National Australia Bank Limited (NAB) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the National Australia Bank's Half Year 2022 Results Conference Call. [Operator Instructions] I'd now like to hand the conference over to Ms. Belinda Bowman from Investor Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and thank you for joining us today for NAB's first half 2022 results. I'm Belinda Bowman from Investor Relations at NAB. I would like to acknowledge the traditional owners of the land I'm calling in from, the Wurundjeri people of the Kulin Nation. I'd like to pay respect to the elders past, present and emerging, and to the elders of the traditional lands in which you are also calling in from. Presenting today will be Ross McEwan, our group CEO; and Gary Lennon, our Group CFO. We're also joined by members of NAB's executive team. At the end of the presentation, which will take about 40 minutes, we'll open up to Q&A. Just a reminder that you will need to be on the phone line to ask a question. I will now hand to Ross.

Thank you, Belinda, and welcome to NAB's First Half 2022 Results Announcement. I'm pleased to report that we've delivered strong financial results and that we have strong momentum across all of our businesses, continued discipline, and the execution of our strategy has been a key driver of the improved shareholder returns. At the same time, we've maintained our balance sheet strength. Our performance has also benefited from a favorable environment this half. The Australian economy has rebounded from the pandemic. The latest business survey indicates business conditions and confidence are above the long-term average and business creditors forecast to grow at the highest level since the global financial crisis. Cash rates have started to increase from historic lows in response to increasing inflation. Inflation is also driving increases in the cost of living, and we are conscious of the impact on households of these pressures. This outlook is very different to the one we anticipated when we refreshed our strategy 2 years ago. But the work we've done positions us well for this changing environment, and it's a good time to the Australia's largest business bank. We will continue to focus on cost discipline and on driving productivity, but we need to consider changes in the operating environment to ensure we strike the right balance between managing our cost and investing to drive sustainable long-term growth. We have delivered strong financial results this half. Revenue grew by 5.5%, benefiting from 5% growth in lending and 6% growth in deposits. Costs were flat with productivity savings offsetting emerging inflationary pressures and the investment made to support growth. This has translated into 10% growth in underlying earnings and 8% growth in cash earnings relative to September 2021. The dividend of $0.73 per share represents 68% of cash earnings this half and is within target dividend range of 65% to 75%. These results reflect strong contributions by all of our businesses, and Gary will spend the time discussing the key drivers of group performance shortly. We have delivered improved returns to shareholders this half, while importantly, retaining our balance sheet strength. The successful execution of our strategy aims to deliver cash EPS growth and a sustainable double-digit ROE to shareholders. The cash EPS grew by 9% relative to second half 2021 and is now 26% higher than the same period 2 years ago. Cash ROE is 11.3%. Although this is 3% ahead of the ROE in 2020 and comfortably within our range set at double digit, it remains behind the returns generated off a lower capital base in FY '19. We do see further upside here. Asset quality outcomes continue to be benign this half. Our provisioning remains strong with a collective provision to credit risk-weighted assets of 1.31%. In March, we announced the completion of a $2.5 billion buyback, which commenced last August, and a further $2.5 billion buyback, which will commence following announcement of these results. The combined $5 billion buyback will move us closer to our CET1 range of 10.75% to 11.25% and will deliver long-term ROE benefits to shareholders. Our pro forma CET1 ratio of 11.6%, which is adjusted for Citi acquisition and the additional $2.5 billion buyback remains well above APRA's unquestionably strong benchmark. It is 2 years since we announced our refreshed group strategy, which is focused on delivering better outcomes for our customers and colleagues. We will do this by being relationship-led and easy to do business with, while adopting a safe and long-term sustainable approach to managing our business. You've seen this slide before, and it hasn't changed. We remain focused on the key opportunities for growth, which are building on our clear market leadership in business and private bank; our disciplined growth in our corporate and institutional bank; becoming simpler and more digital in our personal bank; continuing to grow in personal and SME in New Zealand through BNZ; and acquiring more customers through our digital bank, UBank. Customers and colleagues are the twin peaks of our strategy. We've continued to have the #1 Net Promoter Score of the major banks for consumer in Australia and in New Zealand. And our business NAB score improved by 1 over the past 12 months, and we remain ranked 2 overall, while being recognized as #1 or 2 in each of the segments. In Corporate and Institutional Banking, we were ranked #1 in the 2021 PwC Survey with record high customer scores in transactional banking. The 2022 survey will be available shortly. Our colleague engagement scores improved over the 12 months to February, but remain below our target of top quartile engagement globally, which actually increased by 2% to 79%. Important to building engagement and a culture of collaboration, learning and teamwork has been the adoption of hybrid working practices across the bank. Colleagues can spend a mix of time working from home and together in the office where their roles enable. While we are making progress on both fronts, we have more to do. We continue to see momentum across our business. Our growth relative to system this half in each of Australia's business lending, business deposits, home lending, household deposits was the highest across the 4 major banks. And I want to recognize the dedication of all of our 34,000 colleagues, and in particular, the bankers and operational teams who have worked together to put more people into their own home and support more businesses to start and to grow. Australian business lending, which includes both corporate and institutional and SME lending, has grown by 7.3% this half or 1.3x system. In NAB's largest division, Business and Private Banking, we have further extended our SME market leadership. Over the first half of 2022, business lending in the division increased by almost $8 billion, representing a 6.6% growth in the 6 months and 1.9x system growth. Despite strong momentum in Corporate & Institutional Banking, the business continues to demonstrate disciplined growth and core returns as a percentage of risk-weighted assets have increased by 14 basis points over 2 years. In Australian Home Lending, we grew by $13 billion this half, representing 1.2x system. This is a good outcome in a highly competitive market environment, reflecting the benefits of the investment we are making to improve the home loan experience for customers and colleagues and a balance between volume growth and disciplined pricing. BNZ has again achieved a strong result of 5% deposit growth and 3.2% growth in lending. BNZ's growth in home lending and SME lending was in line with system, but there's more work to be done to achieve system growth in New Zealand deposits. There are good market share results, but we have a lot more to do to become a great bank. We are making progress and market share increases are an important indicator. Our Business & Private Banking has had another very strong performance this half. The 6.6% growth in business lending is the strongest half yearly growth rate achieved by the business since the global financial crisis, and it's been supported by broad growth across our franchise. Our focus on growing our share of business transaction accounts has helped deliver a 10.6% increase in transaction account balances this half and a 36% increase in new business everyday account openings in 2 years. These strong growth outcomes have been supported by continued investment to simplify the business and get the basics right. This includes adding new customer-facing roles and simplifying our policies and processes to reduce time to guess on new lending. In FY '22, we will add additional bankers in targeted areas where we see opportunities to deliver sustainable growth. Based on the performance of new bankers added last year, we anticipate a strong return on this investment. We're investing to improve the digital experience for customers. The recently relaunched QuickBiz offer provides funding for existing NAB small business customers in minutes. Opening a transaction account digitally has also become quicker and easier with a more streamlining account opening process, driving an increase in the portion of accounts opened digitally from 23% to 35%. Our payments business is an integral part of our customer relationship. The launch of NAB Hive and the acquisition of LanternPay are part of our ambition to provide customers with more flexible digital payments platforms. I want to provide you with an overview of our ambition to build Australia's simplest home loan platform, which is already driving significant time savings for customers and bankers. This will be based on a digital end-to-end mortgage platform with human intervention occurring only by exception. Last year, I told you about our progress in rolling out the simple home loan digital applications across our retail channel. This is Stage 1 of this process on the slide. And over the next 2 years, we'll progressively build and roll out the platform across all of the NAB channels, gradually extending the eligibility to facilitate more complex loans and borrowers. In the future, this platform will be used to write all of NAB's mortgages, irrespective of the origination channel, delivering significant scale advantages. The results to date have been very positive, including a halving of their time to yes across retail and broker channels. We're also recognized by PEXA as the first among the major banks for settlement performance. This is a significant improvement from fourth just 12 months ago. The investment and technology foundations over the past 4 to 5 years puts us in a good position today, with more than 60% of our apps migrated to the cloud and strong improvements in our capacity to fight cyber crime and reducing critical incidents. These foundations have supported our progress of leveraging digital, data and analytics to deliver better experiences to customers and colleagues. The improvements in our digital tools for customers have resulted in increased Net Promoter Scores with our mobile and online banking platforms ranked #2 of the major banks. The Net Promoter Score for NAB Connect, which is our Internet banking platform for business customers, has seen a strong 17-point improvement over the last 3 years. While we have made good progress on our digital propositions, there is more to do. In a role as Group Executive of Digital Data and Analytics, Angie Mentis is working with the businesses to lead the development of these 4 key initiatives over the next 2 to 3 years. Personalized digital customer experiences, easy to join NAB consistent across customer onboarding, empowering bankers with digital tools and insights through a single front end, and finally, digital tools to enable colleagues to self-serve. Over the past 12 months, we've announced or completed a small number of acquisitions to accelerate our strategic ambition. In August, we announced the proposed acquisition of Citi Group's Australian consumer business. While it is a complex transaction, this transaction gives us scale in the unsecured lending market, taking us from #4 to #2 in market share. With this scale, we can invest in better systems to deliver market-leading capabilities and drive product innovation. We also look forward to working with a suite of white label partners to expand their business and ours. Subject to APRA's approval, we expect to complete this transaction by the middle of the calendar year. And Gary will talk more about the financial impacts of this transaction. Combining 86 400 and UBank provides an opportunity to deliver a market-leading digital bank experience with access to NAB's balance sheet to support growth. And during the next 12 months, we will focus on completing the integration and migrating our UBank customers across to the 86 400 platform. I touched on the LanternPay acquisition earlier. This is a small acquisition in B&PB that provides a more flexible digital platform for our HICAPS customers to make claims. Earlier this week, we announced that AUSTRAC has accepted an enforceable undertaking from NAB. Under the terms of the EU, NAB will implement a comprehensive remediation action plan. to improve our systems controls and record keeping. We acknowledge AUSTRAC's concerns, and we will get this right. Many of the activities reflected in the agreed plan are underway and expected to be delivered within 12 months. However, other activities will require more time and resources to deliver a sustainable solution. Over the next 3 years, we will spend an additional $80 million to $120 million per annum to deliver the requirements of the enforceable undertaking. These costs, together with ongoing investment to improve our financial crime systems and controls, will help deliver our plan to keep our customers and the bank safe. In April 2020, we laid out our target of lower absolute cost in '23 to '25 compared with full year '20, supporting our ambition to grow cash earnings per share and what was then expected to be a sustained period of low revenue growth, but the outlook has now shifted to one of higher growth, higher inflation, and higher interest rates. Our environment is more positive than we envisaged in 2020, and it's appropriate that we reconsider our targets to ensure we are positioned to optimize the growth opportunities available, while retaining strong cost discipline. In these results, you'll see our focus on maintaining cost discipline with the flat costs over the past 6 months. Progressing our productivity agenda will remain key to helping offset cost inflation and creating capacity to reinvest. And based on the progress we've made in the first half, we are on track to deliver a minimum of $400 million of productivity benefits in full year 2022. We are seeing more really good growth opportunities across our business, and we are determined to seize them. At the same time, there are some clear headwinds, including inflationary pressures and the cost required to deliver the terms of the enforceable undertaking agreed with AUSTRAC. And given this change in our environment and the increased AML costs, we now expect cost growth approximately 2% to 3% in full year 2022. Over the medium term, we anticipate we can deliver a lower cost-to-income ratio. Other than the removal of the medium-term absolute cost target to support cash earnings per share, there are no other changes to the measures of success of our strategy. These continue to reflect the balanced approach between customer, colleague and shareholder outcomes, and I remain confident in our ability to achieve them. I'll now pass over to Gary, who will take you through the results in more detail. Gary, in your hands.

Thank you, Ross. Let's start with our usual high-level overview of the financials, focusing on first half '22 versus second half '21. At the group level, we have delivered a clean result with growth across all key measures of profit. Once again, there are no large notable items. Underlying profit rose 10%, with strong revenue growth. Business of Private Banks, CIB, and New Zealand, all delivered very pleasing growth in underlying profit. The personal bank was the exception with a modest decline, but this is a solid performance given the intensity of housing market competition. The increase in cash earnings of 8% is a bit less than the underlying profit growth, reflecting impairment charges moving from a write-back in the second half '21 to a small charge first half '22. Statutory profit growth of 12.5% was ahead of cash earnings due to the fair value gains on hedging items in noncash earnings and lower losses from the MLC runoff. Turning now to revenue, which increased 5.5% over the half. While stronger markets and treasury performance was a positive driver this half, even excluding this, revenues rose 3.7%. Strong volume growth contributed $287 million, partly offset by lower margins, which I'll discuss in more detail shortly. Fees and commissions rose $57 million from stronger volumes in lending and higher card spend, as activity levels increased. Markets and Treasury income increased $173 million from a relatively low second half '21, with higher trading income, the main contributor. Turning now to margins. Net interest margin declined 6 basis points over the half. Markets and Treasury was a drag of 4 basis points, of which 2 basis points come from the higher holdings of liquids. We don't expect liquids to be a NIM drag going forward as further growth in liquids should be in line with the overall balance sheet growth. Excluding Markets and Treasury, underlying NIM declined 2 basis points. The key driver of the 2 basis points has been lending margin, down 7 basis points this period. Consistent with prior periods, this mostly reflects competitive pressures and mix impacts in home lending. While we see housing competition remaining a headwind, the mix impact from lower-margin fixed rate lending looks to have peaked and should turn to a positive from second half '22. NIM has continued to benefit from deposit mix and funding costs in first half '22, helping offset lending margin pressures. However, in second half '22, we expect this impact to be broadly neutral before turning into an expected headwind in FY '23. After several periods of lower interest rates being a drag on returns from our replicating portfolios, this impact stabilized in the first half '22, and with rising rates, is expected to turn positive from second half '22. I know there's a lot of interest in what the rising rate environment means for our NIM outlook, so let's turn to that, and I'll deal with that in more detail next. We expect NIM to benefit from the rising rate environment in 2 main ways. The first source of upside is our Australian deposits with low rate sensitivities, which are not hedged within our replicating portfolio. The balance at 31 March was approximately $111 billion. The impact of a 25 basis point cash rate increase on this balance is estimated to be approximately 2 basis points of annualized benefit to NIM. The second source of upside comes from the impact of higher 3- and 5-year swap rates on our deposit and capital replicating portfolios, which totaled $114 billion as at 31 March. Based on 29 April forward swap rates, over the full year '23 through to the full year '25, we estimate a benefit to NIM over approximately 8 to 9 basis points per annum. These calculations should be viewed as sensitivities only. They have been prepared on a hold all else constant basis. But in reality, all else will not be the same, and these sensitivities are only part of the overall NIM outcome. The final outcome will clearly be impacted by many variables, including competitive pressures, cost of funds, deposit volumes and mix, and many more. Turning now to costs, which were flat half-on-half, reflecting a balanced approach to maintaining cost discipline while investing in growth in an evolving environment. This period has seen higher remuneration and inflation-related costs, up $45 million, which includes out-of-cycle pay increases in areas such as frontline bankers, technology and data resources. We have also continued to invest in growth across our business, which has added $107 million to costs. This includes volume-related costs such as new bankers and resources to support growth, particularly in Business and Private Banking. Technology costs are higher half-on-half as a result of additional run costs associated with recently deployed systems, while investment spend is lower over the 6 months to March at $649 million. The OpEx component is fairly flat half-on-half. Other costs have been a headwind of $40 million in this period. This includes $30 million of additional spend on financial crime, which forms part of the estimated cost uplift of $80 million to $120 million relating to the AUSTRAC EU this year. Offsetting these headwinds has been productivity, which is $183 million higher this half, generated through simplification benefits, third-party savings and lower occupancy costs. As Ross has already mentioned, we have reset our FY '22 cost target to approximately 2% to 3% growth, reflecting the shift to a more growth-oriented environment with more inflation. Progress on financial crime remediation over the past 6 months, including agreeing an EU with AUSTRAC means we now have a clear view of the expected cost of this work and hence, we've now included in our 2% to 3% target. The impact of the Citi acquisition, which I'll discuss shortly, continues to be excluded from this cost growth target. Investment spend is expected to be about $1.4 billion from FY '22, up on FY '21, and a bit above our previous expectation of $1.3 billion. This allows us to accommodate further investment in financial crime systems and controls, along with a re-prioritization of growth projects, including in FY '22 uplifting our merchant offering. Turning now to CICs and provisions. Credit impairment charges were a charge of $2 million for the first half '22. This comprises of an underlying CIC write-back of $65 million and a $67 million increase in charges for forward-looking provisions. The underlying write-back of $65 million reflects continued low-specific charges and an improved risk profile of the loan book in first half '22. Net forward-looking charges of $67 million include a $131 million top-up to our economic adjustment, driven by an increased downside risk weighting to reflect a number of uncertainties in the economy, including the impact of higher inflation and higher interest rates. This is being partly offset by a $64 million release from target sector FLAs, reflecting reduced exposures and improving asset quality. CP coverage as a ratio of credit risk-weighted assets remained strong at 1.31%, down 4 points from September. Asset quality outcomes improved again in first half '22 across every key measure. The ratio of 90 days past due and impaired assets to GLAs has declined 19 basis points. Arrears are lower, reflecting a broad-based improvement across the Australian mortgage portfolio, and the GIA ratio is at a post-GFC low with continued low levels of new impairments. These outcomes are pleasing and highlight that at a total portfolio level, our customers have emerged from the COVID period in strong shape. The outlook, though, appears more challenging. I know there's been particular interest in how our Australian mortgage portfolio is positioned for an economic environment with higher living costs and higher interest rates. The outlook for continued low unemployment is supportive and our overall book is in good shape. Over the past 2 years, the dynamic loan-to-value ratio has reduced to 37.9% from 45%. And the average number of payments in advance for borrowers has increased from 3 to 4 years. All lending since FY '15 has been assessed on a principal and interest basis using a rate of 9.5% or above, with approximately 50% assessed at a rate of 7.25% or above, and more than 90% of applicants have had excess borrowing capacity at origination. While customers with fixed rate lending face a step-up in repayments as these loans mature, the bulk of our book is principal and interest, which limits the repayment increase, and our expiry schedule is relatively short dated with around 3 quarters maturing by March '24. Early engagement planning is underway to help customers manage through this transition. In terms of our more at-risk customers, less than 1% of our total book, or approximately 1.8 billion, have a dynamic LVR greater than 90% and have no LMI or first home by government guarantee. But these customers are, on average, still 22 months repayments ahead of schedule. Turning now to capital. Our CET1 ratio at March stands at 12.48%, 52 basis points lower than September '21. The key drivers include the share buyback and higher risk weights with strong volume growth, along with higher IRRBB, partly offset by early adoption of APRA's standardized approach to operational risk. The $15 billion increase in IRRBB risk-weighted assets mostly relates to the widening of the gap between the 1-year and 3-year interest rates over the period. While it's subject to interest rate movements, we do expect to see most of this reverse over the FY '23 and FY '24 years, as interest rates start to rise. The movement in other of 20 basis points includes a reduction in deferred tax assets, mostly related to remediation payments to customers, combined with movements in hedging-related reserves. On a pro forma basis, CET1 is 11.65%, taking into account announced acquisitions and divestments and the second $2.5 billion share buyback commencing in May. This compares with our target of 10.75% to 11.25% and sees us well placed to continue to grow and support customers. APRA's unquestionably strong standard becomes effective from 1 January 2023. While this is expected to result in a resetting of capital ratios, it's expected to have minimal impact on the overall level of our required capital. Funding. Liquidity and funding have remained strong. LCR increased to 134%, and excluding the CLF, sits at 119%, well above the 100% minimum required. NSFR has remained stable at 123% over the half. As our lending growth has accelerated, we have continued to focus on generating high-quality deposits right across our business. Despite strong loan growth, the percentage of lending funded by customer deposits further increased to 80% in the first half '22 and more than 100% of lending is now funded from stable sources. While first half '22 saw some volatility in funding markets and widening of credit spreads, we are well advanced on our FY '22 term funding task, having raised $21 billion year-to-date. We expect to access wholesale funding markets further in the second half '22 to support growth and refinancing requirements, as well as to position the balance sheet for the phasing out of the CLF and for TFF maturities. And finally, let me provide an update on our acquisition of Citi, which is due to complete in the second quarter of calendar year '22. Key financial impacts of the transactions remain essentially unchanged from the time of the announcement. Equity consideration is expected to be $1.2 billion. We continue to target approximately $130 million of annual cost synergies, to be achieved over 3 years. And acquisition and integration costs are expected to be $375 million, with the majority incurred in FY '22 and FY '23. This includes $165 million to build the new unsecured lending platform, most of which will be capitalized and amortized over 5 years through cash OpEx. Other integration costs will be recognized as noncash. Based on updated financials for the 12 months to 31 March 2022, underlying profit for the business to be acquired was $280 million and NPAT was $170 million. This reflects a period of very benign asset quality, combined with elevated repayments in the unsecured book, both of which we expect to normalize over time. The future financial contribution to NAB will depend on a range of outcomes, including the rate of decline in Citi's mortgage book, offset by the achievement of targeted cost synergies, along with other environmental factors such as NIM and asset quality outcomes. We remain confident in the acquisition case for this business. And with that, I will hand back to Ross for some closing comments.

Thanks, Gary. And before I move to my closing comments, I just want to touch on the progress we're making to achieve our goal in the net-zero lending portfolio by 2050. We have joined the Net Zero Banking Alliance and are working towards publishing sector-specific 2030 decarbonization targets for our key sectors at the full year. And we continue to work closely with 100 of our largest emitting customers to support them as they transition to a net-zero economy. The commercial opportunity to finance the climate transition is significant. Our Corporate and Institutional Bank remains at the forefront of the development of sustainability and social bonds, ESG-linked derivatives, sustainability-linked loans, and asset-backed securities. Renewables now make up 75% of our energy exposures, and we are the #1 Australian bank for global renewables transactions. We approved our first Agri Green loan in November, and we are piloting the product with a broad range of customers looking to make investments that improve their long-term sustainability. And we recently closed our first ESG-linked FX derivative. In the past 6 months, we have witnessed the devastation caused by natural disasters, and we have launched our major program, NAB Ready Together to support customers, colleagues and the communities with emergency grants, financial hardship assistance and relief efforts. This has included $4.4 million of support for those impacted by the recent New South Wales and Queensland floods. On climate, we know there is much more that we can all do, and at NAB, we intend to play our part. In closing, I'd like to outline my key priorities for the remainder of 2022. These are largely unchanged from the priorities I outlined at the end of last year. We remain focused on executing our long-term strategy. By doing what we said we would, we're disciplined and focus. We continue to build momentum across every one of our businesses. We now have an agreed path forward with AUSTRAC. We will get this right to keep our bank and customers safe. As I outlined, we are positioned for the change in our environment. However, we know some customers may face difficulties and further support required. Many of our colleagues are transitioning to a hybrid way of working, and we'll continue to support them by offering flexible workplace where their roles enable. And finally, we will progress the integration of 86 400 and UBank and the proposed acquisition of Citi Group's Australian consumer business to ensure we deliver the expected benefits of these transactions. I remain very confident in the outlook for NAB. Thank you for your time today. And Belinda, I'll hand back to you for questions and see what comes from the audience.

Thanks, Ross. Before I pass to the operator to moderate the Q&A, just the usual reminder to please limit your questions to 2. Thank you, operator.

[Operator Instructions] Your first question comes from Andrew Lyons from Goldman Sachs.

Just 2 questions for me, if I can. Just on Slide 21, you disclosed your low rate sensitivity deposit at $183 billion. I understand that includes both partial and entirely rate in those deposits. Just wondering if we can get a bit more detail behind that just around the extent to which you think those deposits will be entirely write-in versus partially write-in, and perhaps a bit of detail around, of those partially write-in deposits, over the course of a rate hiking cycle, to what extent would we see deposit rates increase on those partially write-in deposits? I've then got a second question.

Let's go to the second question as well, Andrew. And then Gary can pick up on them.

Yes. Got it. The second question is just around your investment spend, which you increased today from $1.3 billion to $1.4 billion. Now it would certainly appear that your return on investment is coming through pretty well given the strong revenue performance of the group in recent halves. But can you perhaps just talk more broadly about the expectations you do have in your management team when they do ask for incremental investment dollars? And how do you hold them responsible for delivering on those expectations?

Yes. I'll pick up on that one.

Go ahead.

Thanks, Andrew. Good question on the sensitivity charts we've put out there and hopefully you and others and the market will find them useful. Implicit in your question, which is true, you do have to make assumptions to come up with these numbers. But what we've done as a process, we've really gone bottom-up, looked at the detail of the different characteristics of deposits and really formed a view. And you're right, the component that we've provided there is a blend. So there are degrees of sensitivity, but we've made what we think are pretty well-informed, with a bit of a conservative tilt on what those assumptions are. And we haven't included, where we think maybe for early rate rises there might be some degree of insensitivity, but where that will change over time, we've tended to exclude those types of deposits. So we do view this sensitivity that we have provided for 25 basis points delivering a 2 basis points increase in NIM, something that will potentially hold as we go through the interest rate uplift cycle. So we've got enough conservatism built in there. That's how we've built it. But reinforcing the point, which I'm sure you and others are fully aware of, there are assumptions, and if some of these behaviors do change in an unexpected way, we'll get a different outcome. But hopefully, again, this is our best view at the current time on the size of the unhedged portfolio and how that portfolio will perform. So again, take it as sensitivities and assumption-based, but still, hopefully, you'll find it useful as a starting point to then make your own assessments around that. And Ross, on the one on...

On the second question, look, we have signaled a move from $1.3 billion to $1.4 billion of investment spend over the next 12-odd months. First off, let's break it down into 2 quite distinct areas, because you asked the issue about what's the return we expect. There are some areas that are remediation and regulatory related. And last year, those made up 60% of our investment spend and 40% on discretionary, which is more around growth. Actually, this year, it's more around a 50-50 spend, which shows we've got some of the regulatory and remediation issues tidied up and we've been able to spend more money on the growth of the business. So next year, we're hoping that it will actually be the reverse. It'll be 40% remediation, regulatory and 60% on growth. So I'll just give you that one as the background. On the regulatory remediation type activities, I mean, we just have to do them. And if we can find some benefits in doing so, we will, but they have to be done, and they have to be delivered, and that's the spend that we have to take as being a very heavily regulated organization. But on the growth factors, we would expect to see a return greater than our cost of capital across the options that we get given. The thing that we have been doing, particularly with the way we've been running the business, is giving consistent funding to each of our major programs. And you're seeing this, I've demonstrated that in our home lending program that we've got that Andy Ker runs for us. He has consistent funding over a 3- to 4-year period as long as he's delivering the results. And so that's already baked in. But what we've, we're looking to move the $1.3 billion to $1.4 billion is around our enforceable undertaking, but also an investment that we're putting into a merchant business that we see well worthwhile the investment, and that's getting some of that investment as well. Again, core part of our delivery in our business bank, and we'll show benefits in there. But we do expect to see a cost greater than -- return greater than the cost of capital on our growth path. Got plenty of things to invest in. They have to be on strategy, and they have to be adding value to the business long term as well. So we have lots of asks, and I've got lots of opportunities, but we're very disciplined in what we're putting our money into at the moment. And there's only so much a business can deliver. I'm always fascinated by people saying that they can spend huge amounts of money. If you look at the marketplace today, try and find digital data engineers, very difficult. And I think you soon get crowded out if you're not very careful. So a very disciplined approach that we've been taking. Thanks, Andrew.

Your next question comes from Brian Johnson from Jefferies.

Really good slides. Just to -- your enterprise bargaining award agreement is kind of up for negotiation at the moment. Ross, I'd just be intrigued basically as to what you think a possible outcome might be for that relative to history. And if you could give us a rough guide as to how many people you think it basically covers?

Yes. Brian, it's, I think, about 25%, 30% of our colleagues, but it covers actually 34,000, because everybody, even myself, is included in our agreement as a quirk of history. But it covers the bulk of our operational banking staff. So it does impact across the entire organization. We haven't started the bargaining yet. But we have signaled and served the FSU. We want to actually start that bargaining in the next few months. And what I would like to see is a really involved bargaining this time around with our union to get an agreement that works for everybody. And I think that's going to be really important that it does work and it's a long-term agreement that works across the organization for the changes we're all seeing, including our colleagues. Because we are in a different world to what we were 30-odd years ago when this agreement was probably formed. But I want to see a win-win for all here.

It should be -- so it will be -- you would think it will be pretty chunky in this inflationary environment?

Look, let's see what it is. There are pressures on everybody, including our colleagues at work here and what the expenses they're getting. So there will be some pressures there. But we've been able to, I think, negotiate a fair agreement over the last few years with our union, with the FSU. But I'd like to see that it actually worked for everybody this time around as well. And just in the way that people are having to operate, it's changing quite dramatically. We've talked about working from home and the balanced workforce that we've got. But we haven't started those conversations with the union yet and we're looking forward to doing so.

Sorry, Ross, just to push the point, some of your peers globally, if you work from home, you get paid less, is that potentially part of the negotiations?

I hadn't seen it like that, Brian. I think it's sort of going to be benefits for both parties on that. But no, we haven't gone into that detail and or seeing that as an option.

Okay. Ross, just the other one is when we have a look at the NIM leverage stuff that you've provided, it's very good on the liability side. And you talked about this NIM headwind that we have seen from people moving from variable to fixed on the flow. Could you give us a feeling on the potential timing of -- we can see already the flow moving back the other way, could you just give us a feeling on the timing of the upside on the NIM on that because that seems to be the bit that's missing?

Gary, you've got an answer on that one, I mean, on the timing?

Yes, we did give you -- there's a chart that gives you a sense, Brian, on when the fixed rates are maturing. I think it's on Slide 25. So that will give you a bit of a sense when they will be moving out of those low-margin fixed rate loans and then maturing and then migrating back into higher-margin loans. So look, I don't think it's going to be massive, but there's probably a basis point or 2 over the next -- probably 1 basis point over the next half continuing over that period as a tailwind, but in the context that overall competitive pressures are going to continue. So it's more of a modest offset against what we already see as competitive pressures in the mortgage book.

Your next question comes from Jonathan Mott from Barrenjoey.

Guys, well done firstly on the really good growth in the business bank, especially the diversification across the industry. It's really good to see it's supporting the economy. I've got a question on one of my favorite slides, which is on Slide 78, which just looks at the risk in the business book itself, because it's easy to grow a book, but doing it well without extra risk is always a challenge. If you look at the probability of default, it actually fell down to 10% this period. When you take on new customers, generally, there's going to be higher risk than existing customers by definition, because they're taking on more debt. So this indicates that you're still seeing net upgrades coming through. So my question is, if you actually look at that on the new flow of business rather than the existing book, so the flow rather than the stock, how would that look? And the second part to that is that given the greater use of data, and Andrew and everyone talked to a few people over time about using data more. Does that actually mean you can, with better use of data, move slightly further out what you've historically thought of is a riskier customer without actually -- with the data being able to take that exposure on and potentially less security than you historically would have done?

Yes, I will do it in the reverse order, because I think you're right, Jonathan. On the data, it helps us understand the customer better, which means, in some cases, you don't have to have the same conditions you'd normally expect on customers where you're getting all the data, particularly if you've got the entire transaction account history. That's a really key feature. If you've just got the debt, you don't have the transaction account, that makes it much, much more difficult to make the assessment. So I think you're absolutely right, and Andrew and the team are doing a really good job of making sure that they're getting the full transaction capability with the customer, so that we can use the data to do a less complicated lend than what we would have done in the past. On diversity on the default issue, if we have a look at what's coming on to the book, we'd say that's probably of the same risk profile that we're getting on new customers as we are on existing customers. So it's probably not right to say at this point in time that we're taking on, what you say, as riskier customers. To date, the profile has been pretty much exactly the same. And I'm looking at Andrew for a yes or no, but that's my understanding of...

It's the same probability of default.

It's the same -- pretty much the same probability of default.

And we're really pleased about that, Jon, because it demonstrates we can be delivering the above system growth at the levels we're talking about without using risk as a major lever. It's essentially in line. And that's -- I know you've raised previously, which we do discuss internally as well, that are we taking on enough risk, probably with the uncertainty environment currently, probably not the right time yet. But it is a conversation that we've had. But to date, all the data suggests that the front book has been there or thereabouts, if not slightly better than the overall portfolio.

And I would also put out some of our growth down to the fact that we are using data in a much better way with existing customers and new customers to get ourselves in a position to be able to do the deals simply and easily for them. And we've just started down that path. So we've got a lot more to do, but it's working for us.

And just a quick second question, if I could. You talked at the beginning about the ROA going sustainably into the double-digit area. At the moment, you've got a tailwind of effectively no credit losses coming through. So if that normalizes over time, you'd expect that to be more of a headwind. So your view on the improvement in ROA that you're expecting, could you just break that down between how much you think to come from higher margins as you go into a higher rate environment, offsetting that against operating leverage and potentially lower capital. Where do you see the biggest areas of upside on that ROA?

Certainly on the growth we're getting coming through the book is helping us there. Containment of costs is another one for us. We're very conscious of the fact that we haven't had really any CIC charges. So we, in our forward thinking, normalize those out, whatever normal is today. But we're seeing it across the board there, Jonathan, without giving you any forward guidance on it. I think we're seeing it from growth a little bit of NIM, but also just holding on to the costs as much as we possibly can. We're seeing most of our improvements through growth in our book at the moment.

And Ross, I'll add the growth on our book, and don't forget we've got to onboard Citi, which that will help the published ROA, and we'll continue with our share buyback. That is a nice -- that delivers annualized benefits. I'm sure you've done the calc, it's probably in the mid-40s, I think, for continuing with the share buyback, depending on the price that we do that at. And then your big variable is what you've called out is normalization of impairment charges, which at this point in time, very low, really strong book, well covered. So hopefully, that inevitable uptick in impairment charges will be quite gradual and modest. So we might get some time to be growing our business faster than the increase we're seeing in impairment charges. But clearly, a lot of that depends on how the economy goes in the next couple of years.

And if we continue to get a good economy, I would see that we will want to get back into that range we gave of the $10.75 to $11.25 of CET1, Gary, over time, which will help the return on equity.

Your next question comes from Richard Wiles from Morgan Stanley.

I've got a couple of questions. The first is on mortgages, and the second is on how you think our customers will respond to higher cash rates. So just on mortgages, do you think it's getting more or less competitive? And why are you comfortable growing consistently above system in that more competitive environment? And then on the cash rates, how do you think your home loan customers will respond? I mean there's talk of 200 basis points or more of rate rises within 12 months. Is that going to be a shock to them? Or were customers expecting this? Do you think demand for new loans will slow significantly and will refinancing pick up? And then for small and medium-sized business customers, how do you think they'll react? Do you think higher rates will affect their appetite to borrow? Or will the promising economic outlook mean that they'll be happy to continue borrowing at higher rates?

Maybe, Richard, if I start with an overall comment. Customers need to live in a home or rent a home. And for those who are living in a home, a fair number of them need a mortgage. So we're in the business of providing services to customers, retail customers and business customers, that want to take out a home loan. And we'll do that in a profitable way through the pricing mechanisms. We are certainly seeing cash rates going up. And as you said, is it going to be 200, 250 basis points higher than it is sitting at today? We suspect, over the next couple of years, the cash rate will move by those sort of numbers, which customers will be having to absorb at the same time, as they're picking up on higher grocery prices, higher petrol prices, higher energy prices. But the biggest feature for customers is, have I got a job? And that's always been the case there. So our assessment is that these will be absorbed, but it will be painful for customers. But it's pretty hard to see them not expecting the interest rates to go up when they've been coming down for 11 years. And they're never going to stay down like they were at. But I think they will be able to absorb them. But there will be a portion that will have some difficulty. We understand that. That's always been the situation. But we think the vast majority will be fine. It will just be a bit more painful and they'll have to make adjustments. But it's been 11 years and rates have been coming down. It's been a while, 11 years since they've seen an increase. And some of it will be their first ever, but we shock face them before they take out the loan at a greater rate than they're going to be at probably in the next 2 years. On SMEs, they're in pretty good shape. And it's not the biggest issue for them around the cost of the debt. Their biggest issue right now is, can I find people to work in my business. And I think that's the biggest one that we need to sort through as an economy. But there's a level of absorption and you've seen that over the last 2 years where probably you and I have been amazed at how robust the small, medium-sized business sector has been and why we haven't seen more difficulty over the last couple of years when many of them have been semi-closed or whatever. But they're very robust, and I think they can take the increases coming their way and they pick them up through BBSW anyway. So look, I think there is going to be a little bit of pain here. I don't think it will be as big as people are expecting, but we've got to be ready for them. We're a customer-driven bank. We've shown that in the last 2 years. I'm not pulling out of the mortgage market. I think it's a great path to be, because customers need a mortgage. So as long as we're making a reasonable return out of it, we'll be there. And that's what we're showing. But look, there is some pain coming, but let's see what happens. We would be there to support.

Just a couple of things to add on that. And Richard, certainly, we're not seeing any pullback from SME customers to date. So the pipelines continue to be strong as you saw business conditions and credit are strong. Anecdotally, it seems like SME customers are wanting to invest and grow. And that is certainly the feedback we're getting from the field. So at this point in time, the rising interest rates, it doesn't seem to be slowing that at all. I'd expect to see there would be some slowing in housing, but it was going at a reasonable cliff already, but not a total falling off the cliff type decrease in housing. And as Ross said, we're quite comfortably growing at system or there or thereabouts on mortgages. And with all our investment, we want to make sure that we're not growing because of tweaking our risk settings or price. We're trying to grow off the back of a quality service proposition, hence, the investment in the simplest home loan, and Ross has talked you through those processes. So we're looking to those other service-based factors as our primary proposition that we can grow sensibly at system or a bit above without having to go to risk parameters or without having to excessively go to price.

Your other comment was around refinancing, yes, there'll be more refinancing. People will look, as their interest rates go up, to what are their options, and we need to be ready for that, which we are, for customers looking at their optionality, particularly as they're coming off a fixed rate and where do I go to next. So that's something certainly in our mindset here to be all over. It's going to be a competitive marketplace going forward. It is 160 players in this market at the moment and it's very competitive.

Your next question comes from Andrew Triggs from JPMorgan.

So just first question is a point of clarification on the interest rate leverage line. So there's 2 basis points of leverage for every 25 basis point cash rate increase. Can you just clarify that, that which applies to the $111 billion of unhedged deposits captures the part of that deposit book that has some sort of rate sensitivity, but just I wanted to clarify that doesn't include any potential deposit mix shifts by a lot of those transaction accounts flowing into term deposits?

No. So that's a good clarifying question, Andrew. So this is a point-in-time sensitivity. So we've not tried to make any forward-looking assumptions on how the deposit book shape may change over time. Because then you just get too fraught on too many assumptions, whereas we try to be as factual as we could. But yes, it's a portfolio of low rate sensitive deposits. Some of that rate sensitivity varies from different product to product. But we've not tried to adjust anything beyond that. It's just really giving you that sensitivity in those balances as a starting point, from which you can form your own views on some of these other factors around what will change our mix, what the size of those deposit pools be in future, all those sorts of other factors. We haven't tried to get too complicated on this.

Okay. That's helpful. And then the second question, just in terms of, if you look at the headline and ex markets revenue growth numbers for the half and compare them to the similar growth rates at the quarter, it does imply a little bit of a slowdown in Q2 in both markets and nonmarket revenue. But could you just talk to -- I'm more interested in the nonmarket side of things? Was there anything to call out there that was driving that slightly softer result in Q2?

Yes. There's a couple of things, Andrew. And you're right, the markets was slightly off in the second quarter versus first quarter. So that is correct. And on the nonmarket side, it's reasonably flat, but you need to adjust, and this sounds crazy, but it always happens with these first half numbers. There's, I think, 2 or 3 days less. So you got to adjust for the day count, and that essentially accounts for the difference. And we see that, as you'd expect, not just on the revenue side, you see it on the expense side as well. you.

Your next question comes from Victor German from Macquarie.

Yes, I was hoping to also follow up a couple of questions relating to Slide 21. First, just maybe a technical question for you, Gary. Obviously, if I look at $111 billion and multiply by 25 basis points, we get more than 2. So is it the bid that you've captured in that 2 basis point guidance is deposits that you think will be rate insensitive? Or are there any other offsets sort of in that calculation, just so we get the basis of the calc?

Victor, it's rate insensitive deposits, but they can vary in terms of how rate insensitive they are. And there's different products vary greatly to what we've come back with a pass-through rate assumption. So the degree of sensitivity to interest rates. So what it's not is a portfolio that's wholly 100% insensitive. There's a blend depending on the products. So we've made some pretty informed assumptions on that, and then that flows to this blended 2 basis points sensitivity.

Understood. And second question, slightly more broad. I mean, if we look over the last couple of years, one of the things that benefited your margins substantially appears to be the case that historical premium that you used to pay for deposits has really come down in this low rate environment. To what extent do you feel like you've made investments into the franchise to make sure that as interest rates increase, you will not need to pay up more for deposits like you historically had paid?

Yes. It's a really good question, Victor. So we have had -- you've seen it in this half as well. Ross went through this on Andrew's slide, the focus on our capability and our proposition around transactional getting. And we've still got a way to go on this. So we can definitely do more, but our focus on having the right propositions to be growing high-quality deposits without the price lead. And so that's exactly been our focus for many, many years, and we've built up more capability and a better track record. As I sort of -- if you go back many years, we wouldn't have had anywhere near 80% of our lending book funded through deposits. So that should mean that, that weakness that we've historically had is significantly lower now than what it was, but it's still something where we do have some franchise challenges on that, and we want to continue to grow our high-quality deposit base. A bit similar or maybe similar to your question and linking it, what's called out here, and I know what you're aware of this factor that we have had a massive influx of TDs into that call. One of the big assumptions in terms of, well, what does all this mean for '23, '24 on how this will translate. And NIM is a bit about well, will that reverse, or well, it will reverse, but to what extent will it reverse? And what's been curious to date that in New Zealand that's a bit ahead of us in this journey. There's been just the start of movement out of our core back into term deposits. But that's been, in the New Zealand context, at a bit higher rate than we were probably expecting that to start in Australia. So that's going to be one of a number of interesting questions that we'll all get clarity on in terms of how the deposit book will change over the next couple of years and how much some of these sensitivities will actually translate into real NIM tailwind.

And do you think the potential offsets are going to be sort of broadly consistent with peers? Or would you feel like that could be different for you guys?

Look, it goes to the quality of your deposit franchise. So the higher the quality that you have in that, the less that you need to attract deposits purely by price, and we are looking to attract transactional and others for a whole bunch of reasons, and we've got a pretty clear focus on it. And as you can see in this half, it's working. We've got good momentum.

Your next question comes from Ed Henning from CLSA.

Just starting on the SME space. Can you just touch around what you're seeing on competition in that space? And also, obviously, there's been very strong growth at the moment. But what your outlook is for system? And given your investment, are you targeting that 1.9x system or even greater than that going forward? And then just as a second one, if you look on Slide 36, and you talked about your NPS scores today on the consumer and business. But if you add in the high net wealth, or even strip that out of mass affluent, it's fallen quite sharply. Can you just run through why that is and what you're doing to turn that around?

Look, on SME, I'd expect to see us continuing to grow at greater than system. The franchise is working well. We've invested in it. We are continuing to invest in bank as going forward. I indicated that in my opening remarks. So we expect to see this continue to grow above system. And you've seen in our first 6 months, we've done pretty well. And the indications are, even a month after the 6 months end, it's continued on. Now you get a bit of a hiatus or slowing down through an election period, but I think we've invested well to get the results here across the board, and it picks up on Vic's comments around transaction accounts as well. We're seeing very strong results. Again, I've given you that indicator. So I would expect to see that market continuing to grow. Yes, there's competition in it. Everybody wants it. But I think we're doing a pretty good job in it. And it's being, I think, well led, and we've got great bankers. So we'd expect to see that. The second question, sorry, just remind me.

Just before I go to the second question, on the SME, what do you guys think system will be this year and next year for SME. If you look at your economic forecast or forecast business, but it doesn't split out SME. And on the competition side, is it getting worse? And are you seeing levels of competition you're seeing in the housing space of being really, really ultra-competitive?

It's competitive, but I don't think there's 160 players playing around in the SME marketplace. And I think we've invested very well and we expect to see us continuing to grow there. It's not as though we're static in this marketplace. We're putting more bankers on, both across -- the bank is focused on lending, but also bank is focused on transaction and deposit accounts. So I'm confident we will continue to grow above system and we've seen that in the last month. So I would expect to see that continue. There is competition. I mean there's some smaller players in that marketplace. You've got the broker community growing in that marketplace. But at the same time, this is the core of our franchise and we're holding on to it and doing better than probably people have anticipated. I expect to see it grow.

And Ross, the indicator of...

Ed, I think you've got it there, the business credit growth we're forecasting, it's going to still be pretty strong at 8%. Take your point, SME is a subset of that, but it's a pretty fair indicator that SME tends to be a little bit lower than that, but we expect it will continue to be strong. And that's supported anecdotally by what's coming through Andrew's franchise. And the business market or the business side of this is growing the Australian economy. This is where the growth is going to come from.

And as Ross talked about before, it's not the factors on the consumer side, when that we're hearing from our business customers around, I'm really worried about interest rates, I'm really worried about inflation. And there seems to be a pretty decent track record of actually being able to pass on some of these inflationary input costs. It's really about getting the people. It's what's holding up a lot of small businesses, just actually getting the staff to grow. So that's probably the biggest constraint rather than anything else at the moment.

And then the second question was around Net Promoter Score. Yes, it has dropped off a couple of points over the last 3 to 6 months. I think it's more -- not so much in the private banking sphere, it's in the grouping just tucked in below that, that gets pulled into the affluent sector. And we are having to look at our proposition in that area. Rachel Slade and her team have been trialing some pretty good activity in the Premier, which is called Premier Space, that's starting to work. But we do have to do some more work on scaling that up, because it's a bigger group of customers. And you can't have a one-on-one relationship with all of them. So it's a more difficult space there. But the private space, we are growing very well there. I think we were 2.7x system and growth in that area. So we're doing pretty well on our scores on that, particularly through the private and wealth space that Justin Grind has got has been very strong.

[Operator Instructions] your next question comes from Brendan Sproules from Citi.

I just have a question on asset quality, particularly Slide 23. The interesting here is the bottom left-hand chart where you see collective provision balances. Over the last 12 months, you've actually seen your underlying collective provision fall, but you've actually seen an increase in these EA top-ups, which really only emerged in the collective provision since COVID. So I guess what is the outlook for this $1.6 billion of EA top-ups given that they were put in place during quite a different economic environment given the impact of COVID. But obviously, we also are facing obviously, higher rates and the impact on customers. And how do they relate to Slide 25, where you talk about really strong resilience that you seem to have in your home loan portfolio?

Yes. So that's a really good question, Brendan. Maybe you're traveling in global accounting circles, because it's a bit of a debate across banks across the globe. This dynamic, which is not, I'm pretty certain, you'll see it across Australia. It's definitely happening across the globe that through COVID, the underlying model-driven CP calculations were declining, and there was increasing use of forward-looking adjustments, EAs, et cetera, which are all required under IFRS 9, as you know. So the reasons for this is, it's just been an incredibly benign environment with the inputs into our standard models are very benign. So they are generating lower CP, and then it gets -- but on a forward-looking basis, do you think it's always going to continue to be benign. And again, these models have had these types of inputs for quite a long period now since the GFC. So this has been a trend in the output from the underlying models. And so that has been supplemented by the use of targeted sector FLAs or economic adjustments. And that's been across the globe. Over time, I think how this will play out is that there will be more adjustments and bringing in more stress-type data into the underlying model. So that would increase those underlying modeling and get the underlying model to be more sophisticated. And some of those overlays, whether there's EAs or FLAs, will start to decrease over time. But I don't see this is going to be something a rapid adjustment though between those 2, but it is a very real trend.

Sorry, can I follow up on that, Gary, in terms of the quantum? I mean the SLAs and the economic adjustments are actually larger than the underlying collective provision. And in your case, in particular, you've just been pushing the weighting on these worst and slightly worse sort of economic scenarios, while your actual portfolio has actually improved reasonably significantly in the last 12 months as demonstrated by the underlying collective provision.

Yes. And that's exactly right. And it's -- so one, again, that trend of, whether it be FLAs or EAs ending up greater than your bottom-up model build is quite common. So that is not something that's an outlier for us at all. And then the whole point of an economic adjustment is the underlying will be driven about what's actually happening now, which we all look at the environment is pretty benign, and that's why the underlying models are spitting out lower CPs. And the whole point of IFRS 9 is that you've also got to look out, and when we do look out, we see increased living costs, we see increased inflation, we see supply chain challenges. So a whole world of uncertainty, and that's where -- that is exactly what the economic adjustment and the FLAs are trying to form a view on likely future provisions that are required with an outward looking, whereas the underlying model is more point in time and backward looking.

I think it would be fair to say, Gary, we have been reasonably conservative in our settings and we will continue to be. And we've done that at a capital level and on a collective provisioning position as well. So I think that would be fair to say that we have taken a more conservative setting that maybe some others have released out more. It's just at this point in the cycle. There's a few things we're looking at and going, we should hold on.

Well, we talked about earlier in terms of potential stress in the home loan portfolio with higher interest rates. We think we're well positioned in terms of how our book currently is today. But undoubtedly, in the tails, there will be some customers under stress.

Can I ask a second question just on costs, if I can push my luck a little bit. Just on Slide 22, you show during the half that rem and inflation grew at about 1%. What is your assumption for that going forward contained within your overall cost guidance that you've outlined today?

Well, the other thing we've given today is just around that 2% to 3% for this year, which is the accumulation of inflation, wage pressures, third-party costs, but also the enforceable undertaking additional costs that will wear. Across the book, we've said about 2% to 3% this year, it'll be somewhere in that range. And it's a combination of all of those and some investment we're continuing to make and more bankers in certain parts of our business as well, much more than that. So that number includes our annual pay increases. So there is a bit of seasonality that you'd expect it to be higher in the first half. But given what we're also seeing off the back end, I called it out in my speaker notes here that there's an increasing number of out-of-cycle pay increases for areas that are under pressure, where there's competition for people like bankers, tech, data. And so I do expect there will be a reasonably sizable element of rem increases required in the second half, just because if you don't have the right people, then there's all sorts of problems. But it shouldn't be as high as it was in the first half, because that has the official rem increases.

Your next question comes from Carlos Cacho from Jarden.

Congrats for a good result. I was just wondering on the NIM level, again, going back to that, unlike some of your peers, you haven't provided entry or exit levels, but looking at the Q1 NIM, it looks like underlying margins were broadly flat in the second quarter. Taking that along with the guidance, should we be kind of implying that you're expecting NIM to improve in the second half?

What do you think about that, Gary?

Yes. No, it's a good question. And with any NIM outlook, as you would know, we've got a whole bunch of items going in different directions; cost of funds are definitely starting to increase and called out that, that tailwind we saw in the first half is declining. We think competitive pressures, again, sustained, maybe not as intense as they were in the first half. You do get some respite from that as the fixed rates start to move back to variable. And then we've got the tailwinds coming from the higher interest rates. So probably, actually, for the first time for a long time, which I tend to get this question each briefing, and I would say in this occasion that the tailwinds look like they outweigh the headwinds in the outlook for the second half.

And just a second question around, I guess, how you're managing repayments to customers with rising rates. You note that the average customer significantly had repayments. Many customers keep their payments higher when rates fall, so many of them will be making payments in excess of the minimum. When you're putting rates up on the variable loans, are you increasing the repayments for our customers? Or are you just leaving repayment steady and letting on the excess principal repayments decline to offset that increase in required interest?

It's the latter. Because what we have done, Carlos, over the last many, many years, with less customers sitting on the payment structure that they were on, even though the interest rate had reduced, so they're making greater payments into principal. And on the reverse of that is where they're overpaying where we won't make the adjustment, we'll just leave them there, which is reversed orders in the best interest of the customer to get their payments done quicker. If they choose to want to reduce their payments, they're able to do so. There have been some banks, I understand, who have gone through and reduced the payments automatically. We've chosen not to do that. We think it's better for customers to be on the front foot for situations where when the rates reverse and go up, they're in great shape, and that's what we've got. And I think we're in pretty good shape for it.

And that plays through in the numbers that we've been quoting on how many customers are 3 to 4 years ahead. That's because we've...

Exactly. And able to redraw as well. We've got 90% of our customers have had and borrowed up to their limits because they've been making the payments and prepaying, forward paying. And that has cost us money over the years because it's more advantageous for a bank to reduce the payments on customers because you've got their payment for longer. We've chosen not to do that.

In terms of how that works, I guess, thinking about the payments versus being ahead on the mortgage is hypothetically, as a customer who was 2 to 3 years ahead, but had reduced their payments down to the minimum level, would that then see their repayments increase? Or would you essentially offset that against the excess repayments? So I'm just trying to think about how that flows through in terms of the rundown of the mortgage book and rising rates, if it's being offset against the fact that they're 2 years ahead and their repayments don't actually change and that potentially provides a bit of an offset for slower housing credit growth as rates rise and house prices likely fall?

Where the customer is on the minimum, yes, you do increase the payments, but that actually usually happens on the anniversary of the loan. So it often doesn't happen instantaneously, it will happen on the anniversary of the line. But yes, you do move, even if they're ahead, they have reduced their payments down to the minimum, you do make the changes up for them. And if they say they're ahead by 6 months, if they need a holiday on it, that's what they can take, because they've built up the buffer. But with IR on the minimum, the interest rate does go up.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.

Thank you very much. Thanks for joining us today.