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

Good morning, and welcome to today's briefing. Following the opening presentations, we will move to a question-and-answer session. [Operator Instructions] I will now hand over to the Bank of Queensland team.

Good morning, and welcome to BOQ's financial results presentation for the full year ended 31st of August 2026. 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, Rod Finch; and our Chief Financial Officer, Racheal Kellaway, who will present the results. We are also joined in the room by BOQ's executive team. Following the briefing, there will be an opportunity for questions. I will now hand over to Rod.

Thanks, Jess. Good morning, everyone, and thank you for joining. Today, I'll take you through the strong progress BOQ has made in FY '26 to position us for sustainable growth in FY '27. We set the foundations of a simple Specialist Bank maintained disciplined cost management, strengthened our capital position and returned capital to shareholders. This year, BOQ delivered $358 million in cash earnings after tax excluding notable items with net interest margin of 1.7%. This was supported by the decisions we've made to optimize our balance sheet, improve our funding mix and grow with strong risk-adjusted returns. We completed our whole of loan sale. And in August, we paid a fully franked special dividend of $0.15 per share. Our on-market share buyback is also underway. The Board has declared a fully franked final dividend of $0.20 per share, recognizing the group's resilient financial position and strong capital levels. This brings total dividends for the year to $0.55 per share. With the completion of me migration, all ME customers and 68% of all retail customers are now on the digital bank. We have begun scaling the digital mortgage with 88% of application volume and 83% of settlements occurring through digital channels. Our remedial action plans are well progressed with 74% of all activities now complete. While there is more work to do, the risk frameworks we have built through the programs are being embedded across the organization, and our risk culture, measured through our people surveys continues to improve. In FY '26, we continue to recycle our balance sheet from home lending to business lending and established our capital partnership with Challenger. We supported 1.4 million customers across Australia. Our branch network has aligned to identify growth areas, especially focused on Queensland. We expanded our colocated retail and business banking center model and we continue to support the communities we operate in through deeply connected partnerships. Looking closer at the financial results, we delivered total income of $1.7 billion, up 1% year-on-year and strong cost management and expense growth was 2% below inflation and in line with our guidance. We saw improved momentum in the second half with cash earnings of $182 million, up 3% half-on-half and a 6 basis point margin expansion. Racheal will talk to the financial results in more detail shortly. Since we reset the strategy in 2023, we have worked through an ambitious transformation agenda with a clear strategy to deliver a simpler specialist bank. Over the course of 3 years, we developed and are now well progressed in delivering against our risk programs. This has given us strong foundations in our risk practices and operational resilience converting and optimizing our branch network to align more closely with growth corridors and our Queensland heritage has given us the ability to deploy more business bankers into key geographies and better reflect customer preferences. 70% of branches are located in Queensland, reflecting our strategy in this key market. Our technology landscape has simplified throughout this time, and we have halved our core banking systems. We decommissioned 41% of technology assets and 90% of target state IT assets are in the cloud. We have delivered 82% of our simplification agenda with line of sight to the remaining benefits into FY '27. This program has delivered property footprint reduction, a simplified operating model and establishing our strategic partnership with Capgemini to create efficiencies. We completed the integration of ME, built the digital end-to-end bank and all ME customers are now on that platform. We are on track to complete the decommissioning of many legacy technology by the end of this calendar year. After 3 years of building the right foundations, simplifying our operations, building and scaling the digital proposition, we now have the platform for a focused and disciplined return to growth. We remain committed to our strategy of becoming a simpler specialist bank, underpinned by our vision to be the bank that customers choose. To deliver a sustainable return to growth, we have refreshed our strategic pillars. These are: growing our customer relationships, rewiring the bank for the future, accelerating the culture shift and optimizing the bank economics. I'll step through these pillars now in more detail. growing our customer relationships. We are clear and deliberate on the customer segments we are targeting growth in. We are concentrating on the segments where we feel we have the experience and capability to win family-owned businesses and everyday Australians. This focus is anchored to our home state of Queensland where our heritage and foundational strength means we are well positioned to capitalize on the growth underway. Deposits are central to how we want to grow, and we will use the improved offering in our digital bank to deepen relationships and fund our growth with quality deposits. Rewiring the bank for the future builds on the investments we've made to date to create operational leverage. We will continue to simplify and scale benefiting from a modern technology and data platform which supports faster delivery of customer features and has us well positioned to further deploy AI. We've simplified and better aligned our product suite to customer preferences and enabled more straight-through processing and we will continue to add automation to these simpler services. Through accelerating the culture shift, we are creating a culture that is risk focused, accountable and outcomes-based. We are committed to equipping our people with the skills they need in a dynamic environment, upskilling in AI capability and strengthening our leadership capabilities to adapt and better serve customers and compete in the future. Optimizing the bank economics is an approach to growth that is disciplined and accretive to returns. We will do that through the careful allocation of capital and growing capital-light earnings. With our digital retail deposits fully in market, our funding mix will be a key focus in supporting profitable growth. Our Business Bank has continued to grow with commercial lending up 16%. Our proposition for Business Banking is underpinned by our strong Queens position in Queensland and the deep industry expertise we offer in key segments, especially health, agriculture and diversified industry customers. Half of our lending is to our target segment, established family owned and managed businesses supported by bankers who have enduring relationships, understand their customers and are committed to their growth and success over the long term. We have welcomed 42 additional business bankers since 2024, and they have provided strong volume growth. This year, we expanded our co-located business and retail banking hubs in specific growth locations. And these hubs have contributed 20% of the commercial lending growth. Within Asset Finance, we established a capital partnership for the $3.6 billion hole of loan sale for equipment finance assets. The Business Bank is focused on scaling equipment finance lending through the partnership, which generates capital-light earnings without funding requirements and no direct credit risk. Excluding the whole of loan sale, Asset Finance grew 5% this year. This was driven by structured finance and novated leasing, in particular, from continued strong demand for electric vehicles. Turning to the retail bank, we had 2 key priorities this year, completing the migration and shifting mortgage origination to digital channels. We have delivered both. All ME customers are now on the Digital Bank, which offers greater automation, increased self-service and benefits the group with lower unit costs across both origination and servicing. As we focused on scaling digital mortgages, we exited the year with 88% of home lending flow through our digital channels. We've seen strong mortgage application volumes with a 14% increase in the second half, providing momentum into FY '27. While acknowledging this uplift is off a low base, it is a positive indicator of the platform's capacity to scale. Digital home loan customers have 5.5x higher transaction account balances than deposit-only customers, which highlights the importance of our strategy to win a greater share of our retail customers' banking relationships. This will be a key focus as we return to growth. The digital bank is a material shift in how we attract and serve our customers with features and product types continuing to be rolled out through FY '27. There is a changing demographic of customers being acquired to a younger cohort with emerging wealth where we can serve more of their needs over time. We are seeing organic growth in deposits and customers with over $2 billion in new to bank deposits this year, and we saw a strong increase in customers using the platform as compared to FY '25. As we return to lending growth, we remain sharply focused on quality deposit growth. As I noted, rewiring the bank is about leveraging the assets we've built and creating operational capacity for growth. With the simplified business and fuel platforms, products and processes to run, more of our time, investment and attention can go to customers and disciplined growth. We are focused on further automation of processes, less manual intervention and managing our cost base efficiently. Improving the cost to attract and serve customers is a key focus. We have reduced the cost to originate home loan by 22% and remain on track to deliver a 50% reduction at scale. Further functionality releases are planned over FY '27. Branch productivity across the optimized network has improved with an 8% increase in home lending applications per branch this half against the prior corresponding period. And we expect this to continue to improve as the digital mortgage is rolled out across the network in FY '27. Increasing banker productivity is also crucial. Since FY '23, we have seen 17% growth in business lending settlements per banker. As we leverage the tools we have built further enhance our processes and deploy AI, we will free up our bankers to spend more time with their customers. Turning now to how we will accelerate the culture shift to 1 that is more risk focused, accountable and outcomes orientated. Our remedial action plans are well progressed. We have completed 66% of activities in Program rQ and 83% in AML first. Our risk culture continues to be an important indicator of how this is translating into daily activities and one we will continue to monitor closely. We have maintained a steady people experience during a period of significant transformational change, which is a testament to the dedication of our people. Recognizing the dynamic environment we operate in, we are building ways of working and capabilities for our people to learn and adapt to emerging technologies. Over half of our people have participated in training through our AI Academy and over 70% of our people are now using AI agents and tools as part of their day-to-day work. In supporting our customers, we prevented or recovered $7.5 million in losses to customers affected by scams and online fraud. Biometric capability in the digital bank intercepted over 99% of attempts to open fraudulent deposit accounts. During a period of further cost of living challenges, we supported approximately 4,000 customers experiencing financial difficulty. Optimizing the bank economics is an ongoing discipline between volume, returns and capital efficiency. Our track record on strong cost management has resulted in sub-inflation cost growth in the last 2 years. We have, for several years, recycled the balance sheet towards higher returning business lending, particularly while we built the retail digital proposition. Alongside this, we've reduced our reliance on wholesale funding and increased our deposit to loan ratio. Ongoing cost discipline, thoughtful investment and rigorous capital management provide a more resilient, more flexible bank and allows us to pursue returns-focused growth. This will be enhanced through the scaling of new capital-light income streams through the partnership and attracting digital deposits. As a Queensland bank with a 152-year history, we recognize the integral part we play in supporting our customers and the domestic economy and the communities in which we operate. Our community partnership model has continued to evolve with cross-promotional opportunities between our primary partner, Orange Sky Australia and supporting grassroots engagement through Queensland, Rugby Union and the Queensland Reds. We contributed approximately $2 million to community partners this year, enabling support for community connection and vulnerable Australians. This year, we have delivered our first mandatory climate-related disclosures in our annual report and we'll continue to engage with industry, regulators and our stakeholders in this area. I will now hand over to Racheal for more detail on the financial results.

Thank you, Rod, and good morning, everyone. Financial year 2026 was another transformational year for BOQ with the financial results reflecting cost discipline and the delivery of capital initiatives. Stepping through the result, total income increased 1% over the year. Flat net interest income reflects an increase of 6 basis points in margin, offset by lower assets as assets reduced following the sale of the equipment finance portfolio announced in May and the continued shift in our balance sheet from home lending to business lending. Noninterest income increased 12% driven by new origination and servicing fee income relating to our capital partnership and higher business lending fees. Operating expenses, excluding notable items, increased 2%, below inflation, supported by simplification program benefits. Loan impairment expense increased largely as a result of the nonrecurrence of the prior year commercial lending write-back and this resulted in cash earnings, excluding notable items, being 7% lower at $358 million. Second half trends were positive with cash earnings excluding notable items, up 3% to $182 million. Total income was up 2%, supported by a stronger margin, and there was a 1% reduction in expenses. This saw underlying profit increase 8% and which was partially offset by a higher loan impairment expense of $34 million. As disclosed in August, a $33 million post-tax impairment was recognized as a notable item predominantly relating to technology assets. When including this, cash earnings were down 15% against both the prior year and the first half. Statutory net profit after tax of $250 million was an increase of 88%. The prior year included the impairment of goodwill. The most significant item in the current year was the $52 million impact of the Equipment Finance hold of loan sale as disclosed in May. Costs of $22 million related to the second year of the branch strategy conversion costs with the total cost of this program remaining unchanged. The amortization of acquisition fair value adjustments and hedging and fair value impacts had a minimal impact in the year. Margin increased 6 basis points to 1.73% in the second half. Lending was a 5 basis point headwind with competition remaining elevated. There was a 2 basis point impact from housing and a 2 basis point impact from business lending. We saw a continued mix benefit from shifting our portfolio towards business lending and the portfolio sale impacted the lending side of the balance sheet by 1 basis point. Funding was an 11 basis point benefit as we transformed our balance sheet and required less funding. We saw positive benefits from disciplined pricing on Accor savings and term deposits benefited from favorable spreads. There was a mixed benefit as we retired higher-cost wholesale funding. Positive impacts from a higher cash rate environment benefited margin by 3 basis points across the replicating and uninvested portfolios. This was partly offset by a 1 basis point impact from holding higher liquidity assets -- liquid assets, which were deployed in the months after the portfolio sale. Lastly, we saw the nonrecurrence of the brokerage benefit we called out in April. Bringing the impacts of the sale of the equipment finance portfolio together, in line with previous guidance, the margin impact was broadly neutral. Funding benefits offset the small negative on lending and the short-term liquidity impact. The slide also outlines considerations when looking at the first half 2027 margin, where we expect a modest first half uplift, noting the inherent uncertainty. We expect competition for lending and deposits to remain elevated with a higher interest rate environment and slowing of housing growth across the system. Our tilt to growth in higher-margin business lending is expected to see the continuation of a mix benefit. As asset growth returns, we will remain disciplined in funding that growth with a focus on growing customer deposits. Lastly, the replicating portfolio will continue to be a tailwind. 2026 has been a transitional year for noninterest income. Our strategic model is to retain the customer relationship and origination and servicing capability while partnering where it makes sense for access to balance sheet or product capability. These partnerships are important and enable us to broaden our relationships with customers, diversify and increase capital light income and are accretive to return on equity. In the year, noninterest income increased 12% to $159 million. Banking income increased 9% and was driven by higher business lending fees and the full year benefits from the branch conversion. The capital partnership contributed $14 million from origination and servicing fees, which commenced in May. Lastly, we saw a temporary reduction in commission income as a result of transitioning to new partners. Looking to 2027, we expect the full run year benefit run rate of the capital partnership, commissions income to marginally improve following partner transition and other items to remain broadly stable. At the half year, we provided guidance on the moving parts of the back book transaction and forward flow partnership for 2026 with Slide 24 showing delivery against that. Net interest income reduced in line with guidance, and we saw noninterest income slightly above. Overall, resulting in no impact to total income, which was slightly better than expected outcomes. Cash earnings was a $3 million gain and within the guided range. The most meaningful driver of shareholder value comes from the optimization of capital. The on-market buyback commenced in August. As a result, the benefit to return on equity in 2026 was not material. We are planning to continue the on-market buyback through 2027 and expect the previously guided return on equity and earnings per share benefits to come through as the buyback completes. Operating expenses increased 2% on the prior year, delivering on the sub inflation cost guidance provided our first half results. When normalizing for the impacts of operating the branch network, underlying costs reduced 1.6% and is the second consecutive year of underlying cost reduction. There was a $25 million cost increase driven by inflation, higher risk and technology costs and amortization increased by $15 million in the year. Looking to 2027, we expect to see similar drivers of cost movements. Themes of elevated inflation, growth in technology costs supporting new digital platforms, ongoing investment in risk, including financial crime and higher amortization are expected to continue. These 4 categories of increases will be offset by ongoing benefits from the simplification program. In 2023, we embarked on an ambitious plan to simplify the business and drive $200 million of productivity benefits into our cost base. This was increased to $250 million in 2024 as we restructured our operating model and converted the branch network. On exit of 2026, 82% of the program has been delivered and $60 million was delivered in the P&L in the year. 2026 included business processing transitioning to Capgemini, further branch and corporate property optimization and a structural decrease in telecommunications costs. We have line of sight of the remaining 2 components of the program. Decommissioning of the ME heritage environment is currently underway and 2027 will continue to see the transition of services to Capgemini. Our track record of disciplined expense management gives us confidence in leveraging our cost base to deliver a returns-focused sustainable return to growth. In 2026, we invested $180 million into the business with the focus of delivery moving from building the core platform to migrating customers onto it. The digital home loan was also delivered. We commenced the work needed for migrating BOQ retail customers and continue to invest in business bank capability. The carrying value of our technology assets reduced 5% to $540 million. Moving on to portfolio quality. Loan impairment expense is normalizing off a low base and is 8 basis points to GLA. The year-on-year increase reflects the non-repeat of the provision release in commercial lending, which benefited the prior year and a higher collected provision. Looking at the second half, there was a $12 million retail lending expense driven by a collective provision increase, reflecting uncertainty in the economic outlook, higher interest rates, ongoing cost of living pressures and a softening in house prices. 90-day arrears increased slightly to 104 basis points and reflects the contraction of the portfolio with balances in arrears broadly stable over the half. Commercial lending, loan impairment expense was $7 million, with stable 90-day arrears, stable impaired assets and low specific provision activity. In Asset Finance, loan impairment expense reduced to $15 million in the second half as the single name exposure we called out at the half year did not repeat. Normalizing for the portfolio sale, 90-day arrears increased from 96 to 103 basis points, while total balances in arrears reduced over the half. Impaired assets reduced 11% in the half and up 20% lower than a year ago. Asset quality continues to remain sound. However, we are conscious of and are closely monitoring the pressures facing households and businesses. We have $274 million in provisions. During the year, we had the equipment finance sale and the sale of the ME unsecured lending portfolio. Those 2 portfolio changes resulted in an associated provision reduction of $32 million as that credit risk moved off our balance sheet. Normalizing for those impacts, our total provision to GLAs is at 38 basis points, an increase of 2 basis points in the second half. Retail coverage increased to reflect greater uncertainty in the economic outlook, including cost of living pressures and a softening in house prices. Coverage in commercial and asset finance remained relatively stable, and we continue to hold overlays for industries where we see the potential for additional stress. We are holding $74 million of provisions above our base case scenario. If we were to enter the downside scenario, a provision increase of $32 million would be required. On to funding and liquidity, we took the opportunity to optimize the funding stack using the proceeds of the portfolio sale with funding reducing $4.6 billion in the half. Higher cost long-term wholesale funding reduced 12%. Deposits remain our primary funding source, and we are looking to grow retail deposits to support the return to growth. Deposit funding as a percentage of total funding increased to 73% and our deposit to loan ratio increased to 87%. Our liquidity metrics are strong with a quarterly average LCR of 136% and a spot net stable funding ratio of 123%. We ended the year with a CET1 ratio of 11.64%. Returning the capital released from the portfolio sale to shareholders provides an enduring benefit to both return on equity and earnings per share. The sale released approximately $3.2 billion of risk-weighted assets equivalent to 78 basis points of capital. And in August, we paid a fully franked special dividend of $0.15 per share and commenced an on-market share buyback. Pro forma for completion of the buyback, our CET1 ratio was 11.14%, above the top end of our management target range. Looking at the underlying capital position, earnings generated 47 basis points and we returned 35 basis points to shareholders in the ordinary interim dividend. Growth in business lending increased underlying risk-weighted assets. This was partially offset by lower home lending and loan origination costs with a net impact of 15 basis points. The Board has determined a fully franked final dividend of $0.20 per share, representing 72.9% of second half cash earnings, excluding notable items. The dividend reinvestment plan will operate with no discount and is expected to be satisfied in full by an on-market purchase of shares. Our strong capital position supports resilience and provides capacity to grow and invest in line with our strategy to be a simpler specialist bank. I'll now hand back to Rod to talk to the outlook.

Thanks, Racheal. As we look to FY '27, there are risks in the economic environment. Competition for deposits is likely to continue as customers look for returns in a higher cash rate environment. This may be exacerbated by uncertainty in the wholesale funding markets. We are targeting a similar level of commercial lending growth and remain committed to returning to housing growth in FY '27. We expect the competition for quality lending to continue. In the first half, subject to market conditions, we expect a modest uplift in margin with the component parts as outlined by Racheal. We expect strong growth in noninterest income with the full year benefits from the capital partnership and normalizing commission income. With the tail of our productivity program flowing into FY '27, we are targeting flat annual cost growth. We will continue to support our customers as they manage through a higher cash rate environment and continued cost of living pressures. We expect relatively stable loan impairment expense, and our portfolio quality remains sound. We maintain our CET1 target ratio of 10.25% to 10.75% and expect to complete our buyback in FY '27. Our dividend payout target range is unchanged at 60% to 75% of cash earnings. The foundations we have set position us well for a sustainable return to growth, anchored on our strengths and differentiation in the market. We have a committed team delivering for our customers. Thank you to our people for their continued dedication and resilience. Our customers were here to serve and our shareholders for their support. I'll now hand over to Jeff for Q&A.

Thank you, Rod. We will now move to questions. To ensure all participants have an opportunity to ask questions today, please limit to 2 questions each. Operator, can we please have the first question?

Our first question today comes from Thomas Strong from Citi.

Perhaps just a question starting on mortgage growth, Rod. I mean you've been talking to return to growth in '27 for some time, and you've done your bet in terms of lowering the cost to serve. But can you talk about what sustainable growth looks like now versus what you might have anticipated 6 months ago, just given higher competition, slowing investor activity and pretty poor sentiment overall?

Yes. Thanks, Tom. So I think for us, the way we've approached this is similar to what we talked to at the half, which is this year, we've seen some major milestones completed, which is that really build out of the digital bank and the originations we now see flowing through it, which the numbers we talked to earlier, around 88% is originating onto that platform. That gives us a different set of economics as does the conversion of the branch network that we completed a couple of years ago. So for us now, that is the basis for which we can think differently about the returns there. We're very mindful about the outlook that we're looking into. I come back to what we are focused on and that is -- so you should expect to see growth where we're comfortable with an acquisition margin that's accretive to current Roy and are ultimately supporting us to get back to returns above the cost of capital, but we recognize it's a challenging environment out there. We are focused on returning the balance sheet to growth this year, but it really needs to be at the right conditions.

Great. And the second question, just I guess, on market conditions as well. Can you just give some commentary around the capital partnership with Challenger? I mean, again, you made the comment that you've got flexibility to originate on balance sheet or through the partnership, like how are you navigating that split of business, given we're a few months into that partnership now in terms of what's attractive in the market?

Yes. The partnership is where we want it to be. That is well underway. We've established a good working relationship. Really for us, it's about serving more customers and capturing the opportunity that we saw in the market. So in terms of the where the challenger partnership is, which is in line with our expectations.

Our next question comes from Matthew Dunger from BAML.

Yes. I just wanted to follow up on the mortgage growth question. The application volumes on Slide 37, you show if I just look at August, you're annualizing over $25 billion of volumes. So what's the right level to grow the book here, Rod? And what returns do you think you're writing new mortgages at?

Thanks, Matt. So as I mentioned, the volume that we have seen in application momentum rQ, we are coming off a low base. So as we've talked over previous periods, we stepped back while the economics weren't working for us in that mortgage portfolio with those big structural and transformational pieces now in place, we're more confident stepping back into the market. So that 14% is off a low base. And it is a portfolio approach that we're taking, so across both first and third parties. Where we have kind of banked ourselves is ensuring that the acquisition returns that are coming through on the margins are accretive to our current ROE. And it's really over time working to get that back up to the cost of capital. So we're comfortable with where we're at at the moment. It is a mix across both first and third parties. We're also looking at different segments within the portfolio in terms of product type and features. We recognize, as I said earlier, to Tom's question, it is a different market than it was 6 months ago. But what we've really built is an ability to work through the cycle and work through the segments that we feel like we can generate accretive returns.

Great. And if I could just follow up on costs. We can see that the investment spend is very based lower to around $370 million over the last year. Large composition shift in the cost base coming in FY '27 with AME decommissioning and Capgemini. Can you just talk to what is the right level of investment spend going forward for your business?

Yes. So in terms of where we're at in the transformation, the big heavy lifting in terms of remedial action plans and replatforming of the technology environment is behind us. So as we've guided to, we're getting to a level now that we think is consistent with investment going forward. I think what I would say is with the strong capital position that we have, we do have capacity of where we see the right investment and right business case to have the capacity to invest, but it really will be driven by the returns that we see from that investment. So we're comfortable with where we're at. And it really now it's about making sure we're investing thoughtfully to support improved returns.

Our next question comes from Brendan Sproules from Goldman Sachs.

Brendan Sproules from Goldman Sachs. Rachel, I just have a question on your second half bad and doubtful debt expense. I mean, you've shown us $34 million. But when I look on Slide 29, the let Dev, in total fell, I think, $16 million, and I think you called out the sale of the equipment finance is 1 of the drivers of that. So given that write-back, can you maybe talk about the individual provisioning charges that you've had to take during the half? And what's the source of them?

Yes. Brendan. So yes, there's actually 2 drivers really of the overall reduction in provisioning and the first -- they're actually nearly equally attributable. But the first, as you called out, is the sale of the equipment finance portfolio. The second is the sale of the ME unsecured, mostly credit card portfolio that occurred around close at the first half. We noted it then minimal impact to P&L but actually did have a as you would expect on an unsecured portfolio, how to collect your provision associated with that, which was sort of outweighted given the size of the balance sheet. So if you remove those 2 impacts, actually, the collective provision is sort of broadly flat to the same period last year and up about 6.5% half-on-half. And so there is an underlying increase in the collective provision, noting also that the sort of balance sheet has declined given the home lending contraction as well. So the biggest increases in collective provision really come from the retail lending portfolio where we have taken effectively a more pessimistic view on the economic outlook in our downside and severe downside economic scenarios. So we have about 45% weighting to those downside scenarios and the weighting hasn't changed, but we think compared to when we were talking to you in April that the economic outlook has deteriorated.

Just a follow-up question. So those portfolio divestments that you made, you've called out the credit card and unsecured and the equipment finance. Do those write-backs run through the P&L?

So the -- well, effectively, they will be in the lower loan impairment expense number, yes. The equipment finance portfolio write-back was wrapped up in part of the transaction cost of that benefit went into the overall below the line sort of cash adjusted statutory number that you see, I think it's $52 million in total in the year. .

And just a second question in your NIM on Slide 22. In the first half, you indicated that you had a -- on the asset lending side, a 4 basis point headwind from the timing of the cash rate. I was wondering whether that has appeared here in the second half as a reversal or whether that is still to come in FY '27?

Yes. So it was in the first half when we talked to that. If you recall where we were in the cash rate cycle, we had actually seen in the period prior, we had seen reductions in the cash rate, and then they had -- and then the cash rates at are picking up quite quickly in what was our first half. And so the dual impact of that created what was quite a visible net interest income impact in the margin walk. This period because we've just seen effectively 2 periods where we've seen rates rising, the delta hasn't been as great. So it's not an impact in the margin walk.

Our next question today comes from Brian Johnson from MST Marquee.

Congratulations on some of the stuff we can see coming through. Two questions. If I have a look on Slide I can see that your business lending book has got a lot of property in it and property has got a lot of issues at the moment. I know you're telling us that [indiscernible] is well secured, but there's a lot of argument that values could actually be falling. Is there any chance that we could get a little bit more detail of what that actually is that 92-point -- that quite substantial balance like 35% is pretty chunky. But could we get some kind of breakdown on that by sector? .

Yes. Thanks, Brian, and thanks for the question. So on Slide 13 of the deck, we've tried to outline a couple of lenses through which we think about our business banking franchise and how we manage the business. So on the right-hand side there, you'll see from a commercial lending perspective, 1 of the lenses from an exposure point of view with which we cut the bank and it gives you a sense of the profiles -- and then the industry segments. And I'd call out there the diversified industries that you see on the right-hand side of that chart on the left section of the chart. The most of the lending that we're doing, you see that's where the growth is. And a lot of the lending we're doing in that part. These are operating or trading businesses, and they're also investing in existing properties as part of a wealth diversification strategy as part of their business. And then as kind of key strategy they're deploying, and we're supporting that with our customers. The difference you see there to what you've called out on Page 50 is the Page 50 definition is on a pure ANS basis. That is where it reflects the income source that's driving -- servicing the asset underlying. And in those cases, it's where the primary income is coming from. So the difference is there is where our customer is choosing to service the commercial property through the lease payments that would be coming through as a property lend even though they are running a wider trading business or an operating business as part of their overall kind of businesses that they run. So again, we think it's a business that we understand. We are really comfortable with the quality of the assets that we're lending to. We understand the credit risk that we're taking. And we're very thoughtful about the outlook, and we take that into account when we're thinking about the future pipeline and the deals that we're doing.

Rod, it's existing business customers just going and buying the building that they're operating out of. Is that kind of what it is?

Or an investment property as well. So we have clients who are kind of buying the property next door or they're seeing it as a way to diversify their asset base and their income streams off their trading.

Okay. The second question, if I may, just on Slide 26. Just thinking about the productivity kicker for next year. We know you get the $13 million run rate comes through in FY '27 that you didn't realize in this period. How much of that $45 million do you reckon actually hits the P&L in '27?

So Brian, we've called out really the 2 initiatives that will deliver the residual amount into P&L. So do -- we are planning to see that benefit dropping to the P&L and that's the decommissioning of the legacy ME systems, that's currently underway. We're currently in the process of archiving and literally turning things off. So clear line of sight. And then through 2027 the residual amount is the transition of services to Capgemini, which comes at a lower cost. So that full P&L benefit will come through in 2027. .

Does that imply there's another benefit that comes through in -- when you get a full period impact of it. So what you're saying is it's actually greater than 45%. Is that the way to think about it?

No. I mean there's -- the component relating to the legacy ME Bank systems, that's sort of occurring really the -- like let's just say, towards the end of the first quarter, maybe into the second quarter. So there will be a small benefit come through into 2028 off the back of that very sort of small that will continue. The transition of services, that will just come through the year. There will probably be a tailwind that continues into 2028, but we will still be looking at how to manage the cost base into 2028 off the back of all of the moving parts, including inflation, higher amortization and things that will continue through to that period again? .

Rod, can I just push my luck as a third question, if I may. When I have a look on the data set, I can see Bank of Queensland just saying you're going to be very disciplined on housing. I can see that you're going more and more digital, which is great. You say that at the moment, the cost reduction is 22% goes to 50%, but I'd suggest to you that's kind of like miniscule relative to the competitive margin dynamic that we see. But if I have a look on the data sets, I can see ME bank with basically matching Macquarie with the most aggressive owner-occupied rates in the market. Can you just reconcile that for us? If you're going more and more digital, where basically price is the option. It just doesn't seem to ring true matching the price with the most aggressive player in town, particularly through digital. I mean how can we wrap those things together?

Thanks, Brian. So for us, we very much take a portfolio approach. So we recognize that brokers are a key factor in this market. Customers are choosing that. They choose that through the cycle. So we -- to participate in the mortgage market. We need to have a good proposition in that space. And that is really our Me-brand that we take to market. I think the way we've built the digital mortgage and thought about that business more holistically is absolutely. We need -- it is continue on on that efficiency route of making it a very efficient platform to originate and serve. But increasingly, we're thinking really about those first-party channels as well, both through our BOQ brand and our Virgin brand where we are in market with the digital mortgage as well. When we look at that composition and we look at the different product sets into as well, it's really about looking at that overall. And certainly, the returns in first party we're very comfortable with. And in that overall approach, that portfolio approach, which is a mix of channel, different product types and where we might sit on the risk curve albeit facing into the -- being really conscious of the market we're facing into. That is how we get comfortable with returning to growth overall in mortgages. .

Our next question comes from Andrew Triggs from JPMorgan.

Just on the NIM. Obviously, the these benefited from strong funding cost management post the equipment finance sale. Can you talk through, please, just your confidence around a sustainable return to NII growth in what is a competitive mortgage market world? And as a related point to that, I mean how can you be sure that while growing digital deposits, they're just not deposits that are the bleeding price hedge.

Yes. I'll start with the deposits and then I'll circle back on the mortgage. So deposits, it's how we've grown over the last couple of years. We've added some stats in there. And I think it's that mix of transactional accounts along with that call as well. Obviously, the way those products are constructed and similar to the answer for Brian, it's a portfolio approach that we take. So there will be different price points that we take for certain segments that we're looking to attract. I think we are balancing that growth in the context of the wider portfolio and how we're optimizing that through wholesale funds and also third-party deposits. And I think the other factor that we take into account in how we're looking at funding mix and optimizing that going forward is the challenger partnership and the fact that, that is funding that we're no longer required to support to grow asset finance. And so for us, very much a portfolio approach again. Underlying that is obviously just growing transactional balances. I think the other area, Andrew, that we recognize we have an opportunity to grow is deposits for our business customers. We don't do a lot of that. We have some gaps in the proposition. And that's something we're addressing strategically. But I think we also see some areas there that we can do more in the near term. and that's something we're focused on as well, and we think there's some upside for us. So it is a long game. It's shifting that mix over time. And we think that's an important part. And really what underpins our return to growth overall as a business. On mortgages, as I said earlier, it's really about being really disciplined around where we want to play, understanding what role our brands play in the mortgage market, looking at leveraging particularly those first-party brands that we have and looking to grow more there but balancing that in an overall portfolio sense.

Yes. But overall, would you say that the cost of your digital deposits is improving, is it relative to history or relative to peers? Do you have a lens on that? Transaction account aside, really just the savings account. If 1 of your [indiscernible] peers is doing a very good job in growing digital savings accounts and that is leading to NIM improvement. I'm just wondering whether there's a similar story here.

Look, we're comfortable with where we're sitting. We see -- it's core to our strategy, which is really deposit-led growth, and we've been really thoughtful around how we want to grow. And so the product settings are very deliberate. For us, continuing to grow those retail deposits, and I would to include business deposits in that definition. That is we see there's an opportunity for us to improve our funding mix over time by focusing in that space. We recognize it takes time to build that up. But we're really comfortable that we've got a proposition that's winning, and we're comfortable that, that's supporting the kind of returns aspiration we're looking for over the next couple of years.

And just a quick 1 on mortgage originations or applications, should I say, in the fourth quarter. Could you give us a number in terms of the perhaps Racheal the mix of broker and proprietary on that fourth quarter application flow. We've got the FY '26 flow number, but just interested in the period where actually you saw a pickup in applications.

Yes, the sort of broker proprietary mix is still -- it's in line with market, but heavily broker, as you would expect for us, given we are just launching the digital channel. We have seen through our branches and increase in productivity. And so we've seen uplifting momentum or some momentum through our branch network in the period as well, but still largely in line with market, which is broker-led.

Right for the period over time that might start to change?

Yes. We -- that is our plan, for sure. I mean, whilst we have been in the build of the digital home loan mortgage, we have been effectively relying much more on broker than we see going forward. But look, customers still tending to like to use brokers for lots of different obvious reasons. And so we expect that to remain a very important channel for us. .

Our next question comes from Richard Wiles from Morgan Stanley.

I have 2 questions. The first relates to the mortgages. As we've discussed, you've highlighted the improved applications. Can you also comment on how much of that increase in applications is driven by refinancing and also what trends you're seeing in runoff?

Thanks, Richard. So look, I think we're -- the market we're operating in 1 at the moment, which is more of a refinance market. So that is underpinning a large percentage of the application volume. So purchases have really softened, given what we've seen in the market. So that's what we reflected in the second half. If looking forward from there, look, I think we need -- will play out where the market goes to from here. I think for us, it's about maintaining a really clear understanding of the acquisition margin we're acquiring it and making sure we've got those settings right. So at this stage, it is really driven by refinancing.