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Edited Transcript of ABA.AX earnings conference call or presentation 26-Aug-19 12:01am GMT

Full Year 2019 Auswide Bank Ltd Earnings Call

BUNDABERG , QLD Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Auswide Bank Ltd earnings conference call or presentation Monday, August 26, 2019 at 12:01:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Martin John Barrett

Auswide Bank Ltd - MD & Executive Director

* William Ray Schafer

Auswide Bank Ltd - CFO & Company Secretary

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Conference Call Participants

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* Nicholas Caley

Baillieu Holst Ltd, Research Division - Equity Research Analyst

* T.S. Lim

Bell Potter Securities Limited, Research Division - Head of Research and Banks & Insurance Analyst

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Auswide Bank FY '19 Financial Results.

(Operator Instructions) I would now like to hand the conference over to Mr. Martin Barrett, CEO. Please go ahead.

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Martin John Barrett, Auswide Bank Ltd - MD & Executive Director [2]

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Good morning, and thank you for joining us for the presentation of Auswide's financial year '19 results. I'm Martin Barrett, the CEO of Auswide Bank and with me on call is our CFO, Bill Schafer.

Today, I'll be providing a summary of our 2019 full year results. Before handing over to Bill, we will cover the financials in more detail. I'll then conclude with an outline of our 3-year strategy and our financial year '20 outlook. But before we open the session up for questions, just for reference, Bill and I will be referencing our investor presentation release today.

So we kick off then and we turn to Slide 2. I'm going to start by saying financial year '19 was certainly a challenging year for the industry. It faced a number of headwinds, including high BBSW levels for most of the year, followed by what I would describe as the dramatic change in sentiments, and historically low interest rates in the last quarter of the year.

The market continued to be extremely competitive for lending deposits, but Auswide remains well positioned with a strong balance sheet and has delivered, I think, a comparatively sound results.

We delivered net interest revenue of $63.185 million, which is up 3.5% year-on-year, and our underlying NPAT of $17.201 million achieved modest growth, which is positive compared to current industry performance.

Our loan book pleasingly grew 6.6% (sic) [6.3%] to $3.131 billion, which is 1.9x system growth of 3.3%, using RBA data, higher than that if you are using APRA data.

And our funding mix include the customer deposits showing outstanding growth, increasing 12.6% to $2.373 billion.

Our capital adequacy of 13.79% remains one of the best in the listed Australian banking industry. We paid a total dividend of $0.345 per share, a final dividend of $0.185 per share is $0.005 higher than the prior year. Our total dividend yield for financial year '19 is very healthy 6.73% fully franked. Our dividend has continued to improve over the last 4 years.

We'll now turn to Slide 3 and talk about some of the financial year '19 achievements. We are committed to maintaining lending discipline in growing our loan book responsibly. Our success in doing this, I think is evident in our arrears, which are at historical lows. And in fact, at 74%, our loan book has a loan-to-value ratio of less than 80%. Our capital remains unquestionably strong providing headroom for future loan book growth. Our net interest margin stabilized despite challenging market conditions through the second half, due to material improvements in our funding mix as customer deposits grew 12.6%, and we've reduced our exposure to higher cost securitization earlier in the year.

A year ago, growing our deposit base and shifting our funding mix was a key financial year '19 priority in order to give us greater control over our NIM. This highlights the positive reception the term deposits and our core deposit products have received in the marketplace.

We continue to invest in technology to deliver a better service to our customers. As part of this, the rollout of apply online remains on track, and our ongoing investment in data analytics and business intelligence is showing some good results. I will touch on our partnership with QRL later in the presentation.

Slide 4 shows a challenging year and references the declining system growth for home lending, along with the difficult and unpredictable interest rate movements over the year. Housing loan competitions continue to be significant. As I said before, despite these challenges, Auswide Bank grew at 1.9x system and which is reasonably successful in protecting our NIM as we continue to ensure our growth is profitable for us.

Just moving on to Slides 5 and 6, which I call innovation and staff-led service proposition. They continue to innovate and have focused their attention on the product development and improvement. Recently, we are being recognized by numerous awards, which have been won over the last year, and we put some of those in this presentation.

Our products and our services which see us rank very highly and are viewed as such, it's possibly due to significant risk -- due to the significant efforts of our bright staff.

On Slide 6, we show our staff engagement, which at 93% is significantly higher than the industry which, on the whole, has experienced a substantial decline. We see this as highly important as service levels are highly influenced by staff engagements.

On that, I will now pass over to Bill, who will cover the financials in more detail. Thank you.

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William Ray Schafer, Auswide Bank Ltd - CFO & Company Secretary [3]

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Thank you, Martin, and good morning. Martin has provided an overview of the financial highlights for the financial year '19. I will now lead you through the slides relating to the detail of the financial results.

The combined effects of declining system growth, volatility in funding costs and in competition as well as ongoing compliance requirements have created a challenging financial environment. Auswide has responded to the challenges and produced what we believe is the solid results and the platform to move forward across the 3-year of the new strategic plan.

On Slide 8, we have financial year overview. The underlying NPAT for the financial year was up 0.5% to $17.201 million compared to the prior year underlying NPAT of $17.108 million. The financial year '18 underlying results were derived after adjusting for operating losses and the gain on sale of the equity investment in MoneyPlace. There was also an adjustment for professional fees relating to that transaction.

The underlying profit for the financial year '19 is the same as the statutory NPAT as there are no material one-off or nonrecurring items to be adjusted. On a statutory basis, the NPAT was down 3.8% from $17.886 million to $17.201 million, which included the previously mentioned capital gain on the sale of MoneyPlace. The loan book increased by 6.3% to $3.131 billion, up from $2.945 billion. It should be noted that the investment in the Managed Investment Schemes, that is the peer-to-peer lending platform, are not included in the loans and advances line in the balance sheet to comply with the change in challenged standards. These are disclosed in the financial assets.

The NIM was down 6 basis points to 187 basis points year-on-year, with the greatest impact from funding costs being experienced in half 1 of financial year '19. Overall, the loan book growth, accompanied by the movement in the NIM, has produced an increase of 3.5% in net interest revenue to $63.2 million, up $2.2 million.

The EPS on an underlying basis fell marginally from $0.41 to $0.408, and the return on net tangible assets or return on tangible equity is 9.1%, down from 9.5%.

On Slide 9, we have our NPAT reconciliation. The NPAT reconciliation slide discloses the movement in the line items convincing with the effect of the minority interest in discontinued operation for the financial year '18 to arrive at a prior year underlying NPAT of $17.108 million. As previously discussed, the net interest revenue was up $2.2 million or 3.5% as a result of loan book growth and the impact of elevated BBSW particularly in half 1.

Other noninterest revenue was static, with an increase of just over $100,000 year-on-year.

Expense line items, including depreciation and amortization, occupancy and bad and doubtful debts remained flat across the year, highlighting the objective of keeping overheads aligned with the CTI or less.

Employee benefits were up $900,000 due to an increased investment in customer service staff relating to home loans and digital projects management. This investment contributed to the increase in overall loan book of 6.3%. The fees and commissions expense was up across the year due to an increase in brokerage fees and some elevated compliance costs.

The increase in general and administrative expenses included upward trends in insurance and technology expenses. The underlying NPAT was up 0.5% to $17.201 million.

Let's turn to Slide 10, which provides a summary of the loan book. The total loan book increased by about 6.3% across the year to $3.131 billion. That's up $186 million from the prior year of $2.45 billion. The figure included the consumer lending portfolio and funding of the managed investment scheme in P2P lending. This loan book was 1.9x system growth as per the RBA's financial aggregates data of 3.3%. The consumer lending portfolio continues to grow, up from $44 million to $62 million across the financial year.

Home loan settlements were up 13% in financial year '19 to a level of $616 million. Most importantly, the loan book growth was achieved while maintaining the lending discipline and responsibly managing risk.

On Slide 11, we have the net interest revenue. The net interest revenue rose to $63 million, up by $2.2 million, with a net interest margin of 187 basis points while 6 points lower year-on-year. The volatility of the BBSW and the flow on effects for funding costs resulted in a 5 basis point decline in half 1. The NIM stabilized across half 2 on average, resulting in a 1 basis point difference from the half year result, which was 188 basis points to 187 basis points of financial year. Importantly, Auswide recorded an exit NIM of 194 basis points at June 2019.

On Slide 12, we have the loan book diversification. The diversification of the loan book has continued with the growth across the financial year. The Southeast Queensland book has significantly increased, now 39.3% of the total. The Central Queensland book has decreased marginally to just under 30% of the total loan book. Loans in advance outside Queensland now account for 24% of the total, with Sydney experiencing an increase from 10.7% to 11.5% of the book across the financial year.

On Slide 13, we have some data around the loan valuation ratio. Auswide continued to manage risk in the loan book while achieving growth, demonstrated by the strength of the security. The majority of home lending customers have substantial equity in their properties. As demonstrated by this graph, 73.8% of the loan book has an LVR of 80% or less, and the greater than 80% LVR loans are LMI-covered. The greater than 80% LVR loan has continued to decrease as a proportion of the total. Across the 3 years from June 2016, the loans greater than 80% LVR have decreased from 31.5% to 26.2% of the total loans as at the end of this financial year.

The bank continues to see strong growth in the less-than 60% LVR lending. Auswide's home lending book is well secured, and marketing campaigns to target lower LVR lending to ensure growth continues while not increasing risk.

On Slide 14, we have information around our funding mix. As Martin said earlier, Auswide has strategically targeted a more efficient funding mix across the financial year to assist with the volatility of the BBSW and elevated funding costs. Volatile BBSW levels across the year resulted in reduced reliance on securitization, which now forms 14.8% of total funding compared to 22% in financial year '16. Customer deposits rose by 12.6% year-on-year to $2.373 billion, representing 71.4% of the funding mix, which represents material growth across the 3 years in financial year '16, when customer deposits were 66.8% of funding. This is a $480 million growth in customer deposits across 3 years.

The At Call deposits increased 17% or $128 million across financial year '19 to $881 million. There will be an ongoing strategic focus on continuing to build customer deposits in financial year '20. Auswide has also maintained dual investment-grade ratings with Fitch and Moody's of BBB+ and Baa2, respectively.

On Slide 15, we have our loan book arrears. The loan book arrears continue to highlight the sound credit quality of lending portfolio within the bank. The arrears remain at historically low levels with total arrears greater than 30 days past due at $14.2 million at June '19 compared to $14.1 million in the prior year, a marginal increase in dollar terms. However, as a proportion of the overall loan book, arrears decreased to just 46 points of the total loans compared to 0.48% for financial year '18. This is well below comparable indices for Auswide's peers with a spin for other banks at 1.12% and regional banks at 2.01%.

The implementation of the new AASB 9 accounting standard in July 2018 further strengthened the provision for the start of bad and doubtful debt. Tax reserve for credit losses has increased to $4.5 million, which provides a conservative whole of life view of risk in the loan book.

On Slide 16, we had our dividends and EPS guidance. The Board of Directors have declared a fully franked, interim and final dividend of $0.345 per share for financial year '19. The final dividend has been increased from the prior year $0.18 to $0.185 per share. This represents Auswide's commitment to further improve the growth in dividend return to shareholders. Based on the 30 June share price, the dividend yield has been calculated at 6.73% fully franked. The return on net tangible assets is 9.1%, down from the 9.5% based on underlying profit of the bank. The Board further agrees to suspend the DRP for the final dividend due to the strength of Auswide's capital.

On that point, we had our capital Slide #17. The total capital adequacy ratio of Auswide remains strong at 13.79%. This is down from 14.89% at the end of financial year '18, as loan book growth and dividend payments have utilized capital across the financial year. This has been done without the need to raise additional capital other than the ongoing employee share scheme.

The CET1 ratio also remained strong at 11.76%. The capital is materially in excess of the Board target and will adequately fund strong loan book growth during financial year '20.

In summary, Auswide has responded to the challenging financial year with above system loan book growth and a NIM, which is stabilized across the second half. Strategic focus on the funding mix has resulted in full funding ratio rising to 71.4% as customer deposits increased. The net interest revenue increased and disciplined expense management has contributed to a solid underlying NPAT, up 0.5% to $17.2 million. The capital strength has allowed the Board to declare an increased final dividend of $0.185, bringing the total dividend to this year to $0.345 fully franked.

I'll now hand back to Martin.

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Martin John Barrett, Auswide Bank Ltd - MD & Executive Director [4]

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Thank you, Bill. I'll now cover on our 3-year strategic plan, our community engagements. And then, I'll finally want to check outlook.

So Slide 19 is our 3-year strategic plan, financial year '20 through to '22. It's underpinned by 6 pillars. Firstly, we are focused on building the Auswide brand through consistent messaging and enhanced customer service. The partnership with Queensland Rugby League and the Maroons does represents at least a part of the Spread Your Wings journey. With a leverage to QRL membership base to drive broker flows and new customer acquisition while our community engagement initiatives help us to further differentiate ourselves from the larger banks. I'll talk a little bit more about QRL in a minute.

Secondly, we are focused on building partnerships that support retail and business banking growth across our platforms between member and community-based organizations, and by leveraging partner technology and customers, we will be able to drive loan cost growth. To assist this, we appoint a partnership manager to deepen relationships and deliver growth efficiently earlier in the year.

We are also working on improving the customer experience through investment in digital implementation and improving the customer hub to maximize the network service we provide in our growing Southeast Queensland and interstate customers base. A better customer experience and more efficient digital capabilities will help us lower our cost-to-income ratio and increase our return on net tangible assets.

Further on the 3-year strategic plan on Slide 20. We are focused on automating our processes and simplifying our products as a central focus area for back office, including processing, finance and credit decisions. Improving our broker service proposition with faster turnaround times is also vital as we look to become a more efficient organization, allowing us to maximize returns and capitalize on the opportunities ahead.

Our fifth relates to strengthening the bank through enhancing staff capabilities, cyber risk resilience, which is critical today and our ability to detect fraud while reducing errors and further developing our risk audit processes. It's also about maintaining strong funding, capital and balancing the need of our various stakeholders.

Finally, our sixth pillar is nonorganic growth. We will continue to monitor and view opportunity in Fintech as well as partnering opportunities that deliver scale and drive profitability and continue to look at appropriate partners in merger and acquisition territory.

If we just move back to our partnership with QRL on Slide 21. Our partnership with the QRL was a success in 2019. Over 9.5 million viewers watched the 2019 State of Origin series exposing over 820,000 households to Auswide Bank brand. In Games I, II & III series were with the 3 most watched programs to date in 2019. We're obviously a Queenslander. We probably didn't enjoy the results. The partnership delivered immediate results with over 250,000 websites views during the campaign, a strong increase on previous years. Auswide's brand awareness in Queensland increased following the 2019 State of Origin series, with a further 7% or over 315,000 people recognizing our brand in this state. The key objective of the sponsorship is to increase Auswide's brand awareness particularly in Southeast Queensland, our fastest-growing region in lending terms. We see real opportunity in this area, which accounts for over 39% of our loan book.

We look forward to extending our relationship with the QRL over the coming years, driving brand awareness for Auswide Bank to meet a goal of over 60% in Southeast Queensland, opening up a significant market for Auswide.

On Slide 22, our community, environment and sustainability. We're actively involved in our local community (inaudible) adopting sustainable business practices and following responsible lending practices. In financial year '19, we supported many events and projects across the region of Queensland, with our branches serving as fundraising collection points. And we've included in the deck some further details of these events as outlined in the slide.

Our sustainable business practices aim to reduce that impact on the environment. Examples of these practices include promoting electronic options as an alternative to paper, using recycled products, energy-efficient lighting and managing our consumption of electricity.

Finally and obviously, we're not involved in the finance of companies that engage in the export or the mining of fossil fuels.

Now let me turn to outlook. I know the view on outlook would be full without so -- be across the regulatory environment, which has changed. On Slide 24, we provide an update. So APRA is progressing changes to the capital framework to ensure ADIs remain on track to meet the unquestionably strong capital ratio benchmarks. Auswide's capital ratio was 13.79%, which we are already well ahead of the new benchmarks.

Responsible lending is a focus of both ASIC and APRA, but also and probably more importantly, it has been a focus of Auswide Bank now for quite some time. Auswide continues to operate prudently, continually reviewing our lending practices to ensure that we meet regulatory but as well as our own requirements.

Banks have been heavily scrutinized about the way they manage the financial risks of climate change to their business, highlighting the importance of remaining vigilant against cybersecurity and fraud protection. We continue to invest in our cybersecurity and fraud detection capability.

APRA's Prudential Inquiry into CBA and the Royal Commission have highlighted the importance of not just having a healthy balance sheet but having a strong governance, sound project and appropriate internal controls and clear accountabilities. Again, we believe the culture of Auswide Bank remains sound, and we have been concentrating our attention on ensuring that we meet all our governance and regulatory compliance requirements, getting the balance right with some various stakeholders of Auswide Bank.

And finally, the so-called unbalanced playing field between the big banks and the rest is pleasingly arriving. APRA have continued to address this issue by a range of capital level programs that we're focused on, we expect that this will continue, which clearly, I think provides for a better and improved environment for Auswide competing on an even playing field with the bigger banks.

On Slide 25, we've included our Regional Queensland economic update, and I'll summarize that slide by saying that activity continues to improve in regional Queensland. It has been a tough environment and economic improvement has been slow; however, we are seeing essential improvement in Queensland from increasing confidence and greater certainty. It seems the federal election with several large projects in significant government investment happening in Rockhampton, Mackay, Bundaberg and Townsville. Bundaberg, in particular, is experiencing some improved land development sales and some signs of recovery in the region.

Let me now turn on to outlook on Page 26. We believe the environment continues to be uncertain. It is low growth and [ADR] should be challenged to grow profitably. As those of you who have followed our story, we will continue to balance growth and NIM to achieve profitable growth. Our 3-year strategy provides a roadmap for our financial year '20 through '22. And over that period, we are targeting a cost-to-income ratio of 60%; a return on net tangible assets of 10% in the short to medium-term; above-system loan growth across home, personal and business lending; and a stable NIM.

We will also work hard to improve our cybersecurity and fraud protection capabilities to meet our regulatory compliance obligations. Continuing to improve our customer experience and awareness of Auswide -- of the Auswide brand, particularly Southeast Queensland, are fundamental elements of our strategy, which I have touched down already and nevertheless were pleasing.

Growth opportunities will continue to come from the ongoing reputation challenges, regulatory capital increases, remediation and increased regulatory focus, particularly on the big 4 banks. Financial year '19 has been a successful year as we delivered on our commitments to grow the loan book responsibly and shift our funding mix to deposits. Our investment in IT, product innovation and customer service were also integral to realizing the growth that we achieved. Going forward, we will continue to focus on disciplined cost management, expanding our digital footprint, enhancing our value proposition to our customers and to our brokers.

And on that, I'll now hand over to the operator to open up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question today comes from Nick Caley with Baillieu.

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Nicholas Caley, Baillieu Holst Ltd, Research Division - Equity Research Analyst [2]

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On Page 26, I want to check because obviously the 60% CTI and 10% ROI, is that a 3-year target from now? Or...

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Martin John Barrett, Auswide Bank Ltd - MD & Executive Director [3]

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In terms of the cost-to-income ratio, Nick, I would say that we are aiming for that to be 2 to 3. Next on to return on net tangible assets, 1 to 2.

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Nicholas Caley, Baillieu Holst Ltd, Research Division - Equity Research Analyst [4]

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Okay. Are there any big ticket cost items to come in terms of investment?

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Martin John Barrett, Auswide Bank Ltd - MD & Executive Director [5]

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I think we're not expecting any major cost items. We're continuing to update our -- particular service systems but they're not big ticket items in the overall scheme of things. We've done the majority of the heavy lifting during the first half of the year in terms of that big investment. So we expect that our staff costs will not be increasing in the same level they did this financial year. So overall, maybe answer to that question is we do expect that our expense growth going forward should be made more towards the forecasted CTI increases. Bill, do you want to add anything further?

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William Ray Schafer, Auswide Bank Ltd - CFO & Company Secretary [6]

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Yes. Nick, you'll see in the P&L that our depreciation and amortization has remained very flat. What we've founded as we continue to invest, particularly, in technology, that's reflecting some of the old projects that have been completely depreciated because we're replacing one with the other, which has been a good story. We have reflected in our budget an upward trend around CTI, as Martin indicated, with the investments in new technology. And we also had some operating costs, but what we're finding is that those increases are being offset with our disciplined and administrative costs, so they are not spinning out as being a major increase, either this year or into the next.

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Nicholas Caley, Baillieu Holst Ltd, Research Division - Equity Research Analyst [7]

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Okay. And just following -- just either on M&A or Fintech investments, is there anything -- I don't know, you tell us if it was, whether this is still -- discussions continuing?

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Martin John Barrett, Auswide Bank Ltd - MD & Executive Director [8]

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We continue to look for opportunities, Nick.

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Operator [9]

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(Operator Instructions) Your next question comes from T.S. Lim with Bell Potter.

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T.S. Lim, Bell Potter Securities Limited, Research Division - Head of Research and Banks & Insurance Analyst [10]

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Well done. Turning back to Slide 26, you mentioned stable NIM. Is it in reference to FY '19 NIM or the exit NIM? And how do you follow-up the reason for saying stable NIM going forward?

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William Ray Schafer, Auswide Bank Ltd - CFO & Company Secretary [11]

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Yes. T.S., during the presentation, I did indicate that we've had a more stable NIM across the second half. You know from the history of the BBSW that they were very elevated in the first quarter of that half and then declined across the second quarter. That's my comment that, on average, it was stable albeit that was made up of 2 separate quarters.

So what we have found out at this stage is an exit NIM of 194 points. We are reasonably confident that we will maintain that across the third quarter, but may be a very brave man, not knowing what the target of Reserve Bank or BBSW will do to predict beyond that. But at this stage, our exit NIM of 194 appears maintainable, at least across the third quarter of this financial year.

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Operator [12]

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(Operator Instructions)

There are no further questions at this time. That does conclude our conference for today. Thank you for participating. You may now disconnect.