Westpac Banking Corporation's (WBK) CEO Peter King On Q4 2021 Results - Earnings Call Transcript

Westpac Banking Corporation (NYSE:WBK) Q4 2021 Earnings Conference Call October 31, 2021 7:00 PM ET

Company Participants

Andrew Bowden - Investor Relations

Peter King - Chief Executive Officer

Michael Rowland - Chief Financial Officer

Conference Call Participants

Andrew Lyons - Goldman Sachs

Jarrod Martin - Credit Suisse

Richard Wiles - Morgan Stanley

Brian Johnson - Jefferies

Victor German - Macquarie

Brendan Sproules - Citigroup

Jon Mott - UBS Investment Bank

Matthew Wilson - Evans & Partners

Andrew Triggs - JPMorgan

Azib Khan - Morgans Financial Limited

Ed Henning - CLSA

Brett Le Mesurier - Shaw and Partners

Clancy Yeates - Sydney Morning Herald

James Eyers - AFR

Peter Ryan - ABC

Joyce Moullakis - News Corp

Kate Weber - iTnews

Disclaimer*: This transcript is designed to be used alongside the freely available audio recording on this page. Timestamps within the transcript are designed to help you navigate the audio should the corresponding text be unclear. The machine-assisted output provided is partly edited and is designed as a guide.

Andrew Bowden

00:02 Good morning, everyone, and welcome to Westpac’s twenty twenty one full year results. My name is Andrew Bowden, and I'm Head of Westpac’s Investor Relations. I'd like to acknowledge the traditional owners and the custodians of the land in which we meet, 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, Michael Rowland. Without further ado further, I'll hand over to Peter. Thank you.

Peter King

00:29 Well, good morning, and thanks for joining us. Twenty twenty one was an important year for Westpac. We are delivering on our refresh strategy, changing the way we operate, and we've restored momentum in key businesses.

00:42 It's been a complex year with COVID impacting the economy, our customers and how we work. While operational performance has improved, our financials are not yet where we want them to be.

00:54 Cash earnings rose strongly as impairments were better. However, core earnings were lower. Our balance sheet is in good shape, and this allows us to return around five point seven billion to shareholders through the final dividend and share buyback. This morning I’ll reflect on the full year result and the changes we're making in each division before Michael will cover the financials in more detail.

01:19 Across our fixed simplifying perform priorities, we're tracking in line with the plans outlined at the start of the year. In the fixed priority, the customer outcomes and risk excellence program or core as we know it, is largely through a design phase and will soon release a further two Promontory reports.

01:38 The other significant area of delivery was financial crime. We've responded to all areas raised in the AUSTRAC case. We've made significant progress simplifying our portfolio businesses, which I'll touch on shortly. In Perform, the highlight was restoring mortgage growth, and we also grew business lending in the second half. On costs, our eight billion target is a key focus. And with competition and lower interest rates impacting revenue, we must and will reset our costs.

02:12 Cash earnings improved significantly to five point four billion with ROE just under eight percent, and our strong CET1 ratio twelve point three percent allows us to return significant capital to shareholders.

02:27 So, turning to the result, both reported net profit and cash earnings were up significantly. The two main drivers were three point eight billion turnaround in impairments, as COVID’s impact wasn't as big as we feared last year, and a one billion dollar fall in notables.

02:46 Our EPS and ROE were both higher, but slightly lagged earnings growth given the capital we raised in twenty twenty. Stripping out notable items gives us a better indicator of underlying performance and on that basis, cash earnings was still higher, although core earnings was softer from lower margins and higher expenses.

03:07 The decline in margins reflects both the market and our decision to grow mortgages. Expenses were higher as we added resources to improve risk management and reshape our business and do it quickly. Last year, we refreshed our purpose and strategy. I'll use this slide to give our people context behind our priorities.

03:30 The main change has been adding climate as a performed priority, which we announced at our ESG update in September. To deliver this strategy, we are fundamentally changing how we operate, and that starts with a simpler business portfolio.

03:49 The sale and non-core businesses has been active and you can see the great progress at the top of this slide. These transactions have boosted capital by twenty six basis points this year.

04:02 As we turn to twenty twenty two, our major focus is to progress the exit of [super platforms] [ph]. The second leg is simplifying our banking operations, the lines of business operating model is creating clearer end to end accountability and faster decision making, and the outcomes can be seen in both mortgages and business sending.

04:26 We're simplifying products and fees and just as an example, we've reduced the number of mortgages on offer for one hundred and sixty one to sixty eight and have the associated fees. This is reducing complexity allowing us to better focus on core banking in Australia and New Zealand.

04:47 To deliver our transformation, we need to change the way we work embedding performance and risk cultures and simplifying everything we do. Of course, it starts at the top and I now have my team in place. And in late twenty twenty, we implemented Mckinsey’s Organizational Health Index to monitor progress.

05:09 Over the last twelve months, our scores increased four points to seventy four, placing us close to the global top quartile for this measure. We have seen encouraging improvements in the culture measures of leadership, accountability, and direction.

05:28 Now, risk culture is also improving. I can see this in how we manage complaints, the progress in restoring high-rated issues or resolving high-rated issues, and the confidence people have in speaking up. Process simplification through mapping of end-to-end processes and controls helps us better manage risk and simplify the business.

05:53 Twenty twenty two will see us continue this focus, particularly using digital to automate customer processes. I've been pleased with progress consumer this year. Cash earnings rose fourteen percent with credit quality in good shape, although core earnings were lower as margins reduced and resources increased for fixed projects.

06:16 Operationally, we improved the franchise restoring mortgage growth following several halves of contraction. We also lifted customer acquisition with our new app and focus on millennials. While our MPS is not where we needed to be, it started to improve as we enhance digital capabilities.

06:37 And digital has been a priority for the team with our new iOS app launched this year. It's a digital bank in your pocket, available twenty four seven, increasing both the speed and functionality of what customers can do online.

06:52 One of the features introduced was a new deposit opening process and this reduced the time to get a new customer up and running to just a few minutes. This help lift customer acquisition, which is critical to building the strength of this franchise. The other significant change has been in the management of debit and credit cards.

07:14 While many of us continue to use plastic, there's now pathway to fully digital debit and credit cards. With the new app, you can show the card. It allows you to download digital cards instantly. We've also made the CVC dynamic, which is a game changer in security, particularly online.

07:36 And turning around mortgage performance was a highlight and we delivered ten months of consecutive growth this year. To do well in mortgages, we must be competitive on price, application, speed and borrowing capacity or volumes drop off quickly.

07:52 Following our focus on speed and competitive pricing, we are now back in the market. We’re seeing over seventy percent of applications auto decisioned, while customers are also using the app to track the progress of their applications, which is taking pressure off the mortgage team.

08:10 We've completed the rollout of the digital mortgage origination platform through our network, and with first party done, we're now rolling out the platform to brokers. There has been some discussion on processing times and we have a clear roadmap for further improvements next year.

08:29 So, having restored momentum and with brokers beginning to use at digital processes, were well placed for the year ahead. If we turn to business, while the division lifted cash earnings significantly, it was more challenged at the core earnings line.

08:45 Lending decline through the year, a function of more modest demand and our frontline fixing issues rather than spending time with customers. We also tighten our credit standards at the onset of COVID, but these have now been reversed and sees us winning customers back.

09:02 Following changes in the first half, bankers is spending more time with customers and a new digital onboarding process has also helped. The outcome has been higher ending in the second half and a healthy new lending pipeline. Institutional has undergone significant change over the last [eighteen months] [ph], having refocused the business and refresh the leadership team, we're now well placed, with this reduced offshore exposures, slim down correspondent banking, and simplified the product set.

09:36 We also had a tough year in markets income, which was a revenue drag on web and the group. The bottom right chart shows the reduction in offshore lending increase domestic activity, and a rise in M and A activity was a feature of the second half.

09:53 Well this now low risk, the changes have impacted revenue, however, they're mostly behind us. So, we're now shifting our attention to growth, particularly for climate solutions. New Zealand delivered a strong financial result achieving good growth and improved performance of both cash and core earnings.

10:13 Similar to Australia, New Zealand is working through its program to lift risk management and digitize the bank. That changes is being accompanied by the BS11 work to operationally separate from Australia. And these items particularly impacted second half expenses.

10:32 Growth in New Zealand mortgages were strong and while we were slightly under market, we grew that book ten percent this year. New Zealand deposit growth was also solid with plenty of market liquidity.

10:44 Margins were a little higher over the year, but down half on half, and while lower rights contributed to the decline, the New Zealand Central Bank is now increasing interest rates.

10:57 On capital, we ended the year at twelve point three percent well above APRA’s unquestionably strong ten point five percent threshold. Since the benchmark was announced in twenty seventeen, we've restructured our mortgage portfolio reducing the portion of investor and interest only, as well as applying a mortgage RWA flow.

11:17 So, we feel well placed to respond to APRA’s final capital rules expected later this year. On a pro forma basis, taking into account the buyback announced asset sales, our CET1 ratio is eleven point eight percent. We'll finalize the management buffers post APRA’s announcements, but given the strength in the balance sheet, we decided to return up to three point five billion through a buyback.

11:45 And the off market structure works well for us as we can buy back shares at a discount, monetize some of their franking credit surplus and generate our reduction in the share count. And this supports future earnings per share and dividends per share and that benefits all shareholders.

12:05 The strength of the balance sheet from a credit and capital perspective enabled us to lift the dividend to zero point six zero dollars per share. The principle behind our approach remains the same, and we're targeting a medium term sustainable pay-out ratio of around sixty percent to seventy five percent. This is a little higher than we indicated at the half. In this half, we look through notables as many had no impact on capital, and on that basis, the pay-out ratio was seventy percent. We will neutralize the DRP by buying shares on market.

12:41 Well thanks. And I’ll now hand to Michael to take you through the numbers.

Michael Rowland

12:46 Thanks, Peter, and good morning. When I look at the second half result, I'd make three points. First, low interest rates and competition hit margins across lending, trading income was weaker, and costs were up as we focused investment on the things we need to do now and for future performance.

13:06 Second, the balance sheet is strong. Capital generated from operations and divestments has enabled us to increase the dividend and return capital to shareholders. And finally, we have a clear path to our cost target in twenty twenty four. Today, I’ll will provide more color on the numbers, achieving our cost target and considerations for twenty twenty two.

13:29 Let's turn now to the detail. Notables had a one point three billion dollars impact on cash earnings, up one billion dollars on the first half. Remediation and litigation costs were one hundred and seventy two million, as we increased provisions, mainly in Advice and in New Zealand and for litigation matters, including resolving outstanding investigations.

13:52 Asset write-downs, including goodwill and capitalized software, were nine sixty five million. As previously disclosed, we wrote down mainly intangible assets in WIB following the annual impairment test. This concluded that we could no longer support the carrying value of these assets, with exited businesses and lower interest rates impacting revenue.

14:17 Asset sales and revaluations were one hundred and ninety two million dollar drag as we progressed the sale of businesses. The charge was for additional separation costs and write-offs related to the sale of life insurance. This was partly offset by the gain on general insurance and earn out payments from Vendor Finance.

14:36 The sales of our specialist businesses underpin our simplification plans reducing risk and complexity, but there's also an earnings impact. The bottom of this slide summarizes the contributions of the businesses sold. We've previously flagged a one billion dollar after tax charge in twenty twenty two for the estimated loss on completion on the sale of life. This will be treated as a notable item and be recognized in non-interest income.

15:06 Notable will be less of a feature of our results going forward. This chart summarizes second half cash earnings with net interest income, non-interest income, and expenses all contributing to the decline. Excluding notable items, net interest income was down a couple of percentage points with higher lending offset by lower margins, the opposite of the first half.

15:30 Non-interest income decreased, primarily from lower trading income. Expenses were up nine percent, mainly from workforce increases, the lower utilization of leave balances, and higher investment spend on fixed.

15:46 Asset quality has continued to improve, and we recognized a credit impairment benefit in the second half, albeit lower than the first as we fully provided for the foreign finance exposure. Tax was lower with an effective tax rate of thirty six percent above the Australian corporate tax rate, reflecting the non-deductibility of some notable items.

16:09 Turning to lending. This was a pleasing aspect of the result and reflects the focus and priority we have brought to the mortgage business. Total lending increased driven by growth in Australian mortgages where the buoyant property market and the process improvements we have made ensure that we grew in each half this month.

16:29 Investor Lending continued to contract. This reflects our lower borrowing capacity as we have adopted a more conservative approach to credit assessment than some in the market. Australian institutional lending improved from increased demand in a structured finance and retail segments. Business lending stabilized as our bank is focused on supporting customers in our core markets offsetting elevated repayments from ample system liquidity.

16:58 New Zealand continued to grow, with higher housing lending supported by continued growth in its property market. Personal lending declined as customers paid down their unsecured credit and shifted to alternatives.

17:12 Turning to look at this Australian in mortgages in more detail. We're pleased to deliver a turnaround. In the second half, we grew just ahead of major bank system with growth in the owner occupied segment. A better performance has been due to a strong property market, digital origination, additional lenders, improved productivity, and targeted pricing.

17:35 Looking at the composition of the book, we saw a decline in interest only and investor loans. Interest only is now just sixteen percent of the book while investor is down to thirty four percent. Fifty two percent of flows have been in fixed rate lending as customer preferences for this type of loan continue in the low rate environment, but the change in composition has impacted margins, so let's turn to that.

18:02 The eleven basis point impact from lending spreads was mainly from intense mortgage competition along with the mix shift to fixed rate lending. Competition also put pressure on business lending spreads, while the reduction in personal lending balances dragged on margins too. Deposits contributed four basis points from lower TD rates and the continued shift to add coal deposits. The total benefit was smaller this half as a significant portion of add coal deposit rates had already reached their floor.

18:34 Funding and liquidity generally added to margins as wholesale funding costs were lower as we drew down our full allocation of the TFF. Lower earnings on hedge capital balances also reduced margins. Going forward, we expect the Tractor to have a reduced impact as we moved hedge capital back to the three year swap rate.

18:56 Treasury’s contribution fell two basis points, reflecting lower volatility in the half. The September exit margin is around one hundred and eighty basis points, excluding treasury and markets.

19:10 Excluding notable items, non-interest income was down six percent, mostly from the fall in trading income. Fee income was up one percent with higher institutional fees offset by a reduction in fees from correspondent banking. Wealth and insurance income was down eight percent, mainly from the lower revaluation benefit of life insurance liabilities and as customers migrated onto the lower margin Panorama platform. This was only partly offset by higher general insurance income from fewer extreme weather claims and better LMI income prior to these businesses being sold.

19:49 Trading income was down, particularly in fixed income, due the difficult trading conditions for us. Other income also included revaluation gains on investments held by Reinventure.

20:01 Turning to expenses. As we’ve called out, notable items continue to have a major impact adding one point six billion dollars to cost in the half. Excluding notables, costs were up nine percent. We accelerated work on key fixed projects with higher workforce costs. We expect this workforce to fall away progressively as we embed our risk management uplift. Another significant contributor was the lower utilization of leave balances as staff took less leave during the latest round of COVID lockdowns.

20:36 Investment spending, excluding the fixed component, was in line with our normal uplift over the second half. Spend remains heavily weighted to fix. Our core program is improving risk management and our culture. We've also improved our financial crime capability and systems invested to meet changing regulatory requirements and delivered a single Australian complaints handling system.

21:03 The increase in costs was necessary to meet our obligations and set us up to deliver on our cost target. So, let's turn to that. At our last results, we committed to a three year cost plan with an absolute target of eight billion dollars by twenty twenty four. We remain committed to that target and expenses in twenty twenty two are expected to be lower.

21:26 As we move to delivery, we are now providing more clarity on our plans. The decrease in cost is expected to come from a reduction in notable items and across three broad areas. I've called out the one point one billion dollars in expenses on the fixed priority that are one-off in nature. These are mostly related to temporary expansion of our workforce to improve our risk and compliance environment and to respond to historical issues.

21:54 These costs will phase out over the next two years. On portfolio simplification, specialist businesses account for around eight hundred million dollars of costs. We've made progress on divestments and we expect to see the benefits of lower costs this year. The remaining businesses do account for the majority of costs. And as Peter has said, we're committed to exceeding them.

22:18 Once these divestments are completed, we will be left with nine point one billion dollars of costs in our core banking business in twenty twenty one terms. We are continuing to simplify the business through streamlining and digitization in line with customer preference. We've already made good progress in twenty twenty one.

22:39 Our digital mortgage platform has made our processes faster and better. All major brands are on the platform and brokers are beginning to access it. And seventy five percent of customers are accepting contracts online. And our upgraded iOS mobile app has been rolled out allowing customers to deal with this digitally for their banking needs. There's still more to do, but we're progressing digital first at pace. And I'm confident of the strong customer and cost outcomes this will achieve.

23:11 Finally, on organizational simplification, we are reducing our property footprint as we exit some CBD buildings. The next phase of simplification is further embedding our line of business operating model, including streamlining our head office.

23:28 At the first half, we provided the key metrics we're using to track the progress towards the twenty twenty four target. We have updated these and you can see we are implementing our digital first approach. We've also added our total fixed one off spin to this tracker, as we see this as an important metric. The path to eight billion dollars is clear. Every executive and general manager has a three year plan and an annual target and deliveries in their scorecards. As I've have said at the half, we are committed to this target.

24:01 Moving now to credit quality. Almost every credit quality metric has improved. On the left, you can say that stress has reduced with lower watch and substandard as more corporates were upgraded. Employment is robust, asset prices have increased, and savings are high, positive trends for credit. On the top right, you can see thirty day mortgage delinquencies ticked up, given our treatment of the second round of COVID packages.

24:31 We will re-age these lines at the end of their three month deferral period, this should see most of them stay out of the ninety day bucket. There is more information on this in the pack. Unsecured lending delinquencies declined despite the contraction in the portfolio as the underlying performance improved.

24:50 Our provisioning comprises both modeled outcomes and judgment. Total provisions were one hundred and forty basis points of credit risk weighted assets and remain above pre-COVID levels, both despite the releases in the half. In aggregate, provisions were down nine percent over the half, although the level is still twenty seven percent higher than pre-COVID.

25:13 The group has maintained the economic scenario weights, given remaining uncertainties, and applied judgment in the calculation of overlays. Our forecast show that recent lockdowns will negatively impact GDP for calendar year twenty twenty one, but we expect to sharp rebound in twenty twenty two or be it off a lower base.

25:34 Unemployment is expected to be lower, and we expect the property price increases to moderate to high single digits. The overlay reduced over the half as customers who had taken out deferrals following twenty twenty COVID outbreaks recommenced payments. However, we retained the bulk of the overlays as there's still uncertainty how customers will recover from recent lockdowns and when the Australian economy completely opens up.

26:02 Shifting to the composition of the impairment charge. The only increases in new IAP’s in the half, reflecting a group's exposure to forum finance. Write-backs & recoveries were also better as a small number of impaired exposures were refinanced. Write-offs direct were down consistent with the decline in lending and lower delinquencies in unsecured consumer and auto portfolios. Model collective provisions reduced further this half in line with improved credit quality and better economic outlook.

26:36 Capital remains a strength with the CET1 ratio at a healthy twelve point three percent. Cash earnings was the biggest contributor followed by capital released from completed divestments. The payment of the interim dividend consumed forty nine basis points of capital. Risk weighted assets increased on the half and were broadly flat on the prior corresponding period.

26:58 The sixteen basis points decrease from risk-weighted assets in the [order fall] [ph], mostly related to the application of the mortgage risk weight floor of twenty five percent. On the right of the chart, we show the impact of the share buyback and the benefit from asset sales announced, but not yet completed.

27:15 Pro forma CET1 is expected to be eleven point eight percent. Peter has already touched on the rationale for the off-market share buyback. The features of the buyback are on this slide. I’ll refer you to the details in the buyback booklet and encourage you to read it.

27:32 I'd make three points. First, this approach allows us to buy back shares efficiently and at a discount to the market price. It benefits all shareholders, as reduced share count supports earnings per share, dividends per share, and overall return metrics. And the buyback allows us to distribute further franking credits to shareholders.

27:55 The group's franking balance remains healthy even after allowing for the buyback and payment of the fully franked final dividend. Twenty twenty two has a number of dynamics that we see playing out and we’ve set them out here for you. We expect to maintain momentum in the mortgage market and grow in line with system.

28:15 While our focus on business lending is bearing fruit, it will be a longer fix, and we are encouraged by pockets of early growth. Margins remain under pressure with competition and low interest rates likely to continue. Front book, back book pressure and fixed rate lending in mortgages were likely further away on margins.

28:37 The Tractor is expected to have less of an impact compared to the last half as we have moved to a three year hedge on capital as interest rates rose. Non-interest income will benefit from higher economic activity; however, divestments will drag. Markets income is difficult to predict given the impacts of QE and volatility.

28:58 Costs, excluding notables will be lower in twenty twenty two and I've provided color on this already. Credit metrics are in good shape and the economic outlook is positive. And finally, we expect APRA’s final capital rules, while the removal of the CLF will also impact capital.

29:17 With that, let me hand back to Peter.

Peter King

29:21 Well, thanks, Michael. And let me sum up. Twenty twenty one saw us improve our operational performance, laid the foundations for better risk management, and make progress on portfolio simplification. In the year ahead, we expect a stronger economy and that's supportive for banking.

29:39 In twenty twenty two, we're focused on three big priorities. Firstly, growth in our core businesses, in particular, maintaining growth in mortgages and lifting growth in business and WIB. Secondly, resetting our cost base, and finally, ongoing simplification and digitization including further divestments. So, overall, I'm confident on the outlook for Westpac.

30:03 Let me now hand to Andrew for your questions.

Question-and-Answer Session

A - Andrew Bowden

30:08 Thanks, Peter. Can I take a question from – we'll just have one question. [Operator Instructions] I'll take the first one from Andrew Lyons lines, please.

Andrew Lyons

30:19 Thanks, Andrew and good morning. Just a question on your margins. You've noted that your exit NIM is about seven basis points below the half average, can you perhaps just provide a bit of detail around the drivers of the weakness in the exit NIM vis-à-vis the half average, is it broad based or are there some one-off items that might have given the NIM lower at the backend of the half?

Michael Rowland

30:47 Thanks for the question. So, the biggest impact on NIM in the half was the reduction from lending as we indicated in the slide. So, that's a reflection of both the mortgage margin, as well as the business lending margin where we are responding to current market price, and also it reflects the mix shift from fixed rate, from variable lending to fixed rate lending, both, for new lending and also from the back book. So, they are two big impacts that impact the exit margin in the second half.

Andrew Lyons

31:22 Okay. Thanks. And just a second one, Peter have about thirty billion dollars of CLF, which over the course of next year will need to be shifted into HQLA’s, can you perhaps just talk about what impact we think that that will have on the FY twenty twenty two NIM?

Michael Rowland

31:36 So, as we've indicated the CLF does reduce to zero over twenty twenty two. We do need to add HQLA to the portfolio. We'll do that over time. That'll be a function of purchasing additional HQLA through additional funding, but also it'll be function of their deposit rising capabilities. So, we’ll have an impact that we expect it to be minor at this point.

Andrew Lyons

32:01 Thanks.

Andrew Bowden

32:03 Next question from Jarrod Martin, please.

Jarrod Martin

32:07 Thanks, Andrew. Thanks, Peter. Thanks, Michael. So, probably more questions on margins. Can you give us an indication, what your current spread between your front book mortgage margins and your back book mortgage margins so we can sort of utilize that to try and understand what a trajectory from here will be. And then just more broadly on managing margins, Westpac used to be sort of known as prioritizing margin over volume, that seems to have flipped, that volume is a more important driver, going forward. So, just wanted to get some comments on that change in philosophy.

Peter King

32:47 Jarrod, I’m going to take the second part and then I'll hand to Michael further, front book back book question. In terms of the volume margin trade-off, we recognize that we have been seating share and in fact in mortgages the book was contracting. And you're right that's a good strategy to manage margin, but over time, we need to grow our customers. We need to grow the franchise. And with transactions and deposit you get whole of customer relationships.

33:19 So, the way we've thought about it is, we want to be back at market. We've got to see these books growing again. We've got to attract customers. And to do that, we've got to be focused on three things in our mind. First is, the service speed of turnaround. Second is, lending capacity, and the third is competitive pricing. And that's what we've been working on in all our books, you've seen it most in mortgages this half.

33:46 The other thing I would highlight, which is a bit unique at this point is fixed variable has been a very big impact as Michael spoke about in terms of customer preferences. But for us, we've got to grow the franchise. I've got to go revenue over time.

34:03 It's been – we've turned out about twenty percent of the mortgage book into the new market pricing, I think it is this year. But Michael do you want to talk about…

Michael Rowland

34:10 Certainly. So, as Peter said, the way we look at it, we're responding to market pricing. So, we need to remain competitive and that means in a low interest rate environment, the front book, back book spread does decrease, that's exacerbated by the mix shift to fixed rate lending. So, we've given you an indication by the exit margin to give you a trajectory on our margin, but what I'd say on the front back, back book, there's lots of factors in there. That you've got a potential – you've got the actual interest rates and what might happen in the future, you've got all those figures.

34:48 So, I think the best way to look at it is look at the RBA stats, they will give you a view of the industry and ourselves. So, I think that's the best way to look at it in that context.

Jarrod Martin

34:59 Michael, would you suggest that your given historical approach that you would be worse than the industry average for front book back book, I mean having a larger gap?

Michael Rowland

35:10 Can only talk to our numbers. I can't really talked to the industry as a whole.

Peter King

35:14 I think what is different about Westpac is the fact that we've reshaped that mortgage book so materially since twenty seventeen. So, interest only has a higher margin as does investor and we've materially reshaped the mortgage to be much more owner occupied P and I compared to where it was twenty seventeen. It does mean we've given up revenue.

35:40 We had that same shape of book, we would have materially higher revenue, but we just thought that was the right thing to do. Certainly, as we set up for the different risk rates coming in later in the year.

Jarrod Martin

35:52 Okay. Thank you.

Andrew Bowden

35:54 Thank you. Question from Richard Wiles.

Richard Wiles

36:01 About the output cost, you said the costs will be lower in FY twenty twenty, but gone up seven point five percent in the last year. So, that doesn't give us much comfort, certainly doesn't give us much guidance as to where the cost might be next year. Last years are at ten point or twenty twenty is at ten point two, the illustrated guidance on slide twenty five suggests, they'll be around about that level. So, would it be fair to conclude that your guidance for FY twenty two is that costs will be back in line with the FY twenty level of ten point two billion, excluding notable items?

Michael Rowland

36:47 Thank you Richard for the question. What we're trying to do in the presentation today is, giving you a view on how we say cost going down over the next three years. We remain committed to the eight billion dollars. We're not going to disclose what we see as the cost base for next year, but you can see that a lot of the reduction is in relation to the removal of the fixed one-off spend. That reflects us getting through a lot of the design phase on our core and risk uplift programs and that will, as I said, that will come off progressively over the next two years and the underlying cost base and we've shown you that nine point one in twenty twenty one terms will reduce as we digitize and streamline the portfolio.

37:27 So, that will come off over time, it's probably more likely to come off in a trajectory sense in twenty two and twenty twenty three, but as we've given you guidance, it will come down in twenty twenty two.

Richard Wiles

37:39 So Michael, slide twenty two, slide twenty five, if you just look at it, those costs will be ten point two billion in twenty twenty. So, including the specialist businesses and [the mix] [ph]. Should we ignore that drawing, is that drawing to scale? Is that illustrative or is it guidance?

Michael Rowland

38:05 Richard, we don't give guidance on our costs for next year. What we're saying with – that shows you the trajectory of how we're looking at it. That's the best way to look at it.

Richard Wiles

38:15 Thank you.

Andrew Bowden

38:17 We’ll take question from Brian Johnson, please.

Brian Johnson

38:22 Thank you very much. Just to reiterate Richard's point, if you have a look at slide twenty five, it looks like ten point two billion to me, I'm really confused just the way you're saying that's an error in the drawing or whether we should think that’s a guidance, I’m going to assume that the drawing is correct. And I think the whole market will, which is why the share price is down six percent, but the question that I actually had was if you have a look at the exit run rate NIM that was down quite a bit, the problem is that according to the APRA stats, we can see that the owner occupied book is still growing and the invest book is still shrinking. Is the run rate NIM in the next month after the exit run rate, is it even lower again? Because the mix would suggest still declining?

Michael Rowland

39:04 So, you're right Brian, we have grown the owner occupied book this half and the year. Our intention is to provide solutions to all customers and we will focus on growing both investor lending and business lending, which has been indicated, has a higher margin. So, we're actually pleased that we've got growth in owner occupied, but we are focusing on growing those other two books.

39:30 So, we've given you the exit margin as a view of how we're going into the first half of twenty two. That's the best guidance we can give you, but rest assured, we're focused on growing those other higher margin segments.

Brian Johnson

39:43 Yes. But Michael, the point is right, isn't it, given the last month, we saw owner occupied app, and we saw invested down, the exit run rate is probably not commensurate with the margin erosion that you'll see in the next month as well. Can I just confirm that’s correct?

Michael Rowland

39:57 That's the trajectory. That’s a reasonable conclusion to draw.

Peter King

39:58 Brian the only other thing is, as Michael said there is changes to the way we hedge capital which will benefit from the rate rises which have been pretty steep at the back of the year, and there were some deposit rate pricing changes recently as well.

Brian Johnson

40:20 Thank you.

Andrew Bowden

40:22 Take question from Victor German, please.

Victor German

40:26 Thank, Andrew. I was hoping to just follow-up on cost dwell. I appreciate you don't want to give guidance for twenty twenty two, but you did say that costs are going to be lower, would you be able to at least provide us the base that we should work from given there is a few moving parts, including divested businesses just to be useful to understand down from what number? And then as a related question with specialist businesses I can see in that, appreciate the illustrative part, but it looks like you're providing or you're suggesting that they will drop out by twenty twenty three, should we assume that that is the timing of your divestments or should we now start thinking about potential stranded costs with businesses as well?

Michael Rowland

41:15 So, just to give you some assistance on that side. The best way to think about the base is to look at the graph excluding notable items. So, that's how we think about it. So, each of those each of those segments will decrease. So, we will have less costs in fixed one off. We will have. As the specialist businesses sales complete, those costs will come out of the cost base, and we've given you some numbers in the IDP to help you do that. And as I said, we expect a reduction in the BAU cost and we’ve given you the base of that nine point one.

Victor German

41:53 So, Michael, just to be clear, you are expecting a reduction in the cost base ex the extra divestment n an underlying basis?

Michael Rowland

42:03 That's right.

Victor German

42:04 Okay. And just one thing to confirm also with this fixed number of one point one billion, which you're expecting to reduce over time, I noticed that in your investment spend, you've got obviously increased quite materially this year is now around two million dollars, but within that number, that seventy percent relates to [indiscernible]. So, as that number reduced, as presumably you are not expecting your investment spend to reduce well below one billion dollars, does that mean that based on capturing of that investment in the DAU line, how should we sort of think about that mix?

Michael Rowland

42:41 Yeah. The best way to think about, as you say, the investment spend increase this year is predominantly on the fixed spend. As I indicated in the presentation, we've increased our spend on financial crimes, so we've upgraded systems and capability, we've upgraded our compliance management system and we’ve invested generally across our three lines of defense.

43:00 So that's increased. That will come down over time as we exit the specialist businesses, get our risk management framework in better shape, and then have the remaining investment focused on our core banking business. So, we do expect it to go down, but we've still got a little bit of work to do yet.

Victor German

43:20 Thank you.

Andrew Bowden

43:21 Take question from Brendan Sproules, please.

Brendan Sproules

43:25 Good morning. I just got a question on the fixed rate mortgage market, what are your expectations for the competitiveness in that market, just given that swap rates pretty much across, sort of one to five years have really expanded in the last month? And then I have a second question just on costs, I mean, you obviously had to accelerate as you've mentioned some of the fixed costs in this year, which sort of has surprised us today. What are the uncertainties around your cost base for next year that you're not sort of prepared to offer as a target today?

Michael Rowland

44:02 So, Brendan, obviously, we can't talk about any future changes in interest rates. That's tricky area for us, but in terms of sort of fixed rates in the market, if I think about where they were back in March, the three-year swap right was around thirty five basis points you roll forward. Today. It's about one hundred and forty. So, you had over one percent move in those rates.

44:27 It's been pretty quick and it's been through September and October, and you can't, it's unclear where it's going to go, but there's still a chance that it will go up. So, you probably say the rates at some point in the previous half were the best in this cycle for customers.

Peter King

44:48 And on the second question on fixed cost, you are right, we made a deliberate decision to increase an accelerated cost on fixed to get ahead of it. As I said before, we have clear plans over the next three years to reduce those cost across all the buckets. What could come out that we don't expect, additional regulatory requirements that we haven't been advised or we don't know about. That's the only thing at this point, but you can't rule it out, but that would be the only uncertainty that I can say.

Brendan Sproules

45:20 Thank you.

Andrew Bowden

45:21 Take question from Jon Mott, please.

Jon Mott

45:25 Yes, hi guys. And I have a question on the margin. If you go back over time, and I think Jarrod asked the question on this, I wanted to sort of get a bit more detail. If you look over the last couple of years, you margin from twenty eighteen went two point one to two point one two, two point one three, in the last three halves, we’ve seen a down ten, up six, down nine. I know you want to get back in the market and be competitive and stabilizing market share, I can totally understand that, this is huge amount of volatility fuel business and throw huge amounts of volatility through the earnings profile both to get amplified with cost move around as quickly as this. Is there anything apart from getting back in the game on price being more competitive that has led to this huge volatility on an eight hundred billion dollar balance sheet to a margin to move around so quickly? Is there anything else that we can think about throwing these numbers out?

Michael Rowland

46:20 Yeah, I think just a couple of comments on that. Treasury is obviously one of them, but you got to look at the margin treasury can move around a little bit, but that gives you a bit of a sense. And really we're at a point in the interest rate cycle where deposits aren't moving as much as lending. So, there's a bit of a floor impact in the result. We've had a shorter capital hedge Jon in the sense of that.

46:48 So, we're probably a bit further through, but then as Michael highlighted, I think we're well positioned for hopefully what is an upswing. And then the other pace that are flagged is we predominantly been growing mortgages. So, we've got a big mix impact there. We need to get other parts of our business growing, business lending, in particularly the secured personal pieces a bit has been contracting.

47:13 So, I think it's a bit cyclical, a bit competitive and the other thing is liquidity driving into the markets keeping RMBS cost down for lots of people. So, there's obviously the cycle, the competition and then what we need to do to grow our business or apply.

Jon Mott

47:34 So, do you think this will stabilize if we get through this next six, twelve months and then we'll be on to a more stable environment, and we're going for a rebase or how do you say this? Could we easily see price spike back up like we did in the first half [indiscernible]? Or is this a rebate to lower level.

Michael Rowland

47:53 For us and thinking about returns and margins in the medium term, I would hope that they're going to rise from here. I'm talking medium term not next year, but that needs a different interest rate level to what we have in the economy today.

Jon Mott

48:11 Thank you.

Peter King

48:12 And I'll just add to put [indiscernible], we've been just through an extraordinary interest rate cycle. So, we keep forgetting that these are the lowest rates we've seen for many, many, many years and there is, it creates volatility. So, there's nothing that’s in the margin that we haven't disclosed to you. And going forward, we expect there to be more volatility as Peter said. So, I think it's hard to get a stable view, but it's worth keeping that in mind.

Jon Mott

48:38 Thank you.

Andrew Bowden

48:40 Take question from Matthew Wilson, please.

Matthew Wilson

48:43 Yes. Good morning team. Just thinking about the shape of your franchise, you know you used to have the best institutional franchise on the street. We’ve spent the last five years, shrinking it and de-risking it. And it may have happened at a time when we're actually going to move capital back into institutional banking with rates going higher with what we need to do in climate change. Obviously, large amount of billions of dollars of capital needs to be spent there and your institutional franchise doesn't look as though it's now in a position to capture the benefits from them, and then you're pursuing really hard in housing and we look as though we’re at the end of a housing cycle, APRA is clearly going to implement macro prudential, the RBA at some stage when they wake up or raise rate. If you look behind the curve and how you're shaping [your franchise]?

Peter King

49:30 Well, no, I'm probably more positive on the institutional bank than what you sound like you are, for the biggest move that we've had is we invested heavily in some of the Asian locations over the last four to five years and that didn't pay off for us. So, we're coming back to Australia. I feel pretty good about the domestic capability of our institutional book, you can see the growth in lending in the second half, and that was because we were there for some big customers with some big deals.

50:02 So, I think we do have a good capability. We financed about thirty three sustainable finance transactions this year. We have an electricity portfolio skewed to sustainable sources. I think it is about three quarters. So, we don't talk about a lot, but I actually think we've got a very good capability there and one that we can certainly build on. The challenge for that WIB book has been the reshaping to get us back to a simpler geographic presence, but I'm very confident in the outlook for WIB.

Matthew Wilson

50:39 That's good. And then just one final question. We get eight billion dollar cost base in two or three years’ time, what are your plans then for you removing the duplication and complexity your core banking platform?

Peter King

50:53 Well, that's happening over time. So, one of the benefits of the one mortgage origination system for mortgages is that we now have one back office process not four. So, it's policy process, digital offer policy process and then the ledger system at the back end, the ledger is not our problem there. The problem is the front end, and we're getting after it now, not waiting to the back end.

Matthew Wilson

51:25 Okay. Thanks.

Andrew Bowden

51:27 A question from Andrew Triggs, please.

Andrew Triggs

51:31 Okay. I just had a couple of questions really around the slide on the deck slide forty four, which is the customer franchise metrics, which I think is being I believe that the more concerning slide for a while now, for MFI share which is fifteen point seven percent for the group combined is well below both your mortgage and customer deposit market share, consumer deposit market share, two questions there. I mean, one, what are the focus areas from turning this around? And secondly, you talk a lot about the balanced scorecard for management reflecting the cost reset agenda? What percentage of it relates to cost and what percentage of the balanced scorecard relates to specific and quantified improvements in the MFI score?

Peter King

52:16 So broadly for the group, it's thirty six, twenty simplified fifty customer and financials, the broad weightings, and that's across the company so that gives you a sense on relative focus areas if you like. We're looking at both MFI, which is an external measure, as well as the customer stats, but we also then go down into product and channels. And we are seeing improvements in our product and channel, [indiscernible] and MPS as well.

52:50 That's why we are very focused on the capability in each of our businesses for customers. And so, we're seeing improvements there as well. If you get back to my slide on millennials, you can see we started grow there again, that wasn't the case if you go back a few years. And I think the broader point is, we've got the distribution teams focused on the customer. We've got to get the rest of the company lined up behind, how we drive value in the franchise and customer outcomes and that will be at a lower cost for the group, and we've got to reset this cost base because we're uncompetitive at the moment.

Andrew Triggs

53:35 Thanks, Peter. Could I follow-up on the business bank, so I think most of the market have could handle them on what’s happened on the retail side of things, but let's, sort of well understood what's gone wrong in the business bank? Could you give us your thoughts there on what makes to improve to be consistently performing well in small business banking?

Peter King

53:55 It was two too big levers. Firstly, our bankers aren't spending enough time with customers. So, they've been involved with some of the fixed agenda. So that has materially changed towards the end of this year and we're getting them out with bankers. So, everything is going towards banker time out with customers.

54:16 The second piece is credit standards, so we did tighten at the start of COVID. They've been now reset. And the third is, we need to apply what we've done in mortgages in terms of digital capability into the business segment is our other big focus.

Andrew Triggs

54:33 Thanks Peter.

Andrew Bowden

54:36 Take question from [indiscernible], please.

Unidentified Analyst

54:39 Thank you. Just again, kind of related to the margins, on the replicating portfolio, can you just run us through the thinking in terms of that change? Does it look like it gives you a pretty material uplift in the spot reinvestment rate based on today's swap rates about forty five bps by my calculations? Is there a rationale behind that or is it really just to try and take advantage of the higher market pricing?

Michael Rowland

55:04 Yes. So, as I indicated in the presentation, we did in the second half move out to the three swap rate. That reflected obviously a change in the curve at that level, but also as we indicated at the half, the impact on the margin from the replicating portfolio was lessening over the year anyway, but as we pointed out, we just decided to give them the trajectory for rates. We would push out to the [three euro].

Peter King

55:32 The thing behind shortening up earlier in the year was Michael recognized there was no pickup up for term as a pretty flat curve between one and three years, so there's no pickup, so we shorten the profile and then it's been lengthened now as rates have gone up.

Unidentified Analyst

55:48 Thanks. And just also, I guess thinking about NIM and funding again, on the deposit side, you had that bit of a benefit in NIM over the half, it looks like there's probably pretty limited impact there? Do you think you'll be able to squeeze anymore out of lower deposit rates that has most of that come through now given the vast majority on the twenty five bps?

Michael Rowland

56:07 Yeah, the four basis points improvement in the half came from TD, so less in TD is that call is pretty much at the floor. So, we don't expect much margin improvement than the first half from deposits.

Andrew Triggs

56:20 Thanks.

Andrew Bowden

56:21 Great. Thanks. A question from a Azib Khan, please.

Azib Khan

56:26 Thank you, Andrew. Peter, you've already responded to a couple of questions on the margin volume trade, but I've got another one for you, if that's okay. So, in the second half you've grown home lending in line with system with notably lower margin. You're pointing to simplest dynamics next year with growth in mind with system and lower margins, but what we've seen in the consumer division in the second half, is contraction in net interest income, half from half and year on year. Can we expect that contraction to continue next year or do you think you can arrest that decline going into next year? And also, in terms of your system growth outlook, I’ll note that your [economics team] [ph] is forecasting growth of eight point five percent for next year. Do you think if growth does get up to that level that they will be further [macro approved tightening] [ph]?

Peter King

57:15 I'll do with the second one, and Michael can do with the margin. I think we're at a point where the regulators rightly are very much focused on affordability houses and house prices outstripping income growth. And so, it's right to tap on the break to slow it down through the buffers.

57:38 I think if it doesn’t slow down then there's probably going to be more response coming. That's affordability metrics that we track through our economics team is stretched. You got to get back some time to see them as bad as what they are at the moment. So, I think it's a right thing to tap to slow the market down.

Michael Rowland

58:00 Yes, on the margin question, the big driver of the reduction in net interest margin in the half was from lending and from Australian mortgages driving that. And as I indicated, we grew strongly the owner occupied segment, not so much investor and not so much interest only. We will look to grow those sectors in line with market in twenty twenty two.

58:24 So, while we're signaling that, margin will be down in twenty twenty two. There are levers that we can pull and that the team is very focused on to ameliorate any complete adverse impact of the reduction.

Azib Khan

58:39 So Michael, are saying your confident you can grow net interest income for the consumer division next year?

Michael Rowland

58:44 Saying that, we do have levers to pull to manage margin in twenty twenty two. The trajectory is down as I indicated that will flow-through, how that plays out in net interest income will be a function obviously of the size of the market. And if growth outstrips our current estimates then that will do better, but it's with the team to manage that margin up and focus on those high margin segments.

59:08 So, I'm not making a call on what net interest income will be, but we're very clear on what we need to do to arrest the decline in margin. And hopefully growth in the market will help us there as well.

Azib Khan

59:22 Thank you.

Andrew Bowden

59:24 Take a question from Ed Henning, please.

Ed Henning

59:28 Taking my questions. Just two from me and back on over topic of margin. If we just focus on competition, is it fair to say you needed the pedal harder to get back to the system in mortgages and now you also have increasing digital mortgage origination? So, do you see the headwind just from the competition side, slightly easing or is the market is super competitive and that headwinds going to continue at the same pace with the first one?

Michael Rowland

59:56 Yes. Look, as I think I said at the half year, I've been in this industry for a long time. Competition in the mortgage market is as intense if not more intense than I’ve seen in the past. We have a lot of new entrants coming into the market who are offering very low rates with no back book and no cost and providing a digital only offer.

60:14 So, we expect that competition to continue. Our response to that as Peter indicated was providing digital origination, making it easier and quicker for customers to deal with this and having a competitive ride. So, those things are critical. They are within our control. We will manage that, but on the competition side, I really don't see that changing much in twenty twenty two.

Ed Henning

60:38 So, even with the digital mortgage origination, you think you'll have to be as aggressive as [indiscernible] own products, so you can't even things back from middle of the pack and still grow the system?

Michael Rowland

60:49 Need to be at the market on price, in mortgages in twenty twenty two. There's no question.

Ed Henning

60:56 Okay. And then just a second one on non-interest income, you talked about the benefits coming through from activity, and then you've got the divestments as headwinds, do you say that as a net positive or a negative for next year in total for non-interest income?

Michael Rowland

61:11 So, I think as we think about it, we're hopeful that as the economy opens up, we get international travelers. We get more activity in the economy. We will benefit across all our businesses from greater activity. However, we are disposing of businesses that have traditionally generated a lot of non-interest income, and we've got more and more assets on the Panorama platform.

61:35 So, I think regarding generally to lower non-interest income, which is consistent with the trend, and I think I said this at the half as well, it is consistent with the trend over the last ten years in the industry not just with Westpac, but we are hopeful that positive momentum from economic recovery will support non-interest income next year.

Ed Henning

61:55 Okay. But at this stage unless it's really, really strong, you're looking it slightly down.

Andrew Bowden

62:03 Take a question from Brett Le Mesurier, please.

Brett Le Mesurier

62:07 Thanks, Andrew. You grew your loan book by three percent in last six months, do you have a sense as to how much high your margin would have been, if it had only grown by two percent being one percent, assuming one percent reduction across the board?

Michael Rowland

62:23 Haven't done that calculation. Sorry, Brett.

Brett Le Mesurier

62:27 So, given that you haven't done that calculation, how do you determine what level of growth you should be chasing?

Michael Rowland

62:35 Well, we're looking at hurdle. So, we're very happy with the return from the business that we're riding and if I look at the return in consumer bank and business bank, WIB needs improvement. It's about the hurdle that we'll get from that business.

Brett Le Mesurier

62:51 And that hurdles are lower than they used to be I presume?

Michael Rowland

62:54 Yes, they are.

Brett Le Mesurier

62:56 Okay. Those were the questions I had. Thank you.

Andrew Bowden

62:58 Thanks. I might just remind; we are going to take some media calls. [Operator Instructions] I'll take one from Clancy Yeates, please.

Clancy Yeates

63:08 Hi, Peter. You said that more sort of macro credential policy was likely if the market doesn't slow down. Could I just clarify, you talked about [eight percent] [ph] past price next year, does that assume no more change in macro credential policy?

Peter King

63:26 It's from – the eight percent is from our economics team, Clancy and I'm fairly sure that will be forecasting based on what's in place at the moment. I wouldn't be trying to predict any future changes to macro prudential.

Clancy Yeates

63:41 Okay. And what do you think the regulated goal is here? Do they want to stabilize health prices or should I assume [indiscernible] grow more slowly? Like what are you trying to achieve?

Peter King

63:48 APRA is about banking stability. So, they're thinking about the state of the banking balance sheet. Now, I'm not saying there's a problem with banking balance sheet. Capital is good. The credit outcome is good. Funding and liquidity is good, but they're just, I think trying to get a little bit in front of it in terms of what's happened.

Clancy Yeates

64:13 Great. Thanks.

Andrew Bowden

64:15 James Eyers, please.

James Eyers

64:18 Peter, and just to follow-up to one of the analysts, I think Matt, asking about institutional banking in the energy transition. Seeing [indiscernible] twenty six on now there’s discussion of this article six, which is about finalizing carbon market rules, but this is a really big area for Westpac in the past and then we saw [indiscernible] talking about its institutional bank being really well positioned to blend into this massive energy transition. Could you just talk a little more about your aspirations for the institutional bank in this transition? Can you match [China’s] [ph] lending without that Asian footprint? And do you support the carbon market developing in the Australian companies participating in the global emissions trading scheme?

Peter King

65:05 Just on climate solutions, we’re already there. So, we've already got ten billion dollars in lending. As I said, seventy five percent of lending to electricity generation is to sustainable sources. We did thirty three transactions this year. Our focus will be domestic, Australia and New Zealand will be our focus and helping customers to transition. In terms of carbon pricing, we supported a price on carbon. I don't know how that will flow out given the developments globally, but certainly, we do support a price on carbon.

James Eyers

65:45 And on the footprint, of the international bank, without that Asian footprint, do you think you can remain competitive in this sort of energy transition project finance base?

Peter King

65:55 We do. I mean, we've got a massive balance sheet in Australia and New Zealand. We’ve got operations in Singapore, London, and New York and soon to be in Germany for Brexit. So, our footprint will support our aspirations in climate.

James Eyers

66:11 Thanks Peter.

Andrew Bowden

66:12 Take questions from [indiscernible] please.

Unidentified Analyst

66:16 Thanks, Peter. Just wondering if we do get a rising interest rate environment over the next couple of years, I know it is still a big if, what do you think that means for sort the bank net interest margins across the industry? Surely that’s going to be positive and are the banks going to get a positive carry trade therefore on the term funding facility, given that that money was fixed at three years through mid twenty twenty four?

Peter King

66:44 Well, on the TFF, that's now finished. As Michael said, we're drawn down our allocation. So, that's sort of in the numbers if you like. In terms of, sort of look forward and interest rates, that will depend on competition, as well as what happens with interest rates, but certainly, we see some positives from higher rates already in the way that we invest our capital. That's about mid-forty billions worth of capital that we need to invest. So, a three year rate going from forty basis points, thirty five basis points back in March up to one point four percent is good for our margins.

Andrew Bowden

67:32 We’ll take a question from Peter Ryan, please. Maybe we lost the sound there guys. I'll just try.

Peter Ryan

67:53 Can you hear me now?

Andrew Bowden

67:55 Yes we can. Thanks.

Peter Ryan

67:56 Yes, question for Peter. Thanks for taking the question. Just on the housing market, we're seeing house prices continuing to surge [profit] [ph] increase. How concerned are you about a potentially blooming correction once we, even if we do get gentle interest rate increases perhaps earlier than expected?

Peter King

68:18 Well, when we – Peter when we lend and this has been for the last couple of years, we've been using five percent floor rate for assessing affordability of housing. So, and most people are borrowing in the low 2s. So, we've assessed people at five, they're borrowing a two. So, we feel like there's capacity for people who afford high rates.

68:44 Having said that, I think there is a correlation between interest rates and housing prices. We can see that over history and therefore housing prices are likely to moderate and we certainly see our economics team forecasting slower growth, still growth in twenty twenty two and some contraction in twenty twenty three.

Peter Ryan

69:09 Okay. Thanks, Peter.

Andrew Bowden

69:11 [Operator Instructions] I'll take one from Joyce Moullakis, please.

Joyce Moullakis

69:18 Hi, Peter and thanks for taking the question. Just one of the slides in the presentation mentioned head of this role and a real site, a reduced corporate space on the real estate footprint, could you provide little bit more color around that? I think you've mentioned that twenty percent reduction ahead of this [loan] [ph]. Could you give a bit more color around that and the timeframe around it? I understand it excludes branch footprint?

Michael Rowland

69:48 Joyce, Michael Rowland here. So, the way we think about that is, as I indicated, as we simplify our organization, we need less complexity in our head office to support a larger organization. Remembering that Westpac was set up as our banking and wealth business, so as the wealth business reduces, and we exit those businesses we need less head office support. That will come down over the time that we sell those businesses, and as we indicated, that will be progressively over the next two years.

Joyce Moullakis

70:23 Okay. That doesn't include the branch network that's [Multiple Speakers]?

Michael Rowland

70:26 We're very clear that we continue to invest in the branch network. We are focused on responding to customer preferences. So, that's why we're investing heavily in digital and digital first is a clear focus. This is not about the branch network.

Joyce Moullakis

70:44 Okay. Thank you.

Andrew Bowden

70:46 Take a final question from Kate Weber, please.

Kate Weber

70:51 Hello. Thanks for taking my question. I was just looking for an update on your banking as service platform. This is especially since Afterpay got acquired by Square, if that impacts anything? And how much was tax expected banking as a service platform to help reduce its digital cost for FY twenty twenty two?

Michael Rowland

71:13 Yes. So, in terms of the banking service platform, the last major requirement has been delivered, so that was the ACCC sign of open banking. So, we're pretty much ready to launch now. It's a consumer of a consumer deposits is the offer, and you'll hear more soon. I’m going to leave it there.

Andrew Bowden

71:37 Okay. Well, thank you all for your time this morning and good morning.

Peter King

71:44 Thank you.