Australia And New Ze's CEO Discusses F4Q 2013 Results - Earnings Call Transcript

Oct.29.13 | About: Australia & (ANZBY)

Australia And New Ze (OTCPK:ANZBY) F4Q 2013 Earnings Conference Call October 28, 2013 7:00 PM ET

Executives

Mike Smith – CEO

Shayne Elliott – CFO

Nigel Williams – Chief Risk Officer

Mark Whelan – Managing Director Commercial Banking Australia

Shane Buggle – Deputy CFO

Analysts

Craig Williams – Citi Investment Research

John Lott – UBS

James Freeman – Deutsche Bank

Jarrod Martin – Credit Suisse

Victor German – Nomura

Andrew Lyons – Goldman Sachs

Mike Wiblin – Macquarie

Brian Johnson – CLSA

Richard Wiles – Morgan Stanley

Brett Le Mesurier – BBY

Scott Manning – JPMorgan

Unidentified Company Representative

Welcome to the presentation of the ANZ full year financial results for 2013, joined here today by our CEO Mark Smith and CFO Shayne Elliott. They'll present for around 35 minutes and then we'll hand over to Q&A and I'll give you the housekeeping for Q&A. Then we'll come also to everyone joining us on the web and on the phone today.

Mike?

Mike Smith

Okay. Well, good morning everyone and welcome to our new officers here in Sydney.

Today we announced a strong full year result. We had cash profit of 6.5 billion, which is up 11%. Earnings per share were up 9%. ROE was up 20 basis points, so 15.3%. And our dividend is up 13%. This will see us pay out $4.5 billion to shareholders for the year.

This is a clean, high-quality result with good performances in all of our business. Some highlights include market share growth in key customer segments, particularly here in Australia and in Asia. Progress with productivity, the cost/income ratio is down 290 basis points. We improved credit quality as well as improving return. And we invested $1.3 billion in Australia, New Zealand and Asia Pacific to drive up our super-regional strategy and to produce growth and returns for the longer term. In short, the result demonstrates ANZ is firing on all cylinders and it's creating a better bank for our customers and a better bank for shareholders.

What I'm going to do this morning is recap our strategy and then talk about how we delivered against it in 2013. In a nutshell, our super-regional strategy is based on three pillars. The first is growing the already large franchises that we have in our home markets of Australia and New Zealand. The second is profitable growth opportunities in Asia by capturing trade, capital and wealth flows into and across the region. And the third pillar involves an enterprise approach to building the business on common platforms and processes to reduce unit costs, reduce complexity and risk, and improve the customer experience.

This is an integrated strategy that's creating growth opportunities in every part of the business. For example, in retail and wealth, with migrants, Asian students and Asian investors. In commercial, with businesses who need trade finance and foreign exchange. In institutional, with large companies and financial institutions who now want to bank that can meet their needs in multiple markets throughout the region.

As you've heard me say before, given the economic future of Australia and New Zealand, it is now completely linked to Asia, the world's fastest growing region. The logic is compelling. And ANZ is the only Australian bank positioned to fully benefit from this shift. Our goal is to better meet our customers' needs and to deliver peer-leading EPS growth and TSR outcomes for shareholders.

Now let me take you through progress in 2013. The first pillar of our super-regional strategy is a promise to deliver strong growth and returns in our home markets of Australia and New Zealand. In Australia division, profit was up 11%. We saw the strongest overall growth of all major Australian banks across home lending, deposits and credit cards. We saw strong customer acquisition in commercial with 30,000 new clients and above system growth in lending and deposits.

And these results are not just one-off. We've had system growth in mortgages -- above system growth, sorry, in mortgages for the past 14 consecutive quarters; and in commercial lending and deposits, for the past six consecutive quarters.

We're driving customer acquisition and loyalty through new digital mobile and online applications for both customers and front-line staff. For example, goMoney is Australia's first and most popular banking app, with 1 million active users, making 25 million log-ons each month.

We have also reduced costs with the CTI in Australia down 330 basis points, while also investing in banking on Australia. In fact, at 37.5%, the current CTI of our Australian division is world class, and our strategy will actually improve that further.

In New Zealand division, profit was up 29%. Here we are simplifying the business, improving productivity, and building share in core markets. We've grown market share and mortgages and small business. Expenses were down with the cost/income ratio improvement 750 basis points. And there was a significant improvement in provisions.

In the Global Wealth division, we are focused on cross-sell, simplification and digital innovation. Profit was up 36%. Our highlights include an 11% increase in Wealth Solutions held by ANZ customers and the success of our Smart Choice Super product which has seen 15,000 accounts opened since its launch earlier this year.

So the pillar of our strategy -- the first pillar of our strategy is the franchises of Australia and New Zealand. The second pillar is to continue profitable expansion in Asia through an integrated network that connects customers with faster-growing regional capital, trade and wealth flows.

In 2013, IIB division grew profit 15%, and institutional Asia grew 28%, driven by double-digit income growth in trade and markets and strong growth in cash management. This saw further customer acquisition and deeper cross-border relationships. It saw continued focus on capital efficiency. Non-interest income is now around 55% of total institutional Asia income. Ongoing improvements in the quality of the book meant provisions were down 30%. And there have been strong cost disciplines, allowing us to continue to invest yet drive down expenses 3%.

Let me make a couple of points about Asia. The future of Australia and New Zealand are now completely linked to Asia, which is also the number one driver of global economic growth. We are the only Australian bank and one of just a few double-A rated international banks that provides customers with a network and connectivity to these fastest-growing markets. We're continuing to improve returns as we increase scale in retail and rapidly grow both commercial and institutional. We have the management expertise and we have a track record. We have built -- we've built the number four rated international bank in the region from nothing in just six years.

So Asia is a key driver of global growth. It's a key driver of Australia's growth and it's a key driver of ANZ's growth now and in the future.

The final pillar of our super regional strategy is an enterprise approach to building the businesses on common platforms and processes. This is an operation strategy involving our hubs, business simplification and investments in technology. The outcome is lower unit costs, better management of risks through standardization, and stronger enterprise standards and controls. Importantly, this is also delivering a better service for our customers by bringing products to market more quickly and through shorter turnaround times.

We're now at a more mature stage of our operations and technology strategy and we're really beginning to realize the benefits of investments that we have made in the last few years. Notably, in 2013 we absorbed business volume increases of up to 12% while reducing operations expenses by 10%.

Turning to financial management, our capital position remains very strong with our common equity tier 1 ratio at 8.5%. That equates to 10.8% on an internationally harmonized phases. The quality of our balance sheet is continuing to improve, and that's been supported by management actions. These are to create more diversity by product, by customer and by geography, to increase shorter duration, lower risk trade finance, and to provide greater predictability through more exposure to investment grade and multinational customers. And let me acknowledge here that part of the margin challenge that we've been managing, particularly in IIB, is the outcome of the strategy. We're actually largely through this now and I believe investors value the fact that the bank we are building is faster-growing, is of high quality, and is therefore more predictable.

We've also made further progress on our promise to improve returns to shareholders. And as I said earlier, the dividend is up 13%, earnings per share are up 9%. ROE is up 20 basis points. And we'll again neutralize the shares issued for the DRP.

Finally, driving a stronger, better bank is all about consistency and disciplined execution. We have a management team led by experienced international bankers and we have 47,000 people aligned around the goal of building a super regional bank. Our ability to share and collaborate around our strategy and the needs of customers is helping us drive outcomes throughout the group.

And a couple of examples, 35% of IIB income is now cross-border. And cross-border income is growing three times faster than local income. In Australia, new mortgage sales to our commercial customers increased 21%. And sales of Wealth Solutions in Australia retail customers were up 19%.

We're also creating a leadership culture with -- which is comfortable with change and cost management. This is now part of the way that we do business. There are a number of non-financial measures I'd also like to highlight. Staff engagement improved during the year, up 2%. Greenwich Associates identified ANZ as the top four corporate banks in Australia -- in Asia. And we were again ranked number one in the Dow Jones Sustainability Index, a ranking actually that we've held for six of the last seven years.

I said at the start of my presentation that our super regional strategy is all about building a better bank for customers and a better bank for shareholders. It's a long-term strategy and our progress in 2013 and (inaudible) we have in place leave me confident that there's still more gas in the tank.

We have four clear priorities that we'll deliver over the next few years. Improving the customer experience -- this is about being a customer-led bank. Two is about diversifying revenues, to develop our business opportunities and improve the sustainability of income. Three is driving productivity. I talked a lot about this and the outcomes that we're producing from operations and technology, but there's still more to come. And four, increasing shareholders' return -- this includes active capital management as we seek opportunities to improve the overall group return.

Each of these priorities are supported by a multiple number of programs across the bank -- programs which are allowing us to set new targets for the next three years. And these targets are reducing the cost-to-income ratio to below 43% by the end of 2016 and achieving an ROE of above 16% over the same period.

And as I've indicated (inaudible) we are confident that we can deliver on our promise to achieve above [fair] EPS growth and TSR outcomes based on growth and strong expense and capital management disciplines.

So it's a high-quality result for customers and shareholders. And I would like to thank all of our 47,000 people for their hard work during the year that made it possible. Now let me hand to Shayne to look at the results in more detail. Thank you.

Shayne Elliott

Thank you.

As you heard from Mike, this year we delivered a record cash profit of $6.5 billion which is up 11% from last year, and an improved ROE of 15.3%. Earnings per share is up 9%, with an increased dividend payout ratio, contributing to total shareholder returns of 32% for the year, which is 56% over three years.

Economic profit, that is the return to shareholders above our cost of capital, grew a very strong 14% to $2.7 billion. This is a strong result and it shows the value of our super regional strategy and a proactive stance on resource allocation, delivering value to shareholders from solid growth and improving returns. Our consistent strategy and focus on execution delivered improvements in key financial metrics over one year and, importantly, over the past three years.

Now as Mike said, this is a relatively clean result, but I do want to remind you of a few one-offs in last year's numbers that you need to consider in making year-on-year comparisons, and alert you to one small one-time adjustment this year. As you know, last year included profits from Visa shares sale and software impairment and New Zealand simplification expenses.

The only new item I need to bring to your attention is funding value adjustment on derivatives, or FVA. This is quickly emerging as global best practice with respect to derivative valuation. The market is using FVA when processing swaps. And while we may be ahead of others on this one, we think it's appropriate, we use it to value our book. I'm sure there are those amongst you who'd love to get into the technical details, but now I'll just make a few high-level comments on how to think about it.

Given that cash flows within swaps don't match, there are funding implications. And so FVA recognizes that since the GFC, it is no longer appropriate to assume banks can fund themselves at LIBOR. And so when pricing transactions, a funding value adjustment is made to reflect the true funding cost. One mitigant to that is any collateral agreement you may have with your customer. The market is pricing new deals on the spaces. And when you apply that to our [bank book of] derivatives, it resulted in a one-time revenue charge of $60 million for the year, with the vast majority of that charge taken in the second half. That depressed cash earnings by around $45 million for the year and knocked off about 10 basis points off our ROE.

We spent a lot of time at the last trading update (inaudible) the impact of foreign exchange on our business, so I'm looking to repeat that. But it's worth noting that on a constant dollar basis revenues grew 4.2% and expenses were essentially flat. So what are the key drivers of that result?

Our goal was, here, was to allocate more capital to our high-return, high-growth businesses and focus on productivity and revenue quality in the balance. This produced strong revenue growth in Australia division, institutional Asia and wealth. While costs were well-managed in all of the divisions, particularly in lower-growth areas like New Zealand, institutional Australia and retail Asia.

Now to generate that expense growth, we needed to generate productivity savings in excess of $300 million. Now some of that covers normal inflation, salary increases and higher amortization, but with much of it being reinvested to build stronger revenue for the future and drive further expense savings.

In 2012 we made a commitment to reduce our cost-to-income ratio by 200 basis points by next year, without taking any credit of the one-offs that I referred to, it's pleasing to note that we've already achieved 130 basis points with one year still to go. And so while remaining committed to that goal, you heard Mike make a further commitment that our CTI will reduce to 43% or below by 2016.

Now returning to the overview of performance. All of our divisions created value this year. In Australia, above system volume growth and improved margin performance drove revenue up 7%. Cost-to-income ratio fell to 37.5%. Despite our relatively small scale here in Australia, we have a very efficient business model. And that has further upside as we continue to increase share.

IIB core revenue growth of 3.1% dropped to 2% due to that one-time FVA charge that we discussed. Strong revenue growth in institutional Asia of 19% was underpinned by strong volume growth, customers up 11%, FX turnover up 35%, trade volume up 27%, and cash management deposits up 15%.

They more than offset the margin compression in Australia and institutional lending and improved the quality of the IIB revenue base. IIB margins [fell] in the second half, but less than we had anticipated at the trading update. IIB FTE reduced by 5%, driving strong productivity gains, particularly in Australia, and the ROE for the whole division improved.

New Zealand continues to see benefits from the simplification program with FTE down 10% and good improvements in CTI and return on equity. Margins declined for the year but stabilized in the second half.

Wealth had a strong result with a much better CTI and an improvement in ROE. That was driven by strong cross-selling to the bank customer base, a better-than-market performance on [let] rates, and overall simplification of processes and product offerings.

So in summary, all divisions created value, specifically through a strong revenue growth in Australia and institutional Asia, improved cross-sell across the board, continued productivity gains in all divisions, and improved revenue quality, particularly in New Zealand and IIB. That's a good P&L overview, but I want to take a look at the strategic progress we're making and the value that it is creating for shareholders.

As Mike said, our strategy is deliver shareholder value from above peer growth and while improving returns. Now when thinking about value creation, we seek to get that balance right, and at a simplistic level, a 13% ROE business growing at 10% per annum, delivered value that is comparable with if not higher than a 20% ROE business growing at 5%. And our strategy gives us an opportunity to achieve both.

High return businesses like retail and commercial in Australia and New Zealand get the first call on capital. But by nature, these are capital-light. And so it is hard for them to consume too much. In any event, capital is not a binding constraint for them.

In addition, we create value by investing capital into fast-growing opportunities like institutional Asia which, when built on common platforms that exploit existing expertise in scale, will drive good returns and high growth. This is a balanced and diversified approach to value creation and it is why the three pillars of the strategy are all important. And so I want to review progress on each in a little more detail.

In terms of strengthening our core markets, this is a big year. In Australia we allocated more capital to retail banking. We had the strongest overall growth of the major banks in cards, deposits and mortgages in the year. And we've built shares steadily over three years. We invested heavily in training and now had 68% of our branch stock accredited to sell home loans and 30% to provide wealth solutions. This is already having an impact but there's more to do.

Fifty-three percent of new mortgage sales came through proprietary channels, with branch sales of mortgages up 16%. Now Mike mentioned some of the success we're having in terms of providing mortgage through our commercial customers and wealth solutions through our retail customers. This is an exciting progress and it shows that we can grow responsibly by just serving our existing customers more effectively.

We also continue to invest in new product innovation (inaudible) 75% in the year and (inaudible) customers are growing at 30% per month. Sales of our newest product Smart Choice Super have exceeded expectations with the rate of customer acquisition increasing monthly. In addition, almost half of these customers elect to take out life insurance at the time they sign up to Smart Choice.

In New Zealand, our focus has been on using scale to improve productivity and ultimately rebuild share. We are now running one bank in New Zealand instead of two, and the benefits o 30% market share are beginning to emerge, with more to come. The total product offering is being radically simplified, reducing products on offer by over 50%. Cross-sell of our type 5 products, that is transaction accounts, mortgages, cards, life insurance and Kiwi Saver, continues to improve. Branch coverage has increased 7% over three years, while the cost of the branch network reduced 7% this year alone. FTE is down 10% in the year.

Now some of that relates to project staff working on New Zealand simplification. But even if we go back to the time before that project started, total FTE is down 14% in New Zealand over a three-year period. As a result of these actions, productivity improved, we increased share in mortgages, personal loans and credit cards. Our CTI improved as did our return on equity.

We strengthened our position in corporate and institutional businesses in Australia and New Zealand by growing commercial and significant improving the productivity in institutional. In Australia we acquired 30,000 new commercial customers. Loans and deposits to commercial customers were up 7% and 8% respectively, helping to offset margin pressure on deposits, and delivering a direct revenue growth of 3.8%.

Better coordination and improved product design helped produce an 8% uplift in the sales of retail, wealth and institutional products to our commercial base, another strong proof point of the upside of the focus on serving existing customers well.

In New Zealand, small business banking is one of our most valuable businesses and grew customers 13%. Migrants, particularly from Asia, are a strong part of new business formation in New Zealand, and ANZ strongly outperforms in that sector.

With respect to institutional banking, we retained our leading position in both Australia and New Zealand, but revenues fell a little for the year in both markets, primarily due to lower interest rates and margin pressure on loans and deposits. This is no surprise, and the business acted quickly to manage cost appropriately. The cost-to-income ratio of institutional Australia, New Zealand on a combined basis fell 230 basis points.

Now it wasn't all about cost management as we continue to upgrade our product capabilities well. Last year we launched Transactive mobile, effectively a goMoney for institutions. (inaudible) individuals need convenient ways to bank, but I can assure you that even CFOs can be busy. And it shouldn't be a surprise that since launching Transactive mobile less than a year ago, it has already processed 65,000 transactions worth more than $20 billion.

In total, institutional Australia, New Zealand cash earnings were up 12%. Return on equity improved both on an expected loss and an actual loss basis.

So in summary, we've substantially strengthened our market position in both Australia and New Zealand in retail, wealth, commercial and in institutional, with stronger customer propositions, increased market share and improved productivity. These are great businesses, and they continue to get better. We see further growth and productivity upside in both Australia and New Zealand.

The second pillar of the strategy is to drive profitable growth in Asia by intermediate and trading capital flows. We've built a strong solid foundation in Asia with a good customer base and improved infrastructure. This year our focus was to drive higher returns by building scale and foreign exchange, trade and cash management, and continue that investment in core infrastructure. We grew institutional customers by 11% and commercial by 19%. The rollout of Transactive continued at pace, with good uplift in customer numbers and volumes. We also implemented over a hundred functional upgrades to the platform.

I mentioned the strong institutional Asia volume growth before. However, margin pressure meant overall Asian transaction banking revenues were only up 6%. But that shows that even in a subdued margin environment with all-time low interest rates, this is a profitable business with solid fundamentals creating real value. Plus as we build volume further, we are lowering the unit costs, taking advantage of the largely fixed-cost investments we've made today. Overall institutional Asia revenues were up 19% and profit up 28%. ROE improved strongly on an expected loss and actual loss basis.

Now Mike spoke about our success in attracting customers to use us in more than one market. And the key to this connectivity continues to be our focus on trade. Trade flows are driven by multinationals, the generally larger lower-risk customers. And they come to us to help intermediate what is an important cash flow for them. That means foreign exchange, trade and cash management are the key products. And ANZ has strength in all.

But from our perspective, the key service is trade. This is the lifeblood of Asia and it's something that we do incredibly well. When choosing a bank, customers look for a relevant network, risk and liquidity capacity, efficient process and fair pricing. It's a business we excel in and it's built upon 175 years of history and a position as the leading trade bank in Australia and in New Zealand.

Financing trade can be asset-intensive as we know, but the loans are very short term, averaging 90 days, typically to very well-rated companies. Now the spreads are around 80 to 100 points, and on an economic capital basis, the ROE is around 10% on average. But the beauty of this business is that, in order to complete a trade transaction, a customer almost always needs to convert currency, and the obvious counterparty for that transaction is your trade bank.

Unsurprisingly, over 60% of new to bank trade customers transact foreign exchange with us. To make those foreign exchange payments or receipts, you need an account. And so almost half of our trade customers also run an operating account and leave balances with us. That means for every dollar of trade revenue we earn, we typically generate a further $0.57 in foreign exchange revenue and another $0.51 in cash management fees and deposit spread. Not so much cross-sell as it is providing a convenient full service offering. And it's why having integrated platforms like Transactive are so valuable.

Now the only analogy I can think of may not be a great one, but imagine if you have an online relationship with your bank and you take out a foreign currency mortgage. To make monthly payments, you could ring a few banks and take the best FX rate and arrange bank transfers to make the payments, but typically you don't. As long as pricing is fair, it's much more convenient to make that FX payment online with your bank, and that's what people do.

So you start the trade at an ROE of around 10%, bundle it with convenient foreign exchange and cash services on a platform like Transactive, which are high-return businesses, and you end up with a customer return of between 15% and 25%. That's how a super regional strategy focused on trade delivers value to shareholders.

Critical to this strategy is building scale. And to the extent possible, doing things one way in one place no matter where that transaction originates. That will lead to lower unit costs, faster turnarounds and a better quality and control. This is more than just offshoring.

And as we continue to move volume to common platforms and consolidate activities and centers of excellence, including Australia and New Zealand, we're seeing the benefits. Operations expenses are down 10% for the year to $829 million, with reductions in all divisions despite healthy increases in transaction volume.

This is a terrific result. As a rule of thumb, and accepting that it's a mixed bag of products and geographies, transaction numbers have grown around 8% per annum over the last three years. In that time, total operations expense is up 6.5%. So that means average unit cost is down around 15% in the three-year period.

Looking ahead, we think absorbing between 5% and 8% annual volume growth can be achieved without any increase in operations cost, which will drive unit costs down further. About half of these savings come from greater use of regional hubs, which also drives improvement and quality and speed. And the other half comes from continual improvement of process and ongoing automation. Now I'd like to give you some big bang examples of how that's achieved, but in reality it's the result of hundreds of small continuous improvements which we firmly believe can and will continue.

Now despite a slower economy and some concerns over certain sectors, the risk environment remained benign and tiered assets continue to improve and provisions were slightly lower than last year. Overall the book continues to improve in quality. And whilst some of this is environmental, as you heard Mike say, the outcome of our super regional strategy and its three pillars is a book with more diversity by product, customer and geography, more exposure to well-rated multinational companies, and shorter duration trade oriented exposure. Or putting it another way, it drives a less capital intensive, lower risk book.

We've also been more proactive in allocating capital to achieve the right balance between growth and return. In reality, that means a more disciplined approach to which businesses can have capital and under what conditions. This has helped drive better returns which allowed us to increase the dividend payout ratio, remove the discount on the DIP, neutralize the interim DIP, and improve our common equity tier 1 ratio to 8.5%. We've ended the year in a very strong capital position and we will also neutralize that final dividend reinvestment scheme.

In conclusion, earnings growth this year was strong and it was driven by market share gains in Australia, strong revenue growth in businesses aligned to trading capital flow, good expense discipline across the board, and a relatively benign risk environment. Combined with a more proactive stance on capital, this produced solid growth and a higher return on equity. And the business is well-placed to create significant value in the future.

With respect to current revenue momentum, I think it's reasonable to look on a constant dollar basis excluding markets. And without the one-offs we referred to earlier like profits from the sale of Visa shares, on net basis, revenue momentum in the second half was strong at almost 6% annualized. Now I only excluded markets due to its inherent volatility and seasonality, but markets did have momentum in the second half too. It was the strongest second half performance we've had since 2009 and with customer sales revenue up 6.5% versus the first half.

Looking forward, we will continue to allocate capital to high-return businesses where we have a competitive advantage, and use scale to drive better returns. Mike made our priorities clear. And on the basis that what interests my boss fascinates me, I would ensure to allocate resources appropriately, to build share in Australia retail and wealth, grow businesses aligned to regional trading capital flow, further improve productivity in New Zealand, use scale to deliver low unit costs in all our businesses, and do that while maintaining our risk appetite.

As a result, we expect revenue growth to be between 4% and 5% for the year and expenses to grow around 2%. With our commitment to capital efficiency and an expectation that provision costs will remain stable as a proportion of our book, we will see above peer earnings per share growth and further improvements in ROE. Thank you.

Question-and-Answer Session

Unidentified Company Representative

Thank you. Before we go to questions, the usual procedure, if you can wait for a microphone please so that the people on the web and the phone can see you.

Craig, we'll start with you. So, microphone.

Craig Williams – Citi Investment Research

Thanks. This is Craig Williams from Citi here.

You talked today about your aims for above peer EPS growth. Part of the premise of your aim, when you listen to your strategy, seems to be the differentiation you have from peers in terms of your access to higher growth GDP countries. So what have you observed around the linkages between GDP growth in companies and foreign banks and the ability to achieve EPS growth which outperforms?

Mike Smith

Well, I think the important issue here is you have to get a critical mass in terms of your business volume in the various countries in which you operate. And if you are of critical mass, you will have a platform that will actually automatically grow with GDP growth. So if you're in a higher GDP region or a higher GDP growth region, you would automatically expect your business to grow faster than one in a lower one. So of course it is linked. But it doesn't mean you have to have the critical mass to be able to float, if you like, on that economy.

Shayne Elliott

I think there's, you know, there's clearly difference a between a business here in Australia and New Zealand which are highly correlated to GDP, because we're big. And the reality is in Asia, although, you know, we've got higher GDP growth that's a good thing, actually our business is correlated to the trade flow within that GDP mix. And given our relative size is so small, you know, what I like about that is we can grow almost a respectable GDP growth or trade growth that's in that region. I mean our total share of trade, if you will, would be very low single digits. So even if the total wallet doesn't grow, we can continue to pick up share in that market.

Unidentified Company Representative

Thanks. John?

John Lott – UBS

John Lott from UBS. I've got a question, we don't have the (inaudible) in front of us but I think Shayne you might have it there on Page 77, where it talks about -- okay -- it talks about the APR division in US dollars which I think (inaudible) is a fair way of looking at it. And a couple of numbers kind of jumped out. The first one is, if you look at the average lines and advances just in the second half, you can see pretty impressive growth, about 11%, but the spot growth was only 3%. So just want to get a feel there. Were there assets moved off at the end of the period? And the reason why, because risk-weighted assets to APR actually fell in the second half.

Shayne Elliott

So just one point, that page is not the APR division, that's the APR geography, so that can't, you know, that is everything that is booked in -- outside Australia and New Zealand. So for example, talking about the balance sheet, but if you look at say expenses on that, that would include all the costs of the hubs. So it's a geographic view rather than necessarily how we run our business, right?

So APR, one of the issues around loans and advances is that also includes a lot of the liquidity book that sits in London for example. So we trade lots of liquidity because we are raising debt liquidity that's placed in London Central Bank, things like that. That's partly what that number is. So I don’t know that that's necessarily a great way to think about, you know, APR or our success in the Asia Pacific region.

John Lott – UBS

(Inaudible) if you look at it, it's not actually a [much] different number if you look at the institutional Asia business as well, slightly different numbers. But again a lot of assets moved up in the period, risk-weighted assets actually falling. Is that something to do where assets moved off balance sheet at the period, or why would that come through?

Shayne Elliott

No, I don't -- no, there was no kind of moving assets off the balance sheet within the Asia division or within the IIB division at the end of the year. Partly it's to do with there's some seasonality obviously in terms of trade, and the other thing is we do moderate out, going back to what I found out in terms of the returns, pricing does move around in trade, and so we do moderate our appetite, that we make sure we had a decent return, if pricing comes down, and there were some lower pricing at the end of the year, we don't participate. And so you'd end up seeing that volatility in our asset levels.

John Lott – UBS

And also that 22% growth that you did see coming through, how much of -- obviously a very large number -- how much of that was trade versus other loans come through?

Shayne Elliott

A significant portion of it, most of it, is trade.

Unidentified Company Representative

James.

James Freeman – Deutsche Bank

James Freeman from Deutsche Bank.

Just a question on capital, if I could, Mark. You've been building capital for a while despite actually good asset growth. Have we reached a point now where we can actually start going back more, you know, over and above what we've seen in terms of high dividends and DRPs? I mean, when do market buyback start or are you doing (inaudible) something else?

And then just Shayne on trade, you mentioned the ROE 10%, if we change (inaudible) around the risk weighting on trade, what is the ROE (inaudible) or is that to say --

Shayne Elliott

Really quickly. Well, I'll say one quickly. So we haven't -- that hasn't changed. And if it did change, it's not [juicy] material. So this is the idea that (inaudible) kind of one-year minimum tenor on it. Even if you reduce it to 90 days, it's better but it's, look, at the end of the day, I don't think it materially changes their appetite for their business.

Mike Smith

In terms of capital requirements, you know, how long is the piece of string? I really don't know. All I can say is that the arguments and -- no, I should say discussions, going on in the -- in Europe and in the US would say that this issue has not gone away. Quite clearly we're in a better position than most European and North American banks and we believe that we have sufficient capital to cope with most likely increases. But I think it's too soon to call that one. And indeed I think it's more confused now than it was this time last year.

Unidentified Company Representative

Jarrod?

Jarrod Martin – Credit Suisse

Jarrod Martin from Credit Suisse. A couple of questions. First of all, third quarter trading updating you expected institutional margins to be 20 basis points. They're only down 16 basis points in the second half. And considering a lot of that is sort of de-risking of the book, what sort of had changed over the quarter for that to come in less than expected? And your outlook for institutional margins from here.

You make the -- secondly, you made a comment about stable risk. Is -- do you mean that from a basis point perspective or a dollar perspective?

And then thirdly, your FY '16 ROE target of 16% plus, I note that you've got nearly 20% of capital within the international business tied up in partnerships, with a tiny 11% ROE. What have you factored in, in terms of partnerships for that target of 16% plus?

Mike Smith

Let me answer that last piece and then I'll you pick up, Shayne.

Look, the partnership issue is quite clearly something that we need to manage strategically. The efficiency of holding minority interest under the APRA imposed Basel III guidelines is not efficient. And as we mentioned earlier, we'll be looking at various ways of improving our capital efficiency in terms of getting a return.

But that was really more about the existing business. If we can do additional things with things like capital partnerships that aren't strategic anymore, then that would be an added benefit.

Shayne Elliott

Okay. So in terms of the margins, you're right, you know, at the time [David] kind of indicated around 20, and then numbers came in at 16, so what changed in that period? Actually, so just going through (inaudible) interest rate falling no material differences, that explains about half of the fall, and that was kind of bang on what we thought. Business mix was another big driver, and again it was marginally better than we thought on business mix, but there or thereabouts.

Actually the surprising piece is probably just the competitive pressure on pricing. So at the time we felt -- I think we thought that, you know, margins on loans and trading things are going to be under more pressure than they were, and also on deposits, so that came in a little bit better than we thought.,

In terms of the outlook for margins, you know, in terms of institutional, you'd have to -- really the driver there is going to be, and it's same for the group actually, is just this continued low interest rates. And that (inaudible) the book. So if I stand back and think about the group for a second, you'd look and say, group margins, because of lower interest rates that have already taken place this week (inaudible) the book is probably three, four basis points, pressure on margins, and there will be a point or two about the stuff (inaudible) business mix (inaudible) in the first half.

Mike Smith

It's probably worth talking about that two-year --

Shayne Elliott

Yeah. It's interesting, actually -- obviously we spent a lot of time analyzing the changes, and we talked about those three things, you know, interest rates, business mix and competitive stuff. Actually if you look at the group over the last two years, just kind of looking at -- that's where the majority of the pressures come. Actually, group margins, its markets, 90% of that move is because (inaudible). All the other stuff comes out (inaudible). You know, you got margins are up a little bit -- up a little bit in Australia retail, which is a big chunk of the book (inaudible) margins down in institutional, which is big margin down but a smaller part of our book (inaudible) kind of washes out, and you (inaudible) really 90% being driven by just the fact that interest rates are lower. So that's the outlook on margins.

In terms of the risk comments, my comments were more around basis points, so saying we would expect provisions to remain on line with the size of our balance sheet basically (inaudible). So probably if you're looking at a number, probably up, you know, (inaudible) or something.

Unidentified Company Representative

Victor.

Victor German – Nomura

Thank you. Victor German from Nomura. A couple of questions if I may. Firstly, in terms of credit quality in the commercial book, it looks like [BDDs] there have increased from 251 in (inaudible). Just wondering if you can give us a little bit of color as to what's driving that. And more broadly, on appetite that you've got in that business, given that there's some suggestion from (inaudible) taking more risk in the book. And I'll follow up with another question.

Mike Smith

Well, I'll answer that last part. No, we're not. But we did anticipate that question. So [Phil] is all prepared to give you an answer.

Unidentified Company Representative

Thanks for that. Yeah, the bad debt cost is roughly 150 million up year on year. There's really three major drivers for that. The first of them is that we released some of the previous Queensland [fab] provisions during 2012, so that's non-repeating. And that's 54 million so that knocks a big hole in it.

The second big component is we had some write-backs in the corporate portfolio of around 37 million in the previous year. Again the non-replication of that knocks a hole in that delta.

Most of it is pretty finely spread. The only one that's probably worthy drawing some attention to, and you'll get to it, is that there is an increase in the [standard] of around 32 million in provisions. And that's a combination of both book growth but also change in the mix of the book. So there has been a bit more of used cars versus new cars in that book, obviously carries a higher expected loss. And there's also been a valuation issue in some of the used cars.

So it's nothing that would threaten the profitability of the [standard] business, but it is one where there is some real underlying movement in the provisions. But really that's the only one of any materiality. Everything else across the book is in single-digit millions and commensurate with the growth in the book. And as Mike's pointed out, we've looked pretty closely at the quality of the new business acquisition and we're comfortable with it as well with our underwriting standards and in parts of the portfolio, it'd be fair to say that our new acquisition is actually a better quality than the bank book.

Mike Smith

Thanks. Thanks, [Phil].

I'd like Nigel just to give a little -- a view on how he sees it as the Chief Risk Officer as well.

Nigel Williams

Of course I'll be exactly the same as [Phil]. We've actually done quite a review because I think those comments about what our competitors would be saying, that we've taken business off them (inaudible) so we've done quite a major review of all the new business that's actually come on and we've actually done that review by bank, by state, by business sector. And we haven't -- the new business that's come on in that commercial and corporate business is the same or is a quality than our existing book. And so the (inaudible) losses are the same or better. So we've seen no sign that that new business is of worse quality than our existing loss behavior.

And if you actually look at that individual loss experience, what we've seen this year is actually very similar to our long-term averages. So a lot of that is the reverse (inaudible) last year.

Mike Smith

We have of course lost some business to other banks that we didn't want. I would say that.

Victor German – Nomura

Hello? Yeah. If I can just follow up with one more question.

Looking at capitalized software balances, they're up about 400 mil. Can you maybe give us sort of directional trend where you expect that to go, and also how do you expect the amortization charge to play over the next few years?

Shayne Elliott

So I mean the nature of the business is changing, right? So the nature of the business is we're much more about technology than we are about labor. And so you'd see the mix of your expense as you would expect to see technology, and that's characterized in many cases by amortization (inaudible) balance sheet increase.

You know, in the sense there's no right -- the way I think, there's no right number for that. I'm obviously worried about trends and the amortization pressure.

What I'm more worried about is making (inaudible) from that investment, right? So that to me is the critical thing, that when you've got to show that (inaudible) better products, better productivity outcomes, etcetera, and that's where the focus is.

In terms of the trends, it's been increasing. You'd expect that that will continue to increase a little bit and will moderate in terms of the rate of that increase, partly because we still had some (inaudible) major pieces of work that had to come online. Banking on Australia includes a little bit. Completing Transactive, the foundation system in Asia. Some of those pieces had (inaudible) increase in the amortization balances. What is the amount? It does put pressure on our OpEx obviously, so, you know, you get an increase in your OpEx as a result. And, you know, our approach is, simplistically, again, (inaudible) when we're investing in new projects (inaudible) get the balance right within the year between things that drive new revenue and things that drive productivity, that the productivity projects are sufficient to cover the full uplift in amortization if that made sense. Right? So that we can kind of self-fund those amortization increase through productivity projects. And if we can get that balance right, then we're okay.

And if you look at this year, that's what happened. Amortization actually increased pretty materially in the year. But on a constant dollar basis, our expenses were flat because we drove enough productivity to pay for that. And that's our approach going forward.

Mike Smith

I think that's the way to look, is to have the ratio of IT expense to both income and expenses, and see how that moves. But I think we have to expect that banking as an industry is going to get more and more tech dependent. I mean that's just the world is going. The good part is that that technology should be getting cheaper all the time. You just need more of it, but it's, you know, it's not going to drive the cost up too much.

Unidentified Company Representative

Andrew.

Andrew Lyons – Goldman Sachs

Thanks. Andrew Lyons from Goldman Sachs.

Just two questions. Firstly, a further one just on the commercial business, one for [Phil] perhaps, can you just maybe give us a bit of a view around the side of the revenue environment at the moment? I mean your balance sheet was up about 7% --

Mike Smith

You want to give to Mark or do you want to handle that?

Andrew Lyons – Goldman Sachs

-- with the income up about 4%. So just wondering, can you just give us a view just on the volume and also the competitive environment at the moment? And then just a second question, just on your economic profit, up strongly year on year, but then the second half it actually appeared to fall, the growth in your capital requirements [appeared] greater than the growth in your cash earnings. Just (inaudible) any drivers around that?

Unidentified Company Representative

Well, I'll get Mark Whelan who runs the business, but Mark can talk to the difference in the revenue and lending growth, which has a lot more to do with deposits than lending from recollection, but Mark, why don't you take that?

Mark Whelan

Yeah, just with regards to the lending growth, we're, as you've seen the numbers, up around about 7% year on year on the lending growth. And the revenue that we're getting off the back of that actually was slightly improved in the lending side. Where we've seen drag probably for the last two to three years has been on the deposit side. As you would expect with a low interest rate environment, we have -- that has a bigger, particularly on the transaction banking accounts, that's been a significant drag on the revenue over the last two to three years this year (inaudible) different, we're expecting to see that maybe bottom out. So looking forward, we think that there's good potential for that to actually be (inaudible) rather than a headwind as we've had.

And the other point I've got with regards to the revenue growth, the numbers that you see there in the division are really based on our lending and deposits. What it doesn't take into consideration is the cross-sell that we generate, and a lot of the other banks actually put that into the corporate commercial space.

If you look at that, cross-sell revenue was up about 8%, whereas our deposit and lending growth was at -- revenue growth was at 4%. Combined, total revenue, which is what you do in comparison to our competitors, was up around 6%, 6% to 7%, so. And we expect that we can continue to do even better on that, particularly on the cross-sell [work] as there's more upside (inaudible) markets business we believe and also on the mortgage side particularly and trade.

Unidentified Company Representative

So in terms of the economic profit, I mean very simplistic way of thinking (inaudible) 15-1/2 minus 11 (inaudible) times our capital base plus the value of the (inaudible) credits, and the differences in the second half, obviously our capital levels increased. ROE was a little bit lower in the second half than the first half. So that's A. But more importantly was actually to do with (inaudible) credits which was in the second half. Actually it was our (inaudible) businesses were a bigger driver of profit growth. They come obviously without those [franking] credits on a proportional basis, and that's why you end with a half-on-half difference in economic profit.

Mike Wiblin – Macquarie

Mike Wiblin from Macquarie. Four to five percent revenue growth, I mean that's reasonable getting the crystal ball out. Can you give us some idea of where that's going to be coming from, particularly given, you know, you've got some margin declines still coming through next year?

And then just a double-barrel question just on the margin. I mean if we do see more rate cuts here, I know it's not consensus now, but if we do see more rate cuts, I mean when do we start to get worried that, you know, the earnings on [pre-funds] start to get (inaudible) more than you're forecasting?

Shayne Elliott

So I think (inaudible) the rate cuts, it does (inaudible) the earnings on capital and low interest rate balances. So if that would be the case, it's really a question of your ability to re-price the other side of your book. And there's lots of variables in that equation.

The first question --

Mike Smith

All of which are possible.

Shayne Elliott

All of which are possible, sure.

In terms of the revenue growth, actually I think 4% to 5%, I think it's a good outcome. And, you know, because it's about the quality of the revenue growth, right?

So to some extent, you know, we could grow revenue faster by taking more risk, by pushing out our global lines business. You know, that's not our strategy and that's not what we're going to do. And I made that point about maintaining our risk appetite. So I think 4% to 5% good-quality revenue growth is a good thing.

Where is it going to come? It's going to come -- and so the kind of higher than average will come out of Australia again in terms of retail commercial. Wealth should be at or about the average. Institutional Asia will continue to be faster than average.

New Zealand actually has been a laggard for some time, although recently it's actually picking up a little bit. It's only 15% of the bank, so it doesn't have a big impact on the group. But that's more of a positive than a negative. And institutional Australia I would say will be -- continue to be below average. So you can kind of -- you balance all those things out, you come somewhere the 4% to 5%. That's all on a constant dollar basis. You know, who knows what the impact of foreign exchange might be.

So, growth, where it should be, growth in the business (inaudible) investing and growth in the business where we have a competitive advantage and the ability to grow.

Unidentified Company Representative

Brian.

Brian Johnson – CLSA

Brian Johnson, CLSA. I had three questions if I may.

In smallest font imaginable, under the capital management bit, it says that you've released some capital in the LMI in the second half. Can you just run us through exactly what you've done there? And then I have two other ones.

Shayne Elliott

Rick can answer that one.

Unidentified Company Representative

So LMI is now partly financed with -- sorry. So LMI refinanced with some hybrid capital, and from a regulatory perspective that's a deduction at a hybrid capital level rather than core equity tier 1.

Brian Johnson – CLSA

Can you give us a dollar figure on that?

Unidentified Company Representative

I think off the top of my head it's $150 million.

Brian Johnson – CLSA

That's small.

The second one is that (inaudible) your expected loss, now I apologize, I haven't got the pack in front of me, but the expected loss I think, from memory, declined from 30-odd basis points to 37. The actual loss is running at 25. We had a much bigger capital release and expected loss in the capital adequacy note. I think I remember it's about 200 million bucks. We saw the dollar value of new impaired assets increased by about -- so the new emerging impaired assets increased by about 250 million bucks. Can you just give us a feel about the vulnerability of the dividend at some point in time when the expected loss becomes the real loss? And I would have every year you under it (inaudible) probably going to run above it. Because looks optimal.

Shayne Elliott

Do you want to talk about the trends in expected loss, Nigel, and I'll --

Brian Johnson – CLSA

Can we come back to that --

Shayne Elliott

Yeah.

Brian Johnson – CLSA

-- new bad loans coming through?

Unidentified Company Representative

Okay. So the new bad loans that are coming through, if you look where they are, they're actually, and I think we've got a slide, I think it's slide 71, that actually shows the size of the impaired loans. And you'll see, as we said last year, we saw us going down-market to the small banking market, etcetera. And so you're seeing the recoveries from that, you know, much higher, much better. So that the losses will be lower.

Yeah, [better or down].

Unidentified Company Representative

New impaireds are down 22% year on year.

Brian Johnson – CLSA

So that is (inaudible) 37, but the 25 basis points versus the 37 basis points is still a pretty big gap.

Unidentified Company Representative

Yeah. And I think we expect to see some improvement in the 37 as well. So I think there's still a little bit of room there in various areas to come down.

But I mean you're quite, as you know, the 25 is lower than the expected loss number. And it might be three years, it might be five years, it might be seven years, but we'll, at some point, we'll see a higher number.

Unidentified Company Representative

-- if we assumed it jumped from the 25 to 37, that's 50% jump. So if provisions go from 1.2 to 1.8, would you be able to sustain a dividend of 1.8 provision loss years? I mean, you know, would you be able to do it forever? No. It wouldn't be a good thing.

But, you know, if you (inaudible) I think $600 million is not a good thing obviously because [it sits] within the realm of affordability to the dividend.

Mike Smith

And then it's only a cycle, eight years you'll be below the expected loss trade, right? So it's only the two years where you shoot above it. So I think we're okay.

Brian Johnson – CLSA

I'm pretty confident you won't be around (inaudible) Mike, but --

Mike Smith

Well, you know something I don't. Why is that?

Brian Johnson – CLSA

Just the final one, you have a lot of stuff on productivity today, which is great, but when you have a look at ANZ, you are running three disparate core systems. Can you just run us through the thoughts on that going forward?

Mike Smith

Yeah, I can. Our business mix is not like our competitors; it's different. And the -- we have a couple of what I would call legacy core systems and one new one. One of the core systems in New Zealand is actually -- potentially can be upgraded because it's still being serviced effectively and grown. So it's really the core systems in Australia which is the issue going forward.

Is there a need to replace it right now? No, there isn't. And the reason for that is that we are putting our investments in the customer front-end systems and we are basically hollowing out the core banking system so that it's -- the need for a core banking system like you used to have to have will no longer be relevant as technology changes.

And what we will be faced with sometime down the line, maybe in 10 years, is the need to actually replace our accounting system. But it will not touch effectively the front end. And that's where we're moving to.

So, you know, that's a decision that we will have to take at some stage, but it won't be like replacing a core banking system as it is today. The technology has moved along and continues to.

Unidentified Company Representative

Richard.

Richard Wiles – Morgan Stanley

It's Richard Wiles from Morgan Stanley. Your ROE target of 16 isn't a long way above the current ROE.

Mike Smith

-- you think it's so simple to achieve, but, you know, this is, you know, this has basically got to be a continuing trend. And you know, at 15.3, there's still a fair way to go. Sorry, but I didn't let you answer -- ask the question.

Richard Wiles – Morgan Stanley

I had two specific questions. Firstly, how much of that is just driven by mortgages growing above system over that three-year period? I assume [that's not ambition] to maintain your [recent] track record. And secondly, what broad assumptions are you making about IIB within that 6%, 7% target?

Shayne Elliott

You know, so (inaudible) growing mortgages -- at the end of the day, mortgage is a tiny little piece of our capital base, right? So it can grow as fast as it likes and responsibly. It'll help, but that in itself doesn't really drive our (inaudible) group average because it consumes, you know, 10% of the group's capital.

Richard Wiles – Morgan Stanley

Generates a lot of profit --

Shayne Elliott

I don't --

Richard Wiles – Morgan Stanley

-- retail had a great year and a great [part], so if it's not using a lot of capital --

Shayne Elliott

No, no, I agree.

Mike Smith

I mean you can give it all the capital you like, you know, but it's a fact that you can't build the business much more than system growth, right? And how do you fund it? And we could give [Phil] another $3 billion of capital, he'd have to and -- what would you need?

Shayne Elliott

Two hundred billion of mortgage.

Mike Smith

Two hundred billion of mortgages. Now, how is he going to do that and (inaudible)? Yeah.

Richard Wiles – Morgan Stanley

Isn't the point that he can grow his earnings very strongly without much capital? That allows you to continue to neutralize the --

Shayne Elliott

But we --

Richard Wiles – Morgan Stanley

-- maybe do a buyback that [James] wants?

Shayne Elliott

I don't think we're disagreeing here. You're right, it's an important part of -- what I'm saying is in terms of business mix, it's not the driver of it. And in fact, the way that you get to 16 is exactly what we see it. It's growing -- mix growing Australia fast and continuing to do that responsibly, driving productivity in New Zealand in terms of driving the P&L. We think there's a big upside -- continue to be a big upside on that. And then in terms of institutional, Asia in particular, we've got growth. And there's a little bit more productivity in terms of IIB in general. So it's all of these little bits and pieces all get you to that point.

Going back to the question about partnerships earlier on, you know, that current goal kind of assumes status quo in terms of what we have, right? So, you know, we're not dependent on a change in strategy around partnerships in order to get to the 16.

And I think the other point, Richard, you know, it did say 16% plus.

Mike Smith

That was the threshold, yeah.

Unidentified Company Representative

At the risk of starting that again did you have a follow-up, Richard? No.

(inaudible) please.

Brett Le Mesurier – BBY

The tax rate in the AP geography seem to be 19% in the first half and 14% in the second half. And also the wealth management business in the segment earnings (inaudible) to pay any tax of any consequence.

Unidentified Company Representative

Yeah.

Brett Le Mesurier – BBY

What are the factors that created that? And I don't recall in the third quarter update any reference to that. So when did it become obvious that that was going to be the case?

Shayne Elliott

Well, I'm actually going to ask -- I'm not a tax expert, so I'm going to actually ask Shane Buggle, my deputy, to talk through the tax numbers. Shane?

Shane Buggle

Okay. Thanks, Brett. Obviously it's a function of which countries you are, which tax jurisdictions (inaudible) mix of where we are through the half and through the quarter.

Shayne Elliott

Yeah, in terms of the wealth piece though?

Shane Buggle

What was the question?

Shayne Elliott

The wealth taxes -- there was a $50 one-off in there.

Shane Buggle

Oh yeah. That was a reassessing of the tax base on the acquisition of the (inaudible). And so we're in dispute with the Australian Tax Office, we settled our disputes, and we released a $50 million deferred tax liability.

Shayne Elliott

Yeah.

Brett Le Mesurier – BBY

Can I go back to the ROE question? The ROE that you're targeting in the APR region, are you expecting that in your forecast period to hit the company average?

Shayne Elliott

No. No, I don't -- no. And I don’t think it'll hit the company average, it won't be 16. It's unlikely. And again it goes back to that point about how we create value. So we had some businesses that are high return, that came to be lower growth. We had some businesses that are lower return, still above our cost of capital, that are high growth. You know, and as long as you get that balance right, and that's why they try to give that example of kind of a -- and these are -- I don't want people to run away and say, if weight is 13%, but I'd say, you know, as an example, a 13% ROE growing at 10, about the same value as (inaudible) a bit more than a 20% growing at 5%, you know. So, no, I don't think that's a necessary outcome.

What I will say, I think that the institutional business in Asia absolutely has the opportunity to be mid-teen ROE. We know that because of some of the business that we do today. And as the weighting of that business grows within IIB, it'll push the APR business higher.

We also know that from other -- from some of our competitors, and it's, you know, it's about getting the balance right between what you do in that business. And, you know, that's why I spent a bit of time today talking about that trade example.

Brett Le Mesurier – BBY

Right, right.

Shayne Elliott

The more you do that, obviously it pulls up the average.

Mike Smith

But it's also an integrated strategy. You can't just dissect it in pieces. You know, there is a flow of income going both ways. And the customer base requires the presence of your regional presence in -- to get that [custom]. So you might be making more money out of an account in Hong Kong or you might be making it in Australia. But you've got to have both to connect it. It's an integrated strategy.

Brett Le Mesurier – BBY

So what do you currently estimate the ROE of that business today?

Shayne Elliott

We don't estimate it, we know.

Mike Smith

You know, you should be interested in group. You should be interested in the group ROE. That's the number you should be watching. And you should be watching the trend of it.

Brett Le Mesurier – BBY

Okay. So where your incremental capital goes is important in signing (inaudible).

Mike Smith

Of course. And as Shayne has said and explained, the incremental capsule goes where there is a potential shareholder value -- create shareholder value.

Shayne Elliott

I think you can say, Brett, today, if you look at Asia which is obviously is the strategy, is the Asia business today, the ROE is above our cost of capital and it's improving. Okay? And the reason it's improving is because we do -- you do get a (inaudible) because there is obviously a fixed cost element both in terms of actual kind of expense and there's also the kind of FX capital costs, i.e., you know, there's a capital minimum that starts that you grow your way out of. So it's growing, it's low double-digit. It'll grow into that kind of low, middle digit over time.

Is it likely to be above 15 in the long term? Probably not. But, you know, a good 13%, 14%, 15% ROE business in Asia, growing with the growth characteristics that it has, that's a great business, that's a great way to create value. And to Mike's point, that's just looking at a standalone, not taking credit for the fact there's no debt -- look, obviously I used to run the institutional (inaudible) but there's no doubt in my mind today that we're in the business in Australia today because we have a relevant network in Asia. There's no doubt about that.

Now, can you perfectly count it and figure -- no. But we know that that's the case and that that is reinforcing our leading position here in Australia and New Zealand institutional.

Unidentified Company Representative

Scott?

Scott Manning – JPMorgan

Scott Manning from JPMorgan. The guidance or the outlook commentaries around the group, the integrated approach, the cost-to-income ratios for the group, the ROE for the group, the prior targets in years gone by have been, you know, 25% to 30% of those coming from Asia, so it was more aligned understand around, you know, getting people to believe in the Asian growth component of the group.

So two questions. Firstly, within that original target of getting to that 25% to 30%, what was the equivalent capital number that was penciled in to achieve that? And secondly, within the group ROE outlook, is that 25% to 30% coming from Asia still applicable, or is that now off the [table]?

Shayne Elliott

So first of all, the 25% to 30% was talking about earnings from APR, so that's really a point about being outside Australia and New Zealand. And the principle behind that was to say, we're serious. You know, this is about an important business. You know, it wasn't about whether it's 25.2 or 30.5 or whatever (inaudible) meaningful. We haven't walked away from that goal. So that's -- these new goals are in addition to that. So that goal is still there, right?

And in terms of, is that kind of part and parcel of the (inaudible) can get to the 16% and the 43% CTI and the 25%? Yes. But it also (inaudible), you know, over time the world changes in terms of capital rolls, how we think about partnerships and all those other bits and pieces. What we don't want to get is locked in to doing something silly just to meet a 25% goal.

For example, just hypothetically, you know, holding on to a partnership because obviously that helps us achieve the 25% earnings goal, may not be necessarily in the (inaudible) shareholders have it at.

I don't know. I don't remember what the capital assumption was at the time that that goal was given.

Scott Manning – JPMorgan

Thank you.

Unidentified Company Representative

Any more questions?

[Piers].

Unidentified Participant

Hi. This is [Piers] from [Bell Porter]. All the discussions about Asian banks, you never talk about India or North Asia. These market is too difficult for ANZ? I mean what is the x factor needed for you guys to succeed in those markets?

Mike Smith

Well, India we have opened a branch. We are continuing to grow. Acquisition opportunities are limited in India because of the regulation. And quite clearly, in the last couple of years, nothing has been happening in India because of the state of the government at the moment. No decisions are being made.

In terms of North Asia, Japan and Korea, they're difficult markets. We have looked at opportunities there before. We still are growing our organic business. Korea for example, I mean most banks in Korea are earning an ROE of about 3%, which is not really where we would like to be.

So I think that looking forward we will continue to build our organic business in Korea, in Japan and in India. And I think that's the best way to go at the moment.

Unidentified Company Representative

And I think with that, Mike, we might hand back to you for any closing remarks.

Mike Smith

Okay. Many thanks.

So let me just wrap up by saying that we presented a clean and high-quality results today, one which demonstrates that we're creating a better bank for our shareholders and for our customers.

It's also clear that the super regional strategy provides us with so much more long-term potential, but it is a long game, but it has enormous opportunity. As I said earlier, we have set additional targets which are reducing the cost-to-income ratio to below 43% by the end of 2016 and achieving an ROE of above 16% over the same period.

And I think it also demonstrates that we're continuing to make progress in unlocking the potential of our franchises here in Australia, in New Zealand and Asia Pacific. And, you know, as I said earlier, there's a promise of more to come. So many thanks indeed for being here today. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!