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

Thank you all for standing by, and welcome to the Bendigo and Adelaide Bank 2022 Half Year Results. [Operator Instructions] I'd now like to hand the conference over to Managing Director, Ms. Marnie Baker. Thank you. Please go ahead.

Good morning, everyone. And let me begin today by acknowledging the traditional owners of the lands on which we meet today. And for me here in Bendigo, that is the Dja Dja Wurrung people of the Kulin nation. I pay my respects to their elders past and present and extend my respect to the Aboriginal and Torres Strait Islander people who are present on this 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. [Operator Instructions] Our strategy and focus on execution has continued to deliver through first half '22, making this good result possible in a challenging environment. Earnings growth across all our customer divisions has been consistently strong, and underlying balance sheet momentum remains, especially in residential mortgages, which was up 8.4% for the half; and customer deposits, which grew 6.6%. While growing the business and managing the continuing impacts of the pandemic, we continue to have the highest customer Net Promoter Score amongst our listed peers at 29.7, well ahead of the average NPS of the major banks at negative 5. And our employee engagement index has remained high at 76%. Our transformation journey is on track, delivering sustainable changes to our operating model and the third consecutive half of positive jaws. Saying that, there is clearly more to do to extract direct costs from the business and improve returns to shareholders. 2 weeks ago, I announced changes to the bank's organizational structure, bringing together into one division the business banking and rural bank functions with a clear focus on performance and returning to above system growth. I also announced the appointment of a Chief Operating Officer to support the intense focus we have on costs, productivity and strengthening our processes and practices as we enter a critical phase in the execution and delivery of our program of work. The pace of our transformation agenda continues to accelerate. We have disposed of noncore assets and business lines, moved more applications to the cloud, reduced our time to decision for our customers seeking a loan, completed the acquisition of Ferocia, and we are on track to launch our fully digital home loan offering, Up Home, in the second half of 2022 -- sorry, in the second half of financial year 2022. We continue to perform across our key performance indicators both in financial and nonfinancial measures. The cost-to-income ratio has come down for the third consecutive half, and ROE is once again above 8%. Despite this momentum, there is more to be done, and we are further intensifying our focus and actions. Our strong residential lending has consistently grown above system, now representing 6 consecutive halves of above system growth. Customer numbers have grown to over 2.1 million, attracted by our products and points of difference. However, we recognize our overall lending growth has been below system, driven by seasonal factors in agribusiness as well as strong sector conditions, resulting in lower utilization of existing limits and the decline in our business lending book this half. To that extent, the recently announced restructure bringing together business banking and rural bank has a clear focus on growth and earnings. The disciplined execution of our strategy is evident across our financials. Our focus on profitable and sustainable growth as well as removing complexity in cost from the business has delivered another consecutive and meaningful reduction in the cost-to-income ratio and an increase in return on equity, providing good momentum into the second half of financial year 2022. We are pleased to present these interim results to you today, and Travis will go through them in more detail later in our call. Today, we are approaching the presentation of these results a little differently. There are 4 key focus areas that you most likely want to hear from us about and that we wish to address: Our recent acquisition of Ferocia and how this accelerates our strategy; net interest margin and the current and near-term interest rate cycle and more specifically, how it impacts us; how our transformation program is positively impacting our business and how this will drive improvement in our returns; and capital and dividend considerations moving forward. I will take you through the first of these strategic focus areas, and Travis will spend more time on the latter 3. You'll be familiar with our strategy at a holistic level, including our strategic imperatives. So rather than taking you through this again, I will focus in on our recent acquisition and how technology is enabling and accelerating our strategy. So turning to the first of our focus areas, the Ferocia acquisition and how it accelerates our strategy. We've always been the customer-centric bank. It's in our DNA, and the proof points of this are clearly evident in things like our leading NPS and trust scores, our strong customer deposit franchise and the valued role we play in communities. We have always been willing to innovate and partner with others to meet customer needs, be it cutting-edge products such as the introduction of Visa credit and debit cards to Australia or mortgage offset accounts or new business models like Community Bank, which has set us apart and continues to be a significant contributor to our overall customer footing. And we'll always be proud of our heritage as a regional and rural bank. But there are certain realities and limitations that come with this heritage, including scale and customer demographics, which, in turn, placed some constraints upon our relative returns. We've had to face into that, make changes and invest accordingly. And that is where we think that technology becomes a real game changer for us and our customers. By having access to some of the best technology and technology people in the Australian financial services market through our investment in Ferocia and Tic:Toc, we can reduce some of our scale disadvantages, connect more easily with more new customers, service customer needs better and drive better returns for our shareholders. So following on from your questions at our full year results and again in November at our digital transformation briefing, I think it is important to spend more time helping you better understand our investment in Ferocia and the Up platform. We think this business is a genuine game changer for the bank. Up is not just a bunch of rate-sensitive deposit customers, although the younger demographic of customers is better educated and financially literate. Up is not just about gathering more deposits, although it has exceeded expectations by raising $1 billion in customer deposits to date. Up is a great example of the way consumers increasingly wish to do their banking. Upsiders are deeply engaged with and trust their bank. They are main transactional bank customers. Up is how they save, how they pay, how they manage their finances efficiently. And it's how they financially prosper. And soon, it will increasingly be how they will access property finance when we launch Up Home later this financial year. And we're confident about that for at least 3 reasons. Because we can actually see them saving for it in identifiable accounts with 45,000 accounts established to date. Younger customers are increasingly more financially literate, and they have trust in Up and are comfortable using technology in their daily lives. And we'll make it easy for them to do so because we'll be using some of the market-leading smart end capability from our partner, Tic:Toc. And we have seen this sort of transition from a younger customer with a transaction account relationship becoming a mortgage customer before. There is a bank in this country which has more than 30% share of the mortgage market, which has done precisely that. And these younger customers using Up are the future of Australia's workforce with estimates that 70% of the workforce will be Gen Y and Z by 2025. An increasingly dominant presence -- they are playing an increasingly dominant presence in payments and retail spend in this country. And they are approaching 25% of our total group customers after only 3 years of operation. And they are a big reason why we think we have a very bright outlook for our retail banking business and to increasingly be identified by more Australians as their bank of choice. And we're confident in our investment in Up, too, because it gives us access to some of the best technology engineers in the market. And they are excited about what they are building. And importantly, these engineers are being led by one of their own, who is not a long-time bank executive. In summary, the proof points are there as to why this investment will deliver value. And I'll now pass over to Travis to run through the financial detail behind our solid first half results and to expand further on our remaining key focus areas. Thanks, Trav.

Thank you, Marnie, and good morning, everybody. I'd like to extend Marnie's welcome and look forward to taking a different approach today to discussing the focus areas in our first half '22 financial results and outlook. Cash earnings are up 9.8% on last half and 18.7% on the prior corresponding period. Importantly, income has continued to grow despite heavy competitive pressures and [ adverse ] mix impacting the mortgage market. From a margin point of view, there is again a compression through the half with a 5 basis point reduction before the impact of holding higher liquidity. After this liquids impact, NIM was 14 points lower. We see some tailwinds to NIM, and I'll provide more detail later in the presentation. Loan growth was driven by total lending of 4.3%, at around half system. While we delivered residential lending growth of 8.4% or 1.1x system, offsetting this resi growth has been an overall contraction in our business and agri lending portfolios, where competition and agri sector seasonal factors have had a significant impact. Other income increased by $4.8 million, but it's important to note that this did include one-off Cuscal dividends. Other key movements included a $3 million increase in foreign exchange income and a $4.4 million improvement in our trading book loss from last half. However, this was more than offset by a $5.5 million reduction in card and merchant income due to the sale of our Merchant Services business to Tyro and a reduction in agribusiness government services income. Homesafe provided a material contribution to the other income line with earnings of $14.2 million. This represents the strongest half of net realized income from Homesafe. Our costs were up only $300,000 versus pcp and only 1.5% on second half '21, including the addition of Ferocia costs, which we indicated were at around 1.5% on a full year basis. Operating costs, excluding transformation, were up $3.3 million compared to second half '21 as the level of transformation spend was managed in line with the expectations on total income. The cost-to-income ratio reduced, making it now 3 consecutive halves of improvement. And pre-provision earnings continues to grow consistently, up 3.6% half-on-half. Credit expenses were lower, in part driven by a partial write-backs of collective provisions. But importantly, our provision coverage remains strong for the current environment, and lower level impaired assets and arrears exist at 31 December. Our return on equity in the period increased 24 basis points to 8.11%. I would note that hurdle returns on capital markets in general have come down in the falling interest rate environment. However, we know there are concerns about our level of returns, and it remains a focus for us to continue to improve. Delving deeper now into our second key focus area of net interest margin and the rising rate environment that the financial community considers is the key issue for 2022. Starting with asset growth. At the full year result in August, we stated that we expected to see above system lending growth through the half with residential lending being the key driver. As you can see, our call on the residential loan growth has been correct, albeit not to the levels we expected, as we responded at different times during the half with increases to our fixed rates in line with our benchmark return targets, even though competitors were offering pricing below this. Our growth in fixed rate lending and third-party channels has remained the highest proportion of our flow, but we also note the shift back towards variable lending is occurring in more recent months. From a retail business point of view, we've continued to see good flows with settlements increasing by 2.1% on the previous half. Our expectation to grow above system in total lending has not materialized. Business lending has been stronger at a system level. And compared to mortgage lending growth, we have not participated in that opportunity to the extent of our peers. In combination, these loan growth dynamics and stronger liquidity position have contributed to an ongoing rate of margin pressure that was more than anticipated. As you can see from our 1st of February ASX announcement, we've taken action to restructure our executive team, and we are undertaking search for an executive to build on the foundations in place and drive stronger performance in the newly combined business and agribusiness division. Moving now to the NIM outcome through first half '22. In line with our peers, NIM continues to be under pressure. In the half, NIM after revenue share was 1.8%, down 12 basis points on the previous half with NIM prior to revenue share of 2.09%, down 14 points. And I'm also aware of how our results today and share price can overreact to our exit margin disclosures, but I'll keep making that disclosure. And to that extent, you'll note that our exit margin of 2.03% is below the average of our last half. Despite the downward trend, it's important to note that our net interest income lines continued to grow at an acceptable rate, driven by our lending growth through the period. Our residential lending is generating returns above our cost of capital, and our revenue growth remains favorable to peers. As we move into the mechanics of the first half '22 NIM, it's important to remember that NIM is an arithmetic calculation which contains a number of moving parts and will always shift around from period to period. Interest margins reflect the influences of the changes in business mix in both lending and deposits, changes in risk appetite, competitive influences and interest rate settings as well as a host of other factors interacting dynamically. A case in point is we added a stronger liquidity position to our balance sheet, but our reported NIM is lower. Through this half, the negative influence on NIM from front book/back book lending pressure continued at 9 basis points with 5 basis points coming from fixed and 4 basis points coming from variable rate lending. Excluding the impact of our build in liquid assets, NIM declined 5 basis points. Further to this, our asset mix has remained under pressure as we continue to see more than 50% of new mortgage flow into fixed rate lending. The impact of this has subsided a little more recently in terms of new business flows due to the pricing action we have taken and shifts in industry trends towards variable. Positively, we've continued to see NIM tailwinds from our customer deposit repricing as we replaced higher-priced TDs with cheaper sources of funding, and the benefit of the TFF has improved wholesale funding by 4 points. There was a material impact on NIM from the increase of our average liquids balance through the half, up $3.3 billion. You will note this half, we provided extra detail to highlight this trend. This balance was primarily driven by the full drawdown of the TFF at the end of FY '21 and the inability to transfer these funding to assets in a timely manner. So on balance, while experiencing some near-term headwinds, we expect to start to see tailwinds to NIM. Cash rate increases mean we see asset yields increasing more than liability rates as well as the benefit on our equity. Our fixed variable mortgage mix has and will continue to revert towards more historic norms. And as asset growth across the sector moderates, we may see banks should focus more towards margin preservation in order to drive revenue growth, albeit this dynamic is subject to risk. Given we do not operate a replicating portfolio of any significance, you would anticipate the benefit of rising rates to have a more pronounced influence upon our NIMs than you may see for some of our peers. Our monthly NIM movement chart on the earlier slide overlaid with the RBA cash rate decreases highlights the timing of our sensitivity to earn NIM to directional movements in the cash rate. Overall, we forecast on what we consider to be a relatively conservative outlook for NIM over the medium-term planning period. Turning now to the third of our focus areas, our transformation program and how we see the program impacting our business and importantly, enabling us to have improved P&L and shareholder return outcomes in coming periods. As a quick recap, our transformation program began in 2019, and there are 4 major streams within it, being growth and productivity, risk and compliance, foundation technology and asset life cycle management. In first half '22, we spent a further $82 million associated with these initiatives, which compares to $96 million second half '21 and $69 million in first half '21. Our capitalized component of spend has continued to increase to now account for 49% of total spend in the first half, driven by the mix of assets we are building. And our amortization charge in the capitalized balance is expected to impact the P&L, increasing from about $28 million in FY '21 to about $55 million or $60 million by the time we get to FY '24, FY '25. In this period, growth and productivity investment has increased in our core banking and brand consolidation road map and building out of new origination, product and electronic identification capabilities. Risk and compliance investment is relatively consistent half-on-half as spend on building open banking compliance reduced and is replaced by investment in the health and vitality of other critical systems and a continued uplift in risk capabilities. Foundation technology had an elevated spend in FY '20 and '21 and reflects the requirement to modernize key platforms to support change at scale. Investment levels in FY '22 have returned to more normal levels. Asset life cycle management had a material uplift in investment in health and vitality of critical systems into FY '21 and has normalized in this first half of FY '22. And we continue to make progress on our key initiatives. By the end of FY '22, we expect to be completing a number of initiatives, including delivery of Up digital home loans into the market; Delphi Bank integration, which will result in approximately $4 million reduction in ongoing direct cost base; a single business and agri division, ensuring our customers continue to have access to specialist knowledge and quality products while also allowing the bank to streamline operations and deliver efficiencies; and centralized operational activities across the group under the new COO role, bringing together more than 1,000 FTE with a focus on reducing complexity, strengthening processes and practices, improving productivity across the bank. These metrics give you a quantitative perspective of some of the system and customer experience-related impacts to our transformation. We are a couple of weeks away from completing the migration of Delphi customers and systems, reducing one core banking system and a number of associated applications. Median time to unconditional decision for loans in our third-party channel has improved to 14 days. The actual average time to initial conditional decision, as published by Broker Pulse in December '21, is currently 6 days, placing us #3 in the market. The percentage of our active e-banking customers is now at almost 66%, and you'll see an increase in this as our highly engaged Up customer base continues to grow. You've been seeking more clarity on our transformation agenda and how it will drive our overall earnings and returns in future years. This chart on Slide 20 gives you this insight. You'll note that our CTI improvement starts to drive through over the next couple of years. Within that, you might characterize this as being a story of improving revenue performance against a stable expense outlook. To that, the key drivers of our revenue performance will be ongoing above system residential lending growth; a rising interest rate backdrop, albeit some of the benefits of that may be consumed by competitive forces; and delivery of Up Home loans, providing a growth opportunity that represents significant scale. Key drivers of expense performance include the increasing intangible software amortization that I spoke about, offset by progressive benefit of transformation program and organizational restructure, leading to a relatively flat operating expense outlook. The cost lever will be dynamically adjusted as necessary, depending on the environment and our revenue performance. Turning to the fourth focus area now, the topic of capital and some of the key influences associated with this. As reported today, the increase of our earnings in the half and a $1 billion RMBS transaction has seen our CET1 capital reach a strong absolute level of 9.85%, 28 basis points higher than 6 months ago. Prospectively, there are a number of moving parts to consider in our capital and dividend settings. We are today announcing an increased CET1 capital target range of 9.5% to 10%, which reflects a number of factors, including the Board's desired capital position relative to peers and to support our growth outlook and transformation agenda. Our formal dividend payout ratio remains unchanged at 60% to 80% as we expect this to be where we manage dividend levels across the cycle. Regulatory capital changes from APS 110 and 112 will come into place in January 2023, and we expect this to have a broadly neutral net outcome on capital. Currently, with the increase in our target CET1 capital range, our dividend is likely positioned at the lower end of the target cash payout range. Rising capitalized expense levels slows our regulatory capital generation relative to cash earnings, which exacerbates the need for a lower payout ratio for the time being. In any year, interim dividends are more likely to be struck on a conservative basis as we manage our capital position. On a top line basis, loan growth is expected to exceed system, driven by residential growth and a seasonally strong performance in agri in second half. However, we are facing into NIM headwinds in the second half with continued front book/back book repricing pressure on both variable and fixed loans. The drag from liquids should abate, and some further offsets are expected in customer deposit repricing. Other income is expected to decline in the second half with the sale of our Merchant Services business in FY '21, which is an offsetting benefit in lower costs. A further $5 million of first half 2022 income was one-off, and we expect commissions to be slightly lower. Noting the revenue challenges we are facing in this environment, the outlook is for lower costs and positive jaws as the executive team remain committed to see CTI on a continued path of improvement. FY '22 credit expenses are expected to be modest in the current operating environment. Giving consideration to the medium-term outlook, the macro backdrop and our responses. In a rising interest rate environment, we'd anticipate some abatement in system credit growth as debt serviceability declines. We expect net interest margins to be assisted by improving returns on our low-cost deposits and equity as asset yields increase and a shift back towards more traditional levels of fixed and variable rate mortgage mix. While the Australian population is aging, the working population will increasingly be represented by those from generations Y and Z with income growth, retail spending and demand for mortgages coming from this demographic. We are incredibly well placed to meet this demand and assist these customers given our investment in Up and Tic:Toc. And finally, we need to work even harder on improving our returns to shareholders, and customers cannot expect to be meeting the cost of our inefficiencies. We will also make changes to our portfolio of assets as required to ensure that we are the custodians of the businesses that our customers really need and that we are best placed to provide and to own and manage those assets. So thank you. And I'll now hand back to Marnie for some closing comments before we open up to Q&A.

Thanks, Trav. The results we've announced today clearly demonstrate that our strategy is making us a bigger, better and stronger business for all our stakeholders. This result marks the third consecutive half of positive jaws and our sixth consecutive half of above system growth in residential lending. We are delivering value for our more than 2.1 million customers, and our vision to be Australia's bank of choice is a step closer. Despite NIM pressure, we have worked hard to ensure our costs are flat on the prior corresponding half, delivering a strong result. We are managing our margin by repricing and are confident that our approach to margin management, combined with better leverage to a rising cash rate, will play out with improved returns over time. We're also getting on with the job of modernizing our bank by removing complexity and creating additional capacity. We are well positioned with leading NPS and trust scores. Our growing customer numbers and the success of our community bank model proved there is demand for our point of difference, and the investments we are making into digital capability are opening up new markets and bode well for future growth and returns. We have delivered on our promises. Our cost to income is down, and our return on equity is up. Make no mistake, this is a strong result for our shareholders in an environment where NIM is down across the sector. We are now entering a crucial phase of our strategy with the benefits of this work to be realized for years to come. We remain focused on executing the strategy that has served us well, staying focused on cost, lifting productivity and driving long-term sustainable returns for our shareholders. So thank you, everyone, and I will now open for questions. [Operator Instructions] Thank you.

Our first question comes from Josh Freiman at Macquarie.

Congratulations on your results. A couple of quick questions from me. So first is just on asset mix. So a portion of your asset mix impact is probably coming from the increased mix shift towards mortgages over business lending. I just want to check how you expect to bring that business lending growth back to system. And then for the second question, we were just surprised with the deposit margin benefits you guys managed to drive in the half. Just with respect to that benefit, should rate rises take longer than expected to eventuate? Do you guys see any more possible benefits you can generate there? Or is that sort of tapped out at current levels?

Well, I might -- Trav, I'll let you answer the second question of Josh's. So thank you, Josh. I might just touch on the decline that we've seen in our business lending portfolio and how we expect to get back to system. It's very clear, and we're very clear in the results, that, that is a part of the business that has slipped. There's definitely increased competition arrived in the market, and we've seen that. But we still have a position to play given our close connection to communities and especially in the small to medium business sector and communities right across Australia. The restructure that we spoke about earlier in bringing together the businesses of business banking and rural bank, those functions, to be able to support our business and agribusiness customers better and bringing in a new executive that's actually going to head up that area. So it is very much focused on returning to above system growth and ensuring that the appropriate returns are received, I suppose, from the bank and passed through to shareholders. We have said in the past, Josh, that we're here to write profitable business. And it is very -- the pricing is very sharp, and we've had the examples of that. And we have opted to, in some scenarios, actually just step out of the market just given the very fine pricing that's occurring. So Trav, I might hand over to you to talk about the deposit margin.

Thanks, Marnie. And thanks, Josh, for your question. So yes, we were able to get a benefit in our margin in the half through the customer deposit repricing, as we've called out on the chart there, predominantly through TDs. I think there's 2 parts to your question. Yes, I still do expect some benefit from customer deposit repricing, which is what I said as part of that outlook for margin in the second half. I think the biggest impact from a deposit pricing is around the customer change in mix. When we start to see that from call to TD, I think that will hit the industry at some point. But I certainly see still some more benefit from customer repricing in the second half given what we've been able to do with term deposit pricing over the first half.

Our next question comes from Andrew Lyons at Goldman Sachs.

Just 2 questions. Firstly, a question on your expense guidance. Your overall revenue and expense earnings guidance would appear to imply expense growth for the full year of sort of around flat. It is somewhat better than the 3% guidance provided at the full year '21 results for FY '22. So can you perhaps firstly just describe the drivers of this better outcome and whether the guidance does include the Ferocia acquisition? And then just a second question on your monthly NIM chart on Slide 14. It looks like a fairly consistent decline in the NIM over the half. But can you perhaps just talk about the extent to which the liquidity contribution to this decline was relatively evenly balanced or whether it was perhaps more front- or back-end loaded?

Thanks, Andrew, for your questions this morning. So yes -- so we did -- 6 months ago, we did talk about cost growth for this year of 2% to 3%. We did talk about positive jaws and CTI improvement, and we did talk about we'll manage our cost base in light of the revenue environment. So we are calling out some headwinds to revenue in this second half, both through margin and other income. And we have said that costs will be lower in the second half to actually manage that positive jaws. So we are doing better than what we thought we'd be able to do from a cost side when I look back 6 months ago. And I think Marnie has spoken about it again this morning. Just the changes in the way we're thinking about structures and continuing to improve from an efficiency point of view is going to help us drive that cost outcome we need to, to actually generate the positive jaws. And sorry, the second question?

Travis, it was just around the monthly NIM and just whether there was any [indiscernible] in relation to the liquidity or was the build relatively evenly balanced?

Yes. Look, we obviously drew down the TFF fully just in June. So from an averaging point of view, I think it was probably weighted -- you get full effect close -- more in the second half. But it was relatively -- the build as such over the half continued to build over the half. But -- so probably a little bit back end but relatively evenly spread.

So just another way to ask, just as far as the competitive, if we sort of think about the 5 basis points sort of the underlying impact, was there any biases in relation to the timing of when that came through? Or would you say it was also relatively evenly balanced?

Yes. No, it's relatively evenly balanced. I think the front book/back book has been pretty consistent. The mix change that we saw -- that we're seeing in fixed -- from fixed to variable, you can start seeing through settlements. That's going to help into the second half. That probably is not so much in there, but I think relatively spread from the 5 basis points. But as I said, the liquids probably built up as we got further through the half.

Our next question comes from Jonathan Mott at Barrenjoey.

Just actually probably, Travis, if I can ask you a question because you commented on these 2 things. And I wanted to tie them together. Again, Slide 14, which shows the monthly NIM, this time, you've overlaid the RBA cash rates. And the comment you said, I think, was that the timing, you can say that the RBA cash rate obviously fell from 2019, and most of it was down through like 2020. And there's a delay, obviously, to the margin pressure really kicked through. And some of that's liquidity. I totally understand that's excluding liquidity. But if you then flick down a few more pages to Slide 20, when you talk through the benefit really coming through to your cost-to-income ratio, it looks like that is really expected to improve in 2024. So are you anticipating that really, 2024 is when the rate leverage will kick up as a result of the RBA rate movement? So it's first part, and that's why that chart moves down, obviously. And the second one is, have you got any sensitivity that you can provide? I know one of your biggest competitor, CommBank, came out with some guidance about rate leverage coming through. Have you got anything that you can guide us to for any rate leverage given you don't have a replicating portfolio of any size?

Thanks for your 2 questions, Jon. So I think the monthly NIM, so you're right, we've disclosed the tracking of our monthly NIM versus the cash rate decreases. Linking that to, I think it was, Slide 20 around the revenue outlook, so that is a combination of leveraging to the rising rate environment but equally, the -- getting that scale up in the mortgage growth and business and agri over time. So I actually see, and depending on people's views of timing of cash rates, we will actually start to see that benefit definitely sooner than '24 in the sense of NIM. But I think the way that chart shows on '20 is really reflective of the combination of a better NIM overall and then stronger asset growth by the time we get there.

Okay. And then rate leverage, have you got anything [indiscernible]?

Yes. No, I mean, we've disclosed the movement in NIM there as far as -- off the back of the cash rate changes. We have got some pretty good disclosure in the book around our customer, our core portfolio and the split of interest rates there. So that's the way we're thinking about the disclosures, more from a portfolio point of view rather than actually quantifying. I mean, given our position in the market, as we've said before, we are a price taker, but we'll also make sure we're setting prices at the appropriate return hurdles. So a bit of that is out of our hands as far as the market at different points. So we're not providing particular leverage to the cash rate guidance in basis points with lots of other disclosures in there.

Our next question comes from Ed Henning at CLSA.

Just the first one, if we can go to Slide 20. You've given us some great disclosure there at the chart at the bottom. Can we just run through in a little bit more detail on your revenue outlook and how you see that panning out? In that assumption, are you assuming rates go up? And if so, how much? I imagine you're assuming continuing to grow above system. But obviously, with that, there must be significant NIM headwinds to not see any revenue growth until FY '24. So if you could just start with a bit more color on how you're thinking about your revenue growth outlook, it would help us.

Thanks for your question, Ed. So we did put some comments on that Slide 20 as well. We are assuming an improving margin outlook. But as I said when I went through the slides, I think we're taking a pretty conservative view of the impact of NIM because some of that -- on the impact of the cash rate increases because obviously, some of that is outside of our direct pricing control. So it does reflect an improving NIM, but I think -- I actually think it's conservative still. But it does reflect resi lending growth growing above system. It does include, as I said, getting the Up Home loan to market and actually building that portfolio. So short term, as we said, second half, we still see pressures on NIM, I think at the moment, sort of fixed cash rate increases over the next 12, 18 months and certainly being leveraged to that. So it's certainly a dynamic forecast, but that's how we're seeing the combination at the moment.

Just on that, Travis. But if you've got -- even with conservative NIM outlook, you're saying NIMs are going up with the cash rate. You've got above system resi lending, and then you bring Up to the market, which might see some more growth there. How is then revenue -- I understand revenue flat in FY '22. But how is it flat in '23 and only up modestly in '24?

Like I said, Ed, I think that's just a conservative assumption around the full benefit of the cash rate increases and the timing on those as far as how it might play out on the lending side. So we need to manage the asset growth expectation and then the market dynamics on the NIM. So like I said, I think that's a pretty conservative assumption, but it does show the profile of that CTI.

Okay. And then the second one, just on the NIM, you've shown that -- you've run through -- I should go back to the NIM slide, sorry, the revenue share obviously declining or your percentage of revenue share going from 31 basis points to 29 basis points. Is that an impact of variable to fixed? Or is that going to continue to decline going forward? And especially, you've got Up and other things coming through. Can you just touch on how we should think about that impacting your NIM going forward?

There's probably 2 components in that, Ed. So as we have grown parts of our portfolio that -- what I will call nonrevenue shares, so that covers things like liquids, it covers third-party lending, as the proportion of that has grown, then the overall proportion of the margin share in basis points or revenue share on basis points reduces. But the pressures we're seeing on margin, if you think about fixed rates, that does apply to our Community Bank and Alliance Bank network as well. So the biggest swing factor, though, is actually the growth in things like liquids and other nonrevenue share portfolios. But certainly, the margin share that we're seeing at the group -- sorry, the margin pressure at the group is actually seen in our Community Bank and Alliance Bank networks.

So when liquids normalize, once you grow those, do you anticipate that to continue to trend down? Or will it potentially hold steady in the out-years?

As liquids go down, then that would improve. But then obviously, there's the dynamics on NIM as far as how it's flowing through to the products offered through our revenue share partners, Community Bank and Alliance Bank partners. So -- but I do think it's an arithmetic calculation. So as that liquids comes down, then that certainly won't reduce in the same way that we're seeing when we're seeing the growth in those portfolios. The other way to think about it is Up will grow over time. So that's a nonrevenue share portfolio as well. So there's a number of moving parts in there.

Our next question comes from Andrew Triggs at JPMorgan.

Marnie and Travis, first question, please, just why -- understand you don't want to provide a NIM sensitivity to rising rates. Other banks have all provided the dollar value of transaction accounts in their mix, whereas you provide an interest rate exposure -- interest rate by deposits. Could you maybe help us with how much of that, I think, 96% of the at call deposits earning below 25 basis points are actually transaction accounts rather than just term deposits on a very low rate? And then just the other question on the costs. Obviously, expressing a much more positive view on costs than perhaps previously. How do we reconcile this in the face of rising wage inflation pressures in the economy, noting that, obviously, if the RBA is raising rates, it's because they now believe that the wage inflation has set in at higher levels than in the past? And also, given above system credit growth expected, just the volume-based expense dynamic as well.

Thanks, Andrew, for your 2 questions. So in the slide deck, you're right, we do call out and there's a number of slides with disclosures on our deposit base, 74% customer deposit base And of that, 70% is that call. And we do say somewhere in the deck, I think it's about $43 billion is at call. To your point, though, around the disclosures, I think it's on Slide 16, around the interest rate sensitivity, the 42% that are on 0.01% or less, we don't have any savings accounts of note that would actually be on 0.01%. So that's the way we think about our transaction accounts on a whole. But I'll take your feedback, and we can have a look at opportunity for additional disclosures moving forward. As far as the cost side, so you're right that there is real pressure on costs in the sense of wage inflation, attracting and retaining talent. And that is a real dynamic when we think about staff costs. I might let -- Marnie, if you want to add anything at the end, but we've said we've got opportunity to actually keep working on our direct cost base. With things like the Delphi migration, all of those things take out systems and associated applications, and we get direct ongoing operating expense saves. Changes such as the COO role, bringing business and agri give us the ability to look at process efficiency and really making sure that we're as efficient as possible. So we've got some work to do, but we're actually making the changes to mean we can do it. So that's where we're comfortable with the cost outlook. But Marnie, was there anything you wanted to add?

Yes. I think you've covered it, Trav. I mean, there is real pressure, right across -- it's not only across the financial services sector but right across Australia just given the low migration that we're getting. And we need those borders to fully open up to assist with that. But it's a real cost, and we've factored that into our cost profile and what we need to do moving forward. And we'll be managing that, like I'm sure all businesses will be managing that.

Our next question comes from Brendan Sproules at Citi.

I just have a question on Page 17 around the investment spend. I think at the last result, you talked about the investment spend remaining quite elevated out to second half '23. I just wanted to see if that is still the assumption. I know you've given us guidance for this year.

Yes. Thanks, Brendan. So yes, so as we said, we'll manage the investment spend in line with revenue. I think we said it would peak around that '23, '24, depending on which half. I still see the total level of investment spend around that '23, probably now into '24, just given as we've managed the profile of that spend, but not that dissimilar to what we spoke about 6 months ago. But if I had to call the peak, I'd say it'd be FY '24.

Sure. And then my second question is just on your performance in the residential mortgage market. I was just wondering how -- I guess what -- how the percentage of fixed rate loans has changed in the last couple of months as you've repriced. And then I guess a follow-on from that, to what extent does the change in the market from fixed to variable impact what you think your performance will be from above system perspective?

So Brendan, we do give some disclosures. I'm just trying to find the right slide number for you. Slide 28 includes settlement breakdown between retail and third-party resi lending. And you can see it's over the quarters, but you can see it, certainly the change, particularly in third party between -- from fixed into variable. So we started to see that come through and I think even more so in this start of the calendar year. The flows are probably back to even more variable than that they are fixed as a total proportion. So we made some pricing decisions. Obviously, the interest rate environment -- the interest rate view has increased. All banks have increased fixed rates as have we, and that certainly impacted the customer preference for variable over fixed at the moment. So yes, we're starting to see that in the last quarter but even more so in January and February of this year. That obviously puts us in a good spot. We talked about the expectation of rising rates. But obviously, the more variable portfolio we've got, we'll be better leveraged to those rising rates. So we certainly see that as a benefit coming into second half and into FY '23.

Our next question comes from Brian Johnson at Jefferies.

I do hesitate to ask this question. Marnie, if we were to go back to 26th November at the tech briefing, I specifically asked, is the margin -- this is after Westpac, the shocking margin result, 26th of November, I specifically asked, was it worse or better than you thought it was at August? I'm looking at Slide 14, and it plunged. They've even fallen quite dramatically at that point. Can I ask, could you reconcile the comment that you made at the time versus this result? And then I have a second one.

Well, thanks, Brian, and good to hear from you. At that point in time, we were representing what we knew at that point in time. That's all I can say about that. We understand our disclosure requirements, and that's what we knew at that point in time.

So Marnie, does that mean that you don't actually know the result until quite a bit after? Like what is the time line on the reporting? Because that was on -- that was late in November. And I'm looking at Chart 14, and it seems to me that it had plunged quite a bit. But it continued to fall. It becomes quite an important point.

I don't have anything else to add to that, Brian. That was -- we were providing and we provided -- that was a market update that we did. If there was anything else that we needed to update at that point in time or there's a perfect opportunity to go to market to do so, and we didn't have anything to update the market on.

Okay. The second one...

This is Travis. Sorry, can I just jump in here? The other part of that is we're obviously looking at the revenue outcome of margin and growth when we think about the impact for the market. So -- and at any point in time, we make assumptions around the next lot of repricing and how we can actually manage that. So Marnie's right, we obviously looked at that ahead of that briefing, and we're comfortable saying what we said.

Okay. Just on to the next one. Travis, can you give us a feeling about your thoughts on the excess provision balance and the excess liquidity balance? For example, if I have a look in the Pillar 3 on Page 12, I can actually see that alternate liquid assets basically went up, not down. Is that telling me that you basically put -- presumably that the CLF has gone down? Is that telling me that you put more money into the RBA expense settlement accounts? And could I get a feeling on the excess balance of the provision and the liquidity?

Absolutely, Brian. I haven't -- sorry, I can't find the actual excess balances that you're asking for. But we certainly put more in the ASA and hence, the drag on liquids -- on NIM, sorry, through liquids as far as what we saw in the half. So that was really accelerated through that stronger balance in the ASA, but that has the impact on the NIM. I haven't got the details on the excess balances there.

[Operator Instructions] Our next question comes from Richard Wiles at Morgan Stanley.

I have a couple of questions. The first relates to funding. Do you think you have much flexibility on funding? And specifically, Travis, if you achieve that above system growth that you're targeting, how will you refinance the TFF when it matures in '23 and '24? Would you expect to replace that with deposits or run down liquidity? Or do you think your reliance on wholesale funding will need to go up at that point?

Thanks for the question, Richard. So when we think about our maturity profile with the TFF and refinancing that on the way through, we think about it in the same way that our customer wholesale mix is at, let's call it, 75-25. So we'll be using a combination of customer and wholesale as we normally do to repay that TFF facility. I think the -- when I think about funding and the dynamics in that moving forward from a margin point of view, on that 5-year chart, we think about increasing customer deposit rates through TDs and things because that will reflect the interest rate view and the market there. So we factored all of that in when we think about our forward forecast that we will need to have higher cost deposits than what we've got here. But obviously, we're getting the benefit of that on the asset side as well.

Okay. And my second question...

And we have -- and Richard, we have available to us on the retail side, on the customer deposit side, and we've spoken a lot about that franchise. But on the wholesale funding side in the market, we have an ongoing presence in the domestic unsecured and secured markets. And we've got access to offshore markets as well through unutilized EMTN and ECP programs. So we have a number of levers available to us.

Okay. And then my second question just relates to your reference to divestments. You've talked about disposing of the insurance broker, Community Insurance Solutions, in the half. You talked about the disposal of the invoice financing business. What further assets or businesses would you consider to be noncore? And how much sort of revenue or earnings impact would the sale of noncore assets have?

That's -- Richard, it's Marnie. There's some market sensitivity to making those sort of comments. So at a point in time, should we decide to dispose of other parts of our business, then we'll provide that disclosure at that point in time.

Okay. So the two you've sold during the half, how much impact are they going to have?

Richard, it's Travis. So that's part of my commentary on the outlook for second half income, particularly other income. It's not material, but it all adds up, so hence my guidance. But equally, there is a cost saving associated with those transactions, too. So it's all wrapped up in the outlook commentary on the second half revenue, other income.

Were those businesses profitable?

From a direct point of view, yes, they would have been. Obviously, there's an associated support functions and things that different businesses have different impact from that.

We have no further questions. So Marnie, I'll hand back to you for closing comments.

Thank you. So I'll now draw the call to a close and just thank you, everyone, for your time today and continued interest in our bank. And we look forward to speaking to many of you over the remainder of the week. Thank you.