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Edited Transcript of BEN.AX earnings conference call or presentation 12-Aug-19 12:00am GMT

Full Year 2019 Bendigo and Adelaide Bank Ltd Earnings Presentation

Victoria Aug 16, 2019 (Thomson StreetEvents) -- Edited Transcript of Bendigo and Adelaide Bank Ltd earnings conference call or presentation Monday, August 12, 2019 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 - CEO, MD & Director

* 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 Lyons

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Andrew Triggs

JP Morgan Chase & Co, Research Division - Research Analyst

* Brett Le Mesurier

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

* Edmund Anthony Biddulph Henning

CLSA Limited, Research Division - Research Analyst

* James Ellis

BofA Merrill Lynch, Research Division - Director

* Jonathan Mott

UBS Investment Bank, Research Division - MD and Banking Analyst

* Joshua Freiman;Macquarie;Equity Research Analyst

* 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

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Presentation

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

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Good morning, everyone, and welcome to the market briefing for Bendigo and Adelaide Bank's 2019 Full Year Results. I'm Marnie Baker, the Managing Director of Bendigo and Adelaide Bank, and presenting here with me today is the company's Chief Financial Officer, Travis Crouch.

I will start today's briefing with an overview of the 2019 financial year. Next, Travis will take you through our financial results in detail. I will then talk about our strategy execution and the bank's priorities for the year ahead. Then we will open up for questions.

I'll now start by giving an overview of our results for the 2019 financial year and some of the key highlights during the period. In overview, cash earnings after tax was $415.7 million, down 6.6% on the prior year. The reduction is primarily attributable to costs relating to remediation and redundancies. Total income of $1.6 billion was in line with the prior year, achieved in an environment of low growth, clinical uncertainty, subdued consumer confidence and increasing competition. Common Equity Tier 1 improved by 30 basis points to 8.92%. This strong capital position reflects a stable balance sheet and the continuing movement to lower risk exposures.

The Board declared a fully franked final dividend of $0.35 per share, taking the fully franked full year dividend to $0.70 per share, continuing our history of rewarding shareholders with a high-yield and long-term returns.

As you know, I stepped into the Managing Director role this time last year. And together with my new management team, we started the journey to reshape the business to achieve our vision to be Australia's bank of choice. You will see from what is presented today the positive momentum from the implementation of our new strategy. Standouts for the year have been our 4x growth in net customers, taking us to over 1.7 million customers and our above-system residential lending growth at 3.5%. Growth was stronger again in the second half with residential lending at 4.3% and agribusiness lending at 12.8%, both being well above system.

Net interest margin was steady year-on-year. And half-on-half, net interest margin increased 2 basis points to 2.37%, reflecting the active management of margin and volume for both lending and deposits. Bad and doubtful debts are down by 28.8% to $50.3 million, and retail deposits increased by 3.3% to $52.3 billion.

Our Net Promoter Score increased to 24.8, which is over 30 points higher than the average of the major banks. The changing banking environment is creating opportunity for us. Bendigo and Adelaide Bank is consistently ranked as one of Australia's most trusted brands, and we are the top-rated company for customer experience. This sets us apart and is reflected by the commitment and focus of our staff and our capability to continue to attract new customers. During the presentation, I will talk more about how our reshaping of the business is gaining traction, particularly in reducing complexity and investing in new capabilities to focus on customer experience and digitization.

During the year, highlights in this regard were the launch of Up, Australia's first and largest next-gen digital bank. Up has exceeded initial expectations of customer growth, attracting over 100,000 customers, or as we call them, Upsiders, in the first 8 months since launch. And then there's a leveraging of the Tic:Toc instant home loan technology to become the first lender globally to offer a digital home loan application and assessment process under its own brand, Bendigo Express.

Through our key strategic partnerships, we're able to develop these leading-edge products, which appeal to customers and potential customers in our key priority market segments.

Turning to an overview of the financials. Statutory net profit was $376.8 million. The reduction year-on-year was as a result of remediation and redundancy costs and unrealized losses relating to Homesafe, due to the decline in property valuations in Melbourne and Sydney. The reduction in cash earnings after tax is primarily attributable to the remediation and redundancy costs. Excluding these remediation and redundancy costs, underlying earnings were 2.5% below the prior year. Our cost-to-income ratio of 59.2% is higher than we are comfortable with. Whilst total income is in line with the prior year, the increase in cost is disappointing. This year, our costs were impacted by remediation and redundancies, increased staff costs, including the additional 87 Elders agrifinance managers, insurance premiums and IT investment. We recognize that to continue to compete in a highly competitive and highly regulated market, we must get our costs down.

We maintain our ongoing focus is sustainable -- we maintain our ongoing focus to sustainably reduce our cost base, targeting a cost-to-income ratio towards 50% in the medium term. We know this is needed for us to continue to compete and is especially important in a low-revenue environment.

Net interest margin continues to be well managed, and our capital position has strengthened significantly over the course of the year, with us already meeting the additional 50 basis points required under APRA's unquestionably strong capital benchmarks.

I want to talk here to remediation costs as it is an obvious topic of importance and interest. The total cost for remediation for the year were $16.7 million and relate to, firstly, insufficient documentation to demonstrate that services have been provided to Bendigo Financial Planning customers in accordance with their service contracts. The Bendigo Financial Planning business was subsequently sold, and the other area related to products not operating in accordance with their terms and conditions. These were all self-reported under the self-reporting regime to the regulator and the remediations conducted in conjunction with an external adviser.

The bank is committed to comprehensively and efficiently addressing where errors lead to poor customer outcomes, and we have always taken a proactive and customer-focused approach as part of our risk management and governance process. This approach is aligned with Bendigo's values of integrity to maintain customer trust by taking a conservative view of applying any remediation, including when there is any uncertainty.

This next slide talks to our vision to be Australia's bank of choice and a supporting strategy to deliver sustainable growth by feeding into the prosperity of our customers and their communities, not off it.

Deepening customer relationships, enhancing customer experience and optimizing customer engagement are all top order actions for us as we reshape our business. Our strategic imperatives of reducing complexity, investing in capability and telling our story are crystal clear, as is our commitment to our targeted outcomes of providing a seamless customer experience, lowering our cost base in the medium term and continuing to deliver sustainable growth.

And we are seeing early results and examples such as a simpler organizational structure; divestment of businesses like Bendigo Financial Planning; restructuring of existing businesses and handing back the Rural Bank's ADI license; the launch of new innovative digital solutions in Up and Bendigo Express; testing new concept stores in both our corporate and Community Bank branches; the reduction in the number of corporate-owned branches; investment in relationship managers across all 3 of our key market segments; expanded partnerships and increased white label opportunities, for example, the renegotiation of the Elders distribution agreement; new arrangements with Aussie and Connective; our partnership with Swinburne University; and more recently announced, the partnering with CPA Australia for business banking. This has manifested in what can be seen as a story of 2 halves, with the second half commencing with the implementation of a new strategy. We see definite links to the opportunity, which exists in the banking market for us and the disciplined execution of our strategy.

Half-on-half, we have seen positive momentum in lending growth, with residential lending growth of 4.3%; SME growth of 9.5%; and agribusiness, 12.8%, which is a strong result, albeit influenced by seasonality.

And as I mentioned earlier, we delivered 2 basis points increase in our second half NIM, and 16 basis points improvement in our Common Equity Tier 1 position in the second half to 8.92% alongside growth in our key priority markets.

I mentioned that this was a year of reshaping our business to take advantage of market and competitive opportunities to deliver sustainable growth. This slide speaks to the resetting of our priorities and how we are continually building upon our strengths. We have our sights squarely focused on long-term growth. This will be propelled by the adoption of new technologies, an adaptive culture and agile workforce and simplifying our business while remaining acutely focused on better customer outcomes. We know that our customers want personalized solutions, and they want to be able to access them anytime and anywhere, and we are reshaping our business to continue to deliver what our customers demand. We are leveraging new technologies that make us more efficient and suit our customers' evolving needs. We and our community partners are testing new concept stores, building a better customer experience. Our smart retrofitted Norwood branch in South Australia has exceeded expectations, with a 64% increase in foot traffic and a significant uplift in business, and there are more branches to follow.

We have reviewed our organizational structure and undertaken a cultural review to ensure we have the capabilities, collaboration and discipline to continue to execute our strategy. And we have been doing away with legacy platforms and divesting of businesses, like I said, like Bendigo Financial Planning to further simplify and de-risk our business, while also delivering cost savings.

There are $11.9 million in redundancies in the year as we focus on the skills and roles required to deliver our strategy. At the same time, we have been optimizing our channel distribution network. To this end, over the year, we closed 6 branches and 15 agency outlets. Our valued Community Bank partners opened 4 new branch and customer service centers. We have invested in additional relationship managers across key priority markets, and we continue to focus on the risk and compliance activities that support our business.

I mentioned how the positive momentum we have seen during the year is being driven by enhancing our digital capabilities, deepening our customer relationships and leveraging the strength of our partner -- partnership relationships in our key priority markets.

We are amplifying our focus on the markets where we see the best opportunity for our relationship-based style of banking, and where trust and authentic relationships are most valued. During the year, we were recognized with a number of awards for our products, especially in relation to our youth and student products, debit and credit cards and banking apps.

As you can see from this slide, our focus on our core capabilities, relationship-based banking and the strength of our partner relationships in our key priority markets is delivering strong customer growth. As I mentioned earlier, the success of attracting new customers, especially in the younger demographic, gives us an outstanding opportunity to foster lifelong customer relationships. New customers are up 62% for the full year, and retention increased to 93.5%, resulting in net new customers rising fourfold compared to last year with the equivalent growth half-on-half at 239%.

Our focus on and investment in future growth has produced a 145% increase in the number of new millennials for the year. This has resulted in a 5-year decrease in the average age of new customers across our entire customer base to 35 years. Consequently, the average age of new customers is now below the median age of the Australian population of 37 years. This is important because as we accelerate the digitization of our offerings and focus on our priority markets where we have a clear competitive advantage, establishing and fostering lasting relationships with this younger demographic will deliver significant long-term growth opportunities. And it's a similar story for the future in business and agribusiness, where our key priority markets of small to medium businesses and family corporate farms increased net customer growth by 5% and 11%, respectively, over the year.

The changing banking environment is creating opportunity for us, and we have had early successes in enhancing customer experience and growing both our customer base and balance sheet in key priority markets.

I will now hand over to our Chief Financial Officer, Travis Crouch, to take you through the financials.

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

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Thank you, Marnie, and good morning, everybody. I will start today with an overview of our financial performance with cash earnings for the year of $415.7 million, down 6.6% from FY '18. As Marnie had mentioned, this year's cash earnings result was impacted by the recognition of remediation and redundancy costs in the second half. Statutory net profit was $376.8 million and was also impacted by these remediation and redundancy costs as well as the unrealized losses relating to the Homesafe portfolio. Year-on-year, the impact on stat earnings contribution from Homesafe was almost $80 million before tax. Excluding remediation and redundancy costs, our underlying earnings were down 2.5% to $435.7 million.

When we look at the breakdown of cash earnings, you can see that net interest income has declined slightly over the year. Given lower asset growth in prior periods, this was driven through the active management of margin, resulting in a 2 basis point increase in second half NIM.

Other income was strong and improved earnings on the trading book and foreign exchange income, more than offsetting the reduction in fee income while total operating expenses are up 5.9%. When remediation and redundancy costs are excluded, underlying cost growth was at 2.6%. I'll go through this in more detail in the coming slides, that, as Marnie's mentioned, we maintain our ongoing focus on sustainably reducing our cost base over the medium term. The credit expense of $50.3 million was a strong outcome, reflective of our risk profile and remained low and in line with first half.

While remediation and redundancy costs are included in both net profit and cash earnings, when we look at the underlying performance of the business, these are excluded. You will see here the underlying earnings for FY '19 of $435.7 million shows a 2.5% decline year-on-year when compared to FY '18 underlying earnings. This result has been delivered in an environment of low growth, low interest rates and increasing competition with the second half delivering positive momentum in our key priority markets.

A highlight of this result is the growth we've achieved in residential lending, growing above systems for both the financial year and over the last 6 months. Our growth of 4.3% in this second half was particularly strong, well above systems of 2.7%. This growth is a combination of new lending activity following the success of the investment in our retail mobile relationship managers and our renewed investment in our third-party distribution resources and processing capacity. It also reflects the results from our focus on retention, which has been successful in retaining customers and reducing the level of discharges. This last half also saw improvements in business lending, incorporating our commercial, business and agribusiness portfolios. While the business portfolio was down 1.2% in the second half, this was certainly an improvement on the 9.9% decrease we saw in the first half. The reduction was from the continued runoff in the commercial property portfolio and was relatively larger in land development and construction, where the growth of 9.5% in our SME portfolios in the second half has helped to offset this.

Strong seasonal growth, as expected in the second half of each year, delivered most of the 12.8% growth in the agribusiness portfolio.

Another highlight of the result is definitely our margin performance, which ended the half 2 basis points higher at 2.37% and maintained year-on-year at 2.36%. This was aided by the active management of our balance sheet, and in particular, through our approach to deposit pricing. June's exit or monthly NIM was at 2.41%, up 7 basis points from the December 2018 exit NIM of 2.34%. You'll see we've again included a detailed breakdown on the impacts on NIM for each half. And in the table on the bottom left, through the management of term deposits and at core rates, we were able to turn around the impact we saw in the first half and delivered a 3 basis point improvement through the repricing of our retail deposits.

The front book back book pressure on margin continues across the industry, and we saw a 6 basis point impact this half, in line with the averages of the previous halves. This impact is an outcome of competition and is also influenced by the mix of new business, including stronger flows into owner-occupied lending and less higher rate interest only.

We've now separated out the impact of our BBSW priced commercial lending, and with lower wholesale rates as the market forecast cash rate reductions in June and July, this impacted our second half NIM by 1 basis point. We had a similar impact on the treasury liquids from lower rates. These lower BBSW rates though helped drive the 2 basis point improvement from the cost of wholesale funding. And given the structure of our hedging, we did see a benefit through lower wholesale rates, and as a result, lower expenses for hedging for the half.

Margin performance of first half '20 will obviously be more challenging for all banks as the impact of passing on the June and July RBA cash rate changes start to flow through NIM and in a continuing low and likely lower rate environment.

June's monthly, or exit NIM, had minimal impact from our lending rate changes following the cash rate decrease in early July -- in early June. So over the first quarter of FY '20, we expect monthly NIM to move back to around the level of our second half FY '19 NIM.

Total income was in line with last financial year, and the second half result was 0.5% higher than the prior corresponding period. Net interest income was lower. However, taking into account there are 3 less days in the second half, we do see an improvement on the first half of FY '19. With asset growth coming through later in the half, this outcome was driven by that 2 basis point improvement in margin.

Other income was a standout for the year, up 5%. Fee income continues to be under pressure right across the industry, with the reductions in our fee income driven by changes in customer behavior and the product options we now offer our customers. These new deposit products resonate well with customers, and the core deposit portfolio continues to have a positive impact on our cost of funding.

The success of our lending retention teams has resulted in a higher growth rate for our residential loan portfolio, which is positive from an NOI perspective. However, we have seen that lower growth loss -- we have seen lower discharge fee income as a result.

The launch of our new retail FX card, our customers choosing to do more FX transactions over the counter and increased engagement with business customers has generated another improvement in FX activity and income.

Commission income was strong again through flows into our managed funds. Trading book performance for the half was at $10.7 million and was generated through the reduction in interest rates across the curve as well as the contraction in the cash/bill spread in second half '19.

Moving now to operating expenses. We saw an increase in our cost-to-income ratio driven by total cost growth of 5.4% for the year. However, excluding the impact of remediation and redundancy costs, underlying operating expenses -- underlying operating expense growth was 2.6%. Using underlying earnings, our adjusted cost-to-income ratio for the second half was up 0.8% to 57.8%.

When we look at the drivers behind the 2.6% increase in underlying operating expenses, staff costs were up 2.3% due to the $5.5 million of costs associated with bringing on the new Elders agrifinance staff on board from March and increased investment in our risk and people and culture resources.

The annual salary increases have went through in early November, and the lower capitalization rates of project salary costs also impact the staff cost this year. This trend of lower levels of capitalized salaries is a conscious decision as we continue to align the investment associated with each initiative with the timing of the benefits.

Other expenses included increasing corporate insurance premiums, which occurred noticeably across the industry, and insurance costs associated with our new credit card products.

During the year, we incurred around $7 million in external costs relating to compliance. In relation to internal compliance costs, we don't separate this out. These are part of the cost of running our business, and we manage them through the prioritization of work and allocation of resources.

Fee and commission expenses were lower, predominantly as a result of the new distribution agreement with Elders.

As Marnie has already said, our cost-to-income ratio is higher than where we needed to be for us to compete in what is a highly competitive and highly regulated market, so we must drive our cost down. This is especially important in a low-revenue environment. We maintain our ongoing focus to sustainably reduce our cost base, targeting a cost-to-income ratio towards 50% in the medium term.

Following the organizational restructure Marnie announced back in August 2018, the group now has 3 operating segments, being: consumer, business and agribusiness.

Turning to the first of our divisional results, the consumer division, headed up by Richard Fennell, has delivered strong growth in mortgages of $1.3 billion, above system in the second half through both the retail and third-party channels and shows the momentum our investment in our mobile relationship managers and our third-party distribution resources has delivered.

Deposit growth of $1.2 billion was also solid, and the outcome reflected our approach to carefully managing margin through our cost of funding. Despite compressions in lending net interest margin, the division was able to hold net interest income flat for the year. The reduction in fee income I spoke about at the group level is most obvious here. And as a result, other income was lower.

Operating expenses are higher due to the advice and product remediation payments, redundancies, a $6 million increase in software amortization and a nearly $19 million increase in allocated expenses reflecting the group's increased investment in risk, people and culture and technology.

A review of resourcing resulted in a decrease of 43 FTE in the second half, and with the sale of Bendigo Financial Planning, further reducing FTE by another 94 in the first half '20.

Credit expenses of $19.2 million for the year was driven by a $6.8 million increase from the new collective provision methodology.

Bruce Speirs took charge in the new business division last August and has been transitioning the business banking area to a more targeted market segment focus. Driven by lower credit expenses, underlying earnings for the division were up year-on-year.

Lower net interest income this financial year reflects the contraction in the commercial property lending book and increased margin pressures seen in this portfolio. However, we have seen the positive growth achieved across other segments, including growth of 9.5% in our SME portfolios with margin maintained on new-to-bank business.

Improvement in other income was driven by growth in FX income, partially offset by lower fee income. Operating expenses were impacted by redundancies, increased investment in leadership roles and maintaining our relationship banking footprint. In line with the reduction in the commercial property lending portfolio, credit expenses benefited from a reduction in the collective provision.

Our agribusiness division is headed up by Alexandra Gartmann, CEO for Rural Bank. The asset portfolio increased by 12.8% over the half, largely due to the usual seasonal activity and drawdowns. Growth was 2% over the last 12 months in an environment of widespread drought conditions and quick onset natural disasters. Despite continuing stream pricing competition, net interest margins were well managed.

The credit quality of the agribook reflects conservative underwriting standards and deep expertise in agri lending, historically high commodity prices and rising farm land values.

Diversity and quality of earnings were strengthened by the acquisition of data and knowledge businesses of Profarmer and Australian Crop Forecasters and growth in our government services business.

The strategic focus on reducing complexity and cost in our business saw us return the Rural Bank ADI license and execute a new distribution agreement with Elders, providing underlying cost benefits and improved operational risk profile. This new agreement with Elders is in addition to the partnership with our Community Bank networks means we continue to provide a rural and remote-based specialist agricultural banking service across Australia when many other financial service providers are withdrawing services from regional areas.

Many of you know the drought conditions faced by farmers across the Eastern states. Drought impacts are being managed through proactive customer engagement and, where required, hardship assistance. Looking through the longer-term cycle, we expect the majority of our customers to manage within existing limits and facilities.

Homesafe's contribution on a cash earnings basis was in line with the first half. We've completed contracts providing another $7 million in net earnings before tax in this second half. The proceeds we received on these completed contracts during the half exceeded their carrying value by $700,000. On a statutory basis, we have recognized a $24.1 million loss for the year due to unrealized losses in both first and second halves with the reductions in Melbourne and Sydney property values, exceeding the income received from the upfront discount unwind and the profit on sale.

The 6-monthly review of the portfolio valuation methodology was completed and the growth outlook of 0 for the first year, 3% for the second year, and 4% long term was maintained. The discount rate was also -- remained at 5.75%. We'll continue to review these assumptions each 6 months and the key test is how the carrying value of these completed contracts compares to the sale proceeds. And I said -- and as I said, these completion values exceeded the carrying value by $700,000 this half.

As the unrealized gains reflected in the carrying value of the prop portfolio are excluded from regulatory capital, property values would need to fall by almost 40% for the unrealized gains to be reversed and have any impact on regulatory capital.

The strong outcome for credit cost of $50.3 million for the year reflects our conservative risk profile and was only 8 basis points of gross loans, down from 11 basis points in the prior year and under the 11 basis points we consider as our long-term average.

As I spoke about in February, we adopted AASB 9 on 1 July 2018, and you saw the change in our provisions due to the new expected loss rather than incurred loss model.

All core portfolios remain well secured, and the portfolio performance remains sound. The provision coverage of $116.7 million is up from 92% at 30 June and up from $109.8 million at the half.

Overall, total impaired loans for the group decreased by 7.4% over the financial year, with a 10% decrease in the second half driven by commercial exposures either being finalized through property settlements or having balances paid down.

When we look at arrears, which is a key leading indicator, you can see the residential arrears rates continue to fall over the second half and were lower over the financial year. This year, we've included in the main presentation the slides showing the arrears by state, which I'll go through next.

In our consumer portfolios, arrears in our personal loan book were flat for the year and credit card arrears fell 22 basis points, continuing improvement we've seen over the last 2 years.

Agribusiness arrears were also lower over the financial year and finished relatively flat over the second half, with no new material exposures going into arrears. The increase in the business arrears over the financial year was largely driven by the declining portfolio balance, although we did see the increase in the first half, largely due to 2 exposures that have -- that were finalized this half.

The new exposures in the second half are across different states and industries and are appropriately provisioned where required. Overall, we are comfortable with the quality of the business portfolio, and it remains within our risk appetite settings. The amount in business arrears has already reduced by $12 million in July.

This next chart shows the outcome of our conservative risk settings, and you can see the improvements in the home loan arrears across each state in the second half. While Western Australia remains elevated, we are back under the levels of arrears seen in June 2017. And it's worth remembering that our total exposure to WA residential mortgages is only around 9% of our portfolio and new flows are under this level.

Reflecting our risk appetite, the loan-to-value ratio of our residential loan portfolio shows growth in the under 80% LVR bands and a continued reduction in the 80% to 90% and over 90% LVRs.

In July 2019, APRA removed the investor limits for the bank, and our growth in investor is heavily skewed towards P&I lending.

Our core portfolio has continued to remain well secured with low LVRs, with the average LVR for residential mortgages at 57.6%, down from the 58.8% 12 months ago.

Our funding position continues to be a strength for the group, providing us with an important customer relationship as well as the flexibility to fund asset growth and the ability to manage our overall cost of funding. Retail deposit balances increased this financial year to improve the overall proportion of retail funding at June to 81.7%. Once again, this highlights the strength of our branch network in providing this variable customer relationship and source of funding.

Following the strong growth that we saw in term deposits in the first half, we're able to manage pricing and the flows we needed to support asset growth in the second half, driving an improvement in our cost of funds.

We completed a $1 billion securitization transaction in June, providing both funding and capital benefits. Investor demand was strong and led us to double the transaction size from the initial $500 million launch and bring the final pricing of the Class A notes into 103 basis points over 1 month BBSW. So our funding not only gives us flexibility to fund through our almost 82% retail deposit base, but we're also well placed to be able to tap into demand for wholesale markets.

Finally, our capital position and our Common Equity Tier 1 continues to be a strength, up 30 basis points since June to 8.92%. This strong capital position reflects our stable balance sheet and the continuing movement to lower risk exposures.

We're currently undertaking a detailed assessment of APRA's consultation package released in June related to changes in credit risk weights for both standardized and IRB banks and the unquestionably strong requirements under IRB. While the new capital proposals are being evaluated, we continue to make sound progress towards meeting the regulatory requirements for IRB to ensure we can pursue the option most beneficial to the bank.

Thank you. I'll pass you back to Marnie now to take you through the summary and outlooks slides.

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

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Thanks, Travis. The strength of our business is what will stand us in good stead as we reshape our business to be adaptive to future needs -- the future needs and aspirations of our customers. The trust in our brand and our people is what has set us apart. We remain in the top 10 most trusted brands in Australia and are consistently ranked the highest-rated bank in customer experience, and we consistently finish in the top 2 banks for customer satisfaction. We will continue to strive to always excel in customer service and offer a seamless customer experience. We will continue to advocate for our customers and support their communities.

Being based in the communities in which we serve continues to provide great insight into what customers and communities are seeking from their bank. And this close connection to our customers is a strength of our model, which we don't take for granted.

Our proven history of innovation has been directly linked and in response to the needs of customers and communities.

The disciplined execution of our strategy is showing good results. To continue to deliver on our strategy, we are committed to lowering our cost base and targeting a sustainable cost-to-income ratio towards 50% in the medium term.

Importantly, being unquestionably financially strong is fundamental to our business and our risk management approach. We actively manage financial and nonfinancial risk and take a conservative approach to maintaining balance sheet strength.

The regulatory environment for financial services continues to change at pace and has become more demanding for all participants. This is to be expected, particularly given the information that came to light during the Royal Commission and the recommendations in Commissioner Hayne's final report.

Whilst the biggest shift in regulatory focus has been in the areas of remuneration, culture and management of nonfinancial risks, we believe the extent and volume of change is unlikely to abate in the next few years.

Consistent with our culture and values, we maintain an open dialogue and consultative approach with our regulators. Where we get things wrong, our approach is to report and resolve the matter as quickly as possible, not leaving our customers disadvantaged.

Over several years now, we have demonstrated our strong commitment to risk management and governance by making significant investments in our risk management and compliance capabilities, particularly as part of our work towards advanced accreditation. During the year, we continued to focus on and invest in this area. And given the operating environment, we expect this to remain ongoing.

I'll briefly remark here that we are still to see any real policy progress to address the significant market power the major banks exercise as well as the structural features of the industry, which impede nonbank's ability to fairly compete.

I continue to believe that there is considerable scope for this government to supplement the recommendations of the Royal Commission Final Report to improve customer outcomes by leveling the playing field and thus creating greater competition.

And while we always take a long-term view, we are acutely aware of the prevailing economic conditions and market cycles. Business conditions remain reflective of slow but steady growth, and future growth is supported by accommodating monetary and fiscal policy.

There has been a recent uptick in auction clearance rates in Melbourne and Sydney, and business confidence is largely positive, being around the 10-year average. However, we acknowledge sentiment plays significant role in supporting consumer confidence and business investment, and that sentiment has of late been somewhat fickle.

We are on a multiyear journey. I've put in place a new and energized management team, and we have developed our new vision and strategy and have laid solid foundation for the future. We know where we are going and are developing what we need to get there. We are rolling out organizational change across the business while modernizing our technology platforms, streamlining our processes, developing new capabilities and improving collaboration. We have had early successes in enhancing customer experience, growing both our customer base and balance sheet in our key priority markets.

We are focused on our imperatives and market opportunities. As we accelerate our strategy, we continue to focus on the unique prospects in our key priority markets, investing in our capability to ensure we have adaptive people and a strong agile culture and continuing our successful and proven track record of innovation, whether through technology or our proud partnership models.

The trust in our brand and our people is what has set us apart, and we will be rigorous in ensuring we retain this trust and stay true to our values. We are not complacent. We know we must constantly evolve and change because our customers' needs are rapidly changing. And because, as discussed in the previous slide, the banking environment varies with market cycles and macroeconomic conditions.

Along with me, my new management team are committed to reshaping our business and sustainably lowering our cost base, with a target towards 50% in the medium term so that we can continue to deliver sustainable growth.

We firmly believe that the shifts in the banking landscape are creating opportunities for us, and we are actively pursuing these in a disciplined and sustained manner. We have laid solid foundations and achieved early success. We are looking to the future and have begun a multiyear journey to realize our vision of becoming Australia's bank of choice.

Thank you. I will now open for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

(technical difficulty)

Macquarie.

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Victor German, Macquarie Research - Analyst [2]

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I was hoping to ask 2 questions. One on margins and one on capital. So on margins, as always, thank you very much, you've been very helpful to provide us with the split of your retail deposits on Slide 25.

I'm just interested in perhaps a little bit more color in terms of how lower rates will impact your deposit book. Travis, you talked about sort of in the first quarter, seeing some pressures that will result in a similar margin to second half, second half '19. But just maybe more broadly, sort of every 25 basis points, how does that pressure feed through your margins? And if you can remind us on hedges -- hedging profile as well?

And then the second question on the capital. Good capital performance in the half, but I've noticed your risk-weighted assets actually declined despite the fact that you've seen some balance sheet growth. So would love to hear some observations as to what drove that. And also noting 16 basis point headwind to capital next period that you've highlighted in your 4E just maybe some observations on what that means for your dividends as well?

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

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Thanks, Victor. I think I've got all those questions down, so we might start at the start around margin.

And as you said, when we got through that June period with the exit margin that was a high, that really reflected the reductions we saw in the rates in anticipation of the cash rate decreases that we did then get in June. So when I look forward into this new financial year, I do expect the margin to get back to the levels around about that 2.36%, 2.37% that we reported for the financial year and for the half, once the effect of the lending rate changes comes through in this first quarter.

I think to your other question, though, around what do I see happening with further reductions. We do disclose on our funding slide, I think we have about 26% of our core funding that is at 0.01 or less. Obviously, those rates can't be moved. The big factor in how we -- how the margin will respond is obviously also from a competitive point of view around deposit pricing, what TDs do.

When I look back at term deposits over the last 6 months, I think there's around about 50 points that have come out of our special TD rates over the last 6 months. That's -- a lot of that is obviously just in the last couple of months in response to the cash rate. But I think that is a big -- the one that's hard to actually forecast and hard to tell what we're able to do with TD pricing.

So we certainly have got a core part of our deposit portfolio that can't move any further, but it is a hard one to call moving forward. It really does depend on the competitive position and where our deposit rates need to be. So I'm not going to be brave enough to pick the impact of that. But what I will say is we will get back to that second half NIM after this first quarter.

The hedging profile, obviously, we do hedge our fixed rate loans. There's also some hedging there against the TD portfolio, which is probably where the volumes are. And that's that benefit that we saw in the half where the received -- sorry, the pay floating side comes down with the lower rates. So that's the benefit there, which is entirely driven by those movements in BBSW rates.

Second question around RWA and the capital. So the RWA improvement would -- reflects the reduction in that commercial property lending portfolio through the commercial book that I spoke about in the performance of growth. We also did the RMBS in June. So we did $1 billion RMBS in June, which is the first time for a couple of years. So both of those would actually be impacting or improving the RWA position.

And then the sense of the impacts of the new standard moving forward and the impact on capital and what that does on dividends. Obviously, we're very comfortable with where our capital ratio is, and the dividend decision is one that the Board considers every 6 months. So -- but from a capital Common Equity Tier 1, we're comfortable with that impact.

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Victor German, Macquarie Research - Analyst [4]

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Sorry, Travis, can you just -- with respect to those deposit mix, so you've got 26% of your deposits that effectively don't pay any interest. You got 9% that pay from 1 to 25 basis points. In July, we had additional reduction in rates. Presumably, the pressure on margin is a bit more than just 3, 4 basis points. So are there some hedges that you've got in place? Because historically, you haven't had much in terms of hedges? Or are there other offsets because just mathematically doesn't really add up the margin pressure in that sort of first half 20s? Is that low?

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

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What I'm saying, Victor, is over this quarter with what I can see, I expect the margin to get back down to those levels. It is too hard to actually forecast what's going to happen for the rest of the half. There is so many moving parts in that from a deposit pricing and how competitors respond. So I'm not going to look forward any further than this quarter. And that's what I expect to see over the first quarter. With what we've been able to do with deposit pricing ahead of the cash rate change, that's meant that's what I expect this first quarter.

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Victor German, Macquarie Research - Analyst [6]

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Right. So are there any hedges or are there no hedges in place?

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [7]

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We do hedge our interest rate risk in our book, so there are some hedges, as I said, particularly around that -- the TD portfolio as well as the fixed rates, but we use those hedges and also that proactive pricing of deposits. So we've always had hedges there. We don't run a replicating portfolio. We've always had hedges to manage that interest rate risk.

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Operator [8]

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Your next question today comes from the line of Josh Freiman from Macquarie.

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Joshua Freiman;Macquarie;Equity Research Analyst, [9]

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So just a quick question on the income reduction. So I did note there was significant fee income reduction this period. I just wanted to ask you if you could provide a bit more color on how you see that moving over the next half. Do you continue to see it dropping? And if you could quantify the run rate some of your competitors have done?

And second question is just how far through the remediation journey are you? Should we expect any continuation of remediation in FY '20?

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

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Thanks, Josh. I might start with that fee income. So it continues to be something that the industry will see declines in I believe. As we continue to meet the needs of our customers through our product set, and they've recognized their behavior, I think we saw a 2%, 2.5%, 2.4% decrease in fee income. It's -- I would have thought there's something like that continuing is probably that run rate that we would expect at the moment given customer behavior and our fee structures that we will continue to review to make sure we're meeting the needs of our customers.

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Marnie A. Baker, Bendigo and Adelaide Bank Limited - CEO, MD & Director [11]

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Josh, in relation to remediation, we've provided for what we believe is the required amount at this point in time from what we understand.

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Operator [12]

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

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Edmund Anthony Biddulph Henning, CLSA Limited, Research Division - Research Analyst [13]

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Just a question on expenses to start with. Can you just touch on one, just redundancies, obviously, very high in the second half? What's the trajectory for that? And also just going back onto remediation question from the last person, is -- you said the review's still going. Is that review finished now? Or are you still reviewing your book on potential more remediation going forward?

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Marnie A. Baker, Bendigo and Adelaide Bank Limited - CEO, MD & Director [14]

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Yes. The review has been completed. We've provided for the amounts that we believe based off that review. So those -- unless there's any new errors or things that come forward in the future, we've provided for what's required. And based on -- and we've had an external adviser that's worked with us on that to ensure that we are appropriately accounting for it and making sure that we are covering off on our obligations.

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [15]

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And Ed, as far as the size of redundancies, so I think we had $11.9 million total for the year, $9.7 million in the second half, $2.2 million in the first half. And I think the 6 months before that's about $2.3 million. So this second half has definitely reflected that organizational review and the work that we've done.

As Marnie said, this is an ongoing process that as we work through in rightsizing and right shaping our business to actually meet the needs of our customers, I don't expect the level of redundancies that we saw in this second half, but that's part of the work we're going through now, and we'll continue to look at what's the right skills to support our customers. So I don't expect it to be at that level though.

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Marnie A. Baker, Bendigo and Adelaide Bank Limited - CEO, MD & Director [16]

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And I think we don't have a targeted number for redundancies, Ed. And I think it's important also to note that the redundancies occur as a result of us reviewing our business and making calls, which will continue as all businesses should be doing is reviewing their businesses and looking to the future of what are the skills that are required. So there's not a target at all. Let's just say, it is a result or a byproduct of actually transforming our business.

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Edmund Anthony Biddulph Henning, CLSA Limited, Research Division - Research Analyst [17]

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And just a second question on capital. CBA, their result called out a minimal impact from the potential changes in risk weight as they read them at the moment. Can you just comment on your thoughts on the potential change in risk weight? Is that -- do you see that as a benefit for you guys or a potential headwind or not much there?

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

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Thanks, Ed. So as I said when I went through the capital slide, that's a piece of work that we're still working through at the moment. So we're doing the analysis, and we'll make some comments when we're positioned to.

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Operator [19]

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And your next question comes from the line of Jon Mott from UBS.

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Jonathan Mott, UBS Investment Bank, Research Division - MD and Banking Analyst [20]

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A question about the pickup in the growth of the residential housing book and referring to Slide 39, where you give us the flows broken down between retail, third-party and unoccupied investor into semi and P&I. Just looking at the pickup in growth has been predominantly in the investor market. And you can see that the level of flows coming in owner-occupied has actually been quite soft, and you're still losing substantial share in the owner-occupied market. Now given your brands, given what it resonates to most of your customers, why is the success coming in the investor space? And why haven't you been able to see a material pickup in the owner-occupied space?

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [21]

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Thanks, Jon. Look, I think the owner-occupied is obviously the most highly competitive space. So that is something that is key to our approach moving forward. It is taking a little bit longer to pick up. The work we've done across that retention that I spoke about cuts across all different portfolios. And that -- so that's not going to show through in settlement data, but that's actually been a significant factor in actually driving an improved outcome in net growth through the work we've done from a retention point of view.

If I look at the success or the growth in the investor market, I think that just reflects our processing capabilities, particularly through the third-party side. And just getting our pricing right with where we want it from a risk and return. So I actually think it's a combination of all of those things. We have seen some improved activity through investor, but we're very comfortable with both the risk and the pricing that we've got there.

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Marnie A. Baker, Bendigo and Adelaide Bank Limited - CEO, MD & Director [22]

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Yes. I think it's also worth mentioning, Jon, that we were well below the investor cap too. We pulled hard on that part of the business at the time when those requirements come in. So we had a lot of headroom there.

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

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Another question was the rate cut coming through. Do you automatically change your customers' repayment schedule? Or they repay the same amount of money that were with less interest and more principal, so therefore, the back book should start to amortize faster as the rate cuts come through?

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Marnie A. Baker, Bendigo and Adelaide Bank Limited - CEO, MD & Director [24]

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I think it's more a behavioral thing as opposed to whether you actually ask them to adjust their payment schedules. We are saying that borrowers absolutely will take advantage and actually be repaying more of their principal as rates have come down.

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Jonathan Mott, UBS Investment Bank, Research Division - MD and Banking Analyst [25]

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Okay. But you don't actually change the repayment schedule itself?

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [26]

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No.

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Marnie A. Baker, Bendigo and Adelaide Bank Limited - CEO, MD & Director [27]

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No.

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Operator [28]

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Our next question comes from the line of Andrew Lyons from Goldman Sachs.

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Andrew Lyons, Goldman Sachs Group Inc., Research Division - Equity Analyst [29]

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Just a quick question, just around your trading income, obviously elevated given the -- what happened within rates in the half? Just can you give us some sort of a feel around how much revenue has been carried forward into the first half of '20? And also, any sort of rough rules of thumb as to how we should be thinking about the noninterest income trading sensitivity if we do see another 1 or 2.25 basis point cash rate cut?

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [30]

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Thanks, Andrew. Look, I think of a normal trading book contribution, probably more around $3 million a half and I've actually said that, I think, a few results each time that somewhere in that $3 million a half is normal. What we saw over this last half, obviously represented that significant change in the outlook for cash rate, and then the June and July cash rate is actually happening.

So when I think about it more in a normal sense, it sits somewhere around about $3 million. You can probably have a go at modeling somewhere between that, and the $10 million we saw in the half, depending on your view of cash rate. But I think $6 million for a year, $3 million a half is probably more of a normal trading book contribution at the moment.

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Andrew Lyons, Goldman Sachs Group Inc., Research Division - Equity Analyst [31]

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And so can I just confirm with that, is the delta from $3 million to $10 million, is that just from the June cash rate cut? Or is it how sort of the futures curves and everything else was moving in anticipation of the 2 cash rate cuts that happened in June and in July?

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [32]

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It was the latter, Andrew. It was a combination of both.

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Operator [33]

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Your next question comes from the line of Andrew Triggs from JPMorgan.

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Andrew Triggs, JP Morgan Chase & Co, Research Division - Research Analyst [34]

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So just a follow-up. A couple follow-up questions on the cost side of things. Firstly, on the redundancies, just in terms of how many FTEs you managed to take out and what benefit, I guess, tailwind into FY '20 you see?

Secondly, just some thoughts on how software amortization expense will evolve from here? I noticed the software intangible balance still increased at a lower pace than it had been the previous half.

And just a final one. In terms of the 50% medium-term cost-to-income ratio target, other banks have been more willing to talk in absolute cost reduction terms, which historically has not been the case with Bendigo talking more about a sort of inflation style cost number and the need to invest in a sort of high-cost model.

Can you give us some thoughts around whether you think you can get closer towards that absolute flat cost in absolute terms or cost reduction over time? Or do you still need to keep investing for the future?

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

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Thanks, Andrew. So I think I'll go back to start with the first one around redundancies. So that $11.9 million was around about $85 million from a headcount point of view.

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Marnie A. Baker, Bendigo and Adelaide Bank Limited - CEO, MD & Director [36]

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$84 million.

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

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$84 million was it? Thanks, Marnie. And really, I think I spoke to on the consumer slide that actually -- I think there was $40 million, $43 million in the second half from the consumer areas. That was really spread right across the business though.

In the terms of ongoing impact from those redundancies, I say that around about a $10 million ongoing salary reduction at a gross level, though, but we've actually looked to reinvest some of that as I spoke about through the work we're doing around risk and people and culture. So I don't see that as an absolute save. We're actually using that -- some of that where we actually need to invest to support the business moving forward. So that's the quantum of that.

In the terms of amortization, yes, we will expect another pickup because as we've been talking about for these last couple of halves, we have continued to invest, and we've actually seen some of the larger projects start to be amortized in this second half. I actually expect amortization to be up another $7 million or $8 million for the next full financial year, reflecting really that amortization profile of those investments and that full year effect of that.

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Andrew Triggs, JP Morgan Chase & Co, Research Division - Research Analyst [38]

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And in terms of the absolute cost reduction versus inflation style growth?

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

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Look, I think with where we're at the moment, as we've spoken about, we are committing to a medium-term sustainable cost-to-income ratio of 50%. We need to make sure we can do that sustainably, and we need to make sure that we actually do that in the right way. It is a combination of both revenue and expense. So at the moment with low revenue, we need to work hard on the costs. And I think that's where that focus is at the moment. But it is certainly a medium-term target and somewhere that we want to get to.

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Operator [40]

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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 [41]

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Just wanted to ask 2 questions, please. Firstly, on the costs. Could we just confirm that you're going to be using the underlying expenses of $930 million as a starting point from which you're thinking about a lower -- the cost base for the medium term? And kind of really -- and kind of sub-part to that. It sounds like it's unlikely that expenses could fall in FY '20.

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [42]

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Thanks, Andrei. So yes, when we are looking at our cost base and how we think that they're moving forward. It is that underlying cost base, so excluding remediation, redundancies. So that's a $930 million, so you're right. And look, I think with what we see with amortization, it is unlikely that we'll see costs falling as a total. And that's where we will continue to work hard. We'll continue to focus in this low revenue, but FY '19 and '20, I can't see cost is falling.

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Andrei Stadnik, Morgan Stanley, Research Division - VP [43]

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And look my second question, just wanted to check around the margin commentary you've mentioned. So you've said first quarter margin should be similar to second half '19 margin. Just to be clear, that first quarter '20 margin, that includes the full benefit of the [SBR] repricing that you've done. So in other words, there's a fair chance that if rates go lower or we get some deposit competition or from booking additional mortgages, that the margin could actually fall absent any further repricing after the first quarter.

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

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It's a fair comment, Andrei.

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Operator [45]

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Next question comes from the line of T.S. Lim from Bell Potter Securities.

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T.S. Lim, Bell Potter Securities Limited, Research Division - Head of Research and Banks & Insurance Analyst [46]

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Just thinking, what's the view of Bendigo Bank, 3 to 5 years down the track? I mean you've got a cost-to-income ratio of 50%. What are your views on ROE? What are your views on Homesafe? Is this still going to be a business on balance sheet? And also, your views on M&A?

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Marnie A. Baker, Bendigo and Adelaide Bank Limited - CEO, MD & Director [47]

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Good question, T.S. Look, our views in the medium term is that we will be providing a seamless customer experience, focused on improvement in our processes, digitizing our processes, skilling of our people, sustainable growth is absolutely the objective and a reduction to our medium-term cost-to-income ratio. There's going to be a number of contributors that go to that. Over that period of time, we have, and I think we alluded to it there in the packs that, we have been undertaking a complete business review. Looking at all parts of our organization, those customer-facing parts of the business as well as the support areas to see what needs to be done to ensure that we are able to actually meet those targets that we've put before you.

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [48]

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And sorry, just on the Homesafe one. Look, we continue to think it's a really good product for customers. But as we've said, it's something that we think there's opportunity for someone to partner with us. So that doesn't change from the view we've held over the last few years on that one.

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Operator [49]

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

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James Ellis, BofA Merrill Lynch, Research Division - Director [50]

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Just can I ask in relation to the remediation cost on the undocumented advice? I know you're big in that business. Just wondering if that slightly draws the line over there or whether there's any potential for further advice remediation.

Secondly, in relation to the redundancies. Just wondering whether that's all being utilized or whether some of that balance thus will be utilized in future periods. And if so, how long that will go on?

And then finally, in terms of the reference to a lower targeted number of company-owned branch of the 168 you got now, are you contemplating the trimming of that network or anything outside also appropriate in terms of what quantum of a reduction?

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Marnie A. Baker, Bendigo and Adelaide Bank Limited - CEO, MD & Director [51]

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So thanks, James. So in relation to remediation and the advice remediation what that was, like I said earlier that, that was actually worked through prior to the sale of the business. Of course, in selling that business, the party that actually purchased that did a thorough due diligence themselves on that business, so we aren't expecting there to be any further issues to come from there.

I'll touch on the branches before I'll pass over to Travis for the redundancies.

So the branches, we are continuing to review our physical network, and especially our corporate network. We have closed 6 branches, 15 agencies. A number of those are due to the proximity of those branches, the reduction in foot traffic that's going in there. Our customers are making changes in their preferences of how they're choosing to engage with us. And as they change their preferences, we will adjust accordingly.

So you can expect us to be continually reviewing that network and refitting or reshaping what that network looks like and changing even the functions and the way that they're actually represented in their respective areas, too. And I think the Norwood branch that I called out before, and it's actually on the front of our presentation pack here today is a really good example of thinking about it very differently and responding to what our customers are actually looking for. And we've seen a 64% uptick in foot traffic there and a considerable uplift in business that's actually coming through that. So we'll just continue to review this, and we will make decisions as we have in the last period. We'll make decisions that are right for our customers and for our business.

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

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It's just back on the redundancies. So as I said, we had 9.7 in that the second half. But to Marnie's point before, the redundancy is an outcome. We don't have a target. It's an outcome of the work we're doing to reshape our business and make sure we're meeting the needs of our customers. So that's how we think about it, and we definitely don't have a target for what it should be for this year.

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Operator [53]

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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, Shaw and Partners Limited, Research Division - Senior Analyst of Banking and Insurance [54]

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This is also on expenses. So I gather from what you're saying, you expect the growth in underlying costs from 2019 to 2020 to be similar to the 2018 to 2019, growth of around 2.5% that would -- that's the conclusion to draw from the comments you've made. Is there anything to think that, that would not be the case?

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [55]

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Brett, it's Travis. I'll be disappointed if we have another 2.6% growth. As Marnie said, we are doing work. We're reshaping the business, and we are moving forward. We've got a medium-term target now. And I'll be disappointed if we're reporting another closer to 2.5%, 3%?

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Brett Le Mesurier, Shaw and Partners Limited, Research Division - Senior Analyst of Banking and Insurance [56]

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You're still going to have staff costs increasing by a couple of percent though, aren't you?

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

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We will be managing our staff costs as best we can. And I'd be -- again, with the redundancy work that's come out in this last half, I would hope that we can keep it below that.

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Marnie A. Baker, Bendigo and Adelaide Bank Limited - CEO, MD & Director [58]

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I think it's important to note, though, that any salary reviews or bonuses or dividend value creation, bonuses that we provide to our staff, our salaried staff, are based on our performance. And directly linked to that as well as their risk parameters. So if we're not comfortable with the performance and where it's at, then no, there isn't an increase now in our staff costs from a salary perspective.

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Brett Le Mesurier, Shaw and Partners Limited, Research Division - Senior Analyst of Banking and Insurance [59]

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Okay. Now this medium term, 50% cost-to-income ratio assumes that income growth is going to exceed expense growth by 15%. How actually are you going to achieve that in a low growth environment that continues to be low growth, so even keeping flat expenses won't achieve it?

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Marnie A. Baker, Bendigo and Adelaide Bank Limited - CEO, MD & Director [60]

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Well, I think you can see the positive momentum that we have in the second half of the year. I've spoked shortly to -- or briefly to the enhancing and the deepening of the partnerships that we actually have in place. We spoke to our mobile relationship managers. We spoke to the fact that we're actually seeing and are targeting in on key priority areas where we do have a really strong connection to the customer base. So all of those things you are starting to see now in the positive momentum in that second half. And we will be looking to accelerate that.

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Brett Le Mesurier, Shaw and Partners Limited, Research Division - Senior Analyst of Banking and Insurance [61]

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So it'd be fair to conclude then that you're expecting to grow above system without margin decline. Would that be a fair interpretation of what you're saying?

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [62]

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As Marnie said, we think we've got opportunities to grow above system absolutely. With the investments we've made, we can do that. So the number of questions around margin, I think that's an industry thing. We're comfortable with where our pricing is and how we manage both sides of the book there, but there are so many moving parts in the industry margin. That one's a hard one to call.

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Operator [63]

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Your last question today comes from the line of Richard Wiles from Morgan Stanley.

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Richard E. Wiles, Morgan Stanley, Research Division - MD [64]

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Just one follow-up on Brett's question around this cost-to-income target of 50%. That size of improvement is what banks were achieving when volume growth was around double-digit levels. So it looks like a very ambitious target in the low rate environment.

I'm interested in why you chose 50% and not something a little higher than that given that your current cost-to-income ratio is 57.5%.

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Marnie A. Baker, Bendigo and Adelaide Bank Limited - CEO, MD & Director [65]

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It is an ambitious target, Richard, but it needs to be. I think if we want to be the organization the way we are talking about, we actually do need to do this. We've got and have been working on plans to be able to actually achieve that, and we believe it is achievable. We're going through and validating those plans at the moment. But if we act and be a true competitor as we move forward and get the growth and the sustainable growth that we're looking to, that's what we need to do.

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Richard E. Wiles, Morgan Stanley, Research Division - MD [66]

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To correspond to a particular return on tangible equity target or other financial metrics?

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

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Look, Richard, as Marnie mentioned then, we are validating our thinking on a number of those ones. So that would be an outcome, obviously, of sustainable growth and then improve profitability. But we will provide details as we work through that.

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Operator [68]

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(Operator Instructions) There are no further questions at this time. I would now like to hand the conference back to your presenters for any closing remarks. Please continue.

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Marnie A. Baker, Bendigo and Adelaide Bank Limited - CEO, MD & Director [69]

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I'd just like to thank everyone for dialing in and also being here in person to listen to our results presentation, and thank you all again for your support. Thank you.