Westpac Banking Corporation (WBC) Earnings Call Transcript & Summary

Well, good morning, everyone, and welcome to the presentation of Westpac's first half 2020 results. My name is Andrew Bowden, and I'm Head of Westpac's Investor Relations. I'd like to acknowledge the traditional owners of the -- and custodians on the land on which we meet, the Gadigal people of the Eora nation, and pay my respects to elders, past, present and emerging. Presenting today is our CEO, Peter King; and our CFO, Gary Thursby. And we have most of the executive team here today in the room, and we'll be able to take questions in need. So please let me -- without further ado, let me welcome Peter to the lectern. Thank you.

Well, thank you, Andrew, and good morning, everyone. And thank you for joining Westpac's first fully digital results presentation, a bit of a sign of the times. While Gary and I have been banking for some time, it's fair to say we've never presented a result like this with the challenges of low interest rates, COVID-19 and Westpac's own compliance issues. But importantly, we've got the balance sheet to support our customers through this time. And we're absolutely committed to turning around our performance. And if I start with the overview, upfront, I want to recognize the economic downturn is having a big impact on many of our customers, and we're doing everything we can to help. I also want to acknowledge the work of our 35,000 people who are helping customers every day. I spent the last few months working closely with the teams across the organization, and I'm so proud of what they've done. Our priority has been to protect them, keep the bank running, while we're using our scale, strength and experience to support our customers during this challenging time. From a financial perspective, it was a disappointing result, particularly reflecting the $1.3 billion in notable items, mostly related to AUSTRAC as well as a $2.2 billion impairment charge. However, as I said before, the balance sheet remains in great shape across capital, funding and liquidity, and that does position us well to navigate through this period ahead. We also have a need to simplify our business. Our first steps are outlined today with the creation of the Specialist Business units, and we are going to refocus on banking. Today, I'd like to cover our COVID response, how it is impacting the business and how we're going to move forward and our priorities. Gary will pick up the results with a particular focus on asset quality and provisioning. But upfront, I'd like to say that we have used our models, experience and judgments to determine our credit provisions. So if we start with COVID, our response has been guided by 4 goals: protect our people, support our customers, keep essential service running and maintain a strong balance sheet. As a big employer with a large customer base, we move quickly to protect both our people and customers. This included implementing industrial hygiene and cleaning, temperature checking and social distancing measures. Over 90% of our branches have remained open, with new screens installed to protect our people. In our major sites, there's been a lot less people. One of the big wins has been our ability to scale up remote working from home. And that's seen 22,000 people in Australia now working from home. The IT team has made this possible with the recent rollout in the last 6 months of Microsoft 365 and its collaboration tools as well as some upgrade to capacity in our networks. The major upgrades we've done to our IT infrastructure in the last couple of years have really set us in good place because they've handled the extra volume and the stability has been very good. Our long-term success depends on as many customers, both consumers and business, going back to work and getting back into employment. We've helped over 100,000 customers in our consumer and business divisions through deferring loan repayments. To do this, we've had to move a lot of people around the organization from branches to operations and into call centers, and I thank them for that. Deferring loan repayments has been the single biggest thing we have done to help our customers during this time. Now if I turn to the results, it was a tough 6 months and a disappointing result. Net profit at $1.2 billion was down by 2/3. A large part of the reduction reflected higher notable items, including the $1.1 billion for AUSTRAC matters, and this included an allowance for $900 million for penalties. At this point, we haven't been able to reach an agreement and mediation is continuing. The higher impairment charge was the other significant driver of the lower profit. Estimated COVID impacts under the new accounting standards, we added $1.6 billion to provisions in the half, and that took our total credit impairment provision on the balance sheet to $5.8 billion. This -- the charge in the half is around 62 basis points of loans, and that is approaching the levels we saw in the GFC. On the bottom half of the table is the result, excluding notable items. And on this basis, cash earnings were 8% below -- or sorry, core earnings were 8% below, and most of this was related to our Wealth business and Insurance. There were also a few asset write-downs. The sharp rise in impairments, 4.9x last half to $2.2 billion, was the other piece that drove the lower cash earnings down 42%. A bright spot in the half was margin management. Despite the increased -- increase in liquid assets and lower interest rates, margins were well managed, and we held them over the half and over the year. On dividends, after taking into account APRA's guidance, the Board has deferred the decision on the interim dividend, and we won't be paying a dividend on the 20th of June. We recognize this impact on shareholders, particularly our retail shareholders. However, this is the prudent decision in the current uncertain environment. We'll continue to review dividend outcomes over the course of the remainder of the year. Turning to divisions. Each division has a slightly different story, but trends are similar. In Consumer, the banking business performed well, with margin management a standout. We also improved mortgage originations through the half, dealing with some of the issues we had late in the period last year. However, the COVID impact is having a further impact on our processing times recently. Bushfires and storms also saw higher insurance claims in the Consumer Bank, and this was a large headwind along with the costs of stopping one of our group life insurance contracts. In Business, low interest rates had an impact on margins. Platforms also continued to be a headwind, particularly from lower margins, and while impairments were also up off the back of a small rise in stressed assets late in the half and COVID-related overlays. In WIB, margins were also down mainly in deposits related to the lower interest rates. Markets income was solid with FX doing well in a more volatile operating environment. Impairments were also higher from a small number of impaired assets and also COVID overlays. NZ continued to deliver good balance sheet growth. But lower fee income, higher regulatory costs and a lift in impairments saw the overall result fall. And you may recall, the group business units includes Treasury and the Advice businesses we exited. The results here reflect more remediation in Advice and the AUSTRAC provisions. On Treasury, they had an excellent half. They're well positioned for the lower rates, and you can see that in the revenue they generated in the half. If we turn to the balance sheet, the balance sheet strengthened over the course of the half as we boosted both capital and liquidity. Our CET1 ratio rose to 10.8% as we raised $2.8 billion early in the half, and that offset some of the notable items and capital overlays. We also raised additional Tier 2 capital, and that took our total regulatory capital to 16%. On an international basis, we have very healthy ratios at 16% for Common Equity Tier 1 and 23% for total regulatory capital. All our funding and liquidity ratios also improved over the half, and this reflects our strong franchise with good growth in deposits across all segments, but particularly in the Institutional Bank. With little new lending, we've directed this funding to boost liquid assets and our high-quality liquid assets grew by $31 billion this half. It's also worth noting that we haven't accessed the RBA's term funding facility this half. And our minimum access there is $18 billion, which more than covers our wholesale maturities -- long-term wholesale maturities in the second half. So with such high levels of liquid assets, I see our balance sheet is really well positioned to support lending demand as we go forward. So on priorities. Since taking on the CEO role, I've spent time agreeing priorities with the bank -- or with the Board. While COVID requires a large near-term focus, we've also not taken our eye off the future. First is we need to grow our customer franchise by being best in service. Our priority, therefore, remains to improve our service and simplify our business. We also need highly engaged people to deliver great service. Second is performance disciplines. This is where we've spent much of our early time focusing on. It includes a renewed focus on banking and embedding a new operating approach. Third is digital. We've continued to roll out the Customer Service Hub this half. We've done further work on our St. George digital application for mortgages. And we're also working on a new app for the Westpac brand for the second half. We're also ready for Open Banking when it starts in July. Finally, with the events last year, it is clear we need to do more on risk management, and I'm determined to significantly improve our risk culture and capability. We're updating our culture, governance and accountability plans. There will be no compromise on this front, and we'll make the necessary changes that we need to, to improve here. We've also made significant improvements in financial crime capabilities since November, and we're on track to deliver the 200 extra resources that we committed to in the response plan. To execute these priorities, we're embedding a new operating approach. Another of my early priorities has been to review the portfolio to be very clear about where we can add value. If we look back at our performance over recent years, it's been driven by our banking businesses. Other businesses have not performed to the level of the banking businesses. These businesses have also absorbed a significant amount of management time. As a result, we will focus where we have scale and competitive advantage, and that's our banking businesses. Today, we're setting -- we're announcing that we're setting up a new specialist division, which will include insurance, super, platforms and auto finance. To put this in perspective, the business has generated around 10% of group revenue last year, and they absorbed around $4 billion of regulatory capital. We're also delighted that Jason Yetton rejoins us today to lead these businesses and to lead the strategic review. Jason has experience across both banking and wealth, and therefore, he's well positioned to help us here. We're working through the details, and we'll have more to say in the future, including the full P&L by the end of the year. These 2 initiatives set us up well for the future with a simpler and clearer structure, which seeks to deliver improved performance. And a big part of that will be our line of business focus. So in addition to the Specialist Businesses, we're going to drive greater clarity on end-to-end accountabilities and clearer authorities through lines of business. And so as I said, these 2 initiatives will set us up for the future with a simpler and clearer structure, which seeks to deliver improved performance over time. Let me hand to Gary now.

Thank you, Peter. And let me add my thanks for those logging in. Peter has talked about COVID in his priorities. I'll focus on the result, spending a bit more time on provisioning and capital. When I look at the performance, there's 3 things I'd like to -- 3 points I'd like to make. The first, as Peter said, this is a disappointing result as we absorbed high notable items and increased impairment charges. Second, we managed margins well, and we were disciplined about productivity. But the environment is tougher, and this is reflected in our performance. Finally, I'm really pleased with the strength of our balance sheet and our additional provisions improved our cover. So moving to the numbers. Our result is 72% down and, excluding notable items, is 42% lower. Net interest income is up from modest balance sheet growth while margin was flat. Noninterest income was down, including wealth items that we highlighted last year, together with increased insurance claims. Costs were higher as we increased our spend on risk management and had some asset write-downs. However, productivity more than offset BAU growth. Impairments rose sharply on the back of COVID-19. This next slide pulls out some of the larger and more volatile items in the results to help you understand performance. Notable items are in the top left and they impacted our result by just under $1.3 billion. The largest item within here is AUSTRAC, which includes a provision for potential penalty, together with other items, including our response plan that we announced last November. Remediation this period included some amounts for business lending together with 2 other wealth items. We have made good progress on remediation through consumer, New Zealand and salaried advice. The table on the top right details the infrequent and volatile items, which were negative this half. I'll now go through some of the P&L drivers. As we mentioned, balance sheet growth was relatively modest with Australian loan balances down slightly and New Zealand up. One of the trends this period has been the lift in business and corporate balances during March as they've sought to increase their liquidity. On margin, there is a lot of moving parts, but we've managed margin well at 2.13%. As I look at the components, loan spreads are up 4 basis points, reflecting pricing decisions at the end of last year partly offset by compression from competition and switching. Deposit spreads fell 5 basis points from further reductions in interest rates. We now have $160 billion at 25 basis points or less, and this is up from $95 billion at the end of last year. The low rates have also reduced our returns on capital and liquids. This will continue to flow through in coming halves as higher-yielding maturities are replaced at lower rates. As Peter said, Treasury had a very good half. They were well positioned as rates fell during March. So overall, I'm happy with margin at 2.13%, although I do expect we'll -- that margin will continue to be impacted by lower rates and our decision to hold more liquids. Noninterest income is down 18%, excluding notables, with the main drivers being Wealth and Insurance. As I mentioned, Wealth income includes the combination of legislative changes and platform margins, which we called out at the full year. Lower interest rates also impacted Wealth. The insurance contribution was impacted by claims of $140 million from bushfires and storms together with $97 million from the write-off of deferred acquisition costs. Most of the 5% decline in fee income reflects lower levels of customer activity together with the elimination of some fees. Our trading income fell slightly, mostly from the higher charge for derivative valuation adjustments. Notable items had a large impact on expenses this half. And excluding these, costs are up 3%. As we further strengthened our risk management, we increased spend by $98 million, and we expect this to continue. We have enhanced our financial crime program, and we're investing in risk capability across the group. As I said, we've remained disciplined on productivity, with savings of $188 million more than offsetting the increases in BAU spend and investment. If I turn to credit quality, this is an important topic this half. We have a diversified and well-performing portfolio. Stressed exposures are up slightly with a handful of larger names being downgraded. 90-day mortgage delinquencies were up 5 basis points, while 30-day delinquencies are also higher. In both instances, this is due to some deterioration, including bushfire-related hardships. Unsecured delinquencies are also higher, including further contraction in the portfolio. So while there's little movement in the portfolio, all of the interest is on the outlook, and we've considered this as we've set our provisions. As you know, impairment charges have increased significantly on the back of COVID. There's a few large items that increased individual provisions. Write-offs and write-backs are at similar levels to prior periods, with some seasonality in write-offs related to the unsecured portfolio. The $1.6 billion of COVID provision is significant. David, Steven and I have spent a lot of time on this, and we want to share -- I want to share some of our thinking with you. As I mentioned, it's early days. And while the crisis has had little impact on our portfolio, there's a lot of uncertainty in the outlook. At this stage, we just don't know how long -- how severe or long the crisis will be, though we do expect significant government stimulus measures to be effective. There's a wide range of views about the impact, in particular, how this will ultimately impact customers and businesses. But given this uncertainty, we've used various scenarios, tested our models, we've drawn on experience across the company and we've applied judgment to arrive at our provision outcomes. These changes increased our provision to $5.8 billion and has lifted our coverage ratios. Our individually assessed provisions to impaired assets are very well covered at 50%, while collectively assessed provisions to credit risk-weighted assets now sits at 140 basis points. Looking at the drivers of the impairment provision. Given the outlook, we took a prudent approach to provisioning. As I mentioned, the $1.6 billion reflects changes to our base case economic outlook, we've applied a greater weight to the downside scenario and we've included a sector overlay. Looking at those components. The base case economic outlook is for a V-shaped downturn with considerable shock to the economy in 2020 followed by a recovery. This does consider the impact of the government stimulus. On economics, we've modeled unemployment rising to 9% and then recovering back to 7% by the end of 2020. GDP is forecast to contract by 5% in the year to December from a sharp contraction in the June quarter. Our residential property prices are forecast to decline by 15% over 2020. So applying this scenario to our model sees our base expected credit loss, or ECL, rise $1.7 billion to $4.5 billion. Our downside scenario assumes similar immediate economic deterioration but a prolonged recovery. And under this scenario, ECL is $7.9 billion. So given the uncertainty of outlook, we've taken in a prudent approach and increased the weight to the downside, which now sits at 40%. And then in addition to the modeled outcome, we've applied a further $446 million overlay, and this reflects detailed analysis and judgment as we've looked across the primary and secondary impacts of COVID, including various sectors and consumers. As Peter mentioned, in response to COVID, packages have been the most important thing we've done for customers. We've provided relief for consumers and business with interest and repayment deferrals, together with bespoke support for the next 3 to 6 months. We have received significant applications. And as of Friday, around 9% of mortgage customers are seeking support. The mix of these customers is broadly consistent with our overall portfolio. Business customers taking up deferral packages are more concentrated in those industries most likely to be impacted by COVID-19. There's more detail in our IDP pack. On capital, we enter this period of uncertainty having built strong ratios, with our CET1 at 10.81%. Completing the capital raise last year added 62 basis points to CET1 ratio, more than offsetting model changes, overlays and notable items. Our organic capital generation is slightly lower given the lower earnings. We've also highlighted some sensitivity of capital to risk-weighted asset migration on this slide. I'd say we have a strong capital ratio. And while there could be more headwinds, we're well funded and we have options available to release some capital. We've outlined some considerations for the rest of 2020. And given the uncertainty in the environment, we can see a number of headwinds in the immediate outlook. Low interest rates and low activity levels will have the largest impact, while we also expect further pressure on wealth income. We're committed to productivity disciplines. However, we will continue to support customers through this period, and this is likely to add to cost. Looking at impairment charges and asset quality, we may see further stress, and we'll keep you updated on that. I'll now hand back to Peter.

Well, thanks, Gary. And let me sum up. We are in the middle of a once-in-a-lifetime event. The impacts have been rapid and, in many cases, severe. And our priorities remain to protect our people and help our customers. For Westpac, we have a big agenda: we need to navigate COVID-19, we need to establish the Specialist Businesses and we need to embed lines of business to drive performance. On the economy, COVID is unlike other downturns and that the economy is effectively being held back. One of the characteristics of previous recessions is that it's often not clear how to get out and the economy needs to be restarted. Australia is not in that position. As we progressively emerge from the shutdown, economic activity will come back. Finally, as Gary indicated, we do have some financial headwinds in front of us. But our balance sheet is well positioned across capital, funding and liquidity to navigate the period ahead. Thank you. And we'd be pleased to take your questions.

Thanks, Peter. Now this is a joint market and media conference today. And so we'll take the first questions of analysts, and we'll take some questions from the media. And what I'll do is I'll announce the name first, and then the line will be opened up for those to answer those questions. So I'll take the first question from Jon Mott, please.

Jon Mott here. Just a quick -- 2 questions, if I could. The first one on the Specialist Businesses, which you've just announced. You said it's 10% of group revenue. Can you give us an idea, in a non-bushfire, more, if you want to say, normal year, what the ROE on those businesses were or what percentage of cash profit they generated? And secondly, on Slide 35, you give us the loans in Australia, and that fell 3.2% in the month of April, so a bit more into this next half. Can you just elaborate? Was that just some of the drawdowns, which happened in March being repaid? Or is loan growth collapsing in April?

So Jon, on Specialist Business units, we're working that through. So that's something we'll give to you in the full year results because the other important piece is costs, and there's a lot of shared costs within the group. And that's one of the reasons that I've also called out that we need to reset the cost base for a simpler business in time. Sorry, Slide 35 was it, Jon?

In business applications, but also credit growth goes backwards.

Yes. I think -- so we're seeing different things in the loan book in April. So if I just go through the segments, starting in the Institutional Bank, we've seen both demand for new lending is -- corporate shore up their liquidity position. We have seen some drawdowns of unused limits. If we look in top end of Business Bank, there's been a little bit of activity in terms of new lending, but most of the activity has been people actually working with us on how to structure their payments. And then in mortgages and small business, most of the activity has actually been in delaying or deferring payments. So we have had some growth in new lending in April, but it certainly is coming off.

And one of your peers has called out that business credit growth, they expect to be up 13% to 16% this year as a result of drawdowns and people needing cash flow help. What are your expectations? Are you expecting that this will be an ongoing increase in business credit growth? Or is that just a one-off that you saw around drawdowns at the end of the period?

It's hard to tell, Jon. So I think there's going to be 2 phases. The first phase is, I think, businesses are remaining cautious as they work through how they navigate the period where we've got this social distancing impact. So it's really about just shoring up the position. We've given you a bit of a line of sight on the packages to give you a sense. So in one sense, that will mean there's less paydown in the business book. In relation to drawdowns, I think they'll be the combined impact of people wanting to have enough liquidity around them, particularly the top end. And then we're going to have to see how we drive economic growth at the back end. So I think growth in the end will be about economic activity, and that will depend on what opportunities people see and how government policy supports that growth.

Okay. I'll take a call from Jarrod Martin, please.

Gary, no surprise, a couple of questions around Slides 19 and 21. And thanks for the disclosure. So Slide 21, you point out that you've got a $12 billion buffer above the 8% sort of requirement, with unquestionably strong being at 10.5%, and then the 8% level. To what level do you think that, as an executive and as a Board, you're happy to actually draw into that buffer? Obviously, you probably don't want to come in at 8.01%. And we've seen peers talk about sort of 9% being their level. So the first question, at what sort of level are you willing to actually draw into that? And then secondly, thanks for the disclosure around the credit risk-weighted asset sensitivity of 105 to 180 basis points, acknowledging that stress tests are different for provision calculations versus capital, but how does the base case and the prolonged downturn sort of align with what you've got on Slide 19 in terms of your base and downside? Are they equivalent? And so we can sort of get a view and take a view on what a mid-case or what a scenario is in terms of RWA inflation.

Well, Jarrod, I might take the first question on capital. So I think we should be prepared to use the buffer. So we've built capital to 10.5%. And the reason we did that was unquestionably strong so the banking system could borrow money offshore through the cycle. Now the good news is, I think, our liquidity is pretty well positioned certainly for this bank. So we have flexibility on capital. To what level will depend on what type of event you face. So I certainly see that we should let the ratio come down. And then your real question becomes how do you rebuild it. So you can rebuild it through organic growth, so as profitability comes back; you can rebuild it through raising capital; or you can rebuild it through releasing capital from the business. And I know there's a sort of a big focus on where will you go to. The answer to that actually depends on the extent of the downturn. So the way we've thought about it is we've got a good starting point at 10.8%. There is a lot of less activity and more people out of employment at the moment, but we're unprecedented in terms of the government stimulus. We haven't seen this level of government stimulus, and we've got to let it play through. And so we'll get a better line of sight of what's going on in the period ahead. So I'm not going to say there is a level at which we wouldn't be prepared to go, that depends on what you're facing and then how you think about building out of it. But I would say that we built the buffers over the last decade, and we should use them.

I'll take the second part of your question there, Jarrod. We did include in the pack some sensitivity just to give you a guide of how to think about this. As I mentioned in my presentation, we're at very early days. And we're trying to project out 2 years. So it's very uncertain. But what we have done is looked at different scenarios and how they might play out. This is not going to be a linear shift in assets or risk-weighted assets. And so we've looked within the portfolio and just tested different sectors, different loans, different categories, and that's why we've outlined this as a range. And we've said at the low end -- at the base case end, there's a 3% to 5% potential shift and the capital impact of that might be 105 basis points. And then we've given you a downside with -- and similarly with a range. So I would just use it as a range, use it as guide. You could say that they're broadly consistent with the scenarios that we've outlined as we've set our provision. But it really depends on how this crisis plays out through the economy.

Jarrod, I'd just add, there's plenty of information in the Pillar 3 as well. And regulatory expected loss is another lens that we certainly use to look at potential losses and there's lots of PD and LGD information in the Pillar 3 as well.

I'll take a question from Andrew Lyons, please.

Just you've provided some new really helpful disclosures around the rate composition of your deposit base on Slide 14. Just with this in mind, can you perhaps give us a feel for the 2H '20 NIM headwind from low rates from the perspective of, I guess, both the deposits captured by the replicating portfolio as well as the nonreplicated deposits? And then just the second question, Gary, on Slide 21, you mentioned you have some options available to releasing capital. Can you just perhaps provide a bit more detail on both those fronts?

Well, just on -- just before Gary comment specifically, Andrew. On the margin, it's not a normal half where an exit margin really gives you a lot of guidance. And the reason that is, is we're prepared to run a lot of liquid assets, a lot of liquidity at the moment. And I called out the $31 billion increase in liquids. So that, by itself, just the maths of that will pull the margin down. If we look at BBSW, which is a very important funding input, you're probably going to settle pretty low. The Exchange Settlement account with the Reserve Bank is paying 10 basis points, 25 basis points for the long end of the curve, probably somewhere between those. So that will be a positive and a negative for us, if you like. And then you've just got your normal pieces. I think the chart itself gives you a pretty good feel for the impact on the tractor and whatnot. And then we'll update you on other margin components in the future.

I think that's right, Andrew. I'd say at the full year, we'll probably be describing the margin outcome as lots of moving parts. We've sought to give you the component parts within there. On the second part of your question in terms of capital opportunities, obviously, a strategic review of our specialist businesses may provide some opportunity for capital release as well as internally continuing to focus on how we use and allocate capital across the company. We do expect to continue to organically build capital over time as well. And so it is very important to understand that the capital sensitivity we've shown in terms of risk-weighted asset migration is over a 2-year period. So we think we've got options, and we think we've got some time.

Question from Victor German, please.

I was actually hoping to follow up on Andrew's question in terms of margin impact. I completely appreciate, Peter, what you were saying in terms of liquids and all other moving parts. But liquids don't actually have much of an impact on P&L, it might have an impact on margins. I guess your peers provided impact specifically related to lower interest rate, which is being offset by repricing. Are you able to give us a similar number to what peers have provided? And also on the tractor, are you able to tell us what the current rate is? So that's on interest rates. And then also, just a related question on that subject relating to New Zealand. I noticed a couple of economists, including yours, is now forecasting negative interest rate in New Zealand. Can you just walk us through sort of the mechanics of how that potentially plays out in terms of P&L? Obviously, you don't have the biggest exposure in New Zealand, but still fairly sizable, just interested in how it works both from a system perspective and P&L perspective.

Yes, well, why don't I take that one, and Gary, you do the margin one. On -- so the best way to think about negative rates, I think, is that's the wholesale market. So I haven't seen -- well, there's very few incidents around the world of consumer and business deposit rates as it might be actually going negative. It's more a wholesale phenomenon. And therefore, that gives you the answer to the question as well as your systems where it's mainly in your wholesale systems, your treasury systems, your WIB systems, that need to accommodate negative yield curve. So that's something we've done work on. You can debate the merits of negative rates and whatnot, but it's more a wholesale funding phenomenon.

Just a little bit more color on margins, Victor. We have pointed out in the slide the deposits under 25 basis points, and you can see those. While they've been impacted by decreasing rates in the period, you can take that as a guide for deposit rates at that price from this point on. The tractor rate, as you can see, will continue to come down over time. It sort of depends how long interest rates stay low, but the current expectation is that they will stay low for some time. On the other side, we do -- we are holding extra liquids and we need to continue to pursue how we can improve margin on liquids. We are getting a benefit, as Peter said, from BBSW, and some of the wholesale funding spreads are positioning us better for margin. But I'd say, overall, we expect pressure on -- downward pressure on margins.

I'm just a little bit surprised, Gary, that you -- in the past, you've been probably one of the best in terms of disclosure of this particular issue. I'm just a little bit surprised why you don't want to give us just the number in terms of the total impact of tractor, low interest rates and also from repricing.

Victor, it's just because there's lots of moving parts. They're a big part of it. Obviously, I think the disclosures are good. You can -- it's all there. But there's more moving parts than usual at the moment. So we haven't -- we've provided indications in the second half. We're not providing anything specific.

I'll take a question from Brian Johnson, please.

Can you hear me?

Yes, Brian.

Two questions, if I may. Just when we have a look at that Slide 14, we can actually see that over the last 6 months, the balance of these, what I would presume, interest rate-sensitive deposits has gone from $95 billion to $160 billion. Would I be right in suspecting that means that you get quite a big sump in the next half on the NIM to the extent that you're unhedged and thereafter, the negative impact is more of a phase? And then I have a second question, if I may.

Yes, well, that's right. You've got -- the deposit hedging, Brian, you're right, is against all deposits. So to the extent that they're not hedged through the tractor, we manage the asset and liability spreads. So what you've got to actually model out or decide on is what are you going to do with loans, loan spreads. So that's the right way to think about it.

Okay. So absent repricing, we get a big hit and then a fading impact going forward, absent repricing on the loan side?

As we said, Brian, you've also got to consider the BBSW position, long-term wholesale costs as well will be a little bit different with access to the term funding facility. And then I will say liquids again because I think Victor is right, they don't impact your P&L, but they'll have a pretty big impact on margins because we're holding quite a bit of liquidity at the moment.

Yes. And Peter, just on that, Victor did ask what was the tractor rate. Could you share that with us?

You got it? We'll have a look for it.

Yes.

Okay. And then the second question, if I may. Just on your capital intensity, your advanced IRB housing risk weighting, and I apologize I haven't been able to work out exactly what it is in this half, but it starts up well below the peers. Is the -- if we were to move towards APRA's Basel IV where they bring in a 75% capital floor, that would actually create more asset -- risk-weighted asset uplift over and above what you've disclosed in the slides. Is that correct?

Brian, I just think -- that's right in terms of where we start. But I'd also encourage you to have a look at the business book as well. So the answer to your 70% question depends on the whole portfolio and have a look at the relative points on business. So I would love to not be having this conversation about what the final capital rules be, but it looks like it's delayed a little bit further. But I'd encourage you to have a look at both the business and the mortgage book.

So Peter, can you just explain what that actually means?

Yes. You got to look at average risk-weighted density across both books. I think we're a little bit higher on business and a little bit lower on mortgages.

I'll take a question from Matthew Wilson, please.

Firstly, on provisions. ANZ, NAB and yourself are now within a very narrow band of around 8 basis points of gross loans and acceptances. You're all there at 72 basis points. That's unusual that it's saying narrow. To what extent has APRA and the RBA been involved in helping you determine this COVID-19 provision? And then secondly, obviously, the sale of the Specialist Businesses would release about 90 basis points of Core Equity Tier 1. That's very valuable given the credit risk migration. How do you balance that price versus capital release equation because there are some businesses there that have been on the market for a while and are a bit challenged?

Well, on credit provisioning, that's a decision for management and the Board, and that's how we made that decision, Matt. On the Specialist Business units, so what we said is we're doing a strategic review on those businesses. So we haven't made any decisions. So that's a bit of a hypothetical question at this point.

Okay. And just that includes Panorama?

That's in the platforms business, Matt.

We turn to Richard Wiles, please.

I've got a couple of questions, if I could, please. The first relates to capital and the second relates to costs. I'll start with the capital. You flagged that the high risk-weighted density could reduce the common equity ratio by 105 basis points in the base case. Can you tell us how much of that relates to housing and how much relates to business lending? Is it essentially split 50-50? And in the base case, you've assumed housing arrears of 2x the current levels. What would happen to the housing arrears if the 9% of customers who've asked for loan deferral went into arrears at the end of that 6-month period?

Richard, listen, I get the request for more detail. But I'll just say, these models are very complex. You need to look at both migrations, but you got to look at it by customer and then got to look at it over time. So we're not -- we've given you a lot of information between that and the Pillar 3 results. So -- and from here, what we'll do is -- give information on portfolio performance is what we can. So we're going to stick to what's in the pack.

Okay. So that's fine, Peter. The 2x arrears per housing in current levels sounds like a very low level given how strong the housing book has been in recent years. If those customers who have asked the deferral would go into arrears, would it stay below 2x current levels?

It depends -- I mean there's 2 -- and I'll come back -- our base forecast is pretty aligned to our Westpac economics forecast. It assumes a very sharp contraction in economic activity through the next quarter and then a rebound towards the end of the year as you got less social distancing. And so -- and the other big piece is the government stimulus, $130 billion on JobKeeper and probably over $300 billion in stimulus just more broadly, and that's factored into those forecasts. So that's the one where you're going to have to reflect. We think that's a fair estimate at this point in time because we are in unprecedented times, and the government has done a great job with that stimulus. But that's really the thing to reflect on.

Okay. And if I could ask a question on costs, please. In your February update, you indicated that costs would be higher for the full year than you previously expected. At the full year result in '19, you said you thought costs would be up 1% this year. And in February, you said you would provide a further update at the first half result. So do you have an update on what you expect cost growth would be for the full year this year?

I'll make a few comments on that, Richard, if I can. We have called out in the presentation that we will continue to increase our spending on risk management across the company. We've also called out that at times like this, it's really important to maintain operations and support our customers and support our people. So both of those will lead to increased costs during the next 6 months. Underneath, we will maintain our focus on productivity as appropriate. But we want to make sure that we're running the company well to support the environment and to continue to strengthen risk management.

So is it fair to say that you started the year expecting 1% cost growth? In February, your expectations had moved to a higher level of cost growth, and they've stepped up again since February?

I think at February, we were including the continued increased spend on risk management across the company and other activities. That was pre-COVID. With the onset of COVID, we're seeing the need to step in and support customers, which is the right thing to do. So we will maintain our focus on that. Again, we'll continue to look for sensible productivity initiatives to continue throughout the year.

Richard, I'd just add. Last half, we spoke about increased risk and compliance spend. We're still going to do that. That's a priority for me. We spoke about amortization increasing, that's still going to happen. We spoke about $500 million of productivity. That's the piece that Gary said is going to slow down. So in part, that's COVID-related where we stopped restructuring at this point. And then we've got just our normal business. There probably will be a need to add some credit -- further credit expertise given what we're facing into, and that's the only new thing since the quarter, if you like.

I'll take a question from Brendan Sproules, please.

It's Brendan Sproules from Citigroup. I just got a couple of questions on capital consumption. So firstly, given what you were saying earlier to Jon Mott's question around business lending growth, in particular, what is -- what are you expecting in terms of risk-weighted asset consumption? I know it's very low in the first half. I think it was only 1 basis point of capital. And my second question relates to the decision to defer the dividend. What is the Board's sort of looking for here when determining whether a dividend will be paid or whether it will be canceled? Are you looking for the CET1 to rise to a certain level? Obviously, in the next 6 months, given the front-ending of government stimulus and also the payment holidays, you're unlikely to have a really broad view of credit quality sort of by the end of the year. So a few comments on that would be appreciated.

Yes. So -- you might add on this. But in -- I mean the big demand on the balance sheet is in the Institutional Bank. A lot of it is drawing down existing limits. So hopefully, it won't have too much of an impact on risk weights. And then the growth will really depend on new facilities, if you like. And I don't -- I think it will be modest. I don't think it will be as big as some of the other numbers that I've heard in the market. On dividends, you're right, we have deferred the decision. The background behind that was we accepted APRA's guidance that the industry should conserve capital at this point given the uncertainty in the outlook. We will monitor the situation. We will look at our book, and the performance of the credit book is really a key piece to look at. And you're right, it is a bit unclear about when we'll get good line of sight on that. If the economy comes back on a quicker path, then maybe a decision could be earlier. If it comes back on a slow path, then the last time we'd look at it will be as part of the full year results.

I'll take a question from Andrew Triggs, please.

Can I just perhaps get you to make some more comments about the mortgage processing issues that Westpac is having given COVID impact and what ways in which you're dealing with that? Is that just throwing more cost or head count at the problem? And then just perhaps -- just a follow-up on the asset quality. We saw deterioration across new impaireds, watch list and substandard, et cetera, noted a few large single-name impacts there. Just some comments on, I guess, more generally, where the weakness is coming from. It appears to be relatively broad-based.

Yes. On the mortgage operational issues, it is operations, and we don't have as many people processing operational matters at the moment. So you're right, the way to fix it is more people in the short term, and then in the long term, it's automation. So we've got to do both of those. It's one of our top priorities, to get that back into service level. We're probably a couple of weeks away from getting there, but it's a top priority. Sorry, what -- Andrew, what was your second question?

Asset.

Just on the broader asset quality, indicators for asset quality, new impaired rose, watch list and substandard, et cetera?

There's a couple of names in New Zealand, a couple of names in WIB and a couple of names in the Business Bank. So whether you call that broad-based or not, I'll leave that to you to decide. But they're all sort of different reasons.

[Operator Instructions] I'll take a question from Brett Le Mesurier, please.

Your Pillar 3 indicates that you put an extra $100 million of capital into your life and general insurance businesses in the past 6 months. Is that correct?

We would have -- I don't know the exact amount, Brett. But certainly, with the storms that we saw in general insurance, I believe we did put some capital into general insurance.

Can you tell me why you're still showing substantial goodwill for your life and general insurance funds management businesses? That's nearly $1 billion.

Because the business supports that goodwill.

In spite of the fact the profit doesn't support the -- it doesn't matter, I'll just move on.

You've got to look at profit over the longer term, Brett.

Yes, sure. You mean the profit doesn't have -- it doesn't matter. The base case in your Common Equity Tier 1 shows 105 basis points down. Is that roughly equivalent to an average of 1 notch down for -- across the board on your credit quality?

We haven't looked at it like that. So it's not possible for me to sort of explain it that way. We've done it bottom-up and looked at the models, the base case, and then the judgment in particular is where we've picked up things that -- the sector overlays Gary spoke to in his results is where we picked up the areas that we've been particularly focused on.

But when you do your PDs and your LGDs, it necessarily implies something about notches, doesn't it? So you didn't then go back and take a look at that?

I understand you can look at an outcome in that way, but I'm not sure that helps you manage your credit portfolio.

I'll take a question from Ed Henning, please.

Just can you just touch a little bit more on what you're seeing around Treasury and Markets at the moment in April, please?

Gary, do you want to take that?

Yes. As I mentioned, Treasury had a great month in March as they were well positioned as rates declined. Some of that flowed into April. But as you know, rates are -- low rates have stabilized somewhat. So that would -- they're not repeating the same performance in April.

And I'd just say the -- particularly the Treasury business is managing the balance sheet. Interest rates are very important in managing the balance sheet. So with an interest rate curve that's going to settle around 25 basis points, unless it moves around, it's going to be a harder 6 months for Treasury, I think.

Okay. We're going to take a question from the journalists now. Joyce Moullakis from The Australian, please.

I just wanted a little bit of color, if I could, just around the mediation process with AUSTRAC and where that's up to, what some of the outstanding issues may be as that sort of comes to the pointy end of deliberations there. But also I wanted to ask a second question around the specialized business (sic) [ Specialist Business ] division and the review that's going on there. Given the life insurance businesses potentially being on the block for a little while already, can you sort of give us a bit of a time line as to whether there's a -- is there sort of a time frame around specific bits within that business and how you go about that review?

So on AUSTRAC, it is a matter that's ongoing, Joyce, so I can't add any sort of detail, if you like, because it's discussions between us and AUSTRAC. On the Specialist Business, what we are doing today is really focusing each of the executives on the portfolio that I need them to focus on. So in Consumer division, it's really about -- for Gail and David, about focusing on the banking businesses. For Jason, who we're pleased is rejoining us, it's about managing Specialist. And Jason starts pretty much immediately and his -- he'll lead that business as we run it, but he also lead the strategic reviews. We haven't made any decisions yet on timing or what the next steps are. That will come down the track.

So it will be a pretty lengthy process. Is it sort of a 12-, 18-month process, given where we are as well the COVID-19 crisis?

Joyce, we haven't set any time line. So I'm not going to -- so it's going to be a quick or a long process. We've got to manage a number of things through the process, and we will do that.

I'll take a question from Peter Ryan from ABC.

Well, just I wanted to find out about what Westpac's view was on banks getting access to redraw facilities and loans. We see that ME Bank's caught a bit of criticism over accessing redraws there. Want to find out whether or not Westpac had any plans to utilize the fine print and do that as well?

It hasn't even crossed my mind, Peter, and it's not something we'll be doing.

And just on the basis of ME Bank, do you think that is good behavior or ethical behavior that they're doing that?

Peter, I haven't actually looked at it, to tell you the truth. I've seen the press reports, but I don't know what's happened in detail. But as I said, it's not something we'll be doing.

I'll take a question from James Frost, please, from The Financial Review.

Peter, I think you mentioned earlier, just when looking at the crisis, it's different in that the economy is being held back. And once the brakes are off, things will be different, there'll be a stronger recovery. Just wondering if you could fill us in about your thoughts about the best way to do that and an optimum time line for seeing the economy recover. And just secondly, on the dividend, you're talking about it's very difficult to get a good line of sight on that. Potentially, we might have to wait until the full year result, which I guess is in November or certainly late in the year. Is there any risk for the first half dividend or the decision you'd come to is that there is no first half dividend?

So James, on the -- so on the pathway out, really, the government is in the best position. They've got the best medical advice. They've got good view on the economy and we'll be guided by the government on that. The role of this bank is to be set up to help customers at that point. So that's what I'm focused on. And we will follow the advice of the relevant governance. On the dividend, the decision at this point is to defer the decision. So we haven't made any other decisions other than that.

So within the range of outcomes, it's possible that there might not be a first half dividend or it might be a full dividend. Is that as broad as it could be?

We're going to look at the first half dividend down the track when we got more certainty. So that's what we've decided to do today. I'm not going to get into the -- which angles or which options that could be. We're going to look at it when we have more insight.

[Operator Instructions] I'll take another question from the journos. I'll take one from Julian Bajkowski, please.

Just wondering on AUSTRAC and RBA Promontory -- well, sorry, Promontory Group owned by RBA. Are they investigating any of their own software? Is this -- because it's an interesting situation of them being owned by RBA?

I think the issue you're getting there -- getting to there is conflicts management. And we've been very focused, as we always are, on that issue in Promontory being involved. So I'm comfortable we've managed the conflicts appropriately.

Will they be looking at any of their own product though?

In terms of detailed reviews of IT product, that's not really something that we're looking at through those reviews.

And just on ATMs, there was a push before to kind of consolidate there, and there's statements and views expressed. How does it look now in the context of COVID because -- I mean if people were using less cash before, it's positive they're doing those now.

Yes. Well, I think ATMs, if you look at payment channels more broadly, there's, yes, less use of checks and cash and more digital channels. That will be a trend that continues. I think it's an interesting question about whether or not cash usage will step down again off the back of what people have experienced through COVID. There's still lots of areas in the economy that use cash. In the end, we'll see what behavior looks like down the track.

I'll take a question from Emily Cadman, please.

Emily Cadman from Bloomberg News. As this crisis starts to unfold, the bank is obviously going to have to make some very difficult decisions about which customers' loans, both mortgages and businesses, are viable in the near future. What's the bank's thinking about how you're going to handle that? And does it owe anything to the experience with the Royal Commission?

Well, I think in the -- the first thing is the bank is well positioned to support the economy in lend. So that's an important aspect of the go-forward position that we'll be doing that. And that helps the economy grow forward, if you like. In relation to customers who end up with a position that they can't go back in the business, it's customer-by-customer that we'll look at. You've got to look at the individual situations of customers and businesses, and we'll have to work it through that way. We do expect there'll be more people working on those type of issues moving forward.

Now Australia banks have been in a very lucky position that they haven't had to contend with a recession for a generation. What are you having to do to prepare your teams, whether it's hiring new people or changing procedures, to ready yourself to get through this one?

Well, I think we've done a lot of -- if you think about preparing, we've prepared the balance sheet through higher capital, and liquidity is in good shape. So they're the big levers. And then you're right, over time, credit management will become a bigger issue. Hopefully, our economist, as an example, thought that unemployment could hit 17% without the JobKeeper program from the government. So the government has done a great job with JobKeeper, and we think it will peak at 9% and then fall back to 7% by the end of the year in terms of unemployment. But you're right, we will have more customers that need help. And therefore, we'll have to have more people in those areas.

I'll take a question from John Durie, please.

A couple of questions, if I could. Firstly, following on from the answer you gave to Jon Mott. I'm just interested on loan demand. You said small business and consumer was mainly around deferrals and big businesses just getting lines of credit. So it doesn't seem to me there's a hell of a lot of credit demand right now. Would that be a fair assumption?

I think...

Secondly -- go on.

You finish, John.

Okay. Well, the second question was just -- I'm just interested, if all you've been doing so far is deferring mortgages, that hasn't cost the bank a lot of money at this stage. And I guess it's not until October when all the government stimulus is finished that you're really going to be able to know just where you stand.

Yes. On the first question on loan demand, I think it will -- businesses will really look for demand to invest. So at the moment, there is lower demand in the business market is how we're seeing it. It's mostly around shoring up people through this period. On the outlook, I just -- one of the things with the mortgage packages is we do a check-in at 3 months. So I'm hopeful we'll get some line of sight through those contact points at 3 months. And of course, our business bankers will be out talking to customers all the way through, so that we'll get some line of sight on those discussions as we go through as well, John. So while our normal sort of metrics of people missing repayments won't work in the next 6 months, I think there's other ways that we can get a bit of a read of what's going on.

Okay. But it's really October before you sort of know?

3 months in the mortgages will be June, July, so...

I'll take a question from James Thomson from The Financial Review.

There's a couple of mentions in the presentation about resetting the cost base, but not a lot of color around that. Obviously, the Specialist Businesses might provide some opportunity there. But is this the time for some big decisions around branch networks and that sort of thing given the way COVID is changing the way people use the banking system?

Well, in relation to that, that was one of our medium-term priorities, if I put it that way. So if you have a simple business, you'll need a lower cost base. And so what we've done today is really got our divisions allocation of the businesses in a way that helps us focus on what we need to do. So in relation to specifics in that, that will be something we're working through. Branch networks always depend on people using them. So one of the interesting things will be what do we see in terms of activity in branches -- in branch networks. That more guides the size of the distribution and number of branches than anything else.

I'll take a question from Paulina Duran, please.

I have just 2 quick questions. The first is in Panorama. Can you just clarify what was the write-down that you took on Panorama, please? And the second question is around your dividend decision and when do you expect an update for investors? Other banks have mapped out their thinking around that and given just some time line.

On -- just on Panorama, the reason the revenue has fallen is very much to do with low interest rates impacting margins in that business. Obviously, some repricing. The size of the write-down was...

$30 million.

About $30 million, so small in the scheme of things. In relation to dividends, we haven't set out a time line. We've just said the type of things we'll be looking at is how does the economy perform, what extra information do we get on customers and what type of impairment levels we're looking at. So we haven't set out a time, but we'll look at that through the course of the second half.

I'll take the final question now from James Eyers, please.

Peter, it was around the post-COVID outlook. I was just wondering if you've given much thought to which sectors of the economy might be subject to structural changes post COVID. I mean, obviously, all this -- part of the economy getting used to working out of the office, and commercial property is obviously an area that's been problematic for Westpac in the early '90s. Have you positioned the bank around the possibility that you'll get this sort of proportion of the workforce that might not come back to the big office towers in the center of the city?

We've -- maybe have a look at Gary's slide on that sector overlays. That -- I think that gives you a bit of a guide of the areas that we're looking at closely. But you're right, property was one of the areas. Commercial property was one of the areas that we had a good look at. It's hard to tell. I think in our case, we've certainly had a lot of people learn how to work from home, a lot of managers learn how to manage workforces that are distributed. We've got some great technology now that we've recently put in, in Microsoft 365 and collaboration. And our IT team had done some great work to get that in and get the network capacity up. So there certainly is the opportunity, I think, to have a more distributed workforce. And whether that be working from home, whether that be how we use our branches, I think that's all on the table.

Okay. Well, thank you all, and thanks very much for dialing today. I know this is a trying time for everyone. We'd greatly appreciate your feedback on how you thought today went. And with that, I'll call a good morning.