an average loan size of $319,000. You can also see a relatively balanced distribution across geographic locations aligned to our portfolio. Moving to Slide 38. We have received circa 10,000 requests for assistance from our business customers. Dentists, professional services and some property-related sectors have driven the majority of these requests. Business customers receiving assistance have an average LVR of 51%. As you can see, of the 150 customers with an exposure of greater than $10 million, currently, we have received requests from 4% of these customers for support. These customers are operating in the hospitality and tourism, transport services industry and are being managed individually by our relationship bankers. And now to the closing FY '20 observations on Slide 39. We see continued pressure on revenue, while our home loan and business loan application volumes are steady, we are acutely aware that this could change quickly in the current environment. Given how we responded to the last RBA rate cuts, our income will be impacted by ongoing pricing competition in deposits and business lending, which is offset by improvements in mortgage margins. Noninterest income revenue will continue to decline while repayment holidays provide a likely floor for growth in loan balances. FY '21 will see a tailwind due to the low-cost RBA term funding facility. Costs are being tightly managed, and we are benefiting from the productivity savings we announced at the Strategy Day in February. Our frontline and customer support teams are handling increased volumes of queries and requests. And we have been able to flex our workforce to meet this demand while reducing costs in other discretionary areas. Our productivity plans continue to contain cost growth in FY '21 to less than 1%. Continuing on Slide 40. The impact of COVID-19 on impairments remains uncertain. While we have had a significant number of requests for support from our customers, the potential impairment is mitigated by the government support that cushions the downside to unemployment. As mentioned, our current modeling suggests the full year impact to be between $49 million and $71 million, inclusive of the $10 million recorded in our first half results. Significant uncertainty remains. Finally, maintenance of our strong capital funding and liquidity positions remains a key focus of our business as we enter a period of economic slowdown. We are taking a prudent approach in preserving our capital by conducting a review and looking for a number of our noncore CapEx projects. And we retain a number of funding options, including access -- accessing the term funding facility, securitization markets and utilizing capacity in our covered bonds program. Moving to Slide 41. To conclude, the first half results played out as we foreshadowed during what continues to be a transitional year. The investments we are making over the course of FY '20 will see us well placed to execute on our strategic transformation going forward. Despite the dramatic shift in the economic environment, we have a clear strategy, a strong capital position, stable funding and a high-quality asset portfolio and a business demonstrating significant improvements and a shift in momentum. While we continue to closely monitor this rapidly changing economic environment and adapt our business accordingly, our focus will be on maintaining our balance sheet strength, supporting our customers and ensuring the well-being of our people. Thank you very much for your time this morning. With that, I will now hand back to Cherie to open it up for questions.

Thanks, George. We will now take questions from analysts and investors on the phone. [Operator Instructions] And I will now pass to the operator.

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

I just wanted to ask some questions just around the CP modeling that you've provided quite a lot of detail around, just on Slide 35. If we look at the industry impact assessment and the subsequent impact that, that has on the probability of default multipliers, across the portfolio, the portfolio that you stress tested implied about a 3x increase in the probability of default and then across the whole portfolio, if we sort of assume across the whole portfolio, it's about a 1.5 times increase in the PD. I'm just wondering, just in light of the extent of the slowdown, which has been described as the greatest since the depression, I'm just wondering if you think that, that PD, just from a very high level, really catches the extent of the likely weakness we're going to see in the portfolio. And I guess just related to that within the retail book, the assumption around property price movements are just down 5% in the second quarter and then for the full year as well, just sort of how you're thinking about how you came up with that number.

Thanks, Andrew. I might start off and then hand over to Adam to provide some more detail. I think there are 2 things to note here. I mean, obviously, this is a very uncertain environment, and what we're presenting is a range of scenarios to the best of the information we've got at the time. So there are views on, number one, how deep will this decline be; and number two, the uncertainty around how quickly this will recover and what the recovery will look like. Our view is that -- the way we've done this is, number one, looked at what we thought in terms of how deep the impact will be. And we have looked at adjustments to GDP and property prices beyond that. But one of the key things that drives this is unemployment. And I'll have to say, when we look at the government packages, that really does provide a cushion to that unemployment rate, which we've got there peaking at 9%. Now you could argue that they may be a bit higher than that. But that's one of the key measures that really drives the results of the provisioning. The other impact that we've done on this is effectively determine the impact of the stimulus. And as we know, the government stimulus is close to -- into the double-digit when it comes to a proportion of GDP, so it is significant. The critical question will be how long this takes to recover. And as I said, the likelihood is that we are potentially going to see a V-cut recovery. But then for some industries where there's going to be more structural change and more permanent change, you're likely to see an experience of more of a U shape. So what's going to be important for us going forward is really taking an industry-by-industry view of our portfolio. And then the only other point I'd like to make before handing over to Adam is that we've got a very diversified portfolio now in terms of geography and industry. And in fact, even though we've got quite a specialized niche segment approach, the balances within each of those niches is quite modest outside of the health care sector. But I'll hand over to Adam.

Thank you, George. I think you've covered off that question very well. The only element I would add would be where our assessment is applied across the respective industries. It is reflective of our own customer but not the industry more broadly. And I'll hand back to you, George.

Thanks, Adam. Thanks.

Your next question comes from Brian Johnson from Jefferies.

George, can you hear me?

Yes, Brian.

George, I'm just intrigued on 2 things. The first one is that can we get a feeling -- so the sensitivity, I'm on to the Slide 30, you said unemployment could be anywhere between 8.5% to 10%. You've done it on 9%. Could we get a feeling as to what the upper band would basically do to that loan loss assumption?

Yes. So Brian, the way -- we haven't actually disclosed the further scenario analysis that we've done. But what -- the scenario analysis that we've done to date, the critical thing we're looking at is what is the impact on our CET1 ratio. And the type of scenarios that we've looked at today -- and as I said, it's a very uncertain environment, and so -- and critical, how deep does this go, I could argue that the depth of it in the second quarter will be what it will be. It's all about then how quickly does it recover that really makes the impact. And what we've seen on our broader scenario testing is that we still maintain our management down on CET1 of 9% to 9.5%. So we're very comfortable with our capital position and also our liquidity position. So we've got a strong position.

Okay. And George, the second one was, if we have a look, yesterday, we've got our noble leaders basically not only saying that landlords can't evict their tenants but now are talking about a mandatory waiving of rent. I'm just intrigued, what would it do to your earnings if you were basically mandated to actually waive interest on that similar proportion of model that they're suggesting the landlords.

Yes Brian, look, obviously, the one thing I've been really pleased about is how well government, the regulators and the banks have been working together to make sure that as the government has pointed out, this is all about building a bridge across this and also kind of cushioning the impact. Now in those discussions, which have been extremely fruitful, this has been all about how do we, particularly on the smaller end of the business customers, which is where really the balance sheets are not as strong, how do we support those. So there's been no indication or talk about not charging interest, et cetera, or not being able to capitalize interest because I'll have to say that would be a huge dislocation in terms of how the whole economy works and will create flow-in effect that would not be great. The whole emphasis has been on how do we support customers through this. If you look at the programs that we've got in place, up to $10 million for business customers, that effectively covers off 99% of our customer, our business banking customers, and 72% of our business banking book. So what it does is it really gives us an opportunity over that period as the information gets better to, in a very measured way, be able to assist our customers to adjust their businesses to get through this as best they can. And again, that's a similar program in terms of mortgages where there's a program of deferring payments for 3 months with an option of extending that for a further 3 months. Again, that then covers off a big part of our lending book. The critical thing on this, by the way, Brian, is the fact that APRA does not require us to increase the risk weights as we do these deferments. So that period doesn't actually chew up valuable capital support.

So George, just to clarify, if we were to get the powers that be to come out and talk about a mandatory waiving of interest for landlords on the same proportional model, that would actually be quite significantly bad for you guys?

I think it would be, Brian. It would be bad for the industry as a whole and the market as a whole as it works because remember, the other thing we need to do -- banking really is what helps us get back to normality in terms of markets. So the quicker we can get back to open markets where they operate as opposed to requiring support from the RBA, the better. So those type of initiatives would not help getting us to that point. But I have to stress, there's been no implication or discussions or even suggestions down that line that I'm aware of.

Your next question is from Richard Wiles from Morgan Stanley.

George, can you hear me?

Richard, yes.

Good. So I just want to ask a couple of questions on your decision around the dividend. Does your -- does deferral of the dividend mean you certainly won't pay an interim dividend? Or might you still pay one? When are you going to have a discussion with APRA on stress testing? And does your 70% to 80% payout ratio target for the medium term still stand? Or do you think it's no longer appropriate?

Thanks, Richard. Starting point is we definitely recognize the importance of dividends to our shareholders. And we've got a very large retail shareholder base, which particularly in these times where many other income streams are under pressure, the dividend is important. But I'll have to say, I'm supportive of APRA's move on this. They've been very consistent in the sense that they're about conserving capital to ensure the banks are in a position to really lean into assisting customers get through this. It's evident by the fact that the risk weights don't increase as we provide deferrals. They've talked about the potential of going into our buffers. And now really, what they're saying is, given the uncertainty, and they've been pretty clear that their view would be that potentially will become more certain over the coming months. So I don't think this is all about us doing a stress test today. It's really getting certain in terms of how we think the recovery options may look and then agree a stress test with APRA and then determine if we're able to pay a dividend given that stress test. The thing I would say is that we've got a very strong capital position. As you saw, our CET1 ratio is at 9.91%. We're very confident about our business. It is uncertain at the moment, so we would have to think through what are the potential stress test scenarios, agree those with APRA and then conduct the analysis and then go from there. Now in terms of the short term, the other thing that APRA has stated is that their expectations on any dividend that is paid is reduced. What that would mean is that, obviously, in the short term, the 70% to 80% were both on the profit test criteria, and the new guidance from APRA would mean it would be below that if there was a dividend determined.

Okay. So your comments around the timing of the stress test discussion with APRA suggests that you still might pay an interim dividend if these discussions could be completed before the end of the year and the timing of the final dividend? So deferral means -- doesn't mean cancellation. It currently means deferral.

It absolutely means deferral, Richard. But I do want to stress, it will depend on is the clarity in what we're leaning into over the next couple of months. So if there's clarity around that, then an agreement of what a stress test scenario -- or a range of stress test scenarios could look like and then obviously going through that process with APRA. And given that we're confident with our strong capital position, obviously, we would go through that process once there's clarity around the environment.

Your next question comes from Andrew Triggs from JPMorgan.

A couple of questions, please, along, I guess, a similar theme. So firstly, just hoping to get some more details on commercial property exposure. I think it showed -- that the presentation disclosed that 35% of the business lending portfolio sat in property and construction. In the past, that's an area where BOQ has, I guess, seen significant losses in downturns. What -- I note that it's not listed as one of the sort of the key high-impact or medium-impact areas, just your thoughts around the property cycle to come around. And then just a follow-up on the modeling. What -- where do you expect mortgage loan losses to run at in your sort of base case assumptions, please?

Okay. Thanks, Andrew. I'll hand over to Adam to give you a bit more detail on both of those. But just before I do, if you look at the commercial portfolio exposure and the makeup of our business during the last global financial crisis versus now, it is completely different. So we've got a much more diversified business both in geography and in segment, but I can let Adam detail that. The other thing to note, just on housing, is that the LVR, in terms of the customers that are requesting assistance on this, is quite low at 59%, as we've stated in the presentation. Obviously, our objective is going to be to help our customers through this. Both -- basically, the job keeper may assist in that in some way in terms of dampening the level of unemployment. But the real impact really is where does unemployment get to, number one, but more importantly, how does it actually recover to something a bit more normal because -- and then effectively seeing through customers through that period as opposed to forcing any action. But I'll hand over to Adam to provide some detail.

Thank you, George. I might just firstly turn to the question around the commercial portfolio and just reflect on the diversification or the composition of that portfolio today versus the sort of time period that you referred to, which was back in 2012. The composition is substantially different to that point in time, both in terms of the geography and asset mix. The bank was over-indexed in retail commercial property. And in fact, 90% of the impairments in 2012 were originated post GST, with 70% of those in Queensland. Since 2012, risk appetite has diversified away from particularly land banking and retail property, with the majority of our assets now in commercial property. So at this point, we see the impact in commercial property different to that of retail. Obviously, the retail component is the substantial topic of conversation that we stare into at this point in time. In terms of the housing portfolio, George, I think, has covered that off quite well. In terms of the main driver of impairment that would come across the housing portfolio is actually driven by unemployment and then, of course, the time that it actually takes for a recovery to come back. But with the average LVR of 66%, the portfolio is rather well shaped to withstand any downturn or some downturn in the property market. I'll hand back to you, George.

It's Ewen, I'll just jump in quickly there to Andrew's kind of specific question and just to talk to the range, the $49 million to $71 million range in the subsequent event note, Andrew. So the housing book of that range is about 40%; commercial was about 20%; finance was about 25%; and then the specialist business was about 15%. So hopefully, that gives you some sense of the orders of magnitude across the portfolio as we see it across that range at the moment.

Your next question comes from Jon Mott from UBS.

Just wanted to follow up on, I think, B.J.'s question when he asked about the sort of downside scenario, you were talking about the CET1 still selling at that 9% to 9.5% range. Just wanted to follow up on that. That would assume that you didn't pay a dividend in that half, you'd still have underlying profit of, say, $250 million that you generate. And on top of that, you'll be losing at least 50 basis points of risk-weighted assets. So have you been talking to that scenario sort of $500 million to $700 million in loss to the CET? Is that the number that you're talking about in that stress scenario?

Thanks, Jon. Look, under the stress scenario, obviously, it's not business as usual. So there's a number of factors that we've considered in that. Firstly, we've already talked about the deferral of noncritical investments, but that -- and in fact, the program, the plans on that are already underway, so in the order of around about 30% of our capital investment. The other thing that occurs under a stress scenario is, obviously, the risk-weighted asset growth is not there. So that has an impact on capital as well. So they're kind of the dynamics that play to that.

Okay. But I just wanted to make sure, to get your capital to go backwards, you're in a loss-making situation. So you'd have to lose your preprovision profit, which is currently at $250 million per half and then you'd have to chew out between 50 and 100 basis points of risk-weighted assets, which is probably another $150 million to $300 million. So you're talking of 0.5 million -- $0.5 billion-plus of losses, so I just wanted to make sure; and then on top of this, pulling back another noncritical investment as well, so probably make it an even larger loss. So when you're giving us a base case, which is an unbiased probability weighted, which is the one you're going to here, and you've disclosed on Page 35, you also gave us some scenarios where you land at 9% to 9.5% CET1 that you mentioned to Brian. I just wanted to make sure, to get to that 9% to 9.5%, you're taking a very large loss. So can you just confirm that is correct?

Yes. So the starting point would be to say, if you look -- there's 2 ways of looking at this, Jon, right? So one is -- number one, how deep is it; and then secondly, how long the recovery is. So the scenario analysis that we've done to date still does -- still has us in a profitable outcome in terms of our business, and there's very limited growth. We have taken actions, however, to make sure that we're optimizing the business and we're within that range. So we're not at the bottom end of that range, we're in that range. And we're also assuming that we're paying a dividend but a much reduced dividend.

And we're continuing to invest, albeit at a lower rate.

Much lower rate.

So is it realistic that you pay a dividend in that scenario than what APRA came out with yesterday?

Well, back to what -- it's just how we've modeled it, right? So even if we're paying a low dividend, we're still within that range. So now what decision the Board takes or the discussions with APRA, if that stress scenario occurred, that's a different discussion. And the main thing about that -- so Jon, if you did go through those type of scenarios, my point is -- and would you pay a dividend or not, the point when you're kind of into that type of scenario is not necessarily the outcome of that scenario because actually, when we look at the numbers, when we model those scenarios, the outcome's still quite strong. So we -- and the 9% to 9.5% is quite a healthy buffer above the unquestionably strong. The issue is when you're into that type of scenario, it creates a whole lot of uncertainty of the outcome going forward. So you do actually conserve capital further as a result of that uncertainty.

Yes. And George, the only other point, Jon, I would make -- I mean APRA only came out after the market closed yesterday. Obviously, we did all our modeling and the scenario work in the 10 days leading up to these. Well, really since balance date and leading up to these results. So we now need to go back and reassess that modeling.

Your next question is from Josh Freiman from Macquarie.

I hope you are safe in this current setting and fine. Just a couple of questions from me. First off, in Slide 7, you disclosed the material decrease in the growth rate of asset finance. And you called out a focus on margin management. Would you mind just providing a bit more color in this area? And then secondly, you did note some flexibility in your investment slate with regard to the economic environment. Just with that in mind, I just wanted to check how you're progressing with your investment agenda. And would you consider delaying it, including some of the transformation programs just to preserve capital and reinstate dividends?

Yes. I'll hand over to Ewen to talk about the investment slate. But let me cover off on the first question which is the asset finance business. So it was quite a deliberate strategy to make sure we broadened our mix of growth in terms of industries and geographies and product types when it came to business banking. So as you can see in first half '19, there was a considerable reliance on asset finance. In the first half '20, we've considerably shifted that. Now -- and the focus on asset finance there has been on ensuring that we optimize our margins. And in fact, the big emphasis on all of the business bank growth has been on margin management. Now what that's enabled us to do in terms of our more balanced growth and also the growth in our mortgages, it's meant that we've been able to generate 6 basis points of organic capital in the half compared to -- if you look at first half '19, that mix of growth really chewed up 7 basis points of capital. The other thing to note on asset finance is that market as a whole has declined quite significantly, but we're still not losing share in it. And we're just making sure that it's good growth with the required returns that we should be achieving. But I'll hand over to Ewen to talk about how we're thinking about the investment portfolio.

Thanks, George. So on Feb 27, we -- as part of the Investor Day, the Strategy Day, we laid out that clear strategy and then the investment profile to support that. But we're also clear that we do have a lot of strategic flexibility. We're quite fortunate in a lot of ways that there are a number of significant pieces of work that have either completed in the first half or the more significant ones will deliver into the second half. So the carryforward inflight into '21 and beyond is low. The notable exception to that is obviously the critical VMA stages 2 and 3. We've had a strong first half in project delivery, and I took you through some of that, and George spoke to some of those deliverables. Having said that, what we are doing now is just really sitting back and looking at that investment slate. And I think you can expect to see the number come down in the second half of this year and certainly into 2021, certainly and probably even more so in the first half of 2021. And the advantage of the strategy is we have a really clear view on the critical path through the delivery, being those large digital projects as well as the risk and reg. And that's going to enable us, I think, very quickly. I mean we've already done the high-level work, and we're now just doing the detailed work around what smaller projects we will put on hold for a period and changing in the sequencing of the regulatory projects. Perhaps we won't be pushing out some of the acceleration as much as we'd previously considered in terms of the digital projects. But I think you can expect to see a lower number than we had originally planned in the second half and probably even a smaller number into the first half of '21, and then we'll obviously assess market conditions and the environment from there.

Your next question is from Ed Henning from CLSA.

Ed, we can't hear you. You might be on mute. We still can't hear Ed. [Technical Difficulty]

Operator, we might need to take the question from Brett Le Mesurier.

Did I hear you say that in your stress scenario, there would be no risk-weighted asset growth?

So what we have assumed -- now these are not in the current scenarios that we presented. So the scenarios you've got in the pack do assume that there's risk-weighted asset growth. We have looked at more severe scenarios where growth will be subdued, yes.

So the -- what would be the increase in risk-weighted assets in that stress scenario that you're talking about? It has to be something, right, because you've got a reduction in credit rating, a few notches down for different categories.

I see what you mean. Yes, sorry. So when we said there's no increase in risk-weighted assets, we're talking about growth of new business as opposed to movement in the risk weights due to downgrades.

So could you give an indication as to what that increase in risk-weighted assets would be in that scenario, that stress scenario you've identified?

Well, we haven't really disclosed at this stage the more stressed scenario. So what we're saying -- or what we are saying is that when we look at a number of those scenarios, and it's very unclear at the moment what a stress scenario would look like, so we have had a go at that. What we're saying is with even in those scenarios at this stage, we stay well within our management capital ratios. What will happen over the next couple of months is for us to get clarity of what likely stress case scenarios are, agree those with APRA and then do the work, if that makes sense.

Right. And you've not allowed for an increase in the LGD in you stress scenario, if we looked at it, it's just the PD you've increased. Is that correct?

Let me just -- I might hand over to Adam. The other thing to note on this, before I hand it over to Adam, is that if you look at the first 6 months of the deferrals, right, so we've got about 90% -- as I said, 99% of our customers are covered by that deferral, and all of our mortgage customers are covered by that referral. And then at an asset level, that represents something in the order of 72% covered by the deferral in terms of our business lending book. What that means is during that deferral process, we don't need to adjust the risk weight as we get through this, right? So that's an APRA change to their requirements. But I'll hand over now to Adam to provide some color -- more color on your question.

Thank you, George. Yes, I can confirm that we have applied an LGD impact through the model, obviously, after the housing portfolio, that is driven by property prices. When we consider that our commercial portfolio is predominantly well secured and with the conservative lending values that we use to secure those assets, the property downturn does not have a material impact on the commercial profit. For BOQ Finance, of course, where it is secured by assets, that obviously does have an impact. But it's not linked directly to property prices, obviously because it's secured by other assets.

And lastly, I gather from what you're saying, you've had no contact with APRA at all on stress testing.

No. So the APRA notice came out late last night. So there was a requirement to do some scenario analysis early on, but that was quite early on in this whole crisis.

First week of March.

The first week of March, which all banks were required -- all ADIs were required to do. All I have to say, that was even a more uncertain period in terms of what the outlook would have been.

All right. So you really have no idea whether or not your stress test would be satisfactory to APRA?

No, I think I would state to -- the answer to that is no. So we haven't had a conversation in terms of taking APRA through our stress test notes. But I would take 2 things, Brett. My sense -- a clear sense from the conversations I've had with APRA and the letter is that their viewpoint would be that it would be a couple of months or more before there's clarity on what a likely stress case scenario might be, and then you'd have to undertake the stress case scenario, would be my sense.

Your next question comes from Ed Henning from CLSA.

George, can you hear me?

Yes. Ed, sorry about that.

No, that's fine. I don't know what happened there. Look, a couple of questions from me, please. Just looking at your business assistance package and obviously, a lot of people asking for help and you're talking about repayment holidays on that. Can you just run through the impacts of those people taking repayment holidays or moving to interest-only on the second half profit, for the first question?

Yes. And have you got another question or...

Yes. The second question, I just wanted to dive into [Technical Difficulty] just to run through what you're exposed to there. And also, when you talk about security against the assets, is that just the assets of the business? Or is it housing that's backing up some of these lines?

Sorry, can you repeat your second question, Ed? You just cut out.

Okay. Sorry. The second question was just around the health care segment. Can you just run through a little bit more on your exposure there of the individual businesses? And when you talk about LDR and the security of these business assets, is it just the business assets that is secured by?

Right. So I might hand over to Adam to give you a bit more information on your second question. On the first one, I'll start off, and Ewen might want to add onto that. So what happens on deferrals is, effectively, you're deferring both your capital and -- so your P&I payments and your interest. And then that's capitalized at the end of the 6-month deferral. So effectively, you're still accruing income for that. So it doesn't actually change your P&L in any way. What it does do at the end of that period -- and then that's the other important point about the fact that the risk weights don't change either because then it's not chewing up your capital as a result of all those deferrals. What would happen at the end of that 6-month process is you would then re-contract with the customer to either extend the loan in the order of 6 to 12 months or if they able to -- are able to pay at a higher rate, so it'll be up to them in terms of what their business can, then the loan can stay as it is, right, with a higher repayment. But that's effectively how that's treated.

Now that's correct. So we're just continuing to accrue interest. So the NII line, no impact. I did comment, though, on the -- there will be some impact on the noninterest income line, particularly around those waiving their business banking fees. But that is a continuation of -- I mean, more broadly, a continuation of the trend that we've seen over the last number of halves.

Yes. Good. If you look at the last -- just to add a bit more on that, if you look at the last rate reduction by the RBA, effectively, the way we've treated that is by not passing on that rate to mortgages, we were able then to provide better rates for business customers and also be more competitive on deposits. So those 2 things kind of net each other out. You will see a slight decline in volumes as a result of the activity being lower. But at the same time, you'll also get a significant reduction in turnover and churn. But -- and that's really what's going to be driving the reduction in noninterest income. And a final point, obviously, the low-cost term funding facility from the RBA, that benefit really starts kicking in, in FY '21. So there'll be a tailwind as a result of that. But I'll hand over to Adam to add to the second question.

Yes. Thank you, George. Just in response to your question around the security of those loans, so the term debt is secured by our property. And then the asset finance, which for some of the customers is obviously equipment, and that is obviously secured by the equipment in its own rights.

And is that property a bit like a -- of the business or of someone's house?

It will be a combination of both, depending on the customer. But if we think about BOQ Specialists, the majority of that will be their residential property as security.

Okay. And can you just run through the split of the health care like dentists, GP doctor, specialists, if you can?

I'd need to come back to you specifically on that answer.

But Ed, just to add to that, if you look at the request for assistance from that sector, the majority of that has been from dentists because basically, where they're at, at the moment, as you can imagine in this environment, not too many people are going in to get their either elective dentistry stuff done or cleaning. And in fact, the only emergency work is allowed to be done going forward. So you can see those businesses, without a doubt, once we get through this, the majority, if not all of them, will be back up running strongly. So we don't have any concerns of that sector. I think we've got time for one more question given the timing or 2 questions.

Your next question is from Tom Strong from Citi.

Just a couple of quick questions on costs, if I may. Just want to understand how confident you are of keeping costs managed in FY '20 given the pretty seismic shift away from home and the disruptions. We've seen a pretty big demand on technology. And also I would imagine you'd be directing a lot of resources into contact centers to deal with the customer inquiries. So I guess, how deep is the offset elsewhere in the cost base to sort of keep your comfort of keeping costs relatively well maintained?

Yes. I'll hand over to Ewen to say a few words. But you're right in the sense that our absolute priority has been to make sure that we've moved resources where the needs are. So our branches are open for business, our call centers have got extra staff to make sure that we're dealing with the increased volume on that business. And obviously, all our specialist relationship bankers are working quite hard in this period. But I'll hand over to Ewen.

Yes. Tom, I think there's -- it's fairly finely balanced. And as I commented on the expense slide, as we sit here today, we still think that 8% year-on-year expense guidance is right. But as you pointed out, and George just commented on, there's definitely additional costs coming through in certain areas but on the flip side, some of the discretionary travel, entertainment accommodation. And also if we -- as we slow down the project portfolio, there will be project operating costs associated with that capital investment as well. So we feel net-net second half and then the full year will land as we have previously guided. I think then as we -- just more on costs and as we look to '21, and as the COVID-19 situation unfolds and we get more clarity on the issues around timing and so on, obviously, we will be then looking at what is the appropriate cost structure to take into FY '21. And we've previously guided on less than 1%, but we just need to make an assessment on that as the next months unfold.

Your last question comes from Matthew Wilson from Evans & Partners.

Just a question on liquidity coverage ratios. Could you walk us through the impact the mortgage and business deferrals will have given the coverage ratio assumes contractual cash flows, and obviously, those contracts are not being met for at least 6 months? So the impact of the deferrals on the LCR. And then secondly, do you have to refinance and complete that refinance, the wholesale capital note, before you buy back on the 26th of May? Obviously, it's a difficult market, and we've seen some of those refis not complete.

Thanks, Matthew. I might hand over to Tim, our Treasurer, to answer both of those questions. I mean, obviously, our regulators on both of these fronts have been extremely helpful, both APRA and the Reserve Bank of Australia. So I'll hand over to Tim.

Yes, Matthew. Look, in terms of the effective deferments on the calculation of the LCR, really, the LCR has driven off the required stable funding against -- and the runoff factors against those mortgages. So the deferment as such doesn't really change those runoff factors. So it has very immaterial impact on the LCR. In terms of your second question, obviously, we have gained approval from APRA to redeem the additional Tier 1 -- the wholesale additional Tier 1 note on the 26th of May. In terms of the refinance, that has been deferred until after -- well, until markets become more functional and less disruptive. There is a condition on that approval that we will need to refinance the wholesale note at some stage.

Okay. So just to confirm, that buyback consumes about 48 basis points of capital.

Correct. 48 basis points of total Tier 1 capital. So it's not [ for the Tier 1 ].

Thank you. Ladies and gentlemen, that concludes our results presentation this morning.