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Edited Transcript of CBA.AX earnings conference call or presentation 6-Feb-19 12:00am GMT

Half Year 2019 Commonwealth Bank of Australia Earnings Presentation

Sydney Feb 7, 2019 (Thomson StreetEvents) -- Edited Transcript of Commonwealth Bank of Australia earnings conference call or presentation Wednesday, February 6, 2019 at 12:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Alan Docherty

Commonwealth Bank of Australia - CFO

* Matthew Comyn

Commonwealth Bank of Australia - CEO, MD & Executive Director

* Melanie Kirk

Commonwealth Bank of Australia - Head of IR

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Conference Call Participants

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* 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

* Brian D. Johnson

CLSA Limited, Research Division - Research Analyst

* 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

* Matthew Wilson

Deutsche Bank AG, Research Division - Australian Bank Equity Analyst

* Richard E. Wiles

Morgan Stanley, Research Division - MD

* Victor German

Macquarie Research - Analyst

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Presentation

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Operator [1]

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Welcome to the Commonwealth Bank. Before we start, we need to run through a few formalities. In the unlikely event we need to evacuate, Colonial Theatre staff and your nominated wardens will guide you to the nearest exit and out of the building. Emergency exits are located to the back and the side of the theater. Please switch off your mobile phones for the duration of the briefing. Thank you for your attention.

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Melanie Kirk, Commonwealth Bank of Australia - Head of IR [2]

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Hello, and welcome to the Commonwealth Bank of Australia's Results Presentation for the Half Year ended 31 December 2018. I'm Melanie Kirk, and I'm Head of Investor Relations. Thank you for joining us for this briefing. Today we will be having presentations from Matt Comyn, our CEO; and Alan Docherty, our CFO.

I'll now hand over to Matt for his presentation. Thank you.

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

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Thank you very much, Mel. Good morning all. We are 6 months into our strategy, which we announced in August of becoming a simpler and better bank. We're very focused on making sure that we're delivering better outcomes for our customers and our communities, better outcomes for our people and, of course, better outcomes for our shareholders.

A big part of this, of course, is focusing on simplifying our business and really focusing on our core banking businesses, where the majority of our earnings are derived and where our real competitive advantage lies. We also want to make sure that we're delivering the best experience overall but particularly in digital, where we continue to have the largest and most satisfied digital banking experience in the country. And importantly, we continue to invest in our operational and risk compliance. You'll see that quite clearly in our result, which we think is critical for ensuring that we're delivering better customer and risk outcomes.

Overall as you'd expect, we've been very focused on assuring we're responding to the failures of the past and getting to the root cause of those issues. We do not underestimate the work that's ahead of us. And whilst we feel like we've made real progress over the last 12 months, there's clearly a lot more work to do. We believe we're making good progress overall on simplifying our business model and against the divestments that we've already announced. And as I said, we continue to have digital as a particular area of focus for investment and ensuring we're overall the leading technology bank.

I think what this result does highlight is the strength of our underlying franchise and the operating momentum in what has been a challenging context. It's certainly not something that we take for granted for a moment, and we're seeing that in particular improve performance of volume performance, of home lending, a very strong and very pleasing transaction account and deposit performance overall. And then continued discipline and focus on organic capital generation has seen us deliver a Common Equity Tier 1 of 10.8% and a -- maintaining the dividend at $2.

As I said, that big focus on ensuring that we're getting to the root cause of those issues and rebuilding trust and confidence in the organization has certainly appreciated the more than 14,000 customers who took the time to respond to my letter to more than 8 million. There were a number of very clear themes came through that. One of those, of course, was the demand for Apple Pay which we announced on the 23rd of January. I think it's really critical in terms of setting the time and the right culture inside the organization that both myself, members of my leadership team are very engaged directly with our customers. I've been personally involved in a number of the customer issues, we've brought customers into a number of our senior leadership forums, and I think that's going to be a really important critical message to send inside the organization to ensure we're putting them at the heart of everything that we're doing.

We brought in some smart alerts, helping our customers avoid unnecessary fees and charges, trying to remove some of those real points of frustration that have been expressed to us. Of course, we've made a lot of progress against removal of incentives against tellers but a lot of reform more broadly against sales incentives. A big focus on very clear values expectations for our people, a new code of conduct, ensuring that we're there for our customers when they need us most, putting in place a very tailored package for drought-affected farmers. And you might have seen this morning, there was a release of the Promontory report, which is the independent expert which tracks our progress against the remedial action plan, which is, of course, in response to the Prudential Inquiry. Overall what I'd say, a lengthy report can be summarized as: we're on track. We've made good progress in the last 12 months but there remains a lot of work to do.

Clearly the last couple of days quite rightly has been dominated by the Royal Commission, which I think has made a very thorough examination of the industry. To give you a sense of the perspective -- or from our perspective, the scale of that review, we've been through in the context of preparing responding to the commission more than 16 million documents have been analyzed and reviewed. We've responded to 167 notices to produce providing more than 220,000 documents to the Commission. We've had almost 70 witness statements, 19 separate submissions and 16 witnesses have actually appeared. It was a very critical and insightful

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quite clearly, [high leads] that in the past we've heard through a model that we're -- top -- and the broad community being

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the sorts of provision that we've made in the past. Again, these are, of course, remediating and refunding our customers with interest for issues that should never have occurred. We tried to provide that disclosure to give some clarity. As you would expect and has been called out, a number of those issues are related to our Wealth Management business and the broader industry. And I wanted to highlight, again, what has been and will continue to be our approach, which is, as we find any issues, as soon as we're able to reliably estimate them, we provide for them conservatively. As you can see, those provisions that exist as at 31 December and, of course, we will continue to work through any issues that we either may discover or that flow from some of the Commission's recommendations.

As I said, I think we're making good progress against the number of divestments which have been announced. In the first half, we completed the Sovereign and TymeDigital divestiture. The sale of our 37.5% stake in BoComm Life, the regulatory approval process for that is taking longer than expected. It is now the only

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life insurance business. Overall, on the right-hand side of the slide, we've again tried to focus our operating model and structure on ensuring that we are having very focused, clear business unit leads who are focused obviously on our Retail Bank, our business, our institutional bank, which we remain committed to but it's also been very focused in the half and you've seen that come through in terms of the risk-weighted asset reduction and improvements in organic capital generation. And then lastly, we made a $50 million investment into PEXA, which is what we would say an important part of our overall home-buying ecosystem.

As you have noticed, we put additional -- some disclosure here in the context of how we're thinking about costs. And of course, overall we've got to really recognize a couple of important things. Quite rightly, both myself and my leadership team will be judged on what we're able to deliver, and every period we'll be talking about what we've done in the period that's gone before. We have to, of course, balance that against an elevation in our risk and compliance spend. As I said, I think that's entirely appropriate given the current context. But we recognize that we need to make some absolute structural cost reductions to ensure that the organization is best positioned for the future, that we're rightsizing the cost base for undoubtedly a more intensive, competitive environment. But we're also making the right investments for the long term and we're able to put real investment into our technology, into our digital and customer experience.

You'll see, at the right, we talked specifically around our cost-to-income ratio. That is one, but an overall imperfect measure. But certainly, as we look at our overall structural cost base, we see a number of opportunities over time to really focus on the end-to-end digitization, removing variation from the processes, much greater automation. Of course, over time, there'll be the digitization of some of our distribution costs. It's absolutely critical, we're able to reduce the unit cost of technology and change. There's obviously a number of different technologies available to reduce the cost of compute, storage, but ultimately being able to maximize the output for the investment dollars that we're putting in. A much greater focus on just cost discipline throughout the organization and, of course, a simpler operating model, less bureaucracy, faster decisions, better execution.

From a digital perspective, we're very pleased with the way our business is performing there. We've got now more than 6.7 million active digital customers. We have 5 million daily log-ons. We have clearly the market-leading app, certainly from our perspective; the most satisfied from a customer perspective. Forrester recently rated us the #1 mobile banking app in Australia and #3 globally. At the full year results, I talked about the customer engagement engine, which is something that we've invested in over the last few years, which quite simply analyzes 30 billion data points in real time and orchestrates all of the contact and conversations that we're having with our customers across 23 channels. So digital, contact center, branch, e-mail, ATMs.

To give you some perspectives about how we use that to improve both the customer experience and some of the outcomes, over the first 6 months, we've had 10 million face-to-face conversations that have been orchestrated through our customer engagement engine, more than 130 million in total. We've helped an incremental 10,000 customers complete an application through real-time pipeline management; we've orchestrated contact with 100,000 customers who had a maturing term deposit -- got an 85% renewal rate. We used the customer engagement engine to activate customers after we launched Apple Pay. We've had more than 500,000 registrations in the last fortnight. We now have 1.5 million customers or cards registered for mobile banking.

And so importantly, we really see that as a way that we're able to demonstrate that we're adding value for our customers as well. We send every month more than 120 million transaction notifications, helping them manage their expenditure. We also, every month, send 1.5 million notifications telling them when their repayment is due, making sure that they're avoiding, as I said, any unnecessary fees and charges. We've even started using it in the context of third-party data helping our customers, for example, when they're eligible for a rebate on their third-party policy, and we've started to roll it out across the business bank in the last 6 months as well.

Overall, as I said, I think the result really demonstrates the strength and resilience of the franchise. Our cash net profit after tax up 1.7% on the prior corresponding period, 8.3% sequentially. We've seen an improvement in our return on equity of 13.8%. That organic capital generation has enabled us to deliver a very strong capital position of 10.8%. We're now unquestionably strong, and a $2 fully franked dividend. And we've also announced that we'll be neutralizing the dividend reinvestment plan.

Overall, our operating income, we've seen weaker margins offset by stronger volume growth. We've also had approximately $60 million of impact from the weather or storms in New South Wales and Victoria in the half. I think our operating expense performance there is flatted by 2 factors: number one, just a smaller number of one-off reductions in the -- in prior period; we've also had a $145 million of insurance recoveries, which we called out towards the end of last calendar year.

The loan impairment expense remains low but you will have seen that it's picked up a little in the corporate book, which I'm sure we'll return to, again ultimately delivering a cash net profit after tax of 1.7%.

Our volume growth, from my perspective, has been one of the most pleasing aspects overall. Again, much better stabilization of momentum, particularly in our Retail Bank during the half, basically growing at system and home lending. The lending growth of 5% includes New Zealand. And as you would expect with that real focus on capital and risk in our institutional business, we've seen a reduction overall in balances, but we're very comfortable with the risk-weighted asset trade-offs that we're making there. And what has been a highlight of the group's performance for some time has been our strong transaction growth for the Retail Bank in the half, 14%. We've seen our overall deposit funding move to 69%, which again is a real highlight of the overall result.

A bit of a mixture across each of the businesses. If you look at Retail, as I said, a better stabilization and volume performance, slightly above system in both home lending and deposits. Bankwest slightly below in both. That's a consequence, of course, of a slower geographical exposure for Bankwest in WA. We've seen net interest margin come down on both the prior corresponding period on 11 basis points sequentially. There's been a combination of factors in there. Of course, much higher funding costs and we call out that exposure -- net exposure to base as risk premium and a drag on margin from customers switching from interest-only into principal and interest. Our costs overall I think well-managed and loan impairment expense as well.

Turning to the business bank. As I said, I think the deposit growth and transaction performance has been the highlight there. We've been prepared to have a real focus on both capital and pricing and risk, particularly from a property development perspective in our business bank -- had seen our balances -- balance growth be quite modest from a business lending perspective, but we've seen a stabilization in our net interest margin over that period. Again, as I look at the institutional bank, really flat net interest income. We've seen a reduction in the performance of our trading and markets division. Overall, a very strong, as I said, organic capital generation. And New Zealand, once again, a very strong output. Good volume growth leading to overall 8% revenue growth.

That finally leaves us, as I've covered, a 10.8% Common Equity Tier 1. A payout ratio of 74% and leaving us in a position for the first time in 4 years to be able to neutralize the dividend reinvestment plan.

And on that note, I'll hand over to Alan.

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Alan Docherty, Commonwealth Bank of Australia - CFO [4]

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Thank you, Matt, and good morning. I'm going to walk through the result in some more detail now but firstly, to summarize it. I'd say that the top line represented by revenue growth was weaker versus the comparative period, but the bottom line represented by the risk-adjusted profits we generated was exceptionally strong. And both that weaker top line and stronger bottom line were a function of the challenging economic and regulatory context in which we're operating, countered by very disciplined and focused execution of our strategy on better customer outcomes and on risk-adjusted shareholder returns. The economic and competitive context that we are responding to included margin pressures and a softening housing market, and that contributed to a 2% decline in revenue on the same half last

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risk and

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$6 billion. From that, we deduct the profits from our discontinued operations which totaled $92 million in the half. That's less than half the amount of discontinued profits that we earned in the prior 6-month period and there were 3 reasons for that: Firstly, our Australian life insurance business experienced higher claims, particularly in income-protection products, and this is consistent with what we've seen across the broader life insurance industry. We've also seen lower premium income due largely to the loss of 2 large wholesale schemes in the previous financial year.

Secondly, our Global Asset Management business benefited in each of the 2 prior halves from higher one-off performance fees generated from asset sales.

And thirdly, each of the 2 prior periods included approximately $50 million per half of profit from our New Zealand life insurance business, Sovereign, which we, of course, sold in early July of 2018.

We disclosed the impact on the statutory result of noncash items during January, and you can see there the various transaction costs incurred as we continue to simplify our business, together with the reversal of unrealized hedging gains due to the depreciation in the Australian dollar. And so if you deduct all of those items from the statutory profit, we arrive at our cash profit from continuing operations of $4.7 billion. And as Matt has described, our profit is 1.7% higher than the prior comparative period with operating income down 1.9%, offset by a 3% decline in both operating expenses and loan impairments.

So drilling into that, operating income decline of 1.9%, you can see very clearly, how our revenues are affected by both the challenges of the current context, but also our focus on better customer outcomes and our focus on risk-adjusted returns. Within net interest income, home loan volumes included strong growth in owner-occupier balances and our transaction deposit growth demonstrated again the strength of the franchise and the quality of our digital platforms.

Business lending growth across Australia and New Zealand grew 5%. Though as we've said, within that, the domestic Business & Private Banking lending growth was 2%. That was due partly to a targeted runoff of apartment development exposures. We continued to run a tighter credit posture on that portfolio, and that obviously hops our top line revenue momentum, but aligns with our cautious view on that sector and our discipline around earning above-hurdle returns. And you can see that same focus continue to come through the reduction in our institutional lending exposures as we continue to rightsize that portfolio.

Net interest margins reduced 6 basis points on the prior comparative period, that was down 4 basis points in the last 6 months. I will unpack that margin decline in the next slide, and it was that margin decline which led to the 1.3% reduction in net interest income.

Other banking income fell 4.8%. That was due to the reduction or elimination of a number of fees and charges for the benefit of our retail and business customers. Other banking income was also impacted by difficult trading conditions in our global markets business. And as Matt mentioned, insurance income included $61 million in claims from the damaging storms in New South Wales and Victoria during December.

Looking into that 4 basis point net interest margin decline, there were really 3 factors within that decline, and we talked about each of these 3 at the last full year result. Firstly, asset yields contributed 3 basis points of margin decline. That was due to home loan customer switching and increased home loan competition. The benefit of our repricing of standard variable rate home loans in October was offset by more competitive fixed rate home loan pricing and lower consumer finance margins.

Secondly, the lower replicating portfolio benefit in the half offset some of the deposit-repricing activity that we undertook during the last 6 months. And thirdly, the elevated level of basis risk cost us 2 basis points of margin in the half.

Operating expenses were down on the prior comparative period, largely a function of the nonrecurrence of those prior period one-offs, $145 million professional indemnity insurance recovery on the AUSTRAC civil penalty. And then against that, we had the gross-up of expenses due to the consolidation of our mortgage broking businesses, the $200 million recognition of an indemnity provision for historical remediation issues relating to our Wealth Management business and $121 million increase in cost due to the uplift in financial crime compliance, higher customer remediation provisions and also the cost of our Better Risk Outcomes Program, which is coordinating to -- actions to fix the issues identified by the APRA Prudential Inquiry. Excluding those items, costs were up $76 million, and that was due primarily to $50 million of higher IT amortization.

Turning to our balance sheet risk settings. We continue to adopt conservative settings across the range of risk types in order to be ready for and responsive to a range of macroeconomic outcomes. On credit risk, we continue to be disciplined and selective around our risk appetite to particular sectors, and we continue to hold peer-leading provision and coverage levels. On the liability side of the balance sheet, we've continued to increase our net stable funding ratio, up from 110% a year ago, now 112%, and that was due to strong growth in retail and business deposits. On liquidity, we've held our coverage ratio well above regulatory minimums, now at 131% over the last quarter. And on capital, we reaped the rewards of that focus on risk-adjusted return, achieving our unquestionably strong capital benchmarks 12 months ahead of the regulatory deadline.

So looking firstly at credit risk. Our loan impairment expense remained at historical lows as a proportion of our lending exposures with very low levels of loan loss experienced across both our consumer and our corporate portfolios in Australia and in New Zealand. You can see the Business & Private Banking loan loss ratio increased to 19 basis points. All of that increase related to material downgrades to 2 clients. We continue to be watchful for signs of a broader deterioration across industries and regions. We will continue to monitor that and calibrate our risk appetite accordingly.

Troublesome and impaired assets increased, although off a low base. And in the last 6 months since June, that increase related to a single large institutional impairment in the construction sector and higher home loan impairments.

And looking more closely at consumer credit quality, we've seen stable to improving arrears rates across personal loan, credit card and home loan portfolios in the last 6 months. Although if you look against December 2017, there's an elevated level of arrears over the 12-month period. We believe this continues to reflect the small number of households experiencing difficulties due to rising essential costs and limited income growth. And what that's done has muted the normal level of seasonal improvement that we'd see in the first half of our financial year, and so we'd expect in the second half of the financial year for those arrears rates to trend higher. In that regard, we are pleased with our decision at the beginning of the financial year to significantly increase our consumer collective provisions upon the adoption of the new loan impairment accounting standard.

On wholesale funding, we calibrated the tenor of our new long-term debt issuance to ensure that we maintain the weighted average maturity of our long-term debt portfolio above 5 years. And you can see on the right-hand side of this chart that funding costs have continued to increase over the past 6 months. If we -- I'd give you an example. In August, we issued 5-year domestic term debt. It cost 93 basis points over the [bill rate] that we issued a debt of the same tenor domestically in January that cost 113 basis points. So that, together with the elevated level of basis risk means that funding cost pressures will continue to emerge in the period ahead.

On capital, we've had another strong period of capital generation taking our CET1 to 10.8% above the 10.5%, unquestionably strong benchmark. The organic capital growth in the period of 66 basis points is really down to 3 factors: firstly, that discipline around front-book credit origination and also back-book portfolio optimization has delivered 35 basis points of that increase, net of the dividend payment; secondly, we revisited our interest rate risk settings over the half. And so 2/3 of that 24 basis point improvement in IRRBB risk-weighted assets relates to structural reduction in our interest rate risk, and therefore, that will process them to future periods. Those are -- the remaining third of the IRRBB reduction related to favorable market rate movements in December. So you may see some of that unwind in future periods. Thirdly, the reduction in market risk-weighted assets that was related to the implementation of an updated value-at-risk model. The previous model was giving unduly conservative measurement of our underlying market risk exposures.

As we look to the period ahead, the decision to neutralize the interim dividend reinvestment plan will mean that the dividend has a higher than normal impact on CET1 in the second half.

And again, we've broken out that capital generation across each of our operating divisions. Business & Private Banking delivered particularly strong levels of capital generation despite that slowdown in business lending momentum, and that's testament to the level of discipline in the business around risk-adjusted returns. And Institutional Banking & Markets continue to improve their client relationship returns as they continue to reshape and reweight that portfolio.

In summary then, it's been another challenging period for the Commonwealth Bank but our focus on our customers and our discipline around capital efficient growth are very evident in this half year result.

And with that, I'll hand back to Matt.

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Matthew Comyn, Commonwealth Bank of Australia - CEO, MD & Executive Director [5]

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Thanks very much, Alan. So I thought maybe I'll just do 2 things, quickly on the economy and then try and provide some perspectives around housing and particularly availability of credit.

First and foremost, we continue to see the Australian economy performing well. We're seeing GDP growth of close to 3%, we're seeing full in unemployment and a full in underemployment, I think there's evidence of capacity constraints and a slight uptick in wage growth. Obviously, high commodity prices are helping the overall budget deficit. So overall, we feel like the Australian economy continues to perform pretty well. Of course, there's been quite a bit of focus on the housing market and particularly what's been leading to that.

So on Page 79, in the results set, we've tried to give a little bit of perspective, particularly dealing with what's happened to borrower capacity. And so almost all of the changes that had a reduction on borrower capacity occurred between 2015 and 2017. I would say -- or I'd estimate that, that could have had an impact to maximum borrowing capacity of somewhere between 15% and 25%. Obviously, that will vary depending on the borrower, depending on their circumstances. Importantly, as I said, that was pre-2017. And the big changes that led to that were increases in income-based HEM, introduction of minimum floors around interest rates, capping of certain income types, reductions on unstable sources of income. We've seen that sort of translate obviously in the context of the last 6 months of actually average loan sizes have been slightly increasing. I think it's really important to note that, yes, more than 90% of borrowers don't actually borrow at the maximum, so that 15% to 25% is really affecting the 10%. We've seen our application rates -- sorry, our approval rates largely stay unchanged. And we've actually, more importantly, seen a reduction in -- from a demand perspective.

Before I talk about demand, then -- I think it's important to then maybe try and put into context what's actually happening in 2018. And so what you have seen from us and across all of the financial institutions is a much greater focus on very granular expense verification. Now that has seen us reduce our -- the number of applications that relying on HEM, otherwise the prudent floor. And what does that feel like from a customer perspective? It feels like there's a lot more rigorous inquiry into the underlying expenditure. It has a very minimal impact at a borrowing capacity level. We also have to put that in the context of more than 80% of people who are applying for credit for a housing loan, it wouldn't be their first home loan. And so applying for a loan at the Commonwealth Bank and I dare say at others today versus 5 years ago, it would feel like a more rigorous process. But I don't think that is the causation to the perception that there's a reduction in the supply of credit.

I think importantly, of course, and from a demand side, if you separate between owner-occupied, where I'd say largely application volumes are probably flat over the last 2 years, whereas if you look purely at investment lending, we've probably seen a reduction in the order of 25% to 30% of application volumes over the last 2 years. I think that's entirely appropriate and consistent with the outcomes you would expect from a number of measures that were put in place by both the regulator in APRA, which I think is entirely prudent and appropriate. We've seen the impact that we would've expected, which is a slowing in credit growth. We've seen a slowing in turnover and, of course, a fall in house prices. But we also have to put that in the context of a market like Sydney, which, of course, for any individual looking at the value of their home falling, that's an unpleasant feeling. But in that context, 5 years ago, house prices in Sydney are still 60% higher than they were at that point in time.

Finally, I just focus on the summary of the result from my perspective as being obviously a lot of change of the organization, really trying to get to the root cause of issues and failures in the past. Big focus going forward and actually being able to demonstrate real actions and being prepared to be judged by those actions. For us, part of that, of course, has to be really focusing on running our businesses really well and the core operating momentum, making the right trade-offs around volume and margin. We see a continued uptick in funding costs. You see that come through and weigh on our net interest margin in the first half, and that net exposure of $160 billion to basis risk, which is currently, I think, spotting in the high 50s, continues to be a drag on margin going forward. But we will continue to be very focused on optimizing our business and ensuring we're delivering a strong capital result. And whilst delivering better customer and risk outcomes, increasingly turning to our overall cost base.

On that point, I'll hand over to Mel for Q&A.

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Questions and Answers

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

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Thank you, Matt. We'll start with questions in the room, and we'll wait for the microphone. Please state your name and the organization that you represent. Please limit your questions to no more than 2 questions to allow everyone the opportunity to ask questions.

And we'll take the first question from Jarrod Martin.

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Jarrod Martin, Crédit Suisse AG, Research Division - Director and Joint Lead Analyst [2]

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Jarrod Martin from Crédit Suisse. Matt, appreciate the additional information on a simpler bank and cost reduction but, obviously, it raises some more questions without some numbers and time frames, et cetera. Look, the cost base, the starting point, that's probably -- I think it's reasonable to have an understanding of what is the sort of core cost base that you're referring to. The slide says $11.5 billion in the total but then there is a core underneath it. I think it's reasonable for the market to understand what do we need to judge you against. So what is that core level? And then secondly, what sort of investment do you need to make to get some of the reductions? As in -- a lot of times with programs, we don't see those cost reductions until we got to spend another $500 million, another $1 billion here. Is CBA in the situation where the things that you called out in terms of automation and digitization, there's not a great deal of investment and so they can be effectively started executing from day 1.

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

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Yes. So a couple of elements. Yes, you're quite right, we tried to strike the right balance between giving some -- a better view on at least how we're thinking about the cost base but also importantly, recognizing that we'll be judged against our performance each period without necessarily wanting to put too much detail around future targets. I mean, when we talk about core and noncore base, if you back out the divestments that we've already announced, you get our core cost base. And then to your second point around investment of what we've consistently said to date is we don't foresee a large scale investment that's going to be announced to be required. Of course, some of those productivity and cost reduction will require investment along the time. We have to make the right trade-offs. Clearly at the moment, you see in our disclosures, 64% of our investment is put against regulatory and compliance. That's going to remain elevated. Over time, we'd like to be putting more of that investment into both productivity and growth. And so clearly, we see the need for incremental rather than large-scale CapEx announcements at this point in time.

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

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We'll take the next question from Jon Mott.

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Jonathan Mott, UBS Investment Bank, Research Division - MD and Banking Analyst [5]

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Jon Mott from UBS. And no surprises, I'll keep on going from what Jarrod was on. The 40% cost-to-income target that you've called out, if you flip to Page 16, you're already saying that operating expenses to total income, excluding notable items in prior period one-offs for continuing operations. So yes, backing everything out, you're already at 39.7%. So if you're assuming that, yes, costs are going down, it's a pretty negative outlook for your revenue that you'd be implying. Given if you look at the first quarter, you had a really strong revenue and it appears to have really

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Matthew Comyn, Commonwealth Bank of Australia - CEO, MD & Executive Director [6]

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That's a very quick calculation, and you're right on the cost side. So it's less from our perspective as we thought about and I don't think that the timing's right to be putting too much specificity around exactly what our endpoint is. From our perspective, getting -- it's a question of how far below 40% cost-to-income ratio. And I wouldn't necessarily infer that it's a very negative view about income growth. I mean, we would all -- we, of course, see what you can, which is falling volume from a credit growth perspective. We certainly have some near-term headwinds from margins. And in terms of the presentation in preparation for that because obviously there are a number of outstanding issues that we're starting to work through. So we've also got to be cognizant, being able to make the right decisions in any particular period, making the right investments for the long term. Ultimately, our income performance will largely be constrained by the overall performance of the broader economy. So I wouldn't say that we're more positive or negative about revenue outlook other than what we've already seen, which you can see in the half, the pressure around margins.

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

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We'll take our next question from Andrew Lyons.

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Andrew Lyons, Goldman Sachs Group Inc., Research Division - Equity Analyst [8]

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Andrew Lyons from Goldman Sachs. Matt, in your concluding remarks, you highlighted the interesting slides in Slide 79 of your presentation, which suggests your maximum borrow hasn't moved in the last 12 months. Just 2 questions on that. Firstly based on your initial rate of the final report of the Royal Commission, are you expecting any movement in that over the next 12 months? But also -- or next 12, 24 months. But also just based on your current discussions with ASIC and APRA, do you think that there is any incremental pressure on maximum borrow? And then just a second question just in light of this. I note that against system mortgage growth of about 4.7% year-over-year at the moment, the major banks are collectively growing at about 3.3%. Now I admit, you guys are growing a bit quicker than that. But you look at the nonmajor banks, they're growing at about 8% and the nonbanks at about 12%. I just wanted to see if you have a view on -- do you think this is due to the timing of credit tightening that the major banks have been focused on more earlier? Or have customers been more inclined to bank away from the majors than what they have traditionally?

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

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I think the answer -- the second part first. I think it's more about just the timing of some of those to the tightening in the application of those policies. As you'd quite rightly expect, they tend to start with the major institutions and work their way through the rest of the industry. In terms of borrow capacity, I can rely certainly on the public comments today, which is that the heavy lifting is largely done. There's nothing that I can see that really has the capacity to reduce borrowing capacity, certainly at an individual system level. As I said, I think the main factor which people have seen and are talking about is that there's more granular expense inquiry. That's certainly the case for us. I'm sure that will work its way through the rest of the industry. At the margin, the application of that policy can have a slight impact on borrower capacity. But again, putting that in the context of 90% of people aren't borrowing at the maximum, I don't think the supply of credit is a big constraint going forward. And I think there'll be a stabilization of some of those conditions. But for an individual borrower, as I said, who's going through an application process today versus 5 years ago, it would feel like a more rigorous experience. You hear brokers who would say the interview is taking a lot longer to actually complete to get the information that the bank requires. Again, I think that's a prudent application of the existing responsible lending laws. But I -- it's -- I can't see anything incremental to what we already know today coming in the pipeline.

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Melanie Kirk, Commonwealth Bank of Australia - Head of IR [10]

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We'll take the next question from Victor.

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Victor German, Macquarie Research - Analyst [11]

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Victor German from Macquarie. A question on capital. Obviously, a very strong capital position and mindful of the fact that there are divestments coming through, so on a pro forma basis, you're seeing close to 12% based on my very good calculation. So a couple of questions on that. So the first one on the replicating portfolio, you've had a benefit from that coming through, it appears, in the half. Just if you can maybe, Alan, talk us through all the moving parts in terms of what's the new duration for both capital and deposits. And presumably moving sort of to a shorter duration would have a cost to P&L as you move up front. So just indication of what that is and whether that then captured in the half. And just more broadly on capital, 12%, obviously very strong capital position. There's New Zealand uncertainty but even taking a very conservative approach on that seems like you should be well clear of kind of the targeted level, whatever that might be. Your thinking around what you're planning to do, is the strategy to maintain the dividend despite your earnings coming down and increased payout ratio? Or should we be expecting some capital management initiatives of a near medium -- near to medium term?

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Alan Docherty, Commonwealth Bank of Australia - CFO [12]

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Yes, thanks, Victor. So on the IRRBB reduction firstly, that relates to the invested term of capital. So that's really the invested term of our equity balances as opposed to the replicating portfolio, which is the investment term of our nonrate-sensitive deposit balances. So the theory is similar, although that particular reduction in interest rate risk setting really reflects a shortening of the investor term of the equity. For many years, we've had a longer investment term on our equity balances than other banks. And you've seen, through a decade of falling rates that, that has a benefit in terms of stability of earnings and lower margin impacts through the rate cycle. The cost of that comes with a higher interest rate risk in the banking book, and you've just seen higher risk-weighted assets in that regard for CBA relative to other banks. So during the period, we had a look at interest rate risk settings given we are at or near the bottom of the rate cycle. We felt it was the right time to bring our invested term of equity back into line with the other banks, and obviously you get a persistent benefit through a structural reduction in IRRBB. We separately run a replicating portfolio. And we haven't changed the settings on the replicating portfolio. We continue to be comfortable that those match the asset profile of the bank. In terms of the P&L cost, you would have seen some of that reduction come through in the current half. It's not a material impact given the level of rates at the moment. Secondly, around...

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Victor German, Macquarie Research - Analyst [13]

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And what's the new duration?

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Alan Docherty, Commonwealth Bank of Australia - CFO [14]

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Sorry?

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Victor German, Macquarie Research - Analyst [15]

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What's the new duration?

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Alan Docherty, Commonwealth Bank of Australia - CFO [16]

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Oh, our duration's in line with the -- with all these -- the rest of the industry, as you can see through the IRRBB risk-weighted assets. We haven't given specific disclosure around the length of that. The -- secondly, the -- around the capital position. I think, as you've said, there's a strong pipeline of divestments. You've seen, I think, a sign of the board's confidence in our capital outlook with the decision to neutralize the interim dividend reinvestment plan and we'll continue to discuss capital management options with the board as we move forward.

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

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We'll take the next question from Andrew Triggs.

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

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Andrew Triggs from JPMorgan. Two questions, please. Firstly, just following on from -- on the cost side of things. You mentioned that there's reduced spend on productivity and growth and some quick calc suggest that, that's analyzing at around probably less than $400 million versus around $700 million a few years ago. So just in terms of when the regulatory spend starts to ease off, can you actually see a reduction in overall investment spend? Or is it good to say there had not been more investment into the other area? And also just, again, thanks for the additional guidance on Slide 79 around lending standards. I'm just interested if you're seeing -- if you could make any comments on whether you've seen the reliance on HEM increase over time. So you mentioned obviously the changes made in previous years and that it reduced the maximum borrowing capacity. But have you seen an increase to around that, sort of 80% level in 2019 that took the reliance on HEM in your kind of borrower costings?

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

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Yes, sure. So let's deal with investment spend first is a -- I mean, you're quite right with -- we call that 64% of the investment spend in the half on reg and compliance. It's 50% in the half before that. I think if you went back a few years and you adjust for the absolute level of investment, it's probably about 30%. So a clear elevation. We think that's absolutely appropriate in the -- at the moment to ensure that we're able to deliver better risk and compliance outcomes and better outcomes for our customers overall. I guess our starting position would not be to be reducing investment spend going forward. Of course, we'll evaluate that in each period. But we think it's going to be very important we're able to invest in our business both in our core customer experience and potentially around our core businesses. We certainly foresee elevated investment in technology. I think that's critical to make those right investments for the long term. In the foreseeable future, I think it's fair to assume that we can expect elevated risk and compliance spend. And over time, we'd like to see -- once we've been able to demonstrate that we're able to operate at a lower risk and deliver those better outcomes. We'd like to be able to put more of that investment towards productivity and growth as you said. Secondly, your question on HEM. I think for us and I dare say for the broader industry, I think it's October 2015, the change to HEM, which basically was an income-based HEM, so pretty much the HEM was increased based on the underlying income or shift to that methodology. What you really saw during that period of time, which is logically what you'd expect, is a high proportion of borrowers with them hitting the prudent floor of HEM at that particular point in time. We saw that, I guess, stabilize. And I think for us, it's been a big focus. I know it has been for others just seeing the proportion of new line applications that rely on HEM falling over that period of time. And I think it's fair to assume that, that will continue to fall over the next 12 months.

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Melanie Kirk, Commonwealth Bank of Australia - Head of IR [20]

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All right. We'll take the next question from Richard, if you could pass.

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Richard E. Wiles, Morgan Stanley, Research Division - MD [21]

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Richard Wiles, Morgan Stanley. I've got some questions on capital. As Victor rightly points out, your pro forma is at 12%. You've said that 3 life insurance sales will complete before the end of June. You've also said that CFSGAM will complete sometime in the middle of the year. Today, you've flagged your strong capital generation. So if we put all those things together, it's quite possible you're comfortably above 12% at June. So the question is, why wouldn't you be announcing some significant capital management initiatives? You've got a 5% earnings hold from the asset sales, so if you don't do capital management, your EPS is under pressure. You've also got some pressure on your ROE. Today, the ROE's under 14%. So I'd like to know why you wouldn't be announcing $3 billion or $4 billion, $5 billion of capital management initiatives in the second half of this calendar year. I'd also like to know why, if the insurance sale is complete, why you wouldn't consider a special dividend before the end of June?

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Matthew Comyn, Commonwealth Bank of Australia - CEO, MD & Executive Director [22]

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Sure. Let me start, Alan. If there's anything you'd like to add, by all means. So starting from the top level, so a strong finish at Common Equity Tier 1 of 10.8%. Forecast, as you can see in the disclosure's approximately 123 basis points. I think, Richard, and as I said at the outset -- or during my presentation, the Chinese regulatory approval process for the sale of BoComm Life is taking longer than expected. That's the only remaining condition precedent on the sale of our domestic life insurance business. We now have all other regulatory approval processes in place. Our Global Asset Management which -- transaction in which we announced and we believe will settle we said in -- at midyear. But of course, with a transaction like that and everything is on track, there are, of course, regulatory approval processes. You don't tend to make applications to do capital management in advance of actually receiving that process from either a regulatory perspective. And then I guess lastly, any capital management initiatives, the decisions for the board and at the appropriate time, if and when we feel that's in the best interest of shareholders, then that will be a board decision and, of course, we'll announce that shortly, immediately afterwards.

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

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So aside from the timing of completion and the board making a decision, there aren't any other considerations that we should be thinking about? Because you will have $4 billion, $5 billion, $6 billion of surplus capital depending on whether you want to be at 10.5 or 11. I mean, if you want to be near 10.5, you're going to have $5 billion or $6 billion of surplus. Is it just a timing issue? Is it just contingent on completion?

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

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It's contingent on the transactions that have been announced. And of course, the board will make that decision at that point in time and there's nothing additional I can add at this stage.

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Melanie Kirk, Commonwealth Bank of Australia - Head of IR [25]

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Great. And we will pass the microphone back to Brian Johnson.

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Brian D. Johnson, CLSA Limited, Research Division - Research Analyst [26]

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Brian Johnson, CLSA. I'd just be interested if we could get your view on whether you think the RBNZ are actually softening the capital by extending the consultation period but releasing the papers that say -- that confirm their workings that there's basically a potential hold? And then I was wondering, Alan, if you could share some details with us about the exit run rate on the NIM that you're seeing right now because during the period, we only had basically 3 months of housing repricing come through. We had that big switching on the fixed. Could you just run us through where the end rate NIM is right now? So dirty, filthy Kiwis and NIM.

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Matthew Comyn, Commonwealth Bank of Australia - CEO, MD & Executive Director [27]

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So I'll add some (inaudible) on both. And Alan, you add. So first, I wouldn't like to speculate about the views of the regulator. As you said, the consultation period's been extended, we will engage extensively during that period. Clearly what's been announced is a significant increase in capital. We do see the potential for that not only to affect shareholder returns but also the availability and price of credit in New Zealand. I'm sure that, that will be carefully considered and any potential impact on important parts of the New Zealand economy. We won't give a specific disclosure on exit NIM. I guess there's a couple of things to think about in the context of forward periods. As you said, Brian, we don't get the full benefit of the 15 basis points re-price on the standard variable rate. That's clearly a tailwind. The headwinds, of course, are that $160 billion of exposure to basis risk premium and what's happening with funding costs. As Alan called out, some of the headwinds on that asset pricing perspective, we've got switching of customers from interest only into principal and interest. You've got a high proportion of customers that switched to fixed in that period. Yes, we also saw there's a drag on NIM in consumer finance, there's actually a lower revolve rate. So I think you've got to offset. And as you would expect, a lot of competition for new housing in the current competitive context but also in a falling system growth environment. So I guess that I'm not answering your question directly but there's a number of headwinds and, of course, you've got to factor in the tailwind of that rate pricing benefit.

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Melanie Kirk, Commonwealth Bank of Australia - Head of IR [28]

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We'll take the next question from Matthew Wilson.

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Matthew Wilson, Deutsche Bank AG, Research Division - Australian Bank Equity Analyst [29]

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Matt Wilson, Deutsche Bank. Just 2 questions, if I may. You claim leadership in digital banking. Open banking starts in July. I thought you would have been more excited by the opportunity that, that presented and we'd have a slide on it today. Can you add some color to what open banking means to you? And then secondly, to flesh out further Andrew Lyons' question on Slide 31. Those 5 reasons don't really gel. Can you -- it seems more of a political narrative that's come over the bank sector in the last week or so, you're following on from Brian's comment, we're hoping there's a supply of credit. That would seem to imply that your borrowers are more prudent than the banks at the moment. You've got a new Chief Risk Officer who has just put his feet under the desk and come from another bank. Can you add some color because that slide doesn't quite reconcile?

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Matthew Comyn, Commonwealth Bank of Australia - CEO, MD & Executive Director [30]

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Sure. So let me take both of those in order. So you're quite right, Matt. Open banking, well, presumably will be legislated, and we can anticipate going through a pilot period and then eventually being rolled out more broadly across a number of our products. So you'll note I've spent time with the U.K. banks. I was there in November just understanding their experience. I suspect it may be the same here, which is initially I think the takeout will be very modest. But long term, we think about it not necessarily in the context of defensively, but also offensively. I do think some of the core assets that we've got are really important in that context. So the advantage of having such a large customer base and being able to engage with them actively and make those experiences personalized and relevant I think is hugely beneficial. So there's a combination of assets which we think are really important to be able to compete in that sort of era. And that, of course, is 5 million log-ons each day with our customers being able to have very targeted offers and pricing being on the product also incorporating risk. So from our perspective, it's -- yes, there's a compliance element to being able to deliver on our open banking commitments but most importantly, actually, how do we best get ready to prosper and thrive in that competitive context. And that's a critical focus for us and that's one element of it. Secondly, look, I acknowledge your point and I understand it doesn't reconcile with -- and I read the same commentary that you do from others and I've attempted to reconcile by speaking to lots of different people but also just looking at the facts. And the facts are that the borrowing -- the changes that were made to policy that had an impact on borrowing capacity were done in 2015 to 2017. The facts are that our approval rates are unchanged over the last 12 months. Our time to get a decision is the same, if not slightly better, that's -- once the application actually goes in. We've seen average loan sizes go up, and we publish those. And so then it comes to, well, how do you reconcile this broader perception? And the only thing and I think is the cause of that is, undoubtedly, the application process for a customer that's sitting down with a lender, when you're being asked to go through 11 individual expense fields, we automate as much of that as we can within our proprietary lending network, but there's a lot of prompts for our lenders and so there's a much more rigorous process around individual elements of expenditure. I think you put out elements like comprehensive credit reporting, which has come online. And so a good example that I heard a customer that had forgotten that they've taken out a store credit card with a grocery chain 5 years ago to get a discount on their groceries, that gets picked up and, of course, that has a de minimis effect on borrowing capacity. But that's something that's different. And I think if you do that delta between a customer today versus 5 years ago, I think that experience is different. And I think that process and the time that's being taken, I think that's being confused with a very sharp reduction in borrower capacity. So it's certainly not my intent to just create a political narrative. I actually think the narrative aligns very strongly with the facts. But I certainly accept that, that narrative has been told differently by different stakeholders, and that's why I wanted to include it in the presentation today.

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Melanie Kirk, Commonwealth Bank of Australia - Head of IR [31]

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

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Brett Le Mesurier, Shaw and Partners Limited, Research Division - Senior Analyst of Banking and Insurance [32]

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Brett Le Mesurier from Shaw and Partners, a couple of questions. You said your home loan growth was increasing. You're up to 90% of system but that's substantially due to your increased use of brokers, isn't it? The broker percentage is increased from about 40% to 45% on new business over the past year. So why do you think you're unable to get back to system growth notwithstanding the increased use of brokers that you're making? And then secondly, on the remediation and program costs of $1.5 billion, you said that's expenses and provisions. Could you tell us how much of that is actually provisions? And do you -- can you give us an idea of how far through the process you think you're actually on -- are at now?

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Matthew Comyn, Commonwealth Bank of Australia - CEO, MD & Executive Director [33]

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Let me go back to provisions. So let's deal with home-lending performance. So if you go back to the second half of last year, and I think to the question earlier, all of the major banks I think had struggled to grow its system. For us, it's been a focus to get much closer to the system. I think we've talked about why I think some of the reasons why the major banks have struggled. Look, I guess I'll separate the performance and you're quite right insofar as the increased proportion of new loans through the broker channel has increased during that period. I'd say at a macro level, I think 59% of applications at a system level are going through the broker channel. I do think the last 6 months, that context has been conducive to brokers because there's been a lot of discussion and information out there about availability of credit. You see that directly from customers who talk about, "Should I go to another bank when they ask lots of questions?" I think it -- to me, at a structural -- well, at a system level, I think we've seen an increase. I guess I'd break down both flow and stock of our home-lending businesses as follows. I mean, proprietary I think fundings are basically flat on the period. We're actually growing above system in proprietary but there's slower runoffs, so there's been better retention. And for the reasons that I outlined, slightly higher fundings performance in the broker channel, which is us participating in the broker channel, perhaps more so than we have in other periods, and we acknowledge that. So secondly -- and maybe I'm going to hand to Alan, I think you were looking for the specific breakdown on what proportion is.

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Brett Le Mesurier, Shaw and Partners Limited, Research Division - Senior Analyst of Banking and Insurance [34]

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Yes, [so you had one here], and you say that relates to expenses and provisions. Yes, so what proportion of that relates to provisions? And then also, how far do you really think you are through this process?

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Alan Docherty, Commonwealth Bank of Australia - CFO [35]

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Yes. I mean, so that disclosure, as you can see on Slide 9, it's a very -- there's been some long-dated issues that we've been dealing with for a number of years. So the vast majority of that cumulative amount has been spent and the customers remediated, all the program costs executed upon. And our full year disclosures, you can see in the other -- in the provisions note there, that there's a breakdown of the outstanding provisions across the various categories. And so there is an element of provisioning within that $146 billion. So -- and you'll see that again in the full provision disclosures in the annual report, but the vast majority has been taken through expenses. Yes.

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Brett Le Mesurier, Shaw and Partners Limited, Research Division - Senior Analyst of Banking and Insurance [36]

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Okay. And how far do you think are through the process?

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Matthew Comyn, Commonwealth Bank of Australia - CEO, MD & Executive Director [37]

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Of the things that were able to reliably estimate? Or other elements that we may not be able to reliably estimate today?

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Brett Le Mesurier, Shaw and Partners Limited, Research Division - Senior Analyst of Banking and Insurance [38]

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The latter.

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Matthew Comyn, Commonwealth Bank of Australia - CEO, MD & Executive Director [39]

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Well, I guess as per that characterization, Brett, it's very hard to say. And while -- the important point from my perspective is to the extent that there's anything that we need to remediate or fix, we will get to the root cause of that issue as quickly as we possibly can. We're going to be focused on refunding our customers as quickly as we can. And to the moment we feel that we're in a position to be able to reliably estimate, we will.

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Brett Le Mesurier, Shaw and Partners Limited, Research Division - Senior Analyst of Banking and Insurance [40]

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Just linking those 2 together then, to what extent do you think the customer remediation problems relate to your inability to grow anywhere near system in home lending?

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Matthew Comyn, Commonwealth Bank of Australia - CEO, MD & Executive Director [41]

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I don't think they're related at all.

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

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We'll take the next question from James Ellis.

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James Ellis, BofA Merrill Lynch, Research Division - Director [43]

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It's James Ellis from Bank of America Merrill Lynch. Just a couple of questions on loan growth. So the institutional book, which saw some optimization in the period and then in the business book where there was a runoff of the development portfolio, just wondering if both those were the -- that had run its course or whether there's still a way to go.

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

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Let's deal with institutional first. That -- I mean, clearly, the focus on capital and risk, that will continue. We've seen good risk-weighted assets, a reduction of about $7 billion -- just under $7 billion over the period and that's a continuation of what we've been doing for the last couple of periods. That will continue to be a focus going forward. Obviously, the rate of that reduction risk-weighted assets may not continue as it has today. We remain committed to the institutional business and to supporting our clients. We want to make sure that we're pricing appropriately for that and earning a reasonable rate of return on capital deployed. Yes, from a business banking perspective, look, we funded I think $13 billion during the half. As Alan said, we're very comfortable with the decisions that we're making around pricing as well as risk and particularly in the -- that property development perspective, we've been comfortable to tighten risk settings in previous periods, and we've seen a reduction in balances during that period, which is, of course, has constrained our ability to grow balances.

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Melanie Kirk, Commonwealth Bank of Australia - Head of IR [45]

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We're going to take the next question from the phone, we're going to take a question from Brendan at Citigroup.

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

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It's Brendan Sproules from the -- from Citigroup. I just have a question on the NewCo that you're planning to demerge later in the year. Can you give us an update on the timetable, particularly does the Enforceable Undertaking announcement that you made on Monday impact that? Or is there anything contained in the Royal Commission's final report that would impact the -- impact that demerger? And the second part of that question is, to what extent are financial planners within that business incentivized now to maybe find somewhere else given that you're having to work through this Enforceable Undertaking?

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Matthew Comyn, Commonwealth Bank of Australia - CEO, MD & Executive Director [47]

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So in the context of NewCo, we announced that we would be demerging. We said late this calendar year, I don't have any further update on that decision. We've appointed a new CEO, Jason Yetton, into the NewCo business. I think we're making good progress on the transition and separation. Of course, in the context of the Royal Commission, we're carefully considering those recommendations and we're going to make sure that we set that business up for success. In the context of financial planning, look, there's a number of reforms that we'd already committed to in the context of grandfather commissions moving to a 1-year opt-in on an ongoing service fee, et cetera. It's not unique to us but we're certainly prepared to move ahead of the industry in a number of key areas. I think that's really important. But I know Jason would be very focused on engaging closely with our people and making sure, again, that we're setting up those businesses for success in the future.

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Melanie Kirk, Commonwealth Bank of Australia - Head of IR [48]

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We'll take one more call -- one more question from the phones. We'll take a question from Azib at Morgans.

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Azib Khan, Morgans Financial Limited, Research Division - Senior Banks Analyst [49]

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A couple of questions for me, firstly on your deposit mix and secondly on home loan distributions. So on deposit mix, there's been pretty significant growth in your mortgage offset balances from the June half to the December half -- or from -- I should say from June to December, it's gone up from $42 billion to $46 billion. And it looks like that's what's driving the bulk of your transaction deposit growth over that period. At the same time, you've experienced a decline in your savings balances, which is presumably partly a result of the lower online savings rates [on the fee] you have repriced recently. So just connecting these points together, it looks like that maybe there has been money shifting out of online savings accounts and into mortgage offset balances. Is this what's going on? And if that's the case, aren't you better off offering slightly better online savings rates? I'll wait for the answer to that and then I'll ask my next question.

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Matthew Comyn, Commonwealth Bank of Australia - CEO, MD & Executive Director [50]

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No problem. So look, I think it's a fair hypothesis stringing a few of those things together. We certainly made some pricing changes on our savings portfolio. Of course, we're trying to optimize across the broader portfolio. Transaction banking is a big priority for us in the context of both new customer accounts as well as balances within those accounts. We've seen a continued growth in offset. I think that's unique in this particular period. But ultimately, our primary focus is on making sure we have the best everyday banking experience. We're the leader in transaction banking and across the deposit portfolio, the highlight being the 69% deposit funded and then we're prepared to make volume margin trade-offs in any particular period.

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Azib Khan, Morgans Financial Limited, Research Division - Senior Banks Analyst [51]

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Just one on that, just going to follow-up on that before I ask my next one. So do you think the online savings rates that you're offering at the moment are sustainable? Or do they need to go up a bit?

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Matthew Comyn, Commonwealth Bank of Australia - CEO, MD & Executive Director [52]

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Well, I think as you'd appreciate, I won't speculate on any future pricing changes. We look very carefully at all of our pricing in market on a daily basis, and we review and make decisions where necessary.

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Azib Khan, Morgans Financial Limited, Research Division - Senior Banks Analyst [53]

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Okay. And next question is on home loan distribution. So Matt, look, you've clearly carried out some extensive analysis in relation to [broker rim] and the cost of home loan distribution, which you were asked about in around 7 of the public hearings. So presumably you would have a pretty good idea of what it costs you as in CBA on average to sell a home loan through the brand channel. Can you please give us an idea of what this cost is?

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Matthew Comyn, Commonwealth Bank of Australia - CEO, MD & Executive Director [54]

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Look, I won't breakdown the distribution cost differentials between the branch network and the mortgage broking market. I mean, I know that over the years, a number of analysts have estimated it and I think that at least some of the estimates that I've seen are quite reliable. As you noted, I was extensively examined on my views in relation to the mortgage broking channel. I think that they provide an essential service for customers. But my view as -- was examined aligns with the commission's recommendations, that was my view then, and it remains my view today.

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Melanie Kirk, Commonwealth Bank of Australia - Head of IR [55]

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We are going to have to draw the conference call and questions to a close there. So thank you, everyone, for joining us today. If you have any follow-up questions, please come back to us and the IR team and we'll facilitate those answers. Thank you.