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Edited Transcript of NAB.AX earnings conference call or presentation 6-Nov-19 11:30pm GMT

Full Year 2019 National Australia Bank Ltd Earnings Presentation

VICTORIA Nov 11, 2019 (Thomson StreetEvents) -- Edited Transcript of National Australia Bank Ltd earnings conference call or presentation Wednesday, November 6, 2019 at 11:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gary A. Lennon

National Australia Bank Limited - CFO

* Philip Wayne Chronican

National Australia Bank Limited - Interim Group CEO & Director

* Ross Brown

National Australia Bank Limited - 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

Jefferies LLC, Research Division - Equity Analyst

* Edmund Anthony Biddulph Henning

CLSA Limited, Research Division - Research Analyst

* 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

Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst

* Richard E. Wiles

Morgan Stanley, Research Division - MD

* Victor German

Macquarie Research - Analyst

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Presentation

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Philip Wayne Chronican, National Australia Bank Limited - Interim Group CEO & Director [1]

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All right. Well, good morning. And welcome to everyone in the room and also those on the phone as well as those that are joining by webcast. I'm Phil Chronican, the Chief Executive Officer at NAB for the time being. And here, along with Gary Lennon, our Chief Financial Officer, and will be presenting the NAB's full year '19 results before taking questions.

There are 3 themes that I want to -- sorry, an issue with the slides here. All right. There are 3 themes that I want to talk about this morning and update you on reviewing where -- what has obviously been a pretty challenging year for the bank and for the industry.

Firstly, in the aftermath of the Royal Commission report, the APRA self-assessment document had a number of regulatory interventions, we've had to take a number of actions. We've increased our customer-related remediation provisions to over $2 billion pretax. And that now covers all of the known material legacy issues.

We've enhanced accountability for outcomes with our executives, and we've overhauled our remuneration framework for the leadership team. Secondly, our transformation has increased the robustness of our systems and processes that are supporting our shift to digital as well as generating material financial benefits.

And thirdly, we've strengthened our financial settings to ensure that we'll meet APRA's unquestionably strong capital requirements. We've raised $3.7 billion of new equity over the course of the year, reduced the interim and final dividends from $0.99 to $0.83. And we'll also raise around $1.6 billion of additional capital through a partial underwrite of the DRP.

We achieved 1% uplift in underlying cash earnings, excluding the large notable items in the FY '18 and '19 years, but dilution from capital raisings sees this translate into a cash EPS decline of 2% on the same basis.

Incorporating those additional remediation charges and the impact of the capitalized software policy change that we announced last month, cash earnings, of course, declined by just under 11% for the course over the year.

We've had continued tight control of expenses, and we've delivered modest underlying revenue growth and maintained the dividend, as I said, at the reduced level of $0.83 that we set in the first half.

The APRA self-assessment that we published last year and the Royal Commission report recommendations provide a road map for the changes that we need to make. So while sustainable changes take time, as we're showing on this page, we are making good progress and tangible benefits for our customers from the steps that we're taking. And this includes the fee reductions that follow our review of more than 300 NAB products, a 42% reduction in critical and high-technology incidents and $247 million of refunds that have been paid to customers so far.

We've also completed 5 of the Royal Commission recommendations out of the 39 recommendations that are likely to require action on our part.

Importantly, we've taken clear action to meet our stakeholder expectations, and that includes change in Executive and Board accountability. After our Chief Executive resigned in February and our Chairman who is set to stand down later this month, we've also had a number of other changes that the Board has overseen. This includes the forfeiture of significant amounts of unvested variable rewards for the majority of the 2018 executive leadership team, and that relates to periods covered in the 2016 to 2018 financial years.

On top of that, we had a 20% reduction in the Board base fees for ongoing directors. There'll be no 2019 short-term variable reward paid to the ELT members, the leadership team members. And there have been no fixed remuneration increases for the ELT.

We've implemented a new remuneration framework for 2019, which includes an appropriately hurdled long-term variable reward. As we've previously disclosed, additional customer-related remediation charges of $832 million aftertax were recognized in the second half, which takes the total pretax provisions to around $2.1 billion. Over half of these provisions in the second half related to the adviser service fee issues within the self-employed planning groups. And it's important to stress here that 93% of the total provisions relate to the wealth and insurance businesses, 7% relate to our core banking business.

In terms of fee simplification, we know we need to do more to make the bank more attractive to its customers. And that's why we are simplifying, reducing and improving the transparency of our fee structures. We have removed or reduced 185 fees across the Australian banking and wealth business in the course of the last year. And while there is a financial cost to these changes, there are also benefits to the business in terms of lower customer complaints, reduced complexity in the business and reduced operational risk.

Pleasingly, our customers are seeing these improvements. The Net Promoter Score for our priority segments has improved, consistent with the other banks, post the release of the Royal Commission report in February. But clearly, still not where we'd like it to be.

Customer advocacy remains a strong priority for us and the initiatives on fees, on product simplification, on technology resilience as well as the improved governance structures with Executive and Board customer committees are all giving us work further impetus.

While it's been a challenging year, our core businesses are mostly performing well. With business and private bank, corporate and institutional in New Zealand, all delivering a underlying profit uplift over the year.

We had a great New Zealand result with strong revenue growth and good growth in volumes for both housing and business lending. Our business in private bank earnings was slightly lower. We continue to have good growth in small business lending volumes, but offset by a slightly higher credit impairment charge.

Corporate and institutional business also had a lower bottom line earnings with good revenue from the nonmarkets area diluted by a more normal credit impairment charge. The decline in earnings in consumer banking and wealth, obviously reflects considerable pressure on home loan margins and growth and lower wealth revenue as we've repriced to meet the market.

Importantly, we are continuing to invest to keep our business competitive and digital delivery is critical for almost all of our customers, and we've made real progress. 66% of all active customers now are interacting with us purely through digital channels. 51% of all simple consumer sales are through digital channels. 47% of new small business lending accounts are now being open through our QuickBiz platform. And we launched Apple Pay earlier in the year with very high levels of takeup, and we continue to invest in new digital capability for the future, including preparing for the open banking regime.

And we're continuing to pursue growth. There is growth to be had within our businesses. As you know, small business loan growth continues to be one where we're outpacing our peers with 3.5% growth over the year compared with 0.4% for the average of the other 3 major banks.

And pleasingly, much of that growth comes from 2 of our core specializations, agribusiness and health. We closed a further 75 global infrastructure deals in financial year '19, which helped drive a 35% uplift in revenue from infrastructure since FY '16.

We're further extending our private bank reach with NAB Private now launched in Western Sydney, and our JBWere business continues to ingrowth its funds under management, up 44% since FY '17. And our digital bank, UBank, has grown customer numbers by 40% since FY '17. And in FY '19 grew home loans at 7x the rate of growth in system.

So as you can see, we are continuing to focus on the growth of the business, even while we deal with the issues of the past. What I'd like to do now is to hand over to Gary to take you through in more detail some of the financial outcomes and our transformation progress. Thank you.

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Gary A. Lennon, National Australia Bank Limited - CFO [2]

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Thank you, Phil. Great. So let's start with our usual high-level overview of the results. And as Phil has addressed the impact of large notable items, my focus will tend to exclude these and focus on the underlying trends.

In that context, cash earnings rose 1% over the year and are broadly flat over the half. Revenue is higher over the year, up around 1%, but flat over the half, mainly due to lower markets and treasury income.

On costs, we've achieved our target of broadly flat over the years, supported by productivity benefits from our transformation program. Half-on-half, costs are up 1%, largely reflecting timing of investment spend.

Underlying profit is up about 2% over the year, but lower over the half, given softer revenue and higher costs.

Credit impairment charges increased over both the year and the half, but remain at relatively low levels, and asset quality remains sound. Turning to revenue, which is flat over the half and up 1% over the year.

Our performance over the half needs to be viewed in the context of softer markets and treasury income, down $102 million, given more challenging trading conditions, and wealth income has also been a drag. Contributions from loan growth has been solid, given good business lending volumes, while margins have only had a minor impact, reflecting a range of largely offsetting factors. NIM ex Markets & Treasury is flat over the half at 1.79. Lending margins were up 1 basis point, with repricing, partly offset by competitive pressures in home lending and customer switching. This has been offset by lower earnings on capital due to the low rate environment.

So let's explore the impact of low rates in a bit more detail, given this is clearly an important topic for these results. In Australia, we currently have $88 billion of deposits, which are at or near interest rate floors, where we are restricted in fully passing on lower cash rates.

Our replicating portfolio provides some hedging against the impact of lower rates on deposits and capital. We have $69 billion invested in a rolling portfolio of interest rate swaps, with an average term of 3.4 years.

However, the earning rates on the replicating portfolio are currently about 100 basis points higher than current market rates. And, therefore, is continuing to trend down over time.

Looking forward and considering what this means for the group NIM and revenue after allowing for the impact of the replicating portfolio, the full impact of the 3 -- of the last 3 cash rate cuts in Australia reduces FY '20 group NIM by about 6 basis points on a gross basis. But after you consider the SVR repricing, the net impact is a 3 basis points reduction or in dollar terms, an equivalent to a $200 million in lower revenue.

While there are always a number of moving parts impacting NIM in any period, clearly, recent and future rate cuts represent a headwind in the outlook for margins and revenue.

Expenses. Over the year, expense growth was 0.4%, consistent with our target to hold expenses broadly flat over the year. Key to that outcome has been the productivity benefits with an extra $480 million realized in FY '19. Technology and investment spend increased again, up $456 million, with increased spend on transformation and risk and compliance initiatives.

The other components had a larger impact than normal in this period, reducing cost by $183 million. This reflects lower costs relating to the performance-based compensation, the Royal Commission and marketing, partly offset by a provision raise for regulatory actions.

Turning to FY '20. We continue to target broadly flat cost, excluding large notable items. As always, we do face a number of moving parts that are worth calling out. The normalization of performance-based compensation, the change in our software capitalization policy reduces D&A going forward, but this benefit will likely be offset by higher expenses relating to the sub $2 million projects, which are now expensed and the higher regulatory and compliance spend.

We expect to benefit from the non-repeat of the regulatory actions provision, lower annual investment spend and further productivity savings as we trend towards over that $1 billion target.

Turning to asset quality. Credit impairment charges increased 5% over the half, and then as the ratio to GLAs is up 1 basis point to 16 basis points. Second half '19 included higher specific charges for a small number of larger exposures, combined with the non-repeat of write-backs in the first half of '19, and additional collective provisions for our Australian mortgage portfolio.

There was a modest uplift in our forward-looking adjustments and total FLAs now stand at $641 million. The ratio of 90 days past due on impaired assets to GLAs increased over the half to 93 basis points, primarily due to the higher Australian mortgage delinquencies. New impaired assets also rose due to a small number of single-name exposures in our New Zealand dairy portfolio, and I'll talk about both those items in more detail shortly.

And our collective provision to credit risk-weighted asset ratio now stands at 96 basis points, up 2 basis points in the half, despite credit risk-weighted assets increasing $6.9 billion from the introduction of SA-CCR.

So now digging into those areas of interest. Starting with housing. From an asset quality perspective, 90 days past due have increased in a relatively broad-based manner in the Australian housing book, drivers this period continue to be the interest-only convergence to principal and interest loans and customers staying in arrears for longer.

In addition, slower book growth has meant the seasoning impact of earlier vintages is having a more pronounced effect on the ratio in this period. Despite this, our book is in good shape and loss rates remain unchanged and low at 2 basis points.

Turning to agri. Continuing drought conditions in New South Wales and Queensland is something we continue to watch carefully. At this stage, asset quality in our Australian agri portfolio remains sound, with only a modest uptick in arrears, but further stress is expected, if extreme dry conditions do persist.

In response, we have in place a collective provision FLA of $180 million to address any potential future impacts. And finally, New Zealand dairy. The impaired book has increased over the half, mainly due to a small number of corporate dairy customers. While there are some cash flow challenges, these corporates are all well secured. Across the overall impaired book, security levels are relatively high with average LVRs at 86% and specific provision coverage around 14%.

Now turning to the divisional results and starting with the largest division, Business & Private banking. Cash earnings fell 2% over the year and 6% over the half. Over both periods, this reflects higher credit impairment charges and also higher operating expenses with continued uplift in investment spend.

Revenue was up 1% over the year and 0.4% over the half, reflecting continued robust SME business lending growth, partly offset by some modest margin decline due to lower earnings on deposits and capital.

As you can see, our SME lending is up 3.5% over the year, a strong performance, as Phil has already mentioned. Housing lending, however, is lower over the year, down 2.8% with this portfolio overweight to the slower growing investor segment and also impacted by the increased complexity in the origination of mortgages for business customers.

Over time, we do expect the addition of mortgage specialist resources into this business to support improved growth. Credit impairment charges are circa $100 million or higher over the half. Higher collective provision charges are up $28 million are all housing related, reflecting increased arrears and lower house prices.

Specific charges are also higher by $70 million, with about half of this due to the non-repeat of write-backs in the first half '19, combined with a small number of single-name related provisions in second half '19.

Underlying asset quality in our SME business lending book remains sound and average credit scores across the portfolio are largely unchanged year-on-year.

Consumer Banking. Consumer Banking cash earnings fell 8% year-on-year, but increased 20% half-on-half. The second half result will benefit from lower short-term funding cost and repricing. This is obvious from the top right-hand chart, with revenue up 6% over the half, about 2% lower over the year.

Our housing lending growths were a material divergence from system in second half '19, with balances declining 1% over the 6 months to September. While this is mostly explained by competitive factors, including the timing of our pricing decisions and our customer offers, it is clearly a disappointing outcome. And while keeping our pricing disciplines intact, we do expect to get some growth momentum back in 2020.

More recent improvements in housing and lending applications are encouraging, up 18% since June, helped by changes to the serviceability floors and buffers in August. There's also been increased focus on conversion and retention activities.

Wealth. Wealth cash earnings declined 30% over the year and 17% over the half. Lower revenue was the key driver, reflecting lower margins, given repricing and continued shift in business mix to lower-margin products. The strategic repositioning of MLC Wealth has good momentum, a new executive team is now largely in place and a new strategy focused around -- in place with our new strategy focused around 4 business pillars. Significant work is underway to ensure the strength of each pillar, including a simpler, more customized advice business and more competitive pricing across the portfolios.

Preparation for a target public market exit in FY '20 progressing. We do continue to keep all options on the table, including a trade sale or alternate structures.

But our approach to any exit will be disciplined and considered.

Corporate & Institutional Banking. Softer markets income made this a more challenging period for CIB. Over the year, earnings fell 2%. The key drivers were a swing in credit impairment from write-backs in FY '18 to charges on a small number of larger exposures in FY '19, combined with markets income, down 8%. Earnings over the half was 7% lower, with markets income down 19%. Lower margins were also a contributor with NIM ex markets, down 7 basis points, mostly reflecting lower earnings on capital and deposits. CIB continues to demonstrate a disciplined returns focus and has been able to improve the ratio of pre-provision profits to risk-weighted assets, excluding reg and model changes, by 3 basis points over the year, while continuing to grow volume strongly at 7%.

The volume growth is aligned through our tilt to higher growth, higher return sectors of global infrastructure, renewables and [fee].

New Zealand. A strong performance from New Zealand Banking, with cash earnings up 5% over the year, despite an environment of lower economic growth and lower rates. Revenue increased 5% year-on-year and 2% half-on-half, with strong lending growth.

However, margins are down 10 basis points in the second half, reflecting lower earning rates on deposits and capital. The fixed rate nature of lending in New Zealand does make it hard to offset these impacts in the near term through repricing. Higher credit impairment charges, particularly in the second half have also impacted earnings. This reflects an increase in specific provisions raised on a small number of larger dairy exposures, which we've already discussed. Overall though, asset quality continues to be sound, and on an ex dairy basis, the 90 days past due impaired asset ratio to GLAs is down 1 basis point over the half.

Now turning to capital. Our CET1 ratio is 10.38%, down 2 basis points from March. This includes a drag of 34 basis points from regulatory changes around SA-CCR and the op risk overlay and 29 basis points from customer-related remediation, partially offset by 25 basis points benefit from underwriting the interim DRP.

We remain well placed to meet APRA's unquestionably strong CET1 benchmark from January 2020 and are targeting a minimum CET1 ratio of 10.5% at March and September.

The final DRP will be partially underwritten up to $700 million and offer a 1.5% discount. In combination expected to add approximately $1.6 billion of capital of 37 basis points of CET1, to achieve a pro forma ratio of 10.75. This, together with organic capital generation, which was 23 basis points in the half, should see our CET1 trending higher from here.

APRA's APS 111, consultation on equity investments in subsidiaries released last month, is not expected to have a material impact on our Level 1 CET1, which at the 30 September was 10.5%. In terms of New Zealand, the final RBNZ capital framework is expected in December. Our response will be ultimately informed by what are the final requirements as well as our ability to appropriately generate a risk-adjusted returns and potentially may involve repricing, reduced lending and constrain investment into BNZ.

Okay. Shifting now to the transformation, which is progressing well. We're at the 2-year mark and despite a difficult environment, our 3-year targets remain unchanged.

Investment in simplifying and digitizing our business are now having a truly significant impact. If we turn to some of the items in more detail, we have delivered cost savings of $800 million have been achieved so far over the 2 years since FY '17, and we continue to target greater than $1 billion by 2020. Regulatory and compliance spend has been a major headwind to date absorbed within the program. Compared to the FY '17 baseline, our reg and compliance investment spend is up about $120 million. And as a related point, our underlying operating expenses, excluding that investment spend, have also been impacted by higher regulatory risk and compliance costs.

And over that 2-year period since FY '17, these costs have increased by circa $250 million, with that figure expected to rise to greater than $300 million by the end of 2020, all absorbed within our flat cost guidance. FTE reductions from productivity have totaled 3,713 over the 2 years against the 3-year target of circa 6,000. We have also added 1,240 new hires over the 2 years for upskilling growth and compliance against the 3-year target of circa 2,000.

An important focus of our accelerated investment remains the Best Business Bank to provide a significant uplift in capability and innovation in our already leading SME franchise. Progress has continued with good momentum since FY '17. We are increasing the capacity of our bankers to support more complex customer needs with revenue per relationship bank at 20% higher since FY '17.

The portion of revenue from bankers with industry specializations also increased from 20% to 30%. And for our small business customers, we are providing better access to banking services via our scalable customer hub open 7 days a week, plus fast digital access to unsecured lending via QuickBiz. Our simplification agenda remains critical to our ability to deliver better and faster outcomes for our customers and staff. Product numbers are lower again in FY '19, down 72 to 423, and this is now 30% lower than FY '17. And this is reducing complexity right across the company. The trend towards increasing customer interactions via digital channels continues. This is being supported by our investment in new digital and mobile capabilities, including the mobile cheque capture launched in second half '19 and our Virtual Assistant launched in second half '18.

Since FY '17, we have seen over-the-counter transactions in the branch network down 30%. And we've seen a 17% reduction in the number of calls into our call centers.

And finally, on the technology. Clearly, technology is a critical enabler of our abilities to deliver seamless, more personalized experiences to customers, which are simpler, faster and lower risk. We are making good progress. Legacy IT applications continued to reduce, down 11% since FY '17. And over the same period, we migrated 19% of our current IT applications to more reliable, lower cost cloud platforms. There's been a 42% decline in critical and high incidents in FY '19, and we're becoming faster at both detecting and containing cybersecurity threats. One important IT activity, which has been happening in the background is the building of our cloud-based data lake, known as the NAB Data Hub. The data lake is a critical foundation to support advanced data analytics and machine learning. And in time, we'll provide scalable, highly personalized, easy-to-understand insights to customers.

And on that note, I'm going to pass back to Phil.

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Philip Wayne Chronican, National Australia Bank Limited - Interim Group CEO & Director [3]

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Okay. Well, thanks, Gary. And I just want to give some comments on the economic and operating environment outlook as well as a summary. Obviously, the operating environment remains quite uncertain. The Australian economy has never had interest rates this low, despite the fact that the economy is actually in a fundamentally sound position. Economic growth might be slowing, but we're still expecting growth of around 2% in the coming year. Unemployment remains low at around 5%. And inflation, of course, remains low as well.

There's a housing recovery clearly underway in New South Wales and Victoria, and this obviously takes away much of the downside risk that we had to housing credit growth. Business conditions have softened, and that might pose a risk to business credit growth. And the stimulus from recent rate cuts is, I think, potentially less meaningful, and that's something that I'd like to speak a little bit more about.

We know that low rates generally are not good for bank earnings, and NAB is no exception to that. Our deposit costs don't fall in line with lower rates, given that we've got a significant balance of deposits that are at or near rate floors, and Gary has taken you through that.

Our earnings on capital and on 0 rate deposits have obviously reduced by around 1/3 since 2015. And as Gary has indicated, are likely to fall further. Home loan balances are reducing as the majority of our customers take advantage of lower rates to accelerate their debt repayment rather than lowering their repayments and spending the residual cash. So what this means in aggregate is that our revenue will be almost $200 million lower in FY '20 as a result of recent rate falls, even after the impact of pricing changes.

But more importantly, the macroeconomic benefits of very low interest rates may not be as effective as many traditional models would suggest. As we've indicated, households are using the surplus cash that they're receiving to pay down debt rather than using the cash to spend. And of course, those that are receiving less, depositors, particularly retirees are saving more and earning less. In economic speak, this means, to a large extent, lower interest rates are having the effect of transferring money from people who had a high propensity to spend, to those who are demonstrating a high propensity of save. And therefore, not having the macroeconomic impact that many would have expected.

What this means is that economic growth is going to have to come from other sources, particularly from increased business investment, and that needs to be supported by credit growth, and by economic reforms that will support productivity growth and business confidence.

Notwithstanding the obvious challenges that we faced during the year, we have stayed focused on addressing the issues of the past, as well as preparing for the future, including the hire of Ross McEwan, who will start as our new Chief Executive on the 2nd of December. We've used the APRA self-assessment and the Royal Commission recommendations as a road map for the actions that we need to take to meet customer and community expectations.

Our financial settings have been strengthened, as we've increased our customer remediation provisions, lowered the dividend payout ratio to a more sustainable level and our capital position, which is now on track to comfortably meet the unquestionably strong threshold from 1 January.

The underlying performance of the group remains sound, but the low interest rate environment does provide new challenges for us in the business. Importantly, though, we're continuing to deliver the transformation plan that was set out 2 years ago.

Transformation is delivering benefits, including a more digitally-enabled bank, growth for small business, improved IT resilience and productivity savings.

So I'll leave it there and ready to take questions. Ross, so you're going to...

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Questions and Answers

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Ross Brown, National Australia Bank Limited - Head of IR [1]

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Usual protocols. I'm sure you're familiar, if you can wait for the microphone, state your name and the organization you represent. First question from Victor, please.

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Victor German, Macquarie Research - Analyst [2]

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Victor German from Macquarie. Two questions, if I may, one on capital and one on expenses. Your capital, obviously, you were able to meet unquestionably strong or you will be able to meet it once you do your partially underwritten DRP. Just be interested in the key considerations going forward, given that you know you're going to have an impost from New Zealand and how you're planning to address that, and maybe Phil, you can make some comments with respect to how Board thinks about capital being at the lower end of peers, particularly given some of the comments you provided on the outlook from an economic perspective? And second question on costs. Gary, obviously, when you started this journey, you did anticipate, as you've highlighted, $350 million of additional costs that are coming through. And given the comments from some of your peers that reported earlier, they are seeing quite significant growth in expenses in the current environment. Just be interested in your observations, whether sticking to that cost guidance is having short term in the business for the sake of meeting those targets? Or do you think there is something that differentiates NAB to PDs in terms of ability to deliver costs?

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Philip Wayne Chronican, National Australia Bank Limited - Interim Group CEO & Director [3]

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Okay. I'll handle the capital one and pass to Gary for the cost question. In terms of capital, we're about 10.38%, I think, at 30 September with the DRP, that takes us up to around 10.75%, so quite comfortable over the 10.5%. Gary indicated that our organic generation -- with the lower dividend, our organic generation each half is around 20, 25 basis points. And last year, there were a couple of tailwinds in terms of some of the accounting volatility issues that may have the potential to reverse. And an important point is the way in which the remediation provisions are treated. So the tax deduction doesn't occur until the money is actually disposed of. So at the moment, that future tax asset is a capital deduction. All of which says is that, in addition to being at 10.75, we'll have quite a number of tailwinds to our capital position during the course of next year. It mean that's a build to up and around 11%, and in fact, it's quite foreseeable, which means that relative to the peer group and given the steps we've taken, we don't see there's any differentiation at all. In terms of New Zealand, clearly that's a point of some uncertainty. APRA's treatments through 111 didn't have any impact on us in the end. Whether the New Zealand changes go through and what form, obviously, we won't know until December. What we are aware of is that the RBNZ is looking at both timing, so over what time frame that would be rolled out and what instruments would be eligible for capital. And once that's done, we'll assess how much capital we have deployed there and the attractiveness of deploying more capital there. I think what we'll try to be clear on is that it's not just a question of saying everything about our business stays the same, and we put in more capital, because the returns on various activities will change. And that's not just us, it will be the industry as a whole. So I don't -- it's a dynamic that you have to model through but the -- just adding on additional capital is probably the worst possible case and a highly unlikely one.

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Gary A. Lennon, National Australia Bank Limited - CFO [4]

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Yes. Phil, I'm just adding one point on that. It does definitely feel that Reserve Bank in New Zealand have been open to a genuine consultation. So they've got a lot of feedback around maybe not the ultimate quantum but the shape, and that does matter, and as Phil mentioned, the timing. So there is -- we do have a few options around New Zealand that could have an impact, or it might be quite benign. It's really got to -- we really got to see what the shape of those final requirements are.

On the cost question, Victor, and you're right. And I suppose it goes back to any plan or any transformation plan. It never works out quite exactly as you planned it out. And we didn't plan to have an additional $250 million of compliance rate and risk-related costs when we kicked this off, but that's been the reality. What we also didn't plan, and we -- is the benefits that we have achieved thus far and we'll continue to achieve through a whole bunch of other things in our in-sourcing strategy. So that was a strategy where we thought we might do some in-sourcing, but we're getting double benefits from that. By bringing critical technology functions back in-house, we're building capability at a reduced cost. So that is something we didn't envisage to get that degree of benefit.

In terms of third-party spend and the ability to get that third-party spend down, that has been greater than we originally thought we could achieve. And as we continue to go through the transformation, whilst 2020 is going to be tough for the reasons I think that we and others are laying out, because we do see a further uplift in risk and compliance costs into 2020, there is still no shortage of opportunities we see around waste across the organization and no shortage of inefficiencies that, if we put in the right end-to-end process investment, there are still significant opportunities. So whilst the shape of the plan is nearly entirely different, we are able to lend. We've been able to manage all those different changes and get to an outcome that is reasonable. It doesn't understate the challenge for 2020, though. So we've committed to those targets, but we're cautious of what might come at us from the risk and reg standpoint, and we're very mindful that this is all about setting up the business and transforming the business for the future. This is not just about hitting a short-term goal. So we'll not compromise that through the process. And if it gets to the stage where we're compromising customers or we're compromising the longer term, then we'll have to reassess because that's not what we're about. So it's not a achieve goal at all cost. It's -- but we still very much see a path currently.

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Ross Brown, National Australia Bank Limited - Head of IR [5]

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Andrew Lyons?

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Andrew Lyons, Goldman Sachs Group Inc., Research Division - Equity Analyst [6]

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Andrew Lyons from Goldman. Just 2 questions. The first one on the NIM. You said the net impact of the 3 cash rate cuts to date for next year will be a 3 basis point headwind to the NIM. Just based on your disclosures, particularly around the replicating portfolio, it would appear as if that entire impact is the impact of the replicating portfolio. And that does suggest that you are able to fully reprice the impacts of the cash rate cuts that have been done today. Is that correct?

And then a second question, just on business credit growth. Good relative momentum in the year at 3.5% growth. But I think from memory, that number was at 5.8% in the first half, suggesting there was a bit of a slowdown in momentum. Just 2 parts to the question: Firstly, in light of that, how much comfort do you have around the recovery in forecast growth from your economics team? But also, do you think you can continue to keep strong momentum versus your peers in business lending?

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Gary A. Lennon, National Australia Bank Limited - CFO [7]

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In SME, right. In terms of the first one, we don't -- we tend not to isolate and just look at the impact through one lens and one headwind. So the numbers we have provided are blended, which has those multiple impacts. So there's low-rate deposits, what that ultimate impact is, what's the benefit we get from the hedge, we look at that, and then what we think we're getting back on the SVR repricing and sort of view that as a -- in total impact. And that's how we tend to plan and manage it. So it's not a specific that we pointed one action against one element.

In terms of the -- yes, how we're feeling about SME growth, it's -- there's no doubt, even in the second half, it was slowing. The economy was slowing and our -- you can see it through the numbers, the absolute growth of our SME portfolio was slowing albeit it's still ahead of peers. It really goes to Phil's comments about the outlook and the state of the economy and how do we get business confidence and business credit up, not only just for our book and for the sake of now. But as we all know, that confidence in that SME segment is going to be critical more broadly for the economy.

So [Alan] continues to be bullish at some of these benefits flowing through. We can all have a debate with that. We will wait and see in the end whether [Alan's] right. It's -- there is definitely some rationale and logic that is at play for his forecast next year, but he missed this year.

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Ross Brown, National Australia Bank Limited - Head of IR [8]

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Maybe pass it to Brendan. Thanks.

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Brendan Sproules, Citigroup Inc, Research Division - VP [9]

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Brendan Sproules from Citigroup. I just had a follow-up question just on the capital position. So this year, you've called out 63 basis points of kind of one-off hits being remediation, and obviously that gets the hit on the capital -- sorry, the tax treatment, but also some APRA measurement changes. We just sort of read into today's size of the raising that you don't expect those sort of size material impacts on the capital as APRA start to sort of finalize their unquestionably strong treatment.

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Philip Wayne Chronican, National Australia Bank Limited - Interim Group CEO & Director [10]

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I think that's right. We're not expecting issues of that magnitude.

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Ross Brown, National Australia Bank Limited - Head of IR [11]

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Jarrod?

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Jarrod Martin, Crédit Suisse AG, Research Division - Director and Joint Lead Analyst [12]

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Jarrod Martin from Credit Suisse. A question for you, Gary, seeing you're here at the time. 2 years ago, when you announced the transformation program, you announced a net reduction of FTE of 4,000. At that time, your spot FTE balance was, call it, 33,500 FTE. Your spot balance today is 1,000 higher, 34,500 FTE. You've already reduced net reduction of 2,500, so you've got 1,500 to go of that 4,000. And then even if the temporary and insourcing don't count, that's 15 -- around 1,500. So that's 3,000 reduction from the elevated level, which looks as if you're going to be around about 2,000 shy of where you expect it at the beginning of the transformation. So this question really comes down to now FY '21 expenses. And really, is there going to be that $1 billion of productivity savings flow through at all to the bottom line?

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Philip Wayne Chronican, National Australia Bank Limited - Interim Group CEO & Director [13]

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So can I -- before I let Gary loose on the answer, the FTE is ultimately quite a confusing number. As you know, as we reduce expenses by bringing things insourcing, it changes FTE. Irrespective of where the FTE are, accounts as one, no matter whether we're paying onshore/offshore rates. So I think the focus -- there's a lot of noise coming after FTE. The real question is the question you're asking, which is what's our cost trajectory? Because that was what it was all about. So I'd encourage people not to obsess over FTE because we've been hiring and bringing people on for temporary work here and elsewhere and contractors here. So there will be a lot of noise in the FTE numbers.

Right, Gary?

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Gary A. Lennon, National Australia Bank Limited - CFO [14]

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And given I'm taking the lead from my new Chairman, I'm not obsessing about the FTE over what number it's going to be. So you pointed a few things. So in terms of where we thought we'd be in year 2, we're just a little bit behind but we're not massively behind. So in terms of on track for a net 4,000 number, I'd say we may be a couple of hundred behind where we thought we'd hoped to be. And a lot of that is the additional staff, where that's -- it's not really a growth issue, it's additional staff we've had to bring on around sort of control and risk activities. So that's what the first point.

As you've said, the gross numbers are up because of those other categories. We had a big ramp-up in investment in '19, and that has come with FTEs. And increasingly, as part of that ramp-up in investment, we are using our own FTEs rather than consultants. So again, that's another -- whilst we haven't called that out as in-sourcing, it effectively is, where we're using more of our own people to do the projects rather than bringing in consultants. So that tends to bolster up some of those project FTE numbers. And also included within those project numbers, which is dealt doing different provisions because you can't separate them from an FTE standpoint, are all the FTEs we've brought in to work on the remediation and all the FTEs we've brought in to work on the Wealth separation. So it is somewhat inflated in terms of the underlying. And yes, the intent is that many of those FTEs will disappear in due course.

And then you're left for the final category of insourcing, which I've already touched on. The key point, which I think where you're going, is that why it's important we keep vigilant to get there or thereabouts on that net 4,000 number. It certainly helps to achieve flat costs for '20, but as you say, the most important part of that is the trajectory into '21. So that's why we continue to press on to that to see what are the sustainable efficiencies we can keep driving out to set ourselves up the best we possibly can for the future year without doing -- without pushing it too hard and being sensible in the current year.

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Ross Brown, National Australia Bank Limited - Head of IR [15]

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Can you pass the microphone to Andrew, please?

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Andrew Triggs, JP Morgan Chase & Co, Research Division - Research Analyst [16]

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Andrew Triggs from JP Morgan. Just a couple of questions on capital, please. First one, on the Level 1 CET1 ratio. I mean some of the other banks saw a good accretion to capital Level 1 through retaining some of the earnings in the New Zealand subsidiary. Is that a timing issue? Or was it related to the very large size of the remediation provisions this year and the need to pay the group distribution?

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Gary A. Lennon, National Australia Bank Limited - CFO [17]

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It's the second point.

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

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Okay. And the second question, around the interest rate risk in the banking book out of your way. So again, Westpac saw a very large reduction in that figure, close to 0. It's still about a $6 billion odd or even number for NAB. Is that a timing issue as well?

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Gary A. Lennon, National Australia Bank Limited - CFO [19]

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It obviously goes with the size, shape, tenure of your book. The thematic that was driving the decrease in Westpac, we had a similar thematic. So our embedded gains increased with rates moving the way they have. It just wasn't as anywhere near as substantial as the Westpac one. So it's -- we're just -- we're down, I think it's about $1 billion half-on-half as a result of the same driver, just not as large.

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Andrew Triggs, JP Morgan Chase & Co, Research Division - Research Analyst [20]

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And the outlook from here for (inaudible) if the current swap rates remain as they are?

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Gary A. Lennon, National Australia Bank Limited - CFO [21]

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I think it's -- that's one of the categories that's incredibly difficult to forecast. But I think the current spot is as good as any.

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Ross Brown, National Australia Bank Limited - Head of IR [22]

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Okay. I think we've got a couple of questions on the phone. If we could take them now, please.

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Operator [23]

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(Operator Instructions) Your first question comes from the line of Matthew Wilson from Evans & Partners.

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Matthew Wilson, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [24]

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Matt Wilson, Evans & Partners. Andrew Thorburn sort of started and led the narrative. Ross McEwan has been front and center in the U.K. for the last 6 years. And [Ken] is watching closely. Could we get your perspective, Phil, or the Board's perspective on the mortgage book, back book quandary? Because when I look at the average balance sheet from the sector, mortgages are yielding 4.26%, and I could walk into any branch today and get a mortgage close to 3%.

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Philip Wayne Chronican, National Australia Bank Limited - Interim Group CEO & Director [25]

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Well, I can promise you one thing, the front book, back book difference is nowhere near that large. So there must be a large element of fixed-rate loans in the back book numbers you're looking at. The -- one of the things I have known, not only in this role but in previous roles I've had, is that the transmission mechanism from the front book to the back book is rapid because of the -- both the turnover in home loans and the propensity of customers to refinance. I think a previous piece of work I did said there was about 2.5 years. We took about 2.5 years for the front book to become the back book. So I've been concerned that the front book/back book issue was ultimately futile for the industry as a whole. And that's one of the reasons why I've endeavored to ensure that at least we keep the lowest -- as low an SVR as we can. Because at least it minimizes, relative to our peer group, where that disparity is, not for any reason other than the front book will be the back book in 2 years' time.

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Operator [26]

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(Operator Instructions) Your next question comes from the line of Brett Le Mesurier from Shaw and Partners.

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Brett Le Mesurier, Shaw and Partners Limited, Research Division - Senior Analyst of Banking and Insurance [27]

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A couple of questions. Firstly, you commented on the expected reduction in revenue in the banking business, but you didn't talk about the expected reduction in revenue in the Wealth business. The revenue there fell over $100 million over the year. Do you think there will be a similar decline from 2019 to 2020, assuming you've still got the business at the end of 2020?

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Philip Wayne Chronican, National Australia Bank Limited - Interim Group CEO & Director [28]

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Not of the same. There's obviously a full year effect from changes that have been made during the course of the year, but I'm not sure that's going another $100 million. I think it's materially less than that. I'm getting a nodding here from Geoff, so I'll take that as true. Obviously, the key challenge for us in the Wealth business is to stabilize the underlying volumes and make sure that we've got pricing that's fully competitive with the market because that's the best route to having a stable and growing business that's in a good shape for being released to any new owner.

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Brett Le Mesurier, Shaw and Partners Limited, Research Division - Senior Analyst of Banking and Insurance [29]

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The other question I had was on deposits. You focused on the $80-odd billion, which is not sensitive to interest rates being that it's at a negligible cost. Can you comment on the $191 billion, where you're paying more than 1%, your sensitivity of that to changes in interest rates?

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Philip Wayne Chronican, National Australia Bank Limited - Interim Group CEO & Director [30]

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Yes. That's -- I mean it's interesting. That's -- and I'm glad you touched on that one, Brett. But at the same time, as we're concerned about the compression on those low balance or low rate deposit categories, we are dealing with the conundrum of the pricing distortion that ceases paying above the RBA cash rate for many categories of deposits. And that's a product of the various liquidity rules that have been put in place over the years. That remains a reasonably competitive part of the market, but it's certainly one that we're acutely focused on.

Do you want to add to that? Or...

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Gary A. Lennon, National Australia Bank Limited - CFO [31]

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No.

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Operator [32]

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Your next question comes from the line of Azib Khan from Morgans Financial.

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Azib Khan, Morgans Financial Limited, Research Division - Senior Banks Analyst [33]

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Phil and Gary, how much of the step-up that's coming through in risk and compliance spend relates to the CBA issues raised by APRA? And second part to that question is, when do you hope for the operation risk overlay to disappear?

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Gary A. Lennon, National Australia Bank Limited - CFO [34]

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Which issue is that? Well, I'll try to interpret all of that, Phil. So the self -- yes, the CBA self-assessment. There is some, but it's probably not the lion's share. Where a lot of the uplift in risk and compliance spend is coming through is areas like cybersecurity, areas like AML, incorporating some of the new back-end processes were required to do around mortgages. So that's probably the bulk of where a lot of that compliance spend is really focused in more recent times.

And sorry, what was the second part?

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Azib Khan, Morgans Financial Limited, Research Division - Senior Banks Analyst [35]

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When do you expect the operation risk overlay --

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Gary A. Lennon, National Australia Bank Limited - CFO [36]

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Oh, the operation risk overlay. Yes. Well, that's -- so the op risk overlay is clearly being linked to our ability to respond to our self-assessment. And we work very closely with APRA on that. They have seen our detailed plans, and the expectation is that as long as we execute well on those plans and close the risks that have been identified to their satisfaction, then we do get to release that overlay. But in the end, it's going to be APRA's pleasure as to when they get to release it. All we can do is put our best foot forward and try to mitigate all the concerns that they have within the shortest period possible. Look, it's going to be 12 months. It's probably a reasonable estimate, or it might drag on a bit longer depending on how good our progress is.

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Ross Brown, National Australia Bank Limited - Head of IR [37]

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Okay. We might take some questions from the [real beers]. Jon, do you want to take the mic?

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Jonathan Mott, UBS Investment Bank, Research Division - MD and Banking Analyst [38]

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Jon Mott from UBS. Business banking is becoming more and more political, and you're seeing the politicians are getting involved in this whole topic. And you can say this is -- and credit growth is slowing very rapidly in this second half. I think seasonally, it's usually stronger. It's one of the weakest second halves you've had for a long time. You mentioned it a little bit before, but following on that, are you seeing fewer applications from business customers actually wanting to borrow credit? Is it that you're rejecting more loans for various reasons, be it responsible lending or anything else? Or are business customers actively paying down their debt and deleveraging?

And a follow-on question, more on the housing side. You said 77% of customers haven't changed their repayments. I think that's interest-only -- sorry, P&I for owner occupiers. CBA and ANZ have said 93%. So they've had a lot fewer customers than yours actually do it. So I wanted to check, is that because your customers are rigging up and asking to have their repayments reduced? Or do you automatically do it? And why is it the case also that you're seeing your mortgage arrears rise much faster than your peers? And are you actually saying that your mortgage customers are more stressed, ringing up and going into arrears?

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Philip Wayne Chronican, National Australia Bank Limited - Interim Group CEO & Director [39]

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There's a lot in there. But let me just answer one important part of it. We don't have one mortgage offering at NAB. So it's an answer which varies depending on who you're speaking to. So for our core NAB mortgage portfolio, the numbers are well up into the 90s. However, we have different practices in the loan books that have come through our Advantage platform and our UBank, where there is a more automatic flow through. So the number that we have reported here is a blend of different portfolios.

I'll come back to the business banking question. I think it's fair to say it's predominantly a slower flow of new applications. We're not rejecting any more from credit reasons. I do think we -- the process has slowed, so with both the responsible lending obligations and with the new code of banking practice -- or banking code of practice, I'm sorry, that was being renamed. That has included a range of additional steps that have complicated the process. But -- and you may be familiar that the bank code of practice puts particularly stringent conditions around the use of guarantees, which is quite a common feature of business lending. And therefore, there's a lot more steps that you have to go through to meet it. So I think it's less the case of us turning down loans. It's just taking longer to get them processed and a slowdown in applications, which is why we're encouraging business investment both, in our words, 2 businesses but also to Canberra to find things that can be done to improve the confidence and appetite for businesses to invest.

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Gary A. Lennon, National Australia Bank Limited - CFO [40]

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Right, totally. And just to add a couple of things. So it's clear that there is a confidence issue. So there is a confidence issue about where the economy is going, and a lot of small businesses are choosing to deleverage rather than asking for more credit. And as Phil sort of went through in some detail, the process is now for a small business to get credit where it's backed by a mortgage, and then you have to comply with responsible lending rules that are really designed for consumer mortgages. And that is a problem that's being well flagged. And I think there is a genuine engagement with government APRA and ASIC on how to address that.

In terms of the mortgage arrears and that trending up, when you look at all this at current levels, it's reasonably in line. Movements can tend to move around half-on-half. But certainly what we're seeing, which I think everyone is seeing in varying degrees, is the conversion issue still continues from interest-only to principal interest. What we are observing, and it may be different to peers, is that customers are remaining in arrears for longer. And that really goes to practices around how long do you want to support a customer, and we have been very supportive for our mortgage customers as a general rule, and that may differ from others.

And the third point, which I did mention previously on -- there is just the calculation aspect to that where you have lower front book growth and you have arrears coming through from previous -- just that impacts the ratio.

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Ross Brown, National Australia Bank Limited - Head of IR [41]

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Richard?

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Richard E. Wiles, Morgan Stanley, Research Division - MD [42]

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Richard Wiles, Morgan Stanley. I just have a couple of questions on capital and the dividend. The Level 1 CET1 is 10.5%, and I assume with the pay, it pushes towards 11%. Phil, you've said today that APS 111 doesn't affect you, and that's certainly the case on your current investment in New Zealand. But assuming the RBNZ rules don't get changed too much, you're going to need more capital in New Zealand and any future investment will be a deduction at the Level 1 entity. So does this limit your ability to continue to recycle New Zealand earnings by paying a dividend into the Level 1 entity and then reinvesting into New Zealand? Does that mean that you will actually need to retain earnings in New Zealand in the future?

And then on the dividend, can you -- you've mentioned, Phil, a couple of times today, you've reduced it to a sustainable level. Can you remind us what you think sustainable is? What sort of payout ratio are you talking about?

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Philip Wayne Chronican, National Australia Bank Limited - Interim Group CEO & Director [43]

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Well, as for the second part first, the payout ratio, if you look at our -- excluding one-off notable items charges is around 70. And that's -- and at that level, we generate surplus capital. So sustainable, we can model it. But for any given level of risk asset growth, sustainable is going to be a number in the 70s, and we're at the low end of that. So I think that answers that one.

So we've -- I'm going back to my comments on New Zealand, which is that it's highly unlikely that the response to any regulatory change on capital in New Zealand is that we simply hold more New Zealand capital. And I say that because it's not just what we choose to do. It's the way the market reacts. There will be some assets that, for example, if New Zealand domestic banks have to hold twice the level of capital on a corporate asset to what a foreign bank lending from outside New Zealand has to hold, that business will disappear out of the New Zealand banking system. So there are a whole range of corporate dynamics that are going to happen on pricing, on the level of gearing, in various parts of the economy. So I think it's just -- it's far too simplistic a view to say that we're just going to -- banks are just going to have more capital there. It's going to change the nature of banking in New Zealand.

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Richard E. Wiles, Morgan Stanley, Research Division - MD [44]

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So your view is you'll shrink the banks significantly in New Zealand? Because you've said on the current metrics, it's $4 billion to $5 billion. What you're now telling is you don't want to put any more capital in New Zealand?

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Philip Wayne Chronican, National Australia Bank Limited - Interim Group CEO & Director [45]

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What I'm saying is that it's far too simplistic to say, "The impact is $4.5 billion, $4 billion to $5 billion, therefore, just put $4 billion to $5 billion in." Even if we just felt that was the right thing to do, the market will change. Because the returns -- if you take some of the highly geared sectors and you reprice for that level of capital, those sectors will no longer want to be as highly geared. So the credit demand won't be there. So I'm not saying what we'll do, I'm saying what's inevitably going to happen to the structure of banking in New Zealand. It will change.

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Gary A. Lennon, National Australia Bank Limited - CFO [46]

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And Richard, in terms of what we would do in the end, we need to get the final rules, and it will probably be a combination of a whole bunch of things. So we'll be looking at a whole bunch of -- and we've done a huge amount of work. And the New Zealand market is already starting to change around this, where there's repricing occurring. So we're seeing it, and Angie is seeing it on a nearly weekly basis.

But there is -- as a result of these changes, there is pockets within our New Zealand business that fall well below the cost of capital. And you get why you're in that business for where we'll be constraining capital. So -- and that work has well and truly commenced. So that's sort of one. Then we're clearly most likely repricing opportunities that we saw in Australia. So the whole market will sort of reprice some of the risk.

And thirdly, which you haven't -- you didn't quite pick up in terms of the 111. So the 111, we're benign on first blush. But as some of the other banks have said, and we do exactly the same thing, we have a lot of internal additional Tier 1 that we will externalize. And that gives us -- that will give us, as we progressively do that, additional Level 1 capacity to deal with 111 and also the RBNZ changes. So these are the mitigants we can bring into this to try to minimize the overall impact in New Zealand.

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Richard E. Wiles, Morgan Stanley, Research Division - MD [47]

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Would it be fair to say that if the Tier 1 target is 16%, and you don't want to put an extra dollar of capital into New Zealand, you need to shrink the risk-weighted assets by about 20%, 25%?

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Philip Wayne Chronican, National Australia Bank Limited - Interim Group CEO & Director [48]

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So if any of that was true, yes. But that's not what we've said.

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Gary A. Lennon, National Australia Bank Limited - CFO [49]

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But that's the calculation.

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Philip Wayne Chronican, National Australia Bank Limited - Interim Group CEO & Director [50]

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Yes. We -- that's what we published. So we've said that. So it's somewhere between putting that amount of capital in and reducing the risk assets or some combination of the 2 with repricing. That's what we've seen at the half.

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Gary A. Lennon, National Australia Bank Limited - CFO [51]

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And Richard, what's critical for that 16% is the shape. So the original requirements came out was all common equity, where the consultations have been around is that sensible. So what they come out with, it will be what they come out with. But it's certainly possible there's a component of additional Tier 1, say, that's eligible. And that changes the game a bit.

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Ross Brown, National Australia Bank Limited - Head of IR [52]

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Brian?

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Brian D. Johnson, Jefferies LLC, Research Division - Equity Analyst [53]

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You're right. They are miserable. Two questions. And I've got to say, it's rare that you get the opportunity to see the ex-IR guy, the CEO, the incoming Chairman, the new CEO. So you can work out how you answer these questions, which of those roles.

First one, Phil, as the incoming Chairman, because when you come onto these briefings, everyone says, "Ah, that's the Board's decision." You're the Chairman. When you think about the dividend, and we think about separating MLC, should we be thinking that when you -- is victory keeping the dividend flat for the separated -- for NAB plus the separated vehicle? Or is it holding the dividend steady? And if I could add into that, can you tell us what the separation of MLC would do to the ROE?

And then the second question, and there's a lot of them, but there is a second one. If I go to Page 74, the result under the contingent liabilities, there is a reference to an AML problem there. And the context of that is that when we have looked at the CBA and it first came up, it didn't seem like a big deal. It ended up being quite a big deal. Can we just get a feeling, if you could just let us know, should we be not worried about a civil penalty? If we are, what impact would that have on the capital?

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Philip Wayne Chronican, National Australia Bank Limited - Interim Group CEO & Director [54]

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Okay. I mean MLC 1, obviously, the answer is different depending on the form of sale. But you correctly identified that if you take a stream of earnings and park it over here, then there's a dividend implication of that. And we haven't addressed it because we haven't got to a point-of-sale yet. So I don't have an answer for you, but I understand the question. And it really depends on the nature of the sale. And if it's a trade sale, it generates capital. If it's a spin-off in kind to existing shareholders, then obviously there's a dividend flow that is associated with the spin-off. Until we finalize the structure of the sale, we're not in the position to make that assessment.

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Brian D. Johnson, Jefferies LLC, Research Division - Equity Analyst [55]

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Sorry, Phil, can I just go back to what I asked about?

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Philip Wayne Chronican, National Australia Bank Limited - Interim Group CEO & Director [56]

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Yes.

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Brian D. Johnson, Jefferies LLC, Research Division - Equity Analyst [57]

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If it's the -- sorry, can I just go back to what I asked? If it is the spin-off that's been flagged, but I've noticed there is some flexibility around it, should we be thinking that basically a flat dividend is flat on the headstock or flat for the new vehicle plus NAB from the Board's --

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Philip Wayne Chronican, National Australia Bank Limited - Interim Group CEO & Director [58]

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The way you asked the question initially was what would constitute victory, and victory is not what we're seeking to do here. Shareholder value maximization is. So look, I just don't have an answer for you, Brian, because it will depend. I just don't have -- because obviously the dividend is going to be a function of what we think is the sustainable position going forward, post any separation. And we'll address that issue at that time.

The second question, which is around the contingent liability note on AML, can I make it very clear that, that note is substantially the same as it was 2 years ago when we published our annual financial review. So we observed 2 years ago, off the back of the initial CVA issues, that we had reported a number of breaches to AUSTRAC. I think we have subsequently reported some further breaches. We have been working with AUSTRAC on those. And we've been very cooperative with AUSTRAC in making sure that not only do we meet the letter of the law but we meet the spirit of the law by alerting them to a range of issues even we're not strictly required. So at the moment, there's nothing new I can say other than we've been reporting issues to AUSTRAC now for a reasonable period of time. And nothing has changed except that we're continuing to work with them.

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Gary A. Lennon, National Australia Bank Limited - CFO [59]

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If there's anything to add to that, it's just the relationship, Phil, as you know, is very strong. And the partnership to actually identify potential criminals and the contribution that we're making is very appreciated by AUSTRAC. So we're actually working very closely with a pretty important purpose.

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Brian D. Johnson, Jefferies LLC, Research Division - Equity Analyst [60]

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And the net and the mostly separation ROE effect?

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Philip Wayne Chronican, National Australia Bank Limited - Interim Group CEO & Director [61]

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From memory...

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Gary A. Lennon, National Australia Bank Limited - CFO [62]

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Again, it's going to depend but...

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Philip Wayne Chronican, National Australia Bank Limited - Interim Group CEO & Director [63]

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But at the moment, I think, yes, I think it's fair to say that the business has a relatively low ROE. But...

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Gary A. Lennon, National Australia Bank Limited - CFO [64]

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It will be accretive.

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Philip Wayne Chronican, National Australia Bank Limited - Interim Group CEO & Director [65]

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So it would be probably [basically] accretive. But obviously, that's a function of what happens to the capital structure afterwards. But I think the other point to make here is that obviously, with the passage of time and as we've trimmed parts out of the business with the life sale and so on, the scale of the impact is not that great either.

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Ross Brown, National Australia Bank Limited - Head of IR [66]

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I think we have the last question from Ed.

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Edmund Anthony Biddulph Henning, CLSA Limited, Research Division - Research Analyst [67]

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Just Ed Henning from CLSA. Two questions for me. One, just on the weaker markets' performance today and treasury and end markets. How much was that -- was just lower rates? And how much can potentially rebound going forward for customer action?

And secondly, just for you, Phil. You've talked a lot about today about the economic outlook and potential government intervention. What do you think they can do? And realistically, what do you think they will do if trends continue the way they are?

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Gary A. Lennon, National Australia Bank Limited - CFO [68]

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So on the first one, the dip in markets in particular was rates and trading-related. A lot of the sales volumes have continued to hold up, albeit margins are getting tighter. But higher volumes, tighter margins, but sales continues. So the decrease was primarily trading-related, which you would hope they could have a better half year next year. Is that right, David?

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Philip Wayne Chronican, National Australia Bank Limited - Interim Group CEO & Director [69]

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In terms of what governments can and might do, look, there's a lot of things governments can do. And I know that some people are questioning whether maybe bringing forward some tax cuts might be of benefit. I think somebody are speculating that there might be some changes in some business tax to encourage investment. I think if you go back to the end of 2014, when we had house price growth at levels that were causing concern, on the upside, there was a concerted action taken through the Council of Financial Regulators to align all the policy instruments across various bodies to achieve a national macro outcome. So that resulted in APRA initiating some macro potential restrictions on housing and investment and property lending, and about ASIC, tightening its regime around responsible lending. It allowed the Reserve Bank to, I guess, play that duality of not having to push up interest rates to address the housing market cycle. So my feedback to government at this point would be that if the primary -- if we agree on the primary diagnosis which is that there's adequate business investment to generate growth, then maybe we need to have a concerted action across all arms of government to identify all of the barriers to business investment and business credit.

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Ross Brown, National Australia Bank Limited - Head of IR [70]

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Okay. Thank you for your questions, and we'll wrap it up there.

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Gary A. Lennon, National Australia Bank Limited - CFO [71]

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Thank you very much. I'll just make one announcement, a very important announcement. So firstly, this is Ross Brown's last results announcement. Oh, I was just -- I was curious of response. Was it going to be, "Aww" or "Hooray"? But it is his last. He's been a great support to all of us and hopefully to all of you as well. And we do wish Ross all the very best in the future.

And welcoming Sally, who I think is in the room, there, who will be taking over Ross. You'll be seeing Sally next half, and we're delighted to have Sally on board. So that was my announcement, Ross.

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Ross Brown, National Australia Bank Limited - Head of IR [72]

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Thanks, Gary.