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

Thank you for standing by, and welcome to the Bank of Queensland Half Year Results Presentation. [Operator Instructions] I would now like to hand the conference over to Cherie Bell. Please go ahead.

Well, good morning, everyone, and welcome to BOQ's first half results presentation for 2021. Before we begin, I would like to acknowledge the traditional custodians of the land upon which we meet today, the Gadigal people of the Eora Nation, and recognize elders past, present and emerging. I would like to thank you for joining us for today's audio webcast. Joining me today is George Frazis, our Managing Director and CEO; Ewen Stafford, our Chief Financial Officer and Chief Operating Officer; and members of BOQ's executive team and senior management. I will now hand over to George to provide an overview of the financial results and an update on our progress against our strategy.

Thanks, Cherie, and good morning, everyone, and thank you for joining us. As Cherie mentioned, I'm very pleased to be joined by members of the executive committee and senior management who have been integral in the execution of our strategy and in the delivery of these financial results. Turning now to an overview of the half on Slide 6. Today, we are reporting yet another strong performance, and you can see the continued momentum of the BOQ Group, demonstrated by an uplift in statutory profit and cash earnings. These results are the third consecutive half of improved performance and reflect a sharp focus on our strategic priorities and the disciplined operational execution of our transformation plan. Our statutory net profit has increased 66%, and our cash net profit is up 9% compared to the prior corresponding period. Our Home Buying Transformation Program has resulted in the group continuing to achieve growth in housing loans with a 1.6x system growth in the half and just under $1 billion net in new housing loans, which is almost double the growth in the first half of FY '20. NIM has also increased to 1.95%. As mentioned, we remain firmly focused on the execution of our strategy and our digital transformation is on track. Last month, we launched the first phase of the new Virgin Money Digital Bank. And during the half, we announced the acquisition of ME Bank. Our asset quality remains sound, and we have a balance sheet strength to support business growth with a CET1 ratio of 10.03%. As a result of this strong performance, the Board has determined to pay an interim dividend of $0.17 per share, inclusive of the new shares issued through the capital raising. This represents a 66% payout ratio. Turning now to the results in more detail on Slide 7. Statutory net profit after tax increased to $154 million, and we saw an improvement on cash earnings after tax to $165 million. There was an uplift in cash return on average equity to 7.8%. As mentioned, common equity tier 1 remained strong at 10.03%, and our cash earnings per share increased to $0.343 per share. The drivers of the half year results as outlined on Slide 8, Ewen will take us through these in more detail shortly. Total lending grew by more than $1 billion in the half, combined with the NIM growth through the period. This resulted in a 6% increase in net interest income compared to first half '20 and a 2% increase from second half '20. Pleasingly, given the focus on margin management, NIM increased by 3 basis points from the second half and increased by 6 basis points compared to the prior corresponding period. The cost-to-income ratio, again, improved slightly to 53.8% in the half, driven by the favorable income result and the positive jaws. The loan impairment expense of $24 million was in line with historical impairment levels, which is a good outcome, and will remain -- and we will remain prudently provisioned to cover any potential lifetime losses arising from COVID-19. Turning now to lending and deposit growth on Slide 9. Customer deposits lifted by $1.062 billion in the half, which enabled the deposit-to-loan ratio to be maintained at 74%, while further reducing our reliance on term deposits. Lending growth momentum has accelerated in the half, with lending GLAs increasing by $1.065 billion in the period. Housing growth of $997 million was 1.6x system. And business banking lending increased by $91 million against a contracting system. On the housing book, Virgin Money Australia and BOQ Specialist again delivered growth, and I'm extremely pleased with the BOQ Retail brand has delivered $310 million of housing growth in the half compared to contraction in the prior periods. This is the result of our focus on improving the customer experience, reducing our time to conditional yes and increasing productivity across both the proprietary and broker channels. In the commercial portfolio, we experienced a slight recovery in growth post-COVID by focusing on our niche segments. There's more work to do, and we are working closely with our SME customers as the economy recovers to support them and to drive further growth through this channel. Diving a little deeper into the divisional performance on Slide 10. Both businesses have delivered a solid performance for the half. At the full year results, I spoke to you about our priority to fix the Retail Bank. We've made good progress on this during FY '20, and this has accelerated into the first half. I'm pleased to report today, the BOQ Retail business has delivered a significant turnaround in housing loan growth of $795 million in the half. Pleasingly, we are seeing continued momentum with house loan growth accelerating. Increased branch and broker productivity has resulted in a significant increase in application volumes. And importantly, we have maintained our time to yes standard despite the material volume increase. As mentioned earlier, our focus on the customer remains at the core of our transformation, and customer satisfaction continues to track positively. This is reflected in the higher NPS scores. In line with industry, lending growth through BOQ business remains subdued in first half '21, and we supported our customers for the impacts of COVID on their businesses. We continue to focus on our core commercial, SME and agri segments, and our niche segment focus is working. Deposit growth for BOQ business increased to $611 million in the half, supporting the ongoing asset growth across our business. You can see our transformation is on track on Slide 11. Our executive team has been firmly focused on execution. Momentum is building and delivering growth, while we closely manage margin and deliver productivity improvements. The result is positive jaws when compared to the previous 2 halves. We are now in the second year of our productivity program with these efficiencies enabling us to invest in new initiatives and drive growth. The successful execution of our digital transformation remains a key priority with a number of core transformation programs completed or well underway. As I mentioned earlier, the Virgin Money Digital Bank went live last month, and I'll go into more detail on that on the next slide. Importantly, this creates the platform for the BOQ Retail business and the ME Bank integration post-completion. We have also continued to develop our intelligent data platform and our Open Banking capability during the half. And finally, we have a strong balance sheet and capital position, ensuring the ongoing stability of the bank and providing us with the capacity to support growth and investment. Diving into a more -- into a little more detail on our Digital Bank progress on Slide 12. The first phase of the Virgin Money Digital Bank launched in March. And for the first time, Virgin Money now offers, through a leading mobile banking app, a transaction account and 2 saving accounts, plus a fully integrated credit card offering, which is a significant enhancement to the customer experience. These products are fully digital and delivered efficiently at scale, given the digital origination and transaction processes. The new Virgin Money Reward Program has also launched, which has been designed to reward and recognize customers for the way in which they bank. Virgin Money Rewards is seamlessly integrated within the app's interface and has gone live with around 100 earn and redeem partners, which will continue to grow over time. The Digital Bank represents one of the largest production deployments in BOQ Group's history, and its successful execution is testament to our people and world-class partners. It is a market-leading technology solution, API-first in design and has been developed as a cloud-based, scalable solution with an evergreen upgrade path, providing our customers with the latest in innovation. This is a foundational investment for the BOQ Group and provides us with a strategic pathway for the Retail Bank's migration to the digital platform, leveraging common data architecture for Virgin Money, BOQ and ME Bank going forward will enable us to have a common core retail banking platform for all 3 brands. Phase 2 of the Virgin Money Digital Bank is already underway, which will include home loans and an expanded deposit and loyalty offering and Open Banking capability. Along with the migration of the BOQ Retail brand onto the platform, we expect to add ME Bank to the road map post-completion of the acquisition. Turning to the acquisition of ME Bank on Slide 13. As I outlined on the 22nd of February, the acquisition of ME Bank was driven by strong, strategic and financial logic. We successfully completed the capital raising during March. Our integration planning is well progressed, and the regulatory approvals process is underway. The acquisition of ME Bank delivers material scale, broadly doubling the size of our Retail Bank, increasing our number of customer numbers to almost 1.5 million and increasing our retail net profit contribution to greater than 50%. This gives us a platform for growth that is more capital efficient. And as we have said before, we are becoming a compelling alternative to the big banks. ME Bank is a well-loved and highly complementary brand with aligned values. Each of our brands have differentiated customer targets with minimal overlap. Importantly, the acquisition will result in the diversification of our geographic footprint along the East Coast. From a financial perspective, in the first year, the acquisition is expected to be low double-digit to mid-teens cash EPS accretive and more than 100 basis points cash ROE accretive, including full run rate synergies. We expect to deliver around pretax synergies of $70 million to $80 million by year 3, driven by the alignment of our operating models and common core banking platform. The pathway to a cloud-based common retail banking platform enables us to leverage the capital investment envelope across a broader base and importantly, leverages Temenos' ongoing global innovation through continuous cloud upgrades to deliver best-in-class customer experiences. Before I hand over to Ewen, I'd once again like to recognize the strength and execution excellence of our management team. I'd like to thank them and all our people for their tireless efforts in delivering these very strong first half results through some difficult circumstances. Over to you, Ewen.

Thank you, George, and good morning, everyone. Turning firstly to the group financial performance on Slide 16. As George mentioned, we are continuing to build momentum and have delivered another half of strong growth. Starting with total income of $569 million, which is up 5% or $28 million on PCP and 3% on the second half FY '20. The 5% increase was the result of a 6% or $29 million increase in net interest income, driven by ongoing growth in the balance sheet and good margin management. Noninterest income was broadly flat on PCP and up $5 million compared to the second half '20 as a result of the expiry of fee waivers provided to support customers during COVID and a one-off benefit on the cards portfolio. Operating expenses increased 4% or $12 million compared to PCP to support strong growth in business volumes and increased project OpEx. Pleasingly, this performance has driven an underlying operating profit uplift of 6% PCP or $16 million and 3% sequentially. We have focused the business on delivering positive jaws, and we have achieved 1% jaws in the half when compared to both comparative periods. Loan impairment expenses have decreased during the half to $24 million. Cash earnings increased to $165 million, an uplift of $14 million or 9% compared to the first half '20. The combination of the strong financial performance and ongoing capital management has led to an improvement in cash ROE to 7.8% for the half. Moving to noncash earnings on Slide 17. Statutory net profit increased $61 million or 66% compared to PCP to $154 million for the half. There were 2 notable noncash, post-tax items in the period. Firstly, a $6 million expense relating to finalization of the employee pay and entitlements review; and secondly, $3 million of transaction costs relating to the ME Bank acquisition. Looking to the second half of FY '21 and as advised on the 14th of October 2020, we expect the loss on disposal of St. Andrew's to impact statutory profit by approximately $27 million to $30 million post-tax. Further, and to reiterate comments made then, there will be minimal cash earnings and CET1 capital impacts from the disposal. Turning to net interest margin on Slide 18. NIM has increased 3 basis points in the half to 1.95%. Stepping through the walk. Asset pricing and mix resulted in an adverse impact of 5 basis points. Within this, there was a 3 basis point benefit arising from the November 20 repricing activity and other NIM movements. This was more than offset by the continued front to back book drag of 5 basis points on housing and a further 1 basis point in relation to commercial loans. And we saw a further 2 basis point reduction from increased flows into lower-margin fixed rate housing lending. Funding costs had a favorable impact of 13 basis points. We actively managed retail and treasury deposits over the half to optimize margin, which had a favorable impact of 10 basis points. We also saw a 2 basis point benefit from a change in mix away from higher cost term deposits. And further, there was a 1 basis point benefit from the term funding facility in the half. We continue to benefit from hedging costs, which improved NIM by 2 basis points. There was an adverse impact of 4 basis points relating to lower returns on the replicating portfolio and uninvested free funding and low-cost deposits. There was a further 3 basis point adverse impact from higher liquidity levels. Looking forward and excluding any impacts from the ME Bank acquisition, in the second half '21, we expect NIM to be broadly flat. Within this, benefits are expected from customer deposits and also from wholesale funding as we further draw down on the TFF. These positive dynamics will mitigate the headwinds from ongoing front to back book pressures, the current market shift towards lower-margin fixed rate products and the impact of the lower cash rate environment and also higher third-party costs. This will result in NIM being positive in full year '21. We intend to continue to actively compete in the market while managing the volume margin trade-off to ensure sustainable and profitable growth. Turning now to Slide 19. Noninterest income at $57 million was broadly flat to PCP and up $5 million sequentially. In this half, there was an increase in fees following the removal of waivers offered to customers during COVID-19 through the second half of '20 and a $3 million one-off incentive payment from the cards portfolio. We expect noninterest income in the second half to be consistent with the first half, excluding the cards incentive payment. Moving to operating expenses on Slide 20. Expenses increased $12 million or 4% versus PCP and $6 million or 2% sequentially to $306 million for the half. The key drivers of the expense uplift for the half were increased spend on strategic initiatives, including a further $6 million on VMA and $3 million on other key digital projects and $3 million relating to increased lending volumes. We're now in year 2 of the 3-year productivity program, which delivered a further $13 million in savings in the half and offset inflation and other cost growth. This takes the total of productivity benefits to $43 million to date. The cost-to-income ratio has reduced by 50 basis points versus PCP, down to 53.8%. Looking to the second half '21, we expect the productivity program to deliver a further $17 million in savings and for operating expenses to be broadly flat with the first half. Looking now at the capital investment program on Slide 21. As we have previously disclosed, the digital transformation road map has been designed to provide flexibility to dial up and dial down as required. In this half, investment of $37 million is lower when compared to prior period due to our focus on delivering Phase 1 of the Digital Bank; and secondly, there are a number of major projects in mobilization and discovery phase. The amortization charge for the period was $17 million, which we expect to increase to circa $24 million in the second half '21 now that the Virgin Money Australia Digital Bank asset is in use. Turning to the execution of our transformation road map on Slide 22. As mentioned, our key focus this half has been the delivery of the first major phase of the end-to-end cloud-based Retail Bank. This has set the foundation for Phase 2 of the VMA program, which will broaden the available solutions to customers to include home lending and an expanded deposit and loyalty offering. Critically, this has delivered the strategic foundation for the BOQ Retail brand Digital Bank migration and the ME Bank integration. During the half, we have built out the broker portal, which provides brokers with online tools for accreditation, training, credit policies and pricing. Together with the Home Buying Transformation Program, an ongoing process and product simplification, this has made us easier to do business with and enhanced our customer, banker and broker experience. We've also completed Phase 1 of the Microsoft Azure-based data platform, an important foundation for both the Open Banking Program and enhancing our data capabilities. The first 2 phases of the Open Banking product streams were delivered during the half. Additionally, we also continue to invest in our risk and regulatory programs. This half's strong delivery has been enabled by the continuing uplift in our execution capability. Importantly, during the half, we have further strengthened our assurance, project mobilization and benefits realization capabilities. This focused effort to uplift our execution capability has been supported by the deployment of a new, integrated project portfolio management tool and has us well placed ahead of the ME Bank integration. Turning now to provisions and loan impairment expenses on Slide 23. In line with our trading update on 22nd of February, loan impairment expenses reduced to $24 million for the half, representing 10 basis points of gross loans and advances. The collective provision balance remained steady in the half, reducing by $4 million to $271 million. We believe this is prudent, recognizing the uncertain time frames to achieve national vaccination coverage, along with any impact from the end of JobKeeper support. Specific provisions of $103 million were $9 million higher than PCP. Increases in both the retail and commercial portfolios were partially offset by reduced provisions in asset finance due to a strong agricultural season. Impaired assets also remained steady in the half at $194 million. This included a large agribusiness facility returning to performing status, whilst a number of new, smaller impairments were recognized in both the retail and commercial portfolios. Moving to Slide 24. In line with the improving economic trends, we have seen both 30- and 90-day arrears improved during the first half across all portfolios. It's important to note that these arrears numbers include the vast majority of customers that have exited banking relief, but have not yet been able to return to performing status. We continue to work with our customers who require ongoing support. Pleasingly, 95% of housing loans and 97% of SME loans, which are on banking relief packages, have returned to performing. Housing arrears reduced slightly from second half '20 as employment conditions improved. That said, both 30- and 90-day housing arrears remain slightly elevated compared to PCP. Commercial arrears have also improved during the half, with the 90-day arrears benefiting from the recovery of our BOQ Specialist customers as the health care sector rebounds. Asset finance arrears have remained stable over the half, supported by a strong agricultural season. Moving on to our funding and liquidity position on Slide 25. BOQ remains strongly positioned. During the half, we have grown customer deposits by $1.1 billion, which has maintained our deposit-to-loan ratio at 74%. We have increased lower cost savings and investment and transaction account balances by $1.5 billion, allowing us to decrease our reliance on higher cost term deposits by $800 million. The launch of the Virgin Money Digital deposit products are expected to provide further growth in savings and transaction deposit balances. As of the 28th of February, we have drawn down $1.2 billion through the term funding facility, leaving an additional $800 million of capacity. The reported LCR is 182% or 142%, excluding the contractual capital raise inflows, and we have a net stable funding ratio of 118%. Moving to capital on Slide 26. George has already flagged that we're in a strong capital position with a CET1 ratio of 10.03%. To be clear, this does not include any benefit from the recent capital raising. Underlying capital generation added 28 basis points to CET1 in the half, driven by strong revenue growth, and as a result of a relatively lower FY '20 dividend paid in this half. Ongoing net capital investment, in line with our transformation strategy, resulted in a decrease of 6 basis points. Unpacking the positive 6 basis points impact from other items, CET1 benefited from an increase in reserves and lower tax -- deferred tax assets, which were partly offset by increased off-balance sheet RWAs due to a change in contract terms for certain SME customers and also an increase in capitalized loan origination costs. The CET1 ratio of 10.03% sees BOQ in a strong position to support future growth, ongoing transformation investment and ME Bank integration costs. I'll now pass back to George for some closing remarks.

Thanks, Ewen. I'm really pleased with the financial performance we've delivered during the first half and the ongoing momentum we are seeing in the business. We've supported our customers, people and communities while continuing to grow our business and deliver against our strategy. Our lending momentum continues to accelerate whilst we also had balanced margins and costs. We are executing on our strategy, delivering against the digital transformation road map and completing the first phase of our Digital Bank program. We have a strong balance sheet and capital position, and our asset quality remains down. The acquisition of ME Bank was announced, and we have successfully completed the $1.35 billion capital raising. In closing, the economic environment is currently more positive and showing encouraging signs of ongoing improvement. Australia is relatively well placed for economic recovery with less likelihood of negative impact on unemployment and house prices given the success of government stimulus. The national COVID-19 vaccine rollout will enable the economy to open further and build confidence. In line with our strategy to focus on distinctive brands serving attractive niche customer segments, we expect to complete the acquisition of ME Bank and the divestment of St. Andrew's in the second half. We reaffirm the FY '21 outlook of around 1% positive jaws, with above system growth in lending, NIM positive and broadly flat half-on-half and cost growth of [ c.3% ]. We remain absolutely committed to delivering long-term shareholder value through sustainable, profitable growth and attractive returns. We are targeting a dividend payout ratio of 60% to 75% of cash earnings. Thank you all very much for your time this morning. With that, and I'll hand back to Cherie and open it up for questions.

Thanks, George. I will now go to the line for questions. [Operator Instructions] Thank you, operator.

[Operator Instructions] Your first question comes from Andrew Triggs from JPMorgan.

George, just interested in, firstly, your thoughts on how much further you think you can take out of deposit rates. I note that TD rates for BOQ are still somewhat above the peers, which is largely always been the case. But just interested in how much room you think you have to go there. And just as a related point to that, do you need to run any sort of different funding settings in the lead up to the ME Bank acquisition?

Thanks, Andrew. I'll start off on touching on both questions and then hand over to Ewen to fill that -- provide more detail. Starting point is that we have been actually very conservative in terms of how we price deposits. And that's enabled us to have a deposit-to-loan ratio of 74%. And as you've seen, we've had very strong asset growth. In terms of our outlook on the second half margin, we have taken into account some more upside in deposits. And there's probably more after that second half. On the funding settings with ME Bank, obviously, we've got to wait for the completion before we provide any further detail on the ME Bank acquisition. There was quite a detailed [ BD ]. From our perspective, there is upside in terms of the funding profile at ME Bank, but there's probably no more that we could add than what we did at the capital raising. But on that note, I'll hand over to Ewen.

Yes. I mean thanks, George. And we're obviously continuing to balance between customer outcomes, margin outcomes and just keeping an eye on where we sit competitively. Having said that, we definitely feel -- to your specific question, we definitely feel there's further scope. And in fact, last week, we reduced deposit rates a further 15 basis points. In terms of that scope for the second half, that's been included in that NIM outlook statement that both George and I provided. I think importantly over the medium to longer term, we see significant opportunities to enhance -- to continue to enhance our mix, grow transaction accounts. And obviously, the digital strategy will really help that. And the VMA announcements today are a really important part of that. To your question about settings, heading into completion of the ME transaction, we feel we're in a really strong position at the moment from a funding, liquidity and capital perspective. So we're not deliberately adjusting any settings in the lead up to that. We feel we go in with a -- in a strong position and opportunity, as I said, to continue to build out those lower cost deposits.

Can I just ask a second question, a quick one, just on broker flow or broker share of new originations? Slide 39 has -- I think it's a stock which has risen from 21% of the book in the broker channel to 23% this half. You have the number for the flow during the half, please?

Yes. Andrew, the flow of brokers increased to around about 35%. I mean as you can see from that number, at the market level, it's probably closer to 60%. So this is still a channel that we've got quite a bit of opportunity for further growth. And as you know, broker -- the broker channel for us is really important. We made a huge amount of improvements in terms of how we deal with brokers, and we've also extended the broker network that we're operating with. So we see this as a potential going forward in terms of growth.

Your next question comes from Brian Johnson from Jefferies.

Congratulations on a great result. Just if we have a look at Slide 36, just going back to the previous question, a lot of the narrative today is about basically, you've done an amazing job in collecting home loans, which you have, it's much improved. But when we actually have a look at the result, it's just hard not to conclude, from Slide 36, that it's entirely driven by basically the repricing down of the deposits. When we look at the contraction on the housing side, it's pretty steep. So this is really about the repricing on the deposits. George, do you get to a point where basically it's not appropriate to continue to discount at the level that we're seeing in the housing book? And the second one is that when I go to the slides at the back end, there's a slide which shows the maturity profile. And we've seen the term "funding facility" probably doesn't work as well for major banks as it does for regional banks for a whole lot of reasons. But when we have a look at it in the second half of 2024, we see a pretty chunky refi bold building. Could I just get some comments on how you manage that? So that's Slide 50.

Right. I might let Ewen deal to the Slide 50 one, but let me just touch on your first question and Ewen might want to add to that as well. I mean one of the key capabilities we've built up in the bank, which was really important and we did this fairly on, was our pricing capability. And as you know, success in retail banking is all about how well you make those margin and volume trade-offs on a daily and a weekly basis. I'll have -- so I'm really pleased with how we've been able to manage growth and margin. There's no doubt it's a competitive environment. As we said, there is some further upside in deposits. And what we've managed to do is make sure that we're not leading on asset pricing because basically, the way we've achieved that growth in mortgages is really fundamental changes in our time to yes. And being able to maintain a -- really leading service levels whilst -- so as you know, like we've gone from 3 halves being negative growth in mortgages to now growing at 1.6x. So we've been able to actually scale up our business and keep service levels high, which means that it's not all about price. But I'll let Ewen kind of add to both of your questions.

Yes. Brian, just on the term "funding facility," and as mentioned, we do have more to draw down in the order of $800 million, and we are being sort of careful and thoughtful in drawing that down in very orderly amounts. And obviously, with an eye to those maturity profiles that you referenced. So the sort of $600 million to $800 million drawdown, so that is a -- that's a standard refinancing maturity profile for us. We don't see any issues with that. And we -- and there are a number of tools we have in the kit bag to cover that and to refinance all the way from our covered bonds, and we'll have increased capacity with the ME acquisition, the sort of the senior unsecured and through our securitization programs. So your point is taken, but we are very conscious of that and drawing down in a very orderly fashion.

Okay. And just, George, going back to you, I asked that question about the slide, the average balance sheet slide. So I just want to get my head around -- and perhaps I didn't express this clearly, but we've seen the yield on basically your gross loans and advances, and interest rates were 10 basis points lower, but it's gone from 3.62% down to 3.35%. Should we expect that to continue? I suppose that's the other way I should ask the question. Is it the same margin map going forward where do a lot better on deposits, but we see the housing side of it really continue to be smashed?

That's -- yes, right. So actually, I'll get Racheal. Brian, I'll get Racheal just to provide a bit more color on that. [ Racheal, if you could. ]

Brian, there's a couple of things going on, obviously, within the housing portfolio within the period. And there are obviously questions on -- to whether those things continue. The first being the implications of the front to back book rate pricing we've talked about in the context of impact on margin. And within that, interestingly, is this customer switching that's occurring between variable to fixed. So your question around sort of outlook really depends on -- and you're making this point is where does the -- where is competition going to continue? And are we going to continue to see that really aggressive pricing from a fixed rate perspective particularly.

And Brian, just to add to Racheal's comments. I mean the way we look at growth is to maximize revenue, so we're not about going after just asset growth. So our objective has been, if we take on the fixed perspective to be just under market in terms of volumes and to be just over market in terms of what we're getting margin on that. And you've probably just seen a most recent change on the 4-year fixed rate. We went from 1.99 and increased that to 2.29. So this is all about making sure that we're getting that maximizing revenue objective right. And then the other key thing that we've managed to do is positive jaws. So they're kind of the 2 key levers in terms of how we've been able to deliver these results half-on-half for the last 3 halves.

Your next question comes from Andrew Lyons from Goldman Sachs.

Just 2 questions for me. Firstly, on expenses. You said you're expecting expenses to be broadly flat in the second half of this year, supported by $17 million of additional productivity. I was hoping you could maybe give some thought on expenses into FY '21, which will be the third year of the productivity program. Can you perhaps just provide a bit of an update on what your productivity expectations are in FY '21? And whether you think that will be sufficient to deliver flat expenses in that year? And then just a second question just around how you're thinking about business lending growth into the second half and then into FY '21. I think at the time of the ME Bank acquisition, you said you expected business lending to be down a bit in the half. But it's -- you've had some albeit small amounts of growth in the half. Is momentum in that business a little bit better than what you thought? Just be keen to get your thoughts on that.

Yes. Thanks, Andrew. Maybe I'll touch on your second question and then hand over to Ewen for the expense question. I'll have to say, Andrew, we've been very pleased with the green shoots we're seeing in the small business space. There's a couple of things that have benefited that. If we think about housing growth, and we normally kind of consider the benefits that housing growth has on people that own houses. But the other key benefit is on small businesses because it does create confidence, people are more willing to spend and we're just starting to see that. And importantly, small businesses do use their housing to effectively support the growth in their businesses. But what we've seen is there's been a number of sectors that have done well through this. And our kind of niche segment focus is paying off. So just to give you an example of that, agri's gone really strongly and so has construction. And it's not just those industries, then it's all the supporting services that support those 2 industries. And as you know, we provide both traditional business lending, but we're also quite strong on providing leasing for tools of trade. So that's enabled us to see those green shoots. My sense is that we will continue to see a steady increase in our portfolio because of its segment focus. It will depend on the vaccine rollout because that will open up the economy further and increase confidence. But we're confident that, that will occur in some time. Ewen?

Yes. Thanks, George. And Andrew, just on expenses, I think where I'd start the conversation on that and particularly with an eye to the sort of more medium term, which I think was the essence of your question, is that we're really setting the business for positive jaws. So that's the first point. And it is -- as well as the transformation agenda, it is also a growth agenda. And so we'll -- as we get to the end of this year and we'll provide a sort of outlook statement with the full year results, but it will be a balance against that. Having said all of that, the productivity program is critical to us. We'll be in -- and we are committed to a third year, which will deliver the full $90 million that we committed to at the Strategy Day last year. So what we're starting to see and anticipating through the second half and into '22, starting to see benefits of simplified product offering starting to come through. There's some benefits of automation and productivity in the middle office. The more strategic side of the supply chain review and particularly as it relates into the technology areas and some of our key partners there. And we'll continue to look at our branch composition as well and conversions from corporate to owner managed also will help deliver benefits. So the -- it's a critical part of the agenda certainly, as we move into FY '22, but we'll provide that outlook statement as we get to the full year and look at balancing that against the revenue growth aspirations.

So extending the question, I guess, to the -- to jaws, would you be willing to sort of say whether you can -- you're targeting 1% for this year. Do you think, with all the productivity coming through, you can do better next year? Or is 1% sort of a good starting point?

Andrew, I mean, obviously, we can't provide an outlook beyond this year. I think the thing to think through is if you look at our digital transformation, which is more where will we be in, let's say, 3 years' time, when we've got all of our retail brands on a cloud-based common platform, I mean, that's a real game changer for us. Basically, what we're saying is the Retail Bank is digital from front to back with really compelling, innovative digital services at the front end for customers. That really then transforms our cost structure, but we do have to go through that period. Obviously, managing through that, we've done that quite carefully because effectively, you're kind of building while you still have the old. So -- but we'll continue doing that carefully and really excited about where we will be, let's say, in 3 years' time.

Yes. That's right. Andrew, the only other thing I would add to George's answer, more medium term. Obviously, the ME Bank integration as well provides us with another opportunity just to step back and assess the operating model of the combined business as well. And so we're very conscious to make the most of that opportunity right across the organization.

Your next question comes from Richard Wiles from Morgan Stanley.

I have a couple of questions. Firstly, Slide 9 includes composition and growth in housing, and it shows that BOQ Retail had a strong half, but Virgin and BOQ Specialist slowed. So can you explain why Virgin's growth seems to have stalled and what you think drives the overall growth from here?

Thanks, Richard. Starting point is, you're right, we're really pleased about the turnaround of the retail Blue brand. That was fundamental in terms of fixing the Retail Bank. Virgin Money actually has continued to grow quite strongly. In fact, if you look at where we're at in terms of exit rates on Virgin, they're approaching back to their strong levels. So we're really pleased with how that brand is going. And the additional launch of the Digital Bank for Virgin, and particularly once we get home loans onto that over the next 12 months or so, it's going to be really exciting. On BOQ Specialist, as you know, the medical profession, we've got really sound customers in that sector, but they were impacted by COVID. So we had to see through and support those customers through COVID. Now that is -- we're starting to see growth return on the housing side in BOQ Specialist. They're still quite cautious on commercial. But as I said, we're really comfortable with that portfolio. We're very comfortable with the customers, and it's just going to take a bit more time for them to recover.

Okay. And just my second question, George, you talked about housing growth at 1.6x in the half just gone, 1.6x system. We can all see the improvement that's coming through in the system growth rates. Is that sort of growth rate versus system around about 1.5x the sort of level that you're targeting? Or do you actually have ambitions to grow even more strongly relative to system?

Richard, where -- our growth rate is accelerating from that 1.6x. I do want to stress the way we manage the business is optimizing revenue. Obviously, we want to assist as many customers into their house -- homes, but it is about revenue optimization and also ensuring that we're scaling up the middle office to support that growth. We're very comfortable with what we've put in place. So the current run rate is above 1.6. We don't have a specific number we target. It is all about optimizing revenue.

Your next question comes from Brendan Sproules from Citi.

I just have a couple of questions. Firstly, on the NIMS, and particularly, the movement in the funding costs. Obviously, it's been the big swing movement in your net interest margin from period to period. Can you discuss what sort of licensed values you have in this deposit book now, noticing the mix shift has continued towards transaction accounts and to savings and investments and away from term deposits, which I imagine are cheaper deposits. And also, you've mentioned that you've continued to pull down your -- some of your absolute deposit rates. Could we expect to see a similar impact for the second half NIM on that funding cost? And then I have a second question on loan provisioning, please.

Yes. Thanks, Brendan. I mean as already mentioned in our outlook for the half, we have taken into account some more improvements on deposit pricing. But I'll hand over to Ewen to give you a bit more color.

Yes, Brendan, I think as we look into the second half, we're seeing an outlook very similar to what we've just delivered in the first half. And there's definitely funding tailwinds coming through. As I mentioned earlier, we've just repriced the TD book. And we're also expecting further upside on the wholesale funding and just a little more benefit coming through from the term funding facility in the second half than we experienced in the first half. So to your specific question, I think the first half outcome is a good indication of what to expect in the second.

And just a question on loan provisioning, if I could. I mean we've seen a couple of the larger banks start to write-back their collective provisions that they built up during the COVID period. Now your impaired assets and other asset quality indicators seem reasonably strong. So what sort of indicators should we look for that may give rise to maybe reducing some of those elevated collective provisions over the next 6 to 12 months?

Thanks, Brendan. Again, I'll start off and then maybe hand over to Adam to give you a bit more color. The starting point would be, we are really pleased with how the economy is recovering. We think the recovery is sustainable. But there are still uncertainties around the COVID vaccine rollout. We have no doubt -- if you think about how well the governments have managed this in the past, we have no doubt National Cabinet will do a good job to ensure the vaccine is rolled out, but that's still an uncertainty. So we've been cautious in terms of our provisioning. We have actually no concerns in terms of the underlying asset quality. In fact, we're extremely pleased with how well our SMEs have gone back to performing and also our housing customers. And the fact that house prices are going up also provides encouraging buffers for our customers. This is something we'll probably be looking at a quarterly basis to assess when and if and how much release the provision. But at this stage, we're comfortable being quite conservative in terms of our provisioning to date. But Adam, I don't know if there's -- I've probably covered everything you wanted to say, but...

Yes, you have, George. The only other point I would add is that 2 major milestones have just passed with the expiry of banking relief as well as the JobKeeper package only concluding at the end of March. So they are 2 significant support packages that really did a great job during COVID that we now just need to see how that sort of unwinds out of the system. And then, of course, just stability around borders or other milestones that we'll look at over the next half.

Your next question comes from Ed Henning from CLSA.

Can you just touch on how you guys think about using the TFF with fixed rates and therefore, an easier ability to reprice once it rolls off? And also then just going back to some questions on the growth in the housing lending. If we look forward, can we expect the majority of the growth in the next little while to come through that broker channel with your improvements there?

Thanks, Ed. What I might do is touch on the second one and hand over to Ewen for the TFF discussion. The starting point for housing is, obviously, we're very pleased with the housing growth. As I said, we kind of optimize revenue, so we're very comfortable with the growth and margin and also the cost outcome that's associated with that. One of the critical things we've done is with time to yes. And also, we've reset effectively the remuneration model for our owner manager channel, which has been a big positive in terms of how we performed in housing. The positive -- and the unusual thing about our housing growth is that it actually started with a turnaround in our owner manager and corporate branches as opposed to driven by brokers. That continues to improve. And now it's gone into positive territory, and our objective would be, over time, to get that to system. As you said, broker has accelerated. Still only represents 35% of our flow, so we would like that to increase, and that will continue. And once we're able to put mortgages on the new digital platform, then it opens up a whole new channel for us that we haven't tapped into. So effectively, we'll be growing across all of our channels and just ensuring whilst we're growing that we're optimizing revenue. So I'll hand over to Ewen.

Thanks, George. And I'm going to start on this one and see if there's anything Tim would like to add more in terms of the nuts and bolts of managing the roll-off of the fixed book. But I think the important point here is we're really deploying that TFF for growth right across our portfolio. And to Brian's question earlier, we're also drawing -- being very careful in terms of how we draw it down with our eye to the refinancing implications 3 years down the track. We have a further $800 million to come, and we will take the full amount of that by 30th of June. And as mentioned, just to reiterate, we're also starting to see those benefits come through in the margin and increasingly so in -- expected in the second half margin. But Tim, I don't know, is there anything else you would add?

Ewen, probably the only thing I'd add is, obviously, the TFF flows into a natural hedge for fixed rate, so it does assist. But assists through lower cost of funds coming through the portfolio. It does help us manage the rollover of fixed rate housing loans in those buckets. But I guess we actually do convert all of our fixed rates back into floating rate as we're managing it. So it really is -- one of the drivers is just the lower cost of funds.

Your next question comes from Azib Khan from Morgans Financial.

George, there's been a lot of talk about your home loan growth and the improvement there and it has been very commendable. My question is, whilst you are increasing your volume growth, there has been some slippage in your time to yes from 1 day to 2 days in -- through your branch network, through the branch channel. Is this slippage purely due to the larger volumes that you're now processing? And if so, should we expect more slippage of volumes increase from here? Because you have pointed out that you will look to continue to accelerate your home loan growth from here.

Yes. Thanks, Azib. And as you correctly state, one of the key drivers of our performance was effectively to have a leading time to yes. So we will be in the -- my estimate is probably in the top 3 in terms of that performance. What we've done as we've grown is we've been really conscious of the need to scale up our middle office, and I'll get Ewen to kind of talk to that in more detail. And we're really pleased with how we've been able to do that. So that slippage from 1 to 2 days still is kind of leading -- a leading market position in the top 3 or so, so we're pleased with that. And that continues to be a very compelling service level for our customers through all channels. So we'll continue. As I said, momentum has increased. The service levels are being maintained at that level, but I'll pass over to Ewen.

Azib, just a few comments on the sort of productivity and efficiency within the middle office, the macro point and where I'd start is that we are seeing the additional costs that we're investing in to support growth. So the $3 million in this half, it is coming on at a lower cost-to-income ratio. So that's a really positive place to start from. And then more specifically, the productivity agenda is really critical. So we're definitely starting to see benefits coming from greater utilization of automation and artificial intelligence. We've partnered with a local Brisbane company around assessment of loan applications. There's automated verification around income information in the context of responsible lending obligations, and there's also a proof-of-concept underway to really combine AI and Open Banking to really help enable and also get more productivity into digital mortgage assessment. So it's an ongoing journey for us. And then as we get more into the medium term, the benefits will start to come through from this core banking system replatform for the Retail Bank and straight-through processing. So we're really excited and looking forward to that as well.

Yes. So as you can see from Ewen, the time to yes for us is an ongoing focus and really important for both the customer service, productivity and also growth.

Just a quick follow-up on that, George. So can we expect the scaling up of the middle office to be complete by the end of year 3 of the productivity program? Or do you anticipate the need to continue to scale it up beyond that period? And just one slightly different question. Can you also tell us what your current time to yes is in the broker channel?

I'll answer the first one.

Yes.

I mean the job is never done is what I would say, as if in terms of ongoing push for productivity. And I think they'll be -- the work we're doing at the moment around automation and artificial intelligence, robotics, we'll continue to -- a big part of this is the ongoing simplification of the product offering and really streamlining ongoing process simplification and capability uplift. And as mentioned, as we get further into year 3 and beyond, so if we're not -- certainly all be done, but we're really starting to see the benefits of the investment in the technology starting to come through. And I might just get Craig to add a couple of comments on that.

Yes. It's Craig Ryman. Just in terms of our transformation pathway, what we're doing is effectively building a new Digital Bank that we will leverage first at Virgin and then into the BOQ brand. As we stand that new capability up, we will start to write our new business onto that platform. And that will happen within the 3 years. So it will happen within the next 12 months, 12 to 18 months. So you'll progressively see a more automated end-to-end solution around lending as well as our asset processes progressively come on for new business in the back end of that transformation. Ultimately, we'll look to the migration of our existing book onto the new platform as well. So in addition to the work that Ewen talked about, we will see our new business writing as those products get enabled on the platform progressively take up the new volumes that we will secure.

And Azib, just to answer your -- the broker question. The thing to note is one is we've had significant and good growth through the broker channel. The NPS of our broker channel continues to improve. So we're really pleased about that. The turnaround times in terms of conditional time to yes is around 3 days. And our understanding is that, that's market-leading, and we're getting a really good response from our broker channel.

Your next question comes from Josh Freiman from Macquarie.

Congratulations on the results. Just a couple of quick questions for me. So first question is just on the BOQ Blue retail brand. So if I recall correctly, and I could be wrong, but the BOQ Blue retail brand has actually returned to growth for the first time since first half '16. I know you guys have spent a lot of time here talking about sort of the overarching housing trends, but are you able to expand on what you think really drove that growth specifically in the BOQ Blue brand? And then the second question is with respect of your provisions. So your provision level remains relatively conservative from a collective provision to credit risk-weighted asset ratio. Given the improving economic outcomes, just on a longer term, I'm just interested in how we should consider the correct level of provisioning. Is FY '19 that level? Or have accounting standards really changed that?

Thanks, Josh. And I'll start off and then a combination of Ewen and Adam in terms of the provisions. And as you state correctly, we're just really pleased with how the BOQ Blue brand has turned around. And as I've already stated, a key driver of that was really our owner managers and our corporate branches. The 2 key things that enabled that was one is we established a new revenue sharing model with our owner managers, which aligns our 2 incentives towards profitable and sustainable quality growth. And then the other critical thing that actually enabled us to grow in all channels was the time to conditional yes. So they're the 2 key things that drove that. I'll have some -- I'm just really excited about our owner manager channel. This is a channel that we want to grow going forward. What we've got is, as small business owners in communities, that average about 11 years. So they're very, very connected in their communities. And that assess both home loans and small business. And just to mention this, this is a real differentiator for us in terms of being connected, really connected to those communities, which is hard for anyone else to replicate. So on that, I'll hand over to Ewen to give you some commentary on the provisions.

Thanks, George. Josh, I think it has been commented on already, we really feel now is an appropriate time to remain prudently provisioned. So notwithstanding, we're really happy with the portfolio quality and the impairment and arrears position, we do feel it's appropriate just to remain prudently provisioned. And there's still a little bit -- there's just that uncertainty, and there's still a bit to play out. In terms of -- I think it's a bit early under AASB 9 to really make a definitive statement about an underlying or normalized level of provisioning. I think there's just -- it's a relatively new thing, got tested in the middle of a global pandemic, which we weren't expecting. It's very much a forward-looking provision. And the other factor is our asset mix is changing, and we're changing that organically and inorganically. And that will have a real impact as well. And Adam, is there...

Nothing else. I think you covered it, Ewen.

Your next question comes from Nathan Zaia from Morningstar.

Just I had 2 questions. The first one on housing arrears without sitting end of February. Has there been a material change since given land deferrals have come to an end now? And the second one, I was just keen to hear your thoughts on where you feel BOQ ranks in terms of functionality and features with mobile banking apps. And all the banks are making investments around budgeting tools and buy now, pay later. George, do you think that's going to be something that differentiates banks? Or it's just going to be a nice to have and won't really drive customer choice?

Thanks, Nathan. And -- well, I'll just -- I'll cover off both fairly quickly and then hand over to Craig to talk about some of the great features and how we're thinking about the Digital Bank and the launch of the new Digital Bank of Virgin Money Australia. Just on housing arrears, we're not seeing any uptick on housing arrears. They're still a little elevated from historical levels, but we're seeing just a gradual improvement on those. So we're comfortable with where that's at. And as you know, the important thing around that is, one, what's happening to unemployment. So we're really pleased with how employment is recovering. And the second thing is house prices are strong. So again, our customers have got quite substantial equity in their homes, which is great to see. On the functionality and mobile banking, I mean, there's absolutely no doubt in my mind what's going to be critical is, number one, how good you are in mobile banking. And number two, how connected and personal your banking is to the customer segments you focus on. So our absolute focus is to be one of the most connected banks with our customers, both from a personal perspective. And I just talked about our owner managers is a real differentiator. And then the other key element is how we connect with our customers digitally. What's going to be really important on that is how we develop our data capability. And again, we're -- I'm really pleased with how we've progressed on that. And then the other key element to note is we're quite different from many other banks in the sense that we're going all-in with a cloud-based system, which will be API and Open Banking, which means we can continue to add services for the customer segments that we target. And we then leverage global players in terms of their innovation. So that's how we're able to make sure we're providing the most innovative services to our customers on an ongoing basis and enables us to compete with the majors and, in fact, redefine banking in Australia. But on that, I'll hand over to Craig, and you might want to cover off loyalty and things like that.

Yes, certainly. Thanks, George. And I think, George, has covered a lot of points, but just to reinforce, what we're deploying is truly differentiated. Market-leading technology, API first in design and it has been developed as a cloud-based, scalable solution with continuous upgrade path, which does mean we will be able to continuously offer our customers the latest innovation. What the research showed and what we have implemented is a proposition that is data-driven, allows the connected and personal experience with financial business at the heart of it for our customers. And importantly, at the core of our proposition is state-of-the-art technology and loyalty proposition, which means we'll be able to provide ongoing value for our customers through the life cycle of that. So that will be over -- have over 100 rewards partners and that will continue to evolve. But importantly, it is differentiated, and we'll continue to be able to implement the latest in innovation for our customers.

Your next question comes from Matthew Wilson from E&P.

I have 2 questions, if I may. Firstly, on digitalization. Once you are fully digital, where do you see the unit cost of originating a mortgage ultimately falling to? And where are you today?

Thanks, Matthew. I mean we probably haven't disclosed that information. I think probably 2 things to note. Ewen's comment on effectively the cost income ratio of the middle office improvement even before we get to that end state. But you're right in the sense that as we effectively execute on this digital transformation. And when we get to the end state, where all our 3 retail brands are on a common cloud-based platform with mortgages being part of that, that's an absolute game changer for us.

Yes. So when we sort of think about and talk about this with the major banks, they're sort of originating a mortgage at around $2,000, $3,000 unit cost. Are you at that level today? And then when you think about the opportunity with pure digital banks globally, they're sort of more around $100 to $200 unit cost.

Yes, Matthew, the way we kind of run the business is through targeting positive jaws. And effectively through that, a big part of it is our productivity program and also our digital transformation. The difference, I would say, in terms of where, let's say, the majors are and many other players versus where we will be is that we're not fixing the old. We have the choice to effectively build a new, fully digital bank that's at scale with 3 very compelling and loved brands. So that is very unique, and you're right. When we execute on that, let's say in 3 years' time, that does fundamentally change our cost profile.

Yes. Okay. That's good. And then one final question. Just on Slide 13, where you talk about ME Bank. There was a footnote historically that referred to the exclusion of the ME Bank capital note distributions from the EPS calculation. Have you revised that calculation?

No, no.

There's been no...

So you are still excluding the $30 million in capital notes that are paid to those holders from your EPS calculations?

That's the interest. Yes, we are.

Your next question comes from Brett Le Mesurier from Velocity Trade.

Your wholesale funding costs fell by only 5 basis points from the second half '20 to first half '21 according to the average balance sheet, which is a very small reduction based on what happened in average bill rates over the period. And I thought you said that you swapped any fixed rate into floating. So could you explain why there was only a 5 basis point reduction in wholesale funding costs during the period?

Thanks, Brett. I'll hand it over to Ewen. I'll start, and then I'm sure Tim will have something to add. Look, I think it's a fair observation. We have seen that average come down in the first half. But I think the key point is we're absolutely expecting that will now start accelerating. And the -- in terms of impact on NIM, what was 1 basis point in the first half will be 3 basis points in the second half. So we're really starting to see that accelerate.

What is the actual funding costs at the moment on your new wholesale funding?

Tim, did you want to pick that one up in terms of what you're expecting with some of the refinancing in the second half?

Yes. So on, say, 5 year as a benchmark, it's somewhere around sort of the high 50s to low 60s, above 3 months' bill.

Right. So the actual -- so the average you had in first half '21, the average interest rate is 2.1%, and you're heading to an average of around 60 to 70 basis points. Is that correct?

That's on a 5-year point. Obviously, we don't fund everything at the one duration, but it's a combination of durations. Part of the reason that we haven't had the drop in wholesale funding is obviously, we've got $1.1 billion of retail deposit growth through which covered a lot of the GLA growth. And then we, early on, drew down on the TLF -- the TFF. And we issued a covered bond in May '21. And we haven't -- sorry, May '20. And we haven't had the need to actually issue a lot in the wholesale market since. And we do have some maturities that are coming up. And obviously, we have the TFF to draw down by the end of June.

But 5 years would be a fair average for your wholesale funding? What you're targeting, right? Across a broad range in maturities, 5 would be about the middle?

3 to 5 is about the middle.

Thanks, ladies and gentlemen. That concludes the Q&A session this morning. I'll just pass to George for some closing remarks.

Thanks, Cherie, and thanks, everyone, for joining us this morning. We really do appreciate your time. Hopefully, we'll be able to see you face-to-face at some time. As you can see, this has been a big 6 months for BOQ. We're really pleased with the results and the progress we've made on the digital transformation. We've got another big 6 months ahead of us. The way we've managed this business is to each 6 months improve our performance, deliver on the financials and also show real progress in terms of our digital transformation. So once again, thank you, and stay safe.

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