U.S. Markets closed

Edited Transcript of CBA.AX earnings conference call or presentation 7-Aug-19 1:00am GMT

Full Year 2019 Commonwealth Bank of Australia Earnings Call

Sydney Aug 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Commonwealth Bank of Australia earnings conference call or presentation Wednesday, August 7, 2019 at 1:00:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Alan Docherty

Commonwealth Bank of Australia - Group Executive & CFO

* Matthew Comyn

Commonwealth Bank of Australia - CEO, MD & Executive Director

* Melanie Kirk

Commonwealth Bank of Australia - Head of IR

================================================================================

Conference Call Participants

================================================================================

* Andrew Lyons

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Andrew Triggs

JP Morgan Chase & Co, Research Division - Research Analyst

* Azib Khan

Morgans Financial Limited, Research Division - Senior Banks Analyst

* Brendan Sproules

Citigroup Inc, Research Division - VP

* Brett Le Mesurier

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

* James Ellis

BofA Merrill Lynch, Research Division - Director

* Jarrod Martin

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

* Jonathan Mott

UBS Investment Bank, Research Division - MD and Banking Analyst

* Richard E. Wiles

Morgan Stanley, Research Division - MD

* Victor German

Macquarie Research - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Melanie Kirk, Commonwealth Bank of Australia - Head of IR [1]

--------------------------------------------------------------------------------

Hello, and welcome to the Commonwealth Bank of Australia's results briefing for the full year-ended 30 June 2019. I'm Melanie Kirk, and I'm Head of Investor Relations. Thank you for joining us for this briefing. We will be having presentations from our CEO, Matt Comyn, giving a business update. Our CFO, Alan Docherty, will provide details on the financial results. And Matt will provide an outlook and summary. This will be followed by the opportunity for a questions-and-answer session.

I'll now hand over to Matt. Thank you, Matt.

--------------------------------------------------------------------------------

Matthew Comyn, Commonwealth Bank of Australia - CEO, MD & Executive Director [2]

--------------------------------------------------------------------------------

Thank you very much, Mel. Good morning all.

This year, we've been focused on the disciplined execution of our strategy. I feel like we've made very good progress on simplifying both our operating model and our portfolio, and we've been very focused on making sure that we're making the necessary changes to both our culture, fixing and addressing issues from the past as well as improving better customer outcomes. We've also strengthened our overall digital leadership position, and we have a strong pipeline of new innovations coming to market. We have a very high-quality franchise, but it is also one that requires investment given issues and legacy of the past as well as increasing competitive intensity and increasing regulation. We will continue to do whatever is necessary to invest in our business, strengthen our long-term health and franchise, and make sure that we earn the trust of both our customers, businesses and the country.

Against a subdued operating environment and with increased provisions as well as operating expenses, our result in our cash profit is down 4.7% for the period. Overall, our core franchise has continued to perform extremely well, our transaction account and home lending performance 2 particular highlights. And overall, the final year result and our overall balance sheet strength with a Common Equity Tier 1 of 10.7% has enabled us to pay a $4.31 final year dividend. We also announced that we'll be neutralizing the dividend reinvestment plan.

Before I return back to the result, I do want to spend a little bit of time talking about some of the ways that we've been strengthening our business. As I said, we're making good progress on simplifying our portfolio. We -- earlier this year, we completed the sale of both our sovereign life insurance business as well as our South African business, Tyme. In June, we announced the sale of Count to CountPlus, which will now complete in October. This morning, we also announced the assisted closure of Financial Wisdom. Last Friday, we settled the sale of our divestment of our Global Asset Management business, which was at 19.4x earnings, which increased in a 68 basis point increase in our Common Equity Tier 1.

In our ASX release, we also provided an update on our sale of CMLA, our CommInsure Life insurance business. As I've said previously, the sale of our stake in BoCommLife is the final outstanding condition precedent to enable that sale. Both CBA and AIA are fully committed to making sure that the transaction completes. We are well progressed in alternative transaction arrangements should the transfer of that BoCommLife stake take longer, and we believe we'll be in a very strong position to be able to update the market before the end of our first quarter.

We also remain committed to exiting, as we've previously announced, our CFS business as well as mortgage broking over time. Overall, as I said, our Common Equity Tier 1 finished at 10.7% and unquestionably strong. We have a very strong pipeline of capital coming through from those divestments. Our cost-to-income ratio at 46.2%, clearly disappointing in the context of a subdued operating income environment. We believe we've made the necessary choices and investments and focus during the given period, but we also recognize going forward that we absolutely need to be able to reduce our structural cost base over the medium term to ensure that we get to a sub-40% cost-to-income ratio, which we believe will be important to ensure that we remain competitive over the long term.

As part of those investments, we've seen our overall investment spend tick up to $1.4 billion. 64% of that is in risk and compliance projects such as Comprehensive Credit Reporting, Open Banking, Code of Banking Practice (sic) [Banking Code of Practice], but again we've been prepared to continue to invest in our overall business.

We're also making very good progress on becoming a better bank. Over the course of the year, predominantly in our Q3 result, we've raised $996 million of customer remediation provisions. We have more than 400 people working full-time on refunding our customers as quickly as possible. We've refunded $166 million during the course of the financial year, and we want to complete at least another $100 million back to our customers before the end of the calendar year.

We also talked in our Q3 result about the proactive steps that we've been taking to ensure that we're delivering improved outcomes for our customers. This is a range of other changes to fees, investments in making sure that we're alerting our customers, being very transparent and also removing some of the products that we've previously provided. That's resulted in a $275 million reduction in our income in FY '19, and consistent with that guidance that we provided in the Q3 result that will grow to $415 million in FY '20.

We're also making very good progress on the Remedial Action Plan, which is our response to the Prudential Inquiry from May last year. Against those recommendations, there's approximately 156 milestones. We've now completed 75 of those. So broadly, we're on track, and we remain very focused on making sure that we complete that program as quickly as possible. We've also got work underway to ensure that we're implementing the recommendations from the Royal Commission as swiftly as possible. We've already completed 6 of those recommendations. We will have completed another 8 by the end of December, and we believe we'll be able to close out all 23 of those Royal Commission recommendations by 30 June this year.

Last year in September, I wrote out to 14 million of our customers and received more than 14,000 responses about suggestions and feedback, about some of the things that we could be doing differently and better to serve our customers. Since January this year, we committed to making sure that we delivered at least one customer benefit every year as part of our overall better-for-you program.

Some of those are more significant in the context of bringing Apple Pay to market, which was the most frequently requested item. A number of the others have actually been incrementally small, but we hope have a cumulatively large effect for our customers. A couple of brief examples, one would be the ability for our customers to be able to book a home loan appointment online. It's very small but also important for our customers as well as enabling us to deliver our -- run our business more efficiently. And secondly, as part of our purpose of improving financial well-being, we've brought a number of innovations to market, including our emergency savings tool.

We've also, in recent weeks, brought more innovation, particularly to our digital application, our CommBank app, to market. We now have more than 5.6 million customers using our mobile app.

2 weeks ago, we launched the CommSec Pocket app, which enables simple and affordable investing. We have investments from as little as $50, brokerage from as little as $2 for investment up to $1,000, and we saw more than $1 million flowing in terms of investments over a very short period of time.

We also rolled out a small feature to notify our customers when their tax refund was received into their account and also some simple steps that they can be taking in terms of how they'd like to use that tax refund.

In the coming weeks, we'll roll out our CommBank rewards program, which will enable our customers to receive cashback offers from participating merchants inside our mobile app.

This morning, we also announced that we'd entered into an exclusive partnership with Klarna, a globally leading payments provider, and we're excited about some of the innovation that we'll be able to bring to market. We'll be able to provide a more fulsome update about that later in the year.

Our investment in our digital mobile app is really starting to deliver very strong benefits both in terms of satisfaction as well as just engagement with our mobile app. More than 5.6 million logins per day. We've recently rolled out a new look and feel to the overall mobile app, but really what's sitting underneath that is a much more relevant and personalized experience for all of our customers. We've enabled and seen some of the most positive features in particular by us being able to link benefits and entitlements as an example that customers didn't know that they are able to receive. We found about 270 different initiatives, where we believe we can deliver $150 million of benefits to our customers each and every year going forward. What of course makes that possible is the investments that we've been making for some time now in our customer engagement engine.

Our customer engagement engine effectively in realtime analyzes more than 150 billion data points. We're using more than 200 machine learning models, and we analyzed 600 million customer interactions during the course of the year to, in financial year '19, deliver 3.6 billion personalized interactions, a lot of those within the app. We're going to continue to make those investments to make a more relevant and smarter experience for all of our customers as well as of course continuing to make sure that our customers' data and their overall security is at the forefront of our minds. So by making our banking simpler, smarter and more secure, we're able to extend that leadership position. And what I believe now is really unrivaled in the context of the domestic market, we have more than 7 million active digital customers, about 7.5 million daily logons between our mobile app and particularly our NetBank platform. We now have 63% of our total transactions going through our digital channels. And in addition to a very strong Net Promoter Score, which has been in place now for many years, we've recently been recognized as the #1 mobile banking app in both Australia, the Asia Pacific and #3 app globally.

Turning now to the result. As I cited earlier, the cash net profit after tax of $8.5 billion is down 4.7% on the full year period. Our return on equity is 12.5%. We have a full year Common Equity Tier 1 of 10.7%, up 60 basis points. But as I said, that excludes the 68 basis points of Common Equity Tier 1 from the sale of our Global Asset Management business and our full year dividend of $4.31. And again, we'll be neutralizing the dividend reinvestment plan.

Overall, our operating income, down 2%, impacted by a number of factors including a 5 basis point reduction in our net interest margin over the course of the year. Although our net interest margin was flat sequentially, there's also $117 million of weather events included within that, and the fee changes that we call out here are referring specifically to what I discussed earlier around the better customer outcomes.

In the context of our overall expenses including both remediation, increased investment in operational risk and compliance, our overall operating expenses are 2.5% up on prior year. Our loan impairment expense at 16 basis points remains very low. Pleasingly, we've seen an improvement in our 90-day home loan arrears, down 2 basis points. Our credit card 90-day arrears, down 1 basis point. On the other side, we've seen our personal loan arrears rate still remain high. We've seen an uptick in our corporate troublesome and impaired assets, but our loan impairment expense in the institutional bank is extremely low, overall, again, delivering that cash net profit after tax.

Lending volumes, up 2% to $760 billion. Our group deposits, similarly up 2% to $635 billion. I guess the 2 highlights for some time, first of all, our transaction account balances. Another very strong year of 9% increase in those transaction balances, now enabling our funding to be 69% funded by our customer deposits and, as I said earlier, a real highlight given our above-system lending growth in home lending.

Turning now to each of the business units. The Retail Bank has been particularly impacted by a compression on its net interest margin, down 17 basis points for the full year. A big proportion of that, about 14 basis point impact on that increase in the bills cash spread, which is we refer to as basis risk premium given the big net exposure to basis risk in the Retail Bank. As I said, I think the operational execution has been very strong in the Retail Bank, another very good year of transaction accounts up 9%. They've got market-leading turnaround time, and speed to decision has enabled us to grow above system during the period.

Our business bank, much better commercial lending momentum, I called that out the first half. We've seen a better performance with the second half, up 5% in terms of spot balance growth. And our institutional bank, we've continued to focus on disciplined execution on -- focus on risk-adjusted returns. We've generated $2 billion of organic capital generation from our institutional bank, a very strong transaction account performance and, as I said, a very low loan impairment expense as well.

In New Zealand, another very strong year, 5% volume growth, enabling a 5% growth in their profits.

Again, we're in a very strong capital position as we stand here today with a pipeline of divestments, which gives us a pro forma capital of 11.8%, and that $4.31 full year dividend is 88% above our payout ratio. But if you exclude the notables, it brings it back down to 80%.

And on that point, I'm going to hand over to Alan, who's going to walk through the result in more detail.

--------------------------------------------------------------------------------

Alan Docherty, Commonwealth Bank of Australia - Group Executive & CFO [3]

--------------------------------------------------------------------------------

Thank you, Matt, and good morning. I will walk through and unpack the financial results for the year in some more detail. But in summary, we are continuing to focus on staying disciplined in the execution of our strategy in order to respond to our current context and keep on delivering strong and sustainable outcomes for our shareholders. Our continued focus on strategic discipline is evident in our focus on continued better customer outcomes, careful calibration of our risk appetite and continued discipline in our approach to balance sheet settings and risk-adjusted returns.

Our current context present some challenges, and we are running the business in a thoughtful and responsive way to meet those challenges including working as quickly as we can through customer remediation, adapting to the lower interest rate environment, and a start made on simplifying our business in order to reduce operational risks, reduce costs and create additional investment capacity. And our continued focus on delivering strong outcomes across core businesses over the long term means that despite near-term earnings headwinds, we continue to see excellent operational performance within the retail franchise, strong transaction deposit growth across all banking businesses, a very strong surplus capital position and a stable dividend.

But let me start off as usual with the reconciliation of statutory profits to cash profits from continuing operations. Statutory profits for the year are $8.6 billion. From that, we take off the cash profits from discontinued operations of $214 million, which are down on the prior financial year due to lower earnings in both CommInsure Life and the Global Asset Management business as well as the divestment of our New Zealand life insurance business, Sovereign, in early July 2018. We then deduct the usual noncash items relating to our business divestments and hedging volatility and arrive at our cash profit from continuing operations of $8.5 billion for the year. And as Matt has described, that cash profit is 5% lower with operating income down 2%, expenses up 2.5% and loan impairments up 11%.

Drilling into that operating income decline, you can see that revenue was impacted by margin headwinds, our continued discipline around risk appetite and risk-adjusted return, and our focus on better customer outcomes. Within net interest income, home loan volumes outpaced system growth. Transaction deposit growth continued to reflect the strength of our franchise and the quality of our digital platforms. Business lending across Australia and New Zealand grew 4%, and we continue to adopt a disciplined approach to portfolio risk and return trade-offs across both business and institutional banking, and you can see that reflected in the continued reduction in institutional lending exposures.

Net interest margins reduced 5 basis points over the year. They were flat in the past 6 months, and it was that margin decline which drove the 1.2% reduction in net interest income.

Other banking income fell 3.9% due largely to customer fee removals and the reclassification of institutional lending fees from other banking income to net interest income under AASB 15.

And funds and insurance income was lower with the impact of severe weather events across New South Wales, Victoria and Queensland and lower financial advice fees.

Unpacking that stable margin performance over the past 6 months, you can see there were a number of offsetting movements. Firstly, asset margins improved 1 basis point with home loan margins stable and improved lending mix due to reduced lower-margin institutional lending and strong home loan growth. Term deposit margins were impacted by lower swap rates driving that 1 basis point decline in deposit margins. Portfolio mix improved by 1 basis point as we were able to fund more of our asset growth through customer deposits and retire some wholesale funding. And the impact of the lower interest rate environment pushed earnings on free equity down by 1 basis point.

Looking ahead, there are 2 specific headwinds on net interest margin to be mindful of. Firstly, under the new leasing standard, AASB 16, we must recognize a new interest expense from 1 July 2019, costing 1 basis point. Secondly, the impact of the 2 recent cash rate cuts are forecast to impact on net interest margin in FY '20 by approximately 4 basis points, and that's net of the replicating portfolio and equity hedging benefits and the recent home loan repricing.

Operating expenses increased 2.5% over the year on a headline basis. You can see in the first 2 bars the impact of notable items including penalties and customer remediation costs were roughly the same this year and last. Excluding those items, costs were up 2.4% in the year. We were disappointed with that outcome in the context of a declining revenue environment, and it was a function of the good work that we've begun on business simplification being more than offset by costly but necessary enhancements to our risk capabilities and higher staff and IT costs.

We now have approximately 2,800 permanent risk and compliance staff embedded across all line 1 and line 2 teams across the group. That's an increase of approximately 600 on last year and excludes those working on major compliance remediation programs.

On business simplification, we've realized $190 million of cost savings in the year, and that's a combination of in-year savings from the rationalization of businesses within the International Financial Services division, reduced physical distribution footprints across both Bankwest and CBA brands, and the simplification of operating models and better cost disciplines across the group. As we look forward, our strategic focus on medium to long-term cost reduction as we make the bank simpler remains a key priority for us, and we'll continue to hold ourselves and the team accountable for delivering against that priority.

Turning to our balance sheet settings. We continue to adopt conservative settings across the range of balance sheet risk types in order to be prepared for a range of possible macroeconomic outcomes. On credit risk, we remain disciplined and selective in our risk appetite and have retained peer-leading provision coverage.

On the liability side of the balance sheet, we continue to widen the gap to peers on household deposit balances, and we've maintained our net stable funding ratio at 112%.

On liquidity, we've held our coverage ratio well above regulatory minimums at 132% for the past quarter. And on capital, we've remained above the unquestionably strong capital benchmark, absorbing the neutralization of the interim dividend reinvestment plan and higher remediation costs.

Looking firstly at credit risk. Our loan impairment expense remained at very low levels as a proportion of lending exposures, with both consumer and corporate loan loss rates at the low end of historical ranges supported by low interest rates and continued low levels of unemployment. Our loan loss rates at business unit level continued to reflect very similar themes to those we disclosed at the half year result with retail banking loan losses relatively stable, business banking loan losses increasing to 21 basis points due to a small number of single name impairments, and institutional banking loan loss is extremely low due to a combination of portfolio optimization and the absence of any large single name losses this year.

Troublesome corporate assets increased from $3.1 billion at the half to $4.2 billion at 30 June. Of that increase, around 60% related to downgrades of single name exposures with the remaining 40% a function of emerging signs of weakness within corporate sectors exposed to discretionary consumer spending, drought-affected agriculture and the construction sector.

Looking more closely at consumer credit quality, we've seen the expected seasonal increase in both unsecured personal loan and credit card arrears rates. Although pleasingly, credit card arrears were slightly lower now than they were this time last year.

Our home loan arrears performance was also pleasing, declining 2 basis points to 68 points in the year. We are still seeing signs of -- pockets of consumer stress due to limited wage growth and rising essential costs. However, that was offset in the period by improved arrears performance across Western Australia and Queensland. While we are pleased with consumer credit quality, we remain cautious given the softer economic outlook and have continued to increase our collective provision coverage, now 105 basis points of credit risk-weighted assets.

On wholesale funding, we continue to calibrate the tenor of our new long-term debt issuance in order to maintain the weighted average maturity of our portfolio above 5 years.

If you look at the chart on the right-hand side, you can see that funding spreads have fallen significantly over the past 6 months but reflects what was seen globally with historically low interest rate expectations, historically low corporate and government bond yields, and tighter bank funding spreads.

On capital, we've absorbed approximately $1 billion of new customer remediation and other notable items and the neutralization of the interim DRP, and maintained our CET1 above the unquestionably strong capital benchmarks, spotting at 10.7% at the end of June.

Organic capital generation excluding the DRP was above historical averages despite those additional customer remediation costs, reflecting continued strong capital disciplines across the group.

And as we look forward, a number of areas of regulatory capital uncertainty have been clarified recently. And as we look ahead to the completion of our announced divestments, we can expect to achieve a significant capital surplus during the next financial year. As such, we were pleased to be able to maintain the full year dividend at $4.31 per share and neutralize the final dividend DRP.

The strong capital position creates flexibility for the Board in its ongoing consideration of capital management initiatives and the delivery of strong and sustainable dividends into the future.

With that, I'll hand back to Matt for the outlook and our closing summary. Thank you.

--------------------------------------------------------------------------------

Matthew Comyn, Commonwealth Bank of Australia - CEO, MD & Executive Director [4]

--------------------------------------------------------------------------------

Thanks very much, Alan.

Just a couple of thoughts on the economic outlook going forward. I mean clearly we've seen some softening conditions. We've still got a 2.5% GDP growth number into next year. The recent escalation of the trade wars have clear downside risks to global growth. But perhaps countering that, slightly more positive side domestically, we are starting to see the housing market stabilize and improve. We've seen through a variety of different sources, including our housing intention surveys and work that we do, combining our payments data with Google searches, and we can see that the interest level has picked up over the last couple of months. We've seen increased turnover of stock, improved auction clearance rates. We've also just seen a stabilization in terms of credit. In June and July, in both Sydney and Melbourne, we've had now 2 back-to-back increases. In each of those months, we've had a slight increase in house prices. It's the first time, I think, since July 2017 we've seen that. There was a slight improvement in house prices in Brisbane. So in the overall context, we see, for us, sort of credit growth of 3.7% versus 3.5%. As we look forward, we'll be expecting in that range of 3.5% to 4.5%. We do have another rate cut in -- forecast from our economics team in November. If we were to see credit growth get beyond that range, that would concern us. We do believe that unemployment at 5.2%, already low, but a lot of focus on making sure the unemployment remains low is overall a real positive. We get to see the full effects of the stimulus that have come through from the recent tax cuts, of course, the 2 cash rate reductions, and a lot of focus on the structural underpinnings from investments in infrastructure. An ongoing long-term trend of good population growth, which has clearly benefited Australia for many years. And yesterday, we saw the impact of high commodity prices, particularly iron ore, very strong LNG export volumes, very strong trade surplus resulting from that, which is further strengthening the overall fiscal position. But as we look forward, consistent with many commentators, we are really looking at overall consumer and business sentiment and seeing how that might start to translate into household income growth which has, of course, been very modest in recent times.

So briefly in summary before we turn over to questions, we believe our core franchise is continuing to operate and perform extremely well albeit in a more challenging environment. Really from our perspective, that's based around some very strong foundations in our structurally advantaged customer franchise, our digital leadership, further strengthening now of our balance sheet. We remain very focused on ensuring that we're building trusted and deep relationships with all of our customers, making sure that we're earning the trust of both our customers and the community more broadly as demonstrated through our own actions. We also recognize that we need to do more on costs in recognition of a lower-income environment, but we believe we've made the right choices to make sure that we're focused in the right areas and further strengthening our business. The $190 million that Alan talked about in terms of real cost-out, that compares very favorably with prior year performance. But the reality is in a softer-income environment, we have to do more work, and we will, on cost in future periods.

And overall, we intend to continue to invest in -- for the long term into the areas which bring real advantage and continue to strengthen the overall health. Thanks very much. I look forward to your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Melanie Kirk, Commonwealth Bank of Australia - Head of IR [1]

--------------------------------------------------------------------------------

Great. Thank you, Matt. For this briefing, we'll be taking questions from analysts and investors. We'll be starting in the room and moving to the phones. To ensure everyone can hear you, please wait for the microphone, state your name and the organization you represent. And to allow everyone the opportunity to ask questions, please limit them to 2 questions. We'll now start with Jon Mott.

--------------------------------------------------------------------------------

Jonathan Mott, UBS Investment Bank, Research Division - MD and Banking Analyst [2]

--------------------------------------------------------------------------------

Just 2 quick questions if I could. The first one, you called out a lot of the headwinds for NIM, but you didn't call out a tailwind, which is kind of unusual. The BBSW is coming very sharply. I think it averaged 41 basis points through the last calendar year, and I think today, it's around 11. Previously, you called out that every 5 basis points of that move is 1 bp to NIM. So give or take, it's 5 to 6 bp tailwind that you should be seeing if this rate stayed at its current level. So I just wanted to double check, is that included in the comments that you've made?

And I'll -- kind of keep for my second question, if you look at the strong growth in the broker -- sorry, strong growth in mortgages, it's really been driven by broker. You're up to 48% of flow in this half going through the broker channel. And if you look at the numbers, it means that of the new sales, the proprietary sales in this half were down by 18%, but your broker sales were up by 15%. I just wanted to get a feel given the comments that you've made very publicly in the Royal Commission that -- about the broker channel. What's happened to turn the broker flow around so quickly and so substantially? And are you comfortable with almost half of your loans now being written via the broker channel given your comments at the Royal Commission?

--------------------------------------------------------------------------------

Matthew Comyn, Commonwealth Bank of Australia - CEO, MD & Executive Director [3]

--------------------------------------------------------------------------------

Yes. Thanks very much, Jon. Let me deal with the first part. So I mean your math is broadly right. In FY '18, basis risk premium is 28 basis points. In FY '19, it was 48. So there's a 20 basis point headwind that we saw. You can see the same spread that we can on bills cash. So I mean we run a rolling 3-month average, which is why you have basically very little benefit at the back end of '19, but that's a tailwind, as you said, going into '20.

Okay. In the context of the broker market, I guess a couple of things. Clearly, if we can serve our customers directly, we would like to. The broker channel remains an important one. It's fair to say that my comments at the Royal Commission perhaps weren't positively received by everyone in the mortgage broking industry, but I think actually to their -- the industry's credit, what's actually enabled our growth in the broker channel in subsequent periods has been because we've had very consistent speed to decision and turnaround time. So we've been able to get back to customers same day within 2 days. We've seen examples in the industry of buying out sort of 20 days. And in the broker channel, they will preference service and reliability, which has enabled us to grow. So I mean in the context of the numbers you're using there including Bankwest, I think for the full year, we called out in our ASX release 41% versus system of 59%. So I mean the broker channel continues to grow. It's clearly a channel that many customers preference. We would love to be able to provide obviously a very compelling direct proposition, but we recognize that the broker channel is a really important one, has been for many years and will continue to be.

--------------------------------------------------------------------------------

Melanie Kirk, Commonwealth Bank of Australia - Head of IR [4]

--------------------------------------------------------------------------------

We'll take the next question from Jarrod.

--------------------------------------------------------------------------------

Jarrod Martin, Crédit Suisse AG, Research Division - Director and Joint Lead Analyst [5]

--------------------------------------------------------------------------------

Jarrod Martin from Credit Suisse. Just looking at Slide 23 and the expense waterfall, trying to get an idea of what expenses are one-off or diminishing in terms of recurring and those that are actually recurring. So going through each of those items. So the 977 that also includes 450 extra FTE, of that 977, how much of is likely to be recurring? Then the -- you've got 600 additional FTE, particularly risk and compliance, what's your outlook for growth in terms of FTE numbers? The IT increases, you've increased investment by $100 million this year, outlook for that component. So I'm just trying to understand what's truly a one-off and what's likely to recur next year or increase next year.

--------------------------------------------------------------------------------

Alan Docherty, Commonwealth Bank of Australia - Group Executive & CFO [6]

--------------------------------------------------------------------------------

Yes. We've provided some additional disclosure in both the ASX and the profit announcement around those notable items in particular. There's a large component of the current year cost on the notable items related to customer remediation provisions, including a full provision for expected ongoing service fee issues related to lined advisers. And so we have fully provided for all known issues. And as you know, Jarrod, we provide early and provide conservatively for those. The program cost component of the notable items, we've called that out separately within the 977. And that relates to, for example, our response to the APRA Prudential Inquiry through a Better Risk Outcomes Program and our work on uplifting our financial claim compliance through a program of action. So those programs worked on, they are time-bound but are multiyear pieces of work. So I think that bifurcation of the notable items between remediation costs and the program costs is important in that regard.

On the risk -- enhanced risk capability, we see the items generally on the right-hand side of that chart on Slide 23 has been items which are in the ongoing cost base of the enhanced risk capability, which I mentioned, about 2,800 risk and compliance staff across line 1 and line 2. They're doing a really valuable job in terms of working through the issues and making sure that we make the bank a better bank moving forward.

If you look at FTE on both a spot and an average basis, you'll see that the exit spot FTE was actually relatively close to the average FTE over the period. And I'd expect that number in terms of risk and compliance staff will be a recurring feature as we -- as the bank moves forward.

Other items within that right-hand side. Obviously, we're going to continue to focus on business simplification. That's multiyear work within the staff and IT costs. Some element of nonrecurring but generally that's -- take IT costs for example, there's an increased infrastructure volumes as a result of customers continuing to migrate from physical to digital distribution channels. So again, I think you'll see that as an ongoing feature of our results moving forward.

--------------------------------------------------------------------------------

Melanie Kirk, Commonwealth Bank of Australia - Head of IR [7]

--------------------------------------------------------------------------------

We'll take the next question from Victor.

--------------------------------------------------------------------------------

Victor German, Macquarie Research - Analyst [8]

--------------------------------------------------------------------------------

Victor German from Macquarie. Two questions, one on expenses and one on fees. On expenses, if I just can follow up on Jarrod's previous question that slide relating to -- 23. You're still targeting absolute cost reduction. Just so we are all clear on exactly what you're targeting, would it be fair to assume that you're targeting the number -- so your starting base excluding remediation charges, and it backdates to your original target announced last half. In other words, you will absorb that $200 million that you see increase in 2019. I remember last year, you talked about potential increases relating to bonuses and compensation. Just interested on how that played out this year.

And on fees, appreciate a lot of them -- a lot of good disclosure there, and we can see the movement from 2019 into what should be the run rate for 2020. But I'll be interested in your thoughts, maybe Matt, just broadly speaking. I mean CBA has taken a lot of initiatives. Do you feel like you're now leading the market on that? Or do you feel that there's more fee pressures to come? The market is still expecting to see increasing your fee line. Do you think that's a reasonable assumption over the next 2 years?

--------------------------------------------------------------------------------

Matthew Comyn, Commonwealth Bank of Australia - CEO, MD & Executive Director [9]

--------------------------------------------------------------------------------

Yes. So why don't I answer both of those? Maybe Alan, if you want to talk specifically to the bonuses. So let me deal with expenses. So I mean our commentary and guidance, very consistent with what we've said at the first half. So broadly the way you described it is right. I mean absolute cost reduction, sort of working back from the slide that we provided there, we also sort of call out a sub-40% cost-to-income ratio. Obviously, in the falling income environment, as I know a number of you have noted, for every 1% reduction of income, we've got to reduce expenses by 2.5%.

I mean put another way, just building on some of the things that Alan said, if you look at that sort of enhanced risk capability, I'd say a good proportion of that, in my view, is structural. I think it's really important that we're able to -- I'd like to be able to automate a lot of that over time. I think it's really important we're able to deliver consistently good both customer and risk outcomes. Clearly, there's elevated numbers of people around customer remediation. We want to complete that work as quickly as possible and return that money to our customers. And then if you look at the other areas where we're up to sort of $259 million, we talked about some of them in the context of we've added additional people into our, what we call, financial assistance solution, which is also the teams that deal with customers in arrears. It's one of -- probably the primary reason that we've been able to improve our 90-day home loan arrears rate, for example. We've added extra home lending business bankers. We've added extra staff to deal with complaints particularly dealing with the introduction of the new Australian Financial Complaints Authority.

So we sort of feel like in many of those areas, we've got a good return on that investment, an extremely good, in some cases, return. But then when you get to that $190 million, given that softening revenue environment, we just feel like there's genuine cost-out there from simplification and much better cost discipline. There's just more work to do there, and we've got to be able to demonstrate that next year.

Then maybe your question on fees. So in the majority, I guess I would say my -- our outlook overall on ABI in particular especially stabilizing from that point, so that -- majority of that shift from $275 million to $415 million, a lot of that is the full year effect of fee changes that we've made particularly in our wealth business, so in our CFS business that I think there was only 1 month of the $70-odd million, for example, within that. So as you said, we tried to call all of that out in the third quarter. We feel like we've made absolutely the right steps and some deliberate choices. We also believe very strongly in transparency, so providing some of that alerting capability. But I think overall, we're in a good position. And obviously, with volume growth in some areas, we'd like to see an uptick in fee income as well.

--------------------------------------------------------------------------------

Alan Docherty, Commonwealth Bank of Australia - Group Executive & CFO [10]

--------------------------------------------------------------------------------

And on bonuses, you'll recall this time last year, we had significant reductions in equity-based compensation, deferred equity for a number of senior executives. So we've seen that come back to more normal levels in the current year. So that's been an element of headwind within our operating expense base, and you can see that detail in the operating expense note and in the profit announcement.

--------------------------------------------------------------------------------

Melanie Kirk, Commonwealth Bank of Australia - Head of IR [11]

--------------------------------------------------------------------------------

We'll take the next question from Andrew Lyons.

--------------------------------------------------------------------------------

Andrew Lyons, Goldman Sachs Group Inc., Research Division - Equity Analyst [12]

--------------------------------------------------------------------------------

Andrew Lyons from Goldman Sachs. Just a question on your NIM. The disclosure around the impact of the cash rate cut today has been very helpful. But the market is now pricing close to further 2 cash rate cuts by early next year. I assume you're not going to give us any guidance around what that might mean for the NIM. But is it fair to assume that just given where various deposit products are now pricing, that the impact of a further 2 cash rate cuts will be more than the first 2? Then just a second question. Just you note the 9% increase in your investment spend, a big increase. All of the increase in that came from compliance at the expense of productivity growth and other. I'm just wondering with a $1.4 billion investment spend budget for the year, are you comfortable that you can maintain adequate non-risk and compliance spend within that?

--------------------------------------------------------------------------------

Matthew Comyn, Commonwealth Bank of Australia - CEO, MD & Executive Director [13]

--------------------------------------------------------------------------------

Why don't I -- and Alan, please add. So as you said, we called out the 4 basis points. I guess it's a combination of the impact of the rates as well as just the shift in the yield curve, and therefore the tractor or the earn rate on both the replicating portfolio and the duration of equity. We've -- similarly, we've priced in one more cash rate. No, we're not going to give the specific impact, but your overall assumption that each subsequent rate reduction costs more is right, and we called that out when we did the latest pricing change that there's $160 billion of deposits where we currently either can't pass on at all or in full. And as you'd expect, that pool of deposits both grows and the impact of that limited pass-through increases.

In the context of your -- the question on investment spend. Yes, I mean we're very comfortable with that level of investment spend. It was a modest increase. We've got about 5,500 people working on projects. We feel like we're constrained more into the context of capability and capacity and our ability to deliver and execute and get a good return on that investment. We feel that there's enough envelope clearly within that to invest in the necessary regulatory and compliance. But if at any point over the long term, we thought it was necessary to invest more to strengthen our overall franchise, then we'd be prepared to do that subject of course to having availability of the right level of resources.

--------------------------------------------------------------------------------

Melanie Kirk, Commonwealth Bank of Australia - Head of IR [14]

--------------------------------------------------------------------------------

We'll take the next question from James Ellis.

--------------------------------------------------------------------------------

James Ellis, BofA Merrill Lynch, Research Division - Director [15]

--------------------------------------------------------------------------------

It's James Ellis from Bank of America Merrill Lynch. A question on costs and a question on the business institutional balances. So we've seen continued contraction in business and institutional. Just wondering to what extent you expect that to continue into future periods or whether we're done there? And then secondly, on your strategic cost program, you've obviously not put a target in terms of the -- those -- when you expect to achieve those strategic outcomes, but on one hand, it's 6 months. So you've got whatever point in time that is a bit closer, but then you're calling out a tougher revenue environment, so certainly the cost-to-income ratio component of the target is maybe a little bit further away. So does it feel like it's getting closer or further away at that point in time? So the business, the institutional balance contraction, and is it getting further off or closer?

--------------------------------------------------------------------------------

Matthew Comyn, Commonwealth Bank of Australia - CEO, MD & Executive Director [16]

--------------------------------------------------------------------------------

Yes. Look, I mean costs, we've said I think a number of times, we're basically targeting that over the medium term. I appreciate that's not a particularly helpful descriptor. I don't have anything more beyond that other than to say clearly, it's something that's at the forefront of our mind, but we're going to be prepared to make the right choices rather than slavishly hold ourselves to that target in any sort of 6-month period.

On the institutional bank performance, as I called out, we're very comfortable with the disciplined focus on both price and risk. That $2 billion of organic capital in the last 12 months has been extremely effective. Some of that gets harder in the context of go-forward. So I wouldn't necessarily base that level of rate of serve reduction and balances certainly going forward. We want to support the institutional bank. It's a really important part of our overall business in serving our customers. We're also conscious that we want to make sure that we're able to earn the right level of both risk and return in that business.

--------------------------------------------------------------------------------

Melanie Kirk, Commonwealth Bank of Australia - Head of IR [17]

--------------------------------------------------------------------------------

We'll take the next question from Andrew Triggs.

--------------------------------------------------------------------------------

Andrew Triggs, JP Morgan Chase & Co, Research Division - Research Analyst [18]

--------------------------------------------------------------------------------

It's Andrew Triggs from JPMorgan. Two questions, please. First one on the consumer finance portfolio. Looking at the average balance sheet, the yield on that book continues to fall by about 20 basis points this half, 27 basis points last half. Just an idea or a sense of if that magnitude is likely to continue and what the sort of dynamics are at work there. And the second question, the interest-only -- the percentage of flows in interest-only down to 22% and now in line with the percentage of the portfolio to 22%. Does this imply that the drag from switching is likely to be very little going forward? Or could we see a scenario where the percentage of the book dips below the percentage of flows?

--------------------------------------------------------------------------------

Matthew Comyn, Commonwealth Bank of Australia - CEO, MD & Executive Director [19]

--------------------------------------------------------------------------------

Why don't I take consumer finance? I mean there's a couple of things that are happening within that book. First of all, there's much lower growth both on the credit side as well as personal lines. I mean our balances, they are shrinking, we're gaining share. I mean the other thing that's changing there in the context of what's impacting net interest margin is the revolve rate or the proportion of balances that are attracting interest. So that's continuing to come down. Sorry, your second question was -- oh, stock portfolio in terms of the headwind. Yes, that's the right assumption. I mean when we think about switching, I guess there's a couple of different elements to that. One is switching from interest-only to principal-only interest, another is investor to owner-occupier, another is variable to fixed. The majority of that headwind that we've been experiencing has been around interest-only switching to P&I, and exactly as you said, when stock equals flow, you assume that, that drag in future periods is going to reduce and stabilize.

--------------------------------------------------------------------------------

Alan Docherty, Commonwealth Bank of Australia - Group Executive & CFO [20]

--------------------------------------------------------------------------------

That sequential margin drop in consumer finance shows the other factor at play there is, of course, the treasury reforms, the credit card interest. They were effective from 1 January this year. So you see that's the major driver of the sequential move in yields.

--------------------------------------------------------------------------------

Matthew Comyn, Commonwealth Bank of Australia - CEO, MD & Executive Director [21]

--------------------------------------------------------------------------------

Yes. I think in the third quarter, we called out a $52 million full year impact, so work out is basically half of that in this result.

--------------------------------------------------------------------------------

Melanie Kirk, Commonwealth Bank of Australia - Head of IR [22]

--------------------------------------------------------------------------------

Great. We'll take the next question from Richard Wiles.

--------------------------------------------------------------------------------

Richard E. Wiles, Morgan Stanley, Research Division - MD [23]

--------------------------------------------------------------------------------

Richard Wiles, Morgan Stanley. A couple of questions, one on dividend and the other on capital and investment. I'll start with the latter. So it looks like you've got $6 billion-plus of surplus capital, above the 10.5% minimum once you get that life company deal done. What's the potential -- or are you considering taking some of that $6 billion and investing it back into the business, accelerating the investment in order to respond to the changes in the environment?

Second question relates to the dividend. In 2015, your ROE was 18%. Your payout ratio was 75%. Today, the ROE is less than 13%, so it's fallen by 5 percentage points. The dividend payout ratio, if you exclude the notable items, is 80%. So I just like to know how you're thinking about sustainability of the dividend. Is it appropriate to have a higher payout ratio when your ROE is so much lower? And do you expect the payout ratio to get back to 75%? Or do you think it just stays above 80% in the future and that's okay?

--------------------------------------------------------------------------------

Matthew Comyn, Commonwealth Bank of Australia - CEO, MD & Executive Director [24]

--------------------------------------------------------------------------------

Look, I'm happy to make a start, and then, Alan, why don't you add to that? Look, I mean there's multiple elements obviously embedded within that question, Richard. I mean one of the ways that we think about -- why don't we just talk about the dividend to start with? No change to the payout ratio. I think that serves the organization well for some time. Clearly, we're outside the payout ratio, at the upper-end including notables and above it -- sorry, excluding notables and above it including notables.

We still feel that, that payout ratio is appropriate. It's a lower-growth environment. So what are some of the things that we're thinking about or the Board, which is making that decision on dividend at any point in time, is considering both at this stage obviously the overall capital position as well as growth, return on equity is an important driver in terms of what that payout can be. We're in a lower credit growth environment, so we're going to have lower RWA growth. So I think being -- just working it through the upper end of that payout range is not a particular problem.

In the context of our capital position, as you said, where we stand today, including both the asset management business sale as well as other capital that should be received, subject to various regulatory approvals, in those divestments completing, then again, that's a Board decision. It's something that we talk about on a monthly basis in the context of how we're thinking about our overall capital plan and strategy. There's not much more that we can say at this point other than clearly, as we're getting into a position of surplus capital, we will continue to invest in our business. But a reasonable expectation that a proportion -- a good proportion of that surplus capital will be returned to shareholders at the appropriate time, subject to operating conditions and subject to the Board's decision.

--------------------------------------------------------------------------------

Alan Docherty, Commonwealth Bank of Australia - Group Executive & CFO [25]

--------------------------------------------------------------------------------

And the other context, Richard, around historic dividend payout ratio and the middle of that range of 75%. But that's obviously been in the context of a period of capital build over many years. And so the very strong muscle of developed capital discipline and organic capital generation just I think provides the Board with additional flexibility as it -- as we work through the various considerations as we manage capital into the future.

--------------------------------------------------------------------------------

Melanie Kirk, Commonwealth Bank of Australia - Head of IR [26]

--------------------------------------------------------------------------------

We're going to take the next question from the phones, and we've got Brendan from Citi on the phone.

--------------------------------------------------------------------------------

Brendan Sproules, Citigroup Inc, Research Division - VP [27]

--------------------------------------------------------------------------------

It's Brendan from Citigroup just coming through. I've got 2 questions. Firstly, on the home lending market. Obviously, you've been able to restore your growth relative to system in the last 6 months. And Matt, you've mentioned the ability to execute better in the broker channel. I was wondering if you can talk about front book pricing in that market. Particularly now that we've had 2 RBA rate cuts, to what extent are prices still well south of where your average back book is. And my second question relating to institutional business. You've obviously had quite a bit of lending book contraction over the past couple of years. I was wondering what the outlook for the cost base in that business and whether there will be a consummate reduction in the operating costs looking forward?

--------------------------------------------------------------------------------

Matthew Comyn, Commonwealth Bank of Australia - CEO, MD & Executive Director [28]

--------------------------------------------------------------------------------

Sure. So why don't I start on home lending and then I'll let Alan talk to the cost base around institutional? I mean overall, the level of discounting, at least as we see it, is relatively flat over the course of the 12 months in terms of particularly the discounting away from the standard variable rate. What we've seen increasingly come into the market is a number of institutions competing heavily, particularly around cashback offers. What started out as a cashback around refinancing then became a cashback on any new loan and then it became a cashback on multiple securities. And so the cost of how that sort of get manifest itself generally is it will be capitalized and then amortized over the life of the loans. So doing $2,000 cashback, 10,000 loans a month, you're building up a cost base there of $20 million a month. So we're watching that dynamic very carefully. As you'd appreciate, there is intense competition. We see that flow through in terms of for every customer that we're serving on a day-to-day basis, there's also increasing recognition and transparency about what sort of pricing would be available. So you see existing customers, even their refinance, is probably on a relatively low rate on a historical basis. That's not to say there aren't customers that are actively approaching and wanting to negotiate in the home loan. So we see those various dynamics sort of show up in how we think about asset pricing overall, and some of the loans that are being repaid are at higher margins than those that we're originating today. So that's also been a drag in the period on home loan pricing overall.

--------------------------------------------------------------------------------

Alan Docherty, Commonwealth Bank of Australia - Group Executive & CFO [29]

--------------------------------------------------------------------------------

And on institutional banking, I mean obviously Andrew and the team are looking very hard and have been over the past 18 months, 2 years around rightsizing the cost base as we see the lower revenue environment. You'll have seen in the period the costs were down 2.2% in the institutional bank year-on-year. In the prior year, we had a software impairment. And so there was, on an underlying basis, a good momentum built from the tail end of last year in the institutional cost base. And if we look at cost-to-income ratio, it's still at the low end of the range for an institutional bank. So we've got a cost-to-income ratio in the 42%, 43%. And so as we rightsize the portfolio mix and the mix of capital-intense lending revenues within the institutional bank, Andrew and the team are very focused on rightsizing the cost base that's commensurate with the top line.

--------------------------------------------------------------------------------

Melanie Kirk, Commonwealth Bank of Australia - Head of IR [30]

--------------------------------------------------------------------------------

Great. We'll take the next question from Brett.

--------------------------------------------------------------------------------

Brett Le Mesurier, Shaw and Partners Limited, Research Division - Senior Analyst of Banking and Insurance [31]

--------------------------------------------------------------------------------

Brett Le Mesurier from Shaw and Partners. Was it your intention to indicate that the net interest margin would be 2.05%, the most likely outcome for this financial year?

--------------------------------------------------------------------------------

Matthew Comyn, Commonwealth Bank of Australia - CEO, MD & Executive Director [32]

--------------------------------------------------------------------------------

No. As you know, Brett, we don't provide guidance on net interest margin.

--------------------------------------------------------------------------------

Brett Le Mesurier, Shaw and Partners Limited, Research Division - Senior Analyst of Banking and Insurance [33]

--------------------------------------------------------------------------------

Given what you said about the headwinds and starting at 210, that's the logical conclusion. Was that what you intended to imply?

--------------------------------------------------------------------------------

Alan Docherty, Commonwealth Bank of Australia - Group Executive & CFO [34]

--------------------------------------------------------------------------------

No. I mean what we've sought to do is provide some transparency around known events. So one known event is we've got a new lease accounting standard. And under that new lease accounting standard, we have to bring in new interest expense into account so clarifying the outlook on that basis, and we've also had 2 known events in terms of 2 recent cash rate cuts. And so given some transparency around not just the impact of those rate cuts themselves but also the lower yield curves and the impact that has on replicate and equity tractors because they are difficult to model. And so we thought we'd be -- provide some additional clarity around that aspect. They are both known events. There are a lot of other variables, as you know, within net interest margin. We're not seeking to try and second-guess the number of other variables.

--------------------------------------------------------------------------------

Brett Le Mesurier, Shaw and Partners Limited, Research Division - Senior Analyst of Banking and Insurance [35]

--------------------------------------------------------------------------------

Just moving on to the disclosure you gave on transaction balances on Slide 14. You said they're up 9%. When I look in the average balance sheet, I find no growth in transaction balances from the first half to the second half.

--------------------------------------------------------------------------------

Alan Docherty, Commonwealth Bank of Australia - Group Executive & CFO [36]

--------------------------------------------------------------------------------

Are you including noninterest-bearing deposits in that?

--------------------------------------------------------------------------------

Brett Le Mesurier, Shaw and Partners Limited, Research Division - Senior Analyst of Banking and Insurance [37]

--------------------------------------------------------------------------------

They didn't move either. Noninterest-bearing liabilities is the disclosure you give. They didn't move either. So can you reconcile the large increase that you show in the slide pack against what we see in the average balance sheet?

--------------------------------------------------------------------------------

Matthew Comyn, Commonwealth Bank of Australia - CEO, MD & Executive Director [38]

--------------------------------------------------------------------------------

Well, I can reconcile it insofar as the vast majority of the growth will be in the first half versus sequentially. So you do the balances in terms of a full year, year-on-year, so I'd have to look at it. But I'm sure the calculation works, but I don't have the sequential breakdown in terms of balance growth.

--------------------------------------------------------------------------------

Brett Le Mesurier, Shaw and Partners Limited, Research Division - Senior Analyst of Banking and Insurance [39]

--------------------------------------------------------------------------------

The transaction balance is in that slide pack. They include the mortgage offset accounts, I presume. Is that correct?

--------------------------------------------------------------------------------

Matthew Comyn, Commonwealth Bank of Australia - CEO, MD & Executive Director [40]

--------------------------------------------------------------------------------

They would. Yes.

--------------------------------------------------------------------------------

Alan Docherty, Commonwealth Bank of Australia - Group Executive & CFO [41]

--------------------------------------------------------------------------------

Both transaction deposits on an average balance basis are up on both full year and you can see average of the 3 halves.

--------------------------------------------------------------------------------

Melanie Kirk, Commonwealth Bank of Australia - Head of IR [42]

--------------------------------------------------------------------------------

Great. Well take the last question from Azib Khan on the phone. So we'll turn to the phones again.

--------------------------------------------------------------------------------

Azib Khan, Morgans Financial Limited, Research Division - Senior Banks Analyst [43]

--------------------------------------------------------------------------------

Matt, you mentioned early in your presentation that in terms of the Remedial Action Plan, you've completed 75 milestones out of the 156. Is your expectation that once you've completed all 156, the $1 billion operational risk capital add-on will be removed?

And my second question is about potential NIM tailwinds. You've already covered the basis risk part. But in terms of your deposit mix, that's obviously changing favorably at the moment. You're experiencing strong growth in your transaction deposits and contraction in your term deposit book. Presumably, at least some of that dynamic is due to the lower rates being offered on TDs. So if we see further cash rate reductions, is your expectation that there will be a further favorable change in that customer deposit mix?

And also on NIM tailwinds, can we expect the portfolio optimization initiatives that you're undertaking in IB&M to be margin positive? And one of the reasons I'm asking this last part of the question is because you have been conducting some optimal in the institutional loan book for the last 12 or 18 months, but we've seen the NIM contract. Can you explain why that NIM in IB&M has been contracting?

--------------------------------------------------------------------------------

Matthew Comyn, Commonwealth Bank of Australia - CEO, MD & Executive Director [44]

--------------------------------------------------------------------------------

Yes. So Alan, why don't you take the IB&M NIM? Let me deal with the first 2 parts of your questions. So look, the milestones in the context of completing the overall program. Basically, one of the conditions of the Enforceable Undertaking, as you said, was that op risk capital. It's incumbent on us to be able to demonstrate to APRA and to make an application for either a partial, or at the appropriate time perhaps, a full reduction. One would think it's very closely linked to the delivery of the program, but of course, it's up to us to be able to demonstrate that.

Secondly, I mean on the NIM tailwind or just around deposits, obviously, a number of different dynamics there. So first of all, falling interest rate environment, as I said, that $160 billion of deposits gets larger, there's a bigger impact from subsequent cash rate reductions, I'd say. I mean the term deposit pricing at the moment is very low-margin business, in some cases. As the yield curves fell quite rapidly, there's a period there of probably negative margin before rates really are adjusted. So I mean there's just -- there's a lot of different dynamics to try and sort of translate even then for us how that sort of plays out. Of course, an element of that is going to be competitive intensity for deposits as well. We certainly will be very focused on our Transaction Banking franchise. We think the ability to be able to perform well there gives us a very strong sort of liability-led funding advantage.

--------------------------------------------------------------------------------

Alan Docherty, Commonwealth Bank of Australia - Group Executive & CFO [45]

--------------------------------------------------------------------------------

And on institutional banking, the portfolio optimization within institutional bank translates in improved portfolio mix, so improved lending margins at group level. If we then look at divisional, Institutional Banking & Markets margin, that's up 2 basis points over the year although there's an offsetting dilutive effect of the lower-yield environment. That lower-yield environment translates into lower net interest income at our markets business. And so that has a dilutive effect on net interest margin relative to the dynamics we're seeing on lending mix.

--------------------------------------------------------------------------------

Melanie Kirk, Commonwealth Bank of Australia - Head of IR [46]

--------------------------------------------------------------------------------

That brings the briefing to a conclusion. Thank you for joining us. And if you have any follow-up questions, please reach out to the Investor Relations team. Thank you.