Hello, and welcome to the Commonwealth Bank of Australia's results briefing for the full year ended 30 June 2022. I'm Melanie Kirk, and I'm Head of Investor Relations. Thank you for joining us for this briefing. We will be having a presentation from our CEO, Matt Comyn, with an overview of the results and an update on the business performance. Our CFO, Alan Docherty, will provide details of the results, and Matt will then provide an outlook and summary. The presentations will be followed by the opportunity for analysts and investors to ask questions. I'll now hand over to Matt. Thank you, Matt.
Thanks very much, Mel, and good morning, everyone. Throughout the year, we've been focused on supporting our customers through natural disasters and the continuing disruption of COVID. We're very conscious that a number of our personal and business customers are feeling very concerned about rising inflation and rising interest rates, and we remain committed to supporting our customers during this period of economic uncertainty. Turning now to our performance. This year, we have delivered a strong financial result. High levels of customer engagement and a consistent, disciplined execution has delivered volume growth in all core lines of business. We've also continued to strengthen our balance sheet. Overall, we've returned AUD 13 billion to our shareholders over the past 12 months through buybacks and dividends. Now looking at our results in more detail. Our statutory net profit was AUD 9.7 billion.
Cash net profit was AUD 9.6 billion, up 11%, driven by volume growth, lower collective provisions, and lower remediation costs. Operating performance was AUD 13.2 billion, up 3%. This operating performance, combined with our strong capital position, has allowed the board to declare a dividend of AUD 2.10 for the half, bringing the total to AUD 3.85 for the year, fully franked, up AUD 0.35 on the prior year. Focusing on the result in more detail, our operating income, as you can see, was up 1% for the year, excluding the AUD 516 million cash gain on the partial sale of our Bank of Hangzhou shareholding. This was supported by strong volume growth, offset by continued margin pressure. Operating expenses reduced 1.5%, excluding one-offs, with lower remediation costs, partly offset by higher staff costs.
Pre-provision profit was up 3.1%, excluding one-offs, and the combination of 3% growth in operating performance and lower loan impairment expenses resulted in our cash profit up 11% on the same period last year. We've seen strong growth in deposits, home lending, and business lending. This year, we opened more than 1.1 million new retail transaction accounts, with new to bank migrant transaction accounts returning to 90% of pre-COVID levels. Household deposit growth was up 13% in the year. Home lending was up 7.4% in the past twelve months, growing just below system and reflecting our disciplined approach to volume margin trade-offs. Consumer lending continues to gain momentum. Approximately 230,000 of our customers now use StepPay, and personal lending increased 25% over the period.
In business banking, we've added 33,000 new merchant facilities over the year. We also now have over one million business transaction accounts, with more than 200,000 of those accounts opened in FY 2022. The new accounts opened this year alone brought in an additional AUD 6 billion in deposit balances. Overall, business deposit balance growth has been very strong, up AUD 24 billion at 1.4 times system. This more than funded business lending growth of AUD 15 billion at 1.3 times system over the year, with margins stable in the half and up over the past 12 months. In the last three years, business banking has shifted from having a funding gap of AUD 38 billion to being a net funding contributor, with deposit balances now exceeding lending balances by AUD 3 billion.
We remain focused on serving customers well, growing our transactional and deposits franchise, and subsequently lending to those customers. Our retail net promoter score has increased by 7.4 points over the last two years. Now, with more than one in three Australians considering the Commonwealth Bank their main financial institution, which is more than double our nearest peer. Households have trusted us with an additional AUD 41 billion in deposits over the past year, which represents 27.5% market share. Through these relationships, we've been able to deliver strong home lending growth, processing AUD 170 billion in new fundings, with 60% through proprietary channels in our second half. We're now originating more than one in three proprietary loans in Australia. We're executing the same strategy in our business bank.
In business, we've seen NPS, or net promoter score, increase 11 points in the last two years, and almost one in four businesses consider the Commonwealth Bank their main financial institution. This customer engagement has delivered deposit growth of 15% over the year. Business lending growth was up 13.6%. Driven by our priority sectors, like healthcare, up 29%, agriculture, up 17%, and business services, up 17%. With commercial property growing slower than the overall portfolio, up 12%. More than 90% of our business lending customers have a transaction banking account with us. Given the uncertainty regarding the interest rate environment and outlook for the housing market, I thought I might spend a few moments sharing some perspectives. The operational performance of our home buying business remains strong.
We decide on 85% of our home loan applications within a day, and 62% of proprietary applications are auto-decisioned in less than 10 minutes. We hold a transaction account for 98% of our home lending customers and use proprietary decisioning tools and behavioral scoring to understand and manage the risk. Compositionally, we've seen a marked shift from owner-occupier and first home buyers towards refinancers and investors, some of which has been driven by recent increases in the cash rate. We've also seen intense competition and an escalation in price-based offers. We've taken a disciplined approach to managing volume, margin, and risk, and are conscious of the underlying funding market and heightened risk environment. We remain extremely focused on proactively engaging with our customers as they approach fixed rate maturities. We're doing this by bringing together our data capabilities and customer engagement engine across both physical and digital channels.
We see particularly high engagement through our mobile banking app, which averages more than eight million daily logins, and through messaging, which now accounts for 35% of all direct customer inquiries. To navigate the current economic and competitive environment, we will continue our focus on strong, disciplined operational execution. Our balance sheet remains strong, particularly when compared with the settings we had going into periods of uncertainty, like COVID. The balance sheet is 74% deposit funded, weighted average maturity of our long-term funding is 6.3 years, and liquid assets are AUD 191 billion. Our common equity tier one capital ratio is 11.5%. Continued organic capital generation in our retail business, combined with the focus on returns and capital discipline in our institutional bank, allows us to continue to organically fund growth in our business banking franchise.
We're well-positioned for APRA's changes to the Prudential capital framework that are effective from the first of January, 2023. The credit environment was benign in FY 2022, but is clearly an area we are watching very closely. We've seen troubled and impaired assets decrease to AUD 6.4 billion from AUD 7.5 billion over the year. Home loan arrears are near record lows at 49 basis points, with 78% of our customers ahead on their repayments by an average of 36 months. We hold total provisions of AUD 5.3 billion, which is AUD 1.8 billion above our central economic scenario. Switching now to our strategy, which is to build tomorrow's bank today for our customers. I'll spend a few moments sharing our progress on each of our four strategic priorities.
Throughout the year, we've continued to support our customers and communities, not just in the good times, but also through some of the more challenging times. Our customer engagement engine has again been critical in helping us reach our customers. We've offered natural disaster assistance to more than 2.7 million of our customers. We've contacted 5 million customers about government benefits and rebates. We've helped initiate more than 2.1 million claims in Benefits Finder since its inception in 2019, with 26,000 initiated for small business in the last financial year. We're also committed to helping Australia transition to a more modern, resilient, and sustainable economy.
Earlier today, we released our first climate report outlining how we'll play a leadership role in Australia's transition to a net zero emissions economy by 2050, including setting interim and long-term targets and publishing glide paths to 1.5 degrees for our key sectors. We're also helping our customers navigate the transition and have provided AUD 31 billion of sustainable funding since June 2020. We've reduced our Scope 1 and Scope 2 emissions by 90% since 2014, and we've increased financed power generation by 16%. Business banking, as I said, is an important part of our strategy. We see businesses as a critical enabler of economic growth and jobs, and we have a role to play in supporting Australian businesses. We're continuing to differentiate our transaction and merchant banking propositions and digitizing our business banking experience for our customers.
In October last year, we launched Smart, our new point-of-sale terminal, and we've now deployed more than 15,000 terminals, with 30% of those to new merchant customers. Our app marketplace on the terminal allows merchants to personalize their payments experience in sectors such as health and hospitality. Building on the acquisition of Whitecoat, in March, we launched CommBank Smart Health, which enables real-time healthcare payments and claiming, and has been a differentiator for us in market. We now have more than 600 providers processing claims on our platform. Leveraging the acquisition of Doshii, we've been creating a new payments offering for hospitality venues.
Through these and other initiatives, our market share of business deposits has increased 84 basis points in the past year, and is now 239 basis points above our nearest peer, having increased 246 basis points since September 2019. In May this year, we gave an update on how we're creating a more differentiated proposition for both our retail and business customers through new products and partnerships. We announced that we'll progressively bring CommSec functionality into the CommBank app. More than 670,000 of our customers have used this feature in the app, giving them the ability to move seamlessly between their everyday banking and investing. We launched Kit, a money app and digital information tool for kids that's aimed at helping them learn about money, how to save, how to budget, how to manage their spending.
Kit is currently in pilot, and we see it being opened up to the broader public this year. We also launched Unloan, a fully digital direct-to-customer proposition with a loyalty discount, which increases over time. We're currently at a run rate of AUD 100 million of fundings per month on Unloan, and anticipate this will double over the remainder of the year. StepPay, our interest-free buy now, pay later card, continues to grow and perform well. We have more than 230,000 customers since launching about 12 months ago. We receive two StepPay applications for every one credit card application. This quarter, we expect StepPay will become the second most used Pay in Four service by CBA customers, while our arrears performance is substantially lower than the rest of the market. Mainly as a function of our robust serviceability and external credit checks.
Building global best digital experiences and technology remains key to our strategy, and we continue to add features, improve the customer experience, and drive engagement in our digital app. We've been extending a number of retail features to business customers, including cash flow view, Benefits finder, and the alerting capability from our customer engagement engine. Feedback from customers has been positive, and we've continued to demonstrate strong customer engagement in digital, with leading digital NPS scores for both consumers and businesses. Our mobile banking app still leads the market and continues to enable us to move beyond customer service to redefine and extend the relationship we have with our customers. We continue to make good progress on simpler, better foundations. This year, we completed our remedial action plan to improve governance, culture, and accountability.
While the program of work is complete, we know there is still more work for us to do, and we are focused on continuously improving and strengthening these foundations. Employee engagement has remained very high, with pride in the Commonwealth Bank sitting at 90%. We also remain focused on maintaining capital discipline to optimize growth, reinvestment, and long-term sustainable returns. In summary, our strategy aims to protect and extend our core competitive advantages. This starts with building strong relationships with our customers. We are very fortunate to have a trusted brand with a leading share of customers who consider us as their main financial institution. We have the leading proprietary distribution channels, both physical and digital, which underpin a market-leading deposit gathering franchise. This provides a liability-led funding advantage, which is leveraged to the rising rate environment and more stable in times of crisis.
Deep relationships help us better understand and serve our customers' needs. Using transactional data representing approximately 40% of payment flows across the country, we've built a number of proprietary assets over time to better manage and assess risk. We continue to invest in our customer engagement engine to orchestrate the best overall experiences for our customers. It's now making 50 million decisions in real time each day. These assets allow us to deliver superior customer experiences at scale, which is increasingly important in a digital era. Our branch network, the largest in Australia, continues to be an incredibly important part of our business. Over the course of a year, a few million customers will visit us in one of our branches. That compares to our digital experience, where we see on average nearly 9 million logins per day.
The digital distribution advantage as a complement to physical, drives that increasing returns to scale. When combined with a better overall digital proposition, this creates even more points of difference that customers can experience every day. Through our strategy, we remain focused on building the best overall customer experience in a digital era and making sure we deliver a superior and distinctive proposition. One that is more convenient, more integrated, and brings more value for our customers. With that, I'll hand to Alan to walk through the result in more detail.
Thank you, Matt, and good morning to everyone who's dialed in. As usual, I'll provide some more detail on the financial results. I'll also spend some time on the topic of capital management, which has rightly been an area of particular focus from analysts and investors this year. In summary, this is a good set of financial results, and we're well positioned to support our customers and the broader economy as financial conditions continue to evolve. The drivers of our performance can be viewed across three dimensions. Firstly, the impact of changes in our macroeconomic context. Secondly, the results of the actions that we are taking as a management team. Thirdly, how our franchise is evolving. Firstly, on the macro context, the Australian economy has been recovering strongly.
In response to inflationary pressures, rates have been lifted well above pre-COVID levels and are forecast to increase further in the months ahead. Australia is in a relatively good economic position. However, we are carefully monitoring how the combination of higher rates and other forms of policy tightening are impacting upon the finances of Australian consumers and businesses. Turning to the results of management actions, we are seeing improving trends in customer advocacy, strong operational execution, and good pricing disciplines. This has delivered another year of growth in pre-provision profits and built strong momentum in our operating leverage to normalizing interest rates. Finally, turning to our franchise. It has been further strengthened through another year of double-digit growth in customer deposits, as well as continued strategic growth in our business bank.
We have invested behind our strategy and built further capital-generating capacity into our business mix, which has underpinned another year of reducing share count and increasing dividends. Now on to the detail. Statutory profits from continuing operations were AUD 9.7 billion for the year. Non-cash items within continuing operations were relatively small, with continuing cash profits totaling AUD 9.6 billion. As Matt has mentioned, that cash profit is up 11% on last year. There were a few one-off items this year that had a broadly neutral effect on the bottom line. The disposal of a 10% stake in Bank of Hangzhou generated a pre-tax gain of AUD 516 million, which was offset by accelerated software amortization.
Excluding those one-off items, operating income grew 1%, operating expenses reduced 1.5%, pre-provision profits increased 3%, and loan impairments provided a benefit during the period. Looking firstly at operating income. Both net interest income and other banking income increased over the year due to strong volume-driven growth in home loans, business lending, and deposit revenues in both Australia and New Zealand. Insurance income fell this period due to the impact of a number of storm and flood-related weather events over the past 12 months. Our revenue growth was moderated by a decline in net interest margins. Over the most recent six-month period, margins decreased by five basis points. This decline in margin was in line with the expectations that we set out in our February results briefing, with the flow-through of fixed rate home loan margin compression and continued competitive pressure on variable rate margins.
Offsetting that, we have seen higher deposit margins. In the last 6 months, that was mostly a function of higher swap rates. As we look ahead, our medium-term outlook is unchanged. In a rising rate environment, investors should expect higher margins. Given CBA's balance sheet mix and longer-term replicating portfolio, we will have more leverage to rising rates, and our management team have remained disciplined and rational in our approach to pricing. Turning now to operating expenses. They were down 1.5% on the prior year. Remediation costs decreased AUD 324 million. Excluding that, underlying costs were up only 1.4% due to volume-related growth in our front-line and operational support teams. Growth in other costs were offset by our ongoing business simplification initiatives, with cumulative annualized savings achieved over the past 4 years now totaling over AUD 1 billion.
Looking ahead to the next financial year, we are likely to see continued inflationary pressure on wages and other costs, and we'll see the full year impact of higher staff numbers. Software amortization expenses are likely to be broadly flat, and we will continue to focus on productivity through simplification and digitization initiatives. Turning to our balance sheet settings and looking firstly at credit risk. Loan impairments represented a benefit to P&L in the current year, and it was another benign period for consumer arrears. Over the last six months, impaired loan balances reduced significantly, and corporate troubled exposures remained stable. Looking at the key drivers of our loan loss provisioning, there were two opposing factors that resulted in a moderate overall reduction in provision levels over the last six months. We updated our assessment of the multiple economic scenarios and forward-looking adjustments that could affect our lending portfolios.
In particular, we adopted a new downside scenario that reflects the risk of higher inflation, interest rates, and unemployment. This stagflationary scenario models an unemployment peak of just under 10%, and it is less severe than our previous deflationary scenario. This resulted in a 9% reduction in loan loss provisions. Our AUD 5.3 billion of provisions represents 90% coverage of the potential AUD 6.1 billion loss modeled under our downside stagflation scenario. Our balance sheet settings remain very strong, with our deposit funding ratio increasing again, now at 74%. Long-term funding maturities also remain conservative. Given we are forecasting much tighter financial conditions over the next couple of years, we decided to leave short-term wholesale funding at a historically low proportion of total funding of 8%. This conservatism costs money.
We could easily increase our net interest margins by shortening our funding mix, but we feel keeping extra capacity in this part of the liability stack is the prudent course, particularly as the Term Funding Facility begins to mature in the next financial year. On capital, we've delivered a common equity tier one ratio of 11.5%. This is 30 basis points lower over the half after absorbing a significant capital headwind from Interest Rate Risk in the Banking Book. Excluding that item, organic capital generation was strong over the last six months, and we also completed the Bank of Hangzhou divestment. Now, the capital impact to Australian banks arising from Interest Rate Risk in the Banking Book has understandably attracted a lot of attention from market participants, particularly offshore equity and debt investors who are unfamiliar with this capital requirement.
It's a complicated topic, but it's also an important one, so I hope this explanation is helpful. Starting at the bottom of this chart and working up, the biggest driver of higher IRRBB capital has been the valuation difference that arises between investing our equity over a three-year period and the one-year term that is deemed the capital free level within the Prudential Regulations. The easiest way to think about that is that every month we invest about 3% of our equity in a rolling three-year term deposit. So as interest rates move higher, you have to wait three years for your investments to fully benefit from higher rates. In a period of sharply rising rates, that valuation difference drove up IRRBB risk-weighted assets by AUD 22 billion.
Assuming no change in swap rates, this valuation difference would unwind by approximately AUD 5 billion per year over the next three years. Higher rates slow this unwind, and lower rates accelerate it, and I've provided the rate sensitivity at the bottom of the slide. Now, moving up the chart, you also have to hold capital buffers on an assumption that rates keep going up. The recent volatility in rates has increased the level of these swap rate risk buffers by AUD 10 billion. An obvious question to ask is, why don't we simply run an investment term of one year and avoid this capital drag? The reason we don't is that shorter investment terms expose you to higher levels of capital deterioration during stress events.
This is because when stress events occur and economic conditions worsen, rates tend to fall sharply, and that's the moment when you want to have the protection of a three-year term deposit. A longer investment term provides stability of both earnings and capital during a downturn. Now, moving up the chart to credit spread risk. This relates to the liquid assets that we hold in the form of state and federal government bonds. We revalue our bonds every day for changes in credit spreads. We need to hold this buffer against the risk that our bonds lose value from future increases in credit spreads. As you can see, credit spread buffers have increased slightly. As we look ahead, even if credit spreads remain stable, it is likely that this buffer will continue to increase by around AUD 3 billion per annum.
This is a function of expected growth in the volume of bonds that we own. We could reduce this buffer if we reduced our liquid assets closer to regulatory minimums. However, we prefer to hold excess levels of liquidity to ensure stability in times of stress. The other main drivers of IRRBB are expected to remain broadly neutral. In summary, we can achieve lower levels of IRRBB capital through taking bigger wrong-way risks with our balance sheet settings. Either by shortening our investment term or by holding lower levels of liquid assets. While changing these settings would deliver a short-term capital benefit on IRRBB, we strongly believe that a long-term conservative approach to balance sheet risk management is the correct posture.
Turning to the new Prudential capital framework, which is effective from 1 January 2023, we remain well-placed to accommodate the changes and expect an increase in the presentation of our capital ratios as a result of lower risk-weighted assets under the new standards. The new capital models remain subject to final APRA approval and industry calibration, which we expect to receive before the end of the calendar year. We will continue to hold strong levels of capital above APRA's new minimum requirements in order to remain resilient to potential future stress events. We therefore expect to operate with a post-dividend CET1 ratio of greater than 11%, except in circumstances where we experience unexpected capital volatility. The final dividend of AUD 2.10 brings our total dividend for the year to AUD 3.85.
This represents a 10% increase on the prior year dividend and a normalized full-year payout ratio in the middle of our range. Given our very strong capital position, the board have also decided to, again, neutralize the DRP in respect of the final dividend. I'll now hand back to Matt, who will take you through the outlook and a closing summary. Thank you.
Thanks very much, Alan. The Australian economy is experiencing a period of rapid change. There are a number of metrics that are extremely strong. Unemployment is near 50-year lows, underemployment is very low, and the terms of trade are strong, as is non-mining investment. However, inflation is high and continues to rise, and as a result, we've seen a rapid increase in the cash rate, leading to heightened uncertainty. We're conscious that a number of our personal and business customers are feeling anxious about the economic outlook and what it means for them. Consumer confidence has fallen below levels seen in the GFC. We're starting to see a reduction in spend across our debit and credit cards on a seasonally adjusted basis, with spend falling more acutely for interest rate sensitive cohorts such as home buyers.
The cash rate has already increased to 185 basis points, but given the lag in transmission, the effects of this have not yet fully been felt. By December, the impact of already announced rate rises on monthly cash flows for mortgage holders will be more than four times higher than what customers experienced in July. This is given because 40% of our mortgages are fixed, and the majority will mature in the next two years. The impact of rising rates will continue to grow to a level approximately equivalent to 1.5% of GDP. In addition, there are further impacts from rising energy and food prices, which will flow through over the course of the year. We continue to see a wide range of economic forecasts, which are reflective of the volatility and a high degree of uncertainty.
The market forecast terminal cash rate has fallen by almost a third since mid-June. Our economists view is that the tightening cycle will peak with a cash rate of 260 basis points by the end of the year. However, if aggregate demand across the economy does not fall, inflation will increase further, and rates will likely need to rise higher. A cash rate above 300 basis points or 3% is not out of the question, which would take us back to levels that we've not seen since 2013. Regardless, the effects of this will be unevenly felt, and we will be ready to support customers feeling the strain as this cycle flows through. It is a challenging situation for policymakers, but we remain optimistic that a path can be found to navigate through.
We remain of the view, the firm view that the medium-term outlook remains positive. In summary, we've delivered a strong result with customer engagement translating through to volume growth. This has been underpinned by consistent multi-year disciplined execution. Our balance sheet and capital positions remain strong. Looking ahead, we will continue to invest in the bank's core retail business and institutional banking franchises to differentiate our proposition and extend our digital leadership. We have a solid pipeline of new products and services delivering tangible benefits. While we're facing a period of economic uncertainty, we're optimistic about the medium to long-term opportunities for Australia that lie ahead. The strength of our balance sheet means we remain well-positioned to continue supporting our customers and the broader Australian economy while delivering consistent and sustainable returns to our shareholders. I'll now hand back to Mel for your questions.
Great. Thank you, Matt. For this briefing, we will be taking questions from analysts and investors. I will state your name and then wait for the operator to open your line. Once your line is open, please restate your name and the organization that you represent. To allow others the opportunity to ask questions, please limit your questions to no more than two questions. The first question comes from John Storey.
Great. Thanks very much. This is John Storey from UBS. Matt and Alan, thank you for the presentation. Just thinking about the drivers of the P&L and market expectations. You've got AUD 1.8 billion of provisions above your central scenario. As you mentioned in the presentation, your probability weightings and economic scenarios have become more conservative, yet you had a AUD 506 million dollar collective provision release. Your downside scenario implies about AUD 700 million increase in provisions. I'm just thinking if you could help us try and understand some of the sensitivities of the credit charge, and what would actually ultimately end up driving this. That's the first part. Just secondly, be pretty interested to understand, you know, how your clients have been responding to rate increases post the FY 2022 results. Thank you.
Yeah, sure. No, thanks, John. Maybe why don't I start? It's fair to say this is an area that Alan and I have probably spent the most time in preparation for the result, is going through all of the different scenarios and then modeling them accordingly. As you'll see, they're set out in later disclosures around some of the key economic drivers and indicators. I mean, clearly what's a bit different in this cycle versus others is just the full employment. Clearly, you know, low levels of unemployment as a material reduction in overall projected impairment costs. There is, you know, sensitivity to the cash rate, and it's one of the key differences across the scenarios. Clearly, you know, we've modeled differences in terms of the changes of asset prices.
You know, I think we start from a position of, you know, very benign credit conditions throughout the full year. You see that in our TIAs reducing, our arrears being at near record lows as we sit here today. I guess having the benefit of what we've seen in July, there's no change to that position. Clearly, one of the things that we'll be watching really closely is, you know, how that contraction flows through into the broader economy and some of the early signs and indicators of that. I think from our perspective, both at a business or non-retail exposure, sector by sector, and then on the consumer side, we've been through.
It's a very hard thing for sell side to try and model, you know, facility by facility, looking at individual customer positions, their equity position, income, you know, what their LVR is, but also whether, you know, things like lenders mortgage insurance is there. Then secondly, I guess, what's the reaction in terms of the market. Then I'll let Alan maybe add some more detail the first part of your question. We're definitely, as I think I covered in some of the presentation, we're definitely seeing a big increase in concern across the customer base, obviously that we're directly, you know, interacting with. We've only seen a slight uptick in terms of customers that are coming through in terms of financial assistance requests, but definitely heightened levels of uncertainty and anxiety around the rate outlook.
I think what's critical from our perspective, as I mentioned, is there's a lag between a cash rate decision that is made. A financial institution making an announcement about what change will occur, typically a couple of weeks, then that has to flow through into repayment amounts, which can take weeks beyond that. We're not allowing for 40% of our home loans are on fixed rates. Obviously, in New Zealand, it's closer to 85%, but that's higher relative to Australia. Even for the interest rate decisions that have already been announced, we see a quadrupling of the impact on households between now and December. Clearly there's a cumulative effect going into 2023 and a lot of sensitivity about where that terminal cash rate is through that time.
Yeah, John, just on the provisioning change. I mean, we thought it was an appropriate time to revisit, in particular, that downside scenario. As you recall, the previous downside scenario related to, you know, a deflationary scenario related to COVID-related uncertainties. They were very conservative assumptions that were underpinning that. We had provisions for particular sectors of the economy that were impacted under that scenario. The aviation industry was one example. Those that were receiving JobKeeper was another. It was an appropriate time to revisit and refresh and update that scenario. Obviously, the world is very different today in terms of the macroeconomic outlook. I think it's appropriate that we adopted the more stagflationary scenario of higher rates, higher unemployment and falling house prices.
You know, we look at the individual customer sectors, the parts of the non-retail portfolio that are impacted in that environment. As Matt says, at customer level on the retail portfolio, we'll look at individual impacts at facility level in order to assess the losses in that regard. In the non-retail portfolio, obviously, those data, the impacts fall differently in terms of those sectors that are exposed to a belt-tightening by the consumer, so reduction in discretionary spend, as well as supply chain constraints and labor input costs increasing across a number of other non-retail sectors. We feel that was the appropriate scenario change, and the net effect of those two scenario changes was that modest overall reduction in the collective provision.
As you say, we've got strong coverage relative to industry, relative to the central scenario and relative to this new downside scenario.
That's great. Thank you very much.
Thank you, John. The next question comes from Andrew Triggs.
Thank you, Mel. Good morning, Matt and Alan. First question, just on the performance of the NIM in the fourth quarter. If you go back to the third quarter update, it implied that the NIM ex liquidity was down around four basis points in the quarter. In the materials released today, ex the reverse repo impact, the NIM also looked to be down four basis points and a half. I take that to be a fairly stable underlying performance in Q4. That does look a little bit softer than peer results so far this reporting season. Can you talk to perhaps some of the offsets you saw to the small rate that you had during Q4, and in particular, was there any call out on short-term funding costs, or was it just purely mortgage competition?
Yeah. Thanks, Andrew. You know, Q4 was pretty much in line with our expectations. Yeah, as you say, and I think the work that you've done, you know, a stable margin in Q4 relative to Q3. One of the factors that was in the Q4 margin was obviously that big elevation in the swap rates. You've seen again another leg up in terms of the dynamic that we've seen all through the last 12 months, which is that swap rates were rising on average much faster than the repricing of the fixed rate home loan portfolio. You've seen compression.
You know, that compression in the fixed rate home loan portfolio in particular was part of the reason that the Q4 margin performance was maybe more stable than maybe the positive change that you may otherwise have expected. There wasn't any changes in terms of our short-term funding mix. As I mentioned in the presentation, we took a very deliberate approach to retaining you know, historically very low levels of short-term funding in the liability stack. We think that you know, having some capacity there makes a lot of sense as we roll forward over the next 12-18 months and see the Term Funding Facility mature. Yeah, we took a conservative approach on net interest margin as regards to the short-term mix.
Yeah, we were pleased with the Q4 margins in the context of that, those broader movements and rates.
Thanks, Alan. Look, a question, a second question on costs, and there's a few parts to this one. Could you just talk a little bit more about the headwinds that you've called out for FY 2023, around wage inflation, building FTEs, et cetera? Just a maybe more specific one on FTEs. They're up 1,700 in the second half. Could you talk about the extent of insourcing that happened in that number?
Mm-hmm.
Just broadly, I guess the quite strong FTE growth in the midst of a relatively subdued revenue environment except the tailwind from rate hikes. As part of that, productivity looks to be another AUD 50 million incremental saving in the second half. Is that strong enough, just given the narrative around the technology advantage and the increasing digital nature of banking?
Yeah. Thanks, Andrew. Yeah, on the cost outlook, we've provided a number of the moving parts as we see them. Obviously, there's you know, that broader inflationary impact that we're not immune to, whether it's in our wage costs or our other costs. Yeah, as you say, there is an insourcing impact that you see as basically a swing factor between staff costs and technology expenses as we classify those costs. We've had cumulatively something like 2,000 FTE insourced into the organization from third-party technology providers historically. That results in a sort of AUD 80 million-AUD 90 million dollar swing in this year's result between IT expenses and staff costs. Lower IT costs, higher staff costs, and as part of that overall increase that you're seeing in the full-time equivalent employees.
You know, what we've called out, that there's obviously a delta between the spot number of FTE and the average number for the year. That's the reference to the flow-through impact of higher staff numbers into next financial year. It's not a forecast around future spot FTE. That's just the flow-through impact of where our exit FTE was relative to the average.
Perhaps the only thing I'd add, Andrew, is just, you know, as we thought about and we've talked about previously, there's a number of elements, and I think Alan's very well captured, particularly the sort of technology and insourcing. Some of the FTE growth in recent times has been to incorporate a larger investment envelope, which has clearly sort of stabilized. We've, you know, substantially expanded our capabilities in our operational area, specifically in financial crime over the course of the financial year. Obviously, we've continued to invest in, you know, retail home lenders, additional business bankers. But I think there's a number of areas there that we'd, you know, where we've stabilized, we've been prepared to invest in that.
I think certainly in some aspects of our business, we would anticipate sort of a lower volume environment. But for a combination of both investment as well as, I think we just wanted to have a tighter handle around our technology ourselves, and therefore we've made the choice to, you know, deliberately in-source some of those capabilities that were previously being provided by external parties.
Thanks, mate. Are you happy with that productivity trajectory? It's been around AUD 50 million a half the last three halves, and it was higher before that. I mean, is that enough in the context of what's happening in the digitization across the industry?
Yeah. Look, I mean, happy wouldn't be the first description that would jump to mind for me, and I'm sure Alan. You know, I'd say our expense performance has been adequate. We've been very conscious of wanting to invest in the business, and drive a longer term outlook. I think that sort of served us well over the last few years. You know, it's a finely balanced trade-off for us any period. You'll see when we set out the distribution and the mix of our investment dollars. One of the things that was gonna assist that number going forward is, you know, while we've expanded our investment envelope, we have been able to reduce the spend proportionately that's going into, you know, risk and regulation. There's more going into, you know, productivity, growth and innovation.
You know, across a number of different dimensions on a regular basis, we revisit investment prioritization. For us, there's a lot of, you know, foundational things. There's also near-term customer experience, and then there's just investments, as you said, in, you know, digitization to deliver productivity. I think we all see the necessity of making sure that productivity number is at least adequate to be able to enable us to, you know, invest through the cycle at a, you know, a greater rate and set up, you know, a stronger overall position.
Great. Thank you.
Thank you, Andrew. The next question comes from John Mott.
Thank you, Mel. A question on the home loans business. In the second half, you saw new fundings which fell to AUD 76 billion from AUD 94 billion in the first half, about a 20% fall in the flow of new mortgages being written. Totally understand there's some seasonality in that around Christmas in particular, but also it indicates that you pulled back on price, to some extent, given the environment to stabilize your NIM and it led to a bit of market share loss going through in that second half.
Now that your NIM is rebuilding with higher rates, are you more comfortable to compete a bit more aggressively on price, to retain and then grow that mortgage share, especially as you've got about 21% of your entire book, which are fixed rate, rolling off over the next 18 months by December 2023. You've got a huge amount of your book rolling off. Are you gonna be prepared to compete more aggressively on price given the benefit you're getting from higher rates?
Yeah. No, thanks, John. It's a great question. Look, maybe a couple of things in the context of that period. You know, as you said, we saw, you know, from our perspective, some deliberate choices we made around fixed rate pricing. We expected to lose some momentum in that period. We did. We've seen a compositional shift, particularly away from sort of first home buyer/owner occupier, which as you know, is more of our strength versus a greater mix of, you know, investor as well as refinance. I mean, if you think over the course of the two calendar years, in 2020 and 2021, we originated all net balance growth about AUD 62 billion at, you know, margins I'd say well above long-term averages.
We've sort of been conscious of, you know, as you know, the most recent origination cohorts are also the, you know, higher risk given the cycle that we're in. There are aspects, you know, we've seen elevated levels of price intensity. Fair to say in some aspects of that at a level that has surprised us during the period, you know, a significant escalation in both pricing and, you know, cash back incentives. You know, recently we've seen, you know, one institution offering up to, you know, AUD 6,000 per facility. So we've been very conscious of that, and been prepared to, as we have in the past, make decisions around trade-offs on volume, pricing, and risk.
You know, as we go forward, maybe staying away from sort of our pricing response particularly, but you're absolutely right, we'll be very focused on fixed rate maturities. We set those out on a quarterly basis. I think the peak month is in June. You know, it's ballpark AUD 11 billion. We're tracking closely the refinance rate on those customers. For Angus, it's a very significant operational focus as well. You know, we're gonna balance all of those different factors. We have been able to, on a favorable basis of competition, grow strongly above system over the last few years. We didn't think that was present in the last six months but y ou know, we're clear operationally on what we wanna do, and we certainly intend to execute with the same level of discipline that we've applied previously.
Thank you. Just a follow-up question on the fixed rate maturities, and I think you give it to us on slide 89. Huge numbers coming up over the next 18 months as you highlighted. There's also a lot of customers who have split loans, part fixed, part variable, often 50/50, so they can take advantage of the offset accounts and other benefits you can get with a variable rate loan. Do you know the balance of variable rate loans, which are associated with the fixed loan via split facility, that will also effectively mature over that 18-month timeframe?
I don't know it off the top of my head. I'd be, you know, I'd be happy to pick that up in the one-on-one later. You're right, we, you know, we've seen the activity and it's become more frequent for customers to, you know, to split parts of their loans and at times also have different, you know, fixed rate maturities even within that.
By customer numbers, it would be something like one in three loans would be split.
Would that be of the fixed rate loans? For example, you've got 40% of your book, which is fixed and 33%, are split, so the vast majority of the fixed rates are split.
Yeah.
Correct?
Yeah, about half the number of split loans would be fixed only by proportion.
Okay. There's a large proportion of split loans coming up for maturity as well.
Yeah.
It'd be great to follow up with that number later. Thank you.
Thank you, John. The next question comes from Richard Wiles.
Good morning. Alan, I've got a couple of questions for you. The first is on margins, and the second is on mortgages. I'll start with margins, please. On slide 25 in the first half results presentation, you said that you would get a four basis point margin benefit from every 25 basis point rise in the cash rate on your low rate deposits. You also said you'd get a benefit from the equity hedge because of rising three-year swap rates.
Mm-hmm.
When we think about that sensitivity and then consider that the average cash rate is probably gonna be 150-200 basis points higher in the December half, can you give us any reason why we shouldn't conclude that the interest rate environment alone provides something like a 25-30 basis point margin tailwind over the next six months?
Well, you'll recall when we provided that guidance in February, Richard, that the sensitivity we provided on low rate deposits was a sensitivity over time. It was a combination of what's the immediate benefit that you receive on unhedged deposits together with the benefit that you receive over the course of the tracker on the replicating portfolio. That's a mixture of two, and that affects the timing of that four basis point sensitivity. You know, we've provided a lot of detail as you know around the exit tracker rate, you know, what the swap rates are, and so you can model out based on where you think swap rates are gonna head, what happens on the replicating portfolio. And on the equity tracker, similarly, we've provided those sensitivities and.
Yeah, I mean, given the elevated level of swap rate, we would expect there's a tailwind associated with our deposit and equity hedges and obviously the benefit from the unhedged deposits. Yeah, the sensitivities and outlook that we set out in February, we remain comfortable with that guidance, and we sort of reconfirm that outlook and guidance here.
Okay. Thank you. On mortgages, I mean, maybe this is a question for Matt. You've got slide 10, the reference to the rapidly changing market context. In particular, you've flagged high refinance activity, intense competition, and the upcoming fixed rate maturities. All of those factors seem like they're going to encourage more aggressive pricing. Certainly, brokers will be looking for the best deal for their customers. Customers that will, you know, be very sensitive to higher rates. Should we interpret this slide to mean that you think the mortgage margin headwinds will actually get even worse in the next year than they've been in the 2022 fiscal year?
Well, Richard, I mean, I guess perhaps I'll let you draw the conclusion. Certainly what we would have seen over the last, you know, six months and reflective of the answer I gave to John. I mean, you would anticipate in rising rate environment, absolutely, people are understandably, you know, very price sensitive. I'd say, you know, some of the offers that were in market are well below cost of capital, so it probably depends a little bit on, you know, things that are outside of our control. It doesn't tend to remain the case for a persistent period of time, but we'll let you know. You know, we'll have to see. As I said, it was, you know, more heightened.
Certainly as we thought about the period we were going into, we expect the market will continue to remain very competitive. You know, it was pushing, perhaps beyond that over that last six months period. You know, I think we'll see what happens. We'll make our sort of decisions accordingly. You know, we certainly, as I said, operationally are very focused in a few key areas, but we intend to continue to apply discipline. Certainly relative to where we were in February, we've seen an escalation based on what we would have anticipated given the funding environment and also I think the part in the cycle being late stage from a risk perspective.
Right. Thanks, Matt.
Thank you, Richard. The next question comes from Andrew Lyons.
Thanks, Mel, and good morning Matt and Alan. Andrew Lyons from Goldman Sachs. Just firstly another question on NIM and the reiteration of your NIM guidance today that you provided at the first half 2022 result. That was clearly somewhat premised around assumptions in relation to the extent to which deposits that were very low cost are moving to become rate sensitive as rates increased. However, looking at pricing data to date, particularly shorter duration term deposits, it does appear that the price increase in these products has been much slower or the higher increase has been much slower than the rise in the cash rate. I'm just wondering, has that outperformed your expectations to date but is something that you'd expect to have to give up over time? Or is it broadly as expected? Then I've got a second question.
Yeah, well, I think we're seeing, you know, very intense competition for deposits in a higher rate environment. We've got a number of very attractive term deposit offers and changes to savings account rates that we've announced over recent months and weeks. No, I wouldn't change the outlook in terms of the, you know, the amount of switching or the assumed level of switching that we'd see to higher yielding savings and term deposit products across the portfolio. That underpinned the low rate deposit assumption that we set out in February and I'd remain of the same view.
Yeah, look, I think there's so many moving parts, you know, and Alan touched on both the tracker rates, of course, replicating the TFF portfolio and our equity balances. There's also just compositional shifts in terms of mix between products, you know, pricing delays. That's why I think we try to emphasize the full basis points over time. Clearly it's uneven. You know, but based on all of the assumptions that we made when we were sort of preparing that slide and having revisited, we still think it looks on track.
Appreciate it. Just a second question around the strong growth in your business banking, where business lines are up 14% in the year. Can you maybe just talk about the extent to which you may have seen this slow down just in recent weeks as rates have started to move higher? How you're thinking about the sustainability of growth in this segment in 2023, both from the perspective of the system, but more importantly, how you think your franchise can perform in that system environment.
Yeah. No, look, I mean, what we've seen, we've certainly seen a more pronounced impact on demand at the institutional end of the market. Clearly, you know, there it's sort of more dependent on the overall market and M&A and a number of other sort of activity drivers. So we've certainly seen a softening of demand there. You know, a slight slowing as we covered in housing, and we'd certainly expect that to moderate over the course of the financial year. I think not unlike what we've seen sort of past rate hiking cycles, you know, you would tend to see demand stay quite strong in business banking, certainly earlier on in the rate hiking cycle.
We see that at the moment with this sort of dichotomy between, you know, a rapidly falling consumer confidence, but actually, you know, business conditions and confidence remaining quite strong, which, you know, I guess on a number of levels, you know, does make sense. Look, one of the big focus areas for us for several years, and I think it's really pronounced in this result, you know, and Mark and the team have done a great job of really trying to build out the, you know, the liability deposit franchise and customer numbers, record levels of customers who consider us their main financial institution, record levels of, you know, transaction accounts, deposit balance growth, you know, and as I mentioned, and, you know, net funding or liability position versus sort of AUD 38 billion of assets three years ago.
That's been really critical. That means, you know, we've got the same sort of advantages that we have in retail around sort of 90% of customers with our transaction account where we're extending credit. That volume growth strong in the period over the last sort of month, not a deterioration that we can see from that, but we would expect to see that moderate over time. Clearly, we've got to be very conscious, you know, and Alan sort of touched on in terms of our, you know, modeling obviously closely on the consumer book. Sectors are under a lot of pressure like construction. We expect sort of discretionary retail, you know, some aspects of sort of, you know, office commercials. We've got a bias in some areas to tightening. We're pricing and modeling our forward curves.
We're obviously looking at a number of different, you know, buffers. Again, you know, we'd probably start the year thinking, you know, we'd like to grow there or thereabouts on system. We're not committed to be growing above that. If we see opportunities as we have where we think there's good, you know, we're confident on risk identification and pricing, then we're certainly prepared to continue to grow. We're probably most pleased about the overall growth in customer relationships and, you know, deposit balances, which obviously gives us, you know, additional leverage through a rising rate cycle.
Thanks, Matt. Thanks, Alan.
Thank you, Andrew. The next question comes from Brian.
Good morning. I'm gonna go with three quick questions 'cause I know Alan will deny the first one. Just lightning quick. Page 33, you say the dividend is based on the long run loan loss assumption. On slide 83, you actually show the long run loan loss assumption. Your words, not mine. You actually call it out as being 30 basis points. Alan, am I missing something? Have you told us the number?
Well, I certainly haven't called out that number, but what slide are you looking at, Brian?
The loan loss one.
I'm looking at the dividend one.
Yeah.
If you have a look at the loan loss, you've actually
What slide is the second one?
Given us the number of 30 basis points.
Which loan loss one?
It's right at the very back. I think it's slide 83.
No. Not slide 83. Nope. Yeah. That's not our view of average long run loan loss rates. I'm happy to show you offline if you can show me that 30 basis points. That's not our view of long run average loss rates.
Well below that, BJ.
Okay. Well, that one doesn't count because I knew that'd be the answer. Now, the next one is having a quick glance through the riveting read that is the annual report. Page 156 actually details the scenarios.
Yeah.
I just wanted to ask that when we have a look at it, the cash rates are telling us, cash rate by the end of December this morning, well above 3%. That's not that far away. Your cash rate under the central scenario is 2.1% and then falling away. And when I have a look at your downside scenario, it's probably much more in line, at least in the near term, with where the, where the markets are telling you. Could you just run through the difference between the two? Like, what would happen if the downside actually had a higher probability assigned to it on the house price fall?
Yeah. I mean, we've got a very high probability assigned to the. If you take our downside, we've also got another scenario, a severe downside scenario.
Which is similarly double-digit unemployment and actually a much higher expected credit loss than even the downside scenario. We've got a combined probability for those two scenarios assigned in our weightings of 47.5%. You know, you can look at individual assumptions and say, "Well, could you stress that cash rate assumption higher? Could you go a little higher than the nearly 10% unemployment that we've stressed?" You know, if you go with more aggressive assumptions, you have to go with also lower probabilities in the assignment and the MES weighting. We feel comfortable with both the assumptions that we've selected in those scenarios. I think it's a conservative weighting that's been applied to them.
Yeah. I mean, BJ, the only thing I'd add is obviously rate expectations have, you know, shifted in recent times. Obviously, you know, the unemployment number, which is of course the primary driver, looks substantially above what we're likely to see even under, you know, more significant scenarios. I think from our perspective as we go through the, you know, the base, the multiple economic scenarios, then add a number of different forward-looking adjustments, we sort of come at it from top down, bottom up. You know, I guess I'd make the same point we made a couple of years ago. It's not a precision science. There's a lot of different elements and that feed into it. You know, I totally understand the question.
It's Matt. It's just that when you think about it, we're gonna know relatively quickly as to whether that central is right or wrong, aren't we? It is radically different to what financial market's telling us right now.
Yeah. No, that's fair, and that's why it's, you know, I think in one of the earlier questions, I'd say the area that Alan and I have spent the most time on, in the last couple of weeks was, you know, a number of different other ways of sort of back-solving what we've looked at through the, you know, the MES scenarios to make sure that we're really comfortable based on what we think, is gonna happen, but also what could happen given the overall levels of, our provisioning. We, you know, we feel comfortable about that.
The way we've solved, Brian. There's been a lot of obvious movement in rate expectations. There's probably this larger range in rate forecasts, both between economists and also between economists and the market implied rates, which have, you know, the market implied rates have obviously been bouncing around a lot in the last few weeks. You know, they were 50 or 60 points higher a few weeks ago than they are today. We've solved for that partly by that conservative weighting to the downside. That informed, you know, having a higher than normal probability weighting to some very, very severe scenarios.
Okay. The next one. Matt, when we look at the market at the moment, CommBank, and as I say, this is an outstanding result from an operational execution point of view. When we have a look at the term deposit market and now the at call, we see some of the smaller players now dramatically increasing TD rates. Even overnight, I think Suncorp has now come out with a 2.4% at call deposit account. Just in the forward numbers, thus far, CommBank seems to be a fantastic franchise growing deposit market share. Can you just talk to us about strategies with regards to that going forward? Is it a risk?
Yeah. I mean, I think there's a number of things that are a risk including that, BJ. I mean, look, we have a very good strong deposit gathering franchise that's been, you know, really important. I think one of the reasons why you're probably seeing, you know, an elevation is it's probably a challenging aspect for people for other institutions to compete with the same, I guess, proposition that we bring to market with digital and a whole range of elements which support that sort of day-to-day banking proposition. You know, as you see, even in the June month and you know, as we see our overall deposit market share, it's been very stable. We're watching that very closely.
You know, we recognize both we need to make sure we're, you know, always competitive in market, but, I mean, we will see, and particularly in markets of either stress or, you know, where there's a little bit more uncertainty, competitors are gonna price aggressively to be able to attract any sort of deposit flows. We work on a number of things, including, you know, as I said, touched on, you know, the broader overall value proposition, that digital capability, you know, the customer experiences that we're building out. Fair to say we're watching share of flows very closely.
Thank you.
The next question comes from Victor.
Thank you, Mel. Victor German from Macquarie. I was hoping to ask two questions, as well, one on expenses, one on margins. So on expenses, I know that you've talked about normalization in investment, but I just wanted to get a sense whether that normalization or that comment refers to the P&L number or the balance sheet number. Because it appears as though, certainly with some of the changes that you've done to capitalization policies, your number in the P&L that is relating to investment is only AUD 1.3 billion versus you're spending AUD 1.9 billion for your investment. There's obviously quite a large gap.
Just wondering when you're talking about normalization, which number you refer to, and also whether you think, given the changes that you've made to capitalization policies suggest that you should be capitalizing less.
Right.
The second question, do you want me to ask the second question after?
Whatever you like, Victor. We're happy to answer that one or you can give the second one.
Okay. No, no. Yeah, okay. Okay. Yeah, I'll ask the second question after that. Thank you.
Yeah. Well, why don't I start and Alan can deal with sort of the, you know, the capitalization policy. From our perspective, strategically, it's more about the, you know, the total investment envelope, making sure that we're efficiently executing across, you know, a significant capital expenditure and getting value in terms of return on those investments. You know, as I said, we've pushed the envelope up. We've stabilized that mainly you know, we wanna make sure that we're focusing on the most efficient execution. Clearly, the mix of what we're putting those dollars against does change. I mean, for risk and regulatory expenditures typically flow straight through to expenditure for, you know, for investments where we expect a generation of cash flows, and we're able to capitalize that, and then clearly it depends on the useful life as well.
Yeah. I mean, our overall share of investment envelope to productivity and growth initiatives has increased, pleasingly from 31% in the 2021 financial year to 41% in the current financial year. So that's the reason for the capitalization rate increasing over that period. The reference to normalization in the operating expense outlook was a reference to discretionary forms of operating expenditure. So obviously there's more travel that you'll see through the operating expenses going forward, given the ending of the lockdowns. You've seen, you know, a few months of that in this financial year, but you'll get a full twelve-month run rate of that next year. So that's the reference to normalization.
I think on capitalization rate, that's gonna track as a function of, productivity and growth relative to risk and compliance spend as a proportion of envelope going forward.
Understood. Okay. No, that was very helpful. Thank you. The second question I was hoping to ask on margins, and this is just points of clarification, I guess. Going back to that slide 25, in reference to the earlier question, understand that your four basis points obviously talks about timing issues with replicating portfolio, which makes a lot of sense. If I look at your replicating portfolio, it's about AUD 100 billion, and that translates to around sort of two and a bit basis point impact. It appeared as though when we discussed this at the first half result, there's still somewhere in the order of 1.5-2 basis point benefit that you should get from cash rate increases alone.
I mean, would we be getting something wrong if we were to assume that, based on kind of your exit margins, that particular bucket should contribute 10-15 basis point uplift in margins? Then the second bit of the question is, I was a little bit surprised, Alan, with your comments around, competition in term deposits, because based on what we're seeing in terms of actual pricings today, it appears as term deposits should be very, very profitable business, particularly the retail term deposits. Is that not the case? Are you sort of hedging them differently to other banks? Should you not be seeing quite substantial tailwind in term deposits in your fourth quarter?
I mean, that's gonna be a function of where swap rates head, as you know. There's no special hedging treatment of term deposits. What you have seen is much more attractive term deposit yields from a borrower perspective, and that's what I was referring to. Swap rates have behaved in quite a volatile fashion this year, and so you can imagine that creates a lot of volatility in margin around term deposits, given some of the swings that we've seen. On the replicating portfolio and the mix between what translates in nearer term through cash rate changes and what do you see through replicating.
Yeah, the broad split that you referenced and that we talked about as part of the February results briefing still stands. I mean, I think probably the thing that's changed is the swap rate. The reinvestment rate at the three-year for the equity hedge and the five-year for the replicating portfolio hedge, they're both higher than they were in February. As those old trackers run off and we reinvest at the three-year rate and the five-year rate, they're earning, you know, a higher amount of interest earnings than maybe we would have predicted in February. The broad split of the sensitivity between unhedged deposits and hedged deposits remains the same.
Understood. Just to make sure that I understand this. Am I wrong to assume that your current term deposit profitability is materially better than it was, say, three, six months ago?
It will be a function of.
Appreciate the movement.
It'll be a function of where the swap rate is.
Yeah. It's also, Victor, you know, we're running a number of specials. It depends on the flow and the mix of those. You know, I think depending on your weighting and distribution, you'll be able to model that. Similarly, as Alan said, you've got the replicating. It's AUD 98 billion, and I think it's AUD 54 billion on equity balances. If you apply the five-year, the former and 3-year term to the latter, you'll model pretty closely to what you should expect.
Thank you.
Thank you, Victor. Our last question comes from Carlos.
Thanks, Mel. I just have two questions, one on wages and one on borrowing capacity and lending standards. On the wages front, your EBA nominally expired at the end of June. Have you started that process of renegotiating that? You know, and noting that currently the FSU is calling for 6% wage rises with some of the other major banks. You know, I guess separately from that, what sort of wage rises are you currently seeing across the business on average?
Yeah, look, on the first, I mean, you're right around the. We brought in a significant change to our enterprise agreement, which substantially, you know, both modernized and simplified things for both us, as the employer and for our people. We're, you know, actively considering and engaged in that process to determine. I think it's one of the. You know, putting aside the Commonwealth Bank, it's one of the things that's really hard to get that balance right. Clearly, you know, people are and should be worried about cost of living. I think one of the risks to the economy, though, as well is, you know, wages indexed to inflation would be problematic, certainly in the context of, you know, what we would infer the Reserve Bank will be watching closely, with wages data.
We're sort of yet to see or yet to determine exactly what we're gonna do in that regard. More broadly, you know, consistent with many employers and businesses that I speak to, there's with that labor market shortages and tightening certainly across the board. In you know in key skill areas, there's a big significant demand which is hard to meet in the short term. It's one of the things we've just got to balance through and make sure obviously we're rewarding performance and pay people fairly and competitively.
At an aggregate level, it's probably unhelpful to be contemplating, you know, wage growth that's, you know, officially or unofficially indexed to an elevated level of inflation, which we certainly expect to moderate over the near to medium term.
Thank you. Just secondly, on the kind of lending standards and borrowing capacity. You note on slide 83 that borrowing capacity has started to come down with a few of the recent changes, like the higher sensitivity buffers and obviously higher rates more recently. I was just wondering if you'd made any material changes to your HEM expense assumptions, given obviously CPI is pretty elevated and a lot of that is coming through higher essential spending. I would assume that would have a potentially, you know, you could particularly after the energy prices go up post-July, that could have a pretty material impact on what you assume with those baseline assumptions.
Yeah. Look, I'd say overall it's one of a number of different things that we both track closely to understand and see the proportion of originations that are relying on the household expenditure model. You know, if there's the buffers that are consistent across the industry or at least intended to be consistent across the industry, then there's a range of other conservative things that we'll build into our overall net servicing calculation. There's different sort of restrictions or limits that we've brought in either to bring down, as I said, lower proportions of LVR or DTI, or just to try to apply some more conservatism, you know, particularly to some sectors that we think might be more vulnerable or impacted by the rising rate environment.
That's something that's, you know, reviewed on a monthly basis to make sure, you know, overall we feel like we've got the most, you know, appropriate settings. We agree both in the context of origination, but also as we look forward, it's one of the granular elements that we're modeling when we're determining stress is, you know, how resilient our customers are at an individual facility level and what proportion of their overall household income is likely to be consumed by both rising increases in rates, but also other factors such as, you know, food, fuel, and electricity.
Thanks.
Thank you, Carlos. That brings us to the end of the briefing. Thank you for joining us, and we look forward to engaging you over the coming days.