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

Good day, and thank you for standing by, and welcome to the Bendigo and Adelaide Bank 2021 Full Year Results Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to your first speaker today, Marnie Baker, Managing Director for Bendigo and Adelaide Bank. Thank you. Please go ahead.

Good morning, everyone, and welcome to the market briefing for Bendigo and Adelaide Bank's Financial Year 2021 Full Year Results. Let me first begin today by acknowledging the traditional owners of the lands on which we meet. For me here in Bendigo, that is Dja Dja Wurrung people of the Kulin Nation. I pay my respects to the elders past, present and emerging and extend my respect to the Aboriginal and Torres Strait Islander people who are present on the call today. 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. Also joining us on the call is the company's Chief Risk Officer, Taso Corolis, who will be available to take any questions alongside Travis and I at the end of the presentation. To ensure we leave time for everyone, I ask that at the end of the presentation today, you please limit your questions to a maximum of 2 each. So today is an exciting day for our bank as well as announcing a strong FY '21 results, which clearly demonstrate our strategy is delivering. We are also very pleased to announce we will be acquiring Melbourne-based fintech, Ferocia, a close partner of ours for over 9 years to accelerate the bank's digital strategy and shape the future of banking for a new generation of customers. This will see us internalize Ferocia's market-leading digital and technology capability and consolidate ownership of Up, Australia's first and largest mobile-only digital bank platform and highest-rated banking app. I'll come back to you -- back to this exciting new development later in the presentation. But first, let's focus on the results for the year just gone. The bank was well placed coming into this year and has remained so with continued strong business performance and a well-capitalized robust and resilient balance sheet. We continued to deliver on our growth and transformation strategy with total lending growth of 10.6% and deposit growth of 12.5%, both well above system, reflecting the strength of our brand and executional capabilities. Cash earnings were up 51.5%, supported by above system lending growth, continued margin management, sustainable cost reductions across the business and an accelerated level of investment in the growth and transformation of the bank. This strong and continuing growth was achieved whilst delivering near flat operating expenses with EMEA 0.6% increase on the previous year, driven by increased investment in transformation. Excluding the additional transformation spend, operating costs were down 2.5%. Underlying credit costs of 5 basis points for the year pre the COVID collective provision release that was announced on the 5th of August reflect our conservative and diversified credit risk profile and well secured portfolio. In June, we ran state support packages for our customers impacted by the recent COVID lockdowns. And whilst to date, we have only seen a modest number of customers seek assistance, we are conscious that behind each and every number is a person, a family or a small business. We treat each situation individually with care and respect. And through our experience, we are confident the support we offer will assist customers through these difficult times. Our strong capital and provision levels ensures we are well positioned to continue to manage through these prolonged lockdown and the ongoing uncertainty of the pandemic. And given the ongoing uncertainties, we continued to perform stress tests on a range of scenarios that assisted in informing our view on current and future capital needs. Considering the external environment and the continued strong asset growth we are achieving, the Board has declared a final dividend of $0.265 per share, taking the fully franked full year dividend to $0.50 per share. A number of Australians selecting us as their bank of choice climbed again this year, increasing 9.6% to over 2 million customers. Our customers also continued to benefit from continued market-leading customer experience. And Net Promoter Score of 27.3% remains well ahead of the industry average, nearly 26 points higher and almost 30 points higher than the average NPS of the major bank. This sentiment was also reflected through our business customers with a Net Promoter Score well above both industry and the average of the major banks. Consistently strong above-system lending growth has enabled us to continue to increase our market share even in a low growth and highly competitive environment. Total lending growth for the year was a standout at 3.8x system, while our residential lending grew by a record 14.8% or 2.8x system predominantly in owner-occupied and principal and interest loans. And this was further bolstered by a 36.8% increase in lending applications for the year. As always, this growth does not come at the expense of asset quality. Rather, it reflects the strengthened executional capability, success in partnering and an effective marketing strategy, which have all combined to convert customer consideration into acquisitions. Our focus on profitable and sustainable growth as well as removing complexity and cost from the business has delivered a meaningful reduction in the cost-to-income ratio and an increase in return on tangible equity, which will provide significant momentum into the next half. Employee engagement remains strong, and I take this opportunity to recognize the incredible job our staff have done again this year to support our customers, communities past each other through what continues to be challenging times. Our strategy is driving results. Full year cash earnings of $457.2 million was up 51.5% on the prior corresponding period with statutory net profit up 172% to $524 million. Total income of $1.7 billion was up 4.5% on the prior year and operating expenses held relatively flat, up only 0.6%, representing a 240 basis point reduction in the cost-to-income ratio and a 275 basis point improvement in the return on tangible equity. A resolute focus on costs, combined with strong revenue growth, supported our commitment to target a sustainable cost-to-income ratio towards 50% in the medium term. We will continue to act with flexibility around our accelerated transformation so we can further simplify our business and support continued strong growth. We further strengthened our capital position with common equity increasing 32 basis points on the prior corresponding period to 9.57%. Our consistently strong position reflects a well-managed balance sheet and strong risk management, while supporting continued lending growth and future investment in transformation. Cash EPS was $0.856 for the year, up 43.4% on the prior corresponding period. A final dividend of $0.265 per share has been declared, taking the fully franked full year dividend of $0.50 per share and continuing a history of rewarding shareholders with a high-yield and long-term return. A continued focus on our key priority markets and building strong and enduring connections paired with a resolute focus on cost and productivity resulted in positive cash earnings across all customer divisions. Cash earnings contribution for the Consumer division, the largest of our divisions, was up 9%, whilst operating expenses were down 2.5%. Our Consumer division is now into its third year of outperforming system as our customers and partners continued to respond to the experienced and trusted and valued service we provide through our unique branch network and digital and third-party partners. Continued strength in agricultural conditions supported the strong performance of the bank Agribusiness division with cash earnings contribution up 28.3% and operating expenses down 3.5%. Strong seasonal growth in the latter part of the last half bodes well for an income perspective for the first half of FY '22. Business Banking grew market share in our target SME market during the year, accelerating during the second half, resulting in customer growth of 3.5% for the year. The division was also recognized by the customers for the support we provided to those impacted by COVID via an investment in relationship bankers, resulting in Business Banking continuing to maintain its exceptional Net Promoter Score. Cash earnings contribution for the Business Banking division was up 29%, whilst operating expenses were down 10.7%. Our vision remains true to be Australia's bank of choice to those who bank with us, work for us, partner with us and, of course, invest in us. Our purpose of feeding into prosperity, not off it is our anchor underpinned by strong culture, value set and risk appetite, which provides us with a clear identity of who we are. We have an ambitious agenda and are moving the dial further than ever before to reduce complexity and remove costs while at the same time, uplifting the capability of our people and systems and getting our story out there to all our target audiences. Through our actions, we've carved out a unique place as a trusted customer and community-focused bank. It is our customer value proposition and lasting and trusted relationships that make us stand out from the crowd and create customer advocacy. The genuine connections we establish are grounded in our enduring purpose, informing who we are today and where we see ourselves in the future. A future we are genuinely excited to help shape. We value the power of partnerships and seek out partners who stand for what we do and will help us extend our reach and capability and drive cultural, strategic and commercial benefits that we might not be able to achieve on our own. We touch points right across the country. We have a long and proud history of servicing and supporting Australians through our company-owned and community bank branches as well as through our other mix of banking and engagement channels. We are strategically aligning our business footprint to opportunities in key geographies, industries and market segments where we know we resonate have strong capability and a potential to scale above a natural market share. The trust in our brand sets us apart, and we are proud to be in the top 20 most trusted brands in Australia. We love being an essential part of the local communities we live and work in. Our network and unique community bank model are a fundamental part of our customer and community strategy and connection. However, we do know that capability, not trust alone is key to our customers' choice of banking providers. And that's why we're continuing to build and uplift our capability, whilst at the same time modernizing and transforming our business, and that is vital -- and that's vitally important for our future. Customers will always be at the center of our efforts and the overlap between community, human and digital connections is a unique point of difference for us. Embedding core digital capabilities to improve the customer experience and digitizing and automating core processes is a key part of our transformation road map. Our deeply human approach will continue to shape the customer connections that matter most to them. In line with our strategic imperatives to reduce complexity, invest in capability and tell our story, this year, we continued to simplify and modernize our business, reduce brand complexity and build our multi-cloud and API capability and deliver technology simplification. We delivered key capabilities such as open banking and comprehensive credit reporting, enhanced strategic partnerships and further implemented digital capability and process improvement enhancements to reduce costs and improve the experience we offer our customers. We simplified our merchant facility systems from 7 to 1 through our partnership with Tyro. Introduced further enhancements to e-banking app and broaden the use of digital acceptance of documents to [Audio Gap] customer experience. We implemented new ways of delivering learning to our staff, building better capability and productivity. And accelerated our cloud journey, successfully moving 7% of our applications to the cloud. Our review of operating structure resulted in a 6% reduction in FTE numbers, reduced the number of suppliers by 24% and achieved our targeted procurement savings of $21.6 million for the year. Our branches remain a critical part of our retail distribution strategy, and they are important to our customer and community connection. We continued to modernize our branch network with 6 new community-focused experience stores opening during the year. We've also invested in digital coaching in every branch to assist with upskilling customers, increased our mobile relationship managers by 27%, which drive a 63% increase in lending settlement and delivered a 34% uplift in servicing productivity across the branch network. Our partnership with Tic:Toc was further bolstered this year, thanks to a 7-year extension of our distribution agreement, which will allow Tic:Toc the capacity to increase its monthly volume by more than 300% and further accelerate its growth as Australia's leading digital home loan platform. Tic:Toc sustained its growth trajectory in FY '21 with a 55% increase in home loan approvals and a 61% increase in settlements. And as mentioned earlier, we continue to rank highly in key trust and reputation indices. Roy Morgan rates us as one of Australia's top 20 most trusted brands across all industries. Our home loan customers cite ongoing high satisfaction, and we are considered the highest rated bank to supporting business customers through COVID-19. We have grown market share, customer numbers, total lending and deposits. And importantly, we have not achieved this at the expense of our commitment to our communities, our people and our environment, with strong results also recorded against our nonfinancial targets. Since launching our climate change action plan in June 2020, we have reduced our greenhouse emissions by 59% and our absolute emissions by 21% and achieved carbon neutrality in June 2021. We became a signatory to the Task Force on Climate-Related Financial Disclosures. And next month, we'll release our first stand-alone sustainability report. We are well known across Australia for our commitment to community. In FY '21, we further built on this and returned approximately $20 million to communities through our Community Bank Network, which brought our total contribution since the inception of the model to around $70 million. We supported 274 students through tertiary education this year with more than $1 million provided for scholarship. Our charitable arm, Community Enterprise Foundation, continued to support communities affected by natural disaster. It raised more than $15.8 million in donations over the past year, adding to the staggering $47 million raised in the wake of the black summer bush fires. Our focus on our people contributed to an employee engagement score of 73%. In the past year, 63% of people promoted into management roles were women, reflecting the success of the investments made in our women in leadership and Lead BEN programs. We targeted 150 of our most influential leaders, immersing them in the role they play in aligning our culture, strategy and operating model. We also made strong progress against our access and inclusion plan, launched our first gender affirmation policy and toolkit, and we're globally recognized as an organization that is diverse, inclusive and supports women in the workforce when we were endorsed as a WORK180 employer. We pride ourselves on our commitment to conduct business respectfully and ethically within community expectations. Backed by good corporate governance, we offer investors in our banks long-term sustainable returns and a bank they can continue to be proud of. So before I hand over to Travis to talk further about the results, I want [Audio Gap] to the announcement we made this morning to acquire Ferocia. Like I said earlier, I am really excited to share this news today and also for the opportunity to further accelerate the bank's digital strategy and shape the future of banking for a new generation of customers. For those that aren't familiar with Ferocia, Ferocia is a fintech company based out of Melbourne. For the past 9 years, we have partnered with Ferocia and its cofounder, Dom Pim and Grant Thomas, to develop the Bendigo e-banking app and Internet platform. And in 2018, we collaborated to launch Up, Australia's first and largest mobile-only digital bank platform, and Australia's highest-rating banking app. Yesterday, the 15th of August 2021, Bendigo and Adelaide Bank Limited entered into a share sale agreement to acquire 100% of the shares in Ferocia Pty Ltd for consideration of up to $116 million. The consideration will be paid in shares with a portion of the consideration being contingent on future performance. The transaction is subject to conditions precedent and is expected to be completed by the second quarter of FY '22. The transaction will result in the bank's FY '22 operating expenses increasing by approximately 1%, with plans underway to expand revenue opportunities to balance this increase. We expect FY '23 will have minimal earnings impact with positive earnings impact in the years following. Given the long-term relationship and deep integration, this transaction will require minimal integration effort, providing the bank opportunity to accelerate quickly in the development of both Up and the Bendigo e-banking app and Internet platform. And this acquisition cements the enormously successful partnership between Ferocia and Bendigo and Adelaide Bank, uniting our collective innovation, heritage, and matched capabilities to further grow a unique digital banking proposition. Up is a collaboration between Bendigo and Adelaide Bank and Ferocia. Up was initially an experiment to see if we could reimagine the bank [Audio Gap] for a new generation of customers with a fresh approach. When we launched Up in 2018, we set it out to disrupt the industry by building a completely different experience through a technology-led banking, not bank-led technology approach. The launch of Up ushered in a new digital banking age through a unique fintech and bank partnership, which continues to be reflected in numerous awards. With the highest rated banking app, unparalleled customer engagement and a vision to be Australia's #1 consumer lifestyle brand, the time is right to scale Up by deepening the relationship with the bank and creating new product offerings whilst bringing Ferocia's expertise to the rest of the bank's highly engaged customer base. The acquisition unites our strong customer community and innovation heritage with Ferocia's market-leading digital capability to deliver all Australian's world-leading digital banking experiences. Through our partnership, we have embraced Up as a strategic digital test bed, reimagining new banking experiences for a new generation of customers and its rapid growth has far exceeded all expectations. Up's customer engagement is unparalleled when compared to global peers. It is welcomed more than 400,000 customers and $840 million in deposits in less than 3 years, empowered a new generation of savers and it will secure our market-leading position with this emerging influential demographic. Up is winning young customers from the big 4 at speed. Most of Up's customers or Upsiders as they like to be known as, are under 26 years old and are highly engaged. Over 25% of active customers log in over 100 times per month and 40% log into the app more than 50 times. As we further accelerate Up's rapid pace of innovation and growth and further expand revenue opportunities through Up, customers and brands will also benefit from Ferocia's digital innovation and experience. Powered by technology-led customer experience design and run by an internationally experienced team, the acquisition brings outstanding digital and technical expertise to the bank, internalizing Ferocia's market-leading digital capability and consolidating ownership of Up. Up was already supported by the bank's core infrastructure. So there is no time lost on integration activities. All investments can go into further developing and building out the customer experience. The acquisition will allow Bendigo and Adelaide Bank to grow and advance the Up platform to further develop its digital ecosystem, adding Up's exciting product road map to the existing offerings provided by the bank, including the market-leading digital home loan capability of our partner, Tic:Toc. More than 30% of active customers are saving for a home loan with Up scheduled to introduce home loan to its product suite early in 2022. The acquisition will also strengthen the delivery and bring efficiencies in the way the Bendigo e-banking app and Internet banking platform are delivered to customers. And whilst the Ferocia team will join the bank, they will operate as a stand-alone division to support their unique innovation, engineering and design culture. And Up customers will continue to have the same access to their account as they do today. 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. Our strategy to reduce complexity, investing capability and tell our story is delivering stronger financial performance. Full year cash earnings of $457.2 million were up 51.5% with statutory net profit up 171.8% to $524 million. Cash EPS was $0.856 and return on tangible equity was at 10.17%. Strong net interest income growth and our group-wide focus on making sustainable changes to our cost base means our cost-to-income ratio improved over both the financial year and the half, down to 60.3% for FY '21. When we look at the breakdown of cash earnings, you can see net interest income is up over 6%. Asset growth for the half has again exceeded system growth led by residential lending up 14.8%. Other income was lower with stronger fee income, offset by lower trading book, FX and commission income over the year. We've again demonstrated our resolute focus on cost and productivity. Total operating expenses, including accelerated growth and transformation spend were up just 0.6% on last year. We will continue to retain flexibility around our accelerated transformation program, so we can further simplify our business and continue to support our growth strategy. Total credit expense of $18 million include the write-back of the $19.5 million provision announced on the 5th of August and is reflective of our strong credit risk profile. Excluding this provision release, total credit expenses represent 5 basis points of gross loans. Total lending was up 10.6% over the 12 months, almost 4x system. This was driven by a 14.8% increase in residential lending reflecting strong customer demand and the investment made in our retail and third-party businesses. As Marnie mentioned, this residential lending growth achieved means we've grown above system for the third consecutive year. The residential growth was further bolstered by a 36.8% increase in year-on-year lending applications across our retail and third-party networks. Total business lending for the year was up 0.5% and 5.4% for the second half, led by agri businesses, continued strong growth in core markets and seasonal drawdowns due to favorable conditions right across the country. Business lending was 0.2% lower over the half. However, it did perform better than the first half where the portfolio was down 1%. Over the year, we saw deleveraging by our customers. We benefit from government stimulus and the unwinding of working capital needs. Within the business portfolio, our SME segment was up almost 4% in the second half, and total business lending limits increased over the year. The 14.8% growth in residential lending can be seen in the significantly stronger year-on-year settlement activity across both retail and third party. This lending growth was delivered in our core segments of owner-occupied and principal and interest lending. Over 70% of the settlement activity was for owner-occupied lending. And if we look at the split between P&I and interest only, over 85% was in P&I. There's also been significant increase in customers choosing to lock in lower fixed rate lending over the half. This is an industry-wide trend with many customers seeking to take advantage of record low interest rates. The improvement we saw in the first half in the retail channel continued into the second half, and we're able to maintain the strong level of settlements in our third-party business. The investments made in our retail mobile relationship managers in the simplified retail home loan product launched at the start of the financial year and our third-party processing capacity and distribution partners are all driving this above-system lending growth. Net interest margin for the year after revenue payments was 1.94%, down 2 basis points over the year and 5 basis points lower over the half. Net interest margin before revenue share was 7 points lower over the half, and we have again provided a detailed breakdown of the impacts on NIM for each period. The front book back book pressure on NIM increased as competitive new business rates for both variable and fixed lending continued across the industry. There was a positive impact from the variable lending rates following the repricing decision made after the RBA cash rate change in November last year. The significant growth in fixed lending from 32% to making up over 40% of our residential lending book combined with the increase in the balance of liquid assets, particularly as the term funding facility was drawn down towards the end of the half, meant there was an 8 basis point drag on NIM in this half. Providing some offset was a benefit from a reduction in funding costs through the mix of deposits with higher at core balances, lowering of term deposit rates and the drawdown of the term funding facility. The reduction in the basis point impact on margin from revenue share payments reflects the lower interest rate environment, reducing payments to partners. However, a bigger factor was the growth in the proportion of average earning -- of average interest-earning assets that revenue share isn't paid on, predominantly third-party banking lending and liquid assets. Looking forward to first half '22, there are multiple moving parts that may provide meaningful quantitative predictions not helpful in this environment. So instead, what I can say is we are expecting ongoing headwinds from front book back book pressure as the low rate competitive market conditions continue, as well as from the higher average balance of our liquids portfolio and customers' preference for fixed over variable rate lending. While customers' appetite for our core deposit remains and with the full impact of the term funding facility and ongoing active management of term deposit pricing, funding costs should provide some tailwinds in the first half. Total income on a cash basis was 4.5% higher than the prior year. Net interest income was up over 6% from 12 months ago, with the above system lending growth driving this increase. Total other income was down predominantly through lower trading book gains over the 12 months as trading activity was impacted by the RBA's actions, including the lower cash rate, yield curve control and quantitative easing. Total fee income was stronger with increased lending fees through the higher residential mortgage growth and revenue from Agri businesses, government services business. However, transaction and ATM fee income was lower predominantly due to COVID-19, which saw overseas travel restrictions and reduced cash usage. Foreign exchange income was also impacted by the restrictions on international travel and fees to manage funds were lower. Moving now to the operating expense result. The outcome shows our resolute focus on achieving sustainable cost reductions and improved productivity across the business. Operating expenses were $1,027.4 million, driven by an increased investment in transformation. With the above system lending growth continuing to drive revenue improvements in the second half, the decision was made to further accelerate the investment in technology and transformation, meaning total operating expenses were 0.6% higher on the prior year. As you can see on this chart, excluding transformation, operating costs declined 2.5%. Underlying staff costs were lower in the half even after ongoing investment in supporting revenue growth and enhancing organizational capabilities. With our transformation program, including a focus on productivity and organizational design, we were able to reduce FTE by 6.1% over the 12 months. With most of these reductions delivered towards the end of the first half, it resulted in operating expense savings in the second half. The reduction in other operating expenses also reflects the progress made to lowering our cost base. Within the 12 months, we achieved reductions through our review of third-party and supplier payments and that will carry forward into future years, as well as making permanent changes to discretionary spend levels. During the year, transformation spend increased, reflecting the full year impact of the transformation program and the decision to further accelerate this investment in the second half. This spend included investments to improve customer experience and productivity, modernize our technology estate by building out multi-cloud and API capability to deliver process and technology simplification and automation, as well as delivery on key regulatory obligations such as open banking and improved data center resiliency. Our business transformation is leveraging our unique human, digital and community strengths to build an experience for our customers that is simple and convenient and enables our customers to interact with us how and when they want. This investment will allow us to drive our revenue growth further and increasingly build economies of scale to go with this. This investment will also continue to deliver effective cost management initiatives, productivity improvements and customer experience enhancements as we add features to our digital channels to enable our customers to do more. Looking forward to FY '22, as we continue to execute on our growth and transformation program, as we focus on simplification and modernization, we expect an increase in the level of investment in technology and digital initiatives to take full advantage of the benefits this will provide in future periods. Albeit we're talking increase in the order of $10 million to $20 million in total investment, not the year-on-year change we saw this year. Turning now to the first of our customer division results. The Consumer division's cash earnings contribution was up 9%, delivered through significant growth in residential mortgages from both retail and third party. As already called out, our Consumer division has now outperformed mortgage system growth for 3 consecutive years, proving that our strategy is delivering the experience and service our customers and partners want. The reduction in other income is reflected in the group's result I spoke about earlier with lower wealth management fees and the impact of COVID-19 seeing customer behavior driving lower fee revenue. This was partially offset by increased lending fees from the above-system residential mortgage growth. Total operating expenses were down 12 months -- were down against 12 months ago, reflecting benefits of the transformation program in the corporate branch network and other cost management initiatives. Credit expenses were low at only $8.3 million for the year. However, a release of non-COVID-19 collective provisions in the second half of 2020 meant credit costs were higher when compared to last financial year. The cash earnings contributions from both our business and Agri divisions increased significantly on the previous financial year. For Business, this earnings contribution was up almost 30% through higher net interest income and lower operating expenses and credit costs. The increase in NII reflects positive asset growth achieved by the division, strong deposit growth and margin management. While business lending portfolio has continued to see a deleveraging from our customers, as evidenced by lower levels of facility utilization over the year, we have achieved growth in our key target SME segment with the acceleration of this over the second half. The reduction in other income was impacted by COVID-19 in areas such as reduced FX income. Operating expenses were lower, driven by a reduction in FTE as the business transitions to a new operating model. The disposal of assets under management contributed to lower OpEx through one-off recoveries, combined with the full year benefit of the consolidation of the community sector banking business. Credit expenses for the year were almost half what they were 12 months ago, benefiting from lower levels of arrears across all areas of business lending portfolios and the exit of a number of longer-standing nonaccrual facilities, which has reduced our aggregate impaired portfolio to levels below historic averages. For Agribusiness, the earnings contribution was up over 28% through higher income and lower operating expenses. The asset portfolio increased by over 14% over the second half due to seasonal -- strong seasonal growth. However, most of the growth was achieved in June, meaning it provide minimal benefit on NII in the last half, but this will be seen in the NII result for the first half of FY '22. We did see lower loan limit utilization than 12 months ago, reflecting the strong balance sheet of our customers and favorable trading conditions across the majority of the agricultural sector. Loan limits continue to increase, which is positive for future growth. Other income is again higher this year due to revenue from the Government Services business. Active management of costs and structural simplification meant operating expenses were lower even after additional investment made to support the growth in Government Services revenue. Credit expenses were only $1.7 million for the half and only $7.5 million for the 12 months, remaining at historical low levels. Specific provisions raised during the second half were low and in line with previous halves. Underlying credit quality continues to remain strong. This reflects improved seasonal conditions, rising farmland values, strong commodity prices, customer debt deleveraging and disciplined credit underwriting via our experienced and specialized Agribusiness team. Homesafe's contribution on a cash earnings basis for both the year and the second half were higher, contributing another $18 million in net earnings before tax over the last 12 months. On a statutory income basis, we have recognized $76.1 million gain for the second half. Melbourne and Sydney property values increased over the second half and we also recognized an increase in the portfolio valuation in June following a change to the growth outlook. The 6-monthly review of the portfolio valuation meant the growth outlook for the next 12 months was revised upwards, with year 1 now assuming 3% property growth. The outlook is in line with the assumptions on house prices used in our collective provision assessment, taking into account the profile of this portfolio. We continue to review these assumptions every 6 months. And a key test is how the carrying value of the completed contracts compares to sale proceeds. The proceeds we received on completed contracts during the financial year exceeded their carrying value by $5.2 million or 12%. Total credit expenses for the year were $18 million, including the collective provision write-back of $19.4 million announced on the 5th of August. Including -- excluding this provision release, total BDD expenses represent 5 basis points of gross loans, down from 8 basis points in FY '20 after excluding the COVID overlay raised during that year. The improvement in credit performance is a continuation in the trend we have delivered over the last few years. The key drivers of FY '21 bad debts includes lower levels of arrears, a 13.2% reduction in impaired assets from June 2020 and improving economic conditions over much of the financial year. The dollar amount of impaired assets is the lowest it has been for a number of years, with total impaired loans to total assets at 24 basis points, notwithstanding the significant asset growth we've achieved over the last number of years. The provision coverage ratio at June '21 was 213.5%, up from 201% 6 months ago and driven by the reduction in impaired assets and additional provisions. Loan-to-value ratios remain low, with the average LVR for residential mortgages at 56%. Our provision levels remain conservative given the continuing uncertainties resulting from COVID-19. Notwithstanding the improved economic conditions, we continue to take a cautious approach towards the determination of specific and collective provisions. This is reflected in the increased weightings we have assigned to the downside scenarios in the collective provision calculation and the increase in specific provision despite a reduction in impaired assets. We continue to closely monitor the economic conditions and the performance of our portfolios and consider these factors in the ongoing review of provision levels. Moving now to arrears. Across our residential, credit card business and Agribusiness portfolios, arrears are down from June 2020 and compare favorably to recent periods. In our Consumer portfolios, arrears in our credit card portfolio increased in the first quarter as collection and recovery activities on cards were temporarily suspended. However, you can see from October when this was reinstated, arrears levels have reduced. For our personal loan portfolio, the increase shown in the graph on the bottom left is largely driven by the portfolio contraction with write-offs in FY '21, the lowest in 5 years. The increase in arrears for our agribusiness portfolio since December '20 is largely seasonal and driven by the timing of annual review of facilities, noting that the current conditions and outlook for agriculture remains positive. Overall, arrears remain relatively benign, but we do expect a modest increase over the next period given the current uncertainty and lockdowns. The extent of any increase will be driven by the external conditions. In June, support packages and assistance measures were reintroduced for residential, consumer and commercial customers. As at 31 July 2021, we had only 274 accounts totaling 87 million receiving support. 71% of these customers are in New South Wales and 20% are in Victoria. As Marnie mentioned before, whilst we've only seen a modest number of customers seeking assistance, we are conscious that behind these numbers is a person, a family or a small business. Our funding position continues as a key strength of the group, giving us flexibility to fund our targeted above-system asset growth and providing us with an important customer relationship. Total customer deposit balances increased by over $7 billion over the year with our core deposits increasing by over $9 billion, meaning we could reprice higher cost in term deposits. This resulted in reductions in the term deposit portfolio. However, we maintained a retention rate just under 90% for our retail customers. Total customer deposits sourced through the Community Bank network grew by 16% over the 12 months. Wholesale domestic issuance continues to provide a reliable source of stable term funding. In the last 6 months, we successfully completed a $1 billion securitization transaction in April. And in June, a $225 million 5-year senior unsecured transaction at 65 basis points over 3-month BBSW. Over May and June, we accessed the remaining $2.9 billion of our total entitlement of $4.7 billion of the term funding facility. We will see the full impact of the TFF on our cost of funding in FY '22. Our funding gives us the flexibility to fund the above-system asset growth we're achieving through our over 74% customer deposit funding mix. That means we're also well placed to continue to tap into demand from wholesale markets. Our Common Equity Tier 1 ratio increased to 9.57%, up 32 basis points from 12 months ago and up 21 basis points from December 2020. Total capital of 13.81% was up 20 points on June 2020. This increase in our capital position was achieved along with an almost 6% increase in risk-weighted assets over the year. This consistently strong capital position reflects a well-managed balance sheet and strong risk management. Marnie has spoken about the Board's decision on dividends with the declaration of a fully franked final dividend of $0.265 with a DRP discount of 1.5%. Full year dividends of $0.50 are 14.5% higher than FY '20 -- 14.5% higher than FY '20. The full year payout ratio of 58.4% on a cash earnings basis reflects the appropriate balance the Board took with their decision. The Board's dividend decision today supports our strong capital position, our business outlook, including expectations of continued above system lending growth and takes into account APRA's previous industry guidance on capital management, whilst ballasting our commitment to support our shareholders with ongoing economic -- while the ongoing economic uncertainty exists. As we face a historic low interest rate environment, we will continue to take advantage of strong customer demand across our Consumer, Business and Agribusiness divisions. As we advance our transformation strategy, we expect above system lending growth to continue, driven by our Consumer division and further advances in the small Business and Agribusiness sectors. While there are multiple moving parts with the net interest margin outcome for FY '22, as I said earlier, we are expecting headwinds from front book lending rate competition as well as some higher liquids and fixed rate lending. With custom at call deposit flows continuing and the full impact of the term funding facility and ongoing active management term deposit pricing, funding costs should provide some tailwinds. We expect a continued reduction in our cost-to-income ratio for FY '22. This includes the cash flow operating expenditure at around 3% or higher. Half of this increase is attributable to the additional investment in staff and marketing costs we will make to continue to accelerate the growth of the Up platform and to broaden the Up customers experience with a specific focus of introducing a mortgage solution. The remainder is expected to be driven by an increase in technology costs and software amortization as previous year's transformation investments become part of our cost base. The higher cost base in FY '22 and ongoing investment in growth and transformation means we are building what's needed to achieve our medium-term target of towards sustainable 50% cost-to-income ratio, through both revenue growth and our resolute focus on cost and improving productivity. Economic indicators are more favorable than expected. And while our asset portfolios are well secured and provisioned, uncertainty still exists around the potential impacts associated with current and future lockdowns. I'll now hand back to Marnie for some closing comments before we open up to Q&A.

Thanks, Trav. The last year continued to be challenging, further testing the resilience of all Australians. Pleasingly, the depth of the economic contraction was not as severe as initially expected, which has gone some way to improving the forward outlook. Conditions across the domestic economy improved over the year. And in some markets, such as the labor market, conditions improved faster than expected. However, the recent lockdowns have hampered activity, impacted both business and consumer confidence and will more than likely drop in GDP this quarter. We anticipate economic and market conditions will continue to provide both ongoing challenges and opportunities for our bank. While we expect the housing and employment markets to grow nationally and the economic expansion of regional Australia, we remain cautious of the potential impact of further prolonged pandemic-induced lockdowns, a slower than initially anticipated vaccine rollout and take up, international trade sentiments and the continuing effects of natural disasters and climate change. At the same time, we are encouraged by measures introduced by state and federal governments to aid Australia's economic recovery. The results we have announced today clearly demonstrate our strategy is making us a bigger, better and stronger business for all our stakeholders. We have again delivered on what we said we would do and more. While recording a strong financial performance across all customer divisions and growing our customer numbers and market share in both lending and deposits, we delivered sustainable cost-out reductions across the business whilst also providing for an accelerated level of investment in growth and transformation. As we advance our transformation strategy, we expect above system lending growth to continue whilst maintaining a resolute focus on costs, improving our productivity and preserving a strong and resilient balance sheet. Our greatest opportunity to expand our market share lies in our key strength and in our ability to bring together our deeply human approach to customer and community connections with our strong digital capabilities and new digital investments. We have a proven history in delivering innovative banking first in Australia, and this provides us with a foundation upon which to build further investment in new capabilities, partnerships, technology and skills. This foundation is illustrated by our partnership with Tyro, our investment in Tic:Toc and our acquisition of Ferocia will support a significant step change in our transformation and digital banking strategy to deliver market-leading experiences for all customers. We remain resolute in our determination to realize our vision to be Australia's bank of choice and we'll continue to call out our point of difference, strength of purpose, digital innovation, customer and community connection to position us for ongoing success and shape the future of banking for all shareholders and for all stakeholders. Thank you, everyone, and I will now open up for questions. [Operator Instructions] Thank you.

[Operator Instructions] Our first question today comes from the line of Andrew Lyons from Goldman Sachs.

Just 2 questions, if I could. The first, just on the transformation agenda. When you first announced the transformation agenda, you expected spend to peak at about $80 million per annum in FY '23, which would have been next year. Now you've obviously accelerated that and gone through that number in FY '21. But I'd just be keen to maybe get a bit of an update on how you see that transformation spend, what the trajectory looks like over the course of the next couple of years? There was always an expectation that, that would peak at around at $80 million and then start to fall back towards 0. I'm just keen to sort of understand what that looks like today, given the acceleration of that spend? And then just a second question just around some of your targets. You've previously spoken to a Core Equity Tier 1 target of 9% to 9.5% and a payout ratio of 60% to 80%. It's not evident that those targets are reiterated today in -- from the comments and within the pack. So I'm just wondering if you can confirm whether they still are relevant.

Andrew, it's Travis here. So your first question around the profile of our transformation spend. I think we spoke 6 months ago. Just some of that was coming through, we expect it to come through in this half. Looking forward, I see '22, '23 as the peak and then coming back from there. So if anything, since we first started, it's probably pushed out into '23 being that peak now. And I did say as part of my update this morning that we do expect between $10 million and $20 million in total spend into '22 as part of the transformation program. Some of that will be OpEx, but that's still within the comments I made around the overall OpEx outcome for '22. So '22 and '23 is probably where we think the peak with how we see the program at the moment and then falling from there. . And then to your second point, yes, the stated capital and dividend payout ratios remain.

And your next question today comes from the line of Josh Freiman from Macquarie.

Just 2 questions from myself. The first one is really focused on competition in the mortgage book. So with the end of the TFF drawdowns, how do you guys see competition trending just in the next couple of halves on the front book? And then the second question. In your slides, you mentioned an opportunity to further build out partner models. And you guys actually note Wise and after paying that. Are you guys able to provide more color on that?

Josh, I might answer the first one, yes, around competition. Or as far as the impact, Josh, I think, it was more around the current environment off the back of the end of the drawdown of the TFF. I think it depends on what the market does. So obviously, I can't make comments on behalf of the whole market. But obviously, that funding, the TFF there was to improve the cost of funding for banks. And then obviously, that then impacted lending rates for our customers. So I think moving forward, it's hard to see. It continues to be competitive. And I guess we just have to watch and see. But when we think about our forecast moving forward, we're certainly continuing to assume a competitive lending environment, albeit the TFF is fully drawn. Marn, I might hand to you for the second part of the question.

Yes, no worries. And Josh, I mean, everyone knows we've got a long history of partnering ourselves as an organization. And so had Ferocia and there have been a lot of partnering done in relation more specifically to the Up platform. The partners that you talked about there, which was now called Wise, they were TransferWise, now called Wise and Afterpay are partners that partnered with us in relation to the Up platform. There are other partners as well that we partnered with there. We will provide a little more color to the -- to our strategy and what that looks like. I think probably following completion of the transaction, which, like I said earlier, is probably looking at around about the second quarter of FY '22, we'll come back to the market with a bit more detailed briefing once that transaction is completed. But suffice to say, both parties, both Ferocia and ourselves have a history in partnering and looking to partner with others who perhaps have the skills or capabilities that in marrying them with our own provides for a really good customer experience and you'll see more of that as we move forward.

Marnie and Travis, just on that Afterpay partnership comment you made. Has there been any change in your ability to partner with them with respect to sort of Westpac's agreement with them?

No. So in relation -- it is in relation to the Up platform. It partnership is, and no, that transaction has not impacted that partnership at all.

And your next question today comes from the line of Ed Henning from CLSA.

Firstly, can you just run through the impact of Tyro in '22, both on the noninterest income and then the cost? And is that included in the cost guidance? And then secondly, with your anticipated NIM headwinds, do you believe you can get revenue growth in '22? And further, could you even get positive [ jaws ].

Ed, so the 2 questions. The previously announced Tyro partnership is factored into all the numbers we've been talking about today, both OpEx outcome and CTI outcome. If I split the line items, though, I think we are expecting in the order of, I think, slightly above $10 million -- $10 million to $15 million reduction in other income and then a similar level of reduction around about $10 million in operating costs in FY '22. What that does, though, it would also avoids the future investment required to support that. So that's the impact in FY '22, which is actually factored into the numbers there. And to your second question. So even though we're not giving quantitative guidance on NIM, we are calling out those pressures. But in answer to your question, yes, we do think we can grow revenue through the balance sheet growth and the management of that margin.

And any chance for positive jaws considering the cost headwinds?

We do see an improvement in CTI over the year.

And your next question today comes from the line of Matthew Wilson from E&P.

Matt Wilson, E&P. Could you provide us an update with the -- with respect to the strategic options you have available to the Homesafe stake? And also how you think about the carrying value of Tic:Toc and what its strategic optionality is going forward given their likely IPO next year?

I'm going to take the first one, Marn.

Yes. Thanks, Trav.

Yes. So Matt, as we've said before, we think Homesafe is a great product for our customers. It's probably not a natural asset on the balance sheet. No further update from what we said 6 months ago, apart from the fact we continue to review options there. Obviously, with the low rate environment, strong property prices, it's a good time for us to be reviewing all of these assets. So -- but no real update on what we said before.

And just in relation to Tic:Toc, it's a great business. It's a great business. It's growing really strongly. We've got 28.6% investment in that business. And we will continue to retain an investment in that business.

No, I agree. So I mentioned there's an unrealized gain that's quite material that's potentially sitting in that investment.

Well, we think...

[indiscernible]

Sorry. Trav?

No, I was going to say, yes, it's certainly not accounted for that way. And Matt, you've obviously got a view on the value there. But to Marnie's point, this is certainly a strategic investment and what we see Tic:Toc doing.

And your next question today comes from the line of Brett Le Mesurier from Velocity Trade.

You said you expected to achieve above-system loan growth. What do you think system loan growth is likely to be next year?

Yes, Brett, based on all the work out there and our work, we're thinking resi mortgage growth is somewhere north of 5% with total lending just under that.

How important is it to restrict your growth to deposits going forward given that, that is more -- that's the cheapest source of funding than wholesale funding when the TFF runs off as you said, the RMBS was 65 points, yet the average cost of your deposits is below 50 basis points?