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Edited Transcript of BEN.AX earnings conference call or presentation 10-Feb-19 11:00pm GMT

Half Year 2019 Bendigo and Adelaide Bank Ltd Earnings Presentation

Victoria Jun 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Bendigo and Adelaide Bank Ltd earnings conference call or presentation Sunday, February 10, 2019 at 11:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Marnie A. Baker

Bendigo and Adelaide Bank Limited - 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 Triggs

JP Morgan Chase & Co, Research Division - Research Analyst

* Anthony Hoo

Deutsche Bank AG, Research Division - Research Analyst

* Ashley Dalziell

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Brendan Sproules

Citigroup Inc, Research Division - VP

* 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

* Jonathan Mott

UBS Investment Bank, Research Division - MD and Banking Analyst

* Victor German

Macquarie Research - Analyst

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Presentation

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

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Good morning, everyone, and thank you for joining us today and your -- and for your interest in our half year results.

When I was here with you 6 months ago, I spoke about the challenging environment for banks with the Royal Commission and numerous other inquiries placing intense scrutiny on the financial services sector as a general -- as the general public demanded change. Trust in the banking sector was and still is at an all-time low.

I spoke at that time about a subdued banking sector with declining asset growth on the back of title lending standards and regulatory intervention. I spoke about diminishing margins and increased costs as banks looked to bolster their compliance functions. I also spoke to the major advancements in technology and uncertainty about the pace, scale and breadth of disruption which, along with changing customer behaviors and preferences, meant the market share of Australian banks' customers was to become even more contested.

Within this challenging environment, we boldly announced our vision to be Australia's bank of choice and set about putting in place an organizational structure and strategy that was not only going to take us forward but would capitalize on the opportunity that was and continues to be presented to us.

Our objectives were simple: to reduce complexity in our business to make it easier for customers to do business with us when and where they choose and, at the same time, take unnecessary costs out of the business; to invest in the areas and capabilities that will future proof our business and make a difference to the experience our customers have with us; and to tell our story, so more Australians know who we are, what we stand for and why being a customer of our bank matters.

Our strategy is supported by our profound sense of purpose and strong set of values. We know we are better placed than our competitors in the current environment given the deep connection we have with our customers, our relative agility given our size and scale and the high level of trust we hold with the general public in comparison to our peers. So there never has been a better time for our style of banking.

And we're putting our strategy into action. In keeping with our objective to reduce complexity within the business, we have commenced the program of work to take operating costs out of the business through the rationalization and consolidation of existing business models, brands, systems and processes as well as removing functions and roles that are no longer required. Whilst early into this program of work, we have over the last half decommissioned the Rural Finance core banking system as part of the integration of that business into Rural Bank. We've removed our classic e-banking system, which was the proprietary precursor to our current Bendigo Bank mobile e-banking platform. We've rationalized several applications from our current technology architecture and wound up the Adelaide Managed Funds business. Additionally, we've completed the review of our current suite of brands. And in the next period, we'll be reducing the number of brands we go forward with, with a view to further leverage the Bendigo Bank brand.

Cost is a focus for us, especially in this low revenue environment, so you can expect us to continue to make changes to our business to ensure our cost base supports our current business strategy, leverages automation and reflects the new ways in which we are working.

As well as the recent structural changes, we are continuing to invest in the capability of our people in technical competencies, leadership skills, new ways of working and ensuring our people have the resilience to cope in these challenging times. We invested to grow our knowledge and insights capability within the Rural Bank business with the acquisition of Profarmer and Australian Crop Forecasters.

We also continue to invest in areas and platforms that build on our technological capabilities with a focus on continued modernization of our IT infrastructure, further development of our digital platform that supports our omnichannel strategy and continued use and repurposing of new digital technologies to enhance and personalize the experience our customers have with us.

To this end, during the half, we partnered with Tic:Toc to develop a Bendigo Bank-branded online home loan named Bendigo Express, which will launch this month. In October, we publicly launched Up, Australia's first next-generation all-in app digital bank. And just last week, after 3 months soft launch, we launched to the general public Bcause, an online e-marketplace specifically designed to support the disability and aged care sector.

We also recently implemented an improved account-switching process for customers, introduced online pre-qualification for home loan customers, created a pre-submit quality assurance process for our rural customers and introduced web check capabilities to support customers via their channel of choice.

We continued to expand and leverage our distribution opportunities through the modernization of our agreement with Elders and the bringing in of Elders' agri bankers into the Rural Bank sales team, along with reshaping -- the reshaping of our business banking business and further investments into our mobile relationship manager team.

We launched the new concept branch in Norwood, delivering a completely different customer experience, an experience that leverages a retail springboard and multiuse spaces to encourage local businesses to showcase their wares and local community groups to convene. We plan to trial a number of other alternative branch concepts to reflect the spaces sought by our customers and communities to further connect our value proposition and brand.

Following the success of our partnership with Deakin University, we are close to announcing a second partnership with another well-recognized and regarded Australian university, with other like opportunities also progressing well.

A key focus for us to increase the number of people who choose to shift their banking to us is the targeted public relations strategy together with a new marketing campaign, Better Big Bank, which is already having a significant impact on consideration of the Bendigo Bank brand by consumers. The introduction of a new web platform in the next half will also assist in awareness and driving consideration.

And the strategy is yielding results with more customers choosing us as their preferred bank. Whilst the low credit growth environment has had an impact on our ability and appetite to extend growth and grow the balance sheet in the short term, it hasn't limited our ability to grow customer numbers, new customers for today and the future. By focusing our efforts and investments towards the younger demographic, expanding the number of partnerships with universities and investing in digital platforms and offerings such as Up and Tic:Toc, we have substantially grown the number of customers in the past 6 months and reduced the average age -- average customer age, establishing a sound base for our shared future.

The graph in front of you represents the rate of net customer growth per month over the last 12 months. As highlighted on a 3-month rolling average, we saw an 18% increase in new customers joining the bank in December 2018 when compared to the same time last year in December 2017. Net customer growth was up 57% for that same time period comparison. And the average age of new customers joining in December 2018 was 1.4 years less than those joining in December 2017. And I'm pleased to say the increased momentum has continued into this year, where we have seen an even bigger increase in January largely due to the increased take-up of customers in Up as well as a general across-the-board continued increase in customers joining us. New customers joining in January increased by 52% on the same period last year. Customers leaving the bank were down 2%. And the average age of customers joining the bank was down 4.6 years. As you can see, more customers are choosing us as their bank.

And we continue to be well placed with a proven business model and in an environment that plays to our strengths. In the last 6 months, this has been well evidenced through continued trust and customer service rankings, the acknowledgments we've received for our product innovations and our recent technology investments culminating into customer outcomes.

The Royal Commission Final Report, whilst extensive and far reaching, will have less of an impact on our business than many others in the industry given our business model and alignment to customer and community expectations is how we already run our business. Any changes at this stage to our business appear to be procedural and policy related rather than structural.

Our branch network continues to be a strength of retail deposit raising. And we were pleased to see the favorable reference made in the Royal Commission Final Report in relation to our partnering models with community banks and mortgage managers.

Strategic partnering has always been a key strength of ours and assists our growth. The skill and ability we have around partnering with others enables us to bring forward solutions in a timely way for our customers. The success of many partnerships to date has given us access to new markets and financial innovation.

And financially, the business continues to perform well even amidst -- even amongst such a challenging environment and uneven playing field. Strong margin performance, prudent cost management and a strong funding and capital position, combined with a proven business model and customer and community-focused culture, provides a great platform for us to grow the number of customers who choose to bank with us.

I'll now hand over to Travis to take you through the details of our financial results for the first half of 2019.

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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'm pleased this morning to be able to deliver a solid result for the first half in what is a challenging environment for the industry as statutory earnings were up slightly, and importantly, we're able to hold our cash earnings flat on the last 6 months. Cash earnings per share for the half were at $0.451. And we will pay a fully franked interim dividend of $0.35, in line with both our final and previous year's interim dividends. The flat cash earnings result has meant a lower return on equity, with our return on tangible equity down 1 point to 11.32%. Our cost-to-income ratio for the half increased by 30 points to 57.3%. And while we've done a good job in managing costs, this outcome reflects the challenging revenue environment that the industry is facing. Later on, I'll go in some interim through in more detail the drivers behind the first half jaws outcome.

Our balance sheet and particularly our retail funding and our capital continues to be a real strength for us. Our retail deposit balance have increased by more than 3% over the half, and this growth in deposits sees our retail funding ratio at over 82% at the end of December. Once again, this highlights the strength of our branch network in providing us valuable customer relationship and source of funding.

Total loans were down 1% for June. However, this was the net result of growth in residential lending and reductions in both our commercial and agri portfolios. Again I'll go through these in more detail later on.

The capital outcome is very strong, with a good organic capital generation and reduced credit risk weights seeing a 14 point increase in our common equity Tier 1 ratio over the half, meaning we are already positioned to meet APRA's unquestionably strong requirements well ahead of 2020. Total capital was up almost 100 basis points following our Tier 2 transaction in late November. That was completed ahead of the redemption we had in January.

In what continues to be a challenging and highly competitive market for housing lending, we've achieved annualized growth of 2.7% for the half, just under system at 3.3%. Owner-occupied principal interest lending continues to be the most competitive space in the market, and we've been able to maintain a similar level of settlements. We've seen improvements in investor P&I lending flows from the refinements we had made to our offering over the last 12 months given the headroom we had under the previous APRA lending caps. We are seeing lower activity levels through our branch network. However, this channel still achieved positive growth for the half. I'll talk later about the investments we are making to improve the digital experience that Marnie has already touched on, too, for our retail lending customers. We have continued to see improvements in activity through our third-party lending business as the industry sees more customers using these channels. And we returned to more natural level of flows, particularly through our Mortgage Manager partners.

If we look now at our cash earnings result, the challenging revenue environment has meant delivering a flat earnings outcome on last half and 2.4% lower than the prior corresponding period is a solid result. Net interest income was up slightly from last half, with margin down a couple of basis points, reflecting the competitive lending environment and increases in funding costs. I'll go through to the income lines in more detail at the next few slides. However, the improvement comes from a number of lines and includes the trading book results back to the level we expected 6 months ago. Homesafe realized gains net of funding costs was another good contribution and in line with last half. Total operating expenses were well managed and up only 1.9% compared to the last half, with staff costs, software amortization, legal and product costs behind this increase.

The bad and doubtful debt costs of $25.5 million are only slightly higher for the half but still under the long-term average that we look to. They're also down more than $20 million on first half '18 given the provisions on a number of commercial exposures we took back then.

Looking at the margin performance now, and we've delivered a NIM before our Community and Alliance Bank partner share of 2.35%, down only 2 basis points for the half. December's exit for monthly NIM was at 2.34%. We've again included the breakdown of the impacts on NIM for each half, and you'll see in the table on the bottom left there that the front book/back book impact increased to 6 points this half. This increase is not just an outcome of competition, but it's also influenced by the mix of our new business, with more owner-occupied and less higher-rate interest-only lending, meaning the impact was larger. We also continued to see flows in the fixed-rate lending impacting this. In response to higher wholesale funding costs coming through since quarter 4 of the last financial year, we did reprice both our front and back book variable mortgage rates from late July.

The cash bill spread remained elevated, and you can see the impact there on wholesale funding costs. While we did see a reduction in BBSW rates during the half, it has increased again in more recent months. The increase in retail TD rates was driven by higher term deposit rates as the industry looked to TDs as a source of funding given the wholesale -- -- the increase in wholesale funding rates. We did benefit from a reduction in the level of liquidity we were holding and the increase in the proportion of funding coming from our retail deposits.

Looking forward, margin performance in second half '19 will obviously be influenced by where the BBSW rates sit as front book discounts will continue to challenge margins for the industry moving forward.

Noninterest income was a real positive for the half, up more than 7% and back to levels we saw 12 months ago, with the increase both through underlying activity and some seasonal drivers. Fee income was stronger through increased customer activity and the reductions in ATM and transaction fee revenue that we saw last half has slowed. Our new product set continues to resonate well with customers, and this growth in our core deposits is having a positive impact on margin, too. It's also been good to see continued growth in the volume of FX transactions through our branch network and by our business banking customers. And commissions income was strong again with flows into our managed funds. The trading book contribution of $1.5 million returned to what I think of more as a normal level, with short-term funding cost volatility reducing in the half, leading to a more favorable positioning.

As I said earlier, Homesafe's contribution on a cash basis was in line with the previous half, with completed contracts providing over $7 million in net earnings before tax. The proceeds we received on these completed contracts during the half exceeded their carrying value by $720,000 or nearly 7%. On a statutory basis, we have recognized a $5.4 million loss with the reductions this half in both Melbourne and Sydney residential real estate property values exceeding the income recognized over the life of contracts from the upfront discount unwind.

During the half, we completed the review of the portfolio evaluation methodology and moved to a carrying value that reflects the lower growth outlook for these properties, a lower discount rate that better reflects current expected rates of returns and removed the overlay. We've revised the growth outlook from the 3% for the next 18 months and then 6% long term to 0% for the first year, 3% for the second year and then 4% long term. The discount rate is now 5.75%. As you recall, the overlay was in place to reduce the carrying value of the portfolio from the valuation supported by the long-term growth outlook of 6% to a more conservative value given expectations of lower short-term growth rates for Sydney and Melbourne. What we thought at the time was a more short-term view on lower growth rates. However, given the new growth outlook, the overlay has been removed, and the portfolio carrying value will represent these new assumptions.

The loss on property revaluations in this half includes a net production of $1.9 million after removing the overlay and then revaluing the portfolio to $745 million using these new assumptions. We'll continue to review these assumptions each 6 months and a key test is how the carrying value of these completed contracts compares to the sale proceeds. And as I've said, these completion values exceed the carrying value by almost 7% this half.

If we move now to operating expenses, we saw a 30 basis point increase in our cost-to-income ratio over the half as cost growth was just above revenue growth in what still is a challenging revenue environment for the industry. When we looked at the drivers behind the 1.9% increase in total expense since last half, staff costs were up due to higher redundancies, lower levels of capitalization of our project staff costs, the annual salary increase that went through in early November and an extra working day in this half. The lower capitalization rate continues to trend from previous halves and is a conscious decision as we align the investments associated with each initiative with the timing of the expected benefits. Other expenses were also up on last half, driven by higher legal costs and a range of costs associated with the products and services we offer our customers. The increase in total costs also reflects an additional $1.5 million in amortization as a number of our larger technology investments commenced being amortized. I expect to see this increase by another $2 million in second half '19.

Marnie has already spoken about the growth in net new customers we started to achieve following our continued investment in an innovation that matters to our customers. We're committed to continuing to invest, and we're also looking at ways to modernize business processes and customer journeys. We'll also continue to look to simplify business models and systems, ensuring our investments can manage -- can support our business strategies. We know this continues to be a challenging time for the industry, and we recognize that we have more work to do with our cost base.

Looking at bad and doubtful debts now. And the credit costs for the half were 8 basis points of growth loans, in line with prior half and still under the 11 basis points we consider as we're through the cycle loss rate. We've adopted AASB 9 during the half, and so you'll see the decrease in the general reserve there and the increase in our collective provisions due to the new expected loss rather than incurred loss model, with the adjustments being taken through retained earnings on 1 July. The increase was higher than our initial estimate 6 months ago as it now includes the Great Southern portfolio under the AASB 9 approach. As you can see, the BDD outcome for the half includes the net reduction from a release of collective provisions for agri following movement to impaired loans. And obviously, we are comfortable with the level of provisioning for these loans. There were lower recoveries on Great Southern loans, and you will see higher credit costs this half. However, this portfolio continues to pay down, and we now have $35 million of collective provision with $41 million in 90 days past due. We did see an increase in overall impaired loans for the group in the half, and these are being actively managed. And we are comfortable with the level of security and the provisions we have made. At the end of December, we have provision coverage of almost 110%. Our core portfolios continue to remain well secured, with low LVRs. And the average LVR for residential mortgage is down 1% to 58% over the half.

When we look at arrears, which is a key leading indicator, you can see the residential arrears rates continue to fall over the half, reflecting sound economic conditions. While WA remains elevated, from what I've seen from other reporting, this is consistent across the industry. It's also worth remembering that our total exposure to WA residential mortgages is under 10% of our portfolio, and new flows are close to 6%. The recent reduction in agri arrears is impacted by the shift to impaired loans that I spoke about. And the increase in business arrears reflects accounts spread across different states but largely due to 2 exposures that since half year end, both accounts are now close to being finalized in full. We are comfortable with the quality of the business portfolio. And it remains well within our risk appetite setting. The conditions in WA remains flat and, similar to the housing portfolio, has higher level of arrears compared to other states. Additionally, we view conditions in the development sector as soft. Our consumer loan arrears remain at low levels. And the slight uptick in credit card arrears is consistent with the seasonal increase we see each December.

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

If we first look at consumer, headed up by Richard Fennell, you can see the NII and other income were up on last half but are lower than what we saw 12 months ago. The increase in operating expenses is primarily driven by allocated costs and increases in software amortization and redundancy costs. The credit charge in this half includes the $6.4 million increase in the collective provision charge.

With the residential lending market remaining highly competitive, investment in the online mortgage lending experience for our customers is critical. As Marnie mentioned earlier, we have seen online pre-co-location launch in December and the new Bendigo Express home loan using the Tic:Toc platform launched in February.

As part of the new group exec structure, Bruce Speirs is now heading up the business division and is in the final stages of transitioning the business banking area to a more targeted market segment focus. As part of these changes, Bruce has also consolidated a number of business banking risk and operational teams that previously sat across the group. This work on setting the business up for future growth, combined with rebalancing the portfolio away from commercial real estate property exposures, has meant that lending growth has been impacted. Asset balances are lower for the half, and we saw a reduced net interest income contribution. However, the active management of the deposit portfolio does provide some ongoing opportunity to help manage funding costs for the group.

Credit costs include Great Southern, which was $9.8 million for the half. Importantly, the division has increased investment in risk management ahead of the growth expectation, with customer relationship banking model now in place and aligned to the target market segments.

Our agribusiness division is headed up by Alexandra Gartmann, MD for Rural Bank. Cash earnings for the division was stronger for the half with minimal impact on financial performance from the drought. As mentioned earlier, agri credit costs do include a net reduction from the release of the collective provision following the movement to impaired loans. Extensive drought conditions over the Eastern seaboard has generated a lot of media attention. However, our stress testing and our customer calling program have highlighted that our customers are well set up to manage through this cycle.

From drought to the significant flooding seen in Queensland, the information evolved over the weekend shows we've been able to identify approximately 30 customers who may be in impacted areas. However, it is still too early to know the full extent, and we are still contacting customers, noting that many are still in the middle of this extreme weather event.

The asset portfolio reduced over the half due to seasonal pay-downs. And as can be seen from the chart on the bottom left, this is the usual cycle in Australian agriculture, and it's consistent with each first half. Pleasingly, even though the extreme price competition continues, the portfolio has grown by 4% over the 12 months. Ongoing investments in knowledge and insight capabilities and services has seen growth in other income and continues to provide information for our customers to help them better foresee and manage risks. Significant work is going into modernizing the business and systems, with the new distribution agreement with Elders announced in November a great example. This means at a time when many financial service providers are withdrawing services from regional areas, we will continue to provide a regionally based specialist agricultural banking service across Australia.

Turning now to our capital position. And our common equity Tier 1 continues to be a strength, up 14 basis points since June to 8.76% and already at the level to meet APRA's 2020 unquestionably strong requirements. The last half saw strong organic capital generation. And these, combined with moves to a lower risk-weighted exposures, improved the credit risk-weighted asset position. This improvement in common equity was achieved in the absence of any RMBS transactions and even though we had to increase reduction to deferred tax assets following the adoption of AASB 9 on 1 July. As I mentioned earlier, total capital was up nearly 100 points following our $275 million Tier 2 transaction completed in last -- in late November. When you take into account the $300 million redemption we had in January, we would expect our Tier 2 and total capital to reduce by 80 points, so still an increase of nearly 20 basis points over the half.

During the half, we received accreditation for interest rate in the banking book -- interest rate risk in the banking book, and we continue to make progress on credit risk accreditation. We anticipate greater clarity on the impact on capital under both IRB and standardized risk weights once APRA releases the revised credit risk standards.

Our funding position continues to be an absolute strength for the group, providing us not only with an important customer relationship but with the flexibility to fund asset growth and ability to manage our overall cost of funding. Total deposit growth for the half was 4.1% annualized, exceeding system's growth of 2.4%. With increases in BBSW impacting the cost of wholesale funding, the significance of our branch network and customer base was highlighted this half, with our ability to attract and retain deposits proven once again. Our retail funding mix increased to over 82% in December with increases in both term and core deposits. To help fund the improved asset growth, we increased our Bendigo TD rates for the first time in a long time since -- in late June 2018, with the response from customers being immediate and resulting in strong TD growth. We reduced rates in mid-August and then again in late October and still increased our TD -- term deposit retention rate to over 88%, a testament to the value our customers place on our products and the outstanding service our staff provides.

We also completed a $500 million 3.25-year senior unsecured transaction during the half, giving us a good spread of maturities across 2021 and out to 2023. So our funding not only gives us flexibility of fund through our over 82% retail deposit base, we are also well placed to be able to tap into demand from wholesale markets.

I'll now pass you back to Marnie to take you through the next couple of slides.

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

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Thanks, Travis.

As I've already outlined, we're working in a disciplined way to implement our strategy to ensure we control our own destiny, meet the expectations of our customers and balance the needs of our many stakeholders to realize our vision. But I can't underplay how important it is to good customer outcomes that organizations with different objectives and standards can compete on a level playing field, and customers can choose accordingly. This is a point our organization has been making for several years. And in my view, the uneven playing field and the market power that this has yielded is part of the reason why we have seen the behaviors that are been called out in the Royal Commission. Inquiries completed and reported on last year by both the Productivity Commission and the ACCC respectively noted the significant market power the major banks exercise as well as the structural features of the industry which impede nonmajor banks' ability to fairly compete. And these aren't new themes of analysis. Past inquiries dating back well before 2018 have raised similar concerns.

The recent Royal Commission into Misconduct in Banking, Superannuation and Financial Services noted that competition in banking is weak. The final report makes some strong and potentially effective recommendations on how to deliver on better customer outcomes through their legal and regulatory framework. And there will be profound ramifications from the Royal Commission that will reshape the banking sector.

In all of this, as better outcomes for consumers is rightly pursued, we do need to watch out for the unintended consequences of increased regulation on the availability of credit and any negative ramifications to consumers from demand leaking into the unregulated sector. However, there is little in the report that goes to the issues of competition and a level playing field. In this respect, we believe there is still considerable scope for government to supplement the recommendations with pro-competition initiatives. These should include further work to address the too big to fail funding cost advantage accessed by the major banks, enhanced risk weight settings that would result in fairer capital outcomes across all banks and the disproportionate cost of regulation on smaller participants. I hope that adequate attention will finally be given to creating a more level and fairer playing field in banking for, as we all know, a less competitive environment will inevitably result in poorer customer outcomes.

So in the last half, we celebrated 160 years since the bank's inception and 20 years since the first Community Bank opened. We also saw profit contributions by those 321 community partners into their communities exceed $200 million. Our willingness to invest and be disciplined in the execution of our strategy whilst balancing the needs of all our stakeholders has enabled these milestones as well as many others. Equally, it's the investments we're making today to reduce complexity, invest in our capability and tell our story that will help to realize our future success. We know that consumers are looking for an alternative, an organization that they can trust to put their interest first, and we are well placed to be that for them. Despite the uneven playing field and subdued and challenging environment, our business continues to perform well. We are tracking towards system and managing our costs, and balance sheet is solid, and our investment in technology that Australian consumers desire is driving strong customer growth. We live by our purpose to feed into prosperity and continue to deliver to our strategy to cement our position as Australia's bank of choice.

Thank you again for your interest today and for your ongoing support and investment in our organization. I'll now open for 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 Andrew Triggs from JPMorgan.

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Andrew Triggs, JP Morgan Chase & Co, Research Division - Research Analyst [2]

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Just a couple of questions, please. I was hoping you could provide a little more commentary on some of the margin drivers heading into the second half given, obviously, a big increase in the front book/back book repricing headwind and a number of the other drivers which are pretty fluid in the market. And also just a second question around costs. For a small number of additional one-off costs taken below the line with respect to the Royal Commission and customer refunds, and we saw similar in the previous half, just given the industry has moved much more to a cleaner version of cash earnings, just the thoughts on why these are taken below the line. And also, would this be the treatment going forward for customer refunds?

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

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Thanks, Andrew. Thanks for the questions. So maybe if I'll start with your NIM question first, and I'll just talk to Slide 18 with the table there around the drivers for the half. So as I called out, as I mentioned on the call, that front book/back book impact did increase. And as I've said, it was a combination of competition and that mix of our new business. If I think of that, and I've -- I mentioned it even on the slide there, I think that type of impact will continue as competition stays at the level and the mix of flows continues. When I look at some of the other drivers for our performance for the half, within January, we've actually been able to do some repricing or adjustments to our -- some of our accrual rates. So we're already starting to work through some of that opportunity around the funding cost side. The impact on retail TD rates was something that we saw come through right at the start of the half. We haven't seen that since, though. I'm actually more positive on that outlook for the retail side of the margin performance. And look, I think the hard one is obviously around the wholesale funding rates, where those sit. Obviously given the view of the cash rate, probably the next change is now more likely to be down. If those BBSW rates continue to settle a bit, then we wouldn't expect to see that same sort of impact. But I mean, that one's a hard one to pick, and I think we'll all watch that one on the way through. The funding mix side, I think we'll continue to get some benefit from that, the growth in our retail accruals, so I would have thought that type of mix will continue. But I think the big one is obviously around the wholesale funding impact, depending on what the wholesale rates do. And as far as your question around costs and the treatment of that, so the costs we did put below the line around the Royal Commission costs were purely external legals. And then that -- the remediation was to do with an acquisition from a number of years ago and the costs associated with that. So that was consistent with last half, and we've treated them that way again. But I think you'll appreciate the result's pretty clean as far as any other sorts of adjustments. If I think of more broader remediation expenses as we worked through those, it's my expectation that they'll be treated just as part of our ongoing expense line. We wouldn't -- it's not -- unless it was related to a previous acquisition, we wouldn't look to put them below the line, as you said, as is the practice across the industry.

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Operator [4]

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Your next question comes from the line of Anthony Hoo from Deutsche Bank.

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Anthony Hoo, Deutsche Bank AG, Research Division - Research Analyst [5]

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Just a couple of questions. Firstly, in relation to Homesafe on Slide 16, am I reading correctly that the $16.4 million -- negative $16.4 million revaluation is a net number reflecting your property revaluations and then also the change in the valuation methodology? If that's the case, are you able to give us a breakdown of the 2 impacts from that?

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [6]

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Yes, that's -- so thanks, Anthony. Yes, you're right. So Page 16 has that split there. The movement for the half of that $16.4 million includes the property revaluations during the half following the indices for Melbourne and Sydney. As I've called out there on that slide, there was a net reduction of $2 million associated with the change in the growth outlook and the discount rates and removing the overlay. So the $1.9 million loss is included in that $16.4 million.

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Anthony Hoo, Deutsche Bank AG, Research Division - Research Analyst [7]

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And your sort of overlay was $30-odd million, I think from memory, is that correct?

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

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Yes, that's correct, Anthony.

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Anthony Hoo, Deutsche Bank AG, Research Division - Research Analyst [9]

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Okay, so the sort of $30 million -- sort of $30-odd million is -- so we can refund this $30-odd million was the impact from your change in valuation methodology?

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

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We were already reflecting that lower valuation. So the net effect of removing the overlay is that additional $2 million. And as I said, it just -- it reflects the carrying value now more appropriately, based on those, the new growth outlook. So that's -- the $2 million really was that net impact of moving to those new valuation assumptions.

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Anthony Hoo, Deutsche Bank AG, Research Division - Research Analyst [11]

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Okay. And then a second question, if I could. Did I hear earlier, Travis, that you said on your bad and doubtful debt on Slide 18 that you said your -- through the cycle, your bad debt charge is 11 basis points. Is that correct?

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

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Yes, that's right, Anthony. That's how we think of that long-term average, 11 basis points.

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Anthony Hoo, Deutsche Bank AG, Research Division - Research Analyst [13]

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So that's sort of like a 10-year average or so rather than a through-the-cycle view. Is that right?

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

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It's probably both, Anthony.

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Anthony Hoo, Deutsche Bank AG, Research Division - Research Analyst [15]

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Probably both? But then, I mean, we haven't really seen a cycle over the past 10 years. So if you talk -- if you think about through the cycle, would you still think 11 basis points is the right level?

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

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Okay, that's pretty hard to call out at the moment, Anthony, but I think with the history and with our stress testing and what we look at, 11 points is how we think about it.

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Operator [17]

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(Operator Instructions) Your next question comes from Victor German from Macquarie Bank.

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Victor German, Macquarie Research - Analyst [18]

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Hoping to ask maybe 2 questions. The first one is on your volume growth trends, and I was interested to hear that your new number of customers has increased quite dramatically in January. I'd just be interested in your observation as to what you think that's going to lead from a growth perspective given that we haven't really seen much balance sheet growth. I mean, are you expecting over the course of next 6 months for these new customers to actually generate more volume growth and for you to get back to and perhaps go -- slightly grow ahead of system?

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Marnie A. Baker, Bendigo and Adelaide Bank Limited - MD & Director [19]

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Victor, I'll speak to that one. Yes, well, look, we've been really pleased with what we've seen around new customer growth, but not only new customer growth but net customer growth, too, so the loyalty from our existing customers as well. I think it's important to note that, as I said earlier, that in January especially, there's been a larger proportion of the net new customers coming from the digital banks, so from Up. The focus of Up is really focusing in on the younger demographic. We've been leveraging our relationships and partnerships that we have with universities and, in the first sense, with Deakin, and looking at the next generation of customers coming through. So the numbers are extremely pleasing. But it is worth putting in context that they are younger in a demographic sense to our existing customers and, as such, just starting on their journey to amass their financial wealth and to look at -- taking out products like credit products. So it is a longer-term strategy for us, setting us up for the longer term, so I would just caution of assuming that, that growth -- that immediate growth in customer numbers is going to have an immediate impact in the short term.

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Victor German, Macquarie Research - Analyst [20]

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That makes a lot of sense. And maybe just to follow up also on margin trends, and I think Travis sort of made a comment around deposit performance. In the past, we've seen you do very well in terms of managing your margins from a deposit perspective. This half, it's been a little bit of a drag. I'm mindful of the fact that you're growing your deposits, yet your balance sheet trends are fairly subdued. Can you maybe just give us sort of a trade-up between sort of managing margins and deposit side? And I mean, what position would you be comfortable with from a deposit perspective to actually see some of those more expensive deposits then impacting your margins, perhaps go and see a bit of a benefit from deposits performance in the next half or 2?

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

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Thanks, Victor. Look, I think that the outcome from last half really reflected the industry, with those higher wholesale funding costs it did impact what competitors were offering for our -- for retail rates. And look, even some of our retail base rates through our financial markets and wealth areas do reference BBSW rates, so some of those rates were impacted because of higher BBSW rates, too. But also from a competition point of view, for us to be in the market there, we did have to increase those rates, as we said right back at the start. To your first part of your question though, look, I think we're always very comfortable. If it's purely a rate play, we will look to manage that as best we can. So if we were to lose some deposits that were with us purely for rate, then we would obviously get a benefit from margin. But that wouldn't be an issue in the way we manage the deposit base there.

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Operator [22]

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

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Edmund Anthony Biddulph Henning, CLSA Limited, Research Division - Research Analyst [23]

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A couple of questions from me. Firstly, on the business lending side, you've talked about the rebalancing of the commercial property book. Has that now finalized or is there still some headwinds to go on that one?

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [24]

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Ed, thank you for the question. Look, we believe it's pretty well finalized. We are at the position we need to be. I think the outcome of that business lending growth also reflects probably that focus on the structure change and the work we've put into that. But if I think about that commercial real estate exposure, we're pretty comfortable we're there.

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Edmund Anthony Biddulph Henning, CLSA Limited, Research Division - Research Analyst [25]

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Okay. So there are no more headwinds other than the agri stuff that comes on and off and which is a bit more seasonal in your business lending book?

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

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Yes, not that are planned, Ed.

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Edmund Anthony Biddulph Henning, CLSA Limited, Research Division - Research Analyst [27]

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Okay, great. Next one, agriculture. Maybe, Marnie, can you touch on the proposed changes from the Royal Commission around the distressed agricultural loans and the potential impact in your book and how you guys -- if something does go into trouble, how it's going to impact you going forward?

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Marnie A. Baker, Bendigo and Adelaide Bank Limited - MD & Director [28]

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Yes, sure, Ed. There was a number of recommendations that came out from the Royal Commission in relation to agri and the agricultural businesses. The first one I'll probably touch on, Ed, was in relation to the Farm Debt Mediation scheme, something that we've been an advocate for, for some time, so we're really pleased to see that sort of come to fruition. In relation to the -- respect in relation to the drought support programs, we've rolled out a drought support program. We've -- and just in these more recent times, you've seen that in action in relation to how we're contacting our customers and working with our customers through that period of time to ensure that they are not even more adversely impacted by the conditions that they found themselves in. So I think in summary, we're very pleased I think with the recommendations to come out of the Royal Commission in relation to farming, and I think they'll put a solid base to ensure that through all economic conditions that our farming communities support it.

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Edmund Anthony Biddulph Henning, CLSA Limited, Research Division - Research Analyst [29]

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Okay. So from the changes, you obviously have pushed for a number of them, but you don't see it as a hindrance to your businesses, and the cost going up of trying to push if something does go awry, for some of these farmers, it doesn't become a more of a hindrance for you?

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Marnie A. Baker, Bendigo and Adelaide Bank Limited - MD & Director [30]

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No, no, absolutely not because these are -- we have made changes over a number of years now, and so these are things that they're talking about in the Royal Commission the things that we already have in place.

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Edmund Anthony Biddulph Henning, CLSA Limited, Research Division - Research Analyst [31]

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Okay, great. And the second one, do you have any overlays in agriculture at the moment, as in a collective provision? I know you ran down some of your provisions in agriculture during the period.

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

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Ed, there -- I don't have the details at hand, but there are definitely in the collective provision modeling, the way we do it, there are some overlays around ag as there are for a number of industries. I don't have the details, but yes, there are.

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Operator [33]

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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 [34]

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Can I ask my first question just around costs? So you've emphasized the uneven playing field versus the majors, but isn't the real issue that your cost-to-income ratio, at 57%, 58%, is a real impediment to compete with the majors properly on price and service? So to kind of address this, are you now targeting a lower absolute level of costs? And do you think that's achievable?

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

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Andrei, thanks for the question. Look, I think we've had a long-term target for our cost-to-income ratio of that 56%, 55%. We are still working towards that. We are still maintaining that is where we need to get to. As I spoke about before, the outcome was just as much around the softer revenue as it was at costs. And look, that's why I think both Marnie and I have spoken about, we're continuing to look at ways that we -- our business processes and systems, our brands and how the business operates because we need -- we continue -- we need to do more with the costs. And we will continue to look at each of those processes and business models to make sure we can actually -- that we can compete. But it is something we've -- there's a lot of attention on.

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

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Yes, and I'll just add to that, too, Andrei, in relation to -- we are absolutely and do need to focus on our costs and getting those to an appropriate level that we believe is appropriate for our business. But some of these things around the uneven playing field actually do go directly to costs. And funding costs is a really good example of that in a too big to fail and the 3 notch up with credit ratings that majors have to those that are to nonmajors. So that has a direct impact on the cost of our funding. So there is some direct costs there from the uneven playing field as well.

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Andrei Stadnik, Morgan Stanley, Research Division - VP [37]

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And my second question, I just wanted to ask around what kind of housing price declines from here would actually see Homesafe being a revenue bottom line at risk? And particularly, you mentioned that the recent contract sales are completing 7% over carrying value. So does this mean that if house prices fall another 7% from December levels, that contracts will be completing below carrying value?

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [38]

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Andrei, I think that, yes, so you're right, 7% was the -- for the last half, the value that the sales exceeded the carrying value. I think that the heartbeat around that situation is, well, there's obviously a range of contracts that could complete, and there's obviously different ages with those ones. The work -- the modeling that we've done, if I think about the cash earnings contribution, we would need to see property prices fall by more than 30% for that, I think, $7 million cash earnings contribution to actually come back to 0, so in the order of 30% to actually remove that cash earnings gain -- net gain that we're actually showing at the moment. So I think that probably provides some context. And if I think about the unrealized gains that we're holding there, they're not part of our retained earnings for capital purposes, so we're actually not getting a benefit there, for property prices would have to fall by nearly 50% to actually see that unrealized gain come back and start to impact capital. So I think that probably shows the significance of the position that we're in there, either 30% from that cash earnings or over 50% for those unrealized gains.

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Operator [39]

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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 [40]

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Just had a follow-up question. Just looking at the business bank and the restructuring, you did mention the reduced size of the commercial real estate. But it's quite a material runoff. If you're looking at the lending book, construction down 18% and the real estate services down 11% just over the last 12 months, and these are the biggest portfolios that you've got outside residential mortgages and agri. So what are you seeing, firstly, that made you change your strategy? Have you got any residual concerns there? And secondly, how have you done it? Have you actually gone to customers and said it's probably wise that you move elsewhere, or you're actually waiting for these positions to mature and just not renewing them?

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

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Yes. So Jon, it is a material decrease in our portfolios, and we've -- that's how we've actually been -- we have been actively managing it. I think over history, we've built up a strong portfolio there, but we were overweight. So we've actually probably done a combination of either waiting for when those facilities are up for renewal but also actively talking to our customers ahead of time to explain where we need to -- what will happen upon repricing. So I think we've actually managed that as best we can over that time. To the question before, I think we are at that level where we're comfortable with the exposure -- with the level of exposure, but it has been a piece of work over the last 12 to 18 months.

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Jonathan Mott, UBS Investment Bank, Research Division - MD and Banking Analyst [42]

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And what average size is the size of this exposure, is there an awful lot of small $1 million, $2 million developments? Or is there a handful of large exposures you're exiting?

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [43]

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Look, Jon, I think from memory, it's probably more the $2 million to $3 million-type facilities amount.

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Jonathan Mott, UBS Investment Bank, Research Division - MD and Banking Analyst [44]

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Okay. And so why stop now? Is it the high-risk exposures? How did you decide that?

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [45]

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No, we -- well, I think we felt we're overweight with where we were. We're very comfortable with where we are now at the level we're at.

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Operator [46]

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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 [47]

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Just sort of following on from Jon's question around the business lending growth, can you give us an indication on the impact that the loss of these facilities will have on the net interest margin over -- for the group over the next 12 months? And also, within this division, obviously, it's quite a shrinkage of the amount of loans outstanding. Is there going to be some action around the growth in the operating expenses to -- given that this division will be a lot smaller going forward?

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

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Yes, thanks, Brendan. Around the impact on margin, I think we're probably already all starting to see that come through. I haven't got the details on the outlook of what that might do. But the other balance with the commercial portfolio was, obviously, that is priced off the BBSW rate, so that's obviously -- has increased over the last 6 to 8 months. But I think a lot of that impact on margin we're already seeing in the half there. And sorry, I've forgotten your second question.

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Brendan Sproules, Citigroup Inc, Research Division - VP [49]

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The second question just relates to the size of the operating expenses in that division given that division's obviously a lot smaller now going forward.

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [50]

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Yes, look, the asset portfolio is smaller. I think the work that Bruce and the team are doing is around rightsizing and getting the right business banking staff there to actually service those target markets that we're looking for. So that underlying cost base, yes, will continue to be a focus. But I think it's actually been more around getting the business bankers in place and that structure behind around the back-office risk and operational processes to make sure they're well supported. But that cost base, like for all the divisions, will be something that we'll look at -- continue to look at.

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Operator [51]

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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 [52]

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I just had a couple of questions on noninterest income. Just firstly, on trading income, in the past, you've suggested that you're positioned within that book to benefit from a downward revision in market estimates for the direction of the cash rate, which I suppose is sort of seen this calendar year. Should we still be expecting that you will benefit in that sort of environment? And then secondly, how should we be thinking about the launch of this new NDIS Bcause business? And is that likely to add any meaningful contribution to the noninterest income line on a 12-month outlook?

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [53]

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Thanks, Ashley. So firstly, on the trading book, look, I think the contribution we saw this half was -- that was $1.5 million. I think I spoke 6 months ago that I would expect somewhere around that $1.5 million to $2.5 million is that normal contribution in the environment we're in at the moment. So I don't see that outlook changing. I still see a contribution of that size being appropriate given the positioning and the view on rates. And then I think it's from the Bcause initiative, I don't expect any material impact in the next 12 months in the sense of other revenue. I think it is in that early pilot stages, and we'll -- happy to give some update in 6 months' time with what we're seeing there. But I'm not expecting any material change on other income because of Bcause for the next 6 or 12 months.

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Ashley Dalziell, Goldman Sachs Group Inc., Research Division - Equity Analyst [54]

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Okay. Maybe just to round it out, I mean, on the discussion around the roll-off of the [CRA] balances, if you think that, that's mostly within the NIM in the half, to the same end have we seen the impact roll through the noninterest income line? Or is this a more, I suppose, headwind on that front into the second half?

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

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I would've thought we've eventually seen most of that come through the non-GAAP or the fee income based on those facilities already. I think the big part around the non-GAAP or the fee income is competition, and that continues to be a space that's pretty heavily used as a customer acquisition tool, particularly to that commercial and business portfolio.

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Operator [56]

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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 [57]

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You've commented that your front to back book margin compression is 6 basis points in the first half; likely to be that in the second half. You might have a few beneficial impacts from deposits. But from what you're saying, it's likely that the margin will be down. You've got hardly any loan growth. So it looks like your net interest income is going to be -- it's going to be difficult to have that increasing from the first half to the second half. Also, your noninterest income looks like it's struggling to grow as well, so doesn't that imply that you're going to be doing very well if you get any income growth from the first half to the second half?

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [58]

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Our nonincome lines, Brett, actually performed really strongly. I think that as I said, there was an underlying level of activity through our FX and commission income. That fee income held up okay. So obviously, subject to competition and what else happens there, I think that other income was actually a pretty good result. There were some seasonal factors in this half, but underlying activity was still strong. Your comments around NIM, I spoke about the drivers that we can control. We'll certainly be doing everything we can around managing our funding costs and continuing to manage that asset pricing and that mix there. But I guess that funding cost side is the big swing factor particularly around that wholesale. But as I said, we've already started to do some work on our retail funding. We're able to do some repricing in January. So we're certainly doing everything we can there. And then activity through lending, we have seen that pickup in -- as I said, through the -- our third-party channels. More customers are choosing to use that channel, and we're returning to the more natural level of flows that we should be at. And we're doing a lot of work around some of that retail lending experience, too. So we're doing everything we can there to improve that activity. And obviously, that takes time to come through, but we're certainly -- it's certainly a focus.

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

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And your expense growth is running at the rate of 2% every half, so I gather you're a bit more upbeat on your income growth than I am. So are you suggesting that you will be able to get income growth as high as your expense growth in the second half?

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Travis Crouch, Bendigo and Adelaide Bank Limited - CFO [60]

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No, I said that revenue growth is challenging, but the cost outlook is something we need to work through and keep managing. We did have that 2% growth for the half, and it's an absolute focus for our revenue growth is challenging. So as Marnie said as well, it's something we're working through pretty hard around that business processes and systems and making sure we're operating it as efficiently as we can be.

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Operator [61]

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There are no further questions. I will now hand back to the speakers for any closing remarks.

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Marnie A. Baker, Bendigo and Adelaide Bank Limited - MD & Director [62]

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So thank you, everyone, for joining us here today, and thank you again for your interest in our organization and ongoing support.