Bendigo and Adelaide Bank Limited (BEN) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by and welcome to the Bendigo and Adelaide Bank 2020 Full Year Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I now hand the conference over to your speaker today, Managing Director, Ms. Marnie Baker. Thank you. Please go ahead.

Good morning, everyone, and welcome to the market briefing for Bendigo and Adelaide Bank's financial year 2020 results. I'm Marnie Baker, the Managing Director of Bendigo and Adelaide Bank. And presenting with me today is the company's Chief Financial Officer, Travis Crouch; and Chief Risk Officer, Taso Corolis. Given the current COVID-19 restrictions in place, we are all presenting from different locations, so please bear with us should there be some delay in moving between the presentation slide or any other technical difficulties. But we'll see how we go. I'll start today's briefing with an overview of the 2020 full year results and an update on the business. Travis will then take you through our financial results in more detail, and Taso will provide an update on how we are supporting our customers impacted by COVID-19 and the flow-on effects to our collective provision. I will then talk to outlook, considerations for the coming year and our priorities in the short to medium term. And then I will open up the question. [Operator Instructions] It certainly has been a challenging year with the impacts of devastating fires, floods, prolonged droughts and more recently, a pandemic affecting many Australians and Australian businesses with severe impacts to the economy. The bank was well placed coming into this year and has remained so with a well capitalized, strong and resilient balance sheet. Our common equity Tier 1 ratio of 9.25% sits comfortably above APRA's unquestionably strong benchmark, and our lending portfolio remains well secured and performance remains sound. Stable underlying earnings was supported by above system lending growth, efficient margin management and strong deposit funding. Underlying credit costs of 8 basis points for the year before the COVID-19 collective provision overlay reflect our conservative risk profile and well-secured portfolio. All of this is underpinned by a clear multiyear growth and transformation strategy that continues to reduce complexity in the business, build new capability and accelerate the change required to reshape our business for the future all the while demonstrating our purpose in action. We continued our significant customer growth with total number of customers increasing 9.9% on the prior year to a record 1.88 million. And this growth has continued into FY '21, with customer numbers now exceeding 1.9 million. This growth came whilst achieving a Net Promoter Score of 32.1, which is 33.1 higher than the industry average and 35.6 higher than the average of the major banks, a score that we have consistently earned. Continued strong above-system growth has resulted in us taking market share in a highly competitive environment with record levels of refinancing activity occurring. Above-system lending growth was a standout for the year, increasing 5.1% as was our record residential lending growth at 9.4% or 3.6x system. Additional staff costs to support above system lending growth in our priority markets, impacts from COVID-19 as well as accelerated investment in transformation have resulted in an increase in our cost-to-income ratio in the prior year. Total income was up 0.9%, and excluding accelerated investment costs, operating expenses were up just 1.5% for the year. Pleasingly, amongst so much uncertainty and change, our employee Net Promoter Score increased 5.3% over the year to 73%. Our full year results have been impacted by COVID-19, record low interest rates and investment required to support the delivery of our strategy. Stat net profit of $192.8 million was significantly impacted by the COVID-19 collective provision overlay of $127.7 million that was recognized in May. Also, was software impairments following a review of our software assets and accelerated amortization associated with the increase in our capitalization threshold as well as other specific expense items as we continue to simplify our business. Full year cash earnings were down 27.4% on the prior year. Despite this, we delivered total income of $1.61 billion, up 0.9% on the prior year, backed by strong above system lending growth and a well-managed net interest margin which declined 3 basis points over the year. The cost-to-income ratio reflects our above the system growth and the upfront investment required to deliver on our strategy as well as impacts from COVID-19. Looking ahead, we are targeting to return to positive JAWS in FY '21, underpinned by continued asset growth and an accelerated cost reduction program. Even though we further strengthened our capital position by 33 basis points to 9.25% and comfortably above APRA's unquestionably strong benchmark, economic uncertainty remains and the full impact of COVID-19 is still evolving. It has never been more important than to act prudently to balance the interest of our customers and shareholders. Our balance sheet is well positioned to absorb the impacts of COVID-19 with ongoing stress testing supporting a strong balance sheet and capital position. Our liquidity profile remains strong with positive deposit flows and customer deposit funding sitting at 75.2%, with available wholesale funding programs providing additional flexibility. Whilst economic uncertainty remains and the impact of COVID-19 is still evolving, the Board has acted prudently to preserve capital at this time and to defer a final dividend decision. Careful consideration was given by the Board to shareholders' interest, the financial position of the bank and APRA's industry guidance on capital management. Australia is facing its largest contraction in decades with the economy expected to shrink by up to 7%, inflation to remain low and unemployment levels declined to close to 10%. This level of unprecedented economic disruption has required decisive and collaborative action by government and industry. In a strong position heading into the pandemic, banks have played and continue to play a very important economic and social role standing alongside government support by providing financial assistance to our customers, communities and employees. Unprecedented fiscal and monetary support by the government and the Reserve Bank have provided a cushion to those most in need and the stimulus of economic activity to reduce the severity of the downturn and time to recovery and ensure an orderly transition. Banks have provided essential support to around 10% of their customer base, working alongside regulators to ensure timely and decisive actions can be applied pragmatically to maximize the positive effect on customers. Our priority has been to support our people, customers and our communities. They've been impacted by the extreme events of this year through a range of tailored measures in line with our long-standing purpose to feed into prosperity not offered. Since March, more than 25,000 personal and business accounts have been provided with support to help customers manage the impact of COVID-19. Approximately 20,000 customers or 10% of the bank's total loan portfolio remain on deferral of loan repayment arrangement, and we remain committed to ensuring tailored arrangements are agreed with customers prior to their deferral period ending. It is in the best interest of both our customers and the bank to return to repayment of their loans as soon as possible. Where customers cannot resume making repayments at the amount previously required, alternative individual arrangements to restructure their loan will be worked through considering their personal circumstance. As an essential service, we continue to play a very important part in helping the economic recovery while supporting our customers and their communities through the pandemic. More than 90% of our corporate office employees have been working remotely since mid-March, and the majority of our branch network has remained open to assist customers seeking a COVID-safe service. We also quickly deployed over 200 staff to our call center and mortgage help teams to support increased customer assistance. The way our team has adapted at pace and scale is a testament to our culture and something I am very proud of. Bendigo and Adelaide Bank and its Community Bank partners play a vital part in supporting Australian community. There is never -- this is never more obvious than in times of hardship. Over 220 Community Bank companies have provided direct financial support to their communities in response to COVID-19 as well as engaging in their local communities and working closely with them with the broader community response. This additional support is a natural extension of our deep connection with Australian communities and underpins the importance of this model. As one of the largest social enterprise movements globally, the Community Bank model has provided over $245 million in community contribution since its inception some 20 years ago, enabling tangible economic and social benefits for their community. This past year not only reflects the 1 in 100-year pandemic, but it has also been one of the worst bushfire seasons on record. In January, the bank launched national and state-based appeals to help those impacted by bushfires, with more than $46 million raised from more than 144,000 generous donors. Importantly, 100% of the funds raised is being distributed directly to affected communities with distribution decisions being informed and recommended by local communities for local community. Our vision to be Australia's bank of choice is being shared by more Australians as evidenced by the latest count of the more than 1.9 million people choosing to bank with us. Customers are attracted to us by our demonstrated purpose, track record in customer service, our consistent high trust ranking, innovative and competitive products and services and meaningful customer and community outcomes. The strong growth that has been achieved is a direct product of our strategy to reduce complexity, invest in capability and tell our story. Whilst the events of 2020 haven't changed our strategy, the ongoing economic uncertainty has accelerated our need to transform. And as we continue to adapt to the changing economic environment, our enduring purpose to feed into prosperity is central to our strategy. Consistently ranked in Australia's Top 10 most trusted brands, our distinctive strengths are deep human connection, grounded in purpose and embedded in community, our partnering capability and track record of innovation continue to provide customer value and growth opportunities for our bank. We have demonstrated success by growing in key priority markets and extending our reach and relevance. We have our sights squarely focused on sustainable long-term growth. This will be propelled by the adoption of new technologies and adaptive, innovative culture and agile workforce, tight cost management and simplifying our business, all the while remaining acutely focused on better customer outcomes. Our growth and transformation strategy has been refined into 4 interrelated parts: early action to remove complexity and cost, investment in capacity for growth, structural changes to reduce operational complexity and increase productivity and a longer-term transformation initiatives in response to the changing needs of customers and an evolving operating environment. Targeted early action has been taken to remove complexity and cost from the business. We have successfully completed the post-sale transfer of Bendigo Financial Planning to Bridges Financial Services, achieving our targeted savings. We acquired the remaining 50% of community sector banking joint venture and commence the optimization of its operating model. We automated the scheduled review process for business banking customers, improving the customer experience and productivity by reducing time spent on administration, providing our relationship business bankers with the opportunity to do what they do best, more time to focus on delivering customer value. We continue to rationalize and consolidate the number of branches in line with customer and community-led trends, with a net reduction of 17 branches over the year. We successfully integrated Rural Bank following the handing back of the Rural Bank ADI license, which has delivered cost savings efficiencies and reduced ongoing and future compliance costs resulting from duplicate regulatory obligations across the 2 ADIs of Rural Bank in Bendigo and Adelaide Bank. We introduced a new home loan product, the Bendigo Complete Home Loan, reducing the number of products in our system by 95. We reduced the number of technology applications by 12%, and we undertook major restructures of our marketing and technology divisions, reducing the number of roles required and removing management layers. There is latent opportunity between the number of customers who choose to bank with us, their total banking business and our current market share. Significant opportunity exists in drawing on our strength to deepen the relationships we have within our existing customer base, which has grown exponentially over the past 2 years. Focusing on and investing in key growth markets will increase our market share, attracting new customers and providing additional value to our existing customers. We have already demonstrated success by growing in key priority markets supported by our investment strategy, and this remains a focus looking forward. Our Consumer Banking division continued to outperform system with record levels of residential lending, underpinned by a clear customer strategy and driven by investment in lending distribution and processing capacity. Lending applications increased 50% and settlements 31.8% on the prior year, with good activity across all origination channels and supported by a strong deposit franchise in the branch network. Branches remain a critical part of our distribution strategy, providing a significant source of stable customer deposit and community connection. However, the size, look and feel will change over time. We continued the modernization and optimization of the branch physical distribution network over the year with new community-focused experience stores in Carlton, Victoria; Leichhardt, New South Wales and Coffs Harbour, New South Wales; together with a 30% increase in mobile relationship managers to support business and consumer customers seeking convenient personal banking expertise. We invested in processing capacity to support growth. New mobile relationship managers and new and enhanced third-party white label partnerships, which combined to deliver a positive impact on residential lending growth over the year. Loan processing times improved by 13.7% over the year. New third-party managers contributed 60% of growth in that channel, and settlements through mobile relationship managers increased 50%. The success of our fintech partnerships with Ferocia and Tic:Toc were further strengthened this year. Up, Australia's highest-rated banking application and first mobile-only digital bank to launch in Australia, more than doubled its customer numbers to over 250,000. Tic:Toc sustained further growth of 120% year-on-year, with cumulative home loan approvals now at more than $1.22 billion. Looking ahead, we are focused on accelerating our cost transformation program, targeting sustainable cost base reductions that improve the proposition and experience for our customers, taking cost out of our business and driving growth. We have established a cost transformation program, identified key areas of focus, taken early action and appointed Boston Consulting Group to work closely to support us in achieving our medium-term cost-to-income objective. We know we must constantly evolve because our customers' needs and the environment continue to change. The events of 2020 have accelerated the need, the change and the way we work and how we look and operate. It has accelerated the adoption of digital technologies and reinforce the importance of strong community connections and demonstrated how vital trust and the use of data and insight is to underpin strong risk management systems. Our transformation roadmap is focused on delivering step changes across 5 key areas, which support growth, increase operational leverage and maintain a leading customer experience. During the year, we delivered on key initiatives in each of the areas, delivering digital capability to our customers through the ability to sign documents digitally and identify customers via video. We implemented new data streaming and integration capabilities to deliver real-time data and transition to cloud. We reduced the number of products in our systems and technology applications being used, automated a number of workflows to enhance the customer experience, delivered the first phase of open banking ahead of schedule and continue to enhance data capabilities to mitigate risk. As we continue our growth trajectory, we will sustainably step up the level of investment in technology and digital initiatives and people capability to boost scale and efficiencies, increase productivity, further remove complexity in our business and deliver the banking experience of the future. We will continue to take full advantage of the growth opportunities before us. We have a clear plan for the future, which enables us to continue to invest based on the benefits from the investments we make. I will now hand over to our Chief Financial Officer, Travis Crouch, to take you through the financials in more detail.

Thank you, Marnie, and good morning, everybody. I will start this morning with an overview of our financial performance, with cash earnings for the year of $301.7 million, down 27%. As Marnie mentioned, this year's cash earnings result was significantly impacted by the recognition of the COVID-19 collective provision overlay in the second half. Excluding this overlay and other notable direct impacts from COVID-19, our cash earnings was 2.8% lower year-on-year. Statutory net profit was at $192.8 million, reduced by 2 material items in the year. It was $121.9 million impairment expense following a review of our software assets and a $19 million accelerated amortization charge associated with the increase in the capitalization threshold for our projects. When we look at the breakdown of cash earnings, the net interest income is up almost 3% on last year driven by above systems asset growth. Other income was lower driven by the impact on fee income from both COVID-19 and customer behavior and the lower commission income following the sale of Bendigo Financial Planning. Operating expenses were up 7% on last year as we made the investments required in staffing levels to deliver above systems asset growth and in our risk and compliance, technology and people and culture teams. The cost outcome also reflects the acceleration of our investment in technology and digital capabilities that we spoke about 6 months ago. Credit expenses of $168.5 million includes the $127.7 million COVID-19 collective provision overlay we announced back in May, with the underlying credit costs remaining low at $40.8 million almost 20% under last year. Our second half result includes a number of direct impacts from the COVID-19 pandemic. Fee and merchant revenue as well as commission and foreign exchange income have all been impacted through our action to support our customers and as customer activity has reacted to the changing environment. Staff costs are higher as we ensure the safety and welfare of our front-line and head office staff. We also saw a reduction in the level of leaves taken over the last quarter as staff responded to the changing work environment and as resources were maintained and reallocated to assist in our response to assisting customers. Credit costs reflect the further strengthening of our provision through the overlay for potential future impacts from the COVID-19 pandemic. Total lending was up 5.8% over the 12 months, 2x systems growth and driven by a 9.4% increase in residential lending. Our growth is from the continuation in new lending activity following the success of the upfront investment in our third-party distribution partners and processing capacity as well as the investment in our retail mobile relationship managers and recent improvement in activity levels through our retail branch network. It also reflects the results from our focus on retention, which has been successful in retaining customers and reducing the level of discharges. Our second half '20 result is even stronger, with residential lending 4x systems at over 10% and total business lending up 3.5% for the half. The second half residential lending growth achieved means we've grown above systems for the third consecutive half. Agribusiness growth in the second half was up almost 10% and reflects the seasonality of the portfolio. When we spoke at our first half results back in Feb, I said we expected positive growth in the second half for our business portfolio. However, as you can see, we ended up down 0.5%. More importantly, for the customer segments we target, over the last 2 months of the financial year, we grew our portfolio. And at the same time, systems lending declined. The growth in residential lending has been driven by the 50% increase in applications year-on-year as we saw the early return from our investment in an increase in our ability to service and an improvement in our bank time to decision. Processing times improved over 13% over the last year. The momentum we saw in FY '20 and in particular, in the last quarter has continued into July. We also launched our simplified retail home loan product in late July, removing 95 products from our system and our customers and staff have responded through an increase in applications over the last few weeks. A key driver behind the 9.4% increase in residential lending activity in residential lending achieved during the year can be seen here with significantly stronger settlement activity across both Retail and Third Party. Retail settlement for the half were up 18% on second half '19, while Third Party was up 85% with the strongest lending growth delivered in our core segments of owner-occupied and principal interest lending. Net interest margin for the year was at 2.33%, down 3 basis points over the year. June's monthly NIM was also 2.33%, up 2 basis points from December 2019. The improvement in June was driven by decreases in term deposit rate and reduction in the liquidity portfolio. Over the second half, we saw an 8 basis point decline in NIM, and we've again included a detailed breakdown on the impact on NIM for each half. You will see in the table on the bottom left that the front book/back book pressures on margin continues across the industry, and we saw a 7 basis point impact this half. This includes the impact of stronger new business flows into fixed lending and lower rate, owner-occupied P&I lending. The impact of the 2 cash rate reductions in March can be seen across a number of item. With our decision to balance these reductions across our lending and deposit customers, meaning there was a positive impact from the variable lending repricing of 10 points. The 8-point reduction in NIM from our customer deposit pricing reflects the net impact of the pass-through to our at-call rates and changes in term deposit pricing over the half. As I called out back in February, our hedging generated positive net income, but this was lower than the first half and is represented as a 3-point reduction. This was due to the combination of reduced overall long hedging position and reduction in the market interest rate in second half '20. Significant growth in net core funding was the main driver behind the 3 basis point improvement from the funding mix. Margin performance of first half '21 will be impacted by the continuation of front book/back book pressure as the competitive market conditions continue. With the strong core deposit growth continuing into the foreseeable future, combined with access to the term funding facility and our active management of term deposit pricing, we expect to be able to offset this front book/back book impact. However, at some point, term deposit rates will hit, therefore, and core deposit flows may return to a more normal level. And this will put pressure on FY '21 NIM, likely in the second half. While there are multiple moving parts in the NIM outcome, we expect first half NIM to be down slightly on June's exit NIM of 2.33%. However, all things considered, our full year FY '21 NIM could be around 7 points lower than FY '20 as we look forward through the market to understand how things might play out. Total income was 1% higher than the prior year. Net interest income was up almost 3% from 12 months ago, with the above systems lending growth driving it. Total other income was down 8.1% on 12 months ago. However, after normalizing for lower commission income following the sale of Bendigo Financial Planning in June 2019, other income was down 4.5%. The impact of COVID-19 were seen in a number of income lines, including a reduction in fee income. Excluding this impact, fee income was slightly down driven by the competitive environment, customer behavior and the product options we offer our customers. This was partially offset by increased lending fees through the higher asset growth. Moving now to operating expenses. These were up 7% on last financial year driven by higher staff costs, invested upfront to enable the execution of our strategy as well as our accelerated investment in technology. Excluding this technology investment, operating expenses were up 1.5%. As Marnie mentioned earlier, the operating expense outcome is not just enabling the customer and lending growth outcome we are achieving, but also reflects the decision to accelerate investment across the 5 key areas. Total expenses included a first year OpEx of $52.4 million related to the investment in customer experience, digital simplification, automation and compliance and regulatory change. Fee and commission expenses were lower, predominantly as a result of the new distribution agreement with Elders. Following our review of capitalized software assets and the capitalization threshold completed in the first half, we have now also reviewed all regulatory and compliance assets, where there are no measurable and tangible benefits. As a result, statutory operating expenses include an impairment of almost $35 million in the second half. Cash operating expenses now include additional cost as we expense these initiatives at the time of investment. Looking forward to FY '21, and as we continue our growth trajectory and execute on our cost transformation, we will step up the level of investment in technology and digital initiatives to take full advantage of the opportunities before us. Even with this increased investment, the work we have commenced in our cost transformation program means we are targeting total operating expenses to be flat or even lower than FY '20, subject to the timing of the initiatives delivered on cost transformation. Staff costs were up over 9% when compared to the last financial year, and we've included a breakdown of the key drivers behind the movement. You can see the full year investment in staffing levels as we execute on our strategy. This includes the resourcing needed upfront to support the above system lending growth achieved during the year and the growth continuing into FY '21. Our risk and compliance, people and culture and technology divisions have also been priority areas for the group. Agribusiness has seen the impact of a full year of the costs associated with bringing a new Elders agrifinance staff on board back in May 2019, and we have added additional resources to support the increased income generated through the Government Services business. As mentioned earlier, COVID-19 has impacted staff costs through the reduction in leave taken over the last quarter as well as we all respond to the changing work environment and as the resources required to assist in our response to supporting our customers. To support our staff in a time of great uncertainty, we also made a grant of 10 additional days of personal leave to help them deal with the impact of the pandemic, including needed help care for elderly family members or children. Turning to the first of our divisional results. The Consumer division has delivered strong growth in residential mortgages of over $3 billion, well above systems. This growth was led by the Third Party channel. However, as I said earlier, both Retail and Third Party are showing good momentum. Lending applications increased 50% and settlements 32% on the prior year. Growth in our core deposits of $3.9 million enabled us to actively manage the pricing and flows through our more expensive term deposit portfolios across the group. NII increased year-on-year despite the margin compression, reflecting the strong asset growth. The decrease in other income was driven by the lower fee income reflecting both changing customer behavior and the impact of COVID-19. The sale of the Bendigo Financial Planning in June '19 meant there was a reduction in both commission income and operating expenses in FY '20 with an improved earning contribution from wealth following the sale. Total operating expenses were down against prior year also attributed to proactive cost management. The release of the collective provisions during the year offset what was a benign year for underlying credit expenses. The Business division has undergone a significant transition over the last 2 years to move to a fully segmented relationship model, while in parallel, significantly improving the risk profile of the lending portfolio. NII was lower on the prior year, reflecting the contraction in the lending portfolio through the first half, margin compression and a lower contribution from the specialized deposit channel, which were managed down in preference to the strong core growth achieved by the Consumer division. Positive asset growth in the second half represented the first time the division achieved this in over 3 years, with a small business proposition continuing to build on prior period momentum. And the commercial property lending portfolio growing after rebalancing into its targeted risk appetite setting. Other income was impacted by COVID-19 through material reductions in activity over this last quarter. And operating expenses were higher driven by staff costs, with the initial impact of the acquisition and consolidation of the Community Sector Banking business and our increased investment in risk roles being the major drivers. Credit expenses for the year were slightly higher as we finished the number of long-dated impaired assets. Our Agribusiness division delivered an improved earning contribution year-on-year. The asset portfolio has increased by 9.7% over the half due to the seasonal activity for crop planting and growth in core market. For the 12 months, the portfolio grew by 1.3%. This growth, combined with strong margin management on the loan book, following the cash rate changes in the second half saw net interest income up for the year. Other income is again higher this half with revenue from the Government Services division. Staff costs associated with the acquisition of Elders' agrifinance staff and Government Services decrease -- division increased costs. However, the change to the Elders distribution agreement and the cost savings and operating efficiencies from handing back of the rural bank ADI license meant operating expenses were lower year-on-year. Credit expenses for agri reverted back towards the long-term average with FY '19 benefiting from a one-off collective provision release. We recognized a small number of provisions and maintained a $2 million collective provision overlay for drought from the first half. The long-term impact of drought and bushfires are being managed through proactive relationship management and we have required hardship assistance. Homesafe's contribution on a cash earnings basis for the second half was higher. We completed contracts provided another -- providing another $8.6 million in net earnings before tax in this half. On a statutory basis, we have recognized a $36 million gain for the year, including a $2.8 million unrealized loss in the second half. While Melbourne and Sydney property values increased in the second half, this was at a slower rate than the first half. And we also recognized a reduction in the portfolio valuation at June, following the change to the growth outlook. The 6-monthly review of the portfolio meant the growth outlook was revised down, be broadly in line with the assumptions on how prices used in our COVID-19 collective provision overlay. We will continue to review these assumptions every 6 months, and a key test is how the carrying value of the completed contracts compared to the sale proceeds. These proceeds we received on completed contracts during the second half exceeded their carrying value by $1.9 million or 7.5%. As the unrealized gains reflected in the carrying value of the portfolio are excluded from regulatory capital, property values will need to fall by 38% for the unrealized gains to be reversed and have any impact on regulatory capital. The underlying credit cost for the year of $40.8 million was 8 basis points of gross loans and reflects our conservative risk profile. Total credit costs, including the $127.7 million recognized as part of the COVID collective provision overlay announced back in May. We reviewed the collective provision overlay in June. And while conditions were more favorable than those we had assumed in our outlook in May, including the level of deferral starting to decrease, we decided not to adjust the COVID-19 overlay. This decision was largely due to the continuing economic uncertainty and the current conditions in Victoria. Taso will provide additional details next on our lending portfolio, including those loans with repayment deferrals as a result of the COVID-19 impact. Overall, total impaired loans for the group decreased by $75 million or 24% since 31 December, as a number of larger longer-term workout loans resolved during second half, reducing 2 provisions and total impaired assets. All core portfolios remain well secured and portfolio performance remains down. Provision coverage ratio at 30 June was 178%, up 112% 6 months ago and driven by the increase in the COVID-19 collective provision overlay and a reduction in impaired assets. Loan-to-value ratios remain low, with the average LVR for the residential mortgage at 57%, down from 58% 12 months ago. Looking now at arrears, we can see the residential arrears rates continue to fall over the year. Gives a slight uptick in March as arrears collection activities were temporarily suspended when resources were redirected to assist customers requesting COVID-19 loan deferral. However, from April, arrears have reduced. There's a slide in the appendix that shows residential arrears across all states, and it shows it improved over the half year. Net consumer portfolios, arrears in both our personal loan book and credit cards increased over the second half reflecting seasonality. As you can see on the chart on the bottom left, arrears are now at levels below those seen a year ago. The decrease in the commercial arrears over the half was influenced by the decrease in the balance impaired loan, following the finalization of these accounts. All loans over 90 days, including impaired loans are actively managed and where required, are appropriately provisioned. Overall, we remain comfortable with the quality of the business portfolio, and our focus is on working with our business customers through a proactive calling program to help them navigate the challenges arising from COVID-19. Agribusiness arrears were down over the half, with a small number of larger accounts driving the increase in the first half. The portfolio is performing in line with our expectations and compared with this time last year, the conditions to the agribusiness market we lend into are more positive. Our funding position continues to be a strength, providing us with an important customer relationship as well as the flexibility to fund our above systems asset growth and the ability to manage our overall cost of funding. Customer deposit balances increased by $1.4 billion over the half with the annualized growth in our core balances over 23%, meaning we could move term deposit pricing lower. This meant we saw a reduction in term deposit balances. However, we maintained a retention rate of around 90% for our retail customers. Funding source from customer deposits increased from 74.4% to 75.2% over the half. We had accessed less than 40% of our initial entitlement of the $1.8 billion term funding facility by the end of June. Wholesale domestic issuance also continues to provide a reliable source of funding when needed and will be used in the future to differentiate and lengthen our maturity profile. So our funding not only gives us flexibility to fund through our over 75% customer deposit base, but we are also well placed with access to the term funding facility and to be able to tap into demand from wholesale market. Our common equity Tier 1 ratio improved to 9.25% over the year, up 33 basis points from 12 months ago. Our capital position and organic capital generation reflects our earnings and strong balance sheet. Our internal stress testing completed due to our capital ratios maintained above APRA's unquestionably strong minimum. Marnie has already mentioned that the Board has acted conservatively considering the interest of our shareholders and industry guidance and capital management to defer a final dividend decision, whilst economic uncertainty remain and the full impact of COVID-19 is still evolving. The capital raising we successfully completed back in February and March through an institutional placement and a share purchase plan at 78 basis points to common equity Tier 1 ratio. This raising supported our strategy of delivering above-system residential mortgage growth and continuing to invest across the business. This also provided us with an increased buffer over APRA's unquestionably strong CET1 capital ratio requirement. We continue to target a CET1 range of between 9% and 9.5%, and we'll reexamine this range again after a complete review of the capital adequacy framework. I'll now hand over to Taso Corolis to take you through more detail on how we're supporting our lending customers impacted by COVID-19.

Thanks, Travis, and good morning, everyone. The next few slides that I'll cover provide insight into the residential mortgage and commercial portfolios with COVID-19-related repayment deferral arrangements. We haven't separately shown the agri portfolio, given the relatively small direct impact it has experienced to date. In looking at the action we have taken to support our customers, it's important to recognize the huge effort of all our staff in the way they have meaningfully engaged and continue to engage with our customers. As the requests for assistance grew rather rapidly during March and April, we significantly increased the number of staff dealing with requests for repayment deferral. We expanded the channels available to customers by which seek repayment deferral and made available self-help tools to further assist our customers understand and assess the impact of the options being considered. Our bank is in contact with all our relationship-managed commercial customers, not just those seeking repayment deferral, but excluding agri, to offer assistance and discuss their personal situation. These discussions have helped us better understand the challenges being faced so that we continue to provide appropriate and tailored support. During July, we have seen a continued reduction in the number of accounts on repayment deferral across the residential and consumer portfolios with our commercial customers displaying a greater preference to utilize the full deferral period. Our engagement with our customers continues, and the focus is on assisting them to transition off deferral arrangements as we head towards the end of the deferral period. As noted on the previous slide, we have seen a reduction in the total repayment deferrals during July from the 30 June position shown here. The geographic distribution of deferrals for our resi portfolio is broadly consistent with our portfolio distribution, plus or minus 2%, with Queensland higher by approximately 3%, and New South Wales under by approximately 4%. The geographic distribution of deferrals for the commercial portfolio is also broadly consistent with our portfolio distribution, with the exception of Queensland, where the proportion of deferrals is higher at 18% of total deferrals relative to Queensland, comprising 11% of the total commercial portfolio. WA is underrepresented in the commercial deferrals. Of the resi repayment deferrals as at 30 June, approximately 79% of accounts were P&I and 69% owner occupier loans. The P&I profile provides us additional flexibility in terms of the options we can provide those customers who may be unable to resume repayments at the predeferral level. Given the current situation in Victoria, we have provided a breakdown of the Victorian portfolio with a further split between metro and regional. The Victorian resi and consumer portfolio under deferral as at 30 June, 65% metro and 35% regional. For the commercial portfolio, this was 60% metro and 40% regional. There's no significant difference in the LVR distribution between metro and regional, noting that regional VIC has a relatively greater proportion of owner-occupied and P&I loans. Since the deferrals were put in place, we have seen prepayment buffers increase and the proportion of accounts with no buffers has fallen from 34% in March, 20% in July, resulting in 33% of accounts having greater than 3 months' worth of buffers. And this is stronger for Victoria at 35%. Obviously, some of the no or small buffer cohorts are due to structural reasons, for example, fixed rate loans and less than 12 months on book. We've also included a slide in the appendix that shows growth in total deposit balances of customers and deferral, recognizing that customers hold funds in other accounts, not just offset accounts. In terms of the accounts that are no longer on deferral, the geographic distribution shows no significant differentiation by state, and 55% of these were from the no buffer to an inclusive for less than 3-month buffer cohort. The security profile of the resi portfolio under deferral is sound with approximately 84% of accounts, having a dynamic LVR less than 80%. And this is 94.5% in Victoria. The greater than 80% LVR is primarily driven by WA. When we look at the LVR distribution by investor versus owner occupier, there is no significant difference. The shift towards a greater proportion of investor loans on P&I, which was 54% as at 30 June this year and up noticeably over the last 2 years has clearly assisted this. The industry distribution of the commercial portfolio under deferral has remained reasonably stable. Our exposure to the accommodation and food services and arts and recreation segments where our customers have reported the greatest proportional impact on revenues are not large portfolios relative to total gross lending assets. In the rental, hire and real estate services segment, which has the largest balance of deferrals by dollar amount, 26% of customers are on repayment deferrals. The commercial portfolio with repayment deferrals is well secured, with approximately 84% having an LVR less than 80%, and the unsecured portfolio is 5.5%. Within the portfolio under deferral, customers that have banked with us for more than 3 years represent 79% of deferrals by exposure value. Length of relationship serves a pretty conservative proxy for timing business. The length of customer profile also reflects the strength of the customer relationship and a deeper understanding of their business, which is clearly important as we work through the current challenges. In terms of capacity within existing limits compared with the same time period in 2019, limit utilization across the portfolio is down across term loans, overdrafts and credit cards. And we have also observed the buildup in deposit balances since the deferrals were entered into. As Travis has mentioned, the COVID-19 overlays were maintained at the levels established in May. The reduction in the non-COVID-related GRCL and CP was driven by improved performance of the portfolio and some accounts being specifically provided for. In terms of coverage, it is worth noting, particularly with regard to the COVID-19 overlays that the agri portfolio is our largest Commercial segment by industry, where the direct impact to date has been minimal. Notwithstanding the economic conditions remain uncertain, and we continue to review the economic outlook we adopt for provisioning purposes on a monthly basis, paying very close attention to conditions in Victoria. In relation to the recent developments in Victoria, we have not, at this stage, made any specific adjustments to the economic outlook on which our overlays base. Within our existing economic outlook, the downside scenarios assumed greater declines in residential and commercial property prices in Victoria. These assumptions were made to reflect a potentially severe impact in the event of a more pronounced downturn in Victoria given the portfolio distribution of our exposures. I'll now pass you back to Marnie.

Thanks, Taso. And just before I do close, I just want to draw people's attention to Slide 6 of the pack. There is an incorrect number there or a number that has been transposed. So for cash earnings for FY '20, it should read $301.7 million rather than $307.1 million. The FY '19 figure is correct. And so is the variance on that page. Unfortunately, it was just a transposing error. And Page 24 is correct, which has seen the same numbers. So that might actually save some questions at the end. Anyway, in our closing, we expect market conditions to remain challenging. And because of this, we're unable at this time to provide more meaningful guidance for FY '21. We continue to focus on maintaining a strong and resilient balance sheet supported by our growth and transformation strategy. We remain committed to supporting our customers, communities and employees through times of hardship such as those currently being experienced through COVID-19. And we take very seriously the responsibility we have to play our part in the economic recovery. As a bank through the provision of credit to stimulate the economy and as a top 100 ASX-listed company with the responsibility to ensure everyday Australian and businesses of a lesser size than ours are given every opportunity to come through this. We're also observing how COVID-19 is changing the world and considering how we can use this to shape the future of work and continuously improve as leaders in customer experience. We will make lasting changes into the future to continue to feed into customer and community prosperity. And this will see us increase productivity by taking costs out and investing in new capabilities, particularly in customer experience and digitization. These changes will impact our operations, improve productivity and how we engage with our customers. So regardless of any change, our purpose, values, strategy and customer commitment will remain at the center of every decision. We remain committed to achieving a sustainable cost-to-income ratio towards 50% in the medium term, starting with a return to positive jaws in FY '21. This will be achieved through continued profitable and sustainable growth, increased intensity on our cost reduction program and retaining flexibility around the quantum of spend on our accelerated transformation program to align with revenue growth. Our strength in partnering, community and customer connection and innovation are critical in today's new environment. And when combined with our strategy to further differentiate in digital, they become even more important. And position us well for success. So thank you, everyone. And I will now open for questions.

[Operator Instructions] Our first question is from Ed Henning from CLSA.

And I'd just start with a question on NIM. And if you look at the margin you're paying away to the Community Bank and the Alliance Bank share, it's been declining over the last 3 halves, but yet your growth in Third Party mortgages has been going up substantially. Can you just run through the outlook for that and what's driving that, please?

Yes. Thanks, Ed. It's Travis here. So what we're seeing there as far as what we're reporting from previous halves really reflects the -- predominantly the revenue share through the Community Bank and Alliance Bank partners. As we saw the reductions in the cash rates down 1.25% over the, I think, June '19, that has affected the revenue share payable to our Community Bank and Alliance partners, given their strong focus on deposits. So that has seen an impact in there as far as the revenue share. As far as an outlook, obviously, rates are looking like they're fairly steady at the moment. You're right. We are seeing strong growth in the Third Party. So I think that reduction we've seen there, particularly over the last financial year really reflects the reduction in interest rates. I don't expect that to continue.

Okay. That's great. And then just a second question on costs. Can you just run through there -- are you anticipating to force annual leave to reduce the headwind of the leave provisions to help you hold that costs growth flat down? And also just with the accelerated amortization and also the impairment, are they tailwinds that help your growth in FY '21?

Yes. So obviously, I spoke about the higher leave provisions or the higher staff costs as we've responded to the changing working environment and supporting our customers. Since June, we've been working with all our staff to make sure we're all taking leave, both from a financial point of view and from a staff welfare. So that is certainly a focus for us as we come into this new financial year. As far as a tailwind from the amortization changes, we don't expect amortization to increase. But as I said, with the change in the capitalization threshold, and the change in the way we're looking at regulatory and compliance initiatives, we will be expensing more of that at the time. So I expect that to actually pretty much offset the change or the reduction in future amortization.

Our next telephone question is from Joshua Freiman from Macquarie.

Well done on the result. Just a couple of questions from me. First up is staff costs and other administration expenses, in particular, have seen material uplifts. Are you able to provide some color on whether these costs are one-off or whether they're likely to persist and be sustained in the P&L? And just a second point on that. Have you had to push back any of the phasing of any transformation initiatives or technology development given COVID impacts?

Thanks, Josh. It's Travis here. So we obviously gave a fair bit of detail on the call there around the increase in staff costs. A number of those items reflected the full year investment -- the full year impact of our investment and also the full year impact on some of the changes that we made towards the back end of 2019. The other admin expenses or the other expenses reflects the category where the accelerated investment in technology sit of around about $50 million in total or $52 million total, most of that is in that other admin expense. So as I said, we are still looking or targeting either a flat OpEx or depending on the timing of our cost transformation initiatives, a small reduction. That's what we're targeting, and that's what we're working hard on as we come into this year. To your question around have we had to delay or change that investment during the year, we were -- about 1/3 of that spend was related to regulatory projects. Open banking was one of those. We were committed to meeting those deadlines from a regulatory compliance point of view. But as we get through every period, every piece of work on that, we actually assess what the investment is next. And that's the way we will do this project or this piece of transformation all the way through. So it's something we have the ability to rethink. And we haven't had to shift anything out yet based on what we expect to get through in those -- in the last 6 months.

Perfect. And I guess just second question would be on the margin. So just in your pack, you provided that regular chart you normally do on monthly margin movements. Would you be able to provide a little bit more color on what caused the volatility over the half? And how you expect it to normalize down to be a couple of bps lower than the exit rate of, I think, it was 2.33%?

Yes. So the volatility during the half really reflected the 2 cash rates we had in March. So obviously, just the timing of the cash rate changes, the timing of the -- when we pass that through to our deposit and lending customers. There is slightly different timing on some of those. So there is always volatility. We obviously haven't had 2 cash rates in the month, so that obviously created even more volatility in the half. As you said, we finished at 2.33%. My comments there I expected NIM to be slightly down for the first half on that 2.33%. That really reflects just the flow-through from some of the impacts that we saw in this second half off the back of the cash rate. But really, with an RBA view for a fairly stable interest rate environment, we certainly don't expect that volatility that we saw at the time of those 2 cash rates back in March.

Our next telephone question is from Andrew Lyons from Goldman Sachs.

Just 2 questions. Firstly, your full year capital ex the capital raise would have been at 8.42%, down 50 basis points in the year or down 10 bps ex the COVID overlay. How comfortable are you that you can improve the ROE of the underlying business to ensure you can sustainably fund growth in the business? Second question, Slide 47 highlights that your total provisions included a $21 million GRCL top-up for COVID-19. My understanding is that the GRCL is effectively a regulatory provision top-up when your accounting provisions fall short of a certain requirement, which I understood is fairly objective. Can you, therefore, please just explain why a component of your COVID provision top-up was able to be reflected in the GRCL as opposed to going through the P&L?

Thanks, Andrew. So your first question around our capital levels and looking forward as far as sustaining that. Look, that obviously, is a combination of profitable growth that Marnie has spoken about, but also the -- what we're targeting through our cost transformation program from an overall business performance point of view. So yes, the answer is, I'm comfortable we can sustain that. And we can sustain it within that target range that we've spoken about between the 9% and the 9.5%. As far as the GRCL, so that's the way we have to account for that, and that really is the appropriation or the -- reflects the expected lifetime losses of stage 1 loans. It's not that -- in addition, it's actually just the way we have to account for it under the APRA requirement that reflects the expected lifetime loss for stage 1 loans.

Our next question comes from Jonathan Mott from UBS.

I've got a question. You talked a lot at the start about the latent opportunity, and you can see you've got a great customer franchise. But when you look at the retail distribution down to 42% of settlements now and despite such a good distribution network you've got, and most of the growth that you've got is coming through Third Party and especially now white label, really, cranking up. So question is in a 0 rate environment, is now the time that you really want to be pushing through into white label? Is it still making an adequate ROE in a 0 rate environment or new 0 rate environment? And what do you need to do to get the proprietary channel performing again? I know you mentioned it's turned in the last month, but more sustainably, how do you get that retail channel, which is going to be a much higher return to improve?

Jon, it's Travis here. I might jump in first. Then Marnie, if you want to add anything around the distribution model as well. But yes, it is appropriate time to continue to invest in through the Third Party through our partners there. Look, our Retail, our branch network has delivered significant deposit growth for us again during the half and during the year. That gives us the ability to fund the asset growth, so it is certainly a valuable part of our business. The fact that it actually can attract continual flows in from a deposit point of view, which lets us use those deposits to actually write the asset growth that we're seeing on the Third Party side. But as I did say earlier on, as you picked up there, we have seen an improvement in activity over the last couple of months and particularly continuing into July. So we actually feel like that, that's in a good spot as well. But Marnie, did you want to add anything else?

Yes. I think the only thing that I'd add, too, is the branch network. I mean, what they bring that actually doesn't come through Third Party or through the broker network is actually a customer relationship, and that opportunity to actually deepen that relationship with those customers. And the slide that you're referring to, Jonathan, it really was about trying to explain that there is a lot of latent opportunity there, especially since we've been growing customer numbers so quickly. There is that latent opportunity now to deepen the relationships because, of course, when you're growing customer numbers, they come with 1 relationship, with 1 product, whether that be a deposit or loan. And then you get that opportunity to actually do more for those customers and add more value there.

And would you consider the white label customers to be your customers? And would they even know that they are on the Bendigo balance sheet?

They know that they're on the Bendigo balance sheet. Absolutely, they do. But they are -- those products are actually sold under the white label of those mortgage managers. So that is who those customers are dealing with, and that the customers have -- who they've joined with. So -- but absolutely, do know that the balance sheet underneath that and the loan itself is actually being provided by Bendigo and Adelaide Bank.

Our next telephone question is from Brian Johnson from Jefferies.

Two questions, if I may. First one for Marnie. Marnie, the decision to defer the dividend, particularly after Commonwealth Bank basically had a dividend. Is this telling us something about the forward capital, the forward earnings or uncertainty still as far as you guys are concerned from APRA?

Look, it's very hard. I don't think you can actually compare us to the Commonwealth Bank, I mean, what they've done from a divestment of businesses and so forth in their capital position. As a result of that, they are in a different spot than what we are. Look, it does actually reflects the uncertainty of the environment. The Board is making a really prudent decision at this point in time to defer that decision in light of, we really don't know how things are going to play out. And until such time as we do, then it does make sense to preserve that capital. Our capital is unquestionably strong. You heard Travis before. We're sitting within the range that we've been targeting and feel quite comfortable with the strength of our capital and both our balance sheet position.

Okay. Marnie, the second one is just if I go through to the slides at the backward, it talks about basically the provisioning and the economic outlook, Slide 61 and 62. Given that you've still got quite sizable probability weighting for some of these more adverse scenarios, but we can only really see on Slide 61, the difference between the base case and the significant deterioration. Could you just run through for us, basically, why June doesn't -- why you haven't adjusted it since May, despite the fact that we've gone into lockdowns in basically Victoria, but what are those other scenarios in -- that could quantify what they actually are?

Yes. Look, we have -- and I'll pass over to Taso, who can provide you a bit more detail here. But we are continually stress testing the portfolio and have been doing that on a very regular basis, not only for ourselves, but of course, for the regulators as well. We did provide the provision in May, and we have continued to test against that and still feel comfortable with the collective provision overlay that is there. So Taso, whether you want to talk more about some of the other scenarios?

Yes, Brian, probably the key thing to highlight, which I touched on through the slides. With our significant deterioration and the base case there on Slide 61, we did assume a greater deterioration in Victoria, and that was really just in recognition of the weighting we have for the state. When we went through and we reviewed the economic outlook monthly up until a few days ago with the last RBA release, clearly, where the economy was, it was more favorable than where our forecast had it. And we continue to look at our economic outlook and make any decisions around revision on a monthly basis, but there's still a lot of uncertainty, and that's why we've, obviously, [ through our ] probability weighting skewed very heavily towards the downside.

Sorry, Taso, but can you run us through -- I mean you still got sizable proportions to these ones that aren't the significant deterioration. You've even got some mild improvement basically reflected in the weighting. Could we just find out what these other scenarios actually are?

Sorry, Brian, are you trying to understand what's in the mild improvement?

Yes. What's in the mild improvement? I can see what's in significant deterioration and the base case, but I can't see what's in mild deterioration. I can't see in mild improvement. I can't see significant improvement. All of which, well, except for the significant improvement, you don't have a weighting towards. But the other ones you do, but it'd be just -- I just think it will be interesting to actually know what those numbers -- what those scenarios actually are?

I don't have all those details. That's something we can take on notice and obviously come back to you.

Our next telephone question is from Andrew Triggs from JPMorgan.

A few interrelated questions on cost, please. Firstly, just curious as to why you deemed it a good time to sort of accelerate the investment this half. Were there some advantages in doing that, given that it has put pressure on the capital ratio? Also, just I think previous half, you suggested that the cost-to-income ratio is expected to increase modestly in the short term and then return to the first half ratio in year 3 before declining to your long-term target of 50% thereafter. Is that still the case? Or has there been any miss to that? And is that purely COVID-related? Or are there any other sort of issues we should be aware of?

Travis, I'll just talk to the acceleration of investment. The world changed for all of us in March. So that 3 months, into the 3 months of the last financial year. So at the last half, we talked about accelerating investment. We started to do that. We still believe that there is a huge opportunity for us to grow the business at profitable and sustainable growth and profitable prices. We -- part of the acceleration of the transformation is also around costs and it's around productivity. As we do take advantage of the growth opportunities, we need to ensure that we are operating as efficiently as we can, which will help us to actually achieve our long term or our medium term towards 50% cost-to-income ratio. I'll hand over to Trav now. But just on the cost-to-income ratio, we did allude to at the last half, and I know that we did remove guidance from the market when the COVID hit. But we did allude to the fact that we would actually see a slight uptick in our cost-to-income ratio. So it is consistent with what we did provide in that first half. We've also indicated that we will be targeting to return to positive jaws in FY '21 over the FY '21 year. So I hope that gives a little bit of clarification. And Trav, you might want to add something?

Yes. Thanks, Marnie. And Andrew, if I look back 6 months ago and what we're expecting for these 6 months, and I see what's played out, you're right. Our OpEx growth is higher than what we're expecting and what we spoke about. If I look at the key drivers there, there's obviously the notable expenses around COVID-19 that we've actually called out, particularly around staff costs that wasn't known back then. The accelerating investment in transformation was about $10 million higher than what I was expecting, what we're expecting back then. And that reflects our change to the capitalization, as I've talked about, the regulatory and compliance projects. We actually OpEx-ed an additional $10 million in the half than what we're expecting under our previous way of thinking about some of these initiatives. We also had a number of costs in the half. We had additional redundancies. We had some costs associated with reducing complexity, with things like the changes in the community sector banking business. So we did have a number of those costs in the half. But where I get comfort from is they have actually helped improve our outlook going into FY '21. So look, I think we did miss what we thought we would get to from a cost side for this half. But they are, when you strip out some of those, were actually pretty close to what we're expecting.

And when you say sort of flat cost to maybe a slight improvement, we're talking just headline -- against the headline number for the full year?

Yes. The cash OpEx headline number, Andrew?

So no adjustments for one-offs in that?

No.

Our next telephone question is from Richard Wiles from Morgan Stanley.

Just a couple of questions on costs as well. Travis, the expectation for positive JAWS in 2021. Does that rely on positive revenue growth? And cost savings, I'm not sure you've indicated what cost savings you have achieved in FY '20. If you have, could you point us to that? And also what level of cost savings do you expect to deliver in FY '21?

Thanks, Richard. So a few questions there. I think you managed to squeeze 3 questions into the 2 limit, but that was good. The revenue outlook as far as for '21 or the JAWS outcome does assume a small improvement in revenue year-on-year. So part of that assumption or part of what we're targeting sees a small pickup in revenue, but importantly driven by, as you said, a flat or even a lower cost OpEx outcome for FY '21. As far as what -- we haven't called out or we haven't identified the dollars behind some of the efficiencies and the complexity that we've actually achieved, but as I said, when I went through some of my slides, a piece of the work that we did with the rural bank ADI license and actually handing that back, that has helped drive lower operating expenses through the Agribusiness year-on-year. A number of the changes, the Community Sector Banking, that will actually see some impacts on FY '21. So we have made some changes in FY '20, and we will make further changes into FY '21. Part of that would be part of the broader cost transformation program. That's early on. We've really kicked that off starting in July, but that will actually deliver savings, which is why we are targeting that cost outcome that is flat or even lower in FY '20.

So you can't tell us the cost savings that you actually achieved in FY '20? And what you expect to achieve in '21?

They're all represented with my comments, Richard, around the outlook for FY '21 that we are looking for flat to a decrease in cost environment, even with an increase in the investment or the accelerated investment that I talked about.

Our next telephone question is from Victor German from Macquarie.

Travis, I was actually hoping to follow-up on your comments around margin. And I appreciate you already provide a lot of useful disclosure. So I'm sort of pushing my luck a little bit. But I know you talked about broadly sort of flattish trends around margin in the first half, but then talked about 7 basis points decline for the full year, suggesting there is a big impact or much bigger impact in the second half. Given that interest rate changes kind of already played out, I would have thought that they should come through in the first half. Maybe you can just explain sort of what's the dynamic, what's holding out margins in the first half and pushing a lot of pressure -- or putting a lot of pressure in the second half? And second question, just sort of follow-up on capital. You're effectively telling us that you're going to achieve positive JAWS. You already provided for fairly conservatively. I mean what are all of the uncertainties that you talk about on the capital side? And maybe you can also give us a little bit of color in terms of -- on the related subject, risk-weighted asset inflation. All of the major bank peers talked about risk-weighted asset inflation. Maybe that's the missing piece. If you can maybe give us a sense for what that might do to your risk-weighted asset growth?

Victor, we got 3 questions there as well. So as far as the NIM outlook. As I said, so we did expect NIM to be fairly flat in the first half, maybe slightly down on June's exit NIM. You're right. In the first half, we will see the flow-through of really any of the impacts from the repricing or the cash rate changes in the second half '20. But I -- when we look at NIM in this first half, particularly, we do expect, as I said before, that continuation of the benefit from the funding mix. That strong growth in at-call, particularly. And equally, we do think we can continue to work hard on TD pricing. But my comments or my concerns around second half and then the overall NIM really reflects what, sitting here now, what we look through to think around the level of that core deposit funding. We don't expect that to continue. That one is a hard one to sort of look too far into the future, but we don't want to assume that will continue for the full year. So we don't expect things like that funding mix, things like the benefit from the term deposit pricing certainly to be available, particularly in the second half. But with saying all of that, we -- the way we think about that front book/back book pressure, we expect that will continue through both halves. So that's where we've derived our commentary on the NIM outlook.

And so Travis, hedging line has been a little bit volatile. Is that potentially kind of a driver we should be thinking about in the first half, second half?

So it was a headwind for the second half. The way I think about it for the second half, it's probably somewhere similar just given the interest rate environment and our position. That impact really comes from sort of half-on-half as far as the lower income that we saw from hedging. I'd expect that to be a little bit lower, so there would be a small impact on that. But like I said, most of this is around front book/back book and then what we can do around the funding side and the funding mix. Now apologies, Victor, you did ask a question about capital. I didn't get that one all down. So if you just want to repeat that one for me?

Yes. So the capital, I guess, you talked about -- and Marnie talked about uncertainties around capital. I'm just sort of wondering what exactly are sort of some of the things that you're cautious about and perhaps, it's not necessarily a third question, it's more interrelated questions with risk-weighted asset inflation. So your major bank competitors has talked about deteriorating credit quality, putting density on risk-weighted assets. They've given some numbers in terms of what that might mean in a downside scenario. You're obviously not an advanced accredited bank -- or not yet advanced accredited. So I would have thought the impact for you is smaller, but it would be useful to just get a sense for what the impacts are?

Yes. So look, what Marnie spoke about earlier on as far as what the Board considered around acting prudently by deferring the dividend decision was really around the uncertainty through COVID as far as the economic impacts, but particularly in Victoria. So that was really what that decision was around. It was certainly prudent given the uncertainty in Victoria that the Board decided to defer that decision and watch the economic condition in Victoria and Australia. So that was the -- as Marnie said before, the reason for the dividend deferral. And you're right, it's a minimal impact under as an advanced -- not as an advanced bank, as a standardized bank. We don't see that risk weight inflation or movements that the major banks are talking about. We can provide some further color, maybe in some future updates if there's anything extra that you want to call out about that. But we're certainly -- being a standardized bank, we don't have the impact the IRB banks do.

So the risk-weighted asset density is not really growing as a reason -- as credit quality deteriorates?

Not in the same way that we see it come through as an advanced because there is no RWA density issue as a standardized bank.

[Operator Instructions] Next question is from Brett Le Mesurier from Shaw and Partners.

The other income and by that, under that category: fee income, commissions, foreign exchange and so on, that's been falling consistently, do you think the fall in that is over now?

Brett, it's Travis here. The fee income, like, I mean, there is a bit of, obviously, impact from COVID, as I said, around customer behavior and even business and merchant revenue there. So look, I think our fee income, underlying fee income, we have called out that, that continues to decline just with the competitive pressures that we do see. When I think about the product range that we and our competitors offer, I am expecting that as our lending growth continues, that will offset some of that. So look, I think it's a hard one to call as far as an outlook, though, Brett, given the impact that COVID has had in the half. We're all aware of things like international travel and how that might be a fair bit away. So there's a few drivers in there that are outside of our hands to see how that other income will play out. As I said on the call earlier, though, that commission income, particularly was impacted by the sale of Bendigo Financial Planning, reducing other income, reducing expenses and providing an overall positive contribution in this year.

Given that, that's probably going to fall from '20 to '21, you got 7 points of margin decline or thereabout. Are you planning to grow above system? I mean that seems to be the only way that you can get any income growth at all?

Had -- certainly had good momentum, good growth in the second half, Brett. Good momentum continuing into July. So yes, we are targeting to stay above system.

Our next telephone question is from Brian Johnson from Jefferies.

I was wondering if we could go back to Andrew Lyons' question on the GRCL. How big is it? And how did you make the decision between the GRCL versus the P&L, given that it seems to figure in your collective provision coverage on Slide 62?

Thanks, Brian. So the decision is such as how we actually have to account for it under the APRA requirement. And it really is the GRCL does reflect the expected lifetime losses of the stage 1 loans. So that's actually calculated based on the stage 1 loan. So it's actually not a decision as far as how we choose to put it between the 2, that is actually how we have to account for it.

So when you talk about the coverage included -- I'm just intrigued that it figures in your explanation of how well provisioned you are, but it's yet to flow through the P&L.

That's because of the accounting treatment and how we have to provide for it, but it does reflect part of our provisioning. So that's always the way we've accounted for it and show our provisioning ratio.

And Travis, I apologize if this is such a silly question. How big is it now at this result?

I was just trying to -- I don't have that number at hand, Brian. We can find that one for you. I'm sure...

If you could, that would be great.

Okay.

And our next telephone question is from T.S. Lim from Bell Potter.

A couple of questions. What's the COVID impact on the Agribusiness portfolio? And also, how should we think about Homesafe over the next 12, 18 months?

Thanks, T.S., I might ask Taso to answer that question. Sorry, Taso, I'll start with Homesafe and you can pick up the agri. So as I said on the call earlier, we revised the growth outlook for the Homesafe investment. We reduced that, particularly in the short term. So we're seeing a 4% reduction in the assumptions that we're using for year 1. We've aligned the sort of the 3- to 4-year assumptions with how we thought about the COVID collective provision overlay as far as how we're thinking about house prices there, noting that the Homesafe product is only available in certain areas within Melbourne and Sydney. So we've made sure we've recognized those areas. How do I think about it over the next year? As I said, the properties that are completing their contract continue to exceed their carrying value even under this revised growth outlook, I think, by about 7.5% for the last half. So we expect there will be a continued cash earnings contribution from Homesafe. I think the thing that will still play out is just the level of completions. Whether customers are actually -- whether there's less completions over this time, we'll have to wait and see.

And T.S., just on your question on the agri book. Today, there's been a fairly nominal direct impact on the agri book. I think we disclosed, there was less than 110 rural bank customers common sort of feature in areas reliance or proportion of farm income in terms of commodities that are more likely to be directly impacted. And we don't have any significant exposure on those, so the impact has been very small today.

[Operator Instructions] There are no more further questions in the queue. I'd like to hand the call back to the speakers for closing remarks. Please continue.

Thank you. So thank you, everyone, for joining the call today, and we got through it without any technical difficulties. So I'm pleased with that. And thank you again for your ongoing interest and support for Bendigo and Adelaide Bank, and we look forward to getting around to see you all or virtually see you all over the next few days. Thanks, everyone.

Ladies and gentlemen, that does conclude the call for today. You may all disconnect. Have a great day.