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Edited Transcript of BEN.AX earnings conference call or presentation 13-Aug-18 12:00am GMT

Full Year 2018 Bendigo and Adelaide Bank Ltd Earnings Presentation

Victoria Aug 17, 2018 (Thomson StreetEvents) -- Edited Transcript of Bendigo and Adelaide Bank Ltd earnings conference call or presentation Monday, August 13, 2018 at 12:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Marnie A. Baker

Bendigo and Adelaide Bank Limited - MD

* Taso Corolis

Bendigo and Adelaide Bank Limited - Chief Risk Officer

* Travis Crouch

Bendigo and Adelaide Bank Limited - CFO

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Conference Call Participants

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* Andrei Stadnik

Morgan Stanley, Research Division - VP

* Andrew Triggs

Deutsche Bank AG, Research Division - Former Research Analyst

* Anthony Hoo

Nomura Securities Co. Ltd., Research Division - Analyst

* Ashley Dalziell

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Brendan Sproules

Citigroup Inc, Research Division - VP

* Brett Le Mesurier

Asia Pacific Prudential Securities Pty Ltd., Research Division - General Manager, Research and General Manager, Banks and Financials

* Ed Henning

* James Ellis

* Jonathan Mott

UBS Investment Bank, Research Division - MD and Banking Analyst

* T.S. Lim

Southern Cross Equities Limited, Research Division - Financials Analyst

* Victor German

Macquarie Research - Analyst

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Presentation

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Marnie A. Baker, Bendigo and Adelaide Bank Limited - MD [1]

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Thank you for joining us today and for your interest in our full year results for the 2018 financial year. My name is Marnie Baker, I am the new Managing Director of Bendigo and Adelaide Bank. I will be taking you through the business summary this morning and then passing over to our new Chief Financial Officer Travis Crouch to take you through more details in relation to the financial performance. And then we will return back to myself to talk about looking forward.

So there is no doubt, it continues to be a challenging environment for Australian banks; with the effects of the Royal Commission into misconduct casting a shadow across the industry, and increased regulatory oversight, and a renewed debate around culture; trust in the banking sector is at an all-time low. And it's a subdued banking sector with declining asset growth, diminishing bank margins and increasing costs as banks take to bolster their compliance functions.

There has been a major advancements in technology, we are seeing applications such as APIs, artificial intelligence, biometrics, machine learning and distributed ledger technology just to name a few. And they have been creating and enabling a better customer experience and outcomes and in time ease and security. There is also uncertainty about the pace, scale and breadth of disruption to the industry from fintech startups, (inaudible) banks including the unregulated industry who are leveraging those technology advancements to carve out their own opportunities. Those new technologies together with the changing customer behaviors and preferences mean that the market share of Australian banking customers is becoming even more contested, which can only be good for consumers.

We ourselves here at Bendigo and Adelaide Bank are extremely well positioned. With a proven business model in an environment that does ply to our strengths. Our strategy combined with our customer focused culture and innovative mindset draws the highest trust and advocacy in the industry. A recent accolade as Australia's most trusted bank and third most trusted brand in the Roy Morgan net trust score is one of the many metrics that indicates our business model resonates with our 1.6 million customers. It's also reflected in the continued strength in our ability to raise funds from our retail customer base.

We've got a -- we have a history of a continued commitment to innovation. We are the first banks to introduce [Vazer] to Australia, back in the early 80s. First to introduce green loans in 2002. First to introduce mortgage offset accounts in 1990. And we introduced the first of its kind farm management deposit offset account in 2016, to today launching the first Australian fully licensed [O&F] digital bank. And these are just to name a few.

And not to mention also the unique and highly successful Community Bank model is an innovation that we're very proud of. And at a time when community standards in banking have never been more important, our Community Bank model is delivering significant social and economic benefits for Australian communities. This year, we celebrate 20 years since the first Community Bank was opened and in that time more than $200 million has been returned to local communities. And that doesn't include the multiplier effect of when you take those dollars and spend them in a community.

Strategic partnering is also (inaudible) mindset and strength of ours in distribution, product manufacturing and technology. And this is borne out in the success of the many partnerships we've undertaken to date, which have assisted us in gaining access to new markets and delivering financial innovation for the future.

And the business has performed very well over the year, achieving a 6.4% increase in cash earnings. And we've continued to invest in furthering our capability, especially in the areas of technology and staff development, partnering with fintech companies on initiatives such as O&F , our new digital bank, and Tic:Toc, the world's first instant home loan, are some examples of this capability.

We've also built capability in our staff to navigate the future financial services industry through the training and application, resilience and agile working practices. Our continued investments in capability and alignment with customer strategy results in a strong balance sheet growth. In an environment where we're seeing aggressive mortgage processing low volumes, tightening of lending standards and increasing funding costs, margin and volume of both deposits and loans were well managed throughout the year. As were our costs, which came in within expectations provided last half and consistent with where we are targeting our cost to income ratio.

I'll now hand over to our new Chief Financial Officer Travis Crouch, to take you through the details of the financial results for the 2018 financial year.

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [2]

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Thanks, Marnie, and good morning everybody. It's my pleasure to be able to take you through what is a strong performance for the last 12 months. Our statutory earnings were up by over 1% and importantly cash earning are 6.4% higher for the year, driven by the 14 basis point improvement in net interest margin.

Cash earnings per share for the year at $0.921 is over 4% higher. And our final dividend of $0.35 takes total dividends for the year to $0.70 up $0.02 from last year. The cash earnings result has driven a 13 basis point improvement in return on equity, while return on tangible equity fell slightly. Importantly our cost to income ratio for the year was over 50 basis points lower, down to 55.6%, reflecting the strong net interest income growth. Later in the presentation, I will go through, in more detail, the drivers behind the second half jaws outcome.

Our balance sheet continues to be a real strength for us. The full-year increase in total loans was 1.4%, however the strong growth achieved in the second half in residential and agri lending sees this at 4% for the last 6 months. Our retail deposit ratio of over 80% was maintained between June '17 and June '18, including growth in retail deposits in the second half, which given the increase in BBSW rates and the impact this is having on the cost to wholesale funding highlights once again the value these funding source provides to the bank. Not only does this retail deposit come with a customer but it also gives us the flexibility to manage funding requirements as ASIC rate increased.

The capital outcome is also very strong, with good organic capital generation and reduced risk credit risk rates seeing a 35 basis point increase in our Common Equity Tier 1 ratio, allowing us to tick the box on unquestionably strong well ahead of APRA 2020 requirement. Total capital is also up almost 40 basis points over the year.

A real positive with the second half outcome is the improvement in lending growth, in what's still is a very competitive market for credit. We've seen improved flows through both our local connection retail business and our third party mortgage businesses, with housing lending growth up 4.7% for the half. Our second half business lending growth is a combination of some really strong seasonal growth in agri, offset by reductions in commercial lending portfolios, as we continue to reposition the balance sheet on the back of our risk return modeling that we have available with our work for advanced accreditation.

We continue to manage our deposit growth to meet our funding needs and in this most recent half we have seen deposit growth increase from the first half. But the growth rate really is the outcome of what's required given the level of asset growth we need to fund. It has also allowed us to manage our pricing here, which has helped us to deliver the net interest margin result that we did.

Unoccupied principal interest lending continues to be the most competitive space in the market. And we've actually done quite well here for the third consecutive -- and for the third consecutive half at growing settlements in the third party mortgage business. We've also increased settlements in Bendigo Retail in this recent half from what we achieved 12 months ago.

Marnie has already spoken about the strengths in our proven business model and it's pleasing to see our service offering and value proposition continue to resonate through these channels. We've also seen improvements in investors paying our lending flows as we continue to refine our offering to generate some growth given the headroom we have under the APRA lending cap. Interest earnings growth has been reasonably consistent since we made the changes required to reduce the flows, and I can't see those levels changing much in the short term.

If we now look at cash earnings result, net interest income growth supported by the 14 basis point margin expansion over the year has been the key to our 6.4% earnings improvement year-on-year and the 2.3% increase on the prior corresponding half. I will go to the drivers in more detail over the next few slides, there was some -- other income was impacted by [seemingly] lower trading book contribution and reduced fee income. Operating costs are up just over 3% for the year with the increase in second half as expected and as we spoke about 6 months ago. With the impact of staff pay adjustments towards the end of the first half coming through.

The bad and doubtful debt cost on a full year basis are slightly lower. However, the second half credit costs are down by nearly [24%] given the provisions on a number of commercial exposures that we took in the first half. Looking closer at the annual NIM performance, we have done better than what was expected of us with a 14 basis point improvement in NIM before our Community and Alliance Bank partnership.

This increase over the year came in the first half following deposit and lending reprocessing; however, we did a really good job in the second half to achieve a 1 basis point increase through our management of the margin and volume balance for both loans and deposits. Active reprocessing of deposits and particularly term deposits, but even some of [AGCO] rates has helped manage the margin outcome along with the continued strong growth in the AGCO portfolio.

We've also benefited from a reduction in the level of liquidity we're holding given the higher levels needed during FY '17 to support the Keystart portfolio acquisition. We had included a further breakdown on the impacts on both first and second half NIM on this slide and you'll see at the table at the bottom left that the front book/back book margin impact continues to be around 4 basis point each half.

On the bottom right, you'll also see the monthly NIM starting to trend lower from April as we were impacted by the increase in the cash/bills spread with higher wholesale and securitization funding costs coming through. We also saw this start to flow through the increase in retail term deposit rates. And in response to these higher funding costs, we did have to reprice both the front book and back book variable mortgage rates late in July. The cash/bills spread remains elevated and this combined with the front book discounts will continue to challenge margin moving forward.

Non-interest income was a bit disappointing down both for the year and in the second half. A reduced trading book contribution was the largest movement; however, this was expected given the reduced volatility in the interest rate environment in the first half and the second half being impacted by the elevated cash to bills spread.

Fee income was lower, as we were impacted by the change in the ATM fees and other fee revenue reduces in line with the industry. We've also seen a reduction in our transaction fees consistent with a restructure of (inaudible) revised product range. The product set has resonated well with the customers and as a result the good growth in AGCO deposits is having a positive impact on margin.

It has also been a real positive to see the growth in AFIC income this year and in commissions in the second half as we saw strong flows into our superannuation and managed funds. A 50 basis point improvement in our cost of income ratio is a good result in what is a challenging environment for the industry. We, like all banks, have been impacted by the increasing cost of compliance and regulation. We saw staff cost up for the financial year as annual salary increases came through late in the first half and as we expense more of that project salaries. This lower capitalization of project cost is a conscious outcome as we keep testing the benefits associated with each new project. The 3.2% increase in total costs also reflects an additional $70 million in amortization as a number of our larger technology investments commence being amortized.

We did see a negative jaws in the second half, that we did see come in when we presented the first half results and this was driven by a reduction in revenue and the 2.2% cost increase as we expected. When you normalize the NII for the 3 less days in the second half and assume a small positive trading book contribution in line with first half, income is relatively flat half-on-half. The usual benefiting staff costs from a couple of less working days in second half wasn't there due to both the first half and second half including the same number of working days this financial year.

Looking forward, we do still expect another increase in amortization from this year's level as the technology investments continue to come into use. Overall, when we look at these investments, I would expect our amortization charge in FY '19 to be in the order of $10 million higher than what was incurred in this financial year.

Marnie will talk soon about it absolutely being the right environment now for our bank to succeed. We have a real focus on achieving revenue growth and delivering a positive jaws. We also know that we must keep up with the investment in technology and regulatory compliance. So we know that this makes it a challenging time, but we'll continue to manage our -- actively managing our costs.

The credit cost for the financial year were 11 basis point of gross lines, an improvement on the last financial year and there were only 8 basis points of gross lines for the second half following the higher provisions for some commercial exposures that impacted the first half.

Another positive is that we are continuing to see Great Southern credit costs lower as this portfolio continues to pay down significantly. Total portfolio reduced by 32% over the year with 90 days past due down to only $50 million. In line with this, you will see we reduced the collective provision by $3 million.

We did see an increase in impaired lines for the group in the second half and these being actively managed with the provisions we have taken based on recent evaluations. These exposures are quite different from a geographic and industry perspective and we are comfortable that there is no underlying adverse themes.

Our core portfolio has continued to remain well secured with low LVRs with the average LVR for residential mortgages down over the financial year. When we look at arrears, which is a key leading indicator, these charts all show how well all our portfolios are continuing to perform. WA arrears remain elevated and from what we're seeing with other reporting, this is consistent across the industry. It's worth noting that our total exposure to WA residential mortgages is less than 10% of our portfolio.

Western Australian would include the Keystart portfolio, where losses remain low and are certainly below the assumptions we built into the model when we acquired the portfolio.

If we now look at the business segments, both local and partner connection increased their cash earnings contribution driven by significant margin improvement, where both businesses saw increases in direct and allocated costs they had different credit outcomes as local incurred the higher costs from the commercial lending provisions in the first half whereas the partner business benefited from the reduction in credit expenses mainly from the Great Southern portfolio.

Agribusiness cash earnings contribution was down 1% as extreme pricing competition continues and they didn't have the benefit of asset repricing or the same amount of assistance from deposit repricing during the year. The file management deposit 100% offset product is a market leading product for our rural customers that did impact NII this year following the launch during FY '17.

Turning to our capital position now and our common equity T1 continues to be a strength, up 35 basis points since June '17. The last 12 months has seen very strong organic capital generation supported by strong profitability and moves to a lower risk weighted exposures. We've also managed to maintain our common equity ratio during the second half following stronger asset growth and in the absence of any RMBS transactions. Like all banks we've evaluated the new APRA proposals regarding changes to credit risk weights and have made a submission on the proposal. At the same time we continue to be positive on that progress towards advanced accreditation with greater clarity expected once new APRA standards are finalized.

Our funding position continues to be an absolute strength for the organization. It gives us the flexibility to fund asset growth through our more than 80% retail deposit base as well as being able to tap into the demand from wholesale markets to senior, unsecured or securitization transactions. Our retail core deposit portfolio has grown strongly during the year, increasing our customer numbers and increasing the proportion of low or no cost deposits.

I have already spoken about the increased cash/bills spread impacting our wholesale funding costs and as I mentioned, we did see that flow through into retail term deposit rates in quarter 4. To help fund the stronger asset growth, we increased TD rates for the first time in a long time towards the end of the financial year with the response from customers being immediate and resulting in good term deposit growth.

The chart to the bottom of the slide show nearly 50% of our $50 billion in retail funding is well positioned if we were to move to a tightening in Australian environment given the lower sensitivity of these deposits to rate changes, but I'm not suggesting the move up in interest rates will be any time soon.

Finally, before I hand back to Marnie, I do want to provide an update on the outcomes about our modeling work for AASB-9. This new accounting standard introduces an expected credit loss impairment model that differs from the incurred loss model that we follow now. The new standard requires us to incorporate past, current and forward looking economic conditions when estimating expected losses. Our modeling shows $113 million increase in the collective provision due to this expected loss model. With this adjustment required to be taken through retained earnings on 1 July, 2018. Total reg capital position remains unchanged due to the movements between provisions and retained earnings offsetting one another; however, it will have the effect of reducing our Common Equity Tier 1 capital ratio by 8 points on 1st of July.

As you can see on the bottom left of the slide, our coverage ratio of collective provisions to total credit risk weighted assets increased nearly 3.5x with this new collective provision methodology.

To finish, it's important to understand that our process to individually assess specific provisions for loans is unchanged and the underlying portfolio credit quality is also unchanged.

I will now pass you back to Marnie to take you through the next few slides.

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Marnie A. Baker, Bendigo and Adelaide Bank Limited - MD [3]

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Thanks, Travis. Well, the future is really exciting for an organization like ours. We know we've got a proven business model that's resonating with our customers and this is strongly reflected in the awards and recognition that we receive not only for our products and services, but for how we conduct ourselves and for our unique style of banking.

We're especially proud of the awards not only are across the banking industry, but are across all industries such as the Roy Morgan Net Trust Score and the Forrester's Australia Customer Experience Index.

The environment is definitely ripe for us to succeed and our business is poised to take advantage of the opportunities ahead. Our customer focus, our high trust ratings, and customer advocacy provide a great platform for business growth and it is our time to be Australia's bank of choice. And I think we've got the team to deliver it.

Last Friday, I announced a new executive structure charged with the responsibility to deliver on the strategy. The changes were focused on a aligning capabilities and operations with a sharper focus on our vision to be Australia's bank of choice. The new structure is organized around 3 key customer groups: consumer, business, and agribusiness, all presenting significant opportunities for growth. These 3 divisions are underpinned by business support areas designed to optimize performance, reduce complexity, and deliver on our shared customer focus.

Richard Fennell, who you all well know, will lead the customer banking division, the consumer banking division bringing together the areas engaging with and servicing our consumer customers. Bruce Speirs will lead the newly created business banking division with the responsibility for the end-to-end experience for our business customers and we see this as a really good growth opportunity for us. Alexandra Gartmann will continue to lead the agribusiness division with rural bank continuing to have responsibility for the end-to-end experience for our agribusiness customers. Corporate and public affairs which will be led by Robert Musgrove will help to shape and maximize the bank's position through external communications as well as develop an agenda to champion our point of difference to all stakeholder groups.

Customer and partner engagement led by Andrew Twaits will focus on engagement with our existing and prospective customers delivering innovation and incubating new and existing partnerships and relationships. And business enablement led by Stella Thredgold is focused on providing expertise to drive and implement change and transformation across the organization both in technology and operational excellence. There is a new face to the group on the slide in Louise Tebbutt, who's new to the organization, has been appointed to the group executive as the chief people officer. Louise is most recently from the Maya Group where she's held a number of senior roles.

The people division is a newly created division taking on accountability for the bank's human resources and internal communications functions and it reflects our commitment to investing in our people, who are critical to delivering on our vision to be Australia's bank of choice. The risk area continues to be led by Taso Corolis, continues in a service out for risk across the group including managing our prudential regulatory obligations.

Finance and treasury responsibilities and functions in supporting the group remain unchanged, and Travis who is here with me today and as I've said previously has been appointed into the role of Chief Financial Officer. Travis, many of you will know, through his previous roles around Investor Relation but he's been with the organization for 7 to 8 years and held a number of senior roles over that time including Chairman of the bank's pricing committee since 2016. All of these changes are effective immediately as of last Friday. Louise herself will be commencing with the group mid October.

In the period ahead we're focused on growing the number of customers who choose to bank with us. We're doing that through reducing complexity in our business, which has grown very quickly but organically and through mergers and acquisitions over the past few decades. By continuing to invest in our capabilities and making it easier for customers to move banks and we our increasing our profile as a real alternative to the big 4. And of course in growing the business we'll stay true to our values and ensure alignment with our risk appetite.

And now we have a unique and powerful story to tell and not enough people know about us or know enough about us. About our unique banking model and about our capabilities. And we know if more did know more about us that they would choose to bank with us, Australia's bank of choice. So in an environment where many are disillusioned with their current bank we believe the time for our bank is now. And on that note I will open up now to any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Anthony Hoo from Deutsche Bank.

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Anthony Hoo, Nomura Securities Co. Ltd., Research Division - Analyst [2]

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Just a couple of questions. Firstly, on your non-interest -- on the trading book income line it was a pretty significant decline half-on-half. Can you just give some input into your commentary was that part of (inaudible) elevated bills spread? So assuming the comp bills spread stays where it is do you expect the trading book income line to recover to where it was the last half? And then the second question just around Homesafe, question on your overlay. You said you will assume 3% growth over the next 18 months, do you see this at risk and can you talk about the impact and how it works so if had to increase that assumption given current market conditions?

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [3]

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Thanks, Anthony, for your questions. Sorry, if we start with trading book contribution for the second half, you're right there was a loss in the second half off the back of those elevated bill rate that we did see particularly over around March. Look, I think you comment is fair what would be a normal outcome is probably more in line with that very sharp contribution of $2 million or $3 million positive is what we'd be expecting now that the bill rates while they're elevated have settled down a bit. So I think that's a fair assumption with a more normal contribution. As far as the question around the Homesafe overlay and the growth outlook, so as you said we did maintain the overlay, we did make a small increase to it really off the back of the increased portfolio size. When we continue to look at that portfolio performance one way we do test it is on the completed contracts and as you'll see in information there, the profit on the sale of those completed contracts continue to be above the carrying value. So that really gives us confidence and supports the assumptions that we're making. Long-term growth rates are still in excess of what we're assuming there in that short-term. So we did make a small increase in the overlay to reflect the portfolio size, we still continue to make small positive profits on those completions of the contracts. So that really does give us confidence in the valuations in the way we're actually representing that.

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Anthony Hoo, Nomura Securities Co. Ltd., Research Division - Analyst [4]

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Okay. And -- but how often are these -- I mean if you -- these assumptions do you make the -- assess every year, every 6 months or --

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [5]

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Right Anthony, every 6 months we review that formally. And as I said we get details on the monthly completions throughout the year but more formally review that every 6 months.

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Operator [6]

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Your next question comes from the line of Ed Henning from CLSA.

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Ed Henning, [7]

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Positioning your book one way or the other and so or if it's -- you still spark up again --

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [8]

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Sorry Ed, I think you came in a bit late on that, we didn't hear the first part of that question.

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Ed Henning, [9]

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Just going back on the last question just around the loss in the trading book in the second half, was that you guys positioning your book or is it a natural lane. So if you get a blow out in spreads again you potentially make another loss?

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [10]

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It was more the latter, Ed, it was actually just the natural positioning there. So we did see that through that blow out over March.

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Ed Henning, [11]

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Okay. So if there's a potential blow out again that could potentially happen again?

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [12]

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Potentially.

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Ed Henning, [13]

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Okay. Next one, just on the staff costs, you touched on you've reduced some of your project capitalization spend which pushed up the staff costs I think in this period a little -- in the half a little bit because normally if you go back over the last few years you've always had a first half skew because that's when the pay rises come in. Has this just stepped up to another level or is this, if you think about the half-on-half transition or the dynamic going forward, how should we think about that going forward?

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [14]

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I think internally we call it the Fennell factor, to reference the former CFO but normally in the second half we actually do have a couple of less working days, for this financial year we actually have the same number of working days in both halves so we didn't get to see that, that lower cost in the second half. You're right, the salary increases is due -- or will continually come through in that November, December period. So I think, that's probably a few million as far as the impact on the second half without that 2 less working days. So moving forward, I think next one I see that there is a couple of less working days in the second half, or maybe 1. So we would expect a small reduction because of that timing.

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Ed Henning, [15]

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Okay. And just with the amortization you talked stepping up by $10 million is that all for the advanced accreditation model so the -- or is there more in that as well?

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [16]

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No, it actually reflects a number of technology investments across the business more so weighted towards those business projects rather than step-up in advanced.

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Ed Henning, [17]

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And if you do get advanced, is there a step-up over and above that?

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [18]

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Yes, there will be when we get it -- yes.

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Ed Henning, [19]

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Just one last one from me. In the first half, you guys put in a slide on the expected capital benefit from Basel III when it comes through, that slide is obviously in this pack. Do you still anticipate the 50 basis points for standard and 100 basis points for advanced or are things got a little more complicated?

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [20]

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I think, we've done the work as we said around the new risk rates, we need to wait to see where they land, to actually be able to talk about a benefit in basis points. Or there we are still positive on the benefit that that advance would bring so -- but we need to actually come to a landing on both our risk weights but also where APRA calibrates the advance risk weights as well. So it's definitely positive but we need to wait for that to be formalized.

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Ed Henning, [21]

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And then just before I go, is it -- is that, obviously you're still positive you say but is it potentially less positive than your first carve out?

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [22]

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Yes I would I would think so, Ed.

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Operator [23]

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Your next question comes from the line of Jonathan Mott from UBS.

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Jonathan Mott, UBS Investment Bank, Research Division - MD and Banking Analyst [24]

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Question on Slide 41, just to (inaudible) fact. You've really seen a pickup in mortgages at the very end of the period. Some of it is (inaudible) I see a pickup in mortgage lending right around June. But how of this is a result of the majors tightening their underwriting standards and really getting focused on responsible lending. Obviously, as they tighten their underwriting standards, the flow has seemed to go out from that area to others. And secondly, following on from that, can you confirm that you are now verifying the living expenses by actually reviewing the transaction banking accounts and credit card statements rather than just relying on living expense estimates to comply with responsible lending?

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [25]

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I'm going to answer the first one John thanks for that. So you are absolutely, that improvement -- we often do get a stronger lending growth towards that June period, but we are seeing or we did see that the benefit of some of the other banks I think tightening their servicability, I think making the sort of the processing time not quite as efficient as it had been. So we actually did see the benefit and we were the recipient of increased flows as the rest of the industry tightened their requirements. We had moved ours we believe ahead of that. So we're actually already in that position and we did get the benefit of some of those increased flows as others adjusted to be in line with where we are and where we need to be. We've actually got Taso Corolis in the room with us John, so I think he might pick up the second question there.

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Taso Corolis, Bendigo and Adelaide Bank Limited - Chief Risk Officer [26]

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Just in terms of the living expenses, where we do have the transactional accounts with us, we will review living expenses declared against our own transactional accounts.

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Jonathan Mott, UBS Investment Bank, Research Division - MD and Banking Analyst [27]

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Are you requesting that from the mortgage brokers if they can provide it?

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Taso Corolis, Bendigo and Adelaide Bank Limited - Chief Risk Officer [28]

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No, it'd depend.

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

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So I think I will elaborate. So are you actually requesting from the mortgage brokers or the customer that they provide the transaction banking account and their credit card so you can actually verify their living expenses for responsible lending?

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Taso Corolis, Bendigo and Adelaide Bank Limited - Chief Risk Officer [30]

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Yes.

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Operator [31]

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Your next question comes from the line of Victor German from Macquarie.

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Victor German, Macquarie Research - Analyst [32]

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I was hoping to actually clarify a couple of earlier questions and then have one extra one. So with respect to Homesafe portfolio, you're obviously creating additional provisions for it. Can you maybe talk to us about the environment where you're going to start releasing those provisions?

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [33]

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Thanks, Victor. I think what I said earlier on was that the assumption we are making continues to hold that 3% growth for the next 18 months and then returning to the 6% long-term growth rate. So that's been consistent over the last few halves. As far as your question, when would we release that overlay, well it would have to be that we believe we were back at a point where that short-term growth rate was also going to return to 6%. At the moment, we continue to see that the assumption around 3% for the 18 months being appropriate, as I said, is something we test against the profit on sale of those completed contracts. So it really is an assumption around looking forward and that if we changed our view on the long-term growth rates then that's at the time when we would actually make a change and look to release some of that overly. As I think we've spoken about the last few halves, any release to that overlay goes through stat earnings, it doesn't affect the cash earnings result.

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Victor German, Macquarie Research - Analyst [34]

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Second question is just relation with BBSW and OAS spread how that actually impacts you. I mean it sounds like some of that impact has been particularly taken in on interest income line. I'm just wondering what's the likely impact going to be in the interest income from the elevated spreads relative to previous periods. You're obviously getting the benefit of repricing coming through in the next half. I am just wondering whether it's going to be offset by elevated funding costs at all?

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [35]

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I think we have included the extra information on our NIM slide, which I think is Slide 13, this half, where we did call out the impact we saw during the second half was around 4 basis points from that elevated BBSW on our wholesale and securitization funding. So that was the impact we saw there during the half.

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Victor German, Macquarie Research - Analyst [36]

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And any spreads that current levels and there is no more additional impact from that?

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [37]

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Most of that would have been picked up during the year, (technical difficulty) stay at similar levels. Then the only thing I would say Victor is some of that impact obviously came, it started more towards Q4 rather than the start of the half. So there could be a little bit more coming through if they stay at the same level, and obviously depending on what then happen moving forward.

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Victor German, Macquarie Research - Analyst [38]

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Last question, just on provisioning so you as you've moved to AASB-9 there is quite a significant uplift in your collective provision. Going forward, if credit conditions would just stay unchanged as they have been, say in 2018, and given that you're collective provision effectively is much higher base relative to your book. What's going to happen to your BDD charges going forward if conditions were to stay the same or are you able to give us maybe an idea what would impairment charge be this year if you were to assess it on AASB-9?

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [39]

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Maybe I answer in another way. Victor I think, if I look at the 2 halves from a BDD outcome, obviously we spoke about the first half being higher of the back of some commercial exposures, second half was lower, without those and with also an improved rates then on outlook, I would have thought the annual result, the result in BDD charges for the full year is probably representative of a usual BDD charge.

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Victor German, Macquarie Research - Analyst [40]

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So kind of moving to AASB-9, I'm just wondering in the past you obviously the impact on actually collective provision I notice you talked about specifics provision not the way your assessment doesn't change not that makes sense but from the way you assess your collective provisions and you're suddenly your base is sort of 3x higher than it used to be, I would have thought that would mean that, all other things being equal, the additional amount that you would put aside for collective provisions going forward relative to the past would be higher?

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [41]

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Going forward, it would be higher. I mean we've done the adjustment basis and we are up to at the moment with the models I wouldn't have said the collective provisions moving forward would be higher. That's the way the intent of the standards recognize that on 1 July. Look I think us and all banks will work through this as we continue to get another month worth of data but I would have thought as I said that the BDD charge or the BDD outcome for the full year is probably representative of how we look at it moving forward as well.

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Operator [42]

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Your next question comes from the line of James Ellis from Bank of America Merrill Lynch.

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James Ellis, [43]

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Just 2 questions both related to revenue. Firstly on the noninterest income, there's been pressure on that for a number of halves now and obviously the second half are you saying was impacted by negative trading outcome which is not normal. Just wondering if you had a view as to where there was a sort of a firm base line there given that it’s half by half by half, which you just don't seem to have found it. And then secondly in terms of the net interest margin your good -- the composition on Page 13, Slide 13. The retail deposit repricing, a couple of strong halves of positive margin contribution there. Would it be fair to say repricing the term deposit book late in the second half '18 period will remain the -- that’s not going to be repeated term?

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [44]

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Thanks, James. As far as your question on other income. Look, I agree we -- the chart there on Slide 14 does show that half-on-half decline. I think you can make a more normal assumption on trading book contribution. The fee income, it is an industry thing as well. It's not -- certainly not just something that we are experiencing, I am not brave enough to pick the bottom of that, but I think fee income will continue to be under pressure, whether it's deposit pricing or deposit fees or even lending, and just the competition there around the discounting that's happening with asset fees or lending fees. I think the fee income is definitely one that will be a challenge, but you are right. I think with some strong flows with that super managed funds a more normal trading book contribution you can probably have a look at that moving forward for what's a bit more normal. As far as your comment around NIM, so you’re right the [Trade A] repricing we did was actually quite late in June, so it wouldn't have had an impact in the second half. That as I said when I went through the slides that's the first time we've moved to a pricing in a long time, so that does, if I look forward at margin, I wouldn't expect the same sort of benefit in any way around the retail deposit repricing that we've seen over the last year.

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Operator [45]

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Your next question comes from the line of Brendan Sproules from Citi.

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Brendan Sproules, Citigroup Inc, Research Division - VP [46]

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My question comes around your deposit growth on Page 10 you made mention that deposits grew below system partly because it was a function of the lending growth you’ve had. Now given that you had quite a strong into the half, could you comment on whether deposit growth will need to pick up from the here in order to fund the balance sheet?

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [47]

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Thanks, Brendan. Yes look I mean that result for the deposit growth is as I said the outcome of the timing and when the asset growth was coming on. We did run our liquidity portfolio down a little bit. We did have some excess there during the year so that helped during the half of that actually helped fund some of that lending growth. As I said we increased [Trade A] late in June, and that had an immediate effect of the Trade A flows. So if you look at the 0.9% increase that we saw during the half, absolutely that will need to be a little bit stronger to support lending growth moving forward. But we are very comfortable with that, that’s achievable. and as I said it really is a we do what we need to do to actually fund the asset growth.

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Brendan Sproules, Citigroup Inc, Research Division - VP [48]

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I just have a second question on your costs. Is there any particular initiatives that you've got in place to kind of manage your costs going forward? I know there is quite a lot of headwinds especially in relation to the environment particularly with the Royal Commission. Is there anything you could call out there?

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [49]

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Not any particular initiatives. It absolutely is a ongoing focus of the way we actually look at the business performance, so there's nothing that I'd want to sort of call out as a specific focus or a piece of work that we are doing, but I will say it is something ongoing. Marnie touched on just the work we’ve done to actually move the business, (inaudible) change area to a agile way of working. There was some additional costs with that during the year. Yes so there’s a few things like that, that we actually needed to invest in to actually change the structure there. But I wouldn't have said -- I don't think it’s really an approach to overall costs rather than particular initiatives that we wanted to identify.

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Operator [50]

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Your next question comes from the line of Andrei Stadnik from Morgan Stanley.

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Andrei Stadnik, Morgan Stanley, Research Division - VP [51]

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Just wanted to ask 2 questions. Firstly just want to confirm, in terms of the wholesale deposit pricing, you mentioned there was a 4 basis points headwind in the second half. Just want to understand how much of that was the pure BBSW headwind compared to other wholesale pricing trends, because the impression you can -- I think the market might have had is that BBSW the headwind for Bendigo as well to be low maybe at about 2 basis points and it is coming at 4. So how much is this BBSW what do you base this other wholesale issues?

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [52]

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Thanks, Andrei. I mean most of that would be of the BBSW of the increase in particularly around securitization but also wholesale funding. I think that the way we have sort of separated the 4 points after the second half really reflects the change from the first half, so that’s the impact we saw half-on-half. As we said moving forward, if rates stay as they are, I think, your assumption closer to 2 points is probably a reasonable assumption.

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Andrei Stadnik, Morgan Stanley, Research Division - VP [53]

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And my other question was really you are talking about a (technical difficulty) of a revenue growth and mortgage -- so in terms of one of the key drivers for that mortgage growth, what mortgage growth do you think is achievable in FY '19 and how will your investment in Tic:Toc is actually is the best for example would you roll out that taking a real time approval facility across the rest of Bendigo.

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Marnie A. Baker, Bendigo and Adelaide Bank Limited - MD [54]

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Yes Andrei, yes we -- in relation to lending growth we believe that we -- and we should be given however your proposition at low system if not better. So depending on where the system settles, we will be committing to (inaudible) or a less assignment system. Tic:Toc itself yes there is a significant opportunity for us. We’re doing work at the moment to integrate that into our different channels, starting with our retail channel, so that we can actually leverage off, I suppose that instant home loan application through to settlement to improve the experience for our own customers and hopefully get more throughput through our own system as well.

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Operator [55]

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Your next question comes from the line of Ashley Dalziell from Goldman Sachs.

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Ashley Dalziell, Goldman Sachs Group Inc., Research Division - Equity Analyst [56]

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I just have, firstly had a question on the commercial line portfolio. How far through this rebalancing process are you -- and is there sort of more to come through FY ’19? And then secondly I just had a question on the software amortization. Just on Slide 33, you mentioned that if advanced securitization does come through, you’ll begin amortizing the expenses associated with that of your actual capitalized software balance can you just give us a feel for how much of it relates to that advanced accreditation project versus other projects?

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [57]

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Thanks, Ashley. So I didn’t quite catch all of that second question but I’ll start with the first one around that commercial just where we are positioning that. We are through it, it's [AIU], it’s the way we actually operate now. And we have probably the last 12 to 18 months so they will continue to be work on that but it actually is AIU from that commercial book point of view. As far as your question around the amortization and so I missed the first part of that, but I’ll answer the second just around the level of capitalized software. From memory, and I can -- am happy to confirm this but I think it’s probably around about $60 million, $65 million from the advanced securitization cost that are actually part of that capitalized software balance. That will be what’s on there at the moment. And sorry, could you just run through the first part of that question again?

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Ashley Dalziell, Goldman Sachs Group Inc., Research Division - Equity Analyst [58]

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No, no. That was the crux of the question.

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Operator [59]

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Your next question comes from the line of Brett Le Mesurier from Shaw and Partners.

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Brett Le Mesurier, Asia Pacific Prudential Securities Pty Ltd., Research Division - General Manager, Research and General Manager, Banks and Financials [60]

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Your impaired assets increased by 16% from December ’17 to June and your specific provision only increased by 5%. Could you give us the reasons for that so that your coverage of specific provisions for impaireds fell from 39% to 36%?

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [61]

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Yes, thanks, Brett. So I mean the -- most of that increase relates to the business banking portfolio. There was -- most of it related to around 5 large exposures. But these were across Queensland, Vic, WA they are across, so there is no geographic concentration or common underlying issues. They are also across different business sectors, so we are comfortable there is no common theme there as far there was an increase in impaired loan balance, rather than a straight specific good reason and that is lower -- but that reflects the value of the collateral supporting those outstanding loans. So obviously when a loan becomes impaired, have a look at the provision and we rise it based on the accession of the collateral value at that time, so we're comfortable that we recognize the impaired that way and we also make a call on the level of supervisions required. So absolutely, the coverage is at 92% which I think was off around about 100 if you look back over some previous ops it has been around in those 90s as well. So it does affect, it does reflect, sorry, the way we look at the line at that time and we certainly look at the value of the collateral so we're very comfortable with the level of the provisions associated with those lines.

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Brett Le Mesurier, Asia Pacific Prudential Securities Pty Ltd., Research Division - General Manager, Research and General Manager, Banks and Financials [62]

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Were you taking a more optimistic view at the end of June compared to the view you're taking at the end of December?

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [63]

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No, we're taking the same view both halves.

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Brett Le Mesurier, Asia Pacific Prudential Securities Pty Ltd., Research Division - General Manager, Research and General Manager, Banks and Financials [64]

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Did you reduce any provisions, any specific provision in respect to particular line from December to June?

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [65]

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We would -- may change it every month, Brett, I'm not aware of any material ones that I can think of here now. But we would actually be reviewing those provisions every month so we would have made changes, but as I said that raising increasing impaired we're comfortable that we've assessed those well from a provision point of view.

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Brett Le Mesurier, Asia Pacific Prudential Securities Pty Ltd., Research Division - General Manager, Research and General Manager, Banks and Financials [66]

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What type of industries, were those 5 large exposures?

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [67]

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Spread across retail, commercial office, ready property, professional services, so it's absolutely spread well across.

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Operator [68]

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The next question comes from T.S. Lim from Bell Potter Securities.

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T.S. Lim, Southern Cross Equities Limited, Research Division - Financials Analyst [69]

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I'm just looking at Slide 47, the agri business loan arrears is sort of flat, I mean, are you confident that this is going to be the case given that droughts and everything else is happening to the farmers?

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [70]

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Thanks, Tim, yes, absolutely the agri areas continues to perform well as it says on that slide there, so I was just catching up the slides, but I think the work we've done recently, particularly, with the areas that are impacted the most part by the drought, I think, would represent less than 3% of our cost, total agricultural base, as far as those ones experiencing the poor seasonal conditions. So we've got a long proven track record of working with our customers and managing through this but our customers have also got a proven strategy for managing their businesses through adverse weather events. So those areas will move around but at less -- around about 3% as far as our customers that are affected with the worst areas. We are comfortable with the exposures that we've got there.

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Operator [71]

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(Operator Instructions) Your next question comes from the line of Andrew Triggs from J.P. Morgan.

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Andrew Triggs, Deutsche Bank AG, Research Division - Former Research Analyst [72]

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Just a couple of questions please. Firstly, on the cash that adjustment due was almost $20 million of operating expenses -- adjustments related to legal litigation and compensation costs. Can you just discuss what they relate to and the reasons for the treatment as statutory adjustment? And the second question, Marnie, just in terms of taking the reins, are you happy with the size of the branch network, any rationalization that you introduced obviously core to the strategy but obviously quite a large branch network spread across the country?

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [73]

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Thanks for the question, I'll just pick up the first one just around the non-cash items and expenses there. So they are tied in the accounts but the main one relates to litigation costs associated with Sandhurst Trustees, legal cases. These have been finalized -- as these business to which it relates has been sold and the cost we considered not to be core -- as part of the ongoing business of the bank. So they have actually been recognized as non-cash there. We have recognized the Royal Commission, the external legal costs associated with the Royal Commission. They're actually being picked up as non-cash. This is not in the ordinary course of our business and we are recognizing it that way. And then the last one, compensation costs with some work we're doing on the (inaudible) service. The work we continue to do with ASIC on that so there's a small amount represented there, around some refunds to customers that we've picked up there and that relate to an acquisition of a financial planning business rather than anything to do with our ongoing business.

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Marnie A. Baker, Bendigo and Adelaide Bank Limited - MD [74]

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And Andrew, I'll pick up your second question there, just to in relation to the size of the branch network. Yes, we're more than comfortable with the size of the network. As you would understand it is a little different to what you would see in perhaps some of our peers. We've got just over 500 branches and in excess of 300 of those are actually owned by a Community Bank network. So there's a different cost structure that surrounds those branches. But whilst the demand is there for a physical presence in those communities, we will continue to have representation there. And we're still seeing that, we're still getting demand from communities to open up new branches. Because I do see the close connection between the community itself and being able to -- being empowered and to draw off the sustainability of their own communities. So at this point in time as our customers and as a community they expect to have branches residing in physical locations, we'll continue to do so.

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Andrew Triggs, Deutsche Bank AG, Research Division - Former Research Analyst [75]

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Marnie does that also apply to the corporate branches, did you see scope for any shrinking of that network?

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Marnie A. Baker, Bendigo and Adelaide Bank Limited - MD [76]

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Not at this stage, I mean, we do review that but a number of that corporate branches provide a bit of a hub, I suppose to community branches that are in locations that are nearby. So we house a number of, sort of, corporate functions, business banker those sort of thing in the corporate branches which do actually support more than the branch that they're actually residing in. So at this point in time no, there's no change to that, Andrew.

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Operator [77]

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Thank you very much there are no further questions at this time. I will now like to hand the conference back to the speakers for any closing remarks. Thank you.

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Marnie A. Baker, Bendigo and Adelaide Bank Limited - MD [78]

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Thank you. And thank you everyone on the line today for your interest and your ongoing support, and we'll no doubt be seeing many of you as we get around the countryside over the next few days, so thank you.