Australia and New Zealand Banking Group Limited (ANZBY) CEO Shayne Elliott on Q2 2019 Results - Earnings Call Transcript

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About: Australia and New Zealand Banking Group Limited (ANZBY)
by: SA Transcripts
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Earning Call Audio

Australia and New Zealand Banking Group Limited (OTCPK:ANZBY) Q2 2019 Earnings Conference Call April 30, 2019 8:00 PM ET

Company Participants

Jill Campbell - Group General Manager of Investor Relations

Shayne Elliott - Chief Executive Officer & Executive Director

Michelle Jablko - Chief Financial Officer

Mark Whelan - Group Executive of Institutional

Conference Call Participants

Jarrod Martin - Crédit Suisse AG

Andrew Lyons - Goldman Sachs Group

Richard Wiles - Morgan Stanley

Jonathan Mott - UBS Investment Bank

Victor German - Macquarie Research

James Ellis - Bank of America, Merrill Lynch

Andrew Triggs - JP Morgan Chase & Co

Brian Johnson - CLSA Limited

Brett Le Mesurier - Shaw and Partners Limited

Matthew Wilson - Deutsche Bank

Brendan Sproules - Citigroup

Azib Khan - JPMorgan

Jill Campbell

Good morning. I'm Jill Campbell. I'm the Head of Investor Relations for ANZ. Welcome to all of those joining us in Sydney today for the presentation of ANZ's half year financial results 2019 and also to anyone listening on the phone or via the webcast. We're also live streaming today's presentation on social media through Periscope and Twitter. And you can access the feed by searching for ANZ media on Twitter.

We lodged a number of documents this morning with the ASX, and they're all available on our website in the shareholders center. You can access a replay of the presentation along with the Q&A via website from around mid-afternoon today.

Our CEO, Shayne Elliott; and CFO, Michelle Jablko will present for around 40 minutes and then we'll go to Q&A.

Thanks, Shayne.

Shayne Elliott

Good morning. In six years of reporting to you, as either CFO or CEO, I cannot recall a time when the outlook for the home market operating environment was more different than the past, but we well prepared and have delivered a balanced result for the times. We made progress, improving returns, strengthening capital and delivering higher earnings per share. And we've made further improvements in preparing for more difficult future, a future where competitive advantage and long term success will go to those that understand the need for change, and deliver on it at pace.

Three years ago, we laid out a plan based on a simple belief that the way to succeed in an environment of slower growth, faster change and lower margins was to do a few things and do them well. As a result, we said about building a simpler, stronger and safer and more productive ANZ.

On the cost front, we've absorbed $550 million of inflation in that time, and took out over $300 million in cost over and above the benefit we got from selling businesses. On capital, we sold 23 businesses and reduced risk weighted assets and institutional by $50 billion. These and other actions freed up $12 billion of capital, which we use to rebalance our portfolio, return capital to shareholders and invest in targeted growth on simplification with cut the number of products in Australia by third, and successfully transferred 2 million customers from legacy products onto contemporary platforms with simplified processes, decommission systems and reduce their branch footprint and across both Australia and New Zealand by more than 20% as customers moved aggressively to online solutions.

We've built a stronger and safer balance sheet. Yes, we've got more capital, but beyond that, only 18% of our Australian home loan book today is interest only and 86% of our institutional book is investment grade. And I feel good about those settings, with the lowest software capitalization balance of our peers, because we expense more of our investment up front. On remediation, we resource the team early, and the well progressed on getting funds back to customers and learning from our mistakes.

And finally on people, we invested in and rebuilt our senior leadership, made significant progress, changing the way we pay people, skewed our resourcing more heavily to software engineering and data and change the way we work, adopting agile methodology across much of the bank. And this is the most fundamental change in the structure and way of working in decades. And it's delivering results in terms of productivity, engagement, and speed. These actions sometimes came at a short term cost, but we're more focused and capable as a result.

We recognize that community, regulatory and customer expectations have changed. This is not the time to do everything. And it's not the time to focus on absolute market share growth. This is the time for prudent and targeted growth, a time to focus on the long term, recognizing that the cost of getting it wrong will be more than just credit losses.

Non-financial risk including regulatory, legal and capital costs are playing an increasing role in our assessment of risk and reward.

So in summary, we've chosen a strategy of action over hope. We're working hard with more to do, but a better prepared and delivered a balanced result, despite the difficult conditions and outlook. So let me now just quickly summarize the half year result.

Relative to this time last year, profit for continuing operations is up 2% and earnings per share up 5%. Return on equity increased to 12%, while strengthening Tier 1 equity by further 45 basis points, net tangible assets per share increased 4%.

Sustainable revenue growth was always going to be tough, but our diversified business did generate a decent result overall. Absolute costs were down another 1%, despite FX translation moving against us, despite absorbing inflation and despite the increased cost of compliance.

Our discipline and managing shareholders capital is a strength with comfortably above April's unquestionably strong target well ahead of the 2020 deadline, even after using some of our surplus capital to reduce shares.

Organic capital generation remained strong and announced asset sales will further strengthen our position.

The board has declared a fully francs dividend of $0.80 per share. And we will again be fully neutralizing the day I pay on market.

So in summary, it is a tough environment. But our business mix is an advantage. And our capability and determination and managing the 3 C's of capital, cost and change have prepared as well.

So turning to the operating businesses. New Zealand is performing well. There are however obvious concerns about potential changes to the capital raising. Our primary focus is the impact of these proposals on the New Zealand economy. Let's be clear what's good for New Zealand is good for ANZ. We understand and support the desire for a sound financial system. But all insurance policies come with a cost and we need to understand what level of insurance is appropriate and affordable for the New Zealand community.

It's too early to comment on the impact for ANZ, other than to say, we're in a better position to manage any change, given the simplification and strengthening of our New Zealand business. If the rules do change, we have a number of practical options to manage and optimize our capital. And we have a responsibility to do so.

We've been active in New Zealand since 1840, longer than any other bank and we are one of New Zealand's biggest investors. It's our intention to be active and successful in New Zealand, employing thousands of Kiwis paying a significant amount of tax, and helping New Zealanders thrive for many years to come. But we cannot expect our shareholders to unreasonably subsidize those ambitions. We will therefore be making an active contribution to the debate because it's important for New Zealand to get this right.

Institutional is now a very well managed business delivering better consistent results for shareholders and customers. Our institutional return on equity reached almost 11% in the half and we know we can do even better. While we manage it as a whole, the contribution from a well-managed improving Asian network added diversification, growth and quality to the group's results. And I'm proud of that.

But we know better than most, that institutional is a tough business. Most competitors fail to generate consistently decent returns. Most fail to generate a fair balance between customers, shareholders and staff. And we know that the credit cycle can be particularly savage to poorly disciplined institutional balance sheets.

But recognizing those weaknesses is the first step in managing them and we managing them well. With the institutional business in much better shape, our primary objective is to maintain discipline, on cost, on capital and on customer selection, and in doing so, make further improvements to generate a sustainable decent return for shareholders.

Australia retail and commercial has had the toughest headwinds, slower growth, tighter margins, changing customer preferences and higher remediation costs. Our data shows that there is more stress in parts of Australia, particularly for retail borrowers, and particularly those converting from interest only to principal and interest. And surprisingly, some of that is due to stubbornly low wage growth, the fall on house prices and the extension and time it takes for houses to sell.

In terms of our approach to the market, we continue to favor owner occupiers, even though that comes with a drag on margins. This is a marathon not a sprint. And we've made conscious choices about where we think value resides. We tighten standards particularly in home lending, partly in response to our assessment of risk and reward, and partly due to changing definitions with respect to responsible lending.

I regret neither change, they are the right thing to do. But I do accept that we could have implemented the changes in a more thoughtful and balanced way, and not doing so put unreasonable stress on our processes, our people and our customers.

Thinking about what's changed, it's important to remember that the industry has benefited from 30 years of stable high return growth. And so we engineered a production line to maximize efficiency and deliver those high returns. But as we learned in the Royal Commission, while it was an efficient process, it did file some people badly. We're now asking that same process to deal with nuance, judgment and exceptions at an unprecedented scale. And unsurprisingly, that process is struggling and in many cases is no longer appropriate.

So we have two choices, we can assume the world will return to the way it was, and focus on tactical solutions to manage the short term or we can assume that these changes require material reengineering for the long term.

I acknowledge that someone in the industry will take the first option. It's an attractive choice and involves less disruption and will deliver better short term results. But at ANZ, we think this would be a fundamental misreading of the environment. Our customers and the community are demanding a different banking system and ANZ is adapting to those expectations. We do not believe there is any going back. That means rethinking the basis on which we compete, which segments we focus on, what we do where, and how we responsibly fulfill the needs of our customers. And we will advance in that work.

In the short term, we are taking targeted actions, while respecting our risk appetite and responsible leaning obligations. And at the same time, investing in a more strategic reengineering for the long term.

The challenge for our Australian business is complex, completing our remediation task, and rebuilding momentum in chosen areas and ensuring our bankers and customers have the tools needed for long term success in a fast changing world. It became clear that a single governance model for such a complex business was no longer optimal. Other parts of our business are running well. And so we can focus more of our resources on building the foundation for longer term success in our Australian business. So we've made changes to the way we organize ourselves, how we prioritize work, and the leadership of the team. And I'm excited about these changes. We've been able to make take advantage of the diverse skills and experience at ANZ to build a strong capable team fit for the times and to maximize the opportunity ahead.

What we've transformed our bank more in the last three years than any time in our history, the market has been changing even faster. Headwinds that we foresaw in 2016 are stronger than predicted. And as we said before, we're fortunate we started getting costs and our balance sheet in shape early, as it's not something you would want to be starting now. We're not sitting idly hoping for return to the golden years of banking. So today I want to outline the actions we're taking over the next three years.

This is not a change in strategy, but more working, more work, constructing a simpler, safer, more agile bank. We have five priorities. First, facing into the mistakes of the past. In these three years, we will make some standard progress on remediation with the vast bulk of refunds to customers made and processes re-engineered to avoid repeat. We will be a stronger, safer bank for customers, and these costs will largely be behind us.

Second, we will continue to simplify and strengthen the bank, including exiting, shrinking and closing non-core businesses and assets.

Third, we will step up investment to reposition and retool the Australian business for targeted and prudent growth, with lower cost more flexible platforms.

Forth, despite ongoing investment, we will continue our intense focus on cost. All else being equal in 2022, we expect to run this bank for less than $8 billion with the global workforce and branch network to match.

And finally, we will make further investment and transforming our skills and capabilities. This includes increased investment and training and leadership, changing the fundamental reward structure for our people, and strengthening our accountability and consequence frameworks. None of these are easy tasks, but they will result in prudent and targeted growth, a safer bank and better returns.

Our track record simplifying New Zealand, transforming institutional and the hard decision selling 23 businesses, demonstrates our capability, determination and willingness to act.

Part of adapting to these new expectations is in bidding our core purpose and everything we do, who we bank, how we behave and what we care about. And our purpose is to shape a world where people in communities thrive. It's an integral part of our strategy and how we will drive long term value.

Our purpose guided our decision to provide relief to farmers impacted by natural disaster even though it came at a short term cost. It informed our approach to sustainable and affordable housing, an area of particular interest. We will fund and facilitate a billion dollars in projects to deliver more than 3,000 affordable, secure and sustainable homes to buy and rent here in Australia. And to support our ambitions in New Zealand, we launched a healthy homes incentive to encourage Kiwis to improve the environment, environmental sustainability of the homes. We also continued our work with larger customers. We were funded and facilitated more than $3 billion of environmentally sustainable solutions in the last half, taking our total commitments to almost $15 billion.

To ensure customers have the most appropriate product, we've already proactively contacted over 275,000 customers to help them get better value from the banking.

Our approach to remediation has been driven by the need to rebuild trust and led to the creation of a centralized responsible banking team. That team is currently resolving issues with more than 2.6 million customer accounts in Australia. That's not a number that anyone is proud of. But I am proud of ANZ's focused approach and commitment to put things right as quickly as we can to learn and to improve. And all nine remediation challenges are fully provided for.

At the end of March, we've successfully made remediation payments to approximately 420,000 customer accounts, and in some cases getting refunds into our customers' hands and half the time it took previously.

So in terms of the future, we're confident, institutional and New Zealand can continue to deliver, not without challenges, but each with strong teams and track records of delivery. In Australia, the environment will continue to be challenging. There will be less high quality volume in the home line market and we don't want to chase volume for the sake of it. We will continue to invest in targeting the right customers, better risk based pricing and being easier and faster to deal with.

At a group level, our focus is continuing to build a safer, stronger and simpler bank. And our focus on capital efficiency, cost and safety will remain.

If you walk away today with any three points from my presentation, I want them to be these. First, we've prepared well for this increasingly difficult environment. Second, future success requires a different focus. And third, this is a team with a track record and the courage to create long term competitive advantage as a result.

I'll now hand over to Michelle.

Michelle Jablko

Good morning. As Shayne said, we've been positioning ANZ to be simpler, stronger and more productive for the longer term. We've taken some hard decisions, knowing at times they'll have short term negative impacts. Our actions to date have helped us deliver a balanced result in tough conditions.

ROA for the half was 12%. Cash profit was $3.6 billion, which is up 2% compared to the same period last year, it's up 19% half on half. Remember we talked large remediation and other charges in the second half of last year. EPS is up 5% PCP and 20%, half on half, assisted by a $3 billion share buyback, and now balance sheet is stone.

We achieved this results with good contributions from institutional in New Zealand, another half of absolute cost reduction and continuing low credit losses. The Australian Business has had its challenges, but we've largely offset that elsewhere.

We've taken a very deliberate approach to ensuring we have a strong balance sheet and that we're maximizing capital efficiency across the group. This is positioned us well. Under our capital strategy, we've bought back $3 billion worth of shares so far, and we've neutralized the DRP for five halves in a row.

Every shares on issue are down 2% over the past 12 months, contributing to a 5% increase in EPS. Our APRA CET1 ratio is 11.5% well above unquestionably strong. And we've reached these before the completion of our Australian wealth sales.

We are paying $0.80 per share fully frank dividend, and as I mentioned, will again fully neutralize the DRP.

Our funding and liquidity metrics are also strong. So we're safer and stronger and we've released some capital, which has enhanced shareholder returns.

As we look forward, we're on track to complete our Australian life insurance sale at the end of May. Following this, our capital management approach in terms of buybacks, dividends and fracking will depend on three factors. The impact in timing of regulatory requirements, ongoing business needs, and the earnings and growth outlook for the group, including its composition. We'll then look at the most efficient and effective way to return any capital surplus to shareholders.

As part of this, we'll need to consider RBNZ's proposal to increase capital in New Zealand. As drafted, it could mean 6 to 8 billion New Zealand dollars of additional capital over the next five years, around 50% more than we hold today. But it's really too early to conclude as we're still working through the consultation process. It will also be driven by any business decisions we make about the size and composition of our New Zealand balance sheet in the future.

And any impact on the group will depend upon a number of reviews that APRA is underway. We'd hoped to have clarity on all of these over the coming months,

Even in the worst case, we're starting with an unquestionably strong capital position. And we've shown in the past that we're prepared to make hard decisions on capital allocation, just as we've done in Institutional, Asia Retail and Wealth.

In terms of franking capacity, as I've said before, our position is tight. This has become more pronounced this half given the lower contribution of the Australia geography to overall earnings. And clearly our franking capacity for dividends going forward will depend on future Australian earnings.

This slide takes you through some of the larger items to consider when comparing business trends to prior periods. Cash profit this half included a net gain of $86 million, related to divestment and other large and notable items. The total cash profit impact of these items is similar to the same period last year. However, the difference is more pronounced when comparing half on half. If you look through large notable items, cash profit was up 2% PCP and flat half on half.

Customer remediation continues to be a priority. In this half, we took remediation charges of $175 million before tax. At the end of the half, total balance sheet provisions for remediation stood at around $700 million. We're working hard to put customers right. We're also completing product and service reviews to identify any other failures. And we're fixing systems and processes to ensure these don't happen again.

We resourced our team early and we're well progressed. We essentially dealt with salary plan of faith and our service issues in prior years. And we took a large provision last year for our previously owned Aligned Dealer Groups.

In our Australian business, we've been working through our reviews over the past 18 to 24 months, larger and higher risk products were reviewed first, so many of them have already being provided for.

Here you can see the components of our cash profit movement half on half. I'll spend a few minutes now talking you through the key drivers, and then talk about each of our businesses. I'll do this on a half on half basis in order to better highlight the trends, despite seasonality.

As Shayne said, we think this is the time for prudent and targeted growth. You can see how this shows up in our balance sheet. Total loans in the Australia division fell $4.7 billion or 1%, half on half. This was most pronounced in investor and interest only home loans, unsecured retail lending and consumer asset finance. We offset this with growth of around $2.5 billion each in institutional in New Zealand. Our balance sheet mix had an impact on margins, but was positive on a risk adjusted basis.

Margins in our core customer businesses were flat for the half. If you look at the chart, you can see mix had a negative 2 basis point impact, offset by deposit and asset margins, which were up 1 basis point each. The mix impact was split between home lines switching from interest only to P&I, which continued the trend from last half. And other mix shifts like lower unsecured retail lending and growth in low risk segments in Institutional.

Deposit margins were up, mostly an Institutional, due to rising rates and deposit optimization. Asset margins also improved, however, the underlying trend was different. Australian home loans were repriced in September, but there were a number of offsets through the half. These include lending competition in all businesses, support to customers in drought affected communities, and regulatory changes in Australian credit cards. Looking forward, underlying margin pressures likely to continue.

Now, we could have achieved better margins by taking more risk, but we think that would have been the wrong thing to do at this time. We improved risk adjusted margins for the group by 3 basis points. In Institutional, they increased 7 basis points with the continuation of our strong balance sheet discipline and by 5 basis points in New Zealand, driven by strong risk and price discipline in commercial and agri.

In Australia, risk adjusted margins were down slightly. This was because of mix, given low volumes in the higher margin cards business. Notwithstanding this, we improved risk adjusted margins in each of home loans, cards and personal loans.

I've already said it, but it's a point worth repeating. We achieved another half of absolute cost reduction. Costs were down 1% for the half. We achieved this even though we had higher regulatory and compliance spend in Australia and New Zealand, a greater proportion of our OpEx on our investment spend and adverse effects impacts. Excluding FX, costs were down 2%.

Personnel costs were up $78 million as the benefit of FDA reductions with more than offset. Some of this is timing to do with when we accrue for long service leave and incentives. We also brought some technology managed services in-house, which benefited costs overall.

Other costs were down $165 million or 7%. We drive lower property costs, lower DNA and lower managed services and consulting spend.

We expect cost to be slightly higher in the second half given normal seasonal differences in marketing and investment spend. For the full year, we expect cost to be down excluding any adverse effects impacts.

We're pleased with our progress and our commitment to absolute cost reduction remains the same. It may not always be linear, but lower costs remain an intense focus.

One of the positive outcomes of the changes we've made in our business is the lower provision charge. At $393 million for the half, and we had 13 basis point loss rate, it was a strong outcome. Without the same tailwind from right backs and recoveries that we had last year, these were &128 million lower half on half.

New and increased individual provision charges were both lower than last year. The collective provision balance is very healthy at $3.4 billion. You will recall with the transition to double [indiscernible], we topped up the CP provision balance by $813 million.

At the end of the half have, we increased it slightly to reflect a more cautious outlook. These offset reductions because of portfolio change, and compares to CP releases in both halves of last year.

While, a more benign environment has helped provision charges, our internal long run loss rate is now 10 basis points or 27% lower than March 2016, reflecting the significant changes we've made rebalancing our business.

Australia home loan losses remain very low in absolute terms at $45 million, but 90 day pass due rates increased and were 100 basis points at the end of March. This was driven by four main factors. Around half is due to the denominator given lower volumes. Then there was the impact of customers switching from interest only to P&I. We saw $8 billion of contracted switching this half. And interest only lending is now down to 18% of our mortgage portfolio, around half of what it was two years ago.

We've also seen customers taking longer to come out of delinquency, which makes sense as the property market has slowed. And more customers going into hardship, particularly in New South Wales, although have a very low base. This is an area we're managing closely. But to put it in context, when we look at the increase this half, 12% negative equity, with WI in Queensland making up 82% of this.

Importantly, more recent home loan vintages continue to perform better than older vintages, reflecting a more cautious strategy and risk settings.

You can see on this slide that it was a difficult half for the Australia division. Profit was down 8% half on half with revenue down 4%. Expenses were well managed and credit charges were up 3% on the back of highest CP. I've said already the loan volumes were down and margin benefits from repricing will largely offset by mix and competition impact. Fee income fell $131 million of which around half was seasonal and the remainder due to our deliberate decisions to reduce or remove fees across the business.

We know that across the market there is house price moderation, lower borrower capacity and longer application approval times. We think it's right to be selective in this environment. But we clearly could have done better in the implementation of some of our settings and Shayne spoke about this.

Stepping through some key data points. During this half, growth in owner occupied landing was flat, and investor lending was down 3%. Both were below system. P&I lending was up 4% as a result of customers switching. Interest only lending was down 19%, driven by the bank book rolling off and a more cautious approach to frank book volumes. All of these impacted our margins, but enhances the quality of our overall portfolio and provides less of a headwind over the medium term.

Unsecured lending was also lower in both credit cards and personal loans, which is in line with our more cautious stats on both of these portfolios and changing customer preferences.

In response to moderating loan volumes, we've optimized deposit mix over fund growth, with deposit margins up slightly this half and volumes down 2%.

Looking forward, there are a number of uncertainties that make it hard to predict too far into the future. We're refining some of our processes, but the market has slowed and we're sticking to our prudent approach. Improvements will also take time to flow through into some growth and revenue. This means that the home loan balance sheet in the second half is likely to continue to decline and take some time to stabilize. But we'll have the benefit of seasonality in non-interest income.

Commercial loan volumes will also lower this half. We continue to run off our consumer asset finance book and remain selective in unsecured lending and commercial property. Our small business volumes were also lower against a backdrop of weaker sector growth. We're investing in better customer tools, which should provide more opportunity into next year and beyond. Deposit volumes are up half on half, many of these customers will broaden their banking needs overtime.

Overall, it's a difficult time for our Australian business. We know we can do better and have already started work here, but we think our strategy settings are right.

In the Institutional division, we continue to see the benefits of building a simpler, more focused and high returning business. Having significantly rebalanced the business we achieved a disciplined and targeted return to growth. The highlights were consistent customer revenue growth, high risk adjusted margins, a six consecutive half of absolute cost reduction and continued low credit losses.

Revenue increased 6% half on half with customer revenue up 4%. And operating costs were down 2% with lower software amortization and the benefit of FDA reductions.

Institutional has now reduced FDA by 25% since September 2015. And with the reshaping and simplification of the business ongoing, we plan to continue the trend of absolute cost reduction.

All businesses in Institutional performed well this half. Cash management had another record resolve with revenue up 8% as we benefited from hard deposit margins on the back of U.S. dollar right rises in our international business. Loans and specialized finance revenue was up 3% with growth being weighted towards higher credit quality customers, 86% of our lending exposure is now investment grade. And trade finance revenue was up 5%. Global markets revenue was $947 million, up 6%. This was a good result in a challenging environment, largely driven by good customer volumes and improving risk sentiment in Asia. So overall a strong start to the year for institutional with good momentum through the half.

It was a solid underlying performance by the New Zealand business. Volume growth was solid, margins were down, but risk adjusted margins improved 5 basis points, driven by better pricing for risk in commercial and agri.

Expenses were up slightly by $6 million with the benefit of branch consolidation offset by regulatory requirements. Credit quality remained sound with gross impaired assets down 3% and 93% of our home loan portfolio at a dynamic LVR of 80% or less. High provisions were because of CP overlay releases in the previous half, rather than anything unusual this half.

So we're well on the way to creating a simpler, stronger and more productive ANZ. You can see this in our strong balance sheet, our performance on costs, our credit quality, and in Institutional and New Zealand. It's been a tough time for the Australian business in a tough banking environment. The market has slowed, and there have been heightened regulatory and competitive pressures. We know where we need to improve, but think our strategy settings are right and our strengths elsewhere have helped to balance this result.

I'll now hand back to Shayne.

Shayne Elliott

As you know, Royal Commission produced its final report in February. The process, including Commissioner Hayne's recommendations caused us to reflect more broadly on the issues we face in reshaping our bank. This included how we govern the bank, what we ask our people to do, how we pay them, how we hold ourselves to account when things go wrong, and how we ensure that our products and services are appropriate, fair and responsible. Within weeks of the final report, we announced the first phase of our response with 16 initiatives to improve the treatment of our customers and four of those have already been fully implemented.

While it's good to have a checklist, we've not treated this as a compliance exercise. Rather, we also want to respond to the spirit of the report. And so there are a lot more material changes than those shown here.

Our new set of dispute resolution principles is a tangible example of the approach we're taking. While not a formal recommendation. Some customers' frustration with the sector's approach to redress was an important element of the hearings and we felt our public commitment to being a model litigant represented an important part of the process of our response.

The Royal Commission and Plans Law changes having a profound impact on Australia and not just the finance industry. It means that changing customer expectations, more scrutiny from regulators, increased accountability and penalties, and a complete rethink of businesses role in balancing the needs of stakeholders.

The risk and the cost of doing business has risen as a result. And that's not a complaint, but a reality. The work has already begun at ANZ to gain the trust of our customers and the broader community and to reshape our bank for the long term. We believe we are changing to better serve our customers and society and that ANZ will emerge better and stronger for it, driving better outcomes for customers and shareholders.

And our rehearsals for this event, I was told that my talking notes may be too somber and to downbeat. That was not my intention. But I did want you to know that we get it, that we get that it's tougher than before and it's tougher than we would like. But we get the need to adapt and change and quickly. This is not the time for waiting and hoping, it is the time for decisive action. But this is not a defensive strategy. We believe there's real opportunity to create value and we want to grab it.

I often get asked by people whether our people of ANZ are up for the challenge. Let me reassure you that they are, and our internal surveys support that. Our people are dealing with new challenges, but they've risen to the occasion. They're energetic, they're working harder and more collaboratively than before. And I want to thank them for their ongoing support and their focus on building the ANZ that we all want and deserve.

Thank you.

Question-and-Answer Session

A - Jill Campbell

I don't know one in this room is need Q&A, so I'll keep it short, wait for the microphone announce who you are. We'll start with one question each, try and resist the urge to break that into 17 parts. And with that, we'll go to Jarrod, please.

Jarrod Martin

Shayne, interesting that you mentioned you were told that your comments for December, because the first thing that I wrote down for the briefing was the use of the term, long term came out significantly but with short term issues, headwinds around any range of things. And so are we staring down the barrel of a tough couple of hubs in terms of and straight to earnings growth or earning going backwards. Michelle used the term, not linear from here in terms of costs, you're talking about reinvestment. We've got retail revenues going backwards at a rate of knots. And so are you just, are you effectively bracing us for short term profit going backwards?

Shayne Elliott

No, I'm bracing you for the reality that it's tough. But let's put it in perspective. When we're talking about a tough outlook, we're fundamentally talking about the retail outlook here in Australia. Right? And you saw that in the half and we're saying, I don't think that toughness, that environment is going to change anytime soon. Now, we've got the benefit of having high, we've got the lowest waiting amongst your peers in terms of our exposure to Australian retail, and we - and what we're really benefiting from now is, that the rest of our businesses are doing well.

I remember sitting in this room not that long ago, when people doubted our ability to generate double digit returns in Institutional. They doubted our ability to get that business on a footing where is actually generating growth and we've delivered that and that has really provided a great deal of balance and diversification in our business. And that and the strength of our New Zealand business is allowing us to put all of our efforts including my time and the team, and to really dealing into what is it difficult involvement in Australia. We're not shying away from that.

At some level, I guess what we're saying around the short term is, the easier decision for us would be just as go out and book indiscriminate volume in terms of in gain share and book a better revenue. But we think in terms of on a risk based view, and I don't mean just risk weighted assets I mean, risk in the broader sense. Take into account, regulatory risk, legal risk, all of that non-financial risk, we don't think that's the right thing to do. Now, our job is to get the balance, right. We got to like this, have got to deliver a decent result for shareholders to understand that, while doing the hard work to prepare the bank for the long term.

Michelle Jablko

And I just also pick up Jarrod, on your point on costs. I've said, I've actually said for the last two or three years, it won't be linear, it just has been and what we've always said is we want to make the right decisions for the business at any point in time. We're not managing to sort of six month period. So that's more what that was…

Shayne Elliott

Just going to that question. Going back to your point about investment, here we do investment business. We have to re-engineer our processes. And some of that technology and some of its changing processes, some of that's rethinking the role of offshore processing and other things. Yeah, that's going to cost a bit of money, no doubt. And we have to retool for the longer term, in terms of a kind of a data and digital world. But what we think when we look at that challenge, we already spend a lot on and invest a lot in our business. It's around a billion plus every year, but what we're getting the benefit now in terms of our simplification is we get to spend that we wanted and not kind of spray that money across a whole bunch of non-material businesses. So we think within reason, we're going to be able to, it's really about targeting the investment rather than significant changes in the total.

And the reality is - I am sorry, long answer to one question. But 17 part answer. That I think is that's a benefit we're getting that perhaps you didn't really think about, but in terms of that ability to focus on a few things, and quite rightly, the folks at the moment is going to be on the Australia retail business.

Jill Campbell

I didn't think I'd have to cut the answers off. Andrew?

Andrew Lyons

Thanks, everyone. From Goldman. Just a question on the comments you made Shayne around the institutional business and the double digit ROI that you've reported in the half I think you said 11%. Obviously, that's been done on the back of a positive bad debt charge and you showed 27 basis points is what you'd expect over the cycle. Can you maybe just reconcile how you would think about the leavers that you do have within the business that can actually continue to improve the pre provision profitability of that business?

Shayne Elliott

Yeah, there's no doubt that so the ROI is just showed over 11.5, there's no doubt that that was assisted not totally driven by but assisted by low provisions and probably and those provisions will well below what we would expect. But what you're also seeing is top line growth, and you're seeing quality top line growth, it's coming in here is that we want, its customer driven. It's largely, it's coming really strong in terms of our transaction banking business. If you look at cash and trade on a combined basis today, they are nudging our global markets business in terms of scale of revenue. And obviously, the returns particularly in cash are really attractive in that business. And so that's - that we've still got work to do, and we believe we can drive revenue growth from there. There's still work to do on cost. We still we haven't given up I mean, the team yes, of course, it's getting harder six after six hubs have taken cost out. But there's still momentum there. And there's still work to be done there. And actually, capital efficiency and capital efficiency isn't just about customer selection, although that's a big chunk of it. But it's also the way we run that business in terms of branches versus subs where we have our capital deployed on the business.

So we think there's room on all of those fronts to improve. The other thing I would say is when we roll forward to Basel 4 world, one of the big beneficiaries of that is actually institutional, institutional will get capital relief as a result of Basel 4 world, which will be a reasonably material boost to ROI, all else being equal.

Michelle Jablko

The other thing I think worth noting is to the extent that growth is balance sheet driven, the way we approach that is with an economic profit model that uses long run loss rates. So the way we originate business and even as we look at our balance sheet we've got today and tidy that up. It's through that lens of long run loss rate.

Jill Campbell

Richard?

Richard Wiles

Good morning, Rich Wiles, Morgan Stanley, Shayne you've been cutting costs for three years. The operating environments got worse as you said it has. What concerns may is you're losing sharing mortgages in Australia losing sharing, household deposits. I think he tried to give us a message that the loss of sharing mortgages is because of changing your risk profile. But today you've said negative equity is 13% of customers. I think the so what you just said?

Michelle Jablko

I said of the increasing delinquencies, it's the - it's 12% of that number. Not of total caps. Yes.

Richard Wiles

Yeah. That's right. Sure.

Michelle Jablko

Yeah.

Richard Wiles

So you're losing sharing mortgages, which perhaps has to do with changing your risk appetite and your processes. You're also losing sharing household deposits, which is the lifeblood of retail banking in Australia. So the question I've got is, have you gone too far on the course, is it impacting your franchise or you're actually becoming less competitive in an environment that is tougher, and therefore the outlook is going to get worse from here?

Shayne Elliott

It's good question? And I'll get mark that to comment on it and a little - in a little bit. And I don't believe that that's what we've done. I think so first of all, yes, we've lost share in, some of that is a result of our deliberate actions to rethink risk and reward for the long term not - not just thinking about the lines of booking today, but thinking about the kind of book we want to have in the small difficult environment, a book that we want that is focused on owner occupiers that is more heavily skewed towards P&I.

Now, so some of that as a result is deliberate. And you can see that in terms of our quite significant loss of share, if you will, and the investor space. We over did that. Did we overcorrect there? Yes. Okay. So it's not these are supertanker businesses do use it. It's really hard to get that exactly right from our own deliberate action. So yes, we overshot them. We've said that we implemented some of that change badly.

But secondly, there has been a slowdown and I think you can see this with the larger banks in general. This is the risk because the way I think ANZ are further advanced in a depth into the new world around responsible lending. We were early into dealing into an enhanced expense verification. What does that mean? It means that it's just harder for people and longer to get a line. And in that environment, one of our competitive tools is how quickly can you get a response. And I think the large banks and very much ANZ have move faster into that world than some of our others. And as a result of that, our proposition is going to be a little bit less attractive than others and so some of that share is being lost as a result of that.

But that's, that's, that's not deliberate. That's an outcome. And Mark, do you want to talk about the environment and how what we're doing because we're doing a lot to try to restore and get that balance back on track.

Mark Whelan

So it's Mark. And for people who don't know people don't know me, and what's happened because it's become much longer lead time for customers to get deals through the system to get deals approved. That's happened to all banks. So the new arms rise as effectively going to be around that speed to assessment. And our focus is to put all efforts into improving that speed to assessment for a customer. So whether it be a new systems that we've launched recently that allow us to speed up that process, much more automation, much more automation of the income and expense verification and we've had previously.

Verification teams that work with the customers to make sure that all the documents present at the start of the process, which gets it going through the process a lot quicker than it has. And then also, as Shayne said, it's about being more selective about which segments that we apply in and we either corrected in the investor, we've now got a I guess, an appetite sitting that's back in market so we expect that look to change that continued focus on owner occupied and we have been more aggressive in the P&I space than the interest only which has revenue implications for us.

And I think finally, that sweet spot around a business owner that's also a small business, small business customer, it's also a homeowner is an area we felt with our probably underachieved over the years, and we see a really big opportunity for us to grow in that space.

Shayne Elliott

And then the only thing I'm glad you asked about deposits. Deposits is different, deposits loss of share is not due to clumsy implementation of you policies or anything like that. That is largely just a technical decision on our part about the cost, and what's the reasonable, what's the right amount to pay and the right way of doing it. There's also a little bit in there, because as part of our simplification agenda, we felt we just had way too many deposit options out there. And the cost of supporting all of those was not conducive to good outcomes. And so we've simplified that portfolio so some of it is a result of that as well.

Jill Campbell

Richard, would you mind handling the mike. Thanks.

Jonathan Mott

Thanks. I'm Jon Mott from UBS. A question on Slide 85, a long way back. It's the homeland delinquencies Now Michelle, you mentioned this on the 90 days past year, but if you look at the 30 days past, you see this is a top right quadrant you can see the yellow line. It's gone really, really aggressive in the 30 days past to, really this calendar year. And I know there's a seasonal uptick that always happens in the first quarter. This is much more than the past.

Now, if you go through some of the issues that you mentioned for the 90 days past to slow down the bulk, well, that wouldn't have really mattered in the quarter, and then the -

Michelle Jablko

No, it does matter in the quarter actually, maybe not is pronounced for…

Jonathan Mott

When you're talking about numbers going from 180 to 225 basis points, it's a very large move. But also switching spin now going for two years, so I wouldn't have thought that the last quarter would have made a huge difference so with the unemployment rate, still at 5%. What's happened in the last quarter, we've seen such a material increase in the 30 days past to, which I would have thought would flow through and the 90 days past to and into the impairment charge in the second half?

Michelle Jablko

So it is - I think the fact is a largely the Simon Kevin can jump in as well but largely the same as what I spoke about on the 90 day pass to. I think, if you look at switching suddenly the longer so people that could switch earlier and manage the cash flows did so there's a - I said, I think you, you probably do expect the title to be a bit different to the title to be a bit different. And it when customers do get into stress, it's taking them longer to get out. So I think it's a combination of those factors.

Shayne Elliott

Any other thing I'd add, Michelle, is that we did have a spike in the first quarter of this of 2019? What we've seen if you look at it, it's not in their chart, if you look at our 1 to 29 days, that's normalized back to what we were pre in 2018. So that just doesn't come through because that's 30 plus but if you look at 1 to 29, that's come back.

Jonathan Mott

So the 30 day plus is continued to season.

Michelle Jablko

Yes.

Jonathan Mott

So short terms improve?

Michelle Jablko

The short terms improved now.

Jonathan Mott

The deterioration of that missed the payment in the first quarter is continued to set, correct, yeah.

Shayne Elliott

What you're saying there is self-curing is just taking longer, because one of the ways to self-care is to downsize your house or whatever and people, that's going to take longer. So there's more flow through than there was in the past.

Jill Campbell

Thank you.

Victor German

Thank you. Victor German from Macquarie. I'm appreciate, Michelle, you made those comments were remediation charges, which are very difficult to compare bank to bank. But I was just hoping you could provide us a little bit more color in terms of how you thinking about here and mediation just so we can make some additional assessments. Other banks talked about the overall revenue that they received from their aligned channel. Are you able to give us those numbers in also what proportion of effective remediation you assume in both salary and align channels?

Michelle Jablko

I mean, so salary is - I know as you say, Victor, it's very hard to compare. We don't all have the same businesses. The size of the businesses of different. What I do is not exactly the same. And we started at different times as well. So salary plan is for us, we dealt with, and it's not in that $700 million provision balance I spoke about because those customers have essentially been remediated already.

In terms of if you're talking about the aligned dealer groups, again, I'm not sure it's relevant to look at total revenue, but it call it 600 million, roughly. And it's very, very hard to compare the process, I can really talk about the process we've gone through. And as you remember, we took a pretty large provision in the second half of last year. We had quite a lot of learning out of the work we've done on the salary planners. And the way we approached it was to say tight, we looked at the align dealer groups and we divided the advisors into three cohorts sort of high risk, medium risk, low risk based on a number of - you sort of matrix and each of those groups has a different loss rates, so again, I don't think comparing averages across businesses is the right way to do it.

Victor German

And so the 600 million that compares to the number of 966.

Michelle Jablko

Yeah, roughly. Yeah.

Victor German

Even though, is a right to say that you have more line advisors, you have less?

Michelle Jablko

I think our business about two thirds the size, yeah.

Jill Campbell

We did have more in total, but they're more insurance base. So that's why you see the phase or less on the superannuation side.

Michelle Jablko

And that's why they're different, we don't all have the same businesses. James?

James Ellis

James Ellis from Bank of America, Merrill Lynch, just in relation to the proposed New Zealand capital reforms. So if you are asked to unreasonably subsidize ambitions, in New Zealand, can you just talk a bit more about what are the mitigating actions you can take you to refer to balance sheet actions, because a lot of the statements coming out in New Zealand are quite striking?

Shayne Elliott

Yeah. So I know you all know this, but we're at really early stages here, right? We haven't even got to the consultation, papers being delivered. So there's a long way to go. What we're referring to is really look, clearly we have options, we have options about the amount of capital that we put into New Zealand, and then how we deploy that capital in New Zealand into which sectors and what returns we require that.

I mean, I think it's as simple as that. And I'm not suggesting that any of that easy. But what we have seen here is we're going to go through a consultation, and then there's a really long period of time to comply with it and we feel it five years or whatever the number will be at the end will be sufficient for us to rebalance our portfolio as a group, and within New Zealand, and all we were referring to as look. We've shown that we're not shy of taking hard decisions. We will act and we actually, as I mentioned, we actually have a responsibility to act responsibly with our shareholders capital.

And so we will do so. But it's the same old tools we always have. We'll look at our cost base, we think about the capital allocation, we think about how we price that capital, what we asked the business to deliver on it. And we'll do all that appropriately at the right time.

Jill Campbell

Andrew and then to Brian.

Andrew Triggs

Thanks, Jill. Andrew Triggs from JPMorgan. Just a question on costs I think, Shayne, you mentioned an $8 billion target by 2022. I think it was just in terms of the starting point, just to be absolutely clear that that 4.26 billion for the half.

Shayne Elliott

Yes.

Andrew Triggs

Excludes divestments and other features, correct.

Shayne Elliott

Yes.

Andrew Triggs

I just sort of the buckets for that going ahead, I mean is it expense likely actually declined from here include the amortization expense?

Shayne Elliott

It's a good question. Look, I so obviously, it's reasonably bold to go out with a number like that. And there's some risk in doing that. I'm aware of that. Do we have a perfect spreadsheet that explains exactly how we get there? And what the where the money will go? No. But we have done lots of work on why we think that's a reasonable number, and why we think we can run the bank for less than $8 billion responsibly and do all the things that we want. My - what we know is that their composition of that it will change a lot.

It will probably, and when I say technology, I'm not talking about boxes and wires and DNA, but you know, the people we have in technology and all that will increase as a percentage of our business. I think, yes, it will. So the proportion that we spend on technology in the broader sense will go up. We'll have more engineers, more data people et cetera, et cetera. What we've got to do in terms of the boxes and wires, if it's the old fashioned way of thinking about it is get very fun. And what we what I mentioned in near is what we're really thinking through with Maile and the team is. How do, because of it that past we talked about that we've grown into this mess standardization production line, it was actually really efficient to have a big box strategy of fixed costs and just come through volume, right?

In this new world of targeted growth, more flexibility, faster change, we need to re-engineer a system that's much more flexible. That's much more variable costs than fixed. And that's not going to be simple. But that's exactly the work that we're doing. I see it and it's not just being done by Jared, and the tech team, because it's actually being driven by the businesses. It's been driven by Mark and Maile in particular, about that what that Australian business will look like.

So branch costs we've already seen, branch numbers of down 20% that's in Australia and New Zealand. I think that's been the most aggressive re-modelling of a branch new work of our peers. We don't have a target for that inside. But we know that customer preference is changing. And so that costs will change. We know there'll be changes in our contact centers, we know that we changes in our processing shops that's going to shift.

Michelle Jablko

And I was just going to add on technology, I sort of look at it inside the starting points, not right, and it's probably too high and needs to be re based as we work through some of the complexity. But then over time, proportionately, technology becomes a bigger proportion.

Jill Campbell

Would you mind handing to Brian? Thank you,

Brian Johnson

Brian Johnson, CLSA. Can I just first of all make an observation and then I promise I will ask a question. Sure.

Shayne Elliott

Is it a nice observation, Brian or

Brian Johnson

Not really. Page 39, today's spoken a lot about economic profit. But I do see that once again, you've wrinkled up the cost to capital to be pretty miserly 10% not long ago was 9%, we got up to 9.5%, it's now going up to 10%. But you've actually gone back and restarted the concert based on the higher figure, which probably generates a positive delta that wouldn't there, if you would use the historic 9.5%?

The other observation that I suppose I wanted to make there as well is when we have a look at that note, and this is the most important. This is the most important of bank….

Shayne Elliott

I'm not sure that actually makes any sense.

Brian Johnson

Well, I'm happy to sit down with you but then when we actually have a look at on that same note, the whole economic profit construct seems to have changed even apart from the cost of capital previously used to say economic profit is risk adjusted profit measure and used to evaluate business performance unit and variable remuneration. The variable remuneration bit has now moved. I'd also know that you're now talking that even though at the group level, that you allocate the average ordinary equity to determine it, that's the number we see. They're saying at the division one, you basically allocate the regulatory capital. I suppose my observation would be at least one of your peers' managers to actually give us that reconciliation by division. Could I just put in front of you, it would be intriguing as to know why that basically, isn't it, why we don't see the divisional numbers? Because it would save so much time for everyone to really understand.

Shayne Elliott

Okay, that's

Brian Johnson

What businesses are doing well?

Shayne Elliott

Right. Okay, now, the question I don't need to be wasting your time, Brian, but I will work on that.

Brian Johnson

Okay. Now the question. This morning, I saw a letter that I instead of send out to all your agri customers in New Zealand - in New Zealand, yes, which basically points out that, hey guys, we've been running a capital model that that allows us to have less capital on every book than our peers and we might have to respond to this. You pretty clearly telling people that we're going to reprice up. But when I have a look at the housing book in New Zealand, the advanced housing rewarding is also well below the piers. I just wanted to get some clarity on, on basically, why is it in New Zealand that we can see two incidences where your risk ratings are so far below the peers because that is a major contributor to basically this New Zealand capital problem, but how big potential is this capital in post on the agri book?

Michelle Jablko

So if I look at risk rights in New Zealand, that was based on models approved by the RBNZ not everyone had models approved at the same time. And I saw, I mean, and it's reflective of the risk in a book. If when we talk when I've mentioned that $6 billion to $8 billion number that was inclusive of an increase in risk whites, it's probably 15% of the number.

Jill Campbell

Brett, please.

Brett Le Mesurier

Thanks, Brett Le Mesurier from Shaw and Partners. So Michelle, how much of the 700 million is actually the provision for the Align dealer group?

Michelle Jablko

It was from memory about 140 million.

Brett Le Mesurier

And they'll push with a second question. The LPs on new loans have continued to decline they've fallen from 72 I think 68%, 67% over the last couple of years. Do you think they're going to continue to decline given that you've tightened your lending standards is as you commented in November last year?

Mark Whelan

So good question actually, I'm not sure. Mark?

Mark Whelan

I don't think it will because I think we've borne the brunt of a lot of the changes and the amount of customer can actually borrow, I don't think that's going to shrink any further. So I think that's probably found a more natural level.

Shayne Elliott

And the other thing I would - the only thing I would say part of that calculation is influenced by what proportion of loans you're running that a top ups or renovation loans versus first time buyer asset, some of its a mix issue, but I think Mark is probably right that it's unlikely to get any better in any material way.

Mark Whelan

I guess the other thing would probably found a natural level in how much interest we are at, so they tend to be like so the P&I tends to be at lower LVR because you can borrow less under a P&I scenario. So we're probably the main pressures that have driven that have very good stop.

Jill Campbell

I think we have a couple of questions on the phone if we can go to those, please?

Operator

Thank you. Your first question comes from Matthew Wilson with Deutsche Bank. Please go ahead.

Matthew Wilson

Hey, good day, I'm Matt Wilson, Deutsche Bank. Two questions being on the phone if I may, the changes you've made to our mortgage underwriting make complete sense, but they confirm that the industry wasn't lending as responsibly as the more demanded for nearly a decade. How do you therefore think about the ramifications of past Responsible Lending issues? And it's not a new world, the credit act and Responsible Lending obligations were legislated in 2009.

Secondly, you clearly understand the changing surrounds quite well. You're a headed repositioning the business and I think your outlook comments are very credible. Are you finding the right balance between sort of on a pace and content basis between taking cost out, which is easy, and investing for a very different future where IT in disruption is clearly more important. And the sector, frankly, is a long way from being matched in this space.

Shayne Elliott

I think those are really all that you have those two, they're good questions. And in terms of responsible for it. You're quite right and as the Chairman of [indiscernible] has pointed out, the responsible lending was haven't changed over that time, and that's true. But what I would suggest is that the interpretation of that law has changed quite significantly.

The law actually says that we must take reasonable steps to ensure that alone is not unsuitable. Now, nobody would disagree with that. And that has been the case for the last 10 years. And we would stand up and say, that is exactly what we were doing over that period of time. However, that has time has gone on, partly because of the Royal Commission. There has been a debate about what is defined by reasonable step and what exactly is suitable. So that's a good things and the result of that is that definition of what's responsible today has shifted.

So I don't believe that we have any material risk, if you will, around applying today's standards over the past, I think, let's remind ourselves that in through that entire period, we were regulated by ethic, and had regular reviews and discussions about that. So I take your point. And I do think read a really interesting time because I think all players are interpreting that legislation in slightly different ways. We probably at the conservative end of that, I accept that. And that's part of what has driven some of our responses. And that's what I mean about considering the kind of non-financial risks going forward. So I'd like to take that point.

I intend to your question on cause it's a really good point and something that we struggle with that is not easy. Reluctance, if you will, to spend too much on transformation on the future has been really driven by a few things. One is our poor track record of that in the past. And two being really, I think we've shifted and certainly in the last year, and even though not wasn't formally under Maile, but with Maile's input and Jared's is to move away from this idea that the investment required and technology is not a technology transformation. It's a business transformation.

And so we can go out and spend a lot of money and re platform stuff, but we've got to be really clear platform for what, for what purpose to provide what services to which customers. And so we've taken a bit of a step back on that and slow that down. But the reason we've so we really rethinking that whole business, which customers do we want, how are we going to compete, what's the basis of that and therefore what's the right sort of technology that's appropriate and fit for purpose. But we slow down on the short term so that we can speed up later.

Michelle Jablko

I think also Shayne there's a metabolic rate in the organization. What the organization can deal with and it tends to be roughly a billion dollars a year. And at times we've looked to increase it, but actually it hasn't. We haven't because the organization can only has the capacity to do so much.

Shayne Elliott

The good thing and you might say, that's a bad thing, because maybe we do need to do more. And I agree with you, we need to increase the metabolic rate of the organization. But one of the benefits we're getting is through simplification that billion as I see it, is going on these things. Now, it's unfortunate at the moment, a little bit of that is going into the remediation challenge, right. And so the sooner we get that behind us, that's another freeing up of resources of people money boxes to actually apply to exactly that transformation that you were referring to.

Matthew Wilson

All right. Thank you

Jill Campbell

We'll go to the next question please on the phone.

Operator

Thank you. Your next question comes from Brendan Sproules with Citigroup. Please go ahead.

Brendan Sproules

Hi, good morning, Brendan from Citi. I look, I've got a question on the institutional business, obviously quite a strong result, particularly at the revenue lot, as you pointed out. Could you maybe talk about just the momentum on the balance sheet and just notice in the second half that that net lines and advances slowed to 2% and customer deposit slow to zero, particularly in the Australian part of that descend to be quite a slowing the momentum of lending, and deposits, and maybe we can talk about the broader economic climate and how that's affecting the business going forward?

Shayne Elliott

I'm going to hence, Mark, I'll just say, your observations right now, as I said, our focus here is about disciplined. It's about disciplined growth, being really clear what our return hurdles are. And actually it's - so but the success of the institutional is more driven by the things we say no to than it is by the things we say yes to actually. And so growth on the balance sheet is not a given and neither should it be that the some sort of trend, you can extrapolate and hit a target on, that's not the right way to run that business. But Mark, you might want to talk about conditions.

Mark Whelan

So yep, you're spot on with the response here, I will grow the loan book, particularly when the opportunities are there with the right pricing. And so that won't be linear. There'll be opportunities in some hubs that are better than others. And it'll be across different geographies. For example, we've seen some growth in the Asian business recently, but a lot of that fixed position there, and that actually throws off good revenue into Australia to be caught on us.

So you've got to look at this as a nonlinear thing with regards to particularly the Risk Weighted Assets. On the deposit side, we were again, being just cautious around what we want to build their payments cash management, business is growing, but we haven't and we're bringing a lot of mandates but a lot of that hasn't fallen through yet into the bottom line because we're still transitioning. So there's a few component parts there that we need to continue to work on and getting customers on board quick more quickly. But it's a combination of both those factors, I think, was that I think that was covering all the questions.

Jill Campbell

So I did say one question each and we'll - we will go we can you can call us this afternoon to go through other questions. I think we're done. We have one more on the phone.

Operator

Thank you. Your next question comes from Azib Khan with Morgans. Please go ahead.

Azib Khan

Thank you. Shayne so the continue of Australian timelines originated through the brighter channel has been trending up, it was 57% of flow in the first half is a structural trend that's coming through. We expect this uptrend to continue as you focus on absolute cost reduction between now and 2022.

Shayne Elliott

It's a good question. So there is clearly a structural change happening in the marketplace. More and more Australians are choosing to use the broker channel they see value and I, in terms of ease but also in terms of price transparency? I don't know, I can't see that slowing anytime soon. Obviously, there are questions still being asked around the right remuneration model and that might have an impact. But putting that aside, I think that trend will continue. And there are many markets around the world that are, that have much higher penetration of brokers.

Interestingly, we've seen the same trend or that the much lower numbers happening in New Zealand as well. I just want to be clear though, we are responding to customer demand, not we are pushing customers to brokers. We would much prefer customers come into our branches or call us up or go online, that's always going to be our preferred channel. So we don't sit around and say, hey, let's manage our cost base or our marketing or whatever it is to push people into channels into brokers because somehow it's cheaper. That's not how we think about it.

Jill Campbell

I think we're done everybody unless you had any last comments Shayne. Investor Relations team, obviously around all afternoon, as are the executive team. Thank you all for coming.

Shayne Elliott

Thank you.

Michelle Jablko

Thank you.