Now I'd like to turn the conference over to Jill Campbell, Group General Manager of Investor Relations. Please go ahead.
Thanks, Operator . Good morning, everybody. It is Jill Campbell here. I'm the Head of Investor Relations for ANZ. Glad to see you haven't missed. Welcome to the conference call audio path for our third quarter 2020 trading update. This will be available also for replay later in the day. We've released a number of materials today, including two slide packs, which were released as one document. For the purposes of the session this morning, it's the discussion pack that we'll be referring to. So we won't be taking you through the pack, but it'd be helpful if you've got that handy. I also apologize if at any point there's a little bit less clarity in the sound than we'd like. We're obviously in lockdown stage four in Melbourne, and so we're working through all of the logistics issues that come with that.
We haven't done one of these for a while, in fact, not since 2017, and so a reminder about how this will work. Our CEO, Shayne Elliott, and CFO, Michelle Jablko, will speak for between five and 10 minutes. We'll go to Q&A. The operator has already explained to you some instructions about how to do that, but I'll come back with a little bit more housekeeping before we start. Also in the room with us today, we have our CRO, Kevin Corbally, and the Head of our Australian and on the phone, our Head of our Australian retail and commercial business, Mark Hand. I'll hand over to Shayne.
Thank you, Jill. Thanks for all of you for joining us this morning. Now, as Jill said, this will mainly be an opportunity for you to ask questions. However, I did want to make a few initial comments, and then I'll ask Michelle to provide a couple of observations. Firstly, these very clearly difficult and unusual times. And our thoughts with those that have been impacted, either from a health or a financial perspective. And I want our customers to know that we will continue to do all that we can to support them through to the other side of the pandemic. You only need to look around the streets of Melbourne to understand the impact of COVID, not only on the way we go about our daily lives, but also on the economy more broadly.
Even in New Zealand, a country that on every measure had this virus beat, recent days demonstrates this virus is going to be with us for some time to come. So as a community, as an industry, and as a bank, we need to adapt to a COVID way of life. Governments will continue to manage the health and macroeconomic response, and it will be up to the banks, like the ANZ, to support customers while balancing the interests of our shareholders, as well as the safety and well-being of our employees. I don't want to sound overly pessimistic or unrealistic. Sure, Victoria is doing it tougher than other states at the moment, but Western Australia is ticking along with iron ore prices holding up. Parts of Queensland not exposed to tourism are already showing signs of recovery, particularly in the agricultural sector.
Even in Victoria, there are businesses and sectors of the economy that have adapted and are doing okay. This is going to be a very difficult environment to navigate. It's fast-changing, and the impacts are varied state to state, industry to industry, and customer to customer. It requires us to have the capacity, flexibility, and the experience to make decisions and manage that change in real time. I'm pleased to say that today we've navigated this difficult environment effectively. As a bank, we entered the crisis in great shape. We have an incredibly strong balance sheet with record levels of capital and liquidity. The work done over several years to simplify the bank means we're now only focused on the things that matter. Our people are more engaged than ever, and we're able to quickly adapt to the challenges the future holds.
Put simply, we've never been in better shape to support all our stakeholders through what will be one of history's great challenges. But it's not just luck. It's a combination of decisions that we've made over many years to focus on the things we're good at, strengthen our foundations, and invest for the long term. There is no doubt we're also benefiting from a strong regulatory regime and swift and decisive government intervention. You'll see from the media release and the chart pack that we posted an unaudited statutory profit for the quarter of AUD 1.3 billion and a cash profit of AUD 1.5 billion. Common Equity Tier One capital is strong at 11.3% on a pro forma basis without having to raise additional capital from shareholders. So this is a good result in difficult circumstances.
Our operational and balance sheet strength allowed us to provide significant support to customers and our people while also providing a fair return to shareholders. Now, it's worth noting that not all banks have the same exposures. Sadly, the small business and commercial property segments are where much of the economic pain is currently being felt. Relative to others, our loans to these segments are much smaller. But despite that, we took the prudent step of adding to our credit reserves in the quarter. Our performance and strong balance sheet position gives us the confidence in our ability to navigate this crisis, and it means we've been able to announce an interim dividend of AUD 0.25 per share fully franked. As you know, we delayed this decision from April.
However, we believe it was in the long-term interest of the bank and its owners that we waited until we had more information. Given all that has happened in the last month, this has proven to be prudent. Getting to the underlying business. During the quarter, we outperformed Australian home loans, growing well above system. Customers acted very prudently by strongly increasing their savings and paying down credit card debt. Institutional customers also acted prudently, and re paid loans in the quarter, particularly in our international franchise, which delivered a capital benefit to the group. Risk management activity was also higher as customers sought to increase currency and rate hedges. As a result of strong customer flows and underlying volatility, our market business was up 60% on the first half quarterly average.
In fact, as the severity of the health crisis became better understood, the performance of our institutional and international business highlighted the benefit of maintaining a diverse and well-managed portfolio of businesses. And we haven't taken the foot off the accelerator when it comes to simplifying our business, with the sale of UDC in New Zealand to Shinsei Bank and our off-site ATM fleet in Australia to Armaguard. Costs were down 1% for the quarter. This is a really pleasing outcome, which was the result of thoughtful and disciplined cost management for the environment. It wasn't a knee-jerk response to COVID or from underinvestment. In fact, we invested record amounts this quarter to build a better bank for customers and staff. And despite this, we expect annual costs to remain broadly flat on an FX-adjusted basis for the year.
But the biggest feature of the quarter, however, has been the work we've done to support customers through the pandemic. In many respects, you have to remember this crisis is only five months old. It seems an eternity ago that we were all free to go about our business, or here in Melbourne, even venture outside our suburbs. I don't know what the future holds. Nobody does. But what I do know is that we are better placed than when we went into the GFC to identify changes and quickly adapt. We've made prudent investments in big data and real-time monitoring systems that allow us to spot trends quickly and respond to customer needs promptly. But I also know that our people have stepped up, and it's been our company's purpose of shaping the world where people and communities thrive that has guided this response.
Great companies step up when it really counts. And while challenges clearly still remain, we've already supported around 200,000 customers in Australia and New Zealand with their loans that will go a long way to carrying people to the other side of the crisis. And finally, and while this is an investor briefing, I would like to acknowledge the terrific work of our 40,000 people across the world. From our hubs in Bangalore and Manila, through to our contact centers in Australia and branches in New Zealand, they've all done a great job for customers in very difficult circumstances, with people productively working from home despite competing priorities for a long period. They've also done their best in keeping costs under control, with everybody playing their part in managing our annual leave balance.
This has been a meaningful contribution to our cost work, and I thank them all for their efforts. I'd also like to acknowledge the passing of our former Chief Executive, Will Bailey, last week. Will was Chief Executive between 1984 and 1992, having started as a teller in the Oakleigh branch of the old ES&A Bank from 1950. I did have the pleasure of meeting Will, but I never worked with him, but I know he was a mentor to many future ANZ leaders and made a significant contribution in building the ANZ that we all know today over many years, particularly in his efforts to modernize the bank through the use of technology, and on behalf of everyone at ANZ, I'd like to pass on our condolences to his wife, Dorothy, and his daughters, Alison, Robyn, and Merryn, as well as his extended family and friends.
So with that, I'll now pass to Michelle to make a few comments before opening up for questions. Michelle.
Thanks, Shayne. I'll just make a few comments. We're focused on how we've strengthened our balance sheet and capital over the quarter. If you've got it handy, I'd point out slide two of the investor discussion pack that we released today. You'll see here we finished the June quarter with pro forma CET1 of 11.3%, which is around AUD 50 billion of CET1 capital indulgence. This means in a pro forma sense, we were able to generate 47 basis points of capital over the quarter, which is equivalent to a AUD 2.1 billion capital raising without shareholder dilution. Let me take you through how we did this. Firstly, pre-provision profit added 43 basis points and was up 6% for the quarter.
We haven't provided granular detail on this, but I'll point out that institutional banking has driven geographic diversification, and our Markets business achieved revenue around 60% higher than the average of the first two quarters. Margins were impacted by low rates, as we foreshadowed at the first half, and also higher liquidity and market-related impacts. We managed costs really well. Absolute costs were down 1% compared to the average of the first two quarters. We diverted resources to where they were most needed in response to COVID, and we continue to benefit from productivity across the bank, as well as savings like lower travel costs. We were able to manage costs down, even though we invested more in our business this quarter than we ever have. So we were able to benefit from our ongoing focus on simplification, which drove productivity in the quarter.
Plus, we took tactical action, but not at the expense of good customer outcomes or business investment. Now, while we grew PBP, we didn't consume additional risk-weighted assets in doing so. In fact, we released 12 basis points of capital on an underlying basis. This is consistent with what we told you at the first half result. You might remember we said we supported customers with liquidity in the early stages of the crisis, and we told you this was largely timing. Since then, many of our customers have not needed this level of liquidity, which has released capital. Most of this was in our international business, and we've seen this trend continue in July. In terms of credit impact, this was 21 basis points for the quarter, split roughly 50/50 between an increase in credit provision and risk-weight migration.
We increased our collective provision by AUD 234 million to AUD 4.65 billion. If you recall, at 31 March, we based our ECL modelling on some very grim economic forecasts, including a 13% peak quarterly fall in GDP and 13% peak unemployment in the June quarter. While more recent economic forecasts have not been as negative as that, we increased our collective provision. We believe this was appropriate given the level of economic uncertainty. So, for example, we added further overlays for small business and mortgage deferrals. Our risk-weight migration to date has been less than we originally anticipated, especially in our institutional portfolio, and we're very well progressed on all our wholesale customer reviews. We thought migration might have been closer to 20 to 25 basis points this quarter instead of the 10 basis points we actually experienced.
A key reason for this is because our customers have been proactively managing their own balance sheets. They've been managing their own costs, and some have also raised capital. It's too early to call out whether this means our risk-weight migration to the end of 2021 could be lower than that 110 basis points we previously said was our base case. We'll provide much more detail for the full year and, of course, consider the economic outlook again at that time. So we've had strong capital generation this quarter, even after credit impacts. And then, of course, we've announced the sale of UDC, which is on track to complete in the coming weeks. All of this has given our board the confidence to pay a prudent first-half dividend of AUD 0.25 per share, fully franked, and without a discount on the DRP.
The dividend is 46% of first-half statutory earnings, but 30% of earnings if you add back the impairments we took at the first half of ANZ's payments, which were capital neutral. We think this decision is sensible right now. We know we have shareholders that depend on us for part of their income, and we've balanced this with keeping our capital positions strong and not diluting shareholders. It also sits comfortably within the upper guidance. I'm now going to hand back to Jill for questions. I'll point out we've got quite a bit of information in the slide pack on our customer support packages, so, of course, we're happy to talk to them in questions.
Thanks, Michelle, and thanks, Shayne. I'll hand back to the operator in a second. As I mentioned, we have our CRO, Kevin Corbally, with us today, and Mark Hand, who's our Group Executive for Australia Retail and Commercial, is also available. If you can, please try to limit your questions to two. The IR team are available after this call to help you with any additional questions that we don't get to. To any media going in, thanks so much for participating and welcome, but if you could please direct your questions to the media team. With that, I'll hand back to you, operator, to start the questions.
Thank you. If you'd like to ask a question, please press Star then One on your telephone and wait for your name to be announced. If you wish to cancel your request, please press Star then Two. If you're on a speakerphone, please pick up the handset to ask your question. Our first question is from Richard Wiles of Morgan Stanley. Please go ahead.
Good morning. Could you provide some more commentary on net interest income, particularly the impact of liquidity on average interest-earning assets and the margin, the impact of competition, and whether the strong markets income meant the underlying decline in margin was different from the headline decline, please?
Yeah, thanks, Richard. I think it's best that Michelle takes through that answer. Michelle?
Yeah. So in relation to your question on liquids, that had about a two basis point impact on the margin. I think we increased liquids by about AUD 13 billion for the quarter. In terms of your question on the underlying, the difference between the underlying and the headline was about a basis point. So the underlying was sort of a basis point better than the headline you saw. There were some other ups and downs in the margin. We called out the main ones, which were really low rates, which was six basis points, as we previously told you. Liquids, as I've mentioned, and then mix. On mix, the main thing was really the two things: shift from variable to fixed home loans, which has gone up a bit this quarter, and also just the mix of our book with more institutional relative to the rest.
Thanks, Michelle. Could you also comment on competition?
Yeah. In terms of competition, I'd say the impact of competition was broadly the same as they've always been, but we had some offsets to that because, if you recall, we had some higher institutional lending margins through the quarter. So I'd say in terms of competition, similar to what you normally see, about a basis point of impact.
Okay, and if I could just ask a second question, please. Do you have some sense about what proportion of your deferred home loan customers and deferred small business customers may seek an extension of that deferral for an extra four months?
I mean, the short answer to that, Richard, is no, we don't, actually. And I think it's just a timing issue, right? We're right at that point, actually, where we can start to know. We've obviously been in contact with all of our customers. But I might just ask Kevin, do you just want to talk where we are in terms of that contact program and when we will have insight into the numbers that we'll be seeking next section? Or are you sort of Kevin? You can get Richard on that.
Sure. Look, at the moment, we're contacting every, so if I take home loans first, mortgages, we're contacting every deferral customer either digitally or alternatively via phone or letter, as the case might be. And that's to ensure that they understand when those payments are actually due, when we start, and what the payment will be and what their options are as well, and we've also given them the opportunity, and some have done so, to sort of schedule a discussion closer to the end date or alternatively even speak to someone now if they need to, and what we're doing in terms of the process from a calling perspective, telephone perspective, is we're actually checking in on those portions of the deferral who have the characteristics, if I can describe it that way, that suggest they might need some possibly higher risk, so to speak.
So that means there's a material drop in their income on their own employer at this stage. Now, what we're doing is, in having those conversations, I said, we're basing it on that. What we have seen, I think, which is really interesting, is that two-thirds of the customers who sought the deferral, actually, their income level has either improved or it's stable. In addition, a quarter of the customers who sought the deferral have also made a repayment, notwithstanding the fact that they were actually on a deferral during this period, they still continue to make a repayment. And more than half have at least three months of data in terms of a payment buffer. So that's essentially the process. That's broadly where we're at.
At this stage, we've contacted in the order of about two-thirds of our customers on the mortgage side, on the commercial side, on the small business side, and slightly different than that, we spoke with those who had to opt into that process, and we spoke with every solitary customer prior to them actually taking up the package, so they understood exactly what it was that was on offer. We're not required to do the same three-month reviews. We are for mortgages. However, we have actually gone about and started contacting those customers, and we have continued the normal credit and portfolio monitoring that we would have for those customers as well. I think a slide pack has also given some information around those customers. Some of what we've seen there is that 60% of them have actually, interestingly, got higher cash balances at the same time last year.
45% of them, their cash inflow is actually greater than the same time as last year. Also, about 30% of them have actually one of the key things commercial customers have been trying to do is figure out how they can reduce their cost base. About 30% of them have actually decreased their cost base by more than 30%, which is quite significant. That's sort of where we're roughly up to.
The only thing I would add, Richard, just to give a bit of color and clarity on that, I mean, two-thirds of the home loan customers we've seen and mentioned where their income is stable, that is broad. We've had quite a broad definition, so that might still be down. It might be down 18%.
Things seemed like it's not fallen off a cliff, right? So just to be clear on that, that doesn't mean it's necessarily about the same. The other thing I would just add here, I sort of made a reference in my opening about the data investments we've had. That has really shown through here. Compared to the GFC, our ability to actually literally in real time go through, "Give me all the customers who've got a JobS eeker payment in their account. Give me all the customers who've seen their income levels fall," and our ability to be able to respond and target is just at a massively different level than it was in the past, and I think that's enabled us to be much more targeted in the way that we respond and reach out.
Not perfect because we don't have everybody's operating account, but it's really been a massive advantage, I think, this time.
Operator, next question.
Yes, thank you. Next question is from Ed Henning of CLSA. Please go ahead.
Thanks for taking my questions. Just two questions from me. You talked about the trends continuing in July around the paydown of the institutional borrowers. Can you just run through how much more you think has got to play out here? Could the fourth quarter be the same as the third quarter impact, or do you think this is falling?
That's a really good question. Obviously, we don't know yet. But let's just back up a little bit here. What happened at the end of the first half, March, right in the heat of the moment, COVID really quickly hit the shores, not only of Australia but the United States and parts of Europe. That's where a lot of our multinational customers are based. What did they do? They did what they're supposed to do. They shot up their balance sheet. They hoarded cash. They drew down liquidity, etc., etc. And we saw that, yeah? And we saw that, obviously, more than others on our basis. And we made sure we were getting paid for that, yeah? So people were basically we got that. Then what happened there is there was a bit more certainty in the third quarter. Things started to calm down. Capital markets continued to operate.
People realized they could raise equity. And we saw that on a massive scale here in Australia in particular, but also internationally. Treasuries generally calmed down and basically said, "I don't need this expensive debt," and they started repaying. So we've seen that at a reasonable clip in the third quarter. If we look at today, between June 30th and today, that trend has continued at about the same pace now until today. So even today. I don't know from here. I think it really depends on the state of capital markets and the general just sort of economic sense. But if you're a betting person, you'd have to say it's probably no, it'll be a worst case of a flat and probably continues to come down, which from our perspective isn't a bad thing, really. It releases capital. But we'll continue to support our customers as necessary.
But I'd say it's probably flat down would be a pretty decent estimate.
Thanks. And just a second one. Market income was obviously very strong during the period. Can you just touch on what's happened in July and August and how you're seeing that going forward?
Let's go back to why it's strong. It's coming from a couple of things. And again, our markets business, I think it's worth pointing out, is quite different to some of our local peers in particular. More than half of our markets business is international. It's not in Australia. In fact, some of our biggest operations are in Asia, for example, in Singapore and also in London and New York. And that goes to that sort of international franchise we've had. And actually, the really strong performance has been in our international franchise. It's been strong everywhere. But sort of our performance has really very much been in our international franchise. And for the reasons that I mentioned, underlying volatility, what happens? Well, there's a bit of spread widening a little bit in volatility. You get a little bit more activity from customers who are seeking to hedge.
All of those conditions have continued from the third quarter into the fourth quarter. So the basic conditions, probably not to the same degree. It's not as volatile as it was. Spreads are not as wide as they were, but it's still a pretty buoyant environment for global markets businesses. And again, just to be clear, our business, what do we do in markets as opposed to others? Our franchise is a very big foreign exchange franchise and a sort of rates and credit franchise. Our commodities business is tiny. We don't do equity, etc. So it's continued, probably at a slightly more modest pace, though, but still looking pretty good.
Okay. Thank you.
Thank you. Our next question is from Andrew Lyons of Goldman Sachs. Please go ahead.
Thanks. Good morning. Just a question on slide 11 just around your business loan deferrals. On slide 11, you note 94% of your SME book on deferral is fully or partially secured. Can you perhaps provide a bit more detail about what this collateral is and how you'll ultimately balance the needs of your customers versus the needs of your shareholders as we go deeper into this cycle and you may have to start accessing that collateral in a fairly significant way?
Yeah. I'll start with that, Andrew. And I'll ask him to get a bit more detail on that. Yeah. Look, this sounds a little bit high level. But philosophically, what we're saying here, for the most part, the reason that these small businesses have got themselves in harm's way is through no fault of their own. It's not that they had bad business models. It wasn't that they were overheated. It wasn't that they didn't make bad decisions. They've been caught in general. Their business was essentially made illegal by governments in order to operate. And so the question, the good thing is, fundamentally, the vast majority of good businesses that can, in the right circumstances, quickly get back on their feet. Now, those circumstances, unfortunately, are outside of their control. They're largely due to government policy.
So we sort of take in view that the best thing we can do here, the best thing to run those businesses, whether it's a manufacturing business or a restaurant or whatever it might be, are the people who currently do. So giving them time is the right thing to do. So that's the approach we've taken. We are very fortunate, as you know, that we live in a low interest rate world. The cost of giving them time is a hell of a lot lower than it would have been in the GFC or in any other normal financial crisis. So the cost to them, the cost to us of giving time is lower. But we know, sadly, that even if tomorrow morning the vaccine is discovered and governments open up everything, not all of those businesses will have the wherewithal to get back on their feet.
You're quite right, and sadly, at the right time, we're going to have to take some hard decisions. That's sort of what we do for that's our role in the economy. But again, I think we've taken that view that the best thing to do is to give as much time as we can. It's in their interest. It's actually in our interest that these people get back on their feet, so I think we are being more tolerant in terms of and really focus on that customer care in terms of that balance. The cost of the shareholders, in your point, is actually quite low of giving that time, and that's got to be really, really important factor when doing this.
So this idea of the cliff that on some magic days when all these things happen, we're going to act irresponsibly, I don't think holds water for all sorts of reasons, which we can go into. But Kevin, do you want to give a little bit more? Because it is true that there's a lot of security behind here, but it's good to play with what that is.
So look, the vast bulk of SME, Andrew, is secured by either residential or commercial property. There are some other assets that underlying businesses have as well. But the vast bulk of it is that. And when we say fully secured, the majority of that is over 100%, obviously secured. And partially secured is less than 100%. But it is predominantly residential and commercial property that supports it with some other stock and other assets.
Obviously, we've run models in our own scripts here that say, "Well, what if what if the bad things happen to large chunks of that? What is the dimensions of that?" The good thing about and the bad thing about it, obviously, is that you would have to make some pretty difficult decisions. And you might argue, "Well, a lot of that security is the same." Real estate, on the other hand, has tended to be pretty well diversified.
So I'm on that point here. You're absolutely right. When we assess the risk rating of a particular customer, we actually run sensitivities on the value of that property. So it doesn't obviously assume the property stays as is. We have various different scenarios. And those scenarios will drive an outcome in terms of the risk rating that we're going to apply to customers.
Thanks so much.
Thank you.
Thank you. Our next question comes from Jonathan Mott of UBS. Please go ahead.
Thank you. Got a question on the dividend. Really, why did you see the urgency to pay it now? It seems very unusual to have a delayed or belated dividend. Why didn't you wait to the full year result in three months' time when the economic outlook is going to be a lot clearer, especially when you haven't seen the full impact of procyclicality, you haven't seen the deterioration going through? And if you look across Victoria and Auckland, you've got 10 million of the 30 million people in Australasia locked in their houses at the moment. Why not wait and see how the economy is going rather than pay a dividend out on a belated basis?
Yeah. Fair question. So let's put it into context, Jonathan. We generated pre-credit cost 68 basis points of capital during the quarter. And what did we do? We used literally a third of that for credit costs, provisioning, etc. And the dividend we paid out in the quarter is 15 basis points of our capital we paid out. And that's why we use the word modest. We paid a modest dividend, 15 basis points. I'm not sure. We've got a really strong capital position, 11.3. Could we have retained it and so we were even higher? Yeah, of course. And there'll always be this is a judgment. The judgment that our board took was, "This is about balance. Our business is profitable. It generates profits every day. Not as much as it used to, but it's still profitable." And that's generating organic capital during the quarter.
You saw that in this quarter, and you'll continue to see that. That allowed us to put away some more money for a rainy day, increase our credit provision again, yeah, despite the fact that actually, on some measure, economic outlook is better today than it was at the 31st of March at the half. But nonetheless, we've been prudent, and we've topped up our credit provision. We've strengthened our capital ratios again, and we've been able to pay a modest dividend to shareholders. We think that balance is the right thing to do. You can always kick the can further down the road and wait for more and more information. But we think that that was a fair thing to do. And then also, I think look, we also have a role in the broader economy.
And we know that many of our shareholders are retirees and depend on that income. And they've already waited. And we thought it was a fair decision to make. But again, I think the most important point of all of that is, let's put it in context, it's 15 basis points here. I think that on any description, it is prudent and modest.
Okay. Can I just ask a second question, if I could? Probably to Kevin. You spat out a lot of positive statistics about the 12% of the mortgage book, which is still on deferral, like a two-thirds that haven't seen a fall in income. Can you give us, well, we all know in banking it's tail risk. We're not worried about the two-thirds that haven't seen the fall in income. We're worried about the one-third that has. Can you give us some statistics about the tail? How are they looking? What are they seeing in their income? And what prospects have they got of getting back on their feet and repaying their debt?
I'll start, Jonathan. I think your observation is spot on. I mean, in my experience, that's even more the case in this crisis than it is in normal ones. The pain of this crisis is being felt disproportionately by a relatively small cohort, very damaged part of the economy. And it's tended to be as you know and I know you know this, but it's just sort of it's tended to impact lower-skilled workers, more casual workers, sadly more female people, more lower-income cohorts, and therefore disproportionately the renter population as opposed to the homeowner population. But nonetheless, you're right. And there's a tail risk. And we do have some color on that, Kevin, any sense of the proportion of this. So for example, the number of people with a homeowners that are on JobSeeker, who are actually unemployed, is infinitesimally small, as you can imagine.
The reasons I just. You might give a bit of cover to that.
Yeah. Look, a couple of things I'd say. Jonathan, one, I think an important point I expected you to say, but an important point to remember is that the process that we followed meant that every customer who we offered our home loan deferral to was actually current when they went into the deferral program. So these were customers who were up to date with their payments, with their payments still. And we felt it was the right thing to do. I offered them that payment deferral given their circumstances. Not everyone adopted that approach in terms of who they granted the deferral to. We know ours was a little stricter than possibly some others. But that's the approach we did take. And what we have seen to Shayne's point is some of our customers, it's very difficult to see who's getting Job Keeper, but we can see JobS eeker.
That's a single-digit % of those that are on deferrals.
Just so it's a bit funny to compare that to comments from one of your peers. I think it was NAB came out and said they're seeing a disproportionate number of people who were in the Private bBank and had mortgages over AUD 1 million on deferral. Are you seeing a very, very different cohort on deferral and having financial stress?
Yeah. I think I obviously don't know the important comparisons. But I imagine that some of that is to do with business making in terms of how you go about your business in the sort of small business sector. There's a lot of small business people who run some of those debts through Private Bank . It could be Private Bank customers had large. I don't know, Jonathan. We do not have that experience. There is a slight skew to slightly bigger mortgages. So the deferral cohorts are on average slightly higher home loans than not. That sort of makes sense because, as you know, they're averages. And in our total book, there's a whole bunch of people who've got a AUD 50,000 mortgage, probably don't need to get a deferral. But they're only small. So no, we don't have that same skew at all.
We wouldn't have identified that as a trend within our book.
Thank you.
Thank you. Our next question is from Brian Johnson of Jefferies. Please go ahead.
Good morning, and thank you very much for giving us the opportunity to ask some questions. I have two questions. The first one is the slide where you've got on your home lending, the growth. New sales AUD 10 billion, new refi AUD 5 billion, redraw and interest AUD 4 billion, and then repay another down 15, which is telling us that the growth is basically the redraw and the interest. The first question is, can you confirm that basically what is growing your book? How much of that AUD 4 billion is the deferred interest that you've accrued on the deferred home loans? And the other point about it is, Shayne, is that I know that you're very positive that it's starting to turn around. Is that performance good enough? And then I have a second question if I may.
Yeah. Look, I'll answer. I'll get my hands online to give you a bit more color, Brian. But the technical answer to your question of the AUD 4 billion redraw and interest, it's about 10% of that relates to the deferrals that you mentioned. What you're seeing here is we felt confident. We had some issues a year ago in terms of our processing, etc. We spend a lot of money. I've talked about record investments. And part of that has been to get our home loan processing back into shape. We had a big campaign a year ago, which was very, very successful. The David Hasselhoff thing. That was very successful. And that really gave us an ability to test some of our processes.
Then what we did earlier in this year, actually just as COVID was starting, it was sort of pre-COVID, it was already signed, we went out, as you know, with a very, very sharp offer in market. We were stunned by the response. You might have thought that in a COVID time, people would just sit on their hands. What we saw was a massive uptake, you know, this across the industry in terms of refi. So we were just in the right place at the right time. We got completely smashed with volume, which is a good thing. And applications did mean our processing times blew out again. I mean, we saw levels of applications, multiples of what we've seen in our history for extended periods of time, which is a good thing. Those things are still being worked through.
You are not seeing the benefit of that volume yet because, as you know, there's a time delay between the time the loan actually drawing down, so in the third quarter numbers here, you're just starting to see some benefit, but that'll be something that'll be much more evident in 2021. We do absolutely think we're doing enough. The volumes have stayed relatively high, so higher than normal for us. We know we continue to pick up share. We've made adjustments to our pricing, etc., to make sure that we're in market but getting a fair return for the risk, and we've been very targeted about the kinds of loans that we want because clearly there's a heightened risk at the moment, so I've got Mark here. You're much closer to it in terms of just giving Brian and the others a bit more color on the home loan business.
Yeah. Probably the only other thing to add is in that repayment bucket, because of the COVID environment, we're seeing significant deposit growth. And that's included in offset accounts, for instance. And customers that have a redraw capability against their mortgage have paid against that mortgage knowing that they can withdraw it. And that is effectively their buffer. So that minus 15 number I'd suggest is a little bit elevated. And then as Shayne says, this is up to 30 June where we saw really good volumes late last year, right through that period this year. But a lot of those deals have hit the balance sheet. You'll have seen from the APRA stats in the last couple of months. And we expect to see that to continue. And our refinance out continues to improve.
So I wouldn't call it a flight to quality, but there has been a significant flight to the major banks throughout this period, so we expect to see continued growth, and some of that repayment response because of COVID will ease.
So Brian, you got a second question?
Yeah. Second question. Shayne, when we have a look at it, you might recall I complained rather loudly about what I thought was the relatively poor disclosure. And I'd just like to reiterate that point. But on the loan losses, on the ECL provisioning and the capital intensity. But as far as I can work out today, you've lifted your provision coverage to exposure at default from basically 42 basis points to 45 basis points, whereas your peers are all sitting at 60 basis points. You've had a higher historical basically rate of loan losses than your peers. And you acknowledge that in your expected loss disclosures. We can also see that in your housing book, you have a much higher proportion of greater than 90% LVRs. Could we please get a little bit more detail on what you've done in changing the economic scenarios?
What have you actually done in the provisioning and the probabilities that you've basically assigned to the base case and the undisclosed downside case?
Yeah, and I'll get Michelle to start and Kevin will add to that. Just stepping back a little bit first before we get into the detail and it affects commercial business. I think, again, we have to go back to the fact that our businesses are very different, as you know, and constantly criticized before. We have a much bigger institutional business than our peer group. The reality is today, our institutional book is 86% investment grade. Try as we might, when you look through this crisis at this stage, and I don't think we're alone, this does not appear to be a crisis that has done a disproportionately impact on the institutional side of the business. And as you know, institutional banking just the normal course of business has a much higher risk rating in the first place when you're booking business.
So it's very, very different than a business that might be exposed, for example, to the SME sector, which we're not. So I think there are differences in there. But Michelle, you just want to talk through some of this commentary then?
Sure.
Importantly, the ECL assumption.
Yeah. And we will provide very much more detail with the full year as well. The way we thought about it, again, if you go back to what we provided in March, as I said in my comments, we had a pretty grim view of the economic outlook at that point in time. And we can debate the various assumptions around that, but we had a pretty grim view of the economic outlook. What we've done now is, while the economic outlook is still negative, as of June, when we did those numbers, it was less adverse. But what we did was increase the ECL. And we did that through a few means, partly through changes in the probability weights and partly through overlays. Again, I'm happy to provide much more detail with the full year with all the disclosures then. And we'll take on what you'll say back, Brian.
Yeah.
But for now, I think that.
Kevin, you go ahead. I think that's more than enough.
Sorry. The other question, Michelle, was on the capital density. Previously, you said 110. And I can see in the slide, there seems to be about, would I be right in thinking 10 of the 110 has happened in the quarter?
So 10 in the quarter, we had 7 in the second quarter as well. So 17 of the 110 has happened so far. What I did say, and again, it's a bit early to predict this. What we're seeing, we're really well progressed in terms of our wholesale reviews. As of June, so as of these numbers, we were about halfway through. As of today, on institutional, for example, we're probably about two-thirds of the way through. And we're well progressed on commercial as well. So what we've actually seen in our customers, and clearly, we don't just do this once and set and forget. What I did say is our actuals are tracking more positively than what we'd anticipated might have happened this quarter. But I don't want to call out yet a sensitivity to the 110. We will do that at the full year.
But Michelle, your ECL provisioning that you say that you've changed the economic forecast and made them slightly more adverse, are they still more bullish or, sorry, less adverse than the RBA's August restated base case scenario?
So again, the way we've done it, I don't want to make it so formulaic because we've got overlays, etc., in there, but the way we did it, if you look at our March forecast, which were disclosed, they were in some ways more adverse than the RBA, slightly different, probably more adverse upfront, slightly different track in terms of how things improved, but broadly speaking, about the same, and what we've done today is, despite economic forecasts being a bit better, and clearly they change all the time, and we'll update them in September, we've added to the provision, and we've done that through overlays, as I said, probability weights and overlays.
Thank you.
Thanks, Brian.
Our next question is from Brendan Sproules of Citi. Please go ahead.
Good morning. I have a couple of questions. My first question's just on your operating expenses for the quarter. In the first half, you actually called out three notable items in expenses. I was wondering if you could help us understand how much a change in those notable items has contributed to this quarter's result. And then I have a question on your provisioning as well.
So I'll give the generic answer, then Michelle can talk. Hey, Brendan. I'm really, importantly, what we've done through this is, look, clearly COVID is overwhelming, and there's a lot of things we need to adapt to. But we have not given up on our long-term ambitions and our strategic desire to simplify the bank and make it more efficient. So that will continue upheld. We're being more thoughtful about how we implement some of those changes because of the impact on people and just generally your ability to get stuff done and working from home. But that stuff continues. That transformation is just a lot of it, the dividend to the business, is just better productivity and lower flat costs. So that work has continued. There's a whole raft of details in there.
And so the important thing is that what I tried to get through there was the performance of the quarter was not a knee-jerk reaction to, "Oh, there's COVID. Let's go and hack out costs. Let's go buy some people," or anything like that. We didn't do that at all. But what we did do is we quickly went back and looked at our cost base and said, "What are the things we can manage differently and more tightly?" Obviously, you get a tailwind on things like travel. I mean, you don't do anything. Travel just stopped, right? So those are easy. But we've continued in terms of our productivity work to get that cost down. The other thing I'll mention is it did not come because we slowed down investment. So our investment in new technology, new platforms, new features, and functions actually increased in the quarter.
It's the largest expense or largest investment quarter we've ever had in our history. That's a good thing because those things will drive benefits, not only in productivity but better outcomes for customers in terms of some of the new platforms. Because of COVID, we brought forward some of that investment. For example, the e-signatures, the ability to do things digitally that might have been some of the features on our app that might have been on our backlog for later, we brought those forward because they're more appropriate, and Michelle, you want to talk through the large notable pieces?
Yeah. And Brendan, when we talk about expenses being down 1%, that's excluding the large notable. You'll see in our media release, large notables in total was about AUD 100 million. About a third of that was expenses. It was a bunch of little things. There was nothing really big to call out in there. A little bit of restructuring and other things.
Thanks. And just on your CP charge for the quarter, could you help us understand what you've taken specifically around the deferral packages? Obviously, in three months' time, when the holidays do expire, there's going to be quite a bit of movement across the portfolio. So I'm interested in what you've taken now relative to what we'll need to look at later in the year.
Shortly to start, and then you can say there's two components in a way. One is, as you would have seen in the past, our 90 days past due were elevated, and we talked about that in terms of customers that we've chosen that we didn't put on deferral packages. So that had an increase in the provision, as well as we applied an overlay across all portfolios, actually looking at the deferral packages, and then on top of that, we applied an additional overlay to small business.
One way, Brendan, to potentially think about it is that the majority of the increase this year, this quarter, I should say, is effectively reflecting the deferral packages and the high-risk payments within commercial businesses for consumers in New Zealand.
Yes. I mean, I think the obvious answer there is, as the quarter unfolded, it became more and more apparent where the pain was being felt, and we could see it in the data. We know that it is an SME, sadly. It's in that sector, and we were able to sort of do more work on that and figure out what we thought was a more appropriate number. It obviously is not a sector that lends itself to individual risk review, but it does in institutional, so that's why we use the overlay mechanism to account for that.
Thank you.
Thanks.
Thank you. Our next question is from Andrew Triggs of JPMorgan. Please go ahead.
Thank you. Good morning, everyone. Shayne, just had a question, a couple of questions. Firstly, just on the rate environment in New Zealand, a number of economists, including your own, now expecting negative rates last year. I know this was something that was talked about at the last result. But just the expectation for the margin impact, perhaps on FY21, if that were to come through?
Yeah. Good question. It's still pretty early days, Andrew. Look, as you know, there was the RBNZ's announcements to prepare the market for negative rates. In fact, the banks, including ourselves, have to be operationally prepared to do that by December. I think it's worth pointing out that we are, and again, just for the point of clarity for others, we're talking about wholesale rates in New Zealand, not retail deposit rates. That has not been envisaged by the Reserve Bank. So we are talking about wholesale rates. And you're right, our economic team has now sort of forecast that wholesale rates may be minus 0.25%. But Michelle, have we done the work into what that might mean? Maybe it will have an impact.
I mean, it's a bit hard to predict exactly what it's going to mean because it depends on where rates go, what the number is, and what the customer behavior is and the market response. So it's a little bit hard to give an exact number. But as Shayne said, we're preparing for it.
And I think it's something, an absolutely fair question, and it's something we should be more forthcoming with over the full year. We'll have had time to think that through a little bit more. I mean, the other thing I was saying is the end of the year will be less reliant on wholesale as well because we're also seeing that. But it's a fair question, Andrew. And we'll give some thought about how we can give a better answer over the full year.
Thanks, Shayne. And just a follow-up on, I guess, the messaging that institutional will perform more strongly this cycle than previous cycles. And just back to the collective provision coverage discussion with Brian, I mean, I think you have 125 basis points of CP coverage of credit risk-weighted assets. CBA and Westpac are sitting at 170 basis points. There was a meaningful collective provision charge in the last half, 42 basis points of gross loans annualized. But just interested in some comments on that. It would appear that so there was a top-up taken for that book in the previous half. But is the message that, I guess, it's no worse than what you had first modeled on that side of things?
So I think, again, going back to something I said before, I think we don't know the processes at other banks. We only know what we do. We know that we want a really robust process around that. We know that our business looks different to the others. And we also know that in a lot of these models, there's an assumption that the relative credit risk weightings are good indicators of true risk. And we don't necessarily, I think we're not necessarily believe that that's the case. As I mentioned, we know our institutional which we have a skew towards high levels of investment grade, high risk weightings in the normal course of business. So it's prone to some of that. And the nature of this crisis looks like it's going to be disproportionately felt at this stage in other parts of the sector.
So I'm not so sure that just raw comparisons of ratios is necessarily helpful. But as I said, we know that our process is robust. But Michelle, do you want to just add to that?
Andrew, just on your numbers, I think you're comparing total provision charge for our peers with cash profit charge, cash profit for us. So just the like-for-like, not exactly as you said, but there is a difference. As Shayne said, our books are not necessarily the same. We hold more capital for unexpected loss for institutional customers. That's the way the rules work. So you would expect the denominator composition to be slightly different in terms of.
Yeah. And the book that holds the least amount for unexpected loss is home loans. And on a relative basis, we've got the smallest proportion of our book allocated to that. And the two banks you referred to are the highest. So I think there's a reason, it's a mixed issue, if you will, as opposed to do with that difference in capital unexpected loss versus provisions for the expected loss.
Thanks, Michelle. And yes, that wasn't apples-to-oranges comparison on CP versus total provisions. But thanks for the answers.
Thank you, Andrew. Next question.
Thank you. The next question is from Victor German of Macquarie. Please go ahead.
Hi. Good morning. And thank you for taking the time to answer my questions. I just was hoping to follow up on the revenue trajectory. If my math serves me right, it looks like markets income contributed about AUD 900 million or slightly more than AUD 900 million in the third quarter, implying that revenue excluding markets was under AUD 4 billion, which appears to be well below markets' expectations. I'd be just interested in perhaps a little bit more colors to what drove that. I'm assuming partly driven by margins. So any more color on margin trends and any potential volatility in that margin would be, I think, useful. And on sort of related subject, Michelle, you've guided for a six basis points impact from lower rates. It looks like that six basis points actually has fully come through in the third quarter.
Does that mean that six basis points guidance is actually going to be bigger for the full half, or is fourth quarter not going to be having a significant impact from lower rates?
Yeah. So I'll just do the very generic, obvious statement that's what CEOs are for. Look, the revenue environment's perfect, though. I mean, let's face it. I mean, margins are under pressure, very, very competitive market. We're also seeing a continuation of the trend, which was the removal and reduction of fee-based income over long periods of time. There's still a headwind of that. There's still a tail of that coming through the business. Despite the fact we're growing share in home loans and doing it responsibly and at a reasonable return, you've got to pedal really fast when you're booking P&I kinds of income. You've got the headwind of low rates. Low rates manifests itself in so many ways by CPI and then that puts pressure on revenue, etc. So it's not a great environment here. We're not going to kid ourselves.
That's why we've been really, really focused on things like productivity, about capital efficiency, and other things. That's not new. I think the margin pressure has actually become more intense. Your ability, as you know very well, our ability to sort of reprice is much more constrained today than it would be historically because of low rates. That's one. Even on the deposit side, we're reaching some sort of natural limit pre-COVID on your ability to reprice there. Now, that's not true in institutional. You still have an ability to do that, and we get a little bit of a boost there. But revenue outlook is really, really tough. The only sort of tailwind we're going to get on revenue, if you will, will be the rebound volume growth in our home loans business, as we mentioned.
That'll start to come through now, and that'll start to be a little bit of a tailwind on the volume side into 2021. But boy, it's not going to be hugely meaningful. So I think it's a tough environment. I don't think we should shy away from that fact. But on the other hand, this is the kind of environment when markets' businesses shine, and they should. I mean, we shouldn't be surprised if they're having a good time. If we go back over a long period of time, they are countercyclical businesses. And in times like these, they do well. That's the benefit of having that diversification in our book. But I'm sure Michelle can give more color.
Yeah. So besides margins, in terms of the other impacts on revenue, it's mainly to do with what I've heard others say in terms of lower transaction volumes. On margins themselves, the six basis points I referred to at the heart was for the second half, and that sort of hasn't changed. As you look further out, depending on what happens with rates from here, if rates were stable, then the impact on deposits is largely true. The impact on earnings on capital and capital will continue. And we've spoken about that in the slide in the back that shows you sort of how that will progress. Otherwise, on margins, what's sort of the negatives and the positives? In terms of potential positives, your deposit mix is probably improving a bit. So that's potentially a positive. On the negative side, we've still got mixed.
I think we'll continue to see the asset mix change a bit in the fourth quarter. We've got lower credit card spending, and we've got continued conversion of fixed home loans. And then we've got the drawdown of the TFF.
Yeah. I like that.
And there's probably less benefit. I mean, we had a very small benefit from Bills -OIS. That's probably a bit less. So there's a few ups and downs.
Little point Michelle made there, but as we're seeing with cards, so it's good. Customers are doing the right thing, but prioritizing paying down cards. I think that's actually been surprising, and it sort of counter to what we've seen in other markets globally, so people are actually being pretty cautious. Clearly, they're not spending. They're not using their credit cards to buy flights and go on holidays, but those balances coming down tends to be a higher margin business, so little things like that again will slowly chip away, and revenue outlook is tough. Next question.
Thank you. Our next question is from Brett Le Mesurier of Shaw and Partners. Please go ahead.
Thanks. Two questions. Firstly, am I right in assuming that the large and notable items impact a AUD 99 million adverse impact? That was largely in income. That largely occurred in income. Is that correct?
That's correct. Yeah. Yeah. It was largely income. Yep.
Okay. The second question I had was looking at the Pillar 3, the impaired loans from March to June fell from AUD 1.5 billion to AUD 1.3 billion, and the write-offs, and I'm talking about corporate impaired facilities, fell from AUD 1.5 billion to AUD 1.3 billion from March to June, and the write-offs increased by 65 from AUD 65 million to AUD 241 million. So am I right in assuming that the reduction in impairments was because you wrote off the loans?
Yeah.
Can you comment on the industries to which those write-offs related?
I can't remember. Okay, Kevin?
It's a range. Probably one of them in particular we don't even mention previously in the commodity trading sector.
Right. Yeah. Would be one of the bigger drops.
Did you hear that?
Okay.
Yeah.
I heard bits of it.
Yeah. Within the largest, it's a portfolio, but it's not a single but the largest part within the commodity trading sector. And we referred to a charge we took in the first half, and that was essentially written off in that time.
Okay. Great. Okay. They're all the questions I have. Thank you.
Thank you.
Thank you. Our next question is from T S Lim of Bell Potter. Please go ahead.
Hello. Good morning, guys. Thanks for the opportunity. Just going to slide number 10. You have some commercial customers having higher cash inflows and some having lower cash inflows. Are these nets of JobKeeper payments? And my second question is, how can a bank protect itself from businesses that actually fiddle their books to get JobKeeper payments?
So the question's very particularly given by, I think, how much of that cash inflow is JobKeeper. The other is we don't know, right?
We know that roughly about a third of our conventional customers are receiving government assistance in the form of JobKeeper. We do know that. Those numbers there will obviously include JobKeeper payments as well. A lot of the cash inflows.
Yeah. The second question, I think, is, how do we know whether our customers are, I think, if we were fiddling with.
Look, obviously, one of the things we look at when we onboard any customer, when we land any customer, is the character of that customer. So that is part of the assessment process that we go through. Outside of that, if individuals within that company then engage in activities as we've seen and we saw even at the half, it can be sometimes quite difficult to pick that up when those results are then internally audited by the major accounting firms too as well. So it is a challenge for all of us.
But I will say on that piece that, as you know, there's a small program where small businesses apply for JobKeeper where the bank actually funds that before they get the payment because it pays in the ATO. That stuff, though, is pretty low risk from our point of view because it's well documented. It's well supported by ATO data that's there. You pay obviously for that application. It's likely to be approved to zero. So from a risk perspective in a classic sense, I don't think that's a risk. But your point more broadly about sort of, I guess, the word fraud or other things, that is obviously a very complex thing for us to do. Okay.
Okay. All right. Thanks.
Thank you.
Operator, I think at that point we're through the questions. Everybody, thanks for persevering with the Stage 4 lockdown sound. I realize that some of what we've been talking about could have been a little harder to hear than we would like. So we are doing a replay later today, but also we will be launching a transcript. And so hopefully that will help make up for anything that you may not have heard as clearly as we would have liked you to. The IR team and myself are obviously available through the afternoon for questions and review. And with that, thanks to everyone. And stay safe and well.