Westpac Banking Corporation (WBC) Earnings Call Transcript & Summary

Well, good morning, everyone. So great to see everyone here actually. Welcome to Westpac's 2022 market update. My name is Andrew Bowden, and I'm General Manager of Investor Relations. I would like to acknowledge the Gadigal people who are the traditional owners and custodians of this land and pay my respects to elders, past and present. Presenting today is our CEO, Peter King; and our Chief Executive of Westpac Institutional Bank, Anthony Miller. Unfortunately, we have been impacted by COVID. And so Chris de Bruin, the Chief Executive of Consumer and Business Banking was scheduled to speak, but he's now unable to attend. So Peter will step in and do his presentation for us. We hope Chris recovers quickly. As with similar sessions, we'll run through the presentation, and we'll open up for questions. So with that, let me invite Peter up front.

Well, thanks, Andrew, and good morning, everyone, and it's great to be here in person. In fact, this is our first in-person session since 2019, and today's operating environment is very different to 2019. Inflation has returned, largely driven off the supply side issues and the war in Ukraine. On inflation, we don't expect it to moderate until 2023 and we expect interest rates to settle much higher than what we saw before COVID. However, with unemployment at record lows, customers are generally in good shape and the vast majority can handle higher interest rates. Hardship numbers also remain modest. But as always, we strongly encourage any customers who need some help to call us early. As a country, we need to take action on supply side issues, and I welcome the government's Job Summit as a positive step to help address the skill shortages. In speaking with our business customers, a simpler progress of process for migration is needed. And we also require a strong partnership between government, business and education to reskill more Australians. In fact, two of the areas we're touching on today, climate and digital, are being impacted by the skill shortage. Just finally, in opening remarks, the economy is very strong. And so taking some heat out of it will be a good thing in the long run. So today's agenda focuses on three medium-term priorities. First, I'll recap on the strategic progress and update on the CORE program. Anthony and I will then cover our next steps on climate actions, including specific sector targets and committing to the net zero banking alliance. And we'll close with the digital session, including our new digital mortgage and our plans for opening up our network to all customers across all brands. For those in person, we hope you can join us for the displays, and you can speak to the team and see some of these initiatives in person. And as this is a strategy update, we won't cover performance. We will update on capital and credit at the Pillar 3 in mid-August, and our next earnings update will be at our full year results in November. Sorry to the analysts in the room. Turning to specific -- or turning to our strategic progress. Nearly 2 years ago, we introduced our fixed simplify and perform priorities, and we've made clear progress under each of our priorities. And this is making Westpac a simpler, more focused bank. Fix has been our biggest near-term priority. And with the CORE and financial crime programs, we're driving the significant uplift in risk management capability we need. Simplifying our business is also a second big priority. And having recently announced the super and investment transactions, we're focused on announcing the platform sale in coming months. And today, we'll also give you an update on how we're going on digital progress. And as we move through fix and simplify, we released resources for growth and return. And one of the big opportunities that we see is climate transition, which Anthony and I will come back to in a second. If we turn to CORE. This is the program that is the heart of our plans to lift risk culture and improve management of risk in Westpac. The program is big. It has 19 work streams, each having a design, implement and embed phase, and we're now in the heavy lifting of implementing the changes. Overall, the program is on track. Westpac's project rating has moved from green to amber. And that reflects the fact that we're focused on the business outcomes and managing those, but also managing the significant change in all of our divisions. By the end of this year, we'll be mostly in the embed phase, and that's where we repeat the processes and demonstrate that they are sustainable. And I know CORE is a large program, and it can be a bit hard to see from the outside or judge it from the outside. So what we've done on this slide is summarized how we think about success. And the five statements on the left of the slide are the key objectives of the program, but ultimately success is the outcomes and when we exit the EU with APRA. Internally, our CORE dashboard has many metrics, and this is -- there are some of these have been set out on the slide here. And the top charts reflect culture change, and they incur things like constructively challenged, so a way that we measure culture and role clarity in what we expect in terms of risk management. The bottom charts relate more to processes, including how we're going on reducing high-rated issues and data quality improvements. So what you can see from that chart is generally, we are making progress and the trends are in the right way. But we know that there's still a lot more to do. So we are on track, but more to do over the coming years. So if we turn to climate. Action on climate is a long-standing commitment by Westpac. And we've been at the forefront on sustainability for over 20 years now. We're regularly stepping up commitments consistent with the science. And we're again lifting the bar today by committing to net zero banking alliance and setting targets for several of the high emitting sectors. Anthony will cover this in more detail, but our plans are based on transitioning the economy using the science-based scenarios around limiting warming to 1.5 degrees. And becoming net zero bank is a priority in our plans, and it's got three components. The first is reducing our direct emissions. And to do this, we're trimming our carbon footprint and sourcing renewable power. The second and most important step is to reduce our finance emissions by supporting customers in their transitions. The third part of the plan is to work with peers, industry and government on initiatives, policies and disclosures. And the climate transition challenge is a global issue. And so it needs coordination across stakeholders to both reduce emissions but as importantly, to manage the community impact of the change. If we turn to our operations, we are well on track for both our 2050 -- sorry, 2025 and 2030 targets. And last year, we delivered significant reductions across both Scope 1 and 2 as well as Scope 3, our supply chain emissions. And the primary driver of this was the first solar power agreement coming online in mid-2020, which drove that Scope 1 and 2 reduction. And this slide shows the plans to source 100% of our power from renewables, and 45% of our power is already coming from the Bomen Solar Farm. And this week, we've signed agreements to source a further 38% from a wind farm in Victoria and a solar farm and battery in South Australia. So overall, we're well-positioned in terms of our targets. And before handing to Anthony, one of the commitments under the NZBA is to set finance emission reduction targets for the most emissions-intensive sectors. In November last year, we reported the first estimates of sector emissions, and we'll continue to update this data as the data improves and the methodologies agreed across the industries but it's clear from the chart that the top 3 sectors are mining, utilities and manufacturing. And these are the sectors we'll focus on today. The web team has been leading the work and engaging with some of our largest customers. So let me hand to Anthony, who will take you through some of the detail on the sectors. Anthony.

Thank you, Peter. Together with our announcement today that we've committed to the NZBA, we're announcing targets for four of our most emissions-intensive sectors in our portfolio. These are thermal coal mining, upstream oil and gas, power generation and cement production. They are the first of many sector targets that we will set and report on over the next 18 to 36 months. Before I walk through those targets, I want to explain how we set them. Setting an NZBA target is complex and challenging. We have worked with our third-party experts to ensure we've met the standard expected of a commitment to the NZBA. Our approach has been to establish targets in sectors where we can set a 1.5-degree target, where sufficient underpinning data exists, where we can rely upon industry guidelines, we see this as key. We want to be the transition partner of choice for our clients. It is critical that we can work with our clients on their commitments and our approach is, therefore, to apply industry-accepted scenarios, tools and methodologies tailored for each sector. It's also very critical that we can rely upon credible science-based scenarios, such as those provided by the IEA or the CSRA climate works. We also need to rely upon quality data to underpin our targets. To manage to a target, we need to be able to accurately measure our progress. This is a challenge in every single sector, that is ensuring the quality and integrity of the data and identifying the emission levels of our clients across Scope 1, Scope 2 and Scope 3 where appropriate. We do expect the data quality will evolve and improve over time, and this will mean our targets will also need to evolve as we get better detail on our clients' emissions, and we combine that with the changing science, methodologies and technology. Finally, what was also very critical for us is that we need to be able to provide the level of transparency. All targets will be backed by a methodology document, explaining how we established our target and what scenarios underpinned that target. And this will then be supported by consistent annual disclosure so you can assess and see our progress. Let me make a few comments now on each target. Thermal coal mining. We've already committed to reducing our thermal coal lending exposure to zero by 2030. However, consistent with the NZBA guidelines, we've adjusted our definition on thermal coal mining customers as those with more than 5% of their revenue coming directly from thermal coal mining. Upstream oil and gas. Our target is to reduce our absolute financed emissions by 23% for upstream oil and gas by 2030 from a 2021 baseline. This includes Scope 1, 2 and 3 emissions. We've updated our upstream oil and gas position statement to support this. Accordingly, we will only consider directly financing greenfield oil and gas projects that are in accordance with the IEA's net zero scenario or where necessary for National Energy Security. We will continue to provide corporate lending to support transition where customers have a credible transition plan in place by 2025. We've taken a balanced approach to this sector. Power generation. This is arguably the most critical sector. As part of society's commitment to net zero, we must drive the electrification of an enormous amount of activity and processes, particularly across transport, industry and manufacturing. That means our electricity generation needs to reach net zero. Ultimately, the power generation sector's success will underpin society's ability to reach net zero. In 2020, we set a target of reducing the emissions intensity of our power generation portfolio. We have now lowered the original target with a new power generation target of 0.1 tonne of carbon per megawatt hour by 2030. Given the advancements in renewable energy and this sector's central role in helping society reach net zero, we have set a more ambitious target. We already have the expertise and track record in renewable energy and we have actively managed the emissions intensity of our power generation exposure over a number of years. Currently, 79% of our exposure in this sector is to renewables. We have led the market in greenfield renewable power generation for a long time, and we are working to expand our greenfield renewable financing portfolio and importantly, assist our clients transition their power generation from fossil fuel to renewables. Cement. As we set out late last year, and as you saw Peter refer to today, the manufacturing sector alongside mining and utilities is one of the largest sectors where emissions must be reduced. We're setting targets in manufacturing by its many components. Cement production is our first. We're working with our clients and industry groups on other components such as the steel value chain. And as we complete our work, we will progressively release our targets. As it relates to cement, the sector is a large energy user and carbon emitter. We have set a target of reducing the emissions intensity of our cement production exposure to 0.57 tonnes of carbon per tonne of cement by 2030. Our target here is for customers Scope 1 and 2 emissions and covers customers producing clinker in their cement production process. The production of clinker is a key step in producing cement. The clinker production generates approximately 60% of the emissions related to cement production. The balance of the emissions in the cement-making process comes from the energy used in that production process. You can see the links here between potential solutions and the decarbonization of power generation. A lot of work and analysis has gone into setting the targets we've outlined today. And we will release more targets as we complete the work needed. It is critical, however, that we recognize that this area is moving fast. We have set targets based on the best science available, drawing on expert advice. However, our targets and the reduction pathways will evolve as new information, new methodologies, new technology and new science emerges. Our commitment is that we will be transparent in our approach and that we will report the complexities and challenges we face along the way. Having set out the what, I want to quickly highlight how we will deliver on our targets and our ambition to be the transition partner of choice. Firstly, we're starting from a really strong position. We are the largest bank lender to greenfield renewable projects for the last 5 years. We provided the first wholesale green deposit product, and we recently launched an electric hybrid vehicle loan. We are leading. However, this is just the start. We're further investing in our people, systems, risk management processes and products so that we can remain at the forefront of helping our clients transition. Our banker capability is a strength. Our bankers and risk teams have acquired new skills, and they have embraced new areas and taxonomies to help clients with their transition. Our expansion of banker and risk team capabilities is significant, widespread and will be ongoing. Our bankers are engaging with clients on carbon and pathways to a net zero future with the same clarity and confidence they've done on topics such as cash flow, asset valuations and business models. Alongside our investment in banker and risk team capabilities, we will continue to invest in our systems, our climate data program and risk management. On this next slide, we set out the steps every single client has taken, is taking or will have to take. We're working alongside our clients on each step. Clients want our input, for example, and how they might change their operating model and our capacity to support them in that endeavor, can and how should they exit a business and can we be there with them on that, should they and how can they invest in assets or technology or processes so they can progress their way to net zero. Some clients have started with replacing their vehicle fleets with electric vehicles. While others have commenced the divestment or shutdown of businesses and need our support through that transition. Others are seeking funding to invest in new processes, transforming their operating model. I want to emphasize, this is not a product-driven opportunity, rather, the opportunity is to be their partner in the transition of their business to a net zero future. This transition will involve enormous change for many and at least some change for every single one of our clients. That change creates the opportunity. Finally, as you heard from Peter, the transition to net zero requires leadership, collective action and collaboration. As a bank, we will play a significant role by participating in initiatives to support action on climate change, both locally and internationally, such as our commitment today to the NZBA. We're also actively involved in many initiatives to develop climate and sustainability best practices. We are working with peer banks, industry and government agencies through, for example, the Australian Industry Energy transitions initiative to facilitate learning and action for the long-term transition across heavy industry supply chains. The path to net zero is only achievable if every part of society is aligned and committed to the changes needed to realize this important goal. Collaboration and collective action by everyone is the key. Thank you for your time, and let me now pass you back to Peter.

All right. We're changing to digital now. And I think as we've all seen, digital is changing our lives and certainly changing our bank. In Australia, Westpac has more than 5 million digitally active customers and 92% of transactions are now digital, and therefore, it's not surprising a big part of our strategy is around digital. And today, I'll cover the significant changes we've made and what's coming next. Our digital transformation has three elements, and it starts with the principle that sees digital as the primary channel for connecting customers and bankers with our service. Second is expanding access, and we're effectively building a bank in your pocket on your phone. And we know digital can't do everything, and so customers will still need physical service. And so we're also reshaping our branch services, including allowing any Westpac Group customer to bank at any branch. Last, everything we do needs to be anchored in safety. And keeping customers and their money is a priority, and this will not change. And we've led the way on a number of initiatives, but this requires continual effort. The digital-first approach is best described in three ways, as you can see on this slide. Firstly, launching tools that give customers greater visibility and control over their finances and money. Our banking app now has more than 200 features. And the improved design has made banking simpler and faster from smart searches and better navigation to enhance security such as blocks for gambling and abusive language. And we're taking this further. Following the launch in Westpac New Zealand, we've today announced a partnership with Cogo in Australia that will add tracking of customer carbon footprint into the app. And we'll start that rollout early next year, and this allows customers to take action on climate change. Second, using digital as a design principle is creating a single way to do business. And we now have a universal banker platform that covers 40 systems and all brands. And this is making it easier for our bankers and helping them save time, but also helping customers. The principle that we've set out here also applies to new product and services. As part of this change, we're announcing today our new digital mortgage with unconditional approval in as little as 10 minutes. We're also well underway with implementing personal financial management capabilities in the mobile app. And for businesses, we're piloting new tap on phone software, which converts an Android phone into a payments device. The common thread behind all these initiatives is the digital-first approach, eliminating manual processes and putting customers more in control. The slide outlines some of the changes we've made. And while we have made good progress, there's still a lot more work we can do. And so let's have a quick look at some of the new services. If I start with the digital mortgage, it can take customers days to apply for a mortgage with manual prices handoffs and the frequent need for new information. And we've now applied our digital-first approach to redesign our core mortgage process and create a fully digital mortgage. There are three major changes compared to our current process. First is it gains approval upfront to source information required to complete the application. And this includes the necessary checks and balances to confirm affordability and meet our responsible lending obligations. We're using advanced analytics and third-party data to also verify financials and property valuations. Second, the system leverages our existing One Bank platform to provide the approval, the credit approval where conventions are met in minutes. Finally, the process is completely digital with no hands off. Nevertheless, if customers do need support, they can speak to a lender who has access to the same information as they've put into the digital system. And this technology has been built it's been tested, and we are on track to launch it in the fourth quarter of this financial year. The rollout begins with new and existing individual customers refinancing to Westpac. It will be limited to an LVR of 80%. And this is also one of the largest sources of activity we have today and certainly, refinancing will probably pick up in the future. If we move to personal financial management. The Westpac actually rates very well. It has great capability, but it does have one big capability gap, and that's personal financial management. So following the purchase of MoneyBrilliant last year, we're closing this gap and PFM provides tools and features for customers to organize and control their finances. Customers will be able to track income and expenses, view accounts from other financial institutions, categorize and analyze expenses and tag transactions for future reviews such for tax purposes. And we'll begin the rollout of PFM capabilities in the fourth quarter of this year. And we know we also need a good network. So to support our digital transformation, we are also investing in our network. We developed a multi-brand capability that opens the network to all customers across all brands. And from early next year, St. George, BankSA and Bank of Melbourne customers can transact at any Westpac branch and in turn, Westpac customers will be able to use the regional brand locations. Customers can withdraw cash, deposit checks, transfer funds, exchange cash, use coin counters. And these are particularly important for small business customers. The change also enables our new colocation approach, which sees two brands under one roof. Colocated branches improve the economics of the branch network while maintaining the access for customers. And our research is showing that almost 3/4 of customers using these branches rate their experience as a 9 or 10 out of 10, with many noting improvements in both service and location. We already have 21 colocated branches now operating, including in Dubbo, Grafton, Lithgow and Port Stephens. And we're reviewing opportunities for around 100 more colocations over the next 18 months. And to support the digital approach, we'll also be changing our branch footprint. And the design is at the top right where the footprint is smaller and the fit out is more module. And the branch will be powered by mobile devices to better serve customers and help customers move into the digital world. Together, we see these initiatives simplifying the customer experience, increasing access to service as well as helping us with our cost reset. And while we're making banking easier, it must be safe. Scams and frauds are a growing issue, and we continually invest in capability that protects customers and their money. While there's always more to do, we're proud of saving customers over $50 million from scammers last year. We're the first bank to roll out dynamic CVCs on the digital card in the Westpac app, and that protects particularly those customers shopping online. That's the three-digit code on the back of your card, debit or your credit card. And that code is refreshed every 24 hours. And so that limits the ability for people to copy it and use it like we have with that static code on the physical cards. Approximately 10,000 customers are using this feature daily. And what we've seen is an 80%, or nearly 80% reduction in fraud when they use this capability. As you can see on the chart on the right, we've seen significant reduction in fraud as we've introduced new security features. And this is such an important area we will continue to invest and work with industry and community partners to help educate and protect customers. Now digital focus is delivering better features, convenience and safety for customers. And as you can see from this graph, branch activity is falling, digital transactions are rising and our key measures of franchise health are improving. Digital NPS has been particularly strong, and we're seeing the benefit in the network through the tools that the bankers are using. And our people also are seeing less time required and therefore, spending more time with customers. Ultimately, the changes strengthen our franchise, contribute to our cost reset and improve returns. And everything we've set out today is in production or being trialed. And I encourage you to visit the displays after the presentation where you can talk to the team and have a look at the prototypes or the other activities. So in summary, we are making progress to lift risk management, in digitizing the bank and on our climate change actions. And we'll hand back to Andrew now, who will coordinate Q&A. And Anthony will come back to -- for Q&A as well.

Thanks, Peter. Today, the update is for both the market and the media and so I'm going to start with the market first, and I'll start with questions from the room. And I've got a question -- just wait for the microphone, please. Thanks, Nicole, just Andrew. Yes.

Andrew Triggs from JPMorgan. Just a question on the digital NPS, which Peter, which has seen improvements as per the second last slide, noting at the first half result, the NPS score in the consumer bank for the Westpac brand was poor and has been for some time. So just interested in the differences between those two metrics. I appreciate there's 3 months difference in that -- in those metrics. But what is holding back effectively the consumer NPS from improvements?

Yes. So the consumer NPS is the perception of the whole bank, if you like. So it gets wrapped up in a lot of things, including reputational issues. And so we have had a few of those in the past. So it is holding it back. The NPS that we've got here is actually the NPS, the app, the Westpac app. So what encourages me is we're getting great feedback about the new app, which we launched probably about 18 months ago. It's now on -- out in Apple, out in Google. And what we've outlined today is the road map for the extra capability that we're putting into the app, but the app is rating well from a customer experience perspective.

Take a question from Andrew Lyons. Thanks.

Andrew Lyons from Goldman Sachs. Peter, just a question on your digital mortgage, which today is due to be released in the fourth quarter of this year. But can I just maybe ask how much of that process that digitizes the front-to-back mortgage process for the digital mortgage is already used or will be used over time by the broader mortgage business, particularly the proprietary business, but also into brokers as well?

Yes. So two things. It's built on our online -- our IBP platform. So some of the capabilities that are sitting in that platform that we really use include valuation, the credit assessment workflow, so just to bring it together. What this new digital capability has done is improve the interface with the customer and add a digital steps into things that were manual. So requirements and objectives, as an example, was something that was more a manual process in the past, also sourcing of data is being done digitally now. So that's the first thing. So what that means is it's actually in our core process. So it's not something sitting to the side of our core process. It's being built into our core process where we'll expand the products available, the customers that can use it beyond where it is today, but we're focused on refinance for new and existing customers as the first launch.

Richard.

Richard Wiles, Morgan Stanley. Peter, a couple of questions. Firstly, when it comes to digital, how important do you think personalization is for customers? And how important is it to offer nonbank products through the app, things like Internet and electricity? Secondly, you talked about some of the progress you're making on digital, and you also talked about your colocation branch initiatives. Can you tie those back to the cost savings involved with the $8 billion target?

Yes. So maybe I'll deal with the second one. This is part of the plan to reset the cost base in terms of the colocation. So the major cost savings will come out of the property line, the consolidation of property. We will have some reduction in the number of people we need in the branches because we're coming to one, but we'll seek to redeploy those people or there may be opportunities in small business sales as well that we can do -- we can cover. Sorry, the first question was which topic?

So in terms of your digital offering, and particularly what you offer through the app. What do you think -- how important is personalization? And also, how is it important is it to offer nonbank products like Internet...

Yes. Presenting information in a tailored way to customers is important, and that's why I said the -- we've got a great app now, but the main gap was personal financial management, and that's presentation of data to customers in an easy way so they can do something with it. So we see that personalization is very important, and we feel like we've got the base to build on now. In relation to -- I think there's two schools of thoughts on ecosystems as a lot of people call them. Do you create an ecosystem with the bank at the center of it? Or do you partner in an ecosystem with others? We're probably going down the second route. So you partner with others, not trying to build an app that becomes -- everyone comes to the bank to do everything.

Okay. We'll take question from Azib.

It's Azib Khan from [ Evanson Partners ]. Peter, first question is about the business bank. I've got a couple of questions. First question is about the business bank. So you've said today that your major remediation programs are in the final stages. I'd like to understand what that means for the business banking franchise going forward? And the context is if we take a look at the growth of the business lending book within that business bank, last year, it was inferior to some of your major banks peers. That growth has improved somewhat in the first half of this year, but it's come at the expense of some significant margin contraction. And it looks like you're having to offer a sharper pricing point to attract new customers and retain existing customers, whereas at least a couple of your major bank peers are managing to grow the SME lending books at stronger levels with stable margins. Putting that together, it looks to me like the level of service that has been provided by the business bankers, Westpac's business bankers, hasn't been quite up to par with some of your peers. And I would like to understand, has that been the case because your business bankers have been distracted by remediation issues within that division? How much time has that been sucking up with your frontline business bankers? And is that now coming to an end, if that's the case?

Yes. So we'll pick up the performance in margins and volume and whatnot at the full year, if that's all right. But I think the underlying question there is, have we had a lot of distractions in the business bank. And the answer is yes. We've had a lot of remediation. In terms of the large programs coming to completion, I was referring to financial crime -- sorry, not financial crime, financial planning. Some of the planning issues that we've had is coming to an end. We have ticked off a few of the bigger ones in the business bank as well. And that just means we've got more bankers focusing on the business, not sort of looking backwards and resolving historical issues. So we feel like, and you'll see this at the full year results, there is better momentum in the business book, both in the institutional bank and in the business bank. You'll see the market share stats soon, but we'll leave performance -- about the comments about margins and volume to the full year, if that's all right?

Are those bankers still being distracted by remediation issues or that's behind them now?

Some of them are, but the vast majority are back running the business and helping customers.

Can I just sneak in one more question, if that's okay? On the investor home lending front. So you've talked today about launching the digital product, Peter. Will that initially just be in the owner-occupier space or also the investor space? And the reason why I ask about the investor space is, if we go back to November last year, Peter, quite a bit of your margin decline in the second half of last year was attributable to the mix of new home lending. It was that you were achieving strong growth in the lower spread products. And there was low growth coming through in the high spread products of investor and interest-only lending. And you intimated at the time back in November last year, Peter, that, that's something you'll look to turn around and try to address that mix. Since then, the investor home loan book has continued to contract. Can you just give us a bit of color around what's happening there and what you're looking to restore -- what you're looking to do to restore that growth? And will this digital offering help restore that investor home loan growth?

Yes. So the digital offering today is owner-occupied individuals less than 80% LVR. So very focused on Heartland owner-occupied market. It's not to start off with targeted investors. It's -- we're focused on owner occupied. In relation to investor more broadly, obviously, it is a focus. It's particularly been through the business segment that has been a little bit slower, and we have seen improvement in that in the last little while, but obviously, I'll give you an update in September.

Okay. I'll just pass it on to Anita, please.

Anita Stanley from Macquarie. I just had a question around the financed emissions targets. You mentioned that on the steel value chain would be one of the next sectors where you're looking to set targets. Can you give an indication of other sectors where you're looking to set targets and what the time frame is around these?

So look, our intention is to release progressively as we do the work that needs to be done. And you saw the criteria we set ourselves that we must solve for if we're going to release a target for a particular sector. But in no particular order, we're clearly looking at property, both commercial and residential. We're definitely looking at the agricultural sector. Transport, other components within manufacturing are very much what we're working through. And the whole approach is just to make sure we've done that work and we can give you all that clarity that we've given today as we release sectors going forward. The priority under NZBA, is you must prioritize the most emissions-intensive sectors, not necessarily the largest sectors, but the most emissions intensive. So we're focusing on that as a priority over the next 6 to 9 months. And I think it's -- we've got 18 months to put in the sector targets from when you sign the agreement. So that's basically 18 months from now, we'll have it done.

Okay. [Operator Instructions] So I'll just remind those on the call, but I'll take the one from Alison.

Alison Ewings from Regnan, climate questions as well. I noticed that you had said that the trajectory that you got is 1.5 for the targets that you've set already in any of the preliminary work you've done in other sectors. Are there any that are emerging in which 1.5 is not a reasonable target?

That's a really good question. And the simple fact is we're just in the middle of the work on the other sectors. And it's -- one of the biggest issues, though, is getting the right data, the right information so that we can really make an assessment of where emissions are today and just what is the path that you could follow to 1.50. So I would just say that it's too early to comment on the others, they're very hard, and we're in the middle of it.

I'm not surprised. Very hard. The other question I had was with respect to disclosure and measurement. So it's very clear from what you've committed to that we'll reduce exposure to emissions for Westpac. And the intention, it seems is that would also reduce emissions in the real economy through the work that you're doing with customers. I wonder whether you've given any consideration to how you might be able to demonstrate the extent to which that has not only reduced Westpac's emissions, but real economy emissions, given that the risk profile of both the bank and investors will be impacted by that over the long-term?

Well, certainly, the whole proposal behind NZBA was that we had to help clients do a true transition, which is a true reduction in their carbon perimeter footprint technology to be refined over time. And so it's very much about working with clients and saying, well, what is your plan? And how will you reduce your emissions over time? So yes, it is all about substandard reduction that we see in clients that we finance, and we partner with in helping them on that. So I'll come back to, yes, it need to be substantive and it is very much our priority that we see clients reduce their emissions over time. That's the whole approach.

And transitions the big word there because it's -- I think the bigger point is if you move the problem, it doesn't solve the problem, so we get that. And so that's why it is about transition. It is about working with customers with their transition plans. That's the work we want to get done over the next couple of years to 2025. But we acknowledge it's not about the moving the problem it's actually about solving the problem.

Right. And I think any evidence of that as you [ work there ], it would be great.

I might take a question from James at the back there. It's hard to see you right in the light there, James.

James Eyers from the Fin Review. Peter, I just had a question regarding the practical effect of the new targets. And just take cement, as an example, where you've set more ambitious targets on intensity. Just wondering if you could talk a little bit about what impact that policy would have on company practices. For example, would you see more carbon capture and storage investment as a result of that? Would that encourage some of the customers to buy more offsets? Like what's that going to do in the marketplace?

Yes. I'll let Anthony comment on the sector. But we've done a lot of work looking at our customers, our policies and our forecast. So we've done a lot of that work. And so we haven't put out the targets without thinking about the implications. Now the one caveat I would put on it, you can't predict the future. So we're going to have to continually update methodologies, update data and respond to what happens, but we'll be transparent in that. Anthony, you want to...

In that space, all of our clients are already on to this. They recognize almost every client recognizes they need to develop a plan, they need to develop a plan to net zero. And so they're working on and already identifying ways in which they can reduce emissions. And that can be as simple as just efficiencies in how they operate their entity day-to-day or it could be replacing processes. And so it's very much about reduction and about a transition to reduce the emissions intensity. Buying offsets is but one part of the solution, but also is not the one that we want to prioritize that will help and assist the priority has to be reduce the level of emissions by changing your practices, changing your operations, making the investments to facilitate that.

We might take a couple of questions from the phone. So I'll announce your name and then your line open, so I'll take a first question from Brendan Sproules, please. I think your line is open -- line should open, Brendan. You can start now, Brendan.

I'll start again. Good morning, everyone. Look, my question is -- questions relate to the brand strategy and the colocation. Could you give us some indication as to the economics of the reducing of duplication. You talked a little bit about the property leases side. But in terms of the actual running a branch, is it only 30% cheaper or only 10% cheaper when you colocate? And then my second question is, how do you think about the size of your overall branch numbers that you do currently have across Australia and give the indication, I guess, over the next couple of years as digital gets more taken up by your customers, how the size of that branch network is expected to change?

Yes. In terms of -- let me bring the regional branches to life for you. So we might have two branches, which are pretty close together. But if they've only got a couple of people working in them, it only takes one person to be sick, and we actually closed the branch. So one of the benefits that we have is -- by bringing the two brands under one roof, we give it scale. And it's just more sustainable to keep it open more often. COVID's been a big issue for us in this regard that we can bring them more people, more scale. And then the way the branch will work is different. So today, if we had a colocation, you'd actually have two computer systems effectively, our Westpac system and all the other brands. In early next year, we'll just have one system, and that one system has access to all customer accounts. So that's the new technology. So it gives us ability to manage the branches more efficiently. Obviously, the premises costs achieved because you're reducing significantly your premises costs, and it's a better outcome for customers because we're staying in the areas that both our people and our customers like the fact that when we commit to the colocations that we commit to staying in those regional areas. So it just gives us a lot of opportunities. On the question of the branch numbers, what you -- if you saw the that chart I put up towards the end, digital is now 30x the size of physical in terms of activity and physical continues to reduce. Digital continues to increase. That will be reflected in our branch network side. So I do think it will come down over time.

Okay. Eric, do you want to...

[ Eric Johnson ] from the Australian over here behind -- just on the discussion around the colocation, did you -- did that discussion also involve the future for the multibrand, particularly when you've got aggressive cost-saving targets, so as we're moving towards more digital world? So if you could just provide some color around that.

Yes. Well, the thinking here is we've still got customers that choose the Westpac brand or the St. George brand or the BankSA brand as the -- some of the big local brands. And they like banking with St. George or BankSA. So this is a big step for us today because we removed some of the duplication out of the bank, the multibank issues as opposed to the multi-brand issues. And we can see further steps on that in all of our front-end processes and technology we use one and it's branded in different ways. So mortgages is the other big business for us that we've spoken about today. So that's the strategy is about bringing that together as opposed to changing the brand strategy. We're committed to the brand strategies and customers still like to bank with St. George or BankSA as examples.

We'll take another question from the phones. Jon Mott. Jon Mott, if you want to go ahead, I think if your line should be open.

[indiscernible] If I could, about -- something you talked about at the very start [indiscernible] managing community impact as the whole energy transition change. Over the last couple of weeks, we're seeing gas supply crunches. We're seeing ongoing discussion about the cost of utilities are going to have to increase materially as a result of the energy transition and [ no one ] is debating the need to get to net zero, but the impact on customers' needs to be taken into consideration. So could you talk about the impact that this will have on energy security in Australia and the ability for Australia to have reliable cheap sources of energy and how you'll support that through the transition process? And secondly, the impact it's going to have on cost of living. There's ongoing discussions about inflation, cost of living crunch and cost of living crisis in Australia, and this is going to have an impact on many customers. A lot of them have taken out mortgages in the last couple of years and are already facing very substantial increases in their repayments through this process. So it will be great to see -- hear your view on the impact of new security and cost of living from the transition process.

Yes. If I just -- as Anthony said in his words, renewable power is critical to the transition. So if you look at it, it's going to power businesses, it's going to power transport, cars, manufacturing. So the transition of the power source in the country to renewable is critical. And one of the things that we've got in our gas policy is that if we require investment for security of domestic power, then we will look at it. So that -- and that's defined as if the government requires it, if a regulator requires it, then we'll look at it. So that's important in terms of what we announced today. We recognize the country needs to have reliable power and gas will play an important role in transition. The other thing I'd say is it's important that we have a target in terms of reductions, but more important from my perspective that we have a plan because the plan actually sets out -- will generate the focus to deploy capital, to build new electricity generation, to get the transport, to get the storage and gas firming will -- looks like play a really important role in transition. So gas will be here for a long time. Yes, the big question mark at the moment is how long the coal-fired power station is going to be required. And if we don't get on and do some things soon, they'll be required for longer. So it's actually -- we need a target and we need a plan and the plan has got to mobilize the capital, I think, is the important thing. So we do need this plan for security. In terms of the cost of living, a lot of that is a global issue. Obviously, the war in Ukraine has driven up oil and gas prices. Who knows what the future will bring for us from that perspective. But we've really got to bear that in mind, and we're going to have to bear that in our settings for the economy going forward because I don't think these prices are going to come down too quick.

Okay. I'll take a question from Brian Johnson, please. Just hold on a second, Brian, your line should be open now.

Can you hear me?

Yes.

And really good slides and some fantastic initiatives there. Two questions, if I may? Peter, at the May result, when you actually had to look at the Net Promoter Scores, they did look pretty bad. And then over and above it, you had a slide where you spoke about the mortgage time to write and there seem to be celebrations that basically through the third-party channel, it improved from 11.7% to 9.9 days and through the branches gone from [ 9.6% to 7.6% ]. And I want to be clear, that is an improvement, but that's still pretty bad relative to peers. Can we get some updates on basically where you're seeing the Net Promoter Scores now and where we're seeing the mortgage processing right now? Is it improving? Or is today's presentation about what will happen from the end of the year?

No. Well, the NPS scores we had in were direct feedback of the customer for the service of the app. So that is what the customers are feeling. The NPS scores at the bank level are impacted by lots of things, service changes we make, reputational issues. So we still have work to do on the reputational issues for the group as an example. So that will improve over time, but the services is coming through. So I'm just trying to think the NPS scores, I think, have improved a little bit, but not that much is what I've got in my head. On broker, I think, the times tend to follow volume. We've had more volume in the broker channel in the last few months. So the times have probably gone out a little bit from what we had at the half, but that, as you said, we've still got more work to do. But we prioritized some of our investment in the channels that will help first party initially and come through to broker later on. So that's where we're at in terms of prioritization. Broker flows. The brokers are still supporting us even though we're a bit longer than the other banks at the moment. So there is still work to do in broker, but we're prioritizing some of our investment in first party at the moment.

Okay. I'll take a question from Joyce Moullakis from, please.

I just had two quick questions, Peter. In terms of the branch colocation, do you envisage a time when potentially there is 20% of Westpac's entire branch network that are colocated? How is that sort of strategy expected to play out over the medium-term? And then I have a second question to you.

Right. Well, it's roughly, we've got about just under 800 branches at the moment, 120 colocations over the next 18 months gives you a bit of a sense of the size of it. So it's quite a big opportunity to stay in the locations and improve the service.

Is it expected to perhaps roll out across the network? Do you sort of see it being the next...

Next 18 months, we're going to look at another 100 opportunities. So that gives you the dimension.

And I just wanted a little bit of feedback around how the targets you're setting today around carbon emissions sit with what the government is proposing around the 43% and bringing forward targets from a national perspective.

Yes. Well, the 43% is for the economy. So we're not the whole economy, obviously, as a major bank. And we've got clear targets on thermal coal in terms of exiting about 2030. Oil and gas is the main change today, and we've thought that through. But importantly, if energy security for the country is at risk, then we'll look at financing new fields, but that's the requirement to look at it. And then the other industries are really about working with them on improving their intensity. And it's transitioned. So this thing's -- it's not going to be solved in the next 12, 24 months. These are long-term trends. We can't predict the future, and we just got to keep working and improving and dealing with it.

Okay. Take another question [indiscernible].

[ Emma Pringle, Micron Abbott ]. So presumably with the work that you're doing around the climate transition targets, can you talk how you might have mapped that to your customers' own transition, decarbonization plans and what the gap might be there? And then how you might work with customers who aren't decarbonization -- decarbonizing in line with your own goals?

So we have been sharing our thinking and our work with our clients. And as I said, every client is on to this is thinking about what their transition plan should look like, what their target should be. And so it's iterative and interactive and has been ongoing. And it will only get deeper and more substantive as we move forward. The way I think about it and the way we're approaching it is we want to be the partner of choice for people when they want to transition. And so when you're transitioning, you've set a target that you want to carbon reduction of x and you get to a point and the client hasn't achieved that. Just like a client doesn't quite meet their financial forecast, we don't walk away from them. We don't abandon them at that point. We stay with them with work on how we might improve financials so that we meet the covenants or meet the commitments that we've both made. And this is the same thing with carbon, same thing with this transition, which is let's have a look at the plan. Let's look at the substance of that plan. Let's see those reductions. And then if there's challenges along the way, well, how do we solve them. So it's really important, and I emphasized this in my comments at the start, which is this is about just a partnership. We've set our targets. We've shared them with the clients and how we thought about them. It's been a very healthy interactive conversation with them. They're all setting their own targets, and we're making sure they come together.

I'm probably positive that the financiers will require transition plans. The equity providers will require transition plans, and I think companies will get on and do them.

Okay. I'll take a question from the phone from Ayesha de Kretser. Ayesha, your line should open now.

[indiscernible] funny. Just you mentioned -- the thermal coal lending to 5% of revenue. What was it before? And how many customers are impacted there? And can you just give us an idea of how many customers altogether will be impacted by these measures? And then when you mentioned direct financing, does that mean that you'll still participate in syndicated loans or other forms of fundraising?

Well, just a clarification, the direct financing point is the language out of NZBA. Just think about it as financing. So it's probably a technical term. But on the...

So the previous definition was 25%, and now it's obviously 5% consistent with the NZBA. As we've looked at our exposure, there's only one client potentially at the moment that may be impacted by it. And remember, the definition is 5%, and we're using a 3-year rolling average. And of course, what is the risk is that someone who's much more of a metallurgical coal miner has some thermal coal byproduct. And at the moment, all of a sudden, because of high prices, it looks like it's north of 5%. However, it's got to be a 3-year average. And then if you think about it, thermal coal prices will move around. Metallurgical coal prices will move around. Production levels will move around. So there's a lot of inputs that will contribute to it. But just as we look at it today, with these extraordinarily elevated thermal coal prices, there's only one client that is impacted and we're already obviously engaging with clients -- that client on that.

And Ayesha, just to clarify, if we participate in the syndicated facility, that would have included in our exposure. Yes. I'll take a question on the phone from [ Richard Cerdan ], please. Richard, can I just get you to start again, please? We just missed the very start of that question.

Firstly, regarding the multi-brand infrastructure, does that indicate that Westpac has now re-homed the other brand St. George, BankSA and Bank of Melbourne on to Westpac's own core banking platform?

So in the -- if you're divided between the digital front end and then the ledgers which are really just doing the accounting, what we spoke about today is the digital front end. The back ends, there are still some systems that are separate between Westpac and St. George, but that's much of a lower issue for us in terms of priorities. We want to get customer experience in digital, and we want to get one process for the customers. We'll collapse those ledgers down the track, but it becomes a technology project at that point.

Okay. I'll take a question on the phone from Ed Henning.

I've got two questions. Firstly, just following up on the broker channel. You seemingly have removed some priority tiering in there. Can you just touch on what's going on there? And also how long it's going to take you to fix the issue around volumes and when the digital benefit will come through to the broker channel? And then I have a second question on ESG, please.

Richard, I'm not actually sure about your tiering question, so I might get our head of mortgages to give you a color on, if that's all right? So maybe we'll go to the second question.

Okay. What about fixing the volume issue and when the digital benefit will hit the broker channel?

Yes. So that will be next year. So we -- as I said today, we're prioritizing that first-party rollout of the capabilities, particularly with the digital mortgage. That will be next year. And we thought about our priorities heavily. We've reflected on the fact that refinancing will be a feature of the market going forward. And that's why the digital mortgage is focused on refinancing and proprietary channel.

Okay. And then just on ESG, you've clarified some lending targets today. You're talking about reducing your commitment to of lending exposure to thermal coal. But the other industries you've called out, you basically say you could increase your lending, but they've just got to have credible transition plans or reduce their emissions. I guess, firstly, is that correct? And then secondly, overall, how do you see the net zero target impacting your lending outlook? Does it impact in any significant way, you believe?

Yes. So what we've done is set out the targets for the four sectors today. So we've just signed the NZBA. We've got 18 months to put out our sector targets. We've put out four today. We're signing, we'll come out with the other sectors. So that's not the right way to think about it in terms of lending to the other sectors. We are working pretty hard to get those in place. We do already have some targets for a few of them. And then it's really an opportunity. So if you take oil and gas, we've got about $1 trillion of exposure as an organization. $2.4 billion of it is in oil and gas. Not all of that is drawn. The big opportunity for power generation transition is probably much a factor of x of $2.4 billion. So I think over time, you'll actually see more lending into these sectors than what we have to say, in oil and gas, which will wind down over time.

Okay. We don't have any more questions on the phone. I've got one more in the front here. Just I'll take this last question.

This is [ Manoj ] from [ Alinity ]. I think -- this is a question about the responsibility, I guess, that sits in these climate targets. There are initiatives around building ESG expertise and capability that you've outlined. How are you seeing that change in the next couple of years? Is it a challenge to implement this through your workforce, especially with the frontline workers moving into quite a technical scientific space?

Yes. Well, Anthony can give some detail on some of the courses. But actually, the interesting thing is people are learning, they're challenged and they're really interesting and they're engaged in the topic. So I don't -- we don't have any -- it's the other way. It's a pull from our people to really get involved is how I feel it. But Anthony...

There's no lacking in motivation from these teams wanting to become experts in the area and really spend time and immerse themselves in understanding what it means to transition and what is a credible transition look like. And so the courses that we've designed and partnered with [ Monash University ] we've had a tremendous take up and engagement on that. And that's just the first stage. This is going to be ongoing and if you will, quite widespread because we need everyone to be able to think and understand what it means to have a transition or have a credible transition. And so therefore, it's part of what we want to be as that bank partner of choice of people in the transition going forward. So there's no issues in getting engagement from staff. It's about actually meeting their expectations in terms of the resource and the investment we provide them.

Yes. And then I think from a segment perspective, a lot of the institutional clients that Anthony deals with are open and ready to have the conversation. They've really got to top of mind. We'll have to help some of the small businesses and businesses their thinking because they've just got so much they've got a deal where they're running their business, and it's another thing they've got to deal with. So we really think there's an opportunity to help small business and medium businesses to adapt.

Okay. Well, thank you all very much. For those online, we have actually some additional displays that are available if you go through the links on our website. There's a link there in the appendix slides and also a QR code, which will take you straight to those. So please, I encourage you to go and have a look at the book those to check them out, that would be great. But thanks again for joining us, and good morning.