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

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

Well, thank you, and good morning, everyone, and welcome to BOQ's full year results presentation for 2021. Before we begin, I would like to acknowledge the traditional custodians of the land upon which I'm speaking to you from today, the Turrbal people, and recognize elders past, present and emerging. I would like to thank you for joining us for this morning's audio webcast. Due to COVID restrictions, we are joining you from different locations. With me in Brisbane is George Frazis, our Managing Director and CEO; and joining from Melbourne is Ewen Stafford, our Chief Financial Officer and Chief Operating Officer; and Martine Jager, Group Executive, Retail Banking and CEO of ME Bank. We also have other members of BOQ's executive team and senior management on the phone line. Before I pass to George to provide an overview of the results, I would like to highlight that today's results presentation includes 2 months of ME Bank earnings. The investor presentation will primarily focus on the performance of the underlying BOQ business in FY '21. In the overview, George will speak to the key headline numbers on a consolidated basis before touching on the key drivers of the movement for the underlying BOQ performance. Ewen will talk to the numbers in more detail and will also focus on the variance drivers on a BOQ-only basis in order to ensure that an appropriate comparison can be made. He will then touch on the FY '21 pro formas for each of the key lines which should be used as the basis for George's outlook commentary. The 12-month pro forma figures also exclude St Andrew's from the baseline, given the expected divestment in the first half of FY '22. I will now hand over to George to provide an overview of the FY '21 financial results, and an update on execution of the BOQ strategy.

Thank you, Cherie. Good morning, everyone, and thank you for joining us. As Cherie mentioned, I'm very pleased to be joined today by members of the executive committee and senior management, who have been integral in the execution of our strategy and the delivery of these financial results. Turning now to an overview of FY '21 on Slide 7. Today, we're reporting yet another strong performance, and you can see the continued momentum of the BOQ Group, demonstrated by the notable increase in statutory profit and cash earnings. These results highlight our progress on returning the group to sustainable profitability and reflect a sharp focus on our strategic priorities and the disciplined execution of our transformation plan. Today's results marks our fourth consecutive half of improved performance. And it is worth calling out these results have been delivered during a period marked by uncertainty, given the pandemic disruption across Australia and also in a year where we executed the transformative acquisition of ME Bank. So on the actual figures. Our statutory net profit, including 2 months' contribution from ME Bank, has increased to $369 million, an increase of 221% on the prior period, and our cash earnings have increased 83% from FY '20. Our EPS growth of 51% reflects strong business growth and improved economic conditions. Our business momentum continues to build with housing loans growing at 1.7x system for the year. We are continuing to support our customers and people through the ongoing COVID challenges and have demonstrated our business resilience. The execution of our strategy and our digital transformation is on track. Compared to a year ago, our digital customer offering and footprint has been considerably improved and expanded following the successful launch of Phase 1 of the new Virgin Money Digital Bank and the completion of our acquisition of ME Bank. Our asset quality remains sound, with collective provision levels reducing during the year in line with the improved economic outlook. We continue to have the balance sheet strength to support business growth and the integration program with the CET1 ratio of 9.80%. As a result of this strong performance, the Board has determined to pay a final dividend of $0.22 per share, an uplift of $0.05 per share from the first half. This represents a full year dividend of $0.39 per share and a 61% cash earnings payout ratio. Now turning to the results in more detail on Slide 8. As mentioned earlier, statutory net profit after tax, including 2 months' contribution from ME Bank, increased to $369 million, and we saw an 83% increase in cash earnings after tax to $412 million. Cash return on equity was 8.2%, reflecting an increase of 280 basis points for the year, driven by improved underlying earnings and the collective provision release. Common equity Tier 1 remained strong at 9.80%. Net cash earnings per share increased to 0.747per share. The drivers of the full year results are outlined on Slide 9. These figures are presented excluding ME Bank in order to enable the comparison with FY '20 performance, and Ewen will take you through these in more detail shortly. Total lending grew by more than $3.5 billion in the year. This, combined with the 4 basis points of NIM growth in FY '21, has resulted in a 6% increase in net interest income compared to FY '20 and a 5% increase sequentially. The cost-to-income ratio again improved during the half to 53.3%, driven by the favorable income result and the 2% positive jaws. The loan impairment expense benefited from a net $69 million release to the collective provision in line with improving economic conditions and from data quality improvements related to collateral. This resulted in an LIE benefit to the P&L of $20 million for the year. Turning now to lending and deposit growth on Slide 10. Lending growth momentum has continued to accelerate with lending GLAs increasing by $3.5 billion for the year. Housing grew by $2.9 billion, was 1.7x system and business lending increased by $598 million, reflecting our new segment strategy of providing a tailored relationship and recovery in the SME segment in the second half. On the BOQ housing book, positive growth was achieved across all 3 channels for the first time since FY '15 as momentum steadily accelerated over FY '21, which I will provide more details on shortly. In the commercial portfolio, we delivered growth across the corporate lending, BOQ Specialist and small business portfolios. Small business remains a key focus area for BOQ, and we have been seeing increased volumes through our branch, broker and direct business bank channels. Customer deposits lifted by $3.3 billion during the year, supporting asset growth and increasing the deposit to loan ratio to 75%, while further reducing our reliance on term deposits. Turning to home lending growth on Slide 11. Virgin Money delivered another strong performance with growth of $1 billion across the year. The broker channel recorded home lending growth of $1.1 billion as we focused on building quality relationships with new and existing brokers, simplified our end-to-end mortgage processes and enhanced our customer retention activities. The BOQ Specialist home lending portfolio grew by $0.5 billion, with settlement volumes growing in the second half as the health care sector rebounded from the impacts of COVID prior to the latest round of lockdowns. Further, the BOQ branch portfolio achieved a turnaround in its performance with a return to positive growth in FY '21 of more than $0.3 billion, the first full year growth in 7 years. Importantly, this has been quality growth. During the year, loans with an LVR above 90% decreased to 3%. We decreased interest-only loans to 13% and PAYG customers increased, making up 81% of new home loans. Maintaining our time to yes standards and superior customer experience has been critical to the growth turnaround. Now looking at the divisional performance on Slide 12. I'm pleased to report today both the retail and business bank had delivered a solid performance with the BOQ Retail business delivering a significant turnaround in housing growth of $2.5 billion for the year. The turnaround in performance was driven by embedding the retail banking strategy, which included mortgage process simplification, a new owner-manager incentive program, improved retail banking and lending capability and an uplift in customer experience and quality third-party broker relationships. During the year, our mortgage Net Promoter Score also improved to fourth position, up from fifth in FY '20 and up from 11th in FY '19. As business confidence returned and the economics conditions improved during the year, lending growth for BOQ business continues to improve with $1.1 billion of loan growth for the year. During the year, deposit growth for BOQ business increased by $1.1 billion, which has fully funded the business lending growth for the period. Diving into more detail on our digital bank progress on Slide 13. We have a clear pathway to a common cloud-based digital retail core banking platform that will benefit from ongoing innovation by our global provider, Temenos. We are transforming BOQ from a bank that was constrained by legacy architecture with batch processing, non-real-time complex layer technology into a cloud-based digital bank. This will deliver us a scalable solution that is multi-brand enabled, provide operational excellence with a high degree of automation and will be fully digital. Pleasingly, we have completed the build of the major components that will enable our customers to start to engage with these experiences. We have launched our mobile-first capability for VMA with a focus on everyday banking. We have a new card management system that is in the cloud and enables our first migration of BOQ customers onto that experience. And we have successfully completed the ME Bank upgrade to version 18 that enables the pathway to the cloud version 20. As we continue to deliver against our data strategy and enable open banking, the customer experience will become highly contextual and support productivity and quality growth in our retail bank. Once all retail customers have been migrated to the new common digital platform and legacy systems retired, we will see a step improvement in our cost-to-income ratio. This will also provide us with the opportunity to develop ecosystems around our key niche segments. Turning to the ME Bank acquisition on Slide 14. The completion of the ME Bank acquisition has delivered a number of strategic and financial benefits for the BOQ Group. It has significantly enhanced BOQ scale and portfolio mix, with customer numbers increased to 1.5 million, retail banking GLAs broadly doubling to more than $75 billion, and it has rebalanced the portfolio with retail banking net profit contributing approximately 55% to the group. The ME Bank brand is complementary to BOQ's existing suite of brands, and minimal overlap drives the geographic diversification of our portfolio. We have seen immediate financial benefits, and the integration program is well progressed. We are focused on returning ME Bank to growth and are seeing signs of green shoots with higher application volumes post completion. We've accelerated the delivery of synergies, which are expected to be fully delivered by the end of FY '23. The combination of the 2 businesses enables us to leverage the capital investment across both organizations while still delivering capital expenditure benefits. Diving into more detail on our execution progress on Slide 15 now. Momentum continues to build, and we are delivering growth while we closely manage margins and deliver productivity improvements. This revenue growth, combined with the second year of our productivity program, has enabled us to deliver positive jaws of 2% for the year. Our consumer and business NPS scores have continued to reflect the improvements made over the last 18 months and our focus on the customer. Our mortgage NPS ranking has increased to fourth position compared to 11th 2 years ago. Our time to yes standards are improving despite managing a significant increase in volumes during the year. We have a clear digital transformation road map, and the successful execution of this remains a key priority with a number of core transformation programs completed or well underway. And finally, we have a strong balance sheet and capital position, with a CET1 ratio of 9.80% and the deposit-to-loan ratio increasing to 75%. This sees us well placed to ensure the ongoing stability of the bank, and provides us with the capacity to support growth and investment. Lastly, moving on to our sustainability initiatives on Slide 16. We remain committed to building a sustainable business with a clear focus on positive environmental, social and governance outcomes. During the year, we achieved our carbon neutral certification, and we recognized -- we were recognized as an employer of choice for gender equality. Our employee engagement score of 64% has improved 5%, and we are working hard to meet our target of 72%. We continue to support and invest in local grassroot communities through our partnerships. Looking ahead, we're building a more sustainable business. We have a plan to reduce our emissions and are targeting 100% renewable energy by 2025. We are working closely with our suppliers and customers through the transition to a low carbon future. We are well progressed on our gender diversity target of 40%, and employee engagement continues to lift. And we will continue to support our customers, community partners and local communities in which we operate. Before I hand over to Ewen, I'd like to once again 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 supporting our customers, and delivering these very strong financial results in these challenging times. I want to acknowledge all our customers who have shown resilience and trusted us with their banking needs. Over to you, Ewen.

Thank you, George, and good morning, everyone. Further to Cherie's comments, my presentation this morning will focus primarily on the performance of the underlying BOQ business. I will also provide an update on the transformation and progress with the ME Bank integration. Turning firstly to the group financial performance on Slide 18. Excluding ME Bank, BOQ delivered total income of $1.18 billion for the year, which is up 5% or $61 million on FY '20. This increase was the result of a 6% increase in net interest income, driven by growth in the balance sheet and strong margin management. Noninterest income declined 2% or $3 million on FY '20. Operating expenses increased 3% or $21 million compared to FY '20 and 1% sequentially. This expense increase has supported strong growth in business volumes, the build-out of the Virgin Money Australia operating model and further investment in digital and technology projects. BOQ has delivered an underlying full year operating profit uplift of 8% on FY '20 and 6% on the first half. As previously discussed, we are managing the business to deliver positive jaws and have achieved 2% jaws in FY '21 and also 2% half-on-half. The loan impairment expense for the year was a benefit of $20 million. Cash earnings, excluding ME, were $389 million, an uplift of $164 million or 73% compared to FY '20. Including the 2-month contribution from ME Bank and as set out on the far right-hand side of Slide 18, the BOQ Group delivered cash earnings of $412 million, an uplift of 83% from FY '20. The combination of BOQ's strong financial performance and the inclusion of ME Bank has resulted in a cash ROE of 8.2% and EPS of $0.747 for the year. Moving to noncash earnings on Slide 19. Excluding ME Bank, statutory net profit increased $237 million compared to FY '20 and $352 million for the year. There were 3 notable adjustments being finalization of the employee pay and entitlements review, ME Bank acquisition transaction costs and early integration costs. Looking ahead to FY '22, we expect to incur integration costs of approximately $70 million to $80 million over the year and a $26 million post-tax loss on the disposal of St Andrew's. Turning to net interest margin on Slide 20. NIM grew 4 basis points for the year to 1.95%. For the second half '21, NIM remained steady at 1.95%. Stepping through the walk for the second half. Asset pricing and mix resulted in an adverse impact of 10 basis points. Within this, there was continued front-to-back book drag of 5 basis points on housing and 1 basis point in relation to commercial. And we saw a further 5 basis point reduction from increased flows into lower-margin fixed rate housing lending at reducing spreads. This was partially offset by a 1 basis point benefit arising from the November '20 repricing. Funding costs had a favorable impact of 13 basis points. We actively managed retail and treasury term deposits over the half to optimize margin, which had a favorable impact of 6 basis points. We also saw a 4 basis point benefit from repricing of transaction and savings deposits and a further 3 basis point benefit from a reduction in wholesale funding costs, including a further 1 basis point benefit from the term funding facility. There was an adverse impact of 2 basis points relating to lower returns on the replicating portfolio and uninvested free funding and low-cost deposits. Liquidity levels had minimal impact on NIM during the half. Incorporating 2 months of ME, the printed NIM for the group is 1.92%. Including ME Bank annualized NIM of 1.70% and on a 12-month pro forma basis, the combined NIM for the group for FY '21 is 1.86%. Turning now to Slide 21. Noninterest income of $125 million was down $3 million year-on-year. Banking fee income stabilized at $69 million. Other income increased by $5 million, driven predominantly by a $3 million one-off benefit in the cards portfolio in the first half. Insurance income was down $4 million due to the closure of St Andrew's to new business in first half '20. And trading income reduced by $4 million, consistent with industry trends during this period. Pro forma noninterest income for the group in FY '21 is $134 million. Moving on to operating expenses on Slide 22. Expenses increased $21 million or 3% to $633 million for the full year and by $3 million or 1% sequentially. The key drivers of the expense uplift for the year were $6 million for the build-out of the VMA operating model to support the digital bank; a further $7 million investment in technology and digital projects; and $14 million to support volume growth in operations, product and marketing. Productivity savings of $30 million has more than offset $24 million of other cost growth. We've now completed the second year of the 3-year productivity program with $60 million delivered to date. This year's benefits relate to the full year impact to the FY '20 operating model review, improved strategic sourcing outcomes, less reliance on third-party vendors as we build internal capability, benefits from simplification and automation and ongoing disciplined discretionary cost management. The third and final year of the productivity program will focus on further automation and use of AI and digitization of end-to-end processes and will take the total of the productivity benefits over 3 years to $90 million. This ongoing focus on growth, productivity and cost discipline has seen the cost to income ratio improve by 100 basis points in the year to 53.9%. On a pro forma basis, FY '21 expenses are $933 million, with a cost-to-income ratio of 55.8%. Looking now at the transformation investment program on Slide 23. As was flagged at the half year results, capital investment accelerated in the second half to $66 million as a number of major projects moved from discovery into mobilization during the period. There was also a further investment of $10 million in the digital, scalable cards management system, which was partner funded with a small upfront payment with the balance to come in future periods. The amortization charge for the year was $39 million, consistent with FY '20. It is worth noting that amortization increased by $5 million in the second half as the VMA digital bank asset moved into use. On a pro forma basis, amortization for FY '21 was $66 million. Looking ahead, we expect the amortization of the group to grow by approximately $20 million in FY '22. Amortization will further increase in FY '23 and is expected to plateau into FY '24. Turning now to provisions and loan impairment expense on Slide 24. LIE for the year was a benefit of $20 million. This comprises the $75 million release from the collective provision, as previously advised to the market, and was partially offset by $6 million due to the impact of asset growth in the portfolio. Specific provision expense for the year of $49 million was broadly in line with FY '20. Impaired assets increased by $14 million for the year and by 8% on the half. The housing and consumer increase was driven primarily by one new $12 million single-name impairment, and the increase in asset finance impairments was driven by the lockdowns impacting some of the niche medical practices. Commercial impairments were flat in the half and down $9 million on FY '20. The underlying loan portfolio quality remains strong. Loan impairment expenses to GLA, excluding the collective provision release, was 12 basis points for the second half. Moving to Slide 25. During the second half, we have seen arrears continue to improve in housing to 55 basis points for 90 days past due and 85 basis points for 30 days past due, reflecting low interest rates and a recovering economy lifting house prices. Commercial arrears have remained steady in the half at 93 basis points for 90 days past due and 152 basis points for 30 days. Asset finance arrears have increased in the second half, driven by the impacts of the extended lockdown on assets within the BOQ Specialist portfolio and as we pause the enforcement activity in lockdown-affected areas. Our teams continue to work closely with those customers who require ongoing support to manage the impacts of extended lockdowns. As at the end of September, we have 0.5% of retail customers and 0.6% of commercial customers receiving lockdown assistance. Moving on to funding and liquidity on Slide 26, BOQ remains strongly positioned. During the year, we have grown customer deposits by $3.3 billion, resulting in an improved deposit-to-loan ratio of 75%. We've increased lower cost savings and investment and transaction account balances by $3.1 billion during the year, due in part to the lockdowns, which have resulted in increases in household deposits. We have continued to decrease our reliance on term deposits by a further $300 million. BOQ has now drawn down its full term funding facility allowance of $2.2 billion, or $3 billion, including ME Bank. Inclusive of ME Bank, the liquidity coverage ratio is 149%, and we have a net stable funding ratio of 122%. Moving to capital on Slide 27. We are in a strong capital position with a CET1 ratio of 9.8%. On a year-on-year basis, CET1 increased by 2 basis points. The second half, however, saw unusually high capital utilization for 3 key reasons: firstly, the phasing of the investment spend across the year; secondly, the skew in loan growth to the second half; and finally, the absence of ME Bank earnings for the full period to support the dividend payment. As a consequence of these 3 items, there was a net organic capital usage of 3 basis points in the half. 49 basis points was generated from underlying performance of the business, of which 37 basis points of capital was utilized to deliver 1.7x system housing growth and strong growth in the commercial and asset finance book, particularly in the final quarter. There was also a 7 basis point benefit from the collective provision release. The interim dividend utilized 22 basis points of capital. It is worth noting that this was paid from first half profits without the benefit of any additional earnings, but was paid to all new shares issued as part of the capital raising in March. Unpacking the remaining 20 basis point impact: CET1 reduced by 12 basis points as we invested in the digital transformation; there was a 2 basis point impact from securitization runoff; and a further 6 basis point impact from other noncash statutory P&L adjustments. Moving to Slide 28. As George has outlined, we have continued to execute against the transformation road map. The transformation is delivering significant improvements in customer and banker experience. Our digital products have increased self-service capabilities and materially reduced account opening, KYC and maintenance processes for transaction and savings products. The simplification, automation and process reengineering initiatives are starting to deliver meaningful efficiencies and unit cost improvements. To illustrate this, we have processed an additional 54% in lending applications in the year with an underlying expense growth of 1.5% and have decreased the number of products available for sale from 202 to 127 since 2019. The continued uplift of BOQ's execution capability remains critical to the delivery of the transformation program. During the period, we have strengthened our assurance, project mobilization and benefits realization capabilities. The deployment of an integrated project portfolio management tool has improved discipline in delivery, reporting and governance. Turning now to an update on the ME Bank integration on Slide 29. The first 90 days of ownership has seen a fast start to the integration program, and we are tracking ahead of the original plan. Our key focus has been returning ME Bank to growth. We've commenced the home buying transformation program and have aligned our product and pricing functions. We now have a single Board and leadership team in place, and structural changes have largely been implemented to the CEO minus 4 level. These changes have also delivered a number of early synergies. The consolidation of the 2 ADI licenses is well progressed with the technology changes to combine our treasury and market risk systems underway, along with the program to deliver consolidated EFS and FCS reporting. We have commenced engagement with the regulator and expect to complete the consolidation in early calendar year 2022. We moved quickly to deliver technology collaboration tools for our people on day 1, with work currently underway on the core network integration focused initially on identity management and cyber security. The risk and compliance work stream has moved quickly to accelerate and enhance the AML program, customer compliance and prudential compliance programs so as to align risk management capability with the broader BOQ group. Further, we have a number of consolidation and simplification activities underway, including the harmonization of policies and consolidation of our supply chain arrangements. The synergies and integration costs are outlined in more detail on Slide 30. During the first 90-day sprint, we have undertaken a detailed validation of the synergy DD assumptions. This has provided us with the confidence in our ability to accelerate delivery of the cost synergies. We now expect to deliver 50% to 56% or approximately $38 million to $42 million of annualized run rate synergies in FY '22. This will have an in-year P&L impact of $30 million to $34 million. This sees us on track to deliver the full cost synergy benefits on a run rate basis by the end of year 2 FY '23. We are also exploring additional synergy sources. Firstly, we have firmed up $15 million of CapEx benefits from the consolidation of the investment road maps. Secondly, and as noted at the time of the transaction, we identified approximately 20 basis points of funding cost upside for the ME Bank NIM. Approximately half of that has been delivered in FY '21. We see a further 5 basis point of benefit to flow through in FY '22 and additional wholesale funding benefits as the balance sheet is restructured post the ADI handback. And finally, we are also assessing potential noninterest income opportunities. Although not yet quantified, we anticipate further cost synergy benefits in FY '24 and beyond as ME Bank consolidates onto the group core banking platform. Integration costs of $130 million to $140 million have been reconfirmed through the integration planning process. The acceleration of the integration program will result in the majority of these costs being incurred in the first 2 years of the program. The FY '22 spend of $70 million to $80 million relates primarily to operating model and restructuring costs, the risk and remediation program, cost of network integration and ADI handback requirements. The balance of integration costs into FY '23 and '24 relate primarily to the remaining systems integration and customer migration. Before passing back to George, I wanted to briefly touch on the pro forma key metrics on Slide 31. These pro formas have been developed to align ME to BOQ's year-end and also to ensure consistency of presentation. ME Bank numbers have been brought to an underlying cash earnings position, and we have adjusted the pro forma to remove St Andrew's income and expense to reflect the expected divestment in the first half of '22. To summarize the key pro forma numbers: revenue is $1.67 billion; expenses are $933 million, including $66 million of amortization; the underlying profit is $740 million; NIM is 1.86%; and the cost-to-income ratio is 55.8%. These pro forma numbers provide the basis for assessing the group's go-forward position and should be used as the baseline for the guidance on the FY '22 outlook. In summary, BOQ has delivered a strong financial result for the year with underlying profit up and positive jaws. The integration program is well established and moving at pace, and we are delivering against the transformation road map, all of which are providing us with confidence in continuing to deliver improving near- and medium-term returns. I'll now pass back to George for some closing remarks and the outlook for FY '22.

Thank you, Ewen. I'm really pleased with the financial performance we have delivered during the year and the ongoing momentum we are seeing in the business. We have supported our customers, people and communities while continuing to grow our business and deliver against our strategy. Our lending momentum continues to accelerate in a quality way, whilst we also balance margins and costs to deliver sustainable, profitable growth. We are executing on our strategy, delivering against the digital transformation road map and have completed the first phase of our retail digital bank program. We have successfully completed the acquisition of ME Bank and expect to complete the divestment of St Andrew's in the first half. We have a strong balance sheet and capital position, and our asset quality remains sound with conservative provisioning. Finally, to our outlook for FY '22. The economic environment is showing encouraging signs of ongoing improvement. Australia is relatively well placed for economic recovery with house prices remaining strong, consumers ready to spend, businesses ready to invest and the vaccine rollout accelerating towards one of the highest globally. We remain absolutely committed to achieving sustainable, profitable growth and delivering positive jaws. In FY '22, we expect to deliver positive jaws of at least 2%. We expect above-system growth in BOQ and VMA to continue and have a clear pathway to returning ME Bank to around system growth by year-end supporting our customers' needs. We expect to grow around system in our niche business segments as the market opens up further. We see a number of NIM tailwinds and headwinds in FY '22. We expect to see a NIM decline of 5 to 7 basis points for the year. Tailwinds from lower retail and wholesale funding costs and the funding synergy benefits are expected to partially mitigate the headwinds from ongoing front to back book pressure, the market shift towards lower-margin fixed rate products and higher third-party costs. FY '22 expenses are expected to be flat. Headline expense growth for the group is likely to be 3%, inclusive of the $30 million productivity savings, which will be fully offset by accelerated year 1 synergies from the ME integration. The combined FY '22 capital investment envelope will be approximately $115 million to $120 million. We maintain a watching brief on the impacts of COVID and have prudent levels of provisioning. CET1 is expected to remain comfortably above 9.5%. We understand the importance of dividends for our shareholders, and our dividend payout ratio target range remains at 60% to 75% of cash earnings. Thank you very much for your time this morning. And with that, I'll hand back to Cherie to open it up for questions.

Thanks, George. So we'll move to Q&A now. We have a number of analysts and investors on the call. [Operator Instructions] And with that, I'll pass to the operator.

[Operator Instructions] Your first question comes from Jarrod Martin from Credit Suisse. Your next question comes from Richard Wiles from Morgan Stanley.

I've got a couple of questions on housing. Firstly, George, can you talk about how you think macropru might impact BOQ? For example, what proportion are actually borrowing at the maximum level, and so how will the interest rate buffers affect BOQ? And do you think you'll be impacted more or less than sort of the broad system? And then on ME Bank, can you talk about how you expect to improve the performance? Unlike your BOQ business, it doesn't have a proprietary network, so I'd like to know what the key drivers of the improved performance at ME Bank could be.

Thanks, Richard. I'll start off with both questions. And I might actually then hand over to Martine on the second one to give a bit more color around the ME Bank and what we've got in place. You're right to say, the move by APRA will take the froth off mortgages. And we're all very supportive of that move. Just to give you a sense of the relative impact. If you look at our serviceability buffers that we had in place, we had a minimum of 5.35%, which is above all 4 majors. And then we would also have a higher of 2.5% on the customer rate. So that's increasing to 3. We see that having as a modest impact on growth more so in terms of slowing down the acceleration as opposed to reducing growth substantially. So we still see a healthy mortgage environment of about 7.5% growth next year. And then the other thing to note, Richard, from our perspective, given our size, our objective in terms of growing ahead of market still continues to be there. And we're confident that we can actually achieve above-system growth in mortgages overall and continue that momentum. If I look at ME Bank, what we've done there, I mean, this is a business that we understand really well. As you said, it's primarily third-party flow. If you look at the turnaround in BOQ, we did start off in the proprietary channel, but you've also now seen that we're getting very strong growth out of our mortgage channel, which we're really pleased about. What we've done is instigated, effectively, the program that we had for BOQ onto ME Bank. It's quite detailed. There's a weekly cadence. We're already seeing green shoots in terms of the application volume. So they've gone up by 36% over the 2 months that we've had ownership compared to the average of those applications over the last 12 months. And effectively, that momentum is continuing. So we're highly confident we can get ME Bank back to system growth. But I'll hand over to Martine maybe just to talk about the weekly cadence and some of the initiatives we've got in place.

Thanks, George. As George mentioned, we did as week 1 of ownership, put in place our home buying transformation program which we've taken all the learnings from the BOQ experience. And we're really focused on 3 key areas there, which is reenergizing the broker channel, simplifying and aligning the key policies and processes we have across the group and implementing initiatives for our customer retention program. And all of these initiatives will obviously continue to improve our time to yes and our performance. I would also add, we do have a small proprietary channel in the ME Bank, which is about 30% of our flows with broker being about 70% of the flows.

Thanks, Martine. And Richard, maybe just 2 more points. We have centralized pricing for all of our operations now. So our best-in-class pricing capability's now applied across all brands. And we've also integrated operations. So again, the learnings in the middle office, under Ewen's leadership, are being applied to ME Bank. And as you know, the success requires both your front and distribution really firing, your operations being able to handle that and making the right price value -- right price/volume trade-offs to optimize revenue, which is what we will continue to do.

Could I just -- I mean that's really helpful. Could I just clarify one thing? The 7.5% growth number that you talk about, that's your sort of best estimate of system growth for 2022 at the moment. And you think that BOQ brands, including VMA, can grow above that. Whereas ME Bank can sort of track -- can hit that run rate by the end of the year. Is that a good way to summarize your expectations?

That's right, Richard. So our expectation actually ME Bank in the year will deliver around system growth. So we're quite confident we can actually turn that around fairly quickly. And as I said, we've made good progress over the last 2 months. And 7.5% is our best estimate given the latest changes that APRA has made. Obviously, APRA may go further. We -- and we'd have to take that into account. But that was -- is more likely to have an impact on the second half.

Your next question comes from Andrew Lyons from Goldman Sachs.

Just 2 questions. Firstly, just on expenses. In FY '22, you're expecting underlying expense growth of 3%. That seemed a bit high against the ongoing delivery of productivity benefits, which you've spoken to today, and also the fact that you've got fairly sizable integration costs being taken below the line. So can you, therefore, just perhaps talk in a bit more detail just around the drivers of that expected 3% expense growth? And then just secondly, in late September, you announced some executive changes, including a new CRO and head of business banking. Could you perhaps just give a bit more detail just on those executive changes, particularly what drove them?

Thanks, Andrew. What I'll do is I'll take the second question. I'll hand over to Ewen now to touch on expenses.

Thanks, George. Andrew, just in terms of the 3% underlying. The key point there is 2% of that will be taken up by the amortization uplift that I spoke to. And so that leaves 1% then to support the ongoing business growth and the continued build-out in capability. So as you point out, the productivity program is really important there. And the focus -- the real focus next year as that program is maturing is all about automation and AI and also end-to-end process reengineering. So we're happy with how that productivity program is delivering. It's enabling us to manage cost effectively, but still spend money on capability uplift as well as to support the volume growth. But it's really that 2% amortization, 1% true underlying, that's the key point.

And Andrew, just on the management changes. The first thing to note is I'm very proud of the capability we've been able to build up in terms of the expertise, experienced leaders and also the focus on execution that we've got in the executive team at BOQ. And you've also seen that we've had really good outcomes both from a risk perspective and a business banking perspective, and I'm really proud of what those 2 teams have achieved in terms of delivering those results. And Adam will be focusing on -- our Chief Risk Officer, who will be there until David joins us, will then transition on to actually our transformation program. There's a huge amount of work on that, and we're really utilizing his expertise to do that. If I think about what's happened on the business banking side, we're really pleased with that performance. Our focus going forward for the Business Banking -- bank is going to be small business. Chris Screen has a depth of knowledge and experience in small business. So this is all about what we require going forward. So our focus on business banking will be growing the SME business, and I'm really pleased with the caliber of the executive team that we've got at BOQ.

Your next question comes from Brian Johnson from Jefferies.

George, I'm just intrigued, when we have a look at our NIM performance, which was very good, once again we see a pretty sharp contraction on the asset side, offset by basically much improved performance on the liability side. The front book, back book margin compression was 5 basis points a half again, which is running at 10 basis points per annum. I was just wondering if you can basically reconcile for us the risk that if you're targeting a growing above system, more through ME Bank that's actually got a lower margin than basically BOQ, what is the risk to the downside on that margin assumption? And then I've got -- that margin guidance. And then I've got a second question, if I may.

Brian, do you want to give us your second question and then we'll work out...

Yes, certainly. If I have a look on Slide 60, it basically says that you ran down your liquidity. I look at your margin walk, it doesn't say it ran down very much at all. In fact, it says it was a NIM drag of about 1 bp. I'd like to understand the difference of that. But the really big one, I suppose, I'm most intrigued is what is the excess balances that you've got sitting in the RBA exchange settlement accounts. So not the minimum exchange settlement account, but what is the excess. That's it.

Thanks, Brian. I'll hand over to Ewen to take both of those. And we might also hear from Tim. But over to you, Ewen.

Yes. Thanks, George. I'll talk to the margin and perhaps Tim can talk to the liquidity point. Brian, so you're right in terms of the key moving parts. Obviously, this year around, we have the added complexity of ME Bank coming in, and it brings with it its own portfolio characteristics. It also changes the mix in the group, which is important. But just to sort of reiterate that 5 to 7 basis points against the pro forma of 186 just to sort of anchor the conversation. So I would just break it up then into 3 key buckets. And the first one is that the impact of capital low-cost deposits, liquidity and other is a wash. We're expecting -- anticipating that to be a wash in '22. So that will offset each other and largely be 0. So that thing gets us to the funding cost and mix tailwinds, which will -- which we do see continuing into FY '22. There's still further opportunity for deposit repricing in BOQ, albeit at a reduced rate from prior period. And we certainly see significantly further opportunities in the ME Bank deposit book. And then we are starting to see increasingly more benefit from the wholesale funding pricing coming through, including the impact of TFF. So that will partially offset those headwinds that you talked to in terms of the front of back book impact. We see that from a BOQ perspective as largely in line with the market and in fact, starting to slightly slow in FY '21. And then there will be obviously a reasonably material impact from the switch to the market shift towards the lower margin fixed rate housing. So that's really just unpacking that. But we feel -- to your point about risk on the downside, we feel that is fairly balanced across each of those 3 buckets and obviously comfortable with overall outlook statement of negative 5 to 7.

Great. And what about the RBA exchange settlement accounts balance excess?

Brian, it's Tim Ledingham. I might take that one. So I guess the first point I'd make is that at the end of August, we actually settled a REDS equipment finance transaction, which generated net cash of about $780 million. So that was obviously on the books at the end of August. So it's partly generating higher ASA balances. I think our ASA balance is around $895 million at the end of the half. I wouldn't call this excess, but it's really part of our liquidity portfolio that just hadn't been deployed at that point in time. So obviously, with the changes that APRA recently made around CLF, some of that money will go towards buying high-quality liquid assets as part of our liquid portfolio. But I guess at the end of the year, around about $895 million sitting in the account waiting to be deployed and subsequently, some of that has already been deployed.

And Tim, sorry, can I just push my luck? Could I -- of the $895 million, how much could you deploy?

Look, we have deployed a fair chunk of that now. So probably around about half of that. And yes, it's just looking at opportunities to acquire assets and as that comes through at levels which are over and above what you can return in the ESA account.

Which is 0?

Yes.

Your next question comes from Josh Freiman from Macquarie.

Well done on the results. Just a quick question from me. You've accelerated your previously disclosed integration synergies of $70 million to $80 million to be achieved in FY '23. Whereas the -- though the decommissioning of legacy platforms, I think, still remains in FY '24. What sort of uplift do you think is left untapped from the decommissioning of those platforms which will roll off post this integration program?

Thanks, Josh. I might start off and then hand over to Ewen. You're right to point out that we've got a really exciting opportunity in terms of when we move the whole retail bank on a common digital cloud-based platform. As I said, this is a scalable platform. There's going to be a significant amount of automation when we do that. So effectively, it does make a substantial impact on our cost-to-income ratio. And the other thing to note, by the way, is that because we haven't customized that system, it means that we've got an ongoing evergreen upgrade pathway as Temenos improves their platform. Now what we'll do is we will be seeing benefits as we go through this digital transformation. So it's not as if it kind of -- it happens right at the end. But you're right in the sense that the big jump of benefit occurs when effectively, we've got all 3 retail brands on to the new digital platform, and we've migrated all of the back book onto that platform. Again, the risk of that program is a lot lower than normal programs because we're not fixing the old. We've already stood up that platform. So we're really excited about what we're going to be able to achieve in 2 to 3 years' time. But I'll hand over to Ewen to add to that.

Thanks, George. And Josh, George has given a pretty comprehensive answer. There's probably just 2 comments I would make. The core banking platform is obviously critical, but so too are the digital assets that will sit around it. And if I just give you one really important example, which is the digital loan origination asset. So both BOQ and ME Bank, at the time the transaction was announced, were in the market looking for a new digital origination system. So one of the benefits is we've been able to bring that together and do that work in unison and build that towards sitting on top of that core banking. So there'll definitely be further -- to your question, there'll be further upside that will absolutely come from that. And of course, that flows through all the way from the distribution part of the business into the operations and the risk areas. And then the second point I'd make as well. In the lead-up to '24 and beyond, so to that consolidation that you raised, we are still consolidating and aligning our approach across the business. So a really strong example would be in the operations area. And there'll be significant advantages and synergies that will come from that in the lead-up to the core banking consolidation as there will be in the corporate services areas, treasury, finance, HR and also in technology operations. But you're absolutely right. We're very excited about the prospects of what '24 and beyond can bring from that migration as well as the decommissioning.

Okay. And just a second question, if I may. I know you guys have given guidance for FY '22. But if we look past that to sort of FY '23, FY '24, do you think it's reasonable to assume expense growth -- underlying expense growth of sort of 1% plus additional amortization expense as those both being offset by cost saves from synergies?

So Josh, I mean, obviously, the guidance for FY '22 is flat at an underlying perspective. So the 3% which is 2 and 1 is, as I outlined earlier to Andrew's question, offset for those synergies. The profile as we look forward will have a similar nature to it in '23, is likely to. And then I think we've had a long conversation about '24, but that's when we can certainly see some real acceleration in that cost-to-income ratio outlook.

Your next question comes from Brendan Sproules from Citi.

I just got a couple of questions, particularly around the funding of the balance sheet going forward. You've obviously got $2 billion of the TFF. I just want to get a bit of a feel about how you think that, that will ultimately be refinanced. Is that something you leave to the final year? Or is that something that you start looking at earlier? And then my second question just relates to some of the more expensive wholesale debt that you've obviously acquired with ME Bank. And what's the sort of strategy to sort of lower the cost of that?

Thanks, Brendan. I'll just make a couple of comments and then hand over to Ewen, and Tim can give a bit more color. A couple of things to note is we've improved our deposit-to-loan ratio this year to 75%. So we've got a good position in that. The other thing that the combined entity does is that it increases our covered bond capacity by about $2.4 billion. So that is a very effective way in terms of us raising wholesale funds. But on that note, I'll hand over to Ewen, and then Tim can add to it.

Yes. So Brendan, just a couple of points I would make, and then I'll pass to Tim. We were careful in terms of how we drew down the TFF. It was drawn down progressively, just mindful of the maturity towers. So we now have those in the second half '23, the first half '24 and the second half '24. Now obviously, they can be repaid at our option earlier, should we want to do that. We do have a very experienced and a very stable treasury team, and they have been able to put in place over time a really diverse range of funding channels. So ranging from domestic and offshore funding programs to the 4 BOQ securitization programs. And just noting that ME Bank does bring with it its own securitization programs, which we like, and then the covered bond program that George spoke to, which we have another $3.5 billion of capacity once we merge the 2 balance sheets. So bringing those balance sheets together will absolutely provide the opportunity to further diversify that funding base. Tim, is there anything else you would add? I'll take that as a no.

Sorry, I was on hold. I think you've covered it very well. Probably the only thing I'd add is key to the refinancing of the TFF is the additional cover point capacity that we get out of the ME acquisition.

Your next question comes from Ed Henning from CLSA.

Two for me, please. Firstly, you've called out at least 2% positive jaws next year. Can you just talk about where you potentially see the upside there? Is it just in credit growth? Or is it beyond that? And then if we can just circle back to NIM. I know you've answered a few questions on this. But you've called out 5 to 7 basis point headwind for next year. If you look at the second half, it was flat. Can you just run through simply, in FY '22, is there just more headwinds coming through from the front book? Or is it just less funding tailwinds coming through to see that movement down?

Thanks, Ed. I'll touch on the first one and then hand over to Ewen to add to the first and the second one. I mean, as we stated in the outlook statement, we said at least 2% positive jaws. And we see opportunities potentially both in margin and revenue growth and also in costs around that number. But on that note, I'll hand over to Ewen to add some color. Thanks, Ed.

So Ed, just on the NIM to try and address your questions directly, and I won't go through the response that I gave earlier. Just on the asset pricing and mix. Obviously, we don't have the benefits of the repricing coming through that we enjoyed in '21. But beyond that, it is broadly consistent. And then on the funding cost and mix, so the tailwinds that are coming from there. There is less tailwind from the BOQ side. I think we now have 50% of our deposit book price to 25 basis points or less. Not to say there isn't some opportunity, but there is less opportunity. So -- but then on the ME Bank side, I think that equivalent number is at about 20%. So we definitely see further tailwinds on that side. And we are then starting to see some benefit -- further benefit coming through on the wholesale as that -- both from the TFF, but also as the average wholesale cost averages down. And then everything else is a bit of a wash. So they're probably the differences on the past, which is, I think, Ed, what you were looking for.

Yes. No, that's helpful.

And maybe just to add to Ewen's comments. I mean, what you've seen over the last 4 halves, we've been all about disciplined growth. So this is making sure that our credit quality continues to improve and that we optimize revenue. Now I think we've built a really great capability in doing that and will continue with that approach going forward.

Your next question comes from Jonathan Mott from Barrenjoey.

I've got another question on costs. This is kind of looking forward a few years. So I wanted to tease out some numbers and also looking back at what you said previously on costs and seeing where they've landed. So if I go back to your Strategy Day, which is last year, you said in FY '22, your cost base was going to be broadly flat at a number of around $600 million, obviously, before ME Bank came along. Now if we look at the Slide 31, and there's obviously some great numbers in there, so we can benchmark it to that. Your cost base for BOQ stand-alone that you're looking at was $626 million just for FY '21. And you're now saying next year is going to be 3% above that, with its -- before the synergies obviously coming through. So stand-alone, you're looking at $645 million for the BOQ business versus $600 million you're expecting. So obviously, there's been a lot of investment and costs have come in a lot higher than you're expecting sort of the Strategy Day not too far ago. Now if we go forward from here and we look at the synergies that you're hoping to get, and I'm now looking at that final column on Slide 31, where you give the pro forma group numbers, I think, you've anchored all your guidance to. So you've got a cost base of $933 million. But you're saying that you're going to get synergies of about $80 million, which takes you back to sort of around that or at least $80 million, around that $850 million mark. So it means that from here, we should be benchmarking you as a starting point of about $850 million on costs. And I think -- so the question is about where that grows from there to get to the number in 2024 of where you think that will get to when you get the synergies. So 2 questions. And I'll let you -- I'll give you 2 ways of answering this. Firstly, if you use that $850 million post synergies versus the revenue growth today, it should be at least a 50% cost to income based on those numbers here, net of synergies that you think you can get to. So do you think in 2024, firstly, you're going to have a 50% or below cost-to-income ratio for the combined group? Or alternatively, you can use the approach that [ ANZ and Westpac ] have given us which is, where, in dollar terms, do you think the cost base will be in 2024? And the reason I want to do that is it's really easy to say, oh, we're going to get these synergies, but I'll spend a bit of money here and there, and these targets disappear over the year. So I want to actually narrow you down on what your cost base is going to be in 2024 or alternatively, what the cost-to-income ratio that you think it will be at that time.

Jon, I might start with this and then hand over to Ewen. If I look at your -- the way you've positioned this the first time around is probably close to the mark. I mean, obviously, we're not going to provide an outlook for FY '24. But we're confident, number one, on our ability to continue to get productivity improvements. You've seen that now in 2 years of $30 million, and we've committed to 3 years of that. That productivity program in some form will continue. And then we've also accelerated the synergies. That doesn't take into account, by the way, the benefits we will get as we migrate onto a single core banking platform. As I said, until we complete full migration and retire all systems, you don't get that full benefit, but there is some benefit that flows through from that journey. But on that note, I'll hand over to Ewen.

Yes. Thanks, George. Jon, I think you -- in some ways, you almost answered your own question with the overview of what was announced in February '20. I mean everything is largely consistent with the exception of the level of growth that's been coming through and the investment we have made to support that. And I spoke about the operations area and the product area, the marketing area, and we're continuing to invest in our digital capabilities. We did subsequently communicate to the market that we are really -- the way we're setting the business and managing the business is to positive jaws. And I feel we have certainly delivered on that commitment. Higher -- a little higher cost, yes, but considerably higher revenue than when we stood in front of you on the 22nd of February in '20. So that would be the first point. The -- in terms of the synergies. I mean, we've had the keys for 2 months, 3 months now. And we're very confident to stand before the market today and talk about an acceleration and a delivery of those initially identified synergies on a run rate basis by the end of '23. And so we've made good progress on that, I feel. We've also signaled a number of other synergies we're looking at, some of which we've now quantified, and others which remain a work in progress. And it's just too early today, Jon, to be providing further detailed synergy guidance on FY '24. And I mean, to be frank, by the time we get to that point, the business will be integrated and will really be focused on the overall cost-to-income position. And then finally, just on the -- that cost-to-income ratio. And I mean, George is right, we're not going to provide that target today. But we can certainly see a pathway to a cost-to-income ratio that is consistent with what you outlined. But that detailed sort of forward-looking view will come later and when we are further into the integration.

I don't want to -- I need to hold you to something here, guys, because we've said a lot of times people will throw out these great numbers for integration benefits and then they disappear in other investment spend or digital investment, and they disappear over time. So can you give us something that we can actually hold you to like you did at the Strategy Day 1.5 years ago? So the cost base, net of synergies, as of today is $850 million. That's where the starting point is, net of synergies. In a few years' time, where do you expect it to be? Or alternatively, 50% cost to income, net of the synergies, is where you are today, what cost to income should we expect in a few years' time? Because we need you to hold to some number, not, oh, we'd like to get synergies better and it just disappears somewhere else over time. We'd like to hold you to some numbers if possible.

Jon, we're not going to give an outlook on FY '24 at this call, but we will be conducting a strategy briefing this year that will update the February strategy briefing, and that will provide an outlook over the next 3 years. The thing to note is, number one, we have delivered on our productivity commitments 2 years in a row now, and we're committing to the third as well. The second thing to note is we did a detailed DD on those synergies. And we've now reconfirmed those synergies of $70 million to $80 million. So they're not going to disappear anyway. And secondly, we've actually accelerated the delivery of those synergies. If you look at the way we've been operating the business, and there's 2 components of our cost growth. A big part of that is the amortization of our digital investment. The pleasing thing is that those programs and the money we've spent on those programs have been delivered or are about to be delivered. So it's been really well managed and controlled. And the second point to make. If you look at our true underlying operating cost growth, the way we operate the business is that we effectively ensure that we're seeing the revenue growth before we're allowing additional cost growth in that area to realize itself over and above actually to also achieving the $30 million in productivity.

George, just -- Jon, just 2 things I would add. Firstly, the next Strategy Day is likely to be the middle of next year, calendar year. So we'll have a much clearer view on that. And just in terms of using the numbers from the February '20. You just need to gross those up or add $18 million for the gross up on the VMA expenses, which we've done this period. Just one small point there.

Your next question comes from Azib Khan from Morgans Financial.

George, first question for you. You cited higher third-party costs as part of the reason behind your expectation of margin contraction in FY '22. Is this higher third-party cost being driven by the mix impact from increased flow through to third-party channels? Or is it being driven by the new remuneration framework that you've implemented for OMBs? That's the first question. And the second question is around your deposit mix. You've generated pretty strong growth, obviously, in both your transaction deposits and savings deposits over FY '21. To what extent do you attribute this growth to the realignment of incentives for OMBs? And do you expect to sustain above system growth in low-cost deposits over the next couple of years?

Thanks, Azib. And I'll touch on both and then hand over to Ewen to add to that. If you look at our third-party costs, there's no increase in kind of -- in the actual unit cost of that activity. What we've seen, as you know, one of the growth opportunities that we had and still have is growth in our -- through third-party channels. So we were growing previous year, about 30% of our growth came from that. That's now increased to 38%. As you know, third party is growing probably between 55% and 60%. So that does provide us with ongoing opportunities for growth. So with that cost comes obviously revenue growth. On the deposit mix, I think to note, and as I said, I'll hand over to Ewen, is what -- the launch of the new digital bank, the VMA does provide us now with a really compelling and state-of-the-art transact -- mobile banking capability for our customers, and that will help drive transaction accounts further. We're hoping to actually launch that capability for our BOQ Blue brand by the second half. And again, that would add to our ability to grow transaction accounts, which will be low cost. But on that, I'll hand over to Ewen.

Yes. Azib, just in terms of your question about third-party costs and the impact on NIM in '22. It's actually -- we're seeing it as a positive impact in '22. So the brokerage cost's a bit of a wash and slightly lower relatively, slightly lower OMB share. So that's actually a positive -- a small positive -- a very small positive as it will be liquidity. And as I mentioned, that will be offset by a lower but still negative capital and low-cost deposit impact. So net-net of those 3 is a 0. But to your actual question, third-party costs are a very small positive.

Your next question comes from Andrew Triggs from JPMorgan.

A couple of questions on asset growth with reference to Slide 10, please. First of all, I'm a bit surprised that asset finance growth wasn't a bit stronger given the changes to the instant asset write-off scheme and some of the comments by larger banks in the market. So just some comments there, please. And secondly, the improvement you've referenced in ME Bank applications. Is that on its own enough to drive positive loan growth in the early parts of FY '22, noting that you are obviously looking for further improvements to get back towards system by the end of the year?

Thanks, Andrew. And I'll touch on both and then also hand over to Chris to give you a bit more commentary on the asset finance. The standpoint is we're really pleased with our BOQ Finance business. It's had a good year. And it's quite distinctive in terms of the key thing it does is actually fund tools of trade for small businesses, and it's really diversified geographically and by industry. So what it provides us is a really quite steady, sustainable approach to growing and supporting our small businesses. We do have a strong focus on making sure that we're managing margin and returns for that business given the capital. On the ME Bank applications, as I said, we're really pleased with the green shoots. If we take the 2 months that we've had ME Bank, it is up 36%. That's not quite at the point that would get us to a neutral position on growth, but fairly close. So to have achieved that in 2 months is really encouraging. As I said, we're committed and we expect that we'll get ME Bank just around system growth for the year, given the improvement program that we've got in place. It is a detailed improvement program. We've got about 18 initiatives. Martine is on a weekly cadence on that. These are all the learnings that we had from turning around BOQ Blue now being applied to ME Bank and achieving results in a much more accelerated fashion. On that, I'll hand over to Chris maybe just to add a few more comments on asset finance or BOQ Finance.

Thank you, George. Just a couple of things to note with our asset finance performance. We did see and have seen through the year the benefits of the instant asset write-down coming through. So that has been pleasing. And to George's point, we have also had a fairly well-diversified performance, both through the sectors and across the geographies. So that has also been positive. And I would call out that our second half has been a very substantial contributor to the growth. So the momentum that we've seen come through in those industries and those sectors has been trending upwards through the financial year.

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

It's a remarkable briefing given we're 90 minutes into a regional bank. But anyway, I've got a couple. Head count's 3,300 with ME Bank now in there. With respect to the synergy realization, where does that go to? And what inflation assumption is in your numbers? Secondly, when you took on ME Bank, you picked up $112 million of intangible IT and software. You haven't written any of that off. Should we expect that to happen later down the track? And then to what extent are shareholders exposed to the asset investigation of ME Bank, i.e., can you give us details of the retention and cover that should be in place?

Thanks, Matthew. I might touch on the ASIC investigation quickly and also the FTE, but then hand over to Ewen to give you more information on the first 2 items. As you know, the ASIC matter is in front of the court, so we are limited in terms of what we can actually talk about. The thing I would say is that we conducted a very detailed due diligence before the acquisition. This matter was well known and discussed and considered both in the price for the acquisition, but more importantly, in terms of the indemnities that we negotiated. They're conservative and are quite widespread in terms of their application. So we're very comfortable with where we are in terms of that exposure. On the synergies, we have combined the operating models. As you know, there's a moratorium on the 9 levels between both organizations. Those synergies are not dependent on those. There were some senior leaders impacted by the integration, but that's not a lot of head count. And the synergies that we've accelerated over the next 2 years are not dependent on system -- a lot of system work. So it is about optimizing suppliers, optimizing the way we're doing business. But I'll hand over to Ewen to give you a bit more detail on that.

Yes. Matt, just on the head count synergies. Our view on that hasn't changed in terms -- certainly in terms of the 70 to 80 that we're reconfirming and accelerating today. So that was always sort of in the 12%, 13%, 14% from a group perspective. And that's a really important point because, as George noted, we have completely rebuilt and consolidated the group operating model, and we are looking really -- and we are looking at the best of both as we look to integrate the businesses. And there have been many former ME executives and team members who have been appointed into really important group roles. But that's the number at an overall percentage. But important to look at it on the 3,300, not the 1,100. Your second one, inflation, 2%. And then your third one on intangibles. There was one -- there was a $3 million, not impairment, but alignment of policy. So a couple of years ago, we changed the BOQ capitalization threshold to $1 million. You may recall that through '20. And so we've just gone through the intangibles register and clean that up from the ME Bank side as part of the initial consolidation. So that was just a little bit over $3 million write-off there. I think more broadly, though, to your suggestion as we look forward. We've obviously had a really good look at those assets. We think the intangibles that are coming across are really -- are all important parts of the future strategy. If you look back in history, recent history at the ME bank accounts, you'll see that they also had a cleanup of their intangible register as BOQ did last year. And so we're not anticipating any further material intangible write-offs. I think they were the 3. George?

Yes. Thanks for that. So just to be clear then, shareholders won't be exposed to the ASIC investigation? And then secondly, a 2% inflation rate looks fairly optimistic in this current environment.

Go ahead, Ewen.

Yes. No. And potentially, you're right, particularly on the labor side, given the closed borders and the challenges with the labor market. But at the moment, that's broadly our planning assumption, but we're obviously monitoring that one closely. But sorry, George, back to you on the ASIC.

Yes. So Matt, as I said, we're well covered for a range of regulatory -- potential regulatory issues and that ASIC item was well discussed and considered in that -- in the provision -- sorry, not the provision, but the warranties that we've got -- we negotiated during the sale process.

Is there sort of retention, though, or an excess?

Sorry?

Is there a retention or an excess that you'll have to incur before the warranty kicks in?

Not specific for that item. So yes, the warranties have got a number of elements to it. But what I can say is that we've got a material warranty in place. Therefore, anything that is material will be covered off. So it's not something that's going to impact our financials.

Your next questioner is from Brett Le Mesurier from Velocity Trade.

You'll be pleased to know I only have one question. The -- when I look at your outlook statement for FY '22, it implies a return on NTA of around about 10%, assuming, say, 12 basis points bad debt charge of loans. Now on the face of it, that gives you a reasonable amount of capital generation. But that's not really the end of the story here because you also have your capital investment spend of up to $120 million and integration costs of up to $80 million, which really reduces that return on NTA capital generation to around about 7%, which is similar to the loan growth that you've been talking about. But the point of the story is to pay a dividend. It looks like you will be reducing your common equity Tier 1 ratio and using the DRP to substantially fund the dividend in FY '22. Is that how you see it?

Brett, I'll make some comments and then I'll let Ewen kind of add to that. The starting point is that the way we're going to manage the business is having CET1 above 9.5%, which is the top end of our range. Our objective will be to improve our ability to generate organic capital. So we're fairly confident in terms of our capital management opportunities that we've got. So the key thing for us is that we will be operating above that number. And secondly, we'll be generating organic -- additional organic capital to deal with our growth. Ewen, did you want to add to that?

Look, just 3 comments, Brett, as it relates to the CET1 walk in '22. Firstly, important to bear in mind the portfolio mix has now changed. So there's a higher weighting to housing, so lower risk-weight asset usage. Secondly, we have further work to do on our RWA optimization more generally and in the business bank, particularly. And one of the real focuses for Chris and the team moving forward will be that growth in that SME sector at lower risk weights. And then thirdly, important also to remember that there was no securitization benefit in '21. And we are anticipating some of that to come through in '22. So all of which -- all those 3 will help capital generation.

So you're saying that CET1 may not fall below 9.8% in FY '22?

The guidance, as George reiterated, is to be comfortably above the top end of the range.

Thank you, ladies and gentlemen. That does conclude the Q&A section of this morning's call. So I'll now pass to George for some closing remarks.

Thanks, Cherie, and I'd like to thank everyone for joining us this morning. We really appreciate your time. And hopefully, we'll be able to see you face-to-face in FY -- in '22. As you can see, this has been another big year for BOQ. We're really pleased with the financial results and the progress we've made on our digital transformation and the ME Bank integration. Now we've got another big year ahead of us. We're focused on executing on our strategy and driving the business to deliver strong financial results each period. And once again, thank you for your time, and please stay safe.

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