Westpac Banking Corporation (WBK) CEO Peter King on Q2 2020 Results - Earnings Call Transcript

Westpac Banking Corporation (NYSE:WBK) Q2 2020 Results Conference Call May 3, 2020 8:00 PM ET

Company Participants

Andrew Bowden - Investor Relations

Peter King - Chief Executive Officer

Gary Thursby - Chief Financial Officer

Conference Call Participants

Jon Mott - UBS

Jarrod Martin - Credit Suisse

Andrew Lyons - Goldman Sachs

Victor German - Macquarie

Brian Johnson - CLSA

Matthew Wilson - Deutsche Bank

Richard Wiles - Morgan Stanley

Brendan Sproules - Citigroup

Andrew Triggs - JP Morgan

Brett Le Mesurier - Shaw and Partners

Ed Henning - CLSA

Joyce Moullakis - The Australian

Peter Ryan - ABC

James Frost - The Financial Review

Emily Cadman - Bloomberg

John Jury - Jury Freightlines

James Thomson - The Financial Review

Andrew Bowden

Good morning everybody and welcome to presentation of Westpac’s First Half 2020 Results. My name is Andrew Bowden, and I'm Head of Westpac's Investor Relations. I would like to acknowledge the traditional owners and custodians land on which we speak, the Gadigal people of the Eora nation, and pay my respects to elders, past, present and emerging.

Presenting today is our CEO, Peter King and our CFO, Gary Thursby. And we have most of the executive team here today in the room, and we will be able to take questions in need. So, please let me -- without further ado, let me welcome Peter to the lectern.

Peter King

Thanks, Andrew, and good morning everyone, and thank you for joining Westpac's first fully digital results presentation, a bit of a sign of the times. Well, Gary and I've been banking for some time. It's fair to say we've never presented a result like this with the challenges of low interest rates, COVID-19 and Westpac's own compliance issues, but importantly, we've got the balance sheet to support our customers through this time, and we're absolutely committed to turning around our performance.

And if I start with the overview upfront, I want to recognize the economic downturn is having a big impact on many of our customers and we're doing everything we can to help. I also want to acknowledge the work of our 35,000 people who are helping customers every day. I've spent the last few months working closely with the teams across the organization and I'm so proud of what they've done. Our priority has been to protect them, keep the bank running, while we're using our scale strength and experience to support our customers during this challenging time.

From a financial perspective, it was a disappointing result, particularly reflecting the 1.3 billion in novel items, mostly related to AUSTRAC as well as a $2.2 billion impairment charge. However, as I said before, the balance sheet remains in great shape across capital funding and liquidity and that does position us well to navigate through this period ahead. We also have a need to simplify our business. Our first steps are outlined today with the creation of the specialist business units and we are going to raise focus on banking.

Today, I'd like to cover our COVID response, how it is impacting the business, and how we're going to move forward and our priorities? Gary will pick up the results with a particular focus on asset quality and provisioning. But upfront, I'd like to say that, we have used our models, experience and judgments to determine our credit provisions. So, if we start with COVID, our response has been guided by four goals; protect our people, support our customers, keep essential service running and maintain a strong balance sheet.

As a big employer with a large customer base, we move quickly to protect both our people and customers. This included implementing industrial hygiene and cleaning, temperature checking and social distancing measures. Over 90% of our branches have remained open with new screens installed to protect our people. In our major sites, there has been a lot less people. One of the big wins has been our ability to scale up remote working from home, and that's being 22,000 people in Australia now working from home.

The IT team has made this possible with the recent rollout in the last six months of Microsoft 365 and its collaboration tools as well as some upgrade to capacity in our networks. The major upgrades we've done to our IT infrastructure in the last couple of years have really stood us in good place because they're handled the extra volume and the stability has been very good.

Now, long-term success depends on as many customers, both consumers and business going back to work and getting back in our employment. We've helped over a 100,000 customers in our consumer and business divisions through differing loan repayments. To do this, we've had to move a lot of people around the organization from branches to operations and into call centers and I thank them for that. Differing loan repayments has been the single biggest thing we have done to help our customers during this time.

Now if I turn to the results, it was a tough six months and a disappointing result. Net profit at 1.2 billion was down by two thirds. A large part of the reduction reflected higher notable items including the 1.1 being for AUSTRAC matters and this included an allowance for 900 million for penalties. At this point, we haven't been able to reach an agreement and mediation is continuing.

The higher impairment charge was the other significant driver of the lower profit. Estimated COVID impact under the new accounting standards, we added 1.6 billion to provisions in the half and that took our total credit impairment provision on the balance sheet to 5.8 billion. This the charge in the half is around 62 basis points of loans and that is approaching the levels we saw in the GFC.

On the bottom half of the table is the result excluding notable items and on this basis, cash earnings were 8% below -- or sorry, core earnings were 8% below and most of this was related to our wealth business and insurance. They were also a few asset wrap downs. The sharp rise in impairments 4.9 times last half to 2.2 billion was the other piece that drives the lower cash earnings down 42%. A bright spot in the half was margin management. Despite the increase, increase in liquid assets and lower interest rates, margins were well-managed and we held them over the half and over the year.

On dividends after taking into account APRA's guidance, the Board has deferred the decision on the interim dividend and we won't be paying a dividend on the 20th of June. We recognize this impact on shareholders, particularly our retail shareholders. However, this is the prudent decision in the current uncertainty environment. We'll continue to review dividend outcomes over the course of the remainder of the year.

Turning to divisions, each division has a slightly different story the trends are similar. In consumer, the banking business performed well with margin mentioned standout. We also improve mortgage originations through the half dealing with some of the issues we had light in the period last year, however, the COVID impact is having a further impact on our processing times recently.

Bushfires and storms also saw higher insurance claims in the consumer bank and this was a large headwind along with the cost of stopping one of our group life insurance contracts. In Business, low interest rates had an impact on margins. Platforms also continued to be a headwind, particularly from lower margins, and while impairments are also up of the back of a small rise in stressed assets late in the half and COVID related overlays.

In WIB, margins were also down mainly in deposits related to the lower interest rates. Market income was solid, with FX doing well in a more volatile operating environment. Impairments were also higher from a small number of impaired assets and also COVID overlays. And that continue to deliver good bounce rate growth with lower fee income, higher regulatory costs, and a lift in impairments saw the overall result fall.

You may recall the business units include treasury and the advanced businesses we exited, the results here reflect more remediation in advice and the AUSTRAC provisions. On treasury, they had an excellent half. They are well positioned for the lower rates and you can see that in the revenue they generated in half.

If we turn to the balance sheet, the balance sheet strengthened over the course of the half as we boosted both capital and liquidity. Our CET1 one ratio rose to 10.8%, as we raise 2.8 billion early in the half and that'll offset some of the notable items and capital overlays. We also raised additional Tier 2 capital and that took a total rate of capital to 16%.

On an international basis, we have very healthy ratios of 16% for common equity Tier 1 and 23% for total regulatory capital. All our funding and liquidity ratios also improved over the half and this reflects our strong franchise with good growth in deposits across all segments, but particularly in the institution bank.

With little new lending, we directed this funding to boost liquid assets and our high quality liquid assets grew by 31 billion this half. It's also worth noting that we haven't access the RBAs term funding facility this half and our minimum access there 18 billion, which more than covers our wholesale maturities, long-term wholesale maturities in the second half.

So with such high levels of liquid assets, I'd say our balance sheet is really well positioned to support lending demand as we go forward. So on priorities, since taking on the CEO role, I have spent time agreeing prior to the bank or with the board. Well COVID requires a large near term focus. We've also not taken our eye off the future. First is we need to grow our customer franchise by being best in service. Our priority therefore remains to improve our service and simplify our business. We also need highly-engaged people to deliver great service.

Second is performance disciplines, this is where we spent much of our early time focusing on. It includes a renewed focus on banking and embedding a new operating approach. Third is digital. We've continued to roll out the customer service hub this half. We've done further work and have St. George digital application for mortgages, and we're also working on a new app for the Westpac brand for the second half. We're also ready to open banking when it starts in July.

Finally, with the events last year, it is clear we need to do more on risk management and I'm determined to significantly improve our risk culture and capability. We're updating our culture governance and accountability plans. There will be no compromise on this front, and we'll make the necessary changes that we need to, to improve here. We've also made significant improvements in financial crime capabilities since November, and we're on track to deliver the 200 extra resources that we committed to in the response plan.

To execute these priorities, we're embedding a new operating approach. Another of my early priorities has been to review the portfolio to be very clear about where we can add value. If we look back at our performance, over recent years, it's been driven by our banking businesses. Other businesses have not performed to the level of the banking businesses. These businesses have also absorbed a significant amount of management time. As a result, we will focus where we have scale and competitive advantage, and that's our banking businesses.

So today, we're announcing that we're setting up a new specialist division, which will include insurance, super platform and auto finance. To put this in perspective, the businesses has generated around 10% of group revenue last year and they absorbed around $4 billion of regulatory capital. We're also delighted the Jason Yetton rejoins us today to lead these businesses and to lead the strategic review. Jason has experience across both banking and wealth, and therefore he's well-positioned to help us here.

We're working through the details and we'll have more to say in the future including the full P&L by the end of the year. These two initiatives set us up well for the future with a simpler and clearer structure, which seeks to deliver improved performance, and a big part of that will be our line of business focus. So, in addition to the specialist businesses, we're going to drive greater clarity on end-to-end accountabilities and clearer authorities through lines of business. And so, as I said, these two initiatives will set us up for the future with a simpler and clearer structure, which seeks to deliver improved performance overtime.

Let me hand to Gary now.

Gary Thursby

Thank you, Peter, and let me add my thanks for those logging in. Peter has talked about COVID and his priorities. I'll focus on the result, spending a bit more time on provisioning and capital. When I look at performance there are three points I'd like to make. The first, as Peter said this is a disappointing result as we absorbed high notable items and increased impairment charges. Second, we manage margins well and we were disciplined about productivity, but the environment is tougher and this is reflected in our performance. And finally I'm really pleased with the strength of our balance sheet and our additional provisions improve our cover.

So moving to the numbers, our result is 72% down and excluding notable items is 42% lower. Interest income is up from modest balance sheet growth while margin was flat. Noninterest income was down including wealth items that we highlighted last year together with increased insurance claims. Costs were higher as we increased our spend on risk management and had some asset right down; however, productivity more than offset BAU growth. Impairments rose sharply on the back of COVID-19.

This next slide pulls out some of the larger and more volatile items in the results to help you understand performance. Notable items are in the top left and they impacted our result by just under $1.3 billion. The largest item within here is AUSTRAC, which includes a provision to potential penalty together with other items including our response plan that we announced last November.

Remediation this period included some amounts for business lending together with two other wealth items. We had made good progress on remediation through consumer New Zealand and salaried advice. The table on the top right details the infrequent and volatile items, which were negative this half. I'll now go through some of the P&L drivers. As you mentioned, balance sheet growth was relatively modest to the Australian loan balance is down slightly and New Zealand up. One of the trends this period has been the lift in business and corporate balances during March as they've sought to increase their liquidity.

On margin, there is a lot of moving parts, but we've managed margin well at 2.13%. As I looked at the components, loan spreads are up 4 basis points reflecting pricing decisions at the end of last year, partly offset by compression from competition and switching. Deposit spreads fell 5 basis points from further reductions in interest rates, we now have $160 billion at 25 basis points or less and this is up from 95 billion at the end of last year.

The low rates have also reduced our returns on capital and liquids. This will continue to flow through in coming halves as higher yielding maturities are applied at lower rates. As Peter said, treasury had a very good half. They were well positioned as rates spilled during March. So, overall, I'm happy with margin at 2.13, although I do expect will continue -- that margin will continue to be impacted by lower rates and have decision to hold more liquids.

Non-interest income is down 18% excluding edibles with main drivers being worth and insurance. As I mentioned worth income includes the combination of legislative changes and platform margins, which we called out at the full year. Lower interest rates also impacted wealth. The insurance contribution was impacted by claims of $140 million from bushfires and storms, together with $97 million from the write-off of deferred acquisition costs.

Most of the 5% decline in income reflects lower levels of customer activity together with the elimination of some phase. Our trading income fell slightly, mostly from the higher charge for derivative valuation adjustments. Notable items had a large impact on expenses this half and excluding these costs were up 3%. As we further strengthened our risk management, we increased spend by $98 million and we expect this to continue.

We have enhanced our financial program, and we're investing in risk capability across the group. As I said, we've remained disciplined on productivity with savings of 198 million more than offsetting the increases in their use spend and investment. If I turn to credit quality, this is an important topic this half. We have a diversified and well performing portfolio. Stressed exposures are up slightly with a handful of larger names being downgraded.

90 day mortgage delinquencies were up five basis points, while 30 day delinquencies are also higher. In both instances, this is due to some deterioration, including bushfire related hardships. Unsecured delinquencies are also higher, including further contraction in the portfolio. So, while there's little movement in the portfolio, all of the interest is on the outlook and we've considered this as we set out provision.

As impairment charges have increased significantly on the back of COVID, there's a few large items that increased the individual provisions. Write-offs and write-backs are at similar levels to prior periods with some seasonality in write-offs related to the unsecured portfolio. The $1.6 billion of COVID provision is significant. David, Steven and I have spent a lot of time on this, and we want to share -- I want to share some of our thinking with you.

As I mentioned this early days, while the crises has had little impact on our portfolio, there's a lot of uncertainty in the outlook. At this stage, we just don't know how long how severe or long the crisis will be, though we do expect significant government stimulus measures to be effective. There's a wide range of views about the impact, in particular how this will ultimately impact customers and businesses.

But given this uncertainty, we've used various scenarios, tested out models, we've drawn on experience across the Company, and we've applied judgment to arrive at our provision outcomes. These changes increased our provision to $5.8 billion and have lifted our coverage ratios. Our individually assessed provisions to impaired asset are very well covered at 50%, while collected key asset provisions to credit risk weighted assets now sites at 140 basis points.

Looking at the drivers of the impairment provision, given the outlook, we took a prudent approach to provisioning. As I mentioned, the $1.6 billion reflects changes to our base case economic outlook. We've applied a greater weight to the downside scenario and we've included a sector overlay. Looking at those components, the base case economic outlook is for V-shaped downturn with considerable shock to the economy in 2020, followed by a recovery. This does consider the impact of the government stimulus.

On economics, we've modeled unemployment rising to 9% and then recovering back to 7% by the end of 2020. GDP is forecast to contract by 5% in the year to December from a sharp contraction in the June quarter. Our residential property prices are forecasted to decline by 15% over 2020. So, applying this scenario to our model sees our base expected credit loss or ACL rise $1.7 billion to $4.5 billion.

Our downside scenario, assumes similar immediate economic deterioration, but a prolonged recovery. And under this scenario, ECL is $7.9 billion. So, given the uncertainty of outlook, we've taken a prudent approach and increase the weight to the downside, which now sits at 40%. And then in addition to the modeled outcome, we've applied a further $446 million overlay and this reflects detailed analysis and judgment. As we've looked across the primary and secondary impacts of COVID-19, including various sectors and consumers.

As Peter mentioned, in response to COVID, packages have been the most important thing we've done for customers. We provided relief to consumers and business with interest and repayment deferrals together with the spokes support for the next 3 to 6 months. We have received significant applications, and as of Friday, around 9% of mortgage customers are seeking support. The mix of these customers is broadly consistent with our overall portfolio. Business customers taking up to furlough packages are more concentrated in those industries, most likely to be impacted by COVID-19. There's more detail in our IDP pack.

On capital, we entered this period of uncertainty having built strong ratios without CET1 at 10.81%, completing the capital raise last year, added 62 basis points to CET1 ratio more than offsetting model changes, overlays and notable items. Our organic capital generation is slightly lower given the lower earnings. We both have highlighted some sensitivity of capital to risk rate asset migration on this slide.

I'd say we have a strong capital ratio and while there could be more headwinds, we're well funded and we have options available to release some capital. We've outlined some considerations for the rest of 2020 given the uncertainty in environment, we can see a number of headwinds in the immediate outlook, low interest rates and low activity levels will have the largest impact while we also expect further pressure on wealth income.

We're committed to productivity disciplines. However, we will continue to support customers through this period and this is likely to add to cost. Looking at impairment charges and asset quality, we may see further stress and we'll keep you updated on that.

I'll now hand back to Peter.

Peter King

Well thanks Gary and let me sum up. We are in the middle of a once in a lifetime event. The impacts have been rapid and in many cases severe, and our priorities remained to protect our people and help our customers. For Westpac, we have a big agenda. We need to navigate COVID-19. We need to establish the specialist businesses and we need to embed lines of business to drive performance.

On the economy, COVID is unlike other downturns and that the economy is effectively being held back. One of the characteristics of previous recessions is that it's often not clear how to get out and the economy needs to be restarted. Australia is not in that position. As we progressive emerged from the shutdown, economic activity will come back.

Finally, as Gary indicated, we do have some financial headwinds in front of us, but our balance sheet is well positioned across capital funding and liquidity to navigate the period ahead.

Thank you and we'd be pleased to take your questions.

Question-and-Answer Session

A - Andrew Bowden

Thanks Peter. Now this is a joint market and media conference today. And so we'll take the first questions from the analysts and we'll take some questions from the media. And what I'll do is I'll announce the name first and then the line will be opened up for those to answer those questions. So I'll take the first question from Jon Mott, please.

Jon Mott

Yes, hi, guys, Jon Mott here. Just a quick -- two questions, if I could. The first one on the Specialist Businesses which you've just announced. You said it's 10% of revenue. Can you give us an idea in a non-bushfire normal year, what the ROE on those businesses were or what percentage of cash profit they generated? And secondly on Slide 35, you gave us the loans in Australia and they fell 3.2% in the month of April so a bit more into this next half. Can you just elaborate, was that just some of the drawdowns which happened in March being repaid or is loan growth collapsing in April?

Peter King

So, John, on Specialist Business units, we're working that through so that's something we'll give to you in the full-year results, because the other important piece is costs and there is lot of shared cost within the Group. And that's one of the reasons that I've also called out that we need to reset the cost base for a simple business in time. Sorry, Slide 35, was it, Jon?

Jon Mott

Also in business applications, credit growth goes backwards.

Peter King

Yes, I think, so we are seeing different things in the loan book in April. So if I just go through the segments, we're starting the institutional bank, we've seen both demand for new lending as corporates shore up their liquidity position. We have seen some drawdowns of unused limits. If we look in top end of business bank, there has been a little bit of activity in terms of new lending, but most of the activity has been people actually working with us on how to structure their payments. And then in mortgages and small business, most of the activity has actually been in delaying or deferring payments. So we have had some growth in new lending in April, but it certainly is coming off.

Jon Mott

And one of your peers has called out that business credit growth they expect to be up 13% to 16% this year as a result of drawdowns and people needing cash for help. What are your expectations? Are you expecting that this will be an ongoing increase in business credit growth or is that just a one-off that you saw around drawdowns at the end of the period?

Peter King

It's hard to tell, Jon. So I think there's going to be two phases. The first phase is I think businesses are remaining cautious as they work through how they navigate the period where we've got this social distancing impact. So it's really about just shoring up the position. We've given you a bit of a line of sight on the packages to give you a sense, so in one sense, that will mean, there's less paydown in the business book.

In relation to draw downs, I think, they'll be the combined impact of people wanting to have enough of liquidity around them particularly the top end and then we're going to have to see how we drive economic growth out the backend. So I think growth in the end will be about economic activity and that will depend on what opportunities people see and how government policy supports that growth.

Jon Mott

Thank you.

Andrew Bowden

Okay, I'll take a call from Jarrod Martin, please.

Jarrod Martin

Yes, thanks. Thanks, Peter, Gary. No surprise, couple of questions around Slide 19 and 21 and thanks for the disclosure. So Slide 21, you point out that you've got a AUD12 billion buffer above the 8% sort of requirement with unquestionably strong being at 10.5% and then the 8% level. To what level do you think that you as an executive and as a Board you're happy to actually draw into that buffer? Obviously, you probably don't want to come in at 8.01% and we've seen peers talk about sort of 9% being their level. So the first question, what sort of level are you willing to actually draw into that?

And then secondly, thanks to the disclosure around the credit risk weighted asset sensitivity of 105 basis points to 180 basis points, acknowledging that stress tests the different -- the provision calculations versus capital, but how does the base case and the prolonged downturn sort of align with what you've got on Slide 19 in terms of your base and downside, are they equivalent? And so we can sort of get a view and take a view on what a mid case or what a scenario is in terms of RWA inflation.

Peter King

Well, Jarrod, I might take the first question on capital. So I think we should be prepared to use the buffer. So we've built capital to 10.5% and the reason we did that was unquestionably strong, so the banking system could borrow money offshore through the cycle. Now the good news is I think our liquidity is pretty well-positioned, certainly for this bank.

So we have flexibility on capital. To what level will depend on what type of event you face. So I certainly say that we should let the ratio come down and then your real question becomes, how do you rebuild it. So you can rebuild it through organic growth. So as profitability comes back, you can rebuild it through raising capital, or you can rebuild it through releasing capital from the business.

And I know there is a sort of a big focus on where will you go to. The answer to that actually depends on the extent of the downturn. So the way we thought about it is, we've got a good starting point at 10.8%, there is a lot of less activity and more people out of employment at the moment. But we are unprecedented in terms of the government stimulus.

This -- we haven't seen this level of government stimulus and we've got to let it play through. And so we'll get a better line of sight of what's going on in the period ahead. So I'm not going to say there is a level at which we wouldn't be prepared to go. That depends on what you're facing and then how you think about building out of it, but I would say that we've built the buffers over the last decade and we should use them.

Jarrod Martin

Okay.

Andrew Bowden

Gary?

Gary Thursby

I'll take the second part of your question there, Jarrod. We did include in the pack some sensitivity just to give you a guide of how to think about this. As I mentioned in my presentation, we are at very early days and we're trying to project out two years. So, very uncertain, but what we have done is looked at different scenarios and how they might play out.

This is not going to be a linear shift in assets or risk-weighted assets. And so we've looked within the portfolio and just tested different sectors, different loans, different categories and that's why we've outlined this is a range and we've said at the low end at the base case end, there is a 3% to 5% potential shift and the capital impact of that might be 105 basis points.

And then we've given you a downside similarly with the range. So I would just use it as a range, use it as guide you could say that they're broadly consistent with the scenarios that we've outlined as we've set our provision. But it really depends on how this crisis plays out through the economy.

Peter King

Jarrod, I'll just add, there is plenty of information in the Pillar 3 as well and regulatory expected losses another lens that we certainly used to look at potential losses and there's -- and there is lots of PD and LGD information in the Pillar 3 as well.

Jarrod Martin

Thank you.

Andrew Bowden

We will take question from Andrew Lyons please.

Andrew Lyons

Thanks and good morning. Just you provided some really helpful disclosures around the rate composition to be deposit base on slide 14, just with this in mind, can you perhaps give us a feel for the two edge 20 NIM headwind from low rates from the perspective of despite the deposits captured by the replicating portfolio, as well as the non-replicated deposit. And then just a second question, Gary, on Slide 21 you mentioned you have some options available to relation capital. Can you just perhaps provide a bit more detail on both those fronts? Thanks.

Peter King

Well, just on -- just before Gary comment specifically, Andrew, on the margin it's not a -- it's not a normal half where an exit margin really gives you a lot of guidance and the reason that is -- is we're prepared to run a lot of liquid assets, a lot of liquidity at the moment and I called out the 31 be an increase in liquids. So that by itself just the massive that will pull the margins down. If we look at BBSW, which is a very important funding input, you're probably going to settle pretty low.

The exchange share account where the Reserve Bank is paying 10 basis points, 25 basis points for the long end of the curve probably somewhere between those, that will be a positive and a negative for us if you like. And then you've just got your normal pieces. I think the -- the chart itself gives you a pretty good feel the impact on the tractor and whatnot. And then we'll update you on other margin components in the future.

Gary Thursby

I think that's right, Andrew. I'd say at the full year we'll probably be describing the margin outcome as lots of moving parts. We've sought to give you the component parts within there. On the second part of your question in terms of capital opportunities, obviously, a strategic review of our Specialist Businesses may provide some opportunity for capital release, as well as internally continuing to focus on how we use and allocate capital across the Company.

We do expect to continue to organically build capital over time as well. And so it is very important to understand that the capital sensitivity we've shown in terms of risk weighted asset migration is over a two-year period. So we think we've got options and we think we've got some time.

Andrew Lyons

Very helpful, thank you.

Andrew Bowden

Question from Victor German please.

Victor German

Thank you, Andrew. I was actually hoping to follow-up on Andrew's question in terms of margin impact. I completely appreciate Peter what you were saying in terms of liquids and all other moving parts, but liquids don't actually have much of an impact on P&L might have an impact on margins, I guess your peers provided impact specifically related to lower interest rate, which has been -- which is being offset by re-pricing. Are you able to give us a similar number to what peers have provided.

And also on the tractor, are you able to tell us what the current rate is, so that's on interest rates. And then also just related question on that subject relating to New Zealand, I've noticed a couple of economists including yours is now forecasting negative interest rate in New Zealand. Can you just walk us through sort of the mechanics of how that potentially plays out in terms of P&L, obviously you're -- you don't have the biggest exposure and you have two fairly sizable, just interested in how it works both from a system perspective and P&L perspective. Thank you.

Peter King

Yes, why don't I take that one and Gary you do the March one. On -- so the best way to think about negative rates, I think is that's the wholesale market. So, I haven't seen or there's very few incidents around the world of consumer and business deposit rates as it might be actually going negative, it's more a wholesale phenomenon. And therefore that gives you the answer to the question, as well as your systems where it's mainly in your wholesale systems, your treasury systems, your WIB systems that need to accommodate negative yield curve. So that's something we've done work on, you can debate the merits of negative rates and whatnot, but it's more a wholesale funding phenomenon.

Gary Thursby

Just a little bit more color on margins, Victor. We have pointed out in the slide the deposits under 25 basis points and you can see those while they have been impacted by decreasing rates in the period, you can take that as a guide for deposit rates at that price from this point on. The tractor rate as you can see will continue to come down over time. It sort of depends how long interest rates stay low. But the current expectation is that they will stay low for some time.

On the other side, we are holding extra liquids and we need to continue to pursue, how we can improve margin on liquids. We are getting a benefit as Peter said from BBSW and some of the wholesale funding spreads are positioning us better for margin, but I'd say overall, we expect pressure on -- downward pressure on margins.

Victor German

I'm just a little bit surprised, Gary, that you -- in the past you've been probably one of the best in terms of disclosure of this particular issue. I'm just a little bit surprised, why you don't want to give us just a number in terms of the total impact of tract low interest rate and offset from re-pricing?

Gary Thursby

I think just because there is lots of moving parts, they are a big part of it obviously. I think the disclosure is good, you can -- it's all there. But there is more moving parts than usual at the moment. So we haven't -- we provided indications in the second half, we're not providing anything specific.

Victor German

Okay, thank you.

Andrew Bowden

Take question from Brian Johnson please.

Brian Johnson

Can you hear me?

Peter King

Yes Brian.

Brian Johnson

Thank you very much for the opportunity. Two questions if I may, just when we have a look at that slide 14, we can actually see that over the last six months the balance of these what I would presume interest rate and sensitive deposits has gone from AUD95 billion to AUD160 billion. Would I be right in suspecting that means that you get quite a big sum in the next half on the NIM to the extent that you're on hedge and thereafter the negative impact is more aside, and then I had a second question if I may?

Peter King

Yes, what's right, you got the deposit hedging, Brian, you're right is against all deposits. So to the extent that they not hedged through the tractor, we manage the asset and liability spread. So what you got to actually model out or decide on is what you're going to do with loans, loan spreads. So that's the right way to think about it.

Brian Johnson

Okay. So absent re-pricing will get a big hit and then away the impact going forward, absent re-pricing of the loan side?

Peter King

But as we said, Brian, you've also got to consider the BBSW position long-term wholesale costs as well will be a little bit different with excess for the term funding facility. And then I will say liquids again because I think Victor is right, if they don't impact your P&L, but they'll have a pretty big impact on margins, because we're holding quite a bit of liquidity at the moment.

Brian Johnson

Yes. And Peter just on that big data, what was the tractor rate, could you share that with us?

Peter King

You got it? We'll have a look for it, yes.

Brian Johnson

Okay. And then the second question if I may. Just on your capital intensity, your advanced IRRBB housing risk-weighting and I apologize I haven't been able to work out exactly what it is in this half, but it starts up well below the peers. Is the -- if we were to move toward APRA's Basel IV where they bring in 75% capital flow, that would actually create more asset risk-weighted asset uplift over and above what you've disclosed in the slides, is that correct?

Peter King

Brian, I just think that's right in terms of where we start, but I'd also encourage you to have a look at the business book as well. So the answer is your 70% question depends on the whole portfolio and have a look at the relative points on business. So I would love to not be having this conversation about what the final capital rules be, but it looks like it's delayed a little bit further, but I'd encourage you to have a look at both the business and the mortgage book.

Brian Johnson

So, but can you just explain what that actually mean?

Peter King

You got to look at average risk weighted density across both books, I think we're a little bit higher on business and little bit lower on mortgages.

Brian Johnson

Okay, thank you.

Andrew Bowden

Okay. We'll take question from Matthew Wilson. Please.

Matthew Wilson

Yes, good morning team and thanks for the opportunity. Firstly on provisions, ANZ revenue yourself now have been a very narrow band of around 8 basis points of gross loans and acceptances, they are at 72 basis points, that's unusual to say it narrowed, to what extent is APRA and the RBI been involved in helping you determine these COVID-19 provision?

And then secondly, obviously the sale of the Specialist Businesses would release about 90 basis points of core equity Tier 1, that's very valuable given the credit risk migration. How do you balance that price versus capital release equation because there are some businesses in there that have been on the market for a while and are a big challenge.

Peter King

Well, on credit provisioning, that's a decision for management and the Board and that's how we made that decision, Matt. On the Specialist Businesses units, so what we've said is we're doing a strategic review on those businesses, so we haven't made any decisions. So that's a bit of a hypothetical question at this point.

Matthew Wilson

Okay. And just that includes Panorama?

Peter King

That's in the platforms business, Matt.

Matthew Wilson

That's what I thought. Thank you.

Andrew Bowden

Richard Wiles, please.

Richard Wiles

Good morning, gentlemen, I've got a couple of questions if I could please. The first relates to capital and the second one relates to costs. I'll start with the capital, you flagged that the higher-risk weight density could reduce common equity ratio by 105 basis points in the base case. Can you tell us how much of that relates to housing and how much relates to business lending, is it essentially split 50/50 and in the base case you've assumed housing arrears of two times the current levels. What would happen to the housing arrears if the 9% of customers who've asked the lines of barrel went into arrears at the end of that six-month period?

Peter King

Richard, listen I'll get the request for more detail, but I'd just say these models are very complex. You need to look at both migrations, but you got to look at it by customer and then got to look at it over time. So we're not -- we've given you a lot of information between that in the Pillar 3 results. So and from here what we'd do is give information on portfolio performance as what we, what we can. So we -- we're going to stick to what's in the pack.

Richard Wiles

Okay. So, that's fine, Peter. The two times -- two times arrears for housing from current levels sounds like a very low level given how strong the housing book has been in recent years. And if those customers who have asked the deferral going through arrears, would it stay below two times current levels?

Peter King

It depends I mean there's two and I'll come back our base forecast is pretty aligned to our Westpac economics forecast, it assumes a very sharp contraction in economic activity through the next quarter. And then a rebound toward the end of the year as you've got less social distancing. And so, and the other big piece is the government stimulus AUD130 billion on job caper and probably over AUD300 billion in stimulus just more broadly and that's factored into those forecasts. So that's the one way you're going to have to reflect. We think that's -- we think that's a fair estimate at this point in time because we are in unprecedented times and the government has done a great job with that, with that stimulus, but that's really the thing to reflect on.

Richard Wiles

Okay. And if I could ask a question on cost please, in your February update you indicated that cost would be higher for the full-year than you previously expected, the full year result in '19 you said you thought costs would be up 1% this year, and in February you said you would provide a further update at the first half results. So do you have an update on what you expect cost growth to be for the full-year this year?

Gary Thursby

I'll make a few comments on that, Richard, if I can. We have called out in the presentation that we will continue to increase our spending on risk -- risk management across the Company. We've also called out that at times like this is really important to maintain operations and support our customers and support our people. So both of those will lead to increased cost during the next six months. Underneath, we will maintain our focus on productivity as appropriate. But we want to make sure that we're running the Company well to support the environment and to continue to strengthen risk management.

Richard Wiles

So is it fair to say that you started the year expecting 1% cost growth, in February your expectations had moved to a high level of cost growth and they've stepped up again since February?

Gary Thursby

I think February we were including the continued increased spend on risk management across the Company and other activities, that was pre-COVID. With the onset of COVID, we're seeing the need to step in and support customers, which is the right thing to do. So we will maintain our focus on that. Again, we'll continue to look for sensible productivity initiatives to continue throughout the year?

Peter King

Richard, I would just add --

Richard Wiles

Thank you.

Peter King

Last half we spoke about increased risk and compliance spend, we're still going to do that, that's a priority for me. We spoke about amortization increasing that's still going to happen. We spoke about AUD500 million of productivity that's the piece that Gary said is going to slow down. So, in part that's COVID related where we stopped restructuring at this point. And then we've got just our normal business there probably will be a need to add some credit, ex further credit expertise given what we're facing into and that's the only new thing since the quarter if you like.

Richard Wiles

Thank you.

Andrew Bowden

Take question from Brendan Sproules please.

Brendan Sproules

Good morning, it's Brendan Sproules from Citigroup. I just got a couple of questions on capital consumption. So firstly, given what you were saying earlier to Jon Mott's question around business lending growth in particular, what is -- what are you expecting in terms of risk weighted asset consumption, I know it's very low in the first half, I think there is only 1 basis point of capital.

And my second question relates to the decision to defer the dividend. What is the Board sort of looking for here when determining whether a dividend will be paid or whether it will be canceled, you're looking for the CET1 to rise to a certain level obviously in the next six months given the front ending of government stimulus and also the payment holidays are unlikely to have a really broad view of credit quality sort of by the end of the year. So few comments on that would be appreciated?

Peter King

Yes, so on -- you might add on this, but in -- I mean the big to mind is the balance sheet is in the institutional bank, a lot of it is drawing down existing limit. So hopefully it won't have too much of an impact on risk weights. And then the growth will really depend on new facilities if you like. And I don't, I think it will be modest, I don't think it will be as big as some of the other numbers that I've heard in the market.

On dividends, you're right we have deferred the decision, the background behind that was we accepted APRA's guidance that the industry should conserve capital at this point given the uncertainty in the outlook. We will monitor the situation, we will look at our book and the performance of the credit book is really a key piece to look at. And you're right, it is a bit unclear about when we'll get good line of sight on that. If the economy comes back on a quicker path then maybe a decision could be earlier if it comes back on a solid path than the last time we'd look at it will be as part of the full-year results.

Brendan Sproules

Okay. Thank you.

Andrew Bowden

Andrew Triggs please.

Andrew Triggs

Thanks, Andrew. Good morning, Peter. Could I just perhaps get you to make some more comments about the mortgage processing issues that Westpac is having given COVID impacts and what ways in which you're dealing with that, is that just throwing more cost or headcount of the problem. And then just perhaps just a follow-up on the asset quality, we saw deterioration across new impaired, watches and substandard etc about it if you -- the large thing impacts there, just some comments on I guess more generally where the weakness is coming from and it appears to be relatively broad based.

Peter King

Yes, on the mortgage operational issues, it is operations and we don't have as many people processing operational matters at the moment. So you're right, the way to fix it is more people in the short term. And then in the long term it's automation. So, we're going to do both of those. It's one of our top priorities to get that back into service level. We're probably a couple of weeks -- couple of weeks away from getting there, but it's a top priority. So, Andrew, what was your second question?

Andrew Triggs

Just on the broader asset quality leading indicators for asset quality new impaired growth, what is the substandard etc?

Peter King

There is a couple of names in New Zealand, a couple of names and we have a couple of names in the business bank. So whether you call that broad based or not I'll leave that to you to decide, but they're all sort of different reasons.

Andrew Triggs

Thank you.

Andrew Bowden

Okay. [Operator Instructions] Thank you. We'll take a question from Brett Le Mesurier please.

Brett Le Mesurier

Thanks, Andrew. Your commentary indicates that you -- put the next AUD100 million of capital into your life and general insurance businesses in the past six months, is that correct?

Gary Thursby

We would have -- I don't know the exact amount, Brett, but certainly with the storms that we saw in general insurance, I believe we did put some capital into general insurance.

Brett Le Mesurier

Can you tell me why is still showing substantial goodwill for your life in general insurance funds management businesses, it's nearly AUD1 billion?

Gary Thursby

Because the business supports that goodwill.

Brett Le Mesurier

In spite of the fact that profit doesn't support --

Gary Thursby

You got to look at profit over the longer-term, Brett.

Brett Le Mesurier

Yes, sure, you mean it probably don't have, doesn't matter. The base case in your common equity Tier 1 shows 105 basis points down, is that roughly equivalent to an average of one notch down for across the board on your credit quality?

Peter King

We haven't looked at it like that, so it's not possible for me to sort of explain that while we've done a bottom-up and looked at the models, the base case and then the judgment in particular is where we've picked up things that the sector overlays Gary spoke to in these results is where we picked up the areas that we've been particularly focused on.

Brett Le Mesurier

When you do UPD's and your LGD's that necessarily imply something about not notch, doesn't it, so you didn't go back and take a look at that?

Peter King

I understand you can look at an outcome in that way, but I'm not sure that helps you manage the credit portfolio.

Brett Le Mesurier

Okay. Thank you. That's all the questions I have.

Andrew Bowden

Question from Ed Henning please.

Ed Henning

Hi, thanks for taking my question. Just can you just touch a little bit more on what you're seeing around treasury and markets at the moment in April please?

Peter King

Gary, you want to take that?

Gary Thursby

Yes, as I mentioned, treasury had a -- had a great month in March as they were well positioned as rates declined, some of that float into April, but as you know, rates are -- low rates have stabilized somewhat. So that would -- they are not repeating the same performance in April.

Peter King

And just the -- particularly the treasury business is managing the balance sheet, interest rates are very important in managing the balance sheet. So with an interest rate curve that's going to settle around 25 basis points unless it moves around, it's going to be a harder six months for treasury I think.

Ed Henning

Okay, thank you. Appreciate that.

Andrew Bowden

Okay. We might take question from the journalists, now Joyce Moullakis from The Australian please.

Joyce Moullakis

Yes, hi there. Peter, thanks for the opportunity to ask question. I just wanted a little bit of color if I could just around the mediation process with AUSTRAC and where that's up to what some of the outstanding issues may be as that sort of comes to the point end of deliberations there, but also wanted to ask the second question around the Specialized Business division and the review that's going on there given the life insurance businesses potentially been on the block for a little while already, can you sort of give us a bit of a timeline as to whether there is a -- is there a sort of a time frame around specific bit within that business and how you go about that review?

Peter King

So on AUSTRAC it is amount that's ongoing, Joyce, so I can't add any sort of detail if you like, because it's discussions between us and AUSTRAC. On the Specialist Business what we are doing today is really focusing each of the executives on the portfolio that I need them to focus on. So in consumer and division, it's really about for Gill and David about focusing on the banking businesses. For Jason, who we're pleased is rejoining us, he is about managing specialist. And Jason starts pretty much immediately and his -- he will lead that business we run it, but he also will lead the strategic reviews, we haven't made any decisions yet on timing or what the next steps are that will come down the track.

Joyce Moullakis

So it will be a pretty lengthy process sort of 12, 18-month process, given where we are evolved with the COVID-19 crisis?

Peter King

Joyce, we haven't set any timeline. So I'm not going to -- so it's going to be a quick or a long process, we've got to manage a number of things through the process and we will do that.

Joyce Moullakis

Okay, thank you.

Andrew Bowden

Take question from Peter Ryan from ABC.

Peter Ryan

Yes. Hi, Peter. Thanks for taking the call. Well, just wanted to find out about what Westpac's view was on banks getting access to redraw facilities in loans, we see that that ME Banks caught a bit of criticism over accessing redraws, want to find whether or not Westpac had any plans to utilize the fine print and do that as well?

Peter King

It hasn't even crossed my mind, Peter and it's not something we will be doing.

Peter Ryan

And just on the basis of ME Bank, do you think that is good behavior or ethical behavior that they're doing it?

Peter King

Peter, I haven't actually looked at it to entry first, I've seen the press reports, but I don't know what's happened in detail, but as I said it's not something we'll be doing.

Peter Ryan

Okay, thanks very much, Peter.

Andrew Bowden

Take question from James Frost please from The Financial Review.

James Frost

Hi, gents. Thanks for taking the call. Peter, I think you mentioned earlier just when looking at the crisis, it's different in that the economy is being held back and once the breaks were off, things will be different, there'll be a stronger recovery. Just wondering if you could do a scene about your thoughts about the best way to to do that and an optimum timeline so for saying the economy recover. And just secondly on the dividend, you're talking about -- it's very difficult to get a good line of sight on that, potentially we might have to wait until the full-year result, I guess in November or certainly lighten. Is there any risk that the first half dividend or the decision to come to is that there is no first half dividend?

Peter King

So, James, on the -- so on the pathway out really the government is in the best position, they've got the best medical advice, have got good view on the economy and we'll be guided by the government on that. The role of this bank is to be set up to help customers at that point. So that's what I'm focused on and we will follow the advice of the relevant governance. On the dividend, the decision at this point is to defer the decision, so we haven't made any other decisions other than that.

James Frost

So within the range of outcomes is possible that there might not be a first half dividend or it might be a full dividend, is that as broad as it could be?

Peter King

We're going to look at the first half dividend down the track when we get more certainty. So that's what we decided to do today. I'm not going to get into the -- which angles or which options that could be, we are going to look at it when we have more insight.

Andrew Bowden

Okay. [Operator Instructions] I'll have to take one from Julian Petrosky please.

Unidentified Analyst

Can I -- just wondering on AUSTRAC and IBM commentary, well, sorry, Promontory Group owned by IBM, are they investigating any of their own software, is this because it's an interesting situation being owned by IBM?

Peter King

The issue you're getting there -- getting to there is, conflicts management and we've been very focused as we always are on on that issue in Promontory being involved. So I'm comfortable we've manage the conflicts appropriately.

Unidentified Analyst

Will they be looking at any of their own product though?

Peter King

In terms of detailed reviews of IT product that's -- that's not really something that we're looking at through those reviews.

Unidentified Analyst

And just on ITNs there -- there was a push before to kind of consolidate there and the statements and views expressed, how does it look now in the context of COVID because so many people were West cash before positive those now?

Peter King

Yes, well, I think ATMs, if you look at payment channels more broadly there is yes, less use of checks and cash and more digital channels that will be a trend that continues. I think it's an interesting question about whether or not cash usage will step down again off the back of what people have experienced through COVID. There is still lots of areas of the economy that use cash, in the end we'll see what behavior looks like down the track.

Unidentified Analyst

That's great, thanks.

Andrew Bowden

We take a question from Emily Cadman please.

Emily Cadman

Good morning. Emily Cadman from Bloomberg News. Thank you for the opportunity. As this crisis start to unfold, the bank obviously is going to have to make some very difficult decisions about which customers lines both mortgages and businesses are viable in the near future. What's the bank thinking about how you're going to handle that and does it have anything to the experience with the Royal Commission?

Peter King

Well, see in the -- the first thing is the bank is well positioned to support the economy in lend, so that's an important aspect of the go forward position that we'll be doing that and that helps the economy grow forward if you like. In relation to customers who end up with a position that they can't go back in the business, it's customer-by- customer that we'll look at. You got to look at the individual situations of customers and businesses and we'll have to work it through that way. We do expect there'll be more people working on those type of issues moving forward.

Emily Cadman

Now Australia banks have been in a very lucky position that they haven't had to contend with the recession for generation, what are you having to do to prepare your teams whether it's hiring new people, changing procedures and to ready yourself to get through this one?

Peter King

Well, I think we've done a lot of -- if you think about preparing, we've prepared the balance sheet through high capital and liquidity is in good shape. So they're the big levers and then you're right over time. Credit Management will become a bigger issue, hopefully our economist as an example thought that unemployment could hit 17% without the job creeper program from the government. So the government has done a great job with job creeper and we think it will peak at 9% and then fall back to 7% by the end of the year in terms of unemployment, but you're right, we will have more customers that need help and therefore have to have more people in those areas.

Emily Cadman

Thank you.

Andrew Bowden

Take question from John Jury please.

John Jury

Hi, Peter. A couple of questions if I could. Firstly, following on from there, the answer you gave to Jon Mott. I'm just interested on line demand. You said, small business and consumer was mainly around deferrals and big businesses just getting lines of credit. So it doesn't seem to me there is a hell of a lot of credit demand right now, would that be a fair assumption.

Peter King

I think --

John Jury

Secondly -- go on, yes you go on.

Peter King

You finish, John.

John Jury

Okay. Well, the second question was just -- I'm just interested if all you've been doing so far as deferring mortgages that has some caused the bank a lot of money at this stage. And I guess it's not so October when all the government stimulus since finished that you're really going to be able to know just where you stand?

Peter King

Yes, on the first question on line demand, I think it will -- businesses will really look for demand to invest. So at the moment, there is lower demand in the business market is how we are seeing it, it's mostly around shoring up people through this period. On the outlook, just one of the things with the mortgage packages is we do a check-in at three months. So I'm hopeful, we'll get some line of sight through those contact points at three months. And of course our business bankers will be out talking to customers all the way through, so that will get some line of sight on those discussions as we go through as well, John. So I'd -- while our normal sort of metrics of people missing repayments won't work in the next six months, I think there is otherwise that we can get a bit of a rate of what's going on.

John Jury

Okay, thank you. But it's really October?

Peter King

Three months will be --

John Jury

That's what you are going to do now?

Peter King

Three months in the mortgages will be June, July. So --

John Jury

Okay, thank you.

Andrew Bowden

Take question from James Thomson from The Financial Review.

James Thomson

Yes, hi Peter. There is a couple of dimensions in the presentation about rate setting the cost base, but not a lot of color around that. Obviously the Specialist Businesses might provide some opportunity there, but is this the time for some big decisions around branch networks and that sort of thing given the way COVID is changing the way, people use the banking system?

Peter King

Well in relation to that, that was one of our medium-term priorities if I put it that way. So if you have a simple business, you need a lower cost base. And so what we've done today is really got our divisions allocation of the businesses in a way that helps us focus on what we need to do. So, in relation to specifics in that, that will be something we're working through, branch networks always depend on people using them. So one of the interesting things will be what do we see in terms of activity in branch networks that more guides the size of the distribution and number of branches than anything else.

James Thomson

Thanks.

Andrew Bowden

Take question from Paulina Duran, please.

Unidentified Analyst

Hi and thank you for the chance to ask a question. I have just two quick questions, the first is in Panorama, did you -- can you just clarify what was the write-down that you took on Panorama please. And the second question is around your dividend decision and when do you expect an update for investors, other banks have mapped out their thinking around that even just some timeline? Thanks.

Peter King

On -- just on Panorama, the reason the revenues fall on is very much to do with low interest rates impacting margins in that business. Obviously, some re-pricing, the size of the write-down was about AUD30 million, so small in the scheme of things. In relation to dividends, yes, we haven't set out a timeline, we've just said the type of things we'll be looking at is how does the economy perform, what extra information do we get on customers and what type of impairment levels we're looking at. So we haven't set out a time, but we'll look at that through the course of the second half.

Unidentified Analyst

Great. Okay.

Andrew Bowden

I'll take a final question now from James Eyers, please.

Unidentified Analyst

Thank you for taking the question. Peter, it was around the post-COVID outlook and I was wondering if you've given much thought to which sectors of the economy might be subject to structural changes. Post COVID I mean obviously all these part of the economy getting used to working out of the office and commercial property is obviously an area that's been problematic now for Westpac in the early '90s, how you positioned the banks around the possibility that you'll get this sort of proportion of the workforce that might not come back to the big office towers in the center of the city?

Peter King

It -- we've maybe have a look at Gary's slide on the sector, I realize it, I think that gives you a bit of a guide of the areas that we're looking at closely. But you're right, property was one of the areas, commercial property was one of the areas that we had a good look at. It's hard to tell, I think in our case we've certainly had a lot of people learn how to work from home, a lot of managers learn how to manage work forces that are distributed. We've got some great technology now that we've recently put in Microsoft 365 and collaboration and our IT teams have done some great work to get that in and get the network capacity up. So there certainly is the opportunity I think to have a more distributed workforce and whether that be working from home, whether that be how we use our branches, I think that's all on the table.

Andrew Bowden

Okay. Well, thank you all and thanks very much for dialing today and it's trying times for everyone, would greatly appreciate your feedback on how you thought today went. And with that I'll call good morning.