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Edited Transcript of ANZ.AX earnings conference call or presentation 28-Oct-20 11:00pm GMT

·90 min read

Full Year 2020 Australia and New Zealand Banking Group Ltd Earnings Presentation Melbourne Oct 29, 2020 (Thomson StreetEvents) -- Edited Transcript of Australia and New Zealand Banking Group Ltd earnings conference call or presentation Wednesday, October 28, 2020 at 11:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Jill Campbell Australia and New Zealand Banking Group Limited - Group General Manager of IR * Kevin Paul Corbally Australia and New Zealand Banking Group Limited - Group Chief Risk Officer * Mark Hand Australia and New Zealand Banking Group Limited - Group Executive Australia Retail & Commercial Banking * Mark Whelan Australia and New Zealand Banking Group Limited - Group Executive of Institutional * Michelle Nicole Jablko Australia and New Zealand Banking Group Limited - CFO * Shayne Cary Elliott Australia and New Zealand Banking Group Limited - CEO & Executive Director ================================================================================ Conference Call Participants ================================================================================ * Andrew Lyons Goldman Sachs Group, Inc., Research Division - Equity Analyst * Andrew Triggs JPMorgan Chase & Co, Research Division - Research Analyst * Brendan Sproules Citigroup Inc., Research Division - Director * Brett Le Mesurier * Brian D. Johnson Jefferies LLC, Research Division - Equity Analyst * Edmund Anthony Biddulph Henning CLSA Limited, Research Division - Research Analyst * Jonathan Mott UBS Investment Bank, Research Division - MD and Banking Analyst * Matthew Wilson Evans & Partners Pty. Ltd., Research Division - Executive Director of Financials * Richard E. Wiles Morgan Stanley, Research Division - MD * T.S. Lim Bell Potter Securities Limited, Research Division - Head of Research and Banks & Insurance Analyst * Victor German Macquarie Research - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Jill Campbell, Australia and New Zealand Banking Group Limited - Group General Manager of IR [1] -------------------------------------------------------------------------------- Good morning, everyone. I'm Jill Campbell. I'm ANZ' Head of Investor Relations. The ANZ building I'm standing in, we're standing in today, proudly stands on the lands of the Birrarung, who are the traditional lands of the Kulin Nation. I acknowledge the Wurrundjeri and Boon Wurrung peoples as the traditional custodians of the land, sky and waterways that surround us here at Docklands. I pay my respects to their elders past, present and future. And I extend that respect to any Aboriginal or Torres Strait Islanders who are joining us today. Welcome to everyone else who's joining us by phone or webcast for the presentation of ANZ' full year 2020 financial results. As I've just mentioned, we're coming to you this morning from Melbourne where we've just come out of an extended period of lockdown. And so if I paraphrase Keith Richards right at this point, "I'm happy to be anywhere that's outside my house." I do still have the standard Melbourne fashion accessory with me, though, as does everybody else. All the results materials were lodged earlier today with the ASX. They're available on the ANZ website in our Shareholder Center. A replay of this presentation will be available via our website from about midafternoon. I'll talk to you a little bit more about the Q&A procedure once the CEO and CFO are finished. (Operator Instructions) Our CEO, Shayne Elliott; and CFO, Michelle Jablko, will present for around 30 minutes. After that, we'll go to Q&A, and I'll be back to talk you through the housekeeping. Thanks. -------------------------------------------------------------------------------- Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [2] -------------------------------------------------------------------------------- Okay. Thank you, Jill, and thank you all for joining us this morning. It is good to be broadcasting from a reopened Melbourne. And we're fortunate that COVID appears largely under control in our home state, joining the rest of Australia and New Zealand. But despite that good news, our thoughts are with those who have been and continue to be impacted, whether here at home or elsewhere. Now even under the most optimistic health scenarios, the devastating economic and social impacts will be with us for some time. And that's why our purpose: to shape a world where people and communities thrive, has never been more important. It's guiding the way we support customers in need, it's guiding the way we engage with our people, and it's guiding the way we work with others to soften the impacts on the broader community. Now in such times, it's natural to be consumed by managing the immediate impacts. And of course, protecting our business is of prime importance. But the hard work of the last 5 years means we have the capacity to protect what's important and accelerate investment in the future because customers have new needs, and there is no return to normal. Now looking back at one of the most unusual years in our history, we've posted an after-tax cash profit from continuing operations of $3.76 billion, which is down 42% on last year. With operating profit before provisions broadly flat, the largest driver of the profit reduction, we're setting aside a further $1.7 billion for possible future losses. Now it is worth noting that we've not lost $1 in terms of credit losses resulting from COVID directly, but we are well prepared if they occur. Now while not dismissing the impacts of COVID, it says a lot about our strategy that in such a year, we were able to support thousands of customers through the most stressful times of their lives, restore momentum in home loans, deliver an outstanding institutional result, invest a record amount in our future, keep our operating costs flat again, bolster capital and credit reserves and generate sufficient profits to pay a prudent, albeit reduced, dividend without diluting shareholders. In fact, our net tangible assets per share, which is a good indicator of shareholder value, increased to $20.04. Now I should point out that we also paid $2.3 billion in company tax and over $400 million in additional tax under the bank levy. So in the circumstances, our diversified business delivered a decent revenue performance. In particular, Institutional performed well, with rates and currency a highlight. In my experience, when well managed, rates and currency businesses provide a natural hedge in times of stress. Customer activity increases, volatility creates opportunity, and the drivers putting pressure on net interest margin benefits your balance sheet trading position. And while difficult to predict, good opportunities are likely to remain for our Institutional business at least into early 2021. Underlying cost performance was strong with a further fall in the cost of running the bank. Now there were, of course, COVID-related headwinds and tailwinds. We hired more people to help customers under stress, while on the other hand, travel and property costs fell. Our operational metrics improved helped by big shifts in customer behavior with less cash, less branch and more digital activity. This year showed again the importance of a strong culture underpinned by market-leading employee engagement. Early on, we had a mature conversation with our people on the balance needed between supporting customers, delivering for shareholders, remuneration and securing jobs. Now that led to our people doing the right thing: continuing to take leave through difficult times, avoiding a $100 million cost spike in the second half. Better productivity also allowed us to invest at record levels. And we have invested $1.77 billion, very little of which was capitalized, in further process improvement and new capabilities. Now some of this is compliance-related, and some of it's maintenance, but even then, we seek to drive financial benefit. Now while acknowledging the impact of the pandemic, I'm pleased with how the business has performed, how we've responded to the environment and prepared for the future. Now I know there's a lot of interest on how customers are faring in difficult times. And at the first half, some investors were concerned that we've increased -- we increased our lending to institutional customers. But as we said, that was a considered response to support good customers and their need for liquidity in a time of stress. And as predicted, we generated a fair risk-based return, we strengthened those relationships, and the debt was quickly repaid. For home loan and small business customers, there's a lot of information in the slide packs on deferrals. And as a result of the overwhelming government support and our ability to manage at a granular level, so far, the outcome is better than many feared. In a time of ultralow interest rates, time is cheaper than at any time in our history. And so buying time through a deferral can be a very rational response for customers. And from the bank's perspective, it provided space to tailor the best solution for all parties. Just using Australia as an example, we've got 1 million home loans. And 95,000 of them were granted an initial 6-month deferral, and we're right in the middle of those deferrals expiring. Now we work with each customer on their options. And when we need to speak to them, we've been successful making contact 97% of the time. And as at the 15th of October, 55,000 of those customers have already completed their deferral or they've advised us of their intentions. 79%, 79% of them are returning to full repayments, with 20% requesting more time, half of whom are in Victoria. The remaining 1% have either moved to interest only or directly into hardship. Now it's worth noting that during the COVID period, since March, we have seen on average 359 accounts provided hardship per month, including those who were not eligible for a deferral in the first place. Now to put that into perspective, in the 6 months prior, we saw an average 975 customers provided hardship per month. So the deferral program has suppressed demand for hardship in the second half, which means we've got good capacity to manage any increase. Now turning to business. It's clear that small business rather than the larger institutional part of the economy is bearing the brunt of the economic impact. They're particularly vulnerable given their lack of diversification and limited access to capital. While our exposure to this part of the market is much smaller as a proportion of total lending than others, we have moved quickly to help where we can. Now here, too, the data for our small business deferrals has been very positive today. More than half of small business loan extensions had finished by mid-October, with 86% electing to return to full repayment, 4% opting for a restructuring and 9% seeking a further deferral. Now of those extending their deferrals, 60% are based here in Victoria and 70% are fully secured. Now look, if these trends continue, with no rebound in Victoria, less than $1 billion of small business loans will remain on deferral, and we're well resourced to work with these customers individually. Our New Zealand home loan and business experience is broadly similar, if not a little better. Now it is worth remembering that, of course, that customers who opted for deferrals were good customers who up until COVID were making payments on time, and in fact, many were ahead of schedule. And through no fault of their own, they were stood down from their job or their business was made illegal. Now since then, retail and commercial customers, whether on deferral or not, have collectively behaved as you would expect from a CFO facing uncertainty. They hoarded cash. Our deposits grew $21 billion in the last half. They bolstered their rainy day funds. Offset balances grew by another $5 billion. They cut the cost of running their homes and their businesses, and they paid down their most expensive debt. Credit card lending is down 18%. And when they could, they returned to paying both principal and interest. To me, this says a lot about the rational and realistic approach customers are taking. Now as you know, our industry faces shocks with some regularity. And when I consider my own experience over 30 years, 2 areas stand out this time with regard to our ability to respond. The first is data. Our macro data on how industries, segments and postcodes are tracking has allowed us to manage risks in ways that were unimaginable 5 years ago. Micro level, real-time data has allowed us to individually support customers in ways that make sense for them, not some one-size-fits-all approach. Now in many ways, it's our equivalent of contact tracing. Rather than impose lockdowns on huge parts of our book, we're able to track hotspots in our portfolio and manage them while allowing the rest of our business to operate. And this is possible because of the foundations we laid in simplifying and cleaning up data assets, investing in analytics and working with partners like Google, IBM and Experian. Now in addition to improving risk management, we're also using data to learn more about customers and build practical skills to deliver long-term revenue growth opportunities. Now the second difference is the technology and agile work practices that allowed us to pivot resources quickly and safely. For example, we moved from 11 large buildings globally, each housing over 1,000 people, to a network of 40,000 home offices. We became a distributed network overnight, and we're more responsive and flexible than ever before. Now while it is the most immediate area of focus, I don't want anyone to think that all we're doing is managing COVID because we're not. We're getting on with the job of maintaining a well-managed business and preparing for opportunities. In 2016, I laid out a strategy based on a belief that the industry was heading for lower growth, increased scrutiny and a wave of disruption. And that's why we simplified what we do, we strengthened our balance sheet, focused on productivity and undertook a purpose-led transformation. And we also built a diverse and experienced management team. Now clearly, we never predicted a pandemic, but these actions have prepared us very well. In particular, I want to call out the benefits of a simpler portfolio. We are not distracted by Asia retail and commercial, dealer finance or wealth and have focused on businesses that have long-term value. The benefits of a stronger, higher-rated institutional book has also played out well with less negative risk migration. During difficult times, it's easy to stop investing, and it's easy to sweat your assets, but we're not doing that. We're supporting our best customers, and we will emerge with stronger relationships than we started. We'll continue reshaping our portfolio to produce a more balanced, lower-risk business that generates decent, more predictable returns. We'll continue to make the bank simpler and easier to manage. We see further opportunities in our distribution network and automation, which will deliver our $8 billion underlying cost base aspiration while still investing for the long term. We will deliver new capabilities to strengthen our customer proposition, leading to stronger share in targeted areas and higher lifetime customer value. In particular, we're really excited about the opportunities in sustainable finance, open banking, better utilization of data and expanding our banking-as-a-service offerings. And we stand ready to take advantage of opportunities that will arise. Now as Yogi Berra once said, "It's tough to make predictions, especially about the future." So we're not predicting the future, but we are prepared for inevitable change, volatility and uncertainty. Our culture, strong balance sheet, operational flexibility, engaged workforce and our experienced team will see ANZ emerge as a better, more relevant post-COVID bank. With that, I'll pass to Michelle. -------------------------------------------------------------------------------- Michelle Nicole Jablko, Australia and New Zealand Banking Group Limited - CFO [3] -------------------------------------------------------------------------------- Thanks, Shayne, and good morning, everyone. So Shayne spoke about what we've done this year to support customers, to protect our balance sheet and to prepare for the future. All of this shows up in our result, so let me take you through that now. We started with a strong balance sheet and strengthened it further through active capital management, running our core businesses well and bolstering credit reserves. Our pro forma CET1 capital is 11.4%, which is around $4 billion above unquestionably strong. Yes, our profit is down 42%, and that's a large reduction. But it was mainly driven by 2 things: asset impairments that were neutral to capital and higher provision balances that protect against losses that may come in the future. Actual credit losses were low. And excluding large and notable items, pre-provision earnings were down 1%. This is where we benefited from a diversified business and strong and consistent cost management over a long period, which helped to offset the impact of lower interest rates. EPS was also down 42%, in line with profit as we actively manage capital without an equity raising, a well-managed result in difficult circumstances and an outcome that's given us the confidence to pay a slightly higher final dividend of $0.35 per share. So if I start with liquidity and funding on Slide 15. Our key ratios are well in excess of regulatory minimums, which has enabled us to support customers and maintain balance sheet strength. We've had very strong growth in retail and commercial deposits, up $34 billion for the year. We drew down our initial $12 billion allocation of the RBA's term funding facility. This offset $13 billion in term wholesale funding maturities. We can access further TFF funding, but we'll manage this depending on customer demand and the risk-adjusted returns on the use of these funds. Moving to capital on Slide 16. Active capital management has again been a real strength of our result. We finished the year with a CET1 ratio of 11.3% or 11.4% on a pro forma basis. Our capital ratio is effectively the same as this time last year, and that's despite the impacts of COVID. We achieved this through strong organic capital generation and actively managing our capital efficiency. We supported strong demand from our institutional customers when they needed us, pricing appropriately for risk. As global liquidity dynamics changed into the second half, we proactively reduced credit risk-weighted assets, particularly in international, while at the same time growing in less capital-intensive areas like Australian and New Zealand home loans. Strong organic capital growth was partly offset by growth in noncredit risk-weighted assets of 19 basis points mostly due to greater market volatility. And then we used 19 basis points of capital to build our credit reserves and risk weight migration of 10 basis points, which was lower than expected in the second half. I'll come back and touch on both of these in detail later. Finally, we completed the sale of UDC in New Zealand and also paid the interim dividend in September. So we're pleased with our strong capital outcome, which is based on continued pre-provision earnings and good capital management. Moving on to our cash profit performance on Slide 17. Now I've already touched on the 2 main drivers of the reduction in cash profit this year. There were also $528 million of large and notable items in the second half that we announced earlier this week. Larger notable items are included in both cash and statutory profit. Looking through these, just so you can get a better understanding of the business trends, PPP was down 1% for the year, with both revenue and expenses broadly flat. There are a number of important dynamics which drove this result, so let me take you through these. And I'll start with margin dynamics on Slide 18. NIM in the second half was down 10 basis points half-on-half, which was broadly in line with what we spoke about at the Q3 trading update. Lower interest rates had the biggest impact in the half, down 6 basis points net of repricing. Asset mix also had a large impact with reduced credit card balances, more customers choosing fixed-rate mortgages and the flow-through impact of relatively stronger institutional growth from the first half. This was partially offset by improved deposit mix with higher at-call deposits. Now as deposits grew faster than lending, we increased liquid asset holdings in the half, which contributed to a 2 basis point margin headwind. This was offset by lower wholesale funding costs and optimizing deposit pricing. Asset pricing was a small negative with ongoing competitive pressures in our home lending business partly offset by the higher -- by higher asset pricing in Institutional. Now turning to the outlook for margins. So if you look at Slide 19, there are a number of anticipated headwinds and tailwinds. Some of these have occurred, and we can estimate the likely impact. So for example, we expect the impact from existing low rates is around 3 basis points in the first half as these continue to flow through to the replicating portfolios. Other impacts are uncertain, either as to whether they'll occur and, if so, their impact. So for example, possible further easing by central banks. I do note that we're increasingly sensitive to this as we have more low-rate deposits. However, the ultimate impact will depend on the form of any easing as well as the customer and market responses. And any further growth in liquidity may need to be deployed in low-yielding liquid assets, which we'll manage on a risk-adjusted returns basis, although it could have an impact on NIM. Customer loan demand and wholesale debt maturities may help to offset the margin impacts over time. It's worth noting that we have $27 billion in term debt maturities in FY '21. So on balance, we think industry margins will continue to be under pressure, although the magnitude is hard to predict. I won't spend too long on each of our business segments, but there are a few key points I want to make, starting with Slide 20 with Australia Retail and Commercial. Pleasingly, we had renewed momentum in our home loans business. This helped offset amortization given almost 90% of home loans are P&I in addition to some customers paying down their debt faster because of lower interest rates. I've already spoken about lower credit card and personal loan volumes. And commercial volumes were also flat as borrowers remain cautious. So we grew where it made sense, and we'll continue to look for opportunities to prudently support demand as the economic outlook becomes clearer for our customers. Turning to Institutional, where revenue was up 13% this year. Our loans and specialized finance business, which we now call corporate finance, had revenue down 1% for the year but up 5% in the half, with higher average volumes and improved front book margins. Our transaction banking business was down given the impact of lower interest rates and subdued global trade. Markets performed well, generating $2.7 billion in revenue. This was largely a customer-driven outcome, with strong demand for hedging solutions given higher volatility and assisted by wider bid-offer spreads. Balance sheet trading was also up in the second half, with tightening bond spreads. Now I want to be clear: our risk appetite did not change, and we do still resource markets as a $2 billion business. But as you saw this year, we're well positioned to maximize market conditions. Looking now at Slide 22. We continued our track record of strong cost management. Adjusted for FX, costs were flat for the year. Importantly, our BAU costs were down $281 million or 3.7%, and this is net of inflation. Within our BAU savings, we reduced personnel costs by $172 million, and we also reduced property and run-the-bank technology costs. We benefited here from previous year initiatives like property consolidation in our international network and investments we've made to simplify our processes. COVID also accelerated some productivity benefits as customers' preferences towards digital channels increased significantly. However, COVID also caused some challenges, but our people helped to offset these, taking their annual leave despite lockdowns. And with less customers in branches, we also redeployed staff to help with extra demand in our contact centers. We also drove savings in travel and marketing costs. Now while some of this might bounce back in 2021, we've also all learned to work differently, and our simplification and productivity initiatives are continuing. All of this has created more capacity for us to invest in the future and actually more so than ever before. Regulatory and compliance initiatives made up around 40% of our investment spend and a bit over half of the $320 million increase. A number of these initiatives like BS11 should reach their peak spend in FY '21. We also increased spend on our digital and data assets and our broader simplification agenda. 76% of our investment spend was expensed in the year, and new software capitalization was down 13% year-on-year. As we look forward, we remain committed to absolute cost reductions over time. As we've always said, the path may not be linear, and we'll continue to invest to help us get there. But our track record is good and ongoing productivity, an important part of our strategy. Turning to Slide 24. COVID has had a significant impact on credit provisions for all banks this year. We're yet to see the emergence of actual losses from COVID with the second half loss rate of 12 basis points, pretty much the same as 2019 levels. We bolstered our collective provision reserves to $5 billion. This is double what we had before the adoption of AASB 9 in 2018. As you can see on Slide 25, we had a collective provision charge of $1.7 billion over the year, around $1 billion in the first half and around $700 million in the second half. The composition of the increase evolved through the year as we learned more about the economic impacts and it became clearer that the nature of this stress could have a relatively bigger impact on certain customer segments. The first half was mostly about a worse economic outlook, and the second half was more about additional overlays in our commercial segments. So to give you a bit more color here, the $1 billion increase in the first half was based on a rather grim economic outlook with a 13% trough fall in GDP and peak unemployment of 13%. As the year went on, clearly, the 2020 outcomes have not been as severe. However, we're now assuming that the economic recovery takes longer. These changes in economic outlook had different impacts on provisions across our portfolio. Then if I move to the second half, the key driver of the $700 million increase was because we added $685 million in additional overlays. Firstly, we assessed all retail and commercial customers on deferral packages into 4 categories. And we moved all of those customers in the higher risk categories, along with any customers who asked for a deferral extension, into Stage 2 or lifetime expected loss. We also applied an overlay across our commercial business to reflect potentially lower security values in FY '21 and to reflect higher-risk industries and, of course, the impact of the extended Victorian lockdown on some customers. We believe we've taken a very considered approach, adding to our provision balances over the course of the year as health and economic conditions unfolded and as we learn more about the ultimate impact on our customers. So moving to the outlook, I'll begin with capital where we start from a position of strength. Our views here have also evolved through the year. We originally thought that credit risk migration would be higher and would be more skewed to institutional customers. We've now reviewed approximately 93% of the Institutional portfolio and 90% of all wholesale customers this year. And the outcomes were better than originally expected as many of our customers are in good shape. Now that's not to say there won't be further stress here, but we're -- but less likely than we'd originally thought. Retail and commercial customers also responded sensibly and, assisted by a range of support measures, built their savings buffers and reduced credit card spend. This resulted in lower delinquencies. However, as you'd expect, we're forecasting this to change in FY '21 as support measures are wound back. If we put all this together, our base expectation is that group-wide risk migration in FY '21 will be around 50 basis points. This would take the total risk migration over 2020 and '21 to around 65 basis points instead of the 110 basis points we spoke about previously. The key driver of this is lower risk migration in Institutional. All of this has given our Board the confidence to pay a fully franked $0.35 per share final dividend, a cautious outcome that recognizes the health of our balance sheet and the needs of our shareholders. So we've managed the business well at a difficult time. Looking forward, we'll continue to support customers and grow sensibly in our priority segments. While we may see the emergence of actual credit losses from COVID, we've built good capital and provision buffers. Low interest rates may help here, too, but will cause revenue pressures. Against this background, we're managing all our resource settings very closely. We continue to drive productivity to create value and to make the right longer-term decisions for the business. We're actively managing capital to maintain balance sheet strength and to achieve this in the most efficient way. And we're managing our liquidity to optimize risk-adjusted returns. So there are a number of industry challenges ahead, but this year's result sets us up well. And with that, I'll hand back to Shayne. -------------------------------------------------------------------------------- Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [4] -------------------------------------------------------------------------------- Thanks, Michelle. And thanks, everybody, for your time today. Before we wrap up, I just wanted to acknowledge the terrific work of our 39,000 people who've done a great job in what can only be described as challenging conditions. Now I know their efforts are appreciated by both the owners of our company and our customers. I also wanted to acknowledge the significant contribution our now former Chairman, David Gonski, has made to ANZ over many years. As you know, David rejoined the Board in 2014 as Chairman and has been an invaluable source of guidance and advice for me and my team. And it's been a privilege to work with him. We had a small event last night with the Board. And while we didn't envisage sending him off over a videoconference, it was a great opportunity to reflect on his time here and thank him for his efforts. For any Chairman, I imagine one of their goals is to leave the place in better shape than they found it. And I know David has certainly achieved that. And you may have seen some of the media coverage today suggesting that as part of our updated carbon policy, we'll be shifting support away from our farmers. And I want to assure you that this is absolutely not the case. ANZ' climate change statement is focused on the top 100 carbon emitters and will have no impact on the bank's farm gate lending practices. We remain firmly committed to supporting Australian farmers and producers now and into the future. This is about helping our major agribusiness customers run more energy- and capital-efficient operations. It's not about family farms. The measures announced today focused on supporting large institutional customers across all sectors and their transition to a low-carbon business. I'm proud of the new policy, and we've been having very constructive conversations with our customers. And this essentially brings us into line with global best practice. Now our measures also include the allocation of $1 billion of funding towards supporting customers and communities' disaster recovery and resilience, which stands to benefit rural Australia and communities. And you can find more details in the investor slide pack published today. So with that, thank you again, and hopefully, next time, we see you in person. And back to Jill. -------------------------------------------------------------------------------- Jill Campbell, Australia and New Zealand Banking Group Limited - Group General Manager of IR [5] -------------------------------------------------------------------------------- Yes, hopefully and without these. Okay. Now I know that you've done Q&A a million times, but just for old times' sake, I'm going to take you through it anyway. (Operator Instructions) We'll ask you to repeat if we can't hear you properly. So operator, with that, if I can hand over to Q&A, please. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Your first question comes from Andrew Lyons with Goldman Sachs. -------------------------------------------------------------------------------- Andrew Lyons, Goldman Sachs Group, Inc., Research Division - Equity Analyst [2] -------------------------------------------------------------------------------- Just 2 questions if I may. Just firstly, you've had a good underlying cost performance, seems like underlying costs over the year. Can you maybe talk about the opportunity on costs looking forward in a bit more detail? Today, Michelle, you spoke to absolute cost reductions. But previously, you have spoken to a stretched cost base of $8 billion. And so I was wondering if you could provide a bit of an update on this particularly in relation to timing and what areas of the business will be the focus of the absolute cost reduction. And then just a second question around dividends. Average dividend restrictions are expected to come off at the end of the year. Can you perhaps talk to how the Board is thinking about the payout ratio going forward? Your returns would appear to support a payout ratio sort of in the low 60% range, maybe in the mid to high 60%, including DRP. So just keen to sort of understand how the Board is thinking about the trajectory of the dividend payout ratio going forward. -------------------------------------------------------------------------------- Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [3] -------------------------------------------------------------------------------- Yes. Thanks, Andrew. I'll take the first one, and I'll ask Michelle to comment on the second. And they're both really good questions. So let's just talk about costs. So a couple of years ago, I talked about the fact that we felt that it was really incumbent upon us to drive much greater simplification, more automation, more digitization, simplify the bank. And then as a result of that, that would mean that we should be able to run the bank at that sort of $8 billion number. We haven't shied away from that at all. And I still firmly and we still firmly believe, a, that's a requirement, we're going to have to do that; and b, that that's achievable. I just want to break down the cost number. So if you look at our numbers today through the large notables, there's $8.6 billion. But importantly, there's 2 parts of that. There's the run-the-bank costs, $7.4 billion, and then there's the sort of investment spend. Now I'm not for a minute suggesting that all of that investment spend is discretionary because clearly, it isn't. Some of it -- as I mentioned, some of it's good old-fashioned maintenance, which you have to do every year. Some of it's compliance-related, which you have to do in an ongoing basis. But as a rule of thumb and -- you'd say, of that investment spend, which in OpEx terms added $1.2 billion to our cost this year, about 3/4 of it, it would be in the category of sort of must-do stuff. And about 1/4 would be in the discretionary area, the things that we want to do, investing in the future, new capabilities, new technology, new products and features, et cetera. When we think about the future, our focus is on that $7.4 billion, to continue to drive that down in absolute terms year-after-year. And we really see the big opportunities there in 2 big areas of cost. One is in the broad term of distribution, whether that's our branch network, whether that's our people out on the front line, et cetera. We see opportunity to digitize and do that much, much more effectively. And the second is around process automation. The reality is that sadly, we are still very heavily manual in a lot of our processes, including things like home loan processing. And we see opportunity to streamline that and make it much more straight through. But that obviously will cost a bit of money. So the $7.4 billion, we got to continue to drive that down. And that will create space for us to have an ongoing investment pool, which we think is appropriate to drive long-term value. Now when can we get there is your question. It's the right question. So initially, we said, hey, look, we thought the $8 billion was realistic as sort of an exit rate at FY '22. That's going to be harder today, to be perfectly frank, for a couple of reasons. Partly because of COVID, it makes it a little bit harder to know exactly what the environment is going to be like and how we think about these tailwinds and headwinds. But actually, the really big issue is how hard do we want to go on the investment side. And I could sit here today and essentially carve down -- we can stop a lot of that investment to hit a number. I just don't think that would be the right thing to do. So we want to continue to invest. And actually, at the moment, we see more opportunity to accelerate investment. Why? Because our customers are actually changing their behavior at a rapid rate. That move from branch to digital, from cash to card, we're seeing real opportunities, and we're seeing the benefits of some of the new technology. So look, we will get to the $8 billion. It isn't probably going to be the exit rate of '22. I don't have a target in mind because I want to make sure we get the balance right. But as I said, run-the-bank costs down, create the right space, I think through the cycle $8 billion or even potentially below is absolutely achievable. And I'm not kicking the can down the road to say it's in 10 years or 5 years. I'm just not sure it's going to be '22. Perhaps it's more like a '23 sort of outcome. And then on dividend... -------------------------------------------------------------------------------- Michelle Nicole Jablko, Australia and New Zealand Banking Group Limited - CFO [4] -------------------------------------------------------------------------------- You want me to take the dividend? Yes. So in terms of the dividend, clearly, that's a Board decision. But in terms of how we think about the longer-term depot, it still hasn't changed around 60% to 65%. Clearly, in the near term, we'll have to see what APRA says, and we'll have to look at economic conditions and our capital position at that time. But the long-term philosophy hasn't changed. -------------------------------------------------------------------------------- Operator [5] -------------------------------------------------------------------------------- Your next question comes from Ed Henning with CLSA. -------------------------------------------------------------------------------- Edmund Anthony Biddulph Henning, CLSA Limited, Research Division - Research Analyst [6] -------------------------------------------------------------------------------- Just further to Andrew's question on the costs, you've put out obviously a target there for the $8 billion. When do you think you'll be in a position to be able to give us a pathway to get to that $8 billion? Is it next year? Is it '22? How far away do you think you can give a bit more detailed plan on how to achieve that? -------------------------------------------------------------------------------- Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [7] -------------------------------------------------------------------------------- That's a very fair question, Ed. I would -- my aspiration is that at the first half result of this financial year, so -- and whenever it is, April, May, when we're talking to you, I would like to give you much greater clarity about that. And why do I say that? I think at that point, we'll have much greater clarity on how this whole COVID thing is really playing out. And I don't mean the credit costs because to some extent, they're not completely uncorrelated, but that's not what I'm talking about. I'm talking about really what will the impact be on our cost base in terms of, I don't know, new compliance requirements, how -- whether there's new regulation that's starting to emerge as a result, et cetera. So we'll have -- I think we'll have greater clarity on just what that run-the-bank impacts of that will be. And we also are going to feel -- we feel we'll be in a much better shape to talk to you about that investment -- those investment opportunities that I've mentioned. We've been doing a lot of work and spending already actually on some pretty exciting new capabilities. And they're at early stages. But we think by then, we'll be in a position to be able to share some of that in a bit more detail and be able to articulate how much are they costing, what do you get for it, et cetera. So that's certainly my aspiration, all going well. And again, I just want to reiterate, I know there's interest in the $8 billion. And again, the target was set as an outcome of doing the right thing in running the bank. And I think that's important. So again, I'm not shying away from it. We still imagine that -- in fact, if anything, you'd argue the environment in many ways, it's even more incumbent on us to focus on productivity. And we've got a great track record at ANZ. We've done this now for a number of years. But on the other hand, and again, not showing -- I don't want to get in where we just do something silly just to hit an $8 billion number by -- because what I was trying to say to Andrew's question, to some extent, I can get there by '22 if I just stop investing in the business. And that will -- why would you do that? When -- we've got a $50-odd billion business here. Why would you underinvest in it just to sweat assets and say, "Hey, look at me. Aren't I great? I hit a target. I see it." So -- but I accept that I've got to be more forthcoming with Michelle about how -- exactly what that path looks like. -------------------------------------------------------------------------------- Edmund Anthony Biddulph Henning, CLSA Limited, Research Division - Research Analyst [8] -------------------------------------------------------------------------------- Okay. And then just a second question. Can you just give a bit more detail on the outlook for credit growth as you're seeing -- and particularly on the Institutional part, have you seen all the drawdowns repaid? Or is there still some headwind to go there? -------------------------------------------------------------------------------- Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [9] -------------------------------------------------------------------------------- It's a great question. I'll get Mark Whelan, the Head of Institutional, to talk about that because there's been a lot of moving parts there. Mark, do you just want to... -------------------------------------------------------------------------------- Mark Whelan, Australia and New Zealand Banking Group Limited - Group Executive of Institutional [10] -------------------------------------------------------------------------------- Yes. Thanks, Shayne. Yes, look, with regards to the Institutional business, I mean we saw a big surge in loan requests, as we said, at the first half. And then it pretty much reversed completely in the second half. So a lot of our customers really effectively realized -- that did draw down in the first half, realized they either didn't need the money and then paid it back because they overemphasized how much they thought they would need it or secondly, many of them have now accessed debt capital markets. They've gone into longer tenor, both domestically and offshore, in debt capital markets and used that to pay down some of their bank debt, which has been good. And the third thing that we've seen happen is, effectively, we've also gone out and actively managed our book. So we've looked at sectors that we maybe didn't want to have as much exposure to. So we've actively managed that down in the marketplace and dealing with those customers and also active in the marketplace where you can move that. So we've seen that occur in the second half. So actually, our loan volumes, if you strip out all the other noise around FX movements, et cetera, it was down about $5 billion over the course of the year. And my expectation going forward is that we'll continue to look at that risk-weighted asset reduction as we have been over many years. We saw some growth in the last, say, 18 months, but we're actually pushing that back down again. We think that's the right thing to do in this environment. -------------------------------------------------------------------------------- Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [11] -------------------------------------------------------------------------------- I might ask -- I know it wasn't your -- specific to your question here, but I might get Mark Hand, who runs the Australia division, to just talk about the mortgage book in particular because obviously, there's been a bit of a turnaround and growth there, and that's still the single biggest asset we have on our book. So just some thoughts about how we're thinking about that. -------------------------------------------------------------------------------- Mark Hand, Australia and New Zealand Banking Group Limited - Group Executive Australia Retail & Commercial Banking [12] -------------------------------------------------------------------------------- Sure. So... -------------------------------------------------------------------------------- Edmund Anthony Biddulph Henning, CLSA Limited, Research Division - Research Analyst [13] -------------------------------------------------------------------------------- That would be great. -------------------------------------------------------------------------------- Mark Hand, Australia and New Zealand Banking Group Limited - Group Executive Australia Retail & Commercial Banking [14] -------------------------------------------------------------------------------- We -- you might recall, a couple of years ago, we talked about the fact that we had fallen behind, which was largely a factor of our turnaround times. We spent quite a bit of effort getting our policies right, our turnaround times right, so we could get back into the market. And we were really well prepared for a market that was a refinancing market, and we had much better service times to our brokers, which, as you know, is north of 50% of the volumes. What we didn't see coming was the COVID environment. And that very much played into the brokers, into the refinance market, 2 things we were very well prepared for. We coped very well in terms of turnaround times when we went into COVID. Our onshore and offshore capacity worked very well. And we won quite a bit of business from competitors in that time in the refinance market. And it also coincided with the time that we had some fairly sharp fixed rate prices in the market. And fixed rates very much became the flavor of the month for our customers. So we've seen the volumes continue. We've still got turnaround times that are amongst the best in the market. We're seeing good volumes continuing into the new market. And we're still seeing the level of refinance activity. We're still seeing a level of customers opt in for fixed rates to try and secure their repayments for the next couple of years. But we're also starting to see activity just start to show signs of returning in Victoria as well. Of course, we've largely done this without Victoria, which is a very strong market for ANZ. -------------------------------------------------------------------------------- Operator [15] -------------------------------------------------------------------------------- Your next question comes from Matthew Wilson with E&P. -------------------------------------------------------------------------------- Matthew Wilson, Evans & Partners Pty. Ltd., Research Division - Executive Director of Financials [16] -------------------------------------------------------------------------------- Hopefully, you can hear me. -------------------------------------------------------------------------------- Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [17] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Michelle Nicole Jablko, Australia and New Zealand Banking Group Limited - CFO [18] -------------------------------------------------------------------------------- Yes, we can. -------------------------------------------------------------------------------- Matthew Wilson, Evans & Partners Pty. Ltd., Research Division - Executive Director of Financials [19] -------------------------------------------------------------------------------- Yes. Two questions if I may. Firstly, sort of more philosophical. Do central banks frustrate you? The banking sector is obviously doing its best to support the economy, yet our central bank and even more so, the Reserve Bank of New Zealand, continues to replicate the errors that we've seen in other jurisdictions like Japan and Europe. How do you think about negative rates, particularly in that jurisdiction, and very low interest rates and their impact on confidence? Now we've seen pretty clearly from your balance sheet that there's ample amounts of liquidity, there's ample supply of credit, but demand is probably being scared away by what central banks are doing. And then secondly, you've got about $1.7 billion in property-related lease commitments. With the behavior change that's been accelerated by COVID, how are you thinking about your office property portfolio from a leasing perspective going forward? We obviously saw one of your peers take an impairment, which I presume was a break fee. If you could talk about your property portfolio and the longer-term impacts of working from home. -------------------------------------------------------------------------------- Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [20] -------------------------------------------------------------------------------- Sure. Yes, those are good. I'll get Michelle to talk about the property from an accounting perspective on the lease side. I'll give it a little bit of insight. Hey, look, central -- Matthew, you probably know what I'm going to say. Look, the central bank has got a job to do. That's for them to decide. All I can tell you is we have a really good relationship with both the RBNZ and the RBA. We don't always agree on things because we have different perspectives. We've got our job to do. They've got theirs. In terms of liquidity, we've made that point very clear from our perspective. And given the things that we're trying to do, we don't need more liquidity. We've got more than enough. It is not in any way a binding constraint. And as you know, I'm not -- our view would be that money is essentially free today. And making it even more free doesn't really change anything. So we've shared our views. We've also shared the view that in Australia, for example, one of the interesting outcomes is that the bank levy, 6 basis points, has sort of become the marginal cost of funding, if you will, because with everything close to 0, that 6 points is a much bigger chunk of the marginal cost of a deposit than it used to be. And so that's having impacts. But anyway, we have those dialogues with them. In terms of -- I'll just quickly -- in terms of the property portfolio -- I'll give it to Michelle to talk a little about accounting. Just in terms of our approach. So first of all, we've actually already been consolidating our footprint over a number of years. So I can't remember the numbers now, but in my time here, we've radically reduced our footprint. Most of -- our biggest single office is actually owned rather than leased. We've got -- we've had plans in place that continue to rationalize the number and the scale of our space. We do believe that the vast majority of our people will return to office work, perhaps not 5 days a week. But our planning at the moment, and we've had a dialogue with the people asking what they want and what we've -- obviously working on what we want, is that the majority of people will return to an office-based role for the majority of a working week. So we don't see a significant shift, although you're right to point out, it is likely that our total sort of square meterage, if you will, on lease will reduce over time. But we've actually been really, really good at managing the property assets over a number of years. And in fact, you saw in today's result, in one of Michelle's pages, it was already -- the cost of property is already coming down. That was because of some really good work we did in our international footprint. But I imagine Matt's question is much more to do with the lease, the potential accounting element. Do you want to... -------------------------------------------------------------------------------- Michelle Nicole Jablko, Australia and New Zealand Banking Group Limited - CFO [21] -------------------------------------------------------------------------------- Yes. I mean in terms of impairment, we did take a very small amount. And it was in the restructuring charges predominantly because of head -- we made some changes in our head office in New Zealand. And also, we've made some changes in our distribution network, which I spoke about. We will continue to look through it. I think Shayne covered it. We'll cover -- we sort of worked through it in quite a considered way, and we don't want to sort of jump ahead before we know how our people are going to work. -------------------------------------------------------------------------------- Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [22] -------------------------------------------------------------------------------- And that last point -- I think it's a point worth making that while the number of people being in office on any given day may be less, it is likely for some period of time, we will have to learn to work in a more socially distant way. So if you will, the average square meter usage per head will probably go up a little bit, and that will sort of offset some of that. So we don't know. We got to work all that through. But we've got a pretty advanced plan. And one of the good things is with our New Zealand experience here a little bit further ahead in reopening the economy, we're getting really good data about how people feel about commuting and getting back to work and all of that sort of stuff. -------------------------------------------------------------------------------- Operator [23] -------------------------------------------------------------------------------- Your next question comes from Victor German with Macquarie. -------------------------------------------------------------------------------- Victor German, Macquarie Research - Analyst [24] -------------------------------------------------------------------------------- Can you hear me? -------------------------------------------------------------------------------- Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [25] -------------------------------------------------------------------------------- Yes, we can, Victor. Go ahead. -------------------------------------------------------------------------------- Victor German, Macquarie Research - Analyst [26] -------------------------------------------------------------------------------- Yes, great. I just had a couple of questions, and I could really appreciate your earlier comment around difficulties giving guidance. But I just wanted to see if perhaps Michelle can just elaborate a little bit on margins outlook. And in particular, I was hoping to focus on 3 areas. One, we've seen the reduction in institutional loans. Obviously, this half, Institutional was a much lower-margin business relative to the overall portfolio. Just be interested to hear when that reduction has occurred and what impact on margins is it going to have. The second part of the margin question is with respect to mortgages. There's obviously a lot of competition. You highlighted front to back book issue. But would it be fair for us to assume that incremental volume growth that you're getting in mortgages is actually incrementally positive or negative to your margins? And the last bit on that margin question is the impact of -- the lower rate, you've given us 3 basis point impact. Is that pretty much the rest of -- has -- the rest of the lower rate impact has washed through, and it's just replicating the collar that's left? -------------------------------------------------------------------------------- Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [27] -------------------------------------------------------------------------------- Okay. I'm going to get -- Michelle is going to take -- so just before I do, Victor, it's a really good question. I was reflecting with the team earlier this morning. I remember when I first started as CFO, which is 8 years ago, one of the analysts on this call actually showed me the Australian chart for NIM over 30 years, and it was a straight line down. And look, the reality is that NIM has been falling for a long period of time with a short blip in the GFC. And there's lots of reasons why -- as you know, there's lots of reasons why that is the case. Now some of it is that sort of Jeff Bezos' line, "Your margin is my opportunity." The reality is that -- the fact is despite things getting tougher, there's still good margin to be had, and that's driven a lot of competitive behavior as you've seen. And in fact, that you could argue is intensifying. And now we're also seeing the impact on low -- that low rates had. So we don't sit here hoping for margins to somehow recover, et cetera. We sit here and assume that margins -- and I'm not just talking about next year. I'm talking about over the long term. We'll continue to be under pressure, yes, and that the right response for that is being much more selective about our mix of business, and you referred to that, and Michelle will talk about, making sure we get the right insto business and the right retail business. So getting the mix right and targeting that, and then equally importantly, making sure we get our cost base right and et cetera. So that is our approach. I think the days of volume growth offsetting it are also probably behind us given the outlook on system growth. But Michelle, you want to just talk through those components? -------------------------------------------------------------------------------- Michelle Nicole Jablko, Australia and New Zealand Banking Group Limited - CFO [28] -------------------------------------------------------------------------------- Yes. Thanks. And Victor, I think your questions, if I go back to my chart, they sort of relate to the asset mix, to sort of the asset pricing and to the rate impacts. If I start on asset mix, I mentioned -- and I'll answer it a bit broader to the way you asked the question. I mentioned there were 3 reasons why we had a reduction. So one was the flow-through from the first half of more insto relative to retail and commercial business. That actually should -- given we've had more growth in retail and commercial, this half, actually, you might see that change into the next half. We also had lower credit card spend. We have to see what happens in -- particularly around international spend, see what happens as the economies and borders open up. And we had sort of fixed versus variable home loans, and Mark spoke to that. And it does feel that right now, customers are choosing more fixed -- a greater proportion of fixed than they had before. In terms of asset pricing and competition, I mean it's very hard to predict and give you a number. It is -- the market remains competitive. And my personal view is with more liquidity in the market, it probably stays competitive. But it's hard to give you an accurate prediction. And then on low rates, in terms of rates being where they are, yes, the flow-through impact is just on the replicating portfolios. Clearly, if there are further rate changes, that will change again. So I hope, Victor, that answers your question. -------------------------------------------------------------------------------- Victor German, Macquarie Research - Analyst [29] -------------------------------------------------------------------------------- Yes. It sort of -- it conceptually does, but I'm just sort of specifically wondering, with respect to that institutional margin and the fact that we've seen a reasonably meaningful reduction in volume, your institutional margins based on the disclosure is about 50 basis points lower than the group margin. Am I right to assume that, that incrementally will be positive for margins in the first half '21? -------------------------------------------------------------------------------- Michelle Nicole Jablko, Australia and New Zealand Banking Group Limited - CFO [30] -------------------------------------------------------------------------------- Yes, yes. -------------------------------------------------------------------------------- Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [31] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Michelle Nicole Jablko, Australia and New Zealand Banking Group Limited - CFO [32] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Victor German, Macquarie Research - Analyst [33] -------------------------------------------------------------------------------- Completely appreciate that there is a lot of competition. But I mean would it be fair to assume that the incremental mortgages you're writing today are better than 1.5? -------------------------------------------------------------------------------- Michelle Nicole Jablko, Australia and New Zealand Banking Group Limited - CFO [34] -------------------------------------------------------------------------------- Yes, yes. That's right. Yes. -------------------------------------------------------------------------------- Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [35] -------------------------------------------------------------------------------- Yes. I think that's a very good point, Victor. And I think -- the way that Mark Whelan and the way that we've set in the institutional appetite, we are not chasing revenue for revenue's sake. We're very focused on risk-adjusted return and therefore on the NIM. And like -- we haven't talked about, let's say for example, one of the areas you would have -- you'd have seen intense competition that's driven margins way down is in trade. Now there's all sorts of stuff going on in trade, as you can imagine, in this world. But there's just a massive wall of liquidity going into that market, and we're not going to do anything silly there. And so by being -- we're supporting good customers and where we get good cross-sell. But you're right, the approach that Mark and the team have done in Institutional, we'll see, will be a net benefit to margins and will continue to be. So that is well managed. -------------------------------------------------------------------------------- Victor German, Macquarie Research - Analyst [36] -------------------------------------------------------------------------------- And Shayne, you mentioned a few times around when you were answering on the cost side, that you could easily sort of achieve your medium-term guidance by reducing investment spend. I'm assuming -- and I don't want to put words in your mouth. But I'm assuming that's not kind of the intent sort of, of you ultimately achieving that $8 billion target. I'm just wondering kind of as you look through in the next couple of years, where do you think the sort of the sustainable long-term investment spend is likely to settle for you guys? -------------------------------------------------------------------------------- Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [37] -------------------------------------------------------------------------------- That's a really good question. It's so hard to say -- I'm going to answer it. But it is so hard to say because pretty much every year, something new comes along that we -- you didn't think about. And the one that's probably that's one of the biggest impacts on this year and next year in particular is BS11, which is the regulatory change in New Zealand, which will end up costing us several hundred millions of dollars now. Now the good news about that one is that it stops at some point because it has to be done at a certain timetable. So that will peak next year and then largely disappear. So though -- putting things like that aside, the big material sort of things, Victor, historically, our investment -- and I'm talking about both the amount we capitalize and OpEx, so I'm talking about the total, used to be sort of $1.2 billion a year, went to $1.4 billion. This year, it's $1.77 billion. Next year, it will be higher. Again, about 3/4 of it gets OpEx-ed. We do think we're in a bit of a lumpy period for a couple of reasons. One is BS11, and other -- and there's some other things that we're doing on our own bet, some of that discretionary stuff I talked about, which is to do with data and some of the new technology that we're building for customers. But we think getting through this, a more normal, if such a thing exists, total investment state will be closer to sort of $1.5 billion, yes? So we do think we're at an extraordinarily high period of investment for now, and that will more likely settle down at $1.5 billion. But we also have to be prepared -- and that's -- so when I work out my $8 billion number, I sort of assume that that's what that piece of it will be. Does that make sense? And then there'll be years when BS11's kind of stuff gets thrown at us, and we'll have to deal with that. I mean you can backsolve, just -- sorry, you can backsolve, say $1.5 billion, 75% OpEx-ed, call it $1.2 billion or whatever the number is. Back that out, you're sort of saying we've got to get our run-the-bank costs down below -- they're at $7.4 billion today. They have to be below $7 billion. That's giving you a dimension of we think that won't be easy, but that's sort of what we're looking at because remember, a lot of that investment that we are making is designed to deliver that outcome. It is designed to reduce operating cost. -------------------------------------------------------------------------------- Operator [38] -------------------------------------------------------------------------------- Your next question comes from Jonathan Mott with UBS. -------------------------------------------------------------------------------- Jonathan Mott, UBS Investment Bank, Research Division - MD and Banking Analyst [39] -------------------------------------------------------------------------------- Two questions if I could probably for the 2 Marks, Mark Whelan and Mark Hand. So first one for Mark Whelan. Just going to Page 61 of the result itself, which goes through the Institutional book, there are some moving parts here. I just wouldn't mind if you could explain that institutional risk-weighted assets down 10%, loans and advances both down 21, but average loan's up 2%. So I presume this is a lot of that liquid asset put at the end of the period, last period. They really -- did they just run off right at the end of the period, so the average was high, and then it just collapsed at the end of the period? Can you just give us a bit of a feel for that? And is that just a timing issue or why the average was high? And were you booking revenue basically through the whole period, which will make it much harder next period? And the second one was more for Mark Hand, and it's to do with this question around brokers and distribution. I'll go to something that Shayne said, which one of the features -- the costs you need to work on digitizing distribution. But if you look at the -- some of the numbers that came out, 57% of the flow for the full year came through the broker channel, but it was only 49% in the first half, which would imply that more than 65% of all flow in the second half coming through the broker channel. It's an extraordinary number for the banks -- for a major bank. And are you comfortable with 2/3 of your loans coming through the broker channel at a time that you try to digitize it and change that... -------------------------------------------------------------------------------- Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [40] -------------------------------------------------------------------------------- So I'll give the flippant answer to that, and then we'll get Mark to talk about the details before -- so Jonathan, you're right. I mean we can talk about the maths. But I don't think that is surprising at a time when bank branches were closed, I mean -- and people did not want to venture outside their homes. So that was much more a COVID issue. There were no bank -- you couldn't go to the bank branch depending where you lived or you didn't want to. And so yes, it was a spike. And of course -- so that was -- that has normal -- I hate using that word, but sort of normalized again. And Mark can give you some more current data about where those sort of flows are. But that was an extraordinary period. It was not a permanent shift in our mind. But Mark Whelan, do you want to talk about the -- his question on the liquidity, et cetera? I think he answered his own question but... -------------------------------------------------------------------------------- Mark Whelan, Australia and New Zealand Banking Group Limited - Group Executive of Institutional [41] -------------------------------------------------------------------------------- Yes, yes, I think he did actually because I mean there is a lot of noise in there, Jonathan. So you're right. I mean if you look at the GLA results half-on-half, it's down $42 billion. And $9 billion of that was FX. So $17 billion was in lending, the lending book, which is consistent with what we saw in risk-weighted asset reduction in -- and CRWA in that half as well. And there was $16 billion, as you pointed out, in the market's reduction, which did come towards the end of the period. So that is right. I mean obviously, that will have a drag on us in that market's piece in the start of this half, but that also just depends on where we land with those sort of assets in the second half. -------------------------------------------------------------------------------- Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [42] -------------------------------------------------------------------------------- I think it's fair to say, Mark, and you'd correct me if I'm wrong, though, but that liquids piece, while it will have a drag, that was not a massive driver of the market's performance in the first place. -------------------------------------------------------------------------------- Mark Whelan, Australia and New Zealand Banking Group Limited - Group Executive of Institutional [43] -------------------------------------------------------------------------------- No. -------------------------------------------------------------------------------- Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [44] -------------------------------------------------------------------------------- So yes, it's a drag, but it's not really the driver of the result. -------------------------------------------------------------------------------- Mark Whelan, Australia and New Zealand Banking Group Limited - Group Executive of Institutional [45] -------------------------------------------------------------------------------- No, no. I mean if you look at the market's results overall, I mean it really came through from, first of all, our customer activity. Customer activity was highly -- it was elevated, and that meant a risk distribution of that, which we call franchise trading, but the risk distribution off the back of that was where we saw 50% of the uplift in our market's results. This would be a very small portion -- the GLA piece would be a very small portion of that in our revenue. -------------------------------------------------------------------------------- Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [46] -------------------------------------------------------------------------------- Mark? -------------------------------------------------------------------------------- Jonathan Mott, UBS Investment Bank, Research Division - MD and Banking Analyst [47] -------------------------------------------------------------------------------- So the Institutional ex markets NIM should recover next half because you're running off a lot of the low-margin business effectively. -------------------------------------------------------------------------------- Mark Whelan, Australia and New Zealand Banking Group Limited - Group Executive of Institutional [48] -------------------------------------------------------------------------------- Yes, that would be right. -------------------------------------------------------------------------------- Mark Hand, Australia and New Zealand Banking Group Limited - Group Executive Australia Retail & Commercial Banking [49] -------------------------------------------------------------------------------- And just on the -- Jonathan, just on the home loan issue, so we've settled back to around 53%. And so that was an absolute feature of what's occurred in that people were not prepared to venture out of their homes. So brokers became much more focused. A lot more customers fixed, and that's traditionally not something that's happened a lot in Australia. And so a lot of them probably felt they needed to have that conversation. And the other thing was with the lockdowns and people unable to, I guess, instigate renovations at the home, the part of our book that would often come directly to us is existing customers would come and get an extension on their facility for renovation. And that part of the market has settled right back. So it's more of a factor of good broker proposition for the time, but other parts of the book had also been offset. -------------------------------------------------------------------------------- Operator [50] -------------------------------------------------------------------------------- Your next question comes from Brendan Sproules with Citi. -------------------------------------------------------------------------------- Brendan Sproules, Citigroup Inc., Research Division - Director [51] -------------------------------------------------------------------------------- Just sort of looking at collective provision, which has now hit $5 billion, that's actually close to the downside -- closer to the downside case in the base case that you showed us in May. I was just wondering how that unwinds next year as credit quality does actually come to fruition. Will we see it fall dramatically because you've got economic overlay, which you've also, as you've mentioned today, taken some specific overlays around certain industries. Maybe you can give us an indication of -- because it does seem like you pushed it up almost $2 billion from where you were pre-COVID. Is the expectation that we sort of burn through that $2 billion before we hit the P&L again? -------------------------------------------------------------------------------- Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [52] -------------------------------------------------------------------------------- I'm going to ask Michelle to answer that one, Brendan. -------------------------------------------------------------------------------- Michelle Nicole Jablko, Australia and New Zealand Banking Group Limited - CFO [53] -------------------------------------------------------------------------------- So Brendan, if I kind of go through the components, if the economic outlook improves, yes, you'll get some unwind of that, but it may be replaced with risk migration coming through. So it won't be -- so the timing doesn't sort of work perfectly on those. And then in terms of the overlays, I think we'll just have to assess them as we work our way through -- including those components I spoke about. We've got the deferral customers. If they come off deferral as we're sort of expecting, that might help. And so we'll just sort of have to play it through. -------------------------------------------------------------------------------- Brendan Sproules, Citigroup Inc., Research Division - Director [54] -------------------------------------------------------------------------------- And I just got a second question on the Institutional business. Obviously, you talked today about the trading income being quite elevated towards normal levels and obviously the falloff in the loan book. And as Mark said, there's going to be a continued push to reduce risk-weighted assets. Just in terms of the operating expense base here, are we going to see a big shrinkage in that as revenue comes down dramatically? Are we talking about a shrinking of this overall business? -------------------------------------------------------------------------------- Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [55] -------------------------------------------------------------------------------- So first, I'll ask Mark to give a little bit more color. So I think it's a really good question. I think the first thing to point out is that the institutional bank has done a magnificently good job on managing cost. In fact, while we've managed cost overall as a group in terms of flat, Institutional has had a series of halves where their absolute cost has come down. And so they've already embedded that sort of mindset, if you will, into the business, and there's a really good track record there. And yes, it is part of our philosophy, that in order to be successful -- institutional banking is hard, and returns are more challenged than other areas. And you've got to be really, really tight and -- on everything. And I think the team has done a great job on many fronts. But there's still opportunity. And in fact, I talked about digitization and using new technology. In fact, our institutional bank is a step ahead of many parts of our business in terms of actually turning that into reality. But Mark, do you just want to give a sense -- because it's a good question about how we think about our cost base relative to the revenue outlook and running of what is a complex business across many markets. -------------------------------------------------------------------------------- Mark Whelan, Australia and New Zealand Banking Group Limited - Group Executive of Institutional [56] -------------------------------------------------------------------------------- Yes. Look, I think it's fair to say that the cost income ratio in institutional banks compared to retail banks, as you also -- you all know, is -- it's higher. Ours was significantly higher than it should have been, say, 4 or 5 years ago. So we have had 9 -- it's actually 9 halves now of absolute cost reduction. And we want to continue that trend. How are we going to do that? Well, we still think there's opportunities in the property side of our business. We think there's opportunities in ensuring that we get further efficiencies through automation particularly because a lot of the investments that we've been making over the last 3 or 4 years in the business has been in our PCM business and our markets business to generate straight-through processing and a lot of self-service from our customer base. That takes a lot of operational costs out of our business. And the simplification of the business that we've had both in product and in customer and even in our international footprint has meant that we've been able to generate or take out a lot of support costs in the business. I think there is still more room for that. It will get -- it's getting harder. But that's where I think the automation investment that we've made will actually come to the fore. So these trends will continue for us. But the other things that we're looking at, we are getting risk-weighted asset down, which will affect revenue, to your point. But the -- we're going after the risk-weighted assets that are lowest-returning. And we want to then ensure that we're getting a better capital outcome in the division plus a better expense outcome in the division while we're still trying to mitigate any drag on revenue. They're the 3 components for us. And I should also say that the provisions part of our business, we've done a 93% re-rating of our book. Some stayed the same. Some customers were downgraded in our CCRs, and some actually went up. But we think that we're very well provisioned in the book this year. So while there'll be ins and outs, we still think that we can get the appropriate above-capital return next year. -------------------------------------------------------------------------------- Operator [57] -------------------------------------------------------------------------------- Your next question comes from Brian Johnson with Jefferies. -------------------------------------------------------------------------------- Brian D. Johnson, Jefferies LLC, Research Division - Equity Analyst [58] -------------------------------------------------------------------------------- I've got to start by congratulating Mark on a great result. I look forward to having them next year when those financial markets earnings come down. Two questions if I may. The first one, Shayne, on the $8 billion cost aspiration, which you first enunciated with the first half '19 result, which would just seem to be progressively pushing back, I'm just wondering whether $8 billion from first half '19 is still $8 billion given the degree of software write-offs we've seen in the divested businesses. In fact, should we be looking to restate -- if it is truly like-for-like, what is the new rebased $8 billion? Or is it unchanged? And then I had a second one if I may. -------------------------------------------------------------------------------- Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [59] -------------------------------------------------------------------------------- Well, I don't -- look, again, Brian, if you go back to what I said at that first half '19, I did not start by saying the cost target was $8 billion. What I said is we want to simplify the business. And as a result of that, we think a well-run, lower-risk business that's more appropriate for sort of contemporary customer engagement would result in an $8 billion cost target. You're right, there are some things that have helped, some of those software impairments. They're pretty small in the scheme of things, but you're right, they're tailwinds. But equally, I can say that there's been some headwinds. Didn't have total visibility over things like some of the other regulatory requirements we've had imposed on us that have put cost burden on it. So it's a fair question. You're smart. You can figure out the pluses and minuses yourself. We're not going to stop when we get to $8 billion. It's really just -- it's an aspiration to say our philosophy here is that this business is going to get tougher, that there is going to be less growth, and therefore, we must be more focused on productivity and capital efficiency. And we know in the productivity area that there is a -- continues to be opportunity to do better, but not just to make the bank cheaper but to make the bank better. And that is our driving philosophy here. We want to make the bank better for customers and, in doing so, drive costs down. But when we get to $8 billion, we won't be throwing a party and say it's over. We know that we'll have to keep going. So you can figure out for yourself what the right numbers are. -------------------------------------------------------------------------------- Brian D. Johnson, Jefferies LLC, Research Division - Equity Analyst [60] -------------------------------------------------------------------------------- Okay. Just the second one, if we have a look at where home loans are skewing, which seems to be increasingly the 2- to 3-year kind of fixed rate product, could you talk to us about the cashbacks, the amortization profile you're applying and also the broker origination costs? What are you amortizing over the assumed life on the new ones you're writing now? Is it -- for a 2-year loan, is it 2 years? Or is it an assumed life of 4 years? Could you just explain that for us? -------------------------------------------------------------------------------- Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [61] -------------------------------------------------------------------------------- Sure. I don't know the answer. Do you know the... -------------------------------------------------------------------------------- Michelle Nicole Jablko, Australia and New Zealand Banking Group Limited - CFO [62] -------------------------------------------------------------------------------- I'm pretty sure it's over the life, so it's over the fixed life, yes. -------------------------------------------------------------------------------- Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [63] -------------------------------------------------------------------------------- So cashback for a fixed term, you amortize over the life of the fixed term, yes. -------------------------------------------------------------------------------- Michelle Nicole Jablko, Australia and New Zealand Banking Group Limited - CFO [64] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Brian D. Johnson, Jefferies LLC, Research Division - Equity Analyst [65] -------------------------------------------------------------------------------- Okay. And is that the same for the broker origination costs as well? -------------------------------------------------------------------------------- Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [66] -------------------------------------------------------------------------------- Good question. -------------------------------------------------------------------------------- Michelle Nicole Jablko, Australia and New Zealand Banking Group Limited - CFO [67] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [68] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Operator [69] -------------------------------------------------------------------------------- Your next question comes from Andrew Triggs with JPMorgan. -------------------------------------------------------------------------------- Andrew Triggs, JPMorgan Chase & Co, Research Division - Research Analyst [70] -------------------------------------------------------------------------------- Just in terms of the cost -- follow-up on the cost question unfortunately. But... -------------------------------------------------------------------------------- Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [71] -------------------------------------------------------------------------------- That's all right. -------------------------------------------------------------------------------- Andrew Triggs, JPMorgan Chase & Co, Research Division - Research Analyst [72] -------------------------------------------------------------------------------- There look to be about $400 million worth of productivity savings for the year. Just some thoughts on whether that pace can be maintained into FY '21. And on the same line of questioning, the inflation looked to be about 1.5% of the cost base. Are they both realistic starting points for next year? And then a question on asset growth. Mortgage growth has been very choppy for quite a period of time now for ANZ, either growing at some multiple of system or in some periods going backwards. And surely, that must be putting enormous strain on the network itself and does make you an inconsistent partner to brokers. Could you talk about some of the reasons for the volatility in your growth and what perhaps you could do to address this, please? -------------------------------------------------------------------------------- Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [73] -------------------------------------------------------------------------------- Yes. I'll get Mark Hand to talk about that. So -- and then I'll talk about the cost. So it's a -- I'll just comment on that second point first, Andrew. That's a fair point. I mean I think if you look over time, though, it depends on your time scale here, actually, it has been pretty consistent. We've actually, over -- if I look at 5, 6, 7 years, we've been growing above system pretty consistently. When you talk about the volatility, it was really a recent phenomenon. And we sort of owned up to that, and that was at a time when responsible -- was around the Royal Commission responsible lending, we were very concerned about the potential risks associated with the responsible lending legislation and making sure that we didn't trip ourselves over inadvertently. We fessed up to the fact we probably went too hard on that, and therefore, we -- and we were too cautious. And therefore, we saw a falloff in our volumes. But we've sort of restored that. And that's the first point. And the second point really is to do with the processing capacity, which we've invested in. So we've got much greater confidence now because as you know, one of the things that customers -- that influences customers is the turnaround times. And so we've got greater capacity in that area now, and it's more consistent than it was in the past. But -- so that's on that one. Look, we don't -- one other thing. We don't sit here and -- we don't have a target around system. We don't sit and say, our plan is to grow at 1.5x system, 1x system, half -- whatever it is. We want good customers. And we -- our system is pretty non-discriminating. We want good customers, preferably homeowners, preferably people with a job and people who've got really good track records and all those other things as opposed to just, hey, we just got to keep booking the volume and feed the beast. That's not our approach. And we also want to make sure that we're getting appropriately -- we're getting the right returns for the risk. In terms of the $8 billion, I mean Michelle can comment on the specific maths there. I think the inflation number you mentioned is -- that's as good a guess, as good a planning number as anybody else. So that's sort of what we've got. Yes, we can continue to do more. As you know, the benefits we drove this year were really related -- not all of it but a lot of it related to decisions that were made last year because there's sort of a lag. We -- if we make changes to our branch network, for example, or some process that we digitize, there's a bit of a lag. And so we know that in '21, we will get the benefits of many of the decisions that we've made in -- already, yes? And so some of those will flow through, and we just got to keep going. And we have a very, very robust program now. We -- internally, we call it accelerated strategy. All of our divisions, including technology and risk and finance but all the businesses, we have plans around how to make the bank better and, in doing so, drive out unnecessary cost. That's very robustly managed. I meet weekly and fortnightly with every one of those streams, where we work through, what are we doing? What are we adding to the list? How have we gone? What investment do you need to do that? And measuring outcomes, not just in terms of cost but actually better customer outcomes, lower risk, and I mean operating risk as much as anything else, and financial benefits. But Michelle, do you just want to talk through what you think about the cost forecasting? -------------------------------------------------------------------------------- Michelle Nicole Jablko, Australia and New Zealand Banking Group Limited - CFO [74] -------------------------------------------------------------------------------- Yes. Yes, and if I -- so Andrew, if you start on productivity, I think Shayne's sort of covered it. The idea is we continue our productivity initiatives. Of the number you mentioned, most of it was productivity. There was some that was things like less travel, et cetera. And it's hard to know exactly how they'll bounce back. It's hard to give you a precise number because it will come down to timing of how we implement things. But we are on a trajectory to continue to reduce those sort of run-the-bank costs. On inflation, I think, again, it's a little bit tricky with timing. But it is probably a reasonable assumption for now because just in this -- and it's a bit less-than-normal inflation, but I think that's probably reasonable for the moment. -------------------------------------------------------------------------------- Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [75] -------------------------------------------------------------------------------- And as you know, Andrew, and just for others, just the only -- to caution on inflation, just remember that our cost base is a global one. And so we -- it's not reasonable just to look at the Australian CPI number. And so that will be the major influence. We've got a lot of people sitting in India and the Philippines and those things, and they have different cost outlooks than at home. -------------------------------------------------------------------------------- Operator [76] -------------------------------------------------------------------------------- Your next question comes from Richard Wiles with Morgan Stanley. -------------------------------------------------------------------------------- Richard E. Wiles, Morgan Stanley, Research Division - MD [77] -------------------------------------------------------------------------------- In your opening remarks this morning, you said that in 2016, you set a strategy to prepare for lower growth and a wave of disruption. So given that foresight, I'm interested in your response to a couple of questions I have. -------------------------------------------------------------------------------- Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [78] -------------------------------------------------------------------------------- Sure. -------------------------------------------------------------------------------- Richard E. Wiles, Morgan Stanley, Research Division - MD [79] -------------------------------------------------------------------------------- The first relates to loan growth. In recent weeks, we've seen the market respond quite positively to proposed changes in responsible lending laws. We've also seen the market respond quite positively to the budget, which included the 100% asset write-off allowance for businesses. Do you think those 2 initiatives will have a meaningful impact on loan growth prospects next year or the year after? -------------------------------------------------------------------------------- Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [80] -------------------------------------------------------------------------------- Good question. -------------------------------------------------------------------------------- Richard E. Wiles, Morgan Stanley, Research Division - MD [81] -------------------------------------------------------------------------------- That's my first question. -------------------------------------------------------------------------------- Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [82] -------------------------------------------------------------------------------- Yes, fair enough. And just -- oh, can I answer them one at a time so I don't forget? Is that all right? -------------------------------------------------------------------------------- Richard E. Wiles, Morgan Stanley, Research Division - MD [83] -------------------------------------------------------------------------------- Of course, yes. -------------------------------------------------------------------------------- Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [84] -------------------------------------------------------------------------------- It's a fair question. And just to put it in context, when I was talking about growth, I was talking about revenue growth, so not just volume. But it's a fair question. So asset write-off, isn't it asset write-off? Yes. We saw a very, very significant response to that. We saw it in the first announcement of that. And we would expect that they will -- that small businesses will take advantage of that because it's a very sensible option for people to take. So we would expect to see that. Now I have to put that into context, it's not a huge business line for us. But nonetheless, we would see that as being supportive of a little bit of loan growth. Responsible lending, less so, and the reason is this. Our view that -- the responsible lending legislation, for us, if it is removed -- and there's still a big if there that whether this gets through. But if it is removed, from our perspective, it makes the operational aspects of it easier, but it doesn't fundamentally change our risk appetite. So at the margin, there might be some customers and loans that will get approved that wouldn't under responsible lending, but we think it's at the margin. What will happen is that the process for borrowers will be faster and less invasive. So we won't have to ask the same level of questions on every customer. But actually, when you sit back and look at the process we have today, Richard, most of it's sensible. I mean of course, we want to understand somebody's income, and of course, we want to understand their financial position. And we -- of course, we want to understand their expenditure. But this will make it a little bit easier for us. So we think it is about operational efficiency rather than unleashing any sort of new loan growth. That's our view anyway. -------------------------------------------------------------------------------- Richard E. Wiles, Morgan Stanley, Research Division - MD [85] -------------------------------------------------------------------------------- Okay. My second question relates to your views on disruption. Particularly, what's your view on Westpac's decision to provide transaction account capability to Afterpay? It's an organization that's got 3.5 million customers in Australia. It's got strong customer engagement. So if Afterpay can offer deposits, do you think that will affect ANZ' deposit growth prospects? And what do you think it will do for industry deposit pricing? -------------------------------------------------------------------------------- Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [86] -------------------------------------------------------------------------------- So I don't know the details. I only know what I read in the papers, so I can't really comment about what will happen. But what we do know -- and again, not at all being dismissive on it. Afterpay has been enormously successful in a part of the market. I think though, when you look at their customer base, and I accept it may change, I don't know that there's a high correlation with your existing customer base with the people that are saving for a home loan and sort of higher saving-oriented customers. Now as I said, that may change. But that's certainly not the -- that's not the customer cohort that we see today. But the bigger question is -- I think hopefully, this -- I think beyond that, yes, there's going to be disruption. Yes, regulatory barriers are lowering. Yes, there is more technology solutions. Yes, banking is being disaggregated. So clearly, areas in -- payments in certain nonbank lending, asset finance, even in home loans, there are more and more new entrants offering better customer outcomes, easier ways of dealing with financial institutions or nonfinancial institutions. And so we're not at all dismissive of the impact of these. We have a very large, mostly loyal customer base, but we absolutely can't take them for granted. And that's why I was talking -- when I'm talking about the $8 billion, I'm talking about investing. A huge chunk of that investment that we want to make and we are making is about having contemporary, competitive, engaging offerings for those customers, so they don't want to go and look at an Afterpay, Westpac to deposit or whatever that might be. And that's -- I accept that we -- and I would hope, as I mentioned, in the first half to be more forthcoming about what some of those things look like. -------------------------------------------------------------------------------- Richard E. Wiles, Morgan Stanley, Research Division - MD [87] -------------------------------------------------------------------------------- Shayne, do you know how many of Afterpay's 3.5 million customers actually have their transaction bank with ANZ, that transact now with ANZ? -------------------------------------------------------------------------------- Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [88] -------------------------------------------------------------------------------- Yes, yes. Well, what we know is, we know when people who have a transaction account with ANZ make an Afterpay payment. So we do know -- I'm not going to share that number with you, but yes, we do know that. We also know the credit characteristics of those people. And I'm not -- and again, I'll use Afterpay -- so forget -- just put aside Afterpay per se, but buy now, pay later. In fact, yesterday, at our Board meeting, we actually had a review of that whole -- we discussed that sector, its successes, and it's very -- it's engaging and the simplicity and the way that it attracts customers, but also what we understand about the ANZ customers who use them, what their risk profiles are and what might be the leading lagging indicators in terms of that cohort. So yes, we have really great data on it actually. -------------------------------------------------------------------------------- Operator [89] -------------------------------------------------------------------------------- Your next question comes from Brett Le Mesurier from Velocity Trade. -------------------------------------------------------------------------------- Brett Le Mesurier, [90] -------------------------------------------------------------------------------- Michelle, a question for you. You were talking about the deferred loans you put into 4 categories and the most risky of those you put into Stage 2 for assessing collective provisions. I was wondering what the loan balances were of those risky loans that you put into Stage 2. -------------------------------------------------------------------------------- Michelle Nicole Jablko, Australia and New Zealand Banking Group Limited - CFO [91] -------------------------------------------------------------------------------- I don't think we've disclosed them by customer. So I don't think that's in our disclosures, Brett. We talk about the average. But yes, so we haven't disclosed that. I don't know, Kevin, if you want to add? -------------------------------------------------------------------------------- Kevin Paul Corbally, Australia and New Zealand Banking Group Limited - Group Chief Risk Officer [92] -------------------------------------------------------------------------------- The only thing, Michelle, that I would add to that is there's probably a greater proportion of the customers in categories. So basically, categories 3 and 4 were those that were, to use the phrase we use, higher risk. There's a greater proportion in that category than what we're actually seeing now in terms of those who are extending out of deferral. That's probably the best way I think I can describe it. -------------------------------------------------------------------------------- Brett Le Mesurier, [93] -------------------------------------------------------------------------------- And did that category have a higher proportion of small business than home loans? -------------------------------------------------------------------------------- Kevin Paul Corbally, Australia and New Zealand Banking Group Limited - Group Chief Risk Officer [94] -------------------------------------------------------------------------------- When we -- if you were to look at small business versus home loans, the percentages that we had categorized in 3 and 4 were broadly similar. They're reasonably close. But what I would say, and Shayne alluded to it in his speech, what we're seeing is those small business customers that are actually seeking an extension, that's in the order of 9% of the book, and from a home lending perspective, it's about 20%. And both of those are less -- significantly less than what we had thought would be in categories 3 -- from our analysis, were in category 3 and 4. -------------------------------------------------------------------------------- Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [95] -------------------------------------------------------------------------------- Yes. And that's pre -- and sorry, just to be clear, and those numbers are pre the Victorian opening, which you would imagine... -------------------------------------------------------------------------------- Kevin Paul Corbally, Australia and New Zealand Banking Group Limited - Group Chief Risk Officer [96] -------------------------------------------------------------------------------- Correct, that's right. -------------------------------------------------------------------------------- Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [97] -------------------------------------------------------------------------------- Would get better as a result. -------------------------------------------------------------------------------- Kevin Paul Corbally, Australia and New Zealand Banking Group Limited - Group Chief Risk Officer [98] -------------------------------------------------------------------------------- Yes. And for what it's worth, 60% of the small business customers were in Victoria that have sought an extension. And as Shayne alluded to, over half of those are in basically hospitality and retail, which is not surprising either. -------------------------------------------------------------------------------- Brett Le Mesurier, [99] -------------------------------------------------------------------------------- And when I look at the Stage 2 collectively assessed provision in September '20 half, I see $549 million of bad debt charge. Can you give me a sense as to the proportion of that, that relates to those risky categories? Is it all? -------------------------------------------------------------------------------- Michelle Nicole Jablko, Australia and New Zealand Banking Group Limited - CFO [100] -------------------------------------------------------------------------------- It wasn't -- no, it's not all. -------------------------------------------------------------------------------- Kevin Paul Corbally, Australia and New Zealand Banking Group Limited - Group Chief Risk Officer [101] -------------------------------------------------------------------------------- No, it's not all of it. It's a combination of that. And I think Michelle also alluded to the fact that we looked at our small business cohort customers. And we looked at the security valuations, and we also looked at the risk rating, which Michelle had alluded to as well, right? So -- and I think the other point that I just want to make clear is that the Stage 2 categorization that we've spoken about is for those customers that were in categories 3 and 4 that had sought a deferral and also anyone who actually had asked for an extension. So just to be clear in terms of who it was. -------------------------------------------------------------------------------- Michelle Nicole Jablko, Australia and New Zealand Banking Group Limited - CFO [102] -------------------------------------------------------------------------------- And then on top of that, we look at the broader portfolio and make an assessment. And some of those customers also go into stage 2. -------------------------------------------------------------------------------- Kevin Paul Corbally, Australia and New Zealand Banking Group Limited - Group Chief Risk Officer [103] -------------------------------------------------------------------------------- Yes. -------------------------------------------------------------------------------- Brett Le Mesurier, [104] -------------------------------------------------------------------------------- Just to finish up, could you give me a sense as to the loss rates you're assuming for those in the riskiest categories? -------------------------------------------------------------------------------- Kevin Paul Corbally, Australia and New Zealand Banking Group Limited - Group Chief Risk Officer [105] -------------------------------------------------------------------------------- I don't think we have disclosed that. What I would draw your attention to, and it's in the pack, if you take home loans as an example, is at 60 -- the dynamic LVR on those customers is in the mid-60s. And also, Shayne alluded to, I think, in his speech that the small business customers, in excess of 70% of those who -- are fully secured as well. -------------------------------------------------------------------------------- Michelle Nicole Jablko, Australia and New Zealand Banking Group Limited - CFO [106] -------------------------------------------------------------------------------- Yes. And maybe if you go back to what Shayne was saying in terms of the deferrals and how they're rolling through because that assessment was sort of made at 30 September. And what we've seen since then is actually quite a lot of customers come off deferral, including those in those sort of riskier categories as well. -------------------------------------------------------------------------------- Operator [107] -------------------------------------------------------------------------------- Your next question comes from T.S. Lim with Bell Potter. -------------------------------------------------------------------------------- T.S. Lim, Bell Potter Securities Limited, Research Division - Head of Research and Banks & Insurance Analyst [108] -------------------------------------------------------------------------------- Just some thoughts about next week's election. Who is better for business within ANZ, Joe Biden or Donald Trump? -------------------------------------------------------------------------------- Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [109] -------------------------------------------------------------------------------- I think the answer is yes. Look, interestingly -- so look, I don't know that there is a right answer to that other than we've got a really important international network. It's something that differentiates ANZ. We've -- what we're seeing as a result of all sorts of things, all sorts of changes in the world is more of our customers engaging with us about rethinking supply chain, where they're putting their factories, where they want to invest than ever before. So -- and that's a good thing for us, T.S., because that's our job. Our job in institutional is actually to help people facilitate trading capital flow. And when companies are thinking about, well, maybe I should diversify away from China or maybe I should rethink India, maybe I should think about what I'm doing in Vietnam or in the U.S. for that matter, that's a good thing for us. And so we're actually getting a lot more inquiry, whether they're Australian customers or U.S. multinationals about that. So I think that's -- and I think that's a reasonably long-term thing. And by the way, I don't think that's related to COVID. I mean some of that was -- that trend was already intact. We were -- I took my team to Vietnam last year. And part of the reason we did that was we were already seeing a lot of our multinational customers have a -- what they would call as a China plus 1 strategy. And it had nothing to do with COVID or any of this recent noise. It was really to do the fact that, hey, look, the world is changing and we -- that we see opportunity to put plant and open up new trade relationships with different parts of Asia. That's -- as I said, that's a good thing for us. And a lot of that capital is going into places like Vietnam or Thailand or India and Japan. And we've got a great franchise around there. So to some extent, change is good for us. And as long as people are thinking about change, that's an underpinning -- that's a really good lead indicator for our institutional bank. -------------------------------------------------------------------------------- Operator [110] -------------------------------------------------------------------------------- There are no further questions at this time. I'll now hand back to Ms. Campbell. -------------------------------------------------------------------------------- Jill Campbell, Australia and New Zealand Banking Group Limited - Group General Manager of IR [111] -------------------------------------------------------------------------------- Thank you. Thanks, operator. We -- the IR team is around through the rest of the day to help with anyone who perhaps wanted another question or didn't get a chance to ask a question. Other than that, I'll hand back to Shayne. Thank you. -------------------------------------------------------------------------------- Shayne Cary Elliott, Australia and New Zealand Banking Group Limited - CEO & Executive Director [112] -------------------------------------------------------------------------------- All right. Look, I just wanted to thank you all for joining us today. It's obviously a really unusual time. But as I said, in my 5 years of CEO, I'm not sure when it hasn't been an unusual time in banking. That means the environment itself changes. I think the important point about what we're trying to get across here today is, look, despite the environment, we're in -- we feel we're in a really strong position to deal with this. We've got a really strong balance sheet. So we've derisked the balance sheet. It's more focused. It's more investment-grade. It's got a lot more capital behind it. We've got really strong credit provisioning for when and if things go wrong. And now let's not forget that our underlying business continues to perform pretty well. Things are going to get a bit tougher, but that's okay because we're feeling really in a strong position. And that means not just dealing with COVID, not just dealing with the here and now but actually having an ability to talk about the future and think about disruption and think about that investment. And I'm looking forward to that. And we know that we will be back in the first half, and we want to be talking to you more about where we do actually see that opportunity for investment and what exactly we will get for it. And I take the points today that we need more forthcoming about the $8 billion cost and the timing and the road map. And I think that's only reasonable, and we will do so. But thanks, everybody, for your questions and your attendance today.