Suncorp Group Limited (SUN) Earnings Call Transcript & Summary

Good morning, everyone, and welcome. I'm Steve Johnston. And I'd like to begin, as always, by acknowledging the traditional owners of the lands on which we meet and, of course, to pay our respects to all elders past, present and emerging. So today, we join you from Brisbane for the second of our 2 investor updates on our strategy and the initiatives we are executing under our FY '23 business plan. Last Tuesday, as you know, we provided an update on our General Insurance business. And today, we're focusing on the bank and more specifically the work we are doing to drive growth to enhance our digital capability and to simplify the business. Now I'm joined for the presentation in Brisbane by Jeremy Robson, who's our Group CFO; Fiona Thompson, who is currently the Group CRO, who you will have seen earlier today has been appointed to a new role, people, culture and advocacy; and of course, we've got Clive van Horen, who's the CEO of the Banking and Wealth business. Clive joined Suncorp in August last year, having spent the past 10 years at CBA. And we're delighted to have him on board. At the time we announced our new operating model last year, we made several changes, which were aimed at improving the competitiveness of the bank through faster decision-making and greater end-to-end accountability. This change in operating model has led to several teams, including our customer strategy, our marketing and our digital distribution teams, moving from centralized functions to report directly into the bank. Now Clive will run most of today's session, although I've asked Jeremy and Fiona to make some brief comments towards the end of the presentation. And Q&A will follow that soon after in similar structure that we had last week with questions from the webcast first, and then we'll move to the phones. So turning to the next slide. And today, we have also released our quarterly APS 330 disclosure. So I'll briefly update you on the positive trends that we are seeing, which continue the solid performance that we reported in the interim results. In February, the bank reported an 11% increase in profit after tax, which was largely driven by a very strong net interest margin of 2.04%, which was up 8 basis points over the half. And this is significantly above our through-the-cycle range of 185 to 195 basis points and was supported by strong deposit growth particularly in transaction accounts. Credit quality was also strong, with impairment charges of just 3 basis points of GLAs. Reported a modest contraction in home lending over the half year. However, we pointed out then that we'd seen a significant improvement in lodgements and settlements, particularly towards the end of the half year period. Now as you see from today's APS 330, this has translated into balance sheet growth in Q3 with $102 million in home lending growth, and Clive will talk to that soon. Deposit growth has also continued and along with lower funding costs, and net margin remains very strong. We're also reporting impairment losses for the quarter of just 1 basis point, reflecting both an improving macro environment and continuing good credit quality. We no longer have any customers under COVID deferral arrangements, with the vast majority of these customers returning to regular payment schedules. A small proportion have moved into hardship. And this, along with the usual post-Christmas seasonality in arrears, has contributed to an uptick in past due loans. We have decided to retain our collective provision at current levels as at 31 March. Now while some of our competitors have chosen to release some provisions in the most recent round of reporting, our preference is to complete a full review of the CP and the assumptions that underpin it as we finalize our 30 June accounts. Now should the current economic outlook remain, my expectation is that we, too, will be in a position to release some of the collective provision that we put aside during COVID. Now over the past couple of months, our A+ and A1 credit ratings have been reaffirmed. And this again highlights the credit rating strength that the bank derives from being part of the Suncorp Group. And finally, at the end of April, we announced the sale of Suncorp Wealth to LGIAsuper. This represents a significant important and strategic initiative milestone for the group. And it'll allow Clive and the bank leadership team to focus exclusively on the priorities that we are going to take you through today. So as you can see, we have good momentum. And this builds on the similar trends that we talked to last week in our insurance businesses both here in Australia and in New Zealand. We are very confident we can deliver improved returns in our bank. We have the right leadership, the right team and the right set of initiatives to achieve this goal. But we recognize that we have more to do, and we have to deliver. So I'm going to hand you over now to Clive to tell you how we're going to do it. Thank you.

Thank you, Steve, and it's good to be with you all today. As Steve said, I joined Suncorp in August last year from CBA where over the years, I'd led their lending, deposits and payments businesses in both retail and business banks. And during that time, I also led CBA's home loans business. So why did I join Suncorp? Well, in short, I could see the potential and was motivated to help transform the bank. A bit more than 9 months later, I stand here, and I'm as excited, if not more, and more convinced that we have the potential and will achieve that goal. So at a headline level, what I'm going to cover in the next few minutes is a few key messages. The first is we have good foundations in Suncorp Bank. We have a clear plan of how we're going to improve performance, we're investing in that plan, and we have a strong team executing that plan. It's early days, but we have some runs on the scoreboard, and I will touch on that through the presentation. So soon after joining, we settled on this strategy. It is very clear and simple with 5 key priorities: win in home lending, accelerate digital in everyday banking, optimize blended distribution, targeted growth in business banking and simplification. Under each of those 5 initiatives, you can see a number of areas that we are focusing on and investing in, and we'll go through each of these 5 areas shortly. What does success look like for us? It includes above-system growth in home lending, improving our NPS and gaining traction and growth in MFI relationships across the bank. So you'll hear throughout the session that our investment is balanced between revenue growth and cost reduction, all of this driving towards that cost-to-income target of around 50% by FY '23. As I said, we have a strong team, and I'd like to show this team to you and a few observations if I may. The first is we have a very good mix, I believe, of new talent and experienced Suncorp leaders. Secondly, it's very important that the roles and accountability is clearly aligned to our business priorities. And so whether it's home lending, everyday banking, business banking, distribution, all of these are end-to-end. And in the classic sense, structure follows strategy. Thirdly, you also see there's good diversity in this team, both in our profiles and also across digital, product, technology, whether it's Australia or from abroad. And finally, it's important also to see that several functions have shifted from the group to Banking & Wealth. What that means is simpler, faster, more cost-effective management of the business under our direct control. So let's turn to each of the top 5 priorities and starting with home lending. This is our #1 priority. It's also the #1 area that we're investing, as you'll see a little later. Here, what does success look like? It's consistently winning profitable market share. The milestones to achieve that are also very simple. Firstly, restore growth to the balance sheet. As Steve mentioned, that's something that we have achieved. It's a tick. The second one is grow faster than market. That's clearly still a work in progress but one that we have a plan to achieve. Now historically, you'll probably be aware that Suncorp's delivered inconsistent growth over the years in home lending. So how do we turn that? Home lending is a battle fought on many fronts. There's no single silver bullet, and so we are tackling it systematically. On the slide, we show a few of our top priorities, and I'd like to mention a few of them. The first and most important is time to yes. Gone are the days where price or policy evaluations were the key differentiator. Now it's around speed, simplicity and consistency. And so what we have done and are doing is adding capacity to our processing area. We've also made a number of simplification changes to documentation, verification. And some early markers of success are that we've seen our productivity per assessor going up by more than 30% in the last few months, a lot more to come. Broker experience, clearly super, super important for us. We've got a new broker portal coming. We've already improved the transparency and reporting of our turnaround times, we are simplifying our documentation, and we're also adding more frontline support, especially in the areas like Victoria where we've underperformed historically. On pricing. We don't believe that we need to be the cheapest. However, we will be consistently top quartile. This is especially important with the broker best interest duties, which are coming into play. On systems and processes. Our Oracle core platform is stable, and we are now upgrading it to version 2.12, not the first Australian bank to be doing so. And what that will give us is a much simpler and more standardized platform going forward. And of course, on policies, a lot of opportunities to simplify and use smarter, risk-based processes for things like verification. So why do we believe we can win? Well, we have a 2.3% market share, which is -- which means we're coming off a very low base in a very large contestable market. We've seen other midsized banks like us succeed, and so can we. We have a clear plan, we're investing in growth, and we have persistently funded teams, improving that end-to-end home loans process. And lastly, we are getting some good momentum, which I'd like to share some of those results with you now. So Steve mentioned that our lodgement volumes in half 1 were strong, and we called that out in our results. I'm pleased to say that, that lodgement or new application momentum is carried on into the full quarter 3 period and April where for quarter 3, we were up 52% on the prior period. Quarter 3 is up 16% on quarter 2. Our history is one where -- that volume growth has typically meant operations areas have not coped with that volume. And so pleasingly and very importantly, we have maintained or improved our turnaround times in the last while despite this very large increase in volumes. And today, as I stand here, we compare favorably against 3 of the big 4 and are a whisker behind the leader of the big 4 in our turnaround times. Of course, lodgement is one thing. It needs to flow through to settlements in the balance sheet. And there, you can see on the chart on the right-hand side that our settlements are also up 31% on the prior period, and that is leading to balance sheet growth. As Steve said, we saw our first positive amount in February. That's the first time in 19 months we've got positive balance sheet growth in home loans. That continued in March and April, which is the first time in 2.5 years that we've seen 3 consecutive months of growth on the balance sheet. That, you can see, plays out in the all-important orange line on this chart, which shows a swing of $600 million or more in net book movement from quarter 1 to quarter 3. Not on the slide, but I can say as well that our new business pipeline remains strong as we stand here. It's important to call out before I leave this picture that there is a flip side, which is a more of a macro factor. And that's runoff. You can see that our runoff is up 14% versus the prior period. The biggest drivers of this are customers repaying their debt faster, properties being sold because of the activity in the property market and also external refi. External refi is one where we track consistently better than system, so not the biggest concern for us. However, we are continuing to invest in runoff and expect further improvements here over time. So moving on to our second big priority, which is accelerate digital and winning more customers who choose Suncorp as their main bank. I believe we've got a good foundation here. And I can speak from personal experience, having migrated my own banking from our previous bank to Suncorp when I joined the group, and it compares favorably. Of course, there's more to do, but we've got a good digital app in the Sun App. Our investments and focus is in 3 primary areas going forward, and I'll touch on these briefly. So the first is digital engagement. The Sun App is our hero banking experience and will be. We continue to invest in more features and migration from the old banking app onto the new app. Engagement. Digital engagement is strong and growing. So in April this year, we saw for the first time over 1 million app log-ins per week, which is up from about 200,000 last year the same time. Second area is around digital sales. Again, we've got reasonably good capability here but will accelerate. So currently, we originate 2/3 of our deposit accounts online. Interestingly in home loans, digitally sourced home loans are up 150% versus a year ago, now accounting for 1 in 7 of all home loans across all channels. This will continue. And then the third area is innovation in our core banking proposition, especially leveraging data and Open Banking, which we see as a strategic opportunity for us as a smaller bank. Our fee elimination program is complete. And we now have a very competitive proposition, which is resonating well with our target younger customers. What this has meant is, as Steve touched on, strong growth in our core transaction book, which is now up from 35% to 41% of total deposits. That's happened whilst we've also managed down our term deposit book to support both funding and margin outcomes. You can also see on the slide what is a healthy NPS trend. However, a lot more that we will do there. So from an investment point of view, this digital investment that we're making will support continued growth in our transaction account balances and therefore also support our NIM going forward. So moving on to our third priority, which is around distribution. Our strategy here is very simple: we will be where our customers need to be. Now obviously, this is something that is changing very, very fast in the current environment. On this slide, you can see 4 main channels that we use to service our customers. And interestingly, we have created a level of agility for customers to be served in their channel of choice. So firstly, broker, as I've touched on. Suncorp has been and remains a very strong supporter of broker channel, with 70% of our flows originating through brokers. And as I said, we are investing our capacity and capability to support ongoing growth. Digital, I've also just covered that. But clearly, the big shift to digital is an advantage, and we will keep investing in that space. Moving on then to branches. We see an important ongoing role for branches especially for more complex needs like home loans. Transactional needs, on the other hand, are dropping. We saw more than a 25% drop in over-the-counter transactions in the last year and 60% over the last 5 years. As a result, unsurprisingly, we've closed about 30 branches over the last 15 months. What that means is in our branches, we'll be doing less of the simple transactional servicing, more higher-value home loan activity. The savings from these branch closures has gone into 2 places. Firstly, we've improved our cost base, and secondly, we're investing in digital. Likewise, as we exited personal loans a few months back, we've redeployed all that staff into home lending, which is clearly higher value. Whilst the number of branches might be reducing, we are increasing the number of our lenders, mostly mobile. We've also trained around 20% of our branch staff on meeting home loan customer needs. And we see this branch asset as quite unique to Suncorp versus some of our digital-only competitors. The final key channel then is around contact centers. Here, we have a mix of dedicated contact staff and branch staff. When COVID hit us last year, we moved very quickly to enable our branch staff to support customers on the phone. That is now a permanent part of our business, and we see it as a very effective blended model. So this strategic priority requires relatively modest investment, but it will be a key driver, as you'll see shortly, of a lower cost-to-income ratio. So on to our fourth priority, which is around business banking. We recently completed a comprehensive review of our strategy here, which concluded that business banking will remain a core part of Suncorp today and going forward. Just to recap our franchises in 3 main areas. The first is around agri where we've got a long proud heritage, well over 100 years. The second is commercial and property. We have a sound portfolio with strong relationship management capabilities in our target markets. And the third area is SME. We will continue with all of these 3 customer segments but with SME as a key growth opportunity, which, of course, is proximate to our consumer banking franchise. What is important and interesting in this space is that the recent emerging in the last few years of new technology and data-led businesses who are keen to partner with banks like Suncorp will be an important part of our future. And what that will mean is much faster, cheaper and more responsive ways of going to market. There's modest investment in the space in the near term, but it will also benefit not just SME but all 3 of our customer -- business customer segments here. So on to our fifth and final priority, which is simplification, simplification at both the portfolio level and a product or a process level. At a portfolio level, as I mentioned, we exited personal loans, which, frankly, were subscale. We have refocused that capacity on home loans. Of course, we're also simplifying our on-sale products quite significantly across the board. As Steve touched on, we did sell our superannuation business to LGIAsuper, which was announced last month, again, enabling us to focus on our core. The investment that we're making here around automation and simplification is significant. And it will, we believe, drive out material costs, remove a lot of manual processes and make us a more efficient bank. So finally, before I hand over to Jeremy, all of this comes together towards our 50% cost-to-income target by FY '23, noting that there are headwinds that we need to face into -- to achieve that goal. Our improvement in cost-to-income comes from both revenue growth and cost reduction. On the revenue side, the main drivers are lending volume growth, which, as I said, growing above system, will drive a significant revenue outcome. That, however, is offset by net margin reduction back to our target range of 185 to 195 basis points. That margin reduction is driven obviously by cost of funds increasing off current historic lows, some degree of back book repricing but offset in part by growth in our MFI transaction book, which will support NIM. On the cost side, the main drivers are the investment that I've touched on in digitization, automation of currently manual processes, more digital self-service leading to core reductions and that continued optimization of our distribution footprint. And finally, we will also be supported by a reduction in overall group expenses. So you might say this target for 50% CTI has been in place for a while. Why will it be different now? And in summary, we've got a clear plan on the revenue side. We're confident we can achieve that growth. Customers and brokers want to do business with Suncorp. We just need to fulfill on that promise. And on the cost side, in addition to all the investments outlined earlier, the group structure means that the bank has much more direct control over our cost base. So I want to end where I started, and hopefully, I've given you some flavor of this. Suncorp Bank has a good foundation. We have a clear plan, we're investing in it, we have a strong team executing it, and we are kicking some goals. That collectively gives us confidence in that plan. I'll now hand over to Jeremy to wrap up the overall group expense profile as per last week during insurance.

All right. Thanks, Clive, and good morning, everyone. I'd like to now bring together the investment component of the plan that Clive has just outlined this morning. And the chart I've shown on the left-hand side of this slide was included in last week's presentation. And it provides a breakdown of the group's project OpEx over the next 3 years, split between strategic investments and regulatory and systems maintenance. On the right-hand side of the slide, we've broken out the total spend on strategic initiatives between GI and bank as well as more granular breakdown of spending within the bank. Now as with insurance, the bank's investment portfolio has been built bottom-up, backed by good business cases with clear line accountability and is well spread across a range of initiatives under each pillar and with all of them being very proximate to our core banking business. As you can see, nearly 2/3 of the investment is on winning in home lending and everyday banking. Now of course, home lending is our highest-returning portfolio. And so our focus is on delivering increased volumes and improving turnaround times across both the broker and direct channels. And as Clive said, the uplift in growth from these initiatives will drive the balance sheet and NIM, in turn, reducing the cost-to-income ratio. The remaining strategic spend for the bank is across optimizing distribution and simplifying the business, which both target operating expense efficiencies. The bank also receives an allocation of our investment in group areas to improve their operational performance as well as our digital capabilities. I also remind you that we expect to report a modest amount of additional restructuring costs in our other profit after tax line over the period. And consistent with the plan for the insurance business, our strategic investment in the bank is expected to peak in FY '22 and to reduce in FY '23. And with that, I'll now hand back to Steve. Thank you.

Thank you, Jeremy. And now before we move to Q&A, let me briefly talk to some of the structural changes that we have announced this morning. As I pointed out last week and I'll point it out again today, advocacy remains a key pillar of the overall Suncorp strategy. Now to further underscore its importance, we've decided to bring together our advocacy agenda, which is currently managed across the business, and make it a key accountability at the executive leadership team table. The people, culture and advocacy role brings together our traditional human resources, culture, corporate affairs, government relations, regulatory affairs, and our customer advocate functions brings them all together. And I'm delighted that Fiona Thompson, who is currently our Group CRO, will lead this portfolio from 1 June. Stuart Cameron, some of you will be familiar with Stuart, he's currently our CRO for insurance and financial risk. He's a very experienced financial services executive, been at Suncorp for a period of time, will act in this role while we finalize the permanent appointment. Now also in line with best practice, the internal audit function, which is led by Helen Davis, will report directly to me for operational purposes while continuing, of course, to report into the Board Audit Committee Chairman in relation to its ongoing audit activity. So with that, let me hand over briefly to Fiona to make some comments, and then we'll move swiftly into Q&A.

Thanks, Steve, and good morning, everyone. As Steve mentioned, from the 1st of June, I will be moving into the newly established role of Group Executive for People, Culture and Advocacy. I joined Suncorp in 2001 and have over 25 years' experience in risk, regulatory, legal and customer functions, most recently as the Chief Risk Officer where I was responsible for Suncorp's risk transformation program. I'm really excited by the opportunity to bring together these important areas into a single aligned team. We will play a critical role in building trust, driving change and delivering better outcomes for all our stakeholders. This slide outlines some of the early priorities for the new function. Over the past 5 years in the CRO role, I have continued to be impressed by Suncorp's culture. Our people are passionate about doing the right thing and caring for our customers and each other. These strengths provide Suncorp with a great baseline from which we can springboard. While keeping and fostering these elements, we will also be driving for higher performance and improved productivity. As a large insurer and a challenger bank, Suncorp has a unique understanding of the issues which impact our customers and our community. To deliver on our purpose of building futures and protecting what matters, we will look to use these insights to advocate for change, which benefits all our stakeholders. And an example of this is the work we've already been doing on natural hazard resilience. Core to achieving Suncorp's strategy is ensuring that we have the right capability at the right time. We will ensure our workforce planning, talent and training programs are aligned to deliver the workforce of the future and, in doing so, supporting the development of our people. Finally, we recognize that we need to continue to ensure that Suncorp can attract and retain great talent. Our vision is to be known as an organization that is purpose-led with an engaged, productive and diverse workforce that makes a positive difference in the lives of our customers, shareholders and communities. I believe that there is enormous opportunity in leading the people, culture and advocacy team. And I look forward to working with Steve and the team to realize this. I'll now hand back to Steve.

Well, thank you, Fiona. And that brings us to the end of the presentation, the formal presentation. Just to mention I've asked Adam Bennett, who's our Group CIO, who you met last week in the insurance presentation, to join us for the Q&A session this morning.

So we're going to start with the questions on the -- coming through the Web online. And the first one is from Nigel Pittaway. Let me read it through. Given increased digitization is not unique, why does it drive sustainable improvement in returns? Why our Queensland volume is going backwards? Given you are predominantly a price taker in home loans, can you control growth rates in the context -- to the extent you suggest? So Clive?

Yes. I'll take those. Thanks, Steve. Thanks, Nigel. Yes. So yes, of course, digitization is not unique to Suncorp, and how does it drive sustainable improvement in return? We've already seen it driving sustainable benefit. And you can think of digitization in 2 ways. One is origination, and another one is self-service, maintenance or ongoing operational activity. And the big shift to digital origination clearly means that we don't need people to be doing those lower value-add services around, for example, originating a transaction account, a savings account, term deposit and so on. With the mix already at 65%, there's still upside. But that has driven a shift in what those people can do in the branches, which is to focus more on the higher value-add activity. Also, in the operations areas, we have a lot of manual process, which can and will be digitized and will definitely drive significant return benefits. Your second question about Queensland volumes, you're quite right that our Queensland market share has been declining, but it is also too low. So if you look at other banks who have a home state, if you will, they have volumes or market share that is more similar to the big 4 banks or the smaller of the big 4 banks. And so we will be investing more in our capability here both in our direct channels and in our broker channels. And getting to a more natural market share alone will shift our overall volume mix to one where we're gaining share nationally. And then your third question about we are predominantly a price taker, can we control growth rates to the extent we suggest? Absolutely. We're largely a price taker. And as I said, our goal is not to be the cheapest, and we don't want to be the cheapest, but we will be competitive, consistently top quartile. I've -- since I joined Suncorp, I've walked -- I've been around and I've done the grounds with the CEOs of all the listed and non-listed aggregator groups, probably the top 10 broker groups. And without exception, they all say to me, they really want Suncorp to succeed. This is mirrored in the customer research, which customers also say they want Suncorp to succeed. Many, many people want to have a credible, reliable alternative to a big 4 bank, strong enough but also agile enough. And so I've got very high confidence that it's not about price. It's about delivering that consistent service and in particular turnaround time in a steady, predictable way to the broker channel. That will drive growth without having to pull the price lever.

Okay. Thank you, Clive. And Nigel, we'll open up the phones in a minute, so if you need another question, feel free to do so. Next question from Mark Tomlins from MS Tomlins Proprietary Limited. Thank -- good to talk, Mark. Can you elaborate on the timing of when functions shifted from the group to the bank? And did the shift of these functions impact the cost-to-income ratio? Between Clive and Jeremy.

Yes. I'll start. Jeremy, you jump in. So these functions move from group to the bank mid-, late last year. So certainly, when I joined and some of the conversations Steve and I had, which was moving more of those functions to the bank where it meant we could more directly manage those for the size of bank that we are. And so that happened last year. And this financial year, the numbers that we're reporting are with that new structure in place. And without getting to the historical details, it means that close to 2/3 of our costs today, total costs are direct, our costs that we directly manage, which is digital marketing, et cetera, et cetera. And so that is a key part of us being able to manage down that cost-to-income ratio over time. There have also been reductions at a group level. Maybe, Jeremy, you want to jump in there as well?

Yes. And I'll just add, Clive, to the question about did they impact the cost-to-income ratio. Not particularly. All we've done effectively is take costs that were previously allocated and now include them in Clive's direct P&L. So no substantive impact on the cost-to-income ratio. There have been some changes over time, things like the insurance business using less of the branch network. So some of that has and will continue, no doubt, to change allocations over time. And as we go forward, as Clive said, now roughly about 1/3 of the -- Clive's costs are allocated in from the rest of the group compared to previously 2/3, 70%. We will also see some reductions in those through the work I spoke about in terms of automation, process excellence in group functions as well. So the bank will going forward benefit from those in net cost-to-income ratio.

Okay. So no more questions online. We might now go to the phones.

[Operator Instructions] Your first question comes from Andrew Buncombe with Macquarie.

Just 2 on the NIM, please. The first one is a bit shorter-dated. You've said in today's APS 330 that NIMs remain strong in the most recent quarter. Can you give us a bit of color around NIM expectations for second half '21, please?

All right.

Well, you're quite right that -- and thanks for that. The NIM has remained strong. We would say -- I probably wouldn't give you specific guidance on the second half. But clearly, the trend from the current record-low cost of funds rates and current record-high NIMs is that over time, certainly in the next couple of years, we would see that NIM coming more back to the target range.

But in the second half, we'd expect -- we don't see any reason as we sit here today to think that, that sort of level of -- client-level NIM we saw in the first half would not be continued into the second half.

Okay. That makes sense. And then the only other question that I had was a bit longer-dated. You commented on the NIM slowly reducing by FY '23. I know the shape of the FY '23 targets was important coming out of last week's Investor Day. Can you give us a bit of an understanding on how you expect the shape of that trajectory to NIMs through FY '23, please?

Yes. So I would say steady, a steady trend as opposed to any dramatic hockey sticks or cliffs, Andrew.

Your next question comes from Kieren Chidgey with Jarden.

First question, just a little bit related to that last question on the profile of the cost-to-income ratio. Should we expect that to be a steady improvement similar to that commentary around sort of a NIM or it, again, like the GI, is back-end weighted into the '23 year?

Yes. So the big driver is -- I hope you can hear me now because I've switched mics. But the big drivers, as I said, of the cost-to-income improvement over the next 3 years are both revenue and cost, roughly 1/3 revenue, 2/3 cost. Cost benefits typically will flow through in a more smooth way given the branch closures that we've already done. That will be supported in the later part of the plan period by more automation. On the revenue side, which is roughly the 1/3 of the CTI improvement, that is driven mainly by balance sheet growth. And as you know, write a loan today, it takes a while for that revenue to accrue on the P&L. So the revenue growth impact will be more of a build over the next 3 years. Jeremy?

Yes. I think similar to what we said on insurance, Clive spoke to the revenue component, which takes time, the expenses, we need to get the initiatives in and then for the benefits to come through. We would expect to see some benefit year-on-year on the cost-to-income ratio. But to some extent, with the growth in revenue and the initiatives coming through the expense line, we will see more of that in FY '23, but we will see some improvement in '22.

Second related question. Clive, you mentioned, I think, 30 branches have closed over the last 15-or-so months. You've got 83 today. What is that optimal footprint to support the strategy?

Yes. I mean we spend a lot of time thinking about this and tracking this one. And we do not have a target, so I can't give you the number is x. But the key driver of all of this is customer behavior. And so the big shift we've seen in customers, as I say, doing less stuff over the counter in a branch, more stuff digitally, more stuff online, more stuff through brokers, that is the key driver of the rate of change in the future. We have a plan, but we will adjust that plan based on what customer behavior does. And if that digital transformation continues at the pace which, of course, we're supporting, we would expect that footprint to continue to adjust but with, as I said, an offsetting investment in higher value-add activities like home lenders, mobile lenders.

Just Clive, I wonder -- but you couldn't just outline the enhanced role of the bank branch today relative to days gone by?

Yes. In terms of the transaction versus lenders?

Transaction work, yes.

Yes, yes, sure. So less lower-value work, transactional activity, which can largely be done self-service. So for example, using ATMs, which are located on-site with all of our branches for customers to be able to do more of that self-service activity, 24/7 deposits, for example. And I think COVID has also taught us that customers are happy to do business when it comes to home lending, for example, not just in a branch. They like to know there is a branch, but they're very happy to deal with a mobile lender. And so that's where we have increased the number of mobile lenders in our footprint. And we'll continue to do so because customers are increasingly comfortable dealing with somebody, whether it's video, phone or in person face-to-face.

Your next question comes from Andrei Stadnik with Morgan Stanley.

I would like to ask 2 questions if I can. The first one around the cost in sort of that -- in dollar numbers. Many of your banking peers are asking about our cost out. And rough -- just rough check suggests that your FY '23 2% [ situations ] also imply cost volume. So can you just maybe confirm, are you expecting costs in the bank to be lower in absolute dollar terms by FY '23 versus FY '21?

Yes, we are.

And in terms of the branch strategy, if I can ask a question from the point of view of some of your peers, so ING Macquarie has taken share rapidly effectively in our branches but being incredibly focused just on serving our clients and serving mortgage brokers. So is there any value in having some core banks have -- in any branches? If you could just effectively [indiscernible] the rest of the group that have a physical presence?

Yes, it's a great question. That's -- and as I touched on in my presentation, I believe having a branch network is a strategic advantage. And without knocking any of our competitors, some of whom have done a great job through the broker channel, I believe we can do both. And that gives us an advantage having a branch network, a more targeted branch network, focused on higher-value activity because many, many customers still want to see somebody face-to-face and do value the brand. Suncorp has a very, very strong brand especially in Queensland where, as I say, we have big upside. And so I think the benefit of having a branch footprint is -- as I said, closing 30 branches means that we can reinvest a lot of that saving in our proposition in digital as well as some benefit to the cost-to-income ratio. So if I was a digital-only bank sitting here, I would have fewer levers to pull than we at Suncorp Bank have to pull.

[Operator Instructions] Your next question comes from Ashley Dalziell with Goldman Sachs.

Just an initial question on your deposit growth, which sounds that, that would continue in increasing fashion through the third quarter. Could you perhaps just spend a bit of time helping to disaggregate the growth in the at-call? What do you think -- I mean how much is genuine, high-quality transaction accounts [ maintaining ] the relationship-type growth versus, I suppose, some of the lower-margin at-call products? And I guess just as we look forward a couple of years and start thinking about returning to a normal interest rate environment, I mean how much of that deposit or funding mix shift due to change in recent years do you think you'll be able to maintain as term deposit rates beginning to look more attractive?

Yes. Thanks, Ashley. You touched on a few really important points there. So first point I'd make is that at a macro or system level, deposit growth has slowed. That's industry-wide. And we saw this massive surge in deposits across the system last year with all the physical support and everything else that went on. So we do expect system growth to continue slowing. Our strategy to date has been very much to focus on quality deposits. And so we look -- the key measure we look at is what is our household deposit market share. And as we touched on, yes, we have grown, and we've grown that -- 8 out of the last 12 months, we've grown market share and net -- for the year, we've continued to grow that market share. Our primary focus is on, firstly, transaction accounts. So it comes back to the MFI strategy I spoke about earlier, the best-quality deposits, the cheapest deposits, having that customer as your main bank customer means you're more likely to do more business with them in other areas. So number one, transaction accounts; number two, savings accounts; number three, TDs, we have very actively managed that mix. And as I said, from 35% to 41% of the total book is now tran accounts. We will continue to drive very hard to increase that tran portfolio. Obviously, as rates go up, that gives us a bit of a margin benefit, which will offset some of the other margin headwinds on the lending side of the balance sheet. How much more road is there in optimizing that deposit mix? We've pushed it pretty hard. We will continue to optimize. We've probably extracted the most benefit that we can thus far, but there will still be some benefits to come.

Okay. Maybe just quick follow-on, and then I have one further question. I mean is the absolute level now of those genuine low-cost accounts large enough to start thinking about a more active hedging strategy and replicating portfolio, for instance, which I don't think the bank's really been in a position to run in the past? And so just a follow-up question to one earlier around the profile of the NIM. The main headwind that you outlined there, as you said today that the front-to-back book pricing dynamic rolling through. Can you just sort of quantify what that looks like in basis points for us just to try and get that profile up?

Yes, sure. So just touching on those 2 points, we do have a replicating portfolio in our balance sheet structure. So that is something that we've done for some time and will continue to do. In terms of the second question, I won't give you a very specific sort of basis point forecast. But I don't know, Jeremy, if you want to add anything there.

That's -- no, but...

Yes. Probably better than we don't give you a very specific basis point forecast.

Your next question comes from Brett Le Mesurier with Velocity Trade.

In -- Clive, in what areas are you ahead of the major banks?

I think we're probably benchmarking pretty well against major banks in -- and I wouldn't say all of the major banks but certainly several of the major banks, in our digital capability, in our transaction accounts proposition. Our home lending product itself, I'm not talking about the process, but our home lending product is certainly a market-leading product, and it ranks that way. We get that feedback consistently from brokers and from customers. I think in our blended distribution model, and I can only speak for my own experience, but I feel that we are ahead of certainly some of the banks in the way that we have been able to quickly pivot and blend branch and contact center staff in a very rapid way, very cost-effective way. So those would be some things that come that are top of mind.

And Clive, more contemporaneously, we're now better than all but one on turnaround times for our broker mortgage turnaround. So that's pretty pleasing as well.

Yes. And of course, there'll be ups and downs. So these things don't just follow a smooth trend line day in, day out or week in, week out. But we've worked consistently hard in the last while to improve our mortgage turnaround times. And as we stand, as Jeremy said, yes, we're benchmarking pretty well.

Has the cost-to-income ratio targeted seen a reduction in health cost allocation?

Yes, it does. So part of that reduction Clive spoke about in terms of the overall cost base for the bank, about 1/3 of it's coming in from the group. And yes, we do expect to see some reduction on those allocations. It's relatively modest relative to the others, but yes, we do expect to see some reduction.

And lastly, looking at that slide where you've had the balance sheet growth from third quarter '20 to third quarter '21, there's about an $800 million increase in up or down. Can you give us an indication of what proportion of that came -- of the increase was due to brokers?

Yes. So we track -- so just to recap, so runoff, 3 big components that I called out. The first is customers paying back their loans faster, the second is customers paying back loans when they sell their property, and the third is external refi. We track each of those 3 measures for both broker and the direct channel. The rates are slightly higher for broker especially on the external refi. So we do see a slightly higher churn rate for broker originated loans than direct originated loans, not materially different, though, across the 2 channels.

Sorry, question I was really asking was on the upside. So your drawdown has increased from -- in 3 quarter '20 from $2.4 billion up to $3.2 billion in 3 quarter '21.

Yes. Sorry, I misunderstood your question. Drawdowns or settlements, as we'd call them, yes, we've seen improved performance across both broker and direct channels, but the biggest uplift has been in the broker channel.

So do you have a sense as to -- for the increase from $2.4 billion to $3.2 billion, of $800 million. Do you have a sense as to what proportion of that was brokers?

I wouldn't want to give you an exact percentage without checking the precise number, but it will be -- the significant majority will be driven by broker.

Your next question comes from Matt Dunger with Bank of America.

If I could just start on the cost-to-income target, why do you show a relative target rather than an absolute cost target? How controllable is the bank revenue? And what's sort of underlying growth? If you're talking to a $45 million drop in the project and investments like from '21 to '23, what sort of underlying inflation are you looking at to give us a sense of the absolute cost side?

So on the costs, obviously, within that aspiration around the 50% cost-to-income ratio, there is an absolute cost element to that for us that reflects the expected growth in the portfolio. We feel that the revenue assumptions are pretty reasonable, and the cost-to-income ratio is reflective of that. So yes, we do have an absolute cost target in there that's reflective of the benefits of the initiatives I spoke about.

And just on the group dividend payout ratio, should you continue to see the top end of that target range while delivering volume growth of 1 to 1.5x?

Yes. So look, obviously, we've got a 60% to 80% target payout range. And the plan that we've got is being constructed to enable us to -- as we've done recently to -- or putting COVID to one side, sit more at the top end of that range. So yes, the plan has been constructed to enable us to continue to do that.

Your next question comes from Andrei Stadnik with Morgan Stanley.

I just had another question, Clive. Can you talk about -- when you're thinking about the mortgage origination process, I mean, comparing with some of peers today versus the best practice you might have seen elsewhere, how far along is Suncorp in their journey? And how long could it take to get Suncorp up to best-in-class?

Yes. I think the areas in which we currently benchmark quite well and have made some changes recently, which put us up there with the best, those improvements that we've seen in our volumes and turnaround times, I think, are far from the maximum opportunity. Our goal is to get that turnaround time to be consistently better than the pack, consistently better than the pack. And the gap between the current market leader and the pack, if you will, is quite wide. And so we think there's a lot of room between the current market leader and the pack. And that's the space that we want to move in very quickly. All the plans that I've spoken about will get us into that space.

Your next question comes from Kieren Chidgey with Jarden.

The reallocation of group costs to the bank, is that -- are they costs that are being removed from the group entirely? Or will this lead to sort of a higher cost line elsewhere, either at corporate or within the GI?

So Kieren, the -- what we've done is we've effectively -- rather than allocated costs from group functions to the bank, we've just moved the functions into the bank. So as I said, there's not an impact on the bank's overall cost base. It just changes what's direct and indirect costs. What it does, though, is enable -- it gives Clive more direct line of sight over his -- more of his total cost base. So rather than 1/3, 2/3, it's sort of the other way around, give or take. So it gives him more line of sight around that and therefore more ability to control and influence that cost base. But what it hasn't done is meant that we've got more costs at a residual in the rest of the group. We've just reallocated them and then the work for Clive to do to understand and look to get more efficient around that larger cost base.

Jeremy, the wealth costs, are they -- will you be restating sort of the group overall cost targets for the final [ look ] of that business when it completes?

Yes. Kieren, I think -- I mean that would be our expectation. We've got to get through the process up to completion and settlement, which is early part of next year. But once we're through that, then yes, I would expect, everything else being equal, we would look to do some restatement of those cost numbers.

Okay. And can you give us a feel for what the annual cost base of that business is? Is it around $60 million?

Yes. It was $60 million last year. It's probably a little bit less than that this year because part of the cost base for wealth last year included the advice business that we exited. So it's probably closer to $40 million or $50 million, but you'll see what that will be in the FY '21 numbers.

There are no further questions on the phones at this comment. I'll now hand back to Mr. Johnston.

Okay. Thank you very much, everyone, for the questioning. And just in conclusion, I do thank you for taking the time to listen in on the presentation. I think one of the key things that we've been focused on at Suncorp is to make sure that everyone in our organization understands the role they play in delivering improved products, improved service for our customers in insurance and banking. And that flows through to improved outcomes for our shareholders. And today, you've seen that under Clive, we've got a new bank leadership team. We've given them end-to-end control and accountability of their P&L. And they're responsible for and well on the path to improving the returns out of the bank. The business, as I mentioned, had positive momentum through our half year result. That positive momentum has continued, and that's a reflection of the increased focus that we've provided on the core of that business. We believe we've got a compelling strategy for the bank, one that, associated with some target investments, will drive sustainable growth and reduce over time the cost-to-income ratio in line with our target. As in insurance, I'm very confident on the outlook for the bank. And while we're making good progress, we recognize emphatically that there's more we need to do. But we believe we can do it. So with that, let's conclude. Thank you again for joining us. And we look forward to catching up with many of you over the next couple of weeks as we go around to talk further about the momentum in our business as we lead into the full year result. Thank you very much, and have a great day.