Westpac Banking Corporation (WBC) Q1 FY2026 Earnings Call Transcript & Summary

Good morning and welcome to Westpac's Q1 FY '26 Update. I'm Justin McCarthy, GM, Investor Relations. Joining me today is Nathan Goonan, our CFO. Before we commence, I acknowledge the traditional custodians of the land on which we meet. For us in Barangaroo, that's the Gadigal people of the Eora Nation. I pay my respects to Elders past and present and extend that respect to all Aboriginal and Torres Strait Islander people. This is an inaugural quarterly call designed to enhance transparency and disclosure. We hope this refinement is helpful and welcome your feedback. Nathan will provide a brief overview of our quarterly performance and then take questions. In the interests of time, we'll take one question per person. With that, Nathan.

Thanks, Justin, and good morning everyone. Thank you for joining. As we start the financial year, we're continuing to drive operational momentum across the group and our quarterly performance reflects a disciplined execution of our 5 strategic priorities. Net profit excluding notable items increased 5% compared to the second half '25 average. Revenue was up 1%, comprising a 2% increase in net interest income driven by an increase in average interest-earning assets and a stronger Treasury performance, and a 4% decrease in noninterest income driven by lower markets revenue due to unfavorable DVA. Operating expenses ex the second half '25 restructuring charge were stable. Including the restructuring charge, expenses were 5% lower. These revenue and expense outcomes resulted in an increase in pre-provision profit of 6% or 2% ex-restructuring. Sustainably growing customer deposits underpins our ambition to be our customers' main financial institution. The growth of $12 billion in the quarter highlights the inherent strength of our franchise, with household deposit growth of 3% and business transactional deposits up 4%. We expect deposit growth to remain strong through FY '26. Loans increased $22 billion with growth across all customer segments. Institutional lending grew by 7% and was well diversified. We continue to see good opportunities in this part of the market, although we expect the rate of growth to moderate over the remainder of FY '26. Australian mortgages excluding RAMS grew by 3%. This reflected progress in executing our mortgage strategy with the proportion of proprietary flow rising to 35% in the quarter. This positioned us above system for the quarter. We're targeting consistent performance broadly in line with system from here. Australian business lending maintained momentum, growing at 3%. More bankers on the ground is improving proprietary flow. The stronger lending than deposit growth resulted in a modest widening of our funding gap, with the deposit to loan ratio down 1 percentage point to 84%. We remain on track to settle the RAMS transaction by mid-year and have intentionally positioned the balance sheet to accommodate the expected $16 billion reduction in mortgages. Funding markets have been supported and we have issued $18 billion in long-term wholesale funding since October '25. Net interest margin decreased 1 basis point to 1.94%. Consistent with expectations set out at FY '25 results, core NIM of 1.79% declined by 3 basis points compared to second half '25, with the decline moderating to 1 basis point on a quarterly basis. Lending margins edged lower as competitive pressures persisted. The rate of compression was stable in mortgages, has moderated in business, and was more pronounced in institutional this quarter. The nonrepeat benefit related to interest rate reductions in prior period was a net drag in the quarter, with the lending reduction more than offsetting a deposit benefit. Prior period rate lag impacts have now flowed through our numbers. Overall deposits were stable. Compositionally growth in higher rate savings balance continues to be a drag, while liquid assets provided a slight benefit. The Treasury and Markets contribution of 15 basis points was up from 13 basis points, reflecting favorable interest rate positioning by Treasury in a more volatile market environment. To provide further earnings stability through the cycle, the deposit hedge was increased by $15 billion to $92 billion, $7 billion of which was flagged at the full year results. This had no material impact on NIM in the quarter. In terms of considerations for the first half, we continue to expect the net replicating portfolio benefit to be approximately 1 basis point, and our sensitivity to a 25 basis point rate rise is a benefit of approximately 1 basis point over a 12-month period. However, the recent RBA rate rise will be a slight headwind in the second quarter due to the timing of passing through the rate rise to customers. Operating expenses excluding the second half restructuring charge were stable at $3 billion. We report to the nearest $100 million with expenses rounded up in the quarter. We remain confident our FY '26 expense growth will be largely offset by productivity savings, which include ongoing benefits from the restructuring charge taken in the second half of '25. Considerations provided at the full year results in relation to investment spend and operating expenses more broadly remain current. Credit quality metrics improved over the quarter. Stressed exposures to total committed exposures decreased 11 basis points. This reflects a decline in Australian mortgage arrears and reduced stress rates across most industry sectors. Our portfolio remains well diversified across sectors and geographies. Total credit provisions rose marginally and at $5 billion were $2.1 billion above our base case. Coverage was stable at 125 basis points. While modeled collective assessed provisions were stable, reductions from improvements in underlying credit metrics were offset by model adjustments related to the severity of the downside scenario. Credit impairment charges remained low at 6 basis points of average gross loans. The CET1 capital ratio remains strong at 12.3%. The reduction in CET1 reflects the payment of the full year 2025 dividend, which more than offset earnings for the quarter. There were also several items that moved in both directions and summed to a reduction of 5 basis points. These movements, many of which are one-off in nature, include: a benefit from the removal of the operational risk overlay; higher lending balances which were partly offset by credit quality improvements and data refinements; IRRBB was a modest drag with embedded losses and an increase in hedge deposits more than offsetting the benefit of standard changes; and the capital floor drove a marginal reduction. In second half '26, we expect a 22 basis point benefit from the completion of the sale of our RAMS portfolio. To conclude, the performance for this quarter demonstrates solid progress against our plans. Discipline execution is driving our momentum, we're deepening customer relationships and investing in our business. We're optimistic on the outlook for the economy and expect demand for both business and household credit to remain resilient. With that, I'll hand back to Justin for questions.

[Operator Instructions] Our first question comes from Matthew Wilson from Jarden. Matthew?

Pretty clear result. Therefore, perhaps can we ask a question -- obviously, you've had 2 senior leaders in the IT area depart in recent weeks, which coincides with an important part of the UNITE project. I understand Peter Herbert is running it, but obviously IT is important. Could you add some color to the outlook for that?

Yes. Thanks, Matt. We've obviously got an update on UNITE in the diary for I think the 26th of March where we'll do a fulsome update on that. I think obviously Anthony and Scott has announced his retirement and so he and Anthony have been working through that over a period of time to work out when's the best time for that to happen. Scott's remaining with us until the end of the year as we find a replacement for him. But as you said, Peter Herbert runs the UNITE program. We have a dedicated CIO who works for Scott who's been embedded in that program alongside Peter Herbert running it. So don't read anything into that. It's no material impact on UNITE and you'll get a fulsome update on the 26th of March. And you could almost read it the other way, Matt. This is a retirement for Scott that Anthony and Scott have been working through when's the best time to do that.

What about David Walker? He seems more hands-on and obviously has fantastic experience with his time at DBS.

I think David Walker again, these are great executives who have done good things for Westpac over a period of time and come to the end of their time here. I think we've also been bringing in talent into the tech team and again there's a dedicated CIO who isn't David Walker or Scott Collary who's been working on the UNITE program.

The next question comes from John Storey from UBS. John?

Happy Friday. Yes. I guess the question that I would have, Nathan, is just around your hedge, right, and obviously the decision to increase the size of the hedge into a rate hiking cycle. I mean obviously in the short-term, maybe not ideal, but maybe you could just give a little bit of context around how tactical you can actually be on the hedge itself and then maybe the 50 basis points let's say of potential interest rate increases during the course of this year. What would be the impact actually on NIM from increasing the size of the hedge?

Thanks, John. Happy Friday to you as well. On the hedge, I probably came into the role, John, thinking that one of the things we needed to do was just increase the proportion of our non-rate sensitive deposits that were hedged. And I think really what we're trying to do here is provide medium-term earnings stability through the cycle. And so while yes, you can be tactical and when you put it on, I think the main point here is to try and give that earnings stability so that it's better for us when we're planning to run the bank and we think it's a more predictable earnings profile for the market. The timing of these two was -- and I think now just to say, John, I think we're now proportionally up there with some of our peers in terms of eligible deposits that we could hedge. The timing of the two that we put on, so we did 2 $7 billion broadly. The first was in October, that went on probably slightly below cash. So what you're doing here as you know is effectively taking earnings that might be earning the overnight cash rate and investing across the 5-year curve. So the October one was slightly below, so we took a little bit of near-term earnings hit on that one to give us the earnings stability over time. And then actually the December one was just slightly before Christmas and we actually were able to invest that pretty much at the cash rate. So there's no near-term earnings impact from that one. And as I said, take that all in aggregate, we expect a one basis point benefit from the hedge when we get to the first half.

Our next question comes from Andrew Triggs from JPMorgan. Andrew?

Nathan, can I just ask on the momentum in the core NIM in the quarter, please? Just the 1 basis point decline. Just a bit more in terms of the drivers of that, what were you seeing with respect to mix shifts especially on deposits? You mentioned perhaps there was a little bit of a headwind from your change to the hedge there. What are the other sort of drivers you can call out for us please?

Yes. Thanks, Andrew. And I think, maybe I'll answer this one a bit fulsome and then hopefully it helps others on the call as well. I guess the trends that we're seeing in the quarter, Andrew, are very consistent with what we were talking to you about at the full year. And I think they're obviously going to be the things that we'll be talking about when we get to the half as well. It is a more stable environment for margins and you're right to call that out. And as you said, we've sort of seen moderating trends. While there are consistent trends, they're moderated. We had sort of 3 basis point decline in margins when you compare to the second half and then 1 basis point when you isolate it to the quarter. And I think if you back out the net negative from the rate lag, the prior period rate lag when rates were declining, it is relatively stable. That said, the underlying trends are sort of as I outlined at the full year. On lending, we're seeing that gradual decline in lending margins across the books. So mortgages was relatively stable for the quarter, but remains competitive. Business lending, the compression was much more moderate in this quarter than it's been in prior periods for us. And then maybe Institutional is a little bit more this quarter than it's been, although we've seen a little bit of margin compression coming in there sort of last quarter of '25 and into this quarter. And on the deposit side, while relatively stable overall, the thing that's hurting margins there a little bit, and again it's a gradual decline, has just been the real success of that savings product. So at a macro level, deposits mix has been improving, proportion of TDs is continuing to decline. The bonus saver product, the life product, continues to be a great product for our customers and so that might have been $5 billion of growth in the fourth quarter last year was another $4 billion of growth this year. And one of the factors there is consistent with our peers. We're just seeing a slight tick up in the people who are qualifying for the bonus rate. So I mentioned that at the full year, the fourth quarter was about a percentage higher than what it had been for the average of that year, and that's continued into this quarter. So they're the sort of trends. If I thought about the considerations going forward just to be fulsome in the answer, Andrew, I think you continue to see those underlying trends flow through into the second quarter. The replicating portfolio wasn't much of a benefit in the quarter, we expect it to be one basis point in the half. Liquids I think remain a benefit for us in the second quarter. And then just to call out the rate, the benefit from the 25 basis point hike that we've had, albeit a 1 basis point benefit over a 12-month period, it's likely to be a slight drag in the second quarter just given the timing difference between when we pass on to deposit holders relative to lenders.

The next question comes from Jonathan Mott from Barrenjoey. Jonathan?

Just a quick question if I could on the deposits. You said there was really good growth and success that you've had in the savings product, and that's, I think, you just mentioned $4 billion. Have you seen any growth in non-interest bearing deposits which was a real tailwind for CBA when they just reported?

Yes, we have seen growth in those, Jon. Yes, we have seen growth in those transaction deposits. In particular, I called out in the speaking notes. I think Paul and the team are doing a really neat job in business there, Jon. We had sort of 4% growth in the quarter of transaction accounts in Business Bank. That's sort of $2.8 billion growth there. And then overall we're seeing growth in transaction accounts in consumer as well. So it has been outpaced by growth in offsets and growth in savings, so hence calling out that mix shift with the higher proportion of growth coming in those higher rate products. But we are seeing that underlying quality growth as well.

Next question comes from Carlos Cacho from Macquarie. Carlos?

I'm just wondering if you can give us any detail about the proprietary broker split in mortgages. It looks like from your portfolio side you've continued to lose a bit of proprietary share, but on the flow side have you seen any stabilization or improvement there given the renewed focus on the proprietary channel?

Yes, thanks, Carlos. Yes, we have. In from a flow sense -- and you're right to say it's a big ship and I think Anthony's mentioned at the full year, we're going to measure this in sort of halves and years, not in quarters. But for the quarter, we have had that improve for 2 quarters in a row now and on a flow basis it was 35%, which is up from where it had been. Actually, interestingly, if you're sort of looking for a stat or you want to be a believer in this space, which we certainly are, we've had first party growth of $3 billion in the first quarter. If you compare that to the fourth quarter last year, that was a reduction in that first party or proprietary book and it grew by about $100 million in the prior period. So it's sort of grown by $3 billion, prior period it grew by about $100 million. So we are seeing green shoots there. It's going to be a journey for us as we continue to push on that and the team are doing a good job executing against a multi-year plan that we expect to just continue to improve and improve as we go through that.

Our next question comes from Brendan Sproules from Goldman Sachs. Brendan?

Just a quick question on the contribution to NIMs from Treasury this quarter. Is that a little bit circumstantial to the conditions that you faced during December? And how do you sort of see the contribution to NIM on a more sustainable basis from this part of the business?

Yes, thanks Brendan. It's a good question. I think it's clearly been a bit of an outlier in this quarter. So I would expect it to moderate. And I'd expect it to moderate even into the half, Brendan. So I think long run of that has been more like in the 12. Some people tell me it's sort of almost been in the down around 10. I think we've clearly had a good quarter where the contribution's been significant. I'd expect it moderates. And so don't expect that to be 15 when we get to the half.

Our next question comes from Tom Strong from Citi. Tom?

Nathan, you mentioned the funding gap in the quarter which meant that you haven't got the same portfolio mix that your peers have seen. I mean how should we think about the funding of growth into the next couple of quarters given your loan growth is quite strong? How should we think about how you're going to fund this? Do you have to get potentially a bit more competitive in deposit pricing to pick up that deposit growth?

Yes, thanks, Tom. I think we're doing a neat job on deposits. So I think the major thing just to call out as you think about the outlook is just the RAMS sales. So we've got $16 billion of mortgages that we expect to drop off the sheet when we get to completion of that, which we're expecting by mid-year. And so what we've been able to do a little bit if you think about that is just pre-position the balance sheet for that eventuation. We've sort of been doing that a little bit on both sides, I guess. So that has given us the confidence to be lending a little bit more on the asset side. And we've also structured up some of our liability side a little bit for that eventuation. So for the real studies out there, you'll see we've been increasing short-term funding a little bit with for that eventuation. And we've been able to sort of structure up for that. So that's the big thing that we've got going on as we think about the outlook for funding the balance sheet for the rest of the year. I think on deposits, look, it's a competitive market. We're doing well. We feel good about that. And we've been sort of taking a slight amount of share in household deposits or being just slightly above system. We want to continue to do well there. Business transaction growth has been good and the team are executing really well there. So we want to continue to be focused on deposits and make sure we're getting our share or slightly above, but we don't think we have to do anything crazy on price to be able to do that.

Our next question comes from Brian Johnson from MST. Brian?

Nathan, I'd just be intrigued -- I know Carlos kind of answered this, but I'd love if I could get some more detail. We've seen the flow go from like 33% through the prop channel up to 35%. But the flip side is that we've actually seen the percentage of the book decline from 45% to 44.4% on Slide 8. Could you just explain to us the increased flow versus the declining book? Is there something weird that's happened in the life of the book between the two?

Yes, thanks, Brian. I think it is just going to be a sort of a what proportion is running off relative to the flow that we're putting on. And so I can take it away and come back to you and just sort of outline how the maths would work on that, Brian. But I think my comments really go to the bit that we're most focused on had been that flow number in terms of improving how we're going to market and making sure that our application front of funnel was most focused on improving that first party mix relative to third party. Clearly there's just maths in the back about how the back book is behaving relative to that flow that causes the dynamic that you're seeing on the page there.

And that would it be incorrect, so it's hard not to conclude that the prop book is running off faster than the broker book. Is that a fair conclusion?

Yes, I think it has to be the maths of it. So the absolute prop flow was sort of up in the year, but up in the quarter as I said we had sort of $3 billion of prop flow. But then to get the dynamic that you've got there in the stock, you have your prop book is running off faster than your broker book.

And also consider that the flow is still below 50 from proprietary. So we're still getting more flow from broker. Our next question comes from Ed Henning from CLSA. Ed?

Sorry, there might be a bit of background noise. Can I just ask a question on capital? Obviously capital position looks pretty strong. You got the RAMS sale coming through. Can you just talk about more optimization opportunities coming through in the next half and the next year? And also potential impact of the RBNZ changes as well coming through.

Yes, thanks, Ed. We can hear you fine so. Just sort of take those in turn. I think inside the quarter on refinement, we've -- basically, we've had a track record here of about $10 billion of sort of optimization in the risk weights every year. And I think the team have been executing really well against that for a number of years. It's been a pretty consistent number. You'll see in the pack when you get the opportunity, it's been -- that was $2.3 billion of risk weight optimization in the quarter. I do expect, and I think I said at the full year that, that run rate is unlikely to repeat for the full year. So I don't expect we're going to be at $10 billion this year. I expect that will be a much more moderate number. If we got that somewhere near the sort of $7 billion or $8 billion, I think, it would be a good effort based on the pipeline of opportunities we've got ahead of us. So we continue to see opportunities. Maybe they're moderating a little bit from where they've been. The other thing that's, sort of, offsetting some of the strong credit risk weighted asset growth has been credit quality. So when you get the opportunity to go through the pack, you'll see that was a $3 billion RWA benefit from improvements in underlying credit quality. That was about $3 billion in the fourth quarter last year. So that's a pretty consistent trend now. And if we continue to see those asset quality improvements flow through the book, you could expect that that continues to be a benefit for us. And then I think lastly on -- and offsetting that, we've obviously got strong credit growth. So that's the most important thing that's offsetting that there. As it relates to New Zealand, that's still early days in terms of those things haven't been finalized, but they do look positive. So we have -- that would mean that we're pretty much at the capitalization rate of 12.5 set one in New Zealand that we need to be at. So there will be some opportunities there. I don't think it's particularly material for us, but net-net that'll be a positive for us as well.

Our next question comes from Richard Wiles from Morgan Stanley. Richard?

So I just wanted to follow-up on the questions around Treasury. I think you said that Treasury had a good quarter, boosted the margin, but markets was negatively impacted by DVA. If we put it all together, Treasury and Markets, it looks like the margin benefit might have been greater than the drag on other income. Although you haven't split it out. Last year or last half the Treasury and Markets was about $1.1 billion. So the quarterly average is around $550 million. Could you tell us what it was in the quarter and how much it -- so whether that margin boost has been fully offset by a reduction in other income?

Yes, thanks Richard. And obviously we'll sort of do that fulsome disclosure when we get to the half. In terms of just to give a high level sense, I think you're reading it right, they've probably offset each other, but I think we can give more fulsome disclosure on that when we get to the half. But proportionally I think you're getting that pretty right.

Next question comes from Matt Dunger from Bank of America Merrill Lynch. Matt?

Could I just revert to the capital position? Just I know you said the 5 basis point net impact of the one-offs, but just wondering how the embedded losses unwind. You've got the RAMS sales. So just wondering how you thinking about potential for capital returns coming in into the half given strong capital generation expected?

Yes, thanks, Matt. Just specifically on the on the embedded losses there, I think IRRBB was a net drag of 4 basis points. There's sort of 3 component parts here. So we had the benefit of the standard changes, I think we flagged that at the full year. It's about 40 basis points or 39 to be precise. And then sort of offsetting that there's 2 points: the deposit hedge, so we obviously have increased that by 15 $billion, there's 27 basis points consumed there for that. And then as you rightly call out, we had embedded gains swing to embedded losses and so there's sort of 16 basis point drag from that in the quarter. In terms of the look forward on that, obviously the embedded loss or gain is really all rate dependent. So that is quite hard to predict. And so it's like the unwind of that is obviously a possibility -- there's obviously a possibility that that goes the other way as well. So that's a little bit of a one to watch in terms of where things go from here. I think our movement there just looking at the other results this week looks very consistent with what other people have seen. On the go forward, as you rightly call out, I think a number of the movements in this quarter are a little bit one-off in nature. So operational risk overlay removal is one-off in nature. The impact of the standard change is one-off in nature. The additional deposit hedge, while we'll continue to have rebalancing while we've got strong growth there, I think we're now proportionally in and amongst our peer and I wouldn't expect material movements in that in the second quarter. And then it just all comes down to sort of earnings, credit, risk weighted asset growth through credit, what happens in asset quality, what happens in the embedded loss. So there's a few moving parts on that and look forward to discussing it more with you at the half.

That was our last question. We certainly thought this morning was valuable. Hopefully you did as well. We welcome your feedback and thank you for being succinct with your questions because we're just on 8:30 now. Come through with anything else we can help with throughout the course of the day. Thank you, Nathan.

Thanks very much.