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Edited Transcript of ANZ.AX earnings conference call or presentation 1-May-19 12:00am GMT

Half Year 2019 Australia and New Zealand Banking Group Ltd Earnings Presentation

Melbourne May 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Australia and New Zealand Banking Group Ltd earnings conference call or presentation Wednesday, May 1, 2019 at 12:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jill Campbell

Australia and New Zealand Banking Group Limited - Group General Manager of IR

* Mark Hand

Australia and New Zealand Banking Group Limited - Acting Group Executive of Australia

* Michelle Nicole Jablko

Australia and New Zealand Banking Group Limited - CFO

* Shayne Cary Elliott

Australia and New Zealand Banking Group Limited - CEO & Executive Director

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Conference Call Participants

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* Andrew Lyons

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Andrew Triggs

JP Morgan Chase & Co, Research Division - Research Analyst

* Azib Khan

Morgans Financial Limited, Research Division - Senior Banks Analyst

* Brendan Sproules

Citigroup Inc, Research Division - VP

* Brett Le Mesurier

Shaw and Partners Limited, Research Division - Senior Analyst of Banking and Insurance

* Brian D. Johnson

CLSA Limited, Research Division - Research Analyst

* James Ellis

BofA Merrill Lynch, Research Division - Director

* Jarrod Martin

Crédit Suisse AG, Research Division - Director and Joint Lead Analyst

* Jonathan Mott

UBS Investment Bank, Research Division - MD and Banking Analyst

* Matthew Wilson

Deutsche Bank AG, Research Division - Australian Bank Equity Analyst

* Richard E. Wiles

Morgan Stanley, Research Division - MD

* Victor German

Macquarie Research - Analyst

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Presentation

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Jill Campbell, Australia and New Zealand Banking Group Limited - Group General Manager of IR [1]

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Okay, we're ready to go. Okay. Good morning, everyone, I'm Jill Campbell. I'm the Head of Investor Relations for ANZ. Welcome to all of those joining us in Sydney today for the presentation of ANZ's half year financial results 2019, and also to anyone listening on the phone or via the webcast. We're also live streaming today's presentation on social media through Periscope and Twitter. And you can access that feed by searching for ANZ Media on Twitter. We lodged a number of documents this morning with the ASX, and they're all available on our website in the Shareholder Centre. You can access a replay of the presentation along with the Q&A via our website from around midafternoon today.

Our CEO Shayne Elliott and CFO Michelle Jablko will present for around 40 minutes, and then we'll go to Q&A. Thanks, Shayne.

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Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [2]

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Good morning. In 6 years of reporting to you as either CFO or CEO, I cannot recall a time when the outlook for the home market operating environment was more different than the past, but we're well prepared and have delivered a balanced result for the times. We made progress improving returns, strengthening capital and delivering higher earnings per share. And we've made further improvements in preparing for a more difficult future, a future where competitive advantage and long-term success will go to those that understand the need for change and deliver on it at pace.

Three years ago, we laid out a plan based on a simple belief that the way to succeed in an environment of slower growth, faster change and lower margins was to do a few things and do them well. As a result, we set about building a simpler, stronger and a safe and more productive ANZ. On the cost front, we've absorbed $550 million of inflation in net time and took out over $300 million in cost over and above the benefit we got from selling businesses.

On capital, we sold 23 businesses and reduced risk-weighted assets and institutional by $50 billion. These and other actions freed up $12 billion of capital, which we used to rebalance our portfolio, return capital to shareholders and invest in targeted growth.

On simplification, we've cut the number of products in Australia by a 1/3 and successfully transferred 2 million customers from legacy products onto contemporary platforms. We've simplified processes, decommissioned systems and reduced our branch footprint in across both Australia and New Zealand by more than 20% as customers moved aggressively to online solutions. We've built a stronger and safer balance sheet. Yes, we've got more capital. But beyond that, only 18% of our Australian home loan book today is interest only, and 86% of our institutional book is investment grade. And I feel good about those settings. We have the lowest software capitalization balance of our peers because we expense more of our investment upfront. On remediation, we resourced the team early and are well progressed on getting funds back to customers and learning from our mistakes.

And finally, on people, we invested in and rebuilt our senior leadership, made significant progress changing the way we pay people, skewed our resourcing more heavily to software engineering and data and changed the way we work, adopting agile methodology across much of the bank. And this is the most fundamental change in the structure and way of working in decades, and it's delivering results in terms of productivity, engagement and speed. These actions sometimes came at a short-term cost. But we're more focused and capable as a result. We recognized that community, regulatory and customer expectations have changed. This is not the time to do everything, and it's not the time to focus on absolute market share growth. This is the time for prudent and targeted growth, a time to focus on the long term, recognizing that the cost of getting it wrong will be more than just credit losses. Nonfinancial risk, including regulatory, legal and capital costs, are playing an increasing role in our assessment of risk and reward.

So in summary, we have chosen a strategy of action over hope. We're working hard. We have more to do but are better prepared and have delivered a balanced result despite the difficult conditions and outlook.

So let me now just quickly summarize the half year results. Relative to this time last year, profit for continuing operations is up 2% and earnings per share, up 5%. Return on equity increased to 12% while strengthening Tier 1 equity by a further 45 basis points. Net tangible assets per share increased 4%. Sustainable revenue growth was always going to be tough, but our diversified business did generate a decent result overall. Absolute costs were down another 1% despite FX translation moving against us, despite absorbing inflation and despite the increased cost of compliance.

Our discipline in managing shareholders' capital is a strength. We're comfortably above APRA's unquestionably strong target, well ahead of the 2020 deadline, even after using some of our surplus capital to reduce shares on a shoot. Organic capital generation remained strong, and announced asset sales will further strengthen our position. The Board has declared a fully franked dividend of $0.80 per share, and we will again be fully neutralizing the DRP on market.

So in summary, it is a tough environment, but our business mix is an advantage, and our capability and determination in managing the 3 Cs of capital, cost and change have prepared us well.

So turning to the operating businesses. New Zealand is performing well. There are however obvious concerns about potential changes to the capital regime. Our primary focus is the impact of these proposals on the New Zealand economy. Let's be clear: what's good for New Zealand is good for ANZ. We understand and support the desire for a sound financial system, but all insurance policies come with a cost, and we need to understand what level of insurance is appropriate and affordable for the New Zealand community. It's too early to comment on the impact for ANZ other than to say we're in a better position to manage any change given the simplification and strengthening of our New Zealand business. If the rules do change, we have a number of practical options to manage and optimize our capital, and we have a responsibility to do so.

We've been active in New Zealand since 1840, longer than any other bank, and we're one of New Zealand's biggest investors. It's our intention to be active and successful in New Zealand, employing thousands of Kiwis, paying a significant amount of tax and helping New Zealanders to thrive for many years to come. But we cannot expect our shareholders to unreasonably subsidize those ambitions. We will therefore be making an active contribution to the debate because it's important for New Zealand to get this right.

Institutional is now a very well-managed business, delivering better, consistent results for shareholders and customers. Our institutional return on equity reached almost 11% in the half, and we know we can do even better. While we manage it as a whole, the contribution from a well-managed, improving Asian network added diversification, growth and quality to the group's result, and I'm proud of that. But we know better than most that institutional is a tough business. Most competitors fail to generate consistently decent returns. Most fail to generate a fair balance between customers, shareholders and staff. And we know that the credit cycle can be particularly savage to poorly disciplined institutional balance sheets. But recognizing those weaknesses is the first step in managing them, and we're managing them well. With the institutional business in much better shape, our primary objective is to maintain discipline on cost, on capital and on customer selection and, in doing so, make further improvements to generate a sustainable decent return for shareholders.

Australia retail and commercial has had the toughest headwinds: slower growth, tighter margins, changing customer preferences and higher remediation costs. Our data show that there is more stress in parts of Australia, particularly for retail borrowers and particularly those converting from interest only to principal and interest. Unsurprisingly, some of that is due to stubbornly low wage growth, the fall in house prices and the extension and time it takes for houses to sell.

In terms of our approach to the market, we continue to favor owner occupiers even though that comes with a drag on margins. This is a marathon and not a sprint, and we've made conscious choices about where we think value resides. We tightened standards, particularly in home lending, partly in response to our assessment of risk and reward and partly due to changing definitions with respect to responsible lending. I regret neither change. They are the right thing to do. But I do accept that we could have implemented the changes in a more thoughtful and balanced way and not doing so put unreasonable stress on our processes, our people and our customers.

Thinking about what's changed, it's important to remember that the industry has benefited from 30 years of stable, high return growth. And so we engineered a production line to maximize efficiency and deliver those high returns. But as we learned in the Royal Commission, while it was an efficient process, it did fail some people badly. We're now asking that same process to deal with nuance, judgment and exceptions at an unprecedented scale. And unsurprisingly, that process is struggling and, in many cases, is no longer appropriate. So we have 2 choices. We can assume the world will return to the way it was and focus on tactical solutions to manage the short term or we can assume that these changes require material reengineering for the long term.

I acknowledge that some in the industry will take the first option. It's an attractive choice and involves less disruption and will deliver better short-term results. But at ANZ, we think this would be a fundamental misreading of the environment. Our customers and the community are demanding a different banking system, and ANZ is adapting to those expectations. We do not believe there is any going back. That means rethinking the basis on which we compete, which segments we focus on, what do we do where and how we responsibly fulfill the needs of our customers. And we're well advanced in that work. In the short term, we are taking targeted actions while respecting our risk appetite and responsible lending obligations and, at the same time, investing in a more strategic reengineering for the long term.

The challenge for our Australian business is complex: completing our remediation task and rebuilding momentum in chosen areas and ensuring our bankers and customers have the tools needed for long-term success in a fast-changing world. It became clear that a single governance model for such a complex business was no longer optimal. Other parts of our business are running well, and so we can focus more of our resources on building the foundation for longer-term success in our Australian business. So we've made changes to the way we organize ourselves, how we prioritize work and the leadership of the team. And I'm excited about these changes. We've been able to make -- take advantage of the diverse skills and experience at ANZ to build a strong, capable team fit for the times and to maximize the opportunity ahead.

While we've transformed our bank more in the last 3 years than at any time in our history, the market has been changing even faster. Headwinds that we foresaw in 2016 are stronger than predicted. And as we said before, we're fortunate we started getting costs and our balance sheet in shape early as it's not something you would want to be starting now. We're not sitting idly hoping for a return to the golden years of banking.

So today, I want to outline the actions we're taking over the next 3 years. This is not a change in strategy but more working -- more work, constructing a simpler, safer, more agile bank. We have 5 priorities. First, facing into the mistakes of the past. In these 3 years, we will make some standard progress on remediation with the vast bulk of refunds to customers made and processes reengineered to avoid repeat. We will be a stronger, safer bank for customers, and these costs will largely be behind us. Second, we will continue to simplify and strengthen the bank, including exiting, shrinking and closing noncore businesses and assets. Third, we will step up investment to reposition and retool the Australian business for targeted and prudent growth with lower cost and more flexible platforms. Fourth, despite ongoing investment, we will continue our intense focus on cost. All else being equal, in 2022, we expect to run this bank for less than $8 billion with a global workforce and branch network to match. And finally, we will make further investment in transforming our skills and capabilities. This includes increased investment in training and leadership, changing the fundamental reward structure for our people and strengthening our accountability and consequence frameworks. None of these are easy tasks, but they will result in prudent and targeted growth, a safer bank and better returns.

Our track record simplifying New Zealand, transforming institutional and the hard decisions selling 23 businesses demonstrates our capability, determination and willingness to act. Part of adapting to these new expectations is embedding our core purpose in everything we do: who we bank, how we behave and what we care about. And our purpose is to shape a world where people and communities thrive. It's an integral part of our strategy and how we will drive long-term value. Our purpose guided our decision to provide relief to farmers impacted by natural disaster even though it came at a short-term cost. It informed our approach to sustainable and affordable housing, an area of particular interest. We will fund and facilitate $1 billion in projects to deliver more than 3,000 affordable, secure and sustainable homes to buy and rent here in Australia. And to support our ambitions in New Zealand, we launched a healthy homes incentive to encourage Kiwis to improve the environmental sustainability of their homes. We also continued our work with larger customers where we've funded and facilitated more than $3 billion of environmentally sustainable solutions in the last half, taking our total commitments to almost $15 billion.

To ensure customers have the most appropriate product, we've already proactively contacted over 275,000 customers to help them get better value from their banking. Our approach to remediation has been driven by the need to rebuild trust and led to the creation of a centralized responsible banking team. That team is currently resolving issues with more than 2.6 million customers' accounts in Australia. That's not a number that anyone is proud of. But I am proud of ANZ's focused approach and commitment to put things right as quickly as we can, to learn and to improve. And all known remediation challenges are fully provided for. At the end of March, we've successfully made remediation payments to approximately 420,000 customer accounts and, in some cases, getting refunds into our customers' hands in half the time it took previously.

So in terms of the future, we are confident institutional and New Zealand can continue to deliver, not without challenges but each with strong teams and track records of delivery. In Australia, the environment will continue to be challenging. There will be less high-quality volume in the home loan market. And we don't want to chase volume for the sake of it, we will continue to invest in targeting the right customers, better risk-based pricing and being easier and faster to deal with. At a group level, our focus is continuing to build a safer, stronger and simpler bank. And our focus on capital efficiency, cost and safety will remain.

If you walk away today with only 3 points from my presentation, I want them to be these: first, we have prepared well for this increasingly difficult environment; second, future success requires a different focus; and third, this is a team with a track record and the courage to create long-term competitive advantage as a result.

I'll now hand over to Michelle.

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Michelle Nicole Jablko, Australia and New Zealand Banking Group Limited - CFO [3]

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Good morning. As Shayne said, we've been positioning ANZ to be simpler, stronger and more productive for the longer term. We've taken some hard decisions, knowing at times they'll have short-term negative impacts. Our actions to date have helped us deliver a balanced result in tough conditions. ROA for the half was 12%. Cash profit was $3.6 billion, which is up 2% compared to the same period last year. It's up 19% half-on-half. Remember, we took large remediation and other charges in the second half of last year. EPS is up 5% PCP and 20% half-on-half assisted by a $3 billion share buyback, and our balance sheet is strong.

We achieved this result with good contributions from institutional and New Zealand, another half of absolute cost reduction and continuing low credit losses. The Australian business has had its challenges, but we've largely offset that elsewhere. We've taken a very deliberate approach to ensuring we have a strong balance sheet and that we're maximizing capital efficiency across the group. This has positioned us well. Under our capital strategy, we've bought back $3 billion worth of shares so far, and we've neutralized the DRP to 5 halves in a row. Average shares on issue are down 2% over the past 12 months, contributing to our 5% increase in EPS. Our APRA CET1 ratio is 11.5%, well above unquestionably strong and we've reached this before the completion of our Australian wealth sales. We'll pay an $0.80 per share fully franked dividend. And as I mentioned, we'll again fully neutralize the DRP. Our funding and liquidity metrics are also strong. So we're safer and stronger, and we've released some capital, which has enhanced shareholder returns.

As we look forward, we're on track to complete our Australian life insurance sale at the end of the May. Following this, our capital management approach in terms of buybacks, dividends and franking will depend on 3 factors: the impact and timing of regulatory requirements; ongoing business needs; and the earnings and growth outlook for the group, including its composition. We'll then look at the most efficient and effective way to return any capital surplus to shareholders. As part of this, we'll need to consider RBNZ's proposal to increase capital in New Zealand. As drafted, it could mean NZD 6 billion to NZD 8 billion of additional capital over the next 5 years, around 50% more than we hold today. But it's really too early to conclude as we're still working through the consultation process. It will also be driven by any business decisions we make about the size and composition of our New Zealand balance sheet in the future. And any impact on the group will depend upon a number of reviews that APRA has underway. We'd hope to have clarity on all of these over the coming months. Even in the worst case, we're starting with an unquestionably strong capital position, and we've shown in the past that we're prepared to make hard decisions on capital allocation just as we've done in institutional, Asia retail and wealth.

In terms of franking capacity, as I've said before, our position is tight. This has become more pronounced this half given the lower contribution of the Australia geography to overall earnings. And clearly, our franking capacity for dividends going forward will depend on future Australian earnings.

This slide takes you through some of the larger items to consider when comparing business trends to prior periods. Cash profit this half included a net gain of $86 million related to divestments and other large and notable items. The total cash profit impact of these items is similar to the same period last year. However, the difference is more pronounced when comparing half-on-half. If you look through larger notable items, cash profit was up 2% PCP and flat half-on-half.

Customer remediation continues to be a priority. In this half, we took remediation charges of $175 million before tax. At the end of the half, total balance sheet provisions for remediation stood at around $700 million. We're working hard to put customers right. We're also completing product and service reviews to identify any other failures, and we're fixing systems and processes to ensure these don't happen again. We resourced our team early, and we're well progressed. We essentially dealt with salary planner fee for no service issues in prior years, and we took a large provision last year for our previously owned aligned dealer groups.

In our Australian business we've been working through our reviews over the past 18 to 24 months. Larger and higher risk products were reviewed first, so many of them have already been provided for. Here, you can see the components of our cash profit movement half-on-half. I'll spend a few minutes now talking you through the key drivers and then talk about each of our businesses. I'll do this on a half-on-half basis in order to better highlight the trends despite seasonality.

As Shayne said, we think this is the time for prudent and targeted growth. You can see how this shows up in our balance sheet. Total loans in the Australia Division fell $4.7 billion or 1% half-on-half. This was most pronounced in investor and interest-only home loans, unsecured retail lending and consumer asset finance. We offset this with growth of around $2.5 billion each in institutional and New Zealand. Our balance sheet mix had an impact on margins but was positive on a risk-adjusted basis.

Margins in our core customer businesses were flat for the half. If you look at the chart, you can see mix had a negative 2 basis point impact offset by deposit and asset margins, which were up 1 basis point each. The mix impact was split between home loans switching from interest only to P&I, which continued the trend from last half, and other mix shifts like lower unsecured retail lending and growth in lower risk segments in institutional.

Deposit margins were up mostly in institutional due to rising rates and deposit optimization. Asset margins also improved. However, the underlying trend was different. Australian home loans were repriced in September, but there were a number of offsets through the half. These include lending competition in all businesses, support to customers in drought-affected communities and regulatory changes in Australian credit cards. Looking forward, underlying margin pressures are likely to continue.

Now we could have achieved better margins by taking more risk, but we think that would have been the wrong thing to do at this time. We improved risk-adjusted margins for the group by 3 basis points. In institutional, they increased 7 basis points with the continuation of our strong balance sheet discipline and by 5 basis points in New Zealand driven by strong risk and price discipline in commercial and Agri. In Australia risk-adjusted margins were down slightly, this was because of mix given lower volumes in the higher-margin cards business. Notwithstanding these, we improved risk-adjusted margins in each of home loans, cards and personal loans.

I've already said it, but it's a point worth repeating: we achieved another half of absolute cost reduction. Costs were down 1% for the half. We achieved this even though we had higher regulatory and compliance spend in Australia and New Zealand, a greater proportion of our OpEx on our investments spend and adverse FX impacts. Excluding FX, costs were down 2%.

Personnel costs were up $78 million as the benefit of FTE reductions were more than offset. Some of this is timing to do with when we accrue for long service leave and incentives. We also brought some technology managed services in-house, which benefited costs overall. Other costs were down $165 million or 7%. We drove lower property costs, lower D&A and lower managed services and consulting spend. We expect costs to be slightly higher in the second half given normal seasonal differences in marketing and investment spend. For the full year, we expect costs to be down, excluding any adverse FX impacts. We're pleased with our progress, and our commitment to absolute cost reduction remains the same. It may not always be linear, but lower costs remain an intense focus.

One of the positive outcomes of the changes we've made in our business is the low provision charge. At $393 million for the half and with a 13 basis point loss rate, it was a strong outcome without the same tailwind from write-backs and recoveries that we had last year. These were $128 million lower half-on-half. New and increased individual provision charges were both lower than last year. The collective provision balance is very healthy at $3.4 billion. You'll recall, with the transition to AASB 9, we topped up the CP provision balance by $813 million. At the end of the half, we increased it slightly to reflect a more cautious outlook. These offset reductions because of portfolio change and compares to CP releases in both halves of last year. While a more benign environment has helped provision charges, our internal long-run loss rate is now 10 basis points or 27% lower than March 2016, reflecting the significant changes we've made rebalancing our business.

Australia home loan losses remained very low in absolute terms at $45 million, but 90-day past due rates increased and were 100 basis points at the end of March. This was driven by 4 main factors. Around half is due to the denominator given lower volumes, then there was the impact of customers switching from interest only to P&I. We saw $8 billion of contracted switching this half, and interest-only lending is now down to 18% of our mortgage portfolio, around half of what it was 2 years ago. We've also seen customers taking longer to come out of delinquency, which makes sense as the property market has slowed, and more customers going into hardship, particularly in New South Wales, although off a very low base. This is an area we're managing closely. But to put it in context, when we look at the increase this half, 12% were negative equity, with WA and Queensland making up 82% of this. Importantly, more recent home loan vintages continue to perform better than older vintages, reflecting a more cautious strategy and risk settings.

You can see on this slide that it was a difficult half for the Australia Division. Profit was down 8% half-on-half with revenue down 4%. Expenses were well managed, and credit charges were up 3% on the back of higher CP. I've said already that loan volumes were down, and margin benefits from repricing were largely offset by mix and competition impacts. Fee income fell $131 million of which around half was seasonal and the remainder due to our deliberate decisions to reduce or remove fees across the business.

We know that across the market there is house price moderation, lower borrower capacity and longer application approval times. We think it's right to be selective in this environment, but we clearly could have done better in the implementation of some of our settings, and Shayne spoke about this.

Stepping through some key data points. During this half, growth in owner-occupied lending was flat, and investor lending was down 3%, both were below system. P&I lending was up 4% as a result of customers switching. Interest-only lending was down 19% driven by the back book rolling off and a more cautious approach to front-book volumes. All of this impacted our margins but enhances the quality of our overall portfolio and provides less of a headwind over the medium term.

Unsecured lending was also lower in both credit cards and personal loans, which is in line with our more cautious stance on both of these portfolios and changing customer preferences. In response to moderating loan volumes, we've optimized deposit mix over fund growth with deposit margins up slightly this half and volumes down 2%.

Looking forward, there are a number of uncertainties that make it hard to predict too far into the future. We're refining some of our processes, but the market has slowed, and we're sticking to our prudent approach. Improvements will also take time to flow through into fund growth and revenue. This means that the home loan balance sheet in the second half is likely to continue to decline and take some time to stabilize, but we'll have the benefit of seasonality in noninterest income.

Commercial loan volumes were also lower this half. We continue to run off our consumer asset finance book and remain selective in unsecured lending and commercial property. Our small business volumes were also lower against the backdrop of weaker sector growth. We're investing in better customer tools, which should provide more opportunity into next year and beyond. Deposit volumes were up half-on-half, many of these customers will broaden their banking needs over time. Overall, it's a difficult time for our Australian business. We know we can do better and have already started work here, but we think our strategy settings are right.

In the institutional division, we continue to see the benefits of building a simpler, more focused and higher-returning business. Having significantly rebalanced the business, we achieved a disciplined and targeted return to growth. The highlights were consistent customer revenue growth, higher risk-adjusted margins, a sixth consecutive half of absolute cost reduction and continued low credit losses. Revenue increased 6% half-on-half with customer revenue up 4%, and operating costs were down 2% with lower software amortization and the benefit of FTE reductions. Institutional has now reduced FTE by 25% since September 2015. And with the reshaping and simplification of the business ongoing, we plan to continue the trend of absolute cost reduction.

All businesses in institutional performed well this half. Cash management had another record result with revenue up 8% as we benefited from higher deposit margins on the back of U.S. dollar rate rises in our International business. Loans and specialized finance revenue was up 3%, with growth being weighted towards higher credit quality customers. 86% of our lending exposure is now investment grade, and trade finance revenue was up 5%.

Global Markets revenue was $947 million, up 6%. This was a good result in a challenging environment largely driven by good customer volumes and improving risk sentiment in Asia. So overall, a strong start to the year for institutional with good momentum through the half.

It was a solid underlying performance by the New Zealand business. Volume growth was solid, margins were down, but risk-adjusted margins improved 5 basis points driven by better pricing for risk in commercial and Agri. Expenses were up slightly by $6 million with the benefit of branch consolidation offset by regulatory requirements. Credit quality remains sound with gross impaired assets down 3% and 93% of our home loan portfolio at a dynamic LVR of 80% or less. Higher provisions were because of CP overlay releases in the previous half rather than anything unusual this half.

So we're well underway to creating a simpler, stronger and more productive ANZ. You can see this in our strong balance sheet, our performance on costs, our credit quality and in institutional and New Zealand. It's been a tough time for the Australian business in a tough banking environment. The market has slowed, and there have been heightened regulatory and competitive pressures. We know where we need to improve but think our strategy settings are right and our strengths elsewhere have helped to balance this result.

I'll now hand back to Shayne.

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Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [4]

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As you know, the Royal Commission produced its final report in February. The process, including Commissioner Hayne's recommendations, caused us to reflect more broadly on the issues we face in reshaping our bank. This included how we govern the bank, what we ask our people to do, how we pay them, how we hold ourselves to account when things go wrong and how we ensure that our products and services are appropriate, fair and responsible. Within weeks of the final report, we announced the first phase of our response with 16 initiatives to improve the treatment of our customers, and 4 of those have already been fully implemented. And while it's good to have a checklist, we've not treated this as a compliance exercise, rather we also want to respond to the spirit of the report. And so there are a lot more material changes than those shown here.

Our new set of dispute resolution principles is a tangible example of the approach we're taking. While not a formal recommendation, some customers' frustration with the sector's approach to redress was an important element of the hearings, and we felt our public commitment to being a model litigant represented an important part of the process -- of our response.

The Royal Commission and planned law changes are having a profound impact on Australia and not just the finance industry. It means that changing customer expectations, more scrutiny from regulators, increased accountability and penalties and a complete rethink of businesses' role in balancing the needs of stakeholders. The risk and the cost of doing business has risen as a result, and that's not a complaint but a reality. The work has already begun at ANZ to reearn the trust of our customers and the broader community and to reshape our bank for the long term. We believe we are changing to better serve our customers and society, and that ANZ will emerge better and stronger for it, driving better outcomes for customers and shareholders.

In our rehearsals for this event, I was told that my talking notes may be too somber and too downbeat. That was not my intention, but I did want you to know that we get it, that we get that it's tougher than before, and it's tougher than we would like. But we get the need to adapt and change and quickly. This is not the time for waiting and hoping, it is the time for decisive action. But this is not a defensive strategy. We believe there's real opportunity to create value, and we want to grab it.

I often get asked by people whether our people at ANZ are up for the challenge. Let me reassure that they are, and our internal surveys support that. Our people are dealing with new challenges, but they've risen to the occasion. They're energetic. They're working harder and more collaboratively than before. And I want to thank them for their ongoing support and their focus on building ANZ that we all want and deserve. Thank you.

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Questions and Answers

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Jill Campbell, Australia and New Zealand Banking Group Limited - Group General Manager of IR [1]

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Don't think I'll use the word somber. I don't know one in this room is new to Q&A, so I'll keep it short. Wait for the microphone, announce who you are. We'll start with one question each. Try and resist the urge to break that into 17 parts. And with that, we'll go to Jarrod, please.

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Jarrod Martin, Crédit Suisse AG, Research Division - Director and Joint Lead Analyst [2]

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Shayne, interesting that you mentioned you were told that your comments were too somber because the first thing that I wrote down for the briefing was the use of the term long-term came out significantly but with short-term issues, headwinds around any range of things. And so are we staring down the barrel of a tough couple of halves in terms of -- and straight to earnings growth or earnings going backwards? Michelle used the term not linear from here in terms of costs. You're talking about reinvestment. We've got retail revenues going backwards at a rate of knots. And so are you just -- are you effectively bracing us for short-term profit going backwards?

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Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [3]

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No. I'm bracing you for the reality that it's tough. But let's put it in perspective. When we're talking about a tough outlook, we're fundamentally talking about the retail outlook here in Australia, right? And you saw that in our half. And we're saying I don't think that toughness, that environment is going to change anytime soon. Now we have got the benefit having -- a, we've got the lowest weighting amongst our peers in terms of our exposure to Australian retail, and what we're really benefiting from now is that the rest of our businesses are doing well. I remember sitting in this room not that long ago when people doubted our ability to generate double-digit returns on institutional. They doubted our ability to get that business on a footing where it's actually generating growth. And we've delivered that, and that has really provided a great deal of balance and diversification in our business.

And that and the strength of our New Zealand business is allowing us to put all of our efforts, including my time and the team -- the ExCo team and to really dealing into what is a difficult environment in Australia. And we're not shying away from that. At some level, I guess what we're saying around the short term is the easier decision for us would be just to go out and book indiscriminate volume and gaining share and book a better revenue. But we think in terms of on a risk-based view, and I don't mean just risk-weighted assets, I mean risk in the broader sense, taking into account regulatory risk, legal risk, all of that nonfinancial risk, we don't think that's the right thing to do. Now our job is to get the balance right. We got to -- like this half, we got to deliver a decent result for shareholders, understand it, while doing the hard work to prepare the bank for the long term.

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Michelle Nicole Jablko, Australia and New Zealand Banking Group Limited - CFO [4]

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Can I just also pick up, Jarrod, on your point on cost. I've said -- I actually said for the last 2 or 3 years, it won't be linear. It just has been. And what we've always said is we're going to make the right decisions for the business at any point in time. We're not managing to sort of 6-month period, so that's more what that was...

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Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [5]

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And just to add to that question, going back to your point about investment. Yes, we do want to invest in the business. We have to. We have to reengineer our processes. And some of that's technology, and some of it's changing processes, some of that's rethinking the role of offshore processing and other things. Yes, that's going to cost a bit of money, no doubt. And we have to retool for the longer term in terms of -- kind of a data and digital world. But what we think when we look at that challenge, we already spend a lot and invested a lot in our business, it's around $1 billion-plus every year, but what we're getting the benefit now in terms of simplification is we get to spend that where we want it and not kind of spray that money across a whole bunch of nonmaterial businesses. So we think within reason, we're going to be able to -- it's really about targeting the investment rather than significant changes in the total. And the reality is -- sorry, a long answer to one question, but I -- a 17-part answer to the question, I -- but that I think is an -- that's a benefit we're getting that perhaps you didn't really think about but in terms of that ability to focus on a few things. And quite rightly, the focus at the moment is going to be on the Australia retail business.

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Jill Campbell, Australia and New Zealand Banking Group Limited - Group General Manager of IR [6]

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I didn't think I'd have to cut the answer, so Andrew.

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Andrew Lyons, Goldman Sachs Group Inc., Research Division - Equity Analyst [7]

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Andrew Lyons from Goldman. Just a question on the comments you made, Shayne, around the institutional business and the double-digit ROE that you've reported in the half. I think you said 11%. Obviously, that's being done on the back of a positive bad debt charge. And you surely note 27 basis points is what you'd expect over the cycle. Can you maybe just reconcile how you would think about the levers that you do have within the business that can actually continue to improve the preprovision profitability of that business?

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Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [8]

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Yes. Look, there's no doubt that -- so the ROE is just shy of 11% in the half. There's no doubt that, that was assisted -- not tightly driven by but assisted by our low provisions and probably -- and those provisions were well below what we'd expect. But what you're also seeing in here is top line growth, and you're seeing quality top line growth. It's coming in years that we want. It's customer driven. It's largely -- it's coming really strongly in terms of our transaction banking business. If you look at cash and trade on a combined basis today, they're nudging our global markets business in terms of scale of revenue. And obviously, the returns, particularly in cash, are really attractive in that business.

And so that's -- we still got work to do on it. We still believe we can drive revenue growth from there. There's still work to do on cost. We -- so we haven't given up. I mean the 10 years, of course, it's getting harder, in 6 -- after 6 halves of taking cost out. But there's still momentum there, and there's still work to be done there and actually capital efficiency. And capital efficiency isn't just about customer selection, although that's a big chunk of it, but it's also the way we run that business in terms of branches versus subs, where we have our capital deployed in the business. So we think there's room on all of those fronts to improve. The other thing I would say is when we roll forward into a Basel IV world, one of the big beneficiaries of that is actually institutional. And institutional will get capital relief as a result of a Basel IV world, which will be a reasonably material boost to ROE, all else being equal.

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Michelle Nicole Jablko, Australia and New Zealand Banking Group Limited - CFO [9]

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The other thing I think worth noting is to the extent the growth is balance sheet driven, the way we approach that is with an economic profit model that uses long-run loss rates. So the way we originate business and even as we look at our balance sheet we've got today and tidy that up, it's through that lens of long-run loss rates.

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Jill Campbell, Australia and New Zealand Banking Group Limited - Group General Manager of IR [10]

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Richard? There we go. Thank you.

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Richard E. Wiles, Morgan Stanley, Research Division - MD [11]

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Richard Wiles, Morgan Stanley. Shayne you've been cutting costs for 3 years. The operating environment has got worse, as you said, it has. What concerns me is you're losing share in mortgages in Australia. You're losing share in household deposits. I think you're trying to give us a message that the loss of share in mortgages is because of changing your risk profile. But today, you've said negative equity is 13% of customers. I think at the -- is that what you just said?

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Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [12]

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No.

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Michelle Nicole Jablko, Australia and New Zealand Banking Group Limited - CFO [13]

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No, no. I said of the increasing delinquencies, it's 12% of that number not of total costs.

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Richard E. Wiles, Morgan Stanley, Research Division - MD [14]

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That's pretty sure.

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Michelle Nicole Jablko, Australia and New Zealand Banking Group Limited - CFO [15]

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Yes.

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Richard E. Wiles, Morgan Stanley, Research Division - MD [16]

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So you're losing share in mortgages, which perhaps is due to a change in your risk appetite and your processes. You're also losing in household deposits, which is the lifeblood of retail banking in Australia. So the question I've got is have you gone too far on the cost? Is it impacting your franchise? Are you actually becoming less competitive in an environment that is tougher and therefore the outlook is going to get worse from here?

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Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [17]

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It's a good question. And I'll get Mark to comment on it in a little bit. No, I don't believe that that's what we've done. I think -- so first of all, yes, we've lost share in home loans. Some of that is a result of our deliberate actions to rethink risk and reward for the long term, not just thinking about the loan for booking today but thinking about the kind of book we want to have in this more difficult environment, a book that we want that is focused on owner occupiers, that is more heavily skewed towards P&I.

Now -- so some of that as a result is deliberate, and you can see that in terms of our quite significant loss of share, if you will, in the investor space. We overdid that. Did we overcorrect there? Yes. Okay? So it's not -- these are supertanker businesses, to use a cliché, it's really hard to get that exactly right from our own deliberate actions. So yes, we overshot them. We've said that. We implemented some of that change badly. But secondly, there has been a slowdown, and I think you can see this with the larger banks in general versus the risk because we and I think ANZ are further advanced in adapting to the new world around responsible lending. We were early into dealing into enhanced expense verification. What does that mean? It means that it's just harder for people and longer to get aligned. And in that environment, one of our competitive tools is how quickly can you get a response. And I think the larger banks, and very much ANZ, have moved faster into that world than some of the others. And as a result of that, our proposition is going to be a little bit less attractive than others. And so some of that share is being lost as a result of that. But that's not deliberate, that's an outcome. And Mark, do you want to just talk about the environment and how -- what we're doing because we're doing a lot to try to restore and get that balance back on track.

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Mark Hand, Australia and New Zealand Banking Group Limited - Acting Group Executive of Australia [18]

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Yes. So I'm Mark Hand for the people who don't know me. What's happened is because this become a much longer lead time for customers to get deals through the system, to get deals approved, that's happened to all banks. So the new arms race is effectively going to be around that speed to assessment. And our focus is to put all efforts into improving that speed to assessment for a customer. So whether it be new systems that we've launched recently that allow us to speed up that process, a much more automation, much more automation of the income and expense verification than we've had previously, verification teams that work with the customers to make sure that all the documents are present at the start of the process, which gets it going through the process a lot quicker that it has. And then also, as Shayne said, it's about being more selective about which segments that we play in. And we overcorrected in the investor. We've now got, I guess, an appetite setting that's back in market. So we expect that outlook to change. Our continued focus on owner occupied, and we have been more aggressive in the P&I space than the interest only, which has revenue implications for us. And I think finally, that sweet spot around a business owner that's also a small business customer that's also a homeowner is an area we felt we have probably underachieved over the years, and we see a really big opportunity for us to grow in that space.

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Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [19]

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And then the only thing I would add, you asked about deposits. Deposits is different. Deposits' loss of share is not due to clumsy implementation of your policies or anything like that, that is largely just a tactical decision on our part about cost and what's the reasonable -- what's the right amount to pay and the right way of doing it. There's also a little bit in there because as part of our simplification agenda, we felt we just had way too many deposit options out there, and the cost of supporting all of those was not conducive to good outcomes. And so we've simplified that portfolio. So some of that is the result of it as well.

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Jill Campbell, Australia and New Zealand Banking Group Limited - Group General Manager of IR [20]

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Richard, would you mind handing to Mott? Thanks.

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Jonathan Mott, UBS Investment Bank, Research Division - MD and Banking Analyst [21]

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Jon Mott from UBS. A question on Slide 85, a long way there. And so home loan delinquencies, I know Michelle you mentioned this on the 90 days past due. But if you look at the 30 days past due, it sits at the top right quadrant, you can see the yellow line, it's gone really, really aggressive in the 30 days past due really this calendar year. And I know this is not -- particularly, it always happens in the first quarter. This is much more than the past. Now if you go through some of the issues that you mentioned for the 90 days past due, the slowdown in the book, well, that wouldn't have really mattered in the quarter. And in the...

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Michelle Nicole Jablko, Australia and New Zealand Banking Group Limited - CFO [22]

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No. It does matter in the quarter actually, maybe not as pronounced, but it does.

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Jonathan Mott, UBS Investment Bank, Research Division - MD and Banking Analyst [23]

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Clearly small, when you're talking of that number going from 180 to 225 basis points, it's a very nice move. But also the [IEA] switching has been now going for 2 years, so I wouldn't have thought that the last quarter would have made a huge difference. So with the unemployment rate still at 5%, what's happened in the last quarter? We're seeing such a material increase in the 30 days past due, which I would have thought would flow through in the 90 days past due and into the impairment charge in the second half.

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Michelle Nicole Jablko, Australia and New Zealand Banking Group Limited - CFO [24]

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So it is flowing. I think the factors are largely the same, and Kevin can sort of jump in as well, but largely the same is what I spoke about on the 90 days past due. I think if you look at switching, certainly the longer -- so people that could switch earlier and manage the cash flows did, so there's -- I think you probably do expect the tale to be a bit different. And when customers do get into stress, it's taking them longer to get out. So I think it's a combination of those factors.

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Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [25]

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The only other thing I'd add, Michelle, is that we did have a spike in the first quarter of this -- of 2019. What we've seen if you look at -- and it's not in that chart, if you look at our 1 to 29 days, that's normalized back to what we were pre -- in 2018. So that just doesn't come through because that's 30-plus. But if you look at 1 to 29, that's come back.

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Jonathan Mott, UBS Investment Bank, Research Division - MD and Banking Analyst [26]

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So the 30 days plus has continued to season, but the short term has gotten worse. Sorry, short terms improved.

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Michelle Nicole Jablko, Australia and New Zealand Banking Group Limited - CFO [27]

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The short terms improved.

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Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [28]

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Correct.

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Jonathan Mott, UBS Investment Bank, Research Division - MD and Banking Analyst [29]

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A deterioration of the people who missed their payment in the first quarter has continued.

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Michelle Nicole Jablko, Australia and New Zealand Banking Group Limited - CFO [30]

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Correct.

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Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [31]

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Yes. And what you're seeing there is self-curing is just taking longer because one of the ways to self-cure is to downsize your house or whatever, and people -- that's going to take longer, so there's more flow through than there was in the past.

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Jill Campbell, Australia and New Zealand Banking Group Limited - Group General Manager of IR [32]

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Can you hand to Victor? Thank you.

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Victor German, Macquarie Research - Analyst [33]

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Victor German from Macquarie. Appreciate, Michelle, you made those comments around remediation charges, which are very difficult to compare bank-to-bank. But I was just hoping you could provide us a little bit more color in terms of how you think about your remediation just so we can make some additional assessments. Other banks talked about overall revenue that they received from their aligned channel. Are you able to give us those numbers? And also what proportion of effective remediation are you assuming in both salaried and aligned channels?

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Michelle Nicole Jablko, Australia and New Zealand Banking Group Limited - CFO [34]

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Sure. I mean so salary is -- as you say, Victor, it's very hard to compare. We don't all have the same businesses. The size of the businesses are different. What they do is not exactly the same. And we started at different times as well. So salary planners for us, we dealt with, and it's not in that $700 million provision balance I spoke about because those customers have essentially been remediated already. In terms of -- if you're talking about the aligned dealer groups, again I'm not sure it's relevant to look at total revenue but call it $600 million roughly. And it's very, very hard to compare the process. I can only talk about the process we've gone through. And as you remember, we took a pretty large provision in the second half of last year. We had quite a lot of learning out of the work we've done on the salary planners. And the way we approached it was to say take -- we looked at the aligned dealer groups, and we divided the advisers into 3 cohorts, sort of high risk, medium risk, low risk based on a number of sort of metrics. And each of those groups has a different loss rate. So again, I don't think comparing averages across the business is the right way to do it.

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Victor German, Macquarie Research - Analyst [35]

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I'm sorry, the $600 million, that compares to the Westpac's number of $966 million.

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Michelle Nicole Jablko, Australia and New Zealand Banking Group Limited - CFO [36]

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Yes, roughly.

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Victor German, Macquarie Research - Analyst [37]

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Even though -- is it right to say that you have more line advisers?

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Michelle Nicole Jablko, Australia and New Zealand Banking Group Limited - CFO [38]

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No. I think our business is about 2/3 the size of it.

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Jill Campbell, Australia and New Zealand Banking Group Limited - Group General Manager of IR [39]

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We did have more in total, but they're more insurance based. So that's why you see the fees are less on the superannuation side.

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Michelle Nicole Jablko, Australia and New Zealand Banking Group Limited - CFO [40]

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And that's why -- they're different. We don't all have the same businesses.

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Jill Campbell, Australia and New Zealand Banking Group Limited - Group General Manager of IR [41]

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James?

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James Ellis, BofA Merrill Lynch, Research Division - Director [42]

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James Ellis from Bank of America Merrill Lynch. Just in relation to the proposed New Zealand capital reform. So if you are asked to unreasonably subsidize ambitions in New Zealand, can you just talk a bit more about what are the misguiding actions you can take? You did refer to balance sheet actions because a lot of the statements coming out of New Zealand are quite strong.

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Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [43]

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Yes. So I know you all notice, but we're really at a stage here, right, where we haven't really got to the consultation papers being delivered, so there's a long way to go. What we're referring to is really -- look, clearly we have options. We have options about the amount of capital that we put into New Zealand and then how we deploy that capital in New Zealand and to which sectors and what returns we require of it. I mean I think it's as simple as that.

And I'm not suggesting that any that's easy, but what we have seen here is we're going to go through a consultation, and then there's a really long period of time to comply with that. And we feel like 5 years or whatever the number will be at the end will be sufficient for us to rebalance our portfolio as a group and within New Zealand. And all we were referring to is, look, we've shown that we're not shy of taking hard decisions. We will act, and we -- as I mentioned, we actually have a responsibility to act responsibly with our shareholders' capital. And so we will do so. But it's the same old tools we always have. We'll look at our cost base. We think about the capital allocation. We think about how we price that capital, what we ask the business to deliver on it. And we'll do all that appropriately at the right time.

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Jill Campbell, Australia and New Zealand Banking Group Limited - Group General Manager of IR [44]

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Andrew, and then to Brian.

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Andrew Triggs, JP Morgan Chase & Co, Research Division - Research Analyst [45]

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Andrew Triggs from JPMorgan. Just a question on costs I think. Shayne, you mentioned an $8 billion target by 2022, I think it was. Just in terms of the starting point, just to be absolutely clear, is it -- the $4.26 billion for the half [ex large amount of loan]?

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Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [46]

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Yes.

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Michelle Nicole Jablko, Australia and New Zealand Banking Group Limited - CFO [47]

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Yes.

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Andrew Triggs, JP Morgan Chase & Co, Research Division - Research Analyst [48]

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And excludes divestments and other features.

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Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [49]

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Yes.

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Michelle Nicole Jablko, Australia and New Zealand Banking Group Limited - CFO [50]

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Yes.

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Andrew Triggs, JP Morgan Chase & Co, Research Division - Research Analyst [51]

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Okay. Great. And just sort of the sort of buckets for that going ahead. I mean is IT expense likely to actually decline from here if you include the amortization expense?

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Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [52]

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It's a good question. Look, I -- so obviously, it's reasonably bold to go out with a number like that, and there's some risk in doing that, I'm aware of it. Do we have a perfect spreadsheet that explains exactly how we get there and what the 8 -- and where the $8 billion will go? No. But we have done lots of work on why we think that's a reasonable number and why we think we can run the bank for less than $8 billion responsibly and do all the things that we want. My -- what we know is that the composition of that $8 billion will change a lot. It will probably -- and when I say technology, I'm not talking about boxes and wires and DNA but the people we have in technology, and that will increase as a percentage of our business. I think, yes, it will. So the proportion that we spend on technology in the broader sense will go up, we'll have more engineers, more data people, et cetera, et cetera.

What we've got to do in terms of the boxes and wires, if it's an old-fashioned way of thinking about it, is get [verified]. And what we've -- what I mentioned in here is what we're really thinking through with Maile and Gerard and the team is how do -- because of that past we've talked about that we've grown and this mass standardization production line, it was actually really efficient to have a big box strategy of fixed cost and just pump through volume, right?

In this new world of targeted growth, more flexibility, faster change, we need to reengineer a system that's much more flexible, that's much more variable cost than fixed. And that's not going to be simple, but that's exactly the work that we're doing. And it's not just being done by Gerard and the tech team because it's actually being driven by the businesses. It's being driven by Mark and Maile, in particular, about that -- what that Australian business will look like. So branch cost, we've already seen our branch numbers are down 20%. That's in Australia and New Zealand. I think that's been the most aggressive remodeling of a branch network of our peers. We don't have a target for that in sight, but we know that customer preference is changing. And so that cost will change. We know there'll be changes in our contact centers. We know there'll be changes in our processing shops that's going to shift.

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Michelle Nicole Jablko, Australia and New Zealand Banking Group Limited - CFO [53]

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And I was just going to add on technology, I sort of look at it inside -- the starting point is not right, and it's probably too high, and it needs to be revised as we work through some of the complexity. But then over time proportionately, technology becomes a bigger proportion.

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Jill Campbell, Australia and New Zealand Banking Group Limited - Group General Manager of IR [54]

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Would you mind handing to Brian? Thank you.

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Brian D. Johnson, CLSA Limited, Research Division - Research Analyst [55]

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Brian Johnson, CLSA. Can I just, first of all, make an observation? And then I promise, I will ask a question.

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Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [56]

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Sure. It is a nice observation, Brian?

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Brian D. Johnson, CLSA Limited, Research Division - Research Analyst [57]

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Not really. Page 39. Today, you've spoken a lot about economic profit. But I do see that once again you've wriggled up the cost of capital to be pretty miserly- 10%. Not long ago, it was 9%. We have up to 9.5%. It's now gone up to 10%. But you've actually gone back and restated the comps base on the higher figure, which probably generates a positive delta that wouldn't be there if you would use the historic 9.5%. The other observation that I suppose I wanted to make there as well is when we have a look -- and this is the most important, this is the most important of a bank...

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Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [58]

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I'm not sure that actually makes any sense, BJ, but anyway, go on.

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Brian D. Johnson, CLSA Limited, Research Division - Research Analyst [59]

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Well, I'm happy to sit down with the both -- with you, but then when we actually have a look at -- on that same note, the whole economic profit construct seems to have changed even apart from the cost of capital. Previously, you used to say economic profit is risk-adjusted profit measure and used to evaluate business performance unit and variable remuneration. The variable remuneration bit has now moved. I'd also note that you're now talking that even at the group level that you allocate the average ordinary equity to determine and that's the number we see, you're saying at the divisional one, you basically allocate the regulatory capital. I suppose my observation would be at least one of your peers manages to actually give us that reconciliation by division. Could I just put in front of you? It would be intriguing as to know why that basically isn't there, why we don't see the divisional numbers because it would save so much time for everyone to really understand what businesses are doing well and what aren't.

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Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [60]

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Okay. All right. I don't want you to be wasting your time, Brian, but I will -- will comment this.

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Brian D. Johnson, CLSA Limited, Research Division - Research Analyst [61]

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Okay. Now the question, this morning, I saw a letter that ANZ had sent out to your Agri customers.

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Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [62]

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In New Zealand?

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Brian D. Johnson, CLSA Limited, Research Division - Research Analyst [63]

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In New Zealand.

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Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [64]

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Yes.

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Brian D. Johnson, CLSA Limited, Research Division - Research Analyst [65]

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Which basically points out that, hey, guys, we've been running a capital model that allows us to have less capital on our Agri book than our peers, and we might have to respond to this. You're pretty clearly telling people that we're going to reprice up. But when I have a look at the housing book in New Zealand, the advanced type, the housing risk weighting is also well below the peers. I just wanted to get some clarity on basically why is it in New Zealand that we can see 2 incidences where your risk weightings are so far below the peers because that is a major contributor to basically this New Zealand capital problem. But how big potentially is this capital imposed on the Agri book?

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Michelle Nicole Jablko, Australia and New Zealand Banking Group Limited - CFO [66]

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So if I look at our risk weight in New Zealand, those based on models approved by the RBNZ. Not everyone had models approved at the same time. And so I mean -- and it's reflective of the risk in our book. If -- when we talked -- when I've mentioned that NZD 6 billion to NZD 8 billion number, that was inclusive of an increase in risk weights. It's probably 15% of the number.

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Jill Campbell, Australia and New Zealand Banking Group Limited - Group General Manager of IR [67]

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Brett, please.

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Brett Le Mesurier, Shaw and Partners Limited, Research Division - Senior Analyst of Banking and Insurance [68]

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Brett Le Mesurier from Shaw and Partners. So Michelle, how much of the $700 million is actually the provision to the aligned dealer group?

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Michelle Nicole Jablko, Australia and New Zealand Banking Group Limited - CFO [69]

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It was, from memory, about $140 million.

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Brett Le Mesurier, Shaw and Partners Limited, Research Division - Senior Analyst of Banking and Insurance [70]

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And I'll push Mark with a second question.

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Mark Hand, Australia and New Zealand Banking Group Limited - Acting Group Executive of Australia [71]

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Yes.

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Brett Le Mesurier, Shaw and Partners Limited, Research Division - Senior Analyst of Banking and Insurance [72]

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The LVRs on new loans have continued to decline. They've fallen from 70% to I think 68%, 67% over the last couple of years. Do you they're going to continue to decline given that you've tightened your lending standards as you commented in November last year?

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Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [73]

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It's a good question actually. I'm not sure Mark -- I'm just looking at Mark here, go on.

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Mark Hand, Australia and New Zealand Banking Group Limited - Acting Group Executive of Australia [74]

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I don't think it will because I think we've borne the brunt of a lot of the changes and the amount the customer can actually borrow. I don't think that's going to shrink any further. So I think that's probably found a more natural level.

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Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [75]

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And the other thing I would -- the only thing I would say, part of that calculation is influenced by what proportion of loans you're running that are top-ups or renovation loans versus first-time buyer, 8% LVR. So some of it's a mix issue. But I think Mark's probably right that it's unlikely to get any better in any material way.

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Mark Hand, Australia and New Zealand Banking Group Limited - Acting Group Executive of Australia [76]

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And I guess the other thing, we probably found a natural level in how much interest only we write. So they tend to be like -- so the P&I tends to be at a lower LVR because you can borrow less under a P&I scenario. So probably the main pressures that have driven that have eased up.

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Jill Campbell, Australia and New Zealand Banking Group Limited - Group General Manager of IR [77]

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I think we have a couple of questions on the phone, if we can go to those, please.

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Operator [78]

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Your first question comes from Matthew Wilson from Deutsche Bank.

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Matthew Wilson, Deutsche Bank AG, Research Division - Australian Bank Equity Analyst [79]

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Matt Wilson, Deutsche Bank. Two questions, being on the phone, if I may. The changes you've made to mortgage underwriting make complete sense, but they confirm that the industry wasn't lending as responsibly as the law demanded for nearly a decade. How do you therefore think about the ramifications of past responsible lending issues? And it's not a new world, the credit act and responsible lending obligations are legislated in 2009. Secondly, you clearly understand the changing surrounds quite well. You're ahead at repositioning the business, and I think your outlook comments are very credible. Are you finding though the right balance between sort of on a pace and quantum basis between taking cost out, which is easy, and investing for a very different future where IT and disruption is clearly more important and the sector frankly is a long way from being match fit in the space?

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Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [80]

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I think those are really -- I'll let you have those clearly good questions. In terms of responsible lending, you're quite right. And as the team at ASIC has pointed out, the responsible lending rules haven't changed over that time. And that's true. But what I would suggest is that the interpretation of that law has changed quite significantly. The law actually says that we must take reasonable steps to ensure that a loan is not unsuitable. Now nobody would disagree with that, and that has been the case for the last 10 years. And we would stand up and say that is exactly what we were doing over that period of time.

However, as time has gone on, partly because of Royal Commission, there has been a debate about what is defined by a reasonable step and what exactly does unsuitable mean. So those are good things. And the result of that is that definition of what's responsible today has shifted. So I don't believe that we have any material risk, if you will, around applying today's standards over the past. So I think -- let's remind ourselves that through that entire period, we were regulated by ASIC and had regular reviews and discussions about that. So I take your point. And I do think we're at a really interesting time because I think all players are interpreting that legislation in slightly different ways. We're probably at the conservative end of that. I accept that. And that's part of what has driven some of our responses. And that's what I mean about considering the kind of nonfinancial risks going forward, so I take that point.

I -- in terms of your question on cost, it's a really good point, and it's something that we struggle with. That is not easy. Our reluctance, if you will, to spend too much on transformation in the future has been really driven by a few things: one, is our poor track record of debt in the past; and two, being really -- I think where we've shifted, certainly in the last year, and even though not -- wasn't formally under Maile, but with Maile's input and Gerard's is to move away from this idea that the investment required in technology is not a technology transformation, it's a business transformation. So we can go out and spend a lot of money and re-platform stuff, but we've got to be really clear -- re-platforming for what, for what purpose, to provide what services to which customers. And so we've taken a bit of a step back on that and slowed that down. But the reason we've -- so we're really rethinking that whole business. Which customers do we want? How are we going to compete? What's the basis of that? And therefore, what's the right sort of technology that's appropriate and fit for purpose? But we slowed down on the short term so that we can speed up later.

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Michelle Nicole Jablko, Australia and New Zealand Banking Group Limited - CFO [81]

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I think also, Shayne, there's a metabolic rate in the organization of what the organization can deal with, and it tends to be roughly $1 billion a year. And at times, we've looked to increase it. But actually, it hasn't -- we haven't because the organization currently has the capacity to do so much at any one time...

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Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [82]

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A good thing, and you might say it's a bad thing because maybe we do need to do more. And I agree with you. We need to increase the metabolic rate of the organization. But one of the benefits we're getting is through simplification, that $1 billion, as I said, is going on leasing these things. Now unfortunately, at the moment, a little bit of that is going into the remediation challenge, right? And so the sooner we get that behind us, that's another freeing up of resources of people, money, boxes to actually apply to exactly that transformation that you're referring to.

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Jill Campbell, Australia and New Zealand Banking Group Limited - Group General Manager of IR [83]

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We go to the next question please on the phone.

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Operator [84]

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Your next question comes from Brendan Sproules with Citigroup.

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Brendan Sproules, Citigroup Inc, Research Division - VP [85]

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Brendan from Citi. Look, I just got a question on the institutional business, obviously, quite a strong result, particularly at the revenue line, as you point out. Could you maybe talk about just the momentum on the balance sheet. I just noticed in the second half that net loans and advances have slowed to 2%, and customer deposits slowed to 0., particularly in the Australian part of that. There's going to be quite a slowing in momentum of lending and deposits. And maybe you can talk about the broader economic climate and how that's affecting the business going forward.

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Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [86]

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I'm going to hand to Mark. I'll just say your observations are right. And as I said, our focus here is about discipline. It's about disciplined growth, being really clear what our return hurdles are. And actually, it's a cliché, but the success of the institutional is more driven by the things we say no to than it is by the things we say yes to actually. And so growth on the balance sheet is not a given and neither should it be that there's some sort of trend you can extrapolate and hit a target on. That's not the right way to run that business. But Mark, you might want to talk about conditions.

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Mark Hand, Australia and New Zealand Banking Group Limited - Acting Group Executive of Australia [87]

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Yes. I think you're spot on with the response here. We'll grow the loan book, particularly when the opportunities are there with the right pricing, and so that might be linear. There'll be opportunities in some halves that are better than others, and it'll be across different geographies. For example, we've seen some growth in the Asian business recently, but a lot of that's around our FIG position there, and that's actually drives up good revenue into Australia, to be quite honest. So you've got to look at this as a nonlinear thing with regards to in particular the risk-weighted assets. On the deposit side, we're again being just cautious around what we want to build there. Our payments cash management business is growing, but we haven't -- and we're bringing a lot of mandates, but a lot of that hasn't flowed through yet into the bottom line because we're still transitioning. So there's a few component parts there that we need to continue to work on in getting customers onboard more quickly. But it's a combination of both of those factors. I think was that -- I think that was covering all the questions.

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Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [88]

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Yes.

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Jill Campbell, Australia and New Zealand Banking Group Limited - Group General Manager of IR [89]

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So I did say one question each, and we'll -- we will go -- you can call us this afternoon to go through other questions. I think we're done. We have one more on the phone.

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Operator [90]

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Your next question comes from Azib Khan with Morgans.

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Azib Khan, Morgans Financial Limited, Research Division - Senior Banks Analyst [91]

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Shayne, so the percentage of Australian home loans originated through the broker channel has been trending up. There was 57% of flow in the first half. Is this a structural trend that's coming through? And can we expect this uptrend to continue as you focus on absolute cost reduction between now and 2022?

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Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [92]

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It's a good question. So there is clearly a structural change happening in the marketplace. More and more Australians are choosing to use the broker channel. They see value in terms of ease but also in terms of price transparency. I don't know -- I can't see that slowing anytime soon. Obviously, there were questions still being asked around the right remuneration model, and that might have an impact. But putting that aside, I think that trend will continue. And there are many markets around the world that have much higher penetration of brokers. Interestingly, we've seen the same trend although much lower numbers happening in New Zealand as well.

I just want to be clear though, we are responding to customer demand, not we are pushing customers to brokers. We would much prefer customers come into our branches or call us up or go online. That's always going to be our preferred channel. So we don't sit around and say, hey, let's manage our cost base or our marketing or whatever it is to push people into channels, into brokers because somehow it's cheaper. That's not how we think about it.

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Jill Campbell, Australia and New Zealand Banking Group Limited - Group General Manager of IR [93]

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Okay. I think we're done, everybody, unless you had any last comments, Shayne?

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Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [94]

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No.

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Jill Campbell, Australia and New Zealand Banking Group Limited - Group General Manager of IR [95]

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Our Investor Relations team, obviously, around all afternoon as are the executive team. Thank you all for coming.

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Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [96]

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Thank you.

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Michelle Nicole Jablko, Australia and New Zealand Banking Group Limited - CFO [97]

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Thank you.