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

Good morning, and welcome to BOQ's financial results presentation for the full year ended 31st of August 2025. My name is Jessica Smith, and I'm the General Manager of Investor Relations and Corporate Affairs at BOQ. On behalf of the management team, I would like to acknowledge the traditional custodians of the land we are meeting on today, the Gadigal people of the Eora Nation. We pay our respects to elders past and present. I'm joined in the room today by BOQ's Managing Director and Chief Executive Officer, Patrick Allaway; and our Chief Financial Officer, Racheal Kellaway, who will present the results. We are also joined by BOQ's executive team. Following the briefing, there will be an opportunity for questions. I will now hand over to Patrick.

Thank you, Jess, and good morning, everyone, and thank you for joining us today. I'm pleased to take you through our FY '25 results. I have three key messages to leave you with today. We've improved financial performance, grown our strong business bank franchise and our retail bank transformation is well progressed. In 2023, we reset our strategy to become a simpler specialist bank with a superior customer experience and enhanced shareholder returns. We outlined four strategic pillars to transform BOQ: strengthen, simplify, digitize and optimize performance. We are now well progressed through this ambitious program of work to uplift operational resilience, simplify the way we operate, scale customer growth with improved digital experiences and shift our balance sheet mix to deliver more sustainable returns. Turning to our strong performance on Slide 8. This year, we delivered on what we said we would do. One, we supported more customers with a greatly improved experience for the 44% of retail customers now on the digital bank. Two, we improved key financial metrics with a 12% uplift in cash earnings, 70 basis point improvement in return on equity, 210 basis point reduction in our cost-to-income ratio and an 8 basis point uplift in margin. Three, we delivered on our retail bank transformation commitments. We converted 114 franchise branches on time and on budget, creating a high returning proprietary channel. We are well progressed in the customer migration and launched our digital mortgage. Four, we shifted balance sheet mix, recycling low returning capital to support 14% commercial lending growth. Five, we progressed our remedial action plans with 44% of activities now closed. And finally, six, we simplified our business, which resulted in a 4% reduction in underlying costs. We will achieve the $250 million productivity target as we exit FY '26. With capital above the target range, strong funding position and well-secured portfolio, we are well placed to continue the structural shift of our balance sheet and growth in high-returning segments. The Board declared a final dividend of $0.20, a full year dividend uplift of 12%. Turning to Slide 9, outlining the financial results. The 12% growth in cash earnings to $383 million was driven by increasing revenue and the flat cost base. We've maintained discipline in growth and our focus on returns delivered an improvement in return on equity to 6.4%. There are adjustments to the statutory earnings this year, including the impairment of goodwill, a portion to the retail bank, reflecting uncertainty in relation to industry structural shifts and restructuring costs to simplify our distribution channels and operations. Consistent disciplined execution of our strategy is generating tangible financial and operational benefits and an uplift in returns to shareholders. Racheal will speak to the financials in more detail shortly. Turning to Slide 10. We are the bank of choice for 1.5 million Australian households and businesses with 3% customer growth on last year. The customer voice remains at the heart of everything we do as we continue to invest in bankers and technology to provide a superior customer experience. This includes improvements over the past 12 months in the experience on our new digital platform, contact center greater service, hardship response times and faster resolution of customer complaints. We're providing additional support to customers through migration of our heritage systems and have provided support and individual solutions to over 4,000 customers this year facing financial difficulty. To help protect customers from scams, we've introduced biometric capability in the digital bank, which has had an average intervention rate of 98%. We also introduced cryptocurrency restrictions, recognizing the prevalence of investment scams. In building on our foundational strength in Queensland, we launched our Bank of Queenslanders campaign, increased the number of bankers in regional growth corridors and announced partnerships with the Royal Queensland Show, the Ekka and the Queensland Rugby Union. We're investing in more bankers to leverage our strong heritage and competitive strength supporting Queenslanders. An important aspect of our business is how we contribute to the communities in which we operate. For us, this year, that has meant deepening our partnership with Orange Sky Australia, who provide important support for vulnerable Australians. Our cultural transformation remains at the forefront of our broader transformation. This year, against the backdrop of significant change, our people experience index increased 2 percentage points to 73%. Our risk culture index increased 3%, and we're particularly pleased to note 83% of our people feel safe to speak up. Turning now to Slide 11, how our strategic pillars are driving progress. Our strengthened pillar is building stronger operational foundations to ensure we deliver better customer, people and risk outcomes. We're delivering a stronger bank with improved operational resilience, risk maturity and culture. We're well progressed through delivery of our remedial action plans and continue to engage productively with our regulators. Our simplification pillar is driving material productivity benefits. We're reducing complexity across our ways of working and products, simplifying distribution channels, decommissioning heritage technology, optimizing the cost of our supply chains and improving processes. Our digitized pillar is transforming the retail bank to a scalable, low cost to serve digital model, improving the experience for customers and our people and will allow us to be more effective in competing in a highly commoditized retail market. Our digital end-to-end bank is largely built and customer migration and scaling to the platform is now the focus. In FY '26, we will complete ME customer migration and decommission ME heritage systems, the next important proof point in our transformation, delivering a step change improvement to both our cost base and operational resilience. Our optimized pillar is focused on improving returns, which we are progressing across a number of initiatives, including the organic shift in the mix of assets and liabilities on the balance sheet and progressing third-party product partnerships, leveraging our distribution capabilities to grow noninterest income, initially for superannuation and insurance products. The next step in exploring off-balance sheet partnerships with forward flow agreements to scale customer growth and noninterest income. This provides optionality as to which assets we hold on our balance sheet or through partners, enabling scalable growth with capital efficiency. As we announced in August, we're exploring a whole loan sale agreement for up to $3.8 billion of our equipment finance portfolio, which would include a forward flow origination and servicing arrangement. This segment of our portfolio is ideal for a partnership as it would allow us to scale customer demand without balance sheet limitations for more cyclically exposed assets. To be clear, this is not a sale of the business. Our asset finance business remains core to our strategy. There would be no impact to our customers who would continue to receive a dedicated support through BOQ. We're in an active process with strong indicative demand. We will provide a detailed update to the market if the transaction proceeds. Turning to Slide 12 for more detail on our $250 million productivity program. This is well progressed, and we expect the full run rate benefits to now be delivered on exit of FY '26. Having delivered more than 50% of the program, the remaining key components to be delivered in FY '26 are the decommissioning of ME heritage and the operating model restructure announced in August. Our considered approach to customer migration has shifted the sequencing of material annualized cost savings benefits from decommissioning 40 technology platforms and vendors, which will now flow to the expense line in FY '27. We will drive further benefits through our recent strategic partnership with Capgemini, a leading technology and transformation company. This partnership will unlock greater operating efficiencies and scalability in technology and business processing and leverage AI in improving how we service our customers and operate. Turning now to Slide 13 and the growth of the digital bank. The build of our digital bank has been a considerable success. And what sets it apart in the market is that it is fully digital end-to-end, including the customer interface, back-end processing and documentation. The end-to-end build enables migration and full decommissioning of our heritage core banking platform, reducing complexity and duplication of costs. The benefit to customers is a reliable, secure and intuitive banking experience with extensive self-serve capabilities. This year, we completed the migration for the majority of ME deposit customers. We now have 474,000 customers on the digital bank with over $10 billion in deposits. ME Mortgage migration has now commenced with completion targeted for the first half of 2026. Moving to Slide 14. As I said earlier, 44% of our retail deposit customers are now on the digital platform. And in August, 81% of new-to-group deposits were originated through the digital bank. We're seeing a greater representation of active digital customers in a younger demographic with strong average balances, increasing our ability to service more of their banking needs. The digital bank is core to our deposit strategy, growing stable funding for the group. The initial phase of the digital home loan rollout has shown early success. We're delivering conditional approval in less than 90 seconds and unconditional approval on the same day. We've seen a 20% reduction in the cost to originate compared to heritage. And on delivery of the full functionality through FY '26 and FY '27, we will reduce our cost to originate and service home loans by half. Turning to Slide 15 and how we're optimizing our balance sheet. An important part of our strategy to optimize returns is the structural shift of both the asset and liabilities on the balance sheet. Intentionally running off home lending and reallocating capital to business lending, which we accelerated in FY '25 has resulted in improved asset mix. We've increased business lending mix on the balance sheet now by 4% to now 17% of our portfolio. We're also focused on optimizing the mix of home lending origination. The converted proprietary branch channel, combined with our origination on our lower cost to serve digital platform will improve home lending returns. In the period of deliberate low growth, we've built capacity in our funding base for future growth and reduced wholesale funding in favor of deposit customers. While the shift towards a more optimal customer deposit mix takes time, we're seeing strong performance in the digital bank. In considering asset growth, we will continue to exercise discipline. We've flagged that FY '25 will likely be the peak of home lending contraction. We expect slowing decline in FY '26 before returning to growth in FY '27. Early indications from the digital home loan launch provide confidence in this approach, and we're targeting the vast majority of new home lending on the digital bank by the end of FY '27. Turning to Slide 16 for an overview of our retail bank, for which FY '25 has been a considerable year of transformation. The retail bank delivered cash earnings of $109 million, a year-on-year improvement of 24% in an increasingly competitive environment. This performance was driven by an uplift in margin, primarily from the conversion of the branches to our proprietary channel and productivity initiatives to lower our cost to serve, partially offset by GLA decline. The retail bank performance continues to reflect our conscious decision to focus on transformation and returns as we reposition to a scalable, low cost to serve digital bank and recycle low returning capital. We again grew home lending on our low cost to originate ME channel. Supporting the remix of our balance sheet, declines in both VMA and BOQ home lending were on plan as broker origination on heritage platforms remain pause for these brands, and we converted and consolidated the BOQ branch network. We've seen branches return to pre-conversion levels of origination and are focused on supporting customers' evolving preferences with a strong national digital platform complemented by targeted BOQ physical footprint, predominantly in Queensland. Finally, on the retail bank this month, we entered into a distribution partnership with Virgin Australia to leverage their 13 million Velocity Frequent Flyer members to grow both transaction accounts and home lending. Turning now to Slide 17 for an update on the progress on our specialist business bank. The business bank delivered cash earnings of $279 million, an increase of 10% on FY '24. This was driven by a 6% increase in income and 3% increase in expenses, including our investment in new bankers. Commercial lending increased by $1.6 billion, representing a 14% growth rate, driven by core strength in health care, agriculture and well-secured commercial property. During the year, we simplified our product offering in the asset finance business, ceasing origination in cash flow finance. On an underlying basis, asset finance grew by $237 million or 3%, predominantly through novated leasing and structured finance. The BOQ specialist housing portfolio runoff reflected our decision to reset pricing to a more sustainable return, aligned to our broader home lending strategy. The business bank had a 20 basis point uplift to margin in the half, primarily driven by the branch conversion and deposit mix, offsetting increased competition. Our banker value proposition is enabling the hire of quality bankers in a competitive market for talent. We've now onboarded 35 new business bankers, and we'll continue focusing on attracting quality bankers in targeted growth corridors, particularly in Queensland. I will now hand to Racheal to provide more detail on the financials. Thank you.

Thank you, Patrick, and good morning, everyone. Performance in financial year 2025 is evidence of the discipline shown in the execution of our strategy, making decisions benefiting BOQ over the long term. We saw higher income and held expenses flat, absorbing a half year of operating expenses from the conversion of the branch network to a proprietary channel. Underlying profit improved 10% on the prior year. Loan impairment expense of $21 million was up 5% against the prior year, though at an aggregate level remains low as compared to historical averages. And as a result, we delivered $383 million in cash earnings, an uplift of 12% on 2024. Trends were broadly consistent when looking at the second half with underlying profit up 14% as compared to the first half and cash earnings up 9%. Set out on Slide 20 are the adjustments made to cash earnings. FY '25 statutory profit was $133 million. In the second half, we reduced the carrying amount of goodwill allocated to the retail bank to zero, resulting in an adjustment of $170 million. This goodwill arose from historical acquisitions by the group over a number of years, including the 2007 acquisition of Home Building Society. There is now no goodwill allocated to the retail bank. We saw $27 million relating to the previously announced branch strategy, which will see the cost of conversion amortized over approximately four years. The total cost remains unchanged. In August, we announced restructuring costs of $25 million and an increase to the remedial action plan costs of $14 million. And we saw minimal impact from hedging and fair value adjustments. Net interest margin increased 13 basis points, a 12 basis point uplift came from the step change from the conversion of branches. Underlying margin also improved 1 basis point in the half. There was a 6 basis point lending benefit, 4 from pricing and 2 from positive mix shifts on the balance sheet. Funding costs impacted margin by 4 basis points. Deposit pricing and competition was the major contributor to this in the period. In term deposits, we saw swap rates reduce while pricing across the industry lagged. Competition for our core savings continued. And lastly, a replicating portfolio benefit of 1 basis point was offset by the uninvested portfolio as cash rates reduced, and we saw an impact of 1 basis point from liquidity. The result was a second half net interest margin of 1.70%. Turning now to expenses. In line with target, we delivered flat expenses in 2025. Underlying expenses were down 4%, the result of strong commitment to expense management. With all branches converted from the 1st of March, we took on a $42 million cost base to operate those branches. This, along with ongoing inflationary impacts was more than offset by the delivery of the benefits from the simplification program. The program delivered $71 million of cost reductions in the year. As called out previously, ongoing investment in the business is coming through the expense position with higher amortization, particularly in the second half. We also invested in additional business bankers who are supporting growth in the business. Looking at our investment profile in more detail on Slide 23. We have, over a number of years now, invested a significant proportion of our annual earnings with a long-term view of transforming to a simpler specialist bank. This has included integrating the bank, investing in the cloud, building a retail digital bank, supporting risk uplift programs and growing our business bank. This year, we invested $188 million, coming off recent highs as we near the completion of building the digital bank and progressed migration of customers off of our heritage systems and onto our new core platform. These events see assets move from being under construction to being in use and commence amortizing. Higher amortization in the second half was as expected and will continue to put some pressure on earnings going forward. We see the level of investment spend in 2025 as a healthy level to invest in the bank on an ongoing basis. However, we will continue to recalibrate this against market dynamics and as strategic opportunities arise each period. Turning now to portfolio quality. Asset quality remains sound, supported by increasing property values. Loan impairment expense for the year was $21 million and remains below historical averages at 3 basis points to GLA for the year. Looking at the trends within each of the portfolios. Housing saw another year of benign loan impairment expense. Whilst we experienced a very small increase in later-stage arrears, we aren't seeing increased actual losses. In the commercial book, we had resolution of some long-dated impaired assets, resulting in a net write-back and three halves now of improving arrears. Asset finance had more normalized levels of specific provisions and write-offs, and we took an increase in the collective provision in the second half. Arrears increased in the first half of the year. However, there was some improvement in the second half. Slide 25 shows total provisioning, where you can see $307 million of provisions held, representing 39 basis points to GLA. Scenario weightings remain unchanged in our forward-looking models with a 45% weighting towards downside and severe downside scenarios. This results in us holding $70 million above the base case scenario. Should there be a 100% downside scenario, our provision would increase by $21 million. We consider our provision levels to be prudent when we look at the level of uncertainty in the economy and as we review against peers on a standardized credit RWA comparison. Moving to funding. With our strategy of recycling capital, the overall funding task was relatively low, allowing for flexibility in the mix of funding to drive optimization of cost and create capacity for growth. The quarterly average LCR at the end of the year was 143%. We have maintained a focus on growing stable customer deposits with a historically high deposit-to-loan ratio of 86% and stable deposit funding as a percentage of total funding at 72%. On to capital and the group's strong capital position is reflected in the ending CET1 of 10.94%. Earnings generated 50 basis points of capital, and we returned 30 basis points to shareholders through dividends. RWA benefit of 9 basis points is made up of 8 basis points from a reduction in underlying RWAs, along with 7 basis points from lower loan origination costs. This was partially offset by 6 basis points from runoff in securitization. We saw 15 basis points of impact from the branch strategy as a result of the conversion with payments made to former owner managers. Other impacts include the statutory adjustments, as I outlined earlier in my presentation. We maintain our target capital ratio of 10.25% to 10.75% and dividend payout ratio of 60% to 75% of cash earnings. We are in a strong capital position, which has enabled the fully franked dividend of $0.20 per share, representing 66.2% of cash earnings and at a yield of 5.5% at the year-end share price. We will offer a nondiscounted dividend reinvestment plan, which will be satisfied through the on-market purchase of shares. In summary, our results are evidence of considering the volume, margin risk trade-off and a disciplined approach to the allocation of capital. Strong cost management through the simplification program pleasingly resulted in an underlying cost reduction. The demand we have seen from potential capital partners in equipment finance is encouraging, particularly the appetite for us to originate and service more customers with this product in a way that generates capital-light revenues and diversifies our income streams. We will continue to be sharply focused on making decisions that improve our returns and drive long-term value for our stakeholders. I will now hand back to Patrick for some closing comments.

Thank you, Racheal. Moving to Slide 29 for our outlook. We're confident we can continue to execute on our strategy and FY '25 is validation of this. Despite this, we're cautious about the outlook for FY '26 due to geopolitical uncertainty and elevated industry headwinds. We continue to operate in a highly unpredictable macro environment, which has increasing risks. Domestic economic growth is improving, buoyed by higher household incomes, lower inflation and cash rate reductions. We welcome the recommendations from the Council of Financial Regulators review of small- and medium-sized banks aimed at strengthening competition in the sector. If implemented, these recommendations have the potential to materially improve BOQ's return on equity, reduce funding costs and ease regulatory impulse, enhancing our ability to service our customers and communities while delivering sustainable returns to our shareholders. We expect elevated industry competition to continue into FY '26 in home lending and for quality business lending, which is likely to put pressure on margin. While our housing runoff will be slow, we're targeting a system growth at system growth for business lending, driven by our areas of competitive strength. Our focus remains on controlling what we can control. We expect next year's cost growth to be sub-inflation despite the material uplift in our expenses from the annualized impact from the branch conversion and increased amortization. With robust asset quality and strong provisions, we expect LIE to remain below long-term averages but drift higher over the longer term. Finally, Slide 30 sets out our FY '26 priorities, anchoring to our competitive strengths, leveraging our Queensland heritage, specialist business bank capability and the scalability of our end-to-end low-cost digital bank. Our focus remains on enhancing our customer experience and improving shareholder returns with six key priorities for FY '26, optimizing balance sheet mix and performance across both lending and funding, scaling deposit and lending through the retail bank digital platform and proprietary channel; accelerating the growth of our business bank in targeted specialist sectors, implementing and embedding improved risk practices through our remedial action plans. delivering the full run rate of the $250 million productivity target and driving further efficiencies into FY '27. And finally, continue to transform our culture. Before I hand over to questions, I want to reiterate the strong execution and improved performance of the group this year. We're delivering on what we said we'd do and are well progressed through an ambitious transformation to a simpler specialist bank with an improved customer experience and people experience. The playing field in banking is evolving. Our agility, proven execution capability, preparedness to confront challenges head on and make bold decisions will remain critical to our ongoing evolution and success. Thank you to all our people and shareholders for your continued support. I'll now hand back to Jess to open for questions.

Thank you, Patrick. We will now move to questions. To ensure all participants have an opportunity to ask questions today, if you could please limit to two questions each. Operator, may we have the first question, please?

[Operator Instructions] Our first question today comes from Matt Dunger from Bank of America.

I wanted to start off on the net interest margin. And you showed there was a 4 basis point benefit from asset pricing in the half. In first half '26, you're calling out competition. So could I just confirm the NIM trajectory, are you now suggesting that it will be lower given the increase in competition? And was the exit NIM below that 1.70% level?

So, Matt, we're not being bold enough to give an outlook for NIM. What we are saying is that we are seeing ongoing competition across both the asset and liability side of the balance sheet, but also in business and home lending. We do see risk to margin. But our strategy is really, really clear. We've defended margin over four halves now and increased our margin in the last half. And all of the strategic initiatives that we are pursuing are really, really focused on return. And so we will continue to pull levers that we can and control what we can, but we're not going to give an outlook for margin into FY '26.

And if I could just follow up with the advertised term deposit rates and some of your comments made there. Your pricing appears to be broadly in line with peers on what's being advertised, but you've seen some strong term deposit runoff. So how sustainable is this runoff? And given Racheal's comments that the swap rates have reduced versus pricing lagging, do you expect that this is just a short-term reduction in your term deposit growth? Or can we see sustained pullback from term deposits?

Matt, so there's a couple of parts to that. The first is, as swap rates fell in the period, as I said, we didn't see pricing follow as quickly. And so that's had an impact in the period across the industry. I think probably -- and so that's a short-term impact, I would say. Your question around whether it's short term or long term, actually, what we are seeing is particularly given the spread difference between term deposits and savings has come in, that customer behavior has changed. And so if you -- if there's only a 40 basis point difference between a term deposit and a savings product, for example, customers are preferring putting their money into savings products, which is a really rational thing to do. And so we expect that, that could be a trend that would continue. In saying that, term deposits remain a very important funding tool for us. We find that when we shift price, it can dramatically change the inflows. And so as we look into the future and depending on where swap rates go, we would still consider term deposits as being a good funding source.

Our next question is from Andrew Lyons from Jefferies.

Andrew, you are there?

Yes, can you hear me?

I can hear you now. Thank you.

Great. Sorry about that. Just a first question, just further to Matt's question, just around your NIM. The second half NIM walk implies pricing was a 4 bp tailwind for lending and a 3 bp headwind for funding. So it kind of implies a small tailwind in the second half, net-net from competition. But looking forward, your outlook comments do imply elevated competition for both lending and deposits. Now I certainly don't want you to give an outlook for the margin. But is there anything towards the back end of the second half that you saw in pricing trends that deteriorated to such an extent that you are more concerned just around the state of competition at the moment?

Yes. Look, thanks, Andrew. So there's nothing that really is causing us to be cautious. I think what we are saying is competition remains elevated. And so we're taking quite a cautious view. But we are really, really focused on being disciplined about where we want to grow and how we grow and how we manage our balance sheet. So we will be doing everything we can to protect margin. But I think we just want to call out that there is risk to margin, and that's an industry phenomenon.

I think, Andrew, just to add to that, there were two cash rate movements in the second half as well. With that comes some of those timing impacts that you typically see. So keep that in mind when you're thinking about the next half. The other thing we did in the period is we reset profitability on two small segments of our portfolio, which gave us a benefit in the second half. If you really pull back from those two elements, so as Patrick has outlined, we are expecting there to be continued intense competition for both business lending and home lending, and that will be an impact as we look forward.

Okay. That's helpful. Thank you for the detail. And then just a second one on expenses. Slide 12 suggests the productivity program benefits actually accelerate in FY '26, obviously, and you mentioned that the exit will be at the target of $250 million. Despite this, your guidance still implies some expense growth in FY '26, albeit sub-inflation and you've highlighted, obviously, amortization and the like as headwinds. However, just given the acceleration in benefits over the course of the year, can costs actually fall or at worse remain flat in FY '27, given the full impact of those FY '26 productivity benefits?

So, Andrew, I'll make some comment, and Racheal might want to add to that. So, look, I think the biggest step change, which we called out in our talking points was that in FY '26, we are going to be decommissioning about 40 core systems in our Heritage Bank for ME Bank. That will be a significant step change reduction in our cost base. That really flows through into FY '27. So you shouldn't expect to see any material benefit of that in FY '26. Outside of our productivity program, we also announced in August our partnership with Capgemini. And we did say that we'd expect in excess of $30 million of cost benefits into FY '27 as well. So we are outside of the productivity program, continuing to consider what other initiatives we can take to lower our cost to serve and drive productivity benefits going forward. But I think the big one, which really comes into FY '27 is decommissioning. I think we're also, at the same time, investing. So whilst we've said there's inflation and increased amortization and you've got about a $40 million to $42 million uplift again on the branch conversion. We are continuing to invest in bankers. We're investing in new regulation as well. We have said we're going to take any restructuring costs above the line in FY '26 as well. So I think where we've landed is we think it's prudent to call out of a sub-inflation cost outcome for '26.

Our next question comes from Brendan Sproules from Goldman Sachs.

Brendan Sproules from Goldman Sachs. I just have a question on your business banking outlook. Obviously, you've had pretty good commercial loan growth, and you've talked about the specific segments. One thing that's noticeable on Slide 17 is the decline in deposit funding in that division. Could you maybe talk about the deposit strategy around these particular segments and what we can, I guess, expect into the medium term for deposits in business banking?

Yes. Thanks for that, Brendan. And so look, we have called out at the half year, we see this as a big opportunity for us. The business bank is being funded by -- largely by our retail bank. As we sort of grow, particularly in the SME segment, we see a huge opportunity to grow lower cost funding through the business bank. So our current technology that we offer is not a great experience. And so we are really, really focused on leveraging that opportunity and investing to build transaction banking capability and lower cost funding in the business bank. But we're not there yet. We focused the transformation and the digital bank on building the retail digital capability. That's becoming a really strong deposit engine for us. But I think you should expect us to obviously focus on servicing business customers and growing that funding base as well.

And my second question is just on Slide 23 around the transformation investment. Obviously, you've gone through a few years now of elevated investment spend as you build out that digital bank. 2025 showed you had about $190 million. Is this a normal level going forward? Or as you point out, there's some additional things you need to do like digital deposits in business banking, for example, as you just mentioned, that we can see that start to rise again in the medium term?

Brendan, so the way that we think about the investment portfolio is -- and you've called out the digital bank. We also had the integration costs from ME Bank in that period as well. So we were investing quite a proportion of our earnings every year back into the business. At the moment, we think about $190 million to $200 million is the right amount to invest in the bank given our earnings profile. In saying that, we will always look at opportunity to use capital if we can see value for shareholders in the long term. And so at the moment, we're not flagging an increase to the investment portfolio. We do have the capacity to remix that portfolio though. And some of the points that Patrick made around investing further in the business bank could come from remixing what's actually being spent in that portfolio.

Our next question comes from Jonathan Mott from Barrenjoey.

My first question just relates again to the growth in the business bank. If you see the commercial loans, the growth rate has really accelerated over the last few halves. First half '24 was flat, second half 3% sequential then 5% and this half at 8% sequential. So that's growing for SME more than twice system. In the outlook statement, you say that you want to grow business banking at around system growth. Does that actually imply you actually you're going a bit stronger than you'd like to when you actually need to pull that back just given how strong that growth has been?

Not at all, Jon. I think we would like to accelerate and continue to accelerate. I think what we're doing is being prudent on pricing and recognizing we're operating in a very competitive market. So there are some deals that we just won't do because we're being really disciplined about price. But clearly, the objective is, and we called this out a year ago, we haven't seen growth in our business bank. Actually, if you look at the portfolio, the growth really come from the housing portfolio and BOQS over previous years. But this is a core focus for us. So we're investing in it. It's a core strategic priority for us. As I called out in the six strategic priorities when I concluded in my presentation today, we want to accelerate this. We think growing at system is an appropriate call out in terms of where we are, but we would love to grow faster than that, and we certainly would recycle and support that growth if we're getting the appropriate returns.

Okay. So just clarifying that you're actually saying that you'd like to grow system is a bit of a conservative statement because it's currently growing twice system, but you're not applying the brakes. Is that correct?

Yes. Look, I think, Jon, as we sort of said, we've been very cautious in our outlook statements. We want to underpromise and over deliver. And so it's a core strategic priority for us. We would like to continue and accelerate our growth rate. We're bringing on more bankers, which suggests that, that should enable us to continue to accelerate. But we're not going to give targets that are difficult to meet, and we are unsure about what margins are doing. So we will really focus on the sectors where we've got core capability where we've got competitive strength and continue to push really hard. Queensland will be a key part of that. You would have seen through the presentation, we are reemphasizing our Queensland capability, our competitive strength in Queensland. We're the last-standing major bank in Queensland, and we're a Queensland bank, bank in Queenslanders.

And Racheal, in the very end of your comments, you mentioned that demand from capital partners for whole loan sales and forward flow rents is very strong. You've talked about asset finance already. Are there any other areas of your book that you've had inbound inquiries on in recent times?

Well, we won't speculate on sort of portfolio sales, Jon. But I think what I would say is that there is strong demand in the market for origination and servicing capability, and that is the capability that we have and have been strengthening over the past couple of years with our investment profile. So where there is demand and liquidity and we've got an origination and servicing capability, you can expect that, that would be a nice partnership to have. For us, it means diversified income streams. It means capital-light revenue, and it means the ability to actually do more with our customers. And so it's a pretty exciting space from our perspective.

I might just add to Racheal's comments. What we've said previously that the first step in our optimization was to shift our balance sheet mix. I think what capital partnerships give us and this is the next phase is real optionality about what we book on balance sheet and what we take off balance sheet. And there are some assets that might well be better suited to partners. So I think you should assume that we're looking at a whole portfolio approach across our asset mix. And we will make appropriate decisions to manage our capital and funding where we feel that we can optimize returns but also grow noninterest income, but most importantly, scale customer growth without the capital and funding requirements. So I think you should see this as a first step, but we will continue to explore other parts of our balance sheet as well.

Our next question comes from Richard Wiles from Morgan Stanley.

Patrick, your answer to Mott's question sounds like the guidance on business loan growth is conservative. I'd like to ask you about your guidance on mortgages. I think from memory, you were previously expecting stability in the mortgage portfolio during the second half of 2025. That hasn't happened. So could you give us some reasons why the decline in the mortgage portfolio is continuing at a greater clip than what you might have previously expected?

Sure. Thanks, Richard. So we had said that we expected peak contraction in FY '25, and we would continue to have slower contraction through '26 and only return to growth in '27. I think if you think about the impact on the second half, there were two big decisions that we made in the first half. So the first was that we have paused on our broker channel in both BOQ and VMA. But the second is that we converted our owner manager channel, and we also consolidated branches. And so both of those have had an accelerated impact on runoff. They're certainly within our plans. And as I said earlier, we now have a converted proprietary channel that is delivering much higher returns. And the productivity that we're now getting from that branch channel is now equivalent to pre-conversion. So I think there's no surprise to the fact when you withdraw from the broker market and pause broker lending in two brands, but also the branch conversion and consolidation, that certainly has accelerated the runoff. We would expect that to slow into this year and certainly grow into next year. Clearly, we are taking a very dynamic approach. This is all about return for us. So we're going to continue to make decisions, which really reflect where we're going to get appropriate returns. So whilst that's some guidance, I mean, clearly, if markets shift and things change and we can write mortgages with much higher returns, we might accelerate that growth. But if we can't, then it might change. So I think what we're saying to you is we feel that's probably the trend, but we'll continue to evaluate that as we go.

Okay. And then just like you to talk a little bit more about asset finance loss rates. Slide 24 shows that the charge has gone from 2 to 15 to 25 in the last three halves. I think Racheal referenced the -- an increase in the collective provision charge. So could you maybe talk about how bigger impact there was from that increase in the collective provision. Are you sort of indicating that, that was a one-off increase in the CP? And what do you think is a sort of more normal underlying loss rate going forward? What should we be thinking about for '26 when it comes to the asset finance loss rates?

So the loan impairment expense experience in the year is definitely higher than what we would consider to be a long-run average by a significant portion. There are two parts to the story. The first is -- and it's actually split about 50% either way. So about 50% of that increase came from specific provision increases. So they are write-offs. That was very much focused on our dealer commercial broker portfolio. It's a small portfolio, but it has had a disproportionate impact on our loan impairment expense. We have since ceased originating business through that business. And then on the other side, the other 50% really does relate to the collective provision that you just talked to. What we saw was an increase in arrears through the first half we took an increase through the collective through the second half by actually increasing our overlays on that portfolio, specifically looking at two industries that were construction and transport industries. We think we're being prudent, but there's certainly a watch out on this looking forward. And so I won't give necessarily next year guidance on that specific question, but it's certainly running higher than what we would consider to be an average over the long run.

And Richard, I might just add to Racheal's comments. I mean, we've said this is a more cyclical part of our book. Certainly, what we're seeing is no different to what's happening in the industry. So it's not related to our book. Yes, we have seen and you would have seen in the slide are starting to stabilize, but it's something that, obviously, we're very focused on ensuring that we are prompt on collections and managing through that, but it's a cyclical industry-related part of the book that we're seeing those movements on.

Our next question comes from Brian Johnson from MST.

Congratulations on being one of the few banks that's actually addressed goodwill. I had two questions, if I may. Patrick, a lot of your narrative has been that front book mortgage pricing has been below the cost of capital. And everyone loves to say that the digital cost of origination really will make a difference. But relative to the net interest income, it's a pretty small line. So I'd just like to understand why it is that last -- how you can rationally justify the fact that about two weeks ago, you chopped the front book pricing on ME Bank which is the businesses out there that you actually chopped it down to pretty well Macquarie's rates, which clearly you were previously saying were below the cost of capital. So can we just understand what's going on there?

Thanks, Brian, and thank you for your question. Happy to clarify that. So, look, I just wanted to reaffirm, we remain absolutely focused on return, and you're seeing the return growth profile delivering improved margin through FY '25. We are taking a very disciplined approach to lending. And so we recognize we also need to be dynamic in how we manage that, and we take a portfolio approach when we set our pricing. We are not saying to you today that we're delivering a return in home lending above our cost of capital. But I think you would be very aware is we are balancing runoff and revenue and cost. So we can't sit back and basically just take all of the assets off our balance sheet if we haven't managed the cost side of the balance sheet. So as you see our pricing in market from time to time, it's really focused on balancing that revenue cost mix, which is really important and ensuring that the runoff is moderated such that we can continue to deliver profitable improvements from year to year. So don't take any one-off pricing on any product as a suggestion that we're back in the market looking to scale and grow. I think it's more around how we continue to think thoughtfully about dynamically managing our balance sheet and ensuring that we are getting appropriate returns across the portfolio, but also managing the revenue cost mix.

So, Patrick, that pricing pulse is not flowing through to basically the branches?

I beg your pardon.

That pricing pulse that we've seen on ME Bank, and it's pretty chunky. That's not indicative of what we're seeing the real rate that you get when you go into a branch at the moment, a BOQ branch.

So if you look at BOQ branded pricing, Brian, that would be in line with market. It's a different price point than our brand.

And Brian, I might just add to that as well. Just so that converted branch channel now, we are generating a much higher return through that proprietary channel now than we previously were. And so I think you should expect that our pricing will reflect that as well.

The second question, if I may, just on the equipment finance, this forward flow agreement. Having read the ASIC independent report, it was pretty scary. And one of the things they spoke about is basically the private credit investor basically effectively getting the yield that the loan is made to an SPV and the manager is basically stripping out an even higher rate that basically the SPV is lending to basically the company. So the end investor gets a lower rate. So I'm just interested, is that if we have a look kind of in the private credit space, we've got -- they don't run a lot of balance sheet liquidity. There's some pretty unusual fee retentions by the manager. Could you just give us a feeling who are the potential customers? And what would you do -- and how would it flow through if we were to see a redemption cycle basically in the forward flow agreement, what would happen if we would actually see a redemption cycle? What would be the end risk that Bank of Queensland would run? Because when you think about it, Patrick, most of the equipment finance is originated through a broker. You're then basically effectively giving the distribution. So the distribution margin is largely given away. You're doing the underwriting, but it's actually the SPV investor that's actually taking the funding margin. It's not -- I know you get a bit of capital relief, but I'd just be interested on how you're thinking about that retention that BOQ would keep under that mechanism.

Thank you, Brian. And there's quite a few questions in that. So I might start with the first one. We are dealing with very credible, large organizations. This is not the low end of the private credit market of funds that have decided that this is a new growth area that they want to be in. These are large global insurance companies that basically have strong demand for these assets. These are large organizations that are very credible that have been in these credit markets for a long time and managing credit assets professionally and appropriately. So I would distinguish between some of the issues being called out by ASIC in the growing credit market compared to the bidders that -- and the partners that we will be dealing with, with respect to this portfolio. I think just to clarify, we are not taking the risk on our balance sheet. So the risk is fully passed to the asset holders. And so that enables the release of capital from our perspective. And in relation to forward flow agreements, I mean, we have flexibility to continue to book on balance sheet if we require. But I think what we're saying to you is there's an opportunity to scale untapped demand in this sector where we would have concentration limits on our balance sheet. We've also said these assets are more cyclically exposed. And so we see this as an opportunity to continue to support our customer demand and really meet their growth requirements with optionality. And so we could bring those back on balance sheet if we wanted to or we could grow through forward flow agreements.

Our next question comes from Ed Henning from CLSA.

Can I just start the first one on costs. And I just want to understand kind of what changed from your guidance a little while ago when you were talking about costs in line with FY '23 and FY '26, slightly up for the branch conversion largely offset by productivity. Has that really been impacted just with the -- you're getting the decommissioning benefits coming through in '27? And just further on that, you talked about Capgemini being a $30 million benefit in '27, but the decommissioning a big one, does that imply the benefits for the decommissioning is bigger than the Capgemini?

I'll make a couple of comments. So thanks, Ed. So first of all, what's changed? We have been managing our migration in a very considered manner and responding to our customers' needs and supporting our customers through that migration. That has resulted that there's a slight sequencing pushback of our decommissioning. And so what we're saying to you is some of those material benefits that we thought that we'd get from switching off the legacy in FY '26 are being delivered in FY '27. So I think that's the sort of material change. But we're also continuing to invest in the business. And we did call out in August that we didn't want to basically make decisions for the long term that stopped us from doing investment in the short term, which impacted our performance. So, certainly, with the Capgemini partnership, we are going to spend some money in FY '26, which is impacting FY '26 cost as well because we're going to get some material long-term benefits from that partnership. So they are the two sort of material changes as you think about where we go. To your second question, is the decommissioning a bigger cost benefit than the $30 million that we're going to get from our partnership. Yes, it's material.

Okay. That's great. And then just the second one, just a clarification. Today, you talked about the loan loss charge running below the long-run average or the through-the-cycle loss rate. Can you just clarify what you think the long-run average is or through-the-cycle loss rate is that you'll be running below next year?

Yes. I mean I'll talk about the long-run average, but it may be that we don't get there next year. I mean, I think I've been calling out a return to long-run averages for a couple of periods now and have been pleasingly wrong, but still wrong. And so if I think about the portfolio mix as it stands today, I would expect up to about 10 basis points in terms of a long-run average. Obviously, there's quite a significant mix difference there with housing at one end of the spectrum and sort of asset finance at the other in the more cyclical times. And so we do think that it could get up to 10 basis points. I mean the other thing, though, is really over time, as we've been calling out, our balance sheet recycling and the remixing of our balance sheet may mean that, that long-run average does shift over time depending on mix.

Our next question comes from John Storey from UBS.

Patrick, congratulations to your team on a good set of results. I just got a little bit of a follow-up, I guess, just on the mortgage strategy. And just wanted to get your views just on the economics between proprietary and broker as it obviously stands today. And then how would this ultimately evolve as you become more digitally focused? I mean what does the economics look like there?

Thanks, John. So just in terms of our proprietary compared to broker, clearly, with the conversion and with the proprietary channel we've got now, we will be delivering higher returns through the proprietary channel. Our core strategy going forward is to leverage that capability, and we are looking to shift the mix. Broker will remain an important part of our portfolio. but we will certainly look to shift the mix to a greater share coming from proprietary. So you should expect that ongoing focus. In terms of digital mortgage, ultimately, we want to originate all of our mortgages on the digital platform. We started with broker. And as I said in my script, the objective is through FY '27 to have the vast majority of our mortgages originated through that platform. That is going to significantly and is significantly lowering our cost to serve. So that will benefit both channels. So it will support a lower cost to serve in our proprietary channel and in our broker channel. But most importantly, it's giving a fabulous, improved experience to customers. We're seeing really quick response times, as I said, conditional approval on the same day. And so we're quite excited about the growth, both through our converted proprietary channel that we've got now, our digital mortgage and the broker channel through ME Bank in particular, will continue to be an important channel for us.

And Patrick, just on that, that obviously gives you the confidence to kind of reengage with the market. And obviously, you've kind of changed your views to some extent, I guess today just around the runoff in the book and the pace of the runoff and obviously reengaging in the market in '26 and '27, right? Just the change in the economics just around digital is a driver of that, right?

Yes. Look, I mean, we've always said our strategy, John, is to shift to a digital module. And we really have to be one of the lowest cost to serve in the marketplace for us to compete in a more commoditized market. But as I said earlier to one of the questions, we will continue to assess returns. And our whole strategy is focused on return over growth. And so we'll continue to look at what margins are doing in the marketplace and determine where we want to grow and which levers we pull to manage our balance sheet going forward. So whilst we're giving you indications that we've got a much higher returning channel in our proprietary channel, digital mortgage will provide higher returns. We're going to continue to evaluate that, and that will determine how fast our growth is in our balance sheet mix going forward.

Our next question comes from Nathan Lead from Morgans.

Just two questions for me. So, first up, just wondering about the timing and the size of the benefit of migrating your non-ME legacy customers across on to the digital platform. That's the first question.

Thanks, Nathan. So look, that's a core part of our strategy. We started with ME. But obviously, the objective is to convert all of our retail customers and the biggest cohort of that are BOQ customers. Now we are seeing a number of BOQ customers self-migrate. We're also seeing new-to-bank customers obviously come on to that channel. But I think you should expect us -- we are planning now. So you should expect us to start BOQ migration into this financial year. I can't give you an end date, but the size of the prize is very big. We're running two banks at the moment. So we've got duplicative cost across our digital bank and our Heritage Bank. What we've said to you is it's a material benefit, and that's a big proof point that we'll deliver in FY '26 for ME Bank. But the bigger prize is actually to shut down our BOQ heritage and have all of our retail customers on the digital bank. That's going to take some time. I don't think you should expect that to happen in FY '27. We need to carefully migrate customers and support them through that migration. But obviously, our learnings and efficiencies that we've got from running the ME Bank migration will help us do that in a faster way. So it's a core focus for us. One of the key priorities for us is to have all of our customers on the retail digital bank and to decommission all of our heritage core platforms. I think one of the big benefits to call out is this is not just a front-end digital bank. This is an end-to-end digital bank. So unlike many of our peers, we are migrating customers and shutting down legacy. And that will, one, create a lot of simplicity for us; two, reduce a lot of cost, but also give us a lot more operational resilience as well for a far better experience for our customers. So we're quite excited by it.

Great. The second question for you is just on the goodwill impairment. If I look at the notes, the accounts there, you've lifted the discount rate from like 10.15% to 12.7% for the retail bank. So it seems like a far higher discount rate than what your peers are running with. What are you seeing that justifies such a big increase in that amount? Or is it just a lever to ultimately help with the cash ROE?

So, actually, what's happened there, Nathan, is the base discount rate has not materially shifted, but we took a view of increasing the risk factor, and that's what's driven the biggest increase up to sort of 12.71% as you call out. And so our view, as we've been calling out for some time now and has been reinforced in our messages today is that structural headwinds exist in the retail bank, and so we increased the risk factor.

Our next question comes from Matthew Wilson from Jarden.

Obviously, it's clear from today that the business bank is a clear part of your growth strategy. However, when we look at it, we've had 6 divisional heads of the business bank in five years, the last one only the last two months. We never hear when they go, but we hear when they come from a market perspective. Could you please add some color to sort of what's happening in the leadership there, given it's such an important part of the growth strategy, how you're pitching to bankers with that constant change in leadership? And I have a second question.

Thanks for that question, Matthew. Look, I think that the ultimate test is how is the business bank performing, and we haven't missed a beat. So we have shifted the strategy. We decided to change leadership with that shift in strategy when we called out to market what we were trying to do. The leadership team within our business bank across our general management group have done a phenomenal job in growing at 40% over the past year. So I think the key test for us is how is the business bank performing? Are we delivering on what we said we were going to do? And it's great also to make an internal appointment with Keith Strachan now, who has been one of the lead GMs running the business bank over the last three years and driving the change strategy for Keith to join ExCo. And I'm really confident that he will continue to progress the strategy that we've got.

Okay. And then secondly, over the last decade, you've pushed $1.3 billion of charges below the line. I don't think there's a year that you've missed putting an item below the line. Given that you're sort of talking about nearly finishing the transformation, can we have a commitment from you that there will be no more charges below the line? And can you give us an update on the OMB dispute?

So I'll take the first question there. We did actually in the announcement that we made in August, we talked about an update to our accounting policy, which says that going forward, things like restructuring charges, we will take above the line. That has been a more common practice now with peers, and we will be taking them above the line and calling them out clearly, so you can still see an underlying cost number. We've always maintained that putting things below the line provides transparency and comparability across the results. And I think we've never hidden the detail, but we've been very clear about it. We will, in the event of things like material acquisitions or divestments, we will continue to take those below the line for comparability purposes.

Thanks, Racheal. Look, before I get on to the OMB, the other thing I just wanted to call out is we did in 2023 when we called out the change in strategy with the four strategic pillars that we're focused on, but also the productivity initiative, we did call out that there would be a material restructure in the organization. We're fundamentally changing the way we operate. That's through our distribution channels. It's through how we operate our processes. It's through technology change. And that has resulted in some material change to the group. I think what we've said is that the digital bank is now largely built. We've had a significant change in roles. And I think it's appropriate that, that core investment that we've made, which is delivering material benefit to shareholders through our productivity initiative with that fundamental shift that we had over the last three years, it's appropriate now to take it above the line. From the owner manager perspective, we've paid all of their entitlements. We did say at the half that there are a number of owner managers still in dispute. There have been no legal claims. We are not aware of any legal claims. And we are now sort of over 12 months in from the initial -- the original announcement. So it's business as usual. And we're comfortable that the cost conversion cost that we called out is appropriate.

Our next question comes from Carlos Cacho from Macquarie.

I just wanted to ask about if you could give us some more detail about deposits within the retail bank. You've seen some pretty, I guess, been growing well below peers there. Deposits have shrunk half-on-half. It looks like it's mostly TDs. It would be interesting to understand what sort of customers are driving this. Is that the hot money investor looking for a good return? Or is this the fact the mortgage book is shrinking and so you're losing bank customers as a result of that?

Yes. So, I mean, there's been a couple of things that we've seen in the market shift is the first thing I'd say in terms of customer behaviors and then in terms of pricing dynamics, some of which I outlined a little bit earlier. If I -- we actually take a group approach to funding is probably the way that I would start the answer. And that is we have had a low funding ask given that we have been in aggregate, rolling off our assets. And so we will always look then to optimize where we roll off in terms of the highest cost, and that has been through term deposits in this period. The real -- like sort of the longer-term approach to gathering deposits is going to be through the digital channels that Patrick has been talking about today. And we will -- we are an acquisition tool there really is savings, but we are seeing increasing engagement from our customers in terms of all those lower cost deposits. So their transaction accounts that typically come with them. So we have been very transparent. We think that, that will take some time to build up, but it's certainly a core part of our focus.

Maybe just then following up, I guess it would be good to understand a bit more on your strategy on deposits. You've got between the brands and particularly the legacy BOQ business, you've got a lot of different products. You've been growing well below system. Obviously, the funding has been low. But if you look forward, what -- it sounds like the digital bank is focus, but is there a risk that as you decommission the legacy BOQ b, there's a significant increase in costs if you have old legacy savings products with much lower rates. How are you thinking about balancing that decommissioning and actually growing deposits, particularly as you return to growth in the mortgage book?

Yes. So look, we've been balancing that as we've decommissioned -- as we've migrated new customers. The -- myBOQ brand, which is our digital banking app for BOQ, you should expect that, that will be the core deposit engine for the retail bank. We announced a really exciting partnership with Virgin Australia today as well, where through that partnership, we're looking for them to market transaction accounts into their 13.5 million members. We think that's a huge opportunity for us to drive growth through that brand. And then obviously, omnichannel will continue to also focus. But I think we are using the brands very differently, and you should expect myBOQ to be the core driver of deposit growth for the group, leveraging our Queensland strength.

Thank you very much. There are no further questions. I'll now hand back to Jessica.

Thank you, and thank you again for joining today's call. If you have any further questions, please reach out to the Investor Relations team, and we look forward to connecting with many of you over the next few days.