Commonwealth Bank of Australia (CBA) Earnings Call Transcript & Summary

Hello, and welcome to the Commonwealth Bank of Australia's results briefing for the year ended 30 June 2021. I'm Melanie Kirk, and I'm Head of Investor Relations. Thank you for joining us for our virtual results briefing. We are coming to you from Sydney that is currently subject to COVID-19 health restrictions. Our briefing is compliant with the New South Wales government COVID safe requirements and our own strict safety standards. For this briefing, we will have presentations from our CEO, Matt Comyn, with an update on our business and an overview of the results. Our CFO, Alan Docherty, will provide an update on the details of the financial results, and Matt will provide an outlook and summary. The presentations will be followed by the opportunity for analysts and investors to ask questions. I'll now hand over to Matt. Thank you, Matt.

Thanks very much, Mel, and good morning to everyone. It's been a challenging 12 months for many in Australia and around the world. We're watching the situation in Greater Sydney and other parts of the country closely, and our thoughts are with those impacted. Throughout the year, we've been very focused on supporting our customers. We've also been very focused on disciplined execution, which has delivered above system volume growth in all core markets. Cash NPAT up 19.8%. We've continued to strengthen our balance sheet, which has allowed us to declare a final dividend of $2, bringing the full year dividend to $3.50, and we've announced a $6 billion off-market share buyback. We've also been focused on delivering our strategy, building tomorrow's bank today, which has included helping to build Australia's future economy, reimagining banking through a range of new products and partnerships, increasing our investment envelope to drive global best digital and technology and continuing our divestment agenda. One of the things that's really stood out this year was the discretionary effort of our people who have really gone above and beyond to support our customers. We've managed to help households with $157 billion of lending and businesses with over $50 billion, which we've achieved by continuing to invest in differentiating our customer proposition. Thanks very much, Mel, and good morning to everyone. It's been a challenging 12 months for many in Australia and around the world. We're watching the situation in Greater Sydney and other parts of the country closely, and our thoughts are with those impacted. Throughout the year, we've been very focused on supporting our customers. We've also been very focused on disciplined execution, which has delivered above system volume growth in all core markets, cash impact up 19.8%. We've continued to strengthen our balance sheet, which has allowed us to declare a final dividend of $2, bringing the full year dividend to $3.50, and we've announced a $6 billion off-market share buyback. We've also been focused on delivering our strategy, building tomorrow's bank today, which is included helping to build Australia's future economy, reimagining banking through a range of new products and partnerships, increasing our investment envelope to drive global best digital and technology and continuing our divestment agenda. One of the things that's really stood out this year was the discretionary effort of our people who have really gone above and beyond to support our customers. We've managed to help households with $157 billion of lending and businesses with over $50 billion, which we've achieved by continuing to invest in differentiating our customer proposition. We've also relied heavily on our customer engagement engine to help coordinate communications with customers across contact centers, the CommBank app, chat, e-mail and SMS. This has helped us to send 1.7 million personalized reminders to ensure customers know the support available to them and effectively manage the conclusion of 250,000 loan deferrals and support our customers as income measures -- income support measures came to an end. We remain committed to supporting our customers through the ongoing uncertainty. We've put in place a range of measures to support customers during the recent lockdown with a particular focus on the most heavily impacted local government areas and business sectors. This includes new deferral programs for home and business loan customers. We're currently providing 2 out of the 5 of the markets loan deferrals for small business customers and more than 50% of home loan deferrals. For home loan customers, we were initially seeing an average of about 800 applications per day, but this has stabilized to approximately 300 to 400 per day. The demand clearly has been materially less than 18 months ago and represents less than 1% of our portfolio. We're also making sure we're supporting our people during this period and have rolled out rapid antigen testing, a COVID vaccination program to 5,000 of our people and paid vaccination leave. Last Friday, we sent out a voluntary vaccination survey to all of our staff, and we had 11,000 of them or about 1/4 of our workforce respond the same day. What that told us was that 89% of our workforce are either vaccinated or intend to do so and 85% would participate in a corporate vaccination program. And turning now to the results. Statutory net profit was $8.8 billion, with cash profit almost $8.7 billion, up 19.8%, reflecting the improved economic conditions and outlook, resulting in a lower loan impairment expense and strong volume growth. Benefits from divestments, our strong balance sheet and continued discipline on capital management resulted in a Common Equity Tier 1 capital ratio of 13.1%, up 150 basis points. The year's performance and capital position has allowed the Board to declare a $2 dividend for the half, fully franked with the dividend reinvestment plan fully neutralized. Operating income was up 1.7% with strong volume growth and improved fee income offset by lower rates impacting our net interest margin. Operating expenses were up 3.3%, driven by volume-related expenses, continued investment in the franchise and further customer remediation. Our loan impairment expense decreased substantially to 7 basis points due to a low loss experience and an improvement in economic conditions. Our loan loss ratio has averaged 20 basis points over the last 2 years, which is broadly in line with our long-run average. Our core businesses continued to perform very strongly with above system growth in all key product lines. We continued to process record numbers of home loan applications, contributing to home loan balance growth of 6.7% at 1.2x system. Household deposits have grown 11% at 1.2x system and retail transaction balances growing more than 25%. Our business bank continues to perform strongly with business lending growing 11% year-on-year at more than 3x system. The most recent half is the strongest growth we've ever seen from our business bank with credit quality of new originations one notch better than the overall portfolio. Over the half, we saw double-digit growth in 5 key industries, including health, agriculture, property, manufacturing and business services. Business deposits have grown 17%, and we're opening 3,500 business accounts per week at the moment. The combination of having a distinct proposition, high digital engagement and our customer engagement engine has underpinned strong front book momentum. Home lendings -- home lending new fundings are up 33% to a new record of $141 billion with 61% originated through our proprietary channels. Credit cards have stabilized and are showing improving front book momentum with our new interest-free installment card, CommBank Neo representing 28% of new approvals, contributing to credit card approvals growing 50% over the prior corresponding period. Transaction balances are up 30% with more than 900,000 new transaction accounts opened in the past 12 months. Our business lending market share is up 90 basis points to 15.6% with business deposit market share up 210 basis points in the past 2 years, and CommSec continues to perform strongly with over 550,000 accounts opened this year and trade value up 37% over the year. During this year, we simultaneously hit #1 in Net Promoter Score across consumer, business and institutional. Despite this, we still have much more work to do to increase our absolute Net Promoter Scores and to regain #1 in consumer. We see the CommBank app enabling us to move beyond customer service to redefining and extending the relationship we have with our customers. Over the course of the pandemic, our customers embrace digital banking in record numbers. Our mobile banking app continues to lead the market with a Net Promoter Score of 30. Digitization and technology helped to drive strong operational performance in home lending. 65% of all home loan applications are auto-decisioned the same day and 85% of referred applications are decisioned same day for proprietary and in 2 days for broker. In business lending, we focused activity on our customer engagement and turnaround times and are now able to decision and fund the loan through BizExpress in under 12 minutes. As you can see, our balance sheet remains strong with 73% deposit funding, a slight decrease due to the term funding facility. We've seen troublesome and impaired assets down $1.2 billion in the year and $700 million in the half. We're well provisioned with total provisions of $6.2 billion and overlays of approximately $900 million given the ongoing uncertainty. Our Common Equity Tier 1 capital ratio represents approximately $12 billion in surplus capital above unquestionably strong levels. This has put us in a strong position to be able to complete a $6 billion off-market share buyback and still retain a large capital surplus. Participating domestic shareholders will benefit from the distribution of surplus franking credits and nonparticipating shareholders will benefit from higher dividends over time given the lower share count. Earlier this year, we refreshed our strategy to set a more ambitious agenda to build tomorrow's bank today for our customers. We've set 4 strategic priorities, which are: one, leadership in Australia's economic recovery and transition; two, reimagined products and services; three, global best digital experiences and technology; and four, simpler, better foundations. I'll spend a few moments sharing our progress on each of these. I've already talked about how we are supporting both households and small businesses who play such a critical role in job creation and economic growth. We also remain focused on building Australia's future economy. We've helped our clients access $175 billion in funding and for the first time ever ranked #1 in Australian debt markets. It's also our focus to support the country towards a lower carbon economy. And this year, we've been involved in $6.9 billion of sustainability bond arrangements. We've rolled out our green loan nationally for home loan customers who can now access funding at 0.99% for 10 years to install solar panels or a battery for their home. Our second strategic priority is to reimagine our products and services. This starts with making sure we deeply understand our customers and can anticipate their needs. These insights allow us to shape our customer proposition by reimagining products inside our core, by building new services in our digital channels, by scaling new ventures through x15 and through new partnerships and equity investments. We're looking to create a more differentiated proposition for both our retail and business customers who are looking to be rewarded for everyday spend, to buy and manage a home and to start and grow our business. We can see further opportunities to drive sales for our 800,000 business customers and bring greater value to our 11 million retail customers. We want to be one of the largest, highest quality and lowest cost sources of leads for our business customers. We're now live with a new working capital product stream, which provides financing against unpaid invoices within 72 hours. We also announced a partnership this year with BigCommerce to help retailers get online. Our CommBank iQ goes live in 2 weeks and gives our institutional banking clients unique insights to their businesses based off of 40% of Australia's payment transaction data and 1,300 customer data attributes. We also announced earlier this year the acquisitions of Whitecoat and Doshii, which we see as differentiators in the health care and hospitality industry verticals. Whitecoat helps to simplify payment flows for the health care industry, and Doshii looks to simplify the process of taking a hospitality venue online. Doshii has facilitated over 58 million orders this year and grown its venue base by 38%. We know that the most important thing for home buying customers is the certainty that comes from a quick decision and making the bank easy to deal with. We're also thinking more broadly about how we help customers with their home-buying journey. Conveyancing is a point of friction for customers. We've made available to all customers our conveyancing solution, Home-in, which passes on the benefits of a more digitized process through lower costs to customers. Customer feedback has been strong with a Net Promoter Score above 60% and a 5 percentage point increase in conversion rates. We're also saving customers money on their utility bills through our partnerships with Amber and More Telecom and, at the same time, help accelerate the growth of these digital disruptors. Helping customers with their everyday spending remains a huge focus, particularly buy now, pay later. Our pay-in-4 product StepPay will be 1/4 of the cost for the average merchant and allows customers to buy anything in 4 installments at no cost if they pay on time. 80,000 customers have preregistered. It is now live in pilot and will be rolled out to all customers this month. Little Birdie is now also live in market with over 75 million items showcased. From later this year, there will be exclusive offers presented in the CommBank app to help bring value to our customers and drive sales for merchants. And our partnership with Klarna remains a key part of our buy now, pay later strategy. We have a 5% equity stake in Klarna and a 50% economic interest in the Australian and New Zealand businesses. Klarna now has over 1,000 signed merchants in Australia and 1 million customer downloads and is also live in New Zealand. From October, we will begin replacing our SMART terminal fleet with a new point-of-sale device with a range of apps available, including Doshii and Whitecoat. Later this year, we will also commence a pilot of a new compact and fully mobile tap and pay reader, which our customers will be able to get in branch immediately, ready to accept payments. Later this year, we'll also be launching a next-generation home loan proposition called Unloan, which is direct-to-consumer and fully digital end-to-end. It's built in the cloud, using the latest Software-as-a-Service applications, which ingest a range of data feeds, including through open banking as well as APIs from CBA's core systems to enable a seamless experience for customers. Our third strategic priority is global best digital experiences and technology. We've increased our investment spend this year by 26%, with digital now representing 20% of our total spend. We're recruiting 600 engineers in Australia this year. And to complement this, we've also opened an office in India to increase our access to global best talent. We have accelerated our move to the cloud with over 43% of total compute now in the cloud. In parallel, we have large programs of work underway to simplify and modernize our technology estate, including retiring old systems and rehosting or modernizing systems which are end of life. We're seeing the benefits of some of these investments in terms of automation and turnaround times in both home lending and business banking. We're using technology to build deeper, trusted relationships with our 7.5 million digitally active customers by moving beyond customer service to delivering more rewarding experiences and better outcomes. Our customer engagement engine allows us to orchestrate relevant and personalized experiences, supported by over 400 machine learning models running across 157 billion data points. New ways we are helping our customers through the CommBank app include our Cash Flow View, which is helping 830,000 customers get a complete picture of their income spending and saving each month; Bill Sense, which has made over 60 million bill predictions for more than 450,000 of our customers. And by bringing these predictive features together with our new income and expense smoothing products, we can increasingly ensure our customers never miss a payment. We've invested significantly over the past few years, building a simpler, better bank. We've made further progress simplifying the business, completing a number of divestments in the period. We continue our focus -- our long-term focus on disciplined cost and capital management, and we've now submitted all milestones of our remedial action plan, and we'll continue to focus on embedding and sustaining these improvements. Culture continues to be a huge area of focus for us, and we've seen the positive impact this focus has had on our people with employee engagement at 78% and our people sense of pride in the organization at 88%. I'll now hand to Alan to take you through the results in a bit more detail.

Thank you, Matt, and good morning. I will step through the financial results in more detail and also provide some further color on our capital management and dividend considerations. In summary terms, this result is reflective of a disciplined and consistent execution of our strategy and is underpinned by structural competitive advantages that have been built over many years, and that we look to invest in, maintain and strengthen. This combination of execution discipline and franchise strength has meant that we can step up and support our customers and the broader economy during tough times and also deliver strong and sustainable returns to the shareholders of the Commonwealth Bank. The most pleasing aspect of this particular result is the consistency of execution across all of our core businesses. Our people in the business bank, the retail bank, the institutional bank and the ASB in New Zealand have executed exceptionally well this year. They have supported our customers, and we're seeing an improving trend in customer advocacy in each business unit. We've also had a step change increase in the amount of investment that we make in all of those businesses. This is to ensure that we can keep strengthening the franchise in the face of an evolving competitive and regulatory context. We've also been pleased with the financial and risk discipline shown by each of the businesses this year. Margins have been managed well, and this has limited the impact of the low rate environment on our top line. Credit risk outcomes have also been strong. And as we further embed better capital disciplines, we've seen another strong period of organic capital generation. This is reflected in the delivery of a strong set of outcomes this financial year with market share gains in all core products, improved revenue momentum and the opportunity to commence the return of excess capital to our shareholders. Now on to the detail, and let me start off, as usual, with the reconciliation of total statutory profit to continuing cash profit. Statutory profit from continuing operations was $8.8 billion for the year. After adjusting out one-off divestment gains and hedge account and volatility, we delivered continuing cash profits of almost $8.7 billion. And as Matt has described, that cash profit is up 20% over the year with operating income growth of 1.7%, operating expenses up 3.3%, a positive pre-provision operating performance and loan impairment expense falling significantly with the prior period, including that large increase in provisioning during the first few months of the pandemic. I'll step through each of these P&L items in a bit more detail before drilling into the balance sheet, dividend and capital management considerations. Looking, firstly, at operating income. Both net interest income and other banking income increased over the year. That was largely a function of strong volume-driven growth in home lending and business lending revenues in both Australia and New Zealand. That drove most of the growth in net interest income and lending fees, with CommSec posting another good result on higher trading volumes. Other banking income also benefited from higher one-off profits from the revaluation of our minority investment stakes. Institutional bank lending balance is contracted due to lower levels of client demand and a highly liquid capital market. However, they managed to stable -- deliver stable divisional revenues through higher lending margins and the strong performance of the global markets business. Revenue growth was, of course, impacted by a 4 basis point fall in net interest margins over the year. And on the top left of this chart, we've decomposed that movement into 3 component parts. Firstly, we've got the dilutive effect of higher liquid assets, which cost us 4 basis points. Secondly, lower rates cost us 6 basis points. You will recall that we guided to a 7 basis point headwind this time last year, and we did a little better than that due to the rise in long-term yields that occurred between February and June. And lastly, we clawed back 6 basis points through good margin management, particularly on the liability side of the balance sheet and the funding benefit from both lower basis risk and the term funding facility. Over the most recent 6 months, margins increased 3 basis points. The dilutive effect of higher liquids and lower rates were already largely embedded in our net interest margin in the first half, and those positive margin drivers that I just described were weighted towards the second half. As we look ahead to the next financial year, it's difficult to provide useful quantitative guidance on the margin outlook. We know that low interest rates will continue to feed through into lower returns for our deposit and equity hedges. We expect price competition will remain intense across our key lending portfolios. And on the other side of the balance sheet, we are now seeing our competitors better pricing to attract deposits. We expect that customer preference for lower margin fixed rate home loans will remain high and also expect unfavorable deposit mix effects as balances gradually switch into higher-rate deposit products. Against that, we will obviously see a benefit from lower wholesale funding costs from the term funding facility. In summary, there are more headwinds than tailwinds, and we'll need to continue to be focused and disciplined on margin management to do what we can to offset those pressures. Operating expenses increased 3.3% on the comparative period. Remediation costs increased $114 million over the year, probably the most disappointing aspect of these results and again includes top-up provisioning for historical wealth management-related issues. Excluding that, underlying costs were up 2.4%. The biggest driver of the cost increase was the decision we made to rebase our investment spend envelope upwards from around $1.4 billion last year to $1.8 billion this year, nearly 60% of which is expensed. This added 1.8% to our underlying cost growth this period. We believe this additional spending is crucial to the long-term health of the franchise, and we're seeing the benefits of this spend and better customer outcomes, better operational risk management and better digital capabilities. As you can see, volume-related costs increased 1.1% over the year, reflecting strength in new origination flows and investment in frontline business bankers and retail lenders. And lastly, our ongoing business simplification initiatives resulted in incremental productivity savings of $321 million, which have more than offset other inflationary cost increases. Turning to our balance sheet settings and looking firstly at credit risk. Loan impairment expense fell significantly across both our consumer and corporate portfolios. The low absolute level of consumer arrears across all retail portfolios reflects the strong recovery in economic conditions that we experienced through most of last year. We do expect to see continued modest increases in home loan arrear rates off this very low base from those customers most impacted by lockdowns, particularly within the Greater Sydney region. Pleasingly, troublesome and impaired assets continued to fall, down another $700 million in the last 6 months and are now below pre-COVID levels on both an absolute basis and as a percentage of total committed exposures. These strong portfolio trends, along with an improved macroeconomic performance and outlook, have resulted in a reduction to our loan loss provisioning. Collective provisions are down approximately $600 million over the last 6 months and are back around the level of provisioning that we held this time last year. As you can see on the right-hand side of this slide, we've continued to exercise caution around the level of provisioning and have increased judgmental overlays in recognition of the continuing impact of the pandemic on our customers and the economy. We have comfortably provided for a range of macroeconomic outcomes, and we will continue to regularly reassess both our modeling and the level of our judgmental overlays as circumstances evolve. Our balance sheet funding settings remain very strong with a customer deposit ratio of 73%, higher levels of long-term funding and short-term wholesale funding remaining at historical lows. As you can see on the right-hand side of this chart, our support of small, medium and large businesses drove an increase in our term funding facility allocation, which will support continued lending growth and productive investment in the domestic economy in the years ahead. The final dividend of $2 takes our full year dividend per share to $3.50 and represents a cash payout ratio of 71%. This is at the lower end of our 70% to 80% target dividend payout range reflective of the temporary elevation of cash profits from the unwind of collective provisioning this year. Normalizing for long-run average expected loss rates, this year's total dividend payments of $6.2 billion represents a payout of approximately 75% of normalized cash profit. Given our very strong capital position, the Board has also decided to again neutralize the DRP in respect to the final dividend. And as we look ahead, the Board will continue to target a full year payout ratio of between 70% and 80% of cash profits with the dividend weighted towards the second half of the year. The Board will also continue to ensure that dividend payments are sustainable and will take into account a range of factors, including long-run average loss rates. On capital, we've delivered a Common Equity Tier 1 ratio of 13.1%, which is up 50 basis points since December. This was a result of a strong organic capital generation of 46 basis points in the second half. Level 1 parent entity capital remains 20 points higher at 13.3%. And our capital levels will benefit further from the completion of both the majority of divestment of Colonial First State and the sale of our general insurance business. The Board continues to take a structured and balanced approach to the consideration of capital management activities. We will continue to reinvest between 20% and 30% of our cash profits into the retained earnings that support our long-term growth. We have again increased the level of our investment spend, and we'll continue to invest in innovative products, services and partnerships. We will aim to continue to pay strong and sustainable dividends. We will then look to return excess capital in a manner which lowers our share count and supports shareholders' long-term return on equity and dividend per share outcomes. And finally, we will continue to hold capital ratios above the unquestionably strong benchmark in order to remain resilient to potential future stress events. Our capital surplus has now grown to $11.5 billion above the unquestionably strong benchmark. We are well placed to continue to support our customers and manage ongoing uncertainties while also returning a portion of that excess to our shareholders via $6 billion off-market buyback of shares. Together with the expected proceeds from announced divestments, this would see us with a residual pro forma capital surplus of approximately $7.5 billion. That strong residual surplus provides the Board with the flexibility to consider further capital management initiatives, taking into account a range of factors, including finalization of Basel III requirements and target capital levels. Lastly, in deciding to structure the capital return in the form of an off-market buyback of shares, the Board considered a number of factors. This form of capital return was considered the most optimal structure. Our shareholders will benefit from a lower share count, which supports better return on equity and dividend per share outcomes over the long term. Domestic shareholders who participate in the buyback will also benefit from the associated distribution of surplus franking credits. We'll now go back over to Matt, who will take you through the outlook and a closing summary. Thank you.

Thanks very much, Alan. Now regarding the outlook. While unevenly distributed, the recovery in global growth in 2021 is underway. While Australia faces near-term challenges due to the lockdowns, we expect growth will simply be pushed back by 6 months with the economy rebounding in late 2021 and growing strongly in 2022. We see a number of factors supporting growth, including the significant accumulated household savings, a swift employment recovery due to low supply of labor, expansion in fiscal and monetary support and the strong housing market that has been a key area of support for the economy. The New Zealand economy is also in a very strong position, with the RBNZ expected to raise interest rates. Looking ahead, we see a number of upside and downside risks, in particular, the ongoing management of COVID-19 outbreaks and new variants with the vaccine rollout being critical, and ongoing global trade and geopolitical tensions. In summary, we are committed to supporting our customers and communities through any ongoing uncertainty. Our strong focus on customer needs, engaged people and disciplined execution has delivered very strong operational performance and delivered balanced outcomes across all stakeholder groups. We've continued to strengthen our balance sheet, allowing us to announce a $6 billion off-market share buyback. We're extremely focused on accelerating the pace of innovation and building distinct products and services for our customers. And I'll now hand you back to Mel to go through the questions.

Thank you, Matt. For this briefing, we will be taking questions from analysts and investors. I'll state your name, and the operator will open your line. Please introduce yourself, including the organization that you represent. And to allow others the opportunity to ask questions, please limit your questions to no more than 2. We'll now take the first call from Andrew Triggs.

Thanks, Mel. It's Andrew Triggs from JPMorgan here. A couple of questions, please. Firstly, in terms of the leverage to potential rises in New Zealand rates, noting that, I think, the consensus is looking for 3 rate rises this year, if any guide you can sort of help in terms of the leverage to that move and the sort of the hedge profile that's attached to that. And then second question just on costs, please. Incremental productivity savings appear to be getting harder to realize. I think this was the lowest incremental productivity savings number since the second half of 2019. So just interested in some comments there on whether it's getting harder to take that out.

Sure. Thanks, Andrew. Yes, in terms of the New Zealand rates, we've got a similar structure of the balance sheet in ASB that we have to the rest of the group in the CBA yellow brand. So we've got, obviously, a large amount of transaction deposits, which do well in a rising rate environment, probably got a slightly higher mix of term deposits in ASB relative to the rest of the group. And we've also got a replicating portfolio that operates in our ASB balance sheet, so on very similar [ tractile ] terms to the terms in which we operate here in Australia. So we are leveraged to a rising rate environment. We do apply the same balance sheet management and hedging practices on the ASB balance sheet as we apply on the CBA balance sheet. And so you would expect a degree of through the cycle smoothing of the interest rate effects of rising and falling rates and what you see in the CBA brand. But certainly, rising rates and being the first developed economy to get in a rising rate cycle after a prolonged period of low rates would be a welcome sign of progress in New Zealand's economy and the broader prospects around the world. On the productivity question, yes, I mean, we were pleased with the overall level of savings achieved over the year. But as you say, between the sequential half, the second half and the first half, the rate of improvement in the level of cumulative savings achieved did slow. I mean we see that as a sort of natural progression from some of the work that we've done in the early years. We've got the full run rate benefit of those initiatives. One of the reasons that we've increased the investment envelope is that we can continue to invest in getting structural costs out of the organization by investing in automating a number of our back-end processes and sourcing some functions that we think we can do more cost effectively in-house rather than outsource to third parties. And so there's a number of those longer-term structural simplifications, which are on foot, but would take longer, I guess, to build momentum than maybe some of the earlier initiatives. So we're pleased with the ongoing focus on the simplification initiatives, and we're going to continue to do as much as we can to simplify and automate the back end.

Great. Thank you, Andrew. We will take the next question from Andrew Lyons.

Andrew Lyons from Goldman Sachs. Just a few questions. Just on your NIM outlook. Firstly, just on the low rate environment. In the past, you have put specific guidance on this as well as the basis point headwind. I guess if cash rates do stay at 10 basis points, is there any more detail that you can provide as to what the headwind might look like, albeit concede that the TFF benefit will largely offset that. You note that on Slide 69, I think. And I guess, importantly, once we get through FY '22, what does that headwind look like thereafter? Is it largely done? Or is there still more to come, again, sort of assuming rates where they are at the moment? And then just a second one around the liquidity comment and the fact that you're noting that higher liquids, every $10 billion increase equals 2 basis points. You made the point that -- well, you highlighted that the LCR did fall away in the half and on the PCP, which is perhaps a little surprising in light of all the monetary support. It looks like it relates to the CLF, but I'm just wondering if you can sort of talk to how much additional liquids you think you need to put into the balance sheet in FY '22.

Thanks, Andrew. So first point on the NIM outlook. Yes, I guess, there's a number of moving parts that we've endeavored to highlight here. In the past, we've provided quantitative guidance. This year, I think, just given the number of moving parts, I think that's less helpful. And so I thought providing the sort of key qualitative moving parts that we've got our eye on. And to the point, yes, we've included some additional disclosure on Slide 64, which unpacks a couple of those items in a bit more detail. So we've provided, as usual, what the average rate was that we were earning on both our deposit and equity hedges. We've looked at the exit rate on those. So you can see that, that, given a 3-year term on the equity hedge and a 5-year term on the deposit hedge, you're going to see those rates to the extent that long-term yields remain at current levels. You're going to see that being a continued drag on net interest margin over the next number of years. And so -- and we've made the comment that in the next 12 months, the term funding facility will certainly help by lowering wholesale funding costs. That will provide an offset to the deposit and equity hedge impact in '22. But as you rightly pointed out, beyond '22, you'll have the full benefit of the TFF, but we'll continue to see further margin contraction from the deposit and equity hedges on the assumption that long-term yields remain where they are at the moment. So yes, we've put the key factors there. I mean the other one, obviously, is the level of basis risk in the economy. That's remained at 0. We got a 3 basis point benefit from that over the last financial year that's unlikely to be repeated, obviously, and we're watching closely how basis risk moves in the period ahead. To your second point on liquids, yes, the key reason liquids fell was really the reduction in the committed liquidity facility, which is an industry-wide reduction, reflective of the fact that we've got a lot more liquidity in the domestic bond market, the domestic government bond market. And so that takes up the slack. So if anything, in the previous year, at around mid-140% LCR is probably a little high relative to where we'd run LCR from a target perspective. And so we're comfortable with where that level of liquidity is at the moment. If you look at our balance sheet, you'll notice that there's a very large spike in cash and liquid assets at 30 June relative to 31 December. A lot of that increase is due to the drawdown of the term funding facility. So we drew a lot of the term funding facility down right at the end of the financial year. So that comes through as a spike in spot liquids, which will roll through in terms of the impact on net interest margin in the months ahead. And so we would expect to see that the average level of liquidity will be a little higher than we've seen averagely over the last quarter of the financial year.

Okay. Andrew, the only thing I'd add, just to underscore Alan's comments, particularly on the NIM side, would be in the home loan portfolio and 2 factors: one, just the ongoing competitive intensity there; and then two, the compression from switching to fixed rates. I think we're sort of something like 44% new originations at fixed. It was spotting higher than that. And as you probably appreciate, there's a significant margin differential between the variable and fixed and as you flow that through into next year, that's a meaningful part of that headwind as well in combination with intense competition there.

Great. Thank you, Andrew. We'll take the next question from Richard Wiles.

Richard Wiles from Morgan Stanley. I've got 2 questions, one on credit quality and then one on your approach to revenue and expense growth. Starting with credit quality, the June data is obviously backward looking, but you often publish media releases highlighting the insights from your real-time data. So what's that real-time data saying about the impact of the lockdowns on your small business customers and the potential impact on credit quality in the period ahead? In terms of revenue and expense growth, back in 2019, you talked about an ambition to lower the absolute cost base, but your more recent comments have certainly emphasized ongoing investment. You did that again today. Does that mean you've returned to your previous strategy of targeting positive jaws? And if that is the case, keeping in mind that jaws were negative in the full year but turned positive in the second half this year, are you confident of delivering positive jaws in the year ahead in FY '22?

Thanks, Richard. Maybe I'll make a start, and if Alan wants to add anything to it. I mean the numbers that we've provided earlier in the deck and sort of talked to in terms of deferral numbers, you'll see they are as at 31 July. As I said, both on the consumer side, I think we're sort of seeing about 300 or 400 requests of deferrals. On the business side, it's been quite muted to date, and we believe we represent about sort of 40% of deferrals that are in market at the moment. And that's notwithstanding the fact we've made 12,000 outbound proactive calls over the last couple of weeks, particularly to targeted sectors or customers that we think would be experiencing cash flow declines in some of the sectors you can imagine, hospitality in particular. So I mean, at this stage, it's been quite muted. We're certainly there to support our customers through that. But we're seeing a very significant difference between the deferrals and the support that was available, not so much available, but taken up year-on-year. But clearly, that's going to be tied to the ongoing duration of the restrictions. To your second point, look, no change insofar as what we've said in the past about continuing to look for opportunities to reduce our absolute cost base. But I guess, as we've said as well and demonstrated in this period and period prior, I think when we see opportunities to make investments in the business, then we're prepared to pursue those, and there's some elements of that cost growth that we're not happy about, as Alan pointed out, elements of the remediation cost, for example. But where we're able to invest in volume-related growth, increased home lending, business lending opportunities for our -- improving the service and turnaround time in those areas, then we're prepared to do so. And then similarly, as we had flagged previously, we did increase the investment spend, particularly looking to increase the investment in productivity and growth. And we think, obviously, innovation is going to be critical for the future. But we've also got to balance that against quality execution. So for us, it's a number of the factors that we consider, as you said, jaws being one of them. But from Alan and my perspective and discussions with the Board, it's a very dynamic process, and we want to be judged on the decisions that we make in a particular period. I think we're happy with the decisions overall that we've made to support that above-system volume growth.

Thank you, Richard. The next call is from [ Matthew Wilson ].

Two questions, if I may. Firstly, the yield on your interest-earning assets is now 2.56%. That's below the prevailing inflation rate. So what's your strategy for protecting the real value of shareholders' funds in this strange environment where central banks are heavy? And then secondly, when we look at your life cycle charts, you continue to lose market share in that sort of 18- to 34-year-old age group, which is critical. And if we go back to December '19, it looks as though you've lost 5 to 6 percentage points or 10% of that customer base. Given that you are investing heavily in sort of modern digital products that should appeal to that younger cohort, why aren't we seeing it in the ability to defend your market share there?