Westpac Banking Corporation ($WBC)

Good morning, everyone, and welcome to Westpac's First Half '26 Results Briefing. I'm Justin McCarthy, Head of Investor Relations. Before we commence today, I acknowledge the traditional custodians of the land on which we meet. For us here in Barangaroo, that's the Gadigal people of the Eora Nation. I pay my respects to elders past and present and extend that respect to all Aboriginal and Torres Strait Islander people. Pleased today to be joined by our CEO, Anthony Miller; and CFO, Nathan Goonan. And after the presentation, we'll have time for Q&A. With that, over to you, Anthony.

Thanks, Justin, and good morning, everyone. I'm pleased with your progress -- with our progress this half, and we're starting to see operating momentum build across the bank. This was reflected across a range of metrics. Lending and deposits grew, operating expenses were lower, while asset quality improved. In Consumer and Business, we delivered double-digit growth in transaction account sales. Better service quality and productivity have helped to shift more new lending towards proprietary channels. In Institutional, we've continued to build deeper relationships with clients and support their growth. We maintained our robust balance sheet and capital position, providing stability to help support our customers, our people and the broader economy. This strength gives us the flexibility to navigate uncertainty and keep investing to execute our strategy. With a clear strategy, we're working to accelerate the speed at which we deliver. We are simplifying the bank, improving productivity and reducing complexity. While momentum this half is encouraging, consistency in service and performance is critical to achieve our goals. Conflict in the Middle East is having a broad economic impact that will test the resilience of economies, businesses and households. We are now expecting a more pronounced slowdown in the Australian economy this year as energy supply pressures flow through to higher and more persistent inflation. Fuel supply constraints have begun to drive higher input costs for businesses and weigh on real household disposable income. This will create a more challenging environment for some customers, which is reflected in our base case provision scenario and a new portfolio overlay for energy-intensive sectors. In times like this, customers look to their bank for confidence. Supporting our 13 million customers through the cycle is a responsibility we take seriously, and we're ready to provide practical solutions to suit their needs. As a strong and stable bank, we are well placed to support the economy as conditions evolve. Recent events have shown that while we cannot control global shocks, we can influence how sharply they land here at home. Australia is an attractive destination for capital and talent, but there is more we can do to improve competitiveness and living standards. Addressing domestic challenges and unlocking productivity requires bold coordinated action across government, regulators and the private sector. Areas we believe require greater emphasis and investment are energy security and the climate transition, housing affordability and regional prosperity. We are ready to direct capital to sectors and projects that strengthen the country's global competitiveness and protect national interests. Turning to customers' financial position. Last year, we saw economic growth strengthening as inflation returned to target range and interest rates began to ease. Household disposable incomes were higher, supported by tax cuts, moderating inflation and lower interest rates. Corporates were also in a position of strength with leverage close to two-decade lows. Overall, our data highlights the resilience of our customers, and this is reflected across our book. The proportion of customers ahead of mortgage repayments has risen to 85%, including offsets. While in business, we've seen materially stronger cash flow conditions with balance sheet buffers approximately 20% above pre-COVID levels. Looking at the current environment, we've seen only a modest decline in operating conditions. Since the start of the conflict, the average income to expense ratio for business customers has edged lower and overdraft utilization is up just 2 percentage points. Conversations with customers indicate an ability for businesses to pass on higher input costs. For example, I was speaking to a major fuel distribution customer who has adapted by adjusting pricing and other conditions in their customer contracts to manage cost pressures and keep supply moving. The consequence to this is that more of the burden, at least initially, looks set to be borne by households. Our card data shows consumers brought forward spending amidst supply concerns. An additional 200,000 cardholders purchased fuel in March who had not done so in February. Not surprisingly, overall consumer spending has slowed since the conflict began, reflecting pressure from higher interest rates and the expiry of electricity rebates. This is still a reasonable rate of growth by historical standards. We've had a more pronounced slowing in home lending, our most interest rate-sensitive portfolio. Mortgage applications have eased in April following a strong start to the year. Hardship applications and personal loan inquiries have increased modestly. This was anticipated following earlier rate rises and remains consistent with seasonal patterns. Voice analytics using AI show customer mentions of interest rates and geopolitical events remain limited for now and are concentrated in regional and outer growth corridors with high commuting needs. We will continue to monitor these developments closely and provide help to customers who need support. Our success is closely linked to the prosperity of our customers, our communities and the broader economy. During the half, we provided an additional $68 billion in home lending, helping more Australians into their homes. Banks play an important role in strengthening financial inclusion. We're directing investment towards initiatives that will have a lasting impact. Across regional Australia, we are increasing access to banking services while investing in agricultural scholarships and technology to support innovation, resilience and prosperity. We're backing more female entrepreneurs to start and grow their businesses with $974 million in lending since mid-2023, closing in on our $1 billion commitment. Education is now the central focus of the charitable Westpac Foundation, particularly to strengthen national literacy and numeracy. This builds on our $100 million commitment to education through the Westpac Scholars Trust, and we're pleased with the reach and impact of our sponsorships promoting participation in sport from grassroots through to the elite. Together, these actions create more resilient communities. First half performance compared to the prior corresponding period reflected our strategy of balancing growth with return while making investments in people, innovation and transformation. Net profit, excluding notable items, increased 1% to $3.5 billion. Our key financial measure return on tangible equity was steady at 11%. Pre-provision profit growth of 3% was driven by slightly higher revenue than expense growth. Consequently, cost-to-income edged lower to 51.7%. Momentum in the key operating metrics of deposits and loans were solid with both growing by 7%. This reinforces the need to stay focused on outcomes that drive a sustainable improvement in RoTE and CTI. A steady financial performance and strong capital position saw the Board declare a first half shareholder dividend of $0.77 fully franked. This equates to a payout ratio of 75.6% of profit after tax, excluding notable items. Improving service is central to building trust and deeper relationships. Customer measures such as MPS suggest we are heading in the right direction, although there is a lot more for us to do. We want to be the primary bank for our customers by providing consistent service excellence when and how our customers want to be served, whether that's on the app, phone and in person. We are making practical changes while also integrating data and AI to anticipate customer needs and deliver safer, more personalized service. Our award-winning app remains our customers' preferred banking channel with 6.8 million daily logins and significant improvements in digital sales in both consumer and business. Protecting customers remains a priority as fraud, scams and financial crime continue to look for ways to evade detection. We strengthened our defenses using AI to detect unusual activity, helping to prevent $181 million in potential customer scam losses. For customers new to Westpac, we've halved the average time to open a new Choice account. We also introduced digital ID verification for customers integrating from New Zealand, India and China, streamlining onboarding for priority migrant segments and improving account conversion. For business overdrafts, time to cash has significantly reduced, enabling some decisions being made within hours. For large clients operating across markets, we have new digital solutions that make foreign exchange and international payments faster and more transparent. This is just a snapshot of our progress. We aim to be Australia's best workplace with the right culture, capabilities and environment to help our people perform at their best. In the past year, we've been building a stronger employee value proposition to attract and retain great people while supporting their development, health and well-being. We've also expanded career development opportunities, including recently rolling out LinkedIn Learning with access to 20,000 courses. Uptake has been strong with more than 12,000 people already using the platform to build skills for career progression with AI courses the most popular. We're tracking progress through employee engagement which is an indicator of productivity, customer outcomes and retention. Our score continues to sit in the top quartile globally with the survey providing timely insights and practical actions. Deposit growth was solid across all 3 segments. Consumer was up 8% and business grew by 5%. In institutional, growth in accounts from the superannuation and resources sectors provided additional tailwinds. Transaction accounts represent almost half of total balances. They also anchor the relationship, providing richer insights and opportunities to bring more of the bank to the customer. Business transaction account sales were particularly strong, growing 34%, while balances grew 8%. Enhancements to our digital propositions and onboarding capability supported targeted growth in consumer. The depth of our customer relationships and improved service are reflected in market share gains across both business and institutional. In Business Banking, lending grew 13%. Target sectors such as agriculture, health and professional services all performed well, delivering double-digit growth. We're also improving the mix with business proprietary lending accounting for almost 60% of new originations this half. These outcomes reflect focused execution and deeper engagement with our customers. Meanwhile, business is at the larger end of town are investing for the future, and we are backing them to pursue growth opportunities. Balance sheet growth across institutional was 23% across a well-diversified portfolio. We have seen particularly strong activity amongst customers involved in the energy transition, infrastructure, critical minerals and data centers. Also, we remain the country's biggest lender to renewables with balances increasing 16%. We have been disciplined in the growth we have pursued with around 70% of new lending to existing customers. In mortgages, we saw a clear improvement in performance through the year. Balances grew 7%, excluding RAMS, tracking around system on average. Importantly, we returned Westpac first-party lending to growth. This reflects deliberate work to get the first-party proposition right. The improvement has been driven by addressing the basics which have made it easier for our people to serve our customers well. For example, Book a Banker has been rolled out nationally which allows customers to make a home loan appointment online with the banker of their choice. We have invested in productivity and capacity, onboarding more than 60 new lenders. We made targeted policy enhancements for investors and the self-employed. We have focused on improving customer advocacy, while maintaining a time to decision of under 4 days. Together, our strategic priorities are shaping the company we want to be. They keep us aligned on what matters and move us closer to our ambition to be Australia's #1 bank and our customers' partners through life. We're making progress and determined to keep lifting standards through a relentless focus on execution day in, day out. Service quality and Net Promoter Scores continue to improve. We've simplified and strengthened the franchise. Risk management is more deeply embedded, and we're well into the delivery of our multiyear transformation agenda. While we have the right people and capability, performance has been constrained by complexity and legacy systems. To sustain improved performance, we need a simpler operating environment that delivers greater efficiency and consistency in service. We are building on the foundations established for the delivery of UNITE by adopting a more disciplined approach to implementing change in the bank. We are moving to a new end-to-end operating model we refer to as catalyst. This is aligned to our priorities, shifting from hundreds of annual projects to 20 delivery units that bring teams closer to customers with clear accountability for multiyear outcomes. The benefit of this model is persistent funding and capacity, giving teams the certainty and confidence to deliver. It will also reduce handoffs and bring our people and expertise together. This, combined with simpler governance, will help improve speed to market and to better serve our customers. This will support strong risk management and a low cost-to-income ratio in time. UNITE is the cornerstone of our transformation agenda, helping to deliver 1 best way to serve customers and run the bank. We continue to make progress with the most initiatives on track and rated green. At the annual UNITE market update in March, we reaffirmed the program's overall scope, time line and budget. We also shared 2 recent major milestones: the migration of customers to 1 wealth platform on BT Panorama. I'm pleased to report we've had no disruptions on the subsequent round of monthly reporting. We also announced the creation of 1 commercial bank to give more businesses access to Westpac's digital capabilities and a broader range of products and services. Customer feedback has been positive and we'll begin migrating customers alongside their bankers prior to the originally planned start date in July. Our strategic investment in our new business lending origination platform has dramatically improved how we lend to businesses. Biz Edge has processed more than $10 billion in new lending with time for decision improving by 49%. Recent releases have added automated pathway selection. So deals flow through the best decisioning pathway. We've also increased TCEs thresholds from $10 million to $20 million. The platform is reducing rework, so our bankers can spend more time with our customers. Westpac One will be a clear point of differentiation in our support for corporate, large commercial and institutional clients. This platform will bring together real-time treasury management, FX, trade and lending with richer data insights. The first customer pilot is already underway with advanced transaction banking capabilities to be introduced progressively over the coming periods, including corporate liquidity management and multi-currency cross-border functionality. Once complete, the platform will provide end-to-end liquidity and cash management helping clients run and fund their businesses more efficiently. Technology, data and AI are vital to how we deliver outcomes across the bank. Our approach has evolved in recent months where we have moved beyond stand-alone experimentation to scaling and embedding AI as an enterprise-wide capability. We're focused on practical use cases that accelerate delivery, drive efficiency and improve customer outcomes. Deploying AI responsibly is critical. We have embedded a company-wide responsible AI and risk management framework with clear governance and safety guardrails that are built into how AI is designed, tested and used. For customers and frontline teams, AI agents help our people find the right information more quickly. Other agents are helping to verify pay steps for loan applications and support mortgage and consumer finance processing. We're also using call, complaints and social media analytics to identify emerging issues earlier and reduce customer friction. Underpinning all this is the Westpac intelligence layer, which brings together data and AI across the bank to support faster, safer and more proactive decision-making. It is too early to extrapolate all the financial benefits of AI. But as our approach matures, we intend to capture measurable and sustainable benefits from our investment. Nathan will now take us through performance in more detail.

Thanks, Anthony, and good morning, everyone. Starting with the financial performance for the half. My remarks will refer to the results excluding notable items, which relate to hedging and costs associated with the sale of RAMS. Net profit was down 1% with lower operating income and higher credit impairment charges more than offsetting lower expenses. The 2% decline in revenue includes previously announced market volatility related impacts. Excluding these impacts, revenue rose 1%. Operating expenses were 6% lower or 2% lower excluding the second half 2025 restructuring charge. These revenue and expense outcomes resulted in a 4% increase in pre-provision profit or a 1% decline excluding the prior period restructuring charge. Credit impairment charges increased to 10 basis points of average gross loans compared to 4 basis points in the prior period. Sustained growth in customer deposits underpinned our ambition to be our customers' main financial institution. The growth of 3% in the half highlights the inherent strength and diversity of our franchise, with all 4 segments growing. Transaction balances grew strongly across business and wealth and institutional, while household savings and mortgage offset balance growth continued in consumer. Deposits grew 3% in New Zealand, slightly ahead of system across both transaction and term deposits. Our economic team continues to expect strong deposit growth for the remainder of 2026. The higher interest rate environment is likely to result in a mix shift towards higher-yielding products. Lending momentum has continued with growth of 4%. Australian mortgages grew slightly above system at 4%. This reflected progress in executing our mortgage strategy and a strong spring campaign with an increase in the proportion of proprietary flow. We continue to target consistent performance broadly in line with system. Australian business lending continues to show good momentum, growing at 4%. The larger commercial segment generated most of the growth, while SME performed well relative to system, albeit off a considerably smaller base. Proprietary flow across commercial and SME continue to improve. Institutional lending grew by 12% and was well diversified. Growth moderated in the second quarter after a very strong first quarter. Lending grew 3% in New Zealand, where demand for credit improved, notwithstanding a challenging economic environment. Strategically, we continue to focus on doing more with SME and small business customers. However, we expect business credit growth to remain skewed to larger businesses. This will suit our existing book mix, and we plan to maintain our growth posture and support our existing customers. Operating income declined 2%, including the impact of prerelease volatile items. Excluding these items, revenue grew 1% as strong balance sheet growth more than offset core NIM decline of $105 million. The prerelease volatile items covered movements in treasury and markets, timing differences associated with the RBA rate changes and the depreciation of the New Zealand dollar. These items subtracted $271 million from net interest income. Noninterest income decreased 3% for the half after rising 10% in the prior period. Fee income was down $23 million, reflecting lower card fees and decreases in undrawn line fees in institutional. Markets and other income decreased $23 million with tightening funding spreads impacting DVA to 31 March. This was partially offset by an increase in wealth income with higher funds under administration. It's important that I review the components of net interest margin in detail. Core net interest margin decreased 4 basis points to 1.78. Timing differences following RBA rate changes detracted 2 basis points and a transient in nature. This reflects both the larger proportion of loans relative to deposits in the consumer bank and the associated revenue mismatch as mortgage customers paid their new rates after 14 days, while deposit holders received their new rates after 10 days. The timing impact was larger this period given it covered 4 RBA rate changes, the non-repeat of the benefit from 2 rate cuts in the second half of '25 and the drag of 2 rate rises in the first half of '26. Excluding this impact, core net interest margin decreased 2 basis points in the half and was flat in the second quarter. Lending margin shows trends consistent with expectations and were lower as competitive pressures persisted. The rate of compression was stable in mortgage and business and was more pronounced in institutional this period. Deposits were stable as the benefit of replicating portfolio was offset by a number of customers qualifying for the bonus rate. Other impacts, including mix, pricing and the impact of a lower rate environment during the half were all modest and netted to 0. Liquid assets contributed 2 basis points, reflecting mix benefits as liquid assets rose by less than the average lending assets. Capital and other detracted 1 basis point, reflecting lower capital balances and a remediation provision. The treasury and markets contribution of 11 basis points was down from 13 basis points. An elevated 15 basis points in the first quarter was followed by a weaker than usual second quarter of 7 basis points. The second quarter reflected less income from balance sheet positioning through a challenging rate environment. Fewer realized gains as we derisked the liquids portfolio and the timing of accruals that will unwind over time. Looking ahead to the second half, the timing differences related to the two 1st half '26 rate rises will unwind and be a 1 basis point benefit. The replicating portfolio is expected to be a net benefit of 2 basis points at current swap rates. Liquid assets are expected to continue to provide a similar mix benefit as they rise by less than the average lending assets. Customer lending and deposit margins will be shaped by the competitive environment. We expect overall lending margins to continue to edge lower. Deposit spreads will benefit from the averaging impact of prior rate rises and stabilization in the qualification for the bonus rate. But will be adversely impacted by expected growth in higher rate products and mix impacts following strong TD growth at the end of first half of '26. We have also provided sensitivities to help understand the potential impact of future rate rises. The recent alignment of pass-through for mortgage and deposit customers will approximately halve the negative timing impact. A 25 basis point rate hike leads to an approximate 1 basis point expansion over the first 12 months, reflecting the impact on unhedged deposits and capital. Operating expenses, excluding the second half '25 restructuring charge, declined 2% to $5.8 billion. Employee costs increased $103 million, reflecting annual wage increases and more bankers across business, wealth and consumer. This was partially offset by higher leave utilization. The increase in technology cost was modest. Fewer contract renewals and supplier rebates masked ongoing cost increases. Volume and other rose $31 million, drivers include higher operations related expenses to support customers. This was lower than anticipated with the teams able to absorb higher volumes and achieve sizable unit cost savings. We generated $258 million of structural productivity savings. This includes the benefit of a simpler operating model, more automation, reductions in brand space and the initial benefits of UNITE. Investments declined marginally with the lower cash spend largely offset by lower capitalization rates. Lower capitalization was a result of the higher proportion of UNITE investment and a number of smaller projects that were fully expensed is they did not meet the threshold to be capitalized under our policy. There was a modest increase in amortization and no software impairments. Overall, we are managing costs well. The underlying cost trajectory is improving, and we are pleased with the execution against our full year plan. This will set us up well for subsequent periods. Looking to the second half, costs are seasonally higher, and there are several items to consider. The extra day count will impact most categories. Staff costs will rise as lead utilization decrease, the average impact of higher wages blows through, and we continue to invest in bankers. Technology expenses are expected to be a headwind as vendor inflation persists and activity continues to rise. Volume and other is expected to be a headwind as branded marketing spend increases, property costs rise, and we expect customer activity to increase in a rate-rising environment. Investment cash spend will be higher and lower capitalization rates are expected to persist. Amortization expense will also be a modest headwind as the capitalized software balance continues to decrease. We have revised up our FY '26 structural productivity estimate by $50 million to at least $550 million. Productivity and efficiency are key strategic focus areas for the management team as we reposition the business to compete more effectively. Moving to investment. We spent approximately $900 million in the half with UNITE accounting for 44% of spend. As foreshadowed, the proportion of non-UNITE investment reduced. The proportion of investment spend that was expensed increased to 69%, with UNITE the main driver, expensed at 75%. Our FY '26 guidance still holds. Total investment spend is expected to be approximately $2 billion, and we have narrowed our guidance range for UNITE. Overall, credit quality metrics remain sound with consumer and business portfolios improving. Stressed exposures to total committed exposures decreased 12 basis points. We have seen continued improvement in 90-day-plus mortgage arrears. These have reduced to 57 basis points. In New Zealand, mortgage arrears increased by 4 basis points to 50 basis points reflecting cost of living pressures and some seasonality. Business customers are managing conditions well with stress rates reduced across most sectors. We are cautious in the ongoing Middle East conflict. The energy-intensive sectors of transport and storage, construction and agriculture are being monitored closely. Notwithstanding improved credit quality in the half, credit provisions are up $212 million to almost $5.2 billion. As a result, overall collective provisions to credit risk-weighted asset coverage increased by 4 basis points with total provisions now $1.9 billion above our base case. Provisions to gross loans were flat at 58 basis points. The increase in collective provision was a combination of modeled outcomes and management judgment, both the result of the anticipated impacts of conflict in the Middle East. The moving parts include updated economic forecast in the base case scenario, incorporating higher interest rates and unemployment and a lower GDP and new overlays of approximately $100 million, largely related to energy-intensive sectors, although net overlays were up by just under half this amount. These increases were partially offset by improvements in underlying credit metrics. Individual provisions increased $71 million and collective provisions rose $141 million. New and increased impaired assets were $495 million. The uptick was idiosyncratic and largely confined to single names in transport and utilities prior to the impact of the conflict. A strong balance sheet is a critical enabler of our strategy and an ongoing feature of this bank. Our liquidity and funding structure has us well placed. Most long-term funding was undertaken early in the half when spreads were more attractive. A total of $24 billion provides flexibility on the timing of issuance in the second half. We were more active in short-term markets and institutional term deposits increased, both form part of our strategy to provide additional liquidity in response to the increase in geopolitical uncertainty and flexibility ahead of the expected $16 billion reduction in mortgages post the settlement of the RAMS portfolio sale. The stronger lending and deposit growth resulted in a modest widening of our funding gap, with the deposit to loan ratio down 1 percentage point to 84%. Our liquidity and funding metrics are above our normal operating ranges, which we believe is appropriate given the market backdrop. Our capital position provides us with flexibility and opportunities over the medium term. The CET1 capital ratio ended the half at 12.4%. Net profit added 74 basis points, while the payment of the full year dividend reduced capital by 57 basis points. Risk-weighted assets detracted 21 basis points with higher lending balances more than offsetting data refinement and improvement in delinquencies. IRRBB detracted 27 basis points with higher embedded losses and an increase in hedged deposits more than offsetting the benefits of standard changes. Its increase means that capital floor is not currently binding. The removal of the operational risk overlay added 17 basis points. Looking to the second half of '26, there are several considerations. We are anticipating a 22 basis point benefit from the completion of RAMS. The completion of the share buyback would subtract 22 basis points. The material IRRBB risk-weighted asset increases are unlikely to repeat. The 31 March position reflects the forward interest rate curve, which included 60 basis points of anticipated rate rises. Slide 79 of the IDP has been provided to assist with scenario analysis. Risk-weighted assets are $1.8 billion above the standardized floor. Standardized risk-weighted optimization initiatives and regulatory changes are expected to provide benefits over the medium term. However, movements in the IRRBB will also impact whether the floor becomes binding. To provide a sense of the potential asset quality impacts that could arise, the sensitivity to a 1 notch downgrade to exposures in energy-intensive sectors is an increase in risk-weighted assets of approximately $4 billion, which is equivalent to 11 basis point impact in the CET1 ratio. We have not changed any of our capital management settings this half. We've summarized the capital management principles that have been agreed with our Board to provide insight into capital management decisions. Our priority is to maintain a strong balance sheet, which allows us to support customers through ongoing uncertainty and cushion against potential macroeconomic shocks. Alongside this, we will invest to grow the business profitably. Paying fully franked dividend sustainably is an important anchor to our approach. This approach of cascading priorities balances our strong financial position and capital position and maintains flexibility. When considering capital returns, we will weigh up both market conditions and our strong franking balance of $3.7 billion alongside value creation for all shareholders. In this context, we have approximately $2.7 billion of capital above the CET1 target adjusted for the declared dividend of $0.77 per share. The payout ratio, excluding notable items, was 75.6%, which is slightly above the top of our target range of 65% to 75%. We have $1 billion of the previously announced buyback outstanding. We see value in the flexibility provided by this form of capital management. With that, I'll hand back to Anthony.

Thanks, Nathan. We track progress against our FY '29 targets with our continued focus on making improvements every day. On service excellence, we're making steady progress. Consumer NPS continues to improve and we are ranked equal second with the gap to first narrowing. In business, we have moved into first place overall. However, we are realistic about the work ahead to improve customer service. In Institutional, we've moved into equal third position in the last annual RSI survey. We aim to accelerate the pace of delivering our transformation agenda by moving to a new operating model from FY '27. We'll also continue to methodically work through UNITE. These will support a structurally lower cost base. On performance, our ambition is to outperform peers over time. Cost-to-income is currently 4.5 percentage points above peers and return on tangible equity is 1.8 points below, with our decisions guided by improving efficiency, returns and discipline. Overall, our operating momentum and financial position are sound, giving us a strong platform to deliver sustainable returns and build a bank for the future. Thank you.

Thanks, Anthony. We'll move to Q&A now. In the interest of time, given we've got plenty of people on the line, if you could limit your questions to one, that would be appreciated. Our first question comes from Ed Henning from CLSA.

Just if you can just run through how you're thinking about yourself versus peers on the replicating portfolio benefit. You've got less than peers coming through. How should we think about you competing against peers? Are you going to be selective in targeting niches? Or are you happy to take a little bit of volume for margin trade-off there, please?

Ed, why don't I start and Anthony might add. I think -- we've called it out, Ed, and we intend just to be as transparent as we can about where the replicating portfolio benefits are. And clearly, sort of decisions over time have meant that we've had more of the replicating benefits earlier than some of our peers. And so in the outlook will be a little bit less. We said in the second half, we'll get 2 basis point benefit from replicating portfolio. And as we go into 2027, we expect that to be something like 3 basis points in 2027 for the full year. As it relates to then how that impacts competitive pressure, Ed, I guess we're competing in the market with everyone every day, and we've got to make sure that in particular on deposit pricing that we're competitive, that we've got our prices there with an offer and a service that our customers will appreciate, but we've got to make sure that price is not a determining factor in them going from one company to another. So we expect that we'll have to continue to compete there whether that means that we have a little bit more margin degradation than others who have got the benefit of the replicating portfolio that may well be math. The important thing for us is just to continue to improve the service at the front end. And you alluded to it a little bit. I think there are pockets where service really does matter where our digital offering can improve, where we can make it easier for customers on things like rollovers and those other important points. And so we've got to continue to make sure we're really focused on those points that really matter.

Yes. I think that's completely understandable. I agree with you there, Nathan. I think we have made progress, though, on our deposit franchise and in particular, the capacity now to originate and do so inside 7 minutes with actually 50% of all the customers originated that now inside 5 minutes. So I feel like we're making the right allocation of our resource and our priority that will allow us to balance that challenge you've called out, Ed, in driving our deposit franchise.

Thanks, Ed. Our next question comes from Andrew Lyons from Jefferies.

Nathan, maybe a question for you just around your capital sensitivity. You've obviously provided what it looks like in relation to energy-intensive sectors in a one-notch downgrade. But would it be at all possible to marry up what that capital sensitivity looks like in relation to your economic scenarios that you've used around your provisioning modeling. I guess if we see your base case assumptions play out, for example, would that, in your view, be equivalent to a 1 notch downgrade? And perhaps if I can extend it to sort of maybe help us understand what would the downside scenario look like from a capital perspective?

Yes. Thanks, Andrew. Yes, we've been really just trying to think about this a little bit, Andrew, and try and be helpful in terms of making sure that people could understand the sensitivity here in the procyclicality in the risk weights. And so I appreciate that other banks looked at it on the ECL basis, we thought it was a little bit more intuitive just to think about those energy-intensive sectors that we took the overlay for and think about that 1 notch, which we said was $4 billion. It's a little bit of a coincidence that if you do run it through the base case of the ECL, we get a very similar number. I think it's about $3.8 billion for the first 6 months or for the next 6 months if we ran through the base case. And I think that's pretty consistent with peers. I think there's probably a couple of other ways to think about this, Andrew, and we're certainly keen for people to sort of understand the sensitivity in the capital base here. So open to all ideas that are sort of helpful for people. If you go back a little bit over time, Andrew, we've had about $10 billion of risk-weighted asset benefit from asset quality over the last 12 months. The majority of that has come through our mortgage book. And so another way to think about that is if you sort of unwound those asset quality benefits, so 90-days arrears are probably down 20, 25 basis points over those 12 months. You could see a scenario where you unwind back to that, and that would be that sort of $10 billion of risk weights in that scenario. So there's sort of lots of ways to sort of think about it, but there's just a few ways to try and triangulate around that sensitivity and hopefully, that's helpful.

Thanks, Andrew. Our next question comes from Jonathan Mott from Barrenjoey.

I've got a question about the Institutional Bank, if I could. And I'd note there was a big growth coming through in that first quarter. But if you look over the last half and also the year, you can see the loan book in the Institutional business is up 23% and 12% in the last half. And then if you look at the margin excluding market, it's fallen from 203 down to 184 in over the last year, so down 19 basis points in the year, 14 basis points. And also, you're seeing a huge increase in the amount of allocated capital going over $1 billion, I wanted to sort of get your feeling on why our lending so aggressively into this sector because the returns don't appear to be coming through are you covering your cost of capital on the new activity, the marginal activity? I know you mentioned some sectors and some green sectors in there. Are you covering your returns on this? Or are you planning on selling down just given the massive growth that you're seeing in the Institutional business.

I'll make a few comments and Nathan, just jump in. I mean it's very deliberately anchored around the customers we have and the sectors where we are, if you will, positioned at the moment. And so that growth isn't, if you will, us just choosing to grow, Jonathan and just chase growth. It's been anchored around the fact that a stack of our customers in sectors such as infrastructure, energy generation, mining, resources, data centers, et cetera, all growing rapidly. And so we've just been banking them. And so about 70% plus of all of what we've done is just with the existing customers. So point of one. Absolutely, the priorities when we deploy that capital in those loans that we are aiming to get to the return target we have for shareholder. And I can confidently say that we are delivering on that in terms of the loans that are being originated. I do acknowledge also that 1 of the interesting aspects of what we're doing here is many of these customers are really highly rated. And so hence, the margin is a little narrower just because they are very, very strong investment grade, and they are very high-quality risk classes. Then the other thing I'd just call out is that what you see in the institutional business is sort of that feature where markets moving, you're supporting your existing customers. There's a lot of growth in a very concentrated period banking certain themes and then it dissipates and it slows. And so it's important that we do follow our customers in that setting. The other thing I'd say is given the ratings and the position of many of these customers, they'll end up taking a lot of that debt down in the form of going to capital markets. And then we'd obviously anticipate given that support we provided that, that gives us opportunities in the capital markets, debt capital markets, risk management opportunities. And so I do feel like it's aligned with how we want to support our customers and how we bring the bank to bear for those customers given what we're doing for them at the moment.

Thanks, Jonathan. Our next question comes from Tom Strong from Citi.

Nathan, I just wanted to ask about your comments. I mean, you noted that the funding gap has widened modestly in the half, and we're almost at the point of realizing the RAMS funding with that deal closing. How do you sort of think about funding your growth from here? And will we see the above system growth be sustained across mortgages business and Institutional? Or will the growth be a bit more targeted going forward on the asset side?

Yes. Thanks, Tom, for the question. I think I don't -- we've been deliberate and I made some comments just about how we're structuring the balance sheet in the lead up to RAMS that we've probably done about $15 billion of short-term funding, and then we were quite deliberate with some institutional TDs just to give us a little bit of flexibility around the settlement date. There's some learnings from sort of how we manage things around the TFF that we're sort of applying there. When that washes through, we'll obviously be back to sort of a more normal deposit loan ratio in the bank and then sort of expect that, that will continue to sort of grow proportionally. As it relates to our posture in terms of growth more medium term or over the second half, I think we've tried to be a bit clear as we go through the preprepared remarks. I think Anthony has covered Institutional well. There's some long-term macroeconomics here that are -- or macro trends that are really driving credit appetite and investment. And so, we continue to want to participate in that. Growth moderated in institutional in the second quarter off a really strong first quarter, but we would continue to expect to support customers to the extent they want to participate in those macro themes. In business, we've still got some appetite to take share, and we would expect to continue to do that. And in mortgages, we've been pretty consistent. And I think consistent is the word we'd like to stress here. We want to be at or around system in those books, and we think we can continue to do that. If that means sort of 0.8 or 1.1%, we'd call that in the margin of error on those books, Tom. So that's what you should expect from us going forward, and that's what we've been able to do with the balance sheet we've got post RAMS.

Thanks, Tom. Our next question comes from Andrew Triggs from JPMorgan.

Just a follow-up on margin growth balance. I mean are you you're getting the balance right there, the NIM fell quite appreciably in every division? And connected to the question, what's the sort of decision tree you have on reengaging with the buyback or paying a special dividend rather than persisting with above system growth? And maybe if I could just push my luck, you've really strong offset balance growth across the industry which is weighing on average balances in the average interest-earning assets and average balance sheet. Could you sort of set out whether that should be expected to continue at current levels, please?

That's three.

Yes. So maybe I could start and Anthony can sort of jump in. And maybe I think the essence of the first part of the question, Andrew, was really around sort of how we're going on lending margin. And I think that you'll do the work on that, but I suspect the 3 basis points in the half was pretty much as we expected. So we came into that period thinking that we had a much more moderate compression in lending margins and what we've seen in prior years in particular. And we were expecting sort of a gradual decline there. We probably had -- we've had 3 basis points over the half. It was 2 in the first quarter, and it was 1 in the second quarter. So it's a little bit of a moderating trend. Mortgages has been pretty consistent and business has been pretty consistent, just edging lower, and then we had a little bit more in Institutional. So I think I don't see anything that's sort of out of the ordinary in terms of the lending compression that we're having there relative to peers. And I think it's consistent with this participating in the market, as you're seeing. And as I said, with that posture that we've got around system in mortgages, we want to take -- continue to take a little bit of share in business bank, but with a bigger push into -- more in proprietary. And then in insto, we're really just following some of those macro themes. And I think 3 basis points was pretty much as we expected for the half.

The only thing I'd just add, I mean, the quality of the cohort that we've been particularly active in Institutional and Business Bank is very high quality. So as you'd expect, lower margin. I think the other thing -- and this is what we are working on, and we must get better at is, we need to do more in SME small business where there's clearly a better margin. We're just not where we want to be there, but we're making progress. And I think also there's a few product components that we really haven't got right, and we've only now got the means to do that, Andrew. So for example, working capital and invoice financing and the margins there, we've now got the best, what we think is one of the best platform capabilities in the market. And that's been growing nicely, but we're just very small at the moment in that. And so we've got some way to go. I just feel like that will, in time, help balance any idea or risk or worry that we're not getting the margin right in terms of the growth we're pursuing.

And then, maybe the second question, I think, Andrew, was just around like capital management and how we think about that relative to growth. And I think we've tried to lay out here some sort of cascading principles that we would think about. And as you know, we've put -- investing profitably in the business is important to us. And so we start by wanting to make sure that we've got a strong balance sheet that can be there to withstand the shocks that we might have. And I answered Andrew's question to try and give some of the sensitivity as to where asset quality could go on risk weight. So we obviously carefully watch things like that. we want to be able to support the growth in the business. Anthony has spoken about that, and we've talked about that. And then when we get down to what we do when we balance out capital returns, it will be only after we're really comfortable that we've got those first two right and that we're -- that's the best use of capital in our belief, that investment in the franchise.

Yes. I want to just add 1 sort of emphasis there. It's not just picking growth and just trying to grow the sheet. As was flagged in my comments and previous question, we're supporting our existing customers, and they're just a very active moment in the institutional at the moment. So we just got to be there. And so that is the right way to deploy our capital in terms of supporting our existing customers, and we are generating the right return on that capital, and that's how we think about it as opposed to just some myopic focus on growth.

Thanks, Andrew. Our next question comes from John Storey from UBS.

I guess, quite deep into the call, and I don't know it has been much spoken about in terms of asset quality, I suppose. I should switch gears and get your views. I mean, Westpac definitely got one of the more bearish views on the underlying economy in terms of your forecast. How do you guys think about growing at the rate that you are into what -- on your expectations is going to be quite a steep kind of deterioration in terms of the economic outlook? And then how do you square that off with a through-the-cycle credit charge just given the change in your business mix at the moment?

Well, look, I think first and foremost, John and at this point, I'll continue to emphasize, there's a moment at the moment, the Institutional space where those customers are pursuing those macro themes that are very attractive and very much on strategy. And so it's just critical that we support our customers. Likewise, when I look at Business Bank and the growth we've had, it's all been at the larger end of the business book and particularly ag with the theme there, health care and professional services. So we feel like supporting those existing customers in those particular areas has been, first of all, the right thing to do for the customers. And secondly, the right risk orientation because there's obviously very strong underlying thematics that support those growth opportunities. And so that's what's driving the way we're going after growth. I do think, though, with the environment we're in, with the Middle East conflicts and some uncertainty that you're likely to see some areas pull back. And so there will be less growth just because customers are just going to sit by and sort of wait until that uncertainty clears. And so I don't think we'll see a sort of a headlong rush of ongoing growth into particular challenges because already people are just pausing and tempering what they might do, what might be their investment plan. And so as a result, I think our growth will reflect that. The only area that I'd say is an exception to that is, I think the institutional business, particularly with the large corporates who are very focused on, for example, infrastructure or power generation, transmission, renewable power generation, transmission, that investment thematic underpinned by the government is the one that I think will continue. And we'll obviously look to make sure we do that thoughtfully and as we have been doing over the last 24 months.

I just maybe just 1 point to add, but just as a reemphasize, I think it's unlikely, John, that you get all of those things happening at the -- at the same time. So I think if we walk into an environment where the base case scenario plays out, you are going to have lower growth in credit and that will just be a reality. And we're seeing that Andrew made -- Anthony made the comment in his preprepared. We're seeing that a little bit in mortgages our growth in applications in April relative to the second quarter was down quite a bit. The last time it was down or comparably down like that was in 2023, where we had the rate -- the last rate tightening cycle. So we're seeing the early signs of that. In business credit, we probably came into the year thinking business credit might grow at something like 7 got to the first quarter, we thought that it would be -- felt like it was growing at something like 10. And we would expect now even though pipelines are really high, pricing inquiries are really high. So it feels like there's good activity there, that could easily be something like 5 or 6 now. So we're expecting that slowdown as that base case goes through.

Thanks, John. Our next question comes from Matthew Wilson from Jarden.

Yes. Matt Wilson, Jarden. The opportunities from IT innovation appear exciting. And when we look at your net interest income around 20% of your net interest income or 30 basis points of your margin comes from customers lending new money for free. And in the context of digitization, AI and other innovations, how sustainable is that business model? You've got new competitors, new technology changing the fundamental nature about banking.

Yes. So Matt, thanks for the question. I agree. The -- I think banking is changing. I think new competitors, new ways of competing will put pressure on those ways that we have or those ways we've assumed and those approaches we've adopted in the past. So definitely acknowledge that. I think a couple of truths, though, that are foundational, which is a deposit is a very, very privileged thing to provide and obviously, to receive. And so therefore, an Institution, which is very well capitalized, very well rated and highly trusted is sort of foundational to how we want to position ourselves in the marketplace with deposits. And then things like the digital offering and then other forms of value stores such as digital assets are all of what we must improve on and are planning to deliver on over the course of the next 2 or 3 years to ensure that we can compete and definitely offer the customers what they want, where and how they want it. Do acknowledge that also the introduction of AI and Agentic programs mean customers will likely have the means to move and identify best pricing all the time real time, and we understand that emerging challenge and are definitely working to make sure we can meet that challenge. And I think it's something that in a funny old way is already in place. If you think about our institutional business, we take deposits from our customers there, we're still able to generate a good return for shareholders, a good margin for that business by dealing with very sophisticated customers who can move their deposits and check price, check at all times. I think that's likely the future for banking at some point more broadly. And so therefore, we've just got to make sure we've got the offer, the means and the tools to be able to provide that to our customers and serve them the right way and meet that competitive challenge head on.

Thanks, Matt. Our next question comes from Matt Dunger from Bank of America Merrill Lynch.

Anthony, if I could please just follow up on the questions about balance sheet led growth. You've previously talked to the market share opportunity at Westpac on the noninterest income side from deepening customer relationships, but the growth in markets income doesn't appear to have matched the volumes. You've called out the product capabilities and FX. When should we expect to see this opportunity converted to market share gains across noninterest income?

Thanks for the question, Matt, and spot on. We definitely have seen some real progress in our noninterest income, and I think about over the last 12 months. But there is so much more for us to do, and it all comes back to where we are as a bank and what we've got to do, which is to continue to lift and get that service offering and get that, if you will, execution of how you're going to bank day in, day out, right? And so one of the things I'd call out is that we do feel like, for example, our FX offering in consumer is starting to improve, but there's so much more for us to go there. We definitely feel very underweight in what we're doing from, for example, an FX perspective in the Business Bank. And so there's more for us to do on that front. We're equally cognizant that we're not doing anywhere near enough trade finance, invoice financing, working capital style solutions in the business bank which will all contribute to noninterest income opportunities for us. And so just acknowledge that we're working with what we've got now. We're executing well with what we've got. What we need to do is and what we have done is start to invest in and expand and make sure that we're prioritizing so that we do grow that noninterest income. It is the case that I think the growth in deposits and lending as it sits here today, at least that's the cornerstone of that relationship with our customers and then how do we graduate and provide much more to our customers over time. That's very much how we're going after it.

And maybe just one quick add, Matt, just I think all the points, Anthony said spot on. There is a little bit of volatility half-on-half. So I'd just be a little bit wary of that, like in terms of our credit trading business and in DVA. I think just -- I think some of the underlyings might be a little bit better than that, but not taking away from where Anthony was going that the opportunity ahead of us is material.

Thanks, Matt. Our next question comes from Carlos Cacho from Macquarie.

You had the slide where you discussed kind of the AI opportunity ahead of you. You've had obviously quite a bit of change in the leadership of around AI in the bank over the last year or so. I was just wondering if you've had any changes in the approach there? And what, if any, additional investment in infrastructure you think are required to really leverage that. And we've seen from some global peers is investing in large orchestration layers that can be used across the group and really handle a lot of the admin, if there's something like that ahead of you or if it's a bit more piecemeal or if you already have the infrastructure in place that you think you need.

So great question, and one we could circle on for hours, Carlos and maybe we should at your conference tomorrow. But definitely, first things first on AI. The focus for us is to get the right people in the right seats. While it is a wonderful technology, a wonderful tool, ultimately, it's only as good as the people we've got using it. And so we've been very focused over the last 9, 12 months to really get the right people, and I think we put the best team on the street together, and we're up and running. The second thing is then making sure that it is adopted by everyone in the company, and that's what we've done. I think we're one of the first ever to say, let's have every single employee, no matter what role access to Copilot, so that they can -- if you will start to immerse themselves in it. Because the real unlock for us, the real opportunity for us with AI is that it challenges you to be far more open-minded about how you do things and ask you to think about doing things in a different way with far more productivity, far more speed, far more consistency and far more service consequence for whoever you're working with as a result. And so it does require a bit of a mindset shift, Carlos, and that's what we're really focused on. And I think that's what we've now got. And I feel like we've got enough momentum in the company to now go after it. And then what we're doing, and we're under Andrew McMullan's leadership. And we're going to do a day on this later in the year where you can really see how we're doing this. We are building those capabilities, which allow people to utilize those AI engines, those AI tools to do things faster and more efficiently than they ever have done. And then more importantly, we intend to provide more of that capability to our customer-facing roles and then in time to our customers so that they have full access to what we represent and what we want to represent from an AI perspective. So Yes, we're up and running on it. I think we've got the right people in the right seats. I think we've got the right embedment program in the company. And I think more importantly, we're now starting to see tangible outcomes but it's all about how do I have everybody using it, how do I have everybody ambitiously using it in a way to reinvent and refresh how they do their job and deliver better outcomes internally and for our customers.

Thanks, Carlos. Our next question comes from Brendan Sproules from Goldman Sachs.

Brendan from Goldman Sachs. Nathan, I just have a question on the impact of higher cost deposits on your NIM in the second half. I noticed in the Business division and in Institutional, you've seen a big pickup of fastest growth of customer deposits has come in TDs. Also noticed that you pricing TDs a lot higher across Retail and Business Bank over 5% now on the 12-month special rates. To what extent is this going to impact NIMs in the second half? And is this a function of this really strong credit growth that you're seeing across business and institutional that you're having to lean on these more expensive sources of funding?

Yes. Thanks, Brendan. I think if I just isolate sort of outlooks on margins for deposits in the second half. I guess, it's probably one of the line items when you walk across the NIM bar that's got a few moving parts in it. So we will get the benefits of the higher cash rate. So they'll flow through. We have had qualification rates in our savings product, which has been a really strong growth product for us in consumer. They've been ticking up. And in this half, we had some impacts from higher qualification rates. I think we spoke about that at the quarter and at the full year where we've gone from sort of 84% of our customers qualifying to 85%. That's actually plateaued this half. So I don't expect that, that will be a continuing headwind on deposits going forward. And then as you said, we've had a higher growth in TDs at the back end of the half, which will be a NIM drag as we go into the second half. And then that will -- when you put all that together, you've got a couple of benefits, and then you've got the replicating portfolio coming through, and then you've got some of those higher-priced deposits coming through. I also expect that we'll have more growth in those higher rate sensitive deposits. It's just when you go back in history, Brendan, which I'm sure you've done when you think about rate cycling, rate tightening cycles, you do get more growth in those more rate-sensitive products. And we certainly saw that in the Business Bank. I think in Institutional, we were a little bit more deliberate. It was much more about -- we've had very steady sort of TD growth in institutional, not particularly strong growth at all. And then we were very deliberate just towards the end of the period, just to grab a little bit of that, as we said, there's more of funding trade into RAMS. So I don't expect that continues, but we would expect that we'll continue to see growth in the higher-yielding products in business and in consumer as customer preferences push that way.

That's really detailed answer. And if I could just ask a second question. I just want to clarify your comments on business lending growth. I mean it's been very strong in the period. You said it could drop down to sort of 5% to 6%. Given what you're seeing in your pipelines now, I mean, how realistic is that going to happen in the short term? Are we still going to see this macro wave flow through and then maybe into '27, you see a slowdown?

Yes. Maybe I'll just start with a couple of comments, and Anthony, I'll have a good sense to market with his conversations with customers. I think there's one thing I think, Brendan, it's just worth calling out is we've already seen a real bifurcation in the system here in business lending. So even to date with the strong growth we've seen, it's been really pushed towards the top end. So you haven't had huge amounts of growth in SME and small, but you've had very significant growth in the larger corporate sector, which is in our business bank and then in the Domestic, Corporates and Institutional. So we've seen that skew and we -- so the first point is we think that skew continues. And so that will suit our existing book mix. And as Anthony said, we're largely lending to existing customers here. In terms of pipeline and things like there's lots of stats I could throw at you, Brendan, that would tell you that it's not going to slow down. So pipelines have been building in the second quarter. They are stronger than they were 12 months ago. They've really, really rebuilt over the last little while. We were talking to the pricing desk yesterday, we've got pricing inquiries this week, which are above the 12-week average. So there's lots of front-of-funnel activity that we could tell you looks like it's going to continue. But we just also know that in our conversations that when you've got this rate increasing cycle and the level of uncertainty that we've got, we're just expecting that, that will take longer to pull through, and we're going to have some slowing of that. So our judgment on this, as I said, was -- we came in thinking we could have 7% business credit growth. We certainly are in a period in the first quarter where we felt like we were tracking much higher than that. We're just -- we have to be in a environment now where we think that slows and that is not going to slow dramatically. 5% business credit growth would still be a very healthy number. I don't know if Anthony has anything.

Look, I think that bifurcation is the key point. I think the small business, SME and was coming into this year, navigating things. They were not sort of in a robust disposition around what they're going to do and how they're going to grow. But -- and so that was active, but I think that's the one that will slow and maybe it is already slowing a little bit now. But the larger end is very clear and I think very much of the view at the moment, notwithstanding the uncertainty they can see our way through it. They feel they can absorb and/or pass on the price or other disruptions that are following from the Middle East. And so there, if you will, pretty robustly going after it. I think the one to keep an eye on for all of us is just simply those knock-on effects of a disrupted supply chain and a whole list of impact that, that will have on broader economic activity. We just got to keep a close eye on that over the next 3 months.

Thanks, Brendan. We've still got quite a few questions to get through. So just a reminder, if you can limit it to one, we appreciate it. Thank you very much. Our next question comes from Richard Wiles from Morgan Stanley.

Anthony, Nathan, I think in your overlays, you addressed energy-intensive sectors. I'm not sure you included agriculture in that overlay. Could you explain why you didn't? It's a very diesel-intensive sector. It also has a high reliance on fertilizers. So I'd just like to get your thoughts on the outlook for that sector, please.

Yes. I'll just give some comments on what we did, Richard, and then maybe offer an opportunity for Anthony. I think -- what we did here in terms of the overlays, Richard, is probably as you would expect, but there's a little bit of top down. There's a little bit of bottom up here. And so I think as it relates to the overlays, we've certainly been working in the business, looking at all our sectors. And so we've ended up with overlays on a small number of sectors that got identified through that work. But rest assured, you sort of look at the -- you start with the whole portfolio, you start to look at where we've got higher proportions of energy imports. And so that will be more subject to it. And then you sort of narrow down as to where do we then think that we've got the potential for losses. And so we narrowed in on the industries that we've landed on. So I guess, the point being rest assured, we looked at Agri. But for us and where our current book is and what we're expecting to flow through there, what the teams when they did that bottom-up detailed work came up with is that's not 1 where we expect losses in our portfolio. That's not to say that we don't expect that, that's an industry that's going to have some challenges with higher input costs and all the other things that will flow through there. It's just for us when we did the work. It wasn't 1 where we thought that, that would translate into needing a specific overlay over and above what we're holding.

Yes. I mean, Richard, the agricultural sector, the farmer, the cattle, the best risk managers bar none. I mean I've had a few conversations and I don't know anecdotes getting in the way of evidence, but they're well ahead in terms of organizing themselves on diesel reserves and storage, well ahead on fertilizer. I've got some farmers saying, maybe I might start selling some of this diesel just to capture the price opportunity at the moment. So I don't want to be flippant about it, but it's remarkable their ability and where they're at. And so we're very -- we feel very confident about the position of our book. That doesn't mean that there won't be some challenges there, but certainly, as we sit here today and with the -- what we can see and working on with them over the next 6 months, so many of what we're working with in a position where they'll find a way through. And I would also just -- it is the case that I think the government has done a very good job on this front, which is making sure the diesel is prioritized in the right way that ensures the Australian economy keeps ticking over and that rural Australia continues to have what it needs. And likewise, has also done an excellent job on that fertilizer and the prioritization of that acquisition and bringing into the Australian marketplace. So I do think, while Agri is 1 we're very focused on, it does feel like at this point, it's in an okay spot.

I probably should have just said 1 thing, sorry, Richard, to just jump back in. It's also been a sector where we've seen utilization rates are down. So we have seen them come into this particular little bit of shock with pretty low utilization rates. So that's a little bit seasonal, but that's also played into some of the thinking.

Thanks, Richard. Our next question comes from Brian Johnson from MST. Brian?

Just a question. The only thing that really matters from an asset quality perspective really in a crisis is housing. If I have a look at Slide 68, I can see that overall, the housing actual loss rate is up a little 9 basis points, whereas the other banks are saying it's 0. When I have a look at Slide 74, the investor, I can see it gapping up quite markedly to 1.8 basis points. Both of those numbers are after basically the lenders mortgage insurance. Is there something I'm missing here? Why is Westpac's housing loss rate higher? And can we just get some comments basically on the outlook for that going forward given that we've got higher rates and you've got this kind of sharply worse outlook going forward under the base case.

Yes. Thanks, Brian, and it might be one I can -- we can pick up online and just go through. I must admit I haven't looked at where peers reported this over the last couple of days. So we can have a look at that and where the trends might be slightly different. I think you -- where we would look at in terms of the outlook for housing credit is back to the basics. And so it is all about unemployment. And then when you have the unemployment, it's all about the -- where the asset prices are. And so we do come into this even with the economic forecast that where that Lucy is put through, which one of the other questions was it did feel like it was a bit more severe than where others were, we saw unemployment ticking up to just under 5%, which is in historical levels still really low. So I think when you think about that asset quality outlook for housing, it is going to be all about that. And then where we should be concerned is sort of the obvious spot. So we know that to lose money in mortgages, it's in the tails and that will be people who are earlier into their home buying journey, they haven't had the opportunity to build up the buffers and then they have a life event, whether that be unemployment and illness or something like that, and that's when they get into trouble. And so it is all going to be about that unemployment number really as you think about the outlook.

Thanks, Brian. We've got some questions from the media ready to go. So Stephen Johnson from Seven West Media. Stephen?

Yes. I'm from The Nightly, which is part of Seven West Media and the West Australia. Lucy Ellis, your chief economists are seeing 3 more interest rate rises are taking it to an 18-year high of 4.85% per cash rate. Anthony, how concerned are you about surging mortgage stress and the prospect of a recession in Australia?

So Lucy's forecast here. So we're certainly forecasting rate rise in May today and then 1 in June and likely 1 in August. I think the rate rise, if it was the case today, would then return as to where we were about 18 months ago. And so moving beyond this. I think the next 2 rate rises take us into territory we haven't been in for a period of time. The other thing I'd sort of want to sort of acknowledge is that while we have the employment levels that we have and even with a higher unemployment level from here, there is still so much more capacity and ability for the economies to absorb any potential future rate rises and, therefore, potential impact on our mortgage book, for example. I think the -- at the moment, we don't forecast recession. But people who talk with absolute certainty today in this environment, I think, misinformed because it's an unusual environment in which we're in and there's no doubt that there's a lot of competing forces here. On the 1 hand, increasing interest rates, looking to slow the economy down. You also have actually increased input costs, increase pressures coming through to the consumer with the Middle East conflict, et cetera, which also could have a dampening effect on demand and may therefore facilitate or help in the slowdown that the Reserve Bank is looking for and thus, maybe the future rate rises don't need to be as much as it has been called or suggested. So we've got to watch and see how that plays out. I do think the uncertainty is the bigger issue here because the thing that I'm more worried about, I think we are more worried about is that businesses and investment decisions are put on hold or it's impossible to make an investment decision that you will build or you will invest in or you will construct something and you want staff for 6 to 9 months, you just can't make that decision at the moment because of the uncertainty. And so the risk is that no decision today or a delayed decision today is in effect of no investment opportunity. And as a result, activity will fall off in that forward setting of 3, 6, 12 months out. And so that's the thing that we just want to stay focused on is that investment decision and activity is still, if you will, able to think about future investment, future plans, which ensure that the activity levels, which are helping us through at the moment will sustain and thus, I think that's the worry in the context of potential recession. Having said that, we remain at this point with our forecast. I think there's a way through this, and it will obviously also be dependent upon another input of uncertainty, which is the federal budget next week and its role and contribution to both helping the Australians through particularly interesting times and also potentially what it will do for future economic activity. It will be something that we'll work out over the course of the next few weeks.

Thanks, Stephen. Our next question comes from James Eyers from the AFR.

Just to the last 2 questions. You called out some softening activity in the mortgage market in April and also hardship sort of applications increasing modestly. Can you just talk a little bit more about that, please, Anthony? Like if we do get these 3 rate rises coming through or even just 1 today, do you expect these conditions that you saw in April in the mortgage market extending through to May and June?

Yes. Look, I think what we saw in April was something that was anticipated. It wasn't more dramatic than was otherwise to be expected as a result of the 2 previous rate rises. And frankly, they're signaling both from government, from regulators, from Reserve Bank about a need to slow down and the idea that we may increase interest rates further. I don't think we sort of can also tie any of what we saw in April necessarily back to Middle East conflict, et cetera. We definitely have seen a couple of things, which I think we just need to be cognizant of is consumer sentiment has really fallen off. And so the drop in consumer sentiment is an important indicator and alongside that, the -- it's only 1 month sort of, if you will, result, but the drop in business confidence is just another indicator that things are slowing. And so those are the things that we're currently cognizant of. We also noticed that auction clearance rates are a little bit lower. We've also noticed that people's expectation of price is being a little bit more tempered. We also noticed that turnover is slowing. So things are slowing. And in many ways, James, that's exactly what the Reserve Bank was looking for, which is to see things slow and moderate and bring, if you will, activity to a point where we get inflation back into that target band. So hopefully, I've given you some reflections and some inputs there that you're looking for. But we do also feel that it's a little early to be calling things and talking with absolute certainty because the other thing that we just need to keep in mind is with employment levels as they are and even if there's an increase in unemployment, as I say, there's still plenty of capacity there in terms of what it provides for the economy. And also notice that when the constrained consumer arrived into 2026, the prepayment levels, the buffer levels on the mortgage book are at 85%, where people are at least 1 month or more ahead in their payments. And so there is quite a bit of buffer in the economy as we sit here today.

Thanks, James. Look, we've still got quite a few callers online, but we are out of time, unfortunately. So we'll be available over the course of the day to take your questions. Thank you very much for dialing in.