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

Well, good morning, everyone, and welcome to BOQ's Full Year Results Presentation for 2022. My name is Cherie Bell, and I am the General Manager of Investor Relations. Before we begin, I would like to acknowledge the traditional custodians of the lands upon which we are meeting today, the Gadigal people, and recognize elders past, present and emerging. Thank you for taking the time to join us this morning. With me is George Frazis, our Managing Director and CEO; and Racheal Kellaway, our Chief Financial Officer. We are also joined in the room by BOQ's executive team and senior management. This morning, we will be providing you with an overview of our full year results. We are also taking the opportunity today to update the market on our refreshed strategic priorities and long-term targets. I will now hand over to George.

Thank you, Cherie, and good morning, everyone, and thank you for joining us. In today's briefing, in addition to our results, we'll be presenting our refreshed strategy and targets. I would like to start this morning by acknowledging those communities who are experiencing the impacts of flooding, some for the third time this year. Our thoughts are with them. As Cherie mentioned, I'm joined this morning by Racheal and other members of my executive team and senior leaders. Today, we're reporting another solid performance for the full year, continuing the strong momentum achieved by the group in FY '21. Our underlying earnings increased 1% over the year, with cash earnings down 5% due to the absence of material provision write-backs in FY '21. These results reflect the sharp focus on our strategic priorities, the execution and realization of synergies from the ME integration and delivering to plan on our new digital bank transformation. After returning ME Bank to growth in the first half, we have seen growth in housing across all our brands. Our focus on medium-sized family businesses has resulted in SME lending growth ahead of market for the year. The integration program is delivering ahead of plan, with increased synergies. We are delivering against our transformation road map, with BOQ and VMA digital transaction deposits enabled on our new cloud digital bank. The quality of our portfolio has remained high with good underlying security and serviceability buffers. Our CET1 ratio of 9.57% is above our target range. As a result of this solid financial performance, the Board has determined to pay a final dividend of $0.24 per share. This represents a 65% cash-earning payout ratio for the half, which we believe is appropriate while we are transforming our business. Turning now to the results in more detail on Slide 9. Total income increased 1%, while operating expenses remained flat. This resulted in underlying profit growth of 1% to $745 million. We delivered cash earnings of $508 million for the year, down 5% as a result of provision write-backs in FY '21. Cash earnings per share was $0.784. Statutory NPAT was up 15% to $426 million. Both ROTE and ROE improved in the year. The drivers of the results are outlined on Slide 10. Total income increased $9 million in the year, totaling $1.68 billion. While this was an increase of 1% for the year, the result was materially impacted in the first half by the decrease from lower ME balances, which occurred prior to BOQ's ownership. We also saw NIM increase in the second half and finished the year strongly, with the last quarter NIM of 1.81% and an exit NIM well in excess of this. Net interest income increased in the second half by 6% to $788 million. Turning now to lending and deposit growth on Slide 11. Lending growth momentum has remained strong, with all brands contributing to $5.5 billion in GLA growth for the year. Pleasingly, this growth has come through both housing and business lending. This demonstrates the benefits of our diversified portfolio, our multi-brand strategy and balance between retail and business banking. Housing loans increased by $4.4 billion in the year, more than twice the level achieved in FY '21. Central to this has been the turnaround in May, earlier than our initial acquisition projections, helping reverse the headwinds to net interest income we experienced in the first half. In the Business Bank, our strategy is delivering results both in terms of market share and returns. Customer deposits increased by $4 billion for the year across the Retail and Business Bank, supporting asset growth, with a deposit-to-loan ratio of 74%. A highlight was transaction accounts growing at 19% over the course FY '22. Looking more closely now at the Business Bank on Slide 12. We have a differentiated approach focused on medium-sized family businesses. Bankers, owner managers and risk officers are specialized in our niche segments, providing relationship banking. Our lending is primarily underpinned by security. And the investment in the Business Bank is starting to deliver, with revenue growth of 7%. We have simplified our policies, streamlined processes and built capability in our bankers, which is delivering returns. Our SME portfolio increased by $0.6 billion for the year, equivalent to 1.5x system for the SME market. The focus on medium-sized family businesses delivers better margins, returns and the risk profile. Corporate banking growth has been achieved with a focus on returns. And our Finance business also continued to grow despite the global supply challenges. Importantly, this business lending growth is well diversified and secured, with 92% of business lending underpinned by security. Next, on Slide 13, you can see that during FY '22, we have focused on quality growth. This is essentially important given the current uncertain economic environment. We also recognize the importance of optimizing our margin through this period. You can see that in our high quarter 4 margin of 1.81% and an exit margin well in excess of this. Our fixed rate lending applications, which were high during the first half, have normalized, removing the NIM drag going forward. And the revenue decline from the ME balance sheet decrease, prior to our ownership, has reversed and now represents a tailwind. Our portfolio is high-quality, with business and housing loans backed by strong collateral. 53% of our home loan customers are ahead on their repayments by 1 year or more. We have seen our high LVR lending decrease again during the period, with this being an explicit strategy over the last 4 halves. We have strong provisioning levels and are well positioned for the economic environment. Now to Slide 14. Operating expenses were flat in the year. We delivered $38 million in synergy benefits ahead of our estimates and a further $30 million in productivity benefits. These savings have enabled us to invest in growth, such as SME, and invest more in our digital transformation while delivering a solid cost outcome. We are at a midpoint in this transformation, which means we continue to incur the costs associated with our legacy platforms while building our new digital platform. This leads to increased costs in the near term due to the lag between developing the new and decommissioning the old. As has been the case across the banking industry, we are experiencing impacts of regulation, rising inflation and skill shortages. We expect this to drive up costs in the near term. However, in the longer term, unit costs will benefit from the ability to scale efficiently as well as from the retirement of legacy systems. Our impairments remain very low in FY '22, in line with the high-quality asset portfolio that is well secured. We maintain a watching brief on key economic factors and as always, are working side by side with our customers to support their ambitions. Turning to Slide 15. BOQ is committed to building a sustainable business. I'm proud of our environmental commitments and our progress to date. We have continued with our carbon-neutral accreditation, and 54% of our energy needs are from renewable sources. We are committed to achieving 100% renewable energy by 2025 and have committed reducing our emissions by 90% for Scope 1 and 2 by 2030. Our owner managers are embedded in our communities through more than 100 branches, with long tenure and deep relationships. Through our community partners, we are supporting some of the most vulnerable Australians. Our people are core to our business and customer proposition, and we are building a future-fit organization that is agile with curious bankers. We are strengthening our risk culture, improving our risk controls and building an engaged diverse workforce with inclusive leaders. I would like to turn now to an update on our strategy. Just after I joined BOQ in 2020, we set out a strategy which we have been delivering against. Now with the ME integration almost complete, we have refreshed our strategic priorities and have a clear plan for the ongoing transformation of BOQ. FY '22 has been a challenging year as we learned to live with COVID, severe weather events, deal with inflation, labor shortages and for many of our customers, rising interest rates for the first time. Against this backdrop, we have refreshed our purpose and strategy as shown on Slide 17. Building social capital through banking is about how we support each other using the strength of relationships and working together for better outcomes for our customers, shareholders and our people. The purpose is underpinned by 4 strategic pillars aligned to delivering positive long-term sustainable outcomes for all our stakeholders. Our efforts and investments across the bank are aligned to these pillars: exceptional customer experience; cloud digital bank; sustainable profitable growth, with improving strength, risk and return; and fourthly, enriching people. Transformations are never easy, but I'm proud of what we have achieved as summarized on Slide 18. We are modernizing our core and digitizing processes end-to-end. This will give us the flexibility of a neo bank, but with the scale, strong capital position, proven brands of an established institution, with 148 years in banking, providing us with a compelling advantage of both -- over both new and existing competitors. We have delivered solid growth across our retail and business brands. We have delivered digital transaction deposits for VMA and BOQ brands on the new digital bank, providing us a vastly improved banking experience for our customers. We have an experienced executive team in place who are leading the transformation, executing on our strategy, lifting the capability of our teams and driving improved engagement. Importantly, we have returned ME Bank to growth, and we are completing the integration ahead of schedule and with increased synergies. I want to stay with ME Bank for a moment on Slide 19. Given the record of failed banking integrations in Australia, executing on the ME Bank integration is something we are incredibly proud of. We purchased ME Bank because it provided scale in mortgages with a distinctive brand, delivered geographic diversification and used the same core banking system as we are using to transform VMA and BOQ. On the growth front, we have returned ME's books to growth, arresting a significant decline in the mortgage balance sheet that occurred before our ownership. Geographically, we have been able to participate in the mortgage system growth in Victoria, spreading our portfolio more evenly across Australia. As well as upgrading the ME core banking system, we have integrated the balance sheet and treasury functions and are preparing to migrate ME customers onto the group's digital bank. Our focus now is providing ME deposit customers with the benefits of the new digital bank experience. Turning to Slide 20. Another key element of our strategy is our multi-brands, which are focused on niche segments, with minimal overlap and distinctive value propositions. We are about relationship banking. Our owner managers are embedded in the communities we serve. Our specialist bankers are experts in their segments. And we offer distinctive brands, rolling out state-of-the-art digital products and services. Turning to Slide 21. BOQ set out a multiyear transformation strategy in 2020 to digitize the bank and move it into the cloud. The staged approach to our transformation reduces risk. Firstly, the transformation is digitally end-to-end and will span the full range of products and processes across the Retail Bank, Business Bank and support infrastructure. All customers will be migrated onto the new digital bank, which will allow for complete decommissioning and simplification of our future state. Finally, BOQ is working with our partners, including Temenos and Microsoft, building on their global research and development, bringing leading-edge innovation into our future state, improving our customer outcomes and driving revenue growth. On Slide 22, you can see how our technology has been designed and has been built with our target customer segments at the center. It will deliver the simplest banking infrastructure for a bank our size. Using the cloud will enable us to respond quickly to changing customer needs and deliver efficient banking services at low unit costs on an ongoing basis. We have been disciplined to ensure no customization is needed. Reducing complexity has been the focus of the design through simpler product offerings and streamlined digital processes. Underpinning the core banking platforms will be an intelligent customer data capability built on Microsoft Azure public cloud. Our partnership with Microsoft also means we'll be the first bank in Australia to access Microsoft's Cloud for Financial Services, delivering a superior customer experience. Turning to Slide 23. The transformation has been delivered over 3 phases. The first phase will complete digital deposits and payments. We had prioritized this because it benefits the majority of our customers who are mostly transaction deposit holders. And it strategically improves our funding. We have established the core functionality that supports the launch of digital deposit products for all 3 retail brands. We have delivered to market VMA and BOQ digital transaction deposits. As I mentioned earlier, we will deliver ME digital deposits onto the new platform in 2023. And towards the end of next year, we will have migrated 300,000 existing ME Bank deposit customers into the new digital bank. Building a payments capability for Retail and Business Banking customers is another key deliverable for this phase. During this phase, there has also been progress with supporting our transformation plan, which include migration of data center infrastructure into the public cloud, upgraded the Business Bank core to the latest version, technical foundations required to build the home origination functionality and further build-out of our intelligent data platform. The development of lending origination that will sit across Retail and Business Banking will be a key outcome for the second phase, commencing with digital home loans, followed by personal loans and business loans. In terms of personal loans, this is a real revenue opportunity for BOQ, and we are progressing plans to build this capability in our digital bank. Referring to Slide 24. I want to share some of the metrics we are seeing from our digital deposits, which proves execution capability and immediate benefits for our customers and for the group. It was 18 months ago that we launched VMA digital deposits. And only 6.5 months ago, we did the same for myBOQ customers. Yet we have seen $1.5 billion worth of deposits flow into the new digital bank, with an average deposit balance per customer of $24,000. Customers can open an account through our digital app in less than 5 minutes, making everyday banking easy. This has resulted in improved customer acquisition, and we are now attracting 9x more deposit accounts on average per month. The digital transformation is delivering results. Turning to our approach on customer migration on Slide 25. Migrations often limit the completion of transformation. Given this, we have phased the design to mitigate this risk. The payments functionality will allow migration without requiring change to BSB and account numbers, which addresses a major pain point for customers. I've already mentioned the pathway to migrate ME customers and move to decommissioning and complete the closure of the ME legacy systems, providing additional simplification and cost benefits. We deliberately designed the platform so that simple lending customers across ME, BOQ and VMA would be served from the retail platform, while complex retail lending customers would be migrated to be served from the business platform. Within the Business Bank, only 10,000 relationship-managed customers need to be migrated to the BOQS private digital core. Looking at our investment profile on Slide 26. We remain committed to the digital transformation and investing for the future, while in the near term, we recognize we are incurring the cost of running and maintaining our legacy and building and running the new digital bank. We expect to see material decreases in our investment spend in FY '23 as the costs related to integration reduce. Going forward, we expect to see unit cost benefits from customers on the new digital bank and in the longer term, benefits from decommissioning legacy systems. We have real conviction in our strategy, and the outcomes to date give us confidence in the ability to achieve our targets, a cost-to-income ratio below 50% by FY '26, with an ROE above 9.25%. Now on Slide 27. You can see we have a comprehensive approach to improving returns, with our immediate focus on delivering integration and productivity benefits and growing at an attractive ROTE. We are improving margins through well-managed centralized pricing, with benefits from rising rates. And we are seeing growth in digital deposits. Lending growth is focused on SME, and we are optimizing our mortgages for Basel III. We are executing on the digital road map and have a phased approach to transformation to ensure we deliver ongoing benefits. Over the medium term, we expect this will deliver an improved customer experience through self-service capabilities and a faster time to yes. Our strategy and execution of the digital transformation is key to delivery of long-term outcomes of a simpler organization, further improving productivity, ongoing scalable revenue growth and new revenue streams such as personal lending. Our refreshed strategy builds on the momentum to date and provides us with the opportunity to create a differentiated bank with a compelling competitive advantage. With that, I'm really pleased to be passing over to Racheal, who will take you through our financial results in more detail. Over to you, Racheal.

Thank you, George, and good morning, everyone. Looking at the group financial performance, BOQ delivered 1% income growth on the prior year. This, combined with flat operating expenses, resulted in positive jaws and a 1% improvement in underlying operating profit for the year. Whilst cash earnings of $508 million is a 5% decline, this was due to the prior year loan impairment credit. Current year loan impairment expense is $13 million. There were 2 key statutory cash adjustments for the year, both of which were noted at the first half results. These were $57 million of post-tax integration costs and a $24 million loss on the sale of St. Andrew's. Within the second half, 2% income growth and 3% operating expense growth resulted in underlying profit growth of 1%. Turning to net interest income in more detail on Slide 30. In the first half, NII was impacted by lower housing balances in ME Bank, which had declined by $1.4 billion in the year prior to our ownership. NIM declined in the first half driven by higher swap rates impacting fixed rate margins. As we moved into the second half, we saw tailwinds from growth in customer loans, including a turnaround of the ME balance sheet. Pleasingly, NIM also increased 1 basis point in the second half as a result of the rising rate environment and a disciplined focus on lowering our funding costs. The result was a 6% increase in NII for the half. NIM increased 1 basis point to 1.75% in the half. Starting with the full year, NIM of 1.74% was down 12 basis points. This was largely due to the impact of higher fixed rate lending against a backdrop of rising swap rates, ongoing competitive pressures and increased liquidity requirements. Benefits from lower funding cost and mix partially offset the decline. Looking at the half in more detail. Asset pricing and mix resulted in an adverse impact of 15 basis points. Within this, a 6 basis point reduction was driven by fixed rate lending. This includes settlements from loans written in January and February when swap curves were rising, and we also had the full half impact of loans written in the first half. Ongoing competition resulted in a front-to-back book impact of 6 basis points on housing and 2 basis points in business lending. And we saw a further 1 basis point impact from the relative shift in the asset portfolio mix towards home lending. This decline was largely offset by lower funding costs, which had a favorable impact of 13 basis points. We continue to actively manage retail deposit pricing, improving NIM by 11 basis points and saw a further 2 basis point benefit from improved wholesale funding costs. Capital and low-cost deposits contributed an 8 basis point increase to NIM, with the changes to the replicating portfolio slightly better than what we flagged at the first half and benefits from uninvested capital and low-cost deposits as interest rates started to rise. We saw a 2 basis point impact to NIM from third-party costs, including revenue sharing with owner managers and third-party broker commissions. Heightened liquidity levels as a result of the handback of the CLF result -- reduced NIM by a further 2 basis points in the half. Overall, this resulted in a 1 basis point improvement in NIM in the half to 1.75%, and we exited the year with a strong momentum and a Q4 NIM of 1.81%. Given recent volatility, we have provided more detail on future NIM considerations on Slide 32. Looking ahead, we expect to see ongoing benefits from rising interest rates. In the first half, we expect to see further funding cost benefits and continuing tailwinds from our replicating portfolio and unhedged capital and low-cost deposits. Additionally, fixed rate impacts have slowed and are settling to historic levels, with current fixed rate lending applications below 10%. Competition in variable housing and business lending remains. And finally, with the CLF handback continuing through to January, the liquids portfolio will continue to grow. Over the medium term, we expect margin conditions to follow similar trends. Within asset pricing, competition will continue to impact NIMs. We are focused on optimizing our portfolio mix to ensure sustainable profitable growth. We expect to see headwinds from rising retail and wholesale funding costs, the refinancing of the TFF and basis hedging costs. And finally, we expect to see further benefits from replicating portfolio and unhedged capital and deposits with our new digital apps providing further transaction deposit balance growth. Turning now to noninterest income on Slide 33. Noninterest income of $153 million was an increase of $90 million for the year and included a number of material one-offs as called out in the first half. During the second half, noninterest income was $63 million. This included lower banking fee income due to a reclassification of interchange fees to align accounting policies across ME and BOQ. This change has no impact on earnings. Moving on to operating expenses on Slide 34. Expenses have remained broadly flat at $937 million for the year. As laid out in the 2020 strategy, we have now delivered the third year of productivity, with an additional $30 million of benefits, bringing the total to $90 million over the 3 years. In addition, we have achieved $38 million of synergy benefits, which was above the top end of our forecast. This has enabled us to offset volume growth, regulatory costs, inflation and also accelerate our investment while maintaining a flat cost profile. Looking ahead, we have good momentum on our synergy and productivity programs. Spot FTEs reduced by 8% in the year. However, in line with the market, we are experiencing the impacts of rising inflation on our cost base. And we also have the near-term impacts of building the new digital bank and running the old. Through this period, we are focused on managing our costs to ensure we deliver on our transformation. Looking now at Slide 35. We have increased our investment materially in the year to $331 million. This has enabled us to progress our digital bank transformation, open banking and integration. These are all key foundational components as we deliver on our cloud-based digital bank strategy. The velocity and cost of delivery is improving with each additional phase, and this provides us with increased confidence in the benefits for our customers, our people and our shareholders. Looking ahead, as George has outlined, we expect investments to step down next year as integration costs reduce materially. Turning now to provisions and loan impairment expense on Slide 36. Our 90-day arrears have trended down during the period as the economy recovers from COVID and unemployment remains low. As a result, our impaired assets have decreased again during the half to finish the year at $153 million. This was primarily due to the low levels of specific provisioning across both the housing and commercial portfolios. Specific provisions have reduced due to lower arrears and higher underlying asset values. LIE was $13 million for the year. In the first half, we saw reductions in both collective and specific provisions as economic conditions improved. In the second half, we increased the collective provision as improvements in quality were offset by growth in the portfolio and changing economic conditions. We continue to rebuild the ME Bank provision. At the end of the year, our total provision balance is $295 million. BOQ remains well provisioned, with coverage above regional peers, excluding the impact of ME. We see an improvement in our balance sheet mix when the ME portfolio is included toward lower-risk housing exposure, resulting in a group provision ratio of 47 basis points. In addition to low arrears, our home loan customers are well positioned for the rising rate environment. 53% of home loans have a repayment buffer of 1 year or more. Of the remaining portfolio, these customers are predominantly new loans, investors or on fixed rate products. On our fixed rate portfolio, the main maturity tower is in the first half of FY '24, in line with the high levels of fixed rate lending we saw across the industry through the first half of this year. Importantly, we are supporting our customers as they roll from fixed rates into variable products, and we are seeing these customers continue to perform well. Our serviceability buffers ensure customers have the capacity to meet their repayments in a rising rate environment. Moving on to funding and liquidity on Slide 39. As our balance sheet has grown, we have continued to optimize our funding across wholesale and customer deposits. During the year, we have grown customer deposits by $4 billion, with the deposit-to-loan ratio remaining broadly stable at 74%. Our transaction accounts grew by 19% over the year as we saw early success from the launch of our digital apps. TD funding costs remain low, and customers are now seeking yield following the low cash rate cycle. We have taken advantage of TD rates falling below swap rates and grew our term deposit balances by $3.1 billion. Of this, $1.7 billion was new money. We have increased our long-term funding as we replaced the CLF facility. The consolidation of the 2 long-term wholesale funding programs has enabled us to enhance the funding profile for the group, with greater diversity, a lengthened tenor and increased access to securitization and covered bond programs. Turning to Slide 40. We are in a strong capital position, with a CET1 ratio of 9.57%. During the half, we generated 53 basis points of capital through cash earnings. 27 basis points was utilized to support our ongoing loan growth, and 10 basis points of capital was invested in the transformation program. Within the half, we experienced a headwind of 6 basis points from the mark-to-market on our liquid asset portfolio. We continue to maintain a CET1 ratio above the top end of the target range of 9% to 9.5% as we work towards the final impacts of Basel III. In summary, BOQ has delivered a solid financial result for the year, with positive jaws as we focused on balancing growth and margin. We have revenue tailwinds from balance sheet momentum across all our brands, and we have exited the year with a rising NIM. We have continued to invest in our business and are delivering against the transformation road map. And the integration program is delivering above forecast. We are confident in the quality of our portfolio, and BOQ is well placed to optimize performance through the cycle. I will now pass it back to George for some closing remarks and the outlook for the full year.

Thank you, Racheal. In summary, we are delivering quality, sustainable profitable growth through the disciplined execution of our strategy. We've made good progress on our transformation to a truly end-to-end multi-brand cloud digital bank. The lessons learned so far make it clear that we are on the right track. Our digital transformation and simplification will bring greater benefits for our customers, and that means growth of our business into the future will be at a lower unit cost. And we will have even greater flexibility to really go after the opportunities that will deliver for our customers and shareholders. Finally, to our outlook on Slide 43. Australia remains well placed given low unemployment, high levels of accumulated household savings and high terms of trade. Consumer spending is at levels above pre-COVID, and businesses are investing as the economy recovers. However, uncertainty remains given elevated inflation, rising interest rates, global tensions and slowdown and ongoing impacts to supply and labor. We remain committed to delivering sustainable profitable growth. We expect credit growth to slow in FY '23. And while we'll continue to grow our market share, we see this period as a time for optimizing margins, revenue and returns. We will have tailwinds in revenue given the steady quality growth being delivered across Retail and Business Banking. We have positive NIM momentum leading into FY '23 and with further tailwinds expected from rising interest rates, partially offset by the headwinds of rising funding costs. We are heading into a period of cost headwinds given the inflation, regulation and the dual costs of the old and new banking platforms, and we are managing to positive jaws. CET1 is expected to broadly remain above 9.5%. We absolutely understand the importance of dividends for our shareholders. And our payout target range remains at 60% to 75% of full year cash earnings. Thank you very much for your time this morning. I'll now hand back to Cherie and open it up for questions.

Thanks, George. So we'll now move to questions on the phone. [Operator Instructions] And of course, management will be happy to take any further questions that you may have on the results later in the day. Thank you, operator.

[Operator Instructions] Your first question comes from Richard Wiles from Morgan Stanley.

George, just wanted to ask you about your comments on the exit margin. You said it's well in excess of the fourth quarter margin of 1.81%. Do you think the margin can keep rising relative to that exit margin? And so should we be thinking about something like 1.9% for the first half of '23?

Thank you, Richard. The exit margin is well in excess of our quarter 4 margin of 1.81%. Our view is that the tailwinds will continue into the first half and then moderate into the second half. That's really hard to work out the different moving parts, so I'm not sure I would put a figure to it. My sense is the margin will be positive overall for the year and definitely for the half. And we've provided the quarter 4 exit margin for a reason, but I don't know if you wanted to add anything, Racheal, there.

Yes. I mean, Richard, if it's helpful, I can just provide a couple of dot points as to the component parts. So we always are going to see the impact of competition on our margin. We've seen that switch recently from fixed to variable. As you've seen, we will also continue to optimize our funding cost. And so we've seen the benefit, particularly through the retail term deposit impacts. The tailwinds on cash rate will continue both on the hedged and unhedged portfolio. And we will start to see some headwinds, though, on higher wholesale funding costs. And we've then got the liquidity build, as I described. And so as George said, look, we think there's more positives than negatives with a strong first half and then potentially moderating into the second half.

I mean just to add to that, Richard, there was some commentary about potentially BOQ being disadvantaged on a rising interest rate environment. Obviously, this proves that, that's not the case. Thank you.

George, if I could just follow that up, I'm not sure anyone suggests BOQ's disadvantaged by rising rates, but there are certainly some discussion around whether you get as much benefit as some of the other participants in the market. That brings me to my second question on deposit pricing. I wonder if you could just sort of talk a little bit more about your strategy on deposit pricing. You've got some very high rates in the market, particularly, I think, on the bonus saver and some of the term deposits. I know Racheal's comment about very strong TD growth. But could you perhaps give us some more color on how you're thinking about deposit pricing and sort of managing the margin as well as the volume of deposit growth in this environment?

[indiscernible], Richard. And I'll start off and then Racheal can add a bit more on the TDs. I mean the strategy is definitely to increase our transaction banking accounts. And that's why really we've tilted the transformation to focus on deposits on all of our brands, and it's going to be fairly exciting once we get the ME Bank on to the new platform, which means we'll be able to provide those -- that great service on everyday banking for our ME Bank customers as well. So that is the key part of that. And within that is also broadening out our main bank relationships. You saw that our transaction accounts grew by 19%. But importantly, even with the TD growth, which Racheal will talk to, our low-cost deposits continue to grow as well. So it's not just the transaction accounts. So we're really pleased that actually the strategy is working. But on TDs, this is a better mixture between retail and wholesale funding, but I'll let Racheal add to that.

Yes. We have actually outlined, Richard, on Slide 72, if you've got the pack in front of you, we took a very deliberate and strategic decision to grow our term deposit balances through the half. We had some really favorable rates out in market, as you will have seen. But those rates were still well below what was a really elevated BBSW. And so for us, the cost of that funding was really favorable compared to other options.

And just to add to that, Racheal, a big part of that was actually new money as opposed to existing customers sort of increasing our costs. So I think out of the $3 billion in TD growth, $1.7 billion was new money.

Your next question comes from Andrew Lyons from Goldman Sachs.

Just a follow-up to Richard's first question just on the NIM. Your 1.75% second half NIM and fourth quarter NIM of 1.81% does imply that NIM rose sequentially by about 13 basis points in the fourth quarter versus the third quarter. Given time and the average cash rate is likely to increase more in the first quarter of '23 than it did in the fourth quarter of '22, so just given this, is there any reason why the very strong sequential NIM delta in the fourth quarter won't continue into the beginning of FY '23, just around your exit NIM comments, George? I've then got a second question.

Yes. So Andrew, if you look at the second half, obviously, it is the second half of 2 quarters because you still had the headwinds from fixed roll -- settling into the first -- the third quarter. And then obviously, we started to get the rate rises and also those headwinds abating in the last quarter. Now our view is, as interest rates continue to go up, there will be tailwinds as a result of that. Again, Racheal did go through a number of moving parts. So it does depend on what happens to competition and funding costs, particularly on the wholesale side. But we're fairly positive about the first half. As I said, we would be moderating the outcome in the second half, but net-net, overall, a positive outcome. But Racheal, I think that's fine.

I think that's it.

And George, just sorry to follow up. When you say moderating into the second half, are you meaning NIM, you're expecting them to fall or the increase is going to slow?

Yes, Andrew, it kind of depends on how much they rise in the first half, right? So I mean, obviously, we're not providing an outlook on actual NIM. Racheal did go through all those moving parts. So effectively, you've got to make a judgment call on how those moving parts operate as we go through. But we're feeling pretty positive about the first half, but it's hard to determine NIM in the second half. For the year overall, it will be a good outcome. The other thing to note is it just -- the positives from my perspective is that we are growing low cost -- continue to grow low-cost deposits. The acts are working. All of our channels are actually working in terms of delivering low-cost deposits, including our owner managers, and that is hitting our bottom line. So we're really pleased with how structurally we continue to improve our deposit portfolio.

Appreciate that. And then just a second question on your fixed rate maturities in the disclosure provided on Slide 38. I guess given the market is pricing a terminal cash rate of between 3.5% and 4%, depending on the day of the week, what would that imply as to the average increase in monthly repayments that your fixed rate borrowers will see as their fixed rates mature? Are they likely to revert to where variable rates would be assuming that sort of level of terminal cash rate?

Yes, Andrew, what we've done is -- I mean I don't have that exact number, but what we've done is we've had a really good look at our fixed rate portfolio. So it's been one of the deep dives we've done. And on a number of fronts -- so firstly, there's real active communication to those customers advising them of the likely change in their rate and what they would need to do today to start preparing for that rate. So it's not about waiting until that last minute, and that's been well received. The other thing we're doing is we are ramping up our efforts in terms of how we support fixed rate rollovers and retention. And Martine, who runs the retail bank, has put that in place. And what we're finding is actually our retention of rollovers to date has improved, and we've got a good strategy in terms of making sure that those customers are well communicated to well in advance in terms of what they're going to be leading into once they roll over.

The RBA last week said, with a 350 basis point increase in cash rates, you're probably going to see more than 60% of customers with a greater than 40% increase in their monthly payments. Would that be inconsistent with what you would expect for your own book?

Yes. The thing is, as I said, we have broken up -- I can get back to you on that specific answer, by the way, so leave that with us, and we'll -- Cherie will provide that. But the thing we've done is, when you look at our fixed rate portfolio, number one, it's actually quite low LVR, so we've got very little exposure to high LVR fixed rates within that portfolio. And then the second thing is that it's made up of an investment cohort, which obviously has more options in terms of how they deal to that. So we're -- overall, we're really comfortable with our fixed rate quality. The other thing to note is, Andrew, is that our strategy over the last 4 halves has been to reduce high LVR. So a flow for above 90% is just over 1%. And in fact, we've been very active to reduce the flow above 80% as well. So that's gone from around 20% to something above -- just above 10%. So we're pretty comfortable that we've got good serviceability buffers, but the LVRs are low. We're communicating really well with our customers to make sure they're prepared for those rollovers.

Your next question comes from Ed Henning from CLSA.

Just moving on beyond that for a second. Can you just touch on costs? You talked about the reduction in FTEs and also a reduction in investment spend, but then you've got increasing -- around the cost banks, increasing amortization going forward, increasing discretionary spend. Given all those moving parts, do you think you can run below inflation as you look forward into FY '23 is the first question?

And I might touch on that and then hand over to Racheal. There's absolutely -- there's definitely cost headwinds, particularly in the near term. So FY '23 is where those headwinds will be impacted the most. As you said, you've got inflation running quite high. And then the other thing we've got is there is a catch-up of regulation that's coming through. So things like open banking is costing the industry quite a bit. And then we've got the added issue in terms of not only building the new, but also running the new as well as build -- running the old. So they're kind of the key headwinds. Obviously, we'll continue to operate our business efficiently. And critically, we've got good tailwinds on revenue and we'll be maintaining a positive jaws. But Racheal, I don't know if you wanted to add anything.

That was a pretty comprehensive answer. But yes, I mean as George said, the delivery of positive jaws is really important to us. We do have some really strong revenue tailwinds, as George outlined, particularly on margin. And obviously, we're still growing our balance sheet in a really profitable way. We're carrying the cost of the new technology and the old technology, increased [ RAG ]. We're starting to see inflationary impacts in the back end of FY '22. And so we don't expect those to reduce in FY '23. And then the last thing I would just add is there are pockets of really difficult labor market challenges, so in certain role types, for example. So there's definitely headwinds on the cost line, particularly into FY '23. As George said, we've got -- we're disciplined in managing to positive jaws, and we have a plan -- a strategic plan to get to sub-50% cost-to-income by FY '26.

Okay. And then just a second question in regard to the cost-to-income target, more so your ROE target. Can you just help us with the building blocks there? Is it based on getting absolute cost down? Or is it all based on revenue growth there? And then part of that, are we talking about statutory profit? Or do you continue to see below the line items coming through when you're talking about cash impact?

So just to clarify the second part, that was the ROE target and how we achieve that?

Yes.

I suppose the way to look at what happens to costs through this transformation is, if you look at what we've just achieved to date, the retail bank did reduce its cost, but we had an increase in cost in the business bank because we invested in growth there, and that's starting to deliver with 7% revenue growth. Going forward, really, what you've got to do is look at the transformation in 3 bits, what's happening to the retail bank, the Business Bank, and then you support an infrastructure. So depending on how they're phased, that's how their cost get impacted. The other thing to note is that you get immediate benefits as you get new customers on the new digital platform for those services. So the unit costs for those new customers drop quite significantly, but you don't get the full benefit of the cost until actually you decommission all your systems. Now our approach on that is, number one, our objective is to grow from here as opposed to shrink. So yes, if you had a strategy that was a shrinking strategy, you may get absolute cost reduction, but that is not our strategy. And then the other thing to note is, if you look at the build and run of the new, that pretty much is equivalent to the cost of the old because the old is depreciated, then your real benefits come into how you could scalably grow at lower unit cost. So that's really what underpins that. We have not made any heroic assumptions around the growth of the market or our multiples of that growth, nothing that we've not achieved in the past in terms of multiples, but it is a growth strategy. And then you don't get the full benefits until you've got the full migration completed and also all your customers, all your legacy retired. And that's why we've set our targets into FY '26 of under 50% CDI and an ROE above 9.25%.

And is it just on -- are we talking statutory profit? Or are we talking a cash profit and you still have below the line items?

It's cash. It's cash. The thing I would say is we've had material significant below the line items in the last couple of years. Notably, the sale of St Andrew's, and then also recently, the cost of integration, which they are truly one-off costs. And so it's hard to say what will go below the line, but we have a very clean result excluding those 2 items in our statutory cash movements, and we'll continue to see something similar.

Your next question comes from Josh Freiman from Macquarie.

Congratulations on the results. Just a couple of questions from me. Just conscious of the expense growth in this half. I just had a quick question on amortization and the capitalized software balance moving forward and investment spend. How should we really consider your investment spend moving forward as a split between capitalized versus expensed?

Racheal?

Yes. So we're building a digital bank. And the way that we're thinking of the investment every year is actually in a combined manner, so CapEx and OpEx. It's actually really hard, particularly under the new accounting standards, to be very clear, well out as to whether something would be classified as being capitalized or expensed. We're not changing our capitalization policy or anything like that. So we're very clean and clear as to how we're viewing what we are capitalizing. And so I guess the answer is, and you can see it on Slide 35 there, we've got a balance that is growing, so you can expect to see amortization increase, particularly into FY '23. And then we'll just have to work through, year-on-year, what type of costs the transformation is delivering.

Okay. And second question for me. One of the biggest positive drivers on your margin was from the savings deposits, which I think drove that 8 basis points in the half. Are you able to provide some more color on the breakup of your savings portfolio? I know you have a wide range of accounts, but they have pretty significant variances in interest rates and conditions.

We gave a slide on the low cost deposits or not?

No. I mean -- so we can share with you -- I mean we can share with you the product structure sitting within that savings portfolio. What I would say is that, for those savings deposits, particularly the ones that we are growing, there are requirements for those customers to transact a certain number of times. We also have upper limits on those balances, and so the rates are favorable from a customer perspective. The last thing I would say on savings is we don't have a material back book, and so this is -- we are acquiring new customers through our digital apps, but what we're aiming to do is ensure that they actually bank with us more broadly.

Yes, that's a really good point, Racheal, in the sense that the whole strategy is to actually encourage transaction banking and to encourage those customers to move into a main bank customer relationship with the bank. So -- and that is working. And as I said, we continue to grow our low-cost deposits overall and our transaction accounts.

Sorry. Just a quick clarification on that. Racheal, you mentioned you don't have a back book or a significant back book there. I would have assumed that 8 basis points was predominantly coming from that back book as rates accelerated. Is that incorrect? Or...

No, that is completely correct. It's the proportion of our retail deposit that is lower compared to peers. And so whilst we do have a back book, just to clarify, the proportion of savings deposits for us is lower.

Your next question comes from Brian Johnson from Jefferies.

The first one is, Racheal, if we go back to that Slide 35, what we can see is that you've changed around the accounting policy and you're required to about the system software, the $46 million. I just want to double check, where did that $46 million go? Has that gone straight through to retained earnings? Because it doesn't seem to have gone up and gone through the cash earnings. Am I correct?

Yes, Brian, that's correct. That was the Software-as-a-Service accounting policy change that the industry saw. We felt most of that impact in the first half [indiscernible] things with the other side.

So just with that, so you've gone back and revised that away. So that means that it's expensed going forward. Could you give us -- I suppose just going back to Josh's question, if we have a look on that Slide 35, we can see $66 million of kind of operating amortization on an opening balance of $246 million, which is implying something greater than 4 years, but then we've got the $46 million. Can you just give us a feeling about what effective -- the life we should be thinking of going forward? And how much does that one-off move of that revised accounting policy work's gone to retained earnings rather than cash earnings presumably that creates a negative delta going forward? Can you just walk us through basically how we should be thinking about those 2 dynamics?

Yes. So Brian, as you say, the accounting policy adjustment has -- it's balance sheet to balance sheet. So there aren't P&L impacts from that now or going forward. The first part of your question was around the actual balances and expectations around amortization going forward. So as I said to Josh, we will -- we are investing and part of that is capitalized costs, and so we will see an increase in amortization going forward. The way to think about that $439 million worth of intangibles is that some of that will actually be rolling off, i.e., the amortization period will be ending. And then we'll have the introduction of new amortization from the software and the intangibles that we're currently building. And so the real message here is that you can expect to see an increase in amortization going forward.

Okay. One for George perhaps or Racheal or whomever. It's great to see the greater than 9.25% ROE target, but I just wondered we've got run rats being so much higher. Is that good enough? But in any case, just going back to Figure 31, one of the long-term issues the Bank of Queensland has been the front to back book housing conversion, which is far greater than your peers at 6 basis points a half, which is 12 basis points per annum and has been now for a long while, which is really quite a big number. Can we get a feeling on what you're thinking structurally about that going forward with regards to that 9.25% target by 2026?

Yes. So Brian, if you look at that 9.25% target, we've assumed ongoing competition, so ongoing front to back book that we've experienced to date. So that will continue. Now as -- our strong view is once we get to a digital end-to-end bank, what we've got then is the capability to have sustainable and leading-edge time [ to yes ] as an example, so you start being much more in control in terms of how you price in the market. And we've also then got a digital capability that enables you to really innovate and provide new products and improve your products a lot better as well. Now none of that really is in our forecast going forward, but the expectation is that our competitive advantage on that front improves. But up to FY '26, we've assumed ongoing competition and the impact to our margins.

And George, is that continual every 6 months? At 6 months -- it's 6 basis points every 6 months as it has now been for quite a while?

Look, it's hard to predict margins, and we're not providing a margin outlook, Brian, but our view is that we're assuming that competition continues.

Your next question comes from Jonathan Mott from Barrenjoey.

Just a question about the lending momentum. We only get the statistics, which they give a huge amount of detail. But if you look at the housing stats, it really slowed down over the last couple of months, especially into the month of August. Can you give us a bit of detail on why that is and why the owner-occupied book actually went backwards last month? What was driving it? Is it across all brands and across all channels? And was this almost a conscious decision given the margin was hit so hard in the third quarter to take your foot off the pricing labor a bit and try and slow credit growth down and improve margin into that fourth quarter?

Yes, Jon, thanks for that. In terms of our growth in assets, I mean you've seen in the past that we can actually dial that up and down. And that's the beauty of, number one, having multi-brands and being -- having effectively a 3% market share that's niche-focused. So growing between 1 and 2x system in mortgages is something that we can do while still optimizing revenue and margin. Our objective going forward as we're going through this transformation is to grow around about above system. So that's a comfortable place for us, and our focus is going to be on optimizing margin, as you said, margin revenue and return, within that, so still gaining some share, but optimizing those 3 things. The way we see growth really is over the year as opposed to any month on month. So -- and the whole objective of that is we want to make sure that there's steady growth in the balance sheet that continues to provide a nice tailwind to revenue growth going forward. So that's how we kind of manage the business. So there's nothing that means that we can't actually grow all these issues around that, if that clarifies it.

Okay. So just sort of read between the lines, you're sort of suggesting now that you want to get back to above system? I don't know if system is going to slow dramatically over the next couple of months. I'm not saying that. But to get back to a growth situation, you're expecting margin to expand rapidly in that first half and part of that in the second half would have to be reengaging in competition. So that would have to be one consideration as [ BJ ] and you've talked about before.

No, Jon. I mean our objectives on growth is just above market. So we're not talking about 1.5 or 2x system. So our priority is actually optimizing margin and particularly revenue and returns as opposed to the growth element, but we want to be growing just above system. Now that's not something we have to achieve next month. This is what we aim for over the 12-month period. And you're right, we'll make that decision in terms of growth as we see the best time to optimize that revenue.

Your next question comes from Azib Khan from E&P.

You've mentioned on Slide 39 that cash rate increases are driving growth in term deposits. If we think about FY '23, do you think you can sustain low-cost deposit growth or transaction deposit growth above TD growth? Or come second half '23, do you think it's possible that the shift in deposit mix starts to become a NIM headwind with increasing growth in TDs?

Yes, Azib, I'll start it off, and then maybe Racheal can start -- add to it. I mean we've got an explicit strategy to definitely grow -- continue growing transaction accounts. And again, that's the whole logic around our first phase of our transformation. So that will continue. And that -- and as you saw with our stats there, our ability to get new accounts through that is accelerating, which we're really pleased about. And once we get the ME Bank onto that platform, that will then bolster our capability to continue growing transaction accounts. We continue to be able to grow low-cost deposits. Now how long that goes on for, that's something to be seen. There's no doubt there will be increased competition in deposits in the second half, so we'll have to wait and see how that pans out. And obviously, there will be some headwinds in terms of wholesale funding as well, particularly in the second half. But we're still fairly confident, the way we're structurally changing our deposit book is favorable, and we'll be able to optimize revenue and margin. But Racheal, was there...

Look, I mean just the way that we think about funding is we will optimize across both retail and wholesale. And then within retail, we'll optimize against transaction savings and term deposits. And as George has said, we've built some really attractive products in terms of the digital apps now to ensure we can continue to grow our transaction balances. And then what's happened in this period and what we expect to see continue is that, as cash rates have increased, we have seen customers prefer to seek security and seek yield. And so we saw growth in term deposits. For us, that was a really good funding strategy because, as I outlined, the cost of that was below BBSW at the time. So we will continue to optimize within the retail deposit stack.

And Azib, just to add to that, if you look at the $1.7 billion in UTD, these are new customers that our whole objective is also to convert them into transactional account customers as well.

All right. Just another question on TD. So if I take a look at the chart you've kindly provided on Slide 72, you've shown the benefit that you've received from TD carded rates relative to BBSW. That benefit has been closing though. I mean if I take a look at towards the latter part of second half '22, the gap there is closing. What are you thinking in terms of first half '23? Do you think those carded rates will remain favorable relative to BBSW? Or will you be looking to manage the mix? For example, it looks like you'll benefit much more with new money coming into 3-month TDs. Is that going to be the strategy, managing the mix in terms of duration? Or do you think you can manage -- you can have benefits across the board across all terms in first half '23?

Azib, you're right in terms of those benefits are shrinking. So we will optimize depending on what the economics are, exactly as you stated, right? So it's an explicit strategy in terms of how we look at optimizing our funding costs.

Can I just slip in one more on the front to back book mortgage headwind? For the 3 preceding half years, it was running at about 5 bps per half. It's now increased to 6. Do you think it can increase further? And can you provide some indication of that headwind by [indiscernible] investor? Where is it stronger?

We don't actually provide that -- was the question investor in [indiscernible]? We don't actually provide the breakup in terms of front to back book on that. As you can see, we've actually grown investor quite strongly. This is a segment that has low 90-day past dues, better margins. So we think it's a very attractive segment and we'll continue targeting that segment, ensuring we've got good returns. Look, our sense is that competition will continue, so we're not assuming that it's decreasing. I don't think it's going to accelerate overly from here, but again, we'll just have to wait and see. It's hard to predict competition.

Your next question comes from Brendan Sproules from Citi.

I have a question on the growth in the business lending that we've seen in the last 6 months. Notably, on the NIM slide, you do show a drag from front book/back book. Could you maybe talk about the competitiveness of new business lending, particularly in that SME segment where you've obviously had the strongest growth? And then I have a second question.

Thanks, Brendan. Now the way we focused on SME -- so this has been an explicit strategy to kind of reorientate the bank out of corporate banking into SME. And obviously, SME provides a much more attractive margin and also is capital more efficient. Now within that SME, by the way, our focus is more on medium-sized family businesses as opposed to the small end. On the medium-sized businesses, they're more diversified. It's more efficient to service those, and you do get nice margins as well. Now if you look at the key players in this market, you've got NAB and CBA competing. We've had to maintain that competition. That was a point in time. That seems to have stabilized. But the net result of our mix, even though we've had to kind of -- we're just above market, I would say, in that medium-sized pricing, but the net result of kind of shifting out of corporate banking and into the medium-sized market is a real positive for us, and we're seeing margins broadly stabilize.

Okay. My second question actually relates to your FY '26 targets. Are you able to give an indication of what you're expecting underlying inflation, particularly wage inflation, out to there? And then secondly to that is, with loan growth slowing and obviously risk-weighted asset growth expected to slow as well, is these assumptions, particularly around the ROE, contingent on a rise in the dividend payout ratio over the medium term?

The way we've looked at this is, number one, we have not taken any heroic assumptions around market growth. And then particularly in the earlier years, our multiple of system is reasonable as well. I mean you do get to a stage closer to FY '26 and beyond then, you've got a scalable platform. And then by definition, the benefits of a scalable platform is to be able to grow faster. And because you're providing a better service, you're able to do that whilst also maintaining your margins. So that's what we've assumed. Now in terms of our forecast on inflation, we've got those in the pack. Racheal, I don't know what page.

[indiscernible] about 3%, yes.

And if you look at FY '23, our sense is the impact on our costs will be in the order of 4%. But we've used economists' forecast in terms of going out from there.

Your next question comes from Andrew Triggs from JPMorgan.

So a couple of questions. Firstly, just a follow-up on the cost outlook. George, the synergy realization that's actually likely to come through the P&L next year, could you help with that side of things? And then just broadly on the flows, 2 things there. Firstly, I mean broker, I think, was up to 55% of flows. I think that was a yearly figure, so slightly higher than that in the second half. Talk to where that might get to over time, please? And just on Jon's question, I think, around mortgage deceleration and mortgage growth. Does the need to prefund TFF have any sort of -- has that influenced at all the decisions around front book pricing just in the short term?

Okay. Thanks, Andrew. Just on the last one. I mean, obviously, the TFF impacted the fixed rates in the first half, so that was the key driver of that. Obviously, the benefits of the TFF then abate, and you would expect that basically people will take that into account when they're pricing, and that's what we're seeing at the moment. In terms of the synergies, I'll let Racheal -- what was the second question? I missed it.

I'm trying to find the synergies side.

Sorry. What was your second question, Andrew? And I'll try...

So the second one is around realized synergies in FY '23 and then the broker network flows with the other...

Yes, yes. Sorry. That's right. So what we've got is we had an increase in terms of our broker flows primarily to do with the ME Bank coming back to growth. So BOQ and Virgin Money, those flows have been steady, so we haven't seen an increase in broker flows in BOQ as an example. So our owner managers are working really well in terms of being able to serve our home loan customers. Now there will be some growth still to come from the ME Bank getting back up to market. But once we get to a stable position on that, then we don't see that increasing substantially more. Within the ME Bank, it's not fully broker. So it's about 70% of their flows is brokered. There's about 30% that's proprietary through our mobile bankers. And then on synergies.

Yes. Sorry. So we're exiting the year with about a $47 million run rate on synergies, and we'll -- I mean we did actually laid this out in the acquisition and have increased our synergy targets, but we expect to see about $36 million worth of synergy benefits into next year.

Is that the P&L impact? What's the sort of year-on-year P&L benefit expected just from a cost delta perspective?

So we'll see a reduction in our cost base of $36 million, but just -- if you just look at the synergy component.

Thank you, ladies and gentlemen. That concludes our Q&A section. So I'll pass back to George for some closing comments.

Thank you all for joining us today. Obviously, you can see BOQ has had another big year. We're really pleased in terms of the momentum of our growth, particularly the growth -- the quality of our growth. We're definitely on track in terms of our integration. We're really pleased in terms of the progress we've made on our digital transformation. And we're also really pleased on our refreshed strategy and how we're going to be heading towards our FY '26 targets. Next year is going to be another big year for us. We really want to thank all of our bankers, my leadership team, our customers and particularly thank you all for your support and thank you for your time.