Westpac Banking Corporation (NYSE:WBK)
F4Q10 and Full-Year (Year End 09/30/10) Earnings Conference Call
November 2, 2010 8:00 PM ET
Andrew Bowden – Head of IR
Gail Kelly – CEO
Phil Coffey – CFO
Rob Coombe – Head of Retail and Business Banking Operations
Curt Zuber – Group Treasurer
George Frazis – Chief Executive of Westpac New Zealand Limited
John Watts – UBS
Victor German – Nomura
James Freeman – Deutsche Bank
Ben Koo – Goldman Sachs
Jarrod Martin – Credit Suisse
Ben Zucker – CBA Equities
Richard Wiles – Morgan Stanley
Craig Williams – Citigroup
Matt Davison – Bank of America-Merrill Lynch
Brian Johnson – CLSA
Brett Le Mesurier – Axiom Equities
T.S. Lim – Southern Cross
Scott Manning – JPMorgan
Johan Vanderlugt – Daiwa Capital Markets
Good morning and welcome to Westpac's full year 2010 results announcement. My name is Andrew Bowden. Thanks for joining us whether you're here in person or in the web.
Presenting this morning will be Gail Kelly, our CEO, and Phil Coffey, our CFO. And as per usual practice, we'll run through the presentation that was launched this morning and then we'll open up for questions.
So without further ado, let me invite Gail Kelly to the [inaudible] and to start proceedings. Thanks, Gail.
Thanks very much, Andrew, and good morning everyone, those of you in person and those of you who are listening in by the way of telephone. Welcome to you all.
And I certainly realize it was only a month ago that we were actually here together discussing the productivity and IT initiatives, but today of course is our full year 2010 results, and I have all of my team here to help take questions, any questions that you may have at the conclusion of our presentation, and George Frazis who's on the phone from New Zealand.
So let me start with the key messages from the result.
2010 has been another challenging year, and I am pleased with our performance. This is a strong, high-quality result. We've made a number of strategic choices over the past few years that have driven this performance. During 2010 we have in a very focused way improved the sustainability of our earnings and put the business on an improved footing.
Starting with customers, this was the year we implemented enterprise-wide reductions in exception fees across both business and personal customers across all brands in both Australia and New Zealand. We remained open for business throughout the crisis, and we have intensified our focus on key relationship segments and grown market share in chosen areas. In home lending, we've materially strengthened the contribution of proprietary channels over third-party channels.
This year has seen further significant investment in our people, in our multi-brand distribution platform and in technology. Our multi-brand platform was made possible by our St George merge which has proved to be a highly successful strategic decision. It has provided us with an exciting point of differentiation in our local market.
We've enhanced our wealth platforms, where BT and us together ranked number one in market share and number one in share of new business flows. We further embedded wealth into our distribution business with great traction occurring in Super for Life and insurance product sales.
We've materially strengthened our capital position and the quality of our funding. We've lengthened the tenor of our short and long-term funding and we focused on retail deposit gathering. This of course has come at a cost as can be seen from the margin outcomes for the year.
A feature of the year for us and a highlight has been the low impairment charge, and I'd like to pause and reflect on this just for a moment. Across any major credit risk management metric or ratio, the Westpac Group comes in at the number one position. We came into the crisis in good shape, we managed our way through with less impact to the bottom line than others, and we've emerged more quickly and more strongly.
Our ratio of impaired charges to average gross loans comes in at 0.30 and is lower than our peers. And our provisioning coverage to credit risk-weighted assets at 1.46% remains sector-leading. I dwell on this because not only do we have further upside here but what it says about us is that we are a lower-risk, higher-quality business with a consistency that investors can rely on.
Finally, on dividend, you will have seen that with our final dividend of 74 cents, we have restored our dividend growth path. As a half-yearly dividend, this is a new high. Looking at the numbers, a 21% increase in earnings per share to 197.8 cents is a strong performance. Return on equity is a healthy 16.1%, which is a pleasing outcome given the additional goodwill we picked up with the St George merger and our stronger capital base.
Cash earnings come in 26% higher and reported net profit after-tax is a very strong outcome, boosted by the tax consolidation related to the merger. Core earnings are down 1% this year, perhaps not surprising given the 19% uplift last year and the rebasing of revenue that has occurred during 2010. I've already referred to our performance with regard to impairment charges, and our expense to income ratio while up on last year remains an important comparative advantage.
Looking at the portfolio of business, we see a remarkably strong outcome and uplift from our high-quality institutional bank and material improvements for BT Financial Group and Westpac New Zealand. Our Australian retail and business banks have taken the brunt of the rebasing of customer fees and of the higher funding cost environment. St George earnings were unchanged year-on-year with Westpac Retail and Business Bank down 8%.
On Westpac Retail and Business Bank, it's worth recalling that the business was a standout performer in 2009, partly because of its credit quality, and so it's not had a decline in impairments that other business units have benefited from. Its underlying business momentum is pleasing. It has grown market share in home lending and retail deposits. It's grown its customer numbers and strengthened its products for the customer. Its customer retention is at pleasingly high levels, as is its employee engagement. Overall it is a business that has had to adjust to a new funding environment, absorb fee cuts, while position itself for the future.
On Westpac New Zealand, I'm pleased to say that we have a real turnaround in performance occurring. While the economic recovery is slow, we have renewed momentum in our franchise with a reinvigorated network and much strengthened risk management focus. We are winning market share in target segments, both household and business, and margins are starting to improve.
A key theme for the Westpac Group is of course sustainability, across all elements of business, our people, our customers, our engagement with the community, this is something we focus on. And in the 2010 year, we've done a number of things to improve the sustainability of our earnings. This slide points to a few.
Firstly, and I've already mentioned this, the 300 million reduction in customer fees, we've gone further on this front than many and have effectively rebased our customer fee revenue line. The year has also seen a rebasing of markets and treasury income, down almost 500 million from last year's extraordinary year, and now effectively at a more sustainable level. On productivity, we provided some insights into our approach a few weeks ago. We are underway with this and have a growing trajectory of savings and benefits to come.
And as the bottom-right slide shows, we've quietly gone about restructuring a few of our businesses. In particular we've largely closed our structured finance business and the book is running off. The turnaround in the equities business has also been a success story. This is a small business that last year made a 95 million loss. It is now being restructured and refocused, and this year contributed 93 million. Further, within WIB, we have exited property funds management. Finally, we've managed our commercial property portfolio back down to levels we were at prior to the merger, at 7.7% of TCE and 9% of lending.
The year has been a busy one in terms of focus on customers, and in the light of a challenging funding environment, we particularly focused on key segments, those where we can build deep relationships, relationships that last. We worked hard in increasing the number of customers with four or more products in both Westpac and St George, and retention levels have remained very high.
We've also put a particular focus on driving stronger productivity out of our proprietary channels and I'm delighted by the significant increase in the percentage of home loans coming through our first-party channels, up 10 percentage points. In our Westpac brand, 71% of home loans come through our own channels; and in St George, 62%.
On complaints management we've made excellent progress this year. Total complaints in Westpac are down by 55%, and I'm pleased to say we've made gains in actually removing the underlying source of the issues, that has been aided by our much-improved technology environment with Severity 1 incidents down 95% over three years.
One of the success stories over the year has been BT, a strong performer with an excellent platform for growth. Significant merger work has occurred in this business over the past two years yet the franchise has not missed a beat.
On the distribution front, we have an extensive network of financial advisers, firstly within our Westpac and St George distribution businesses, also through our Securitor and Magnitude adviser groups, and finally through independent adviser channels. In light of the strengths in distribution, we are capturing more than our natural share of new business flows, consistently one in every $3 or one in every $4 of platform flows.
Our BT Super for Life product continues to power ahead. It has now surpassed the 1 billion mark in funds under management. This is a truly innovative, very easy to sell, easy to understand product that breaks down the barriers between banking and wealth. It is also very well-aligned with regulatory change. Insurance has had a strong performance with excellent cross-sell in both Westpac and St George.
Turning to our capital and funding, from a tier 1 capital point of view, we finished the year at 9.09, up 98 basis points from a year ago. Our common equity ratio at 7.5% sets us up well for regulatory changes in the pot line, and Phil will talk more to this.
From a funding and liquidity point of view, this has been a big year. We raised 43 billion in wholesale funding, and in doing so, we materially extended the term of this funding, so ensuring a balanced maturity profile into the future. We reduced the percentage of short-term wholesale funding and even within that category we extended the average duration. We grew our customer deposits by 13 billion or 5% and our overall stable funding ratio improved at 80%. All this has meant rising costs and we can see the effect of this in our margin.
Not surprisingly, a very big focus for us over the past two years has been the St George merger. I'm pleased to say that after incredible effort across the organization, this is largely complete, almost a full year ahead of initial expectations. From an operational point of view, all the key milestones have been achieved, all on time and within budget. On the benefits side, we're ahead with expense synergies 28% higher than we had planned at this point. Revenue benefits are also tracking ahead of plan.
While our business case allowed for the expected 4% customer attrition, we set ourselves the goal of not suffering any customer loss, and we've delivered on this. In fact we've grown customer numbers consistently over the past two years. We have this year also expanded the product range available to St George customers including BT Super for Life insurance products and our new amplified rewards card.
Overall we're truly delighted with this merger. It has materially assisted us in the transformation of the Westpac Group and set us up with a multi-brand strategy offering customer’s choice. There's much more in terms of potential to come.
I'd like to pause for a moment and just take the opportunity to acknowledge Greg Bartlett. As CEO of St George, Greg steered the bank through the merger and ensured the unique St George positioning of being both big enough and yet small enough has been further embedded. After 28 years of being in the bank and 18 years on its executive committee, Greg heads off onto a well-earned retirement at the end of this month.
So to finish on dividends, it is pleasing to announce our 74-cent final dividend which is up 23% on the second half 2009 dividend and is in fact a record level for a half. For the year our total dividend is 139 cents. The payout ratio for the full year is 71%.
So to sum up, we've delivered a high-quality result for 2010. As I have discussed, we used the year to further strengthen the franchise, to steadily implement our customer-centric multi-brand strategy and to ensure that we have the capacity in our balance sheet for future growth. We have a strong and stable team and a culture that rewards collaboration and accountability. And for this year and the next, we are raising the bar in terms of delivery. There's a lot more to be done.
I will now hand over to Phil, and at the conclusion of his presentation I'll return just to make some brief remarks on the outlook.
Well, thanks, Gail, and good morning everyone.
Our full year financial results for 2010, like all years, have their specific elements, and I'll cover those today, looking at both the full year and the second half outcomes. Let me start by looking at the performance trends over the past three years given the volatility and the disruption that we've experienced.
It's very pleasing to have achieved health compound growth rates in cash earnings and in core earnings. And core is the term that we use to describe revenue less expenses. As well also we had some sizable swings in our statutory reported results both from the merger and from tax impacts. The growth picture over the past three years is also very strong, and you see that in the capital picture which I'll touch on later in the presentation.
Looking at the right-hand side of this slide, it highlights that cash earnings performance has also largely translated into earnings per share. The full period impact of our share issuance in early 2009 still had some impact on annual growth rates, but other than some dilution from issuing and discounted shares to set us [ph] for the DRP, the earnings per share have not been dampened, and that's obviously important in terms of how we set the dividend.
As we flagged at the first half, a 25% increase in cash earnings was a difficult act to follow and our second half earnings were largely flat or on the first half down 1%. Impairment charges were the key feature of both halves and therefore the key feature of the full year result.
There are a number of moving paces in the components of the result, and starting with interest income. And the balance sheet saw good volume growth over the year in mortgages and in household deposits with growth ahead of the banking system in both those key metrics. Growth in mortgages did slow during the year as we had foreshadowed and we've emphasized distribution through our own enhanced retail networks and we've wound back the use of third-party brokers.
Aggregate business lending was lower over the year and it was reasonably consistent half-on-half. Our decision to reduce exposure to commercial property reduced loans by $7 billion, and that accounted for two-thirds of that business decline. A further $3 billion was from lower outstandings to financial institutions, mostly in securitization facilities that were rolled out into the public bond markets.
Customer deposit growth was slightly stronger in the second half and it fully funded lending in the half. The segment split for deposits is important and we saw a strong growth in the Westpac Retail and Business Bank where deposits were up 10% and in St George with deposits up 7% while the Westpac institutional customers ran down their deposits.
The margin picture is shown in this slide and I want to highlight a few points. In the left chart we've shown the margin outcome distinguishing between our total margin and that excluding the volatile element coming from our markets activities. We've also shown the quarterly results for 2010.
Now I wouldn't normally highlight quarterly perspectives for margins, but given the size of the swings that we saw through the year, I think this helps explain the underlying picture. Importantly, as we expected, the rate of decline in margins excluding markets eased in the second half and our margin at the end of the fourth quarter was about 2 basis points lower than at the end of the second quarter when we exclude markets.
The chart on the right-hand side highlights the drivers of the decline over the year and we've moved to show these excluding our internal transfer processing impacts and hope this will assist your analysis.
The chart shows that cost of funding pressures reduced margins by 26 basis points over the year. 15 basis points from deposits and 11 basis points from wholesale. This has been partly offset by asset repricing which has recovered 21 basis points of margin.
Within deposit costs, 4 basis points was due to the mix impact of more deposit growth in higher-rate term deposits and online savings accounts while 4 basis points was due to the impact of hedging our low rate balances, and others call that the replicating portfolio. Lower interest income from our markets activities in the institutional bank and treasury further reduced margins by 6 basis points over the year.
Our non-interest income performance has been impacted by two significant headwinds. Firstly, the reduction in customer exception fees, and you can see that on the slide in the dark-gray bars on the chart. As Gail mentioned, we have reduced fees on a broader range of products and across both consumer and business customers compared to our peers, and we're confident this is the better approach. However, it has reduced income and the full year impact across all brands and in Australia and New Zealand was $298 million.
The second headwind was the natural winding back of markets income as volatility eased from the extraordinary levels that we saw at the end of 2008 and through 2009. And the trading income component over the full year was down $217 million. Growth in wealth income and other fees helped offset these headwinds. Other fees were up 7% over the year and wealth income a strong 21% high.
Freshing [ph] out the total markets results in a bit more detail shows that customer-related revenue saw a good growth and the second half result was up 14% compared with the previous half and 21% over the prior corresponding period. Nevertheless, volatility has reduced quite a bit, and you can see that in the VAR [ph] measures for both markets and treasury. They're significantly low, almost half the levels of the first half of 2009. And this has reduced the potential for risk management income. In total, markets and treasury income was 205 million lower in the half and 479 million lower over the full year.
There does tend to be a correlation between impaired assets and markets income, and in 2009 with deteriorating economic conditions, more uncertainty and higher market volatility, we recorded higher impairment charges but also higher markets income. In 2010, as conditions reversed course, so have these two P&L lines, with lower markets income and lower impairment charges. Whilst it's difficult to forecast, our markets results appear to have reached a more sustainable level from which to grow.
I'm going to touch on the performance of two of our key divisions, that of the Westpac Institutional Bank and Westpac Retail and Business Bank, and I think they'll benefit from some more detail.
The WIB result was a standout. Obviously the significant reduction in impairment charges was the biggest driver of the better bottom line, and that in turn highlights the underlying quality of the WIB loan book. However, we shouldn't lose sight of the top line, and revenue growth of 7% and core earnings growth of 10% over the year is very pleasing, given the decline in markets income I just spoke about. The continuing growth in our transactional business, good management of our debt market risks and recoveries in equity and Hastings businesses all contributed to the WIB result.
The WIB loan book decline was the major factor behind our business loan negative growth. Within that book, more than half the decline is due to the reshaping of the portfolio. We've wound back our commercial property exposures, allowing capital raisings, cash flow and asset sales by our customers to flow through to lower exposures. And that reduced WIB loan balances by $3.7 billion over the year.
At the same time as capital markets began returning and supported by the AOFM, we rolled off mortgage securitized exposures out of the bank's warehouse into the market. And that's the appropriate operating model for these exposures. WIB was the leader ranger in Australia for domestic bonds and securitized assets over 2010. Our WIB loan book reduced by $3.3 billion over the year due to this activity. So, de-gearing [ph] of non-property corporate Australia was material and accounted for a rundown in business lending at $5.7 billion but that was only 40% of the overall decline in the WIB book.
Looking forward, we expect this declining trend to have run its course. WIB has a healthy pipeline of borrowing intentions and we would expect positive growth over the course of 2011.
Our Westpac Retail and Business Bank division recorded a drop in earnings of 8% over the year but was 1% better in the second half. The drop in exception fees for this division of $182 million was the major drag on earnings over the year and lower credit card loyalty fees also contributed to a year-on-year reduction in income.
This business though does have good momentum, flowing from the Westpac local investment. Loan and deposit growth continues at or better than system. In the mortgage area, this is really pleasing given the winding back that has taken place in terms of third-party origination. It reflects excellent and improved customer retention and relationship-referred new business, and ultimately this will be reflected in relatively better margins.
Customer number growth in aggregate has been good and there's also been an enhanced focus on earning more business with existing customers, 30% of the Retail and Business Bank customers now have four or more products with the bank. And this includes business customers and the SME segment, especially customers with [inaudible] between $1 million and $5 million which is a specific area of focus for us. Loan growth of 6% to this segment over the year and the Business Bank of the Year award indicate the Westpac local focus is delivering.
Expenses continue to be well-managed and accommodated [ph] quite a large investment program. Investment in distribution capability, the Westpac local initiative and in St George expanded footprint increased expenses over the year by $129 million. Across the group we opened 26 new branches and 85 additional ATMs.
We've also increased the investment in our strategic technology priorities, our SIPs, and in compliance requirements and other projects. And that added $182 million to expense growth. And these increases were mostly offset by additional merger synergies.
We have had some one-off increases, the $20 million grant to the Westpac Foundation and additional restructuring costs which were also $20 million higher in the second half, and we've taken those items above the line. Nevertheless, the overall expense growth was kept to 3%.
Our cost to income ratio lifted to 41.2% for the full year and was 42.4% in the second half, although this lift had more to do with the revenue headwinds I've mentioned. Nevertheless, we continued to operate with a significant efficiency advantage over our peers, with the cost to income some 400 basis points better than the average of those peers. And we aim to attain that through our productivity initiatives.
It's interesting, there seems to be a lot less market focus on credit health these days and I guess that goes to show analyst optimism regarding the Australian economy. For the Westpac Group, our broadest indicator of credit health is our stressed exposures. And you can clearly see from this chart that the aggregate picture has stabilized over the year.
Within the total, we are still seeing a drift down in credit ratings. We've watched these exposures actually reducing and some facilities deteriorate to substandard or impaired, and they were replaced fully by new problems. However, the deteriorating credits have generally already been recognized and the requirement for additional provisioning is reducing.
The bulk of our impaired assets also have security which underpins the risk of loss. The amount of new and impaired assets at a little less than $3 billion for the 2010 year is down from 4 billion in 2009 and compares with over 5 billion for each of our peers. So we feel pretty good about the relative credit health of our portfolio. And our provisioning coverage remains sector-leading with collective provisions to credit risk-weighted assets at 146 basis points. That allowed a small $49 million reduction in our economic overlay at the end of the year.
Our capital position is also very health with our tier 1 ratio now over 9% and up 98 basis points over the year and a core tier 1 or a common tier 1 ratio of 7.5%.
Organic capital generation was very strong at 86 basis points for the year. We benefited from 42 basis in terms of 42 basis points from the St George merger related impacts, and that helped to offset some sizable other negatives, including the impact from increased deferred tax assets, that deduction is mostly from higher impairment provisions and FX impacts, and that meant that tier 1 was down 9 basis points. There was additional defined benefit deduction, we were down 6 basis points from that impact, and higher software capitalization down 7 basis points. I'd call it our number of the deductions are likely to be timing issues only.
We're also very well-placed to meet the Basel III capital requirements as we understand them today. And the chart highlights that in two ways.
Firstly, compared to the current FSA [ph] calculation, our tier 1 ratio would equate today to 12.6%. Secondly, compared to the proposed Basel rules, our common equity ratio today would decline by 82 basis points. However, aligning upper measures to Basel adds 266 basis points. So if you combine this, our core common ratio would be 9.34%, obviously a very strong ratio whether you use a domestic or international comparisons.
Now, APRA have made it pretty clear that they would take a lot of convincing to change their measures. I do think though there is a good argument around the accrued dividend deduction which reduces our ratio by 62 basis points, especially given that the dividend payment flexibility is reduced by their proposed conservation buffer. So we'll be having that discussion and making that point to APRA. But in any case, I think our overall comparative position to the proposed capital requirements is very sound.
We've also focused on our funding strengths this year and improving the quality of our funding both deposits and long-term wholesale, reducing our short-term and increasing our full-funded high-quality liquid assets. This has seen our stable funding ratio measure increase to 80% compared to 64% in 2008 and 78% in 2009. Our term wholesale maturities are only $17 billion in 2011, and that's down from $20 billion last year.
The amount we continue to access from global capital markets will also be influenced by the speed of recovery in credit growth in Australia versus deposit growth, the pace of continuing to build liquid assets, the value of the Australian dollar, and the extent we get ahead of our 2012 maturity program.
Overall today I'd anticipate raising from wholesale markets $5 billion to $10 billion less in 2011 than we did in 2010. We have done considerable work over the year to reposition and strengthen the balance sheet and we are now well-placed to meet the opportunities in the year ahead.
So let me wrap up with some comments regarding our financial outlook for 2011.
We have been dealing with three major revenue headwinds, lower fees, reduced markets income and falling margins from higher cost of funds. On the first two factors we've largely dealt with those issues. In regard to margins, whilst we expect margins to be lower over 2011, we would expect the rate of decline to ease compared to 2010.
Volumes should be generally supportive over 2011 although credit growth will still be modest. Mortgage growth is likely to be in the 6% to 8% range and business credit is expect to expand through the year compared to the decline that we saw this year. Our relatively strong capital positions us well to participate in the business recovery without having to require external equity.
I'd also point out that our total Australian business book when combining WIB, St George and Westpac Retail and Business is roughly equivalent to two of our peers and larger than the third, so we feel well-placed to benefit from improved credit growth in Australian business. Wealth markets and flows should also be broadly supportive over the year.
Expenses, I've mentioned quite a bit over the past month and there's not much more to add, we will manage those in a disciplined fashion and we have already a broad-based productivity program underway.
Impairments, we are in the improving part of the credit cycle. We won't get the reduction we saw in 2010 but we have a relatively high-quality book and we will see the benefits of that.
With that, let me hand back to Gail.
Thanks, Phil. And so let me make just a few brief remarks in conclusion.
While the global operating environment is improving, we're still living in a world of continuing uncertainty, particularly in the U.S. and European economies which are facing major structural challenges. The Australian economy is overall strong with some sectors such as mining much better-placed than others. The fact that credit growth is remaining somewhat subdued at present reflects caution on the part of both consumer and business customers and the deleveraging trend continues. Next calendar year we'll expect to see business credit growth pick up. And as we know from prior experience, when that happens, it can happen quickly.
Looking beyond the short term we become more positive still. Australia will be one of the best-performing advanced economies over coming years and one of the five key economies in Asia in terms of GDP growth. 2011 and 2012 will also be busy years in terms of dealing through a very full regulatory agenda. There is, as you know, more work to be done with regard to the anticipated Basel III regime. So far the industry has been working well with APRA and the government and I expect that will continue.
Turning to Westpac specifically, Phil has pointed to key factors for the 2011 year. It is likely to again be a challenging year with modest credit growth, although pleasingly having dealt with some major headwinds this year, 2011 should see more in the way of top line growth for our retail and business banking divisions.
In conclusion, the transformational journey that the company has been on over the past few years is well underway. We are substantially stronger than we were before the crisis, and you can see that in any number of ways, if you look at our funding profile, our capital position, our credit quality, the technology environment, our market share positions, employee engagement and our customer franchises, all are stronger.
But we have so much more to do and I know I will look back into 2010 year as being a seminal year, one of adjustment, one of building, one of heightened focus and of discipline.
So I'd like to thank you all for coming this morning and thank you for listening to Phil and I.
I'm going to move on to questions and Andrew will lead us through that. But before we get to questions and in the light of the cash rate move yesterday, let me deal upfront with the obvious question. So the question is obviously with regard to our own decision on interest rates.
And the answer is that we have not yet made a decision on that. Perhaps not surprisingly, our focus today and indeed over the past several days has actually been on the delivery of our full year 2010 results. It's very important to deal with this properly, the significant board and other processes that actually go into that.
Interest rate decisions are also very important and are things that we never take lightly. In coming to our position, we always take into account a range of factors including the effects on all of our stakeholders and our competitive position. And so no decision has been taken as I stand here today and our interest rates remain under review.
So with that, let me hand over to Andrew.
Thanks, Gail, Just standard procedure, please if you just state your name and where you're from, it would be great. And if you could just limit to one question each, that would be great as well. [Inaudible].
John Watts – UBS
Hi, guys, John Watts from UBS. I actually had a question on deposits and the trend in the second half. So I'm just referring to the full result, the 4A [ph] on Page 19 which goes into a bit of detail about the deposit mix. One thing that you're seeing in Australia in particular is that a big slowdown in deposits in the second half to close to zero, but not only that, big swings around it in the movements. You're seeing at-call [ph] really pick up and the term deposits saw those moves. So could you just give us a bit of a background on what's happening there in the deposits firstly slowing down in the second half and why the big movement in those categories [ph]?
Certainly the big trend has been, as you correctly say, from term deposits which was the phenomenon, the feature of the first half into online deposits and savings deposits in the second half. Just recently actually it slowed a little and just recently the PRAS [ph] competitiveness has come off a little. PRASes [ph] have been just a little more favorable from that point of view. But I don’t think it's slowed materially for us over the whole half, it's been really just a sift of composition, more from the term onto the online side.
Yes, I think in fact – I mean that's what those – that table shows you that actually our customer deposits actually had just as good growth in the second half, in fact slightly higher, than we did in the full year.
And I think once again it's a matter of sort of the composition of them. I think the thing we're most pleased about is that total customer deposits in the retail businesses, St George and Westpac RBB continued to perform well. So, as Gail mentioned, compositional shift, yes; but aggregate growth, no, it didn't slow that much for us at all.
Victor German – Nomura
Victor German from Nomura. Just a question on the dividend policy, if we look at your capital positions, clearly very strong and you're generating significant amount of service capital. Can you just perhaps give us an idea how you see your dividend policy pan out over the next few years, particularly if we're entering a lower volume growth environment?
Well, let me start off, and Phil, I'm sure you'll add in. I mean as we see things at the moment and as we understand the changes that are coming our way in terms of capital in the Basel III regime, we feel very comfortable with our dividend payout ratio at around the 70% level. We are driving strong organic growth within – organic capital growth at the moment. Now obviously things may change, there may be something unexpected that emerges and then we may need to adjust for that. But as we see it at the moment in terms of what we see coming our way in terms of the reason [ph] to change, we remain comfortable with our payout ratio. Phil, I don’t know if you want to add to that.
The only thing I'd add is the shrinking [ph] balance for Westpac given the amount of Australian dollar earnings that we generate is a healthy surface today and will continue to be healthy and we weigh that up in terms of what should we pay out as the dividend to return those shrinking [ph] credits to shareholders versus what kind of dilution you might get through issuing shares in the DRP. And so we've kind of weighed that up. We've come to the balanced view that maintaining the dividend and issuing shares and discounting [ph] to the DRP is the right balance to get those shrinking [ph] credits back out to shareholders.
James Freeman – Deutsche Bank
James Freeman from Deutsche Bank. I just wanted to ask a little bit about the economic overlay, we saw the reduction come out this half, just sort of any indications to what we can get for next year. I mean, is expectation you'll get rid of the whole economic overlay or do you want to keep some of it around? If you could run that please.
Look, I think the expectation is that we will continue to have an economic overlay for the foreseeable future. About half of the economic overlay really goes to uncertainty in the economic environment and half of it goes to individual risk items that we believe are unusual. And those risk items over the last few years have covered things like aspects of the property market, aspects of exposures in New Zealand, exposures to financial institutions early in the GSC. And those are the kind of things that actually play out in terms of justifying holding an additional provision in the form of an overlay.
Over the last 12 months, we got into the end of 2010, we looked at a number of those factors and came to the conclusion that it was very difficult for us to justify holding the full amount of the provision in sales or the – the release actually has got two bits to it. There's a release to do with Australian exposures into the property sector, given how much we've already recognized, but we actually topped some up for uncertainty coming out of the Christchurch earthquake. So those sorts of things played their way through the overall provision balance.
Over time whether that provision balance gets released, how much gets released, will be a function of those specific issues and also obviously what's happening to the other collective provisions as credit growth starts to grow again.
Ben Koo – Goldman Sachs
Hi. Ben Koo, Goldman Sachs. Just got a question, or two questions, on the revenue growth outlook. The first one is just when looking at Slide 6 of what you've just shown us there with the treasury contribution, the treasury markets contribution over the last half, and comparing that to the '08 halves, the second half tends to look [ph] relatively elevated versus the '08 average. Is that – and your comments about halves broad-based, is that just around the view that it's now a bigger balance sheet so you just don't see as much normalization risk going forward. So that's the first question on the revenue outlook.
And then the other one is, in terms of your comments about improvement in business lending, can you just give us a feel for what you're seeing the pot line for business lending growth as well?
I think you've really almost got the answer there, Ben, with regard to the markets and treasury income. So, look, clearly there's volatility there, but our view is that it's back to a more sort of sustainable level. It certainly is a bigger balance sheet and that's the key factor about why it would be expected to be higher than it was in 2008. So that's the key answer there.
With regard to business lending which is your other major question, look, I think we've all expected over the course of this past period to see the pot lines that are there for business lending to start to translate into draw-downs, but it has been a whole lot slower, there's remained caution in our business customer segments and I would expect actually that to continue for a period. So there will be a pickup and we're set for that pickup when it happens. There are still quite healthy pot lines in our business banking businesses, institutional is still in a deleveraging phase. But really I would see that more as a second half 2011 pickup.
So, credit growth I think Phil briefly spoke to. I mean it will be at least a strong as it was this year. It should be stronger when business credit starts to pick up in that second half of next year with home lending being much the same as it's been this year, this sort of 6%, 7%, and then we'll start to see a pickup of business credit next year.
Jarrod Martin – Credit Suisse
Jarrod Martin from Credit Suisse. Notwithstanding the strong headline results, you pointed out the core earnings growth was a bit tougher in particular in the second half, it was weaker sequentially, pointing out to the rebasing of fees and treasury. Particularly on the rebasing of fees, you say you have gone harder than others and gone further. Could you comment on that against the backdrop we have. Is that an inquiry into competition where you've also got Wayne Swan announcing that he's going to come up with ideas next month in terms of competition? Where are the vulnerabilities, one, for the sector, and also in particular for Westpac, and whether there is actually further rebasing to go for the industry as a whole?
Well, there's lots of uncertainty in all of that, I'd have to say. Certainly on the exception fee side, as you'll recall, going back to September last year, we made a call to actually rebase all of those fees and to do it at once, so across our personal customer segments, across our product [inaudible] overdraft-type products as well as credit cards, across all of our brands in Australia and New Zealand. So at one turn we actually reset all of those fees and took them down to $9 which is a sustainable level, so from what was obviously higher levels and different levels.
So that was going further than others. There are still some organizations out there that haven't done as much in that particular area. They may have done in some product categories or in some custom segments but not quite as comprehensively as we have. So we think that does position us quite strongly with that category of fees that's called those exception fees.
Difficult to know where to see what the next steps will be with regard to the announcements that Wayne Swan made yesterday. Certainly hope that there'll be proper consultation and discussion with the industry on that. But I would have to say, I think from a Westpac and St George point of view, we paid a lot of attention to the range of fees that we have over the course of this year, and whether it's mortgage exit fees or other fees, really to make sure that we're comfortable with where they sit just at the moment.
Jarrod Martin – Credit Suisse
Is that likely to be one of the risks for your revenue next year then?
I think – well, we wait and see, I'd have to say. We need to wait and see what actually emerges out of the reform that's being tabled, and certainly hope that we can engage constructively with government on that, because as always when there's new reform coming and new regulations coming, there can unintended consequences and things that pop up that hadn't been expected. So we certainly hope and expect that we'll have an opportunity to engage constructively with government on that and understand those impacts.
We are certainly very pro-competition. We believe competition is a healthy thing. We believe there's plenty of competition in the market and we want to be in a position where customers choose to bank with us and that's because we provide good service for them, deep relationships for them and support for them through the cycle. So we're certainly pro-competition.
Ben Zucker – CBA Equities
Ben Zucker from CBA Equities. Just two quick questions. One around funding, trying to get a bit of feel for, you talked about the improvement in funding mix, deposit growth has been healthy, happy with some of the terming out that you've done to date, et cetera. But when you look forward, how intensely do you still plan to compete for deposits and the priority there? And also, how much more in terms of terming out of funding?
And on the cost management side, in terms of investment spend and the pressure that's coming through there, the productivity initiatives and how much that will offset that, how would you describe I suppose the cost pressure and ability to maintain your efficiency?
Well, look, I mean on the funding side, as you heard me say, this has really been a big year, this 2010 year, raising as we did 43 billion in wholesale markets, and of course doing quite extensive maturity terming out of the portfolios, extending the term of the portfolio, both in the longer-term funding profile and in the shorter-term funding. We don't expect to need to do as much with regard to wholesale funding next year, and it's partly because we think that the credit growth will remain relatively modest next year.
We've also improved our capability of raising retail deposits. I'd have to say we've got more to do there. It has been a source of focus for us really ever since I've arrived in the organization, and part of the shift I think we're all going through in the industry of shifting our bankers from thinking about lending, just thinking about relationships, and making absolutely sure they're talking to customers and engaging on the deposit and transactional side of the balance sheet. So we've got more to do there but we have upped the focus on that and that's the way we incentivize people, the way we manage people, what's in scoreboards with our local bank managers.
So we expect to continue to grow above market share with regard to retail deposit gathering. We have strong franchises that speak to customers in terms of safety and security and looking after all of their savings. So we'll expect to continue with that.
Phil, do you want to add to that and perhaps answer the productivity one?
I think that – I mean there's a lot of different moving parts that will shape the balance sheet and therefore shape how much wholesale fundraising we need to do given Gail touched on deposits. I think that the only other – I mean a couple of points to make are, one, in the process of this year's term raising, we've also reduced our short-term wholesale and we reduced some of the WIB deposit balances that were quasi-short-term wholesale. And so that we think we've – is part of the element of strengthening and repositioning the balance sheet which we wouldn't expect to have to do next year.
Similarly, the Australian dollar plays into just how much wholesale fundraising you need to do. And whilst we might expect the Australian dollar to perhaps be strong and even stronger next year, the reality is over the course of the last 12 months we've had an extremely strong Australian dollar. And that's led to more collateralization balances and that's absorbed some of their wholesale funding as well. So those things I think will also – might be [ph] as severe in 2011 as what we've seen in 2010.
Look, on productivity, I thought we had a good session at the start of the month. It is important for us to ensure that we are able to find the wherewithal in the company to invest in the technology that we want to invest in. And we've got two programs at work that Bob and Peter spoke to which Bob talked about what we're looking to do from a technology point of view. They will have benefits but they are longer-term benefits, and we have to find a way in the company to absorb the cost of that until those benefits start to play through. And so the productivity initiatives that Peter is leading that really are right across the company are already starting to have traction. They do go to actually doing things smarter, not just trying to tighten the belt, and they will lead to a lot of costs. And that in turn as I said will be the mechanism by which we fund the company.
Richard Wiles – Morgan Stanley
Richard Wiles, Morgan Stanley. Phil, in Westpac and Retail Bank, you said you'd ultimately expect relatively better margins. Could you explain what you mean by that? Do you mean relative to this year or relative to the peers? And given that you've made no decision at this time in relation to the home loan interest rates, does your guidance for the group's full year margin assume that current level of interest rate remains in place?
So the relatively better margins goes to the reality that if you're originating a mortgage through your own distribution channels, you're not paying brokerage and therefore your return is [inaudible] by the amount of brokerage that you're not paying to a third party. And so as we've shifted the mix of our origination to more first party and less third party, therefore the return on that individual loan should be higher. So that's the comment on that and that's part of an overall mechanism that we should expect to get as a return on the investment that we've made in Westpac local and that we are making in a broader-based St George distribution. So it really goes to that's what you would expect us to get as a return on that investment, better margins per loan.
Look, I think when we think about our margins going forward, we're thinking about the fact that our cost of funds will continue to increase. They did in 2010, higher average long-term wholesale, higher deposit costs. We would expect that to continue through 2011 and we need to find ways to offset that. But overall we're thinking that our margins will be slightly lower, but the decline will be less than what we experienced and recorded in 2010.
I'm going to take a question from the phone. Craig Williams please?
Craig Williams – Citigroup
Yes, good morning. I think one of your short-term incentive drivers is customer advocacy. Can you talk about customer advocacy as a driver of volume growth in the business? If I refer to Page 67 of your result deck, St George appears to be growing below system and lending and probably deposits, you've called out today, that 62% of St George's mortgage origination comes through proprietary channels, 71 for Westpac brand. If you could provide motivations [ph] around that please.
Thanks, Craig. Well, certainly one reason why St George would be growing below system and lending is that very shift of focusing more on raising the loans through the proprietary channel. Because if you'd recall, St George's primary geographies, its primary states, it primary strength is in New South Wales and then in South Australia through the banking say franchise. And as we're winding back the focus on raising broker-originated loans, necessarily in areas such as Victoria and Queensland and Western Australia, we would by subsystem.
So when you look at St George, really you shouldn't be looking at St George's performance relative to system as a whole, you should be looking at St George's performance relative to New South Wales system and with regard to South Australia system. And certainly we would expect them, and Rob Chapman, the new CEO of St George would expect to grow about system in his core geographies, and using his proprietary channel as the area of primary focus.
So, have I answered the question? What was the other one?
Customer advocacy. Look, that's always been a long battle within St George, sort of I recall going back many years ago when I was there too, that one had very strong customer advocacy and strong customer satisfaction and yet one seem to have to work really hard to have that actually translate into increased products per customer.
We're beginning to get that right, I'd have to say. It's been really good to see over the course of the past year that St George's products per customer have risen quite significantly. And what we measure there is in particular customers with four or more products in our chosen segments, and we've definitely seen uplift there. I think it's referred to in one of the slides.
So that remains a key area of focus. But pleasingly, all the way through the merger, it is I think a highlight of St George and it does speak to its strong culture and it does speak to the effectiveness of the merger, that we've retained number one spot in both consumer and in business and consumer advocacy over that period.
Craig Williams – Citigroup
Okay, thank you.
A quick question from Matt Davison from the phone please.
Matt Davison – Bank of America-Merrill Lynch
Thank you. Good morning everyone. I had a question on costs as well. I guess just initially on the headcount. If we go back to when the merger was done with St George, it was just under 36,700 staff, and today there's 38,500. Recognize there's a lot of temporary staff in the numbers at the moment. I'm just interested on a two-year view where you see that staff number coming back to once the projects are over.
If I can [inaudible] just a bit more near term on costs, you've been very adamant about managing the growth in the near term, you had 3% growth in the last half. If I look into the next half, you will have an amortization headwind, you're not going to benefit from really staff cost provision and the headcount move as well. So I'm just interested if you think you can do better than 3% per half on cost growth over the next couple of halves?
Look, on the staff number, let me start with that; Phil, you might want to deal with the absolute growth in cost. On staff number, what we said at the presentation that we gave just a few weeks ago is that we expect our overall staff numbers to be lower at the end of this year and then lower again at the end of next year. So those are the points that we made.
And there are a number of moving pieces within that, which is why we don't want to be more definitive than that. We are still putting on staff in our technology areas to actually deal to those 14 strategic investment priorities that we have there. We put on something like over 1,000 over the course of last year, and we're putting on more people as those programs ramp up and as we need to implement there. So there's increase in costs going on, specifically in projects.
But we also are continuing to invest in distribution where we believe necessary. But in our head office areas, in our operational areas, there is staff reductions occurring. So overall we would see staff numbers coming down, but really don't want to be more definitive than that.
I think on the cost base, Matt, the reality in the second half, we've called out a couple of things. I mean I called out a couple of things that were also sort of one-offs in the half, the $20 million of grant to Westpac Foundation and the additional restructuring cost, both those we've taken above the line, there's $40 million of additional costs. The software, as you pointed out, is going to be up again, but we did have some of that in the half. It's up quite a bit on the first half as well.
And then lastly, the productivity benefits that we expect to get from the productivity program, we started to get those in the half but they're actually pretty minor, and we would expect to see a much better result going forward to allow us to have quite a bit better result than 3% per half.
Matt Davison – Bank of America-Merrill Lynch
A call from Brian Johnson on the phone please?
Brian Johnson – CLSA
Hi. My question basically came down [ph], Phil, could you give us a bit of an explanation Page 47, the movement in the expected loss, capital deduction, it would strip out the impact of St George's change?
Well, you picked up the point, Brian, that the bulk of that increase was actually due to the fact that when you transition St George from standardized to advanced, you then have to take an expected loss calculation into consideration which was not there before. And so that led to quite a material uplift in the reg expected loss. The overall benefit though turns up in the fact that you get much lower risk-weighted assets for that same portfolio.
I don't have the numbers at hand in terms of what the direct impact was on the reg expected loss, I'm happy to get it for you. But I can assure you that the overall combination of those two things was a significant improvement. And we call that out in terms of what was the overall impact from the St George advanced accreditation on capital and we called that including those things together gave us an 18 basis-point uplift in our tier 1 capital ratio.
Brian Johnson – CLSA
Phil, do you think that all the major banks [inaudible] systematically important banks for Basel III?
I think, Brian, that the origination of the concept of systematically important came from a view that when looking at the global disruption that was – that occurred, a number of very large global entities were having ramifications broader than their impact in their home economies. And I think the regulators then said, well, we need to consider a globally systemic importance here when we look at what's the appropriate allocation of capital. I think that discussion has moved broader. I'm not sure it's actually broadened in the regulatory space but it certainly broadened in other commentary to say, well, isn't every big bank in their home market systemically important?
My view and the discussion with our local regulator is that they think that's part and parcel of what they do. They provide credential supervision on the banking system here, that they take account of different size banks and the different importance that we have for the local financial system. And there's lots of means of doing that through credential supervision that don't necessarily jump straight to, shouldn't we be applying a different capital measure?
So I think the debate's got some way to go. I think we'll distinguish between domestic and global, and I don’t think you should necessarily assume that therefore domestics have to get additional capital overlay.
Brian Johnson – CLSA
Bret, could you --?
Brett Le Mesurier – Axiom Equities
Brett Le Mesurier from Axiom Equities. Question on the outlook on your core earnings. Since you've had income falling from the first half to the second half and obviously you've described the reasons for that, it looks like the – it will be difficult, and given that your expenses are continuing to go up, it looks like it will be difficult for your core earnings in 2011 to exceed the pro forma number that you provided for 2009. Would you agree with that observation?
I'm not sure what pro forma number we provided for 2009. But just to talk to the overall points about the factors that drive our revenue and core earnings. I think we've discussed the – explained this already, the factors therefore that drive the revenue. But 2011, as we've said already, we think will be a challenging year, there will be continued modest credit growth, although you've heard me say already I think the credit growth will be at least as strong as it was this year, frankly it should be higher, as business credit starts to pick up later in the year.
So, and we would expect to actually grow in our chosen segments ahead of system growth in the areas that we've chosen. So we've used this year, this 2010 year really to significantly strengthen our franchise and rebase that revenue. We've dealt with some of the major headwinds during the 2010 year and we don't expect that they will come back in 2011.
And what we've done through our Westpac distribution and St George is really strengthened their front line distribution with an absolutely razor-sharp focus on particular segments. And we would expect to grow above system in those key segments over next year. In St George's case, as I've said, in their natural geographies; in Westpac's case, in those key segments nationwide.
So we feel we've used this year quite well to be really disciplined and very focused, critical segment focus where we can have deep relationships, long-standing relationships with four or more products per customers. And then a real focus on our proprietary channels because we believe that drives a greater value for us and is in line with our strategy. So that's some of the pointers that would actually go to revenue growth.
Had a question at the back there.
Yeah, [Philip] [inaudible] Management. Could you just give us a feel for around the housing line sector, whether the movement in default [ph] is sustained over the last period? And also just on the product improvement that you've got with the full product you're talking about at 30%, just the main products there and where you getting that growth from?
Okay. Well, I might ask Rob Coombe, he may want to add something to the product piece actually about where he's getting the product growth from. I mean the wealth product has been particularly strong, but I know that Rob would like to add to that.
On the housing situation and with regard to the performance, it does remain an exceptionally high-quality portfolio and performing very, very well. There's been some pickup, as you would have seen, in our 90-day delinquencies, but it's off a very low base, so the overall 90-day delinquency for our Australian home loan portfolio across the board at both St George and Westpac comes in I think at 0.43. Our overall properties in position [ph] have grown a little and it's new coming on and taking a little longer to actually move those that you have in the system out, but it's 383. Now that's against obviously an overall portfolio that's well over a million, 1.5 million sort of properties.
So it does remain a very well-performing portfolio, more than 55% of our people actually are ahead of their repayments, our overall loan to valuation ratio across the portfolio as a whole is in the 40s, and loan to valuation ratio for new to bank customers at origination is in the 60s, I think it's 67%. So the portfolio does remain in very good shape.
Out low doc portfolio, that obviously grew during the period last year, remains, as we see it, I think at the half, better performing than actually the portfolio as a whole. And we have a particularly strong product per customer relationship with our low doc customers. So that's performing well too.
Rob, would you like to add something on where you're getting the products per customer?
Well, firstly, it's mainly coming from the segments that we relationship-managed and we've lifted the level of relationship – I was going to say I was standing up [inaudible] we've heard that before. The areas where we relationship-managed and we've lifted relationship management focus particularly in the SME segment and also in the upper end of affluence. So we've been significantly lifting penetration of products per customers in those levels in particular.
If you want to look at the products, it's been primarily in the wealth area, so in our premium financial services area which is the upper end of the affluent area we've lifted wealth [ph] of 60% year-on-year. We've lifted Super for Life sales 37% over the year, and more broadly, we've lifted wealth [ph] sales by about 30%. As you can imagine, given my background, it's an area that I'm particularly interested in continuing to up the ante on.
T.S. Lim – Southern Cross
Hi. T.S. from Southern Cross. Bank matching [ph] seems to be back in fashion. Does it make it more difficult for you to sustain St George as a fighting [ph] brand, I mean perception-wise, given its association with Westpac?
Not at all. T.S., that's not the way I would have thought the question would have gone actually. I think if anything, it gives us additional strength. St George is a very strong brand with a very strong culture and connection to customers, providing customers choice, and customers respond to that. And I think it provides us with an opportunity to speak to different types of customers. We've seen remarkably little overlap between customers who choose St George and customers who choose Westpac. It's one of the reasons why we've had no customer attrition. And so I think it gives us an opportunity to actually have a multi-brand approach, and [inaudible] customers choosing those brands, deepening relationships with those brands, it helps us rather than anything else.
Scott Manning – JPMorgan
Scott Manning from JPMorgan. Just wanted to further have a look at the liquidity requirements, and I know that that's obviously not coming through until the end of this year when the discussions are going to be had. But of that $47 billion liquid portfolio, would you able to share what proportion of that is into bank paper including government guarantee paper? Just to get a sense of in terms of what we've got to consider in terms of the potential [inaudible] funding requirement [inaudible] challenge.
Yes. So we've got – I think we've got it in our IDP [inaudible] I don’t know what page it's on. But –
Do you want Curt to answer it?
Yeah, maybe you want to answer that, Curt.
Curt, do you want to answer that?
So at the moment we've got 24 of the total [inaudible] what we call DT [ph] which is the [inaudible] and everything else, 23 of it's in banking, corporate and RMBS. I mean I think the thing to remember is obviously that 23 does roll off, so it turns into cash. There's no new funding requirement for that. Going forward, I think when you think about liquidity, will soon go away from just looking at the liquid assets, say, we'll look at management of outflows and inflows. So inflows are obviously skewed very much towards liquid assets [inaudible] you can do on the outflows. And obviously the third thing, and we don't know yet, is what the high-quality liquid asset solution that we're going to get.
So I think all those things factor in at the moment that it's very difficult to predict what the economic is going to be, whether it's better to hold more liquids or to manage your outflows out.
So at the moment, I think the key thing is it's all refill-eligible, it provides us with that insurance that we talked about in the past, it's built up appropriately given what's happened in the world over the last couple of years and at the moment we're really comfortable with the position, where we stand.
We've got a question from Johan Vanderlugt on the phone please?
Johan Vanderlugt – Daiwa Capital Markets
Yes. Good afternoon everyone. First, an observation that I am sort of missing the product spread metrics in the fact that used to be in the cash earnings retail [ph] section, but just as an aside. And then a question on New Zealand, we're seeing the net interest margin improving by 9 basis points for the half which is explained by a mix of new business and some repricing. Could you provide some further details around that NIM movement, and also your expectations in terms of the repricing that you may look forward to for the current FY11 financial year, especially in the light if I look at some of the peers, their sort of NIM improvement in the second half seems to be bit less than what we have seen for the other two banks reporting.
So I'll answer that, Johan. So I mean the product spread data really obviously also had a large element of internal transfer pricing as the component part of driving that, and we thought, without having a consistent approach to doing that across the sector, it's very hard to include that data.
In terms of New Zealand NIM, you picked up a number of the factors that have driven the improvement. I guess the one you didn't mention was the mix shift in mortgage origination and mortgage book which has shifted to more floating rate and less fixed rate. That has had quite a material mix benefit to the margin.
There's been repricing, there's probably been another round of repricing across the industry in business, and I think that probably reflects the assessment of the credit risks that exist in business lending in New Zealand, and I think that that's been an industry phenomenon that we're starting to see ply through in New Zealand. We feel quite positive about the way that the team in New Zealand is managing that volume margin trade-off. Volumes are continuing to be quite modest but actually still positive, which is different to the system. So we're actually gaining share both in mortgages and in business in New Zealand but we're still improving margins. And that feels to be the right mix. We'd rather do that rather than see volumes down to repair margins.
I was just going to say, we could test the system and see if George can actually add something to that. George, can you hear us? George should be listening in. You perhaps want to add something to that from the ground.
Can you hear me, Gail?
Yes, we can.
Look, I think Phil sort of characterized it correctly in the sense that we're making the right trade-offs between margin and volume. So we've gained share in all of our key products and been able to see the benefits of repricing the first half flowing through into second half. There will be some more repricing flowing through as the book turns over and we will continue to manage that tightly.
Okay. Well, there is no more questions on the phone or in here. So I'm going to call proceedings to a halt. Thank you very much for attending, and good morning everyone.
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